ATLANTIC RFG. CO. V. PUB. SER v. COMM'N
Legal provision: Natural Gas, or Natural Gas Policy Acts
Argument of David T. Searls
Chief Justice Earl Warren: Number 518, the Atlantic Refining Company, City Service Production Company, Continental Oil Company, et al., petitioners versus Public Service Commission of the State of New York, et al and number 536, Tennessee Gas Transmission Company, petitioner, versus Public Service Commissioner of the State of New York, et al.
Mr. Searls, you may proceed.
Mr. David T. Searls: Mr. Chief Justice, and may it please the Court!
This is a natural gas case and involves a decision by the Federal Power Commission granting Certificates of Public Convenience and Necessity to these four petitioners who are four producers of natural gas authorizing them to sell their natural gas in interstate commerce to the Tennessee Gas Transmission Company which is a long line extending from Texas and Louisiana into the middle west and on into the Atlantic seaboard and in to New England.
As a result of the order of the Commission, granting Certificates of Public Convenience and Necessity to these four producers, the New York State Commission and two distributing companies, who were interveners before the Commission, filed a petition for review with the United States Court of Appeals for the Third Circuit and that court reversed the Commission's order and sent the case back and set aside the order of the Commission, granting certificates for Public Convenience and Necessity to these four producers and the case is before Your Honors on certiorari.
These four producers discovered one of the large natural gas fields and they found it out in the Gulf of Mexico, about 25 or 30 miles off the southwestern shore of Louisiana.
In fact, the record shows that it is the largest natural gas reserve that's ever been committed to interstate commerce in a single sale.
Each of these four producers entered into a separate contract with a pipeline company for the sale of this gas, but the contracts are substantially the same.
Those contracts were made in August 1956 in which they agreed to sell this gas in interstate commerce at a price commencing at 21.4 cents per MCF plus 1 cent gathering tax with a provision that the price would escalate 2 cents per MCF each four years during the life of the contract.
In this contract, it was provided that each of the producers would file an application for Certificate of Public Convenience and Necessity with the Federal Power Commission, and it was also provided that if they did not obtain satisfactory certificates by April 1, 1957, they would have the right to cancel their contract.
Pursuant to this contract, applications were filed, a hearing was held in early part of 1957, and on March 29, 1957, the examiner rendered his decision in which he found that certificates should be issued to these four producers.
He stated that this was a new pricing area.
This was a new productive area for natural gas and the examiner as a fact that the payment of the price provided for in these contracts would not escalate or trigger any of the favored nation's clauses of the other Tennessee gas contracts about which Tennessee had agreed to purchase gas onshore in Southern Louisiana.
And that it would not disrupt the price of natural gas because it was in a new area, in a new pricing area where no gas was being delivered from at present time.
He found that he should not go into the question of price and convert this certificate case into a rate hearing, rather that he should proceed to grant certificates in this case because there was a great need for the natural gas and accordingly the certificates should issue it subject to review by the Commission.
In a few weeks, on April 22, the Commission entered its first order.
In that order the Commission found that price was a very important matter here.
They also recognized that this supplier was very important.
That this was a very important supplier for the Tennessee gas system, an important supplier for the consumers who acquired this gas.
But -- so the Commission stated that it would issue temporary Certificates of Public Convenience and Necessity to these four producers and then it would send the case back to the presiding examiner to determine at what price the Public Convenience and the Necessity required this gas to be sold.
These four producers filed their motion re-hearing and a motion to modify the order in which they stated that they could not take the economic risk of accepting temporary certificates.
On the hearing, it had been proved that they had to place these leases into production by 1958 or they would lose their leases.
So they stated they could not take this economic risk, and they asked the Commission to reconsider the matter.
The Commission did reconsider the matter and on May 20th 1957, the Commission entered its second order and in this order, the Commission granted permanent Certificates of Public Convenience and Necessity to these four producers, but in doing so, it made these two findings.
The Commission said now there is pending before the Congress, the Harris Bill, and this Harris Bill as it is now written will take away from us the right to review the initial price, even under Section 5(A) proceeding.
And in view of that fact, in other words, they said in effect, we really got to review this price now or we might lose the right to review, if the Harris Bill should pass.
That particular Harris Bill had not passed up to this time.
They further found that price was a very important issue here and that the evidence was insufficient to show at what particular price level, the Public Convenience and Necessity required this gas to be sold.
After making those findings, they then ordered, that a certificate issue on the condition that these four producers rewrite their price provision and the Commission set forth in the order, in very precise language, what particular language should be written into the price order.
And it provided that the price should be 17 cents instead of 21.4, and that it should escalate to 21.4 and the Commission provided that on the second day after service commenced under this contract, these producers could get their full price, but that price would be suspended and they get could put that price into effect under bond and then they could try to issue as to whether or not they were entitled to the 21.4 cents as a Section 40 proceeding in which the burden rest upon the producers to establish their price.
Justice John M. Harlan: What price the order passed?
Mr. David T. Searls: That order of May 20th and the particular price provision which I am referring to Your Honor, appears on the second volume on page 530, where the Commission provides for the changing of Section 10 of the contract right at the bottom of Page 530, and sets out specifically what this initial price shall be.
Now this was not a satisfactory certificate to these producers.
Firstly as they didn't think the order was lawful, they did not think it was lawful, they didn't think it was in accordance with the law, but they did not file a motion for rehearing with respect to it, but the pipeline company, the Tennessee Gas Transmission Company filed a motion for rehearing, in which the pipeline company stated that the producers had advised it that they would not accept this certificate where this price condition as set forth in the Commission's order and they would elect to terminate their contract.
Justice John M. Harlan: Could I ask you a question?
Mr. David T. Searls: Yes sir.
Justice John M. Harlan: Under the examiner's original order, the price, I would like to know did the Commission questioned the price under 580 (Inaudible) --?
Mr. David T. Searls: The Commission could proceed under the Section 5(A) once the price schedule is -- once the price is on file as a rate schedule, they could review it.
Justice John M. Harlan: In fact what the Commission can do is to say no, we won't do this, have a lower price and then let you test out the price before (Inaudible)
Mr. David T. Searls: Yes, sir.
And the Commission did what we say, the Act does not give the Commission authority to do it, they suspended that increase of 4 and 10th cents, and right of suspension is not given with respect to an initial price and they placed the burden upon us to proceed in a Section 4 (a) proceeding.
Now after the Tennessee Gas Transmission company filed their motion for rehearing, setting out these facts, the Commission granted the rehearing and issued another opinion.
I do wish to call the Court's attention that in connection with this May 20th order, one of the Commissioners has dissented, and he dissented on this proposition, that the matter of the initial price, was a matter to be agreed upon in the contract between the buyer and the seller, and that the consumers could be amply protected in a Section 5(a) proceeding.
Now in this rehearing, two of the Commissioners, who had been with the majority on the May 20th order, switched over and joined Commissioner Kline who had been on the dissenting side on the May 20th order and so the three of them constituted a majority in rendering this order which is the one in issue here of June 24th 1957.
Now in the June 24th order 1957, this particular order that I am referring to appears in Volume-2 of the record commencing at page-44, in this June 24th order, the Commission pointed out that this was one of the great suppliers of natural gas, that there was a need for the natural gas, and that price was not the prime determinant of the Public Convenience and Necessity.
And they went on to state that they were going to grant, and they did get grant, permanent Certificates of Public Convenience and Necessity to these four producers, but in doing so, they pointed this out in a opinion.
They said that Sections 5(a) proceedings and investigations are already on file as to three of these four producers and this particular price after it's filed as a rate schedule will be investigated and determined in these three Sections 5(a) proceedings that are now pending against three of these four producers.
And then the Commission further said that contemporaneously with the entry of this order, we are instituting a Section 5A proceeding against the fourth producer and that was done.
And after saying that the Commission then said by this means, relief can be afforded to the consuming public, if it should be found that the 21.4 cent initial rate to be charged for the offshore gas is excessive.
Now we say that the basic issue in this case is did the Commission have the discretion to enter that order and to provide that this matter of price or rate could be determined in section 5A proceedings without going in to this question of the initial rate and undertaking to the determinant in connection with the issuance of these certificates, what the initial rate should be and then placing a condition in its order limiting the rate to that which is found to be the one that might be just and reasonable or as the Commission expressed it in their pervious opinions, a particular that was required for by Public Convenience and Necessity.
Now when the case was reached the Court of Appeals, they really never reached or never got to this basic issue as to whether the Commission had this discretion and whether they properly exercised the discretion in this case or whether there was an abuse of the discretion as exercised by the Commission.
They went off on this proposition.
They said that when the producer said they would not accept this May 20th order, which rewrote the price condition, price provision and made it a condition in the order, they thereby circumscribed the inquiry and the jurisdiction of the Commission and limited the jurisdiction of the Commission, because they refused to accept a certificate which reduced their price, under the terms of the May 20th order.
And as I say, the Commission actually never determined the issue as to whether or not the Commission had the discretion, the court never determined that question where the Commission had the discretion to issue the later order granting the certificates and saying this matter of price or rate can be determined in a Section 5 (a) proceeding.
Justice Felix Frankfurter: I thought that the decision of the court, and you correct me, was that the Commission had handicapped itself and mutilated the range of inquiry relevant to and necessary for determining whether there is a public interest and that – is that an unfair way of saying --
Mr. David T. Searls: I don't think that it is exactly correct Mr. Justice Frankfurter.
I think they said that we had done that.
That we had --
Justice Felix Frankfurter: They gave us a reason.
They said that producers were influenced by the fact -- or the Commission felt this threat that announced business actions of the producers, but I didn't understand that; that motive -- because that was the motive or the business reason of the producers, that therefore the order was no good, that certainly illuminated why that happened, what happened.
I read it was a failure to consider the relevant basis on which a certificated must be granted.
Mr. David T. Searls: That is true, but they said we have brought that about.
We had brought about that limitation upon the inquiry.
Justice Felix Frankfurter: Because they didn't want to take a certificate except this condition.
Mr. David T. Searls: Yes Sir, they said, we had brought about that limitation on the jurisdiction of the Commission and upon -- limitation upon the inquiry of the Commission.
Justice Felix Frankfurter: But do you think that the speculation -- suppose you said, well, we are going to terminate this option, if that's what it was, I suppose it was, and gave no reason at all, do you think that would have made a difference?
Mr. David T. Searls: No, I don't think it would make any difference, Your Honor.
