The Cities of Canton, Cleveland, and Massillon, Ohio v. Federal Power Commission, Consolidated Gas Supply Corporation, Intervenor

360 F.2d 521, 123 U.S. App. D.C. 387, 1966 U.S. App. LEXIS 6481

• Court: Court of Appeals for the D.C. Circuit
• Decided: April 15, 1966
• Docket: 19371
• Status: Published

Opinions

WILBUR K. MILLER, Senior Circuit Judge:

On April 5, 1963, Hope Natural Gas Company applied to the Federal Power Commission for a certificate authorizing it to acquire by merger, and thereafter to operate, the natural gas facilities of its affiliate, New York State Natural Gas Corporation. Both companies were wholly-owned subsidiaries of Consolidated Natural Gas Company, a registered public utility holding company.¹

Hope and New York Natural were remarkably similar: each had annual revenues of about one hundred million dollars ; each produced natural gas, and also purchased it from others; each owned and operated pipelines and underground storage pools and each sold gas in interstate commerce. The real difference between the two companies lay in their geographic locations: Hope operated principally in West Virginia, and New York Natural in Pennsylvania and New York. Their pipelines were interconnected at the West Virginia-Pennsylvania line.

Hope proposed that after the merger (with its corporate name changed to Consolidated Gas Supply Corporation) it would make all sales and render all services theretofore made and performed by Hope and New York Natural. The sales contracts and tariffs of both companies would continue in effect in the name of the surviving corporation, the application said. No change in rates or services or physical operation was proposed.

At a prehearing conference September 24, 1964, before a Commission examiner, opposition to Hope’s application was expressed by the Cities of Canton, Cleveland and Massillon, Ohio, for themselves and other ratepayers of East Ohio Gas Company (another wholly-owned subsidiary of the Consolidated system) which is the sole distributor of natural gas within their corporate limits, a part of which it had purchased from New York Natural prior to the merger. On October 6, 1964, a hearing was conducted by the examiner and on November 18, 1964, he issued an initial decision which approved the proposed merger, with a proviso, however, to which we now refer.

The surviving corporation’s adoption of New York Natural’s tariffs presented no problem, except with respect to the latter’s OSS rate schedule² which embodied a cost-of-service formula, a substantial element thereof being the cost of gas. Prior to the merger, New York Natural bought from 10 to 15 per cent of its storage gas from its affiliate, Hope. After the merger this purchase no longer took place because there was only one company. But the gas from the former Hope lines continued to flow into the former New York Natural’s storage pools. Literal application of the OSS rate with the important element of the cost of gas absent from the formula would result in a bonanza to East Ohio and Peoples of about seven hundred thousand dollars per year.

To meet this problem, it was proposed that the surviving corporation employ an accounting procedure which (a) would separately price the gas stored in the former Hope and New York Natural pools, continuing the premerger practice, and (b) would use all the cost of gas purchased by Hope in Louisiana in calculating the weighted average cost of the gas acquired for injection in the former New York Natural pools as a substitute for Hope’s former charges to New York Natural.

The examiner’s initial decision regarded this proposed accounting method as a change in the OSS tariff which required use of the procedure set forth in Section 4 of the Natural Gas Act, 15 U.S.C. § 717c, before it could become effective: a new filing by the surviving corporation, public notice thereof, and possible suspension and hearing, all subject to the Commission’s order thereon. Accordingly he included the following paragraph in his order:

“(F) As a part of its new tariff volume Number 2, Hope-Consolidated Gas [the name the examiner gave to the surviving corporation] shall file, under and pursuant to Section 4 of the Natural Gas Act and the regulations thereunder, a sheet or sheets setting forth its program for storage accounting and pricing under the former New York State Natural OSS tariff, designed to be effective upon consummation of the merger herein referred to.”

But the Commission rejected the examiner’s paragraph (F) just quoted. It noted there was proof in the record that the proposal would maintain the preexisting level of charges under the OSS rate schedule and in fact would slightly reduce that level. In this connection the Commission’s opinion said:

“ * * * The proposed storage accounting was tested against actual operations in 1963, the last full calendar year for which figures were available, and was projected against the estimated operations in 1965, assuming the latter to be the first year of operations of the merged company. The results showed that the total effect of the proposed accounting procedure would be to decrease the charges to East Ohio and Peoples by $3,000 to $4,000 per annum, or a change of only 2/100 of one percent when compared to annual billings for gas under the OSS schedule exceeding $13,000,000 per year.”

