Warren E. Burger: We’ll hear arguments next in two consolidated cases, 73-437 Mobil Oil against Federal Power, 73-457 Public Service Commission against Federal Power; and Municipal Distributors against Federal Power. It is three then not two. Mr. Gilliam.
Carroll L. Gilliam: Mr. Chief Justice and may it please the Court. I argue for petitioner Mobil Oil Corporation only. There are differences as to provision and result sought by petitioners. These cases come from the Fifth Circuit and arise under Sections 4 and 5 of the National Gas Act and involve rates for natural gas producers. The proceedings before the Commission were to fix such rates for the Southern Louisiana area, both on shore and offshore, an area that now supplies approximately one-third of the nation’s interstate supply of natural gas. As the issues reach this Court, the subject matter involves first, a fund of approximately $375 million which were amounts collected by producers in the area prior to August 1, 1971. The case also involves a rate structure that fixes charges to be made by producers to pipeline purchases of something in excess of $1 billion annually for each of the years after August 1, 1971 and under a rate structure that extends by terms to 1976 and 1977. These two branches of the case became intertwined before the Commission and the background lies in two separate area rate cases, two Commission opinions and now two opinions by the Fifth Circuit. The first area rate case for Southern Louisiana was initiated in 1961. This led to what is denoted Commission Opinion number 546 issued in 1968 that was followed by review in the Fifth Circuit and opinions that are referred to in the briefs as the Austral case or Southern Louisiana 1. That opinion was an affirmance of Opinion number 546, but included language in the initial opinion and in a later opinion by the Fifth Circuit denying petitions for rehearing that give rise to the issues that are raised by the other petitioners, the Municipal Distributor Group and New York as to the Commission’s power thereafter to reopen the rates fixed by that opinion and to revise them. Those questions will be covered by Mr. Morrow. The second Southern Louisiana area rate case produced the opinion which is now here, denoted Commission Opinion number 598. This proceeding was initiated in 1969 before review of the first opinion had been completed. At first, it was restricted to rates for new contracts for new sales from the Federal offshore domain only. Later, Commission Orders expanded the scope of the proceeding to include all producer sales in southern Louisiana and after the Austral decision by the Fifth Circuit, the Commission also enlarged the docket to include the issues of revision of the rates that had been fixed by the first opinion and to include the issues of disposition of refund liabilities that would have been fixed by the rates in the Commission’s first opinion. The proceeding before the Commission was before a hearing examiner. It was an adjudicatory type hearing. The cost data in the records are essentially the 1969 test year. There are two major types. One is what is called historical cost of flowing gas. This ultimately became the cost used to fixed rates for contracts dated prior to October 1, 1968. The second major type of cost is the so called current cost. This ultimately was used with reference to rates for what is called new gas and in this case, that classification is gas sold on the contracts dated after October 1, 1968. There was other extensive evidence of economic, financial, supply demand, nature of the type that this Court reviewed in the Permian case. There were conferences and then hearings before the examiner, beginning in 1969 and continuing to March 1971. While the hearing was in progress, a settlement conference was initiated under the Commission’s rules. This conference is held off the record and all parties to a given proceeding are invited to participate. Those conferences resulted in the filing of a motion with the Commission by a group of distribution companies referred to in the briefs here as United Distribution Companies or UDC. The motion was submitted November 1970, asking the Commission to approve a proposed settlement which was appended to the motion. The Commission then issued notice of that and provided for the filing of comments. The comments indicated very wide support for the settlement from major producers in the area, pipeline purchasers, distribution companies in two groups and some state Commissions. However, the settlement was opposed by Mobil by another major producer in the area, in some small details by other producers. It was also opposed by the Public Service Commission for the State of New York, the Municipal Distributors, the American Public Gas Association, the American Public Power Association and the Consumer Federation of America. On December 24, 1970, the Commission issued an order that made the settlement proposal a part of the record and provided that opponents could present in the hearings that were still going on before the hearing examiner, the reasons are basis for their objections. This hearing continued the conclusion. In March 1971, the Examiner’s decision was omitted, briefs were filed directly to the Commission. There was no oral argument and the Commission issued its Opinion number 598, the opinion now here on July 16, 1971. This adopted the settlement proposal in its entirety. It has specific features that give rise to the issues now raised here by Mobil. As to the past, that is this fund of collections prior to August 1, 1971, the Commission adopted a formula set out on the settlement proposal to dispose refund liabilities. Specific rates were fixed for the past period. Amounts collected by individual producers in excess of those rates were not to be refunded, but were to be retained as working capital and subject to future discharge by dedication of new reserves in the area. As to the future, that is the period after August 1, 1971, the Commission adopted precisely a two-part rate structure that was set out in the settlement. Rates were prescribed for flowing gas that is rates for -- sales under contracts dated prior to October 1, 1968, a fixed escalation in October, 1973 was provided and a system was included for contingent escalations up to a total of 1.5 cents, up to 1977, if by that time the industry as a whole dedicates certain specified quantities of new gas in the area. But on one of the points we raise here, that contingent escalation formula excludes from the reserves that will be counted. The reserves that are used by individual companies to discharge their own refund liabilities and it requires those of us such as Mobil, which have small refund liabilities to in effect earn these escalations which are then allowed for all others. The rate structure also includes a separate rate for new gas, that is sales on the contract dated after October 1, 1968 and a moratorium on increases in rates under Section 4 of the Act, extending to October 1, 1976 for flowing gas and October 1, 1977 for the new gas. Other provisions that we have raised and discussed in our briefs were included, precisely as set out in the settlement. The opponents of the settlement sought rehearing as required by Section 19 (a) of the Natural Gas Act. This was denied by Commission Opinion 598-A in which the Commission reiterated that it adopted this settlement proposal in its entirety. Review in the Fifth Circuit followed. The Commission’s opinion was affirmed. In August 1973, however, the District of Columbia Circuit reversed the Commission as to an identical rate structure which the Commission had imposed in the Texas Gulf Coast area, finding essential elements of this rate structure in conflict with the standards of Sections 4 and 5 of the Natural Gas Act. The proceedings in this Court then followed. Now the issue is raised by Mobil go both to what we term the invalid end result, impact and consequences, in this case under the standards that this Court set out in the Hope test in 1944 and in its review of the first area rate case, the Permian Basin decision in 1968. The issues we raise also go to the invalidity of essential elements of this rate structure. In our view, the District of Columbia Circuit Opinion which is before this Court is correct. This structure violates express standards of Sections 4 and 5 of the Natural Gas Act which prohibit unjust and unreasonable rates and also prohibit unduly discriminatory and unduly preferential rate structures. In addition, as our briefs indicate, there are substantial parts of the Commission’s opinion in this case which do not include any of the findings that this Court indicated in both Hope and in Permian are required for valid rates under the Natural Gas Act. Now in particulars as to our view on the discriminatory and preferential nature of this rate structure, it begins with this treatment of refunds for the past period and it carries on from that over into the rates prescribed for present and future. By the treatment of refunds, the Commission has in effect in this case, adopted a rate structure which prefers the producers who in the past collected the highest rates, who did not follow Commission guidelines and policies between 1960 and 1968, it provides those producers additional and special working capital available in the present and in the future for use in competitive bidding and other operations and this same formula is tied to the flowing gas rates that were fixed here for the present and the future. We cite in our briefs specific parts of the Commission’s opinion which reflect that the Commission treated its present and future allowance for exploration and development capital and the other capital allowances in the flowing gas rates as in part satisfied by this special allowance of working capital to the few producers who owed the large refunds. As we cited in our brief, they are quite disproportionate. They do not or not proportional among producers in the area and only a handful of the producers owe the bulk of the refunds, but under this rate structure, both as to past, present and future, the incentives and the benefits the Commission has allowed or channeled straight to those three producers and they are not allowed to the remaining producers in the area. Now --
Harry A. Blackmun: What is to be the effect Mr. Gilliam upon the consumer, I take it they feel that the refund system will what, penalize the old consumer and help the current one?
