Petitioners Brief — Permian Basin Area Rate Cases

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SUPREME COURT: U, & th @ OT. 8 ley

In THE.

| Saprne Court of te Hoitd Stats

Octoszr TzRM, 1967

NOS. 90, 95, 98-102, 105, 117, 181

PERMIAN Bastn Area Rate Cass ~

On Waits or CERTIORARI TO * THE UNITED STATES Court ;

ae OF APPEALS FOR THE TENTH CircuIT

BRIEF FOR THE SUPERIOR OIL COMPANY

(ne ee ne ee

ee oad ere —

Homer J. Penn

Attorney for Petitioner,

The Superior Ow Company

Of Counsel:

Murray CunisTan, General Counsel

H. W. Varner, Assistant General Counsel

_ Homer J. Penn, Attorney

- Tue Superior.Om Company

P. O. Box 1521

Houston, Texas 77001

Dated: October 9, 1967

FIDELITY PRINTING COMPANY, INC., HOUSTON

370

Opinions. Below , SR, 4. Seer

Jurisdiction .. seilaemalbane suinrteseielibctinilees 1

Questions Presented : 2

Constitutional Provisions and Statutes. Involved .............0+0 3

Statement of the Case 3

Summary of Argument 8

Argument:

1. The Natural Gas Act Presiaies Group thats Fixing 10 ©

II. Group Rate Fixing Under Other Statutes Cannot Sup- an

' port The Commission’s Group Rate-Making Scheme 16

III. The Rates Fixed Are Constitutionally Deficient ........ " 28.

IV. A Meaningful And Workable Savings Clause Must —

3 Be Included In Any Valid Rate Order .................0000+ 33

V. Producers Have A Constitutional And Statutory

Right To Be Reimbursed For All Expenses Includ-

ing Dry Hole Expenses ....... 38

‘ ‘VI. The Court Below Was Correct In Its Treatment a

. The Question of Refunds 7 _ 43

VII. The Natural Gas Act Does Not Permit The Award-

ing of Reparations ssocesccsenessesocsenoeeoccccsscocosocosvecsoedes ae

Conclusion .........seeseeeeeeeees sobscnamiiccoseccnens miata Fa 58

Appendix: :

OA” ., Ja

“Bo. cai taas sis 15a

CITATIONS

= Cases |

Acker v. United States, 298 U.S. 426 : vgn

Akron, 0. & Y. Ry. Co. v. United States, 261 U.S.

| SIE siiliisicekuibpencadtatinitionnsnbiichantgnesibaaiinhpanniniumninsionioe 23, 24, 25, 32, 33

Arizona Grocery Co. v. Atchison, T.& 8. F. Ry. Co., 284 U.S.

44, 45, 46

ll ae

oe PAGE —

Associated Oil & Gas Nidinees v. Féderal Power. Commis-

_ Sion, 280 FP. 2d-81 (Sth Cir. 1960) .......ccscsccossscsssssssecssseeessees -, 56

Atlantic Coast Line Railroad Company’ v. State of Florida,

ee Ce EE sakes ate ctesenA ee daichsiiinidssnpetiapenninsenciatia 48, 49

Beaumont, 8. L. & W. Ry. Co. v. United States, ‘282 US. 74 25

Bowles V. Willingham, 821 U.S. 503 (1944) otc 6, 12, 14, 27

Colorado T nterstate Gas Company v. Federal Power Commis-

NR, TI OB: CEE Bi si nntstiinneiggenes sessions slptesnsccininlipgniclinenyens 12, 32

Columbus Gas and Fuel Co. v. Public Utilities Commission of ;

IE I: GU asics Peshciesecenentnrpnncgansointcinsioeinbesotinillenascuts 41, 42

‘Covington and Lexington Turnpike.Co. v. Sandford, et al.,

eee ye ee ee jelindteetsighapiienkitensediaies 32, 36 ©

District of Columbia Transit System v. Washington Metro.

Area Transportation Commission,’ 350 F. 2d 7 53 (CADC

CUED << dsschnsaibbiaceagie i oneal etnkaiiniaastainsesainlliebinadaieiantdebansictanses 15

East Texas Motor. Freight Lines, Ine. v. Frozen vane

OIE Ce hg CI Wi I cease ccecesvelseteletzanceecsensnijieteetgpesssions 11

Federal Trade Commission v. Bunte Bros., 312 U.S. 349 ina 11

Federal Power Commission v. Natural Gas Pipeline Co., 315 ees

Los hee SESE ERASE OEE SERA Ts 12, 32, 39

Federal Power Commission Vv." Hope Natural Gas Co., 320

Wane NE “cnednsalh ibicncondescdeapghiiiahavesetidiinevininlisoins 12, 14, 15, 31, 39, 43

Federal Power Commission v. ‘Ben Pacific Power Co., 350

Tels TUNED” shvcciiniielonslaceibianianihinnpsiinnsinnsainsinatagtetegatlaseaiiaaiceiiteniamertatice 32.

_ Market St. Ry. Co. v. Railroad Commission of State of. Cali-

fornia, 324 U.S. 548 (1945), rehearing den. 324 U.S. 890

C2BGS) covscrsses AE EES ol Aid SR A, XL AE hae 36

Mississippi Rwer Fuel Corporation. v. Federal Power Com- -

mission, 202 F. 2d 899 (1953). .0........sscceeeee ee 56 .

_ Montana-Dakota Utilities Co. v. Northwestern Public Service

ak ee ip chacbipeneis 53

National Labor Relations Board v. Brown, 380 U.S. QTB secceec - 11,14

Nebbia v. People of the State of New York, 291 U.S. 502 .. 17

Panama Refining Co. v. Ryan, 293 U.S. 388 ssccsssssscsssssssssseeio 28

People of the State of California, et al. v. Lo-Vaca Gathering

Company, ef Gl., 379 U.S. B66 .....crcsccscscrcecseocsecescesoseiooscosoccsett 84

Phillips Petroleum Co. v. Wisconsin er Phillips), 374

UT cechecc DR nscieanelpsvedinseindacehiineninamnadideelbibienannintininbeidstietiaiens 14.

Railroad Commission of Texas, et al. v. E. Texas Railroad

| Company, 264 U.S. 79

"toe tee ' ili

, re

PaGE

Social Security Board v. Nierotka (1946), 327 U.S. 358 ...... 11

Sunray Mid-Continent Oil are v. Federal Power Com;

mission, 864 U.S. 137 oc..cscsecooveesesseesssesecesetecsssesssnnsssssssesssssssssess 65

‘ Tagg Bros. & Moorhead, et al. v. United States, et al., 280 ,

Bs SOU ck chdsccepinsncsdllbciaiiidlaipcdnliietnictandnbicintetiglioni et aominsiaenidtaiatee ie

Texas Eastern Transmission Corporation v. Federal Power

Commission, 357 F. 2d 232 (sth Cir: 1966) ‘i btliailayiadincotaneses 47

’ United Airlines, Inc. v. C.A.B., 198 F. 2d 100 (7th Cir. 1952) 36

United Gas Improvement v. Calling Properties, Inc., et al.

CARINE Bc APU: SOL I eel sincssicccntetemsscbthid bassctdinpseutaotsbcinonptagio 6, 53

' United Gas Pipe Line Osiapany v. Mobile Gas Service Cor-

SUIT, Tee Citi NUE pacssccisstecniickocdiscicevesiiensiepuinttnincanesarecinitl 54

United Gas Pipe Line Company v. Willmut Gas and Oil ,

i RL ee. eee ee 54

United States v. Fort Belknap Irrigation District (D. Mont.

BOGE) FOG a WO Bi icvccnviveonssintaitssitnstnstasscsaiennee ioaliiaitee i

. United States v. Rock Royal Co-Op, 307 U.S. 533 apap eicindadinlee =.

UB: ¥. Beda Ceig B70 BBE .scissescoccossscvscsssesosvecssosssevesossoese 30

U.S. v. Rock Island Motor Transit, 340 U.S, 419 ......cccoscscrseee 36

-Willmut Gas & Oil Co. v. Federal Power Commission, 294 F. -

_ ' 2d 245 (1961), cert. den. 368 U.S. 975; reh. den. 369 U.S.

A SIEM SNE BTS NE 55

Wisconsin v. Federal Power Commission (Second Phillips), -

878 U.S. ZOE .cseczooscececepsvescocresessiocsncgpvenscnseseovesoves 6, 12, 14, 27, 32, 35

Statutes |

ww. Page |

Agricultural Marketing Agreement Act of 1937, 7 US. C.

601, 7) snide epaihbeciiatteigelliameiatinielineanadisiginipipianlbdabiondtiaig 6, 16

Bituminous Coal Conservation Act of 1937, 15 U. S.C. $28- }

SE. - <scozasonisthasiiendebusabieneoniibunpincienithimciiapaiererpalcanncaieiipsaieindiaiasiidain . 6,16,17

The Constitution of fi the United States of America, ‘cle I,

Section 1 Fie SOT 2, 3, 8 0, 28, 35,39 . -

Fifth ‘Amendment to the Constitution of the United States of

1. IPERS <cotensecccitiiinisinasinisasaitticiaiclssiuisicinssteldeielilbibiatmepiuaniitibdiesosesen -2,3;14 .

Fourteenth Amendment to the Constitution of the United

Bees Of AMGTICG, oinccccecoivensenicecntscsceecessiveesiiteevsensecseensnencensefomnee 41

The Emergency Price Control Act of 1942, 56 Stat. 23 .. eideiinials 14, 16

Act of February 4, 1887, 24 Stat. 379 ....cssypalvessseessssssseeseene 44, 45

eile Sette

PaGE

_ Federal Power Act, 16 U.S.C.A. 824d(e), 824€(8) .....cssssseeses 54

Hepburn Act, 49 U.S.C. §§ 1-6, 11-20a, 26, 27, 142 cece 45

Interstate Commerce ‘Act, 49 U.S.C. § 15 iscccccsseseeees 6, 16, 23, =P 26

Natural Gas Act, 52 Stat. 821-838, 15 U.S.C. 717, |

CE SEQ. orceeee 2, 3, 4, 5, 6, 8,10, 11, 12, 13, 14, 15; 16, 17, 20, 22, 23,

27, 28, 29, 30, 35, 36, 39, 44, 45, 46, 49, 50, 53, 54

Packers é Stockyards Act of 1921, 7 U.S.C. 181, et'seq. va

Transportation Act, 49 U.S.C. §§ 1-6, 11, 14-16, 18, 20,41... 45

Transportation Act of 1920 ...... \. a “diiihenisisidmasiaills 16, 24, 32

Miscellaneous : o

- Commniasion Orders: \°

Area Rate Proceeding, Denials of Rehearing and Modif.

: cations, 34 F.P.C. 1068, 1082 and: 1198 ....2.........sescceceseseeeee

Area Rate Proceeding, et al,, Docket ‘Nos. AR61-1, et al.,

Opinion No. 468, 34 F.P.C. 159 (1965)... plans 1, 5, 33 ©

Statement of vite Policy 61-1, 24 F.P.C. 818 ............ ~ vee a

. Commission DeciSions: ; |

General Passenger-Fare I sonaiiiiblins 32 0.A.B.291 (1958) 21, 22

- Gulf Oil Corporation, Docket Nos. R163-265, et al., “Order

Denying Petitions to Withdraw Increased ‘Rate Filings,”

1, PE SN, I RI cas iccphuttnctccisegthivontidpscecipantebicenisviasosoes 51

In the Matter of Hunible Oil and Refining Company, 25

“CAE Dade BU Pi nanisnenssactesnsiete Auseaphbeaptecbintbapetaataiipaecanliiassenee 52

Pacific Coast /H awan and Atlantic Gulf /Hawaii General .

Increase in Rates, 5 F.M.B. 347 (1957) ...n....cccscccscesseeeees 21

_ ' Inthe Matter of Panhandle Eastern Pipeline sia 25 FP. C. .

aa sclishndaunitilinesiniiadstiiniatiaipshinannentinpaseteeniniilahpenuniions 52

Postal Telegraph-Cable, et.al., 5 F.C.C. 524 (1938) ees a

The Western Union Telegraph Co., 25 F.C.C. 535 (1958)... 19,37

Webster's New International viride Second Edition.. 13 -

In Tae

‘Siecle Court.of the Hnited Sti |

ccna on 1967

NOS. 90, 95, 98-102, 105, 117, 181

Panes Basry Anna Rate Cases

Ox Warrs oF CERTIORARI TO THE UNITED, — Court

Z OB APFRALS vor THE TenTH CicuIT

BRIEF FOR THE siabeiaian OIL COMPANY

aos) 4 _ OPINIONS BELOW

} The opinion of the Court of Appeals for the Tenth Cir- |

cuit, sub nom Skelly Oil Company, et al., Petitioners, v.

Federal Power Commission, Respondent, Nos. 8385, et al.

[No. 8510], and the opinion on Motion for Rehearing are

reported at 375 F. 2d 6 (XII R. 15-61 and XIT-R. 87-89).

The opinion and orders of the Federal Power Commission

am herein a styled Area Rate Proceeding Dockets No. AR61-1,

: ao et al./are reported at 34 FPC 159, with denials of rehearing

and modifications at 34 FPC. 1068, 1082, 1198, shown in the

Joint Appendix printed for the use of the court below as

follows: R. 516d-826d, R. 1105d-1132d, R. 1156d-1157d.

JURISDICTION | Fact

The Seidiieiset of the Court of Appeals 1 was entered Jan-

uary 20, 1967: Certain petitions for rehearing were granted

.:. in part and refused in part by opinion entered April 18,

* 1967. Jurisdiction of this Court.is invoked under 28 U.S.C.

co aaa Lon

‘\

"Sec: 1254 (1) and Section 19(b). of. the Natural Gas Act,

15 0.8.0. 2 T1Ts(b). ;

QUESTIONS . PRESENTED

A Is there a constitutional or statutory bar to deter-

mination of just and reasonable rates for a natural gas

company under the om on the basis of group composited

costs?

2. If the Act sali the iehed of rates for a Brera ii

: gas company on the basis. of composite cost determination

for a group, does the Act as so ‘applied not violate Article

I, Section 1, of the Constitution of the United States in that

it fails to. provide any standard whatsoever for the selec- _

tion, composition or make-up of such group?

3. Where ‘the regulatory agency without evidence or

hearing selects a group of natural gas companies for regu-

lation of the rates of each on the basis of group composite

‘gost, and precludes any contention that the group selected

may.be inappropriate for such purpose, is not a natural gas

: company aggrieved by the rate so fixed for it deprived of

due process of law under the Fifth Amendment to the Con-

"stitution of the United States?

4. Does a. gas producer, regulated as a wahiinal gas

company under the Act, have a constitutional and statu-

~ tory right to be reimbused for all expenses, including dry

hole expenses reasonably incurred in finding and proday-.

ing natural gas sold subject to said act?

5.:° Whether the Commission was required to specify as

part of the hearing procedure the circumstances and method

by which a producer would be granted exceptions from area -

rates and whether the Commission must, as a matter of :

- law, stay the application’ of those rates where the Commis-

np ere at emer oan

3...

- sion has failed to provide a a exception proced-

ure at the hearing stage.

6. Whether the Commission properly hemened a refund

| obligation under Section 4 of the Act for those years where __

group revenues from the area return léss than the com-

posite area cost of service and whether the Commission in

ordering refunds for individual respondents may totally

ignore all equitable considerations.

7. Whether the Commission has authority under the Act

to order restitution of sums in excess of the amounts sub-

_ ject to refund where the just and reasonable rate is found

to be less than the last firm rate in effect not subject to

any refund obligation under Section 4 of the Act.

- CONSTITUTIONAL PROVISIONS

AND STATUTES INVOLVED

The constitutional provisions involved are Article I, Sec-

tion 1, of the Constitution, and the Fifth Amendment to the

Constitution. The statute involved is the Natural Gas Act,

June 21,°1938, «. 556, 52 Stat. 821-833, as amended, 15

U.S.C. 717-717w, and particularly Sections 2, 4, 5, 7 and

16 thereof. The pertintent portions of the respective pro-

visions of the Constitution and the statute are set forth in

Appendix “A” hereof. —

STATEMENT OF THE CASE

' This proceeding represents the Commission’s first at- |

tempt at group rate fixing under the Act, and presents’ *

‘to this Court the opportunity for review ai such effort for

the first time.

