*1 The Second National Natural Gas Rate
Cases AMERICAN PUBLIC GAS AS al., Petitioners,* et
SOCIATION
v. COMMISSION,
FEDERAL POWER
Respondent.* 76-2000.
No.
United of Appeals, States Court
District of Columbia Circuit.
Argued 23,1977 March 24,1977.
March
Decided June
As Amended on Denial of Rehearing
Aug. also, U.S.App.D.C. 380,
See F.2d 852.
* following (identi- 77-1039, Consolidated cases From the Fiñh Circuit: Continental petition- 77-1052, fied Company; Superior Circuit’s case number and Company; Oil Oil er) originally arising 77-1060, 77-1063, or transferred to this Company; Tenneco Oil Gen- Circuit, in all of which the Texas; Federal Power Com- Company 77-1064, eral American Oil respondent: mission is the 77-1065, Company; Placid Oil Shell Oil Com- 77-1066, pany; USA, Inc., al.; Aminoil et 77- Originally 76-2001, filed this Circuit: Sen- Company, al.; 77-1068, Pennzoil et Abourezk, Durkin, Aztec ators James John and Wil- 77-1069, Company; Proxmire, Oil and Gas Austral Representatives Aspin, Oil liam Les Company, Inc; 77-1070, Bedell, Brodhead, al.; Exploration, Berkley Enserch William et 76- Inc.; 77-1071, al.; 76-2053, Company, Companies; Hunt United Distribution Oil et 77- 1072, Freeport 77-1073, Commission; Company; Tennessee Public Service 2069, Minerals 76- 76-2072, 77-1074, Inc., Phillips Company; Company; Ecee, Inexco al.; 77-1075, Petroleum Oil et Service Exploration Commission of the State of New Louisiana Land Public York; 76-2103, Company; Company, al.; Marathon Oil 76- et 76-2137, Corporation; Belco Petroleum 77-1120, From the Seventh Circuit: Amoco Distributors; 76-2147, Associated Gas 77-1121, Laclede Company; Production Natural Gas 77-1005, Company; Supply Gas Mountain Fuel Pipeline America; Company of 77-1016, Inc.; Company; 77-1022, Ashland Oil 77-1219, Getty From the Ninth Circuit: Oil Corporation: Gulf Oil 77-1220, Company; Compa- Atlantic Richfield 77-1117, From the First Circuit: Cabot Cor- ny; 77-1221, Company; Union Oil poration; 77-1118, From the Tenth Circuit: Kerr- 77-1126, From the Second Circuit: Mobil Oil 77-1119, Corporation; McGee Cities Service Corporation; 77-1127, Corporation; Exxon 77-1288, Company; Skelly Company. Oil Oil 77-1139, Texaco, From the Third Circuit: Inc.; 77-1140, 77-1141, Corporation; Gulf Oil Company; Sohio Petroleum *5 Jr., Wheatley, Washington,
Charles F. D. C., with William T. Miller whom and Stan- C., Balis, Washington, W. D. were on ley petitioners the brief for in No. 76-2000 and intervenors, Ass’n, Gas American Public et al. Feldesman, Washington, C., L.
James D. petitioner, on the brief for Consumer was of America in No. 76-2000. Federation Gen., Spannaus, Atty. Warren R. State Minnesota, Paul, Minn., was on the brief St. Minnesota State of in No. petitioner, 76-2000. Wilson, Gen.,
Rodney Sp. Atty. Asst. A. Minn., Minnesota, Paul, State St. was petitioner, the brief for Minnesota Public Commission No. 76-2000. Service Counsel, Schur, Chief Public Steven M. Wisconsin, Madi- Service Commission Wis., son, petitioner, was on brief Commission of Wisconsin Public Service No. 76-2000. Graham, D. Washington, C., B.
David *6 petitioner, for Natural Rural on brief in Co-op. Elec. Ass’n No. 76-2000. C., Gunther, D. was on Washington,
John petitioner, the brief for United States Con- in Mayors ference No. 76-2000. C., F. D. was on Flug, Washington, James Energy Action petitioner, the brief for in No. 76-2000. Committee Detroit, Mich., Stephen Schlossberg, was petitioner, on the brief for United Automo- bile, Agriculture Aerospace Implement in No. 76-2000. Workers of America C., Frisk, Jr., Washington, D. Frank W. petitioner, American on the for was brief in Public Power Ass’n 76-2000. No. Colo., Brannan, Denver, was on Charles Farmers petitioner, the brief for National in Union No. 76-2000. Sinclair, Md., Potomac, D. was on the
Lee petitioner, for brief National Farmers Or- 76-2000. ganization in No. Foschio, Counsel, C., Buffalo, D. John M. Michael Corp. Young, B.
Leslie G. Silva and Houston, Tex., on Y., Phyllis Rainey, for were petitioner, City N. was on the brief Buffalo, petitioners York in 76-2000. brief for in Nos. 77-1060 New No. intervenors, Co., 77-1067 and Pennzoil et al. Straub, County Atty., Erie Buf- William Co., and Tenneco Oil et al. falo, Y., petitioner, was on brief for N. Johnson, Tex., Erie, Houston, G. New York in No. 76-2000. Thomas for County Y., Buffalo, petitioner intervenor, N. in No. Magavern, James L. also 77-1065 and for Co. appearance petitioner entered No. Shell Oil 76-2000. Attwell, Tex., Houston, J. Evans with Brazier, Mont.,
Geoffrey Helena, Johnson, Tex., Judy Houston, L. was whom M. was on the brief for for petitioner, petitioners 76-2108, Montana Con- the brief in Nos. 77-1068, intervenors, sumer Counsel in No. 76-2000. 77-1069 and Austral Co., Inc., Co., Oil Aztec Oil Gas Belco Forlenza, J., Newark, Felix G. N. was on Oil, Petroleum Corp. and Transocean Inc. the brief for petitioner, Jersey New Bd. of Public Utility III, Foster, Washington, Commissioners No. 76- Bernard A. D. Bello, Newark, 2000. Carla J., , Jr., Vivian N. C. with whom Hillyer, H. H. New Orle- also petitioner, ans, La., entered an appearance for was on petitioners the brief for Jersey New Utility Bd. of Public Commis- No. 77-1075.
sioners No. 76-2000. 111., Paul Mallory, Chicago, W. with whom Guttman, C., Daniel D. Washington, Joseph Wells, Goldstein, with M. Paul E. Chica- Roth, C., whom Alan Washington, go, 111., Albrecht, D. and Harry Washington, L. on the brief for petitioners C., in No. petitioner 76-2001 D. were on the for brief No. intervenors, Abourezk, intervenor, Senators James 77-1121 and Pipe- Natural Gas et al. 76-2053, line Co. of America in Nos. 76- 2041 and 76-2072. Solomon,
Richard A. Washington, C.,D. Schiff, with whom Y., Peter H. Albany, Counsel, N. Drexel D. Journey, Gen. Federal Counsel, Gen. Public Service Commission of Power Commission Keeley, and Patrick J. Hollis, Commission, State New York Atty., and Sheila S. Federal Power Wash- Washington, C.,D. were C., on the brief ington, D. with whom Robert W. Per- petitioner in No. intervenor, due, 76-2072 Deputy Gen. Counsel and Allan Abbot The Public Sol., Service Tuttle, Commission, State Power Federal of New York. C., brief, Washington, D. were on the Telleen, respondent. Philip Atty., R. Feder- Moring, Frederick C., Washington, D. al Commission, Washington, C., Power D. Philip Marston, whom M. Washington, also entered an appearance respondent. *7 C.,D. was on the brief for petitioner in Nos. intervenors, 76-2137 and 77-1013 and Williford, Bartlesville, Okl., Asso- John L. was ciated Gas Contratto, on Distributors. Dana the brief for in petitioner No. 76-2069 Washington, C., intervenor, D. also appear- an and entered Petroleum Co. Phillips intervenor, ance for Gas Associated Distrib- B. James A. Friday, McGraw and Randall utors. Houston, Tex., peti- were on the brief for Bates, Utah, John F. Lake with tioner Nos. City, Salt in 77-1022 and 77-1140 and whom Campbell, Jr., intervenor, Robert and R. Corp. S. G. Gulf Oil Groussman, Utah, City, Salt Lake were on Robinson, Cody Derrill and' Patricia D. the brief petitioner for in No. 77-1005. City, Okl., Oklahoma were on the for brief Mass., Falmouth, petitioner intervenor,
C. William in No. Cooper, and 77-1118 and Jones, Bethesda, Md., A. peti- Tilford for Corp. Kerr-McGee intervenor, tioners in No. 76-2041 and Unit- Hamill, Tom P. R. D. Haworth and Ros- Companies. ed Distribution Elmore, Houston, Tex., coe were on the Gooch, C., Washington, Gordon brief petitioner D. for No. in 77-1126 and in- Darling, IV, tervenor, whom Washington, Corp. Charles M. Mobil Oil Jack also Oil Co. L. Brandon entered Timmons, Getty Jr., F. Pat Wagner, B.W. Tex., intervenor, Getty Co. Houston, and for Oil Dunnam, appearance an M. James C.,D. were Bonderman, Washington, David Henderson, Dallas, Tex., was W. Robert in 77-1052 for No. petitioner brief on the petitioners in No. on the brief for 77-1071 intervenor, Superior Oil Co. and Co., intervenors, et Hunt Oil al. and Wright and Erck, Paul W. N. Martin Berner, City, New York was on Arthur S. Houston, Tex., Travis, Jr., were Edmunds in 77-1073 and petitioner the brief for No. 77-1127 in No. petitioner brief for on the intervenor, Pow- Inexco Oil Co. Wm. Neal intervenor, Corp. Exxon and Houston, Jr., Tex., ap- an ers, also entered Houston, Tex., was on Whitney, M. David No. pearance petitioner for in 77-1073. 77-1066 and in No. petitioner brief for Sackman, Ohio, Findlay, William A. was intervenors, Production Co. Aminoil No. petitioner on for in 76-2103 the brief Okl., Tulsa, on the Emerson, was Wm. H. intervenor, Co. and Marathon Oil and in- in No. 77-1120 for petitioner brief Hicks, Dallas, Tex., W. was on the Paul tervenor, Co. Amoco Production in- petitioner in No. 77-1064 and brief for C.,D. was Generelly, Washington, F.R. Bailey, Jimmy Oil C. tervenor Placid Co. 77-1016 in No. petitioner brief for on the Dallas, Tex., appearance an for also entered Oil, Gen- intervenors, Inc. and Ashland intervenor, in No. 77-1064 and petitioner Texas and also Oil Co. of American eral Placid Oil Co. in petitioner for No. appearance entered Remmers, City, Richard F. Oklahoma 77-1063. Okl, the brief for in petitioner was on No. Aston, Dallas, Tex., D. J. E. Kremer intervenor, 77-1141 and Petroleum Sohio in No. petitioner on brief for were Co. intervenor, Richfield Atlantic 77-1220 and Houston, Tex., Brandt, was on Roger L. Co. petitioner the brief for No. 77-1139 and Mass., Nail, Boston, onwas Edwin S. intervenor, Texaco, T. Ben- Inc. William 77-1117 in- petitioner brief for No. ham, Houston, Tex., appear- also entered an tervenor, Corp. Cabot Texaco, intervenor, Inc. ance for Jr., Riggs, Robert Wheeler and Sam S. Riedman, Jr., Kenneth L. and Richard F. for Tulsa, Okl., petitioner were on brief Wornson, Cal., were on the Angeles, Los intervenor, Ser- 77-1119 and Cities in No. in- petitioner in No. 77-1221 and brief vice Oil Co. tervenor, Union Oil Co. California. Badger, John M. Hous- Tom Burton and Counsel, Asst. MacDougall, Sp. P. Gordon Tex., petitioner in ton, were on the brief for Wash- Pennsylvania, Commonwealth intervenor, Continental 77-1039 and Oil No. C., for interve- D. was on the brief ington, Tex., Gooch, Houston, Co. Gordon nors, Pennsylvania Commonwealth C., IV, Washington, D. Darling, Charles M. Public Utilities Commission Pennsylvania petitioner also entered an appearance No. 76-2000. No. 77-1039. Jr., City, Scoggins, Oklahoma Harold B. C., Anger, Washington, D. P. Scott intervenor, Okl., was Inde- brief for petitioner on the brief No. 77-1070 *8 Ass’n of America in pendent Petroleum intervenor, Exploration, Inc. Enserch Nos. 76-2000 76-2001. Houston, Powers, Tex., Jr., Wm. Neal Cal., Elliott, Angeles, Los Randolph J. petitioners on brief for Nos. was intervenor, Pe- Statex was on the brief for intervenors, Free- 77-1074 and 77-1072 and troleum, Inc. Inc., al. and Co., Ecee, et port Minerals Cockrill, Jr., al. et Estate of E. Houston, Tex., Gooch, was on the Gordon intervenors, Corp., Oil Felmont brief for the brief for Monzingo was on Clay D. Rodman Co. intervenor, Corp. and The Coquina Oil 77-1219 and petitioner in No. Lacy, Birmingham, Ala., Hanschen, A. was on the Peter W. S. Malcolm H. Furbush intervenor, Corp. brief for Alabama Gas Gibson, Francisco, Cal., Daniel E. San No. 76-2000. appearances intervenor, entered for Pacific Gas and Elec. Co. Stead, Gen., Atty.