Carroll L. Gilliam: Your Honor, of course Mr. Morrow will address this question from the viewpoint of the consumers, but in the District of Columbia Circuit opinion, the opinion notes that this is adverse both to the interests of producers in the area who are old producers such as Mobil and adverse to new entrants and adverse to the competitive structure in the area, and therefore, would be adverse to the ultimate benefits that consumers should expect in the sense of the two objectives of the statute which are reasonable rates and an adequate supply. Now the analysis of that in the Texas Gulf opinion, from the District of Columbia Circuit is quite detailed. We rely on that quite heavily and I think it does cover this problem which we raise of undue discrimination and preference both from the viewpoint of the affected producer and from the view point of the ultimate consumer and in that opinion, the basis for the opinion by the District of Columbia Circuit, rested of course on the statutory standard, but on the adverse impact on both of the most affected interests. Now in the analysis of this rate structure, everything for present and future that we attack is being too low or not a high enough reasonable rate, not high enough current allowance at 1969 and 1971 cost. Everything was justified all along the way by ah yes, but we made those allowances in the treatment of refunds. But then when you look at that, those allowances go in only a few directions. Those who follow the past policy are somewhat left out in the cold so to speak. It even comes in the opinion before the Fifth Circuit on the moratorium. In the Permian case, this Court spelled out certain things the Commission should find when it imposes a moratorium on rate increases such as projected stability of cost, trends as to rising cost, on this instance, it would have been looking towards the 70s. Here we have only five lines in the Commission opinion which establish a moratorium from August 1971 to 1976 and 1977 in one of the nation’s most critical areas. There is not one word in those five lines about whether cost could be expected to rise, whether capital requirements would be greater or so on and yet the Fifth Circuit opinion, in looking at our objection to that and comparing it with what this Court said in Permian, the Fifth Circuit says ah yes but somehow that is compensated for by the refund allowances that were permitted under this rate structure. But I would suggest that is no compensation to those producers who did not collect those rates in the past and it's an intermixture, an intertwined effort to tie together a rate structure to protect refund liabilities for a handful of companies, but in so doing, the Commission has mixed it up with what should be current and future just and reasonable rates for the entire area industry. It has used that also to lay down a moratorium on the whole area and has done it in a period when even this record which cut off in 1971 indicated that we already were in a natural gas shortage. It indicated that the heaviest demands for capital on this industry that have ever existed would arise in the 1970s and when the drilling effort, increasingly, must be directed toward greater offshore distances, deeper drilling and so on. Now with that, we have the Commission simply adopting a rate structure that in our view was tailor-made to benefit only a handful of people who had collected as we say the highest rates from 1960 to 1968. There are other issues that we have raised that deal with particular parts of the settlement agreement, one of them I have mentioned, the moratorium. We also have brought the question of the Commission’s refusal to make an adequate allowance for our royalty payments. In Southern Louisiana, the producer’s payments of royalty to others, including governmental institutions are some 16% of total revenues and the Commission has put together a rate structure here that (a) it was based on an assumption years ago that its own rate jurisdiction extended to control of the level of royalty payment. That assumption by the Commission some years ago was held to be invalid and yet the Commission still is prescribing rates on the assumption that the royalty payment is controlled or a function of the rate fixed by the Commission. We have submitted that the Commission erred in not allowing an adjustment pause in the rates where if the producer is required to pay government or someone on market value that that escalation be permitted. Thank you.
Warren E. Burger: We will not ask you to put your argument on a minute and a half here. We will just start after lunch, unless you would prefer to go ahead.
George E. Morrow: I have one matter before my argument, if I might take it up with the Court.
Warren E. Burger: Yes.
George E. Morrow: We have not yet filed a reply brief to the brief of the Government and the other parties because the Government’s brief was late.[Voice Overlap] With the Court’s permission, we will file one some time today. It ought to come from the plaintiff.
Warren E. Burger: Yes, that’s of course at least one of the factors that entered into the sua sponte decision to give you a little bit more time. I might add there’s no compulsion on either of you to use all that time.
George E. Morrow: We appreciate that Your Honor.[Luncheon Recess]
Warren E. Burger: Mr. Morrow, you may proceed.
George E. Morrow: Mr. Chief Justice and may it please the Court. My name is George Morrow and I represent the Municipal Distributors Group in this case which is a group of approximately 200 municipal distribution systems throughout the country and I also have the honor to speak for the New York Public Service Commission in this argument. The Municipal Distributors and New York are here objecting to two elements of the Commission’s order in this case which relay either to gas already sold and delivered or else the gas already committed to long term contracts. These two elements are; first, that drastic modification of refunds ordered by the Court in this case which changed the refunds which had been ordered in an earlier case in 1968. Secondly, a provision for four and one-half cent future escalations in the rates for flowing gas from this area, the first of which alone, when applied to the 80 trillion cubic feet of known proven reserves of flowing gas would at one stroke, increase their value by about $400 million. First, as to the refund issue --
William J. Brennan, Jr.: Mr. Morrow, may I ask? Do I correctly read the Fifth Circuit opinion as suggesting that the only issue of judicial review as they saw the case, those Universal Camera problem whether or not the order of the Commission was supported by substantial evidence?
George E. Morrow: And they kept talking, yes, Your Honor and they kept talking about substantial evidence on the record as a whole without --
William J. Brennan, Jr.: Yes, but your argument goes beyond that, doesn't it? It challenges the provisions of the order not as unsupported by substantial evidence for further rehearing?
George E. Morrow: It challenges them as unsupported, but before we get to that, we challenge the right of the Commission to reopen its 1968 order.
William J. Brennan, Jr.: And do you read the Fifth Circuit as expressly addressing that question or as --
George E. Morrow: I did not find anything in that question in the Fifth Circuit’s opinion, Your Honor.
William J. Brennan, Jr.: Well, if they were right, if they were right in thinking as the only question of judicial review as the shorthand Universal Camera question.
George E. Morrow: Yes, sir.
William J. Brennan, Jr.: Now that -- if they were right about that, then our review is even more limited, isn’t it?
George E. Morrow: If there were no serious questions concerning the record in this case, concerning the substantive evidence on which the record is based, then obviously if the Court of Appeals of the Fifth Circuit, I mean, of the Fifth Circuit, decides that on a factual basis, this Court would not review. But we feel that there are serious legal issues involved in this case.
William J. Brennan, Jr.: And you think those are open, assuming again we were to agree with the Fifth Circuit?
George E. Morrow: Yes, Your Honor.
William J. Brennan, Jr.: In this approach, do you still think those would be open?
George E. Morrow: I think those would be open, yes sir. Let me explain the first one, on the refund issue. The Commission in Opinion 546 which is Southern Louisiana 1, in 1968 made findings as to the just and reasonable rates for gas in the Southern Louisiana area and these findings related to gas from 1954, the inception of producer regulation up through 1968, the date of the order. Finding that the producers had charged excessive rates, this Commission ordered refunds, the amount of which approximated $376 million. Three years later, in Opinion number 598 which is now under review and which I refer to as Southern Louisiana 2, the Commission reopened its final order in the 1968 docket, which had been affirmed on appeal and modified two elements of the costs found in that document, modified them retroactively and since it modified those cost items retroactively and increased them, that of course had an effect upon the refunds which it had ordered in the other case and so it drastically modified its 1968 refund order, reducing it at one fell of swoop by $226 million and then providing for the work off of the remaining $150 million by dedications of gas by the producers to interstate commerce in the future. Now, our proposition in this case, the basic legal proposition is very simple. The Commission had no power by its 1971 order to reopen a final judicially affirmed 1968 order and modify the fact findings in that final 1968 Order and change the refunds relating to the 1954 to 1968 [Voice Overlap].
