United States v. El Paso Natural Gas Company

PRELIMINARY STATEMENT

The following is a brief summary of the facts and background which lead to the present phase of this litigation. A more detailed account is found in three decisions of the Supreme Court:

California v. Federal Power Commission, 369 U.S. 482, 82 S.Ct. 901, 8 L.Ed.2d 54; United States v. El Paso Natural Gas Co. et al., 376 U.S. 651, 84 S.Ct. 1044, 12 L.Ed.2d 12; Cascade Natural Gas Corp. v. El Paso Natural Gas Co. et al., 386 U.S. 129, 87 S.Ct. 932, 17 L.Ed.2d 814. (Referred to as Cascade)

Prior to the year 1954, El Paso Natural Gas Company (El Paso) was engaged in the business of transporting natural gas interstate to the California border for sale to distributors who distributed the gas to users in southern California. At that time, El Paso was the sole out-of-state supplier to the California market.

In 1954, Pacific Northwest (PNW) received the approval of the Federal Power Commission to construct and operate a pipeline from the San Juan Basin in New Mexico to the State of Washington to supply gas to the then unserved Pacific Northwest area. The pipeline was completed and service was begun in 1956.

PNW had obtained authorization to receive large quantities of Canadian gas and, in addition, had acquired Rocky Mountain gas reservoirs along its route and gas reserves in the San Juan Basin. In 1954, PNW tried to enter the rapidly expanding California market by transportation of Canadian gas to Pacific Gas & Electric Co. (PG & E) in northern California, and the effort was renewed in 1955. In 1956, PNW negotiated with Southern California Edison Co. (Edison) to supply it with natural gas.

Although PNW had no pipeline into California and its efforts to enter the California market were unsuccessful, these efforts were a substantial competitive factor in the California market and led to a price reduction and other concessions to the ultimate benefit of Edison.

El Paso had been interested in acquiring PNW since 1954. The first offer from El Paso was in December 1955, an offer PNW rejected. Negotiations were resumed by El Paso in the summer of 1956, while PNW was still trying to obtain entry to the California market.

In November of 1956, El Paso offered to exchange El Paso shares for PNW shares. This offer was accepted by *8 PNW directors and by May 1957, El Paso had acquired 99.8 percent of PNW’s outstanding stock.

In July 1957, the Department of Justice filed suit against El Paso in the U. S. District Court for the District of Utah charging that the stock acquisition violated Section 7 of the Clayton Act.

In August 1957, El Paso applied to the Federal Power Commission for permission to acquire the assets of PNW, and on December 23, 1959, the Commission approved and the merger of PNW with El Paso was effected on December 31, 1959. California, an intervenor in the proceedings, obtained a review by the Court of Appeals, which affirmed the Commission (111 U.S.App.D.C. 226, 296 F.2d 348). The Supreme Court granted certiorari and set aside the Commission’s approval, holding that it should not have acted until the District Court had passed on the Clayton Act issues. California v. Federal Power Commission, 369 U.S. 482, 82 S.Ct. 901 (supra).

Meanwhile, (in October 1960) the United States amended its Complaint in the District Court so as to include the asset acquisition by merger in the charge of violation of the Clayton Act. Upon trial of this action, the District Court found for El Paso; the U. S. appealed; the Supreme Court, on review of the record which was composed largely of undisputed evidence, concluded that the effect of the acquisition “may be substantially to lessen competition” within the meaning of Section 7 of the Clayton Act, reversed the judgment and remanded with directions to the District Court “to order divestiture without delay.” United States v. El Paso Natural Gas Company et al., 376 U.S., p. 651, 84 S.Ct. 1044 (supra).

Upon remand to the District Court, motions to intervene by the State of California, Southern California Edison Company, (Edison) and Cascade Natural Gas Company (Cascade Company) were denied, and the District Court entered a decree of divestiture which had been agreed upon by the Department of Justice and El Paso.

