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Justia › US Law › US Case Law › US Supreme Court › Volume 417 › FPC v. Texaco, Inc.
"with respect to new small producer sales, but only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales in the same producing area."
the court held unacceptable the possible contention that market prices themselves would produce just and reasonable rates.
1. The scheme for regulating small producer rates indirectly did not exceed the FPC's statutory authority. Pp. 417 U. S. 386-393.
(a) Order No. 428 is not invalid because it does not initially consider each company and the reasonableness of its rates, or because it has a two-tier system for small producers and large producers. Cf. Permian Basin Area Rate Cases, 390 U. S. 747. P. 417 U. S. 390.
(b) Since pipeline rates are subject to refund to the extent that the purchased gas component of their rates is excessive, there is an incentive "to bargain prices down." Pp. 417 U. S. 390-391.
(c) Requiring the pipelines and the large producers to assume risks in bargaining for reasonable prices from small producers that might entail refunds unrecoverable from the small producers, is not an abuse of the FPC's discretion under § 4(e) in balancing the interests involved. Pp. 417 U. S. 391-392.
(d) It is premature to assert that the indirect regulation contemplated by Order No. 428 is confiscatory, especially since the FPC is to maintain a close review of the avowedly experimental scheme. Pp. 417 U. S. 392-393.
2. But it is not clear from the wording of Order No. 428 that it satisfies the statutory requirement that the sale price for gas sold in interstate commerce be just and reasonable; at the least, the order is too ambiguous to satisfy the standard of clarity that an administrative order must exhibit, and the implication that the reasonableness of the small producers' rates would be judged by the assertion that the FPC "would consider all relevant factors" in determining whether the proposed rates comported with the "public convenience and necessity," is insufficient to sustain the order. Pp. 417 U. S. 394-397.
3. The FPC lacks authority to rely exclusively on market prices as the final measure of "just and reasonable" rates mandated by the Act; moreover, the FPC order made no finding as to the actual impact the market price increases would have on consumer gas expenditures. Pp. 417 U. S. 397-399.
154 U.S.App.D.C. 168, 474 F.2d 416, vacated and remanded.
WHITE, J., delivered the opinion of the Court, in which all Members joined except STEWART, J., who took no part in the consideration or decision of the cases.
small producers sell. The Court of Appeals, with one judge dissenting, set aside the order, 154 U.S.App.D.C. 168, 474 F.2d 416 (1972), concluding hat the Commission's order amounted to "deregulation" of small producers and was unauthorized by the Natural Gas Act (the Act), 52 Stat. 821, 15 U.S.C. § 717 et seq. Because the validity of the order is of obvious importance, we granted the petition for a writ of certiorari filed by the Commission in No. 72-1490 and by the estate of Mrs. James R. Dougherty, an intervenor in the Court of Appeals, in No. 72-1491. 414 U.S. 817 (1973).
"propos[ing] prospectively to exempt from regulation under the Natural Gas Act all existing and all future jurisdictional sales made by small producers. . . ."
"small producers [Footnote 1] to increase their exploratory efforts which are so important to the discovery of new sources of gas . . . to facilitate the entry of the small producer into the interstate market and to stimulate competition among producers to sell gas in interstate commerce. [Footnote 2]"
"when he enters into a new contract for the interstate sale of gas, the provisions of his contract will not be subject to change. We also want to relieve the small producer of the expenses and burdens relating to regulatory matters."
45 F.P.C. at 455. Accordingly, the order provided for a nationwide blanket certificate for small producers and relieved them, with some exceptions, from all filing requirements under the Act. Unlike large producers, subject to Commission-fixed ceilings on rates charged, the small producers could sell gas at the price the market would bear, even though in excess of maximum rates set for producers in pertinent area rate proceedings. Furthermore, they would have "no refund obligations with respect to increased rates, if any, collected for sales regulated hereunder to pipelines. . . ." Id. at 457.
certificate cases. "The Commission shall consider all relevant factors." Id. at 458. Review of tracking increases by pipelines was not anticipated as to existing contracts with small producers; the order authorized small producers to increase their rates under these contracts, terms permitting.
"as long as the price differential is consistent with prevailing price differentials in the area, and as long as the small producer prices for new gas are not unreasonably high, considering appropriate comparisons with highest contract prices by large producers or the prevailing market price for intrastate sales in the same producing area."
