The productivity factor in Federal Power Commission opinion no. 770

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Title:
The productivity factor in Federal Power Commission opinion no. 770 staff study
Physical Description:
v, 12 p. : ; 24 cm.
Language:
English
Creator:
United States -- Congress. -- House. -- Committee on Interstate and Foreign Commerce. -- Subcommittee on Oversight and Investigations
Publisher:
U.S Govt. Print. Off.
Place of Publication:
Washington
Publication Date:

Subjects

Subjects / Keywords:
Natural gas -- Rates -- United States   ( lcsh )
Genre:
federal government publication   ( marcgt )
non-fiction   ( marcgt )

Notes

General Note:
At head of title: Subcommittee print.
Statement of Responsibility:
by the Subcommittee on Oversight and Investigations of the Committee on Interstate and Foreign Commerce, House of Representatives, Ninety-fourth Congress, second session.

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Source Institution:
University of Florida
Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 025987073
oclc - 02873293
System ID:
AA00022607:00001

Table of Contents
    Front Cover
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
    Summary
        Page v
        Page vi
    The productivity factor in Federal power commission opinion no. 770
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
    Appendix
        Page 11
        Page 12
    Back Cover
        Page 13
        Page 14
Full Text



S( [SUBCOMMITTEE PrIINT]















COMMITTEEL' ON INTERSTATE AND FOREIGN COMMERCEE


IHARLEY 0. STAGGE -:, West Virginia. Chairman


JO !I'N I. IM() :-;, C ilf,,riii.
JOHN D. DINGELL, Mi.'i.:,n
PAUL G. ROGER.0 Florida
LION E-L VAN DEERLIN, California
FREDI) B. ROONEY, P. iil .\lvaiia
JOHN M. MURPHY, New York
DAVID E. SATTERFIELD III, Vir,inia
BROCK ADAIMS. W 5!iinutlon
W. S. (BILL) STUCKEY, JR., Georgia
BOB ECKHARDT, Texas
RICHARDSON PREYER, North Carolina
JAM2ES W. SYMINGTON, Mi.isuiiri
CHARLES J. CARNEY, Ohio
RALPH H. METCALFE, Illinois
GOODLOE E. BYRON, Maryland
JAMES H. SCHEUER, New York
RICHARD L. OTTINGER, New York
I I ENRY A. WAXMAN, California
ROBERT (BOB) KRUEGER, Texas
TIMOTHY E. WIRTH, Colorado
PHILIP R. SHARP, Indiana
WILLIAM M. BRODHEAD, Michigan
JAMES J. FLORIO, New Jersey
ANTHONY TOBY MOFFETT, Connecticut
JIM SANTINI, Nevada
ANDREW MAGUI RE, New Jersey
MARTIN A. RUSSO, Illinois


SAMIELL. D .E\INE, Ohio
JAMES T. BROYHILL, North Carolina
TINI LEE CARTER, K.rzTucky
CLARENCE J. BROWN, Ohio
JOE SKUBITZ, Kansas
JAMES M. COLLINS, Tr,..s
LOUIS FR EY, JR., Florida
JOHN Y. McCO.LLI-TER, Nil r.,'ka
NORMAN F. LENT, New York
H. JOHN HEINZ III, Pennsylvania
El )WARD R. M A DI(GAN, Illinois
CARLOS J. MOORHEAD, (C"liforia
MATTHEW J. RINALDO, New Jersey
W. HENSON MOORE, Louisiana


W. E. WILLIAMSON, Clerk
KENNETH J. PAINTER, Assistant Clerk



SUBCOMM'ITIC: ON OVERSIGHT AND INVESTIGATIONS
JOHN E. MOSS, California, Chairman


RICHARD L. OTTINGER. New York
ROBERT (BOB) KRUEGER, T.\..s
ANTHONY TOBY MOFFETT, Connecticut
JIM SANTINI, Nevada
W. S. (BILL) STUCKEY, Georgia
JAMES 1i. SCIIEUER, New York
II ENRY A. WA-\.' MAN, California
PHILIP R. SHARP. Indlana
ANDREW MAGUIRE, New J.rs,..'
HARLEY 0. STAGGERS. West Virci]i i
(ex ,li( I")


JAMES M. COLLINS, Texas
NORMAN F. LENT, New York
MATTHEW J. RINALDO, New Jersey
W. HENSON MOORE, Louisiana
SAMUEL L. DEVINE, Ohio
(ex ol;1i, ,))


MICHAEL R. LEMOV, Chief Counsel
JAMES L. NELLIGAN, Operations Director
FRANCES WHITE, D- put'- Clie f Counsel
Dr. JOHN GALLOWAY, Special Assistant, Energy Task FI'rce D)iri-f'
JoHN Mi E. ATKI- 4IN, Special Counsdl
B i NJ \.I' SM ETln i R'T, Special Assistant
DR. OSCAR STrO\'.,IN. Special ('"ii.1,0to1t
JANICE DANIELS, S-l/,ff Assistant