The Federal Power Commission initiated this proceed-

ing in 1960 to establish maximum just and reasonable rates

for interstate sales by independent producers of natural

POORER ASL. : Sail Rapa A SSS

e .

4. 3 0

‘gas in the Permian Basin Area of western Texas and south-

eastern New Mexico. In 1965, the Commission issued. its

decision prescribing area rates and rendering various in-

cidental rulings and orders collateral thereto. On review, :

_ the.Court of Appeals for the Tenth Circuit sustained .in

part and set aside in part the Commission’s orders.

The geographical area, the so-called Permian Basin Area,

encompassed separate pricing areas delineated in the Com-

mission’s Statement of General Policy 61-1, 24 FPC 818.

It included (1) the so-called Permian Basin Area of New

Mexico — three entire counties; (2) that in Texas Railroad

Commission District 7-C — fourteen -entire counties; and

(3) that in Texas Railroad Commission District No. 8— _

. forty-one entire counties. The Policy Statement had recog-

nized that the areas there established might ultimately be

found inappropriate as pricing areas, 24 FPC 818, 819, al-

though the guideline prices. announced. for the manta

areas were the same,

The companies selected for regulation as a group in-

- eluded all natural gas companies classified as independent

producers under said Act making jurisdictional sales within

any part of the so-called Permian Basin Area.

The Commission order invoking this hearing specifically

provided that issues or contentions that the geographical

area selected, and the resulting group composition, were

; not appropriate for group rate making purposes would not

be entertained because such consideration might delay the

final determination of rates. Order issued December. 23,

1960 (R. 1d. -3d).

By subsequent Order of Angee 2, 1961 (R. 38d-46d) as

amended January 11, 1962 (R. 62d-65d), the Commission

- directed respondents to complete and submit certain data

forms; i.e. Appendix A— “Operating Data” (all respond-

Hy)

ents); Appendix B— “Cost and Statistics Pertaining ‘to ~

Oil and Gas Production, Exploration, Gas Gathering and

Products Extraction Operations, Year 1960” (respondents

with companywide jurisdictional sales of 10 Million Mcf _

or more); and Appendix C— “Costs and Statistics Per-

taining to Oil and Gas Production and Exploration — Small

‘Producers, Year 1960”. -

The Commission’s Order of April 5, 1961 (R. 29d-32d)

. specifically ruled that rate base cost of service studies for

individual producers or groups of producers could not be

introduced in evidence in this proceeding.’.

The Commission held in Opinion No. 468 (R. 516d-826d)

that while Section 4(a) of the Act requires that all rates

‘and charges of any natural gas company shall be just and

reasonable, nothing i in the Act states or suggests that such

rates cannot be determined i In group or on an area basis_

rather than in individual proceedings (R. 543d-544d) ; that

constitutional restrictions and statutory powers should be

considered in the light of the particular problem and what -

is necessary for a “sensible” result (R. 545d-546d). The .

Commission found that rates based on individual cost ex- .

perience could be either too high for consumers in relation ©

to other available supplies, or too low to be fair to the

regulated producers considering their risks. The Commis-

sion also found that since profits in the aggregate would

_ be at a reasonable level,-that group cost-based rates would

be fair to all although individual returns. thereunder would

vary greatly (R. ‘547d-548d); and finally that group rate

fixing under this Act is legal as other price regulatory acts

do not require consideration of rates related to individual

costs (R. 543d-546d).

1See also Order of August 2, 1961 @® 38d at 41d and 42d) and

" Examiner’ s —— at hes 1905- 1907. ii

The Court below held that no prior judicial decision had

. passed on the question of legality of group rate fixing un-

der this Act,? but noted that group rate regulation had been

sustained under other statutes. The Court assumed that

the Congressional requirement for rate regulation must.

- have intended use of any method by which that end could

be attained. Thus there was flo abuse of discretion in here |

resorting to group price fixing since it was: not specifi-

cally prohibited by the Act and there was tio constitutional

obstacle to such method.

The Court below further held that although the neanene

of the Act in all pertinent clauses provided for regulation

in the singular (R. 34-XII) and was entirely silent on group

rate fixing, nevertheless it contained sufficiently definite

- standards to allow the Commission to select groups for rate

making. Therefore, the Commission’s action was not sub-

ject to objection under Article I, Section 1, of the Consti-

tution as an unfettered delegation of legislative power, par--_

ticularly since the Court was unconvinced that the Com--

mission order precluding contest of the grouping for price

regulation denied the producers any: — right (R. 34,

35-XIT).

_ The Court also held that the end result of a just and

r sonable rate established under the Act must be a rate

? R..32-X1T, pointing out that Wiscontie v. Federal Power Com-

mission, 373 U.S. 294, 83'S.Ct. 1266. (1963), did not reach it nor

did United Gas Improvement v. Callery Properties, Inc. et al.

-(Callery), 382 U.S. 223, 225-226 ; and holding that while Bowles

v.. Willingham, 321 U. S. 503, 517, (1944), held that individual .

‘rate making was required ‘by the Natural Gag Act, such was

dicta, the value of which wag destroyed by Second Phillips.

8 R-33-XII, Interstate CommerceAct, 49 U.S.C. § 15; Packers &

Stockyards Act of 1921, 7 U.S.C. 181, et seq.; Agricultural Mar-.

keting Agreement of 1937, 7 U.S.C. 601, et seqg.; Bituminous

Coal Conservation Act of 1937, 15 U.S.C. 828-851; and state

acts for regulation of insurance rates and control of milk prices.

. i 7

that produces revenues sufficient to cover operating ex-

. pense, capital costs, including service on the debt and divi-

dends on the stock of the regulated enterprise. The return

to the equity owner must be commensurate with that from

investment in other enterprises with corresponding risks

and sufficient to assure confidence in the financial integrity

of the enterprise and maintenance of its credit and ability

to attract capital (R. 37, 44, 45- XII). te

The Court below reversed the Commission for failing

to find that the group rate here established was sufficient

to meet the above end result test for the group (R. 46-XIT).

_ The Court held that expense items and dry.hole expenses

which might be included in an individual cost of service for _

determination of lawful rates was not the measure of a con-

fiscatory rate because a gas producer has no obligation

to remain in business or replenish its committed gas sup-

- ply. Therefore the adverse impact of a group fixed rate

on high cost producers, even though inevitable, does not

nd the area or group rate fixing method anh 46-49-

The on also found that the Commission’s provision.

for special relief from area rates was “so vague and nebu-

lous that neither [the producers] nor a court can determine .

_what relief is being granted”, and holding that an “ade-

quate savings clause should contain guidelines which if:

followed by an aggrieved producer will permit it to be heard

promptly and to have a stay of the general rate order until

- “its claim for exemption is decided” (BR. 50-51-XII).

On rehearing, the Court concluded that no refund obli-

gation could be imposed for any period in which there was

a “group revenue deficiency”. In fixing an area rate, the

Cscisab must consider the effect which past and po-

tential refunds have on balancing the group revenues with

group revenue requirements” (R. 88-89-XI1).

. The further holding of the Court below on particular |

matters are here omitted : as not — to the questions

posed. | :

The various appeals from the Decision of the Tenth Cir-

cuit below were consolidated as the “Permian Basin Area

Rate Cases”. These cases-were consolidated -for argument

and the briefing schedule fixed by this Court on June 12,

1967.

SUMMARY OF ARGUMENT

We shall urge in‘this brief that the decision of the Court

below should be sustained in part.and reversed in part. In

essence we urge that the Court below erred insofar as ‘it

affirmed the Commission’s decision below with regard to

the legality of group rate making and of the right of the

. Commission to exclude dry hole costs, but was correct inso-

_far as it remanded the case to the Commission for further

consideration of the question of refunds and. the inclusion

- of an appropriate savings clause. |

The Natural Gas Act does not provide we the fixing of

rates on an area or group basis. For this reason, if area

rate making is to be affirmed, the authority necessary for

such a rate-making approach must be found to be in the Act

by implication. Because the Commission in fixing rates has

only such authority as is delegated to it by’the legislative

branch, the authority which may be given it by implication

_is of necessity primarily procedural rather than substan-

. . tive. The Court may not supply that which Congress has

failed to provide by way of regulatory standards and safe-

guards. The Commission which was sustained by the Court .

below has justified its group rate-making procedure solely

on the basis of group rate making by other regulatory

agencies ; however, in each instance, these other regulatory

agencies have found all of the necessary provisions for so-

called group rate making within the specific provisions of |

a 9 :

various Acts. In no instance has it been necessary for any

authority to be granted to these agencies by implication or |

ingrafted from other Acts or in order to achieve -complete

and effects ive rate-making powers. Furthermore; each of

to justify the group approach provides much more than

ere authorization of group rate making. These Acts in-

lude provisions for the selection of the greup, for the

granting of-relief to those whose position is atypical of the

group, and in each instance provide a standard against

which the regulatory result as to the group may be meas-

ured. , 7 Sab : “git

We shall urge that the Commission erred in its: selection —

- of a-Zroup and area to be regulated without evidence'‘or

hearing. That the result: of such selection and the denial

of opportunity to offer evidence to show that such group or

area was inappropriate constitutes the denial of due process

of law, for the result was foreordained by selection of the

group and the area. Further, we shall urge that the Com- —

_ mission and the Court below are incorrect that dry hole ex-

penses may be ‘properly excluded in any determination .of

the confiscatory level.

While the Commission most certainly has the power to

determine the manner in which such legitimate incurred

expenses shall be recovered, it does not have the power un-

der constitutional limitations to deny thei? recovery as

- either an item of current expense~ar_as 3,papital recovery —

charge. ;

We shall urge that. the Court below was ‘correct in re-

manding to the Commission the issue of the inclusion of

an appropriate savings clause. Further we shall show that

the Commission’s failure to provide during the course of the

hearing a realistic and workable method for allowing the

“ “ - . - .

seer meena aeeameammemeeneameamastmreanaenatannemeeeiaenenememenemmemaeenmmmmeanen men _ we in tig

individual respondent to show its exceptional circumstances

constitutes a denial of due process and that the Court below

- erred in failing to set aside the Commission’s decision for

such reason.

We shall urge that the Court below was correct in re-_

manding to the Commission the question of the proper.

measure Of refunds. If group rate making is valid under the

- Constitution and the Act, then as a matter of law refunds

may be required of the industry only for those test years

where industry revenues exceed industry costs. Further, we

shall ufge that the Court below was correct that refunds

must be determined with regard to individual respondents

on an equitable basis, for in determining refund obliga-

tions, the Commission i is At ea a judicial rather than

J a legislative function. -

Finally, we shall urge that California is incorrect in a

contention that the Commission has power to order repara-

tions.. Refunds, if ordered, are by the express provisions

of the Act limited.to the incremental increase subject to the

Commission’s suspension powers under section 4 of the Act.

| | ARGUMENT Dat

THE NATURAL GAS ACT PRECLUDES

GROUP RATE FIXING .

The Court below held that necessities of procedure and

administration have led to regulation of the natural gas

/ industry. on an area rate method and that the Commission

did not abuse its discretion in using that method: since it:

‘ «was not barred by provisions of the Constitution or stat-

‘utes. It recognized that it was determining a question of

' first impressign (R. 33-XII) but refused to consider group

rate fixing cases under other statutes as authority for like

regulation under the. Natural Gas.Act because of the

“treacherous business” of applying implications from one

. . statute to a totally different one, Federal Trade Commis-

iP)

sion v. Bunte Bros., 312 U.S. 349, 353. It acknowledged that

from its dilinitinns to its regulatory clauses (Sees. 2, 4, 5,

7) the Natural Gas Act speaks in the singular, to individual .

company rate regulation, but noted that Section 16 author-’ .

ized orders “necessary or appropriate to carry out the pro-.

visions of this Act”. It bottomed its holding om the view

that Congress intended effective regulation and thus must

have intended any method of determining just and reason-

able rates for the pees by which that task could be per-

formed.

Preliminarily we point, to several matters as to which

we believe there is no dispute, i.e.:

(a) In enacting the Natural Gas Act Congress intendad

*. to provide for “regulation along recognized and

more or less standardized lines”, H. Rep. No. 709,

75th Congress, First Session, p. 3; ‘FPC Brief Pas6.

(b) An administrative agency may exercise ‘only She

. authority expressly or impliedly granted it by Con-

gress, Social Security Board v. Nierotko (1946), 327

U.S. 358, 369; Hast a. Motor Freight Lines, Inc.

v. Frozen Food Express (1956), 351 U.S. 49, 54;

United States v. Fort Belknap Irrigation District

‘ (D. Mont. 1961), 197 F. Supp. 813, 822; and see Na--

tional Labor Relations Board v. Brawn, 380 U. S. 278,

291, and has no inherent legislative power.

(ce) The “just and reasonable” rate standard of the Nat-

ural Gas Act is identical with the “just and com-

pensation” requirement of the Fifth Amendment. ~

= Mek ara eee

: Haden’ Power Commission v. Mabel Gas Pipeline

eo 315 US. 575. _ a. ;

. (d) While the Natural Gas Act does not require use of

: any single method for rate deterniination, the end

résult of the method or methods used must produce ~

a rate which “from the company point of view” will

yield sufficient revenues “not only for operating ex-

penses but also for the capital costs of the business”

‘which include “service on the debt and dividends on ~

the stock”. Federal Power Commission v. Hope. Nat-

ural Gas Co., 320: U.S. at 602; see also Colorado In-

_terstate Gas Company v. Federal Power Commis-

‘ston, 324 U. S. 581.

(e) While cost of service is not a sine a non of natural

gas company rate. regulation, neither consumers nor

. producers can be deprived “of their right to a- just

and reasonable rate”, Wisconsin v. Federal Power

: es clita 373, U.S.. 294.

In its AN Wa the court below conceded that if the words

of Section 4(a) of the Act’* * * “all rates * * * made * * *

by any natural gas company * * * shall be just and reason-

able” means that each producer i is entitled to a rate just

and reasonable to it, the inquiry is at end, and the area rate-

method is invalid (R. 34-35 XII). It is submitted that the

court erred in finding that’ the quoted words do not have

just such meaning, particularly i in the context of the bal-

ance of the Natural Gas Act and the declared intention of °

Congress mentioned above. Justice Douglas, who wrote

. the opinion in Hope, supra, came to the exact conelngion 3 in

Bowles v. Willingham, 321 U.S. 508. °

The Federal Power Commission Brief points to the fact

that this Court in Wisconsin v. Federal Power Commis- ©

sion, 373 U.S. 294, (Second Phillips) did not find that the

138

Commission was’ abusing its discretion by experimenting Be

with area ‘regulation | of producers’ sales. Perhaps rates.

based on “the reasonable financial requirements of the in- |

dustry in each producing area” might possibly yield a rate

to each producer in the area which is just and reasonable.

- But here, as the court below found, the area rate method

result covers the entire range from “bonanza to bank- .

ruptey” (R. 36 XII) for the individual producers in the

area, and except by chance the: costs of “any” natural gas

company will not equate to the area determined rate called

just and reasonable, and even then will so equate only for

one of thany: years (FPC Brief P. 55).° .

It seems beyond controversy that a method of rate mak-

ing which yields a just and reasonable rate to any “natural

gas company merely by chance and then only fleetingly,

does not meet a standard that declares any rate of any

company that is not just and reasonable at any time un- -

- lawful. To ‘so say goes beyond constructif@m of the English

language to distortion of words. The Act by its terms re-

quires that the justness and reasonableness of each particu-

lar natural gas company’s rates be tested with reference to

_ that individual seller’s circumstances and operations. Sec-

tion 2 defines “person” as an individual or corporation,

and;the term “natural gas company” as/a person transport-

ing interstate or selling natural gas ingnterstate commerce

for resale. Each reference‘ in Section®4 and 5 of the Act

the natural.gas cémpany is in the singular, and while Sec-,

tion 5 authorizes the investigation of rates, the finding with

respect to just and reasonable must be with regard to “any”

rate of “any” natural gas. pany. “Any” means “every”

or each “one out of all.”* Further, the ‘constitutional right

"4 And. see opinion of the court. below (R. 34 XII) for some

elaboration of said wording. ~-

5 Webster’s New ianernaciet Dictionary, ‘2nd Ed., P. 121 ard

742.