Ben for the Asst. Pub- lic Utilities Commission the State of Stevenson, Tulsa, Okl., David G. entered Dakota, South the brief for interve- intervenor, an appearance for Amerada nor, Commission, Public Utilities State Corp. Hess South Dakota. Wolf, Justin R. C., Washington, D. en- Henry M. Howard Petricoff and J. Bour- appearance intervenors, tered an for guignon, Toledo, Ohio, filed a brief on be- Co., Co., California et al. and Chevron Oil Toledo, half of the as City Ohio amicus Western Division. curiae urging reversal. T. Brooke Farnsworth and Wm. Neal Ala., Philip Wrangle, C. Birmingham, Powers, Jr., Houston, Tex., entered appear- Exploration filed a brief on of Sonat behalf intervenor, ances for Corp. Damson Oil Co. and the Offshore as amicus Co. curiae Talisman, Harold L. Wright, Dale A. Mel- urging reversal. Richter, vin Gregory Grady and Terence J. Johnson, J. Judy Evans Attwell and M. Collins, C., Washington, D. entered appear- Houston, Tex., filed a brief on behalf of intervenors, ances for Cities Service Gas Co. Small urging Producers amicus curiae Co., and Tennessee Pipeline Gas etc. reversal. Toney Anaya, Gen., Atty. New Mexico Eugene Jr., W. T. Midyett, Ward and E. Graham, and Cameron Sp. R. Asst. Atty. Nashville, Tenn., entered for appearances Gen., Fe, M., Santa N. appearances entered petitioner in No. 76-2053. intervenor, for of New State Mexico. Mann, Jr., C., J. David Washington, D. Jeffrey Clarke, A. Meith and Thomas D. entered appearance petitioner an for in No. Cal., Los Angeles, appearances entered for intervenor, 76-2147 and Laclede Gas Co. intervenor, Southern California Gas Co. Curtis, Houston, Tex., H. Lamar entered intervenor, an appearance for J. M. Huber Bomar, Jr., James L. Tenn., Shelbyville, Corp. entered appearance intervenor, an for East Tennessee Group. McGrath, J. C.,
Jerome Washington, D. appearance intervenor, entered an for In- John B. Randolph, Washington, C., D. terstate Natural Gas Ass’n of America. entered an appearance intervenor, for Mis- sissippi River Corp. Transmission Jacobs, Ronald E. Jarrett and J. Ronald Tulsa, Okl., appearances entered for inter-
venor, Skelly FAHY, Co. Oil Before Judge, Senior Circuit LEVENTHAL, Judge, Circuit and GER- Olsen, James D. Richardson, Tex., entered GESELL,* HARD A. United States District appearance intervenor, Sun Oil Co. Judge for the United States District Court (Delaware). District of Columbia. George Hugo, Houston, Tex., W. Kiely, C., Bruce F. Washington, D. entered Opinions for the Court filed LEVEN- an appearance intervenor, Gulf, Texas THAL, FAHY, Judge, and Circuit Senior Inc. Judge. Circuit Tulsa, Lynch, Okl., Thomas W. entered an intervenor, appearance for FAHY, Texas Pacific Oil dissenting part by Co., Inc. Judge. Senior Circuit
* Sitting by designation pursuant 292(a). to 28 U.S.C. §
TABLE OF CONTENTS Judge Opinion Circuit the Court LEVENTHAL........(cid:127)...............1025 OF AND SCOPE REVIEW..............................1027 I. OVERVIEW Regulatory Background.........................................1027 A. (cid:127) in FPC Docket....................................... B. Procedure Scope of Issues................................................1028 C. Judicial Review....................................1028
D. Standards Approach......................................1030 1. FPC General Changes...........................1031 of Reasons 2. Examination Regulation...........1031 Experimental Dynamic 3. Features of Novel ..................'.........................1032 II. PROCEDURAL ISSUES .. 1033 PROFITS VINTAGING TO AVOID EXCESSIVE OF III. REINSTATEMENT PAYABLE ................1034 FOR INCOME TAXES ALLOWANCE IV. COST Policy.....................................1034 Departure Prior A. from Model ......................................1036 B. Use of an Economic Objections Specific to the Model..................................1039 C. Returns........................................1039 1. Consolidated Intangible Drilling Costs.............................1040 2. Increased D. Conclusion....................................................1042 .............................1043 AND GAS RESERVES PRODUCTIVITY
V. .......1049 TO AND PRICES NATIONAL APPROACH COSTS ATTACKS ON VI. Distinguish and Offshore Gas Costs........1049 Between Onshore A. Failure to Regulation...........................1051 for Area Rate Need B. Claimed ADVANCE PAYMENTS ..........................1052 IMPACT OF VII. COST GAS .. 1057 699 RATE FOR “ROLLOVER” OF THE OPINION VIII. CONTINUATION BIENNIUM RATES......'........................1061 APPLICATION OF IX.
X. CONCLUSION....................................................1063 Judge Opinion FAHY.......................1064 for the Court bv Senior Circuit BY THE COMMISSION FOLLOWED THE PROCEDURES XI. LAWFUL.................................................1064 WERE TO ISSUE NOT WAS DISQUALIFIED THE COMMISSION XII. 770-A..............................................1067 NO. OPINION Attachment.......................................................1070 dissenting part...................1073 Judge of Senior Circuit FAHY. ..................................1073 TAX COMPONENT THE INCOME
I. PAYMENTS......................................1078 PAST ADVANCE II. and October September orders issued Judge:
LEVENTHAL, Circuit A, rehearing, 1976; on Opinion No. 770— to review petitions presents case This brief, 5, 1976. issued November Commis- Power the Federal orders following rates: prescribed the gas FPC’s orders natural nationwide second sion Mcf, (a) per for sales proceeding. $1.42 rate January on or after wells commenced embrace orders pertinent for escalation.1 provision 1975—with 1976; clarifying July 770, issued No. on $1.45 January per quarter. $1.44 increased The rate cent Of one April *10 1026 24, petitioners All 23 and 1977. on March from the $1.01 Mcf—reduced (b) $0.93 perti- violate that the FPC orders complain 1973- Opinion 770—for in prescribed
rate mandates, support lack statutory nent e., gas from i. sales of gas, 1974 biennium arbitrary and are evidence substantial 1, January on or after commenced wells peti- the consumer Essentially, capricious. 1, 1975. This January prior 1973 and by that the rates FPC complain tioners subject to escalation.2 rate is also com- high; producer petitioners are too Mcf, (c) per applicable to sales of $0.52 low. There those rates are too plain where a con- gas under “renewal contracts” will parties positions, other as are also terms. expired by Again tract has its own appear.
there is escalation.3
provided
this court
Pending disposition,
refunds. While
770
contingent
increases from
represent
These rates
by the Commis
was under reconsideration
Mcf, established
per
nationwide rate of $.52
sion,
jurisdiction un
exercised its
this court
699-H,
upheld
was
which
by Opinion No.
Act,
1651
All
28 U.S.C. §
der the
Writs
FPC,
(5th
1061
Cir.
520 F.2d
Co. v.
Shell Oil
possibility
of a re
(1970),
preserve
Co.
nom. California
1975), cert. denied sub
1976,
9,
August
fund. See Order
2660,
941,
49
FPC,
96
v.
426 U.S.
S.Ct.
FPC,
v.
177
Association
U.S.
AmericanPublic Gas
(1976).
394
L.Ed.2d
209,
(1976). After
rate
in
B. Procedure
FPC Docket
Opinion 699
resulted in
R-389-B. This
No.
4, 1974,
On December
day
same
in
amendments, culminating
Opinion
and
Opinion
issued,
699-H
the FPC instituted
4, 1974, which
699-H,
December
issued
No.
RM-75-14,
Docket
which culminated in the
per
52$
of
Mcf
base rate
fixed a nationwide
opinions (770
orders and
770-A)
and
cur-
Alas-
(except
States
throughout
the United
rently under
The
projected
review.
notice
com-
gas (governing wells
ka) for new
need for a
Opinion
revision of
699-H to
January
after
begun
deliveries
menced and
govern
gas
new natural
for the 1975-1976
1973,
replacing
new contracts
1,
and also
changes
might
biennium and such
as
fur-
Opin-
“flowing gas”).
expired contracts on
ther the public interest.
subsequent clarifications
ion 699 and its
opinion
propose specific
in the 1975 Shell
The FPC did not
rates
were affirmed
sketches,
rely
re-
opinion
the Fifth Circuit.5 That
its Notice but stated
would
background
by
parties
and Commission
repeat,
sponses
and we do
regula-
in producer
designated
respondents
staff. The order
previous developments
abstinence;
1954
early
pipeline companies,
tion —the FPC’s
all
and all
interstate
decision,6
Act
Phillips
jurisdictional
that the Natural Gas
sales exceed-
producers
charged by
annum,
regulation
prices
for
10
who
provided
per
million Mcf
have
sales;
in interstate
Producer Re-
gas producers
participated
natural
since
as Indicated
by
regulation
Ultimately
parties
some 46
spondents.
and the FPC’s
areas,
segments
in the Permian Basin
all
upheld
representing
regional
groups
parties,
747,
Cases,
industry
88 S.Ct.
and the consum-
gas
390
of the natural
Area Rate
U.S.
1344,
(1968).
filed written comments
ing public,
cannot
of
ation
ings
support
in the absence
reasoned
is underscored
nation’s wide-
ranging
comprehensive
grounded
experience.
in
reevaluation of
energy policy.
impact
There is no direct
on
underlying, principle
The
is broader than
issues
us. Yet
legal
before
the review
natural
The en banc
regulation.
opin
equity
ap
court' acts as a court of
CAB,
ion in American Airlines v.
123 U.S.
praising
need and method of further
(1966)
F.2d 624
App.D.C.
presented
359
Co.,
of
consideration
issues. See Mobil Oil
of
judicial approval
space
the blocked
Equity
417
94
his
U.S.
S.Ct.
program
projection, taking
reasonable
torically
changing
takes into account
cir
agency’s capacity
duty
into account the
context,
present
cumstances.
In
these
light
of
provide reappraisal
experi
come to include revision of the structure
F.2d,
(And
p.
see
of 359
633
p.
ence.
of
functions
the Commission whose or
F.2d: “a
will
experience
359
month
ders are under review.
a year
hearings.”)
worth
In United
light
In the
of this broad perspective, we
al.,
v. CAB
et
States
Airlines
[American
turn
more particular
contentions
ALPA,
et al.],
U.S.App.D.C.
511
raised
petitions
consolidated
for re-
(1975),
F.2d 1315
the court
upheld
Octo
view.
an air
approving
ber
CAB order
carri
agreement
ers’
capacity
reduction as
II. PROCEDURAL ISSUES
action,
emergency
interim or
it set
order
July
aside
CAB ex
varying
With
emphases,
consumer in-
tending its
approval because of
agency’s
procedures
terests have
attacked
used
provide
failure to
continuing consideration
by the FPC.
question
The basic
is whether
of the matter
a non-emergency
basis.
procedure
notice-and-comment
of infor-
mal rulemaking
permissible
for an enter-
however,
principle
vitality,
has full
prise
such magnitude
and complexity.
gas regulation,
the field of natural
as is
This issue has been given special attention.
dramatized
this court’s actions concern
Our discussion
appears
opinion of
ing the
program
pay
FPC’s
for advance
Judge Fahy
approves
the FPC’s basic
ments to
producers.
this court
procedural approach.
“justifiable
sustained the
as a
experi
order
possibility
residual
procedure
continuing
ment
search for solutions
may have been
as to
inadequate
particular
to our nation’s
shortage
critical
natural
issues is
separate
subsumed under
sections
gas.”
FPC,
Public
N. Y. v.
Serv. Comm. of
opinion, dealing
with the evidence
307, 317,
U.S.App.D.C.
467 F.2d
reasoning
pertinent
to those issues.
(1972). The court stressed the need for
*16
Subsequently,
further
evaluation.
Similarly
necessarily
those sections
re-
court held that
FPC
failed
the
had
to en
flect the court’s
conten-
consideration
review,
in
gage
meaningful
analysis and
tion that even
is
agency
where
experience
pro
evaluation of
under
required to institute more than a minimal
gram,
extension,
and
to affirm
declined
an
procedure,
notice and written comment
FPC,
Public Serv.
of N.
v.
Comm.
Y.
167 court may call for
procedures
additional
as
U.S.App.D.C. 100,
(1975).
1034 only price Opin- is increase over that change, say producers, the allowed
This situation be- degree from the difference ions 699 and 699-H. 770 allows 43 in de- the FPC in 1975. Differences Mcf per fore cents to cover the of income cost justify as to may become so wide gree gas taxes on within the biennium. 1975-76 response. and It was difference outlook price This constitutes of of 26.7% the total the of Commis- policy the latitude within is and somewhat less than the amount $1.61 interests, empha- to sion, in its balance of profits (48 cents). allowed for here, “responsibility it to size, as did its methodology The discounted cash flow economic and harmful dis- minimize severe the by adjusts used for the rates.”19 due to increased location the impact ways. of federal tax code in two is approach at producers say First, model credits the producers regulation the function of rate odds with of tax produc- the value benefits which the what whereby government simulates ers can obtain by deducting their various free market. would have been achieved in a intangible drilling costs. as- The model support producers In of this contention these expensed sumes that costs will be at alia, Inc., cite, Texaco, inter v. FPC U.S. possible time, the earliest pro- and that the (1974). S.Ct. L.Ed.2d ducer the model of well will have other is opinion specifi- That ironic because that taxable income which preproduction these held Order No. 428 not vulnerable cally was deductions could offset. In to reflect order just because set different levels and savings gains the tax producer rates for and reasonable small expense, from a deductible the model re- 390, 94 large producers. 417 at S.Ct. U.S. gross expense duces the cash outlay for that Not on unexpectedly the Court relied 48%, Thus, the statutory tax rate. when rejected Permian. Texaco the Court outlay adjusted the net is by the discount was free contention that the Commission value, obtain present factor to the con- when it rely exclusively prices on market gains present sumer also value legislative regulation premise tax deduction.20 there was no free market competitive adjustment The second made the Com- oil industry. and Simulation of paying mission was to allow for the cost competitive what would obtain in a free This, too, income tax at 48% of profits. premise regulation market is a of rate discounted obtain its present value. As one, speculative often a one that and noted, previously price the increment neither conclusive nor over the dominant consisting an allowance these to cover adjustments pragmatic need strive with 43$. taxes is for a fair balance producer consumer turn objec- We now to the consumers’ interests. tions, beginning with generalized moving specific. IV. COST ALLOWANCE FOR INCOME TAXES PAYABLE Departure A. from Prior Policy examine Commission’s initially
We
treatment of the
income
impact
challenge
of federal
The consumers
the Commis-
taxes
natural
incre-
sion’s treatment
on the
operations.
tax effects
price
ground
ment to
taxes
pay-
methodology
allowed for income
able constitutes the
largest portion
unexplained departure
constitutes an
from
2057, citing
Appalachi-
19. R.
is somewhat difficult to
or ex-
Area Rates for
understand
Areas,
However,
plain.
exactly
Illinois Basin
FPC
it has
math-
same
1309-10,
FPC,
aff’d Shell
1035 industry.24 July 1, 1976, Effective previ- it re- 699 Opinion methodology percentage depletion allowance pealed Opinion In 699 opinions.21 ous Commission respect producers,25 to most to reflect and limit- costs had reduced foreign the use of tax credits to foreign but had ed deductions generated tax credits taxes related income.26 As the consumers recog- income payment allowed nize, repeal depletion of the allowance credits.22 Where of those to the extent impact alone have a substantial tax liabil- will on the incurred a producer an individual producers’ liability.27 tax credits, petition he could his ity in excess estimates that allowed for upon 27$ 43$ it relief, could obtain special taxes is attributable to the repeal that he tax return with his actual showing depletion might provide con- allowance. Others The consumers tax. paid had in fact from different estimates. But it is clear that movement the Commission’s tend that congressional which assumes action procedure, significantly affects Opinion 699 net tax setting will have no the tax in which current producers drilling is model, an gives 770A, taking place. to the 770 In liability, Com- statutory at the explained: for income taxes allowance mission unjust- rate, unexplained constitutes required That action a reconsideration of agency policy. in change ifiable impact overall of the income tax law producer on the rate-making methodolo- contention. merit in this We find no gy. The re- reconsideration of the issue noted, Boston Greater already we have As premises prior vealed that on which agency’s “An view holds: Corp. TV v. FGG decisions were founded were inaccurate interest public in the of what is outset, law, at the by change eroded change with or without change, either properly gas accounted for in the new circumstances,” long agency as the costing model. a “reasoned supplies its course changing indicating prior policies analysis R. 3636. changed, casually ig being deliberately thoroughgoing This kind of reexamina- 384, 444 F.2d U.S.App.D.C. nored.” 143 tion of the tax issue was no means modi at 852. In this case the Commission’s precluded by the analysis Opinion 699 or justified both methodology
fication of
judicial
affirming
in the
it.
opinion
in cir
changes
responsive
because
FPC,
1061,
Shell Oil Co. v.
520 F.2d
1081
of a
product
and because it is
cumstance
(1975),
upheld
the Fifth Circuit
Com-
of the tax is
reexamination
conscientious
choice” to exclude an aver-
“policy
mission’s
sue.
component
ground
tax
on the
that the
age
liability
individual
Act of 197523
variation of tax
between
The Tax Reduction
reduced
individuals,
significant
was more
than the
but was intend-
taxes for most
Reconsideration
industry liability.
taxes for the oil and
overall
ed to increase
producer liability
Basin Area
24. An increase in
is contem-
cite Permian
21. The consumers
159,
(1965),
plated by
613A(b)(2)(B) (Supp.