J. THIOMAS G i r. '. is". Coun ,l to the (C'..airman


BERNARD J. WUNDER, Miniorihi Counsel








LETTER OF TRANSMITTAL


CONGI .-SS OF TIIK UN TITI.\ S1i- .1.S,
HOUSE OF REI'RVI-,TA'riVI-.S,
S iIC(OMMiII"['1: O OVEltsIGHtT AND INVE. ,TIGATION.--,
(COMMII"'TKE ON IN't.'-'TATIE ANi) FoilIG-:n x ( 'I.M i.IE,.
('/u.,. ;,1/(,t, ). ., ( 'lcobir 7. 1: .
Diu SI' ICOM ITT I Ir MrI: RI;I: Enclo,-:ed for your con-ider-itioli
is- a copy of a Sllubcolliilittee staff study entitled "'lThe Produlctivity
Factor in FPC Opinion 770." Productivity is the t elrmii u-el to measuiilre
(in thousands of cubic feet) the amount of natural fa. found p]r
successful foot drilledl. As -:uch it is the key el inents in -,ttinL tlhe
price of new natural g:cas. Following the is.,uance of FPC Opinion 770
which raised the price of new riatural gas- from 52 cents to $1.42 pr
thousand cubic feet (Mcf), I instrilcted the staff to review Forii (I
and Form 40 reports on file at the FP(. The two forms corit;tiri
productivity data, submittedl under oath by natural ,,. producers.
(On the basis of this-; data, thle staff established a productivity index
for the years-; 1965-1974 independent of the published indi-trv daata
relied upon by the Cominission in O)pinion 770. The report acknowl-
ediges that the Form 64 and 40 data had not been audited or verified.
But whatever the infirmities of unaudited data, thie pre-iiiption of
correctness is higher for submissions under oathi than the A meri,,;n
Gas Association re-erve data employed by the Comili-;-ion in Op)inion
770.
llThe resulting Iproductivity factor i-, much higher than that eII-
ployed b)y the Connmmission and calls for a new sgs. price of $1.00 per
efI including a Federal income tax allowance. If the tax allwance
is omitted, as it -hould be, the data require a new ga< price of s4
cents per Mecf. The study points, moreover, to a Major flaw in the
FPC's handling of reserve revisiois,. An alternative ap)pr,,.ih eim-
ployedl by the staff requires a new gas price of from 46 to 55 cents per
NIcf. Tlhos-e prices are reasonably close to the prices recommended )by
the FPC's own Office of Economics and Producer R.ites Divisior.
The to -aiff studv do,-s not recommend a specific price for new nati'-il
2,-as. It does, however, demonstrate that tlhe ComIni-'-ion's S1.42 price
i1 exce--ive a.nd that it ignori-( countervailing:, evidence in the [,ls-,,-on
of thle Coinini,-,ion.
Moreover, if tlhe staff's theory of rv:.-'eve reviiuo is correct, the
(lata suigze.t th:it the price of new natural Ig-as should be rolt led tack
to its pre-.July level of 52 cent- per Mcf. In any event, the (iiini--iion
for severall monthly now 1ha, been -itting on evidence, which if prTp-
,r1ly ti-ed, would have permnitteI it to end it- reliance on contro-
Veir-ial indtn-ryt publi:-hed( data. The failure of the (Comni- ion to
cn-.ider tlii. evidence prior to its final recon-ideration of ()Opinion
770, raises -erious questions about the willignve-s of the F P( 'om-
1i-,-ioler- to ,li-,chir.e their duli,- under the Ntitur;.l Gas Act.
Sil cerely,
JIon\ B. Moss,
da rni, ii, Sab,',),1, f;tt, e I,,, firll ,.,i, t and Iur+...,i ( t 1W
(Mi)


















Digitized by the Internet Archive
in 2013












http://archive.org/details/productivityfa








Si MMA1~Y


III til' hl:Li"'g -t rat einc I,.-aI ever gri( n iI Id by a U.S. rI'gul:LtoYV ,,(i.Iicy,
l, 1 laisedl the prices of i n('\ 1121itiil'd1 g .- ,(l d inII initer.-tite cv()1 l ,n froi ,
52 cents to $1.42 ,per ltioumimid cubic feet (Mcf). The Commrii--ioi,
-tiilliated(l tlie first ye2r. conlLuimtler cost of this incr<':se( to b1e S1.5
lbilliol, based on an October 21 clarifyin order I tlit purpj)orts to eliji-
111te some of tilte more (er["(rgioVIt loophol,(s in the (Coi ..ni-.ion's defini-
ti lon of "nlew' 1ittiral gas plrviolIusly pointed out by the Subconinittee.
Tile (o)iiinission cited ;-I a "cornerstone" of its drama.itic incr-ense
ill tlhe price of nthiural gais, (leclinini pro(luctivity Prodluctivity is the
termn used to nmea-ire tit, 1l nount of gas found per stUcceCssful foot
drilledl in any given yver. As -uch, it is tl(e single most imnpo(rtanit ele-
ientt in iatunral :s- ratcmaki g. Under the Nattiral Gas Act the
Commission is required to set irate on the bNasis of actual costs. The
use of an artificially low productivity factor, therefore, will yield a
higher, non-cost bne(1d priice, in violation of the Act.
In Opinion 770 the Comm~isusion arrived at a productivity factor
of 300, using publi.fied data from the American Gas Association and(l
otIlier industry sources. Later, the Subcommittee obtained from the
Commission previously unused Form 64 and Form 40 data which
had been submitted to the Commission, un(ler oath, by various.
natural gas producers, and which permitted the Subcommittee staff
to determine a productivity factor independently of industry publislied
data.
This new data, when incorporated into the productivity formula
employed by the Commission in Opinion 770, yields a productivity
factor of 411 and resultant new gas price of $1.00 per Mcf. But under
the Subcommittee staff's productivity formula, this same data results
in a productivity factor of at least 680 and a new gas price of 55 cents
per Mcf.* Elimination of the Commnission's controversial Fedrial
income tax allowance yields even lower prices-S4 cents per Mcf
under thle Commission's productivity formula, and 46 cents per MIcf
under the staff's alternative methodology.
* Staff's recom ,i nd,,d formula omits hr'th positive and nrcative revisions of reserves fld;'-verd in earlier
years based on the conclusion that such revisions are not relevant to current productivity levels.










Till: 1'i:( )l)M(t'IVI'I'Y FAL(1'O)! IN !'.I':L, AIA 11O'):,1 (C(O),-
M)ISI(N P1 (PI N N"o. 77<


TIr, 11edeil Iwer (nmmi- -',, i l. ()IiioI No. 770, i lld(I I., l 27,
19i'7, ri-.I the price of :Caturd ;:'. frol wlls I ,>fiier,,i W"! Mir
;it er .J:miuirtty 1, 197.,, to a hai, price of s1..12 per tli, qv.rl.d cubic frit
(mrf) with n1 ,ne cet per quarter c-' alat' r. 'Tlhle $1.42 plri, ',pre-
-e'tit- i I .s- I prcenIt incre:-u (overt the [rf, i'*tV irs pIrie of .ti ',,l r.v
M cf, ith 1 cent-pr-y';ar :iltor, the (I" iii:-is':i hd f.T ITl tO I',
"ju-t FT'l r('.i.)iali" in ,,,.iitber 197 L. Thle ,?nlv (ri(, incrci(\o, us
",larifiuti'" by the ('wili li-,-i(il ,,n Outol,.r 21, 1 .ill :,!d ,ti (VUi. ;tl'l
$1.5 billionI to consui,'r g;j"- bills in thO next t eel'"e nionths.
Tilt' Cinii.:-ion, I)on S. Sd.tith diss'"!tini, -,,ltt to j:stifv its
Sric' illcr.1it-,c oi the basis of thlree fa n1..rs .. Ie. necrea(d P(rxhi(ctivity,
inrea-id d(rillit! c(',-.is, and the fir-t-tiiiie use of ; FulNeruil ii-tiiiwe tax
;i'l,,wiftt't, ,(-t'rn-ibvly to (omi'iiJts:ite produci-'r- for virtual repeal of
tihe depletion all(wi,,:ee on natumtl ':.,.3. Fortv-tli,''e ,'rnts of the new
ia-i, rice is anttribut,.,I to the tax allowance. 'The Subcoiiiiit,1. st.fT,
in an A.it. tu1 27 report, qu'-ti,,Td the 1lwfiilr'--; of the tax ;ill bltwCu-ion of the o r ions refusal to insidere r the< itil.rv s ft.i*r 'ii
tax credits, 1id( other so-:tlled "non-juri-idictional" tax befits, and
its failure to obtain areti l prolduc(r t .x d(,.ta.
But asi(le fr,'m1 the tax allow:acwe, new productivity daNta in th.
Cotinmis-ion's I,'-.-Iion esstal1i-li, th;.t the S1.42 rnite is I);i-.,d (oit
an eveui greater cr(ir. Fromn a' review of tfhat data the Sulbr.,iinittee
staff las determined that new gtas can be c()t jiu-tified at a price not ill
excess. of $1.00 per Mcf, even a-,-uming, for the sake of argument, the
reasoonblerm-c of the Comrni--i(on's productivity formula. And if tlhe
tax factor is di-allowcd, ;s it -hould be, the data require- a price of 84
cent-; per Mcf.
But the Subcommittee staffs criticism goe, beyond the Conmins-
ionI failure to price n'-w gun oin the ,asis of newly availa le eviece.
It extends to the ba-ic met, l olo.vy u-el ,y th.' C(.;. Tin.--i ',n to dleter-
mile pi'1)rducti\ity. Art alterfi:itive inethod, (develoj,.d by th0 Sub-
Co',, mittee tft41 (-T e Par't II, infra), yields a new .iV price of 41TIly 55
ce'.t- per Mcf with a Federal income tax all ,W)Wice, 4( cent-. with' ,ut it.

