Earl Warren: Number 49, United Gas Pipe Line Company, petitioner, versus Federal Power Commission, et al. Mr. Woods.
Vernon W. Woods: Mr. Chief Justice, may it please the Court. The petitioner in this case, United Gas Pipe Line Company is a natural gas company is engaged in the business of purchasing gas from producers in the field, transporting that gas through pipe lines and then selling it to distributors for resale and to industry directly for there own use. This case arises out of the Natural Gas Act and it grows out of an order issued by the Federal Power Commission. That order for the first time in the history of the Natural Gas Act in this 38 and this is an Act of 1938. For the first time in the history of the Act, the Federal Power Commission has assumed they had power to order a pipe line to purchase gas. Moreover, to pay a price fixed unilaterally by the seller and finally to purchase quantities in volumes consistent with the cancelled contract. Our petition for writ of certiorari posed two questions, whether the Federal Power Commission in fact had a power, authority to order a pipe line without its consent to continue purchasing gas after the producer had cancelled the contract in which a pipe line had been buying gas whether it had authority to order the pipe line to pay the unilaterally increased price fixed by the seller for that gas. The second question being that if the Act have -- that in it which permits the Commission to issue such an order then is the Act to that extent unconstitutional as violative for the due process requirements just compensation required by the Fifth Amendment to the constitution of the United States. The facts are undisputed and can be stated briefly and they're important to this petition to show the problem that it is faced with by the Commission's order. In January 1953, United and Continental Oil Company entered into a contract under the terms in which Continental agreed to sell and United agreed to buy gas produced by Continental Oil Company in the junction Bayou Field. The junction Bayou Field is located in Cameron Parish which is right in the southwest corner of Louisiana next to the Texas boundary or border. A contract of a ten year primary term with the provision that it would automatically continue in effect after expiration of the primary term provided that either party could cancel the contract upon 90 days prior written notice. The contract also provided fixed prices to be paid for the gas. Two prices, the one in effect at the end of the primary term. That is the second 5 year period of the contract was 10.79 cents per MCF inclusive of tax reimbursement. In other words, United Gas Line Company was paying Continental 10.79 cents per MCF as the contract was nearing the end of its primary term. Now, this contract would've continued automatically in effect. But for the fact, the Continental Oil Company some 90 days prior to the expiration of the primary term wrote to United and said, We cancel the contract. And United accepted the letter. It was canceled on the terms of the contract. Thereafter United rather Continental came to United and said, We'd like to negotiate with you. We'd like to enter to a new contract covering the injunction, Bayou Field gas. And it is ,Fine, let's talk about it. Continental said in substance that we want to increase the price by our standards, United standards substantially. They ordered the price to go up to approximately 18 cents in MCF. That is over the whole term of the contract. They would've started a little less than that about 15.75. But they had something else in there that was completely unacceptable to United. They said that, We wanted to remain open-ended. With the idea in mind that you will agree contractually that if the Federal Power Commission will permit a higher price or different -- a higher price and that to which we've agreed contractually in the so-called area rate proceeding, that we may charge that rate and you must pay it.
Abe Fortas: Well, are they -- excuse me sir. There are area rate proceedings affecting this field?
Vernon W. Woods: There are area rate proceeding, yes sir, affecting south --
Abe Fortas: Well, if those area of rate proceedings aren't completed, what sort of order will be entered?
Vernon W. Woods: As I appreciated the Federal Power Commission contemplates that it would enter an order stating that all gas sold in South Louisiana will be sold at a specific price, 18.50 cents, that is as an initial rate. I think that they probably contemplate that gas which is defined as all gas would be sold at a lesser rate.
Abe Fortas: Is there any determination as to whether that will apply to existing contract?
Vernon W. Woods: Oh, yes. I think it will apply to existing contracts sir.
Abe Fortas: Does Con -- did Continental's stipulation that which just referred mean anything more than that, the area rate price one promulgated by the Commission would apply to this contract?
Vernon W. Woods: That's exactly what it does mean sir. That means at the
Abe Fortas: Well, why was that an issue of contention?
Vernon W. Woods: Because of this, we wished to had the -- we wished to have a prize that was fixed. It's very well possible.
Abe Fortas: Well, but if the Federal Trade Commission is doing the supervene prize anyway? What difference does it make whether your contract to -- about that or accepted as by a reason of the operational FPC's order?
Vernon W. Woods: Well, it makes a very great deal of difference to us, sir --
Abe Fortas: That's what we'll find out.
Vernon W. Woods: -- in this sense. Yes, but it makes a difference in this sense. That we sell gas in turn and here is really the crux of this problem. We sell gas in turn and we sell it the only way we can sell it under the Act and that's a contraction to fixed rates. The Federal Power Commission can't come along and increase of those rates.
Abe Fortas: Well that's a -- that's the hardship of you're having to abide by the area price. What I'm asking you is what difference does it make to you whether you agreed to abide by the area prices Continental was demanding?
Vernon W. Woods: Well?
Abe Fortas: Or whether you have to abide by the area price as a result of the FPC order?
Vernon W. Woods: Let me say this, we do not have to abide by the area price if we agreed to a lower price. I didn't make that clear. In other words If we contractually agree, Continental and United, this gas will sell for 15 cents in MCF and the area price eventually comes out and says that the maximum allowable price is 18 cents.
Abe Fortas: The maximum?
