Opposition Brief — Federal Energy Regulatory Commission v. United States (Nos. 89-1453, 89-1452)

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Mog On. EXPLORATION & PRODUCING

SOUTHEAST, INC., Er AL., PETITIONERS

UNITED DISTRIBUTION COMPANIES, ET AL.

FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER

UNITED DISTRIBUTION COMPANIES, ET AL.

ON WRITS OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

- FORTHE FIFTH CIRCUIT

BRIEF FOR THE

FEDERAL ENERGY REGULATORY COMMISSION

>". KENNETH W. STARR

ee Solicitor General

5 LAWRENCE G. WALLACE

2 Deputy Solicitor General

1 WILLIAM S. SCHERMAN EpwWIn S. KNEEDLER

. Solicitor Washington, D.C. 20530

Bee.

- J§R0ME M. Ferr Department of Justice

: aos (202) 514-2217

QUESTIONS PRESENTED

1. Whether the Federal Energy Regulatory Commis-

sion lawfully exercised its authority to raise the price

ceiling for “old” natural gas in conformity with the re-

quirement in Sections 104 (b) (2) and 106(c) of the Na-

tural Gas Policy Act of 1978, 15 U.S.C. 3314(b) (2) and

3316 (e), that the “higher” price be “just and reasonable

within the meaning of the Natural Gas Act.”

2. Whether Section 7(b) of the Natural Gas Act, 15

U.S.C. 717f (b), permits the Commission to prescribe in

advance and on a generic basis the conditions under

which the abandonment of services will be authorized,

rather than requiring case-by-case adjudication.

3. Whether the court of appeals erred in holding that

the Commission could not adopt the orders at issue here

(which increase the price ceiling for old gas but estab-

lish a good faith negotiation procedure to protect pipe-

line-purchasers against automatic imposition of the in-

crease) unless it first solved the problems created by

“take-or-pay” clauses in certain pipelines’ natural gas

contracts, even though the Commission has addressed the

“take-or-pay” problem in separate administrative pro-

ceedings.

(1)

PARTIES TO THE PROCEEDING

The parties to the proceeding in No. 89-1452 are listed

in the appendix to the petition in that case at 76a-82a.

The petitioner in No. 89-1453 is the Federal Energy

Regulatory Commission. The respondents in that case

are listed in the appendix to the petition at 83a-86a.

TABLE OF CONTENTS

Statutory and regulatory provisions involved

r ũͥͤͤͥſfff?:?:e iUlſñ..

A. Historical background: The course of wellhead

price regulation Z

B. The pricing scheme enacted in the N GPA.

C. Promulgation of Order No. 451.

D. The decision of the court of appealllss

Introduetion and summary of argument

Argument:

II.

III.

The alternative price ceiling in Order No. 451 is

fully consistent with the “just and reasonable”

standard incorporated into Sections 104(b) (2)

and 106(c) of the Natural Gas Policy Act of

1978 ... .

A. The NGPA expressly authorizes the Commis-

sion to adopt a “higher” ceiling price for old

gas where, as here, that price is “just and

and reasonable” standard when it was in-

corporated into the Natural Gas Policy Act

strongly supports the Commission’s revision

of the vintage pricing system for old gas

C. The legislative history does not support the

court of appeals’ interpretation of Sections

EEE

The Commission was authorized by Section 7 (b)

of the Natural Gas Act to specify in Order No.

451 the circumstances under which future

abandonment of gas service is permitted —........

The Commission was not required to implement

a comprehensive solution to the “take-or-pay”

problem in connection with Order No. 451 be-

fore raising the ceiling price for old gas

(III)

do do do

Argument—Continued: Page

IV. Congress’s enactment oi the Wellhead Decontrol

Act confirms the soundness of Order No. 451 49

88888 ———j—ĩ 50

765 —— . TEE 1a

TABLE OF AUTHORITIES

Cases:

American Public Gas Ass’n v. FPC, 567 F. 2d 1016

(D.C. Cir. 1977), cert. denied, 435 U.S. 907

I ——————————————————— 6, 7, 20, 27, 28, 33

Associated Gas Distributors v. FERC, 824 F.2d

981 (D.C. Cir. 1987), cert. denied, 485 U.S. 1006

(1988) ...... b 17, 43, 44, 45

Atkins v. Rivera, 477 U.S. 154 (1986) 1 25

Cannon v. University of Chicago, 441 U.S. 677

—.. . 31

Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837

(| — —vt̃ — 24

Consolidated Edison Co. of New York v. FERC,

823 F.2d 630 (D.C. Cir. 1987) ..................-.......---- 41

CPSC v. GTE Sylvania, Inc., 447 U.S. 102 ( 1980) 36

Duquesne Light Co. v. Barasch, 109 S. Ct. 609

55 . 4

FCC v. Schreiber, 381 U.S. 279 (19657 48

Felmont Oil Corp., 33 F. E. R. C. J 61,333 (1985),

rev’d sub nom. Consolidated Edison Co. v.

FERC, 823 F.2d 630 (D.C. Cir. 19877 41

FERC v. Martin Exploration Management Co.,

GG yyy 9, 25, 27

FPC v. Hope Natural Gas Co., 320 U.S. 591

(| | 4, 31, 34-35

FPC v. Moss, 424 V. BR yy 40

FPC v. Natural Gas Pipeline Co., 315 U.S. 575 1

FPC v. Sunray DX Oil Co., 391 U.S. 9 (1968) 43

FPC v. Texaco, Inc., 377 U.S. 33 (1964) -............... 43

FPC v. Texaco, Inc., 417 U.S. 380 (1974) -............ 6, 31, 32

FPC v. Transcontinental Gas Pipe Line Corp., 423

II 48

Cases—Continued:

Hallstrom v. Tillamook County, 110 S. Ct. 304

Heckler v. Campbell, 461 U.S. 458 (1983)

Kansas Power & Light Co. v. FERC, 851 F.2d

ee aaa ee

K Mart Corp. v. Cartier, Inc., 486 U.S. 281

ET SE ae ae aS ae

Merrill Lynch, Pierce, Fenner & Smith, Ine. v.

Curran, 456 U.S. 353 (19827

Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974)

Morissette v. United States, 342 U.S. 246 (1982)..

Order No. 428, Exemption of Small Producers

from Regulation, 45 F.P.C. 454 (19717

Order No. 436, Regulation of Natural Gas Pipe-

lines After Partial Wellhead Decontrol, 50 Fed.

Reg. 42,408, 1982-1985 FERC Stats. & Regs.

[Regs. Preambles] (CCH) 7 30,665 (1985),

aff d in part and remanded in part sub nom.

Associated Gas Distributors v. FERC, 824 F.2d

981 (D.C. Cir. 1987), cert. denied, 485 U.S.

Oe a ee ee

Order No. 451, 51 Fed. Reg. 22,168 (1986) passim

Order No. 451-A, 51 Fed. Reg. 46,762 (1986)

Order No. 500, 52 Fed. Reg. 30,334 (1987), FERC

Stats. & Regs. [Regs. Preambles] (CCH)

730,761 (1987), record remanded sub nom.

American Gas Ass’n v. FERC, 888 F.2d 136

Order No. 500-H, 54 Fed. Reg. 52,344 (1989),

FERC Stats. & Regs. [Regs. Preambles] (CCH)

I .

Order No. 500-I, FERC Stats. & Regs. [Regs.

Preambles] (CCH) 7 30,880 (1990), petitions

for review pending sub nom. American Gas

Ass'n v. FERC, No. 87-1588 (D.C. Cir.)

Order No. 699 (National Rates for Natural Gas,

Se .

Order No. 699-H (National Rates for Natural Gas,

, a ee

Order No. 749 (National Rates for Natural Gas,

I %

46, 47

Cases—Continued : Page

Order No. 770 (National Rates for Natural Gas,

56 F. P. C. 509 (1976) ) -....-..2..----------.-eceeeeeeeeeeee 6, 7, 20, 27

Order Instituting National Rate Proceeding, 57

F ee er eee een 7

Panhandle Eastern Pipe Line Co. v. FERC, No.

89-1354 (D.C. Cir. June 29, 1990072 44

Pennhurst State School v. Halderman, 451 U.S. 1

c 38

Pension Benefit Guaranty Corp. v. LTV Corp., No.

89-390 (June 18, 1990) 22222 ————— 24

Permian Basin Area Rate Cases, 390 U.S. 747

rr 5, 25, 31, 32, 43

Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672

r 4

Public Employees Retirement System v. Betts, 109

S. Ct. 2854 (198999 30

Public Serv. Comm'n v. Mid-Louisiana Gas Co.,

463 U.S. 319 (1983 8, 5, 9, 25, 28, 33, 37, 38, 39

Rodriguez v. United States, 480 U.S. 522 (1987).. 35

Shell Oil Co. v. FPC, 520 F.2d 1061 (5th Cir.

1975), cert. denied, 426 U.S. 941 (1976) 6, 33

Shell Oil Co. v. FPC, 491 F.2d 82 (5th Cir. 1974).. 6, 33

Smyth v. Ames, 169 U.S. 466 (1898) 6 4

Statement of General Policy, No. 61-1, 24 F. P. C.

ß 4, 5, 33

Sullivan v. Stroop, 110 S. Ct. 2499 (1990)

Sullivan v. Zebley, 110 S. Ct. 885 (1990)

Tenneco Oil Co. v. FERC, 571 F.2d 834 (5th

Cir.), cert. denied, 439 U.S. 801 (1978) ............. 7, 33

Texas Eastern Transmission Corp. v. FERC, 769

F.2d 1053 (5th Cir. 1985), cert. denied, 476

rr. 30

Transcontinental Gas Pipe Line Corp. v. State Oil

& Gas Bd., 474 U.S. 409 (198)))) 8, 15, 22, 45

Transwestern Pipeline Co. v. FERC, 820 F.2d 733

(5th Cir. 1987), cert. denied, 484 U.S. 1005

TIES — 47

United Gas Pipe Line Co. v. Mobile Gas Serv.

Corp., 350 U.S. 382 (195902 13

United Gas Pipe Line Co. v. McCombs, 442 U.S.

| _aaa eee 18, 40, 44

Cases—Continued: Page

United States v. Monsanto, 109 S. Ct. 2657

(1989) 30

Vermont Yankee Nuclear Power Corp. v. NRC.

Inc., 435 U.S. 519 (1978) 48

Williamson v. Lee Optical of Oklahoma, Inc., 348

U.S. 483 (1955) 1 19

Wisconsin v. FERC, 770 F. 2d 1144 (D.C. Cir.

