Opinion ID: 362296
Heading Depth: 3
Heading Rank: 1

Heading: Lease Acquisition

Text: 40 We begin by noting the dimensions of the lease acquisition issue. According to statistics compiled by the Department of the Interior and used by the FPC, the costs of lease acquisition for offshore oil and gas have grown enormously in the past decade. Those costs rose from less than $3 billion in the five years from 1967-71, to $2 billion in 1972, $3 billion in 1973, and $5 billion in 1974, for a total of over $13 billion in 196774. 54 Leasing at high bidding levels has continued since 1974. 55 Much of this cost will eventually be reflected in oil rather than gas prices, but lease acquisition costs constitute a large and increasing share of rising natural gas prices. Moreover, the long lead time between leasing and production ensures that present lease acquisition incentives will affect rates for decades to come. 41 The courts have repeatedly admonished the FPC in various contexts that the much larger lease acquisition costs offshore, and other related differences between offshore and onshore gas, must be the subject of reasoned consideration in ratemaking. In The Second National Natural Gas Rate Cases, supra, 186 U.S.App.D.C. at 56, 567 F.2d at 1049, we stated: 42 The objection that has given us distinct pause is the contention that there is no validity to the Commission's continued insistence upon treating as a single gas source onshore gas subject to unregulated intrastate competition, and offshore gas from the Federal domain over which the Commission exercises plenary authority and to which the interstate market must look for most of its new gas supplies. 43 We affirmed the FPC's national ratemaking order only with the limitation that the FPC would have to give more attentive consideration to the special situation of offshore costs, Id. at 57-58, 567 F.2d at 1050-1051; See also id. at 67, 567 F.2d at 1060. 44 Similarly, in Public Service Comm'n v. FPC, supra, 167 U.S.App.D.C. at 114, 511 F.2d at 352 (footnotes omitted), in remanding for further consideration of advance payments, we addressed the FPC's failure to take into account in advance payment orders the great difference between onshore and offshore in regulatory power and practical circumstances:SU The Commission's treatment of advances related to offshore gas blandly sidesteps all and any mention of the critical fact of its plenary power to prevent diversion of gas from wells on leases in the federal domain to the interstate market. Whatever role advance payments may play in attracting onshore gas from the intrastate and to the interstate market, this justification is absent in the case of advances to offshore producers. Any reasoned assessment of the relation of costs and benefits of the advance payments program involves manifestly different calculations for offshore and onshore advances. The complete failure on the part of the FPC to focus on this issue is a failure to seek answers. 45 Moreover, the Commission declined to respond to submissions by New York which cast doubt on the need for advances to spur acceleration of the exploration and development of offshore reserves. 46 Moreover, in our most recent optional certification case, Consumers Union of U.S., Inc. v. FPC, supra, 166 U.S.App.D.C. at 281-82, 510 F.2d at 661-62, we took special note on rehearing of producers' contentions about the higher offshore lease acquisition costs. In upholding the 1974-75 national ratemaking proceeding, the Fifth Circuit, too, noted the boom in lease acquisition costs and explicitly warned that the Commission is Surely obligated to monitor these developments . . . . Shell Oil Co. v. FPC, supra, 520 F.2d at 1082 (emphasis supplied). The FPC's sole response to the trend in offshore leasing costs has been to average older, lower lease costs with recent costs in computing national ratemaking averages, thereby temporarily deferring the impact on rates of high recent costs. 56 The record in this areas is thus one of repeated FPC failures to study and consider in active policy formulation the major developments in offshore gas and lease acquisition costs, even though they threaten large future increases in nonproductive expenses, returns on investments, and gas prices. 47