: ra pass upon the constitutidnality and legality of the Com-:

. ns i.

to “just eompensation” goes to individual companies or

‘persons.

», In each ‘instance wins this Court has: dete called upon

mission’s actions under the Act, it has done so within the

context of the Act’s application to individual entities.®

Here, in seeking to construe the Act as authorizing group

rate making, the Commission has introduced constitutional

questions not presented in any prior proceedings which

dptermined rates on an individual basis. Contrary to the

holding below the Act and the Fifth Amendment require

individual rate making for natural. gas companies.

The Commission urges as it has in the past the great

difficulty of regulation of independent producers under the .

Act, and as stated i in Second Phillips, supra, the task within

the framework ofthe Act may be inipossible if the Com-.

mission must proceed on: a case-by-case, company-by-com-

-pany basis. If this is in fact so, it is a problem for Congress.

Difficulty of administration in enforcing regulations under»

an Act of Congress does not justify a procedural or ad-

ministrative method which results in a violation of the Act _

itself. 4a

It ‘was maintained above that the- ennaciuind in area °

. or group rate making under this Act raises constitutional

- questions never before passed on by this Court. Accepting

“»

6In Bowles v. Willingham) 321 U.S. 508, Justice Seeiin dis-

tinguished the Act from The Emergency: Price Control -Act of

1942, 56 Stat. 23, on this very basis at the same time in which he

had délivered for this Court the decision in FPC v. Hope Nat-

ural Gas Co., 320 U.S. 591. Producers are beyond question “nat-

ural gas companies” under Phillips ¥. Wisconsin, 347 U.S. 672,.

otherwise they are not subject to regulations. The Act sets a

single standard for regulation of “natural gas companies”.

292.

7. National Labor ‘Relations Board v. Brown, 380 U.S. 278, 291,

15.

that. the fixing of ‘Fait and ‘Yeasonahle rates tinvelven a

balancing of the investor and consumer interests, Hope,

supra, 320 U.S. 591,°603; FPC Brief p. 39, it seems clear

B that a rate fixed by an area method at least as was done

here for the producing industry cannot meet the test.

If the balancing of investor and consurfer intérests is

the sine qua non of a “just and reasonable” rate under the ©

Act, a rate method that precludes any such: balance is in-

herently invalid. Reasonableness becomes an abstract’ and

subjective standard fixed entirely by agency discretion, the

“proper application of which cannot be reviewed by~the

_ courts because there is no standard by which to judge

- whether the discretion was properly exercised or abused. ©

As held in District of Columbia Transit ‘System v. Wash-

ington Metro Area Transportation Comm., 350 F.. 2d 753

(CADC 1965), a rate.fixed without particularized reference

to the legitimate expenses of the regulated. company “does

- not satisfy any standard of rate making” especially. ie

“just and reasonable”. standard, ibid, p. 778.

- However, there is no investor interest-i in the industry as

such. Investments are made in individual companies which .

together make up an.industry. Certainly the investor in

“A” company with a bankruptcy rate is not properly con-

sidered nor his interest balanced merely because another

investor. in. “B” company has a bonanza ‘rate. But more

importantly the Act does not: regulate industries, produc-

ing, pipeline or distribution, bat companies in those indus-

tries. |

A rate making procedure which produces a result which

‘ cannot be measured against the standards heretofore set

_ forth in Hope can meet neither the constitutional standards

nor those of the Act.

oo" 16°

GROUP RATE FIXING UNDER OTHER STATUTES

CANNOT SUPPORT THE COMMISSION'S

GROUP RATE-MAKING SCHEME

In support of: the legality of the Commission’s group

-rate making, the ‘FPC Brief cites a broad range of regu-

latory activities, ranging from milk.to coal to stockyards

to airlines. In relying upon such regulatory standards as

supporting the Commission’s action in the proceeding below -

the Commission overlooks the obvious that jn eaclf instance

the regulatory standard under which the agency acts is

complete and is contained within the framework of the Act

involved. .The Acts cited cover the regulation of both mo-

-nopolies and non-monopolies, provide for egret or ie.

the standard of just and reasonable and other standards

and provide for both uniform and: non-uniform rates. Of |

all of the Acts cited, the only Act which bears even faint |

resemblance to the area rate proceeding as undertaken by

the Commission is the Interstate Commerce Act wherein

_ it provides for the division of joint rates among carriers.

Granting that Congress intended regulation of natural

gas companies to be effective, merely because it did not

expressly prohibit group rate making is no reason for

- assuming it authorized. group rate making in the face of

language to the contrary. Congress obviously knew how

.to provide for group rate fixing long before the enactment

of the Natural Gas Act in 1938. It specifically so provided

in the Transportation Act of 1920, and has specifically

done so in other Acts before and since the Natural Gas Act,

but in these other a statutes it provided much more.*

8 See Agricultural Marketing Agreem>nt Act of 1937, 7 US.C.

601, et seq.; the Bituminous Coal_Act of 1937, 15 U.S. C. 828-

851; the Emergency Price Control Act of 1942, 56 Stat. 23:

cg eet ae : | : |

In Nebbia v. People of the State of New York,® the stan:

dard of regulation was complete within the ct. This Act

provided for the fixing minimum prices which -weuld “best

protect the milk-industry in the state and i insure a sufficient

quantity of pure and wholesome milk . : . and be most in

the public interest” (291 U.S. 502). Thus, in Nebbia they

were concerned with neither the’ fixing of just. and reason- :

able rates nor, for that matter, maximum rates at all. More

importantly, however, the selection of the area to be regu-

lated was specifically provided in that the groupings were

to be “in the several localities‘and markets of the state”.

There can be no issue of confiscation of property under

minimum price orders as Nebbia, nor can a regulated entity

urge that the effect of a minimum price order would deny

it an opportunity to earn a fair return on its investment... |

In United States v. Rock Royal Co-Op, 307 U.S. 533,

there is a similar situation involving marketing conditions

for agricultural commodities so-as-to-insure the farmers

equivalent purchasing power. The statute does not involve

in any way the just and reasonable standard, but rather

employés a standard which will achieve parity of prices.

The Commission also relies on the regulations of the .

‘coal industry under the Bituminous Coal Act of 1937, 15

U:S.C. 828. Under this. Actsthe make-up of the group is

specifically provided by statute and its provision for the

- fixing of maximum and minimum. prices on the ‘basis _

of voluntary “codes”. The Bituminous Coal Act had a.. -

twofold effect: the minimum price provisions prevented

price cutting and are dbviously fixed to allow a substan-

tial portion of the group to earn a fair. return. The max-

imum price which was allowed was fixed so as to allow any

mine subject to the voluntary group a sufficient price so as

9991 U.S. 502.

to- yield a fair return on the fair value of the property

employed in the mining operation. . |

- The Commission likewise ‘relies upon The Packers and

Stockyards Act of 1921,° an Act which provides a rate

fixing standard of “just and reasonable”. Under, this Act

the.grouping is established by the very nature of the stock-.

. yard operation. This Act specifically authorizes group

‘rates witht? a stockyard’ because the stockyards “had

bound themselves to maintain uniform charges, regardless

of the differences in experience, skill, and industry” Tagg

Bros. € Moorhead, et al. v. United States, et al., 280 U.S.

420, 439. To the extent that The Packers and Stockyards

Act of 1921 provides regulation, ‘it is important to note .

that it deals with voluntary groupings, and that these

groups never had been, nor were they likely to in the fu-

ture, in price a with one another. In effect this

. within any stoakivavd area, and in order to prevent un-

conscionable charges to. the public, the maximum rates

. which these stockyards may charge are subject to regula-

tion. Thus; while group rates were established due to the

agreement of the regulated parties, the effect was the same

as individual price.regulation for the rate fixed for any

one would be taken by ail. _ Tagg Bros. é Moorhead, et al. -

v. United: States, etal, s wind a; Acker v. United States, .

, 298: U.S. 426. ; 4

The Commission also - relies upon regulation of airlines,

_ “telegraph companies, steamship companies, under the just

~—and reasonable standard. However, the Commission con-

_ fuses group rate making in this instance with group hear-

ings undertaken for the purpose of fixing “aniform prices” —

for the- ‘same service rendered by several carriers between

107 USC. 181, > seq.

the same points. Under these circumstances, there is no .

necessity for determining the group or specifying the group

composition in the statute. If the investigation is to de-

termine the just and reasonable rates for telephone serv-—

ice between New York and San Francisco, the inquiry is

of necessity limited to those that supply such service. If

the inquiry is with regard to charge for air travel between

- New York and Miami, only those carriers directly con-

cerned and certificated to fly such route would be respond-

ents in a hearing before the Civil Aeronautics Board. _

However, the Commiasion’s reliance upon the Federal

Communications Commission/is particularly misplaced be-

cause of the standard employed by the FCC in fixing the ©

rate of return to be allowed on services. In-Postal Tele- |

graph-Cable, et al., and Western Union Telegraph. Co.4

relied upon by the Commission, there was involved the fix-

ing of charges for handling point-to-point telegraph traffic.

In the more recent case, Western Union, some ten carriers

“were involved. The FCC prescribed new land line divisions |

and new rates for international carriers. In connection with

this investigation, the Commission reviewed the earnings ~

of certain carriers in order to determine if these carriers

__-were able to absorb the possible decreases in earnings as

‘a result of the reduction of their share of the joint charges

under the new divisions. The Commission rejected an in- -

dustry-wide rate base and a fair rate of return for the

group as a standard. Rather it took the experience of.

- RCAC as‘ the “bellwether” :since it was the most’ profit-

_- able general service carrier, 25 FCC at 583. Since RCAC

‘was the most profitable, the effect ‘was-to allow all. other

carriers a rate of return less than the 84% percent allowed

to RCAC. The FCC ices its actions in the bes nati

"11 Postal Telegraph-Cable, et al., 5 FCC 524, (1988) ; The Western

Union Telegraph Co., 25 FCG 535 (1958). ;

A,"

PASM

sion was under no’duty to fix rates so that all carriers might

~ earn a fair return om the fair value of their property or

even make some pfofit on their operations. But the Com-

: mission overlooks the most important element of the de-

cision which is that all of the carriers wére not required in . |

order to provide adequate. facilities at reasonable charges,

whicli it was that Commission’s duty to. assure were pro-

vided under that Act. The FCC found, therefore, that it

was under no duty to, subsidize the less profitable carriers

whose facilities in effect were superfluous. On the -other

hand, the carriers were. not required to continue service

and had thé choice of seeking to improve efficiency and to

remain in competition or withdraw from the market.”

The purpose of the Communications Act is, as inter-

preted by the Federal Communications Commission, not ~

only create a monopoly but to assure that such monopoly

is preserved. This position is in sharp contrast with the

standards of. the Natural.Gas Act which requiré a fair

return on the property committed to interstate commerce

by the producer until such properties are depleted “or the

_ cited by the FPO Brief P. 47 to’ the effect that the Commis. .

_ public convenience and necessity requires the termination .

of service”.** There is no evidence, no contention, no find-

ing or even suggestion that the public convenience and

the average of the unsifted costs of all respondents with-

draw from exploration and ‘development of natural gas |

for sale in interstate commerce. If this is the desired but .

unannounced intent of the Commission’s area rate pro-

webinar

12 However the FCC did provide a savings clause.

18 _— USC. T17E£-

ss Ls

Veet LRAT LOM IRE SIT LOE ET OE Annee MRP RTI OE LS ATR EH

at necessity requires that all producers whose costs exceed °.

eéedings, then the effect upon the consumer will be cata-— } +

ie a Be isi

“ . .

TE NS NINE OO NE USN tN ORES A RN

Phe regulation of the FCC may be ‘intdivinan with the

of regulation of the Federal Maritime Board and the Civil ©

Aeronautics Board. Rather than using the bellwether, the

Federal: Maritime Board has resorted to a dominant car-

‘Tier as the touchstone for setting rates to be observed by.

‘all carriers operating between the fixed points.) In a 1957:

decision, Pacific Coast/Hawati,* the. Federak- Maritime

‘Board chose Matson as -the dominant carrier’ and deter- -

mined a rate of return which would be jyst and reasonable -

for Matson. But the Federal Maritime Board did not:stop

with a mere determination of a single. rate of return to be

applied to Matson; rather it chose a range of return from

7.8 percent to 9.3 percent which it then applied to. various

rate bases from approximately $36, 060, 000 to $43,000 ,600:,

The Board’s conclysion in the Pacific Coast/Hawaii inves-.. *

tigation was that far from the proposed rate-increase being -

too high, that it was not high enough and increased the.

‘ The Federal Martitime Board’s group rate making does’

not support the action of the Commission below. The Board

does not translate. average costs into ceiling prices — rather.

- it uses the dominant carrier which is fairly representative

of a substantial segment of the industry and applies a rate

.of return to the rate base whichis in a “reasonable range”.

Then to asfize that the minority ‘shippers are protected |

from unprofitable operation, Board makes pragmatic ad- -

justments. as in the case of the increase in the shipping cost

of canned pineapple from 6.9 percent to 13.2 percent.

The Civil Aeronautics Board in the General Passenger

Fare Investigation*® followed a similar course to the Fed-

eral Maritime Board. Having no dominant carrier, the

14 Pacific ‘Const /Hownit and Atlantic Gulf Hawaii General In

crease in Rates, 5 F.M.B. 347 (1957).

15 General Passenger-Fare Investigation, 32 C.A.B. 291 (1958).

. _proposed 6.9 percent increase on pineapple to 13.2 percent.” <,

22 pt

° >

Obpaininsio lumped 12 carriers together which were in turn

divided vhto the big 4’and the intérmediate 8.. This ap-

proach was characterized as the bulk line approach and is

, permitted under 49 U.S.C. 1482(e) subject to the proviso

that the Board shall consider “the need of each air carrier

- for revenue sufficient to enable such air carrier . .. to pro-

vide adequate and efficient air carrier penile’ In this

investigation the Board set the rate of return at the upper

limits of the range of reasonableness since it was apparent. |

that many of the member parent enterprises would fall be- |

low the line of the average rate of return (32 C.A.B. at ©

305). The Board determined that where the bulk of the

carriers fell within a reasonable range, ‘that the ‘industry

figures -were not distorted by unrepresentative results and

the carriers who are in extremely poor or’ extremely fav-

orable situations, rather that the fare adjustment should

be based upon the industry as a group (32 C.A.B. at 330).

However, the Board felt that the rate of return adopted, ie

‘since they wére not minimum rates of return below which

confiscation would result, were returns which were within

the broad range of reasonableness amd would be reasonable .

- for all entities. The Board also makes refence to the other

tools available to the Board to aid the unprofitable car-

riers who, even with a general fare increase, were stil,

unable to provide adequate and efficient air carrier ser-

vices. The tools available to the CAB are, of course, un-

available under the Act. This emphasizes the undesirability

of attempting to transfer group rate: making from one

agency into a standard for another agency unless the entire

_ Act, including all of the special provisions, exceptions and

safeguards, are also utilized. Reliante upon these other

Acts to support a group rate making. ‘under the Act is

coinpletely unfounded.

3 ‘

7 eHOPE TERE RRERGRENEFUPORNNANNgURE PHO

oh > 7.

The FPC Brief also relies upon the provisions of’ the

- Interstate Commerce Act*® to justify its group rate makiag.