1985), cert. denied, 476 U.S. 1114 (1986) 49

Wisconsin v. FPC, 373 U.S. 294 (1963) 31, 32

Statutes and regulations:

Department of Energy Organization Act § 403, 42

r è . ie a 10

Natural Gas Act of 1938, 15 U.S.C. 717 et seq.:

r 4

§ 4(a), 15 U.S.C. 7176 (ahhh 2, 3, 1a

, 4

55 (a), 15 U.S.C. 717d (a) 2, 3, 1a

87 (b), 15 U.S.C. 717f (b) 2, 17, 19, 22, 39, 40,

42, 43, 44, 45, 2a

Natural Gas Policy Act of 1978, 15 U.S.C. 3301

r 2

§ 2(12), 15 U. S. C. 3301 (12) 9

D 25

TE ee ae 8

ͤ· eee 8

§ 104, 15 U.S.C. 3314 2, 9, 25, 34, 36, 2a-4a

§ 104(b) (1), 15 U.S.C. 3314 (b) (1) ....9, 18, 20, 27, 34

§ 104(b) (1) (A) (i), 15 U.S.C. 3314 (b) (1)

gC ——̃ —„— 25

§ 104 (b) (1) (A) (ii), 15 U.S.. 3314 (b) (1)

r 25

8104 (b) (1) (B), 15 U.S.C. 3314 (b) (1) (B).... 25

8104 (b) (2), 15 U.S.C. 3314 (b) (2) 22 passim

een 8

§ 106, 15 U.S.C. 3310 2, 9, 25, 34, 36, 4a-6a

§ 106(a), 15 U.S.C. 3316(a) 9, 27, 34

§ 106 (a) (1), 15 U.S.C. 3316 (a) (1) 25-26

§ 106 (a) (2), 15 U.S.C. 3316 (a) (2) 26

§ 106(c), 15 U.S.C. 3316 (e)) passim

§ 107, 156 U.S.C. 8817 8

Statutes and regulations—Continued : Page

§ 108, 15 U.S.C. 3318 8

§ 121, 15 U.S.C. 3331 9

Natural Gas Wellhead Decontrol Act of 1989, Pub.

L. No. 101-60, § 2 (b), 103 Stat. 158 23, 49

18 C. F. R.:

Section 157.301 — 2, 14, 6a-7a

r 2, Ta-16a

Section 270.201 (b) (1) 14

Section 270.201 (b) (2) 14

Section 207.201 (b) (4) 14

Section 270.201 (e) (1) 14, 40

Section 270.201 (e) (2) 14-15

Section 270.201 (e) (3) 40

Section 270.201 (e) (4) 14, 40

Section 270.201 (f) (3) 14-15

Section 270.201 (f) (5) 40

Section 270.201 (h) 18

Section 271.101 Table II (1990) 8, 27

Section 271.402 2,17a

Section 271.402 (e) (3) (iii) an 12

Section 271.402 (e) (77777 = 12

r 2, 17a-18a

Section 271.602 (a) (3) 12

Sr 18

r .. 18

Section 385.206 44

Miscellaneous:

123 Cong. Rec. (1977):

. 38

ES 38

124 Cong. Rec. (1978) :

EE 37

0 37

Energy Information Administration, Dep’t of En-

ergy, Natural Gas Monthly (Mar. 1990) 29

50 Fed. Reg. 48,540 (1985) - 10

51 Fed. Reg. (1986) :

p. 22,168 —— — — 10

p. 22,176 on 11

Miscellaneous —Continued: Page

pp. 22, 171-22,17 2 — 39

p. 22,172 — 11, 12

. 10, 15, 47

r 11

p. 22,177 13

r 11

p. 22,183 0 15

r . . 12

e . 12

e — 13

e 12

r 13

D 5 47

r 15, 47

. 16

EEE 13

e 14

e .... 39

. 27

r .... 10

e . 27

. 37

r . 12

. 12

pp. 46, 766-46, 767 —ͤ K 12

e 12

r . . 12

. 11

F . 13

r 15, 47

. 14

V 41

r. 39, 40

r . . 43

VT e 42

r ...... 43

H. R. 8444, 95th Cong., Ist Sess. (1977) 38

H.R. Rep. No. 29, 101st Cong., Ist Sess. (1989) 49, 50

H.R. Rep. No. 496, 95th Cong., Ist Sess. Pt. 4

re 38

Miscellaneous—Continued : Page In the Supreme Court of the United States

Natural Gas Price Controls: Hearings on H.R. OCTOBER TERM, 1990

1595 Before the Subcomm. on Energy and

Power of the House Comm. on Energy and Com-

merce, 101st Cong., Ist Sess. (1989) 48 No. 89-1452

8. 2104, 95th Cong., Ist Sess. (1977) 38

S. Rep. No. 38, 101st Cong., Ist Sess. (1989) 18 MoBIL OIL EXPLORATION & PRODUCING

S. Rep. No. 39, 101st Cong., Ist Sess. (1989) 49, 50 SOUTHEAST, INC., ET AL., PETITIONERS

UNITED DISTRIBUTION COMPANIES, ET AL.

No. 89-1453

FEDERAL FE NE?CY REGULATORY COMMISSION, PETITIONER

UNITED DISTRIBUTION COMPANIES, ET AL.

ON WRITS OF CERTIORARI TO THE

'NITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE

FEDERAL ENERGY REGULATORY COMMISSION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-

60a) is reported at 885 F.2d 209. The orders of the

Federal Energy Regulatory Commission (J.A. 5-205

(Order No. 451), 206-435 (Order No. 451-A), and 437-

, 467 (Order No. 451-B)) are reported at 51 Fed. Reg.

, 22,168; 51 Fed. Reg. 46,762; and 52 Fed. Reg. 21,669,

respectively.

1“Pet. App.” refers to the appendix to the petition for a writ of

certiorari in No. 89-1453.

(1)

JURISDICTION

The judgment of the court of appeals was entered on

September 15, 1989, and petitions for rehearing were

denied on December 15, 1989. Pet. App. 61a-62a. The

petitions for a writ of certiorari were filed on March 15,

1990, and were granted on June 4, 1990. The jurisdic-

tion of this Court rests upon 28 U.S.C. 1254(1).

STATUTORY AND

REGULATORY PROVISIONS INVOLVED

Sections 4(a), 5(a) and 7(b) of the Natural Gas Act

of 1938, 15 U.S.C. 717e (a), 717d(a) and 717f(b); Sec-

tions 104 and 106 of the Natural Gas Policy Act of 1978,

15 U.S.C. 3314 and 3316; and 18 C.F.R. 157.301,

270.201, 271.402 and 271.602 (the regulations affected

by the Orders of the Federal Energy Regulatory Com-

mission) are reproduced in relevant part in an appendix

to this brief. App., infra, la-18a.

STATEMENT

This case involves the validity of Order No. 451 of the

Federal Energy Regulatory Commission, which was is-

sued in 1986 to address the serious dislocations in the

natural gas market that resulted from the outdated pric-

ing structure for “old” gas (gas that was already in

production on the date of enactment of the Natural Gas

Policy Act of 1978 (NGPA), 15 U.S.C. 3301 et seg.)

Prior to Order No. 451, old gas was divided into a num-

ber of categories (“vintages”), for which the price ceil-

ing varied according to such factors as the year produc-

tion commenced, the size of the producer, whether the

gas was sold under a renewal contract, and the region

in which the gas was produced. Order No. 451 collapsed

those diverse vintages into a single category subject to

a single price ceiling. The Commission based its modifi-

cation of the old gas pricing structure on Sections 104

(b) (2) and 106(c) of the NGPA, which permit the

Commission, “by rule or order,” to raise the ceiling price

for “any” old gas to a “higher” price, as long as it is

“just and reasonable within the meaning of the Natural

Gas Act.” 15 U.S.C. 3314 (b) (2), 3316(c). A divided

court of appeals in this case held that Order No. 451

was beyond the Commission’s authority under the

NGPA, even though the court did not disturb the Com-

mission’s judgment that the single price ceiling for old

gas was “just and reasonable” within the meaning of

the Natural Gas Act.

A. Historical Background: The Course of Wellhead Price

Regulation

1. Prior to enactment of the Natural Gas Policy Act

of 1978, the sale and transportation of natural gas in

interstate commerce were regulated by the Commission

(and its predecessor, the Federal Power Commission)

exclusively under the Natural Gas Act of 1938. Section

4(a) of the NGA imposes on the Commission an obliga-

tion to ensure that all rates and charges requested by a

regulated natural gas company in connection with the

transportation or sale of natural gas within the Com-

mission’s jurisdiction are “just and reasonable.” 15

U.S.C. 717e (a). Section 5(a) of the NGA similarly pro-

vides that when the Commission determines that any

“rate, charge, or classification” observed by a natural

gas company in connection with the transportation or

sale of gas (or any “rule, regulation, practice, or con-

tract” affecting such rate, charge, or classification) is

“unjust” or “unreasonable,” the Commission “shall de-

termine the just and reasonable rate, charge, classifica-

tion, rule, regulation, practice, or contract to be there-

after observed and in force, and shall fix the same by

order.” 15 U.S.C. 717d(a).

As this Court explained in Public Serv. Comm’n v.

Mid-Louisiana Gas Co., 463 U.S. 319, 327-331 (1983),

the Commission, with the approval of the courts, has fol-

lowed a number of different approaches over the years in

giving content to the broad “just and reasonable” stand-

ard under the NGA. Initially, when the Commission con-

fined its rate regulation to interstate pipelines, it pro-

ceeded on a company-by-company basis, studying the his-

torical costs incurred by each pipeline company in ac-

quiring natural gas for, and transporting gas to, its cus-

tomers. The Court sustained that approach in FPC v.

Hope Natural Gas Co., 320 U.S. 591 (1944), explaining

that Sections 4 and 5 of the NGA do not bind the Com-

mission to the use of any single formula or combination

of formulae in determining rates,” and that “[u]nder

the statutory standard of ‘just and reasonable,’ it is the

result reached not the method employed which is control-

ling.” 820 U.S. at 602. The Court thus dispelled the

notion, emanating from Smyth v. Ames, 169 U.S. 466

(1898), that the only constitutionally permissible rate

structure is one based on the current fair value of the

utility’s assets. See Duquesne Light Co. v. Barasch, 109

S. Ct. 609, 616-620 (1989).

2. The Commission began to depart from its company-

by-company, historical-cost approach after Phillips Petro-

leum Co. v. Wisconsin, 347 U.S. 672 (1954), which held

that the NGA requires the Commission to regulate not

only the downstream rates charged by interstate pipe-

lines, but also the upstream sales rates charged at the

wellhead by thousands of independent gas producers. In

response to Phillips, and presented with an overwhelm-

ing number of producer rate cases to process, the Com-

mission turned to an “area rate” approach for independ-

ent producers, while retaining the individualized “cost-of-

service” method of regulation for interstate pipelines.

The area rate approach, as first articulated in 1960 in

the Commission’s Statement of General Policy, No. 61-1,

24 F.P.C. 818, provided for the establishment of a single

rate schedule for all gas produced in a given region,

based on the region’s average production costs, invest-

ment, and rates of return. Each area rate schedule con-

tained two separate price ceilings: a lower ceiling for

gas prices established in “old” contracts and a higher

ceiling for gas prices established in “new” contracts. /d.

at 819. The Commission rested its two-tiered “vintage

pricing” system on the premise that although higher ceil-

ing prices for new gas would encourage additional gas

production, “price could not serve as an incentive” for the

production of old gas and “any price above average his-

torical costs, plus an appropriate return, would merely

confer windfalls.” Permian Basin Area Rate Cases, 390

U.S. 747, 797 (1968). However, the Commission antici-

pated that “these differences in price levels will be re-

duced and eventually eliminated as subsequent experience

brings about revisions in the prices in the various areas.”

