Federal Power Commission v. Texaco, Inc.

PETITIONER:Federal Power Commission
RESPONDENT:Texaco, Inc.
LOCATION:Alabama State Capitol

DOCKET NO.: 386
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 377 US 33 (1964)
ARGUED: Mar 25, 1964
DECIDED: Apr 20, 1964

Facts of the case

Question

  • Oral Argument – March 25, 1964 (Part 1)
  • Audio Transcription for Oral Argument – March 25, 1964 (Part 1) in Federal Power Commission v. Texaco, Inc.

    Audio Transcription for Oral Argument – March 25, 1964 (Part 2) in Federal Power Commission v. Texaco, Inc.

    Earl Warren:

    Mr. Wahrenbrock, you may — I think you had finished — you’d —

    Howard E. Wahrenbrock:

    I believe I have two minutes, Your Honor.

    Earl Warren:

    Alright.

    Two minutes, I won’t argue about that.

    Howard E. Wahrenbrock:

    Well, in those two minutes, I think that it is an opportunity after having had a few moments to let the thoughts spill on over us as they have been coming at us for two hours.

    To recollect that the key issue in this case is the power of an agency directed by a statute not to promulgate any rules going to either rights or contracts which will be effective in the future without holding a hearing and developing an evidentiary record.

    The issue then is the power of that agency despite that statute to hold such a hearing that does not provide for a record or the development of those facts.

    This was an issue that has come up once before.

    It did not get as far as this Court but it was actively litigated in the District of Columbia Circuit.

    Before 1960, the Federal Power Commission issued its general policy statement in which it promulgated prices for some 23 areas in the country.

    And in that general policy statement, it provided for specific prices.

    And the consumers of natural gas felt that they did not like those prices and they challenged the issuance of that policy statement in the Court of Appeals.

    And there the court said, “But this is only a matter of policy.

    There has been no hearing.

    The Commission cannot promulgate prices without a hearing.

    The avenues of recourse and the development of facts must be kept open as they are here under this policy statement.”

    “But the statement, “said the court, “may stand.”

    So, these rules may stand as policy only.

    Thank you.

    Tom C. Clark:

    How do you reconcile Wisconsin with your position?

    Howard E. Wahrenbrock:

    The lower court in Wisconsin held exactly this —

    Tom C. Clark:

    Not in the — this Court on those general policy statements.

    Howard E. Wahrenbrock:

    This Court merely affirmed what the lower court had said Your Honor that the policy statement prices were no more than guidelines just as the Tenth Circuit below here has permitted these prices that I held up earlier to be statements of the Commission’s policy to let the industry know generally how the Commission feels about these clauses.

    But obviously —

    Tom C. Clark:

    They are ceilings (Inaudible)

    Howard E. Wahrenbrock:

    Excuse me Your Honor?

    Tom C. Clark:

    They are in effect the ceiling on the price, aren’t they?

    Howard E. Wahrenbrock:

    The prices?

    Tom C. Clark:

    The — general policy.

    Howard E. Wahrenbrock:

    No, Your Honor, they are not.

    Tom C. Clark:

    They won’t let them file them by that ceiling?

    Howard E. Wahrenbrock:

    Oh, they will — they will permit a filing and they will permit hearings as to why you should have a right.

    And this is the only reason that the court — the District of Columbia Court, where the policy statement was specifically challenged permitted the policy statement to stand.

    Byron R. White:

    This is just a guarantee that there’s going to be a hearing.

    And everybody knows that to file — higher those rates, there’s bound to be a hearing?

    Howard E. Wahrenbrock:

    That’s correct, Your Honor.

    And it was also where the consumers really got concerned about it was, that — that it appeared, put on both a ceiling and a floor.

    And they were concerned that if — if a price filed below the ceiling were submitted to the Commission, the Commission would automatically stamp it and approve it and the Commission has not allowed that.

    A challenge can be put in even for prices below the policy statement and a hearing held.

    But as you say Mr. Justice White, if it’s over, you’re certainly going to get that hearing.

    Tom C. Clark:

    Well, I understood that the — well, the policy statements say they fixed the price in a certain field.

    Then they had applications subsequent to that that were in excess of that ceiling on that price.

    That they reduce them to the ceiling price before they would certi — certificate them.

    Howard E. Wahrenbrock:

    No, Your Honor, yes and no.

    Number one, the — the policy statement did promulgate prices for certain producing areas rather than specific fields as they are designated in the industry.

    Tom C. Clark:

    Yes, just an area.

