H. L. Hunt; W. H. Hunt, Trustee for Hassie Hunt Trust; Caroline Hunt Sands; J. A. Goodson, Trustee for Caroline Hunt Trust Estate; A. G. Hill, Trustee for Lamar Hunt Trust Estate; Nelson Bunker Hunt, Petitioners, v. Federal Power Commission, Respondent, 306 F.2d 334 (5th Cir. 1962)

These cases raise the common question of whether the Federal Power Commission in granting a temporary certificate for the sale of natural gas at a specified initial sales price may lawfully prescribe as a condition that such price may not be increased without express approval of the Commission. The effect of such a condition is to deny to the producer the opportunity of filing a § 4(d) (e) subsequent rate increase. We hold that the Commission may not thus effectually condition-out a statutory right which Congress has prescribed. We therefore sustain the attack of the Producers who petition for review and reverse the Orders of the Commission.

While this question is almost submerged in the seemingly unavoidable flood of papers which consumes another natural resource while adjudicating this one, each of these ten separate petitions for review and the underlying orders, petitions for rehearing, orders on rehearing, and post-certification orders present substantially the same facts. Fortunately, what we can readily identify as the natural gas Bar, shows a commendable cooperation in streamlining into a single consolidated record and consolidated briefs and argument all of the essential materials — but no more — without costly repetition or duplication.¹ 

While, as we stated, these involve many different dockets concerning rates or sales in the Alvin, Alta Loma and Chenango Fields within the Texas Railroad District No. 3, for all practical purposes the cases are the same and present this one basic question. Moreover, very little factual detail even as to a typical case is needed. Some dates and times are, however, important in showing the sequence and to pinpoint the complaints of the Producer. A brief synopsis of the Alta Loma proceedings will suffice.² 

On July 1, 1960, the Commission issued a permanent certificate under § 7(e) to the Producer for the sale of gas to the pipeline purchaser. The rate prescribed was 20¢ Mcf. The 20-year contract as originally proposed called for an initial price of 20¢ with four escalations of 2¢ each every four years. In granting the permanent certificate, the Commission required that this be altered by prescribing a single 3¢ escalation at the end of the first ten years. This was accepted and service commenced. That Order, as such, is not under review in these cases.

Thereafter new production was brought in on this pooled gas unit. On December 15, 1960, the Producer entered into individual gas sales contracts with the Pipeline purchaser for the sale of this additional gas. The price fixed was 20¢ Mcf, but with four 2¢ escalations.³  Thereafter on February 27, 1961, the Producer applied to the Commission for a Certificate of Public Convenience and Necessity to make these sales. It sought also temporary authorization to begin service immediately, alleging the existence of an emergency situation resulting from "the necessity of paying shut-in royalties and the incurrence of drainage through sales by others to pipeline companies other than" the pipeline Purchaser.⁴ 

It is helpful to digress here to point out two things. First, while the initial price, 20¢ Mcf was the same as the currently effective permanent certificate covering gas from the same field to the same pipeline Purchaser, the escalation provisions were markedly different, and on a total weighted average the price was greater. Second, and of more importance, between the date of the issuance of the permanent certificate covering the sale of gas from this same field to the same pipeline Purchaser, the Commission issued its Statement of General Policy No. 61-1, 18 CFR § 2.56, 24 FPC 818. In this Statement it established area price standards to be used as guides in determining where the proposed initial rates should be certificated without a price condition. The "initial service rate" established for Texas Railroad District No. 3 was 18¢ Mcf. Of course the application of February 27, 1961, was for a new certificate and was a transaction expressly envisaged by 61-1. No reference in the application was made by the Purchaser to Statement 61-1 and, oddly enough, none was made in these terms by the Commission until long after the petition for review machinery had been set in motion by the Producer.

