Federal Power Commission v. Transcontinental Gas Pipe Line Corporation – Oral Argument – November 15, 1960 (Part 1)

Media for Federal Power Commission v. Transcontinental Gas Pipe Line Corporation

Audio Transcription for Oral Argument – November 15, 1960 (Part 2) in Federal Power Commission v. Transcontinental Gas Pipe Line Corporation

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Earl Warren:

Number 45, Federal Power Commission, Petitioner, versus Transcontinental Gas Pipe Line Corporation, et al. and number 46, National Coal Association, et al., Petitioner, versus Transcontinental Gas Pipe Line Corporation et al.

Mr. Solicitor General.

J. Lee Rankin:

Mr. Chief Justice and may it please the Court.

This case involves the Natural Gas Act.

It is a question of a certificate to transport gas under Section 7 of that Act.

The particular part of the application that’s involved here is what is known as the transportation of X-20 gas, which is somewhat unusual and I’ll try to describe it.

Under the tariff, proposed tariff, the X-20 was gas that Consolidated Edison Company, New York, bought directly from the producers in Texas at $19.25 for 1000 cubic feet to have transported by the Transcontinental Gas Pipe Line Corporation to New York City with the restriction on the use of the gas that it could only be used as fuel for boilers.

The record is clear that the purpose of the restriction was for the producers to avoid any regulation of the price of their gas.

The examiner in considering it — well there’s a further factor that is of importance, and that is that Transco, Transcontinental Pipe Line Company, agreed that for a period of 60 days at the election of Consolidated Edison, they would furnish their own gas that could be used for resale in the New York City area, to Consolidated Edison in the portion of the pipeline that had otherwise been provided under this X-20, for the transportation of this gas, Consolidated Edison that Consolidated Edison bought directly.

Potter Stewart:

I don’t quite understand that.

They do that for 60 days?

J. Lee Rankin:

Well, whatever Consolidated Edison elected to do so.

Potter Stewart:

Would that be presumably for a peak period?

J. Lee Rankin:

That’s right.

That is what is called the peaking gas.

Potter Stewart:

I see.

William J. Brennan, Jr.:

Well then what happens, Mr. Solicitor, what happens to the X-20 gas?

J. Lee Rankin:

Well, during —

William J. Brennan, Jr.:

It’s not been delivered?

J. Lee Rankin:

That isn’t delivered.

It’s what they —

William J. Brennan, Jr.:

Is or is not?

J. Lee Rankin:

Is not.

William J. Brennan, Jr.:

Is not.

J. Lee Rankin:

It’s, what they call, a drawback and it’s though the pipeline is there with that space available for Consolidated Edison to use and instead of using the X-20, they put into a Transco gas that can be resold.

William J. Brennan, Jr.:

But that — is there a condition against the use of that Transco gas for fuel or boilers?

J. Lee Rankin:

No.

It — it can be resold.

It could be used for boilers too.

William J. Brennan, Jr.:

Oh, I see.

J. Lee Rankin:

But the purpose of it, the purpose of the provision is to be able to resell — sell it, to take care of the peak loads during that period that Consolidated Edison would have.

William J. Brennan, Jr.:

The Transco would sell it or Edison?

J. Lee Rankin:

Consolidated Edison would sell it in the New York market.

Transco would merely carry the gas but it would be gas that Transco purchased itself and would be subject to resale, as distinguished from the restriction on the Consolidated Edison purchased gas which could not be resold in the New York market but had to be used according to the terms of purchase for a boiler fuel.

William J. Brennan, Jr.:

Now this Transco gas, I gather, the price of that is regulable?

J. Lee Rankin:

It is regulable, yes.

And there was a general tariff covering that.

But the tariff that they — that Consolidated Edison purchased that gas under was one in — that was interruptible.

That is they had a right, Transco had a right to take the regular gas of what’s called CD under the tariff and interrupt the Consolidated Edison being able to have that gas in order that they’d be able to put it in storage during a part of the year.

William J. Brennan, Jr.:

Does that mean this is significant for the spending of gas, significant for the use in the United States?

J. Lee Rankin:

Well it is because of the peaking provision to understand, because that was one of the reasons, the justifications, by Consolidated Edison and Transco for having this arrangement.

Now as a matter of fact, it does seem important as to whether or not, air pollution was truly an important part of the consideration in this matter.

And I think that as I develop, that you’ll see that the air pollution was an explanation or a justification that they gave for wanting this particular tariff approved by this transportation certificate.

But as a matter of fact, it did not loom nearly as important as the opportunity to be able to buy the gas direct without interference.

Felix Frankfurter:

Does the volume of X-20 gas as against the 60-day gas, is that a relevant factor in your — in the problem?