24 F. P. C. at 819.

In Permian Basin, the Court sustained the Commis-

sion’s two-tiered area rate approach. 390 U.S. at 795-

799. It held that the courts are without authority to set

aside any rate selected by the Commission that is within

a “zone of reasonableness,” id. at 767, and that within

this zone, the Commission may “employ price functionally

in order to achieve relevant regulatory purposes” and

“may, in particular, take fully into account the probable

consequences of a given price level for future programs

of exploration and production.” Id. at 797. Accord Mobil

Oil Corp. v. FPC, 417 U.S. 283, 320 (1974).

3. By the time of the rapid rise in natural gas prices

during the early 1970s, it had become clear that the two-

tiered area rate approach, based on average historical

costs, “was not working” and “had led to serious produc-

tion shortages.” Mid-Louisiana Gas, 463 U.S. at 330. In

response, the Commission shifted to a regime of uniform

“national rates” for most gas drilled after December 31,

1972. In Order No. 699 (National Rates for Natural

Gas, 51 F. P. C. 2212 (1974)), the Commission established

a national rate ceiling for gas drilled during the two-

year period beginning January 1, 1973, and announced

its intention to establish separate price ceilings for gas

drilled during each succeeding two-year period. Soon

thereafter, in a further refinement of its national rate

policy, the Commission shift [ed]! from a pure historical-

cost-based to an incentive-price-based approach” and “tem-

porarily abandon[ed] the practice of vintaging.” Mid-

Louisiana Gas, 463 U.S. at 330 (citing National Rates

for Natural Gas, 52 F.P.C. 1604, 1615-1618, 1636 (1974)

(Order No. 699-H)). Specifically, in Order No. 699-H,

the Commission: (1) prescribed a national rate designed

to “encourag{e] increased future drilling efforts and the

discovery of incremental gas supplies to avert ever deep-

ening natural gas shortages,” 52 F.P.C. at 1615, and (2)

announced that the Commission would not prescribe dif-

ferent rates for succeeding biennial vintages (as it had

recently stated in Order No. 699), but would instead es-

tablish a single maximum rate for all post-1972 gas and

periodically revise that single rate. Id. at 1636-1638.

The Fifth Circuit sustained this shift, noting that the

vintage rate structures had been “experimental” from

the outset. Shell Oil Co. v. FPC, 520 F.2d 1061, 1073-

1074, 1077-1078 (1975), cert. denied, 426 U.S. 941

(1976) ; see also Shell Oil Co. v. FPC, 491 F.2d 82, 87-89

(1974) .*

The Commission’s non-vintage pricing regime for post-

1972 gas proved to be short-lived. In Order No. 770

(National Rates for Natural Gas, 56 F.P.C. 509 (1976) ),

the Commission established a new (and substantially

higher) national rate ceiling for gas first sold in the

1975-1976 biennium, but it allowed only a smaller in-

crease in the ceiling prescribed by Order Nos. 699 and

699-H for 1973-1974 biennium gas. This reinstitution of

vintage pricing for post-1972 gas was sustained by the

D.C. Circuit in American Public Gas Ass’n v. FPC, 567

F.2d 1016 (1977), cert. denied, 435 U.S. 907 (1978),

which, like the Fifth Circuit in Shell Oil, stressed the

2 The Commission authorized small producers” (those selling

less than 10 billion cubic feet of gas per year) to sell gas at mark

based prices, even if they were above otherwise applicable area or

national rates. Exemption of Small Producers from Regulation,

Order No. 428, 45 F.P.C. 454 (1971). In this manner, the Commis-

sion proposed to remove all direct regulation of small producer rates

and instead subject those rates only to indirect regulation“ e.,

to Commission review of the purchased-gas costs of the pipelines and

large producers that purchased from small producers. In FPC v.

Texaco, Inc., 417 U.S. 380 (1974), the Court held that the NGA

permits the Commission to undertake such “indirect regulation”

and to take market prices into consideration (albeit not to the

exclusion of all other factors) when setting producer rates. Jd. at

387-391, 397-399. However, the Court remanded the case to the

Commission because it had failed to articulate a sufficient basis for

its order. Id. at 395-397.

experimental nature of the Commission’s treatment of

vintaging. 567 F.2d at 1033-1034. The D.C. Circuit also

sustained the Commission’s decision in Order No. 770 to

increase the price ceiling for gas covered by renewal con-

tracts, finding it appropriate to place a portion of the

burden of developing new sources of supply on the con-

sumers whose access to this cheaper gas was “largely an

historical accident.” Id. at 1058.

At about the same time, the Commission consolidated

a number of the pre-1973 rates for each separate pro-

ducing area into a single nationwide category comprised

of gas flowing prior to January 1, 1973. Order No. 749

(National Rates for Natural Gas, 54 F.P.C. 3090

(1975)). The Fifth Circuit sustained the considerably

higher price ceiling that resulted for the oldest of this

pre-1973 gas, finding it to be justified by administrative

convenience and the need to factor in an allowance for

the “replacement cost” of exploring for and developing

new sources of supply. Tenneco Oil Co. v. FERC, 571

F.2d &%4, 841-842, cert. denied, 439 U.S. 801 (1978).

Despite this consolidation of the pre-1973 area rates,

the Commission’s regulations in effect in the mid-1970s

continued to provide for a number of separate vintage“

categories of gas, each subject to its own price ceiling.

The broadest categories were pre-1973 (“flowing“) gas,

1973-1974 hiennium gas, and post-1974 gas.“ But there

were three additional categories of pre-1973 gas as well,

covering three of the producer areas (Permian Basin,

Rocky Mountain, and Appalachian Basin) for which

price ceilings higher than the new national ceiling had

already been established in separate proceedings. See

Tenneco Oil Co., 571 F.2d at 837. The Commission also

had created a separate category for gas covered by re-

newal contracts, discussed above. And to complicate

Qn March 1, 1977, the Commission initiated proceedings to

establish yet another price ceiling for gas from wells commenced

on or after January 1, 1977. Order Instituting National Rate Pro-

ceeding, 57 F.P.C. 1238. However, the Commission took no action

on this biennial update after the NGPA bills were introduced in

Congress.

matters still further, each of the foregoing categories (ex-

cept post-1974 gas) was subdivided into two subcate-

gories, one for large producers and one for small pro-

ducers. As of December 1978, the price ceilings for these

15 categories and subcategories ranged from a high of

$1.630 per million BTU’s (for all post-1974 gas) to a

low of $0.332 per million BTU’s (for large-producer

pre-1973 gas). See 18 C.F.R. 271.101 (Table II), at 367

(1990).

This, then, was the collection of price ceilings in effect

when Congress enacted the Natural Gas Policy Act of

1978.

B. The Pricing Scheme Enacted In The NGPA

The national rate approach, coupled with the Com-

mission’s supervision of the complex set of vintage price

ceilings, proved inadequate to solve the problems besetting

the production and distribution of natural gas. The rate

structure caused ceiling prices for interstate gas sales to

fall considerably below prices the same gas could com-

mand in the intrastate market, which was not federally

regulated. The resulting price dichotomy soon resulted in

severe gas shortages in the interstate market. Congress

responded to this situation by enacting the Natural Gas

Policy Act. See Transcontinental Gas Pipe Line Corp.

v. State Oil & Gas Bd., 474 U.S. 409, 420-421 (1986)

(Transco) ; Mid-Louisiana Gas, 463 U.S. at 330-331.

The NGPA instituted a “national market price regu-

latory scheme,” covering intrastate as well as interstate

sales, the purpose of which is “to assure adequate sup-

plies of natural gas at fair prices.” Transco, 474 U.S.

at 421. The price ceilings established by the NGPA de-

pended primarily upon the date the gas was first pro-

duced and the relative difficulty of producing it. Thus,

the NGPA established higher ceiling prices for new or

hard-to-produce gas and, at the same time, prescribed a

scheme of phased deregulation for most such gas. §§ 102,

103, 105, 107, and 108 (15 U.S.C. 3312, 3313, 3315, 3317,

3318). Under that scheme, “the price ceilings for certain

‘high-cost’ gas were eliminated in 1979, for certain ‘old’

intrastate gas and ‘new’ gas in 1985, and for certain

other ‘new’ gas in 1987.” FERC v. Martin Exploration

Management Co., 486 U.S. 204, 207 (1988); see § 121,

15 U.S.C. 3331.

The NGPA adopted a different approach for “old” gas

and for certain types of interstate gas subject to “rollover

contracts.“ Sections 104 and 106, 15 U.S.C. 3314 and

3316, furnished initial NGPA price ceilings for this gas

by carrying forward the ceilings that previously had been

prescribed by the Commission under the NGA, but man-

dated that those ceilings be automatically adjusted by a

monthly inflation factor. 15 U.S.C. 3314(b) (1), 3316(a).

The effect was to carry forward (albeit adjusted for in-

flation) the same 15 vintage price ceilings that happened

to be in effect for old gas when the NGPA was enacted.

Congress also recognized, however, that the price ceiling

for old gas “may be too low and authorize[d] the Com-

mission to raise it whenever traditional NGA principles

would dictate a higher price.” Mid-Louisiana Gas, 463

U.S. at 333 (citing NGPA Sections 104 and 106). Spe-

cifically, Sections 104 (b) (2) and 106(c) both authorize

the Commission, “by rule or order,” to prescribe a

“higher” ceiling price for old gas, “if such price is * * *

just and reasonable within the meaning of the Natural

Gas Act.” 15 U.S.C. 3314(b) (2), 3316(c).

The Court described the overall thrust of this compre-

hensive new regulatory scheme in Mid-Louisiana, 463

U.S. at 333:

In each category of gas, the statute explicitly es-

tablishes an incentive pricing scheme that is wholly

divorced from the traditional historical-cost methods

applied by the Commission in implementing the NGA.

The price is established either in terms of a dollar

figure per million Btu’s, or in terms of a previously

Section 2(12) of the NGPA defines a “rollover contract” as a

contract entered into on or after November 8, 1978, for the first

sale of natural gas that was previously subject to a contract that

expired at the end of a fixed term specified in the contract itself.

15 U.S.C. 3301(12).

existing price, and is inflated over time according to

a statutory formula.

C. Promulgation of Order No. 451

The NGPA went far to remedy the disparity that had

developed between the interstate and intrastate natural

gas markets under the NGA, and the higher prices per-

mitted by the NGPA led to increased gas production,

which alleviated shortages. Nevertheless, as the court

below recognized, the “natural gas market became

fraught with distortions.” Pet. App. 9a. For example,

although the greater production fostered by the NGPA,

coupled with decreased demand, led to excess supply,

prices paid by consumers continued to increase. Further-

more, the lower ceiling prices for old gas that were car-

ried forward for the time being under the NGPA led to

inadequate development and premature abandonment of

extensive reserves of old gas, even though the marginal

cost of producing old gas often was less than the mar-

ginal cost of producing other types of gas. The resulting

shift to production of new and high-cost gas, rather than

development of extensive old gas reserves, produced

higher prices for consumers and created incentives to

import foreign oil and gas. 51 Fed. Reg. 22,174-22,175

(1986) (J.A. 32-36).