Vernon W. Woods: Yes, that's what it would be.
Abe Fortas: There won't be a fixed price?
Vernon W. Woods: It won't be appraised that every bit of gas has got to be sold that's if there are lesser contract prizes then as I appreciate the area price it doesn't -- published by the Federal Power Commission. They will not supersede those lesser prices. It will not make unlawful Continental's agreement to sell us gas at 15 cents simply because the Federal Power Commission said the gas, the maximum price it can be charged is 18 cents.
Abe Fortas: I -- well, either I misunderstood you --
Vernon W. Woods: Well, I did not make it clear sir.
Abe Fortas: If I misunderstood you, I'm sorry.
Vernon W. Woods: I apologize for not having made it clear. In any event these negotiations proceeded on this basis. United said we're willing to buy your gas but we want to charge, we won't -- we're going to pay a specific prize. It was the price that we would then pay. There were circumstances as we thought, that was the appropriate level. Continental said, we don't agree with that. Any event the parties could not get together. At that point Continental went to the Federal Power Commission and filed its rate that it asked us for unilaterally with the Federal Power Commission and the Federal Power Commission accepted it and made it effective. Now, there are these other aspects of the case that I think the court should be aware of. First of all when Continental undertook to sell us his gas, actually the Philips case, it came to the Federal Power Commission to obtain a certificate of public convenience and necessity authorizing it to sell the gas to United. United also when it undertook to buy this gas out at the injunction Bayou Field it had an existence, a pipeline, it ran from the southwest corner of Louisiana over into Texas and this gas is located close to that pipeline. We had to build certain minimal facilities to receive this gas into our system. Meter station and tubing that came into our line and we asked the Federal Power Commission for a certificate authorizing us to construct and operate those facilities. We also received an authorization to move this gas and to transport in into state commerce. Now, at the time the Federal Power Commission accepted the increase rate filed unilaterally by Continental which was the rate they demanded of us and which weren't willing to read to contractually. The Commission advised upon Continental's request that it would be come effective at the end of the primary term of the contract which was January 31, 1963, the date that Continental had made its cancellation effective. United did not then accept any gas from Continental after that date. It did not do so because it did not wish to pay that price for the gas and because he believed that the bargaining processes were left intact. If he weren't forced to buy this gas, that they could bargain with Continental and then forget the gas in his judgment and price it though as appropriate and proper for sale in the Beaumont area where this gas in actually transported. Now in that connection, United sells gas in the southeast part of Texas around Beaumont where it takes this gas. Its sells are not only to city gates, that is to distributors for resale in the city of Beaumont but it sells a very great quantities of gas directly to industries and on the only and the only way you can sell it of course is by contract and it sells there at contractually fixed rates. Now in addition to that fact United is faced in this area as it is in the whole of South Texas and South Louisiana, the very active and very strenuous competition for its markets is faced with competition by intrastate suppliers who are willing to sell their gas directly to industries or to town borders often times at prices cheaper than the Federal Power Commission had itself reflected in its approval of rates and so fort filed by independent producers such as Continental. So United is -- the point is that we are faced there with very active competition, the Federal Power Commission has itself ruled in a case involving United that it cannot protect United selling gas to even a city gate, that that is a distributor for resale from intrastate competition. It said to United that the Federal Power Commission's jurisdiction extends only to interstate commerce. If there's intrastate commerce that you must compete with then you must take care of yourself. Now the point of it is that in the structure of the Act, United Gas Pipe Line Company as a pipe line sells gas by contract. That's the only way it can sell gas. It has to compete with other suppliers and it has to compete with other fuels and it has to sell gas to industries for example on the basis of contractually fixed rates. Now that is the way the Act is designed and that's the scheme of the Act. And in order to do that United must determine what it can afford to pay for gas. It's not here so much concern with the fact that the Federal Power Commission may view Continental 15.75 cents which it filled as fair and reasonable from Continental's point of view. That is not our concern. Our concern is that we must buy gas that we can sell in competition in Southwest Texas and still make a profit and we must buy gas at a price that we can sell under contractually fixed rate and still make a profit and that we under the Act are the only one that determine that fact. The Commission has no authority to do it.
Abe Fortas: What do you do with Section 5 (a) How do you reconcile that with your position?
Vernon W. Woods: Well let's see, Section 5 (a) provides that the Commission may up on motion institute a proceeding to determine a justness and reasonableness of the rate of any natural gas company subject to its jurisdiction.
Abe Fortas: No, it doesn't. It says that the Commission may after a hearing on its own motion, couldn't it or upon a complaint?
Vernon W. Woods: Upon a complaint.
Abe Fortas: It may do it either way?
Vernon W. Woods: Yes, that's correct sir, either a complaint upon its own motion. How do I reconcile that and how do that fit into this problem here?
Abe Fortas: That's right because that seems to provide that the Commission has very broad rate making power.
Vernon W. Woods: Yes, it has broad rate making powers on this sense sir. That under those circumstances it would be inquiring in this case into the rate that Continental is charging for this gas and the question that it would seek to determine there is whether Continental's rate is just and reasonable measured by what test Measured by the financial requirements of Continental that is the producer's requirements. It's measuring it by the sellers' requirements as distinguish from the buyers' requirements.
Abe Fortas: Well, what I'm? What I want to get at is whether your point is that the Commission did not have power to fix the rate here or that it fix the rate pursuant to an incorrect standard that's what I like to know.
