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09/19/74 Torbert H. Macdonald and v. Federal Power Commission

September 19, 1974





Certiorari denied April 14, 1975.

Petition to Review Orders of the Federal Power Commission.


Wright and MacKinnon, Circuit Judges, and Jameson,* Senior District Judge. MacKinnon, Circuit Judge (concurring). Opinion for the court filed by Circuit Judge Wright. Concurring opinion filed by Circuit Judge MacKinnon.


Petitioner congressmen challenge orders of the Federal Power Commission *fn1 permitting a natural gas producer, George Mitchell & Associates, to increase its rates for gas sold pursuant to a 1954 contract in interstate commerce to a level about 65 per cent above that which other producers in Mitchell's production area may charge under the Commission's recently established Other Southwest Area rates. *fn2 Since the Commission justified its grant of "special relief" to Mitchell from the area rate by Mitchell's commitment to invest a certain level of funds in further gas exploration and production, this case requires us to exercise again our responsibility to review the Commission's efforts to respond to the natural gas shortage which all agree now confronts our nation. We recognize the broad discretion which has been entrusted to the Commission "to devise methods of [natural gas] regulation capable of equitably reconciling diverse and conflicting interests," Mobil Oil Corp. v. FPC, 417 U.S. 283, 331, 94 S. Ct. 2328, 41 L. Ed. 2d 72 (1974), and that this discretion must be given particular respect "in this time of acute energy shortage." Id. However, the Supreme Court this year reaffirmed that the purposes of the Natural Gas Act, including that of protecting consumers from prices which are forced above a just and reasonable level by the market power of natural gas suppliers, impose limits on this discretion. *fn3 And we cannot say on the basis of the record before us that the orders here challenged do not constitute a transgression of those limits. *fn4 I

The facts of this case take on greater meaning in the context of the history of federal regulation of natural gas producers. In the first several years after the Supreme Court held the Federal Power Commission to have a responsibility under the Natural Gas Act to regulate gas producers as well as pipelines, *fn5 the Commission evaluated the justness and reasonableness *fn6 of a producer's rates by attempting to determine the producer's individual costs, including of course its capital costs, and adding thereto a fair profit return on its investments. *fn7 In 1960, however, the Commission announced that it would divide the major gas producing regions in the United States into several discrete areas and would initiate proceedings to establish for each of these areas ceilings up to which it would approve producer charges as just and reasonable and above which it would not. *fn8 In the ensuing area rate proceedings, these price ceilings were fixed by reference to average area-wide costs. This meant that low-cost producers would be able to charge rates appreciably above their individual costs and that high cost producers would be limited to rates which would not permit them to obtain a full fair return on their investments or perhaps even to recoup unsuccessful investment costs.

However, in its first area rate decision, Permian Basin Area Rate Proceeding, 34 F.P.C. 159, 225-226 (1965), the Commission made clear that the area ceilings were not to be ignored whenever a showing was made of inordinate producer costs. The Commission declared it would grant relief from the ceilings only in more limited special circumstances such as "where a producer who has contracted for an above-ceiling price can show that his out-of-pocket expenses in connection with the operation of a particular well are greater than the revenues under the applicable area price." 34 F.P.C. at 226. The Commission stated that there might be other circumstances warranting special relief, but it did not elaborate on what they might be. The Supreme Court approved the Commission's area rate policy as applied in the Permian Basin Area, specifically finding the provisions for special relief to be adequate. Permian Basin Area Rate Cases, 390 U.S. 747, 770-773, 20 L. Ed. 2d 312, 88 S. Ct. 1344 (1968). In subsequent decisions establishing rates for the other gas producing areas, including that for the Other Southwest Area, *fn9 the Commission provided that special relief from the area rates could be obtained in accordance with its Permian Basin precedent. *fn10

By October 1971 when the order establishing rates in the Other Southwest Area was entered, the seriousness of our natural gas shortage had become evident to the Commission. In 1969 the Commission had instituted proceedings to reconsider in light of supply shortages the rates which it fixed for the Southern Louisiana Area in 1968. *fn11 The result of this reconsideration was a 1971 order increasing the ceiling rates for this area and providing incentives for commitment of additional gas to the interstate market. *fn12 The Commission's 1970 Hugoton-Anadarko *fn13 and its 1971 Texas Gulf Coast *fn14 rate decisions also both provided for increased rate incentives in response to the "present critical shortage of all forms of energy in the United States and the anticipated rapid growth of demand for natural gas." *fn15 As would be expected, the Commission set the Other Southwest Area rates as well after full consideration of the gas shortage. The Commission stated:

While we cannot expect that this area will be able to supply the potential demand upon it, it is important that its potential be fully utilized in this time of national need for all available gas.

. . . The prices established herein provide incentives, however, to the producers in this marginal area to find gas and dedicate it to interstate commerce. The prices established will enable the interstate market to compete in price with the present and potential intrastate buyers in the area.

46 F.P.C. 900, 910-911, 911-912 (1971). As noted by the Fifth Circuit in approving the Other Southwest Area rate decision, *fn16 the Commission used average cost levels as its major point of reference but also considered supply and demand imbalance and existing inter- and intrastate price levels in establishing ceiling prices which it judged would provide adequate exploratory incentives. *fn17 It is from these Other Southwest Area ceiling prices, established in response to the natural gas shortage, that George Mitchell & Associates sought to obtain "special relief."

Mitchell filed its special relief petition less than a year after the Other Southwest Area decision. Under the established area rates Mitchell could sell gas produced from its Wise County region wells pursuant to a 1954 contract with Natural Gas Pipeline Company at 18.859 cents per Mcf. *fn18 It requested permission to sell this gas at 30.25 cents per Mcf. In support of its request Mitchell did not argue that the costs of its Wise County area operations are significantly greater than the average costs of gas production in its district of the Other Southwest Area. *fn19 Indeed it did not offer any evidence on its costs, or on the profitableness of its wells at the rates it was then charging. *fn20 Rather Mitchell requested the sharply above ceiling rate in return for its promise to undertake additional exploration in the Wise County area.

After a prehearing conference had been commenced and testimony had been placed on the record, a settlement proposal agreed to by the Commission staff and by Natural was submitted by Mitchell to the Commission for its consideration. Two months later the Commission approved the settlement by a two to one ...

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