Petitioners Brief — Permian Basin Area Rate Cases

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Cees Gee ee ES oe Fiee 1

Jurisdiction ........ OT ald age Re ae ae 2

Statutes Involved ......... ein tre tA. be! - . a

Questions Presented ............. mae : de ee aie

CS os sc Se ess ee ae { 5

1. The Commission’s Permian Decision ree 7

i‘ a. The area approach ...... Ceimean ees 8

b. The two-price system ...... Mer peg oe 8

‘c. The basis of the area rates .......... 8

‘d. The rates. prescribed ......4..5,.. 9

e. Quality deductions ‘from the rates pre-

* QE 4g SA ee ee ee . 10

=: Mase of retwm 2 . e. 10 |

g. Special —eseiintale — ‘the applicable oh

| RP ees oar ee ee . 11

—h.. The moratorium on rate increases .. -2

i. Permanent prohibitions of ° certain. pric- é-

. Welt GND cs 5 5 hk eee 12

j. Refund of amounts above the area rates 12

k Small producers sees Aah aC oe 13

2. The Decision Of The Tenth Circuit AS AN 2B

~ Summary of Argument ............... aoe

. Argument: =

Introduction ................ is perry ete” 21

I.. Mobil As Petitioner ..... Se eer |

A. The Conimission Erred In Imposing A

Dual Pricing Structure Which Classified

Gas As “New” Or “Old” According To

The Date Of Execution Of The Applic-

able Gas Sales Contract And Imposes ~

Lower Rates For “Old” Gas ...:....

_1.. The Commission Is Bound In Its Reg-

ulatory Attempts By A Just And —

Reasonable Standard Which This

Court Has Held Requires A Balanc-

ing Of Consumer And Investor In-

CR ee

2. The Two-Price System Ignores The

_ Economic Characteristics Of The Pro-

ducing Industry And Will Not Provide

The Necessary Incentive For Future

- Exploration And Development ‘Of Gas

I ce oe et MS...

- B. The Commission Erred In Proscribing

The Filing Of All Rate Increases Above

‘The Applicable Area Rate For A Speci-

fied Period And In Further Permanently

Proscribing The Filing Of Rate Increases

Under Certain Flexible Pricing Clauses

In Existing Contracts ..............

1. The Commission’s Moratorium’ On

Rate Increase Filings Is An Invalid

Limitation On The Ratemaking And

Rate Changing Principles Embodied

In The Natural Gas Act .......... .

a. The Commission has no statutory

power to impose a moratorium on

contractually allowable rate in-

creases in a proceeding determining

just and reasonable rates ..... fees

Page

21.

. 27

-b. The moratorium which the Com- -

mission has imposed is not essential .

to an area method of regulation

and its imposition conflicts with

principles which any method of

group regulation must meet .... 40

2. The Commission Erred In Proscribing

Pricing Clauses In Contracts Pre--

viously Approved And Made The .

Basis Of Certificates Of Public Con-

venience and Necessity....... frogs 41

-C. In Determining Just And Reasonable

‘Rates Under Sections 4 And 5 By Com-

_ piling Composites Of Group Costs The

' Commission Erred In Excluding From

Such Composites The Costs Incurred By

The Producing Industry In Gathering and

Processing Natural Gas For Sale To

Pipeline Purchasers. >............... 48

WL Mobil As Respondent ...... Sy «ah 9 ; =

.A. The Commission Failed To Adopt A

Fair Rate Of Return And Then Denied

The Industry The Opportunity = Earn poe

That Adopted Rate .......:..:..... “33

- B, The Commission Erred In Adopting A

Minimum Rate Of Only 9 Cents And

Subjecting Such Minimum To Quality

MI. Kens > ys be a ps a ey sea _ 38

-C. The Exemption Which The Commission -

Provided From The Applicable Area ©

Rate Is Inadequate And Not In Con-

formity With The Statutory Scheme Of |

Ratemaking Required By The Natural —

ae ee nee ae Pi. eee An 62

Page’ —

D..The Commission Erred In Ordering Pro-

ducers, On The Basis Of ‘Their Individ-

ual Contracts, To Refund All Amounts

Collected Above Applicable Area Rates .

As To Each Contract Subject To A. Sec-

tion 4(e) Proceeding ......i....... 66

E. The Issue Of The Automatic Application

Of The Area Rate To Initial Certifica-

tions Under Section 7 Should Not Be

Decided By This Court BEN, HAS 72.

| Conclusion ets; ee uae at ame

i ak

Cases: x i. Page

Acker v. United States, 298 U.S. 426 (1936) 38

Atlantic Refining ‘Company v. Public Service

Commission of New York, 360 U.S. 378

Us ek ge hh a et ae 33, 34, 36, 69, 72

Bluefield Water Works and Improvement Com-

pany v. Public Service Commission, 262 U.S. ~-.

Ce a oo ck aay es a ss 53, 54, 58

Chicago and North Wenters Railway Company .

v. Atchison, Topeka and Santa Fe Railway titel

Company, 18 L.Ed. 2d 803 (1967) ...... 64, 65 -

Colorado .Interstate Gas Company v. Federal

Power Commission, 324 U.S. 581 (1945) ... 49,50

Colorado-Wyoming Gas Company v. Federal

‘. Power Commission, 324 U.S. 626 (1945) ... 49

Federal Power. Commission v. Hope Natural Gas

Company, 320 U.S. 591°(1944)...........

as. ee 22, 23, 29, 434.45, 49, 51, 54,,55, 58, 66,68 -

Federal ‘Power Commission v. Hunt, 376 US.

Pee CUMOR RT: ice viv aen cs ini tee 34, 35, 70, 72

Cases: . - Page

Federal Power Commission §v. Sierra Pacific ddda>

Power Company, 350 U.S. 348 (1956) ... .58,59,60 —

Federal Power Commission v. Texaco, 377 US. |

Be REE oc GAL ae cess a 35, 42, 44, 45.

King v. United States, 344 US. 254 (1952) ... 40,65 -

New’ England Divisions Case, 261 US. ~184.

Re Gl. Mis Wl Oe eso ees eet 64, 65

Panhandle Eastern Pipe Line Company v: Federal 7

‘Power Commission, 324 U.S. 635 (1945) . ~ 49

Phillips Petroleum Company v. Wisconsin, . 347

3 Re ry Bigs.” ) RSE | hee eee ener 5, 6, 50, 65

Seaboard Air Line Railroad Company v. United

States, 382 U.S. 154, 157 (1965) ..... & 2. 76,77.

Sunray Mid-Continent Oil Company v. Federal

Power Commission, 364 U.S. 137°(1960) .. .32, 33, 69

. Tagg Brothers.and Moorehead v. United States,

280'U.S. 420 (1930) 0 lca ee. . 2

United States Improvement Company Vv. Caliery

‘Properties, 382 U.S. 223 (1965) ... .35, 36, "66, ‘tl, 72

‘United Gas Pipe’ Line Company v. Memphis

Light, Gas and Water Division, 358 U.S. 103

fn Oe | EE Fe Nee iit 30, 31, 32

United Gas Pipe Line Company v. Mobile Gas

_ Service Corporation, 350 U.S. 332! (1956) ,

ss cee Es cc te ek cn ut 30, 31, 32, 37, 59

Ynited States v. Corrick, 298 U.S. 435 (1936) 38

United States.v. Great Northern Railroad Com-

pany, 343 U.S. 562, 578 (1952) ........-°. 176

»Wisconsin v. Federal Power Commission, 373

U.S. 294 (1963) - rae ees 6, 8, 21, 46, 47, 51, 52

Administrative: — ~~

Amerada Petroleum Company, 24 FE PA. 218

Dita re Oh es Pan Ne ee 66

. Nashville Traffic Bureau v. Louisville and Nash-

ville Railroad Company, 53.1.C.C. 37 (1919) | 37

Phillips Petroleum iti 24 .F. PL... 587

B. 1900) Pe ate Sone we OY IRIS Suess yeas 51

Statutes: : i Page

Interstate Commerce Act, 49 U.S.C. §15(2) 37

‘Natural Gas Act of 1938, 52 Stat. 821-833, as

amended, 15 U.S.C. 717-717 15 ers

Peis 18, 22, 27, 29, 31, 33, 35, 37, 38, 39, 40, 42, 43,

’ i Dea (Re 48, 61, 62, 65, 67, 71, 72, 74, 715

Sociing 1(b), 15 U.S.C. 717(b) ..... MB, 49,50- ~

Section 4(d),; 15 U.S.C. 717c(d) ......

.. m:.. B27, 28, 29, 30, 31, 32, 33, 34, 35,.36,

4S oy ae ee eee tye 39, 48, 70, 7

Section 4(e), 15 U.S.C. 717c(e).......

See 20, 27, 28, 29, 30, 32, 33, 34, 35, 36, 38, 39,

23 a ae 47, 48, 66, 67, 68, 69, 70, 71, 72

Section 5(a), 15 U.S.C. 717d(a) a Abas

"% ate ... .20, 28, 29, 39, 48, 68, 69, 70, 71, 72

Section 7(b), 15 USC. 717£(b) APM 42, ‘43

Section 7(c), 15 U.S.C. 717f(c) ..... ap

, 20, 21, 30, 34, 35, 36, 42, 70, 71, 72, 75, 76

: Section 7(e),- 15 US.C.. 717£(e) cel eta

20, 21, 30, 34, 35, 36, 42, 45, 70, 71, 72, 75,

Section 16, Ss USE. File. .:.... ogy: 39

Section 19(b), 1S USC: .717r(b) ..:... 76

Packers and Stockyard Act, 7 U. S. C. §§201,

et a ea Me eta <9 ae OE Re ee oe 38

Regulations:

OF Cre SOs et ee 42, 43, 44, 46

Rie. i

te :

Supreme Court of the Wuited States

October Term, 1967.

NOS, 90, 98, 98-102, 105, 117, 181, 261, 262, 266, 388

THE PERMIAN BASIN AREA RATE CASES

On Writs of Contbocani to the United States Court , |

of Appeals for the Tenth Circuit

BRIEF FOR MOBIL OIL CORPORATION AND

NORTHERN NATURAL GAS PRODUCING ;

COMPANY

OPINIONS BELOW

_ The opinion of the Court of Appeals (XII R. 15-61? i

as well as its opinion on rehearing (XII R. (87-89), are

1. The following system will be employed in citing to the 14-

volume record in this Court: “R. 1 - R. 1908” -- Volumes I - VV

(testimony); “R. le - R. 1146e” - Volumes VI - VIII (exhibits) ;

“R. 1d-- R. 1157d” - Volumes IX - XI (pleadings, orders and opin-

ions, in the administrative Proceedings) ; “XII R. 1 - XII R. 90” -.

+Volume XII (proceedings in the Court of Appeals and this Court) ; :

“R, Ils - R. 40s” (supplemental volume). The remaining ,yolume is

..a table of contents for Volumes I - XI.

ee ee ee

. reported at 375 F.2d 6 (10th Cir., 1967). The opinions

and orders of the Federal Power Commission (R. 516d-

826d, 827d-838d, 37s, 1105d-1132d and 1133d-1136d)

are reported at 34 F.P.C. 159, 418, 424, 1068 and 1082

. (1965). The opinion of the Commission’ s Hearing Ex-

aminer (R. 97d-364d) is — at 34 uo 306

(1965).

JURISDICTION ©.—"

The judgments of the Court of Appeals were entered

- On January 20, 1967. (XII R. 62-83). An order on

rehearing, modifying the judgments, was entered on April .

18, 1967. The petitions for certiorari in Nos. 90, 95,

. 98-102, 105, 117 and 181 (Continental Oil Company v.

Federal Power Commission; Superior Oil Company v.

. Federal Power Commission; New Mexico v. Federal

Power Commission; Sun Oil.Company v. Federal Power

‘ - Commission; California v. Skelly Oil Company; Hunt Oil

Company v, F. ederal Power Commission; Pacific Gas and

Electric Company v. Skelly Oil Company; Bass v. Federal

Power. Commission; Federal Power Commission v. Skelly

Oil Company; City of Los Angeles v. Skelly Oil Company) |

were filed previously to and granted by this Court on

June: 12, 1967. (XII R. 89-90). Mobil Oil Corporation

. .and Northern Natural Gas Producing Company (Mobil):

are- respondents in Nos. 100, 102, 117 and 181. Since:

the above listed petitions were granted, petitions for

‘ certiorari in Nos. 261, 262, 266 and 388 (City and

County of San Franciso v. Skelly Oil Company; City of

San Diego v. Skelly Oil Company; Standard Oil Company

v. Federal Power Commission; Mobil Oil Corporation vy.

Federal Power Commission) have been filed but not acted

upon by this Court: Mobil is petitioner in-No. 388 and |

seta

a respondent i in Nos. 261 and 262. As to those questions

presented by Mobil in No. 388, the petition for certiorari

states that the briefing schedule prescribed by this Court

in ‘the June 12, 1967 order would be followed. In its

brief to this Court, filed by August-25,-1967, the Federal —

Power Commission has responded to the questions raised

by Mobil as petitioner in No. 388. This brief is therefore

filed by Mobil as petitioner in No. 388 and as respondent

in Nos. 100, 102, 117, 181, 261 and 262.: The: jurisdic-

tion of this Court is invoked under 28 U.S.C, 1254(T)

and Section 19(b) of the Natural Gas Act, AS USC. _

TM 7e(b).

‘

STATUTES INVOLVED . Noe

The pertinent provisions of the Natural Gas .Act,

15 U.S.C. 717-717w, are reproduced in the Appendix of

the Brief for the Federal Power Commission, which has

previously been’ filed with the Court, and are incorporated

herein ad reference. |

QUESTIONS ie sae

The Federal Power Commission has determined what

it considers to. be those just and reasonable rates which

independent producers may chargé for natural gas sold

in the Permian Basin. Mobil has petitioned the Court

for review of four questions regarding the Commission’s

determination. Numerous other questions are presented

in the various petitions for certiorari in which Mobil is

a ‘respondent. The questions which Mobil presents are

as - follows:

1, Whether the Federal Power Commission, bound -

_ by a just and reasonable standard may lawfully impose

Pa wie Sy a

a system of rates based on classifying natural gas as

“new” or “old” according to the date of execution of gas

sales Contracts, and impose lower rates for “old” gas.

2. Whether, in proceedings determining just and reason-

able rates under the Natural Gas Act, the Federal Power

Commission may impose a moratorium prohibiting the ~

future filing under Section 4 of the Act of contractually

allowable rate increases, thus barring hearings to deter-

‘mine the justness and reasonableness of such increased

rates.

3. Whether the Federal Power Coteabiaton's may forbid

rate increase filings under Section 4 of ‘the Act based on

price-changing provisions in producer contracts considered

by the Commission in previously issued certificates au-

_thorizing the sale of gas under these contracts.

4. Whether i in compiling composites of group costs used

to . determine producers’ “tevenue requirements” and to

prescribe area sates under Sections 4 and 5 of the Natural

Gas Act, the Federal Power Commission may exclude

from such composites the costs incurred by the producing

industry in gathering and processing natural gas for sales

to pipeline purchasers.

The principle questions presented by those pititions

in which Mobil is respondent may be outlined as follows:

: Whether the Federal Power Commission, in deter-

' mining maximum area rates for the Permian Basin may . |

adopt only a 12 percent rate as the fair rate of return on -

production investment and whether after allowing only

a 12 percent return the Commission may fail to allow a

Tecoyery of that rate on production investment by allow- |

ing additional impacts on the rate which lower it from |

the 12 percent level.

his il inci

te in, 2 a

2. Whether the Federal Power Commission, in deter-

mining maximum area rates as the industry revenue re-

quirement in the Permian area may justify only a 9 cent

-.. minimum from the record before. it‘ whén consideration —

is given to the fact that the Commission should design

rates within the framework of the Natural Gas Act which .

will allow a return of those revenue requirements.

