Public Service Commission v. Federal Power Commission

543 F.2d 874, 177 U.S. App. D.C. 389

• Court: Court of Appeals for the D.C. Circuit
• Decided: January 27, 1976
• Docket: Nos. 73-1647, 73-1793 and 73-1794
• Status: Published

Opinions

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. 595² 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.]

* sft * * sje *

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.

Appellate review of Opinion No. 639 was thorough in Shell and we are in full agreement with the conclusions reached in that case. Petitioners here, as in Shell, do not attack the fact findings in Opinion 639, but only the conclusion reached by the Commission therein with respect to vintaging.

We particularly note the following in Shell (491 F.2d at 89-90):

A caveat is appropriate at this point. In regard to vintaging, today we are approving FPC’s interpretation of certain regulations. We do not reach the question of whether FPC may altogether discontinue the use of vintaging. Rather in each future rate order the Commission must continue to produce substantial evidence to support each essential element of the proposed rate structure. In re Permian Basin Area Rate Cases, supra [390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968)]. Certainly the absence or presence of vintaging must be regarded as an essential element.

Though we concur completely in the quoted “caveat,” we note that the instant appeals do not involve an area rate order per se or a “proposed rate structure.” The question of whether the “new” gas rates themselves are “just and reasonable” under 15 U.S.C. § 717d(a) is not before us. Presumably, substantial evidence to support those rates is present in the previously issued applicable area rate orders. Those orders are not in dispute here and the present case does not involve an area rate proceeding with all of the protracted fact finding efforts, over a period of years, which such a proceeding entails.

We share the concern, expressed in argument before us and by our dissenting brother, that the increased rates permissible under the Commission’s new interpretation of area rate schedules may lead to increased gas prices without triggering the desired exploration for additional gas deposits. In Shell (491 F.2d at 89), the court recognized the same argument:

But FPC’s new interpretation of the vintaging provisions will produce a contrary result, we are told. With “new” and flowing gas at the same price level, the producers will have no incentive to find more gas because they can reap windfall profits by selling cheap flowing gas at the higher rate formerly reserved for “new” gas. If FPC required the producers to show higher costs or new production to justify the higher rate, then FPC would be acting rationally. But it is irrational only to raise gas rates with no quid pro quo required. The producers will not find increased production to be in their best interest, and, as NYPSC puts it, they will “take the money and run.”

The Fifth Circuit, however, went on to say (Id.):

It is also conceivable, however, that a departure from vintaging will serve to increase gas production. In Opinion 639 the Commission stated it believes that vintaging actively discourages new drilling on acreage already committed to the interstate market. If a producer has signed a contract before the division date, all the gas he producers [sic] during the contract’s life will receive the low “old gas” price. Even if he drills new wells at current costs, the “new” gas he discovers and produces will be priced as “old” gas, on the basis of historical costs computed in a year long since gone by. Since costs seem to rise inexorably with the passage of time, new drilling will become less attractive as the contract ages. For example, we think it quite likely that a producer operating under a 1964 contract may have little incentive to find expensive 1974 gas only to sell it at bargain 1964 rates. But if he can raise his prices to a uniform rate for both “new” and “old” gas when the old contract expires and a new one is signed, he might be more inclined to drill new wells.

If the higher rates do stimulate production, the extra increment for flowing gas will supply needed additional capital for exploration and drilling. Precedent, moreover, supports the view that FPC does not necessarily create an irrational windfall when it includes in the price of flowing gas an increment for further exploration and development. We approved in SoLa II [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)] a rate structure with just such an increment.

No one can say with certainty that additional gas revenues will lead to an increased gas supply. It is apparent, however, that without sufficient revenue to support exploration for new deposits and further development of old deposits, an increased quantum of such activity is unlikely. The evidentiary factors discussed in Opinion No. 639 support that conclusion. The Commission’s action, in modifying its earlier interpretation of its own vintaging mechanism, followed a pragmatic, non-doctrinaire approach based on its experience and expertise. It is not illogical to believe that removal of impediments can result in revival of the impeded activity. It is well, also, to recognize, as did the court in Austral Oil, supra, (at note 46) that:

The gas industry is different from metropolitan transit in that it requires a constant infusion of entrepreneurship of the highest order if even basic public needs are to be satisfied. * * * On the other hand, we count upon persons who carefully weigh investment risks for our supply of natural gas. We think the Commission here, having calculated the dangers involved in allowing the gas supply to lapse, and the probabilities that its estimates might be too low, is justified in having added the small noncost factors it thought were necessary. It found that it needed to do' so to protect the public interest and not to assure any rights of gas producers.

As noted in Placid, supra, the distinction between “old” gas and “new” gas is artificial. We agree with the holding in Shell that the Commission cannot be charged with error because it chose a literal and strict interpretation of particular language in preference to another possible interpretation. The Commission’s interpretation of what constitutes “new” gas, and application of that interpretation in the present cases, were reasonable actions falling within its authority.

The orders under review are affirmed.

1 . Area Rates for Appalachian and Illinois Basin Areas, 48 FPC 1299 (1972), reh. denied, 49 FPC 361 (1973), aff'd sub nom., Shell Oil Co. v. F.P.C., 491 F.2d 82 (5th Cir. 1974).

2 . Area Rate Proceeding (Texas Gulf Coast Area), 45 FPC 674, reh. denied, 46 FPC 826 (1971).

3 . 49 FPC 1009, reh. denied, 49 FPC 1411 (1973).

4 . We decline the invitation to treat Shell as binding under the doctrine of res judicata or collateral estoppel. The parties here are not identical to or in privity with those in Shell. Nor are the causes of action identical. They arise from different contracts and different Commission orders. Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948). We note, however, that petitioners here were intervening parties in Shell and that much of petitioners’ expanded argument here was absent from the proceedings below on the orders herein appealed and from the presentations made in Shell.