FERC V. PENNZOIL PRODUCING CO., 439 U. S. 508 (1979)

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U.S. Supreme Court

FERC v. Pennzoil Producing Co., 439 U.S. 508 (1979)

Federal Energy Regulatory Commission v. Pennzoil Producing Co.

No. 77-648

Argued November 28, 1978

Decided January 16, 1979

439 U.S. 508


Respondent pipeline company purchases for resale in the interstate market natural gas produced from a Louisiana field by respondent oil companies (Producers), whose prices are subject to regulation by petitioner Commission. Under their lease agreements with the field's owner, the Producers pay royalties pegged to the "market value" or "market price" of the gas. Following a dispute over the lessor's contention that those terms related to the unregulated price of natural gas in the intrastate market, rather than to the lower interstate Commission-regulated rates, the parties ultimately agreed to increased royalty payments based on intrastate market values of natural gas. Alternatively, the Producers would abandon delivery to the pipeline company of the royalty portion of the gas and deliver it instead as payment in kind to the lessor. The settlement agreement was to be binding only if the rate increase or the alternative abandonment was approved by the Commission, which the Producers then petitioned for special relief. The Commission denied price relief, holding that it would be contrary to its mandate to permit royalty costs to be passed on to the Producers' customers if the royalties were calculated on any basis other than the just and reasonable rate for the gas involved, and, relying in part on FPC v. Texaco Inc., 417 U. S. 380, the Commission concluded that it was "not free" to allow royalty costs based on the value of the gas in an unregulated market. The Commission also denied the alternative abandonment request. The Court of Appeals reversed and remanded, concluding that the Commission had "authority to consider the reasonableness of any costs incurred," which "necessarily requires consideration of market price"; had failed to explain why royalty costs in an unregulated market differ from other production costs; and should determine the merits of the Producers' requests. The court, following its opinion in Southland Royalty Co. v. FPC, 543 F.2d 1134, disagreed with the Commission on the abandonment issue.


1. The Natural Gas Act does not deny the Commission authority to give special rate relief to individual producers where escalating royalty costs are a function of, or are otherwise based upon, an unregulated chanrobles.com-red

Page 439 U. S. 509

market price for the product whose sale in the interstate market is regulated by the Commission, and the Commission misconstrued Texaco in holding to the contrary. Pp. 439 U. S. 514-517.

2. The Court of Appeals encroached upon the Commission's ratemaking authority when it strongly suggested that the Commission is required to grant relief to the Producers as long as the increase in royalty costs is not imprudent and the relief, when granted, will merely sustain, rather than increase, the Producers' profits, since the Commission is not obliged automatically to relieve the bind on producers facing increased royalty costs based on unregulated prices. "All that is protected against, in a constitutional sense, is that the rates fixed by the Commission be higher than a confiscatory level." FPC v. Texaco Inc., supra at 417 U. S. 392. Pp. 439 U. S. 517-519.

3. In view of the record, a remand to the Commission is proper so that, in the first instance, it may clearly enunciate whether and to what extent individual relief from area rates will be granted due to the increased royalty costs, and, if relief is to be denied, that it may adequately explain its judgment. Pp. 439 U. S. 519-520.

4. On the abandonment issue, the Court of Appeals erred to the extent that it relied upon its judgment that was later reversed in California v. Southland Royalty Co., 436 U. S. 519. Moreover, the questions of individual rate relief and abandonment are not unrelated, and may be considered by the Commission on remand. Pp. 439 U. S. 520-521.

553 F.2d 485, vacated and remanded.

WHITE, J., delivered the opinion of the Court, in which all other Members joined except STEWART and POWELL, JJ., who took no part in the consideration or decision of the case. chanrobles.com-red

Page 439 U. S. 510


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