Specifically the reliance is tpon Section 15(6) of the Act

providing for the establishment of just divisions of joint

rates, fares or charges. Section’ 15(6) requires that there

be just, reasonable and equitable division of the joint rates

. which shall not unduly prefer or prejudice any of such par-

ticipating’ carriers. While admittedly the division of joint

-rates under the Interstate Commerce: Act comes closest to

_ being analogous to the regulation of ‘producers under the

area proceedings, there are a number of differences between .

the two Acts as applied. There i is, of — no provision

_ in the Natural Gas Act with regard to aggregate operating

income on the aggregate of the natural gas industy’s prop-'

erties used in public service. More importantly, as discussed

above, the Interstate Commerce Act is so worded that the

‘selection of the groups is not within the Commission’s dis-

cretion.’ Rather it is fixed by the statute and encompasses Ee

| all carriers involved with the through « or joint rates which

are the subject matter of the hearing. Finally, this Court

| has interpreted that statute as requiring the provision for “

and the inclusion of the so-called savings clause as.a neces-

sary: part of the proceeding and the Interstate Commerce ‘

Commission’s orders resulting therefrom. °

In The New England Divisions Case” this Court was

-_jealled upon to analyze the effects of the provisions added _

by the 1920 amendments to the Act. The Court found that - °

the divisions were not required to be uniform and that the

Act contemplated in effect taking from the rich and giving

es 2

1649 U.S.C. #1, et seg.

17 Akron, C..& Y, Ry. Co. v. United State, 261 U.S. 184 (The New

_ England Divisions vr A

. S

to the poor, 3 ustice Brandeis speaking for the Court stated

with’ —* to the purpose of ws ceeennay Act of

1920:

“rt was necessary: to avoid unduly. burdensome rate

’ increases and yét secure revenues adequate to satisfy

the needs of the weak carriers. To accomplish this, two

new devices were adopted: The group system of rate

' making and the division of joint rates in the public

interest. Through the former, weak roads were to be

helped by recapture from. prosperous competitors of

surplus revenues.. Through the latter, the weak were

- to be helped by preventing needed revenue from pass-

_ ing to prosperous connections. Thus, by marshaling the

"revenues, partly through capital account, it was plan-

. hed to distribute augmented earnings, largely in pro-

portion to.the carrier’s needs” (261 U.S. at 191).

Justice Brandeis concluded that the provisions concerning

- divisions were an integral part-of the machinery for dis- .

tributing the funds to be raised by. the new rate fixing ©

. sections. This Court held that Congress did not intend

that the ICC hear. specific evidence and fnake specific

adjudications with respect to division of each rate

of each carrier, but rather that:

. if the Commission finds that evidence introduced

is ic boottah of traffic and operating conditions, and of the

joint rates and divisions, of the carriers of a group,

_ it may be accepted as prima facie evidence bearing

‘ upon the proper divisions of each joint rate of each

carrier in that group” sim US. at ae, oo :

supplied.) at ,

Subject always to the inclusion of a proper savings clause

and the necessary procedural safeguards.

“Serious injustice to any carrier could be avoided

by availing of the saving clause which allows anyone

‘ to excep@itself from the order in whole or in part on

proper shdwing” (261 U. S. at 199). .

Se nme” eo meremmEBE Af

This Court again reviewed the same provisions of the In-

terstate Commerce Act in Beaumont,.S. L. & W. Ry. Co.

v, United States, 282.U.S. 74, and expanded the doctrine

of The New England Division Case by requiring that. the —

carrier assume the burden-of showing its entitlement to an —

exception at the hearing stage rather than on ‘appeal,

saying: — ae .

stitutional protection, the facts relied upon to prevent

enforcement of rates prescribed by governmental au- -

thority must he specifically alleged, and from them it

must clearly appear that the enforcement.of the meas-

ure complained of will necessarily deny. to the utility -

the just compensation safeguarded to it by the Consti-

tution. Aetna Insurance Co. v. Hyde, 275 U.S. 440,

447, 448,... and cases cited. Here the joint rates them-

selves are not assailed as too low, but the claim is that

“It ig well-established by the decisions of this court

that, in order to invoke such [Fifth Amendment] con-°

the prescribed divisions are confiscatory. The same -

rules as to pleading and. proof apply to orders pre-

_ seribing divisions as to laws fixing rates. There is no’

allegation in the complaint, or evidence in the record

_ to show, that any division to any of the appellants will

not yield operating expenses chargeable to the service

covered by it plus a reasonable return on property

value fairly attributable to that service” (282 U.S. at

— (Emphasis supplied.)

While sustaining the Commission’s action, the- Court re-

iterated its previous rule that the rates must be just and —

reasonable ue all who are thereafter required to observe.

. them, and that adequate provisions for demonstrating the

-exeeptions to such rates by individual carriers must be

afforded at the hearing stage.

During the last term of this Court, it passed upon a

Commission order under Section 15(6) of the Interstate

. Commerce. Act. 18 In sustaining the action of the Commis-

sion ‘and revérsing the decision of the district court, the - ,

Court again reviewed the standards under Section 15(6)

of the Act and reiterated the need for consideration of the

regulated company individually even in an authorized Broep ays

ets holding:

. It has always been accepted that an individual

carrier may challenge this premise and, on proper .

«showing, receive independent consideration if-its in-

dividual situation is so atypical that its inclusion in

group consideration would be inappropriate” (Slip

Op., p. 14).

However, the Court noted:

_*.¢ eR we point during the administrative hearings

or the presentation of evidence did they raise any

claim for separate treatment” (Slip Op. «, p. 15). |

. This Court found that. the aggrieved carriers had waited

too long to raise the issue of confiscation, but that the

* Commission was not required on its own motion to guess

which of the 300 carriers might require individual treat-

ment (p. 1605) when none of them even requested it.. The -*

aggrieved carriers argued that the Commission erred in

’ generally treating them on a group basis and not making

individual findings on their costs and individual needs, —

but it is clear that the decision rests on the fact that the

carriers failed to show at the hearing stage that they would

be aggrieved or would suffer injury under the Commission’s

revision of divisions i in joint rates.’®

.18 49 U.S.C. 15(6).

"19 The position of the aggrieved carriers is in sharp contract with

the instant proceedings where producer respondents, including

petitioner, insisted at the inception of the hearing on the adop-

tion of a.meaningful savings clause provision (R> 29d-38d). Su-

perior’s cost-of-serviée presentation shows that Superior’s juris-

dictional’ cost of service is in excess of its revenues on a

companywide basis. Based upon such a showing, ‘we urged to

the Examiner and to the Court below that we were entitled as

a matter of law to exception from the area ceiling rates.

SBIR > NS PREERIEE RA gootan

ECL LO Ra = .

: - :

"etna aeamaemataamel

We did not seek, nor do we seek now, rates fully equal

_ to our cost of service. To any extent that our contract rates .

'. are less we are willing to carry out our bargains. However,

we strongly ‘contend that. our bargained rates may-not be

reduced when as in Second Phillips they produce less rev-

enue than our cost of service. ,

As pointed out by the Court. below, the treacherous busi-

ness of taking an implication drawn from one statute to

a: totally different statute which has different purposes and

provisions (notwithstanding some similar or even identical

*parts) is well demonstrated. Where group regulation was

expressly provided for in the statute or is properly im-

plied from the wording or purpose of the legislation, there

are invariably large differences in the total enactment. It

was the unusual rather than the standard type of recog-

nized regulation in 1938 when the Act was enacted. This

' Act by wording and intent was to provide for individual .-

natural gas company regulation as Justice Douglas stated

in Bowles v. Willingham, supra, No other conatyhetion 3 ae

warranted. 3 :

i ?

: III.

THE RATES FIXED ARE

CONSTITUTIONALLY DEFICIENT

In discussing: cases arising under other statutes we

pointed to the fact that the statutes themselves expressly

provided for group determination where group rates were

permitted. Certainly it is not even contended ‘that the Act

has any such provision.

Statutes which permit group rate making, or fixing uni-

form rates for groups, prescribe standards for fixing the

rates, selecting the group, and, in most instances, methods

by which the agency can ameliorate-the effects of the ap-. .

plication of uniform rates to the individuals in the -group, °

If the Act which lacks-sueh standards is construed as im-.

_ pliedly authorizing group rate making; then the Act itself

is contrary to Article I, Section 1 of the Constitution of

the Umited States. This section invests all federal legisla-

. tive authority in Congress. In all instances where agencies

Pegulate rates they do so under legislative authority dele--.

gated by Congress or the various state legislatures. Such

~ regulatory agencies have no inherent power. Such power

as they have is limited.to that delegated, which must be

accompanied by the laying down of policy and the estab-

lishment of standards for its exercise. An attempt by Con-

gress to delegate legislative power is void where Congress

has “established no standard, has laid-down no rule” (Pan-

ama Refining Co. v. Ryan; 293 U.S. 388).29 0 +

It i is here contended that by implication, the Act gerieite

group-rate se We ae on the ground that such

20 .* every case in which the question has been raised, the

Court has recognized that there are limits of delegation which

there is no constitutional authority to transcend” = US. at

430).

implication is forbidding by the very terms: of the Act.

But assuming this is-not the case all parties agree that the

makeup of such group must be reasonable. As discussed

above those supporting the Commission’s area rate experi-

ment cite the operation’ of many: other agencies regulating

groups of individuals under similar and dissimiliar stand- ~

ards as supporting the Commission’s action in the pro-

' ceeding below. If the standard of. the Commission’s action.

is reasonableness, then each and every step in the proceed-

_ing must also be reasonable. The Commission determined |

the area which would be encompassed by its initial rate

_ hearing (R. 2d TX) which provided. that the geographical

area should consist of the Permian Basin of New Mexica

_and Texas Railread: Commission Districts Nos. 7(c) and 8.

There was, in fact, no selection of a grouping, but rather

the inclusion, of all those selling in interstate commercial -

_ natural gas within the area as the group. Thus, the group-

ing of the companies whose rates were to be fixed arises _

entirely without rhyme or reason, or without explanation

of any kind. But more importantly, the areas selected, and

thus the grouping, although acknowledgedly subject to ques- -

tion, were placed beyond the issues and controversies in the

_ proceeding. The Commission stated:

cw e have siashiloa that no useful purpose would

be served at this time by delaying the discharge of ©

_ our primary responsibility under the Act of deter-

mining just and reasonable rates by entertaining issues

or considering contentions that the areas we have de-

lineated in our Statement might be inappropriate for

rate making purposes. Accordingly, for the purposes .

of this area proceeding we do not propose to consider.

any evidence looking toward the fixing of rates for _

sales af gas in areas outside the boundaries. of the

a SSR FE, ON ONO OSE OY et ey a .

" geographical area. we ‘ies dilened | in | Appendix ‘D’

hereto” (R. 3d TX).?2 :

As there is 3 absolutely. no legislative standard in the Act for

the selection of the group, the result i is predetermined by »

the arbitrary selection of the group by the Commission by

proscribing-the adinission of any evidence with regard to

the area. The group’ could be neither expanded. nor con-

tracted, and, for this reason, the final result even if other-

wise supportable as just and reasonable, constitutes a de-

nial of due process. 7

Whenever costs are used in regulation,. the validity: of

the use‘of averages‘is dependent upon a “close resemblance

of the individual members of each group on the essential

point or points which determine the costs considered” -

(U.S. v. Borden Co., 370 U.S. 460, 469). It is uncontested

that the characteristics of the various members of the

‘group are quite dissimilar. Thus for*grdup rate making to

meet the constitutional standards, there must be a group

whose characteristics are essentially similar. A reasonable

group could include only companies with production from

the same or equivalent depth with wells drilled at approxi-

mately the same time in the past, or with drilling costs

21 The Commission’s action in Permian may bé contrasted with

the notice provided in later area proceedings such as the Texas

. Gulf Coast and the Hugoton-Anadarko. The order there (30 -

FPC 1354, 1357) stated:

: “The investigation will encompass not only issues re-

lated to the establishment of particular area rates, for the

future, but will also consider whether such area rates should

be uniform throughout separate production areas which are’:

being consolidated for joint hearing,’or should vary from

different production areas or for any other geographical

area encompassed within the proceeding. The Commission

will accept and consider petitions by any party to either

proceeding filed within three months of this order (and:

served upon all other parties thereto) seeking to enlarge

’ the areas to be considered in either procbeding: a

CO EEE oer

‘adjusted for changes in per foot cost of drilling over “3

‘period of time. By defining the multi-state area the group

consisted of high cost-producers and low cost producers.

The unsifted average costs were directly translated into

ceiling prices. The lumping of all producers inthe broad

area, including those that-drilled the old shallow and rela-

'. tively.inexpensive wells and those that drilled the newer

deeper and more expensive wells, could have but one effect.

The rates of the active aggressive wildcat companies will .

be reduced in order to supply a windfall for those com-

panies that are little better than in a liquidating posture.

Neither in its order, nor in its decision, has the Commis- .

sion ever justified the aggregation other than it is a well-

known producing aréa. Yet the record is clear that it is-

_ an area from which production varies from 7,000 feet in

_ Nolan County,. Texas to 25,000 feet in Reeves and Pecos ~

County Texas. The evidence is uncontroverted that there

' has been a general increase in cost of drilling over the long ©

run. It is also uncontroverted that: the cost of drilling goes

up expotentially with depth and that’ doubling the depth: ©

of a well may increase the cost fourfold. Companies such —

as Superior which are arbitrarily lumped in the group and

who have drilled relatively. deeper wells and with substan-

. . tially all of their production of recent ‘vintage will have

=—c— eee ne ere

higher costs than the group irrespective: of prudence effi-

ciency and even reasonably good fortune. The selection of

the area which in turn controlled the group, coupled with

- the direct translation of group average costs into ceiling

prices, is unlawful as a matter of law.

As indicated above, individual cost. of service need not.

be the sine qua non of natural gas company regulation ‘but

any. other method used must produce at least equal rates.

Such method is certainly.a proper method of determining

just and reasonable rates (Hope, supra, Colarado Inter-

: state, supra. The producers, any, each, and every one, have | ae

a right to a just and reasonable rate. Natural Gas Pipeline

Co., supra, and Second Phillips, supra. ° a 2

Nor does this requirement present the liorrendous prob- a

_ lem posed by the FPC Brief P. 54, anticipated by Justice _- f

_ Clark dissenting in Second Phillips. Regardless of ‘its cost ~

of*service, no producer can obtain rates or prices higher .

than a competitive market level (between producers in the

supplying market and between competing fuels in the con-

sumer market). But to the extent the producer within a

* market has negotiated prices higher than average cost-.

based rates, those prices may not be reduced by regulation

if a non-conficatory rate for that producer i is greater than —

the average cost-based rate. Confication does not result _ .

' from voluntary acceptance of a j rice which will not return

costs, Covington and Lexington Turnpike Co. v. Sanford;

-et al., 164 U.S. 578, and Federal Power Com. v. Sierra, 350 7

US. 348. Rather confiscation results from governmental ’

compulsion requiring less than just compensation.

The FPC Brief P. 54 points to the intolerable adminis-

trative burden of regulating the many producers. This . 4

burden seems completely bearable for some ninety-odd pipe-

.line companies, each of whom are natural gas companies _~

governed by the same statute as producers. They are in-

dividually regulated. The Commission seems to have de-

termined that small producers, the largest member of the

total, need: only minimal regulation, and to have fixed as

_its regulatory target the larger producers who number con-

siderably less than presently regulated pipeline companies. 7

en . . .

oo ee

Itis rather strange that the Commission is embarking

on this experiment, while placing gréat emphasis on cases :

arising under the Interstate Commerce Commission not- law =

withstanding differences i in the two statutes, does not con- i

sider the purpose and effect of the Transportation Act of

1920. As stated’in the New England Dwisions case,.supra, —

the purpose was to preserve the weaker or a higher cost

a .

ee ee Eee a ° :

oan OILS RIF NEI ett Aiea irae SR ers te nen & ;

- = ap sthtantniiads — Aa * sacar never

é a ain ninth doi 5 TAR ise par ica _—— t ,

ere 33

| company by Sitiail from the’ stronger or a lower st com-

pany revenues in amounts which would prevent confisca-

tion to either.2? This purpose was to be achieved pringgrily .

by “equitable divisions” of joint rates. In.a truly repre-

sentative. situation (group to separate members) such as

the dominant carrier or bulk line approach ‘could solve

the “bonanza to. bankruptcy” result and related. consti-

tutional and statutory problems. It would ‘certainly an-

swer in a large measure the intolerable administrative

_ burden the Commission’ complains of, permit gfficient and

~ _ practical regulations and at the same time protect the regu-

lated natural gas ‘companies in the producing field from

being deprived of their property without just compensation. .

Some exceptions or exemptions might still be required as _

in the Interstate Commerce Commission procedure, but

such would ‘be relatively few compared with - pepomt

experimental monstrosity.

