Consumers Union of U.S., Inc. v. Federal Power Commission

Decision Date07 October 1974
Docket NumberNos. 73--1792,73--1817 and 73--1834,s. 73--1792
Citation510 F.2d 656,166 U.S.App.D.C. 276
Parties, 5 P.U.R.4th 500 CONSUMERS UNION OF UNITED STATES, INC., Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Tenneco Oil Company, et al., Intervenors. PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Exxon Corporation et al., Intervenors. AMERICAN PUBLIC GAS ASSOCIATION, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Public Service Commission of the State of New York et al., Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

Peter H. Schuck, Washington, D.C., for petitioner in No. 73--1792 and intervenor Consumers Union of the United States, Inc.

Richard A. Solomon, Washington, D.C., with whom Peter H. Schiff, Gen. Counsel, Public Service Commission of the State of New York, Albany, N.Y., was on the brief, for petitioners in No. 73--1817 and intervenor Public Service Commission of the State of New York.

John Staffier, Atty. F.P.C., for respondent. Leo E. Forquer, Gen. Counsel, F.P.C., George W. McHenry, Jr., Sol., and John H. Burnes, Jr., Atty. F.P.C., were on the brief, for respondent.

J. Evans Attwell, Houston, Tex., for intervenor Belco Petroleum Corp., Agent for Belco 1971 Oil and Gas Fund, LTD.

Kirk W. Weinert, Houston, Tex., with whom C. Fielding Early, Jr., Houston, Tex., was on the brief, for intervenor Texaco, Inc.

R. Gordon Gooch, Houston, Tex., with whom Jeron L. Stevens, Houston, Tex., was on the brief, for intervenor Tenneco Oil Co.

Charles F. Wheatley, Jr., and William T. Miller, Washington, D.C., were on the brief for petitioners in No. 73--1834.

Harry S. Littman, Washington, D.C., entered an appearance for intervenor Tennessee Gas Pipeline Co.

John H. Cooper, Jr., Houston, Tex., entered an appearance for intervenor Exxon Corp.

Edward W. Stern, Philadelphia, Pa., entered an appearance for intervenor, Philadelphia Gas Works.

Before BAZELON, Chief Judge, and TAMM and LEVENTHAL, Circuit Judges.

BAZELON, Chief Judge:

This is the first appeal from a decision of the FPC acting under section 2.75 of its regulations, which establishes a procedure for certification of new sales of natural gas "notwithstanding that the contract rate (might) be in excess of an area ceiling rate established in a prior opinion or order of this Commission." 1 In Moss v. FPC, 2 we upheld the basic validity of section 2.75, but we did not define the permissible conditions of its application. In this case, we must consider the character and quantum of proof needed in the certification of contract rates under the optional procedure.

In this proceeding, the FPC considered the rate provisions of contracts between three producers (Belco, Tenneco and Texaco) and the Tennessee Gas Pipeline Co. The contracts provide for the sale of gas produced from wells recently drilled in the offshore Louisiana area. The FPC approved as 'just and reasonable' the basic rate of 45 cents per Mcf provided for in each contract as well as certain yearly escalation features. 3 The area rate presently applicable for 'new gas' is 26 cents per Mcf. 4 There are serious weaknesses in the Commission's justification for this nearly sixty percent increase over the area rates, which were established as recently as 1971. These weaknesses appear both in the way in which the Commission calculated the costs of producing the gas and in the weight which the Commission accorded non-cost considerations.

The staff's cost presentation, on which the Commission relied partially, sought to estimate the current costs of producing new gas. The staff utilized the methodology consistently employed by the Commission in its area rate decisions, combining information from a number of sources to establish the national cost of finding and producing new gas. 5 There is some question initially whether reliance on nationwide data is consistent with the 'supply project' approach adopted by the Commission in its opinion, an approach whereby it seeks to ensure that 'gas consumers are receiving the lowest cost available increment of supply.' 6 FPC Chairman Nassikas, dissenting in part, thought that the 'supply project approach' required reference to 'actual unit costs . . . or . . . individual project costs.' 7 A decision requiring the Commission to rely on individualized cost data, however, would have to be reconciled with this court's opinion in Moss, which approved, by implication, the Commission's avowed intent to rely on "cost findings embodied in our area rate decisions." 8 And in any event, another more obvious problem with the Commission's cost analysis makes it unnecessary to reach this issue.

