MOBIL OIL EXPLORATION v. UNITED DISTRIBUTION

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Argument of Edwin S. Kneedler

Chief Justice Rehnquist: We'll hear argument first this morning in No. 89-1452, Mobil Oil v. United Distribution Companies, and No. 89-1453, Federal Energy Regulatory Commission v. United Distribution Companies.

Mr. Kneedler.

Mr. Kneedler: Thank you, Mr. Chief Justice, and may it please the Court:

The court of appeals in this case struck down a rule adopted by the Federal Energy Regulatory Commission in 1986 to eliminate the substantial market distortions and inequities among consumers that resulted from the prior system of vintage pricing for old gas.

Old natural gas is gas that was dedicated to interstate commerce prior to the enactment of the Natural Gas Policy Act of 1978.

Although the regulatory history and market context of this case may be somewhat complex, the case boils down to straightforward questions of statutory construction.

On each we submit the text of the act clearly authorizes the Commission to do what it did, but if there were any question on that, the Commission's actions, in our view, rest on a reasonable interpretation of the act.

Let me identify at the outset the two issues that are presented here, principal issues.

First is what I will refer to as the pricing issue.

Sections 104 and 106 of the Natural Gas Policy Act authorize the Commission by rule or order to raise the ceiling price of any gas or any category of gas, as long as the Commission finds that the higher price is

"just and reasonable within the meaning of the Natural Gas Act. "

The court of appeals held that this language did not authorize the Commission to depart from the prior vintage pricing system for old gas, but instead permitted the Commission only to grant special relief from applicable ceilings where it believed warranted.

The court ignored the plain meaning of the statutory text, which contemplates price increases of general applicability.

But beyond that, it also ignored the broad and flexible interpretation given to the just and reasonable standard by the Commission, by this Court in its classic rate making cases, Hope Natural Gas, Permian Basin, and Mobil Oil, and by the lower courts immediately prior to the adoption of the Natural Gas Policy Act and the incorporation of that language into the act.

The second issue concerns the abandonment of service under Order 451.

The court of appeals found fault with the provision in Order 451 that permits a producer of gas to abandon its sales to a pipeline or other purchaser where the purchaser is unwilling, after negotiations, to pay a higher price for old gas allowed by the order.

Unknown Speaker: Mr. Kneedler, my I ask you about the abandonment question--

Mr. Kneedler: Yes.

Unknown Speaker: --that we have in front of us.

Is it possible that an individual plaintiff could come in and challenge an abandonment and assert specific grounds and get a hearing?

Do we know whether that is possible?

Mr. Kneedler: Well, there... the Commission's regulations specific... the answer is yes.

The Commission's regulations specifically provide for the filing of complaints, and if a purchaser objected to a proposed abandonment on the grounds that the standards prescribed in Order 451 have not been met in the particular case, it could file a complaint and seek an adjudication of that.

Unknown Speaker: It wasn't clear to me from your brief whether that is the position that FERC was taking.

Mr. Kneedler: No, that is, that is clearly our position.

Let me, let me just explain the setting for that.

Unknown Speaker: Yes.

Mr. Kneedler: What the Commission... the standard for abandonment under section 7(b) of the Natural Gas Act, the Commission may authorize abandonment if it concludes that the present or future public convenience or necessity warrants the abandonment.

And it also says after due hearing.

And what the Commission concluded here that it was, that upon the occurrence of certain conditions subsequent, a producer would be authorized to abandon the gas service.

So what the Commission did was give particular content to the general statutory standard of public convenience and necessity in Order 451 itself.

And this Court has held in numerous cases that an agency, and particularly the Commission's predecessor, the FPC, may do that under the Natural Gas Act.

And then, upon the occurrence of those, satisfaction of those standards, the producer is permitted to abandon the sale of gas.

There is, the pipeline has no right to an individualized hearing on the general standards that were promulgated by rule, because the pipelines and others had an opportunity to participate in the hearing afforded by that rule making.

What could be challenged in a complaint is whether the producer satisfied those conditions.

Now there has also been a question raised as to whether there might be an opportunity for waiver of the general standards under the rule, and that is a procedure that has been referred to in several of this Court's cases discussing general stan... abandonment or similar, not abandonment, but similar generalized determinations under which parties may obtain rights.

And the Court has discussed those in several other cases, Storer and FPC v. Texaco.

But... in WNCN, for example, the Court noted that it had not resolved the question of whether a provision for waiver would be necessary.

And in fact it doesn't make a lot of sense in the context of this case, because what triggers the opportunity for abandonment under this, under Order 451, is the purchaser's refusal to pay the rate requested by the pipe, by the producer up to the new ceiling prescribed by Order 451.

In other words, what triggers abandonment under this order is a purchaser's refusal to pay a rate of general applicability that the Commission has prescribed.

The rates are, by their nature, items of general applicability that do not require, at least short of constitutional insufficiency, the opportunity for waivers or special exceptions, as under Permian Basin.

So we don't believe that, that the nature, intrinsic nature of Order 451 and the pricing schedule, or ceiling set in place by that requires an opportunity for a waiver.

But if a pipeline or other purchaser thought that a waiver was nevertheless appropriate, as we point out in our reply brief, the purchaser would have an opportunity to file a petition under the general rules governing the filing of petitions under the Commission's regulations.

And in fact, Williams Natural Gas argued in the court below that the Commission had authority under section 16 of the Natural Gas Act to grant a waiver from the provisions of Order 451 in appropriate circumstances.

Although Williams made a passing request for an exemption or waiver in its rehearing petition in these rule making proceedings before the Commission, that is not the right place for an individual pipeline or purchaser to request an exception.

The proper procedure is to file a petition with the Commission, where the Commission can focus on the equities of the particular purchaser, outside of the context of adopting a rule of general applicability.

Unknown Speaker: Would that petition necessarily be given a hearing?