California, Edison, and Cascade Company appealed from the denial of their motions to intervene. The Supreme Court in Cascade Natural Gas Corporation v. El Paso Natural Gas Company et al., 386 U.S. 129, 87 S.Ct. 932 (supra) reversed the District Court and remanded with directions to allow each appellant to intervene as a matter of right and that the proceedings be reopened to give California, Edison, and Cascade Company an opportunity to be heard as intervenors.

The Court also held that the agreed decree, entered by the District Court, was not in accord with the Supreme Court’s mandate in 376 U.S. 651, 84 S. Ct. 1044 (supra) which required that PNW, or a new company, be at once restored to a position where it could compete with El Paso in the California market; ordered the District Court to vacate the orders of divestiture previously entered; “have de novo hearings on the type of divestiture” the Court envisioned and made plain in its opinion in 376 U.S. 651, 84 S.Ct. 1044; directed “ * * * there be a divestiture without delay * * * ”; suggested guidelines that should be followed in ordering the divestiture and ordered that a different District Judge be assigned to hear the case.

PROCEEDINGS SINCE CASCADE

(For further detail see APPENDIX)

On April 18, 1967, the undersigned was assigned to the District of Utah to conduct the further proceedings required by Cascade.

After a conference with counsel on June 9, 1967, the Court granted 26 Motions to Intervene; continued the Federal Power Commission as amicus curiae; ordered El Paso to file a plan for divestiture by August 4, 1967; ordered those desiring to acquire the divested properties (applicants for acquisition) to file proposals by August 25, 1967; and permitted intervenors until September 18, *9 1967, to file comments on the proposals made and to make proposals of their own.

On October 3, 1967, a pre-hearing conference was had; the “de novo” hearings were commenced on October 16, 1967, in Ogden, Utah; were recessed on November 15, 1967; were resumed on January 8, 1968, in Denver, Colorado, and the taking of evidence was concluded March 21, 1968.

Briefs were filed — the last one on May 25, 1968, and oral argument was had on June 3, 1968.

In addition to the plaintiff and defendant, the Federal Power Commission as amicus curiae, 22 intervenors and 9 applicants for acquisition participated in all or a part of the hearings.

The names of the participating intervenors and applicants for acquisition are set forth in the APPENDIX.

SUMMARY OF PLANS PROPOSED

In accordance with the procedure prescribed by this Court, El Paso filed a divestiture plan (El Paso Exhibit 1) which is here summarized.

Thereafter, the applicants for acquisition filed their proposed plans, followed by the comments of intervenors, some of which made specific suggestions concerning the plans proposed. Edison suggested two alternate plans for divestiture.

SUMMARY OF EL PASO PLAN

Transfer of Assets to New Company

El Paso proposes to transfer to a corporate entity referred to herein as “New Company”, all of the operating property acquired from Pacific Northwest and additions thereto, $5,000,000 for working capital, designated gas reserves, and certain other assets in exchange for all of New Company’s common stock and New Company’s assumption of approximately $170,000,000 face amount of El Paso’s bond and debenture indebtedness, plus the cost of transferring this debt from El Paso to New Company (roll over cost) of an increase in the interest rate of one-eighth of one percent.

El Paso would sell up to 20 percent of New Company’s common stock to the successful applicant selected by the Court, and the balance of eighty percent or more would be deposited by El Paso in a voting trust to be administered under Court supervision by a trustee who would be wholly independent of El Paso and who may, with the approval of the Court, be the purchaser.

Non-voting certificates of participation in the voting trust would be issued and distributed by El Paso to its common shareholders. These participation certificates would be exchangeable for the underlying shares of New Company common stock under Court-approved provisions which would effectively preclude El Paso, its officers, directors, and common shareholders from acquiring any shares of New Company common stock.

The voting trust would terminate at the end of ten years, at which time any remaining New Company shares not exchanged would be sold by the trustee for the benefit of the remaining certificate holders.

