483 F.2d 1238 (D.C. Cir. 1973), 72-1471, Mobil Oil Corp. v. Federal Power Commission

Docket Nº:72-1471.
Citation:483 F.2d 1238
Party Name:MOBIL OIL CORPORATION, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Public Service Commission of the State of New York, Intervenor.
Case Date:July 11, 1973
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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483 F.2d 1238 (D.C. Cir. 1973)

MOBIL OIL CORPORATION, Petitioner,

v.

FEDERAL POWER COMMISSION, Respondent,

Public Service Commission of the State of New York, Intervenor.

No. 72-1471.

United States Court of Appeals, District of Columbia Circuit.

July 11, 1973

Argued March 13, 1973.

As Amended July 26, 1973.

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Carroll L. Gilliam, Washington, D. C., with whom Tom P. Hamill, Houston, Tex., and Philip R. Ehrenkranz, Washington, D. C., were on the brief for petitioner.

Joan E. Heimbigner, Atty., F.P.C. with whom Leo E. Forquer, Acting Gen. Counsel, and George W. McHenry, Jr., First Asst. Sol., F.P.C., were on the brief for respondent.

Peter H. Schiff, Gen. Counsel, Public Service Commission of the State of N. Y., Albany, N. Y., Richard A. Solomon and Paul M. Ruden, Washington, D. C., were on the brief, for intervenor.

Before LEVENTHAL and WILKEY, Circuit Judges, and JAMESON, [*] Senior District Judge for the District of Montana.

WILKEY, Circuit Judge:

This case arises on petition for review of orders of the Federal Power Commission setting minimum rates required to be charged by natural gas pipelines for the transportation of certain liquid and liquefiable hydrocarbons. As a producer of natural gas and other petroleum products required to pay these transportation rates, petitioner challenges their validity on the grounds that (1) the Federal Power Commission has never been granted jurisdiction to establish rates for liquid hydrocarbons; (2) the Commission unlawfully used privileged data submitted as part of an unaccepted settlement proposal in formulating the rates; (3) the Commission violated certain procedural requirements in establishing the rates; and (4) in any case, there is no evidentiary basis for the rates promulgated by the Commission. We find that the Commission does have jurisdiction to establish at least some of the rates involved in this action and that the Commission under certain safeguards could lawfully use the data submitted as a part of an unaccepted settlement proposal. On the record currently before the court, however, we are not able to determine whether the rates have a valid evidentiary basis, nor are we satisfied that the procedure employed by the Commission here met the requisite standard for the objectives the Commission was seeking to accomplish. We

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therefore set aside the orders of the Federal Power Commission here challenged, and remand for further proceedings.

I. Background

The mechanics of natural gas production are such that gas and liquid hydrocarbons (i. e., crude oil) are often produced simultaneously from a single well. The gaseous product of the well may also contain some hydrocarbons which, although in a gaseous form when released from the ground, may later be liquefied and treated as a liquid. Thus a single well often produces simultaneously liquid, liquefiable, and gaseous hydrocarbons; the gaseous product is sold at or near the wellheads to interstate pipelines.

The economics of natural gas production often preclude having facilities at each well to separate the three products for individual transportation. Consequently, an interstate natural gas pipeline company may at times transport liquids and liquefiables through a single pipeline, even though it is only interested in purchasing a gaseous product of the well after the original natural product is separated into component parts.

The contractual aspects of natural gas production have evolved with due regard to these natural and economic phenomena. The producer and the pipeline frequently agree that the producer will sell the gas from the well but reserve title to all the liquids and liquefiables transported. The gas pipeline company transports, along with the gas it purchased, various quantities of liquids and liquefiables that are still owned by the producer.

This transportation service constitutes a value to the producer, since he must have some way of transporting his oil to the refinery, and a cost to the pipeline, since the use of its pipeline capacity to transport oil reduces its ability to transport gas. Thus the rate charged a producer for transporting liquids has a direct effect upon what must be charged for the transportation of gas, if the pipeline is to operate at a profit.

