Shell Oil Company v. Federal Power Commission

• Citation: 491 F.2d 82
• Decision Date: 15 April 1974
• Docket Number: 73-1763,73-2028.,No. 73-1329,73-1329
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)
• Parties: SHELL OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. CITIES SERVICE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

491 F.2d 82 (1974)

SHELL OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

CITIES SERVICE OIL COMPANY, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.

Nos. 73-1329, 73-1763, 73-2028.

United States Court of Appeals, Fifth Circuit.

March 14, 1974.

Rehearing Denied April 15, 1974.

Sam H. Riggs, Jr., Clark A. Halderson, Tulsa, Okl., for petitioner in 73-1763.

Leo E. Forquer, Gen. Counsel, Federal Power Commission, George W. McHenry, Jr., Acting Sol., Michael J. Manning, Atty., John R. Staffier, FPC, Washington, D. C., for Federal Power Commission.

Homer D. Johnson, William C. Charlton, Pampa, Tex., for intervenors (for petitioner) in 73-1763.

John E. Holtzinger, Jr., Frederick Moring, Washington, D. C., for Associated Gas Distributors.

Richard F. Generelly, Washington, D. C., John T. McMahon, Houston, Tex., for Ashland Oil Co.

Carroll L. Gilliam, Philip R. Ehrenkranz, Washington, D. C., for Mobil.

Robert D. Haworth, Houston, Tex., for Mobil Oil Corp. in 73-1763.

Thomas G. Johnson, Dan A. Bruce, William G. Riddoch, Houston, Tex., E. M. Sutter, New Orleans, La., for petitioner in 73-1329.

Robert D. Haworth, James T. Nesbitt, Houston, Tex., for Mobil Oil Corp., in 73-1329.

David G. Stevenson, Tulsa, Okl., for Amerada Hess Corp.

Ronald J. Jacobs, Tulsa, Okl., for Skelly Oil Co.

Kenneth Heady, John L. Williford, Bartlesville, Okl., for Phillips Petroleum Co.

T. C. McCorkle, Chicago, Ill., for Amoco Prod. Co.

Edward J. Kremer, Jr., William J. Bonner, Dallas, Tex., for Atlantic Richfield Co.

J. Donald Annett, Washington, D. C., Kirk W. Weinert, John M. Young, C. Fielding Early, Jr., Houston, Tex., for Texaco, Inc.

Richard A. Solomon, Washington, D. C., for petitioner in 73-2028.

E. W. Cole, Washington, D. C., for Union Oil Co. of California.

Martin L. Friedman, Washington, D. C., for Phillips Petroleum Co.

Thomas G. Johnson, Houston, Tex., for Shell Oil Co. Robert D. Haworth, Tom P. Hamill, Houston, Tex., for Mobil Oil Corp. in 73-2028.

Before GEWIN, THORNBERRY and COLEMAN, Circuit Judges.

THORNBERRY, Circuit Judge:

In 1954 the Federal Power Commission began its search for a solution to the baffling puzzle of producer regulation.¹ In 1965 it settled on area ratemaking and contract vintaging.² But after ten years gas demand continues to outstrip supply, and the producer regulation problem remains unsolved. This case marks the beginning of a new phase in the continuing effort to hit upon a ratemaking technique that will bring the gas supply in line with consumer demand.

This petition for review comes to us in a most unusual posture. All the parties, including FPC, agree that the rates set in the Appalachian and Illinois Basin Area³ (AIBA) were satisfactory for only slightly more than a year and now are obsolete. But the parties' harmony ends there, and the pricing problem's solution is hotly disputed. The petitioners have suggested a new area rate proceeding and a third "vintage" of gas prices. To their dismay and disbelief, in Opinion 639⁴ FPC not only rejected their suggestions but went on virtually to abandon the concepts of area pricing and contract vintaging.⁵ We affirm the Commission's decision.

I.

This case is the product of gas company dissatisfaction with FPC's Order No. 411,⁶ which set area rates for gas produced in AIBA. The order was issued October 2, 1970, and never appealed. Less than sixteen months later, however, Iroquois Gas Corporation, Pennsylvania Gas Company, United Natural Gas Company, and Columbia Gas Transmission Corporation formally complained that Order 411's rates were too low. Their petition requested FPC to amend its regulations⁷ by establishing a third, higher priced vintage for AIBA gas sold after February 1, 1972.

The Commission considered this petition in an informal rulemaking proceeding that commenced with a notice issued June 19, 1972. Thirty-two parties responded to the notice with their written views of the rate revision request. On December 12, 1972, FPC in Opinion 639 denied the petitioners' request. That opinion is the subject of the instant appeal by the New York Public Service Commission (NYPSC) and a group of producers (collectively referred to as "Shell"), who were intervenors below.