The Commission’s opinion later said: “We do not agree with the examiner that applicant must file its storage accounting proposal as a rate change under Section 4. The change giving rise to the necessity for the revised accounting procedure is to be a change in circumstance, namely, the corporate merger, and no ‘change in rate’ actually will be effected. Instead, the procedure will simply maintain the existing level of rates to the greatest possible degree. Moreover, the procedure will be employed only on an interim basis. Under these circumstances, the permissive language of Section 4 does not necessitate the examiner’s filing requirement.

“However, we do not give unconditional sanction to the costing procedure. Our determination to allow the procedure to be used is strongly influenced by the showing that only a negligible difference in charges will result during 1965. Whether this will hold true in subsequent years cannot now be determined. Accordingly, we shall limit our approval of the accounting procedure to a period of three years following the initiation of operations by the merged company. Following the submission of the actual operating figures for 1965 we will scrutinize carefully the rate structure and charges of the merged company. * * * ”

The Commission further conditioned its approval of the accounting procedure (1) by imposing a 23-month moratorium on rate increase filing, (2) by requiring the maintenance of “suitable accounts and subaccounts to enable the isolation of costs chargeable to the former OSS System of New York Natural and to ascertain costs * * * in the same manner as is presently the case for each of the two companies,” and (3) by specifying that approval of the new procedure is “without prejudice to applicant or this Commission as to the treatment to be accorded storage costs in any future rate proceeding involving the merged corporation.” ³

Accordingly, the Commission entered an order February 2, 1965, by which it approved the merger, and also approved the accounting procedure proposed with respect to the OSS rate, subject to the conditions heretofore mentioned. Pursuant thereto, the merger became effective April 1, 1965. The petition for rehearing of the approval order filed by the Cities of Canton, Cleveland and Mas-sillon having been denied, they petition for review as permitted by Section 19(b) of the Natural Gas Act, 15 U.S.C. § 717r(b).

The Cities list three questions which they say are presented by their petition for review. The first of these is thus stated:

“Does the Federal Power Commission have the authority to approve without any hearing a change in a rate schedule for natural gas that raised the charges to the Petitioners ?”

The petitioners state a question-begging query: it assumes that the Commission approved a change in a rate schedule which raised the charges to the petitioners, when the real question is whether the Commission has approved an increase in the OSS rate.⁴ Petitioners’ question should have been phrased as follows:

In order to prevent an in justified reduction in charges which would have resulted from the mechanical application of the formula in a cost-of-service rate schedule, did the Commission err in adopting, on an interim basis, an accounting procedure which had the effect of maintaining the existing level of charges?

The answer to this question is that the Commission did not err. Prior to the merger, in calculating the average cost of the gas withdrawn from storage, a significant part of such cost was determined by the charges New York Natural paid to Hope for gas received from Hope. As we have pointed out, Hope’s sale to New York Natural ceased when the merger became effective, but the physical flow of the gas from the former Hope facilities into the Oakford and South Bend storage pools continues unchanged. Thus, although the formal sale has ceased, the costs for the volumes of gas flowing from the former Hope system continue to be incurred. As the Commission made clear:

“ * * * The problem is how to continue to reflect in the OSS cost-of-service form rate schedule the cost element comprising the per Mcf price now paid by New York Natural to Hope. Sales under the OSS schedule are made to East Ohio, supplying the Cities, and to Peoples Natural Gas Company. Without the utilization of some formula designed to record a gas purchase cost equal to the price now paid Hope by New York Natural, the storage input rate charged the former New York Natural pools would not reflect all the dollar effect of the costs presently included and, as a result, the charges under the OSS rate schedule would drop significantly without any corresponding reduction in the costs to the combined companies.”

Indeed, the petitioners accept the fact that, unless the proposed storage accounting formula were adopted, charges under the OSS rate schedule would decline by $700,000. Any such reduction, in the absence of any justifying reduction in the costs of rendering the OSS service, would be of course an unwarranted reduction amounting to a “windfall” to East Ohio, as the examiner recognized.

The Commission’s approval of the accounting procedure proposed by Hope was based on its unchallenged finding that such procedure “will simply maintain the existing level of rates to the greatest possible degree.” As we have said, the charges to East Ohio and Peoples have actually been slightly decreased. Yet the petitioners contend that, by approving the interim accounting, the Commission gave the surviving corporation an increase of $700,000 per year in the OSS rate. The contention is so obviously unsound that further discussion is unnecessary.

Petitioners state a second question which they say is presented in this proceeding:

“Is it just and reasonable both to authorize the merger of two natural gas companies in order to facilitate their achievement of joint cost savings of roughly $1,600,000 and to deny to their customers the benefits of such cost savings?”

