Tenneco Oil Co. v. Federal Energy Regulatory Commission
| Decision Date | 18 April 1978 |
| Docket Number | Nos. 76-2960,s. 76-2960 |
| Citation | 571 F.2d 834 |
| Parties | , 25 P.U.R.4th 107 TENNECO OIL COMPANY et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. et al. * |
| Court | U.S. Court of Appeals — Fifth Circuit |
Allan Abbot Tuttle and Howard E. Shapiro, Solicitors, Drexel D. Journey, Gen. Counsel, J. Paul Douglas, Atty., F.P.C., Washington, D. C., for Federal Energy Regulatory Com'n.
Gordon Gooch, Bruce Kiely, Washington, D. C., Vernon M. Turner, Michael Silva, Phyllis Rainey, Houston, Tex., for Tenneco Oil Co.
Thomas G. Johnson, Houston, Tex., for Shell Oil Co.
David M. Whitney, Houston, Tex., for Aminoil USA, Inc., Aminoil Development, Inc. and Signal Petroleum.
Justin R. Wolf, Washington, D. C., for California Co., a Div. of Chevron Oil Co.
William A. Sackmann, Findlay, Ohio, for Marathon Oil Co.
Pat F. Timmons, Houston, Tex., for Superior Oil Co.
Robert W. Henderson, Dallas, Tex., for Hunt Oil Co., et al.
Paul W. Hicks, Dallas, Tex., for Placid Oil Co.
Richard F. Generelly, Washington, D. C., for General American Oil Co. of Texas.
James D. Olsen, Dallas, Tex., for Sun Oil Co. (Delaware).
George B. Mickum, III, Washington, D. C., for Atlantic Richfield Co.
Thomas H. Burton, Houston, Tex., for Continental Oil Co.
Richard A. Solomon, Washington, D. C., for Public Service Comm. of State of N. Y.
Patricia D. Robinson, Oklahoma City, Okl., for Kerr-McGee Corp.
Edmunds Travis, Jr. and Paul W. Wright, Houston, Tex., for Exxon Corp.
Judy M. Johnson, Houston, Tex., for Belco Petroleum Corp.
Charles F. Wheatley, Jr., Washington, D. C., for American Public Gas Ass'n.
John L. Williford, Bartlesville, Okl., for Phillips Petroleum Co.
Robert D. Haworth, Houston, Tex., for Mobil Oil Corp.
B. James McGraw, Houston, Tex., for Gulf Oil Corp.
Kenneth L. Riedman, Jr., Los Angeles, Cal., for Union Oil Co. of Cal.
Richard F. Remmers, Oklahoma City, Okl., for Sohio Petroleum Co.
William H. Emerson, Chicago, Ill., for Amoco Production Co.
C. Roger Hoffman, Houston, Tex., for Texaco, Inc.
Randolph C. Bruton, Tulsa, Okl., for Amerada Hess Corp.
Alan H. Maclin, Sp. Asst. Atty. Gen., St. Paul, Minn., for State of Minn.
Sam Riggs, Jr., Tulsa, Okl., for Cities Service Oil Co.
Tilford A. Jones, Bethesda, Md., for United Distribution Companies.
Malcolm H. Furbush, San Francisco, Cal., for Pacific Gas & Elec. Co.
Jack L. Brandon, Houston, Tex., for Getty Oil Co.
Ronald E. Jarrett, Tulsa, Okl., for Skelly Oil Co.
William W. Hensley, Pampa, Tex., for Cabot Corp.
David H. Thornberry, Houston, Tex., for United Gas Pipe Line Co. Petitions to Review Orders of the Federal Energy Regulatory commission.
Before CLARK, RONEY and TJOFLAT, Circuit Judges.
In 1976, the Commission established, for the first time, a national rate which would govern future prices for "flowing gas," i. e., natural gas from wells commenced prior to January 1, 1973. In this decision we affirm the Commission's rate, find its procedure proper, and hold the petitioners have failed to show the rate is unjust and unreasonable under the limited review permitted this Court. We reverse only that portion of the Commission's order which denies refund credit under the new rate to producers who have already dedicated gas to the interstate market on the representation that they would receive the credit in addition to the established just and reasonable rate for such gas.
