PUBLIC SERV. COM'N, STATE OF NY v. FEDERAL POWER COM'N

• Decision Date: 29 March 1972
• Docket Number: No. 71-1161.,71-1161.
• Parties: PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Natural Gas Pipeline Company of America, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

467 F.2d 361 (1972)

PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Natural Gas Pipeline Company of America, Intervenor.

No. 71-1161.

United States Court of Appeals, District of Columbia Circuit.

Argued January 28, 1972.

Decided March 29, 1972.

Rehearing Denied May 19, 1972.

Mr. Richard A. Solomon, Washington, D. C., for petitioner.

Mr. Francis C. Allen, Atty. F.P.C., for respondent. Messrs. Gordon Gooch, Gen. Counsel, F.P.C., Leo E. Forquer, Sol., and J. Richard Tiano, Asst. Sol., F.P.C., were on the brief for respondent.

Mr. Paul E. Goldstein, Chicago, Ill., with whom Mr. William W. Brackett, Chicago, Ill., was on the brief, for intervenor.

Before ROBINSON, MacKINNON and WILKEY, Circuit Judges.

WILKEY, Circuit Judge:

The Federal Power Commission (FPC) in the Southern Louisiana Area Rate Proceeding recognized that this country is now facing a critical shortage of natural gas,¹ attributable to an unprecedented demand for "clean" gas energy which has not met with commensurate exploration and development.² Interpreting its duty to be "to take all the action we believe necessary to reverse the downtrend of the exploration and development effort,"³ the FPC has taken several steps to alleviate the natural gas shortage. The case at bar is a result of one of these steps taken by the FPC to meet this established need, its decision that under certain conditions advance payments, made by natural gas pipelines to natural gas producers for gas to be delivered at a future date, may be included in the rate base which the pipeline uses to calculate the price that consumers will be charged for the gas.⁴

The rationale behind this decision is that the advance payments will help to give the gas producers the necessary investment capital to finance the development and production needed to alleviate the gas shortage, and the pipelines will be encouraged to make such advance payments if they are allowed to include the payments in their rate base, thus virtually simultaneously shifting the cost of the advance payments to the pipelines' customers, the natural gas consumers. This treatment of advance payments to producers was proposed to the FPC by the pipelines, on the theory that "the costs so incurred by making advance payments should be recoverable from customers in rates because such costs are directly associated with the acquisition of gas supply for the pipelines' customers and, . . . absent such advances, such gas supply would be unavailable."⁵

In a Notice of Proposed Rulemaking, issued 23 January 1970 in response to the proposal of the pipelines,⁶ the FPC noted that "The Commission has never specifically ruled on whether pipelines should be permitted to reflect in their rates costs associated with advance payments," and that since "this matter is an important policy question," the FPC invited "comments by interested persons expressing their views of the appropriate treatment."⁷ The FPC received comments from thirty-four respondents, including gas companies, electric companies, oil companies, public service commissions, and others.⁸ A glance at the list of respondents and the FPC's allowance of extra time for the filing of some of these comments (until 1 June 1970 in some cases) suggests that the views of those affected were amply ventilated.

On 2 October 1970 the FPC issued Order 410, which indicated that the FPC approved of a method of accounting treatment of advance payments, apparently in line with the thinking of the pipelines, whereby "advance payments for gas would be recorded as prepayments and unrecovered advance payments would be included in the rate base as part of working capital."⁹ While it could have been made somewhat more explicit, it nonetheless appears clearly that the FPC had accepted the reasoning of the pipelines that such treatment of advance payments as rate-base items would help alleviate the shortage in the gas supply. Thus, in Order 410 the FPC concluded that "alternative method A should be adopted because of its accounting soundness and the encouraging effects it would have on gas supply."¹⁰ And the FPC added that if it had approved Alternative C, excluding advance payments from the rate base (and thereby removing the immediate adverse cost effects to consumers), it would have been unsatisfactory:

. . . several respondents opposed alternative method C because it was believed that if it were adopted, it would be a depressant to development of future sources of supply of natural gas, and therefore not in the public interest. The Commission agrees with the comments in opposition.¹¹