The limitation of the sale of New Company stock to a maximum of 20 percent and placing the balance in a voting trust for the benefit of El Paso stockholders is designed to qualify the divestiture as a “D” type reorganization under Section 368 and a spin-off under Section 355 of the Internal Revenue Code, which under Section 361 of the Code would result in no taxable income to El Paso on the transfer of the assets to New Company. A sale of more than 20 percent of the New Company stock would not comply with the requirements of Section 368(c) of the Code, hence the 20 percent limitation.

The voting trust is proposed as the means to comply with the requirement of Cascade that New Company be insulated from domination by El Paso or its stockholders.

Sale Price of New Company Stock

The sale of up to 20 percent of New Company stock would be at a negotiated price. El Paso proposes that the Court select those applicants which it finds qualified and allow El Paso to negotiate *10 separately with each of them and present to the Court the agreements negotiated. The Court would select the successful applicant, presumably the one paying the highest price.

Divestiture

The successful applicant would then acquire the management of New Company, and El Paso and New Company would file applications with Federal Power Commission for authority to transfer the divested properties to New Company for operation.

Westcoast and Northwest Production Stock

El Paso proposes to sell this stock to persons satisfactory to the Court as soon as practicable after the Court approves the plan of divestiture.

Reimbursement for Use of PNW’s Tax Losses

El Paso proposes no reimbursement to New Company for its use of PNW’s tax losses. El Paso claims that the tax losses were used to maintain lower rates in the northwest division than otherwise would have been possible and thereby the benefits of the utilization of the tax losses were largely flowed through to the gas consumers in the northwest.

Inter-Company Contracts

El Paso proposes to reinstate the Sumas Exchange Agreement which provides for the purchase by El Paso of 100,000 MCF per day from New Company’s reserves in the San Juan Basin and to reinstate the CIG contract, whereby New Company will honor an obligation of PNW to transport and deliver from the San Juan Basin to CIG at Rock Springs, Wyoming, a certain amount of gas.

El Paso also proposes negotiation of a mutual gas gathering agreement in the San Juan Basin on a cost-of-service basis.

(These contracts and their disposition are discussed in detail later in this opinion.)

GAS RESERVES

El Paso proposes to divest to New Company the following gas reserves:

1. All reserves attributable to all gas supply sources now held by El Paso in the San Juan Basin and elsewhere as a result of the acquisition of PNW stock, both in the form of leaseholds and contracts for the purchase of gas;

2. All contracts negotiated since January 1, 1957, for Canadian gas and for all other gas supplies located north of Ignacio, Colorado;

3. A division of the gas reserves in the San Juan Basin.

SUMMARY OF OTHER PLANS

During the course of the hearings, some plans were modified from the original proposals; but the final briefs of the applicants contain a summary of the plans as finally submitted. However, all applicants for acquisition stated that they desire to be considered as applicants under any plan which the Court might devise. With this qualification, the Court summarizes the more pertinent parts of the plans submitted for the Court’s consideration.

SUMMARY OF ASPEN PLAN

Aspen accepts El Paso’s proposal to convey the assets to be divested to New Company, with New Company assuming the bond and debenture indebtedness as proposed by El Paso. El Paso would receive all of the stock of New Company, except an amount to be determined by the Court which would go to the founders of Aspen as founders’ shares. Aspen suggests three percent. The remainder of the New Company stock would be deposited by El Paso in a voting trust as proposed, but the trust would be limited to five years. Aspen’s plan eliminates the sale of any New Company stock by El Paso.

At an appropriate time, Aspen would merge with New Company.

The West Coast and Northwest Production stock would be divested to New Company, sold by it, and the net proceeds after payment of taxes would be used as working capital.

Aspen desires no reimbursement for El Paso’s utilization of PNW’s tax losses.

*11 Aspen accepts El Paso’s proposals regarding the inter-company contracts.

Aspen accepts El Paso’s division of the gas reserves as fair and equitable.

SUMMARY OF COLONIAL’S PLAN

Colonial accepts El Paso’s proposal with certain modifications, and is prepared to purchase up to 20 percent of the New Company stock at a negotiated or Court-determined price.

