Continental Oil Co. v. Federal Power Commission (378 F.2d 510, 1967)

DYER, Circuit Judge:

Three groups of cases raise in a variety of ways the validity of the Federal Power Commission’s “in-line” price pronouncement, its statement of general policy, moratorium ceilings, and refund requirements.

In the first group the producer petitioners pursuant to § 19(b) of the Natural Gas Act, challenge an order of the FPC of September 30, 1965, in a consolidated proceeding entitled Turnbull & Zock Drilling Co. (operator) et al., Opinion No. 478, granting permanent certificates of public convenience and necessity under § 7(c) and (e) of the Act to sixty seven producers to undertake new sales of natural gas from Texas Railroad Commission District No.4 to interstate pipelines contracted between 1956 and 1964.

The producers had proposed initial prices for their sales ranging from 14.5$ to 20.045$ per Mcf. The FPC applying its previously announced in-line price schedule issued its permanent certificates conditioning them so that the initial price for the sales contracted prior to September 28, 1960, should not exceed 15$, and for those after that date 16$. A temporary restriction (moratorium) was placed on the filing of increased rates above 18$ until the issuance of a decision in the Area Rate Proceeding, covering District 4, or January 1, 1968, whichever is earlier.

The producer-petitioners variously object that the initial prices are too low, that exceptions from generally prescribed in-line initial price should have been allowed for some sales, and that the moratorium on increases over 18$ was erroneously imposed. The second group, eastern seaboard distributor-petitioners object principally that the 16$ initial', price for contracts executed after September 28, 1960, was too high. They,, as well as some of the producer-petitioners also object to the action of the-Commission in deferring the question of whether or not refunds of amounts collected by the producer-petitioners in excess of the in-line prices should be required.

The Distributors intervened in partial support of the Commission’s order in some of the Producers’ cases. Producer-petitioner Austral Oil Co., Inc. intervened in partial support of the Commission’s order in the Distributor cases.

The third group comprises the three Hunt petitioners.

In 21286 petitioner had negotiated gas purchase contracts in 1959 with interstate pipeline companies for sales for a twenty year period from reserves in Texas Railroad Commission Districts 2, 3 and 4 at an initial contract price of 20$ per Mcf. By order of December 9, 1963, Opinion 412, the FPC issued permanent certificates conditioned so that the initial price should not exceed 15$ for sales in Districts 2 and 4 and 16$ in District 3; and that petitioners refund with 7% interest the difference between the contract rates and the initial prices determined by the Commission paid by the pipeline purchaser subsequent to November 2, 1961.

In No. 21575 'by order of February 24, 1964, opinion 412A granting permanent certificates, the FPC proscribed the filing of any price increase in excess of 19$ in District 3 and in excess of 18$ in Districts 2 and 4 until a final decision was issued by the Commission in the Area Rate Proceeding covering these districts, or until January 1, 1968, whichever is earlier.

In 21856 the producer-petitioners whose sales were in Districts 2 and 4 filed notices of change, reducing the price from 18$ (which they were collecting under the temporary certificates) to 15$ (the reduced price under Opinion 412) with an immediate increase to 18$ (the moratorium level established in Opinion 412A). Similar action was taken as to sales in District 3. The 20$ contract price was reduced to 16$, the “in-line” price, and immediately increased to 19$, the price moratorium level.

The FPC rejected the attempted change for Districts 2 and 4 and accepted for filing the change for District 3, then suspended it. The latter change ultimately was permitted to go into effect subject to refund.

The Hunt petitioners assert that the in-line prices are too low, that they were denied administrative due process, that 7 % interest ordered to be paid on refunds is exorbitant, that the price moratorium was unreasonable, and that the price increase was improperly rejected.

All of the causes were set for oral argument at the same time because, although there are several peripheral questions involved, there is an identity of principal issues. The causes are likewise treated here.

“In-Line” in § 7 Applications

The nature and scope of the FPC’s duty to review producer price proposals before permitting natural gas to enter the interstate market has been so-thoroughly litigated in the past few years that it might be thought that the picture to be drawn from the decided cases could be painted with a light brush. Unfortunately this is not so. Not the least of the problems being the continuous flow of new opinions from our sister courts, five of which have come out since submission of this case, and requiring a choice among several conflicting holdings.

