Phillips Petroleum Co. v. Federal Power Com'n

• Decision Date: 20 February 1973
• Docket Number: 71-1739,No. 71-1659,72-1134 and 72-1167.,71-1659
• Citation: 475 F.2d 842
• Parties: PHILLIPS PETROLEUM COMPANY, a Delaware corporation, et al., Petitioners, v. FEDERAL POWER COMMISSION, Respondent, The State of New Mexico, Intervenors.
• Court: U.S. Court of Appeals — Tenth Circuit

475 F.2d 842 (1973)

PHILLIPS PETROLEUM COMPANY, a Delaware corporation, et al., Petitioners, v.FEDERAL POWER COMMISSION, RespondentThe State of New Mexico, Intervenors.

Nos. 71-1659, 71-1739, 72-1134 and 72-1167.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted July 12, 1972.

Decided February 20, 1973.

Rehearing Denied April 10, 1973.

Edwin S. Nail, Tulsa, Okl., and Kirk W. Weinert, Houston, Tex. (Kenneth Heady and John L. Williford, Bartlesville, Okl., on brief for Phillips Petroleum Co.; Edwin S. Nail, Tulsa, Okl., on brief for Amerada Hess Corp.; Edward J. Kremer, Jr., Dallas, Tex., and Charles E. McGee, of McGee & Ketcham, Washington, D. C., on brief for Atlantic Richfield Co.; Lynn R. Coleman, J. Evans Attwell, and Vinson, Elkins, Searls & Smith, Houston, Tex., on brief for Belco Petroleum Corp. and High Crest Oils, Inc.; Cecil E. Munn, of Cantey, Hanger, Johnson, Scarborough & Gooch, Fort Worth, Tex., on brief for Beta Development Co.; Justin R. Wolf, Wolf & Case, Washington, D. C., on brief for Chevron Oil Co., Western Division; Thomas H. Burton, Houston, Tex., on brief for Continental Oil Co.; Warren M. Sparks and B. James McGraw, Tulsa, Okl., on brief for Gulf Oil Corp.; Martin N. Erck, Kirby Ellis and John R. Rebman, Houston, Tex., for Humble Oil & Refining Co.; William A. Sackmann, Findlay, Ohio, for Marathon Oil Co.; Ronald J. Jacobs, Tulsa, Okl., for Skelly Oil Co.; Stanley M. Morley, of Shannon & Morley, Washington, D. C., on brief for Sun Oil Co.; John E. Watson, Houston, Tex., on brief for Tenneco Oil Co.; J. Donald Annett, Washington, D. C., Kirk W. Weinert, John M. Young, C. Fielding Early, Jr., Houston, Tex., for Texaco Inc.; Douglas C. Gregg, George C. Bond, Robert L. Humphrey, Dee Hughes Richardson, Los Angeles, Cal., on brief for Union Oil Co. of California), for petitioners.

Gordon Gooch, General Counsel(Leo E. Forquer, Solicitor; J. Richard Tiano, Deputy Solicitor; Joan E. Heimbigner, Atty., Federal Power Commission, Washington, D. C., on brief), for respondent.

David L. Norvell, Atty. Gen. of New Mexico, on brief for State of New Mexico.

Joel B. Burr, Jr., and William J. Cooley, Farmington, N. M., on brief for Four Corners Gas Producers Assn Tilford Jones, Bethesda, Md., for United Distribution Co.

Donald S. Graham, of Davis, Graham & Stubbs, Denver, Colo., and G. Scott Cuming, El Paso, Tex., for El Paso Natural Gas Co.

William G. Webb, of Turner, Hitchins, McInerney, Webb & Hartnett, Dallas, Tex., for Pubco Petroleum Corp.

Norman J. Provost, K. R. Edsall, and W. H. Owens, Los Angeles, Cal., for Southern California Gas Co.

Barr McClellan, of Clark, Thomas, Harris, Denius & Winters, Austin, Tex., for Aztec Oil & Gas Co.

Thomas G. Johnson and Dan A. Bruce, Houston, Tex., for Shell Oil Co.

Before SETH, McWILLIAMS and DOYLE, Circuit Judges.

WILLIAM E. DOYLE, Circuit Judge.

The Phillips Petroleum Company, together with the several intervenors, all independent producers of natural gas in the Rocky Mountain area, seek review of an order of the Federal Power Commission promulgating a rulemaking procedure for the fixing of rates of natural gas sales in interstate commerce pursuant to the Natural Gas Act, 15 U.S.C. § 717 and, particularly, §§ 4and5 of the Act, 15 U.S.C. §§ 717cand717d, which grants the Commission the authority to establish "just and reasonable rates."

The peculiar aspect of this case is that the Commission has drastically changed the procedure from the traditional method involving trial-type adjudicatory proceedings to this rulemaking method.This is an informal hearing which is not conducted on the record and which does not afford an opportunity for cross-examination.It is used so as to enable the Commission to establish area rates without having an individual hearing on each producer.It calls for composition and reconciliation of written submissions of the various producers.The validity of this procedure is the issue which is presented to us.

