Respondents Brief — United Gas Improvement Co. v. Callery Properties, Inc.

SUBJECT INDEX

QUESTIONS PRESENTED ..0....cccsseccscsecssernsentenesnese

STATUTES INVOLVED

‘STATEMENT é

SUMMARY Ne DAR SOIT le

I. THE COMMISSION ERRED IN REJECTING PROF-

FERED EVIDENCE RELEVANT TO A DETERMI-

NATION OF THE PUBLIC CONVENIENCE AND

SITIES. © i 6c chads ialicnctstneacehsoteicenanyosicarininiaenepiiiianevatenshe

Be MAM OU GIG 1B PHOROIY ~<.00.cesecceosceseerveeseecsnsssovenenneones

2. ODECO’s Attempt to Augment the Record ............

TE SN COQTOGINE oaccccescosecesisvessensesnvsessencevovesernvens

+

5

ECL OO EAT ETE SO TEE

. Justification Offered by Petitioners for Excluding

BD PROM ETCR TE VIMCMOD ....2n-.ccsceieeecccevenvcecesosscersessececeses

ee Sr OEAGD BUOTE ses vrnevocsenesqrsnesenieusportosnmninvnneinnes

. THE RECORD IS DEVOID OF ANY EVIDENCE

TO SUPPORT THE 23.55¢ PER MCF PRICE IN-

CREASE MORATORIUM IMPOSED BY THE

IPT cab heserveinsnsdochronDpierevncetiostajchoneconnineervitanccticierees

TITIES ssn ncsessnsecdieeebiniaiabnimiinloitaignebenncetiiantmiamevensotbanmenein

CITATIONS

Cases

Atlantic Ref. Co. v. Public Serv. Comm’n, 360 U.S. 378

Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954) ....

Public Serv. Comm’n v. FPC, 287 F. 2d 146 (D.C. Cir. 1960),

Gert. denied, 365 U.S. 880 (1961) ...........cccccsccecscsecsreseecereocers

Pure Oil Co. v. FPC, 292 F. 2d 350 (7th Cir. 1961) ................

United Gas Improvement Co. v. Continental Oil Co., ...... U.S.

wun, 14 L. Ed. 2d 466 (1965) at

‘United Gas Improvement Co. v. FPC, 290 F. od 133 (5th

Cir.), cert. denied, 368 U.S. 823 (1961) RE ES EES be

I hit nsd aiaslersiniercsapesberleioilernoententinetionsiantiminiiane 6, 7,

PaGe

aor, w— wp wo DN =

12, 21

7,9, 10

12

ii

United Gas Improvement Co. v. FPC, 290 F. 2d 147 (5th

Cir.), cort. denied, 366 U.S. 964 (1961) eececcececccn.,

United Gas Improvement Co. v. FPC, 283 F. 2d 817 (9th

Cir. 1960), cert. denied, 365 U.S. 879 | Baa ae 7, 12, 22

United Gas Improvement Co. v. FPC, 269 F. 2d 865, vacated,

361 U.S. 195 CTW D , ceiesintonigntsisntgiaietiiacnse hebhsssdicidain Sacte 1

Opinions

Area Rate Proceeding, Opinion No. 468, ...... FPC ...... (1965) 9

Continental Oil Co., Opinion No. 351, 27 FPC 96 (1962) 10, 11,17

Skelly Oil Co., Opinion No. 362, 28 FPC 401 (1962) .......... 17

Trunkline Gas Co., Opinion No. 321, 21 FPC 704 (1959) .... 23

United Gas Pipe Line Co., Opinion No. 399, 30 FPC 329

SIF ictestinisinsnseccloiies siltetag iets estas secs age 17

Statutes

Natural Gas Act, 15 U.S.C. 717a et. REESE RNa eR ed passim

Miscellaneous ~

Morris, Recent Independent Producer Certificate Cases: The

“Suspect Order” Rule, 32 Gro. Wasu. L. Rev. 489 (1964) 14

Ross, The Area Rate Proceedings: An Unsettled Experiment

in Public Control of Natural Gas Prices, 18 Sw. L. J. 165

PRE shahgeineialinntdnitbinrenchaaniadciieid goa 14

Nos. 21, 22, 32

In THE

Supreme Court of the United States

OcToBER TzEM, 1965

Tue Untrep Gas Improvement Company,

Lone Istanp Licutmse Company, and

PrrmaDELPuia Exectric Company,

Petitioners,

Vv.

Catuzery Properties, INc., BT AL.,

Respondents.

Pustic Service Commission or THE State oF New York,

Petitioner,

Vv.

Cattery Properties, Inc., ET AL.,

Respondents.

FreperaL Power Commission,

Petitioner,

v.

Catuery Properties, Inc., ET AL.,

Respondents.

On Warts or CERTIORARI TO THE Untrep States

Court or APPEALS FOR THE Firtn Circuit

BRIEF FOR RESPONDENT

OCEAN DRILLING & EXPLORATION COMPANY

OPINIONS BELOW

The opinion of the Court of Appeals for the Fifth Circuit

(R. 619-42) is reported at 335 F. 2d 1004. The opinions and

orders of the Federal Power Commission (R. 549-93, 606-17)

are reported at 30 FPC 283 and 682.

