Pan American Petroleum Corp. v. FEDERAL POWER COM'N

• Decision Date: 22 May 1967
• Docket Number: 7962,8119,8118,No. 7912,8121-8125.,8116,8115,7912
• Citation: 376 F.2d 161
• Parties: PAN AMERICAN PETROLEUM CORPORATION, E. Cockrell, Jr., Continental Oil Company, Freeport Sulphur Company, General American Oil Company of Texas, J. Ray McDermott & Co., Inc., Placid Oil Company et al., Shell Oil Company, the Superior Oil Company, and U. S. Oil of Louisiana, Inc., Petitioners, v. FEDERAL POWER COMMISSION, Respondent. Long Island Lighting Company, Philadelphia Electric Company, Philadelphia Gas Works Division of the United Gas Improvement Company, Public Service Commission of the State of New York, Intervenors.
• Court: U.S. Court of Appeals — Tenth Circuit

376 F.2d 161 (1967)

PAN AMERICAN PETROLEUM CORPORATION, E. Cockrell, Jr., Continental Oil Company, Freeport Sulphur Company, General American Oil Company of Texas, J. Ray McDermott & Co., Inc., Placid Oil Company et al., Shell Oil Company, the Superior Oil Company, and U. S. Oil of Louisiana, Inc., Petitioners, v. FEDERAL POWER COMMISSION, Respondent Long Island Lighting Company, Philadelphia Electric Company, Philadelphia Gas Works Division of the United Gas Improvement Company, Public Service Commission of the State of New York, Intervenors.

Nos. 7912, 7962, 8115, 8116, 8118, 8119, 8121-8125.

United States Court of Appeals Tenth Circuit.

March 9, 1967.

Rehearing Denied May 22, 1967.

COPYRIGHT MATERIAL OMITTED

Harold H. Young, Jr., Tulsa, Okl., for petitioner in Nos. 7912 and 7962, Neal Powers, Jr., Houston, Tex., for petitioners in Nos. 8115, 8118 and 8125, Joseph C. Johnson, Houston, Tex., for petitioner in No. 8116, Cecil E. Munn, Fort Worth, Tex., for petitioner in No. 8119, Paul W. Hicks, Dallas, Tex., for petitioners in No. 8122, Oliver L. Stone, New York City, for petitioner in No. 8123, and Herbert W. Varner, Houston, Tex., for petitioner in No. 8124. With them on the briefs were:

J. P. Hammond, Tulsa, Okl., William P. Hardeman, New Orleans, La., Carroll L. Gilliam, Philip R. Ehrenkranz, and Grove, Jaskiewicz, Gilliam & Putbrese, Washington, D. C., for Pan American Petroleum Corporation, petitioner in Nos. 7912 and 7962.

Cecil N. Cook and Butler, Binion, Rice, Cook & Knapp, Houston, Tex., for E. Cockrell, Jr., Houston, Tex., petitioner in No. 8115, Freeport Sulphur Company, petitioner in No. 8118, and U. S. Oil of Louisiana Inc., petitioner in No. 8125.

Bruce R. Merrill and Thomas H. Burton, Jr., Houston, Tex., for Continental Oil Company, petitioner in No. 8116.

W. P. Barnes, Jere G. Hayes, Dallas, Tex., and Cantey, Hanger, Gooch, Cravens & Scarborough, Fort Worth, Tex., for General American Oil Company of Texas, petitioner in No. 8119.

H. H. Hillyer, Jr., and H. H. Hillyer, III, New Orleans, La., for J. Ray McDermott, Inc., petitioner in No. 8121.

Robert W. Henderson, Dallas, Tex., for Placid Oil Company, Margaret Hunt Hill, Trustee for Hassie Hunt Trust, H. L. Hunt and Hunt Oil Company, petitioners in No. 8122.

Thomas G. Johnson, New York City, for Shell Oil Company, petitioner in No. 8123.

Murray Christian, Houston, Tex., for The Superior Oil Company, petitioner in No. 8124.

Howard E. Wahrenbrock, Washington, D. C., for the respondent. With him on the brief were Richard A. Solomon, General Counsel, Cyril S. Wofsy, Attorney, and Joel Yohalem, Atty., F.P.C.

Before LEWIS, BREITENSTEIN and HILL, Circuit Judges.

DAVID T. LEWIS, Circuit Judge.

These petitions by independent natural gas producers seek review under section 19(b) of the Natural Gas Act¹ of orders entered by the Federal Power Commission establishing an "in-line" price and other conditions for permanent certificates of public convenience and necessity issued under section 7 of the Act and covering sales of gas in interstate commerce from producing areas in South Louisiana and the adjacent federal domain offshore.² Proceedings before the Commission encompassed some 362 separate certificate applications, two-thirds of which were settled and severed before the conclusion of hearings, for a wide variety of gas-sales contracts executed between 1945 and 1963.³ By its orders the Commission set the "in-line" price, or maximum initial price, at 18.5 cents per Mcf, with an additional 1.5 cents per Mcf for tax reimbursement where the gas is produced within the taxing jurisdiction of Louisiana. Refunds were required, with interest, for amounts in excess of the in-line price previously collected under temporary certificates that contained express provisions for potential refund liability. All permanent certificates that issued were made subject to a moratorium on increased-rate filings above 23.55 cents per Mcf, including tax reimbursement, pending completion of the South Louisiana area rate proceeding or July 1, 1967, whichever is earlier. Finally, for those producers whose temporary certificates contained no refund conditions, the Commission reserved for further consideration the question of whether they would in fact be required to make refunds.

