Sunray Mid-Continent Oil Company v. Federal Power Commission/Opinion of the Court

This case presents an important question under the Natural Gas Act. This question, central to the case, is: When a company, proposing to make, under contract, jurisdictional sales of natural gas in interstate commerce, applies for a certificate of public convenience and necessity as required by the Act, and requests that the certificate be limited in time to the duration of a contract for the sale of gas which it has entered, does the Federal Power Commission have the authority to tender it, instead, a certificate without time limitation?

Petitioner Sunray Mid-Continent Oil Company, an independent producer of natural gas, entered into a contract with United Gas Pipeline Company, an interstate transmission company. The contract covered considerable acreage owned by, or under mineral least to, petition in Vermilion and Lafayette Parishes, Louisiana, in and about what is called the Ridge field. Under it, United agreed to take an annual amount of gas from petition equivalent to 4.5625 per cent of petitioner's gas reserves in the area covered by the agreement; and United had the right, in addition, to call for any amount up to 150 per cent of the amount it had annually agreed to take. The term of the agreement was 20 years. The initial price provided was 20.5 cents per thousand cubic feet (Mcf.); and the price was to increase one cent per Mcf. every five years.

Section 7(c) of the Natural Gas Act provides that "no natural-gas company * *  * shall engage in the transportation or sale of natural gas, subject to the jurisdiction of the Commission *  *  * unless there is in force with respect to such natural-gas company a certificate of public convenience and necessity issued by the Commissioner authorizing such acts or operations." This Court held in Phillips Petroleum Co. v. State of Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 796, 98 L.Ed. 1035, that by virtue of § 1(b) of the Act, sales of gas by an independent producer to a pipeline "in interstate commerce * *  * for resale for ultimate public consumption" came within the scope of the Act. Petitioner had no certificate of public convenience and necessity authorizing sales in interstate commerce from the field in question. Accordingly, in order to carry out its contract with United, it was necessary for petitioner to apply for a certificate from the Commission, which it did.

Petitioner's application for the certificate contained the request that the certificate sought "provide for its own expiration on the expiration of the * *  * contract term so as to authorize Applicant to cease the delivery and sale of gas thereunder at that time." The Commission, upholding its examiner's recommendations, rejected the contentions of petitioner that there should be issued to cover the contract only a certificate limited to the term of the contract itself, and tendered it a certificate without time limitations. 19 F.P.C. 618. Petitioner applied for a rehearing of the Commission's order. Basic to this application was the contention that "The Commission is without authority to issue a certificate to an applicant authorizing more than the whole or some part of the sale covered by the application for certificate of public convenience and necessity * *  * ." The Commission denied the rehearing application. 19 F.P.C. 1107.

Petitioner did not avail itself of its undoubted right to stand firm on its own application, and reject the proffered certificate. Cf. Atlantic Refining Co. v. Public Services Comm., 360 U.S. 378, 387-88, 79 S.Ct. 1246, 1252, 1253, 3 L.Ed.2d 1312. Instead it accepted the Commission's certificate and commenced deliveries of gas under it, reserving its right to object, on review, to the certificate's unlimited nature. The Court of Appeals for the Tenth Circuit rejected petitioner's objections, and affirmed the order of the Commission, 267 F.2d 471. In view of the importance of the central question presented, to which we have already alluded, we granted certiorari. 361 U.S. 880, 80 S.Ct. 151, 4 L.Ed.2d 118. We are in agreement with the Court of Appeals, and affirm its judgment.

The practical reasons behind petitioner's superficially self-abnegating desire to have a limited rather than an unlimited authorization from the Commission are obvious from a study of the Natural Gas Act's provisions. Obvious also is the damaging effect that acceptance of petitioner's central contention would have upon the policies of the Act.