Mr. Kneedler: I think that what would be required is that the, that the purchaser would at least have to make a showing of pretty substantial reasons why an exception should be made to the general standards in Order 451.

Unknown Speaker: So if I think that the, that the word hearing in 7(b) in that context requires an individualized hearing, it is not your contention that this waiver procedure through petition would necessarily satisfy it?

Mr. Kneedler: Well, I... I think the place--

Unknown Speaker: I mean, you say the waiver, the waiver procedure is available, but you are not arguing that that necessarily fulfills the requirement, if there is one, which you contend there is not, of an individualized hearing.

Mr. Kneedler: --Well, not across the board.

But in the context of this case, again going back to what this Court said in FPC v. Texaco, which concerned the same sort of argument about a right to a hearing under section 7(c) of the Natural Gas Act; and what the Court said, it was fine for the Commission to weed out at the threshold, solely by virtue of not satisfying the standards and the rule adopted by the Commission, various private entities were applying for special relief.

But it left open the possibility of applying for a waiver.

I think the same thing would apply here.

What the pipeline could not contest in such a hearing is the general standards set forth in the rule itself, because again, those were adopted after due hearing in the rule making proceeding on the order itself, which is again the conclusion the Court reached in FPC v. Texaco.

What the pipeline could request in such a waiver application would be to show that his particular condition so departed from the premises of the order that special relief was warranted.

Now again, I am not in a position to speak on behalf of the Commission as to what its response would be to a particular waiver application.

My only point here is that the Commission's regulations do not foreclose it, and that none of the respondents in this case has pursued the procedure that would be appropriate under the Commission's regulations to present that claim.

Unknown Speaker: Mr. Kneedler, perhaps it isn't significant, but we are talking about kind of an abandonment of a particular customer, rather than abandonment of service in the sense of the supply of gas is, doesn't come off the market, it just goes to some other purchaser, doesn't it?

Mr. Kneedler: Yes.

In fact, under the good faith negotiation procedure set up by the Commission in Order 451, the producer cannot abandon, may not abandon until it has entered into a contract with another purchaser to purchase that same gas.

And the Commission deemed this to be an important protection in the public interest, public convenience and necessity, because it assures that the gas will be, will remain in the market and not be lost forever.

And it is that purpose that in our view lends considerable support to the Commission's approach.

Because not only, not only has the Commission determined from the overall needs of the market that it's proper to release that gas to a new purchaser under the circumstances, but even comparing the two competing purchasers, as it were, the existing purchaser and the new purchaser, the Commission has concluded that the, if the new purchaser is propared to pay more, or under more favorable circumstances for that particular gas, that the, that as between those two purchasers, the subsequent purchaser, market indications show, has a greater need for it.

And that... the Court, again in WNCN v. FCC, concluded that it is proper in circumstances for an agency to rely on the market to resolve questions of comparative need, or in that case, diversity of programming.

And so it is... and the Commission made that point on rehearing, relying on WNCN, that it is really the same sort of comparative needs of the two pipelines.

Unknown Speaker: Mr. Kneedler, do you agree with the statement I see in the brief on the other side, the Commission has admitted that the new ceiling price for old gas would not be just and reasonable if it were actually collected?

Mr. Kneedler: No, we do not.

The Commission, as we point out in our reply brief, the Commission repeatedly and explicitly said that the new ceiling is just and reasonable within the meaning of the Natural Gas Act.

And in fact what the Commission did was set that ceiling at the same level as was already applicable to one of the ceilings for post-1974 gas.

Unknown Speaker: What do they mean, if it were actually collected?

Mr. Kneedler: Well, again, this ties into this good faith negotiation procedure.

Although the Commission determined that the rate which was carried forward by statute for one category was just and reasonable, it concluded that it wouldn't be appropriate for a producer to automatically collect that higher rate under particular contract provisions that many pipelines and producers had entered into.

Now, let me explain how that works.

90 percent of contracts between--

Unknown Speaker: Well, it sounds like you do agree with the statement.

Mr. Kneedler: --No, no, what we don't agree--

Unknown Speaker: You mean this contractually, it wouldn't be fair.

Mr. Kneedler: --Well, it wouldn't be fair... this rule was in fact set up for the protection of respondents and pipelines and consumers, not for the protection of producers.

But beyond that the Commission concluded it would not make sense for the market as a whole.

Let me explain why that is so.

The 90 percent... 90 percent of the contracts between producers and pipelines contained contract provisions, typically indefinite price escalator clauses, that would have allowed the price the pipeline was required to pay under existing contracts to rise to the new ceiling level.

That new ceiling level was and is above the market price.

And the Commission concluded that the market distortions it was trying to eliminate by raising the ceiling would be reintroduced if the market, if the price of old gas went from substantially below the market to substantially above the market, and that it would also be appropriate to mitigate the impact on individual pipelines.

And so what the Commission did was to say that as a prerequisite to collecting this higher rate, the producer would have to trigger negotiations with the pipeline to enter into a mutually agreed upon price.

Only if the pipeline refuses to pay a price up to the ceiling would abandonment occur.

In other words, only if the pipeline refused to pay a price that it was contractually obligated to pay under the escalator clauses could abandonment occur.

And so, contrary to the court of appeals' view of the good faith negotiation system, this is not one-sided or unfavorable to the, to the pipelines.

Unknown Speaker: What about the other 10 percent that didn't have an escalator clause?

Doesn't this--

Mr. Kneedler: If the--

Unknown Speaker: --Doesn't this provision apply to them?

Mr. Kneedler: --No, it does not.

If... under this Court's Mobil Sierra Doctrine as incorporated in section 101(b)(9) of the act, the contract price controls.

And if there is no provision in the contract between the producer and the pipeline to increase the prices, there is no contractual authority and no right of the producer to charge the higher price.

Unknown Speaker: But Mr. Kneedler, it is true, just following up on Justice White's question, that the ceiling price is presumably above the market price for most of the old gas, and that that price is nevertheless, in your view, just and reasonable?

