Sunray Mid-Continent Oil Company v. Federal Power Commission

PETITIONER:Sunray Mid-Continent Oil Company
RESPONDENT:Federal Power Commission
LOCATION:Dry Docks at Reed, WV

DOCKET NO.: 335
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Tenth Circuit

CITATION: 364 US 137 (1960)
ARGUED: Apr 26, 1960 / Apr 27, 1960
DECIDED: Jun 27, 1960

Facts of the case

Question

  • Oral Argument – April 27, 1960
  • Audio Transcription for Oral Argument – April 27, 1960 in Sunray Mid-Continent Oil Company v. Federal Power Commission

    Audio Transcription for Oral Argument – April 26, 1960 in Sunray Mid-Continent Oil Company v. Federal Power Commission

    Earl Warren:

    Number 335, Sunray Mid-Continent Oil Company, Petitioner, versus Federal Power Commission.

    Melvin Richter:

    May it —

    Earl Warren:

    Mr. Richter.

    Melvin Richter:

    May it please the Court.

    This is case is here on certiorari to the Court of Appeals for the Tenth Circuit.

    It involves the question which is similar to one of the issues which was discussed in the Sun Oil case in which argument has just been concluded.

    The question here relates to the Commission’s authority under Section 7 (e) of the Natural Gas Act, generally, to issue certificates of unlimited duration where the applicant has explicitly sought a certificate, coextensive in duration with the term of his gas sales contract.

    There is no question in this case as there was in Sun Oil as to rates whether initial rates, the rates changes.

    Nor there is any question here, again if there was in Sun Oil, as to the scope of a certificate that was issued earlier or the propriety of issuing a second certificate.

    In this case, there’s been no previous sale of the gas involved in interstate commerce.

    If here, Sunray applied for certificate to sell the gas in interstate commerce for the first time, its application unequivocally requested that the certificate be coextensive with the term of his gas sales contract.

    Felix Frankfurter:

    And what was that, Mr. Richter?

    Melvin Richter:

    20 years.

    Felix Frankfurter:

    20 years.

    Melvin Richter:

    Basic term to 20 years.

    And the Commission clearly so understood.

    Briefly, the facts in this case are these.

    Sun Ray is an integrated company engaged in virtually all spaces of the oil business.

    In addition at present, it is producing and selling natural gas under about a 160 long term contracts, most of which offer terms of 20 years or more.

    And I might add by the way at this point that about 85% of the gap produces contracts in the industry offer terms of 20 years or more.

    Sun Ray also produces substantial qualities of crude oil and frequently in conjunction with natural gas.

    Sun Ray refines the crude oil into fuel oil, to gasoline and other products and sell these various products to the public and to the Government.

    By contract dated February — January 1, 1957, Sunray agreed to sell United Gas Pipeline Company gas produced from certain lands and acreage owned by it in Lafayette and Vermilion Parishes in Louisiana.

    At present, Sunray is only known of proving gas reserves in this area are in a small portion thereof known as the “Ridge Field,” and this is in Lafayette Parish.

    The total area involved here that’s dedicated to this contract about 33 square miles of which Sunray owns about 7000 acres.

    A very small proportion of those 7 — 7000 acres have been developed and have proven to have gas reserves.

    Under the contract, Sunray is to deliver in United’s tank annual minimum quantities about 4.5% of the estimated reserves.

    The United in addition is to have a further right, annually to take up to an additional 50% of this, amounted about 6 close to 7%, just right 7%.

    That’s the maximum take of United.

    As I mentioned before, this acreage is in the haul of a ballistic gas fields in South Louisiana and it’s expected for the great deal of confidence that additional gas will be discovered in this dedicated area.

    Melvin Richter:

    Subject to certain conditions not here relevant, these additional reserves are to be included under the contract.

    However, such inclusion is only for the remainder of the 20-year term from the time when these additional reserves are discovered.

    In other words, if a — if an additional reserve is discovered, say 10 years from now, that reserve goes into under the contract only perspectively.

    And under the term of the contract will definitely be gas left at the end of the 20-year period.

    These specific quantities of gas as — are to be sold and delivered for a basic term of 20 years.