PA RT I
Prot.icthcity
Tlie Commi:.sion recitedl in 770() that productivity "is the ',,rCer- I Ie"
of tlhe atly.i- 1 s'edl to (letermirne the co)-t of 'iew' a.-." It is tlhe
measure of tthe amount of gas found p'r succ,'-ful foot drilled, artd ;-
such:
Prodilrii'vitv in t-rmis of Mf ICer foot drill'.l i:i a h.. ni -ip t -11:iii-r:i,::t imlh: Ict
uPnM tihe' wh(le of th' ratt, :t riif tiire. "Protlictivitv I F P ii pi .ini No. r,' il i .-u -. I-, cm hr 4, 1 'I-.
I' Fl ()O-'Il-r RoliiriTig N -.-\ r,,,liiur Fill; t. i) c l' I'.M 7.,-1 1. Octobw r -1, 1.T.
3 Opinion No. 770. p. 4.
4 .-laIT ttei rimo .' of Dr. John R. ;al!i.wav and I)r. fli .ir .`tr, ci, before -' Su .coi miit.'. o 'd. ",_l.t
'L IT.," .,: 1' ifthe House i i,::i:'iii, *' on Interstate .',1 FIr 1:' C 'omn erce, ."", t' 27, 1 F"4..
S(pirilon No. 77'". p .
(1)








s1'ck --ful w, 11 c -, which in turn aff.-cl- the allo\vwari, cc for lea-' acquisition costs
and the allo,;i:ie. for production faciliti,-,; proiluctivity a1-,, determinres the
allowance for dry hole co-t -, which affect the allowance for exploration overhead
'\pILnt -; and .') on, virtually ad infin itu in.l "
The first-time inclusion of a Federal income tax allowance by the
Commission further enliance(--- the importance of productivity, since
now productivity influences both the return element of the rate, and
to an almost equal extent, the amount of the Federal income tax
allowance itself. Yet ironically, as noted by Comn)is :ioner Smith in
his 770 disent, productivity "is a factor that must be developed from
the least reliable data series to which must be applied the greatest
amount of judgment." 7
Productivity, in Opinion 770, was determined by dividing non-
associated gs reserve additions (including revisions of previous esti-
mnates) for a selected number of years by the total successful gas
footage for the same years. In this case the Commission arrived at a
figure of 300 Mcf per successful foot drilled, representing the average
between results of two data series: 1967-1975 and 1968-1975.8 The
selection of those two data series, nine and eight years, would be
troublesome enough without the highly suspicious nature of the data
itself, which came in this case, as it always has in the past, from
industry publications.
Gas reserve additions are those published by the American Gas
Association (AGA), an industry trade group, and the successful
gas footage figure is derived from a variety of industry publications.
AGA reserve data, the most important element in determining pro-
ductivity, has become increasingly suspect of late. Last January, for
example, the Subcommittee staff demonstrated that AGA reserve
estimates for a major portion of the Federal Outer Continental Shelf
were 37.4 percent lower than those provided by the U.S. Geological
Survey.9 Neither the AGA reserve data nor the industry published
successful gas footage data have ever been subjected to a full FPC
audit or review.
Even a small variation in the ultimate productivity figure can
amount to millions of consumer dollars. In his dissent to Opinion 770,
Commissioner Smith came up with a factor of 354, instead of the
majority's 300, which by his calculations would yield a price of $1.19
per Mcf, about 25 cents less than that ordered by the majority.10
That difference amounts to $360 million in direct costs to consumers
for the first year alone, according to Commissioner Smith. The higher
the productivity factor, of course, the lower the price of gas.
This is not to say that the FPC has not recognized the infirmities
of relying on AGA and other industry published data. Its stated
concern over that very problem led to the issuance of two orders
promulgating Forms 40 and 64, requiring natural gas producers to
furnish the FPC with the key data components of productivity:
reserve additions and suce ssful (drilling footage.1 Both forms required
6 FPC Order 526, February, 1975. p. 7. 'lUiinif Commissioner Moody, diissentiiig in Opinion No. 699.
7 Dissenting Opinion of Commissioner D)un S. Smith, FPC Opiniirn No. 770, p. 2.
8 Opinion No. 770, p. 41.
8 Slaff testimony of 1)r. John R. Galloway before the Subcommittee on Oversight and Investigations
of the Hlouse Committeo on Inlerstalte and Forign 'oinC mmre:, January 21, 1976.
10 Di.-,'.,,iij Opinion of Commissioner Don S. Smith, Opinion No. 770, p. 9.
1 Formin 64 also includes certain cost data inclieuiii drilling costs, dry hole costs, aid lease acquisition
costs which are worthy of Commission and Iiublic ,'vi,.w.








