Opposition Brief — Mobil Oil Corp. v. FPC

(i)

TABLE OF CONTENTS

Page

ee es) a ar 2

JOMMDEOTION on ks 5 octet cease cnt eseseeweevcenees 2

SraTUTE INVOLVED .........- ccc cece cece cece ceceees 2

Tue United DistrIBUTION COMPANIES .............--. 2

CoUNTER-STATEMENT OF THE CASE ..............2005- 3

ARGUMENT .... 2... ccc ccc cece cece cece ee eeees 7

There Are No Issues Raised in the Petitions for

Certiorari Which Warrant Review of the Decision

of the Court Below .......... 0.0.2... cece wee eee 7

I. The Decision Below Does Not Conflict with the

Decision of the District of Columbia Circuit in

the Texas Gulf Coast Area Rate Case. ........ 8

II. The Commission’s Action Was.Supported by

Substantial Evidence. ....................... 11

III. Allegations of Discrimination Are Strained, Re-

late to Matters Within the Commission’s Ex-

pertise and Under the Circumstances Do Not

Present Substantive Issues Worthy of Consid-

eration by This Court. ....................... 15

. There Is No Good Reason for Reviewing the

Court’s Affirmance of the Commission’s Ap-

proval of the Settlement Provisions Establish-

ing Minimum Rates For Transportation of

Liquids and Liquefiable Hydrocarbons. ....... 18

. The Authority of the Commission to Place

Moratoria on New Rate Filings Was Pre-

viously Upheld by This Court in Permian, Was

Reviewed in This Proceeding by the Court

Below and No Issues of Substance Worthy of

Consideration by This Court Are Raised. ..... 21

. No Good Reason Has Been Shown For Review-

ing the Court of Appeals Affirmance of the

Commission’s Refund Discretion. ............ 21

ConcLusIon

(ii)

TABLE OF AUTHORITIES

CasEs: Page

ANDERSON v. YUNGKAU,

$29 U.S. 482 (1946) 2... ccccsccecccceghccccccsees 23

FeperaL Power Commission v. Hore Nat. Gas Company,

330 U.S. 591 C1968): cv nese nscnde rca cRbecessosns 24

Farmers AND MERCHANTS Bank or Monroe v. FEDERAL

REsERvE Bank,

262 US. GAD (1982) ci ncccssscacestsscescsesiveses 23

FreperaL LAnp Bank v. Hansen,

113 F.2d 82 (2nd Cir. 1940) ...........ccececccees 23

Mosit Or Corporation v. FEDERAL PowER CoMMISSION,

F.2d (No. 72-1471, D.C. Cir., July 11, 1973)

19, 20

PrerMiAn Basin Anza Rate Cases,

390 U.S. 747 .

20 L.ed 2d 312 (1968) ........ 10, 11, 15, 21, 22, 23, 24, 25

SoutHern Lovuistana AREA RaTE Cases,

(Austra Ori Company ET AL. v. FPC)

428 F.2d 407 (5th Cir.) aff’d on rehearing,

444 F.2d 125 certiorari denied, 400 U.S. 950 (1970)

,* 9

Strate Corporation Comm’N or Kansas v. FPC,

206 F.2d 690 (8th Cir. 1953) ....... 0... eee eee ees 16

State or Wisconsin v. FPC,

303 F.2d 380 (D.C. Cir.)

Affirmed, 373 U.S. 294 (1963) ........cc..ccccccee 22

Texas Gutr Coast Area Naturat Gas Rate Case,

(Pustic Service CoMMISSION FOR THE STATE oF NEW

York v. FPC, £T At.)

F.2d (No. 71-1828, CADC, August 24, 1972)

8, 9, 10, 11, 17, 22

Unitep States v. THOMAN,

106 Uo O08 C1805) concen dtp seeeecase ian sisoaes 23

ADMINISTRATIVE DECISIONS:

Area Rate Proceedings (Southern Louisiana Area),

M5 BEC O08 (ICG) on oces sceneries skeasteenss

Area Rate Proceedings (Southern Louisiana Area),

MO PU G00 (AS0G) oes nee ecsseey se siceses 12, 13, 14

—

(iii)

Page

Area Rate Proceedings (Southern Louisiana Area),

46 FPC 86 (1971) ...............0000. 4, 6, 12, 14, 25

Area Rate Proceedings (Texas Gulf Coast Area)

Docket No. AR64-2, —— FPC —— (Opinion No.

595, May 6, 1971), rev’d. sub nom. Texas Gulf

Coast Area Natural Gas Rate Cases (Public

Service Commission for the State of New York v.

FPC, et al.), —— F.2d —— Nos. 71-1828, et al.,

D.C. Cir., August 24, 1973) ...............0005. 9

STATUTES:

Natural Gas Act, 52 Stat. 821 (1938), 15 U.S.C. § 717

et seq.:

Section 4, 15 U.S.C. §717¢e ................ 15, 21, 23

Section 7, 15 U.S.C. §717f .................... 15

Section 19, 15 U.S.C. §717r ................2.. 4,12

Administrative Procedures Act, 80 Stat. 383 (1966)

5 U.S.C. §553, et seq. 2.0.0... c cece eens 12

TREATISES :

Horack, Sutherland Statutory Construction 3rd ed... 23

a

IN THE

Supreme Court of the United States

d OctToBER TERM, 1973

No. 73-437

Mostix Or CorporaTIoN, Petitioner

Vv.

FEDERAL PowER COMMISSION

No. 73-457

Pus.iic SERVICE COMMISSION OF NEW YoRK,

, Petitioner

Vv.

FEDERAL PowER CoMMISSION

No. 73-464

MuniciPaL DistrisuTors Group, Petitioner

Vv.

