Earl Warren: Number 60, Sunray DX Oil Company et al. and companion cases. Mr. Simon, you may proceed with your argument.
Morton L. Simon: Mr. Chief Justice, may it please the Court. I appear in these cases on behalf of four clients, the Public Service Commission of the State of New York which is a regulatory agency of that state, and three public utilities serving in the Philadelphia, New York area; Philadelphia Electric Company, Brooklyn Union Gas Company, Long Island Lighting Company. We appear in these cases are representatives of the consumer interest. In these proceedings before the Commission, the contest was between the producers who are regulated by the Commission and who were the applicants for certificates of public convenience and necessity on the one hand and ourselves with some general support from the staff of the Federal Power Commission on the other. There are three principal issues in this case; their short form is need, in-line and refund. On the need issue, the question is whether the Federal Power Commission can grant certificates of public convenience and necessity to the producer applicants authorizing them to make their sales in interstate commerce without first making a finding that there is a public need for the gas proposed to be sold. On that issue it was our position that the Commission was required to make a finding of need. The Commission held that it was not. The District of Columbia Court of Appeals, District of Columbia Circuit in the decision by a Chief Judge Bazelon agreed with us and this Court has granted certiorari on that issue. On the second question, the so called in-line issue, the question is at what initial price should the Commission certificate these sales to be sold. In each of the three dockets, the Commission elevated the in-line price that it had previously found for each of the three areas by one cent per Mcf to correspond with a guideline level that it had previously announced. We challenged that once in escalation. The Court of Appeals for the Tenth Circuit has affirmed the Commission's escalation in the District 4 case Amerada. The District of Columbia Circuit has reversed the Commission's escalation in the Districts 2 and 3 case, Hawkins and Sinclair. The Commission, I should add, decide at that one against us also as it had decided the need issue. The final issue in the case is if the sales are certificated, should the producers make refunds of the amounts that they have collected under temporary certificates during the pendency of the litigation to the extent that those collections exceed the in-line price as finally determined by the Commission after hearing. As indicated by other counsel earlier, the Commission originally held in a prior opinion, the Skelly Oil opinion in August of 1962, that it would not require refunds. We, along with Mr. Coleman's client, United Gas Improvement Company appealed that decision to the D.C. Circuit. The D.C. Circuit in January '64 held that the Commission could not excuse refunds merely because there had been no expressed refund condition in the temporary, that this Court denied certiorari after the D.C. Circuit's decision. And up to that time, the Commission had decided against us. After that decision, the Commission substantially decided in our favor. Accordingly, on these three issues we are opposed to the Commission on need and in-line and we in the Commission are now in agreement on the third question, refund, although there is a slight difference which I will get to when I discuss that issue. Now, it appears to us that one of the reasons that the Commission went wrong here is because it overlooked the very basic elements that are involved in this case. And I want just for a moment to go back to the basics that are involved in the Natural Gas Act. These are very elementary matters. I apologize to the Court for being so basic. But I think that even as expert a body is the Commission may have jumped in a little too late. May not have gone back into what the Gas Act is all about. This Court has reminded that time and time again, that the Natural Gas Act is designed to protect the consumer. It is a piece of consumer protective legislation. That is its purpose. That is its design. That has been the consistent interpretation given to it by this Court. This Court has phrased that protection in various ways, at various times but it has always been extremely consistent. It was to protect the consumer from exploitation of the hands of Natural Gas companies. It was the phrase that Mr. Justice Douglas used in the Hope case back in the 40s. That phrase was repeated in a whole series of cases in the late 50s and the early 60s. Mr. Justice Clark in the CATCO case which is really the lead case so far as this whole area of producer certification under Section 7 is concerned, said that the purpose of the Act was to provide a complete, permanent, and effective bond of protection to the consumer from excessive rates and charges. This then is the purpose of the Act. And I think that it is interesting both in the Commission's opinion to some extent in its brief and on argument yesterday that Commission counsel has noted that the Commission has taken a middle ground between the consumer contentions and the producer contentions. Now, that maybe a perfectly accurate description of what the Commission did, and I will come to that later too. But I don't think that is -- it is any sort of a defense for the Commission to make of its actions here. It is not charged by statute with adopting a middle ground between contending conditions -- positions. It is charged with protecting the consumer and that is an affirmative duty. And when it has failed to discharge that duty, this Court and the Courts of Appeals have found it necessary to remind the Commission of its duty and to reverse the Commission's action.
Potter Stewart: There's no other duty at all although except every single contentions made by every representative of every consumer.
Morton L. Simon: Certainly not, certainly not. And I -- let me make perfectly clear, Mr. Justice Stewart that by saying that we are consumer representatives does not relieve us one iota of the burden of making persuasive arguments in the statutory terms to you and to persuade you. And I meant to obtain no advantage in that sense. I merely wanted to indicate what our interest was. The Commission is certainly not bound to accept a contention because we make it. On the other hand, I don't think that it's discharging its duty to say that it hit somewhere in between the two contentions. Its obligation is to do what the statute commands it to do, not to mediate to opposing contentions. It's not a mediation board. It has affirmative duties. Now, the section of the statute we're dealing with is Section 7. That came into the Act in 1942. The original act was passed in '38. The original act had -- the heart of the original Act if you will was Sections 4 and 5 which gave the Commission control over rates. Section 7 came in 1942. That was the certificate section. And it says in essence, that no person may sell natural gas for resale in interstate commerce without first obtaining a certificate of public convenience and necessity from the Commission. When an applicant seeks a certificate, the Commission is charged by statute with giving notice and providing for a hearing. The hearing is statutorily required; the Commission has no power or authority to waive a hearing on a certificate application. If at the hearing, it is found among other things, that the certificate is required by the public convenience and necessity. And I think that required in the context of the need issue certainly is the keyword here. If the sale proposed to be made is required by the public convenience and necessity, then a certificate shall issue. Otherwise, it shall be denied.
Hugo L. Black: Is that the complete mandatory basis for your argument on this point?
Morton L. Simon: On need?
Hugo L. Black: On this point?
Morton L. Simon: Yes sir. Yes it is.
Speaker: On need?
Morton L. Simon: Indeed. There are two other aspects of the statute which should be mentioned. One is the Commission has a conditioning power to cure a proposal that is largely correct but partially incorrect. The Commission does not have to deny it in total. It can condition its approval on deletion of the unsatisfactory aspects. And it was its conditioning power that led to the in-line conditioning concept in this Court's 1959 CATCO decision. There is another provision of the Act that provides in cases of emergency, the Commission may during the pendency of a decision on the application for a certificate, grant a temporary certificate without notice and without hearing. This is an emergency power.
Speaker: I don't understand insufficiency proposition that it must consider need. It says that it doesn't have to consider at the time of the application of certificate.
Morton L. Simon: I think that is its contention, Mr. Justice Harlan. Our problem essentially is this. In reading yesterday to you from the decision of the court below and this is in Volume 4 of the appendix -- at appendix page 266, Mr. Schiff read, a large part starting over at 265 and ending on to 266. This is Judge Bazelon's decision in the District of Columbia Circuit. He stopped, however, prior to what I think must be agreed as the operative part really of the D.C. Circuit's decision after discussing what the Court was not deciding Judge Bazelon states, “We decide only that when a party makes a non-frivolous claim that there is a -- there is no public need for the gas, the FPC must give considered reasons if it decides otherwise. Its decision must be made before” and that word is emphasized in the court below. “Its decision must be made before it grants a permanent certificate to the producer.” Now, we think that at the time it issues a certificate, it has to make a finding of need. If it has made a finding of need that is appropriate and applicable in some other proceeding, certainly it can refer to that. We have no objection to that. Our problem is that it did not purport to refer to any other finding of need that it had made. That the orders that it was issue in contemporaneous cases indicated that the pipeline purchasers here involved were in a severe take-or-pay situation in which they had contracted to pay for more gas than they could physically take into their system. And I think it is agreed that that situation imposes additional cost on the pipeline which will eventually be born by the consumer. Our problem with a lot of what the Commission has done is that, the cost goes through the consumer that we are being called upon to pay for much of the Commission's action, and we don't feel that its action is appropriate. Now, the Commission did not make a finding before it issued its certificate. The thought that it can consider it elsewhere, if you analyze what they say very closely, I think, and I do want to be fair that the Commission here. But I think that what you are left with is, they're saying they could examine it elsewhere. They do not really say that it is examined elsewhere or that as to these dockets, it has been examined elsewhere. It's remarkable to me that throughout this entire case, they have nowhere pointed to what other orders they were talking about. Where they decided that there was some need, it would have been very easy to say in August 1963, in such and such an order we considered this problem, we're relying on that. There has never been --
Abe Fortas: Where could they tackle it again, in the pipeline distributor's hearing?
Morton L. Simon: They could in the pipeline hearing surely, no question.
Abe Fortas: Is it your contention that they no longer have jurisdiction to do that or what -- or just -- what is your contention?
Morton L. Simon: Oh, it's too late I -- I think.
Abe Fortas: Too late what, legally or physically?
Morton L. Simon: Legally and practically. I suppose physically it's not.
Abe Fortas: Tell me why it's too late practically?
Morton L. Simon: What the Commi -- I think that there is a human tendency to ratify what you have done. And I think that if you have already certificated producers to sell 100,000 Mcf a day to a pipeline and they are selling it, and they have been selling it for two to three years, that when you come to decide whether the pipeline has a need for that gas two or three years later, you're going to find that they do. You're not going to find that you'll need a silly decision three years ago.
Abe Fortas: You suspect through psychology.
Morton L. Simon: Indeed.
Abe Fortas: But now, as a matter of fact what will happen now is that the -- at some -- a producer has been certificated. At some subsequent time, the pipeline will come in and present to the Commission its application to buy the gas, is that right, to end up --
Morton L. Simon: Not really. Not really Mr. Justice Fortas.
Abe Fortas: -- of the gas.
Morton L. Simon: The principle pipeline proceedings are proceedings in which the pipeline is seeking authority to construct facilities, to make sales, and to make sales itself. And the issue of pipeline need in that kind of a proceeding is, does the pipeline have enough gas to make the sale that it is proposing feasible? Now, it is true that in some cases perhaps many did, although the figure isn't in the record the Commission council yesterday said about 75% of the gas involved some sort of the future sales, involved some sort of pipeline application.
Abe Fortas: For a pipeline construction.
Morton L. Simon: Construction, yes. It is possible that the issue could be raised there but --
Abe Fortas: Well then, are you complaining about the balance of the 25%?
Morton L. Simon: No, I'm complaining about the 100%. Because (Voice Overlap) the statutory scheme says such a review in Section 7 --
Abe Fortas: Alright, I'll --
Morton L. Simon: At the time you issue a certificate --
Abe Fortas: Yes, but forgive me I'm trying to get to the -- went to my mind rightly or wrongly if the administrative reality of what we're dealing with here is the position as follows, taking these certificates, these producer's certificates with which we're dealing right now. Is that the position that -- let's say with respect to 75% of the gas involved, there will be subsequent applications to construct pipeline--
Morton L. Simon: No.
Abe Fortas: -- facilities at which time the need will have to be considered.
Morton L. Simon: No, there are apparently were some conglomeration of various hearings in which authority for the relatively minor facilities to attach the gas have been held, have been noticed and certificates issued in the past. There was one case that did go to hearing, the Lone Star Gathering case subsequent to this. I do want to point -- as I simply, the principal type of pipeline case, the case where the pipeline wants to make sales.
Abe Fortas: Have I made my question --
Morton L. Simon: I think so.
Abe Fortas: I'm not sure that I have --
Morton L. Simon: I think you have. I want to get to the budget type authority. Each year, several years ago, the Commission adopted a regulation. There had been a contention that for the relatively minor facilities, a pipeline might need to attach to supplies. And in some cases, apparently 25% of the cases, it might mean no facilities at all to attach supplies. The sale might be made out in an existing point on the pipeline's facilities. The pipeline each year will say we would like general blanket authority to construct such facilities as we need to attach such gas as we may buy from time to time. The gas is not identified, the facilities are not identified. The Commission said in adopting this regulation, that it had been proposed to exempt these facilities altogether since they were not sales facilities. And the Act speaks in terms of sales, regulating sales, and the facility is used to make sales. They said, “We won't exempt them altogether. We'll give these blanket authorities.” So I supposed that it is in those proceedings where the pipeline gets whatever authority it needs but there is no study in those proceedings as to whether the pipeline has a need for the gas or not.
Abe Fortas: The point that I'm raising and perhaps somebody else will see, as well see address himself to, perhaps the Commission's counsel on rebuttal. Will there or will there not, come a point of time at which you and other interested persons will have an opportunity as a matter of administrative procedure to object to the -- to object on the grounds that there is no need for these facilities? So that if you prevail at that time, the consumers whom you represent, will not be settled with additional cost. That's my --
Morton L. Simon: At no time in the future.
Abe Fortas: -- the question I stated as distilled as much as I can do.
Morton L. Simon: No, I think I understand here the question, Mr. Justice Fortas. The answer to your question is no. The reason for the answer is that the Commission says that there have been other proceedings at some other times. They are not identified. They say some of them perhaps were before these hearings came on. Some were after these hearings came on but they were not identified in any general sense. They were by and large, this budget applications which there's a one or two-page notice that identifies nothing. Now, there was one proceeding in the Sinclair case about almost half of the gas in the Sinclair case was proposed to be sold to Lone Star Gathering Company for in district two, Lone Star was a short line that would gather the gas, do what processing was necessary, resell it to United Gas Pipeline. The sales to Lone Star were included in the Sinclair proceeding. The applications of Lone Star and United had been filed sometime before we had intervened in that proceeding. The Commission never set it for hearing. It issued temporary certificates to the pipelines. It issued first temporaries then permanent certificates in Sinclair to the producers to make the sale. After it had issued the certificates to Sinclair, it set Lone Star and United applications for hearing. We participated in that hearing. And what happened was very interesting. After it went through the hearing the first time, the Commission found -- the majority of the Commission found that United had a need for the gas and it should be approved. And what they had done in Sinclair was right. And the concurring opinion on that case pointed out that all the Commission really was doing, was ratifying its prior Sinclair opinion. It pointed out that as a human psychological matter if you will, unless need as examined when the producers have their applications pending, it will never be examined at all. In any event, the Commission finally need issued a certificate. We then applied for rehearing, pointing out the numerous legal and factual areas that the Commission had made. The Commission on rehearing concluded that United, the ultimate purchaser from Lone Star Gathering, had not adequately shown need, that there were a number of defects in its presentation, and set the matter rather than denied a certificate. However, it set the matter down so that Lone Star and United could try a second time to prove need.Lone Star and United first ask for postponement, another postponement. Then they said, “We give up. We really don't need the gas if that's what we have to prove.” Their certificates were cancelled or the permanent certificates were simply revoked, that had never become -- the permanent certificates had never become final. And that gas is no longer being sold in interstate commerce, almost half of the gas in the Sinclair proceeding. I think that when you count, if there is a time to test it and particularly if the judgment is not clouded by the fact that the Commission has already granted permanent certification, then I think we will have some very interesting results on whether there is a need for gas and how much of the need. But the statute says before you can issue a certificate, you must find that there's a need. And I really don't understand how it is in answered to say “Well, we'll issue this certificate first and we may find a need a year from now or two years from now or in some other proceeding.” The statute seems to say, and it would be consistent with all statutes filing for certificates of public convenience and necessity that before you issue a certificate you have to find that somebody needs the service or the sale that's proposed.
Hugo L. Black: May I ask you, what is the exact point of relationship between the point you aid as to the need and the fixation of a rate?
Morton L. Simon: We would think that the basic question here is, is there a need for a gas? If there is a need for gas -- if there is no need, no certificate. If there is a need, then the question becomes at what price, what initial price should the gas be sold.
Hugo L. Black: In other words if you are right, the whole order would fall?
Morton L. Simon: That is correct, yes sir.
Hugo L. Black: Including the fixing of the rate.
Morton L. Simon: That is -- well, substantially yes. There is one purpose I think for which a rate would have to be fixed, and that is caused by the temporary certificates. During the pendency of these proceedings, the Commission permitted the sales to be made at prices, which we believe and we think the Commission believes, are excessive. It would be necessary to determine what was the appropriate rate during that period for purposes of making refunds. But other than that and had there been no temporaries, there would be no need to go to the in-line question at all. And that would terminate it if there's no need.
Speaker: In applying this need here, this need determination, argument has to made at the time of temporary certificates.
Morton L. Simon: No. On the other hand, much of the problems of the Commission gets into is because, it issues the temporary so readily. The statute speaks in terms of emergency to justify a temporary. The Commission issues temporaries as a routine matter, and I will address myself to this point right here even though it's slightly out of order. There is no hearing. Application for temporary can be a one or two-page sheet. It is responded to by a letter. The Commission issues temporaries as a matter of routine. Every applicant gets one that there they have it. Now, I don't think the temporaries wherever intended to be issued on that kind of basis, I don't think then that the most generous concept of emergency and this is an emergency power. It has granted the ex parte at the time when the consumer who will be called on to pay these charges on others is absent from the proceeding. I don't see how an emergency power can be expanded to cover routine everyday application. But if there were an emergency, I don't think that there would have to be the type of finding of need that I'm talking about at that time.
Speaker: Well, I think your -- logically, your need argument would carry back the temporary certificate.