    Highlighting the fact that the contract is for the specific quantity of gas, is the provision that of Sunray should use any of the gas for re-pressuring or recycling operations so that it cannot deliver the fourth or annual minimum to United in any specific year, the contract is to be extended for a sufficient period of time to make up to deficiency.

    In other words, United has a guarantee, they will get the annual minimum for 20 years and it can take up to 50% additional.

    That is the range under with — of gas that’s sold and under this contract.

    On March 11, 1957, Sunray applied to the Commission for authority to sell this gas under this contract to United under Section 7 (a) of the Natural Gas Act.

    That Section provides impertinent power set out on page 12 of our brief, among other places, in full it’s set out on page 57 and 58 of our brief but the pertinent language with which we’re concerned here is set out on page 12.

    And that provides that a certificate shall be issued to any qualified applicant, authorizing the whole or any part of the sale, on the leading language we cluster out as the sales service operation, construction etcetera, but the — we’re — we’re concerned with the hearsay.

    Covered by the application if it is found that the applicant is willing — is able and willing properly to do the acts and to perform the service proposed and that the proposed sale and again I’m leading some words, to the extent required by the certificate is or will be required by the present of future public convenience necessity.

    And then this — it goes on, “Otherwise, such application shall be denied.”

    The Commission can’t make an affirmative finding that — that the application is — the terms and conditions of which the application is made accords with the public interest that has the authority absolutely to deny the application.

    There are further provisions in the statute in Section 7 (e) relating to a conditioning but it’s not involved in this case with no rate condition problem here.

    The application as I mentioned initially, specifically requested a certificate coextensive in term with the contract.

    That as for the contract — the certificate being for the basic term of 20 years.

    After hearing and which the only evidence introduced with regard to the duration of the certificate was by Sunray.

    The Commission, despite — despite Sunray’s specific request issued a certificate of unlimited duration.

    The Commission, with the approval of the court below, assumed that the act established a presumption that certificates are to be unlimited in duration.

    Based on this presumption, the Commission ruled that Sunray had not made out a case justifying the issuance of a limited certificate.

    In other words, so far as the Commission was concerned, all certificates are — are to be of unlimited duration unless there is a showing of special circumstances justifying initial in service certificate of limited duration.

    It’s our position that the — that exactly the converse is true.

    This presumption —

    Felix Frankfurter:

    Well, was this, Mr. Richter?

    Melvin Richter:

    Sir.

    Felix Frankfurter:

    Was this based on a general rule by the Commission or regarding the specific circumstances presented by your contract?

    Melvin Richter:

    No, sir.

    It was the general presumption that the Commission indulges in presumably as Mr. Wahrenbrock has indicated in his argument in the Sun Oil case, the statute is a — as a broad public utility ramifications and one of the necessary obligations under a public utility statute is a presumption of indefinite service.

    Felix Frankfurter:

    When I indicated that the Commission has the power of not being bound by a specific contract, indicate that to my ignorance, he seem to not welcome that suggestion?

    Melvin Richter:

    Well, I would assume not — I — for obvious reasons.

    It’s Commissions with —

    Felix Frankfurter:

    Well, I thought — as you thought I — as I gather from you, that’s what the Commission did in this case.

    Melvin Richter:

    Commission ignored the contract.

    Felix Frankfurter:

    No, no, no.

    But the Commission here said, we don’t — we don’t want a term contract — a term certificate —

    Melvin Richter:

    That’s right.

    Felix Frankfurter:

    — we’ll give you indefinite certificate.

    Melvin Richter:

    We’ll give you a — presumptively, the certificates ought of be of an indefinite duration.

    Felix Frankfurter:

    Perhaps that — this is my talent, has come within but I got the impression that he was not welcome to that suggestion when I made it.

    Melvin Richter:

    Well, maybe you might have —

    Felix Frankfurter:

    Alright.

    I do it again.

    Charles E. Whittaker:

    How then does that nature of language, the last three words forwards the application shall be denied?

    Melvin Richter:

    They — the Commission’s view apparently is and I have limited time and I prefer trust of the addressed question, well, I’m quite — as — as I understand the Commission’s view, I would like — is that this nature of the statute inherent in the very nature of the statute.

