United Gas Improvement Company v. Continental Oil Company Federal Power Commission v. Marr

Decision Date01 June 1965
Docket Number693,Nos. 644,s. 644
Citation14 L.Ed.2d 466,381 U.S. 392,85 S.Ct. 1517
PartiesThe UNITED GAS IMPROVEMENT COMPANY, Petitioner, v. CONTINENTAL OIL COMPANY et al. FEDERAL POWER COMMISSION, Petitioner, v. M. H. MARR et al
CourtU.S. Supreme Court

[Syllabus from pages 392-394 intentionally omitted] Sol. Gen. Archibald Cox and William T. Coleman, Jr., Philadelphia, Pa., for petitioners.

David T. Searls, Houston, Tex., for respondents.

Mr. Justice HARLAN delivered the opinion of the Court.

In Phillips Petroleum Co. v. State of Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035, the Court held that Federal Power Commission jurisdiction under the Natural Gas Act, as amended, 52 Stat. 821, 15 U.S.C. § 717 et seq. (1964 ed.), extended to what are described colloquially and perhaps somewhat loosely as 'wellhead' sales of natural gas by producers to inter- state pipeline companies for resale in interstate commerce. The issue in the present cases is whether sales to an interstate pipeline company of leases covering proven and substantially developed reserves of gas to be sold in interstate commerce are also subject to Commission jurisdiction. We hold that they are.

I.

In 1957, Texas Eastern, a natural gas company which owns and operates an interstate transmission system extending from Texas to the Philadelphia-Newark area, executed gas purchase contracts with Continental Oil Company, M. H. Marr, Sun Oil Company, and General Crude Oil Company, to purchase their natural gas production in Rayne Field, Louisiana, at an initial price of 23.9¢ per Mcf. 1 The producers applied to the Commission for certificates of public convenience and necessity authorizing them to sell their gas to Texas Eastern. Texas Eastern applied for a certificate permitting it to build new pipeline facilities to connect its system to Rayne Field. After a hearing, and in spite of objections by several intervenors to the 23.9¢ price, the examiner issued a decision recommending a grant of the requested certificates. However, before the Commission acted on the examiner's decision, the Court of Appeals for the Third Circuit handed down its decision in Public Serv. Comm. of State of New York v. FPC, 257 F.2d 7172 (the 'Catco' case), reversing an order of the Commission granting unconditional certificates for sales of natural gas on the ground that the certificate applicants had the burden of showing that the proposed sale price of 22.4¢ was justified by public convenience and necessity, and that the burden had not been sustained. Thereafter the producers in the present case requested the Commission to permit withdrawal of their applications for sales to Texas Eastern at 23.9¢ (1.5¢ higher than the Catco price) and canceled the sales contracts. The parties then agreed on a different method for achieving their objectives.

Under the new plan formulated by the parties, Texas Eastern, instead of making conventional wellhead purchases of natural gas, proposed to buy the producers' leasehold interests in the Rayne Field lands in which the natural gas was located. The provisions of the lease-sale agreements were such that they were very close in economic effect to conventional sales of natural gas. The gas reserves in Rayne Field were proven, and the field substantially developed. 3 Texas Eastern was still to build the connecting facilities to the field which had been called for under the original plan, and the same volumes of gas were to flow into its system. The lease-sales were to cover no minerals except natural gas and condensate, all other mineral rights being reserved to the lease-sellers, and by a management agreement Continental Oil, one of the sellers, was to continue to do the bulk of production work.4 Payments on the purchase price could be accelerated if gas production exceeded a specified amount, and the leases were purchased through an intermediate corporation so that Texas Eastern's liability would be substantially limited if production from the field fell below expectations.5 Completion of the transfers was conditioned upon issuance of the necessary certificates by the Commission.

The Commission granted Texas Eastern's request to reopen the proceedings in order to consider the lease-sale plan, and issued an unconditional certificate to Texas Eastern permitting it to build the pipeline facilities necessary to connect with Rayne Field. In issuing the certificate the Commission overruled objections made by the New York Public Service Commission that the prices paid for the leases were not justified, and noted that 'Texas Eastern has not filed an application for a certificate authorizing the acquisition of the Rayne Field leases and we have no authority to issue such a certificate.' 21 F.P.C. 860, 864.

