# Federal Power Commission v. Sunray Dx Oil Company

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United States Supreme Court
391 U.S. 9
Federal Power Commission v. Sunray Dx Oil Co. et al.
Certiorari to the United States Court of Appeals for the Tenth Circuit
No. 60. Argued: January 22-23, 1968 --- Decided: May 6, 1968
The Federal Power Commission (FPC) has decided to rely on area rate proceedings to establish just and reasonable rates for producer sales under §§ 4 and 5 of the Natural Gas Act. Pending completion of those proceedings the FPC has rested interim producer regulation on § 7. Under that section, natural gas may be sold only pursuant to an FPC certificate of public convenience and necessity, which under § 7 (e) may be conditioned "in such manner as the public convenience and necessity may require." In Atlantic Rfg. Co. v. Public Serv. Comm'n (CATCO), 360 U.S. 378, this Court held that the FPC should use its § 7 conditioning power to prevent large initial price advances, pending the determination under §§ 4 and 5 of just and reasonable rates, which would become effective only prospectively. The FPC thereafter began to use its conditioning power to determine maximum initial prices at which sales could occur, basing these "in-line" prices upon current prices in the area of the proposed sale but excluding current prices which for various reasons were "suspect". In United Gas Improvement Co. v. Callery Properties, Inc., 382 U.S. 223, this Court generally approved this regulatory approach, holding that the FPC might properly refuse to hear cost evidence in such "in-line" price proceedings, and that when issuance of permanent certificates was held erroneous on judicial review, the FPC might on remand impose new certificate conditions for refunds of amounts previously collected above the subsequently determined in-line price. On September 28, 1960, the FPC began its post-CATCO regulation of sales in Texas Railroad Commission Districts 2, 3, and 4, the three Texas Gulf Coast districts which are involved in these proceedings, by issuing its General Policy Statement, announcing a guideline ceiling price for new sales in each district of 18¢ per Mcf. On March 23, 1964, at the conclusion of the District 4 (Amerada) proceeding, the FPC determined an in-line price of 16¢ per Mcf for sales contracted after the issuance of the Policy Statement. The FPC relied primarily on a comparison of prices in contracts entered into since the Policy Statement and during the preceding two years. The FPC noted that 82% of post-Policy Statement sales were at 16¢ or more per Mcf. It gave "some measure of weight" to its 18¢ Policy Statement guideline price. Some weight was also accorded to prices under temporary certificates because only 1.4% of the gas in the area was moving under permanent certificates, though the FPC was mindful that the temporary prices were "suspect" and took their unreliability into account when it rejected the 17.2¢ average contract price. The FPC's conditional certification of proposed sales in District 4 was appealed to the Court of Appeals for the Tenth Circuit. That court upheld the FPC's price line against contentions by certain consumers and distributors (the "seaboard interests") that the 16¢ price was too high and that in fixing that price the FPC erred in taking account of prices at which gas had been sold under temporary certificates. On September 22, 1965, the FPC issued its in-line price orders in the District 2 (Sinclair) and District 3 (Hawkins) proceedings reaffirming an earlier established price of 16¢ for the pre-Policy Statement period in District 3, and for the later period fixing a 16¢ price in District 2 and 17¢ in District 3. In fixing the 16¢ District 2 price the FPC gave full weight to the permanently certificated prices at which about 40% of the gas in the area was then moving; some but "not undue" force to the temporary prices at which 60% of the gas currently flowed; accorded "some weight" to the original, unconditioned prices in the area and to the 16¢ volumetric median and 15.29¢ volumetric weighted average prices for post-Policy Statement sales; and recognized that 53% of the gas in the area was moving at prices at or below 16¢. In fixing the 16¢ District 3 price the FPC gave full force to permanently certificated sales of small volumes of gas below 16¢ and comparatively large volumes at 16¢ and 16.2¢; considered the fact that a little less than half the total volume of gas was sold at 16¢ or less; gave "some weight" to permanently certificated sales of very large volumes at 17.5¢ or above (even though those were regarded as "suspect" prices); and apparently considered the weighted average price of 15.16¢ for all except the latter suspect sales. In fixing the 17¢ District 3 price the FPC gave full weight to the permanently certificated sales of moderate volumes of gas at 15¢ and 16.2¢, a small volume at 16.5¢, and large volumes at 18¢; gave "some weight" to temporary prices; noted that the 17¢ price reflected the weighted average of 16.17¢ for permanently certificated sales; accorded some weight to original, unconditioned prices in the area; and considered the fact that 43% of all permanently certificated area sales were at or above 17¢. The FPC's orders conditionally certificating the proposed sales in Districts 2 and 3 were appealed together to the Court of Appeals for the District of Columbia Circuit, which sustained the seaboard interests' contention that the post-Policy Statement prices for Districts 2 and 3 were too high and that the FPC erred in considering temporary and unconditioned prices. It rejected Superior