Opinion ID: 339939
Heading Depth: 2
Heading Rank: 2

Heading: The Treatment Of Producer Rates

Text: 103 In the Opinion No. 565, a majority of the Commission decided that the price to be paid to the producers for gas deliveries to Texas Eastern after the effective date of the Commission's decision in Southern Louisiana Area Rat Proceeding 380 should be set at the just and reasonable rate of 18.5 cents ascertained therein. 381 Said the Commission: 104 Here we are issuing a certificate under Section 7 of the Natural Gas Act. Section 7(c) provides that we have power to attach to the certificate such reasonable terms and conditions as the public convenience and necessity may require. 382 We think it reasonable ... to require that the Producers reduce their rates prospectively to an effective 18.5 cents per Mcf in accordance with [the area rate determination]. 383 105 In Opinion No. 565-A, the Commission majority held similarly the just and reasonable rate should govern the initial price for prospective gas deliveries. 384 The Commission concluded, however, that the area rate for Southern Louisiana producers had not been finally resolved. 385 5] So, with respect to the future pricing of the gas, the Commission said: 106 Since we have stayed this rate as a result of the court's review of our area decision 386 and the appropriate rate is still subject to further proceedings, we shall require that the producer rate schedule filing be on the basis of 20 cents per Mcf, the in-line price in Southern Louisiana as found in our original opinion. When the Southern Louisiana rate is finally determined, we shall require that this basic producer rate be modified accordingly. 387 107 The challenge we are now summoned to resolve is to the Commission's substitution by Opinion 565-A of the in-line rate for the just and reasonable rate employed in Opinion No. 565 as the measure of the initial price to be paid by Texas Eastern to the producers for future deliveries of natural gas. 108 --(1) The Choice Of The In-Line Price 109 The unfeasibility of establishing a just and reasonable rate within the framework of a Section 7 certification proceeding 388 off times forces resort to some other means of fixing an initial price for newly certificated gas in the public interest. So it is that the in-line price frequently becomes the criterion--simply because it is the only point of reference extant. 389 Where that is so, it is settled that the in-line price may legitimately be utilized as the initial price imposed as a condition qualifying the certificate issued. 390 The in-line price thus functions as the ceiling on the price at which the gas may be sold pending ascertainment of the just and reasonable rate. 391 110 It is evidence, however, that use of the in-line price as the yardstick for the initial-price determination on certification cannot be justified in situations where a just and reasonable area rat for gas of the vintage in question has already been established. The goal of gas-pricing to which the Act emphatically speaks is the just and reasonable rate, 392 for which the in-line price is not a reliable substitute. As the Supreme Court has pointed out, where the Commission has decided to rely solely upon contemporaneous contract prices in setting initial rates, there can be no assurance that an initial price arrived at by the Commission will bear any particular relationship to the just and reasonable rate. 393 Rather, as we have explained, adoption of the in-line price as the initial price is merely an interim measure designed to hold the line until the just and reasonable rate for the gas can be ascertained. 394 If that rate, by reason of a past determination, is already available, its use as the initial price for future gas sales follows logically and, we think, legally as a normal concomitant of certification. 111 Just and reasonable rates for jurisdictional gas, we repeat, are the end and aim of price regulation under the Act. 395 They are the ultimate in the pricing of the natural gas over which the Commission exerts its authority. That the Section 7 proceeding is directed primarily at certification rather than ratemaking does not diminish the Commission's duty to fix initial prices which are calculated to best serve the public weal. The congressional intent underlying Section 7 is that jurisdictional gas shall, from the very beginning, be sold ... at the lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest. 396 Ordinarily that policy is frustrated by selection of an in-line price over a just and reasonable price that is for the asking. 112 As we see it, only the presence of an overriding consideration promoting an identifiably legislative purpose can justify administrative displacement of the just and reasonable rate through approval of another rate for gas to which the Act applies. The need for prompt setting of an initial price in a Section 7 certification proceeding becomes such a consideration where there is no just and reasonable rate as yet. 397 But where, on the other hand, the just and reasonable rate has been established when the Commission comes to fix an initial price for gas, there is simply no need to resort to any other rate. 113 Two courts, for the purpose of computing producer refund liabilities in Section 7 proceedings, have passed over the in-line price for natural gas in favor of the just and reasonable area rate which had become available. 