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

Decision Date14 January 1975
Docket NumberNos. 73--1338,74--1301,s. 73--1338
Citation167 U.S.App.D.C. 100,511 F.2d 338
PartiesPUBLIC SERVICE COMMISSION FOR the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent. PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Petitioner, v. FEDERAL POWER COMMISSION, Respondent.
CourtU.S. Court of Appeals — District of Columbia Circuit

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 petitioner.

Charles E. Bullock, Atty., F.P.C., with whom Leo E. Forquer, Gen. Counsel, and George W. McHenry, Sol., F.P.C., were on the brief for respondent. Platt W. Davis, III, Atty., F.P.C., also entered an appearance for respondent.

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

LEVENTHAL, Circuit Judge:

In October 1970, the Federal Power Commission authorized natural gas pipelines to include in their rate bases certain advance payments made to natural gas producers for gas to be delivered at a future date. 1 The FPC's action was one of a number of efforts to spur capital formation for gas development in order to alleviate the critical shortage of natural gas. 2 The Public Service Commission of the State of New York (New York) sought review in this court of the FPC order establishing rate base treatment of advance payments. 3 Prior to the resolution of that appeal, the FPC modified its initial order, restricting its scope and limiting its duration to the period ending December 31, 1972. 4

This court sustained the advance payment scheme on the basis of 'the temporary character of the FPC order' and 'our belief that it represented a justifiable experiment in the continuing search for solutions to our nation's critical shortage of natural gas.' Public Service Commission v. FPC, 151 U.S.App.D.C. 307, 317, 467 F.2d 361, 371 (1972). We stressed the need for further evaluation by the FPC prior to any continuation of rate base treatment of advance payments to producers.

Fundamental to the concept of any experiment is the assumption that the data developed from the experience thereunder will be subjected to meaningful review, analysis, and evaluation before the experimental practice is allowed to continue or to become institutionalized as a more permanent procedure.

In approving this temporary order, we had no intention of abridging that concept nor of approving capitalization of advance payments beyond its stated expiration date without the FPC having first carefully evaluated the experience under Order 441 to determine whether its justifying objectives are being satisfactorily met at an acceptable level of ultimate economic cost to the nation's gas consumers. 5

Since our 1972 opinion, the FPC has twice reaffirmed the rate base treatment accorded advance payments to producers and has expanded the types of payments eligible for such treatment. 6 Data compiled by the Commission reveal that as of July 30, 1973, pipelines had committed advance payments totalling over one and a quarter billion dollars to producers in the 'lower 48' states and had actually advanced them over a billion dollars. 7 The ultimate cost to the consumer attributable to the funds already advanced has been estimated to exceed half a billion dollars. 8

Although the FPC's continuation of the program has been through orders for successive extensions of one year and two year periods and the FPC has directed its staff to continue its evaluation of the program during the present term, the rate base treatment of advance payments can no longer be viewed as a temporary, experimental approach to the supply problem. The Commission's endorsement of rate base treatment in five orders and the huge sums involved in escalating advance payments commitments 9 indicate that the initial experimental practice has 'become institutionalized as a more permanent procedure.' 10 The present case requires us to examine whether the FPC's actions have been premised on the type of meaningful review, analysis, and careful evaluation of experience called for by our earlier opinion.

New York urges that the Commission has not developed 'a proper factual predicate' to support the continuation of the advance payments program. 11 New York does not call for the abolition of all rate base treatment of advance payments. 12 Rather it contends that the present size and scope of the program cannot be sustained as a reasoned exercise of the Commission's discretion based on the record as a whole.

After a thorough review of the record before us, we find that the FPC has failed to engage in 'meaningful review, analysis, and evaluation' of the experience under the advance payments program. The data presented by the Commission as a justification of its repeated extensions of the advance payments program provide an inadequate basis from which 'to determine whether its justifying objectives are being satisfactorily met at an acceptable level of ultimate economic cost to the nation's gas consumers.' 13 Accordingly, we remand the record for further evidence and consideration by the FPC. 14

I. THE ADVANCE PAYMENTS ORDERS

We begin with a brief review of the origin of the advance payments program and changes in its scope since its inception.

The first of the five advance payment orders was Order 410, issued October 2, 1970, which established new Account 166, Advance Payments for Gas, and provided that '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.' 15 The order defined advance payments to include amounts paid to independent or affiliated producers for exploration, lease acquisition, development, or production of natural gas, 'when such advance payments are to be repaid by delivery of gas. 16 Other provisions indicated that advances should be repaid within a five year period and that the rate base account must be credited by the amount of advances which become non-recoverable. 17 The rationale underlying this procedure was that rate base treatment would allow the pipeline to pass on to the consumer the monetary cost of making advances--i.e., the rate of return on this part of the rate base, and thus would induce advance payments which would supply producers with capital required for the development of additional gas supplies. 18

The Commission was persuaded on rehearing to renotice Account 166 in order to afford further opportunity for comment. The renotice was set forth in a Notice of Proposed Rulemaking in Docket No. R--411, issued on January 8, 1971. 19 The same day, the FPC issued Order 410--A, which provided interim rate base treatment for 'advances by pipelines to independent producers for exploration and lease acquisition costs.' 20 That order reserved the question of the appropriate treatment of exploration and lease acquisition advances made by pipelines to their own affiliates for consideration in the upcoming docket. 21

The reconsideration led to Order 441, November 10, 1971, which adopted certain modifications and limited the advance payments program to the period ending December 31, 1972. 22 It created Account 167, Other Advance Payments for Gas, a mechanism to record all advances not accorded rate base treatment. The FPC determined that rate base treatment would be denied to all advances for exploration and lease acquisition, as well as payments to both affiliated and independent producers which resulted in a working interest. 23 Order 441 also provided that where economic interests other than a working interest were received by a pipeline as a result of an advance payment properly includable in the rate base, 'any realization therefrom' was to be treated 'so as to reduce the (pipeline's) cost of service.' 24 Further, the FPC confined its rate base treatment program to advances which required repayment in full 'by either delivery of natural gas or other consideration' and added the requirement that, unless otherwise authorized, repayment must take place within five years after the date of advance. 25

In the March 1972 ruling that affirmed the FPC's initial orders allowing rate base treatment of advance payments, this court relied on Order 441 as evidencing the Commission's 'willingness to assimilate criticism from parties such as New York, and adjust its treatment of advance payments to conform with the realities of the natural gas market.' 26 Since our 1972 decision, however, the Commission has reversed course in Orders 465 and 499 and has significantly enlarged the types of advances includable in the pipeline's rate base.

On July 3, 1972, the FPC issued a Renotice of Proposed Rulemaking and Request for Comments in Docket No. R--411, 27 stating that the new proceeding would 'undertake a careful evaluation of the experience under Commission Order No. 441.' 28 The notice requested comment on the advisability of continuing rate base treatment beyond the December 31, 1972, expiration date, restoring advances for exploration and lease acquisition to Account 166, handling advances to pipeline affiliates like advances to independent producers, and requiring producers to pay 7% annual interest on advance payments. 29 Comments were filed by 49 respondents, including 21 independent producers, 13 pipelines, and 8 affiliated companies. 30 The Commission also collected data from all pipelines that had filed advance payment agreements under the prior orders and sought comments from interested parties on the summary tabulations. 31

Order 465, December 29, 1972, extended the advance payments program for one year and made several major modifications. First, the Commission reallowed rate base treatment for advances in aid of exploration but continued to deny it for lease acquisition advances. 32 Second, rate base treatment was extended to advances by a pipeline to an affiliate even though the affiliate...

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