Appendix — Sun Oil Co. v. Public Service Commission
Supreme Court brief1976
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. Supreme Geurt, U.S
FILED
F NOV 18 1875
75-73 Laem ns
No. eeeeeeeeeereeces >
In THE
Supreme Court of the United States
Octroser TERM 1975
Sun Om Company, GENERAL Crupe Or. Company,
M. H. Marr, ContinentaL Or Company,
Petitioners,
Vv.
Pvusuic Service CoMMISSION OF THE StTaTE OF New York,
Puruaperpui1a Gas Works Division or UGI Corporation,
Texas EasteRN TRANSMISSION CORPORATION,
FreperaAL Power CoMMISSION,
Respondents.
Ow Petition For A Writ oF CERTIORARI
TO THE Unitrep States Court or APPEALS
FOR THE District oF CoLuMBIA CIRCUIT
APPENDICES
TO PETITION FOR
WRIT OF CERTIORARI
FIDELITY PRINTING COMPANY, HOUSTON
- es
APPENDIX A
OPINION OF THE UNITED STATES COURT OF
APPEALS FOR THE DISTRICT OF COLUMBIA
CIRCUIT DECIDED MARCH 25, 1974
A-1
Notice: This opinion is subject to formal revision before publication in
the Federal -w-y or U.S. App. D.C. Reports. Users are requested to
ify the Clerk of any formal errors in order that corrections may be
made before the bound volumes go to press.
United States Court of Appeals
For Tue District or CoLtumBia Crircvit
No. 24,716
Pvustic Snrvice CoMMISSION OF THE
Strate or New York,
Petitioner,
v.
FeperaL Power CommMIssiIon,
t
Respondent.
Texas Eastern TRANSMISSION CORPORATION,
’
Sun Om Company, GENERAL CrupDE Or Company,
ConTInENTAL Or Company, anp M. H. Marr,
Intervenors
No. 24,823
Sun Om Company,
Petitioner,
v.
FeperaL Power ComMISssION,
Respondent.
Texas EasTeRN TRANSMISSION CORPORATION AND
Pumapeirpaia Gas Works Drvision or
UGI Corporation,
Intervenors
A-2
No. 24,824
GENERAL Crupe Om Company,
Petitioner,
v.
FreperaL Power ComMIssIon,
Respondent.
Texas EBastern TRANSMISSION CORPORATION AND
PurmapeELpui1a Gas Works Drvision or
UGI Corporation,
Intervenors
No. 24,825
M. H. Marr,
Petitioner,
v.
FreperaL PewerR CoMMISSION,
Respondent.
Texas Eastern TRANSMISSION CORPORATION AND
PurmapeLpHia Gas Works Division oF
UGI Corporation,
lntervenors
No. 24,836
ConTINENTAL Or. Company,
Petitioner,
v.
FeperaL Power ComMISssION,
Respondent.
Texas Eastern TRANSMISSION CORPORATION AND
Puimapectenta Gas Works Division or
UGI Corporation,
Intervenors
A-3
No. 24,846
Texas Eastern TRANSMISSION CORPORATION,
Petitioner,
v.
FeperaL Power Commission,
Respondent.
Sun Om Company, ContTiInentaL Or Company,
M. H. Marr, Genera Crupe Or Company, AND
PurmapeLpHia Gas Works Division oF
UGI Corporation,
Intervenors
PETITIONS FOR REVIEW OF ORDERS OF THE
FeperRAL Power ComMMISsION
Decided March 25, 1974
Morton L. Simons for petitioner in No. 24,716.
Bruce R. Merrill, with whom Tom Burton, Stanley Mor-
ley and Francis H. Caskin were on the brief, for petitioners
in Nos. 24,823, 24,824, 24,825 and 24,836 and intervenors
Sun Oil Company, General Crude Oil Company, Continental
Oil Company and M. H. Marr in Nos. 24,716 and 24,846.
J. Evans Attwell for petitioner in No. 24,846 and inter-
venor Texas Eastern Transmission Corporation.
Kenneth E. Richardson, Attorney, Federal Power Com-
mission, with whom Gordon Gooch, Genera! Counsel, and
J. Richard Tiano, Assistant Solicitor, Federal Power Com-
mission, were on the brief, for respondent. Jsrael Convisser,
Attorney, Federal Power Commission at the time the ree-
ord was filed, also entered an appearance for respondent.
A-4
William T. Coleman, Jr., was on the brief for intervenor
Philadelphia Gas Works Division of UGI Corporation in
Nos. 24,823, 24,824, 24,825, 24,836 and 24,846.
Before Fany, Senior Circuit Judge, and Tamm and Rosin-
son, Circuit Judges.
Opinion for the Court filed by Circuit Judge Rosinson.
ITI.
A-5
TABLE OF CONTENTS
Page
OID cctettcstctcinssmintenicnnemnunnnnenmenen a A-7
Background of the Litigation ............cccesseeeee A-8
A. Producer-Pipeline Transactions ................ A-8
B. Opinion No. 322 and Its Demise ................ A-10
i NE IIs IE rrnicesestiinditnnsaninnaitsinitnsetestnrcnnnes A-13
SD Bis GD ccencsccnnsccsssenniscenscrssecmnsterncseneses A-14
EB... Opimion No. 565-A .........cccscsscssssscesersssssseees Z A-18
Status of the Commission’s Opinions .............. A-23
A. The Problem and Its Genesis .................... A-23
B. The Governing Principles ........0........0ccc0e A-26
C. Application of Doctrine Here .................... A-30
Conventionalization of the Lease-Sale ............ A-32
A. Certification of Conventional Natural Gas
TIE comnniresenrseneveantesesiensnecnieeetennimmenennnenes A-33
B. The Lease-Sale Contrasted ..............0008 A-38
C. The Decision to Conventionalize ................ A-39
Sale Price of the Gas w....ccccccsesessesseseeeeeeseeneees A-48
A. The Price Adjustments .0..........c cece A-48
B. The Power to Change Contract Prices .... A-54
C. The Purchase Price Adjustment ................ A-58
—(1) The Unit Price .0.............cccccccssscsseeees A-59
—(2) The Total Price .0............cccsscssceseeeees A-64
Producer Rates and Refunds ................:c:0000 A-72
A. The General Standard for Producer Rates A-74
9
A-6
TABLE OF CONTENTS—Continued
The Treatment of Producer Rates ............ A-76
—(1) The Choice of the In-Line Price .... A-78
—(2) The Status of the Southern Louisi-
ana Area Rate Proceeding .............. / A-81
The Standard for Producer Refunds ........ 2 A -87
The Treatment of Producer Refunds ........ A-91
—(1) The Deferral of Producer Refunds A-95
—(2) The Amounts of Producer Refunds A-99
VI. Flow-Through of Rate Reductions and Re-
SOUNINIID saseinscsseitesbedbiscadcaestnideietaiacipuiuneisiaibaliisibintbakasssaedinds A-101
A. The Treatment of Rate Reductions in
GIES Tis ND ceiccsciennqpiticceccemnrnasdeerensin A-103
B. The Treatment of Refunds in Opinion
GP wnentisnnctinamdinn A-104
C. The Impact of Opinion No. 565-A ............ A-110
ie: Pe 8 ee A-111
E. The Standards for Flow-Through of Rate
Reductions and Refunds ..............cccsseeeseeees A-115
F. Flow-Through of Rate Reductions ............ A-118
G. Flow-Through of Rate Refunds ................ A-122
VII. The Second Southern Louisiana Area Rate
PIR sccttennssimantenieninnniisemmiees A-130
VIII. Summary and Disposition ........ ce eeeeseeeeeeees A-133
A-7
Roxsryson, Circuit Judge: We are called upon to review
three orders promulgated by the Federal Power Commis-
sion in lengthy proceedings arising and conducted under
the Natural Gas Act.' The Commission has granted four
producers of natural gas leave to sell their leasehold in-
terests in substantial proven rererves to an interstate pipe-
line, and the pipeline authority to construct and operate
facilities enabling it to take gas therefrom. These grants
have, however, been conditioned upon terms which are
continuing subjects of complaint by the producers, the pipe-
line, and other as well.
The producers are Sun Oil Company, General Crude Oil
Company, M. H. Marr and Continental Oil Company. The
pipeline is Texas Eastern Transmission Corporation
(Texas Eastern).? Other litigants in this court are the
Public Service Commission of the State of New York (PSC)
and the Philadelphia Gas Work of UGI Corporation
(PGW).’
™“he orders under attack emanate from a series of Com-
mission proceedings extending over a period of more than
thirteen years. But notwithstanding its longevity, the con-
troversy arrived here in a posture far from a final resolu-
tion. We have painstakingly examined its diffuse history,
analyzed its multifaceted issues and pondered the com-
plex problems emerging. Then, finding and identifying
error in their administrative treatment, we are led to a
disposition which, fortunately, will bring this long-standing
litigation to a just and early end.
1 Act of June 21, 1938, ch. 556, 52 Stat. 821, as amended,
15 U.S.C. §§ 717 et seq. (1970).
2Texas Eastern operates a pipeline system extending from
Texas to the Northeast. Its principal markets are in New England
and the Middle Atlantic region.
3 PGW, a customer of Texas Eastern, operates under contract
the municipally-owned gas facilities serving some 600,000 con-
sumers in Philadelphia.
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I. BackGrouNpb oF THE LITIGATION
A. Producer-Pipeline Transactions
By contracts executed on February 1, 1957, the prodne-
ers agreed to sell, and Texas Eastern to buy, their natural
gas production in Rayne Field,‘ in Southern Louisiana, at
an initial price of 23.9 cents per Mef.5 Shortly thereafter,
the producers applied to the Commission for certificates
of public convenience and necessity authorizing the sale,®
and Texas Eastern sought a certificate permitting con-
struction of new pipeline facilities extending its system to
Rayne Field.’ Because the unit price specified by the con-
tract was high,® the applications were opposed by PSC and
nine distributor intervenors. Hearings were held and on
April i5, 1958, the presiding examiner recommended that
the sale and the construction be unconditionally certifi-
cated. Exceptions to the examiner’s decision were noted,
but before the Commission ruled on them the Court of
Appeals for the Third Circuit rendered its decision in the
so-called CATCO litigation,’® reversing an earlier Com-
4 At the time, Rayne Field was a large and fully developed gas
reserve uncommitted to serving a market. It was only 22 miles
distant from one of Texas Eastern’s major pipeline systems, with
which it could be connected at relatively small cost.
5 The price included 1.3 cents for reimbursement of state taxes.
The contracts provided for escalations during future years.
®See Natural Gas Act §7(c), 15 U.S.C. §717f(e) (1970);
Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954).
7See Natural Gas Act §7(a), 15 U.S.C. § 717f(a) foged
Ohio Fuel Gas Co. v. FPC, 111 U.S.App.D.C. 337, 296 F.2d 5
(1961).
® See text infra at note 11.
° Texas Eastern Transmission Corp., 21 F.P.C. 869 (1959)
(examiner’s decision).
10 Public Serv. Comm’n v. FPC, 257 F.2d 717 (3d Cir. 1958),
aff'd sub nom. Atlantic Ref. Co. v. Public Serv. Comm’n, 360
U.S. 378 (1959).
A-9
mission order granting unconditional certification of gas
sales at an initial price lower than the 23.9-cent price in-
volved in the pending applications.'' The Third Circuit’s
decisional ground was that the applicants for certification
had not discharged their burden of demonstrating that the
sale price they proposed was justified in terms of public
convenience and necessity.'”
After that pronouncement, Texas Eastern and the pro-
ducers renegotiated, and on December 4, 1958, agreed upon
another arrangement. Instead of a conventional wellhead
sale of the gas at a 23.9-cent price, the new plan provided
for sales to Texas Eastern of the producers’ leasehold
interests in the gas reserves in place.’® The aggregate sale
price was some $134 million,’* which equated during the
11 The CATCO initial price was 22.4 cents per Mef, including
tax.
om Public Serv. Comm’n v. FPPC, supra note 10, 257 F.2d at
-23.
18 By that agreement, Texas Eastern acquired the producers’
entire working interest in Rayne Field gas, with an exception not
here material. Assignment and conveyance of the leasehold interests
was expressly made subject to four conditions. See Texas Eastern
Transmission Corp. (Opinion No. 322), 21 F.P.C. 860, 864 & n.5,
865 & n.6 (1959). For a succinct summary of other salient features
of the lease-sale arrangement, see Atlantic Ref. Co. v. Public Serv.
Comm’n, supra note 10, 360 U.S. at 396-97 & n.5.
The lease-sale agreement was made between the producers and
Louisiana Gas Corporation, a subsidiary of Texas incor-
porated for the purpose of transacting the sale. See Texas Eastern
Transmission Corp. (Opinion No. 322), supra note 13, 21 F.P.C.
at 864, 865. The Commission has consistently recognized Texas
Eastern as the real party in interest, and has treated the
ment as though Texas Eastern was the direct purchaser thereunder.
We do the same.
14The exact price was $134,395,700. Of that sum, $12,420,500
was to be paid in cash and the balance in installments spread
over a 16-year period ending in 1975, notwithstanding an antici-
pated lifetime of the field to 1986. "After 1975, Texas Eastern
would obtain the gas by payment of royalties, severance taxes and
operating expenses. Texas Eastern was also required to remit to
the producers, until production of some 600 million Mef of gas,
the proceeds of condensate liquids less costs for operating the field.
A-10
early years’® to about 23.5 cents per Mecf for the gas, a
figure out of line with prevailing prices.'* The producers
terminated their original contracts with Texas Eastern and
withdrew their applications for certification.‘ Texas Bast-
ern moved to amend its certificate application to reflect
these developments, and to reopen the administrative hear-
ing.
hb. Opinion No. 322 And Its Demise
On June 23, 1959, the Commission overruled objections
to the new proposal and, in its Opinion No. 322, awarded
Texas Eastern an unconditional certificate to build and
operate the facilities needed to effectuate the lease-sale.**
While the Natural Gas Act gave the Commission regula-
tory authority over the sales of gas which Texas Eastern’s
original contracts with the producers had contemplated,’®
15The years 1959-67. The equated per-Mcf cost stated in text
includes only the $134 million purchase price, and not other costs
falling upon Texas Eastern.
16 The in-line price, see note 44, infra, for gas sold under 1958
contracts was 20 cents per Mef, as the Commission was later to
determine. Teras Eastern Transmission Corp. (Opinion No. 565),
42 F.P.C. 376, 384 (1968). See also Texas Eastern Transmission
Corp., 42 F.P.C. 446, 448-49 (1968) (examiner’s initial decision).
17 Three of the producers did so promptly, and the fourth some-
what later. The producers’ theory was that, with a sale of the gas
leases rather than the gas itself, Commission approval of the sale,
as distinguished from Texas Eastern’s proposed construction, was
unnecessary. But see text infra at notes 22-29.
18 Texas Eastern Transmission Corp. (Opinion No. 322), supra
note 13. An application by PSC for -ehearing was subsequently
denied. Teras Eastern Transmission Corp., 22 F.P.C. 451(1959)
(order denying rehearing).
1? Natural Gas Act §§ 4, 5. 15 U.S.C. §§ 717e, 717d (1970). In
Phillips Petroleum Co. v. Wisconsin supra note 6, 347 U.S. at
676-85, the Court held that the Commission had jurisdiction over
wellhead sales of natural gas to interstate pipelines for resale in
interstate commerce.
A-11
the Commission held that it lacked jurisdiction over sales
cf their gas leases,?° and that for that reason it was under
no obligation to determine, as a precondition to certifica-
tion of pipeline construction related to those leases, whether
the $134 million price was compatible with the public in-
terest.2! As a result, the producers’ gas soon began to flow
through Texas Eastern’s pipelines for interstate distribu-
tion; and over the years ensuing, the flow has continued
ari the out-of-line prices paid to the producers have, as
cust-of-service items, been reflected in the rates Texas East-
ern has charged its customers.
Opinion No. 322 was, however, brought to this court for
judicial review, and was reversed.?? Our opinion predated
the holding in United Gas Improvement Company v. Con-
tinental Oil Company® that the Commission possessed
jurisdiction over the sale of the leasehold interests.** We
stated that while the Commission was empowered to cer-
tificate the pipeline construction without passing on the
financial merits of the lease-sale arrangement, its order
indicated general approval of the terms of that arrange-
ment; and that to the extent that the order purported to
do so, it was unsupported by substantial evidence in the
20 Texas Eastern Transmission Corp. (Opinion No. 322), supra
note 13. 21 F.P.C. at 864. The Commission relied on FPC v. Pan-
handle Eastern Pipe Line Co., 337 U.S. 498 (1949), wherein it was
held that a transfer of undeveloped leases of gas reserves by an
interstate pipeline to a production company fell within the provi-
sion of §1(b) of the Act, 15 U.S.C. § 717b (1970), excluding “the
production or gathering of natural gas” from the jurisdiction of
the Commission.
21 Texas Eastern Transmission Corp. (Opinion No. 322), supra
note 13, 21 F.P.C. at 864.
22 Public Serv. Comm’n v. FPC, 109 U.S.App.D.C. 289, 287 F.2d
143 (1960).
23 381 U.S. 392 (1965).
24 See text infra at note 37.
A-12
record.?> We realized that a determination of the reason-
ableness of proposed rates is not an express statutory
requirement in a proceeding seeking authorization to extend
pipeline facilities,?® but we also recognized that the eco-
nomic fact of escalating natural gas prices “does make
price a consideration of prime importance.”’*? We read the
Supreme Court’s CATCO decision “as holding that where
a natural gas company seeks an unconditional certificate to
make new sales of natural gas at proposed prices which
are ‘out of line’ with existing prices, or which will tend to
have an inflationary impact on the natural gas market, it
ix under an obligation to demonstrate upon the record the
reasons why such increased prices are justified by the
‘public convenience and necessity.’”** And we held that
irrespective of whether the parties’ lease-sale was beyond
the Commission’s regulatory jurisdiction, Texas Eastern’s
pipeline construction and its sales of Rayne Field gas were
jurisdictional matters, and the price paid by Texas Eastern
to the producers was a factor demanding consideration
since Texas Eastern’s acquisition costs would become rele-
vant in the regulation of sales by Texas Eastern to its
customers.?° We remanded the case to the Commission with
25 Public Serv. Comm’n v. FPC, supra note 22, 109 U.S.App.
D.C. at 291, 287 F.2d at 145.