When in 1954 it was held in Phillips 7 that the FPC had the statutory responsibility for regulating interstate sales by natural gas producers, the FPC was faced with two major problems. The first was to determine the just and reasonable rates under Sections 4 and 5 of the Natural Gas Act for producer sales in interstate commerce. The second was to develop a standard which would permit new sales to be made under pricing arrangements that would protect all interests pending determination of just and reasonable rates.

The Supreme Court made clear in Cateo that in cases under § 7 of the Act, it is the responsibility of the FPC to make certain that the consumer is protected against excess charges between the time the gas first enters the interstate market and the time — many years later —that a rate investigation is concluded and a just and reasonable rate is fixed by final order. This is accomplished by the imposition of a rate condition in the grant of an initial certificate, either temporary or permanent, whenever an initial price is not in keeping with the public interest because it is “out of line”.

Following Cateo and the Third Circuit’s Transco-Seaboard decision a number of circuits wrote on the in-line price concept.

After some of the petitions for review were filed in these cases the Supreme Court decided Callery reversing the decision of this Court and holding that (a) in a § 7 certificate proceeding the FPC is not required to consider cost, economic and related evidence; (b) it has the power to condition permanent certificates to forbid the filing of rate increases above a specified level for a limited period of time, and (c) it has the statutory authority to order refunds of amounts collected pursuant to permanent certificates which were subsequently judicially reversed. The Court approved FPC orders which conditioned permanent certificates at a price in line with the price level at which substantial amounts of gas had been certificated to enter the interstate market under contemporaneous certificates.

The “In-Line” Conclusions Reached

The FPC having been vindicated in the use of an in-line price method, there remains the question of whether the Commission’s determinations of in-line price levels in these cases are supported by the evidence and are well founded in law.

Of the sales for which permanent certificates were issued by the order in Turnbull and Zock, some were contracted before September 28, 1960, some between that date and August 31, 1962, and some thereafter. There is significance in these dates because of the effect of the Statement of General Policy No. 61-1, issued on September. 28, 1960, and the Fifth Amendment thereto issued on August 30,1962. Among other things this policy statement established guide line prices for each marketing area, below which the FPC would exercise its rate and certificate powers without full investigation and hearing, unless there were objections. New sales that were contracted for prices above the guide line would not be allowed to start above that level. Thus, by observing the guidelines Producers could generally avoid involvement in the investigation, hearing and regulatory procedures they would otherwise have to go through.

As before noted, we are here concerned with both pre-Policy and post-Policy sales contracts, which were ultimately authorized by permanent certificates conditioned so that the initial price for sales contracted prior to September 28, 1960, should not exceed 15^ per Mcf and those thereafter 16 0 per Mcf.

These in-line certificate prices for District 4 have been considered and upheld by the Court of Appeals for the District of Columbia and the Tenth Circuit. In Shelly the District of Columbia Circuit concluded that, in the period prior to September 28, 1960 (the Statement of General Policy date) the FPC could declare an in-line price of 15^ per Mcf for District 4.

In Sunray DX the Tenth Circuit considered contracts dated between September 28, I960, the date of the issuance of the initial Statement of General Policy and August 30, 1962, and concluded that the FPC could declare an in-line price of 160 per Mcf for District 4.

Like their Shelly and Sunray DX counterparts the Turnbull and Zock applications, here under consideration, involved sales in the same producing area, both before and after September 28,1960, some by the same producers. We are in agreement with Shelly and Sunray DX, upholding the in-line price determination of the FPC and conclude that in these cases its action on that issue should be affirmed.

The Pre-Policy Statement 150 Level Without belaboring the analysis of prices in District 4 made by the Examiner and approved by the FPC, a recapitulation for the period January 1, 1958, through September 27, 1960, shows this. The average of all the permanently certificated sales weighted by volume is 14.200 per Mcf. Out of 39 temporary certificates 38 were issued at prices between 16.00 and 18.00 per Mcf. The largest number of contracts and the largest volumes were at 15.00-per Mcf. And the average between the median price and the highest group of prices is 15.140 per Mcf.