Mr. Kneedler: Yes.

Unknown Speaker: Yes.

Mr. Kneedler: And the reason that is so is because the Commission con... this price is based on calculations the Commission did in 1974, which have been updated over time by inflation.

It's an estimate of the replacement cost, the long-term replacement cost of these supplies of old gas.

The current spot market for old, for gas generally is below that long-term replacement cost, but that doesn't detract from the justness and reasonableness of the ceiling the Commission has prescribed.

And in fact, the Commission also concluded, strongly reinforcing this, that the new price ceiling and allowing the prices to increase would elicit 11 trillion cubic feet of additional supplies of old gas, which would compete with new gas, bring down prices, and stabilize the market.

If the Court has no further questions at this time, I would like to reserve the balance of my time for rebuttal.

Unknown Speaker: Very well, Mr. Kneedler.

Mr. Lee, we'll hear now from you.

Argument of Rex E. Lee

Mr. Lee: Thank you, Mr. Chief Justice, and may it please the Court:

The single dispositive point to which the respondents have no answer is that sections 104 and 106 of the NGPA specifically and unequivocally authorize the Commission to set a new ceiling price for old gas, so long as it is higher and so long as it is just and reasonable.

And that is all that has happened here.

That is specifically what has happened here.

And you have to ask yourself then, under those circumstances, what is it that FERC did that was wrong?

Our opponents' only real answer to that is that this amounts to de facto regulation.

That is nothing more than substituting a label for what the statute says.

Moreover, Order 55 did not in fact deregulate.

What it did was to set a new ceiling, a higher ceiling, just as the statute requires.

But regardless of what happens to the market, in the event that it might go above the ceiling, that is still a ceiling and therefore still a regulated price.

The oft-repeated assertion that the effect has in fact been to increase the prices of old gas is totally beside the point.

Consumers do not buy old gas as such, and the price that consumers pay at the burner tip for the mix of old and new gas that they in fact buy has in fact significantly declined since Order 451.

And among the reasons that this may be the case are those that the Commission itself predicted, namely the 11 trillion cubic feet that would be at issue in the event that Order 451 were not enacted.

That has two effects on the price.

One is it puts more gas onto the market, and the second is that the increment that it puts onto the market is low-priced to mix with the higher price.

The contention that Congress relaxed the pricing structure only for new gas, while carrying forth the existing vintages for old gas, and that that was the compromise that Congress reached, is true as far as it goes, but it tells only half the story.

And the half that it leaves out is the half that is dispositive of this case.

It is true that Congress itself did not alter the old gas ceilings.

It simply carried them forth.

But in words that could not be more plain, in sections 104 and 106, it gave the Commission the authority to exercise its traditional NGA authority to decide just and reasonable ceilings, and to alter those ceilings in light of subsequently changed conditions in the event it chose to do so.

So that the only issue, the only issue in this case is whether those rates are just and reasonable.

And it is an issue that is really not a proper basis for invalidating Order 451.

The Commission determined that they were just and reasonable.

The Fifth Circuit did not, did not disturb that.

And the only argument that our opponents have as to why this is not just and reasonable is the one to which Mr. Kneedler referred, that the Commission said it would not be just and reasonable to charge that price without first going through a negotiation procedure whose ultimate effect would probably be and has been to get the price lower.

The claim that the Commission's GFN procedure is too one-sided simply ignores the central purpose of that procedure.

The ceiling itself was borrowed from what Congress itself did.

Moreover, it had been judicially approved.

So clearly, if that is all they had done, it would have been all right to charge up to that ceiling.

But they said that was not the just and reasonable procedure.

First, as a condition to charging that higher price, the producer was required to initiate a procedure which might bring the price lower.

Now, in light of the fact that there were these price escalation charges, something like that negotiation process was absolutely essential, and in fact it has worked very well.

In the great majority of instances what has happened is that the parties have not used the GFN formal procedure, but rather have simply renegotiated their contracts.

And the effect has been to eliminate not only the distortions on the lower end, the old gas price distortions over which Congress, excuse me, the Commission did have some authority, but also has been to bring the producers to the bargaining table and put the new gas on the bargaining table as well.

Now, the second major issue in the case concerns what kind of hearing is due under section 7(b).

We submit at the outset that this falls well within the Vermont Yankee Rule, that agencies enjoy particular deference with respect to their own procedures.

There is a very good reason why the hearing that was due in this case was not the individualized one that the respondents advocate.

And that reason is bottomed on the FERC's governing substantive standard for abandonments, which is not challenged here.

The old standard, which focused on the comparative needs of the two prospective parties to the contract, that is the one that would, then had the gas and the one that would get the gas in the event of abandonment, necessarily concentrated on the needs of the individual parties.

But the new standard is concerned not with comparative needs, but rather with the overall needs of the market.

And as a result, the hearing that FERC held was not concerned with any facts relevant to particular companies or particular contracts, but rather with overall market needs.

The respondents have never really... well, they do not dispute the substantive standard, nor do they dispute that that substantive standard is not at issue in this case.

But they have never faced up to the interaction, the bearing that that unchallenged substantive standard has on the procedural argument that they are making in this case.

Finally, the Court has held on several occasions that generic hearings do satisfy the statutory requirement that there be a hearing, and that is particularly appropriate in the context of this case, where the statute says due hearing.

And that language is, by its nature implies a great deal of discretion in the Commission in determining what kind of a hearing is due.

What Mr. Kneedler said in response to Justice Scalia's question about whether there would be opportunity for not only consideration by the Commission, but also the hearing, even if we assume that an individualized hearing is required, which has not been decided really, and even if we assume that the Commission wouldn't grant it... and that has not yet been determined, that issue ought to be decided, if at all, at such time that anyone actually asks for a hearing... then you still have the question, or you still have the point that the proper remedy is simply to let them go back, and if they are entitled to a hearing, then FERC will be entitled, FERC will be obligated to give them a hearing.