Morton L. Simon: I think logically that if there's no public need, the Commission has no business issuing a temporary certificate. I would think that the real emergency situation is one where the public is about to go out of gas and something has to be done pretty quick, and you don't have time for a hearing. So you issue a temporary certificate. The Commission issues a temporary certificate because it takes it a while to get around to deciding it on the basis of the hearing. I don't really think that's an emergency situation.
Abe Fortas: Could there be an emergency from the point of view of conservation?
Morton L. Simon: Not at all. No. Could there be an emergency from the point of view, yes. I think that that might be a possible legitimate interest. But I would like to run through very briefly the grounds for an emergency certificate. Their drainage, drainage means you have two wells adjacent to each other. One is being produced and the gas from the second one is migrating below the first one. In the Sunray temporary certificate that Mr. Coleman read to you yesterday, the allegation was, that the adjacent well had been contracted to be sold to Tennessee Gas Pipeline and was being sold. And Sunray wanted to get a temporary to sell to Tennessee. Now, there was no public interest here at all because all of the gas would go to Tennessee Gas Pipeline and its customers. And it would simply -- whether it would go through the Sunray well or the adjacent well. There is --
Abe Fortas: It might be a little rough on the person who owns -- the company who owns the well that's being drained.
Morton L. Simon: That is correct. However, since you -- the statute says you can't make a sale until you get a certificate. The statute says there is a hearing. Now, the delay between the time you filed an application on the hearing which is statutorily created, doesn't seem to me to create an emergency right. There is -- flaring of a gas is a basis. Flaring occurs when you have gas being produced from a well that produces both oil and gas. The producer decides he wants to produce it in order to derive revenues from the oil. He has no outlet for his gas so it is simply burned off in effect. The states can control flaring. But the decision on whether or not to produce is a decision made by the producer to derive the oil revenues. There is loss of lease. Some of the leases that the producers have with their lessors provide that the lease shall be on production within a certain time. This is a private contract condition. Then there is the broad catch-all category which I think explains the other three, it renders, the other three really mandatory. And that is an economic hardship. And the Commission has accepted as a definition of economic hardship and this is the basis of perhaps the majority of the temporary applications. The loss of revenue that occurs to the producer during the time he is waiting for permanent certificate. Therefore every time you file an application for a permanent certificate, you have, under the Commission's regulation, created a basis for an emergency because you will have to wait sometime until the hearing can be held. It's a peculiar concept to the emergency, I think. It's an unparalleled one.
Byron R. White: I gather that the Commission always finds that the public convenience and necessity requires the issuance of this --
Morton L. Simon: Yes, it always makes that finding in the statutory line of --
Byron R. White: But you know that it did in this case?
Morton L. Simon: Yes sir.
Byron R. White: And at the same time it said that we think the issue of need, however, should be confined to pipeline cases because of the need for the pipelines to range for advanced supply of gas. Now, you just differ with -- you don't think without considering need they could find public --
Morton L. Simon: That's right. You can't say we've satisfied the statute unless you make the findings that really would (Voice Overlap)
Byron R. White: (Voice Overlap) disagrees with you?
Morton L. Simon: Pardon?
Byron R. White: The Commission just disagrees with you on the construction of public convenience and necessities.
Morton L. Simon: That's correct, that's correct. And --
Abe Fortas: But theoretically anyway there's no impact on consumer interest until a pipeline arrangement has been made.
Morton L. Simon: Until -- do you mean until the pipeline begins taking that --
Abe Fortas: Yes.
Morton L. Simon: I think that's correct but the pipeline can take it under temporary ser -- there was a case in Louisiana. Tennessee Gas Transmission CP 60-57 was filed in 1960. We intervened. It was to take some offshore gas. The Commission granted a temporary in 1961. In the meantime, the producer sales were certificated. In 1964, the Commission noticed it again and said, “Does anybody still object to this?” And we said, “Yes we do.” Because Tennessee is in a take-or-pay situation and we want to examine it. And I said “Oh!” and I put it back on the shelf and that's where it's been. So it's not that easy to get a hearing if the Commission doesn't want to give you a hearing, and the Commission really doesn't. That Tennessee line has been going for seven years under a temporary certificate. There has never been a finding as we've been ready from the date the notice was filed. To go to hearing on whether there was a need. And --
Hugo L. Black: Excuse me; I thought you said -- what I just wanted to ask you, state as simple as you can what it is the need that they should find, need to do what?
Morton L. Simon: I think essentially there are two aspects of need. One is, is there a public need for this gas? Does the public needed to receive gas service or does --
Hugo L. Black: To receive any gas service?
Morton L. Simon: Well yes, sales being made to the consumer, through the distributor, and through the pipeline. Now, if the public can be adequately served without the addition of this gas, if there is no --
Hugo L. Black: For this gas or for this pipeline?
Morton L. Simon: This gas.
Hugo L. Black: This gas.
Morton L. Simon: This particular gas. If the public can be served without the addition of this gas then there is no public need.
Hugo L. Black: You mean, if there are other competitors who could sell it.
Morton L. Simon: No. If perhaps this pipeline could sell it, I want to go into this take-or-pay problem because it illuminates I think the whole problem of need. In other words if the pipeline is selling say 800,000 Mcf a day, that's its market demand. And if they presently has contracts that give it 800,000 a day, and then it goes up and buys another 100,000 a day, is there a need for the other 100,000? What are they going to do with it? Now, what has happened is the contracts have minimum take provisions. These are 20-year contracts and they provide for takeover the life normally based on an evaluation of the reserves. They contained minimum provisions. You take so much depending on the reserves. You take 10,000 Mcf a day and if you don't take it, you will pay for it anyway. Now, what has happened and this is why we started to raise the need issue. We found that the pipelines were getting in situations increasingly where they were paying for gas that they could not physically put through their system. They had cut all of their contracts down to the minimum take provision that it provided. And not withstanding that, they were paying for gas they couldn't take and accruing huge balances. United Gas Pipeline paid $22 million for gas that it physically could not put through its system. And United was one of the purchasers in the cases that are before this Court. It came to the Commission on a rate case. Now it says, “We want to capitalize it, include it in our rate base, increase rates over what they would otherwise be to reflect this $22 million for gas that we've paid for but couldn't take.” The New York Commission objected to that. And the Commission said, “Well, that's alright. We'll let United include in its rate base.” There are other problems because once this --
Hugo L. Black: Is there any finding that the Commission on that particular point which you have just discussed?
Morton L. Simon: In the orders here under review?
Hugo L. Black: In this case?
Morton L. Simon: No. No findings at all.
Hugo L. Black: And is that one of the things you're complaining about?
Morton L. Simon: It certainly is, Mr. Justice Black. It certainly is.
Hugo L. Black: You're saying that there should be an issue determined when you raised that someone raised the question that they do not need this gas as simply purchase of something they do not need and they'll have to pay for it and that money will be wasted?
Morton L. Simon: That's correct and the consumer will be taxed for it. That is the heart of it, yes sir. There are other aspects of take-or-pay. What happens --
Hugo L. Black: But why should that not that be handled at first?
Morton L. Simon: I think it should. I think that that was the way the Act was written that in the certificate case, you do not permit improper charges to become embedded in the pipelines cost.
Hugo L. Black: I suppose it's just a minor thing. You wouldn't say that after they begun with --
Morton L. Simon: It would depend on how minor. But I think that's right. It's trivial and certainly not. The problem that we have found is that this situation has become very widespread throughout the industry. Mr. Schiff said yesterday that the Commission found that it was decreasing. That's just not so. We quote from there in 1955 and 1960 -- the Commissions 1955 and 1966 annual reports to Congress. In those reports, the Commission shows that the take-or-pay balances was increasing and something like 65 million to 85 million. Subsequent to the filing of our reply brief where that is cited. It was called to my attention that although the Commission has to come up with its 1967 annual report is yet the same figure is available in another commission publications statistics of natural gas pipelines. And that at the latest figure as of the end of 1966 has risen another 10% to some $95 million or prepayments. The situation is getting -- these problems don't go away. They don't go away because the Commission refuses to look at it.
Byron R. White: Doesn't the Commission have some kind of proceeding going on take-or-pay or not?
Morton L. Simon: They closed that out. It was a -- it might have been a good proceeding. One of the problems with this, it was a rule-making proceeding. It was instituted in 1961 when the Commission first became aware of these problems. Now, what their proposed rule would have done, Mr. Justice White, was essentially two things. It would have limited the type of minimum take provision that could be put in any contract. And the effect of this would have been that pipelines would have not have gotten into take-or-pay situations. The second thing it would do is provide a longer period for them to make up the gas once they got in a take-or-pay situation. The Commission let this sit for some six years until the eve of decision in the Court of Appeals for the District of Columbia Circuit. Then they came out with their rule and the rule does nothing about the type of minimum take provision that can be put in a contract. It does nothing to alleviate or to prevent the pipeline from getting into a minimum take -- into a take-or-pay provision. All it did was say, that they shall have five years to make up any prepayments that they have made.
Byron R. White: Well, the Commission must feel that as a practical matter necessary to contract to hit for gas and arrange for just because of the uncertainty of the future. And I don't suppose that gas companies just thoughtlessly make improvident purchases of gas that could cost (Voice Overlap) --
Morton L. Simon: I would --
Byron R. White: -- dollars.
Morton L. Simon: When you make that kind of a contract, Mr. Justice White, I think that your judgment is affected by whose going to pay for it. And I think if you're not going to pay for it certainly it's desirable to go out and preempt as much gas as you can. Don't let your competitor get it, don't let any pipeline get it, I suppose that if a pipeline could tie up all of the gas that there is in Southern Louisiana and the Texas Gulf Coast and if there would be assured that its cost in doing so would be passed on to the consumer, it would like to do it whether it needed it or not. It would then be assured of every market there is. This goes to one of the conservation issues too because what has happened here because the Commission does that considered need is, it leads to wasteful and preemptive buying.
Hugo L. Black: Can the pipeline buy without the Commission's consent? (Inaudible)
Morton L. Simon: It contracts. That enters into a contract, sales contract. That sales contract comes before the Commission in the Producers Certificate case which is what we have right here. Now, there are other aspects as there are other injuries that are caused by take-or-pay problems. I just want to mention one of them and that is this. The take-or-pay problems became more onerous, more observable in the late, very late 50s perhaps and early 60s. And the earlier contracts did not have either this kind of take-or-pay provisions or strict take-or-pay provisions. What the pipelines first started to do therefore, was to cut back on their older contracts, cut back the takes under the older contracts which did not have a minimum take requirement. So they might have two contracts, one calling for the purchase of gas of 20 cents recently contracted. The other calling for the purchase of gas at 9 cents contracted say 10 or 15 years ago. They're entitled under their 9-cent contract say to take 10,000 Mcf a day, but they can take no gas without any penalty.
Abe Fortas: Well, it seems to me Mr. Simons that everything you are saying tends to straighten the position that the place to tackle this problem is in the pipeline hearings. Now, what -- take a step back please. Tell us why this problem should be tackled in the producer hearings apart from the psychological --
Morton L. Simon: It should be tackled in the producer hearings because it's the producer -- it should be tackled in the producer hearings because it's the producer that's asking for a certificate of public convenience and necessity.
Abe Fortas: I understand that but I mean in reality –-
Morton L. Simon: In reality, the one --
Abe Fortas: -- the argument you've been making here in response from various questions seems to me to be addressed to the undesirability for the take-or-pay provision in the pipeline contracts. Now, why should that particular problem be tackled in the producer hearing beyond a general finding which the statute requires of public convenience and necessity? But why -- how do all of these considerations that you've been so effectively presenting to us relate to the producer hearings?
Morton L. Simon: Well, the pipeline is the purchaser in the producer hearing. I suppose in any type of proceeding where an applicant is seeking a certificate, it is the applicant who shows his market although his market is composed of people who are not himself. I suppose that a tracker who is seeking a certificate should bring in shippers to show that the shippers have a need for the service proposed. Certainly, in the pipeline cases, the pipeline proves its market by bringing in its customers. It will bring in the distributing companies who will testify as to what their needs for the gas will be. And this -- the Commission has suggested that it's a difficult administrative problem and it's backed off and said really it isn't. But we had in these proceedings a total of five pipeline purchasers. All that would have been required was to bring a witness from each of the five to explain what their present sales are, what their present minimum and maximum entitlements to are under their existing contracts. It's not that difficult and I don't see how you can make --
Abe Fortas: What is the certificate that's issued to a producer's say in terms of quantity?Does it say anything about quantity?
Morton L. Simon: I'm sorry.
Abe Fortas: The certificate that's issued to a producer in the -- in these proceedings, what does it say?
Morton L. Simon: It simply to grant some authority to make the sale as filed.
Abe Fortas: To make the sale, this sale as filed?
Morton L. Simon: Yes sir.
Abe Fortas: That's a producer's certificate.
Morton L. Simon: Yes sir.
Abe Fortas: That's what you're talking about here?
Morton L. Simon: Yes.
Abe Fortas: And what you're saying is that that is the time at which there ought to be an inquiry into the terms of the contract for the -- for its bearing upon me?
Morton L. Simon: Yes sir. I would like --
Byron R. White: For the things that you say just one more -- if you -- if you would prevail, it would mean that the inquiry or need must consider the pipeline situation as a whole.
Morton L. Simon: Each pipeline?
Byron R. White: In every producer certificate hearing --
Morton L. Simon: Where the matter is raised.
Byron R. White: You're not only would be dealing with the -- the specific quantity of gas but the pipeline's total overall situation in each in the markets that it serves.
Morton L. Simon: Whether it needed this additional gas in order to satisfy its market, yes sir.
Byron R. White: It certainly does expand this hearing into a major --
Morton L. Simon: I don't think so. It isn't that much of a pipe -- a pipeline will bring in some 40 or 50 customers in each proceeding to show its market. I do want to move on to the in-line issue. I've spent more on need that I had intended. Now, on the in-line, and the in-line doctrine comes from this Court's CATCO decision which said that in certificating new sales, the Commission must protect the consumer against excessive rates and charges by denying sales that are out of line. It is from this concept that the in-line and the hold of the line language has come. Now what the Commission did here, we're talking about the Texas Gulf Coast. There are a series of events. In September 1960, the Commission established guidelines in each of the three areas at 18 cents per Mcf. There is not the slightest question in the world that that did not conform to this Court's CATCO requirement. I don't think that the Commission would so argue. 18 cents was out of line. The Commission subsequently found for each of the three areas that on September 28, 1960 when it promulgated its guidelines, the in-line prices in the three areas were 15 cents in Districts 4 and 2, and 16 cents in District 3. Indeed, those in-line determinations subsequently in 1962 and 1963 had found 15 cents was in-line in District 4 and 2, and 16 cents was in-line in District 3. It amended its guideline levels at that time. Instead of amending its guideline levels to the in-line level that had just found as two of the five Commissioners urged, it fixed the guideline level one cent above the in-line level that had just found 16 cents in Districts 4 and 2, 17 cents in District 3. It then sets the instant cases that we have here for hearing. After hearing, the Commission found that wonderful to relate the in-line level for the period after the policy statement was the elevated by one cent guideline levels that it had fixed at the outset of these hearings. Now, a difference of one cent per Mcf, while it sounds small, when we apply it to the industry as a whole amounts to enormous sums of money. It is true that in this case they are not that large but then the Chairman of the Commission has pointed out that if you applied one cent across the board to all natural gas sales, you're talking about a $150 million a year. If you apply it to all of the estimated known reserves in the ground, you're talking about $2.5 billion. Now, the purpose of finding an in-line level, we submit, was to protect the consumer. The way this works is, once the in-line level is found that is the initial price the producer can charge, he can file up under Section 4 for an increase, but if he can't justify the increase, he has to make refunds. The evil of a high in-line prices that there is no way to catch by refunds or otherwise, the excess in the event that it should be determined that that in-line price is higher than the subsequent just and reasonable rate. We think that the whole concept of in-line pricing as you start with CATCO is to find the line and then hold it. Now, the Commission talks about, it has to go to current conditions and contemporaneous conditions. First of all, there's nothing in the cases that suggests that you have to go to contracts which is what the Commission did. The Commission limited its view here to contracts entered into in Amerada for example between 1960 and 1962. But during this times span, there were enormous volumes of gas being sold under contracts dated prior thereto. The Commission ignored all of those prices, fixed itself only on the contracts entered into between 1960 and '62. Those contracts had been entered into at high prices. We had intervened on the applications to make those sales. The Commission says because we intervened, there are no permanently certificated prices. We will therefore look at the prices we have temporarily certificated. In fact, we looked at the very prices that are before us. The Commission in writing at its 16-cent guideline, it relied on 38 contracts. 36 of those contracts were the contracts at issue in the Amerada preceding where we were holding a hearing to determine what the in-line level should be. The Commission said, well we will grant certification on the basis of the temporary certificates we've issued. As noted, these temporary certificates are issued on an ex parte basis. They are not reviewable. When this whole business started out at the time of Skelly, and the Commission first said that it would not make refunds, we appealed the Skelly decision to the District of Columbia Circuit. At the same time, we appealed some temporary certificates which had just been issued which were issued in our view at out of line prices. The two appeals as McDermott and Skelly were heard before the same panel of the D.C. Circuit, at the same time within a couple of weeks. They were decided within a couple of weeks of each other. Both opinions were written by Judge Fahy. And in essence, what he said was, we cannot make a determination on a temporary certificate whether it's right or wrong. These matters are not foreclosed at the end of the proceeding. However, in Skelly he said, at the end of the proceeding, the Commission has to go back and do what is right, make it right from the beginning. We think that's right. If the Commission doesn't have the power to make it right at the end of the proceeding, then we think that the temporary certificate is wrong, right from its inception because it would then be violating CATCO. And of course this goes to a question that you asked Mr. Justice White yesterday. It was answered by Mr. Coleman and I want to support his answer. Could the Commission say in a temporary certificate, “We're giving you a temporary certificate at 18 cents or 20 cents or any price and we're not going to make you give anything back at the end of the hearing no matter what”? Could it do that? No. We don't think legally it has the power to give that kind of money away to be that generous. CATCO said you have to provide a complete permanent and effective bond of protection. And what was involved in CATCO was the excessive initial price between the time of certification and the time you would catch up to the excess in a Section 5 proceeding. But the same reasoning applies to the excess price in the temporary certificate and the time you catch up with it on permanent certification. There is no gap in the Act. This Court has --
Byron R. White: Don't we -- don't we just about have to get that question here?
