Petition for Writ of Certiorari — Permian Basin Area Rate Cases

In the Supreme Court af the Shes

United States ows

_ Octoser TzRM, 1966

7a | No. a 1 00 |

PEOPLE OF THE STATE OF CALIFORNIA %

~ and Pusiic Utmiities CoMMISSION OF

THE STATE OF CALIFORNIA,

Petitioners,

“V8.

‘

SKELLy On. Company,

Puruires PETROLEUM CoMPaNy,

WakREN PETROLEUM CORPORATION,

Mosy. Or Corporation (formerly

-‘Socony Mobil Oil Company, Ince.),

- Pan American PETROLEUM CorRPORATION, .

NorTHERN Natura Gas Propucine Company,

{Continued on Inside Cover]

_ Petition for a Writ of Certiorari to the

United States Court of Appeals for the Tenth Circuit

Many Moran Pasauion

Chief Counsel

J. Carvin Sitcpson

Wim N. Fouiry

Associate Counsel

5072 State Building

San Francisco, California 94102

Attorneys for the People of the

State of California and the

Public Utilities Commission

silent of the State of California

April 17, 1967 ;

SORG PRINTING COMPANY OF CALIFORNIA, 346 FIRST STREET, GAN FRANCISCO 84105 -

2

Pe NEVE ASSES RE RONEN EINEM MEER AE I) 2S Ie PORE Io ER EH taal adie aia. J . a eI ve eee

> -

[Continued from Cover]

Sranparp Om Company or Texas, a Division of

- Chevron Oil Company, .

- Trxaco.Inc., -

Hunt Or. Company jointly with

H. L. Hunt,

Lamar Hunt,

N.'B. Hunt, .

W. H. Hunt,

Secure-Trusts, °

Caroline and Loyd B. Sands,

‘Caroline Hunt Trust Estate, ~

Lyda Hunt-Caroline Trusts,

. Lyda Hunt-Bunker Trusts,

Lyda Hunt-Lamar Trusts, |

Lyda Hunt-Herbert Trusts,

Lyda Hunt-Margaret Trusts

(formerly Estate of Lyda Bunker Hunt, “anne

Hunt Industries

(formerly Estate of Lyda Bunker Hunt, Deceased), and.

Placid Oil\Company,

_ Humate On & Rerinixe Company,

SHELL Om. Company,

‘Tre ATLANTIC RICHFIELD Ontinaine (formerly

The Atlantic Refining Company) jointly with.

_ Dorchester Gas Producing Company,

Southland Royalty Company, and

Westates Petroleum Company, ©

- ContrnenTAL Or: Company jointly with -

Sunray DX Oil Company, |

Sinclair Oil & Gas Company,.

Cabot Corporation,

Sohio Petroleum Company,

Joseph E. Seagram & Sons, Inc.,

Joseph E. Seagram & Sons dba

Texas Pacific Oil Company,

Gulf Oil Corporation, |

Murphy Oil Corporation, — | ag

The Nueces Company,

Samedan Oil Corporation,

, . . . ° ,

[Continued from Inside Cover]

Cities Service Oil Company ..

(formerly Cities Service Petroleum Corporation),

Cities Service Production Company - —

(now merged with Cities Service Oil Company),

_ Columbian Fuel Corporation,

Amerada Petroleum Corporation,

Union Oil Company of California and as successor re

The Pure Oil Company, ‘

Tidewater Oil Company, |

Reef Corporation, and

William A. & Edward R. Hudson, J sit Operators,

MaratHon On. Company, * *

Sun Om Company,

INDEPENDENT PETROLEUM ASSOCIATION OF » Axenica,

Tue BritisH-AMERICAN Or. Propuctnc ComPAny,

Union Texas PeTroievm, a Division of

Allied Chemical Corporation,

MipHourst On. Corporation,

Tue Superior On. Company,

Perry R. Bass jointly with

- Panther City Investment Co.,

Bass Bros. Enterprise, Inc, .-_

Perry R. Bass, Incorporated, and

Richardson Oils, Inc.

Cotumsian Carson CoMPANY jointly with

Coltexo Corporation,

Tue State or Texas, ,

Bie CHIEF Dritine Company jointly with

King-Stevenson Oil Co., Inc., and =

Service Drilling Company,

Texas INDEPENDENT Propucers & Rovanty OwNERS

AssooraTion jointly with Piet aa, ,

_. West Central Texas Oil and Gas Asnenteiian,

~ Strate or New Mexico,

Gur On. Corporation, and +e

J. C. Barnes, et al., : | Respondents.

L

~

2.

SUBJECT INDEX

aa

“Due to the National Importance of Effective Producer

Regulation, Consumers Need a Decision by This Court on

the Validity of Area Rate Making

The Court Below Has Misconstrued This Court’s Deci-

sions in the Hope and Sierra Pacific Cases with Regard

to Rate Making Under the Natural Gas Act.

a. The Hope End-Result Test Does Not Require That

Coneltision

Area Revenues Equal the Allowable Area Cost of

Service

b. The Rigid Interpretation by the Court Below Contra-

dicts This Court’s Holding i in the Sierra Pacific Case..

It Is for the Commission to Determine the Propie. Regu-. .

latory Method to Provide for the Impact of the Quality

Deductions Kod

The Remand Order of the Court Below Is Vague with

Regard to the rata te Relief and Quality Provisions. dient

: Page

Opinions Below .. | 2

Jurisdiction 2

‘Questions Presented 3

Statute Involved ie

Statement of the Case 5 3

A. Historical Background eon i

B. The Proceeding Before the Commission 7

1. The Presiding Examiner’s Initial Decision. eeniesiion ESS

2. The Commission’s Decision . 9

8. Applications for Rehearing . 12

C. The Proceeding in the Court Below 2.

Reasons for Granting the Writ 16

TABLE OF AUTHORITIES CITED

oe _ Court Cases “> Pages |

. Atlantic Refining Company, et al., v. Public Service Commis-

sion of New York, 360 U.S. 378 (1959) 18

_ Bluefield Water Works and Improvement Company v. Public

Service Commission, 262 U.S. 679 (1923) ‘28

City of Detroit v. Federal Power Commission, 230 F. od 810

(D.C. Cir. 1955) ’ : 24

Federal Power Commission v. Hope Natural Gas ‘Company,

320 U.S. 591 (1944) 8, 13, 17, 18, 20,21, 22, 23, 27, 28

Federal Power Commission v. Sierra Pacific: Power Company,

350 U.S. 348 (1956) : 4,17, 20, 25, 26, 27

_. Federal. Power .Commission v. Tennessee Gas Transmission

Company, 371 U.S. 145 (1962) 19, 27, 30

Market Street Railway Corporation v. Railroad Commission,

. $24 U.S. 548 (1945) ‘ 25

New England Divisions Case,-261 U.S. 184 (1923) ..cccseccee-- 30

Phillips Petroleum Company .. v. Wisconsin, 347 U. 8. 672

(1954) .....:.... 5,18 .

_ Securities and Exchange Dicidalbdion v. Chenery, 332 U.S. 194

(1947) 25

Sunray Midcontinent Oil Cunapany v. Federal Power Commis- ;

sion, 364 U.S. 187 (1960) 18

United Gas Improvement — v. Callery Properties, Inc.,

382 U.S. 223 (1965) 30

‘ Wisconsin v. Federal Power Commission, 303 F. 2d 380 (D.C.°

Cir. 1961) -

Wisconsin v. Federal Power Commission, 373 U.S. 294 (1963)

..6, 18, 17, 22, 23, 24

Faves PowER CoMMISSION CASES

Phillips Petroleum Company, 24 FPC 537, 1 aes No. 338

(1960) ..... 3 6

TABLE OF AUTHORITIES Crrep iii

; ‘Srarores | Pages

Natural Gas Act (Act. of Just. 2h “1938, c. 556; 52 Stat. 821,

. 15 U.S.C. 717-717w, as amended) ae

Section 4, 15 U.S.C. 717e¢ 3,12.

