Appendix — FPC v. Sunray DX Oil Co.

ae

APPENDIX A |

Sz. 7(c) 3 ki $ Sibi Stok atte .

(c) No natural-gas company or person which will be »

a natural-gas company eae n completion of any pro-

posed construction or extension shall engage in the

transporfation or sale of natural gas, subject to the _

jurisdiction of the Commission, or undertake the con-

struction or extension of any facilities therefor, or

_ aequire or operate any ‘such facilities or. extensions

. thereof, unless there is in force with respect to such

natural-gas company a certificate of public convenience -

and. necessity issued by the Commission, authorizing

such acts or operations: Provided, however, That if

any such natural-gas company or predecessor in

interest was bona fide engaged in -transportation or

sale of natural gas, subject to the jurisdiction of.the .

Commission, -on the effective date of this amendatory

. Act, over the route.or routes or witMin the area for

which application is mad¢ and has 80 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, an

without further proceedings, if application for

certificdte is made to the Commission within ninety

_ days after the effective date of this amendatory Act.

Pending the determination of any such application, the

continuance of such operation shall be lawful.

In all other cases the Commission shall set the mat-

ter for hearing and shall give such reasonable notice of ©

. the hearing thereon to all interested persons as in

its judgment may be necessary under rules ‘and reg-

ulations to be prescribed by the Commission; and the

roe application shall be decided in accordance with the

: procedure provided in subsection (e) of this section

and \such certificate shall be issued or denied accord-

ingly: Provided, however, That the Commission may is- ©

sue a temporary certificate in cases of emergency, to

assure maintenance of adequate. service or to serve

particular customers, without notice or hearing, pend-

ing the determination of an application for a certifi-

cate, and may by regulation exempt from the require-

ments of this section temporary acts or operations for

which the issuance of a certificate will not be requiréd

in the publit interest. [52 Stat. 825 (1938), as amended,

56 Stat. 83 (1942); 15 U. S. C. § 717 (c)]

Seo. 7(e) - |

(e). Except in the cases governed by the provisos” :

contained in subsection (c) of this section, a certificate

“~shall be issued to any qualified applicant therefor, au-

thorizing the whole or any part of the operation, sale,.

service, construction, extension, or acquisition 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, extension, or

acquisition, to the extent authorized by the certificate,

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 rights granted.thereunder such reason-

able terms and conditions as the public convenience |

and necessity may require. [56 Stat. 84 (1942); 15.

U.S.C. §717f (e)] . | ;

| . 3a

ns APPENDIX B

° O-.

#

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 19,796

Pusuic Service Commission oF THE State or New York, */

Rie PETITIONER; — | :

na v. .

FeprraL Power Commission, RESPONDENT

Sxetiy On Company,

, Sun Om Company,

- Cattery Properties, Ino.,

Suet Or Company,

Pan AMERICAN PeTroLeuM CorPoRATION,

: Superior Om Company,

rn Humsie Ow & Rerinine Company,

' -. W.S. Kimpoy, et al., and Kizroy Prorzrtiss, Inc.,

- ALL. Hawkins & H. L. Hawkins, JB.,:

“ _ Pxiacw Om Company, et al.,

INTERVENORS

No. 19, 800

| Pustic Smavici CoMMISSION OF THE Saute OF New Youn, i

: ¢ er PETITIONER, |

3 v.

_ «Fenerat Powzr CoMMISsIoN, RESPONDENT

MonsaNTO Company,

Mrs. Jai ames R. Doveueety, et al., W. A. Srockasp, et al.,

Epwin M. Jones On CoMPANY, .

_ Sxezt On Company, os

H: D. Bruns & MPS Propvocriom Company,

' . Contrventan Om Company, |

Lamar Hont, | ‘

INTEBVENORS

y

G

4a

No. 19,919

Lone Istanp Licutinc CoMPANY, PETITIONER, ,

® E Vv. _

- Feperat Power Commission, RESPONDENT

| 3 Lamar Hunt, |

Mrs. James R. DoveHerrty, et al., W. A. SrocKarp, et al.,

Epwin M. Jones On. Company,

INTERVENORS

No. 19,941

‘ ContrnenTat On Company, PETITIONER,

| ey gst Crea

_ Feverat Power CoMMISSION, RESPONDENT .

No. 19,957

Tue Supzrior Om Company, PETITIONER,

Vv.

- Fenerat Power CoMMISSION, RESPONDENT

On Petitions to Review Orders of the _

Federal Power Commission

Decided Febraary 3 1967"

Mr. Morton L. Simons, with whom Mr. Kent H. Drews :

“was on the brief, for petitioner i in Nos. 19796 and 19800.

Mr. Joseph C. Johnson, of the’ bar of the Supreme Court .

of Texas, pro hac vice, by special leave of court, with whom

5a

-Messrs. Bruce R. Merrill ‘and Thomas H. Burton were on

the brief, for petitioner in No. 19941.

Mr. Homer J. Penn for petitioner in No. 19957. Messrs. .

Herbert W. Varner and William T. Kilbourne, II, were

on the brief for petitioner in No. 19957.

Mr. Joel Yohalem, Attorney, Federal Power Commis-

sion, with whom Messrs. Richard A. Solomon, General

- Counsel, and Howard-E. Wahrenbrock, Solicitor, Federal

Power Commié¢sion, were on‘the brief, for respondent.

_ Mr. Sherman S. Poland, with whom Mr. Donald B.

Robertson was on the brief, for intervenor Skelly Oil Com-

pany in No. 19796, argued on behalf of all intervenors.

Mr. Oliver L. Stone was on the brief for intervenor Shell

Oil Company. Mr: Richard F, Generelly was on the brief

- for intervenors Callery Properties, Inc., H. L. Hawkins,

H. L. Hawkins, Jr., and Monsanto Company. Mr. J. Evans

Attwell-was on the brief for intervenor W. S. Kilroy, et al:

Mr. James K. Schooler was on the brief for intervenor

Humble Oil & Refining Company. Messrs. Carroll L.

Gilliam and Philip R. Ehrenkranz were on the brief for

intervenor Pn American Petroleum Corporation. Messrs.

Bernard A. Foster, Jr. and Donald. B. Robertson were

on the brief for intervenors Mrs. James R. Dougherty,

_et al., Edwin M. Jones Oil-Company and W, A. Stockard,

etal. Messrs. Morton L. Simons and Bertram D. Moll

- also entered appearances for petitioner in No. 19919. -

Mr. Robert E. May also entered an appearance for inter-

venor Skelly Oil ‘Company. Mr. Robert W. Henderson

also entered an appearance for intervenor, Lamar Hunt.

Before Bazeton, Chief Judge, Wusvr K. Muisr,

Senior Circuit Judge, and Tamm, Circutt Judge.