398 It is even plainer to us that, absent unusual circumstances, that course must be pursued when the Commission is called upon to set initial prices prospectively. In our view, the Commission is legally compelled to peg a producer's initial price at a previously ascertained just and reasonable rate unless some consideration effectuating a countervailing congressional policy is shown on balance to outweigh the congressional interest in just and reasonable rates to the consumers of natural gas. 399 114 (2) The Status of the Southern Louisiana Area Rate Proceeding 115 On September 25, 1968, the Commission capped a seven-year-old rate investigation with its Opinion No. 546 Docket No. AR61-2--the Southern Louisiana Area Rate Proceeding. 400 The orders effectuating Opinion No. 546 soon came under review in the Fifth Circuit. 402 Producers and pipelines challenged the rates as too low, while consumer interests argued that they were too high. On March 10, 1970, the court sustained the orders in full. 403 116 In the meantime, the Commission, on March 20, 1969, had issued its Opinion No. 546-A in response to applications for rehearing of Opinion No. 546. 404 In Opinion No. 546-A, the Commission modified Opinion No. 546 in some respects, but refused to reopen the investigation or to readjust the price levels set. 405 The Commission felt, however, that the importance of an additional supply of gas from the offshore areas of Southern Louisiana warranted the commencement of another proceeding looking forward to possible revision of the area prices for such gas. 406 The Commission rejected suggestions that the new proceeding--Docket No. AR69-1--should embrace a further inquiry into the adequacy of the rates promulgated in Opinion No. 546 for gas produced on shore in the Southern Louisiana area. 407 Within nine months, however, the Commission changed its mind as to the scope of the new investigation. On December 15, 1969, the Commission issued an order enlarging the proceeding to include the entire geographical area of Southern Louisiana, onshore as well as offshore, and to provide for a review of the just and reasonable rates for all vintages of gas therefrom. 408 117 The order expanding the investigation in Docket No. AR69-1 came shortly prior to oral argument in the Fifth Circuit on its review of Opinion No. 546, the original Southern Louisiana area rate proceeding, occasioning a pause to consider the impact of that investigation on the pending review. 409 The court agreed with the parties that it had no effect, 410 pointing out that 118 The maximum rates that the Commission has set ... are to remain in effect throughout the new proceeding, which may last for years. Moreover, it was never contemplated that there should be a single area proceeding setting rates once and for all; rather the Commission has always made it clear that it intended to review the rates it had set whenever the circumstances made it advisable to do so. 411 119 And in upholding the orders under review, the court stated: 120 The mandate of this Court should not, however, be interpreted to interfere with Commission action that would change the rates we have approved here. We specifically and emphatically reject the contention ... that the Commission has no power to set aside rates once determined by it to be just and reasonable when it has reason to believe its determinations may have been erroneous. 412 In fact, the existence of the new proceedings, which as we understand will take into account many of the issues whose absence has concerned us here, has been one of the factors we have considered in deciding to affirm the Commission's decisions. 413 121 Such was the history of the Southern Louisiana area rate inquiry at the time the Commission handed down Opinion No. 565-A. We cannot agree with the Commission that the events we have recited rendered Opinion No. 546 so tentative in character as to support the Commission's refusal in Opinion No. 565-A to employ the 18.5-cent just and reasonable rate as the initial price to be paid to the producers for gas delivered after the effective date of that rate. By Opinion No. 565-A, the Commission had fixed the just and reasonable rate for Southern Louisiana gas of the Rayne Field vintage at 18.5 cents per Mcf. On review of that rate and others promulgated in Docket No. AR61-2, the Fifth Circuit had affirmed the Commission's orders. 414 In the process of doing so, the court had ruled that the reviewability of the orders accompanying Opinion No. 546 were unaffected by the pendency of Docket No. AR69-1--the new Southern Louisiana area rate investigation. 415 We think that the 18.5-cent rate established by those orders was no less definitive and definite in its role as the legally appropriate criterion for the initial price which Rayne Field producers would be permitted to charge. 