Opinion ID: 339939
Heading Depth: 1
Heading Rank: 3

Heading: conventionalization of the lease-sale

Text: 32 Opinions Nos. 565 and 565-A each express the finding of a majority of the Commission 146 that the lease-sale transaction, in the form agreed to by the parties, did not survive the test of pubic convenience and necessity. 147 For that reason the Commission, in awarding the parties the certificates requested, conventionalized some aspects of the lease-sale to more nearly conform it to a normal gas-sale contract. 148 Both the producers and Texas Eastern contend that the Commission's adverse finding on public interest is insufficiently supported by the evidence, and that the administrative record demonstrates that the lease-sale is more favorable to consumers than a conventional sale could be. 33 The Commission faced a novel situation in the lease-sale arrangement presented to it, for the lease-sale was not readily amenable to administrative supervision in the Commission's accustomed mode of regulating prices between producers and pipelines. 149 The problems which the lease-sale presented come into sharper focus when the process of certificating conventional sales for gas is first examined. 34
35 A conventional gas-sale contract sets a price for each unit--each Mcf--of gas to be supplied, frequently with a provision escalating the price. When a sale is sought to be certified, the price is subject to scrutiny by the Commission in the exercise of its authority, under Section 7 of the Natural Gas Act, 150 to attach such conditions to the certificate as are necessary in the public interest. 151 36 The Supreme Court's decision in Phillips Petroleum Company v. Wisconsin 152 opened the door to Commission regulation of sales by producers to interstate pipelines, and Sections 4 153 and 5 154 of the Act armed the Commission with general authority to establish just and reasonable rates for the gas sold. But full-fledged rate proceedings are, by their very nature, unsuited to the needs of price review when a producer seeks certification of a sale. 155 Such proceedings are extraordinarily time-consuming, 156 and any relief from excessive rates emanating from those under Section 5 is prospective only. 157 Consumers were thus exposed to irremediable excessive charging while rate-reform proceedings were pending. 158 Even when area rate proceedings came into vogue as the preferred method of setting producer rates, 159 the exigencies of interim price protection remained. 160 37 In the CATCO litigation, 161 the Supreme Court focused on the problem, emphasizing the vital importance of price regulation under Section 7: 38 [T]he inordinate delay presently existing in the processing of Sec. 5 proceedings requires a most careful scrutiny and responsible reaction to initial price proposals of producers under Sec. 7 ... The fact that prices have leaped from one plateau to the higher levels of another ... [makes] price a consideration of prime importance. This is the more important during this formative period when the ground rules of producer regulation are being evolved .... The Congress, in Sec. 7(e), has authorized the Commission to condition certificates in such manner as the public convenience and necessity may require. Where the proposed price is not in keeping with the public interest because it is out of line or because its approval might result in a triggering of general price rises or an increase in the applicant's existing rates by reason of favored nation clauses 162 or otherwise, the Commission in the exercise of its discretion might attach such conditions as it believes necessary. 163 39 Following CATCO, the Commission undertook to assure that the prices at which producer sales were certificated did not exceed in-line prices--the field prices at which the bulk of contemporaneous gas transaction not suspect took place. 164 The Supreme Court, in turn, approved the practice as a means of holding the line on prices in the interest of consumer protection until the Commission could determine just and reasonable rates for the gas. 165 This technique streamlined the Section 7 certification process, and the Commission was enabled to certificate sales on the basis of comparative pricing alone, without need to delay the process by indulgence in orthodox rate-making. 166 40 The Act spells out the processes by which producer rates set at in-line levels may be altered. After Section 7 certification, a producer may, under Section 4, vie for a higher price by the simple expedient of a 30-day notice to the Commission and the public. 167 The Commission may, however, suspend the proposed increase for a maximum period of five months while it investigates and acts on the application. 168 Before it may finally approve the increase, the Commission must find that it does not exceed the just and reasonable rate for gas of its vintage, 169 and the burden of proof on that issue is on the applicant. 170 Pending the outcome of the proceeding, the producer remains under a liability to refund the excess of any increase above the eventual just and reasonable price. 171 And should the Commission see a need to launch its own investigation of a producer's initial rates, it may institute a proceeding for that purpose under Section 5 of the Act. 172 41 Case-by-case determination of just and reasonable producer rates on the traditional cost-of-service basis, however, proved to be an intractable process which threatened to inundate the Commission's regulatory function. 173 The solution which the Commission eventually devised was the previously-mentioned scheme of area-wide rate determinations. 174 The scheme won Supreme Court approval in the Permian Basin Cases 175 and, in the Court's words, began a new era in the regulation of natural gas producers. 176 The Commission's regulatory effort with respect to Rayne Field, as we have seen, was destined to reach that era. 177
42 Upon a conventional gas-sale transaction, then, the ratemaking aspect of a Section 7 certification proceeding has as its purpose the fixing of an initial price in line with prices in other jump-free transactions pending the establishment of a just and reasonable rate. 178 The Rayne Field lease-sale transaction, however, could not easily be subjected to the in-line price concept. Although the total price which Texas Eastern was to pay to the producers was fixed by the contract, the eventual volume of gas which the field would produce was necessarily an estimate, and so also any cost per Mcf of the gas which would be extracted. Nonetheless, it was clear that until the late years of production from the producers' holdings in Rayne, Field, the price to be paid would exceed the in-line cost of gas actually delivered. 179 Since the purchase price of $134 million was to be remitted in full by 1975 but production was expected to continue until 1986, 180 the parties and Commission alike were seemingly reconciled to the conclusion that the price of the gas would run considerably higher than the 20-cent in-line price during most of the production period. 181 43 Adherence to the Supreme Court's CATCO 182 ruling demanded that the Section 7 certification process not develop into a protracted affair bogged down in the mire of intricate cost calculation. 183 The in-line price measure was an available index of price tends, and so a ready reference to a price that might shield consumers against exorbitance. 184 Producers could secure reasonable protection under Section 4 by immediately filing for rate increases, subject to refunds contingent upon the just and reasonable rate ultimately determined. 185 Consumers, on the other hand, got no refund protection under Section 5 against the contingency that the initial price might turn out to be too high. 186 It was against this need to safeguard the interest of consumers that the Commission was summoned to determine whether the lease-sale merited unconditional certification.
