MR. JUSTICE WHITE delivered the opinion of the Court.
This litigation involves the validity of Order No. 428 of the Federal Power Commission, 45 F. P. C. 454 (1971), which provides a blanket certificate procedure for small producers of natural gas, and relieves them of almost all filing requirements. The rates of small producers would no longer be directly regulated but would be subjected to indirect regulation through the review of purchased gas costs of the pipelines and large producers to whom these
On July 23, 1970, the Federal Power Commission issued a notice of proposed rulemaking "propos[ing] prospectively to exempt from regulation under the Natural Gas Act all existing and all future jurisdictional sales made by small producers . . . ." 35 Fed. Reg. 12,220 (1970). Following the filing of comments and informal conferences, the Commission, noting that one of its important responsibilities was "to assure maintenance of an adequate gas supply for the interstate market," issued Order No. 428, aimed at encouraging "small producers
The order nevertheless asserted that the "action taken here in our view does not constitute deregulation of sales by small producers," id., at 455, and that the Commission would continue to regulate such sales in the course of regulating the rates of pipelines and large producers to whom the small producers sell their gas. Pipelines purchasing from small producers at prices in excess of existing ceilings were to be permitted to file "tracking increases" in their rates, but those rates would be subject to refund "with respect to new small producer sales, but only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales in the same producing area." Id., at 457. The issue would be resolved either in pipeline rate cases, a proceeding limited to the tracking increase, or in
Large producers buying from small producers would be permitted tracking increases to the extent authorized by their contracts and without refund obligation "as long as the price differential is consistent with prevailing price differentials in the area and as long as the small producer prices for new gas are not unreasonably high, considering appropriate comparisons with highest contract prices by large producers or the prevailing market price for intrastate sales in the same producing area." Id., at 456. To the extent that they reflected small-producer prices in excess of that standard, large-producer tracking increases would be subject to refund.
The Commission finally asserted that "[w]e intend to review the prices established in new contracts or contract amendments relating to sales by small producers to assure the reasonableness of the rates charged by such producers pursuant to the action we are taking herein. In the event we determine that this approach is inimical to the interests of consumers, we shall take further action to protect the consumers." Id., at 459. The Commission apparently remained free to institute separate proceedings under § 5 (a) of the Act, 15 U. S. C. § 717d (a), to reduce the producer's rates prospectively.
The Commission also made clear that small producers remain subject to the requirements of § 7 (b) of the Act, 15 U. S. C. § 717f (b), with respect to the abandonment of jurisdictional sales, including those sales dealt with in the order. The order also limited the use of indefinite price escalation clauses in small-producer contracts and
The Court of Appeals set aside the Commission order, holding that under the statute all natural gas sold in interstate commerce must carry just and reasonable rates and that even if indirect regulation was permissible under the statute, Order No. 428 was infirm because nothing in it satisfied the Commission's "duty to insure that all rates are `just and reasonable.' " 154 U. S. App. D. C., at 173, 474 F. 2d, at 421. Instead, the order was thought merely to call for rates that were not unreasonably high as compared with the highest contract prices for large-producer sales or the prevailing market price in the intrastate market—"factors which [the Commission] does not regulate or which derive solely from market forces." Ibid. Nor could the court accept the possible argument that market forces themselves would produce just and reasonable rates, particularly when it understood the Commission itself to take the position that the just-and-reasonable standard was in no event mandatory. The Court of Appeals accordingly set aside the Commission's order.
The Commission does not contend in this Court that the Act permits it to exempt small-producer rates from regulation or to regulate those rates by any criterion less demanding than the just-and-reasonable standard mandated by §§ 4 and 5 of the Act, 15 U. S. C. §§ 717c and 717d. Its major propositions are, first, that Order No. 428, when properly understood, provides for just and
We face first the issue as to the validity of indirect regulation of small-producer rates: on the assumption that Order No. 428 allows pipelines and large producers to reflect in their rates only just and reasonable charges for gas purchased from small producers, is the order valid? We hold that it is, for we see nothing in the Act which requires the Commission to fix the rates chargeable by small producers by orders directly addressed to them or which proscribes the kind of indirect regulation undertaken here.
The Act directs that all producer rates be just and reasonable but it does not specify the means by which that regulatory prescription is to be attained. That every rate of every natural gas company must be just and and reasonable does not require that the cost of each company be ascertained and its rates fixed with respect to its own costs. Although for a time following Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), the Commission proceeded to regulate rates company by company, there was soon a shift to the technique of setting area rates based on composite cost considerations. We sustained this mode of rate regulation.
In Wisconsin v. FPC, 373 U.S. 294, 309 (1963), the Court affirmed the Commission's decision to abandon the individual cost-of-service method of fixing rates and to substitute area ratemaking. The Court said:
This was wholly consistent with the Court's prior views, see FPC v. Natural Gas Pipeline Co., 315 U.S. 575 (1942); FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944); Colorado Interstate Gas Co. v. FPC, 324 U.S. 581 (1945), and reaffirmed the principle which had been clearly stated in the Hope case: "Under the statutory standard of `just and reasonable' it is the result reached not the method employed which is controlling." 320 U. S., at 602.