Against this background, the Secretary of Energy, pur-

suant to Section 403 of the Department of Energy Or-

ganization Act, 42 U.S.C. 7173, formally recommended

that the Commission issue a notice of proposed rulemak-

ing to revise the pricing system for old gas. 50 Fed. Reg.

48,540 (1985). The Commission initiated those proceed-

ings in November 1985. After reviewing extensive com-

ments filed by all segments of the natural gas industry

and after holding a two-day public conference, the Com-

mission issued Order No. 451, at issue here, in June

1986. 51 Fed. Reg. 22,168 (J.A. 5-205). In December

1986, the Commission issued Order No. 451-A, which

reaffirmed the basic approach of Order No. 451, while

modifying certain of its details. 51 Fed. Reg. 46,762

(J.A. 206-436).

1. Based on the voluminous record of the rulemaking

proceedings, the Commission concluded that the maximum

lawful prices for old gas should be raised, because the

vintage prices fail led] to assign a reasonable share of

the replacement cost or marginal cost of new supplies to

purchasers of old gas.” 51 Fed. Reg. at 22,170 (J.A.

15). The Commission made several critical findings on

this point. First, it agreed with the Secretary of Energy

and other commenters that valuable supplies of inexpen-

sive old gas that remained subject to the price ceilings

carried forward under Sections 104(b) (1) and 106(a) of

the NGPA were being inadequately developed or prema-

turely abandoned. In the Commission’s judgment, an in-

crease in old gas prices would encourage recovery of an

additional 11 trillion cubic feet of natural gas that other-

wise would be permanently lost. 51 Fed. Reg. at 22,170,

22,172, 22,180, 46,774-46,779 (J.A. 15, 24, 54, 259-275).

Second, the Commission determined that the various vint-

age ceilings, as then preserved, kept old gas priced well

below the competitive market price for wellhead sales of

higher-priced new gas, thereby creating an artificial and

unfair competitive advantage for those pipelines that had

access to large supplies of old gas and for the regions

and customers served by those pipelines. “This means

consumers, purely by the accident of vintaging, pay dif-

ferent gas prices for reasons wholly unrelated to the

value of the commodity or the cost of replacing it.” Id.

at 22,172, 46,766 (J.A. 25, 227).° Third, the Commis-

sion found that the low prices for old gas further dis-

torted the market by permitting producers that had a

cushion of old gas to “roll in” the prices of new and

deregulated gas with artificially low prices for old gas,

thereby enabling them to charge a higher price for in-

cremental supplies of new and deregulated gas than pur-

5 The Commission noted that as a result of differing access to

old gas, the average residential price of gas in Maine and Connecti-

cut in 1984 was $9.58 and $8.80 per thousand cubic feet (Mcf),

respectively, while in Arkansas and Kansas it was only $4.37 and

$4.49 per Mef. 51 Fed. Reg. at 22,176 (J.A. 39).

chasers otherwise would be willing to pay. Id. at 22,172

(J.A. 25); see generally id. at 46,765-46,768 (J.A. 223-

233).

For the f ing reasons, the Commission found that

the actin deem price structure for old gas was

“the major cause of the market distortions identified by

the Commission,” and it accordingly determined that the

price ceilings for old gas were unjust and unreasonable

within the meaning of the NGA. 51 Fed. Reg. at 22,182,

46,765-46,766 (J.A. 62, 223-224). The Commission fur-

ther concluded that “the current problems being experi-

enced in natural gas markets would largely be remedied

by chllapsing vintages and raising ceiling prices of below-

market priced gas.” Id. at 22,182 (J.A. 63); see also id.

at 46,766-46,767 (J.A. 224-231). The Commission there-

fore decided to consolidate the 15 separate vintage cate-

gories of old gas into one category and to establish an

alternative maximum price that a producer may charge

for gas in that category—but only to a willing purchaser.

See pages 13-15, infra.

Specifically, this single new category was made subject

to a price ceiling equal to the highest of the ceilings then

in effect for old gas (that having a post-1974 vintage),

adjusted monthly for inflation. 51 Fed. Reg. at 22,183-

22,185 (J. A. 69-77); see 18 C. F. R. 271.402 (e) (3) (iii)

and (7), 271.602 (a) (3). The Commission explained that

the ceiling price for old gas should approximate, as elosely

as possible, the replacement cost of that gas, in order to

assure an adequate long-term supply. Because the Com-

mission and the D.C. Circuit had found the ceiling price

for post-1974 gas to be just and reasonable inasmuch as

it was based on the then-current costs of finding and pro-

ducing gas—and because the ceiling price for post-1974

vintage gas had been adjusted for inflation since 1977-—

the Commission concluded that the ceiling as so adjusted

(which stood at $2.57 per million BTUs) approximated

replacement cost in 1986 and therefore was “just and

reasonable” within the meaning of the NGA. 51 Fed.

Reg. at 22,183-22,190, 22,194, 46,768, 46,771-46,774 (J.A.

69-95, 109-112, 233-235, 245-257).

The Commission recognized that this alternative ceiling

price exceeded the then-current market price for old gas,

but it noted that the ceiling “is no higher than the highest

vintage rate Congress itself retained for flowing gas

under the NGPA”—.e., the rate carried forward by Sec-

tion 104(b) (1) for post-1974 old gas. 51 Fed. Reg. at

22,177 (J.A. 43). Moreover, the Commission projected

that in the long term, market forces would result in lower

(and more stable) prices overall, as trillions of additional

cubic feet of the relatively low-cost old gas increasingly

competed with higher-priced categories of gas. 51 Fed.

Reg. at 22,190-22,204, 46,779-46,784 (J.A. 95-141, 276-

295). The Commission found this projection to be sup-

ported by: (1) Congress’s judgment when it enacted the

NGPA that the wellhead market for natural gas had be-

come competitive, (2) the declining price of gas that had

been decontrolled under the NGPA, and (3) the fact that

the market price of other gas still subject to regulation

under different sections of the NGPA was substantially

below the statutorily prescribed ceilings. Jd. at 22,195-

22,198 (J.A. 115-127).

2. The Commission also included in Order No. 451 im-

portant protections for pipelines and other purchasers.

By virtue of this Court’s decision in United Gas Pipe

Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332 (1956),

a producer could not charge the higher rate permitted by

the Commission’s new ceiling in Order No. 451 unless its

contract with the purchaser permitted the increase. How-

ever, the Commission recognized that many existing gas

contracts contained indefinite price-escalation clauses,

under which the price the purchaser was obligated to pay

could rise to the maximum lawful price allowed by the

Commission under the NGA and the NGPA. In the

Commission’s view, producers that were parties to such

contracts should not automatically be entitled to receive

the new ceiling price, because the ceiling would then be

come a floor and the natural gas market would be sub-

ject to the same sorts of distortions that led to enactment

of the NGPA. 51 Fed. Reg. at 22,204 (J.A. 141). Ac-

cordingly, the Commission conditioned a producer’s right

to collect higher rates under Order No. 451 upon the pro-

ducer’s entering into a voluntary agreement with the

existing purchaser to that effect or its invocation of a

structured “Good Faith Negotiation” (GFN) procedure

prescribed by Order No. 451. See generally id. at 22,204-

22,209, 46,784-46,802 (J.A. 141-163, 295-367).

The GFN procedure, which is codified at 18 C.F.R.

270.201 (App., infra, 7a-16a), consists of several steps.

First, a producer may request a purchaser to nominate

the price at which it would be willing to continue to pur-

chase old gas under one or more contracts between the

parties. 18 C. F. R. 270.201 (b) (1). However, such a re-

quest is deemed to constitute an offer by the producer to

release the purchaser from its contractual obligation to

purchase any gas sold under any existing contract be-

tween the two parties that includes the sale of old gas

(not merely the contract(s) named in the producer’s re-

quest). 18 C.F.R. 270.201 (b) (4). Upon receipt of the

producer’s request, the purchaser not only may nominate

a price at which it would continue to purchase gas under

the contract(s) specified by the producer, but also may

make a counter-request of the producer to nominate a

price at which the producer would be willing to continue

selling any gas (old or new) under any contracts speci-

fied by the purchaser that cover at least some old gas.

18 C. F. R. 270.201 (b) (2).

If, after the nominations, the producer and the pur-

chaser are unable to agree on a new price for gas covered

by an existing contract, the producer must continue sales

to the purchaser at the same price, although it may aban-

don its contract service obligations to that purchaser if

(1) it has executed a contract with another willing pur-

chaser for the released gas, and (2) it furnishes at least

30 days’ notice to the former pipeline-purchaser. See 18

C. F. R. 157.301, 270.201 (e (1) and (e (4). But the pur-

chaser has an important reciprocal right: if the producer

does not agree to the price the purchaser nominates, the

purchaser may terminate its purchase obligations under

any of the contracts named in its counter-request. 18

C.F.R. 270.201 (e) (2) and (f)(3). The GFN procedure

S Fs

old gas, would have the salutary effect of encouraging

renegotiation of many contracts to eliminate or modify

the take-or-pay clauses. 51 Fed. Reg. at 22,174-22,175,

22,183, 22,196-22,197, 46,783-46,784 (J.A. 33-36, 66-69,

120-124, 292-295). Indeed, the Commission pointed out

that the GFN procedure, permitting a purchaser to nomi-

nate a price it is willing to pay for all gas (old and new)

under existing contracts and to terminate its contract

obligation if the producer does not agree to that price,

* Such a clause requires a pipeline to take a specified volume of

gas from a producer or, if it is unable to do so, to pay for the

specified volume. See Transco, 474 U.S. at 412.

7 Order No. 436, Regulation of Natural Gas Pipelines After Par-

tial Wellhead Decontrol, 1982-1985 FERC Stats. & Regs. [ Regs.

Preambles} (CCH) { 30,665 (1985), aff'd in part and remanded in

part sub nom. Associated Gas Distributors v. FERC, 824 F.2d 981

(D.C. Cir. 1987), cert. denied, 485 U.S. 1006 (1988). The background

of the take-or-pay problem and the Commission’s subsequent meas-

ures to address it are explained in greater detail in our petition for a

writ of certiorari (at 4-13) in FERC v. Associated Gas Distributors,

petition for cert. pending, No. 89-2016 (filed June 22, 1990).

“provides the purchaser with a powerful additional bar-

gaining card to negotiate a lower price for new gas in

multi-vintage contracts.” Jd. at 22,197 (J.A. 122).

D. The Decision of the Court of Appeals

Numerous producers and purchasers of natural gas

thereafter sought judicial review of Order No. 451 (as

modified on rehearing by Order No. 451-A). With one

nied the application by the one respondent (Williams

Natural Gas) that did seek a stay. As a result, the new

pricing system and Good Faith Negotiation procedure

established by Order No. 451 were permitted to go into

effect, and they have resulted in the renegotiation of

numerous producer-pipeline contracts since that time.