, IV. ;

A MEANINGFUL AND WORKABLE SAVINGS CLAUSE

_ MUST BE INCLUDED IN ANY VALID RATE ORDER

The Tenth Circuit was correct in its decision to remand

Opinion No. 468 to the Commission for the determination

and inclusion of a workable and meaningful savings clause

for the protection of those producer respondents, including

petitioner Superior, who were denied the opportunity dur-

ing the hearing stage to demonstrate why they were entitled

to an exception from the Commission’s area ceiling prices.

The FPC Brief P. 66 urges that petitioner is not aggrieved

by the Commission’s failure to specify in greater detail.

than it did fhe conditions under which exceptions to an area

rate would be allowed. Said brief cites among others The

New England Divisions case, — Of course this case

r 261-U.8.C. at 191.

vig

lie convenience and necessity-and the rights of holders’ .

34 ‘

does not support this position whatsoever, but rather affirms

the Coshmission’s error in failing to provide a mechanism

throughout the hearing stage for proof ‘of the need for an

exception. |

It is also contended that-the Commission is not required

to stay application of an’ area rate where a natural gas

company seeks. an exception. This position is shocking

under the circumstances. In brief, it is an argument that

respondents should have known in an admittedly evolution-

ary proceeding the precise manner in which regulation on

an area basis would evolve. It also assumes that such re- .

spondents were derelict in failing to. make a proper evi-.

denciary showing notwithstanding the fact that the Com-

mission repeatedly stated that individual -presentations

would not be permitted. ‘ee as

Fundamentally,- however, this argument arises from the

failure to recognize the real nature of the certificate of pub-

thereunder. While the producer is not required to commit

natural gas into interstate commerce, having once volun-

tarily done so; even under mistake?* of fact he is thereafter

required to observe all the rules ‘and regulations promul-

gated by the Commission under the Act. The sole basis for

discontinuance of service under the Act by an independent’.

producer is the exhaustion. of natural gas which is the

subject matter of the sale or the requirements of the public

_ eonvenience and necessity. So long as the producer is a

ORT AP ET LIE PLOY PMN MOT

natural gas. company and performs the acts’ required of

‘it under its certificate of public convenience and neces-

sity, it is entitled to all of the cae neg afforded under the

28 The Commision has treated sales sie compressor fuel as juris-

dictional and required retroactive certificates for- such sales

based upon the Lo-Vaca Doctrine, People of the State of Cali- .

paleo. et al. v. Lo-Vaoe Tren Company, et al., 379 U. s. 366.

Tie 5’?

Act and under the Constitution, including a fair return on

its property committed to public service. ;

| What is urged in fact is that the nature and character

of the’ public convenience and necessity be changed so as -

to deny for the period of time between the effective date of

the Commissions’s order herein and the conclusion of hear-

ings on the exception, the right to the individual natural

gas company to earn a fair return. on its property. Thus

_ the Commission would seek to do by indirection two things

‘which it is not allowed to do directly, i.e., (1) require the

. abandonment of service prior to the exhaustion of natural

gas in the total absence of any showing that ‘such abandon:

ment is in the public convenience and necessity; (2) deprive

- the producer of his right to a just and reasonable rate.

The Solicitor of the Federal Power Commission in oral .

_ argument before this Court in Second. Phillips stated in re-

sponse to a question from this Court that if the Commission

did not allow exceptions to area rates for! those whose costs .

exceed the average cost, that the Commission “would just

have to let them go out of the interstate. business.” That is, ©

- the Commission would enter an erder in the alternative

that the natural gas company would either (1) thereafter

observe the ceiling price, or (2) discontinue sales in inter-

state commerce. These Alternatives have repeatedly been

suggested by the Staff of the Commission at the hearing _

stage, before the Commission and on appeal. They urge ©

this as the perfect solution to the dilemma which they see |

the Commission. facing — if aihaaraie don’t like it, they .-

can lump it.24

The Commission would use Section 5 of the Act.to ter- '

minate a certificate of public uch 9 and necessity

24 Parhaps it should be “Let them éat cake .. .” But there, are

but few scraps from the feast table of the high return: pro-

ducers with their old; shallow, low-cost properties.

without regard for the requirements of abandohment set

out in Section 7.of the Act.. This the Commission cannot

_ do for the rights granted under certificates of public con- | |

“venience. and necessity issued under: all Acts are recog-

‘nized as valuable property rights. All agencies who have

attempted’ to modify the express statutory provisions with

regard to changes or modifications in certificates have found

the powers sharply curtailed, andthe courts have repeat-

edly admonished various other agencies for attempts to do

indirectly that which they are not entitled to do directly.?®

Abandonment under the Natural Gas’ Act comes only

upon request of the régulated party, and there is no in-

stance under the Act where the Commission on its own

~* motion has ‘sought to terminate. service by any natural gas

‘company. The Company may not by setting rates so low

-as'to result in confiscation, but deny a. savings clause,

et deprive a natural gas company of its right-to a reasonable

rate and thus destroy the economic value of the certificate

of public convenience and necessity under the guise of rate

making. The permissive character of a certificate does

not give rise to any obligation on the part of a company

to operate at a loss, and no contract that it will do so can .

"be elicited from the acceptance of the certificate. Although

_ their property is devoted to the public use, such commit-—

- ment is on the condition and statutory provisions that the

opportunity be. afforded to earn a just and reasonable

rate.*¢ -

The opportunity . earn a fair vied may not be pres-

ent as in the Market St. Ry. Co..v. Railroad Comm’n of

- State of California, 324 U.S. 548 (1945), rehearing den. |

25 See United Airlines, Inc. v. C.A.B., 198 F. 24 100 (7th Cir.

1952); U. 8. v. Rock Island Motor Transit, 340 U.S. 419.

26 Railroad Commission of Tense, et al. v. E. Texas Railroad Com-

pany, 264 U. 8. 79.

324 U.S. 890 (1945), and-Lexington Turnpike, supra, cases.

The over-all economic conditions or particular available _

markets may be. such that at no rate level will there be

revenues sufficient to allow the regulated entity to earn

a fair return on its investment. But it is only-in the —

absence of an opportunity to earn a fair return on the

investment that-abandonment is an alternative which the

regulatéd. entity may seek. If the opportunity to a fair

return is present (and such opportunity. is beyond doubt

available here as the Commission order would reduce .

rates reached at.arm’s length), such an opportunity must

be given to the regulated entity to the full extent of the

just and reasonable rate. This is the only standard un-

‘der any of the Acts providing for individual or group

rate. making by regulatory agencies. In fact, there ap-

pears to be only one instance where an agency has sug-

gested that the rates to be fixed would result in a return

- substantially below that that the agency found to be rea- °-

sonable. However, in the Western Union, supra, proceed-

ing refed upon by the Commission in the decision below

and in its brief, the order of the FCC (25 FCC at 639),

provided that any entity: might file tariff schedules on the

-statutory 30.days notice reflecting rates higher than those

authorized for RCAC; the bellwether company. However,

. that Commission specifically recognized that the effect of

that savings clause would be sharply curtailed by economic

considerations, for the higher rates if allowed for those

earning a return less than the bellwether could only result —

_in a reduction it in traffic and, in fact, less rather than more

revenue.

No limitation on the opportunity to earn, within con- _

tract limits, exists with respect to sales in the Permian |

Basin Area. There is not-one word of testimony by any —

party to the proceeding that any pipeline was unable to

pay any of the “rates in effect under: its various purchase

. contracts which were consolidated by the Commission. for

~PN DSNETSE RTRIINEE

hearing. Nor did:any responsible party urge that a single .

uniform rate was required at which all gas of a similar

type would be sold. As the opportunity to earn is present :

it must be afforded the regulated natural gas company and ~

at this opportunity must not be confused with the fact that

where opportunity is lacking, the regulating agency. cannot

assure an adequate return.

, V.

_- PRODUCERS HAVE A CONSTITUTIONAL AND:

STATUTORY RIGHT TO BE. REIMBURSED

- FOR ALL’ EXPENSES. INCLUDING DRY

HOLE EXPENSES.

‘The Commission urges in its Brief, page 25, that since

the ‘Commission’ does not authorize exploration, it is not

accountable for fruitless expl@ration. The Commission had

held (R. 658d) with regard to the cost which would be

allowed under any savings clause that the amount which

would be allowed would be limited. While the Commission

stated that it could not specify all of the special circum-

stances, it’ did state that it would not permit recovery of

unsuccessful ‘exploration and development costs.2”7 The

court: below reversed the Commission on the savings clause

provisions but seemingly affirms the Commission’s state-

ment that it may properly exclude dry hole costs in deter-

oe the confiscatory level. The court stated:

. We agree with the Commission that the ex-_

pense items included in an individual cost-of-service

. 27 However * Commission failed to specify the procedures. by

which a savings clause would operate and, for this reason, was

_ reversed by the court below (R. 50-51, XII). Thus this issue

‘may not properly be before this court. However the issue of

the propriety of the exclusion of dry holes has been raised by |

‘.the brief of other parties in opposition to Superior as well as .

‘by the statement of the court below and, for this reason, must

. be answered.

° 39

are not the measure of a confiscatory rate. A producér

has no constitytional right to be ‘aii aiee for: dry-

hole expenses” (R. 49 XIT). |

The court further found that while’ on the one hand the

producer had no obligation to remain in business by re-

. plenishing the supplies of gas, that “.. . Inability to con-

tinue exploration and development is not confiscation”

(R. 49 XII). Thus the issue with regard to the exclusion

‘of dry hole expense which was raised as a part of the ex-

ception to and the attack upon the saving clause was dis-

cussed by the court below in a different context, i.e:, the

| mort p of group rate making.

The Act and the Constitution prentuie the tempoattion of

any rate which will not yield the regulated entity revenues

equal to such entity’s costs and financial requirements.

The Act and the Constitution condemn any method includ-.

ing group rate making and any rate fixed there der which.

may be reasonable as to such entity only at some time in ~

the future, and then by mere change. This court has stated :

“By long standing usage in the. field of tate regula-

tion the ‘lowest reasonable rate’ is one which is not

confiscatory in the constitutional sense.” Federal Pow-. §

er Commission v. Natural Gas a 20am Co., 315 U. 8.

575, 585.

And the lowest reasonable rate is one mat promotes and

alldws an ongoing business.

“From the investor or company point of view it is —

important that there be enough revenue not only for

operating expenses but also for the capital costs of |

the business. These include service on the debt and divi-

dends: on the stock.” Federal Power Commission v.

Hope Natural Gas Company, 320 U.S. 591, 603.

The argument has been made in each of the: area pro- |

ceedings that dry holes are not a legitimate item of ex-

pense. This is based totally upon an argument designed to

deceive and confuse. Stated in its simplest terms, the argu-

_» ment is that dry holes incurred in the test year are a part

of the over-all search for gas which will be sold in the .

future. This gas which is found as a result of the successful

search may or may not be sold in interstate commerce.

Thus the consumer may or may not benefit from the indus-

try incurring such dry hole expense and thus the inclusion

of such items are improper. Admittedly, the exclusion of .

dry holes from the rate base does not do away with the

expense. The cost of dry holes is still there and must be.

. paid for, and since the only flexible item is fhe rate of re-

turn allowed on rate base, the exclusion of dry hole ex-

_ pense simply reduces. the effective rate of return by an .

amount sufficient to offset the mT hole expense which is -

not allowed.

But the confusion over the dry holes and their proper

- treatment in cost of service arises solely from a misunder-

standing of the nature of the dry hole allowances as an

‘item of expense in the test year. The industry almost uni-

formly for book purposes expenses all dry hole expenses,

tangible or intangible, in the year incurred. It is argued

that since the dry holes are expensed, when they are in- —

curred somehow this miraculously provides a recoupment

_ of the investment. This, of course, is patently impossible.

The investment i is recouped. (and dry holes represent part

of the total investment) only when the products provided by

the over-all investment, i.e:, the gas, are sold regardless

of how the investment is treated on the books. The dry .

hole allowance in the test year, which admittedly reflects ©

_eurrent experience, is but a proxy for the dry hole ex-

pense incurred in past year for gas of many different.

years vintage. The dry hole expense is not, therefore, an

item of current expense at all, but in truth represents a

return of capital which was- constructively committed in

some previous period or periods.

No one contends that the dry hole expense incurred with °

respect to flowing gas.is not a proper item of expense.?®

The fact that current dry hole experience is used as a

proxy for past dry hole expense which is unrecovered does

not in fact change the nature of. the charge. The amount

allowed as dry hole expense does not represent recoupment

of part or all of the investment expenditures made in the

test year because no revenues flows from test year expen-. -

ditures. Therefore, the disallowance of dry hole expense

in a cost-of-service presentation is not a disallowance of an

item of current expense but in fact is a denial of a full re- |

| turn of capital committed to develope the gas sold in the

_ test year.

The Court’s below pillenns on Columbus Gas”® does not .

support its decision. There a state statute was involved

which was struck down as being violative of the Fourteenth fF

Amendment. The statute in its operation precluded the F

allowance in operating expenses of “amortization of the

value of leaseholds and wells and equipment thereon.” As

stated above, the dry hole expense is in effect an amortiza-

tion of the over-all cost of development. This Court held:

“When the allowance has been fixed and has been

charged to operating expenses, it will supply the

answer to other questions in controversy Pe ilies

(292° U. S. 398, 406).

- 28 The Staff Brief concedes this paint : “Like all petepecting, ex-

- ploring for natural gas is a highly risky.and uncertain busi-.

ness. The same investment may yield a dry hole, a marginal

well, a moderately productive well, or a bonanza, depending §—

upon luck as much, perhaps, as on extraordinary skill” (p. 51).

. 29 Columbus ‘Gas and Fuel Co. v. Public Utilities Commission of

Ohio, 292 US. _ |

Columbus Gas rather than supporting the Court below,

supports the position of Petitioner Superior for it makes

clear the rule that the regulatory agency may determine

in its over-all costing technique whether an item of cost is

to be recovered as an expense item or capitalized and re-

covered through depreciation. Columbus does not stand

for the proposition that an item of expense can be excluded

from recovery in both manners as the Commission claims

it may do, and this Court so-states:

“To withhold from a public utility the esivnage of ©

‘including a depletion allowance among its operating

expenses while confining it to a return of 614 per cent.

upon the value of its wasting assets, is to take its prop-

erty away from it without due process of law, at least

where the waste is inevitable and rapid. * * * * Plainly

the state must either surrender the power to limit the

return‘or else concede to the business a compensating

privilege to preserve its capital intact” (pp. 404 and

405). ‘

If the Commission is to‘disallow dry hole expense, it must

return to the rate basé the unamortized portion of the dry

hole expense incurred in all prior years. Further, for all .

. years subsequent to the test year and in all future rate

proceedings, the Commission must permit full capitalization

_of all dry hole expenses fairly related to that portion of

_ the newly developed supply committed to interstate com-

merce. 3 ,

No one disputes that the producers must incur the ex-.

ploration and development expenses, including dry hole

costs. No one disputes or offered any evidence in the pro-

ceeding with regard to any individual eritity or as to the _—

industry which would show that the cost associated with

the discovery and development of the gas moving in inter-.

state commerce in the test year in any way reflects an im-

* 6

~~ oe

" prudent or unnecessary investment. Since dry hole expenses

are a legitimate item of total cost of supply, they must

be recovered either as a return of. capital or as an item of

expense irrespective of the bookkeeping practices of the

individual producers or of the industry. Any rate fixing

method which excludes thes’ items of expense leaves the -—

producer and the industry with its. capital impaired. In

terms of Hope®*® there can be no balancing of investor and

consumer interest nor for the reasonable financial require-

ments of the producer and the industry being met for the

individual producérs’ property has clearly been taken for

- pubhe-use without just ore

THE COURT BELOW WAS CORRECT IN ITS |

TREATMENT OF THE QUESTION OF REFUNDS

The decision below originally held that refunds must be

on a company-by-company and rate schedule-by-rate sched-

ule basis and in its remand to the Federal Power Commis-

sion instructed the Commission to consider refunds on such

a basis. On Motion for Rehearing the court was convinced .

that the previous holding was wrong as it was inconsistent

with the end result test which required the equating of

group revenues with group revenue requirements and held:

“This modification of the opinion means that no re-

fund obligation may be imposed for a period in which

- there is a group revenue deficiency. When group rev-.

enues-exceed group revenue requirements, refunds may

be ordered on some equitable contract-by-contract basis.