Section 7(b) of the Natural Gas Act regulates the abandonment by natural-gas companies of their facilities and services subject to the jurisdiction of the Commission. The section follows a common pattern in federal utility regulation in forbidding such abandonment "without the permission and approval of the Commission first had and obtained." The Commission is to extend permission for an abandonment of service only on a finding "that the available supply of natural gas is depleted to the extent that the continuance of service is unwarranted, or that the present or future public convenience or necessity permit such abandonment." The proposal of petitioner was for a certificate that would by its own terms expire when the contract with United expired. Thus at the end of the period, petitioner would become free to cease supplying gas to the interstate market from the Ridge area without further leave of the Commission, and without there having been made the findings that Congress deemed necessary.

If petitioner's contentions, as to the want of authority in the Commission to grant a permanent certificate where one of limited duration has been sought for, were to be sustained, the way would be clear for every independent producer of natural gas to seek certification only for the limited period of its initial contract with the transmission company, and thus automatically be free at a future date, untrammeled by Commission regulation, to reassess whether it desired to continue serving the interstate market. And contracts-as did the 1947 contract in the companion case to the one at bar, Sun Oil Co. v. Federal Power Comm., 364 U.S. 170, 80 S.ct. 1388, might provide for termination in the event of a rate reduction by the Commission. Petitioner's theory, by tying the term of the certificate to the contract, would mean that such a reduction of rates would under those circumstances enable the producer to cease supplying gas, without obligation to justify its cessation of this service as being consistent with the public convenience and necessity.

The consequences of petitioner's argument do not stop there. The identical provisions of the Natural Gas Act regulate pipeline companies as well as independent producers. If producers can insist in their certificates on the inclusion of a provision relieving them in advance from their obligation to continue the supply of gas, as of a date certain, pipeline companies-whose dealings with local distributing companies generally also take the form of a "sale" of gas to them-could insist on a similar provision. If an individual producer were thus left free to discontinue his supply, the transmission company would be forced to find a supplier of gas elsewhere, and make connection with him, to continue its service; and the consumer ultimately would pay the bill for the rearrangement. If the pipeline company were left free to cease its service to the local distribution company, a local economy which had grown dependent on natural gas as a fuel would be at its mercy. And this, though the primary practical problem that led to the passage of the Act was the great economic power of the pipeline companies as compared with that of communities seeking natural gas service. See Federal Power Comm. v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.ct. 281, 291, 88 L.Ed. 333.

And there are practical consequences, related to rate control, which are even more concrete. The companion case, sun Oil Co. v. Federal Power Comm., 364 U.S. at page 170, 80 S.Ct. at page 1388, illustrates them. If petitioner's certificate of public convenience must expire with its first contract with United, service after then-under a new contract or otherwise-will require a new certificate. And under that certificate, petitioner may file, pursuant to § 4(c) of the Act, its rates for the "new" service. The only power the Commission would have, under the Act, with respect to those rates, would be to bear the burden of proof in an investigation under § 5 of the Act, that the rates are unjust or unreasonable, and thereupon order a new rate, solely for prospective application. Last Term in the so-called Catco case, Atlantic Refining Co. v. Public Service Comm., supra, 360 U.S. at page 389, 79 S.ct. at page 1254, 3 L.Ed.2d 1312, we had occasion to remark that "the delay incident to determination in § 5 proceedings through which initial certificated rates are reviewable appears nigh interminable." At oral argument, counsel for the Commission confirmed that no contested major producer's § 5 case had been finally adjudicated by the Commission in the six years since this Court's decision in the Phillips case. In contrast to § 5 are the protections that would be available if at the conclusion of the original contract the producer's certificate remained in full force and effect. Then the rates to be charged under a new contract or otherwise would have to be filed as rate changes under § 4(d) of the Act, with 30 days' notice to the Commission and the public. Under § 4(e), the Commission, on complaint of any State, state commission, or municipality, or sua sponte, may order a hearing on the new rate, and suspend the effectiveness of the rate for five months. At the hearing, the gas company would have to shoulder the burden of proving that its new rates were just and reasonable. If the hearing were not concluded by the end of the suspension period, the increased rate could be collected ad interim; but the Commission is empowered to require the company to collect the increment under bond and accounting, and refund it if it could not make out its case for the increase.

