California v. Lo-Vaca Gathering Company Southern California Gas Company/Dissent Harlan

by John Marshall Harlan II

United States Supreme Court

379 U.S. 366

California  v.  Lo-Vaca Gathering Company Southern California Gas Company

 Argued: Nov. 17, 18, 1964. --- Decided: Jan 18, 1965

Mr. Justice HARLAN, dissenting.

Today's decision furnishes a too-ready answer to an intricate problem of administrative regulation. It reflects the sort of decision that is to be expected when the Court is willing to make a bare choice between two unrefined points of view as to regulatory method, without first being informed by the regulating agency concerned as to its evaluation of the competing factors something that is indispensable to achieving a well-balanced solution of a problem such as this. The respective positions of the parties here each possesses the capacity to frustrate the scope of natural gas regulation ordained by the Congress. The Commission's molecular theory, accepted by the Court with undefined reservations, results in expanding the regulatory scheme by sweeping within the Commission's authority gas that has not been supplied or used for interstate resale ('nonjurisdictional' gas). The respondents' contractallocation position, on the other hand, might serve to contract the legitimate scope of regulation by interfering with the ability of the Commission to deal with gas restricted under a supply contract to 'not-for-sale,' but which has been actually used by the pipeline-purchaser for interstate resale ('jurisdictional' gas).

Whether or not there is a middle ground that would more closely fulfill the purposes of the Natural Gas Act than either of the proposals now before us is something that this Court is not competent to assess without expert guidance from the Commission, and we have been given none. Lacking this, I am unwilling to accept at this juncture the position of either party to this litigation. I think the Court should decline to pass upon these cases until the Commission has first illumined the regulatory problems involved through an appropriate exercise of its rule-making powers. ^[1]

The complexity and elusiveness of the matters with which we are asked to deal are best exposed from the vantage point of this Court by considering some of the questions to which allocation contracts in varying contexts give rise.

The Commission has, at least until this case, accepted the proposition that a single supplier to a pipeline may allocate by contract between the amount of gas used for jurisdictional purposes and the amount used nonjurisdictionally. For example, in City of Hastings v. Federal Power Comm., 95 U.S.App.D.C. 158, 221 F.2d 31, a pipeline company sold gas to the city through one pipeline under two contracts, one covering the gas to be resold by the city, and the other gas to be used by the city in its own plants. Although the gas was mingled in the common pipeline, the allocation was approved, and the latter gas was, without more, considered not subject to Commission regulation. A similar situation was presented in United States v. Public Utilities Comm. of California, 345 U.S. 295, 73 S.Ct. 706, 97 L.Ed. 1020, where a power company sold electricity to the Navy for use in its power plants and also for resale to dependent families. The absence of any allocation was fatal in that case, but the Court recognized that a different question would be presented if there had been two separate transactions. 345 U.S., at 316-318, 73 S.Ct., at 718-719.

The result does not change when two or more suppliers are involved, provided that the allocation of nonjurisdictional gas is prorated among all of the suppliers. For example, if a pipeline company consumed 30% of its total volume of gas in its own plants, and sold 10% of the total volume in the State of production, each supplier could allocate 40% of its gas supply to nonjurisdictional use. Such was essentially the case in North Dakota v. Federal Power Comm., 8 Cir., 247 F.2d 173, where the allocation was upheld with Commission approval. If these cases are accepted by the Court, two corollaries follow: since gas is a fungible commodity, the mingling of gas does not alone render ineffective for purposes of Commission jurisdiction the allocation contracts, although the molecular identification of the nonjurisdictional gas is destroyed; and the fact that the prices paid for nonjurisdictional gas ^[2] may affect the rate base for the jurisdictional gas, is also not a critical factor at this stage. ^[3]

The issue now before the Court arises only when some suppliers are allocating part or all of their gas to nonjurisdictional use, but others are not. This issue could arise commonly in two contexts: if existing suppliers were allocating pro rata, and new suppliers were added which did not allocate, the addition of the new suppliers might be thought not to destroy the validity of the existing allocation contracts since the new suppliers might be satisfying an increase in the demand for jurisdictional gas. ^[4] The converse situation is presented in this case, where the new suppliers are attempting to allocate, and existing suppliers are not. One possible test in such cases might be to determine the source of the demand for the gas supplied to El Paso by Houston and Lo-Vaca. To modify the argument used by respondents, if a separate pipeline were constructed from the Coquat station (at which the gas enters the El Paso system) to the point along El Paso's system where the outflow will increase, would the sale be jurisdictional or not? If in fact El Paso has formerly been using the same amount of gas in its compressors that it intends to use in the future, then the purpose of the Lo-Vaca allocation will be merely to release for interstate sale-to satisfy the interstate demand-gas from other suppliers which formerly was used for nonjurisdictional purposes.

The record before us does not answer the question put. There is some indication that El Paso intends to construct new compressor plants, and may have to use more nonjurisdictional gas at its existing plants to handle the added gas received from Lo-Vaca under the unrestricted contract. Such a use would satisfy a nonjurisdictional demand. However, there is also evidence that in fact El Paso's consumption for nonjurisdictional purposes will remain constant, and that Lo-Vaca's supplies will be used to satisfy an increased demand from interstate consumers. The fact that Lo-Vaca gas purportedly replaces the compressor gas supplies formerly furnished by other suppliers, thus releasing that gas for interstate resale, should not defeat Commission jurisdiction under this analysis.