William J. Brennan, Jr.: Mr. Morrow, in that connection, didn’t the Fifth Circuit say that, in its opinion on rehearing on the first order, it made it abundantly clear that it was not affirming, it was reading the Commission, all the authority in the world reopen everything if it wanted to, didn’t it say that?
George E. Morrow: No sir, Mr. Justice Brennan, it did not.
William J. Brennan, Jr.: Where did the --
George E. Morrow: And that’s where we come to nub of the case.
Warren E. Burger: Where did they use the term “experimental?” At what stage did that first enter into this --
George E. Morrow: Your Honor, that was discussed by the Court of Appeals in Southern Louisiana 1. It was one of the main basis of the Court of Appeals opinion in Southern Louisiana 2 and of course in the Texas Gulf Coast case, the Court of Appeals at D.C. disagreed and said we are past the experimental stage now and you cannot get by with that sort of thing by calling it experimental.
Warren E. Burger: They weren’t dealing with the same records, were they?
George E. Morrow: They were dealing with an almost identical record, Your Honor, the same issues.
Warren E. Burger: The same issues, but the same factual --
George E. Morrow: Not the same numbers, but certainly the same issues, the same type of --
Warren E. Burger: Let us go back for a moment.
George E. Morrow: The same settlement.
Warren E. Burger: Yes. Let’s go back for a moment to that 1961 reference to its being experimental. In what sense do you suggest the Court of Appeals was using that term back with reference to the 60, the proceedings began in 1961.
George E. Morrow: The 68 record?
Warren E. Burger: To Louisiana 1 --
George E. Morrow: Your Honor, it was using that for the purpose of excusing some very loose findings on the part of the Federal Power Commission. In the first Southern Louisiana case, the Court said “We are not going to let the Federal Power Commission get by with basing its conclusions on such loose findings and basing findings on such big and general factual allegations in the future, particularly non-cost findings.” In the future, if the Commission wants to put non-cost additives onto a rate of return, onto a rate, it’s got to show what those additives, how much they are needed, and what they will accomplish. And this is what the Court of Appeals in the Texas Gulf Coast case reversed the Commission for because it had not shown just exactly that, that the non cost additives were worth what they cost in effect. But Your Honor, you asked what -- exactly what the Court of Appeals in the first case have decided and let me read it to you.
Warren E. Burger: Where do we find it here?
George E. Morrow: Your Honor, this is in the first case and it’s not in the record here, I happen to have a record of the first case and -- sir?
Warren E. Burger: Go ahead.
George E. Morrow: The Court said, since we have concluded that the Commission is on the right course now, our best course is to keep within the proper sphere of a reviewing court. The point is that the probability of shortage based on new evidence is not before us for review. All that is before us is the legal adequacy and not the wisdom of the Commission’s orders. Finally and most importantly in the light of Permian, we think we are required to hold that the Commission’s orders in this case are procedurally and substantively adequate under the law. Whether they are ultimately wise is a question to be presented not to the court, but to the Commission and again in the later page which I don’t see right now, it says we hold that Permian requires affirmance and then on its opinion on rehearing, it reiterated this is an affirmance and not a remand. So what happened was, and incidentally this is the sole basis on which the Commission now rests its case. If this order in Southern Louisiana 1, the Court of Appeals is not valid, then the whole defense of the Commission of its refund orders must collapse.
William J. Brennan, Jr.: Do you have, again, I am looking for it, I cannot find it. In the opinion before us now, on the order on the judgment under review, were they addressed whether or not they left these things open in a petition for rehearing on the first case?
George E. Morrow: Yes, sir.
William J. Brennan, Jr.: I can’t seem to find that. I thought I was [Voice Overlap] something in it which is contrary to the implications to which you read us from the first opinion?
George E. Morrow: I am looking in the appendices --
William J. Brennan, Jr.: Well, don’t let me waste your time Mr. Morrow, I will find it.
George E. Morrow: Alright, sir.
William H. Rehnquist: Mr. Morrow.
George E. Morrow: Yes, sir?
William H. Rehnquist: If in that first proceeding, the Commission’s order had been open-ended or tentative so to speak, an affirmance by the Court of Appeals of that order wouldn’t destroy the open-ended or tentative character of the Commission’s order, would it?
George E. Morrow: If it had not been a final order then I presume it would not have been a final order Your Honor that’s correct. But this was a final order and the Commission defended it before the Court of Appeals as a final order and successfully defended every single finding in that case. Now what the Court of Appeals did was first to affirm, because it says we have to affirm. The Commission’s opinion is based solidly on evidence in the record and we have no choice, but to affirm. It then went on to say that with respect to this lawful order, we make, it says we rely upon the broad remedial powers that in here in the Court of Equity and for acting pursuant to its equitable powers stated, we make it part of the remedy in this case that the authority of the Commission to reopen any part of its orders is left intact. Now our position is very simply, that if the Commission order was lawful in all respects, there was no basis for the Court of Appeals to provide a remedy, a judicial equitable remedy for a perfectly lawful order. Once the Court of Appeals found that the Commission order was substantially supported by facts and findings in the record, its jurisdiction was at an end with respect to that order and this Court said so in Natural Gas Pipeline versus F.P.C. which is cited in our reply brief. The Court said this, referring to the Court’s review of the Commission order, “Once a fair hearing has been given, proper findings made and other statutory requirements satisfied the courts can not intervene, in the absence of a clear showing that the limits of due process have been overstepped.” And again this Court, in SEC versus Chenery Corporation said that it’s the duty of a reviewing court, that the duty of a reviewing court “is that an end when it becomes evident that the Commission’s action is based upon substantial evidence and is consistent with the authority granted by Congress.” This is the crucial distinction between this case and the Ford Motor case and all the other cases that are cited along that line by the Commission and the intervenors in this case. In the Ford motor case, the agency had committed legal error. Someone’s rights had been violated. A wrong, a legal wrong had been perpetrated and this called upon the equity powers of the court, the remedial powers of the court to provide a remedy for the wrong, to provide relief for someone who had received legal injury. In the present case or rather in Southern Louisiana 1, there was no legal wrong. The Commission’s opinion was affirmed in all respects upon the special request of the Commission, and therefore, the Court had no power under the Natural Gas Act, as part of its reviewing power under the Natural Gas Act, it had no power to go ahead and provide a legal equitable remedy, judicial equitable remedy for a perfectly lawful order. But if the Commission had no power to change that order which was perfectly lawful, then it certainly had no power to use its equitable remedial rights to invest such an unprecedented power in the Federal Power Commission.
William J. Brennan, Jr.: Mr. Morrow, I found finally what I had in mind. It’s at page 30 of the appendices?
George E. Morrow: Yes, sir.
William J. Brennan, Jr.: In the petition, dealing with flowing gas, at the bottom of page 30, where Judge Brown says, after referring to the first order, the eighteen-and-a-half and then the nineteen-and-a-half cent rates. Although he pointed out that our mandate was an affirmance of these rates, he pointed and he emphasized that our opinion did not foreclose the possibility of change. On rehearing, we reiterated, we wish to make crystal clear the authority of the Commission in this case to reopen any part of its order if circumstances require, then reopen.
