Public Service Commission of the State of New York v. Federal Energy Regulatory Commission, Pennzoil Producing Co., Intervenor

BAZELON, Bеfore LEVENTHAL and ROBB, Judges. Circuit Opinion Court by for the filed Circuit Judge LEVENTHAL.

Dissenting opinion Judge filed Circuit ROBB.

LEVENTHAL, Judge: Circuit In this review an order of the case we (FPC). The or- Federal Power Commission der is one for a approves a certificate gas natural under the cer- producer indicated, program. tificate As we vacate the order for further and remand considera- successor, tion by the FPC’s the Federal (FERC).1 Energy Regulatory Commission AN OVERVIEW must, Since our discussion of issues necessity, extended, we technical provide a preliminary opin- sketch of this ion’s highlights. developed reg- FPC has a mimber of Solomon, Richard A. Washington, C.,D. ulatory programs alleviating aimed at Schiff, Counsel, with whom Peter H. Gen. gas shortage. Starting’in natural Public Service Commission State of N. here, FPC developed the involved

Y., Y., brief, Albany, N. on the was program. Option- certification petitioner. producers al gave favorable Garten, Atty., Allen M. Federal Energy procedures standards and rate as an incen- Com., Washington, C., Regulatory D. exploration with tive to increase their and devel- Counsel, Journey, whom Drexel D. opment Gen. sources. gas of new Perdue, Deputy Counsel, W. upheld procedures. Robert Gen. re- program’s Tuttle, Sol., standard, and Allan Abbot Federal Ener- manded the which program’s Com., C., gy Regulatory Washington, D. had used a “test basis year” instead of brief, respondent. requisite were on the data.2 actual cost Energy Regulatory cy points 1. The Federal Commission under review. At where Act the 1977 Department Energy has affected our created discussion we have its § noted impact. Organization Act of 42 U.S.C.A. (West 1977). provided appeals The act 2. Moss v. prior taken to the stаtute were to continue as (1974), part, cert. denied though 705(c), it had not been enacted. Id. § L.Ed.2d rev'd 7295(c) (West 1977). 42 42 U.S.C.A. § part, appeal prior events involved in this occurred S., (1976); Inc. v. Union of U. Consumers passage of the act. For convenience we refer agen- the Federal Power as the However, acreage. insofar explanation, adequate Without (at low- anyway would be leased acreage stan- optional certification adopted an bids), it is hard to see how inclusion rates that er approve it will dard under gas supply. such would increase cost of the total producers return Again, Commission has advanced incompati- find standard projects. We justification. The Commission cannot any its asserted aim respects ble several justifica- development. just shrug requirement off the increasing exploration and agency man- is another federal the standard because problem The chief indepen- has an ages leasing. main rate- It FPC’s offshore with the not coordinated national con- ratemaking. dent consider responsibility its making procedure, takes care of already statutory cerns duties. ratemaking National which relate reim- projects; in the reasoned engage The FPC by their inclusion projects bursed for such necessary to formulate and consideration Optional average cost base. in the national remand, its rate standards.3 On it justify producers a reimburse would engage in opportunity will the such have time, high same cost directly, for the second consideration. with na- any without coordination projects, plain is thus a There ratemaking. tional I. THE OPTIONAL CERTIFICATION consum- counting” billing risk “double — PROCEEDINGS may high same costs. It twice for the ers authority permit that FPC the Development A. Certification Optional a consumers as such a double burden on Standards discretion, it but reasonable exercise of begin there is deliber- We with the must at a minimum show a brief review of discretion, origin by identifying changes and in the ate exercise of certifica- approach. for its tion its reasons problem, program.