26 Id. See Natural Gas Act § 7, 15 U.S.C. § 717f (1970).
27 Public Serv. Comm’n v. FPC, supra note 22, 109 U.S.App.D.C.
at 291, 287, F.2d at 145.
28 Td.
29 Td. at 292, 287 F.2d at 146. The producers had “insist[ed]
that their gas ha[d]} only been committed to Texas Eastern on the
basis of the proposed rates and state{d] that, if conditions are
attached, consideration will be given to the disposition of the
Rayne Field gas in markets not subject to th{e] Commission’s
jurisdiction.” Teras Eastern Transmission Corp. (Opinion No.
322), supra note 13, 21 F.P.C. at 874. We held that the Commission
could not “abdicate its responsibilities simply because the parties
A-13
instructions to either disclaim any approval of the $134
million price or “reopen the record in the certificate pro-
ceeding to permit Texas Eastern to establish by adequate
evidence that the acquisition costs which it proposes to
incur will be consistent with the public convenience and
necessity.”*°
C. Opinion No. 378
On remand, the Commission took the latter course, and
after further hearings, reached two conclusions. On Febru-
ary 6, 1963, in Opinion No. 378,*! it reversed its earlier
position on jurisdiction over the lease-sale and held that
it indeed did have jurisdiction.** After discovering that
power, however, the Commission recognized that the pro-
ceeding was not in a posture enabling final disposition. It
was essential that the producers, who were not parties to
the remanded proceeding, file an application for a cer-
tificate of public convenience and necessity for approval
of their sale,®* and the nature of the lease-sale transaction
presented novel difficulties in the way of price regulation.**
The parties were given six months to work out new arrange-
tell it that the whole transaction will collapse unless the full price
asked is approved.” Public Serv. Comm’n v. FPC, supra note 22,
109 U.S.App.D.C. at 291, 287 F.2d at 145. Accord, Public Serv.
Comm’n v. FPC, supra note 10, 257 F.2d at 722-23.
30 Public Serv. Comm’n v. FPC, supra note 22, 109 U.S.App.D.C.
at 292, 287 F.2d at 146.
31 Texas Eastern Transmission Corp. (Opinion No. 378), 29
F.P.C. 249 (1963).
82 Td. at 252-56.
33 Id. at 256.
34 Td. at 256-57.
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ments and submit new filings.*®
Opinion No. 378 was subjected to judicial review in the
Fifth Cireuit, and the Commission’s jurisdictional deter-
mination was reversed.** On further review, however, the
Supreme Court, limiting its consideration to that question,
reversed the Fifth Circuit and sustained the Commission’s
jurisdiction over the lease-sale.*7 Since no question as to
the propriety of the Commission’s disposition was before
the Court,®* its action left Opinion No. 378 intact.
D. Opinion No. 565
In March, 1966, in response to Opinion No. 378, the pro-
ducers filed applications for certificates of public conven-
ience and necessity, and another round of hearings ensued.
The presiding examiner split his initial decision into two
parts, the first dealing with the question of payments to
be remitted to producers in the future, and the second,
made necessary by the first, with the question of refunds
on account of payments to producers in the past. In his
Phase I decision, issued January 23, 1968,°° the examiner
35 Jd. at 257, 258. By Opinion No. 378-A, the Commission denied
rehearing of Opinion No. 378 Teras Eastern Transmission Corp.
(Opinion No. 378-A), 30 F.P.C. 153 (1963), with a modification
extending the filing period for producers to six months after com-
pletion of any judicial review, id. at 157.
36 Marr v. FPC, 336 F.2d 320 (5th Cir. 1964), rev’d sub nom.
United Gas Improvement Co. v. Continental Oil Co., supra note 23,
381 U.S. 392 (1965).
37 United Gas Improvement Co. v. Continental Oil Co., supra
note 23. The Court distinguished FPC v. Panhandle Eastern Pipe
Line Co., supra note 20, on the grounds that in the latter the trans-
ferred leases were undeveloped, and the transfer was to a produc-
tion company in contemplation of sales of gas in intrastate com-
merce. Id. at 403-04.
38 Id. at 399.
39 Reported at 42 F.P.C. 446.
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was of the view that the lease-sale did not meet the test
of public convenience and necessity because uncertainties
as to the volume of gas which would be produced entailed
tvo great a risk for consumers,*® and because the imbalance
in payments during earlier years was not outweighed by
countervailing benefits.*' The examiner recommended modi-
fications of the transaction calculated to render it equiva-
lent to a conventional sale of gas at 20 cents per Mef after
adjustments reflecting costs incurred and benefits obtained
by Texas Eastern which normally would have accrued to
producers.*® The examiner’s Phase II decision, issued on
September 11, 1968,*° and utilizing an in-line level of 20
eents per Mcf** as the basis for computations, recom-
mended that the producers refund to Texas Eastern, and
49 7d. at 451.
In March, 1967, while the applications were pending, Texas
Eastern and the producers formalized an agreement obligating
the latter to reimburse Texas Eastern at the rate of 20.625 cents per
Mef for any amount beneath 814,339,000 Mef that their holdings
in Rayne Field might fail to produce. This guaranty was deemed
insufficient to dispel the uncertainty because reliance on it depended
on other assumptions which were equally risky: the ability of
producers individually to meet the financial demands in the future;
the cost to Texas Eastern of realizing upon it; and the estimates
as to production of liquids, the revenues from which would accrue
to Texas Eastern and would be unaffected by any deficiency in gas
output. Id.
#1 Td. at 453.
42 Td. at 448-52.
43 Reported at 42 F.P.C. 455 (examiner’s Phase II decision).
44 The in-line price is the field price in a given time period at
which the bulk of proper sales of gas have been made. We have
already noted that the in-line price was 20 cents per Mcf when the
lease-sale agreement was made. See note 16, supra. The examiner
recommended that the in-line price be supplanted by just and
reasonable prices as they become available. Jd. at 458, 461, 467.
See note 53, infra, and accompanying text.
A-16
that Texas Eastern in turn refund to its customers, excess
collections estimated at $31.5 million through 1967.45 The
examiner further recommended reduction of Texas East-
ern’s rates.*®
On August 6, 1969, the Commission issued its Opinion
No. 565 and an order upholding in the main the examiner’s
decision on both phases.‘7 The Commission found that the
lease-sale arrangement as formulated by the parties did
not comport with the public convenience and necessity.*
Even with a producer guaranty alleviating the possibility
of payment for gas that did not exist,*® the Commission
concluded that other uncertainties generated too much
risk.°° Had the lease-sale agreement come before it in an
unexecuted form, the Commission declared, it might well
have been rejected,5! but since almost half of the total
estimated volume of gas had already flowed through Texas
Fiastern’s pipelines, the Commission decided to modify the
transaction in order to put it in its most palatable form.*?
The Commission ordered Texas Eastern to limit further
payments to producers to amounts, not exceeding a just and
reasonable rate of 18.5 cents per Mef** or any such super-
#5 Td. at 461, 463, 464.
46 Td. at 466.
*7 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16. The principal difference between the Commission and the
examiner related to the amount of producer refunds which Texas
Eastern should immediately flow through to its customers. Compare
text supra at note 45 and infra at note 58. See also Part VI, infra.
48 Td. at 382-90.
#9 See note 40, supra.
°° Teras Eastern Transmission Corp. (Opinion No. 565), su
note 16, 42 F.P.C. at 382-83. See note 40, supra. ane
51 Td. at 383.
527d.
*’ After issuance of the examiner's Phase II decision but before
rendition of Opinion No. 565, the Commission had set a just and
A-17
seding just and reasonable rate as might thereafter be
established,®* and to cease payments when the producers
received the full $134 million contract price.*> The Com-
mission ordered the producers to refund to Texas Eastern
the excess, after specified adjustments, of payments re-
ceived above the 20-cent in-line level prior to October 1,
1968, and thereafter above the 18.5-cent or other appli-
cable just and reasonable rate,®® a total of $31.5 million
through 1967.57 And the Commission directed Texas EKast-
ern to refund about two-thirds of that amount — $19.9
million through 1967 — to its customers,** and to trim its
rates to reflect a cost of 18.5 cents,®® or a cost at any other
area rate thereafter becoming applicable.*°
reasonable rate of 18.5 cents per Mef for Southern Louisiana gas
of the Rayne Field vintage. Southern Louisiana Area Rate Pro-
ceeding (Opinion No. 546), 40 F.P.C. 530 (1968), order on rehear-
ing, 41 F.P.C. 301 (1969), aff'd sub nom. Austral Oil Co. v. FPC,
428 F.2d 407 (5th Cir.), cert. denied, 400 U.S. 950(1970). See
text infra at notes 69-75.
54 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390, 403. The figure derived by application of
this formula would be increased by the addition of Texas Eastern’s
net receipts from sales of liquids after completion of the producer
payments, and by the addition of salvage realized by Texas Eastern
under certain conditions, and decreased by the amounts of royalties,
state taxes and specified development and operating expenses. Id.
at 403.
55 Jd. at 404. Producers would however, receive additionally the
amount of any salvage which Texas Eastern might realize from
investments made before the final payment. Jd.
56 Td. at 404-05.
57 Td.
58 Jd. at 398-99, 405. The Commission also required Texas Eastern
to compute and escrow the amount of customer refunds, id. at
405-06, to shape its accounting practices to exclude the producer
refunds from its rate base, id. at 406-407, and to amend its rates to
reflect reductions in costs made possible by Opinion No. 565, id.
59 Td. at 401, 407.
6° Jd. at 401.
A-18
Opinion No. 565 was not a unaminous decision. Com-
missioners O’Connor and Bagge subscribed to it fully.®
In all respects save one, they were joined by Chairman
White, who dissented solely as to the use of the 20-cent
in-line rate partially, instead of the 18.5cent just and
reasonable rate exclusively, as the basis for computation
cf producer refunds.*? Commissioners Carver and Brooke
expressed the view “for decisional purposes” that the 20-
and 18.5-cent refund bases were correct® but, on the ground
that the lease-sale might yet garner approval, they would
have remanded for the development of additional data.®*
E. Opinion No, 565-A
It so happened, however, that Opinion No. 565 and
its accompanying order were not effectuated in any mean-
ingful way. Applications for rehearing were presented to
the Commission, and by orders entered September 2° and
is8,°° 1969, the Commission granted rehearing, and by sepa-
rate order on the latter date stayed, pending reconsidera-
t:on, the certificate conditions formulated in Opinion No.
065.°7 On September 29, 1970, the Commission issued
Opinion No, 565-A,°° which purported to reaffirm many
cf the considerations underlying Opinion 565, but also to
substantially modify the solution it presented.
61 Td. at 354, 407.
62 Td. at 417.
63 Td. at 438.
64 Td. at 422-23.
®° Texas Eastern Transmission Corp. (F.P.C. Sept. 2, 1969)
(unreported ).
°6 Teras Eastern Transmission Corp. (F.P.C. Sept. 12, 1969)
(unreported ).
°7 Teras Eastern Transmission Corp. 42 F.P.C. 684 (1969)
(order granting stay).
°* Tevas Eastern Transmission Corp. (Opinion No. 565-A), 44
F_LP.C. 1079 (1970).
A-19
The modifications proposed by Opinion No. 565-A are
directly treaceable to significant developments in producer-
rate regulation in Southern Louisiana occurring contem-
poraneously with the proceeding under review. In 1960,
the Commission inaugurated a series of proceedings to en-
able determination of maximum producers’ rates for
major gas-producing areas and the regulation of such
rates on an area-wide basis.®°® Southern Louisiana, in
which Rayne Field is situated, was one of those areas. A
final order in the Southern Louisiana proceeding — Docket
No. AR 61-2—was issued on September 25, 1968,7°
establishing 18.5 cents per Mef as the just and reason-
able rate for gas of the Rayne Field vintage.” On the
same date, the Commission commenced a new proceed-
ing — Docket No. AR 69-1—to determine whether the
Southern Louisiana rates set in Docket No. AR 61-2 needed
modification in light of later circumstances. In the mean-
time the Court of Appeals for the Fifth Cireuit reviewed
and sustained the Commission’s order in Docket No. AR
61-2,”" but petitions for writs of certiorari were presented
to the Supreme Court.”* On applications for rehearing, the
Fifth Cireuit adhered to its holding, but indicated that
despite its affirmance the Commission might have power
69 Phillips Petroleum Co., 24 F.P.C. 537, 547 (1960); State-
ment of General Policy No. 61-1, 24 F.P.C. 818 (1960). See also
Permian Basin Area Rate cases (Continental Oil Co. v. FPC), 390
U.S. 747 (1968).
70 Southern Louisiana Area Rate Proceeding (Opinion No. 546),
supra note 53. Docket No. AR 61-2 awaited developments in Docket
No. 61-1, related to the Permian basin in Texas. See Permian Basin
Area Rate Cases (Continental Oil Co. v. FPC), supra note 69, 390
U.S. at 458-60.
71 Southern Louisiana Area Rate Proceeding (Opinion No. 546),
supra note 53, 40 F.P.C. at 648.
72 Austral Oil Co. v. FPC, supra note 53.
73 The petitions were denied, 400 U.S. 950 (1970), but more
than two months after Opinion No. 565-A was issued.
A-20
to reconsider the order.7* The Commission then stayed its
order in Docket No. AR 61-2 and consolidated that docket
with Docket No. 69-1 for further hearing.** Thus, when
Opinion No. 565-A was handed down, a Commission order
establishing just and reasonable rates for Southern Louisi-
ana gas had been affirmed but was pending application for
further review, and from the Commission’s viewpoint the
matter of rates for gas of Rayne Field vintage was still
in flux.
Order No. 565-A reflects some shifting of positions
among the Commission’s members.”® A majority, of the
members’? reaffirmed the basie conclusion that the lease-
sale in original form did not serve the public interest.”*
A majority also felt, however, that the modifications im-
posed by Order No. 565 must undergo some changes.'?
Chairman Nassikas and Commissioner Bagge were of
opinion, like Chairman White before them,*° that the
standard for producer refunds to Texas Eastern’? should
be the just and reasonable rate exclusively, rather than
the 20-cent in-line rate partially;*? but, arguing that a
74 Lustral Oil Co. v. PPC, 444 F.2d 125, 126-27 (5th Cir.), cert.
denied, 400 U.S. 950 (1970). ’
75 Southern Louisiana Area Rate Proceeding (Opinion No. 546),
supra note 53.
76 Chairman Nassikas and Commissioner Pagge joined positions.
Teras Eastern Transmission Corp. (Opinion NO. 565-A), supra
note 68, 44 F.P.C. at 1080-89. Commissioners Carver and Brooke
joined in different positions, but voted with Chairman Nassikas
and Commissioner Bagge to enable a disposition. Id. at 1098.
Commissioner O'Connor stood on his position in Opinion No. 565.
Id. at 1092. Chairman White had left the Commission.
77 Chairman Nassikas and Commissioners O’Connor and Bagge.
78 Teras Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1083-86, 1092.
79 See text and notes infra this part.
8° See text supra at note 62.
5! See text supra at notes 48-57.
82 Texas Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1084, 1088.
A-21
just and reasonable rate had not been finally determined,
they voted to defer the question of amount of the re-
funds.**? They also were of opinion that Texas Eastern’s
payments to producers should not be limited to the con-
tract price of $134 million,’ but should continue until
the field was exhausted.*® These views collided with those
expressed in Opinion No. 565 by Commissioner O’Con-
nor,*® who in Opinion No. 565-A adhered to them.§? Com-
missioners Carver and Brooke, the dissenters in Opinion
No. 565, would have granted the certificate unconditionally
on the ground that the lease-sale met the requirements of
public convenience and necessity,®® but as the next best
alternative, concurred in deferment of refunds®® nd ex-
tension of payments to producers for the life of the field.®°
So it was that the Commission reached no decision as
to the refund liability of either Texas Eastern or the pro-
ducers, and that all issues in that regard were post-
poned.** Thus the provisions of Opinion No. 565. re-
specting Texas Eastern’s prospective payments to pro-
ducers,” the producers’ refunds to Texas Eastern, the
latter’s refunds to customers®* and its rates for the fu-
ture,*° together with the associated escrowing and ac-
83 Td. at 1087-88.
84 See text supra at notes 52-55.
85 Texas Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1081.
86 See text supra at notes 61-64.
87 Texas Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1098-1107.
88 Td. at 1097.
89 Td. at 1098.
90 Td.
91 Td. at 1081, 1087-88, 1089, 1097-98.
92 See text supra at notes 53-55.
93 See text supra at notes 56-57.
94 See text supra at note 58.
95 See text supra at notes 59-60.
A-22
counting requirements,°® were all postponed indefinitely
pending a new round of hearings.®’ The certificates sought
by Texas Eastern and the producers were issued, condi-
tioned upon payment of an adjusted price of 20 cents per
Mef until such time as the area rate might be established.*”
Petitions seeking rehearing of Opinion No. 565-A were
filed“? and on November 16, 1970, they were denied,”
again with shifts in position. Chairman Nassikas and Com-
missioner Bagge voted for denial without further state-
ment.°!. Commissioner O’Connor voted to deny, but
appended a statement arguing that the total to be paid
under the lease-sale contract should be adjusted to reflect
the time value of money payments to the producers which
were delayed by reason of the order requiring refunds.’