The principles of these prior cases were recognized and applied in the Permian Basin Area Rate Cases, 390 U.S. 747 (1968), where we sustained a two-tier system of rates for natural gas producers. In the course of doing so, we recognized that encouraging the exploration for and development of new sources of natural gas was one of the aims of the Act and one of the functions of the Commission. The performance of this role obviously involved the rate structure and implied a broad discretion for the Commission. The Court summarized the principles controlling the judicial review of Commission orders in terms very pertinent here:
It followed that Commission action taken in the pursuit of a legitimate statutory goal enjoyed the presumption of validity, id., at 767, and that he who would upset the rate order under the Act carries " `the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.' " Ibid.
Indirect regulation through the mechanism of controlling large-producer costs will not merely recreate the situation which the Court in the Phillips case found to be inconsistent with the Natural Gas Act. In the pre-Phillips era, although asserting the right to pass on the prudentiality of various items of the pipelines' costs, the Commission did not purport to regulate the rates of producers with the aim of keeping them within just and reasonable limits, as the Commission now asserts it is doing under Order No. 428.
It is argued that permitting the small producers initially to charge what the market will bear and relying on later regulation of pipeline rates to protect the consumer is contrary to Atlantic Refining Co. v. Public Service Comm'n, 360 U.S. 378 (1959) (CATCO). But pipelines and large producers must file with the Commission their new contracts with the small producers, and their rates will be subject to suspension and refund within the limits set out in Order No. 428. As the Court noted in FPC v. Sunray DX Oil Co., 391 U.S. 9, 26 (1968), the basic assumption which must have underlain the Court's CATCO decision was "that the purchasing pipeline,
This leads to the contention of the pipelines and the large producers that the scheme of indirect regulation envisioned by Order No. 428 unfairly subjects them to the risk of later determination that their gas costs are unjust and unreasonable and to the obligation to make refunds which they cannot in turn recover from the small producers whose rates have been found too high.
Here, requiring pipelines and the large producers to assume the risk in bargaining for reasonable prices from small producers is within the Commission's discretion in working out the balance of the interests necessarily involved. The consumer would be protected from current excessive rates, but at the expense of the pipeline, rather than the producer, who is engaged in necessary exploratory activity, thus serving the public interest in getting greater gas production but at just and reasonable rates. Under such circumstances, it is surely not an abuse of the discretion the Commission retains under § 4 (e) of the Act, see Permian Basin Area Rate Cases, supra, at 826-827, to refrain from imposing a refund obligation on the small producers.
Any broadside assertion that indirect regulation will be confiscatory is premature. The consequences of indirect regulation can only be viewed in the entirety of the rate of return allowed on investment, and this effect will be unknown until the Commission has applied its scheme in individual cases over a period of time. Moreover, the "regulation of producer prices is avowedly still experimental," id., at 772, and Order No. 428 asserts the
If, in the course of the necessary bargaining with small producers, the large producers and the pipelines are given no guidance whatsoever as to what the standards of the Commission may be, the risk of incurring unrefundable expenses that may later be disallowed is considerably enhanced. The scope of this possible difficulty is measured by the standards, or lack of them, by which the Commission will review the purchased gas costs of the large producers and the pipelines. As Order No. 428 reveals, the Commission is surely aware of the problem, and we would expect additional attention to be given this question in the course of the remand proceedings which, as explained in Part III, we think are necessary here.
We turn now to whether Order No. 428 is invalid for failure to comply with the Act's requirement that the sale price for gas sold in interstate commerce be just and reasonable. The Court of Appeals rejected what it apparently understood was "the Commission's basic contention all along . . . that the `just and reasonable' standard was not mandatory and that the FPC can simply choose not to regulate rates." 154 U. S. App. D. C., at 175, 474 F. 2d, at 422. Whatever the position of the Commission heretofore has been, it wisely does not challenge that aspect of the Court of Appeals judgment. Sections 4 and 5 of the Act require that all gas rates be just and reasonable; and the Court held in Phillips that this very prescription applies to the rates of all gas producers. The Commission may have great discretion as to how to insure just and reasonable rates, but it is plain enough to us that the Act does not empower it to exempt small-producer rates from compliance with that standard.