See 89-1452 Pet. 3, 13, 17-18, 26-27; 89-1453 Pet. 16, 26.

1. On September 15, 1989, a divided panel of the court

of appeals held Order No. 451 invalid and vacated the

Order in its entirety. Pet. App. la-60a. The court ex-

pressly did not suggest that the Commission was “mis-

guided” in its conclusion that the disorder in the natural

gas market had resulted, at least in part, from the vin-

tage pricing structure for old gas. Id. at 20a. Nor did

t overturn the Commission’s finding that the higher ceil-

rice for old gas under Order No. 451 is “just and

reasonable” within the meaning of the NGA. The court

held that the uniform ceiling price for all

old gas under Order No. 451 is wholly beyond the Com-

mission’s statutory authority to prescribe. Pet. App.

16a-23a. The court dismissed the Commission’s reliance

on the express authorization in Sections 104(b) (2) and

106(c) to impose “higher” rates for old gas, as long as

they are “just and reasonable,” as a “somewhat ingeni-

ous application of the plain meaning rule of statutory

construction.” Pet. App. 2la. It instead believed that

Sections 104 (b) (2) and 106(c) should be read to confer

only “limited authority” on the Commission, and would

be “more appropriately interpreted as special relief

measures to be utilized in the event that existing con-

gressional ceiling prices become confiscatory.” Pet. App.

22a-23a & n.24.

The court did not point to any statutory language that

confines the Commission’s authority under Sections 104

(b) (2) and 106(c) in this manner. Rather, in rejecting

the Commission’s approach, the court relied solely on

floor statements by several Members of Congress con-

cerning what the court believed to be the “essence” of

the legislative compromise leading to enactment of the

NGPA. Pet. App. 17a-20a & n.22. In its view, those

floor statements (none of which addressed the Commis-

sion’s authority under Sections 104 (b) (2) and 106(c) )

revealed a legislative intent to concentrate the rewards

of higher prices solely on the development of new, high-

cost gas and to guard against what the court labeled

“de facto deregulation” of old gas prices. Pet. App. 17a

, the court concluded, did not au-

the Commission to break] virgin ground” un-

just and reasonable standard by “abrogating the

pricing structure” for old gas. Id. at 22a-23a &

(

;

The court also invalidated the provisions of Order No.

Pet. App. 24a-28a. The court acknowledged that the

D.C. Cireuit had found “no procedural objection” under

Section 7(b) of the NGA, 15 U.S.C. 717f(b), to the

Commission's identification, in an otherwise valid rule,

of circumstances “which automatically trigger its ap-

proval of abandonment,” and that the D.C. Circuit like-

wise had found it “well-established that the Commission

need not hold an evidentiary hearing when no issue of

material fact is in dispute.” Pet. App. 26a (quoting

Associated Gas Distributors v. FERC, 824 F.2d 981,

1015 n.17 (D.C. Cir. 1987), cert. denied, 485 U.S. 1006

(1988), and Kansas Power & Light Co. v. FERC, 851

F.2d 1479, 1484 (D.C. Cir. 1988)). The court nonethe-

less believed that the Commission hald] abdicated its

responsibility under Section 7(b) of the NGA” by pro-

284.8(b), 284.9(b), 284.221-284.226; see 8. Rep. No. 38, 101st Cong.

Ist Sess. 6 (1989). In these circumstances, no petitioner has sought

further review of this transportation issue.

Brown dissented. Pet. App. 36a-60a. He be-

the majority had improperly If ail led] to

the Commission] the expertise which Con-

;

8 2

Id. at 57a. He pointed out that “reform may take one

step at a time,” id. at 59a (quoting Williamson v. Lee

Optical of Oklahoma, Inc., 348 U.S. 483, 489 (1955)),

gress 104 (b (1) of the NGPA.

After thoroughly reexamining that rate (as adjusted for

inflation in accordance with the NGPA), the Commission

“just and reasonable,” this

The Commission also adopted a balanced and carefully

structured Good Faith Negotiation procedure that must

be invoked by a producer as a condition precedent to de-

manding rates permitted by the higher price ceiling for

old gas. This procedure was designed to assure that the

ceiling did not unfairly prejudice pipelines that had

agreed to open-ended price-escalation clauses (which

otherwise would have permitted producers to collect

higher rates on demand) and to afford pipelines signifi-

cant leverage in resolving their liability under “take-or-

pay” contracts with producers.

Order No. 451 has had a significant effect on the na-

tural gas industry since it went into effect more than

three years ago. It has led to the successful negotiation

or renegotiation of numerous contracts between pro-

ducers and pipelines, some of which address take-or-pay

issues between the parties as well. Moreover, the Com-

mission’s projection when it issued Order No. 451 that

the overall price of natural gas would decrease has

proven to be accurate, as the natural gas market has be-

come increasingly competitive. The court of appeals

I. The court of appeals did not disturb the Commis-

sion’s expert judgment that the system of disparate vin-

tage price ceilings for old gas no longer yielded rates

that were “just and reasonable” within the meaning of

the Natural Gas Act standard incorporated into the

NGPA and that the single new ceiling adopted for old

gas in Order No. 451 does, by contrast, satisfy that flex-

ible standard. In any event, the Commission’s judgment

on these ,points is sound and exhaustively documented:

the new ceiling was designed to bring about lower prices

for consumers generally, create incentives to produce an

additional 11 trillion cubic feet of old gas, reduce in-

equities among purchasers that had unequal access to

old gas, and remove obstacles in the transition to the

fully competitive market Congress envisaged.

Nevertheless, without pointing to any statutory provi-

sion that prohibits what the Commission did, the court

of appeals held that the Commission had exceeded its

statutory authority for eliminating price vintaging. As

a result, the court effectively removed from the Com-

mission’s regulatory jurisdiction the price ceilings that

the Commission itself had put in place. And in doing

so, it accorded a permanent and exalted status to the

particular hodge-podge of price ceilings that happened to

be in effect for a brief time in the midst of the far dif-

ferent and rapidly changing market and regulatory cli-

mate that immediately preceded passage of the NGPA

almost 12 years ago. These perverse results cannot be

squared with the text of Sections 104 (b) (2) and 106(c)

of the NGPA, which expressly incorporates the flexible

“just and reasonable” standard of the Natural Gas Act,

or with the experience under that standard preceding

enactment of the NGPA, when the Commission, sus-

tained by the courts, constantly revised the rates for

these same categories of gas in response to changing

market and other conditions. The court of appeals’ hold-

ing thus is inconsistent with the Commission’s broad

mandate under the NGPA “to overse[e] a national mar-

ket price regulatory scheme.” Transcontinental Gas Pipe

Line Corp. v. State Oil & Gas Bd., 474 U.S. 409, 421

(1986).

II. The court of appeals likewise erred in invalidating

the provisions of Order No. 451’s Good Faith Negotia-

tion procedure that specify in advance the conditions un-

der which a producer is permitted by the Commission to

abandon its contract service obligations to the purchaser.

Section 7(b) of the Natural Gas Act provides that no

natural gas company shall abandon * * * any service

* * * without the permission and approval of the Com-

mission first had and obtained, after due hearing, and a

finding by the Commission * * * that the present or

future public convenience or necessity permit such aban-

donment.” Those requirements were satisfied here. The

Commission gave its “permission and approval” for the

abandonments covered by the Order, based on a finding

that the “public convenience or necessity” would be

served by releasing the gas to another purchaser when

the GFN procedure fails to result in an agreement be-

tween the parties. And because the relevant legislative-

type facts supporting Order No. 451, including its aban-

donment component, were resolved in the rulemaking

proceedings, no further hearing is “due” for relitigation

of those issues in the context of each individual abandon-

ment.

III. The court of appeals plainly overstepped its role

by insisting that the Commission must comprehensively

solve the problems created by “take-or-pay” clauses to

which the pipelines themselves agreed before the Com-

mission may exercise its express authority under the

NGPA to raise the price ceiling for old gas. The court

was apparently unaware of the extensive and largely

successful undertakings by the Commission to address

the take-or-pay problem, which have resulted in the set-

tlement of current or future take-or-pay liabilities of

pipelines to producers totalling approximately $44 bil-

lion. In any event, established principles of judicial re-

view preclude the court of appeals from reordering the

Commission’s rulemaking proceedings and priorities.

IV. The soundness of the Commission’s judgment in

raising the ceiling price of old gas and instituting the

related measures in Order No. 451 is confirmed by Con-

gress’s enactment of the Natural Gas Wellhead Decon-

trol Act of 1989, Pub. L. No. 101-60, § 2(b), 103 Stat.

158, which builds upon the Commission’s efforts, includ-

ing Order No. 451, to promote a fully competitive na-

tural gas market.

ARGUMENT

I. THE ALTERNATIVE PRICE CEILING IN ORDER

NO. 451 IS FULLY CONSISTENT WITH THE “JUST

AND REASONABLE” STANDARD INCORPORATED

INTO SECTIONS 104(b)(2) AND 106(c) OF THE

NATURAL GAS POLICY ACT OF 1978

In holding that the Commission is without authority

to revise the anachronistic system of vintage pricing for

old gas, the court below disregarded the plain meaning

of the relevant statutory provisions and the settled ju-

dicial construction of the “just and reasonable” standard

that Congress incorporated into the Natural Gas Policy

Act. Rather than seizing upon a few vague statements

by individual Members of Congress to fashion an absolute

barrier to the Commission’s actions that appears nowhere

in the Act, the court of appeals should have measured

the price features of Order No. 451 against the princi-

ples developed under the “just and reasonable” standard

that does appear in the Act. Under those principles,

Order No. 451 is clearly valid.

A. The NGPA Expressly Authorizes The Commission

To Adopt A “Higher” Ceiling Price For Old Gas

Where, As Here, That Price Is “Just And Reason-

able”

The starting point for any analysis of the Commission’s

statutory responsibilities is, of course, the language of

the NGPA itself. “If the statute is clear and unam-

biguous, ‘that is the end of the matter, for the court,

as well as the agency, must give effect to the unambigu-

ously expressed intent of Congress.’” Sullivan v. Stroop,

110 S. Ct. 2499, 2502 (1990) (quoting K Mart Corp. v.

Cartier, Inc., 486 U.S. 281, 291 (1988)). But if the

statute is ambiguous, the court must defer to a reason-

able administrative interpretation. Chevron U.S.A. Inc.

v. NRDC, Inc., 467 U.S. 837, 843-844 (1984); see Pen-

sion Benefit Guaranty Corp. v. LTV Corp., No. 89-390

(June 18, 1990), slip op. 12-17. Even greater deference

is required where, as here, Congress has charged an

agency with giving more particularized content to broad

statutory standards by issuing rules having legislative

effect. Atkins v. Rivera, 477 U.S. 154, 162 (1986); see

also Sullivan v. Zebley, 110 S. Ct. 885, 890 (1990). And

in the special area of ratemaking, “the breadth and com-

plexity of the Commission’s responsibilities demand that

it be given every reasonable opportunity to formulate

methods of regulation appropriate for the solution of

intensely practical difficulties.” The Commission’s orders

therefore “may not be overturned if they produce ‘no

arbitrary result.“ Permian Basin, 390 U.S. at 790.