But you don't upset the entire pricing provisions of Order 451 for that reason.

Mr. Chief Justice, unless the Court has questions, I have nothing further.

Unknown Speaker: Thank you, Mr. Lee.

Ms. Halladay, we'll hear now from you.

Argument of Roberta Lee Halladay

Mr. Halladay: Thank you, Chief Justice Rehnquist, and may it please the Court:

This is not a basic rate case.

This case involves an effort by the Federal Energy Regulatory Commission to overturn the pricing and regulatory policies for natural gas prescribed by Congress in precise and detailed language set forth in the Natural Gas Policy Act and the Natural Gas Act.

In Order No. 451 the Commission has taken three interrelated actions that are directly contrary to the plain language of those statutes.

First, the Commission upset the pricing policy of Congress embodied in title I of the NGPA by placing significant incentives for additional production of old gas for the expressed purpose of displacing any further development of new gas.

Second, the Commission removed virtually entirely any kind of regulatory rate control over old gas, and stated repeatedly in Order No. 451 that the purpose it had taken its action was to allow gas to be priced by the market, that is deregulate it.

And finally, the Commission surrendered to the marketplace the very specific statutory responsibilities it long had held under the Natural Gas Act and that Congress had expressly preserved in the Natural Gas Policy Act to regulate the sale and abandonment of gas sold to the interstate market.

In vacating Order No. 451, the Fifth Circuit closely examined the language, history, and purposes of the Natural Gas Act and Natural Gas Policy Act.

It then looked to the actual end result of Order No. 451 and determined that the Commission had taken an action that only Congress could take or that only Congress could authorize the Commission to take, namely to deregulate old gas and to remove all remaining controls on the sale and abandonment of that gas to the market.

Unknown Speaker: Ms. Halladay, the statute says that FERC can raise the price ceiling on any gas, so long as it is just and reasonable.

It doesn't talk about maintaining vintage pricing.

And FERC has interpreted its powers as allowing this particular order.

Isn't that the end of it as far as we are concerned?

Mr. Halladay: It cannot be the end of it unless, of course, we ignore the statute as a whole.

Now what should be made clear at first is that sections 104(b)(2) and 106(c) did not just carry forward the just and reasonable rate making authority that the Commission previously had had in the Natural Gas Act.

It changed that authority by stating that the Commission could only raise rates.

It did not allow them to lower rates.

In the past, when the Commission could raise or lower, it could take a much more involved role in trying to make gas market-responsive.

The limitation of its authority only to raise rates suggests that Congress had some different purpose in mind than in the past.

The second thing is, the Commission itself repeatedly interpreted this provision to state that it required that, it provided an outlet, rather, for those producers whose actual costs of production exceeded the average ceiling prices set by Congress, and thereby would, without relief, have a constitutional, unconstitutional compensation through property.

Unknown Speaker: Well, certainly the Commission can change its mind and its approach, so long as it's within its statutory authority.

Mr. Halladay: It can change its mind.

It can't change Congress' mind, and here that is what they did.

Congress decided that there should not be great incentives placed on the incentives of old gas, that incentives should be given to new and hard-to-produce gas, because that is precisely where new sources of supply would come to the market.

Unknown Speaker: Well, Congress decided that that should happen at the moment when it passed its legislation.

But it did not decide that that should never happen, did it?

Mr. Halladay: I think--

Unknown Speaker: I mean, does that appear anywhere in the statute?

I, I would think from the way the crucial provision is worded, that Congress essentially said right now we are not going to do it, but we are not taking away the power of the Federal Energy Regulatory Commission to do it.

Mr. Halladay: --And yet the Federal Energy Regulatory Commission also ruled in Order 72 that one of the key components of the overall pricing scheme of the NGPA had been the continued availability of sections 104 and 106 to old gas.

Now what the Commission has done here in Order 451 is it has melded together approximately one-half of all of the pricing categories that Congress established, and it has set a rate that is equal to an incentive rate the Commission set under another provision of the NGPA, 107(c)(5).

Now that provision states that the Commission can only when it is reasonably necessary set a new incentive based price for gas in this, in the 107(c)(5) case, that is produced at extraordinary cost or risk.

And in a prior proceeding the Commission determined that the ceiling price now set here in Order 451 represented such an incentive price.

Now they say for gas that they admit is low-cost in production and does not involve extraordinary risk, it should get the same incentive.

And it has thereby read 107(c)(5) right out of the act.

But the bottom line is that whatever authority the Commission had in sections 104(b)(2) and 106(c), and they previously had said it was a special relief mechanism, they also have very clearly stated that it is not the authority to deregulate the price of gas.

And that is in fact what they have done in this case, and let me explain why.

There is no doubt in this case that there are no effective controls presently on the market actually setting the price of old gas.

The Commission has admitted as much in its reply brief.

It stated that at the present time, and I would submit, and the record establishes this, that since the rule was adopted this ceiling price has had no teeth.

It cannot control what happens.

It allows the market to set the rate, and that is assuming if the GFN process works as intended.

But as Mr. Kneedler pointed out, the only way that a pipeline can be assured of actually keeping the supply of gas under contract is to agree to pay a price that the Commission itself stated would be unjust and unreasonable if automatically collected.

Now in making that--

Unknown Speaker: That is the ceiling price, Ms. Halladay?

The, the price you just referred to--

Mr. Halladay: --Is the new ceiling price--

Unknown Speaker: --Is the new ceiling.

Now, as these GFN procedures have worked in practice, have most of them ended up with the pipeline paying the ceiling price or paying something less?

Mr. Halladay: --There have been, as Mr. Kneedler pointed out, a number of negotiations.

We don't even have record of all of them, because in many cases they don't have to file anymore with the Commission what happens.

