Opinion ID: 362296
Heading Depth: 1
Heading Rank: 4

Heading: challenges to the fpc's failure to coordinate with

Text: NATIONAL RATEMAKING 64 The FPC has supplemented its national ratemaking program with a large number of ancillary producer incentive programs. Perhaps no other agency has ever assembled so large an array of incentive programs focused on a single objective. 67 The array consists entirely of extrapolations from the objectives of a statutory scheme which does not explicitly provide for any such programs. For the reasons we now set forth, the Commission is obligated by its creation of this large array of parallel programs to coordinate them with national ratemaking. 65 Pragmatically, the incentive programs require coordination in order to work. Incentive programs are justified only insofar as there is a connection between the incentive and the supply of new gas. The likelihood of such a connection diminishes to the extent the programs duplicate or conflict, both because of the diminishing returns on successive increments of incentive, and because producers which can choose among incentive programs will rationally seek those programs with the least stringent requirements of benefit to the public. If the FPC allows the connection between incentive and supply to become unjustifiably attenuated by lack of coordination, it has failed to give  'reasoned consideration' to the shaping of its order in an effort to protect consumers from paying substantially more than necessary to bring forth the needed supplies. Cities of Fulton v. FPC 168 U.S.App.D.C. 33, 37, 512 F.2d 947, 951 (1975). 66 More fundamentally, coordination is required in the interests of justice. In West Ohio Gas Co. v. Public Utilities Comm'n, 294 U.S. 63, 71, 55 S.Ct. 316, 320, 79 L.Ed. 761 (1935), Justice Cardozo stated that a commission policy of using unexplained, inconsistent bases to prescribe sale prices for gas in two cities was at variance with 'the rudiments of fair play.'  See also Callanan Road Improvement Co. v. United States, 345 U.S. 507, 513, 73 S.Ct. 803, 97 L.Ed. 1206 (1953); Trans World Airlines, Inc. v. CAB, 128 U.S.App.D.C. 126, 147, 385 F.2d 648, 669 (1967), Cert. denied, 390 U.S. 944, 88 S.Ct. 1029, 19 L.Ed.2d 1133 (1968). Commissions must be as much on guard not to subject consumers to unexplained duplication or conflict in incentive approaches. The existence of a large array of uncoordinated incentive programs creates the impression that the incentive device . . . (is being) paraded before the courts in a number of guises, a spectacle (viewed) with some skepticism. Cities of Fulton v. FPC, 168 U.S.App.D.C. 33, 36-37, 512 F.2d 947, 950-51 (1975). Ultimately, that appearance is inconsistent with the Rule of Law. If continued unchecked it would create an impression that the agency is engaging in an uncontrolled giveaway to the regulated companies without Congressional warrant, instead of protecting the public interest and that the courts were abdicating their review responsibility. 67 We upheld the optional certification procedure in Moss v. FPC, supra, and gave the FPC what virtually amounted to a blank check to develop standards for the new program. Over the last six years, the Commission has failed to devote the necessary analysis and investigation to the proper filling of that blank check. As the Fifth Circuit has said, programs may be upheld on an experimental basis by kid-glove review during the period of their initial development. However, a cautionary note should indicate that as experiment lapses into experience, the courts may well expect the Commission to justify its policies. . . . Shell Oil Co. v. FPC, 520 F.2d 1061, 1072 (5th Cir. 1975), Cert. denied, California Co. v. FPC, 426 U.S. 941, 96 S.Ct. 2661, 49 L.Ed.2d 394 (1976), Quoted in The Second National Natural Gas Rate Cases, 186 U.S.App.D.C. at 38, 567 F.2d at 1031. 68
69 New York contends that there is a fundamental inconsistency between the national ratemaking program, based on average costs, and the optional certification program, based on the individual costs of high-cost programs. On rehearing before the FPC, New York contended that (t)he fact that Pennzoil's project costs are in excess of the nationwide norm is hardly a 'special circumstance'. Since the nationwide rates are based on the producers' average costs . . . it is to be expected that approximately half the volumes produced will be at rates in excess of this level. 68 On appeal, New York elaborated: 69 70 It would however appear to be lawful, though of doubtful practicality, to establish a pricing system under which all producer sales (or all sales of a particular producer) would be justified on a project cost basis . . .. Similarly, it is lawful to fix the just and reasonable rates for all producer sales on an area or nationwide basis reflecting primarily, if not exclusively, average producer costs. . . . However, the combination of the two cost techniques resulting from the Commission's action here is neither proper nor lawful. 