Permian Basin Area Rate Cases
390 U.S. 747 (1968)

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U.S. Supreme Court

Permian Basin Area Rate Cases, 390 U.S. 747 (1968)

Permian Basin Area Rate Cases

Argued December 5-7, 1967

Decided May 1, 1968*

390 U.S. 747

Syllabus

Following this Court's decision in Phillips Petroleum Co. v. Wisconsin, 347 U. S. 672, holding that independent producers are "natural gas compan[ies]" within the meaning of § 2(6) of the Natural Gas Act, the Federal Power Commission (FPC) struggled under a heavy administrative burden in attempting to determine whether producers' rates were just and reasonable under §§ 4(a) and 5(a) by examining each producer's cost of service. In 1960, the FPC announced that it would begin a series of proceedings under § 5(a) in which it would determine maximum producers' rates for each major producing area. A Statement of General Policy was issued by the FPC, asserting its authority to determine and require application throughout a producing area of maximum rates for producers' interstate sales, tentatively designating certain areas as producing units for rate regulation (three of which areas were consolidated for this proceeding), and providing two series of area guideline prices, for initial filings and for increased rates. This first area proceeding was initiated in 1960, and in 1965, the FPC issued its decision, devising for the Permian Basin area a rate structure with two area maximum prices, one for natural gas produced from gas wells and dedicated to interstate commerce after January 1, 1961, and the other, and lower, price for all other natural gas produced in the area. The FPC found that price

Page 390 U. S. 748

could be an incentive for exploration and production of new gas well gas, while supplies of associated and dissolved gas and previously committed reserves of gas well gas were relatively unresponsive to price variations. The FPC aid not use prevailing field prices in calculating rates, but utilized composite cost data from published sources and from producers' cost questionnaires, establishing the national costs in 1960 of finding and producing gas well gas, and, for all other gas, deriving the just and reasonable rate from historical costs of gas well gas produced in the Permian Basin in 1960, with a local and historical emphasis. The uncertainties of joint cost allocation made it difficult to compute the cost of gas produced in association with oil, but the FPC found that the costs of such gas were less than those incurred in producing flowing gas well gas. Each maximum rate includes a return to the producer of 12% on average production investment based on the FPC's two series of cost computations. A system of quality and Btu adjustments was provided for. The following rates were determined: 16.5� per Mcf (including state production taxes) in Texas, and 15.5� (excluding state production taxes) in New Mexico, for gas well gas dedicated to interstate commerce after January 1, 1961; 14.5� per Mcf (including taxes) in Texas, and 13.5� per Mcf (excluding taxes) in New Mexico, for flowing gas, including oil well gas and gas well gas dedicated to interstate commerce before 1961; 9� per Mcf minimum for all gas of pipeline quality. The FPC declared that it would provide special relief in hardship cases; that small producers (annual national sales not above 10,000,000 Mcf) need not adjust prices for quality and Btu deficiencies; that it would require a moratorium until January 1, 1968, for filing under § 4(d) for prices above the applicable area maximum; that the use of indefinite escalation clauses to increase prevailing contract prices above the area maximum was thereafter prohibited, and that refunds were required of the difference between amounts collected by producers in periods subject to refund and the amounts permitted under the area rate. The Court of Appeals held that the FPC had authority to impose maximum area rates, sustained (but stayed enforcement of) the moratorium on § 4(d) filings, approved the two-price system and the exemption for small producers, but concluded that the requirements of FPC v. Hope Natural Gas Co., 320 U. S. 591, were not satisfied. It held that the FPC had not properly calculated the financial consequences of the quality and Btu adjustments, had not made essential findings as to aggregate revenue, and had not precisely indicated the circumstances in which individual producers could

Page 390 U. S. 749

obtain relief from area rates. On rehearing, the court also held that refunds were permissible only if aggregate actual area revenues exceeded aggregate permissible area revenues, and only to the amount of the excess, apportioned on "some equitable contract-by-contract basis."

Held:

1. A presumption of validity attaches to each exercise of the FPC's expertise, and those who would overturn its judgment undertake "the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences." FPC v. Hope Natural Gas Co., supra, at 320 U. S. 602. Pp. 390 U. S. 766-767.

2. The FPC has constitutional and statutory authority to adopt a system of area regulation and to impose supplementary requirements. Pp. 390 U. S. 768-790.

(a) Area maximum rates, determined in conformity with the Natural Gas Act, and intended to balance investor and consumer interests, are constitutionally permissible. Pp. 390 U. S. 769-770.

(b) In these circumstances, the FPC's broad guarantees of special relief were not inadequate or excessively imprecise. Pp. 390 U. S. 771-772.

(c) The FPC did not abuse its discretion by its refusal to stay, pro tanto, enforcement of the area rates pending dispositions of producers' petitions for special relief. Pp. 390 U. S. 773-774.

(d) Area regulation is consistent with the terms of the Act, and is within the statutory authority granted the FPC to carry out its broad responsibilities. Pp. 390 U. S. 774-777.