But there are in some instances voluntary negotiations that have been at a market price, in other words a price that would have been established had this gas been deregulated.

However, there are many other instances where pipelines, some of whom are respondents in this proceeding, have offered to pay the market price and the producer has come back and stated that is not sufficient, and then cancelled the contract.

Now, there is another point that bears repeating here, and that is that the agreement to actually pay the market price does not mean that any new gas will be produced from these existing production reserves.

That of course was the whole point of the rule making, was to bring an additional 11 TCF to the market.

But if any change in the contract term is offered by the pipeline purchaser, that can be grounds for the termination of the contract by the producer.

So if the pipeline purchaser states to the producer that I will pay the new ceiling price, that is admittedly now nearly twice the spot market price for gas, but in return for that agreement I would ask that you agree to actually produce more gas from these reserves, that could be viewed as a change in contract terms and it would enable the producer to walk away from the contract.

Furthermore, nothing in this rule even requires the producer to actually produce any more gas.

Unknown Speaker: When you say the pipeline offers to pay the market price, that suggests that the price it is paying under the contract is lower than market?

Mr. Halladay: In many cases the prices were lower than market.

They had--

Unknown Speaker: So you have really three kinds of prices.

One, the contract price which is lower than market, then a market price, and then a ceiling price which is above market?

Mr. Halladay: --Yes, quite grossly above the market ever since the rule was adopted.

And the Commission's theory was that it could help to resolve some regional disparities by bringing the gas closer to market-responsive levels.

Now, the interesting thing is that Congress--

Unknown Speaker: Which it has succeeded in doing.

Mr. Halladay: --It has in some cases succeeded in doing that--

Unknown Speaker: Overall it has succeeded in doing that.

I mean, the overwhelming record is that it has been a success in that objective, isn't it?

Mr. Halladay: --Yes, but now, if that is true, it is interesting because precise language in section 121 of the act stated where Congress intended to deregulate and where it did not intend to price deregulate.

And primarily it chose to deregulate new and hard-to-produce gas, and let them be market-responsive.

It did not include old gas.

Moreover, in this rule making the Department of Justice proposed as an alternative to the procedure actually adopted that the Commission simply allow the parties to negotiate in the market any price that they wanted, and then once they negotiated it, simply file it with the Commission.

And if they couldn't agree, then under the Department of Justice proposal, the producer would then file and seek expedited abandonment of the contract.

So, as we will see later, the producer actually in that case had a greater burden to comply with the abandonment requirements than what the Commission required in Order 451.

But the Commission rejected that Justice Department proposal on the specific grounds that it had authority to allow the market to set the rates.

So what did it do?

It turned right around and did the same thing.

And the only difference between the purportedly unlawful... or the, no, the actual unlawful action that found the Department of Justice had proposed, and what did here was to set some ceiling price.

But, as the Department of Energy recently stated, any ceiling price that is this far above the market effectively deregulat the gas.

It cannot have teeth, as the Commission states.

It achieves the same deregulatory result that the Commission found in Order 451 it had no power to take.

Unknown Speaker: Well, it does have these teeth at least.

If you have a gas sales contract that is binding on both parties that has an escalator clause, you could charge above that ceiling price and impose it on the purchaser.

But because of the ceiling price you can't.

Doesn't it have at least that constraint upon the parties that operate under it?

Mr. Halladay: The Commission, of course, that is its position.

The interesting thing is that in all prior proceedings these automatic escalator clauses in fact had operated to permit collection of the new rate.

Here the Commission found that they had done something quite different.

This was a new animal.

They had set a rate so high and far above the market that they could not follow the normal pattern of conduct that had been followed in the past, and let the contracts operate as they had operated in the past.

It had to protect consumers from a just and reasonable rate, a paradoxical statement in and of itself.

Now, the good faith negotiation or GFN procedure was supposed to provide this protection, or as Mr. Kneedler just said, provide a mitigation of the just and reasonable rate.

It cannot do that.

By the Commission's own words, the GFN is one-sided.

They stated in the rules that the only time a producer would ever invoke the GFN process is when it had weighed the risks and benefits of doing so, and after such cautious review, and that was their word, determined that they stood to gain more than they could lose by getting into this process.

And furthermore, the GFN process is, one, it is just, it is not in anyway capable of assuring that a gas supply that is actually needed by the consuming public will remain there.

Remember, the gas we are talking about had been purchased and sold under contracts, some of which had been in place for 40 and 50 years, and provided the bedrock of service to the general public.

Now the producer was going to decide if that gas should even continue to come to the market at all.

And let me turn specifically to the abandonment procedures that are authorized here.

They are absolutely contrary to section 7(b), the prior holdings of this Court, and they cannot be squared with the actions the Commission took in the Felmont case or the KP&L case.

First of all, Justice O'Connor, you asked Mr. Kneedler if it were true that there is a complaint procedure available.

Nowhere in the rule making did the Commission ever mention that complaint procedure.

The first time we heard about it was when we received their brief in this case.

And all they have stated on brief is that we can file such a complaint with them if we prove that the producer did not comply with the good faith negotiation procedure.

That is precisely our concern, that the producer will comply with the good faith negotiation procedure.

That he will invoke it when he determines that there is a net benefit to him.

And if he doesn't like the price we offer, including even a market price, he will simply cancel the contract and walk away.

That result is the very thing this Court found in United Gas Pipeline v. McCombs is unlawful.

Unknown Speaker: If the producer walks away when you offer the market price, can't you find other people to buy from at the market price?

Mr. Halladay: Under present conditions that is likely to happen.

But, as the Commission itself stated, no one knows what the future holds.

And as these contracts disappear we may or may not be able to do that.

Unknown Speaker: Well, whatever the future holds, it's a truism that you can always buy a commodity at the market price.

Isn't that a truism?

That defines the market price.

It's what you can buy it at.

Mr. Halladay: Well, that would be a truism, but for, in this case, Order 451.