Commissioners Carver and Brooke dissented, and an-
nounced withdrawal of their “reluctant concurrence” in
Opinion No. 565-A “to the end that the producers can
receive” payments “for the life of the field.”*°* They reite-
rated their belief that the lease-sale contract should be
approved as originally written.1°* The petitions for review
by this court followed.
96 See note 58, supra.
97 Teras Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1091.
°3 Td. at 1089-90.
%° The applicants for a rehearing of Opinion No. 565-A were
Texas Eastern and three of the four producers. PGW, the inter-
venor here, submitted an application for rehearing which the
Commission rejected as untimely by one day, but accepted it as a
motion for reconsideration. Teras Eastern Transmission Corp.,
supra note 100, 44 F.P.C. at 1471 (order denying rehearing). PSC,
a petitioner here, did not seek rehearing of Opinion No. 565-A. See
note 116, infra.
100 Teras Eastern Transmission Corp., 44 F.P.C. 1471 (1970)
(order denying rehearing).
101 Jd. at 1471.
102 Td, at 1472.
103 Td at 1474.
104 Jd.
A-23
II. Sratus or tHe CommMission’s OprInions
The threshold question we confront is the current status
of Opinions Nos. 565 and 565-A and the orders respectively
accompanying them as exertions of the Commission’s adju-
dicatory authority. No one argues that either of these opin-
ions or orders lacked a Commission majority when they
issued. No one suggests that Opinion No. 565-A, when an-
nounced, did not effectively modify Opinion No. 565. Rather,
the dispute relates to the impact upon the substantive and
procedural aspects of those decisions which may have been
made by the commmissioners’ subsequent votes on the order
denying rehearing of Opinion No. 565-A. The votes which
Commissioners Carver and Brooke cast on that order are at
the center of the controversy.
A. The Problem and Its Genesis
Opinion No. 565 and its companion order were sup-
ported by the majority votes of Chairman White and Com-
missioners O’Connor and Bagge in every aspect save one.!°
The one divergence was on the question whether the just
and reasonable rate was to be utilized retroactively as well
as prospectively as the basis for computing producer re-
funds to Texas Eastern.?®® On that issue, Chairman White
took the affirmative’®’ and Commissioners O’Connor and
Bagge the negative’ but they were joined by Commisson-
ers Carver and Brooke “for decisional purposes,’
although the latter two dissented for other reasons.'!°
105 See text supra at notes 61-62.
106 See text supra at note 62.
107 See text supra at note 62.
108 See text supra at notes 56-57, 61.
109 See text supra at note 63.
110 See text supra at note 64.
A-24
Similarly, Opinion No. 565-A and the order related to it
were sustained, initially at least, by the unqualified votes
of Chairman Nassikas and Commissioner Bagge,'"? and by
the votes which two of their disagreeing colleagues, Com-
missioners Carver and Brooke, “reluctantly” contributed
to enable the disposition dictated by that opinion and
order ;!2 only Commissioner O’Connor voted against that
disposition.!!* The order denying rehearing of Opinion No.
565-A was backed by a majority consisting of Chairman
Nassikas and Commissioners O’Connor and Bagge,'** with
Commissioners Carver and Brooke undertaking to “with-
draw [their] reluctant concurrence” in that opinion ;**® and
it was the purported withdrawal that bred the first contro-
versy which we consider.
PSC,1"* deeming the withdrawal effective, contends that
the majority vote originally effectuating Opinion No. 565-A
1tl See text supra at notes 80-85.
112 See text supra at notes 88-90.
113 See text supra at notes 86-87.
114 See text supra at notes 101-02.
115 See text supra at notes 103-04.
116 PSC sought rehearing of Opinion No. 565 but not Opinion No.
565-A, and on that account Texas Eastern aid Continental have
moved to dismiss PSC’s petition for review to the extent that it
complains of the order accompanying Opinion No. 565-A. Texas
Eastern contends that Opinion No. 565 was so drastically altered
by Opinion No. 565-A that an application for a rehearing of the
latter opinion was prerequisite to judicial review. Continental
argues additionally that in Opinion No. 565-A the Commission
met the objections PSC registered against Opinion No. 565, and
that in consequence PSC is no longer aggrieved thereby. For rea-
sons following we deny the motions to dismiss.
Section 19(a) of the Natural Gas Act, 15 U.S.C. § 717r(a)
(1970), provides that “[n]o proceeding to review any order of the
Commission shall be brought by any person unless such person
shall have made application to the Commission for a rehearing
thereon.” Thus an application for rehearing is a jurisdictional pre-
requisite to judicial review. Dayton Power & Light Co. v. FPC,
[Footnote continued on page 25]
eee
a
in its modification of Opinion No. 565 evaporated with the
vote on the order refusing rehearing of Opinion No. 565-A.
In other words, PSC claims that when Commissioners
116 Continued]
102 U.S.App.D.C. 164, 165, 251 F.2d 875, 876 (1958); Michigan
Consolidated Gas Co. v. FPC, 83 U.S.App.D.C. 395, 167 F.2d 264
(1948); Pan American Petroleum Corp. v. FPC, 268 F.2d 827
(10th Cir. 1959). Moreover, § 19(b) of the Act provides that “[{n]Jo
objection to the order of the Commission shall be considered by
the court unless such objection shall have been urged before the
Commission in the application for rehearing unless there is reason-
able ground for failure to do so.” See also, e.g., FPC v. Colorado
Interstate Gas Co., 348 U.S. 492, 497-501 (1955); Panhandle East-
ern Pipe Line Co. v. FPC, 324 U.S. 635, 649 (1945). We find,
however, that PSC satisfied these demands.
The obvious purpose of the statutory requirements is to afford
the Commission the first opportunity to consider, and perhaps
dissipate, issues which are headed for the courts. See Dayton
Power & Light Co. v. FPC, supra, 102 U.S.App.D.C. at 165, 251,
F.2d at 876; City of Pittsburgh v. FPC. 99 U.S.App.D.C. 113, 121,
237 F.2d 741, 749 (1956). We have consistently held that our
authority to review actions of the Commission is unaffected by
events—even irregularities—which do not hamper attainment of
that objective. See Michigan Consolidated Gas Co. v. FPC, 108
U.S.App.D.C. 409, 430-31, 283 F.2d 204, 225-26 (1960); Dayton
Power & Light Co. v. FPC, supra 102 U.S.App.D.C. at 165-66, 251
F.2d at 876-77; City of Pittsburgh v. FPC, supra, 99 U.S.App.D.C.
at 121, 237 F.2d at 749. Surely a modification of a prior administra-
tive decision on rehearing does not generate a need to request an-
other rehearing where the litigant has already presented his point
to the Commission for decision. Here PSC submitted an application
for rehearing of Opinion No. 565 on specified grounds, and in
Opinion No. 565-A the Commission disdained PSC’s positions
and denied the application. The grounds which PSC advanced
to the Commission match or subsume the contentions PSC now
wishes to litigate in this court with respect to both opinions. We
cannot say that PSC was obliged to do more before the Commission
than it did.
As Continental says, judicial review is reserved by §19(b),
15 U.S.C. §717r(a) (1970), to a “party to a proceeding under
[the Act] aggrieved by an order issued by the Commission in such
proceeding. .. .” But contrary to Continental’s assessment, we are
satisfied that the effect of Opinion No. 565-A was to intensify
rather than ameliorate PSC’s complaints as to Opinion No. 565.
Put another way, PSC remains “aggrieved”—as much by the one
decision as by the other.
A-26
Carver and Brooke retracted their joinder in Opinion No.
565-A, that opinion perished and Opinion No. 565 became
automatically reinstated. Texas Eastern argues similarly,
though more limitedly, that after the loss — because of the
withdrawal —of a majority of the commissioners for
Opinion No. 565-A, there could no longer be the certificate
condition, fashioned in that opinion, converting the respon-
sibility for producer payments from the contract total of
$134 million to a liability for continuing payments until
cessation of gas production in the transferred leasehold
properties.
The Commission, on the other hand, eschewing the with-
drawal, asserts that the majority vote for Opinion No.
565-A when issued was unaffected by the subsequent voting
with respect to the applications for rehearing of that
opinion, and in that position the producers unite. The issue
thus boils down to whether the attempted withdrawal
charged the 4-1 vote for Opinion No. 565-A and its sus-
pension of the certificate conditions to a vitiating 3-2 vote
against Opinion No. 565-A, thus restoring Opinion No. 565
as the final and only decision of the Commission. It is
important to resolve the dispute at the outset so that we
may know just what we are legitimately called upon to
review.
B. The Governing Principles
The authority to entertain and dispose of applications
for rehearing of Commission orders is defined by the Nat-
ural Gas Act. “Upon such application,” the Act provides,
“the Commission shall have power to grant or deny re-
hearing or to abrogate or modify its order without further
hearing.”"?’ This grant, in terms, runs to the Commission
as a governmental body. The Commission is an entity apart
17 Natural Gas Act § 19, 15 U.S.C. § 717r (1970).
A-27
from its members, and it is its institutional decisions —
none other—that bear legal significance.’ Only as an
entity can the Commission formulate valid original de-
cisions; by the same token, only in that character can it
fashion new decisions remaking those which it has already
promulgated."'® Collective action is prerequisite to any alte-
ration of a preexisting order, whether a grant or denial of
rehearing,'*° or a total abrogation or partial modification
of that order.'*?
By institutional decisions, we mean, of course, a decision
by a majority vote duly taken. That is the rule of the
18 See Braniff Airways v. CAB, 126 U.S.App.D.C. 399, 405,06,
410-11, 379 F.2d 453, 459-60, 464-65 (1967). See also WIBC v. FCC,
104 U.S.App.D.C. 126, 127-28, 259 F.2d 941, 942-43 (en banc), cert.
denied, 358 U.S. 920 (1958); Olsen Co. v. State Tar Comm’n, 109
Utah 563, 168 P.2d 324, 328 (1946); Adkins vy. Citizens Bd., 112
W.Va. 171, 163 S.E. 853 854 (1932).
19 In Braniff Airways v. CAB, supra note 118, three members
of the five-member Civil Aeronautics Board participated in and
agreed unanimously upon a decision, but on a motion for recon-
sideration two of four participating members voted to deny and
the remaining two to grant. The two members voting to grant
filed a statement which contained findings additional to the earlier
findings of the board. We held that the additional findings could
not validly supplement or buttress the original findings because
.. . they were the findings of only two out of four members.
Even though these two members were among the three who
concurred in the [earlier] decision, we are concerned with
reviewing institutional decisions. Despite their personal con-
nection with that opinion the statement of two members of an
equally divided regulatory agency possesses no authoritative
significance.
126 U.S.App.D.C. at 411, 379 F.2d at 465. See also Sperry Gyro-
scope Co. v. NLRB, 129 F.2d 922, 924 (2d Cir. 1942).
120 See text supra at note 117.
121 See text supra at note 117.
A-28
common law,'?? which we have hitherto applied to adminis-
trative action,'** and the rule by which, we notice judicially,
the Commission has regularly functioned. There being no
statutory specification to the contrary, we have no difficulty
in accepting it as the governing rule here.’** And since each
of the five members of the Commission’ cast a vote toward
each of the three decisions relevant here, it follows that a
concurrence of at least three votes was essential to con-
stitute any given feature of the voting an aspect of
commission action.!2* It follows, too, that the efficacy of
122 Baltimore & O. R.R. v. United States, 298 U.S. 349, 362
(1936); Plymouth Coal Co. v. Pennsylvania, 232 U.S. 531, 547
(1914); ICC v. Delaware, L. & W. R.R., 220 U.S. 235, 248-51,
(1911); Brown v. District of Columbia, 127 U.S. 579, 586 (1888) ;
Cooley v. O’Connor, 79 U.S. (12 Wall.) 391, 398 (1871) Railroad
«Comm'n vy. Louisville & N. R.R., 140 Ga. 817, 80 S.E. 327, 335-36
(1913); Codman v. Crocker, 203 Mass. 146, 89 N.E. 177, 180
(1909); Re State Treasurer’s Settlement (Bartley v. Meserve),
51 Neb. 116, 70 N.W. 532, 534-36 (1897); State ex re!. Clausen v.
Hartley, 144 Wash. 135, 257 P. 396, 400 (1927).
123 In WIBC v. FCC, supra note 118, where the votes of six of
seven members of the Federal Communications Commission present
were equally divided, we rejected the contention that the vote of
the seventh commissioner, which broke the tie, was not decisive.
104 U.S.App.D.C. at 128, 259 F.2d at 943. It was argued that since
by statute four members of the Commission constituted a quorum,
47 U.S.C. § 154(h) (1970), three votes would control irrespective
of the number present and voting. Id. at 127-28, 259 F.2d at 942-43.
We said that “[w]hen a quorum is preseni, the . . . Commission
may act, but only on the vote of a majority of those present,” td.
at 128, 259 F.2d at 943, and, quoting Adkins v. Citizens Bd., supra
note 118, 163 S.E. at 854, that “[i]t is the commen law that
where joint authority is involved, a quorum being present, legal
action can be taken by a majority and by none less,” id. We con-
cluded that “when six voted, it took four to control,” id., and that
when the seventh commissioner voted, “there were seven partici-
pants and it still took four to control; hence his vote was decisive,”
id. See also Greater Boston Television Corp. v. FCC, 143 U.S.App.
D.C. 383, 403, 444 F.2d 841, 861 (1970), cert. denied, 403 U.S.
923 (1971).
124 FTC y. Flotill Prods., Inc., 389 U.S. 179, 183-85 (1967).
125 See 16 U.S.C. § 792 (1970).
126 In this view, we have no occasion to consider whether action
of a majority of a quorum of three commissioners, see 16 U.S.C.
§ 792 (1970), as distinguished from a majority of the full Commis-
sion, is prerequisite to the promulgation or modification of an
opinion or order. See FTC v. Flotill Prods., Inc., supra note 124,
389 U.S. at 181-86 & nn. 4, 9, and cases there cited.
Ss eh ca Tle as
ee ere ere eee
A-29
action taken by majority vote is in no wise affected by the
fact that there is also a minority.'*? “[A] dissent no more
reduces the legal effect of [an agency’s] findings and order
than does a dissenting opinion of a member of a court
detract from the legal effect of the court's judgment.”!”*
We perceive no incongruity with logic or precedent in
these conclusions. On the contrary, neither the requirement
of institutional action which Congress has imposed on
tle Commission nor the principle of majority rule which
the Commission has itself impressed upon its decision-
making processes could tolerate any other. Collective action,
we repeat, is the only authorized means to a decision, in-
cluding a decision to undo a prior decision. If an agency
proceeding could be reopened by the unilateral action of a
member who casts a vote for the majority, then, irrespective
of the conviction of remaining members that the interest
in repose outweighed their doctrinal differences, a single
defection from the majority could thwart many a careful
considered resolution, and wreak havoe on the stability of
the agency’s decisions. We have not been referred to nor
have we found any authority for such a novel and frighten-
ing proposition.
We do not mean to suggest that a commissioner’s vote,
once made, imprisons him in an intellectual straitjacket.
The point is that an individual change of mind cannot
change an institutional decision unless it garners a ma-
jority vote to do so. Nor is there any requirement, statu-
tory or otherwise, that members of administrative agencies
maintain consistent positions throughout the course of
lengthy proceedings. Commissioners, no less than judges,'”®
— Sperry Gyroscope Co. v. NLRB, supra note 119, 129 F.2d at
128 Td.
129 Compare Screws v. United States, 325 U.S. 91, 113, 134 (1945)
(concurring opinion of Justice Rutledge).
A-30
may cast their votes solely to avoid an impasse,’*° or other-
wise to draw the administrative phase to a close. Commis-
sioners Carver and Brooke utilized their votes on Opinion
No. 565-A to achieve an objective deemed more important
than adherence to personal precept.'*! Commissioner
O'Connor voted against rehearing of Opinion No. 565-A
despite his differences with that opinion because he felt
that the litigation was ripe for judicial review.’** But, in
each instance, what counted in the definition of agency
action was the vote rather than the individual view.
In sum, a change of individual position, to affect the
institutional decision, must occur as a part of a collec-
tive effort directed toward that decision. Once made, the
decision remains the decision of the body, immune from
alteration save by another collective effort of that body.
Individual endeavor to modify an institutional decision,
so long as it is only that, is of no consequence in the ad-
ministrative process.
C. Application Of Doctrine Here
The petitions for rehearing of Opinion No. 565-A and its
related order!*? presented to the Commission the questions
whether the petitions should be granted or denied, and
whether the Commission should “abrogate” or “modify”
that opinion.!*¢ The Commission plainly decided those ques-
130 Compare Greater Boston Television Corp. v. FPC, supra
note 123, 143 U.S.App.D.C. at 403, 444 F.2d at 861.
131 See text supra at notes 88-90.
132 Texas Eastern Transmission Corp., supra note 100, 44 F.P.C.
at 1471-73 (order denying rehearing).
133 These included applications for rehearing by Texas Eastern
and the producers and a motion for reconsideration by PGW. PSC
did not seek rehearing or reconsideration of Opinion No. 565-A.
See notes 99, 116, supra.
134 See text supra at. note 117.
A-31
tions in the negative. The order on rehearing declares the
Commission’s “opinion” that “the questions raised by the
Applicants are sufficiently covered by or are clear from the
language of Opinion No. 565-A and order, so that further
discussion is unnecessary.”?*> The order also sets forth the
Commission’s finding that “(t]he assignments of error and
grounds for rehearing set forth in the applications for
rehearing . .. present no facts or legal principles which
would warrant any change in or modification of Opinion
No. 565-A and ” its accompanying order.'** The sole dispo-
sition effected by the order was that “[t]he applications
for rehearing... [and] the motion for reconsideration .. .
are denied.”?97
It is also evident that the Commission’s decision to
deny rehearing of Order No. 565-A was supported by the
votes of a majority of the commissioners. Chairman Nassi-
kas and Commissioner Bagge subscribed fully to the order
of denial.'°* Commissioner O’Connor concurred in the de-
nial,’®® and while he filed a statement expressing a change of
view as to the amounts which the producers should receive
from Texas Eastern,'* he announced categorically his posi-
tion that “[t]he granting of rehearing at this time would not
serve any constructive purpose,”!*! and that “an additional
rehearing would not be fruitful.”'4*? Only Commissioners
Carver and Brooke dissented, adhering to their thesis that
the lease-sale transaction should be approved as it was.?*
1385 Texas Eastern Transmission Corp., supra note 100, 44 F.P.C.
at 1471 (order denying rehearing).