Baxmon, Chief Judge: We are to review a Federal

Power Commission (FPC) order certificating sales of

natural gas from producers to interstate pipelines. The

sales were certificated in the Hawkins (Texas Railroad

6a

District No. 3)! and Sinclair (Texas Railroad District

No. 2)? proceedings, which are consolidated here. ;

The New York Public Service Commission challenges

the certificates on three grounds. First, there was no

showing of public need for the gas. Second, the ‘‘in-line’’

price was too high. And third, the FPC,erroneously post-

- poned deciding whether the producers should be required

to refund amounts in excess of the in-line level which .

were collected under a temporary certificate. Superior

and Continental (producers) challenge the in-line price

‘as too low. Superior claims alse that the FPC set too

high an. interest rate on funds which would be retained

by the producers in excess of the amount allowed by the

permanent certificates. The intervenars support the FPC’s

determinations, although some of them think that the

in-line price sauces have been higher.

| I

The Public Need for the Gas

~ We face some confusion about: whether New York prop-

erly raised the issue of public need. At the prehearing

conference in the Hawkins proceeding, New York limited

the issue to whether or not the pipelines needed the gas.*

However, in its exceptions to the Examiner’s initial

decision New York said, ‘‘In view of (a) the absence of

any evidence, of public need for the gas and (b) the many

_. indications that pipelines in the Gulf Coast area are

presently suffering from take-or-pay problems,".the applica-

” “i

. dH. L: Hawkins & H. L. Hawkins, Jr. (Operator), et al., Docket

Nos. G-18077, etal. ©. -

? Sinclair Oil & Gas Company, et al., Docket Nos. G-16760, et al.

$H.A. (Hawkins Joint Appendix) 7-19. ;

‘New York claimed that the pipelines were obligated to take or .

pey for more gas than they could use. [Pettante added. :

be Ta

‘ton should be ‘denied. ”»5 This raised the issue of the ©

public’s need for the gas. New York used .the take-or-pay

problems to alert the FPC to a potentially harmful situa-

tion and obligate it.to give reasons why, in spite of tliose

problems, the, sales should be certificated. New York

reiterated its position in a petition for rehearing ee

, the FPC."

: In _Sinclair, New York raised the issue in the same

_ terms as in the Hawkins proceeding.® And again, after

the F'PC refused to consider the issue, New York repeated .

its contentions in a petition for rehearing.” Since New

York presented the issue of public need in its petition for

rehearing in both the H awkins and Sinclair proceedings,

our review is authorized by Section 19(b) of the Natural

Gas Act.”®

‘The most obvious element of public necessity. in the de-

mand for the gas. In several cases decided before CATCO,

the existence of an unsatisfied market was considered of

great importance. For example, in Oklahoma Natural Gas |

Co. v. Federal Power Commission™ the court allowed the:

need in the Chicago market to outweigh even considera-

tions of the price of the gas. And in United Ges Imps al :

SHA. 268. , |

®This argument is siiiaiitin to the argument that the FPC

must give reasons why a certificate should be granted even though

the price is out of line. The out-of-line price alerts the FPC to:

the potentially harmful situation. See Atlantic Refining Co. v.

Public Service Commission, $60 U.S. 378 p aeees (CATCO).

THA, 811-12. |

Pa: A. (Sinclair Joint Appendix) 198,

>g.4. 243-44.

15 U.S.C. § 717 (b) (1964).

411103 U.S.App.D. C. 256, 257 F. 2d 634, cert. grentéd, 358 U: S. 877.

(1958), cert. dismissed, 358 U. 8. 948 (1959).

8a

‘ment Co. v. Federal Power Commission, because the

demand for the gas was: shown to be great, the court did |

not insist that the, FPC regulate the initial price." |

Since these cases were decided, the Supreme Court has

held, in CATCO, that the initial price is-extremely import-

ant. But CATCO does not suggest that the public’s need

for the gas is irrelevant. Indeed, the Court seems to have

‘imposed on the producer the burden of proving public

_ need before certification. In part, the Court reversed the

Commission’s certification in CATCO because there was

no ‘‘support whatever in the record for the conclusory.

’ . finding on which the order was based that ‘the public

served through the Tennessee Gas System is greatly in

_ need of increased supplies of natural gas.’ ’’ ™

But market demand is not the only relevant factor. In

the Transco case, the question was whether. the FPC,

“through its. certification. power, may prevent the waste

of gas committed to its jurisdiction.’’** The Supreme

Court said ‘‘no one [disputed] that natural gas is a wasting

resource and that the necessity for conserving it is para-

mount.’’?7 The dispute was whether the ‘‘public conven-

ience and necessity,’ referred to in §7(e) of the Natural ©

Gas Act, included considerations of conservation, or

whether the FPC was precluded from considering that

12 269 F2d 865 (3d. Cir.), vacated sub nom. Public on

Commission v. Federal Power Commission, 361 U.S. 195 (1959). -

18 See also Department of Conservation v. ‘Federal Power Com-

mission, 148 F.2d 746 (5th Cir.), cert. denied 326 US. 717 (1945), :

.in which, the court allowed the need for the gas to outweigh evi-.

dence that the gas was going to be put to an inferior use. ~

14 Supra note 6, at 393.

15 Federal Power Commission v. Pieneentinniad Gas ‘Corp,

365 U.S. 1 (1961).

_ 7d. at 8.

17 Thid.

s

ae

factor. In sliviiaas the Commission’s aia the Court

decided that conservation was. relevant to public con-

venience and necessity. Transco was a pipeline certificate

ease, and the instant case is a producer certificate case.

But pipelines: and producers are certificated under the

same statute, and, at least without strong evidence, we

should not say that conservation is relevant in one case

and not in the other. The public’s interest in conserving

gas is no less when the applicant fora certificate of pa

convenience and necessity is a producer.

The parties do not explicitly deny the relevance of market

demand and eonservation, but we are asked to disregard

the issue of public need for four other reasons. First, .

it was not properly raised below. We have already dealt

with that argument. Second, the public need for the gas

should be determined in a pipeline certificate or pipeline

rate case, not in a producer certificate case. Third, the

FPC can postpone consideration of public need until it

completes its pending rule-making proceeding on the

problem of take-or-pay contracts. And fourth, ‘‘because

of the nature of the gas business and the obligation | of

pipeline companies to the consuming public, it is to be

expected that’such companies will occasionally have long-

term contracts for supplies which will give them gas for

future, even though the supplies may be slightly in excess

of their present-day needs, ’”?® We will deal with the last.

_-three contentions in turn.

1. According to New York, the issue of public fiéed

should not be decided only in a pipeline certificate or

rate case. New York argues that if the gas is sold to

a pipeline which is unable to use it, and if the pipeline

must either take’ the gas or pay for it nonetheless, then

the loss sustained by the pipeline will be reflected in the

price ‘charged to the public utility and ultimately in the

‘price charged to the consumer. The FPC could eliminate

18 FLA, 280.

° bs ;

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. > « ea

“+ -. ra... ;

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~ this problem by ruling that the pipeline ’s investment. in

the unused gas was ‘‘imprudent’’ and refusing to allow

the pipeline to add its cost to the rate -base. ‘However,

the FPC has cited no case in which the cost of unused gas

was eliminated from the rate base. To the contrary, there

is some indication that the FPC may be allowing at least

part of the loss to be shifted to the consumer.” Indeed, ©

it would seem difficult for the FPC first to certificate a

sale to a pipeline and then to claim that the pipeline’s

investment in the gas. was imprudent.

Regardless of how the FPC uses its ‘‘imprudent invest-

ment’’ doctrine, there is another reason why the public’s

need for the gas must be considered in a producer cer-

‘tification. As we have indicated, the FPC must prevent

wast of natural gas. One of the most important. ways

is to control and limit the end uses of gas.” The FPC

--must compare various uses and determine which ones are

more economically necessary. If the proposed sale is

to a consumer who will use the gas in an economically

‘‘inferior’’ way then the sale is not certificated. Of course,

to do the job properly the FPC must consider all alterna-

tive uses.24 It recognizes -this responsibility in pipeline

certificate cases.” But if it refuses to consider the issue

in producer certificate cases and waits for pipeline cases,

some of the alternatives will already have been eliminated.