FEDERAL PowER COMMISSION

On Petitions for Writs of Certiorari to the United States

Court of Appeals for the Fifth Circuit

BRIEF FOR THE UNITED DISTRIBUTION

: COMPANIES IN OPPOSITION

United Distribution Companies (UDC hereby state

their opposition to the petitions for a writ of certiorari

to review the judgment and opinion of the United

States Court of Appeals for the Fifth Circuit entered

in this case on April 16, 1973.

sat oe. *

2

OPINIONS BELOW

The initial opinion of the Court of Appeals (Mobil

App. 5-64) and its opinion on rehearing (Mobil App.

34) are not yet reported. The opinion (No. 598 of the

Federal Power Commission (Jt. App. 559-668) and its

opinion on rehearing (No. 598-A, Jt. App. 866-879) are

reported at 46 F.P.C. 86 and 46 F.P.C. 633."

JURISDICTION

The judgment of the Court of Appeals was entered

On April 16, 1973 (Mobil App. A, pp. 1-2). Timely

petition for rehearing was denied by order entered

June 11, 1973 (Mobil App. B, pp. 3-4). This Court’s

jurisdiction is invoked by Petitioners under 28 U.S.C.

§ 1254(1) and Section 19(b) of the Natural Gas Act,

15 U.S.C. § 717r(b).

STATUTE INVOLVED

The relevant provisions of Sections 4, 7 and 19(b) of

the Natural Gas Act, 52 Stat. 821-833, as amended, 15

U.S.C. §§ 717-717w are set out as Appendix D to the

petition in Case No. 73-437 (Mobil App. 65-69).

THE UNITED DISTRIBUTION COMPANIES

The United Distribution Companies is an ad hoc, vol-

untary group of 32 gas distribution companies serving

approximately 48 million people, and comprising ap-

proximately 25 percent of the gas distribution opera-

1 Copies of the judgment, opinions and orders of the Court of

Appeals appear as appendices to Mobil Oil Corporation’s petition,

which appendices are incorporated herein by reference. The

opinions and orders of the Federal Power Commission appear

in the printed Joint Appendix in the Court of Appeals of which

forty copies of the pertinent volume have been filed with the Mobil

petition.

| tions throughout the United States.? It was originally

formed for the purpose of participating in these pro-

ceedings before the Federal Power Commission because

these companies were no longer able to obtain the gas

supplies required by growing demands of the consum-

ers they serve.

COUNTER-STATEMENT OF THE CASE

On May 10, 1961, the Commission initiated the first

Southern Louisiana Area Rate Case in Docket

/ AR61-2 (25 F.P.C. 942). On September 25, 1968, it is-

sued its Opinion No. 546 in that proceeding. On March

20, 1969, it issued Opinion 546A on rehearing and at the

same time initiated a second Southern Louisiana pro-

— eeeding in Docket AR69-1. Opinion Nos. 546 and 546A

) in the first proceeding were appealed to the United

- §$tates Court of Appeals for the Fifth Circuit and a

decision affirming the Commission’s order was issued

on March 19, 1970. Austral, et al. v. FPC, 428 F.2d 407

(1970)*

The Court stated, however:

The mandate of this Court should not, however, be

interpreted to interfere with Commission action

that would change the rates we have approved

here. We specifically and emphatically reject the

contention advanced by the MDG that the Commis-

sion has no power to set aside rates once deter-

mined by it to be just and reasonable when it has

reason to believe its determinations may have been

erroneous. (428 F.2d at 444-45)

? Petitioners Municipal Distributors Group (MDG) contend that

they have some special credibility because they are municipally

owned whereas other parties are owned by stockholders. One of

the UDC member companies, Citizens Gas and Coke Utility, is a

municipally owned distribution company, in Indianapolis. It

serves more residential customers than Memphis, the principal

MDG member.

8 Also referred to as Southern Louisiana I.

77

U

4

Subsequently, after several applications for rehear-

ing were filed the Court asked the Commission to re-

spond to the question whether the Court in the exercise

of its equitable powers could affirm an order of the

Commission while preserving the authority of the Com- {

mission to stay, modify or rescind the order if the cir-

cumstances seem to make such action advisable. After

the issue was briefed by all parties and the Commis-

sion requested a remand, the Court stated:

We wish to make crystal clear the authority of the }

‘Commission in this case to reopen any part of its

order that circumstances require be reopened. Un- [|

der section 19 (b) of the Natural Gas Act, this

Court has the broad remedial powers that inhere

in a court of equity, and pursuant to our equitable _

powers we make it part of the remedy in this case }

that the authority of the Commission to reopen any |

part of its orders, including those affecting reve-

nues from gas already delivered, is left intact. The

Commission can make retrospective as well as pro-

spective adjustments in this case tf it finds that it

is in the public interest to do so. (444 F.2d at 127 |

(1971) ) [Emphasis added] ;

Petitions for certiorari were filed by the Municipal

Distributors Group (MDG), the Public Service Com- |

mission of New York (PSCNY) and others challeng- |

ing the authority of the court below to authorize the |

Commission to reopen an opinion which had been af-

firmed and to make retrospective adjustments to the

rates therein prescribed. Certiorari was denied. 400

U.S. 950 (1970)

Thereafter, the Commission reopened the proceeding

in AR61-2, and in its Opinion No. 598 issued July 16,

1971, held that its previous action was mistaken and

disposed of the issues in the first Southern Louisiana

7

5

Case, AR61-2, and the second Southern Louisiana Rate

Case, AR69-1.

In the proceeding below, there were extensive hear-

ings, comprising 57 volumes of transcript and including

111 exhibits, in addition to the record compiled prior to

the Southern Louisiana I decision.