3. Whether the Commission, in determining maximum

rates applicable to all producers within a producing area,

must provide an exemption from the maximum which

allows producers specific and individual relief in the form

of higher than average rates where maximum rates are

confiscatory.

4. Whether the Commission may require refunding of

‘amounts previously collected under permanent certifica-

tion where a producer has filed for a contractually allow-

able rate increase above this “last clean’ rate” and the’

applicable area rate is determined to be at a level below

that previously certified.

5. Whether this Court may paeity consider the hold-

ing by the Commission that the applicable area rate should

be automatically oe in an initial certification under

| Section 7.

' STATEMENT

In 1954 this Court determined that the Federal Power _

Commission has jurisdiction over the sale of natural gas

by producers ‘to interstate pipelines. The decision in

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

(1954) (Phillips 1), thrust upon the Commission regula-

tory responsibility over thousands of natural gas sales by

producers. Having gained expertise in regulating interstate .

. eile since the inception of regulation ~— the Nat-

ural Gas Act in 1938 by use of the individual rate base—

cost of service: method of regulation, a common method —

used to rate regulate public utilities, the Commission at-

. tempted to regulate producer sales by the same. method.

By 1960. the Commission was ready to concede that pro-

ducers of natural gas could not be classified as typical pub-

~ lic utilities by reason of vastly differing characteristics.

Consequently, the Commission concluded that the rate

base—cost of service method of regulation, developed in

the context of public utility regulation, was unworkable

in rate regulating producer sales and proposed that in the

future producer sales be regulated on an area rather than

an individual basis. This Court in Wisconsin v. Federal

Power Commission, 373 U.S. 294 (1963) (Phillips II),

' . approved the Commission’s actions in terminating the

then pending individual company rate investigations and

instituting area rate hearings. This Court noted the com- —

plications which had been encountered in previous at-

tempts at producer regulation by the Commission and

expressed the hope that the results of the area rate method

would satisfy constitutional and statutory standards. ap-

plicable to the Commission and its. orders.

The present proceeding before this Court is a review

of the results of the Commission’s first area rate determina-

tion. The decision of this Court in these proceedings will

influence and determine the course of producer regulation —

for many years. It is the most important Commission deci-

sion to reach appellate review since this Court charged

the Commission with the duty to regulate producer sales

in Phillips I. It is incambent upon this Court to render

a clear and concise decision to assure some semblance

-- of stability and direction in producer Sia and regula-

tion under the Natural Gas Act.

= HER

Jee ee eo Ee

= ——— .

;

The Commission instituted this rae; es in 1960 to.

establish just and reasonable rates for interstate sales by

producers ‘in the Permian Basin of western Texas aifd ©

southeastern New Mexico. The area accounts for around

11. percent of all natural gas that moves in interstate com-

merce and primarily serves. the California market. Ex-

tended. administrative hearings were held before a Com-

mission Hearing Examiner, who issued his initial decision

in 1964. On review of the Examiner’s decision, the Com-

mission issued its decision and orders prescribing area

‘rates for the Permian Area in 1965. Various producers .

perfected appeal for judicial review by the Court of Ap-

peals for the Tenth Circuit, which issued an opinion in

early 1967 sustaining in part and setting aside in part the

decision of the Commission. Subsequently, producers, the

Commission and distributor interests petitioned this Court

requesting writs of certiorari be granted to review the

decision of the lower court. The petitions were granted ©

and the cases consolidated. This Court directed that brief-

ing and oral argument be divided as to those supporting

and those opposing the Commission’s decision. Mobil —

urges that certain portions of the Commission’s decision

~ be reversed: by this Court. e

1. THE CoMMISSION’S PERMIAN DECISION.

‘ . After almost two: years of hearings, which produced

a transcript of over 30,000 pages and which involved

some 384 parties representing producers who were made

respondents in the hearings, and numerous: affected dis-

tributor and consumer groups, the Examiner issued his

decision on September 17, 1964. (R. 97d-364d). The

Commission issued its decision on —s 5, 1965. ( R.

516d-826d).

a. The area approach.

The Commission determined that it iat statutory and

‘constitutional authority to determine producer rates on an

area’ basis as opposed to individual rate determination.

This decision was based primarily on the characteristics -

of the producing industry as the Commission mterpreted .

~ them. In so concluding, the Commission compared its

area.method to other area methods of rate regulation em-

ployed by Federal regulatory agencies, primarily in the ~

fields of transportation and communications. The Com-

- mission also interpreted this Court’s decision in Phillips II

as authority for its attempt at determining just and rea- -

sonable producer rates on an area basis. (R. 541d-552d).

b. The two-price system.

- The Commission coricluded that the record before it

indicated that the producing industry now possesses. the

ability to direct exploratory activities toward either oil or.

gas reservoirs. From this conclusion the Commission deter-

mined. that a two-price system of area rates should be

adopted, since a higher rate was justified for recent and

future gas discoveries than that allowed for gas already

discovered and flowing i in order to induce exploration for

adequate supplies of gas for the present and future con-

sumer. The division date between the two classes. of gas

was set at January 1, 1961, a date which the Commission

felt was near the time ae orga became widespread

in the industry. (R. 563d-572d).

c. The basis of the area rates.

The Commission held that the maximum area rate ap-

plicable to gas well gas (gas not produced in association

with oil) in the Permian Area contracted to interstate

sales subsequent to January 1, 1961 (termed new gas),

should be determined on a nationwide basis from averages -

_of certain items of cost incurred in association with the

production of gas. The rate for new gas well gas was based

primarily on averages of nationwide statistics representing

_ what the Commission felt were the current costs of finding

and producing natural gas. (R. 572d-577d). In so con-

cluding, the Commission rejected producer contentions

that producer contract rates should be the basis for- deter-

mining just and, reasonable rates. (R. 552d-558d). The

Commission also refused to adopt a reserves to production

ratio as a regulatory standard. (R. 558d-563d). The rate

for old gas well gas, that contracted to interstate sale prior

to January 1, 1961, was determined primarily on the basis

of the historical costs of gas well gas in the Permian Basin.

_{R. 624d-639d). Again, the Commission based the rate

on various cost items incurred in producing gas. Further,

‘the old gas well gas rate was-made applicable to all casing-

head gas (gas produced in association with oil) and all

residue gas (gas remaining after gas well gas or casing-

head gas is processed to remove liquid hydrocarbons),

except residue gas derived from new gas which was given

the same. higher rate as new gas. (R. 615d-624d).

d. The rates picid

Using nationwide cost, the Commission determined that

the averages of the} various included cost items justified

an ar te for new gas of 16.5 cénts per Mcf (thousand

‘cubic feet o Baty, including taxes, in the Texas Permian

Area and 15.5 cents, plus tax, inghe New Mexico Per-

mian Area. Using the historical Permian costs, all other

gas, termed flowing gas (old gas well gas, residue gas and

casinghead gas) was priced at 14.5 cents, including tax,

in Texas, and 13.5 cents, plus taxes, in New Mexico. (R. -

570d-572d, 688d-689d). Having prescribed maximum

- area rates, the Commission also concluded that all pro-

ducers, both in.the New Mexico and Texas Permian Area,

should be allowed to make/ unilateral filings for a 9 cent

per Mcf minimum rate, e if the applicable contract

specified a lower rate. (R. 669d-671d).

‘e. Quality deductions from the rates prescribed.

Having determined maximum and minimum area rates, |

the Commission’s order provides that the applicable area

‘tate which a producer will be allowed is to be determined

by deductions from or additions to the maximum area .

rates, and deductions from the minimum area rate re-

' flecting deviations from a pipeline quality standard set

by the Commission for interstate gas. The standards re-

flect the carbon dioxide, hydrogen: sulfide, sulphur and —

water content of gas plus its pressure and heating value.

The amount of the deduction from the maximum rate is

to be measured by the pipeline purchaser’ s cost of bring- .

ing producer’s gas up to pipeline quality. The precise ex-

tent of these specific deductions was unknown at the time ©

of the decision. In regard to heating value (BTU), pipe-

line quality gas was determined to be that gas having

between 1000-1050 BFU’s per cubic foot. Proportional

upward or downward adjustment for the maximum rate

was prescribed for gas outside this range and made ap-

plicable to all gas. (R. 645d-656d, 1108d). The quality

standards were also made — to minimum rates.

(R. 671d). sn

f. Rate of return. : Sats *

_ In computing the maximum area rate for both new and

* flowing gas, the Commission adopted a 12 percent rate

+. ate

_ of return which was to reflect, in addition to being a

return On production investment, the. “risk of finding gas

_’ of less than pipeline quality” in the Permian Basin (R:

614d, 633d), and the need for current funds to finance

future exploration. (R. 633d).

g. Special exemption from the applicable area rate. —

In framing the limits of the exemption provision the _

Commission was clear in noting that it was not dealing

with sales to be certificated after the date of its decision. ©

° “However, the Commission did note that’ its decision has

_ a double impact on gas. presently being sold interstate:

the future price of that gas and the amount to be refunded

for the past sale of that gas. The Commission provided |

* the outline of a procedure for exemption from the ap-_

' plicable area rate for aggrieved producers,. noting that

where producers who have contracted for “an above ceil-

ing price” can show out-of-pocket expenses in connection .

with the operation of a particular well above revenues

_ received from the applicable area rate (the maximum less

or plus quality standards), gthe Commission will grant

Bsc npr relief.” The Corgmission also noted that there

ay be other situations where “appropriate relief” should

be granted. “Appropriate relief” was further defined to

indicate that in most cases “it may ‘be sufficient to permit

them [producers] to abandon their unprofitable sales.”

In relation to a refunding of amounts collected in the past ~

above the applicable area rate, whatever that rate, - the

Commission notéd that a producer should not be required

“to make refunds for past périods [not defined] which

would deprive him of amounts sufficient to cover his out- -

of- pocket Operating expenses inthe Permian Basin for such r

period.” The Commission refused to speculate further “as

to the exact circumstances in which special ‘relief may be

'- warranted” and held that until relief was granted a pro-

ducer would be bound to continue service at the — .

"rate. (R. 65-6604).

h. The moratorium on rate increases. 2,

The Commission imposed an absolute pee on

the filing of contractually allowable rate increases above -

‘the applicable maximum rates until January 1, 1968. To .-

avoid the moratorium, a producer must reopen the area .

_ proceeding to allow consideration of modifications. The

Commission reserved the right “in its discretion® to reopen

for moratorium modification. A primary justification for

the moratorium was that costs, concludéd the Commission,

would remain stable from the 1960 test year that forms .

the basis of Permian rate calculations. (R. 6604-6694).

i, Permanent prohibitions certain pricing clauses. .

_- With respect to Section 4 rate increase filings based on

certain flexible pricing clauses in existing contracts, which

the: Commission found to be objectionable, filings for a

contractually- allowable rate increase above the. applicable

area rate were permanently ,prohibited. Filings based on |

_ such‘clauses were ene up to the 7 area rate. —

(R. 682d-683d).

j. j. Refund ‘of amounts above the area rates.

‘Regarding rates that have been collected subject to re-

' fund under Section 4 (e), the Commission ruled that

it would require refunds of the difference between the

' applicable area rate (maximum rate adjusted for quality

standards) and the amount previously collected under

the increased rate. Refunding would be only for the

period that the increased rates have been in effect but ,

: ae .

‘would include both the Section 4( e) increase as well

as that portion of the rate collected prior to the increase

filing which may be above the applicable area rate and .

which has been collected since the increase filing. (R.672d-

675d). The Commission previously commented on the

possible application of the exemption provisions to these

_ .refunds. (R. 569d-660d).

_ s -k. Small prodycers.

: The ‘Commission determined that any producer whose

‘ annual sales subject to the Commission’ S$ jurisdiction were

less than 10 million Mcf of gas per year should be classi-

‘ - fied as a “small producer.” The Commission further deter-

mined that the area rates should be applicable to small

producers, but without- downward adjustment for gas of

- - Jess than pipeline” quality. The Commission further in-

‘stituted a rulemaking procedure to simplify Section .7

applications by small producers (certificates of public con-

venience and n@essity) and relieve annual reporting re-

quirements. (R. 675d-682d). However, if a small pro-

ducer wishes to take advantage of upward BTU adjust-

ment for a particular Sale, all other quality standards are

applicable to the sale. (R. 675d).

y 3 THE D ION OF THE TENTH: Circurr.

Following the Commission’ s refusal to alter the tiesic

principles of its Permian decision, numerous producers,

along with the States of Texas and New Mexico, filed

petitions to review the Permian decision and accompany-.

ing orders. On January 20, 1966, the Court of Appeals

for the Tenth Circuit stayed the application of the Permian

orders insofar as they require rate reductions and refunds.

eal R. 12-14). | A

Tent Circuit found that the Commission did have

- constitutional”and statutory authority to attempt to de-

termine producer rates by use of an area method. (XII .

_R. 31-38). It upheld the Commission’s. adoption of a

‘ two-price system: and ‘the chostn division date. (XII R. .

38-40). The Court refused toquestion the Commission . °

selection of cost information used in setting the applicable.

area rates. (XII R. 40-41). The Commission’s moratorium

- on Section 4 rate increase filings was approved. (XII R.

43-44). However, the Court refused to either approye

or reject the Commission’s order regarding the filing‘ for

rates above the. applicable area rate based on certain |

escalation clauses reserving a decision. until a producer.

sought waiver of the ban and was rejected. (XII R. 44).

~ The Court felt that the Commission. had adopted a

_ “fair relationship standard” for reviewing administrative

rates as opposed to the “end result” test previously ap-

- preved by this Court. (XII R. 44-46): The Commission

- treatment of small producers was approved and the Court

obsef'ved that the problem of high cost. producers was in-

herent in any system of area regulation, but that “the

impact of the Permian rates,on the high cost producers

_-. does not destroy the area rate method.” (XII R. 46-49).

In relation: to gathering and processing. costs, and the .

Commission’s allowance of the same rate for-gas delivered -

. at the tailgate of a processing plant after gathering and

processing as that allowed for gas sold at the wellhead

before gathering and processing, the Court regarded al-

lowance of such an element of individualization which °

should not be allowed in an area proceeding, noting

_ further that if disallowance of such was confiscatory,

relief should be granted individually. (XII R. 49-50).

The Court found the special ‘exemption provisions “

} .

SO —

15.

vague” and nebulous that neither they [Commission] nor

a court can determine what relief is being granted.” (XII__

R. 50-51). In passing on thd legality of the quality stand-

ards and their effect on the applicable area rate, the Court |

refused to rule on producer contentions that imposition

of the standards was without notice and, violated due

«process since “We are remanding the case and now. every-

one has notice.” The Court further noted ‘hat the exact

impact of the quality standards on the maximum area rates

was unknown and that it did “not understand the Com-

- mission’s reasons” for the 50 BTU gap in lowering or

- Taising Price. (XII R. 51-53).

Turning to the rate of return allowed: the Court was

- not persuaded by the Commission’s reasoning that the

possibility of finding gas of substandard quality which.

- would receive a price-much lower than the maximum area

rate had been “taken care of” in determining the allow-

able rate. The Court held that by treating the impact of

quality ‘deductions as a risk instead of.a cost, and given

the unknown impact of the quality deductions, “the.Com-

mission has made it impossible to determine the «amount

of return with any degree of certainty”, and that since

.- producers were already burdened with the risk of dis-

covery gas “The Commission has here compounded the

risk of discovery with the risk of substandard quality.”

- (XII R. 53-54). The Court felt that the price reductions

to reflect quality deviations should be an item of cost

rather than a risk factor, since about ninety percent of

' Permian gas is substandard (XII R. 52) and “should be

directly reflected in the applicable base rates instead of

hidden in a rate of return allowance.” (XII R. 54).

Regarding contract limitations that would preclude pro-

. ducers from receiving’ the applicable area rate and the

impositién of a minimum rate, the Court agreed with -

the Commission that “contract limitations do not pre-

_. @Clude the establishment of a just and reasonable area

tate.” However, the Court refused to pass on the legality

of the 9 cent minimum since it felt the controlling ques- _

tion: was whether the revenue: requirements of Permian

producers “as a group can be satisfied with rates having

the ceiling and the floor which the Commission has fixed.”

