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05/22/58 Oklahoma Natural Gas v. Federal Power Commission

May 22, 1958




Before BAZELON, DANAHER and BASTIAN, Circuit Judges.


Date Decided: May 22, 1958.


BASTIAN, Circuit Judge.

This appeal seeks review of an opinion and order of the Federal Power Commission (Commission), Opinion No. 299 and accompanying order of December 4, 1956, 16 F.P.C. 80, 16 PUR3d 277 (1956), amendatory order of January 22, 1957, 17 F.P.C. 67, and order of January 31, 1957, 17 F.P.C. 85, in issuing certificates of public convenience and necessity pursuant to § 7(e) of the Natural Gas Act, as amended. (Acts of June 21, 1938, c. 556, 52 Stat. 824; February 7, 1942, c. 49, 56 Stat. 83; July 25, 1947, c. 333, 61 Stat. 459; 15 U.S.C.A. § 717f).

Natural Gas Pipeline Company of American (Natural), an intervenor in this proceeding, since 1931 has operated a natural gas pipeline from the Panhandle field in Texas to Joliet, Illinois, and, together with its affiliate, Texas Illinois Natural Gas Pipeline Company, supplies the entire natural gas requirements of the metropolitan Chicago area. Natural's existing pipeline, which has a capacity of 510,000 Mcf per day, is presently being operated at more than 98% load factor. The record shows that a growing and unsatisfied demand for natural gas exists in this area. Natural sought to accommodate this demand and, to accomplish this, contracted with three independent producers, Sunray Mid-Continent Oil Company, Warren Petroleum Corporation, and Oil Drilling, Inc., intervenors in this proceeding, to buy at an initial price of 13.9› per Mcf the large gas reserves of 78,000 Mcf per day which those producers had discovered in Jack and Wise Counties, Texas.

In October 1954, Natural and its proposed producer-suppliers (hereinafter referred to as Producers) made applications to the Commission for certificates of public convenience and necessity pursuant to § 7(e) of the Act. Natural's application sought permission to extend its Chicago-Texas Panhandle pipeline from Fritch, Texas, southeasterly through major gas-producing areas of southern Oklahoma to a point in Grandy County, Oklahoma, thence southerly to certain gas fields in Jack and Wise Counties in the north central part of Texas, a distance of some 350 miles. Producers' applications sought permission to sell and deliver their gas to Natural in accordance with their contracts with Natural.

Lone Star Gas Company (Lone Star), which had been the sole large buyer of gas in northern Texas, filed a rival application under § 7(c) of the Act. Under this proposal Lone Star would supply 80,000 Mcf of gas to Natural at Fritch, Texas, through a 230.5-mile pipeline which would be built from its existing line in Cotton County, Oklahoma.

Oklahoma Natural Gas Company (Petitioner) is, and has been for over fifty years, engaged in the distribution of natural gas in Oklahoma. It serves approximately 335,000 customers and uses approximately 125 billion cubic feet of natural gas annually. It now purchases, and is expected in the future to purchase, approximately 60% of its required gas supplies in southern Oklahoma at a maximum price of 10› per Mcf.

In the proceedings before the Commission, permission to intervene in each and all of the proceedings was granted by the Commission to Petitioner, Cities Service Gas Company, Upham Gas Company, Consolidated Gas Utilities Corporation, Central Illinois Electric and Gas Company, Iowa Power and Light Company, State Fuel Supply Company, and the City of Chicago, Illinois. Natural and Lone Star each were intervenors in the proceedings involving the application of the other.

The gas utility intervenors opposed the granting of certificates and, alternatively, asked that, if certificates were granted to Producers, such certificates be conditioned on Producers receiving no more than 11› per Mcf of gas, which was alleged to be the prevailing price in the area of Jack and Wise Counties.