In fixing an area rate, the Commission must consider

the effect which past’and potential refunds have onthe

balancing of group revenues with group revenue re- ~

* quirements” :(R. ikea :

80 Hope, supra.

- The Commission challenges this portion of the Order and

their argument*is set out at pages 92 through 99 of their

Brief to which we now reply as Respondent ‘on this issue.

‘The Tenth Circuit correctly recognized thaf in group

rate making as with-fily other form of rate making, the

Commission’s:function in fixing rates for the future differs

from the Commission’s function in ordering refunds. For

this reason it prescribed an “equitable” basis for refunds.

' The Federal Power Commission Brief fails to recognize

the differences in function between Section 5(a)"and Sec-

_ tion 4(e) of the Act. | ‘A :

' The distinction between the quasi legislative function

and the judicial function has been recognized by every.

jurisdiction and by all courts without exceptio he dis-

tinction was pointed out by this. Court in the Arizona

Grocery case®! where the question was whether reparations.

could be ordered where the alleged invalid rate was one. |

prescribed by the Commission rather than one fixed by the

earrier. This Coprt reviewed the development of regula-

tion under the Interstate Commerce Commission contrast-_

ing the operation of rates under Commission regulation

with the rules existing under common law. The Court noted

that under the Act of 1887°? the Interstate Commerce Com-

mission did not have the power to prescribe a rate to- be

charged in the future.** Rather the carriers were forbidden

to extract unreasonable rates. If past charges were found

.to be unjust or unreasonable, reparations could be ordered

by the Commission. Thus the Act of 1887 altered the com- °

mon law by lodging with the Interstate Commerce Com- |

1ission the judicial powers theretofore exercised by the ¢

~ - gourts of determining the justness and reasonableness of

“81 Arizona Grocery Co. v. Atchison, T. & 8. F. Ry. Co., — US.

370.

32 Act of February 4, 1887, 24 Stat. 379.

83 yo ow to operations under Section 7 of the Natural Gas

ct.

rates ‘charged during past periods.** The enforcement of

“the award of the Interstate Commerce Commission was

° relegated to the courts. Subsequently, the Hepburn Act*®

and the Transportation Act*® changed the policy under. the ©

Act of 1887 to give the Commission authority with regard

to the fixing of rates for the future, similar to those pro-

visions found in Section 5(a) of the Act. Specifically the

' Interstate Commerce Commission was given the. authority

to fix minimum and ‘maximum limits within which a car-

rier’s rates must fall. This Court stated:

. When under this mandate the Commission de-

slates a specific rate to be the reasonable and lawful

rate for the future, it speaks as the Legislature, and —

- its pronouncement has the force of a‘statute” (p. 386).

_ (Emphasis supplied.) Arizona raha v. Atchison,

T. éS. F. Ry. Co., supra. ,

It we contended that any shipper could still challenge

a rate clearly fixed within the maximum-minimum limits

and upon a showing that such rates were unjust or unrea-

sonable would be entitled to reparations-from the shipper.

. This argument overlooks the fact that in de-

| yn a maximum rate the Commission is erage |

“a delegated power legislative in character .

“Specific rates prescribed for the’ future "take the

place of the legal tariff rates theretofore in force by |

the voluntary action of the carriers, and\ themselves

become the legal rate... This is true because the

84 However the Interstate Commerce Commission had no. power

to prescribe the rate which_would ‘thereafter be charged, and

the carrier was not bound to limit its rates in the future to

no a found to be. just and reasonable during the past

85 Brising effective provisions of this Act are found in Title 49\.

U.S.C. §§ 1-6, 11-20a, 26, 27, 142.

86 Existing effective provisions of this Act are found i in Title 49"

U.S.C. §§ 1, 6, 11, cate 18, 20, 41.

The court then noted that. the ‘Commission in determining :

the appropriateness of reparations must recognize that its ~

function in ordering such reparation is quite different than —

Commission, in naming the rate, speaks in its quasi

/ legislative capacity. The prescription of a maximum

rate, or maximum and mimimum rates, isa legislative °

quality as is the fixing ofa specified rate”. (pp. 387,

/ 388). (Emphasis supplied.)

its function in prescribing rates to be thereafter observed

and stated: -

“|. Where, as in this case, the Commission has -

made an order having a dual aspect, it may not in a

subsequent proceeding, acting in its quasi judicial ca-

pacity, ignore its own pronouncement promulgated in

its quasi legislative capacity and retroactively repeal

its own enactment as to the reasonableness of the rate

it has eeergs (p. 389).

Iti is the same with the Commission here when it sncatgies

a maximum rate for the future, it is performing a quasi

legislative function. When it is awarding refunds under

Section 4(e) of the Act, it is performing a judicial func- .

' tion in which equitable considerations are an important

_consideration. The fact that the Federal Power. Commis-

sion in ordering refunds is performing a judicial function

~ precludes itis a matter of law from using group costing

techniques as fhe sole basis of ordering refunds by in- ..

dividual respondents even if it could validly exercise. its

quasi legislative power in such a way.

A most important consideration is, of course, the equi-

' ties. These obviously can be shown only as to individuals and

‘not as to groups, The appropriateness of a refund require-

.thent upon any individual respondent may only be deter-

mined by analysis of the particular circumstances of such

individual respondent. The position of the FPC Brief.on

‘this matter is particularly. surprising in light of the Com-

mission’s announced position with regard to the question ;

of refunds and its affirmation by the Fifth Circuit:

“In this early stage of shaping policies covering re-

' funds, the Commission has simply faced up to the ex-

istence of a serious problem: Perhaps because of pro-

cedures required by the Natural Gas Act but in any

event through its own process, the Commission has cre-

. ated enormous funds subject to various equitable ©

claims. From well-head to pipe-burner any or.all of -

the distributors and users of United’s natural gas may

have equitable claims to the refunds. But overriding

all claims.is the public’s interest in Commission pro- |

cedures and processes that ‘will produce reasonable .

ses

. The Federal Power Commission is required to enter an

‘order which will be fair to ag}, both the individual respond-

‘ent required. to make the refund as well as the pipeline —

distributors and, ultimately, ‘the consuming public. Re-

funds cannot be created by any species of order which di-

rectly translates rates fixed on the basis of unsifted aver- |

ages of the experience of the group into rates applicable’ .

_ for past periods for. individual respondents. Rather the

Commission must provide a method by which the standards

as to each individual respondent aré equitable, similar to

those required for restitution. This Court in Atlantic Coast

Line Railroad Company v. State of Florida*® considered

the question of the appropriateness of reparations for in-

terim charges collected under admittedly invalid orders of

the Interstate. Commerce Commission which after remand |

87 exas Eastern Transmission Corporation v. Federal Power

Commission, 357 F'. 2d 232, 239 (5th Cir. 1966).

98295 U.S. 301.

».

™~

: the Interstate Commerce Commission practically re-entered

with proper evidentiary support. Refunds of 34 percent

of the increased rates collected between the original rate

order and the second order finally were ordered. It was

urged by the shippers that since the first order was admit-

tedly invalid, the proper rate until the second order became ~

effective was the prior lower rate theretofore in effect al-

though said prior rate was found non compensatory and dis-

criminatory. The Supreme Court reversed and ordered that

there be no refunds. The considerations underlying —_

order were stated as follows:

. A cause of action for restitution is a type of

fhe broader cause of action for money had and received,

“Sa remedy which is equitable in origin and function.

(Citations omitted.) The claimant, to prevail, must

show ‘that the money was revived in such circum-

- stances that the possessor will give offense to ke ged

and good cons¢ience if permitted to — it . > (p.

309). Seats

“a .

“The case up to this point has been dealt with on the ©

assumption that the dward upon restitution is to be .

for the whole demand or nothing. There is, however,.a

possibility between these two extremes, a possibility

exemplified in the decree of the court below .. : We

think the claim for restitution should have been re-

jected altogether ...” (pp. 316, 317).

: The field of inquiry is one in which the search

for certainty is futile... There is a zone of reason-.

ableness withim which judgment is at large oe eane

‘claimants do not sustain the burden that is theirs by

showing that the master set up a.reasonable schedule.

They. must show that the other schedule, the one set

up by the Commission, is unreasonable. In the absence

aGench a showing, the carrier does not oF eed against

49°

-equity. and conscience in standing on ‘its possession ;

and keeping what it got” (pp. 317, 318). Atlantic Coast

— Line Railroad Company v. State of Florida, supra.

(Emphasis supplied. ye

This court’s finding with regard to the futility of the sisi:

for certainty is particularly appropriate in the instant pro-

ceedings. The admitted lack of precision when coupled

with the group rate-making technique clearly ‘compounds

the refund problem. Thus, the court below was correct in

remanding to the Commission for its determination of an

equitable basis for ordering refunds on a respondent-by-.

respondent, rate schedule-by-rate schedule basis.

The rates here under, consideration ‘reached the deci-

a sional stage by two dissimilar: routes. By its Order of De-

cember 23, 1960 the Commission consolidated all of the out-

standing suspended rate increases under Section 4-(e) of

the Act-with all other.rate schedules on file with the Com-

mission within the delineated area. In each instance where '

increases had been suspended under. Section 4(e) of the

Act, the Commission,had stated that such rate might be

unjust, unreasonable or otherwise discriminatory. At the

' ‘time, the sole standard for measuring the justness or rea-

sonableness of any rate increase was by individual com-

pany cost- of-service. .Thus, the only basis upon which a

respondent eould reliably determine to file a rate increase

~ was to measure such increase, and the revenues derived

therefrom in connection with overall company revenues

compared with a company-wide cost-of-service. 4

The Commission changed that standard here when it

proscribed cost-of-service presentations of any nature, in-

dividual or collective, and prescribed that the hearing to

consolidate matters would consider economic considera-—

tions and costs for the group of respondents. It was im- ~

possible, therefore, for any respondent, unless perfectly

clairvoyant, to perceive that the standard to be utilized by

.. the Commission in fixing just and reasonable rates, with

respect to rate increases would be based upon a group’s .

experience. Fair dealing and équity would forbid any Sec-

tion 4(e) refund unless and until it is shown that some .

part of the increase is in excess of a just and reasonable

~~ rate individually determined. Since not all rate schedules:

_were subject to suspension under Section 4(e) of the Act,

refunds to be ordered, if any, are limited to less. than all

of the rate schedules in effect. However, all rate schedules

are subject to Section 5(a) of the Act and to prospective

reduction if so ordered. It is conceivable, therefore, that

even if the Commission had matched its costing technique

. against industry revenues, which it admittedly failed to

do, the available funds for refund might or might not have

been sufficient to reduce the group’s revenues from the

area to the group’s revenue requirements for the area as _

found by the Commission.

_ The problem is further complicated by the ®&ct that nu-

~merous rates have been suspended involving increases to

rates which are below the ceiling prices prescribed by the

_ Commission’s order. The‘ refuhd pool is thus limited to

those rates schedules which have rates in effect higher

than the ceiling price fixed but limited to the difference .

between the ceiling price applicable to such rate schedule.

and the rate in effect subject to refund under Section 4(e)

of the Act. This result necessarily follows that the impact

of the Commission’s orders will be primarily prospective

‘in nature. It was for this reason that a number of producer

respondents pointed out to the Commission that the group © |

ane technique would provide fewer refunds to the

consumer. than individual compatiy approach. The result

. arises through no fault of those respondents whose costs

are higher than the average of the group but rather because

those companies whose costs are lower than the average

receive, as a result of group rate making, receive a wind-

fall rate of return which would be completely unconscion-

able in an individual situation.

VIL.

THE NATURAL GAS ACT DOES NOT PERMIT

. THE AWARDING OF REPARATIONS

The Commission in its decision specifically reserved the

question of whether in fact refunds should be ordered

below the last firm rate (R. 1117d-1118d).*° The. People

of the State of California i in their brief at page 49 state in

summary :

‘Thus, in this sense, the area rate is the law- |

ful ‘rate for each individual producer in the area. It

therefore follows that, as the Commission found, past - ~

rates collected subject to refund in excess of the law-

ful rate, i.e., the just and reasonable area rate, must

be disallowed aud refunded.” ° 7

At page 57 the eas of the State of California character-

ize the producer position as follows:

“The producers also contended in the court below

that the Commission may only order refunds of rate

‘ increases collected subject to refund under Section 4(e)

of the Act. 7 vigorously denied that al Commis-

89 See also the Commission’s Order of March 14, 1966, “ The

_ Matter Of Gulf Oi Corporation, which Order is set out in the.

7a.

sion is authorized to require refunds of the full amount

of the mcreased rate, collected subject to refund, which

exceeds the applicable area rate. The Commission has |

said that it will require refunds of all amounts col-

lected subject to refund under Section-4(e) in excess”

of the applicable area rate (R. 672d, 695d-6d). We urge

this Court to affirm the’ Commission’s conclusion.”

_., The People of the State of Califorma argue “. . . There is

nothing in the statute which limits the amount refundable

to the rate increase only.” We reply to their position as

respondents to their petition.

In the Panhandle Eastern case, 25 FPC 787 at 803,"

the, . Commission’s position on the point was stated as -

follows: |

It has sane never been settled idatiee a

ae can be ordered that reflects a rate decrease

below settled rates previously in effect. We.do not be-

lieve we have to decide that question here because it

- appears that the rates that will be determined in this .

‘proceeding will be higher than those determined: in

Docket No. G- a which are:effective up until Janu-

ary 1, 1955...” (Emphasis supplied. )

In the Humble Oil and Refining Cainsiniiy case; 25 FPC

‘1173, which. involved an application to have that portion

of a suspended rate below the aréa guideline removed

from suspension and possible refund, the Commission’s

holding is limited:to the increment between the last firm

rate and the guideline. It correctly pointed out that the

just and reasonable rate might in fact be below the Com-

mission’s own guideline level. This is shown by the Com-

mission’s* statement:

40 This case and the Humble case, infra, have been cited by the

Commission’s Staff in subsequd¢ht area proceedings as authority

for the Commission’s power to order reparations.

on ce | ghia = x.

“53

“... the issue is raised as to whether such increased-

rate meets the requirement of Section 4, not whether

the increment-in-excess of the area price meets such

_ requirement.” -

We do not dispute that the entire rate is at issue prospee-

tively under Section 5 of the Act. This is true notwithstand- -

ing the fact that Sections 4 and 5 of the Act are identical in

their standard of just and reasonable. However, all auth-

ority is to the effect that refunds are limited to that portion

of the funds constituting the incremental increase above

the last firm rate which has been subject to the suspension

order of the.Commission under Section 4(e) of the Act. .

-The reason for limiting the refund to the increment is ~

quite obvious‘as any attempt to extend the refunds to more

than the increment constitutes retroactive rate making and

unlawful restitution. This Court has held that the Com-.

mission does have have the power to order restitution

_ under its rate-making authority.“

In Montana-Dakota Utilities Co. v. Northwestern Public:

' Service Co., 341 U.S. 246, it was contended by petitioner

that the. Federal Power Act’s requirement for just and

reasonable rates gave petitioner a legal right to such

rates, and further that petitioner might by court action —

find a just and reasonable rate at a level different than

that accepted and filed with the Power Commission. After

first pointing out that the legal rate was the filed rate,

whether fixed by the Commission or aus accepted by

the Toe the court stated:

. The fact:that the Congress withheld from the

Cuaicieston power to grant reparations does not re-

quire courts to entertain proceedings they cannot

41 The Commission: power to order restitution appears to be lim-

_ ited to situations similar to Callery — see United Gas Iniprove- -

ment Co. v. Callery Properties, Inc., 382 U.S. 223.

themselves decide in order indirectly to obtain Com-

mission action which: Congress did not. allow to be.

taken directly ... It is urged that this leaves 2. gage

without a remedy under the Power Act. We agree .

(p. 254). .