West Coast stock should be transferred to New Company at book value and sold by New Company.

As to inter-company contracts, Colonial suggests the reinstatement of the Sumas Exchange Agreement with an option to cancel on 18 months’ notice; reinstatement of Colorado Interstate Contract; non-reinstatement of Kingsgate Agreement and reinstatement of the San Juan Gathering Agreement at the old price subject to negotiation under the requirements of the natural gas act.

Colonial believes that the total gas reserves to be divested have been overestimated, and that the New Company-San Juan reserves should be supplemented; or, there should be an exchange of New Company Basin-Dakota reserves for additional Mesaverde reserves. El Paso should convey to New Company the exploratory acreage acquired by El Paso since the stock acquisition in basins located in the northwest division area.

SUMMARY OF COLORADO INTERSTATE PLAN

CIG accepts El Paso’s proposals with substantial modifications.

CIG proposes to furnish its own working capital.

CIG would reimburse El Paso for the divested assets at fair market value to be determined by negotiation with El Paso.

CIG would accept El Paso’s proposal that the assets be divested to New Company; New Company assume approximately $170,000,000 -of the debt and debenture indebtedness, plus the roll over cost. For its equity, El Paso would receive preferred stock of New Company convertible into CIG common. CIG would receive 100 percent of the New Company common stock in exchange for $5,000,000 in cash plus sufficient stock of CIG to satisfy the conversion requirements of New Company preferred stock.

Appropriate restrictions would be included in the divestiture decree to insulate New Company and CIG from domination or control by El Paso, its directors, officers, or major stockholders.

CIG proposes the acceptance of El Paso’s division of the gas reserves, subject to modification of the Sumas Exchange Agreement, either by reducing deliveries to 50,000 MCF per day, commencing in 1971 and terminating after 1973, or an option by CIG to cancel the agreement on reasonable notice.

CIG accepts El Paso’s proposal with reference to the West Coast and Northwest Production stock, the tax loss carry over, and the inter-company contracts, except for the proposed modification of the Sumas Exchange Agreement.

SUMMARY OF CONTINENTAL-PACIFIC (COPACO) PLAN

Copaco accepts the El Paso plan with modifications.

Copaco would merge into New Company and Copaco stockholders would, as a result of the merger, receive common stock of New Company on the basis of one share for each $12.50 of capital provided to New Company by Copaco. Thus, Copaco would obtain 480,000 shares of New Company stock (9.16 percent); New Company by the merger would receive $6,000,000 in cash, and El Paso would receive 90.84 percent of the New Company stock. El Paso would have the right, subject to Court approval, to sell approximately 10 percent of the New Company stock or offer to exchange that much with El Paso shareholders for El Paso common. The remaining New Company stock (80 percent or more) would be placed in a voting trust as proposed by El Paso.

Copaco does not propose divestment of West Coast and Northwest Production stock to New Company and does not propose a reimbursement by El Paso for the *12 use of PNW's tax losses; but should such a reimbursement be made, it should be used as a reserve to lower the book value of the property to be divested by El Paso.

SUMMARY OF GREAT LAKES PLAN

Great Lakes adopts the El Paso plan including the non-divestment of West Coast and Northwest Production stock and no reimbursement for tax loss carry over. However, Great Lakes suggests that the voting trust should be for a period of 10-15 years; that there should be an independent trustee and that the trustee should not be controlled either by El Paso or New Company.

SUMMARY OF PACIFIC WESTERN’S PLAN

Pacific Western proposes the assumption of a proportionate part of El Paso’s bond and debenture indebtedness and a cash purchase of the equity. The purchase price would be based on book value of the utility assets and West Coast stock; or, if the Court so decides, the fair market value. The funds for the purchase would be obtained from a public sale of Pacific Western stock.

As an alternative plan, Pacific Western proposes to acquire the equity in the divested assets by a stock exchange as follows:

1. Pacific Western would exchange its stock with El Paso stockholders in return for all of their El Paso stock.

2. El Paso would transfer the assets and related liabilities to New Company in return for 100 percent of New Company stock.