After separate hearings on the two proposals, the proceedings were consolidated. The examiner rendered a consolidated decision which rejected the application of Lone Star and approved those of Natural and Producers, subject, however, to a condition which effected a reduction in the initial price to be charged Natural by Producers. The examiner was of the opinion that such a condition was required by the Commission's opinion in In re Cities Service Gas Co., et al., 12 PUR3d 3 (1955), which he regarded as controlling and not restricted to the facts in that case.

All parties excepted to the examiner's decision. The Commission permitted the proceedings to be reopened for the introduction in evidence of matters that had occurred since the close of the initial hearings, including amendments to the contracts with Producers reducing their initial price by 1› per Mcf with provisions respecting price escalation.

After further testimony, the Commission ordered the omission of an intermediate decision of the examiner and issued its order of December 4, 1956. That order again granted the applications of Natural and Producers without any condition as to price, but it did provide:

"The grant of the certificates herein shall not be construed as a waiver of the requirements of Section 4 of the Natural Gas Act, or of Section 154 of the Commission's Rules and Regulations thereunder requiring the filing of rate schedules for the service herein authorized, and is without prejudice to any findings or orders which have been or may hereafter be made by the Commission in any proceeding now pending or hereafter instituted by or against the applicants. Further, the action taken in this proceeding shall not foreclose nor prejudice any future proceedings or objection relating to the operation of any price or related provision in the gas purchase contracts herein involved."

The order again denied Lone Star's application for construction of its proposed facilities. The Commission, however, found that there was demand for gas beyond the supply now authorized, and authorized Lone Star to sell to Natural an average daily volume of 80,000 Mcf of natural gas and a daily maximum of 100,000 Mcf at the point of intersection between Lone Star's existing pipeline and Natural's proposed line in southern Oklahoma. The Commission also required Natural, in the event of Lone Star's acceptance of such authorization, to file with the Commission an application for a certificate of public convenience and necessity for facilities necessary to increase the sales capacity of its system between Fritch, Texas, and Joliet, Illinois, by 100,000 Mcf per day. Lone Star accepted the plan, and Natural filed its application pursuant to the Commission's order. Only Petitioner has appealed from the Commission's decision.

Under § 7(e) of the Natural Gas Act, the Commission has authority to issue a certificate to any qualified applicant if it finds that the applicant is able and willing properly to perform the proposed service and that the service "is or will be required by the present or future public convenience and necessity." Of course, the section also authorizes the imposition of conditions.

Petitioner's main contentions are that the Commission erred in granting the certificate to Producers without imposing a price condition, because, it was contended, Natural's proposed price exceeded the prevailing price in southern Oklahoma, and that the Commission did not make a finding that the increased rate proposed by Producers was "just and reasonable," as required by § 4(a) of the Act, 15 U.S.C.A. 717c(a). That section requires that all rates and charges made or received by any natural gas company shall be "just and reasonable," and provides that any rate which is not "just and reasonable" is unlawful.

Petitioner asserts that, in a proceeding for a certificate of public convenience and necessity under § 7(e), when the rate is challenged by a party raising a substantial question as to its reasonableness, § 4(a) imposes a mandatory duty on the Commission, as an essential prerequisite to the granting of permission to make the sale, to insure that the proposed rates are just and reasonable. Petitioner further contends that the Act does not state that the provisions of § 4(a) shall not apply to a sale to be authorized under § 7(e); that the prohibition of § 4(a) against sales that are not just and reasonable is all-inclusive and pervades the entire Act; and that § 4(a) applies to any and all sales, hence it applies to a sale as soon as it is commenced.

Petitioner claims the record does not support a finding, and the Commission did not find, that the increased rate proposed by Producers was "just and reasonable." This error, Petitioner asserts, requires that the order granting the certificates be set aside since the granting of the certificates as authorized results in Natural's obtaining its gas at a higher cost to its customers and, at the same time, results in increased cost to competing utilities by causing an unwarranted advance in the prevailing price in the area.

An examination of the evidence is necessary to determine whether the Commission abused its discretion in refusing to impose a price condition on the certificates issued to Natural and Producers.