Presumably in the usual form and without the statement of any reasons, the Commission by letter order of April 7, 1961,⁵  issued the temporary authority to sell the gas as proposed in that docket, but "subject to the following conditions" which for ease of reference we identify in brackets [1], [2] and [3]:

[1] That the total initial price not exceed 18 cents per Mcf at 14.65 psia;

[2] that there be filed within 20 days a supplement to the rate schedule consistent with [1] above and a revised billing statement;

[3] that the temporary authorization be accepted in writing by a responsible official of the company.

On May 5, 1961, the Producer filed its acceptance of this temporary authority but without prejudice to a claimed right to seek removal of conditions [1], [2] and [3] and to seek an increased rate in accordance with terms of the amended rate schedule filed contemporaneously. Filed presumably in compliance with Condition [2] was a contract amendment stating that the initial price would be 18¢ Mcf for the first thirty (30) days following commencement of deliveries and thereafter 20¢. Deliveries had, in the meantime, commenced under the temporary authorization on April 19, 1961. Contemporaneously with the filing of its acceptance, the Producer also formally sought rehearing of the Order of April 7 imposing conditions [1], [2] and [3].

Again we digress to point out that the Commission did more than deny the petition for rehearing. It changed its Order of April 7 substantially. This action forms an additional complaint of the Producer here. That action was taken on May 31, 1961. That Order (a) denied the application for rehearing, and (b) rejected the amended rate schedule on the ground it appeared to authorize an increase from the 18¢ rate during the continuance of temporary authorization. Then, to remove doubt it (c) expressly modified the language of the authorization to provide explicitly that no change from the 18¢ rate could be made during its term.⁶  And, finally, because of (b) and (c), the Order (d) rejected a proposed filing of a 20¢ rate made in accordance with the amended contract.⁷ 

The Producer filed a timely application for rehearing of the Order of May 31 and shortly thereafter formally retendered its acceptance of the temporary authorization and also the increased-rate filing to 20¢. On July 26, 1961, the Commission denied the application for rehearing and rejected the retendered increased-rate filing.⁸  Timely petitions to review the Commission Order issuing temporary authorization subject to conditions and the Commission Order rejecting the Producer's purported acceptance, its filing of an amended rate schedule, and its filing of increased rates were thereafter filed.

While that ordinarily would be the cutoff date, the record as certified shows that subsequent action was taken by the Commission. On November 2, 1961, the Commission sent the Producer a Letter Order which amplified its previous orders and modified them on one respect. This letter undertook to state reasons for the prior action generally in terms that the imposition of the 18¢ price condition was taken in keeping with policy Statement No. 61-1. It further stated that upon reconsideration, the Commission had determined that it should permit the filing of the contract amendment which it had rejected earlier. This was, the Commission explained, merely to afford a contract basis for the collection of the authorized 18¢ rate. It was made clear, however, that this was "for the express purpose of permitting there to be on file the contractual agreement between you and [the pipeline Purchaser] under which you will be receiving 18¢ per Mcf." And it sounded the warning that "this should not be construed as permission for you to file for an increased rate pursuant to section 4(d) of the * * * Act during the pendency of the temporary authorization." The Commission thus made plain that in the new condition of the Order of May 31, 1961,⁹  it was speaking precisely in terms of the use of the statutory right to file rate increases under § 4(d) of the Act.¹⁰ 

The Producer asserts three principal complaints, the first two of which we think have no merit.

There is, first, the contention that after the grant of temporary authorization by the Order of April 7, 1961, imposing its Conditions [1], [2] and [3], the Commission could not make these conditions more onerous by its Order of May 31. It emphasizes two things, one of which is that condition [1] spoke precisely in terms of the "initial price" not exceeding 18¢, the other being that it commenced deliveries on April 19, 1961. The suggestion seems to be that this is too much changing of the rules in the middle of the game. There is nothing to this. The Producer sought a change in the rules. The Producer was unhappy with the Order of April 7 and — by its conditional acceptance with express reservation of rights and its simultaneous application for rehearing — sought to obtain a new ruling by the Commission. If anything as fresh as the Order of April 7, 1961, had to have anything to keep it alive as a matter within the continued reconsideration of the Commission at least during the 60-day period allowed for appeal to the Court of Appeals, the application for rehearing was more than enough. The petition for rehearing is not a one-way street. It seeks a reconsideration. A reconsideration carries with it the imminent prospect that things will be worse, not better, after rehearing.