Because of the, absencé of the impact of quality deductions —

‘in. the record, this could not be ascertained. (XII R. —

55-57). The Court could see “no escape” from ordering

refunds on an individual basis for those rates being col-

lected subject, to Section 4(e) rate increase filings which

were above the applicable area rate. But the Court di-

rected -that producers be heard on any confiscation issue

raised by refunding, and similar treatment must be allowed

” if refunds are to _be below the “last clean rate” (perma-

nently certified rates previously in effect not subject to

refund). (XII R. 57-58). Yo Laie is,

’ And finally, noting that “The Commission held that its

ceiling provided a ‘fair relationship’ between consumer

‘prices and producer ‘costs”, the Court ‘felt that this was

not complete satisfaction of the “end result” test which

this Court has previously prescribed in judging regulatory

results. The Court felt that the “end result” test could

not be. satisfied by reliance on unknowns as the Com-

mission had done in its Permian decision. Specially, the

Court found that the unknown impact of the quality de- |

_ ductions prevented the Commission from finding that the

proposed area rates would provide producers, as a group,

_ “their prudent operating expenses and capital costs with

a return commensurate to the risk and sufficient to attract

capital.” (XII R. 60). Therefore, the Court held that the

“cases must be remanded because the actions of the ~

Commission do not comply .with the end result test estab- .

lisied in. Federal Power Commission v. Hope. Natural

Gas Co., 320 US. 591, 602-603, aes other cociatoms. ,

(XII_R. 22).

On rehearing, the Court altered its refund ie con-

cluding that no refund obligation could be imposed for a

period in which there was a “group revenue defitiency”

- and that the. amount of refund must be considered in

balancing group revenues and, requirements. (XII R.

_ . 88-89). The Court further refused to rule on whether an

_ area rate established in a Section 5 proceeding automati-

cally becomes an in-line rate for a Section 7 initial certi-

fication proceeding and new gas being sold interstate, ee

noting that the principle may be affectéd by the final

validity of the Permian area. rate. (XII R. 88-89).

“SUMMARY OF “ARGUMENT

These consolidated cases bring before this Court the

questions ‘surrounding the legality of the results of the

_ Federal Power Commission’s first area rate proceeding.

The proceeding has determined what the Commission con- ,

- siders. to be just and reasonable rates for the Permian

Basin area and has devised and applied the method by

which those rates are to be made applicable to producers

in the area. Mobil does not attack the authority of the

Commission to determine producer rates by an area

method. Mobil does attack certain of the results which

the Commission’s area method has produced. ‘This sum-

. mary is divided into those points which Mobil ‘raises as

petitioner and into those points which. Mobil answers as

respondent.

18 =:

As Petitioner, Mobil presents to this Court four issues.

First, Mobil questions the decision by the Commission to

adopt a dual pricing structure with a lower maximunf

applicable to older gas than to newer: gas since such a

- Structure ignores the basic industry characteristic that

gas. is sold for its present value as energy; ignores the fact

that funds for future exploration are generated from cur-

rent, revenue; ignores the fact that new gas reserves can

be developed under old reserves previously committed

to interstate service; ignores the fact that by its-own ad- —

mission the cost of replacing old gas is higher than the

revenues received from such old gas; and taises the spec-

. ture’ that old and: new gas prices may-be lowered in the

future thus defeating financial expectations where gas -

is committed interstate on the —_ of present area ceil-

ings.

_ As” ‘anal ania third points, Mobil: as” Petitioner” yues-

tions the statutory authority and reasonableness of the

-Commission’s actions in imposing a moratorium on all in-

creased rate filings above the maximum area rates for a-

, specified period ‘of.time and in permanently prohibiting

"rate increase filings based on flexible pricing clauses since’

such actions are not justifiable by reason of the specific

__matural gas companies the option to file for contractu- |

ally allowable rate; are not ‘justifiable - in that existing

contract rate structures which have formed the basis for.

commitment of gas to interstate sale are disrupted thus ~

destroying previously approved contracts; and are not

' justifiable when such action destroys the only means by

which an aggrieved producer may exempt himself from

the applicable area rate.

And, as a fourth point, Mobil as Petitioner questions

the Commission in excluding ‘gathering and processing

rate changing and refund provisions of the Act giving

£7

aCe

| re i |

.costs from the various jtems whose averages were ued

to cost both old and new gas. Had .these same costs been

incurred by a jurisdictional pipeline, they would have

been included in the pipeline’s rate base and cost of ser-

vice and passed to consumers. The Commission in its ©

determination of both old and new gas provided the same

price for gas sold interstate at- the wellhead prior to

‘gathering and processing as for that sold after gathering

and processing are completed and the selling producer

burdened with such costs. Such costs are a legitimate

and reasonable cost of producers who must gather. and

process to sell their gas. The average cost of gathering

and processing on either a nationwide or area‘basis should.

have been determined from the record before the Com- ©

mission and this item of ‘cost “included. '

As Respondent, Mobil answers the various Briefs sub-

mitted in support ‘of the Commission’ S decision by the

following points.

First, thé Commission has failed to allow a rate of re-

turn’ which is in keeping with the previous decisions of

this Court. In allowing only a 12 percent rate of return

‘on-production investment the Commission has failed -to

consider those characteristics which set the industry apart

from not only the pipeline industry but other service jn-

_ dustries. However, even considering the 12 percent level,

because of the impact of the quality deductions as well as"

the allowance in the flowing gas rate for generation. ‘of

funds from current revenue for future exploration the

producers will not earn the 12 percent rate. This clearly -

indicates: that revenue requirement will not be recovered —

and by the Commission’s own standard the end results of

the Permian area method are unjust and unreasonable. —

Second, the Commission has determined’ that a mini- |

mum rate should be allowed, but as set a minimum rate

which will not provide an opportunity for recovery of the

revenue requirements which the ‘Commission has deter-

mined for the Permian area.

Third, Mobil as Respondent questions the seis of

the exemption provision-which the Commission has in- .

cluded in the Permian decision both as being too gen-

eral in not specifying in more detail the individual relief

which a producer faced with, confiscation may obtain.

and in suggesting relief through abandonment. Previous

comment has been made as to the effect that the mora-

torium and the ban on flexible pricing. clauses will have

on the exemption provisions. Abandonment provisions -

_ and exemption provisions serve two differing purposes in

regulatory schemes and the Commission has erred in con-

fusing them. Further, the Commission should: ‘be required

_ to stay the effectiveness of the applicable area rate pend-

| ‘ing determination of the question of ¢onfiscation. Other-

wise, the rates requested will be lost irfevocably to the

‘- ‘aggrieved producer.

_ Fourth, Mobil questions the siesta authority of the

Commission to use the just and reasonable standard of

Section 4 to require refunds below a rate level previously

- permanently certified by the Commission under Section 7.

The refund obligation of Section 4 properly ‘extends only

~ to the increase above the “last clean rate” since once a

rate level is permanently certified by the ‘Commission, it

may only be altered by Section 5, which only -— ptospec-

tive effect. aVheR a

Fifth, because of the Tenth Circuit’s failure to. approve

the Permian area rates, it did not. decide the issue of

‘to certain portions of its Permi

whether the ‘eitiadihe, area ‘rate should automatically te .

applied to initial certifications under Section 7. Because

the issue*has not been decided" by a lower court, this -

Court should not decide it. Should this Court reverse the: -

Commission in Permian, the issue would of necessity be

: remanded to the Commission.

: ARGUMENT

INTRODUCTION

In Phillips II (Wisconsin v. Federal Power Commission, _

373 U.S. 294 (1963)), this Court approved the Com-

Iission’s attempt at determining just and reasonable pro- «

ducer rates by the use of an area as opposed to an indi-- ~ =

vidual method. But in approving the attempt, since it is

the result reached and not the method used which is con-

trolling, this Court made clear that it was hot approving

results; noting that the results of the area method would

still be subject to review to determine if they ‘meet the

constitutional and statutory standards applicable to the

Commission and its ‘rate orders. It is the contention of

Mobil, both as petitioner. (Part: I of this. argument) and

as respondent (Part II of this argument) that in regard

obtained by use of the area rate method.do not meet

— constitutional or statutory standards.

I. Mosit As PETITIONER

x: The Commission Erred In Imposing A Dual

Pricing Structure Which Classified Gas As

“New” Or “Old” According To The Date Of .

Execution Of The Applicable Gas Sales Con- °

tract And Imposes Lower Rates For “Old” Gas.

Under the Commission’s concept of dual pricing, gas

well gas and residue gas therefrom contracted to interstate

decision, the results

se EPAPER

‘i nee oe or.

sale on or after January 1, 1961 is to receive a higher

new gas price/ Gas well gas committed to contract | prior

to that date as well as casinghead gas and all. other residue

gas is to receive a lower “flowing” gas price. (R. 563d- —

569d). Both prices are of course subject to quality de-.

ductions. The Commission has thus adopted a system of

= ‘regulation. where deliveries of similar quality gas during a -

given year may bring different prices. The Commission ~

has adopted a system of rate regulation which ignores the

economic characteristics of the industry and the neces-

sity to generate internally the funds for future explora-

tion. The Commission has raised the spector .of entrap-

ment whereby producers who commit gas in reliance on.

existing levels of price have no assurance that such rates

: will be maintained for the future. What is new gas at the

_ present may well be lower priced flowing gas in: future

modifications of the Commission’s opinion. Further, the

Commission has indicated that the old rather than the

new price of gas will be applicable to new reserves de-

*. veloped under previously. committed ‘acreage.

It is Petitioner’ s contention that the Commission’s ap-

plication of the dual rate structure in Permian results in

y: regulation which is unjust and unreasonablé in light of

- existing economic. realities and the need for continuing .

replenishment of gas reserves.

‘The Commission Is Bound In Its eeiitanais At-. «©

"tempts By A Just And Reasonable Standard Which

~& This Court Has Held Requires A- Balancing Of

Consumer- And Investor .Interest.

In Federal Power Commission v. Hope “Natural Gas .

Company, 320 U.S.°591 (1944), this Court, in an opin-

‘jon by Mr. Justice Douglas, explained the just and rea-

‘sonable. regulatory standard of the Natural Gas Act.

The rate-making process ‘indies the ‘Met, ie., the

fixing of “just and reasonable” rates, involves a.

. balancing of the investor and the consumer interests.

320 USS. at 603.

Operating within this standard, the question remains: Is a

dual pricing structure just and reasonable and a balance

of both consumer and investor interests?

' 2. The Two-Price System Ignores The Economic ‘Char-

acteristics Of The Producing Industry And Will Not

Provide The Necessaty Incentive For Future Ex-

ploration And Development Of ‘Gas Reserv

By imposition of a dual price, the PVE has held

_ that there are two maximum area rates which are just

‘and reasonable to each affected producer and his various ~

interstate sales. The basic Commission justification for .

a two-price structure is based on the conclusion that

since the producing industry now possesses the ability to:

direct exploration toward either gas or oil, a higher rate

should be allowed for “future” gas. well gas in order to

stimulate exploration activities for gas. Unlike earlier in-

> dustry development when gas well gas was found merely | ;

as a- ‘by-product in the search for oil, and flared, the

supply of gas is directly related to the price it. receives in’

_. the maket place. |

" By its price justification for dual pricing, the Commis:

sion has contradicted itself.. It has recognized that the

. cost of new’ gas is higher than flowing gas discovered

- when prices were lower. It has also priced: flowing gas

at what it considers to be the area level of the cost of

finding flowing gas. Therefore, -the Commission. has ac- .

knowledged that the present replacement’ cost of gas is

-higher than the cost formerly encountered in finding

flowing gas. Yet the industry is expected to replace gas

z a w& - ° =

COSI IIO LP OTE AD OG CPO.

A 0 AL LI

* at present high costs with revenues based on the lower

costs of flowing gas. The prime source of funds for ex-

ploration and development in -the ‘industry is current

revenue. As Cominissioner O’Conner recognized “ . ..

- since the natural gas industry generates a large portion of

_its own capital, it thereby underwrites current explora-

tion by the older production. Reinvestment is an accepted

‘and necessary feature’ of the industry, and the revenues it

receives must be a source of funds for continued and

increased nationwide exploration and development.’ ” (R.

751d). The Commission’s Brief to this Court ignores this

“factor ‘when it states ‘the price of flowing gas “will have

no significant effect in eliciting additional ‘supplies of gas.”

(Comm'n. Br., p. 87). The Commission itself has recog-

that if consumer interests are to be supplied with

gas to-meet their demands, the producing industry must

~ do more than merely replace the amount of gas consumed

each year. (R. 568d). The Commission, in its opinion,

took notice. of the need for current generation of funds

for future exploration and stated that it had not over. .

- looked ‘this’ factor and had included this need in the

flowing gas price.. (R. 566d).°-The question is where in

- the flowing gas _price has this factor been considered. —

In attempting to justify the dual pricing structure, the

‘Commission relates the two-price structure to. the home —

. mortgage field. Noting that the ceilings for interest. rates

on FHA or VA loans are periodically established on the

basis of what interest rates will then elicit sufficient mort-

_ gage funds, -even though the rates will remain constant

for the life of a twenty to thirty-year mortgage, the Com- -

‘ mission stated that “Changes in these ceilings may mean

that a mortgage obtained one day will be ‘substantially

more expensive than one obtained on the same type of

- 25.

, building a oe earlier.” ible, Br., pp. 88-89). Gun. |

- rent ceilings for interest on government guaranteed home

loans reflect the current money market. What the Com-

- mission overlooks in ‘its analogy is that in determining cur- .

- rent, mortgage rate‘geilings, the source an¢d<the time when

money came into the mortgagee’s hands aré not considered.

Regardless of the cost of the money to him, whether ob-

tained when money is cheap or expensive, the current

_interest factor is allowed on a current mortgage.

Further, there is the possibility that the dual-price system °

- will not provide the reward for exploration it is intended

~ to encourage since the Commissidn could reduce the

-“new” gas rate after the producer has made a financial °

commitment on the basis of the new rate. The Commis-

sion’s Brief to this Court acknowledges this possibility,

‘but states that “such uncertainties inhere whenever gov-

ernment fixes prices” (Comm’n. Br., p. 89), and one can

only “assume that should the Commission some day lower

the price of new gas-well gas, it would do so prospec-

tively.” (Comm'n. Br., p. 89). ‘This is little or no. as-

‘surance to a producer risking millions of dollars in future

exploration and committing gas interstate in reliance on.

a certain. price level in order to recover the investment.

The Commission has also ignored the problem of new

- gas exploration under acreage previously committed to

interstate sales by “old” contracts. The development. of

newer and more’ costly drilling equipment raises the pos-

_ sibility that newer and additional gas supplies may be

‘developed by deeper drilling on committed acreage: Cer-

tainly the Commission will not deny that the cost of such

gas is comparable to that encountered in drilling uncom-

‘ mitted acreage. This problem is not answered for Permian

producers by. the fact that the ae, is being considered _

in another area proceeding. (Comm’n. Br., p. 92). Neither

is the problem satisfied by citation to a “long-etablished

policy of. treating alike all gas from acreage committed

under a contract. E.g., Placid Oil Co.,.26 F.P.C. 166.”

(Comm’n. Br., p. 92). This effect on new gas ftom —

“old” acreage clearly is an inconsistency in the Commis-

sion’s dual pricing structure for the Permian area.

Finally, the Commission’s dual pricing order ignores the

economic fact that gas, as is any commodity, is sold for.

its present worth. In no other instance of group ratemaking

are the present rates for services or commodities so re-'

stricted in relation to the date they entered the regulated

market. By dual pricing the Commission attempts to im-

pose a method of regulation which is not in conformity

with the economic characteristics of the producing industry

and is thus unjust and unreasonable.