In other words, we think the Court of Appeals decided the matter sue sponte which was not raised by the parties and which had to be raised by one of the statute, by motion for rehearing as well as in the petition for review, a point that none of the parties ever conceived off, because certainly, no party can limit the jurisdiction or the scope of the inquiry of the Federal Power Commission or any other administrative body.
We might take a position during the course of the hearing just as we took a position here for a business reason, but that doesn't limit the power, the jurisdiction, or the scope of the inquiry of the Commission.
Justice Felix Frankfurter: But this wasn't the criticism of the producers, this was a decision of self-restricted scope of inquiry and that was the decision, isn't it (Inaudible) whether the Commission can neglect to consider the question of price, at the moment it did?
Mr. David T. Searls: I don't interpret the decision just that way.
I interpret the decision that the producers imposed this upon the Commission and that the producers brought this situation about which certainly we couldn't bring about.
Justice Felix Frankfurter: The Commission was (Inaudible) body.
They were free to do what they feel.
Mr. David T. Searls: The Commission was free to reach on a decision on what they pleased, then we had the right to either accept or reject the certificate which was issued to us, but under no circumstances could we limit the jurisdiction to Commission.
Justice Felix Frankfurter: But it could as a matter not as too distinct, but it is certainly an intellectually tenable preposition that an administrative agency unduly disabled itself from taking into account the relevant issue for its judgment.
Mr. David T. Searls: I don't know that it would be disabling itself.
I think it might say what is more in the public interest to have this natural gas committed to interstate commerce and determine this rate question under Section 5(a) proceeding.
Justice Felix Frankfurter: But that's the real question, whether they can do that?
Mr. David T. Searls: Whether they can do that and I think that certainly the Commission can say weighing to public interest, we think that the important thing here is to get this gas committed to interstate commerce.
Here is that price.
It's the largest unsold natural gas reserve and we think the public in interstate commerce should have this reserve.
Therefore, we will issue these certificates, but we think we can protect the public by proper Section 5(a) 8 proceedings where we review the rate schedule which is on file.
Now the respondents don't undertake to defend the position of the Court of Appeals here.
The Commission in an amicus brief which they filed, they want Your Honors to say that the Court of Appeals reached an incorrect decision here.
So we say, if there is no one defending the position of the Court of Appeals before Your Honors in this case.
So that brings us back to what we say is the real issue here.
Did the Commission had the discretion to do what it did on June 24 and did it properly exercise that discretion or was there an abuse of that discretion?
That is the real issue in the case.
Justice John M. Harlan: The Power Commission's brief as I understand is that they are not asking us to have this case to reverse.
The thing that they're interested in, the fact is the I don't quite understand it but it is that this case can be affirmed that the basic question as they discussed and you were discussing is something that ought not to be determined in this context, and therefore (Inaudible)
Mr. David T. Searls: Yes sir, I think this is what is responsible for the Commission's position in there and I think they very candidly admit it why they've changed.
The Commission filed a motion for rehearing in the Court of Appeals attacking Court of Appeal's decision.
But before the time came prior Certiorari to this Court, we commenced service, we started delivering natural gas and the Commission states commencing at the bottom of page 17 and then turning over to page 18 of that brief, the amicus brief, hence they say when the Court below denied rehearing in August 1958, it was no longer possible for the producers to abandon their service to Tennessee gas, absent a finding by the Commission under section 7B.
It followed that the producer sought has a result of that decision to begin service, while the petition to review the Commission's order was still outstanding were no longer free to refuse to sell their gas and to reject a permanent certificate.
So I think they're very candid in saying, we have commenced service now.
We can't abandon that service.
So this gas, without the consent of the Commission, so this gas is committed to interstate commerce.
So the Commission said in effect, we have this gas now committed to interstate commerce, and therefore we can go back now and re-impose the May 20th order.
Now that's the way, I construe that brief as shown in pages 7, 17 and 18.
In fact, they say, they think the order of the Court of Appeals requires a re-imposition of the price condition of the May 20th order.
Justice Tom C. Clark: You are still stuck with it.
Mr. David T. Searls: How is that?
Justice Tom C. Clark: If you are still stuck with it.
Mr. David T. Searls: We are stuck with it, now.
In other words we've commenced service they say and now we question whether that's --
Justice Tom C. Clark: Do you agree with that?
Mr. David T. Searls: No I do not agree with it.
In other words, we don't have a valid certificate.
I don't think we have to go to the Commission to ask for an abandonment of service, but the Commission takes the position in their brief that once we've commenced service, we cannot abandon that service without their consent under the Natural Gas Act.
That brings to, this gas now being committed then they can impose such price condition as they may elect, but they admit further on this brief, and I want to call this to Your Honor's attention that this price condition which was imposed in May 20th order was actually without any support in the evidence as shown on page 94 of the Commission's brief when they say that the 17 cent price which they impose which the Commission originally sought to have the producers accepting this proceeding, was probably subject to this defect.
In other words, it was conjectural and not supported by evidence.
I'm on a road to explain why the Commission has taken that position except that the candidly admit, we having commenced service, we cannot now abandon that service without their consent.
Now we say that this, the basic issue here is whether or not the Commission has this discretion which we say they have, that there was no abuse of the discretion and the Commission deciding that the proper way to handle this matter is by Section 5(a).
But we further say that actually this order of May 20th, where the Commission undertook to rewrite the initial price was contrary to the law that the Commission had no right to rewrite that price provision.
That was a matter for the parties to agree upon the initial price and then as this Court said in Mobile, in a Section 40 proceeding, on a Section 5(a) proceeding, that price can be reviewed in a proper proceeding.
Justice Felix Frankfurter: When they did, what you call rewrite the price, was there any direct proposal before the Commission?
Mr. David T. Searls: There was no --
Justice Felix Frankfurter: Any price proposal?
Mr. David T. Searls: The only price proposal was that in the contract.
Justice Felix Frankfurter: That of course they rejected.
Mr. David T. Searls: And that that they rejected.
There was no other price proposal.
After all this was merely a price proposal, after the certificate issues, then the contract would be filed as the rate schedule and would be accepted to being reviewed by the Commission.
Justice Felix Frankfurter: Are you was saying, or did I not understand you to say, that although there was this price proposed, it was beyond the Commission's legal power to act upon that tentative proposal by the parties in giving a tentative price of its own.
Mr. David T. Searls: I say that the Commission could not in effect rewrite the initial price, yes sir and I say that for this reason.
Your Honor's will recall that on the Motor Carrier Act, there is right to suspend the initial price and then the Interstate Commerce Commission can go forward and determine what that initial rate of price shall be, but there is no right to suspend the initially price under the Natural Gas Act.
That isn't given and we think it's clear under the Natural Gas Act then that it was not intended that Commission should make the initial price.
Justice Felix Frankfurter: Or do you say that they must accept that and then subject to their price, Section 5, would you?
Mr. David T. Searls: Well, I say they must do that or else they can turn down the certificate.
Certainly they can deny – if they think the price is exorbitant for instance –
Justice Felix Frankfurter: They can turn it on –
Mr. David T. Searls: -- certainly they could turn down the certificate or I think this sort of a situation could exist Your Honor where they find that this price is going to disrupt the price situation in particular area, that would trigger favored nation's clauses then they could impose a condition reducing that price under those circumstances.
They wouldn't be undertaking to determine what is a just and reasonable price.
They would just be saying now, this would disrupt the mark.
This would bring about a triggering of the favored nation's clauses in all of these contracts and thereby increase the whole price level.
Justice Felix Frankfurter: What is the source for that power which you recognized?
Mr. David T. Searls: The source for that power is Section 7 (E) of the Natural Gas Act which is the certificate provision and which provides that they can attach reasonable conditions in connection with the issues of certification.
Justice Felix Frankfurter: But initiating a price tentatively is not in your view a reasonable condition?
Mr. David T. Searls: But when they undertake to determine the initial price since they have no right to suspend that price, I say that's not a reasonable condition because that's contrary to the statutory scheme under the Natural Gas Act.
But I say it's not ever necessary for you to reach that issue here because accepting the May 20th order is perfectly valid, still the Commission has the discretion to do what they did on June 24th, thank you sir.
Mr. Littman --
Chief Justice Earl Warren: Very well.
Mr. Littman, you may proceed.
Argument of Harry S. Littman
Mr. Harry S. Littman: Mr. Chief Justice, may it please the Court.
I should like to present my very brief argument from the point of view of the pipeline company, my client, Tennessee Gas Transmission Company, which was buying this gas.
We operate a long distance pipeline that extends from the gas fields in Texas and Louisiana, way into New England.
Now along the route of this line, we supply gas to some 80 utility costumers.
In 1956, as is our custom, almost annually, we made a canvas for our costumers to determine their future needs for gas and we learned that some 50 of the 80 wanted additional gas supplies.
And so we filed with Federal Power Commission in a separate proceeding, which I'll call the pipeline proceeding, docket G1107 is what it's designated, an application or a certificate to authorize the installation of a very large expansion program which would increase our capacity by come 450 million cubic feet a day.
The cost of the installation of the additional pipe and compressor stations would cost us about $175 million.
Now, obviously in order to achieve this very ambitious and substantial program to give our customers the additional service which they wanted, it was necessary for us to go out and obtain additional gas reserves.
At that time, the only large gas reserve available to us, that was for sale at that time, in the area of our lines, was this particular two trillion cubic feet of gas, which we purchased from these four producers, who are the petitioners in case number 518.
The contract was negotiated over a period of 10 or 11 months in the hardest kind of bare-knuckle bargaining in which we tried to get the best price we could for that gas and the contract was entered into certainly at arm's length, the evidence clearly shows that.
The evidence also shows that the acquisition of this gas reserve was of great benefit to Tennessee and its customers.
It was a very large reserve.
It constitutes some 12% of our present gas supply.
It was well located with reference to our lines being only about 60 miles away from our main transmission system.
The price was not very far out of line; certainly only it was 21.4 cents per thousand cubic feet as compared with 20 cents which was then currently being paid in numerous transactions along the Gulf Coast on dry land for smaller reserves having a lesser potential and being smaller in size than this reserve.
So we bought this gas, we went to hearing.
I might also add that this gas gave us an entrance into this tremendously prolific reserve out in the Gulf Coast, out in the Gulf of Mexico, where we could of course have access to still additional reserves for the future needs of our customers.
At the hearing, no evidence was presented showing this rate to be unjust or unreasonable.
Respondents presented no evidence at all.
There was no challenge at the hearing concerning the need for this gas.
As a matter of fact, there were three orders issued in this case, three separate certificate orders.