    Howard E. Wahrenbrock:

    That within an area such as a certain large number of counties and railroad in Texas.

    Tom C. Clark:

    They are (Inaudible)

    Howard E. Wahrenbrock:

    If you file for a price that exceeds the policy statement, make a certificate application, the Commission consolidates a great number of these applications and has the statutory hearing to determine the public convenience and necessity.

    And it may condition the certificates if it — on the basis of that record, finds that they do not need the test of the public convenience and necessity.

    They do not reject your application in that instance.

    The policy level is just that.

    It is a policy.

    Tom C. Clark:

    Is that in addition to —

    Howard E. Wahrenbrock:

    Excuse me Your Honor?

    Tom C. Clark:

    And that’s your additional price.

    Howard E. Wahrenbrock:

    But only when there is a record which will support it in a court of review which you have a right to, under Section 19 (b) of the Natural Gas Act, permits you to bring that record before a competent court of review to see whether there are findings which support the Commission in its cut.

    And there must be findings of record and there must be facts of record to support the finding that a condition should issue.

    And they have not just cut them to the policy level, Your Honor.

    In some cases, the Commission had stated that the facts of record require even a further reduction in the policy.

    Tom C. Clark:

    I understand, of course you’d have a right there to — I suppose on the permanent — permanent certifications to have a hearing, isn’t it?

    Howard E. Wahrenbrock:

    Absolutely.

    And that hearing has been permitted in those cases but it has been permitted in the cases of these contract clauses.

    Tom C. Clark:

    Because that’s a directive.

    It operates directly on the price though, doesn’t it?

    Or rates, doesn’t it?

    Howard E. Wahrenbrock:

    Well, the — the certificate proceeding?

    Tom C. Clark:

    Yes.

    Howard E. Wahrenbrock:

    Yes.

    Well, first of all, these clauses —

    Tom C. Clark:

    This doesn’t operate directly on the rates.

    Howard E. Wahrenbrock:

    These clauses go obviously directly to the price that you will be able to file for.

    And secondly, the authority of the Commission over a contract and price is spelled out in the same sections of the Act.

    They have no greater authority over price than they have over contract, exactly the same statutory limit is placed on them.

    Price and contract appear in the same section of the Natural Gas Act in the same sentence.

    There can be no greater authority over one than the other.

    No — no permission to do something without findings as to one but the necessity for findings as to the other.

    Tom C. Clark:

    Wisconsin case first speaks for itself.

    But on page 299, that statement is what the case hold, not quite what you state because its — Commission stated in that case absence of compelling evidence, it will certificate, an issue would raise and suspend increase of rates which exceeded those price level.

    Howard E. Wahrenbrock:

    That’s correct but you have the opportunity to put on the evidence, Your Honor.

    The hearing is held and the evidence is taken.

    Tom C. Clark:

    I suppose —

    Howard E. Wahrenbrock:

    And in the absence of the compelling evidence, you — you can’t —

    Tom C. Clark:

    Well, there’s no — there’s no barrier into the statute for your company to propose rate at any time and get a hearing.

    Howard E. Wahrenbrock:

    The very barrier is the fact that this rule and regulation —

    Tom C. Clark:

    Is actually —

    Howard E. Wahrenbrock:

    — precludes us from having contracts that will permit us to come before the Commission.

    This is our essential complaint Your Honor.

    Tom C. Clark:

    You — you — you’re talking about a contract, we’re talking about rates.

    I was talking about rates.

    Howard E. Wahrenbrock:

    But — well, the rate is the product of the contract terms that we have, Your Honor.

    And as Mr. Justice White asked this morning —

    Tom C. Clark:

    What I’m — comes back to whose — was this an Act to — for the protection of pipeline companies or is it the Act for protection of consumers?

    Howard E. Wahrenbrock:

    Well, that it — I don’t see how the Commission can — can ever protect the consumers if it is permitted.

    If any agency is permitted to promulgate prices, contracts or anything else without evidence, without a hearing in which the consumer can appear to state what he thinks the price ought to be.

    Tom C. Clark:

    Of course your — your only objection is that — this right that there might be a deterioration in the Btu’s that therefore, you’d have to readjust.

    Is that your position?

    Howard E. Wahrenbrock:

    Your Honor there —

    Tom C. Clark:

    That’s — that’s a — is that the only provision that you have in your contract that they’ve struck out?

    Howard E. Wahrenbrock:

    No, not at all.

    They had in our contract — oh, we had in contract also, Your Honor, the result at the end of — of 10 years and 15 years to negotiate — renegotiate the contract price on the basis of quality, quantity and all the other pertinent provisions as to delivery conditions in the 10 and 15th year.

