Amicus Curiae Brief — Federal Power Commission v. Consumer Federation of America

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IN THE

Supreme Court of the Anited States

OCTOBER TERM, 1975

No. 75-227

FEDERAL POWER COMMISSION,

Petitioner,

CONSUMER FEDERATION OF AMERICA, et al,

Respondents.

AMICUS CURIAE BRIEF IN SUPPORT

OF PETITION FOR A WRIT OF

CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

I.

INTRODUCTORY STATEMENT

A.Statement of Position and Interest of Amicus

Curiae

This brief amicus curiae is filed by the American Gas

Association (“A.G.A.”), pursuant to Rule 42(1) of the

2

Rules of the Supreme Court of the United States, in

support of Solicitor General’s Petition for a Writ of

Certiorari to the U.S. Court of Appeals for the District

of Columbia Decision in Consumer Federation of

America et al. v. Federal Power Commission, 515 F.2d

347, decided March 13, 1975. All parties to this action

have consented to the filing of this brief.

A.G.A. is a non-stock, non-profit corporation in-

corporated under the laws of the State of Delaware. It

is the national trade association for approximately 300

natural gas distribution and transmission companies

serving customers in all 50 states. These companies

serve nearly 90 percent of the natural gas customers in

this country. Natural gas provides about one-third of

our nation’s total energy requirements and, when

energy for transportation is excluded, more than 60

percent of the energy requirements for industry in the

United States. The 900,000-mile pipeline network is the

most efficient and economical energy delivery system

presently available or foreseeable. This national network

of pipes and mains, representing a total investment of

some 50 billion dollars, serves some 160 million of our

population.

Natural gas is the most efficient form of energy

available in the United States for appropriate residential

uses, according to the President’s Council on Environ-

mental Quality. It is also the least polluting fuel

available, a fact which places it in great demand by

industries concerned with achieving air quality stand-

ards; further, its burning characteristics make it

irreplaceable for many industrial processes. Finally it is,

and will continue to be one of our least expensive fuel

resources because of the capital efficiency of the gas

industry itself, as well as its transportation and

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combustion efficiencies. It is, in short, a premium fuel

for which great demands exist.

The Federal Power Commission (FPC) itself, in the

instant proceeding, in a multitude of other cases prior

to this case, and in other proceedings and reports since

1973 has recognized the existence of the supply

deliverability problem, and the fact that the interstate

consumer in particular has been placed at a severe

disadvantage in competing for available gas supplies by

the lack of pricing restraints upon intrastate customers

in the producing states. It has adopted a variety of

measures to deal with this problem, ranging from

revision of pipeline tariffs to specify the rights and

priorities of pipelines and their customers in curtailed

supply situations, to the measures here at _ issue,

designed to permit interstate consumers to compete on

more equal footing for gas supplies available in the

intrastate market.

At the present time, it is clear that demand for

natural gas far exceeds the supplies dedicated to the

interstate pipelines. Failure to remedy this situation

could jeopardize the more than $30 billion of

unamortized assets of the industry, as well as ultimately

possibly rendering useless the multi-billion dollar

investment of consumers in gas appliances and equip-

ment. Since 1968, A.G.A. has been expressing publicly

a concern about declining supply. In 1970, interstate

pipelines for the first time were required to curtail

contracted-for deliveries, and these curtailments reached

a level of 13.58 percent in 1974.

The validity of FPC determinations of gas supply

shortages is not here at issue, but is well documented

by the findings and reports of other federal agencies of

which this Court may take judicial notice. For example,

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in 1974, according to the Federal Energy Administra-

tion, natural gas production declined for the first time,

to 21.2 trillion cubic feet (Tcf), or almost 6 percent

from the 1973 level of 22.5 Tcf. This is equivalent to

over 230 million barrels of crude oil. The greatest

impact will be on industry, especially fertilizer, food, glass,

fiberglass, electric components and electric equipment,

aluminum refractories and kilns, bearings, steel rolling

mills and plastics. Consumers will feel the impact of the

shortages in the form of higher prices charged them for

goods and_ services produced using more costly

petroleum fuels.

While the impact of the natural gas shortage will be

minimized by the availability of Alaska and outer

continental shelf reserves, the exploration, production,

and distribution problems inherent in developing those

reserves are substantial and will forestall delivery for a

significant period of time.

The Federal Energy Administration reports that the

nation’s network of interstate gas pipelines will be short

1.3 Tcf of the 9.0 Tcf of gas needed for the November

1975 to March 1976 winter heating season or a

shortage 30 percent greater than the nation endured last

winter. On an annual basis, it has also been predicted

that the nation will be short 2.9 Tcf of the

approximately 20 Tcf it will need. This constitutes a

cutback which is 45 percent worse than endured in

1974. See Federal Energy Administration, The Natural

Gas Shortage: A Preliminary Report, August 28, 1975,

at 3.

