Secretary of Army v. Federal Power Commission

• Decision Date: 12 December 1969
• Docket Number: No. 22675.,22675.
• Citation: 425 F.2d 496
• Parties: SECRETARY OF the ARMY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

425 F.2d 496 (1970) SECRETARY OF the ARMY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 22675.

United States Court of Appeals District of Columbia Circuit.

Argued September 11, 1969.

Decided December 12, 1969.

Petition for Rehearing Denied January 20, 1970.

Mr. Stephen R. Felson, Atty., Department of Justice, with whom Mr. Alan S. Rosenthal, Atty., Department of Justice, was on the brief, for petitioner.

Mr. Israel Convisser, Attorney, Federal Power Commission, with whom Messrs. Richard A. Solomon, General Counsel at the time the brief was filed, Peter H. Schiff, Solicitor, and Robert L. Russell, Asst. General Counsel, Federal Power Commission, were on the brief, for respondent.

Before TAMM, LEVENTHAL and ROBB, Circuit Judges.

TAMM, Circuit Judge:

In this petition the Secretary of the Army seeks to set aside an order of the Federal Power Commission rejecting the Army's contention that all of the natural gas used in the Vint Hill Farms military reservation should be subject to the Commission's jurisdiction under the Natural Gas Act. Our review reveals substantial inadequacies in the findings compiled by the Commission, and thus we remand for further proceedings.

I. THE FACTUAL CONTEXT

On December 3, 1965, the Secretary of the Army applied to the Federal Power Commission pursuant to section 7(a) of the Natural Gas Act¹ for an order directing the Atlantic Seaboard Corporation (hereinafter "Seaboard") to sell the Army the natural gas needed in operating the Vint Hill Farms military reservation in Warrenton, Virginia. Seaboard is a Delaware corporation engaged in the interstate transmission of natural gas; its main transmission line runs through the Vint Hill reservation and connects near the boundary of the facility with metering and regulating devices operated by Virginia Gas Distribution Corporation ("Virginia Gas"), an affiliate of Seaboard² which sells natural gas to the public in Virginia. The gas used at the Vint Hill station is taken from the Seaboard pipeline at that point and delivered to the Army's distribution system through a twenty-two foot pipe owned by Virginia Gas. Some of the gas thus purchased by the Army is admittedly resold within the meaning of the Act, although the exact proportion is in dispute; the remainder is direct-use gas consumed in the operation of military facilities on the base.

The Army's purpose in seeking this order was, simply stated, to eliminate the middleman, Virginia Gas. The Army took the position that Virginia Gas performed no services meriting compensation other than providing the short length of connecting pipe; in addition, the Army contended that because part of the gas being used at Vint Hill was destined for resale and thus subject to Commission regulation, all of the gas in the commingled stream would be "jurisdictional" or subject to federal rate regulation; cf. California v. Lo-Vaca Gathering Co., 379 U.S. 366, 85 S.Ct. 486, 13 L.Ed.2d 357 (1965). Power to regulate "direct-use" sales of natural gas to the ultimate consumer is expressly reserved to the States by section 1(b) of the Natural Gas Act,³ but the State of Virginia does not assert jurisdiction over sales to federal instrumentalities; as a result of this regulatory gap, the Army contends, it is forced to pay over $50,000 per year more than it would be if the entire stream of gas entering the Vint Hill distribution system were subject to federal rate-making jurisdiction.

After conducting a hearing on the Army's application, an examiner ruled that the Commission lacked power under section 7(a) of the Natural Gas Act to compel Seaboard to sell the Army any gas that was not to be resold within the meaning of the Act; since the Army had not supplied an estimate of the amount of gas destined for resale, as required by Commission regulations,⁴ the Army's application was denied without prejudice. The Commission adopted the examiner's view of the jurisdictional question, and remanded the proceeding to the examiner with directions to reopen the record so that the Army would have an opportunity to comply with the applicable regulation requiring an estimate of the quantity of gas destined for resale (J.A. 24a-33a). The Army's petition for a rehearing was denied by the Commission on November 25, 1968 (J.A. 39a-42a), and this petition resulted.