Vernon W. Woods: Oh, well to begin it the Commission has no power to fix any rate, the Commission cannot make rates.
Abe Fortas: That's your position.
Vernon W. Woods: That's the law sir, I think.
Abe Fortas: True. Now, how do? I mean, but that is what the Commission did here in effect, is it not?
Vernon W. Woods: Well, actually what had actually happened here was that Continental unilaterally decided on the rate it would charge entirely.
Abe Fortas: I understand that but then the Commission issued some sort of order, didn't it?
Vernon W. Woods: The Commission had issued some orders in a so-called policy statement in a Docket 61-1 which said this, that these are guideline rates. And you're right sir, they were certain rates that had been fixed and they were to be employed by the Commission not as the rate that would be charged necessarily by the any particular producer but as the basis on which they would either suspend an Act.
Abe Fortas: (Inaudible)
Vernon W. Woods: Sir?
Abe Fortas: I am sorry. As I understand the Solicitors General's brief, he places a good deal of reliance on the powers of Section 5, is that right?
Vernon W. Woods: I think not on Section 5, sir.
Abe Fortas: You don't?
Vernon W. Woods: No, I didn't understand that he was -- he placed on reliance as I appreciate it on the fact that 15.75 cents have been fixed by the Commission --
Abe Fortas: Well, I --
Vernon W. Woods: -- as a guideline rate. United thinks that the Commission was never intended that the Natural Gas Act to have power to do what its done in this order that is to order the purchasing of gas are the acceptance of a rate filed unilaterally by the seller. Now we think that's true for basically for the reasons. First of all the Act very clearly does not include and encompass and bring within the Commission's jurisdiction that purchasing of gas. Secondly, the Act quite clearly provides that Act -- that rates had to be fixed by a contract. That is that the Commission itself does not fix rates. That natural gas companies fix rates and file them and they're reviewed by the Commission. And that the Commission has no authority to do what is done here and that is to force the natural gas company to accept any rate. That unless a consent is given first to the natural gas company to accept the rate which it can be reviewed by Commission that the Commission itself have no authority to supply that agreement to a rate. Thirdly, we think under the scheme of the Act, the detrimental effects have opened this to United Gas Pipe Line Company illustrate that the Act was never intended to place a company in a position were it had to buy gas or had to pay a particular rate. Because of the fact that the company itself sells the gas under contraction arrangements and it is only under those circumstances that he can sell gas and that the Commission has no authority to increase his own sales rate that is the company's sales rates in order to recover to that company. The increase calls to -- are forced upon it by unilaterally increased rates by the seller. Now, let me fix the first proposition and that is that the Natural Gas Act does not include the purchasing of gas. The scope of the Natural Gas Act is defined by Section 1 (b) of the Act. And Section 1 (b) says that the Act extends to the transportation and sale of natural gas in interstate commerce and that the companies engage in such transportation and sales. For emphasis I think it's appropriate to point out that the Government here concedes that Section 1 (b) does not include purchasing. Page 5 of its brief in opposition for the writ of certiorari, the Government says, Although Section 1 (b) does not explicitly bring within the Commission's regulatory power the purchase of natural gas, it does give the Commission authority over the transportation of natural gas in interstate commerce. The Government has conceded what is obvious and that is that this Act was not designed to regulate the purchasing or the procurement of natural gas. We think that the legislative history establishes that Congress adopted an Act that it knew did not include or extend the Commission's jurisdiction to the purchasing or procurement of natural gas. This is true because in January -- in July 1937 at the time the Natural Gas Act was being considered by Congress there was -- it introduced into Congress a Bill in both Houses, it's in the Bill 1717 or 1919 which would have given the Commission jurisdiction over the procurement or purchasing of natural gas by pipe lines. Now, that bill was not adopted that is itself clearly reflects the fact that Congress rejected the type of thing that the Commission is undertaking here to say is true. Congress did not intend to give the Commission power to make a common purchase so to speak out of a pipe line, are to require to purchase gas other than on a contractual basis consistent with the legislative history and with the wording of Section 1 (b) of the Act which does not include purchasing. Those Sections of the Act on which Commission here relies, the certificate Section of the Act does not authorize the Commission to issue a certificate of public convenience and necessity to purchase gas. The Commission has never issued such a certificate. Consistent therewith Section 7 (b) which is the abandonment Section of the Act does not authorize the Commission to issue an abandonment to stop purchasing gas. The word purchasing doesn't appear in either of those two Sections at all.
Speaker: Oh, I gather National -- natural gas companies including pipe line purchasing, doesn't it?
Vernon W. Woods: Sir?
Speaker: Is the language of 7 (b), every natural gas company or something like that?
Vernon W. Woods: The language of 7 (b), it applies to all natural gas companies, that's correct sir.
Speaker: Oh, and that -- doesn't that include pipe lines, doesn't it?
Vernon W. Woods: It applies to a pipe line company.
Speaker: Yes.
Vernon W. Woods: It says no natural gas company, is that --
Speaker: It will abandon all or any course of its facilities so fort without the approval.
Vernon W. Woods: That's correct sir.
Speaker: Well, does that involves -- isn't that the core of the case, its to what the scope of that (Inaudible) requirement?
Vernon W. Woods: The Commission --
Speaker: And you -- that's fine I guess, I'll summarize (Inaudible).