    The mere fact that Congress in act of the Natural Gas Act with various rate provisions, certificate provisions etcetera that that carried with it a presumption that all certificates issued out of the — of indefinite duration unless special circumstances were shown, justifying the issuance of a special certificate.

    We come back to Mobile.

    In Mobile, the Commission’s position was some — substantially the same.

    In Mobile they said, “Sure, the contracts are entitled to or preserved under the statute but the Act by virtue of public utility filed rate procedures,” the terminology they used.

    That — that the — that the statute permits the overriding freely of contracts and the Court rejected them then.

    And we think they ought to reject them here again.

    But basically this presumption which they have involved appears to be have founded upon three erroneous premises, that we understand it.

    One is an asserted purpose and policy of the Act to assure indefinite continuity of service.

    Second, a cargo of policy derived from the provisions of Section 7 (b) of the Act relating to abandonment.

    And third, an alleged the — they’re contrary result or enable applicants to “dictate” the terms on which they will sell their gas in interstate commerce.

    Now, in light of the limitations of time, I’m not going to be able to go in a great detail into the various ramifications of our position.

    I would like to just hit some of the highlights here.

    As I say, it’s our position that where an applicant applies for authority to sell gas for a period coextensive with the sales contract, the Commission’s authority is limited generally or I say generally, to issuing a certificate for that term.

    Section 7 (e) of the Act which I’ve just read expressly so states as we read it, as the Court recall, that Section provides for the issuance of a certificate authorizing the whole or any part of the sale covered by the application.

    When as in the case, such as we have here, the whole of the application is for a certificate of a — for a limited period, the issuance of a certificate for longer period of time or if indefinite duration exceeds the bounds of the application and the contract enhances not within the Commission’s authority under Section 7 (e).

    Melvin Richter:

    Now, this reading of Section 7 (e), we think does not mean that the applicant is able to dictate the terms and conditions under which he’ll sell his gas in interstate commerce.

    This Court that latter in so called capital Atlantic Refining case last term, held flatly that there was nothing in the Natural Gas Act that precluded an applicant from standing firm on his terms and conditions from making a sale provided he haven’t sold this gas yet, and this is that type of case.

    At the same time however, the Commission is not required to authorize a new sale unless it finds that the applicants proposed terms and conditions are in the public interest.

    If the Commission finds that they are on a public interest they issue us a certificate.

    If they find that is not, they deny the certificate.

    And in the course of making that determination, there’s no reason why they cannot take into account the term for which the sale was being made.

    They do that everyday in the pipeline cases.

    One of the most important factor in the pipeline certificate case is the adequacy of reserves.

    And the Commission looks to the reserves and if its for less than of prescribed minimum, they’ll deny the certificate.

    If it’s for — meets their standards for of minimum — of minimum requirements, they’ll grant it.

    And I might point out in addition that whereas here, we — we’re willing to sell the gas for 20 years.

    In the pipeline cases, the Commission is now accepting reserves down to 10 and 11 years as is being adequate as in the public interest.

    Now, we want to point out further that this reading of the Section 7 (e) is nowhere conflicts with Section 7 (b) of the Act.

    In order to create a conflict, Mr. Wahrenbrock in the Sun Oil case and he’ll probably argue here again, seeks to read into Section 7 (b), a general congressional mandate to assure indefinite continuity of service.

    But Section 7 (b) is not that broad.

    The only abandonment authority granted by — to the Commission by that Section is lower and I’m quoting.

    “Facilities subject to the jurisdiction of the Commission or any sale rendered by means of such facilities, it’s limited to certain kind of service assuming that what Sunray is doing here is making a service.

    It’s providing a service rather than just selling gas.”

    Now, we can go back in that point to 7 (e) which has — says, sale common service and as Sunray applied for was authority to make a sale, not to render a service.

    But assuming that Sunray is engaged in providing a service, there would still be — or even get to whether or not this is subject to 7 (b), it says facility subject to the jurisdiction of the Commission.

    That is the prerequisite, is that you stop there first and if you — you find facilities, then you go on and service, but if you don’t find facilities, you don’t have any service.