George E. Morrow: That’s correct. That’s what the Court purported to do and it’s our position that the Court simply could not do both. It cannot affirm and at the same time provide a judicial equitable remedy for perfectly valid order and that is what it purported to do in this case. Now there is -- the New York Commission emphasizes this point that in that Southern Louisiana 1, the Court had carefully and exhaustively reviewed every single fact finding of the Commission and it had affirmed every fact finding of the Commission. And regardless of how you construe the Commission’s final order in the case, it is not reasonable to construe it as having the Court say we just reviewed all of these facts and costs, we affirm them all, now Federal Commission go and change them. In other words, if the Court was leaving anything open validly in the Southern Louisiana 1 case, it was leaving open matters with respect to non-cost additives. But that brings us to the second leg of our case, of our position here, and that is that even if the Commission’s reopening of its 1968 opinion were lawful, the manner in which it did so is totally, totally unsupported on the record. This is not just a matter of conflicting findings. This is a matter of a mis-analysis of the facts. The sole basis upon which the Commission made its change in the 1968 refund order was on its finding in the 1971 case that it had committed error, factual error in the previous case. The Commission said, Opinion 546 did not afford an adequate return and it understated the requirements for exploration and development. In the light of these inadequacies, the Commission said, we find that the rights of 20.625 cents and 21 and a quarter cents as a based for refunds are reasonable and in the public interest. So the only basis for the finding as to the refunds was that the 1968 Order was in error with respect to rate of return and allocation of exploration and development costs. The rate of -- but the court -- the fallacy here is that the Commission never reviewed its 1968 record. It never went back to determine whether the fact findings in that record were wrong. What it did was to use its findings in the new case, its rate of return based on the 1971 decision and using the economic conditions and the capital conditions of the 1971 decision, defined the of rate of return there and it took that rate of return and said because this is higher, this is 13 to 16%, therefore, we find that the 12% rate of return that we ordered in the 1968 opinion is inadequate. And it is our contention that the rate of return in the second case is no evidence as to the inadequacy of the rate of return in the first case. The same thing is true with the other cost element which is a major cost element. The allocation of costs is between a Dry Hole Cost or exploration and development costs between oil and gas. It used a new method in Southern Louisiana 2, but it never applied that method to the costs in Southern Louisiana 1. So regardless of the result that it reached in Southern Louisiana 2, it could not use that result as evidence that it had been wrong, erroneous or inadequate in Southern Louisiana 1. So there was no evidence to support the Court, the Commission’s changing of its rates in the earlier opinion, and therefore, no evidence to support the change of its refunds in that period. I haven't had a chance to get into the escalation provisions which, as I say the first one-half cent escalation provision amounts to $400 million. There are three additional escalation measures. Now, Mobil in its brief has discussed in great detail the discriminatory aspects of these. I only want to say this about them. There is no evidence whatsoever in the Commission’s opinion to support them. There is no evidence or that there is going to be anything like that kind of fact, of cost increase in the future. This gas is the gas that has already been found. This gas, they have already had the lease costs, the dry hole cost, the drilling cost, all of the costs have been expended in the past except the cost of sitting there and letting the gas flow from the well bore into the pipeline. And as New York points out in its brief those cash cost actually decreased between 1968 and 1971 and there is no finding in the future that those costs are going to increase in any perceptible degree and no conceivable possibility that those costs will increase in the realm of hundreds of millions of dollars, as is involved in these half-cent increases. The Commission never made any findings as to how much good these half-cent increases were going to do. Whether they were needed, in the first place and if they were needed, there was no balancing of the hundreds of millions of costs versus the probable new reserves that will be gotten as a result of them. So this is what disturbed Judge Leventhal too. Judge Leventhal, addressing this precise issue in the Texas Gulf Coast case concluded that since the rates for new gas had been expressly found by the Commission to be adequate, alone, the rates for new gas alone and to induce capital investment in the area, there was no basis for an extra allowance to rates for old gas to accomplish all over again identically the same thing. Your Honor, I would like to reserve the rest of my time for rebuttal, if I may.
Warren E. Burger: Very well Mr. Morrow. Mr. Forquer.
Leo E. Forquer: Mr. Chief justice and may it please the Court. I would like first of all to take a little time to give a chronological resume of what happened in these cases. It may duplicate certain things that have been said before, but I think it gives a better perspective on it. The first Southern Louisiana case was initiated in 1961 and was decided in 1968, shortly after this Court’s affirmance of the Commission in the Permian case. The rates established in that proceeding were based on 1960 costs and were lower than the guideline and inline rates which the Commission had previously established for Southern Louisiana. The Commission devoted very little discussion to the gas supply situation, but concluded that its rates would induce adequate supplies. It said that findings to production and reserves to production ratios were not significant in helping to determine reasonable rates. Among the many applications for rehearing presented to the Commission was one by the pipeline purchasers group that indicated they were having difficulty purchasing sufficient supplies of gas to meet their customer’s demands and that the rates were inadequate to increase that supply. While the Commission denied rehearing, it recognized the inadequacy of the cost and reserve data, particularly that with respect to the offshore federal domain area of Southern Louisiana. Accordingly, it lifted the indefinite moratorium that it had imposed on price increases in that area to the extent necessary to permit certain limited increased rate filings, for gas sold under contracts dated after October 1, 1968 and it limited the moratorium on similar onshore sales to five years. At the same time, it instituted a new proceeding which was to reexamine the rate for offshore Southern Louisiana, establish a new just and reasonable rate for that area. This was the beginning of South Louisiana 2, the case which is now before this Court. Later that same year they expanded the proceeding so that it encompassed the entire area involved in the First Southern Louisiana case. In September of 1969, before this case, the first Southern Louisiana 1 was submitted to the Court for review. The staff of the Federal Power Commission issued a report, indicating the national gas supply situation had deteriorated, the reserves to production ratio and the findings to production ratios had declined sharply. They concluded that unless aggressive action was taken to increase the finding of gas, supplies would soon not be adequate to meet demands. They pointed out that the findings in 1968 were less than production and that there would probably be regional supply deficiencies as early as 1973. They were much too optimistic because early as late fall of 1970, one or more pipelines were curtailing supplies of gas to firm customers. In its review of South Louisiana 1, the Court below indicated its misgivings with respect to the Commission’s consideration of the supply situation and their lack of any attention to the reserves to production or findings to production ratios. However, they felt that with the presently pending South Louisiana proceeding, now before the Commission that it would serve little purpose to remand or to reverse or to set aside the order which was before them since the same thing was being investigated. They said, however that it’s possible that the Commission may find it advisable to immediately modify its order or it might set aside the order affirmed here. They said the Commission has the power to take these actions if it finds them appropriate. Petitions for rehearing were filed with the Court and it was argued that the Commission had no authority to set aside orders which they had finally issued. And the Commission itself, in response to request from the Court said we have no authority to make retrospective changes in rates which we have established and which are finally affirmed unless this Court tells us that we can do so. And in its order on rehearing, the Court made this and I wish to quote this statement, “We wish to make crystal clear the authority of –-
Warren E. Burger: Where are you reading from now Mr. Forquer?
Leo E. Forquer: Sir, this is the order on rehearing --
Warren E. Burger: Where is it in here?
Leo E. Forquer: Page 5 of the brief.
Warren E. Burger: Is it in the appendix too?