In the meantime, the shortage of natural gas will

cause plant closures and loss of jobs in affected parts of

the country and will generally contribute to adverse

economic conditions. Ten or twelve states face severe

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curtailments this winter. These include the mid-Atlantic

states stretching from New York to South Carolina and

several midwestern states, such as Ohio, West Virginia

and Kentucky. Curtailments in these areas are primarily

due to cutbacks by five interstate pipelines.’ For

example, United Gas Pipeline Co., Texas Eastern and

TRANSCO incurred, respectively, 41.42 percent, 21.45

percent, and 27.70 percent curtailment of firm

requirements for the year April 1974 - March 1975 and

will incur a projected deficiency of 47.65 percent,

25.72 percent, and 40.53 percent, respectively, for the

year April 1975 - March 1976. See FPC Press Release

21454, June 6, 1975, at Schedule I. Further, it is

expected that these shortages will increase in the next

few years.

The legislative and executive branches as well as

cognizant administrative agencies, of states and the

federal government are groping for long term solutions

to the nation’s natural gas crisis. There is no single

answer. Regulatory innovation, such as at issue in

Consumer Federation, and indeed pragmatic experi-

mentation will be required to develop requisite curative

devices.

B. Statement of the Case

The present case arises from Federal Power Com-

mission Order No. 491, issued September 14, 1973,

' Representing, according to FEA statistics, nearly 80% of the

volume of projected curtailments are Columbia Gas Transmission

Corp., El Paso Natural Gas Co., Texas Eastern Transmission Co.,

United Gas Pipeline Co., and Transcontinental Gas Pipeline Corp.

(TRANSCO). FEA Preliminary Report, at 4.

ae ee hae tht hie ua ied

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which attempted to deal with projected gas shortages

during the 1973-74 heating season. Order No. 491

extended from 60 to 180 days the exemption from the

certification requirement of Section 7 of the Natural

Gas Act of 1938 (the “Act’’) permitting short-term

emergency sales of natural gas at prices above FPC area

rates to pipelines experiencing or facing gas shortages or

curtailments of service. The Commission indicated,

however, that any such pipeline purchases would be

subject to review under Sections 4 and 5 of the Act.

After many procedural steps (set forth in the Solicitor

General’s petition), the order was finalized on November 2,

1973. Thereafter an appeal was taken to the Court of

Appeals, which set aside Order No. 491 after which the

instant Petition for Writ of Certiorari was filed. The

Court of Appeals concluded that the FPC lacked the

authority to promulgate Order No. 491 because the

Section 7(c) exemption in the Act was never intended

to include large, widespread deliveries of gas for up to

180 days without hearings and also because it violated

the just and reasonable rate standard of Sections 4 and

5 of the Act.

7

II.

THE DECISION OF THE COURT OF |

APPEALS SHOULD BE REVIEWED UNDER

A WRIT OF CERTIORARI FOR PURPOSES

OF DECIDING THE IMPORTANT

QUESTION OF THE AUTHORITY OF THE

FEDERAL POWER COMMISSION TO DEAL ;

WITH EMERGENCY SHORTAGES OF

INTERSTATE PIPELINE GAS SUPPLIES. i

§

A.G.A. believes that the Commission has_ the i

authority under Section 7(c) of the Act to exempt

pricing of emergency gas sales from the normal

certification requirements of Section 7, and that 180

days is not an unreasonable time for the FPC, in its

discretion, to select and, with the exception noted

below, the Commission properly exercised its discretion

in the instant proceeding. In a period of grave national

emergency, administrative agencies charged with

responsibility for an area of national concern should be

granted reasonable latitude to deal with the subjects of

their expertise. It is most urgent, in view of the

increasing shortages of natural gas since Order No. 491

was first promulgated, that this Court define this

emergency authority under Section 7(c) of the Act to

enable the FPC to deal with such matters.

On the other hand, it should be pointed out that one

consequence of Order No. 491 is to cause the pipelines

to assume the risk that the Commission in subsequent

Section 4 or 5 proceedings might consider the price

paid for these emergency purchases to be unjust or

unreasonable. A.G.A. believes that this consequence is

counterproductive, as a pipeline, even if faced with cur-

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tailments will not be likely to buy gas that may be avail-

able at a premium if it runs the risk that it will not be

able to recover its cost for such purchased gas.

Ii.

CONCLUSION

For the reasons set forth above, A.G.A., on behalf of

its pipeline and distribution company members serving

the public, respectfully submits that the Petition for a

Writ of Certiorari to U.S. Court of Appeals for the

-° District of Columbia Circuit should be granted and that

the decision of the Court of Appeals should be

reviewed by this Court.

Respectfully submitted,

F. BOSLEY CROWTHER, III

1515 Wilson Boulevard

Room 1111

Arlington, Virginia 22209

Counsel for Amicus Curiae

American Gas Association

Of Counsel:

ALBERT J. FRANCESE

Dated: September 10, 1975

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LIBRARY

IN THE | MICHAEL ROD: ane.

Supreme Court of the United States

OcTOBER TERM, 1975

No. 75-227

FEDERAL PowER CoMMISSION, Petitioner

Vv.