Section 4(e), 15 U.S.C. 717e - , 6, 7, 11

Section 5, 15 U.S.C. 717d . 3, 12

Section 5(a), 15°U.S.C. 7174 ........... 5, 6,7

Section 7, 15 U.S.C. 717f neeoen bonnsiatil 7

Section 19(b), 15 U.S.C. 717r ...............2. a,

United States Code, Title 28, Sec. 1254 (1) ......... 2

: | REGULATIONS a

, "Michie of General Policy No. 61-1, 24 FPC 818 (1960),

18 OF BR. 2.56, as amended , «6

. Texts AND OTHER AUTHORITIES | ,

2 Davis, sacuesaaantied Law (1968). senetens 25

°

ib the Supreme Giant of the

_ United. States i.

OcTOBER Tero, 1966

« a.

PEOPLE OF THE STATE OF CALIFORNIA

and Pusiic Utititres CoMMISSION OF —

_ THE State or CaLiFoRNIA,

‘Petitioners, ?

vs. Phas

SKELLy On. Company, et al., é

Respondents.

*

.

| |

| Petition fora Writ of Certioraritothe _ .

United States Court of Appeals for the Tenth Circuit

The Petitioners, the People of the State of California

and the Public Utilities Commission. of the State.of: Cali-

fornia, respectfully pray that a writ of certiorari issue to

review the judgment of the United States Court of Ap-

peals for the Tenth Circuit entered of January 20, 1967. oe

1. Petitioners were intervenors in support of the Federal eter

. Commission, respondent in thé court below. Respondents on this

. petition for a writ of certiorari were the petitioners in the court

~~ below.

| 3 . ®

- The opinion of the Court of Appeals i is not at reported,

and is printed i in Appendix A.? The Federal Power Commis- . |

Sion’s Opinion Determining Just and Reasonable Rates for

Natural Gas Producers in the Permian Basin, Docket No.

-AR61-1, et al. (Opinion No. 468), and related orders, issued

' on August 5, 1965 “J. A. 516d-838d, 37s-40s),° are reported

at 34 FPC 159, 418, and 494 respectively ; and its Opinion

and Order Denying Applications for Rehearing of Opinion

No: 468, Docket No. AR61-1, et al. (Opinion No. 468-A),.is- °

sued on October 4, 1965 (J.A.:1105d-1136d), are reported

at 34 FPC 1068. Opinion Nos. 468 and 468-A are ‘also

poland in Appendix A.

| JURISDICTION |

The judgment of the Court of Appegls was entered on

January 20, 1967. pcttoners herein did not petition for ie-,

hearing before. the’ Court of Appeals.* The jurisdiction of

this Court is invoked under. the provisions of 28 U.S:C. -

1254(1) and Section 194b) of the Natural Gas Act.®

ee following respondents have filed petitions for rehear- |

‘ing before the Court of Appeals: Shell Oil ‘Company and

2. Printed separately in. Appendices to Petition for Writ of

| Certiorari.

3. The Joint Appendix eunteles thirteen volumes. which are

paginated as follows: Volumes I through V, whieh contain only

testimony, are paginated 1-1908. Volumes VI through VIII, which

_ contain exhibits presented during the hearings, a paginated le-’

1146e. Volumes IX through XI, which contain pleadings, orders, °

and‘ opinions, age paginated 1d-11574. There are also two small

volumes—a supplement numbered 1s-40s, and a separate volyme:

containing the table of contents for Volumes I through XT, ;

4. Rule 26 of the United States Court of Appeals for the Tenth |

Circuit allows twenty days after judgment or decision to petition

for rehearing.

5. Act of June 21, 1938, ec. 556, § 19, 52 Stat. .831, as amended

15 U.S.C. 717(r) (1958). |

; 8. air a

Phillips Petroleum Company in Docket Nos. 8409 and 8489;

Warren Petroleum Corporation, Gulf Oil Corporation, The.

-British-American Oil Producing Company, Humble Oil & ©

Refining Company, Cities ServiceDil Company, Cities Serv-

ice Production Company, Coltexo Corporation, Columbian

Fuel Corporation, and Columbian Carbon Company ‘in

Docket Nos. 8440, 8493, 8534, 8497, 8488, 8493, and 8517;

Standard Oil Company of Texas in Docket No. 8479; Mobil’ .

“Oil Corporation (formerly Socony Mobil Oil Co., Inc.)

and Northern Natural Gas Producing Company in Docket

Nos. 8455, 8460, and 8588; Pan American Petroleum Corpo-

ration and Sinclair Oil & Gas Company in Docket Nos. 8458 -

and 8493; Texaco Inc., Amerada Petroleum Corporation,

' Atlantic Richfield mpany, Southland Royalty Company,

| Westates Petroleum Company, Dorchester Gas Producing

Company, Sunray DX Oil Company, Marathon Oil Com-

- pany, Sohio Petroleum Company, and Tidewater Oil Com-

pany in Docket Nos. 8482, 8541, 8493, 8542, 8490, 8540, and

8494. These petitions for rehearing are pending at the.

present time. Petitioners will advise this Court of the deter-

mination of. theseppetitions by the Court of Appeals as soon

as possible. |

QUESTIONS PRESENTED

: Tn determining just and reasonable area rates under -

Sections. 4 and 5 of’ the Natural Gas Act, must the. Federal

Power Commission, in order to satisfy the “end result” test -

_ set forth in Federal Power Commission v. Hope Natural

Gas Company, 320 U.S. 591 (1944), determirfe the allowable

_’ area cost of service for the gas produced in the area, in-

cluding an allowance for explotation to meet future demand

for gas, find that such cost of service constitutes the area

revenue requirement, and establish rates which will recover

such revenue requirement; or may it determine area rates -

—_

(

= which establish a fair relationship between the revenues ~

~ derived from the rates prescribed‘and the allowable area

cost of service? : ;

2. Where Federal Power Commission. v. Sierra Pacific |

“Power Company; 350 U.S. 348 (1956), holds that voluntarily .

made contract rates, which are below the Federal Power

Commission’s subsequently determined just and reasonable —

rates, are not required to be raised to the same level as the

just and reasonable rates ‘unless the public interest, so neces-

_ sitates, must the Commission raise these low contract rates _

. for the purpose of insuring that area revenues equal the

‘Commission’s determination of allowable area costs?

3. In establishing group ceilmg rates applicable to pipe-: .

line quality gas, is the Commission’ s rate-of-return allow-

: ance of 12 percent adequate where specific recognition was

given to the fact that lower quality gas commanding a lesser

price might be found and where this sr was treated

as an additional risk?

4.. Where the Federal Power ‘Commission establishes’

. just and reasonable ‘area rates, and there is a possibility

that some -producers may require special relief from

these rates, did the Commission err by establishing a ‘ special

relief provision which announces that such producérs may

* ~ petition for relief, but which. does not ve detailed: cage

lines for such relief?

5. Is the Federal Power Commission’s area rate decision

so vague and unclear with regard to the establishment of the « |

“Btu gap” in its Btu quality standard that larifeation is

required ne : :

.