This has not done. 7(e) Act of Under § the Natural 1938,15 the costs now issues The allowance of some 717f FPC U.S.C. § “total cost” standard public included in the certificates of convenience and neces- so, This projects. gas. To do simply sity bail out cost for new sales of natural an incentive charged the rates rather than must approve means windfall already Since the existing projects particu- those sales.4 task of as producer’s sales was too part scrutiny that larized of individual sunk. We note spent burdensome, adopted this were in the 1960’s total costs in case 1960’s, Supreme practice, approved by certifica- long before this Court, issuing If is a without program was envisioned. there 7 certificates close to scrutiny it has such rates justification existing projects, particularized as to contemporary authorized under A rates not been advanced the Commission. Act, 717c provision and 5 of 15 U.S.C. objection §§ §§ different arises as FPC would (1976).5 Generally, the outlays to on 717d projects whereby for new bid refund subsequently require in total offshore are included costs. leases However, re- way.6 may an incentive to bid rates certified in this give producers This Prop Callery problems Improvement in- v. argues 5. 3. that same United Gas Co. Petitioner erties, Inc., pro- special relief 88 S.Ct. volved are U.S. here involved merit, (1965). ceedings. Federation argument L.Ed.2d While the has some See Consumer express opinion about the v. we need not here America validity proceedings. n. 515 F.2d cert. standards 356 n. such 96 S.Ct. 46 L.Ed.2d Refining Public Service 4. Atlantic Co. v. Co., Comm’n, Sunray 6. DX Oil L.Ed.2d 388 did not state what stan- ordered, No. 455 Order occasionally funds were determining the rea- would be used in dard uncertainty.7 in some were left ducers rates, proposed 4 of under § sonableness uncertainty, producer To diminish be considered. of factors would what kind exploration “impeded domestic which had “certification only promised The FPC Order FPC issued development,” of Sections the standards shall conform to That order established in 1972.8 However, Act.”10 and 7 of the Natural Gas Under for certification. optional procedure hold- in a crucial declared the Commission an individ- the FPC conducts procedure, circumstances,” “special ing that absent both which determines proceeding ualized strict stan- very art which invoked term of issue and 7 certificate should whether a § “accept conclusive the dards,11 it would reasona- rate is proposed whether also findings embodied in our area rate If all determinations ble under § also declared The Commission decisions.”12 “re- favorable, rate is a firm proposed rates way proposed negative in a floor,” can be ordered. “notwithstanding fund and no refunds would be considered ex- other desirable bene- be in [proposed] Producеrs also receive contract established in a ceiling of an area a certificate.9 cess fits from such 455-A, quoted in Moss 10. Order 48 FPC 7. Hunt Oil Co. v. 1970). supra, U.S.App.D.C. at requirement certified rates at 467. Certificating Optional New Procedure for is embod- sections meet the standards of both Gas, R- Docket No. Producer Sales of Natural 2.75(1) (1977). ied in 18 § C.F.R. 223 Order No. regulations 48 F.P.C. by the order are The established ratemaking completed area The first FPC’s codified 18 C.F.R. 2.75 § proceeding Supreme decision and the Court’s Cases, it, affirming Permian Basin Area Rate program are discussed 9. The full details of the 390 U.S. L.Ed.2d 312 in Moss (1968), producers “special allowed relief’ if the (1974), part, cert. denied in confiscatory. rates threatened to be The set in 95 S.Ct. 45 L.Ed.2d 680 rev'd however, “emphasized, pro- Commission that a part, 424 U.S. 96 S.Ct. inability ducer’s to recover either its unsuccess- program’s As the features were exploration return on costs or the full summarized, ful 96 S.Ct. at U.S. at 12% not, more, production would (footnotes omitted): its without war- rant relief.” at 1362. by optional procedure introduced Or- applying “special In this strict relief’ standard designed der No. 455 was to “lessen rate (out which certificate context § uncertainty prevailed which has since the optional developed), held Id., it was early procedure certification at 219. The 1960’s.” showing “spe- First, to be a permits that there would have has several features. it Phillips approval for a rate. cial circumstances” ducers to tender for contracts FPC for the may at rates that Petroleum sale of new natural Co. 1969). by Phillips important influence on exceed the maximum authorized was an Second, applicable rate will order. No. at 222. Order see single proceeding determine in a whether the “public necessity” under convenience and point, this 48 FPC on 455 states Order No. Act, 7(c) 717f(c), § 15 U.S.C. war- § 229: authorizing rants the issuance of a certificate We believe that each contract filed under by the sale and whether the called for rates procedure be considered the alternative “just under the contract are and reasonable” provisions on the merits the terms and Third, 717c(a). perma- 4(a), § 15 U.S.C. § nent certificate issued certainly must within each contract. There by the Commission by evidentiary preferred be some basis by subject accepted producer is not seller-applicant upon judge which we can change proceedings 4 of in later under § just whether the contract rate is and reasona- Act, 717c, may 15 U.S.C. and the rates § will, showing special ble. We absent a obliga- be collected without risk of refund circumstance, accept the cost as conclusive F.P.C., at 226. See CFR tions. decisions, findings in embodied our area rate Fourth, 2.75(d) (1975). au- Order No. 455 § supplemented be time to as such permanent certifi- inclusion in the thorizes by appropriate time order. “pre- the abandonment assurance —or cate of granted point. reemphasized this Commission later question abandonment” —called 455-A, Order No. 48 FPC at 481. 2.75(e) (1975). case. 18 CFR mine whether Commission had recon- of this Commis- prior opinion order approach with sion.” supply ciled its new prior reversed statements because upheld note we In supra, Moss v. for failure to consider actu- the certification procedures. optional al cost data. no for reasona- noted since standards “we must prescribed, yet bleness had been argument After Union oral Consumers by will abide the Commission assume that issued, opinion before our was but prom- of the statute and the standards op- changed to a new set of standards for thereafter, we Shortly ises it has made.”14 It certification. declared that indi- tional optional approval reviewed the FPC’s data henceforth be vidual actual cost The FPC and its first standards. certificate procedures.16 It was “relevant” in high- approve made clear that intended the standard for apparently intended that it had er certification than by rates henceforth would wheth- reasonableness ratemaking. It certified by an areawide full reim- proposed provided er the Mcf, per at a time when 45 cents projects’ on a full return plus bursement cents was 26 corresponding area rate time, At that actual costs.17 total Mcf, approach project” on a relying “supply gave subsequent opinions, the Commission rea- as what vague standards jts new total- justification almost no non- of both in consideration sonable and standard, complete was a project-cost which “test year” cost factors of Order change premise from the data.15 issued, radical departure and a originally certification, we noted reviewing setting reasonable rates policy from the “supply of a notion the fundamental many projects. average costs of based the Commis- project” approach “requiring consideration There was thus no reasoned cost data . rely sion to on individualized problems novel of incentive given with this- would have be reconciled created a total effect and coordination Moss, approved, court’s opinion projects. cost standard for individual in- avowed implication, Commission’s ‘ findings in rely tent on “cost embodied Proceedings Background and ’ ” B. Factual Consumers Un- our area rate decisions.” Company Producing FPC, In Union U.S., U.S.App.D.C. ion of Inc. v. 166 made a successful bid in the (1974). (Pennzoil)18 658 It was offshore leas- Department in Union to deter- of the Interior’s unnecessary Consumers Wallender, (1977), Perryman 2.75(e) J. 51 13. 18 first stated & A. C.F.R. 16. W. C. Maiding, Fed.Reg. Proposed (1974) (mentioning orders 37 1545 identical Notice of 7345, Rule that FPC, (1972), quoted su- Rodman unreported); in Moss v. The 7346 other cases were Pipe- pra, U.S.App.D.C. Stingray Corp., 463. (1974); 502 at F.2d 51 FPC 1548 see Co., Oil (1974); McCulloch line 51 FPC 1446 FPC, U.S.App.D.C. supra, 14. Moss v. Corp., (1974). 52 FPC 1430 general, Order No. F.2d at 467. In procedures certifi- established the Wallender, Perryman 51 FPC 17. W. C. & J. A. cation, leaving all standards substantive Smith, (1974) (Commissioner con- Moss, future. See FPC v. curring). majority opinion that The declared may L.Ed.2d 186 “special the would constitute actual cost data practical note we declared a matter “as that in Order No. 455. referred to circumstances” skeptical ability may one about the significance comment of this abbreviated endeavor,” Moss Commission to succeed in this by spelled in his Commissioner Smith was out supra, concurrence. J.). retrospect, skepti- (Robb, at 468 In cism have been warranted. acquisition, During period since lease Producing Company has become Penn- Union Corp., (1973), Petrоleum 49 FPC 1154 Belco Producing Company. spun off Unit- zoil It U.S., sub nom. Union of reversed Consumers (United), pur- Company Pipe Line ed Gas Inc. (1974), 510 F.2d 656 chaser here. Opinion see go consideration, rate to into effect acquired pending an interest in a ing program 186, 5000 acre Block a Ship although eventually lease for allowed the Shoal certifi- the Louisiana Ini- area coast. issue 100 miles off cate to at that rate.21 a tentative sale drilling tial remand to On the administrative law In when it 1960’s were unsuccessful. judge, proof Pennzoil submitted of its total soon likely seemed FPC would costs, project counting actual costs. Those per 26 cents Mcf in its approve a rate of acquisition sunk costs of other ratemaking, the decision was areawide taking 1960’s into account one-sixth new well. That well was made to drill a lessor, royalty owed to the States as United en- August, Pennzoil successful. In per Allowing were 65 cents Mcf.22 a fifteen contract, Pipe tered United into a per years produc- cent return since for the (United), supply gas Line Co. began resulted in total cost-based October, Mcf.19 project per at 47 cents Mcf, potential per rate of seemingly $1.015 United submitted the Pennzoil and proposed more than Pennzoil justifying the an application contract an as per rate of cents Mcf.23 provided under then certificate. As The FPC issued Pennzoil certificate 2.75(o) current 18 C.F.R. § regulations, February, accepted 1976.24 The FPC Pennzoil received area cent rate approved amendment and delivery, the first six and then months figure justified the actual total per received the contract rate of 47 cents project costs. Public Service Commission Mcf. York), intervenor, (New New York After hearings, the administrative law sought rehearing. The FPC reaffirmed its judge issued initial April, decision in March, order in 1976 and New York appeal- 1974, denying applica- the Pennzoil-United ed. tion. appeal, On Commission remanded July, 1974, hearing for a actual on the II. OF PRINCIPLES REVIEW August, 1974, costs.20 In Pennzoil Scope A. of Review and United to substitute for their sought initial 47 an “amended” contract cent rate scope FPC rate of review of orders at a rate cents per of 80 Mcf. The FPC a little familiar one requiring elaboration refused to allow the “amended” contract 19(b) Section here.25 of the Natural Gas 19. This similar rate was to what 23. Pennzoil further it was enti- contended allowing year” approach, years under its “test subse- tled to return for the before the lease quently rejected began Including producing gas. this Court. See Consumers those extra U.S., years, potential plus Union of Inc. v. of cost return $1.65 became 510 F.2d 656 Mcf. Since even the “low” figure $1.015 of more than covered the amend- policy. 20. This was in line with new FPC See price Mcf, per ed contract of 80 cents the ad- 16, supra. note judge ministrative law and the Commission unnecessary argument it found to reach the for then, 21. Since the FPC amended 18 C.F.R. years production. a return on the before 2.75(o) only § to clear make that it allows the initially go during “contract filed” 752, into effect Opinion Producing Company, 24. Pennzoil proceedings. 2.75(o) 18 2, § C.F.R. (Feb. Docket No. CI74-244 12 F.P.S. 5-385 (1977); Operations, see Pennzoil Offshore 1976), denied, Gas rehearing Opinion 752-A, 12- FPC, 1977). Inc. v. 560 F.2d 1217 (March 22, 1976). 5-816 F.P.S. acquisition, dry review, 22. Costs scope included hole 25. For fuller of treatments of costs, exploratory, produc- and g., FPC, successful well see e. Public Service Comm’n v. 167 facilities, production operating U.S.App.D.C. 100, 106-08, 338, and ex- 511 F.2d 344- pense, (1975); per for a FPC, total of 53.8 U.S.App. cents Mcf. Ad- 46 MacDonald v. 164 justing 248, royalty, for the 355, (1974), one-sixth were 65 D.C. 505 362-63 F.2d denied, cents 1568, Mcf. For a of further breakdown cert. 95 S.Ct. costs, only see (1975); note infra. a Pennzoil had L.Ed.2d FPC, v. Public Service Comm’n partial lease; figures interest U.S.App.D.C. 389, 394, 405-06, all in this opinion adjusted par- J., (1974) (Robinson, relate to that dis senting). tial interest. (1976), stringent ment is the more one thus the Act, 717r(b) provides 15 U.S.C. § controlling approval.27 by the courts one for rate of FPC orders review finding of the Commission appeals, of “[t]he facts, supported by substantial if Ancillary