Proceeding,
V
26
§
34
206-07
U.S.C.
Rate
F.P.C.
1975).
1344,
affd,
88 S.Ct.
20 L.Ed.2d
390 U.S.
(1968);
Area Rate Pro-
Southern Louisiana
1975).
(1968),
613A(a) (Supp.
ceeding,
aff’d sub
V
40 F.P.C.
585-86
25. See 26 U.S.C. §
Area Rate
v.
nom. Southern Louisiana
Cases
FPC, Cir.,
1975).
sub nom.
(Supp.
428 F.2d
cert. denied
V
26. See 26 U.S.C. 907
§
FPC,
Municipal
Group
400 U.S.
Dist.
v.
(1970),
as the
Ways
29. E.
Cities of
v.
cert. denied sub nom.
v.
[etc.]
California
(4th
1961);
(1961).
staggered wells.36 As agency nor the court can Neither consistently applied, is ogy required to on whether fairly speculate do from taxes that “savings” will have no deregulation, of its how there will be also the benefit the consum- not inure to when, accompanied whether can be ers. assuring protec- reasonable other measures One caveat is critical. fairness tion that time. consumers at methodology depends di- Commission’s rectly assumption on the that it will be D. Conclusion consistently applied in future biennial rate- making proceedings. If the previous of the The FPC’s treatment tax other adopt were some method problem deliberately 699 was accounting adjust which failed left tentative further consideration. deductions, produc- full value of current The repeal depletion allowance neces- “savings” ers could achieve a indeed tax are aware that approach. sitated a new We permanent and would inure to methodology yields Commission’s the benefit of consumers. greater than allow- depletion amount point The ultimate ance alone. We revert to Commissioner ob- Smith’s reflects a determi- approach servation, concurring in the treatment of comprehensive both fair. nation to be taxes, noting of meth- “continuity need rates in The Commission’s to set odology underly- . . is an . essential audit it could not await the means that ing premise rate herein.” established new tax returns under act. analysis of R. 3814. stress that our approval We made important, More rates these is conditioned the continua- judgment implausible reasoned it was tion of such We treatment. see no need *25 yield that tax use- historical returns would out in spell opinion operation this liability ful information about the tax ac- consequences condition. of this It suffices gas. cruing jurisdictional from 1975-76 say to that any new biennial rates that did designed give The model is to Commission’s adjust not for the full value of price time compensation any full tax taken, producer tax but not previously deductions payments and the the full benefit accounted for the consumer in offsets benefit of con- sumers, model, “arbitrary capri- any savings. logical tax would be It is a experience cious.” that into account all that takes put successive it that down. The value each deferral consumers the tax model might be in rates for the confronted with an infinite series of would be reflected lower conceptual, produced subsequent in For tax deferrals. This is and not suffi- biennia. discus- ciently probable consequences deregula- of future to warranted extended consid- sion situation, U.S.App.D.C., tion, pages---of eration. even in that But extreme see methodology pages not break would 1043-1044 of 567 F.2d.
1Q43 reasonably Judge Fahy’s known and that can be antici- demonstrates, is own analysis pated. producers’ tax pertaining returns to
revenues from wells drilled the most biennium recent would be not available un- given respectful We have the most con- til, earliest, at the 1977-78. Commis- sideration to the of our colleague views long sion’s model obviates wait for fil- Judge point, Pahy dissenting on and to returns, incredibly and the difficult companies concern oil major may his that of calculating specific task taxes wells not ways deferring presently find taxes from overall returns. model. reflected Never- theless, ap- we think that the Commission’s experience develop If defects in its should is a to this issue reasonable proach thorny methodology, for reasons that not fore- one, at and should be sustained this time. court, seen the Commission or the Implicit Judge Fahy’s in much concern any least on projected by basis now consum- assumption nonjurisdic- is an of losses interests, er that would a reason be for a (and tional benefits activities tax from us- approach different future. for the For the ing those losses to reduce taxes due on what present, we have conforms full jurisdictional sales). The Commission requirement measure that the agency found it implausible that as a make a conscientious effort to seek an- whole unregu- would sustain losses their swers, apply knowledge analysis making gains lated activities while in sales decisionmaking. with reasoned of regulated gas. interstate There is no challenge evidence in the record certainly not V.
conclusion. It is unreasonable PRODUCTIVITY AND GAS to presume, contrary in the absence of evi- RESERVES dence, unregulated prices that the sphere of We turn next pro- to the calculation of likely to be profitable. more ductivity, an important issue both and diffi- If there events that are other tax reduce cult. producers’ liability, parties tax can We begin by voicing malaise. The FPC’s bring these to the attention Commis- thin, approach for its Commis- support sion, so that its model can refined. Our divergent opinion suggesting sioner Smith’s approval framework of here of the basic cogent, modifications modest seems pre- Commission’s model is not intended to rejoinder Yet we ad- weak. adjustment. analysis clude further In- ourselves that is not the func- monish ours deed, perceive we sup- no basis would review, tion of decision but of circumscribed port Commission’s refusal to consider such saying presumption limited whether emerge information as may regarding taxes favoring FPC’s has reasonableness been and the paid, implications concerning the overcome, whether it shown has been accuracy type of its model. If this of anal- FPC failed to seek reasoned answers. achieved, can be ysis and discloses flaw in model, can component tax be ad- charge The consumer interests sales, just as to as the cost of justed future systematic FPC’s course was a determina- adjusted service was the 1973-1974 bi- high tion resolve all costs on the issues ennium changes productivity. for actual as get gas prices possible side close the quarterly contemplated And escalation the intrastate level. contention is that .The by Opinion 770 a rather obvious provides the FPC to the uncon- abdicate *26 simple implementing and mechanism market, may reasonably trolled and act adjustments. such a cat tail when trying like to chase its go tail is free to will. Yet courts In sum we be unfair where it believe it would rarely undercutting have deny producers any allowance basis for officials’ uncertainty inquiring at all as to the statements of reasons into by taxes because of sub- shoulder. precise liability they jective will As motivations. This in turn per well cost Mcf. successful objective data, we are con-
Looking at
hole cost
dry
of
underpins determination
there is a bare mini-
to find that
strained
Mcf, cost
Mcf,
per
cost
per
acquisition
lease
rulings. We can
the FPC’s
support
mum to
ex-
and other
of other
facilities
production
any
future
rate
caution that
and do
ploration
per
costs
Mcf.
a more
be need for
solid
order there will
pro-
result. That
undergirding of
proceeding
In
this
quest for more
government’s
by
vided
number of suc-
figures for the
obtained its
If a future
gas reserves.
firm data on
under
years
drilling
feet
in the
cessful
change in stat-
governed by a
proceeding is
the American
publication
analysis from
whereby
rules
intrastate sales
utory ground
Institute,38
there is relative-
Petroleum
and
controlled,
process may
become
are
figures.
controversy about
those
ly little
At
and realistic.
manageable
more
reserves
proven
concerning
For data
approval,
our
but
juncture we announce
discovered,
on data
relied
sigh
whoop.
with more of a
than a
Association.*
supplied by the American Gas
¡fc
$
sfc
ü:
aft
“reserves added” in a
figures
AGA
opinion
The Fifth
describes
net
computed
Circuit’s Shell
on a
basis:
given year are
key application
newly
is a
of a
why “productivity”
only proven reserves
they include not
year
cost-based formula. See
In
this factor
FPC
pro-
for which
year
on the most recent
gas)37
lated for nonassociated
determines
cus
Membership
is,
gas”
and each
omitting
on the Committee
for “associated
37. That
data
produced
by product
operation.
by
individual so
as a
of oil
is retained
each
Subcommittee
properly
assignments
long
are
dis-
as the
Quarterly
Drilling
Review of
Statistics for
policies
charged
are
and the
of the Committee
States,
by
published
the American
the United
expected to serve
individual is
observed. Each
only
*27
(1975),
paid by
companies
in-
those
data are available
but
for
ductivity
spent
time
range
by
serving
to a
created
two
on the
stead looked
Subcommittee.41 Petitioners
averages. Because
AGA
that
multi-year
charge
Subcommittee
respon-
members
very
show a
substantial downward
reporting particular
data
sible for
areas may
past
years,
in
over the
productivity
trend
have limited or no access to proprietary
urged
data,
FPC consider
producers
possessed
other than that
by the mem-
e.,
(i.
relatively
multi-year period
short
ber’s own employer,42 and that
there is no
Commission,
years).
four-five
The
how- procedure
verifying
the estimates sub-
ever,
average productivity
calculated
reporters.43
mitted
Because the
(323 Mcf/ft)
past eight years
and for
data,
Subcommittees work with confidential
(279 Mcf/ft)
then
past
years
nine
they meet in private,
except
for isolat-
figure
range
selected a
at the center of that
audits,
ed
there
public
is no
or Commission
Mcf/ft)
for its calculation
(300
basis
access to the raw data.44 The Commission
Through
rate.
the same
of the national
concedes
it
does not even know some
methodology,
the Commission settled on a
assumptions
of the
on which the AGA esti-
in lieu
figure
gas,
of 373 Mcf/ft for 1973-74
mates are based.45
of 485
in
of the estimate
Mcf/ft
recognize
Petitioners
the Supreme
699-H.
approved
Court
the Commission’s reliance
petitions opposing
Permian,
The consumer
on
data in
801,
AGA
1046
data,
We
they
judicious
an alternative set of
concluded that
use of
not offer
industry data collected after
this data and the
argue
prompt
issuance of
subject
Opinion
No. 770
Permian and not
would be better
than
delay.
further
inadequate
verification are an
basis on
investigation
permitted
that the informal
is not the most desirable source of
pared this
which to fix a new national rate. Petition
taint
explains that its own efforts to collect such
data
been
er
sion states:50
Cir.
Oil Co. of Calif. v.
The Commission
APGA
at
1976).
drilling
stayed by
from the
which
” means of
puts
data will suffice to remove the
data and an
and
cross-examine
the consumers and Staff are
staff of all
Opinion
it:
court order.49 See Union derivation of data.
present
industry
independent
“Nothing
FPC,
implicitly acknowledges
compulsory
770-A the
wereWe faced with the choice of further fairly tence. “Courts ‘cannot demand the the new delaying the issuance of national perfect expense at achiev- ” 53 opinion rate until “in sufficient house” expect able.’ While we would the Com- gathered data could be and used in this procedures mission to use its own revised proceeding, proceeding gather or the AGA data for the next national ratemak- Opinion API ing proceeding,54 juncture data as done No. 699. at this we cannot 6,875 Bcf, figure Study, Report, and the annual has 52. National AGA not Gas Reserve A Staff 5-digit prepared by returned since level. the FPC Staff for the National Gas Survey, September Congress- revised 1973. 48. APGA Brief at 66. pointed study only men out this covers proven through reserves 1970. 42', Opinion 770-A at R. 3608. FPC, 53. Pub. Serv. Comm. of N. Y. v. 770-A at R. 3609. 100, 108, U.S.App.D.C. (1974) 511 F.2d (advance payments). Report Updated 51. Staff on the 31-Lease Inves- tigation, (June 1976), Docket No. RM 75-14 prevented 54. The Ninth Circuit the Commis- emphasizes 41 F.R. 26573. The Commission using gather sion from Form 40 to data on the the Staffs conclusion that “the estimates grounds that the record lacked sufficient evi- petition- total are reasonable.” R. 2447. The producers’ dence to overcome the contention argue that ers context, this statement must be read in reservoir-by-reservoir accounting that a light following sentence that unduly Co., supra, burdensome. Union Oil at states that there was a minor difference in 1042-44. The court also found that the Com- staff, totals for the 19 fields on which the sufficiently justified provi- mission had not producer and AGA all had reserves estimates public discoveries, sions for disclosure of the data. for 1971-72 and that this conclu- objections ap- apply F.2d 1044 45. These do not sion was not intended to to those fields pear entirely preclude to be of the kind that would on the AGA failed include a report period. within other Commission efforts to collect on the the time Because of the data conclusion, reserves, ambiguity growth proven particular we do we note that Nevertheless, rely presently we note that the it. has this matter un- report against Staff did not recommend use of der its consideration. data, spoke but rather of the need for AGA trending averaging. some form of that, than that given the context FPC’s used 699.61 hold For that analysis for further program efforts at and earlier ratemaking national proceeding, the *29 data is so de- cross-checking, AGA initially projected range had a it cannot serve as void of substance from 7 to years,62 10 but had ultimately “substantial evidence.” year settled on a 7 period as the basis for its productivity calculation.63 This choice was level, petitioners argue At the next Shell.64 As already in upheld noted, Opin in the there are inaccuracies specific ion 770 selected a figure midway in the 8 to rejection for their statistics which call AGA Thus, year ranges. 9 Petitioners did adjustments. or for additional studies, grapple problem, a with the including study pre and made an cite several Competition attempt the Bureau of pared by impact to reduce the of any lag in Commission,55 a House Federal Trade reporting additions to reserves. staff Representatives study,56 subcommittee A potential second source of inaccuracy which the study and the BNG on Commis by petitioners identified is the inclusion of also relied.57 sion revisions in the AGA reserves added data. According study, principal to the BNG a As the Commission stated in Opinion 65 in the AGA data is inaccuracy source of 699: reported not in that new reserves are often significant A factor in the decline [in discovery.58 of their a year As result of reserve sharp is the increase in additions] reporting, in the AGA “reserves “lag” this negative net existing revisions to nonas- year will not figure given added” for a sociated reserves that was first re- year. made in that reflect all the discoveries ported in 1969 and which has continued to However, actually include reserves this day. Hence, in as the prior year. discovered figures The AGA show that year first out, multi-year the use of Report points in which the revisions neg- net statistic was impact minimize the averages tends to 1969,66 ative was eight and that for the year reporting.59 in In of this any lag light 1968-1975, period negative revisions ex- did not recommend the analysis, Staff 7,502 positive ceeded revisions Bcf.67 data, but rather cau- rejection of the AGA net negative produc- These revisions reduce figures tioned that the AGA be used with tivity for given year though even some of
“discretion,” and commended the Commis- adjustments them may be to reserves dis- past multi-year averages.60 sion’s use of prior years. covered in 770, Opinion the Commission acknowl The Commission has edged utility multi-year average recognized po- accounting misreported data, tential deficiency discoveries its revision but fact, and, in longer period chose to look at a concluded “important that revisions are an Memorandum 55. Staff to the Federal Trade 59. R. 2448. Association, American Gas et 25, al., (March 1975). File No. 711-0042 60. Id record, entire memorandum is not portions quoted Appendix 1 to the Initial 34-38, 61. 770 Mimeo at R. 2529-2533. APGA, R. 1052-1057. Comments 2212, (1974). 62. 51 2246 F.P.C. Hearings Supplies 56. Natural Gas Before Oversight the House Subcomm. on and Investi- 63. 51 at F.P.C. 2281. Comm, gations Foreign on Interstate Commerce, Sess., Cong., January 94th 2d Supra 64. note 5. (testimony Galloway). Dr. John (1974). 65. 51 F.P.C. Report Updated 57. Staff on the 31-Lease Inves- tigation, (June 1976), Opinion 699, Docket No. RM 75-14 (Appendix 66. 51 F.P.C. A). 41 F.R. 26583. 58. R. 2447. 770-A at R. 3614. We take into account The Commission information.”68
piece of
that,
attempt
the extent that the revi-
to correct
for the weaknesses of its
out
points
year
using
made in a
data
year average,
discoveries
8-9
as a
relate to
sions
series, the inclusion of means of minimizing any lag
reporting
the data
covered
necessary to obtain an misreporting
say
of reserves. We cannot
adjustments
these
during
added
picture of reserves
Commission has failed “to seek an-
accurate
Oil,
But
period.
because
swers.” Mobil
multi-year
U.S.