Clearly, the rate of change provisions of §§ 4(d) and 4(e), rather than the "initial rate" provisions of § 4(c), are better tailored to the situation that exists when an initial contract of sale of natural gas terminates, and the supply of gas continues, whether under a new contract or without one. When a producer commences interstate sales from a particular field, or when an interstate transmission company commences sales to a local distributing company, there are by definition no existing rates, and accordingly the protective provisions of §§ 4(d) and (e), which are bottomed on delaying the effectiveness of, and suspending, changes, are not relevant. But of course this is not the case where one sales contract expires and service continues; in this situation, where a rate change is proposed, the protective provisions fit as well as they do in the case of a rate change made pursuant to a contract, during its term.

Thus it is apparent that petitioner's position would enable it to make what in practical effect would be rate changes, but without compliance with the procedures of §§ 4(d) and 4(e), and subject to revision only in procedures which are likely to "provide a windfall for the natural gas company with a consequent squall for the consumers," as we said in Catco. 360 U.S., at page 390, 79 S.ct. at page 1254. When attached to the leverage of a power to abandon service, at a contract's termination, without contemporaneous Commission approval, this power to exercise contractual control not only over rates but over the mode of their regulation, would be a substantial one indeed. And, like the power to force an advance license for the abandonment of the continued supply of gas, the power would be one enjoyed by pipeline companies and producers alike. Further, declaration today of a want of authority in the Commission to issue a certificate of longer duration than that of a sales contract attached to the application would have a retroactive effect; it would at least furnish a guide to the construction of certificates issued previously on such applications. See Sun Oil Co. v. Federal Power Comm., 364 U.S. at page 170, 80 S.Ct. at page 1388.

This Court declared as early as the Hope Natural Gas case that the primary aim of the Natural Gas Act was "to protect consumers against exploitation at the hands of natural gas companies." 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333. We reiterated that declaration last Term in Catco, and observed that "The Act was so framed as to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges." 360 U.S., at page 388, 79 S.Ct. at page 1253. Against the backdrop of the practical consequences of the petitioner's claim and the purposes of the Act, we look to the details of its argument that the Commission is limited, in granting its certificate of public convenience and necessity, to a term certificate of the duration petitioner has proposed.

First. Petitioner's argument is based primarily on its construction of § 7(e) of the Act. That section provides that a certificate of public convenience and necessity shall be issued "to any qualified applicant therefor, authorizing the whole or any part of the operation, sale, service, construction, extension or acquisition covered by the application." This petitioner urges, makes it clear that the outside limit of what the Commission may authorize is what the applicant proposes. Further, petitioner urges that the language requiring a finding "that the applicant is able and willing properly to do the acts and to perform the service proposed" negates the Commission's authority to go beyond the time limitations the applicant inserts in its proposal; for it is claimed that it cannot be found that petitioner is willing to do more than what it has proposed. Under petitioner's theory, the abandonment provisions of § 7(b) would have application only if it was desired to abandon service while the contract was still in effect.

The argument seems to us unpersuasive even on the face of the statutory language. It depends in the first instance upon freightening the phrase "the whole or any part," obviously intended to give the Commission power to grant less than the whole of an application with a load of negative meaning which nothing in the legislative history indicates that it was to bear. Even without the illumination of the purpose of the Act, it could be argued with equal force that all that was meant was that the certificate to be granted be one sufficient to authorize the specific "sale" proposed; which an unlimited certificate clearly is, in any case. But apart from this, petitioner's contention depends on the assumption that the provisions relied upon speak only in terms of the specific "sale" contemplated by the parties and not in terms of a "service" in the movement of gas in interstate commerce, of which "service" the initial "sale" is the commencement. For under § 7(e) the Commission is authorized to issue a certificate authorizing the "service" covered by the application, as well as a "sale"; and since § 7(c), which details the acts for which a certificate is a prerequisite, sets forth no specific antecedent for the "service" to which § 7(e) refers, it might well be thought that one who "engage[s] in the transportation or sale of natural gas," which § 7(c) does refer to, is performing a "service" within the meaning of § 7(e). Certainly there is no more likely antecedent in § 7(c). The structure of § 4(c) presents the same feature, and that of the abandonment provisions of § 7(b) themselves looks the same way.