186 Tq.
187 Jd.
138 Jd.
189 Td. at 1471-73.
140 Td. at 1471.
141 Td. at 1471.
142 Td. at 1472.
143 Td. at 1473-74.
A-32
We hold, then, that Opinion No. 565-A was not abrogated
or modified by the vote on the petitions to rehear it.'** Three
commissioners — a commission majority— concurred in
refusing rehearing of Opinion No. 565-A, and that was the
only action which commanded a majority vote. Although the
coalitions spawning Opinion No. 565-A were altered by the
poll on the petitions for rehearing, the only proposal
garnering a majority was the denial of rehearing; and the
vote of the majority was, unequivocally, to leave Opinion
No. 565-A intact. It bears repeating that the order recited
the decision that “[t]he assignments of error and grounds
for rehearing set forth” by the applicants for rehearing
“present no facts or legal principles which would warrant
any change in or modification of Opinion No. 565-A” or the
order effectuating it.14° Hardly could the Commissioners
comprising the majority have made plainer their purpose
not to change Opinion No. 565-A in any respect whatsoever.
In consequence, the matters before us for review are
Opinion No. 565 as modified by Opinion No. 565-A, and
Opinion No 565-A without modification, and the orders
respectively accompanying those opinions. To the issues
tendered for review we now turn.
III. ConveENTIONALIZATION OF THE LEASE-SALE
Opinions Nos. 565 and 565-A each express the finding
of a majority of the Commission’® that the lease-sale
144 So concluding, we do not reach the question whether an agency
opinion or order can be rescinded or amended without a prior
vote to reconsider it.
145 Teras Eastern Transmission Corp., supra note 100, 44 F.P.C.
at 1471 (order denying rehearing).
146 As to Opinion No. 565, Chairman White and Commissioners
O’Connor and Bagge; as to Opinion No. 565-A, Chairman Nassikas
and Commissioners O’Connor and Bagge. See text supra at notes
61-62, 78-79, 86-87.
mt A ae ene
A-33
transaction, in the form agreed to by the parties, did not
survive the test of public convenience and necessity.'*
For that reason the Commission, in awarding the parties
the certificates requested, conventionalized some aspects
of the lease-sale to more nearly conform it to a normal
gas-sale contract.'** Both the producers and Texas KEast-
ern contend that the Commission’s adverse finding on
public interest is insufficiently supported by the evidence,
and that the administrative record demonstrates that the
lease-sale is more favorable to consumers than a conven-
tional sale could be.
The Commission faced a novel situation in the lease-sale
arrangement presented to it, for the lease-sale was not
readily amenable to administrative supervision in the Com-
mission’s accustomed mode of regulating prices between
producers and pipelines.'*® The problems which the lease-
sale presented come into sharper focus when the process
of certificating conventional sales of gas is first examined.
A. Certification of Conventional
Natural Gas Sales
A conventional gas-sale contract sets a price for each
unit — each Mef —of gas to be supplied, frequently with
a provision escalating the price. When a sale is sought
to be certificated, the price is subject to scrutiny by the
147 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 382-90; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-85.
148 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390-93; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1085-87.
149 See Texas Eastern Transmission Corp. (Opinion No. 565),
supra note 16, 42 F.P.C. at 380; Texas Eastern Transmission Corp.
(Opinion No. 378-A), supra note 35, 30 F.P.C. at 256; Texas
Eastern Transmission Corp. (Opinion No. 378), supra note 31,
29 F.P.C. at 156.
A-34
Commission in the exercise of its authority, under Section
7 of the Natural Gas Act,'®® to attach such conditions to
the certificate as are necessary in the public interest.’*?
The Supreme Court’s decision in Phillips Petrolewm
Company v. Wisconsin'®? opened the door to Commission
regulation of sales by producers to interstate pipelines,
and Sections 4'°° and 5'** of the Act armed the Commis-
sion with general authority to establish just and reason-
able rates for the gas sold. But full-fledged rate proceedings
are, by their very nature, unsuited to the needs of price
review when a producer seeks certification of a sale.155
Such proceedings are extraordinarily time-consuming,'*®
and any relief from excessive rates emanating from those
15015 U.S.C. § 717f (1970).
151 Natural gas companies must obtain certificates of public con-
venience and necessity prior to engaging in sales of natural gas
subject to the Commission’s jurisdiction. Natural Gas Act § 7(c),
15 U.S.C. § 717f£(¢) (1970). Notice to interested parties and hear-
ing are prerequisite to the issuance of a permanent certificate, but
not to the issuance in a case of emergency of a temporary certifi-
eate pending application for a permanent certificate. Jd. Another
prerequisite to issuance of a permanent certificate is a finding by
the Commission that the sale “is or will be required by the present
or future public convenience or necessity,” td. §7(e), 15 U.S.C.
§ 717f(e) (1970), and the Commission may qualify the certificate
by “such reasonable terms and conditions as the public convenience
and necessity may require.” Id. See FPC v. Sunray DX Oil Co.,
391 U.S. 9, 16-19 (1968) ; United Gas Improvement Co. v. Callery
Properties, 382 U.S. 223, 227-29 (1965) ; Atlantic Ref. Co. v. Public
Serv. Comm’n, supra note 10, 360 U.S. at 391-92.
152 Supra note 6.
153.15 U.S.C. §717e (1970).
15415 U.S.C. § 717d (1970).
155 See the discussion in FPC y. Sunray DX Oil Co., supra note
151, 391 U.S. at 16-20; United Gas Improrbment Co. v. Callery
Properties, supra note 151, 382 U'S. at 227-28; Atlantic Ref. Co.
v. Public Serv. Comm’n, supra note 10, 360 U.S. at 388-91.
156 See Atlantic Ref. Co. v. Public Serv. Comm’n supra note 10,
360 U.S. at 389-91. See also FPC v. Sunray DX Oil Co., supra
note 151, 391 U.S. at 17-18.
A-35
under Section 5 is prospective only.’®*’ Consumers were
thus exposed to irremediable excessive charging while rate-
reform proceedings were pending.'®* Even when area rate
proceedings came into vogue as the preferred method of
setting producer rates,'®® the exigencies of interim price
protection remained.'®
In the CATCO litigation,’ the Supreme Court focused
on the problem, emphasizing the vital importance of price
regulation under Section 7:
[T]he inordinate delay presently existing in the
processing of 45 proceedings requires a most care-
ful scrutiny and responsible reaction to initial price
proposals of producers under §7.... The fact that
prices have leaped from one plateau to the higher
levels of another . . . [makes] price a consideration
of nrime importance. This is the more important
during this formative period when the ground rules
of producer regulation are being evolved. . . . The
Congress, in §7(e) has authorized the Commission
to condition certificates in such manner as the public
convenience and necessity may require. Where the
proposed price is not in keeping with the public in-
terest because it is out of line or because its ap-
proval might result in a triggering of general price
rises or an increase in the applicant’s existing rates
by reason of “favored nation” clauses*™ or o*herwise,
157 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 389. See also FPPC » Sunray DX Oil Co., supra note 151,
391 U.S. at 17.
158 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 089. See also FPC v. Sunray DX Oil Co., supra note 151,
391, U.S. at 17.
159 See test supra at notes 69-75.
160 FPPC v. Sunray DX Oil Co., supra note 151, 391 U.S. at 16-19.
161 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10.
162 “Favored nation” clauses assure producers that they will
receive the highest price currently being paid in the same area by
their own purchasers or, as it may be provided, by any purchaser.
See FPC v. Sunray DX Oil Co., supra note 151, 391 U.S. at 18 n.2.
A-36
the Commision in the exercise of its discretion might
attach such conditions as it believes necessary.'®
Following CATCO, the Commission undertook to assure
that the prices at which producer sales were certificated
did not exceed in-line prices —the field prices at which
the bulk of contemporaneous gas transactions not “sus-
pect” took place.’** The Supreme Court, in turn, approved
the practice as a means of holding the line on prices in
the interest of consumer protection until the Commission
could determine just and reasonable rates for the gas.!*®
This technique streamlined the Section 7 certification
process, and the Commission was enabled to certificate
sales on the basis of comparative pricing alone, without
need to delay the process by indulgence in orthodox rate-
making.'®
The Act spells out the processes by which producer
rates set at in-line levels may be altered. After Section
7 certification, a producer may, under Section 4, vie for
a higher price by the simple expedient of a 30-day notice
to the Commission and the public.'®? The Commission may,
however, suspend the proposed increase for a maximum
period of five months while it investigates and acts on the
e 163 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 391. See also FPC v. Hunt, 376 U.S. 515 (1964).
164Tn ascertaining the in-line price, the Commission and the
courts have usually excluded or discounted certain prices which
for one reason or another might reflect impermissible price jumps.
See FPC vy. Sunray DX Oil Co., supra note 151, 391 U.S. at 19.
169 Td. at 21-36. See also United Gas Improvement Co. v. Callery
Properties, supra note 151, 382 U.S. at 226-29.
166 United Gas Improvement Co. v. Callery Pr :
note 151, 382 U.S. at 327-28, ry Properties, supra
167 Natural Gas Act §4(d), 15 U.S.C. §717e(d) (1970). The
notice is given by filing with the Commission and keeping open
for public inspection new schedules specifying the rate changes
and the time they are to go into effect. Id.
A-37
application.’®* Before it may finally approve the increase,
the Commission must find that it does not exceed the
just and reasonable rate for gas of its vintage,’®? and
the burden of proof on that issue is on the applicant.’
Pending the outcome of the proceeding, the producer re-
mains under a liability to refund the excess of any increase
above the eventual just and reasonable price.*’* And
should the Commission see a need to launch its own investi-
gation of a producer’s initial rates, it may institute a pro-
ceeding for that purpose under Section 5 of the Act.*”
Case-by-case determination of just and reasonable pro-
ducer rates on the traditional cost-of-service basis, how-
ever, proved to be an intractable process which threatened
to inundate the Commission’s regulatory function.’** The
solution which the Commission eventually devised was
the previously-mentioned scheme of area-wide rate de-
terminations.!7* The scheme won Supreme Court approval
in the Permian Basin Cases‘™ and, in the Court’s words,
“began a new era in the regulation of natural gas pro-
aa Natural Gas Act §4(e), 15 U.S.C. §717e(e) (1970).
170 7
171 Jd, But the initial rate established by an unconditional per-
manent certificate issued under §7 represents a firm floor below
which refunds cannot subsequently be required. FPC v. Sunray
DX Oil Co., supra note 151, 391 U.S. at 23-24. See also United
Gas Improvement Co. v. Callery Properties, supra note 151, 382
U.S. at 227. The Court has indicated, however, that the Commis-
sion might, as a condition to certification, require the producers to
assume liability for refunds measured by the difference between
the in-line price and the just and reasonable rate subsequently
established should the latter prove to be lower. FPC v. Sunray DX
Oil Co., supra note 151, 391, U.S. at 36-37.
172 15 U.S.C. § 717d (1970).
173 See Permain Basin Area Rate Cases (Continental Oil Co.
v. FPC), supra note 69, 390 U.S. at 755-58.
174 See text swpra at notes 69-75.
175 Permian Basin Area Rate Cases (Continental Ow Co. v.
FPC), supra note 69.
A-38
ducers.”’'*® The Commission’s regulatory effort with respect
to Rayne Field, as we have seen, was destined to reach
that era.‘77
B. The Lease-Sale Contrasted
Upon a conventional gas-sale transaction, then, the rate-
making aspect of a Section 7 certification proceeding has
as its purpose the fixing of an initial price in line with
prices in other jump-free transactions pending the estab-
lishment of a just and reasonable rate.’7? The Rayne Field
lease-sale transaction, however, could not easily be sub-
jected to the in-line price concept. Although the total price
which Texas Eastern was to pay to the producers was fixed
by the contract, the eventual volume of gas which the field
would produce was necessarily an estimate, and so also
any cost per Mef of the gas which would be extracted.
Nonetheless, it was clear that until the late years of produc-
tion from the producers’ holdings in Rayne Field, the price
to be paid would exceed the in-line cost of gas actually
delivered.'*® Since the purchase price of $134 million was
to be remitted in full by 1975 but production was expected
to continue until 1986,1®° the parties and the Commission
alike were seemingly reconciled to the conclusion that the
price of the gas would run considerably higher than the
20-cent in-line price during most of the production period.1*
Adherence to the Supreme Court’s CATCO'® ruling de-
manded that the Section 7 certification process not develop
176 Td. at 755.
177 See text supra at notes 69-75.
pe an" See Sunray DX Oil Co. v. FPC, supra 151, 391 US. at
<0
179 Teras Eastern Transmission Cor
note 16, 42 F.P.C. at 380. eee em eee ae
180 Td. at 379.
17d. at 380.
82 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10.
A-39
into a protracted affair bogged down in the mire of intri-
eate cost caleulation.’** The in-line price measure was an
available index of price trends, and so a ready reference
to a price that might shield consumers against exhorbi-
tance.!** Producers could secure reasonable protection un-
der Section 4 by immediately filing for rate increases,
subject to refunds contingent upon the just and reasonable
rate ultimately determined.’*® Consumers, on the other
hand, got no refund protection under Section 5 against
the contingency that the initial price might turn out to be
too high.1** It was against this need to safeguard the in-
terest of consumers that the Commission was summoned
to determine whether the lease-sale merited unconditional
certification.
C. The Decision to Conventionalize
In reviewing action by the Commission within its juris-
diction under the Natural Gas Act, we exercise an “esen-
tially narrow and circumscribed” function.’*? The Act pro-
vides unequivocably that “a finding of the Commission
as to the facts, if supported by substantial evidence, shall
be conclusive.’** And, equally plainly, a Commission rul-
ing on a nonfactual question is to be sustained if there is
183 360 U.S. at 389-91, Accord, FPC v. Sunray DX Oil Co., supra
note 151, 391 U.S. at 17- 18; United Gas Improvement Co. v. Callery
Properties, supra note 151, 382 U.S. at 227-28.
184 PPC vy. Sunray DX Ow Co., supra note 151, 391 U.S. at
25-26.
185 See text supra at notes 167-72.
186 See note 171, supra, and accompanying text.
187 Permian Basin Area Rate Cases (Continental Oil Co. v.
FPC), supra note 69, 390 U.S. at 766.
188 Natural Gas Act §19(b), as amended, 15 U.S.C. § 717r(b)
(1970).
A-40
a rational basis for the conclusion it achieves.'*® It is by
these standards that we must test the Commission’s deci-
sion to condition the certificates of public convenience and
necessity awarded Texas Eastern and the producers so as
to conventionalize some of the features of the leasze-sale.
As early as 1963, when Order No. 378" addressed
the requests for certification of the lease-sale, it was
“clear” to the Commission “from the record in this case
that it is not in the publie interest for this Commission
to certificate a transaction such as the one presented
to us on this recerd.’?*! And as the presiding examiner
observed in his Phase I decision in 1968, “[t]he reason
. was that it would be impossible to regulate, or even
ascertain, what the producers were getting for the gas or
what the cost to the pipeline would be.’®? For, in the
beginning, a major unknowable was the volume of gas
which the transferred reserves would ultimately yield, and
consequently the eventual unit price which Texas Eastern
would pay for the yield.'%
After Opinion No. 378 was announced, the producers
sought to eliminate the risk of possible overestimation of
the reserves by guaranteeing that they would supply Texas
189 Atlantic Ref. Co. v. FTC, 381 U.S. 357, 367 (1965) ; Gilbert-
ville Trucking Co. v. United States, 371 U.S. 115, 126 (1962);
Rochester Tel. Corp. v. United States, 307 U.S. 125, 146 (1939) ;
Mississippi Valley Barge Line Co. v United States, 292 U.S. 282
286-87 (1934); Brotherhood of Ry. Clerks, Freight Handlers,
Express & Station Employees v. Railroad Retirement Bd., 99
U.S.App.D.C. 217, 224, 239 F.2d 37, 44 (1966) ; American Airlines
v. CAB, 97 U.S.App.D.C. 324, 327, 231 F.2d 483, 486 (1956) ;
Namekagon Hydro Co. v. FPC, 216 F.2d 509, 512 (7th Cir. 1954).
' Texas Eastern Transmission Corp. (Opinion No. 378), supra
note 31.
19129 F.P.C. at 256.
192 Tezas Eastern Transmission Corp., su t
at 447 (examiner’s decision). orp, supre note 16, 42 F.P.C.
1°38 Texas Eastern Transmission Corp. ini
misreamns 6
ee aes
ee os
.
ks
eee eee
A-41
Eastern with a designated minimum volume of gas.'** With
this single change in the transaction, the parties again
presented the lease-sale to the Commission with requests
for unconditional certification.'®® The examiner decided that
certification should be accompanied by an imposition of
conditions,!** and the Commission adopted and has con-
sistently adhered to that position.*®”
Like the examiner, the Commission in Opinion No. 565
was of the view that the reserve guaranty did not reduce
much of the cost-price hazard inherent in the lease-sale.'**
“(T]here are,” the Commission said, “numerous other fac-
tors which can have a substantial impact upon the cost
of the gas to Texas Eastern and its customers under
the lease-sale, such as the value and quantity of the
liquids, the rate of production of the gas and liquids, the
rate of return Texas Eastern is entitled to throughout
the life of the wells, and associated taxes, variations in
operating expenses and uncertainty of delivery.”'* So great
was the peril that the Commission felt that were the lease-
sale still executory, it might well reject it.?°°
When, however, the Commission came in Opinion No.