as Principles of Review of C. Per- In the evidence, conclusive.” shall be Regulation Producer Cases, 390 U.S. Area Rate mian Basin certification, like other new Optional (1968), the 88 S.Ct. decade, poses certain initiatives of the last responsibil- three delineated Supreme Court judicial review which special for problems determine reviewing court: ities discussion. worthy separate we deem of order abused whether the Commission's development in FPC path The main of each ele- authority, whether exceeded been, course, of regulation has producer by sub- supported ment of the order was ratemaking to individualized evolution from evidence, and whether order stantial ratemaking. areawide nationwide integrity while would maintain financial However, decade, there has in the last been public the relevant providing protection for major path development in FPC a second of were responsibilities interests. These a producer regulation in the form of series key sentence: up summed “[t]he special ratemaking programs.28 These supplant responsibility court’s deregulation ‍‌‌​​‌​​​‌​​​‌​‌‌‌​‌‌‌​​​​​​‌​‌‌‌‌​‌​​​‌​‌​‌​​​‌‌‍produc- small have included these interests Commission’s balance ers,29 deregulation emergency purchas- liking, in- nearly to its but with one more es,30 special relief payments,31 advance the Commission stead to assure itself contingent escalations ceedings,32 and re- to each given reasoned consideration special credits,33 fund work-off rates 390 U.S. pertinent factors.” gas”).34 (“rollover renewal contracts added.) (emphasis at 1373 pat have programs these Some Statutory B. Standard statutory command ently violated regu responsibility no about the rele the FPC exercise its There is also issue not simply late rates and producer For statutory vant standard. stamp rates set contract.35 Other procedure, proposed rubber under courts programs presented have conve “public must meet both the calling sensitivity more task difficult 7 of the Natural nience” standard § the need adminis Act, the conflict between “just and reasonable” two, flexibility responding to a crisis require- 4’s trative 4.26 Of the standard of § 479; nied, 455-A, 46 L.Ed.2d 136 v. 96 S.Ct. FPC at Moss 26. Order FPC, (1975). supra, 502 F.2d 467; 2.75(1) (1977). 18 C.F.R. § 31. Public Comm'n v. 151 U.S. Service Cities of Fulton App.D.C. (1972); U.S. App.D.C. 511 F.2d 338 judi initiatives, resulting new 28. These and the review, U.S.App.D.C. 248, cial interest has aroused considerable MacDonald among something a classic commentators 505 F.2d 355 cert. administrative-judicial See case of interaction. 43 L.Ed.2d 778 Fiorino, Interaction Judicial-Administrative Regulatory Policy Making: The Case of 283, FPC, 316- Corp. U.S. 417 33. Mobil Oil v. Commission, Admin.L.Rev. Federal Power 28 2328, (1974). S.Ct. 41 72 94 L.Ed.2d (1976); Daniel, Independent 41 Natural Producers, A Courts: FPC Case Rate 34. The Sеcond National Natural Gas Intermeddling, 784 53 Tex.L.Rev. Judicial Cases, 567 186 F.2d 1016 (1975). U.S. 98 cert. 435 (1978). 55 499 L.Ed.2d Texaco, Inc., 417 94 S.Ct. 29. FPC v. U.S. (1974). 41 L.Ed.2d 141 Texaco, Inc., See, g., v. 35. e. FPC, of America v. 30. Consumer Federation 41 L.Ed.2d 141 94 S.Ct. de- cert. level of overriding requirement of minimum coordination of situation and the national rate- fidelity legislative gram scrutiny to com- with administrative under programs they “mindful so that consistently making mand. been other We have unnecessarily dupli- conflicting the Federal no accorded create broad discretion ‘ Lastly, there cating “to incentives.39 in its efforts devise be Power Commission costs so that producers’ it evidence actual capable equitably regulation methods of the additional can determined whether conflicting inter- be reconciling diverse funding profits huge too results be ener- ests” this time of acute ... ”36 legislative reconcilable command.40 However, gy we have also shortage.’ been Congress mindful that created the TO THE III. CHALLENGES FPC’S impose FPC to limits that avoid extortion- ALLOWANCE OF TOTAL PROJECT ate natüral gas rates. If a decision to be COSTS AS AN INCENTIVE prices, made to deregulate gas natural FPC, must be by Congress, made A. General Arguments permit and this court cannot administrative challenges New York the Commission’s transgression the legislative mandate in per allowance of a cents Mcf this regard. Accordingly, we have been ground proceeding general this on the consistently [give] “that the FPC concerned unnecessary entirely the rate was to secure shaping ‘reasoned to the consideration’ gas new market. New the interstate protect order in an effort to consumers points. It specific York several notes raises from paying substantially more than neces- to make the willing that Pennzoil was final sary bring supplies.”37 the needed forth requisite gas produce investments to conflict, To resolve have early 1970’s when the areawide rate flexible principles elaborated several of re It also 33, 37, 512 F.2d lyzed in this case. step now The Commission has taken the gas on the basis high-cost producers of sates Moss, of time of high costs alone. it not the their own had principle setting forth the substantive —the Pennzoil, intervenor The FPC and optional project total cost standard —for responses to general two on make appeal, we determine Now certification. First, they ar New York’s contentions.41 is reasonable principle whether that challenging is the York core gue that New purpose and the consistent with the statute pro optional certification “concept” of program. certification optional argued, it cedure, challenge, this is However, by v. our rejected in Moss FPC. is Our view of Moss confirmed Union, previously upheld year has a total the same holding court not in Consumers optional optional under the set of project cost standard Moss, first that the FPC’s above, As discussed program. the statute. violated certification standards procedural upheld the novel Moss v. FPC Union in Consumers specifically We noted certification, notably the aspects of optional project on individual that standards based proceedings. of Section 7 and prior combination reconciled costs would have were that we not specifically We noted ratemaking аp- FPC statements with FPC standards presented at that time proaches.42 that reconcilia- precisely It is we were assum and that reasonableness perform. tion which the FPC has failed to eventually adopted ing standards that the if response, other statute. “On the would conform to the program were lim rates under record,” said, “we must assume present no rate “there would be ited the national by the stan that the Commissionwill abide also fails point optional procedure”, it promises statute and the dards not arguments. This is to meet New York’s the Commission made. We cannot condemn alternatives, a of ei situation of two not theory may on the that it do what has an inflexible making ther the national rate FPC, supra, promised to do.” Moss v. rates, accepting un ceiling or on (empha U.S.App.D.C. 502 F.2d at project costs conditionally FPC’s total sensibly uphold cannot supplied). sis is all Rather, whether approach. now on the issue standards Commission’s ap project ground was established in the elements of the total ruling that this con proach is reasoned justified fact that we Moss v. when the have been of re sideration, principles upheld procedure, Moss as to light FPC in Change in admin issued in assumption programs. standards view light of the increased with the due course would be consistent istrative standards appropriate, is provide judicial experience To under them statute. affirmance circularity are discerned judicial through if flaws without review be desirable However, change previous with the standards. bootstrapping or is not consonant by reasoned consider- accоmpanied to the courts. must be review function entrusted added). (1975) (emphasis sprinkles allegations brief with Pennzoil allegations like those Mcf would be Nor does Pennzoil make that a rate below cents “confiscatory” company sup- would not which because the of the “unusual circumstances” plus finding Algonquin ported return. recover its costs on this confiscation LNG, FERC, Inc. v. ratemaking generalized In its area the Com- (Commission (1978) delayed autho- F.2d 1043 mission, re- while not free of constitutional drop rizing facility, causing a ruinous LNG straints, requirement same bound to the 391,000 projected of LNG sales of barrels producer case of for each as in the individual nonetheless, 280,400; sales of to actual monopoly regulation single quasi-mo- applying the rate for- Commission insisted on utility. nopoly Permian Area Rate Basin company original appli- in its mula used Cases, 747, 769-70, cation, reality). now bore no relation to L.Ed.2d 312 comparison Pennzoil does not submit U.S., 42. Consumers Union Inc. dedicat- “the total rate of return to the value of property as a Transcontinental ed whole.” Pipe Line supporting Specifically, argues ation the new standards. York New that even if “[T]he process change agency policy must be (without project allowing total cost one that does serves and not erode any investment) return on were 65 cents (cid:127) principle making.” of reasoned decision Mcf, per the gas here would have been FPC, supra, Public Service Comm’n 167 forthcoming price at a lower than that. F.2d at 353. As project Allowance of a rate on total based stated, we have Boston Greater Tеlevision cost thus constituted a windfall to the FCC, any ducer without demonstrable connection cert. 403 to increasing supply gas. 29 L.Ed.2d 701 support validity The of New for the (1971): logic York’s in the economic contention lies vigilance Judicial enforce Rule without, 1960-61, of “sunk costs.” In process Law in the administrative course, any expectation of certifi- particularly where, here, upon called as treatment, large cation Pennzoil sank sums n the area under consideration is one acquisition into lease drilling. It had wherein the policies Commission’s are in during no success period. In agency’s flux. An view of what is in the when Pennzoil had to make a decision as to public may change, interest either with or efforts, whether to renew its those older change without a in circumstances. But costs were irretrievably “sunk” and could an agency changing its sup- course must longer no unspent be reallocated or left ply a reasoned analysis indicating that light of new inducements to invest else- prior policies and are being standards de- where. The relevant considerations liberately changed, casually ignored, not and if for Pennzoil agency in 1972-73 were glosses over or swerves whether prior expendi- from new precedents new without discussion inducements warranted it may cross the line the tolerably of the 65 Roughly speaking, tures. cents terse to the intolerably mute. Pennzoil, per Mcf eventually expended by 1960’s, 33 cents in the had been “sunk” B. pre-1972 Treatment of Sunk Costs newly expended while only 32 cents were argument, 1970’s.44 New York43 areawide rate of 26 cents per likely prospect Mcf in with a does dispute higher producer not significant future, increase in the near rates based project cost considerations adequate justified investment, to induce the shown, if it can be further gen- erally situations, any guarantee in individual without would cover both they required provide order to that further investment previously and the needed additional supplies to the in- outlays. sunk terstate market at prices compatible with Where, here, an agency