Furthermore, within § 7(e) itself, there is found the further requirement to which petitioner itself points-that with respect to an application for a certificate of any nature, a two-part finding must be made: that the applicant is willing and able "to do the acts and to perform the service proposed." Thus, it is evident that all matters for which a certificate is required-the construction of facilities or their extension, as well as the making of jurisdictional sales-must be justified in terms of a "service" to which they relate. Accordingly, § 7(e) itself gives positive indication that the "service" which the Commission's certificate may authorize is something quite apart from simply the specific sales which § 7(c) forbids without a certificate sufficient to authorize them. To be sure, § 7(e) requires that the applicant be found willing to perform the "service" in question; but surely such willingness can be inferred from its willingness to enter into a long-term sales contract. To say that the finding cannot be made in view of the applicant's declared desire to stop and have a look in 20 years as to its continued desire to be subject to regulation, and that this is a limit on its willingness to perform the service that the certificates must respect, is to make effective regulation turn on the desire of the regulated enterprise to be subject to it. The willingness to make the proposed "sale" thus must imply willingness to perform the "service" which it represents. Thus even as a verbal argument, petitioner's contentions lack persuasiveness.

Second. Once we pass beyond parsing the Act to a consideration of its purpose, and of the practice under it, the construction we have given it becomes inescapable. We have outlined the serious consequences for the regulatory scheme that acceptance of the petitioner's argument would entail. These consequences cannot readily be averted by other means suggested by the Act.

It is urged that if it is in the public interest to award only an unlimited certificate, the Commission might attain this end by refusing all applications for a limited one, intimating that an unlimited application would be favorably regarded. But the action of the Commission is refusing the certificate as originally applied for would be subject to judicial review; and once it were held that the Commission had no authority to award a certificate of longer duration than that prayed for, such an indirect method of attaining the same end might well meet judicial condemnation as arbitrary. There is also some suggestion that the Commission might use its power, under § 7(e), of attaching to the certificate "such reasonable terms and conditions as the public convenience and necessity may require," to attach the "condition" that the certificate be permanent. But again, once want of power to do this directly were established, the existence of power to achieve the same end indirectly through the conditioning power might well be doubted; and the acceptance of a certificate for a longer duration than requested might not be said properly to be a "term or condition" of a limited one at all. We think the Commission's power to protect the public interest under § 7(e) need not be restricted to these indirect and dubious methods.

The Commission's practice supports its authority here in the terms of § 7(e). It has long drawn a distinction between the underlying service to the public a natural gas company performs and the specific manifestation-the contractual relationship-which that service takes at a given moment. For example, an independent producer may file as its rate schedule its contract of sale with a pipeline company. That contract may provide in explicit terms for an adjustment of rates at a future time-even one foreordained in a precise amount. Yet when the adjustment is made pursuant to the contract, the adjustment is subject, as a "change" in rates, to the procedures of §§ 4(d) and 4(e)-however explicit the upward adjustment was in the contract from the start. Cr. Texas Gas Transmission Corp. v. Shell Oil Co., 363 U.S. 263, 80 S.Ct. 1122. This position of the Power Commission is evidence that the service in which the producer engages is distinct from the contract which regulates his relationship with the transmission company in performing the service. And it has been upheld in every Court of Appeals case on the question. Episcopal Theological Seminary of the Southwest v. Federal Power Comm., 106 U.S.App.D.C. 37, 269 F.2d 228; Bel Oil Corp. v. Federal Power Comm., 5 Cir., 255 F.2d 548, and companion cases;  Continental Oil Co. v. Federal Power Comm., 5 Cir., 236 F.2d 839;  Cities Service Gas Producing Co. v. Federal Power Comm., 10 Cir., 233 F.2d 726;  Mississippi River Fuel Corp. v. Federal Power Comm., 8 Cir., 121 F.2d 159. See United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., 358 U.S. 103, 110, 79 S.Ct. 194, 198, 3 L.Ed.2d 153. If the Act does not contemplate that in a seller's contract there may inhere the power, of the contract's own accord, to effect a rate change at a future date unchecked by the regulatory scheme, it is hard to believe that it contemplated that contracts would of necessity have the effect of providing for a discontinuance of service, without further leave of the Commission.