565 to again consider the lease-sale on its merits, it had
long since ceased to be entirely executory. By the end of
194 See note 40, supra.
195 Texas Eastern Transmission Corp., supra note 16, 42 F.P.C.
at 447 (examiner’s decision).
196 Td. at 447-53.
197 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 382-90; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-85; Texas
Eastern Transmission Corp., supra note 100 (order denying re-
hearing).
198 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 383.
199 Td.
200 Td.
A-42
1968, almost half of the estimated recoverable gas had
been taken, and most of the contract price had been paid to
the producers.*"' In this milieu, the Commission deemed it
“appropriate to compare the estimated cost of the lease-
sale as a whole to Texas Eastern and its customers with
the cost of a conventional gas purchase arrangement.”?°?
The Commission admonished that “[i]n making this com-
parison, however, we must keep in mind the continuing
substantial uncertainties as to the lease-sale arrangement
and could only find it is required by public convenience
and necessity, as contrasted with a conventionalized sale,
if the comparison were significantly in its favor.”?°? And
on scrutiny the Commission found that “the comparison
is not favorable to the lease-sale, even without considering
the uncertainties thereof.”?
Opinion No. 565, as we read it, predicated that finding
on two bases. One was a cost comparison of the lease-sale
with a conventional ga:-sale, which disclosed a difference
of some $6 million in favor of the latter.2°° To the pur-
chase price of $134,395,700 the Commission added Texas
Eastern’s other net Rayne Field costs and, using the
producers’ estimates of gas and liquid takes, computed
a total cost to Texas Eastern of $168,900,000 over the
expected life of the reserves.?°* On the other hand, the
Commission ascertained that a conventional sale of the
gas priced at 20 cents per Mcf from the start of the
flow until October 1, 1968,?°" and at 18.5 cents thereafter,
201 Td.
202 fq.
203 Td.
204 ld. '
2°5 Td. at 387.
206 Td.
207 This was the effective date of the Commission’s decision
in the Southern Louisiana Area Rate P : » °
546), supra note 53. e roceeding (Opinion No.
A-43
would cost Texas Eastern a total of $186,537,000.°° But
when these two totals were discounted at 5 percent for
the time value of Texas Eastern’s advances to the pro-
ducers, the Commission learned that the effective cost
was $122,403,000 under the lease-sale and $116,270,000 by
a conventional approach. As the Commission noted, the
difference would be greater if a discount rate of 6 percent
were employed.””°
This difference in cost was not, however, the only con-
sideration motivating the Commission to disapprove the
lease-sale as presented. A second factor which loomed
large was the Commission’s belief that despite the re-
serve guaranty, the lease-sale was fraugat with uncer-
tainties which precluded a confident evaluation of its
economic impact, and that the public interest would hardly
be served by thrusting the risk of an excessive price on
consumers. Opinion No. 565 set forth a summary of the
uncertainties, to which we have adverted,?"* and the Com-
mission’s overall conclusion:
[T]he lease-sale arrangement produces a lack of cer-
tainty over the life of the field and, as the record
indicates, a higher cost than a conventional sale at
20 cents per Mcf. Because of these features of the
lease-sale transaction, it is imperative for the Com-
mission to take steps within its jurisdiction, which
will protect consumers from paying excessive rates.
This can be done, we believe effectively, through regu-
lating the payments made by Texas Eastern to the
Producers by conditioning the lease-sale arrange-
ment.?!?
208 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 387.
209 Td.
210 Id.
211 See text supra at notes 190-200.
212 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 389.
A-44
The uncertainty factor reappeared as a topic of dis-
cussion in Opinion No. 565-A. The producers contended
that uncertainty is an element in many projects submitted
for Commission approval, and that the uncertainties re-
maining in the lease-sale transaction after the reserve
guaranty was made, did not exceed reasonable bounds. The
Commission disagreed, responding :
While, of course, there is always uncertainty, more
is involved here, for the proposal is to commit Texas
Eastern to a fixed price of $134,395,000 for the life
of the field, and that is not true in the conventional
certificate proceeding where the price is subject to
regulation. The essence of our objection to the lease-
sale transaction is its inflexibility. If the price turns
out to be too high in the light of changing circum-
stances, it fails to protect the consumers; if it is too
low the producers will not receive an adequate re-
turn and this, in turn, may affect thei ili
serve the market.?!* , _—
Before the Commission the producers also argued, as
they have here, that the advantageous features of the
lease-sale demanded consideration conjunctively with cost
data in determining whether it was that arrangement or
a conventionally-converted sale that best served the public
convenience and necessity.*"* We agree that the price of
21%
Teras Eastern Transmission Corp. (Opini . £
supra note 68, 44 FP.C. at 1083 (NOFA),
*14The producers also contend that one of the modificati
effected by Opinion No. 565-A so undermined one of the omg
tions underlying the decision in Opinion No. 565 to conventionalize
as to leave it without sufficient evidentiary support. As we have
seen, one of the factors contributing to that conclusion in Opinion
No. 565 was the Commission’s finding that the lease-sale would
ultimately involve a cost of some $6 million more than a conven-
tional sale of the Rayne Field gas. See text supra at notes 205-10
In so finding, the Commission caleulated gas costs at the in-line
price of 20 cents per Mef to October 1, 1968, and at the just and
reasonable rate of 18.5 cents thereafter. See text supra at notes 207-
A-45
the Rayne Field gas was not the only relevant criterion,
and that the Commission was required “to evaluate all
factors bearing on the public interest,”*** but we cannot
agree that the Commission was derelict in that duty. On
the contrary, the Commission, in both of its opinions on
the subject of conventionalization,”*® addressed the non-
cost factors which the producers advanced and found them
insufficient to warrant unconditional approval of the lease-
sale.2!7 In addition to the reserve guaranty,”’* the pro-
08. In Opinion No. 565-A, however, the Commission held that pro-
ducer refunds should be computed from the beginning on the
basis of the just and reasonable rate to be established in the ongo-
ing investigation in the Southern Louisiana area. See text supra
at notes 80-83. The producers argue that this change of position
upset the earlier position on conventionalization. We think it does
not.
The higher cost of lease-sale gas which the Commission found
in Opinion No. 565 was not the only reason for the Commission’s
refusal to unconditionally certificate the arrangement ; another was
the grave uncertainty as to just what the gas would eventually cost
under that arrangement. See text supra at notes 211-13. Whatever
may be said as to the effect on Opinion No. 565 of the refund-base
change made in Opinion No. 565-A, it is clear that the Commission
had no intention of altering its decision on conventionalization.
Opinion No. 565-A not only confirms the Commission’s resolve
in Opinion No. 565 to conventionalize, but also modified Opinion
No. 555 in several particulars “so as to bring it closer to a conven-
tional sale.” Texas Eastern Transmission Corp. (Opinion No. 565-
A), supra note 68, 44 F.P.C. at 1081. We have no warrant to set
aside a Commission determination simply on the thesis that it rests
on one valid ground instead of two.
215 Atlantic Ref. Co. v. Public Serv. Comm'n, supra note 10, 360
US. at 391.
216 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 382-90; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-85.
217 In so concluding, the Commission discounted testimony by
three witnesses offered by the producers in an attempt to demon-
strate financial advantages for the lease-sale. Teras Eastern Trans-
mission Corp. (Opinion No. 565), supra note 16, 42 F.P.C. at 388;
Texas Eastern Transmission — (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1084-85. Commission pointed out that
one of the witnesses failed to take into accourt about $18 million in
severance taxes which Texas Eastern would pay over life of the
A-46
ducers pointed out that Texas Eastern and its customers
obtained a large supply of gas in a single package close
by its pipeline, with resultant savings in gathering and
transportation costs. The Commission felt that that did
not make for a unique situation, since large and well
located reserves are features of many conventional sale
transactions.”?® The producers pointed to the further fact
that Texas Eastern secured the Rayne Field gas at a firm
price, and to the potential saving from the absence of
price escalations; but, as the Commission responded, the
price was in any event subject to the Southern Louisiana
area rate.22° The producers also called attention to the
flexibility of operations— another cost saver — which
Texas Eastern gained under the lease-sale arrangement. As
the Commission responded, however, Texas Eastern was
taking the gas at a normal rate, and would be required to
continue to do so is the future.?24 “These factors,” said
field, Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 388; that another failed to take into account
the time value of Texas Eastern’s advance payments to producers,
id.; and that the third omitted that factor and other costs to Texas
Eastern as well, id.; Texas Eastern Transmission Corp. (Opinion
No. 565-A), supra note 68, 44 F.P.C. at 1085. In these circumstances,
we have no occasion to disturb the Commission’s action in that
respect.
218 As we have stated, the Commission in Opinion No. 565 con-
cluded that the reserve guaranty, standing alone, did not eliminate
the objectionable uncertainty in the lease-sale arrangement. See
text supra at notes 194-200. And in Opinion No. 565-A, the Com-
mission expressed the view that the guaranty “should not be con-
sidered of much weight for it guarantees the amount of the reserves,
but not the rate at which the gas may be taken and therefore takes
no account of the time value of money.” Tezas Eastern Transmis-
sion Corp. (Opinion No. 565-A), supra note 68, 44 F.P.C. at 1084.
219 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 389.
220 Id.; Teras Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 *.P.C. at 1084.
221 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 389. See note 241, infra. And in Texas Eastern
Transmission Corp. (Opinion No. 565-A), supra note 68, 44 F.P.C.
A-47
the Commission, “do not justify the price of gas to Texas
Eastern under the contract which may be excessive even
on the basis of the entire life of the field.’’***
When this litigation was previously before this court,
we extended to the Commission the option to “reopen the
record in the certificate proceeding to permit Texas Hast-
ern to establish by adequate evidence that the acquisition
costs which it proposes to incur will be consistent with the
public convenience and necessity.”*?? And when the Com-
mission elected to do so and properly asserted jurisdiction
over the lease-sale,?** it concluded that the public interest
would be ill-served by certification of a transaction in
which the unit cost of the involved gas could not be ac-
curately determined.?*5 Conventionalization of the lease-
sale developed for the Commission as the appropriate, and
we think as a rational, method of enabling the Commis-
sion to discharge its statutory responsibilities.
In reviewing the Commission’s decision to convention-
alize, we have remained advertent to the difficulty of the
problem which it faced and to the appeal which some of
the parties’ arguments had for a minority of its mem-
bers.?® Those arguments, in large measure, have been
at 1083-84, the Commission stated that “[i]t is impossible on this
record, and it would be extremely difficult on any record, to ap-
praise the advantage to Texas Eastern of large daily swings,” and
that in any event that opinion would require a take at a lower
level and limits on downward swings. Compare Phillips Petroleum
Co. v. FPC, 405 F.2d 6, 9-10 (10th Cir. 1969).
222 See Texas Eastern Transmission Corp. (Opinion No. 565),
supra note 16, 42 F.P.C. at 389-90 (footnote omitted).
223 See text supra at note 30.
224 See text supra at notes 31-35.
225 See text supra at notes 194-200.
226 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 435-38, 439-40; Texas Eastern Transmission
Corp. (Opinion No. 565-A), supra note 68, 44 F.P.C. at 1097-99,
1102-09; Texas Eastern Transmission Corp., supra note 100, 44
F.P.C. at 1473-74 (order denying rehearing).
A-48
repeated here in a forceful effort to persuade us to a
result opposite to that thrice reached by a Commission
majority.**? But “Congress has entrusted the regulation of
the natural gas industry to the informed judgment of
the Commission, and not to the preferences of reviewing
courts.’*** And “[a] presumption of validity ... attaches
to each exercise of the Commission’s expertise, and those
who would overturn the Commission’s judgment undertake
‘the heavy burden of making a convincing showing that
it is invalid because it is unjust and unreasonable in its
consequences.’ ”’*?° We have witnessed ample support in
the evidence for the Commission’s factual findings,”*° and
ample support in reason for its non-factual conclusions.**
We hold that the Commission’s action on this branch of the
litigation must stand.
IV. Save Price or THE Gas
A. The Price Adjustments
In Opinion No. 565, the Commission effectuated its deci-
sion to equate the lease-sale to a conventional gas sale
by attaching to the certificates of public convenience and
227 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 382-90; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-84; Tezas
Eastern Transmission Corp., supra note 100, 44 F.P.C. at 1471
(order denying rehearing).
228 Permian Basin Area Rate Cases (Continental Oil Co. v. FPC),
supra note 69, 390 U.S. at 767. For the same reason, we put aside
the suggestion of Commissioners Carver an. Srooke that “[i]f the
Court of Appeals decided [that the lease-s».c] must be rewritten
in some fashion, it may tell us how it believes it should be done.”
Texas Eastern Transmission Corp., supra note 100, 44 F.P.C. at
1474 (order denying rehearing).
229 Permian Basin Area Rate Cases (Continental Oil Co. v. FPC),
supra note 69, 390 U.S. at 767, quoting FPPC v. Hope Natural Gas
Co., 320 U.S. 591, 602 (1944).
230 See text supra at notes 198-225.
231 See text supra at notes 198-225.
A-49
necessity which it awarded a set of conditions designed
to achieve that end.?°? The Commission’s central effort in
the formulation of the conditions, as it would have been
had the gas been conventionally sold, was the setting of
an initial unit price which would serve the public interest
until such time as a just and reasonable rate might be estab-
lished.?** The conditions we consider now are those which
concern pricing. We will have occasion to examine others
later.
Utilizing as a base price the area rate of 18.5 cents per
Mef effective October 1, 1968,?°* which was to remain sub-
ject to change in any future area rate proceeding,*®® the
Commission subtracted the costs assumed by Texas Eastern
which normally are borne by producers and added the eco-
nomic advantages which normally accrue to producers.?*®
Since under the lease-sale arrangement Texas Eastern
was paying royalties and state taxes, and was making
capital investments and incurring expenses in developing
and operating the field,?*? the Commission directed that
these outlays be deducted from the 18.5 cent unit price.?**
These adjustments, the Commission ordained, would con-
tinue in effect until Texas Eastern paid the $134 million
purchase price in full.?*® On the other hand, since producers
232 Texas Eastern Transmission Corp (Opinion No. 565), supra
note 16, 42 F.P.C. at 390-407.
233 Td. at 390-93.
234 See text supra at notes 69-75.
235 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390.
236 Td. at 390-93.
237 Jd at 390. The lease-sale contract provided that until
613,406,700 Mefs of gas were produced, revenues from liquids
would be used to reimburse Texas Eastern for part of the pro-
duction investments and expenses. The reduction of the 18.5 cent
price on account of these items was accordingly limited to the
amount of unreimbursed investments and expenses. Id.
238 Td.
239 This aspect of the matter will shortly be addressed extensively.
A-50
selling gas conventionally ordinarily realize the benefit of
liquid revenues and salvage, which under the lease-sale
contract inured to Texas Eastern, the Commission specified
that after payment of the purchase price the 18.5 cent price
would be increased by those items.*4° The Commission also
imposed conditions caleulated to afford the producers pro-
tections which they would have enjoyed under a conven-
tional arrangement.?*!
In conventionalizing the lease-sale, the Commission felt
it unnecessary to reject all of its features, some of which
the Commission felt had tax advantages for the contract-
ing parties.**? One of the features retainable, the Com-
mission held, was the $134 million price specified in the
lease-sale contract as the total of the consideration to be
paid to the producers by Texas Eastern. The Commission
proposed, in that connection, to “require that the payments
to be made by Texas Eastern for the Rayne Field gas
until the purchase price of $134,395,700 has been paid be
the equivalent of a purchase of gas under a conventional
contract.’’*4? The Commission elucidated:
240 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390-91.
241 These included a requirement that Texas Eastern remove the
gas at a specified minimum pace over a 20-year maximum period,
id. at 391; and a provision giving the producers the right of prior
approval of Texas Eastern’s expenditures for royalties and develop-
mental expenses, id. at 392.
242 Td. at 389. So, in addition to the total price ceiling soon to be
discussed, the Commission decided not to amend the notes evidene-
ing the unpaid installments of purchase price, and observed that
any change as to them should be made by the parties or other
holders. Id. at 391. The Commission also declined to make provision
for periodic price increases, reimbursement for new taxes, take-or-
pay or the buyer’s bearing cost of compression, stating “that if
the Producers for their own purposes including possible tax advan-
tages, entered into a lease-sale arrangement, they are not entitled
to claim the benefit of provisions found in a conventional sale.”
Id. at 393.
243 Td. at 390.
A-51
[W]e shall adjust the arrangement so that, up until
the entire purchase price of $134,395,700 is paid by
Texas Eastern, it will be equivalent in economic effect
to a conventional sale at the just and reasonable price
of 18.5 cents per Mef. After that, as proposed by the
Applicants, Texas Eastern would make no further
payments, for if we required continued payments until
the Field was exhausted the lease-sale would be, in
effect, converted into a conventional sale, presumably
with the corresponding tax consequences. To accom-
plish these ends will clearly involve a reduction of
the payments for gas and an extension of the paying
period, but the Producers would eventually receive the
full purchase price of $134,395,700, although over a
longer period, even after making the refunds which
[Opinion No. 565 directed].**
And the Commission further explained:
After the end of the production payment until the
entire purchase price is paid, the price should con-
tinue to be reduced by royalties, state taxes, invest-
ments and expenses, but should be increased by liquid
revenues and salvage, for the Producers in a conven-
tional sale would receive the benefit of both of these
items.
Eventually, even though the payments are reduced,
as long as gas continues to flow from the Rayne Field,
Texas Eastern will pay the full purchase price of
$134,395,700 albeit over a longer period of time. In our
opinion the Producers, providing there is sufficient gas,
should receive the full amount for which they contracted
even though they have been required to make a refund
for the period prior to this order. After the full pay-
ment as been completed Texas Eastern will pay the
Producers no more for gas taken from the Rayne Field.