You cannot necessarily buy it at the market price.

Precisely when a pipeline has the greatest need to keep gas under contract to meet its service requirements, it must pay the ceiling price or bear the risk of losing the gas.

Unknown Speaker: I don't see why that is, Ms. Halladay.

If the market price is lower than the ceiling price, and the producer tells the pipeline to in effect get lost after the GFN, why can't the pipeline go out and buy at market?

Mr. Halladay: In many cases they are able to make a substitute because the market does provide that opportunity.

But remember, the reason the NGPA was adopted was because of severe shortages of supply.

The market has tended to go up and down.

Those supplies may not always be available.

Unknown Speaker: Well, true, and the market won't be what it, the same today as it is 3 months from now.

But I don't see how that deflects the force of the argument, at least to me--

Mr. Halladay: Well, the further point is in fact that that is what Congress specifically intended as to new and hard-to-produce gas by virtue of section--

Unknown Speaker: --You say that is what Congress--

Mr. Halladay: --The ability to go out and shop in the market for gas supplies.

Unknown Speaker: --Which you, which the pipelines now have.

Mr. Halladay: But in the NGPA, what Congress said is the pipelines should make that kind of a shopping excursion as to new gas and hard-to-produce gas.

Section 601 of the NGPA expressly removed the Commission's authority to regulate sales and abandonments of new or hard-to-produce gas.

But in direct contrast, Congress retained the Commission's regulatory control over old gas.

It did not want the market to be the protector of consumer interests as to that gas.

Unknown Speaker: Unless perhaps the Commission wanted it to.

I mean, it retained the Commission's authority to prevent the market from being the determinant, but it didn't, it didn't command that the market not be the determinant.

Mr. Halladay: In this case in fact the Commission alleges that it has regulated in some sense the abandonment of old gas.

But when you look at this rule there is no regulatory presence at all.

If and when any abandonment occurs is solely at the discretion of the producer.

And in the... there are really two what I might call generations of abandonments involved.

One is the first set of abandonments that occurs under the GFN process.

Both the Commission and the producers seek to defend only that abandonment.

They claim the procedures they have adopted fully met with the procedural requirements of section 7(b).

But there is an entirely different set of abandonments at issue here.

Once the contract expires from the renegotiation under the GFN, then the producer is free to do anything that it wants with that gas until the reserves are depleted.

Any future abandonments that it may have required, absent the Commission's action in this proceeding, are now removed.

The Commission has granted a blanket certificate and a blanket abandonment to authorize all future sales and abandonments of old gas.

Now what that means, bluntly, is that private parties and the contracts they enter into now control the entire process of how old gas reaches the market.

This Court held, in McCombs, in the Sunray case, and in the Southwind case, that private contracts, expiration of leases, and the private conduct of a party cannot meet the clear and express demands of section 7(b), which required Commission intervention.

Moreover, even as to the first generation of abandonments here, there is no opportunity for an interested party to take part in the abandonment process.

There is no notice to the Commission that a producer has invoked the GFN process against a particular pipeline.

Unknown Speaker: What, what use would it be for an individual party to participate, unless he is contradicting one of the, compliance with one of the general requirements that the Commission has set forth by rule.

What purpose would there be?

The Commission has set forth we are going to grant all abandonments if A, B, and C occur.

Unless the party comes forward and says A, B, and C does not exist, what use is there for the private party?

Mr. Halladay: Well, that is our whole concern, because the Commission has said if you don't say A, B, or C, don't even bother coming to us.

We don't want to know about the hard impact it may have on consumers.

Unknown Speaker: Isn't the Commission entitled to set forth the conditions on which it will permit abandonment?

I think it... doesn't the Commission always have to do that?

Mr. Halladay: The Commission--

Unknown Speaker: Whether by rule or by adjudication, it is going to set forth criteria for abandonment.

It can't act willy-nilly.

Mr. Halladay: --But it has to, it has to provide some regulatory presence for itself.

You know, at the time they approved these particular procedures, the GFN process was not yet even in effect.

They could not know at that point what abandonments might or might not occur in the future.

They could be occurring right now and they know nothing about it.

The bottom line is, they have chosen, as a form of "regulation" to simply absent themselves from the whole process.

And the extent to which they have absented themselves is shown by the fact that there is no requirement that the producer file with them, provide an opportunity for, say, a local distribution company served by a pipeline to come in and show that this gas is necessary to meet its market requirements, which are even more closely tied to the consumer.

There is no opportunity to demonstrate that private-party interests are not in some way impairing consumer interests under this rule.

Now, the bottom line is that when you read the order as a whole, this was exactly the result that the Commission intended.

It set a ceiling price that it says it doesn't want to be collected.

It wants the market to set the rate.

Unknown Speaker: Well, do you... are there escalator clauses in your clients' contracts?

Mr. Halladay: Yes, there are.

Unknown Speaker: And what do they mean?

That if the, that the price charged under the contract can be escalated right up to a ceiling price?

Mr. Halladay: Exactly.

Unknown Speaker: I would think, I would think you would like to get out of that contract... if the market is lower, if--

Mr. Halladay: That, of course, was a problem as to these high-cost contracts that were contributing to the take or pay problem.

Up until the Commission's action in this proceeding it had never been a problem, because quite frankly the Commission had never provided such an unprecedented increase in the price of old gas.

Unknown Speaker: --Well, that may be, but under... I suppose under your contract you would, if the producer said, pay me the ceiling price or else, you are supposed to pay it, aren't you?

Mr. Halladay: Under the contract as it stood, that is true.

But, you see, the difference is in Order 23, which was issued--

Unknown Speaker: Well, yes, but if the producer has said to your clients either pay the ceiling price or not, or the contract is cancelled, I suppose you would prefer the contract was cancelled.

Mr. Halladay: --In some instances that might be true, but where you--

Unknown Speaker: Well, what instances wouldn't you, if you--

Mr. Halladay: --Well, when you... for example,--

Unknown Speaker: --Because if the contract is cancelled, you can automatically go get gas at the market.