3. El Paso would transfer the stock of New Company to Pacific Western, solely in exchange for the shares of El Paso acquired by Pacific Western.

4. Pacific Western would merge with New Company.

Pacific Western believes such an exchange is a tax-free transaction.

West Coast stock should be sold by El Paso and the net profit after taxes should be credited to New Company.

Northwest Production stock to be retained by El Paso.

El Paso may retain Pacific Northwest Realty stock, Phillips Pacific stock, and the Prairie Pipeline, Prairie Transmission, and Specialty Products stock.

El Paso should reimburse New Company to the extent of $4,972,000 for El Paso’s use of the tax loss carry over.

As to inter-company contracts, Pacific Western suggests reinstatement of the CIG contract and Sumas Exchange Agreement, but the latter with an option to cancel. The San Juan Gathering Agreement should be reinstated at $.04% per MCF with any price differential determined by the Federal Power Commission to be retroactive.

The Kingsgate Exchange Agreement should be reinstated.

Gas Reserves

Pacific Western takes the position that El Paso’s estimate of the gas reserves to be divested of 9.2 TCF is overestimated and that El Paso should guarantee to New Company, total reserves in the amount of 9.2 TCF, and that New Company should have an option to cancel the Sumas Exchange Agreement.

SUMMARY OF PARADOX PLAN

Paradox proposes a cash purchase of El Paso’s equity. Paradox would assume $170,000,000 of El Paso’s indebtedness and pay cash for the equity at book value ($61,000,000) plus an amount equal to the book value of the stock of West Coast Transmission; or, Paradox would pay cash up to $73,000,000 plus an amount equal to the book value of the stock of West Coast.

The funds would be raised through an underwriting and sale of Paradox stock to the public.

SUMMARY OF ROSENBLATT-HUSKY PLAN

Accepts the El Paso plan, with modifications.

West Coast stock should be divested to New Company for working capital, “at a *13 value equal to the net realizable proceeds from the sale of those shares.”

There should be some reimbursement for El Paso’s use of PNW tax losses.

There should be three voting trustees to be designated by the Board of Directors or the Executive Committee of Rosenblatt-Husky.

SUMMARY OF WESTERN STATES’ PLAN

Accepts the El Paso plan and would propose to purchase 20 percent of the common stock of New Company (less founders’ shares). The funds for the purchase would be obtained through a nationwide public offering of Western States’ stock.

In the alternative, Western States would acquire all of the common stock of New Company. Up to 20 percent of the stock would be purchased for cash derived from the proceeds of a public offering of Western States’ stock. The balance of 80 percent or more would be acquired by an exchange of El Paso stock for the New Company stock. The El Paso stock would be acquired by an exchange of Western States’ stock for El Paso stock, the offer of exchange being made to El Paso stockholders.

Western States proposes that El Paso pledge the West Coast stock as security for an open line of credit which could be drawn upon by New Company for interim expenses. At the time of closing, this stock would be released from the pledge and sold as directed by the Court, with El Paso paying off the borrowings. Also, El Paso should stand Western States’ interim expenses until the actual take-over.

With these provisions, El Paso should retain the West Coast stock and also the stock of the Northwest Production Company.

Western States does not request any reimbursement for the use of PNW tax losses.

Sumas Exchange Agreement should be reinstated with option to terminate on reasonable notice.

SUMMARY OF PLANS PROPOSED BY EDISON

In its original comments, Southern California Edison Company proposed two plans.- The first proposed that the Court designate a specific purchaser from among the applicants, and that all of the assets to be divested be transferred to the successful applicant’s corporation in exchange for its bonds and debentures in an amount to be fixed by the Court and a specified percentage of the common stock of the acquiring corporation. The bonds and debentures received by El Paso would be exchanged by it for retirement of its own bonds and debentures in a manner similar to what El Paso proposes. The percentage of stock to be retained by the successful applicant should fairly reflect the effort expended, the expense incurred, and the risk taken.