This Court has never deviated —s finding that there —

is no residual right of restitution existing under the Fed-

eral Power Act,** which Act is essentially the same as Sec-

tions 4 and 5 of the Natural Gas Act. However, Mr. Justice

Frankfurter’s dissenting opinion specifically deals with the

question of the funds which are — forerefunding

and he states: ,

. Wholesale consumers of electric energy were

appalnal considered, as a rule, adequately protected

by the provisions of the Act authorizing the Commis- |

sion to-grant prospective relief and, in. certain: cir-

cumstances, to order refunding of sums accumulated

during the pendency of rate proceedings. §§ 203(e),

206(a), 49 Stat. 852, 16 U.S.C. $4 824d(e), 824e(a), 16

U.8.C.A. §§ 824d(e), 824e(a). Despite the unqualified

statutory declaration that unreasonable rates are: un-

lawful, we think it clear that Congress did not intend

either court or Commission to have the power to award

reparations on the ground that a properly. filed» rate

or deme has in fact been unreasonably high or low

had 258). (Emphasis supplied.) .

In United Gas Pipe Line Company v. Willmut Gas and Ow

Company, 97 So. 2d 530, this court has held that the pur-

pose of Section 4(e) of the Act is to preserve the status

quo during the period required to determine the just and

reasonable rate. In United Gag Pipe Lime Company v.

Mobile Gas Service Corporation, 350 U. 3 332 at 341, this _

Court stated :

4216 U.S.C.A, 824d(e), 824e(a).

- +58

“All that Section 4(e) does, ovsitec, is to add-.

the further powers (1) to preserve the status quo pend-

’ ing review of the new rate by suspending its operation

for a limited period, and (2) thereafter to make its

order retroactive, by means of the refund procedure,

to the date the change became effective. The scope and

purpose of the Commission’s review remain the same —

to determine whether the rate fixed by the natural gas

company is lawful.”

~£ Tn like manner the peat in Sunray Mid-Continent Oil.

Company v. Federal Power Commission, 364 U.S. 137 at

146, stated:

. If the hearing were not eonituiie’ by the end

Pi its suspension period, the inereased rate eould be

collected ad interim; but the Commission is empowered

to require the company to collect the increment under .

bond and accounting, and refund it if it could not make

out its case for the increase.” (Emphasis added.)

It is quite. clear that the antecedent of the word “it” which

limits the amount of refund is that increment which is col-

lected under bond and accounting.

We find statements to the same effect i in the Decision by °

the U. S. Court of. Appeals for the D. C. Circuit! 3

“The Commission’s power with respect to a filed in-

crease is found in Section 4(e): to initiate a hearing

as to the lawfulness of the changed rates, to suspend

their effectiveness for a time, and to order refunded

- that portion of the mcrease which, after hearing, it

_ determines to be unlawful” (p. ai). ae sup-

spines _.

A Decision of the Third Circuit i. ican River Fuel

48 Willmut Gas & Oil Co. v. F.P: C:, 29 », 294 F. 2d 245 (1961) cert. den.

368 U.S. 975; reh. den. 369 U.S. 813.

AP.

56 Wy Ae,

: Corporation v..Federal Power Commission, 202 F. 2d 899

(1953), also appears to be " accordance. That Court states:

“The Commission, upon completion of hearing and

decision, is empowered, in the language of the statute, .

‘to order such natural-gas company to refund, with in-

terest, the portion of such increased rates or charges

by its decision found not justified.’ This-provision clear-

ly demonstrates, if demonstration is needed, that Con-

gress contemplated that there-would be cases in which,

after hearing, some part of a requested increase would.

_ be approved as justified even though some other part

would be'found inadequately supported and disallowed. -

It would be arbitrary and unfgir to hold that the appli-

cant includes any items of.cost which in administrative

judgment may turn out to be not allowable at peril of |

summary rejection of his -entire proposal” ae )

added "hia by the Court).

In Associated Oil d Gas Company v. Federal Power Com-

mission, 280 F. 2d 31 (5th Cir. 1960), at the end of the -

statutory suspension period the producer had not furnished

‘tthe necessary bond nor placed the increased rate into effect..

Subsequently the bond was furnished and the question

arose as to whether the rate was effective although not

collected in the absence of a bond. The decision of the court _

makes it quite clear that not only was the bond unnecessary

to anything but the collection of the increased rate, but that

the bond i is limited by the court’s interpretation of Section

4(e) to the increment which constitutes the increase over

the prior rate. - 5 ~~ a)

-The Commission’s own rules and regulations also support

. the interpretation that the amount subject to refund is only.

the increment over the last firm rate..The Commission’ Ss.

ot 57 . Mee

Regulations under the N atural Gas Act, Section 260.6, re-

_ quire that each year the producers file Form 301B. This re-

port requires a listing rate schedule-by-rate schedule of the -

- amounts collected subject to refund. The revenues subject

to refund as reported by the producers in these filings have, -

in each instance, ‘been limited to the amounts directly ‘re-

lated to the increased increment. Further, with each order

allowing a suspended rate go into effect, the Commission

has prescribed quarterly reports by each producer of the -

amounts collected each quarter subject to refund. In each -

and every instance the amounts reported to and accepted

by the Commission have been limited to the increment to

- . the last firm rate.

Moreover, common sense dictates that any commercial

entity regardless of regulation must carry on its every- .

‘day. business. These entities. must prepare annual reports,

pay dividends if possible to their investors, pay income tax,

both state and federal, pay royalties to their land owners:

promptly after the sale of oil or gas. It is quite apparent:

that if refund obligations are extended to cover the. total

amount collected under each and every rate schedule sub-

ject to suspension under Section 4(e), the entire operations.

of the industry would be jeopardized. Actual income of the

companigs would be an impossible determination; royalties

could not be paid on any portion of the increased rate for —

fear that the voluntary payment made under mistake of

law could not be recovered ifthe final rate, fixed were

below the last firm rate. Special accounts would have to be

maintained to cover this contingent liability, but each en-

tity would establish such ‘account under. the peril that the

sufficiency of such account would cover the fall amount of

any ciara, refund.

‘eit

58 on

- CONCLUSION

Wuezerorz, for the reasons set forth ‘above, Petitioner -

prays that the judgments of the Court of Appeals be re-

versed and the cases remanded to that Court with direc-

tions to vatate and set aside Commission Opinion Nos. 468

and 468-A and the orders thereof. Alternatively Petitioner

prays that if, this honorable Court finds that group rate

making is lawful under the Constitution and the Natural

affirmed. \

es | ~ Homer J. PENN

sae Bae Attorney for Petitioner,

fer poem ' * The ‘cecattats Oil Company

Of Counsel:

Murray Curistian, General Counsel — ae

H. W. Varner, Assistant General Counsel

Homer J. Penn, Attorney |

THe Superior On. Company -

P. O. Box 1521 !

Houston, Texas 77001

Dated: Oetober 9; 1967 ;

Se a a ieee,

* Been.

A”

;

‘

APPEN DIX “Ay :

THE CONSTITUTION OF THE

UNITED STATES OF AMERICA

_ ARTICLE I

_ Section: 1.

| -Legislative powers sented im Congress. — All Leaitative ..

Powers herein granted shall be vested in a Congress of the

United States, which shall consist of. a Senate and House

of Repfesentatives.

AMEN DMENTS TO THE CONSTITUTION -

-OF THE UNITED STATES

ARTICLE V

Trials for crimes; just compensation for private property

taken for. public use. — No person shall be * * * * * deprived

of life, liberty, or property, without due process of law, -

nor shall private property be taken for public use, without

‘THE NATURAL GAS ACT

f _ So. 2. When med in this act, unless the context other-

wise requires —

(1) “Person” includes an individual or a. corporation.

(2) “Corporation” includes any corporation, joint-stock

company, partnership, association, business trust, organ-

ized group of persons, w incorporated or not, re-

_ ceiver or receivers, trustee or tristees of any of the fore-

' . gping, but shail not include municipajities as hereinafter

defined.

(6) «N atural-gas company” means a person engaged i in.

the transportation of natural gas in interstate commerce,

or the sale in interstate commerce of such gas for regale.

“RATES AND. CHARGES ; SCHEDULES ; SUSPENSION ~~ NEW RATES

Sro. 4. (a). All rates and charges made, demanded, or |

received by any natural-gas company for or in connection

with the transportation or sale of natural gas subject to

the jurisdiction of the Commission, and all rules and Tegu-

lations affecting or pertaining to such rates or charges,

-shall be just and reasonable, and any ‘such rate or charge

_ that ig not just and. reasonable is hereby declared to be

s unlawful. .

-(b) No sianiataka company ‘shall, with aoe to any

transportation or sale of natural gas subject to the juris-

diction of the Commission, (1) make or grant any undue

preference or advantage to any person or subject any per- —

‘son to any undue prejudice or disadvantage, or (2) main- |

- tain any unreasonable difference in rates; charges, service,

facilities, or in any.other respect, either as between local-

_ ities or as between classes of service.

-(c) Under ‘such rules and regulations as the Commis-

sion may prescribe, every natural-gas company ‘shall file |

with the Commission, within such time (not less than sixty

days from the date this act takes effect) and in such form

'-as the Commission may designate, and shall keep open in

convenient form and place for public inspection, schedules

showing all rates and charges for any\transportation or

sale subject to the jurisdiction of the Commission, and the

_ Classifications, practices, and regulations affecting such

rates and charges, together with all contracts which in any

manner affect or relate to such rates, charges, classifica-

| tions, and services. .

-(d) Unless the Commission otherwise orders, no change

shall be made by.any natural-gas company in any such rate,

charge, classification, or service, or in any rule, regula-

tions, or contract relating thereto, except after thirty days’

notice to the Commission and to the public. Such notice

- shall be given by filing with the Commission and nd keeping

open for public inspection new schedules stating plainly

the change or changes to be made in the schedule or sched-

ules then in force and the time when the change or changes

will go into effect. The Commission, for good cause shown, .

may allow changes to take effect without requiring ‘the

thirty days’ notice herein provided for by an order. specify-

ing the changes so to be made and the time when they shall

_take effect and the manner in which they shall be filed and

published. )

(e) Whenever any wesk new eer is filed the Cit ;

- mission shall have‘authority, either upon complaint of any |

State, municipality, State commission, or gas distributing

company" or upon its own initiative without complaint, at -

once, and if it so orders, without answer or formal plead-..

ing by the natural-gas company, but upon reasonable’ no-|

tice, to enter upon a hearing concerning the lawfulness of

_ such rate, charge, classification, or service; and, pending

. such hearing and the decision thereon, the Commission,

upon filing with such schedules and delivering to the nat-

ural-gas company affected thereby a statemént in writing

of its reasons for such suspension, may suspend the opera-

tion of such schedule and defer the use of such rate, charge,

classification, or service, but not for a longer period than”

five months beyond the. time when it would otherwise go

into -effect ;!* and after full hearings, either completed be-—

fore or after the rate, charge, classification, or service goes

into’ effect, the Commission may make such orders with .

_ reference thereto'as would be proper in a proceeding ini-

tiated after it had become effective. If the proceeding has

1a Subsection 4 (e) was amended May 21, 1962 by Public Law

87-454, 87th Congress, 2d Session [S. 1595], 76 Stat. 72. |

not been concluded and an order made at the expiration

of the. suspension period, on motion of the -natural-gas

company making the filing, the proposed change of rate,

charge, classification, or service shall go into effect. Where

increased rates or charges. are thus made- effective, the

Commission may, by order, require the natural-gas com-

pany to furnish a bond, to be approved by the Commission,

to refund any amounts ordered by the Commission, to keep

accurate accounts in detail of all amounts received by rea-—

son of such increase, specifying by whom and in whose be-

half such amounts were paid, and, upon completion of the

hearing and decision, to order such natural-gas company to

refund, with interest, the portion of such increased rates or

eharges by its decision found not justified. At any hearing

involving a rate or ‘charge sought to. be increased, the bur- |

den of proof to show that the increased rate or charge is

just and reasonable shal be upon the natural-gas company,

and the Commission shall give to the hearing and decision .

of such questions preference over other questions pending

before it and decide the same as speedily as possible. [52

Stat. 822 (1938) ; 76 oem. 72 (1902) 15 U.S.C. iii

FIXING RATE AND CHARGES; DETERMINATION OF COST.

OF .PRODUCTION OR TRANSPORTATION.

Sec. 5. (a) ‘Wateever the :Cominiieniots,- after a hear-

‘ing had upon its own motion or upon complaint of any

. State, municipality, State commission, or gas distributing

company, shall find that any rate, charge, or classification

demanded, observed, charged, or collected by any natural-

gas company in connection with any transportation or sale

' of natural gas, subject. to the jurisdiction of the Commis-

sion, or that any rule, regulation, practice, or contract af-

fecting such rate, charge; or classification is unjust, unrea-

sonable, unduly discriminatory, or preferential, the Com-

i |

mission shall determine the just and reasonable rate, charge, |

classification, rule, regulation, practice, or contract to be

order: Provided, howevek, That the’ Commission shall have

no power to order any increase in any rate contained in the

currently effective schedule of such natural-gas company

on file with the Commission, unless such incréase is in ac-

cordance with a new schedule filed by such natural-gas

company; but the Commission may order a decrease where

existing rates are unjust, unduly distiminatory, preferen- .

tial, otherwise unlawful, or are not the lowest reasonable .

rates.

(b) The Commission upon its own motion, or upon the

request of any State, commission, whenever it can do so

without prejudice to the efficient and proper. conduct of

its. affairs, may investigate and determine the cost of the

production or transportation of natural gas-by a natural-

gas company in cases where the Commission has no authori-

ty to establish a rate governing the transportation or sale

of such natural gas. [52 Stat. 823 (1938) ; 15°U.S.C. § 717d]

EXTENSION OF FACILITIES; ABANDONMENT OF SERVICE

Szo. 7. (a) Whenever the Commission, after notice

- and opportunity for hearing, finds such action necessary or .

desirable in the public interest, it may by order direct a

natural-gas company to extend or improve its transporta-

tion facilities, to establish physical connection of its trans-.

- portation facilities with the facilities of, and sell natural

gas to, any person or municipality engaged or legally auth-

orized to engage in the local distribution of natural or

artificial ; gas to, the. public, and for such purpose to extend

‘its transportation facilities to communities immediately

= ee

_ adjacent to such facilities or to territory served by such

natural-gas company, if the Commission finds that no undue -

burden will be placed upon such natural-gas company there-

by: Provided, That the Commission shall have no authority

to compel the enlargement of fransportation facilities for

such purposes, or to compel such natural-gas company. to

establish physical ‘connection or sell natural gas when to

do so would impair its ability to render adequate service

to its customers. [52 Stat. 824 (1938) ; 15 U.S.C. § 717f (a)]

(b) No natural-gas company shall abandon all or any

portion of its facilities subject to the jurisdiction of the

Commission, or any service rendered by means of. such

facilities, without the permission and approval of the Com-

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

finding by the Commission that the available supply of

natural gas is depleted to the extent that the’ continuance

_of service is unwarranted, or that the present or future

public convenience or necessity permit such abandonment.

[52 Stat. 824 (1938) ; 15 U.S.C. § 717f(b)]

(c)? No natural-gas company or person which will be

a natural-gas’ company upon completion of any proposed

construction or extension shall- engage in the transporta-

tion: or sale of natural gas, subject to the jurisdiction -of .

the Commission, or undertake the-construction or exten-

sion of any facilities therefor, or acquire or operate any

such facilities or extensions thereof, unless there is in

force with respect to such natural-gas company a certifi-

cate of public convenience and necessity issued by the

’ Commission authorizing such acts or operations: Provided,

however, That if any such natural-gas company or predeces-

.’ Sor in interest was bonafide engaged in transportation or

. 2 Subsection 7 (c) amended; (d), (e), (£) and (g) added. Feb-

ruary 7,:1942 by Public Law No. 444, 77th. ate: Chapter

49, 2d Session _ R, meri, 56 Stat.. 83, 84.

.sale of natural gas, subject to the jurisdiction of the Com-

mission, on the effective date of this amendatory Act, over

the route or routes or within the area for which application

is made and has so operated since that time, the Commission

shall issue such certificate without requiring further proof

that public convenience and necessity will be served by such

operation, and without further proceedings, if application

for such certificate is made to the Commission within ninety

days after the effective date of this amendatory Act. Pend-

ing the determination of any such application, the continu-

ance of such — shall be lawful.