CONSUMER FEDERATION OF AMERICA, ET AL.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the District of Columbia Circuit

BRIEF OF TEXAS GAS TRANSMISSION CORPORATION

AND

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

IN CONDITIONAL SUPPORT

Of Counsel:

ROBERT O. KOCH, Ezecutive Vice

President and General Counsel

STEVE H. FINCH, Assistant

General Counsel

TEXAS GAS TRANSMISSION

CORPORATION

P. O. Box 1160

Owensboro, Kentucky 42301

BRIAN E. O’NEILL, Vice

President and General Counsel

WILLIAM N. BONNER,

Senior Attorney

TRANSCONTINENTAL GAS PIPE LINE

CORPORATION

P. O. Box 1396 .

Houston, Texas 77001

ROBERT G. HARDY

FRANK X. KELLY

GALLAGHER, CONNOR AND BOLAND

821 Fifteenth Street, N.W.

Washington, D. C, 20005

CHRISTOPHER T. BOLAND

THOMAS F. RYAN, JR.

GALLAGHER, CONNOR AND BOLAND

821 Fifteenth Street, N.W.

Washington, D. C. 20005

Telephone: (202) 347-8866

Attorneys for Texas Gas

Transmission Corporation

and Transcontinental Gas.

Pipe Line Corporation

Press oF Byron S. ADAMS PRINTING, INC., WASHINGTON, D. C.

a , ge acler2: 7

INDEX

Page

a 2

ee 2

ee nda cack bb hdsbadinbsgeaacceans 3

AE er 3

B. Proceedings Before the Commission ........ 5

ch SO ches sac ceccccscecnuas 6

D. Commission Action Subsequent to Order

eine Seek G4 sik 6 V6 kn 6's Ses we «0 7

Tue Position or Texas Gas aNp TRANSCO .......... 9

Ee te 10

A. The Commission Has the Legal Power to Ex-

empt Short-Term Interstate Sales of Natural

Gas From Rate and Certificate Regulation

During Periods of Emergency ............ 10

B. The Prevailing Market Price Provides an Ap-

propriate Standard That Fully Satisfies the

Dictates of the Natural Gas Act ......,..... 11

C. Contrary to This Court’s Decision in Texaco,

Order No. 491 Provided Absolutely No Stand-

ards to Guide Pipelines in Making Emergency

I once te es wa bs ch RRA Oa cse a cas 13

Pe 17

CITATIONS

CASES:

Atlantic Refining Co. v. Public Service Commission of

the State of New York, 360 U.S. 378 (1959) ....12, 13

FPC vy. Texaco Inc., 417 U.S. 380 (1974) ....3,7,9, 11, 12,

13, 14, 15,17

Permian Basin Area Rate Cases, 390 U.S. 747 (1968).. 11

SPAN AL EPR MELLEL EI ALA SE OL LS ENE ALS EET BT

li Index Continued

Page

STATUTES:

Natural Gas Act, 52 Stat. 821, et seq., as amended, 15

U.S.C. 717, et seq.

EE BOGE: Scan os io subd atCMRESeeMe wes 2,8

NN SENS iaevkns cdoascancaees 2, 3, 5, 6, 10, 11, 12

PE MP ea aca eheancdsacasteurbashes Coa ke 2

MISCELLANEOUS:

FPC Staff Report: ‘‘A Realistic View of U.S. Natural

Gas Supply,’’ December, 1974 .................. 13

Order No. 431, 45 FPC 570 (1971) .................. 4

Order No. 533, — FPC — (1975) .................. 8

xy setae

IN THE

Supreme Court of the United States

OcTOBER TERM, 1975

No. 75-227

FEDERAL PowWER Commission, Petitioner

Vs

CONSUMER FEDERATION OF AMERICA, ET AL.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the District of Columbia Circuit

BRIEF OF TEXAS GAS TRANSMISSION CORPORATION

AND

TRANSCONTINENTAL GAS PIPE LINE CORPORATION

IN CONDITIONAL SUPPORT

Texas Gas Transmission Corporation (Texas Gas)

and Transcontinental Gas Pipe Line Corporation

(Transco), parties to the proceedings in the court

below, hereby submit this brief in conditional support

of Petitioner.

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TEXAS GAS AND TRANSCO

Texas Gas is a corporation organized and existing

under the laws of the State of Delaware. It is a natu-

ral gas company as defined in Section 1(b) of the Nat-

ural Gas Act and, as such, is engaged in the business

of transporting and selling natural gas in interstate

commerce under authorizations granted by the Com-

mission. The facilities operated by Texas Gas, as a

natural gas company, consist primarily of a pipeline

system located in Texas, onshore and offshore Louisi-

ana, Arkansas, Mississippi, Tennessee, Kentucky, In-

diana, Illinois and Ohio.

Transco is a corporation organized and existing

under the laws of the State of Delaware. It is a natu-

ral gas company as defined in Section 1(b) of the Nat-

ural Gas Act and, as such, is engaged in the transpor-

tation aud sale of natural gas in interstate commerce

by means of its natural gas transmission system ex-

tending from its sources of gas supply in Texas, Loui-

siana and Mississippi through the States of Alabama,

Georgia, South Carolina, Virginia, Maryland, Penn-

sylvania and New Jersey to its termini in the Metro-

politan New York area.