94 S.Ct.
identify
year
say
And we cannot
at the present
AGA does
relate,
juncture
tell
impossible
revisions
it is
either that
Commission’s de-
be included in the
which revisions should
termination is irrational or that
the under-
*30
average.
lying data are too insubstantial
multi-year
permit
to
agency
the
to
grapple
prob-
the serious
choice between uti-
Faced with a difficult
covering
lems of
the
of natural
in
costs
adjust
fig-
historical
lizing revision data
a time
shortage
declining pro-
altogether,
it
the Commis-
excluding
ures or
ductivity.
incorporate
adjust-
these
sion decided to
upheld by
adjustment
This was
the Fifth Cir-
Further
ments.
of the AGA data
Shell,
might
in
Reviewing productivity lag reporting ment that a in reserves is not whole, provided calculation as a we find that agency because the is unable to comments the parties quantify lag precisely, and its own staff contrary and as provided minimally adequate studies evi- legal requirement to the that an agency use support dence to its use of the 300 Mcf/ft judgment salvage its best the inade- figure. protesting quate, Petitioners increase rather than recognized abdicate to have identified some deficiencies in the data deficiencies. That does not end the discus- Commission,69 sion, by used poten- put but these for Commission it that tial inaccuracies lag reporting do not undermine Com- addition to the reserves productivity (tending costs) mission’s basic conclusion that a lag increase there was has over the substantially past reporting (tending declined dec- drilling decrease costs). ade. petitioners What is abdication to is lay way 770 at R. 2638. batable for us to down a choice either by as mandated law. It lies within the realm of policy arguments latitude. In addition to the discussed in text, petitioners points. make two further petitioners A second contention of is that the First, they argue that the errone- failed to take into account the fact ously computed average productivity price contemplated by that the increase in year periods by dividing the 8 and 9 the total Opinion 770 will itself increase the reserves drilling footage by the total reserves added dur- recovery economically whose is feasible. Here multi-year period, using rather than again, point, the Commission did consider this average averages. of annual The Commis- answers, and did seek but found no means of calculation, say challeng- sion’s method of adjusting figures project- historical to take this ers, gives years weight too much to recent ed effect into account. 770-A at R. drilling footage larger. which the That many government, 3617. As so issues of calculation is undeniable. But whether sound problem to state is easier than a solution. theory average statistical counsels an of aver- provide compelling Petitioners no answer. ages, weighting, rather than such a is too de- be conducted Commission, statute new what to them prudent a wild to the Commission judgment agency. best muddy, but in the end The matter is
guess. question The ultimate is whether we cannot the view that we are left with finding and conclusion us is before minimal- met their heavy have say petitioners that ly adequate power under our circumscribed nec- demonstrating refinements burden of of review. It is our judgment our say We cannot that the validity. essary equity, review as a court of concerned with these re- obligated to undertake FPC was justice, interest of the overall U.S.C. finements, juncture. at least at this is best fulfilled affirmance of the § petitioners’ We have also considered juncture. under review at this ruling case be remanded to suggestion up: approve To sum We do not or em- proceedings ex- for further figures; simply we tolerate brace the AGA data or accuracy of AGA ploring the purposes proceeding. them for of this We adjustments. further possibility expect the next biennium the Com- event, however, petition- producer put mission will have into effect its own they would be entitled point ers out that procedures gathering reserves data. To record with more figures refine other the extent AGA data remain for considera- increases. The showing data cost current *31 tion, contemplate we that the Commission not insubstantial.70 Additional problem is acquired permit will have information to with a second round together proceedings, adjustments supplied by further to the data create additional uncer- would appeals specific In the AGA. circumstances of a time when industry at some tainty for the proceeding, we find that Commis- necessary encourage growth. stability is productivity sion’s calculation is adequately pre- lite have pendente While our orders supported.72 contingent of a re- possibility served the judicial in the event of a declaration fund national the context of the invalidity, VI. ATTACKS ON NATIONAL AP- declaration, us make such a emergency bids PROACH TO COSTS AND PRICES can, other, if fairly we way one opinion accepting In this we are af- suspense. The
rather than hold matters pre- course in firming pre- will not provide kind of affirmance we scribing ceiling nationwide rates based on taking corrective vent the Commission from composite figures nationwide of nationwide information, new see light action in the objections TWo have been leveled. costs. 811, Mobil, at S.Ct. U.S. subsequently objection is the Considered ruling of our on future impact As for the Rocky in the Mountain area that producers ratemaking for the ratemaking, preparation higher, therefore their their costs already for 1977-78 biennium has be- ceiling higher. should be prices building an ad- gun.71 The Commission 40, per- Form ministrative record for its Distinguish A. Failure to Between On- information gathering mit its of direct shore and Offshore Gas Costs reserves, producers through rather than objection given that has us dis appraisal by industry statistical commit- pause tinct is the contention that “there is point, tee. we do not rest on the we While validity no to the Commission’s continued ignore possibility future cannot treating single gas a new as a ratemaking governed by upon insistence producers argument dissenting be- concluded 70. claimed at oral 72. The Commissioner recently published fig- productivity court JAS should have been 354 Mcf/ft fore this drilling judi- cost in 1975 showed a ures for actual than 300 Mcf. R. 2692. From the rather Transcript p. perspective, increase. at March the zone of reasonableness cial may 20% figures. well embrace both 77-13, RM 42 F.R. 13048 71. FPC Docket No. 8, 1977). (March subject unregulated gas underlying that the
source onshore reason really high- competition, gas and offshore intrastate er gas, costs incurred on onshore and those from the Federal domain over already costs had recouped by unregu- been plenary authority exercises lated price unregulated increases in the in- market must look to which the interstate trastate market. gas supplies.”73 most of its new There is no reality higher doubt Congressmen press objec- APGA prices intrastate market perti- for all presses New York it as gas. tion as to all periods. Indeed, nent Opinion No. 770 it- price in a flowing gas, acquiescing $1.42 self reveals how prices intrastate had noncost basis to seek gas for new on a climbed the first quarter of well the interstate market. onshore 770,75 before the Opinion issuance of to an Opinion dissent Commissioner Smith’s average in per excess of By Mcf. $1.50 questioned part upward No. 770 revi- Opinion time No. 770-A issued on Nov. Accepting sion in the 1973-74 biennium. 1976, there was another jump intrastate “vintage” the decision to the 1973-74 natu- prices, unexpected in view of the $1.42 gas, ral and the need for an income tax price set in No. 770.76 allowance future delivery gas, of that his question 770-A, was as to other costs. “The No.
attempt to reconstruct an average ‘actual’ addressed itself to the arguments peti- nationwide cost for 1973-74 results in com- separate tioners for pricing of gas. offshore that, pensating for costs for The Commission challenged the implicit part, the most were not incurred with re- “assumption that onshore costs are higher spect sold in interstate commerce.” than offshore costs. analysis The cost be- (Opin. 2693). R. He continues: low indicates that the contrary is probably appear would the vast majority true.”
[I]t
Mimeo at
R. 3703. The Com-
*32
higher
of that
cost natural gas was in-
(#
15)
mission’s exhibits
14 and
show that
tended for and sold in the intrastate mar-
gas
while offshore
“many
higher”
has
times
[Wjhen
ket.
engages
in
productivity (1651
against 196),
as
it has
retrospective compensatory ratemaking,
higher
costs,
drilling
dry hole costs and
actually
should not costs
incurred with
acquisition
lease
costs. The “bottom line”
respect to the particular gas that is being
$1.63,
of these
average
exhibits is an
cost of
repriced provide
guideline
for the re- with
for onshore
$1.51
and
for off-
$1.84
pricing
(Id.)74
decision?
shore. The
acknowledges
FPC
33$
that this
“if,
difference would
with
be reduced
Starting
objection,
the most
some
modest
parties claim,
there
sparse
would be at least a
and the
ques-
substantial
UDC data
tion whether
indicates77
the Commission has
offshore
been arbi-
rates-of-take are faster
trary
raising
in
prices
(for
to the consumers
than those employed
Opinion
in
No. 770
offshore as well as
gas produced
onshore
15-year
assumed a
It
[which
rate-of-take].
during
biennium)
the 1973-74
if it develops
concludes that “a split between onshore and
73.
74. Commissioner Smith
75.
vis-a-vis the intrastate
the interstate market tive
Public Service
new contracts with
$1.50,
market would deteriorate even more.”
The data show an
Quoted
rates should cover the “full
80%
producer
$1.78
Exh.
volume
Commission.
p.
.
11 of brief of New York
.
average price
R. 2609.
57%
renegotiated
. else the
agreed
excess of
of volume above
marginal
position
$1.50
contracts,
$1.54
prospec-
Mcf.
cost
for
of
76. The FPC informs us in another
trastate contracts now
2105,
levels
$2.50.
those contracts at rate levels
citing
and
are now
case, p.
$2.01
Mcf.
1976: “new
Citing
7.4%
76%
APGA and Consumer Federation v.
exceeding
FPC News Release No.
31 of Brief filed Dec.
.
[1976]
Exhibit 13 to
$2.50.”
of those intrastate sales are at rate
...
.
contract
.
averaging
$1.51 and
[Renegotiated
at rates between
rates for intrastate
[1976]
$1.59,
9.3%
28, 1976,
average
exceeding
with
are between
...
$2.01
$1.66
pending
70%
Nov.
#
$1.51,
FPC,
sales
75-
per
in-
of
4,
average
group
ble for the
or
and accommo-
apprecia-
would lead to no
pricing
offshore
higher-cost
gas through
Mimeo at
R. 3704. date
incremental
ble differences.”
adjustment provisions.
special
record,
the court
In this state of the
evi-
a lack of either substantial
cannot find
Regula-
B.
Need for Area Rate
Claimed
rationality.78
(cid:127)dence
tion
However,
concern
acknowledge
we also
Company,81
Mountain Fuel Supply
rate-of-take, obviously
a
the factor
argues in effect
the Commission was
dis-
key consideration
required
prior program
to revert
to its
methodology,
is treated
counted-cash-flow
regulation,
area rate
either as a matter of
“sparse
reference to
data”
glancing
with a
jurisdiction under
the Commission’s
signifies.
what it
“guesstimate”
and the
Act,
Natural
or as a matter of the
Gas
brings parity
prices
If the future
reasonableness,
requirements
taking into
gas,
sought
interstate
as is
intrastate and
account
fundamental differences
cost
energy proposal
the Administration’s
gas
and market for the sale of natural
rates,79
disap-
intrastate
regulate
issue
Area.
Rocky
Mountain
If the future main-
pears for the future.
essence,
is an
on the
attack
con
unregu-
tains marked differences between
cept
rate-making
of national
for natural
inter-
prices
regulated
intrastate
lated
gas. We accept
approve
has
the determi
responsi-
prices,
state
question
nation of this
Oil Co. v.
attentive consideration
Shell
bility
give
more
FPC,
(5th
1975),
cert.
arbitrary
520 F.2d
Cir.
to the contention that
denied,
FPC,
v.
costs for onshore
California Co.
U.S.
average high
[which
(1976).
and lower costs
cost based
Moreover,
assuming
even
that
there was
and the
Opinion
missioner Smith
770-A,
Opinion
a shift' in course in
towards
several consumer
rehearing
petitions
discouragement
participation
pro-
impact
focused attention on the
groups
gram,
adequate support
we think there was
capi-
on the cost of
interest free loans
a
The Commission reasoned:
for such shift.
Commission,
tal;
grant-
in its order
and the
recognize
capital generated
that
We
rehearing,83 explicitly
ing
petitions
through
payments program
the advance
“the effect of
argument
invited oral
longer
required
bring
no
be
should
capital.”
cost of
on the
payments
advance
badly
gas supplies
needed
to the inter-
adequate
had
no-
producers
R. 3089. The
The rate structure
set
state market.
considered.84
issue would be
tice that
designed
forth in this
consider
was the Commission’s
Nor
objective.
capital
achieve the
formation
its treat
precluded
ation of this issue
the full re-
Mimeo at
R. 3715. Given
in its Order
obligations
ment of contractual
new
on investment
included in the
turn
That
on Remand of December
rates,
capital
and the additions to
national
were
say
did not
that
order
rate for rollover
from the non-cost based
existing
con
completion
to both
entitled
(discussed in section VIII of this
contracts
interstate
of the full
tracts and collection
opinion),
sup-
we
evidence
find substantial
rates;
pipelines
simply permitted
that
the Commission’s conclusion
porting
include in their rate bases ad
continue to
longer
no
needed.
by existing
payments
mandated
con-
advance
were
payments
vance
Similarly,
reject
expire.
onshore
the contention of the
found that
we
Commission
payments
producer group
they
attract new or additional
not ade-
advance
did
small
that
were
accepted
pipelines’
quantities
gas,
apprised
scope
quately
beneficial,
they
inquiry.
this was
contention
while
While it is true that
were not
develop-
proceeding,
they
best assure such
respondents
could
were
made
(Mimeo
through
and dedication
rate relief
applicable
ment
the rate
to their sales
aware
10-11). On the issue of whether
refunds
directly
large produc-
related to the rate of
was
agreed
required,
should
they
currently rely-
To the extent that
ers.
and Louisiana
with the New York Commission
ap-
point
the Commission’s
on the
required
Exploration that the issue
Land and
executory portions
proach
of advance
under,
balancing
equities,
g.,
e.
Consum-
agreements
greater
payment
ad-
will have a
FPC,
U.S.App.D.C.
Federation v.
er
they
impact
producers,
are es-
verse
on small
(1975) (which
terminated
180-
515 F.2d
sentially
adequacy
questioning of the ad-
day emergency
program),
account of
sale
took
producer pro-
provided
justment
in the small
part
program
evidence that
was
R-393,
ceeding.
No.
Docket No.
success,
equities
and concluded
August
think that
1975. We do not
issued
requirement.
against
weighed
a refund
required to
with that
deal
*35
point
of this national
ratemak-
the context
Granting
Rehearing
Petitions for
for
83. Order
ing.
Consideration, Granting
Purposes
Further
Providing
Argument,
for Oral
Interventions
2, 1976,
September
R. 3086.
issued
assume,
tion,
view that we can
it is our
that
the Commis-
producers argue
intention
manifested
from the Commission’s
has an unfair ret-
sion’s rate determination
issue, that
thorny
this
handling of
in the
drilling projects already
roactive effect on
exercise its
will continue to
existing
the basis of
advance
launched on
interest,
public
in the
regulatory powers
However, as the
payment agreements.
public interest is the
that central to the
throughout Opinions
out
points
access to those
of consumer
continuation
770-A,
rates set therein are in-
770 &
the
the inter-
previously committed
supplies
high enough
tended to be
to attract addi-
that
contemplate
We
state market.
capital
producer expan-
tional
to finance
any abusive
guard against
will
event,
sion.
it should be noted that
any
renegotiation
opportunity
for
use of
produc-
770-A
not
prohibit
does
770-A.
provided by Opinion
accepting
payments
ers from
to which
are
they
existing
entitled under
contracts.
reject
we
reason
For much the same
We will not disturb the Commission’s im-
Exploration Co.
