Opinion ID: 362296
Heading Depth: 3
Heading Rank: 2

Heading: Optional certification objectives in its formulation of the national rate

Text: 48 We may assume for present purposes that the FPC can include all reasonable lease acquisition costs in national ratemaking. 57 However, the optional certification program has been developed as an exception to the national rate, to escalate rates in order to provide an incentive necessary for exploration and development. Absent justification by the FPC, a standard guaranteeing reimbursement for all lease acquisition costs incurred cannot be upheld under that objective. 49 The optional program provides reimbursement for expenditures because of the connection between an incentive for higher expenditure and supplies of new gas. There is an obvious connection between an incentive spurring expenditures for exploration and development, and gas supply since for practical purposes in the short term, the opportunities to employ such expenditures to augment supply are unlimited. There is no such obvious value for the consuming public in escalating expenditures for lease acquisition. 58 The acreage which is made available by the federal government for lease bidding is limited. The Commission has not explained on what basis a spur for higher acquisition expenditures goes beyond raising the bids made for acreage that would be leased anyway, or has a substantial effect in increasing acreage. 50 Any reimbursement for lease acquisition costs through the optional certification program must address the problem of delay between expenditures and reimbursement. In this case, Pennzoil's lease expenditures were made thirteen years before project completion and reimbursement, and in general, lease outlays are made long before reimbursement. At the time when producers bid on leases, optional certification is no more than a distant possibility. Reimbursement for lease costs operates as a bailout at the end of a losing project, but the question is whether it is a significant incentive at the time of bidding on leases. Reimbursement for lease costs contrasts in this respect with reimbursement for development outlays. Development outlays are made later in the production cycle, so optional certification is a closer, more calculable and influential prospect. 51 At bottom, the issue is whether companies that make a lease bid largely on calculation of the relative likelihood of high production or dry holes can obtain an exception over and above average lease acquisition costs to transfer high costs to consumers in the intermediate case that the project produces medium-sized volumes of high-cost gas. It would be anomalous if producers received handsome returns because of high volume in highly productive fields, and also high optional rates in less productive fields. An incentive must also be related to its objectives. 52 The Commission did not give any consideration whatever, much less reasoned consideration, to the problem of undesirable effects from reimbursement for lease acquisition costs. Producers have limited budgets for spending on all aspects of the production cycle from leasing to operating. Incentives for one kind of spending induce a shift away from other kinds of spending. An incentive which makes it more desirable to put in high lease bids may thus divert funding from exploration and development. Such an incentive may actually be counter-productive for the program's purposes. Also, the present lease acquisition system may have built-in anticompetitive aspects in terms of benefiting the larger, cash-rich producers which are best able to make high cash bonus bids. A program which gives a large share of incentive funding as reimbursement for lease bids may perpetuate and strengthen those anticompetitive aspects. 59 It is well settled that the Commission must take into account the effects of its programs on competition as well as on production. 60 53