Margaret Hunt Hill, Trustee for Hassie Hunt Trust, Petitioner, v. Federal Power Commission, Respondent.placid Oil Company, Petitioner, v. Federal Power Commission, Respondent, 335 F.2d 355 (5th Cir. 1964)

The question in this case is whether it is too late for an Agency to declare the standards to be met by its decision holding that they have not been met. The answer, quite obviously, is in the affirmative. That this problem occurs is just further proof of the incessant challenge to the administrative process and the necessity for resourceful ingenuity in the efficient management of it brought about by the first, 1954, Phillips¹  decision holding that producers are subject to the Natural Gas Act. We reverse.

One of the problems, of course, is the fact that with at least a considerable present blessing from the Supreme Court²  the Commission for very good reasons has generally abandoned cost-of-service regulation for area pricing. But every now and then, for some reason thought wise or inescapable, the Commission severs a case or otherwise has to treat it on more "traditional" grounds. Such are these cases. The Producers³  in May 1962 filed separate § 4(e)⁴  applications for a rate increase from 21.5¢ to 23.5¢ under a gas purchase contract covering South Louisiana production.⁵  The Commission suspended the effectiveness of the rate to December 1, 1962. The applications were consolidated with similar South Louisiana gas rate proceedings, and set for hearing on July 16, 1962. The hearings were concluded in four days, and with an Examiner's decision bypassed, the Commission, by opinion No. 369, and over the strong dissents of Commissioners Ross and Morgan, on November 30, 1962, granted the motion of the Staff (and certain intervenors) to dismiss the application for failure to make out a prima facie case. 28 FPC 897.⁶  Oddly enough, while presumably holding on the merits that the proposed increased rates were not "just and reasonable," § 4(e), the Commission expressly stated that the Producers could immediately refile the same proposed increases and start the whole thing over. In the meantime, of course, the dismissal put an end to the right of the Producers to collect the increases subject to refund. This is a practical escape mechanism reflecting an adjustment between traditional common law notions of res judicata which are apparently discarded here in order to avoid the triggering of other rate increases as to other producers. We mention it, not to criticize or approve the mechanism as such, but to highlight at the outset the Commission's awareness that its final opinion 369 was the first real authoritative declaration of the standards which these producers would have to meet.

The Producers make three principal attacks. The first is that the hearing lacked basic fairness because the standards were never announced until it was all over. The second, under various headings, is that on the undisputed facts the Producers at least made out a "prima facie" case for the increase. The third is that the right to an increase was established beyond question. We do not get to the second and third branch because it is the Commission, not the reviewing Court, to whom Congress has initially committed the important role of rate review.

In a broad sort of way, the Commission held that the Producers' proof did not meet the standards laid down in Phillips, 24 FPC 537.⁷  Discussed in more detail later on, two principal deviations or deficiencies were found. The first was the use of "sales volume" rather than "production volume" of gas in the allocation of joint oil-gas costs. The second was the failure to include "some gas condensate production in the `gas only leg' of the relative cost computation." It was these two asserted deficiencies which for all practical purposes the Commission found would alone destroy the "prima facie" case. Of course there were a number of others, some of importance, others quite secondary, which we need not specify. The Producers sought, but were denied, the right to a further hearing to meet or overcome these deficiencies and to supply the proof now determined to be essential.⁸ 

These deficiencies in the rate application asserted by the Commission highlight the Producers' basic claim: the standards were not announced until the decision which simultaneously held that the proof was insufficient to make out the "prima facie" case under them. The Commission's answer — or rather, the rationalization of its decision by the General Counsel — is that for all who would read, Phillips was the answer, if not alone, then by contentions which others — intervenors, Staff, etc. — were making in other cases.

We are of the definite view that Phillips⁹  was no crystal ball, and the Commission had the duty at some stage prior to the close of proof to declare what it considered the relevant standards to be.

We need not examine Phillips in detail. The Supreme Court in the 1963 second Phillips case¹⁰  dwelt at length on the Commission's conclusion in Phillips that the school of hard knocks had demonstrated that the traditional utility-prudent-investment-cost-of-service type of rate regulation was not the answer.¹¹  Rather, Phillips was a stop-gap decision on out-moded test year figures for this one producer and a general pronouncement that from here on out, the solution was to be found in area pricing. This got a considerable blessing from the Court which restated what it had long made clear that "just and reasonable" did not tie the Commission to any one method. It was the result, not the route taken, that was important.¹² 

Probably most significant, the Commission in Phillips, recognizing that allocation was indispensable in the cost of service approach, disclaimed any purpose of laying down in Phillips any fixed standards to be followed in what it hoped would be the very few cost-of-service cases pending the day when all would be washed out by area pricing.¹³  In the meantime the Commission had itself manifested that Phillips was not a panacea, that for many cases the factors there applied would not be relevant to other situations.¹⁴ 