In all other cases the Commission shall on the matter

for hearing and wa

(d)* (omitted)

(e)® Except in the cases governed by the provisos .con-

tained in subsection (c) of this section, a certificate shall be

issued to any qualified applicant therefor, authorizing the

whole or any part of the operation, sale, service, construc-

tion, extension, or aequisition covered by the application,

if it is found that the applicant is able and willing properly

to do the ‘acts and to perform the service proposed and to |

conform to the provisions of the Act and the requirements, :

rules, and regulations of the Commission thereunder, and

that the proposed service, sale, operation, construction, ex-

tension, or acquisition, to the extent authorized by the cer-

tificate, is or will be required by the present or future public

convenience and necessity; otherwise such application shall

be denied. The Commission shall have the power to attach

to the issuance of the certificate and to the exercise of the

* 4, 5,6 See footnote 2, p. 7.

rights granted thereunder such reasonable terms and condi-

tions as the public convenience and necessity may require.

[56 Stat. 84 — 15 US. C. iets (e)] a

¥ . ee itn: a =—

ADMINISTRATION POWERS OF COMMISSION; RULES, REGULATIONS, —

_ AND ORDERS

Szc. 16. The Commission shall have power to perform

any and all acts, and to prescribe, issue, make, amend, and

rescind such. ordérs, rules, and regulations as it may find

necessary or appropriate to carry out the provisions of

this act. Among other things, ‘such rules and regulations may

define accounting, technical, and trade terms used in this

act; and may preseribe the form or forms of all statements,

declarations, applications, and reports to be filed with the

' Commission, the information which they shall contain, and

the time within which they shall be filed. Unless a different

date is specified therein, rules and regulations of the Com-

mission shall be effective thirty days after publication in

the manner which the Commission shall prescribe. Orders

of the Commission shall be effective on the date and in the

manner which the Commission shall prescribe. For the

classify persons and matters within its jurisdiction and

-. prescribe different requirements for different classes of -

persons or matters. All rules and regulations of the Com-

mission shall be filed with its secretary and shall be kept

open in convenient form for public inspection and examina-

tion during reasonable business hours. am Stat. 830 (1938) ;

15 U.S.C. § 7170]

> .

9a -

FEDERAL POWER ACT

§ 824d. Rates and. charges; schedules suspension of new

rates

. (a) All rates and charges made, demanded, « or received

by any public utility for or in connection with the trans-

mission or sale of electric energy subject to the juxisdiction —

of the Commission, and all rules and regulations affecting

or pertaining to such rates or charges.shall be just and rea- |

sonable, and any such rate or charge that 1 is not just.and

reasonable i is hereby declared to be, unlawful. :

—(b) No public utility shall, with respect to any trans-

mission or sale subject to the jurisdiction of the Commis-

sion, (1) make or grant any undue preference or advantage

to any person or subject any person to any undue prejudice

or disadvantage, or (2) maintain any unreasonable differ-

ence in rates, charges, service, facilities, or in any other

respect, either as between localities or as between classe.

of service.

sion may prescribe, every public utility shall file with the

Commission, within such time and in such form as the

Commission may designate, and shall keep open in con-

venient form and place for public inspection schedules

showing all rates for any transmission or4#ale ,

subject to the jurisdiction of the Commission, and the

classifications, practices, and regulations. affecting such

_ rates and charges, together with all contracts which in any

‘ manner affect or relate to such rates, charges, classifica~

tions, and services.

(d) Unless the Commission otherwise orders, no change

shall be made by any public utility in any such rate, charge,

classification, or service, or in any rule, regulation, or con-

tract relating thereto, except after thirty days’ notice to

10a

the Commission and to the public. Such notice shall be

given by filing with the Commission and keeping open for

public inspection new schedules stating plainly the change

or changes to. be made in the schedule. or’schedules then-

in force and the time when the change or changes will go

into effect. The Commission, for good cause shown, may

_-. allow changes to take effect without requiring the thirty

_ days’ notice herein provided for by an order specifying

the changes so to be made and the time when they shall take.

effect and the manner in which aed shall be filed and

_ published. |

16 § 824d:

(e) Whenever any such new sidibteit ienthea the Com-

mission shall have authority, either upon complaint or upon

its own initiative without complaint, at once, and, if it so

orders, without answer or formal pleading by the public

utility, but’ upon reasonable notice, to enter upon a hearing

concerning the lawfulness of such rate, charge, classifica-

tion, or service; and, pending such hearing and the decision

thereon,-the Commission, upon ‘filing with such schedules —

-and delivering to the public utility affected thereby a: state-

ment i in writing of its reasons for such suspension, may sus-

| pend the operation of such schedule and defer the use of

such rate, charge, classification, or service, but not for a

longer period than. five months beyond the time when it

would otherwise go into effect, and after full hearings,

either completed before or after the rate, charge, classifica-

tion, or service goes into effect, the Commission may make

such orders with reference theret@ as. would be proper in

ng has not been concluded and an order made at the

f such five months, the proposed change of rate,

charge, classification, or service shall go into effect at the

end of such period, but in case of a proposed increased rate

proceeding initiated after it had become effective. If the -

- tla.

oe charge, the Commission may a order require the inter-

ested public utility or public utilities to keep accurate ac-

count in detail of all amounts received by reason of such

increase, ‘specifying by whom and: in whose behalf: such

amounts are paid, and upon completion of the hearing and

decision may by further order require such public utility.

or public utilities:to refund, with interest, to the persons

in whose behalf such amounts’ were paid, such portion of

such increased rates or charges as by. its decision shall be

- found not justified. At. any hearing involving & rate or —

' charge sought to be increased, the burden of proof to show ~

that the increased rate or charge is just and reasonable

shall be ugon the public utility, and the Commission shall

give to the hearing and decision of such questions prefer-

ence over other questions pending before it and decide the

game as speedily as possible. June 10, 1920, c. 285, § 205, as

added Aug. 26, 1935, c. 687, Title IT, § 213, ” Stat. 851.

| § 824e. Power of Commission to fix ra D ius charges; de-

: seceiaition of cost of production or transmission °

(a) Whdaews the Commission, after a hearing had

upon its own motion or upon complaint, shall find that any

rate, charge, or classification, demanded, observed, charged, >

or collected by any public utility for any transmission or

sale subject to the jurisdiction of the Commission, or that

any rule, regulation, practice, or contract affecting ‘such

rate, charge; or classification is unjust, unreasonable, unduly

discriminatory or preferential, the Commission shall detér- °

mine the just and reasonable rate, charge,. classification,

rule, regulation, practice, or contract to be thereafter ob-

_ served and in force, and shall fix the same by order.

request of any State commission whenever it can do so

without prejudice to the efficient’and proper conduct of its

. Je

a 12a

affairs, may investigate and determine the cost of the pro-*,

duction or transmission of electric energy by means of fa- %

cilities under the jurisdiction of the Commission in cases -

where the Commission has no authority to establish a rate

governing the sale of such-energy. June 10, 1920, c. 285, §

206, as added rn * 26, 1935, c. 687, — IT, § 213, 49 Stat.

852. ©

‘TRANSPORTATION ACT OF 1920

4 15, par.. (6). Commission to establish just divisions of

joint rates, fares, or charges; adjustments. Whenever, aftér .

'- full hearing upon complaint or upon its own initiative, the

Commission is of opinion that the divisions of joint rates,

_. fares, or charges, applicable to the transportation of passen-

~ was established pursuant’to a finding or order of ‘the Com- -

gers or property, are or will be unjust, unreasonable, in-*

equitable, or unduly preferential or prejudicial as between °

the carriers parties thereto (whether agreed upon by such

carriers, or any of them, or otherwise established), the —

Commission shall by ord@r prescribe,the just, reasonable,

and equitable divisions thereof to be received by tle several

carriers, and in cases where the joint rate, fare, or charge

mission and the divisions thereof are found by it to have —

been unjust, unreasonable, or inequitable, or unduly prefer-

ential or prejudicial, the Commission may also be order

determine what (for the period subsequent to-the filing of

the complaint or petition or the making of the order of

_ Investigation) would havé been the just, reasonable, and

equitable divisions thereof to be received by the several

carriers, and require adjustment to be made in accordance

therewith. In so prescribing and determining the divisions

of joint rates, fares, and charges, the Commission shall give

due consideration, among other things, to the efficiency with

’ which the carriers’concerned are operated, the amount of

revenue required to pay their respective operating expenses,

13a “A

taxes, and a fair return on their railway property held for

and used in the service of transportation, and the. impor-

tance to the public of the transportation services of such

. carriers; and also whether any particular participating

"carrier is an originating, intermediate, or delivéring line,

and any other fact or circumstance which would ordinarily,

without regard to the mileage haul, entitle one carrier to a

greater or less proportion than another carrier of the joint

rate, fare, or charge. Feb. 4, 1887, ¢. 104, Pt. I, § 15, 24 Stat. |

384; Feb. 28, 1920, ¢. 91, § 418, 41 Stat. 484. :

49 U.S.C. 1482 (CAB)

POWEE‘TO PRESCRIBE RATES AND PRACTICES OF AIR CARRIERS

(d) Whenever, after. notice and hearing, upon com-

plaint, or upon its own initiative, the Board shall be of the

opinion that any individual or joint rate, fare, or charge

demanded, charged, collected or received by any air carrier

for interstate or overseas air transportation, or any classi-

fication, rule, regulation, or practice affecting such rate,

fare, or charge, .or the value. of the service thereunder, is

or will be unjust or unreasonable, or unjustly discrimina-

tory, or unduly preferential, or unduly prejudicial, the

Board shall determine agd prescribe the lawful rate, fare,

_ or charge (or the maximum or minimum, or fie maximum

. and ‘minimum thereof) thereafter to be demanded, charged,

_ collected, or received, or the lawful classification, rule, regu-

lation, or practice thereafter to be made effective: Provided,

That as to , fares, and charges for overseas air trans-

portation, the Board shall determine and prescribe only

a just and reasonable maximum or minimum, or maximum

and minimum rate, fare, or charge.

7 ~ «€

BULE OF RATE MAKING

(e) Imexercising and performing its powers and duties

with respect to the determination of rate&*for the carriage

_ : Reese ek ita

f persons oxpropecty, the Board shall take into considera-

on, among y other factors oe.

(1) . The effect Of such rates upon the movemenit of

teal, hoe

(2) The need in the public interest of sien ol

| efficient: transportation of persons arid property by-air

carriers at the lowest cost consistent with the furnish-

ing of such service;

(3) ‘Such standards respecting the character Pr

- quality of service to be rendered by air carriers as

may be prescribed by or pursuant to law;

(4) The inherent. woheen ts of transportation by |

~ aircraft; and

(5) The need of ent air carrier for revenue suffi- -

cient to enable such air carrier, under honest, economi-

cal, and efficient management, to ee adequate and

efficient air carrier service.

. draw its increased rate filings’ in excess of the 16 cents per

‘Wa “9

APPENDIX BY

UNITED STATES OF AMERICA :

FEDERAL POWER COMMISSION

Before

Commissioners: Lee C. White, Chairman; L. J. Om,

. Jr., Charles R Ross, David S. Black, and

Carl EK. Bagge.

on SER: Docket —_ RI63-265,

Guay On. ae : 4 -RI64-83, and RI64-176

ORDER DENYING PETITIONS TO WITHDRAW

INCREASED RATE FILINGS

(Issued March 14, 1966) .

On January 6, 1966, Gulf Oil Corporation (Gulf) filed

petitions in the above-entitled proceedings seeking to with-

Mcf permanently certificated rates ‘under its FPC Gas —

Rate Schedule Nos. 138, 193, 194, 197, 213 and 215 for its

jurisdictional sales of natural gas in the Permian Basin

Area of Texas’ and New Mexico. All of the sales involved

are to Transwestern Pipeline Company, except Gulf’s sale -

under its FPC Gas Rate Schedule No. 138 to West Texas

Gathering Compaity.

1 Gulf proposes to 7“ its increase in rates from 16 cents

to 17 cents per Mef under its Rate Schedule No. 138; which is

“involved in Docket No. R163-265, and under its Rate Schedule

Nos. 193, 194 and 197, which are ‘involved i in Docket Nos. RI64-

173; and also to withdraw its increase in rates from 16 cents

to 16.077 cents under its Rate Schedule Nos. 213 and-215 which

are involved in Docket No. R164-83. The former increased rate .

' group represent 1.0 cent per’Mef periodic increases, and the

latter reflect. reimbursement for the .0.55 cents per Mcf- New

Mexico Emergency School Tax increase of April 1,:1963. All

‘of the increased rates involved are being collected subject to re- |

fund in the respective docketed Apes ;

7 eV arate i POR tee a

16a

’

In its petitions, Gulf proposes, upon being permitted to

withdraw said. filings, to refund with interest all of the

amount of increase collected. thereunder ;.and requests that .

_ the aforementioned docketed proceedings be served from

the “Show Cause” proceedings in Docket Nos. AR61-1, et al., .

instituted. by order issued therein.on August 5, 1965, and °

~ that Docket Nos. RI63-265, R164-83 and R164-176 be termi-

. . nated insofar as they relate to the withdrawn filings. Gulf

states that the intent and purpose of the petitions is to place

Gulf and its purchasers in the same position they. would -

have been in had the increased rates involved never have —

been filed and placed into effect.

‘An answer in opposition to Gulf’s ssstition | to withdraw

its increased rate filing in Docket No. RI64-176 was filed

_ by telegram on February 6, 1966 by The People of The

State of California and the Public Utilities Commission*of

The State of California (California Commission). In its:

answer, the California Commission states:

«** * Petitioner Gulf seeks to re-establish an unjust

tion, as well as by its similar petition in Docket No.

RI64-83, Gulf is attempting to avoid the effect of

Opinions 468 and 468-A, and thereby retain.the benefits -

of higher rates than those prescribed for all dockets

in the Permian Basin area rate proceeding, Docket No.

AR61-1. Granting these petitions would thwar(t) the

purpose of area rate making. * * * ”

The subject Section 4 (e) proceedings under the National

Gas Act were not consolidated in the Permian Basin Area -

Proceeding, Docket Nos. AR61-1, et al:, but were therefore

included in the aforementioned “Show Cause” proceeding —

to afford Gulf, and the other respondents, the hearing to

_ which they are entitled for the purpose among other things,

‘of determining the refund obligations under their former-

ly non-consolidated Section 4 (e) proceedings. The Cali-

17a

fornia Commission’s objection appears to be directed to the

question of whether or not the Commission has authority

to require refunds in a Section 4 (e) proceeding below the~.

last unsuspended rate. It is apparently the California Com- -- *

. mission’s position, that during the refund period, Gulf

should make refunds to a rate level of 14.5 cents per Mef,: :

or other quality ;adjusted rate, for the Texas sales and

‘. 13.5 cents per Mcf, plus applicable state arid local produc- —

tion taxes, for the New Mexico sales, even though Gulf’s

last clean rate for these sales 1 is 16 cents per Mcf.

While ‘certain parties briefed this issue in the Permian

Basin Area rate proceeding, it was not decided in Opinion

No. 468-A, (mimeo p. 10) since it was not clear that the |

issue was raised as a result of. that order, and we indicated

that a decision thereon would be reached “ * * * when and

- if it is established that any refunds below the last clean

rate are required”. We do not deem it appropriate to rule .

on this question in the context of petitions to’ withdraw

- increased rate filings and-we- shall deny the petitions as

filed. However, if Gulf so desires, we shall permit with-

.drawal of the increased rate filing and refund of the amount

of the increase but will not terminate the proceedings so’

that the question of further refunds may be determined

upon consideration of the problem in the Permian Basin

\ area generally. _

‘The Siiniested orders:

For the foregoing reasons, Gulf’s petitions filed Janu-

ary 6, 1966 in Docket Nos. RI63-265, RI64-83 and RI64-176

are denied. :

By the ‘Commission.

[sEAL] : .

be Joserx H. Gurtsez,.

| Secretary.

FDS RIN AINE EH TRE STINE OILS EI IIN RT ST pee) SCREEN RRR S27 oo TR NE ns ONLY ERE

. = <a Cmts $i te a = sis = = = fs of Sr 2 whet 3 .

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.