B.. The Commission Erred In Proscribing The Fil-

ing Of All Rate Increases Above The Applic-

able Area Rate For A Specified Period And

In Further Permanently Proscribing The Filing

“Of Rate Increases Under Certain Flexible Pric-

ing Clauses In Existing Contracts.

Two orders of the Commission, while presenting separ-.

ate error, are interrelated and will be discussed within the

framework of a single point for the purpose of clarity and

understanding. Both provisions deal crippling blows to the.

right of a producer to seek a rate higher than the maxi-

‘mum rate levels authorized by the Commission. Both pro-.

‘visions represent an attempt by the Commission to pro-

scribe the right of producers with previously certified sales

to ‘seek a-higher rate allowed by and under a contract

previously certified by the Commission. The first order to

be discussed, the general moratorium, prevents the filing

of any contractually allowable rate increases above‘ the-

_. =e.

_ applicable area rate for a specified time. The second order,

. applicable during and after the general moratorium, per-

manently bars the filing of rate increases allowable under

certain proscribed pricing clauses in existing contracts.

Both orders are an unreasonable and unjust attempt by

the Commission to insulate itself from judicial review. even

though statutory provisions aes adequate protection

for consumers.

1: The Commission’s Moratorium On Rate Increase

Filings Is: An Invalid Limitation On The Ratemak-

- ing And Rate Changing ee Embodied In The

: Natural Gas Act.

The Commission i in its order determining area rates for

the Permian Basin prohibited all ‘contractually allowable —

Section 4 rate- increase filings in excess of the applicable

area ceiling until January 1, 1968, unless the Commission

grants special leave to file in advance of that date. (R.

‘660d-669d). As- the Commission correctly noted in: its

Brief to this Court (Comm’n. Br. p. 69; fn. 44), while

this Court’s decision may postdate the expiration of the

original moratorium,. the validity of the Commission’s

‘moratorium is important for other area rate proceedings

as well as for possible extension or reinstatement of the

Permian moratorium. Mobil questions the legality and rea-

sonableness of the Permian moratorium in light of the ex-

pressed rate-changing tights. granted by the Natural Gas

Act and the expressed statutory duty. of the Commission

to regulate natural gas —_— in a just and reasonable

* Manner..

a. The Commission has no. statutory power to

impose a moratorium on contractually allow-

able rate increases in a proceeding determin-

‘ing just and reasonable ratés.

mo Wey 4(d) of the Natural Gas Act requires natural

gas companies to file notice of proposed contractually

allowable changes in existing rates. The Commission may

suspend the new rate for up to five months under Section

4(e), pending a determination of the justness and rea-

sonableness of the proposed increase. If the Commission

has not completed its determination at the end of the five-

_ month period, the increase may be put into effect subject

‘to refund if later found to be unjust and unreasonable.

Under Section 5(a) of the Act existing rates may also

be changed. ‘Under this section the Commission may order.

a rate change, not otherwise allowed by contract, upon a

- finding that existing rates are unjust and unreasonable.

While the procedures of both Sections 4 and 5 are ad-

dressed to the same. general subject matter, that is to say,

the changing of existing rates charged by. a natural gas

company, it is beyond question that each procedure is

available only in certain prescribed -situations. Thus, the

Section 4(d) and 4(e) mechanism may be used only when

- a natural gas company seeks to change its rates by filing

_ for contractually allowable increases. Section 4(d) not

* only expressly prohibits a gas company from changing

its rates without complying with the procedure therein set

out, but makes no provision for its invocation by any

other-party, namely the Commission. In contrast, Section

. 5(a) permits the initiation of the procedure there provided

by the Commission or by “any Staté, municipality, State

commission, or gas distributing company.” Significantly,

natural gas companies are omitted from the detailed

enumeration of those authorized to invoke Section 5(a).

_ Thus, Section 4(d) and (e) and Section 5(a) together

deal with all situations in which changes in existing rates ,

may be sought and each procedure complements the other.

_ Rate changes in existing rates when initiated by a gas

_ company are processed under Sections 4( vide and ds ©),

wid when begun by: someone other than the natural gas

company itself are governed by Section 5(a).

The Commission places primary reliance for its mora- —

torium power upon Section S(a) which gives the Com-

mission power to:

; [Determine the just and reasonable rate, charge,

classification, rule,- regulation, practice, or contract

to be thereafter observed and in force, and . . . fix

the same by order . . . [Emphasis added].

By.so doing the Commission confuses the proper roles -

for Sections 5(a) and 4(d) and (e) and attempts to apply

Section 5(a), which does not set forth the rate changing :

procedures applicable to rate _changes-instituted by natural

* gas companies, to contractually allowable rate increase

filings instituted under Section 4(d). As previously demon-

strated Section 5(a) applies only to.those proceedings in-

stituted by the Commission, or “any State, municipality,

State commission, or gas distributing company.” A natural —

gas company may not institute a Section 5(a) proceeding.

_ Further, the Commission may not institute a Section 4(d)

_. and (e) rate increase filing. This is reserved exclusively —

for natural gas companies. Regulation under the. Act, as

evidenced by Hope, is-a balancing of consumer and in-

vestor interests. 320 U.S. at 603. This is plainly evident

in the filing and hearing rights granted by Sections 5(a), -

4(d) and (e). To say that the language of Section 5(a)

may be used to prevent Section 4(d) filing is to also say

that the language of Section 4(d) may be used to prevent

the Commission from instituting a Section 5(a) proceed-

ing. Such was and is not the intent of Congress as evi-_ -

denced by the _ and clear _— of the Act.

"30

The Commission also attempts to support statutory

justification for the moratorium by reliance on a series of

decisions by this Court interpreting both the scope” of

Sections 4(d) and 4(e) and defining the Commission’s

power over. the initial certification of interstate gas sales

under Section :7. iets es ‘

‘ Quoting in _ of the moratorium from United Gas

Pipe Line Company v. Mobile ,Gas Service Corporation,

_- 350 US. 332- (1956), the Commission notes. tat this

-. Court has stated that: one vA

. §4(d)- is simply a prohibition, not a grant of

power. . . . it does not say under what. circumstances

a change can be madé.. . 350 US. at 339.

Taken out of the context in which it was written, the state-

ment seems. to support the Commission’s position. Aside

from being an incorrect interpretation of what Mobil con-

_ tends, is the true role of Section 4, as discussed previously,

‘the Commission has failed to correctly interpret this

Court’s holding in Mobile. As has been‘ expressed pre-

viously : | F

’ [T]he fundamental icaching of Mobile. ris] : . that.

the Natural Gas Act, in preserving private contracts

between the natural gas companies and their pur-

chasers did not limit the companies’ contractual rights

' to change rates. Hence if a gas company has the

power (either by contract or otherwise) to change

its rates; that right is unaffected by.the Act and

7” continhes in full force and effect... . . However, if

the gas company has no such right apart from the Nat-

~~ ural Gas Act, the Act did not bestow that right upon

"it, and it is without power to change its rates except

with the agreement or acquiescence of its purchasers.

[Comm’n. Br. to this Court in United Gas Pipe Line

LOA TLS Reels 31 a

Commany v. Memphis Light, Gas and Water Division,

Nos. 23, 25 and 26, October Term, 1958, P. 31].

(Emphasis added 3 in part).

_ Thus Mobile-stands for the cecbballion that:

—

ib ea [T]he sole function of the notice-and-filing require- .

’ ment of Section 4(d) is to enable the Commission ‘to

i review, for compliance with the statutory standards,

ery those new rates which a natural gas company may be ©

Lae oh empowered to file on the basis ‘of authorization inde-

pendent of the Act. [Comm’n. Br. to this Court,

, United Gas Pipe Line Co. v. Memphis, supra, p. 32).

And thus, Section: 4(d) “does not say ‘under what circum- 3

_ Stances a change can be.made” since: this is left to the con-

tracting parties. As this Court noted in Mobile:

.°§4(d) on its face indicates no more than that

- otherwise valid changes cannot be put into effect with-

; - Out giving the required notice to the Commission. .

‘it os 350 US. at 340.

. Further in Mobile, this Court, in a undnimous decision

. delivered by Mr. Justice Harlin recognized that the Natural

Gas Act was not intended “to abrogate private rate con-

: tracts as such” and as the Commission has observed in

‘its Brief to this Court in these proceedings: “This Court

held in . . . Mobile . . . that under the Natural Gas Act

rate regulation is superimposed on—not o_o for—

private bargaining.” (Comm'n. Br., p. 93).

Subsequently, in United Gas Pipe Line Company ve,

Memphis Light, Gas’ & Water Division, 358 U.S. 103.

(1958), this Court recognized that the. corollary of .

Mobile was that. where the contract left the seller free

to file rate increases in an .existing rate, he could act ©

unilaterally under Section 4 and file such rate increases

with: the Commission. ‘The rationale of the two decisions

was best expressed by this Court in Sunray Mid-Conti-

nent Oil Company v. F. ederal Power Commission, 364

U.S. 137 (1960). - .

In Mobile, this Court held that where a seller of gas

had entered into a contract for the sale, it could not,

by virtue of the provision in § 4 for rate ehanges, file

“an increase in rates that violated the t of the

contract. This was because the heme the Act

was one which built the regulatory system on a

eg of private contracts. It, was held in the

emphis case [citation omitted] that. the corollary

of Mobile was that where the contract left the seller

free to act, he could’ act unilaterally under § 4. 364

US. at 154-155. (Emphasis added).

Of course, implicit in the reasoning of ‘the Court i in. eon

Mobile and Memphis is the assumption that although

Section 4 allows the -filing of contractually permissible —

_ rate increases and the collection of the ‘increased rate

subject to refund,: the: increased rate ‘does not become

final and. binding until the Commission has determined

it to be just and reasonable. This is the protection which

the Act provides for the consumer while the justness and

reasonableness of the increase is being tested. .Contrary

‘to the impression which the Commission attempts to

foster, the mere ‘filing of a contractually allowable rate ~

increase does not mean that it automatically becomes the

just and reasonable rate. Only after a hearing. on the

increase does the Commission make this determination. |

In both Mobile and Memphis there is no indication or

intimation in either decision that the Commission may

abandon its duty and obligation under Section 4 to de-

termine if contractually allowable rate increases are -”

a ie

and reasonable at the time of their filing by. probing |

‘their filing. The Commission is not empowered under

the Act to thus insulate itself from judicial review

' producers desiring to question the level of applicable area

rates, .. x

This Court in Sines Mid-Continent vikaceied per-

haps the most important reason for Congress. allowing, °

in the Natwral Gas Act, unrestricted filing of contractually

allowable -rate increases. Recalling its ‘decision in ATCO

. ‘(Atlantic Refining Company. v. Public Service Commis-

sion of the State of New York, 360 U.S. 378 (1959) )s

this Court observed:

“ae 2

An initial application of an independent pra ees to

make movements of natural gas. in interstate com-

merce, leads to a certificate of public convenience |

and necessity under which the Commission controls

the basis on which “gas may be initially dedicated

to interstate use. ‘Moreover, once so dedicated there

can be no withdrawal of that supply from continued

interstate movement without Commission approval.

The gas operator, although to this extent a captive

. subject 'to the jurisdiction of the Commission, is not

without remedy to protect himself.” 360 US, at 389.

That remedy- he has, as.the Court there said, in the

“change” power under -§ 4(@. when his contract has

expired or where his contract permits its use ieee

its term. 364 U.S. at 156. (Emphasis added).

Thus, clearly this Court.’has recognized and stated the

: importance of the rate changing provisions of Section 4

to a producer. As the Sunray decision observed, this

Court in CATCO noted that a producer who commits gas

to interstate sale is not without protection. |

He-may, unless otherwise bound by contract, United .

Gas Pipe Line Co. v. Mobile Gas Service Corp: [cita-

34,

tions omitted] file new rate. schedules. with the Com- Ay

mission. 360 U.S. at 389. (Emphasis added).

This Court’s decision i in CATCO is important in the his- ;

‘tory of producer regulation. In CATCO this Court di-

' rected the Commission to use the authority granted under —

* - Section 7 and its conditioning power to control the initial

entry of gas to the interstate market and to “hold the

line” on producer rates pending determination of “just

and reasonable” rates. Based on the rationale of CATCO,

_-this Court has subsequently approved procedures adopted

by the Commission under Section 7 to accomplish this

purpose. However, the Commission now attempts to ex-

tend the CATCO rationale to a proceeding actually deter-

mining just and reasonable rates and attempts to confuse

the power granted under Section 7 with the ee |

rights of producers under Section 4.

In Federal Power Commission vy. Hunt, 376 U. S. 515

(1964), this Court was confronted with an issue as to

the exercise of the CATCO inspired use of the condition-

ing power of Section 7, and its effect on the, filing rights

of Section 4. a; this Court stated:

' These sections [§§ 4 and 7) are the avenues

through which the natural gas producer may, by con- °

tract or otherwise, initially propose the dedication of

his natural gas supply to interstate movement (§ 7) |

and, once so dedicated by order of the Federal Power

Commission, thereafter initiate. changes in existing

rates. 376 US. at 519.

‘After ‘a careful analysis of both sections, this Court ob-

served that: , :

The power granted to the Commission in g. 4 does not

come into ‘play until after the initial certification of

the natural gas into interstate commerce has been

Branted under §7. 376 USS. at 521.

Thus, a line is ; clearly discernible between those pro-

cedures allowed under the guise of Section 7 and. the

| proceedings allowable under Section 4. At issue in Hunt

_ was whether the Commission; operating under the con-

ditioning power of Section 7 could grant a temporary

certificate conditioned upon the preducer agreeing not to

file for rate increases, under Section 4 of the Act during

the pendency of the temporary certificate. The Commis- |

sion imposed a moratorium for the term of the temporary

certificate. This Court: agreed that such a procedure and

the moratorium.was allowable under the authority granted

the Commission by- Section 7 in initially ae pro-

ducer sales. |

- Clearly, the Commission was given the power to lay

- down conditions precedent to the entry of the natural

gas into interstate commerce. 376 U.S. at 526.

The power. of the Commisssion over the initial entry of

gas into interstate commerce under Section 7 was “further ‘

"- defined by this Court in Federal Power Commission v.

Texaco, 377 U.S. 33 (1964) where approval was given’

to Commission regulations proscribing certain flexible

pricing clauses in future contracts committing gas to

. interstate sale for ‘resale. ,

_ Finally, in United Gas Improvement Company’ v.

Callery Properties, 382 U.S. 223 (1965) this Court

spoke again regarding the power of the Commission over

the initial entry of gas into the interstate’ market. In

approving the authority of the Commission to impose'a

moratorium on increase rate filings undet Section 4

through use of the certificating power in a permanent

certificate, notation was made, and strongly emphasized,

that this was an interim measure to be - allowed

pending determination of just and reasonable rates. This

- Court noted that the conditioning of the permanent cer- |

* tificates “was ... aimed’ at keeping the general price level

relatively constant pending determination of. the. just .and

reasonable rate.” 382 U.S. at 228. And, in affirming

the action of the Commission the Court stated further:

We think, contrary to the: <Court of Appeals, that

- there was ample ‘power under § 7(e) for the Com-

mission to attach these conditions for consumer pro-

—— ~— this interim a . 382 US.

,. at Jeep,

' , In‘so —— this Court reiterated the CATCO rationale:

We said in CATCO that § 7 procedures are designed

“to hold the line awaiting adjudication of a just and

reasonable rate. ™ 382 USS. at 228.

Thus, the restrictions which this Court has eravionsly

‘ allowed the Commission to impose upon the filing rights

granted by Section 4 have been necessitated by the Court’s

and Commission’s desire to maintain stability ——

determination of just and reasonable rates.

The Commission’ S decision ‘in these proceedings is a

_ determination, of just and reasonable rates. The period.

of pendency spoken of in Callery has ended. Yet in its

imposition of the moratorium, the Commission draws

upon the authority given it under Section 7 during the

‘period between initial certification and before just and

reasonable rates are determined. - Clearly this is not. sup-

portable from the decisions previously decided by: this

Court.