consumer has es interests. But there can be no basis for tablished guaranteeing producers average more national rates on than production basis, their costs in the absence exceptions escalating individual of such a showing. the price above the national are estab- 43. Petitioner’s Brief at 32. totalling respectively, to 33.2 and 31.4 cents (after project rounding out) per 65 cents Mcf provided 44. Pennzoil schedules costs. costs. R. 813-15. Sunk costs of the 1960’s principle text, discussed in not the illus- Mcf; acquisition, included lease 18.5 cents figures, specific trative discussion is decisive dry cents; exploratory, hole and and more 4.8 note, example, here. We the FPC staff costs, cents, than half of successful well 4.4 adjustment contested the costs to of Pennzoil’s outlays a total of 27.7 cents. New of the 1970’s States, royalty paid include the the United costs, included less than half of successful well percentage before return. R. calculation of the cents; facilities, production cents; 13.4 accounting approaches 1173. Such alternative production cents, operating expense, 8.8 for a specific figures would alter the but total оf 26.2 cents. These totals must be ad- principle undermine the involved here. justed royalty, for the United States’ one-sixth increasing supply, 283, 318, 2328, FPC, in the interest of 94 S.Ct. lished v. 417 U.S. between such occasion, a 2350, must be connection an (1974). there On 41 72 L.Ed.2d explo- experimental program increased funding and the to increased be allowed gas newof sources development without ration and commence a tentative existence has been principle to result. This alleged showing such a of a connection if the FPC that there ways: in a number of stated pro- in of the committed its continuation ” for extra “quid quo pro must be a gram verify to monitoring in order to “inquiry must be an there funding;45 programs such a connection exists.48 Such gas supply” increase the incremental into subject being to vacated if Commis- and program;46 to the attributable requisite sion fails make the demonstra- between “symmetry” must be there tion.49 In production.47 funding and increase incentive provide programs its words, program Court’s Supreme long FPC expenditures for new funding “while as- increased provide avoiding payment been with lev- concerned such be suring that increase the announce accompanied by expenditures “sunk” before consumers unless upon ied e., avoiding incentive, Mobil Oil a supplies gas.” i. with increased ment 248, fund FPC, U.S.App.D.C. strable between the increased connection v. 164 45. MacDonald ing gas supplies. Service 355, and new Public 258, (1974). The Second See F.2d 505 365 307, FPC, Cases, supra, 407 186 Comm’n v. 151 Natural Rate Gas National U.S.App.D.C. 1059-60, (1972). 66-67, pro F.2d 361 F.2d at at 567 FPC continued FPC, 1061, gram 465, (1972) with quoting Oil v. Order No. Shell Co. 1550 48 FPC 941, denied, 499, (1975), 96 (1973). cert. 426 U.S. Order No. 50 1077 FPC 2111 These 2661, (1976). difficulty In the absence 394 orders evinced an аwareness of the pro quid quo showing any connection, except in The Second National a clear demonstrable pric generous (“reasona Rate Natural Gas Cases for funds advanced within a short funding pro gas, ing ble”) increased expenditure exploration rollover time of experimental an gram development, allowed on by clarifying “reasonable time” 2115; basis. limits. See 50 FPC at 51 FPC 819 significance (explaining the of “reasonable” FPC, time); Pipeline Co., 652, 46. Public Service v. U.S. Natural Gas Comm’n 167 52 FPC 338, (1974). App.D.C. (1974). F.2d 347 511 655 This court reviewed the 1972 and 1973 orders and concluded had failed the FPC FPC, connection, 188 47. Cities of Fulton v. to show a demonstrable Public Ser 33, 38, FPC, 952 vice Comm’n v. 167 (1975), 511 F.2d 338 but commended limitation, U.S. 167 U.S. Public Service for its Comm’n “reasonable time” (1972); App.D.C. App.D.C. n.115, The Second 467 F.2d 316 355 n.115. at 117 F.2d Cases, supra, Rate remand, Gas Natural. required In our mission, the Com National U.S.App.D.C. order on (income 567 F.2d at on-going evaluation of its course model); id. at F.2d at 1046-47 payments tax of the effectiveness of the advance data); gas id. at (gathering of reserve program, give “prompt atten and careful (rollover pricing); gas cf. Shell Oil at 1059 F.2d problems opinion, tion” in our identified 1975) (5th Cir. 520 balance”), Co. particularly the absence of estimates data or (“tentative cert. the ad incremental incentive effect of L.Ed.2d 394 96 S.Ct. program payments vance reserves. Subsequently, abandoned the generally See Basin Area Rate Permian Remand, program prospectively, Order on Cases, (1976), Fed.Reg. fully elaborated (1968) (deference to L.Ed.2d 312 FPC limitation, Opinion “reasonable time” Ten significantly “must lessen as Commission’s Pipeline 9, 1976), (July nessee Co. v. еxperience lengthens”). . . . The ad- appeal pending, (D.C. No. filed payments provides vance the fullest 2, 1977). June The FPC’s ultimate standards example experimental evolution of require explicit showing of a demonstrable program. The FPC established the payments connection in between advance gram with Order No. FPC 1142 supplies gas by “positive creased benefit” and Order These test. tentative, experimental affirmed on were ba- sis, awaiting showing the FPC of a demon- including to cover total policy In its lowed expenditures. old windfall for acquisition primary costs its effect regard to lease with particularly vintaging, the offshore (“rollover gas”), area could well permit be to gas in contracts renewal court, capital access ready the Commis- those by this recently upheld new, high up rates to to present to allow bid offshore leases above their sion has declined producers who invested before paid overly high appeal, level.”52 On York New is “It difficult the of such rates.50 prospect renewed its argument, contending that “the could reasonable to see how (and [a] main effect of a system such a main retrospec- expected encourage have been vice the present of Commission’s opinion) production that had and tively, exploration could well be to remove the last restraints Basin Area Permian already occurred”. already on the spiralling [offshore lease] 1344, 747, 798, Cases, 390 88 S.Ct. Rate payments, bonus with no real increase in Here, (1968). in its 20 L.Ed.2d 312 gas exploration production.”53 and project costs of total novel extension Commission con- give adequate has failed to costs to include sunk basis for rates increasingly significant sideration to the the program, the onset of the period before problem acquisition of offshore lease costs “ to give has failed ‘reasoned Commission proceedings. in rate In the certifi- shaping its order in consideration’ to the context, given cation the FPC has no con- protect paying an effort to consumers from sideration at problem, despite all the the bring necessary to substantially more than program’s objective conflict between supplies.”51 forth the needed increasing exploration development and and acquisi- effect of an incentive for lease expenditure. Acquisi- C. Treatment of Offshore Lease tion Costs approval The FPC’s of Pennzoil’s i. Acquisition Lease

posed on total of all based .the costs, including Pennzoil’s the lease begin noting dimensions acquisition (the original acquir- cost of acquisition lease issue. According ing to statis- the offshore lease from federal compiled tics by the Department words, government). In other the FPC’s FPC, Interior and used guaranteed costs of standard reimbursement acquisition lease gas in offshore oil and acquisition way lease costs the same grown past have ‍‌‌​​‌​​​‌​​​‌​‌‌‌​‌‌‌​​​​​​‌​‌‌‌‌​‌​​​‌​‌​‌​​​‌‌‍exploration enormously in guaranteed decade. reimbursement Those costs rose development approach and costs. Such an from less than billion in $3 years 1967-71, consequences. has New five prospective serious from billion $2 on billion argued $3 York before and billion in $5 is al- for a rehearing guarantee that “if such total of over billion in 1967- $13 50. The Second Cases, Rate Natural Gas Basin Area National Rate Cases, U.S.App.D.C. supra, at 20 L.Ed.2d 312 FPC, Industries, 1033-34; Inc. v. Koch F.2d at 554 F.2d 1158 Application Rehearing 52. Petitioner’s FPC, Compare F.2d 82 v. rent, Shell Oil Co. R. 1225. lease a form of Since costs are 1974); v. Public Service Comm’n ap- invoking New York was the current FPC (tempo (1976) F.2d 874 proach price ceilings. toward the function rary phasing vintaging, was sub out of “[L]imiting producer rents and windfalls reviewed). sequently important underlying reg- more concern recent Breyer MacAvoy, ulation.” & Natural Shortage Regulation and 51. Cities of Fulton Natural Gas Producers, (1975), quoting Harv.L.Rev. Mobil Oil 53. Petitioner’s Brief (1974), quoting 41 L.Ed.2d 1136 Permian Leasing levels bidding ing 74.54 for further consideration advance Much of this cost since 1974.55 payments, continued we addressed the FPC’s failure oil rather reflected in eventually will payment take in advance into account acquisition costs between on- prices, great but lease difference gas than orders increasing share of large and power constitute a regulatory and offshore shore Moreover, gas rising prices. natural practical circumstances: leasing produc long between lead time of ad- treatment The Commission’s acquisition lease present tion ensures that blandly gas related offshore vances for decades to will affect rates incentives crit- any mention sidesteps all come. to prevent power plenary ical fact of its on leases in wells repeatedly admonished diversion of The courts have mar- that the much the interstate contexts domain to various the federal payments offshore, advance larger acquisition ket. Whatever role gas from attracting onshore may play other related differences between offshore mar- subject interstate gas, and must be onshore and the intrastate in the case ratemaking. in In is absent ket, reasoned consideration justification this producers. Any Bate The National Natural Gas Second advances to offshore Cases, at relation of supra, of the assessment reasoned pay- F.2d at we stated: the advance benefits of costs and manifestly dif- involves ments objection us given The that has distinct offshore and on- for ferent calculations pause is the contention that “there is no complete failure on The in- shore advances. validity to the Commission’s continued on to focus this issue gas part of the FPC upon treating single sistence as a unregulated to seek answers. gas subject source onshore to is a failure gas competition, offshore intrastate and Moreover, to declined the Commission which the from the domain over Federal York by New respond to submissions authority plenary exercises ad- the need which cast on doubt to interstate market must and which the explo- of the spur vances acceleration gas supplies.” look for most of its new re- offshore development of ration and serves. We national ratemak- affirmed FPC’s that the