Both Texas Gas and Transco fully participated as

intervenors in the proceedings before the court of ap-

peals.

QUESTIONS PRESENTED

1. Whether the Commission possesses the legal power

under Sections 7(c) and 16 of the Natural Gas

Act, 15 U.S.C. 717f(¢), 7170, to exempt, from rate

and certificate regulation, short-term emergency

sales of natural gas that would otherwise be sold

in the intrastate market in order to forestall the

3

rapidly decreasing supplies of natural gas avail-

able to the interstate market and the concomitant

increase in interstate pipeline curtailments of

high-priority markets ?

bo

If not, may the Commission exempt such sales

from rate and certificate regulation by indirectly

regulating such rates in rate proceedings of the

purchasing pipelines: (a) when the pipelines ‘‘are

given no guidance whatsoever as to what the

standards may be’’ (F PC v. Texaco Inc.) and (b)

when the exemption will be counter-productive

since neither the pipeline nor the producer will

enter into such transactions under these cireum-

stances?

STATEMENT

A. Background

Section 7(c) of the Natural Gas Act, as amended,

provides that the Commission ‘‘may by regulation ex-

empt from the requirements of this section temporary

acts or operations for which the issuance of a certifi-

cate will not be required in the public interest.’ Pur-

suant to that enabling provision, the Commission’s

Regulations have, for many years, provided for ex-

emption of temporary acts and operations by natural

gas companies from certain certification requirements

of the Act. The term ‘‘temporary acts or operations”’

was consistently interpreted as including sales in inter-

State commerce by producers to pipelines for resale.

Prior to the issuance of Order No. 491, et seq. (FPC

Pet., pp. 33a-109a), however, such exemptions were

available only where the acts or operations were lim-

ited to a period of not more than 60 days. Order No.

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491 extended the period during which the emergency

sections could be invoked to 180 days.

Recently, the exemption provisions have been in-

creasingly utilized on a widespread basis due to the

nationwide natural gas shortage. Pipelines experi-

encing gas supply emergencies have made ‘‘spot’’

purchases for the 60 or 180 day exemption period in

order to supplement dwindling reserves. Under Sec-

tion 2.68 of the Commission’s Regulations, distribution

companies have also engaged in exempt 60 day sales

among themselves. In addition, pipelines have con-

tracted for ‘‘limited-term’’ purchases pursuant to Or-

der No. 431, 45 FPC 570 (1971), by which producers

apply for limited-term certificates (generally for 1 to 2

year periods), with pre-granted abandonment, for sales

at rates in excess of the ‘‘just and reasonable”’ ceiling

then applicable to long-term sales in the Commission

pricing area in question. Although these prices were

higher than the appropriate ‘‘just and reasonable”’

rates, these rates became legal rates which the pipe-

lines were authorized to pay without exposure to later

disallowance of any portion of such expenses from their

costs of service.

The severe shortage of natural gas has intensified

the competition for available long-term and short-term

supplies. Pipelines are attempting to attract gas away

from the unregulated intrastate market. It is common

knowledge, however, that prices in the intrastate mar-

ket are at least two or three times the price set by the

Commission for interstate sales. In order to secure

gas that would otherwise be sold in the unregulated

intrastate market at prices in excess of federally-

controlled rates, the Commission, through its exemp-

tion regulations, relieved producers from the constraint

of area rate ceilings in the hope that interstate pipe-

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lines would thereby be able to compete effectively with

intrastate purchasers for such scarce supplies. It is in

this context, then, that the Order No. 491 series must

be considered.

B. Proceedings Before the Commission

On September 14, 1973, the Commission issued Or-

der No. 491 (FPC Pet., pp. 33a-41a) which extended

from 60 days to 180 days the period of time that a pipe-

line experiencing a system shortage could make

emergency purchases of natural gas absent Commis-

sion certification under Section 7(c) of the Act. The

order was designed to avert significant economic and

social dislocations that would result from the severe

supply deficiency projected for the 1973-1974 winter

season. The amendments were to expire at the con-

clusion of the winter season on March 15, 1974.

The Commission, in Order No. 491-A (FPC Pet.,

pp. 42a-75a) dated September 25, 1973, denied motions

for stay of Order No. 491 and reiterated the necessity

of extending the emergency regulations in order to

augment the available gas supply for the interstate

market during the critical heating season. However,

the Commission also indicated for the first time that

“(t]he rate at which these emergency volumes are

committed to interstate pipelines will be examined in

our pipeline regulatory review under Sections 4 and 5

of the Act, in the same manner as purchases are re-

viewed under the prior emergency procedures.’’*

(FPC Pet., p. 52a)

? While the Commission’s statement implies that emergency pur-

chases had previously been reviewed by the Commission in the

same manner as here proposed, neither Texas Gas nor Transco had

any prior knowledge of any such review of emergency purchases

or, for that matter, any prior hint that such ‘‘indirect’’ review was

ever contemplated or intended by the Commission.