The FPC’s finding of an inline price of 150 is based upon the principle that the price line is not established by the highest price or prices permanently authorized, but falls between the highest group of prices and the median price. We think this is a permissible criteria to apply. The Producers emphasize heavily the statement in Cattery that: “We believe the Commission can properly conclude under § 7 that adequate protection to the public interest requires as an interim measure that gas not enter the market at prices higher than existing levels.” But, as the Tenth Circuit observed in Sunray DX, “This language does not mean that the public interest is not protected if the sales are approved at less than existing levels.” This conclusion is consonant with Catco’s admonition to halt the escalation of prices that had been and were taking place.

Distinctive Objections

Various Producer-petitioners assert special contentions not joined in by all, thus Continental urges that the exclusion of intrastate data from the price line determination was arbitrary and capricious. Except for the testimony of one witness concerning nine sales, four of which are jurisdictional and five of which are non-jurisdictional, there was no comparison of intrastate prices with interstate prices because the former were unavailable. We agree with the FPC that this evidence was too fragmentary to support an inference that intrastate prices make it advantageous for sellers to market their supplies under non-jurisdictional contracts.

Continental also contends that in four separate § 7 proceedings since 1962, involving the same area, the FPC has not found it necessary to use prices below 140 in finding this to be the price-line, but here it could not use the same type data and get the answer it wanted, so it used data for sales below 140. Except when such sales are not generally comparable to Producer sales, we see no reason why they should not be considered in order that the in-line price determination might be based on a complete range of relevant price data. In any event, we are not impressed with Continental’s attack on the non-exclusion of below 140 sales here for, whatever weight the FPC gave such sales, it was not enough to change its in-line determination from the 150 it found in Shelly which the District of Columbia Circuit approved.

Continental, joined by Hunt, complain that the FPC did not give them notice of the FPC’s standards and adequate opportunity to meet the standards. We have already discussed some of the Producer’s objections advanced to support this charge. We note that the Hunt hearing, after court remand, began on March 28, 1962, and that the Turnbull and Zock proceeding was not initiated until May 28, 1964. In 1959 Cateo decided that the FPC is not obligated in § 7 proceedings to determine the just and reasonable price for the gas sold, it being sufficient to determine the in-line price. In applying this concept many decisions thereafter dealt with the interpretation of the in-line standard, and the weight to be accorded various kinds of evidence in applying that standard. Furthermore, the FPC by its decision in Continental Oil Co., 27 F.P.C. 96, July 22, 1962, made clear that contemporaneous sales price data were of major importance. Again, on March 21, 1962, in Ohio Oil Co. et al., 27 F.P.C. 551, the determining factor was said to be contemporaneous sale price data. By May 28, 1964, (when the Continental proceeding was initiated) Shelly had been affirmed by the District of Columbia Circuit and the FPC had fixed the initial prices in its Amerada case. Thus all parties were on notice of the standards to be applied and given an adequate opportunity to present relevant evidence. The situation therefore in no way resembles that in Hill, Trustee v. F. P. C., 5 Cir., 1964, 335 F.2d 355.

Austral contends that it was discriminatory for the FPC to make applicable to it the in-line price of 150 based upon permanently certificated sales under contracts dated between January 1,1958, and September 28, 1960, even though Austral’s sale was made pursuant to a contract with Natural Gas Pipeline Company dated September 1, 1960. Austral argues that the cut-off date of September 28, 1960, is arbitrary and that sales made under contracts thereafter should be considered.

The Commission used September 28,1960, as a cut-off because on that date it issued Statement of General Policy No. 61-1 and thereby established guideline prices. The evidence shows that as a result of this regulatory action there was a change in the level of contract prices. We agree with the Examiner that “A comparison of prices both before and after September 28, 1960, would therefore be a comparison of prices based upon dissimilar circumstances and would not reflect the current conditions in the industry.” Both Shelly and Sunray DX have accepted the separate time periods as appropriate, and we think this is in keeping with the public convenience and necessity.