The petitions are before this court by virtue of the fact that Pan American Petroleum Corporation, petitioner in Nos. 7912 and 7962, has its principal place of business within the territorial bounds of this circuit and was the first producer to file for review. The other petitioners are transfers from other circuits. 28 U.S.C. § 2112(a). The four intervenors are parties of record, but upon their election not to file briefs we denied their requests to present oral arguments.

At the hearings below, several producers offered economic and geological evidence which purported to reflect an increase in production costs from those that had prevailed during prior South Louisiana certificate proceedings. The examiner rejected this evidence, the Commission sustained the examiner, and some of the petitioners here have filed motions to adduce. Action on the motions was deferred until completion of arguments on the merits of the orders. We have since held in Sunray DX Oil Co. v. FPC, 10 Cir., 370 F.2d 181, Dec. 9, 1966,⁴ that the standards of public convenience and necessity to be applied by the Commission in section 7 proceedings do not compel admission of such evidence. And while circumstances surrounding certificate applications may on occasion dictate consideration of cost factors, these are matters subject in the first instance to Commission expertise and discretion. United Gas Improvement Co. v. Callery Properties, Inc., 382 U.S. 223, 227, 86 S.Ct. 360, 15 L.Ed.2d 284. Here, as will be discussed, the Commission's orders are based partially upon comparisons between current prices and in-line prices previously established. Concededly, current economic and geological cost evidence could have a substantial effect upon final disposition of the applications. But for purposes of section 7, there is nothing in the record to suggest an abuse of Commission discretion in the rejection of such evidence, and accordingly, the motions to adduce will be denied. We turn then to the substantive content of the orders and the producers' various objections thereto.

THE IN-LINE PRICE

The origin of the in-line price concept is the landmark CATCO decision, Atlantic Ref. Co. v. Public Service Comm'n of New York, 360 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312, where the Supreme Court admonished the Commission to hold the line on natural gas prices pending determination of just and reasonable rates. Since CATCO, numerous court opinions have attempted to articulate and refine the evidentiary standards and methodology for in-line pricing. See, e. g., United Gas Improvement Co. v. Callery Properties, Inc., 382 U.S. 223, 86 S.Ct. 360, 15 L.Ed.2d 284; Sunray DX Oil Co. v. FPC, 10 Cir., 370 F.2d 181, Dec. 9, 1966; California Oil Co., Western Div. v. FPC, 10 Cir., 315 F.2d 652; Public Service Comm'n of New York v. FPC, 117 U.S.App.D.C. 287, 329 F.2d 242, cert. denied sub nom. Prado Oil & Gas Co. v. FPC, 377 U.S. 963, 84 S.Ct. 1646, 12 L.Ed.2d 735; United Gas Improvement Co. v. FPC, 9 Cir., 283 F.2d 817, cert. denied sub nom. Superior Oil Co. v. United Gas Improvement Co., 365 U.S. 879, 81 S.Ct. 1030, 6 L.Ed.2d 191. From these and other authorities, two principles have emerged which more than once have presented the Commission with delicate problems of reconciliation. The first is that the price line must reflect current conditions in the industry and the prices on which the line is based must be those under which substantial quantities of gas presently move in interstate commerce. The second is that the Commission must be suspect of all current prices that are under review in pending court or Commission proceedings or that were arrived at by methods which subsequently have been disapproved in unrelated proceedings.

It was almost impossible for the Commission to adhere fully to both of these principles in the instant proceedings. Because of the substantial number of temporary certificates involved and the recent history of South Louisiana in-line price litigation, the majority of interstate gas volume from the area was moving under suspect prices. In a sense, current conditions in South Louisiana had to be treated as suspect. Under the circumstances, therefore, the Commission looked to the 18.5-cent price line (exclusive of tax reimbursement) that had been established in three previous South Louisiana cases,⁵ and adopted the view that, absent sufficient evidence showing the contrary, the old line would be presumed to have continued. All of the three previous decisions involved sales under contracts executed in the period 1956-1959. Absent the severed dockets, the instant case involves sales under contracts executed in the period 1957-1963.

One of the important factors that the Commission had to consider was whether the amendments to its Statement of General Policy No. 61-1, 24 F.P.C. 818, might have caused a general increase in permanently certificated prices for the South Louisiana area. The Statement established twenty-three geographic rate areas and proposed guideline prices for each area. When originally issued in September 1960, it did not set guidelines for South Louisiana because of pending litigation. On October 25, 1960, however, the Commission issued its First Amendment to the Statement, 24 F.P.C. 902, which fixed the South Louisiana guideline price at 21.5 cents per Mcf exclusive of tax reimbursement. Then on October 31, 1961, the Commission issued its Fourth Amendment to the Statement, 26 F.P.C. 661, which lowered the South Louisiana guideline price to 21.25 cents per Mcf, including tax reimbursement, and set a guideline of 19.5 cents per Mcf for gas produced in the adjacent federal domain offshore. In light of ...