Since it will then have fully paid for the properties
transferred, Texas Eastern, alone, should bear the cost
of the royalties, state taxes and costs of operating the
244 Td. at 389.
A-52
Field, but it should receive the benefit of all liquid reve-
nues. Texas Eastern, however, should pay the Pro-
ducers for any salvage realized on property installed
before the purchase price has been fully paid, since
the cost of such property under the opinion and order
will be deducted from the price of gas of 18.5 cents per
Mef. Of course, salvage realized from property in-
stalled after the payments have been completed and not
charged against the Producers should benefit Texas
Kastern.?*
In Opinion No. 565-A, however, the Commission changed
its treatment of the purchase price completely. The pro-
ducers had contended that Opinion No. 565, in partially con-
ventionalizing the lease-sale, had unfairly and confiscatorily
placed burdens on them without conferring the benefits of
a conventional sale.*** Attention was directed particularly
to the provision that after Texas Eastern paid the $134 mil-
lion contract price, it would get any additional gas and
liquids free of charge.**7 Attention was also called to the
fact that while under the lease-sale agreement the entire
purchase price would be remitted during the first 16 years
of production, Opinion No. 565 enlarged the payment period
to the extent required to absorb the $134 million at the
adjusted 18.5 cent rate.?*
The Commission was persuaded by these arguments. In
Opinion No. 565-A, it declared that “while the Producers,
under the arrangement we prescribed, [in Opinion No. 565]
will be getting the contract price it will not be of the same
value because they will receive it over a much longer period,
and they will not receive the benefit of al? the gas and liquids
produced by the Field as they would under a conventional
245 Td. at 390-91 (footnote omitted).
246 Teras Eastern Transmission Corp. (Opiuion No. 565-A),
3 68, 44 F.P.C. at 1085.
A-53
contract.”**® In these circumstances, the Commission felt
“that it is only equitable that they be paid for the gas and
receive credit for the liquids produced until the Field is
exhausted.’’®° The Commission added:
Texas Eastern will retain the leases conveyed to it,
and will continue to be responsible for operating ex-
penses and necessary investments.
This means that the conditions prescribed in this
Opinion and order with respect to future pricing of the
gas from the Rayne Field will be extended until the
exhaustion of the field. Thus Texas Eastern shall pay
the Producers the appropriate area rate for the gas
produced less royalties, state taxes and investments
and expenses for the development and operation of the
Field. Under the lease-sale arrangement before the
termination of the production payments revenues from
liquids are used to reimburse Texas Eastern. There-
fore, the area price should be reduced only by unreim-
bursed investments and expenses, and, after the termi-
nation of the production payment, the price should be
increased by the liquid revenues.*™
This modification of Opinion No. 565 was supported in
Opinion No. 565-A by four of the five members of the
Commission,”** and when rehearing of Opinion No. 565-A
was sought, the Commission adhered to that position.?®*
The Commission’s reversal. of position as to the con-
tinuing efficacy of the $134 million contract price as a
ceiling on Texas Eastern’s payments to the producers for
Rayne Field gas engendered an issue which is hotly con-
tested in this court. Texas Eastern argues that the condi-
249 Td.
250 Td.
251 Td. at 1085-86.
252 Chairman Nassikas and Commissioners Bagge, Carver and
Brooke, Id. at 1081, 1098.
253 Texas Eastern Transmission Corp., supra note 100, 44 F.P.C.
at 1471 (order denying rehearing).
A-d4
tion extending its payments over the life of the field will
compel an expenditure of many millions of dollars over
the maximum price agreed to by the producers, and that
the Commission exceeded its authority in imposing that
requirement. The producers and the Commission, with
equal vigor, defend the requirement as a lawful and appro-
priate exercise of regulatory power under Section 7 to
condition certificates of public convenience and necessity.
Our starting point will be a comprehensive analysis of the
Natural Gas Act in its relation to the Commission’s author-
ity to alter contract prices to which the parties have volun-
arily subscribed.*** The remaining point we will consider
is the Commission’s power to effect the alteration of which
Texas Eastern complains.**®
B. The Power to Change Contract Prices
Two decisions of the Supreme Court, read conjunctively,
make it crystal clear that the Commission possesses only
limited power to raise prices for natural gas above those
contractually fixed by the parties. In United Gas Pipe Line
Company v. Mobile Gas Service Corporation, a regulated
pipeline supplying natural gas to a distributor filed with
the Commission a new rate schedule purporting to increase
the price of its gas above that specified in its contract
with the distributor. The Commission rejected the latter’s
complaint but, on review, the Court held that the Act did
not empower the pipeline to unilaterally change the con-
tract rate.**7 The Act, the Court stated, “evinces no pur-
pose to abrogate private rate contracts. To the contrary,
by requiring contracts to be filed with the Commission,?**
the Act expressly recognizes that rates to particular cus-
°54 Part IV (B), infra.
255 Part IV (C), infra.
256 350 U.S. 332 (1956).
257 Jd. at 344.
258 See Natural Gas Act § 4 (d), 15 U.S.C. § 717e(d) (1970).
A-55
tomers may be set by individual contracts.”*** Rejecting
the contention that Section 4(d) and (e)*®° and 5(a)?®
are alternative rate-changing procedures, the Court said:
These sections are simply parts of a single statutory
scheme under which all rates are established initially
by the natural gas companies, by contract or other-
wise, and all rates are subject to being modified by the
Commission upon a finding that they are unlawful.
The Act merely defines the review powers of the
Commission and imposes such duties on natural gas
companies as are necessary to effectuate those powers ;
it purports neither to grant nor to define the initial
rate-setting powers of natural gas companies.”
Section 5(a), authorizing the Commission to set aside
or modify any rate found to be “unjust, unreasonable,
unduly discriminatory, or preferential[,]” the Court con-
tinued, “is neither a ‘rate-making’ nor a ‘rate-changing’
procedure. It is simply the power to review rates and con-
tracts made in the first instance by natural gas companies
and, if they are determined to be unlawful, to remedy
them.”?°* And since the Act does not define the power of
natural gas companies either to make or change rates and
contracts,?** “[t]he obvious implication is that, except as
specifically limited by the Act, the rate-making powers of
natural gas companies were to be no different from those
they would process in the absence of the Act: to establish
ex parte, and change at will, the rates offered to prospec-
tive customers; or to fix by contract, and change only by
259 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., supra
note 256, 350 U.S. at 338.
260 15 U.S.C. § 717e(d) and (e) (1970).
26115 U.S.C. § 717d(a) (1970).
262 United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., supra
note 256, 350 U.S. at 341.
263 Td.
264 Td. at 343.
A-56
mutual agreement, the rate agreed upon with a particular
customer.’*°° So, the Court concluded, “there is nothing
in the structure or purpose of the Act from which we can
infer the right, not otherwise possessed and nowhere ex-
pressly given by the Act, of natural gas companies uni-
laterally to change their contracts.”?®
In Mobile, the Court also noted, however, “that this in-
terpretation, while precluding natural gas companies from
unilaterally changing their contracts simply because it is
in their private interests to do so, does not deprive them
of an avenue of relief when their interests coincide with
the public interest.” *°? The Court explained:
Section 5(a) authorizes the Commission to investi-
gate rates not only “upon complaint of any State,
municipality, State commission, or gas distributing
company” but also “upon its own motion.” Thus, while
natural gas companies are understandably not given
the same explicit standing to complain of their own
contracts as are those who represent the public interest
or those who might be discriminated against, there is
nothing to prevent them from furnishing to the Com-
mission any relevant information and requesting it to
initiate an investigation on its own motion. And if
the Commission, after hearing, determines the contract
rate to be so low as to conflict with the public interest,
it may under §5(a) authorize the natural gas com-
pany to file a schedule increasing the rate.*®
265 Jd. (emphasis in original).
266 Td. at 343-44.
267 Td. at 344.
268 Td. at 344-45 (footnote omitted). Compare, however, United
Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S.
103 (1958), where a pipeline’s service agreements with distributors
were construed as fixing, not a single specified rate, but rather the
going rate as periodically established through proceedings under
the Act, with the result that Mobile was inapplicable to an increase
effected unilaterally by the pipeline’s filing of new rate schedules
under § 4(d), subject to commission review under § 4(e). There
the pipeline sought “simply to assert, in accordance with the pro-
cedure specified by the Act, rights expressly reserved to it by con-
tract.” Id. at 112.
A-57
On the same day Mobile was decided, the Court an-
nounced its opinion in Federal Power Commission v. Sierra
Pacific Power Company.?® The question there was whether
the Commission could increase the rate specified in a con-
tract by which an electric utility agreed to supply power
to a distributor. The Commission allowed the increase
solely on the ground that the contract rate yielded less
than a fair return on the utility’s net invested capital.?”° The
asserted basis for the increase was Section 206(a) of the
Federal Power Act?" which, similarly to Section 5 of the
Natural Gas Act, authorizes the Commission to fix the just
reasonable rate for electricity if the existing rate is “unjust,
unreasonable, unduly discriminatory, or preferential.”?”
The Court pointed out that “while it may be that the
Commission may not normally impose upon a public util-
ity a rate which would produce less than a fair return,
it does not follow that the public utility may not itself
agree by contract to a. rate affording less than a fair return
or that, if it does so, it is entitled to be relieved of its
improvident bargain.”®”* “In such circumstances,” said the
Court, “the sole concern of the Commission would seem
to be whether the rate is so low as to adversely affect the
public interest —as where it might impair the financial
ability of the public utility to continue its service, cast
upon other consumers an excessive burden, or be unduly
discriminatory.”*"* Observing that “the purpose of the
power given the Commission by § 206(a) is the protection
of the public interest, as distinguished from the private
269 350 U.S. 348 (1956).
270 Td. at 354-55.
27116 U.S.C. § 824e (1970).
272 FPPC vy. Sierra Pac. Power Co., supra note 269, 350 U.S. at
353.
273 Jd. at 355 (emphasis in original).
274 Td.
A-58
interests of the utilities,”?7> the Court deemed it “clear
that a contract may not be said to be either ‘unjust’ or
‘unreasonable’ simply because it is unprofitable to the pub-
lic utility.”?76
These decisions furnish the standard by which the ad-
ministrative action under scrutiny must be gauged. In
recent years, the Supreme Court has applied them to up-
hold the Commission’s refusal to fix minimum area rates
for producers at levels above their contract prices.?77 “The
regulatory system created by the Act,” the Court declared,
“contemplates abrogation of these agreements only in
circumstances of unequivocal public necessity.’’?7* We our-
selves have applied the Mobile-Sierra doctrine,?”* and the
Commission has relied on it to justify its refusal to over-
ride Southern Louisiana producers’ contract prices with
higher minimum area rates.?®°
C. The Purchase Price Adjustment
The plan by which the Commission conventionalized the
lease-sale arrangement involved contractual deviations of
three major types. The first was the substitution of an
275 Td.
276 Tq.
277 Permian Basin Area Rate Cases (Continental Oil Co. v. FPC),
supra note 69, 390 U.S. at 820-22.
278“The regulatory system created by the Act is premised on
contractual agreements voluntarily devised by the regulated com-
panies; it contemplates abrogation of these agreements only in
circumstances of unequivocal public necessity.” Jd. at 822 (citation
omitted).
279 See Portsmouth Gas Co. v. FPC, 101 U.S.App.D.C. 99, 102-03,
247 F.2d 90, 93-94 (1957) ; Cincinnati Gas and Elec. Co. v. FPC,
101 U.S.App.D.C. 1, 6, 246 F.2d-688, 693 (1957). See also Richmond
Power & Light v. FPC, U.S.App.D.C . , 481 F.2d 490,
cert. denied, sub nom. Indiana & Michigan Elec. Co. v. Anderson
Power & Light Co., 42 U.S.L.W. 3334 (U.S. Dee. 4, 1973).
280 Southern Louisiana Area Rate Proceeding (Opinion No. 546),
supra note 53, 40 F.P.C. at 624.
A-59
initial unit price for the original price which the parties
had fixed at the lump-sum figure of $134,395,700.?** The
second consisted in a series of requirements, to which the
parties had not themselves previously agreed, which imple-
mented the unification of the initial price.**? The third was
the elimination, in Opinion No. 565-A, of the $134 million
contract price as the amount to be remitted to the producers
by Texas Eastern, and the direction that Texas Eastern
pay a to-be-established just and reasonable area rate for
all gas realized from the beginning to the end of produc-
tion.?** As is evident, each of these changes portended a
problem in terms of the Mobile-Sierra doctrine.?**
— The Unit Price
We may readily resolve any problem arising from the
setting of the initial unit price for the gas. As we have
seen, the restriction on contract-alteration by the Com-
mission is not total; the Commission is authorized — in-
deed, is required— “to review” the parties’ “rates and
contracts . . . and, if they are determined to be unlawful,
to remedy them,”?** and to change them “in circumstances
of unequivocal public necessity.”** This is the power which
the Commission exercises when it imposes upon a Section
7 certificate of public convenience and necessity a condition
that a designated initial price be observed.
As the Supreme Court said in CATCO,
The purpose of the Natural Gas Act was to under-
write just and reasonable rates to the consumers of
281 See text supra at notes 53-55, 80-83, 232-41.
282 Texas Eastern Transmission Corp. (Opinion No. 565), swpra
note 16, 42 F.P.C. at 398-400, 404-07.
288 See text supra at notes 84-87, 242-53.
284 See Part IV (B), supra.
285 See text supra at note 263.
286 See text supra at note 278.
A-60
natural gas**’ .... As the original §7(c) provided,
it was “the intention of Congress that natural gas
shall be sold in interstate commerce for resale for
ultimate public consumption for domestic, commercial,
industrial, or any other use at the lowest possible
reasonable rate consistent with the maintenance of
adequate service in the public interest®** ... The Act
was so framed as to afford consumers a complete,
permanent and effective bond of protection from ex-
cessive rates and charges. The heart of the Act is
found in those provisions requiring initially that any
“proposed service, sale, operation, construction, ex-
tension, or acquisition . . . will be required by the
present or future pubiic convenience and necessity,”?*®
. and that all rates and charges “made, demanded,
or received” shall be “just and reasonable”*®® ...
The Act prohibits such movements unless and until
the Commission issues a certificate of public conven-
ience and necessity therefor®™ .... Section 7(e) vests
in the Commission control over the conditions under
which gas may be initially dedicated to interstate use.?%
Moreover, said the Court in CATCO, “[i]n view of [the
statutory] framework in which the Commission is author-
ized and directed to act, the initial certificating of a pro-
posal under § 7(e) of the Act as being required by the public
287 Citing FPC v. Hope Natural Gas Co., supra note 229.
288 Citing 52 Stat. 725 (1938). In its footnote to text at this
point, the Court observed:
The 1942 amendments to § 7, 56 Stat. 83, were not intended
to change this declaration of purpose. See Hearings, House
Interstate and Foreign Commerce Committee, on H.R. 5249,
77th Cong., 1st Sess. 18-19; H.R. Rep. No. 1290, 77th Cong.,
Ist Sess.; S.Rep.No. 948, 77th Cong., 2d Sess.
Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360 U.S.
at 388 n.7.
289 Citing Natural Gas Act §7(e), as amended, 15 U.S.C.
§ 717f(e) (1970).
290 Citing Natural Gas Act § 4, 15 U.S.C. § 717e (1970).
291 Citing Natural Gas Act § 7(c), 15 U.S.C. § 717f£(c) (1970).
292 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
US. at 388-89.
A-61
convenience and necessity becomes crucial.”?®* This is partly
“because the delay incident to determination in §5 pro-
ceedings through which initial certificated rates are review-
able appears nigh interminable.”*** Undeniably, “the Act
does not require a determination of just and reasonable
rates in a §7 proceeding as it does in one under either § 4
or § 5,”°5 nor is “a ‘just and reasonable’ rate hearing .. .
a prerequisite to the issuance of producer certificates.”?*®
But “the inordinate delay presently existing in the process-
ing of § 5 proceedings requires a most careful scrutiny and
responsible reaction to initial price proposals of producers
under 4 7,”?°7 and “[t]heir proposals must be supported by
evidence showing their necessity to ‘the present or future
public convenience and necessity’ before permanent certi-
cates are issued.”®°* And “[w]here the application on its
face or on presentation of evidence signals the existence of
a situation that probably would not be in the public interest,
a permanent certificate should not be issued.”?%
The certificate-conditioning power of the Commission ex-
ercisable upon a Section 7 producer application is the vehicle
by which the Commission is summoned and enabled to pro-
293 Td. at 389.
204 Jd. The Court pointed out that “long delay, without the pro-
tection of a refund, as is possible in a § 4 proceeding, would provide
a windfall for the natural gas company with a consequent squall
for the consumers,” id. at 390, and that “the fact that the Commis-
sion was not given the power to suspend initial rates under § 7
makes it the more important, as the Commission itself says, that
‘this crucial sale should not be permanently certificated unless the
rate level has been shown to be in the public interest.’ ” Id., citing
Continental Oil Co. v. FPC, 17 F.P.C. 563, 575 (1957).
295 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 390.
296 Td. at 390-91.
297 Td. at 391.
298 Td. See also text supra at notes 162-63.
299 Td.
A-62
tect the public interest.*°° It is the “method by which the
applicant and the Commission can arrive at a rate that is
in keeping with the public convenience and necessity.”*”
For “(t]he Congress in § 7(e), has anthorized the Commis-
sion to condition certificates in such n.anner as the public
convenience and necessity may require;”*” and “({w]here
the proposed price is not in keeping with the public inter-
est ... the Commission in the exercise of its discretion
might attach such conditions as it believes necessary.”*°°
From the regulatory scheme, thus analyzed, it is apparent
that the establishment of an initial price in a Section 7
certificate proceeding does not ordinarily implicate the
Mobile-Sierra rule. As in CATCO the Court explained:
This is not an encroachment upon the initial rate-
making privileges allowed natural gas companies under
the Act, .. .°°* but merely the exercise of that duty
imposed on the Commission to protect the public inter-
est in determining whether the issuance of the certifi-
cate is required by the public convenience and necessity,
which is the Act’s standard in § 7 applications. In grant-
ing such conditional certificates, the Commission does
not determine initial price nor does it overturn those
agreed upon by the parties. Rather, it so conditions
the certificate that the consuming public may be pro-
tected while the justness and reasonableness of the
price fixed by the parties is being determined under
other sections of the Act. Section 7 procedures in such
situations thus act to hold the line awaiting adjudication
of a just and reasonable rate. Thus the purpose of the
Congress “to create a comprehensive and effective regu-
800 See text supra at notes 150-163.
301 Atlantic Ref. Co. v. Public Serv. Comm'n, supra note 10, 360
U.S. at 391.