In the pipeline case the FPC can direct the gas towards

one rather than another of the eae s customers but

19 See United Gas Pipe Line Co., 31 FPC 1180, 1191-92 (1964), -

and United Gas Pipe Line Co., 32 FPC 1515, 1519 (1964).

2 Federal Power Commission v. Transcontinental Gas. Corp.,

~ supra note 15, at 8.

ane [Section] 7(e) requires the Commission to orients all dian

bearing on the public interest.’’ Atlantic Refining Co. v. Public

Service Commission, supra note 6, at 391. [Emphasis added.]

22 Federal Power Commission v. Transcontinental Gas Corp.,

* supra note 16.

lla

without considering the customers of other pipelines which

might have bought the gas. Thus, the gas may go ulti-

mately to consumers whose use will be less economically

beneficial than the use of other potential purchasers.

Because the FPC refused to consider the issue of need,

_ this record does not indicate whether or not this gas

has been wasted.” However, such wasting is a possible

result of the alleged oversupply situation of some of the

Pipelines here.* The possibility that gas may be wasted

requires that the FPC determine the issue of need before

the initial sale to a pipeline. Otherwise it may be too late

to protect the public interest.» ©

_-2.-The-FPC argues that ‘‘insofar as-there may be any

[take-or-pay] problem for [the pipelines in the instant -

- case], it is one not peculiar to them and may therefore

be resolved ... by the Commission’ s reservation of the ..

matter, for consideration in the pending rulemaking pro- -

ceedin ifton that subject ....’’** As we have noted, though,

the take-or-pay problem does not exhaust the considera.

tions relevant to an informed decision about the public’s

‘need for the gas. It is unlikely that any decision the:

Commission makes .in its rule-making ‘proceeding would

deal with the entire “need”? j issue. The rule-making pro-

38 We do not know whether anyone else could have taken the

‘gas, or, if so, whether he served markets which ‘would differ from

the markets served by the pipelines here.

2 There is a suggestion that the gas involved in this case was

obviously needed because some of it has already been consumed.

The issue of need, however, is not decided simply because some-

one will consume the gas. The real questions are whether the con-

sumer was forced, or will be forced, to pay more for the gas be-

~ cause of the pipeline’ 'S poor take-or-pay situation and whether the

gas could have been put to a superior use. —

See City of Pittsburgh vy. Federal Power Care, 99 :

US.App.D.C. 113, 237 F.2d 741 (1956).

26 — for Respondent, p. 2.

,

~~

~~,

ELLIS OPI L ELE DS TP OL RIED IIE Sea eS “ “iceenamnneced

12a .

ceeding on which the FPC relies has been pending for

five and a half years,”” and we do not know when a deci-

sion will be reached. We can only speculate about what

that decision will be and how it will apply to the question

of public need. We thik such an uncertain proceeding ~

should not excuse the Commission from’ its present

responsibilities.”

3. The FPC’s last argument is that the ‘‘nature of the

gas business and the obligation of pipeline companies to

the consuming public’? sometimes require a poor take-or-

pay situation.” If this means that other considerations

may outweigh the pipeline’s poor take-or-pay situation,

we agree. And these considerations may also outweigh the .

considerations of conservation inherent in the case. But ..

there is no evidence in the record, which indicates what

these considerations are or how they, are relevant -to this

‘certification. If. public convenience and necessity requi

this certification, this must appear: from something more

than the FPC’s broad and unsupported statement about

the ‘‘nature of the gas business’’ ina case where the FPC

thought: the issue inyelevant.™ -

Docket No. R-199, 26 Fed. Reg. 4615 (May 22, 1961).

28 See Public Service Commission v. Federal Power Commission,

117 U.S.App.D.C. 287, 292-93, 329 F.2d 242, 247-48, cert. denied

sub nom. Prado Oil & Gas Co. v. Federal Power Commission, 377

U.S. 963 (1964). A day before this opinion was issued, we were

informed that the FPC completed its rule-making proceeding on

January 18, 1967. The new rule does not affect our decision to

remand this case for a determination of public need. That rule

is subject to further review. In any event, we think the FPC

should decide, in the first instanée, how the new rule relates.to the

-issue of whether the public needs: the gas involved in this case.

Therefore, on the remand we order herein, the PC will make

that determination according to the principles stated in this opin-

ion. See discussion as ag note. 30 infra.

.79 HA. 280.

” Ts CATCO: the Siinocins Court also rejected an Nabe |

statement about the public need. Supra note 6, at 393.

GF”

a i

-* Although we remand this case so that the FPC can

consider the issue of public need, we recognize an obvious

tension between the statutory requirement that it do 50,

and administrative feasibility. The public convenience

and necessity izicludes many considerations, but. if there

is to be any effective certification of producers the FPC

‘must sometimes stop short of the ideal.** It is evident,

too, that the FPC must have great latitude in its choice

of procedures. We are not demanding that the FPC hold

a long and complex hearing in each of its many producer

application cases. But it does not seem too difficult to

have the producer’s customers or the pipeline’s customers

testify about the take-or-pay situation.® Regarding the

_ broader aspects of the ‘nature of ‘the gas husiness’’ or ”

_ of conservation, the FPC may consider studies of its staff. .

It may, after study, issue policy statements, These studies

. or statements may be relevant to large geographic areas,

or perhaps to the whole gas industry. Then it would not

be necessary to relitigate need in each case; the FPC need

only show that the broad statement or study covers the —

particular certification before it. In short, we do not -now

prescribe: any partictlar method for deciding need. Nor

is our discussidn of what public need means exhaustive.

‘+. “

81 Cf. United Gas Improvement Co. v. Callery Properties, 382

U.S. 223 (1965). Callery does not apply directly though. There,

no one doubted the need for the gas. The dispute was over the

price. The longer it took to set the price, the more the consumer .

was hurt. Understandably, the Supreme Court wanted the Com-

mission to act quickly and efficiently. The entire purpose \of the

Act is to proteet the consumer. Here, New York claims that, this ~

sale should not be certificated at all, no matter at what price and

no matter how quick the procedure. It is counter-productive to

streamline procedure when the effect is to prevent the Commission

from considering the possibility that the sale itself would not be

in the public interest. : '

, 82 Or perhaps the Commission can rely upon a previously de-

‘ided producer or pipeline certificate case if the decisions there

are relevant to the applications pending before the Commission.

1éa

We decide only that when a ‘ia makes a nenttelvdious

claim that there is no public need for the gas the FPC

must give considered reasons if it decides.otherwise. Its

decision must be made before it ergs a permanent cer-'

tificate to a producer.” ‘‘[A] certificate shall be issued

: re the... sale... if... the proposed

rs . sale ... is or will be required by the-present or future

oa convenience and necessity; otherwise such spplice-.

tion shall be denied. thie

| I

The In-Line Price -

The second major dispute in this case concerns the

FPC’s determination of. the in-line price. Since the

CATCO decision, the FPC has been granting permanent

the price of the’ gas is in-line. The question is, in line

with ,what? Judging from these and other FPC proceed-

ings, the ‘‘line’’ is determined as follows: First the Com-

mission chooses’a time period and a geographical area

which it considers ‘relevant * and lists all the prices at

_ -which gas was sold at that time and in that area. Then

it. eliminates prices which are ‘‘suspect’’ either because

they are presentiy under litigation or Commission review

38. Cf, Federal Power Commission v. ‘Texaco, 317 US. 38, 49-44

(1964), and Federal Power Commission v. Hunt, 376 U.S: 516,

525-26 (1964).