Further, the Power Commission has from an early date taken the view that there is a continuing obligation to perform "service" imposed by the Act which outlasts the term of a seller's original contract of sale. As early as 1942 it held that an abandonment of service after the expiry of such a contract had to have Commission approval under § 7(b). United Gas Pipe Line Co., 3 F.P.C. 3, 9. This ruling was made by Commissioners who had been in office during the passage of the Act. It was not a fundamental ruling on a broad question of jurisdiction as to which a court might enjoy a wider latitude of review. See Phillips Petroleum Co. v. State of Wisconsin, 347 U.S. 672, 678, 74 S.Ct. 794, 796, 98 L.Ed. 1035. It was rather an early implementation and application of a detail of the statutory scheme by the Commission in a regulatory setting before it. The ruling has been followed, see Panhandle Eastern Pipe Line Co., 11 F.P.C. 167, 172, and we think this contemporaneous and consistent construction, pointing again to a distinction between the underlying "service" to the public and the contractual means by which it is implemented, is to be afforded weight in the construction we make.

Third. But against these considerations, it is urged that United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373, establishes dominant factors which impel one to the construction petitioner would put on the Act. Petitioner claims that Mobile establishes a principle that the Act (unlike many other regulatory schemes) in general preserves the integrity of private contracts, and that the judgment below is in conflict with that principle.

The petitioner states accurately enough the principle that Mobile establishes. See 350 U.S., at pages 338, 344, 76 S.Ct. at pages 377, 380. But the conclusion petitioner asserts does not follow. In Mobile, this Court held that where a seller of gas had entered into a contract for the sale, it could not, by virtue of the provision in § 4 for rate changes, file an increase in rates that violated the terms of the contract. This was because the scheme of the Act was one which built the regulatory system on a foundation of private contracts. It was held in the Memphis case, United Gas Pipe Line Co. v. Memphis Light, Gas & Water Div., supra, that the corollary of Mobile was that where the contract left the seller free to act, he could act unilaterally under § 4.

It is apparent that the Commission's order in no way violates the integrity of petitioner's contract with United. During its term, both parties are bound by it to the same extent as any members of this regulated industry. When it expires, petitioner, to be sure, will be under an obligation to continue to deliver gas to United on the latter's request unless it can justify an abandonment before the Commission; but we do not see how this in any way disturbs the integrity of the contract during its term. The obligation that petitioner will be under after the contract term will not be one imposed by contract but by the Act. It will be free then, as it was not free during the contract term under the contract here in question, to make rate changes under § 4 without United's consent. It is said that petitioner will be in a position of inequality, because it must supply gas then to United without a corresponding obligation on United to take it. But United, subject to the Act in its sales to local distributors, has its obligations too; and if in fulfilling them it desires to have a continuing supply of gas with the stability of price protection which a contract furnishes under Mobile, it may be discovered that each side has its bargaining strength. In any event, we do not see how the prospect of this situation after the term of petitioner's contract in any way impairs the integrity of any contract. Mobile is thus simply beside the point.