122 It is true that the Fifth Circuit, in affirming Opinion No. 546, spoke to the Commission's authority to reopen the orders accompanying it. We read that reference as no more than a recognition of the Commission's prerogative-and duty-to revise rates when they are found to be inconsistent with the public interest. Section 16 of the Act expressly empowers the Commission to amend[] and rescind ... orders ... as it may find necessary or appropriate to carry out the provisions of this [Act]. 416 That power undoubtedly extends to alteration of an existing rate upon a determination that it does not subserve the legislative objective of fair and equitable charges for natural gas. 417 But surely a rate is no less final, in terms of its operating capability, merely be-because it is subject to future revision. A fundamental precept of ratemaking is that rates may and should be changed whenever the exigencies of the public interest demand. And a vital function delegated to the Commission by the Natural Gas Act is the maintenance of the balance between producer, pipeline and consumer interests at the point of just and reasonable rates. 418 If the view espoused by the Commission in Opinion No. 565-A 419 were carried to its logical end, no rate set by the Commission could ever attain finality. 123 The 18.5-cent just and reasonable rate was established in Opinion No. 546 after a long and comprehensive exploration. 420 It earned, as we have said, full judicial approval. 421 Neither in Opinion No. 546-A nor in Opinion No. 565-A did the Commission find that the 18.5-cent area rate arrived at in Opinion 546 was unjust or unreasonable, or gravely doubtful in that respect. Rather, the investigation set in motion by Opinion 546-A and subsequently enlarged sought simply to determine what the just and reasonably test might require, if anything, in the way of modification of that rate. 124 In sum, the 18.5-cent rate differs little in any from any other rate that is inherently subject to change upon a suitable showing. The Commission's authority to alter or discard its prior rate orders is limited to changes which it may find necessary or appropriate to carry out the provisions of the Act. 422 In our view, the Commission is not free to disregard a rate competently determined in the past to be just and reasonable unless and until it finds that the rate is unjust or unreasonable in the present, or seriously suspect on that score. The Commission's revision power enables no more, and the legislative mandate for just and reasonable pricing 423 demands no less. We hold that neither the susceptibility of the 18.5-cent area rate to modification upon such a finding nor the ongoing administrative inquiry into the propriety of such a finding was adequate justification for the Commission's decision in Opinion No. 565-A to ignore it. AC. The Standard For Producer Refunds 125 In 1959, after the Commission announced its ill-fated Opinion No. 322 certificating the extension of Texas Eastern's pipeline to Rayne Field, 424 deliveries of gas from the producers' holdings therein commenced, and Texas Eastern began the purchase-price payments called for by the lease-sale contract. This court set Opinion No. 322 and its accompanying order aside in 1960, 425 and in Opinion No. 378 in 1963, the Commission asserted jurisdiction over the producers' sale. 426 In Opinion No. 565 in 1968, the Commission conventionalized the sale and directed producer refunds, 427 and in Opinion No. 565-A in 1969, the Commission deferred the refunds for an indefinite period. 428 126 Throughout this lengthy period--a decade--the gas continued to flow through Texas Eastern's pipeline en route to consumers, and Texas Eastern continued its payments to producers on the schedule specified by the lease-sale contract. Since those remittances, as the Commission found in Opinion No. 565, greatly exceeded the amounts which Texas Eastern would have paid for the gas had it been delivered pursuant to a conventional sale arrangement, 429 the Commission's power to order producer refunds was incontestable. We realize, of course, that the early administrative treatment of the parties' transaction contributed to the occasion for financial adjustments between Texas Eastern and the producers, but the Commission's authority to require them nonetheless remained unimpaired. 430 An agency, like a court, can undo what is wrongfully done by virtue of its order, 431 and the Commission could properly conclude that the public interest required the producers to make refunds for the period in which they sold their gas at prices exceeding those properly determined to be in the public interest. 432 The problem for the Commission, rather, was the standard by which the amounts of the refunds were properly to be fixed, and that we must first define. 127 The Natural Gas Act, we have noted, mandates just and reasonable rates for jurisdictional gas and declares that any other rate is unlawful. 