Id. at 456. To the extent that they reflected small producer prices in excess of that standard, large producer tracking increases would be subject to refund.
"[w]e intend to review the prices established in new contracts or contract amendments relating to sales by small producers to as sure the reasonableness of the rates charged by such producers pursuant to the action we are taking herein. In the event we determine that this approach is inimical to the interests of consumers, we shall take further action to protect the consumers."
Id. at 459. The Commission apparently remained free to institute separate proceedings under § 5(a) of the Act, 15 U.S.C. § 717d(a), to reduce the producer's rates prospectively.
The Court of Appeals set aside the Commission order, holding that, under the statute, all natural gas sold in interstate commerce must carry just and reasonable rates, and that, even if indirect regulation was permissible under the statute, Order No. 428 was infirm because nothing in it satisfied the Commission's "duty to insure that all rates are just and reasonable.'" 154 U.S.App.D.C. at 173, 474 F.2d at 421. Instead, the order was thought merely to call for rates that were not unreasonably high as compared with the highest contract prices for large producer sales or the prevailing market price in the intrastate market -- "factors which [the Commission] does not regulate or which derive solely from market forces." Ibid. Nor could the court accept the possible argument that market forces themselves would produce just and reasonable rates, particularly when it understood the Commission itself to take the position that the just and reasonable standard was in no event mandatory. The Court of Appeals accordingly set aside the Commission's order.
reasonable rates, but through the means of indirect, rather than direct, regulation; and, second, that the Act does not forbid this kind of indirect regulation. Respondents, on the other hand, contend that the duty imposed by the Act to provide just and reasonable rates cannot be satisfied by indirect regulation, and that Order No. 428, in any event, abandons the just and reasonable standard with respect to small producer rates.
We face first the issue as to the validity of indirect regulation of small producer rates: on the assumption that Order No. 428 allows pipelines and large producers to reflect in their rates only just and reasonable charges for gas purchased from small producers, is the order valid? We hold that it is, for we see nothing in the Act which requires the Commission to fix the rates chargeable by small producers by orders directly addressed to them or which proscribes the kind of indirect regulation undertaken here.
The Act directs that all producer rates be just and reasonable, but it does not specify the means by which that regulatory prescription is to be attained. That every rate of every natural gas company must be just and reasonable does not require that the cost of each company be ascertained, and its rates fixed with respect to its own costs. Although for a time following Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672 (1954), the Commission proceeded to regulate rates company by company, there was soon a shift to the technique of setting area rates based on composite cost considerations. We sustained this mode of rate regulation.
any other method could be sustained would be wholly out of keeping with this Court's consistent and clearly articulated approach to the question of the Commission's power to regulate rates. It has repeatedly been stated that no single method need be followed by the Commission in considering the justness and reasonableness of rates. . . ."
This was wholly consistent with the Court's prior views, see FPC v. Natural Gas Pipeline Co., 315 U. S. 575 (1942); FPC v. Hope Natural Gas Co., 320 U. S. 591 (1944); Colorado Interstate Gas Co. v. FPC, 324 U. S. 581 (1945), and reaffirmed the principle which had been clearly stated in the Hope case: "Under the statutory standard of just and reasonable,' it is the result reached not the method employed which is controlling." 320 U.S. at 320 U. S. 602.
interests.' FPC v. Hope Natural Gas Co. [320 U.S.] at 320 U. S. 603. This Court has repeatedly held that the width of administrative authority must be measured in part by the purposes for which it was conferred; see, e.g., Piedmont & Northern R. Co. v. Comm'n, 286 U. S. 299; Phelps Dodge Corp. v. Labor Board, 313 U. S. 177, 313 U. S. 193-194; National Broadcasting Co. v. United States, 319 U. S. 190; American Trucking Assns. v. United States, 344 U. S. 298, 344 U. S. 311. Surely the Commission's broad responsibilities therefore demand a generous construction of its statutory authority. [Footnote omitted.]"
"Such a construction is consistent with the view of administrative rate making uniformly taken by this Court. The Court has said that the"
"legislative discretion implied in the rate making power necessarily extends to the entire legislative process, embracing the method used in reaching the legislative determination as well as that determination itself."