The Commission also attempts a comparison between

the Interstate Commerce Act. and the Natural Gas Act to

justify the moratorium.’ However, in so doing the.Com-

mission overlooks two important and distinguishing

points. First, as this Court observed in United Gas Pipe

Line Company v. Mobile Gas Service Corporation, supra,

in discussing the differences between: the Interstate Com-

‘» merce Act and the Natural Gas Act:

_ In construing the Act .[Natural Gas Act], we should

bear in mind that it evinces no purpose to abrogate -

private rate contracts as such. To the contrary, by

requiring contracts to be filed with the Commission,

the Act expressly recognizes that rates to particular

customers may be set by individual contracts. In

this respect, the Act is in marked contrast to the

Interstate Commerce Act, which-in effect precludes

private rate agreements by its requirement that the

rates to all shippers be uniform, a requirement which’

made unnecessary any provision for filing contracts.

See Armour . Packing Co. v. United States, 209 US

56, 5241: ed. 681, 28 S Ct 428. The. Commission

in its Brief recognizes this basic difference between

the two Acts and notes the differing natures of the

industries which gave rise to it. 350 U.S. at 338.

(Emphasis added). . es

Thus, the Commission’s reliance on Nashville Traffic

Bureau v. Louisville & Nashville Railroad Co., 53 I.C.C.

37, 38 as justification for the moratorium is improper.

Under ICC regulation a common carrier may not raise its

rate above that set by the ICC by merely publishing new

rates. It must return to the ICC for relief, since’ all rates -

for a particular service are uniform and not based on >

individual contracts: Therefore, the effective order of the

ICC must be “thereafter observed” until changed, other-

wise the _——-. public is unprotected if a company may

unilaterally change its rates. Again, the provisions “Of

Section 4(e) of the Natural Gas Act prevent a filed rate -

increase from becoming’ the just and reasonable rate un-.

less the Commission so orders. .

Neither is the Commission’s aitain on The Packers.

_ and Stockyards Act proper. The decision Ap United States

v. -Corrick, 298 U.S. 435 (1936), relied upon by the.

Commission, is a companion case to Acker v. United

States, 298 U.S. 426 (1936), both decisions being de- -

cided May 18, 1936 with both opinions by Mr. Justice

Roberts. This Court has also considered the Stockyards

Act in Tagg Brothers and Moorehead v. United States, -

280 U.S. 420 (1930). The Stockyards Act imposed regu-

lation by the. Secretary of Agriculture over services per-

formed by commission merchants at stockyards where

“Little capital is invésted; the business is the rendering

_ Of personal services for which charges are made accord-.

- ing to a uniform schedule.” 298 U.S. at 428. As in the

case of the ICC, the rates under the Stockyards Act

are in force and effect until changed by the. Secretary.

Since the service performed by each merchant was identi- |

cal with uniform cost and risk, the merchants themselves,

prior to. federal regulation, had agreed among themselves.

to charge uniform rates. Regulation was imposed to

insure that these uniform rates were just. and reasonable

_ in relation to cost and risk. Therefore, the uniform maxi- ©

mum imposed by the Secretary must continue until

changed by him, otherwise commission merchants could

resort to their own uniform maximum. ~ |

Even forgetting the dissimilarities between the various

statutes and the Natural Gas Act, the Commission gains

little by placing reliance ‘on the “to be thereafter ob-

_ Served” language of other statutes. Under the Natural Gas’ -

Jes 39

- Act, the mere filing of a rate increase under Section 4

does not necessarily mean that the increased filings become —

the just and reasonable rate “to be thereafter observed.” °

Of course, if the Commission suspends the increase and

has not completed its hearing on the justness and rea-

sonableness of the increase prior to the expiration of a

five-month period, the producer may require that the in-

‘crease be placed in effect, but the Commission may also

require, as is usual practice, that the increase be placed |

in effect subject to refund with interest if later found to be

unjust and unreasonable. Thus, if the Commission de-

- termines just and reasonable rates “to be thereafter ob- -

served” in a Section 5(a) proceeding, these rates are in

force until changed by the Commission. By a contractu-

ally allowable filing under Section 4(e), a producer does

not unilaterally change an existing rate the Commission

has found should “be thereafter observed.” That change

may only come after the Commission finds the increase |

just and reasonable. If the increase is not just -_ rea--

sonable then a refund is made and the. old rate is, still

“thereafter observed.” |

The Commission’s contention. (Comm’n. Br. + ©. 73),

_ that “if any additional: authority for such action [the

moratorium], beyond that provided in Section 5(a) it-

self, is required, it is provided by the broad language |

of Section 16”, ignores completely the proper role for

that rulemaking section. The rulemaking authority, of the

Commission may: be used to implement that authority

granted by other sections of ‘the Act. However, it is not

an independent. grant of authority which’ may be used to

override expressed rights granted by other sections. Sec-

tion 16 itself makes very clear that it shall be used “to

carry out the provisions of this Act.”

40 - t

‘b. The moratorium which the Commission has

imposed is not essential to an: area method of

- regulation and its imposition conflicts with

principles which any method of group regula-

tion must meet.

Assuming that it has statutory authority for imposition

of the moratorium, the Commission asserts that the mora- .

- torium imposed “was appropriate in the circumstances.”

(Comm’n. Br.,. p. 73). In making this assertion, the

-Commissien ignores several facts of regulatory life under .

its own Permian Decision. First, in the Permian exemp-

tion provisions, the Commission specifically bases eligi-

bility on “a producer who has ‘contracted for an above-

ceiling price.” (R. 657d). It is an accepted fact of

‘regulation’ under the Natural Gas Act that during the

term of a contract, the contract price fixed by the parties

determines the maximum price which the producer may

receive.. As the Commission has observed “under the

Natural Gas Act rate regulation is. superimposed on—

not substituted for—private bargaining.” (Comm’n. Br.,

p. 93). In order for a producer to be able to take ad-

vantage of any exemption provisions, and Mobil objects

to the sufficiency of the Commission’ S present exemption

provision for Permian, there must be an existing ‘con-

tractual right to seek a rate higher than the maximum

area rate. If the Commission is allowed to proscribe all

rate increase.filings, those contracts which must depend

on rate increase filings to place them above the area rate

offer a producer no opportunity to take advantage of -

any exemption. There is no need to discuss the principle,

‘applicable to any method of group rate regulation, that . °

an effective and. workable exemption is required. See

King v. United States, 344 U.S. 254 (1952).

Second, the Commission attempts. to impress the Court

with the assertion that: the “area proceeding would be

quickly set at naught” if the moratorium is not upheld.

(Comm’n. Br., p. 69). This again ignores the fact that

rate increase filings do not automatically become the ef-

fective area rate. Only after the Commission finds the

increase to be just and reasonable does it “set at ndught”

an existing rate: . Further, the Commission’s contention :

that, the moratorium is “appropriate in the circumstances”

is defective for the reason that, the Commission has as-

sumed that no rate increase to be filed during the mora-

torium period will be just and reasonable. This. is an

assumption which the Commission may not make from

the record before it in this proceeding. The moratorium .

is in effect from September 1, 1965, the effective date for

the Permian decision until January 1, 1968. This record

contains, as well it may not since it was closed prior to *

the Commission’s decision, no actual cost figures for the

‘moratorium period. The Commission attempts to - gloss

over this deficiency by stating that “The new gas well gas

[gas contracted to interstate sale subsequent to January

1, 1961] price primarily reflects national data for years

through 1963, projected -to subsequent years.’ > (Comm’n.

Br., p. 74). Thus, by a projection of pre 1964 data the Com-

mission is attempting to prevent producers from making

an actual showing of. cost and possible other evidence ~

‘ which would show rate increase. filings made during the

- Moratorium period to be just and reasonable. Mobil cen-

tends this is not in keeping with the proper _—

of the just and reasonable standard.

2. The Commission Erred In Proscribing Pricing

Clauses In Contracts Previously Approved And

. Made The Basis Of Certificates Of Public Con-

- ventence And Necessity.

- Supplementing the general moratorium, which prevents

the filing of all contractually-allowable rate increases above

“=

ree

ella an,

the maximum area rates until January 1, 1968, ‘the Com-

mission has permanently forbade contractually allowable

rate increase filings above the maximum area rates based

C00 meng

on any price-changing provisions that would not be author-.

ized under Section 154.93 of its Regulations. (R. 682d-

683d). This prohibition is applicable both during and

after the general moratorium: Section 154.93 prevents

-producer sales contracts executed on or after: April 3,

1961 which contain most favored nation, spiral-escalation

and other indefinite pricing provisions from being filed

with the Commission after April 2, 1962 for initial cer-

tification under Section 7. Until the Permian Decision, the

: prohibition of Section 154.93 was not applicable to those

contracts which had been accepted for filing in Section 7

certifications prior to its effective date.

This Court has sustained the Section 154.93 prohibi-

tions as they now. exist in Commission regulation. Federal

Power Commission v. Texaco, 377 U.S. 33 (1964). How-

ever, this Court’s decision did not deal with the retroactive °

application of the 154.93 prohibitions, as the Commission

now proposes in Permian. Unlike the Texaco proscription

_ which was only applicable to future contracts when pro-

mulgated, the Permian proscription applies .to existing

contracts that were negotiated and filed by the parties

when Commission approval was being given to contracts

containing such clauses. Relying on-the pricing provisions

contained in their contracts to cover present and future

costs, producers, with the approval of the Commission,

‘committed gas to interstate sale. Under Section 7(b) of

the Act, such sales must be continued until the Commis--

sion approves abandonment. It is Mobil’s contention that

the Commission’s permanent proscription is unreasonable

and invalid in light of this Court’s decision in Texaco; the

—,

rate - inate provisions of the Act; the Commission’ S

prior approval and acceptance of the proscribed contract

clauses; and, producers commitment of. gas to interstate

sale in reliance on Commission approval of the sales con-

tract.

The Commission, in its brief to this Court, attempts to

_ justify the permanent proscription of the clauses by reli-

ance on Section 5 of the Act stating that “The Commis-

sion has express authority under Section 5 of the Act to

modify contractual provisions. after a hearing.” (Comm’n.

Br., p..77). However, the Commission fails to specifically

_ note that its actions in modifying contracts under Section

5(a) are to-bé judged by the just and reasonable standard,

~~ which this Court has already held in Hope involves a

balancing of both consumer and investor interests. Further,

the Commission relies on its asserted authority to impose | 4

a general moratorium as additional justification for the

permanent proscription. (Comm’n. Br., p. 77). As Mobil

has previously contended, the imposition of the general

moratorium by the Commission is likewise invalid in light

of Statutory provisions as well as any test of reasonable-

- ness. But even if this Court were to uphold the Commis-

sion in the imposition of the general moratorium for a

- limited period, the actions of the Commission in per-

manently -proscribing flexible pricing clauses’ in existing

contracts are invalid: for the reasons stated herein. An

affirmance by this Court of the moratorium does not re-

quire that the ban on flexible pricing clauses also be af-

firmed. After expiration of the moratorium all rate in-

crease filings except those based on flexible clauses are to

be allowed by the Commission’s present orders.

Since the promulgation of. the orders of the Cimniie-

sion which are now set forth in Section 154.93, producers .

- 44

in negotiating sales contracts have been on notice ‘that

indefinite pricing clauses should not be included otherwise .

the Commission will not allow the contract to be filed.

Therefore, other and acceptable pricing clauses ‘are now

included to cover rising costs in the future. But producers _

whose sales contracts were executed prior to April 3,

1961, the present effective date of Section 154.93, are

trapped in a position from which they may not extricate

themselves. Contracts were negotiated and executed on the -

basis of the acceptability of indefinite as well as other

- pricing clauses. Numerous contracts of the period, cogtain

' only indefinite pricing clauses for future price increases.

Many contracts contain indefinite as well as other clauses.

These producers now find contracts which they have relied

upon, which the Commission has previously approved,

which sales have been made under, and under which_sub- +

stantial amounts of gas have been committed to interstate

sales suddenly severely limited in regard to the contrac-

tually allowable price. In effect the Commission has re-

written contracts previously approved by it. Such actions

hardly seem in accordance with any test of reasonableness.

The Commission attempts to justify the proscription by

noting that it is. one which only limits, but does not destroy .

flexible clauses in existing contracts, since a producer may

‘use a flexible clause to file up to the maximum area rate.

(Comm'n. Br., p. 79). This ignores the real issue. The

~Commission has: completely and permanently destroyed -

the ability of producers to file for rates above the maxi-

mum area rate, if based on a flexible pricing clause.

_ The Commission charges that flexible pricing clauses

“are clearly contrary to the public interest,” and contends

that this Court has already sustained that view in Texaco.

(Comm'n. Br., pp. 77-78). In Texaco, this Court held

‘ that Commission orders ip proscribing flexible pricing

clauses in contracts to be filed for future certification were

supportable by reason of the control over initial certifica-

tion given the Cothmitssion by Section 7(e).

‘ And, where, as here, seelicnioie for certificates are

' made under §7 of the Act, the Commission under

§7(e) is required to control ‘the terms and conditions |

. under which natural gas companies . . . may initiate

- sales at wholesale of natural gas in commerce. 377

US. at 41-42. ,

\ The eroecrintion which the Commission prescribed. in

Permian is not over a gas sale which is to ‘be initiated, it

is over a sale that has already been initiated, approved by.

- the Commission, and which is continuing — an existing _

contract. = hi ;

In Texaco this Court also commented on | the regulatory

= of the Commission as to existing contracts.

In a rate case under §5(a) of the Act the Commis-

sion can pass on existing contracts affecting ‘rates,

can find that particular contracts are “unjust, un-

reasonable, unduly discriminatory, or preferential”

_ and thereupon has power to determine the “ ‘just and»

Us ara. rate or contract and “fix the, same. "on

at41. ~ 3

Thus, in oa tainting contracts the Commission is

bound by the just and reasonable standard, which, this

Court stated-in Hope is a standard which requires. a

balancing of consumer and investor interésts. 320 U.S. at

_ 603. It hardly seems a balance to deny producers the right

- to file for rate increases under previously approved pricing

_ Clauses, even after the Commission itself is to allow all

other rate increase filings. What is acceptable for reg-

. ulating future contracts and the initial entry into com-

| merce is not necessarily acceptable in regulating existing

contracts and sales in commerce.

The proscribing of pricing clauses in existing contracts

is vastly different from controlling pricing clauses in

initially certifying a sale, and this Court has previously

observed the difference in pointed language. In Phillips II.

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

(1963)), where this Court approved the Commission’s

attempt at determining just and reasonable producer rates |

by use of the area method, the Commission had refused to

declare “void ab initio” certain spiral escalation clauses’ in

existing contracts on. which three Section 4(e) rate in-

creases were based. 373 U.S. at 303. This Court had

“grave doubts” as to. whether the issue could be raised at

- that time, but did offer this comment:

Further, we see no merit in California’s [the com-

plaining party] contention. It is true that the €om-

' mission has announced prospectively that it would:

not accept for filing contracts containing such clauses

{the Court here footnoted the various Orders which

. form Section 154.93], but it would have been quite a

different matter for the Commission to have declared

that past rate increases were ineffective simply be-

cause they were based on sipral provisions. The effect

of a contract clause of this type, of course, is only.

to permit the producers to resort to the filing pro-

visions of §4(d) of the Act. Ifthe increase is chal-

lenged, the producer must still establish its lawful-

ness wholly apart from the terms of the contract.

' Thus we have sustained the right of a seller to file

- an increase under a contract which, in effect, author-

ized him to do so at anytime. United Gas Pipe Line

Co. v. ee Light, Gas and Water Div. 358 US

103, . .. The spiral clauses here are far more limited

in scope, duplitene as they iis on the occurrence of

' external events. 373 U.S. at 304.