Morton L. Simon: Pardon?
Byron R. White: Don't we just about have to --
Morton L. Simon: I think you do. I think you should. And I think that what you should say --
Byron R. White: And now the petition turned down a request --
Morton L. Simon: That's right. Now, we filed that request. At the -- the Commission had just held in Skelly that at the end of the preceding, it wouldn't order refunds. And the Amerada preceding was pending. We said “Alright, if you don't think it's fair at the end, you've got all of this outstanding at 16, 17, 18 cents. We're litigating. We're saying that 15 is the highest. That at least put in a condition now if you don't think it's fair.” We said this is without prejudice to the appeals we're taking in McDermott that you have no right at the outset to do it. It's without prejudice to the appeal we're taking in Skelly that you can make refunds at the end. And the Commission said, “Oh! Well we won't do it here either.” We didn't appeal that. I agree that left us with our Skelly remedy, but we won Skelly. The Commission has recognized that and that has changed the law. There are certain of the comments that were made by Mr. Schiff. I can't get to them all. I do want to get to one. He said that one of the purposes of in-line pricing was to prevent rate increase filings. Now, that is just dead wrong. You can't find it anywhere in the opinions, and in fact it's illogical. If an applicant comes in for an 18-cent price, if you'll allow him his 18-cent price, and that's all he has the contract for, obviously, he can't file up under this Court's mobile doctrine. If you cut him back and that's what CATCO was talking about, cutting back to the in-line level, certainly, he then has a contract right to file up. But it seems a very strange thing to say that you're preventing a rate increase filing by giving the producer everything that he would get out of a rating for his filing right at the outset. I have -- I'm afraid I spent more time than I intended on need issue and I think I will reserve the rest of my time for rebuttal. Thank you.
Byron R. White: You may. Mr. Tell.
William K. Tell, Jr.: Mr. Chief Justice, may it please the Court. My name is William Tell. I'm counsel for Texaco. I am appearing this morning on behalf of the 12 producer respondents who have filed a joint brief in Number 60, 61, 62, Number 80 and 97. We are respondents from the appeal taken from the Tenth Circuit's decision at a case which is sometimes referred to as the Amerada case, sometimes the Sunray case. The lead docket was Amerada and the proceedings before the Commission; it was Sunray and the Tenth Circuit that's the reason for the varying nomenclature. I will be followed by four other producer counsels. My presentation will be directed solely to the question of the appropriate in-line price for Texas District 4, for the period subsequent to the issuance of the Commission statement of General Policy in September 1960.
Hugo L. Black: May I ask if you can identify that as your brief?
William K. Tell, Jr.: Yes, that is my brief, Mr. Justice Black. Mr. Johnson following me will appear on behalf of certain producers who are parties in the appeals from the District of Columbia Circuit's decisions in Sinclair and Hawkins. He will be followed by Mr. Killbourne who is presenting an individual argument on behalf of the Superior Oil Company with respect to the appeal from the District of Columbia Circuit decision in Sinclair and Hawkins. Following Mr. Killbourne will be Mr. Caskin, who is appearing on behalf of the same 12 producer respondents that I am from the Tenth Circuit's opinion in Amerada and Sunray. Mr. Caskin will discuss the question of refunds under the temporary certificates. That issue appears only in the Tenth Circuit decision. It is not present in the District of Columbia opinion in Sinclair and Hawkins. Following Mr. Caskin will be Mr. Justin Wolf appearing on behalf of the Standard Oil Company of Texas. Mr. Wolf will also direct himself to the question of the propriety of the Commission's ordering of retroactive refunds under the unconditioned temporary certificates that were issued in District 4. If I may, I will turn at this time to the question of the initial price in the Amerada or Sunray cases. As previous counsel have pointed out to you the doctrine of in-line pricing had it's genesis in this Court's CATCO decision rendered in 1959. At that time the Court was faced with a situation particularly on the Southern Louisiana area but not necessarily confined thereto where as a result of the rapid growth and demand for natural gas, there had been an increase in the field price of that product. As it rose from a waste product to a product that had premium value and became an equal partner with crude oil in the end markets. During the period subsequent to the Phillips decision in 1954 when the Commission was told it had jurisdiction over independent producer rates, there was, as a result of this accelerated growth and demand for natural gas, an increase in fuel price levels. The Commission at that time faced with a difficult problem of attempting to determine and develop standards for the regulation of independent producers. As a practical matter, it was not able with the limited staff that it had to pay as much scrutiny, as this Court felt was required to the initial prices that it was certificating under Section 7. The Commission's position at that time was that it would do the best job it could in Section 7 proceedings but would hold until the Section 5 rate investigations, the final determination of just and reasonable rate. In CATCO, this Court directed the Commission to give more scrutiny to the initial price lines. And it remanded a Commission decision which had certificated new producer sales in Southern Louisiana that had established a new price plateau. I submit that upon reading the Court's decision in CATCO, the vice which the Commission -- which the Court found in the Commission's decision was the failure to make fundings upon the record in that case that justified the reason why it was in the public convenience and necessity to approve a new, and at that time, the highest price plateau that had been proposed for that particular pricing area, Southern Louisiana. The Court in its opinion instructed the Commission to hold the line. It did not attempt to spell out any précised formula as to what techniques should be used to hold the line, what was meant by the line, how the line should be found. Within the context of the Court's opinion in CATCO, it would appear that the reference to the line was a reference to the existing level of contract prices in the field at that time. On remand in CATCO, the Commission attempted to implement this Court's directive to hold the line. And it developed a methodology which has subsequently been referred to as in-liners or in-line pricing. This Court first had before it, a review of the Commission's in-line methodology in the Callery case. Unfortunately, the producer respondents in Callery, did not fully briefed the question of the Commission's in-line methodology because the Fifth Circuit had held that the Commission had erred in confining its consideration to in-line evidence, and that broader evidence representations were required. Although the Court's majority opinion did approve the Commission's 20-cent in-line price established in Callery, 47 Louisiana. Mr. Justice Harlan's opinion clearly recognized that the in-line methodology had not been fully developed in Callery, and suggested that the matter would not be foreclosed for further consideration in subsequent cases. Now, we have a situation where the Commission in its review of the price line in Texas Railroad District 4 for the period after September 28th, 1960, the date on which it issued its statement of initial policy, concluded that changed circumstances and current conditions required an increase in its original in-line price established for a period in the 1950s from 15 to 16 cents. I think it is important to recognize in evaluating whether or not the Commission may have erred in concluding the changed circumstances required an increase in the price line. To recognize that when these proceedings were started in 1961 and '62, that it was apparent that there would be a period of a substantial number of years before we would have just and reasonable rates finally established in the Texas Gulf Coast. As a matter of fact, I think that that prognosis has been shown to be correct by the passage of time. We do not as of this date even have the examiners decision recommending just and reasonable rates in the Texas Gulf Coast, although the hearings have been completed. And I think it would be fair to anticipate that at least an examiner's decision would be rendered shortly, possibly a Commission's decision within a year or year-and-a-half from now. But it's certainly fair to say that the in-line price established by the Commission in the Sunray and Amerada proceeding was the price for the decade of the 1960s in the Texas Gulf Coast. That was the price that was going to determine the extent to which interstate pipeline purchasers would be able to effectively compete for new gas supplies from the Texas Gulf Coast. It was well known to the Commission the evidence that had been brought to its attention in many proceedings that the Texas Gulf Coast is one of the most rapidly expanding industrial markets in the country. That it is a giant consumer of intrastate gas for the petrol chemical complexes and other industrial components in the Texas Gulf Coast area. In 1958, approximately two thirds of the new sales made in the Texas Gulf Coast were two interstate pipeline purchasers. By 1961, that volume had dropped to only 50%. And today it is far below that figure. We have been faced with a situation in the Texas Gulf Coast, for a number of years where the new purchasers by the interstate pipelines has been less than their withdrawals. In other words, they are liquidating their present committed reserve inventory in the Texas Gulf Coast Area. These were the circumstances --
Abe Fortas: Did you say interstate?
William K. Tell, Jr.: The interstate pipeline.
Abe Fortas: Not intra?
William K. Tell, Jr.: No sir. The interstate pipelines have been unable to acquire new reserved editions equal to their withdrawals in the Texas Gulf Coast. They are liquidating their inventory of committed reserves. We submit that under those circumstances it was clearly appropriate for the Commission not to feel placed in a straitjacket and bound to perpetuate a 15-cent in-line price that it had found for the 1950's and project that into the decade of the 1960's. CATCO just clearly cannot be read to say that the Commission as a matter of law was required to hold the line for an indefinite period into the future regardless of any changes in circumstances that might come to the Commission's attention. Since CATCO, the various circuits and the Commission itself has recognized, that in applying the in-line standard, consideration must be given to current conditions in the industry and changed circumstances. Now, within the context of this case, what were those changed circumstances, what evidence do the Commission look to, to justify its judgment, that change circumstances required an increase in its 1950's price line? The producers, when this hearing was first set, came forward with evidentiary presentation that was 400 pages in length including exhibits. We were conscious of the problems that this Court had recognized and directed the Commission to adopt more streamline procedures to move these producer cases along. Our evidentiary presentation here was not that the individual company cost of service presentation that so dominated the producer evidence that was presented in Callery. There may have been one or two producers who proffered individual company cost to service evidence. But the main producer group came forward with what we considered to be a streamline evidentiary presentation that would show to this Commission graphically what were these changed circumstances. All of the evidence was excluded on motion by the distributors and the Commission staff. They claimed it was irrelevant. We have pending in this Court a conditional cross petition in Number 82 which has not been acted upon, which request this Court to grant certiorari. In the event it concludes that the evidence that Commission did use to justify its increase in price from 15 to 16 cents was inadequate and not substantial. What the distributors have done is put the Commission in a complete vice. They have successfully obtained the exclusion of all of the generalized cost trend and economic evidence, supply and demand consideration evidence that the producer has brought forward. They have confined the evidence of record to a limited area. And now they claim that the Commission's reliance upon the remaining evidence was inadequate that it -- the evidence that's left wasn't substantial enough to support their result. There go less perpetuate the price freeze at 15 cents. Now, the Commission attempted to respond to the difficult position that it was placed in. It wanted to move these cases as long as quickly as it could. Therefore, it rounded the distributor motions, excluded the producer presentations, and relied rather instead upon a price exhibit that was submitted by its staff which did show the trends in contracting patterns in the Texas Gulf Coast during the period from 1955 to 1962. It also looked to its initial price levels that had been approved under temporary certificates and gave consideration to the price levels which it had established in a statement of general policy, which was the product of Commission expertise and based upon six or seven years of experience in handling producer matters since 1954. It concluded on the basis of that evidence that there definitely had been change circumstances in the market. And that an increase in the price from 15 to 16 cents was clearly required by the public convenience and necessity. Now, we submit that what the Commission has done was proper and lawful. That although it may have been more desirable to make a more detailed analysis into these underlying economic trends and changed circumstances which were shown by the evidence that we proffered, that nevertheless certainly a general feeling for the industry problems and developments could be found from the type of evidence which did remain in the record in which the Commission utilized. We do say, however, that if you are unwilling to accept the quality of the evidence which the Commission utilized in this proceeding in supporting its initial price determination, then you cannot leave this agency in the type of straitjacket that is inherent from the distributor position. But you must then, we respectfully submit, grant our conditional cross petition in Number 82 and permit the Commission to enlarge the record to receive the more detailed evidence which we proffered which clearly would have supported and justified the pricing decisions which the Commission reached in this case. I would --
Byron R. White: Did this area rate proceeding started in the Texas Gulf Coast?
William K. Tell, Jr.: Yes Mr. Justice White, the Commission started in area rate proceeding in the Texas Gulf Coast in 1963. The --
Byron R. White: But it has not been concluded.
William K. Tell, Jr.: The hearing has been concluded. Briefs have been filed before the presiding examiner. He has not yet rendered his initial decision. We expect it very shortly.
Byron R. White: Now, with those prices above -- what is exactly -- what was the in-line price that he had just --
William K. Tell, Jr.: 16 cents.
Byron R. White: Now, there would be refunds I suppose if the fair and reasonable price is that in the area of proceeding is below the in-line price.
William K. Tell, Jr.: Mr. Justice White we, first of all, do not contest that there would be refunds due for amounts that have been collected after 1964 under the Court's stay or Commission's stay, I should say. We're talking here about a prospective period.
Byron R. White: But if the in-line happens to be above -- be above 16, there's nothing to do about the interim?
William K. Tell, Jr.: The Commission's rate investigations under Section 4 or 5 deal prospectively. There would not be retroactive adjustments. I might say, however, that one can only speculate as to whether or not the final just and reasonable rate will be greater or lesser than the in-line price. We know in the Permian Basin area, that the new gas rate was higher than the policy statement guideline.
Byron R. White: Well did the -- did the permission limit your ability under this permanent certificate to file increase rates?
William K. Tell, Jr.: They did above a level of 18 cents. They found that as a matter of fact, that it would take a price higher than 18 cents to have an adverse effect upon the general pricing structure in the area.
Byron R. White: Do you think that the -- you could go up immediately to 18 cents assuming your contracts permitted you to do so?
William K. Tell, Jr.: There could have been an alternative approach, Mr. Justice White, but let me show you why that was not an adequate remedy. We are accepting the 16-cent determination although before the Commission on the lower court, we contended that it should have been higher. But certainly we say that the record of evidence was adequate to support 16 cents.
Byron R. White: But even for 15, you could file -- you could make filings to take up to 18?
William K. Tell, Jr.: We could prospectively but since --
Byron R. White: -- was that the reason?
William K. Tell, Jr.: -- 1964 we have been making deliveries under the Commission's permanent certificates at 16 cents. We couldn't have made filings from 15 to 16 cents between 1964 and 1968. That would have been exercising redundancy because we already had a filed rated of 16 cents. And yet if you hold for the distributors now and say it should be 15 cents before the mechanism is an adequate protection, there's no way we could retroactively recoup the difference for the past four years. It's just -- it's just not an adequate mechanism. I think it might also be significant to note that the Commission staff rate recommendations in the area rate proceeding for this area. And in the Permian Basin the Commission staff rate recommendations were substantially lower than what the Commission itself approved. The Commission staff recommendations, for 70% of the gas that is involved in these two consolidated cases would be between 16-4 and 16-8, a level higher than the in-line price which the Commission has established.
Byron R. White: Well, I don't know why right after this Commission's order, you couldn't have filed an increase rate up to 18 cents?
William K. Tell, Jr.: We could've file from 16 to 18.
Byron R. White: And it would have been -- that might have been suspended for a few months but then it would have gone into effect.
William K. Tell, Jr.: We could have, Mr. Justice White. Our position is that where we have had so much uncertainty that where we're willing to accept the 16 cents. We're not seeking levels higher than 16 cents. We're willing to stand on the Commission's order. We certainly could have filed for more under Section 4 (e). Our concern is, how are we going to keep the penny between 15 and 16 cents? The Commission gave it to us. If it's remanded now and later found to be something more, we could never get it back. There's no retroactive mechanism for that.
Hugo L. Black: Are the main differences between the producers and the distributors to consumers, the two questions which you have raised in this brief which you were talking about then?
William K. Tell, Jr.: Basically, there are three issues in the consolidated cases before you. There are two raised in our brief. One is the appropriate initial price. Second is -- 15. The second is whether or not there should be retroactive refunds under the unconditioned temporary certificate. The third issue is not present in my case. It is present in the D.C. Circuit opinion and that is the need issue that Mr. Simons addressed himself to.
Hugo L. Black: Those are the three issues?
William K. Tell, Jr.: Those are the three issues before the Court today. Yes, Your Honor. Now --
Hugo L. Black: You have on your rate the findings of the Commission. You have on your 16 cent rate, the findings of the Commission on your side?
William K. Tell, Jr.: That's correct. Now, Mr. Justice Black, we are here before the Court aligned with the Commission on the initial price issue.
Hugo L. Black: What do you have on the refund?
William K. Tell, Jr.: On the refund issue, the Commission in its February 5th order originally held for the producers. It later reversed itself. And today I regret to say the Commission is aligned with the “seaboard interest” on the refund issue. The Commission is also aligned with us on the need question. We are aligned with the Commission on two of the three issues before the Court this morning.
Speaker: The preferences on which they found the 16 cent price?
William K. Tell, Jr.: Yes.
Speaker: Use of the temporary certificate.
