United Gas Improvement Company v. Federal Power Commission

290 F.2d 133

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 6, 1961
• Docket: 18112_1
• Status: Published

Opinions

TUTTLE, Chief Judge.

This case presents the identical problem heretofore resolved by the Courts of Appeal for the 9th Circuit in United Gas Improvement Co. v. F. P. C., 283 F. 2d 817, and the District of Columbia Circuit in Public Service Commission of New York v. F. P. C., 287 F.2d 146, and now pending after argument in a companion case in the 10th Circuit. Petitioner here also contends that it has been resolved by the United States Supreme Court by directing a reversal (see 361 , 80 S.Ct. 292, 4 L.Ed.2d 237) of the 3rd Circuit decision in United Gas Improvement Company v. F. P. C., 269 F.2d 865.

The issue is whether the Commission erred in granting a certificate of public necessity and convenience without condition to Sun Oil Company authorizing it to sell gas produced from the Belle Isle Field in Southern Louisiana at an initial base price of 21 %$ per Mcf, plus reimbursement of Louisiana severance and gathering tax of 2.3$ per Mcf, plus 75% of any new taxes thereafter imposed. The issue must be resolved by a determination whether the Commission observed the standards requiring the “most careful scrutiny and responsible reaction” which the Supreme Court said is required to be given by the Commission to “initial price proposals * * * under Section 7” of the Natural Gas Act, 15 U.S.C.A. § 717f. Atlantic Refining Co. v. Public Service Commission of New York, 360 U.S. 378, 391, 79 S.Ct. 1246, 1255, 3 L.Ed.2d 1312.

Not only the deference due the studied and careful conclusions of the two other Courts of Appeals, but on our own study of the Atlantic Refining Company case (now known throughout the industry as the CATCO case) compels us to conclude, as the other courts did, that the record before us does not support the determination that the certificate of public necessity and convenience should unconditionally issue in light of the strictures in the CATCO decision.

The essential facts developed in the record before us are: The Sun Oil Company filed an application on May 19,1958, under Section 7 of the Natural Gas Act, seeking a disclaimer of jurisdiction or in lieu thereof a certificate of public convenience and necessity authorizing the sale of natural gas to the United Gas Pipe Line Company (United) from Sun’s onshore production in the Belle Isle Field, St. Mary Parish, Louisiana. Sun is a New Jersey corporation. Its principal place of business is located at Philadelphia, Pennsylvania. Its application was numbered G-15122.

The United Gas Pipe Line Company also filed an application on May 19, 1958, under Section 7 of the Natural Gas Act, seeking a certificate of public convenience and necessity authorizing it to construct and operate certain facilities, estimated to cost $1,176,175.00, to connect with its presently existing natural gas transmission system, which would enable it to purchase, receive and transport in interstate commerce the natural gas produced by Sun in the Belle Isle Field in St. Mary Parish, Louisiana.

By an order issued on January 5,1959, the Commission permitted the interventions of United Gas Improvement Company and Public Service Commission of New York.

As provided in the Commission notice dated November 26, 1958, a hearing was convened on December 30, 1958, but, on account of the petition to intervene by U.G.I. and the notice of intervention by PSC-NY, was recessed to January 27, 1959, on which date a formal hearing was held and concluded.

The source of the natural gas to be produced by Sun and sold to United, if certificated herein, is from leases or other interests in minerals owned or controlled by Sun in the Belle Isle Field, St. Mary Parish, Louisiana. No gas is to be purchased by Sun from third parties to effectuate this proposed sale. The Belle Isle Field is not a new discovery. The discovery well was drilled in 1940. Since then Sun has drilled some sixty-five or more wells in this field; twenty-one were dry holes. The record shows that at the date of this hearing Sun had in this field eight producing gas wells, twenty-seven producing oil wells and ten temporarily abandoned wells that are to be re-completed as gas wells. There has been continuous exploration in the field since the discovery of the original gas well in 1940. The gas being produced in the Belle Isle Field is sweet, dehydrated gas, the major portion being gas well gas. Under the terms of the sales agreement Sun will dehydrate the gas being sold to United.