Oil Company's contention that the initial prices in District 3 for both pre- and post-Policy Statement periods were too low, Superior having urged that the FPC erroneously excluded from consideration nine large-volume sales at 20¢ per Mcf when it set the 16¢ price in District 3; that in fixing the initial prices the FPC erroneously excluded a number of 1955-1956 sales at 17.5¢ to Coastal Transmission Company; that with respect to both time periods the FPC erroneously failed to consider prices embodied in settlement orders; that the FPC failed to take enough notice of temporary prices and refused to consider prices of intrastate sales; and that for both periods the FPC had incorrectly relied on estimated rather than actual volumes of gas sold. The FPC did not expressly consider whether any of the "in-line" prices it fixed were suitable when regarded as refund floors, i.e., a level below which the FPC may not order refunds pursuant to § 4 (e) of the Natural Gas Act. Most of the producers in the District 4 proceeding had applied for and been granted temporary certificates under § 7 (c) of the Act, those certificates authorizing them to sell gas at or below 18¢ per Mcf, the then-guideline price. Eight certificates provided for refunds should the eventual in-line price be lower than that charged under the temporary certificate; the other certificates contained only general cautionary language respecting further FPC action. The FPC ultimately ordered the District 4 producers to refund sums collected under the temporary certificates in excess of the in-line rate. The Court of Appeals for the Tenth Circuit held that the FPC lacked power to order refunds of amounts collected under unconditioned temporary certificates, reasoning that to permit such refunds would undermine producer confidence and destroy stability. In the District 2 and District 3 proceedings the New York Public Service Commission contended that there was no public need for the gas and alleged that several pipelines were already obligated by contract either to take more gas than they could foreseeably use or to pay for it. The FPC refused to give more than perfunctory consideration to this "need" issue, which it concluded should be dealt with in pipeline rather than producer proceedings. The Court of Appeals for the District of Columbia Circuit held that the FPC erred in not meeting the need issue in the producer certification proceeding.
Held:
    1. The post-Policy Statement period initial price of 16¢ per Mcf in District 4 was not based on impermissible factors and was not unreasonable. Pp. 28-30.
       (a) The FPC did not abuse its discretion in giving some weight to the guideline and temporary prices (especially since 98.6% of the gas was flowing under temporary certificates), since both those types of prices, like permanently certificated prices, give some indication of cost trends. P. 29.
       (b) The 16¢ price, which was at the lower end of the spectrum of current prices considered by the FPC; was within the "zone of reasonableness" within which the FPC has rate-setting discretion, and satisfied the CATCO mandate against abrupt price rises. Pp. 29-30.
    2. The FPC did not abuse its discretion in establishing the in-line prices in Districts 2 and 3. Pp. 32-36.
       (a) The FPC's consideration of temporary and unconditioned contract prices was proper. P. 32.
       (b) The 16¢ and 17¢ initial prices were within the "zone of reasonableness" and did not breach the CATCO directive. P. 32.
       (c) The FPC properly discounted the force of the 20¢ sales which were out of line with respect to the post-CATCO price structure and which the FPC had reason to believe would have been set aside on judicial review had it not been for a procedural defect. P. 34.
       (d) The prices to Coastal Transmission Company (a pipeline company which at the time of the sales did not have a certificate and was not yet in operation) were properly discounted by the FPC, as those prices may have included a higher-than-normal allowance for risk. Pp. 34-35.
       (e) The FPC had discretion to disregard the prices embodied in the settlement orders as not supplying independent evidence of market trends. P. 35.
       (f) The FPC gave adequate consideration to temporary prices; and it properly rejected evidence of intrastate prices as not covering the entire area or being representative. P. 35.
       (g) Actual volumes of gas sold during 1962 and 1963 were not known and FPC's reliance on estimated volumes was therefore justified. Pp. 35-36.
    3. An in-line price is a "refund floor" below which the FPC may not order refunds under § 4 (e) of the Natural Gas Act. Pp. 22-24.
    4. The in-line prices fixed here were not impermissibly high when viewed as refund floors. Pp. 36-40.
       (a) Though it was regrettable that the FPC did not explicitly consider whether or not the in-line prices it fixed were suitable when regarded as refund floors, it was not obliged in this instance to do so. See Callery, supra. P. 37.
       (b) The 16¢ price in the District 4 proceeding was not beyond the FPC's power when viewed as a refund floor since it was near the lower end of the price range suggested by the price evidence. P. 38.
       (c) The 16¢ price in the District 2 proceeding and the 17¢ price in the similar District 3 proceeding (neither of which is likely to exceed the probable Texas Gulf Coast area rate) were within the FPC's authority when viewed as refund floors; despite the weaknesses in the FPC's opinion with respect to these aspects, it is desirable to terminate this protracted and outmoded proceeding. Pp. 39-40.