William K. Tell, Jr.: Use of the temporary certificates, its policy statement guideline levels and then an examination of trends in the field prices, in the Railroad District during the relevant time period. I want to also say that I think it's important in terms of evaluating what should be done on the initial price issue that as the Commission solicitor told you yesterday, the period of in-line pricing is pretty much water over the dam. We're hopeful that there will be just and reasonable rates established within the next year or so. There are no important policy questions here for the future. A remand of these cases on the initial price issue to start all over again, one of Texaco sales the gas reserves are already depleted, the wells has been -- have been plugged and abandoned. I'm sure that in the case of most of these producer sales the reserves are pretty close to being half depleted. If we have to go back and start all over again for the purpose of trying to set prices for what is basically a lot in period in the past, I submit that that will not be a utilization of the Commission's resources that would be most consistent with the public interest. The Commission and its staff and I think the industry would hope that we could get these just and reasonable rates established and in effect, and have a workable system of regulation that would permit us all to get on about our business. And going back and reopening and attempting to readjust these past retroactive periods, six or eight years ago adjusting rates generating refunds that whether they will ever reach the people that paid the rate differences back in '60 or '61 is highly problematical. It just does not seem to be a satisfactory approach to the problem.
Hugo L. Black: Does this record show the position taken by the parties in the pending price as fixing permanent rates --
William K. Tell, Jr.: Mr. Justice Black --
Hugo L. Black: -- by 16 or 15 or what?
William K. Tell, Jr.: By permanent rate you mean just and reasonable rates in the area proceeding?
Hugo L. Black: That's right.
William K. Tell, Jr.: No, that is not in the present record Mr. Justice Black.
Hugo L. Black: Would our decisions have any affect on that?
William K. Tell, Jr.: I don't believe that it would. These cases come before you as certificate cases under Section 7 and the permanent rates, the just and reasonable rates are in the rate cases under Section 4 and 5. There, the Commission has agreed to receive and review entirely different types of evidence in these rate cases.
Hugo L. Black: But the ultimate objective of its finding is the same. What if there is just and reasonable rate?
William K. Tell, Jr.: Under Section 5, the rate cases, that would be correct. Under Section 7 we have different statutory language. It may mean the same thing. What is the public convenience and necessity rate is the issue that's before the Court in the certificate procedures.
Hugo L. Black: Now, suppose that means rather different between the two?
William K. Tell, Jr.: Well, I think you have to -- we have an area rates that would be one of the important questions that someday this Court will have to resolve. In new Section 7 proceedings that have been initiated after we have an area rate established, is the area rate automatically the Section 7 rate or will there be perhaps opportunities for the Commission to consider whether a change circumstances may require some revisions there.
William J. Brennan, Jr.: Mr. Tell this isn't -- I thought Capital Railroad indicated that just and reasonable rate and public convenience and necessity, there are a lot of different things, isn't it? This is the evidence.
William K. Tell, Jr.: No, and it might --
William J. Brennan, Jr.: It really, it's really not too clear that the end results of Section 7 and Section 5 proceeding is the same, isn't it?
William K. Tell, Jr.: And I hope that I didn't mislead Mr. Justice Black because I think there definitely is a distinction in statutory standard that may lead to two different results.
William J. Brennan, Jr.: I perhaps misunderstood you. I thought your answer to Mr. Justice Black, they were the same thing.
William K. Tell, Jr.: I didn't intend to.
Hugo L. Black: Does that indicate you may have the whole thing up again?
William K. Tell, Jr.: Well, let's hope the Commission set rates that everybody's happy with it and that won't be necessary.
Earl Warren: Mr. Johnson.
Thomas G. Johnson: Mr. Chief Justice, may it please the Court. My name is Thomas Greene Johnson. I represent Shell Oil Company, the petitioner in case Number 111. And I appear here also on behalf of humble Skelly and the other petitioners in case Number 143. We are aligned with the Commission on two of the three issues involved here. The in-line price which the Commission determined in Railroad Districts 2 and 3, and the Texas Gulf Coast area, we support the Commission's decision. On the need issue, we further support the Commission's decision that the proper place to consider this issue is in a pipeline certificate proceeding and not a producer certificate proceeding. Both of these decisions by the Commission were held beyond abuse of discretion by the District of Columbia Circuit. I would like to address myself first to the in-line issue. And first of all, I would like the Court to direct this attention to the role of the distributor interest in these in-line proceedings. The Commission has discussed at great length the Commission's procedure. The distributors yesterday pointed out the efforts that producers have made to obtain a contract prices. I would request to the Court now direct its attention to the role of the distributors in these cases. First of all, I would like to refer to you, Mr. Justice Harlan's question to Mr. Coleman yesterday. The first of which was, how much money will the distributors receive in refunds? And how much will they pass on to the ultimate consumer? In this connection, Mr. Coleman had pointed out that pipelines are not participants in these proceedings. We disagree with Mr. Coleman's reason for that. But his reason was that the rate increases can be passed along by the pipelines. In our view, the real reason why the pipelines are not here is because, they already have their opportunity when they negotiated the contracts with the producers. And they did not feel on the position to attack those contracts which they themselves negotiated before the Commission. To be that, if I may, I would like to rephrase Mr. Coleman's question and ask why the distributor companies are always such active partners in these proceedings before the Commission on the Courts and if as they contend, they are simply conduits of this line. And it's all passed on to the ultimate consumer. I think the answer is obvious and that answer is that the distributor company to do retain a large amount of the refunds which will be ordered in this case, if the Commission is sustained and larger amounts of refunds, if the distributor position is sustained.
Speaker: Is this shown on the record?
Thomas G. Johnson: Mr. Justice Harlan, the record shows this. The Commission undertook in 1962 and 1963 a survey that the distributor companies. And they asked these distributor companies how much refunds they were passing along. This evidence was compiled by a producer witness. And that witness testified that that questionnaire showed that 42% of the refunds received by the distributing companies during the period covered by the Commission's survey which was about -- well, from July 1961 and November 1962, during that period, the distributors retained 42% of the money which they received. Those moneys amounted according to the Commission's record, to $51.9 million. That evidence was excluded by the presiding examiner on the motion of distributing companies. So therefore, it was not before the Commission and unfortunately we have not included there in the joint appendix because our posture here is to support the Commission's decision. Nonetheless, that evidence is in the record I offered proof.
Abe Fortas: What do you want us to do with it?
Thomas G. Johnson: Mr. Justice Fortas, I merely – I'm raising this question in order to point out that the real representative of the consumer in these proceedings is the person that's the -- or the part that the statute has required and represented themselves. And that's the federal partnership. It's not the distributor companies.
Abe Fortas: That -- that would -- that would illegally being shared hard enough.
Thomas G. Johnson: Alright sir, I like to address myself to that. Aside from the motives of the distributor companies, we would like now to focus on their objectives. And their objective, they have made clear at various points in their briefs but they do not emphasize it in this case. That objective is very simple. The objective is to freeze the price line at the levels that have existed from 1958 to 1960. Now, for some mean, by some means known only to the distributor's interest, they determine that this line should be frozen, somewhere in the area between 14 and 15 cents. They then embark on a program of intervening in all producer certificate cases where the prices exceeded those levels. By this method of intervention, they were able to and by prolonged litigation on these contract prices they were able to place these prices in a suspect category over a long period of time. As a result, the Commission under the rules announced by various circuit courts did not consider these prices when it originally determined the line in these areas. I would like to also point out that during the time that the contracts in these proceedings were made, there were no in-line prices in these areas for any period. These contracts were made in the time period from September 28, 1960 to about the end of 1963. The in-line prices were not determined by the Commission for this same period. For Amerada, the decision came out in August of 1962. For the Hawkins case, the decision in District 3 in the earlier case was decided in March 27, 1963. In District 2, the decision by the Commission covering the earlier of period was in December 9, 1963. In all of the Amerada sales and one of the Hawkins sales and in all but one of the Sinclair sales, there was no in-line price determined by the Commission at the time these sales were made. Yet the distributors continued to intervene in these cases above the level which they had determined, not a Commission determined level. All the industry had to look to was the 18 cent guideline level which the Commission had determined, which the distributors contend cannot be utilized in this case. We have detailed further in our brief the methods which the distributors have followed in attempting to exclude all of the evidences which the Commission could possibly use to find that the price line was higher for the 1960s than it was in the 1950s. I would like to focus now on the question which Mr. Justice White has raised last night and again this morning with reference to the relation between the in-line price which the Commission has determined here in just and reasonable rate. And I believe it is now clear that the in-line price is the level to which refunds will be ordered in this case. And it is the level if it's too high that is if it's above the just and reasonable rate. There would be no way that the producers can retroactively file for this difference correspondingly if in-line price is below the just and reasonable rate. There is no way that refunds can be required for this difference. So really in our view, what the Commission was attempting to do here and they used the terms fair and reasonable. And Mr. Justice Brennan is ultimately correct that these are different sections of the statute. But at least in the Commission's consideration, the standards which they use I think are very closely approached each other to the extent that they can under the limited consideration which the Commission can give the evidence in an in-line proceeding. So I think it's material here to at least consider to the extent that we can whether the in-line price will be above or below the just and reasonable rate. Now Mr. Tell mentioned this briefly in his argument. We do have some guidelines on this. In the Permian case which was argued before this Court last December, one of the findings which the Commission made in that case was the national cost of gas for 1960. Now, of course, the national cost includes the Texas Gulf Coast area here. And that finding was 16.43 cents per Mcf national cost. Now, in the Permian case as Mr. Tell pointed out, the Commission had previously determined an in-line price for that area of the 16 cents. In their price for new gas, in the Permian area, they determined that part level to be 16 1/2 cents, one half cent above the in-line price. Mr. Tell has pointed out that the record is now closed in the Texas Gulf Coast area rate proceeding. And that the Commission staff has recommended a price for new gas and incidentally new gas as defined by the Commission on the Permian case and by the Commission staff in this case as involving all contracts dated after January 1st, 1961. Now, you see there's only three months or two months difference between the dividing line on the policy statement, the definite periods selected for the in-line price, and the dividing line between new and old gas which the Commission has found different rates for in the area rate proceedings. The Commission staff in the Texas Gulf Coast area rate proceeding for gas delivered at a central point which is the predominant method of delivery has recommended that just and reasonable rate of 16.8 cents. And even more significantly a witness for the same -- some of the same distributor companies which are here attacking the in-line price made a recommendation for Texas Railroad District 4 for new gas of 16.25 cents, for Railroad District 2, 16.75 cents, and for Railroad District 3, 17.25 cents. Now, I should add that the cut off date which the distributors recommend is January 1st, 1963 not '61. But if the Commission follows its decision in the Permian case and finds to cut off date for the reasons which they gave in that case to the January 1st, 1961. Even under the distributor recommendations, the in-line price will be below with the just and reasonable rates filed. I would like now to turn to the -- very briefly to point out two things with reference to the use of temporary certificates. First of all, the deliveries are conducted most under these proceedings, under temporary certificates, because of interventions which the distributor companies filed which force contested proceedings, thus required a very lengthy proceeding. And under the circumstances there, the producers there had no alternative but to apply for temporary certificates so they can begin delivering their gas. Secondly, the Commission did not give as I say very clearly their opinion full weight to these temporary certificates. The temporary certificate order does consider the price question to the extent that the Commission can do so at that time under the absence of a record and all of the other situations which exist in the temporary. But they do consider the price question. And they do condition the price down to the guideline levels. Therefore, the Commission thought that they could give some consideration to these temporaries in determining the in-line price. And that's what they did. If they had given full weight to the temporaries, they would have had to found the price line to be higher than that which they did find. Now, we believe that decision is correct. I would like now to turn to the take-or-pay clause. And I believe there's some misunderstanding which may exist which I would like to address myself to. First of all, Mr. Simons stated that the Commission was in error in balancing between the consumer interests, as he terms himself, and the producers. We feel that the balancing which the Commission did here was on the one hand, to determine the weight to be given to the price. In other words they will hold the price down as low as they can but there is one other important consideration and that is, if they force this price too low, they will not be able to obtain a sufficient supply for the consumers. Now, this is just basic economics. It's true in all sections of the economy whether regulated or non-regulated. They have to weigh on the one hand, the supplies which will be brought forth by the price and on the other hand the price to be found. Now, the Commission did consider the supply question in this area. In the Commission's brief to this Court on page 19, the Commission states, “The Commissions essential duty in passing upon the applicant's initial price is to evaluate market conditions. And in this light to a say a reasonable approximation of the fair price for gas. A figure which will presumably elicit continuing supplies for the interstate market yet protect against the danger of excessive and inflationary price proposals by the dominant supplies.” And in the Tenth Circuit's decision in the Sunray case, they referred to this balancing between the supply problem and the price problem. And we submit that that is the function basically of the Federal Power Commission. It's to balances these two issues. Now, let's see what the record shows with reference to supply in the Texas Gulf Coast area --
William J. Brennan, Jr.: Tenth Circuit, am I right?
Thomas G. Johnson: That's right.
William J. Brennan, Jr.: That that's the need issue was not raised.
Thomas G. Johnson: That is correct, Your Honor. The need issue was not raised in the Amerada case. It was raised by the distributor interest in Districts 2 and 3, the Hawkins and Sinclair Cases in the District of Columbia Circuit Court.
Byron R. White: But why it isn't raised?
Thomas G. Johnson: Your Honor, I don't know why that isn't raised in there. Turning back to the contract to the supply problem, the record does show because the contracts which were entered into during this period. And it shows the volumes which were committed under those contracts. We have a table which is attached to Appendix C to our brief, which shows these volumes which were committed in the interstate commerce. And in District 3, the figures are particularly significant. The new contract volumes in District 3 declined from 33 billion cubic feet per year in 1958 to only 2.7 billion cubic feet in 1963. These new gas reserves committed in Districts 2 and 3 from September 28, 1960 to about the end of 1963 were approximately 1.2 trillion cubic feet. During the same time period, the pipelines in this area withdrew 2.9 trillion cubic feet over twice as much from their existing reserves as they were able to compact for in this supply. We feel that the Commission did consider this in determining that the price line should be where it was. Now, Mr. Simons has raise at some length the take-or-pay problem of the pipeline chemicals. I would like to first focus on that. Now in our view if the take-or-pay problem is a problem, and we deny that it is, it should be -- the emphasis should be in the material facts or the take-or-pay problem existing in the pipelines buying gas in these proceedings and in these areas not in general industry-wide statistics, which is what Mr. Simons quoted to you. Now, I like to give you the figures from the record on the take-or-pay positions of the pipelines in this case. There are five pipelines buying gas from the dockets and Districts 2 and 3. The first one is Tennessee Gas Company. It had a take-or-pay balance as of December 31st, 1963 and this evidence is in the record. $1,322,000m, this compares with an annual throughput of -- in Tennessee system of over 1 trillion cubic feet per year. $1,000.322.00, yes.
Abe Fortas: Well, what do you mean by that?
Thomas G. Johnson: I beg your pardon?
Abe Fortas: What do you mean by that? If that's the amount to pay I have to spend in one year to discharge a take-or-pay obligation?
Thomas G. Johnson: No sir. I think -- let me go into that because I think it's very important. The pipelines have contracts which provide that if they do not take the contract quantity of the gas, they have to pay for it. Now, the figure which I gave you is the total balance, not an annual fee. It's the total balance which Tennessee has for all of its contracts. And I should again emphasize that this balance is not something to take that the Tennessee pipeline and its customers have to pay that the never received any value for it. It is simply like paying rent in advance. The pipeline has the right to make up this gas at no cost to itself in later years. And the Commission --
Byron R. White: Limited to what?
Thomas G. Johnson: Limited to certain volumes but the --
Byron R. White: Time.
Thomas G. Johnson: Limited in time. And Mr. Justice White, I'm jumping around a little bit here but in response to your question, I would like to point out that the Commission has thoroughly considered the take-or-pay clause in its real making docket R-199. And the certificates in this proceeding were specifically conditioned to that docket. And the Commission found --
Byron R. White: Are they here?
Thomas G. Johnson: I beg your pardon?
Byron R. White: Argued?
Thomas G. Johnson: Yes sir. The Commission found in Docket R-199 that it could fully protect the consumer from any forfeiture. And the Commission has repeatedly found and found on the same pages of the annual reports referred to by Mr. Simons that the pipelines have not made any substantial forfeitures of gas under this take-or-pay clause. And the Commission found that if it permitted a minimum of five years for the makeup of the gas under the take-or-pay provision, it would have adequately protected the consumer and the dockets in this proceeding were specifically conditioned to permit such a makeup period where they did it already and most of them did.
Abe Fortas: What year was that Commission decision?
Thomas G. Johnson: The Commission decision in Docket R-199 came out about a week before the D.C. Circuit decision in this case. And we believe that it's significant that even though the distributors admit that the Commission decided against them in Docket R-199, they did not appeal that decision. And that decision is now final unless it is subject to collateral attack in this case.
Byron R. White: How did that affect these dockets? Is it already -- isn't these certificates are already issued?
Thomas G. Johnson: But the Commission in its order issuing these certificates made it specifically subject to Docket R-199 and its findings in that case, Your Honor.