% 15 U.S.C. § 717f (e) (1964).

85 Here the area for the Hawkins proceeding was Texas Rail-:

réad District No. 3, and the area for the Sinclair proceeding was

Texas Railroad District No. 2. In both proceedings there were two |

relevant time periods—in Hawkins from January 1, 1958, to Sep-

tember 28, 1960, (pre-Policy Statement period), ‘and from Sep-

tember 28, ‘1960; to January 1, 1964, (post-Poli¢y Statement period),

and in Sinclair from January 1, 1957, to September 28, 1960, (pre-

Policy Statement period), and from September 28, 1960, to March

10, 1964, (post-Policy Statement ~— 4

certificates of public convenience and necessity only ae

15a

-. OF because they are‘ similar to a price under a cloud.”

When the price array is completed the FPC makes several

calculations, for example, the average price, the median

price, the weighted average price, and the price at which

- substantial volumes of gas flowed in interstate commerce,

The FPC adjusts some of these prices by assigning differ-

ing weights to the various prices which form the price

array. At least one Commissioner in our case gave some -

weight. also to a guideline price announced first in 1960

and subsequently revised.** The Commission considers

these weights and the adjustments, and then ‘picks a

price.” Here the Commission set the in-line: price’ -at

15¢ per Mef for District No. 2 during the period before

the Policy Statement (September 28, 1960) and at. 16¢

for the post-Policy Statement period.” For District No. 3,

_ the pricés were 16¢ and 17¢ respectively. '

The petitioners have-many disagreements with what the

FPC did-in ‘this case. Continental and Superior think

the Commission should have given more weight to certain

20¢ sales which were permanently certificated, to sales

which were temporarily certificated, and to contract prices

even before these prices are tested in any kind of certificate -

proceeding.“ They also claim that the Commission

36 See, ¢.g., United Gas Improvement Co. v. Federal Power Com- -

mission, 283 F.2d 817 (9th Cir. 1960), cert. denied sub nom. Su-

perior Oil Co. v. United Gas Improvement Co., 365 U.S. 879 (1961).

87 See Commissioner Bagge’s concurring opinion in Hawkins.

H.A. 297,

88 The proceedings in this case provide. some examples of the

~ Commission’s methods. See the appendix attached to this opinion. .

a

5° The pre- and. post-Policy Statement periods are described fully

in note 35 supra, net ,

# Their claim that the Cominission disregarded these prices can-_

not be based on the record’ in this case. See, e.g., S.A. 226 and

H.A. 285-86 quoted in the appendix infra. The producers’ claim

is reduced to the contention that, not enough weight. was given. —

° .

#

16a

erroneously considered certain sales at i14¢ and less,

erroneously excluded intrastate sales, and erroneously |

used estimated rather than actual volumes when calculating

weighted average prices. In short, they claim.that the ©

Commission acted arbitrarily and without any recognizable

standards.

New York dela that the FPC should love given no

_weight to contract. prices ‘or to sales made pursuant to

temporary certificates, and that it erroneously considered

certain permanently certificated prices. New York says

these- permanently certificated prices were incorrectly

- . determined and therefore should not be allowed to affect

subsequent in-line prices.

. To properly weigh these iiaiess we must understand the

pitrpose of in-line = .

ig:

In-Line Pricing

The concept of ‘an in-line price is an artificial one created

‘by the Supreme Couit;. the Courts of Appeals, and the .

Commission for. the sole purpose of protecting: the con-

_ sumer. ‘Before the concept ‘existed, the FPC usually

_ proceeded in the following way. A-producer who wanted

- to: sell gas in interstate commerce applied to the Com- |

mission for a certificate of public convenience and necessity .

under §7 of the Act. When the certificate was granted, —

the. producer-seller and the pipeline-byyer executed the

_sale at a price which they had already negotiated.. If that

price was ‘too high, the FPC, either on its own motion or

acting on the complaint of an interested party, could

institute proceedings under § 5 of the Act to determine

‘the ‘‘just and redsonable’’ price, after which the producer

was forced to lower his. price accordingly. However, since

§ 5 does not provide for refunds, the producer was allowed

a “‘windfall’’ (with a consequent. ‘‘squall’’. for the con-

sumer). during the period between commencement of the

<

17a.

sales and the conclusion of the hearing under § 5.*’ Section’

5 hearings were long and complicated, and the windfall .

could be quite large. The ordinary protections of the -

market place did not exist in this regulated monopoly

industry. The producer, of course, was interested in. .—

extracting the highest price from the buyer. But the buyer

did not have an equal interest in keeping the price down

because the price he paid became part of his rate base and

was ‘ultimately paid by the consumer. Presumably the

‘consumer did not havé any choice except to buy the fuel

_at the price which was set.*

‘The procedure after the: imvention of in-line pricing —

changed in one significant way. Now, when the FPC

grants a certificate of public convenience and necessity;

a price condition is usually attached. A dissatisfied pro-

- ducer who wants to sell at a higher price can file a new

rate schedule under, § 4 of the Act subject to his contract

with the pipeline.“*. These rates become effective after

thirty days unless challenged by the FPC. Even if chal-

lenged, the new rates become effective after five months

if the Commission has not completed its ‘‘just and reason-

able’’ determination by that time. Eventually, then, the

producer may charge whatever price he wants.* However,

. 4 Atlantic Refining . Co. v. Federal Power Commission, supra ’

note 6, at 390. Re ae

* Atlantic Refining Company v. Federal Power Commission, 115

U.S.App.D.C. 26, 28 at n. 11, 316 -F.2d 677, 679 at n. 11, (1963).

48 United Gas Improvement Co. v. Federal Power Commission, ©

290 F.2d 133, 185 (5th Cir.), cert. denied sub nom. Sun Oil Co. v.

United Gas Improvement Co., 368 U.S. 823 (1961). -

“Cf. Texaco v. Federal Power Commission, 290 F.2d 149, 156 |

(5th Cir. 1961). ) ro

“*The Commission may, however, impose a temporary mora-

torium on price increases. See United Gas Improvement Co. v.

| Callery Properties, supra, note 31. A price moratorium was im-

_ Posed in the instant case, but it is not before us-on appeal.

~

18a

by filing under § 4, the producer becomes subject to pay-

ment of refunds if the FPC later finds that the price

charged was not just and reasonable. In this way, the

consumer is afforded at ieast some protection against

excessive prices.*®

The Use of Catiniat Prices: |

From the description of insline pricing it: is evident

that ‘the FPC cannot use.the prices at which producers

and pipelines contract as a basis for setting the price.

The need for the FPC, and for a concept like in-line prices, _

arises: primarily because fhe unregulated market place

cannot protect the consumer adequately, Congress created

the FPC to protect the consumer from the market place,

not simply to reflect it. The Commission should not rely

upon: prices over which it has not exercised careful

control, sey .

One ‘Court of. hppa has etwed the Commission’s

reliance on contract prices as the reason neh the CATCO

opinion. e

[W]e perceive that most of the Commission’s approach

to the certification procedures, until stopped” by the

Supreme Court in CATOO, was subject to the [follow-

ing] criticism ... : that the Commission was permitting

_the initial filing prices to be ffxed by the producers

merely on.a showing, so far as price justification was

concerned, that they had been bargained for at arm’s

“* The Act was so framed as to afford a complete, permanent and

' effective bond of protection from excessive rates and charges. At- .

lantic Refining Co. v. Public a Commission, supra note 6, .

at 388, .