433 As the Supreme Court has said, 128 Logically, this would seem to imply that to assure the complete, permanent and effective bond of protection [which the Act affords consumers From excessive rates and charges], 434 any rate permitted to be charged during the interim period before a just and reasonable rate can be determined must be accompanied by a condition rendering the producer liable for refunds down to the just and reasonable rate, should that rate prove lower than the initial rate specified in the certificate. 435 129 Although, as the Court acknowledged, the Commission apparently does not impose such a condition and reviewing courts have not insisted that it do so, 436 the need for a comparable course here seems irrefutable. If, at the time the refunds are to be made, the just and reasonable rate is readily available, there is hardly room for argument that some other criterion is ordinarily to be taken as the basis for computing the refunds. We have reasoned that absent an extraordinary situation, the in-line price cannot be utilized consistently with the Act as the initial price on a certificated sale when the just and reasonable rate for the gas has already been ascertained. 437 Since refunds serve the purpose of correcting prices which were too high, it follows that the excess over a predetermined just and reasonable rate is normally to be refunded. Only in the most unusual situation could a departure from that course be logically or legally justified. 438 130 We are mindful of considerations which superficially might indicate a preference for the in-line price over the just and reasonable rate as the predicate for calculating refunds, but on analysis they do not support such a preference. Refunds must be made on the basis of the in-line price in lieu of a wait for the just and reasonable rate, 439 but because the consumer's interest in speedy refunding--possible only on the basis of the in-line rate--predominates. 440 Initial pricing permissibly done at the in-line figure sets that figure as the refund base, 441 but because that is the preferred interpretation of the Act. 442 The use of inline prices for purposes of refunds has been judicially approved, but in cases where no just and reasonable rate was extant. 443 On the other hand, where the just and reasonable rate has already been found, two courts have held that it might be employed. 444 131 We have concluded that only a consideration subserving an overriding aspect of legislative policy affords adequate justification for a selection of the in-line price over an existing just and reasonable rate as the initial price at which a proposed gas sale is to be certificated. 445 5] No more can lesser considerations justify a refund base at the in-line price where the just and reasonable rate is at hand. We hold that an already established just and reasonable rate must be accepted as the foundation for producer refunds in the absence of paramount countervailing circumstances. D. The Treatment of Producer Refunds 132 In Opinion No. 565, a majority of the Commission decided that the 18.5-cent rate set in the Southern Louisiana Area Rate Proceeding 446 should serve as the basis for refunds by the producers on account of payments made to them by Texas Eastern after the date on which that rate went into effect. 447 The Commission majority further decided that the foundation for producer refunds to Texas Eastern because of deliveries prior to the effective date of the area rate should be the 1959 in-line price of 20 cents 448 --the price in vogue at the commencement of the deliveries. 449 The Commission reasoned: 133 [U]nless we are to treat the present sale in the same manner as those contemporaneously contracted for and certificated at the in-line price of 20 cents per Mcf, we will in effect be punishing the producers for litigating their by no means frivolous legal and policy claims in the courts and before this Commission. This in our view would not only be inequitable, but would necessarily lead to unnecessary producer uncertainty when they choose to dedicate gas to the interstate market. Obviously, where their claims to special consideration are rejected they should not benefit by the passage of time in the course of their litigation. But where contemporary sales in the same area have been permanently certificated at in-line prices, approved by the courts, and used for both in-line and refund purposes, we do not believe that the exigencies of the timing of litigation on similar sales should lead to a different result. 450 134 In Opinion No. 565-A, however, the majority position of the Commission shifted; all payments above the just and reasonable rate, that opinion held, should be refunded. 