a broker in oil and gas leases. Now those two big monopolists have built up a fine company on the American system of free enterprise. There is another outfit there, the Shamrock Oil & Gas Corp., with 220,000 acres in the Panhandle field of Texas and 1,700 acres-which of course is many thousands off-in the Hugoton field.

I was a little broker myself in the early days in the Panhandle and I bought many of the first holdings of the Shamrock Oil & Gas Corp. for them, and they paid me commissions for doing it. At that time it consisted of four individuals, Clark, Baldridge, McCamey & Sherrin, and it has gone through two or three different steps. It is completely independent; it has grown to say a 30 or 40 million dollar proposition now. It has grown big right there in Amarillo and it has grown big on the same American system, gentleman, that is all.

There is another point in that connection, however. That is shown in here with these pipe lines going into interstate commerce. I will quote from the Railroad Commission of Texas advance sheets on district 10 for the month of December 1947.

The daily average production, plus purchases-and nearly all production of the Shamrock Oil & Gas Corp, was 325,441,000 cubic feet. Of that, 52,141,000 went into transmission lines, that is all, a little less than one-sixth. The rest of it went to other uses locally.

The Cabot Carbon Co. shows up there. I don't have the figures for Cabot. Let me say this, that I don't know if there is any gas from Cabot in the Panhandle field or the Hugoton field going into transmission lines; I know of none. This Cabot Carbon Co. is a manufacturer of carbon black. I can see no reason whatsoever for them being included in here. They own a lot of acreage, true, 17,920 acres, and since this was reported they have bought considerably more. They are also, I am reliably informed, in the process of-or perhaps they have completed-a contract for the purchase of gas from the Panhandle Eastern Pipe Line Co., one of these companies operating in interstate commerce. I don't know the amount of it, but I understand the price of that, gentlemen, is 6 cents a thousand cubic feet. I can well understand that the Panhandle Eastern would far rather sell gas locally to the Cabot Carbon Co. at 6 cents a thousand, than whatever the price is that is included in their rate base.

The Cities Service Oil Co., for instance, has 33,000 acres up thereprincipally in the Stonebreaker ranch in the Oklahoma Panhandle. That, I don't believe, is dedicated to any interstate line.

The Columbian Fuel Corp. is shown here with 55,000 acres in the Hugoton field. I know that is not dedicated; it is another carbon black operation.

Mr. WOODWARD. Are you familiar with the application that the Cities Service Oil Co. made to the Commission for a determination of its status if it sold the gas produced from its acreage to the Cities Service Gas Co. ?

Mr. KAY. I am only familiar with it to the extent that I understand they made such an application, and I understood that their independent status was not acted on favorably.

Mr. WOODWARD. In other words, if they sold their gas from their oil acreage, that is the oil companies which are owned by a parent holding company, to the Cities Service Gas Co., then the Cities Service

Oil Co. to that extent would be held to be a natural gas company and they would receive, then, an allowance fixed on the historical cost of the oil company's gas?

Mr. KAY. Yes, and that brings another point in there, too

Mr. WOODWARD. How many acres of reserves did that involve? Mr. KAY. Well, I understood it was 33,000 acres, but I might be wrong in that. That might not include all of it but the Stonebreaker ranch was the principal one.

Mr. WOODWARD. Wasn't there about 200,000 acres involved?

Mr. KAY. I am just not sufficiently familiar with it to tell you, but I am quite sure that there was at least one property involved there which was 33,000 acres in one single property.

There is also on that list shown extensive holdings of companies of which only a small percentage goes into interstate commerce. Gentlemen, there are a considerable number of other very large holders of acreage in the Panhandle. There are a great many millions of acres in the Panhandle, and I offhand do not have right here the amount producing, but the acres in the Panhandle and the Guymon field are far greater than those shown there.

There are already numerous other local markets appearing, each with its large demand. These local intrastate uses will withhold large volumes of gas from the interstate pipe lines in ever-increasing quantities unless production and gathering of gas and sales incident thereto are definitely excluded from Federal regulation.

I might add right at that point that not only are these other markets being sought for safety, but the sales in those other markets are at substantially higher prices. All independents are going to seek the market which is going to give them security first, and increased price second, and I think that is just common sense to any of us.