The second plan is a slight variation of the El Paso plan. It would transfer the assets to New Company in exchange for New Company’s common stock and an assumption of El Paso’s bond and debenture indebtedness in the amount of $150,000,000 instead of $170,000,000 as proposed by El Paso. All of the stock of New Company would be deposited with a trustee. As soon as possible thereafter, the trustee would make a public offering through underwriter of 80 percent of the stock held by it, and as soon as the price for the 80 percent is established, the trustee will then sell the remaining 20 percent of the stock to the successful applicant at the net amount per share El Paso will realize from the public sale.

In its final brief, El Paso suggests that its alternate plan be modified to allow El Paso to dispose of the New Company stock as it sees fit, so long as it disposes of all the stock within a period of one year from the date of divestiture.

OTHER SUGGESTIONS OF INTERYENORS

The intervenors have made many and varied suggestions for modifications in the El Paso plan and suggestions for *14 the Court’s consideration in devising a plan for divestiture. Time does not permit nor would any good purpose be served by a discussion of them. They have been considered by the Court and, together with the evidence, constitute the basis for the Court’s determination.

PROPERTY TO BE DIVESTED

El Paso proposes to divest to New Company the following:

Physical Assets

The property, plant and equipment described in El Paso Exhibits 18 and 22 together with any additions, modifications, or replacements thereof subsequent to August 4, 1967.

Gas Sales Agreements

All gas sales contracts with any customer connected to any of the facilities to be divested to New Company existing at the effective date of the divestment.

Investments

(See APPENDIX for further detail.)

1. 49 percent of the capital stock of Phillips Pacific Chemical Co., which owns a fertilizer plant near Hedges, Washington;

2. All of the capital stock of Pacific Northwest Realty Corporation which owns an office building in Salt Lake City, Utah;

3. Inactive subsidiaries acquired from Pacific Northwest as a result of the merger:

Prairie Pipeline Ltd.

Prairie Transmission Lines Ltd.

Specialty Gas Products

The total investment in these companies is $61,000.

4. Miscellaneous club memberships representing an investment of $7,000.

These proposals have met with no objection. The Court finds that these physical assets and gas sales agreements are essential to the service of the northwest division and should be divested to New Company. The investments above described were acquired as a result of the merger, will in total contribute to the welfare of New Company, and should be divested to it.

GAS RESERVES

El Paso, in its plan of divestiture, proposes to divest to New Company, all reserves now held by El Paso in the San Juan Basin and elsewhere as a result of the acquisition of Pacific Northwest stock, all contracts negotiated since January 1, 1957, for Canadian gas, and all other gas supplies located .north of the San Juan Basin (Ignacio, Colorado), and a portion of the San Juan reserves acquired since the acquisition of PNW by El Paso.

After deducting the gas produced since January 1, 1957, to serve the northwest division markets, the gas reserves to be divested to New Company as of January 1, 1967, are estimated by El Paso to be approximately 9.2 TCF.

At Tabs 5 and 6 of El Paso’s Exhibit 1, is El Paso’s summary of the dedicated reserves to be divested and a comparison of remaining reserves, percentages, and reserve life indexes for divested company and El Paso. Tabs 5 and 6 are set forth on the following pages:

_TAB 5_

SUMMARY OF DEDICATED RESERVES TO BE DIVESTED

(Gas Volumes in M3cf at 14.73 psia Pressure Base and 60° F.)

Source 1-1-67 Pipeline Field and Reservoir Gas Reserves

CANADIAN

2,667.9 West Coast Transmission-Sumas

765.0 West Coast Transmission-Kingsgate

3,432.9

*15 ROCKY MOUNTAIN AREA

Big Piney Fields

Big Piney (Almy-Mesaverde) 138.9

Big Piney (Frontier-Muddy) 2,153.2

2,292.1

Piceance (Douglas Creek — Wasatch “A” & “G” 196.2

Miscellaneous Fields 128.6

2,616.9

SAN JUAN AREA

Basin Dakota Field 1,053.7

Basin Pictured Cliffs Field 396.2

Blanco Mesaverde Field 1,752.1

Miscellaneous Fields 4.6

3,206.6

TOTAL — 9,256.4

TAB 6

COMPARISON OF REMAINING RESERVES, PERCENTAGES AND RESERVE LIFE INDEXES FOR DIVESTED COMPANY AND EL PASO

(Gas Volumes at 14.73 psia and 60° F.)