Vernon W. Woods: Oh, I very much think I should.
Speaker: (Inaudible)
Vernon W. Woods: To begin with, you're right. The Commission has taken the position that it has the power to order the purchasing of gas and the payment of this unilaterally increased priced because it has authority to authorize the abandonment of facilities and it said --
Speaker: You have the duty that -- you have the duty, do you not, that in that argument, you have the duty to continue those (Inaudible) the operation of this, or isn't he -- continue that --
Vernon W. Woods: Permission --
Speaker: Permission to abandon and the question is whether that comprehends this abandonment in the sense that if you don't have those authorities physically there although not utilize to purchase gas in this custom.
Vernon W. Woods: Yes sir, I think it does comprehend that and we've so argued it the Commission.
Speaker: That's what -- that's the core of the case.
Vernon W. Woods: Well, I think that's a large part of it and I think the rest of the Act --
Speaker: (Voice Overlap) is a kind of a collateral issue here, isn't it?
Vernon W. Woods: Oh, no, I think it all ties together Your Honor. I think it demonstrates that the Act doesn't --
Speaker: Well, it may not be essential --
Vernon W. Woods: It doesn't permit the Commission to do what it's undertaken to do. The Commission has -- to get to the point that's raise by Mr. Justice Harlan, taken the position that United here has a duty to continue purchasing gas and therefore to operate these facilities and that unless it does so its abandon facilities --
Speaker: Yes.
Vernon W. Woods: Now, so far as we are concerned that assumes the very answer to the question at issue and that is, Does the Commission have the authority to regulate that is to require us to purchase gas and that's the reason we say that Section 1 (b) is important because the Commission is assuming the answer to the question that's really post and that is the Natural Gas Act does not include purchasing of gas. It does not give the Commission power to force a company to accept the rate fixed unilaterally by the seller. And the Commission can't get that authority by saying as it says here in substance that if we don't have that authority then this company is going to abandon facilities. It readily begs the question. We haven't abandon facilities baised as we view the matter, the facility is still there, they're operational. They can be used at anytime to transmit gas if that's necessary.
Speaker: Is -- Mr. Woods, wasn't the argument made in Sunray by the producer there that what not make and continue supplying gas if United didn't have to take it and I think this language as well, United has its obligation too. Would that mean you suppose --
Vernon W. Woods: Well sir, Sunray I think is very important to this case and I think this Court there recognize exactly what we're saying here. Now, in Sunray --
Speaker: You mean at their request?
Vernon W. Woods: Yes sir.
Speaker: I don't know why I used those except in the context of the case but at least what follows after that about United having its obligation it says, some significance too I suppose.
Vernon W. Woods: Well sir, our obligations to distributors of course we have and we haven't quit selling gas to any of those distributors. We haven't curtailed any of our service.We haven't discontinued any service and we have no obligation to Continental. And I think Your Honor the reason that you used this own request and I think it's a very meaningful term is in recognition --
Speaker: Oh, I'm sure you do.
Vernon W. Woods: Sir?
Speaker: I'm sure you do.
Vernon W. Woods: Well, I think it's in clear recognition of the whole scheme of the Act.
Speaker: Yes.
Vernon W. Woods: And that is the gas was bought and sold in contract. And also in the contract we can't be forced to buy gas.
Speaker: Did the Commission say that it has the power to force the purchaser to continue even if there isn't an abandonment of facilities?
Vernon W. Woods: No sir, the Commission didn't so far as the abandonment is concern I think if these are the powers that the Commission would exercise in these circumstances and they all turn to the available Continental.
Byron R. White: I suppose there's some times when you could -- when a pipe line could quit buying without having to abandon some facilities in the process?
Vernon W. Woods: Oh, yes sir, there are a lot of such instances because --
Byron R. White: Well, in no senses did the Commission say it had the power to prevent you from -- the pipe line from ceasing purchasing?
Vernon W. Woods: During the entire history of the Natural Gas Act, it's never said so and we've done it before.
Byron R. White: But did it say so here?
Vernon W. Woods: Well, it take the position here necessarily that if we stop buying gas that we've come to come in and ask for some kind of abandonment. Now, if we continue to use our facilities I guess it would make us ask for an abandonment or ceasing purchasing soon.
Byron R. White: So you are saying what they know, does it every time you cease purchasing there is an abandonment or something?
Vernon W. Woods: Yes sir, I think that's what they tell. Now here they have said its abandonment of facilities but there are certain circumstances where this could exist for example and it's quite common that we have facilities built into a field where we buy from a number of producers.
Speaker: (Inaudible)
Vernon W. Woods: Facilities sir as I appreciate it means those physical pipes, meters, valves and connections --
Speaker: Only physical?
Vernon W. Woods: Well, land rights, I suppose might be included.
Speaker: (Inaudible) is on the contract?
Vernon W. Woods: Sir?
Speaker: Oh, (Inaudible) gas on the contract, continuing the same type of business?
Vernon W. Woods: Never --
Speaker: (Inaudible)
Vernon W. Woods: Never understood that facilities included a gas reserve in the ground. We've never gotten -- never been so interpret it. It's never been in a certificate related to either the discovery of our facility, I mean of gas in the ground are at the time you as a pipe line buying gas that is contractually agreed to purchase gas, all we've ever gotten -- all the Commission has ever issued is a certificate authorized in the construction of a pipe and the valves and whatever is required to move gas and it authorized you to operate those facilities.