Here, as in the Court’s last case arising under the

NGPA, [the plain meaning of the statute decides the

issue presented.” FERC v. Martin Exploration Manage-

ment Co., 486 U.S. 204, 209 (1988). Sections 104 and

106 of the NGPA unambiguously authorize the Commis-

sion to increase the ceiling price for old gas and inter-

state rollover gas “whenever traditional NGA principles

would dictate a higher price.” Mid-Louisiana Gas, 463

U.S. at 333. By contrast, the text of those Sections lends

no support whatever to the court of appeals’ view that

Congress withheld that broad authority from the Com-

mission and instead froze the prior system of vintage

pricing. If the court of appeals had any doubt on this

score, however, it should have deferred to what is, at the

very least, a permissible interpretation of the relevant

statutory provisions by the expert agency charged with

their administration.

1. Section 104 (b) (1) (A) (i) and (ii) of the NGPA

provides that the maximum ceiling price for old gas shall

be the just and reasonable rate established by

the Commission which was applicable to the first

sale of such natural gas on April 20, 1977,“ adjusted by

an inflation factor for each month since April 1977. 15

U.S.C. 3314 (b) (1) (A) (i) and (ii); see § 101, 15 U.S.C.

3311.“ Section 106 (a) (1) similarly provides that the ceil-

* The NGPA also carries forward any just and reasonable rate“

established by the Commission after April 27, 1977, but before the

NGPA’s effective date. 15 U.S.C. 3314(b)(1)(B). This provision is

of little practical significance.

fective date of the NGPA. 15 U.S.C. 3316 (a) (i).“ By

enacting these provisions, Congress carried forward for

time being the ceiling price for each of the various

tages listed in the Commission’s regulations at the

was

Congress did not, however, mandate that the ceilings

based on those grandfathered rates (as adjusted for in-

flation) remain permanently fixed. To the contrary, it

expressly authorized the Commission to prescribe a dif-

ferent ceiling for old gas, just as it was free to do under

the NGA before the NGPA was enacted. Section 104

(b) (2) of the NGPA provides (15 U.S.C. 3314(b) (2)):

Ceiling prices may be increased if just and rea-

sonable. The Commission may, by rule or order, pre-

scribe a maximum lawful ceiling price, applicable to

any first sale of any natural gas (or category

thereof, as determined by the Commission) other-

wise subject to the preceding provisions of this sec-

tion, if such price is—

(A) higher than the maximum lawful price

which would otherwise be applicable under such

provisions; and

(B) just and reasonable within the meaning

of the Natural Gas Act.

Section 106(c) of the NGPA, 15 U.S.C. 3316 (e),

which governs interstate rollover contracts, is essentially

identical.

The only restrictions on the Commission’s authority

under Sections 104 (b) (2) and 106(c) are: (1) any re-

vised ceiling price preseribed by the Commission must be

higher than the applicable grandfathered rate (as

adjusted for inflation), and (2) the higher rate must be

„just and reasonable within the meaning of the Natural

10 Section 100% (a) (2) provides an alternative ceiling of $0.54 per

million Btu’s if that is higher than the rate previously established

by the Commission. 15 U.S.C. 3316(a) (2).

—————EEEEE

Gas Act.” Both of these requirements were satisfied

here. First, the single ceiling price adopted by the Com-

mission in Order No. 451 is “higher” than each of the

ceilings carried forward by Sections 104(b)(1) and

106 (a)—except, of course, for post-1974 old gas, for

which the ceiling price remains the same.

Second, the Commission found, after extensive analysis,

that the higher ceiling price is “just and reasonable”

within the meaning of the Natural Gas Act. See pages

11-13, supra. The price ceiling selected by the Commission

for all old gas is not an arbitrary number without any

relation to costs or prior ratemaking practices. The

Commission collapsed all of the pre-NGPA vintages of

old gas into a single vintage subject to a single price

ceiling that the Commission, employing traditional NGA

principles of “just and reasonable” ratemaking, had

already found to be a “just and reasonable” price, for

gas having a post-1974 vintage. That determination, in

Order No. 770, was sustained by the D.C. Circuit in

American Public Gas Ass’n v. FPC, supra, and was car-

ried forward by Congress itself in Section 104(b) (1)

of the NGPA. The Commission rationally determined

that this ceiling, as periodically adjusted upward for

inflation, did not become any less “just and reasonable”

simply because market prices had since dipped below that

level, presumably to the benefit of consumers. See Mar-

tin Exploration, 486 U.S. at 208 (“by 1984 the market

price of natural gas had plunged below the regulated

price ceilings”). And because the rationale for estab-

11 There is no merit to respondents’ contention (Br. in Opp. 21-

23) that the Commission engaged in impermissible “de facto de-

regulation” because the ceiling now is above the market price for

natural gas. All old gas remains subject to a regulated price ceil-

ing, which may later be adjusted if necessary to assure just and

reasonable rates. 51 Fed. Reg. at 22,211, 46,764-46,765 (J.A. 170-

171, 219-222). That is all the NGA and NGPA require. Indeed,

the ceiling price for post-1974 old gas that is carried forward by

Section 104(b)(1), which stood at $2.94 as of April 1990 (18 C. F. R.

271.101 (Table II), at 376 (1990)), is above the market price; and

the Commission cannot lower that ceiling because Section 104(b) (2)

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The Commission also explained that the price ceiling

for post-1974 gas tha. it was extending to all old gas

approximated the “replacement cost” of that gas, which,

i and reason-

tion of an additional 11 trillion cubic feet of old In

the Commission’s judgment, as more of this relatively

requires that any revised ceiling be “higher. Pet.

it!

low-cost old gas began to compete with higher-cost “new”

it issued Order No. 451), the national average wellhead

price for all natural gas declined from $1.94 per Mef in

1986 to $1.71 per Mcf in 1989. Energy Information

Administration, Dep’t of Energy, Natural Gas Monthly,

at 32 (Table 4) (Mar. 1990).

2. The court of appeals did not attempt to refute

either the Commission’s exhaustive analysis and findings

in Order No. 451 or the Commission’s conclusion that

the approach it adopted was just and reasonable under

traditional NGA principles. In fact, the court expressly

did not suggest that the Commission was “misguided”

in concluding “that the disorder in the natural gas mar-

ket has resulted, at least in part, from the NGPA’s vin-

tage pricing structure which compelled natural gas pro-

ducers to sell gas at below replacement costs,” Pet. App.

ious.” Id. at 23. But the court believed Congress had

tied the Commission’s hands and prevented it from

implementing that solution.

In the court of appeals’ view, Sections 104 (b) (2) and

106(c) must be read to permit the Commission to adopt

added). Congress’s use of the word “any” makes clear

that the Commission’s regulatory jurisdiction over old

gas prices is all-encompassing. Compare United States

v. Monsanto, 109 8. Ct. 2657, 2662 (1989); Public Em-

ployees Retirement System v. Betts, 109 S. Ct. 2854,

2864 (1989). Moreover, because the single ceiling price

the Commission selected in Order No. 451 had been

found to be “just and reasonable” when it was first

adopted in 1976, and because it has been adjusted reg-

ularly for inflation ever since, it is difficult to see how

it could ever become confiscatory. Congress therefore

must have had some purpose other than special relief in

mind when it enacted Sections 104 (b) (2) and 106(c).

In addition, as Judge Brown pointed out in dissent, the

“sweeping nature“ of Sections 104 (b) (2) and 106 (e) is

also reflected in their authorization for the Commission

to proceed by rule or order.” Pet. App. 48a. Since the

“le)xercise of this power is not confined to case-by-case

rate making,” it is “entirely appropriate for it to be used

and employed generically.” IJbid.* The broad scope of

the Commission’s discretion is further reinforced by the

fact that both Sections permit a higher price ceiling for

any “category” of old gas, “as determined by the Com-

mission.”

104/b) (2) and 106 (e) wholly ignores the significance of

the standard by which the Commission’s exercise of its

* As Judge Brown also observed, Pet. App. 48a n.7, the Fifth

Circuit previously had recognized, in a related context, that t be

drafters’ choice of the words ‘rule or order’ * * * clearly con-

templates the establishment of an industry-wide scheme.” Teras

Eastern Tranemission Corp. v. FERC, 769 F.2d 1063, 1061 (5th Cir.

1985), cert. denied, 476 U.S. 1114 (1986).

authority is to be governed. As respondents concede (Br.

in Opp. 19): “The just and reasonable’ standard that

Congress borrowed from the NGA and incorporated into

the NGPA was familiar statutory language that carried

with it a regulatory scheme well-known to Congress, the

Commission, and the industry.” Congress therefore must

be understood to have intended that the “just and reason-

able” standard would be interpreted in the same manner

in the NGPA. See Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Curran, 456 U.S. 353, 378-382 (1982);

Cannon v. University of Chicago, 441 U.S. 677, 699

(1979) ; Morissette v. United States, 342 U.S. 246, 263

(1952).

I. As we have explained (see pages 3-5, supra),

prior to enactment of the NGPA, the “just and reason-

able” standard had been repeatedly construed by the Com-

of ‘just and reasonable,’ it is the result reached not the

method employed which is controlling.” Hope Natural

Gas Co., 320 U.S. at 602; see also FPC v. Natural Gas

Pipeline Co., 315 U.S. 575, 586 (1942); Wisconsin v.

FPC, 373 U.S. 294, 309 (1963); Permian Basin, 390

consin v. FC, the Court held that the NGA’s “just and

reasonable” standard does not compel unwavering ad-

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that Congress carried forward in Sections 104 (b (1)

and 106(a) of the NGPA, expressly recognizing in the

statutory text that each was a “just and reasonable rate

* * * established by the Commission” under the NGA.

15 U.S.C. 3314(b) (1), 3316(a) (emphasis added). Con-

gress therefore must have intended the Commission to

have at least the same degree of discretion it was found

to have in Permian Basin and the appellate decisions to

carried forward in Sections 104(b)(2) and 106(c).

2. The court of appeals’ only response to Congress's

explicit incorporation of the “just and reasonable” stand-

ard into Sections 104(b) (2) and 106(c) was to label

mean if it does not confer the sort of flexibility and dis-

cretion that the Commission exercised here. It simply

language upon which the Commission relied in consolidat-

ing all old gas into a single vintage.

particular approach (or the price ceilings it once yielded)

old gas, 15 U.S.C. 3314(b)(1), 3316(a) (emphasis

added )—i.e., the end result of the Commission's appli-

gress’s decision to carry forward a particular “rate”

(subject to a subsequent increase under the just and

reasonable standard) does not imply that the underlying

has become part of the NGPA and therefore

binding on the Commission.