Likewise, it is “quite a different matter” for the Commis-

sion to declare invalid rate increase filings under existing

_and previously approved contracts simply because they

are based on flexible pricing clauses. This permanent ban

- is even less acceptable when consideration is given to the

fact, as illustrated by this Court in the above quoted sec-

tion from Phillips II, that both the investor and. consumer

interests are adequately protected when.a rate increase

filing based ona flexible clause is made under Section

4(e). |

The Commission attempts to build an argument for the.

“indefinite” proscription by stating that such clauses “are

also inconsistent” with the dual pricing. system. This of

course assumes the validity of dual pricing, which is also

at issue before this Court, and wétich Mobil among other -

parties contends is unjust and unreasonable in and of itself.

(See Part IA of this Brief.) But assuming for the sake of

argument that the Commission is sustained in: regard to

dual pricing, it is still no justification for proscribing filings

based on the flexible clauses, which is attempted by the

statement: “But limiting these clauses is highly important,

since they would-permit the escalation of flowing-gas prices

_ to the new gas well gas price level and thereby disrupt the

; _ operation of the two-price system.” (Comm’n. Br., p. 78-

79). This again ignores the fact that after the expiration

of the general moratorium, all ‘rate filings; except flexible

filings, are to be accepted by the Commission. The filing

of thesé acceptable rate increases will “disrupt” the two-

price system as much if not more than “flexible” filings.

(Certainly, the Commission does not wish to say that be-

“cause of the dual pricing system ‘it may ey ban

all rate increase filings, whether based on flexible clauses

. or cares.

+ In eiweiaine Just And Reasonable Rates

Under Sections 4 And 5 By Compiling Com-

- posites Of Group Costs The Commission Erred

In,Excluding From Such Composites The Costs

Incurred By The Producing Industry In Gather-

ing And Processing Natural Gas. For Sale To

Pipeline Purchasers.

In determining the maximum area rate, the Commission

allowed the same rate for gas sold at the tailgate of a

processing plant and for gas sold at the wellhead prior to

x _ gathering and processing. Tie Commssyon refused to con-

-Sgider or include in its composites of: cost for both new and

flowing gas an item representing the average industry cost

; of processing and gathering. It is Mobil’s contention that

such. deletion is unreasonable and unjust, and that such .

costs are necessary in a pricing system based upon aver-

age of industry costs in producing gas and oes a

to the facilities of a purchasing pipeline. a

. Gathering and processing are -essential. and. necessary” el:

functions of the natural gas industry in bringing gas from

the reservoir to the consumer’s burner tip. In the industry,

gathering and processing are sometimes handled by the

producers themselves, by the purchasing pipeline, or by |

a third party. When handled by producer, the cost in-

‘curred is as legitimate and necessary a cost as when

handled by an interstate pipeline — wellhead pur-

chases.

' The sccdincing an gathering exemption found in. Sec-

tion 1(b) of the Act does not prevent the Commission

from including gathering costs in its composition of the

items comprising an area cost for gas. This is amply borne

. 49

out by the position taken by this Court when reviewing

earlier efforts of the Commission in regulating’ interstate

pipelines with gathering and processing facilities and costs.

In Colorado Interstate Gas Company v. Federal Power

Commission, 324 U.S. 581 (1945), this Court decided

directly what had been indicated indirectly in Hope as to

the inclusion of producing.and gathering facilities of a

pipeline in its rate base. Both this Court and the Com-

mission agreed that there should be such an inclusion since

the production and gathering exemption of Section 1(b)

‘was not prohibitive on the subject. As this Court stated,

‘after noting that the exemption of Section .1(b) was ap-

plicable to prevent Commission jurisdiction over drilling,

well spacing and possible other like limitations: :

betes We only decide that it "[the” exemption] does not

preclude the Commission from reflecting the produc-

tion ‘and gathering facilities of a natural-gas company

in the rate base and determining the expenses incident

thereto for the purposes of determining the reason-_

at 603. of Tates —_—- to its ene 324 US.

at 603

- Further in both Colorado-Wyoming Gis Company v. Fed-

eral Power Commission, 324 U.S. 626 (1945) and Pan-

handle Eastern Pipe. Line Company v. Federal Power:

. Commission, 324 U.S. 635 (1945), this Court upheld the

Commission in including a pipeline’s gathering facilities

in its rate base. ‘True enough, Colorado Interstate, Colo-

rado-Wyoming, and Panhandle involve an individual pipe-

line rate proceeding. However, the decisions of this Court

clearly indicate that the Commission, as far as the pro-

ducing and gathering exemption of Section 1(b) is con--

’ cerned, does have the authority to include the costs of

gathering as well as production in determining the rate of

a “natural gas company.” Relevant also is the fact that

Phillips I, which held independent producers to be “nat-

ural gas companies” and thus subject to Commission reg-

ulation, relied heavily on the reasoning of Colorado Inter-

state in. rejecting the argument that the exemption of .

Section 1(b) prevented Commission regulation of a

producer’s interstate sales. See Phillips Petroleum Com-

pany v. Wisconsin, 347. U:S. 672, 678 (1954). And

further,.in Phillips I, this Court dealt specifically with a

situation where the independent producer gathered the gas

and sold it to an interstate line after gathering was com-

pleted. See 347 U.S. at 674-675.

It is also clear from. the pipeline rate: cases discussed

above, as well as from subsequent cases, that when and

if gathering is performed by a pipeline, the facilities in-

cident. thereto are included in the rate base and pipeline

rates adjusted accordingly, thus passing such costs along

- to the consumer. By failing to adopt similar treatment

_ for producers, the Commission in determining maximum

area rates has, only computed the cost of finding and

producing gas, has omitted’ from its cost computations a

portion of the legitimate expenses of producers apd has

left. a “cost gap” in producer rate regulation, not so “at-.

tractive” to producers, between wellhead production and

sales after gathering is complete. | o

It is true that the ni bitlotiations! activity of extract-

ing and selling natural gas liquids must be considered by

the Commission under its adopted procedure in deter-

_Mining a national and/or Permian area average for pro-

cessing and gathering to be included in the cost of gas.

' There are common producing, gathering and processing .

costs: which must be allocated between the extracted liquids -

and the gas sold to an ‘interstate pipeline, and the Com-

.. co

mission has so allocated in individual producer proceed-

ings. See Phillips Petroleum Company, 24 F.P.C. 537,

562-565 (1960). Further this allocation is not an .im-

possible task in an area proceeding as the Commission has _

‘itself. demonstrated in determining a “net liquid credit”

(i.e., net only of production taxes and royalties (R.

589d) ) average which was subtracted from all other aver-

ages in determining the cost of new gas. (R. 586d-590d).

The credit was based on revenues received from both

wellhead condensation and- plant extraction (R. 589d)..

The presence of the “net liquid credit” is but another in-

dication of the unjustness and unreasonableness of the

Commission’s actions in failing to include processing and —

gathering costs: the Commission has subtracted a “credit”

' without including those costs from which the credit should

.properly be subtracted. A figure based, on both wellhead -

and plant revenues has been subtracted from a figure

which represents only wellhead costs. Such a procedure

hardly is a “balancing of consumer and investor interests”

as required by Hope.

Because the initial determination: of. an average cost

for processing and gathering is a function which the Com-

mission must determine from the record before it, neither

Mobil nor this Court can. or should attempt to arrive -

at a specific figure. However, the Commission should be

' directed to make the: determination, either from the record

now before it or with the addition of any additional evi-

dence it may desire. :

Il. Mosit As RESPONDENT

In Phillips II this Court observed that: |

The Comsnission has stated in its opinion in this pro-

at that the goal is to have rates base on the

“A

“reasonable financial ——, of the industry”

in each production area . . 373 US. at 310.

in these proceedings it is evident that the Commission has

~ determined that the industry revenue requirements for new .

gas are the applicable area maximum-of 16.5 cerits and |

that the industry revenue requirements for.old or flowing

gas are the applicable area maximum of: 14.5 cents. To-

gether with the révenue generated by application of the

area minimum of 9 cents, these area maximums are sup-

posed to produce the overall revente requirements for the.

industry in the Permian Basin. However, having deter-

minded the revenue requirements, the Commission has not

provided a rate design which will allow recovery of these

rates. The return which the Commission allows on pro-

duction investment is improper; but even considering its

propriety; the yield. actually returnable, while not precisely

known, is less than what the Commission has determined

to be just and. reasonable. Thus the end result becomes

unjust and unreasonable. This deficiency is further ac-

cented by the Commission’s minimum rate order, which

fails to aid the producer in recovering the revenue require-

“ment. And, as a final element,’ the Commission, although

it can not determine if the revenue requirements which

is has determined are to be reached: because of the im-

proper treatment for rate of return, has ordered a refund- |

ing of all amounts collected above the applicable area

rates by individual producers. These, and other errors by

. the Commission discussed in this second part, along with

those points previously ‘discussed, render the results of the

area method expressed in the Permian decision clearly

| _ unjust and unreasonable.

A. The Commission Failed To Adopt A Fair Rate

Of Return And Then Denied The Industry The |

Opportunity To Earn That Adopted Rate.

The Commission in determining a fair return in its first

area rate proceeding adopted “a return of 12 percent on .

production activities” as being the fair rate of return which

would protect gas consumers against excessive prices for

new and flowing gas but which would not be so low that

it would fail to respond to the needs of the industry. (R.

606d). The rate of return on production items purports

to include, in addition to’an allowance for exceptional

risks and the impact of quality deductions in both the rate

of return for new and flowing gas (R. 614d), an allow-

ance in the flowing gas rate of return to. compensate for

producers’ need to finance future exploration from current

revenue. (R. 633d). Thus, as developed by the Commis-

sion, the rate of return purports to be a combination of

three factors: a return.on production investment an allow- -

ance for the impact of quality deductions; and a means -.

to generate current funds for future exploration.

The test for what is or is not a proper rate of return

has been explicitly stated by this Court on at least two

separate occasions. First, in Bluefield Water Works and.

Improvement Company v. Public Service Commission, 262

U.S. 679 (1923) this Court stated that what “rate will

constitute just. compensation depends upon many circum-

stances and must be determined by the exercise of a. fair

and enlightened judgment, having regard to all- relevant |

_ facts.” 262 U.S. at 692-693. But considering all circiim-

stances and relevant facts, this Court — noted that:

A public utility j is entitled to such rates as will permit

' it to earn a return on the value of the property which

it employs for the convenience of the public equal

to that generally being made at the same time and

- in the same general part of the country on invest-

ments in other business undertakings which are at-

tended by corresponding risks and uncertainties...

A rate of return may be reasonable at one time and

become too high or too low by changes affecting,op- |

portunites for investment, the money market, and

business conditions generally. Idem. :

Second, in Federal Power Commission v. Hope Natural

Gas Company, 320 U.S. 591 (1944) this Court, in. an

opinion by Mr. Justice Douglas stated that the revenue _

_ obtained from a rate should allow not only operating ex- |

_ penses but also capital costs and noted that: .

By that standard the return to the equity owner should

be commensurate with return on investments in other

- enterprises having correponding risks. That return,.

moreover, should be sufficient to assure confidence in. .

the financial integrity of the enterprise, so as to main-

tain its credit and to attract capital. 320 U.S. at 603.

“The Commission recognized the principles of Bluefield and

Hope which this Court has announced as governing rate.

of return. (R. 598d). However, having recognized them

as controlling -and binding, neither the resulting dollar —

. return nor the rate of return fixed by the Commission is

acceptable when judged against those standards.

_ In adopting 12 percent as the fair rate of return, the

Commission relied on several considerations “particularly

the testimony of witnesses Shaffnmer and Morton with

respect. to the-returns by nonintegrated producers in

the Permian Basin.” (R. 606d).? The ‘Commission also

2. The Commission noted (R. 604d) that the average rate of

return for witness Shaffner’s sample of seven non-integrated producers

with Permian Basin operations was 13.4 percent for the 1957-1961

ae 55

specifically recognizes that investment in.the exploration

and producing industry represents a higher degree of risk -

than investment in the pipeline industry. (R. 599d). Con-

trary to the doctrine of Hope, the Commission’s 12 per-

cent rate of return allowance does not meet the basic test

of providing this industry the opportunity to earn a return

' equal to that of other industries with corresponding risks .

- and uncertainties.. It is not adequate to generate the flow

of funds for gas, exploration and development projects. .

Furthermore, by the Commission’s own computations, the

indtstry has not been allowed to earn the fair rate of return

which it adopted. ve ted

The basic flaws in the Commission’s rate of return

analysis are (1) its failure to consider the substantial

comparable earnings evidence in the record demonstrating

what other industrial groups, especially Commission reg-

ulated pipelines, have earned on equity capital over a

relevant period of time and (2) to provide for the special

risks of the gas producing industry. Moreover, the Com-

mission failed to’ consider the substantial evidence regard-

ing the significant increase in earnings ratios reported for

the major industrial groups, the rising cost of debt capital

and the significant decline in the purchasing power, of

the dollar. The 1957-1961 period considered representa-

- tive by the Commission in determining the fair rate of

return covers the period of depressed earnings following

the first Suez crisis, and encompasses two of the four well-

documented recessions since World War II—namely in

period. Dr. Morton’s sample of 13 non-integrated producers earned

an average rate of return on average capitalization of 14.5 percent

for the same period. On common stock equity the. return was 15.4

percent. During the.longer more representative period, 1947-1961, Dr.

Morton’s sample earned average rates of 18.1 percent and 19.5 per-

. cent on total average capitalization and average equity, respectively.

(Ex. 220, Sch. A-29). (R. 685e). ae

1958 and in 1960-1961. Furthermore, Dr. Shaffner’s Ex- —

hibit No. 176, Schedule’ No. 19 (R. 562e), shows that

the producing industry did not. share in the general re-

covery. of the economy that took place between 1959

and early 1960. In fact, the same exhibit (R. 56le)_

shows that since World War II, no five-year period

could have been’ selected that resulted in a lower

a. average rate of return that the 1957-1961 period

; relied upon by the Commission. Since 1961, rates of return

jn the economy. generally and for the producing industry,

} in particular, have improved significantly. At the same

time, interest rates‘on. new debt capital have climbed to

: _ their highest levels since before World War II. Therefore, -

: the 1957-1961 period is not representative of. prior or

+ ~——__s current conditions in the capital markets and the data

_ relied upon by tlie Commission -seriously understate the

_ fair rate of’return required by the natural gas producing

industry. Sufficient incentive to search for and develop

adequate future natural gas supplies at reasonable prices

is the key to the protection and growth of consumer re-

quirements as -well as of the nation’s huge investment in

transmission and distribution facilities.

Assuming, arguendo, that 12 percent represents a fair

' rate of return for the gas producing industry, nevertheless,

the actual return, by the Commission’s own admission,

falls short of this yield. The Commission’s Brief candidly

States that: ~~“ | . |

. . . this meant that the prescribed @nea rates mights ”

yield as little as about 10% percent overall (about

12 percent on equity) on average quality new gas- -

well gas, and possibly only slightly more than 9 per

cent overall (about 10 percent on (equity) on the

average quality of old gas-well’ gas.” (Comm’n. Br.,

p. 141). (Emphasis added). : |

Thus, the lack of opportunity to earn a fair rate of

_. return is self evident. Moreover, the return on equity is

-- shown by the Commission to be equal to or below that ~

of returns on equity of Commission regulated pipelines

in spite of the fact that it points out significant risk dif-

ferentials between pipelines and producers. (R. 5 98d-601 d).

Since 1947, the average rate of return on equity for reg-

ulated natural gas pipelines has been 12.0 percent (Source:

.FPC, Statistics for Interstate Natural Gas Pipeline Com- \ ;

- 1963 to 13.6 percent in 1956. Since 1961 the average has

been 11.9 percent. Obviously the rates on equity estimated °

by the Commission in its brief of “about 12 percent on

equity” for new gas well gas and “about 10 percent on

equity” for old gas well gas are inadequate and unfair when

compared with the higher rates yielded by admittedly

safer pipeline investments.? : .