It is the third one that is here under review.
In the first two orders there were findings made that the gas was needed by Tennessee as well as in the third order and in those first two orders, respondents took no exception to that finding although they now begin to raise some questions about the need for the gas in their appeal on the third order.
I might also say that respondents, while they were interveners and active participants in the pipeline phase of the case where the question of the need was very thoroughly gone into, and all of these 50 customers and their witnesses testified concerning their needs, they raised no questions there concerning the need for the gas and took no exceptions to the certificates that were offered, that were granted by the Commission in which orders the Commission found that the gas was needed and that the Public Convenience and Necessity required the installation of the facilities and the capacity.
Now the order under review contains all of the statutory findings.
It finds that the Public Convenience and Necessity requires these sales and this service.
It finds that applicants are able and willing to render the service and that they are ready and willing to conform to the provisions of the Natural Gas Act.
The respondents make a concession, that I deem of utmost importance in this proceeding, they concede, all of them do in their briefs over and over again that the Natural Gas Act does not require a finding of justness and reasonableness of a rate as a prerequisite to the issuance of a Certificate of Public Convenience and Necessity in a certificate proceeding.
And that was advised in conceding that point because one searches the four corners of the rate sections of the Act to find any such requirement even as being necessary before the Commission can make effective a rate.
For example, new rates, that is the initial rates cannot be suspended as respondents concede, therefore, they may be made effective without any finding of justness and reasonableness under the statute.
Rate changes may be made effective in the Commission's discretion to be sure, and may be suspended or not suspended as the Commission pleases, but the Commission can make them effective without suspension in its discretion and without a finding of justness and reasonableness.
And in the Mobile case, this Court held categorically that the Natural Gas Act contemplates that all rates are to be established initially by the natural gas companies by contract or otherwise subject to review by the Commission under Section 5.
Therefore, as we see it the basic issue in this case and as Mr. Searls has correctly stated here, whether there was an abuse of discretion on the part of the Commission in refusing to impose a price condition in the certificate order, we submit that there was no abuse of discretion.
The Commission explored the rate aspects of the matter as fully as was practicable under the circumstances.
Its three orders were largely concerned with and contained a full discussion of the price issue.
I say the Commission explored the rate aspects as fully as was practical short of a full blown rate case.
The Commission concluded upon application for rehearing and I would like to quote some of the language, because I think it's quite revealing.
In the third order the Commission finally concluded upon our rehearing, upon our urgent request to save this supply of gas for our markets and our customers that “important as is the issue of price, the precise charge that is made initially is less important than the assurance of this great supply of gas”.
Justice John M. Harlan: (Inaudible)
Mr. Harry S. Littman: Yes, Your Honor, that's in Volume 2, page 489 that's in the smaller of the two volumes and that “in the circumstances of this case, in view of the great demand for gas by customers of Tennessee Gas, the price consideration should not be made the prime determinant of what the Public Convenience and Necessity required.”
Accordingly the Commission reversed its previous order, containing the price condition which was unacceptable to the producers and it instituted Section 5 investigations against the four producers or the other three, pardon?
Justice John M. Harlan: (Inaudible)
Mr. Harry S. Littman: It is on the page 487, I beg your pardon.
It is around about middle of the page there and the Commission then instituted these Section 5(A) rate investigations against the producers.
Now on arriving at this decision, the Commission had before it, the following salient facts which I would like to very briefly summarize, which compelled it to reverse its earlier order and save this great supply of gas for our customers.
First, there were no comparable prices in the area here involved since which would form the basis of a price condition, since this was the first sale in this particular offshore field.
Secondly, as Mr. Searls pointed out there, the price here involved would not trigger any increases in our other gas contracts or otherwise cause any economic disruption in the producing area.
Thirdly, the need for the gas in the interstate market was great and time was of the essence.
This hearing was being tried, the latter part of February and early part of March of 1957.
Our customers wanted service in that winter.
In order to get service to them, we had to build this tremendous pipeline.
We had make all of these arrangements.
We had to construct underwater marine gathering system out in to the waters in the Gulf of Mexico to connect up these 22 wells and additional wells, that were going to be drilled, we had to a tremendous amount of work to get that job done.
The producers told us that they were going to cancel their contracts unless a satisfactory certificate was issued to them by April 1 as was their right to cancel under the agreements.
There was insufficient time as respondents, well, I am sure, they admit and have admitted in their brief, there was insufficient time within which to conduct a full-blown full-scale rate investigation.
It takes years to conduct such an investigation.
The respondents concede that within -- that it was not practicable within the time limitations of this proceeding to convert it, to convert the certificate case in to a rate case.
The producers as I said, a moment ago had advised us definitely that they were going to cancel their contracts and thereafter dispose off their gas in intrastate markets rather than to accept the certificates issued by the Commission's first and second orders and I might say that, that is a very realistic situations with which we are confronted.
The intrastate markets are in constant competition with the interstate markets for this gas.
For example, in Louisiana, some 42% of the gas produced there is sold in intrastate commerce.
In Texas, some 41% and in Oklahoma some 62% or 63% is in interstate commerce and so we weren't the only customer available to them for this gas and there is no means under the Natural Gas Act whereby a producer can be compelled to make an initial sale of gas to an Interstate Pipeline Company, and so it was at our urgent request.
We filed the petition for rehearing with the Commission that it modified its second order, so as to ensure that this great supply of gas would not be lost to the interstate market.
The Commission properly recognized, the overwhelming importance of getting this gas into our lines, and committed to interstate commerce so that thereafter it could not be abandoned without an application first being made and permission granted under the abandonment provisions of the Act and so that the Commission could thereafter exercise its continuing great jurisdiction.
In these circumstances we respectively submit, that the Commission did not abuse its discretion.
Now the respondents extol the virtues of the Commission's second order which contained this price condition.
They hold it up a shining example of a very beautiful device that can be used and should be used by the Commission to control producer prices.
We respectfully disagree.
Not only was the order of doubtful legality as Mr. Searls has already explained, but it didn't make good economic sense and for this reason, the Commission fixed a floor of 17 cents in the price condition and said here you can charge the 21.4 cents said to the producers.
You can charge 21.4 cents while we're investigating the price, but you'll have to refund down to 17 cents if we should find after investigation that the price is too high.
But the 17 cents was the floor, and why did they select the 17 cents because that was the highest price that Tennessee was paying to any other producer.
Now that would put us if this is the pattern to be followed as respondents recommend to be followed and if that had been the vogue of the day, we could have never bought this gas for this reason.
We were paying 17 cents to our -- highest price to our producers, than anyone, but I think one single producer was receiving that much no more.
Other pipeline companies were paying 18 cents, others were paying 19 cents and some were paying as high as 20 cents, and if this type of order had been in the practice at that time, we could never sell this gas – we could never purchase this gas because obviously producers would flock to the company that was paying at that time higher prices than ourselves.
The Court below held sue sponte that the rejection by the producers of the price condition automatically divested the Commission of its jurisdiction to entertain the applications.
Now we agree with Mr. Searls most wholeheartedly that the court below was clearly wrong and so hold it.
As the respondents themselves recognize, an applicant for a certificate when he applies, does not, by the filing of that application agree to accept any kind of the certificate that the Commission may choose to issue.
Indeed the Commission's rules and regulations specifically prescribe that a certificate doesn't even become effective unless it is accepted in writing by the applicant within 30 days after its issuance.
We cite on Page 35 of our main brief that's the buff colored brief, the legislative history which we think conclusively demonstrates the error of the court below.
And now one final word about the position of the New York Public Service Commission, they say that the Federal Power Commission has been derelict in its duty to control producer prices and has failed to do its job in stemming the tide of increase in producer prices.
We respectfully disagree and submit that there is no merit to that contention.
Since this Court handed down its decision in the Philip's case in June of 1954, the Federal Power Commission has suspended over $105 million, now that's per year, of annual rate increases.
Not only that, but the Federal Power Commission has instituted many section 5A rate investigations.
As a matter of fact, as of the present time I think it is fairly correct to say, that practically every large producer of natural gas in the country is under a rate investigation by the Federal Power Commission.
Those of us who practice before the Commission day in and day out, we are not living that way.
We represent producers and pipelines.
I think would be almost unanimous in saying to this Court that the Federal Power Commission is a mighty tough regulator of rates.
Chief Justice Earl Warren: Mr. Brown.
Argument of Kent H. Brown
Mr. Kent H. Brown: May it please the Court?
In 1954, when this Court determined the Phillip's case and announced to the world that the producer of natural gas who sold its product or resale interstate commerce, was within the content of the Natural Gas Act, a natural gas company, subject to all of the provisions thereof.
The going rate for producer sales in Southern Louisiana was in the neighborhood of 10 cents.
In the short space of time, since the rendition of that decision in 1954 and today, we have leaped in progressive steps to as high as 24.5 cents per MCF.
We are here engaged in the proceeding that gave rise to the leap from 18 cents to 22 cents in one fell swoop.
I think it is vital for this Court to know, in order to evaluate the contentions made both by the petitioners before this Court and by ourselves, how we got from the 10 cents that we started out with in the 1954, also in one fell swoop to the 18 cent level from which we started with this case.
Obviously, we have been through all of these things once before.
We know all of the ramifications of the contention that Section 5 is an adequate means of protecting consumer's interest against excessive gas prices.
We know all of the consequences that instill from precipitous increases in the initial rate, such as is here evident.
I will be very brief in my depiction of that development from the 10 to the 18 and hasten on to this one.
That league was initiated by a sister pipeline company of Tennessee, Transcontinental Gas Pipeline Corporation; they take turns in this regard.
In 1954 Trans-co renegotiated a goop of its then 10 cent contracts and agreed to pay to producers 17 cents, for the gas already committed to their markets.
Justice Tom C. Clark: When was that?
Mr. Kent H. Brown: 1954, during dependency as a matter of fact, of this Court's decision in Philips and immediately after.
That was the Southern Louisiana area, and constituted almost immediately the elevation of the going price from 10 to 17 cents.
It had these three immediate ramifications.
In the first place, the rate increase filings that were filed as a result of those renegotiated contracts, boosting the initial -- boosting the rate, charge theretofore from 10 to 17 cents under Section 4, was the first Section 4, Producer Proceeding to come before the Federal Power Commission under its new found, newly directed authority to regulate producer affairs.
Those proceedings prompted -- those filings rather, prompted the Commission to suspend the 17th -- 7 cent increase in the price, for the maximum period in most cases, outside months that Section 4 allows.