At bottom, the court of appeals’ refusal to give effect

to the “just and reasonable” language Congress enacted

was driven by the court’s belief that “Congress’ intent

was, as it has been in the past, to protect the interests

of consumers through incorporation of a vintaged old

gas pricing scheme.” Pet. App. 22a. But as we have

just explained, the protection Congress afforded consum-

ers derives not from a supposed incorporation of the

vintaged-pricing scheme, of which there is no suggestion

in the NGPA, but rather from Congress’s express incor-

poration of the broad “just and reasonable” standard.

There is a deeper flaw, moreover, in the court of ap-

peals’ decision to construe Sections 104(b) (2) and 1064

far more narrowly than their language permits in order

to further what it understood to be Congress’s intent“

to “protect the interests of consumers.” The Court has

recognized the dangers of that approach even where Con-

gress has acted with a singular purpose: [NIo legisla-

tion pursues its purposes at all costs. Deciding what

competing values will or will not be sacrificed to the

achievement of a particular objective is the very essence

of legislative choice—and it frustrates rather than ef-

fectuates legislative intent simplistically to assume that

whatever furthers the statute’s primary objective must

be the law.” Rodriguez v. United States, 480 U.S. 522,

525-526 (1987). The point has even greater force here,

because the “just and reasonable” standard has always

been understood to require the Commission to consider a

variety of interests, not merely those of consumers (or

a particular group of consumers), in fixing or review-

ing rates.

In any event, the court of appeals’ premise that Sec-

tions 104 and 106 embody an unqualified commitment to

maintaining the lowest possible prices for the particular

pipelines and consumers that were fortunate enough to

have access to ample supplies of old gas is refuted by

the text of those Sections. Both Sections provide for

automatic inflation adjustments in the ceiling price for

old gas, whether or not the resulting increases are jus-

tified by the producer’s historical costs. And both Sec-

tions authorize the Commission to adopt a different ceil-

ing price only if it is higher than the one carried for-

ward by the NGPA. If Congress was as single-minded

in its determination to assure the lowest possible price

as the court of appeals believed, it surely would have

permitted the Commission to lower the ceiling prices in

appropriate circumstances as well.

C. The Legislative History Does Not Support The

Court Of Appeals’ Interpretation Of Sections 104

And 106

The court of appeals attempted to avoid the force of

the statutory text and its historical background by rely-

ing on isolated statements by several Members of Con-

gress during the floor debates on the NGPA. Pet. App.

17a-20a & n.22. This Court has repeatedly stated, how-

ever, that “‘[a]bsent a clearly expressed legislative in-

tention to the contrary,’ the words of the statute are

conclusive.” Hallstrom v. Tillamook County, 110 S. Ct.

304, 310 (1989) (quoting CPSC v. GTE Sylvania, Inc.,

447 U.S. 102, 108 (1980)). Here, the court of appeals

pointed to no clearly expressed legislative intention sug-

gesting that the term “just and reasonable” in Sections

104(b) (2) and 106(c) should be interpreted in a man-

ner that departs so drastically from its settled meaning

in the NGA,

The floor statements upon which the majority relied

consist largely of general descriptions of the uncontro-

verted political compromises that led to enactment of the

NGPA and of the NGPA’s policies of protecting con-

sumers while offering sufficient incentives for the pro-

duction of additional gas. Those statements—none of

which specifically addressed the scope of the Commission’s

authority under Sections 104(b)(2) and 106(c)—are

fully consistent with the Commission’s approach in Order

No. 451. The NGPA ultimately protects consumers of

old gas not by permanently freezing whatever prices

and pricing system happen to have been in effect for old

gas at the time of enactment of the NGPA, but by carry-

ing forward the “just and reasonable” standard of regu-

lation that previously had been applied to the same gas

under the NGA.

Moreover, as the Commission observed, 51 Fed. Reg.

at 46,765 (J.A. 220), other portions of the NGPA’s leg-

islative history, which were not cited by the court below,

demonstrate that Congress was aware of the broad and

flexible authority vested in the Commission under the

“just and reasonable” standard incorporated into Sec-

tions 104(b) (2) and 106(c) of the NGPA. For example,

Senator Abourezk found it “critical to point out that [the

NGA] does not require that the price set by the FERC be

cost-based, except that, in the absence of full cost justi-

fication, the FERC must show the tangible benefits to

consumers. This is the ‘end result test’ established in

FPC against Hope Natural Gas Co.” 124 Cong. Rec.

30,018 (1978). He also observed that Inlothing pre-

vents FERC setting the rates at whatever level is nec-

essary actually to elicit new supply.” Ibid. Senator Ken-

nedy similarly observed that the Commission enjoyed the

authority under the NGA “to establish prices which will

bring forth gas at a ‘just and reasonable’ price and to

vary that price according to conditions.” Id. at 30,023.

The court of appeals’ reading of the legislative history

also ignores the origins of the “just and reasonable”

standard in Sections 104 (b) (2) and 106(c) as finally

enacted. The bill passed by the House of Representa-

tives would have extended controls for new gas, Mid-

Louisiana Gas, 463 U.S. at 331, but would have effectively

frozen the maximum lawful price of old natural gas on the

basis of the applicable just and reasonable price estab-

lished by the Commission as of April 1977 (as adjusted

for inflation). The House bill con

subsequent increases in the price ceiling for old gas;

producer could collect a higher price only under a spe-

cial relief provision for high-cost gas.“ By contrast, the

bill passed by the Senate would ha new

gas in the near future, but “would have maintained Nat-

ural Gas Act regulation for all gas sold or delivered in

interstate commerce before January 1, 1977.” Mid-

Louisiana Gas, 463 U.S. at 331.“ Under the Senate bill,

the Commission plainly would have retained the author-

ity it had under the NGA’s “just and reasonable” stand-

ard to abandon vintage pricing. The bill reported by

the Conference Committee and enacted into law was a

hybrid: it incorporated from the House bill the

of statutory price ceilings for old gas based on

and reasonable rates established by the

April 1977, but it ineorporated from the

retained power of the Commission to modify

ings (but only to make them )

reasonable standards of the NGA. Thus,

771

fae }

strued Sections 104(b) (2) and 1

court, in short, read too much into

derman, 451 U.S. 1, 20 (1981).

II. THE COMMISSION WAS AUTHORIZED BY SEC-

TION 7(b) OF THE NATURAL GAS ACT TO SPEC-

IFY IN ORDER NO. 451 THE CIRCUMSTANCES

UNDER WHICH FUTURE ABANDONMENT OF

GAS SERVICE IS PERMITTED

The court of appeals also erred in invalidating the

abandonment provision of Order No. 451, which is an in-

tegral component of the Good Faith Negotiation (GFN)

18 H.R. 8444, 95th Cong., ist Sess. $§ 405, 409 (1977), 123 Cong.

Rec. 26,169 (1977); see H.R. Rep. No. 496, 95th Cong., Ist Sess.

Pt. 4, at 104-106 (1977).

1% See S. 2104, goth Cong., Ist Sess. § 3 (1977), as amended, 123

Cong. Rec. 32,306 (1977).

procedure and, indeed, of the entire rulemaking package.

Pet. App. 24a-28a. Under Order No. 451, a producer

may abandon its service obligation to the purchaser un-

der an existing contract only if the purchaser elects not

to continue buying the gas in question, and only if the

producer has entered into a contract to sell the same gas

to another purchaser, which ensures that the gas will re-

main in the interstate market. See pages 14-15, supra.

The Commission reasonably concluded that where these

conditions are satisfied among the parties directly con-

cerned, the producer should be permitted to abandon its

service obligations tu the prior customer so that it may

begin to serve its new customer.

The NGPA “comprehensively and dramatically”

changed the wellhead price regulation of natural gas

sales. Mid- Louisiana Gas, 463 U.S. at 322. The NGPA

did not, however, relieve the Commission of its respons-

ibility under the NGA to regulate the non-price features

of most old gas sales. Of particular relevance here, the

NGPA left unaltered the requirement in Section 7(b)

of the NGA, 15 U.S.C. 717f(b), that natural gas, once

“committed or dedicated” to interstate commerce, must

continue to flow in interstate commerce until the Com-

mission authorizes the “abandonment” of that service.

Specif My, Section 7(b) provides that “[n]Jo natural-

gas cc» yy shall abandon * any service * * * with-

out the ~ission and approval of the Commission first

had ned, after due hearing, and a finding by

the Sion that the present or future public

conve - nce or necessity permit such abandonment.”

Order No. 451 complies with these express requirements

of Section 7(b) in every respect. The Commission so

concluded after thoroughly considering the scope of its

Section 7(b) authority when it issued Order No. 451.

See 51 Fed. Reg. at 22,171-22,172, 22,205-22,206, 46,785-

46,787 (J.A. 21-23, 147-149, 301-309). That reasonable

interpretation of the NGA by the agency charged with

its administration is entitled to considerable deference.

A. In Order No. 451, the Commission expressly gave

the “permission and approval” required by Section 7(b)

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n See Natural Ges Price Controls: Hearing on H.R. 1595 Before

the Subcomm. on Energy end Power of the House Comm. on Energy

end Commerce, 10ist Cong. Ist Seas. 158-159 (1989).

See also FPC v. Transcontinental Gas Pipe Line Corp. 423

or-pay problem in the Order No. 451 proceeding, “under

penalty of forfeiting its judgmental conclusion on in-

creased price for old gas and] abandonment.” Pet. App.

58a (Brown, J., ). Certainly nothing in Sec-

tions 104 (b) (2) and 106 (e) of the NGPA authorizes a

court to impose such a condition precedent. Those Sec-

tions authorize the Commission to raise the ceiling price

of “any first sale of any natural gas,” 15 U.S.C. 3314

—

„

) (emphasis added), without regard to

whether that gas (or other gas covered by a contract be-

tween the same producer and purchaser) is subject to a

take-or-pay clause.

CONGRESS’S ENACTMENT OF THE WELLHEAD

DECONTROL ACT CONFIRMS THE SOUNDNESS

soundness of Order No. 451 under the NGPA

orced by the basis on which Con-

gress passed the Wellhead Decontrol Act of 1989, which

lifts controls on wellhead sales of natural gas effective

993. Pub. L. No. 101-60, § 2(b), 103 Stat.

in the framework for Federal natural gas regulation

that have occurred over the past decade * * * make the

repeal of remaining wellhead controls appropriate.” S.

Rep. No. 39, 101st Cong., Ist Sess. 5 (1989). Among the

Order No. 451, which Congress believed would function

essentially as a transitional device between the NGPA

and decontrol. Id. at 5-6; H.R. Rep. No. 29, 101st Cong.,

Ist Sess. 6 (1989).

organization considerations, it may best proceed to develop * * *

the methods, procedures, and time dimension of the needed in-

quiry”); Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1159-1160

(D.C. Cir. 1985) (“for the reviewing court to maintain its proper

function, it cannot require agencies to solve all problems that may

be related to a particular decision at the same time”), cert. denied,

476 U.S. 1114 (1986).

Moreover, Congress recognized in enacting the Wellhead

Decontrol Act that “[t]hrough [Commission] initiatives,

more competition in the interstate pipeline industry has

brought lower prices to all consumers, including captive

residential consumers,” and it premised the future de-

control of natural gas on its disapproval of many of the

same market conditions and other factors the Commis-

sion sought to address in promulgating Order No. 451.