6. If certiorari is granted, we 6 also reserve the right to argue two’

: additional questions :

- 1.° Whether the Commission gave ‘teraine notice that it would

. prescribe quality standards in this proceeding. .

2. Whether the area rates fixed by the Commission are just

~ and reasonable within the meaning of the Natural Gas

oa

_ STATUTE INVOLVED Sd.

_ The relevant provisions of the N atural Gas ths 52 Stat.

821, as. amended, 15 U.S: C., Sections 717-717w, are set an

in Appendix B. =

_ STATEMENT, OF THE CASE

The opinions and orders of the Federal Power Commission

(Commission) remanded by the court below establish just

and reasonable rates for jurisdictional gas sold in a specific

geographic area—the Permian Basin of west Texas and.

southeastern New Mexico. Opinion Nos.. 468 and 468-A

_ represent the first attempt by the Commission to regulate

the rates of independent producers on an area basis, Area -

rate making under the Natural Gas Act is the product of a

long administrative and legal struggle to find a workable

and effective approach to awe regulation. |

A. Historical Background —

On June 7, 1954, this Court, in Phillips Petroleun ds

pany v. Wisconsin, 347 U.S. 672 (1954), decided that inde-

. pendent ‘producers are natural gas companies within the

meaning of the Natural Gas Act. Sales by producers for

_. Yesale in interstate commerce are therefore aelgeet to the

regulatory jurisdiction of the Commission. -

In response to its newly found obligation to regulate the

- rates of independent producers, the Commission went for-

ward under Section 5(a) of the Act with an investigation

of the rates and charges of Phillips Petroleum Company

a Phillips). On icames 28, 1960, the Commission issued

Act. (This question covers the insues which th court baie

failed to reach due to its remand order. Petitioners will ask |

thie Chart te aflicen the; Commninaiin’s decision: ie Wl re- ae

A 6

ciel eee thabllie’ No. 338" terminating both the rate ‘tivventigation

- and the consolidated Section 4(e) rate increase proceedings.

- The Commission rejected individual company cost-of- aoe

service rate making as a basis for fixing Phillips’ future >: bf

rates under Section 5(a), and announced that it would $

attempt to regulate producers through the development of

area rates. At the sme time the Commission issued its

Statement of General Policy No. 61-1.° The purpose of

the policy statement was {6 announce price levels for the

various gas, producing areas.of the nation which would |

provide guidance to the Commission in certificating initial © 8838 =| —

. Sales of gas and in suspending rate increase applications.

The policy statement guideline price levels have served-as .

an interim form of.producer regulation pending the issuance

of the Commission’s first area rate decision.

——Petitioners, the People of the State of California and the

_ Public Utilities Commission of the State of* California ~~

(California), the states of New York and Wisconsin, as well ,

as several eastern gas distributing utilities, sought review

of Opinion No. 338 in the Court of Appeals for the Distriet

of Columbia Circuit. ‘The Court of Appeals denied the |

petitions for review, affirming Opinion No. 338.° On\ May

20, 1963, this Court affirmed the judgment of the Court of

Appeals. Wisconsin v. Federal Power Commission, 373

U. S. 294 (1963). This Court held that individual company

| cost-of-service rate making was not the sole aneanal of

7. Phillips Petroleum Company, Docket Nos, 0.1148, et “ es

FPC 587 (1960). 7 4

8. Two of the Section 4(e) dockets were léft open, pending deter- =. ~

mination of issues involving contractual support for the rate in- ~ a

‘creases in question.

. 9. 24 FPC 818 (1960), 18 C,F.R. 2.56, as amended.

10. Wisconsine v. Pedergs Power Commission, 303 F. 2d 380

(D.C. Cir. 1961). pets

Ps

7 - “ey e

. enturel gas rate ‘regulation, and although the question of

the legality of area rate making was not before the Court one

for decision, the Commission was not prohibited from com-

, —— the use of this ‘method.

B. The roaeodne Before the Catentecten ae

The Commission selected the Permian Basin as the first ©

‘area with respect to which just and reasonable producer.

_ iner for an initial, decision.

_*

: rates would be determined by use of the area rate making

technique. On December 23, 1960, the Commission instituted

a Section 5(a) investigation of the rates of producers

relating to jurisdictional sales of natural gas produced in

the Basin. Existing Section 4(e) rate increase proceedings

and several Section 7 certificate proceedings involving gas

produced in the Basin were consolidated with the investiga-

. tion. Thus the Commission would be in a position deter-—~

~ mine just and Teasonable area rates for the future and to

apply such area rates (1) i in determining whether suspended

increased rates, collected subject to refund, should be al- .

lowed or refunded in whole or in part, and (2) in determin-

_ ing the price at which an initial sale ‘should be certificated

"in terms of the public convenience and necessity.

The proceeding commenced on October 11, 1961, wk

ultimately involved 251 days of hearing, a transcript con-

taining 30,369 pages, and some 337 exhibits. On September

12, 1963, the hearings were concluded. Briefs were filed —

by the parties, and the matter was submitted to the Exam-

e Pit MS |

1. THE PRESIDING EXAMINER'S INITIAL DECISION |

- The initial decision was issued on September 17, 1964..

The Examiner determined area ceiling rates for various

types of gas within two major categories—new and old

. & ie

gas. The fixing of prices for new and old gas has come to

be known as the two-price system.

The Examiner found that producers could direct, to some

extent, their exploration activities in a search for either

gas or oil. This meant that a price for new gas-well gas

- ould serve the economic function of eliciting supplies of gas,

_ because the price of oil would play no’ part in motivating

the separately determined search for gas reservoirs. In

accordance with this economic approach, the price for new |

gas-well gas would be based: on higher current. costs—as

opposed to lower historical costs. Thus the rate fixed for

“new gas-well gas would be higher than the rate fixed for

old gas-well gas. This higher rate could therefore serve as

an incentive to producers to explore for gas reservoirs

and to dedicate new supplies of gas to the interstate market. .

. The Examiner selected December 23, 1960, » as the date —

- dividing new and old gas.

The core of the initial de€isiong was the Examiner’s

determination of an area ceiling price for new gas-well

‘gas. The estimated national current cost of finding and

producing new gdas-well gas, including réturn at 12 percent,

was related to the Permian Basin area by the application: ;

a

= —

aha average ar area price. A “gold standard” isles was

added to the average price to obtain the area ceiling price.

11. Gas-well gas is gas produced from gas only and gas conden-

_ sate reservoirs. It is gas not found in association with erude oil.

' Gas-well gas is to be distinguished from casinghead gas, or oil well

gas. Casinghead gas is produced in conjunction with oil from crude

oil reservoirs. Either casinghead gas or gas-well gas from gas con-

_ densate reservoirs sent through a gasoline plant where liquid -

and later sold. The gas smeared from

the tailgate of the plant, wn as residue gas.

. 9 =

“The gold standard is the premium above the average price

for superior quality and value.” (J.A. 246d.)

