You asked for some analysis of the decision issued on April 29, 1960 by FPC Examiner Neston, giving conditional approval to the importation of Canadian gas by Pacific Gas Transmission Company, El Paso Natural Gas Company and Montana Power Company. Exceptions to this decision have already been filed by the first two of these companies, as well as by the staff of the Commission itself. It has been suggested that this Government might wish to express any feelings of its own on the subject through the State Department.

Those parts of the decision to which exception is taken reflect the Examiner's uneasiness over the fact that natural gas imported from a foreign country lies quite beyond U.S. regulatory control until it crosses the border. In his own words, "The only important issue in the case is whether such a project, involving future costs to American consumers based on unregulated 'fair field prices' to be paid to Canadian producers, plus Canadian transmission charges not fixed for the protection of the said consumers, is consonant with the American public interest." He continues in the text.

"Except for the rather abstract expressions of the California Commission, no participant in the record has raised or discussed the question of how much this project gas will cost the American consumers. Yet, as will be seen, the prospective gas costs at the border, and the future possibilities of higher Canadian costs over which this Commission has no control, makes the issue one of high importance. After many millions of dollars are invested in the general project, there will be no practical alternative to continuation of the project supply at almost any price that may be exacted. Stated simply, domestic gas prices in the project area are, for the most part, regulated in the interests of consumers from the wellhead to the burner top. Should the situation be otherwise in the case of Canadian gas? . The subject cannot be rationalized by unilateral action of this Commission in the imposition of border price conditions, because (a) it is impossible to forecast future costs and revenue needs of the Canadian companies, and (b) such action would be in substance an unseemly attempt to indirectly control Canadian regulatory policy . It is desirable to retain the possibility of future control over contract prices and rates, which possibility is not necessarily implicit in the Canadian regulatory process unless provided for at the outset. If the Commission and all others concerned are continuously during the life of the project supplied with the facts behind prices at the Canadian border, the basis will be established for appropriate action - a change in the regulatory process - in the light of such facts . In the event that the annual reports signal the existence or possibility of excessive costs or prices in the Canadian components of the project, further action may be taken by the Commission, the local authorities in the territories to be served, or jointly by both, to induce representation, through appropriate channels to the appropriate Canadian authorities, on behalf of American consumers . In view of the evident good faith desire of all project components, including the Canadian components, to serve project gas at the lowest reasonable rates, there will be no objection to the requirement of full disclosure of prices back to the wellhead annually during the life of the project, or to the reservation of the possibility of future Canadian prices regulations as described."

In short, the Examiner felt that blanket authorization of these projects would imply (a) acceptance of the odd preference for Canadian producers, who could charge what the market would bear, over U.S. producers whose prices were regulated in the interests of the consumer; (b) approval in principle of "field price" contracts with diverse unregulated escalator prospects; and (c) Canadian service and transmission charges not necessarily regulated in the interest of American consumers.

His solution to these problems was to have each of the three U.S. companies concerned file annual reports with the Commission showing complete details of the operations of each project component, including those within Canada. Pacific Gas Transmission would report for Alberta and Southern, Alberta Gas Trunk Line and Alberta Natural Gas; El Paso for Westcoast Transmission; and Montana Power for Canadian-Montana. Such details would include data on field prices, financial statements, the cost of delivered gas, revenue and volume figures, tax accruals, new construction and copies of new or revised gas purchase contracts. If this information uncovered what appeared to be excessive costs on the Canadian side of the border, representations might be made to the appropriate authorities in this country.

The Examiner also felt that blanket authorization of the projects would imply acceptance of imperfect showings as to the cost of equity involved in project capital, and the necessary rates of overall return as hinged on the cost of interest-money capital at the time of financing. He would therefore, condition the issuance of a certificate on the "further showing of necessary overall rate of return for project companies when financing is in imminent prospect." Going into detail, he recommended that the overall rate of return disclosed should be such as to provide, in respect of equity securities allowable to each project component, a return within a certain range. For Alberta and Southern, this would lie between 10-12 percent. For Alberta Natural Gas, Alberta Trunk Line and Westcoast Transmission, it should be no more than that currently being realized by utility companies in Western Canada, including Trunk Line and Westcoast themselves.

The decision dealt as well with certain purely domestic matters, but any communication which we might wish to make to State Department would obviously be concerned with those points mentioned above. Some of our possible objections have, in fact, already been anticipated in the brief filed on May 17 by the Commission staff. With regard to the rate of return conditions proposed by the Examiner, the Staff submitted that the FPC could neither feasibly nor legally exercise what amounted to indirect control of the rate of return of the project's Canadian components. The chief companies concerned, for example, Alberta Gas Trunk Line and Alberta Natural Gas were both subject to Canadian regulation in this regard, the first by the Alberta Board of Public Utility Commissioners, the second by the National Energy Board. While the agreed rate of return of 7 1/2 percent might be pierced sometime in the future, there appeared to be no feasible way in which the FPC could do more than approve delivered prices to the U.S. consumer on the assumption that the present arrangements of the Canadian companies with regard to rate of return would remain fixed, save under circumstances beyond control.

Alberta Gas Trunk Line differs from the other Canadian components in that it makes no promise of a fixed rate of return. Subject to approval by the provincial Board of Public Utility Commissioners, its directors hold the right to fix its rates, tolls and other charges, on a cost of service basis. The FPC staff had at one time suggested that any increased costs, arising from a rate of return for Trunk Line higher than 7 1/2 percent, should not be allowed to be passed on to the consumer unless the U.S. company concerned could prove that its Canadian shippers had "vigorously" contested the new rate before the Utility Board. On reconsideration, however, the staff decided that this would be a meaningless gesture, and an indirect attempt to control a utility which was subject to the jurisdiction of a Canadian regulatory agency.