*? See Atlantic Refining Company v. Federal Power Gicsatinten,

supra note 42, at 28, n. 11, 316 F.2d at 679, n.11. |

19a

length, or that they were not higher than a price

. Someone else was then paying in the area.**. Ca

And this court has been wary of allowing the Commission .

to avoid its responsibility by relying on prices negotiated

in the market -place.” | .

‘The Use of Temporary Certificates

and the Policy Statement

If the Commission relies on prices over which it has

never exercised control, it effectively abdicates its respon-.

sibility to protect consumers, Although prices contained

in temporary certificates are not completely without Com- —

mission control, neither are they subjected to thorough

- consideration. According to . the statute, temporary cer-

tificates are granted only ‘‘in cases of emergency’’ pending

determination of an application for a ‘permanent certifi-

cate. Temporaries are granted in ex parte - proceedings

_ “without notice or hearing.’’® No record is made, so it

‘is impossible for a court to know on what basis the Com- ~

mission granted the certificate. Accordingly, standards

on review are minimal. This court has upheld a temporary

certificate although we admitted that the summary nature

- 8 United Gas Improvement Co. v. Federal Power Commission,

supra note 43, at 135-36. [Emphasis in the original.] See also

United ‘Gas Improvement Co. v. Federal Power Commission, 290

F.2d 147, 148 (5th Cir.), cert. denied sub nom. Superior Oil Co.

v. United Gas Improvement Co., 366.U.8. 965 (1961). °°. ~

' Public Service Commission v. Federal Power Commission, 109

US.App.D.C. 289, 291, 287 F.2d 143, 145 (1960), and Public Serv-

ice Commission v. Federal Power Commission, 109 U.S.App.D.C.

292, 296, n. 4, 287 F.2d 146, 150, n. 4 (1960), cert. denied sub nom. °

Hope ae Gas Co. v. Public Service Commission, 365 U.S. 880

(1961). . : ; |

15 U.S.C. § 717f (c) (1964).

20a

of the proceeding precluded us frunn passing ne te

upon the parties’ contentions.”

Recently, though; the FPC has sheng to make tem-

porary certification a more considered decision. In 1960

it promulgated a Policy Statement which included guide- ©

line prices beyond which it would not certificate sales, even

temporarily. In theory, the Policy Statement could justify

inclusion of temporary certificates in the permanent cer-

tificate price array, since the Policy Statement could

provide some degree of intelligent control: over temporary

prites.

In fact, however, the Policy Statement has not had a

curative effect. The FPC itself seems to give ‘the State-

ment very little (and very ambiguous) weight. In its first

statement, the FPC said that ‘‘these price levels . . . are

for the purpose of guidance and initial action by the

Commission and their use will not deprive any party of

substantive rights.’’°? When the State of Wisconsin. peti-

tioned this court to review the Policy Statement, the FPC

moved for dismissal on the ground that the Policy State-

ment ‘‘does not modify the. procedures under which cer-

- tificates are granted. ... It denies no rights and imposes

no obligations.’’ ® We agreed and dismissed Wisconsin’s

petition for review.* The Commission has repeatedly ©

= Public Service Commission v. Federal Power Commission, 117 .

U.S.App.D.C. 195, 199, 327 F.2d 893, 897 (1964). See also Ameri-

can Liberty Ow Co. v. Federal Power Commission, 301 F.2d 15 (5th

Cir. 1962). And see Public Service Commission v. Federal Power

Commission, supra note 28, at 294, 329 F.2d at 249, in which this -

- court characterized temporary certifica,. 4 as being “without notice

or hearing or mature ee.

_ 8294 FPC 818, 819 (1960). ae

. %8 Wisconsin v. Federal Power Commission, No. 16118 Motion to

Dismiss, p. 2 (1961). . ;

54 Wisconsin v. Federal Power’ ‘Commission, 110 US.AppD. C. :

* 260, 292 F.2d 158 (1961).

21a

held that the Policy Statement does “not purport to fix

the ‘in-line’ price.”? > And recently the Commission char-

acterized the guideline prices as being relevant only when

‘no protests of petitions to intervene [are] filed’’ in the .

certification proceeding.®* In the instant case, only one

Commissioner relied’ upon the guideline prices; two

ignored them, and two felt that reliance upon the Policy

Statement would be impermissible. ,

Further, we cannot know whether: the guideline price

actually controls temporary prices unless we know what

the guideline price is based on.. For example, it is

conceivable that. temporary certificates have significant

influence upon the guideline price. If so, the guidelines

do. not control temporary prices. In any event, it is im-

possible to determine how the guidelines weré set. The

Commission listed a number of very general factors but

was not specific about what the factors were or how they

" were considered. ‘When asked, the FPC refused to disclose

the basis for its determination®* ) a

A still more persuasive reason for eliminating tem-

porary prices from the permanent price array: is the way

their use may injure consumers. The effect may be a.

slow escalation of in-line prices: An in-line price is set; -

the guideline price is set somewhat higher; temporary

. certificates are granted at the guideline price; the néw

temporary certificates are used in determining a new

in-line price, which will be higher than the first in-line

" Amerada Petroleum Corp. 29 FPC 171, 172 (1963), Union

_ Texas Petroleum, 29 FPC 273, 275 (1963), Union Texas Petroleum,

29 FPC 733,734 (1963). .

86 30 Fed. Reg. 4670, 4671 (1965). See also Amerada Petroleum

Corp., supra note 55, at 172 and Union Tezas Petrolewm, 29 FPC ©

at 275 (1963). . :

°7 See, ¢.g., Nos. 7781, et al., Sunray DX Oil Co. v. Federal Power |

Commission, (10th Cir. Dee. 9, 1966), Op. pp. 15-19; Amerada

: ° Petroleum Corp., supra note 55.

- 22a

price; the new in-line price raises the guideline price; and

then the spiral begins again. Although, in fact, we cannot

isolate so‘clearly the effect of the temporaries and the

guidelines, there can be no doubt that an escalation has

occurred, and in a manner.similar to the-process described.” —

This process contradicts CATCO’s admonition to hold the

line in the interim period between the sale of gas and

_ the determination of just and reasonable rates. According

to CATCO, one reason why the consumer needs protection

during the interim period is that the period is often long.”

Under the present administration of the in-line price doc-

trine the amount of. protection for the consumer decreases.

as the Jength of the interim period increases. The longer

_ it takes to determine a just and reasonable price, the

higher the in-line price becomes, and the consiimers’ poten-

tial refund drops accordingly.

There is a final, and completely separate, reason why

- temporary prices should not affect the in-line price. The

58In -Teraco Seaboard, 29 FPC 593 (1963), the Commission

found the Texas Railroad District. No. 3 in-line price to be 16¢:

for the period preceding September 28, 1960. At the same time,

_ the Commission set its guideline price at 17¢. 29 FPC 590 (1968).

Now the Commission finds that the in-line price for District No. 3

has jumped to 17¢.