United submitted an offer to Sun for the Belle Isle Field gas early in February, 1958. After much negotiating and several bargaining sessions a sales agreement was executed in May, 1958. Each party to the sales agreement was willing and interested in concluding a contract but neither party was under any compulsion to do so. This record shows no affiliation between Sun or United and the two companies have no common officers or directors. United says it conducted its negotiations, which culminated in an agreement, with the objective of purchasing the Belle Isle gas from Sun on terms suitable to United and at the lowest possible price.

United shows it has need of, and a demand for, this Belle Isle gas to meet the present and future requirements of its customers. United now delivers more than one trillion cubic feet of natural gas per year to its customers and the demand on it for additional natural gas increases each year. United agrees to pay, and Sun agrees to sell, the Belle Isle Field natural gas for an initial price of 21.5 cents per Mcf at 15.025 psia plus state taxes, which are shown to be 2.3 cents per Mcf, thus producing a total cost price to United of 23.8 cents per Mcf. The sales agreement provides for 2 cents increase in price per Mcf each four-year period of the twenty-year agreement until a total price of 29.5 cents per Mcf, plus tax, is reached. United says that Belle Isle Field is exceptionally well located for them since it is approximately 12 miles from a United 26-inch and a 30-inch main pipeline. Because of the proximity of this gas to its system main line United was anxious to acquire the total field production feeling it to be in the best interests of its customers by adding this sizeable reserve.

The other sales agreements of United do not contain a “favored nation” clause, hence existing contracts will not be triggered into higher prices by this contract.

United contends, if they expected to purchase this gas, and they maintain they need it, that the demand upon them for additional gas supplies by their present customers requires them to purchase same for the public convenience and necessity, therefore in order to purchase this gas they would be required to offer Sun the current market price, or better, hence the 21.5 cents per Mcf offer.

United’s system-wide average cost of gas in 1957 was estimated to be 11.7 cents per Mcf — a United witness testified it had probably gone up a cent or a cent and a half per Mcf in 1958 — and this purchase of the Belle Isle Field gas would increase this average cost by less than one tenth of one cent per Mcf. The intervenors contend any certificate issued by the Commission should be conditioned to a maximum of 17 cents to 18 -cents per Mcf.

As we have previously stated in Bel Oil Corp. v. F. P. C., 5 Cir., 255 F. 2d 548, 553, a price paid for gas as the result of arm’s length bargaining with the producer is not, merely because bargained for in a highly competitive market, “just and reasonable” within the intendment of the Natural Gas Act, 15 U.S.C.A. § 717 et seq. See also New York Public Service Comm. v. F. P. C., D.C.Cir., 287 F.2d 143. This is so because the only justification for giving the Commission the duty to regulate prices was the determination by Congress that the producers have a supply that is so restricted in relation to demand that they have the economic power to bargain for prices that will be injurious to the public. “The purpose of the Natural Gas Act was to underwrite just and reasonable rates to the consumers of natural gas.” Atlantic Refining Co. v. P. S. C., 360 U.S. 378, 388.

We consider the foregoing comment appropriate at the outset of the discussion of this case, because we perceive that most of the Commission’s approach to the certification procedures, until stopped by the Supreme Court in CATCO, was subject to the same criticism which the Commission itself was successfully leveling at the producers in the Section 4 proceedings: that the Commission was permitting the initial filing prices to be fixed by the producers merely on a showing, so far as price justification was concerned, that they had been bargained for at arm’s length, or that they were not higher than a price someone else was then paying in the area.

Thus, at the very threshold of the regulating procedure newly contracting producers were being permitted to charge prices for their gas that were in some instances 30% to 50% higher than earlier prices that were at the very time being suspended by the Commission pending hearings under Section 4 procedures. This inconsistency that con-cededly arose largely because of the sheer magnitude of the problem of processing the certification proceedings on any other basis, is what the Supreme Court brought in question and corrected in the CATCO decision.