J. Lee Rankin:

It becomes —

Felix Frankfurter:

I mean it depends how much is —

J. Lee Rankin:

It becomes —

Felix Frankfurter:

— the relative — the relativity volume?

J. Lee Rankin:

It becomes relevant in regard to how they might use it for air pollution that they really meant, that air pollution was important in this consideration.

Now this particular volume we’re talking about that they contracted for, was 50,000 Mcf. of gas per day that they could — they bought in Texas under this price of $19.25, to be used for boiler fuel.

There, they had a provision that they could get during the peaking period for the 60 days at their election up to 50,000, the same amount, from Transco of resalable gas.

Their testimony was that they were going to use only 25,000 because they were going to use 25,000 of the X-20 gas that they bought themselves in the boilers, in two boilers at water side, in order to take care of the air pollution and the rest, they would proceed to use for resale for their peaking purposes.

Felix Frankfurter:

What if — I probably don’t understand this.

But if they were going to use a fraction, in a sizable fraction, of the peaking supply in relation to air pollution, then that is just so much more in order to deal with it or to avoid air pollution.

Then they add that on to the main claim that they make, that they bought the 50,000 Mcf. for that purpose.

Am I wrong about that?

J. Lee Rankin:

Well, it’s clear in the record that they didn’t intend to use this peaking gas from Transco for air pollution.

Felix Frankfurter:

Well I thought you just said they use 20 – they were going to use 20,000?

J. Lee Rankin:

25,000, but that was still the same gas that they had purchased directly from the producers at $19.25 and that they had to use for boilers.

J. Lee Rankin:

Now what they used over the 25,000 was going to be gas that they could resell, and they wanted to have the benefit of that.

And it was a beneficial transaction to them because that would help them at least to the extent of 25,000 Mcf. to take care of the greater demands of their consumers in the New York market for gas that could be burned by the consumers.

That is gas for resale.

Felix Frankfurter:

So that they had themselves against resale potentially by the 60-day provision.

Is that right?

J. Lee Rankin:

That’s right.

And that was —

Tom C. Clark:

Same gas, same type of gas?

J. Lee Rankin:

Well —

Tom C. Clark:

Peak gas is the only gas?

J. Lee Rankin:

It’s all the same burnable, but there was no restriction on the resale as to the $19.25 gas, the X-20 gas.

And the gas they would get from Transco could be resold.

Felix Frankfurter:

But there — I understand and I’d like to know too Justice Clark’s question.

Was the quality of gas, forget the price, was the quality of gas the same?

J. Lee Rankin:

Apparently.

There’s no dispute in the record that there was any difference.

It’s —

Tom C. Clark:

There is a technical proposition that they could resell because they own the peaking gas, they could resell it.

It had nothing to do with the quality of the gas though?

J. Lee Rankin:

That’s right.

Now the record is also clear although it is not involved in this particular case, but it has important bearing upon the decision of the Federal Power Commission that the program was within two years to increase this X-20 gas that they would buy directly and then have a restricted use of it to a 120,000 Mcf.

That is from 50 — 70,000 Mcf. more within a two year period.

But — and it was inferred at first that they would use this to take care of some more of the air pollution problem.

But the testimony was that when they got the whole 120,000 Mcf. of the X-20 gas, they would still, during certain periods of the year, use only 25,000 for air pollution purposes.

William J. Brennan, Jr.:

Mr. solicitor, I am about a little confused and much confused.

But I don’t quite understand this.

I thought you said to us that they take 25,000 of this X-20 gas, is that it?

J. Lee Rankin:

Yes, Mr. Justice.

William J. Brennan, Jr.:

And is that the maximum that they’ve been using for boiler fuel?

J. Lee Rankin:

No.

William J. Brennan, Jr.:

In other words that whole 50,000 that they get, which is conditioned for use only as boiler fuel, they are in fact, using as boiler fuel?

None of that can be resold, isn’t it?

J. Lee Rankin:

No, it cannot.

But there would be — during the peaking period, they wouldn’t take the whole 50,000.

During part of the year except the peaking period, they would take the 50,000 —

William J. Brennan, Jr.:

Right.

J. Lee Rankin:

And — and use it for boiler fuel.

They were using large amounts of boiler fuel other than for air pollution at other stations.

And this particular station involved here, well there are two of them on the east river, one at 40th and the east river near the United Nations building, which would need 50,000 to take care of eight boilers that were bad.

Two of those were the only ones that there was a — there wasn’t even a violation of the ordinance, but they were worst and they would — they were the real problem and they take 25,000 Mcf. to take care of.

The others were probably, it’s a business reason for getting the others also to take care of gas according to the record or to have them burn the gas in the boilers, because the record is clear that the 71 and 72 boilers are the ones that are making the fly ash difficulty that is bothersome to the city.

John M. Harlan II:

Mr. General, now suppose in this air pollution issues were not in case at all and these people have said, “We want this gas for boiler purposes and not resale for these keepers in coal.”