ing order with the limitation Moreover, in our most recent “give attentive FPC would have to more U.S., Union case, Consumers certification situation of special consideration” to the U.S.App.D.C. at FPC, supra, 166 Inc. v. 57-58, costs, at offshore id. at 661-62, special took 1050-1051; see also id. at 567 F.2d at contentions producers’ rehearing on note 1060. acquisition lease higher offshore about the national Similarly, in Public Comm’n v. upholding Service In costs. Circuit, supra, Fifth ratemaking proceeding, (footnotes omitted), acquisition F.2d at 352 in remand- in lease too, the boom noted 770-A, Fed.Reg. Opinion (1976) (Exhibit part). 15 in See, Bidding high has e. levels continued. g., Andrus, State of Alaska v. (1978); County 580 F.2d 465 of Suffolk v. Interior, Secretary (2d 562 F.2d 1368 Cole, 1977); Proposed The Outer Continental 1976; Shelf Lands Act Amendments of An In- that “the Com- explicitly warned costs and incentive spurring expenditures for explo- these obligated monitor surely mission is ration development, and gas supply— . . Oil Co. developments . Shell practical since for purposes in the short (emphasis at 1082 supra, 520 F.2d term, opportunities employ such ex- response to the sole supplied). FPC’s penditures augment supply are unlimit- been leasing costs offshore trend ed. There is value no such obvious for the recent costs older, lower lease average consuming public in escalating expenditures ratemaking av- computing costs acquisition.58 for lease The acreage which deferring the temporarily thereby erages, is made govern- available the federal costs.56 recent on rates impact ment for bidding lease is limited. The repeated one is thus this areas record explained Commissionhas not on what basis in active consider study failures spur expenditures acquisition developments major formulation policy goes beyond raising the bids made for acre- costs, acquisition lease offshore age that anyway, would be leased or has a in- large future threaten they though even substantial effect in increasing acreage. returns expenses, nonproductive creases acquisition for lease Any reimbursement gas prices. investments, and certification through objectives in Optional ii. delay problem gram must address of the national formulation reimbursement. expenditures between pur present expenditures assume case, Pennzoil’s include,all reasona can poses that before years were made thirteen in national rate- costs reimbursement, gen- in acquisition lease ble completion and However, optional certifica long before making.57 made eral, outlays are lease as an ex developed has been produc- tion when the time At reimbursement. rate, to escalate national ception to the is no certification leases, optional on ers bid neces an incentive provide to rates in order Reimburse- possibility. a distant more than Ab development. exploration for sary as a bailout at operates ment for lease costs FPC, a standard justification sent question but losing project, of a end all lease for reimbursement guaranteeing at the incentive significant it is a is whether upheld be cannot incurred costs acquisition leases. Reimbursement bidding on time of objective. under respect with in this contrasts lease costs for outlays. development for reimbursement reim- provides optional program The in the made later outlays are Development of the because expenditures bursement certification cycle, optional so production an incentive between connection influential calculable and more gas. of new supplies expenditure closer^ prospect. an connection between is an There obvious present approach as to whether the FPC’s to adequate Shelf Guide to Outer Continental De- ratemaking national costs in velopment, lease is correct. Harv.J.Legis. question is That not us. We have al- before ready quoted judgments need acquisition as to FPC’s 56. The lease costs FPC factors into to monitor lease costs were made by averaging which ratemaking its national those reviewing ratemaking. courts years, generally national costs over several the most years recent for which full data is available. produce bidding more Spurring See Shell Oil Co. v. does lease ap- 1975) (average 1967-72), government. de cert. revenue for the federal nied, leasing propriate national L.Ed.2d to consider manner 770-A, (1976); Opinion Fed.Reg. setting policy in stan- (1976) (weighted event, average eight any over most is discussed In dards below. years). Thus, impact producers provided current lease ac the reimbursement to quisition expenditures yet fully repay- acquisition has not been be a lease costs would not years, building paid government It in felt. will hit the next few to the ment of the revenue gas prices. bids, surcharge covering through automatic escalator into natural but a lease per year pro- to the cent return the fifteen distinguishing certification from ducers. ratemaking, any imply we do not view as on programs competition its on well as bottom, compа- is whether issue At largely bid on production.60 calcu- that make a lease nies high pro- likelihood lation of relative an excep- can Authority holes obtain iii. dry duction acquisi- average lease and above tion —over jus- attempted to sometimes to high transfer costs con- costs —to give prob- tify a consideration failure in case sumers the intermediate by asserting costs acquisition lems lease volumes of project produces medium-sized to deal authority a lack of information or would anomalous if gas. It be high-cost As the declared them. returns producers received be- handsome ratemaking pro- its recent national most high highly productive cause of volume A, Fed.Reg. ceeding, Opinion 770— fields, optional rates less high and also (1976): An incentive must also productive fields. time, same At the we determined objectives. be related legitimate ac- lease acquisition costs any not give consid- The Commission did recouped by tual whatever, reasoned much less con- eration cost-of service. their part sideration, problem of undesirable F.P.C., supra. The Mobil Oil for lease acqui- from reimbursement effects pass- to disallow suggestion of APGA budg- have limited sition costs. Producers therefore, costs, certain through of aspects all spending ets for on be unlawful. operating. cycle leasing from duction object does current NYPSC not our spending kind of induce Incentives for one costs, but acquisition treatment of lease away spending. other kinds of a shift from suggests: incentive which makes it more desirable An expressly an- The Commission should lease bids thus divert put Rehearing in its Opinion nounce development. funding exploration and its future rate deter- nationwide may actually be coun- Such “incentive” any ratio mination will utilize purposes. ter-productive program’s for the figure utilized which exceeds 1.1 Also, system present acquisition any figure 770, Opinion anticompetitive aspects in have built-in may specific might applicable which larger, cash-rich benefiting terms of bonus lease sale cases as a result of to make are best able producers which being 1976 or payments 1975 gives a cash bonus bids. A applications. subject special relief funding as reim- large share of incentive motivation be- appreciate the While we perpetuate may for lease bids bursement we so cannot anticompetitive suggestion, hind strengthen those as- NYPSC’s determinations. It is well settled future pects.59 that the Commis- limit our could not deter- must take the effects of this Commission sion into account Just as FPC, U.S.App. Conway (1973); 167 is several have v. 59. This one of concerns aff’d, may 43, 49, 1264, programs (1975), raised 510 1270 been that FPC incentive D.C. F.2d 1999, 271, anticompetitive Public 626 have effects. See Ser- 426 96 L.Ed.2d U.S. S.Ct. 48 172, FPC, FPC, U.S.App. (1976); City Pittsburgh vice v. 159 Comm’n v. 99 1043, (1973), 741, 113, (1956). vacated F.2d 754 See also D.C. 237 consideration, Texaco, 380, 397-98, Inc., for further 417 and remanded 94 FPC 417 U.S. v. 964, 3166, (1974) 94 41 1136 2315, (1974) (Natural U.S. S.Ct. L.Ed.2d S.Ct. 41- L.Ed.2d 141 (contingent anticompetitive escalation’s effect monopolistic controlling Act aimed forces Note, “plain enough”); Beneficiaries Refund gas); (1976) (Energy 42 natural 6213 § U.S.C. Act, and Refund Under Natural Gas Credits Policy provision and Conservation Act control (1974) (“[t]he 41 812 refund U.Chi.L.Rev. ling leasing); anticompetitive joint 42 offshore option possibility credit thus creates 7112(12) (West 1977) (Department § U.S.C.A. cоmpetitors efficient new be locked out of will Energy competi should and ensure “foster market”). supply among parties engaged tion 7152(b)(1) energy fuels”); 42 U.S.C.A. FPC, See, g., 411 e. State Utilities Co. Gulf (West 1977). 747, 758-59, L.Ed.2d 635 93 S.Ct. 36 558 43, 49, allowable amount of App.D.C.