When I first testified in Houston in docket G-580, in my prepared statement I had considerable information and considerable complaint about the price being received for gas which is sold for the manufacture of carbon black. At that time the only gas we could sell for the manufacture of carbon black was sour gas. Since then a law has been passed in Texas which allows the sale of sweet gas for the manufacture of carbon black, provided a price is paid for said gas at the wellhead not less than the prevailing market price at the wellhead for sweet gas for pipe-line use. That price is ascertained under that law by the Railroad Commission of Texas. As of September 4 that price was ascertained to be 4.25 cents per thousand cubic feet on the basis of 16.4 pounds. The carbon black market now, in contrast to a very low market price for gas going into carbon black at the time of the Houston hearing in docket G-580, is considerably in excess of that price and is computed on the basis of 14.65 at the wellhead, which means at about 5 cents a thousand, or close to that, for that market, which is for residue gas and not wellhead gas, that would be a little better than 512 cents on 16.4. So I believe you can fairly consider that the price on the 16.4 basis is 30 percent higher for residue gas going to carbon black manufacture than gas going to the pipe lines at the mouth of the well.

Natural gas reserves are at an all-time high. Yet we are now experiencing a shortage of supply at the points of consumption in the North and East. This shortage will not be remedied so long as producers are threatened with Federal regulation if they sell to interstate pipe

line companies. Congressional assurance to the producer that he will not be subjected to public utility regulation under the Natural Gas Act, will do much to alleviate this shortage of gas now and in the future.

I might at this point just bring in a little comment on Mr. Old's plan for using this gas to bring industries to the Southwest producing areas. If the record has been read thoroughly I believe it appears in the docket-it appears in numerous public instruments-that Colonel Thompson, who is chairman of the Texas Railroad Commission and has been a member of that commission since 1932 continuously, was formerly the mayor of the city of Amarillo, and he has repeatedly in his public statements blasted this "planning."

Amarillo for years, when Colonel Thompson was mayor, offered free gas-not low-priced gas, but free gas-for fuel to attract industry, with no takers, not one.

Senator MOORE. That was in Amarillo?

Mr. KAY. That was in Amarillo. There wasn't a single taker. Amarillo spent well over a hundred thousands dollars in advertising that free gas through Time and other national mediums, and one thing or another.

The answer to it is this, that fuel is only 5 percent of industry's problem, and it is relatively unimportant in comparison with other requirements. Now the industries that have come down to Texas have come for a combination of advantages.

For instance, Dow Chemical went down for gas for fuel, for raw material, and also for the sea water, because they are taking the magnesium out of it. Other industries have gone down there to use gas for raw material and for fuel in the manufacture of butadiene. Now they are going for acetylene, for synthetic rubber for the manufacture of tires, and many other uses.

When talking about the consuming public and the investors in interstate pipe lines whose legitimate interest must be recognized, we would have you keep another large segment of the general public in mind. The farmers, the ranchers, the many large and small business and professional men, the producing States and their subdivisions, their universities and schools and other institutions, the thousands of landowners and investors in royalties and in royalty companies who, together, constitute the land and royalty owners and who, taken together with the thousands of large and small producers and their countless employees, all of whose interests are inseparable from ours, are a part of the same great group of citizens. Included in this large group whose interests are involved are the landowners everywhere who do not now have production but are hoping that some day oil or gas will be found under their land. They are all a substantial part of the same great investing and consuming public and their interests, too, must be appropriately recognized. The administration of the Natural Gas Act by the Federal Power Commission has had a depressing effect on the value that the land and royalty owners receive for their gas.

The great body of land and royalty owners who are very much akin to the great body of ultimate consumers look to you gentlemen on this committee and to the Congress behind you to safeguard their proper interests by the adoption of the Rizley-Moore amendment which will go far toward restoring this industry to the true American system of government by laws and not by man.

I only have one or two comments that I would like to add to that, if you will bear with me one moment. You will notice that in my testimony I spoke of the oil and gas leases which we royalty owners and producers enter into all the time. Most of those leases provide for one-eighth of the proceeds or one-eighth of the market value. We believe, and sincerely feel, that it is very important that the trackage of section 51⁄2 (a) (2) in the Rizley bill conform to this prevailing market price. The prevailing market price has a definite meaning. This one-eighth, of the market value is definite and is written out in our oil and gas leases. As long as you track along with that, the courts with all their previous determinations and the decisions as to what "prevailing market value" means, will track along with the current oil and gas leases and with the hundreds and hundreds of thousands of those in existence, and it is vitally important.

