Mobil Oil Corp. v. FPC
417 U.S. 283 (1974)

Annotate this Case

U.S. Supreme Court

Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974)

Mobil Oil Corp. v. Federal Power Commission

No. 73-437

Argued April 17, 1974

Decided June 10, 1974*

417 U.S. 283

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Syllabus

The Federal Power Commission (FPC) instituted a proceeding in 1961 to establish an area rate structure for interstate sales of natural gas produced in the Southern Louisiana area. After extensive hearings, the FPC in 1968 issued an order establishing ceiling rates for gas sold by producers in the area and ordering refunds of rates in excess of the maximum that had been collected prior to the order. The Court of Appeals upheld the order, but declared that the affirmance was not to be interpreted to foreclose the FPC from making such changes in its order, as to both past and future rates, as it found to be in the public interest. In response to petitions for rehearing urging that the FPC's authority to modify its order, after affirmance by the court, could be exercised only prospectively, the Court of Appeals stated that

"[w]e wish to make crystal clear the authority of the Commission in this case to reopen any part of its order that circumstances require be opened,"

that "[t]he Commission can make retrospective as well as prospective adjustments in this case if it finds that it is in the public interest to do so," and that, if

"the refunds are too burdensome in light of new evidence to be in the public interest . . . , the Commission shall have the power and the duty to remedy the situation by changing its orders."

The FPC thereupon reopened the 1961 proceeding, and, after considering a settlement proposal that had been agreed to by a large majority of the parties, issued an order in 1971 establishing a new rate structure for the Southern Louisiana area superseding the 1968 order. This 1971 order established, inter alia, (1) higher ceiling rates for both "flowing" or "first vintage" gas (gas delivered after the order's effective date under contracts dated prior to

Page 417 U. S. 284

October 1, 1968), and "new" or "second vintage" gas (gas delivered after the order's effective date under contracts dated after October 1, 1968); (2) two incentive programs, one providing for refund workoff credits based on a refund obligor's commitment of additional gas reserves to the interstate market (the producer being required to offer at least 50% of the new reserves to the purchaser to whom the refund would otherwise be payable), and the other providing for contingent escalation of rates based on new dedications of gas to the market; (3) minimum rates to be paid by producers to pipelines for transportation of liquids and liquefiable hydrocarbons; and (4) a moratorium upon the filing of rate increases for flowing gas until October 1, 1976, and for new gas until October 1, 1977. The Court of Appeals upheld this order as an appropriate exercise of administrative discretion supported by substantial evidence on the authority of Permian Basin Area Rate Cases,390 U. S. 747.

Held:

1. The FPC had the statutory authority to adopt the 1971 order, notwithstanding the Court of Appeals' affirmance of the 1968 order. Pp. 417 U. S. 310-315.

(a) Under circumstances where the Court of Appeals' affirmance of the 1968 order was not "unqualified" or final, and such order had not been made effective, but was stayed until withdrawn in the 1971 order, the Court of Appeals' action in authorizing the FPC to reopen the 1968 order did not exceed the court's powers under § 19(b) of the Natural Gas Act "to affirm, modify, or set aside [an] order in whole or in part," or constitute an improper exercise of the court's equity powers with which it is vested in reviewing FPC orders. Pp. 417 U. S. 310-312.

(b) The fact that the settlement proposal lacked unanimous agreement of the parties did not preclude the FPC from adopting the proposal as an order establishing just and reasonable rates, since the FPC clearly had the power to admit the agreement into the record, and indeed was obliged to consider it. Pp. 417 U. S. 312-314.

(c) The fact that the Court of Appeals' opinion on rehearing regarding the 1968 order authorized modification of the 1968 refund provisions if the refunds "are too burdensome in light of new evidence to be in the public interest" did not require the FPC, before revising the refund terms, to find, based on substantial new evidence, that the refunds "would substantially and adversely affect the producers' ability to meet the continuing gas needs of the interstate market," since the opinion on rehearing was explicit

Page 417 U. S. 285

that the FPC was to have "great flexibility," and could make retrospective as well as prospective adjustments; moreover, the Court of Appeals flatly rejected

"the notion that the label 'affirmance' could possibly impair FPC's ability to alter or modify any of the provisions, particularly the refund provisions"

of the 1968 order. Pp. 417 U. S. 314-315.