    The problems which might come up as to costs of value of the commodity, the supply and demand situations, all of the facts which necessarily will go into a determination of the justness and reasonableness.

    It’s not just one clause that we’re complaining about.

    What must be remembered is that Commission has stricken all clauses, the fertility of the businessman’s mind to provide for the sale of his commodity over 20, 30 or 40 years, has been completely set aside and he is restricted to the half page of pricing provisions which are spelled out in Order 232A, that were spelled out.

    Well, this Commission still insist it doesn’t know how or what is the test of a just and reasonable rate.

    Tom C. Clark:

    Of course, you could go under 4 and — and (Voice Overlap) —

    Howard E. Wahrenbrock:

    We have no contract rights, Your Honor.

    Tom C. Clark:

    And after 20 years, you could.

    Howard E. Wahrenbrock:

    In our case, we would be able to because our contract would expire and under the holding of this Court, we would be able to file.

    Pan American does not have that situation as I’m sure you’ll recall there is this, a life of production.

    They would never —

    Byron R. White:

    What about a contract that’s for 20 years, except that — except that as in yours, the rate provision expires in 10?

    Howard E. Wahrenbrock:

    The rate provision doesn’t expire, Your Honor.

    Here, they — there is a fixed escalation.

    Byron R. White:

    (Voice Overlap) —

    Howard E. Wahrenbrock:

    Each five years and the alternative —

    Byron R. White:

    Assuming you had a contract that’s said at the end of 10 years, the — this rate expires and we shall — we will renegotiate it.

    Howard E. Wahrenbrock:

    That’s what Pan American has.

    Byron R. White:

    That’s not permitted?

    Howard E. Wahrenbrock:

    That’s not permitted.

    Tom C. Clark:

    Well, if you make it 10 years.

    Byron R. White:

    (Voice Overlap) —

    Howard E. Wahrenbrock:

    They can’t make the contract for 10 years?

    Tom C. Clark:

    Yes.

    Howard E. Wahrenbrock:

    Because if you read these rules and regulations, Your Honor, you’ll find that the Commission has also found in them that long term contracts, 20 years and more are in the public interest and are necessary in order to put together a pipeline project and have financing and then get gas to market.

    Byron R. White:

    But then —

    Howard E. Wahrenbrock:

    So on one hand, we must have them but we can’t have any (Voice Overlap) —

    Byron R. White:

    Well, you have them in less than 20 years or don’t you?

    Howard E. Wahrenbrock:

    Once in a while, you’ll get a distressed sale where you will have a small patch of gas and the pipeline will — will take it at — at some distressed price for a period of five years or something like that.

    But normally, in any pipeline project, they have got to have affirmed commitment in order to get their certificate from the Commission.

    And the Commission has normally — these long term contracts are actually the product of regulation.

    We have been given the requirement on one hand to negotiate a long term contract and had taken back on the other hand, the ability to get any flexibility, any sound business prospects for the future while we do this.

    Earl Warren:

    Well, Mr. Wahrenbrock.

    Howard E. Wahrenbrock:

    Mr. Chief —

    William J. Brennan, Jr.:

    Mr. Wahrenbrock, before you begin, I want to (Inaudible) if I could ask you.

    We wanted to find out why the Commission concluded that only those forms of chain clauses combined with 232 was good and everything else was bad, where will we go?

    Howard E. Wahrenbrock:

    The Commissions rules Orders 232 — 232A and 242 appear in the record in this case —

    William J. Brennan, Jr.:

    I — I know they’re here, but what — where — why — where will we find the — the groundwork upon which the conclusion is reached that this order ought to be in here?

    Howard E. Wahrenbrock:

    Principally, in the Pure Oil decision of the Commission which was issued at the same day as Order number 232, the Pure Oil decision is reported in the Commission’s reports in Volume 25, it’s cited in our brief.

    That — the — the Order 232 on page 13 of the record refers to the Pure Oil opinion as for the discussion of the problem with which the Commission was dealing.

    William J. Brennan, Jr.:

    Then that’s starts to which this (Inaudible) terms —

    Howard E. Wahrenbrock:

    Yes, I don’t —

    William J. Brennan, Jr.:

    — to find out why this was done.

    Howard E. Wahrenbrock:

    Yes.

    Now I —

    William J. Brennan, Jr.:

    Well, that — that suggests another question.

    Then whatever record there maybe in 387 would not help this — in this respect, correct?

