Opinion ID: 339939
Heading Depth: 2
Heading Rank: 3

Heading: The Purchase Price Adjustment

Text: 76 The plan by which the Commission conventionalized the lease-sale arrangement involved contractual deviations of three major types. The first was the substitution of an initial unit price for the original price which the parties had fixed at the lump-sum figure of $134,395,700. 281 The second consisted in a series of requirements, to which the parties had not themselves previously agreed, which implemented the unification of the initial price. 282 The third was the elimination, in Opinion No. 565-A, of the $134 million contract price as the amount to be remitted to the producers by Texas Eastern, and the direction that Texas Eastern pay a to-be-established just and reasonable area rate for all gas realized from the beginning to the end of production. 283 As is evident, each of these changes portended a problem in terms of the Mobile-Sierra doctrine. 284 77 --The Unit Price 78 We may readily resolve any problem arising from the setting of the initial unit price for the gas. As we have seen, the restriction on contract-alteration by the Commission is not total; the Commission is authorized--indeed, is required--to review the parties' rates and contracts ... and, if they are determined to be unlawful, to remedy them, 285 and to change them in circumstances of unequivocal public necessity. 286 This is the power which the Commission exercises when it imposes upon a Section 7 certificate of public convenience and necessity a condition that a designated initial price be observed. 79 As the Supreme Court said in CATCO, 80 The purpose of the Natural Gas Act was to underwrite just and reasonable rates to the consumers of natural gas 287 .... As the original Sec. 7(c) provided, it was the intention of Congress that natural gas shall be sold in interstate commerce for resale for ultimate public consumption for domestic, commercial, industrial, or any other use at the lowest possible reasonable rate consistent with the maintenance of adequate service in the public interest 288 .... The Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges. The heart of the Act is found in those provisions requiring initially that any proposed service, sale, operation, construction, extension, or acquisition ... will be required by the present or future public convenience and necessity, 289 ... and that all rates and charges made, demanded, or received shall be just and reasonable 290 .... The Act prohibits such movements unless and until the Commission issues a certificate of public convenience and necessity therefor 291 .... Section 7(e) vests in the Commission control over the conditions under which gas may be initially dedicated to interstate use. 292 81 Moreover, said the Court in CATCO, [i]n view of [the statutory] framework in which the Commission is authorized and directed to act, the initial certificating of a proposal under Sec. 7(e) of the Act as being required by the public convenience and necessity becomes crucial. 293 This is partly because the delay incident to determination in Sec. 5 proceedings through which initial certificated rates are reviewable appears nigh interminable. 294 Undeniably, the Act does not require a determination of just and reasonable rates in a Sec. 7 proceeding as it does in one under either Sec. 4 or Sec. 5, 295 nor is a 'just and reasonable' rate hearing ... a prerequisite to the issuance of producer certificates. 296 But the inordinate delay presently existing in the processing of Sec. 5 proceedings requires a most careful scrutiny and responsible reaction to initial price proposals of producers under Sec. 7, 297 and [t]heir proposals must be supported by evidence showing their necessity to 'the present or future public convenience and necessity' before permanent certificates are issued. 298 And [w]here the application on its face or on presentation of evidence signals the existence of a situation that probably would not be in the public interest, a permanent certificate should not be issued. 299 82 The certificate-conditioning power of the Commission exercisable upon a Section 7 producer application is the vehicle by which the Commission is summoned and enabled to protect the public interest. 300 It is the method by which the applicant and the Commission can arrive at a rate that is in keeping with the public convenience and necessity. 301 For [t]he Congress, in Sec. 7(e), has authorized the Commission to condition certificates in such manner as the public convenience and necessity may require; 302 and [w]here the proposed price is not in keeping with the public interest ... the Commission in the exercise of its discretion might attach such conditions as it believes necessary. 303 83 From the regulatory scheme, thus analyzed, it is apparent that the establishment of an initial price in a Section 7 certificate proceeding does not ordinarily implicate the Mobile-Sierra rule. As in CATCO the Court explained: 84 This is not an encroachment upon the initial rate-making privileges allowed natural gas companies under the Act, ... 304 but merely the exercise of that duty imposed on the Commission to protect the public interest in determining whether the issuance of the certificate is required by the public convenience and necessity, which is the Act's standard in Sec. 7 applications. In granting such conditional certificates, the Commission does not determine initial prices nor does it overturn those agreed upon by the parties. Rather, it so conditions the certificate that the consuming public may be protected while the justness and reasonableness of the price fixed by the parties is being determined under other sections of the Act. Section 7 procedures in such situations thus act to hold the line awaiting adjudication of a just and reasonable rate. Thus the purpose of the Congress to create a comprehensive and effective regulatory scheme, 305 ... is given full recognition. And Sec. 7 is given only that scope necessary for a single statutory scheme under which all rates are established initially by the natural gas companies, by contract or otherwise, and all rates are subject to being modified by the Commission.... 