submissions under oath, subject to audit. Unforti.natly, b,0th woiid
up in the courts before Opinion 770 was rendered.
But iany forms were submitted anyvwyiv; 1,nd llis the Si,.,m-
mIittee staff was able to study in detail. The FIP'C, for it part, ia not
seen fit to use what Form 40 and 64 data is avaiilable, lde'-pite tIie
magnitude of difference between the filed data mnid that publi),.ed by
the industry.
Form 40
On February 25, 1975, the Coiiiiis.,sion voted lihr'e-lo-lwo to i--,t'
Order 526, establishing a ('comprelLciisiv' Form .10 reporting g -.stm
designed to provide tlhe C(oIlilis-ioIi with reserve data ii,-.,.ble in a
number of areas, including rateiiaking. As stated by the Coin i::-ion1
in Order 526,
There is no doubt that the proposed information will he( of aid to ti,. Coinrni,-inm
in carrying out its obligation to assure "just and rcasoi1(ah. rate-, to the cirn.-,uirs
of natural gas" for the Act was so framed as to affUrd consunmer-, a cIrJpl.t(.,
permanent and effective bond to protection from excessive rate., and char_.f--.12
Following the issuance of Order 526, the Coin:is-ion (..till-1lCd
March 1, 1976, as the deadline for submission of 1974 Form it r-s0rve
data, and April 1, 1976, for 1975 reserve data. Future filin- wcrev
to be received on or before the first of April of eachl riportiiig year.
Items 25-27 of Form 40 required pcil producerr to report the voltlue
of non-associated gas r('serves- for bo()th the previoi- a!.d the rep )rt
year, as well as net changes during the report year.'" Items 35-42
called for changes in the company's year-end reserve inventory,
including positive and negative revisions of previous reserve estimates,
extensions due to an increase in the proved area of a gas reservoir, new
field discoveries, and new reservoirs discovered in old fields. Finally,
Item 43 required each company to report net successful gas well
footage producing non-associated reserve additions for the report
year.
Together these items provide the information necessary to com-
pute a company's productivity, both with and without the inclusion
of revisions of previous reserve estimates.
Form 40 included the requirement that all information be furnished
under oath by a company officer. Since the Natural Gas Act grants
FPC the right "to inspect and examine all accounts, records, and
memoranda of natural-gas companies," 14 it was understood that the
Commission would systematically audit and verify the company's
Form 40 submissions.
Form 64
On December 10, 1975, the Commission issued Order 543 promul-
gating Form 64, which required natural gas producers to furnish data
on an annual basis regarding costs, exploration and development
activities, and reserves. While Form 64 was addressed primarily to
cost data, it did require reserve and drilling data (excluding Alaska
0 Order 526, p. 16, quoting Atlantic Refining Co. v. Public Service Co'mmssion of Newu York. 30 U.S.
378, at 388 (1y59).
1 The term non-associated natural gas refers to gas that is produced Independently of any oil production.
Associated gas is that which is produced in conjunction with the production of oil. Since associated gas
production relates to the price of oil, associated gas which accounts for less than 20 percent of U.S. naturaJ
gas production, is not considered by the FPC In setting natural gas prices.
SNatural Gas Act of 1938, ch. 556 8, 52 Stat. 825; 15 U.S.C. 717g(b).


S-5S9---76----2








and Hawaii) for the years 1965-1973. It omitted post-1973 reserve
datai to avoid duplicating the more detailed reservoir-by-reservoir
data reqliired by Form 40. As with Form 40, Form 64 required the
submii.-ion of reserve data both with and without revisions of pre-
vious reserve estimates. Again,like Form 40, Form 64 data was to
be submitted under oath by a company officer, subject to audit and
verification by the FPC.
In the atggrer.gate, therefore, Form 40 and Form 64 were designed
to enable the Commission to determine productivity independently
of AGA and other published industry data. According to a MAarch 13,
1975, Commission Notice of Proposed Rulemaking, datfi from the
two forms "will permit the Commission, in its biennial review of the
nationwide rate, to rely primarily on information submitted directly
to us and auditable by us, rather than to be forced to rely upon pub-
lished data, not open to close scrutiny." This data the Commission
further stated, "will be invaluable in providing the Commission with
reliable data on productivity." 15 August 11, 1976, was set as the final
date for the submission of Forms 64 for the period 1974-1975.
But the Commission's original plan to obtain a complete set of
Form 64 and Form 40 data for use in computing productivity for the
years 1964-1975 was frustrated by a series of legal challenges from
natural gas producers.
Producer Opposition to Foin 64
Superior Oil Company on April 26, 1976, and Mitchell Energy
Corporation on May 7, 1976, petitioned the U.S. Court of Appeals
for the Fifth Circuit to review Orders 543 and 543-A which estab-
lished Form 64. The companies described the Orders as arbitrary and
capricious, duplicitous, and overburdensome in that they required
data not readily available to the producers. On July 29, 1976, nearly
three months after the filing of the review petition, Mitchell applied
to the Fifth Circuit for a temporary stay which was granted on
August 4, pending further order of the Court. The Commission filed
its response to the stay on August 16 where the matter now stands.
Producer Opposition to Form 40
Commission Orders 526 and 526-A, establishing Form 40, were
also subjected to judicial review, in this instance before the Ninth
Circuit Court of Appeals, which on June 2, 1976, ruled in favor of
the twenty-three gas producers who had filed the petition.8 The
Orders were set aside and returned to the Commission with instruc-
tions to develop a factual record to enable the Court to judge the
FPC's need for Form 40 data, its availability from other Federal
agencies, and the burden on gas producers charged with supplying it.
But the gravamen of the producers' complaint, and of the Ninth
Circuit's decision in their favor, turned largely on Form 40's curious
insistence that reserve data be supplied on a reservoir-by-reservoir
basis rather than ". . on a field, lease interest, or any other commonly
recorded and reported basis. ."17 The Court felt the Commission
I5 Notice of Proposed Rulemaking Docket RM75-24, March 13, 1975, p. 3.
to Union Oil Co. of Calif., Getty Oil Co., Ashland Oil, Inc., Fason Oil Co., Gulf Oil Corp., Mobil Oil Corp.
Texaco, Inc., Cabot Corp., SkeUlly Oil Co. General American O6il Co. of Texas, Burmnah Oil & Gas Co., Tenneco
Oil Co., EXron Corp., Cities Service Oi Co., Phillips Petroleum Co., Mitchell Energy Corp., The Superior
Oil Co., Sabine Royalty Corp., Continental Oil Co.. Amoco Prod. Co. v. Federal Power Comnmission, United
States Court of Appeals for the Ninth Circuit, Docket Nos. 75-2891 et al., slip opinion, June 2, 1976.
17 Id., p. 14.