Would your case be any different?

J. Lee Rankin:

Well, I don’t think it is.

I do think there is a problem —

John M. Harlan II:

I didn’t take your point and as I was confused as to with all the talk and the brief was and that you’re spending time on knowledge for what bearing really on this basic issue, the air pollution issue on that.

J. Lee Rankin:

Well, I don’t think that in the base — in regard to the basic issue that air pollution is anything except something too confusing, because I don’t think there’s any validity to the point.

On the other hand, I did feel that I had to deal with it because there is an act to the Congress that says that the United States has appropriated $5,000,000 to cooperate with the states, that the states have a primary obligation about air pollution and whatever research could be developed, in that regard, the United States would cooperate and then the President of the United States issued the Executive Order in which he directed that people in the United States Government cooperate with the states and cities to see that whatever could be done about our own industry that is governmental industries, did not contribute to air pollution.

So I thought there was a duty to try to show to the Court that air pollution was not a real problem in this case.

Felix Frankfurter:

There’s a difference between validity to the point and relevance to the point.

J. Lee Rankin:

Yes.

I view that Mr. Justice.

But I think that the basic issue in this case is whether or not this end use, that is the difference between the use of gas for boiler fuel which is considered as an inferior use was so determined by the Federal Trade Commission Report in 1936 which this Court has said, and it’s recited in the 1938 Natural Gas Act, was the reason for the Natural Gas Act to be passed.

And on the — on the considerations of conservation, the superior use as compared with the inferior use, and whether that can be considered by the Commission in regard to determining whether certificates should be issued, is the basic issue in this case.

Now the Commission did determine that it would not issue a certificate in this case, and this is a Section 7 application, I want to make it clear.

It’s not a rate case application.

It’s a certificate for transportation in which Section 7 comes into play.

And the Commission held that in this kind of a situation, there were four basic reasons why in the public convenience and necessity under that condition as provided in Section 7, this — at this certificate could not be required by the public interest — by the public convenience and necessity.

Because, first, they felt it would breakdown the practice over a period of some 20 years of the purchase of gas and resale by the transmission companies and would be damaging to that established price.

Secondly, they felt that it would inflate prices in competition to have these various large users go into the marketplace and bid against the pipelines to require gas and resell it in this manner.

J. Lee Rankin:

And it would drive the prices up.

Third, they said that the small consumers wouldn’t have the buying power to engage in any such practices as this and they would be forced to have — to acquire their purchases through the transmission companies of the pipelines in the same way and would be adversely affected by the fact that prices and the pipeline gas would be driven up, but they couldn’t compete by going out and trying to get the gas at the lesser price.

Potter Stewart:

So it is kind of a trial, are you —

J. Lee Rankin:

That’s right.

Potter Stewart:

The second —

J. Lee Rankin:

Yes.

They further took the position, this was an inferior use that the pollution issue was not a valid one under the showing made, and that it was therefore, not justified under their prior holdings and positions that boiler use is an inferior use unless there’s special justifications, there should not be — that use should not be certificated.

Earl Warren:

General, I don’t know whether it’s pertinent or not, but is there any differential in this case as between the boiler gas and the gas that’s for resale?

That is so far as the price paid for it.

I don’t know — I don’t know whether it’s relevant or —

J. Lee Rankin:

There — there was.

The price that they paid in the field was higher, $19.25.

Earl Warren:

Yes.

J. Lee Rankin:

And the gas for — that CD gas, the Transco sold generally for resale, was based on accumulation of a number of prices that they put together over the years of the — substantially below that.

The Commission was trying to hold gas in this particular area where Consolidated Edison went in and bought and paid $19.25.

They were trying to hold it below 18 cents.

Consolidated Edison, in order to get this large chunk of gas under these terms that would not be regulated, went in and bid $19.25 and got it.

And that had the effect of lifting prices in that area.

The — the testimony from Transco on the other hand, was that they couldn’t — they did not dare try to buy this gas at — in competition with Consolidated Edison and I think the inference is fair, probably lower than even $19.25, because it would escalate other prices they had on gas.

But there’s no question to what they paid substantially, above the general market that the pipelines had been paying for this gas, but the producer said, “We don’t want any regulation as a part of it.”

And they gave them that part of the agreement so they wouldn’t get regulated and agreed to use it for this limited purpose.

Now, it’s also clear this doesn’t help Transco at all on getting its load factor railings like this type of gas sometimes does where there’s a direct purchase and its run through the pipeline.

It doesn’t help on that kind of a thing.

It does give them more money, because they get paid a fair price and there’s no controversy about that for transporting the gas.

But the Court of Appeals reversed the Commission and held that it had no right because of what it said the legislative history was, to consider the conservation factors that is the end use of the gas in any way, that if could — couldn’t consider whatever was done about buying the gas.