UDC offered evidence showing: (1) the causes and

magnitude of the gas shortage, (2) the exploratory ef-

fort and capital expenditures necessary to meet future

requirements, (3) the cost of producing gas, (4) the

inadequacy of past rates to meet costs and (5) the

significant lagging of gas prices behind inflationary

trends. UDC also presented evidence showing that the

annual increments of new gas supply required by its

member companies, but not available for purchase for

the years 1970 through 1975, total 3.3 trillion cubic feet.

(R. 886G-886N, Ex. No. 1)

Executives of UDC member companies testified as to

their inability to purchase the required volumes of nat-

ural gas. (R. 887-898, 900-910, 912-918, 920-923, 925-

936, 938-954, 2410-2512)

On April 1, 1970, the Administrative Law Judge con-

vened a settlement conference in accordance with Com-

mission rules and negotiations were conducted, concur-

rently with the taking of evidence, looking toward a

settlement of the issues.

As a result of these settlement negotiations, UDC

filed with the Commission an offer of settlement which

had the support of most but not all of the parties. (R.

13652, 13665) All parties were given an opportunity to

respond. In addition to UDC, the settlement was sup-

ported by the Staff of the Commission, the Associated

4

Gas Distribution Companies, which serve about 10 mil-

lion customers at retail, by all interstate pipelines pur-

chasing gas from the Southern Louisiana Area and by

46 natural gas producers comprising 80% of the total

gas production flowing from the area. (R. 13575-6)

6

The Commission made the Settlement Proposal a

part of the record and set the matter for further hear-

ing. (R. 13575) All parties were given full opportunity

to submit additional evidence specifically addressed to

that proposal.

UDC submitted evidence of the witness Baker Clay

showing, among other things, the inadequacy of prior

rates. (R. 10636) Mobil and MDG introduced evidence

{ in opposition to the settlement. Briefs and reply briefs

were filed by parties supporting and by parties oppos- /

ing the settlement.

F The Commission issued its Opinion No. 598 on July

’ i 16, 1971, approving the settlement on its merits and,

; after applications for rehearing were filed, issued Opin-

: ion No. 598-A on September 9, 1971, modifying and

; affirming Opinion No. 598.

The crux of the settlement approved on its merits by

: the Commission’s decision was a three-pronged ap-

proach designed to serve as an incentive to greater ex-

; ploration and development of gas in the Southern

; Louisiana area. First, rates were set for contracts dated

prior to October 1, 1968, at 22.375¢ per Mef onshore and

j 21.375¢ per Mef offshore and at 26¢ per Mcf for all

4 contracts after October 1, 1968.

Second, a contingent escalation was provided on con-

5] tracts dated prior to October 1, 1968, of 0.5¢ per Mef

when new reserves dedicated to the interstate market

. —

from the Southern Louisiana area total 71% trillion

cubic feet prior to October 1, 1977. Further successive

0.5¢ per Mcf increases were allowed when new reserves

total 1114 trillion cubic feet and again when 15 trillion

cubic feet are committed prior to that date.

7

Third, producers in Southern Louisiana were re-

quired to refund $150,000,000 of amounts previously

collected, provided, however, that a producer could re-

duce the refund obligation by 1¢ for each Mef of new

gas reserves committed to the interstate market from

the Southern Louisiana area. New gas used for reduc-

ing refunds would not be counted in computing the

volumes for purposes of contingent escalations.

The case was appealed to the United States Court of

Appeals for the Fifth Circuit which, after reviewing

the issues and the extensive record, found no error.

ARGUMENT

THERE ARE NO ISSUES RAISED IN THE PETITIONS FOR

CERTIORARI WHICH WARRANT REVIEW OF THE

DECISION OF THE COURT BELOW

The Federal Power Commission is an expert body

which was confronted by difficult problems relating to

area prices for natural gas in Southern Louisiana,

which produces one-third of the nation’s gas supply. It

held extensive hearings and on the basis of the com-

plete record adopted a multi-faceted solution to the

very real problems of supply and rate making policy.

It used price and other incentives in an attempt to

stimulate the exploration for and production of natu-

ral gas while keeping its rates at the lowest practicable

level. The various elements to the solution are inter-

related and no element can be judged without looking

=e ERE NEERRONMNEHT

a

8

at the whole package. The Commission’s solution was

supported by detailed findings and conclusions, all of

which were reviewed in detail by the court below, which

concluded that the Commission had acted within its

statutory authority on the basis of substantial evidence.

The substantive issues raised in the Petitions for Cer-

tiorari have been carefully considered by the Commis-

sion and the court below and do not warrant further _

review. |

The Decision Below Does Not Conflict With the Decision of

the District of Columbia Circuit in the Texas Gulf Coast _

Area Rate Case

Petitioners contend that the approval of the incen-

tive provisions by the decision below is in conflict with

the opinion of the District of Columbia Circuit in the

Texas Gulf Coast Area Rate Case.* This contention

does not withstand analysis. Texas Gulf was remanded

to the Commission for further consideration of the in-

centive provisions because the decision (1) was not sup-

ported by evidence in the record and (2) did not pro-

vide an explanation of how the Commission reached its

conclusions (Tezas Gulf slip op. 10, 53, 55, 60, 65-66,

69). This holding is completely consistent with the

result reached by the Fifth Circuit in the instant case

where the Commission acted on the basis of a complete

record and extensive findings.

After the Fifth Circuit’s initial Southern Louisiana

decision, the Commission convened additional hearings.

When those hearings led to a settlement proposal, the

I.

