Public Utilities Com'n of State of Cal. v. F.E.R.C.
| Decision Date | 01 May 1987 |
| Docket Number | 86-1158,Nos. 86-1078,86-1172 and 86-1210,s. 86-1078 |
| Citation | 817 F.2d 858 |
| Parties | PUBLIC UTILITIES COMMISSION OF the STATE OF CALIFORNIA, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southern California Gas Company, Pacific Gas & Electric Company, Southwest Gas Corporation, City of Mesa, Arizona, El Paso Natural Gas Company, Fina Oil and Chemical Company, Transwestern Pipeline Company, Phelps Dodge Corp., Salt River Project Agricultural Improvement and Power District, Intervenors. ASARCO, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Salt River Project Agricultural Improvement and Power District, Phelps Dodge Corp., Public Utilities Commission of the State of California, City of Mesa, Arizona, Southwest Gas Corporation, El Paso Natural Gas Company, Pacific Gas & Electric Company, Fina Oil and Chemical Company, Arizona Public Service Company, Intervenors. EL PASO NATURAL GAS COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Public Utilities Commission of the State of California, Southern California Gas Company, Arizona Public Service Company, Pacific Gas & Electric Company, Southwest Gas Corporation, Transwestern Pipeline Company, City of Mesa, Arizona, Phelps Dodge Corp., Salt River Project Agricultural Improvement and Power District, Intervenors. FINA OIL AND CHEMICAL COMPANY, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Salt River Project Agricultural Improvement and Power District, Phelps Dodge Corp., Public Utilities Commission of the State of California, City of Mesa, Arizona, El Paso Natural Gas Company, Pacific Gas & Electric Company, Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Harvey Y. Morris, with whom J. Calvin Simpson, Nicholas W. Fels and David N. Heap were on the joint brief for Public Utilities Com'n of the State of Cal. and ASARCO, Inc., et al. petitioners in Nos. 86-1078 and 86-1158. Steven F. Greenwald, Robert B. McLennan, Douglas Kent Porter, Barbara S. Jost, Joel L. Greene, Stanley W. Balis, Susan N. Kelly and Kathleen A. McKee were on the joint brief for Public Utilities Commission of the State of Cal., et al., intervenors in Nos. 86-1158, 86-1172 and 86-1210.
Richard C. Green, with whom Donald J. MacIver, Jr., Richard Owen Baisch and Scott D. Fobes were on the brief for El Paso Natural Gas Co., petitioner in No. 86-1172 and intervenor in Nos. 86-1078, 86-1158 and 86-1210.
Steven R. Hunsicker, with whom Gordon Gooch, Charles M. Darling, IV and John W. Leslie were on the brief for Fina Oil and Chemical Co., et al., petitioners in No. 86-1210 and intervenors in Nos. 86-1078 and 86-1158.
Joanne Leveque, Attorney, F.E.R.C., with whom Barbara J. Weller, Deputy Solicitor, F.E.R.C. was on the brief for respondent.
Howard V. Golub entered an appearance for intervenor, Pacific Gas & Elec. Co. in Nos. 86-1078, 86-1158, 86-1172 and 86-1210.
William I. Harkaway and Steven J. Kalish entered appearances for intervenor, Southwest Gas Corp. in Nos. 86-1158 and 86-1172.
Richard H. Silverman, Phoenix, Ariz., entered an appearance for intervenor, Salt River Project Agr. Improvement and Power Dist. in Nos. 86-1078, 86-1158, 86-1172 and 86-1210.
Herbert I. Zinn and Tamara L. Huddleston, Phoenix, Ariz., entered appearances for intervenor, Arizona Public Service Co. in Nos. 86-1158 and 86-1172.
Adele S. Buchman, Houston, Tex., entered an appearance for intervenor, Transwestern Pipeline Co. in Nos. 86-1078 and 86-1172.
Before WALD, Chief Judge, EDWARDS and STARR, Circuit Judges.
Opinion for the Court filed by Circuit Judge STARR.
This case comes to us in the wake of Congress' restructuring of the pricing system for natural gas. Two questions are presented: the first concerns the proper disposition of funds remaining in a pipeline producer's deferred tax reserves following a change in pricing structure; the second relates to the availability of a certain price category, the replacement contract price, for gas produced by a pipeline. In our view, the Federal Energy Regulatory Commission failed adequately to explain its resolution of the first issue; in addition, the second issue, we are persuaded, is not in an appropriate posture for review by virtue of a related pending issue before the Commission. We therefore remand both issues to the Commission.