The errors of the Commission, as previously indicated, :

are that the 12 percent rate of return adopted is inade-

quate and that the Commission has burdened the adopted ~

rate of return with other factors so that the actual return

to be earned is not only highly uncertain but also impos-

sible to achiéve on a group basis. It is not:only impossible

for the natural gas producing industry to average 12 per-

cent rate of return because of quality deductions, but also

impossible for the industry to achievefhe 9 percent and

‘

3. Average rates of return on average common equity of privately-

owned electric utilities ranged from 11.0 percent in 1958 to 12.6 per-

cent’ in 1965. The average rate for the 1955-1965 period was 11.5

percent. (Source: FPC, Statistics of Electric Utilities in the United

States, 1965, Privately Owned). Hence, the very low risk electric

utilities, regulated by the Commission, have earned higher rates of

return on equity in past’ investments than the 10 percent now con-

templated for producer investments in “old gas-well gas” and ‘both

“old and new” casinghead gas.

10-3/4 percent re now aes for the first time in

the Commission brief. Some of the factors that preclude

these average yields are (1) price limitations below area

ceilings in a substantial number ‘of contracts; (2) quality

deductions below the so-called standards for “pipeline

quality gas”; (3). applying” the rate of return to a base

which excludes a significant and necessary portion of the

' industry’s investment aed (4) inclusion of an urn-

realistically short time lag in the rate base; (5) applying

the ‘rate of return to a theoretical rate base (for new gas

well gas) consisting of only one-half the investment out-

standing over an assumed \20-year ‘period; and (6) under-

estimation of several important cost components such as

successful well costs, lease acquisition costs and royalty.

Thus, the Commission, while purporting .to recognize

the need for an incentive to the ‘producing industry to

search for additional supplies, has not only deprived the

.producers of the incentive: to conduct further exploration, ’

but also failed to meet the legal standards of Bluefield

and Hope. Simply stated, even if the producing industry

‘\ were given the opportunity to earn a 12 percent rate of

return, the industry will not be able to compete success-

fully for investment funds which have the opportunity: of

earning a higher. return in other regulated and non-

_’ regulated activities involving much less risk.

. B. The Commission Erred In Adopting A Mini-

mum Rate Of Only 9 Lents And Subjecting

Such Minimum To Quality Deductions.

In the Permian decision, based on its. interpretation of

the decision by this Court in Federal Power Commission

v. Sierra Pacific Power Company, 350 U.S. 348 (1956),

the Commission established a minimum area: rate, appli-

cable to-all gas, of 9 cents, but reduced the minimum

- even further ‘by subjecting it to quality deductions.

(R. 669d-671d). It is Mobil’s contention that the decision

of the Commission to impose a minimum rate is just and

reasonable, but that the 9 cent level is not supported by

the record in these proceedings, and that the minimum .

should be placed at a level which will allow recovery of

the revenue’ requirements which the Comimission has

; established. ~ ‘

‘As the Commission in its Brief to this Court has cor-

rectly noted, the decision by this Court in United Gas

. Pipe Line Co. v. Mobile Gas Service Corporation, 350

U.S. 332 (1956) held that under the Natural Gas Act

rate regulation is superimposed on, not substituted for,

private bargaining. (Comm’n. Brief, p. 93). However,

by the minimum rate order the Commission has aban-

doned any pretense of basing minimum rates on individual

contracts, allowing unilateral producer filings up to the

designated minimum. (R. 671d). Thus, if the Commis-

sion is to abandon contract restrictions.in allowing pro-

ducers to file up-to the designated minimum,,then the |

minimum rate level chosen should be supportable from

_ Abe record before the Commission and should form a part

‘- of a rate design which will allow. recovery of revenue

requirements.

In setting. a.minimum the Commission emphasized that.

Sierra, decided by this Court on the same day as Mobile, |

recognized that the Commission possesses the power to

authorize rate increases despite contractual limitations. __

However, Sierra atso held that the Commission must base

such authorization on more than a “bad bargain” by the

‘producer with the pipeline purchaser, which has resulted’

‘ in a low rate. Rather, this Court stated:

A 60 | ee

[T]he sole concern of the Commission would seem

to-be whether the rate is so low as to adversely

affect the public: interest—-as where it might impair

the financial ability of the public utility to continue

its service, cast upon other consumers an excessive

burden or be unduly discriminatory. 350 U.S. at 355.

| “The ‘Commission concluded that the test of raising rates

above contractual limitations must therefore rest on pub-

lic rather than private considerations and that “the ex-

amples set forth by the Court are not, and were. not .

intended to be, the only instances where public interest

would justify an authorization to increase rates in con-

. travention of a contract. " (R. 670d). The Commission —

determined that a minimum rate was in the public: in-

. terest’ because...

The rate received by a producer must not.be so low

as tO prevent or retard further exploration and there-

by decrease possible discovery-of gas -reserves which

will be needed by consumers. (R. 671d).

The Commission stated that the impact of its 9 cent rate

would be de minimus on consumers, but would perhaps —

encourage producers: with low contract rate ceilings to

continue to search for gas.

Whether this Court adopts or rejects Mobil’s position

that the Commission’s dual rate structure is invalid, it is

obvious that the maximum area rates which the Commis-

sion has developed based on averages of certain items of

industry cost' are the Commission's revenue requirements

ae Mobil has objection to the ‘exclusion of processing and gather- »

- ing. charges in the items considered in determining maximum area

averages, which would in and of itself place a averages: at a

—* level. .

for the industry in the Permian Basin. In order to allow

recovery of these revenue requirements, since regulation

under the Act is “superimposed” on contract rates, the __

. Commission should adopt a minimum rate which will

allow recovery of this industry revenue requirement. Con-

sidering the fact that not all contracts allow rates at or

near the area maximums determined by the Commission

but many at rates substantially lower than the maximums,

considering the fact that rate increase filings above the

area maximums should be allowed,® and considering that .

contract rates presently above the area maximums are to

be lowered to those maximums, the area minimum should

be determined from substantial evidence in the record

‘which will insure that a producer has the opportunity to

earn the industry revenue requirements under his ap-

plicable. contract rate. Mobil submits that the 9 cent

minimum adopted by the Commission does not fulfill this

need. The only justification for the 9 cent figure is that

its effect on consumers is. de minimus. The Commission

itself estimates that “at the most $250,000 annually”

(R. 671d) will. be produced. The reduction in contract

rates presently above the area level should more than ~

‘counterbalance this figure. Considering the requirement

under the Natural Gas, Act that rate regulation is to be

- superimposed on contract rates with the need to allow

producers to recover thie revenue requirement in the Per-

+ mian area, the Commission should be directed to recon-

sider the minimum rate level with a view toward estab-

lishing a minimum which will allow recovery of the

revenue requirements for the Permian. area.

5. Mobil has objected to the imposition of a general moratorium |

on such filings and the permanent proscription of filings based on |

flexible pricing clauses.

C. The Exemption .Which The Commission Pro-

vided From The Applicable Area Rate Is In-

adequate And Not In Conformity With The

Statutory Scheme Of Ratemaking Required By

The Natural Gas Act. .

Clearly recognizing that the Permian decision must

make provision for an aggrieved producer to seek ex-

emption from the applicable area rate, the Commission

; provided that where producers who have contracted for

“an above ceilirig price” can show out-of-pocket expenses in

connection with the operation of a particular.well above the.

revenues received. from the applicable area rate, “appro-

priate relief” will be granted. (R. 658d). The Commis-

sion also noted that: there may be other situations where

“appropriate. relief” should be granted as a matter of law

or in the public interest but refused to “specify all of the.

special circumstances.” (R. 658d)° “Appropriate relief”

was further defined to indicate ,that in most cases “it may

be sufficient to permit them [producers] to. abandon their

- unprofitable sales.” (R. 658d-659d). In a proceeding which

has determined maximum area rates from nationwide or

_ >. area averages of certain items of cost incurred in gas pro-

duction, the Commission’s reliance on “individual well

cost” seems a rather inadequate exemption provision for

the individual producer and one re ny ad-

ministratively.

- »The. Commision’s exemption provision is further com-

plicated by the separate provisions of the Permian decision

applying a moratorium on all contractually allowable rate

increases above the maximum area rates for a specified

6. The ‘ieidituaien also stated that refunds would not be required

-. if a producer in so doing would be deprived “of amounts sufficient to

_- caver his out-of-pocket operating enpenane in the Permian Basin for.

‘such period.” (R. 660d). |

period, and permanently prescribing rate filings above the .

maximum area. rates based on certain flexible pricing

clauses. These provisions have previously been discussed

in the first portion of this argument. Considering these

. provisions, should a producer experience rising costs that

have been anticipated through contractually allowable |

rate increase filings, then. because of the Commission’s

moratorium or its prescription on flexible. clauses a pro-

ducer may be unable to file for a rate ‘higher than the

maximum area rate and seek exemption from the area

rate. Thus, the Commission’s exemption is only: applicable

at present to those: producers who have contract rates -

that are presently above the maximum area rate, and

which are not in effect subject to refund. During the

’ period of the moratorium, no contractually allowable — .

rate increases are to be allowed above the area maxi-

“mums. Even after expiration of the moratorium, filings

based on flexible clauses are prohibited. As the Commis-

sion correctly stated “This Court held in United Gas

Pipe Line Co. v. Mobile Gas Service Corp. . 350 US.

332, that under the Natural Gas Act rate. regulation is

superimposed on—not substituted for private bargain-

ing.” (Comm’n. Br., p. 93). A producer who has a

contractually allowable right to file for a higher rate,

which higher rate.may prevent confiscation and cover

rising costs, will be denied such contract right, aside from

the adequacy of the Commission’s exemption provisions,

during the moratorium period or permanently if the con-

tract right is by flexible pricing clauses.

The maximum area ceilings adopted by the Commission.

are equal to the sum of the averages of ‘certain items of .

cost incurred in producing gas which the Commission felt

should be considered in pricing gas on an area basis. |

By the very nature of an average, such ceilings will only

_ provide for the recovery of production costs for that

gas having average or below average costs. By the very

nature of an average, a large percentage of Permian gas

has and will have above-average costs. Yet in allowing

for relief if “out-of-pocket expenses” are greater than.

applicable area rates, the Commission fails to explain .

what costs are to be considered as “out-of-pocket ex-

penses.” This presents a‘regulatory standard that is im-

possible for a court to _feview or for an aggrieved pro-

ducer to meet. Further, the Commission’s brief to this

Court makes clear that these “out-of-pocket expenses” are

not to be individual costs “since relief'on such a ground

would resurrect the rejected company-by-company ap-

re and make the.area rate a floor rather than a ceil-

” (Comm’n. Br.; p..66). This reasoning by the Com-

we a ignores the often repeated principle that confis-

cation is an individual consideration. Chicago & N.W. R.

Co. v. Atchison T. & §.F. R. Co., 18 L. Ed. 2d 803, 815,

829 (1967); New England Divisions Case, 261 U.S. 184,

204 (1923). An exemption provision is included to

prevent confiscation of the individual’s ——- by rates

based .on group requirements.

Further, the basic remedy of abandonment proposed by

the Commission is deficient for at least two basic reasons.

First, the proper function of. an exemption provision in

group ratemaking is not to force a choice between offer-

. ing a service or a commodity at certain prescribed rates

or not at all. Rather, the proper function of an exemp-

. tion provision in group ratemaking is to’ allow a continued

offering of a service or commodity but at rates which

will not be confiscatory where the applicable group- -rate

will be’ confiscatory, As this Court has noted in other in-

stances of group ratemaking, an exemption. provision

should always be available to allow for modification of |

the rate order, thus allowing continued service. See

Chicago & N.W. R. Co. v. Atchison T.. & S.F. R. Co.,.

. supra; New England Divisions Case, supra; King v. United

_ States, 344 U.S. 254, 275-276 (1952) Second, if aban-

donment of interstate sales is to be allowed in all confis-

catory situations, the interstate market may be deprived

of substantial quantities of gas. As this Court has ob-

served on many occasions, the primary purpose of the

Natural Gas Act was to provide protection to the “ulti-

mate consumer.” See Phillips I, 347 U:S. at 685. It

does the ultimate consumer little or no good to have a

gas supply committed to interstate service abandoned. The -

continued protection of consumer interests demands an

adequate and stable gas supply. The abandonment pro-

vision in the Natural Gas Act, as in all regulatory stat-.

utes, was included to assure that the public would have

continued and reliable service which could only be aban-

doned when no longer justifiable in. the public interest.

_ Certainly the Commission may not be allowed to say, that

it is not in the public interest to allow gas having above

_ which are not confiscatory to the party offering regulated

services or commodities is not in degradation of the pub- -

lic interest. Further, from the standpoint of the individual

producer; abandonment of interstate sales in the Permian

Area offers little or no relief since most area wells and

reservoirs have no alternative non-jurisdictional markets

available for immediate connection. Under applicable —

State property law, this-cessation of production could well

result in a loss of producing properties or substantial

damage claims from royalty owners. Finally, the inequi-

ties and the possible damage to thé public interest result-

ing from abandonment have been previously noted and _

a ih

rejected by the -Commission itself. Amerada Petroleum

_. Company, 24 F.P.C. 218 (1963).

-. The Commission attempts to refute the proposition that

when a producer seeks exemption from the area rate, the

applicable area rate should be stayed ‘and the producer

allowed*to collect the contract rate which he is attempting ~

to justify. (Comm'n. Br., pp: 67-67). Basically, the Com-

mission asserts that the stay of an adminstrative order is |

‘not automatic, but must be justified by a substantial show-

exemption from the applicable area rate. Should the area

rate not be stayed pending determination of the confisca-

tion issue and should the issue of confiscation prove valid,

the increased rate which would have been collected during

' this interim period is irrevocably lost, since as this Court

noted in Hope and Callery. the Commission “has no power

to make reparation orders.” 382 U.S. at 229. The loss

of such’ revenue will but compound the impact of con- |

fiscation. Should the issue of confiscation prove invalid,

_ the consumer will be adequately protected ” the refund

procedure.

The Permian exemption provision demands additional

-* consideration and thought by the Commission.

D. The Commission Erred In Ordering Producers,

a On The Basis Of Their .Individual Contracts,

plicable Area Rates As To Each Contract Sub-

ject To A Section 4(e) Proceeding.

Having determined the maximum ceilings for area rates

and having outlined the procedure to determine the

amount of quality deviations. to be subtracted from the.

- ; maximum to give applicable ,area rates, the Commission

then ordered refunds .for collections- above the resulting

applicable area rate “made prior to its decision if made

under a contract subject to'a Section 4(e) proceeding.

Should this Court uphold the Commission in relation to '

the area rate levels, the Commission has still erred in

regard tq this refund order. The refunding obligation is

‘to be effective from the date the Section 4(e) proceeding

“was instituted and is to include both the 4(e) increase

as well as the rate formerly collected. (R. 672d, 674d)..

The Commission is thus requiring a refund below the >

4(e) increase procedure. In so ordering, the Commission

—has clearly indicated is or its 8 power under the Nat-.

ural Gas Act.

- By way of illustration, if in 1964 a Permian producer

were collecting a 16 cent rate permanently certified in

1958, the 16 cent rate’ would be referred to as a “last

clean rate”; that is to say, a rate permanently in effect

not subject to refund. If in 1964 the producer filed a

contractually allowable rate increase of 1 cent, assume

that the Commission suspended the increase under Sec-

tion 4(e) but upon producer motion it was placed in.

effect subject to refund five months later, and has been

collected te- date. The 17 cent rate presently being col-

lected by the producer is~thus_ divided into two. parts:

the 16 cents collected prior to the rate increase.which the

Commission has previously allowed without refund’ lia-

bility through permanent certification; and the 1 cent .—

increased incrument placed into effect under the pro-

cedures of Section 4(e), which have allowed the increase

to be collected subject to refund, pending a determination

of its justness and reasonableness. Assume also that the ~

gas sold under the contract must be processed to bring it

up to “pipeline standard” and that the purchasing pipe-

line and the producer agree that this processing charge

should be 1 cent per Mcf. The applicable area maximum

would be 14.5 cents and the 1 cent charge would be sub-

tracted from it giving an area rate of 13.5 cents. Therefore,

the hypothetical producer would be required to refund 3%

cents of the present 17 cent rate from 1964, the date of the

4(e) increase, to the present. This would include not only

the.1 cent increased increment which has been collected sub-

ject.to refund but in addition 2% cents of the 16 cent

rate permanently certified by the Commission in 1958.