302 Jd.
803 Jd.
804 Citing United Gas Pipe Line Co. v. Mobile Gas Serv. Corp.,
supra note 256.
A-63
latory scheme’®®> ... is given full recognition. And >
§7 is given only that scope necessary for “a single
statutory scheme under which all rates are established
initially by the natural gas companies, by contract or
otherwise, and all rates are subject to being modified
by the Commission... .”°°°.... On the other hand,
if unconditional certificates are issued where the rate
is not clearly shown to be required by the public con-
venience and necessity, relief is limited to § 5 proceed-
ings, and... full protection of the public interest is not
afforded.*°’
In Opinion No. 565, the Commission found that the lease-
sale, even as amended by the reserve guaranty,*’* did not
comport with the public convenience and necessity ;°°* and
that, in order that it might do so, it was essential that it
be altered in certain respects.*'® In Opinion No. 565-A, the
Commission adhered to that finding.**! In Opinion No. 565,
the Commission fixed an initial price,*'? and in Opinion No.
565-A, though it abrogated that price, it specified that the
future area rate would become the initial price between
Texas Eastern and the producers.*!® In Opinion No. 565,
the Commission imposed a set of additional requirements
395 Quoting Panhandle Eastern Pipe Line Co. v. Public Serv.
Comm’n, 332 U.S. 507, 520 (1947).
896 Quoting United Gas Pipe Line Co. v. Mobile Gas Serv. Corp.,
supra note 256, 350 U.S. at 341.
°7 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 391-92.
808 See note 40, supra.
809 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 382-90. See also Part III(C), supra.
310 Jd.
311 Texas Eastern Transmission Corp. (Opinion No. 565-A),
more, a 68, 44 F.P.C. at 1081, 1083-85. See also text supra at
note ,
$12 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 383-87.
313 Teras Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1085-87.
A-64
to adjust the lease-sale arrangement to the pricing pre-
seribed.*!* While in Opinion No. 565-A, the Commission
suspended some of those requirements, it was not because
they lacked an intimate connection with the initial price
which Opinion No, 565 had set.*'? To the extent that these
specifications changed the parties’ lease-sale contract, they
were manifestly designed to serve the public convenience
and necessity®!® — a necessity born of the great difficulty, if
not the impossibility, of otherwise ascertaining and effectu-
ating an initial price for the gas, and consequently of pro-
tecting consumers against excessiveness.*'? In these modi-
fications, we perceive no impingement upon the Mobile-
Sierra doctrine.
— The Total Price
As we have stated, Texas Eastern argues strenuously
that the Commission’s decision to eliminate the $134 mil-
lion lease-sale contract price as the ceiling of its monetary
liability to the producers for their Rayne Field gas stands
on entirely different ground. We find, upon careful ex-
amination of this particular change, that Texas Hastern’s
position is well taken. We accordingly hold that the Com-
mission’s action in that regard cannot be supported as an
appropriate exercise of its contract-revision authority ander
the narrow exception to the Mobile-Sierra rule.
Before elucidating the reasons persuading us to that
conclusion, we pause to address two preliminary consider-
ations. The producers and the Commission point to the
14 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390-400.
315 Teras Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1085-89.
316 See text supra at notes 285-307.
317 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 389; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083.
A-65
uncertainties as to the volume of gas in the field, the
quantity and value of liquids that may be extracted, the
amount of future state taxes and the size of salvage re-
coveries; and on that basis they argue that the displace-
ment of the contract price by a unit price payable through-
out the life of the field does not absolutely forebode an
increase of the cost of the gas to Texas Eastern. In the
view of three members of the Commission — a majority in
Opinion No. 565-A, in which the displacement was directed
-—- such an increase would indeed follow. Commissioner
O’Connor estimated that the producers would gain “an
additional $52,141,000.’°'® Commissioners Carver and
Brooke put the gain in current dollars at between
$17,637,000 and $25,912,000.*'° All three commissioners
recognized that these figures would go higher if the area
rate for Southern Louisiana producers were raised pros-
pectively above 18.5 cents per Mef.®*° Neither of the two
remaining Commission members indicated in Opinion No.
565-A any belief that the linking of Texas Eastern’s pay-
ments to the full period of productive activity was not
an extracontractual financial boon to the producers.**'
Moreover, the Section 7 certification proceeding does not
tolerate the kind of cost figuring which ‘a more solid de-
termination on the matter of increase, if possible at all,
would unavoidably necessitate.**® In these circumstances,
318 Teras Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1096.
319 Td. at 1103.
820 Td. at 1096 n.11, 1103.
321 See id. at 1085-86.
822 Compare United Gas Improvement Co. v. Callery Properties,
supra note 151, 382 U.S. at 226-28. There the Court reversed a hold-
ing that the Commission could not utilize the in-line price as the
initial price in a Section 7 certification proceeding without can-
vassing evidence as to what a just and reasonable price would be.
“To consider in this § 7 proceeding the mass of evidence relevant to
the fixing of just and reasonable rates under § 5 might in practical
effect render nugatory any effort to fix initial prices.” Id. at 227-
28. See also text supra at notes 155-63.
A-66
we feel bound to accept the premise that the contract price
was substantially raised.
Beyond that, the fundamental teaching of Mobile and
S'erra is that the parties’ agreement, and not the Commis-
sion’s bent, sets the price of gas for purposes of adminis-
trative regulation unless overriding considerations of public
convenience and necessity unmistakably appear.**® We
deem this the governing rule not only where, in consequence
of the Commission’s action, a raising of the contract price of
gas is evident but also where it is reasonably likely. For
it is the prerogative of each contracting party to seek
protection in a firm price, and to insist upon it if it becomes
a term of the contract. Texas Eastern and the producers
stipulated such a price in their lease-sale contract, and
Texas Eastern is free to demand the financial security
which it provides. Like any other estimate, the views that
elimination of the contract price inexorably increased
Texas Eastern’s gas costs cannot rise to the level of com-
plete certainty. But it cannot be gainsaid that, af the very
least, eradication of the contract price poses the serious
threat that Texas Eastern may have to pay the producers
much more. That, we think, is enough to give substance to
Texas Eastern’s complaint, and to bring the Mobile-Sierra
restriction into play.
There is another preliminary matter which the producers’
position presents. They contend also that because the appli-
eations to the Commission invoked its Section 7 power to
confer certification, and not its Section 5 authority to re-
view rates for their reasonableness, the Wobile-Sierra doc-
trine does not apply. Like the Third Cireuit, however, we
deem this “an immaterial difference.’*** Mobile and Sierra
323 See Part IV (B), supra.
324 Natural Gas Pipeline Co. v. FPC, 253 F.2d 3, 7 (3d Cir.),
cert. denied, 357 U.S. 927 (1958).
A-67
together ordain that a party to a gas contract may not
unilaterally increase the contract price,®®® and they also
specify the only condition under which the Commission can
elevate that price.®*® We cannot read either of those de-
cisions as a holding that, absent an exigent public interest,
the Commission can exercise a prerogative which the parties
contractually denied to themselves. Nor do we find in Sec-
tion 7 a grant to the Commission of greater power over
contract prices than it possesses under Sections 4 and 5.
On the contrary, it is our clear understanding from the
Supreme Court’s CATCO decision,**’ which we have already
extensively analyzed,*** that the Mobile-Sierra rule applies
full force to Section 7 proceedings.®*® We conclude that the
Commission was as much bound to preserve the integrity
of the contract price in this case as in any other.
This brings us to a consideration of the propriety of the
Commission’s holding in Opinion No. 565-A that instead of
discharging the fixed purchase-price obligation defined in
the lease-sale contract, Texas Eastern must continue its
gas-purchase payments to the producers until the trans-
ferred reserves are exhausted. The majority vote®®® to make
that change was predicated upon a single ground: that “it
appears that while the Producers, under the arrangement
we prescribed [in Opinion No. 565], will be getting the
contract price it will not be of the same value because they
825 See Part IV (B), supra.
826 See Part IV (B), supra.
827 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10.
328 See notes 161-63, 304-07, supra.
329 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 391-92, quoted in text supra at notes 304-07.
330 We remind that Opinion No. 565-A gained a majority only
because Commissioners Carver and Brooke joined Chairman Nas-
sikas and Commissioner Bagge to make possible a disposition more
alatable to them than the disposition proposed in Opinion No. 565.
text supra at notes 76-90, 111-13.
A-68
will receive it over a much longer period, and they will not
receive the benefit of all the gas and liquids produced by
the Field as they won!d under a conventional contract.’’**
For that reason alone, il was concluded “that it is only
equitable that they be paid for the gas and receive credit
tor the liquids produced until the Field is exhausted.”***
We think it clear that the Commission’s direction to
that end does not survive the Mobile-Sierra test. That
test, as we have seen, is not whether a contractual pro-
vision seems to be equitable to the contracting parties
hut whether it is detrimental to the public interest.**
It bears repeating that “[t]he regulatory system created
by the Act is premised on contractual agreements volun-
tarily devised,”*** and that “it contemplates abregation of
these agreements only in circumstonces of unequivocal pub-
lic necessity.”*°> Unlike the conventionalizing provisions of
Opinion No. 565 responsive to the dire public need to estab-
lish an initial unit price for the gas,°** the Commission’s
alteration of the stipulated aggregate price has not been
shown to serve any facet of the public interest at all.
The Commission did not find that the $134 million con-
tract price was “so low as to adversely affect the public
interest.’’**? It did not find “financial or other difficulties
that required the Commission to relieve the producers...
from the burdens of their contractual obligations.”*** Nor
331 Teras Eastern Transmission “orp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1085.
332 Tq.
333 See Part IV (B), supra.
234 Permian Basin Area Rate Cases (Continental Oil Co. vy.
FPC), supra note 69, 390 U.S. at 822.
335 Jd.
336 See text supra at notes 285-317.
ny FPC vy. Sierra Pac. Power Co., supra note 269, 350 U.S. at
55.
"Permian Basin Area Rate Cases | Continental Oil Co. v. FPC),
supra note 69, 390 U.S. at 822.
See Mi te
A-69
did it find that the apparent enlargement of Texas Eastern’s
ultimate financial Jiability was essential to conventionaliza-
tien of the lease-sale arrangment.°**® It simply felt it “only
equitable” to lift the $134 million ceiling on the total con-
sideration the producers were to receive in order to adjust
the difference in time value of the money and to assure
remuneration for all gas and liquids yielded. It may be
that, as things turned out, the producers would have been
better off had the parties not substituted the lease-sale for
the original gas-sale transaction, but “the Commission ma:
not, absent evidence of injury to the public interest, relieve
a” contracting party “of ‘its improvident bargain.’ ”** It
follows that the Commission’s attempt to extend Texas
Eastern’s payments over the life of Rayne Field must be
set aside.
That is not to say, however, that its counterpart in
Opinion No. 565 is invulnerable. Except as the exigencies
of the public interest demanded, the Commission was no
more at liberty to alter the lease-sale contract to the
prejudice of the producers than to do so in their favor.
Opinion No. 565, by limiting Texas Eastern’s financial
liability to the contract price and simultaneously spreading
its discharge over a longer period of time, would cause the
339 Counsel for the Commission argue that the scrapping of the
$134 million contract price was a necessary step in conventionaliza-
tion of the lease-sale so as to make it regulable. The Commission,
however, did not rely on that ground, see Part III (C), supra, and
rationalizations by counsel which were not reasons for the agency
decision are unacceptable on judicial review. Burlington Truck
Lines v. United States, 371 U.S. 156, 168-69 (1962); Teras Gas
Transmission Corp. v. Shell Oil Co., 363 U.S. 263, 270 (1960) ; SEC
v. Chenery Corp., 332 U.S. 194, 196 (1947). Furthermore, the
transaction could readily have been conventionalized without eleva-
tion of the contract price. See text supra at notes 242-45, 246-49.
3849 Permian Basin Area Rate Cases (Continental Oil Co. v.
FPC), supra note 69, 390 U.S. at 821, quoting FPC vy. Sierra Pac.
Power Co., supra note 269, 350 U.S. at 355.
A-70
producers to receive less than the quid pro quo for which
they contracted. That is because the value to the producers
of the money to be paid over the longer time span would
be less than its value by the payment schedule embodied in
the lease-sale arrangement.**! The Commission, in con-
ventionalizing the lease-sale in the public interest*** was
virtually compelled to change that schedule, and we have
sustained its action in doing so;*** but in the process the
producers were deprived of a part of their bargain.
Every member of the Commission has come to recognize
the producers’ plight demands rectification,®** but we see
no need for a remand to the Commission for its accomplish-
ment. A majority of the Commission has held on five ocea-
sions that the public convenience and necessity would not
be served by certificaton of the lease-sale as a lease-sale,**
and on two occasions that conventionalization was necessary
in the public interest,°** with a linking of Texas Eastern’s
341 See. ¢.g., the discussion in Texas Eastern Transmission Corp.,
supra note 100, 44 F.P.C. at 1471-73 (separate opinion of Com-
missioner O’Connor) (order denying rehearing).
342 See Part III (C), supra.
343 See text supra at notes 308-17.
844 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 436 (Commissioners Carver and Brooke) ;
Teras Eastern Transmission Corp. (Opinion No. 565-A), supra
note 68, 44 F.P.C. at 1085 (Chairman Nassikas and Commissioner
Bagge) ; id. at 1098 (Commissioners Carver and Brooke); Teras
Eastern Transmission Corp., supra note 100, 44 F.P.C. at 1472
(Commissioner (Connor) (order denying rehearing); Id at 1473
(Commissioners Carver and Brooke).
*45 Teras Eastern Transmission Corp. (Opinion No. 378), supra
note 31, 29 F.P.C. at 256-57; Teras Eastern Transmission Corp.
(Opinion No. 378-A), supra note 35, 30 F.P.C. at 156; Texas
Kastern Transmission Corp. (Opinion No. 565), supra note 16,
42 BF BPLCl at Seles, os7-0; Teras Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-85; Teras
Eastern Transmission Corp., supra note 100, 44 F.P.C. at 1471
‘order denying rehearing).
6 Teoras Eastern Tranemission Corp. ( Opinion No. 565), supra
note 16, 42 F.P.C. at 359-90; Teras Eastern Transmission Corp.,
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1083-85.
A-71
gas-purchase payments to gas-deliveries.**7 With these
holdings, which the Commission deems unavoidable and
which we have no basis for disturbing, the only alternative
legally available to the Commission is an increase in Texas
Eastern’s payments beyond the aggregate $134 million con-
tract price by an amount equal to the time value of the
money to be paid on the Commission-rearranged payment
schedule.*** That would confer on the producers the full
equivalent of their contract price, and would impose on
Texas Eastern no more than the equivalent of its contract
cost; and the economic positions of both parties would then
be harmonized with Mobile-Sierra requirements.**® Our
judgment on this review will, in lieu of a remand for the
purposes, incorporate such a modification in the Commis-
sion’s disposition.
347 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 390-91; Texas Eastern Transmission Corp.
(Opinion No. 565-A), supra note 68, 44 F.P.C. at 1085-86.
348 Texas Eastern seems also to recognize the need for this
adjustment. In its reply brief (p. 11), it agreed that the elimina-
tion in Opinion No. 565-A of the $134 million price ceiling was
unnecessary since, as an alternative its payments to
could be adjusted upward to take account of the time value of
the money paid on the plan of conventionalization set forth in
Opinion No. 565, and the producers would thereby realize the same
consideration as they would have under the lease-sale contract.
349 We disagree with the Commission’s conclusion in Opinion
No. 565-A that the $134 million price ceiling could be dissolved in
order to require Texas Eastern to pay for all of the gas and liquids
roduced over the life of the field. See text supra at notes 250-51.
y the parties’ contract, payment of the $134 million purchase
price entitled Texas Eastern to all of the gas in place in the
producers’ Rayne Field holdings and to all liquids extracted from
the gas. In no way did Opinion No. 565 undertake to change this
feature of the contract, see text supra at note 245, nor was the
Commission free to do so in Opinion No. 565-A. The Commission
has pointed to no “circumstances of unequivocal public necessity,”
see text supra at note 335, which would warrant that treatment
consistently with the Mobile-Sierra rule.
A-72
é
V. Propvucer Rates anp Rerunps
Having decided to conventionalize the lease-sale trans-
action,®®® with a view to establishment of an initial unit
price for the producers’ gas as the major product of con-
ventionalization,®*! the Commission then embarked upon
achievement of that goal. The task which the Commission
undertook may be defined quite simply. An initial price for
the gas, geared to actual deliveries, would fix a ceiling on
the payments which Texas Eastern would thereafter make
to the producers. It might also serve as the point of refer-
ence for financial adjustments between the parties, which
past remittances on the schedule of the lease-sale purchase-
price payments would almost certainly make inevitable. In
addressing these matters the Commission was, however, to
travel a long and tortuous path to an inconclusive end.
In Opinion No. 565, a majority of the Commission held
that the certificates issued to Texas Eastern and the pro-
ducers should be conditioned upon an initial price of 20
cents per Mef for gas delivered to October 1, 1968, and at
the price of 18.5 cents on deliveries thereafter.*>? The 20-cent
price was the in-line price, as determined by the Commis-
sion.*®? The 18.5-cent price was the just and reasonable area
rate which the Commission had recently set in the Southern
Louisiana Area Rate Proceeding.** The changeover date
was the date on which the area rate took effect.°°> The order
359 See Part III (C), supra.
351 See Part IV(A), (C), (2), supra.
852 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 FPLC. at 383-93.