From that period on, since 1954-55, we have, as Mr. Littman just advised, been paying in excess of $105 million a year of dollars for gas that is subject to FTC Suspension, and theoretically, ultimately, might be refunded to us, but the prospects are still of that are still very dim.
Those Section 4 proceedings that started in 1955 are still pending before the Federal Power Commission unresolved.
The explanation lies for that rise principally, in the fact that the producers adamantly refused to supply the Commission with any cost of service evidence upon the basis of which the Commission might possibly arrive at just and reasonable rate for those producers.
We had to come all the way through the First Circuit to this Court in application for certiorari to find out the cost of service was material at all in the producer rate case.
The cases were remanded to the Commission, there they append.
The same development has occurred with respect to Section 5.
The Commission has instituted several Section 5 proceedings against producers, particularly the four here involved, they have progressed virtually nowhere to date.
Only last month that we got the first examiner's tentative decision in the Phillips case if you please, that was the case that gave rise to the whole business of producer regulation in the first place, and went back to them in 1954.
Five years later we got the examiner's proposed decision.
The Commission has yet to consider and yet to rule upon a single Section 4 proceeding or a single Section 5 proceeding, involving in a major producer of natural gas in this country.
The point is, no one knows yet how, when, why, where the Commission will fix a just and reasonable rate for a natural gas producer.
Accordingly, the protective devices built into those sections are ostensibly designed to protect the consumer, have yet to come in to full-play or yes, any play at all; with respect to producer prices, other than suspension, was a maximum period of 5 months.
The second ramification of that boost that Trans-co effected in 1954 –
Justice Tom C. Clark: For the maximum of what?
Mr. Kent H. Brown: Five months is the maximum duration of the period of suspension of a rate increase filing under Section 4.
Justice Tom C. Clark: What has happened in the Phillips case is that – you say that was started five years ago?
Mr. Kent H. Brown: Yes sir that was the Section 5 Proceeding.
Justice Tom C. Clark: It was suspended for five –
Mr. Kent H. Brown: There was not a rate increased filing sir.
Justice Tom C. Clark: (Inaudible)
Mr. Kent H. Brown: It was a Section 5 investigation by the Commission of the justness and reasonableness of Phillips' entire rate structure, in which the burden is on the Commission to establish the unjustness and unreasonableness, of the rates, currently being collected.
The second ramification of that jump with Trans-co affected in 1954 of 7 cents was of course, that it established a new price floor for bargaining for future gas, additional gas supplies in Louisiana.
New contracts were signed for new production at 17 cents and those proceeds, the predecessor of the one before us, now, were the first to come before the Commission under Section 7 of the Natural Gas Act, the one with which we are here involved.
Then on November 28, 1955, the Commission determined to permit or grant an unconditional certification of a new purchase contract at 17 cents in Southern Louisiana in effect finding that Public Convenience and Necessity required -- in effect finding that the producer has sustained his burden of proof of establishing that, imposing no condition, no limitation, no restraint upon the collection of that 17 cents and determining, and this notwithstanding the fact that in the related Section 4 Proceedings, it has already made findings with respect to this 17 cent level, that they made the unjust and unreasonable as a basis of suspending those, notwithstanding that, unconditional certificates were granted for the new purchase contracts on November 28, 1955.
The Commission saying, we think we can adequately protect the public interest under Section 5 proceedings, which may be instituted at such time as they may be called for.
This begins to ring a familiar story.
I -- no, I hope all time failing in my purpose.
On the same day, November 28, 1955, which in our parlance, if the court will permit, has come to be known the, which paper do you read day, on the same day that the Commission determined to certify unconditionally 17 cents in Southern Louisiana, it refused to -- certificate unconditionally 2 cents increase from 10 to 12 in Southern Okalahoma, in almost identical phases and type of situation.
It there found that the petitioner had not sustained his burden of proving Public Convenience and Necessity for the 12 cents sale.
It has been demonstrated therein that the 2 cent increase would increase the rate level in Okalahoma generally, to the detriment of other purchases of gas and this purchaser in that area, that to grant the 2 cent increase would disrupt the market and therefore, and that further that Section 5 proceedings, the recourse they have brought for us in Southern Louisiana, the Section 5 proceedings were totally inadequate means of protecting the consumer and others and so it affected by a marked increase in the field price of natural gas such as the 2 cents here involved.
It was inadequate for the following reasons.
They were bound to be long and protracted and assuming the culmination, ultimately of the Section 5 case, there is no refund prerogative vested in the Commission under that Section.
Any excess over the just and reasonable rate ultimately determined, it may have been paid by -- due to their authorization or certification of the 2 cent increase here could not be refunded, or could not be recouped.
Hence the deleterious effect of an unconditional certification of an increase in price, the proprietary of which had not been fully demonstrated.
Rationalize all you will, I respectfully submit two decisions, the Tamburello involving a 7 cent increase in Southern Louisiana and Signal involving a 2 cent increase in Okalahoma cannot possibly be reconciled.
The Tamburello decision was not appealed to the court.
Had it been, perhaps we would not here be faced with 22 cent gas, or, nor would we be faced immediately before the Commission with 25 cent gas.
Justice Hugo L. Black: Why --
Mr. Kent H. Brown: Because --
Justice Hugo L. Black: -- would that follow?
Mr. Kent H. Brown: -- if it was if – and a field had been taken in Tamburello and had been established as we hope to establish definitively before this Court that in the absence of full demonstration by the producer of the proprietary of their price increase or price boost, if you will, that the Commission should exercise by some conceivable (Inaudible) if it's going to certificate the case at all, a protective means of saving the public against these increases, protecting them from paying, having to pay them.
If that is the law on the land as we think it clearly is, the likelihood of their having been negotiated in bargaining positions, subsequent to the determination and Tamburello of an ever progressive upwards spark, each one establishing a new floor for bargaining would not have occurred, because the industry would have well known, that is either had to fully establish the proprietary of the price when it came in or it was going to be to be limited on a conditional – so to a conditional certificate at a level which would not disrupt the market and permit of such an spiraling increase in the initial price of the product.
Justice Hugo L. Black: You say if that had been taken to the court, why was it not taken to the court, I don't quite understand --?
Mr. Kent H. Brown: At that juncture in the Federal Power Commission's Development or endeavors to develop the procedures regulating the producers, we as one of the potential participants that might have taken it, resolved not to, but rather to repose upon their assurance, that they would evolve protective procedures under the Section 4 and Section 5 processes available to them, to prevent of ever increasing spark prices products that develops, that way we repose too much confidence.
That is the real explanation for our not having taken Tamburello up at that time.
Signal on –
Justice Felix Frankfurter: That's another way of implying you got to have discreation in this field?
Mr. Kent H. Brown: Not necessarily Your Honor!
We were willing to assist the Commission in everyway possible at that juncture in evolving the procedures for the sizeable task that it had inherited at the decision made by Phillips.
We were not pursuing our every right and remedy to fullest extent.
Justice Felix Frankfurter: (Inaudible)
Mr. Kent H. Brown: The discretion was ours as that we exercise, that we exercise it not to take the matter up at that time.
Justice Felix Frankfurter: When you say you lie down there of services, it worked out to be so (Inaudible) they have a no way ground.
Mr. Kent H. Brown: Oh, they have a wide variety, and a wide range of maneuvering gone.
Our only insistence at this juncture is it that they exercise one or another outcome effectively, to prevent this ever repeating, squishing operation by which we have gone from 10 to 25 cents in Southern Louisiana is say for less than four years.
Justice Felix Frankfurter: I mean, we would have to decide, you are really inviting us to consider with the Okalahoma case which is on a (Inaudible)
Mr. Kent H. Brown: Not exactly Your Honor, no sir.
Justice Felix Frankfurter: Well, otherwise, say they were lying, yet they contradict each other.
Mr. Kent H. Brown: We are taking -- we took a position before the Lower Court and are taking it here very much like if not on all force with the decisions in other Commission and other courts for sustaining it in the Signal case.
It is our position before this Court; the Signal epitomizes the heart really of our contention here.
Justice Felix Frankfurter: It takes there is a (Inaudible) they will compel to fix the price, again with the bill.
Mr. Kent H. Brown: No.
They felt so impelled, because the producer had not sustained the burden of proof, to sustain the boosting of the price that was in Oklahoma from 10 cents to 12 cents and the court sustained --
Justice John M. Harlan: Excuse me, I understood your advisory to say that you agreed, there did not have to be a rate determination, just a reasonable rate determination in a Section 7 proceeding.
Mr. Kent H. Brown: That's substantially correct Your Honor.
Justice John M. Harlan: What do you say is the lower limit of the discretion, the Commission's discretion?
Mr. Kent H. Brown: If the producer in an application under Section 7, before the Commission, accompanies his proof with some demonstration of the proprietary of the price requested, and if that price is not of a size or quantity that will disrupt the market involved, there is demonstration I would say and the Commission would be added promptly to stand in the determination of granting an unconditional certificate, assuming all other proof were, requisite proof were available.
If however, there is no proof or inadequate proof of the proprietary and in this we insist the producer has the burden of proof, he is the applicant for a new certificate.
The law prohibits his sale in interstate commerce unless he possesses the certificate.
If he puts in no proof pertaining to his new high price and that it is demonstrated on the record or from information contained in the Commission files that this is going to establish a new higher rate, a new high level in the area involved, then we believe that under the law, the only way the Commission may certificate that sale is by exercising one of the multitudes of means available to it, limiting the certificate or conditioning it in such a way that it will not have that deleterious effect upon the public interest, and thus permit the sale to go through on that basis.
But if it does not elect to exercise those varieties that are available to it, or put in another way, its duty to keep the price level that's within a range of reasonable, then we insist it must pursue the only alternative left in the law, the one specifically directed, in fact, namely deny the application.
Justice John M. Harlan: What would be, a company would be, producer is not then willing to work committed to interstate commerce, on what the Commission would like to have it do, what happens then?
The Commission (Inaudible)
Mr. Kent H. Brown: That was substantially the position that petitioners here would have you believe evolved in this case.
Justice John M. Harlan: I am just putting the question to you.
That's the way --
Mr. Kent H. Brown: If they're so faced, we do not believe that that alters in the slightest, the Commission's obligations prescribed under Section 7 of the Natural Gas Act.
The fact that -- in fact, under the Natural Gas Act, it has no authority; it hasn't indicated to compel anyone to devote anything, any gas reserve to the interstate market.
It is not vested.
It is not charged with the responsibilities under the Act of seeing to it that people do so.