2

JURISDICTION

The judgment of the court of appeals reversing the Fed.

eral Commission’s order and remanding the proceedings

was entered on August 14, 1964 (R. 643). Orders were issued

on November 6 and 12, 1964, extending the time for fili

petitions for writs of certiorari in Nos. 26 and 32 until

November 23 and December 12, 1964, respectively. The

petitions were filed on November 10 (No. 21), November 12

(No. 22), November 23 (No. 26) and December 11, 1964

(No. 32), Orders were entered granting the petitions in all

four cases on March 8, 1965 (R. 645-647). 380 U.S. 931.

The jurisdiction of this Court rests on 28 U.S.C. 1254(1)

and Section 19(b) of the Natural Gas Act, 15 U.S.C. 717r(b).

QUESTIONS PRESENTED

1. May the Federal Power Commission in a certificate

proceeding under Section 7(e) of the Natural Gas Act at-

tach price-reducing conditions to producer-applicants’ cer-

tificates without considering cost, economic, and other evi-

dence tendered by the producer-applicants to show why

the present and future public convenience and necessity is

best served by granting unconditioned certificates?

2. May the Federal Power Commission, without notice,

hearing, or any supporting evidence, impose a condition on

permanent certificates of public convenience and necessity

forbidding the filing of contractually authorized rate in-

creases above a specified level?

STATUTES INVOLVED

The pertinent provisions of the Natural Gas Act (Sections

4 and 7(c) and (e), 52 Stat. 821, as amended, 15 U.S.C.

717-717w) are reprinted in the Appendix to the Federal

Power Commission’s brief, pp. 61-65.

1 References throughout this brief to sections “4”, “5” or “7”

refer to sections of the Natural Gas Act, 15 U.S.C. 717c, 7174,

7178.

3

STATEMENT

The Statement contained in the Federal Power Commis-

sion’s (Commission’s) brief fairly outlines the background

of this case. Certiorari was granted in Nos. 21, 22 and 32?

on the two questions restated and presented above and on

a third question as to the measure of refunds in the event

it is determined that the Federal Power Commission has

authority under Section 7(e) of the Natural Gas Act to

require producers to refund amounts previously collected

pursuant to unconditional permanent certificates.’ This

brief is directed to the two question noted above.*

The court below did not reach the questions raised by

Ocean Drilling & Exploration Company (ODECO) pertain-

ing to the manner in which the Commission determined the

“in-line” price to support its 20¢ per Mef price condition

2 Petitioners in No. 21 are The United Gas Improvement Company,

Long Island Lighting Company, and the Philadelphia Electric

Company, all privately owned distributing companies who, of

course, have a proprietary interest in seeing lower gas prices.

These companies will be referred to singly as “UGI et al”. Peti-

tioner in No. 22 is the Public Service Commission of the State

of New York which, as the name implies, is the state agency in

New York responsible for utility rates. This state commission

will be referred to singly as “New York”. For simplicity, UGI

et al and New York will be referred to collectively as the “Inter-

venors”. The Commission is Petitioner in No. 32.

3 ODECO as Petitioner in No. 26 has submitted a brief to support

its position that under Section 7(e) of the Natural Gas Act the

Commission has no authority to award reparations of amounts

collected pursuant to unconditional certificates of public con-

venience and necessity. No. 26 has been consolidated with Nos.

21, 22 and 32 (R. 659).

“ Assuming that the Commission has the power to order refunds,

ODECO adopts the briefs of the other respondents in Nos. 21,

22 and 32 as to the measure of refunds.

4

or the error in the Commission’s determination to require

ODECO to pay interest on the refunds which it ordered,

(R. 641, 640) Although the Commission as Petitioner in

No. 32, now asks this Court to pass upon these undecided

issues, they were not presented in the petitions in Nos, 21,

22 and 32 and were not included in the orders granting

certiorari. Therefore, ODECO is not responding to the

arguments directed to the “in line” price and interest ques-

tions. However, if the Court nevertheless decides to pass

upon these questions ODECO requests the opportunity to

submit a supplemental brief.

SUMMARY OF ARGUMENT

1. Under Section 7(e) of the Natural Gas Act a certif-

cate applicant has the burden to show that his proposed

price is required by the present or future public convenience

and necessity. Accordingly, under the statute the certificate

applicant must be given the opportunity to meet this burden,

In the orders under review the Commission denied the cer-

tificate applicants the opportunity to meet their statutory

burden by excluding all evidence except that related to other

certified sales in the area.

2. The Commission does not have authority under the

Natural Gas Act to impose a condition on permanent certi-

ficates of public convenience and necessity forbidding the

filing of contractually authorized price increases in accord-

ance with Section 4 of the Natural Gas Act. Further, the

record is devoid of any evidence to support the 23.55¢ per

Mef price increase moratorium imposed by the Commission

on the certificates issued in this case.

5

ARGUMENT

I.

THE COMMISSION ERRED IN REJECTING

PROFFERED EVIDENCE RELEVANT TO A

DETERMINATION OF THE PUBLIC

CONVENIENCE AND NECESSITY

This case involves the failure of the Commission to afford

producer-applicants the opportunity to explain the “reason

why” their proposed contract prices are in the present and

future public convenience and necessity even if they are

higher than prices previously certificated by the Commis-

sion in the same area. The Commission takes the unqualified

position that, in a Section 7 certificate proceeding, the only

relevant evidence is that relating to prices previously

certificated in the area and that it is not required to

consider any other evidence bearing on the public con-

venience and necessity.

After erroneously concluding that ODECO’s proposed

price was not “in line” with prices previously certificated

in Southern Louisiana,® the Commission refused to receive

and consider evidence tendered by ODECO which would

have explained the “reason why” its initial contract price

was in the present and future public convenience and

necessity. The Commission’s refusal to consider such evi-

dence was predicated solely on administrative convenience.