The short of the matter is that Mobile recognized that there were two sources of price and supply stability inherent in the regulatory system established by the Natural Gas Act-the provisions of private contracts and the public regulatory power. See 350 U.S., at page 344, 76 S.Ct. at page 380. Petitioner now urges an application of that decision that could make private contracts the only stabilizing factor under the Act. Not only does this reading have nothing to do with the integrity of private contracts which Mobile underwrote, but it makes a severe incursion into the sources of that stability of natural-gas prices and supply to which that decision gave confirmation. Our consideration of this, as well as the rest of petitioner's arguments, leads us to reiterate as our holding the clear implication of what we recently said in Catco: An initial application of an independent producer, to make movements of natural gas in interstate commerce, leads to a certificate of public convenience and necessity under which the Commission controls the basis on which "gas may be initially dedicated to interstate use.  Moreover, once so dedicated there can be no withdrawal of that supply from continued interstate movement without Commission approval.  The gas operator, although to this extent a captive subject to the jurisdiction of the Commission, is not without remedy to protect himself." 360 U.S. at page 389, 79 S.Ct. at page 1254, 3 L.Ed.2d 1312. That remedy he has, as the Court there said, in the "change" power under § 4(d) when his contract has expired or where his contract permits its use during its term. Under a similar Act, this Court has held to the same effect as we hold today. Pennsylvania Water & Power Co. v. Federal Power Comm., 343 U.S. 414, 423-424, 72 S.Ct. 843, 847-848, 96 L.Ed. 1042.

Once the power of the Commission to issue the certificate without time limitation is established, the other objections of the petitioner fall readily. It is contended that the Commission's order, by requiring the petitioner to supply gas beyond the term of its contract, may, by requiring petitioner to produce more gas than it has contemplated, offend the provision of § 1(b) of the Act that the Act does not apply "to the production or gathering of natural gas." The point was not raised before the Commission, and accordingly is not for our consideration here, and we might say in any event that the point is not for evaluation in this certification proceeding, but rather on the specific facts presented in the context of an abandonment application by petitioner under § 7(b), after the expiration of its contract, when and if it desires to make one. We intimate no view as to its merit.

Other objections seem primarily directed to the point that the Commission imposed the burden of proof on the petitioner to show that the certificate should be limited, in the public interest, rather than itself taking on the burden of supporting its issuance of an unlimited certificate. There is no contention that the Commission was again indulging in the erroneous notion that it had no power to issue a limited certificate. Cf. Sunray Mid-Continent Oil Co. v. Federal Power Comm., 10 Cir., 239 F.2d 97, reversed on other grounds 353 U.S. 944, 77 S.Ct. 792, 1 L.Ed.2d 794. This procedural formulation seems to us well within the Commission's discretion as an implementation of the Act's protective provisions which we have discussed. And, though much urged by petitioner, the fact that the Commission has certificated pipeline operations despite their showing of gas resources of a shorter duration than petitioner's contract term is not inconsistent with the Commission's approach here. From the fact that the Commission has issued certificates in the presence of what may prove to be physical limitations on the service to be rendered under them, it does not follow that the Commission cannot take care lest these physical problems in the continuation of supply become further complicated by the legal certificate term limitations for which the petitioner contends.

Finally it is suggested that for various reasons which petitioner claims to be related to the public interest, it would be more advantageous if gas producers were given a free hand, after the completion of each contract, to determine for themselves whether they should continue to serve the interstate market. These considerations were not urged before the Commission, and hence we are not called upon to decide whether they would compel a different approach by the Commission to the question of time limitations in certificates, or even whether, in the light of the Act's provisions-particularly the policy expressed in § 7(b)-it would be proper for it so to rely on them. There is no contention made that petitioner demonstrated any specific circumstances in its own case indicating that, despite the Commission's general policy, the public convenience and necessity warranted a limited certificate for it.

Affirmed.