Next, on 8 January 1971, in response to petitions for rehearing of Order 410, the FPC issued Order 410-A, which gave further amplification of the treatment to be accorded advance payments. On the same day the FPC issued a Notice of Proposed Rulemaking in Docket No. R-411, the object of which notice was "to afford all parties further opportunity to comment" on the treatment of advance payments and particularly advances for exploration and lease acquisition costs.¹²

In addition to some minor changes in the pipelines' Balance Sheet Account for Advance Payments, Account 166, Order 410-A enlarged upon the scope of Order 410 insofar as the FPC indicated that "advances by pipelines to independent producers for exploration and lease acquisition costs will be assured of accounting and rate treatment pursuant to Order 410 as modified herein."¹³ Finally, Order 410-A provided that "Advances to independent producers and to affiliates for development in this interim before Order 441, in Docket R-411 will be assured of accounting and rate treatment pursuant to Order 410. . . ."¹⁴ With regard to another area of contention here, advance payments by pipelines to their own affiliates for exploration and lease acquisition costs, the FPC reserved for determination in Docket R-411 whether such advances would be assured rate treatment pursuant to Order 410. On 26 February 1971 the FPC denied the petitions for rehearing of Order 410-A. One of these petitioners was the Public Service Commission of the State of New York, which filed the present action for review on 5 March 1971.

On 10 November 1971 the FPC issued Order No. 441, in Docket No. R-411. Probably the most important feature of Order 441 was to add a new account, "167, Other Advance Payments for Gas," which is not to be a rate-base account, but will include some advance payments, most notably those for exploration and lease acquisition. These types of advance payments are thus removed from the rate-base account created by Orders 410 and 410-A, which rate-base account is now to be called "166, Advance Payments for Gas Development and Production."¹⁵ This was a change in the procedure for accounting for exploration and lease acquisition advance payments under Order 410-A, which had allowed them rate-base treatment.

In other provisions of Order 441 the FPC provided that "for rate purposes advanced payments to pipeline affiliated producers shall be treated the same as advances to independent producers,"¹⁶ but that "where a working interest¹⁷ is obtained by a pipeline or a pipeline affiliate as a result of a related advance payment, we have determined that such a payment should be included in the applicable production account and not be accorded rate base treatment."¹⁸

Thus the FPC resolved some of the questions that it had left open in Order 410-A, by deciding that, in general, payments to affiliated producers would be treated the same for rate base purposes as payments to unaffiliated producers, although this would not be so where the pipeline acquired a "working interest" in the producer, and in the case of both independent and affiliated producers, advance payments for exploration and lease acquisition would not be afforded rate-base treatment. Order 441 also provided that "All advances made under contracts executed prior to the issuance of this order shall receive rate treatment in accordance with the provisions of Order Nos. 410 and 410-A." Order 441 is temporary in effect, and is to apply only to contracts executed before 1 January 1973.

In its brief, filed before Order 441, the Public Service Commission of the State of New York (New York) raised three issue: (1) whether the FPC could lawfully allow pipelines to include advance payments to producer suppliers in the rate base, when the FPC "either did not consider or gave inadequate consideration to the questions of whether the producers could receive such advance payments or, if so, their effect upon the lawful price they may charge for gas"; (2) whether there was any basis for the FPC's authorizing rate-base treatment for advance payments made to production affiliates of pipelines, or for exploratory or lease acquisition purposes; and (3) whether the procedures adopted to protect against unjust enrichment of the pipelines as a result of advance payments paid for by their customers or for undue delay in eliminating advance payment accounts are adequate.¹⁹

We are not persuaded by the arguments made by New York, and we affirm the determinations of the FPC.

I. The Authorization to Pipelines to Treat Advance Payments as Part of the Rate Base

New York's challenge to the FPC's decision to treat some advance payments made by the pipelines as rate-base items appears to rest on two grounds. The first is New York's accusation that "the basis for the Commission's action is obscured by the lack of an adequate statement of purpose in its Notice of Proposed Rulemaking, and almost complete absence of any discussion of the comments, or other statements of the reasons for its actions, in Orders 410 and 410-A. . . ."²⁰ The second is what New York has characterized as "the anomaly of purporting to decide that pipeline customers could be obligated to reimburse the pipelines for advance payments when the Commission had not yet determined whether producers could receive such...