It couldn’t consider whatever was done about the use of the gas.

The only thing it had a right to do was consider whether or not the gas could be transported, and it said that in regard to that, it was to examine the conventional, as it described it, factors.

Now, it’s the position of the Federal Power Commission that when the Court of Appeals so held, it disregarded the true legislative history of this Act.

In the first place, the 1938 Act was passed as you will recall, with a provision that the Commission would have jurisdiction of certificate cases in regard to transportation only where there was another gas line — transmission line in the area and it would not have in other cases.

Now, it was found in 1942 that that was — in the experience up to 1942, but that was not an adequate solution for the problems in the industry.

J. Lee Rankin:

And there was a considerable — there were recommendations that the conservation factors of having a number of lines come in to a particular area could not be adequately dealt with.

There were also the factors of the other fuel interests and the transportation interest of other fuels, were not permitted to intervene under the 1938 Act and present a showing as to the fact that coal or the transportation of coal could adequately take care of the fuel needs of a particular proposal of a certificate or application.

And therefore, that factor could not be properly taken into account by the Commission the Commission had so taken that position in some of its holdings.

And so that Congress, with expressed reference to conservation, had amended the Act so as to make it possible for the Commission to go into any application for extension or new transmission lines wherever there was application, wherever there was an attempt to do that.

And also, to allow the intervention of other fuel interests and transportation interests to show that other fuels could be used to greater advantage and conserve the gas.

Now, the Court of Appeals relied upon the 1944 statement of the Federal Power Commission in regard to conservation in which it had said in a report to Congress that it didn’t have the comprehensive right to control conservation and disregarded the footnote to that statement, which was clearly set out to the effect that they didn’t have the right to control the direct sales to industry or to suspend the rates on indirect sales to industry through the pipeline.

And it made it explicit that it was the comprehensive control of these other things that it needed.

And in 1944, the same year, the Federal Power Commission in reporting on a resolution by the Senate, which suggested a complete examination or investigation by the Federal Power Commission into conservation of gas and other fuels.

In reporting on that, the Federal Power Commission expressly told the Senate Committee that it had the power to regulate and it considered the end use under in certificate cases, and that it needed this comprehensive power to consider — to be able to protect conservation in regard to direct sales to industry and suspension of rates on indirect sales.

Tom C. Clark:

That it direct sales where there’d be no certificate acquired.

J. Lee Rankin:

That’s right, Mr. Justice.

And indirect sales where they can’t suspend it, even though there is a certificate and they go under Section 5 for a regulation.

So that, the Commission was explicit about this, then time after time, they have taken a similar position and they have reported the various cases they’ve taken, the fact that they asserted the right to consider the end use of the product in regard to inferior and superior uses of gas and made a claim that they considered boiler fuel as the Federal Trade Commission had said, an inferior use.

Now, the practices of the Commission were that they did allow certificates for boiler fuel in various situations and those are set out in detail in the brief.

But there had to be a special justification for the use, this inferior use, or they would not allow it and some of the special justification was in a Transco case.

Transco, in its earlier applications, made justification showing that they needed the right to sell for industrial purposes in order to bring the rates down to their resales to other consumers, because of the lack of volume during their valley periods or their low periods in regard to resalable gas.

And therefore, they justified on that basis, but even then, the Commission said to the time after time, you should get busy and establish some storage, so you don’t have to sell all this gas for this inferior purpose.

But you can put it in storage during your valley periods and then sell it out during the peak periods, sold to the consumers for the highest use, and therefore, conserve the gas.

And they pressured Transco time after time on that and finally in this application for the first time, Transco has come forward with what was called the Leidy Storage Project.

Now, this proposal is damaging to that project amongst other things, because it doesn’t conceive that this particular gas that they will get during the 60-day peaking period or during the other period that they use this part of the pipeline which is the valley period, will go into the Leidy reservoir, but it’ll be used for the special advantage of Consolidated Edison under this X-20 tariff.

But the Commission had insisted constantly as one example of their position that Transco get more into the storage business for the conservation of gas and it finally come around to that point.

Now, they’d also allowed it for the atomic energy plant at Oak Ridge.

They’ve allowed it for other installations where they needed to raise the amount of their volume, so as to reduce the price of the gas generally to the consumer.

They had allowed it for special industrial purposes, where it was shown that the gas, itself, would form chemical compound or help in that regard with the — in the manufacture and so had a contribution other than just the use for the purpose of producing steam, which is a low value use as far as the amount of return from the Btus in it, and each of those situations we have analyzed at some length.

Now in regard to the legislative history, there’s also expressed specific examples where the congressmen had come forward with the proposal to prohibit the Commission from considering end use, four different times and the Congress had not yet allowed it.

Earl Warren:

We’ll recess now.