The court below reversed the Commission, agreeing with

ODECO that “The Commission must, however, hear and

evaluate all relevant evidence bearing on public convenience

and necessity when it is urged, or held,** that the proposed

price is out of line.” (R. 632).

5 ODECO’s contracts were executed in 1958. The 18.5¢ per Mcf

price for 1957-1958 contracts which the Commission found to

be “in-line” constituted approximately the lower 25% by volume

of the contracts executed during those years. (R. 297).

6

1. CATCO and its Progeny

Since CATCO* is the only producer certificate case involy-

ing the price issue which this Court has considered since

its first Phillips’ decision, each petitioner relies on this im-

portant decision in discussing what evidentiary criteria

must be considered in certificate proceedings.? CATCO in.

volved a sale by four producers to Tennessee Gas Trans-

mission Company of 1.67 trillion cubic feet of natural gas

from offshore Louisiana at an initial price of 22.4¢ per Mef

including tax reimbursement of 1¢ per Mef. The Commission

had twice refused to issue a certificate to the producers at

this price and the producers had threatened not to dedicate

this large gas supply to interstate commerce. Finally, Ten-

nessee notified the Commission that if a certificate was not

issued to the producers this needed gas supply would be

forever lost to the interstate market. On the third attempt

the Commission granted certificates to the producers at

their contract prices on “the primary consideration that the

public served through the Tennessee Gas system is greatly

in need of increased supplies of natural gas...” 360 US.

386.

This Court reversed the Commission, describing the

CATCO record thusly:

“Our examination of the record here indicates that

there was insufficient evidence to support a finding of

public convenience and necessity prerequisite to the

issuance of the permanent certificates. The witnesses

tendered developed little more information than was

included in the printed contracts, As the proposed con-

tract price was higher than any paid by Tennessee,

6 Atlantic Ref. Co. v. Public Serv. Comm’n, 360 U.S. 378 (1959).

7 Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 ( 1954).

8 In describing CATCO Judge Brown once stated “Catco came

up on a bare bones record with some macabre-like implications.”

United Gas Improvement Co. v. FPC, 290 F. 2a 133, 141 (5th

Cir.), cert. dented, 368 U. S. 823 (1961).

7

including offshore production in the West Delta area of

Louisiana, it is surprising that evidence, if available,

was not introduced as to the relative costs of production

in the two submerged areas. Moreover, the record indi-

cates that the proposed price was some 70% higher

than the weighted average cost of gas to Tennessee;

still no effort was made to give the ‘reason why’.” 360

U.S. at 392-93.

This Court further held, that under Section 7 of the

Natural Gas Act the Commission is not required to make

a Section 4 or 5 just and reasonable rate determination,

but that the “inordinate delay presently existing in the

processing of {5 proceedings requires a most careful

scrutiny and responsible reaction to initial price proposals

of producers under §7”. 360 U.S. at 391.

In response to the teachings of CATCO, the courts of

appeals? reversed four Commission certifications of sales

from Southern Louisiana based upon records completed

prior to the issuance of the CATCO opinion.” The orders

of the Commission under review in these four cases were

issued after CATCO and in each the Commission con-

eluded that the applicants met the CATCO standards. But

9 Public Serv. Comm’n v. FPC, 287 F. 2d 146 (D.C. Cir. 1960),

cert. denied, 365 U.S. 880 (1961) ; United Gas Improvement Co.

v. FPC, 290 F. 2d 133 (5th Cir.), cert. denied, 368 U.S. 823

(1961) ; United Gas Improvement Co. v. FPC, 290 F. 2d 147

(5th Cir.), cert. denied, 366 U.S. 964 (1961) ; United Gas Im-

provement Co. v. FPC, 283 F. 2d 817 (9th Cir. 1960), cert.

denied, 365 U.S. 879 (1961).

10 Six weeks after CATCO this Court summarily reversed the

Court of Appeals for the Third Circuit which had affirmed a

Commission order certificating new sales in Southern Louisiana

which was entered prior to CATCO. United Gas Improvement

Co. v. FPC, 269 F. 2d 865, vacated, 361 U.S. 195 (1959), “. .

with directions to remand the case to the Federal Power Com-

mission for reconsideration and redetermination in the light of

Atlantic Refining Co. v. Public Service Com. of New York,

360 U.S. 378, 3 L. ed. 2d 1312, 79 S. Ct. 1246.”

8

as the Court of Appeals for the District Court of Columbia

stated :4

“The Supreme Court noted, in the Catco case, that

the record before it supplied ‘little more information

than was [contained] in the printed contracts.’ Td., 360

U.S. at page 392, 79 S. Ct. at page 1256. It does not

appear to us that the record presently under review

is materially better than that found to be deficient in

Catco. Although the order now before us was handed

down a month after the Supreme Court had spoken in

Catco, the evidence was taken before the court’s opin-

ion was rendered, and thus before it had become known

that additional explanatory proof would be required to

support inflated prices.” 287 F’. 2d at 149-50.

Likewise, the Court of Appeals for the Fifth Circuit in

reversing one of the CATCO progeny noted:

“We do not attempt to determine what the ‘line’ is

on this record. We have no doubt that in this case the

price of 23.8 cents per Mcf, including the tax reimburse-

ment,’ was out of line as the term was used by the

Supreme Court. The only evidence on this record that

supports such ‘out of line’ price is the fact that it was

negotiated at arms’ length and was required by the

intense competition. This, as we have said, is not

enough. It is clearly incumbent on the proponent of

such a rate to make some showing of the ‘reason why’

(as tt was expressed in the CATCO opinion) 21% cents,

excluding tax, is the proper initial rate in 1958 when

the parties were freely contracting in 1954 at half that

figure.” (Emphasis added). 290 F. 2d at 138.