Leo E. Forquer: It’s in the brief that -- page 20, the bottom of page 20 of the Government brief. “We wish to make crystal clear the authority of the Commission in this case to reopen any part of its order that circumstances require be reopened.” Under Section 19 (b) of the Natural Gas Act, this Court has broad remedial powers that in here in the Court of Equity and pursuant to our equitable powers, we make it part of the remedy in this case with the authority of the Commission to reopen any part of its orders, including those affecting revenues from gas already delivered is left intact. The Commission can make retrospective as well as prospective adjustments in this if it finds that it is in the public interest to do so. I might say that the rates which were established by the Commission in Southern Louisiana 1, either through Court or Commission stays were never made effective. Now petitions for certiorari were filed with this Court and were denied in December of 1970 and in the same month, the Commission reopened South Louisiana 1 and consolidated it with South Louisiana 2. In the meantime, pursuant to an order of the presiding examiner and also consistent with the provisions of the Administrative Procedure Act and the Commission rules, settlement negotiations were being conducted by the parties to this proceeding. I might point out that the Commission staff participated in all of these conferences, a member of the staff presided at the conferences and the staff supported the settlement which came before the Commission in this case. The Commission issued its opinion and order in July of 1971 and its order was affirmed by the Court below [Inaudible] legal issues that are presented to the Court in this case.
William O. Douglas: As respect to SoLa number 1 or with SoLa number 1.
Leo E. Forquer: How’s that Your Honor? I am sorry.
William O. Douglas: As respect to SoLa number 1.
Leo E. Forquer: The issue as to SoLa.
William O. Douglas: Concerning that, who stands -- Mobil does not stand opposed to that?
Leo E. Forquer: No, I don’t think so Your Honor.
William O. Douglas: Any party [Inaudible]?
Leo E. Forquer: It is New York and MDG. They support SoLa I and say that the Court had no authority to give us the Commission authority to do anything about --
William O. Douglas: The party to -- who stand against SoLa or --
Leo E. Forquer: Against SoLa I are the, all the people who joined in the settlement proposal in SoLa II.
William O. Douglas: Except Mobil?
Leo E. Forquer: Mobil, that’ right. Well, they didn’t join it, they opposed consistently Your Honor. The first issue that -- legal issue before the Court is whether the Commission did have authority or rather whether the Court below had the authority to authorize the Commission to take another look at its decision in the first Southern Louisiana case and make retrospective as well as perspective adjustments.
William J. Brennan, Jr.: Do you know Mr. Forquer whether that question was raised on the petition for cert here from --
Leo E. Forquer: Indeed it was, Your Honor, it was the primary issue that was raised before the Court at that time under the petitions. Under Section 19 (b) of the Natural Gas Act, the Court of Appeals of course has authority to set aside an order in the whole or in part or it could order additional evidence to be heard by the Commission upon such terms and conditions as it deems proper. Now the Court below was greatly troubled by the Commission’s failure to discuss supply and demand and its lack of concern with the reserve and the finding ratios. They felt that the decisions with respect to the validity of Southern Louisiana 1 should be made by the Commission who made the original decision because they have the data which indicated what the supply situation was and only they had the expertise to evaluate that data and to evaluate the impact of the Southern Louisiana 1 rates on supply. It seems to us that it is entirely consistent that this Court’s opinion in the Ford Motor Company case, that Courts of Appeals in these instances are vested with equity powers and that, as the Court said in that case, while the Court must act within the bounds of the statute and without intruding upon the administrative province, it may adjust its relief’s to the exigencies of the case in accordance with equitable principles governing judicial actions. We think that is what the Court below did in this case and gave the Commission the authority to reopen its previous order. If that is true, the argument made by certain of the petitioners, that the Commission was granting reparations by its order in this case obviously is not correct. Now the second legal issue concerns compliance by the Commission with the three criteria established by this Court for review in the Permian case. One, did the Commission’s order abuse or exceed its authority? Two, were each of the order’s essential elements supported by substantial evidence? And three, can the order be expected to maintain financial integrity, attract necessary capital and fairly compensate investors for the risks they have assumed and yet provide appropriate protection to the relevant public interest. Now as had been the Court’s concern in Southern Louisiana 1, Commission’s concern in Southern Louisiana 2 was directed to the supply situation of gas and the demand for it. The Commission pointed out the steady decline in both the reserves to production and the findings production ratios and stated that their minimum objective in the case was to halt the downward trend of the reserved production ratio. They pointed out that the estimated demand in South Louisiana would increase from an annual figure of six trillion cubic feet per year to nine-and-a-half trillion cubic feet in 1975. And in this connection, this Court said in Permian, we do not suggest nor did the Commission that the Commission should not continuously assess the level and success of exploration or that the relationship between the reserves and production is not a useful benchmark of the industry’s future. Now the Commission indicated that it was unable to quantify the volumes of gas which would be elicited by a particular rate. But they did find that there was a strong positive relationship between price and supply or exploratory effort. They also pointed out that capital formation for gas exploration and development had been declining since 1957 and that the industry’s capital requirements had increased and that the cost of producing gas have continued to climb.
William J. Brennan, Jr.: May I ask Mr. Forquer? I gather that the Fifth Circuit did apply the three criterion of judicial review under Permian?
Leo E. Forquer: That’s correct, Your Honor.
William J. Brennan, Jr.: And concluded that --
Leo E. Forquer: They had met those tests.
William J. Brennan, Jr.: They were all satisfied.
Leo E. Forquer: That’s right.
William J. Brennan, Jr.: Now, what’s the scope of our review, of that determination of the Fifth Circuit?
Leo E. Forquer: Well, if you followed it.
William J. Brennan, Jr.: Are we to do the job of the Fifth Circuit did?
Leo E. Forquer: Not in our view, Your Honor.
William J. Brennan, Jr.: What do you think we should do?
Leo E. Forquer: I think that you should look at the general result of the Commission’s rate order to find out that if the ultimate conclusions the Commission arrived at were appropriate and reasonable, but not to weigh the evidence as the Court of Appeals was required to do. Now in an attempt to meet the problems of declining supply and inadequate capital formation, the Commission approved a rate design-formula which encompassed several facets, all of which were directed to in an attempt to increase the supply of gas available to the consumers in this country. This formula included base area rates. It included fixed and contingent escalations. It included refund write off provisions and each part of the rate design was directed to the problems facing the Commission. The rate design had to function for the entire area and apply to many producers in differing circumstances and the record show that the industry had placed great reliance and had expanded internally generated funds to finance its exploratory efforts. The basic finding that the Commission made was that a portion of the funds required for further exploration and development in South Louisiana will be generated by the increased cash flow from the higher rates for flowing gas and to further the operation of the contingent escalation provisions. Flowing gas resources represent an important source of capital to the industry. The additional resources from a higher new gas rates and the escalations allowed will also contribute to the total of needed capital. Now in their approach to designing these, the Commission felt that they could not and should not be restricted to encouraging increased supply solely by one method and that was by the area rates which they established, particularly, the rates for new gas. However, they discussed, as they had, as had been done in Permian the cost -- current cost data which was before the Commission in the determination of the new gas rates. They indicated that the lack of precision in these costs and the difficulties involved in making allocation procedures made it desirable that they indicate a range of costs based on reliable and credible data. As a matter of fact, this Court, in a footnote in the Permian case said that by one estimate, the costs of non-associated gas are 45% separate, 31% joint and 24% common. So they are great areas for differences and judgment with respect to those. Accordingly, they examined the cost data and established what they considered a range of reasonable costs and utilize as step witness presentation with that in that respect who had recommended a rate of 25 cents per MCF. In order to be assured that there would be enough in this to encourage additional supplies, the Commission indicated that the rates for -- the cost for least acquisition and for drilling were all going up and they should be increased slightly. They approved a rate as found just and reasonable for 26 cents and said it should operate to elicit additional supplies of gas. It used a similar method for flowing gas to that which was approved by this Court in the Permian case. The only difference was that they had a direct assignment of exploration development cost because there was evidence in the record which justified that use and it approved to settlement rate of 22 and 38 cents. The Commission however, at the same time pointed out that under this traditional old gas costing method that the exploration and development allowance too often indicates the cost of exploration under past periods rather than the current increased cost and it added a non-cost component to the old gas rate to increase the cash flow to producers for an increased exploration development effort.