On appeal petitioners attack two aspects of Opinion 639. Their first complaint is that FPC abused its discretion by recognizing the present area rates' inadequacy and refusing to amend them upward. The second objection is that FPC acted illegally and irrationally when it interpreted its prior rate orders' vintaging provisions in a manner that will phase out gas pricing by contract vintage.

II.

We consider first FPC's refusal to amend area rates. At the outset we note that petitioners agree with FPC's fact findings. After measuring the effectiveness of curren area rates in AIBA the Commission found:

On the basis of each of the general areas discussed above — national supply, area drilling and production activity, intrastate competition for new gas, the need for deep exploration, comparative costs, and changes in cost of service — we are persuaded that the rate structure provided in Order 411 is not a complete answer to the need of the consuming public for adequate and reliable supplies of new gas.

Thus FPC found that Order 411's rates are too low to ensure adequate gas supplies — but declined to make an areawide change.

The producer petitioners argue that FPC has drawn an illogical conclusion from its correct fact findings. In their view, if the area rates are inadequate, the logical remedy is to raise them. To do otherwise is to leave in effect unjust and unreasonable rates, and that constitutes an abuse of discretion. The petitioners recognize that the Supreme Court has granted FPC a liberal standard of review in area rate cases, but they argue that Opinion 639 is unjust and unreasonable in its consequences because it leaves in effect inadequate rates.

Because the impact of this aspect of Opinion 639 is to leave standing the area rate structure created by Order 411, we will examine it with the standard of review appropriate for rate orders. The Supreme Court has said that rate orders are to be approved unless their total effect can be called "unjust and unreasonable." We are concerned with the rates' consequences, not the method by which they are formulated. The Commission is not bound to a single ratemaking method or formula, and it is at liberty to make pragmatic adjustments in its methods. Its rate orders are the products of expert judgment and as such are presumed valid unless a petitioner can show the consequences will be unjust and unreasonable. In re Permian Basin Area Rate Cases, 1968, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312; FPC v. Hope Natural Gas Co., 1944, 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333.⁸ See Austral Oil Co. v. FPC, 5th Cir. 1970, 428 F.2d 407, cert. denied, 400 U.S. 950, 91 S.Ct. 244, 27 L.Ed.2d 257 (SoLa I).

The next step is to review the Commission's position in light of the "unjust and unreasonable consequences" standard. Applying that standard to Opinion 639 convinces us that it does not leave the producers in such a hopeless situation that it will have unjust and unreasonable consequences. While it rejects area rate revision, it provides two alternative routes for seeking higher rates. We cannot say that foreclosing one route to higher rates is necessarily unjust or unreasonable.

For gas produced from wells commenced after April 6, 1972, producers may seek rates above the area ceiling via the optional certification procedure provided in Order No. 455, 18 C.F.R. § 2.75. The Commission has set out eight tests to determine whether an Order No. 455 rate request meets the statutory standard of "just and reasonable":

(1) the contract rate in relation to other intrastate and interstate contract rates in that area, (2) the costs developed in recent area rate decisions, (3) increased costs since the close of hearing records, of which this Commission can take official notice, (4) the price of alternate fuels, (5) the supply-price-demand relationship, (6) capital formulation within the producing industry, (7) the consequences of our order upon the producing industry and (8) whether the order provides appropriate protection to the relevant present and future public interests.

Order Denying Application for Rehearing in Opinion 639, ___ F.P.C. ___ Feb. 8, 1973.

Order No. 455 optional certification provides an avenue of relief for "new gas" producers who are willing to go outside the area rate structure. Opinion 639's second escape route, the departure from contract vintaging, is designed to give rate relief to producers desiring to stay within the area rate structure. It makes their "old" gas eligible for the higher current area rates by narrowly interpreting the contract vintaging provisions in existing area rate orders. When current production contracts expire, producers may contract with their customers to sell flowing gas at the higher current area rate for "new" gas.

Shell finds these relief opportunities inadequate and argues that FPC abused its discretion by refusing to raise area rates across the board. It maintains that Opinion 639 forces each producer individually to seek relief before the Commission, a return to the old case-by case-ratemaking approach that area regulation was intended to replace. With area rate revision unavailable, the "optional" procedure becomes mandatory in Shell's view, and the Commission will be hopelessly flooded with Order 455 rate requests. Shell believes that an individualized approach to ratemaking is unworkable, and the ultimate effect of the inevitable administrative nightmare will be to discourage new production.

Mindful of FPC's wide latitude in choosing a method of regulation, In re Permian Basin Area Rate Cases, supra, we cannot say it abused its authority in...