71 As stated by New York, the Commission's present mixture of ratemaking standards presents the problem of double counting of high costs and single counting of low costs. When the same cost treatment approach is used in both national ratemaking and optional certification, there is no coordination problem. Both ratemaking procedures can use an average costs approach, so that all consumers pay for the average costs of high and low cost gas. Alternatively, both procedures can use a project cost approach, so that consumers of high cost gas pay high costs, and consumers of low cost gas pay low costs. However, when different cost treatment approaches are used in the two proceedings without coordination, then there is a double counting problem. Consumers of high cost gas pay high costs because the high cost projects received optional certification. Consumers of low cost gas pay an average of high and low costs because of national ratemaking. In sum, all consumers taken together end up paying more than the average of all costs: they pay double for high costs. 72 This is precisely the kind of problem which we warned in Consumers Union would have to be reconciled if the FPC changed from its Order No. 455 average costs standard to a project costs standard. 166 U.S.App.D.C. at 278, 510 F.2d at 658. This is also the kind of problem we recently noted twice in The Second National Natural Gas Rate Cases. There, we upheld an FPC scheme designed to keep consumers from paying through national ratemaking for gas they pay for in the advance payments program. 186 U.S.App.D.C. at 59-61, 567 F.2d at 1052-1054. We also warned it was questionable to make consumers pay through national ratemaking for gas they pay for in intrastate purchases. Id. at 58, 567 F.2d at 1051. 73 Pragmatically, there is no incentive value served by charging consumers through the national program for high costs covered by other mechanisms. More fundamental is the problem of inconsistency and unfairness. The Commission is free to change the standards in the optional certification program, but to do so it must give reasoned consideration to the effects of its change. We hold that on remand, the FPC must give such consideration to how best to coordinate the optional certification program with national ratemaking in order to reconcile the inconsistencies set forth herein. 70 74
75 Pennzoil and United originally submitted their application for an optional certificate at a rate of 47 cents per Mcf. Following the FPC's remand for findings of the actual project costs, they amended their application to seek a rate of 80 cents per Mcf. Although the FPC refused to allow them to collect the amended rate during the pendency of the action, it certified the 80 cent rate in its final order. 76 New York vigorously protests the FPC's approval of the Pennzoil amendment. The FPC and Pennzoil respond that the approval was justified both by the facts of the case and by FPC precedent. Our prior analysis indicates that there will be a need to reassess the facts of the case on remand, and we do not find the weight of FPC precedent to support approval of the amendment. Therefore, we deem it appropriate to outline the factors requiring further consideration of the approval, leaving initial decision on the new factual background of the case to the Commission. 77 As we have discussed, the Commission must attempt to coordinate optional certification with national ratemaking at the level of the whole program, particularly with respect to double counting of high costs. For much the same reasons, the Commission must attempt to coordinate optional certification with national ratemaking at the level of individual applications, so that individual producers do not reap the benefits of both procedures. 71 78 In contending that there was precedential support for allowing this amendment, the Commission cited only one Commission action, which like the decision before us was barren of explanation of why amendment should be allowed. 72 In contrasting spirit are the well-reasoned orders, regulations and rulings affirmed on appeal, when tested that declined to allow a higher price, stating that such an amendment of an optional certificate application (to allow a higher price) secures no new benefit for the public while conferring a new benefit on producers. 73 For a short period, the FPC allowed producers applying under the optional procedure to receive the subsequently issued national rate if the producer could satisfy certain difficult criteria. Pennzoil asserts here that it would have met the criteria. 74 Even assuming this, the FPC by its nationwide ratemaking has apparently abolished the route by which producers could obtain the national rate. 75 This action reinforces the previous barriers against amendatory rate hikes. 76 79 The simple answer the courts have given in upholding this steadfast 77 FPC policy has been that amendments are an attempt to get the benefits of two distinct procedures, the optional procedure and the national ratemaking procedure. Producers reap an immediate benefit from filing under the optional procedure: after a nine month period of gestation, they can commence collecting the rate specified in their optional application instead of the national rate. Once they have filed for this benefit, they cannot also ask for the benefit of subsequent developments the way an applicant under the national ratemaking procedure can. A producer may benefit by one procedure, or the other, but not both. Ecce, Inc. v. FPC, 526 F.2d 1270, 1275 (5th Cir.), Cert. denied, 429 U.S. 867, 97 S.Ct. 176, 50 L.Ed.2d 147 (1976). Accordingly, we remand for further and reasoned consideration by the Commission of whether and under what conditions amendment of the optional certificate application may be allowed.