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01/09/79 Blanco Oil Company, v. Federal Energy Regulatory

January 9, 1979

BLANCO OIL COMPANY, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; GULF OIL CORPORATION; ESTATE OF H. L. HUNT, ET AL.; ESTATE OF MRS.

JAMES R. DOUGHERTY, ET AL., INTERVENORS; CHEVRON U.S.A. INC., PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; GULF OIL CORPORATION; MOKEEN OIL COMPANY, ET AL.; ESTATE OF MRS. JAMES R. DOUGHERTY, ET AL., INTERVENOR

; ESTATE OF GEORGE H. COATES, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; ESTATE OF MRS. JAMES R.

DOUGHERTY, ET AL., INTERVENOR; EXXON CORPORATION, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT; GULF OIL CORPORATION; ESTATE OF MRS. JAMES R. DOUGHERTY, ET AL., INTERVENOR; ESTATE OF GEORGE H. COATES, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT



Before LEVENTHAL, ROBINSON and WILKEY, Circuit Judges.

UNITED STATES COURT OF APPEALS, DISTRICT OF COLUMBIA CIRCUIT

Nos. 77-1458, 77-1460, 77-1463, 77-1471, 77-1730 1979.CDC.2

Petitions for Review of Orders of the Federal Energy Regulatory commission.

APPELLATE PANEL:

Opinion for the Court filed by WILKEY, Circuit Judge.

Dissenting Opinion filed by LEVENTHAL, Circuit Judge.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WILKEY

The controversy in these cases arises out of the issuance by the Federal Power Commission (Commission),1 pursuant to § 7 of the Natural Gas Act,2 of "permanent" certificates authorizing independent producers of natural gas to sell gas to pipelines for resale in interstate commerce. Petitioners,3 who are independent producers, seek review of orders4 of the Commission requiring them to refund payments received for sales covered by "temporary" certificates which were in excess of the so-called "in-line" prices upon which their later "permanent" certificates were conditioned. Petitioners claim that their refund obligations should be limited rather to amounts in excess of the somewhat higher "just and reasonable" prices which had been determined by the Commission prior to its ordering disbursement of the refunds. Because we believe that the Commission's departure from the statutory norm of "just and reasonable" prices was without justification, we vacate the orders in question and remand for proceedings consistent with this opinion. I. BACKGROUND

A. History and Statutory Structure

An understanding of the controversy in these cases requires some background. The Commission's authority to regulate sales of natural gas derives entirely from the Natural Gas Act of 1938.5 Although the provisions of the Act do not expressly extend to independent producers or to well-head sales of gas, the Supreme Court held in 19546 that independent producers are "natural gas companies" within the meaning of § 2(6)7 of the Act. Since that time the Commission has tried with some difficulty to find an appropriate way of regulating producer sales. Initially, it sought to determine the "just and reasonable" rate at which § 48 of the Act requires that natural gas be sold by examination of each producer's cost of service.9 This approach, although suitable to other rate-making situations,10 proved inappropriate to the regulation of producer gas sales for a number of reasons.11 Eventually, the Commission decided to rely instead on a number of area rate proceedings through which maximum rates would be set for each production area. The Supreme Court approved this method of regulation in the Permian Basin Area Rate Cases.12

The determination of "just and reasonable" rates within the area rate proceedings still entailed protracted inquiry which invariably consumed years. Consequently the Commission was obliged to rest interim regulation of producer sales on § 7. Section 7(c)13 of the Act provides that a natural gas company may engage in a sale of natural gas subject to the Commission's jurisdiction only if it has obtained from the Commission a certificate of public convenience and necessity. "Permanent" certificates are issued only after hearing with notice to interested parties, although the Commission is authorized in cases of emergency to issue temporary certificates without notice or hearing. Section 7(e)14 provides that permanent certificates shall be granted if, and only if, the Commission finds that the proposed sale "is or will be required by the present or future public convenience and necessity." That section further provides that the Commission may attach to permanent certificates "such reasonable terms and conditions as the public convenience and necessity may require."

In the early years of regulating producer sales, the Commission construed its authority under § 7 quite narrowly and the field price of natural gas rose rapidly. The Supreme Court determined, however, in Atlantic Refining Co. v. Public Service Commission ,15 that the Commission's loose practice under § 7 afforded too little substantive review of initial prices. In light of the fact that the just and reasonable rates determined under § 516 became effective only prospectively, consumers were left unprotected from excessive charges pending completion of the area rate proceedings. The Court said:

"he 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. . . . The fact that prices have leaped from one plateau to the higher levels of another . . . (makes) price a consideration of prime importance. . . . 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."17

Following the CATCO decision, the Commission devised a system whereby it would set maximum initial rates at which gas could be sold, pending the determination of just and reasonable rates. These initial prices were intended to be "in line" with current prices for gas in the area of the proposed sale, thus affording a rule of thumb likely to prevent exceptional rises in price.18 Where an in-line price existed, permanent certificates were conditioned pursuant to § 7(e) to provide that the producer could not initially sell gas at a higher price. Some certificates were conditioned further to limit the rate increases which a producer might otherwise file under § 4.19 The Supreme Court generally approved the method of in-line pricing in United Gas Improvement Co. v. Callery Properties, Inc.20