    The same broad reading of Section 7 (b), I might add, that the Commission have the case here was advanced by it in the Panhandle case in 337 U.S.

    And with respect — as — as expressly rejected by this Court, properly read as far as we see it, Section 7 (b) is in complete harmony with our reading of Section 7 (e).

    As we see it, a certificate issued under Section 7 (e) defines the period definite or indefinite.

    But it defines the period that the sale is to be made of the service rendered.

    We applied for a certificate of limited duration and that defines the scope of the Commission’s jurisdiction to issue a certificate.

    Section 7 (b) in turn applied only when there is an attempt to abandon service short of the period set out in the contract.

    In other words, assuming that Sunray is making a sale of serve — providing a service here and it has jurisdictional facilities so it’s subject to 7 (b).

    Then Sections — sale we — and we applied for a certificate of limited duration and we obtained it, the Commission gives it to us.

    Then Sunray cannot discontinue that self-service of sale within the period so it’s covered by the certificate, i.e. for 20 years unless of course it has to get a Commission approval.

    Melvin Richter:

    It’s in no way free to discontinue as it wishes.

    Now, apart from Section 7 (b), the Commission appoints that no provision in the Natural Gas Act vesting it the general responsibility to assure indefinite continuity of service.

    Section 7 (a) on which the court below rely is very limited in scope and indeed as the Commission concedes in it’s brief in this case, does not reach sales of gas by a producer to a pipeline company.

    At this point, I’d like to pause for a moment.

    Mr. Wahrenbrock mentioned the legislative history in Sun Oil of Section 7 (b).

    And he referred to John — Mr. Benton as being one of the most eminent authorities on that.

    If we pause for a minute and read the language of the amendment that Mr. Benton proposed which is set out on page 30, in the footnote of the Commission’s brief.

    It says, “No gas company which is supplying gas to a public utility company engaged in distributing such gas to the public shall discontinue service to such public utility company without first obtaining from the Commission a certificate that probably convenient and necessity permits such abandonment.

    This on its — this on its face, doesn’t reach a — a sale of gas by a producer but obviously was only intended to relay to a pipeline providing service to a distributing company.

    I might point out in that connection to that read in context, Mr. Benton was talking about 7 (a).

    And as I pointed out before, 7 (a) clearly, and the Commission concedes, does not apply to sales by a producer.

    In urging that the Natural Gas Act nevertheless should be construed as imposing such a broad responsibility upon the — it — the Commissioner asserts that this is necessary in order to protect the consumers.

    This argument however fails to give any effect to the provision of Section 1 (b) exempting from the Commission jurisdiction, language which Mr. Wahrenbrock in Sun Oil, were characterized as irrelevant, the production and gathering of natural gas.

    Section 1 (b), it has an affirmative grant of jurisdiction and goes on to exclude from the Commission’s jurisdiction.

    Among those items excluded from the Commission’s jurisdiction is the production and gathering of natural gas.

    This exemption as this Court has already recognized in Panhandle case and other cases, Mobile and Memphis, reflects a Congressional reconciliation of the interest of the consumers on the one end and those of natural gas companies on the other.

    To stress as the Commission does in this case, a need for an indefinite continuity of service is underway to the consumer’s interest and results of invasion of a production in gathering exemption.

    In contrast, we believe that our position results from an a reasonable accommodation of the needs and legitimate interest of both the producers and the consumers as to this Congress had intended.

    Could I ask you a question —

    Melvin Richter:

    Yes, sir.

    — born of curiosity?

    Why did you go to the precaution of applying for a limited certificate?

    Melvin Richter:

    Because we — that’s been the practice of Sunray.

    Has it?

    Melvin Richter:

    Yes, sir.

    Right — Sunray has from the outset written, make sure that there was no question that — as to what the scope of certificate there were applying for.

    In other words, you don’t think it’s as clear as you have here (Voice Overlap) —

    Melvin Richter:

    Well, I’m not (Voice Overlap) take any position on that but Sunray left no question and it’s cleared.

    Thus, as I say, the position that we’re at — we’re just taking here provides in reasonable accommodation of the interest of all the consumers and the — well, natural gas company.