5

had failed to fashion a factual I'vid 'ltitry rt.-eorl d'(toi i- tr itiiiL it-
"'regulaltory need for the (It a ini the furin/ miu irt t 'd N or did t I'
p)Io)tluCe'S eVell "claili that the ( ohl, i-'i0, 1 a- no li ,rv '',
for reserve (12dta; they Wnly c(lnim tlhat tlhc ('oili--iii, ,io,- not l ,',',
th it data on a re.ervoi ba-is." 19
'Tlis imav account in some imas-n. for CIIIIIIi.--i,,.i o Sit's
August 9, 1976), statement to ,I Senati Subc Immittee, rlf Iril1! to
problleis with relin. oni indu1-tdi i oiV iteld 41.11;" i "P'art of '"
difliculty is our fault. I think -.,iii, of ftie r':,i I-o Ilii' colrVt ('E ji'- 1.'1
our usage of Form 40 \WLas .- I 1-.' \W' CmIld l i v Ie d')it' a t,1t1'I. jb
designing it." .''
Not \\itlij-ti ,tiid th,' N inth Cai t c d(.i-.i(.. ;i u,, 1 m, 1Vy , panic-; dlid cotiplei,' botli Forii.- 40 aiid 64, which ti u e)'iommitt,.'l
staff was alble to review.
Subem'imithc l(c'lw of 40i'r, .(/ and FPrm 64 Data
Tlie Fifth Circuit's stay enabldIl pIroducer- to i.'nri tlhe (',.ii-
sion's A.u,'ii-;t da'id!i i' for t-.dl)iil---.ion of Form ti4. Appro\iml,il Iv .360
prodlc('rs, lhowvr, niotwithl-' ti '_ifil the stay, -ubmitt,' tlie ionws
in mil-A.ugust. Of these, 113 lhve 64e1n1 revie\..! by tle (',ii, un--ion
staff and found to be complete and free of obviou- error. The d;ita liwi-
been computer pr'ocesed and i.- almost int-:litly retri\ 1able i;i a
variety of usefil forms. Included in the:,e 113 Form 64's ;iri s,--
missions from nine of the 25 bi'r'e-t naturitl ..]IS pru.e.- iii tlIe
country, including Amoco, Chev'roi. Cliaipnllin. ('ontiin.'tal, EL\\on,
Getty, Gulf, Pennzoil, and Shell, plus -nubiim-eions fro', ,ine of tle
next 25 leading producers, including Andarko, B:v,-s, Diammiodn-Slia!ii-
rock, Marattlon, General-American Oil, Texa. Gas, Columbia (ia-,
Cabot, and Monsanto. Together these 113 respondents aio respouiiible
for approximately 45 percent of total U.S. non-associated natttral mas
production, exclusive of Alaska.
In the case of the Form 40's, some 675 producers, although under no
legal obligation to do so because of the rulings of the Ninth Circuit,
submitted their 1974 Form 40's about January 1, 1976. By MIay 1.
1976, the FPC had received 1975 Form 40's from 225 producers.
Unlike the Form 64's, which had been reviewed by the FPC staff
for completeness and reasonableness, the Form 40's were provided tlhe
Subcommittee staff in raw form. Out of the roughly 675 1974 Form 40
submissions, the Subcommittee staff considered those of 225 companie-
to be sufficiently complete to warrant analysis. Tl'ese 225 include a
representative number of both large and .small producers, affordin.. a
statistically valid sample. Nine of the top 25 producers, for example,
including Texaco, Exxon, Shell, Mlobil, Continental. Sun, Gulf,
Champlin, and Pennzoil, are included, along with nine of the next 25
leading producers, including Columbia Gas, Diamond-Shamnrock,
Andarko, Monsanto, Marathon, Armada-Hess, Bs. Texas Ga-:, and
Texas Pacific. In the aggregate these Form 40 submissions cover about
47 percent of total U.S. non-associated production for 1974. excliidinmz
Alaska.
Year end 1975 Form 40's were submitted by 225 companies, but of
these only 94 were judged by the Subcommittee staff to be complete
I Id., p. 12, emphasis supplied.
I Id., p. 13.
- Hearings, August 9. 1976, United States Senate, Committee on Commerce, Special Subcommittee
on Oil and Natural Gas Production and Distribution, tranTsript p. 44.








and free of obvious error. The 94 submissions, in the view of the Sub-
committee staff, do not constitute a statistically valid sample, because
none of the top 25 producers is included. The 1975 Form 40 sub-
missions, therefore, cannot be used to compute a meaningful productiv-
ity factor for that year.
After a detailed review, the Subcommittee staff is of the opinion that
thle Commission has before it a sufficient number of useable Form 64's
and 40's to derive a statistically valid productivity series for the ten-
ye'ir period 1965 to 1974. And cer tainly the data from the Forms is
more trustworthy than that supplied in industry publications. This
data ca i be used to arrive at a productivity factor both with and with-
out revisions of previous reserve estimates.
The treatment of revisions of previous reserve estimates (both
positive and negative) is particularly troublesome. The key factor in
costing new gcas is the amount of gas that the industry is currently
finding per successful foot (drilled. A 1975 productivity factor should
not be raisedl or lowered, therefore, by including revisions of reserves
originally reported in previous years.
AGA reported negative revisions have exceeded positive revisions
in recent years. This might be due to the industry's suspected practice
of having inflated 1950 and early 1960 reserve estimates to promote
the use of natural gas and the construction of natural gas pipelines.
Accordingly, the large net negative revisions that suddenly began to
appear in 1969 can only relate to the original overreporting of
reserves.21
From a purely random standpoint one would expect positive and
negative revisions to be about equal. But from a geological perspective
one would expect positive revisions to exceed the negative, as has
been the case for 30 years with crude oil reserve estimates published
by the American Petroleum Institute. And with respect to natural
gas, there is even more reason to expect positive revisions to outstrip
the negative because of the AGA's extremely conservative defini-
tion of proved reserves.
Proved reserves are defined as the "current estimated quantity
of natural gas and natural gas liquids which analysis of geologic
and engineering data demonstrate with reasonable certainty to be
recoverable in the future from known oil and gas reservoirs under
existing economic and operating conditions. Reservoirs are considered
proved that have demonstrated the ability to produce by either
actual production or conclusive formation test." (Emphasis added).
A definitive estimate of reserves originally in place cannot be obtained
until a field has been depleted. Prior to that time, however, a reserve
estimate under the AGA's con-ervative definition is like the first
row of goods on a shelf, which are the only goods visable. Further
drilling and production are more likely than not to increase the
original reserve estimate beyond that which was originally deter-
mined, just as removal of a can from the grocer's shelf reveals yet
another can just behind it.
The suddenness and magnitude of negative revisions reported
by industry in recent years, strongly suggests that much of those
St As reported by the AGA, negative revisions of non-associated gas in 1969 exceeded positive revisions
by 1.5 Tcf. For the three previous years positive revisions of non-associated reserves as reported by the
AGA, exceeded negative revisions by from 3.5 to 4.8 Tcf.