"Los Angeles Gas Co. v. Railroad Comm'n, 289 U. S. 287, 289 U. S. 304. And see San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 189 U. S. 446. It follows that ratemaking agencies are not bound to the service of any single regulatory formula; they are permitted, unless their statutory authority otherwise plainly indicates, 'to make the pragmatic adjustments which may be called for by particular circumstances.' FPC v. Natural Gas Pipeline Co., [315 U.S.] at 315 U. S. 586."
390 U.S. at 390 U. S. 776-777. It followed that Commission action taken in the pursuit of a legitimate statutory goal enjoyed the presumption of validity, id. at 390 U. S. 767, and that he who would upset the rate order under the Act carries "the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.'" Ibid.
Accepting these views of our role as a court sitting in review, we cannot at this point say that the Commission has exceeded its powers by instituting a regime of indirect regulation of small producer rates. Surely it is not fatal to Order No. 428 that it does not, as an initial matter, consider the costs of each company and the reasonableness of its rates. Nor is the order vulnerable because there will be one level of just and reasonable rates for small producers and another for large producers. As previously noted, the Court approved two sets of just and reasonable rates in the Permian Basin cases, the justification being the necessity to stimulate exploration for and the development of new supplies of natural gas. Id. at 390 U. S. 796-797.
Indirect regulation through the mechanism of controlling large producer costs will not merely recreate the situation which the Court in the Phillips case found to be inconsistent with the Natural Gas Act. In the pre-Phillips era, although asserting the right to pass on the prudentiality of various items of the pipelines' costs, the Commission did not purport to regulate the rates of producers with the aim of keeping them within just and reasonable limits, as the Commission now asserts it is doing under Order No. 428.
whose cost of purchase is a current operating expense which the pipeline is entitled to pass on to its customers as part of its rates, lacks sufficient incentive to bargain prices down."
Here, on the other hand, the incentive is provided -- pipeline rates are subject to refund to the extent that the purchased gas cost component of their rates is excessive.
This leads to the contention of the pipelines and the large producers that the scheme of indirect regulation envisioned by Order No. 428 unfairly subjects them to the risk of later determination that their gas costs are unjust and unreasonable and to the obligation to make refunds which they cannot in turn recover from the small producers whose rates have been found too high. [Footnote 4] But those whose rates are regulated characteristically bear the burden and the risk of justifying their rates and their costs. Rate regulation unavoidably limits profits as well as income.
"The fixing of prices, like other applications of the police power, may reduce the value of the property which is being regulated. But the fact that the value is reduced does not mean that the regulation is invalid."
"Regulation may, consistently with the Constitution limit stringently the return recovered on investment, for investors' interests provide only one of the variables in the constitutional calculus of reasonableness."
Here, requiring pipelines and the large producers to assume the risk in bargaining for reasonable prices from small producers is within the Commission's discretion in working out the balance of the interests necessarily involved. The consumer would be protected from current excessive rates, but at the expense of the pipeline, rather than the producer, who is engaged in necessary exploratory activity, thus serving the public interest in getting greater gas production but at just and reasonable rates. Under such circumstances, it is surely not an abuse of the discretion the Commission retains under § 4(e) of the Act, see Permian Basin Area Rate Cases, supra, at 390 U. S. 826-827, to refrain from imposing a refund obligation on the small producers.
"to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risk they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable."
Id. at 390 U. S. 792.
"the Commission's basic contention all along . . . that the 'just and reasonable' standard was not mandatory, and that the FPC can simply choose not to regulate rates."
154 U.S.App.D.C. at 175, 474 F.2d at 422. Whatever the position of the Commission heretofore has been, it wisely does not challenge that aspect of the Court of Appeals judgment. Sections 4 and 5 of the Act require that all gas rates be just and reasonable; and the Court held in Phillips that this very prescription applies to the rates of all gas producers. The Commission may have great discretion as to how to insure just and reasonable rates, but it is plain enough to us that the Act does not empower it to exempt small producer rates from compliance with that standard.
"[f]or the purposes of its rules and regulations, the Commission may classify persons and matters within its jurisdiction and prescribe different requirements for different classes of persons or matters."
"for the courts to determine whether the agency has done so, it must 'disclose the basis of its order' and 'give clear indication that it has exercised the discretion with which Congress has empowered it.'"