(e) The FPC may, under §§ 5 and 16 of the Act, impose a moratorium on the filing under § 4(d) of proposed rates higher than those determined to be just and reasonable, and the relatively brief moratorium declared here did not exceed or abuse the FPC's authority. Pp. 390 U. S. 777-781.

(f) Under the authority of § 5(a), the FPC permissibly restricted the application of indefinite escalation clauses. Pp. 390 U. S. 781-784.

(g) The problems and public functions of small producers differ sufficiently to permit their separate classification, and the exemptions created for them by the FPC comport with the terms and purposes of its statutory responsibilities. Pp. 390 U. S. 784-787.

(h) The regulatory area designated in this first area proceeding was both convenient and familiar, and the FPC was not obliged under these circumstances to include among the disputed

Page 390 U. S. 750

issues questions of the proper size and composition of the regulatory area. Pp. 390 U. S. 787-789.

3. The rate structure devised for natural gas produced in the Permian Basin did not exceed the FPC's authority, and the "heavy burden" of attacking the validity of that rate structure has not been satisfied. Pp. 390 U. S. 790-813.

(a) The responsibilities of a reviewing court are to determine whether the FPC abused or exceeded its authority, whether each of the order's essential elements is supported by substantial evidence and whether the order may reasonably be expected to maintain financial integrity, attract needed capital and fairly compensate investors for risks they have assumed while appropriately protecting relevant public interests, both existing and foreseeable. Pp. 390 U. S. 791-792.

(b) While field prices may have some relevance to the calculation of just and reasonable rates, the FPC was not compelled, on this record, to adopt field prices as the basis of its computations of area rates. Pp. 390 U. S. 792-795.

(c) The two-price rate structure, which is permissible under the Act, will provide a useful incentive to exploration and prevent excessive producer profits, and thus protect both present and future consumer interests. Pp. 390 U. S. 795-799.

(d) The FPC may employ "any formula or combination of formulas" it wishes, and is free "to make the pragmatic adjustments which may be called for by particular circumstances," as long as the consequences are not arbitrary or unreasonable. FPC v. Natural Gas Pipeline Co., 315 U. S. 575, 315 U. S. 586. P. 390 U. S. 800.

(e) In calculating cost data for the two maximum rates by selections of differing geographical bases and time periods, the FPC did not abuse its authority, as its selections comported with the logic of its system of incentive pricing. Pp. 390 U. S. 800-803.

(f) The FPC's use of flowing gas well gas cost data to calculate the rate for old gas, disregarding the costs of gas produced in association with oil, was essentially pragmatic, and its judgment was warranted under the circumstances. Pp. 390 U. S. 803-805.

(g) The computation of the rate base by determining an average net production investment to which the FPC applied a constant rate of return was within the FPC's discretion, and was not arbitrary or unreasonable. Pp. 390 U. S. 805-806.

(h) The selection of 12% as the proper rate of return for gas of pipeline quality was supported by substantial evidence that

Page 390 U. S. 751

the rate will be likely to "maintain financial integrity, to attract capital, and to compensate investors for the risks assumed." Pp. 390 U. S. 806-808.

(i) It was not impermissible for the FPC to treat quality adjustments as a risk of production, and its promulgation of quality standards was accompanied by adequate findings as to their revenue consequences. Pp. 390 U. S. 808-812.

4. The FPC's rate structure has not here been shown to deny producers revenues consonant with just and reasonable rates. Pp. 390 U. S. 813-822.

(a) The FPC need not provide formal findings in absolute dollar amounts as to revenue and revenue requirements; it is enough if it proffers findings and conclusions sufficiently detailed to permit reasoned evaluation of the purposes and implications of its order. P. 390 U. S. 814.

(b) The FPC permissibly discounted the producers' reliance upon the relationship between gas reserves and production to establish the inadequacy of the rate structure. Pp. 390 U. S. 816-818.

(c) The contention that, since the area maximum rates were derived from average costs, they cannot, without further adjustment, provide aggregate revenue equal to the producers' aggregate requirements has not been sustained. Pp. 390 U. S. 818-821.

(d) The FPC's authority to abrogate existing contract prices depends upon its conclusion that they "adversely affect the public interest," and it properly applied that authority in setting a minimum area price of 9� per Mcf and in declining to apply it to prices less than the two area maximum rates. Pp. 390 U. S. 820-821.

5. Since it has been almost eight years since these proceedings were commenced, and the remaining issues, which were not decided by the Court of Appeals, were briefed and argued at length in this Court, no useful purpose would be served by further proceedings in the Court of Appeals. Pp. 390 U. S. 823-824.

6. The FPC's orders requiring refunds of (1) amounts charged in excess of the applicable area rates for periods following the effective date of its order and (2) amounts collected in excess of area rates during previous periods in which producers' prices were subject to refund under § 4(e), were within its authority. It reasonably concluded that the adoption of a system of refunds conditioned on findings as to aggregate area revenues would prove inequitable to consumers and difficult to administer effectively. Pp. 390 U. S. 825-828.

375 F.2d 6 and 35, affirmed in part, reversed in part, and remanded.

Page 390 U. S. 754

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