    Howard E. Wahrenbrock:

    387 which was an attempt to review Order 242 itself directly.

    William J. Brennan, Jr.:

    339?

    Howard E. Wahrenbrock:

    242, the last order —

    William J. Brennan, Jr.:

    Yes.

    Howard E. Wahrenbrock:

    — prescribing these regulations, in which the Tenth Circuit granted our motion to dismiss.

    In that case, when our motion to dismiss was put over to the merits, we did then certify the record in the rulemaking proceeding in which 242 was issued.

    Not the record in the rulemaking proceeding in which 232 was issued and not the or — in the yet earlier rulemaking.

    William J. Brennan, Jr.:

    Well then — what then — the answer is that the record on 242 would not be helpful to us, the 233?

    Howard E. Wahrenbrock:

    There — there — only the record on 242 was certified in the other case to the Tenth Circuit.

    The Tenth Circuit, we feel could in any of these cases, have judicially noticed that —

    William J. Brennan, Jr.:

    No.

    No, I’m sorry, I guess I’m not making myself clear.

    I’m trying to find out whether there’s anything in the record in 387 which as you said involves Review Order 242, will help us find out why the Commission promulgated 232.

    Howard E. Wahrenbrock:

    That record does not contain Commission analysis — Commission — Commission appraisal.

    It is the comments and data and arguments that were submitted.

    And most of those comments and argument and data that were submitted were like the argument that is made here, it’s argumentative.

    There was no request by either of these petitioners in any of these rulemaking proceedings, in the rulemaking proceedings for a trial like hearing for an opportunity to present evidence.

    William J. Brennan, Jr.:

    I (Inaudible) — but I’m still trying to make clear to myself at least —

    Howard E. Wahrenbrock:

    I’m sorry, I’ve —

    William J. Brennan, Jr.:

    — while I look at to find out why the Commission promulgated this order.

    Now, you told me if I look at the Pure Oil decision —

    Howard E. Wahrenbrock:

    Yes.

    William J. Brennan, Jr.:

    — I’ll find help there.

    Howard E. Wahrenbrock:

    Yes.

    William J. Brennan, Jr.:

    Will I find anything in the record in 242 — at 242 and find it in 387?

    Howard E. Wahrenbrock:

    You will find there only the comments and data which were submitted in response to the invitation.

    William J. Brennan, Jr.:

    As I know, it may not as a Board’s appraisal which underlies the — the 232.

    Howard E. Wahrenbrock:

    That’s right.

    William J. Brennan, Jr.:

    Alright.

    Howard E. Wahrenbrock:

    That’s right.

    Byron R. White:

    Where is the Board’ appraisal except in the Pure Oil case?

    Howard E. Wahrenbrock:

    In the — Pure Oil and in the — these three orders, 232 — 232 —

    Byron R. White:

    Just in the text of the orders you’ve served.

    Howard E. Wahrenbrock:

    That’s right, yes.

    Byron R. White:

    Now, did the — the Pure Oil case cover — cover all types of proscribed contracts or all — of all types of proscribed clauses?

    Howard E. Wahrenbrock:

    The one that was immediately involved in the Pure Oil case was a — a favored-nation clause.

    Byron R. White:

    That’s right, that’s right.

    Howard E. Wahrenbrock:

    And that was the basis for the consideration of the general question of these indefinite clauses.

    Byron R. White:

    But to take — take a provision where a contract provides for a definite price for 10 years and then the — the price clause expires and there’s a provision for renegotiation at the end of 10 years.

    Howard E. Wahrenbrock:

    Yes.

    Byron R. White:

    Now, the Commission proscribes that.

    Howard E. Wahrenbrock:

    Yes.

    Byron R. White:

    That is out, that’s impermissible.

    Howard E. Wahrenbrock:

    Now if —

    Byron R. White:

    But now —

    Howard E. Wahrenbrock:

    It proscribes it if the basis for the redetermination are other prices that themselves have not been subjected to Commission scrutiny.

    Byron R. White:

    So that — so that if — if you had a contract that’s set after 10 years, the rate shall be a just and reasonable rate.

    Is that permitted, the — your — of your (Voice Overlap) —

    Howard E. Wahrenbrock:

    No.

    Byron R. White:

    — its —

    Howard E. Wahrenbrock:

    It’s — it’s — you’re coming very close to the Memphis type of provision and that was —

    Byron R. White:

    (Voice Overlap) —

    Howard E. Wahrenbrock:

    — what I was going to start talking about because you had asked about that before.

    That provision, that type of indefinite had never — I think never been used, that was — that was not known of.