Whatever vitality the Commission intended for Phillips as to cost of service rates for producers other than Phillips itself, it is plain that when these hearings were ordered for July 1962, there was no indication what standard was to be applied. The Commission never even so much as breathed the name Phillips and indeed declined categorically to give to the earnest plea of one of the bewildered petitioners¹⁵  anything but the most perfunctory and uninformative reply.¹⁶ 

Of course for those who had been struggling with this problem since the fallout of 1954, this was, at best, a lecture to indicate that while not there expressed, somewhere in the bosom of the Commission there was full understanding and identification of applicable standards. And this was so even though the Commission in 1955 had thrown up its hands in its then formalized attempt to ferret out, assay and declare them in Docket R-142 bearing the ambitious heading of "Consideration of Principles and Methods to be Applied in the Fixing of Rates to be Charged by Independent Producers for Natural Gas Sold in Interstate Commerce for Resale."¹⁷ 

And the quandary was not confined to counsel. At the commencement of the hearing, the presiding Examiner joined the lamentations in response to an inquiry of a producer's counsel.¹⁸ 

The uncertainty of Phillips as a code of standards is even more unmistakably revealed by the candid statements in the General Counsel's brief before us. Thus, the brief states, "We recognize, of course, that producer rate making standards are still in a formative stage * * *." At most "* * * the Phillips case" might be regarded "as a generally pertinent common law precedent [which] * * * pointed to the standards of proof to be met" although "much remains to be clarified through a case-by-case * * * development." In Phillips "the Commission explained * * * certain principles and approaches * * *" and the "explanations, in general, provide guidelines that may appropriately be followed * *." But the caveat is sounded that this "is not to say Phillips can be followed mechanically." To end this short summary of these comments, the brief recognizes that since Phillips cannot "be followed mechanically * * * it may be necessary to adapt the principles of Phillips to the different fact situation of another case." And, of course, the "validity of such adaptation will depend on its reasonableness."

This brings us to some of the deficiencies which destroyed the prima facie case.

Specifically, there is nothing in Phillips compelling the use of wellhead production volumes rather than "sales volumes." The cost of service adopted by the Commission in Phillips was based on its own cost studies in which what may be loosely described as modified production were used.¹⁹  More than that, the Commission's brief here recognizes that "it is true that the matter was not directly in issue in Phillips, where both production and sales volumes were furnished." The fact is, as the dissent of Commissioner Ross points out, "it was not until October (of 1962) in the Hunt case * * * that this matter was considered by the Commission."

Even more bewildering is the criticism concerning the elements to be included in the so-called gas leg of the relative cost computation.²⁰  Quite positively, Phillips offered no guide. Thus, the General Counsel's brief tells us, "in Phillips 60 per cent of the company's gas production came from so-called `gas-only' leases; accordingly, there was no difficulty in determining a gas leg * * *." The situation, however, in our case was quite different. For example, Placid's gas-only leases account for less than 1 per cent of its gas sales, while 89% was condensate gas. Since Phillips did not point the way specifically, the Producers' cost of service materials for the gas leg submitted with these rate applications included not only costs related to gas-only leases, but also all gas condensate leases. This practice was attacked in cross examination and in its initial decision was categorically condemned by the Commission. "Some gas condensate production should be included where the gas-only leg is too small for an adequate sample, but only the minimum necessary to assure inclusion of a representative portion of gas production in the gas leg. To include all condensate has not been shown to be reasonable."<sup>21</sup>  Trying to satisfy the undisclosed demands of the Commission, the Producers, by proposed additional evidence appended to their briefs on submission to the Commission, excluded these criticized items. Having first put them in, then taken them out, the producers learned that the Commission was still not satisfied. The Commission now condemned the Producers because they "made no attempt to include condensate in the gas leg in such proportion as would suffice to produce a reasonable sample." The failure, it said, "left [the producers] with such a thin gas leg in its reworked studies as to make meaningless its revised allocation of joint production cost."<sup>22</sup>  Closer to the scene than we, Commissioner Ross, dissenting, describes the Producers' predicament as that of one who "* * * occupies the unenviable position of being damned if he does and damned if he doesn't."<sup>23</sup>  From these extremes — (1) all or (2) none — one can now distill the requirement that "some gas condensate production should be included" but it should be "only the minimum necessary to" include "a representative portion of gas production" to supply for the Commission "an adequate sample."<sup>24</sup>  But the simple fact is that this "some but not all," "adequate sample" requirement applied decisively in this case was announced by Commission for the first time in Hunt Oil Co., Opinion No. 365, 28 FPC 623, issued October 17, 1962, some three months after the record in this case closed. But unlike Hunt, in which the Producers were granted the right to bring forward additional evidence to meet the newly declared standards, the Commission here declined such right largely because to "remand this case would not only lead to the triggering of almost a million dollars a year in rate increases, but would result in the collection of rates, which even if collected subject to refund would create a new higher price `plateau' for natural gas."²⁵ 

In this setting we are clearly of the view that the procedure here followed by the Commission deprived producers of a fair and adequate hearing because the standards to be applied were neither evolved nor announced until the decision holding them unsatisfied. Commissioner Ross, dissenting, summed it up accurately.