The Federal Power Commission has by statute the duty to establish "just and reasonable" rates for the transportation and sale of natural gas traveling in interstate commerce. 1 Thus

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the Commission clearly has the authority to regulate the transportation charges of gas pipeline companies for natural gas. The statute does not, however, grant the Commission the power to regulate pipeline transportation charges for liquid products. 2

The ability to regulate transportation rates for gas and arguably liquefiables, but not for liquids, creates an obvious problem. The transportation rates for all three are interrelated; it follows that what are "just and reasonable" rates for natural gas is related to what

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are the actual costs and proper charges for transporting liquids and liquefiables. For example, if a pipeline company charges the producer less than the actual cost of transporting liquids and liquefiables, the extra cost must be allocated to the other product being transported, natural gas, with the resulting danger that the consumer of natural gas will be asked to pay this extra transportation cost in the form of higher gas prices.

Between 1954 and 1968 the Federal Power Commission, as the agency obligated to assure that gas rates are "just and reasonable, " sought to assure that the costs of transporting liquids and liquefiables were not passed along to gas consumers. It followed the practice of considering the problem on an individual basis when producers applied for certificates to sell natural gas to pipelines or when holding hearings on the reasonableness of pipeline rates. With information as to the type of transportation involved and the contractual arrangement between the producer and the pipeline, the FPC would determine what proportion of transportation costs should be attributed to the transportation of liquids and liquefiables. The Commission would then approve the certificate or rate schedule on the condition that the expenses be appropriately allocated.

It is critically important to understand that under this method the Commission was not setting rates that had to be charged for the transportation of liquids and liquefiables by the gas pipelines. It was simply saying that a certain percentage of transportation costs could not be charged to the transportation of natural gas. It is clear and no one disputes that the Commission was empowered to do this under its authority to set "just and reasonable" rates for the transportation of natural gas.

II. The Commission's Action

By notice issued 5 February 1968 the Commission announced that it was "contemplating adopting a statement of general policy" providing that the Commission would allocate an appropriate proportion of costs to the transportation of liquids and liquefiables. 3 In essence, this proposal would have formalized the procedure already used to assure that transportation costs attributable to nongas products were not paid by gas consumers. The notice did not clearly indicate whether the procedure would establish a single uniform proportion applicable to all producers, nor did the notice contain any intimation that the Commission would establish rates that pipelines

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must charge producers for transporting liquids and liquefiables; in fact, the implication was to the contrary. Both omissions, particularly the latter, were of great significance, if in fact the FPC intended to make changes in long-followed regulatory procedures.

In response the Commission received comments from fifteen natural gas producers, including Mobil, eleven pipeline companies, and two state agencies. Only the two state agencies supported the "policy" as proposed. 4

None of the commenting parties presented any data regarding pipeline costs, distances, or any other facts that would be relevant to determining what proportion of costs should be allocated to the transportation of liquids and liquefiables if the Commission chose to adopt such a policy. No technical, financial or other data were submitted in any form, by affidavits or statement. It is a fair implication from all of this that all parties understood that the proposed rule was designed to determine whether the Commission should at some future time hold proceedings to determine specifically the proportion that would be generally applicable. From the nature of the comments received, it is clear that none of the interested parties felt, at least initially, that the rule-making proceedings then underway would result in allocating an actual proportion. There was even less reason for anyone to think that the Commission would set specific rates for the transportation of liquids and liquefiables, since there was no mention of rates in the proposal for rule-making. The interested parties undoubtedly felt that they were commenting on a "general policy"-as it had indeed been described in the published proposal.

No action was taken by the Commission on its proposal for two and one half years. On 10 September 1970 parties who had filed comments were informed that a "conference" had been called by the Commission Staff Counsel on 29 September 1970 to discuss the proposed rule.

An attorney from the Commission's Office of General Counsel conducted this conference. No transcript of this conference was taken, although "minutes" in the form of a paraphrase of the discourse were prepared and distributed later by the FPC staff. The Commission attorney conducting the meeting stated that the FPC staff was at a "disadvantage" because the "comments" "did not contain any substantial factual...

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