CALIFORNIA OIL COMPANY, WESTERN DIV. v. FEDERAL POWER COM'N

• Decision Date: 28 March 1963
• Docket Number: No. 7148.,7148.
• Citation: 315 F.2d 652
• Parties: CALIFORNIA OIL COMPANY, WESTERN DIVISION, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

315 F.2d 652 (1963)

CALIFORNIA OIL COMPANY, WESTERN DIVISION, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

No. 7148.

United States Court of Appeals Tenth Circuit.

March 28, 1963.

Justin R. Wolf, Washington, D. C. (V. P. Cline, Denver, Colo., Eugene E. Threadgill and Stanley Wanger, Washington, D. C., on the brief), for petitioner.

Paul A. Sweeney, Sp. Consultant (Richard A. Solomon, Gen. Counsel, Howard E. Wahrenbrock, Sol., and Robert L. Russell, Asst. Gen. Counsel, on the brief), for respondent.

J. Calvin Simpson, Sr. Counsel, San Francisco, Cal. (William M. Bennett, Chief Counsel and Walter G. Linstedt, Asst. Counsel, San Francisco, Cal., on the brief), for intervenors, People of State of California and Public Utilities Commission of State of California.

J. David Mann, Jr., Washington, D. C. (Harry P. Letton, Jr., Milford Springer, Los Angeles, Cal., William W. Ross, Washington, D. C., and William E. Zeiter, Philadelphia, Pa., on the brief), for intervenors, Southern California Gas Co. and Southern Counties Gas Co. of California.

Before BRATTON, LEWIS and HILL, Circuit Judges.

HILL, Circuit Judge.

This is a petition to review an order of the Federal Power Commission brought by California Oil Company, Western Division, (petitioner) under the provisions of Section 19(b) of the Natural Gas Act, 15 U.S.C. § 717r(b). The opinion and order complained of, entered on June 11, 1962, granted to the petitioner a permanent certificate of public convenience and necessity providing for the sale by it to El Paso Natural Gas Company (El Paso) of natural gas in interstate commerce for resale. However, the Commission, as a condition to the issuance of the certificate and pursuant to its authority under Section 7(e) of the Act, 15 U.S.C. § 717f(e), prescribed an initial sale price of 15.384 cents per Mcf at a pressure base of 15.025 psia in substitution of the contract price of 18.5 cents per Mcf.

The question is whether under the facts set forth in the record the Commission could validly and legally prescribe an initial sales price of the gas at 15.384 cents per Mcf rather than the 18.5 cents per Mcf called for by the contract, as a condition to the issuance of the certificate. Petitioner contends that the condition is not a reasonable one within the meaning of Section 7(e) of the Act; that the Commission acted arbitrarily and capriciously in imposing it; and that the Commission's action in this respect is discriminatory and deprives it of property without due process of law. The Commission, on the other hand, takes the position that it was merely performing its duty of holding the line on the price of natural gas in interstate commerce by fixing the initial price so as to protect the ultimate consumer as it was admonished to do by the Supreme Court in Atlantic Refining Co. v. Public Service Commission, 360 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312, commonly referred to as the CATCO case.

The certificate in question authorizes the sale of natural gas produced by petitioner from the Red Wash Field, which is a part of the Red Wash Unit located in the Uintah Basin of Northeastern Utah. The land comprising the Red Wash Unit is owned, in part, by the United States and, in part, by the State of Utah. It is leased to petitioner, an independent producer of natural gas. The Red Wash Field is a unitized operation in which petitioner acts as the operator and owns the majority interest of 97.64 per cent. The ownership of the remainder of the field is not material here.

The discovery oil well in the Red Wash Field was drilled by petitioner in 1951 and, since that time, the field has been developed to include 123 producing oil wells, 7 gas injection wells, 2 dry holes and 6 gas wells capable of producing gas. These 6 wells have been, and presently are, shut-in and have never been connected with the gathering system which petitioner has built since 1957. The oil wells produce both oil and casinghead gas but, prior to 1960, the field was operated exclusively for the production of oil. The casinghead gas produced from the oil wells was, until 1960, collected in petitioner's gathering system and taken to its central processing plant where the gas was compressed and, thereafter, reinjected to aid in the production of oil.

In January, 1960, the gas sales contract involved herein was entered into by petitioner and El Paso. Under the terms of that contract, petitioner agreed to sell and El Paso agreed to buy certain minimum quantities of the casinghead gas previously reinjected to aid in the production of oil at an initial price of 18.5 cents per Mcf at a pressure base of 15.025 psia. The contract provides for an escalation of 1 cent every 5 years over the 20 year life of the contract. It also provides for delivery of the gas at the tailgate of petitioner's processing plant. After such delivery to El Paso, the Red Wash gas moves into El Paso's main line without any additional processing or compression being required. Thus, this is not a wellhead sale, but, rather, it is a gas plant sale.