lnegative I rc vi-lol- clit.12t to )prevlu 'l di-,v, i V 1 ield t ls -.. it'l li"iI
the ( 'oniniision failed to tike inlt() )I, rmIit in O )pinion, 770.
To d(,terlilJe prodluctivity, lthe ( ',illiii--irl iIIn O( )pii'n 771) ,lied
on AGA reported 'IldditioiT, alnd revisiosIl fr i al S.5-.1 1 1ii 1i -in,1
( 1)ii7/19t;.s-1975). Inli-ciiiiiiiiat, use( of AGA .(IPrtl r*i os
(Idirilig this period bNi-cd thie (Comii Iionitl's re-nilt jTil prodmi'iivit
factor down\ward to to x 'x tht 1]1it 1lV,1tiV, rcvi-iOiis of pi,-1 ,17
rc.erve addition-' eriv included.
Tlhe AGA aid industry I)fite of r,,portinf i-t.ive rc\i-ion- of
pre 'i, sl" ,i-c'ovr' ,e-erves 1 s l,,.n 1,,li ni ,,lc fy mr. !,- plh
Lenier, r who until en'+'Itly was- con-lltil.,Cu eneigv (,,flm,,fi-t for ile
Fe(lei al Irirdc( Co i .ion 1"i 19(,9) A B llebook, for (xa; I ij)lb,
c..tiiU ted(I iittiU-ral fields (li-,',,vei-cd in 1+929 ii 'I'c.x -,i l(!ilro:il
District I to linve an iiltininti eovier-y of 243.*. I ]f. ]i the follo\% in_,
ynear i lte (c)iplrl"ble figiK, 21s ijorltld 1y the AG(A, \\;:-I 151.9
liaf, while l\v, yeVr- later it \vs 41.5 Bocf. Thii- the r-ivultin. i,,, iidrly
five-fold reduction in the ,reservesw.. for thc-c 1929 fields, \Olich intder
tlie AGA and FPC's scheme of things, \W- pciilitted to influence.
thle FPC's letermilation of how much new gt-. )roducers w1ere in, ing
per successful foot drilled in the e0irly 1970's!
Clearl\'y, a true ])io(ductivity factor ,i ,i be determined only after
the careful a.-i,_,ii., of revi-iou+ (both positive anid n',:l;it ive) to fli(
Veair of di-eovery, thlii eliminating from co01 -id(t''tion ill rev-isio- s
attributal)le to rc-erve additions,; reportedly priior to the periodl ,(1ii r
review. But .,iven- the choice of deteriniiiiin r productivity with and
without revisions, tlhe Coimi ni-ion opte(l for the former, appal gently
oblivious to tlhe extent to which its reiilting productivity factor was
lowered by neilgrative revisions properly beloigiiig to an alto,_rther
different and irrelevant tinmie period.
The Form 64 and Form 40 data on file with the Coen i--ion doe-
not assignm reviions to year of discovery either. Nonethlele--, Sub-
committee -taff cIculiations derived from this (latn. an( iiicludinu
all reported revisionf, result in at 1965-1974 productivity factor of
411 (see Chart I), as opposed to the Comnmi:ion's 1967/68-1975
factor of 300. That 411 figure, other factors being equal, tranu-lates
to a new gas price of 100.4 cents per Mcf, including a Fed(leral income
tax allowance. Absent the tax allowance, the price falls to ,,4.4 cent,
per Mcf.
Significantly, as shown on Chart I, the 411 factor re-dults even fr
consideration of a low 13.8 productivity factor in 1972, can-ied partly
by Exxon's having reported ( net negative revisions that yV:ir of ap-
proximately 1 Tcf. At thi- writing there is no way for the -.t AifT t ( d1.t'r-
mine the extent to which the-se revision, relate to fields di-c.overI'd
prior to 1965. By totally eliminittiiir Exxon, however, the -taff lhia
calculated that thlie productivity factor, including revi-iois for the
years 1965 to 1974, average., about 476.
One canl anticipate, however, tlie Commission's matint ,i'iiif tliat itk
8.5 year 1967-1975 and 1968-1975 serie- a- ucl inl Opinion 770 i- a
2 Dr. Josopnh L.r",er, 'npiihlihii4r1 study, s"F imal,-.s of Ultimate Recovery of Non-Associated Nmiiral
Gas. Texas Rpilroa'l ('m(nOt1 siiOn Districts and Louisiana." Oi hr oxampls ,i, li'h the f.ii, 1 .V
(a) Fields dl ic ,rn\-'1 in I'1,3 in Texas Railr( d Commission District a were evs imatld in 1',-I, to have
an iul imai e recovery of r.i .5 B1f while, in 1'73:, the estimate was ,.2,:S.3 B. f, a ', w ilw'ril revision of almost
2.0 Tef.
(b) Filid; dieovered in South Louisiana in 1'.37 were estimated in l'l \ to have an ultimate recovery of
2.i1.1.J.3 Bcf while in l'72. it was 2.21_'1.l Bcf and in 1'7-. '2. Bcf fir a total (I,,% n revision oif more
than 1.0 Tcf.








better miea-idure of productivity lhiht the slaff's 10-Ycair 1905-1974
seri'-. The (Conm i-.ion defended its iu- of an eight and i!iIe year
time span in Opinion 770 on grounds that tliis was a -iifFiciently Iong
enough period of li i ie to compel i ate for AG A "reporting lags, lack of
information requiru(d to make a re-erve e-timate in any given yeaI', aI nd
inaccuraiies found in the AGA reports . ." This .amne time serie-,
moreover, wa-, ;id to be short enough to allow for the most recent
decline, in productivity as determined on the ba:-is of AGA data.a
Whereai ideally 1975 productivity data should be utilized in pricing
new g0as,; the spar-e ,anij)le size obtained from a review of 1975 Form
40 productivity data makes this an impo--ibility. A ten-year series as
i,-ed by the staff is the same as was used by the Comnni-i-ion in the
two rate decisions (699 and 699-H) that preceded Opinion 770. Even
assuming, however, that no consideration should be given to the
year- 1965 and 1966, at best an arbitrary assumption, the resulting
eight year 1967-1974 productivity factor, as described by the staff
on the basis of Form 64 and 40 data, is 320. Use of this shortened
time series, however, highlights the fallacy of the Commnission's
blind embrace of reserve revisions, especially Exxon's 1972 1 Tcf net
negative revision. Omitting Exxon from this data series results in a
1967-1974 productivity factor with revisions of 414, again considerably
higher than the Comnmnis-ion's 300.