Somewhat akin to this criticism is the further procedural one that the Letter Order of November 2, 1961, is of no consequence in this record. The Commission asserts that since this occurred prior to its certification of the record, the Commission continued to have jurisdiction. § 19(b), 15 U.S.C.A. § 717r(b). But we do not have to decide this specifically. The reasons asserted, perhaps retrospectively, in support of its May 31 modification is but a forecast of the rationale elucidated by the General Counsel to sustain the Order. In any case, it is the Order that is in issue. What the Commission says, as with the Court's opinion, is of great importance and its intrinsic weight is not affected by the time of its deliverance when, as was the case here, it is on a temporary certificate, as to which no formal record is or can be made. So far as the modification which allows the filing of the amended contract, previously rejected by the Commission, is concerned we regard that as an accomplished fact. It merely spells out what is otherwise so plain in the Commission's actions that it was permitting the sale under a contractual arrangement, but on the express positive condition that no increases in the rate would be allowed whether in, or not in, the contract.

The second complaint is more substantial. In effect it is that there was no reasonable basis for requiring a price reduction from 20¢ to 18¢. If the Producer were to establish this contention, it is not likely that, at this juncture, we would even reach the problem of the prohibition of § 4(d) increases.

Both as to the specific reduction in the initial sales price and in the related problem of requiring a price reduction — as distinguished from collection of the contract price under an obligation to refund the difference — great reliance is placed upon the decisions of the 10th and 7th Circuits in the cases reversing the BTU adjustment condition. The Pure Oil Co. v. F.P.C., 7 Cir., 1961, 292 F.2d 350; Sohio Petroleum Co. v. F.P.C., 10 Cir., 1961, 298 F.2d 465; Eason Oil Co. v. F.P.C., 10 Cir., 1961, 298 F.2d 468; and see also from the 3rd Circuit, J. M. Huber Corp. v. F.P.C., 3 Cir., 1961, 294 F.2d 568. For our present purposes, we can accept the standards elucidated in those opinions, but they do not compel any reversal here.

It is important to bear in mind a factor we discuss in greater detail later on. We are here dealing with temporary authorization. There is, and can be, no formalized record in the traditional sense. What tools are we to use, then, by which to construct a thesis showing that it was completely arbitrary for the Commission to have required an effective reduction in price? The Producer emphasizes the previous permanent certification of a 20¢ rate in the related sale. But aside from whatever uncertainty is now cast upon that decision,¹¹  we think a good deal of water has gone over the dam which at least warranted the Commission taking an individualized look. One, of course, is the Policy Statement 61-1 with its area pricing approach whose fetal development ought not to be imperiled by pre-natal traumas inflicted by restraints or restrictions from the judiciary. Equally important is the declaration from this and other Courts concerning the nature of the evidence required on the hold-the-line policy of CATCO.¹²  In addition to these intervening events of considerable administrative-legal significance, the rates in all but the Chenango Field (see note 3, supra) carry ultimate rates considerably in excess of 20¢ Mcf. We are asked on this skimpy record, unaided either by traditional evidence or that of expert economists, to say as a matter of law that a contract with four built-in 2¢ escalations does not have an inflationary or triggering effect. On the assumption that the collection of the increases is ultimately allowed, it is quite plain that over the life of the contract the price for all gas delivered was 20¢ plus. We would assume that what is so inescapable as a matter of economics would be understood in the same way by practical men in the business of selling and buying natural gas.