    William O. Douglas:

    I suppose, you would you say that the Commission couldn’t deny then a certificated to you?

    Melvin Richter:

    No, no.

    We say the Commission adopted the wrong standards and —

    William O. Douglas:

    Well, but you — I suppose you would say that the Commission couldn’t deny you a certificate?

    Melvin Richter:

    Well, we say — we — we —

    William O. Douglas:

    And they — they would have to give you one for —

    Melvin Richter:

    We think, that the — we are — are — application for a basic term of 20 years meets the standards, that should be applicable.

    William O. Douglas:

    Yes.

    But suppose the Commission said, “We don’t want any of these limited term certificates —

    Melvin Richter:

    If they can —

    William O. Douglas:

    And therefore, we’ll —

    Melvin Richter:

    If —

    William O. Douglas:

    — we’ll deny your application.”

    Melvin Richter:

    Presumably, if we could — we could take that to the Court and if that’s not an arbitrary and capricious action by the Commission.

    We would be forced off from selling the gas.

    William O. Douglas:

    That’s what — you — you maintain that they — you maintain that — that they have that one choice there and that is the — to grant this (Voice Overlap) —

    Melvin Richter:

    No.

    Not at — at the present posture of the case, I think, the — the Commission qualified the — the wrong standard, that they assumed that there was a presumption and that — that the certificates should be of definite duration and that on special circumstances justify this.

    They didn’t apply the right standard and that is to look at the certificate application of the contract for a term of 20 years and look at that and say, “Does this meet the public interest?”

    They didn’t do that, they did the other way around.

    Felix Frankfurter:

    Well, suppose the — suppose they set forth what they haven’t set froth, I take it, reasons of the inadvisability of trying himself without perfect experience.

    Suppose they say —

    Melvin Richter:

    Well, then —

    Felix Frankfurter:

    — and not this [Inaudible] of things whatever it is, 35 whatever it is.

    Melvin Richter:

    Well, they haven’t undertaken with — just to issue any — give any reasons why they think they — while there is a presumption.

    They say it’s a statutory — they read into the statute basically and they don’t have to give reasons because that’s what the law provides as from — from their point of view.

    I’d — I’d like to just make one more point and I’d like to reserve the remaining remainder of my time.

    As I was just about to say that the — our position results in a reasonable accommodation of interest of both the consumer and the producer, on the one hand, the 20 years gas supply of gas such as involved here, provides to the consumer a highly reasonable assurance of continuity of service.

    And I — true, this is not a supply for an definite period but it barely — very nearly approximate such a supply as far as the needs of most consumers are concerned.

    The Commission as I said, has never insisted upon a supply for longer period of time in the pipeline cases and indeed has been satisfied with very much less, down to 11 years.

    On the other hand, the producers, we think have the legitimate need, periodically to reappraise their gas commitments.

    Melvin Richter:

    Like Sunray, most producers of necessity are in the oil business as well as in the natural gas business.

    The oil business, I might point out, is not federally regulated.

    This is so because frequently, oil and natural gas are produced from a single well is a joint product.

    It’s result of geological factor.

    In addition, in the drilling wells of new fields, it’s frequently not known in advance what of anything will come out of the well.

    Now, not only as oil and gas joint products but they are competing products as well because the oil is used for feeding typically about 40% of the production of crude oil that goes into fuel oil and natural gas’ major use is for each place heating.

    Has the Commission given you other limited certificates in other instances?

    Melvin Richter:

    No, sir.

    They’ve turned us down consistently.

    We have other cases pending in Court.

    Earl Warren:

    Have they issued any — any limited certificates to anyone?

    Melvin Richter:

    Oh, they have in long sense, in some pipe line cases, not in the producer cases.

    Earl Warren:

    Not in the produces.

    Melvin Richter:

    But they originally took the position, I might say, in the Oil Sunray case for instance, they had no authority and all the issuance of certificates on limited duration.

    Then Sunray took them to the Court of Appeals, the Court of Appeals held that they had authority to issue certificates to limited duration and Sunray and — then when came up to this Court, the Commission then confessed that they had made a mistake, they can issue a certificates to limited duration.

