United Gas Improvement Company v. Continental Oil Company

PETITIONER:United Gas Improvement Company
RESPONDENT:Continental Oil Company
LOCATION:Point of picking up hitchhiker

DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 381 US 392 (1965)
ARGUED: Apr 28, 1965
DECIDED: Jun 01, 1965

Facts of the case


Audio Transcription for Oral Argument – April 28, 1965 in United Gas Improvement Company v. Continental Oil Company

Earl Warren:

Number 644, the United Gas Improvement Company petitioner versus Continental Oil Company et al., and Number 693, Federal Power Commission versus M.H. Marr et al.

Mr. Solicitor General.

Archibald Cox:

Mr. Chief Justice, may it please the Court.

This case is here on certiorari to the Court Appeals for the Fifth Circuit to review a decision setting aside an order of the Federal Power Commission made under the Natural Gas Act.

The case is one of great importance because if that decision stands, it opens what we conceive to be a very serious gap in the power of the Commission to regulate prices at which produces sell gas to pipelines under the Phillips Petroleum case.

The essential facts are these, Texas Eastern is an interstate pipeline company with a system running from South Texas up to Northeast through Philadelphia and on to the New York area.

The other respondents in this case are oil and gas producers who held leases in the Rayne Field in Louisiana.

Early in 1957, the respondent producers, agreed to deliver gas in the Rayne Field, Texas Eastern at the initial price of $23.59 per thousand cubic feet over a period of what would probably be about 20 years.

Texas Eastern then applied for certificates to construct the necessary facility.

Under the Phillips Petroleum case, the Federal Power Commission clearly had jurisdiction not only over the construction of the facilities, but also over the agreement to sell the gas in the price at which it was sold.

At this point, the Third Circuit rendered a decision in the Catco case which later came before this Court which made it apparent that the Commission could not approve the sale by these respondent producers to this pipeline company because this sale was at a price a cent-and-a-half higher than the sale which had been sale price that have been disapproved by the Third Circuit in Catco.

The respondents then cancelled their agreement to sell the gas and recast the deal in the form that it is now before the Court.

As in the form that it is now before the Court, the respondent producers conveyed to a newly created subsidiary of Texas Eastern.

Their leasehold rights to gas in the Rayne Field down to a specified depth together with wells and related equipment.

Reserving, it’s important to emphasize is the so-called production payment all the condensates that could be extracted from the gas as it came from the ground.

This new subsidiary then assigned its rights under the leases to Texas Eastern.

Texas Eastern retained the respondent Continental which had been operating the field for the benefit of all the producers, under a management agreement to continue to operate the field, extracting the gas from the ground and ultimately delivering it to Texas Eastern.

The consideration for the lease was $134 million about 9% payable in cash and the rest are paid in notes of the subsidiary which fell due periodically through the expected life of the gas field.

Texas Eastern assumed no contractual liability and the subsidiary had no other assets beyond the lease that it assigned.

Texas Eastern then went back to the Federal Power Commission for certification of the construction of the necessary facilities.

At that stage, it was June 1959, the Commission assumed that it had no jurisdiction over this lease transaction and issued the necessary certificates.

The Court of Appeals for the District of Columbia Circuit on review set aside the Commission’s order upon the ground that the Commission might either go into the price at which the gas was transferred or the cost of the gas to Texas Eastern, or it might state clearly then entirely but that it had heard and indicating in the course of its opinion that the price or cost was in the public interest without sufficient evidence in the record to support that.

And I should say that in the course of its opinion, the Court of Appeals for the District of Columbia Circuit also assume that the Commission had no jurisdiction over these transactions as such.

Upon remand, the Commission reopened the entire matter.

It then decided contrary to its early assumption and contrary to the assumption of the Circuit Court that the lease sale transaction was itself within the Commission’s jurisdiction as a sale in interstate commerce of natural gas for resale and ultimate public consumption.

On review, the Fifth Circuit set aside the Commission’s order holding that since the transaction involved a lease of mineral rights, it constituted production and gathering and was not a sale in interstate commerce of natural gas for resale.

We then brought the case here adjoined by one of the distributing companies in Philadelphia area represented by Mr. Coleman and the question very simply is whether the Commission was right in holding that it had jurisdiction or whether the Fifth Circuit was right in holding that it had not.

The case turns on Section 1 (b) of the Natural Gas Act which is printed on pages 2 and 3 of our brief.

It gives the Commission jurisdiction over the transportation of natural gas in interstate commerce and more importantly over the sale in interstate commerce of natural gas for resale for ultimate public consumption.

But it excludes the production and gathering or production or gathering of natural gas.

Archibald Cox:

The term sale in interstate commerce of natural gas and production for gathering are used in contradistinction as this Court held in the interstate case in the Phillips Petroleum case.

If a transaction involves a sale of natural gas in interstate commerce, then that part of the transaction at least is not production of the gathering and therefore not excluded from the Commission’s jurisdiction.

Consequently, we can concentrate here on the question whether these transactions, this lease sale transaction that I described constitutes a sale in interstate commerce of natural gas for resale.

And the starting point of course in inquiring into that question is the settled premise to their producer’s agreement to sell and deliver natural gas to an interstate pipeline company is subject to regulation by the Federal Power Commission, and that was the Phillips Petroleum case in 347 U.S. and of course it’s been predicated in numerous subsequent decisions.

There’s not the slightest doubt to put the points specifically that the respondent producers earlier agreement in this case to sell the gas in the Rayne Field to Texas Eastern over a 20-year period and its implicit dedication of the gas to the public, to the performance of that contract, I should say, was a sale requiring certification by the Commission and subject to its disapproval.

Our argument is that the recasting of the transaction made it no less a sale in interstate commerce of natural gas and we proceed in three steps.

First, we say that the Commission had ample basis for concluding that revised transaction viewed from the standpoint of the policy of the Natural Gas Act involved what was both in fact and in economic function a sale in interstate commerce of natural gas for resale to the public.

Texas Eastern thereby acquired gas as a pipeline for interstate transportation and resale.

It thereby fixed the cost of the gas that it was going to resell and it didn’t really take on to any significant degree of the functions of a producer.

Second, we submit that whether a transaction involves a jurisdictional sale as they say, a sale in interstate commerce depends not upon concepts and definitions that may be important in the law of sales and conveyancing, but upon as I put it the fact and economic function of the transaction viewed from the policy of the act that we’re charged with applying, viewed here from the standpoint of public regulation of this industry.

And then third, we distinguish the Panhandle case which was so much relied upon by the court below.

Very little argument it seems to me is necessary to show that the Commission had ample basis for concluding that from a regulatory standpoint, the transaction and the question had the same functions and would have the same kind of effect upon rates as an ordinary agreement to sell such as was involved in the Phillips Petroleum case.

Conversely, it seems to us that when you look at this from the standpoint of its substance of its economic function or the fact that the distinctions between this and an ordinary lease for exploration, development, and production become very, very clear.

Let me emphasize just a few points; first, what Texas Eastern obtained here was natural gas for its interstate pipeline system.

The Rayne Field was proven largely developed and so the estimates of the amount of gas there varied, it’s clear that that was gas in a very large quantity.

Texas Eastern as a pipeline wanted that gas.

It wasn’t interested in exploration or development or production.

The conclusive proof I think is that these transactions did replace a conventional agreement to sell the gas lasting over a period of roughly 20 years.

No one has ever suggested so far as I am aware that there was any substantial reason for recasting the transaction except the effort to get it out from under the Commission’s jurisdiction.

Indeed, in withdrawing the application, the old applications for proof, the respondent Continental gave as the reason in seeking leave to withdraw them that all the producers had entered into negotiation with Texas Eastern to sell their gas in place.

They described it as a sale of gas and they said that by assigning the leasehold rights, such in place sale of natural gas had been made.

Second, I would emphasize that Texas Eastern took on very few of the typical functions of a producer or gatherer.

It acquired only natural gas.

All the oil or other mineral rights were withheld.

The net proceeds from all the liquefiable hydrocarbons, so what could be extracted from the gas were reserved as a production payment to the producers say for a little bit at the end of the lease.

The respondent producers even reserved the rights to the gas deep down below a specified level where further exploration might be conducted.

And finally, I would point out that to a large but not 100% extent, Texas Eastern even left with the producers the responsibility for bringing the gas to the surface.

That responsibility of the field had been managed by Continental.

A Texas Eastern subsidiary entered into a management contract with Continental on giving to it most of the work of bringing this gas to the surface, also it reserved certain ultimate rights and responsibilities and just as the producers had paid before the cost of Continental is doing this.

So under the agreements, the cost came out of the production payment assuming that there was any production payment because they were condensates and thus was subtracted from what all the producers would get under the production payment.

Archibald Cox:

And so in all probability would be born in the same fashion as originally.

Third, I would emphasize that this transaction was the final step by which gas would pass from true producers into the pipeline where interstate transportation at sale.

We’re not dealing here with a transfer of leasehold rights among producers, those who are interested in exploration, development or simply in bringing the gas up under circumstances where another transfer would be necessary to put the gas into the interstate pipeline.

This was the transaction, the final commercial step that committed the gas to the pipeline system for interstate commerce.

And fourth, I would emphasize that this is the transaction just like the kind of agreement involved in the Phillips case that fixes the cost of the gas to the pipeline and it will therefore be a critical element in fixing Texas Eastern’s rates that it may charge to the distribution companies and so ultimately to the public.

There are exactly the same reasons here for regulating this transaction that there were for holding that the Commission had jurisdiction in the Phillips Petroleum case.

And I could confess that I can think of no reasons that would lead to not regulating this transaction.

It might not also have been applied in Phillips Petroleum case.

Byron R. White:

What about the undeveloped lease, Mr. Solicitor General.

Archibald Cox:

What undeveloped lease?

Byron R. White:

Well, I mean I assume that there was an undeveloped lease is there the same reason then?

Archibald Cox:

Well, I would need the term developed and undeveloped don’t have quite definite context to me that enables me simply to discuss it in those terms.

I think there is room for a number of distinctions here chiefly to be made on a case-by-case basis.