William J. Brennan, Jr.: And how was that computed?
Leo E. Forquer: It was a -- the figures, if I recall correctly Mr. Justice Brennan, were from approximately like 20 cents to 25 cents, 24 cents I think it was. The rate which the staff had developed was 21.18 cents and they increased it to 22.375. Now, probably one of the things that has been most vigorously attacked here by the petitioners are the provisions for refund right offs. This was the really the second leg of the Commission’s attempt to encourage additional supplies to South Louisiana. The Commission first of all went back and looked at the rates which had been established for past periods and established new rates for gas delivered under contracts dated prior to 1961 and from to 1965 and from 1965 to the date of their order, and established rates which were consistent first with what the Commission had used in certificating sales of gas prior to that time in Southern Louisiana and secondly, their Guideline Policy Statement prices. But it also reflected back from the 26 cents for a new gas, a reduction which was consistent with the increase cost of gas which the record in this case reflected. The determination of a total of $150 million of refunds was obviously in a sense a compromise with by the parties who had participated in the settlement conference, but they resulted from these rates which the Commission established.
Byron R. White: Well, this was a reestablishment of just and reasonable rates that have been established in SoLa I?
Leo E. Forquer: For refund purposes Your Honor they were --
Byron R. White: And just for refund purposes?
Leo E. Forquer: Yes, well they determine what the amount refunds would be.
Byron R. White: There would be any anything that collected over that they had refund and that happen -- it ended up being a $150 million?
Leo E. Forquer: That’s right, Your Honor. Now, rather than have the cash --
William J. Brennan, Jr.: You mean they just didn't pick the 150 million out of the air, and say that was a fair figure?
Leo E. Forquer: Well, what happened was that the 20.625 rate for the first period would generate so much and the 21 a quarter, the next period with so much and then the final period up to January 1, 1971 was placed in a percentage of the difference between the SoLa I rates and SoLa II two rates to equate to a $150 million.
Byron R. White: Well, it nevertheless, I suppose to have the authority to reduce the refund you had to raise -- the Commission had to raise the just and reasonable rate?
Leo E. Forquer: That’s correct.
Byron R. White: Now, what are you going to do with the work off?
Leo E. Forquer: Well that’s – that’s the point. The work off of the refunds was related directly to the finding of new gas --
Byron R. White: Well, I know but does the right -- but you’re going to work off -- they can work off the remainder of the refund?
Leo E. Forquer: That is correct.
Byron R. White: And every time they work off for a little bit of it, I bet the just and reasonable rates goes up?
Leo E. Forquer: There’s no change in the rate, but they [Voice Overlap] the effect I guess is that they get --
Byron R. White: I didn’t realize -- Are you asserting that Commission may find, may suspend rates or let rates go into effect subject to refund which they did in SoLa I, right?
Leo E. Forquer: That’s right.
Byron R. White: And then establish just and reasonable rates lower than what the rates were and yet forgive a refund?
Leo E. Forquer: Lower than they were or a higher than they were?
Byron R. White: Lower than have been charged. Let’s assume that they filed rates and the Commission let’s them go into effect, subject to refund?
Leo E. Forquer: Yes, Your Honor.
Byron R. White: Then they have a proceeding and they establish what the just and reasonable rate is and it is lower than what has been charged?
Leo E. Forquer: That’s right.
Byron R. White: Now do you say they have it -- they have discretion if they find that the just and reasonable rate is lower than what has been charged to forgive a refund?
Leo E. Forquer: I think that they do have authority given a proper --
Byron R. White: Where is the authority for that?
Leo E. Forquer: Well, first of all the Natural Gas Act itself says that they may order refunds. It does not say that they must.
Byron R. White: So why did they even go to the trouble of resetting just and reasonable rate?
Leo E. Forquer: To establish the refund levels, Your Honor.
Byron R. White: Well, they didn’t have to, they could just say --
Leo E. Forquer: Well but they -- as a matter of fact the staff witness in the case suggested that no refund should be ordered that the -- those who had charged excessive rates would be better of if they retained these amounts and therefore had additional [Voice Overlap]
Byron R. White: Well, do you have some judicial authority for the fact that they -- that the Commission may forgive refunds even though it finds that the rate has been charged -- that has been permitted to go into effect subject to refund is higher than what the just and reasonable rate is?
Leo E. Forquer: In the Hugoton-Anadarko case, Your Honor, one of the Commissions area rate proceedings, the Ninth Circuit so held.
Byron R. White: And that they could just need an order of a refund even though they --
Leo E. Forquer: Well, they did not require certain portions of them to be paid back. But it seems to me that the Commission has a discretion to do what is in the public interest with respect to these refunds. If in an appropriate case they would find that for instance the ordering of refunds would cost such great damage to the industry that the ultimate consumer really would suffer, I think that they have the authority to so excuse.
Byron R. White: Well you certainly are -- you certainly are putting the – certainly, you are charging all consumers on all the money for a future exploration?
Leo E. Forquer: Well they -- one of the -- if you don’t do that perhaps, Your Honor, they won’t have any gas. This was again an attempt to get a greater supply of gas and under the refund --
Byron R. White: Even though the Commission might have even set a higher price for new gas?
Leo E. Forquer: That’s right they --
Byron R. White: Or for flowing gas?
Leo E. Forquer: They did include an element in flowing gas to encourage additional exploration and development, but they did not want to rest on simply the new gas rate as the sole incentive to bringing forth new supplies of gas. Now in these $150 million of refunds if in fact those owing those amounts do not find and dedicate new supplies of gas, they must pay these refunds in cash.
Byron R. White: This $150 million?
Leo E. Forquer: Yes, Your Honor.
Byron R. White: Not the old amount?
Leo E. Forquer: Not the old amount. Indeed, because the Commission said that the 546 Opinion of Southern Louisiana 1 had not given them a proper rate of return or properly reflected exploration development expenses.
Byron R. White: And anybody with flowing gas I suppose and with a refund obligation, the larger the better now, I guess has got to -- had quite an incentive, or quite an advantage in exploring for -- in bidding for a new gas I suppose?
Leo E. Forquer: Well he -- the only why he is not getting any additional revenue by this he is not having to pay out something that he might otherwise, but he has a very heavy responsibility if he has large refunds to find very large quantities of gas and dedicate it to the interstate marketer, he who will have to pay this.
Byron R. White: Yes but with -- forget the refund for the moment. A person with first with flowing gas, the price is for that flowing gas has been increased?
Leo E. Forquer: It has been increased to 22 and three --
Byron R. White: For not discovering non-cost item -- exploration item?
Leo E. Forquer: There is a small component in there for that, yes Your Honor.
Byron R. White: And that is going to be escalated for that purpose too?
Leo E. Forquer: It’s going to be escalated once because of the increase in cost that the Commission found were involved and then there are the contingent escalations to flowing gas rate in the event that additional dedications are made and these dedications do not count until the refund requirements are paid off for those producers who were involved in refunds.
Byron R. White: So your suggestion is that we -- that is perfectly alright for the Commission to tell all consumers, “well, you’ve been paying unjust and unreasonable rates, but nevertheless we are not going to order a refund because we think we should stimulate further explorations?”
Leo E. Forquer: We think it they could say I think quite properly. We think it as much more in the public interest that additional supplies of gas be furnished so that you will continue to have gas than it is that you get these amounts of dollars in refunds and if we do not get the gas --
Byron R. White: Why put it on just to people who have been buying old gas? I mean they’ve been paying unjust and unreasonable rates and the larger and more unjust, the more unreasonable they are, the more they are going to be charge for a future price?