2. Petitioners' challenges to the established price levels under the 1971 order are without merit. Pp. 417 U. S. 315-321.

(a) Mobil's attack on the FPC's evidence of costs is clearly frivolous, since the FPC took extensive evidence of costs in its 1968 order hearings for flowing gas and in both its 1968 and 1971 hearings for new gas, and since the fragments of the record cited by Mobil do not sustain its heavy burden of showing that the FPC's choice was outside what the Court of Appeals could have found to be within the FPC's authority. P. 417 U. S. 316.

(b) With respect to Mobil's argument that inclusion of refund workoff credits and contingent escalations in the just and reasonable rates indicates that producers unable to gain part or all of their share of such payments will receive merely their "bare-bones" costs, which constitute illegally low prices, the Court of Appeals did not err in deciding that it was within the FPC's discretion and expertise to conclude that the refund workoff credits and contingent escalations could provide an opportunity for increased prices that would help in generating capital funds and in meeting rising costs, while assuring that such increases will not be levied upon consumers unless accompanied by increased supplies of gas. Pp. 417 U. S. 316-319.

(c) New York's contention that the 1971 order rates for flowing gas are excessive is predicated on an erroneously limited view of the permissible range of the FPC's authority. Where the FPC's justification for increasing the price of flowing gas was the necessity for increased revenues to expand future production, rather than new evidence of differing production conditions, the Court of Appeals, against the background of a serious and growing domestic gas shortage, could properly conclude that the FPC might reasonably decide that, as compared with adjustments in rate ceilings to induce more exploration and production, its responsibility to maintain adequate supplies at the lowest reasonable rate could better be discharged by means of contingent escalation and refund credits. Pp. 417 U. S. 319-321.

3. The claims of all three petitioners, with respect to both the contingent escalations on flowing gas and the refund credits, that

Page 417 U. S. 286

even if the 1971 rates are sufficient to satisfy the Natural Gas Act's minimum requirements as to amount and, on the basis of the FPC's chosen methodology, are supported by substantial evidence, they are nevertheless unduly discriminatory and therefore unlawful under §§ 4 and 5 of the Act, are also without merit. Pp. 417 U. S. 321-327.

(a) Concerning Mobil's argument that undue discrimination results because producers who had not settled their refund obligations will receive advantages from the contingent escalations and refund credits that producers like Mobil, which did settle its obligations, will not receive, it cannot be said that the Court of Appeals misapprehended or grossly misapplied the substantial evidence standard in concluding that the FPC's assessment of the need for refund credits, compared to the costs and benefits of some other scheme, was adequately supported. Pp. 417 U. S. 321-325.

(b) Though New York and MDG argue that the refund credit formula discriminates against pipeline purchasers because it permits producers to work off refunds by offering 50%, rather than 100%, of the new reserves to pipeline purchasers other than those owed the refunds, the Court of Appeals did not err in holding that the refund credit provision, the purpose of which was to increase the supply of gas, was within the FPC's discretion, since the FPC could reasonably conclude that the producers' incentive to explore for and produce new gas in the area, could result in their dedication of new reserves that would exceed in benefit the amount of the refunds. P. 417 U. S. 325.

(c) With respect to New York's argument that some producers might abandon their normal business of exploring for and developing new reserves and yet enjoy the increase in their prices for flowing gas if other producers contribute substantial additional reserves, the FPC's belief that producers already operating in the area will continue to do so is at least an equally tenable judgment, and New York offered nothing to overcome the presumption of validity attaching to the exercise of the FPC's expertise. Pp. 417 U. S. 326-327.

4. The Court of Appeals' conclusion, contrary to Mobil's contention, that the FPC's fixing of moratoria on new rate filings was supported by required findings of fact and by substantial evidence, did not misapprehend or grossly misapply the substantial evidence standard. Pp. 417 U. S. 327-328.

5. Mobil's argument that the FPC improperly failed to provide automatic adjustments in area rates to compensate for anticipated

Page 417 U. S. 287

higher royalty costs, is hypothetical at this stage and, in any event, an affected producer is entitled to seek individualized relief. P. 417 U. S. 328.