88 Td. at 384. See also Texas Eastern Transmission Corp.
(Opinion No, 565-A), supra note 68, 44 F.P.C. at 1086-87.
354 (Opinion No. 546), supra note 53.
355 See Southern Louisiana Area Rate Proceeding (Opinion N
546-A), 41 F.P.C. 301, 309, 341 (1969). 9 (Upemeen Ne.
A-73
accompanying Opinion No. 565 directed Texas Eastern to
make payments to the producers, and th» producers to make
refunds to Texas Eastérn, in accordance with that
formula.*** Chairman White was of the view that the price
should have been fixed at the 18.5-cent just and reasonable
rate from the time the flow of the gas commenced in 1959.°°7
In Opinion No. 565-A, however, this disposition was
changed radically. A majority of the Commission rallied
to the position expressed earlier by Chairman White,°**
who no longer was a member of the Commission, but con-
cluded that no just and reasonable area rate had been finally
determined.*®* On that ground, the majority held that Texas
Eastern should pay the producers the 20-cent in-line rate
on future gas deliveries until a firm area rate was forth-
coming.*®° On the same ground and others, the majority also
held that producer refunds should be deferred until then.**
The Commission subsequently denied a rehearing of that
decision.*®
We find the resolutions of the Commission majorities in
Opinions Nos. 565 and 565-A legally unacceptable. We hold
that, as a matter of law, the Commission was compelled to
utilize the previously ascertained 18.5-cent just and reason-
able area rate both as the unit price for the gas deliveries
356 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. e 403-05.
357 Td. at 417-22.
358 Teras Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1085-86.
359 Jd. at 1086. ‘
360 Jd. at 1087.
361Jd. at 1087-88.
362 Teras Eastern Transmission Corp., supra note 100, 44 F.P.C.
at 1471 (order denying rehearing).
A-74
to be made and as the basis for refunds by the producers
on account of deliveries already made. We further hold that
the Commission was legally obliged to order the producers
to make those refunds to Texas Eastern immediately.
A. The General Standard For Producer Rates
“The purpose of the Natural Gas Act,” the Supreme
Court instructs, “was to underwrite just and reasonable
rates to the consumers of natural gas.’*® Its “primary
aim... was to protect consumers against exploitation
at the hands of natural gas companies.’°** Section 4(a)
of the Act specifies that “[aJll rate’ .nd charges ... by
any natural-gas company’®® on the “sale of natural gas”
regulable by the Commission “shall be just and reason-
able’ ;°®* and by that section, “any such rate or charge
that is not just and reasonable is declared to be unlaw-
ful.”°®? Nowhere does the Act in terms condone any rate
or charge other than the one that would be just and reason-
able. Nowhere does the Act suggest that a rate or charge
above that which would be just and reasonable is not un-
lawfully excessive. Nor can it be gainsaid that “(t]he Act
was so framed as to afford consumers a complete, perma-
363 Atlantic Ref. Co. v. Public Service Comm’n, supra note 10,
360 U.S. at 388.
364 PPC vy. Hope Natural Gas Co., supra note 229, 320 U.S. at 610.
865 The producers are “natural gas compan{ies]” within the
meaning of the Act. Natural Gas Act § 2(6), 15 U.S.C. § 717a(6)
(1970); Phillips Petroleum Co. v. Wisconsin, supra note 6, 347
U.S. at 676-77.
866 “All rates and charges made, demanded, or received by any
natural-gas company for or in connection with the transportation
or sale of natural gas subject to the jurisdiction of the Commission,
and all rules and regulations affecting or pertaining to such rates
or charges, shall be just and reasonable and any such rate or
charge that is not just and reasonable is declared to be unlawful.”
Natural Gas Act § 4(a), 15 U.S.C. § 717e(a) (1970).
367 See note 366, supra.
ge ce a .
A-75
nent and effective bond of protection from excessive rates
and charges.”*®
The Commission’s responsibility to hearken to these
policies attaches at the very moment it is requested to
certificate activities within its regulatory domain. Sec-
tion 7(e) imposes upon it the duty to determine whether
a “proposed service, sale, operation, construction, exten-
sion, or acquisition . . . will be required by the present
or future public convenience and necessity.”*® By the
same token, that section “vests in the Commission control
over the conditions under which gas may be initially
dedicated to interstate use.”*7° That authority extends
indubitably to a determination as to whether the charges
which a producer proposes to make for his gas are in
the public interest.’ Indeed, Section 7(c) of the Act
itself originally articulated “the intention of Congress
that natural gas shall be sold in interstate commerce
for resale for ultimate public consumption... at the
lowest possible reasonable rate consistent with the main-
tenance of adequate service in the public interest.”*”* That
objective, though no longer expressly stated, stands as a
major congressional concern today.*”®
To be sure, “the Act does not require a determination
of just and reasonable rates in a §7 proceeding as it does
in one under either § 4 or § 5,” °** nor is “a ‘just and rea-
367 See note 366, supra.
868 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 388.
369 Natural Gas Act § 7(e), 15 U.S.C. § 717(e) (1970). See also
Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360 U.S.
at 388.
870 Atlantic Ref. Co. v. Publie Serv. Comm’n, supra note 10, 360
U.S. at 389.
371 See text supra at notes 263, 278, and Part [IV(C) (1), supra.
372 52 Stat. 825 (i938).
373 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 388.
A-76
sonable’ rate hearing ... a prerequisite to the issuance
of producer certificates.’’*> The setting of the producer’s
initial price at the just and reasonable rate, were that
course feasible, would, of course, contribute handsomely
to the consumer-protection goal of the Act. But as we
have seen, the exigencies of prompt initial certification of
was sales and pipeline extensions preclude, within the certi-
fication proceedings themselves, fullfledged investigations
worthy of a “just and reasonable” appellation.®*® That is not
to say that the Commission need not bend its best efforts to
achieve an equitable price arrangement when it awards
certification under Section 7. On the contrary, the very
delay incidental to just-and-reasonable-rate investigations
“requires a most careful scrutiny and responsible reaction
to initial price proposals of producers under §7.°77
“(Price [is] a consideration of price importance’’’* in
the certification process, and “if unconditional certificates
are issued where the rate is not clearly shown to be re-
quired by the public convenience and necessity, .. . full
protection of the public interest is not afforded.’
B. The Treatment Of Producer Rates
In Opinion No. 565, a majority of the Commission de-
cided that the price to be paid to the producers for gas
deliveries to Texas Eastern after the effective date of the
Commission's decision in Southern Louisiana Area Rate
47d. at 390 (emphasis supplied). See Natural Gas Act §§ 4, 5,
15 U.S.C. §§ 717e, 717d (1970).
875 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 390-91.
876 See Part III (A) supra.
; 377 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 391. See also FPC v. Sunray DX Oil Co., supra note 151,
391 U.S. at 17-18.
878 Atlantic Ref. Co. v. Public Serv. Comm’n, supra note 10, 360
U.S. at 391.
379 Td. at 392.
A-77
Proceeding®® should be set at the just and reasonable rate
of 18.5 cents ascertained therein.**! Said the Commission:
Here we are issuing a certificate under Section 7 of
the Natural Gas Act. Section 7(c) provides that we
have power to attach to the certificate “such reason-
able terms and conditions as the public convenience
and necessity may require.’**? We think it reason-
able... to require that the Producers reduce their
rates prospectively to an effective 18.5 cents per Mef
in accordance with [the area rate determination].°
In Opinion No. 565-A, the Commission majority held
similarly that the just and reasonable rate should gov-
ern the initial price for prospective gas deliveries.*** The
Commission concluded, however, that the area rate for
Southern Louisiana producers had not been finally re-
solved.**> So, with respect to the future pricing of the gas,
the Commission said:
Since we have stayed this rate as a result of the court’s
review of our area decision®®® and the appropriate rate
is still subject to further proceedings, we shall require
that the producer rate schedule filing be on the basis
of 20 cents per Mef, the in-line price in Southern Lou-
isiana as found in our original opinion. When the
Southern Louisiana rate is finally determined, we shall
require that this basic producer rate be modified ac-
cordingly.3*"
880 (Opinion No. 546), supra note 53. See text supra at notes 69-75.
881 Teras Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 383-93.
882 15 U.S.C. § 717f(¢) (1970).
383 Texas Eastern Transmission Corp. (Opinion No. 565), supra
note 16, 42 F.P.C. at 385.
384 Texas Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1085-86.
385 Jd.
386 Southern Louisiana Area Rate Proceeding (Opinion No.
546), supra note 53. See text supra at notes 69-75.
387 Texas Eastern Transmission Corp. (Opinion No. 565-A),
supra note 68, 44 F.P.C. at 1086 (Footnote omitted).
A-78
The challenge we are now summoned to resolve is to the
Commission's substitution by Opinion 565-A of the in-line
rate for the just and reasonable rate employed in Opinion
No. 565 as the measure of the initial price to be paid by
Texas Eastern to the producers for future deliveries of
natural gas.
~-(1) The Choice Of The In-Line Price
The unfeasibility of establishing a just and reasonable
rate within the framework of a Section 7 certification
proceeding®** ofttimes forces resort to some other means
of fixing an initial price for newly certificated gus in the
public interest. So it is that the in-line price frequently
hecomes the criterion — simply because it is the only point
of reference extant.°** Where that is so, it is settled that the
in-line price may legitimately be utilized as the initial price
in.posed as a condition qualifying the certificate issued.**°
The in-line price thus functions as the ceiling on the price
at which the gas may be sold pending ascertainment of the
just and reasonable rate.®*?
It is evident, however, that use of the in-line price as
the yardstick for the initial-price determination on cer-
tification cannot be justified in situations where a just
and reasonable area rate for gas of the vintage in ques-
tion has already been established. The goal of gas-pricing
888 See Part III (A). supra.
389 See FPC vy. Sunray DX Oil Co. supra note 151, 391 U.S.
at 18-20; United Gas Improvement Co. v. Callery Properties, supra
note 151, 382 U.S. at 226-28.
890 FPC y. Sunray DX Oil Co., supra note 151, 391 U.S. at 18-20;
United Gas Improvement Co. v. Callery Properties, supra note 151,
382 U.S. at 226-28.
391 FPC vy. Sunray DX Oil Co., supra note 151, 391 U.S. at 21-22,
25-26; United Gas Improvement Co. v. Callery Pruperties, supra
note 151, 3s2. U.S. at 226-28.
A-79
to which the Act emphatically speaks is the just and reason-
able rate,®*? for which the in-line price is not a reliable sub-
elitute. As the Supreme Court has pointed out, where the
Commission has decided “to rely solely upon contempo-
raneous contract prices in setting initial rates, there can
be no assurance that an initial price arrived at by the Com-
mission will bear any particular relationship to the just
and reasonable rate.’’®? Rather, as we have explained,
adoption of the in-line price as the initial price is merely
an interim measure designed to hold the line until the just
and reasonable rate for the gas can be ascertained.®™ If
that rate, by reason of a past determination, is already
available, its use as the initial price for future gas sales
follows logically and, we think, legally as a normal concomi-
tant of certification.
Just and reasonable rates for jurisdictional gas, we re-
peat, are the end and aim of price regulation under the
Act.°°> They are the ultimate in the pricing of the natural
gas over which the Commission exerts its authority. That
the Section 7 proceeding is directed primarily at certifica-
392 See Part V(A), supra.
893 FPC vy. Sunray DX Oi! Co., supra note 151, 391 U.S. at 25.
The Court added:
Any such assurance would necessarily be based on a belief that
the current contract prices in an area approximate closely the
“true” market price — the just and reasonable rate. Although
there is doubtless some relationship, and some economists have
argued that it is intimate, such a belief would contradict the
basic assumption that has caused natural gas production to be
subjected to regulation and which must have underlain this
Court’s CATCO decision — namely, that the purchasing pipe-
line, whose cost of purchase is a current operating expense
which the pipeline is entitled to pass on to its customers as part
of its rates, lacks sufficient incentive to bargain prices down.
391 U.S. at 25-26 (Footnotes omitted).
394 See text supra at notes 388-91.
895 See Part V(A), supra.
A-80
tion rather than ratemaking does not diminish the Commis-
sion’s duty to fix initial prices which are calculated to best
serve the public weal. The congressional intent underlying
Section 7 is that jurisdictional gas shall, from the very
beginning, “be sold... at the lowest possible reasonable
rate consistent with the maintenance of adequate service in
the public interest.’*** Ordinarily that policy is frustrated
by selection of an in-line price over a just and reasonable
price that is for the asking.
As we see it, only the presence of an overriding considera-
tion promoting an identifiable legislative purpose can jus-
tity administrative displacement of the just and reasonable
rate through approval of another rate for gas to which the
Act applies. The need for prompt setting of an initial price
in a Section 7 certification proceeding becomes such a con-
sideration where there is no just and reasonable rate as
yet.2°7 But where, on the other hand, the just and reason-
able rate has been established when the Commission comes
to fix an initial price for gas, there is simply no need to
resort to any other rate.
Two courts, for the purpose of computing producer re-
fund liabilities in Section 7 proceedings, have passed over
the in-line price for natural gas in favor of the just and
reasonable area rate which had become available.*** It is
even plainer to us that, absent unusual circumstances, that
course must be pursued when the Commission is called upon
to set initial prices prospectively. In our view, the Com-
mission is legally compelled to peg a producer’s initial price
—_——
996 See text supra at note 372 (emphasis supplied).
997 See FPC vy. Sunray DX Oil Co. supra note 151, 391 U.S. at
25-26.
398 Hunt Oil Co. v. FPC, 424 F.2d 982, 986 (5th Cir. 1970) ;
Phillips Petroleum Co, v. FPC, supra note 221, 405 F.2d at 9. See
also Part ViC), infra.
A-81
at a previously ascertained just and reasonable rate unless
some consideration eifectuating a countervailing congres-
sional policy is shown on balance to outweigh the congres-
sional interest in “just and reasonable rates to the con-
sumers of the natural gas.’’°
— (2) The Status of the Southern Louisiana Area Rate
Proceeding
On September 25, 1968, the Commission capped a
seven-year-old rate investigation with its Opinion No.
546 in Docket _No. AR61-2—the Southern Louisiana
Area Rate Proceeding.“ By that decision, the Commission
fixed just and reasonable price ceilings, including a mini-
mum of 18.5 cents for natural gas of the Rayne Field
vintage, for the Southern Louisiana production area.*®!
The orders effectuating Opinion No. 546 soon came under
review in the Fifth Cireuit.“°? Producers and pipelines
challenged the rates as too low, while consumer interests
argued that they were too high. On March 10, 1970, the
court sustained the orders “in full’’.*°
In the meantime, the Commission, on March 20, 1969,
had issued its Opinion No. 546-A in response to applica-
tions for rehearing of Opinion No. 546.*°* In Opinion No.
546-A, the Commission modified Opinion No. 546 in some
399 See text supra at note 363.
409 (Opinion No. 546), supra note 53. The proceeding had been
instituted by an order issued May 10, 1961. Southern Louisiana
Arca Rate Proceeding, 25 F.P.C. 942 (1961) (order instituting
proceeding).
401 Southern Louisiana Area Rate Proceeding (Opinion No. 546),
supra note 53, 40 F.P.C. at 544, 636, 648.
402 Southern Louisiana Area Rate Cases, (Austral Oil Co. vy.
FPC), supra note 53.
403 498 F.2d at 444.
4°4 Southern Louisiana Area Rate Proceeding (Opinion No.
546-A), supra note 355.
A-82
respects, but refused to reopen the investigation or to re-
adjust the price levels set.4°° The Commission felt, however,
that the importance of an additional supply of gas from
the offshore areas of Southern Louisiana warranted the
commencement of another proceeding looking forward to
possible revision of the area price for such gas.*°* The Com-
mission rejected suggestions that the new proceeding —
Docket No. AR69-1—should embrace a further inquiry
into the adequacy of the rates promulgated in Opin.on No.
546 for gas produced onshore in the Southern Louisiana
area.”’?7 Within nine months, however, the Commission
changed its mind as to the scope of the new investigation.
On December 15, 1969, the Commission issued an order en-
larging the proceeding to include the entire geographical
area of Southern Louisiana, onshore as well as offshore,
and to provide for a review of the just and reasonable rates
for all vintages of gas therefrom.*®*
The order expanding the investigation in Docket No.
AR69-1 came shortly prior to oral argument in the Fifth
Cireuit on its review of Opinion No. 546, the original South-
ern Louisiana area rate proceeding, occasioning a pause
to consider the impact of that investigation on the pending
review.*°? The court agreed with the parties that it had no
effect,*!? pointing out that
The maximum rates that the Commission has set
. are to remain in effect throughout the new pro-
495 Td. at 308-42.
406 Jd, at 306-07. The new investigation, Docket No. AR69-1,
was lannehed immediately. Southern Louisiana Area Rate Pro-
ceeding, 41 F.P.C. 378 (1969) (order instituting proceeding).
7 Td. at SOT-08.
8 Southern Louisiana Area Rate Proceeding, 42 F.P.C. 1110,
1111, 1118 (109) order enlarging proceeding).
Southern Louisiana Arca Rate Cases (Austral Oil Co. v.
FI’C), supra note 53, 428 F.2d at 421,
410 Td,
A-83
ceeding, which may last for years. Moreover, it was
never contemplated that there should be a single
area proceeding setting rates once and for all; rath-
er the Commission has always made it clear that it
intended to review the rates it had set whenever the
circumstances made it advisable to do so.*!!
And in upholding the orders under review, the Court
stated:
The mandate of this Court should not, however, be
interpreted to interfere with Commission action that
would change the rates we have approved here. We
specifically and emphat
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