Burlington Truck Lines v. United States, 371 U. S. 156, 371 U. S. 167-168 (1962), quoting in part from Phelps Dodge Corp. v. NLRB, 313 U. S. 177, 313 U. S. 197 (1941). We shall indicate briefly our basis for this conclusion.
"only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales. . . ."
45 F.P.C. at 457. (Emphasis added.) The order took a very similar approach to the tracking increases by large producers. Moreover, under the order, contractually authorized increases in rates for flowing gas under existing contracts could be automatically passed through by the pipelines and would not be subject to examination under the standard proposed by the order with respect to new sales by small producers. There was no finding that these contemplated increased rates for flowing gas would be just and reasonable. The Commission merely asserts in its brief here that it was familiar with the existing contracts, and must have considered the rates reserved to be acceptable under the Act.
is also true that the Commission asserted that it was not deregulating small producer rates, that the Commission "shall consider all relevant factors" in determining whether proposed rates were consistent with the "public convenience and necessity," and that the Commission intended to review new contract prices charged by small producers "to assure . . . the reasonableness of the rates charged by such producers pursuant to the action we are taking herein." But these generalities do not supply the requisite clarity to the order or convince us that it should be sustained.
Had the order unambiguously provided what the Commission now asserts it was intended to provide, [Footnote 7] we would have a far different case to decide. But as it is, we cannot "accept appellate counsel's post hoc rationalizations for agency action"; for an agency's order must be upheld, if at all, "on the same basis articulated in the order by the agency itself." Burlington Truck Lines, 371 U.S. at 371 U. S. 168-169; SEC v. Chenery Corp., 332 U. S. 194, 332 U. S. 196 (1947).
"would necessarily be based on a belief that the current contract prices in an area approximate closely the 'true' market price -- the just and reasonable rate. Although there is doubtless some relationship, and some economists have urged that it is intimate, such a belief would contradict the basic assumption that has caused natural gas production to be subjected to regulation. . . ."
In subjecting producers to regulation because of anticompetitive conditions in the industry, Congress could not have assumed that "just and reasonable" rates could conclusively be determined by reference to market price. Our holding in Phillips implies just the opposite. This does not mean that the market price of gas would never, in an individual case, coincide with just and reasonable rates or not be a relevant consideration in the setting of area rates, see Permian Basin Area Rate Cases, 390 U.S. at 390 U. S. 793-795; it may certainly be taken into account along with other factors, Southern Louisiana Area Rate Cases, 428 F.2d 407, 441 (CA5), cert. denied sub nom. Associated Gas Distributors v. Austral Oil Co., 400 U.S. 950 (1970). It does require, however, the conclusion that Congress rejected the identity between the "true" and the "actual" market price.
The Court is not unresponsive to the special needs of small producers who play a critical role in exploratory efforts in the natural gas industry and ameliorating the supply shortage. The requirements of the Act, however, do not distinguish between small and large producers with respect to just and reasonable rates. Even if the effect of increased small producer prices would make a small dent in the consumer's pocket, when compared with the rates charged by the large producers, the Act makes unlawful all rates which are not just and reasonable, and does not say a little unlawfulness is permitted. Moreover, there is no finding in the Commission's order as to the actual impact the projected market price increases would have on consumer expenditures for gas, and the Commission is previously on record in its Permian decision, as stating: "[T]he impact of small producer prices on consumers is by no means de minimis on an area basis, and is of great impact in some situations." 34 F.P.C. 159, 235 (1965).
In concluding that the Commission lacks the authority to place exclusive reliance on market prices, we bow to our perception of legislative intent. It may be, as some economists have persuasively argued, [Footnote 9] that the assumptions of the 1930's about the competitive structure of the natural gas industry, if true then, are no longer true today. It may also be that control of prices in this industry, in a time of shortage, if such there be, is counterproductive to the interests of the consumer in increasing the production of natural gas. It is not the Court's role, however, to overturn congressional assumptions embedded into the framework of regulation established by the Act. This is a proper task for the Legislature, where the public interest may be considered from the multifaceted points of view of the representational process.
The President made this judgment despite the arguments that imposition of price control would discourage exploration and development of new wells. Public Papers of the Presidents, Harry S. Truman, 1950, p. 257 (1965). For the Court to step outside its role in construing this statute, and insert itself into the debate on economics and the public interest, would be an unwarranted intrusion into the legislative forum where the debate again rages on the question of deregulation of natural gas producers.