If one goes way over to a transfer of a potential oil field among people who are engaged in the business of producers or perhaps simply the transfer of a potential oil field to a pipeline company where exploration and development must be carried on, that it seems to me is a very different kind of transaction and would be treated by the Commission quite differently.

Byron R. White:

If there had been here a transfer of the lease at all levels and the company took over the operation of the lease, would there really be any difference here?

It would still be, I would think you would say, there was a sale of gas.

Archibald Cox:

I think we probably would.

I look at it Mr. Justice White, let me put the two steps in our argument in the reverse order that I stated them before.

I would say first, as the matter of our general principle that we say that the question in general, the test in general, is whether the essential substance of the transaction viewed from the standpoint of public regulation is that a pipeline acquires the right to a quantity of gas for interstate commerce and it commits itself for the price.

If that’s a fair description of what’s really the heart of the transaction and I intend to exclude other things, it would overbalance that when I state it that way.

That I say is the appropriate test under the Act and whether that is —

Byron R. White:

That —

Archibald Cox:

— I’m really coming back to your point if I might say just a word or two about it.

I think that the proper test under the act is the one I’ve stated.

That of course is a question of law that this Court must decide, what is the proper test?

Then, as to the application of that standard in any particular case, Mr. Justice White, I think that’s a question that is essentially delegated to the Commission as this Court’s decisions in Gray and Powell and the Hearst case and others like them teach.

Now, I think — and I think I’m coming directly to your question in deciding just what change is here tip the case from one side of the line to the other, it depends on examining the facts from the standpoint of the criteria that I’ve stated.

In this case, the facts are very, very strong for holding that this is in fact an economic substance of sale.

One should suggest, as you did.

Well, suppose that they got all the mineral rights, they got the right to go deeper, would that change anything?

Archibald Cox:

I don’t know of any case in which the Commission has faced that.

I think this is very similar, if I may suggest you, like the problem of deciding who is an independent contractor and who is an employee for the purposes of many labor laws in social legislation that you can make all kinds of small differences and the line has to be struck somewhere, but the difference in principal and the cases of who is an employee of social and labor legislation, depends on the policy the economic reality from the stand point of the Act.

And so here we say that the test, not on common law concept of master and servant, and we suggest the same thing is true here.

Now, as to any, in other words if you get way over on the current store of an undeveloped lease even though it is to a natural gas pipeline company, there’s no need for us to argue that that results in giving the Commission jurisdiction.

Byron R. White:

Suggesting that the —

Archibald Cox:

No I think it’s — I think purpose is an important part because it must be a sale in interstate commerce for resale.

Byron R. White:

It’s an objective test, I mean, did they really buy gas or didn’t they, do you know?

Archibald Cox:

I would say that it was rather the essence of the thing, the guts of the thing, if I may put it colloquially, is whether they were really getting gas and whether they were really fixing the price at which they got gas.

And if that is a fair way to characterize it, then it is within the Commission’s jurisdiction.

Now, if you add more and more things in addition to the getting gas and make the amount of gas more and more speculative, then the case gets farther away.

It may get so far away that the Commission’s decision would not have warrant in the record in the reasonable basis in law.

For example, one of the things, Mr. Justice White, that distinguishes the instant case from the conventional agreement to sell gas is that here Texas Eastern does take of some economic risk that would not be taken under the — by the pipeline under the familiar agreement to sell.

It will lose if it turns out to be less gas than it thinks there is.

It will gain if it turns out to be more.

And I would say that that was a relevant circumstance, I would doubt, we certainly think it isn’t decisive in this case because in this case steps have been taken both to insulate Texas Eastern from any personal liability and to make it possible to throw up to lease without future payments.

If it turns out to be too bad a deal, I would doubt to taking more economic risk would be enough to tip the case the other way.

But I think each of these things has to be taken into account to determine what is the reality of the transaction.

I come back perhaps at risk of repeating myself, I would say, that one way to look at it is to say is this a transaction which from the standpoint of the purposes and policies of the Natural Gas Act as developed in the Phillips Petroleum case has the same characteristics?

Now here, from that standpoint it makes not the slightest difference where the Texas Eastern gets the gas under a conventional agreement as originally arranged or by the sale of the leasehold interest.

The need for protection of the consumers is just to say, the statutory safeguards are equally appropriate in the one case than the other.

And the assertion of jurisdiction creates no danger of interference with state regulation of production and gathering indeed the Commission specifically said was not interfering with that part of the aspect nor does it create any risk of federal intervention at the stages of the industry, truly antecedent in any substantial sense to the sale of the gas in interstate commerce.

There just aren’t enough other real facts.

There aren’t — just aren’t enough differences in economic function to say to draw a line between these two.

Now, as I understand the respondent’s brief, they did not really deny what I’ve been saying about the economic reality of this transaction.

As I understand their argument briefly stated, comes to this.

The instruments they executed they say were not a sham but entailed substantial consequences.

Their legal effect was to give Texas Eastern a leasehold interest in real property under which it have the right to bring the gas to the surface and to obtain title by severing it and reducing it to possession.

Such a conveyance of an interest in real property, they say, is not a sale of natural gas because it isn’t the transfer of title to a commodity and it’s not a sale in interstate commerce because you don’t sell real estate in interstate commerce, and this is an interest in real estate.

We have three faults to find with that argument.

Potter Stewart:

They also, I have very briefly, legitimate argument under the — an affirmative argument, you’ve given their negative as they say —

Archibald Cox:

That it’s production,

Potter Stewart:

— that it isn’t but its production of gathering?

Archibald Cox:

I was going to treat — and I’m sure I’ve got a long treatment of the Panhandle case, is that what Your Honor was suggesting?


Let me just finish this if I may.

Potter Stewart:


Archibald Cox:

The first fault we find with this argument is that it proves too much.

The typical long term agreement such as was involved in Phillips, to sell and deliver natural gas which is conceded to require a Commission approval, does not then and there pass any title to the gas.

You agree to sell and deliver it.

You fix the price but the gas remains in the ground, it is not a commodity at that stage anymore than it said to be a commodity at this stage.

And of course title passes in the future when the gas is delivered and so here are the title to the gas as a commodity, well I suppose pass in the future, it passes by a somewhat different process, it isn’t delivery from the seller to the buyer, it’s rather the buyer, as we would call him, capturing it by taking it out of the ground.

Second, to the extent that I don’t know just how far it does, but to the extent that the respondent’s argument is that this is a sale of natural gas within the meaning of the Act applies only the selling above the ground and not to a sale in place, because the gas when it’s in place is not a commodity, I suggest it produces a distinction which from the stand point of purposes of the Act is demonstrably absurd, I don’t mean any disrespect but consider.

If that is really the line of distinction, then a producer could agree that he would now sell and pass title to so many million cubic feet of gas in the ground, and this could be done in Texas where you can make such sale, at a price for a thousand cubic feet and I suppose even to be paid upon delivery, and there’s no reason that title can’t pass in a sale and present it to be made before something is delivered to that’s part of a normal law of sale.

It surely when the Court decided the Phillips Petroleum case, it didn’t intend to open that easy door to the evasion of the regulatory process.

So that this distinction between selling the gas when it’s in place, and selling the gas when it’s above the ground, I submit, comes to nothing.

But our real difference with the petitioners, I really anticipated, that is the difference in terms of what is the governing criteria.

We do not say let me make it perfectly clear we do not say that this transaction was a sham.

The form the transaction took has practical and legal consequences, some of its legal consequences may be very important as between the party.

It has some practical consequences different from the ordinary agreement itself.

What we say is that those concepts are all right in their place that the criterion from the standpoint of the application of the Natural Gas Act is the economic function, the substance of it, and that from that standpoint, the differences between this and ordinary agreement to sell are small and unimportant in this case and that the similarities are overwhelming.

Now, I could develop that some length the general principle that in at least in applying a regulatory statute, the Court will not apply the technical — will not be governed by the technical form in which the parties cast their transaction, even so that form has importance for other purposes and they as between them, but it will look at the economic facts from the standpoint of effectuating the policy of the particular Act.

The cases on that point go back as far as early cases under the Interstate Commerce Act of which B&O against Settle is one the best examples and they come down to such a decision as the Lo-Vaca Gathering case decided by this Court quite recently.

The cases it seem to me most enlightening, I suppose because I’m most familiar with area, are the cases rejecting the common law test for the purposes of social and labor legislation in determining who is an employee.

There, the Court has said that regardless of the consequence for tort purposes that the particular appropriate thing to do is to see whether the particular workers are subject as a matter of economic fact to the evils the statute was designed eradicate and whether the remedies heretofore are appropriate one.

And that’s the way we think whether this is a sale should be approved.

As a matter of economic fact is this really a transfer of the interest in natural gas for resale to the public, and is the remedy is appropriate here as it was in the Phillips case.

We think the answer for the both cases is yes.

The case most closely impart is one which I could confess I overlooked its significance when we prepared our original brief is Gray and Powell.

Gray and Powell involved the question whether there was a sale of coal for the purposes of the Bituminous Coal Co. because the code provided, no coal shall be sold or delivered or offered for sale at a price below the minimum established by the Commission.

And what happened there was that a railroad a heavy user of coal leased some coal lands and then it hired somebody to bring what it said was the coal in which should have a lessee’s interest to the surface and turn it over to him.

Archibald Cox:

And it said there is a no sale here because there is no transfer of title from the man who is digging the coal, the company that’s digging the coal of course to us Seaboard.

And the Court said without pausing to quote from the opinion that it didn’t matter whether there was a technical sale and the transfer of title from the producer or not, that the purposes of Congress would be hampered by an interpretation that requires the transfer of title in the technical sense to bring a producers coal consumed by another party within the ambit of the coal company.

And so here, it seems to us, that while this isn’t exactly on all force because there, there was a question whether there was a sale by the company that did the mining to the railroad, here we don’t even have to show that as long as we show that there was some sale, but we think in principle, both in the way the problem was approached and even in principle on the holding that Gray and Powell is governing here.

Is that case on your brief?

Archibald Cox:

It’s referred to and stated in our reply brief, yes.

