Public Service Commission for State of N. Y. v. Federal Power Commission

• Decision Date: 27 January 1976
• Docket Number: 73-1793 and 73-1794,Nos. 73-1647,s. 73-1647
• Citation: 543 F.2d 874
• Parties: PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Continental Oil Company et al., Intervenors. ASSOCIATED GAS DISTRIBUTORS, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company et al., Intervenors. ASSOCIATED GAS DISTRIBUTORS, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Mobil Oil Corporation, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 874

543 F.2d 874

177 U.S.App.D.C. 389

PUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Continental Oil Company et al., Intervenors.

ASSOCIATED GAS DISTRIBUTORS, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Phillips Petroleum Company et al., Intervenors.

ASSOCIATED GAS DISTRIBUTORS, Petitioner, v. FEDERAL POWER COMMISSION, Respondent, Mobil Oil Corporation, Intervenor.

Nos. 73-1647, 73-1793 and 73-1794.

United States Court of Appeals District of Columbia Circuit.

Argued Oct. 31, 1974.

Decided Jan. 27, 1976.

Richard A. Solomon, Washington, D.C., with whom Peter H. Schiff, Albany, N.Y., was on the brief for petitioner in Nos. 73-1647 and 73-1793.

Frederick Moring, Washington, D.C., with whom Richard G. Morgan and Thomas C. Watson, Washington, D.C., were on the brief for petitioner in No. 73-1794.

John R. Staffier, Atty., Federal Power Commission, for respondent. Leo E. Forquer, Gen. Counsel, Federal Power Commission, George W. McHenry, Jr., Sol., Richard A. Oliver and A. Lee Wallace, Attys., Dept. of Justice, were on the brief for respondent.

Tom Burton, Houston, Tex., for intervenor Continental Oil Co.

Carroll L. Gilliam, Washington, D.C., with whom Tom P. Hamill, Houston, Tex., and Phillip R. Ehrenkranz, Washington, D.C., were on the brief for intervenor Mobil Oil Corp.

John L. Williford, Bartlesville, Okl., entered an appearance for intervenor Phillips Petroleum Co.

Before ROBINSON and ROBB, Circuit Judges and MARKEY, ^* Chief Judge, United States Court of Customs and Patent Appeals.

Opinion for the Court filed by Chief Judge MARKEY.

Dissenting opinion filed by Circuit Judge SPOTTSWOOD W. ROBINSON, III.

MARKEY, Chief Judge, United States Court of Customs and Patent Appeals:

These appeals present the question of whether the Federal Power Commission (Commission) may permit application of previously established "new" gas rates to flowing natural gas ("old" gas) sold pursuant to a new contract which replaces an expired contract. We answer in the affirmative.

The Facts

The seeds for these appeals were sown by the issuance of the Commission's Opinion No. 639. ¹ The Commission announced in No. 639 that the language of previous area rate orders, which had established the criterion for "old" gas rates and "new" gas rates ("vintaging"), would be literally and strictly applied. Specifically, the Commission announced that

(t)he wording of Order No. 411, and all other Commission area rate orders or opinions of similar import, stating that 'old' gas rates will be applicable to 'gas sold pursuant to a contract dated prior to October 8, 1969' will be literally and strictly applied. If a gas contract dated prior to October 8, 1969, terminates, and the purchaser and seller enter into a new contract, gas sales under the new contract will be governed by the applicable pricing provisions relating to 'gas sold pursuant to a contract dated after October 7, 1969.' . . . In time this will result in the elimination of a two-price system, a result we believe intended by the original authors of vintaging and a result we wholeheartedly endorse.

On applications for hearing the Commission in Opinion No. 639-A clarified this decision, saying (49 FPC 364)

the new gas ceiling may be applied upon execution of a new contract for deliveries of gas previously certified and dedicated to the interstate market under a contract which has expired by its own terms. (Emphasis in original.)

Under the vintaging concept, employed since 1960, "new" gas had been considered as limited to gas from newly discovered fields. Hence the rate established in the original contract for gas from a particular field applied to gas from additional wells in that field and to later contracts for gas from that field, i. e., all gas from that field was "old" gas. The Commission's present interpretation means that "new" gas rates may be applied without regard to whether the contract covers gas from a newly discovered field or whether it replaces an expired contract for currently flowing gas.