I.HISTORY OF THE CONTROVERSY

The Commission's authority to regulate interstate sales of natural gas derives from the Natural Gas Act of 1938 which declares that "the business of transporting and selling natural gas for ultimate distribution to the public is affected with a public interest."15 U.S.C. § 717(a).The Commission is empowered to set aside and modify any rate or contract which it determines after hearing to be "unjust, unreasonable, unduly discriminatory or preferential."

A brief history of some of the antecedent events is necessary.In 1954the Supreme Court decided in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035(1954), that independent producers of natural gas are natural gas companies within the meaning of § 2(6) of the Act.From this time forward, the Commission has "labored with obvious difficulty to regulate a diverse and growing industry under the terms of an ill-suited statute."In re Permian Basin Area Rate Cases, 390 U.S. 747, 756, 88 S.Ct. 1344, 1354, 20 L.Ed.2d 312(1968).

Following the Phillips decision, the Commission undertook the regulation of rates of approximately 2,500 producers selling gas in interstate commerce and did so on a company-by-company basis.The result of all this was somewhat ineffectual.SeePermian Basin, supra, at 757 n. 13, 88 S.Ct. 1344.Thus in 1960 the Commission undertook to regulate producers on an area basis, whereby a uniform ceiling price applicable to all producers would be established based upon producers' actual costs, area data for the flowing gas costs and national data for new gas-well costs.SeePhillips PetroleumCo., 24 FPC 537, 540(1960), aff'd sub nom.Wisconsin v. FPC, 112 U.S.App.D.C. 369, 303 F.2d 380(1961), aff'd, 373 U.S. 294, 83 S.Ct. 1266, 10 L.Ed.2d 357(1963).The Commission spent five years with its first area rate case which involved the establishing of rates for the Permian Basin.SeePermian Basin Area Rate Proceeding, 34 FPC 159(1965).This case was reviewed by the Supreme Court and the area rate procedure was affirmed.In re Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312(1968).

As a result of the approval given in the Permian Basin case, the Commission instituted a number of other similar proceedings.¹These proceedings were lengthy and cumbersome, and as a result of this experience the Commission undoubtedly considered some of the admonitions given in the Permian Basin opinion which included: the Commission should "continue to examine both the premises of its regulatory methods and the consequences for the industry's future of its rate-making orders;"²Permian is "the first of many steps toward a more expeditious and effective system of regulation."³Based on these statements and the ruling in the Permian case, the Commission issued a notice of proposed rulemaking which called for the issuance of rules fixing just and reasonable rates for independent producers in the Appalachian and Illinois Basin Area.⁴In less than a year after its notice rates were prescribed for these areas.⁵

The next step was for the Commission to embark on a nationwide rulemaking proceeding, whereby it sought information on independent producers' costs of exploring and developing natural gas, gas supply, rate of return and general revenue requirements and prices for new gas sales.35 Fed.Reg. 11638(1970).Public hearings of record were held and arguments were heard concerning the Commission's attempt to promulgate rates through a rulemaking procedure.See36 Fed.Reg. 13585(1971).See alsoOrderNo. 435 which established some rates under § 7 of the Gas Act.This case is currently on appeal, American Public Gas Ass'n v. FPC, D.C.Cir., No. 71-1812.

This led to the issuing of notice of proposed rulemaking and order procedures for the Rocky Mountain area.36 Fed.Reg. 13621(1971).This notice provided that just and reasonable rates would be issued for gas contracts dated before October 1, 1968.It provided also for determination as to whether the rates under Order 435 were to apply to contracts dated between October 1, 1968 and June 17, 1970.Except for these specifics contained in the notice, the rulemaking proceedings in DocketNo. R-389A continued in effect.It was thus clear that informal rulemaking was being employed since the order outlined the manner in which data was to be submitted and provided that the Commission's staff would composite and reconcile such data.It named the petitioners herein together with the purchasing pipelines.It allowed other persons to become parties by filing a notice of intention to respond by August 2, 1971.

The petitioners challenged the new rulemaking procedures.These challenges were, however, unsuccessful before the Commission.Motions for rehearing and for reconsideration were made in which the present contentions as to the necessity for evidentiary hearings were made.The Commission rejected the contention that an adjudicatory hearing was required, stating that both the Natural Gas Act and the Administrative Procedure Act recognized the use of rulemaking procedures by notice to interested parties and the opportunity to submit written material.⁶

The Phillips Petroleum Company then filed its petition seeking review in this court.Amerada Hess Corporation on behalf of itself and others filed a petition for review in the Court of Appeals for the District of Columbia.This petition was transferred and consolidated with the Phillips case for the purposes of this review.

The matter submitted for review herein is "Notice Instituting Proposed Rulemaking and Order Prescribing Procedure", which document was, as previously noted, issued by the Commision on July 15, 1971 in DocketNo. R-425.This was called by the Commission a rulemaking procedure having the purpose of more quickly effectuating the Commission's task of fixing just and reasonable rates.The Commission ordered:

(1) completion by petitioners and pipelines producing

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