The gas reserve in Jack and Wise Counties is the largest remaining undedicated gas reserve in the mid-continent area, and one of the largest discovered in the United States in recent years. This reserve was discovered by Producers in 1952 and is presently estimated to contain 2 1/2 trillion cubic feet of gas. Natural has contracted with Producers for 750 billion cubic feet of this gas and Lone Star and Upham Gas Company have contracted for approximately the same amount, which leaves approximately 1 trillion cubic feet uncommitted to any purchaser. Petitioner has not sought nor does it seek to purchase any of this uncommitted gas, for it does not purchase any gas in Texas; its purchases and sales are wholly within the state of Oklahoma and no regulatory authority, as such, controls the price which Petitioner pays for gas. There is no reserve of gas well gas in Jack and Wise Counties, or in southern Oklahoma, comparable to that involved in this proceeding. The gas in these areas, exclusive of this reserve, is not gas well gas but casinghead gas, and gas well gas is much more valuable than casinghead gas.

In Jack and Wise Counties, Lone Star is able to enforce a policy of paying no more for gas well gas than it pays for casinghead gas, the price of which was increased to 12› per Mcf in January 1957. In southern Oklahoma, Lone Star and Petitioner have an agreement as to the price of gas and are able to enforce a policy of paying 10› per Mcf for both casinghead gas and gas well gas. This constitutes a two-cent differential. Petitioner has not increased its price because of the increase in price in the Jack and Wise Counties area. A comparison of Natural's 13.9› per Mcf price with the prices being paid for gas well gas by other gas purchasers in relevant areas shows that Natural's price is in line.

The foregoing facts support the findings and conclusions reached by the Commission in its order denying applications for rehearing, etc., issued January 31, 1957:

". . . It is contended, first, that our opinion fails to protect the ultimate consumers of natural gas from excessive charges for gas. It is contended that the price for the producers' sales is excessive, being above the prevailing price in the area traversed by Natural's extension; that no sufficient reason has been given to justify authorizing the sale at such a price; and that the impact of the producers' prices in Oklahoma Natural's price structure will be most harmful. Further in this connection, Oklahoma Natural contends that there is nothing in the record on the basis of which the Commission could find that the rates of the producers are just and reasonable, a requirement said to be imposed by Section 7(e) of the Act, and further evidenced, it is said, by certain Commission opinions and court decisions. Thus it is argued that we erred in concluding that the impact on Oklahoma Natural was not a matter of paramount concern in this case.

"These contentions likewise we find to be without merit. The element of price to the ultimate consumer is but one factor to be considered in determining upon the convenience and necessity involved in a given case. Here, as we pointed out in opinion No. 299 and accompanying order, other elements over-balance such increases as may ensue from the certification of the producers' sales to Natural at the prices authorized. Indeed, it may be mentioned that some doubt exists whether producer authorizations calling for lower producer prices would or could be consummated. Significantly, the City of Chicago, which represents consumers there, has not sought rehearing of opinion No. 299 and accompanying order. And although we have considered the public interests relating to Oklahoma Natural and the customers it serves, we are unable to conclude that those interests, either as a matter of law or on the basis of the particular facts in this case, outweigh the more pertinent interests represented by Natural and the consumers it serves.

"Nor do the prevailing prices in the area and such other related data as to market and producing conditions as are available to us justify the conclusion that the producers' prices are excessive or will have the violent impact which Oklahoma Natural envisages. . . . With respect to the contention that the producers' rates have not been shown to be 'just and reasonable,' a requirement said to be imposed by section 7(e) of the Act, it suffices to comment, without entering into any lengthy discussion of this question, that as we stated in opinion No. 288 and accompanying order, In the Matters of Cities Service Gas Company, et al., docket No. G-2569, et al., issued November 28, 1956, 'A proceeding of this nature can not and is not intended to take the place of a proceeding under Section 4 or 5 of the Act.'"

