Opinion ID: 313092
Heading Depth: 2
Heading Rank: 2

Heading: Procedures Required Under the Natural Gas Act

Text: 60
61 In promulgating the rates under review the Commission stated that it was acting pursuant to sections four, five and sixteen of the Natural Gas Act. Sections four and five are the sections which grant authority to set just and reasonable rates. 54 Section sixteen allows the Commission to perform any and all acts-including making orders and rules-that are necessary or appropriate to carry out the provisions of [the Natural Gas Act]. 55 The Commission argues that section sixteen permits it great latitude in the procedures it will follow in setting rates under sections four and five. 62 In essence, the Commission reads section sixteen as performing the same function with regard to the Natural Gas Act that the necessary and proper clause performs in the United States Constitution. Accordingly, if something is required by another provision of the Natural Gas Act, section sixteen permits that which is necessary or appropriate to get the job done. The Commission has determined the procedures necessary and appropriate here to be the minimal requirements of section 553 of Title 5 U.S.C.-i.e., public notice and an opportunity to comment. These simple procedures are necessary and appropriate in part because the Commission feels it would be unduly burdensome to permit more elaborate inquiry into the matter. 63 The Commission's approach goes too far. A more tempered and balanced approach would accord reasonable significance to section 16, without making it a carte blanche. Such 'necessary or appropriate' provisions do not have the same majesty and breadth in statutes as in a constitution, . . . [but] they are not restricted to procedural minutiae, and they authorize an agency to use means of regulation not spelled out in detail, provided the agency's action conforms with the purposes and policies of Congress and does not contravene any terms of the Act. 56 64 Support for the Commission's expansive reading of the meaning of section sixteen is allegedly found in the Permian Basin Area Rate Cases. 57 There the Supreme Court approved procedures by which uniformly applicable rates were set for all the gas producers in a particular area. This form of rate-making was not mentioned in either the Natural Gas Act or the Administrative Procedure Act; it is doubtful that the framers of either piece of legislation ever conceived of such a procedure. 65 In the course of its decision the Court recognized that a case-by-case method of rate-making had seriously overburdened the Federal Power Commission, and that the entire regulatory process was in danger of collapsing because of its inability to perform its statutory duty to set just and reasonable rates for gas production. In the face of this overwhelming task the Court agreed that strict adherence to traditional forms of rule-making must give way to the exigencies of the situation. Recognizing that it was an experiment and might not be the final answer to the problem, the Court approved the area-wide method of setting rates. The entire tone of the opinion evinces a tolerance for flexibility and experimentation in administrative process. 66 In the course of its discussion the Court referred to section sixteen as supporting the position that the Commission should be permitted substantial discretion in formulating procedures for the administration of the Act. 58 In a similar vein this court, in two recent opinions, has taken section sixteen as supporting the validity of administrative procedures that departed from established methods and that permitted substantially less elaborate safeguards than had previously been the case. 59 The FPC relies on this language as authority to deal with its problems, apparently in whatever manner it deems necessary or expeditious, so long as a slight bow in the direction of section 553 of the APA is made. This far-reaching interpretation of section sixteen seriously misconstrues both the nature of the provision and the import of court references to it. 67 First, it is significant that the Supreme Court, in the Permian Basin Area Rate Cases, did not hold the procedures under examination there to be valid because of any authority granted under section sixteen. Rather, the Court sought and found a justification for experimentation and flexibility in the nature of the regulatory scheme envisioned by Congress. The Court first isolated the purpose behind the passage of the Natural Gas Act. It then noted that it has long been the rule that administrative authority must be measured in part by the purposes for which it was conferred . . . and that statutory provisions must therefore be liberally construed. 60 The Court then concluded its analysis as follows: 68 The Commission has asserted, and the history of producer regulation has confirmed, that the ultimate achievement of the Commission's regulatory purposes may easily depend upon the contrivance of more expeditious administrative methods. The Commission believes that the elements of such methods may be found in area proceedings. [C]onsiderations of feasibility and practicality are certainly germane to the issues before us. Bowles v. Willingham, supra, 321 U.S. 503, at 517, 64 S.Ct. 641, 88 L.Ed. 892. We cannot, in these circumstances, conclude that Congress has given authority inadequate to achieve with reasonable effectiveness the purposes for which it has acted. 