    5. In the exercise of its power to condition permanent certificates under § 7 (e), the FPC may require producers to refund amounts collected under outstanding, unconditioned temporary certificates in excess of the finally established in-line price. Pp. 43-45.
       (a) Parties, at least those other than the producer itself, may challenge a temporary certificate at the time a permanent certificate is applied for, notwithstanding the time limits on appeal set out in § 19 (b) of the Act. Pp. 43-44.
       (b) To hold that refunds could not be ordered for the interim period on the ground urged by the producers that a temporary certificate creates vested rights which may be altered only prospectively could contravene the objectives of the National Gas Act. P. 44.
       (c) When a producer, due to an emergency, has requested permission to deliver gas before normal certification procedures are completed, it is not unfair in return for that permission that when those procedures are terminated the producer's terms may be retrospectively altered to conform to the public interest. Pp. 44-45.
    6. Neither the procedure followed nor the result reached by the FPC in ordering refunds constituted an abuse of discretion because of the particular circumstances of the Amerada proceeding. Pp. 45-47.
    7. The FPC did not abuse its discretion in deciding that the question whether the gas to be sold is actually needed by the public can be better dealt with in pipeline rather than producer proceedings. Pp. 47-52.
       (a) Data about the purchasing pipeline's total gas supply, its take-or-pay situation under outstanding sales contracts, the purchasing pipeline's customers and the alternative uses for gas by other pipelines which might buy it are not in the producers' but in the pipelines' possession. P. 49.
       (b) The pipeline proceedings, supplemented by other forms of regulation available to the FPC, will, so far as appears from the present record, provide an adequate forum in which to confront both the take-or-pay and end-use aspects of the need issue. Pp. 50-52.
Nos. 60, 61, and 62; 370 F. 2d 181, affirmed in part, reversed in part; Nos. 80 and 97, 376 F. 2d 578, and Nos. 111, 143, 144, and 231, 126 U.S. App. D.C. 26, 373 F. 2d 816, reversed.
Peter H. Schiff argued the cause for the Federal Power Commission. With him on the brief were Solicitor General Griswold, Ralph S. Spritzer, Harris Weinstein, Richard A. Solomon, and Joel Yohalem.
William T. Coleman, Jr., and Morton L. Simons argued the cause for the Public Service Commission of New York et al. (Consumer-Distributor Group). With Mr. Coleman on the briefs for the United Gas Improvement Co. were Robert W. Maris, Richardson Dilworth, and Harold E. Kohn. With Mr. Simons on the briefs for the Consumer-Distributor Group were Samuel Graff Miller, Kent H. Brown, Edwin F. Russell, Barbara M. Suchow, Bertram D. Moll, and Barbara M. Simons.
William K. Tell, Jr., Thomas G. Johnson, William T. Kilbourne II, Francis H. Caskin, and Justin R. Wolf argued the cause for the Sunray DX Oil Co. et al. (Producers). With Messrs. Tell and Caskin on the briefs for the Sunray DX Oil Co. et al. were Homer E. McEwen, Jr., William R. Slye, James D. Annett, Phillip D. Endom, Robert E. May, Richard F. Remmers, Kiel Boone, Martin N. Erck, Frank S. Troidl, Thomas G. Crouch, Robert W. Henderson, Donald K. Young, Warren M. Sparks, Sherman S. Poland, Robert V. Smith, Vernon W. Woods, J. Evans Attwell, and W. H. Drushel, Jr. With Mr. Johnson on the briefs for the Shell Oil Co. et al. were Messrs. Erck; Troidl, Poland, Bernard A. Foster, Jr., and Oliver L. Stone. With Mr. Kilbourne on the briefs for the Superior Oil Co. were Murray Christian, H. W. Varner, and Homer J. Penn. With Mr. Wolf on the briefs for the Standard Oil Co. of Texas were Francis R. Kirkham and Louise C. Powell.
J. P. Hammond, Harold H. Young, Jr., Wm. J. Grove, Carroll L. Gilliam, and Phillip R. Ehrenkranz filed a brief for the Pan American Petroleum Corp., as amicus curiae.

## Notes

* ↑ Together with No. 61, United Gas Improvement Co. v. Sunray DX Oil Co. et al., No. 62, Brooklyn Union Gas Co. et al. v. Federal Power Commission et al., No. 80, Federal Power Commission v. Standard Oil Co. of Texas, a Division of Chevron Oil Co., et al., and No. 97, United Gas Improvement Co. v. Sunray DX Oil Co., also on certiorari to the same court; No. 111, Shell Oil Co. v. Public Service Commission of New York, No. 143, Skelly Oil Co. et al. v. Public Service Commission of New York et al., No. 144, Federal Power Commission v. Public Service Commission of New York et al., and No. 231; Superior Oil Co. v. Federal Power Commission et al., on certiorari to the United States Court of Appeals for the District of Columbia Circuit.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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