4 Public Service Commission v. Federal Power Commission, No.

71-1828, August 24, 1972, — F.2d — (Di, Cir. 1972).

nee eee

9

Commission solicited and received evidence specifically

addressed to the merits of that proposal. Thus, at the

time it adopted the incentive provisions, it had a full

and complete. record upon which to rule.

This was not the case in Texas Gulf. That case had

been pending for years, and the record had been closed

for three years at the time the Southern Louisiana Set-

tlement proposal was submitted. The Commission ob-

viously seized upon the three-pronged approach of the

Southern Louisiana Settlement as a solution to the

Texas Gulf Coast issues. In an effort to expeditiously

resolve issues which had been pending too long, it did

not set the proposal for hearing in Texas Gulf as it did

in Southern Louisiana. No evidence was submitted or

invited on the incentive provisions which were adopted

ab initio by the Commission. After the fact, in response

to petitions for rehearing, the Commission apparently

recognized this defect and sought to rely upon the rec-

ord developed in the instant Southern Louisiana pro-

ceedings.

The District of Columbia Circuit held that the Com-

mission could not rely by reference upon the Southern

Louisiana case for three reasons. First, Southern Loui-

siana II was not a proceeding setting a national rate,

but only a separate rate for a different area. The par-

ties were not necessarily identical and were not on

notice that the Southern Louisiana evidence would be

used in the Texas Gulf proceeding. Second, the Com-

mission’s Southern Louisiana ITI opinion was actually

issued one month after the Texas Gulf opinion. Third,

Southern Louisiana IT was based upon a settlement

proposal under which, as the court recognized, there

might well be a compromise of issues which might oth-

erwise have been litigated. At 51-52.

10

Thus, the Court of Appeals for the District of Co-

lumbia held only that the Commission could not rely

upon the instant Southern Louisiana II proceeding to

justify the adoption of incentive procedures in Tezas

Gulf and without that reliance the record was not suffi-

cient to support the Commission’s conclusions.°

This result does not conflict with the ruling of the

court below where the record was sufficient to justify

the utilization of incentive procedures to stimulate

greater natural gas production and where the issues

raised by these procedures were fully addressed by the

parties to the proceeding and considered by the Com-

mission.

In addition to the absence of necessary conflict be-

tween the results reached by the Fifth Circuit and the

District of Columbia Circuit, there is likewise no con-

flict as to approach. Both courts applied the standards

of review set by this Court in the Permian Basin Area

Rate Case, 390 U.S. 747 (1968).° Both expressly fol-

lowed the three-pronged test for reviewing area rate

5 Judge Leventhal’s opinion in Texas Gulf expresses some con-

cern over the appropriateness and legitimacy of the incentive pro-

visions in that case. However he did not regard the incentive

provisions as invalid per se, but felt instead that the record and the

Commission’s opinion did not support the need for these measures.

For example, Judge Leventhal stated:

In view of the absence of Commission analysis, we observe that

our comments do not constitute an implacable prohibition on

the use of flowing gas to raise required revenues. We have,

however, identified substantial problems that the FPC will

have to consider on remand. At 60.

See also Tezas Gulf at 53, 55, 60-61, 64, 65-66, and 69.

® Southern Louisiana II, 11-13; Texas Gulf, 17-19.

11

determinations enunciated by Mr. Justice Harlan in

Permian:

It follows that the responsibilities of a reviewing

court are essentially three. First, it must deter-

mine whether the Commission’s order, viewed in

light of the relevant facts and of the Commission’s

broad regulatory duties, abused or exceeded its

authority. Second, the court must examine the

manner in which the Commission has employed the

methods of regulation which it has itself selected,

and must decide whether each of the order’s essen-

tial elements is supported by substantial evidence.

Third, the court must determine whether the order

may reasonably be expected to maintain financial

integrity, attract necessary capital, and fairly com-

pensate investors for the risks they have assumed,

and yet provide appropriate protection to the rele-

vant public interest, both existing and foreseeable.

390 U.S. at 791-92.

In the Texas Gulf case, the court found that the sub-

stantial evidence test was not met and that, in fact,

there was no evidence in the record to support the

adoption of production incentives. In the instant case,

however, these issues were specifically addressed by

the parties and the Commission’s ruling was based

upon that record. Thus, the asserted conflict does not

exist and does not form a basis for review by this

Court.

II

The Commission’s Action Was Supported by Substantial

Evidence

The function of the FPC as an administrative

agency is to develop a body of expertise within its area

of administration. The exercise of this expertise by the

FPC should not be disturbed so long as it conforms

12

to the requisites of due process and statutory authority

including the substantial evidence requirements of

§ 706 of the Administrative Procedure Act, 5 U.S.C.

§ 706, and Section 19(b) of the Natural Gas Act, 15

U.S.C. § 717.

The record in this case is replete with well docu-

mented testimony and evidence placed into the record

in open hearing and subject to cross-examination,

which adequately satisfy the Commission’s need for

substantial evidence on which to base its determina-

tions. It is well settled that a presumption of validity

attaches to each exercise of the Commission’s exper-

tise.”

The evidence before the Commission in the reopened

record showed that there is a supply crisis* (findings

40 through 106, R. 13587-13615) ; that there has been a

decline of more than one billion dollars per year in

funds devoted to exploration for hydrocarbons (R.

1456) ; that substantial amounts of money will be re-

quired to reverse the downward trend in the discovery

and production of natural gas; that the rates prescribed

in Opinion No. 546 (Southern Louisiana I) were un-

reasonably low; that the crude oil incentive is no longer

adequate to bring about the exploration needed to

find gas reserves and that gas must stand on its own

feet. (R. 1457-1460)

The evidence showed that the cost findings in

Opinion No. 546 (issued in 1968) were unreasonably

low and that it is technically possible to find costs only

within a range. In Opinion No. 598 (issued in 1971)

7Permian Basin Area Rate Cases, 390 U.S. 747 at 767 (1968).