In Hassie Hunt Trust, 30 FPC 1438 (1963), the Commission

_ found the District No. 2 in-line price to be 15¢ for the periog

preceding September 28, 1960. At the same time, the Commission

set its guideline price at 16¢. 30 FPC 1485 (1963). Now the

Commission finds that the in-line price for District No. 2 has

jumped to 16¢. j

In Skelly Oil Co., 28 FPC 401 (1962), the Commission found the

District No. 4 in-line price to be 15¢ for ‘the period preceding Sep-

tember 28, 1960. At the same time, the Commission set its guide-

‘lin price at 16¢. 28 FPC. 441 (1962). Recently the Commission

found that the in-line price for District No. 4 has jumped to 16¢.

See Sunray DX Ou Co. v. Federal Power Commission, supra note

57.

” Supra note 6, at 389.

23a

. first court to discuss in-line prices held that prices. which

were suspect because they’ were under 4@ cloud of court

or Commission review could not be used in the permanent —

price array.” Since then almost every court,” including |

_ the Supreme Court,” has decepted the suspect price doc-

_trine. The suspect price doctrine clearly includes tem-

porarily certificated prices. Temporarily certificated prices —

may be, and often are, changed by the Commission. They

are ‘subject to judicial review.’’® Prices that are so_

particularly subject to the hazard of change do ‘‘not

provide a reasonably reliable basis upon which to predicate

a price line.’?™ . And, acceptance of temporarily certificated

prices has, in fact, had the effect of “‘creating a standard

by which the questioned rates [are] judged.’’ *

The producers argue, contrary to our holding, that

temporarily certificated prices and contract prices must .

influence the in-line price. They rely on suggestions in

some opinions that the line should ‘‘reflect current condi-

tions in the industry.’ This argument was adopted

recently by the Tenth Circuit in Sunray DX Oil Co. v.

Federal Power Commission™ which held that it is per-

© United Gas Improvement Co. v. Federal Power Commission,

supra note 36. rit ; ‘ : r.

— | See, e.g., Public Service Commission v. Federal Power Com-

“mission, 109 U.S. App. D.C. 292, supra note 49 and Public Service

- Commission v. Federal Power Commission, supra note 28,

°2 United Gas Improvement Co. v. Callery Properties, supra

note 31, at 227. ’

8 Ibid. -

. “United Gas Improvement Co. v. Federal Power Commission,

supra note 36, at 824. ea a

5 Ibid...

| 68 See, ¢.9., ibid.

87 Supra note 57.

missible for the FPC to sonaar temporarios and contract

prices. —

However, the Tenth Circuit was faced with a problem

very different from ours. There, only 1.39% of the gas_

sold in the area was permanently certificated.’ On this

basis the court refused to apply the suspect price doctrine

and approved the FPC’s method of determining the in-line

price. ‘[W]hen no appreciable volume of gas is moving

under permanent certificates, the Commission has nothing

upon which’ to: base a decision as to in-lineness unless it —

turns to the temporaries.’?” In our case there is a gub-

stantial volume moving under permanent. certificates.”

We are not reviewing the FPC’s metifod of determining.

an in-line price when theré are no permanently certificated

prices available for comparison.

Moreov er, We cannot accept the reasoning of the Tenth

Circuit’s opinion as it applies to this case. Temporaries

and contract prices do reflect current conditions in the

industry because they reflect real dealings.in the market

place. This recognition, far from justifying reliance upon

these prices,, provides a reason for disregarding them.

As we have noted, the need for in-line pricing arises

because the unregulated+market place cannot protect the

consumer adequately. Reliance on prices over. which

there has been no careful a al control contradicts

this need.

We are not suggesting, of course, ‘that current condi-

tions are never relevant to the FPC.. Ina § 4 or § 5 hearing

the FPC considers current conditions in order to set a

just and reasonable price. . Howeverjmthe courts hayé

already rejected attempts to import standards relevant to

§4 and $5 hearings into §7 hearings. For example, in

© Supra note 57, at Op. p. 24. :

* Supra note 57, at Op. p. 26.

™ See, ¢.9., H-A. 282, 284-86, 579-20; S.A. 220, 223, 996-91.

t 25a | : 3 >

‘Callery the: producers tried to introduce economic and

financial evidence, but the FPC disregarded it. The

' Fifth Circuit reversed the Commission. In essence the

court said that this,evidence was relevant to current con- . |

ditions in the industry, and that these conditions were

relevant to the determination of the in-line price.”7 The —

Supreme Court rejected this argument summarily. ‘To

consider in this §7 proceeding the mass of evidence —

relevant to the fixing of just and reasonable rates under

-§5 might in practical effect render nugatory any effort -

to fix initial prices.’”? In the recent Tenth Circuit case ‘

the producers tried to introduce the same kind of evidence.

The court responded: : eek

The producers seek to avoid the impact of Callery —

by the assertion that the proffered evidence was a

streamlined . presentation which could not cause any

crippling delay. In.our opinion, the admissibility of

such evidence does not depend on any quantitative .

test. Relevance is determined by the substance of the.

offer. Although we agree with the producers that

neither CATCO nor Callery establishes’ any eo |

evidentiary standards, the point is that ‘the just and ~

reasonable rate standards of §§4 and.5 do not apply -

to § 7 where the test is public convenience and .

necessity.” | | =

We think this response, which is properly based on the |

logic of Callery and CATCO, is inconsistent with the same —

court’s acceptance of temporaries and contract prices. If:

the courts and the FPC will not allow consideration of

71 See Callery Properties v. Federal Power Commission, 335 F.

2d 1004, 1009 (5th Cir. 1964), for a description of the evidence.

12 Td, at 1018. ae Ceny

78 Supra note 31, at 227-28. In CATCO the Supreme Court had

. already recognized the difference between the standards of a

§7 and a §4 or §5 proceeding. ‘‘[T]he Act does not require a

determination of just and reasonable rates in a §7 proceeding as

it does in one under either § 4 or'§5.”’ Supra note 6, at 390.

™ Supra note 57, at Op. pp. 14-15. :

OP SIO DE 6 PY Ot ERE AS SeTcegty ae

26a

evidence which shows what, the current conditions are, then

temporaries and contract prices should not be accepted

on the basis that they reflect current conditions.

The purpose, quite simply, of a §7 proceeding is to .

protect the consumer until the FPO can determine the

just and reasonable rate. This latter determination

depends, in part, on current conditions in the industry.

The determination of an in-line price should not depend

' on current conditions unless, in a particular case, there

is something special about these conditions which requires _

the FPC to sacrifice some of the consumer’s protection.

For example, in a particular ease, the FPC may feel that

an in-line price which is. too low subjects the producers -

to too much risk. Aid this risk may endanger invest-

ment in the industry. In that event the FPC would have

to weigh this danger against the diminution of consumer |

protection. But the FPC has advanced no such reasons

in this case. Here the FPC. used temporarily certificated

and contract prices in an automatic, arithmetical way- to

raise the in-line price, without attempting to acd the

decrease in consumer protection.

- Finally, it is argued that elimination ‘of ‘Sectioiatty

certificated and contract prices from the price array will

cause a ‘‘price-freeze.’? But eur proposed decision will

not freeze the price of: gas. If the producer. is dnstie

with the in-line price he can file a new, and higher, rat

--schedule under § 4 of the Act.* Neither will our decision —

permanently freeze the in-line price for an area. We

presume that the in-line price will be adjusted after the

Commission ,determines the just and reasonable price.

It is true.that our decision may cause’ the in-line price

to be frozen temporarily during the interim period between

sales of gas and the rate determination under §4 or $5

of the Act. This kind of freeze seems to be required by

the logic of CATCO and in-line pricing. ‘But we do not

™ See note 45, supra. e- fa Ws

U og | 7 a

~~ -23.