44 In reviewing action by the Commission within its jurisdiction under the Natural Gas Act, we exercise an essentially narrow and circumscribed function. 187 The Act provides unequivocably that [a] finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive. 188 And, equally plainly, a Commission ruling on a nonfactual question is to be sustained if there is a rational basis for the conclusion it achieves. 189 It is by these standards that we must test the Commission's decision to condition the certificates of public convenience and necessity awarded Texas Eastern and the producers so as to conventionalize some of the features of the lease-sale. 45 As early as 1963, when Order No. 378 190 addressed the requests for certification of the lease-sale, it was clear to the Commission from the record of this case that it is not in the public interest for this Commission to certificate a transaction such as the one presented to us on this record. 191 And as the presiding examiner observed in his Phase I decision in 1968, [t]he reason ... was that it would be impossible to regulate, or even ascertain, what the producers were getting for the gas or what the cost to the pipeline would be. 192 For, in the beginning, a major unknowable was the volume of gas which the transferred reserves would ultimately yield, and consequently the eventual unit price which Texas Eastern would pay for the yield. 193 46 After opinion No. 378 was announced, the producers sought to eliminate the risk of possible over-estimation of the reserves by guaranteeing that they would supply Texas Eastern with a designated minimum volume of gas. 194 With this single change in the transaction, the parties again presented the lease-sale to the Commission with requests for unconditional certification. 195 The examiner decided that certification should be accompanied by an imposition of conditions, 196 and the Commission adopted and has consistently adhered to that position. 197 47 Like the examiner, the Commission in Opinion No. 565 was of the view that the reserve guaranty did not reduce much of the cost-price hazard inherent in the lease-sale. 198 [T]here are, the Commission said, numerous other factors which can have a substantial impact upon the cost of the gas to Texas Eastern and its customers under the lease-sale, such as the value and quantity of the liquids, the rate of production of the gas and liquids, the rate of return Texas Eastern is entitled to throughout the life of the wells, and associated taxes, variations in operating expenses and uncertainty of delivery. 199 So great was the peril that the Commission felt that were the lease-sale still executory, it might well reject it. 200 48 When, however, the Commission came in Opinion No. 565 to again consider the lease-sale on its merits, it had long since ceased to be entirely executory. By the end of 1968, almost half of the estimated recoverable gas had been taken, and most of the contract price had been paid to the producers. 201 In this milieu, the Commission deemed it appropriate to compare the estimated cost of the lease-sale as a whole to Texas Eastern and its customers with the cost of a conventional gas purchase arrangement. 202 The Commission admonished that [i]n making this comparison, however, we must keep in mind the continuing substantial uncertainties as to the lease-sale arrangement and could only find it is required by public convenience and necessity, as contrasted with a conventionalized sale, if the comparison were significantly in its favor. 203 And on scrutiny the Commission found that the comparison is not favorable to the lease-sale, even without considering the uncertainties thereof. 204 49 Opinion No. 565, as we read it, predicated that finding on two bases. One was a cost comparison of the lease-sale with a conventional gas-sale, which disclosed a difference of some $6 million in favor of the latter. 205 To the purchase price of $134,395,700 the Commission added Texas Eastern's other net Rayne Field costs and, using the producers' estimates of gas and liquid takes, computed a total cost to Texas Eastern of $168,900,000 over the expected life of the reserves. 206 On the other hand, the Commission ascertained that a conventional sale of the gas priced at 20 cents per Mcf from the start of the flow until October 1, 1968, 207 and at 18.5 cents thereafter, would cost Texas Eastern a total of $186,537,000. 208 But when these two totals were discounted at 5 percent for the time value of Texas Eastern's advances to the producers, the Commission learned that the effective cost was $122,403,000 under the lease-sale and $116,270,000 by a conventional approach. 209 As the Commission noted, the difference would be greater if a discount rate of 6 percent were employed. 