Hunt Petitions

Proceedings in these cases (see notes 12, 13 and 15) were stayed by the court pending the outcome of Cattery. That decision settled the contentions of the Producers that the FPC lacked the power to exclude cost evidence in a § 7 proceeding, to order refunds of rates collected during temporary authorization, and to impose a moratorium on the filing of price increases as a condition to the issuance of permanent certificates. Petitioners now contend that the FPC improperly exercised the power it was found to have.

Hunt’s Procedural Complaints

We have above discussed and rejected these petitioners’ argument that they were denied administrative due process because they did not receive notice that the only evidence that would be considered would be that relating to the in-line price. To this we would only add here that these petitioners elected to disregard the burden cast upon them to sustain the in-lineness of their rates. Rather they simply took and stood upon the position of respondents, who have no burden of proof.

These petitioners also argue that they were denied the opportunity to submit rebuttal evidence concerning Staff Exhibit No. 236, which was intended to update Staff Exhibit No. 60 previously used in the original proceeding which had culminated in the granting to petitioners of permanent certificates that were subsequently set aside and replaced with temporary certificates. Petitioners were granted a three weeks’ recess in which to prepare for cross-examination, and when the hearings resumed they asked for a further adjournment of some two weeks to prepare rebuttal evidence. The Examiner refused to grant a further continuance. Under the circumstances we find no abuse of discretion.

In-Line Determinations

Petitioners’ contracts for the sale of gas here on review were dated May 15, 1959. Petitioners attack the FPC’s determination of the in-line price to be 150 for Texas Railroad Commission Districts Nos. 2 and 4 and 160 for Texas Railroad Commission District No. 3. They particularly object to the exclusion of permanently certificated sales to Coastal Transmission Company and Truckline Gas Company as being “suspect”, the period of time utilized for comparability, and the ■ use of estimated rather than actual volumes.

As the petitioners adduced no evidence, the in-line prices were determined by considering the various sales permanently certificated for the calendar years 1958 to September 28, 1960, as shown on Staff Exhibit No. 236, eliminating from consideration all sales at prices below 140 (about which petitioners do not complain). Sales only temporarily authorized were substantially eliminated. Sales that were suspect were not used.

In District No. 2 there were 29 sales at or below 150 per Mcf, having an estimated first month volume of 2,347,765 Mcf. There were six contracts having an estimated first month volume of 635,000 Mcf above 150 per Mcf. This we find was a sound basis for the FPC’s finding of an in-line price of 150 for District No. 2.

In District No. 3 there were twenty-four permanently certificated sales having an estimated monthly volume of 886,-995 Mcf at prices between 140 and 160 per Mcf. There were three at 16.14967 per Mcf with initial monthly volumes of 467,500 Mcf. The other prices were not considered, because they were either in litigation, under review or “suspect”.

In District No. 4 with one exception that is insubstantial, there were no contracts permanently certificated at prices, above 150 per Mcf, except those excluded in the same categories as in District No. 3.

Staff Exhibit 23 also included the sales relied upon by the FPC in Skelly Oil and Texaco-Seaboard, Inc In these cases the FPC had found that the in-line price for District No. 3 was 160 and for District No. 4 was 150., We think that the FPC acted properly in comparing the evidence in its Staff Exhibit here with the evidence in those cases and certainly had ample basis for concluding that there were no substantial dissimilarities sufficient to warrant a higher in-line price.

We are not impressed with the contentions of petitioners that actual instead of estimated volumes should have been used in the staff compilations. This, was usual FPC procedure and is predicated upon the fact that the buyer and seller in determining price do not await deliveries but make estimates of reserves that are stated in their contracts. These estimates are one of the underlying elements in determining the consideration for the contracts and are probably a better criteria of existing market prices than are later variations from those estimates. Shelly, supra.

What we have heretofore said makes it unnecessary to extend this opinion further concerning petitioner’s complaint that there is no comparability of contracts in point of time.

