Opinion ID: 339939
Heading Depth: 1
Heading Rank: 4

Heading: sale price of the gas

Text: 57 In Opinion No. 565, the Commission effectuated its decision to equate the lease-sale to a conventional gas sale by attaching to the certificates of public convenience and necessity which it awarded a set of conditions designed to achieve that end. 232 The Commission's central effort in the formulation of the conditions, as it would have been had the gas been conventionally sold, was the setting of an initial unit price which would serve the public interest until such time as a just and reasonable rate might be established. 233 The conditions we consider now are those which concern pricing. We will have occasion to examine others later. 58 Utilizing as a base price the area rate of 18.5 cents per Mcf effective October 1, 1968, 234 which was to remain subject to change in any future area rate proceeding, 235 the Commission subtracted the costs assumed by Texas Eastern which normally are borne by producers and added the economic advantages which normally accrue to producers. 236 Since under the lease-sale arrangement Texas Eastern was paying royalties and state taxes, and was making capital investments and incurring expenses in developing and operating the field, 237 the Commission directed that these outlays be deducted from the 18.5 cent unit price. 238 These adjustments, the Commission ordained, would continue in effect until Texas Eastern paid the $134 million purchase price in full. 239 On the other hand, since producers selling gas conventionally ordinarily realize the benefit of liquid revenues and salvage, which under the lease-sale contract inured to Texas Eastern, the Commission specified that after payment of the purchase price the 18.5 cent price would be increased by those items. 240 The Commission also imposed conditions calculated to afford the producers protections which they would have enjoyed under a conventional arrangement. 241 59 In conventionalizing the lease-sale, the Commission felt it unnecessary to reject all of its features, some of which the Commission felt had tax advantages for the contracting parties. 242 One of the features retainable, the Commission held, was the $134 million price specified in the lease-sale contract as the total of the consideration to be paid to the producers by Texas Eastern. The Commission proposed, in that connection, to require that the payments to be made by Texas Eastern for the Rayne Field gas until the purchase price of $134,395,700 has been paid be the equivalent of a purchase of gas under a conventional contract. 243 The Commission elucidated: 60 [We] shall adjust the arrangement so that, up until the entire purchase price of $134,395,700 is paid by Texas Eastern, it will be equivalent in economic effect to a conventional sale at the just and reasonable price of 18.5 cents per Mcf. After that, as proposed by the Applicants, Texas Eastern would make no further payments, for if we required continued payments until the Field was exhausted the lease-sale would be, in effect, converted into a conventional sale, presumably with the corresponding tax consequences. To accomplish these ends will clearly involve a reduction of the payments for gas and an extension of the paying period, but the Producers would eventually receive the full purchase price of $134,395,700, although over a longer period, even after making the refunds which [Opinion No. 565 directed]. 244 And the Commission further explained: 61 After the end of the production payment until the entire purchase price is paid, the price should continue to be reduced by royalties, state taxes, investments and expenses, but should be increased by liquid revenues and salvage, for the producers in a conventional sale would receive the benefit of both of these items. 62 Eventually, even though the payments are reduced, as long as gas continues to flow from the Rayne Field, Texas Eastern will pay the full purchase price of $134,395,700 albeit over a longer period of time. In our opinion the Producers, providing there is sufficient gas, should receive the full amount for which they contracted even though they have been required to make a refund for the period prior to this order. After the full payment has been completed Texas Eastern will pay the Producers no more for gas taken from the Rayne Field. Since it will then have fully paid for the properties transferred, Texas Eastern, alone, should bear the cost of the royalties, state taxes and costs of operating the Field, but it should receive the benefit of all liquid revenues. Texas Eastern, however, should pay the Producers for any salvage realized on property installed before the purchase price has been fully paid, since the cost of such property under the opinion and order will be deducted from the price of gas of 18.5 cents per Mcf. Of course, salvage realized from property installed after the payments have been completed and not charged against the Producers should benefit Texas Eastern. 245 63 In Opinion No. 565-A, however, the Commission changed its treatment of the purchase price completely. The producers had contended that Opinion No. 565, in partially conventionalizing the lease-sale, had unfairly and confiscatorily placed burdens on them without conferring the benefits of a conventional sale. 246 Attention was directed particularly to the provision that after Texas Eastern paid the $134 million contract price, it would get any additional gas and liquids free of charge. 247 Attention was also called to the fact that while under the lease-sale agreement the entire purchase price would be remitted during the first 16 years of production, Opinion No. 565 enlarged the payment period to the extent required to absorb the $134 million at the adjusted 18.5 cent rate. 148 64 The Commission was persuaded by these arguments. In Opinion NO. 565-A, it declared 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. 249 In these circumstances, the Commission felt that it is only equitable that they be paid for the gas and receive credit for the liquids produced until the Field is exhausted. 250 The Commission added: 65 Texas Eastern will retain the leases conveyed to it, and will continue to be responsible for operating expenses and necessary investments. 66 This means that the conditions prescribed in this Opinion and order with respect to future pricing of the gas from the Rayne Field will be extended until the exhaustion of the field. Thus Texas Eastern shall pay the Producers the appropriate area rate for the gas produced less royalties, state taxes and investments and expenses for the development and operation of the Field. Under the least-sale arrangement before the termination of the production payments revenues from liquids are used to reimburse Taxes Eastern. Therefore, the area price should be reduced only by unreimbursed investments and expenses, and, after the termination of the production payment, the price should be increased by the liquid revenues. 251 67 This modification of Opinion No. 565 was supported in Opinion No. 565-A by four of the five members of the Commission, 252 and when rehearing of Opinion No. 565-A was sought, the Commission adhered to that position. 