# Appendix — FPC v. Sunray DX Oil Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0160%3A09 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1968 - **Citation:** 391 U.S. 9 ## Text 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 ; ° Se OE . > « ea “+ -. ra... ; 1 Set a é | ~ 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 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. ; “ a - Cree ee --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386412_0160%3A09. Public record. Not legal advice.