Finally, the petitioners challenge the in-line price of 160 in District No. 3, because the FPC disregarded as “suspect” the so-called Coastal and Trunkline sales. The petitioners urge that these sales are permanently certificated and not subject to any further FPC or court review, modification or infirmity. But we cannot say that the FPC acted arbitrarily and capriciously in excluding these sales, for the certificates surely would have been set aside had it not been for a procedural defect (an untimely petition for review filed by Public Service Commission of New York from the FPC’s denial of intervention. Thus, while review may be said to have been unsuccessful, we agree that there was an apparent infirmity and the FPC acted with a discretion that we refuse to overturn.

7% Interest in Refunds

Petitioners, while conceding that the Supreme Court in Cattery upheld the imposition of interest on refunds as a means to prevent unjust enrichment, complain that 7% imposed in these proceedings cannot be considered equitable, because the parties acted in good faith, and the rate of interest should be in line with the then currently effective present commercial practices, i. e., 4.5% (prime rate) fixed by the Federal Reserve Board and applied in various decisions by the FPC.

In Cattery the interest assessed was 6% from the time that the gas first was certificated and at the rate of 7% from the time that the initial certificates were set aside and temporaries were issued in place thereof. The Supreme Court affirmed the assessment of interest, Callery, 382 U.S. at 230, 86 S.Ct. 360. Here the FPC, unlike Cattery, did not require petitioners to refund the difference between the price collected under the original certificates while they' were in effect and the ultimately certificated in-line price but imposed a refund obligation only from the time the temporaries were issued and ordered interest only from that date. This was far more favorable to the petitioners than was the procedure in Cattery.

On remand of Cattery, this Court by its order of March 29, 1966, summarily denied the petitioner’s contention similarly here made that the FPC’s orders should be modified to reduce the interest rate to 4% percent, instead of that of 6 and 7 percent as prescribed.

The 4.5% rate applied by the FPC in other refund cases is not comparable, because the FPC applies this rate only when the company is directed to retain the refundable amount pending a determination of the proper distribution.

We conclude that the 7 percent interest imposed by the FPC was permissible. Mississippi River Fuel Corp. v. F. P. C., 1960, 108 U.S.App.D.C. 284, 281 F.2d 919, cert. den. 365 U.S. 827, 81 S.Ct. 712, 5 L.Ed.2d 705; Texaco, Inc. v. F. P. C., 5 Cir., 1961, 290 F.2d 149.

Change in Rates to Avoid In-Line Limitations

Upon the promulgation of Opinions 412 and 412A setting an in-line price of 150 for Districts 2 and 4, and the orders of February 24 and March 20, 1964, establishing a moratorium of 180 petitioners in No. 21856 while collecting 180 filed a notice of change under § 4 (e) from the price ultimately approved in these proceedings (150 per Mcf if the opinions 412 and 412A are upheld) to the 180 moratorium ceiling. Their second rate filing was rejected on the ground that the petitioners were already collecting 180 and the FPC’s order directing them to reduce the price to 150 was stayed during this appeal.

In District 3 the petitioners who were collecting 200 per Mcf filed a notice of rate change that fixed the price at 190, which was accepted by the FPC, suspended for five months and made subject to a § 4(e) rate proceeding.

Petitioners contend that the rejection of the rate change in Districts 2 and 4 was erroneous and discriminatory.

We think that the FPC’s interpretation of the Act was correct. Since the attempted filing price and the one the petitioners were collecting was identical, there was no change, and we conclude that only filings that do change the sales price are authorized by the Act. Cf. Amerada Petroleum Corp. v. F. P. C., 10 Cir., 1961, 293 F.2d 572. There was no discrimination in accepting the filings in District 3 because there was a change — a reduction in the cost of gas to the purchaser.

The remaining error relied upon by these petitioners, asserting that the imposition of a price moratorium on the filing of increases above 180 and 190 until January 1, 1968, was unlawful is deferred to our discussion of a similar point raised by the other petitioners. In all other respects we conclude that the points the Hunt petitioners raise are without merit.

The Post-Policy Statement 16