Speaker: Could you lodge up your -- the rest of those figures --
Thomas G. Johnson: Yes sir. Natural Gas Pipeline Company had no take-or-pay obligation or whatever. Trunkline Gas Company had no take-or-pay obligation or whatever. Florida Gas Transmission Company had $384,000 in their total system. United Gas Pipeline Company had $19,829,360. Now, that looks like a large figure until it's compared with the annual throughput in United System of 1.3 trillion cubic feet. Now, I don't know what the average price is in United System. But if we assume an average price of 15 cents, that means an annual throughput by United of over a $165 million a year. So it's not a very large figure when the -- when you look at take-or-pay balance of $19 million. Now, we've also looked at the Commission's records and brought these figures up to date. And I'd like to give you those figures, if I may. With reference to Tennessee, the annual take up -- the take-or-pay volumes as of December 31st, 1966 which are the last figures available in the Commission's record was $2,127,742. Natural Gas Pipelines still have none at all, Trunkline still have none at all. Florida Gas Transmission had completely eliminated the balance it had before and showed no balance at all. United Gas Pipeline had reduced their balance by 25% to something over $15 million. So you see this is not a real problem.
Speaker: These figures that you're giving now are not in this record.
Thomas G. Johnson: The figures for 1966, of course, are obviously not in this record. They are taken from the Form 2 reports filed by the pipelines with the Federal Power Commission which is the same source that Mr. Simons is referring to when he gives the take-or-pay balance figures for the industry.
Hugo L. Black: I haven't understood precisely what you've meant by the figures here. You're talking about take-or-pay and so did you mean by that that they have not spending contracts for gas, they will not use to the extended $15 million?
Thomas G. Johnson: Mr. Justice Black, they have paid for gas which they have not received yet. And the yet is the important thing because the pipelines do have the right under their contracts to make up this gas at no cost in subsequent years. And the pipelines have always been able to do this. That's why the Commission found in Docket R-199 that this take-or-pay problem was not a problem to the industry. And that's what the Commission meant when it said that the pipelines normally have to contract to take care of a year when they may not be able to buy it again or another year when they may have a demand which they have not previously anticipated. The pipelines simply cannot under the nature of their operations go out and buy every year all of the gas which they need to replace the supplies which are being consumed together with all the gas they need for growth. It's just not that accurate a projection. The pipelines have to protect themselves. And the Commission realizes this, they continually, as Mr. Schiff pointed out, supervised the pipeline's operations. If the pipelines were out of line on this, the Commission would certainly catch them up.
Hugo L. Black: What you are saying in short, as I understand it, whether have agreed to pay this, they may never have to pay.
Thomas G. Johnson: That's right. And the com -- yes sir, excuse me.
Hugo L. Black: That the Commissions has so found it.
Thomas G. Johnson: Yes sir, that's correct.
Hugo L. Black: The Commission found they would not have to pay in front of it or --
Thomas G. Johnson: No, Your Honor. They don't reach this question because the pipelines continually incur take-or-pay balances on other contracts. And the take-or-pay balances incidentally which I cited to you basically from contracts in South Louisiana. They aren't even contracts in this case. But it's a continuing thing. The pipelines may take more in one contract in South Louisiana than their contract provides for. They incur a small balance in that contract. Then the next year, then may incur a balance over another contract and make this one up. This goes on all the time in the pipeline industry.
Speaker: Are those figures depicted in your briefs?
Thomas G. Johnson: No, Your Honor, they are not.
Speaker: (Inaudible)
Thomas G. Johnson: No sir, I'll be happy to lodge them to the Court. I would like to say one thing on the need issue before I close and that is that the producers introduced in these proceedings evidence to show that the need for gas, the supply problem I've been talking about was such that the Commission could certificate their contracts even though they found these contracts to be out of line. This evidence was excluded on the motion of Mr. Simons, the attorney for the distributors. And so the reason why there is not more evidence in this proceeding on the question of need is not because the producers failed to introduce it, it's because it was excluded on distributor mode. Thank you very much, Your Honor.
Earl Warren: Mr. Killbourne.
William T. Killbourne: Mr. Chief Justice, may it please the Court. I am William Killbourne, the counsel for the Superior Oil Company, petitioner Number 231. Superior is the only party to these consolidated proceedings that has thought to review on the price findings of the Commission as well as the Court position below, due to a 15-minute time restriction, I shall limit my comments to two areas dealing with the construction of the initial in-line price for the period 1958 to 1960. I refer you to a full discussion of Superior's position on our initial brief in reply briefs filed previously with this Court. The Commission Opinion 475 concluded that the proper initial certificate price for producer applicants in Texas Railroad Commission District Number 3 for the period prior September 28, 1960 was 16 cents per Mcf. Superior challenges this conclusion and the findings there under for the reason that the Commission refused to consider all the record evidence. Specifically, the Superior's protest is the Commission's refusal to include all high volume, non-suspect permanent certificates and a computation of the average weighted price used by this Commission to ultimately determine the in-line price for such period This Court's CATCO decision in 1959 helped delay of the Commission in determining the just and reasonable rates required a most careful scrutiny of initial price proposals of the producers under Section 7. This Commission has since developed the in-line price technique to meet this duty under the Natural Gas Act. The Ninth Circuit is now famous as UGI Case on which the Commission so heavily relies considered the in-line price technique to be a simple, direct, and effective device on which to determine the in-line price. Callery said the proper and only evidence necessary to establish a price line can allow a proper evaluation of all factors bearing on the public convenience and necessity was a field price study. This Court in Callery held that adequate consumer protection under Section 7 was attained through the utilization of the in-line price technique and the related suspect price doctrine. This Court in Callery approved a certification of applications of the highest price level after elimination of suspect prices. Prices tainted by the erroneously issued and remanded CATCO certificates were set aside. Only prices then subject to Court and Commission review as well as like prices in the same area not currently under review will regard as suspect. The general concept of the suspect price doctrine that is prices still subject to Commission in Court review was urged by the Commission and approved by this Court in Callery. And it is now urged in the Commission's initial brief in this proceeding. It is a distorted application of the suspect price doctrine that causes the Commission to commit legal error in the record below and not the definition of the doctrine. Mr. Justice Harlan concurring in the line determination in Callery, said the in-line price was comparatively easy to fix. His statement is correct but I would submit that if the fixing of the line is done improperly, then the whole purpose of the stock gas measure is blunted. Mr. Justice Harlan also expressed great concern for the use of a crooked measuring rod derived from a too broad application of the suspect price doctrine. That would result in too lower price line. The producer and consumer are permanently injured by the uncertainty and the price instability, the results from unduly low price line. The line determination is an artificial approach. And although mechanically easy to compute, the Commission must make full use of the proper inputs to arrive at a proper place line. The Commission has totally ignored nine final non-suspect 20-cent permanent certificates and six other large volume final non-suspect permanent certificates. The Commission Opinion 475 acknowledged the charismatic impact for this nine 20 cents sales, certificated in 1959 the Trunkline Gas Company. But stated or eliminated from the weighted average price determination because such elimination was consistent with an earlier District 3 certificate proceeding, Texaco Seaboard Opinion 383 to which Superior was not a party and to which no appeal was ever taken. The only reason given by the Commission for eliminating these sales was that six of the nine 20-cent sales would have been set aside on the New York Public Service Commission's petition for review of a Commission ordered denying intervention but for the failure to prefect their appeal. This reading --
Abe Fortas: Mr. Killbourne your position is that the in-line price supplied to your client was too low?
William T. Killbourne: That's correct sir. Both periods.
Abe Fortas: Mr. Johnson had proceeded here for Shell and some others, are you still talking about Districts 2 and 3?
William T. Killbourne: No sir, I'm limiting my argument to which Superior was only a party District 3. Mr. Johnson --
Abe Fortas: District 3, Mr. Johnson talked about 2 and 3.
William T. Killbourne: Yes sir, that's correct. He's representing clients from both districts.
Abe Fortas: So that there is a difference of opinion among some of the producers represented here?
William T. Killbourne: There were some producers who accepted the in-line price determination of the Commission who never sought any appeal whatsoever. There were some producers who sought review to the District of Columbia Circuit Court. And that accepted --
Abe Fortas: Let's take District 3. I'm trying to find out what the line up for the day, this ball game is. Let's just take District 3.
William T. Killbourne: Yes sir.
Abe Fortas: May I correctly assume that Mr. Johnson's position for his clients is that they support the in-line prices?
William T. Killbourne: Before this Court support the in-line determination of the Commission --
Abe Fortas: That's not for this Court. You for Superior Oil I think is too low.
William T. Killbourne: That's correct. The fact remains at the Trunkline sales were certificated a 20-cent permanent certificate rate after a full hearing in which producer Hawkins, the Commission staff and 16 interveners including the Michigan Public Service Commission, the state of intended consumption of the gas had fully participated, briefs exceptions to the examiner's decision and applications for rehearing were filed. Oral argument was held before the Commission in a fully considered opinion issuing permanent certificates at 20 cents was issued. Clearly there was no price infirmity resulting from the Commission order. The Public Service Commission filed knows of intervention in that proceeding as provided for in the rules of the Commission. In line with the established Commission policy at that time, the Commission found that a denial of intervention was required because allegations of the would-be intervener, the Public Service Commission, failed to show a direct or immediate interest to justify their intervention as a matter of right. However, in deference to Public Service Commission it was offered the status of a limited participant in the proceeding to show to the examiner that the Public Service Commission had a sufficient interest and that its intervention would be in the public interest. The Public Service Commission elected not to exercise this right of limited participation and made no appearance in the proceeding. Subsequently, an order was issued denying intervention and the Public Service Commission's petition for review with that order denying intervention was dismissed. The failure to perfect the petition for review whether the intervention in hindsight was proper or not is no more failed to the correctness of the Trunkline opinion in the 20-cent certificate therein, then would be the producers fair to brief and argue the in-line issue and the Callery case suggest that the Callery case is wrong. Both decisions must be taken as correct and they have an impact on this proceeding here. The 20-cent sales became final after the judicial review and are taking place to this date. Clearly, they were not erroneously issued. No action has been taken to modify them to any individual Section 5 (a) complaint proceeding, which maybe initiated either by the Commission or by any producer, distributor, or party agreed.
Earl Warren: We'll recess now.
William T. Killbourne: Thank you. We were talking before the luncheon break about the Commission action eliminating certain permanent non-suspect certificates. And the method the Commission selected to hold the line is the in-line method approved by this Court in Callery. And the Commission consistently states that the in-line price is derived from a review of only permanent non-suspect certificates when available. Then Superior insists that every comparable permanent certificate, not classified suspect under the suspect price doctrine, be included in that determination. The Commission has selected the method and it is under a legal obligation to apply it consistently. The Commission cannot be allowed to pick and choose among otherwise helpful permanent certificates no longer subject to review in order to find the price line. The error of citing Texaco Seaboard has authority to disregard these sales must not be allowed to result in unduly low price line. Full consideration of these sales raises the average weighted price to 16.92 cents per Mcf. Opinion 475 has done a weight average place for the period involved of 15.16 cents per Mcf. The fixing of the in-line price at the highest level of prices after elimination of property suspect prices were at some level between the weighted average price of 16.92 cents and 20 cents would result in a price line that would justify Superior's sale in this proceeding. The Commission committed further error in refusing to use six permanent certificates issued by the Commission under settlement orders. The prices of these file certificates ranged from 16 to 18 cents per Mcf and would have a clearly upward impact on the average weighted price. The Commission has made an express finding that such certificates resulted from settlements are required by the public interest. The certificates result from proposals or producers concurred in by regulatory bodies, distribution companies, and the Commission to accept amended price levels in order to obtain permanent certificates at firm prices without the usual administrative delay. The purposes that motivated the parties to a settlement are identical with the purposes of the producer in a contested certificate proceeding. Whatever the reasons for seeking a settlement, the obligations of the Commission under the Natural Gas Act are unchanged. It may not, for its own convenience, issue an order that is not in the public interest. Settlement orders specifically find that the prices approved by the Commission are required by the public interest. The permanent certificate is in all respect final and beyond review. Permanent certificates resulting from settlements have never been considered erroneous or suspect. In addition, settlements represent current conditions in the regulated industry. They reflect the consider judgment not only the Commission and the producer, but also the expressed or tacit approval of the distributors and the regulatory state bodies who have actively participated and who were submitted the proposed settlement offered before the Commission issued it's final order.
Byron R. White: Is it your position that the Commission may not consider anything but permanent certificate pricing?
William T. Killbourne: It is the position of the Commission that in-line pricing, where permanent certificates are available to rely exclusively on permanent certificates.
Byron R. White: Is that your position?
William T. Killbourne: That is my position also. And these are permanent certificates and must be relied on by the Commission and not ignored.
Byron R. White: Well, yes, but you -- but even if we considered all the outstanding permanent certificates, you would say they're also to consider some temporary certificates.
William T. Killbourne: Temporary certificates can be looked to determine the current market as they've done in the Callery case in this instance so the --
Byron R. White: Well, let's assume that there are 10 permanent certificates that could give you a price of an 18. And there are some other evidence on what current market prices are that would reduce to 17. You would say it would stick with this --with the permanent certificate?
William T. Killbourne: I would refer you to the Callery case, Mr. Justice White, where in fact --
Byron R. White: Your position like the distributors here?
William T. Killbourne: No sir. No, I would not say my position is like the consumer at all. I said that permanent certificates are available use them. And then look to the current -- for the current conditions in the market. You may look to the temporary certificates and see if they buttress your determination of the in-line price by using permanent certificates.
Byron R. White: But what if they would lower it?
William T. Killbourne: In the Callery case, they were lowered. And in South Louisiana, they found for successive periods that from 1958, the average weighted price in fact had gone down but nevertheless in their own discretion and this Court proved it found the 20-cent price to continue for the in-line price determination despite the fact that subsequent to 1958 average weight of price determinations resulted in lower weighted prices.
Byron R. White: Well, do you agree or disagree with it?
William T. Killbourne: I agree with the Commission discretion that they feel that the permanent certificates show a change downward nevertheless they may find the line continuous because of skimpy permanent certificates that are available in the post statement period.
Byron R. White: So you disagree with the Court of Appeals --
William T. Killbourne: Oh, very much so.
Byron R. White: What kind of evidence is available?
William T. Killbourne: Very much so. We made offers approved to show on company wide cost service and what not to try and get in before the Commission and that was denied, and Callery approved that. Very much so we would deny the holdings of the lower court in this case. The law and Commission policy is clear that where there is any objection to a proposed settlement, there is in fact no settlement to consider. The prices reflect what all of these parties believed to be the in-line price at that time. That they've considered such sales in the average weight of price is in error. The examiner categorized these settlements as other than permanent certificates. The settlements are obviously permanent certificates and worthy of as it is as much weight in the price line review as a contested permanent certificate. Full consideration of these settlement orders raises the average weighted price to 0.63 cents per Mcf above the average weighted price of Opinion 475 below. The full consideration of all non-suspect permanent certificates in Railroad District 3 for the pre-statement period, raises the average weighted prices at 16.95 cents per Mcf. Mr. Justice Fortas and this is my final point, I just want to bring to your attention here, and you ask the question yesterday whether or not, there are no permanent certificates involved in this proceeding. Superior believed they had a permanent certificate. In September of 1960, we're issued an unconditioned permanent certificate at 17.5 cents per Mcf. We held that certificate for over one year and the only condition -- I take it back, there was one small condition and it said that this is conditioned to the acceptance of a permanent certificate by Florida Gas Transmission, the pipeline purchaser. In August of 1961, a permanent certificate was issued and the same time, the Commission came out of an order resending our permanent certificate, at 17.5 cents, gave us an unconditioned temporary certificate at 17.5 cents. So we now look in 1968 to a situation where we find the Commission may file a 16-cent price with refunds, with interests of believing in 1958 that we had a permanent unconditioned certificate. Thank you.
Earl Warren: Mr. Caskin.
Francis H. Caskin: Mr. Chief Justice, and members of the Court. On behalf of 12 of the producing companies who were respondents in the cases coming here from the Tenth Circuit in the Amerada cases, I will discuss the retroactive refund issue. The Tenth Circuit is held but the Commission lack the power to impose refund liabilities upon amounts previously collected on the temporary certificates which contained no full wanting that refunds would be imposed. As its opinion makes clear, the Tenth Circuit carefully considered the circumstances in which these certificates were issued as well as the terms of the certificates themselves. At the outset, I wish to make clear that the producers recognized that the Commission may impose reasonable conditions at the time of issuance of the temporary certificates. And this Court in Hunt in -- at 376 U.S. has recognized that this power at that time is broad. The Commission often exercises its conditioning power when it issues temporary certificates. It sometimes reduces the initial price proposed. It sometimes imposes expressed refund conditions. Consequently, the absence of an express condition that temporary certificate was highly significant. In this case itself, the Commission exercised its conditioning power at the time of the issuance of the certificates. In one instance, it lowered the price proposed. In several other instances, it imposed the expressed refund conditions. This case, however, presents to the Court for the first time, whether the Commission is empowered to modify the terms of lawful temporary certificate orders, issued without refund condition by imposing refund conditions at a later point in time when a retroactive basis long after the producer has irrevocably dedicated his gas to the interstate market. A temporary certificate orders in this case not only lack their refund condition. Indeed the Commission affirmatively stated that the prices authorized were firm prices subject only to prospective modification at the time of permanent certification. Now, the temporary certificates in question must be considered in conjunction with the Commission statement of General Policy No. 61-1. This became effective on September 28, 1960. It established great standards for various producing areas in the United States, and in particular established price ceilings at or below which the Commission would issue temporary certificates or permanent certificates in the absence of innovation without a price condition. These price ceilings as evidenced by the Commission's Policy Statement were based upon comprehensive data and made available to the Commission as a result of six years of producer regulation. In its 1963 Phillip's decision at 373 U.S., this Court gave recognition to the significant role which the Policy Statement ceilings had had in maintaining and in some instances, reducing the upward trend of producer prices. But what I mean, they either maintain the level or reduce them. And the Commission itself wanted to -- wanted to establish this Policy Statement prices found that the prices would promote effective producer regulation and I quote, “in a manner fit to all with these interests are affected by Commission regulation.” There has been some contentions here that the Policy Statements -- the Policy Statement prices were pulled out to fit in. One only has to read the Commission's Policy Statement to see the comprehensive support that it marshaled for those prices.
