Opinion ID: 727217
Heading Depth: 2
Heading Rank: 2

Heading: Mcf Equivalent Prices as Evidence of Comparability

Text: 20 El Paso's expert, Hassen, submitted testimony and exhibits that were designed to show that a valuation of $135 million placed a price on the La Perla properties' gas reserves that was significantly lower than the price paid for comparable reserves in other South Texas transactions. Specifically, he compared the Mcf equivalent price attributable to each property. The Mcf equivalent price reflects the price paid by the buyer for reserves in the ground. It is determined by dividing the price paid for a property by that property's proved developed and undeveloped gas equivalent reserves. 21 By dividing $135 million (El Paso's asserted fair market value of La Perla) by Calhoun's estimate of its reserves, Hassen arrived at an Mcf equivalent price for La Perla's reserves of $0.85, which he then compared to the Mcf equivalent prices he determined to have been paid for some 60 other gas and oil properties in South Texas. These comparisons showed that $0.85 per Mcf was significantly lower than all but one other sale in 1989; that it was significantly lower than the prices paid for Wessely ($1.45 per Mcf), Tana ($1.39 per Mcf), and Royal ($1.58 per Mcf); and that it was lower than the median price paid for South Texas gas reserves in 1988 ($1.10 per Mcf), 1989 ($1.16 per Mcf), and 1990 ($1.20 per Mcf). On the basis of these comparisons, Hassen stated that $135 million [was] a very reasonable fair market value for [La Perla]. Direct Testimony of Thomas E. Hassen at 16-17, reprinted at J.A. 63-64. 22 The Commission found, however, that El Paso had failed to support its asserted quantification of an exact 'Mcf equivalent' [321 U.S.App.D.C. 18] 'premium' price, Order Denying Rehearing, 69 FERC at 61,593, and thus declined to afford any weight to Hassen's testimony. The Commission noted, for example, that some of the properties compared by Hassen involved the transfer of assets other than gas reserves; accordingly, in order to establish an Mcf equivalent price for those properties, Hassen had to extract from the total sales price a specific portion to be assigned solely to the purchase of the gas reserves. The Commission found this extraction to be a wholly speculative proposition. Id. 23 Similarly, the Commission noted that Hassen's study failed to account for the fact that other properties may have had varying quantities of additional 'probable' or other higher-risk categories of estimated gas and oil reserves which were sold along with the proved reserves but which were not reflected in Hassen's calculations. Id. at 61,592. If Hassen had taken into consideration the price the purchasers might be willing to pay for these higher risk categories, the Mcf equivalent prices attributed to the Tana, Wessely, and Royal proved reserves would have been lower. Conversely, Hassen underestimated the Mcf equivalent price for La Perla by relying on Calhoun's estimates of proved reserves, which were subsequently found by the ALJ to be exaggerated. 24 El Paso now concedes this last point but argues that if one bases the calculation on the net proved reserves found by the Commission (approximately 97,200,000 Mcf), the resultant Mcf equivalent price for La Perla is only $1.01 per Mcf, which is still below the ... average yearly Mcf equivalent prices and far below the Mcf equivalent prices paid for Wessely, Tana and Royal. Brief for Petitioner at 9. Indeed, those yearly averages were $1.10 for 1988, $1.16 for 1989, and $1.20 for 1990. See Exhibits to Hassen testimony, reprinted at J.A. 70-71. But the Commission found that El Paso's Mcf-equivalent analysis was unreliable because it failed to take into account important drawbacks to the La Perla properties, which required additional, costly drilling and potential workover costs that no prudent purchaser would ignore. Order Denying Rehearing, 69 FERC at 61,591. Under these circumstances, we find no reason to question the Commission's preference for a DCF methodology. The likelihood that the variations in extraction cost invoked by the Commission might have a drastic impact is, indeed, suggested by the range of Mcf equivalent prices in the data offered by El Paso. In 1989, for example, the prices ranged from $0.55 to $1.88 per Mcf. 25 El Paso having failed to prove the existence of comparable sales, it was entirely proper for FERC to rely on the DCF methodology in order to determine the value of the La Perla properties. See United States v. 22.80 Acres of Land, 839 F.2d 1362, 1364 (9th Cir.1988). It is, in fact, the methodology El Paso itself relied on to support its fair market value estimate until the discovery of computer errors forced it to reduce its DCF estimate by $15 million.