Mr. Halladay: --But you can't always buy the volume that you need or when you need it, and so the problem is that we have--

Unknown Speaker: Well, I know, but... are you saying then you would stick to the contract and pay the ceiling price?

Mr. Halladay: --There have been instances when respondents have had to stick to the contract because they needed the gas supply.

Now you see, the interesting thing is is that the Commission keeps talking about the fact that automatic collection is a bad thing because it causes market distortions that are just as unjust and unreasonable, they say, as the old vintage structure did.

But the bottom line is, the only way you have any assurance of keeping this gas under contract is to pay a price that they say should not be collected.

Unknown Speaker: Well, it looks to me like the good faith negotiation provision is really in your favor.

Mr. Halladay: That was their statement, but any kind of a hard look at that indicates it cannot be.

We offered a number of changes to that procedure--

Unknown Speaker: Well, I know, but if there hadn't been that process provided for and... why, the producer can, is in charge anyway.

He can just say pay up to the ceiling or not.

If you want out, why, get out.

Mr. Halladay: --And had there not been that process, the Commission would have taken an action that it itself conceded was unlawful.

It defined the--

Unknown Speaker: When did... wait a minute.

Mr. Halladay: --The Commission defined--

Unknown Speaker: What is the basis for that statement?

Mr. Halladay: --The Commission stated that the GFN process is an integral component of the rate itself.

It is essential to the justness and reasonableness of this rate.

Therefore, while they now claim that it was put in for our protection, and they certainly hoped that it would operate that way, they knew they had to have that rate there, that condition and procedure there to make the rate they set just and reasonable.

They have never done anything like this before, because they had never provided this type of a price increase for old gas.

The interesting thing is that what they did here is they wiped out in one fell swoop not only all vintage prices for old gas, but one-half of the pricing categories that Congress established on the face of the NGPA itself.

They did so for the express purpose, they said, of delaying production of new gas.

And yet any reasonable reading of the NGPA indicates that Congress wanted just the opposite.

They wanted to produce that new gas, and they withheld incentives from old gas.

Then, when you look at the operation of the procedure established, there is no fundamental difference in how this rule operates and the way the Department of Justice proposal would have operated that they proposed.

It allows, if it goes according to plan, for the market to set rates.

Congress expressly refused to let the market set rates for old gas.

It did not include old gas in section 121, which is the deregulatory provision.

And then, only 2 months before the Commission initiated this rule making, it stated in its block billing rule making proposal that old gas is not market-responsive specifically by legislative intent.

And that legislative intent was that the price incentives be focused on new and hard-to-produce gas.

And then 2 months later it suddenly found that old gas should be priced at the market, and it offered no reason whatsoever why its statement 60 days before was wrong.

The bottom line is that the end result of the action taken just on the pricing mechanism is that old gas is now priced much higher than the average price of new and hard-to-produce gas that has been deregulated.

That result simply cannot be squared with what Congress intended.

It said the market, upon deregulation, should provide the maximum incentive.

Well, the Commission has provided a much greater incentive for old gas, as is shown in Appendix C to our brief.

The price of old gas is now substantially higher than the price of new gas.

Unknown Speaker: You mean the ceiling price?

Mr. Halladay: The ceil... the price of... the average wellhead price paid for old gas is now higher than the average price of all other wellhead gas, including new gas that has been deregulated.

That can't be squared with what Congress intended in this statute.

Every aspect of this order, as the court of appeals found, was designed for one reason.

The Commission decided it just wasn't wise any more for them to exert any kind of a regulatory presence over old gas.

Unknown Speaker: Well, if the market, if you say the Commission really deregulated it and said the market is going to set the price for old gas, is that what you say?

Mr. Halladay: Um hum.

Unknown Speaker: And they deregulated new gas--

Mr. Halladay: Congress deregulated new gas.

Unknown Speaker: --Well, all right.

So it, so... I would suppose new gas is going to be sold at the market, isn't it?

Mr. Halladay: In many cases it is.

The only problem is that--

Unknown Speaker: Well, why... if the market is determining both kinds of gas, why do you say old gas is, in the marketplace is getting a higher price than new gas?

Mr. Halladay: --Because, in fact, its price has gone up under this rule in some instances.

The average price paid--

Unknown Speaker: Well, why would it?

Why would it, if it is set by market forces--

Mr. Halladay: --The procedure--

Unknown Speaker: --I don't know why it wouldn't--

Mr. Halladay: --The procedure apparently isn't working in all respects as they anticipated.

You see, that's... the best that could be hoped for here, the best thing that could happen if this rule operated as intended would be that the price of old gas would actually be deregulated.

But there was something worse here.

If you needed the gas, the only way you could keep it was to actually pay the ceiling price, and then you were paying, as the current circumstances are, twice what the market allowed.

Unknown Speaker: --Ms. Halladay, Congress wanted this great disparity in the prices and the much higher price for new gas at the time the statute was passed, which was a time of severe gas shortage.

Mr. Halladay: Um hum.

Unknown Speaker: Which has been transformed in, or was transformed into a period of gas glut, was it not?

Mr. Halladay: That is true.

Unknown Speaker: And this is what the, what the Commission is doing, is scrambling to take account of those vastly altered, of that vastly altered situation.

Which Congress allowed it to do by giving it, although it said we won't deregulate, if you want to use that word, old gas now, Congress, in the sections that are central to this case, did not take away the power of the Commission to do that.

And it may be a good thing, because the whole situation changed.

Mr. Halladay: No, no, Congress never said that the Commission could deregulate old gas, and the Commission in Order 451 specifically said it could not.

Congress left a piece of the Commission's just and reasonable rate making authority changed in a very significant respect.

They can only raise the price.

Now, that fits precisely with the prior definitions the Commission had given of how that should be interpreted.