This question erroneously assumes that the merger will result in an immediate annual saving of $1,600,000 by the surviving corporation, and that the Commission has denied the ratepayers the benefit thereof. The record shows without contradiction that the anticipated annual reduction in the operating costs of the surviving company will not be achieved until after three years. That being true, it would have been an improvident act for the Commission to order an immediate reduction in rates commensurate with the savings anticipated three years later.

It is noted again, in this connection, that the Commission limited its approval of the accounting proposal to the first three years after the merger, and stated that “Following the submission of the actual operating figures for 1965 we will scrutinize carefully the rate structure and charges of the merged company.” Moreover, the Commission conditioned its approval of the merger, as we have already shown, so as to prevent prejudice to its consideration of any future rate proceedings involving the surviving corporation. In the circumstances, the action of the Commission amply protected the ratepayers if the annual savings should occur as anticipated and if other costs should be constant so that a rate reduction might be justified at the end of the interim, and was fully justified. Cf. FCC v. Schreiber, 381 U.S. 279, 289-294, 85 S.Ct. 1459, 14 L.Ed.2d 383 (1965).

In the course of their argument the petitioners state:

“The Commission capriciously and arbitrarily denied the Petitioners any opportunity to prove the unreasonableness of the modifications in the OSS rate schedule which were proposed by Hope and ordered by the Commission.”

To the contrary, petitioners were given ample opportunity to be heard on the proposed storage accounting procedure. Their counsel was allowed considerable latitude in cross-examining the witness who supported the new procedure and stated to the examiner that another hearing would be “an unnecessary duplication of effort.” Near the conclusion of the hearing petitioners’ counsel said:

“* * * [W] e will not introduce any additional evidence. We can rely upon the record as it is. * * * ”

Thus the petitioners’ charge that the Commission capriciously and arbitrarily denied them an opportunity to prove the unreasonableness of the proposed storage accounting procedure is without any foundation.

Finally, the petitioners state as a third question presented in this proceeding the following:

“The last question is whether the Federal Power Commission may shift the burden of proof from the applicant for an increase in charges to the opponent of said change?”

The petitioners did not raise this issue in their application to the Commission for rehearing, nor did they state any ground for their failure to do so. Consequently, the objection will not be considered by this court, because Section 19(b) of the Natural Gas Act provides:

“ * * * No objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission in the application for rehearing unless there is reasonable ground for failure so to do. * * * ”

It is well settled that, in obedience to this statutory provision, courts will not consider such questions. In any event, the question is inapposite here, as it is based on petitioners’ claim that the storage accounting procedure approved by the Commission amounted to an increase in the OSS rate which required Section 4 procedure — a claim we have already discussed and rejected.

We have given careful consideration to all the contentions made by the petitioners, and have concluded that the Commission’s order must be upheld.

It is so ordered.

1 . The principal purposes of the merger were to simplify the corporate structure of the Consolidated system and achieve savings in administrative, operating and regulatory expenses which, it was estimated, would approximate $1,600,000 per annum in about three years.

2 . Applicable only to New York Natural’s sale of gas out of storage to two affiliates, East Ohio Gas Company and Peoples Natural Gas Company.

3 . The conditions were thus stated in the Commission’s opinion:

“ * * * Further, and in keeping both with the ad hoe nature of the procedure and its interim status, we conclude that the following additional limitations are required in the public interest as conditions to the issuance of the certificate herein: (1) a moratorium on all future rate increase filings by the merged company so as not to be effective after suspension prior to January 1, 1967, except as necessary to reflect increases in excess of $250,000 in purchased gas costs, any such increase to be offset by any rate reduction required to be made effective at or about the same time pursuant to any obligations remaining in Dockets Nos. G-5474, et al., and RP64-40; (2) the cost-of-service filed by the surviving corporation with the Commission in any future rate proceeding shall reflect the annual savings in costs realized from the merger; (3) the maintenance of suitable accounts and subaccounts to enable the isolation of costs chargeable to the former OSS System of New York Natural and to ascertain costs by zones and geographical areas in the same manner as is presently the case for each of the two companies, such data to be available for application in any future rate-making proceeding; and (4) that the accounting for the storage method as herein allowed shall be without prejudice to applicant or this Commission as to the treatment to be accorded storage costs in any future rate proceeding involving the merged corporation. These conditions, with the moratorium extended by one-half year, are in accord with a stipulation proposed by applicant on September 25, 1964. As so conditioned it is our opinion that the certificate for which application is made should be issued.”

These conditions were embodied in Section (F) of its order.

4 . The impropriety of their first “question presented” was acknowledged by the petitioners when they said in their brief: “ * * * The only dispute seems to be as to whether there was any increase in rates and charges or whether there was a denial of a decrease.”