ODECO’s certificate applications were originally involved

in the Commission’s order reversed by the Court of Appeals

11 Public Serv. Comm’n v. FPC, 287 F. 2d 146 (D.C. Cir. 1960),

cert. denied 365 U.S. 880 (1961).

12 United Gas Improvement Co. v. FPC, 290 F. 2d 133 (5th Cir.)

cert. denied, 368 U.S. 823 (1961).

9

for the District of Columbia."* That court specifically re-

manded the case to the Commission “for further proceed-

ings in which the producer applicants may, if they so choose,

either augment the record so as to support a certification

without price condition, or seek a certification appropri-

ately conditioned”.'*

2. ODECO’s Attempt to Augment the Record

The reversals spawned by CATCO returned to the Com-

mission where all were eventually consolidated and set for

hearing (R. 409-21). Certain lessons seemed evident from

the reversals. No longer would producers be granted per-

manent certificates at prices substantially above prices pre-

viously paid by their pipeline purchaser merely by showing

that their contracts were negotiated at arms’ length; that

another pipeline had offered approximately the same price

for the gas; that their proposed price was “in keeping with

numerous other certified sales in the area”,’® and that if

the Commission did not grant the certificate at the proposed

price that the gas might not be dedicated to interstate com- -

merce. It also seemed clear that if the proposed price was

substantially higher than the prices theretofore paid by the

pipeline purchaser, that the producer was going to have to

explain the “reason why” the increased price was in the

present and future public convenience and necessity. At the

same time CATCO expressly held, and the inferior courts

echoed, that a Section 7 producer certificate proceeding was

not a Section 4 or 5 rate proceeding and that the Commis-

sion was not required to determine a just and reasonable

price or conduct a rate hearing to determine the appropri-

ate price in a certificate proceeding.

18 Public Serv. Comm’n v. FPC, 287 F. 2d 146, 150 (D.C. Cir.

1960) cert. denied, 365 U.S. 880 (1961).

14 Public Serv. Comm’n v. FPC, supra note 13.

15 287 F. 2d at 150.

10

After remand, the immediate unanswered question obyi-

ous to all was what kind of evidence and how much wag

required for a producer to receive a price higher than the

prices previously paid by his pipeline purchaser.!® The

problem was compounded by the failure of the Commission

to declare what type of evidence it envisioned was required

by CATCO to support unconditional certification. Absent

any guidance in the remanded proceedings ODECO pre-

sented the evidence summarized below.27

Company-wide financial requirements as shown by all

domestic exploration and development activities conducted

by ODEC0O from its inception in 1953 to December 31, 1961.

On the basis of three alternative approaches, ODECO com-

pared costs and revenues over the life of all oil and gas

reservoirs found by ODECO. Each of these comparisons

reflected a substantial revenue deficiency (R. 356-59). This

evidence clearly demonstrates on the basis of ODECO’s

revenue requirements the ‘reason why’ its initial contract

price of 21.5¢ per Mef, plus tax reimbursement of 2.05¢

per Mef, is the proper initial price.

ODECO also participated with three other producers in

a four-company economic analysis which demonstrated the

16In reversing the unconditional certificates issued to CDECO,

the Court of Appeals for the District of Columbia noted:

“The Catco decision does not prescribe a standard of proof

which must be satisfied to support an unconditional certifica-

tion.” Public Serv: Coimm’n v. FPC, 287 F. 2d 146, 150 (1960),

cert. denied, 365 U.S. 880 (1961).

17 ODECO did have the benefit of the remanded CATCO decision

issued January 22, 1962. Continental Oil Co., Opinion No. 351,

27 FPC 96 (1962). In the remanded CATCO proceedings the

Commission received and considered cost of service studies, a

discounted cash flow study, reserve studies, evidence of drilling

and operating costs, ete.

11

ever-increasing sums of money required for exploration and

development operations in Southern Louisiana. In addition,

ODECO helped sponsor industry-wide evidence re:ating to

the increased cost of production and exploration, the decline

in the ratio of gas supplies to production, the price advan-

tage of natural gas over other competitive fuels for many

years, and similar data for the United States and Louisi-

ana.!®

ODECO does not contend that the above evidence is the

sine qua non of producer certificate proceedings. However,

ODECO does cont»nd that such evidence is relevant to a

determination of the peblic convenience and necessity, par-

ticularly since it tends to show the increasing costs being

incurred by ODECO and other producers which were re-

flected in the rising sales price level in Southern Louisiana.

ODECO should have saved the time and expense, for

the Commission upheld its Examiner’s exclusion of all of

the evidence described above. The Commission did not

attempt to strike a balance between a full-blown rate pro-

ceeding and the “bare bones” records which led to the

earlier reversals. Nor did the Commission afford ODECO

and the other producers the opportunity to augment the

record so as to support unconditional certification. Instead,

the Commission decided not to allow any cost, economic, or

other supporting evidence but relied solely on evidence

of other certified sales in the area. To do this the Commis-

sion developed the “in-line” concept, concluding that it was

not in the public convenience and necessity for a producer

to sell gas in interstate commerce above the “line” even if

18 Obviously this evidence falls far short of the standard necessary

to determine a just and reasonable rate. Continental Oi Co.