It might be conceded that it has – assumed to have an obligation of providing or seeking through conduct itself in a manner that it will in all likelihood assure reasonable supplies of gas, at reasonable quantities, at reasonable prices, but it isn't in a position of the Chamber of Commerce or someone other similar agency.
Its primary interest in other words is not to ensure the devotion of gas to interstate commerce.
As a matter fact, the statute reads quite in the negative of that.
Its obligation is to prohibit the introduction of gas into interstate commerce, unless it is accompanied by proof of the Public Convenience and Necessity, including if you -- this Court so holds and I hope it will deny their price.
Justice John M. Harlan: Even though taking that position, it might have been a larger public interest in stagnant supplies.
Mr. Kent H. Brown: I think the act in neglecting to provide any means is devoting gas or having Commission command gas, if you will, obviously, relied upon an economic incentive to produce for the interstate market adequate supplies from the producers.
It has been more than an inadequate incentive.
We are faced with no problems along that score as far as products are doing more here of course.
It is unlikely that that incentive will fail.
As has been demonstrated this morning that there is an intrastate market that they can bargain against to the intrastate market too, but there was no proof in this case, for instance, of any potential intrastate market for this gas.
We were dealing here with the two trillion feet of a natural gas, in which -- at which -- at 18 cents the price that was going level in Louisiana at that time, produced 360 millions of dollars.
There were millions upon million of dollars invested in the platform to produce it, returning no -- and nothing -- no return on reinvestment.
The Inspiration for the delivery at 17 cents we think was there and in any event the Commission never gave an opportunity to anyone that down the (Inaudible) there was not.
The threats made a withholding were we believe not substantial, and yet they were accepted by the Commission as potential, and it was persuaded on the basis there off to junk the most important obligation it has, under Section 7 of the Natural Gas Act, namely the Price Protection in favor of a self appointed position of Chamber of Commerce, get all the gas to (Inaudible) to be interstate market.
Justice Tom C. Clark: And the 18 cents -- way out underwater (Inaudible)
Mr. Kent H. Brown: Yes, sir.
Justice Tom C. Clark: How did you know?
Mr. Kent H. Brown: In the West Delta area Tennessee had purchased 17, 18 cent depending on whether you include the tax reimbursement, gas for our Gulf production, and as a matter of fact we endeavored before the Commission that introduced those contracts into evidence as a basis of comparison, just to establish the fact that there was a 17 cent level, the highest known in Southern Louisiana and for Tennessee (Inaudible) Gulf for those gas that we were denied the opportunity.
Justice Tom C. Clark: More than the Gulf (Inaudible)
Mr. Kent H. Brown: In the Gulf, yeah, and it is called the West Delta area.
Now, if there is a distinction and --
Justice Tom C. Clark: I was thinking in terms of (Inaudible) and they have one important implement to it.
Mr. Kent H. Brown: We didn't get to the point of finding out whether there were kept comparable exactly or not.
Justice Tom C. Clark: Has it (Inaudible) like that time?
Mr. Kent H. Brown: There are potentially all kinds of possibilities, quite like reasonable that appear to me that the gas here involved is more expensive to acquire, than gas under our land, it's not an unreasonable assumption, if you're going out in the middle of delta to get it.
There's absolutely no demonstration however, of any cost of either one and it produces adamantly and vehemently refused the permits of the FBC consideration of any such aspect of their cases.
Having gone from 10 cents, which never incidentally has been determined to be just and reasonable for a major producer, the 18 cents and now the 22 cents, and just on the assumption that this maybe required by I think to increase cost, we think is egregious dereliction of duty.
Justice William J. Brennan: The minimum demonstrations, it should be as planned.
Mr. Kent H. Brown: In the matters of this kind in a full fledged rig case on either under Section 4 or Section 5 of matters of cost, these are -- these get terrifically involved.
Justice Felix Frankfurter: Preceding the determination of the granting of certification.
Mr. Kent H. Brown: Oh, no sir, no sir.
Justice Felix Frankfurter: Oh then that was the question.
Justice William J. Brennan: My question, I suggested for minimum demonstration to this cost.
Mr. Kent H. Brown: No minimum demonstration as to cost is required generally or would reasonably be anticipated in a Section 7 case, unless the price were above the higher of the going rate for the area, and the producer was desirous of establishing the proprietary of his going that much higher to get a full unconditioned certificate.
If he wished to discharge his burden of so elevating the price, in his case, by demonstration of the fact that it cost him X dollars more to get it then it did the 18 cent gas for instance, that would be his privilege --
Justice Felix Frankfurter: (Inaudible) just to indicate that there might be differences, the going rates implies, going rates for the same, for the going territory.
Mr. Kent H. Brown: There will be differences in the ultimate determination of the just and reasonable rate for producer against other producers, certainly that's true.
Ultimately all of them will be subjected to produce just and reasonable rate determinations and probably no two of them have the same average price, cost of service price determination.
Justice Felix Frankfurter: (Inaudible) question in my mind for some time.
If full scale rate determinations are not be made, how shallow or substantial would be this preview determination on a hop, skip and a jump.
Mr. Kent H. Brown: We don't urge that there be hop, skip and a jump approach for determination.
Justice Felix Frankfurter: How much more on the hop skip and jump?
Mr. Kent H. Brown: No particular an inquiry at all, as a matter of fact, unless, if that prices within the going range that you can reasonably anticipate a sale to be made at any given time and any given field and this is demonstrable, this is the so called fair field price, about which we've heard endless remarks in this Section 4 and Section 5 cases, the producer who's had that --
Justice Felix Frankfurter: Test with that for us, as when this – the context in which it is made with --
Mr. Kent H. Brown: Not to determination of the fair field price, those are demonstrable from the contracts on file with the Commission.
Justice Felix Frankfurter: (Inaudible) context is unread as to the applicability of those --
Mr. Kent H. Brown: The context is where the just and reasonable rates for producers under the Natural Gas Act can be determined solely on the basis of these unregulated fair field prices or whether we must start with some cost --
Justice Felix Frankfurter: I got you.
So hearings under such house, from how your experience, how long those hearings, is it a matter of a few days or --
Mr. Kent H. Brown: Months.
Justice Felix Frankfurter: It's in months?
Mr. Kent H. Brown: With long postponements for interruptions, Philip for instance is, as I indicated, went on for years.
Justice Tom C. Clark: Are you then satisfied with (Inaudible)
Mr. Kent H. Brown: Quite satisfied Your Honor.
Justice Tom C. Clark: Difference between is may be water, water (Inaudible) and put things different or really plan until Friday, under (Inaudible)
Mr. Kent H. Brown: You want an order that will in some way –
Justice Tom C. Clark: Does that become (Inaudible)
Mr. Kent H. Brown: -- prevent our having to pay an excess -- grievously excessive price, without any demonstration at all?
Justice Tom C. Clark: As I understand this is the issue with (Inaudible)
Mr. Kent H. Brown: Either that they accept a certificate?
Justice Tom C. Clark: You want (Inaudible)
Mr. Kent H. Brown: You might say that we would accept and we did accept, although quite startled by the second order, the May 20 order that said we will grant you a certificate, if you will condition your price to start at the going rate of the area and assume the obligation of demonstrating this justness and reasonableness and above that in a Section 4 case.
We were willing to accept that and quite willing to abide by, even though the Commission therein said and we will promise you that we won't suspend that increased rate filing from 18-22 more than 24 hours, so that you can collect the full 22 cents for as long as it takes you to demonstrate the justness and reasonableness of this rate.
And failing which, you will only have to refund the difference between the 22 and the 18 cent base on which we start.
Now, the only one that could lose under a situation like that would be the consumer, he could lose, because there is yet to be a demonstration or a decision on just and reasonable rate anywhere near 18 cents.
The highest one yet known, and there are only a few involving small producers too in different areas, the highest one yet known is $12.25 cents.
So, that our willingness to accept the 18 beyond any recourse of refund, I think demonstrated some disposition on our part to adjust all interests in the proceeding, the consumers, and as well as the producers.
But no, they weren't content with that.
They had to have it all or nothing and under arrangements whereby they would be under no obligation, whatever, to prove anything, that if there were to be any recourse, this Commission must assume the full responsibility of proving them unjust and unreasonable in a Section 5 case the nature of which no one yet understands.
Justice Felix Frankfurter: I am not used to take (Inaudible) or wasn't just to – they were unwilling, they were unwilling.
Mr. Kent H. Brown: The applicant, producer applicants.
Justice Felix Frankfurter: I understand it.
If the Commission had insisted on picking a tentative rate and they had to post that on the ground, there was no basis especially, and they had then come here against the denial of a certificate, because the Commission insisted on condition yet with the rate or the price, and I think it would be quick reaction, early reaction, they insisted, but this the Commission's doing.
Now unless you say that the Commission coerced by their correcting your suggestions with determination of the contract, then the question is whether the Commission of its own determination and on its own responsiveness made this decision without a doubt.
I don't think that it helped the argument much that they were not satisfied (Inaudible)
Mr. Kent H. Brown: There is no denying the last remark Your Honor.
That is absolutely correct.
It was they in the sense that I used it who brought the pressure to bear upon the Commission doing three separate decisions in which they refused to accept the first order then refuse to accept the second.
Justice Felix Frankfurter: Not only you have to decide this order at pressure, are you?
Mr. Kent H. Brown: No sir, no sir!
In other words, the Commission adjusted itself downward progressively on the protection of the pubic interest in three consecutive steps, winding up with a zero; that is our position.
Justice Potter Stewart: Mr. Brown, in answer to question of Mr. Justice Frankfurter and Mr. Justice Brennan a few minutes ago, I want to be sure that your answer -- that I understand your answers and your position.
Am I right in understanding that if the contract rate had been equal to or less than a prevailing rate which this pipeline company was buying gas, it's your position that the Commission was under no obligation at all -- to make any investigation at all on price?
Mr. Kent H. Brown: Nothing in particular, so sir.
They could have -- as a matter of fact they have so called fanning hearings for these, abbreviated --
Justice Potter Stewart: I am talking about this Section 7.
Mr. Kent H. Brown: -- that's right, under Section 7.
Justice Potter Stewart: If on other hand the contract rate had it exceeded the going rate at which this particular pipeline was buying gas, or had exceeded the maximum rate, current rate, then it's your position that the -- that it was incumbent upon the applicant to justify that rate, is that it?
Mr. Kent H. Brown: Yes sir.