Soon thereafter the lease-sale transactions were completed and Texas Eastern began to receive gas from Rayne Field for interstate distribution. However, on review of the Commission's action the Court of Appeals for the District of Columbia Circuit set aside the certificate order because the language and tenor of the Commission's opinion appeared to approve the prices paid for the leases under the acquisition agreement. Public Serv. Comm. of State of New York v. FPC, 109 U.S.App.D.C. 289, 287 F.2d 143. The court thought it of 'no importance here that the transactions by which Texas Eastern proposes to acquire the gas will themselves be, by virtue of a change in form, beyond the regulatory control of the Commission,' id., at 292, 287 F.2d, at 146, since the Commission could regulate Texas Eastern through its certification authority over the connecting facilities regardless of its jurisdiction over the lease-sale transactions themselves. The Court therefore remanded, stating that:

'Two courses are open to the Commission. It may, by clarification of the order presently under review, expressly disclaim any approval of the price to be paid for natural gas by the applicant. * * * Or it may reopen the record in the certificate proceeding to permit Texas Eastern to establish by adequate evidence that the acquisition costs which it proposes to incur will be consistent with the public convenience and necessity.' Ibid.

The Commission chose to reopen the proceedings. After hearings before an examiner, it decided that the question of its jurisdiction over the lease-sales themselves, as opposed to authority over Texas Eastern's connecting facilities, was not foreclosed either by previous Commission rulings or the mandate of the Court of Appeals for the District of Columbia Circuit. On the merits, it decided that a holding that it had no jurisdiction to inquire into production costs because the transaction was cast as a sale of leases instead of a sale of natural gas 'would exalt form over substance, would give greater weight to the technicalities of contract draftsmanship than to the achievement of the purposes of the Natural Gas Act, and would impair our ability to control the price received for gas sold to the pipelines in interstate commerce to the detriment of the ultimate consumer.' 29 F.P.C. 249, 256.

After asserting jurisdiction over the lease-sales, the Commission concluded that it would not be in the public interest to certificate them. Reasoning that the trans- action was not subject to effective regulation because of the difficulty of estimating the unit price paid for the gas and the impossibility of providing continuing price regulation because of the one-shot nature of the sale, it ordered that the parties be given a six-month period in which to reframe the transaction so as to rectify these alleged infirmities.

Appeal was taken, not to the Court of Appeals for the District of Columbia Circuit, but to the Fifth Circuit pursuant to the alternative routes of appeal provided by § 19(b) of the Act.6 That court reversed. It interpreted this Court's decision in FPC v. Panhandle Eastern Pipe Line Co., 337 U.S. 498, 69 S.Ct. 1251, 93 L.Ed. 1499, as holding that leases such as those here involved 'relate to the production or gathering of natural gas and are thus outside Commission jurisdiction * * *.' 336 F.2d 320, 325. Under this view, it was unnecessary for the court to decide whether the earlier decision of the Court of Appeals for the District of Columbia Circuit had established 'the law of the case' on the jurisdictional question. We granted certiorari, 379 U.S. 958, 85 S.Ct. 664, 13 L.Ed.2d 554, because of the importance of the issue to the proper administration of the Natural Gas Act. It should be noted that no questions are before us relating to the propriety of the Commission's disposition of the case following its assertion of jurisdiction. It is only the jurisdictional question which we must answer. We reverse.

II.

Section 1(b) of the Natural Gas Act provides that '(t)he provisions of this Act shall apply * * * to the sale in interstate commerce of natural gas for resale * * * but shall not apply * * * to the production or gathering of natural gas.' 52 Stat. 821, 15 U.S.C. § 717(b) (1964 ed.).

Without impugning in any way the good faith and genuineness of the transactions, we think it clear that the lease-sales here in question can nonetheless be considered 'sales' of natural gas in interstate commerce for purposes of the Act. A regulatory statute such as the Natural Gas Act would be hamstrung if it were tied down to technical concepts of local law.7 The Court recognized as much in National Labor Relations Board v. Hearst Publications, Inc., 322 U.S. 111, 64 S.Ct. 851, 88 L.Ed. 1170, when it held that 'employee' as used in the National Labor Relations Act was to be defined by reference 'to the purpose of the Act and the facts involved in the economic relationship' (id., at 129, 64 S.Ct., at 860) rather than exclusively by reference to common law standards or local law. Gray v. Powell, 314 U.S. 402, 62 S.Ct. 326, 86 L.Ed. 301, decided under the Bituminous Coal Act of 1937, is also closely analogous to this phase of the cases at bar....

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