306 .... On the other hand, if unconditional certificates are issued where the rate is not clearly shown to be required by the public convenience and necessity, relief is limited to Sec. 5 proceedings, and ... full protection of the public interest is not afforded. 307 85 In Opinion No. 565, the Commission found that the lease-sale, even as amended by the reserve guaranty, 308 did not comport with the public convenience and necessity; 309 and that, in order that it might do so, it was essential that it be altered in certain respects. 310 In Opinion No. 565-A, the Commission adhered to that finding. 311 In Opinion No. 465, the Commission fixed as initial price, 312 and in Opinion No. 565-A, though it abrogated that price, it specified that the future area rate would become the initial price between Texas Eastern and the producers. 313 In Opinion No. 565, the commission imposed a set of additional requirements to adjust the lease-sale arrangement to the pricing prescribed. 314 While in Opinion No. 565-A, the Commission suspended some of those requirements, it was not because they lacked an intimate connection with the initial price which Opinion No. 565 had set. 315 To the extent that these specifications changed the parties' lease-sale contract, they were manifestly designed to serve the public convenience and necessity 316 --a necessity born of the great difficulty, if not the impossibility, of otherwise ascertaining and effectuating an initial price for the gas, and consequently of protecting consumers against excessiveness. 317 In these modifications, we perceive no impingement upon the Mobile-Sierra doctrine. 86 --The Total Price 87 As we have stated, Texas Eastern argues strenuously that the Commission's decision to eliminate the $134 million lease-sale contract price as the ceiling of its monetary liability to the producers for their Rayne Field gas stands on entirely different ground. We find, upon careful examination of this particular change, that Texas Eastern's position is well taken. We accordingly hold that the Commission's action in that regard cannot be supported as an appropriate exercise of its contract-revision authority under the narrow exception to the Mobile-Sierra rule. 88 Before elucidating the reasons persuading us to that conclusion, we pause to address two preliminary considerations. The producers and the Commission point to the uncertainties as to the volume of gas in the filed, the quantity and value of liquids that may be extracted, the amount of future state taxes and the size of salvage recoveries; and on that basis they argue that the displacement of the contract price by a unit price payable throughout the life of the field does not absolutely forebode an increase of the cost of the gas to Texas Eastern. In the view of three members of the Commission--a majority in Opinion No. 565-A, in which the displacement was directed--such an increase would indeed follow. Commissioner O'Connor estimated that the producers would gain an additional $52,141,000. 318 Commissioners Carver and Brooke put the gain in current dollars at between $17,637,000 and $25,912,000. 319 All three commissioners recognized that these figures would go higher if the area rate for Southern Louisiana producers were raised prospectively above 18.5 cents per Mcf. 320 Neither of the two remaining Commission members indicated in Opinion NO. 565-A any belief that the linking of Texas Eastern's payments to the full period of productive activity was not an extracontractual financial boon to the producers. 321 Moreover, the Section 7 certification proceeding does not tolerate the kind of cost figuring which a more solid determination on the matter of increase, if possible at all, would unavoidably necessitate. 322 In these circumstances, we feel bound to accept the premise that the contract price was substantially raised. 89 Beyond that, the fundamental teaching of Mobile and Sierra is that the parties' agreement, and not the Commission's bent, sets the price of gas for purposes of administrative regulation unless overriding considerations of public convenience and necessity unmistakably appear. 323 We deem this the governing rule not only where, in consequence of the Commission's action, a raising of the contract price of gas is evident but also where it is reasonably likely. For it is the prerogative of each contracting party to seek protection in a firm price, and to insist upon it if it becomes a term of the contract. Texas Eastern and the producers stipulated such a price in their lease-sale contract, and Texas Eastern is free to demand the financial security which it provides. Like any other estimate, the views that elimination of the contract price inexorably increased Texas Eastern's gas costs cannot rise to the level of complete certainty. But it cannot be gainsaid that, at the very least, eradication of the contract price poses the serious threat that Texas Eastern may have to pay the producers much more. That, we think, is enough to give substance to Texas Eastern's complaint, and to bring the Mobile-Sierra restriction into play. 90 There is another preliminary matter which the producers' position presents. They contend also that because the applications to the Commission invoked its Section 7 power to confer certification, and not its Section 5 authority to review rates for their reasonableness, the Mobile-Sierra doctrine does not apply. Like the Third Circuit, however, we deem this an immaterial difference. 