Speaker: You think it -- that wouldn't justify the Commission to say, since you've been buying gas in (Inaudible) -- since you've been doing that we've permitted you to do it, you can abandon (Inaudible) -- you think the Commission has no power of this kind under (Inaudible)?
Vernon W. Woods: I'm not sure I understood your question. It would -- it has power to authorize us to abandon the contract.
Speaker: You've been selling -- you've been buying gas (Inaudible).
Vernon W. Woods: Yes.
Speaker: You wanted change it and buy it and get to pay more?
Speaker: (Inaudible)
Speaker: (Inaudible)
Vernon W. Woods: (Inaudible), yes.
Speaker: (Inaudible), do you think it could make (Inaudible) to require you to continue to operate under those terms?
Vernon W. Woods: I think insofar as purchasing gas is concern sir. Our sole obligation is to buy that to which we are contractually committed. And I don't think the Commission has power to force us to buy gas in any circumstances. I don't think the Natural Gas Act ever contemplate it. And I think the whole scheme of the act shows it very clearly.
Speaker: Is that a limited meaning of the word facility?
Vernon W. Woods: No sir, I think not. I think facilities mean what they've been accepted to mean all these years on the Natural Gas Act and that is those facilities require to move gas and it measure --
Speaker: You may be right now with the statute figuratively --
Vernon W. Woods: Oh, yes sir.
Speaker: Mr. Woods, could this problem arise in connection with your sales, United sales to your customers?
Vernon W. Woods: You say, with --
Speaker: Could you have a price disagreement with one of your customers?
Vernon W. Woods: The only way we could sell gas is by contract that is --
Speaker: That -- I know.
Vernon W. Woods: -- with our customers.
William J. Brennan, Jr.: Well, suppose one of the contracts run out and you had the same -- they didn't want to pay as much as you've been charging, they want to look up a smaller price and you refused to supply them at the price that which they wanted to buy. Would Sunray force you to continue supplying that?
Vernon W. Woods: Mr. Justice Brennan that have been the law along before Sunray.
William J. Brennan, Jr.: Yes.
Vernon W. Woods: There'd never been any question about really what the seller's obligation is including Sunray's obligation. Now, there's never been any question about what United Gas Pipe Line Company's obligation to its customers is. This Act was designed to regulate the sale of gas as distinguished in the purchase of gas. We're obligated to sell gas once we get started whether we've got a contract or not. And here's what you said sir in Sunray which is really important to this case. You said that while to that extent a captive of the Act which is true --
Speaker: What was that again?
Vernon W. Woods: While to that extent a captive of the Act. That is the seller. The seller still has no reason to complain. Why? Because he's got the right after expiration of his bilateral contract to go far with the unilateral contraction arrangement. He can file his own rates without the buyer's consent. Now we've got no argument with that proposition, that's always been the law, it's the law before Sunray.
John M. Harlan: (Voice Overlap) attached terms and conditions to your certificate to require you to maintain facilities and keep a flow of oil through the line for a stated period or indicment or until further order of the Commission?
Vernon W. Woods: Sir I don't think the Commission can right in some -- something in a condition as contrary to the Act itself, it can't right the law.
John M. Harlan: Well, what's contrary to that again?
Speaker: (Inaudible)
Vernon W. Woods: Well --
John M. Harlan: They say, you go and then you apply for a certificate to construct and operate pipe line, let's say. What's contrary to that? Then the Commission saying to you, alright, we're giving this provided that you maintain a flow of product through this pipe line for the next 50 years?
Vernon W. Woods: Well, to say the least, we'd have the option looking at the certificate to either accept it or reject it. We don't have to go in business of course.
John M. Harlan: Well, so the Act looks to me as if there's no limitation on the terms and the conditions that the Commission could attach except the standard on the convenience to necessitate --
Vernon W. Woods: Well, it says --
John M. Harlan: -- what constitution may provide. The -- what you're telling us is that the certificate here containing the no provisions of that sort whatever, no provisions subjecting you to -- the further order of the Commission?
Vernon W. Woods: No sir, it did not. All this --
John M. Harlan: (Voice Overlap) subjected to the Commission's rules and regulations?
Vernon W. Woods: Well, yes, should of course subjected as to the Commission's rules and regulations.
John M. Harlan: Anything in the Commission's rules and regulations are relevant here?
Vernon W. Woods: Yes sir. Commission's rules and regulations are relevant here and of course we're --
John M. Harlan: What I say is, anything that's pertinent to this particular problem?
Vernon W. Woods: No, I think not. I think that a certificate issued to construct and operate facilities that sincerely carries with it the structural of the Natural Gas Act and since that --
John M. Harlan: Well, they're not sales, does it? That you've got to be ready and willing to -- can file permissions? To do the acts and the performance or service proposed in the confirmed provisions of the Act in the requirements rules and regulations in question so you don't have to go around and buying things, do you?
Vernon W. Woods: Yes sir, it said that very clearly but that doesn't mean that the Commission can do something the law doesn't permit it to do. That's our point. They can't require us to buy gas that the Natural Gas Act doesn't authorize them to, requires to buy gas. And either sir can they make us accept the right.
John M. Harlan: It may be an issue not an answer.