Mr. WOODWARD. You referred a moment ago, Mr. Kay, to the statute in Texas which uses the term "prevailing market price." How does the Texas commission determine that?

Mr. KAY. It ascertains that by inquiry. The facts are determined and the quantities and prices are weighted. They hold a hearing, under the statute, semiannually or annually. The next hearing is set for the 4th day of March, and at that time they take evidence in open hearing, and quantities and prices are put into the record and their technical staff, together with the commission, ascertain what that prevailing price is.

Mr. WOODWARD. Then it is a weighted average of the contract price in the field, for the purpose of applying the statute?

Mr. KAY. That is correct; but that weighted average is only on the gas which is going to fuel lines. They only ascertain the fuel-line price because it is a comparative price, and under the statute the sweet gas cannot be sold for the manufacture of carbon black without the extraction of the liquids, unless they pay at least that much, and currently they are paying a great deal more than that. The determination of it at the present time is hardly necessary because the price at which they are contracting is considerably in excess of this ascertained average price.

Mr. WOODWARD. Then, in short, the Texas Railroad Commission has defined the term "prevailing market price" in the field to mean the weighted average contract price for gas sold for pipe-line fuel purposes?

Mr. KAY. Yes; I believe that is substantially correct.
Senator MOORE. Thank you, Mr. Kay.

We have a few more industry witnesses listed here. I think it was understood, Chairman Smith, today, that we would hear these staff members of the commission. Am I right about that?

Mr. N. L. SMITH. Well, I said this morning that we were here, that is, that the staff members were here, if they were needed, but we would very much prefer it if you went forward with the industry witnesses first, some of whom might be anxious to get out of town, and that would still be our desire, but the members of our staff are ready to testify when they are needed.

Senator MOORE. They are here now?
Mr. N. L. SMITH. Yes.

Senator MOORE. Are they ready now?

Mr. N. L. SMITH. I understand that Mr. C. W. Smith is prepared to go forward if that is desired, at this time, although we would prefer-of course, you are the judge of your own procedure-but we would prefer that all the industry witnesses might be heard first.

Senator MOORE. I understand that some of the industry witnesses are not quite ready to proceed, and there are only two left, I believe, is that correct?

Mr. WOODWARD. That is right, Mr. Chairman.

Senator MOORE. I think we will hear Mr. C. V. Smith now.

Mr. N. L. SMITH. Mr. C. V Smith, I would like to say for the record, is and has been for some years the Chief of our Bureau of Accounts, Finance, and Rates, and he is prepared to testify concerning the staff calculations which have been questioned here. Also, as I understand about certain of the figures put in by the industry witness, Jirgal. Is that correct, Mr. Smith?

STATEMENT OF C. W. SMITH, CHIEF, BUREAU OF ACCOUNTS FINANCE, AND RATES, FEDERAL POWER COMMISSION, WASHINGTON, D. C.

Mr. C. W. SMITH. Yes, sir; that is correct.

Senator MOORE. Do you have a prepared statement. Mr. Smith? Mr. C. W. SMITH. No, sir.

My name is Charles W. Smith. I live in Baltimore County, Md. am Chief of the Bureau of Accounts, Finance, and Rates of the Federal Power Commission.

I have a B. S. degree and a law degree. I am a member of the bar of Maryland, the Supreme Court of the United States, and a certified public accountant of North Carolina and of Maryland; a member of the leading accounting associations, having been president of the Maryland CPA Association in 1931.

I have been engaged in a major way in regulating public utilities for about 19 years. From 1920 to 1929, after passing a civil service examination, I was an auditor in the Bureau of Internal Revenue, handling income-tax matters.

For 7 years I was chief auditor of the Public Service Commission of Maryland, and in 1936, after twice declining an offer of the Federai Power Commission, I was persuaded to come to the Commission in substantially my present capacity.

I have testified in about 60 public utility proceedings. Eight of those went to the Supreme Court, and many went to other courts. I have been associated in one manner or another with practically every public utility rate case decided by the Supreme Court in the last 10 or 12 years. In particular, I have been devoting my efforts to putting the prudent investment method of rate regulation into practice.

I testified in the Hope case, which has succeeded Smyth v. Ames as the leading public utility rate case.

Reference has been made to the $39,000,000 of annual reductions in natural gas company rates since the Natural Gas Act was passed. I supervised most of those cases. The Hope case, being one of the first, resulted from a petition filed by the city of Cleveland, a petition