8R. 886G-886N, 900-910, 2410-2512, 887-898, 912-918, 920-923,

925-936, 928-954, 1454, 4787, R. 1414, 1437-1440, 1454, 1462.

-_

13

the Commission properly found that Opinion No. 546

rates were not just and reasonable and did not produce

sufficient return, that such opinion should be set aside,

and that the refunds required therein should not be

made. (R. 13615-13632 ; 13635-13638)

In Opinion No. 546, the Commission found the na-

tional average cost of new gas (including the Louisiana

Severance Tax) to be 18.80¢ per Mef. 40 F.P.C. 530,

589 (1968). It found the cost of flowing gas to be

18.36¢ per Mcf. 40 F.P.C. at 603. Evidence in the re-

opened record shows that costs substantially exceeded

these findings and in its discussion in Paragraphs 107

through 158 (R. 13615 through 13632) the Commission

has now found that the reasonable range of costs is at

a materially higher level for both new and flowing gas.

In support of these findings, there is a wealth of new

cost evidence in the new record—presented by experts

for the Staff, UDC and the producers. This evidence

clearly supports the need for modifying the unrealistic

costing methodology of Opinion No. 546.

The Commission fixed rates within a zone of reason-

ableness coupled with fixed escalations and provided

further incentives for the discovery and dedication of

natural gas to the interstate market. It allowed a work

off of refunds at one cent per Mef for new dedications

of gas to the interstate market and provided further

escalations in the ceiling prices contingent upon the

dedication of certain specified volumes to the interstate

market. These incentives are desperately needed. The

Commission concluded, on the basis of substantial

evidence, that there is a strong positive relationship

between price and supply, and between price and ex-

ploratory effort. (R. 13605) The record is clear that

14

there is a need for the incentives, and the producers of

most of the natural gas in Southern Louisiana stated

that the settlement, which the Comniission approved,

would provide incentives for further exploration and

further dedications of natural gas to the interstate

market.

The Commission’s Opinion No. 598 deals with re-

funds in paragraphs 169 through 172 (R. 13635

through 13638) and, in the light of the inadequacies of

Opinion No. 546, and the evidence in the new record,

it adopted the compromise worked out by the pro-

ponents of the Settlement Proposal on the basis of

its merits.

On the basis of the substantial evidence in the

record, this action was entirely justified.

In support of the Settlement, UDC introduced the

testimony of witness Baker Clay showing that rev-

enues at the Opinion No. 546 rates fell far below in-

dustry costs during the refund period. (R. 6833-6853)

Since no one is entitled to refunds unless revenues ex-

ceed costs, cancellation of all refunds could have been

justified.

The Settlement Proposal recognized this situation,

but rather than eliminate refunds entirely the Settle-

ment reduced refund obligations from $375,000,000 to

$150,000,000; and it then allowed the producers owing

these remaining refunds to work them off through

dedications of new reserves to interstate commerce. _

Mobil, New York, and MDG oppose this whole as-

pect of the Settlement Proposal on the ground that the

basic refund obligations imposed by Opinion No. 546

should not have been reduced at all.

f 15

‘

fi!

2

be

;

Assuming as we have shown, that Opinion No. 546

refunds must be revised downward, the remaining

$150,000,000 retained by the Settlement Proposal, as

a result of negotiation, can hardly be adverse to either

Mobil, New York, or MDG in the light of the evidence

in the record—introduced by UDC through Baker

Clay—that all refunds might be excused. Significantly

neither Mobil, New York, nor MDG introduced any

evidence at all comparing revenues to costs in the

refund period.

As this Court observed in Permian, agencies must

be permitted, consistent with the obligations of due

process, to adapt their rules and policies to the de-

mands of changing circumstances. 360 U.S. at 784.

Clearly, therefore, the Commission acted lawfully in

changing its course on the basis of the reopened

record.

Ill

Allegations of Discrimination Are Strained, Relate to Matters

Within the Commission’s Expertise and Under the Cir-

cumstances Do Not Present Substantive Issues Worthy

of Consideration by This Court

All of the Petitioners join in chorus to allege that

the court below has affirmed a discriminatory opinion

in this case. (Pet.: N.Y. Public Service Commission

p. 11-12, 18; Mobil Oil Corp. p. 9, 20; MDG p. 25)

The chief ground of alleged discrimination’ arises

from the fact that some producers (including Mobil)

have executed voluntary settlements, and made refunds

so as to reduce their revenues to the general level of «

the Commission’s Section 7 guidelines. (R. 13585-

13586) Other producers have, in the meantime, col-

lected the higher contested Section 4 and Section 7

rates. Mobil’s suggestion to cure this ‘‘defect’’ en-

16

compassed ‘‘higher prices for new gas, coupled with

a procedure for retrospective achievement of equity

among the Southern Louisiana producers’’. (R. 13,586)

This remedy does not appear to be supported by either

the New York Public Service Commission nor the

Municipal Distributors Group. However, these Pe-

titioners have been quick to seize upon this alleged

discrimination as a convenient vehicle to support

their petition.

Mobil’s brief before the Court of Appeals leaves

one with the impression that they are seeking high

rates for the future to offset the low settlements which

some producers agreed to (improvidently as it

transpired) in the past. The Commission has no

authority to fix rates on that basis. State Corporation

Comm’n of Kansas v. F.P.C., 206 F.2d 690 (8th Cir.

1953) There is no question but that the Commission

is supported by the evidence in refusing to approve the

high level of rates advocated by isolated producers.