A dominant factor in this case is the need for more gas in the Chicago area. The Commission found that unsatisfied demands exist in Chicago and are increasing at a phenomenal rate, and the demand in the future will be over and above the present sales capacity of Natural's existing system of 510,000 Mcf per day. Natural's need has been rendered more acute by the fact that the Herscher underground storage field in Illinois, which was expected to develop a daily supply of 1,500,000 Mcf, can be relied on for only 430,000 Mcf per day.

The statute makes the issuance of a certificate dependent upon a finding of "public convenience and necessity," and it delegates to the Commission the power and duty to make that finding. The Commission, by its expert knowledge of and continuing contact with the natural gas industry, is qualified to make the determinations of fact and the evaluations of policy which the issuance of a certificate requires.

The granting or denial of a certificate of public convenience and necessity is a matter peculiarly within the discretion of the Commission. The Commission's action in imposing a price condition on the issuance of a certificate was upheld in Cities Service-Signal Oil supra; and in Sunray Mid-Continent Oil Co. v. Federal Power Commission, 10 Cir., 1956, 239 F.2d 97, 101, reversed on other grounds, 353 U.S. 944, 77 S. Ct. 792, 1 L. Ed. 2d 794, in upholding the Commission's authority to refuse to impose conditions on the issuance of certificates, the court said:

"Just as the Commission has authority to impose conditions upon the issuance of a certificate so, too, it has authority to refuse to impose conditions."

Under § 7(e) it is provided:

"The Commission shall have the power to attach to the issuance of the certificate [of public convenience and necessity] and to the exercise of the rights thereunder such reasonable terms and conditions as the public convenience and necessity may require."

It is obvious that the plain congressional meaning is to vest the Commission with the discretion to attach terms, including rate conditions. It is fitting that there should be this discretion and, in the absence of an abuse of that discretion, courts should not interfere. We find no such abuse here.

Petitioner contends that in a certificate proceeding under § 7(e), where the price being paid by a producer is above that then being paid by others in the specific area, the Commission must either impose a price condition or determine the justness and reasonableness of the price, as in a proceeding under §§ 4 and 5, 15 U.S.C.A. §§ 717c, 717d. In other words, it is contended that the Commission, in such a situation, has no discretion but must take one of the two courses. We think not. Section 4(a) states the substantive objective of the Act, that rates be reasonable; it does not specify the procedure by which this objective is to be attained. That procedure is prescribed by §§ 4(d), 4(e) and 5(a). The Commission cannot be required to convert every certificate proceeding into a rate proceeding. As the Commission said in In the Matter of Tamborello, FPC Docket Nos. G-3045, et al., 15 F.P.C. 1, 3 (1955):

"Such holding would not only be contrary to the plain language of the act but would also prevent us from exercising the judgment and discretion delegated to us by Congress."

Petitioner also relies on Cities Service Gas Co. supra, affirmed sub. nom. Signal Oil & Gas Co. v. Federal Power Commission, 3 Cir., 1956, 238 F.2d 771, certiorari denied, 1957, 353 U.S. 923, 77 S. Ct. 681, 1 L. Ed. 2d 720. It is contended that the Commission erred in not following that case and in granting the certificate to Producers without the certificate to Producers without the price condition.

In Signal Oil supra, Cities Service Gas Company proposed to purchase the processed "residue" from Signal Oil in southern Oklahoma at a rate of 12› per Mcf. This petitioner and Lone Star were intervenors in that proceeding. In determining that the sale of Signal to Cities Service should be conditioned upon the price being reduced to 10› per Mcf, the Commission stated:

"In the face of admitted injury to many parties in this proceeding, we are convinced that a rate structure which has prevailed in this area for some time should not be disturbed without a showing more substantial than appears on this record that such a change is necessary and that the level to which the rates are proposed to be changed is itself just and reasonable."