"The propriety of our motion to dismiss assumed the existence of standard. Quite clearly, it makes no sense to ascribe a `burden of proof' to parties, or even to emphasize the existence of such a burden, without having first described the nature of the burden. * * * Thus, the basic issue before us is whether the Commission had established standards in advance of the hearing in this case which described the criteria to be applied to applications for rate increases under Section 4(e) * * *. The majority takes the position that such standards are clearly defined in the Phillips opinion. I flatly disagree. * * * [In July 1962] this new Commission had never stated its views with respect to the standards it would apply to 4(e) proceedings. Until the issuance of our recent Hunt order generally reaffirming the so-called Phillips approach, there was considerable speculation in the industry as to whether this Commission would utilize any kind of a cost of service method in 4(e) proceedings. Significantly, that Hunt order was released on October 17, 1962 — well after the time the hearing was concluded in the instant proceeding. Even assuming the industry was psychic enough to realize in advance our general reaffirmance of Phillips, that case constitutes a very feeble elucidation of the principles governing 4(e) proceedings. As a matter of fact, the whole tenor of the Commission's decision in that case was a rejection of individual cost of service methodology in favor of an area approach."

The dissenter was on sound ground. More than a quarter of a century ago in Morgan v. United States, 1938, 304 U.S. 1, 18-19, 58 S. Ct. 773, 776, 82 L. Ed. 1129, the Court declared:

"The right to a hearing embraces not only the right to present evidence, but also a reasonable opportunity to know the claims of the opposing party and to meet them. The right to submit argument implies that opportunity; otherwise the right may be but a barren one. Those who are brought into contest with the Government in a quasi-judicial proceeding aimed at the control of their activities are entitled to be fairly advised of what the Government proposes and to be heard upon its proposals before it issues its final command."

These principles are still very much alive. In the APA Congress provides that " [p]ersons entitled to notice of an agency hearing shall be timely informed of * * * (3) the matters of fact and law asserted," 5 U.S.C.A. § 1004(a). And the Court, within the year, has expressly relied on Morgan v. United States in Willner v. Committee on Character and Fitness, 1963, 373 U.S. 96, 83 S. Ct. 1175, 10 L. Ed. 2d 224.

To require that the Commission formulate the standard to be met will neither force unrealistic rigidity in the content of those standards nor bring about administrative inefficiency. We would not for a moment suggest that the Commission should, or could for that matter, lay down once and for all the standards to be applied in natural gas producer cases. We have emphasized the flexible, unfixed, frequently vague' factors and the slight or substantial deviations from Phillips and others, out of no spirit of criticism for the lack of consistency on the Commission's part. Rather, we have done so to highlight the fact that in the informed, expert judgment of the Commission based upon its long struggle, experience has demonstrated the impossibility of contriving a single test or series of tests by which to measure "just and reasonable" rates. Courts have extended, and continue to give, the Commission almost a free hand. (See note 12, supra). And the Commission's own reports show that even with respect to cases to be judged on the so-called cost-of-service basis, many internal adjustments are required to take into account the peculiar circumstances relating to the particular producer, the area, engineering or geological difficulties, problems of exploration, production, transportation, or the like.

But investing the Commission with such wide latitude imposes a correlative burden on the Agency. From a substantive standpoint, it must of course always make certain that the differences in treatment are rationally founded to avoid the charge of arbitrary discrimination. And procedurally it must make sure that those who are to be judged by the standard evolved to meet the exigencies of that particular case are advised of it in time to have a fair opportunity to meet it. Quite obviously, this is, or may well, call for adaptations which would be quite foreign to the traditional utility-type rate inquiry. In the traditional case the criteria will have long been established and all will know of the likely necessity of meeting one of the usual subsidiary standards, such as prudent investment, cost of reproduction less depreciation, or the like. But in this field, as illustrated by the difficulty of determining just how much production from gas condensate leases should or should not be included to obtain a fair representative sample, the broad legal tests are of little help either in ultimately deciding the case or in ascertaining what sort of evidence might be required. Chief Judge Tuttle emphasized this for the Court in Gulf Oil Corp. v. FPC, 5 Cir., 1958, 255 F.2d 556, 557:

"This is concededly a difficult standard to specify especially in light of the fact that producers are in reality selling gas which they own and are not, in the traditional sense, primarily furnishing a service to the public."