Should this Court uphold the Commission’s Permian area .

rate levels and the quality deductions: there is no question

that a refund from. 1964 to the present of the 1 cent a

increased increment collected subject to refund is pr

Further, since the Permian proceeding is a Section 5(a )

rate proceeding, there is no question but that the Com-

mission can if otherwise allowable prospectively order

refund of the difference between the 17 cent rate and

the applicablé area rate of 134 cents from the effective ~

date of the Permian Decision, September 1, 1965 to the

present. What Mobil contends is improper is the Com-

’ mission’s attempt to order refund of the 21% cent differ-

ence between the 16 cent rate permanently certified in

1958 and the 1314 cent applicable area rate from the

1964 date of the 4(e) increase down to the effective

date of the Permian order on September 1, 1965. Since

--a permanently certified rate may only be reduced prospec-

tively, by a 5(a) proceeding, the 16 cent rate permanently

certified in 1958 may only be refunded in whole or aed

part after September 1, 1965.

This Court has previously stbinsites itself to the general

problem o retroactive ratemaking by’ the Commission... In

Federal-Power Commission v. Hope Natural Gas Com-

- pany, 320 U.S. 591 (1944), this Court stated:

It is conceded that under the Act the Commission.

has no power to. make: reparation orders. And its

power to fix rates admittedly is limited to those “to

be thereafter. observed pe in force.” 320 U. S. at 618.

_ As’ viidiinaily discussed in » the section of this Brief deal-

ing with the Commission’s Permian moratorium, the Court

has dealt extensively with the authority granted to the -

Commission by Section 4(e) of the Act. In Sunray Mid-

Continent Oil Company v. Federal. Power Commission;

364 U.S. 137 (1960), this Court dealt with the authority

of the Commission if a hearing had not been concluded

between suspension: and the expiration of the five-month

period. :

_ If the hearing were not concluded by the ‘ial of the

suspension period, the increased rate could be col-

lected ad interim but the Commission is empowered

to require the company to collect the increment [the

increase] under bond and accounting, and zefund it

[the increment] \if it [the company] could flot make

out its. case for the increase. 364 U.S. at 145. (Em-

phasis added). | Sates a

- The Commission may not dispute the authority given

- under Section 5(a). In Atlantic Refining Company v. Pub-

lic. Service Commission of New York, 360° USS. 318

(1959), this Court stated: ‘s.

Under this section, however, the rate tonal by. the

Commission to be just and reasonable: becomes ef-

fective prospectively only. Gas purchasers, therefore, -

have no protection from excessive charges collected

eer | the pendency: of a §5 Proceeding, 360 U.S.

The prospective effect of Section 5 is illustrated by the

_ Statutory language that rates fixed thereunder are “to. be.

thereafter observed and in force."

With the granting of a permanent certificate under Sec-

- tion 7, the Commission can only institute review of the

certified rate under a Section 5 proceeding. As this Court

observed in Federal Power Commission v. Hunt, 376 U.S.

515 (1964): 7

Once a. permanent certificate is: s- granted. the Com-

mission can correct an improper rate only under §5

of the Act. ... . 376 US. at 521. (Emphasis added).

Thus, if a rate is: permanently certified’ at 16 cents, the |

‘ Commission: may not review the 16 cent level until it

institutes a Section 5 overall rate investigation. At the con-

clusion of the Section. 5. proceeding, if 13.5 cents is the

resulting just and reasonable rate, then prospectively the

16 cent rate is reduced to 13.5 cents, with no refund of

the 2-1/2 cent difference already collected since the fore-

going principles. are undisputable. The question remains

as to-what effect the institution by a producer of a Section

4 increase for a rate above the 16 cent perfnanently cef-

tified rate has on the permanently certified-16 cent level.

The Commission admits that Section 4 gives no refund

authority prior to the date a producer institutes a Section

4 increase. Theréfore, prior to the institution of the 4(e). .

increase, the 16 cent rate is not subject to refund. What

the Commission attempts by its refund order is to allow

_ the refund power of Section 4 to extend to a portion of

a rate which is not being collected under any power .

granted by Section 4(e). The Commission is- attempting

to extend the refund power of Section 4(e) beyond the

increase in rate placed in effect under 4(e). The Gom-

mission is. attempting to abrogate the clear holdings of ‘this -

Court that a permanently certified rate may only be’ re-.

duced. prospectively at the concluston- of a Section 5

proceeding. ;

- 71

In United Gas Improvement Company v. Callery Pro-

perties, Inc., 382 U.S: 223 (1965), the Court reiterated -

this interpretation in relation to an in-line initial price.

The fixing of an initial “in-line” price establishes a firm

price at which a producer *may operate, pending

determination of-a*just and reasonable rate, without

any contingent obligation to make refunds should a

just and reasonable rate turn out to be lower than

the “in-line” price. 382 U.S. at 227. )

The State of California urges (Calif. Br, pp. 57-58)

that the language of Section 4(e) allows the Commission

to order a refund of both the increase and any portion of

the “last clean rate” which is above the applicable area

rate by reason of the language in Section 4(e) to the

eflect that after the Commission determined a rate it

[M]ay, . . . order such natural-gas company to re-

fund, with interest, the portion of such increased rates

or charges by its decision found not justified.

The contention, therefore, is ‘that /increased rates” in the

above quoted section refer to th suspended increase

as well as any portion of the “last clean rate” above the

applicable area rate. Other than the interpretation of the

statutory language as réquested, no other authority i is Cited *

to this Court. | i,

As discussed previously, this Court a por that, as .

was conceded by the Commission: in 1944, the Natural

Gas Act gives the Commission “no power to make repara- *

tion Orders.” Also ‘this Court has held that Section 5(a)

has prospective application, only and once a rate ‘has been *

permanently certified by the Commission under Section 7,

it may be altered only by a 5(a) proceeding. Section: 7,

" ki ™~y?

re a |

as this Court has recognized in‘CATCO, Hunt and Callery,

_ has no refund procedure. Neither does Section 5 havea -__—

_. refund procedure. However, Congress has provided for con- Ps,

- sumer protection in the case of rate increases above the

level .previously certified or approved by requiring that |

viously approved under Section 5(a) is to be changed,

the Commission must determine if ‘the increased rate is. .

just and reasonable. But should this determination ‘be

delayed, the increase may be placed into effect, but subject: .

to refund. Later if the increase is not just and reasonable —

in whole or in part, it will be refunded in whole or in |

part. These are the, powers given to the Commission

under Section 4. To allow. the Commission to go behind

the Section 4(e) refundable increase destroys the structure

of the Act, and ignores almost a decade of decisions by.

_ this Court on the eens and charging provisions of

the Act.

E. The Issue Of. -The Automatic Application Of

The Area‘Rate To Initial Certifications Under

Section. 7 Should Not Be Decided By This

Court. — .

= Concurrent with its ‘Permian ‘palin by a separate

_ Order Issuing Certificates (R. 798d, R. 827d-839d), and

by Modifications of that Order (R? 1133d-1136d),

' Commission issued permanent certificates of public con- |.

- venience and necessity under Section 7 of the Act in four

_ applications consolidated in the Permian procedings.: One.

of these, Docket No. CI 61-34 is a Mobil-sale which prior }

to the Commission’s order was being made under tem- __ \

porary certification at 17 Cents ‘subject to.a refund floor |

of 11 cents. The Commission,. following its decision in

— 468, made the — area rates of that deci-

~ oe

sion also-applicable to these initipl certifications. (R:827d-

828d): In the case of Mobil this is a 14.5 oie sas rate, sub- .

_ ject to.quality deductions.

In Opinion 468, the’ Commission held that #s Permian

orders ‘would .be applicable to “all ‘sales of espondents -

whether they were being made at: the time we tituted

this proceeding or were begun subsequent thereto. oe

683d). In response ‘to’ the contention that the Permian

trate determinations could not apply to contracts filed after ~ .

Permian was instituted, the Commission felt that any

other holding “would ‘require an unending succession of

Section 5 area rate procedings, each covering only the

sales instituted prior to the institution of the proceeding.”

(R. 683d). The Commission had previously noted in

regard to its Permian Decision that:

This proceeding, instituted under Section 5(a) of the

Natural Gas Act, will-determine the just and reason-.

able rates to be hereafter observed and in force for -

all jurisdictional sales being made under respondents’:

rate schedules. (R. 683d).

Therefore, the Cominission felt that “Consistent with the .

to all of respondents’ sales in the described ‘area. (See.

United Gas Co. v. Mobile Gas Service. Cops 350 US.

332, 341 (1956)).” (R. 684d).

The Tenth Circuit, because of its reversal of the Com-

mission’s determination of the applicable area rates, re-

fused to decide the issue, and remanded the Order to the

Commission stating: ,

/We note that in its * ipodition: of this particular

docket the Commission took the | peer that an

“.\@ oe

established area rate automatically becomes the in-

line rate for a §7 proceeding. The same position was

'. taken .by the Commission in its Opinion No. .484

which we are today reversing by our decision in Nos.

8723 etc.—Phillips Petroleum Company, et eS ae

Federal Power Commission, .....F.2d . . We

there hold that in a §7- application heard by the ‘Com-

rat mis-[ fol. 140] sion after its Permian. decision the

- adoption of the area rate as an in-line rate must fall

because we have rejected the area rate. We do not.

there, and we do not here, express either approval or

disapproval of the principle that an area rate -estab-

lished in a §5 proceeding automatically becomes an

* 4

in-line rate for a §7 proceeding. The validity of such |

a principle may be affected by the final determination __

- of*the validity of the Permian Basin area rate: (XII

R. 87-88). _

In its’ Brief to. this Court, the State 7 California (No. |

100) urges approval of the Commission’s order for the

reason that should the Commission’s decision be reversed

or altered there would be “further delay in the development

of area rate making.” (Calif. Br., p. 62):.The Brief of the

California Gas Distributors also urges to this Court that

the area rate should. become an “in-line” rate for certifica-

tion purposes. (Calif. Gas. Br., p. 39).

Concurrent with this Order, the Commission instituted

a Show Cause Proceeding (R..37s) in which it con-

- included in the Permian proceedings. The Commission

directed all consolidated parties to “show. cause” ‘why the

’ principles of the Permian Decision should not be made

applicable to the consolidated procedings) It was of course

necessary for the Commission to institute a separate pro-

ceeding for the dockets not consolidated in Permian:in

order to comply with the hearing provisions of the Natural

es j

Gas Act. The Canadien has taken no further action’ in -

regard to the Show Cause Proceedings, an and no ne |

has been held or yet scheduled. ~

Also, relevant to this issue, are the Petitions for Cer- =

-tiorari now pending before this Court in Nos. 373, 380,

385, October Term, 1967 dealing with the Commission’s

Opinion 484 issued subsequent to its Permian Decision.

In Opinion 484, the Commission issued permanent cer-

tificates under Section 7. by automatically applying the

' area rates determined in Permian’ in certificate applica-.

‘tions not included in.the Permian Degision nor included.

adopted virtually the same position as it had in Permian, .

stating:

When area rates for the 1 Permian Basin receive final

judicial approval, the issue presented here will be ripe

for decision. If we were to decide them now, we would

be rendering an advisory opinion. We now decide

‘only that the rates fixed by Opinion No. 484 and.

accompanying orders are disapproved because they

are based entirely on the Permian area rates which.

we have rejected. 377 F. 2d at 279.

_ Thus, in this proceeding, as in the procesdings Teview- - -

ing Opinion 484, the Tenth Circuit, because of its rejec-

- tion of the Commission’s Permian rate did not decide the

‘issue of whether the area rate may become the rate auto-

matically applicable to initial certification under Section

7 _ As has been urged in this Court’ S review of Opinion

4% 7. As indicated by the various Petitions and _—. * there are

additional issues in the proceeding.

i . + 8. Again, as noted previously, there are other and different issues’

in Opinion 484 which the Tenth Circuit did not decide,

a . > . .

. ,

. - ~ .

° j _ Age I EEO ages

ee ON GAT EGE I :

2 : . — ARE CP EASON ’ .

[ “ : ; = . =

76 |

484 on Nos. 373, 380, and 385, October Term, 1967, the

disposition: of this i issue should be i in-one of the two follow- °

ing procedures.

_ First,, should this Conte affirm the Rssesibitions | in its

| Permian Decision, which Mobil for the various oe

set forth th this Brief contends-the Court should not; then

this issue, the issue of the automatic adoption by the Com-

mission of an area rate as the rate applicable in subsequent

Section 7 initial certifications, should be remarided to the

Tenth Circuit for that court’s decision. In affirming the

‘ Commission this Court will approve the area rate, there-

by enabling the Tenth Circuit.to consider the issue which -

it refused to consider since it felt the area rate was im-

properly decided. Opposition to.this procedure is expressed

- by State of California (Calif., Br., p. 62), as~ being”

~~ “further delay in the development of area rate making.”

‘

is fe]

The contention is also made that a remand by this Court

would diminish consumer protection. This is far from true

_ as is illustrated by Mobil’s docket. Sale is being made

under temporary authorization subject to refund down to

11 cents when a permanent certificate is issued. This offers

complete consumer protection. Further, for this Court*to——

_ decide the issue:reserved by the Tenth Circuit in Permian ,

as to the adoption of the area rate in all initial certifica-

tions would deprive Mobil of the review guaranteed by

Section 19(b) of the Act, and would require this Court.

to proceed. de novo into a complex issue and record with- .

out the benefit of an opinion by the Tenth Circuit. The -

course of action proposed by the California Brief would

thus be violative of this Court’s general practice not “to - 7

review an administrative record in the first instance.”

United States v. Great Northern Railroad Company, 343

~ US. 562, 578 (1952). See also Seaboard Air Line vuanll

Senne od ean ear yee eee setae

. Se ee

11 | | :

vind Company v. United — 382 U. S. 154, 137

(1965).

Second, should this Court reverse the Cranilon. i in

whole or in part, then the issue of the applicability of the

area rate to initial certifications should be remanded .to

the Commission, along with the remainder of these pro-

ceedings, for consideration of this issue in light of this

Court’s opinion. The Commission has determined its an-

swer to this issue based on the present Permian Decision.

A change in the structure of the Permian Decision may

well mean a change in the Commission decision: A change

in the Permian Decision may well change the objections

of producers to the position advocated by the Commission.

Should this Court attempt to decide whether the applicable

"area rate is to be automatically applied in all initial cer-

tifications would again require this Court to review an

seein sales in the first instance.

Rather, this issue should be remanded either to the Tenth

Circuit or to the Commission. Should: an appeal follow

from the decision. reached either administratively or

judically, then this Court can exercise appellate review

over. that decision.

CONCLUSION

For -the reasons stated herein, Mobil’ submits that the

“ Commission’s Permian decision and accompanying orders

__ + should not be sustained in their entity but that these pro-

. ceedings should be remanded to the Commission for altera- ~

° 78 | .

tion in sacremaraa with the Positions advanced y Mobil

herein. : ‘

Respectfully Een

~. TuHomas P. HaMiLr

-RoBErT D. HawortTH

JAMES L. ARMOUR sp

Mobil Oil Corporation. .

P.O. Box 2444

Houston, Texas 77001.

*DonaLp G. CANUTESON |

WILLIAM H. Tass.

Mobil Oil: Corporation

~’ P. O. Box 900 ,

Dallas, Texas 75201 |

», October, 1967.

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