To prove, to bearing the burden of proof was establishing --
Justice Potter Stewart: By what kind of proof and how through as compared to a Section 5 proceeding for instance?
Mr. Kent H. Brown: Perhaps by pointing out that he was getting 18 cents on land at cost which gave him 6% return and he would not get a 6% return going out in to the Gulf, and therefore needed the 22 cents.
Justice Potter Stewart: It could be kind of rather a complicated procedure --
Mr. Kent H. Brown: Indeed yes, indeed yes.
Justice Potter Stewart: Having to justify --
Mr. Kent H. Brown: But that is his obligation, if he wants to affect an increase in the going price range of the area, we think he has the burden of proving the necessity for the Commission to permit it.
That is the whole regulatory purpose involving rates in the natural gas.
Justice Potter Stewart: It would follow, would it not in your position that the -- very much of the interest of the producers to find a pipeline company which was paying the highest rate currently, because it could then establish contract rate, that has within the highest rate and there would be no duty upon the Commission to make investigation and no burden upon the applicant to make any justifications at all.
Mr. Kent H. Brown: No, I beg your pardon.
The turning point, if you will, is not the highest price paid by the purchaser pipeline involved.
It so happens in this case that the 18 cents was in fact the highest price paid by Tennessee, but point and the purposefulness of this second order's condition of an initial price of 18 cents was not that factor.
It was the factor that 18 cents was the going price for the area.
One, an additional sale and rich would not be disrupted, would not send things sky high, so that the next purchaser going into the area would not be confronted with a 22 cent floor before he can even start to bargain, as is the situation today.
Justice Tom C. Clark: It contains the same area, I don't understand --
Mr. Kent H. Brown: I beg your pardon.
Justice Tom C. Clark: (Inaudible) the same area, I thought Mr. Searls said that it was a deal that has just been discovered, not the same area.
Mr. Kent H. Brown: It's a new field in the sense that it's out in the Gulf offshore, Southern Louisiana, but within a matter of hours, days, after the price was negotiated and in subsequent cases before the Commission as is demonstrated time and time and time again, that price washed right up on shore and became the going negotiating floor for all of Southern Louisiana, therefore, we say the area, namely Southern Louisiana.
Justice Felix Frankfurter: Oh then it would be -- then it will be taken care from the floor, if it's as easy as that and they can't maintain this price under, in the Section 4 (B) proceeding?
Mr. Kent H. Brown: If we had to demonstrate that a Section 4 case was a feasible remedy and could be carried on expeditiously and determined expeditiously, we wouldn't have to have these, as you say manipulative things in trying to protect the consumer interest in the Section 7 case, but we do not have it.
It has been demonstrated that the rate provisions of the act to date at least, meaningless as producer price or preventives against producer price rampages.
They have yet to be demonstrated they have any import, as far as protected --
Justice Felix Frankfurter: Are there -- is there any bounding?
Mr. Kent H. Brown: They are bounded, yes, but as has been mentioned we pay $105 million a year under bond, theoretically sometime we'll get it back.
We pay an awful lot more than that that is not under bond; that has not been suspended by the Commission that we will never get back.
Justice Felix Frankfurter: Your argument gets down to, doesn't it that the administrative teachings of these statutes as they're effectually operating, have turned out to be not efficacious, and from there an inference is to be drawn as to the restrictions under which the Commission must apply Section 7.
Mr. Kent H. Brown: That is one of the reasons why we think those strictures must be drawn.
We think it's the rare reason, more fundamental however, built right into Section 7 by Congress itself in the means of -- method by which they directed that statute.
The conditioning clause was added in 1942 specifically if you please, to give the Commission the authority to limit price, rate; excesses at the very outset of the dedication of gas or gas products.
Justice Felix Frankfurter: Does the certification provision specifically say that they must, in granting the certificate, make price protection, does it say that?
Mr. Kent H. Brown: It does in so many words.
Justice Felix Frankfurter: I am not saying that looking from literal language as an answer to statutory questions, but you say so strongly, that it says specifically, it doesn't say specific.
Mr. Kent H. Brown: I said the Congress enacted the conditioning authority specifically as derived from its legislative history, as can be demonstrated in its legislative history.
It is our principle contention here that has been demonstrated that the Federal Power Commission, not only abused a privilege of considering price in a Section 7 certificate application, which is what the court below held, did so at the instigation of CATCO, but rather that it was in dereliction of an absolute duty imposed upon it by the law to make price the prime determinant always, in Section 7 applications.
Of the abuse of the privilege by CATCO we complained bitterly before the Federal Power Commission and the court below.
It is not a new objection.
It was not a resurrection of the court below under a sua sponte motive.
Of the dereliction f duty, we -- contention, we have made that contention in every major Section 7 rate case before the Commission in the last five years.
There is nothing sua sponte on that either.
We respectfully urge therefore that the decision of the court below is not only abundantly correct, but we urge further that this Court sustain it under the broad construction of Section 7 as requiring the Commission to do what it –
Justice John M. Harlan: Do what?
Mr. Kent H. Brown: What it bargained itself out of doing in the third order, namely, junking the aspect of price in consideration of Public Convenience and Necessity applications under Section 7.
Justice John M. Harlan: The first order shows that it did (Inaudible)
Mr. Kent H. Brown: It gave due full considerations and reacted responsibly --
Justice John M. Harlan: And –
Mr. Kent H. Brown: -- and in second as well.
Justice Felix Frankfurter: Well, the producers weren't going to accept the certificates on those terms which I take it they had the right to do.
Indeed the Commission then said all right, we think the larger public interest requires that we handle the matter as they handle it in a second order.
Now what I am asking is what you want the Commission to do now?
What do you think they should do?
They've considered the thing, highly observed the thing, but you say the only thing is they should consider now what more can they do?
Mr. Kent H. Brown: It is conceivable that there might be such a screaming need for gas under certain circumstances, not here present that they could jump price and not pay attention to and not be determined principally by --
Justice John M. Harlan: But they said that.
Mr. Kent H. Brown: But they cannot -- we do not believe, bargain price away under the guise of need for expansion of gas facilities.
The whole purpose of regulation presupposes need for the regulated commodity and a necessity for the exercise of price regulatory provisions.
You do not bargain the two together and weigh one against the other, and junk one or the other, as you elect, you must reconcile them both, that we think the Commission failed to do in this third order.
Thank you very much.
Chief Justice Earl Warren: We'll recess now.
Argument of Edward S. Kirby
Chief Justice Earl Warren: -- et al. petitioners versus Public Service Commission of the State of New York et al. and number 536, Tennessee Gas Transmission Co. petitioner versus Public Service Commission of the State of New York Et Al.
Mr. Kirby, you may proceed.
Mr. Edward S. Kirby: Mr. Chief Justice and may it please the Court.
In these cases I represent Public Service Electric & Gas Company which is a gas distribution public utility in the State of New Jersey.
We serve over 1,100,000 customers and have large purchases of natural gas from three pipeline companies.
We purchased for example a 1958 already 8 million MCF of natural gas, which by coincidence is slightly larger than the entire amount which will be delivered at Tennessee under these contracts per year.
Now, we are rightly interested in the field price of gas in these cases because the field price of gas is a large element in the price which the pipeline company charges the distribution company.
Now, in my argument, first, I would like to try and cover two points which I felt were prompted by questions from the bench yesterday and these two points are (A) the rate making standard of the act in connection with the Commission's discretion in a Section 7 proceeding and 2 or (B), what's a touch off Commission action, and what evidence is necessary where it appears a producer is seeking too high of price?
Taking up the first point, I agree that the Commission has a certain amount of discretion which it may use in the Section 7 proceeding.
And in the exercise of that discretion, it need not make a finding of just and reasonableness with respect to the initial rate in every case.
What this discretion must be exercised within the framework and policy of the Natural Gas Act.
The cases for example which express that policy are the Hope case and the Phillips case, and the policy as this Court interpreted was namely to protect consumers from exploitation at the hands of natural gas companies.
Justice Felix Frankfurter: May I trouble you to repeat exactly the words you said that it need not find what at the rate --
Mr. Edward S. Kirby: Yes, Mr. Justice Frankfurter, I said it need not make a finding of just and reasonableness in a Section 7 proceeding with respect to the initial rate.
Justice Felix Frankfurter: But, the contention of the respondent is that it can't issue a certificate without making some provision for rates (Inaudible).
Mr. Edward S. Kirby: Not in every case, if for example --
Justice Felix Frankfurter: In this case.
Mr. Edward S. Kirby: In this case, yes.
That is our position, in this case, they should not issue the certificate without (Inaudible)
Justice Felix Frankfurter: It doesn't find what the reasonable rate is, but it must make some what shall I say --
Mr. Edward S. Kirby: Some provision to protect the consumer.
Justice Felix Frankfurter: Pardon me?
Mr. Edward S. Kirby: Some provision to protect the consumer in the meantime.
Justice Felix Frankfurter: If determination of that would be and just and reasonable rate.
Mr. Edward S. Kirby: No, that's right Your Honor.
Justice Felix Frankfurter: What is the significance of the rate?
Is this an outside gas or what is it?
Mr. Edward S. Kirby: All right.
I think I can answer that right here Your Honor.
I say that the Commission's discretion in a Section 7(4) proceeding must recognize that Section 4 points out that this is a price oriented statute and that Section 7 provides all rates must be just and reasonable, and if they are not, they are declared to be unlawful.
Justice Felix Frankfurter: Well, perhaps when you say that, and well then you take the whole question.
Mr. Edward S. Kirby: No, I think I will come right to it.
Justice Felix Frankfurter: Maybe you make it improper; you think you start with it in your premise --
Mr. Edward S. Kirby: All right!
Let me just say it Your Honor.
Section 4 does not exclude initial prices paid to producers.
However, and this is the point I think that answers your question, the precise time at which the Commission must make such a determination of just and reasonableness maybe left to a later time, outside the Section 7 proceeding, after it has concluded provided, and only if, it protects the consumer in the meantime, the waiting period.
As this Court said in the Hope case at 320 US at page 611, the Federal Power Commission was given broad powers of regulation for fixing of just and reasonable rates under Section 4 with the powers attended there too, was the heart of the new regulatory system.
I believe Justice Harlan asked Mr. Brown yesterday a question to this effect.
Isn't the nub of the problem that producers want a Section 5 proceeding and you want a Section 4 proceeding?
The unequivocal answer to that question is yes, but it must be understood that there is no way to provide for a Section 4 proceeding unless a condition calling forth is placed in the certificate which is issued in the Section 7 proceeding.