61 69 At no point in its discussion did the Court rely upon section sixteen as a basis for its conclusion that area rate-making was permissible. It merely referred to section sixteen as giving additional assistance to a conclusion reached on the basis of its analysis of overall Congressional statutory intent and the nature of the regulatory process involved. 62 Permian does not construe section sixteen as a grant of additional authority. At most, the Court reads the provision as being designed to assure that the Commission will be able to perform the functions granted under the substantive portions of the Act. 70 In a recent decision of this court Judge Tamm likewise interpreted section sixteen in this limited fashion: 71 The Commission asserts for the first time on appeal that it relies upon Section 16 of the Natural Gas Act and Section 309 of the Federal Power Act as authority for Order 427. Although we view this as post hoc patchwork, we have considered and rejected the argument. Both sections are of an implementary rather than substantive character. The cases have made abundantly clear that while these provisions must be read in a broad expansive manner, they can only be implemented consistently with the provisions and purposes of the legislation, and that they authorize an agency to use means of regulation not spelled out in detail, provided the agency's action conforms with the purposes and policies of Congress and does not contravene any terms of the Act. These sections merely augment existing powers conferred upon the agency by Congress, they do not confer independent authority to act. 63 72 The opinions of this court in City of Chicago v. FPC 64 and more recently in Mobil Oil Corp. v. FPC 65 are not to the contrary. City of Chicago clearly did not rely upon section sixteen as a source of authority for the procedures involved there. Indeed, much of the discussion of section sixteen is in the context of a discussion of the need to test procedures by the nature of the regulatory function commanded by Congress. The language in Mobil is even less relevant since rate-making was not involved. There the Commission had established a temporary rule designed to maintain the status quo pending the outcome in conventional area rate proceedings being conducted pursuant to sections four and five of the Act. Thus the Commission was using section sixteen to preserve its rate-making authority by establishing a moratorium; it was not using the vague language of that section to make rates. Such an implementing rule, i.e., a writ in aid of jurisdiction to be exercised under another section of the statute, is precisely what section sixteen was designed to permit. The court did not intimate that the rudimentary procedures approved there would be adequate in setting rates-indeed, the inference is to the contrary. 66 73 We conclude that section sixteen standing alone does not permit the sketchy procedures employed in originally setting the rates currently under review. The substantive provisions of the Act contemplate certain procedures, as incident to the functions provided. The range of permissible procedures must be derived from these sections, sections like sections 4 and 5 of the Natural Gas Act, and the functions they describe. Section 16, which uses a broad generality of necessary or appropriate that is not rooted in a function, cannot enlarge the choice of permissible procedures beyond those that may fairly be implied from the substantive sections and the functions there defined. 74
75 Any administrative proceeding designed to set rates for a large number of separate enterprises possesses elements of both a legislative policy determination and an adjudicative resolution of disputed facts. 67 Although these distinct elements are intertwined and necessarily exist simultaneously in any rate-making, one may predominate over the other. Rate-making always involves factual predicates; yet the facts relevant to rates in any given industry may be more or less well established. For example, if industry costs are well established, the rate-making process would consist primarily of policy judgments such as the fair rate of return or the desired level of safety; appropriate procedures for resolution of these policy disputes would not resemble adjudication. In contrast, if the rate of return policy was clear but the cost base uncertain, adjudication might be more appropriate. Congress could take into account the differences in these two type situations and require greater evidentiary support for factual findings in some instances than in others. 76 The degree of fact dispute resolution necessary in a particular proceeding is directly related to the degree of evidentiary support required by Congress in establishing a factual basis for a proposed rate. If a relatively high degree of evidentiary support is required in establishing a factual predicate, the rule-making procedures must be designed to create this. Thus, if we know the degree of evidentiary support required, this will indicate the type of procedures that Congress intended to be employed. 77 The Natural Gas Act explicitly states that factual determinations must be supported by substantial evidence. 68 Unlike many other forms of rule-making, rate-making necessarily rests upon findings of facts. 69 The phrase substantial evidence is a term of art well recognized in administrative law. This requirement imposes a considerable burden on the agency and limits its discretion in arriving at a factual predicate. 70 Substantial evidence as interpreted by the Supreme Court is more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. 