' The area ceiling price for new gas-well gas governed the

area ceiling price for new residue gas, i:e., residue gas -

‘derived from new gas-well gas. Separate rates were also

determined for new casinghead aa

The area ceiling price for old gas-well gas was determined

by “deflating” the cost based revenue standard for new

gas-well gas. The area ceiling prices for old residue and

old casinghead gas were, in turn, related to the old gas-well |

gas price in terms of relative value.!*

It should be noted that, although determining area ceiling

rates by inclusion of a gold standard for superior quality

_ and -value, the Examiner nevertheless failed to provide

for deductions from the ceiling price, where gas was of less

than pipeline — i 7

2. THE COMMISSION'S DECISION

Many parties having filed exceptions to the initial deci- :

sion, the Commission heard oral argument on February 8,9,

18. The area , ceiling prices determined by the Presiding Exam-

iner were:

New Old

: ants per Met) Cents per Met)

Gas-well gas 16:75 18.5

+ Residue gas .: 1675 185

Gasinghead gas. 11.00° . 10.0

14. The foregoing description of the Exaffiner’s initial decision ©

has been confined’ to a brief review of the derivation of the area

ceiling rates. The Examiner also determined minimum rates for

gas-well gas and residue gas (9 cents per Mcf) and for casinghead

gas (7 cents per Mef). The decision covered other subjects, such as.

exemption from regulation for small producers, prohibition of

certain price escalation ‘clauses in producer. contracts, computation

of refunds on an area basis, and provision for special relief for

individual producers “ee imposition : of the group rates would :

lead to serious injustice. ©

10

and 10, 1965. Its decision, Opinion its, 468, was issued oan z

August 5, 1965.

| The Commission adopted the two-priecé system dnd de-

_.. ‘termined base area ceiling rates for new gas-well gas and

old (flowing) gas.!* The Commission selected January 1, ©

_ 1961, asthe date dividing new and flowing gas. Separate

~ prices were not established. for types of gas, i.e., -selebag

gas, residue gas, and casinghead gas.

In determining the base area rate for new wiaeil gas,

_ the Commission utilized the estimated national current

cost of finding and producing new gas-well gas, including

return.computed at a rate of 12 percent. The Commission — -

- rejected the use of a geographical discount and a gold

: standard premium... | y

In-determining the base area ceiling price for flowing gas,

the Commission relied upon the 1960 area historical cost

of service, including a return of 12 percent, applicable to

"flowing gas-well gas. This cost was used as a yardstick for

the pricing of flowing residue and all casinghead gas..

- The base area ceiling rates were to apply to sales of pipe-

line quality gas. Downward adjustments from the base area

rates were to be made for deviations from the pipeline

quality standards defined by the pha necane for hydrogen

15. These Permian Basin. base area rates are:

* Texas, Including Production Taxes

-J New Gas-Well Gas® .............. 16.5 cents per Mef.

Flowing. Gas - 14.5 cents per Mef.

. New Mexico, Production Taxes To Be Added

aye Gas-Well Gas® .............. 15.5 cents per Mef.

Flowing Gas raewsenee 13.5 cents per Mcf.

‘ ©The ceiling price for new gas-well gas is appli-

eable to residue: gas derived from new pesos.

gas.

Flowing gas includes all gas except new gas-well ies and residue

gas derived therefrom.

a

| sulphide, sulphur, carbon dioxide, iit: and delivery pres-—

sure. Both a downward and an upward adjustment were

prescribed to reflect quality differentials respecting Btu

content. The' Btu adjustment, either upward or downward,

would apply only to the base area rates for new gas-well

gas and residue gas derived therefrom. The rate resulting -.

from the application of the quality adjustments became —

the applicable area rate for the particular sale in question.

A minimum base area rate of 9 cents per Mef for all

gas subject to quality adjustments was prescribed.

Special treatment was provided for small producers,

whom the Commission defined as ‘producers ‘with sales of

less than 10 million Mcf. of jurisdictional gas per year.

They may receivesmall producer certificates whigh authorize

-all-future small producer sales in the area at or below the

applicable area ceiling rate. They, will not have .to obtain

separate certificates for each sale, or file the normal annual

reports required from large producers. _ ,

Provision was made by the Commission for a an individual

_ producer to obtain special relief from the imposition of the

area rates where such a producer could make a proper

showing justifying such: treatment, but the Conimission

made clear that it would not allow this provision to become |

-. an-escape clause to return to individual company rate

making. Baris - ‘aca.

The Commission ordered a moratorium on the filing of

rate inereases above the applicable area rate until J: ene

1, 1968.

‘With respect to Section 4(e) dockets etneolidated 4 in the

proceedings, the Commission provided for refunds of in-.

creased rates collected subject to refund prior to September

1, 1965, in excess of the applicable area rates. Payment of

these Section 4(e) refunds was stayed by the Comniission |

pending judicial review of its decision-(J.A. 696d, 11234).

ee

~ "3. APPLICATIONS FOR REHEARING =

_ Numerons applications for rehearing. were filed by the

producers. Rehearing was also sought by California (J.A.

1002d-1026d). On October 4, 1965, the Commission issued

‘Opinion No. 468-A, denying all applications for rehearing.

However, in response to objections made by producers,

tle Commission modified the quality standards prescribed

in Opinion No. 468 by reducing the delivery pressure

standard, and by applying the downward and upward

Btu adjustments to flowing. gas. It also dealt with the

. producers’ contentions that pratetewl revenues must

equal Jurisdictional costs. aul

9

CS ei ‘The Proceeding in the Court Below : .

Pursuant to Section 19(b) of the Natural Gas Act, the

producers, related producer associations, and the states of

New Mexico and Texas, respondents herein, filed in the —

Court of Appeals for the Tenth Circuit petitions to review

| Commission Opinions Nos. 468 and 468-A.

California’ intervened in these review proceedings and

took the position that the Commission’s decision. should

-be affirmed as a lawful exercise of the Commission’s au- _

thority under Sections 4 and-5 of the Natural Gas Act to

fix just and reasonable rates.

On January 20,-1966, the court below. stayed Opinions

Nos. 468 and 468-A, with certain exceptions, until. thirty

days after its decision on the merits or until thirty: days

. after the determination of any petition for rehearing.* On _

16. The court below did not stay the provisions.of the Commis-

sion’s decision which require filing of rate reduction supplements,

_. quality statements, and refund reports, these filings are not to

become operative until termination of the stay order. It also

ordered the producers to set aside for possible refund all amounts

collected subsequent to September 1, 1965, in excess of the rates

determined to be just and reasonable.

e’

‘ * = ;

January 20, 1967 it rendered its decision remanding the

proceedings to ‘the Commission for further hearings. On

_ February 1, 1967 the Commission moved for a stay -of

mandate and suggested: the extension of the stay order.

The court below, on February 15, 1967, extended its stay

_ order until thirty days after termination of the proceed-

ings in this Court in the’ event that petitions. for writ of

certiorari are filed.” paar 6. v

The Court of Appeals the Coniniteionte au-

thority to adopt the area rate method of regulation. Further-

more,. it unequivocally rejected-the producers’ ‘conten-

tion that effective competition exists in the natural gas’

production industry. Instead, it concluded that the Natural = °

Gas Act’s standard of just and reasonable rates and Fed-|

eral Power Commission v. Hope Natura} Gas: Company, .

' 320 U.S. 591 (1944),7* required consideration of costs and

revenues and rejection of the producers’ contract-based ,

commodity value approach. However, “the court concluded -

that the’ Commission failed to ‘comply. fully. with the legal _

requirements for rate making under the Natural Gas Act

as determined in the Hope case and in Wisconsin v. Fed-

eral Power Commission, 373 U.S. 294 (1963).* It also con-

cluded that certain other provisions in the Coimmission’s |

— and orders were Vague. —

| ‘ With regard to the question of compliance with this

Hope and Second Phillips cases, the court below held that

the Commission had “rejected the end result test and

adopted a fair relationship standard.” (App. A, p. 411.) It _

17. The court did not rule on the Commission’s motion to stay

mandate due to the pending - oe Se eons. ‘(Rule 31b,

U.S. Court of Appeals for the Tenth Circuit.)