2p . ° fe

/

hold that the FPC can never raise the price line in the

interim period. We hold only that the Commission has

advanced no reason why an escalation is justified in this

case. ae Ser ete, Seer ee es ae

Other Claims Regarding the In-Line Price - a ee

New York argues that the FPC erroneously determined

the pre-Policy Statement in-line price for District No. 3,

because it gave weight to prices ‘‘tainted’’ by other prices

‘which were permanently certificated in 1956-57.. New

' York thinks these 1956-57 prices were incorrectly certif-

icated ‘‘in light of CATCO and the ‘subsequent court

cases.’’’° Although sometimes it may be wise to re-examine.

certificated prices, we think that the FPC may give weight

to permanently certificated prices-even if they were cer-

’ tificated under standards later changed by the courts.

This area: of the law is constantly changing, and if we

_” require the Commission to re-examine earlier certifications .

‘whenever there is a new decision, hearings under §7 will

-never end. The proper rule was stated by the Ninth

Circuit. . c ee 7

_- No doubt: there are many certificated prices—some

“under unconditional certificates and others... . con-

. ditioned, some established in contested: proceedings

_. ‘and others not contested—which might be different,

- and lower, if the Commissidn were passing on. them

under section 7 today. But this, we think, does not -

_ require, although .it.may permit, the Commission to

disregard them or to give little weight to them in .

. @eciding what is -an appropriates price line to which

* ‘to refer.” , | ;

e -‘Though the FPC isnot required to re-examine per- -

manently certificated prices, neither is it required

76 Brief for Petitioner, p. 27.

| , | a

™ California v. Federal Power Commission, 353 F.2d 16, 23

(1965). [Emphasis in the original. } .

s

- 988 eS

‘\

include a price in the price array simply because the price :

- ‘was sanctioned in a permanent certificate. The Commis-

‘sion may ignore a price if it-has a good reason to do so.”

In this case, over Superior’s objection, the Commission.

refused to give full weight to certain 20¢ sales. According

to the FPC these and similar sales should be discounted

‘because ‘‘they either have subsequently been set aside .. .

or would have been set aside ... save for the procedural _

defect in the PSC review action. 79 This reason is ade-

quate; and we do not think the Commissien abused its

discretion by not giving full weight to the 20¢ sales.

Lone Star Gathering Company i

New York claims that Lone Star is a patharing com-

pany rather than a pipeline, and therefore sales to Lone

Star should: be certificated at the in-line price less the

cost of gathering. ‘Since oral argument we have been

informed that in Opinion No. 505 the FPC granted Lone

Star and United Gas Pipe Line Company permissior to

consolidate some of their facilities.° The FPC was to

rehear that case beginning December 6, 1966." Since we

do not know what effect the Commigsion’s final decision

. will have. on the issue before us, we reserve decision: on .

New York’s claim.

_ We need not’ deal with any of the ‘other contentions

regarding. the in-line price. Some of the parties may now |

wish to abandon some of their claims. On remand the

-FPC can deal with the remaining claims according to the

principles announced in this opinion.

78'A .price which is not ‘‘comparable’’ is not considered even

if.it is permanently certificated. See United Gas‘ Improvement Co.

wv. Federal Power a supra note 36, at 823.

7 HLA, 284.

’ 8 Lone Star Gas Company, et al., Docket Nos. CP 65-118, cet al.,

issued August 22,.1966.

81 Order issued October 14, 1966.

Refunds

New York argues that the FPC erroneously postponed

a decision about whether the producers must—refand—.

amounts which were collected, ‘pursuant to temporary cer-

tificates, in excess of the in-line level set in the permanent

certificate. The FPC answered that it had been awaiting

the Supreme Court’s action in the Callery case which was

not decided until, December of 1965." According to the

FPC’s brief, its decision in this case ‘should be forth-

coming ‘in:the near future’? now that the Supreme Court

has decided Callery.* The Commission, took its promise

seriously, and on July 22, 1966, it issued Opinion No.

- 498 which required refunds from some of the producer-

_» applicants involved in the Hawkins proceeding.“ We may

assume that a decision in Sinclair will follow.

Interest Rates ; * RM

Superior attacks the FPC’s order which sets interest

‘rates for some refunds at 7% and for others at 414%.

Since Superior did not make this objection in an applica-

tion for rehearing before the Commission, we cannot deal

with: the claim.® - In any event, at least on the record

and briefs now before us, the ‘Commission’s justification

for the 7% interest rate seems reasonable.

The Commission’s ‘order will. be set aside and the case

remanded to the Commission for further proceedings

consistent with this opinion. oe

. oh, So ordered.

82 Supra note 31.

%8 Brief for Respondent, p. 37. ;

“<i. L. Hawkins & H. L. Hawkins, Jr. (Operator), et al., Docket

Nos. G-18077, et al. The order was amended in Opinion No. 498-A

_ (December 6, 1966). :

15 U.S.C. § 717r (b) (1964). Cf. Utah Power & Light Co. v.

Federal Power Commission, 339 F.2d 436. (10th Cir. 1964).

!

_— ———a

30a

_ Wuzur K. Muzr, Senior Circuit Judge, dissents.

| APPENDIX |

Statements Explaining the Method Used to Determine

the in-Line Price

In Hawkins the hearing examiner explained his decision

". in the following terms:

It will be observed from the foregoing distribution

of prices for the period September 28,1960 through -

December 31, 1963 [the price array], that the largest

concentration of sales occurred at 14:cents and 15 cents

per Mef, and that the largest volumes of gas were sold

_at or below 15 cents per Mcf—more:than 80 percent.

The average sales price for the period was approxi-

mately -14.67 cents and ‘the average sales price by.

volume was approximately 15.51 cents per. Mcf. In

respect to the period January 1, 1958 through Septem-

ber 27, 1960 more than 73 percent of the sales occurred

‘at 16 cents or below arid these sales account. for more

than half the volume. The average sales price for

this period is 15.41 cents per Mef and the average sale

price by volume:is approximately 16.76 cents per Mef.

When the two periods are combined (January 1, 1958

through December 31, 1963) it is apparent that there

‘are two major concentrations of sales namely at 14

-eents and 15 cents and minor concentrations at 13.5,

14.5, 16.2 and 20 cents. The average price of the 94

sales i is 15.11 cents per Mef and the average rd volume

‘ is 16.43 cents per Mef. .

- In view of the foregoing and the iii adduced

- there is ample support for finding that 16 cents per

Mef at 14.65 psia is an appropriate ‘‘in line’’ price

applicable to producer contracts in this proceeding for

the period prior to September 28, 1960. The Staff wit-

ness found, however, that 16.2 cents was the appro-

‘priate ‘‘in line’’ price applicable to the period follow- -

he AMET ms

3la_

ing September 28, 1960 and in doing so sivessed the

significance of the sales which were made at 16.2 cents

per Mef,- (Four sales before September 28, 1960 ‘and °

three afterwards.) We do not think that this is deci-

sive. Indeed there is evidence which tends to show.

that a higher price may be justified for the pre-Policy

Statement period than for the post-Policy Statement

period. — an * ie

_ It is manifest that the ‘‘in line’? price is neither the

_ highest price nor the lowest price at, which gas is.sold

from a particular area in interstate commerce. It is

also clear that it is not the general average of prices

at which gas is sold in a particular period or indeed

the mathematical weighted. average. ~ Consideration .

necessarily must be given, however, to the number of.

sales as well as to the volume—large volumes fre-

quently selling: at higher prices than low volumes. .