Earl Warren: Where did you get those -- where did you get all that information, in an adversary proceeding?
Francis H. Caskin: In some cases, it did, Your Honor. It gathered out many of the individual cost cases that had been instituted by the Commission against producers following this Court's Phillips decision in 1954. It also had previously issued permanent certificates in these various areas. It looked to that. I must say that we were stymied in this case. We attempted to get to the bottom of this but we were excluded from testing the basis. However, the Commission by its own words, use the very comprehensive support for these Policy Statement pricing. I should also point out --
Earl Warren: There was no hearing?
Francis H. Caskin: There was no hearing.
Earl Warren: Consumers never had an opportunity to be heard?
Francis H. Caskin: Well, I think the consumers were clearly given a notice that they have the opportunity to be heard because the Commission here --
Earl Warren: Any hearing?
Francis H. Caskin: Well --
Earl Warren: Any hearing?
Francis H. Caskin: Well, Your Honor, the Commission said that they were establishing these prices as the guide for initial action by it. And as Mr. Schiff said yesterday, this would be reflected in temporary certificates. Now, this was a fully published statement and in the Federal Register, and I believe that the producers, I mean the distributors will put on clear notice that the Commission would implement its Policy Statement by the issuance of temporary certificate. And there's no doubt in my mind that temporary certificate always is judicially reviewable. Now --
Earl Warren: Is that contested in anyway here?
Francis H. Caskin: That they are judicially reviewable?
Earl Warren: Yes.
Francis H. Caskin: It is contested, Your Honor, to the extent that Mr. Coleman has suggested that this is a right without a remedy but what he does is rely on District of Columbia Circuits Mcdermott case which I think really took a very limited view to the scope of review of temporary certificates. And by comparison, I would point to the Seventh Circuit's review of temporary cer -- temporary certificates in the Pure case of 292 F. 2d, and the Tenth Circuit's review of temporary certificates in the Sohio case at 298 F. 2d. And there the Court really went into the question of whether or not temporary certificates based upon the Policy Statement, that is conditioned at or below the Policy Statement level were problem in the sense or in regard to whether or not the Policy Statement reflected the in-line price in the particular area and in those -- in both of those cases the courts found that the Policy Statement level was actually lower than the in-line price. That it has been --
Earl Warren: Has the Commission ever held any hearings on any temporary certificates?
Francis H. Caskin: Your Honor, the Act provides that they would be -- they are not issued without notice of hearing. The --
Earl Warren: How did it happen? Why then do you say that the consumers were put on notice by this going in to the Federal Register so that they could have had their hearing?
Francis H. Caskin: Well as Mr. Schiff indicated yesterday and I think the distributors have from time to time considered this. The Commission indicated that they would use these policy statements as the basis for initial action in the issuance of temporary certificates. They didn't say so in so many words but that was very clear. And what I am saying is that the distributors who are on a highly sophisticated group were clearly unnoticed that this was going to be implemented. The only question then becomes as to the scope of the review of the temporary certificates which I would like to get to --
Earl Warren: What could they have demanded from in the nature of the hearing from or to present their case, the information on that issue?
Francis H. Caskin: Well --
Earl Warren: That time?
Francis H. Caskin: I think the Commission could have -- they could have asked for different procedures to be followed. But I think that the Act itself was a guide to the Commission that these temporary certificates which will meet emerging situations and it was necessary that as a consequence, they'd be passed upon without notice of hearing. But I wish to point out that the Commission's action was immaturely considered action. And I believe that the distributor's rights to whatever redress they thought they should have could have been fully protected on judicial review especially after the Commission's issuance of its February 5th order in this case. I'd like to explain the sequence in which these sales or the sequence in which these temporary certificates were issued, the Commission issued its Policy Statement. In District 4 which is the area in question, where the refund issue is, the Commission established a maximum price of 18 cents. Now, each of the contracts were executed subsequent to the Policy Statement and accepted one instance, they were at or below the policy statement level. They range from 15.9 cents to 18 cents. Most of them were in the area of 17 cents. Now, during the hearing, the producers attempted to show the extent of their reliance upon this policy statement. Some of the producers testified that they had ceased negotiations for a higher price in reliance upon what the Commission had said that is unconditional certification at or below the Policy Statement level. Other producers even made clear that they had given up specific intrastate market so we're alternatively available doing in reliance upon unconditional certificates.
Abe Fortas: Has there ever been an approval of the rights and charges under these temporary certificates?
Francis H. Caskin: Well, Your Honor, I believe there was by the Commission --
Abe Fortas: But doesn't the temporary certificate say specifically, expressly and in so many words that the acceptance of a temporary filing is not to be considered as approval of the rates and charges?
Francis H. Caskin: Well, Your Honor, I believe that --
Hugo L. Black: Does it or it doesn't?
Francis H. Caskin: Yes it does, Your Honor, but I would like to say that those words cannot be read literally in line of what the Commission has said this to the meeting.
Abe Fortas: I think I had followed your argument, so that from a one point of view anyway because I'm far from coming to rest on this but from one point of view, it could be said that what we're dealing with here is not analytically a refund but for the first time, the approval of a price under the temporary certificate --
Francis H. Caskin: Your Honor, I would have to confess that. I believe that --
Abe Fortas: Of course, you would.
Francis H. Caskin: I believe that –-
Abe Fortas: But what I'm saying is that I think if I'm correct there maybe have some significance that all of the temporary certificates with which we are here concerned did specifically recite that the temporary certification does not constitute approval of any rates and charges.
Francis H. Caskin: Yes, Your Honor. And as a matter of fact, every temporary certificate ever issued by the Commission contains that language. But what I'm saying is, it must be read on the context of what the Commission has said since 1955 on. Mr. Coleman deprecated our citation of the Signal case. I think any reading of it, it appears at 238 F.2d will show that the Commission has not interpreted until this case that without prejudice language in the temporary certificate is a refund condition. And the February 5th order itself, shows that the Commission did not intend it as a refund condition because as I say, should the temporary certificates contained that without prejudice language. I believe, however, that the February 5th order is important in more than that respect. I mean, not only does it make clear that the prices authorized on the temporary certificate were firm prices subject to modification at the time of the permanent certificate. But it also articulates a well-considered Commission policy to grant temporary certificates at firm prices at or below the Policy Statement level while proscribing price increases during the period of temporary certification. Now, the February 5th order which appears in Volume 1 at page 155, and particularly, at page 158, the Commission says as to such temporary authorizations under those conditions, it's about -- about fourth line down, “We have balanced the competing interest of producers and consumers as well as given full consideration to the needs for certainty of the natural gas companies and the public general by providing that while temporarily certificated price is not subject to refund, the period, the price during this interim period cannot exceed our ceiling price.” Now, this as we have shown in our brief, was a policy not limited to this case. It was industry-wide scope. And from the point of view of the Commission, I want to establish initially that this policy was in effect retroactively changed by the Commission. And we believe that your decision in the American Tracking Association case at 358 U.S. condemns this action. The Court while recognizing that an agency may rectify inadvertent errors in prior decisions observed that an agency cannot make such retroactive changes merely to establish a new policy on a retroactive basis. Now, Mr. Coleman contends that this policy never existed. That is of issuing temporary certificates at or below the Policy Statement level or proscribing price increases during the temporary certification period. It's interesting to note that Mr. Schiff represents the Commission here never denied that. All that Mr. Coleman could muster for his support was an order in CATCO on remand issued in January '62. But as this order makes clear and I'm afraid it must be read quite clearly because the Commission really mischaracterized what it was doing there but what it was doing there was imposing refund liabilities upon temporary certifi -- a temporary certificate which contained an expressed refund condition. And we do not contest that in that situation, the power to order refunds exist.
Hugo L. Black: What would you do now? Are you defending entirely on the issue retroactivity?
Francis H. Caskin: Not entirely, Your Honor. We're also saying –-
Hugo L. Black: Supposing it wasn't, as you call it retroactive, would you contest their power to order refund?
Francis H. Caskin: I contest their power to change a rate that has been filed and accepted without refund.
Hugo L. Black: Do you claim -- do you claim whatever rate they say that in fact, changes their evidence?
Francis H. Caskin: I would have to concede that they can change it prospectively. And this is what explicitly they refuse to do in the February 5th order.
Hugo L. Black: What you claim here is that whatever manner by the in-line price? They read on these certificates, temporary certificates.
Francis H. Caskin: Your Honor, that they were not bound --
Hugo L. Black: They are bound until that's changed by some new order --
Francis H. Caskin: That is --
Hugo L. Black: They cannot prospectively, retroactively, change that amount in that certificate.
Francis H. Caskin: That is correct, Your Honor.
Hugo L. Black: That's the basis of your argument?
Francis H. Caskin: Yes sir, and it -- it ties in with the other aspect of the question that not only was this a well-articulated Commission policy that produce these unconditioned temporary certificates but the distributors themselves had the opportunity to contest it. And as I say, their idea of what the scope of review of a temporary certificate order is -- is -- is limited in my judgment. And as a matter of fact, when they cite the McDermott case in 32 -- at 327 F.2d, they failed to recognize that there was not a question there before the Court of a determination by the Commission, that a temporary certificate was explicitly not subject to refund.
Hugo L. Black: Suppose they reach the conclusion that the temporary rate was confiscatory?
Francis H. Caskin: That the producers –-
Hugo L. Black: That a temporary rate was confiscatory, could they have remedy there on the permanent -- on the temporary certificates?
Francis H. Caskin: Well, Your Honor, I think it would be rather difficult to do it except prospectively. I think that we certainly as producers could come in and seek prospective relief but --
Hugo L. Black: What do you mean by prospective relief?
Francis H. Caskin: Well, relief from and after the day that the Commission acted. I --
Hugo L. Black: That would relate retroactively, would it not?
Francis H. Caskin: I don't believe so, Your Honor. I think that the Commission lacks a reparation power. And that under Section 5 of the Act, its action would be prospective only so that -- but we have of course raised a -- such questions.
Hugo L. Black: Well no.
Francis H. Caskin: What we --
Hugo L. Black: -- because that's not here but I was wondering if you meant that it was fixed and inflexible this temporary rate even though it was confiscatory.
Francis H. Caskin: I would say that it was fixed until from the point of view that producers, we sought relief from confiscation if that was a question, and that the action on a requested relief would be of prospective effect.
Earl Warren: If they had a policy, a general policy that all the producers relied upon, what was the standard guiding the Commission in determining that in some of these certificates, temporary certificates, they provided for refunds and some, they did not?
Francis H. Caskin: Well, Your Honor, this requires going into the voice of the Commission and I really couldn't say except that they were exercising their discretionary authority to attach conditions at the time of issuance of the temporary certificates.
Earl Warren: Or if they have the power to fix the policy that everybody was controlled by, how would they have the right to pick and choose between these various companies or producers?
Francis H. Caskin: Well, Your Honor, I think that always that, peculiar circumstances have to be taken into account. And there is one temporary certificate in this case where the refund condition was imposed with a floor of 12 cents which obviously related to the fact that the producer was acquiring the properties from someone else. I think what the Commission was saying very clearly was, that in the case of new certificate applications controlling contracts or governing contracts under certif -- under con -- governing contracts issued after the Policy Statement. They would permit unconditional certification without refund condition provided that the producer was proscribed from filing price increases during the period of temporary certification. Now I --
Earl Warren: Did they say that? They say that?
Francis H. Caskin: Well yes sir. They said that in the February 5th order.
Hugo L. Black: Well if they did, no, no, you're just taking your time.
Francis H. Caskin: Yes. They said that at page 158 of Volume 1 of the record. Now, the Commission presently takes the position that its February 5th order didn't mean what it said. What it says is that the February 5th order was a refusal to imposed and expressed refund condition. The implication being that there was already an implicit refund condition. But this is truly incomprehensible in light with the plain words of the February 5th order, itself. And it only shows to me that it's a form of post hoc rationalization to cover a change in policy applied retroactively.
Byron R. White: What is that February 5th order? Is it cited here?
Francis H. Caskin: The February 5th order?
Byron R. White: Yes.
Francis H. Caskin: Yes sir. It appears that page 155 of Volume 1 of the appendix. And it goes on to several pages Mr. Justice. Now, as a part of its argument, the temporary certificates --
Abe Fortas: I beg your pardon. In your judgment, does a Commission have the power to issue an authorization to a producer, without approving the price, without any approved price.
Francis H. Caskin: Your Honor, it's my position that they have to approve the price at -- at least a certain price.
Abe Fortas: That's what I thought and the fact of the matter is if you take -- go back to the temporary authorizations themselves they have not approved the price. And then you get all these stashing back and forth as it seems to be on the part of the Commission but you come back to the proposition that there has not been an approved price under this temporary authorization. What then affects and it's arguable therefore that what they're in effect doing now in addition to fixing a prospective price is to fix a price that would be applicable to the sales under these temporary certificates. I don't know whether that squares with the Commission's idea of a statute, what they're doing or not. I am impressed with your argument about this February 5 order particularly what is said on page 157 of the record. But to look at this thing from the point of view of a refund, you do have a February 5th order statements by the Commission which seemed clearly to indicate they don't think that they doubt that they've got the power to do it. And if they did they have the power to do it, that they thought this would be kind of short practice.
Francis H. Caskin: Well, Your Honor, I believe that --
Abe Fortas: But on the other hand that if you --
Francis H. Caskin: They thought they had the power. I believe they have the power. And the distributors were unnoticed. And if they want to assert --
Abe Fortas: Do you believe they have the power to do what?
Francis H. Caskin: The power to issue temporary certificate what are (Voice Overlap).
Abe Fortas: Without approving the price.
Francis H. Caskin: Well, Your Honor, what I am saying is that they --
Abe Fortas: That's what I'm asking you though.
Francis H. Caskin: Do they have the power to -- I say not unless they put a floor in it. They often issue temporary certificates for the refund conditions based upon an explicit price floor. And this is in clear accord with what they have done since 1959 following the Tenth Circuit Sunray Mid-Continent decision in 270 F.2d. So I say they have the power to issue a temporary certificate without approving the total price but they do not have the power to merely hold in advance what the price maybe contingent upon permanent certification.
Abe Fortas: Well they do it in some cases.
Francis H. Caskin: Well, Your Honor, this was the first case that they've done it in. This is the first time that they have success -- not successfully, but have attempted to read without prejudice language as an absolute lack of approval of the rate accepted for filing of the temporary certification period.
William J. Brennan, Jr.: You mean that they might have approved as far as power is concerned the expressed provision and there shall be no refund with respect to this right. They could have gone that far.
Francis H. Caskin: Yes, Your Honor.
William J. Brennan, Jr.: And in fact you're saying that's really what they did.
Francis H. Caskin: That's what I'm saying they did. That's what I'm saying they said they did witness the February 5th order. Your Honor, I would like to cover one question finally because it's before this Court and that is the question of the Commission's exercise of the refund power which we of course, concede or refuse to concede exist, I urge that the Court, the further view of that question at this time. When the Commission actually imposed the refund liabilities by its Opinion 501, the threshold question of whether it possessed the power was then pending before the Tenth Circuit. And by the time that the 11 petitions to review Opinion 501 were before the Tenth Circuit, that Court decided in Sunray DX that the Commission lacked power. And based upon a motion for summary disposition of the second series of appeals, the Tenth Circuit set aside Opinion 501 in light of its Sunray DX case. I wish to note that the Tenth Circuit had nothing before except a mere listing of the record and the allegations concerning the exercise of the power had not even been briefed. And for this reason, among others, as stated in our briefs, particularly our reply brief, I would respectfully urge this Court to let the Tenth Circuit decide this exercise of the power questions in the first instance.
Earl Warren: Mr. Wolf.
Justin R. Wolf: Mr. Chief Justice and may it please the Court. I appear here today on behalf of the Standard Oil Company of Texas who is the main respondent in Number 80. We concern ourselves and address ourselves solely to the question of refunds. I think it is clear at least we argue that when the Commission issued a temporary certificate to Standard fixing and prescribing a temporary rate of 18 cents, and this was done in Standard's case after the guideline Policy Statement had been issued. And it was a temporary certificate which prescribed an 18-cent rate that cause Standard to reduce rates it had contracted to receive. The Commission was acting at that time in a legislative or a quasi-legislative capacity. Its action bounds Standard for the future until that action was changed. If the rate thus prescribed was by its terms that is by the quasi-legislative after the Commission at that time, made subject to refund, then we do not argue that a later refund ordered by the Commission would be improper or invalid. And I think that this is exactly what my friend, Mr. Coleman, and my friend Mr. Schiff are arguing. They are saying that the so-called “without prejudice language” in Standard's temporary certificates in effect said, that the temporary rate was to be 18 cents until a hearing on final certificate at which time when the Commission prescribed an in-line price a refund from the 18-cent rate would have to be paid down to the rate fixed as the in-line price. Now, one of Standard's temporary certificates particularly the one appearing in the joint appendix at pages 108 and 109 says, “This is without prejudice to such final determination of the application for the certificate as the record may require.” The other temporary that Standard received provides, and this is at the Joint Appendix 100, 101, “This authorization and the acceptance of the above rate schedule are without prejudice to such final disposition of the application for certificate as the record may require.” So the issue becomes how does one reads it without prejudice language. That question, Mr. Justice Fortas which I think you recently addressed yourself.