Vernon W. Woods: Well, I think its necessarily an answer because the Act clearly doesn't cover the purchasing of gas. And I'd like to get back sir to Mr. Justice Brennan's question to go ahead and explain that Sunray while the seller had the protection of being able to unilaterally to file an increased rate and therefore is assured that he's going to get a just and reasonable rate for his gas and for the service he renders. The Natural Gas Act doesn't give that protection to the bar. And that's the reason we're in this difficulty and that sir is the whole reason we're here today. There is no way that United can recover this increased costs that are enforced upon it. It must absorb --
Speaker: Well, yes, but it can precipitate -- at least can be assured that the Commission thinks the rates are reasonable.
Vernon W. Woods: That it thinks Continental's rates are reasonable as to Continental's sir. But that doesn't have anything to do with us. Continental might conceivably require 20 cents or 25 cents on the basis of its investment and its requirements as to what's just and reasonable from its point of view. You see sir in the utility concept, it is the seller's cost and the seller's investment that determines a seller's rights.
Speaker: But we've got away from that?
Vernon W. Woods: Sir?
Speaker: I thought we made some departures from that basis of rate making in this gas area, didn't we?
Vernon W. Woods: No, I think that you've got -- haven't gotten it.
Speaker: So, its still so -- is it still at the seller's cost?
Vernon W. Woods: I think that even --
Speaker: (Inaudible)
Vernon W. Woods: I think even on the area of rate concept sir.
Speaker: In the -- it is in the area --
Vernon W. Woods: It's still the composite. Its still the composite of the seller's cost. It still doesn't have anything to do with the pipe lines.
Speaker: With all of the sellers, isn't it?
Vernon W. Woods: Well, that's right. The area rate concept is that it's all the sellers. But I'm still not certain that this Court is going to say to Continental or anybody, if it cost you 30 cents to produce gas that you've got to sell it at 15. Now this is an area rate concept and hasn't yet been decided by this Court but the point here is that its still a -- its still the seller's costs that determines the rate and that doesn't help United Gas Pipe Line Company (Inaudible).
Speaker: I suppose you'd be making this argument, would you Mr. Woods if your only source of supply was Continental and therefore the supply that you'd have available for your costumers, you'd be making the same argument, wouldn't you?
Vernon W. Woods: Be making exactly the same argument sir.
Speaker: That's what I thought.
Vernon W. Woods: Because I think the Act contemplates --
Speaker: Which would mean there that -- to that extent the dedication of that gas necessarily your costumers is quite meaningless, isn't it?
Vernon W. Woods: No sir. If its -- it's quite meaningless in this sense and we think the Natural -
Speaker: And if you're the only supplier of your costumer and you're only source to survive, I suppose it doesn't (Inaudible) but that's the extreme to which you'd carry your argument, I take it?
Vernon W. Woods: I would certainly take it to that extreme and here is why sir. I think that's exactly what Congress contemplated.
Speaker: Yes.
Vernon W. Woods: I think it contemplate it when you left out of the Natural Gas Act. Not only the provision that the Commission could require purchasing but it left out all that structure of the Act that would go along with protecting the purchaser forced to buy gas and forced to pay a price to which it hasn't agreed. It wouldn't leave to the -- the purchasers such as United and the position where the only way it can sell gas is by contract. But it would -- given the Commission power to say either that Continental rates got to be reduced or that United's contract rates can be increased but the Commission doesn't have that power sir. And I think that's -- I think Congress made that decision deliberately because it viewed the matter in this respect that natural gas companies while they' were going to be regulating, still they were subject to competition. The Natural Gas Act even leaves completely unregulated -- about half the gas it sold into state commerce at least for this company and that is gas sold directly to industries. The Federal Power Commission has no jurisdiction over those but nevertheless, they're telling us that we must pay Continental's unilateral rate for gas that we take and sell to industries.
Abe Fortas: If Continental doesn't sell this gas to you, what can you do with it?
Vernon W. Woods: Well, sir, first of all, they can apply it to the Commission for an abandonment that that is to abandon --
Abe Fortas: A what?
Vernon W. Woods: For an abandonment that is, it can abandon its sale to us.
Abe Fortas: Abandon what?
Vernon W. Woods: Abandon its sale, the certificate.
Abe Fortas: (Voice Overlap) if they don't sell the gas to you, what could they do with it?
Vernon W. Woods: Well, they could do whatever they could've have done with it absent the Act. They could sell it to somebody else. There is somebody there's --
Abe Fortas: Anybody else down there with (Voice Overlap) --
Vernon W. Woods: Yes, Trans Continental Gas Pipe Line Company is there.
Abe Fortas: Oh, why -- they -- are they a competitor for this but they didn't wan it?
Vernon W. Woods: They're purchasing gas in the same field. Now whether or not they want it, I don't know. I think Continental tried to sell it to them.
Abe Fortas: Neither you nor the seller company want to take the gas, what happens to it?
Vernon W. Woods: If it -- if there's no market outlet for it, the Natural Gas Act -- and I think this is important --
Abe Fortas: What happens to the gas? The gas remains in the ground, was it distributed -- does it move into another field, so what happens to it?
Vernon W. Woods: It either remain in the ground or if its common purchase statute enacted as there is in Louisiana, may they come and purchase statute could be used to compel a pipe line to buy it. But the point is, the Natural Gas Act does not accomplish --
Abe Fortas: And it may be siphoned off or whatever the proper phrase is by -- under wells or the fields, is that right?