Leo E. Forquer: But Your Honor there was no other source to get these additional supplies of gas unless you are going to rely solely on the rate for new gas. New gas wasn’t in existence. You had to go back to be tied with those who were presently in the business who presently had reserves, who presently were delivering gas to encourage them to go forward and find additional supplies.
Byron R. White: Well, has it been a traditional function of rate making to finance expansion?
Leo E. Forquer: Well, I think that this Court certainly --
Byron R. White: And to build up internal sources of capital?
Leo E. Forquer: This Court indicated in Permian that was entirely --
Byron R. White: [Voice Overlap] I said traditional.
Leo E. Forquer: Traditional not in the utility stands.
Byron R. White: And I agree with you, I know what the Permian said?
Leo E. Forquer: Not in the public utility sense it certainly was -- is not traditionally true.
Byron R. White: Yes, true.
Leo E. Forquer: But this is a situation wholly different again as this Court pointed out in Permian where the gas producing industry is entirely different situation than the ordinary public utility. One other item and the third leg of the Commission’s attempt to increase gas supply were the contingent escalation provisions which were definitely key to new dedications of gas in Southern Louisiana. By that provision if after refunds have been paid off producers dedicated up to 15 trillion cubic feet of gas, there could be increased rates as higher as the cent and a half. Now, the refund write-off provisions were completely taken care of, the contingent escalations were completely taken care of, there would be 30 trillion cubic feet of gas supplied for the interstate market. I would like to comment about one other thing and that is the argument that there was discrimination as between producers because some of them had earlier settled their obligations and would have much lesser refunds. In connection for instance with petitioner Mobile Oil Company, they made a settlement in 1964 in which they were excused from refunds of approximately $14 million and subsequently when a moratorium which they proposed in their settlement had expired they chose to continue with those rates and not make any additional filings. Now these were management determinations. These were things that if they wanted to make a settlement in 1964 and get their $14 million then, if they chose not to make increased rate filings in which they were no moratoria, that was entirely up to them and did not require this Commission to take all of those aspects in the consideration. But what they tried to do was to make broad general rules covering all of producers in this wide area, but primarily in an attempt to bring forth additional supplies of gas.
William O. Douglas: I haven’t found that Ninth Circuit Court of Appeal case.
Leo E. Forquer: The Hugoton-Anadarko.
William O. Douglas: What was the name of it?
Leo E. Forquer: Hugoton-Anadarko Area rate case. Its 466 F. 2nd 974 and I think the refund provisions are discussed at page 990.
William O. Douglas: [Inaudible]
Leo E. Forquer: No --
Speaker: [Inaudible]
Leo E. Forquer: Yes, Your Honor no petition for review were filed --
Speaker: (Inaudible)
Leo E. Forquer: 466 Federal Second the Ninth Circuit.
Warren E. Burger: Mr. Rebman.
John R. Rebman: Mr. Chief Justice and may it please the Court. I want to address my first and earlier remarks very briefly to the argument with respect to the question of the powers of the Court of Appeals to provide the Commission in turn with the power to set aside and reconsider the first Southern Louisiana decision. And I want to call attention to --
William O. Douglas: It was a little more than that, wasn’t it? Didn’t they -- the result of the consolidation of the first case and the second case and the hearing on the two combined?
John R. Rebman: Yes, indeed Your Honor, that’s quite true. And your question ties to the point that I wanted to make and call the Court’s Attention. To that portion of the Fifth Circuit’s opinion on appeal on rehearing where the court indicated and this is after the 428 F. 2d 445, that their disposition of the case was influenced by the existence of a new proceeding which the Commission itself had already committed and their specific statement was that, in fact the existence of the new proceedings which as we understand then will take into account. Many of the issues whose absence has concerned us here has been one of the factors we have considered in deciding to affirm the Commission’s decision. Now and that’s into the court and I think that the important thing about this is to tie into this Court’s opinion in the Ford Motor Company case where the Court regarded as a contention without substance whether the Court below, Court of Appeals set aside the opinion or whether it allowed the agency there, the NLRB to set aside the opinion. And the Court characterized the contention on that ground as one without substance. And this is a situation I think where the Court of Appeals found the Federal Power Commission in an error of transition because to read the two opinions of the Court -- the Commission side by side reflects an enormously different outlook about the gas supply situation in this nation. In the first opinion, there was little or no concern by Commission. In the second opinion three years later, it had become virtually an overriding consideration. Turning if I might next to the questions with respect to the refund discharge and the questions raised by you Mr. Justice White, I think it’s very necessary in looking both of the refund discharge and contingent escalation question to start at the beginning of the book and not in the middle of the book as petitioners have done here. The beginning of the book is this Court’s analysis in Memphis and Mobile in the early 1960 of the function of Sections 4 and 5 and there the Court pointed out that this is a punitive sort of regulation in this respect. The buyers and sellers, the parties who have regulated start out in the first instance with individual contracts which they make according to their own evaluations of the bargain. Then superimposed on top of that becomes the regulatory powers of the Commission. Now, this I think is the source of a good deal of the argument and confusion with respect to the refund write-offs. What this Commission was working on in the Southern Louisiana case was a multitude of contracts by multitude of parties that had been negotiated and entered into at variety of different levels. Some of these were affected by refund orders, some were not. The important -- sir?
William O. Douglas: No company’s cost you know.
John R. Rebman: That’s correct Mr. Justice Douglas they are in fact the Commission --
William O. Douglas: You have found in this order some discrimination?
John R. Rebman: That’s right. In fact, the Commission excluded from evidence some occurrence of individual company proved by some companies.
Warren E. Burger: Didn’t the Permian base in opinion indicate that there was either -- by inference that there was their potential for built-in discrimination?
John R. Rebman: That’s absolutely correct Mr. Chief Justice.
Warren E. Burger: By my arbitrarily drawing area line?
John R. Rebman: Area lines and also the utilization of composite costs and this was thought by the Court there to be and simply an unavoidable aspect of group regulation that the agency itself was not required to look at the individual financial impacts on each entity being regulated.
William O. Douglas: Now the chicken has come home to roost?
John R. Rebman: According to some parties.[Laughter Attempt] Here, I think carrying forward the concept of the impacts on these individual companies I think the Court should be very interested in looking at some of the materials in the volume 5 of the appendix because there, one can evaluate how revenue reductions, resulting revenues, and refunds impacted on individual companies because you find a very peculiar thing. We hear the greatest complaint with respect to the refund write-off from Mobil and its very interesting to look at the revenue of the impact of the Commission's decision which gives Mobil the highest resulting average revenue, third highest in the 23 largest producers listed and in fact the highest in the 10 largest, although their refunds are relatively modest. Now, I don’t know why and I don’t think it’s important why. What’s important is that different parts the order impact different producers differently. Now --
Byron R. White: But the revenue would be somewhat higher [Inaudible]
John R. Rebman: No, sir.
Byron R. White: Why not?