mine the state 510 (1975), F.2d 1270 duction or severance taxes for aff’d, inclusion 426 U.S. 96 S.Ct. rate, similarly in the allowed this Com- (1976); City FPC, of Pittsburgh v. authority mission no to determine has 113, 126, payments method or amount of lease (1956), approval, cited with California v. Department of the Interior. While FPC, 482, 485, 369 U.S. 82 S.Ct. responsibility are mindful of our not L.Ed.2d 54 National environmental to allow costs in our unreasonable cost- policy is responsibility many federal determination, we based cannot arbi- agencies yet required give the FPC is its acquisition trarily conclude that own independent consideration to environ beyond some set ratio unreason- See, mental g., factors in its decisions. e. timely able infor- without substantial Udall v.

mation. L.Ed.2d 869 generally See NAACP F.2d foregoing analysis made in FPC its aff’d, ratemaking opinion does not relieve it of L.Ed.2d 284 responsibility to consider whether Con versely, leasing because offshore provide implicates an incentive for lease acquisition in energy policy alternatives Optional many certification. certifica- agencies, required we have exception Department tion is an national ratemaking allowing higher Interior to encourage energy rates to assess explora- factors in cluding development. activity It in its pre- is not the environmental scribed statements on passthrough leasing. channel for offshore produc- Natural costs;61 Morton, ers’ that is Resources Defense the funсtion Council v. of national U.S.App.D.C. 5, 15, ratemaking. The (1972); elements F.2d cf. Continental incentive must be Oil Co. v. connected to objectives. 1966) (leasing incentive act The fact that does not block a lease has been arranged by gas regulation). another offshore need not federal de- partment consider weight is a matter for that how much the FPC department, give leasing and is policy not in and of itself reason for ratemak ing because it has special-exception program by yet discussed Commis- matter at all. sion. There is no that the We hold indication Interi- or cannot Department responsibility give abdicate its put it forward that reasoned leasing require simply efforts consideration because leas depend special ing provision department.62 involves another for its lessees. Moreover, functions, in carrying out its providing initial statute for offshore required FPC has been when appropri- leasing, the Outer Continental Shelf Lands give ate to independent policy 1953, consideration Act of expressly staked out an FPC to matters which are also the responsibility regulation role in gas pipelines of from the of other agencies. federal National anti- leased lands to take account of conserva- trust policy is principally the responsibility Beyond tion.63 is the overriding re- of Department of Justice and the Fed- quirement regulation public of in the inter- Commission, eral yet Trade is est, FPC re- which can take account of national poli- quired give to independent its own consider- cy. As any for administrative difficulties ation to competitive in its faсtors decisions. of coordination, justify a total this did not See, g., e. Conway Corp. v. past, lack of in the effort 61. Lease auctions were Department conducted decades 62. The FPC and the of Interior being any optional without there certification have consulted with each other about offshore hardly leasing incentive program. at all. It can be con- 455, tended (1972); the lease Order No. statute 48 commands FPC Order 455-A, program. there be an incentive FPC 1334(c) (1970).

63. See 43 U.S.C. § future, justified only programs more in the since tive insofar as may be tractable Energy Organization Department of the incentive there between is connection new De- part of the Act makes the FERC supply The likelihood gas. and the of new of which has inherited partment Energy ex- to the of such a connection diminishes De- leasing responsibilities.64 offshore That conflict, programs duplicate tent posi- will be in a partment the FERC diminishing returns on of both because to take enhanced over- remand incentive, and be- successive increments of policy view of concerns be coordinat- among can choose cause ed here.65 rationally seek programs incentive will stringent least re- those programs with give has failed to Since public. If the quirements benefit factors, pertinent consideration at all to any incen- allows connection between we must for further remand consideration. supply unjustifiably to become at- tive view of “In the absence of Commission coordination, by lack of it has tenuated analysis, we that our do observe comments “ give failed to ‘reasoned сonsideration’ implacable constitute prohibition” have, shaping its order an effort leasing; against incentives for “[W]e however, paying protect consumers from substantial- problems identified substantial necessary bring than forth the ly on re- more FPC will have consider of Fulton v. FPC supplies.” mand.” Comm’n v. needed Cities Public Service supra note

F.2d 1043 at 1074.66 re More fundamentally, coordination III. TO THE CHALLENGES FPC’S West quired justice. in the interests FAILURE TO COORDINATE WITH Comm’n, 294 Co. v. Ohio Gas Public Utilities NATIONAL RATEMAKING 79 L.Ed. 761 U.S. S.Ct. its na supplemented stated that a com (1935), Justice Cardozo large tional with a ratemaking program unexplained, incon policy using mission pro ancillary producer number of incentive prices bases to sale prescribe sistent has ever grams. Perhaps agency no other variance with ‘the in two cities was “at ” large array incentive assembled so play.’ of fair also rudiments ‍‌‌​​‌​​​‌​​​‌​‌‌‌​‌‌‌​​​​​​‌​‌‌‌‌​‌​​​‌​‌​‌​​​‌‌‍See Callanan programs single objective.67 focused on a States, Improvement Co. United Road n entirely array extrapola consists 97 L.Ed. objectives statutory tions of a Airlines, CAB, Inc. v. (1953); Trans World explicitly provide scheme which does not 126,147, any programs. such For the reasons (1967), cert. forth, obligated now set the Commission is (1968). Commissions 19 L.Ed.2d 1133 large array parallel creation of subject guard not to must be as much on programs to them with coordinate duplication or consumers to unexplained ratemaking. The exist approaches. conflict incentive in programs incentive re- uncoordinated Pragmatically, large array of a ence the impression Incen- quire programs coordination order work. creates centive 65. The 1977 nation of consider (West herited 7153(b) (consultation). Envir.Rep. coordination See 42 1977) Commission has a leasing on U.S.C.A. leasing. remand. Rather (Leasing Liaison act (BNA) responsibilities). before the 1977 provides See 42 7152(b) (competition See channels for range U.S.C.A. Committee); (West than generally act). completely options 1977) (in- § instead coordi- ^[1975] id., accounting out sive optional disallowing original 589 F.2d cost See providing findings (unless -p. standard certification supra. certification. actual in national include extra incentive. of 191 costs, Order lease costs are and take lease average U.S.App.D.C., p. This ratemaking No. 455 for might would return costs with- acquisition allow lower) costs in conclu- 549 of to its on producers’ that “the incentive device . . . be- based average costs [is ing] paraded the courts in a number before . expected approxi is to be guises,” “spectacle with some produced mately half the volumes will be [viewed] FPC, skepticism.” Cities Fulton v. rates in appeal, excess of this level.”68 On 33, 36-37, 512 F.2d 950- New York elaborated: Ultimately, appearance is lawful, It appear would however to be inconsistent with the Rule of Law. If con- though practicality, of doubtful to estab- tinued unchecked it impres- would create an pricing system lish a pro- under all sion that the agency engaging is in an (or particular ducer sales all sales of a giveaway uncontrolled to the regulated producer) justified project be on a companies Congressional warrant, without cost basis Similarly, . . .. it is law- protecting instead of public interest— ful to just fix the and reasonable rates and abdicating thе courts were their an area or na- producer for all sales on responsibility. review reflecting primarily, tionwide basis if not upheld pro certification exclusively, average producer costs. . . . cedure in supra, gave Moss v. two cost However, the combination FPC what virtually amounted a “blank techniques resulting from the Commis- check” develop standards the new proper nor sion’s action here is neither program. years, Over the last six the Com lawful. mission has the necessary failed to devote York, As stated New the Commission’s analysis investigation to the proper fill present ratemaking mixture of standards ing of that blank check. As the Fifth Cir presents problem counting of double said, cuit programs may upheld on high single counting costs and of low costs. experimental basis “kid-glove” re When the same cost treatment approach is view during period of their initial devel ratemaking used in both national op- opment. However, “cautionary note certification, tional there is no coordination should indicate experiment lapses that as problem. ratemaking procedures Both can experience, into the courts well expect average use an approach, costs so that all justify Commission to policies. ...” average consumers pay high for the costs of Shell Oil Co. v. gas. Alternatively, and low cost both 1975), cert. California Co. approach, cedures can use a cost so high pay high that consumers of cost (1976), quoted L.Ed.2d 394 in The Second costs, gas pay and consumers of low cost Cases, National Natural Gas Rate 186 U.S. However, low costs. different when cost App.D.C. at 1031. approaches treatment are used in the two coordination, proceedings without then A. Coordination with the National Rate- there is a counting problem. double Con- making at the Level of the Whole Pro- high gas pay high sumers of cost costs gram high projects op- because cost received New York contends there is a funda tional certification. low Consumers of inconsistency mental between the national gas pay average high low ratemaking program, average based on sum, ratemaking. because of national costs, and the optional pro all together up paying consumers taken end gram, based on the high- individual costs of more average than the all they costs: cost programs. rehearing On before the pay double for costs. FPC, New York contended that fact “[t]he that Pennzoil’s project costs are in precisely excess of This is problem the kind of the nationwide norm hardly ‘special which we warned in Consumers Union circumstance’. Since nationwide rates would have to be “reconciled” if the FPC Application Rehearing 68. Petitioner’s 69. Petitioner’s Brief at 33. R. 1225. action, of during pendency the the it certi- average