Nor do we find any basis for attacking the Commission's choice between a reduction in the initial price, rather than an order permitting collection of the contract rates subject to refund. There are a whole host of problems, legal and administrative, wrapped up in this choice. In the Commission's limited facility for study of the probable ultimate merits of a sale when considering an application for temporary authority, the circumstances would, we think, have to be quite unusual to warrant a Court differing with this conclusion inevitably calling for the nicest of expert judgments.

But we view the express prohibitions of § 4 increases as beyond the pale of administrative discretion. We do not think that under the guise of a condition of a temporary authorization, the Commission can forbid what Congress has expressly allowed to a natural gas producer. We reach this conclusion by application of the principles discussed and followed in Texaco, Inc. v. F.P.C., 5 Cir., 1961, 290 F.2d 149, and American Liberty Oil Co. v. F.P.C., 5 Cir., 1962, 301 F.2d 15. We do not, however, regard, as do the parties in various aspects, that either or both of these decisions is directly and positively controlling. As is perfectly plain, there is and must be a difference between a permanent certificate and a temporary authorization. Consequently, what is said in Texaco with regard to action permissible for a permanent certificate does not necessarily apply for a temporary.¹³  On the other hand, the opposite is not necessarily true.

These cases start with the recognition that conditions may be imposed. And, of course, the factor deemed to be of such importance in CATCO was the beginning price. Thus, the Supreme Court held, the Commission, without making a rate case out of it, had the duty to take into account price as that might bear specifically, generally, immediately or remotely, on the public interest. In Texaco we did, of course, state that "The power of the Commission to condition a certificate is co-extensive with its power to reject or deny a certificate * * * because the power to reject an application for certificate completely is harsher than the power to grant it on any reasonable condition," 290 F.2d 149, 156. But we did not intend this to declare that since the Commission had it within its actual power not to grant an application, it could therefore impose any conditions that, no matter how harsh in fact, were somewhat less than a complete refusal. We had earlier expressed it in terms such as these: "* * * it can hardly be argued that the Commission would not have had the power, if it made a soundly based finding that the public convenience and necessity did not warrant its granting of a certificate at an initial price higher than 17.7 cents, to deny the certificate out of hand." 290 F.2d 149, 155 (emphasis added).

The idea of reasonableness was therefore implicit in equating outright denial and grant subject to conditions. We spelled it out plainly in American Liberty where, of the grant of a temporary we declared, "This is not to say that the Commission can act arbitrarily, whimsically or in a manner that amounts to a clear abuse of its discretion." 301 F.2d 15, 18. Elaborating on this we then adopted as our own the standards suggested by the Commission. "The reasonableness of the Commission's determination must be viewed in light of the summary and ex parte nature of a grant of such temporary authorization * *" and "* * * the Commission's action * * * can be set aside only if the court were to determine that the order issuing a conditioned certificate was a clear abuse of discretion, i. e., arbitrary, whimsical, or capricious action, or that the order was otherwise as a matter of law erroneous on its face." 301 F.2d 15, 18.

This envisages, of course, that there is a line past which the Commission may not go. The line is different for a permanent, rather than a temporary. The line may be a fuzzy one and difficult to locate. But somewhere there is a mark.