John R. Rebman: The revenue under the order prospectively and I am speaking of prospective revenues only is higher. The prospective revenues are not affected by the refund that’s a locked-in period for the past only. And I wish I could get to some of the questions that were bothering you Mr. Justice White [Laughter Attempt] and I think perhaps there’s one or two key elements here and that is that the Commission while it did indicate its view that the refund floors which it had established for a past period were just and reasonable. It went further. It expressed the opinion that the formula -- the formula I am reading from page 5 -- 654 of volume 2 of the appendix, that the formula for determining the refund obligations during this period is found to be just and reasonable. So I think you have to accept the Commission’s view that it was dealing with a range of costs, old and new and that there is a zone of reasonableness for just and reasonable rates not a single .2 decimal place estimate. Now, carrying the fixed amount of refund obligations forward as to its impact on the individual producers, I would come in to your reading very strongly the brief filed by intervenor Associated Gas Distributors. There is a large group of distribution companies who took very active part in this case and they expressed the whole problem very, very well I think. Throughout producer regulation from the very first the Commission has been confronted with this confounding problem of trying to link together a certain price in a certain volume of gas. It has been unable to do it, it cannot do it. It is inherent in the nature of an industry that extends the bulk of its exploratory moneys for unsuccessful project. The producers in general every year expend in the neighborhood of $1 billion on what are unsuccessful projects, mostly dry holes. There’s just no way that you can link a specific price to two decimals to a specific volume of gas. The Commission has recognized this and so did the Fifth Circuit. So what this refund does this is what AGD points out. This is one of the first times that the Commission has been able to provide this linkage between its price and supply. This is a situation where the consumer either gets the money as a refund or he gets the new gas commitment. And the same thing applies with respect to the contingent escalation. The consumer does not pay that unless the industry provides the total interstate dedications that are specified in the opinion.
Byron R. White: And who will get the refunds that are probably made in pipelines although they would be passed through?
John R. Rebman: In general, if Commission provides for a passed through from the pipe lines to their distribution customers and then it is turned over to the local state agencies.
Byron R. White: So you think, we really are talking about the consumers not just the pipelines in general?
John R. Rebman: That’s correct. There’s no question as to pipelines in general are under orders to flow through. Now, the Commission itself made a judgment from the same page I cited earlier a finding. We find that such an incentive being the refund discharge will be a net benefit to the consumer by obtaining additional gas supply. The reason it is such a benefit is because of this direct linkage of the AGD describes between price and supply and we think this is one of the crucial parts of the case.
Byron R. White: But the Commission must presume and I suppose the Court assumes if you read the Fifth Circuit?
John R. Rebman: Yes, sir I do.
Byron R. White: That the refunds are given in order to stimulate exploration. Now, the use of the refunds, are these [Inaudible]?
John R. Rebman: In fact one can go even further Mr. Justice White the --
Byron R. White: Well that’s my entire point?
John R. Rebman: And unless they -- unless, you see here is the thing. Those refund amounts can be expended to exploration and the unsuccessful and the companies still be left to raising the refund obligation. So I think it’s a sort of --
Byron R. White: But you can also not expend it for exploration at all and still not have the refund?
John R. Rebman: No sir, that’s not correct they have to and each individual company has to make a commitment.
Byron R. White: But they already have their refund obligation because of that situation [Inaudible]
John R. Rebman: I am sorry sir you were speaking in reference of the First Southern Louisiana case and I was speaking of the increment.
Byron R. White: The Government are given the refund obligation if that is so what it wants.
John R. Rebman: Yes, sir. I think that, that should be kept in the context, however the fact that while a Commission opinion issued with respect to that as Mr. Forquer pointed out that opinion never became final and in its second decision the Commission itself recognized that its error in that regard. And here is an interesting point about that the -- if you look at page 277, I believe it is at volume 5.
Byron R. White: You say the commission has conceded that there is error [Inaudible]
John R. Rebman: No as Mr. Forquer was pointed out --
Byron R. White: What happens if they were quite right? Before we know, this time, they were quite right. And even use the word affirmance.
John R. Rebman: They use the word affirmance but they use many other words Mr. Justice White including its remedy.
Byron R. White: [Inaudible] that it was an error?
John R. Rebman: I don’t think I said that. If I did, I misspoke myself. But I wanted to call the Court’s attention to the fact that most of the refunds and this shows on page 277, volume 5 that are required by the present opinion all in the late years the late 60s and early 70s and this is why it was most appropriate for the Commission to focus on its cost computation made as of the test year 1969 not to test year 1960 which it had earlier used and if you recall Mobil described, Mobil’s counsel described before you the process of individual companies settlements through the mid 60s. And these settlements themselves had eliminated most of the refund obligations by making refunds through the early late 50s and early 60s. So we would like to most appropriate that the Commission now looks at the 1969 test year for the derivation of its present refund obligation. One additional point I think should be made in this respect and it ties back to the Court’s decision in the second Phillips. You recall that Mr. Forquer pointed out that a staff witness in the second part of the case made the finding and a recommendation that no refunds at all should be required because the revenues received during that period were less than his cost estimates on an aggregate basis. And this is precisely the reason that in Phillips too this Court affirmed the Commission for not requiring refunds of that company in a similar revenue cost position, and in our view this finding gave the Commission the power to utilize this refund obligation as a supply eliciting factor in its overall rate design. Thank you.
Warren E. Burger: Thank you. Mr. Morrow, do you have something further?
George E. Morrow: Yes, Your Honor if I may.
Warren E. Burger: You have got about four minutes left.
George E. Morrow: Thank you sir. First, with respect to Justice Brennan’s question about the standard used by CA Five in reviewing the rate. We contend that they used the wrong standard and that this Court will look at the Texas Gulf Coast Trade, you’ll find the exactly the right standard that should be used.
William J. Brennan, Jr.: What’s [Inaudible] to ask Mr. Morrow.
George E. Morrow: Sir?
William J. Brennan, Jr.: Do you think both these two decisions can stand together?
George E. Morrow: No sir, one of them is wrong.
William J. Brennan, Jr.: Whatever we do in this case will govern just to happen on --
George E. Morrow: That case used of virtually identically the same or settlement provision that this case has used, yes, Your Honor. So it was modeled directly after this case. They both got to stand afoul it seems to me and we suggest that the general result that Mr. Forquer was said that the Court used there, what’s the general overall result, that’s not the proper standard. This Court has said that each essential element of the cost of service must be supported by evidence. And we contend that it’s not in this case. Now, as to the matter that Your Honor raised Justice White, as to the discretion of the Commission to order refunds, we treated that right strongly in our reply brief and would commend that to your attention because we take the position that the Commission has no discretion to allow a company to remain unjustly enriched by unlawful exactions from its customers, particularly under an Act that’s supposed to give complete permanent and effective bond of protection to the consumers. As to the compromise -- as to the $150 million of refunds, I must take issue with Mr. Forquer as to how that was arrived at. It was pulled right square out of the air. It was a result of settlement negotiations and after that $150 million figure had been reached, then the Commission started building a floor of cost under it to support it. And it couldn’t find the cost in its cost of service to support that reduction to a $150 million and that’s why the Commission went back to 1968 and remodeled its 1968 opinion and all -- and it did so by using a different kind of cost allocation method in this case. The cost allegation method which the Commission used in this case was one it had rejected in every other case it’s ever had of producers. The only reason that this cost allocation method was used in this case was to jack up retroactively the cost in Southern Louisiana 1, so that they would meet this package deal that had been presented to the Commission. If it please the Court, the thing that's basically wrong with this case is that we have a serious question here, a serious problem and the Commission and it demands a rational well thought out result. And what the Commission has done has abdicated its responsibility to a kind of regulation by negotiation by the industry itself. And with respect to the refund -- with respect to the whole thing, you got a negotiation between selling parties who are the producers controlling virtually the entire supply of gas in Southern Louisiana. And buying parties, the pipelines and the distributors who had desperate for gas must to get it from these producers and can resell it at any rate that the producers proposed to sell it to them for and who have no interest in the refunds whatsoever because as Mr. Rebman pointed out the pipelines don’t keep them, they pass them along to the distributors and the distributors do not keep them there, the state regulatory agencies make them passed along. So the negotiations that resulted in this $150 million worth of refunds were by people who were negotiating with other people’s money. And that is how they got down to the $150 million. Thank you, Your Honor.
Warren E. Burger: Thank you gentlemen. The case is submitted.