210 50 This difference in cost was not, however, the only consideration motivating the Commission to disapprove the lease-sale as presented. A second factor which loomed large was the Commission's belief that despite the reserve guaranty, the lease-sale was fraught with uncertainties which precluded a confident evaluation of its economic impact, and that the public interest would hardly be served thrusting the risk of an excessive price on consumers. Opinion No. 565 set forth a summary of the uncertainties, to which we have adverted, 211 and the Commission's overall conclusion: 51 [T]he lease-sale arrangement produces a lack of certainty over the life of the field and, as the record indicates, a higher cost than a conventional sale at 20 cents per Mcf. Because of these features of the lease-sale transaction, it is imperative for the Commission to take steps within its jurisdiction, which will protect consumers from paying excessive rates. This can be done, we believe effectively, through regulating the payments made by Texas Eastern to the Producers by conditioning the lease-sale arrangement. 212 52 The uncertainty factor reappeared as a topic of discussion in Opinion No. 565-A. The producers contended that uncertainty is an element in many projects submitted for Commission approval, and that the uncertainties remaining in the lease-sale transaction after the reserve guaranty was made did not exceed reasonable bounds. The Commission disagreed, responding: 53 While, of course, there is always uncertainty, more is involved here, for the proposal is to commit Texas Eastern to a fixed price of $134,395,000 for the life of the field, and that is not true in the conventional certificate proceeding where the price is subject to regulation. The essence of our objection to the lease-sale transaction is its inflexibility. If the price turns out to be too high in the light of changing circumstances, it fails to protect the consumers; if it is too low the producers will not receive an adequate return and this, in turn, may affect their ability to serve the market. 213 54 Before the Commission the producers also argued, as they have here, that the advantageous features of the lease-sale demanded consideration conjunctively with cost data in determining whether it was that arrangement or a conventionally-converted sale that best served the public convenience and necessity. 214 We agree that the price of the Rayne Field gas was not the only relevant criterion, and that the Commission was required to evaluate all factors bearing on the public interest, 215 but we cannot agree that the Commission was derelict in that duty. On the contrary, the Commission, in both of its opinions on the subject of conventionalization, 216 addressed the noncost factors which the producers advanced and found them insufficient to warrant unconditional approval of the lease-sale. 217 In addition to the reserve guaranty, 218 the producers pointed out that Texas Eastern and its customers obtained a large supply of gas in a single package close by its pipeline, with resultant savings in gathering and transportation costs. The Commission felt that that did not make for a unique situation, since large and well located reserves are features of many conventional sale transactions. 219 The producers pointed to the further fact that Texas Eastern secured the Rayne Field gas at a firm price, and to the potential saving from the absence of price escalations; but, as the Commission responded, the price was in any event subject to the Southern Louisiana area rate. 220 The producers also called attention to the flexibility of operations--another cost saver--which Texas Eastern gained under the lease-sale arrangement. As the Commission responded, however, Texas Eastern was taking the gas at a normal rate, and would be required to continue to do so in the future. 221 These factors, said the commission, do not justify the price of gas to Texas Eastern under the contract which may be excessive even on the basis of the entire life of the field. 222 55 When this litigation was previously before this court, we extended to the Commission the option to reopen the record in the certificate proceeding to permit Texas Eastern to establish by adequate evidence that the acquisition costs which it proposes to incur will be consistent with the public convenience and necessity. 223 And when the Commission elected to do so and properly asserted jurisdiction over the lease-sale, 224 it concluded that the public interest would be ill-served by certification of a transaction in which the unit cost of the involved gas could not be accurately determined. 225 Conventionalization of the lease-sale developed for the Commission as the appropriate, and we think as a rational, method of enabling the Commission to discharge its statutory responsibilities. 56 In reviewing the Commission's decision to conventionalize, we have remained advertent to the difficulty of the problem which it faced and to the appeal which some of the parties' arguments had for a minority of its members. 226 Those arguments, in large measure, have been repeated here in a forceful effort to persuade us to a result opposite to that thrice reached by a Commission majority. 227 But Congress has entrusted the regulation of the natural gas industry to the informed judgment of the Commission, and not to the preferences of reviewing courts. 228 And [a] presumption of validity ... attaches to each exercise of the Commission's expertise, and those who would overturn the Commission's judgment undertake 'the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.'  229 We have witnessed ample support in the evidence for the Commission's factual findings, 230 and ample support in reason for its nonfactual conclusions. 231 We hold that the Commission's action on this branch of the litigation must stand.