PART II
As noted in Part I, the productivity factor employed by the Com-
mission in Opinion 770 is understated because of two factors: the
Cormmi-ion's refusal to utilize Form 40 and 64 data and by its in-
discriminate use of reserve revisions. To obtain a true productivity
factor it is necessary to attribute all reported revisions to the year of
discovery. Failing that, the next best approach is to exclude all
revisions from consideration, in view of the huge negative revisions
that have been reported in recent years and on the theory that positive
revisions, if properly accounted for, would exceed negative revisions.
Accordingly, with the Form 64's and 40's as a base, the staff con-
structed a 1965-1974 productivity factor exclusive of all revisions. As
shown on Chart I, the resulting calculations yield a productivity
factor of 680 which results in a new gas price of 55 cents per Mcf with
a Federal income tax allowance and 46 cents per Mcf without it.
This pre-tax price of 46 cents per Mcf comes considerably closer to the
58-cent and 62-cent per Mcf pre-tax prices recommended by the
FPC's own Office of Economics and Producer Rates Division than
do(,-s the roughly $1.00 per Mcf pre-tax price adopted by the Com-
mission in Opinion 770.
A new gas price of 46 cents per Mcf, calculated by the staff, may
be surprising to tho-;e conditioned to accept the industry's OPEC
influenced demands. Yet it is worth noting that this price is 20 cents
per Mcf, or 77 percent, higher than the price set by the Commission
only five years ago on the basis of a pledge from natural gas. producers
that a price of 26 cents per Mcf would-
23 Opinion No. 770, p. 41.








wl~ii'Ii -li' Iil* pJrui d' tLII iirmritiv for a I hd!; atI aii( k V, ir (*p rt r'd
d{, l.,'- rin n ,ni l :,irtivisi' :,iii,.-, ,1,'l in ti ij r I'mtl ri : I tiol tI Irl.r .'I fI. I L :Iildi-
ti l It -,llj Ilir' ,,f I: II
t 'fr i lf If)J if I fi ljf --- .1 < /*d.2i*

't', ('oii i,,i-.--ion i l'evi(,\\II, its ,,-I, P-76;, nc', ,'-'i- p1iie of
.,2 pvr M. t'' w s in the i,,-itiou of litil" abIle to i liintr cli
of thle .t',-.-\.,Mw k from ,t'iii ,-' Li tcx.I.,Li'wi_ ', l,,, lil, d t:I 1I 11r
lh:in tlihlt \ liich lh;id her, uji)Tlisit-h l by til, A.'IA.( A ft'v. i,,iili' (Jf
Ilhlitioil \\oilk, % ith litclily l)illiols' of dollars :!t -tuike, \ol( liive
',:Ibitit lt1e Co,,iinii--.ion to (leteriniiIle ; i ,...,oiiC, 'ol, ,'tivitv f,.vtor.
lIiIldevd, it would n1ot eXven h;Ive keen n- '-Iry for ihe ('- --,m1ii ion, tC
review nll Fo ii 64 ;nid 40 tit 21 in its ),,-..e 1on. Ubf1er t I.e (cin'-ii-
st8,ir'S it would have l)(.11 ;pi)p1ro)rilite four the ( oIIIt1L-ii to -i l''t
,I -.,'iv'ntific - (co111d 11hc hve 1O b ii'c .iditd ,'i Id verified, 1and the ,cvi-i on ,-inied to
tihe ijpproprihte years of di-i.overy.
The FP( shouldd revi-e Opinion 770 ;ind utilize actual productivity
(ittfi which it now hli., in it.- po--(---ion either tlhan continuing to rely
on ul11i) dit ed industi rv data which is not Bunder o(th. Inii the ilte, iiT
1ihe Subcolllimmittee star (onclude-, that tihe 1Co in' i- ion's $1.42 per
MIcf price is at variance with evidence in the h dirL of thle ('o;llii- ion
arid i-, therefore unireii-onable and unlawful.

14 Opiiiuio'i No. )'i', Atip,,rilix A, p. 27 (July 1,. 1',71).

CHART I
NATURAL GAS PRODJCTIVITY, 1965-751

Reserve
revisions (plus
Reserve and mri'us)
extensions extensions and
and new field new field and
Successful and reservoir Productivily reservoir Pr.odL.t;ty
gas well discoveries (thousand di':ccve,'.es (Ihrijand
footage (million cubic feet (million cubic feet
Year (feet) cubic feet) per foot) cubic feet) per foot)

Form 64:
19C52 ...................... 7,989.914 8,397,102 1,051.0 6,947,179 869.5
196 ... .............. 8, 561.887 7,604. 3250 888.2 5,911,714 690.5
1967.......................-----------------.. 7,019.146 5,369, 191 803.4 4,9rF.829 760.2
1968 .....-.......-- .........-- 6,505.231 5.925.691 910.9 2, .90. 051 444.3
1969 ..------------.---------.. 6.376.771 3,664,095 574.6 1,551.444 243.3
1970-----------...................... 5.740.2E.4 3,744,460 (52 3 2,140. 459 372.9
1971---------------------........................ 5,851,633 3.745,8?6 640.1 841,rf54 143.7
1972...................... 7,296, 998 3,105,730 425.6 100. F79 13.8
1973 .-.--..--------..--------- 8,432,879 3.616,993 428.9 1, 72.986 205.
Total ------------------.................... 63,774,Cfl 45,413.298 -.........-- 27,072,396 ............
Form 40:
1971- ......... ....... 10.390C.270 4,423.954 426.2 4, 41. 7r? 431.2
1975 .4- .. 3,937,807 1,C49, 5 6 2 r.5 3,313 2.1 6
Productivity, 19.5-73 (reserves
divided by footage .....- .....- ....-----....--.. 7!2 6 --................ 424.5
Average productivity --------.-----...---------- 708.3 .....-. -.. 410.0
Productivity, 1965 74 (reserves
di.ided by footage) .............................. ......... 672.4 4.5 5
Average productivity ..----..---.--...------. -..---..- 680.1 --......... .... 411.4

I Data from FPC form 64 for 1965-73 and form 40 for 1971
1965-73 pe'iod includes data from 113 comples that produced about 7.7 Tcf of natural gas in 1971.
3 1974 data from 225 companies that produced about 8 Tcf of natural -- in 1974
4 1975 data from 94 companies do not include a-iy of thetop 25 producers; data are not considered suffi :,er I, comrn.ete
for inclusion in productivity calculations.
S Average productivity is the sum of the p;oduct-vitv of each year d, de1 by t'e number of years.














ArPPF. 'NDix


CoN;Ril.SS OF Till; UNIMrv .'TATI -,
COMMI TTLL ON INTER. ISTATF AND FI"i(1 IG;N ('1 MM1 i:' V,
\I'a i injlyt, D.C., _V., ,r >., 1r7"'.