451 But on the premise that the rate promulgated in the Southern Louisiana Area Rate Proceeding remained open to change, the Commission deferred producer refunds pending the establishment of a firm area rate. 452 The Commission explained: 135 [T]he just and reasonable rates applicable to the Southern Louisiana area in which the Rayne Field is situated have not been fully determined, nor has it been determined whether refunds should be made by the producers in that area either for the periods before or after October 1, 1968. In these circumstances it is our opinion that the public interest precludes our ordering refunds to be paid by the Rayne Field producers at this time. The myriad problems confronting the Commission in coping with producer regulation render our task difficult and complex, at best. However, the one objective that must always be kept in sight is the need to provide fair and equal treatment for all of those regulated. It is essential, therefore, this proceeding should be afforded the same treatment as will be given to all other producers in Southern Louisiana. In this regard, we believe that the just and reasonable rates which ultimately flow out of any settlement, or any further proceedings in [the Southern Louisiana Area Rate Proceeding ], should govern the level of payments in this case prior to October 1, 1968, as well as after that date. 453 136 We cannot embrace fully the course of reasoning which the Commission majorities pursued in either if two opinions. The standard for producer refunds we have said, is the just and reasonable rate where that rate is available and use of another rate is not vindicated by some overriding facet of congressional policy. 454 Consequently, we have no difficulty with the holding in Opinion No. 565 that the producers must refund the excess of the Texas Eastern's future payments over and above the just and reasonable rate determined in the Southern Louisiana Area Rate Proceedings 455 nor with so much of the holding in Opinion No. 565-A as would constitute an established just and reasonable rate the basis for any and all producer refunds. 456 Since, however, as we have held, the Commission is not at liberty to discard the just and reasonable rate promulgated in the Southern Louisiana Area Rate Proceedings, 457 and as well for other reasons to be discussed, 458 we cannot accept the Commission's decision in Opinion No. 565-A to postpone refunding to such time as the area rate for Southern Louisiana producers might be reformulated. We conclude, too, that the considerations advanced in Opinions Nos. 565 and 565-A are legally insufficient to justify a refusal to employ the existing just and reasonable rate as the predicate for the producer's refunds. 459 137 (1) The Deferral of Producer Refunds 138 Even assuming the nonexistence of any just and reasonable rate which might function as the basis for immediate refunds by the producers, that office could readily have been performed by the in-line price, which the Commission ascertained in its very proceeding. 460 The Supreme Court has made plain the Commission's authority to direct refunds predicated on the in-line price pending determinations of the just and reasonable rate for the gas in question. 461 The Court has also made it clear that producer refunds, when found due, are to be ordered promptly, and are not to be postponed for a retroactive application of a just and reasonable rate yet to be determined. 139 In the United Gas Improvement Company v. Callery Properties, 462 the Commission ordered producers to refund the difference between prices they charged and in-line prices at which the sales should originally have been conditioned. On review, the Fifth Circuit held, just as the Commission did in Opinion No. 565-A, that the measure of the refunds should have been the difference between the contract price and the just and reasonable rate subsequently to be fixed, and that refunds should be delayed until the latter was fixed. 463 The Supreme Court reversed the Fifth Circuit, stating: 140 We have said elsewhere that it is the duty of the Commission, where refunds are found due, to direct their payment at the earliest possible moment consistent with due process. 464 ... These excessive rates have been collected since 1958; under the circumstances, the Commission was not required to delay this refund further. 465 141 The considerably longer period over which the producers here have collected above the in-line price can hardly escape notice. 466 142 We are mindful of the fact that in Callery and other cases it was the Commission that ordered refunds based on the in-line price, while in Opinion No. 565-A the Commission did just the opposite: It reversed the direction in Opinion No. 565 to that effect. We deem this difference insufficient to remove the case from the purview of the Callery ruling. The Commission was not merely at liberty to require immediate refunds but, where refunds are due, it also had the duty ... to direct their payment at the earliest possible moment consistent with due process. 467 That duty charts the only course in keeping with the purpose of the Act to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges. 468 No more than the Fifth Circuit in Callery could the Commission defer refunds demanded in the public interest to the uncertain time at which a just and reasonable rate might for forthcoming. 143 In his Phase II decision, the presiding examiner found the through 1967 Texas Eastern had paid the producers $21.8 million more than gas deliveries at the in-line price would have brought--a figure which with interest increased to $31.4 million. 