..18. Hereinafter referred to as Hope.

19. Hereinafter referred to as Second Phillips.

\

4 eet ie

could not. ascertain from the Commission’s decision the

producers’ revenue requirer ents, or the economic fac-

_ tors which: permit departure from consideration of costs |

and revenues, and therefore it could not accept the Com- -

mission’s determination that a “fair relationship” betweén

cests and revenues was sufficient to comply with the “end

result” test.. It took the position that under the end result

_ test costs and revenues. must balance: :

“Nothing. in Second Phillips rejects the end eat

~* test of Hope. We believe that it applies here and that

‘it is not satisfied ‘by a finding of fair relationship .. .

- From the standpoint .of the producer the situa-

- tion is different. It is entitled to recover its prudent

operating expenses and capital costs with a return

commensurate -to the risk and sufficient to attract

capital. These requirements must be tested against

the record. They may not be brushed aside with a

general finding of fair relationship. The Commission

- goncedes that it did not equate jurisdictional costs to

jurisdictional revenues. This is obvious because no

determination was made of the jurisdictional revenues

: which the rates will Product. ” (App. A, pp. 412-13.)

‘The court ordered that the Commission hold further hear- :

ings “to determine ,roup revenues and group revenue re-

quirements,” and to make detailed findings to sustain. the

| _- conclusion of fair relationship. (App. A, pp. 413, 431.)

' The court disapproved of the manner in which the Com-

mission treated the problem of price: deductions for poor

quality gas.:The Commission decided: that the possibility

of finding poor quality gas co tituted a risk to the pro- |

- ° ducers and that it should be included in the rate-of-return -

allowance. The court rejected this position, and held that

price deductions‘ to reflect quality deviations are an item

15

of cost: wai should be quantified and included “in ‘the ap-

plicable base rates instead of hidden in a rate of return

allowance.” (App. A, p. 423.) Only then, the court. held,

could it review the adequacy of the rate-of-return allow-

- ance.

The court found that the Commission’s special relief

provision was “insufficient and unsatisfactory.” (App. A,

p. 430.) This provision indicated that relief would be avail-

able for high cost producers who. are unable to recover

_their costs under the applicable area rates. The court agreed

with the producers that this relief provision was “so vague -

and nebulous that. neither they nor a court can determine

what relief is being granted.” (App. A, p- 418.) It directed

the‘Commission- ~to establish relief provisions which “con-

tain guidelines, which if followed by an aggrieved pro-

ducer will permit it: to be “heard promptly and -to have a’

stay of the general rate order until its claim for es

is decided.” (App. A, p. 419.)

With regard to the quality standard for heating ebik

the court did not understand why the Commission decided

to have the downward adjustment begin at 1,000 Btu and

the upward adjustment begin at 1,050 Btu. The court di-

rected that the Commission clarify its reasons for this

50 Btu gap between upward and downward adjustments

in price. As for the other quality standards the Commis-

-sion established, the court did not expressly approve or

- disapprove them. However, it did réfuse ‘to resolve the

producers’ argument that the imposition of them violated ©

procedural due process because of lack of notice, saying:

“We are remanding the case and now sie ont has notice.”

(App. A, pp. 421.) —

—— nnn

re ee

REASONS FOR GRANTING THE WRIT

The serious regulatory problems created by the decision

of the coiirt. below require resolution by this Court, which

- charged the Commission almost thirteen years ago with the

duty to regulate natural gas producers. Now this Court

should decide whether the Commission’ s first area rate de-

cision is valid and lawful.

An answer to this question by this Court is of funda-

mental importance to all parties involved in the long

struggle to establish regulation of this industry. To date, no

effective method of just and reasonable price regulation of

_this industry has been enforced. Price uncertainty continues

to be the reality—producers do not know what price to which

they are entitled, and consumers do not know whether tlie

price they are paying is lawful. Millions of dollars of poten-

tial refunds have accumulated and continue to grow. The

time and effort invested in this first area rate proceeding

are very great—over six years, including 251 days of hear-

_ ings and 30,369 pages of transcript. Three other area rate

proceedings have been completed through the hearing

stage.” They substantially {6lkywed the framework created

by the Commission’s decision in\the proceedings presented -

here for review. Together with the Permian decision, they

will achieve regulation for approximately.70 percent of the ©

interstate sales of natural gas. If the decision of the court |

- below remanding the Commission’s decision is correct, then

not only the Permian proceeding, but all three other area

' rate proceedings must be reopened, and the achievement of

‘effective regulation of natural gas producers will be delayed

-20. Area Rate ‘iain (Southern Louisiana Area), Docket

- No. AR61-2; Area Rate Proceeding (Hugoton-Anadarko and Texas -

Gulf Coast Areas), Docket Nos. AR64-1 and 2.

e

ss

.

eer a | |

The decision of the court below constitutes a major judi-

cial precedent under. the Natural Gas Act. Unfortunately, it

is obscure and contradictory. The court below misconstrued .

the requirements for rate making as laid down in the H ope

case and the suggestions relating to area rate making which .

were made in the Second Phillips case. With regard to the

question of jurisdictional revenues balancing jurisdictional

costs, it seems to require disregard of the principles. estab- |

lished by Federal Power Commission v. Sierra Pacific

Power Company, -350 U.S. 348 (1956).* It has departed,

from the primary principle of the Hope case that “it is the

result reached, not the method employed, which is control-

ling” by directing the Commission to treat quality devia-

- tions as an item of cost and not as a risk, Finally, ‘the court

below has failed to make known to the Commission what it

‘must do in order to correct its decision with regard to the

: “Btu gap” and the special relief provision. For these” rea-—

sons, the case fully deserves review here.

1. Due to the National Importance of Effective Producer Regu-

dation, Consumers. Need @ Deshicn by ThlsCont on the

| Validity of Area Rate Making.

The result of the decision by the court dein is to over-

throw the Commission’s time-consuming attempt to establish

effective regulation of natural gas producers on an area

- basis. This result can have only dire consequences for con-

sumers who have been waiting almost thirteen years for

effective producer regulation. Rate increase has piled upon

rate increase without any final. determination of just and

- reasonable rates. California asks whether or not intermin-

able administrative proceedings—apparently -seeking an

> ideal and perfect method of. doing Snes and —_— at

~

91. Raseinathin iden to as _— —

18

great heat ‘and consuming lohg periods of time—are hot .

presently or, at least, will sath soon be tantamount to failure

to regulate. : 3

' The court below makes little or no mention of the primary — |

purpose of the Natural Gas Act, which this Court has said

is “to protect consumers against exploitation at the hands of

natural gas companies.” - Federal Power Commission v. -

Hope Natural Gas Company, 320 U.S. 591, 611 (1944);

nar Philips Petroleum Company v. Wisconsin, 347 U.S. 672,

. . 685 (1954). This purpose was reaffirmed in Sunray Midcon-

timnent Oil Company v. Federal Power Commission, 364

U.S. 137, 147 (1960), and rephrased in Atlantic Refining

Company v. Public Service Commission of the State of New

- York, 360 U.S. 378, 388 (1959) : “The Act was so framed.as .