Consideration .should be given to numerous factors

depending upon individual cireumstances from one case

to another. Consideration must also be given to the

Commission’s Statement of General Policy No. 61-1,

and to policy of the: Natural Gas Act as heretofore

construed by the Commission and by the courts par-

ticularly by the United States Supreme Court in the

CATCO case. Atlantic Refining Co. v. P.S.C., 360 U.S.

378. In view of these factors, and all the facts of

record we conélude that the subject sales in this pro-

ceeding from the Texas Railroad District No. 3. made

under contracts executed both before and after the

Policy: Statement dated September 28; 1960: should be

conditioned at a price no greater.than 16 cents per

Mef at 14.65 psia. H.A»2 " 2

When the Commission reviewed the examiner’s initial deci-

sion, it explained the method as follows: . a ,

For the pre-Policy Statement period we agree with

_-the examiner that 16 cents per Mcf... is the appro- -

Bes 8a =<

priate in-line price. ... As can be seen from the table

- above [the price array], there are comparatively large

. volumes of gas sold at the 16.0 and 16.2-cent levels,

small volumes at 17.5 and 18.0, and very large volumes .

at 20 cents. 38 sales (72 percent) are at 16 ‘cents or

below, while a little more than half the volume is sold

at 16 cents or below. . . . Arithmetically the large

volumes at 20 cents would have a strong effect on the |

weighted average of 15.16 cents per Mcf, but these

. should be discounted. .

The producers, on the other hand, argue that the

20 cent sales, if not given .full weight, should be given

some weight. The Commission adopted this considera-

tion in Sun Oil Co. ...A ceiling at 16 cents for the

pre-Policy Statement period, in effect, gives some .

weight to the prices above 16 cents as well as the con- -

tract prices and the prices under temporary certificate,

for if we gave no consideration to the prices above 16

cents, the ceiling would be set at a lower level, since

- ordinarily we do not set ‘the — price at the highest

level.

As for the post-Policy Statement period, it may. be

observed that there are nine sales and moderate

volumes’ at 15 cents, three sales and moderate volumes

at\16.2 cents,_one sale ‘and a small volume at 16.5 cents,

and three large sales at 18.0 cents. As the producers

argue, the fact that the 18-cent prices Were established

in abridged hearings should not detract from their

weight in setting the line.... ©

‘We are of the opinion that 17.0 cents per Mef .

the in-line price for the period following September 98,

- 1960.. It is our judgment that this conclusion gives

- appropriate. weight to the comparatively large volumes

.sold under permanent certificates at 18.0 cents per.

- ’ Mef while reflecting the weighted average price of 16.17

cents per Mcf. In addition, a 17.0 cent price clearly ©

33a

gives some weight to the unconditioned contraot prices

_and to the prices under temporary certificates. Finally,

some 43 percent of the gas has been permanently cer-

tificated at a price higher than 17.0 cents. One pro-

“posed sale ... is at 17.0 cents, under a contract dated .

October 1, 1963. Giving due consideration to all sales

in the area during the period in question, an in-line

-price of 17.0 cents is fully justified. ‘H.A. 284-286.

; e

In Sinclair ‘the trial examiner determined the: pre-Policy

Statement in-line price as follows:

Applying the criteria for the determination of an

in-line price, as developed by the numerous Commis-

sion and Court decisions following Catco, to the data

in. the foregoing tabulation, resulted in a numerically —

weighted average price of 16.68 cents per Mef and a -

volumetrically weighted average price of 17.18 cents

per Mcf. In according the proper evidentiary weight

to the evidence of record, most reliance or the. greatest

weight has been accorded:the 14 permanently certifi-

cated sales with an estimated first month’s delivery

volume of 460,575 Mcf. These sales and volumes do not

‘reflect current conditions in the industry’’ because of

their limited nature. Having accorded the greatest

weight to the permanently certificated sales and in

giving appropriate consideration to temporary cer- -

tificated sales at substantial volumes presently moving —

in interstate commerce, it is concluded the public con-

venience and necessity requires the natural gas here

under consideration at an in-line price of 16.0 cents

per Mcf at 14.65 psia. -

The in-lineness of the 16.0 cents per Mef here deter-

mined may be further demonstrated. The Commission

- said in Texaco-Seaboard Inc., et al., 27 FPC 482, 485,

and Hassie Hunt Trust (Operator). et al., 30 FPC

1438, 1445, “*. . . as brought out in Catco and... in |

Texaco-Seaboard, the price line: does not accord with

S4a : . .

the highest price or prices permanently authorized but

falls. between the highest group of prices and the

median price. r Applying this test to Staff Chart 3,

- Exhibit 4, [the price array] ..., reveals a median price.

of 14.57 cents (volumetric weighted average) which,

when averaged with the highest price of 17.59 cents,

produces an in-line price of 16.08 cents per Mcf.

A similar test further illustrates the in-lineness of

. the 16. 0 price per Mef.

Using all permanently. (77) and all amber (35)

certificated sales related to all volumes of natural gas’ |

(4,390,500 Mcf) moving in interstate commerce during :

the period after September 28, 1960, and through —

March 10, 1964, from District No. 2, a volumetrically

_ weighted average price of 15.15 cents per Mef is indi-

eated. This median price when averaged with the

highest . temporarily certificated price of 18.00 cents

. per Mef produces an in-line price of 16.57 — per

-Mef, S.A. 181-82. ' der

Ow

Of the post Policy Statement: in-line price, the examiner

said:

For the 22 sales being made in the 14.0 to 14.75 cent» ;

price level in the above tabulation [the price array} .

the numerically weighted average price is 14.24 cents --

and the volumetrically weighted average price is 14.35

cents per Mcf at 14.65 psia. However, the numerically

weighted average price for the-29 sales is 14.58 cents

_-per Mef and the volumetrically weighted average price

is 14.84 cents per Mcf at 14.65 psia. Considering the

foregoing data and the evidence of record showing

the history of priges and the price patterns in District

'. No. 2, the Examiner i8 of the opinion that the present °

or future public convenience and necessity requires the

natural gas here under considération at an in-line price °

of 15.0 cents per Mef at 14. 65 psia. S. A. 185-86.

The Commission further explained the method of select-

ing the post-Policy Statemént in-line price as follows: |

A totaling of all permanently and temporarily ver-

tificated sales in District No. 2 under contracts dated

after September 28, 1960 and through March 10, 1964, —

_ exclusive of the sales to Valley at 14 cents, shows a

- listing -of 101 sales involving a combined estimated

first month volume of 4,060,388 Mcf. The median price

on a volumetric basis is 16.00 cents and the volumetric

weighted average price is 15.29 cents: Approximately _

53 percent of the estimated first month volume covered

by these sales moved in the price range of from 16

cents to 18 cents. On the basis of these calculations,

and with recognition of the fact that the temporarily

certificated sales represented most of the sales above

the 16 cents price level, and.should not be accorded

undue weight, and giving some weight to the uncondi-

tioned contracts we conclude that the price of 16 cents

per Mef represents the correct post-policy in-line price

of jurisdictional sales of natural gas in District No. 2.

In reaching this result.we may observe that if we

confined ourselves to permanently certificated sales we

would not find a line as high as.16 cents, for the next

highest sales are at the 15.25 cents level. S.A. 225-26.

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