changed from Order project a costs standard. rate its final costs standard to fied the cent order. at at 658. F.2d the vigorously protests York FPC’s New recently problem kind of we This is also the of amendment. approval the Pennzoil Natural in The National noted twice Second the respond approv- and Pennzoil FPC There, upheld an FPC Rate Cases. justified both facts the by al was the of to designed keep scheme consumers by precedent. prior FPC Our case ratemaking for through national paying will be that there a need analysis indicates pro- payments in the they pay for advance remand, on to reassess facts of the case the at gram. weight and we do not find of FPC the was at We warned 1052-1054. also precedent approval of the support pay consumers “questionable” to make Therefore, we deem it appro- amendment. ratemaking gas they for through national requiring to outline the factors fur- priate at pay for in intrastate Id. purchases. approval, leaving of ther consideration 567 F.2d at 1051. back- initial the new factual decision on no value Pragmatically, there is incentive of case the Commission. ground by charging through served consumers discussed, As we have the Commission high for costs program national covered optional attempt must coordinate certifi- other mechanisms. More fundamental ratemaking cation the level problem inconsistency unfair- particularly program, whole with re- to change ness. Commissionis free spect counting costs. For double optional standards in the certification reasons, much same the Commission gram, give but to do so it must reasoned optional must certifi- attempt to coordinate change. of its consideration effects ratemaking at level cation with national remand, hold on FPC that individual so applications, individual coor- give such consideration to how best to benefits both reap do optional dinate the procedures.71 in order recon- ratemaking with national cile the inconsistencies set forth herein.70 precedential was contending that there amendment, support allowing With National Ratemak- B. Coordination Commission ac- Commission cited one ing Applica- Level at the of Individual tion, before us— which—like the decision tions why explanation amend- barren of In contrasting ment should be allowed.72 originally sub Pennzoil United orders, regula- well-reasoned optional spirit cer application mitted for an their rulings appeal, per cents Mcf. Fol tions tificate a rate —affirmed allow lowing findings high- remand for of when tested—that declined to a the FPC’s costs, they stating that such an amendment of price, the actual “amended” er (to allow application application their to seek a rate of 80 cents certificate price) Although Mcf. FPC secures no new benefit refused new public conferring allow collect while benefit them to the “amended” p. U.S.App.D.C., ---of 562 of 589 70. One obvious method of reconciliation is approach Opinion 770-A advance examples used include Mitchell infra. F.2d Other payments including credit in national some Energy Corp. F.2d 36 ratemaking paid for the consumers 1975) (special program); relief Cities of Fulton through optional certification. FPC, supra, U.S.App.D.C. at (investment plowback); at 954 The Second Na lack of 71. The in which most common situation Cases, supra, U.S. tional Rate Natural Gas dupli- conflicting produce coordination can (advance App.D.C. pay 517 F.2d at 1054 attempts cating producer incentives is when ments). programs advantage overlapping to take of two steadfastly such аt once. The blocked Corp., 72. The Rodman attempts programs were where the pp. making, see certification and national 562 in collecting the their specified menee rate period, short For a producers.73

on of the national op- optional application the instead applying under producers allowed benefit, the this subsequently they have filed for receive rate. Once procedure tional benefit of the producer they could ask for if the cannot also issued national rate way appli developments criteria. Pennzoil subsequent certain satisfy difficult proce ratemaking have met “would cant the national asserts here that it under by one may benefit assuming this, producer FPC “A Even dure can. criteria.”74 not other, both.” apparent- but ratemaking procedure, its by nationwide (5th 1275 FPC, F.2d Ecce, which 526 producers Inc. v. the route ly abolished denied, Cir.), rate.75 ac- cert. obtain the national This could Accordingly, we re 50 147 against barriers L.Ed.2d previous reinforces the tion reasoned considera and amendatory mand for further rate hikes.76 of whether and tion the Commission given the courts have simple answer The conditions amendment under what policy this “steadfast”77 FPC upholding in optional application certificate be al attempt are an has been that amendments lowed. get proce- the benefits two distinct dures, optional na- procedure and the V. CONCLUSIONS ratemaking procedure. tional Producers certifica- reap filing optional benefit from un- created the an immediate The FPC optional exception after a nine tion as an national procedure: der the security they can com- period gestation, ratemaking give greater month Daniel, area, See, supra g., Operations, note 77. at 802. e. Gas 73. Pennzoil Offshore FPC, 1977); (5th policies Inc. v. Ecce, 560 F.2d 1217 Cir. been consistent from FPC’s have (5th Cir.), cert. beginning. original Inc. 526 F.2d 1270 Order In its reconsideration, again Or on 455-A, Both affirmed FPC from orders der No. the FPC refused FPC at years. Accord, previous Explora Texas appli Gas optional allow inclusion in certificate Corp., (1974), aff’d cations of “areawide clauses” which would published opinion, without 129, automatically applications amend or certifi 561 F.2d 1022 cates to raise levels. We affirmed the FPC, supra, reasoning. Moss v. 164 U.S. FPC’s 74. Intervenor’s at 17 n.14. Brief While Strictly App.D.C. F.2d at 469-71. decisive, obviously significant weighing it is requested speaking, producer’s case in this appropriate policy considerations to con- type amendment was different from chat sider whether who have commenced explicitly prohibited. requested has been optional procedure be would specific to a amendment was rate rather allowed to and obtain the rate. leave it rate. We than to the current area or national do not find this difference material. 2.56(a) Compare (1977) with 18 § C.F.R. suggests amend- The dissent that Pennzoil’s 2.56(a) (1976). change C.F.R. is ex- § justified “[pjresumably no ment was question because Opinion 770-A, plained Fed.Reg. had can- be if Pennzoil would raised contract, application, celled the withdrawn 2.75(n) submitted a then see 18 C.F.R. why § 76. There reasons our decision two How- application.” new contract nеw requiring the allow FPC to amendment ever, case, analogous held that in an contract Mobil U.S. Oil lawyers’ gambits loopholes in the App.D.C. on inappli based 570 F.2d 1021 phrasing First, not be of 18 important, C.F.R. 2.75 cable to this and most case. permitted Mobil, intent and to override unlike the the overall contract contract here optional provision policy program. See Penn- contained no behind affirmative for amend Indeed, not, Operators, provision ment. it could for such a zoil Inc. v. Offshore 1977); regulations would be inconsistent with the “remains, course, question the as an incentive there higher producers rates to development. challenged sufficient exploration rule finds for increased whether the to latitude the FPC broad gave proceed- In 1974 we administrative justification in the pro- the for standards develop appropriate the review- upheld by be ings that it should not seen ex- we have gram. Since finding ‘If is not ing court. ... [a] by the FPC of analysis panded or refined the administrative record sustainable on Instead, if program the work. how to make made, [agency’s] the decision must be then earli- retreated from its anything, the matter remanded to for vacated and [it] ” justifying its analytically attempts er at Yankee, Vermont further consideration.’ “kid standards, essentially lapsed into supra, 435 U.S. S.Ct. the of natu- desires glove” acquiescence Pitts, quoting Camp L.Ed.2d at 482— in this case The issue gas producers. ral 36 L.Ed.2d U.S. op- there will be been whether has not how the program, but tional certification the certifica- recognize that coordinated can be program’s standards large part experi- program is in programs. and other objectives with its encourage pragmatic accept ment. We position, it Pennzoil’s If we understand by the FPC to the approaches and flexible unsuc- high-cost, assurance that wants opinion This experiment. conduct of that of a the benefit wells will have cessful respects in which has identified a number This recapture costs. special provision give failed to the reasoned provided to be supposed is assurance promulgat- standards it consideration those wells high costs of though even remand, will have the FERC ed. On for prices paid already have raised responsibility opportunity —and —to for (because prices from low-cost wells consideration, that and to supply coordinate wells are determined gas from low-cost appropriate in the manner high, as that includes average an areawide need for new gas sup- nation’s natural costs). position accept well as low To plies reasonable rates. given by the consideration not requires This case is remanded for further Commission, for the further and we remand ceedings opinion. not inconsistent with this assurance provide that will consideration taken into the matter has been that ordered. So account, and ad- explanation with whatever Commission, discretion, in its justment ROBB, Judge, dissenting: Circuit appropriate. considers without ade- majority argues that into the ad- action intrude Our does not quate has al- explanation the Commission do not dictate ministrative domain. We proce- producers lowed to use the Commission, v. Na- see poliсy to the FCC costs that are project dure to recover Broadcasting, tional Citizens Committee ratemak- rate. National than the national 56 L.Ed.2d “already takes care majority, ing, says the with the nor do we interfere are reim- projects; cost high proce- of its own fashioning Commission’s their inclusion projects bursed for such dures, Power Vermont Yankee Nuclear see Optional base. average in the cost NRDC, 519, 543, 98 S.Ct. Corp. v. producers a certification would reimburse (1978). We time, directly, same second not re- saying its action did with na- projects, any without coordination the consideration of relevant factors flect plain ratemaking. There is thus tional this is a by law. That required consumers counting’ billing risk of ‘double court re- appellate function of continuing — high costs. The twice for the same remand to this view is reaffirmed for a any justification provided has not determina- Yankee for a court in Vermont Op. (Maj. the consumer.” double burden on action was agency’s tion of whether -at case, U.S.App.D.C., at 545 said in arbitrary. As the Court example responsible er than an rate- F.2d) The Commission is also faulted justify for failure to the conclusion making, applicant use costs, including costs, allowance of Pennzoil’s costs or nationwide which- project leases, incentive cost of would be an agreed higher. ever are the APGA majority gas supply. increase the re- the staff that costs should not be mands the case to the Commission with hand, used. On other McCulloch con- give instructions “reasoned considera- price proceeding tended that an optional my opinion tion” to these how- matters. not be con- flexible and should objections the raised questions by ever and to one cost. type fined of majority by are subsumed Commis- of Policy In Order No. Statement proce- establishing optional sion’s orders for Relating Optional Procedure Certi- dure, ‍‌‌​​‌​​​‌​​​‌​‌‌‌​‌‌‌​​​​​​‌​‌‌‌‌​‌​​​‌​‌​‌​​​‌‌‍by which were this approved court. of Natural ficating New Producer Sales 2.75; 455, 48 18 C.F.R. Order No. F.P.C. § 2.75) Gas, issued (18 48 FPC CFR 477; 218; 455A, Order No. 48 F.P.C. Moss 229): (Id. August we stated v. 502 F.2d 461 contract filed believe each that 494, 96 part, rev’d in S.Ct. U.S. procedure under the alternative 47 L.Ed.2d 186 of be the merits considered on recognized As we Moss v. FPC in provisions terms and within each con- contemplated Commission its orders that certainly tract. There must be some applications op- under the evidentiary preferred by the basis sell- procedure tional would be considered “not- er-applicant upon judge which we can withstanding that rate the contract be just whether the is contract rate and ceiling in excess of an area rate established will, showing reasonable. We absent a prior opinion a order of Commis- circumstance, accept special as con- 2.75e, sion.” 18 C.F.R. findings clusive the embodied in cost recognized 473. We decisions, may be our area rate as such although general further the cost by to time ap- supplemented from time findings embodied in area decisions order. propriate Commission accepted, would be applications be No. cost As we indicate in Order subject hearings those cost at which find- evidence is for the determi- indispensable Project ings might challenged. be rates as a just nation of reasonable and justified if by would be allowed shown to be depar- comparison point and basis of 455A, special No. circumstances. Order F.P.C., Detroit, Michigan City ture. 478-79; F.P.C. (CADC-1955), certiorari principle 502 F.2d at This 466-67. 77 S.Ct. U.S. apply- been followed the Commission cost L.Ed.2d 48 Area evidence ing Order No. 455. in McCulloch Thus Oil would, course, in the area found Corp., (1974) 52 F.P.C. 1430 the Commission decisions, said: but in accordance with the language above if a from Order present In the proceeding McCulloch producer higher than those claims costs relating has introduced cost evidence found in the area determina- applicable the five it wells in the has drilled Olson required showing a tion he is to make Prospect, Ellis County, Oklahoma. As opinion, as special In our circumstance. developed, Judge employed will be Jenkins, al, et we said in William A. project figures determining these cost and CI75-119 proposed price just that the Docket Nos. rea-' showing of cases, a staff, hand, RI75-5 and sonable. The the other earlier be deemed is not project project properly concluded that cost data costs should approval circumstance” proper evidentiary “special to constitute the basis of a 2.75 It said with all application. together Section be considered other support to submit such make data would Order material which would evidence policy No. 455 more of an rath- finding just insurance rate in and reasonable if area rate. It would be raised Pennzoil had cancelled applicable excess of the contract, “the seller- follows, says, that application, as Jenkins withdrawn its see 2.75(n) relevant evi- applicant may introduce and then submitted a C.F.R. § particular application. dence of new and a new contract sought”. for which certification respectfully suggest I In conclusion (52 1431-32) F.P.C. [Footnote omitted]. itself majority opinion concerns policy, matters of which are the business what has been said is My conclusion from court, and not of this underlying optional Commission policies by the majority com- which were settled Commission when procedure about which 455A, procedure. plains were fixed Orders 455 established the See Pennzoil’s attack now. Vermont Yankee Nuclear Power open and are not Council, for consid- application qualified on its face Natural Resources Defense (1978); procedure. eration under evidentiary need not hold an FCC v. National Citizens Committee test the validi- hearing producer Broadcasting, for each See, g., the rule. e.