253 68 The Commission's reversal of position as to the continuing efficacy of the $134 million contract price as a ceiling on Texas Eastern's payments to the producers for Rayne Field gas engendered an issue which is hotly contested in this court. Texas Eastern argues that the condition extending its payments over the life of the field will compel an expenditure of many millions of dollars over the maximum price agreed to by the producers, and that the Commission exceeded its authority in imposing that requirement. The producers and the Commission, with equal vigor, defend the requirement as a lawful and appropriate exercise of regulatory power under Section 7 to condition certificates of public convenience and necessity. Our starting point will be a comprehensive analysis of the Natural Gas Act in its relation to the Commission's authority to alter contract prices to which the parties have voluntarily subscribed. 254 The remaining point we will consider is the Commission's power to effect the alteration of which Texas Eastern complains. 255
69 Two decisions of the Supreme Court, read conjunctively, make it crystal clear that the commission possesses only limited power to raise prices for natural gas above those contractually fixed by the parties. In United Gas Pipe Line Company v. Mobile Gas Service Corporation, 256 a regulated pipeline supplying natural gas to a distributor filed with the Commission a new rate schedule purporting to increase the price of its gas above that specified in its contract with the distributor. The Commission rejected the latter's complaint but, on review, the Court held that the Act did not empower the pipe line to unilaterally change the contract rate. 257 The Act, the Court stated, evinces no purpose to abrogate private rate contracts. To the contrary, by requiring contracts to be filed with the Commission, 258 the Act expressly recognizes that rates to particular customers may be set by individual contracts. 259 Rejecting the contention that Sections 4(d) and (e) 260 and 5(a) 261 are alternative rate-changing procedures, the court said: 70 These sections are simply parts of 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 upon a finding that they are unlawful. The Act merely defines the review powers of the commission and imposes such duties on natural gas companies as are necessary to effectuate those powers; it purports neither to grant or to define the initial rate-setting powers of natural gas companies. 262 71 Section 5(a), authorizing the Commission to set aside or modify any rate found to be unjust, unreasonable, unduly discriminatory, or preferential[,] the Court continued, is neither a 'rate-making' nor a 'rate-changing' procedure. It is simply the power to review rates and contracts made in the first instance by natural gas companies and, if they are determined to be unlawful, to remedy them. 263 And since the Act does not define the power of natural gas companies either to make or change rates and contracts, 264 [t]he obvious implication is that, except as specifically limited by the Act, the rate-making powers of natural gas companies were to be no different from those they would process in the absence of the Act: to establish ex parte, and change at will, the rates offered to prospective customers; or to fix by contract, and change only by mutual agreement, the rate agreed upon with a particular customer. 265 So, the Court concluded, there is nothing in the structure or purpose of the Act from which we can infer the right, not otherwise possessed and nowhere expressly given by the Act, of natural gas companies unilaterally to change their contracts. 266 72 In Mobile, the Court also noted, however, that this interpretation, while precluding natural gas companies from unilaterally changing their contracts simply because it is in their private interests to do so, does not deprive them of an avenue of relief when their interests coincide with the public interest. 267 The Court explained: 73 Section 5(a) authorizes the Commission to investigate rates not only upon complaint of any State, municipality, State Commission, or gas distributing company but also upon its own motion. Thus, while natural gas companies are understandably not given the same explicit standing to complain of their own contracts as are those who represent the public interest or those who might be discriminated against, there is nothing to prevent them from furnishing to the Commission any relevant information and requesting it to initiate an investigation on its own motion. And if the Commission, after hearing, determines the contract rate to be so low as to conflict with the public interest, it may under Sec. 5(a) authorize the natural gas company to file a schedule increasing the rate. 268 74 On the same day Mobile was decided, the Court announced its opinion in FEderal power Commission v. Sierra Pacific Power Company. 269 The question there was whether the Commission could increase the rate specified in a contract by which an electric utility agreed to supply power to a distributor. The Commission allowed the increase solely on the ground that the contract rate yielded less than a fair return on the utility's net invested capital. 270 The asserted basis for the increase was Section 206(a) of the Federal Power Act 271 which, similarly to Section 5 of the Natural Gas Act, authorizes the Commission to fix the just and reasonable rate for electricity if the existing rate is unjust, unreasonable, unduly discriminatory, or preferential. 272 The Court pointed out that while it may be that the Commission may not normally impose upon a public utility a rate which would produce less than a fair return, it does not follow that the public utility may not itself agree by contract to a rate affording less than a fair return or that, if it does so, it is entitled to be relieved of its improvident bargain. 273 In such circumstances, said the Court, the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest--as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory. 274 Observing that the purpose of the power given the Commission by Sec. 206(a) is the protection of the public interest, as distinguished from the private interests of the utilities, 275 the Court deemed it clear that a contract may not be said to be either 'unjust' or 'unreasonable' simply because it is unprofitable to the public utility. 276 75 These decisions furnish the standard by which the administrative action under scrutiny must be gauged. In recent years, the Supreme Court has applied them to uphold the Commission's refusal to fix minimum area rates for producers at levels above their contract prices. 277 The regulatory system created by the Act the Court declared, contemplates abrogation of these agreements only in circumstances of unequivocal public necessity. 278 We ourselves have applied the Mobile-Sierra doctrine, 279 and the Commission has relied on it to justify its refusal to override Southern Louisiana producers' contract prices with higher minimum area rates. 280
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.