And it’s also cited in the principal brief but in the principal —

William O. Douglas:

You have the Panhandle case and —

Archibald Cox:

We have the Panhandle case.

William O. Douglas:

And what’s your argument today is the essence, the dissent in Panhandle, is that it?

Archibald Cox:

No, I think the Panhandle case to which I’m now —

William O. Douglas:

You’re distinguishing it but it’s — your argument sounds like the dissent that I joined in the Panhandle case.

Archibald Cox:

Well, we — I don’t want to repudiate the dissent but I think there is no inconsistency between our position here and what was held in Panhandle.

The — we will be happy to have the decision prevailed.

Let me — I was just coming to direct myself to that case.

William O. Douglas:

Which raises a peculiar question perhaps just for me because having taken this point of view of yours originally in that case that being truly a problem not of constitutional dimension but of statutory of construction, whether we should apply stare decisis the type of which that should operate, the extent to which we should feel free to change the order by the majority and so on.

Those are the considerations in my mind.

Archibald Cox:

Let me see if I can satisfy Your Honor that you could accept the Panhandle case just as fully as anyone who is in the majority and still accept our position in this case, because it seems to me that Panhandle is distinguishable.

And if what we are saying here does not require any overruling of Panhandle or modifying of what I would say was the holding or really the — or that It’s probably against us, because I think it’s broader that it needed to be.

Now, in Panhandle, as many of the Court will recall, Panhandle operated an interstate pipeline system.

It also held leases on lands in the Kansas Hugoton Field where apparently it functioned as a producer and exploration of development.

Also this was a field where there was pretty well known to be gas.

The gas reserves in place there had never been dedicated to interstate commerce.

They never flowed or indeed by have been committed even by contract in any sense to interstate commerce.

But they had been cited by Panhandle as a source from which it intended to get gas, or could get gas to pipe through certain facilities that it had asked the Commission to certificate.

When the Commission sought to bar Panhandle from transferring the leases on the Hugoton Field to a subsidiary which would function as a producer and perhaps also as an intrastate pipeline, the Court held that the Commission had no jurisdiction, saying that the transfer of undeveloped gas leases is an activity related to the production of gathering of natural gas and beyond the coverage of the Act.

Now, the critical and I think undeniable difference between the Panhandle case and the case at bar is that there, the transfer of the leases was not a step by which an interstate pipeline secured gas to transport interstate and resell for public consumption.

Whereas here, on this lease transaction, as it is called, is the step by which interstate pipeline did procure its gas

Potter Stewart:

(Inaudible) was it not?

Archibald Cox:

The lease — the cost of the lease are not — well the transfer to Hugoton —

Potter Stewart:

Took it out.

Archibald Cox:

Took it out.

Some of those costs, there was a question about whether they should be included or not, but the sale as such was, I suggest, a moving away from interstate commerce rather than a moving interstate commerce.

Let me see if I can develop that thought by pointing out the precise differences.

Hugoton was not an interstate pipeline, Texas Eastern obviously is.

After the transfer, Hugoton would function initially as a producer.

It would develop the lease.

It would gather gas and it would complete the development and complete the decisions as to where or how it was to be sold.

Texas Eastern won’t really function in that respect at all, except in some very minor detail.

In Panhandle, the gas could not and would not move into interstate commerce, into an interstate pipeline, without some further transaction, some further sale in the sense that we used.

Whereas here, of course, this, as I’ve said before is the transfer in interstate commerce, because that’s true it’s also true that what Hugoton paid Panhandle would not necessarily and perhaps not at all have the same significance in fixing the ultimate rates at which somebody carried this gas interstate as the price paid here will have.

Now, I suggest that those factual differences between moving something out of interstate away from interstate commerce and moving it interstate into interstate commerce are paralleled by the difference in the legal issues.

There was no opportunity for the Commission to argue there that what was involved was a sale of natural gas in interstate commerce.

But the arguments have to be that this if not so far dedicated to the field.

I think that the marshal’s lights must be off Mr. Chief Justice.

I got up.

I think it was a quarter off — quarter after, and we have an hour between us, Mr. Coleman and I.

And Mr. Coleman and I have an hour between us.

Earl Warren:


Archibald Cox:


The light was flashing.

Earl Warren:


Archibald Cox:


No, I guess we had a misunderstanding.

But not even, I understand we have another considerable amount of time more.

I had just about finished when I was diverted by the lights.

The point I was trying to make at this case in its focus on whether there was a sale in interstate commerce presents an issue that was not raised and could not have been raised in the Panhandle case.

Now, I think that — excuse me.

Arthur J. Goldberg:

At this point, do you think the court decision yesterday in Clay Brown dealing with sale has some relevance to this case because like Justice Douglas, a good deal of your argument about economic reality is what I mean when you just said —

Archibald Cox:

Well, I think there are two – I think that there are many differences but two seem to me particularly important.

One is the opinion in Clay Brown was expressly recognized, that where these is some strong evidence with respect to a contrary policy of the particular statute then that may be controlling with respect to the meaning in words.

Archibald Cox:

And I can’t believe that the Court in Clay Brown intended to modify its decisions in Gray and Powell, Hearst case, the Lo-Vaca Gathering case and a whole line of them.

Second, I suggest there is a major difference between legislation of this kind and the tax laws.

Even accepting as of course, we do in that decision, I would say that the tax laws to a greater extent at least, take the transactions as they find them for other purposes, if Your Honors, sees what I’m trying to say.

That there isn’t any overwriting aim, many function.

They are intended to be in a sense neutral, and to accept the business purposes of people as they carry them out.

I don’t want to overstate that but I think that is a marked difference between the two cases.

I just want to say one further word before yielding to Mr. Coleman.

I think it is obviously true that if you take the language in the Panhandle case, that undeveloped leases are facilities of production, and apply that in a wooden fashion as a universal principle, then it is inconsistent with our opposition here.

But I don’t think the Court ever means its words to be read in that fashion.

There are leases and leases.

That lease had as I’ve attempted to show an entirely different function than the assignment of this lease has.

And I don’t think the language was intended to lay down a universal proposition.

And therefore, is not controlling on any justice in this case whether he agreed with the philosophy of that case or not.

I would now like to give Mr. Coleman such time as he required.

Earl Warren:

Mr. Coleman.

William T. Coleman, Jr.:

Good morning, Mr. Chief Justice, and may it please the Court.

Petitioner in Number 644, the United Gas Improvement Company is a Pennsylvania public utility, and is a distributor in natural gas to the residential, industrial, and commercial customers at Philadelphia and upstate Pennsylvania.

We purchased a substantial part of our natural gas supplies from respondent, Texas Eastern.

Thus, it’s of vital concern to us what is the actually course the Rayne Field gas to Texas Eastern.

The course of the estimates of the Rayne Field gas varied in this record from 17.5 cents to 24 cents.

And this should be compared with the fact that in Catco this Court held that where the record show that the gas would move in interstate commerce at 22.04 cents per Mcf that that should have alerted the Commission and caused the Commission to hold a hearing and determine whether that price was in the public interest.

Now, it’s clear here that “but for” the decision of this Court in Catco that the parties here would have made a traditional type of sale.

And therefore, the point here is whether the parties by merely changing the form of the transaction are able to move gas from the discoverer and the owner of the gas to the pipeline into interstate commerce, and put that cost in the pipeline’s rate base and still escape of public regulation.

In fact, the issue here is even narrower, and that is whether the Commission had within its power and its judgment the right to determine that what took place here was essentially a sale for resale of natural gas and interstate commerce, and therefore, should be subject to regulation.

Actually, the issue here is easier for this Court than the issue in the Phillips case because as you recall in the Phillips case, the Commission had made an investigation and determine that in each judgment that it did not have to regulate the producer in order to be able to carry out its statutory obligation.

But here, the Commission tried awfully hard to protect the public interest by not having to regulate this transaction but only after it made the inquiry and made the determination that the only possible way that it can protect the consumer was to determine that because this gas in effect was going to move at interstate commerce that therefore, it would have to be regulate it.

Now, what did the Commission had before which would justify such a determination?

In the first place, it knew and it had the fact Continental Oil, Sun Oil, and the other producers except for Marr were known to be gas producers.

And it had been found to be so on many occasions, and in fact, decisions of this Court have recognized that Sun Oil and these other companies are in the business of producing gas.

Secondly, the record shows that Continental Oil, the owner of this gas originally was the one that discover the field.

William T. Coleman, Jr.:

Third, the Commission had the fact that these parties, by their original contact demonstrated what they wanted to do at the business matter was transfer this gas from the discoverer into interstate commerce.

And the only reason why Texas Eastern ever wanted this gas was to sell it in interstate commerce.

In the fourth place, the parties knew by the time this field had been developed and this contract had been entered into exactly what Texas Eastern was getting.

If you would turn to the record in volume one sir, there is an exhibit on page 163.

I guess before the luncheon break, Your Honor, I asked the Court that they turn to page 163 of the record and you see this —

Earl Warren:


William T. Coleman, Jr.:

163 of the record which is in Volume 1.

And you will see this chart and I ask your attention to it only to point out to and very graphic from that when this transaction was entered in to, the parties knew what they were buying, they in fact knew what type of gas would be there in the ground, and in fact, they could assign the volumes to each one of the sense.

And it’s also important to note that even after the transaction was completed, that the party who had been the original owner of the gas and the discoverer of Continental Oil was the one that was to do the lifting of the gas from the ground.

Indeed, when you turn to page 828 of the record, the management agreement, in the whereas clause, you will see a notation that one of the conditions which would cause the pipeline to go into this transaction was that Continental assured pipeline that Continental would be available to do the lifting of the gas from the ground.

Potter Stewart:

Mr. Coleman, this chart, which I presume was an exhibit in the case —

William T. Coleman, Jr.:

Yes Sir.

Potter Stewart:

— 163, was this is an exhibit just prepared for this litigation or was this an annex to a contract or what was it?

William T. Coleman, Jr.:

Well, this was in the record.

It was introduced at the time of the first hearing, and it follows right after another exhibit in the case.

I frankly don’t know whether this was to the contract or it was just put in the case.