Land &
claim of Louisiana
plicit judgment
alleged hardship
charge
that the
“carrying
that
producer
outweighed by
public’s
This
vague.
plan
impermissibly
credit”
interest in cost-based rates.85
the outlines
petitioner
recognizes
are clear:
rate scheme
the Commission’s
plea
turn to the
Gas
We
Natural
rate
charge
must
reduced
producer
Pipeline Co.
the Commission’s determi-
gas is delivered
volume of
until a sufficient
separate
producers
nation of
rates for
re-
the amounts
rate to offset
the lower
advance
ceiving
payments may provide
from customers
borrowed
previously
producers
opportunity
these
to withdraw
pro-
is that a
claim
pipeline. Louisiana’s
existing
payment
advance
agreements
accepts
at the time
ducer cannot calculate
agree-
and to sell the
covered
those
be,
will
what the ultimate cost
an advance
ments to intrastate purchasers.
If this
with preci-
cannot know
producer
for the
were in fact the effect of the Commission’s
collect
pipeline
will
sion what sums
structure,
rate
it would seriously undercut
including
as a result
from its customers
objectives
the central
of Opinion 770-A.
rate base.
pipeline’s
the advance in the
The consequences of the Commission’s ac-
any
or
many
There is
indication whether
no
however,
depend,
tion will
largely
on
want more ad-
producers will now need or
regulatory
within
framework
which exist-
within the Commission’s
payments
vance
renegotiated.
contracts are
The Com-
world
the financial
framework. Moreover
(at p.
mission’s brief before this court states
in which in
is not unaware of instances
135):
per-
uncertainty
there is
respects
some
paid
To
extent
that consumers have
for
(a commonplace, indeed
mitted return
past
advances
inclusion in the rate
(by
in interest
utilities)
or even
investors
base) and
have
on such
pipelines
relied
(as
case of indexed or
obligation
agreements
plan
future levels of resale
debt).
are differences
variable
If there
facilities,
and construct new
it would not
pipelines
producers
between
approach
public
be in the
interest for the Commis-
matter,
only one of a number of
on this
it is
permit
escape
sion to
such
ne-
realistically
points
they
on which
must
interstate
agreed by
market as
the con-
poses
extent
gotiate. To the
tracting parties.
we think that
problem
producers,
real
While
opinion,
this is not a Commission
is not a reversal of
Commis-
solution
770-A and
we do
sion’s basic mandate
strictly rely
representa-
on this
loans,
pay
conventional
Because the Commission’s
rates are ulti-
would have
mately
give
capital
con-
decision to
based on the lower cost of
the Commission’s
pro-
producers receiving
payments,
the rate of return allowed to the
advance
we re-
sumers
ject
impermis-
their own investments
falls within
ducers on
the contentions
that these rates
range
sibly
penalize
against
of discretion in much
those
the Commission’s
discriminate
way
productiv-
carrying
producers.
recognize
as does its estimate of
the same
We
ity.
charges
higher
than those the
*36
embodied,
problem
request
recognized
grappled
a
principle
conceiva-
It
for clarification and
it.
devised
formula for the calculation
Commission
further
adjustment.
discourage
of rates that would
ad-
bly refinement
vances under the executory portions of out-
the contentions of
We turn now to
would,
standing
any
contracts and that
who attack
petitioners
the two consumer
event,
producer
ensure that no
obtained a
adjust
for its failure
Commission
subsequent receipt
windfall from
of funds
prior
advanced
payments
rates to reflect
payment
under an advance
contract. The
begin
770-A. We
the issuance of
modify
Commission chose not to
its national
complex
that once a
recognition
with the
pur-
rates to reflect funds
advanced
already
its ef
regulatory program implemented,
suant to these contracts but it did so adver-
producers’
undone. The
easily
fects are not
tently,
casually. Opinion
not
770-A states:
application
objections to the Commission’s
Certainly,
improper
penal-
it would be
subsequently received
of reduced rates to
producer
any prior
by
ize a
without
notice
the even more serious
payments suggest
reducing
prospective
its
rates because of
unfairness
disruption
problems
prior acceptance
payments
its
of advance
by
have been created
retroac
might
Commission-approved program.
under a
payments
of these rates
application
tive
Furthermore,
outstanding
these
advance
program.
received under the
We
already
payments
provided
capi-
have
additional
regulatory
conclude that
the Commission’s
exploration
development
tal for
ac-
fully
erase
require
mission does not
tivities,
1,
during the period (January
of the
it undertook in
impact
program
27,
1973-July
1976) when the rates col-
expanded supply.
the interest of
lected were below levels which we herein
program was
It is unfortunate that
just
have determined to be
and reasona-
expanding
not more successful in
reserves
(Mimeo
150,
3715).
ble.
R.
pro-
for the
market. But
interstate
Because the
payments
advance
issue did
operation—
it was in
gram was valid while
appear
computation
to be central to the
experiment.
things,
as an
In the nature of
rate,
of a new national
and because of the
rejection
experiments
some
lead to the
many
important
implicated by
other
issues
predic-
rather
than the confirmation of a
justifica-
this rate
setting,
tion.
It
be unsound to view this as
would
tion of its action in this area is succinct.
taking
an occasion for
the Commission
But the
of reasons
Commission’s statement
present func-
past
task for a
mistake. Our
“tolerably
“intolerably
terse” rather than
agency’s
tion is
to review the
formula-
approach.
mute.”86 It outlines a rational
future,
policy
tion of
for the
to insure
action is an exercise of
Commission
First,
out
points
reasoned
within the broad limits
discretion
improper
penalize
that “it would be
set
statute.
producer
any prior
without
notice
reduc
mind,
prospective
prior
rates because
its
With this definition of our role
acceptance
payments
of advance
under a
uphold
we
the Commission’s treatment of
program.”
In the
payments program. Opinion Commission-approved
advance
issue,
770-A,
apparently
770 did not discuss this
context of
770 and
we
Opinions
because it was not raised
the comments
think it plain that this was not a technical
comment
parties
preceding
procedural objection inhibiting the Commis
period.
possible
taking
But once the
collateral im-
sion from
account of a factor be
pact
called to the
program
had been
cause it was not noticed at the commence
through
fairly
Commission’s attention
the dissent ment of the
As we
dis
proceeding.
path,
of Commissioner
and the comments
cern its
was here
Smith
parties
rehearing,
equitable
referring
to a more substantial
FCC,
FCC,
179,
U.S.App.
U.S.App.D.C.
Boston TV v.
WAIT Radio
Greater
v.
denied,
(1970),
denied,
D.C.
consideration:
the time the
The
avoidance of
program.
not told at
Commission’s
were
advances
complexities
such
is a choice that deserves
and the contracts
approved,
was
program
deference.
“An
confronted with a
agency
given
the benefits
negotiated,
were
that
may rationally
task
turn to sim-
complex
later be the
would
them as an inducement
rules,
and administrative
plicity
ground
reductions of rates.
subject
compensating
convenience, at least where no fundamental
Indeed,
or burden been
penalty
had such a
v.
injustice
wrought.”
Corp.
Gulf Oil
start,
obviously
it would
announced at the
368, 374,
Hickel,
435
U.S.App.D.C.
F.2d
purpose
have cut across
Commission’s
(1970).
to en-
activity,
induce otherwise unavailable
investment and dedication to
courage more
why we cannot
770-A identifies
The
the interstate market.
injustice” is creat-
say that a “fundamental
policy judg-
to make
undoubted latitude
to retain its
ed
the Commission’s decision
ments,
question
which the court
not
despite
uniform national rate
some varia-
arbitrary,
includes a
they
unless
broad
payments
the advance
tion in costs due to
equitable judgments,
discretion to make
out that
program.
points
The Commission
that
it would be unfair to
and to conclude
1, 1973,
27, 1976, (the
July
January
producers
reduce the rates of those
who had
770),
pro-
date of issuance of
payments
very
accepted
advance
lower than
selling gas
ducers were
at rates
expectations.
different
reasonable
judged
just
those
to be
authority
it has
equity,
a court of
but
In linking
the context
proceeding.
of this
take
into account
equitable considerations
with the availa-
deficiency
this
in revenues
forming policy.87 In matter such as
the ad-
interest-free
loans from
bility of
equitable
undergrid
considerations
rea-
program,
payments
vance
ongoing
the Commission’s
sonableness and
justice between
rough
a kind of
perceived
An
which must consider
credibility.
agency
say
cannot
producers.
consumers and
We
incentives,
just and rea-
part
of overall
arbitrary.
perverse
this was
rates, may reasonably
sonable
seek to avoid
jus-
Moreover,
even broader
there is an
on those members
unanticipated burden
approach to the
tice in the Commission’s
industry
participated
that had
in a
issue. The Com-
payments
whole advance
program.
Commission-sponsored
for the
recaptured
mission
have
may not
Remand,
The Commission’s Order on
is-
already
of sums
consumer the full value
sued
(supra
82),
December
note
advanced,
producers
who
but it forces
indicates that
there were
payment
substantial num-
make
subsequent
take
advances to
bers of cases in which the interest-free
expected
at a rate
than was
at
higher
loans were
to undertake additional
itway
pro-
needed
time of the contract.
In this
activities
they
producers’
pre-
and where
were used for
tects the
reliance interest in
gives
both
purpose.
viously
payments,
received
in rene-
producers
pipelines an interest
An argument might be made that the full
of con-
gotiating
executory portions
benefit of the new national rate should not
out con-
general
tracts that have in
worked
producers
allowed to those
for whom
trary
public
interest.
payments
really premiums,
advance
were
expanded
and not an inducement to
invest-
program
payments
The advance
ment.
Any rate scheme based
distinc-
was unsuccessful
experiment
was an
types
tions between
of situations
provided
these two
on balance.
It
some
gas.
would
into
their
But
inevitably
“premium” price
have
been drawn
with a
necessarily speculative
analysis
the Commission’s
is sufficient
time-consuming and
brief
judgments
preclude any judicial requirement
and motiva-
capacities
about the
FPC,
Corp.
See,
g., Niagara
v.
U.S.App.D.C. 376,
Mohawk Power
e.
“ROLLOVER” GAS
point
1973-74 or 75-76
But as we
biennia.
opinion,
ed out earlier in this
the Commis
next to the
treat-
We turn
well
sion was
within its discretion in re
(pre-1973) vintages
ment of the oldest
as a
turning
vintaging,
pre
means of
770,
flowing gas.
Opinion
prices
Prior to
venting
profits
windfall
by two
gas
specified
for that
were
Commis-
greatly
mitigating
increased rate and of
Decem-
Opinion
sion
issued
Opinions.
impact
of that rate on consumers. This
31, 1975,
a rate of 29 cents
ber
announced
kind of protection
especially appropriate
Jan-
prior
from wells commenced
gas
gas,
gas
as to renewal
that is oldest and
though issued
uary
1973.
associated with lowest costs.
earlier,
an
establishing
is best understood as
rate,
exception
general
exception
argue
The consumers
the Commis-
a certificate of
gas
pursuant
allowing price
sold
sion acted
a
unlawfully
cost-justi-
gas
unlimited duration and under a renewal
renewal
to be
above that held
effect,
January
They urge,
contract executed after
fied
Co.,
Utility
Telephone
New York
88. Board of Public
23, 31-32,
Commissioners v.
271 U.S.
(1926).
46 S.Ct.
New York’s
has
tions.
considerable
Our
is on the con-
force. The
explain
Commission does not
dition that the Commission monitor closely
why it feels that the 29 cent rate for
producers’
flow-
both the
needs and the capital
ing gas will not
capital
being
contribute to
forma-
raised from internal and external
tion.
gap
is the more conspicuous in
premise
sources.
It is our
that the Commis-
*40
that it is identified in Commissioner
sion
Smith’s
would determine the contributions to
dissenting
(R. 3825). Opinion
view.
770 capital of the
flowing gas,
oldest
rollover
persuasive
would be more
if it
gas,
contained a
and the newer vintages. With this
complete
more
or explicit analysis of antici-
prospect of continuing inquiry in the light
pated
capital
sources of
and their interac-
of experience,
discharge
obligation
we
our
tion.
to further the interest
justice,
of
28 U.S.C.
2106, without
§
insistence on a more ex-
us,
Yet in the context before
we do
predictions.
tended and
plenary analysis
not require a remand. The Commission is
have, however,
We
pondered the
projections
limited at this time to
about
second
the
challenge pressed by the consumer
producers’
petition-
effects of its rates and about the
against
ers
needs.
will
continuation of the
699
Further
consideration"
still
rate for
prediction,
proof.
gas,
present-
leave the matter
not
rollover
that the rates
ly put
The
into
public
requires exploration
interest
effect
the
are
development;
regulation may properly
unaccompanied
rate
by any condition or other
take
provide
into account the need to
action to
capi
assure that
the funds raised
funds,
establish;
tal
as Permian and Mobil
through
supplies
these rates are used to add
there
present
is no assurance at
of defining
to the interstate market. The consumer
the exact rate of capital accumulation
petitioners
point out that
the 52 cent base
allocation of burden that will further
the
rate for
rollover
provisionally
public
however,
interest. Experience,
Shell,
will
approved by the Fifth
Circuit
520
permit
the Commission and the
to
nation
F.2d at 1077. At
time
the Commission
whether under the rates set in
pipelines
ascertain
had claimed that
the
would be
Opinion 770-A producers would accumulate
able to bargain
expansion
for an
of inter-
more capital
they
than
can efficiently rein
state supply by refusing
sign replace-
to
vest.
It is the hallmark of the administra ment
(and thereby holding
contracts
tive process that it can
proceed
flexi
prospect
to the old rates or the
bility and re-examination.
Public
abandonment
The
proceedings).
Serv.
consumers
FPC,
Comm’n of N. Y. v.