Vernon W. Woods: It's entirely possible that if there are other wells producing that, it would siphon off this gas, that's right sir. But United has also --
Abe Fortas: (Voice Overlap) is important, if Continental is selling this gas and --
Vernon W. Woods: Well, it's important for Continental to sell its gas and it's got a market. We offer to buy it. We offer to buy it sir on the same basis we've been buying. We offered to continue the status quo and the offer remains open. The argument here is whether or not we've really got to buy -- got to pay their price as distinct from our price. And if it -- if it's going to be drained Your Honor it's because they choose drainage to -- acceding to our terms in the contract negotiation.
Speaker: Suppose we have the other side of the coin -- suppose instead of the producer rating, the price to you at the end of the period, the contract period, suppose you said to them, Now, in the future, we're only going to pay you 20% less. And we've been paying that in the past. Would they have any jurisdiction over that situation?
Vernon W. Woods: Absent to contract agreement --
Speaker: As to what?
Vernon W. Woods: I'd say without a contract agreement as between Continental --
Speaker: Continental -- if the contract is terminated for one reason or another and you're negotiating and you just to say to this people perhaps have no other outlet for their gas, don't you say you'll now in the future we're going to pay you 20% less and there's no more. And they couldn't do it profitably, would the Commission have any jurisdiction over (Voice Overlap) --
Vernon W. Woods: No sir, they would have no jurisdiction on that. No sir. No more than they would have over this Your Honor. There may be other producers in that field who have gas that they want to sell.
Speaker: Oh, I see but I suppose we have to have a rule that would encompass a situation by the word no other pipe lines to take the gas, don't we?
Vernon W. Woods: Well, Congress could enact such a law. Congress turned down such a law.
Speaker: I think there has been -- they wouldn't contemplate at all and decide it.
Vernon W. Woods: No sir, it was not and Congress turned down an Act that would have taken care of the situations you're talking about sir.
Speaker: (Voice Overlap) at that time.
Vernon W. Woods: That was --
Speaker: Does that mean that they gave no consideration to it or that they thought this would cover it?
Vernon W. Woods: I think it means this, that Congress considered this Senate Resolution 1919 that would've made the pipe line a common purchaser and it turned it down and it adopted instead this more limited Act which contemplates a gas will be both bought and sold on a contractual basis and really it would -- says, that the bargaining between the seller on the bar insofar as contract is concern, its not to be superseded by this Act. Now, just one remaining point sir, had we been a common purchaser, had Congress adopted the Act that made us a common purchaser, they would require us to have bought this gas. And there's no doubt about it as the Senate resolution itself concluded. The Commission itself would've had authority to pass on through our rates these increased costs that they are forcing on us. But this Commission doesn't have that authority under this Act. It cannot increase our rates above those to which our costumers has contractually agreed. And it's just because of the fact that we are being forced to pay prices that we can't recover. That we are being loaded with costs that we can't pass on. And the Commission can't pass on for us. That be his --
Abe Fortas: (Voice Overlap) and sell to you unless than its -- Commission approved prices?
Vernon W. Woods: Sir?
Abe Fortas: Continental has filed a posted prices with the Commission, doesn't it?
Vernon W. Woods: It has filed a price, yes sir.
Abe Fortas: And that's been approved by the Commission?
Vernon W. Woods: Has been accepted by the Commission sir.
Abe Fortas: Accepted by the Commission. If Continental sell to you is less than, would that break the law?
Vernon W. Woods: Continental could follow, that's the rate.
Abe Fortas: Yes, but can they sell that without violating the law?
Vernon W. Woods: I think the filed rate is the rate they must charge if we buy, that's right sir.
Earl Warren: Mr. Schiff.
Peter H. Schiff: Mr. Chief Justice, may it please the Court. In our view the basic issue in this case is whether the literal language of Section 7 (b) of the Natural Gas Act, the abandonment provision is going to be given effect. Section 7 (b) says in terms that no natural gas company may abandon all or any portion of its facilities or any services rendered thereby without the Commission approval first obtained. There is no real question in this case that there has been an abandonment of facilities and of services rendered by means of those facilities.
Potter Stewart: I thought there was?
Peter H. Schiff: No, there was -- it was raised --
Potter Stewart: If there's no question about that, then I suppose the answer in this case is clear. But I thought that was -- that's what -- one of the big questions was.