- to afford consumers a complete, permanent and effective —~-

bond of protection from-excessive rates and charges.” The

direct effect of the lower court’s decision will be several

more years of delay in achieving effective regulation. It is .

even possible that upon reopening these proceedings, the

~ Commission and consumers will hear the argument that the

1960 test year has becomhe “too stale” and that a more re-

cent one is required. In this way the producers may yet

‘avoid completely any realistic regulation, and thereby

achieve the relief Congress has denied them...

California’s need for. effective producer regulation is .

unusually great. California is the largest state in the Union,.

having a current population in excess of 19,000,000. The

State depends on natural gas as the basic source of residen-

tial and industrial energy. Not only is gas used directly for

a. space heating, water heating, air conditioning, and cooking,

but it provides in large measure the energy used for gener-

ating electricity. Unlike other areas of the nation, coal is

not an economical alternative to natural gas for meeting

19

California’s energy veqeirements for space and water} heat-_

ing.

California intervened in: the Rae eee before the Coth-

mission and in the review proceedings in the court below

' because most of the’gas produced in the Permian Basin is

consumed in California.” The State consumes approxi-

mately 11.1 percent of all the gas produced in the United

States. Almost 75 percent of the supply of natural gas

needed to meet the demands of the. California market is

furnished from sources beyond the borders: of the State,

while the remainder is drawn from wells within California. © —

Of the out-of-state supply, 87 percent is transported to Cali-

fornia by El Paso Natural Gas Company and Transwestern —

_. Pipeline “Company from sources in Texas, New Mexico, -

Oklahoma, and Arizona; and 13 percent is imported from

_ ,Canada and transported to California by Pacific Gas Trans- ©

- mission Company. Residents of California must ultimately

. pay the rates determined by the Commission in the orders

reviewed by ‘the court below. These orders result in rate

reductions and substantial refunds which will benefit ulti-

mate consumers in California.

The delay resulting from the lower court’s jain will

adversely affect the possibility of any refunds to consumers.

‘As this Court has noted, future refunds cannot and do not

fully protect the ultimate consumer of natural gas. In-

evaluating the effectiveness of future refunds as protection

for natural gas consumers, the Supreme Court in Federal

Power Commission v. Tennessee Gas Transmission Com-

- pany, 371 U.S. 145, 154 (1962), stated :

“True, the exaction would have been ‘iahdeot to sled

but experience has shown this to be somewhat illusory |

22. In 1964 alone, slightly less than 70 percent of the Basin’ 8

Leagecs san dedicated to interstate sales was delivered to the Calton:

nia market. - ;

in view: of the trickling down process necessary to be

followed, the incidental cost-of which is often borne by

the consumer, and in view of the transient. nature of

_ our society which often prévents refunds from reaching’

those to whom they are due.” [Footnote omitted.]

————

} Gidininniitn of natural gas have waited almos five years for

the relief provided them by the Commission i Opinion Nos.

| ’ 468 and 468-A* The remand order of the court below, when

combined with the risk of a possible second review proceed-

ing, Means an unspecified delay, perhaps into the 1970's.

s—

Even: now the total amount of refunds due consumers is -

estimated to be nearly forty million dollars ($40,000,000). If

another three or four-year delay occurs, this amount will be

so great that consumers will be told that refunds are not -

possible because the poe suse will suffer irrepar-

able damage.

Time is critical in this proceeding. Ciinenincs, producers,

and the Commission need a decision by this Court reviewing

the first area rate decision. California maintains that the

remand order of the court below is erroneous and obscure,

and that it is unclear what the Commission must now do.

The risk of a second review proceeding and another remand

to the Commission is too great, and the questions of public

policy are too — not to have a decision by this

; Court.

el ae iasas wate eeetli Dkchone in

the Hope and Sierra Pacific Cases With Regard to Rate

Making Under the Natural Ges Act :

a. The Hope End Result Test Does Not Require That Area Revenues Equal

the Allowable Area Cost of Service

The critical issue in this case is whether the Commission

_ “has complied with the legal requirements for rate making —

under the Natural Gas Act. The court below concluded that

—_—

Yen

214

_~ the (pisideaiani failed to do 80. Although the court recog-

: nized that “the Commission is not bound by any formula or .

method” in rate. making under the Natural Gas Act, it con- _

— “eluded that the controlling standard for area rate making i is’

the end result test set down in the H ope case. (App. A, pp.

400, 403, 412.) It rejected the Commission’s determination

that the end result test was satisfied by its finding that the

rate order, when viewed in its entirety, established a fair”

relationship between the area rates prescribed by the Com-

‘mission and the allowable cost of service for the area: The ©

Commission’s method involved consideration of composite

cost data as a basic ingredient in area rate making, as well

as other economic and policy factors, but it did not involve a

specific finding that group revenues would balance group

costs.* The lower court concluded that the Commission

must, under the end result test, balance these costs and ©

revenues. (App. A, pp. 411, 413.)

The position taken by the court below. fully adopts the

producers’ contention that once composite cost-of-service

data are utilized in area rate ‘making, the Commission must

proceed as it would in an individual utility company cost-of-

service - proceeding. (App. A, p. 428-29.) This position is

erroneous because it interprets the Hope end result test to be

extremely rigid and narrow, thereby denying any flexibility

to the Commission at all, and it grossly misunderstands the

area rate,concept by viewing it as no different from: indi-

| vidual company cost-of-service rate making. The end result

23. It should be recognized that “group Pre used herein

refer to the Commission’s cost-of-service determinations for new and

old gas-well gas. These cost-of-service determinations were used as

yardsticks for the pricing of other types of gas. They include allow-

_ances for exploration, which may or don n nd be expended for this

purpose. Certainly the term “costs” d refer to costs which

“must be recovered in order to avoid colifaeation and oe

denial of due process. - .

a

; a :

, test fos! not require that group revenues Silas group —

— costs; nowhere in the-Hope case has this Court said that this

test can be satisfied only by computing this particular equa-

tion. On the contrary, Hope affirmatively states that no

single formula. is required to be used in rate anaking under

the Act. 320 U.S. 591,602,

The essence of the end result test is whether the Commis-

sion’s order “viewed im tts entirety” meets the requirements

of the Natural Gas Act. While the court below relied on .

Second Phillips for applying the end result test to area rate

-” making, it failed to follow this Court’s explicit description in

that decision of what this test involves:

“But to declare that a particular method of aan regu-

lation is so sanctified as to make it highly unlikely that .

any other method could be sustained would be. wholly -

out of keeping with this Court’s consistent and clearly . —

articulated approach to the question of the Commis- -

- gsion’s power to regulate rates. It has repeatedly been

- stated that no single method must be followed by the -

Commission in considering the justness and reasonable-

_ ness of rates, Federal Rower Comm’n v. Natural Gas,

Pipeline Co., 315 U.S. 575; Federal Power Comm’n v.

Hope Natural Gas Co., 320 U.S. 591; Colorado Inter-

. state Gas Co. v. Federal Power Comm’ nm, 324 U.S. 581,

and we reaffirm that principle today. As the Court said

‘ in Hope: “e

‘We held in Federal Power Commission v. Nat-

- ural Gas. Pipeline Co., supra, that the Commission

was not bound to the use of any single formula or

combination of formulae in determining rates. Its

rate-making function, moréover, involves the mak-

ing of ‘pragmatic adjustments. ’ id., p. 586. And —

when the Commission’s order is challenged i m the .

courts, the question is whether that order ‘viewed

- im its entirety’ meets the requirements of the Act.