We do, however, make clear that, under the present Act, the Commission is free to engage in indirect regulation of small producers by reviewing pipeline costs of purchased gas, providing that it insures that the rates paid by pipelines, and ultimately borne by the consumer, are just and reasonable. It may be, as some of the respondents suggest, that ensuring just and reasonable rates by means of indirect regulation will not be administratively feasible, but this is a matter for the Commission to consider.
We agree with the Court of Appeals that the order of the Commission must be set aside; but, for reasons previously stated, we vacate the judgment of the Court of Appeals and remand the cases to that court with instructions to remand the cases to the Commission for further proceedings consistent with this opinion.
* Together with No. 72-1491, Dougherty, Executor, et al. v. Texaco Inc. et al., also on certiorari to the same court.
A "small producer" was defined as an independent producer, not affiliated with a natural gas pipeline company, whose total jurisdictional sales on a nationwide basis, together with sales of affiliated producers, did not exceed 10,000,000 Mcf at 14.65 psia during any calendar year. New small producer sales included any sale made pursuant to a contract dated after March 18, 1971.
The Commission found that small producers produce about 10% of the gas purchased by pipelines, excluding all pipeline-to-pipeline sales. It appears, however, that they also account for 80% of the natural gas exploration in this country.
Subsequently, the Commission issued two supplemental orders, Order No. 428-A, 45 F.P.C. 548, revising the annual statement requirements for small producers and Order No. 428-B, 46 F.P.C. 47, which denied applications for rehearing and modified Order No. 428 in respects that need not be mentioned here.
The large producers also contend that they are put at a disadvantage by the Commission's order because their contracts may not permit them to pass on the increased costs of gas purchased from small producers, whereas the pipelines will be in a position to do so. This is, however, a function of the producers' contracts, and the Commission has no authority, absent a finding that the existing contract rate "is so low as to have an adverse effect on the public interest," to permit large producers or pipelines to raise their rates in excess of the maximum authorized in their contracts, FPC v. Sierra Pacific Power Co., 350 U. S. 348, 350 U. S. 355 (1956); United Gas Co. v. Mobile Gas Corp., 350 U. S. 332 (1956). We think other claims of the large producers, as to unfair treatment or discrimination, are equally ill-founded.
The New York Public Service Commission also questions whether it is administratively feasible for the FPC, on review of individual pipelines' costs, to make sure rates are just and reasonable, claiming that this would be a return with a vengeance to the administrative morass which led to the adoption of area rates for producers in the first instance. This claim is also premature in light of possible regulatory approaches the FPC may take on remand.
The Commission's position is not advanced by FPC v. Hunt, 376 U. S. 515, 376 U. S. 527 (1964). The Court in that case merely questioned whether exemption might prove, after study, to be an available alternative.
The Commission, in its brief, has indicated that the standard will not be limited to comparisons with appropriate market prices, but will include (1) producer's costs, (2) the pipeline's need for gas, (3) the availability of other gas supplies, (4) the amount of gas dedicated under the contract, and (5) the rates of other recent small producer sales previously approved for flow-through.
"[t]he prime characteristic of the situation described is that of a steadily developing concert of interests dominating the producing, transporting, and distributing branches of the industry."
"to determine the amount of natural gas which may be marketed by fixing the amount which may be transported. That, in turn, gives it power to say how much shall be produced."
Ibid. Based upon these findings, the Commission singled out as "Specific Evils Existing in the Natural Gas Industry" both the "[u]nregulated monopolistic control of certain natural gas production areas" and the "[u]nregulated control of pipeline transmission and of wholesale distribution." Id. at 615. It concluded that regulation, at least of pipelines, see id. at 616, was required.
See C. Hawkins, Structure of the Natural Gas Producing Industry, and P. MacAvoy, The Regulation-Induced Shortage of Natural Gas, in Regulation of the Natural Gas Producing Industry 137-191 (K. Brown ed.1972). See also Statement of John N. Nassikas, Chairman, Federal Power Commission, Hearing on the Natural Gas Industry before the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary, 93d Cong., 1st Sess., 43-72 (1973).

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