But you will note the date as of January 1, 1959, which is before the transaction was quoted.

I think it’s also fascinating to note that at the hearing they say estimated gas reserves dedicated to Texas Eastern Transmission Corporation.

Potter Stewart:

Yes but it might depend on who says that if this was an exhibit prepared for this particular litigation by one of the parties.

William T. Coleman, Jr.:

It’s clear.

It was prepared by one of the parties.

It was not prepared by the federal pal Commission or anyone to intervene it.

This came from the producer pipeline side of the situation.

As I indicated sir, the parties religiously and conscientiously here refrained from transferring anything other than the natural gas already discovered.

And now I’d like to turn back to Mr. Justice White with respect to the Panhandle situation.

That once you had this type of factual situation, it seems to me that the Commission would certainly justify to make the finding that they made on page 972 of the record.

Byron R. White:

What part of the record?

William T. Coleman, Jr.:

This is volume three Your Honor, where they said —

Hugo L. Black:


William T. Coleman, Jr.:

972 of the record.

Hugo L. Black:


William T. Coleman, Jr.:

Where they said at the first full paragraph, “We have jurisdiction over this transaction, because by it, the producers transferred natural gas to Texas Eastern for resale by Texas Eastern in the interstate market.”

Now, no such finding was made in Panhandle.

You were not dealing with leases where they have been fully discovered.

You were not dealing with leases where they had been fully proven.

That there you had undeveloped leases and the leases were being transferred not to a party who has going to resale the gas in interstate commerce, but indeed, they were being transferred out of the interstate commerce market into the intrastate market.

And the problem before the Commission, I’d like to spend a minute on this if I may.

The problem before the Commission and Panhandle was completely different.

In Panhandle, what the Commission was faced with was the fact that when the pipeline wants to resell gas to a distributor company, it has to get approval to say that we want to resell on a day-to-day basis so many Mcf per day.

Now, to get that approval under Section 7, they have to prove that they have the reserves.

Now, after they proved they have the reserve, the question then becomes the next day can they denude themselves of those reserves and not to be subject to jurisdiction.

Now, that’s what Panhandle dealt with.

The question was whether because of the words in Section 7, which says that if you’re going to sell to the consumer in interstate, you have to get approval to do that, and if you come before the Commission and say that we ought to be permitted to do this at the pipeline because we hold this reserve.

Can they thereafter sell those reserves in the intrastate market, not be subject to regulation.

You must recall that that transaction or the Panhandle situation was before Phillips.

Now, I would think that once Phillips was on the books, you had a completely different problem.

And the Court probably would have decided Panhandle differently.

But leaving that aside, there’s nothing in Panhandle which says that if the Panhandle, instead of selling those undeveloped, unproven reserves to the intrastate market had decided to sell proven reserves where you can actually almost by name and number identify the gas to a pipeline that was going to resell in the interstate market, then that that would not have been subject to jurisdiction.

Indeed, I think that’s what you’re decision in 331 U.S. and interstate pipeline says that whether pipeline decide to sell some of its gas at its own to another pipeline that’s going to immediately transfer the gas in interstate commerce that that is subject to jurisdiction.

I think, therefore, any person sitting on this Court at the Panhandle case, I really think that that when you had this problem, you really even shouldn’t go to that Panhandle case because it’s completely a different problem.

And so what you really have to determine here is whether the production and gathering exemption, which is in Section 1 (b), which says that even though interstate sale for resale are subject to jurisdiction, that this does not mean production or gathering.

Now, I think what the words mean, it does not mean mere production, a mere act to producing, or the mere act of gathering.

But there’s nothing in the exemption which says that if you have something that is a sale for resale in interstate commerce of natural gas, that because the contract or because the passage of title is to take place prior to the time that production or gathering is completed, then that means that what is otherwise the sale for interstate commerce for resale of natural gas, somehow, gets taken out of that.

I think the legislative history makes it clear.

And one thing is clear in this case, the legislative history makes it clear, that as far as the Congress was concerned, they didn’t think they needed the exemption.

That if you had a sale for resale in interstate commerce, that was clearly regulated, and that was all they intended to regulate.

And that’s what is happening here, and the fact that the transaction is dressed up so that part of it may take place before you get all the gas out of that is completely relevant.

You still have a sale for resale.

Now, the cases have made it clear and the one thing has been constantly litigated in the Court of Appeals and the decisions are uniform.

That where the sale takes place prior to the completion of the gathering, which is also in the exemption, that if what is happening is a sale for resale, namely from the producer to the pipeline, and that’s in the interstate market that clearly that is subject to jurisdiction.

William T. Coleman, Jr.:

And it just seems to us equally as clear, the way you have a situation where the transaction here and the Commission founded a fact and the evidence is clear on this, that by this transaction, that what the parties intended and the only thing they intended was to move this gas from Continental Central Oil into the interstate market to a pipeline that sold only in interstate commerce that you clearly had a transaction which is in interstate commerce and is the sale of gas for resale.

And the production exemption and the gathering exemption had nothing to do with this.

And this Court really faces problem in Phillips.

And there, it determine that because the gas was to be resold in interstate commerce to the pipeline, the fact that the producer after executing the contract, nevertheless, still had to lift the gas out of the ground was completely irrelevant, because the thing that Congress wants to prevent is the high cost of gas being paid by the pipeline, and then that being charged against the consumers.

And if you have a situation the way you do here, where if Texas Eastern at this price, is able to take the gas into its pipeline, at a such a price that a proper finding on this record may be that the cost is 24.5 cents per Mcf, that under those circumstances that the only way to protect the consumer is that that transaction is regulated.

Now, you can’t regulate it merely by the pipeline because with the pipeline, it had to pay the money.

And the only way you can protect the consumer is to regulate the producer or the discoverer of the gas, and to say that the price that you’re charging is not in the public interest.

And so therefore, we submit that based upon the facts, the findings here, based upon the purpose of the Act that it’s clear, that if this Commission, which is trying to do a good job is going to be able to protect the ultimate consumer, that it has to have the power where parties say, “How can we frame a transaction which will have the same identical economic effect and if you had a conventional sale, that somehow that doesn’t escape regulation.”

And this is completely different from a tax situation where what you’re trying to do is determine who has the economic benefit of the gain because that’s the man that has to have the money to pay the tax.

Here, what you’re trying to do is determine for purposes of regulation, how do you protect the public?

And the only way to protect the public here is to look at this transaction, the way I think, with all due respect, any school boy would look at it.

That clearly, you have natural gas here, clearly the parties intend it to lift it from the ground, to pass it in interstate commerce, clearly the pipeline is going to pay for it and it seems to me that just by reading the statute, this is a sale for resale in interstate commerce regardless of what else also you want to call it.

Byron R. White:

Mr. Coleman, what is lacking as far as power is concerned in the Commission if they just regulated that pipeline, and attempt to get at this price through regulation of the pipeline?

William T. Coleman, Jr.:

Well sir —

Byron R. White:

Just allowing some part of its rate base.

William T. Coleman, Jr.:

Well sir, I first say that in Phillips, you could have done exactly the same thing.

So you start up with the fact that in Phillips, if you want it you could have told the pipeline if you buy their gas with Phillips at 25 cents even though that’s what you paid for, we are still going to let you put it in your rate base only at 20 cents.

Secondly, I say, that the test where the utility actually pays the money is whether it made an investment which is provident or not.

Now, that’s a test which is much higher than the test as to weather the price for the gas is the public interest price and here you have it very dramatically.

If the sale is regulated by the producer and if we followed Catco and if we followed what happened in Catco and remand when it went back and they tried what was the public interest price, they determine that the price could not be more than 20 cents.

Now, if instead of that you’re going to regulate it by whether Texas Eastern in an arms-length transaction where it paid $134 million was acting as a good businessman or not which would have to be a test and you have one on the record here that made the prices 24 cents where the Commission as very difficult work away to go to say that under those circumstances, we have to knock out the other 4 cent point nine.

Now, the other thing is Your Honor and I think is you have to realize this that if this strike had been right on the Texas Eastern main pipeline, the Commission would never have been called upon to do anything with respect to Texas Eastern which would even call into play its power to regulate.

Under the law, under Section 7, the pipeline doesn’t have to get approval to buy the gas.

The one that needs approval is the one that sells the gas and the only reason why the pipeline got involved in this was because to take the gas it had to construct 22 miles and had to build a compressor.

Now, that mere fortuitous circumstance that the strike was not only on the line should not be the basis on which you call into play the regulation.

Secondly, the real issue here should not be what the pipeline paid for the gas but what the producers paid and what it caused them to bring the gas from the ground.

So unless the producers are made part of this record and they’re subject to regulation, you’re going to have Texas Eastern trying to litigate this matter by having to prove what somebody else’s cost were.

So it seems to me that’s all you had in Phillips and this Court in Phillips after looking at this said that the only way to protect the consumer was to regulate the producer.

Now, Phillips came after Panhandle and that’s the practical way that this has to be handled.

Earl Warren:

Mr. Searls.

David T. Searls:

Mr. Chief Justice and if the Court please.

Texas Eastern Transmission Corporation which is the pipeline respondent in this case filed its application in this case for certificate of public conveyance and necessity eight years ago before the Federal Power Commission.

Its application was for authority to construct certain facilities along its main line and also to build a 22-mile line from its main line for this Rayne Field and a compressor station on that 22-mile line.

During this period of time, there have been three Commission opinions, two decisions by the Court of Appeals on two different appeals.

Both Court’s of Appeals, the D.C. Circuit and the Court of Appeals for the Fifth Circuit held that the sale of these leases was a non-jurisdictional sale but each Court of Appeals said basing their decision upon the decision of this Court in Catco, that the Commission could determine whether the acquisition cost of Texas Eastern were consistent with public convenience and necessity.

In 1959, six years ago, the Commission rendered its decision in opinion Number 322 in which it held that this was a non-jurisdictional sale of leases and the Commission in that opinion disclosed why this was very important public interest for the pipeline company too far of this basis.

In this order issued by the Commission, it required Texas Eastern to build this pipeline and these other facilities within six months.