Opinion No. 351, 27 FPC 96 (1962).

12

the producer by supporting evidence could justify a breach

above the “line”.29

3. The “In-Line” Concept

The most important aspect about the Commission’s “in,

line” concept is that the Commission takes the position that

the “in-line” price is the public convenience and necessity

price. The idea for determining an “in-line” price germi-

nated with CATCO when this Court said:

“Where the proposed price is not in keeping with

the public interest because it is out of line , , ,’20

The Ninth Circuit interpreted the “out of line” language

as follows:

“... the ‘line’ referred to in Cateo may properly be

referenced to relevant existing producer prices under

which substantial amounts of natural gas move in inter-

state commerce,’”””!

19 It is ironic that in 1959 the producers, to the dismay of the In-

tervenors, asked this Court’s blessing of a procedure that ignored

any explanation of the underlying basis for increased gas prices.

Now in 1965, the Commission and Intervenors, to the dismay of

the producers, ask this Court’s blessing of the same type of pro-

cedure whereby the Commission refuses to consider any evidence

to support increased gas prices and consequently issues certifi-

cates with price-reducing conditions, Further, it is interesting to

note that counsel for UGI, in the oral argument in United Gas

Improvement Co. v. Continental Oil es sepece US. ....... 14 L. Ed.

2d 466 (1965) advised the Court that, “Secondly, the real issue

here should not be what the pipeline pays for the gas but what-

the producers pay and what it costs them to bring the gas from

the ground. So unless the producers are made part of this record,

and they are subject to regulation, you are going to have Texas

Eastern trying to litigate this matter by having to prove what

somebody else’s costs were.” (Transcript of Argument, p. 41).

*° Atlantic Ref. Co. v. Public Serv. Comm’n, 360 U.S. 378, 391

(1959).

*1 United Gas Improvement Co. v. FPC 283 F. 2d 817, 823 (9th

’

Cir. 1960), cert. denied, 365 U.S. 879 (1961).

13

On brief in this case the Commission defines the “in-line”

price as:

“.., the highest price at which substantial amounts of

gas had been certificated to enter the market under

other contemporaneous certificates not themselves sub-

ject to court review or otherwise suspect.”

Regardless of the definition used, it is more important to

determine what the Commission does in actual practice.

To begin with, the Commission staff prepares an exhibit

listing all of the contracts in a particular geographical area

filed with the Commission for a certain time period — in the

instant case for the years 1957-1958, This exhibit contains

the names of the buyers and sellers, contract and certifi-

cated prices and some of the quality specifications (sulphur,

water, and carbon dioxide content, etc.). It does not contain

any elements of cost or any data such as drilling depths,

size of reserves, ability of the reserves to produce, delivery

conditions, supply and demand factors, or any evidence to

show the price necessary for the maintenance of an ade-

quate gas supply.”* The Commission then determines the

“line” on the basis of the permanently certificated prices

contained in the exhibit.**

It is extremely important to understand at this point

what the Commission does because it explains why the

same Intervenors who asked for reversal in this Court six

and one-half years ago in CATCO are now defending the

Commission on the same type of inadequate record.

The Commission does not examine the actual contract

prices negotiated by the parties free of governmental re-

straint which would at least have some materiality as to

what the economic interplay of the free marketplace had

created. The Commission only looks to what it has done

* Brief for FPC, p. 17.

* For example, under the Commission “in-line” system, gas pro-

duced from offshore Louisiana at depths of 15,000 feet receives

the same price as gas produced onshore at depths of 3,000 feet.

Therefore of necessity, the Commission compares “apples with

“Tf there js an insufficient number of permanently certificated

prices, the Commission examines temporary certificates.

14

before, i.e., to certificated prices. In the first contested hear.

ing for producer certificates in a particular geographical

area the only permanent certificates which are available to

be examined are those which the Intervenors have not previ-

ously contested, presumably because the price was satis.

factory to them. Once an “in-line” price is determined, it

perpetuates itself because the Commission will thereafter

look to the prices previously permanently certificated as

evidence of the price line in future proceedings. The cir.

cularity in the procedure is self-evident.*® When you con-

sider that the Commission and the Intervenors are con.

tending that the “in-line” price and the “public convenience

and necessity” price are the same, you reach the result

that the public convenience and necessity price is the price

which Intervenors do not oppose.®* In this manner the Com.

mission has abdicated to Intervenors the responsibility to

determine prices consistent with the present and future

public convenience and necessity. At the same time, use

of this “in-line” price method also explains why the Inter-

venors do not want any other evidence offered to support

higher prices in the record. It is a mathematical certainty

that prices will be frozen at Intervenor-approved levels.”

2° The mechanical “in-line” price theory is discussed in Morris,

Recent Independent Producer Certificate Cases: The “Suspect

Order” Rule, 32 Gro. Was L. Rev. 489 (1964).

26 For an excellent review of the Commission’s present policies with

regard to producer regulation including producer certificate

eases see Ross, The Area Rate Proceedings: An Unsettled Ex-

periment in Public Control of Natural Gas Prices, 18 Sw. L.

J. 163 (1964). Mr. Ross was counsel for the Commission in

CATCO and was also formerly counsel for United Gas Improve-

ment Co., one of the Intervenors.