6. The Court of Appeals did not err in concluding that the FPC "acted within the bounds of administrative propriety in abandoning" as a pragmatic adjustment the distinction in maximum permissible rates between casinghead gas and gas-well gas so far as new dedications are concerned, even though casinghead gas was formerly treated as a byproduct of oil, and therefore costed and priced lower than gas-well gas. Pp. 417 U. S. 328-330.

7. In arguing that the minimum rates provided by the 1971 order to be paid by producers to pipelines for transportation of liquids and liquefiable hydrocarbons are not supported by substantial evidence, Mobil has not met its burden of demonstrating that the Court of Appeals misapprehended or grossly misapplied the substantial evidence standard. P. 417 U. S. 330.

483 F.2d 880, affirmed.

BRENNAN, J., delivered the opinion of the Court, in which all Members joined except STEWART and POWELL, JJ., who took no part in the consideration or decision of the cases.

Page 417 U. S. 288

MR. JUSTICE BRENNAN delivered the opinion of the Court.

We review here the affirmance by the Court of Appeals for the Fifth Circuit of a 1971 order of the Federal Power Commission [Footnote 1] that established an area rate structure for interstate sales [Footnote 2] of natural gas produced in the Southern

Page 417 U. S. 289

Louisiana area. The Southern Louisiana area is one of seven geographical areas defined by the Commission for the purpose of prescribing area-wide price ceilings. [Footnote 3] This

Page 417 U. S. 290

is the second area rate case to reach this Court. The first was the Permian Basin Area Rate Cases,390 U. S. 747 (1968), in which the Court sustained the constitutional

Page 417 U. S. 291

and statutory authority of the Commission to adopt a system of area regulation and to impose supplementary requirements in the discharge of its responsibilities under §§ 4 and 5 of the Natural Gas Act [Footnote 4] to determine whether producers' rates are just and reasonable.

The Court of Appeals affirmed the 1971 order in its

Page 417 U. S. 292

entirety as an appropriate exercise of administrative discretion supported by substantial evidence on the record as a whole. Placid Oil Co. v. FPC, 483 F.2d 880 (1973). We granted the petitions for certiorari in these three cases [Footnote 5] to review the correctness of the Court of Appeals' holding sustaining the 1971 order as in all respects within the Commission's statutory powers, and to determine whether the Court of Appeals misapprehended or grossly misapplied the substantial evidence standard. 414 U.S. 1142 (1974). We affirm.

I

The Commission first instituted proceedings to establish an area rate structure for the Southern Louisiana area on May 10, 1961. 25 F.P.C. 942. The area consists of the southern portion of the State of Louisiana and the federal and state areas of the Gulf of Mexico off the Louisiana coast. The area accounts for about one-third of the Nation's domestic natural gas production

Page 417 U. S. 293

and has been described as "the most important ga producing area in the country." Southern Louisiana Area Rate Cases, 428 F.2d 407, 418 (CA5 1970) (hereafter SoLa I). Proceedings continued over seven years. [Footnote 6] On September 25, 1968, the Commission issued an order establishing an area rate structure, 40 F.P.C. 530, and, on March 20, 1969, a modified order on rehearing, 41 F.P.C. 301. [Footnote 7] Refunds under this structure for overcharges during the pendency of the proceeding amounted to some $375 million. [Footnote 8]

An appeal was taken to the Court of Appeals for the Fifth Circuit. On March 19, 1970, the Court of Appeals

Page 417 U. S. 294

affirmed the FPC orders but with "serious misgivings," SoLa I, supra, at 439. Noting that " [a] serious shortage, in fact, may already be unavoidable . . . ," id. at 437, the Court of Appeals was critical of the Commission's failure adequately to assess "supply and demand in either a semi-quantitative or qualitative way," id. at 436. It was reinforced in this view by the evidence, including an FPC Staff Report, issued while the appeal was pending, [Footnote 9] that the Nation was faced with "a severe gas shortage, with disastrous effects on consumers and the economy alike." Id. at 435 n. 87.