71 The Court in a later opinion explained further that it must be enough to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury. 72 It has also been established that in determining whether facts are supported by substantial evidence the entire record must be considered and not merely the evidence tending to support the finding. 73 78 From this outline of the meaning of substantial evidence, we can perceive the sort of procedures required. Clearly some evidence supporting the FPC's finding must be in the record. More importantly for our purposes, the rule that the whole record be considered- both evidence for and against-means that the procedures must provide some mechanism for interested parties to introduce adverse evidence and criticize evidence introduced by others. This process of introduction and criticism helps assure that the factual basis of the FPC rates will be accurate and provides the reviewing court with a record from which it can determine if the agency has properly exercised its discretion. 79 Our interpretation of the significance of the substantial evidence requirement is supported by the Attorney General's Manual on the Administrative Procedure Act. 74 This Manual was prepared more or less contemporaneously with the adoption of the Act and has been described by this court as being an authoritative source of information concerning the APA. 75 Indeed, the Manual went even further than this court and interpreted the substantial evidence requirement as meaning formal hearings under sections 556 and 557: 80 Sometimes the requirement of decision on the record is readily inferred from other statutory provisions defining judicial review. For example, rate orders issued by the Federal Power Commission pursuant to the Natural Gas Act (15 U.S.C. 717) may be made only after hearing; upon review in a circuit court of appeals or the Court of Appeals for the District of Columbia, the Commission certifies and files with the court a transcript of the record upon which the order complained of was entered, and the Commission's findings of fact if supported by substantial evidence, shall be conclusive. It seems clear that these provisions of the Natural Gas Act must be construed as requiring the Commission to determine rates on the record after opportunity for an agency hearing. See H.R.Rep. p. 51, fn. 9 (Sen.Doc. p. 285). 76 81 We have, of course, concluded that full section 556 and 557 proceedings are not required in the case at bar. The Attorney General's conclusion is, however, understandable. Clearly the existence of the substantial evidence requirement in the Natural Gas Act demands that facts be determined and reviewed with a greater degree of certainty than is possible under the informal methods of section 553 of the APA. The Attorney General simply concluded that section 553 was inadequate; the only obvious, easily referenced alternative in the APA was full adjudicative proceedings under sections 556 and 557, hence the stiffer test was stated as providing the appropriate standard to which to repair, a conclusion with which we do not agree as applied to this case. The fundamental principle behind the statement in the Manual is what we find important here: in any administrative proceeding, the type of procedure required is related and proportionate to the degree of evidentiary support required for the agency's decision. 82 Our conclusion that the substantial evidence requirement necessitates some sort of adversary, adjudicative-type procedures is made more obviously necessary by considering the record in this case, such as it is. The FPC admittedly made findings of fact here regarding transportation costs and points to evidence which it claims supports the accuracy of these facts. 77 It is clear, however, that none of the interested parties knew that this evidence-which was taken from a number of different sources -was to be the basis for the Commission's action. Consequently, no one was able to introduce evidence in opposition, criticize the Commission's position, or point out flaws by questioning the validity of its sources. As the record stands, in reviewing the Commission's action we are unable to decide whether its factual determinations are supported by substantial evidence. Much of the evidence appears possibly suspect, we have no way of knowing from the record whether the figures are valid. 78 There is no evidence in the record except that which the Commission has chosen to include to support its position. 79 Substantial evidence, the test of the Natural Gas Act, requires the consideration of the whole record, and the whole record should contain sufficient unimpeachable-or at least persuasive-evidence to support the conclusion the Commission has reached if its action is to be sustained on appeal. 83 Informal comments simply cannot create a record that satisfies the substantial evidence test. Even if controverting information is submitted in the form of comments by adverse parties, the procedure employed cannot be relied upon as adequate. A whole record, as that phrase is used in this context, does not consist merely of the raw data introduced by the parties. It includes the process of testing and illumination ordinarily associated with adversary, adjudicative procedures. Without this critical element, informal comments, even by adverse parties, are two halves that do not make a whole. Thus, it is adversary procedural devices which permit testing and elucidation that raise information from the level of mere inconsistent data to evidence substantial enough to support rates. 