II. COMMINGLING AND COMMISSION JURISDICTION

The Commission's decision that it does not have jurisdiction over all of the gas involved in the instant transactions rests on the plausible argument that a contrary result would create a conflict between section 7(a) of the Act and the provisions in section 1(b) reserving state control over direct-use sales of natural gas:

Were we to direct Atlantic Seaboard to make available to the Army any more gas than that which is resold, we would quite plainly be directing an interstate pipeline to make a direct industrial sale at a regulated rate. We need not belabor the fact that we have no authority so to act. Clearly, Congress intended to distinguish between resales and direct consumptive sales and to reserve the prerogatives of the state and local authorities over the latter.

(J.A. 29a.) However, it is obvious that one tacit premise of this rationale is the assumption that Seaboard does not presently sell gas directly to the Army, but rather sells only to Virginia Gas.⁵ This characterization of the transaction is clearly at odds with the following language in the examiner's initial decision:

The Army did make a prima facie case that the gas in issue is supplied directly by the wholesaler (Seaboard). The distributing company (Virginia Gas) furnishes minor facilities (a 22-feet sic pipe) and does a single billing, while the Army, perhaps for its own convenience, performs all the other normal functions of a gas distribution company. Respondent Seaboard failed to rebut said allegations. It presented no contradictory evidence, but merely rested on a general contention that as a matter of law the Army just cannot truly be in the utility business. Yet as a matter of fact the Army comes close to being a Distributor of gas at Vint Hill Farms Station.

(J.A. 21a-22a.) The Commission's decision does not articulate any reason for ignoring or rejecting this description of the transactions; yet, it seems clear that a finding that Seaboard sells directly to the Army could well affect the outcome of the controversy.

As a general matter, the question of whether the Federal Power Commission can and should assert regulatory authority over transactions involving commingled "jurisdictional" and "nonjurisdictional" gas is fraught with difficulty, and hedged by rather artificial distinctions. Much of the confusion surrounding this question arises from the need to implement the Congressional decision that authority should be divided between the states and the federal government in regulating transactions in a fungible commodity which moves in a generally continuous stream from producer to ultimate consumer. The Supreme Court dealt with one aspect of this problem in California v. Lo-Vaca Gathering Co., 379 U.S. 366, 85 S.Ct. 486, 13 L.Ed.2d 357 (1965). In Lo-Vaca, the gathering company contracted to sell natural gas to an interstate pipeline company for direct use; the gas was measured before delivery, then commingled by the pipeline company with resale gas during transportation to the point of use outside the state, where it was again metered. In these circumstances the Supreme Court ruled that "the fact that a substantial part of the commingled gas will be resold * * * invokes federal jurisdiction at the outset over the entire transaction." 379 U.S. at 369, 85 S.Ct. at 488.

Lo-Vaca can be distinguished from the instant case, provided that Seaboard in fact makes no direct sales to the Army; if this condition were clearly demonstrated in the record, it would be possible to conclude that Seaboard has not participated voluntarily in any transaction which necessarily involves commingling of jurisdictional and nonjurisdictional gas. On the other hand, if the examiner's finding quoted above implies that the interposition of Virginia Gas is merely a sham, devoid of economic substance and designed to avoid federal regulation,⁶ it becomes much more difficult to distinguish Lo-Vaca.⁷ There would also be strong policy reasons for favoring federal regulation under these circumstances. Since it could be said that Seaboard had voluntarily placed itself in a position in which it was actually supplying commingled jurisdictional and nonjurisdictional gas directly to the Army, the element of compulsion inherent in the normal section 7(a) order would be absent and any incursion on state regulatory policy would presumably be slight; at the same time, assertion of federal jurisdiction would avoid the "attractive gap" in the regulatory scheme which results from Virginia's decision not to control rates charged to federal instrumentalities. The suggestion that state motivation to abstain from regulating a given type of transaction constitutes a proper premise for the assertion of federal jurisdiction can be found in FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 19-20, 81 S.Ct. 435, 445, 5 L.Ed.2d 377 (1961) (emphasis in original):

When Congress enacted the Natural Gas Act, it was motivated by a desire "to protect consumers against exploitation at the hands of the natural gas companies." * * * To that end, Congress "meant to create a comprehensive and effective regulatory scheme." * * * It is true, of course, that Congress did not desire comprehensive federal regulation; much authority was reserved for the States. But, it is equally clear that Congress did not desire that an important aspect of this field be left unregulated. * * Therefore, when a dispute arises over whether a given transaction is within the scope of federal or state regulatory authority, we are not inclined to approach the problem negatively, thus raising the possibility that

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