On December 21, 1972, Mobil Oil Company (Mobil) applied for permission to abandon certain natural gas sales to Shell Oil Company (Shell). The application indicated that Mobil's sales contract with Shell had expired by its own terms and that a new contract had been negotiated with Texas Eastern Transmission Company (Texas Eastern). Approval of the latter sale was requested in a related application in which Mobil indicated that it would accept an initial rate equal to the area ceiling for "new" gas established in Commission Opinion No. 595 ² for the Texas Gulf Coast Area. As authority for allowing it to collect the "new" gas rate, Mobil cited Commission Opinion No. 639. Associated Gas Distributors (AGD) sought and was permitted to intervene. A hearing was held and on April 16, 1973, the Commission found ³ the proposed abandonment to be "permitted by the public convenience and necessity." The Commission also granted Mobil a temporary certificate authorizing sale under the Texas Eastern contract at the area "new" gas rate. AGD's request for rehearing was denied and a petition to this court (No. 73-1794) to review the Commission's order followed.

Contemporaneously, the Commission issued a notice that Continental Oil Company, Getty Oil Company, and Phillips Petroleum Company had filed requests for rate increases, the first two in the Other Southwest Area and Phillips in the Texas Gulf Coast Area. AGD and the Public Service Commission of the State of New York (PSCNY) were permitted to intervene. In each case the oil company had apparently entered into a new contract after the expiration of a prior contract. The Commission's order of April 27, 1973, cited Opinion No. 639 as controlling and granted the requested rates. Following denial of a request for rehearing, this court was petitioned, separately by PSCNY (No. 73-1647) and by AGD (No. 73-1793), to review the Commission's order.

The three appeals were consolidated for briefing and argument before us.

Issue

The substantive issue is whether the Commission's orders, permitting application of the "new" gas rates established in prior area rate orders, are authorized. The appealed orders involve individual implementations of the Commission's prior decision to discontinue, gradually and as individual contracts expire, the use of the two-price (vintaging) system. That decision, first announced by interpretative rule in Opinion No. 639, was reviewed and approved as "rational, reasonable, and therefore fully permissible" in Shell Oil Co. v. F.P.C., 491 F.2d 82, 89 (5th Cir. 1974). ⁴

OPINION

The Commission's natural gas regulation efforts, in the short view, appear plagued by conflicting goals. While guarding against artificially inflated rates, it must simultaneously assure a rate schedule sufficient to encourage vigorous development of new gas sources assuring maintenance of an adequate gas supply. In the long view, increased supply may be considered a major prerequisite to reduced rates and the apparent conflict in goals may be seen to evaporate.

To prompt the search for and development of new gas deposits, the Commission incorporated into its area rate schedules a two-price system, referred to as the concept of "vintaging." See generally, Placid Oil Co. v. F.P.C., 483 F.2d 880 (5th Cir. 1973), aff'd sub nom. Mobil Oil Corp. v. F.P.C., 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d 72 (1974); Austral Oil Co. v. F.P.C., 428 F.2d 407 (5th Cir.), cert. denied, 400 U.S. 950, 91 S.Ct. 244, 27 L.Ed.2d 257 (1970). Conceived in 1960, the vintaging mechanism first appeared in a completed rate order in 1965. Permian Basin Area Rate Proceeding, 34 FPC 159 (1965), reh. denied, 34 FPC 1068 (1965), remanded sub nom. Skelly Oil Co. v. F.P.C., 375 F.2d 6 (10th Cir. 1967), on rehearing, 375 F.2d 35 (1967), modified sub nom. Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). The two-price vintaging policy was viewed from the outset as a temporary measure. Statement of General Policy No. 61-1, 24 FPC 818 (1960).

Unhappily, the Commission's creation, vintaging, failed to achieve the desired results. Opinion No. 639 contains "substantial evidence" to support that finding of failure, 15 U.S.C. § 717r(b). As the court said in Shell (491 F.2d at 85 n. 8), "no fact findings are disputed." The Opinion No. 639 findings did in fact include detailed discussion of national gas supply, area gas drilling and production activities, intrastate competition for new gas, the need for deep gas exploration, comparison with costs of supplemental gas, and changes in costs of finding and producing new gas supplies. A major fact finding, pointing toward the failure of vintaging, was that the exploratory gas well count in the area had been 97 wells in 1968 and that within one year after the issuance of Order No. 411 in 1970, applying the vintaging concept to the area, the exploratory gas well count dropped to 47 wells.

In Opinion No. 639 the Commission recognized the failure and stated:

We believe vintaging to be an anachronism which we should now move to eliminate. Vintaging operates to discourage development of the full productive capacity of acreage committed to the interstate market, for even though such developmental drilling is undertaken at current costs, gas production obtained thereby is priced at the lower of two rates, when it is the higher of the two that is Commission-designed to provide the incentive for development of additional gas supplies. (Original emphasis.)

Any change in vintage rates would require a modification by us of rates already determined to be just and reasonable. Many of these determinations are under judicial review and should not now be altered by the Commission. We are free, however, to effect one change in the application of vintaging concepts by interpretation of the specific language used in setting vintage rates, and we now do so.

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