IToi,. Ri ('hairmni, Filer,1! Pou'er Cvnmmisqion,
11Lashingtonl, D.C.
DI-:.AR Mit. Cii \IR\MAN: In pu)IIli-hl nw-papr rp'rt- ard in Olpi!i'ion! 7711 A
i-.zsiid Noveniher 5, 1976 r, rt:airi all. gation,- wi r, mat, v 'i,,dik ,'iT rii ." tl,' SI1 t-
conimmnittee's Ort)eol.r 31, 1976 -taff studd "The Prmiluctivity F:tu-t.r ir, IPC
Opinion 770." Spetcifi:allyv your as-i-.tant, Danny J. Bli mg a0rd tlie C>'rnIi--in
dismissed the Sul cmnmit t, "tatff report onl the fll',wing grindd:
(1) The Form 614 aind 40 productivity d:itat onil fill it thit. (',,inr:ii--io'u i Ti' ,t -f
sufficient quality f,'r u-<, in rat.teLIkint.. Mr. Brgg-, airrordirin to the- Wq i,,7qfn
Star, went so far a-; to dt',eribe the data a., "crummy."
(2) The Form 64 arid 40 data on file at the Cnmmi-iof tends to -iipii,,rt tli,
300 productivity factor einployed by the Coninis:i-'in in Opiri,,n 770 (, pi;uion
770-A. p. 43).
(3) D1)rilling, dry hole, and Ica-;t', acqui-ition data as r,. rr.-entled in Fv.rm 64
could justify a price higher than $1.42 l'er thous-and ctilic fe.t (Mef).
The fact., howevt.er are thv-,c:
(1) Form 64 and 4.0 pIroductivity d:ita when rceviwved for obvi ,'i fr.liiig err-,rs
and having bt.een att-.,ted to by high corporate official.-s carri,-' a much higher
p)re-urnpti,'in of validity than unverified ard unattt'-tcd A.ni(ricai ('1,- A.--Y'.ia-
tiin da:ita. Even a-.i1ninmg the data to be "crummy," th.r,, wn- ,p r, :i'',i fr thi-,
Cmmi-,-ion not to hav. li)grad,'d tlhe quality of the data by audit a::l vriti'.t ion.
k2) Form 40 and 64 data available to the Conmni--in do not -,llpport ll. 300
productivity factor and th, S1.42 per Mef pricr adopted by the Crnir:ii-iin in
Opinioin 770. In Opinion 770-A the Cornmnik.ion obtained thi- r,'.ilt by con-truit-
inri a 1q67-1975 Form 64- and 40-ba'- 10.65-1'174 -erit- ,rnmpl,,y-"d by the Subco.mmittee staff. Thi, st aff did not c.d.-lil-itt
a 1*75 i produ,-tivity factor b)ec:.iii-.z f tlh -tevt.r'ly limited numinr of 1975 F.'rmn
40's on file at the Commi,-,ion. The Cornmiri-ion in con-trur'ting its 1975 lF'orm
40-b.a- ed i)prductivity fact, r arbitrarily aligned a weight ,,f thr,'-, to compi..,.te
for the --mall number of 1975 F.-rm 40 filira-. One cannot, however, train-frm
a -t-iti-ticnily invalid sample into a worthwhile nmeaiire by multiplying -rinll,
unnrenl pr r*nt:ati\ve -ample by some arbitrary nmnbher. The ten y,'.ar 1.ii15-1974
productivity serie- employed by the Suhcimmittee staff i- th, only -,.ri t: .t
C..n h- olti.- id on the ba- k of a full and judiciuus u-;e of Form 64 and -4', .,a.
UL.'s, f a t n yvLLar productivit' -rr. s cy nfrm-, moreov,-r, to th,- n', th.,i! v
s,,ed i.i Opiiii'in 699 and 699-I1 that immediately pr. cedId Opiri,,n 770 and
770-A. A ten y,-ar serir-, w.-a -iid in Opinion (109 to lie "of s'fimr'ient 1-. 1th .
,-ii.-re that a rep),:rtinz lag or the lack of th" informati, n required t, i .-ke a
restrv, estimate in any giv.n ,ar will not unduly influence tli- end r,'ilt \%%li'e
aLt the -a-inc time gjvi\i, th.. r quisit e c in-ider:,tion to theo more r,-cf-nt i,:.l.-tr.
c (., Fo)rm 64 drillinTi, dry hol'v anid le:ia", aeq' iitin o'-t-,. unlike th pro d'!'-
tivity dat:i ha:- n.'t b-,'-1 r,.'vi,-wed by the FPC? -taff for gr,-- dat.i entry ,rr' r-
a:'nd out of r in, situation- Form 64 drilling, c -'t data isk si-zpect, mor., ,ver. -i n',
(a) It d,-.- n,,t apre-ir probable that .tvr:a,_ dry hlihe cI'-t-; ,h-l,,ld exci','d
-ule,-f, il well cot-; :,s was reported fir 1974 since, sucv-'sful well c -t.
invari:tlily exceed dry" h',l c,,ts.
(b) Th, ren,.rted near 40 percent increa,;e in succ'-ful well c,,st- fr 1975
over 11174 d,'e; nt. :npp,.ur r,,'a:t ,nma ,-.
(r) The more than 60 percent incrn.ist, in dirv hile costs fr,,in 1973 to) 1974
and a further 20 percent increase frim 1974 to 1975 (or a two-ve.ir incre.ise
of .' p'-rent) d& in.t s-',n reasonable.
(11)







12

The staff -tuiidv further -Itr.-sed that a true productivity value can be de-
',iiined only af1,r a--iiL" revnisi" -'O to the year of discover- and that the
(Comm)1lisilons failure to con-ider t lii- faet.,r r.-iilted in a -igniific':nt 1ii]dcrlt:,ite-
meniot of productivity. The Cojmmission addi.--'-,d this is-leu in (O)piiiii 770-.\
(pp 49-51) in a modele" Tof logic, ti.it both I and the .t:iff confess to having r,.iad
inany times and -till do not colmpreIhend. .\eecording to the Coniiiii--in:
Exclio-,,n of r.vi-iins can only tend to distort the productivity calcula-
tions. If there \v;,- a tendency to bias initial reserve etirn:tt,,s too low, then
failure to include ]' .,rves 1sic] would cl;i rl y lead to iind''r,-ti i: tin of
productivity. If there was a tendency to bias r,-.trve e-tiri:tes high, then
exclusion of revisions would lead to clear over-estimation of productivity.
If three is no bi:a, and the initial estimates are neither high nor low on the
av,'rage, then. inclusion of revisions should have no appreciable effect over
a hng period of time. Thus, if an initial es-timation bias were to exist,
inclusion of revi-i,,ns would be proper, and if no bias were to exist,
inclusion would al-. be proper. Therefore, revisions inclusion is proper
ev.n without proof of bias.
This "h'.adk you win-tails I lose" rationale in denying the existence of this
flaw in the FPC's productivity methodology is symptomatic of other Com-
iii-,ion actions thlit have cavalierly negated the intent and spirit of the Natural
Gas Act.
As previiuii-ly indicated, there is more than a 65%, difference in productivity
fromn Form 40/64 data) when c:lceilated with revisions and without revisions.
Therefore, even ;i--uming the validity of the reported drilling cost increases, the
imp:it is more than off-,.t by using the productivity value without revisions. On
this Si.,,is, it c:i'i be c:,lculated that the price would be under $1.00 per Mcf includ-
ing a Federal income tax allowance.
Sincerely,
JOHN E. Moss,
C/ a i;na an, Subcommittee on Oversight and Ileves.igations.







UNIVERSITY OF FLORIDA
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