In March, 1960, petitioner filed its application for a certificate of public convenience and necessity under Section 7 of the Act seeking authorization for the sale, under the above contract, of the gas to El Paso for resale. In April, 1960, petitioner's application for temporary authorization to make the sale to El Paso was granted by the Commission and delivery of the gas commenced in June, 1960. However, the temporary certificate was issued subject to the condition that the initial sales price be reduced from the contract price of 18.5 cents per Mcf to 15 cents per Mcf. It was further provided that the condition imposed was "without prejudice to such final disposition of the application for certificates as the record may require."

A hearing was held before an examiner on petitioner's application for the permanent certificate. At the hearing, certain interested parties appeared as intervenors as they do here and, in general, they urged that an initial sales price of from 12 to 15 cents should be established. The Commission Staff presented evidence as to the price for gas sold in Utah and contended for a 12 cent price. Petitioner presented evidence as to the high cost of exploratory drilling in Utah and the need for an incentive price to encourage such drilling. It was established that Utah is one of the most expensive areas in the United States in which to drill. Petitioner also presented evidence with respect to prices paid and delivery conditions under other gas sales contracts in Utah, Colorado and Wyoming in an effort to distinguish some of such sales and establish its position that 18.5 cents was required by the public convenience and necessity. In addition, the examiner had before him the area prices fixed by the Commission in its Statement of General Policy No. 61-1, 24 F.P.C. 818, showing the "in line" price for gas in Colorado at 15 cents per Mcf at 15.025 psia and in Wyoming at 15.384 cents per Mcf. No price was fixed for the sale of gas in Utah by this policy statement.

The examiner concluded that Northeastern Utah, Southwestern Wyoming and Northwestern Colorado constituted a pricing area.¹ He recommended that a permanent certificate be issued with a conditioned price of 15 cents per Mcf at 15.025 psia. Exceptions to this decision were filed by the Staff and by petitioner. The Commission, after carefully reviewing the record, issued a detailed opinion wherein it concluded that the sales prices from Southwestern Wyoming could appropriately be applied to the sale of Red Wash gas. In accordance therewith, the certificate was issued conditioned upon the initial sales price not exceeding 15.384 cents per Mcf. Petitioner's application for rehearing was denied and it filed this petition to review.

At the outset, we must recognize and emphasize that this case involves the issuance of a certificate of public convenience and necessity under Section 7(e) of the Act. It is not a "rate" case under either Section 4 or Section 5 and, therefore, the complex and intricate problems as to what is a "just and reasonable" price under those sections are not before us. We have only to determine the issue of the validity of the price condition imposed upon the certificate issued to petitioner.

It is well settled that in appropriate circumstances the Commission can, and indeed should, attach initial price conditions to the grant of a permanent certificate of public convenience and necessity. Atlantic Refining Co. v. Public Service Commission, supra; Texaco, Inc. v. Federal Power Commission, 5 Cir., 290 F.2d 149; Signal Oil and Gas Co. v. Federal Power Commission, 3 Cir., 238 F.2d 771, cert. denied, 353 U.S. 923, 77 S.Ct. 681, 1 L.Ed.2d 720; Public Service Commission of New York v. Federal Power Commission, 109 U.S.App.D.C. 292, 287 F.2d 146, cert. denied, 365 U.S. 880, 81 S.Ct. 1031, 6 L.Ed.2d 192. The same rule is applicable with respect to a price adjustment clause and other contract provisions in the issuance of a temporary certificate. Sohio Petroleum Company v. Federal Power Commission, 10 Cir., 298 F.2d 465; Sunray Mid-Continent Oil Co. v. Federal Power Commission, 10 Cir., 270 F.2d 404; Hunt v. Federal Power Commission, 5 Cir., 306 F.2d 334; American Liberty Oil Co. v. Federal Power Commission, 5 Cir., 301 F.2d 15; J. M. Huber Corporation v. Federal Power Commission, 3 Cir., 294 F.2d 568.

The Commission's authority and power to attach conditions to the issuance of a certificate is found in Section 7(e), 15 U.S.C. § 717f(e), which provides, in pertinent part, as follows:

"* * * The Commission shall have the power to attach to the issuance of the certificate and to the exercise of the rights granted thereunder such reasonable terms and conditions as the public convenience and necessity may require."

And, it is in accordance with the purpose of the Natural Gas Act to "underwrite just and reasonable rates to the consumers of natural gas" an...