In other words, the two must be in conjunction because you cannot initiate a Section 4 proceeding, the pipeline itself must do that or the producer rather in this case.
Justice Felix Frankfurter: What you're saying or are you saying is that the scheme of Section 4 would be rendered (Inaudible) and would be frustrated, unless you have some price pegging in the certificate.
Mr. Edward S. Kirby: Absolutely right.
Justice Felix Frankfurter: That's what you are saying.
Mr. Edward S. Kirby: That's what I am saying.
Justice Felix Frankfurter: Section 4 is another --
Mr. Edward S. Kirby: If you have no price pegging, or for that period of time until the Section 5 made the initiative.
Justice Felix Frankfurter: (Inaudible) because of the different burden approved, is that?
Mr. Edward S. Kirby: It's one of them.
Justice Felix Frankfurter: Or because the volume of the business is before the Commission involves delay.
Mr. Edward S. Kirby: You're right and the case itself, the Section 4 takes great time.
Justice Felix Frankfurter: In other words --
Mr. Edward S. Kirby: Pardon me, Section 5 Your Honor.
Justice Felix Frankfurter: In other words, the argument is that the actual administrative operation of the statute passed by Congress will determine how you construe Section 7, is that it?
Mr. Edward S. Kirby: That's exactly right Mr. Justice.
Justice Felix Frankfurter: That's the case, isn't it?
Mr. Edward S. Kirby: I think it is.
Justice John M. Harlan: How do you made the point that the Commission having proposed what you say would have been agreeable to you namely a Section 4 proceeding which would have been effectuated by new filing one day after the certificate issued.
The Commission being faced with a refusal by the suppliers to accept that, (Inaudible) for the choice is to whether they were going to get this gas supply or accept or decline a certificate.
How do meet that?
Mr. Edward S. Kirby: Yes sir Mr. Justice Harlan, that's exactly the point right there.
I think that was the nub of the dissent of Commissioner Kline when he said it was a Hopson's choice before the Commission to either deny the certificates or something to that effect.
Now, I would say this.
The plain answer to that question is found in the statute itself, and the statute, I am just speaking of the Natural Gas Act, Section 7 proceeding says, there were two requisites that the Commission must find before it can issue a certificate one that the Public Convenience and Necessity requires it at the price level proposed and number two that the applicants are willing and able to perform the act.
Now, in this, in the question that Your Honor proposed is the applicants are unwilling to accept the first and second orders in this case which would protect the public, the consumers.
They said no, we won't accept that.
Then the Commission, and here is where I think the error was, agreed to them and issued it without any condition.
I say they had no discretion at that point because the statute says you must in that case deny the certificates.
They should have denied the certificates, they have to.
That's what the statute requires them to do when they find an unwilling applicant.
Otherwise it says, the certificates must be denied.
Justice John M. Harlan: Would your position have been different if there had been express findings that this source of supply, the importance of this source of supply overrode the price consideration, would your position have been different here --
Mr. Edward S. Kirby: On that question there Mr. Justice Harlan --
Justice John M. Harlan: There are no such findings --
Mr. Edward S. Kirby: No, there aren't because twice, in the first two orders, in the first order and the second order, the Commission both times said, the record contains insufficient evidence from which this Commission can make a finding or determination that the certificate should issue at the rate level proposed.
Therefore we have to condition it.
So, they didn't have the requisite evidence in the first and second, but in the third, they just gave that off.
Justice John M. Harlan: So then your quarrel really is narrower, namely that there are not adequate findings here to support what you would recognize the Commission would have the right to do with proper findings.
Mr. Edward S. Kirby: Well, Your Honor then stating that, they have a right to balance the need against price when they have the evidence as to both the elements.
They didn't have it here, but if they had those two, I suppose in their discretion, they can do that, but they must protect the public against an unlawful price.
If the price is so high that they know from the start that it's going to probably be unreasonable, they can't say well, we'll let you have the price because the need overcomes it, they have to say we have to go back to section 4 --
Justice John M. Harlan: Well, they have a 5 (A) avenue; you say it's an inefficient one.
Mr. Edward S. Kirby: Yes sir.
Justice John M. Harlan: But they have that, so they are not (Inaudible) public protection, but if there were such findings, would you then agree that the Commission could have done what it undertook --
Mr. Edward S. Kirby: No Your Honor because I have to say that if they found that there was a great need, and they found that the price was extremely high or unreasonable, but they balanced the two.
I say they can't do that because an unreasonable price cannot be the basis of a certificate or any action or any rate under the act.
They are bound in their discretion by Section 4 of the act.
Justice John M. Harlan: And the absence of findings is -- there is an absence.
It makes no difference to your position.
Mr. Edward S. Kirby: It makes the difference because the case is stronger against the producers where they have put in no evidence as to the request for this higher price.
There was no evidence on which it could be balanced.
Justice Felix Frankfurter: Mr. Kirby, may I ask what Justice Harlan strikes in another form, or another aspect, another face of it, would your case be any different if there had not been, pardon me -- three determinations by the Commission but just one, if the crutch all before us merely gave us the certificate in its last case.
Would the case be any different?
Mr. Edward S. Kirby: Not one bit.
Justice Felix Frankfurter: All right.
Mr. Edward S. Kirby: Not -- It makes it stronger, but it would not.
Justice Felix Frankfurter: (Inaudible)
Mr. Edward S. Kirby: Yes.
Justice Felix Frankfurter: The legal questions stripped down as many --
Mr. Edward S. Kirby: It's the same.
The Section 5 doesn't protect the public during that interval however long it may be.
Well, to get back to the second order, it guarantee to producers at least at just and reasonable rate.
Justice John M. Harlan: Can I put one more question here really just to orient myself –-
Mr. Edward S. Kirby: Yes.
Justice John M. Harlan: -- supposing in practice a Section 5 proceeding was just as expeditious as a Section 4 (e) proceeding, would that make a difference to your position?
Mr. Edward S. Kirby: If it could be just as expeditious?
Justice John M. Harlan: Yes.
Mr. Edward S. Kirby: Well it would not make a difference because the burden of proof is shifted over to the Commission at that type of a proceeding and you couldn't possibly when you have to carry the burden of proof and you don't have the evidence, the producers have their evidence, and it's usually cost or something like that, you couldn't possibly do it as expeditiously as a Section 4 because there the producer would come in with everything all prepared.
Justice John M. Harlan: Well, I am assuming if you could, because of an increased Commission staff, or because of falling off of business, or what not, that you could (Inaudible) expeditious determination, what would be your position then?
Mr. Edward S. Kirby: Well, then you would be -- if we were under all those rules, it would be curing the defect, that is, exposing the consumer for a long period of time.
You would cure that, and if he can be protected almost as fast, then I couldn't see any difference, except that burden of proof which is a terrible burden which was placed on the Commission.
Justice Felix Frankfurter: Mr. Kirby, what you're really doing, what your argument does is to infuse Section 4 (e) into 7, is that right?
Mr. Edward S. Kirby: I think it has to be recognized whenever you look at it.
Justice Felix Frankfurter: I mean that's how they do it?
Mr. Edward S. Kirby: Yes.
Justice Felix Frankfurter: But I want to know why it isn't just as reasonable, just as fair, just as relevant if you're going to infuse, why you don't infuse Section 5 rather than Section 4 (e)?
Mr. Edward S. Kirby: Because Section 5 Your Honor would not protect the consumer over that long period of time.
Justice Felix Frankfurter: But if we have to imply, if we have to imply the protection of the consumer, why don't we imply it from 5 just as well as from 4?
Congress has said nothing in 7, about one or the other, and yet you choose 4 instead of 5.
Mr. Edward S. Kirby: Well, I choose 4 instead of 5 Mr. Justice Frankfurter because the Third Circuit Court has agreed with us when they said in their decision Section 5 is no remedy at all.
Justice Felix Frankfurter: But if that isn't quite true (Inaudible) so you can't take no remedy at all.
Mr. Edward S. Kirby: Well, they said -- I've got to give the exact language Mr. Justice Frankfurter.
They said, well there is not an adequate remedy and therefore it amounts to no remedy at all.
Justice Felix Frankfurter: But Mr. Kirby, the case is here in order to review whether they were right, they are not foreclosed by what they said.
Mr. Edward S. Kirby: That is right.
But, I must say that the Section 5 did not protect the consumer in this case because it placed the risk on consumer of having paid this excess if there is any over this period of time with no possibility of refund.
It shifted as I said the burden of proof to the Commission, and actually, it exposed the consumer by the shift from the second order to the third order, it exposed the consumer to a liability to pay per year up to $4 million in excess rates based on these figures.
That is, that would be if the rate later on were determined to be 17 cents, maybe two years from now or three years from now, having in mind how long it takes to now complete a Section 5A within the matters of years, four or five years.
These very petitioners here, three of them had Section 5 (a) complaints filed against them in August of 1955 by the Tennessee Public Utility Commission and they haven't been heard yet or they have started some hearings but they haven't been completed, so that we have no prospect of knowing when just and reasonable rate for Continental, Tidewater, and Atlantic refining is going to be determined.
It's somewhere in the future.
Now as I said before, the second order protected all parties because the consumer was protected from the 17 cent level to the 21 point by virtue of the refunding provisions of the act, that is under the Section 4(e) proceeding.
It has a refunding and finding provision which is Section 5 does not have, and that's another reason I prefer before proceeding.
I see my time is --
Chief Justice Earl Warren: Yes your time has expired.
Mr. Edward S. Kirby: I will just conclude by stating that in the first and second orders the evidence shows that it was insufficient evidence to certificate the proceedings on the basis of price at this price level and urge that the Third Circuit Court be upheld.
Chief Justice Earl Warren: Mr. Searls.
Argument of David T. Searls
Mr. David T. Searls: Mr. Chief Justice and if the Court please.
In the June 24th order which is under review here, the Commission expressly found that supply was more important than price in this particular situation, and they used this language.
So as to show that they were not disregarding price, because they said as important as price is in this matter, still supply is more important because this is the largest single supply of natural gas which is ever been committed to interstate commerce.
So the Commission said, further it appears to us, important as is the issue of price, that as far as the public is concerned, the precise charge that is made initially is less important than the assurance of this great supply of gas.
Justice Felix Frankfurter: Mr. Searls, I am still an ignorant of why the fact that it's largest supply, is significant, so as to render the determination, tender the determination of price irrelevant?
Mr. David T. Searls: Not too (Inaudible) irrelevant Your Honor, because it didn't disregarded as such --
Justice Felix Frankfurter: (Inaudible) not defined.