° Id., p. 586. Under the statutory standard of ‘just

and reasonable’ it is the. result reached \not the

rere ,

6

. 4 *

° . ° e :

‘ 50K os

Pee RT NETTIE LEE AALS TR RET TIT OEE RIT CT OCT

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23 «

wethod sinboyee which is } controlling.’ 320 U.S.,

at 602. 3 7 ms

More specifically, the Court has never held that the

individual company cost-of-service method is a sie

qua non ofmatural gas rate regulation. Indeed the pru-

dent investment, original cost, rate base method which

' we are now told ‘i is lawful, established, and effective is

the very. one the Court was asked to declare impermis-

sible in‘the Hope case, less than 20 vee ago.’ 2 ai8

U. Ps 309; emphasis added.) |

This pabetiae deity demonstrates that the Commission

- does not have: to use one particular formula or equation,

and that the end result test is made by viewing the Com-

mission’s order in its entirety to see if it is’ just and

reasonable as required: by the Act. The lower court has

' misunderstood the Hope case by transforming the flexible -

end result test into a rigid and narrow method consisting

-of no more than’ the revenues-must-equal-costs equation.

- It says, in effect, that only this equation satisfies the end

result test, and this equation must show revenues equal

- eosts or the rate order falls. This view is in direct ‘conflict

with Hope and’ the passage above from Second eae 5 and

the other cases cited therein.

, Moreover, this rigid interpretation of the end result test

is contradictory not only to the Commission’s concept of

area rate making but also to this Court’s preliminary view

of it'in Second Phillips. In that case this Court stated that

area rate niaking involves consideration of economic fac-

tors of the industry and not merely strict adherence to

the revenue-cost equation.. This Court quoted the statement

by the Commission in Opinion No. 338 that it intended

_ toset rates “based on ‘the reasonable fmancial requirements

of the industry’ in each production area.” (373°U.S. 294, .

310.) This statement demonstrates that this Court under- .

24

ig stood and approved, of the Commission’s intention to con-

sider economic factors other than costs.*

Nevertheless, the court. below emphasized that rap re-

-Jected the Commission’s: “fair relationship” interpretation

of the end result test because it was not told what eco-

nomic factors “either require or permit departure from —

costs and revenues.” (App. A, p. 429.) In taking this posi-

-tion, the lower court does not evaluate or even’ mention

the various factors which the Commission said it did con-

sider, such as: (1) that area rate making differs from

individual company. cost-of-service rate making in that it

does not involve the costing of all gas, but instead, the

costing of old gas-well gas as the yardstick to set the price —

for oil-well gas on a commodity value basis because this

gas is a by-product of oil production and, as a result, its

“ cost could not be accurately determined. (J.A. 5744,.614d-

624d) ;* (2) that some 9.0 cents of the 14.5 cents price

for flowing gas was partly based on non-cost factors -with -

- the purpose of meeting the producers’ “revenue deficiency”

argument (J.A: 1112d-1114d); (3) that the’ producers

would recéive additional revenues than merely those pre-

mitted by the Commission’s rates because of certain con-

tract provisions and because of the extraction of liquid

hydrocarbons (J.A. 1112d-1115d); (4) that the Commis-

sion substantially reduced the amount of the ‘downward

price adjustments due to quality deviations (J.A. 1115d-

24.- See also footnote 16, 373 U.S. 294, 310, where this Court an-

nounced that. it did not interpret the decision of the Court of

Appeals for the District of Columbia in City of Detroit v. Federal

Power Commission, 230 F. 2d 810 (D.C. ‘Cir. 1955), “to suggest,

that, in the view of that court, individual company cost of service is

_ the method required tobe used in independent natural gas producer

.rate regulation.”

25. While the cost of oil-well gas could not be determined pre-

cisely, the Commission specifically found that its cost was substan-

tially below the cost of old gas-well gas GA. a).

' 1116d); and (5). that the Commission took into: aecount

that its rates should avoid abrupt departures from exist-

ing pricing patterns in order to avoid business disloca-

tions (J.A. 573d-574d). At the very least, the court below

should have given consideration to these factors. in evalu- ©

- ating the Commission’s decision. The lower court having |

failed to do so, the Commission is the victim of obscurity

in that it has not been told why these factors are not

sufficient to justify its finding of a - relationship be-

tween revenues and costs.

Finally, the court below has refused ta give tlie Com-

mission any deference for its judgment and discretion as

a federal administrative agency in possession of expertise | ;

in the. matters under its jurisdiction, Securities and Ex-

change. Commission v. Chenery Corporation, 332 U.S. 194,

207-8. (1947). It is clear’ that where rate making is in-

volved some findings of regulatory bodies are proper. with-

out detailed explanations or even any supporting evidence.

‘Market Street Railway Company v. Railroad Commis-

sion, 324 U.S. 548 (1945); 2 Davis, Administrative Law,

471-2 (1958). But the lower court has. rejected, without’

any discussion, the various economic factors relied upon |

. by the Commission in determining area rates. |

b. The Rigid Interpretation by the Court Below Controdicts This Cours

Holding in the Sierra Pacific Case

‘ In requiring that group revenues balance group costs, |

the court below has disregarded this Court’s decision in

Federal Power Commission v. Sierra Pacific Power Com-

pany, 350 U.S. 348 (1956), which held that voluntarily made

rates which are below the just and reasonable rate cannot.

be raised. merely because they are unprofitable..A natural

gas company may agree by edntract to a rate affording

- less than a fair return, and, if it.does so, it is not entitled

Mees . ERS | ee

to relief by the Commission for its improvident bargain

unless such relief is required by the public interest. But

the court below seems to suggest that the minimum rate

- be raised in order to make group revenues-equate to group

costs. Any such action would be wneey ey to the

Sierra Pacific decision.

Unfortunately, the opinion of the court below is am:

biguous on this point. While noting that “the producers

are not entitled as a matter of right to collect contract —

rates that are higher than otherwise reasonable in order

to offset other rates limited by contract to below maximum

‘reasonable levels” and that “contract limitations are one of .

the facts of life for the natural-gas industry” (App. A, pp.

- 424), it expressed concern over the revenue deficiency re-

- sulting from these contract limitations, and it noted that

in group procedures before the Interstate Commerce Com-

mission “revenue from one source may balance that from

. another” (App. A, pp. 423-24). The lower court’s discussion

of this matter ends with the statement that “the control- ..

ling. question is whether the proper revenue requirements

of the area producers, as'a group can be satisfied with

rates having the ceiling and the floor which the Commis-

sion has fixed” (App. A, p. 425). This language suggests

that the minimum rate would be rejected or raised if the

“ eourt concluded, that. the “proper revenue requirements”

were not “satisfied.” Significantly, the lower court. con-

eluded that it cannot answer this question because the

revenue-cost equation has not been provided.

Whatever the lower court’s opinion may mean with

regard to this matter, there can be no doubt of the unlaw-

26. 350 U.S. 348, 355. The Commission partly justified its mini-

mum rate order as being i in ‘the public interest because its effect on .

consumers would be de minimis. No such finding is possible if the

- minimum rate is raised to produce 10 million dollars in order to

balance the lower court’s revenue-cost equation.