I
Prior to 1978, sales of natural gas were regulated under the Natural Gas Act (NGA), 15 U.S.C. Sec. 717 et seq. (1976 & Supp. V). Initially, FERC's predecessor, the Federal Power Commission, regulated the gas rates of interstate pipelines, 1 but not those of independent producers. The FPC set rates for pipeline-producer gas on a "cost-of-service" basis, allowing the pipeline to be reimbursed for "all expenses incurred, including income taxes, plus a reasonable return on capital." Public Service Co. v. FERC, 653 F.2d 681, 683 (D.C.Cir.1981).
In 1954, the Supreme Court held that the NGA conferred jurisdiction on the FPC over rates charged by independent producers of gas, as well as pipeline producers, in sales in interstate commerce. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954). At first, the Commission employed its individualized cost-of-service methodology across the board, but the sheer number of independent producers soon forced it to set rates for those producers on a regional, and eventually a nationwide basis. See Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968); Shell Oil Co. v. FPC, 520 F.2d 1061 (5th Cir.), cert. denied, 426 U.S. 941, 96 S.Ct. 2660, 49 L.Ed.2d 394 (1976). The FPC continued, however, to use cost-of-service ratemaking for all pipeline-producer gas until 1969. At that point, it extended independent-producer pricing to a limited category of pipeline-producer gas. 2
Congress completely revamped the regulation of natural gas, including pricing structures, in the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. Sec. 3301 et seq. (1982). Under section 104 of the NGPA, the maximum price for gas is set at the just and reasonable rate established by the Commission under the NGA and is thereafter adjusted over time by a statutory formula. 15 U.S.C. Sec. 3314(b)(1). In interpreting the new statute, the Commission determined that the NGPA applied only to gas produced by independent producers; FERC thus continued to regulate pipeline producers in accordance with pre-NGPA policies. In Public Service Commission of New York v. Mid-Louisiana Gas Co., 463 U.S. 319, 103 S.Ct. 3024, 77 L.Ed.2d 668 (1983), however, the Supreme Court held that pipeline-producer gas, as well as independent-producer gas, was subject to NGPA pricing. As a result, the pipeline producer whose rates are under review here, El Paso Natural Gas Company, was able to switch from cost-of-service ratemaking to the more lucrative NGPA system.
El Paso's transition from the old rate structure to the new regime was not entirely smooth. Because the two issues raised in this petition are, for all practical purposes, unrelated, we discuss them separately, turning first to the disposition of the deferred tax reserve created under the prior system of pricing (cost-of-service) and then to the availability of the replacement contract gas price category for El Paso's gas.
Under cost-of-service ratemaking, the Commission required the amortization of expenses, typically mandating that a current utility expense not be borne entirely by current ratepayers, but rather be charged to customers over time. 3 This policy, however, created a problem for the Commission with respect to the pipeline producer's income taxes, one of the cost elements included in the cost-of-service rates. Determining the proper tax allowance was problematical because, whereas an expense was allocated over time for rate purposes, the tax laws generally permitted the pipeline producer to deduct the expense more quickly through accelerated depreciation.
Over the past twenty years, the Commission alternately employed two methods ("flow-through" and "normalization") to deal with the timing differences between its pricing policies and the tax treatment of expenditures. See Memphis Light, Gas & Water Div. v. FERC, 707 F.2d 565, 568 (D.C. Cir.1983) (describing history). Under the "flow-through" method, the Commission allowed customers to receive the entire benefit of a tax deduction at the time the pipeline producer took the deduction. As this court put it not long ago, "[t]he primary rationale for flow-through is the actual taxes paid principle, i.e., in each year customers are charged no more than the current tax liability of the utility." Public Systems v. FERC, 709 F.2d 73, 76 (D.C.Cir.1983) (Public Systems II ). Under the "normalization" method, on the other hand, the benefit of a tax deduction is spread evenly over the period that customers were charged for the expense. "The primary rationale for normalization is the matching principle, i.e., equity demands that the customers who pay the expense receive the tax benefit associated with that expense." Id. 4
After 1975, the Commission consistently permitted employment of the normalization method. As tax buffs might suspect, normalizing taxes for rate purposes allowed the pipeline producer to collect more from its customers in early years than needed to cover current taxes (because, as explained above, of accelerated depreciation). During the period when amounts collected from ratepayers for taxes exceeded actual taxes paid, FERC required the pipeline producer to account for the difference by creating and maintaining reserves for deferred taxes. The Commission also required the pipeline producer to deduct the amount reflected in the deferred tax reserves from its rate base. The rationale undergirding this requirement was twofold: (1) that the pipeline producer should not be permitted to...
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