There is a further variation of the ratemaking process, material here, occasioned by the delay attending the determination of the in-line prices themselves. In order to permit delivery of gas preceding the determination of in-line prices, the Commission issued temporary certificates pursuant to § 7(c) of the Act. These certificates, like the permanent certificates, provided that gas not be sold at prices above certain prescribed levels. The initial rates contained in temporary certificates were governed by the Commission's 1960 guidelines21 and were ordinarily somewhat higher than the in-line rates subsequently established. Once the in-line prices were set, the temporary certificates were replaced with permanent certificates conditioned upon the in-line rates.22

By their nature, neither the temporarily certificated prices nor the in-line prices contained in permanent certificates were likely to closely approximate the just and reasonable prices mandated by §§ 4 and 5.23 Consequently, to the extent that delay in setting the just and reasonable price was unavoidable, it became important whether producers might be required to refund payments subsequently found to have been excessive. The Commission's authority in this regard is largely constrained by the settled principle that the Commission has no reparations power. Although § 4(e)24 of the Act does permit the Commission to require refund of such portions of Rate increases which it determines after hearing to have been unjust, the Supreme Court held in FPC v. Sunray DX Oil Co., "that an initial price which is authorized in a final, unconditioned permanent certificate is a lower limit below which a refund cannot be ordered under § 4(e)."25 Thus an in-line price contained in such a permanent certificate constitutes a refund floor for sales covered by the certificate.26

The same is not true, however, of an initial price contained in a temporary certificate, which is issued on the producer's own representations. In Sunray DX, the Court held that it was a permissible exercise of the Commission's power to condition permanent certificates under § 7(e) for it to require producers to refund amounts collected under temporary certificates in excess of the finally determined in-line prices.27 It is precisely this condition on petitioners' certificates whose continued relevance is here attacked.

B. The Origin and Course of the Litigation

Petitioners each were issued at times between 1960 and 1962 "unconditioned" temporary certificates authorizing sales of natural gas within Texas Railroad District Nos. 2, 3 or 4.28 The temporary certificates prescribed initial rates which were governed by the Commission's 1960 guidelines. Thereafter, in a series of decisions in 1964 and 1965 the Commission determined the in-line rate for each of the sales in question and issued permanent certificates at those rates.29 In its opinions setting in-line prices the Commission deferred the question whether refunds should be ordered as a condition of the permanent certificates.30 In opinions in 1966 and 1968, the Commission decided that refunds would in fact be ordered of all amounts collected under temporary certificates in excess of the in-line price,31 although it declined at that time to order disbursement of the refunds.

Later in 1968 the Supreme Court in Sunray DX approved the in-line rates applicable to several of the producers who are parties to this controversy and sustained the one order before it requiring producers to measure refunds on temporarily-certificated sales by the in-line price.32 Following the decision in Sunray DX, the Commission extended its order to retain refundable payments to all producers having refund obligations arising from the in-line pricing orders, still declining to order disbursement.33 Then, by orders of 28 November 1968,34 the Commission directed implementation of the in-line pricing orders and refund orders, but continued its order that refundable monies be retained.

Nearly three years later, on 6 May 1971, the Commission issued Opinion No. 595,35 establishing just and reasonable ceiling prices for the Texas Gulf Coast Area. The opinion provided, Inter alia, that the just and reasonable rates would be applied retroactively to calculate refund liabilities for producers holding permanent certificates subject to 4(e) refund proceedings and producers who had operated Throughout with temporary certificates (for whom no in-line prices ever were fixed).36 Upon rehearing of Opinion No. 595,37 petitioners (holders first of temporary, then permanent certificates) requested that their refund liabilities as well be determined by reference to the just and reasonable price. The Commission rejected petitioners' argument that it was inequitable to require refunds down to the lower, in-line price, believing that that argument would require it in every case to postpone refunds until the just and reasonable prices were fixed. The Commission stated that its previous orders had finally determined petitioners' substantive refund liability, "reserving only the administrative determination as to distribution" of the refundable amounts. It would not, therefore, alter a final determination of liability on the basis of its subsequent order.

This court reviewed the Commission's decision in Opinion No. 595 and on rehearing in No. 595-A. We separated for review and disapproved the Commission's refusal to consider petitioners' contention that their refund liability ought to be measured by the just and reasonable price.38 We held that petitioners were entitled to have the merits of their argument considered, the Commission apparently having believed incorrectly that it was without jurisdiction to do so. We observed that although the principle of finality in administrative law is important, it was enough uncertain whether the controversy previously had been suitable for judicial review the principal indicium of finality for us to conclude that the matter was still reviewable. We remanded in order that the Commission would ...


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