151 U.S.App.D.C.
strenuously disagreed, arguing
had
that “in
307,
(1972);
pro quo.” 520 expansion price— noted that interstate reserves court Opin- higher available under prices that the does not consider pro- will ex- ion 770-A for new induce It has determined. finally matter internally generated capital in the for consideration ducers invest reserved pressly development. whether question exploration in further biennial review good negotiating are pipelines at rest. wholly We cannot the matter put advantage of the to take trying faith con- general observations Commission’s position, and wheth- locked-in producer’s reserves not more cerning additions to are generated funds er or the additional not less, informative, general than the perhaps rate in- of the new application full offered as a unsuccessfully statistics committed crease “the level of monies payments program defense the advance development programs exploration and York v. in Public Service Comm’n New dedi- gas supplies new volumes of FPC, 100, 109, 511 F.2d U.S.App.D.C. long- under pipelines cated to interstate of af- (1975). present state 699-H, Appen- term contracts.” best in the fairs is reflected and n. 121. pp. dix 564-65 precisely quanti- that “we cannot admission argue that at 1077. The consumers Shell rollover fy effect treatment] [the] [of an anal- such the Commission has made Opinion 770-A R. herein.” ratemak- biennial ysis context re- analyzed has not The Commission therefore ing and the court should pipelines, filed placement contracts discontinue require the Commission they have been able to evaluate whether condi- impose at least some 52 cent rate or supplies exchange negotiate expanded rate, designed guarantee tion rate, the funds higher and whether will be used generated the funds generated by the rollover treatment supplies. The consumers expand interstate *41 in for actually exploration reinvested being argument pressed were the court at oral market. interstate a specifics requirement, for the of such but for contention that As They a answer. satisfactory did adduce gas for higher prices allowed interstate insist that the Commis- thought with some capi- of rollover will induce the investment “connecting sion could develop workable operations, tal in this too gas interstate gas rod” from rollover profits between this conjectural. Experience may indicate new investment. domain, for offshore in the Federal gas points The makes basic Commission three all, produced if at go which must interstate First, that be- response. points it out other establishing without attraction for tween 1974 and reserve additions go to gas long option so it has the footage by approximately increased drilled unregulated higher prices. at Con- markets inadequacy “In of the 8%. view of least one petitioners sumer reiterate that at 699- Opinion national rate established in- prominent has fit to company oil seen H”, Commission, ‘rollover’ says the “the vest its Ward. Pro- Montgomery funds in undoubtedly provided treatment therein may quest ducers seek other investments capital such drill- necessary of the part risk, higher return, of or of diversification at R. Opinion activities.” 770-A Moreover, objectives. assumption other Second, asserts that 3584. high of 770-A price gas Opinion of a under pre- more undertaking now measure it is internally enough producers’ attract prices, by cisely the effect of “rollover” also, log- some generated funds would with its producers from the on Form gathering ic, support private the conclusion that other producers spent have on 64 the amounts Third, It that funds will be attracted. be development. Com- exploration and argument logic by experience, such will be undercut put during mission counsel oral it would “connecting logic rod” confirms good experience that a and sufficient if taxing type review, together the basis for This obviate consumers with the anal- gas old for this capital. ysis capital of other contemplat- sources ed earlier opinion, in this section of the press any We do not further should insure that the rates on rollover gas this of the with kind of dissection Commis will as it is continued discerned that reasoning. Obviously, the sion’s Commis generated funds are both needed and cannot this time a full present sion em used to development finance the of new analysis efficacy of the of its pirical rollover supplies for the interstate market. On however, note, treatment. We that this premises, these we affirm the 52 cent base proceeding began less than two months af rate replacing prior contracts contracts Shell, the Fifth ter Circuit’s which have expired their own terms.91 less than 770 was issued nine after down. The months Shell came Com IX. OF APPLICATION BIENNIUM have
mission could moved more certainly RATES the effects vigorously appraise of the however, say, rollover rates. We cannot The raise questions con response sluggish so or has been cerning procedure fairness dilatory as to termination of the mandate FPC’s in Opinion determination No. 770-A attempt The Commission is now program. which limits the for “new” price gas to ing to gather concerning information sales from wells on commenced or after exploration development producers’ ex January prime argument and, penditures through its Form 64 if nec that the Commission should have permitted essary, other We means. therefore con the rate gas apply for “new” gas to all disposition clude that the appropriate first contracted or “dedicated” to the inter issue is 52 cent to affirm the base rate state market on after January contracts, renewal the condition The criterion of the cut-off date for expeditiously under “new” pondered has been much by the take to measure the success of this pro FPC. The contract-date test was used in gram. Ultimately data Permian I92 and Southern Louisiana I.93 It gathered required has will be to meet the provided recognition there standard laid down in Public Serv. Comm’n incentive character the “new” rate. FPC, U.S.App.D.C. 100, New York v. (advance (1975) F.2d pay rely Producers on the especially actions in ments): the first proceeding. national rate original
Justification of notice program depends proposed the cut-off *42 date be on the attraction of new or additional based well quan- solely commencement 699,94 gas tities of the interstate date. In supply Opinion to mar- No. the a FPC used ket, or at least on the advancement of later cut-off date the date —the of the initial date at gas delivery which some reserves become into interstate commerce. In 699-H, available to that interstate market. Opinion rejected peti- the FPC the Austral advantage: 91. Oil Co. and Aztec Oil & Gas Co. tracts did so for mutual the The Opinions attack the Commission’s 770 & 770-A supply former to a source secure constant of for their the failure to extend 52 cent rate to Opinion and the latter to secure a market.” replacing prior contracts contracts of 28, indefinite 770-A at R. The 3593. Commission could They argue term. that from an economic reasonably give pipeline to have decided the standpoint renegotiation the of a contract of bargain. the full benefit of its We will not indefinite term been in which has effect for 20 equitable judgment. disturb this kind of years indistinguishable or more is from the 468, Opinion 92. Area Rate No. Permian Basin replacement expired of a contract which has of 159, (1965). Proceeding, 34 187 FPC its own terms. view, While there merit some to this Opinion 93. Southern Louisiana Area No. we do not think that the Commission’s resolu- (1968). Proceeding, Rate FPC 530 tion of this issue is an unlawful one. The recognized “Pipelines that 94. 51 FPC 2215. producers which entered into unlimited con- reports indicated in the of the AGA for the as filed New reconsideration tions for Opinion of 699- pro years went to since the issuance No. APGA, and further York and H, majority of new reserve would where the vast apply rates gas vide new to the additions was committed intrastate discovery there was January after market. interstate market obtained The though even prior reservoir of a new reserve only 25% of the new additions dedication to was a contract there 1974, and 13% of the additions for acreage. interstate commerce (R. 3681). the 1604, 1634. Finally, definition of F.P.C. extended, by a March “new” was gas out the Finally, pointed FPC consum- the 699-H, ap clarifying 1975 order “it would be fundamental- position ers’ a reservoir into new ply “recompletion” pricing to ly inconsistent with cost-based drilling into where existing in an well higher gas to receive cost- permit lower cost was commenced on reservoir different Thus, prices.” (R. 3579). on this based January after point Opinion opin- 699-H and the Shell No. tanto, inapplicable, pro ion when became history, expansion prior All this vintaging, went back to a availability gas pro- “new" definition of in Part III of this premise already approved (Br. was, 30), up- say producers vision opinion. in Shell. held the Fifth Circuit fairness, producers say they As Circuit, Fifth “sus-
They argue that
were not given notice of consideration of
699-H,
specifically
tained
Opinion No.
change in
for new rates. But as
eligibility
gas
new
upheld
definition
the Commission’s
indicated,
original
already
notice said
is not deci-
against
The contention
attack.”
proposing
FPC was not
revisions to
sive,
to note that this is
but we feel bound
on
relying
699-H
was
responses.
itself but
case,
court
In that
misreading
Shell.
comment,
APGA
its initial
recommended
of the “new” rate to
upheld
application
flowing gas
that no
should be entitled to a
contracts,
problem already
dis-
renewal
possibility
new rate. This embraced the
VIII).
(supra,
cussed
Section
As
rate to
denying the new national
al-
discussion, however, the
points now under
ready
the intrastate market
flowing to
propriety
noted that
specifically
court
which,
contracts,
subsequent
was
because
“new” rate to new commit-
applying
later
to the interstate market.
dedicated
already
ments
from wells
com-
point
This
in the
pressed
application
questioned
proceed-
menced “is not
for rehearing.
ing.”
at 1070.
520 F.2d
producers
deprecate
vitality
now
merits of what
Turning to the
FPC did
of a
on
urged
rehearing.
contention
It
No. 770-A considers the con-
clearly appears from the Commission’s ac-
application
tention
for rehear-
of APGA
tions in regard to the first national rate
should
apply only
that the new rates
original
docket
order in Opinion
commenced,
new
and not to
dedi-
wells
new
699 was
more favorable
than
sold
intra-
gas previously
cations of
notice,
the orders on reconsidera-
agreed
state
as to this
market.
FPC
(March 1975)
clarification
(699-H)
tion
aspect
position, saying
of the APGA
*43
were more favorable to the
than
proba-
new
for such sales “would
rate
$1.42
context,
original
the
In this
we can-
order.
as a
bly
price
tend to serve
floor
producers’
the
conten-
seriously accept
market,
the
rather
intrastate
than attract-
previously
tion that
invoked
procedure
the
in the intrastate
ing gas previously sold
advantage
inherently
to their
became
un-
(R.
market
to the interstate market.”
advantage,
fair when now invoked to the
3579).
no
The FPC found
evidence since
degree,
some
consumers.
of
699-H
the
the
of
No.
that
issuance
any
reality
along
class
The
runs
these
underlying
rates for this
resulted
national
lines:
cut-off criterion
significant
dedication to the interstate
The issue of
had
new
evidence,
long
as
been in a state of flux. The order
market. There was substantial
eventually
by
agencies
issued
the
was consist-
administrative
FPC
is subject
re-
vintaging
its
ent with
reversion to a
straint
in the requirement
imposed
lawby
—
policy. The
criterion
cost-based
cut-off
the
enforced
courts —of reasoned
philos-
plainly
underlying
decisionmaking
interrelates to the
procedure.
and fair
This
gave
does, however,
of cost-based rates.
FPC
ophy
The
doctrine
provide wide lati-
to incentive in the
regulatory
consideration
selection
tude for a
agency
engaged
higher range of level
and rate
the
of costs
rate
price regulation
or
to undertake “prag-
of return rather than an increment above
adjustments.”96
matic
And at a
time
The
costs.
FPC was concerned with balanc-
national supply emergency and intrastate
guard against higher
of interests to
regulation
freedom from
puts
that
severe
being allowed
rates
without
cost basis.
constraints on efforts to increase interstate
And
was an
supply,
there
absence of substantial
is
greater
there
even
latitude for
demonstrable benefit in
terms that
supply
agency.
administrative
to act
compelled
FPC
otherwise.
opinion
The Mobil
instructs us to abstain
affirm
We
judicial
FPC’s determination as
intervention
long
as the
supported by substantial
evidence
exer-
agency has not “failed to seek answers” to
cise of reasonable discretion.
the crucial questions,
given
and has
reasons
for the
answers
chose.
The
Congressmen
that
urge
APGA
was faced with most troubling problems,
rate
only apply
“new”
should
to wells com-
and it
itself
problems
addressed
to those
menced after the
Opin-
date of issuance of
way, probing
reflective
for possible solu-
ion No. 770. We think the Commission
tions.
consumer
The
interests complain
within
acted
its discretion in
applying
that
the Commission has systematically
rate
“new”
to all wells commenced within
steered its answers
favor of higher rates
that
subject-matter
the biennium
was the
unduly
and was
influenced
wisp
proceeding.
who com-
Producers
hope that
these would solve supply prob-
wells within
menced
the biennium but be-
complain
lems. The producers
fore the FPC issued its order were entitled
approach
is less favorable to
on the
rely
fairness of the rate order that
them, and to realistic assurance of inter-
in due
the pro-
would
course be issued for
prior
state
than
opinions. We think
supply,
ceeding. That was the Commission’s an-
presented
Commission has
rea-
nounced intention.95
soned responses
objections,
to both sets of
in view of the evidence available.
X. CONCLUSION
We end the opinion
began.
where we
sustaining
we
Opinion 770-A
judicial
standard
review substantial-
very
have relied in
considerable
measure
determines,
this,
in cases
the out-
ly
premise
like
this agency
charged
that_
general
come of
court. The
deference
responsibility,
duly
and will
exercise
of the courts to the technical
competence
responsibility,
for re-examination of its
Congressmen argue
drawn from
could involve
all
in endless
priced according
squabbles
experimental,
should be
a reservoir
over which wells were
exploratory
developmental.
developmental
well commencement date for the
Since
drilling
reservoir,
price applying
into that
rather than the well
limited to
wells would be
develop-
spud
exploratory
dates for
commencement
after-drilled
date
the associated
necessary
well,
produce
producers might
produc-
wells
mental
not undertake
managing underground
pressure.
lag
long
while
tion of
reservoirs
fields which a
gravamen
argument appears
of this
to be that
time was foreseen between commencement of
located,
initially
exploratory
completion
reserves
added when
rath-
well and
of all nec-
mapped
essary developmental drilling.
when
er than
their extent
out
developmental
Further,
drilling.
ain
time of
rates,
rising
costing by
developmental
date of
Pipeline,
v.
Gas
FPC
Natural
U.S.
*44
drilling might
delays
586,
736,
well
lead to
in such drill-
(1942);
62 S.Ct.
assumptions
1941, 1951,
742, 758,
Overall we conclude rate recommendations Cost studies and judicial obliga- out our proach that carries staff were by prepared in the interest of judgment tion to render opportu- parties, made available to the a pecu- 2106. It is justice, see 28 thereon, § U.S.C. leading to file to a nity comments at a time like approach liarly appropriate pre- clarification the Commission of the engaged the Nation present when Op- vious studies and recommendations. energy poli- entire review of its searching parties was then afforded the portunity restructuring agency cy possible and a Additional stu- reply to the clarification. cogni- contemplate We powers. were made with- dies and recommendations its re-examination will conduct agency zant organization, with simi- the Commission’s interest, and public with devotion As opportunity reply. lar to comment be reviewed its actions will points out: to fairness and the with dedication courts forty-six parties groups Some Law. of Administrative Rule parties segment of representing every gas industry consuming natural and the Affirmed. comments public reply filed initial and/or FAHY, Judge: Senior Circuit of the various staff rate recommenda- tions, the intrastate market and natural posi- the court’s opinion This sets forth regulation rate general, and addi- followed procedures tions on the comments, re- tionally answers and filed alleged disqualifica- Commission and on plies to the submittals of each other. Opinion to render tion of the Commission Br. p. No. 770-A. 1976, 27, July No. 770 was issued BY
THE PROCEDURES FOLLOWED rehearing after followed November WERE LAWFUL THE COMMISSION No. 7.70-A. arguments, by and oral initiating proceedings these justness as to their Apart dispute notice on December gave challenged rates and reasonableness the Proce to the Administrative pursuant procedurally invalid because determined 4, 5, 7, 8, 10, 14, 15 dure Act98 and Sections hearing the kind of full dress said without Act,99 and 16 Of Gas that it was Natural required by to have been the Administra- estab regulations” “rules and prescribe (APA), tive Procedure Act the Natural Gas just and rea lishing on a nationwide basis As process Act and due of law. sales of nat jurisdictional sonable rates for APA, considered, the answer turns on first gas by producers. ural hearing required by whether the Sections invoked, procedures fol- 556 and 557 or the of Section The Commission thus provisions, of those rulemaking procedures 553 or an admixture throughout, lowed which, applied. in United language to borrow States seq. FPC, U.S.App. 98. 5 U.S.C. 551 et §§ v.
97. Public Serv. Comm’n
(1972); Public Serv.
D.C.
1065 dures, is, F.P.C., non-adjudicatory Corp. U.S.App. type In Mobil Oil v. 157 1235, 235, 249, (1973), hearing 483 F.2d 1249 on written submissions. D.C.
our court said that when
556 and
Sections
after,
Soon
in United
v.
States
Florida
have the
govern, “parties
557 of the APA
Co.,
224,
Rwy.
East Coast
410
93
U.S.
S.Ct.
engage
evidence and
in
right
to submit
810,
(1973),
again
by “substantial
fair notice
give
parties
course
the
must of
court observed
717r(b), the Mobil
§
proposes
what the Commission
exactly
reviewed
to be determined
facts were
do,
opportunity
with an
to
together
to
degree of
greater
with a
that Act
under
comment,
object,
to
and to make written
infor-
under the
possible
certainty than
submissions;
order of the
553,
and the final
adding that
of Section
procedures
mal
upon
based
substan-
a rec-
Commission must be
not create
could
informal comments
v. Flori-
evidence
tial
United States
substantial
evidence. See
the
ord that satisfies
Co.,
410
Rwy.
supra,
was
U.S.