At page 22 of its petition, Mobil cites cases which

held that those similarly situated should be treated

with equality. These arguments are without merit be-

cause, inter alia, Mobil, which settled its rate cases

years ago, is not similarly situated to those companies

which refused to settle, and which proved, on this

record, that the rates Mobil accepted would be con-

fiscatory if applied area wide.

It would be unconstitutional for the Commission to

fix confiscatory rates in order to treat all producers

the way Mobil agreed to be treated.

The Commission properly observed:

‘‘Parties who enter into settlements or those

who refuse to do so, always run the risk that the

RS eae

tl

17

ultimate Commission determination may be

higher or lower than the settlement levels.”’ (R.

13628)

MDG, by its petition, would have the Court believe ——

that the D.C. Court of Appeals, in the Texas Gulf

Coast Case, found that the Commission’s refund pro-

visions (similar to those in the instant case) promote

discrimination and are anti-competitive in effect.

(MDG Pet. 13) The implication is that this was the

reason for its remand. In fact, while the D.C. Court

of Appeals did discuss possible discriminatory effects

of the Texas Gulf Coast Opinion, it also stated that

‘‘To some extent discrimination is inherent in

the contingent escalation because it works on an

industry basis, rather than on an individual pro-

ducer basis.’’ (Ship Op. p. 67)

This is, of course, fundamental to area rate making.

The primary reason for remand there was not the

alleged discriminatory potential of the Opinion, but

the lack of sound explanation as to why the Com-

mission held as it did. (Slip Op. p. 69)

The refund provisions in the instant case were

found by the court below to have been subjected to

“cross examination and additional evidentiary

scrutiny.’’ (Slip Op. p. 52) The Court, therefore, had a

strong foundation of substantial evidence on which to

premise its finding that the ‘‘... FPC was acting with-

in the bounds of its discretion when it adopted the re-

fund credit work-off program.”’ (Slip Op. p. 53)

Clearly, there can be no area rate-making without

some degree of discrimination or difference in impact

on individuals. Only unreasonable discrimination is

unlawful and the expert body which reviewed the

=

evidence, after cross-examination, concluded that the

refund credit workoff was reasonable. The Court below

properly found this action within the bounds of the

Commission’s discretion.

The treatment of refunds was only one facet of an

opinion in which the Commission utilized a combination

of formulae and pragmatic adjustments in an attempt

to protect the interest of future as well as past con-

sumers. It applied its expertise to intensely practical

problems in the area of its discretion in time of a

supply crisis.

18

IV

There Is No Good Reason for Reviewing the Court's Affirmance

of the Commission's Approval of the Settlement Provisions

Establishing Minimum Rates for Transportation of Liquids

and Liquefiable Hydrocarbons —

The Commission, on the basis of substantial evidence

and on its merits, approved the settlement provisions

fixing minimum rates which the producers must pay

to pipeline purchasers for the transportation of

liquids and liquefiables owned by the producers. This

was necessary to preserve and protect the Commis-

sion’s action on the price of the natural gas.

Mobil contends that the Commission exceeded its

authority, that is, that producers should be completely

free to negotiate with pipeline purchasers for the

transportation of liquids and liquefiables at less than

cost, and thus possibly to obtain an effective price for

gas in excess of the ceiling price for the gas fixed by

the Commission. }

Liquids and liquefiables are often mixed with gas

at the wellhead and must be transported from the

platform to the processing plant in a mixed stream.

Ea ee eS |

19

The Commission had determined that 26 cents was a

just and reasonable price for the gas. If the producer

could negotiate for transportation of commingled

liquids by the pipeline purchaser at less than the

proven cost to such purchaser, clearly the Commis-

sion’s action on the price for the gas could be circum-

vented. In such event, the real price received for the

gas would be greater than the lawful rate. If, based on

substantial evidence, the Commission could not as a

part of the approved gas rate settlement fix a mini-

mum rate for the transportation of liquids and

liquefiables by the pipeline purchaser, its regulation

of the wellhead price of natural gas could be rendered

ineffective.

The minimum charges established for the transpor-

tation of liquids and liquefiable hydrocarbons were

found by the Court below to have been determined by

the FPC on a “substantial evidentiary basis’’. (R.

13634, 13645) (Slip Op. p. 63) This finding is ade-

quately supported by the testimony of W. P. Anderson

(R. 6395-6410, 6692-6725) and of John L. Moye (R.

6400-6408, 6734-6747).

Mobil Oil Corporation advances the argument that

the decision by the U.S. Court of Appeals for the Dis-

trict of Columbia in Mobil Oil Corporation v. Federal

Power Commission, No. 72-1471, CADC, July 11, 1973,

F.2d. , ‘is at odds’’ with the Court’s de-

cision in this case.

It is true that in the last cited Mobil Oil case, the

D.C. Circuit reversed the action of the Commission in

fixing minimum rates.for the transportation of liquids

and liquefiables in a general rule-making proceeding

which the Court found completely inadequate from

20

the standpoint of necessary notice”, necessary evi-

dence", and necessary findings’. In the process of

such reversal, the D.C. Cireuit did hold against the

Commission’s jurisdiction over transportation of

liquids. At the same time, it recognized, as did Mobil,

the Commission’s minimum rate authority over the

transportation of liquefiable hydrocarbons.* However,

in the process of so doing, the Court there stated :"*

We are not confronted with a case where the

Commission has demonstrated that rate jurisdic-

tion over liquids is necessary to preserve its rate

jurisdiction over natural gas.