84 The Supreme Court's recent decision in United States v. Florida East Coast Railway 80 in no way diminishes the validity of our conclusion that the substantial evidence test requires more exhaustive procedures than those in section 553 of the APA. As we have previously noted, in that case the Supreme Court upheld rates set by the ICC under informal section 553 procedures, but the ICC statute does not require that factual determinations be supported by substantial evidence. While stating that the rates were based upon factual inferences, the Court concluded that the statute did not mandate inquiry into the substantiality of the evidentiary basis, since the factual inferences were not used in adjudicating a particular set of disputed facts. 81 85 The ICC statute provides that the Commission shall give consideration to various aspects of the railroad industry. 82 The test then would be whether the Commission considered everything it was supposed to in making its determination. If the reviewing court determines that the ICC has considered everything that it should, it will inquire no further. 83 This consideration test obviously permits the ICC much greater leeway and requires much less certainty than does the substantial evidence test. It is entirely appropriate that the procedures for consideration of evidence would employ almost none of the dispute resolution procedures ordinarily associated with adjudication. Under these circumstances prevailing in Florida East Coast, the informal procedures could be more than adequate. 84 86 In both Florida East Coast and Morgan v. United States 85 the critical factor as to proper procedure was derived from the substantive statute itself. In Morgan Chief Justice Hughes referred to the 'full hearing' required by the statute and then said, Nor is it necessary to go beyond the terms of the statute in order to consider the constitutional requirement of due process as to notice and hearing. For the statute itself demands a full hearing and the order is void if such a hearing was denied. 86 87 Likewise, in Morgan the required procedure was derived from the nature of the responsibilities with which the agency was charged. Chief Justice Hughes inquired, What is the essential quality of the proceeding under review, and what is the nature of the hearing which the statute prescribes, and then answered: 88 It is a proceeding looking to legislative action in the fixing of rates of market agencies. And, while the order is legislative and gives to the proceeding its distinctive character [citation omitted], it is a proceeding which by virtue of the authority conferred has special attributes. . . . 89 A proceeding of this sort requiring the taking and weighing of evidence, determinations of fact based upon the consideration of the evidence, and the making of an order supported by such findings, has a quality resembling that of a judicial proceeding. Hence it is frequently described as a proceeding of a quasi-judicial character. The requirement of a full hearing has obvious reference to the tradition of judicial proceedings in which evidence is received and weighed by the trier of the facts. 87 90 So here in the case at bar. The Natural Gas Act term substantial evidence smacks of a judicial proceeding, but as we have made clear, we pin nothing on categorization by rule-making or adjudication, nor by formal or informal, and neither did the Supreme Court in Morgan when it used both terms legislative and quasi-judicial. What is important and decisive is the essential quality of the proceeding under review. 91 We recognize that the Tenth Circuit in its recent opinion in Phillips Petroleum Co. v. FPC 88 has specifically approved the use of section 553 procedures in establishing rates. With all due respect, we disagree with the two majority judges in Phillips in their construction of the breadth of discretion granted the Commission to formulate rules. 89 We agree with dissenting Judge Seth, who based his position in part on the failure of the procedures used by the Commission to create a record that would adequately support the factual findings and permit judicial review, 90 a factor which plays a large part in our decision here. 92 The defect we find in the Commission's procedures here, and the resulting inadequacy of the evidence, could be remedied by according the procedure described under sections 556 and 557 of the APA, but such complete adjudicatory procedures are not required. 93 What is required are procedures which will adequately test the Commission's factual determinations and create a record that will allow a reviewing court to examine the agency's actions. The procedures required are related and proportionate to the test of evidentiary support which the agency's decision must ultimately withstand. 94 Compliance with this standard could conceivably be achieved in a number of ways. 91 There must, however, be some mechanism whereby adverse parties can test, criticize and illuminate the flaws in the evidentiary basis being advanced regarding a particular point. The traditional method of doing this is cross-examination, but the Commission may find it appropriate to limit or even eliminate altogether oral cross-examination and rely upon written questions and responses. In proceedings involving numerous parties, the Commission might find it expedient to screen the written interrogatories in the manner approved in International Harvest Co. v. Ruckelshaus. 92 It is also possible that the Commission could use evidence incorporated by reference from other proceedings. 93 But whatever procedure is followed, it must assure that the Commission has a substantial evidentiary basis for its findings and it must provide the court with an adequate record on review.