Another possible standard which suggests itself would be to determine the probable percentages of gas from each supplier which will be used for nonjurisdictional purposes, and only permit each supplier to allocate by contract to nonjurisdictional use his pro rata share of the total estimated nonjurisdictional gas. For example, if we suppose a pipeline running from the Gulf coast of Texas through New Mexico into California, as does the El Paso system, then each supplier should determine what percentage of the total volume of gas flowing west from the point of its input will be ultimately used for a nonjurisdictional purpose. It would then be mathematically probable that his gas would be used for nonjurisdictional purposes in the same percentage, and he could allocate that amount by contract, subject to change should new supplies be added to the system. ^[5]

I recognize, of course, that there may be pitfalls in both of these possible methods, and that there may be other formulae that are preferable to either. I have ventured them only as support for my belief that the Commission's molecular theory, which in the name of protecting the Commission's jurisdiction in reality involves a judicial expansion of its authority, should not be accepted until the Commission, after due exploration in a rule-making proceeding, is able to satisfy this Court that no other feasible method-more particularly no modification of the respondents' contract-allocation theory-exists that would better fit the boundaries of the Commission's jurisdiction as fixed by Congress.

It is undoubtedly true that normally an administrative agency may decide for itself whether to proceed in a given field of its regulatory functions through the promulgation of general rules ^[6] or by the process of case-by-case adjudication. ^[7] This Commission from the outset has usually proceeded, with the Court's approval, ^[8] in developing its procedures by the adjudicatory process. Nevertheless, there are good reasons why the rule-making power appears to be the more promising avenue of approach in this instance. First, the adjudicatory process has not yielded any satisfactory basic principle to serve as a point of departure for judicial assessment of cases of this kind, or indeed for a consistent administrative approach; ^[9] even in this litigation the Commission's position is far from clear as to what room, if any, there may be for restrictive allocation contracts. Second, the gas industry is entitled to know the fundamental ground rules by which it should conduct itself in this regard with some degree of predictability, as witness the situation of these respondents whose good faith in the transactions giving rise to this litigation has not been impugned in any way. Third, that unlike the line of cases in which agency jurisdiction is conceded, ^[10] here the Commission should not be permitted to adopt a theory which expands its jurisdiction beyond statutory limits ^[11] without full hearings and the formulation of a rule interpreting its jurisdiction in this area which conforms to the jurisdictioinal limits of § 1(b) of the Natural Gas Act. Fourth, because these matters are fraught with technical 'perplexities, both geological and economic,' Railroad Comm. of Texas v. Rowan & Nichols Oil Co., 311 U.S. 570, 574, 61 S.Ct. 343, 345, 85 L.Ed. 358, the informed expertise of the Commission is a necessary adjunct to satisfactory judicial resolution of particular cases. 'Had the Commission, acting upon its experience and peculiar competence, promulgated a general rule of which its order here was a particular application, the problem for our consideration would be very different.' Securities & Exchange Comm. v. Chenery Corp., 318 U.S. 80, 92, 63 S.Ct. 454, 461, 87 L.Ed. 626. The courts have a right to the informed judgment of the Commission before acting further in this presently opaque area.

I would vacate the judgment of the Court of Appeals and remand the case to the Commission for further proceedings after the promulgation of interpretive rules to cover this, and like cases. ^[12]

Notes

1. See Elman, Comment, Rulemaking Procedures in the FTC's Enforcement of the Merger Law, 78 Harv.L.Rev. 385 (1964).
2. See Court's opinion, ante, p. 370. In fact, the price charged by Lo-Vaca for its nonjurisdictional gas is exactly the same as the price established for its concededly jurisdictional sale, and the Houston sale is for a price lower than either of the Lo-Vaca sales.
3. Both Lo-Vaca and El Paso are constructing pipelines to connect with the El Paso system at its Coquat station, and both must obtain Commission certification under § 7 of the Natural Gas Act in order to construct such pipelines. The Commission could take many of the factors presented in this case into account when ruling on the applications, see Federal Power Comm. v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 81 S.Ct. 435, 5 L.Ed.2d 377. The Commission could also take into account the reasonableness of the prices charged for nonjurisdictional gas should El Paso apply for a rate increase on its jurisdictional sales.
4. See Amerada Petroleum Corp. v. Federal Power Comm., 334 F.2d 404 (C.A.8th Cir. 1964), cert. pending, No. 585, this Term, where the suppliers in the North Dakota case, supra, had been allocating, and the pipeline then added new suppliers which did not allocate. The Court of Appeals upheld the allocation contracts.
5. Corrections would have to be made, of course, where gas is withdrawn for intrastate consumption from a trunk line before the gas is mingled with the interstate system. Such gas would all be attributed to the suppliers feeding the trunk line, and this gas would not be used in computing the total percentages. Cf. Peoples Natural Gas Co. v. Public Service Comm. of Pennsylvania, 270 U.S. 550, 46 S.Ct. 371, 70 L.Ed. 726. This method of allocation would only operate with natural gas, which flows in one direction only; different considerations would be applicable were we dealing with electric power, which can flow in both directions along a system.
6. See United States v. Storer Broadcasting Co., 351 U.S. 192, 76 S.Ct. 763, 100 L.Ed. 1081. See generally 1 Davis, Administrative Law Treatise, § 5.01 (1958).
7. See Securities & Exchange Comm. v. Chenery Corp., 332 U.S. 194, 67 S.Ct. 1575, 1760, 91 L.Ed. 1995.
8. See, e.g., United States v. Public Utilities Comm. of California, supra, 345 U.S., at 318, n. 28, 73 S.Ct., at 719.
9. See Lo-Vaca Gathering Co., 26 F.P.C. 606, 615:
10. As for example, in rate-making proceedings.
11. Natural Gas Act, § 1(b), quoted in the Court's opinion, ante, p. 368 n. 1.
12. See Addison v. Holly Hill Fruit Prods., Inc., 322 U.S. 607, 619, 64 S.Ct. 1215, 1222, 88 L.Ed. 1488.