Texas Eastern complied with the order, built the facilities, and since August 19, 1959, has been taking natural gas from the Rayne Field.

Now, petitioners say here, and their position as we understand, is that the sellers of this leases and Texas Eastern you were trying to circumvent the powers and jurisdiction of the Federal Power Commission and rights on with the Natural Gas Act.

We take issue on that.

We say the purpose in buying these leases was not to circumvent the jurisdiction of the Federal Power Commission but we say as the situation developed and as the circumstances disclosed by this record to establish, it developed that the only feasible deal that could be made in this case was for Texas Eastern to buy the leases and that natural gas.

And why do I say that?

Because there was a hearing at that time Texas Eastern proposed to buy this gas from these companies under gas sales contract.

There was an extended hearing before an examiner and in that hearing the purchase of this gas by Texas Eastern which was opposed by some of its most substantial customers including the United Gas Improvement Company of Philadelphia.

And one of the main bases for the opposition was this, if Texas Eastern buys this gas and this was brought up by extensive cross-examination of Texas Eastern witnesses, it will trigger “favored nation” clauses under Texas Eastern’s insisting contracts, there being 32 contracts was brought out on cross-examination will be triggered and the increase in the annual cost of natural gas with Texas Eastern would be $10 million a year which would be passed on to the customers and in turn of course to the consumers.

And so these customers of Texas Eastern has one as the Public Service Commission in New York, vigorously opposed this transaction.

And in the meantime and has been stated by the Solicitor General by Mr. Coleman, the Court of Appeals decided the Catco case.

It really went off on the point that the Commission didn’t have jurisdiction that’s — of that application but that was reversed by this Court but nevertheless the Court of Appeals for the Third Circuit made it very clear that prices and cost should be considered by the Commission in a certificate case and as Your Honors said, when that price falls within the disputed area, it’s one of the most relevant factors to be considered in a certificate case.

So in view of the holding by the Court of Appeals for the Third Circuit, and in view of this opposition which had taken place on the hearing in regard to these gas sales contracts, and knowing that this question about triggering these “favored nation” clauses, would be a most serious obstacle to a certificate.

Texas Eastern then approached these producers who became sellers to sell the leases to Texas Eastern because if they purchased leases instead of natural gas, it would not trigger the “favored nation” clauses.

And it also have been brought out on cross-examination of Texas Eastern witnesses at this first hearing that it would trigger not only the “favored nation” clauses in Texas Eastern contracts, but it would trigger what was known as third party “favored nation” clauses in the contracts of other pipeline companies.

And so Texas Eastern proposed to these producers, sell me the leases covering all of the area through the known horizons that are known to be productive.

After all, Texas Eastern knew that producers would not sell in deep horizons which have never been explored by the drill bit, because they might be given away an oil field if they did that.

Any sophisticated producer or a company just as doesn’t do that.

Well, after considering the matter, this proposal by Texas Eastern to buy the leases in which they contented this will not trigger the “favored nation” clauses in our contract, appeal to these companies who turned out to be the sellers of the leases.

First, they would get a $12,420,500 cash payment at the time of the closing transaction.

They’d get money now.

They would get the balance of the consideration over a period of 16 years in annual installments instead of waiting for the life of the field which was 31 years, so as a result they were willing to take a substantially lower cost for their natural gas.

Now, under the gas sales contracts, price would been 22.6 cents but if you take the amount of recoverable gas that was conveyed or was covered by these leases, the price was 17.15 cents that it cost Texas Eastern, and that was the price first to be received by these sellers of the leases.

Another factor that appealed to the sellers of the leases was this, if they can sell leases instead of natural gas, they could get possibly Catco gains tax treatment, they thought they could.

David T. Searls:

And a condition of the entire transaction was that the Internal Revenue Service would have to render them on opinion first that this would be given Catco gain tax treatment before they would make the transaction.

So having paying their 25% Catco gain tax as compared with 52% ordinary tax was a real inducement to the sellers of these leases to go forward as well as getting the money in the early day.

And of course the inducement of the Texas Eastern was it would not trigger the “favored nation” clauses.

And so the parties entered into an agreement for the sale and purchase of the leases.

Now, Texas Eastern was very interested in having Continental Oil Company continue as the one who do the drilling and operation of that field.

The reason for that was Continental had developed the field.

There were very high pressures in that field.

They were very difficult to complete in and for Texas Eastern to incur the cost of putting a new organization there and the risk which might come from dealing with those high pressures was out of the question, so they ended in to what they call a management contract in which Continental was implored as the management agent of Texas Eastern to operate the field.

But no wells could be drilled except those requested by Texas Eastern and since the matter has been closed, Texas Eastern has caused to be drilled five wells at its cost.

The amount of production from that field can only be the amount of production designated by Texas Eastern.

All of the reworking of the wells, the deepening of the wells can only be done upon the authority of Texas Eastern, so Texas Eastern through this management contract controls that field.

Now, after the party has entered into this transaction for the purchase of the leases, they submitted with the Internal Revenue Service for rooting on the capital gains tax and then they submitted to the — in back in 1958 to the Federal Power Commission.

And the Federal Power Commission issued its opinion Number 322 in June 1959 and it found this entire transaction to be in accordance with public convenience and necessity.

It pointed out in its opinion that those customers of Texas Eastern and we think this is a rather important fact here, which had opposed the purchase of gas by Texas Eastern on the gas sales contracts had now withdrawn their objections.

They didn’t object to the lease purchase sale although they had the objective vigorously to the purchase of natural gas under those gas sales contracts and they didn’t object to the lease purchase sale because they knew the lease purchase sale would not trigger the “favored nation” clauses in the Texas Eastern contracts and thereby bringing about an increase to $10 million a year in Texas Eastern costly gas.

And one of those customers was the petitioner, United Gas Improvement Company and the hearing before the Federal Power Commission after this when this matter was submitted to the Commission, United Gas Improvement Company read a statement into the record to this effect, but this was a step in the right direction.

What do they mean by that?

The purchase of these leases by Texas Eastern is a step in the right direction.

We favor this because they meant this will not trigger the “favored nation” clause and all of the customers, as the Commission found, withdrew their objections to the lease transactions although they had oppose the purchase under gas sales contract.

The only concern, the only one it opposed it was Public Service Commission of New York.

Now, in its opinion finding that they had no jurisdiction over this matter, the Commission went on to say, it’s important for a pipeline company to own leases, it gives it flexibility of operations.

They can produce larger quantities in the winter, smaller quantities in the summer and that is very much in the interest of the public and other consumers.

Texas Eastern is enabled to treat this as a storage field in effect because it owns the leases.

They found of course the price was fixed for 31 years, the life of the field.

There wouldn’t be escalations in the future such as we have had and before the Commission that caused so many rate cases before the Commission.

There was one price that was the price determined at that time.

No favored nations, no future re-determinations of price.

So the Commission after setting out all of those facts found that an unconditional specific public convenience and necessity should issue to Texas Eastern.

The Public Service Commission appealed that to the Court of Appeals for the D.C. Circuit by filing a petition for review.

One of their main contentions was the contention which is made by Mr. Coleman here in this case.

David T. Searls:

They contended that the first, the Commission should not have approved the terms of the trade because there wasn’t substantial evidence to support the cost of the gas of Texas Eastern.

That’s one of the main contentions, so the Court of Appeals says.

When the matter was decided for the Court of Appeals, they recited the contentions of the parties.

The Court of Appeals clearly held that the sale of leases was non-jurisdictional and not subject to jurisdiction of the Commission.

But the Court of Appeals for D.C. Circuit said that it was error for the Commission to pass on the price or the acquisition cost for Texas Eastern without having substantial evidence to support them.

So they sent the case back and we say for a limited purpose and they said to the Commission, you can do either one of two things you can follow either alternative.

You can clarify your former opinion by showing or stating that price is not approved here at this term.

Now, if the Commission had done that this litigation would have ended 1961.

But the Court of Appeals said you might, you can follow the other alternative, you can reopen the record for the purpose of permitting Texas Eastern to support its acquisition cost by evidence.

The Commission thought of that course and in July 1961, entered an order which required Texas Eastern to offer evidence in detail supporting its acquisition cost.

Volume 2 of this record, substantial or it’s made up of the evidence of Texas Eastern Oil, exhibits a detailed evidence to support the fact that its cost — acquisition cost were reasonable that these acquisition costs were consistent with public convenience and necessity.

And the Commission after ordering Texas Eastern to offer this evidence and specify it in detail what type of evidence would be offered and after the hearing was over and the matter was presented to the Commission for decision, the Commission refused to pass on the issue of cost despite the decision of the D.C. Circuit and despite the Commission’s own order of July 1961 which directed Texas Eastern to offer evidence of cost.

They said that we have jurisdiction over the sale of these leases and they further directed the parties to resend this lease sale transaction retroactively.

And to enter into gas sales contracts and submit them to the Commission because they said we cannot adequately pass on the sale of leases.

Now, the respondents here filed their petition for review to the Fifth Circuit from that opinion.

The Fifth Circuit likewise held basing its decision also on the decision of this Court just as D.C. Circuit have done in Panhandle Eastern and made it clear that the Commission had no jurisdiction over a lease sale.

But the Court of Appeals for the Fifth Circuit said, “We will reverse this case so that the Commission can reject the application, grant the application or grant the application conditionally in view of the acquisition cost of Texas Eastern.”

And then the Fifth Circuit said, “It is with regret that we note that this is essentially what the D.C. Circuit told the Commission to do three and one-half years ago.”

So the Commission brought a petition for certiorari here and the issue of cost has not yet been passed on despite this Court’s decision in Catco which said that it’s one of the prime considerations in a certificate case.

We say first that the Commission was bound by the decision of the D.C. Circuit that this was a non-jurisdictional sale, that the reversal to the Commission was for a limited purpose that is either write a short opinion clarifying this matter and saying we’re not approving price or else receive evidence to support the acquisition cost of Texas Eastern.

But instead of doing that the Commission had gone contrary to the opinion of the D.C. Circuit and has held it they had jurisdiction.

Now, we say that the decision of the D.C. Circuit would apply in the Commission.