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In response to written comments filed by various

parties, the Commission issued Order No. 491-B (FPC

Pet., pp. 76a-104a) on November 2, 1973, and again

reaffirmed its policy of permitting 180 day emergency

sales. The Commission amplified its position with

respect to ‘‘indirect’’ review of emergency sales in the

following manner:

‘*As we indicated in Order No. 491-A (mimeo at

8), we will scrutinize the rates of all emergency

purchases in the review of purchased gas costs in

pipeline rate proceedings, including purchased gas

[footnote omitted] adjustment clause increases.

We will permit the pipeline to pass on to the con-

sumer the rates of emergency purchases only when

such rates can be shown to have been required by

the public interest.”’ (Emphasis in original.)

(FPC Pet., p. 91a)

* * *

‘‘Should we determine in a pipeline rate case that

any emergency purchase was improvidently con-

summated at a rate which was more than neces-

sary to secure the gas for the interstate market,

we will not require refunds by the producer.’’

(FPC Pet., p. 92a)

The Commission denied rehearing and stay on No-

vember 21, 1973, in Order No. 491-C (FPC Pet., pp.

105a-109a). Pursuant to applications for stay filed by

interested parties, the court of appeals granted a stay

of the Commission’s orders on December 10, 1973.

The stay, however, was later vacated by this Court on

December 20, 1973 (414 U.S. 1117).

C. The Decision Below

The court of appeals determined that the action

taken by the Commission was outside the scope of its

authority under Section 7(c) of the Act and, thus, set

7

aside the orders (FPC Pet., pp. 1la-30a). In analyz-

ing the legislative history and the purpose of Section

7, the court concluded that the exemption proviso con-

tained therein did not enable the Commission to ex-

clude the short-term emergency sales authorized in

Order No. 491 from the certification process.

Citing FPC v. Texaco Inc., 417 U.S. 380 (1974), the

court below held that the Commission’s orders did not

constitute a valid means of indirect regulation because

there was no assurance that the rates ‘“‘paid by pipe-

lines”? (FPC Pet., p. 22a) to producers would be just

and reasonable. The court also indicated that the

standard for indirect regulation did not guarantee, as

required by its reading of Texaco, that ‘“‘the rates

‘ultimately borne by the consumer are just and rea-

sonable.’ ’? (FPC Pet. p. 25a)

The indirect regulatory scheme was further deemed

inadequate for its failure to articulate standards to

guide pipelines in contracting for emergency pur-

chases. As the court noted:

‘“‘In Texaco the Court was concerned with the

squeeze on the pipelines which stemmed from

making payments that would be both disallowed

and nonrefundable, and made it clear that any

such program would require ‘guidance’ for those

that might be affected. [footnote omitted] The

warning in Order 491 against ‘improvident’ con-

tracts does not provide adequate guidance to pro-

tect the pipelines.’”’ (Emphasis added.) (FPC

Pet., p. 26a)

D. Commission Action Subsequent to Order No. 491

Because of the uncertainty surrounding the validity

of the 180 day exemption, the Commission terminated

the program on March 15, 1974. However, the Com-

EN REAP ALE DE PLIES LAL EAS

mission has continued to recognize the need for at-

tracting intrastate supplies into the interstate market.

First, it sought and obtained an expedited decision in

this case from the court below in a vain effort thus far

to reinstitute the 180 day exemption. Second, the

Commission recently (August 28, 1975) promulgated

Order No. 533 which announced the Commission’s will-

ingness to certificate transportation arrangements by

interstate pipelines on behalf of their high-priority

industrial customers. The purpose of such policy is

to allow industrial users to purchase gas directly from

producers at prevailing market prices and, therefore,

to ‘‘compete with the producer’s intrastate customers

for gas supplies not otherwise available to the inter-

state market.’’ The Commission’s rate jurisdiction

would not attach to such direct sales because Section

1(b) of the Act only authorizes the Commission to re-

gulate sales for resale.

On June 17, 1975, the Commission issued the first of

a series of orders (see, e.g., Texas Gas Transmission

Corporation, Docket No. RP74-25, et al.) concerning

the 180 day purchases made by interstate pipelines pur-

suant to Order No. 491. The various orders set pro-

cedural schedules for the convening of public hearings

so that the producer and the pipeline could justify the

justness and reasonableness of the rates for all emer-

gency sales consummated in excess of the 51-cent na-

tionwide rate. Despite the fact that the Commission

did not list any meaningful standards in Order No.

491 to guide pipelines in contracting for emergency

purchases, these later orders compelled the submission

of evidence pertaining to, inter alia, the producer’s

individual costs, the pipeline’s need for the gas and the

availability of other gas supplies (see p. 15, infra).