Abe Fortas: Thank you for that. Would you look at page 72 of Volume 1 of the joint appendix?
Justin R. Wolf: I beg your pardon sir.
Abe Fortas: Page 72.
Justin R. Wolf: Yes sir.
Abe Fortas: And that's say a temporary certification isn't it, for -- to the Sunray Oil Company?
Justin R. Wolf: This is a temporary certification to the Sunray Oil Company, yes sir, in Docket CI 61, 657.
Abe Fortas: And on page 72, there is a sentence in the second paragraph, it says, this acceptance per filing shall not be construed as constituting approval of any rate charged classification etcetera --
Justin R. Wolf: Yes sir.
Abe Fortas: -- obtained in the filing. And then I look at the Standard of Texas temporary certificates towards to just direct our attention. Those don't' have that provision and --
Justin R. Wolf: It is correct sir.
Abe Fortas: Why is that?
Justin R. Wolf: I do not know, sir. I suspect -- I suspect that it is a choice of language which the drafter of the temporary certificate may have used but significantly I suggest you that the language makes no difference.
Abe Fortas: Well, that's what I wanted to ask you. That is do you contend but the temporary certification which your client received does constitute an approval in any degree of the rates?
Justin R. Wolf: I contend that the temporary certificate that was issued to my client prescribed that 18-cent rate until it could and would be changed prospectively. I challenge the Commission's authority to change it retroactively.
Abe Fortas: You have to be a little more blunt for me. Do you or do you not regard it as an approval of the rate until it changes?
Justin R. Wolf: Yes sir.
Abe Fortas: You do?
Justin R. Wolf: Yes sir.
Abe Fortas: But then that the situation would be different than the case of your client than it would be in the case of Sun Oil under the temporary certificate to which I directed your attention.
Justin R. Wolf: No sir, respectfully sir.
Abe Fortas: Well how can you say that the Sun Oil temporary certification is in approval of the rate when it says it's not?
Justin R. Wolf: The Commission in its order of February 5th, 1963 has specifically unequipped stated exactly what it meant in temporary --
Abe Fortas: Sometimes it says -- let's assume and I think it's right that February 5 order says we won't order -- we won't add a refund condition.
Justin R. Wolf: That is right.
Abe Fortas: But that's still isn't right on the button because I -- you have to leave out an important word, that little word not in the Sun Oil certification to reach your result and you have to say you're leaving it out because of some other things outside of the temporary certification itself and that's what you're arguing. That's what --
Justin R. Wolf: I regret that I do not appear to becoming too clear to you as I hope I would. What I am trying to say is irrespective of the language used in the respective temporaries, and particularly in the light of what the Commission said with regard to the language that it did use in its February 5 order. The Commission has made it quite clear that it did not intend to. It would not order refunds --
Abe Fortas: I understand that.
Justin R. Wolf: -- retroactively reduced the rates prescribed by the ordering of refund.
Abe Fortas: A few possible positions. One that temporary certification did approve the rate.
Justin R. Wolf: Yes.
Abe Fortas: Two, that the -- despite the fact that the temporary certification said that it did not. Two, that the temporary certification did not approve the rates and nothing subsequently changed that. The -- three, that approval of the rates was not necessary and that the Commission's February 5 statement that it would not order refunds as governs and is binding on the Commission.
Justin R. Wolf: I think that latter you said, yes, yes Mr. Justice Fortas, is correct. And the significance of the argument that Standard of Texas wishes to present to you, is that what we are saying is clearly and wholly inline with the decisions that had been articulated by this Court. In Arizona Grocery, in 284 U.S., you said, that a quasi-legislative body and that is just the ICC could not retroactively repeal its own enactment. And we agree with that. We say that what the Commission is attempted to do in its Opinion 501 is retroactively to repeal its whole enactment.
William J. Brennan, Jr.: What you're saying here is the correct analysis, it's not of approval or disapproval of a rate rather this is in effect a legislative specification of a rate which may not be changed except prospectively because otherwise, it would be something ex post facto in nature, is that it?
Justin R. Wolf: Exactly, Your Honor, you have phrased it better than I. In fact, I should quit at that point. And as a matter of fact, I think I will. Thank you, Your Honor.
Byron R. White: Can I ask you just one question. This is the last one on your side, isn't it?
Justin R. Wolf: Yes, sir.
Byron R. White: Does any part of your objection to the refund order here go to saying that the in-line rate is not a proper measure of the refund if the refund is what we had but that the refund obligations should be measured by what ultimately is forthcoming in the area rate proceedings about fair and reasonable rates?
Justin R. Wolf: I do not so argue with that Justice White, nor do I understand that that argu -- that the argument which you have just articulated has been set forth in any of the other briefs.
Byron R. White: So that the in-line rate is set by the Commission if there is to be a refund. You concede that it's a fair measure of what the refund should be.
Justin R. Wolf: If there is to be a refund and I sincerely trust there will not be because it would be retroactive rate measure. And the measure is the measure which the Commission has prescribed, the difference between the rates prescribed in the temporary certificate on the in-line.
Byron R. White: Does your argument necessarily mean that Callery was really wrong insofar as they decided a refund?
Justin R. Wolf: No, I don't think that --
Byron R. White: On Callery though, here's a Commission that in the -- in a Section 7 of the proceeding sets a rate. It determines a rate. And that company goes ahead and charges that rate. And it just so happens the rate isn't final. But the Commission has said it is, that the rate isn't final and gets reversed on appeal. And if there's a refund there, isn't the -- the Commission may order a refund. In fact, it has to, is that right?
Justin R. Wolf: In the circumstances of Callery, they did exactly what you say, Mr. Justice White.
Byron R. White: Well now only --
Justin R. Wolf: But after the non-final permanent certificates had been vacated by this Court's decision in CATCO.
Byron R. White: Well, I know but it seems to me that you haven't touch time with that case and that suggests that the temporary certificate which sets a rate is a less -- is a more formal, a more reliable, a more final sort of a thing than an in-line rate that's set in Section 7 proceeding after a hearing. And even if the producer goes ahead and charges that rate, set at us and -- charges the in-line rate that he's told to charge by the Commission, he nevertheless has to refund if this happens to get reversed.
Justin R. Wolf: I am saying that if the Commission prescribes a rate in a temporary certificate, it does not provide -- and -- and provides that it can be changed in the future prospectively that the producer provided (Voice Overlap) to keep those dollars.
Byron R. White: The Commission didn't provide anything like that in Callery.
Justin R. Wolf: No, sir. But they provided in the October 5th, in the February 5th order they said that's exactly what they did in this case. I'm not in Callery, if it may -- if it may please, Your Honor. I am in this case dealing with exactly what they said in date of effect --
Byron R. White: You mean -- you mean without -- without the February 5th order having been in review, you wouldn't be here. Oh! I'm sure you would.
Justin R. Wolf: I think I would be here on any --
Byron R. White: Exactly the same argument except without the February 5th order.
Justin R. Wolf: I think that if --
Byron R. White: You would say that that -- you would still say that the temporary rate set by the Commission was a legislative act that couldn't be changed through retroactively.
Justin R. Wolf: Retroactively, yes sir. Yes, yes, I would make that argument with or without the February 5th order.
Byron R. White: What do you think about -- what do you think about the in-line price though? Why does the company have to refund whatever rate that it's been charging which the Commissioner set after an in-line price hearing.Callery said it had to.
Justin R. Wolf: I don't read Callery as at least, I may not if I don't read it. I certainly don't understand Callery in the way that you have just articulated Callery. I have to not hold to the fact that it's one of your opinions without mine but I (Voice Overlap) -- I did not read it that way.
Byron R. White: Thank you.
Earl Warren: Mr. Schiff.
Peter H. Schiff: Mr. Chief Justice. Briefly, I think I should make it clear on the -- with respect to refunds, that first, we do believe that the -- without prejudice language in the temporaries, certainly shows the non-finality of the rates which were permitted to be charged under the temporary authorization. At the same time, if I did not make this clear yesterday, the Commission during the course of the proceedings with respect to in-liners has changed its view as to the equity of ordering refunds where there has been no express conditions stating that refunds would not be required at the end.
Abe Fortas: In other words, you really have to conceive, don't you, that your action here is contrary to that February 5 order, to the language of the February 5 order.
Peter H. Schiff: Well I think, Mr. Justice Fortas, that the -- it's certainly our action is contrary to our or the Commission's view on the equities in that order. There is no question about that. The Commission's view of the equities in the February 5th order is precisely the same as the Commission's view of the equities in the Skelly case which was decided by the Commission in August of 1962.
Abe Fortas: Well, I myself don't think you could say stated position against refunds because they are more empathetically than it was said in Chairman Swidler's opinion for the Commission on February 5.
Peter H. Schiff: Well, that opinion is as I read it and it's consistently with your earlier decision is not that the Commissions had no power to order refunds of these even without the expressed refund condition. It is a view that the Commission at that time did not think it would be equitable to order refunds. Subsequently, had the consequence no doubt, of the reversal by the District of Columbia Circuit in the Skelly case and upon a more considered in depth consideration of the equities, the Commission concluded that although it assumed that the producers reasonably relied on the lack of refund condition in the belief that they would not have to order refunds, the Commission then concluded that it would be equitable to order refunds. And there is no question but that this is a change in the Commission's view of the equities. And then --
Hugo L. Black: Suppose you -- suppose you argued on the basis that someone might believe what that order as said, was that the Commission was without power to do that even if it wanted to. And it wouldn't do it even if it has the power.
Peter H. Schiff: Well I -- I think --
Hugo L. Black: I must say that's the way it looks to me like, what they said. What then would you say about the effect of that order?
Peter H. Schiff: Well and -- and if -- I don't think that order really makes any difference in this case, Your Honor.
Hugo L. Black: Well, that's it and why?
Peter H. Schiff: Well, let me get to it. The temporaries in this case were issued in service commenced long before this February 5th order was entered. The Commission's action in -- the distributors in the motion which led up to this order, requested the Commission alternatively to either vacate the temporaries that had been issued or else to impose a prospective refund condition. In that motion, the distributors pointed out that they were challenging in Court the power of the Commission or the propriety of the Commission not ordering refunds and not imposing refund conditions. The Commission in its February 5th order said that because service had already commenced, it did not regard it as appropriate to vacate these temporaries because before you could stop service with respect to flowing gas, the Commission should make the determination as to whether abandonment was justified. It then went on to say that in any event, we don't think that it would be a fair play if we now after service had commenced change the terms of service. I don't believe, I'm not sure, but in my view, that order was in the context of a contention that the Commission has a power to order refunds in any event and all the Commission was doing here is saying we still think that it isn't equitable to order refunds.
Hugo L. Black: But it should hold what it said here.
Peter H. Schiff: Well, if --
Hugo L. Black: Is it your idea that the Commission was wrong without its power. And that it construed the statute improperly.
Peter H. Schiff: Well I think it -- I think the Commission would have been wrong in construing that it did not have the power. I don't think that that order was strictly reviewable at that time because the service was already flowing and it really related to the consequences it would have at the end of the proceeding. I don't think that the February 5th order changed the consequences or the situation that existed prior to the February 5th order.
Hugo L. Black: It would have changed it, would it not, if they were right and as we're saying, and I think they did, that they will with that power to do this and they wouldn't do it if they could under the statute?
Peter H. Schiff: Well, I --
Hugo L. Black: You don't have to defend it, do you, if you think it was a wrong construction of the statute? Or are you defending it even though it was a wrong construction to the statute?
Peter H. Schiff: If it was a wrong construction that -- well, I don't think that that construction -- I think that construction, if that was a construction that we had no power to order refunds would be --
Hugo L. Black: Under those conditions.
Peter H. Schiff: -- under those conditions, would be an interlocutory interpretation by the Commission which was not binding even upon the Commission and was not viewed as the Commission's interpretation in the later order.
Hugo L. Black: Well, do you think it has the power?
Peter H. Schiff: Yes, very definitely, I think the Commission has the power to order refunds.
Hugo L. Black: Even under those conditions.
Peter H. Schiff: Even under the conditions that it had not imposed an expressed refund condition and in answer to Mr. Justice White's question yesterday, I think in effect that because of the prior history of refund conditions and no refund conditions, that you virtually have to get to the point of saying that the Commission has the power to order refunds where there is a tentative rate even if it had said we do not intend to order refunds.
Hugo L. Black: Did I understand that this order was after these particular certificates here were issued?
Peter H. Schiff: This February 5th order was after these certificates were issued or it's long after the time when they had commenced service under those certificates.
Hugo L. Black: And you would say, therefore, I assume that the certificates hold it didn't have the right to rely on that so that it would be breaking face with them. That was wrong.
Peter H. Schiff: Well the -- oh, the Commission takes a view and I take the view that the certificate holders -- because not just because of this order, but also because other Commission orders in this period had the right to believe that they would not be required to make refunds and the Commission in the order in its Opinion 501 where it did order refunds expressly accepted the proposition that there had been reasonable reliance. But it went on to conclude that the producers when given an opportunity to show any detriment from that reliance had failed to do so except with a very limited area of royalties which was specifically paid out on reliance on the higher price and certain state production taxes. And it is our view -- and I think this is the only way that this can be differentiated from Callery which I think it's illegal for Callery, we think on a legal proposition is certainly controlling. But in terms of equity, the Commission's course of conduct here may have been such as to induce the producers to pay out certain specific sums which it would not otherwise have paid out. And we based on our decision on that assumption. But beyond that, we think that has to be reliance and a detriment from that reliance. And the producers simply haven't shown any detriment except in the very limited circumstances I've made.
Hugo L. Black: Thus the Commission specifically overruled or repudiated this February 5th order?
Peter H. Schiff: Oh! Yes.
Hugo L. Black: It's done in an opinion?
Peter H. Schiff: Well, in Opinion 501 --
Byron R. White: It's ordered to refund.
Peter H. Schiff: And it's ordered a refund, Opinion 501 which is in this small section --
Hugo L. Black: You're talking about in this case?
Peter H. Schiff: That's this case --
Hugo L. Black: I was asking, if they would have done it in with any another?
Peter H. Schiff: Well, there had been a series of other cases where the Commission has ordered refunds in comparable circumstances. There is the case which is pending here from the Tenth Circuit, Pan American case which relates to a Commission proceeding involving many South Louisiana sales. I believe that in that case, there was an order similar to the February 5th order. The Commission has ordered re -- well, it hasn't ordered refunds there yet. But it has again, said that this called for hearings to determine the equities. But it has now ordered refunds in the Hawkins case which is the Texas District 3 case. That case is pending in the Tenth Circuit. It has ordered refunds in the case relating to Sun Oil.
William J. Brennan, Jr.: Any difference detriment to either of the cases?
Peter H. Schiff: Well, in one -- in one case, Mr. Justice Brennan, I referred to yesterday, I think it's Hawkins. There was a situation where a producer showed and we've mentioned in our brief, produced to show that these very large -- that he had very large refunds in relation to his own operations. And that this, if he was required to make refunds immediately, might cause them difficulties even though --
William J. Brennan, Jr.: But all he did was spread that over to --
Peter H. Schiff: Well, that could be spread out over --
William J. Brennan, Jr.: Well, I -- I gather then, the Commission's position is that it does have power to order refunds but it also has power to adjust the amount of refunds or eliminate them entirely on the showing by the producer of what the Commission would regard as detriment.
Peter H. Schiff: That's right, Mr. Justice Brennan. And in this respect, the District of Columbia Circuit in that early Skelly case, agreed with us that we should consider the equity. And the equities there were -- that were presented to them, there was in fact that there had been no specific refund obligation and the Judge Fahy in writing that opinion, recognized as the Commission has here that the Commission had not followed the straightest line in these matters and that we had to take this into account. I may say that there was an argument, I think both by the counsels here and there's an amicus brief which suggest that the Commission has a declared law which may producers were entitled to rely upon. Whatever that means here, the Commission accepted the reliance but it didn't find the (Voice Overlap)
William J. Brennan, Jr.: Well as I gather it you -- you -- that the Commission's present position is that even if we had said we will not ask for refunds, we nevertheless have power to order refunds unless we discover that the reliance took the form of a concrete detriment to the producer of some kind, is that it?
Byron R. White: That is correct.
Byron R. White: Mr. Schiff, if the in-line price here is determined to have been set too high, it's 15 rather than 16. And if the companies had been charging that higher in-line price at 16, and then the order is reversed and that it said that it should be 15, what authority is there for saying there would have to be a refund in that situation? Is that Callery?
Peter H. Schiff: Yes, that is the situa -- well that is the situation --
Byron R. White: Except that in Callery, the original -- the rate or the part of which was refunded really wasn't set by the Commission, was it?
Peter H. Schiff: Well, I maybe I have -- I better make sure that I understand your question. If the Commission had fixed a 16-cent which is --
Byron R. White: -- in-line price.
Peter H. Schiff: Yes. And you now were -- remanded and (Voice Overlap) ultimately would be 15. I think that would still be Callery. I think it would just change the measure of refunds but it wouldn't change the legal --
Byron R. White: You don't think it was significant in Callery that the -- that that was a permanent certificate and a rate under a permanent certificate, I suppose. But the Commission didn't specify that original rate in this.