ty applicability (1978); 56 L.Ed.2d 697 Action for Cases, Basin Area Rate FCC, Permian U.S.App. Television v. Children’s L.Ed.2d 437, 460-61, D.C. by the Commission approved 80$ was the evidence. Pennzoil’s supported cost was

testimony was that its

$1,649 Mcf, including a 15% rate of per Judge Law The Administrative

return. eliminating eight found that the cost after INC., CO., TRANSPORTATION C & H the return allowance years retroactivity on Inc., Daily & Dallas & Express, Mavis finding seriously is not and this $1.0148 Petitioners, Inc., Co., Forwarding New York challenged by petitioner I note also Public Commission. Service the time briefs the national rate COMMIS- COMMERCE INTERSTATE Mcf, were filed in this court was $1.01 SION & United States would have and that Pennzoil’s contract America, Respondents. Pennzoil not qualified for that rate had Hauling Rigging Co., optional certificate.

obtained its & Home Ace Doran Inc., Company, Transportаtion Aero the Com- majority require would also Freight, Trucking, Inc., Miller’s Motor give further consideration to mission to Inc., Inc., Transportation, H. J. Wales application Pennzoil’s amendment of Inc., al., Line, et Interve- Rose Truck I reason to certificate. see no nors. action in this question the Commission’s submitted regard. originally The contract No. 77-1389. 47$. rate of for a provided Pennzoil Appeals, Court of United States in economic conditions change of a Because District of Columbia Circuit. unwilling to sell however Pennzoil became buyer that it price at that and informed 27, 1978. Argued April This contract. Penn- desired to cancel the Decided Oct. 2.75(n). right zoil had a to do.' C.F.R. 31, 1978. Rehearing Denied Oct. buyer however the wishing Not to cancel 21, 1979. Denied Certiorari Feb. price 80$ and the agreed to increase See 99 S.Ct. 1222. were amended application and the contract 57) see (J.A. any- I do not accordingly. explanation, needs

thing irregular, or that Presumably question no procedure.

in this cents Mcf. notes cases, view applicable to these which we gas at issue here came from an pro discuss below summarize lease, but here involving special offshore federal two vide an overall perspective. The basic ten compensation considerations: that full reviewing sion in programs these is producers for lease acquisition costs need- they producers provide spurs with rates in lessly upward spiral in lease bid- excess of found “just those to be and rea ding; jurisdiction and that the FPC’s over sonable” under the ratemaking nationwide gas offshore with the contrasted lack of —аs return, proceedings. ancillary pro jurisdiction these gas over onshore sold in intra- grams, according FPC, encourage state the need for commerce—-lessens extra explora engage additional gas financial incentives to secure tion and development vitally Finally, needed new the New interstate market. York pro upheld sources. We have these that there are fundamental contends incon- grams satisfy if they principles. average three sistencies between the cost method There showing must be substantial evidence ratemaking, high- national under which a demonstrable connection between the cost enhance production serves to the aver- funding scrutiny in the under price and age costs and available gas supply increased which it will al producers, low-cost the standards of legedly produce.38 There must some optional program, compen- certificate p.-of U.S.App.D.C., FPC, p. 38. See Public Service Comm’n U.S. 553 of 100, 116, App.D.C. (1975) 589 F.2d infra. payments remand], quoting [advance Mobil Oil pp.---of 94 S.Ct. U.S.App.D.C., See (1974), quoting pp. Permian Basin 559-560 of 589 F.2d infra. Cases, Area Rate L.Ed.2d 40. See Consumers Union of U.S. Inc. v. U.S.App.D.C. 276, 510 F.2d 656 37. Cities of Fulton v. put Actual data was in evidence and ana-

Notes

notes procedure. Second, legal sleight- hypothesized supra. the contract Whether ing parties bearing permitted, Mobil had not the bene received and its of-hand would by applicants case, fits received under the did in this are matters ‍‌‌​​‌​​​‌​​​‌​‌‌‌​‌‌‌​​​​​​‌​‌‌‌‌​‌​​​‌​‌​‌​​​‌‌‍best what Pennzoil procedure. receipt It is the benefits these left to the Commission to consider on remand. prevents applicant option under the procedure changing drop al contracts or ping procedure out of the as it wishes.

Case Details

Case Name: Public Service Commission of the State of New York v. Federal Energy Regulatory Commission, Pennzoil Producing Co., Intervenor

Court Name: Court of Appeals for the D.C. Circuit

Date Published: Sep 28, 1978

Citation: 589 F.2d 542

Docket Number: 76-1352

Court Abbreviation: D.C. Cir.