One probable adaptation which would be workable and fair would be in effect to conduct the rate hearing in two main stages. The first would afford an opportunity for the full development of the evidence bearing upon the peculiarities or special circumstances of any particular case, producer, or the like, out of which the standards to be applied would be evolved. Such standards would then authoritatively be announced, and the parties given a reasonable opportunity in the second stage to satisfy the consequent burdens imposed.

This plan is neither unworkable, inefficient, or visionary. Indeed, this record demonstrates how it could have been employed effectively. In so doing, the case demonstrates also that the legal mechanism of the motion to dismiss is of dubious value in an undertaking calling for the delicate adjustment of so many variable factors. Here, for example, without ever having declared any standard of sufficiency, it was first thought that too much condensate gas production had been loaded into the costs. At a later stage it was thought there was too little. What is enough? How many or how much will be needed to make the sample a fair one? Likewise, in allocating exploration costs to crude oil, should the economic factor be 3-1 or 4-1? In allocating such costs between condensate and gas, what sort of an economic factor should be employed? As to these and many other factors, the Commission seemed to require a letter perfect application with letter perfect subsidiary elements. It declined to undergo the judicial travail of weighing those portions on which complete information was furnished simply because certain computations were then announced for the first time to be wrong. The Commission simply held as a matter of law that because in the evidentiary material and schedules the Producers claimed more than they ought to, sought the inclusion of elements in excess of that which the newly declared standards would permit, the whole thing had to be dismissed outright.

In the judicial-administrative adaptation imperatively called for because of these unavoidably shifting, constantly developing substantive standards, the Commission at that stage had at least two methods of dealing with these asserted deficiencies, none unduly disruptive of rate regulation. First, as to matters on which full information was revealed (as was true in many instances), the Commission could have exercised the judicial responsibility committed to it of evaluating the extent to which the evidence under proper standards did or did not support the proposed increase. Or second, it could have announced the standards with instructions to the Producers to recast the information in the form now demanded after which the case would proceed in the normal course.

Of course there are other likely variations, but the prospect need not be disturbing. Courts are finding day by day that there is both a need to meet extraordinary problems and ample procedural resources available to do the job.²⁷  Litigation is frequently and most efficiently handled in defined stages.²⁸  Certainly no adjudicatory tribunal is faced with a more formidable task than is the Commission as it undertakes to solve and then master the responsibilities imposed on it by the 1954 Phillips decision. We have frequently pointed out that the Commission has demonstrated great resourcefulness in handling with an over-burdened staff and limited resources the monumental and increasingly unmanageable task. Hunt v. FPC, 5 Cir., 1962, 306 F.2d 334, 343, n. 15; Texas Eastern Transmission Corp. v. FPC, 5 Cir., 1962, 306 F.2d 345, 347, n. 2. But this case illustrates that again the quickest way through is the longest way around. After hearings terminating in 1962 by precipitous orders dismissing the applications outright, the cases must go back two years later presumably to start the laborious process all over again. And were we not reversing for further hearing, the Commission's own invitation to refile immediately for the identical rate increase would have set the same machinery in motion. In the meantime the pendency of the applications unresolved would add further disturbing uncertainties, the prospect of added collections under refund all with the likelihood that these may entail the very triggering which the Commission properly seeks to minimize.

We would therefore join the Supreme Court in its admonitions to the Commission that it exploit to the maximum with all resourceful ingenuity the means of coping with this task.²⁹  Since it is dealing with a problem which is undulating by nature, it cannot, as it did here, content itself with traditional procedures. It must adapt these to the peculiarities of this business. This means here that when it evolves standards, it must declare them in a way and time to give those affected a meaningful opportunity to meet them.

And, of course, what we do here is what we required in Bel Oil Corp. v. FPC, 5 Cir., 1958, 255 F.2d 548, 553, and Forest Oil Corp. v. FPC, 5 Cir., 1959, 263 F.2d 622, 626. In each, after first holding that the Commission was entitled to conclude that the producer's case did not meet the standards for a rate, we modified the orders sufficiently to permit a further rehearing. We emphasized in Bel Oil what is true here, that the parties are entitled to an opportunity "to introduce evidence" on those elements of a rate base which the Commission "in its written opinion" dismissing the applications held, "for the first time" to be "an essential part of such an inquiry." 255 F.2d 548, 553.

Reversed.