The reporting requirements were also turned down, as imposing duties on Canadian subsidiaries which lay outside the authority of the FPC. The Staff Counsel stated:

"(The Examiner's) specific findings do trespass upon Canadian authority and are tan¬tamount to mandates and controls to be imposed upon Canadian companies. The Examiner fails to recognize that the goals he seek to reach are beyond the control of the Federal Power Commission if an import licence is to be issued . The Staff is quite alert to the inherent dangers of importation without a fixed price at the border, but a regulatory agency must balance interests to the best of its ability without frustrating a project which is desirable in the public interest."

El Paso and Pacific Gas Transmission filed similar exceptions, in which they referred darkly to regulatory invasion of Canadian sovereignty. Canadian firms, it was submitted, could not be defined as "natural gas companies" under the U.S. Natural Gas Act. Consequently, the FPC had no authority to regulate their return on equity. As for annual reports, the American importers could not require their Canadian components to furnish information not required by the Canadian authorities or by the contractual provisions already placed on record. Finally, a regulatory agency such as the FPC could not accomplish by certificate condition that which it could not accomplish directly.

Additional arguments pointed out that all the information necessary on which to base a decision was already available to the Commission, that the future was admittedly cloudy, as all futures were, with respect to wellhead prices and transportation costs, but that these matters were within the regulatory scope of Canadian authorities, in whose good faith and efficiency the U.S. consumer must trust.

Those companies which have filed exceptions may be guilty, for their own reasons, of slightly exaggerating the affront to our sovereignty. It is undeniable, however, that Canadian toes are being trod on to some degree. Under the Natural Gas Act, the FPC can neither directly regulate the rate of return nor require reports from, any company save that defined as a "natural gas company," i.e. "a person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale." Interstate commerce, in turn, refers to "commerce between any point in a State and any point outside thereof, or between points within the same State but through any place outside thereof, but only insofar as such commerce takes place within the United States." A 1957 decision by a U.S. Court of Appeals, quoted in the Pacific Gas Transmission brief, makes it equally clear that the Commission cannot overcome this lack of authority by throwing the responsibility for Canadian control on the American companies, as a condition attached to their certificates.

Canadian intervention will scarcely be needed to point out that the Examiner is consti¬tutionally out of bounds so far as the Natural Gas Act is concerned. It might be helpful, however, if we were to point out the extent of the trespass on our own authority, and the basis on which the latter rests. This might at least rouse some interest in State Department as to the real need for exchanges of information between the FPC and the National Energy Board.

It might be pointed out that our natural gas industry, insofar as it is regulated at all, is regulated in the Canadian public interest. There is no provision for recognizing U.S. public interest, save where it affects our own. At the same time the fact that consumers in Canada are being supplied from the same gas fields and, to some extent, by the same pipelines, makes it unlikely that costs within Canada would be allowed to rise excessively without cause. The American consumer would in most cases be indirectly protected by our own self-interest.

Secondly, Canadian authorities have approved certain rates of return for the companies in question. These allowances, in their estimation, represent the best compromise between consumer protection and the utility's need to attract capital. While we cannot prevent the FPC attaching conditions to their certificates which would have the effect of tampering with these rates of return, there would be no question of actually allowing changes to be made at this point, unless it could be proved to be in the Canadian public interest.

Similarly, we cannot prevent the FPC from attaching what conditions it pleases regarding annual reports. Under Section 7(e) of the Natural Gas Act, it may attach "such reasonable terms and conditions as the public convenience and necessity may require." It is for the companies themselves to decide whether they wish to bear this additional burden. Neither provincial nor federal authorities however, are under any compunction to act if U.S. complaints of excessive costs are brought forward. We are under no statutory obligation to protect the American consumer. The Examiner implied at one point that the requirement of annual reports had been inserted to bring the light of publicity to bear on the various utilities operations and so discourage even an attempt at hanky-panky. Laudable as this reasoning may be, he would surely have been better advised to rely on the vigilance of Canadian regulatory agencies.

If the FPC is ignorant of or confused by our regulatory techniques, better liaison between the two countries is surely called for. If it has suggestions for improvement, they should be brought forward in the same way. But it should not attempt to assert its authority over matters outside its jurisdiction, when these matters have already been examined and approved by competent Canadian agencies.

The only questions remaining concern the form which any Canadian protest should take, the level at which it should be submitted, and the advantages which we might expect to derive from making it. Since we are under no obligation to assist in carrying out the conditions imposed by the Examiner, we could very well remain quiet, on the grounds that we had not been an interested party in the proceedings and hence had received no official notification of the Examiner's recommendations. This would scarcely be a sensible proceeding. If the FPC were to approve the Examiner's decision as it stands, and subsequently run into a stone wall when it complained to us about Canadian costs, it could justifiably be annoyed. At the same time, since this is more or less a test case, it might pay us to be insulted rather than passive.

It would seem best to explain through State Department that while we recognized the FPC's right to attach whatever conditions it pleased to certificates of public convenience and necessity, nevertheless those parts of the project within Canada had been approved by Canadian agencies as being in the public interest, that they would continue to be regulated with that same goal in mind and no other, that while we had no statutory responsibility to consider the U.S. public interest it was usually close enough to our own to ensure that no undue advantage would be taken of American consumers, and that any misgivings which the FPC might have as to our regulatory efficiency or general good faith could easily be resolved through subsequent exchanges of information.