Rwy., supra,
da East Coast
East Coast
test. Florida
224, 241,
810,
the
L.Ed.2d 223
contrary, because
93
35
S.Ct.
thought not
pro-
evi-
(1973).
no substantial
We think
Act contained
Commerce
de-
support an I.C.C.
requirement
to
cedures here meet this test.
dence
Nevertheless,
in the end the
termination.
also,
In this
see
found in the
provision
review
the rehearing
No. 770 which
Act, does
procedure
not dictate the
to be
resulted in Opinion No. 770-A. The pro-
followed, or the
hearing
nature of the
to be
ducers rely upon Pillsbury v. Federal Trade
held.
It has to do
awith
court’s review of
Commission,
(5th
1073 FAHY, Judge dissenting component income tax to then Circuit the rates Senior established there because was no evidence part: of paid, taxes because would estimates opinion in the for the generally I concur speculation. have unfounded The involved While by Judge Leventhal. written court endorsed, however, special Commission a re a I do have reser- its excellence recognizing procedure supply lief should tax returns the scope treatment of respecting its vation warranting evidence such an allowance. review, thought required by be the to of affirmed, Co., Fifth The Shell Oil et Circuit Court, particularly seem Supreme 1061, FPC, (1975), a l. v. 520 F.2d 1080-81 reviewing responsibility relax our unduly to Company cert. denied sub nom. California v. which requires respect standard FPC, 2660, 426 49 L.Ed.2d U.S. S.Ct. of a elements Com- that essential factual (1976). substantial supported order mission pro- present The in the evidence. Commission staff there was ceeding concluded that similarly I which are two differ respects There an in- on which to base insufficient data the court: the the result reached from tax the Com- component, urged come components, the tax of income treatment The data. necessary mission obtain payments of advance and the treatment resisted, urged the industry present (past on ad- outstanding November actual in- as a substitute for methodology Moreover, I while concur payments). vance data, tax it has refused come which pay- advance treatment of future in the It contends supply Commission.' ments, producers’ in the I find much merit percentage deple- the virtual repeal compliance of to the mechanics concern as allowance, July tion effective respect. in that order with the Commission’s a tax including for now sufficient reason clarification, mandate Although we do not Commission, setting a component. The is due. to me clarification it seems pre-1973 gas by rate for vintage nationwide included previously No. had INCOME TAX COMPONENT THE of per Mcf in a rate component such 6$— court’s respectfully dissent I 29.5$, allowance, and income tax This the rate of the inclusion in approval reimburse, were liability it intended in the from wells commenced 1975-76 treating jurisdictional-produc- calculated component of an tax biennium income apply- entity er separate activities as a Mcf, one-third the total per nearly 43.05$ tax corporate statutory ing the maximum affirmance of I dissent also from rate. methodology Identical rate 48%. component, similarly of a tax cal- inclusion present proceeding, carried forward in culated, adjusted rate for any tax- historical support without vintage. 1973-74 data, and with- tax-liability paid or current Cases, Rate In Permian Basin Area data provision gathering such any out 1344, 1373, 747, 791-792, 88 S.Ct. U.S. as it accumulates. responsibil- one the three L.Ed.2d for such evidence substitution placed upon reviewing ities the Court 43.05$ in its employs model following: court is the Mcf based a mathemati- per component The court must examine manner which, suggest, cal I does calculation employed has which meet test of substantial evidence. regulation it has itself methods by calculating component is arrived at selected, whether and must decide each of which, price increment when added is sup- order’s elements essential costs, the amount other will recoverable ported by substantial evidence. an income yield amount of sufficient paid No. 699 and at the 48% Opinions permit Commission in income taxes to be 699-H, producer the first nationwide still enable the establishing statutory rate and refused to return on its ratebase. gas, rate for natural add to earn rate of 15% *53 component proceeds producers It is well to remind ourselves that as if all which include these income tax com- rates jurisdictional gas engage in finding, ponents by are defended Commission as drilling, producing selling gas inter- entirely cost-based: state commerce. This fails take account fully
This rate is cost-based and great gas of the fact that a amount of [$1.42] justified. Additionally, non-cost factors weighted per with this Mcf tax 43.05$ cost have been examined to ensure that produced by integrated corporations is such just cost-based rate is and reasonable. Exxon, Mobil, Texaco, Shell, as Gulf engaged in a variety far-flung non-gas Opinion No. at 1. divisions, affiliates, through activities cost-justified, The rate fully is as is $1.42 subsidiaries. Under the Internal Revenue rate. $0.93 they may Code of 1954 file consolidated tax 3; 770-A, see, Opinion No. Id. at returns aggregating operations, all those 13-14. rendering inapplicable thus separate en- Thus, in 52$ contrast with the rate in- Moreover, tity theory. producers, such as volved in the problem “roll-over” discussed producers well as corporate opera- whose Judge opinion court, Leventhal’s for the gas production, tions are limited to market component justified none of tax by gas in the intrastate as well as the inter- stimulating Commission as new supplies state market. While the income tax re- or on any ground other than that it turns of the latter are complicated by is needed to cover income taxes. It activities, non-gas as are the consolidated not, therefore, reassigned by be the court to returns of the larger companies, both types Moreover, other any purpose. it has no producers earn taxable income on pro- particular relationship to the shortage from, duction and deduct expenses pre- unless it enables the industry ^actually to production to, outlays recover expends whatever related reserves as tax costs and still which may earn a rate be 15% of return. dedicated to the intrastate market. stemming Deductions from non- I have no by doubt that repeal jurisdictional gas production will also be percentage depletion Congress allowance applied against income, all sought to obtain increased income 'taxes including jurisdictional sales. from the petroleum-gas nor industry, do I ways model thus fails in two distinct light doubt that in of the repeal the Com- take pertains account of the situation which mission is well within its authority in recon- reality, by doing justify so does not sidering its treatment of the income tax characterizing component as a recovera- problem. Yet neither the need to do so nor ble cost supported substantial evidence. the likelihood of increased tax liability jus- tifies an allowance which fails to be sup- If the per 43.05$ Mcf for the 1975-76 ported evidence, by substantial or which vintage gas part does not become a otherwise is unacceptable. Large sums are revenues, income tax but is retained being or will paid by consumers without producer because deductions or losses in its assurance of their need pur- or use for the operations as a whole have reduced or elimi- pose for which paid. income, nated its taxable money being collected pay from consumers to taxes but above,
As indicated the Commission mod- it is not finding way Treasury. el is framed in “regulated the belief that producer using The action of the activities are properly separate viewed as a non-jurisdictional deductions to reduce or corporate entity and the Federal income tax deprives eliminate its taxable income computed accordingly”. allowance separate entity policy of reali- very complexity determining exactly ty. The point how much tax is is not whether the deductions paid by producers any lawful, given establishing due but whether in year specific vintage to a jurisdictional gas separate renders the enti- rate the Power Commission should itself ty policy computation including unreliable. The follow a method which results in *54 postulates only in use. model taxes be borne as- for income an amount support not have the does sumption liability upon consumers' which tax based sale it is needed for income expected of evidence commerce and price interstate costs, all other recoverable deductions; taxes. Unlike it does not reflect what turns gas cannot be producing cost of tax be the the produc- out to taxable income of has be- production after determined until er when it compare files its return or taxes earned, income a fact gun taxable paid with the sums collected from consum- model ignores which the Commission’s yet ers. And the amount of the theoretical failing and in component establishing the component upon laid is consumer in its correction. provide for life of the produc- dollars cents for the wells required by ing provision testing without for were component If the accuracy by existing either actually pay to be utilized to evidence or to at- in the amount model be obtained. income taxes or to refund- gas, Mcf of be taches to each A technical somewhat more series of revenues ed, of increased expectation problems component tax with the arises repeal Congress’ per-
following upon
assumptions underlying
when the
it are
might
real-
centage
allowance
be
depletion
compared
expenditure-timing
with the
as-
model —under
ized.
under
But
sumptions of the discounted cash flow mod-
producer
Opinions
Commission’s
—the
model,
el.
Examining
liability
or
paying
assuming
free to avoid
capital
is deemed to occur at
formation
time
amount because of:
computed
for
full
—3,
—1,
well commencement at time
first
jurisdictional
1)
ex-
higher-than-anticipated
production
(end of
depletion
pro-
or tax loss-
2) allowable deductions
penses;
duction) at +14. For 1975 well commence-
non-jurisdictional prepro-
es associated with
(the
biennium),
ments
first half of the
17%
activities,
3) tax benefits associ-
duction
or
Mcf
preproduction
per
of all
expenses
operations
a consoli-
non-gas
ated with
in the year
deemed
be incurred
—3
review
Biennial
of rates is
dated return.
—2
(1973),
year
(1974),
in the
31% to occur
evidence,
not a
for substantial
substitute
(1975,
—1
year
and 51% occur in
well
that biennial rates for later
nor
the fact
But
income
year).
commencement
vintages might
compensatorily
be lowered
those wells
not commence to flow until
does
Moreover,
error.
to correct
effort
(1976),
year
according
to the model. Ex-
tempo-
authorized is not a
component
penses
income for wells commenced in
rary
Revision can
arrangement.
(the
biennium)
half of the
second
made
for the remainder of the
prospective
would occur at the same assumed ratios but
well life.
fifteen-year
income
year
one
later. Thus taxable
would
above,
Furthermore, as noted
the Com-
not be
from wells
by gas
earned
commenced
provision
mission has made no
ascertain-
during the 1975—76 biennium until 1976-77
as to
reality
payment
what in
occurs
earliest,
reported
at the
not be
and would
taxes,
so as to be able
liability for income
Thus,
component
until
the tax
1977-78.
adjust
component.
There is
43.05$
has
biennial gas
been collected on
no
evidence
actual taxa-
collection of
.of
July 27,
since
not be
could
tested
sample
producers,
ble
even a
income of
after
until
cor-
accuracy against
paid
taxes
each
or of the share to be allocated to
in 1977-78.
porate returns were filed
jurisdictional gas. Specific
biennium of
fact,
argues against
tax
practical
are not even
types of offsets and deductions
and later
component
proceeding
set in one
to assure that
charted in an effort
interval
adjusted,
long
dur-
because
kept up-to-date.
It
complete
model is
pay
must
the unad-
ing which consumers
the model has
say
is not sufficient to
tax
justed
component.
payment
room
tax benefit and
every
According
4 to
No.
Code;
to Exhibit
must be
conceivable under the
770-A, preproduction expenses made in
by component
shown that the
calculated
—3
year
year
and in
—1 constitute the tax
actually
model
the tax events
upon
is based
*55
me,
Thus,
ignore the fact
expensing.
when
that some producers
reductions from
will
in the 1975-76 biennium
wells commenced
file
merging jurisdictional
tax returns
and
generate
and
otherwise
begin
produce
to
activities,
non-jurisdictional
or mingling gas
1976 and
years
income in
taxable
operations
non-gas
with
affiliates’ activities
by prepro-
reduced
taxable income will be
(the
situation).
consolidated return
year
in the —3
of wells
expensing
duction
propriety
including
compo-
a tax
be commenced in 1978 and
and such
to
nent
in the regulated interstate rates for
the —1
of wells com-
expensing
year
in
natural
depends solely upon whether
menced in 1976 and 1977. As indicated
the producer
paid
has in fact
or becomes
terms,
general
above in
it is
amount of
liable for the amount
the component.
If
expenses
those
that will de-
preproduction
not, improper
is as
a cost component to be
other,
(absent any
complica-
termine
hidden
recovered from consumers as is an overstat-
tions)
per
43.05$
whether a net tax of
Mcf
drilling rigs,
ed costs for
capital.
labor or
paid.
contingency
will be
This
would re-
By permitting
possibly
overstated tax
main, even if the Commission’s unrealistic
component
collected,
to be
without deter-
jurisdictional
view of
gas taxable as an
mining if a like amount
per
of taxes
Mcf is
entity were true.
paid
liability
assumed,
be
or
therefor
The Commission does realize that even if
enable the industry to en-
jurisdictional
its model does not understate
joy funds received from consumers to com-
preproduction expenses
years,
for successive
pensate for costs which in fact are not
producers may
pay
per
not
the full 43.05$
part
incurred.
no
compo-
Since
tax
computed
Mcf tax share when taxes are
incentive,
nent is related to
any excess of it
the real world with reference
non-juris-
costs,
above actual
“would merely confer
non-gas
dictional or
activities.
Permian,
U.S.
windfalls” —
[producers’]
liability may
tax
also differ
S.Ct. 1344.
per
because
43.05$
.
[from
Mcf]
While the Tax Reduction Act of 1975 did
their tax situation is different
than we
not in
deny
terms
oil and
producers the
expect
would
it to be on the basis of
statutory option
return,
of a consolidated
jurisdictional
If it
activities.
is so be-
neither did it entitle
my
them in
view to a
cause
non-jurisdictional
activities
combination of
by
taxes lowered
consolidat-
which
credits,
result in tax losses or
such
ed returns
regulation
federal
rate
factors lie beyond
jurisdiction.
our
premised upon reimbursement
for maxi-
770-A,
Opinion No.
at 68. This admission
mum taxes otherwise calculated. However
Commission would seem to act as a
producers ratably lower
liability
their tax
single
bar to the
entity model.
jurisdictional gas
given
allocated to
for a
I think that
to the extent
the Internal
vintage,
actually
taxes
due should consti-
Revenue
permits,
Code
not
producers,
tute the upper limit of reimbursement de-
adopting
separate entity concept
in cal-
manded
consumers.
tax,
culating their
paying
and not
to the
I disagree with the tax component as
United
component
States
tax
recovered
incorporated
into
1975-76 and 1973-74
from consumers under that concept, take
vintage rates because the
employed
method
advantage of the offset of income tax liabil-
to calculate the sums
activities,
collected from con-
ity
by non-entity
afforded
jurisdictional gas allegedly to be
jurisdic-
Commission should not treat
sumers —
separate
treated as a
operations
entity, vintage-by-vin-
tional
as a separate entity tage
should allow only special
substantially
relief
from the meth-
according to
—differs
employed by
income taxes
od
pro-
producers
assumed
fact
to calculate taxes
ducers.
producer-by-producer
owing
paid
Where
regu-
percentage
flat
of all
—a
lation
necessity given
has of
way
regula-
polled
respect
taxable income
without
tion by
upon
a model based
av-
by jurisdictional gas,
nationwide
whether earned
non-
erages,
not,
that model should
it seems to
jurisdictional gas,
non-gas
activities.
non-jurisdictional gas
activities of
indicated,
losses
ap-
the means
we have
As
could
which tax costs
be
court attributes
producers,
in Shell
proved
be rein-
could now
by producers
finding
implausibility
recovered
stated;
it resulted
appear
it does
as a
would
whole
sustain
If a better means
hardship to producers.
unregulated gas
losses in their
activities
evidence re-
the substantial
consistent
gains
sales of
making
federally
while
devised,
we should
can be
quirement
I
regulated gas.
read thé Commission’s
are not
accept it. Producers
course
point
opinion at
the court
*56
their in-
to recover
right
deprived
find
implausible
refers
to
that such
other
here, as in
as-
tax costs. And
come
non-jurisdictional
losses will ever exceed all
averaging is
ratemaking,
pects of national
My position regarding
by
income.
the use
required
exactitude
not
accepted,
any
or
to
producers of
deductions
losses due
in
are tolerated
defer-
inequities
reasonable
activities, as
unregulated
their
such use
to be served.
to the over-all interests
ence
problem,
bears on our income tax
has been
utilized,
Moreover,
may be
but
experiment
stated.
p.-of
See particularly
186 U.S.
experi-
to ascertain costs
the task is
when
F.2d, supra.