1

27 :

fulness of raising the minimum rate to or near the just

-and reasonable rate in order to balance group revenues

and group costs. This view is contrary not only to the

Sierra Pacific case, but also to Federal Power Commission

v. Tennessee Gas Transmission Company, 371 U.S. 145

(1962), which held that losses in one zone of operations

do not justify ‘an illegal. gain in another zone. If the court

below. is correct in viewing area rate making as only an-

gther instance-of individual company cost-of-service rate

making, then. certainly it’ cannot ignore tlie Sierra Pacific

and Tennessee cases by relieving the producers from their

voluntarily made low contract rates. ‘

3. It Is for the Commission to Determine the Proper Regulatory

Method to Provide for the Impact of the Quality Deductions

The court below has rejected the Commission’s method -

of providing for the impact of the quality adjustments by:

permitting a more than adequate rate of return. Contrary

to the Hope case, the court has determined what method the

Ree should use. The court has ordered the Commis-

ion to treat price deductions for deviations from pipeline

quality gas as “an item of cost rather than an item of risk” _

which “should be directly reflegted in the applicable base

rates instead of hidden in a rate of return. allowance”

(App. A, >. 422-23).

By directing the Cornmission how. to treat the impact

of quality deviations, the lower court has again miscon-

strued the Hope: case. Despite the fact that under Hope

it is the end result, not the method used, which is the .

standard for judicial review of the Commission’s rate

- orders, the court has disagreed with the Commission’s

views on the regulatory method to be followed and sub-

stituted its own theory and method. The Commission, as

well as the Examiner in his initial decision, explained the

compelling necessity for quality standards (J.A. 245d-246d;

28 :

645d-647d). Certainly the Commission has. the expertise

and discretion to view the quality problem as a risk. There

can be no. -doubt that in exploring for natural gas there-

are at least two possibilities: (1) that no gas will be

found, and (2) that the gas which is found may be poor

_ -in quality.. Both these possibilities are unknown until drill- '

ing is.completed. By holding that these price deductions

for quality deviations be treated as an item of the cost of

production, the court ignores the fact that there was nd

showing that low quality gas costs any more to produce

than gas of pipeline quality, and the fact that the essential

processing costs to bring it up to pipeline quality are

borne by the pipeline purchasers. As the body possessing

expertise in regulating this industry, the Commission is

well within its legal -powers to view this problem in the -

‘manner it deems best.

Moreover, the court refused to consider the question —

whether the 12 percent rate of return is adequate because,

under the Commission’s approach, it. cannot “determine

the amount of return with any degree of certainty.” (App. .

A, p. 422.) The court justifies this refusal on the ground

_ that the record failed to disclose the amount of the quality

deductions, and therefore it was “impossible to determine

whether the rate of return satisfies the Bluefield and Hope

principles .. .”** (App. A, p. 423). In Opinion No. 468-A the ©

'. Commission expressly found that while the record did not

permit exact quantification of the impact of the quality

deductions, there was adequate record support for the

conclusion that the quality. impact would be in the range

of .7 to 1.5 cents per Mef, reduced by additional revenue

for plant liquids and the effect of the Btu adjustments —

(J. A. a): Instead, the lower court aereneously stated

27. Bluefield Water Works and Improvement Company v. Public

3 Service Commission, 262 U.S. 679 (1923).

- clusion is clearly erroneous. The Co

29 ;

that. the only estimates of quality inipebb is were alte on

the quality statements filed with the Commission pursuant

_ to Opinion No. 468. Since the quality impact was known

and since the Commission found it to be reasonable, the —

“court should have resolved the question of the adequacy of

the rate of return which was deliberately made generous on

this account.

4. The Netnend Coder at the Coat Silene Is Vague With Regard ‘

to the Special Relief and Quality Provisions

The decision of the court below is particularly obscure

regarding the Commission’s special relief provision and its.

quality ‘standards in that it has left unclear what precisely |

the Commission must do upon remand.’

‘ Concerning the special relief provision, the court below’ .

_ seems to conclude that the Commission intended to grant

relief only from confiscation. (App. A, p. 419.) Such-a cont

| ission did not limit

‘the basis for invoking the special relief procedure to claims ,

of confiscation; it spécifically stated thi t “there may be

other circumstances where-a producer ag a matter of law

or in the public interest would be entitled to some relief”

‘(J.A. 658d). Obviously when the Commission has only be-

gun the task of establishing a new concept such as area rate

making, it cannot now foresee all possible relief situations.

The relief provision was designed to provide notice that

relief would be available. For practical reasons, the Com- .

mission did not attempt to foresee all the possible factual

- situations justifying special -relief, nor did it spell out in

PP. 423, 422.)

detail what the relief would be. These specifics obviously

28. The court.is inconsistent here. It did rely on the Commis-

sion’s estimate in order to justify its decision that quality deduc-

tions should be treated as a cost item, but it did not use the estimate

in considering the adequacy of the rate of return, saying that the

reeord failed to disclose the amount of the deductions. (App. A,

‘ 30 a

“ could be provided when the time for such relief arose. The

court below, however, characterized this provision as “in- — .

adequate” and said that an adequate relief provision would -

“contain guidelines which if followed by an aggrieved pro-

ducer will permit it to be heard promptly and to have a

stay of the general rate order until its claim for exemption

is decided.” (App. A, p. 419.) In addition, the lower court

-, seems to say that individual costs should be the basis for

relief. (App. A, p. 419. ) This position would mean a return -

to individual cost of service. |

In direeting that each producer be entitled to a stay —_—

the Commission’s rate order, the lower court provides the

means to undermine area rate making through numerous

stays pending relief. The Commission could be deluged with

. _ hundreds of petitions for relief. No such right to a stay was

required by this Court in the New England Divistons case,

' 261 U.S. 184. (1923), in which the Interstate Commerce

Commission’s rate order became effective immediately,

. subject to later adjustment if a proper showing was made.

As in that case, there is no reason for an automatic stay -

from area rates; the general rule should prevail that stays —

will be granted only upon a showing of irreparable injury .

to the producer concerned. The mere possibility that‘a pro-

ducer is entitled to special relief from area rates does not

justify the continuance of collecting rates which have been

held to be too high. Federal Power Commission v. Tennessee

Gas Transmission Company, 371 U.S. 145, 151-2, 154 (1962) ; ae

_ United Gas Improvement Company v. ‘Callery Proves Seca

Inc., 382 U.S. 223 (1965). |

‘With regard to quality standards, the lower court is even

more obscure. It specifically required explanation why the

Commission provided the “Btu gap” in its quality standard.

for Btu content. (App. A, p. 421.) But it failed to approve

or disapprove the other quality standards. It merely com-

31 ; '

mented that it would not resolve at this time the producers’

contention that procedural due process was violated because

‘of lack of notice on the-matter of quality standards. Such

language leaves the Comfnission in.a quandary. Is-it sup-

posed to reopen all the quality standards for further hear-

ings .arid redetermination, or should it just explain at

* greater length its reasons for the Btu gap. If it fails to

reopen all the quality standards for. further hearings, the.

Commission risks a second remand on the notice question.

The effect of the lower court’s decision is to reverse the

Commission on all its quality standards without giving any —

reasons.

, CONCLUSION

Petitioners respectfully request the opportunity o pre--

. Sent these questions to the Court more fully. They are im-

portant questions of public law. They are questions affect- —

ing millions of citizens and involving millions of dollars.

Their resolution will have far-reaching effect. | ;

Petitioners respectfully submit that this petition for a- |

writ of certiorari to the United States Court of Appeals =

the Tenth Circuit should be granted.

pepe zai submitted,

Mary Moran Pasaticu

Mary Moran Pajalith

_ Chief Counsel |

J. Carvin Simpson | re

J. Calvin Simpson

Principal Counsel

Wim N. Foiey

William N. Foley

Associate Counsel

Attorneys for the People of the

State of California and the

Public Utilities Commission

of the State of California

Dated: April 17, 1967