The instant case, however, stands in an entirely

different posture. The record is complete with sub-

stantial evidence adequately supporting all of the

.. Commission’s findings. In thus exercising jurisdiction

over the minimum rates for transportation of liquids

as well as liquefiables, the Commission has determined

that such exercise is necessary to preserve its rate

jurisdiction over natural gas. This determination is

-well supported by the testimony and evidence pre-

sented by W. P. Anderson and John L. Moye as re-

ferenced above. By its terms", the Commission’s action

on this question in this case applies only to this case,

and the Commission has not acted in the general rule-

making proceeding on the same subject on remand

from the decision of the D.C. Circuit in Mobil Ou.

Thus, there is no occasion for any general review of

this question at this time.

>

10 Slip Op. p. 9.

11 Slip Op. p. 21.

12 Slip. Op. p. 50-51.

13 Slip. Op. p. 20.

14 Thid.

18 46 F.P.C. 86, 139.

21

Vv

The Authority of the Commission To Place Moratoria on New

Rate Filings Was Previously Upheld by this Court in

Permian, Was Reviewed in this Proceeding by the Court

Below and No Issues of Substance Worthy of Considera-

tion by This Court Are Raised

Mobil complains that the Commission placed a five-

year moratorium on deviation from the area rates

fixed in this proceeding.. A moratorium was upheld

by this court in the Permian” case where costs

were found to be stable. In this case costs were not

found to be stable and the Commission provided

fixed escalations in the price of gas. It also fixed con-

tingent escalations. Kurthermore, it has provided in

its rules a method by which a producer may petition

for authority to deviate from the area rate ceilings.

Surely, as this court held in Permian, the Commission

cannot be required to start a new rate case every time

an old one is concluded.

VI

No Good Reason Has Been Shown for Reviewing the Court of

Appeals Affirmance of the Commission’s Refund Discre-

tion

Petitioners urge that the Court of Appeals erred in

affirming the Commission’s decision to permit the write

off. of refunds by the dedication of new volumes of

natural gas to the interstate market. MDG asserts

that under Section 4(e) of the Natural Gas Act the

Commission is required to order refunds. The Court

of Appeals rejected this contention, holding that

Section 4(e) provides only that the Commission

“may’’ require refunds but is not required to do so.

© Permian Basin Area Rate Cases, 390 U.S. 747 (1968) (Here-

after referred to as Permian)

22

This is not an all or nothing case in which the Com-

mission was called upon to refuse refunds or grant

them 100 percent. Instead, it is a case in which the

Cemmission’s refund discretion had already been ex-

pressly recognized by the Court of Appeals in its re-

mand of Southern Louisiana I, from which decision

this Court denied certiorari. Pursuant to that remand

and after full evidentiary hearing, the Commission

found that certain refund reductions, tied to the in-

ereased price of flowing gas and to work off credits

for new production, all in the interest of a much needed

increase in supply, would be in order. $

This is not an issue meriting review by this Court.

There is no conflict among the Courts of Appeal and

the Fifth Circuit’s holding is consistent with

of this Court. In fact, the District of Columbia

in the Texas Gulf case, expressly agreed that the ques-

tion of whether or not to order refunds is a matter for

the Commission’s discretion. Texas Gulf 68-69. |

In Wisconsin v. F.P.C., 303 F.2d 380, 386 (D. C. Cir.,

1961), Judge Prettyman stated that under Section

4(e) the Commission ‘‘may”’ order a refund and that

this is not mandatory. While the Supreme Court in

reviewing that case did not specifically deal with the

Commission’s discretion to order a refund under Sec-

tion 4(e), Mr. Justice Clark in a separate opinion

speaking for four justices stated that under certain

conditions the Commission might have to forgive

refunds. Wisconsin v. F.P.C., 373 U.S. 294, 324 (1963)

footnote 8. Subsequently, in Permian Basin Area Rate

Cases, 390 U.S. 747, 827 (1968) this court stated that

the court did not have authority to interfere with the

Commission’s ‘discretion’? with respect to refunds.

23

The substance of MDG’s argument is that ‘‘may”’

as used in Section 4(e) of the Natural Gas Act means

‘‘shall’’. It cites two cases both of which are older than

the Interstate Commerce Commission, the first federal

administrative agency.

This court stated in Farmers and Merchants Bank

of Monroe v. Federal Reserve Bank, 262 U.S. 649,

662-3 (1922), that

“Tt is true that in statutes the word ‘may’ is

sometimes construed as ‘shall.’ But that is where

the context or the subject matter compels such

construction.”’

That ‘‘may’’ as used in Section 4(e) of the Natural

Gas Act is intended to confer discretion, is also sup-

ported by the fact that ‘‘may”’ is used in juxtaposition

to “‘shall’’ throughout the Natural Gas Act. In Section

4(e) where the ‘“‘may”’ in question appears, ‘‘shall’’

is used four times. Under some circumstances certain

things must be done, but the requirement of refunds

is discretionary. United States v. Thoman, 156 U.S.

303 (1895), Anderson v. Yungkau, 329 U.S. 482, 485

(1947), Horack, Sutherland Statutory Construction,

3rd ed. Sec. 5821, Federal Land Bank v. H ansen, 113

F.2d 82, 84 (2nd Cir. 1940)

No good reason has been shown for reviewing this

point of law, which is well settled. / :

CONCLUSION

This Court observed in Permian 390 U.S. 747 at

756, that since 1954 the Commission has labored with

obvious difficulty to regulate a diverse and growing

producing industry under terms of an ill-suited

statute. Now the industry has stopped growing.

24

When the Commission attempted to regulate rates

on a company-by-company basis, the administrative

process broke down. (390 U.S. at 758) Since 1960 it

has been attempting to regulate producers on an area

basis, but area rate cases take a long time and condi-

tions change.

As observed by Justice Jackson in a separate

opinion in Federal Power Commission Vv. Hope Nat.