In its final estimate of production costs, the Commission made use of 1971 as a 'test year' in determining productivity--the average number of Mcf added to available reserves per each foot drilled. The Commission's staff followed the practice, well-established in area rate-making proceedings, of using productivity figures averaged over a period of years. The low end of its cost estimate was based on average productivity over the last 15 to 25 years, and the upper limit of its analysis was based on average productivity between 1967 and 1971. Its calculations yielded a cost range of 28 to 36 cents per Mcf.

The Commission adopted the staff's upper limit as the basis of the lower limit of its estimate. 9 The upper limit of the Commission's estimate (48 cents per Mcf) was based on productivity statistics for 1971 alone. The 1971 productivity figure (379) was substantially lower than the productivity figures which the staff arrived at by its averaging methods (555--600), and it accounts almost entirely for the higher cost estimates by which the Commission was able to approve the contract rates. 10 The Commission justifies its departure from past practice in selecting the 'test year' approach on the ground that 1971 was the year in which the wells producing the contract gas were drilled. As productivity had been generally on the decline in the years prior to 1971, the statistics for that year, the Commission argues, offered a more accurate estimate of the actual productivity of the new wells.

The superior accuracy of the 1971 figures is brought into question by evidence on the record. First, as Chairman Nassikas summarizes in dissent, '(t)he results of the wells drilled in 1971 will be reflected for the most part in reserves added in subsequent years. . . .' 11 Second, there were certain 'statistical revisions' made in 1971 which significantly affect productivity rates for that year. These were negative adjustments in the estimated reserve additions carried over from prior years, and had nothing to do with the actual experience of the industry in 1971. They resulted in a reduction of 1.1 billion Mcf. If allowance were made for this purely statistical manipulation, productivity for 1971 would approach 500 Mcf rather than the 379 Mcf relied on by the Commission. 12

The reasonableness of the Commission's adoption of the 1971 'test year' is further undercut by evidence that the productivity of wells in the Southern Louisiana area was about 4.8 times as high as the national average in 1971. 13 Thus, in the name of 'accuracy' the Commission moved to a lower productivity rate than had been used by its staff, in the face of evidence that an even higher rate may, in fact, have been closer to reality.

The Commission is certainly free to try out new techniques, but it is constrained to show that its departures from established practice are reasonable, 14 particularly where, as here, the change is crucial to its decision. 15 It has not made that showing on the record in this case.

The Commission also points to various non-cost factors as justification for its decision. These include the contract rates, as negotiated, the prevailing intrastate rates, the cost of importing gas from other sources (e.g., Canadian gas, coal gas), and the 'commodity value of natural gas' (based on a comparison of the contract rates with the cost of 'substitutable forms of energy in sixteen areas served by Tennessee and its resale customers.' 16). The appellants attack the Commission's reliance on these factors from a number of different directions. In light of the problems with the Commission's cost estimates, however, perhaps only two rather general points need to be made.

Even after Permian and Mobil Oil, it is doubtful that non-cost factors can sustain a decision by the FPC which is unsupported by sound cost data. In Mobil Oil, for instance, where great deference was paid to non-cost elements in upholding the Commission's decision, the Court began with the premise that '(appellant's) attack on the Commission's evidence of costs is clearly frivolous.' 17 And even if non-cost factors could, under certain circumstances, overcome problems in cost analysis of the sort apparent here, these factors are not entitled to overriding weight in the particular circumstances of this case.

Reliance on non-cost factors has been endorsed by the courts primarily in recognition of the need to stimulate new supplies of natural gas in interstate commerce. 18 Here, however, the needed supplies are assured. The gas reserves have already been discovered and tapped. 19 More importantly, as the wells are on leases in the federal domain, the gas cannot be sold at all without the Commission's approval. 20 Thus, there is no potential diversion to intrastate commerce. This is not to suggest that offshore producers, as in some sense captives of the Commission, are to be confined to the lowest rate constitutionally permissible, but their peculiar status cannot be ignored in determining what weight market factors should be accorded.

One could argue that the approval of the 45 cent rate sought by these companies would in fact augment interstate supplies by encouraging producers...

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