Section 16, 15 U. S. C. § 717o, upon which the Commission relies, is not to the contrary. It authorizes the Commission to perform any and all acts and to issue any and all rules and regulations "as it may find necessary or appropriate to carry out the provisions of this Act"; and "[f]or the purposes of its rules and regulations, the Commission may classify persons and matters within its jurisdiction and prescribe different requirements for different classes of persons or matters." But § 16 obviously does not vest authority in the Commission to set unjust and unreasonable rates, even for small producers. It does not authorize the Commission to set at naught an explicit provision of the Act. No producer is exempt from §§ 4 and 5. Neither the Permian Basin Area Rate Cases nor FPC v. Louisiana Power & Light Co., 406 U.S. 621 (1972),
The Court of Appeals also read Order No. 428 as failing to provide a mechanism for insuring that small-producer rates will be just and reasonable. In its view, the order provided a pure market standard for the approval of the purchased gas costs of large producers and pipelines, a standard which fell short of the requirements of the Act. Accordingly, it set aside the order.
The Commission does not assert here that it is free under the Act to equate just and reasonable rates with the prices for gas prevailing in the market place. Its major remaining contention is that the Court of Appeals misread Order No. 428 and that the order, properly understood, contemplates a scheme of indirect regulation that would assure just and reasonable small-producer rates for natural gas and that would judge small-producer rates not only by market factors but by all the relevant considerations necessary to arrive at the considered judgment contemplated by the Act. For present purposes, then, the Commission accepts the Court of Appeals' construction of the Act; but insists that the order is consistent with the statute as so construed.
In this posture of the case, we think it clear that Order No. 428 cannot stand in its present form and that the cases should be remanded for further proceedings before the Commission. We have studied the order with care, and we cannot accept the construction of it that the Commission now presses upon us. At the very least, the order is so ambiguous that it falls short of that standard
In the first place, Order No. 428 does not expressly mention the just-and-reasonable standard. It comes no closer than to subject pipeline rates to reduction and refund "only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales . . . ." 45 F. P. C., at 457. (Emphasis added.) The order took a very similar approach to the tracking increases by large producers. Moreover, under the order, contractually authorized increases in rates for flowing gas under existing contracts could be automatically passed through by the pipelines and would not be subject to examination under the standard proposed by the order with respect to new sales by small producers. There was no finding that these contemplated increased rates for flowing gas would be just and reasonable. The Commission merely asserts in its brief here that it was familiar with the existing contracts and must have considered the rates reserved to be acceptable under the Act.
It is true that pipeline and large-producer costs for new small-producer gas were not to be "unreasonable" but the implication appears to be that reasonableness would be judged by the standard of the marketplace. It
Had the order unambiguously provided what the Commission now asserts it was intended to provide,
For the purposes of the proceedings that may occur on remand, we should also stress that in our view the prevailing price in the marketplace cannot be the final measure of "just and reasonable" rates mandated by the Act. It is abundantly clear from the history of the Act and from the events that prompted its adoption that Congress considered that the natural gas industry was heavily concentrated and that monopolistic forces were
The Court is not unresponsive to the special needs of small producers who play a critical role in exploratory efforts in the natural gas industry and ameliorating the supply shortage. The requirements of the Act, however, do not distinguish between small and large producers with respect to just and reasonable rates. Even if the effect of increased small-producer prices would make a small dent in the consumer's pocket, when compared with the rates charged by the large producers, the Act makes unlawful all rates which are not just and reasonable, and does not say a little unlawfulness is permitted. Moreover, there is no finding in the Commission's order as to the actual impact the projected market price increases would have on consumer expenditures for gas, and the Commission is previously on record in its Permian decision, as stating: "[T]he impact of small producer prices on consumers is by no means de minimis on an area basis, and is of great impact in some situations." 34 F. P. C. 159, 235 (1965).
In concluding that the Commission lacks the authority to place exclusive reliance on market prices, we bow to our perception of legislative intent. It may be, as some economists have persuasively argued,
Attempts have been made in the past to exempt producers from the coverage of the Act, but these attempts have been unsuccessful. The Court realized as much in the Phillips case. 347 U. S., at 685, and n. 14. In 1950, Congress had passed a bill, H. R. 1758, 81st Cong., 2d Sess., to exempt gas producers from the Act, but President Truman vetoed the bill stating that "there is a clear possibility that competition will not be effective, at least in some cases, in holding prices to reasonable levels. Accordingly, to remove the authority to regulate, as this bill would do, does not seem to me to be wise public
We do, however, make clear that under the present Act the Commission is free to engage in indirect regulation of small producers by reviewing pipeline costs of purchased gas, providing that it insures that the rates paid by pipelines, and ultimately borne by the consumer, are just and reasonable. It may be, as some of the respondents suggest, that ensuring just and reasonable rates by means of indirect regulation will not be administratively feasible, but this is a matter for the Commission to consider.
We agree with the Court of Appeals that the order of the Commission must be set aside; but for reasons previously stated, we vacate the judgment of the Court of Appeals and remand the cases to that court with instructions to remand the cases to the Commission for further proceedings consistent with this opinion.
Vacated and remanded.
MR. JUSTICE STEWART took no part in the consideration or decision of these cases.