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EIT CO SPE LEAT LEER IS TE :

9

THE POSITION OF TEXAS GAS AND TRANSCO

Texas Gas and Transco are fully in accord with

the Commission’s announced intention of securing ad-

ditional gas for the interstate market by means of its

emergency regulations. However, it is unnecessary

and, in fact, unlawful to uphold the validity of the

emergency provisions on the basis of indirectly regulat-

ing the producer prices at the pipeline level. We

support the Commission’s petition for a writ of cer-

tiorari but only to the extent that the emergency ex-

emption is permissible without a subsequent rate re-

view at the pipeline level.

Inasmuch as there were no standards prescribed in

Order No. 491 to guide pipelines in making emergency

purchases, it seems clear under Texaco, supra, that the

same defects are present in Order No. 491 as in that

ease. A contrary conclusion would entail the retro-

active imposition of ex post facto Commission guide-

lines. The court below, as did this Court in Tezaco,

perceptively took cognizance of the unlawful

‘*squeeze’’ on the pipelines resulting from the lack of

adequate standards (FPC Pet., p. 26a).

The major thrust of our participation in the instant

case, however, is directed to the legal parameters which

must cireumscribe future Commission actions involv-

ing emergency interstate sales. If properly enacted,

such future regulations will provide a viable means for

interstate pipelines to alleviate their serious supply de-

ficiences. We believe that the Commission possesses

the requisite authority under the Natural Gas Act to

exempt short-term emergency sales to curtailing in-

terstate pipeline companies from rate and certificate

jurisdiction.

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We submit that the prevailing (‘‘in line’’) market

price provides the only appropriate test to be used in

satisfying the requirements of the Natural Gas Act in

making the 180-day exemption a viable vehicle for the

acquisition of additional interstate gas. It must be

remembered that the emergency provisions were

adopted by the Commission to procure gas not other-

wise available to the interstate market. If a producer

has the option of selling its gas in the unregulated in-

trastate market, the only relevant consideration should

be, as far as the Commission is concerned, the deter-

mination of the price required to entice the producer

to sell his gas in the interstate market. The choice for

interstate pipelines, and the interstate market in gen-

eral, is not between gas priced at one level vs. gas

priced at a different level but rather gas priced at the

prevailing market level vs. no gas at all. Emergency

provisions not attuned to this fact of life will only

ensure that essentially all onshore gas will continue to

be sold in the intrastate market.

ARGUMENT

A. The Commission Has the Legal Power To Exempt Short-

Term Interstate Sales of Natural Gas from Rate and Cer-

tificate Regulation During Periods of Emergency.

The exemptive authority contained in Section 7(¢)

of the Act affords a proper legal foundation for Com-

mission suspension of rate and certificate jurisdiction

with respect to short-term emergency sales of natural

gas. Confronted with an acute shortage of new sup-

plies and rapidly escalating curtailments of high-

priority markets by interstate pipelines, the Commis-

sion has resorted to extraordinary, and yet necessary,

measures to cope with this crisis. The powers of the

Commission in this area, therefore, must be generously

11

eonstrued to enable the Commission to fulfill its press-

ing responsibilities under the Act. Permian Basin

Area Rate Cases, 390 U.S. 747, 776 (1968).

In order to attempt to maintain adequate service

to existing interstate consumers, the Commission is

certainly justified in exempting emergency sales on a

temporary basis. Unlike Texaco, which involved the

permanent certification of small producer sales, the

emergency provisions contemplate transactions of a

short-term nature only and, hence, fall within the con-

fines of the exemption proviso in Section 7(¢).

B. The Prevailing Market Price Provides an Appropriate

Standard that Fully Satisfies the Dictates of the Natural

Gas Act.

As conceived by the Commission, the principal pur-

pose of Order No. 491, and presumably of any future

emergency regulation, was to secure, for the interstate

market, gas that would not otherwise be available to

interstate consumers. In pursuit of this laudatory

goal, the Commission authorized and, indeed, en-

couraged interstate pipelines to compete with prospec-

tive intrastate purchasers for reserves that would or-

dinarily be sold in the intrastate market. We cannot

overemphasize the very basic maxim that, unless inter-

state pipelines are able and willing to offer a price

competitive with the existing rate in the intrastate

market, the gas will not be obtained. Indeed, the

whole point in the Commission’s issuance of Order

491 was to free the pipelines from the price constraints

of existing area ceilings. Otherwise, there would have

been no purpose in the issuance of such an order. This

fact was recognized by the court below:

‘‘The entire point of Order 491 is to free ‘pipelines

facing emergencies’ from price constraints to ‘en-

cong

12

able them to secure substantial gas supplies which

might otherwise be lost to the intrastate market

or interstate pipelines not facing an emergency.’ ”’

(Footnote omitted.) (FPC Pet., p. 25a)

Given this simple fact of life and coupled with an

interstate gas shortage of enormous proportions, we

submit that a rate that is first, ‘‘in-line’’ (CATCO,

infra) with prevailing market prices, and second, able

to elicit the additional supplies, satisfies the require-

ments of the Act for short-term emergency purchases.