77 The Commission eliminates many contracts at certain prices

from consideration, on the basis that the contracts are the sub-

ject of litigation or that the price level in the contracts is the

same level as prices in litigation. The effect of such an absurd

attitude is that any price level contested by the Intervenors

automatically eliminates any consideration of prices at that

same level in a producer certificate proceeding. This system has

resulted in the elimination of all prices above 18.5¢ per Mef in

determining the “in-line” price in Southern Louisiana causing a

price freeze at that level from 1956 through 1962.

4. The Court Below

There are some statements in Petitioners’ briefs describ-

ing the holding of the court below on the exclusion of evi-

dence question which may be misleading. The court below

did not hold that the Commission should not determine an

“in-line” price ; indeed, the court below expressly recognized

that the in-line price “is an important, sometimes decisive

factor.” (R. 625). What the court below held was that the

Commission does not satisfy its statutory obligation by

merely determining an “in-line” price. The Commission

is required by the Natural Gas Act to determine the price

that is consistent with the present and future public con-

venience and necessity, which entails a broader inquiry

than simply examining past regulatory action as exempli-

fied by “other certified sales in the area”,

In reversing the Commission for its refusal to consider

any cost, economic or other supporting evidence, the court

below properly characterized the Commission’s and Inter-

venor’s philosophy :

“As though Catco began and ended with ‘in-line’

the Commission and the intervenor-distributors are

mesmerized by this catch phrase into supposing that

the Commission’s responsibility is discharged with that

limited inquiry and if unsatisfied on that score, it is

free to reject out of hand a producer’s application for

a new service.” (R. 627)

The court below pointed out that the Commission does not

fulfill its statutory duty by a limited inquiry into the “in-

line” price, stating:

“To be sure, if the proposed price is not ‘in-line’ this

may become the dominant factor in denying the appli-

16

cation. But it must be done as a part of the larger ele-

ment of ‘public convenience and necessity’.” (R. 628)

Time and again the court below emphasized that the Com.

mission is required by statute to determine whether a pro-

posed sale is in the public convenience and necessity and

that this broad term means more than the limited inquiry

into whether the price is “in-line”.*® The court below ad-

monished the Commission:

“The task facing the Commission in this developing

field calls for innovation and adaptation. It is not,

therefore, enough merely to inquire whether the price

is ‘in-line’. On the other hand, for §7 purposes, there

need not be a full dress § 4 or ¢5 rate hearing. The

Commission must, however, hear and evaluate all rele-

vant evidence bearing on public convenience and neces-

sity when it is urged, or held, that the proposed price

is out of line.” (R. 632) )

5. Justification Offered by Petitioners

for Excluding the Proffered Evidence

Petitioners have employed what might be called the “neg-

ative defense” to support their position that cost, economic

and other evidence should not be permitted in producer

certificate proceedings for the purpose of determining the

public convenience and necessity price. The principal reason

given to justify not receiving such evidence is that it would

defeat administrative expediency, or stated differently, to

17

receive and consider such evidence requires additional time

and effort. To a lesser extent, Petitioners also argue that

such cost and economic evidence is duplicative of evidence

being received in area rate proceedings. Finally, Petitioners

urge that producers will not be hurt by limiting evidence in

certificate proceedings to the determination of an “in-line”

price because in the normal situation®® they can reject the

certificate offered by the Commission if they believe the

“in-line” price is too low.

The Commission has apparently concluded that if one

shred of evidence other than evidence of prices being paid

to other producers in the same area during the same time

period is admitted that an administrative monstrosity will

result. This is not true. The Commission admitted and

thoroughly cross-examined cost and economic evidence sim-

ilar to the evidence now in dispute in the proceedings under-

lying Opinion No. 351,°° Opinion No. 362,°! and Opinion

No. 399°? without a “monstrosity” resulting. Under current

Commission procedure, there are between 60 and 80 appli-

cations from a contiguous geographical area consolidated

and set for hearing. Even fewer producers are involved

since many producers have more than one application.

Out of this number there are usually not more than a

dozen producer counsel in any one hearing.** The majority

of the evidence is presented on a joint basis by the pro-

ducers, t.e., the producers all support the same witness. For

*°In this case the producers were not given the opportunity to

reject the conditioned certificates.

5° Continental Oil Co., Opinion No. 351, 27 FPC 96 (1962).

51 Skelly Oil Co., Opinion No. 362, 28 FPC 401 (1962).

52 Dnited Gas Pipe Line Co., Opinion No. 399, 30 FPC 329 (1963).

**Many of the producers are not represented in these hearings

and do not participate in the administrative process,

to take whatever price is awarded them, no matter how low.

18

example, in Opinion No. 351, which was the CATCO remand,

Continental Oil Company, one of the four CATCO pro-

ducers, presented a cost of service presentation based on

Continental’s costs and made the assumption that the other

three producers’ costs were the same. Repeatedly, in Opin-

ion No. 351, the Commission pointed out that Continental’s

presentation fell far short of the type of proof required for

§ 4 or §5 proceedings. The producers, as well as the Com.

mission, have accumulated considerable experience since the

early days of producer regulation and know that it is not

necessary for each producer to present, for example, sep-

arate witnesses on cost trends, production depths, ete. The

producers have little difficulty in making joint presentations

on problems common to each.** Given any guidance from

the Commission, the producers in this case would have made

more joint presentations with less duplications than they

did. A dogmatic “no evidence” approach is not the answer

required to avoid the detailed intricacies of a “just and

reasonable” rate determination. Considerations of admin-

istrative convenience should not be used to deny the ad-

missibility of relevant evidence or to deny a certificate

applicant the opportunity to show the reason why a pro-

posed price is in the present or future public convenience

and necessity.

