Cities Service Gas Company v. Federal Power Commission

• Decision Date: 23 January 1970
• Docket Number: No. 151-68.,151-68.
• Citation: 424 F.2d 411
• Parties: CITIES SERVICE GAS COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Continental Oil Company, City Group Gas Defense Association, City of Springfield, Missouri, and the Board of Public Utilities of Springfield, Missouri, Intervenors.
• Court: U.S. Court of Appeals — Tenth Circuit

424 F.2d 411 (1969)

CITIES SERVICE GAS COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent Continental Oil Company, City Group Gas Defense Association, City of Springfield, Missouri, and the Board of Public Utilities of Springfield, Missouri, Intervenors.

No. 151-68.

United States Court of Appeals Tenth Circuit.

October 16, 1969.

Rehearing Denied January 23, 1970.

COPYRIGHT MATERIAL OMITTED

Charles V. Wheeler, Oklahoma City, Okl., and Dale A. Wright, Washington, D. C. (Harry S. Littman, Washington, D. C., Jack W. Wertz, and Conrad C. Mount, Oklahoma, Okl., were with them on the brief), for petitioner.

Richard A. Solomon, Washington, D. C. (Peter H. Schiff, Abraham R. Spalter, and William H. Arkin, Washington, D. C., were with him on the brief), for respondent.

Tom Burton, Houston, Tex., for intervenor Continental Oil Co.

Alfred J. Tighe, Jr., Washington, D. C. (John F. Carr, Springfield, Mo., and Charles S. Rhyne, Washington, D. C., were with him on the brief), for intervenors City Group Gas Defense Ass'n, City of Springfield, Mo., and the Bd. of Public Utilities of Springfield, Mo.

Before MURRAH, Chief Judge, and TUTTLE^* and BREITENSTEIN, Circuit Judges.

BREITENSTEIN, Circuit Judge.

Petitioner Cities Service Gas Company seeks a review of the Federal Power Commission's Opinion No. 542 and accompanying orders. See 39 FPC 1034. The effect of that order is to reduce the jurisdictional rates of Gas Company by a disallowance of a portion of the gas costs and to require a refund of excess collections made since April 23, 1964.

The situation is that an interstate pipeline owned certain gas producing properties which it spun off to an affiliate. Through a series of corporate transactions the stock of the affiliate was transferred to the parent company of the pipeline and sold by the parent to an unaffiliated company. The basic question is whether, in arriving at the rates to be charged by pipeline to its customers, the gas shall be priced on the basis of pipeline's cost of service or on the basis of the price fixed by the contract between pipeline and the unaffiliated producer. By a three to two decision, the FPC overruled the Examiner and held that cost of service controlled. Subsidiary questions go to the determination of the cost of service.

Gas Company operates an interstate pipeline which the Natural Gas Act, 15 U.S.C. § 717 et seq., places under FPC jurisdiction. For about 40 years it has supplied gas to consumers and industrial customers in Kansas, Oklahoma, Nebraska, and Missouri. In 1943, the FPC determined its rates on a cost-of-service basis, 3 FPC 459, and its action was upheld in Cities Service Gas Company v. Federal Power Commission, 10 Cir., 155 F.2d 694, cert. denied 329 U.S. 773, 67 S.Ct. 191, 91 L.Ed. 664. Prior thereto Gas Company had acquired leases covering a substantial acreage in the Texas Panhandle Field in Texas and in the Oklahoma-Hugoton Field in Oklahoma. On that acreage there are about 300 producing wells from which gas is transmitted interstate.

In April, 1953, Gas Company transferred the producing properties at their net book cost to Cities Service Gas Producing Company. The purpose of the transfer was to facilitate compliance with an order of the Oklahoma Corporation Commission. Cities Service Producing was a wholly owned subsidiary of Gas Company. Gas Company contracted with its affiliate to take production at 6.7961¢ per Mcf for gas from the Texas field and at 9.8262¢ per Mcf for Oklahoma gas. The contract provided for an upward revision to reflect the prevailing field price at the wellhead. In December, 1953, the price of the Texas gas was increased to 7.1863¢.

In March, 1962, Gas Company transferred all the stock of Cities Service Producing to Empire Gas and Fuel Company as a stock dividend. At that time Empire owned all the common stock of Gas Company. In July, 1962, Empire was merged with Cities Service Company, the parent company in the Cities Service system. The Examiner found that the transfer to Empire and the merger of Empire and Cities Service Company were steps in an overall plan of corporate reorganization and simplification.