Section 19 (b) of the Natural Gas Act which provides for the filing of the petition for review in the Court of Appeals says, that the decision by the Court of Appeals in the absence of review by the Supreme Court is final.

Statutory finality was given to this decision of the Court of Appeals by reason of the statute and it’s our position that that decision that the Commission had no jurisdictional dismisses at finding.

Now, the issue between us on this point seems to be this, they say in their briefs although the matter has not been discussed here this morning, that the Court of Appeals did not actually decide that the Commission had no jurisdiction over this matter and if what they said about it was actually dictum and that shouldn’t have been binding on the Commission that is what we understand to be the petitioner’s view here.

We say, they expressly said the Commission did not have jurisdiction over this sale of leases, and furthermore, the Court of Appeals for the D.C. Circuit could not erase the conclusion that they did without deciding that.

They couldn’t have sent the matter back just for the Commission rather clarifying opinion that it was not approving the price unless they thereby held that the Commission had no jurisdiction over this lease sale that was impertinent.

Or they couldn’t have sent it back just for the purpose we submit of taking evidence on the acquisition cost unless — of Texas Eastern unless they thereby had not held that the Commission did not have jurisdiction over these leases.

Further, we say, that there’s no statutory or there’s no gap here.

That is of course a usual argument made by the Commission when it seeks to extend this jurisdiction.

David T. Searls:

They have made that argument before the Congress that unless they had control over direct sales they would be an attractive gap.

They have made that argument here.

Since Panhandle Eastern was decided in 13 or 14 years, the Commission in its annual reports to the Congress has asked Congress to give it jurisdiction over the lease sales by the natural gas company.

So far, despite those 13 requests, Congress has not done so.

And the only year that the Commission did not request that it be given jurisdiction over lease sales was the year they rendered their decision which is now on review in 1963.

But then they told Congress in their annual report that they had made a policy decision to take jurisdiction over lease sales.

We say a policy decision is for the Congress and not for the Commission.

Now, although, we say that there is no gap here because you have two Courts of Appeals which you told the Federal Power Commission, you can pass on these acquisition costs.

And furthermore, we have the order of the Federal Power Commission which it entered upon the reversal in the D.C. Circuit.

And which have stated to carry the evidence to be offered by Texas Eastern and we say they in effect converted this certificate case after it was reversed by the D.C. Circuit into a rate case by reason of the character evidence which Texas Eastern required to offer.

At page 871 of the record an up-to-date reserve and deliverability study for the Rayne Field to include actual production to date.

Two, annual production plans for the Rayne Field extending to the estimated life of the field since there has been an operator that would be 29 years in the state.

Annual production plans to 29 years, an exhibit showing the proposed method of accounting by Texas Eastern for the Rayne Field transaction and all cost instant thereto.

And then fourth and finally, a study, cost of service study showing the cost of making the natural gas from the Rayne Field available to the Texas Eastern system and then they said you must include every cost which will be associated with making this Rayne gas available to the Texas Eastern system for the life of the field just as an all cost that Texas Eastern would not claim in subsequent rate cases where you have the question as to whether rate or the cost is just unreasonable.

Now, in view of that requirement on Texas Eastern to come forward with that character evidence, we say that the consumer was assured that the acquisition of cost of Texas Eastern would be passed on in this certificate case.

Here was detailed evidence required.

Texas Eastern complied with that order Volume 2 contains all of these evidence in regard to this cost evidence and the Commission was thereby enabled to pass on the acquisition cost but have to order Texas Eastern to produce this evidence, they have refused to pass on it up to this time but instead said well we rather have jurisdiction over the sale of those leases.

Now, we say that there can be no gap as long as the Commission can require in a certificate case such as done here with this extensive evidence to be offered.

The Commission is enabled to pass on the acquisition cost to determine whether or not they are reasonable.

And thereby determine whether a certificate should be granted.

And as the fifth —

Byron R. White:

Do you say the main standard is (Inaudible)

David T. Searls:

Not the same standard as this Court said in Catco.

Not the just and reasonable standard they passed on the rate case, no sir I consider.

But I say they certainly have to look to the reasonableness of the cause not to determine that they’re just and reasonable as those words of art are used in rate cases.

But they can certainly determine as this Court said in Catco whether or not those acquisition cost are consistent with public convenience and necessity.

And I think that gives a broad ground for the Commission to pass on the matter in determining whether it’s in the public convenience and necessity that those costs be paid by Texas Eastern but that is not to Your Honor, Mr. Justice White, certainly the same standard that would be applied in the rate case.

Byron R. White:

Could they fix the price?

David T. Searls:

They could have fix the price and as the Fifth Circuit said Your Honor, you should determine whether you’re going to reject this application, whether you’re going to grant or whether you’re going to grant it conditionally and the right to the impose reasonable conditions certainly gives the Commission considerable control over the matter.

Earl Warren:

Do you think the Commission could by exercising power over Texas Eastern specify a purchase price for Texas Eastern?

David T. Searls:

I certainly do.

To purchase price which they would stay at this condition —

Byron R. White:

At what stage — at what stage of the proceeding?

Let’s assume that they didn’t have to get a certificate to build this facility.

When did the matter ever come up?

David T. Searls:

In the certificate case.

They must eventually get a certificate and of course they must bill certain facilities in order to connect the leases with their pipeline.

Byron R. White:

You think that always would be true?

David T. Searls:

Yes sir I think that would always be true.

I can’t conceive of a situation where some time they’re not going to have to build facilities to connect that gas reserve even if it’s installing a barrel or some certain line.

I mean the Commission goes long ways of acquiring these pipelines to get authorization before they can install in the facilities.

So I say somewhere down the line, they must do that.

Now, it so happens Mr. Justice White in this case a condition with this entire transaction was that Texas Eastern would obtain a certificate from the Federal Power Commission.

That was a condition of the transaction.

But even if that hadn’t been the condition I say at some time there’ll have to be a certificate case in which that could be passed on.

Now, if it’s conceivable that that’s not true, that doesn’t mean the matter could not be passed on at a later time if that is not made an issue in a certificate case.

Arthur J. Goldberg:


David T. Searls:

No, Your Honor we haven’t, we did have.

We obtained one in 1959 in June 1959 and then the matter was reversed by the Court of Appeals in the D.C. Circuit and so we find ourselves in this clamor.

Arthur J. Goldberg:

What was the present state that (Inaudible)

David T. Searls:

Texas Eastern is taking gas from the Rayne Field.

Arthur J. Goldberg:


David T. Searls:

The connection has been made and course the certificate application applies not only to construction but also for future operation of the facilities and so Texas is in still much have a certificate.

Now, we could not abandon this service, of course without going for the Federal Power Commission under the Natural Gas Act and filing a petition for abandonment.

And so, we have taken no action pending a determination of the matter.

Byron R. White:

Deserves, if you say that the Commission has got power to regulate this price, to which Texas Eastern acquired the gas, and it can get all the information it wants and it had gotten all the information already in this hearing, or what difference does it really make to you?

How the Commission does this, I mean if it’s going to be the same result by the same rules anyway, why are you making such a fuss about it?

David T. Searls:

Do you mean why they should determine it in a certificate case?

Byron R. White:


David T. Searls:

Why we want them to —

Byron R. White:

You just, you say that well they’re going to get — they could do the same thing anyway in the present — without exercising jurisdiction over the producer.

I mean, but — you represent all these respondents, don’t you?

David T. Searls:

Yes, I’m appearing here for all of them, yes.

Byron R. White:

Now, what difference does it make to Continental Oil Company, one of your clients, whether they — the Commission doesn’t do one way or another.

David T. Searls:

Yes, well now if — assuming they made gas sales contracts say for instance.

The seller respondents would have to come in with an application for public means and necessity.

Now, the Public Service Commission in New York —

Byron R. White:

Now, I get you, was that another party to the proceeding and I thought your client some money, but would it all end up in the same result?

David T. Searls:

It wouldn’t end up.

It wouldn’t end up the same result, no.

Here — here — here’s what I’d say be the difference.

Just as the United Gas Improvement has already here this afternoon and just as the Public Service Commission has argued, they say that if the producers were in here or the sellers of these leases, we would then go into the cost incurred by the sellers for those reasons.

We determine what their cost are and we would allow them only a rate of return on those costs and we don’t think that where you’re passing on the acquisition cost that you would investigate the cost incurred by the sellers in buying the leases, in exploring that the leases.

And so, the difference is and I would say that would be the difference that under the contentions by the petitioners, if the producers were in here and that’s what the Federal Power Commission wants.

They say just the Federal Power Commission makes the same statement that the Solicitor General made in his lucid argument this morning.

And that is the need for the protection of consumer is just as great when the leases are purchased at when gas is acquired.

So they say that when you’re buying, both should be subject to control over the Commission and the Commission says they would have greater control over the matter.

They could go on to question the cost of these produces.

And I would say that the sellers of these leases do not think first that their cost should be investigated in selling these leases, that they should be allowed only what might be determined to be a reasonable term on the cost of these leases whenever explored for natural gas and drilled wells.

Byron R. White:

Do you say that — if you say the Commission could actually set a purchase price to Texas Eastern, how can it possibly do that without investigating these very matters?

David T. Searls:

Well, they could determine this, Mr. Justice White.

They could look to the first, the cost, acquisition cost of Texas Eastern.

Then they could look to what are the other costs of gas the Texas Eastern of comparable quantities.

How does this compare with other acquisitions?

Byron R. White:

Just look in market criteria.

David T. Searls:

Well, they would look to market criteria and that’d be the primary consideration.

They would look to market criteria where the Commission, for instance, has authorized certificates at various prices.

And what would be the cost of Texas Eastern as compared with obtaining equivalent quantities of gas.

That would determine whether or not this is a provident and reasonable investment on the part of Texas Eastern, whether it be consistent with federal convenience and necessity.

They could look to all other reserves.

David T. Searls:

They could determine whether the reserves are properly determined.

They could look to determine what are all the costs Texas Eastern will acquire in making this gas available to its system and they could compare the gathering cost with gathering costs in other areas.

It gives the Commission considerable control over the acquisition cost.