PNW or Divested Company EPNG Total

January 1,1957

San Juan Reserves, bcf 2,591 9,539 12,130

Per Cent 21.4 78.6 100.0

Total System Reserves, bcf 6,054 27,281 33,335

Per Cent 18.2 81.8 100.0

1956 Production, bcf 856

Reserve Life Index, Years 31.9

January 1,1967

San Juan Reserves, bcf 3,207 11,509 14,716

Per Cent 21.8 78.2 100.0

Total System Reserves, bcf 9,256 30,165 39,421

Per Cent 23.5 76.5 100.0

1966 Requirement, bcf 343 1,268

Reserve Life Index, Years 27.0 23.8

Deliverability Life, Years 12 10

*16 A detailed description of the reserve acreage and gas supply data is set forth in El Paso Exhibits 23 and 24.

The primary controversy regarding the division of the gas reserves relates to the validity of El Paso’s estimate of the reserves proposed to be divested to New Company in the Big Piney fields (principally Frontier-Muddy) and in the Blanco-Mesaverde, Basin Pictured Cliffs, and Basin Dakota fields of the San Juan Basin. It is to this controversy that the Court’s Findings of Fact are first directed.

The reserves in the Big Piney field and the San Juan Basin consist of both developed and undeveloped reserves, and there is no way of being absolutely certain of how much gas can be produced and recovered from these various fields in advance of the time that the gas is actually produced in its entirety. However, the gas industry recognizes certain methods and techniques by which estimates are made which are used by industry and regulatory commissions such as the Federal Power Commission.

Two basic methods are recognized. One is the performance method, often referred to as pressure performance or the pressure decline method. In order to use the performance method, it is necessary to have pressure data and cumulative gas production records over a period of time from a substantial number of wells. Having this information, reservoir engineers can make an estimate of the recoverable gas in a particular gas reservoir.

The other method is known as the volumetric or pore volume method. This method is designed to calculate the porous space within a gas reservoir which contains recoverable gas. By the drilling of wells, analysis of the cores, use of electric logs and other techniques, the thickness, porosity, water content, gas pressure, temperature, and production limits of the formation are determined and with this information and by the use of recognized techniques, the amount of recoverable reserves is computed.

The volumetric method of estimating gas reserves is used when there is not sufficient performance data to justify the use of the performance method, but there is a sharp difference of opinion among the experts as to the number of years of performance data required to justify the use of the performance method in preference to the volumetric method.

In this case, the reserve experts who testified used one or both of these methods as well as their own refinements or modifications of the performance method. It is clear from the evidence that whatever the method or methods used by the experts who testified, the judgment of the expert plays an important part in the appraisal of the available data and in arriving at an estimate of recoverable gas reserves.

In addition to El Paso, Aspen, Colonial, Colorado Interstate, Pacific Western, Rosenblatt-Husky, and Western States made estimates of the gas reserves in the Frontier-Muddy in the Big Piney and the Mesaverde, Pictured Cliffs, and Basin Dakota fields in the San Juan Basin. The experts who made these estimates testified concerning them and the methods by which they arrived at their estimates.

The estimates of the various experts are at variance not only with El Paso’s estimate, but also with each other, and the Court can discern no thread of consistency by which the Court can reconcile these variations.

To illustrate the size and nature of the variations, there is set forth the reserve estimates of El Paso, Aspen, Colonial, Colorado Interstate, Pacific Western, Rosenblatt-Husky, and Western States in the San Juan Basin and the Frontier-Muddy of the Big Piney.

*17