Peter H. Schiff: Oh! We approved the original rate in the -- in the original certificate just as much --
Byron R. White: This might (Voice Overlap) in issuing the certificate?
Peter H. Schiff: Well, we had a hearing to determine whether that was a proper certificate price when we issued --
Byron R. White: In Callery?
Peter H. Schiff: In Callery, that those were the cases that were set aside in the UGI case but we --
William J. Brennan, Jr.: But the rates you approved were actually agreed upon rates, weren't they?
Peter H. Schiff: Agreed upon in this -- well, that -- that was a rate that the contract rates and we simply didn't lower it in that sense.
William J. Brennan, Jr.: Were the rates as specified it. You specified what the parties agreed to do?
Peter H. Schiff: Yes, I don't think in terms of say the Arizona Grocery case of reparations that these are -- these were any different.
Abe Fortas: Mr. Schiff, does a -- does the Commission have the power to -- under the statute, to issue a permanent or temporary certificate without approving rates?
Peter H. Schiff: Without specifically approving rates?
Abe Fortas: Without approving rates, sometimes, somehow, someway.
Peter H. Schiff: Well, I think this Court's decision in the CATCO case indicates that the Commission must give careful scrutiny to the rates of the Commission if it wants to give scrutiny to the rates in the certificate case then of course has discretion in large measure to determine whether it will have a rate hearing.
Abe Fortas: When you issued temporary certificates here did the Commission or did it not approve the rates?
Peter H. Schiff: Well it approved them in the sense that these were the rates that could legally be charged, that if by the producer by charging them could not have been held --
Abe Fortas: -- provision was cited in the Sun Oil temporary certificate for example that it did not approve the rates.
Peter H. Schiff: Well, it didn't approve the level of the rates. It didn't find that they're either the just reasonable rate or the appropriate certificate rate. It was allowing the rates to be charged. I think the Commission has a power to do that. It doesn't have to necessarily give either the scrutiny required by section or by rate case --
Abe Fortas: Then they have to come with time under this statute when the Commissioners to approve the rate?
Peter H. Schiff: Well, all these rates are involved in the area rate proceeding relating to the Texas Gulf Coast. And we have considered them in the --
Abe Fortas: Not if you don't have power to ref -- to order refund?
Peter H. Schiff: Well, this is why we think that we do could order refunds here down to the price determined in the permanent certificate case. I don't think we have to make a full adjudication of the rates before we permit them to commence service under a temporary. I would like to spend a minute or so on the questions of need. And I like to reiterate that the Commission fully realized this that it must consider not only whether the pipelines are getting sufficient quantities of gas but also whether there are more than sufficient quantities of gas being purchased and what effect this might have on the rates of the pipelines and consequently on the rates of the producers -- or of the consumers. The –- well, I see my --
Earl Warren: You may make a very short statement.
Peter H. Schiff: But basically our view, however, as I said before is that the question of need may and can, and is being considered in pipeline proceedings. The particular pipeline facilities involved in these cases have been approved in the past. But normally, in order to consider the question of need before the gas goes into the market which is the proper time to consider it is in pipeline proceedings. It cannot be done in producer proceedings unless you simply eliminate temporaries because as was recognized before, the gas will be flowing long before for a long time before the question of a need can be finally determined in a producer case. So in these circumstances, the appropriate place is in the pipeline proceedings and there are continuing pipeline proceedings. They are always asking for new facilities to pick up more gas, there are these budget facilities, we believe that these cases provide an ample opportunity for the consumer interest. Those present here and any others to express their views as to the needs of the pipelines and of the various markets affected. Thank you.
Earl Warren: Mr. Simons.
Morton L. Simon: Mr. Chief Justice. Mr. Tell during his presentation stated that in the prior cases, the Commission had found 15 cents as the in-line level for the 1950s and that the question before the Commission in this proceedings was to determine whether there were changed circumstances which would justify a change in the in-line price. I would like to comment on his statement in two respects. First of all, the prior in-line finding is not an in-line finding for the 50s. In Skelly, for the example, the Commission had before basically nine contracts executed in 1959 and 1960. And it predicated its finding on the conditions that existed from 1958 through 1960. In the Amerada case, we had contracts for the two-year period beginning immediately after Skelly from September 1960 through August 1962. But in any event, the question is, what were the changed circumstances that the Commission relied on to elevate its in-line level by a penny. The changed circumstances were essentially the higher prices negotiated in the marketplace. And I think that this brings us not only to the whole suspect line doctrine but to the manner in which it was phrased by Judge Bazelon below. He said the need for the FPC and for a concept like in-line prices arises primarily because the unregulated marketplace cannot protect the consumer adequately. Congress created the FPC to protect the consumer from the marketplace, not simply to reflect it. It may well be true that the marketplace was leading to higher prices of pipelines and producers who are willing to negotiate for higher prices in the 60s than they were in 1959 and 1960. This fact, far from contradicting a need for holding the line for FPC control merely emphasizes it. Now, the Commission attempts to say, “Well, we aren't relying on the naked marketplace as we did in the CATCO case which led to this Court's reversal. We're relying on the fact that we have issued temporary certificates. But the prices contained the temporary certificates are not approved. They are not final. They are subject to revision, happy outcome of the hearing on those temporary certificates. That price is the price that obtains only during the pendency of a hearing to determine whether it should be permanently certificated. And indeed once it's permanently certificated, it can be replaced by the just and reasonable rate at a later time. But it's for this reason that no reliance can be placed on temporary -- temporarily certificated prices. Now, what is the difference between certificating an in-line level of 15 cents and an in-line level of 16 cents? It is just this, under both circumstances, the producer can file it up to its contract level, be it 16, 17, 18 cents, or whatever. However, if the ultimate just and reasonable rate is determined in the area rate proceedings, turns out to be lower than 16 cents, if the in-line -- the difference between 15 and 16 cannot be recouped unless the in-line level has been fixed at 15. It's possible that the just and reasonable level could be even lower than 15 cents. In that case, the consumer is just disadvantaged without any recourse at all. But the fact is --
Byron R. White: Unless there is a proper condition in the permanent certificate?
Morton L. Simon: Well, there are no conditions, no conditions are put --
Byron R. White: There aren't any?
Morton L. Simon: No, no sir. There are none in any others that I know of. The permanent condition -- the conditions that's put in is to certificate at an in-line level which is the initial certificating level. That's what you can charge until you change it under Section 4.
Byron R. White: And then no refund?
Morton L. Simon: There are no refunds if you don't change it. That's right. There is no way to touch that at all. That's firm and fixed. Now, the basis for the determination -- oh, incidentally I would say that the Commission never made any finding that there was less need for consumer protection with respect to these contracts which have the 16-cent level than it had for the contracts in Skelly which had a 15-cent level. There was in all three of these cases a diminution in the degree of consumer protection over the prior series of cases without any finding by the Commission that such diminution was proper or was required. Now, what was the basis for the determination of the in-line price? In each of these proceedings, I want to run through it very briefly. In Amerada, I understand this morning that I said that of the 38 contracts relied on for guideline level, and I should have said for in-line level purposes here, 36 of the --
William J. Brennan, Jr.: Excuse me, Mr. Simons, did I understand you said that the Commission has no power to condition a permanent certificate on refund after determination of the just and reasonable rate?
Morton L. Simon: I don't know of any that they have ever done that way, Mr. Justice Brennan.
William J. Brennan, Jr.: Well, I thought I heard you say that but did you suggest that the Commission has no power to do that?
Morton L. Simon: I didn't say that. I don't know whether they do. Let me say that. I don't think it has ever arisen.
Abe Fortas: I thought I heard Mr. Schiff say that.
Morton L. Simon: I --
Abe Fortas: There are no reparations prior to --
Morton L. Simon: I think that's right. There is no reparation. Now, if they put in a specific condition for that, I don't know. We're talking about two different situations. If the certificate let's say, at 15 cents, and the in-line price turns out to be 14 later, there is no power to get reparation on the difference between 15 and 14. If they can issue a certificate conditioned at 15 and said further more, anything we later find in an area rate proceeding to be unjust and reasonable shall be refunded. Then you would have the propriety of that kind of a condition. The Commissioner has never imposed that kind of a condition so far as I know.
Abe Fortas: I'm sure my Brothers Brennan is on certainty about what the Commission's position is on that range of possibilities.
Morton L. Simon: About imposing a condition that's not in this case? Yes. I would hesitate to say. I'm a great believer. I'm leaving it to the litigation lending their eyes with this.
Byron R. White: Well, Callery, the Callery case itself said that the fixing of an initial in-line prices establishes a firm price.
Morton L. Simon: That's correct.
Byron R. White: And which a producer may operate without any contingent liability to make refunds.
Morton L. Simon: That's correct.
Byron R. White: That this is just a reasonable rate to have it be lowered than the in-line price. And one of the reasons given was the Commission didn't have any reparation power.
Morton L. Simon: That is correct. I thought Mr. Justice Brennan was asking me about a situation not present in Callery, not present in --
William J. Brennan, Jr.: You're absolutely right, I was.
Morton L. Simon: Yes, certainly.
William J. Brennan, Jr.: I've misunderstood what you've said.
Morton L. Simon: Yes. Since you have mentioned Callery, I would like to turn right to that. At this point, in Callery, this Court twice mentioned what the standard is for fixing in-line price. It said at 382 U.S. 227, consumer protection is afforded by keeping the in-line price -- by keeping the in-line price at the level where substantial amounts of gas have been certificated to enter the market under contemporaneous certificates no longer subject to judicial review or in any way suspect. Now, there's no question here that the Commission use suspect prices. Again the Court said at page 229, the in-line price of 18.5 cents is supported by the contract prices in the South Louisiana area that were not suspect. Again there's not question that the temporarily certificated prices and the contract prices, that the Commission relied on in this case, the elevated in-line level and thereby reduced the amount of consumer protection were suspect. I said in Amerada that 36 of the 38 contracts which have been temporarily certificated and were relied on for the guideline level were the very -- to fix the in-line level, were the very contracts before the Commission itself. In Sinclair, the Commission referred to the fact and they said this out on page 33 of their brief. They were impressed by the fact that 40% of the total volume was moving at 18 cents. That 40% was all under temporary certificates. Three quarters of that 40% were sales to Lone Star Gathering Company which as I discussed this morning under the need issue, it was subsequently determined. There was no need for it. The certificates were vacated. That 75% of the 40%, three quarters of the 40%, those sales are no longer being made in interstate commerce. Yet, that's what the Commission relied on. They relied on sales that are no longer being made in interstate commerce. That fact alone, it seems to me, would require vacation of the Commissions finding that the in-line level is 16 cents. I would point out too that those were all contracts that were before the Commission to determine the propriety of the in-line price for permanent certification. In the Hawkins case, the Commission seems to have shifted its basis for getting the price of a penny. And it says that its primary reliance was on three permanently certificated 18-cent prices. Those three 18-cent prices, I don't want to go into all of it, but those three prices were deemed suspect by the examiner, by the Commission staff, by the two dissenters, and we set out the reasons in Volume 3 of the appendix of pages 312, 313, why those were suspect. The Commission never addressed itself to a discussion of whether or not they were in fact suspect. But we think clearly under the prior court decisions, they were. Now, the Commission says, it attempts to get around this business of the fact the prices were suspect by saying, well we gave discounted weight, we didn't give full weight to it. But the problem with giving weight anyway to suspect prices is the suspect prices are probative nothing at all of no factor that is relevant in an in-line determination. And you don't cure the defect of giving weight to inadmissible evidence that has no probative value by saying, you gave discounted weight. There is no question here that the discounted weight was crucial. The Commission itself said in Sinclair that if we didn't give any weight, we would have arrived at a lower level. And so you had an inadmissible confession and you had no other evidence so you needed some evidence, so you let it in because it provided that the term would be reduced by one-half or one-fourth. If it's inadmissible, it's inadmissible. If it's not probative, it's not probative.
Speaker: (Voice Overlap) was that after all the Commission has some expert -- expertise in this business type where they (Inaudible).
Morton L. Simon: I think Mr. Justice Harlan --
Speaker: (Voice Overlap)
Morton L. Simon: I think Mr. Justice Harlan that you get into a tyranny of lack of standards and vague standards. And I want to --
Speaker: Very complicated problem that any standards you find to regulate this industry that we all have experience it in this Court. And we hold to make (Inaudible).
Morton L. Simon: Well, let's see what the Commission itself said. At page 33 of its brief it says, it's speaking here of the Sinclair case. It says, “No doubt on this evidence, the Court examining the matter de novo might choose a different price line. There is room for arguing that the price line should be 15 cents or 15.5 cents or even as high as 18 cents. But in the final analysis, the statute commits the decision to the expert judgment of the Commission. Now, as I understand that they're saying based on the evidentiary record before that they could have come up with anything between 15 and 18 cents. And I submit Mr. Justice Harlan, that that kind of standard is just too vague. It has no meaning. If that's what it is, then the hearing that we had, we might just as well have forgotten it. If that, there is that much range for the Commission to pick an in-line level, then I think that the in-line determination and the protection that this Court intended in CATCO, have been a terrible waste of time. Now, I want to address myself to certain statements made by Mr. Caskin with respect to the Policy Statement. First of all, it was not possible as you pointed out Mr. Chief Justice, to take an appeal from the Policy Statement when it was issued. It was issued without notice, without hearing, without record. The State of Wisconsin representing the consumer interest, filed an application for rehearing which is a prerequisite for review. The Commission rejected that application. The State of Wisconsin took an appeal to the District of Columbia Circuit that Commission defended on the ground that the Policy Statement fixes no rights. It fixes no procedures. When it is applied, that is the time to approach it when it is implemented. I would point out too that in June of 1962, the New York Commission filed the petition to amend the Policy Statement. That petition has been pending for six years. I don't think we're going to get any action on it. When the Commission did implement the Policy Statement in a case like McDermott, we did appeal. The DC Circuit said, “We don't have a full record.” These matters can all be worked out. We did attack specifically in the McDermott appeal, the failure to include and express refund condition, we attack the fact that the price was out of line in the temporary. The DC Circuit said, “These matters, we don't have a full record before as these matters can all be determined on permanent certification. That is the time to obtain it.” Now, Mr. Johnson has suggested that the distributor companies are here before you because they will retain a large amount of money if they can and that it's purely a selfish interest. First of all, a statement would not apply in any event to the Public Service Commission of the State of New York which is not a distributor. With respect to the three distributors I represent, I like to state that two of them, Brooklyn Union Gas Company, Long Island Lighting Company have purchased gas adjustment clauses in their contract, the effect of which is that any dollar that they get back out of this proceeding will flow right through to their customers. They will not retain it. With respect to Philadelphia Electric Company, I had occasion to check what they had done with the monies they have gotten back through the end of 1966. They had received $4 million from their two pipeline suppliers, part of it, being producer refunds that the pipelines have passed on. And they had refunded or flow through to their customers, passed on to their customers 99.6% of that. Now, I think that this is a meretricious argument. I think if there's any question at all, certainly the clients I represent would have no problem if this Court where to say that the money should flow through directly to the consumer. We are here trying to vindicate the consumer interest. We're not trying to make the money for ourselves. I would point out too that as to some of the refunds that were withheld by some distributors, they may well have been used to offset rate increases. They may well have benefited the consumer in other ways. In any event, they don't apply so far as these refunds are concerned with respect to my clients. With respect to the Commission's exercise of its refund power, I would like to point out that in Amerada, the Commission declined in its original Amerada order, Opinion 422 in 1964, the Commission declined to take any action on refunds. In our appeal to the Tenth Circuit, and in our appeal here, we took the position that the Commission's failure to take action was error, that it was required to act and that it was required that it had the duty to order refunds. If we are correct in that contention which is before this Court, and if this Court should find that we are correct, then you don't get into the problem of the equities. We accept the fact that the Commission's subsequent order Opinion 501, substantially moots our appeal on that point if 501 does satisfy our request on that point. But our appeal right from the beginning was that the Commission had the power and the duty to order refunds at the time that it issued permanent certificates. I think that the issue we have here in these cases is one of proper administrative standards, does the Commission have to explain in a meaningful way what it did? Does it have to provide adequate protection for the consumer? We would ask that you find that the Commission must make a finding of need before it certificates, that it must hold the line at the level that it previously found and not elevate it by reference to temporary certificates and that refunds were required to make the consumer hold for the out of line amounts paid.
Speaker: Can you brush on that point? What was this need issue?
Morton L. Simon: Oh! Yes. I meant to respond to that, Mr. Justice Harlan. The Amerada proceeding arose in 1962. The Hawkins and Sinclair in a related term (Inaudible) proceedings came on for hearing 1964. At 1962 and through 1962, we were willing to accept the fact that there was a need or at least we were not raising that issue. We were attempting to focus in on the price issue. And we did not raise the issue either we did not raise it or in some cases, Union Texas was another contemporaneous case we stipulated. But we became increasingly aware between the institution of the Amerada proceeding and Hawkins-Sinclair that the pipelines were getting into increasing difficulty that they were having to make dump, the low cost dump sales from oil re-fillers for example because they had these take-or-pay problems for their use. And so by 1964, we concluded that we could no longer stipulate that there was a need. If -- had Amerada come later we would have raised it. Had the others come earlier, we probably wouldn't have it this time. Thank you very much.