We follow a familiar path. The methodology on which the Commission relied tracks the design of the area rate order affirmed by the Supreme Court in Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968), and closely parallels that established in Area Rate Proceeding (Southern Louisiana Area), 46 F.P.C. 86 (1971), aff'd sub nom. Placid Oil Co. v. FPC, 483 F.2d 880 (5th Cir. 1973), aff'd sub nom. Mobil Oil Corp. v. FPC, 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d 72 (1974). This Court in Shell Oil Co. v. FPC, 520 F.2d 1061 (5th Cir. 1975), cert. denied, 426 U.S. 941, 96 S.Ct. 2661, 49 L.Ed.2d 394 (1976), upheld the Commission's Opinion No. 699, which announced its decision to switch from area to national ratemaking. Shell Oil Co. affirmed the Commission's first national rate for "new" gas, i. e., natural gas from wells commenced on or after January 1, 1973. In Opinion No. 770, the Commission revised that rate, and established a second national rate for gas from wells commenced after January 1, 1975. The D.C. Circuit affirmed that order, American Public Gas Ass'n v. FPC, 186 U.S.App.D.C. 23, 567 F.2d 1016 (1977), cert. denied, 46 U.S.L.W. 3541 (Feb. 28, 1978).
The rate presently under review, established in Opinion No. 749 (Dec. 21, 1975), Opinion No. 749-A (Feb. 20, 1976), Opinion No. 749-B (March 31, 1976), and Opinion No. 749-C (July 19, 1976), is a national rate for gas from wells commenced before those controlled by the other national rates, that is before January 1, 1973. The producers state the wells covered by this rate produce about 90 percent of the natural gas sold interstate in the United States today.
The Commission established a price of 29.5 cents/mcf, rejecting both the minimum 24.5 cents/mcf figure suggested by its staff and the maximum 43.3 cents/mcf requested by the producers. It limits the price that can be charged for gas produced under contracts providing for a price, higher than this rate, and establishes a new price level for gas sold under those contracts that fix price at the highest price allowed by the Commission. It makes an exception to the ceiling, however, for area rates previously established at a higher price. All contracts do not come to the ceiling. See Gillring Oil Co. v. FERC, 566 F.2d 1323 (5th Cir. 1978). If fixed at a lower price, they remain unaffected, unless they are below the floor, or "minimum" rate the Commission also established. That minimum is 18 cents/mcf. The resulting net impact of this rate is expected to be an increase in the average price of flowing gas from 22.90 cents/mcf to 27.68 cents/mcf, and an increase of $503,000,000 a year in producers' income.
The starting point for setting price is cost. The Commission attempted to establish an aggregate cost for the nation's flowing gas. It issued a notice of proposed rulemaking and collected industry data. The staff proposed a rate, the parties commented on it, and the Commission formulated its opinion, which was modified on rehearing. In calculating costs, the Commission made a number of judgments challenged here. It chose to measure exploration and development costs by using a 1972 test year, even though many of the wells from which the gas comes were developed at a lower cost years earlier. The Commission included a component to cover the cost of income taxes producers might have to pay on their income, despite a lack of evidence that taxes would actually be paid. It allowed producers a 15 percent rate of return. In allocating the costs of wells which produce both oil and gas, the Commission selected a division based on the relationship of oil price to gas price in the unregulated intrastate market.
In the overall rate design, the Commission adhered to the methodology first established in Permian. In particular, it decided to "vintage" the rate, by basing it on historical cost, and making it lower than rates for subsequent years when costs have risen dramatically. The price for flowing gas of 29.5 cents/mcf stands in marked contrast to the 50 cents/mcf rate the Shell decision approved for post-January 1, 1973 gas. The later price, subsequently raised to 93 cents/mcf, is still far less than the $1.42/mcf rate for post-January 1, 1975 gas approved in American Public Gas Ass'n, supra.
The petitioners, both consumers and producers, stand in opposite camps. The only point on which all would agree is that producers should at least recover their historical, or actual, costs.
The consumers argue the Commission has, without adequate justification, exceeded actual cost. In particular, the American Public Gas Association, an organization of public utilities whose brief is joined by the State of Minnesota, challenges the use of the 1972 test year, the inclusion of an income tax component, the choice of a rate of return, the design of the cost allocation method, and the adoption of the minimum rate. The Public Service Commission of the State of New York, a regulatory body representing consumer interests, joins in the objection to the income tax component and the cost allocation method. Both seek to have the rate set aside, and as an additional ground the Association argues the Commission erred in using rulemaking rather than adjudication.
On the other hand, the producers, led by Tenneco Oil Company, contend the Commission failed to award even actual cost at a time when replacing dwindling gas supplies requires far more than that barebones standard will allow. The producers:
object to the Commission's use of the Permian methodology, and allege the rate will produce a return so far below the amount they currently need to do business as to violate the Natural Gas Act;
raise the Commission's failure to take into account regulatory lag, the time value of money, and inflation;
fault the Commission's failure to provide in the rate for individual adjustment when royalty costs go up;
and argue the Commission erred in requiring them, in order to collect the new national rate, to waive credits against refunds due for gas previously sold in excess of ceiling rates.
Atlantic Richfield Company (ARCO) separately attacks the whole vintaging concept as contrary to the basic purpose of the Natural Gas Act and a violation of the due process clause of the Constitution.
The producers do not want the rate set aside, because it is higher than the...
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