On May 8, 1963, the parent company sold all of the stock of Cities Service Producing to Continental Oil Company, which is not affiliated with the Cities Service system. The sale price of $24,250,000 was found by the Examiner to be the fair value of the stock. Cities Service had a capital gain of about $21,450,000 from the transaction. Continental changed the name of the company to Continental Gas Producing Company. The FPC authorized the change in name of the holder of the pertinent certificate. On April 30, 1965, Continental Producing was dissolved and all of its assets transferred to Continental Oil. The Examiner found that this transaction was "for the purpose of reducing unnecessary costs and achieving tax benefits." Continental then applied to FPC for a certificate recognizing the change in ownership of the producing properties.

After the 1954 decision in Phillips Petroleum Company v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 Cities Service Producing applied for, and the FPC issued, a grandfather certificate authorizing the rates of 7.1863¢ and 9.8262¢ per Mcf for gas respectively produced in the Texas and Oklahoma fields in question. See Cities Service Gas Producing Company v. Federal Power Commission, 10 Cir., 233 F.2d 726, cert. denied 352 U.S. 911, 77 S.Ct. 149, 1 L.Ed.2d 118. In 1955, Cities Service Producing filed schedules increasing its rates for sales to Gas Company to 8.8129¢ and 10.1480¢ per Mcf for gas from the respective fields. The FPC consolidated these proceedings with increased rate filings made by the Gas Company. The proceedings were terminated by an FPC approved settlement. The filed rates were allowed to remain in effect but the parties agreed that the termination of the proceedings was not a determination of the reasonableness of the rates of Cities Service Producing.¹

On two subsequent settlements of Gas Company's rate cases, the allowances for gas from Cities Service Producing were on the basis of 4/100 of a cent less than the latter's filed rate in the first case and of 2/100 of a cent less in the second case. These allowances were made because the municipal interests, intervenors therein and herein, were unwilling to recognize the Cities Service Producing filed rates in the determination of Gas Company's cost of service. In its order approving the settlement in Docket No. RP64-9, the FPC said, 33 FPC 1292, 1294:

"The issues relating to the allowance in Cities Service\'s cost of service for gas purchased from Continental Gas Producing Company (formerly Cities Service Gas Producing Company) are reserved in accordance with Article X of the settlement and subject to notice as provided in Section (3) of that Article."

Thereafter, on the motion of the municipal intervenors the FPC consolidated the Continental certificate proceeding, Docket No. G-2737, with the Gas Company rate proceeding, Docket No. RP64-9. After an evidentiary hearing, the Examiner found that "if cost of service of gas from the Producing Properties is the measure of the allowance to Pipeline Gas Company for such gas," the cost of service is 3.38¢ per Mcf and that this required a reduction in Gas Company's jurisdictional sales of 1.0¢ per Mcf. In reaching this figure the Examiner allowed a cost reduction of $1,042,368 in Gas Company's overall cost of service because of the depletion allowance claimed by Continental Producing on its tax returns.

The Examiner did not allow the cost-of-service rate. Instead he approved the contract rate saying that the FPC was aware of the potentiality of the alienation of producing properties and "had neither announced nor even intimated the existence of regulatory prohibitions" and that Gas Company is "entitled to fair and timely notice of new or changed Commission policy and standards imposing new or changed obligations and duties."

On the certificate application of Continental, the Examiner held that Continental was a bona fide transferee for value and successor to the interest of its former subsidiary. He recommended the grant of the certificate on condition that it was without prejudice to "future proceedings or objection relating to the operation of any price or related provisions in the gas * * * contracts."

On review, the FPC adjusted the cost of service on a unit basis to 3.47¢ per Mcf by taking into account royalties which the Examiner deemed inconsequential. By a three to two vote the FPC reversed the Examiner's holding that the contract price governed and held that cost of service controlled. It said that "as of the time of the sale Cities was, or should have been, aware of the great likelihood that in any contested rate case gas `purchased' from an affiliated company would be priced on a cost-of-service basis." The FPC ordered refunds of excess collections made since April 23, 1964. It upheld the Examiner on the grant of the certificate requested by Continental.

Commissioner Carver dissented. In his opinion the FPC decision was improper prospective rule making; failed to treat consistently the transferor Cities Service and the transferee Continental; and produced an "excessively onerous and harsh end result." He pointed out the pendency of the "Pipeline Production Area Rate Proceeding," 35 FPC 497, and said that the decision of the FPC left "little room for intellectual maneuver" in that case. He specifically stated that "it cannot be found that the transferor wilfully acted contrary to prescribed standards of regulated conduct."

Commissioner O'Connor disagreed with the action of the majority because the consumers had not borne the risk of development of the gas reserves and should not receive the benefit of a straight cost-of-service treatment. He concluded that it is inequitable to apply either (1) straight cost-of-service treatment, or (2)...