New York and UGI, et al, in their briefs before this Court

have attempted to inject the idea that the producers prefer

protracted certificate proceedings.®® Apparently this theory

is premised on the hypothesis that the Commission issues

temporary certificates ex parte to producers at whatever

price the producers request, and that if the producers

84In these consolidated proceedings each producer is entitled to

rely on all of the evidence: presented.

35 Brief for the Public Service Commission of the State of New

York, pp. 20-21; Brief for the United Gas Improvement Co.,

et al, pp. 28-30.

19

impede the hearings on the applications for permanent

certificates that they can continue to collect “excessive”

prices under temporary certificates for longer periods.

First, the Commission does not grant temporary certifi-

cates at whatever prices the producers seek and has the

full power which it frequently uses to condition temporary

certificates to lower prices. In the second place, the Com-

mission could insert refund conditions in temporary certifi-

cates with a floor at a level satisfactory to the Intervenors

so that the producers could collect their full contract prices

during the pendency of the temporary certificates. If

it was later determined that the price was toe high the

producer would then refund the excessive amounts collected.

The Commission also frequently utilizes this latter pro-

cedure.*® Intervenors would virtually eliminate producer

certificate proceedings rather than require the Commission

to properly exercise its discretion in issuing temporary

certificates.

Incidental to their delay argument, Intervenors state

that protracted hearings will result in the producers ¢ol-

lecting excessive prices for long periods to the detriment

of the consumer even if the excess price is later refunded.

This is an unusual argument since the alternative approach

which they advocate is to develop a procedure to issue per-

manent certificates quickly at lower prices and then let the

producer immediately file for rate increases which will be

suspended and collected subject to refund. Under either

system, interstate pipelines may pay prices subject te

refund for long periods. However, the producer greatly

benefits by having an early opportunity to seek a firm

price at a level which he thinks is justified. On brief

*¢ Of course, if the Commission does not insert refund conditions

in temporary certificates which the Intervenors believe are

necessary, then they may appeal such action to the courts.

20

in this Court, the Commission very eloquently states why

the producers want a firm price not subject to refund as

soon as possible.®”

“For very sound economic reasons, many producers

wish to commence service at a firm price rather than

run the risk of the indefinite and potentially large re.

fund obligations which could result if they were certifi.

cated at contract rates subject to a refund condition

should these rates ultimately prove unjustified. If they

know the price is free and clear, they can release funds

for operational purposes, make necessary payments to

royalty owners (who often are entitled to a percentage

of the sales price) and meet their obligations under

State taxing statutes (which in many areas are calev-

lated at a percentage of producer revenues).”®

New York sponsors the duplicative evidence argument,

which is: why allow the producers to introduce cost and

economic evidence in a certificate proceeding when the same

type of evidence can be heard in an area rate proceeding!

The Commission examiners, now with the approval of the

Commission in the Permian Basin area rate case,** have

systematically excluded all individual cost and economic

evidence in the area rate proceedings. For a small producer

37 Brief for FPC, p. 18.

38 The Permian Rate proceeding just completed took 5 years and

approximately 250 hearing days to complete. The Southern Lou-

isiana Area Rate proceeding now in progress has completed ap-

proximately 260 hearing days as of this date. Consider this in

contrast to the hearing days in the three opinions in which eost

evidence was admitted : Opinion No. 351 (48 days) ; Opinion No.

362 (10 days); Opinion No. 399 (23 days). Is it any wonder

that: “Thus in the nine in-line determinations made prior to the

present opinion, of a total of 87 sales whose initial price was set

below contract levels, only 13 have subsequently filed for higher

rates, either to the original contract level or to take advantage of

periodic escalations subsequently coming due.” Brief for FPC,

p. 19.

89 Area Rate Proceeding, Opinion No. 468, .... FPC ...... (1965).

21

such as ODECO with only a few sales, this duplicative evi-

dence argument is devastating since the Commission will

never have any evidence before it in either certificate or rate

proceedings which would show what the price set by the

Commission does to the small producer. In any event, the

evidence which the producers want the Commission to con-

sider in a certificate proceeding is not the evidence of the

kind and quality necessary to find a just and reasonable

rate such as is now being considered in the area rate pro-

ceedings. The area rate proceeding evidence is much more

extensive and sophisticated and, indeed, a small producer

could not afford to make such costly presentations.

New York also suggests that the producers can reject

a certificate in the usual situation or, in any event, they can

file for a rate increase up to their contract price. The latter

argument is, of course, subject to the qualification that

there be no price moratorium such as the Commission and

Intervenors are defending in this case. In any event, the

producers’ option to reject certificates is fictitious relief

which this Court clearly recognized in its CATCO opinion

when it stated, “Since some 90% of all commercial gas

moves in the interstate market, . . .”“° Almost all of the

nation’s natural gas supply comes from four or five states

and these states can only absorb a limited amount of the

natural gas produced within their borders. If a producer

rejects one interstate sale he does so because he has found

intrastate market. He cannot expect the Commission to

offer any better terms if he once again offers his gas in the

interstate market.