Therefore, although determining "that affirmance is the best course," id. at 439, the Court of Appeals declared that the judgment was not in any wise to foreclose the Commission from making such changes in its orders, as to both past and future rates, as it found to be in the public interest. The court noticed the fact that, while the appeal was pending, the Commission, in March, 1969, had instituted proceedings to reconsider rates for the offshore portion of Southern Louisiana, see 41 F.P.C. 378, and later that year expanded the procedure to include the entire area, 42 F.P.C. 1110. Thus, it stated:

"The mandate of this Court should not, however, be interpreted to interfere with Commission action that would change the rates we have approved here. We

Page 417 U. S. 295

specifically and emphatically reject the contention advanced . . . that the Commission has no power to set aside rates once determined by it to be just and reasonable when it has reason to believe its determinations may have been erroneous. In fact, the existence of the new proceedings, which, as we understand them, will take into account many of the issues whose absence has concerned us here, has been one of the factors we have considered in deciding to affirm the Commission's decisions."

428 F.2d at 5.

Pending decision on petitions for rehearing, however, the Commission advised the Court of Appeals, in a letter requested by the court, that, unless that court otherwise directed, it did not believe that it had authority to modify, rescind, or set aside a rate order or moratorium affirmed by the court. The Court of Appeals answered in its opinion denying rehearing, 444 F.2d 125, 126-127 (1970):

"We wish to make crystal clear the authority of the Commission in this case to reopen any part of its order that circumstances require be reopened. Under section 19(b) of the Natural Gas Act, this Court has the broad remedial powers that inhere in a court of equity, and, pursuant to our equitable powers, we make it part of the remedy in this case that the authority of the Commission to reopen any part of its orders, including those affecting revenues from gas already delivered, is left intact. The Commission can make retrospective as well as prospective adjustments in this case if it finds that it is in the public interest to do so."

"At the same time, we emphasize that our judgment is an affirmance, and not a remand. The appropriate place for originally considering what

Page 417 U. S. 296

parts of the orders must be reopened in light of new evidence is before the Commission. It may be that the Commission will decide that the refunds it has ordered are just and reasonable, or at least that their significance to the public interest is outweighed by the confusion and delay that would result from their reopening. In this event, the Commission will allow its refund orders to stand as they are. Or it may be that the refunds are too burdensome in light of new evidence to be in the public interest. In that case, it is our judgment that the Commission shall have the power and the duty to remedy the situation by changing its orders."

The Commission thereupon formally reopened the 1961 proceeding and consolidated it with the new proceeding, 44 F.P.C. 1638 (1970). [Footnote 10] An extensive record of many thousands of pages of testimony and more than a hundred exhibits was compiled between April, 1970, and March, 1971. [Footnote 11] Pursuant to the instructions of the Court of Appeals, much of the evidence focused on the gas shortage, projected levels of demand, and estimates of new supply needed to alleviate the problem. Evidence was also adduced bearing upon rate levels needed to induce additional supply, the potential industry consequences of any new order, and new cost trends based on data unavailable at the time of the earlier proceedings.

Contemporaneously with the hearings, settlement conferences were instituted, on motion by the Presiding Examiner, 46 F.P.C. 86, 103 (1971), and those conferences were attended by producers, pipelines, distributors,

Page 417 U. S. 297

state commissions, municipally owned utilities, and the Commission staff. Eventually, a settlement proposal was submitted by one of the parties, [Footnote 12] and, after being placed on the record for comments, it was agreed to by a large majority of all interests. [Footnote 13] An intermediate decision of the Presiding Examiner was waived, and the Commission took up the case.

At the outset, the Commission stated that it believed that adoption of the settlement proposal was precluded unless the Commission found the terms to be in the public interest and supported by substantial evidence. [Footnote 14]

Page 417 U. S. 298

Accordingly, the Commission evaluated the proposal in the light of the massive record that had been compiled in the decade since 1961, including the additional year of hearings directed in large part to the terms of the settlement proposal and the nature of the supply shortage. The Commission concluded that the terms of the proposed settlement were just and reasonable, and found them to be supported by substantial evidence in the record. [Footnote 15] The ceiling rates established in the 1968 orders, which because of Commission and court stays had never gone into effect, were held "now [to] perform no office," 46 F.P.C. at 102.

The effective date of the 1971 order was August 1, 1971. By the terms of this order, "flowing gas," i.e., gas delivered after August 1, 1971, under contracts dated prior to October 1, 1968, receives treatment different from "new gas," i.e., gas delivered after August 1, 1971, under contracts dated after October 1, 1968. The established flowing gas price ceilings are 22.275

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