Gas Company, 320 U.S. 591, 647 (1943), the explora-

tion for and the production of natural gas are more

erratic and irregular and unpredictable in relation to

investment than any phase of any other utility business.

Producers are not required to invest in the high-

risk, speculative adventure of searching for natural

gas. They may do so and it is the Commission’s re-

sponsibility to fix rates that will encourage them to

do so.

It is necessary therefore that pragmatism be accom-

panied by innovative approaches if the Commission is

to succeed in its task of steering between the Scylla of

excessive rates and the Charybdis of not enough gas

for the consumer.

As this Court pointed out in Permian, supra, at p.

698, the Commission’s responsibilities extend to future

customers as well as present customers. It has an obli-

gation to provide a useful incentive to the exploration

for natural gas as well as to prevent excessive pro-

ducer profits. We believe it cannot be gainsaid that if

past profits had been excessive there would have been

no decline in exploration activity. Since the first

Southern Louisiana Area Rate Case, evidence has

proved to the Commission that its past regulatory

25

techniques have been unsuccessful in protecting the

public interest in an adequate supply of gas.

In the second Southern Louisiana Case here in-

volved, the Commission adopted a new, many-faceted

approach designed to stimulate production and to en-

courage producers to dedicate new reserves of natural

gas to the interstate markets. The Commission has

attempted to harness cost and noncost factors side by

side. (Permian, supra, at 815) And it has employed a

combination of formulae in an attempt to cope with

its intensely practical problems. (Permian, supra, at

777 and 800)

Nearly all of the parties to the proceeding below

recommended this approach but a few object. NYPSC

and MDG want the refunds that would have been made

under the old approach. Mobil wants higher rates for

the future to offset the lower rates it voluntarily ac-

cepted in past settlements. Each of the Petitioners

attack individual segments of Opinion No. 598 as if

each segment stood alone. No Petitioner evaluates

Opinion No. 598 as a totality.

The record shows that this nation is dependent upon

Southern Louisiana for one-third of its natural gas

requirements, that the amount of money devoted to

exploration and development has declined sharply

resulting in a decline in the discovery of new gas re-

serves, and that enormous amounts of money will be

required to reverse such decline.

The FPC has met its responsibilities by determining

cost-based rates within the zone of reasonableness for

both vintages of gas, by providing for the work off of

refunds by the dedication of new reserves, and by fur-

ther providing price escalations based upon new dedi-

26

cations, coupled with fixed escalations to offset inflation.

The court below properly held that the Commission’s

order was supported by the record and that it was

within its statutory authority.

Wuererore, the United Distribution Companies

respectfully urge that certiorari be denied.

C. WILLIAM CooPER

161 Moorland Road

Falmouth, Massachusetts 02540

TruForD A. JONES

Epwarb H. GERSTENFIELD

Suite 212

7316 Wisconsin Avenue

Bethesda, Maryland 20014

Attorneys for

United Distribution Companies

Of Counsel:

JULIAN DE BRUYN KOPS

WILLIAM E. HERRON

25 North Main Street

Dayton, Ohia 45402

ROBERT CORP

1717 East Ninth Street

Cleveland, Ohio 44114

JAMES B. FALAHEE

212 West Michigan Avenue

Jackson, Michigan 49201

PETER V. FAZIO, JR.

Schiff, Hardin, Waite, Dorschel

& Britton

231 South LaSalle Street

Chicago, Illinois 60604

GEORGE H. FISCHER

P.O. Box 764

Columbia, South Carolina 29202

NORMAN A. FLANINGAM

CHARLES R. BROWN

Suite 400

1101 16th Street, N.W.

Washington, D.C. 20036

HENRY A. JACKSON

Two Gateway Center

Pittsburgh, Pennsylvania 15222

LAUMAN MARTIN

300 Erie Boulevard West

Syracuse, N.Y. 13202

JAMES R. McCLARNON

Smith, Morgan & Ryan

Suite 1900, Indiana Towers

One Indiana Square

Indianapolis, Indiana 46204

RICHARD M. MERRIMAN

Reid & Priest

1701 K Street, N.W.

Washington, D.C. 20006

DONALD I. MORITZ

420 Boulevard of the Allies

Pittsburgh, Pennsylvania 15219

ELMER NAFZIGER

Nafziger & Otten

900 Illinois Building

Springfield, Illinois 62701

JON D. NOLAND

Barnes, Hickam, Pantzer & Boyd

1313 Merchants Bank Building

Indianapolis, Indiana 46204

JAMES O'MALLEY, JR.

HALCYON G. SKINNER

RONALD D. JONES

LeBoeuf, Lamb, Leiby & MacRae

One Chase Manhattan Plaza

New York, New York 10005

RICHARD A. ROSAN

20 Montchanin Road

Wilmington, Delaware 19807

October 30, 1973

27

WILLIAM W. ROSS

THOMAS C. MATTHEWS

Wald, Harkrader, Nicholson & Ross

1820-19th Street, N.W.

Washington, D.C. 20036

ARTHUR R. SEDER, JR.

One Woodward Avenue

Detroit, Michigan 48226

CHARLES V. SHANNON

1700 K Street, N.W.

Washington, D.C. 20006

JUSTIN A. STANLEY

WENDELL H. ADAIR, JR.

Mayer, Brown & Platt

231 South LaSalle Street

Chicago, Illinois 60604

J. STANLEY STROUD

Mayer, Brown & Platt

1101 17th Street, N.W.

Washington, D.C. 20036

HENRY P. SULLIVAN

4 Gateway Center

Pittsburgh, Pennsylvania 15222

DAVID E. WEATHERWAX

445 West Main Street

Clarksburg, W. Virginia 26301

JOSEPH M. WELLS

122 S. Michigan Avenue

Chicago, Illinois 60603