6. A Practical Remedy

The problem still remains — how to reconcile the two

extremes — the Commission’s theory that prices can be de-

hg Ref. Co. v. Pubic Serv. Comm’n, 360 U.S. 378, 394

22

termined in a sterile “in line” vacuum versus the “alleged”

intention of the producers to convert every §7 certificate

proceeding into a § 4 or §5 rate proceeding. ODECO sug-

gests that with a little thought, a little time, and a little

effort, particularly on the part of the Commission, that

this problem can be resolved. ODECO and other producers

have no objection to the determination of an “in-line” price,

An “in-line” price properly determined is material and

relevant in a Section 7 certificate case. Most producers

would rather accept the “in-line” price than become en-

gaged in an administrative hearing with an agency of

the Federal government. ODECO suggests that the Com.

mission continue to determine an “in-line” price in each

certificate proceeding and hold that the producers can

collect this price on a minimal showing, i.c., after they

have shown a need for the gas, that they are ready, willing

and able to perform under their contracts according to the

Natural Gas Act, and that the contracts were negotiated at

arms’ length.*! It is only as to those producers who want

something more than the “in-line” price that the Commis-

sion should admit additional evidence to give the producer

the opportunity to prove he is entitled to a higher price.

All ODECO asks is to be given the opportunity to shoulder

the statutory burden by showing that its proposed price is

consistent with the public convenience and necessity even

if its proposed price exceeds an appropriately determined

“in-line” price.

41 Apparently, the Commission contemplated this procedure at one

time. See United Gas Improvement Co. v. FPC, 283 F. 2d 811,

820 (9th Cir. 1960), cert. denied, 365 U.S. 879 (1961) where the

court stated :

“It is apparently with reference to this principle that the

Commission states in its brief: ‘Where a proposed price is

‘in line’ a certificate issues on a minimal showing; where,

however, the price is ‘out of line’ the applicant must make

an extensive demonstration in support of his rate, else he

suffers a certificate denial or a price reduction’.”

23

II.

THE RECORD IS DEVOID OF ANY EVIDENCE TO

SUPPORT THE 23.55¢ PER MCF PRICE INCREASE

MORATORIUM IMPOSED BY THE COMMISSION

In the orders under review the Commission imposed a

condition on the certificates issued to ODECO forbidding

the filing of rate increases above 23.55¢ per Mef until July

1, 1967 or the completion of the Southern Louisiana Area

Rate proceeding, whichever is earlier. (R. 582) ODECO

agrees with the court below that the Commission lacks stat-

utory authority to impose such a price increase moratorium.

However, the briefs concurrently filed by other respond-

ents will thoroughly discuss this point so that further

discussion by ODECO appears unnecessary.

In addition, ODECO points out that there is absolutely

no evidence in the record to support the Commission’s con-

clusion that triggering and price redeterminations will

result from the filing of rate increases above 23.55¢ per

Mcf.** The Commission does not attempt to show any evi-

dence to support this conclusion.**

“In fact, sales from the Southern Louisiana area have been made

under permanent certificates issued by the Commission at firm

prices of 24.05¢ per Mef since 1959. See Opinion No. 321,

Trunkline Gas Co., Opinion No. 321, 21 FPC 704 (1959).

“ This lack of evidence results from the fact that no party in the

hearings before the Commission contended that such price in-

crease moratorium should be imposed or presented evidence

directed to the price at which triggering and price redeter-

minations would result. Therefore, the Presiding Examiner’s

decision does not even discuss the price increase moratorium

question. This lack of notice and hearing alone is sufficient to

vitiate the Commission’s sua sponte imposition of a price in-

crease moratorium.

24

Instead, the Commission argues that ODECO did not

properly preserve this error in its application for rehearing

before the Commission (Br. p. 44). In particular, the Com.

mission cites a fragmentary portion of ODECO’s applica.

tion for rehearing and contends that ODECO failed to

properly preserve the error now asserted.“* ODECO snb.

mits that the Commission’s attempt to hide behind this

technicality is to no avail, since the point of error in its

application for rehearing clearly and unequivocally raised

the price increase moratorium issue and the lack of evidence

to support the 23.55¢ per Mef triggering level found by

the Commission.

44The Commission also urges that ODECO had the burden to

reopen the record to controvert the Commission’s finding as to

triggering and price redeterminations (Br. p. 44). This novel

theory contradicts established precedent that the proponent of

a certificate condition has the burden to support such condition

by substantial evidence and soundly based findings in the record.

Pure Oil Co. v. FPC, 292 F. 2d 350, 352 (7th Cir., 1961). Until

such supporting evidence was presented, ODECO had no burden

to adduce evidence to controvert the Commission’s unsupported

“finding.”

“5 The pertinent portion of ODECO’s application for rehearing

provides as follows:

“The Commission has erred and has exceeded its author-

ity in Ordering Paragraph (C) providing a moratorium on

the filing of all price increases in excess of 23.55¢ per MCF

pending the issuance of a final decision in the area rate

proceeding in Docket No. AR61-2 or until July 1, 1967,

whichever is earlier.

“There is no evidence in the record before the Commis-

sion which pertains to the effect of filing by Odeco of its

contractual price increase.” (R. 603).

A reading of the full point of error (R. 603-606) removes any

doubt that ODECO adequately raised the issue now asserted.

25

CONCLUSION

For the foregoing reasons, it is respectfully requested

that the opinion of the court below be affirmed except inso-

far as it affirms the Commission’s power to refund amounts

previously collected pursuant to unconditional permanent

certificates.

Respectfully submitted,

J. Evans Arrweiy —

First City National Bank

Building

Houston, Texas 77002

Attorney for Respondent

Ocean Drilling &

Exploration Company

Of Counsel:

W. H. Devsxzn, Jr.

First City National Bank Building

Houston, Texas 77002

J. A. O'Connor, Jr.

H. Y. Rowz

Murphy Building

El Dorado, Arkansas

September 30, 1965