This record discloses that United, the purchaser in this contract from Sun, had been purchasing gas in 1954 at from 9 cents to 12 cents per Mcf in the South Louisiana territory. The testimony of C. C. Barnett, Vice President of United in charge of the gas supply department, as to the move upward from that figure is significant:

“Q. Well, it just seems to me that it can be simply stated that the new high prices do tend to establish new floors for prices. A. Well, I think that you are — you are probably correct in that. I won’t go all the way to it, but in about 1954 we were buying gas in South Louisiana at around nine to twelve cents, and Gulf Interstate was certificated and they were paying the enormous amount of 20 cents.

“Q. That is the Erath Field, is it not? A. In the Erath Field. And of course they bought one big package. There was a trillion foot field and they wanted it. So they paid 20 cents for it then.

“About six months or a year later, American Louisiana came in, and instead of paying 20 cents for a trillion foot field they paid 20 cents for smaller fields. And there can be no argument about it that that had brought the price up.”

This discussion by the responsible parties who fixed this initial price makes it perfectly plain that a substantial part of the increase from “nine to twelve cents” to 21% cents resulted from the tremendously increased demand as contrasted with the available supply. In stating that this is plain from the record before us, we, of course, do not say that a substantial part of the increase may not also be attributable to increased costs, nor do we decide that the nine to twelve cents price was a just and reasonable figure. We do know that virtually every increase resulting from escalator clauses or from the operation of “favored nations” provisions in existing contracts was being subjected, during this four year period, to Section 4 hearings for reasonableness.

Apart from any decision of the Supreme Court, it does not seem reasonable or consistent with any understandable policy of Congress that the Commission would, as an illustration, permit the filing of initial price of 20 or 20% cents, resulting in the collection of that rate until set aside by a Section 5 proceeding (found by the Supreme Court and conceded by all parties to be practically ineffectual because of the volume of business under Section 4) and, on the same day, suspend an automatic increase under an escalation clause from 9 to 15 cents.

In dealing with this problem, the Supreme Court said in Atlantic Refining Co. v. Public Service Commission, supra [360 U.S. 378, 79 S.Ct. 1254]:

“In view of this framework in which the Commission is authorized and directed to act, the initial certificating of a proposal under § 7(e) of the Act as being required by the public convenience and necessity becomes crucial. This is true because the delay incident to determination in § 5 proceedings through which initial certificated rates are reviewable appears nigh interminable. Although Phillips Petroleum Co. v. State of Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035, was decided in 1954, cases instituted under § 5 are still in the investigative stage. This long delay, without the protection of refund, as is possible in a § 4 proceeding, would provide a windfall for the natural gas company with a consequent squall for the consumers. This the Congress did not intend. Moreover, the fact that the Commission was not given the power to suspend initial rates under § 7 makes it the more important, as the Commission itself says, that ‘this crucial sale should not be permanently certificated unless the rate level has been shown to be in the public interest,’ 17 F.P.C. 563, 575. ******

“It is true that the 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. Nor do we hold that a ‘just and reasonable’ rate hearing is a prerequisite to the issuance of producer certificates. What we do say is that the inordinate delay presently existing in the processing of § 5 proceedings requires a most careful scrutiny and responsible reaction to initial price proposals of producers under § 7. Their proposals must be supported by evidence showing their necessity to ‘the present or future public convenience and necessity’ before permanent certificates are issued. This is not to say that rates are the only factor bearing on the public convenience and necessity, for § 7(e) requires the Commission to evaluate all factors bearing on the public interest. The fact that prices have leaped from one plateau to the higher levels of another, as is indicated here, does make price a consideration of prime importance. This is the more important during this formative period when the ground rules of producer regulation are being evolved. Where the application on its face or on presentation of evidence signals the existence of a situation that probably would not be in the public interest, a permanent certificate should not be issued.