Peter H. Schiff: This was a question which was presented to the Commission Mr. Justice Stewart. It was not a question presented to this Court in the petition for certiorari. The question as I understand it that has been raised by petitioner is notwithstanding the fact that there hasn't been an abandonment of facilities and services that the Commission can't exercised that jurisdiction because there is an implied exception because this would effect purchasing. I think this is the only real issue in this case. There is also no issue in this case as to whether the Commission in the circumstances here described should have allowed an abandonment. United talks about the fact that it didn't need the gas and that the price was too high. But United has never availed itself of the opportunity to seek abandonment juris -- abandonment approval from the Federal Power Commission. In the Commission in determining that United had to seek abandonment approval from the Commission also said that they were free at any time to request such authorization. But at no time have they done so. The -- I would like to mention also really the preliminary matter that the reasonableness of Continental's rate is not at issue here. It is true that there was an increase, a determination of the contract from about 10 and three quarter cents to about 15 and three quarter cent. The Commission did -- permitted this rate to go into effect without suspension. United never challenged the reasonableness. The particular level is the -- below the level at which the Commission under its policy statement will suspend increased rates and in the pending South Louisiana area rate case, no party has suggested that the just and reasonable area rate is any less than this 15 and 3 quarters. In fact, all the recommendations are above that. The staff of the Commission in attempting to -- and I presume properly so attempting to follow the Commission's decision in the Permian Basin Area Rate Case has recommended a area rate of 18 cents which is about more than 2 cents above the rate involved here. So, that does not present a real question. Instead what United is arguing is that the Commission's jurisdiction over sales and transportation and its abandonment authority has to be read narrowly because the word purchasing does not appear anywhere in the statute. Now, this we believe is quite inconsistent with what this Court had held in case after case that the Natural Gas Act was intended to provide a comprehensive regulatory system over natural gas companies. The -- there are exceptions written into the Act and I would respect the production and gathering and with respect to local sales. And -- but these exceptions don't mean that the gas companies are not subject to regulations. It means rather that in those particular spheres of interest, they are subject to regulation by the states rather than by the Federal Power Commission. But in this case, even though in the situation where the court was reading the affirmative grant of jurisdiction over sales and transportation in relation -- or I should say -- this Court has read the Commission's affirmative jurisdiction over sales and transportation in relation to production and gathering as meaning that you have to give primary effect to the affirmative grant of jurisdiction. Of course that was the holding of the first Phillips case in which the court said that the Power Commission does have jurisdiction over independent producers notwithstanding and expressed exception over production and gathering. Here, without any such expressed exception, United is asking that the Commission's jurisdiction be severely limited.
Potter Stewart: Well, now, do you -- I was under the impression that there was an issue as to whether or not there had been an abandonment and I've now find it in the brief which I recollected. It says as follows, United points out that in fact it has abandoned neither facilities nor reserves when United ceased purchasing Johnson Bayou Field gas. All it did physically was close a series of valves. It removed none of its facilities and it altered none of them. It claimed that there was no abandonment.
Peter H. Schiff: Well, I -- I'm aware of this language in their brief. I don't think its really before this Court because it wasn't raised in the petition but quite aside from that, the Commission found and the -- I think properly so and the court below agreed that United's action in completely -- in stating that it would not use these facilities for any purpose in fact constitutes and abandonment of certain facilities which have no other function at all. The Commission has -- as its opinion points out has frequently held that abandonment does not depend upon the removal of facilities from the ground. That abandonment can result simply by turning off a valve as well as by physical removal. In addition to that -- in this case the Commission found that there was an abandonment of the services which United is rendering by means of the facility. It's a transportation service. It's a service or it was a service of delivering gas from reserves which had been dedicated by the producer to the -- ultimately to the market. Now --
Potter Stewart: What if there had been three producers delivering at this same well -- at this same point to these facilities? And this argument developed just as between one of the producers and United, would that -- would the Commission would have had authority under 7 (b) to force that purchase, the continuation of that purchase? Would that one-third abandonment than an abandonment within the meaning of 7 (b)?
Peter H. Schiff: Yes Your Honor. It would not have been an abandonment of facilities perhaps. But I think --
Potter Stewart: Of service.
Peter H. Schiff: -- it would've been of the services. That's right.
Potter Stewart: Even though the facilities were in use continually to -- continued to be in used --
Peter H. Schiff: Well --
Potter Stewart: -- by the two-thirds of the --
Peter H. Schiff: Well, that's not the statute, it is very clear that the abandonment jurisdiction relates to facilities --
Potter Stewart: Facilities or service they are under?
Peter H. Schiff: And any service rendered thereby. Now, maybe there are three services rendered by means of the same facility but if you drop one of those services, it's a service, any service within the meaning of Section 7 (b). Of course this makes very good sense under this Court's decision in the Sunray case.
Potter Stewart: Well, what if the -- one of the sellers constructs these service in this facility and constructed all the facilities necessary to connect with the buyer's pipe line?
Peter H. Schiff: Well, if --
Potter Stewart: Does the Commission's power here depend -- is the jurisdiction wholly dependent upon this abandonment of facilities concepts?
Peter H. Schiff: Yes. I think our jurisdiction depends upon an abandonment of facilities or services rendered by means of united facilities.
Byron R. White: You don't claim any other kind of power over natural gas -- over pipe line companies, the purchases of pipe line companies?
Peter H. Schiff: In this case at -- we are only claiming jurisdiction based upon Section 7 (b). I'm not sure Mr. Justice White of when a situation would exist where the cessation of a purchase under a contract would not result in the abandonment of some facility or service rendered thereby but we do base our jurisdiction --
Byron R. White: Well, apparently your opponent has held so too so that's just an academic question.
Peter H. Schiff: I think it's an academic question and we do rest specifically on Section 7 (b). In Sunray it was pointed out that the problem of the abandonment was a broad one and that the question of whether the rearrangement of purchasing activity, whether one pipe line should purchase from a producer vice versa should not be left to the sole discretion of the natural gas companies. But that this was something that in the public interest should be left to the overwriting jurisdiction of the Federal Power Commission and that is we suggest the same -- exactly the same problem exists here. The Gas Act is concerned with protecting the ultimate consumer and the ultimate consumer is not -- is affected about the same as we see it whether the pipe line initiates the discontinuance of the facility, the service or whether a producer initiates such a discontinuance.
Earl Warren: Well, recess for now.