To hold otherwise would be to engage in the naive no-

tion that the Commission must establish a rate for

short-term onshore sales at a level beneath the pre-

vailing market price. The Commission would then be

establishing a rate at which not one additional cubic

foot of gas would be sold in the interstate market. It

is inconceivable that regulation of this type produces

any benefits whatsoever for high-priority interstate

customers desperate for new sources of natural gas.

Inasmuch as Teraco dealt with small producer sales

of permanent duration, this Court’s admonition that

‘fall gas rates [must] be just and reasonable’’ would

not appear to be applicable to the temporary emer-

gency sales discussed herein.? In Atlantic Refining Co.

v. Public Service Commission of the State of New

York (CATCO), 360 U.S. 378 (1959), for instance, this

Court stated that the Act does not compel a determina-

tion of just and reasonable rates for initial sales made

pursuant to a certificate issued under Section 7(c).

*Even if the rates for emergency sales have to be ‘‘just and

reasonable’’, the prevailing market price standard would still be

applicable because it is the only standard that will elicit any on-

shore supplies away from the unregulated intrastate market and,

therefore, under such circumstances, the ‘‘ prevailing market price’’

must be considered as the ‘‘ just and reasonable’’ rate.

13

Thus, the rates paid by pipelines for emergency pur-

chases should be adjudged excessive only in the event

that such rates are ‘‘out of line’’ with prevailing

prices in the area. See CATCO, 360 U.S. at 391.° Only

the ‘‘in-line’’ prevailing market price standard will

ensure compliance with the appropriate statutory re-

quirement and, at the same time, provide a means of

acquiring the sorely needed gas supplies for the inter-

state market. Therefore, we urge this Court to ap-

prove utilization of such standard in the Commission’s

determination of the propriety of the rates agreed to

by interstate pipelines and producers in connection

with emergency sales.

C. Contrary to This Court’s Decision in Texaco, Order No. 491

Provided Absolutely No Standards To Guide Pipelines in

Making Emergency Purchases.

The court of appeals rightly concluded, pursuant to

the doctrine espoused in Texaco, that Order No. 491

unlawfully neglected to establish standards by which

pipelines could be guided in the consummation of em-

31t is interesting to note that while the court below placed con-

siderable emphasis on CATCO in reversing Order No. 491, certain

significant factors upon which the 1959 decision was premised

are no longer valid today: (1) the pipeline had not demonstrated

a need for the gas; (2) the producers had not shown the avail-

ability of the intrastate market as an outlet for their gas; and, (3)

the sales would only have been profitable in the interstate market

where 90% of all gas was then being sold. 360 U.S. at 393-394.

In contrast, in 1973 production for interstate use represented less

than 63% of total production in the lower 48 states. More im-

portantly, in the most recent four years for which data are avail-

able (1970-1973), interstate pipelines have acquired only about

“% of national reserve additions, including offshore reserves,

which demonstrates vividly the inability of interstate pipelines

to compete for market priced intrastate suppiies. Source: FPC

Staff Report: ‘‘A Realistic View of U.S. Natural Gas Supply,’’

December, 1974.

14

ergency sales contracts. As the court below aptly re-

marked:

‘‘A related shortcoming is the Commission’s

failure to provide pipelines with standards to

guide them in latitude contemplated in contract-

ing for emergency purchases. Under Order 491,

if pipelines pay too much for gas supplies, they

may incur expenses that are nonrefundable. In

Texaco the Court was concerned with the squeeze

on the pipelines which stemmed from making pay-

ments that would be both disallowed and nonre-

fundable, and made it clear that any such program

would require ‘guidance’ for those that might be

affected. The warning in Order 491 against ‘im-

provident’ contracts does not provide adequate

guidance to protect the pipelines. The Commis-

sion attempts to avoid this problem by stating that

the procedures are ‘purely optional’ and that the

order does not ‘coerce a pipeline into making such

purchases.’ But a commission seeking to defend

an exemption order cannot in this way ignore its

responsibility to give guidance to pipelines that

accept the Commission’s open-door invitation to

obtain needed supplies through Order 491 pur-

chases.’’ (Footnotes omitted.) (Emphasis added.)

(FPC Pet., p. 26a)

Since the requisite standards are missing, the Com-

mission should be precluded from denying in a pipe-

line’s cost of service any amounts paid to producers

with respect to emergency sales which are required to

obtain the gas for the interstate market. Otherwise,

interstate pipelines will be held accountable, unjustifi-

ably, for emergency purchases on the basis of retro-

actively applied standards.

Although Order No. 491 terminated on March 15,

1974, it was not until June 17, 1975, in Texas Gas

15

Transmission Corporation, Docket No. RP74-25, et

al., that the Commission first suggested criteria that

would be used to evaluate the prices paid for emer-

gency gas. The injection of such ex post facto stand-

ards into pipeli.. rate proceedings involving Order

No. 491 transactions is patently at odds with the most

basic due process considerations. Because these,stand-

ards might be employed in the future, however, it is

appropriate to set forth the Commission’s statement

regarding the evidence that must be furnished in these

proceedings. In Tezras Gas Transmission Corpora-

tion, for example, the Commission ordered the follow-

ing data to be submitted :

“‘Cost evidence relating to the producer sales

under Order No. 491 can clearly provide the basis

for ‘just and reasonable’ rate findings. F.P.C. v.