H.R. Rep. No. 29, supra, at 3-4, 5-7; S. Rep. No. 39,

supra, at 3-6. Congress further recognized that as a re-

sult of the Commission’s initiatives, while about one-

third of our supplies are st*'l controlled, most of those con-

trols are well above market levels,” and only about 5%

of the nation’s total gas supply was still subject to price

controls at below-market levels. H.R. Rep. No. 29, supra,

at 3-4; S. Rep. No. 39, supra, at 3. In short, Congress’s

decision to proceed with wellhead decontrol because of

its approval of what the Commission had accomplished

administratively confirms the Commission’s considered

judgment that the elimination of the vintage-pricing sys-

tem in Order No. 451 (along with other measures to pro-

mote competition in the natural gas industry) comports

with both the policies of the NGPA and the long-term

interests of consumers.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted.

KENNETH W. STARR

WILLIAM S. SCHERMAN Solicitor General

General Counsel * d. w

WRENCE G. WALLACE

J EROME M. FEIT — — General

EpwIn S. KNEEDLER

RoBERT H. SOLOMON : -

Attorney Assistant to the Solicitor General

Federal Energy Regulatory Commission

Abdusr 1990

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

A. RELEVANT STATUTORY PROVISIONS

1. Section 4(a) of the Natural Gas Act of 1938, as

codified at 15 U.S.C. 717¢(a), provides:

(a) Just and reasonable rates and charges

All rates and charges made, demanded, or re-

ceived by any natural-gas company for or in con-

nection 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 reason-

able, and any such rate or charge that is not just

and reasonable is declared to be unlawful.

2. Section 5(a) of the Natural Gas Act of 1938, as

codified at 15 U.S.C. 717d (a), provides:

717d. Fixing rates and charges; determination of

cost of production or transportation

(a) Decreases in rates

Whenever the Commission, after a hearing had

upon its own motion or upon complaint of any State,

municipality, State commission, or gas distributing

company, shall find that any rate, charge, or classifi-

cation demanded, observed, charged, or collected by

any natural-gas company in connection with any

transportation or sale of natural gas, subject to the

jurisdiction of the Commission, or that any rule,

regulation, practice, or contract affecting such rate,

charge, or classification is unjust, unreasonable, un-

(la)

duly discriminatory, or preferential, the Commission

shall determine the just and reasonable rate, charge,

classification, rule, regulation, practice, or contract

to be thereafter observed and in force, and shall fix

the same by order: Provided, however, That the

Commission shall have no power to order any in-

crease in any rate contained in the currently effec-

tive schedule of such natural gas company on file

with the Commission, unless such increase is in ac-

cordance with a new schedule filed by such natural

gas company; but the Commission may order a de-

crease where existing rates are unjust, unduly dis-

criminatory, preferential, otherwise unlawful, or are

not the lowest reasonable rates.

8. Section 7(b) of the Natural Gas Act of 1938, as

codified at 15 U.S.C. 717f(b), provides:

(b) Abandonment of facilities or services; approval

of Commission

No natural-gas company shall abandon all or any

portion of its facilities subject to the jurisdiction

of the Commission, or any service rendered by

means of such facilities, without the permission and

approval of the Commission first had and obtained,

alter due hearing, and a finding by the Commission

that the available supply of natural gas is depleted

to the extent that the continuance of service is un-

warranted, or that the present or future public con-

venience or necessity permit such abandonment.

4. Section 104 of the Natural Gas Policy Act of 1978,

as codified at 15 U.S.C. 3314, provides:

§ 3314. Ceiling price for sales of natural gas

dedicated to interstate commerce

(a) Application

In the case of natural gas committed or dedicated

to interstate commerce on November 8, 1978, and

The maximum lawful price under this sec-

tion for any month shall be the higher of —

(A) (i) the just and reasonable rate, per mil-

lion Btu’s, established by the Commission which

was (or would have been) applicable to the

first sale of such natural gas on Apri! 20, 1977,

in the case of April 1977; and

(ii) in the case of any month thereafter, the

maximum lawful price, per million Btu’s, pre-

scribed under this subparagraph for the preced-

ing month multiplied by the monthly equivalent

of the annual inflation adjustment factor appli-

cable for such month, or

(B) any just and reasonable rate which was

established by the Commission after Apri! 27,

1977, and before November 9, 1978, and which

is applicable to such natural gas.

(2) Ceiling prices may be increased if just and

reasonable

The Commission may, by rule or order, prescribe

a maximum lawful ceiling price, applicable to any

first sale of any natural gas (or category thereof,

as determined by the Commission) otherwise sub-

ject to the preceding provisions of this section, if

such price is—

(A) higher than the maximum lawful! price

which would otherwise be applicable under such

provisions; and

(B) just and reasonable within the meaning

of the Natural Gas Act [15 U.S.C. 717 et seq.).

5. Section 106 of the Natural Gas Policy Act, as codi-

fied at 15 U.S.C. 3316, provides in pertinent part:

$ 3316. Ceiling price for sales under rollover

contracts

(a) Interstate rollover contracts

In the case of the first sale under any rollover

contract of natural gas which was committed or

dedicated to interstate commerce on November 8,

1978, the maximum lawful price under this subsec-

tion for such natural gas delivered during any

month shall be the higher of —

(1) (A) im any case of the month in which

the effective date of such rollover contract oc-

curs, the just and reasonable rate, if any, per

million Btu’s, established by the Commission

and applicable on such date to the natural gas

subject to the expired contract; and

(B) in the case of any month thereafter, the

maximum lawful price, per million Btu's, pre-

scribed under this paragraph for the preceding

month multiplied by the monthly equivalent of

the annual inflation adjustment factor appli-

cable for such month; or

(2) (A) $0.54 per million Btu's, in the case

of April 1977; and

(B) in the case of any month thereafter, the

maximum lawful price, per million Btu’s, pre-

scribed under this paragraph for the preceding

month multiplied by the monthly equivalent of

the annual inflation adjustment factor applicable

for such month. For purposes of this subsec-

tion, the term “rollover contract” includes any

contract which would have been a rollover con-

tract but for the fact that the expiration of the

5 ˙— — peter to Mivember

the

(A) (i) the maximum price paid

the expired contract, per million Btu’s, in

the case of the month in which the effective

month ; or

(B) (i) $1.00 per million Btu's, in the

case of April 1977; and

(ii) in the case of any month thereafter,

the maximum lawful price, per million

Btu’s, prescribed under this subparagraph

for the preceding month multiplied by the

monthly equivalent of the annual inflation

adjustment factor applicable for such

month.

(2) Certain State or Indian production or

royalty shares

provisions; and

(2) just and reasonable within the meaning

of the Natural Gas Act [15 U.S.C. 717 et seg.

(1) Name of former purchaser ;

(2) Name of new purchaser ;

(4) Contract date;

(5) Contract term;

(6) Average price; and

(7) Estimated annual sales volume (mcf).

(d) Waiver of rate filing requirements. The

filing requirements of §§ 154.92 and

chapter are waived for sales under

B. RELEVANT REGULATORY PROVISIONS

ADOPTED BY ORDER NO. 451, AS AMENDED granted by this section.

2. 18 C.F.R. 270.201 provides:

1. 18 C.F.R. 157.301 provides: § 270.201 Good faith negotiation procedures.

(a) Applicability definitions, and general rules.

(1) This section applies to requests for renegotia-

tion of the price of old gas sold under an existing

(2) For purposes of this section:

(i) “Old gas” means natural gas which, if sold,

would be subject to a maximum lawful ceiling price

under section 104 or 106(a) of the NGPA.

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14a

with a new purchaser after any necessary compli-

ance with paragraph (g) of this section.

() First seller’s nomination of price; purchaser's

options. (1) If the first seller nominates a price in

purchaser’s request under

within 30 days after receiving the nomination. If

the purchaser does not accept the first seller’s nomi-

(3) If the purchaser rejects the nominated price,

the purchaser may at any time terminate its pur-

chases of all or part of the gas named in its request

for nomination upon 60-days written notice to the

first seller.

(4) The terms of the existing contract apply until

the first seller's nominated price or terminates pur-

chases of the gas under this paragraph.

(5) A first seller is authorized to abandon sales

nates purchases of gas under this section and the

first seller enters into a written contract for the

sale of the gas to a new purchaser after any neces-

refusal—(1) General rule. (i) If the first seller

offers to sell gas subject to release due to termination

or abandonment under paragraphs (c), (e), or (f)

of this section (“offer”) to a new purenaser that is

not an existing firm sales customer of the existing

purchaser, the first seller must present the same offer

to all existing firm sales customers, if:

15a

284.9 (b) of this chapter, and;

(B) The offer encompasses the sale of any gas

subject to the Commission’s jurisdiction under sec-

tion 1(b) of the Natural Gas Act and is substan-

return receipt requested.

(3) Acceptance and rejection of offer; no counter-

(iii) If the first seller receives more than one ac-

ceptance from an existing firm sales customer, the

first seller may determine which such customer will

become the new purchaser.

(4) Termination of right of first refusal. If no

existing firm sales customer accepts the offer made

under this paragraph within 20 days of receiving the

offer, the first seller may execute a written contract

chaser. A purchaser that is an interstate pipeline

not subject to the non-discriminatory access provi-

sions of 284.8 (b) or § 284.9(b) of this chapter

(i) Does not submit a timely nomination of a

price for gas under paragraph (c)(1) of this sec-

tion in response to the first seller’s request for nom-

ination of a price;

(2) Nominates a price under paragragh (e) (1)

of this section that is less than the highest price to

which its existing contract price could escalate if

it were a new or amended contract;

(3) Terminates purchases of gas under para-

graph (c)(2) of this section when the first seller

does not submit a timely nomination of a price; or

(4) Terminates purchases of gas under para-

graph (f) (3) of this section after rejecting a price

for gas nominated by the first seller.

17a

3. 18 C.F.R. 271.402 provides in pertinent part:

> * „ * *

(3) In the case of any first sale under any roll-

over contract to which this subpart applies, the max-

imum lawful price for the month in which the eff

contract becomes effective;

(ii) The price specified in Table II of § 271.101

(a) for interstate rollover gas; or

(iii) The price specified in Table II of § 271.101

(a) for post-1974 gas if the rollover contract be-

comes effective after July 18, 1986.

(7) The maximum lawful price, per MMBtu, for

the first sales of all categories of gas otherwise sub-

ject to lower maximum lawful prices under this sub-

part is the price specified in Table II of § 271.101

(a) for post-1974 gas, if the price is established:

(i) Under a contract or contract amendment

executed after July 18, 1986; or

(ii) In accordance with the good faith negotia-

tion procedures of § 270.201 of this chapter.

. 18 C. F. R. 271.602 provides:

§ 271.602 Maximum lawful price.

(a) General rule. The maximum lawful price for

a first sale of natural gas under an intrastate roll-

106(b)(1) of the

- 45 phi] 411435

tail ean gill

a 1115

W nner enen e

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.