    It would — we weren’t aware of it.

    Byron R. White:

    Isn’t that in a sense what they —

    Howard E. Wahrenbrock:

    At the time —

    Byron R. White:

    — have here?

    Howard E. Wahrenbrock:

    No, no.

    Let me come to that.

    The one we have here is for redetermination upon the basis of other prices at the time, an average of three, something of that kind.

    Now, the Commission had not explicitly considered that in Pure Oil.

    It invited comments after 232 so that in effect, there was another rulemaking proceeding.

    Byron R. White:

    Yes.

    Howard E. Wahrenbrock:

    And 30 comments were received to argue this.

    And on the basis of that, the Commission adhered to the position that it had originally taken, accepted and modified it to permit these — these indefinites that are now permitted, redeterminations.

    Once, not more than once in a five-year period if they are based on rates that the Commission has had a chance to look at and hasn’t questioned.

    Now —

    Byron R. White:

    But we —

    Howard E. Wahrenbrock:

    Pan American can have what it wants at the — in 8 — in 1983 or in 1965, if it will provide that the redetermination shall be upon the basis of three jurisdictional rates or one, if they want to make it for that which the Commission has and which has been filed with the Commission and the Commission has not suspended it and hasn’t been — hasn’t questioned it —

    Byron R. White:

    But on —

    Howard E. Wahrenbrock:

    — in a certificate case.

    Byron R. White:

    But on 242, the — there is nothing available to show why the Commissioner arrived at this conclusion other than just the text of the order itself.

    Howard E. Wahrenbrock:

    The text of the order, that’s right.

    Byron R. White:

    That’s all.

    Howard E. Wahrenbrock:

    Now that complies with Section 4 (b) of the admin — the — of the Administrative Procedure Act which says that in issuing the rules, the Commission shall state the basis of the rules and the purpose sought to be achieved.

    Byron R. White:

    Are you suggesting —

    Howard E. Wahrenbrock:

    And there has been no suggestion that it did not.

    In Order 242, state the basis or that it did not state the purpose.

    Byron R. White:

    But now, you suggested that these — that the — that the companies didn’t request a trial-type hearing.

    Are you — are you suggesting that they had a right to request it or that it — that he would’ve granted (Inaudible) —

    Howard E. Wahrenbrock:

    It is what —

    Byron R. White:

    — accountability if they — it would have been granted?

    Howard E. Wahrenbrock:

    Under the Administrative Procedure Act, it is solely within the Commission’s discretion whether two and if anyone asks it and there were — and if there had been factual questions raised, the past practice of the Commission indicates that if a trial-type hearing is the best way to resolve that question, it will follow that method.

    Byron R. White:

    For —

    Howard E. Wahrenbrock:

    It has voluntarily done so and times passed.

    Byron R. White:

    For a rulemaking — for a rulemaking —

    Howard E. Wahrenbrock:

    Yes sir.

    Byron R. White:

    — purposes?

    Howard E. Wahrenbrock:

    Yes sir.

    It has —

    Byron R. White:

    Is there any instance where this has had a trial (Inaudible)?

    Howard E. Wahrenbrock:

    I can’t say them to you.

    Howard E. Wahrenbrock:

    My definite impression and I’ve — and I’m — I’m sure that I could verify this, is that it has on occasion used trial like proceedings to resolve questions when it did not have to have a room at such proceeding so far as the statute was concerned.

    It certainly can use that and whether that is an effective way of doing, so it will.

    But here, the provision of the rules permitting petitions for waiver to be filed enables a company in the case of a Memphis-type provision or in the case of such a provision as Mr. Gilliam referred to for an adjustment on account of rising costs due to the necessity for eliminating contamination which may occur if they have circumstances like that that the Commission has not considered, that are not within the ambit of the — of the general problem, which it has resolved or — or which it was dealing with, then it can apply for a — a waiver and the Commission will grant it an app — a hearing as it has in the of the case of the — the Memphis-type clause itself, which Atlantic presented in a petition for amendment — for waiver of the rule.

    And the fact that there has been delay in that Atlantic proceeding to which Mr. Gilliam referred as though this were a sham.

    This was a run around, the Commission was giving the companies is I submit, perfectly explained by the fact that when the examiner took that case under consideration, he was immediately confronted by the fact that the rule which was sought to be waived was one which the Tenth Circuit has said was an invalid rule.

    And the court examiner, I would suppose is waiting up to see what the outcome of this decision is.

    Thank you.

    Earl Warren:

    Very well, Mr. —