    In language, which if I would have time, I would like very much to read to you.

    I’d like to reserve the remainder of my time —

    Earl Warren:

    You may.

    Melvin Richter:

    — for rebuttal.

    Earl Warren:

    You may.

    Mr. Wahrenbrock.

    Howard E. Wahrenbrock:

    In the few minutes that remain today, I would like to address myself first to this question of the scope of the Commission’s action here whether it regarded itself as bound by the statute not to do this or whether it exercised its jurist — its discretion in deciding that it would not grant a limited term certificate.

    Felix Frankfurter:

    Well, not granted ad hoc with reference to the particular situation or as a general guiding principal with.

    Howard E. Wahrenbrock:

    The Commission has not been granting limited term certificates in the absence of a showing that the public convenience and necessity permit the limitation of the term.

    Felix Frankfurter:

    And what were the criteria for determining whether the public interest does?

    Howard E. Wahrenbrock:

    Well, it has not spelled out the general criteria.

    In the pipeline cases in which it has granted limited terms certificates there were as I attempted to say earlier, special circumstances which called for them, or conditions which — which created an — an — a clearly temporary need for gas than to which are temporary supply was given.

    Felix Frankfurter:

    Well even as the pipeline didn’t have a general quality against term grant?

    Howard E. Wahrenbrock:

    As indicated by the results and only as indicated by the results.

    Felix Frankfurter:

    Not as an —

    Howard E. Wahrenbrock:

    Yes.

    Felix Frankfurter:

    — explicit declaration of its doctrine.

    Howard E. Wahrenbrock:

    That’s right.

    It has not — in here or any place, made an explicit determination were bound by this as a doctrine.

    Felix Frankfurter:

    Not done but just this will guide us and will guide everybody to be equally treated like that.

    Howard E. Wahrenbrock:

    But looking at the result, it has required in every case that there be a showing or that the claim of a right to stop shall have a support the effects will support.

    And the Commission has expressly said in some occasions that it — it cannot speculate as to what the situation will be 20 years hence as to whether the public convenience and necessity will then permit.

    That it can now look at the need for gas and see that the gas is need.

    Regarding the need for the gas as now existing, it authorizes the content — the starting of the service.

    Felix Frankfurter:

    Well, in the Sun Oil case, there was a term certificate, wasn’t it?

    Howard E. Wahrenbrock:

    No, sir.

    In the one that was — just our argument today?

    Felix Frankfurter:

    Yes.

    Is there a 10-year contract?

    Howard E. Wahrenbrock:

    There was a 10 year contract which the Commission — but the Commission used only the standard language which it had used here, used the same language in granting this certificate as it used in the Sun case.

    Felix Frankfurter:

    Well, then in response —

    Howard E. Wahrenbrock:

    An indefinite term.

    Felix Frankfurter:

    Then for the new contract, there’s no need of asking for a certificate on — is there?

    In the Sun case.

    If it’s an undefined and none determinable —

    Howard E. Wahrenbrock:

    That is our position.

    Felix Frankfurter:

    Yes.

    Howard E. Wahrenbrock:

    — that there was — there was an outstanding —

    Felix Frankfurter:

    I don’t mean to say that there couldn’t be but there — that to give the certificate.

    Why do you come us if you still have a certificate?

    Howard E. Wahrenbrock:

    That was the Commission’s position when it said it was duplication of an outstanding certificate which was of indefinite term.

    It used the same language there as it used here where there was before it a specific — a request for a limited term.

    And here, the finding of the examiner was that there had been no showing in support of the request for that limitation on term which would warrant the — would warrant a finding that the public convenience and necessity required that.

    Felix Frankfurter:

    But in the Sun case, you also had an outstanding 10-year contract.

    I suppose people would assume that the certificate will last as long as the contract was operated?

    Howard E. Wahrenbrock:

    In — in practically every case, the Commission has an outstanding limited term contract that, I’d say, 999 out of a 1000, without having account of them.

    So, having that kind of a contract before it, it has always issued this what — what we regard or we argue in the Sun Case, we argue here, is non-limited term certificate and which is here treated as an unlimited term certificate.

    Earl Warren:

    We’ll recess now.