Texaco Inc., 417 U.S. 380 (1974). It follows then,

that the producer should introduce relevant evi-

dence of the cost involved in its sale. Such evi-

dence shall be considered together with all other

material evidence which would support a finding

of a just and reasonable rate in excess of the na-

tional rate [51 cents per Mcf].

The cost evidence submitted by the producer

should include, inter alia, the direct and indirect

costs, including the cost of all capital funds rea-

sonably allocated to its sale. In addition, the prod-

ucer should indicate the price for which the sub-

ject gas is now being sold, whether in intrastate

or interstate commerce.

The pipeline should submit evidence as to (1)

its need for the gas, (2) the availability of other

gas supplies, (3) the amount of gas purchased

from the producer involved under the emergency

provisions of Order No. 491, as amended, (4) the

rates of other producer sales under Order No. 491

“EATERY

16

approved for flow through, and (5) the prevailing

prices in the area for both interstate and intra-

state sales of gas.”’

The above-mentioned ‘‘guidelines’’ are hopelessly

vague; there is no indication as to the relative weight

to be accorded to the various pieces of evidence. Given

these imprecise guidelines, the risk of possible Com-

mission disallowance of prudently incurred purchased

gas costs is too severe and will undoubtedly deter the

pipeline and the producer from executing a contract

for the scarce supplies.

It is evident that the criteria suggested in Texas Gas

Transmission Corporation, supra, are eounter-produc-

tive. They will discourage producers as well as pipe-

lines from entering into emergency sales agreements.

Moreover, the Commission has given no indication of

whether, in the event that excess charges are deter-

mined, the producer will be required to make refunds

or the pipeline will be required to absorb costs already

incurred. In either event, under today’s conditions,

no substantial amounts of emergency gas would be

made available. Either the producers will refuse to

sell the gas because of the risk of refunds and the

ability to sell the gas intrastate with no risk, or the

pipeline will refuse to buy the gas because of the po-

tentially enormous risk of cost absorption to its stock-

holders.

The Texas Gas case provides ample support for our

contention that emergency regulations eannot properly

be administered pursuant to the guidelines announced

therein. In such proceeding, six producers were re-

quired to submit voluminous cost data to justify emer-

gency rates in excess of the 51-cent nationwide ceiling.

17

The total amount of money in question was $21,263;

in fact, two of the producers collected revenues of only

$462 and $527 above the revenues for comparable vol-

umes priced at the national rate and, yet, were still

expected to file the evidence, come to Washington,

D. C. for the hearing, and furnish supporting wit-

nesses. To forestall such unnecessary expense and

obvious waste of time, Texas Gas reluctantly expressed

its willingness to absorb the $21,263 in its rates and,

therefore, moved to terminate the proceeding.

A decision by this Court authorizing emergency

provisions to operate in the manner suggested by the

Commission would result in the classic example of a

Pyrrhiec victory. The Commission would then issue

new emergency regulations encompassing the Texas

Gas standards—standards under which neither pro-

ducers nor pipelines would be willing to participate.

CONCLUSION

It is unfortunate that the Commission has not faced

the reality that only competitive market prices will

elicit emergency supplies for the interstate market and

then only if the purchasing pipelines are assured of

passing on these prices to their customers. Given the

posture in which the Commission presents its petition,

ie., that the prices will be “just and reasonable’”’ un-

der the vague criteria suggested by the Commission,

the grant of certiorari and reversal of the court below

would not only be clearly contrary to this Court’s deci-

sion in Texaco, supra, but, in addition, would accom-

plish little, if anything, toward the acquisition of addi-

tional gas for the interstate market. However, if the

Court is inclined to consider not only the question of

Commission power to exempt for 180 day emergencies

%

ete ela eee eter |

18

but also the question of authority to permit sales and

purchases of such gas at market price levels, Texas Gas

and Transco would support the grant of certiorari.

Respectfully submitted,

Of Counsel: CHRISTOPHER T. BOLAND

ROBERT 0. KOCH, Executive Vice an sak a ee

SORES one Sanita Teens 821 Fifteenth Street, N.W.

STEVE H. FINCH, Assistant Washington, D. C. 20005

General Counsel Telephone: (202) 347-8866

Texas Gas TRANSMISSION Attorneys for Texas Gas

Pp Rey a” Transmission Corporation

oe , a a poe and Transcontinental Gas

wensboro, Kentucky 42301 Pipe Line Corporation

BRIAN E. O’NEILL, Vice

President and General Counsel

WILLIAM N. BONNER,

Senior Attorney

TRANSCONTINENTAL GAs PIPE LINE

CorPORATION

P. O. Box 1396

Houston, Texas 77001

ROBERT G. HARDY

FRANK X. KELLY

GALLAGHER, CONNOR AND BOLAND

821 Fifteenth Street, N.W.

Washington, D. C. 20005

—————— Sse zn ‘ef’ EE EEE