Up to now the line has not been permitted to go so far as to obliterate specific sections of the Natural Gas Act by requiring that one seeking to make an interstate sale must agree to forego and relinquish for an indefinite period of time safeguards and rights which Congress has established. On the contrary, what was done in Catco and by us in Texaco demonstrates that the necessity for conditioning a grant of a certificate is to fulfill the aims of the Act by an accommodation of all of its demands. Thus, the Court in Catco had this to say. "In granting such conditional certificates, the Commission does not determine initial prices nor does it overturn those agreed upon by the parties. Rather, it so conditions the certificate that the consuming public may be protected while the justness and reasonableness of the price fixed by the parties is being determined under other sections of the Act." 360 U.S. 378, at 391, 79 S. Ct. 1246, at 3 L. Ed. 2d 1312. In a very practical way we made just such an accommodation in Texaco. Thus, by rejecting a highly legalistic impediment supposedly founded on Mobile,¹⁴  we categorically stated that the price condition in the certificate would not prohibit the producer from filing, as soon as the sales contract otherwise permitted, a rate increase under § 4 which would thereafter be subject to suspension and collection under the obligation of reimbursement. This was a recognition that while, as a condition to a grant, the Commission would require the parties to commence the sale at a price lower than that fixed in the contract, the contract thereafter did not cease to have vitality. The so-called "revision of the contract obligation" resulting from condition imposed by the Commission does not, we said, "amount to a revision of the contract obligation of the parties between themselves except to the extent only that the Commission has a legal duty to deny the producers the right to receive, at least for a limited time, part of the benefits the parties have agreed among themselves it is entitled to." 290 F.2d 149, 156.

Without even remotely implying that a permanent and a temporary are to be treated always alike, we can see no distinction in this area when viewed either as a matter of statutory power in the Commission or statutory rights accorded to a natural gas producer, or both. If, as we held may legally be done, the producer may increase rates and thereafter collect them subject to suspension and refund under § 4, it is obvious that the Catco price "line" sought to be maintained by the condition is not the one currently being observed after the permissible § 4 increase. From the standpoint of the payments the purchaser is required to make, the actual price is in fact above the "line." Of course that makes maintenance of price line something less than completely effective. But that is the unavoidable consequence of a unique statutory regulatory scheme in which, as Mobile (see note 14, supra) points out, rates are initially prescribed (and increased) by private contract. Not everything is lost, however, since, as Catco contemplated, any contract increases are collected subject to refund. Additionally, this puts the burden of establishing lawfulness of the rates on the producer. Also it eliminates the prospect of irretrievable excess payments even though, in a lumbering and prolonged § 5 rate investigations, the initial price is found to be too high. Viewed in this light we see no real distinction between a permanent and a temporary. Both in terms of the effectiveness and in terms of economic impact, the collection of a post-condition § 4 increase is the same for a temporary as for a permanent.

To allow this prohibition of § 4 condition, we would be as much as saying that in determining whether the addition of the proffered gas to the interstate market serves the public interest the rates to be prescribed are not those fixed under the sales contract by the parties. Rather the rates are those (a) fixed by the Commission in the first place and which are to continue until (b) the Commission itself fixes another level. This is a complete abandonment of the approach deliberately selected by Congress and which, all must agree, was a radical break with traditional utility-type regulation.

The consequences are too awesome for us to assume that Congress ever committed such undefinable legislative judgments to an administrative agency. There is, first, the status of the producer under a temporary. His rights may be temporary, but his duties are not, or at least on the present holding they are not. Like the ancient covenant running with the land, the duty to continue to deliver and sell flows with the gas from the moment of the first delivery down to the exhaustion of the reserve, or until the Commission, on appropriate terms, permits cessation of service under § 7(b), 15 U.S.C.A. § 717f(b). Sun Oil Co. v. F.P.C., 1960, 364 U.S. 170, 80 S. Ct. 1388, 4 L. Ed. 2d 1639; Sunray Mid-Continent Oil Co. v. F.P.C., 1960, 364 U.S. 137, 80 S. Ct. 1392, 4 L. Ed. 2d 1623; Continental Oil Co. v. F.P.C., 5 Cir., 1959, 266 F.2d 208. That means that, for good or evil, a producer under a temporary is subject to all of the regulations, restraints and duties of a natural gas company, § 2(6), 15 U.S.C.A. § 717a(6). Nothing in § 4 or in § 7 outlining the grant of certificate, or anything elsewhere in the Act takes from such producer the rights as a natural gas company which the law accords as a part of the duties imposed. Such producer is required under § 4(a) as a "natural-gas company" to maintain "just and reasonable" rules, regulations and rates, is forbidden under § 4(b) to "make or grant any undue preference" in "rates, charges, services, facilities * * *" and under § 4(c) is obliged to maintain and "keep open * * * for public inspection" its "schedules showing all rates and charges for * * * sale * * *," and under § 4(d) to make no change, without Commission approval, except upon "thirty days' notice." Finally, the critical § 4(e) prescribes that such proposed rate shall be in effect. It first provides that whenever a new rate is filed by a natural gas company "the Commission shall have authority * * * to enter upon a hearing concerning the lawfulness of such rate * * * and, pending such hearing * * may suspend the operation of such schedule and * * * rate, * * * but not for a longer period than five months * * *." But it then goes on to provide that "If the proceeding has not been concluded and an order made at the expiration of the suspension period * * *" then on motion of "the natural gas company" the "proposed * * * rate * * shall go into effect * * *."