It was a special relief mechanism.

Unknown Speaker: You think it's a good thing that there should still be a great incentive for the production of new gas as opposed to old gas, so that the glut can be, can get even bigger?

Mr. Halladay: Well,--

Unknown Speaker: That's the--

Mr. Halladay: --Actually, the Commission--

Unknown Speaker: --That's the condition you want to perpetuate?

Mr. Halladay: --I just want to follow a scheme that Congress proposed.

The Commission here said it wanted to put more gas on the market, with the hope that that would cause other prices to come down in problem take or pay contracts, and it didn't even work on that point.

The bottom line is Congress had a very clear pricing scheme--

Unknown Speaker: The bottom line is your time has expired, Ms. Halladay.

Mr. Kneedler, do you have rebuttal?

[Laughter]

Rebuttal of Edwin S. Kneedler

Mr. Kneedler: Thank you, Mr. Chief Justice.

Justice O'Connor is correct.

The plain meaning of the statutory text here answers the question.

The Commission is expressly authorized to increase ceiling prices if they are found to be just and reasonable within the meaning of the Natural Gas Act.

Unknown Speaker: Mr. Kneedler, could you explain the apparent contradiction that the Commission says a ceiling price is just and reasonable but does not allow it to be charged--

Mr. Kneedler: The Commission doesn't prohibit--

Unknown Speaker: --without later negotiation.

How come is that?

Mr. Kneedler: --Well, first of all, what the Natural Gas Act provides, allows the Commission to set a rate within a zone of reasonableness, as the Commission has said in Permian Basin.

Unknown Speaker: It says the ceiling is within the zone--

Mr. Kneedler: The ceiling was within the zone and certainly the market, the current market price is within the zone.

Unknown Speaker: --I have no problem with that.

Right.

Mr. Kneedler: And what the Commission has said is that because automatic collection of the higher price, not that it is a just and reasonable rate in the abstract, but that automatically allowing producers to charge rates above the market would distort the market, and therefore not be just and reasonable within the context of a rule that is trying to bring order and regularity to the market.

That's, that's the reason why the Commission has concluded that.

The Commission can regulate practices as well as prices, and what the Commission has done here--

Unknown Speaker: You think the Commission could do that to rates?

I mean, can it say $30 is a just and reasonable rate, so long as somebody is willing to pay that?

Mr. Kneedler: --Well, no--

Unknown Speaker: I mean, is that the definition of a just and reasonable rate?

Mr. Kneedler: --No, no.

There is another point that--

Unknown Speaker: If you can coerce somebody into paying it, it is just and reasonable.

Otherwise it is not.

Mr. Kneedler: --No, because there is an important limitation here, and it is also the complete answer to the respondents' position that this price is deregulated.

The Commission did not pull the price out of thin air.

The price, the ceiling that all of this gas is subject to is the ceiling price for post-1974 old gas, which was carried forward by Congress itself in the NGPA.

That is a statutorily, statutory touchstone for this ceiling.

Also, it is important to reinforce the point that the Chief Justice made.

If, if pipelines cannot purchase gas from the current producer, they can go out and get it at market from other producers.

Respondents have not identified any pipeline that has been unable to replace supplies by going to the market.

Unknown Speaker: Mr. Kneedler, can you help me on one concept on the abandonment part of the case?

Is it correct that under the rule that really two abandonments are approved on a wholesale basis?

First, the shift to a different pipeline purchaser, and then the subsequent abandonment when the producer decides to go, to discontinue production.

Are both stages approved--

Mr. Kneedler: No, no.

The subsequent abandonment that is authorized is if the producer then chooses to sell it to yet a third pipeline.

That's the--

Unknown Speaker: --What if the producer decides that it's no longer economic to produce gas from that particular well?

Mr. Kneedler: --Well, the Commission's position on that is that its jurisdiction does not extend to additional productions of gas from wells, that that is subject to State jurisdiction.

The Commission set that forth in the Northwest Central Pipeline case.

And that is one of the reasons why the Commission concluded it was necessary to have a price incentive, to encourage producers to continue to produce old gas.

Otherwise 11 trillion feet of natural gas would have been lost, the Commission determined, to the market.

Respondents do not challenge that determination by the Commission, and has exhaustively talked--

Unknown Speaker: So this order doesn't, this order just doesn't deal with the problem of abandonment that we normally think of in other regulatory contexts of discontinuing production?

Mr. Kneedler: --Right, this is... this speaks of abandonment of sales.

Unknown Speaker: Okay.

Mr. Kneedler: And again, only in circumstances where the, where the pipeline is unwilling to pay the market-responsive price and a price that it is obligated to pay by contract.

I should also point out that this has been a hugely successful order.

The market price of old gas at the end of 1989 exactly equaled the market price of gas generally, $1.69 per thousand cubic feet.

What this, this order has been a success in eliminating the distortions and the unfairness among consumers, and the long-time disparity with respect to replacement cost, and bringing this sort of order to a nationwide market that Congress wanted to have when it enacted the Natural Gas Policy Act.

This Court said that the Commission's goal under that act is to assure adequate supplies at fair prices.

And surely a regulatory system that requires, in the end, pipelines to pay what the market will bear and producers to charge what the market will bear, with a touchstone to the market pricing system that Congress set loose in the Natural Gas Policy Act itself, is fair and it is also, within the meaning of the act, just and reasonable.

Chief Justice Rehnquist: Thank you, Mr. Kneedler.

The case is submitted.

Print this transcript Transcript: 

Argument of Speaker

Mr. Lee: The opinions of the Court in two cases will be announced by Justice White.

Argument of Justice White

Mr. White: First of these cases is Mobil Oil Exploration & Producing Southeast Incorporated against United Distribution Companies.

The judgment of the Fifth Circuit Court of Appeals is reversed in an opinion joined by all the justices except Justice Kennedy who took no part in the decision of the case.