And I say they can go to all of the cost that this Court had in mind when it decided Catco.

And that is any cost that bears upon public convenience and necessity and as the Court said, speaking to Mr. Justice Clark, prices in important consideration, and in a certificate case, you can determine whether those costs are consistent with public convenience and necessity which is rather a broad term.

And any cost that would fall in that category, I say, could be examined in the certificate case.

Now, we say that this Natural Gas Act is not actually here.

Because Congress was very careful not to use its full Commerce Clause power to its limits in giving the Federal Power Commission jurisdiction here.

First, it gave the Federal Power Commission, jurisdiction over only sales in natural gas.

Second, it gave it jurisdiction over only sales in interstate commerce.

And we think that is a restrictive term as the Court has repeatedly recognized.

It didn’t say, we’ll give you jurisdiction over all those activities which may affect interstate commerce or promote interstate commerce or restrain interstate commerce.

Byron R. White:

Well, Mr. Searls, let me get this straight.

You say that without exercising any jurisdiction over the — over Continental or other these producers that the Commission could, if it wanted to, regulate the crisis at which Texas Eastern acquires gas, that’s what you said a while ago.

David T. Searls:

Yes, sir in the certificate case.

Byron R. White:

Now, do you think it could in a transaction like this?

David T. Searls:

Yes, I do, Your Honor, now —

Byron R. White:

Well, remember, — remember you say it’s a sale of a lease.

David T. Searls:

Yes, but here’s a way I’d had —

Byron R. White:

If you say that — if you say that in the transaction like this, the Commission could regulate the price at which Texas Eastern acquired gas.

You’re saying that Texas Eastern — that Texas Eastern’s acquisition of a lease is subject to regulation, if that’s correct?

David T. Searls:

No, its acquisition of the lease is not subject to regulation.

The procuring of the natural gas is not subject to regulation.

But in passing on the question whether it will authorize the facilities, it can look to the cost of the natural gas.

So, you could say indirectly the Commission does pass on it.

Now, just like in Catco where if a producer applies for an application for — to sell gas in passing on that certificate, the Commission might impose a condition that we authorize this certificate of public convenience and necessity, conditioned upon the price being deduced to blank sentence.

William J. Brennan, Jr.:

Well, tell me what’s the difference between you and the Government?

David T. Searls:

Well, the between us and the Government is we say that the Commission cannot take jurisdiction over the producers or the sellers of these leases.

William O. Douglas:

Commission has no word to say if this — the value of this item in any rate base that you have.

David T. Searls:

In the Texas Eastern rate base?

William O. Douglas:

Yes in the —

David T. Searls:

Oh yes sir, I think they have Your Honor.

William O. Douglas:

At this item, the control of this item of the lease, the value of this lease?

David T. Searls:


I think they could impose a condition here that Texas Eastern will be allowed in its rate base on a blank percent of the acquisition cost in the certificate case.

I think they could do that in the certificate case.

In authorizing Texas Eastern to build facilities which are based upon this acquisition, they could provide that this certificate is granted, conditioned upon Texas Eastern accepting this condition that it will be allowed only blank dollars in its rate base.

Byron R. White:

Do you say (Inaudible)

David T. Searls:

Yes, I do.

In passing on an application for a certificate on public convenience and necessity that they can determine all factors that bear on a public convenience and necessity.

Now, if it’s in public interest, if the Commission decides that this is an improvident purchase by Texas Eastern to the extent of blank dollars, then I’ll say, in granting a certificate for public convenience and necessity, they could impose a condition that the amount which would be allowed in Texas Eastern rate base will be so much.

Byron R. White:

Well, what’s the source of their jurisdictional power there?

Is it their power to regulate a sale and gas in interstate commerce for resale?

David T. Searls:

It’s — no it’s their power under this Section 7 (c) of the Natural Gas Act to issue a certificate of public convenience necessity.

In other words, they must decide in the certificate case what is consistent with public convenience and necessity?

That’s a very broad power.

Byron R. White:

Even though it might be part of production and gathering?

David T. Searls:

Yes, I don’t think production and gathering has nothing to do with it.

This is the pipeline phase of it.

The exemption as to production and gathering means that the lease sale falls within the production and gathering exemption, and therefore the transaction is non-jurisdictional.

Now, for instance, Your Honor, you will recall the consolidated Edison case decided by this Court about 1960, in which certain producers in Southwest Texas made direct sales from consolidated Edison Company in New York.

And in determining whether not you would grant the Transcontinental Gas Pipeline Corporation a certificate of public convenience and necessity to transport that gas, this Court held that price was a very important consideration, being received by those producers.

Even though all parties admitted those direct sales were not subject to the jurisdiction of the Federal Power Commission because they were direct sales and not sales for resale.

But in passing on this issue of granting a certificate to the pipeline company to transport the gas, the Court held you could determine what affect the price received by the producers would have in that area in determining whether or not to grant a certificate to the pipeline company.

Arthur J. Goldberg:

Mr. Searls, what is the practical condition (Inaudible)

David T. Searls:

We say —

Arthur J. Goldberg:

Of the consumer.

David T. Searls:


Well, I’d say the practical difference is that you cannot investigate the cost of the owners of these leases, the former owners of these leases in this certificate case.

The Government and Mr. Coleman had just argued, the Public Service Commission of New York has argued, you should go in to the cost of these producers.

David T. Searls:

You should fix the price to be paid Texas Eastern by reason of the cost to these producers and if you take jurisdiction over these sellers of the leases and pass on what cost they’re entitled to receive that is important here.

We say you cannot go into the cost of the sellers of the leases.

William J. Brennan, Jr.:

But what if you — you pay a million dollars in the pipeline’s rate case, the Commission may limit to a hundred thousand.

David T. Searls:

If the Commission decides that $900,000 is not a prudent investment, it’s improvident, they could limit until $100,000.

William J. Brennan, Jr.:

(Voice Overlap) then therefore you can’t take that —

David T. Searls:

And you could not — and you could make that —

William J. Brennan, Jr.:

Or you can return the consumer of this in that sort of thing?

David T. Searls:

I think it —

William J. Brennan, Jr.:

Pipeline companies did make a lot of improvident —

David T. Searls:

Well they —

William J. Brennan, Jr.:

— some actions to this kind.

David T. Searls:

Of course a pipeline company must make a private investment in steel pipe running into millions of dollars or it might be disallowed in a rate base.

But here in this case, Texas Eastern has provided that the granting of this certificate, this transaction is conditioned upon it obtaining a certificate which is acceptable to it.

Arthur J. Goldberg:

Mr. Searls, can the Commission practically make the determination as to the pipeline whether it’s a provident investment without going into the cost of the original.

David T. Searls:

I think it can Mr. Justice Goldberg as I mentioned.

It can go into the question of what does it cost Texas Eastern to obtain another comparable supply of gas at this point.

Now, we have offered substantial evidence as to what other comparable supplies of gas which have been certificated by the Commission or costing Texas Eastern at the Opelousas, Louisiana.

We proved that.

We proved this is a better deal than other purchases which have been certificated or other — and so, we have offered extensive evidence which is summarized in the appendix to our brief to establish that the cost incurred by Texas Eastern here are consistent with public convenience and necessity.

As I say, we’re around Section 1 (b) which is the jurisdictional section of the Natural Gas Act to establish that this is not a sale of natural gas first and second it’s not a sale in interstate commerce, and that Congress carefully did not used its full or power under the Commerce Clause of the Constitution.

Where it Congress has intended to reach those transactions which may affect interstate commerce or promote interstate commerce or restrain interstate commerce, it has been very explicit so Mr. Justice Frankfurter has repeatedly said, in the legislation to show that it is reaching transactions which may affect interstate commerce.

Now, petitioners argue here.

Well, when you acquire these developed leases that has an economic effect upon your rates and upon the consumers, that’s true with any leases which a pipeline company may acquire.

There’s just a difference in degree.

Byron R. White:


David T. Searls:

Yes sir?

Byron R. White:

Do you think that if you win this case, the price of gas, the Texas Eastern is going to be different than if the Commission wins it?

Or are we going to come out with the same result —

David T. Searls:

Mr. Justice White I —

Byron R. White:

— in a different way?

David T. Searls:

I would be concerned —

Byron R. White:

Are we really struggling here over the price of gas, or just over — just some litigative advantage to one side or the other?

David T. Searls:

Of course, I don’t know what the price of gas would be if the Commission should win, but I would be concerned that if they went into sellers cost, they would reduce the price to be received or the consideration to be received by the sellers below the cost which it’s now receiving.

Byron R. White:

So that’s what the mean of — certainly there’s anyone would almost include that the outset that this is really as an argument about the price of gas.

David T. Searls:

Well, it’s — I’m not willing that you go that far, but certainly we are concerned about the consideration about these sellers getting that consideration and Texas Eastern thinks it’s made a good deal.

It thinks this consideration is inline that it’s a better deal than it may have been buying —

Byron R. White:

Well, the only — although the Commission has the power to regulate Texas Eastern’s purchase price, you say one way or another, it probably wouldn’t have the tools available without investigating producer cost to come out with the same answer that it would if it had this power of the producers.

David T. Searls:

It would not come out with the same answer because it would have a different approach to the problem if it were investigating the costs of the producers.

But I say that if — when you follow their order as to character evidence Texas Eastern was required to produce and when you look to summary of the evidence which we did produce as shown in the appendix to this brief, you can see that substantial evidence was offered to support Texas Eastern’s acquisition cost.

Byron R. White:

Well, what if the — what if the Commission was following an area price approach?

David T. Searls:

Well, we don’t think an area price approach should be applied here.

Byron R. White:

You mean, there would be less difference between the two approaches and the —

David T. Searls:

Yes, if they tried to apply area price approach, we do not think they could be applied in this case.

Byron R. White:

Why not?

David T. Searls:

Well, we don’t think in passing on the pipeline company’s acquisition cost, determine whether there was a prudent investment whether it was properly made that you could look just to merely the price, because that would not be necessarily —

Byron R. White:


David T. Searls:

It actually be higher than the price here.

Our position is it would fall about higher price in here.