1076 of 567
It
App.D.C.,
evidence,
nor is
is not a substitute
ment
concern with this
my
should be noted
circumstances;
in the
of administration
ease
upon
pro
focused
question
entirely
is not
evidence,
to
has
access
the
industry has
operations,
non-jurisdictional gas
ducer’s
is capa-
and of course
proof,
of
the burden
might
upon
which
occur
also
losses
available for
the evidence
making
ble of
of
variety
operations
from the
other
of cor
the Commission.
consideration
conglomerates
which
file con
porate
deepening concern over
At this time of
solidated returns. And even
absence
shortage
natural
with conse-
gas,
of
losses,
non-gas
heavy expenditures
personal
even more
economic and
quent
drilling
preproduction
and other
activities
consumers, it
to
seems
burdens
be borne
later produce non-jurisdic
for wells which
burdens not
these
especially important
permitted to
tional
are
offset current
tax
compo-
be
needlessly
increased
income.
jurisdictional
here
nents
discussed. As Commissioner
position
parties
As to
court’s
that the
respect to the rates as a
said with
Smith
attention
bring
can
to
Commission’s
whole,
components
particular
I
these
think
producer’s
other tax events that reduce
of factual
high”
“too
in the absence
model can be re-
liability
tax
so
them.
supporting
evidence
remedied,
flaws
I have several
fined and
states,
Commission,
it
does
While
First, the
has been and
problems.
burden
non-jurisdictional
jurisdiction
have
over
not
tax
upon
remains
establish
jurisdiction
it
have
con-
activities
does
liability
actuality
commensurate with
any
if
tax
upon
their effect
what
sider
43.05$ Mcf allowed to be collected.
per
established. See FPC
component should be
position
entirely upon
rests
96 S.Ct.
Conway Corp.,
v.
U.S.
contemplated
the model without
Com-
any
(1976).
regard
I also respectfully dissent from the court’s approval of the Commission’s failure payments While the were made under a give effective consideration to the ad- Commission-approved program, judi- also payments vance which outstanding noted, were cially upheld as the court has neither the time of the issuance Opinion No. approvals gave of these assurance that 770-A, 5, 1976, November and which savings have in cost resulting from the advance not yet fully been repaid (past advance payments would not be considered in a sub- payments). Some billions of capital sequent proceeding $1.5 to establish cost-based supplied had been producers during rates. In initiating proceedings objection 2785. Similar was made duty R. specify under was not Dakota Commission’s Public Utilities might be South affecting costs all items rehearing. R. 3064. petition from consideration considered, nor barred in the notice. The specified of an item not Moreover, producers notice adequate brief, rejecting objec- receipt Commission’s cost of advance savings from given that the Com- notice was into relevant payments tion that no be factored would Opinion new inheres per rates in the fact $1.44 mission restrict would ratemaking. No. 770 series wells af- is a cost-based from commenced Mcf rate to 1, 1975, ter states: January seen, As we have the Commission also no assurance that as a gave stated reason for not otherwise con- [T]he sidering past changes payments they be modifica- advance there would not exploration provided capital additional experience. tions on actual based 1, 1973, development January Br. at 50. 27, 1976, rates July “when the collected experi- We well substitute for “actual can we herein were below levels which have ence” factual situation.” We “a known just determined to and reasonable.” appropriate with particularly think this is acceptable The above if would lim- reason billions respect $2.2 to a cost factor. Some effect past payments it the advance outstanding were payments of advance issuance years immediately preceding issued, 770-A was No- when No. No. By 770-A. As vember Commissioner Smith’s model, however, capital assembly own out, “. . . dissent points drilling com- place years takes two before pro- use of continuing capital have had the mences, pro- to first years prior three *58 that previously made vided advances by during period January duction. While the 770-A, Opinion repaid.” No. have not been 1,1973, 27,1976, rate set July by 52$ to the had Dissent, only 15. Not Commis- p. at rate) earlier Opinion (or No. 699-H a lower payments the advance sioner Smith raised by 93$ been superseded had not Opinion to initial dissent No. question in his just rates found to be and reasonable $1.42 by petitions for but it was raised 770-A, outstanding cap- by No. as well. Senator James Abour- rehearing, producers ital advanced to since ezk, (Congressmen) pressed et the issue al. gas found to be be associated strongly, contending: that vintage the 1973-74 as well as with are premised The calculations Opinion’s vintages. subsequent the 1975-76 and capital that the cost of assumption on the the value Clearly appear it that would To the extent that producers is 15%. capital advances extends outstanding have been available as payments advance high- period by present into the covered is not correct. The capital, premise rates, to be to the rates set perhaps er be adjusted must producers rate allowed rates present for the next biennium. The in consideration the ad- downward a reasonable rate upon are based cost and vance payments. rates the arriving return. at rate, rate is a biennial . The repre- a cost factor Commission included 1975-76, for and must based on costs capital, without evidenc- senting cost of Indeed, it is that strange for period. savings any value attributed to rate premises capital supplied $1.01 producers the cost-free hoe post a actualiza- 1973-74 then outstand- by past payments advance costs, while, in its treat- this omission do given tion of 1973-74 The ing. reasons in my it it. payments, argues justify ment of advance not Further consideration possi- ignored. opinion accordingly required must be is actual costs certainly upon not cost- protected impact payments The is ble these consumer in the rates ignore of-capital component dollars he included by willful decision by No. 770-A. industry. established has contributed LEVENTHAL, Judge joined by Circuit the result of further not forecast I do GESELL, Judge: District If it by the Commission. consideration have rehearing that petitions The capital a value to the attaching leads to require opinion filed1 not been do which should be but has supplied thus long opin- repeat already supplement or is that an possible for it been accounted ion of June credit or some carrying charge additional We write rather to say that the concerns developed. should be other mechanism trouble distinguished our colleague, not, might lead also might, Consideration and occasion him, a further word from also between distinction possible us; trouble but in our they view cannot who payments and those who received control the decision in this case. of course should did not. The Commission It is hardly disputed that there will be with the aid of sub- reach its determination some considerable increase in taxes paid by parties. missions the interested the industry. That is Congress what I of the matter The substance the people wanted. fairly disputa- of the reasons ad- cannot that either agree ble point However, is—how much? if the justifies vanced Commission were confined to a doctrine the question strictly situation. Aside from present insisting on evidence of “actual tax- discussed, paid,” that, es general plain fact previously of notice a time when the nation cannot any tolerate undue which the statement Com- unanalytical block to supplies, producers selling to possible of the issue of disposed mission the interstate market forego would have to rates of some billions impact upon the new any price increase whatever notwithstand- outstanding payments of dollars of advance ing an inescapable income tax cost increase me be an exercise of the does not seem to of considerable extent. which calls for our expertise or discretion opinion court’s sanctions the use of a acceptance. deferential evidence, model as substantial con- templates subjected that this model will be ORDER ON PETITIONS FOR experience. to the test of If a flaw in the REHEARING model is revealed, be, then there can PER CURIAM. U.S.App.D.C. pp.---, 567 F.2d *59 1042-1043, future, an adjustment for the On petitions consideration of the adjustment an readily approached through for rehearing by filed American Public Gas withholding the benefit of future escala- Association, al.; et Austral Company Oil tions. While this will not affect prices for Incorporated and Aztec Oil & Gas Compa gas delivered, already it would have sub- ny; Pennsylvania; Commonwealth of impact, stantial and if error is found would Congressmen petitioners, it is forestall an undue perpetuation. It strikes by ORDERED the Court that the afore- is, a view, balance that in our in “the inter- petitions said are denied. justice.” est of 2106.2 U.S.C. § By APGA, al.; Congressmen petitioners et imply, 2. The reference to § 2106 does not as (Abourezk, al.); Pennsyl petitioners et rehearing suppose, Commonwealth of some for that vania; by Austral requirement Oil Co. and Aztec Oil the court has discarded the of sub- and Gas. support stantial evidence to the Commission- findings ers’ and result. The court does feel petition, The Austral-Aztec which deals with application give bound in of that standard to replacements contracts, for indefinite term deference to the Commission if it has asked the questions soundly whether its contention can right questions sought answers, and if it rejected theory preserving bargain. be on a of a reasonably regarded relies on material is particularized question may This merit further finding as substantial in the answers. In the reflection, analysis but in the last the court is of hand, circumstance and with the information at the view that there are considerations both economic the model is substantial evidence. ways primary responsibility and the for deci- light experience, the of the standard of sub- agency. sion must be left to the might require agency evidence stantial to take a different course. incorporate volved. The model does evi- Judge: FAHY, Circuit Senior dence of certain other costs to be recovered denied, this I take is rehearing Though by producers in the rate. On founda- of aspect one explain further opportunity to calculate proceeds tion the model then tax views the income about my dissenting to recover to enable components under consideration. 15% rate of those costs and also to earn a of rates for nationwide Establishment such an they return must realize amount unavoidably strains the jurisdictional charged will from the to be as income rates to support Natural Gas Act efficacy producer meet an income tax enable the effort; long prior Act enacted jurisdic- each Mcf of liability 43.05$ for contemplation development. of such a not This calculation does tional sold. situation, as the court must be Realizing data incorporate from or actual tax proceed reasonably possible open-minded as previously I to. The such as have referred to accommo- authority in the Act seeking then, at resulting component, is entitled in such date the Commission’s difficulties an such most to the status of estimate of However, not the Act is undertaking. an producers might as be called income taxes remains, originally and it as open-ended; I not upon to assume. do now revert con- primarily protective purposed, dissenting in my difficulties mentioned the nature this interest. While sumer opinion arriving jurisdictional at definite times, an inexo- may vary with interest separate entity theory; tax costs under binds and court: rable standard ar- aside, I those difficulties now assume be a rate order must Essential elements of guendo the Natural Act would Gas ap- by evidence. This supported substantial court, light the difficulties permit amount of an essential plies to dollar by the in estab- encountered rate as well as to the inclusion of element rate, accept lishing a nationwide such in the rate structure. element evi- as supported estimate substantial component tax of an income however, The amount By definition, on- dence. a reason- rate must achieve in a nationwide context, not an ac- going the estimate is rep- amount a relationship to the ably close it is ceptable component basis for unless re- producers are group resentative correctness the Commis- tested for, as liability or to assume pay, quired re- factually what develops sion’s resort to rela- This reasonable taxes. their income produc- taxes of garding actual income consistently with found tionship Commission, ers. Yet here the neither when a tax standard substantial evidence means, by any provides other model nor mathematically calculated component or for such verification correction. jurisdiction- Mcf of per of taxes an estimate provide readjustment does of oth- model however, verification subject, gas, al light experience, er cost factors evi- in substantial grounded modification review, read- the next biennial *60 tax data. income dence of actual component of tax on justment the income reasonably experience the of the of a basis Here, the record no contains data that industry of the representative cross-section per the component 43.05$ Mcf tax included for, actually paying, assuming liability in or vintage in rate gas, the for 1975—76 by income taxes as evidenced paying, in not example, reasonably comparable any is to Internal Revenue returns filed with the being income taxes which have been or are evidentiary any other manner. Service or in paid by representative or assumed such a component tax in some other To revise the the record group producers. Concededly, manner, adjusting figures the by simply as as- payment contains no of actual or data the costs included in formula for non-tax any liability in tax return filed sumption component, to the used calculate by any with the Internal Revenue Service originally tax-liability against actual does not test or a producer by cross-section in- representative industry wholly inadequate of the national is to veri- experience situa- correct the estímate. this of the model as an answer to fy integrity or proceed- established, the of this rate question tion —in context has been yet this not think the court should hold not required to be Com or established the —I components the tax lack the income just or the court. It is neither nor mission as a definite support substantial evidence to my opinion reasonable in make the model costs,1 tax reckoning of recoverable but regardless those the master facts.2 the con- neither the nor model require- or tains verification modification components which establish the ments - estimates. To
legally acceptable permit continuing
their and indefinite collection accu- testing
from consumers without their suggested above I think
racy manner is within discre-
we should also hold not the the
tion available to Commission under the Natural Gas Act. AND FARMERS MERCHANTS BANK CRUCES, OF LAS NEW problem my opinion This in calls for re MEXICO, Petitioner, outstanding accumulating sort to the taxes, respecting evidence income and for v. in analysis by its the Commission a manner BOARD OF GOVERNORS OF reach satisfactory enable it to conclu SYSTEM, FEDERAL RESERVE respecting subject sion the basis of Respondent, important the most evidence relevant to it possession and which is in the regu First New Mexico Bankshare is industry lated or under control. One Corp., Intervenor. situation, must know is actually what No. 76-1367. to a degree, just least reasonable to reach a and reasonable conclusion about it. It United States Court of Appeals, justice requires seems to me that simple District of Columbia Circuit. amount ultimately consumer Argued April 1977. pays producer enable to recover its tax supported pay income must be Decided Nov. by tax ments accruals evidenced tax returns As Amended Dec. data, supporting repre or other reasonably sentative of question the situation. The justifies
the end whether such evidence component priori included a rate.
tax ignores proceeding, producer Iish them adopt the failure of 1. In context where theory relevant facts are in computing most as to income taxes its income tax. possession producers, filed, availa- When a consolidated return is losses due arriving nonjurisdictional ble at the income non-gas activities used components, application a fair tax of the sub- single entity theory reduce which taxes requires stantial evidence standard the court Moreover, require paid. would to be court my opinion deciding stan- to withhold that the present “pay assumes that rate more” complied dard is evidence, with unless and until this purpose borne the consumer for the of cov- accuracy refute the ering producer’s income-tax has al- cost components, made available. ready validly been established in an amount *61 comparable My cost. concern also opinion 2. The court’s states its footnote 33 “pay component may more” used “pay that natural less” producer consumers should not producer, part, pay whole not to because, gas simply example, tax, recoup its income losses as which money nonju- such as loses in a Mobil knowledge neither Commission nor court has enterprise. simplistic justifi- risdictional This whether such losses are cost related to the components present tax based cation jurisdictional producing marketing gas. theory upon separate entity used to estab- notes Petroleum Institute. The Commission long an affiliation with as he retains years has been substantial that over the there industry capacity gas in an active oil and agreement compiled figures between these and those to the work enables him to make a contribution by reputable other sources. or Subcommittee. of the Committee 770 at 33 n. R. 2528 n. 75. * * * * * * * reports Its annual reserves describes its SUBCOMMITTEES organization as follows: the Subcommit- Each Committee member is ORGANIZATION respective of his areas for the tee Chairman of the Reserves Committee Chairman Subcommittees, which are responsibility. The appointed Board of Directors of the Association. The Committee behalf of the the President on reserves, responsible for the determination engineers geologists composed from and Staff Executive is a member industry. They segments of the oil all are member of the Re- Association staff and is a experienced determination in reserve representative from the serves Committee. A United States Bureau of Mines member of the Committee. Other members are capacity have producing estimation and/or is an ex officio assigned knowledge of the areas intimate them. Committee They to them also have available appointed the Chairman indus- company information of detailed records responsibility. assigned geographic areas of developments. try operations and carrying responsibility each Committee out this excerpted of “Re- the volume from Above is organization of an Area member maintains Oil, Liquids, Gas Natural serves of Crude composed qualified technical Subcommittee Canada,” United States and Natural Gas supervi- industry his personnel who under from 31, 1973, officially noted December as of Opinion procedures in accordance with sion and 2493-2699). (R. p. No. guidelines the Committee formulated and compile reserve, necessary pro- report distinguished must be “revisions” 39. These capacity productive data to duction and Committee for inclusion de- to current “extensions” attributable responsible for the Area member drilling. velopment Report of the Com- in the Annual mittee.