324 Mobile and Sierra together ordain that a party to a gas contract may not unilaterally increase the contract price, 325 and they also specify the only condition under which the Commission can elevate that price. 326 We cannot read either of those decisions as a holding that, absent an exigent public interest, the Commission can exercise a prerogative which the parties contractually denied to themselves. Nor do we find in Section7 a grant to the Commission of greater power over contract prices than it possesses under Sections 4 and 5. On the contrary, it is our clear understanding from the Supreme Court's CATCO decision, 327 which we have already extensively analyzed, 328 that the Mobile-Sierra rule applies full force to Section 7 proceedings. 329 We conclude that the Commission was as much bound to preserve the integrity of the contract price in this case as in any other. 91 This brings us to a consideration of the propriety of the Commission's holding in Opinion No. 565-A that instead of discharging the fixed purchase-price obligation defined in the lease-sale contract, Texas Eastern must continue its gas-purchase payments to the producers until the transferred reserves are exhausted. The majority vote 330 to make that change was predicated upon a single ground: that it appears that while the Producers, under the arrangement we prescribed [in Opinion No. 565], will be getting the contract price it will not be of the same value because they will receive it over a much longer period, and they will not receive the benefit of all the gas and liquids produced by the Field as they would under a conventional contract. 331 For that reason alone, it was concluded that it is only equitable that they be paid for the gas and receive credit for the liquids produced until the Field is exhausted. 332 92 We think it clear that the Commission's direction to that end does not survive the Mobile-Sierra test. That test, as we have seen, is not whether a contractual provision seems to be equitable to the contracting parties but whether it is detrimental to the public interest. 333 It bears repeating that [t]he regulatory system created by the Act is premised on contractual agreements voluntarily devised, 334 and that it contemplates abrogation of these agreements only in circumstances of unequivocal public necessity. 335 Unlike the conventionalizing provisions of Opinion No. 565 response to the dire public need to establish an initial unit price for the gas, 336 the Commission's alteration of the stipulated aggregate price has not been shown to serve any facet of the public interest at all. 93 The Commission did not find that the $134 million contract price was so low as to adversely affect the public interest. 337 It did not find financial or other difficulties that required the Commission to relieve the producers ... from the burdens of their contractual obligations. 338 Nor did it find that the apparent enlargement of Texas Eastern's ultimate financial liability was essential to conventionalization of the lease-sale arrangements. 339 It simply felt it only equitable to lift the $134 million ceiling on the total consideration the producers were to receive in order to adjust the difference in time value of the money and to assure remuneration for all gas and liquids yielded. It may be that, as things turned out, the producers would have been better off had the parties not substituted the lease-sale for the original gas0sale transaction, but the Commission may not, absent evidence of injury to the public interest, relieve a contracting party of 'its improvident bargain'  340 It follows that the Commission's attempt to extend Texas Eastern's payments over the life of Rayne Field must be set aside. 94 That is not to say, however, that its counterpart in Opinion No. 565 is invulnerable. Except as the exigencies of the public interest demanded, the Commission was no more at liberty to alter the lease-sale contract to the prejudice of the producers than to do so in their favor. Opinion No. 565, by limiting Texas Eastern's financial liability to the contract price and simultaneously spreading its discharge over a longer period of time, would cause the producers to receive less than the quid pro quo for which they contracted. That is because the value to the producers of the money to be paid over the longer time span would be less than its value by the payment schedule embodied in the lease-sale arrangement. 341 The Commission, in conventionalizing the lease-sale in the public interest 342 was virtually compelled to change that schedule, and we have sustained its action in doing so; 343 but in the process the producers were deprived of a party of their bargain. 95 Every member of the Commission has come to recognize the producers' plight demands rectification, 344 but we see no need for a remand to the Commission for its accomplishment. A majority of the commission has held on five occasions that the public convenience and necessity would not be served by certification of the lease-sale as a lease-sale, 345 and on two occasions that conventionalization was necessary in the public interest, 346 with a linking of Texas Eastern's gas-purchase payments to gas deliveries. 347 With these holdings, which the Commission deems unavoidable and which we have no basis for disturbing, the only alternative legally available to the Commission is an increase in Texas Eastern's payments beyond the aggregate $134 million contract price by an amount equal to the time value of the money to be paid on the Commission-rearranged payment schedule. 348 That would confer on the producers the full equivalent of their contract price, and would impose on Texas Eastern no more than the equivalent of its contract cost; and the economic positions of both parties would then be harmonized with Mobile-Sierra requirements. 349 Our judgment on this review will, in lieu of a remand for the purposes, incorporate such a modification in the Commission's disposition.