469 In Opinion No. 565, the Commission Adopted the examiner's finding and directed refunds, 470 and nothing in Opinion No. 565-A is at variance with that finding. Beyond that, the refund liability ascertained in Opinion No. 565 had endured, on a gradually increasing scale, over an eight-year period during which Texas Eastern had passed the greater portion of the price excesses on to consumers at a part of its cost of service. 471 These circumstances support vividly the Commission's resolve in Opinion No. 565 to direct refunds, and point convincingly to the error in the Commission's decision in Opinion No. 565-A to postpone the long overdue refunds even longer. 144 The Commission assigned two reasons for its decision to put off all producer refunds while the area rate for Southern Louisiana was undergoing further investigation. The first was the recurring thesis that the 18.5-cent area rate for Rayne Field gas had not been finally determined. 472 We have already examined that premise and found it to be erroneous. 473 And with the just and reasonable area rate--at least for the time being--available, and the gross excess in producer receipts above that rate evident, 474 it is clear enough that the Commission's concern that the producers might not have to make refunds 475 was unfounded. 145 The Commission's second reason was that a deferral of refunds would foster equality of treatment among the Southern Louisiana producer, 476 presumably because all producers under an obligation to refund would do so on the basis of the area rate which the Commission would eventually formulate. But, obviously, with a just and reasonable rate of 18.5 cents already in being, 477 the highly desirable goal of equal treatment could have been achieved simply by enforcing at uniformly among the producers. 478 Moreover, we can perceive no significant difference between the Commission's action here and the Fifth Circuit's postponement of producer refunds in Callery 479 to the day that a just and reasonable rate would become established. 480 Such a postponement might give the assurance the Commission sought, 481 but sacrifices the superior interest of consumers in prompt refunds. 482 By its decision to delay refunds here, the Commission misconceived its consumer-protection functions under Section 7 as enunciated by the Supreme Court in CATCO. 483 We can no more condone the deferral here than the Supreme Court could in Callery. 484 146 481. The extent to which it could do so might depend in part upon whether initial prices allowed producers were all fixed at the same level, since those prices established refund floors. See note 171, supra. 147 (2) The Amounts Of Producer Refunds 148 The Commission the, should have directed immediate producer rate refunds in Opinion No. 565-A, as it had earlier done in Opinion No. 565. That is not to say that Opinion No. 565 employed the correct standard for measuring the amounts of the refunds. We are not satisfied that in part it did not. 485 149 It will be recalled that in Opinion No.565 the Commission selected the 20-cent in-line price as the foundation for refunds on payments to producers prior to October 1, 1968, the effective date of the 18.5-cent rate on payments made thereafter. 486 The problem, as we see it, is with the use of the in-line rate at all. As we have said, an existent just and reasonable rate furnishes the exclusive basis for producer refunds unless the use of another basis is indicated by some overriding consideration of legislative policy. 487 The Commission endeavored to justify utilization of the in-line rate for the period prior to establishment of the just and reasonable rate on the ground that it would enable an equitable treatment of all Southern Louisiana producers and promote certainty as to the initial price at which they might dedicate their gas to the interstate market. 488 But as we have previously pointed out, equality of treatment among producers could have been achieved as readily by uniform application of the just and reasonable rate to Southern Louisiana producers. 489 And to the extent that stability of the initial price obtainable by producers pondering a choice between interstate and intra-state markets was legitimately a competing consideration, 490 it would have been as fully assured by adoption of the just and reasonable rate as the initial price payable on certification. 491 150 We cannot accept the grounds the Commission put forth in Opinion No. 565 as considerations of a caliber sufficient to outweigh the clear congressional preference for just and reasonable rates when available as indices for initial pricing in Section 7 certification proceedings. Nor can we accept the reasons advanced in Opinion No. 565-A as adequate justification for the Commissions' decision to defer refunding by the producers. We hold that the Commission was legally bound to order the refunds forthwith, and to predicate them upon the just and reasonable rate of 18.5 cents previously established in the Southern Louisiana Area Rate Proceeding. 151