“There is, of course, available in> such a situation, a method by which the applicant and the Commission can arrive at a rate that is in keeping with the public convenience and necessity. The Congress, in § 7(e), has authorized the Commission to condition certificates in such manner as the public convenience and necessity may require. Where the proposed price is not in keeping with the public interest because it is out of line or because its approval might result in a triggering of general price rises or an increase in the applicant’s existing rates by reason of ‘favored nation’ clauses or otherwise, the Commission in the exercise of its-discretion might attach such conditions as it believes necessary.”

The parties here belabor the question: whát is the “line” as envisaged by the Court in the language quoted above, “out of line” and “hold the line”? The principal question here is whether the line is established by proof of what others are paying under certificates that were either uncontested or were being appealed and are thus “suspect,” or what others are paying based on such “suspect” rates, or what even unregulated intrastate purchasers are paying. We agree with much that is said in the Ninth Circuit opinion, supra, which is in turn adopted by the Court of Appeals for the District of Columbia [283 F.2d 824]:

“When an order certificating an initial rate is under court or Commission review, it is possible that the certificate may be eventually denied or price conditions may be attached. In our opinion an existing rate subject to such a hazard does not provide a reasonably reliable basis upon which to predicate a price line. In the event the existing rate is later modified or conditioned as a result of the pending proceedings the foundation of the line derived; therefrom would be undermined. Moreover, the acceptance of aues-tioned existing prices as a guide in setting the line might itself have the anomalous effect of creating a standard by which the questioned rates would then be judged.

“For the reasons indicated we are of the opinion that it would be an abuse of discretion for the Commission in establishing a price line to rely upon producer prices which are under such a cloud.

“We go further and express' the view that where a substantial number of certificated prices are thus under court or Commission review, like prices in the same area though not currently under review ought to be regarded as suspect. In such circumstances it would seem that such similar prices ought not to be relied upon in fixing a line except upon evidence and findings to the effect that they are not subject to the same infirmities which are under test in the pending proceedings.”

We think it too plain for argument that the first court tested and court approved certificated sale at a price much higher than any theretofore certificated according to the standards found by the reviewing court to be consonant with CATCO will unquestionably breach “the line.” Such, we think, would be the effect of our approval of the certificated price in this case.

We do not attempt to determine what the “line” is on this record. We have no doubt that in this case the price of 23.8 cents per Mcf, including the tax reimbursement,¹ was out of line as the term was used by the Supreme Court. The only evidence on this record that supports such “out of line” price is the fact that it was negotiated at arm’s length and was required by the intense competition. This, as we have said, is not enough. It was clearly incumbent on the proponent of such a rate to make some showing of the “reason why” (as it was expressed in the CATCO opinion) 21 Yz cents, excluding tax, is a proper initial rate in 1958 when the parties were freely contracting in 1954 at half that figure.

We are fully aware of the criticism that has been leveled at any regulatory scheme that keeps sums now approaching three quarters of a billion dollars subject to refund pending final determination of just and reasonable rates. However, we take notice of the fact that the log jam is now breaking, as witness the decision in the Phillips Petroleum Company case, F.P.C. Op. No. 338, and it may be hoped that appropriate formulas for resolving the other section 4 eases may soon be forthcoming. The Commission is at least making a strong bid to that end by the publication of its Area Price Level schedules. See Statement of General Policy No. 61-1, issued September 28, 1960.

We conclude that the order here under attack must be set aside and the proceedings remanded for further appropriate action by the Commission.

It is so ordered.

JOHN R. BROWN, Circuit Judge.

I dissent.

1 . It was testified and the Commission found that the 2.3 cents tax reimbursement was an element of bargaining. Thus, while it may represent actual reimbursement for taxes paid, it is an element of cost to the purchaser, and in negotiating contracts purchasers do not always agree to reimburse the entire tax burden. The agreement here to pay 21% cents plus full reimbursement for currently collected taxes, was found by the Commission to be a new high rate for United and for the area.