Because we say here, in this case, if the price was 17.15 and in addition Texas Eastern has to receive $9 million from liquids.

Now, the Solicitor General was in error in saying that if the production payment was reserved in all the gas liquids, that production payment is extinguished after 75% of the gas had been produced, and is estimated that Texas Eastern will obtain $9 million which will reduce its acquisition cost to 16.57 per Mcf.

Hugo L. Black:


David T. Searls:

I think to the character evidence that they require to be produced in this case along that line.

It could not go into the cost of the seller, no sir.

I don’t think so.

Hugo L. Black:

(Inaudible) so if that’s the condition on the basis that it’s improvident, that’s what I haven’t quite understood about your argument.

I would if that’s relevant the connection was their determination of the issue as whether it’s provident, what statutory provision bars them from considering from hearing as one of the elements?

David T. Searls:

Well, Mr. Justice Black I’d have to say that in passing on whether or not the pipeline companies made a prudent investment and provident investment and improvident investment, it’s immaterial how much profit the sellers are making out of transaction.

Hugo L. Black:

Suppose somebody had bought something about $100 and then they’d sold at leasehold in this for million, could you say that that’s not relevant in connection with determining whether it affects this problem.

David T. Searls:

I think you’d have to say will what it would have to pay to get other profits like that.

Hugo L. Black:

That other would be relevant.

David T. Searls:

Yes, I’d have to say that whatever profit the sellers are making out of transaction is not material and determined whether the acquisition cost of Texas Eastern are consistent with public convenience and necessity.

Hugo L. Black:

Just simply because you come back to the word profit.

What I was thinking about was in determining whether a purchase is provident, always I suppose, one of the element would be.

What’s been the — when the sell we’re here for?

Not that it be quit buying it but.

David T. Searls:

What are the leases so far, I think that would be material.

Hugo L. Black:

With other lease so far, how much — in the selling of product for?

But that would have some kind of an element, irrelevant in connection with determining providence (Inaudible)

David T. Searls:

I think it would Mr. Justice Black, that’s the character evidence we offer.

We offer to prove what gas was costing other pipeline companies at this point.

We offer to prove what we — what it caused us to acquire comparable reserves of natural gas in order to establish that this was a prudent and provident investment by Texas Eastern.

Now, we say that whether not being made 50% percent profit or 100% profit, in the sale of the leases is immaterial.

Hugo L. Black:

A man making a purchase in ordinary goodness I would think, would look to that if he could, I don’t see why he wouldn’t.

David T. Searls:

Well, I think —

Hugo L. Black:

Just a quick question of pure relevance.

David T. Searls:


Hugo L. Black:

I’m not talking about whether statute’s forbidden it.

David T. Searls:

Well, I don’t believe that the profit that the sellers are making wouldn’t be material in determining whether I am making a prudent investment.

In other words, one seller might have bought a high cost leasse.

Another seller might have bought a “wildcat” lease and he’s making a large profit, but yet both of them sell their leases at the same price.

Now I say Texas, Eastern can make a provident and prudent investment in buying both of those leases even though one of them makes 5% percent profit and the other one makes 500% profit.

Hugo L. Black:

But if a man went into store, buy something and he found out quite of a (Inaudible) the price they had on it was to give them 2000% profits.

He might suspect that he had bargained around with him a little, he could get them cut price.

That would be irrelevant consideration I would think for him to have in mind.

David T. Searls:

Well, if you went into that store and that party had that product on the shelves about five years, it might make a large profit, or as it might have the same product that he bought six months ago and the price is going up.

Hugo L. Black:

What I’m talking about the relevance not the degree of relevance.

David T. Searls:

Yes sir.

Well, I don’t believe, and it’s my position that the profit being made by the sellers has any materiality in determining whether the pipeline company is making prudent and provident investment.

That you look to see what is going to cause it that is a pipeline company to require comparable reserves on natural gas, that’s one of the material consideration.


David T. Searls:

The reasonableness of the purchase price and not the reasonableness of the sale price.

As I was saying, the petitioners have contended here that there will be an economic affect upon interstate commerce or upon the consumers if a raise in the price which is paid by Texas Eastern for the acquisition of leases, and since it has some economic effect, you should treat it just like you treat a sale of natural gas at the mouth of the interstate pipeline company.

But that’s not what Congress said, Congress said, it’s only at the sale is made in interstate commerce and only if it is a sale of natural gas.

Now, this Court in 1949 has said in the Panhandle Eastern case, an attempt has been made here to distinguish that case.

And as I understand the basis for the argument it’s this, the Court in the Panhandle Eastern case said, well there’s, that instead of the fact that transfer was made of undeveloped leases.

But I want to call to Your Honors attention that in Panhandle Eastern, there was evidence offered as to the exact amount of gas underlying those leases.

Those leases where located in the middle of the Hugon Field, the largest natural gas field in the United States, extending to the Panhandle of Texas to the Panhandle of Oklahoma and into Kansas.

Yet it was possible for the geologists to estimate that there were 700 billion cubic feet underlying those leases and that was the testimony in this case, and this Court referred to the fact.

Now, when the court said undeveloped leases, I assume that the court meant that the leases had not been fully developed and not been connected with an interstate pipeline company.

Likewise, the leases is involved here were not fully developed.

Texas Eastern has drilled at its own cost and expense and not reimbursed to many source, five wells below 10,000 feet since it has acquired these leases and plans to drill two more wells as the record discloses in this case.

So the leases here weren’t fully developed.

But that’s immaterial, the fact is the leases were been proved up in that case and was able to estimate that there was involved there 700 billion cubic feet of natural gas.

Furthermore, in this case in the Panhandle case and quite a point are made — was made by this in the dissenting opinion in Panhandle, that three certificates have been issued to Panhandle Eastern based up on those oil and gas leases which were involved in that case.

But those leases in Panhandle had been included in their rate base and that the interstate rate pair consumer had been paying the expense cost and development cost and another expenses in connection with maintaining those leases.

In the present case, those conditions do not exist, we say that there was more reason to hold that those — that sale jurisdiction and there is to hold that this sale is of jurisdiction.

These leases had not been dedicated.

Byron R. White:


David T. Searls:

Well, of course, in Panhandle, they have an account of production and gathering reception, that the sale of those leases was non-jurisdiction because the Natural Gas Act provides that should not apply to —

Byron R. White:


David T. Searls:

The pass on acquisition cost because I think the Commission can always pass on the acquisition cost of the pipeline company, in a certificate case whether it’s natural gas, pipe, valves or what it might be.

Byron R. White:


David T. Searls:

And because its power to issue to a certificate a public convenience and necessity, I say that the — the Commission in deciding whether to issue a public convenience and necessity can pass on any acquisition cost that are involved in that certificate case.

And when the certificate case is based upon the acquisition of leases, is based upon the acquisition of pipes, is based upon the acquisition of compressors and pumps, the Commission can investigate all of those costs and determine whether or not the pipeline company made of provident and prudent investment in that certificate case.

Because as Mr. Justice Douglas suggests, those cost are going to go into the rate base of that pipeline company.

And I think in that certificate case, they can do it, so therefore that’s why I say that even that Pan Am does not deprive a pipeline company purchasing facilities, whether it’s natural gas leases or whether its pipe depends on whether it’s a prudent on investment.

Byron R. White:


David T. Searls:

It would be passing along the — well I have to —

Byron R. White:


David T. Searls:

Well, I have to say that the Commission has no —

Byron R. White:


David T. Searls:

I’m not — I don’t want to perceive it because the Commission has no authority to pass from the cost of, I cannot pass upon the acquisition of release, but we have to recognize that indirectly, concerning a certificate to construct certain facilities, I think the Commission is passing on the acquisition by indirect trial.

And I think that’s been done although the Commission did not have the jurisdiction to pass on that acquisition leases as know you, when the natural gas act was pending as a bill before the Congress.

There was another bill pending there, which would have given the Commission jurisdiction all of the procurement of natural gas by a pipeline company.

And that bill was not passed for the Congress which was given jurisdiction over the procurement of natural gas.

So the history of the Natural Gas Act as developed in the footnotes of the Panhandle Eastern discloses, and it passed the bill which gave them jurisdiction only over the sale of natural gas any sale in interstate commerce.

We say that this was not a sale of natural gas, not a sale of interstate commerce, and aside from that Section 1 (b) expressly provides that it would not apply to any other sale and all supervise of course it would not apply to the production and gathering of natural gas.

William J. Brennan, Jr.:


David T. Searls:

That’s correct.

William J. Brennan, Jr.:


David T. Searls:

That’s exactly our position and we say that the Commission cannot only do that Mr. Justice Brennan, in the rate case but they can do that in the certificate case.

But they can’t determine what profit the United States still is making for these hundred million dollars of pipe that it sells to the pipeline company, can’t go into those costs or what profit it’s making.

But it can determine in view of other costs which would be incurred in buying other pipes and so forth, whether or not the pipeline company is incurring it probably, they’re making a provident investment or an improvident investment in buying that pipe, one of those compressors this case might be.

Now we — we say that the Commission has no jurisdiction to over these sellers of these leases but they will beat no gap because this right to pass on the acquisition cost will adequately protect the consumers, wasn’t it?


David T. Searls:

On behalf of the seller, well, I represent them, too here, you know?


David T. Searls:

Well, the pipeline company made a deal here and you’d think it made a good deal and it wants to go forward with this deal that which is made back in 1958, and it’s been trying for a number of years to have this mater finally determined.

And it thinks it made a better deal here by buying to get a large reserve of gas if trade in cubic feet located just 22 miles from its main line.

Therefore, it will incur low gathering cost in bringing that gas to its line.

This was the best located larger reserve of natural gas which could have been acquired by Texas Eastern.


David T. Searls:

If it’s not, I say, there have to be a certificate.

They don’t have to build certain facilities that will deprive them to get a certificate.

But if it’s not sever to the scrutiny in a certificate case, if that’s not made on issue.

It’s certain going to be subject to the scrutiny in a rate case and problem with rates of Texas Eastern as whether or not they’re just and reasonable.

Earl Warren:

Very well.

Number 800 — have you not finished your time?