Signal appealed. The Court of Appeals for the Third Circuit held that the Commission's finding that the public convenience and necessity required that the certificate be conditioned at the 10› rate was supported by substantial evidence. The court pointed out that Signal failed to establish that the proposed rate of 12› per Mcf was reasonable to the purchaser or that the existing rate of 10› per Mcf was unjust to the seller. Petitioner here contends that, no proof having been offered that the rate was just and reasonable, the Commission's decision should be set aside. We do not agree with this conclusion. The Commission stated that its decision in Cities Service-Signal was made solely on the basis of the facts presented in that case, and added:

". . . clearly the basis for decision in this proceeding is not necessarily controlling in any future proceedings involving the rates of Signal or any other independent producer."

In that case, Lone Star, Petitioner and Cities Service were purchasing the same type of gas, i.e., casinghead, under similar conditions and under contracts having substantially the same characteristics and identical price provisions. They were sharing the same sources of supply from the same area. Also, it was clear that the effect of paying 12› per Mcf would be to drive the price upward in southern Oklahoma, and that Lone Star and Petitioner would have to compete against any new higher price level. The Commission found that 10› per Mcf was the prevailing price in the area.

In its opinion in the present case, the Commission stated:

"As to the price for gas purchased by Natural from the producers, under the amendments to these parties' contracts contained in the record in the reopened proceedings, the price for the initial volumes of gas is 13.9 cents per Mcf on a 150 B.t.u. basis, and including the dehydration charge. However, as detailed hereinafter, with the increase in through-put anticipated, there would be very little difference between the cost to Natural of gas delivered at Fritch under its own proposal and under that of Lone Star. Accordingly, although the record does not afford a basis for determining what the precise 'just and reasonable' rate is for the gas sold to Natural under its contracts with the producers, in view of all the circumstances in this case we cannot conclude that the public convenience and necessity requires that this certificate issue only if the rate at which this gas is sold is less than the proposed price of 13.9 cents. The matter of the producers' rates is subject to our continuing supervision and control and if sufficient reason appears therefor, can be considered on the basis of a factual record developed in an appropriate proceeding under the Act.

"Nor do we consider that any condition should be imposed in the certificates issued to the producers, requiring the reduction of their proposed price to Natural. In our opinion No. 288, In the Matters of Cities Service Gas Company, docket Nos. G-2569, et. al., we made it clear that the particular circumstances presented in each case are of decisive importance in determining whether a condition like that imposed in the Signal case should be attached to the issuance of a certificate to a producer. These circumstances include the extent to which a convincing showing has been made that as a result of the price proposed, the prices for other sales in the area in question will be increased, keeping in mind such relevant factors as the kind and quantity of gas sold, the degree of competition present in the area, and the extent to which the producer contract in question resembles the other gas sales contracts in the area. But in this case, no convincing showing has been made that as a result of the price proposed under the contract between Natural and the producers, the results we envisaged in opinion No. 288 will come about. Nor are we satisfied that the competitive conditions in the Jack and Wise Counties area are such as to justify fixing upon 11 cents as the prevailing price."

We are unable to state that the facts developed at the hearings do not support the Commission's findings and conclusions.

Finally, insofar as this court is concerned, the question would seem to have been passed upon by this court in Florida Economic Advisory Council v. Federal Power Commission, 102 U.S.App.D.C. 152, 251 F.2d 643, 646, certiorari denied 78 S. Ct. 996, where, on the point involved, we used language particularly appropriate here:

"Suppliers' Rates. Petitioner claims the Commission should have held a rate hearing to determine the lawfulness of the rates to be charged by the gas suppliers. But this inquiry may be resolved in a rate proceeding rather than in a proceeding for a certificate of public convenience and necessity, and the Commission did not abuse its discretion in declining to consider the matter in the instant proceeding. The rates are subject to the Commission's continuing jurisdiction, and, whenever sufficient reason appears, they may be taken up. Petitioner cites City of Pittsburgh v. F.P.C.

We have considered this case as though Petitioner has standing - a claim seriously controverted by respondent and intervenors. The views above expressed make it ...

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