Moreover, this subjugation of such a producer under a temporary to the almost perpetual control of the Commission is more than an academic theoretical. It is a clear and present — and largely unavoidable — fact. It is no reflection on the Commission or its over-burdened and energetic staff to take practical cognizance of the great delay in processing these matters. On the contrary, one can have only a genuine respect for the manner in which all grapple with this monumental and increasingly unmanageable task as the result of fallout from Phillips Petroleum Co. v. Wisconsin, 1954, 347 U.S. 672, 74 S. Ct. 794, 98 L. Ed. 1035. But despite strenuous efforts and the importation of resourceful, new plans and methods for coping with it, the fact is that progress is slow, so slow indeed that it is hardly progress.¹⁵ 

Even from our remote position, it seems safe to conclude that never will the Commission be able to process certificates on an individualized basis. The hopes for a practical solution must rest in generalized area-pricing or similar resourceful adaptations of law and life.¹⁶  But assuming its legal validity will be upheld broadly enough to make it effective, even this can not be counted on for much immediate help. Speaking of this "new system" of area pricing and the time before it can be established, Judge Prettyman stated (see note 16, supra), "This period will be long, estimates running from four to fourteen years."¹⁷ 

This is important for we have to view Commission action in terms of its broad and inescapable impact. It is no answer to the awesome implications thus revealed to suggest that as to these particular dockets, the Commission has, so we are informed, assigned them to a hearing which, perhaps by now has actually taken place. The problem presented in these hearings will be essentially the one presented in Catco and if it, and the many other numerous cases coming to this Court from the Commission, are any guide, it is almost certain that we are dealing with orders which cannot become final for two or three years more.¹⁸  Time is therefore important. Time is a part of the problem for adjudication. In view of the structure of the Natural Gas Act, this time is irreplaceable to the producer. This is so even though the decision of the Commission on the grant of the permanent or, perhaps even later, in a § 4 or § 5 determination of just and lawful rates approves the proposed initial contract rate (or at least one higher than the conditioned rate).

And finally, the condition is so awesome because — and it is no mere reductio ad absurdum to say — if the Commission may set aside § 4 and the rights, privileges and protections which it accords to a natural gas company subject to all of the obligations of the Act, then there is no end to the legislative tampering which the Commission may undertake. It may just as well deny the producer the right of review by rehearing or petition to the Courts under § 19(b).¹⁹  Or it might just as well conclude that the producer's operations are uneconomic because of doubtful reserves or a current exploration program and condition the grant of a temporary on divestment of unprofitable leases or the cessation of wildcat drilling.²⁰ 

The condition is erroneous on its face and the cause must be reversed and remanded for further consistent proceedings.²¹ 

Congress has subjected a temporary natural-gas producer to § 4 and all other parts of the Act. Congress has extended to all natural gas companies, permanent or temporary, the protection and rights of § 4 and the Act. Each is interlocked.

That which Congress has joined together, let not the Commission put asunder.

Reversed and remanded.