Mr. David T. Searls: But because it was such a great supplier of natural gas, it assured continuity of supply to the consumers on the Eastern Seaboard, and by the reason of obtaining that continuity of supply, that assurance of supply, it was important to give prime consideration to supply and because of the need for this gas.
But certainly the size of the reserve was a most important thing to the distributing companies, to the pipeline companies and to the consumers.
Justice Felix Frankfurter: It also implies that a good tentative case, as to the to the proper taking of the price could not have been made within the allowable period or relevant business period.
Mr. David T. Searls: I don't think it could because --
Justice Felix Frankfurter: (Inaudible)
Mr. David T. Searls: Yes, yes, Your Honor and then we can say we think we can amplificate the interest of the consumer by Section 5 (a) proceedings.
Justice Felix Frankfurter: What is answer to Mr. Brown's argument, that you had patterns in other price contracts?
Mr. David T. Searls: We had no patterns in other price contracts.
It's true that in the May 20th Order, they had adopted the price, that is the Commission did, as a condition, the price of 18 cents per MCF which were being paid 200 miles for the East, but this was a new pricing area.
They did not find that that 18 cents was the market price being paid.
On the contrary the New York Commission recognizes that the market price for natural gas in Southern Louisiana before this contract was ever made had reached 20 cents per MCF for onshore gas and I refer particularly Your Honor, I would like to call the Court's attention to the New York State Commission brief at Page 23, where the New York State Commission points out that in 1953 and early 1954, now this was before even the Phillip's decision on June 7th, 54 by this Court.
Two paper pipeline companies as they called, because they weren't in operation, were paying from 17 to 21 cents per MCF, the New York Commission says in 53 and 54 in Southern Louisiana and the FTC granted certifications without price limitations or conditions.
Now that's three years before the contract in this case.
Then they referred to the order of the commission on May 20th, 1953 in the Gulf Interstate Gas Company case which set a price in Southern Louisiana, the initial price of 20 cents per MCF to be paid for gas from the Iraq field.
So there you have, three years prior to the execution of the contracts involved in this case, 20 cents being paid for onshore Southern Louisiana gas.
So the market price had reached that level.
Now here was a greater prize as a larger reserve because the reserves involved in the Gulf Interstate Gas and the Iraq field and also in the other fields for smaller quantities of gas and also the record shows in this case if other companies were paying in the range of 20 cents per onshore gas.
Now here was gas discovered in 90 feet of water, 25-30 miles off the Southwestern shore of Louisiana, and in view of this evidence and this record, and here was a larger supply of gas we think that the this price was inline with the market price being paid onshore.
Justice John M. Harlan: Could I ask you a question?
Mr. David T. Searls: Yes, Your Honor.
Justice John M. Harlan: Am I correct thinking that the examiner excluded all evidence with respect to price?
Mr. David T. Searls: No, Your Honor.
Justice John M. Harlan: Am I wrong in that?
Mr. David T. Searls: That's wrong.
Justice John M. Harlan: What I am really getting at was there evidence in the record support this finding of the Commission that you call attention to?
Mr. David T. Searls: The finding of the Commission was --
Justice John M. Harlan: What source that, considered to be, to getting the source of supply was more important than the price?
Mr. David T. Searls: I think that was in the record, Your Honor.
Now as to the -- there is no evidence.
Justice Felix Frankfurter: Was it a contestant issue?
Mr. David T. Searls: It was not a contestant issue.
Justice Felix Frankfurter: I mean, well --
Mr. David T. Searls: Supply no --
Justice Felix Frankfurter: Was there any issue with contestant?
What's the problem the balance that you put (Inaudible) found supply this new price you call it, as against determining the price within a reasonable time, was that canvassed by the examiner and was a relevant factor in determining any claim if one can call it, before the Commission on the basis of the examiner's evidence.
Mr. David T. Searls: The examiner found that it was important to obtain the supply.
He also found that he should not go into price and neither respondents here with the interveners below offered no evidence attacking the price being paid in this case.
They offered no evidence on the question where it not, it was just and reasonable.
Justice Felix Frankfurter: Were the issues, were issues are permitted to make such offer?
Mr. David T. Searls: Well, the -- when a application is filed, I assume that it's brought it up, permit that issue being made if they wanted to offer evidence, on that scores.
Justice Felix Frankfurter: No offer (Inaudible)
Mr. David T. Searls: But they offered no evidence.
The only evidence that was offered, they did offer evidence as for this contract, these contracts that Tennessee had made in the West Delta area, but that price was already in evidence and it is before Your Honor, now as you know, but no offer evidence was made attacking price involved in this case.
Chief Justice Earl Warren: Mr. Searls, where do we find the evidence in the record, that hearing officer used to determine that the need for this supply was greater than the cost consideration?
Mr. David T. Searls: Well, commencing at the point about the prices being paid by others –-
Chief Justice Earl Warren: I beg your pardon?
Mr. David T. Searls: The prices being paid by others commencing at 247 (a) of Volume 1 and continuing for five or six pages, reference has made prices being paid by others and that's shows what -- how this price compared with the price being paid by others.
And now the issue as to the need for the gas was not contested by the interveners.
It was tested by it, that Tennessee had this expanded system proposed that this gas would be needed for the expansion and that issue was contested.
It was found in every opinion rendered for the Commission in this case.
They found the need existed.
Chief Justice Earl Warren: My point is this, was there any comparison based upon evidence between the need and the price consideration?
Mr. David T. Searls: As in issue as such, there was no actual comparison.
That gives a comparison which is a conclusion, and which can be made from the record in the case.
But it was not a contested issue to make a comparison between price and between supply.
Now by adopting the 5 (a) proceeding, I want to point out to Your Honor, that the Commission in this order that's under review here, adopted a plan which is the plan that they have consistently followed as being the best way to determine the producer price and that's 5 (a), and why is that true.
If they deal with one price at a time under in a 4 (e) case, they create discrimination, because these producers sell gas from many fields, onshore as well as offshore Louisiana, but in a 5 (a) proceeding, they look to all the prices and for that reason, whenever a producer of any size, as a general rule, commences a 4 (e) case, the Commission comes right back with a 5 (a) proceeding, so that they can review and adjust all other prices.
And when they adopted the 5 (a) proceeding in this case, they were following the practice that they considered to be best to determine the producer prices. Otherwise, if they reduce the price or raise the price one at a time they would create a discrimination which is forbidden in the act just as much as the act requires the prices to be just and reasonable.
Now these proceedings are moving ahead, I don't agree that these 5 (a) proceedings are a stall at all.
Chief Justice Earl Warren: Have any of them finally decided?
Mr. David T. Searls: Not finally decided, the examiner's decisions was rendered a month ago in the Phillips case which is a 5 (a) m 4 (e) combination case, that now awaits the Commission decision.
Chief Justice Earl Warren: That goes back to 54?
Mr. David T. Searls: Yes it does Your Honor.
Now in these four cases involving these four producers, the Commission has completed its investigation in two cases that evidence has been offered, the witnesses has been cross-examined.
And next month one of these producers goes forward with its evidence, another producer has already offered its evidence, and in the third case the producer already offered its evidence.
Three of these four producer cases, rate cases, should be ready for decision by the examiner in the fall.
So these cases are moving forward.
The Commission has had a tremendous responsibility following the Phillips case to decide these producer cases.
It was in a new field, it's going to have to set new standards and has had many cases, but it's been handling the cases expeditiously, the administrative process has not broken down and as long as that expertise is allowed to be exercised and the commission is permitted to go forward and exercise its discretion, I am confident that the public interest would be fully protected.
Justice Felix Frankfurter: Did you say a word, can you take a minute to say something or comment on the argument heavily stressed as I follow it, that the difference between 4 (e) and 5 (a) is a very considerable difference in the handicapping presumption so far as the (Inaudible)
Mr. David T. Searls: In that it places the burden of proof in 4 (e) on the producer and 5 (a) on the Commission.
I don't think that the burden is going forward with any great difference.
Now for instance, in this 5 (a) proceeding involving Cities Service, in this case, which is one of the producers here, it is a combination of 4 (e) and 5 (a) case, because here is the case where the Commission, by the 4 (e) case, may have consolidated 4 (e) with 5 (a).
The producer has gone forward with its evidence first, instead of letting the Commission go forward first.
In other words --
Justice Felix Frankfurter: Is that out of, it's just something (Inaudible) who determined that it's going to --
Mr. David T. Searls: That's a matter of working out with the staff or the Commission or with the Commission as to who will go forward first with the evidence.
Justice Felix Frankfurter: Was the Commission (Inaudible) direct that the producer better go forward in one of these combined hearings.
Mr. David T. Searls: Well, it has in several cases.
Yes, Your Honor, and in that case the Cities Service went forward without any objection.
So it's just like in any lawsuit, once the evidence gets on the way it's never cited as a general rule which one had the obligation to go forward first.
Justice Felix Frankfurter: Is there a difference in the quantum of proof that you find?
Mr. David T. Searls: Well, since the burden of proof in one case would rest on the Commission it might be considered that the quantum of proof would be great, but I have not seen any case turn on that issue.
Chief Justice Earl Warren: Mr. Searls I was wondering why in one of these later cases such as we have here it can be anticipated that the decision of the Commission would be made early this fall, where on the other hand none of the older cases have been decided and the Phillips case, which was as far back as 1954, it's not if then decided.
Mr. David T. Searls: I didn't say the Commission Your Honor would reach the decision, (Inaudible) I said it would be ready for decision by the Examiner I believe Chief Justice.
Chief Justice Earl Warren: Well, all of these other earlier ones ready for decision by the examiner?
Mr. David T. Searls: Not necessarily so.
Now I think I could answer that this way.
The Commission has been pioneering of course in these producer cases, those that never had this issue before it until after the decision on June 7th, 1954.
Now after that decision they had to lay down certain rules to be followed, and whatnot.
Now when the Commission decides the Phillips case, which is already been decided by the examiner and which resulted in $9 million annual increase for Phillips, under the examiner's decision in a 5 (a) case, when that's decided undoubtedly a number of standards will be set which will expedite the handling of these other rate cases.
Up to this point we have not had a decision to set the standards in determining how you ascertain a just and reasonable price for the producers.
So I would say to answer Your Honor's question as soon as we get the first case decided, setting those standards we will be able to move forward much faster.
Chief Justice Earl Warren: Thank you, Mr. Searls.
Mr. David T. Searls: Thank you.