Opinion ID: 370388
Heading Depth: 2
Heading Rank: 5

Heading: Interpretation of the Advance Payment Orders

Text: 45 The pipelines assert that the advance payment orders contemplated the use of extended front-end advance payments as a mode of competition for available supplies of gas. From this it is argued that the Commission's current interpretation constitutes retroactive rule making. The pipelines rely principally on various excerpts from the text of the orders, and draw additional support from language in previous administrative decisions. Moreover, it is asserted that to the extent the Commission's current interpretation might at one time have been a reasonable and legally supportable construction, that approach has been foreclosed by the Commission's repeated renewal of the program without appropriate modification in the face of actual and constructive notice that extended front-end advances had become a term of trade. The express mention of a reasonable timing standard in Order No. 499 is viewed as an inadequate reaction to a crying need. Indeed, the generality of the Commission's response to specific comments is cast as further evidence that the Commission did not intend at the time to curtail extended front-end advances. Finally, as to the Commission's use of Staff's 30-day rule as a presumption subject to rebuttal, petitioners challenge its evidentiary basis, and more fundamentally its premise that the only factor relevant to application of the reasonable and appropriate standard was the financial requirements of the transaction. 46 The essence of petitioner's arguments is this: multiple factors encouraged extended front-end advances, and no specific Commission direction restricted their use. Asserting that each pipeline's good faith business judgment should prevail over the Commission's present interpretation, petitioners propose this clear-cut rule: the sole test for determining whether the advance payments made under these orders were to be included in rate base as 'reasonable and appropriate' (should have been) whether they were made in order to obtain commitments for additional gas supplies. 49 47 We find that petitioners' arguments in support of their interpretation are undercut by consideration of the character of the advance payment program as an experimental departure from well accepted and understood principles of regulatory law. The Commission has correctly construed the underlying purposes of the program as it was understood by this court in PSC (Advance Payments ) I & II and has not abused its discretion in discerning a reasonable timing requirement and in rejecting petitioners' business judgment rule as the sole test for the program's administration. 50 Completely separate, however, is the question whether the Commission, in choosing a manner of administering the reasonable timing requirement, gave due consideration to all pertinent factors. As discussed in section I-F Infra, we conclude that it did not, and remand. But first we turn to those considerations that support rejection of petitioners' business judgment rule. 48 1. Petitioners have the burden of demonstrating an affirmative authorization for extended front-end advances. In Smyth v. Ames, 51 the Supreme Court articulated the guiding principle that the basis of all calculations as to the reasonableness of rates to be charged by a (public utility) must be the fair value of the property Being used by it for the convenience of the public. Although methods for determining values of rate base items have evolved since Smyth v. Ames, 52 the precept endures that an item may be included in a rate base only when it is used and useful in providing service. In other words, current rate payers should bear only legitimate costs of providing service to them. The FPC early adopted the used and useful standard and has not departed from it without careful consideration of the wisdom of requiring current rate payers to bear costs of providing future service. 53 49 One such departure was the advance payment program. At the very least it contemplated that current rate payers would shoulder the costs (I.e., the financing charges) of qualifying advance payments. This was intended to expedite the development of additional gas reserves by providing supplemental sources of capital, which would be used to provide service for future rate payers. Such a modification of the used and useful principle was thought justified in view of the discouraging supply forecasts and the general correspondence between classes of current and future rate payers. Consumers would eventually have to bear the costs of developing needed gas supplies. In theory, the advance payment program promised to provide that gas at the lowest ultimate cost. 54 50 The Commission has taken the position that any departure from such a well-rooted regulatory principle must be affirmatively authorized and that an authorized departure must be presumed limited to its express terms. We agree with the analysis that agency silence in these circumstances must be construed to mean that traditional principles retain their vitality. 55 We are not so clear that authorization for a departure from settled principles must be expressly set forth in an order (as contrasted with what is fairly discernible as the intent of an order), but it must be established with reference to the order. 51 This conclusion allows us to by-pass petitioners' factual assertions that, during the pendency of the program, the Commission had actual and constructive notice that it was widely understood within the industry to be acquiescing in extended front-end advances. It is urged that the Commission's failure expressly to restrict extended front-end advances gave such payments an affirmative blessing, or what is the same thing estops the Commission from now asserting an interpretation contrary to that held by the pipelines. We accept Arguendo petitioners' factual assertions of notice, and reject their proffered conclusion. Though a belief that the agency was cognizant of widespread employment of extended front-end advances may have further encouraged their use, the Commission's inaction cannot be construed to change existing law where the Commission resists such a change and has given no indication that it intended a wholesale abandonment of traditional principles. Any modification of traditional principles broad enough to permit extended front-end advances must be derived from the advance payment orders themselves, not from Commission inaction. Further, since the Commission relies on well-established principles of public utility law, it is not sufficient for petitioners to come forward with some conceivable interpretation of language in the advance payment orders that supports their view. At the very least, the burden must fall on petitioners to demonstrate that a preponderance of the interpretative evidence is favorable to their position. 52 2. The program was intended to provide additional sources of capital to expedite development of gas supplies, not to give license for competition among pipelines. Petitioners attempt to carry their burden of showing an affirmative authorization for extended front-end advances by citing specialized provisions of the advance payment orders, which they construe to support their position. The first problem is that the cited passages, often less than clear, are subject to conflicting interpretations. 56 But a more fundamental difficulty with petitioners' approach is the premise that the underlying purposes of the program were sufficiently ambiguous to admit of an interpretation favorable to extended front-end advances. We find overwhelming the Commission's evidence as to the purposes of the program, as intended by the Commission and as understood by this court in PSC (Advanced Payments ) I. Thus we need not pause to consider in depth the particulars of petitioners' references (and the Commission's strenuous rebuttals) but may proceed to consider the evidence supporting the Commission's narrower view. 53 In the introductory paragraphs to Order No. 441, the advance payment order conditionally approved in PSC (Advance Payments ) I, the Commission stated: 57 54 In our area rate opinions for Southern Louisiana and Texas Gulf Coast (Opinion Nos. 598, 46 FPC 86, and 595, 45 FPC 674), we recognized that it is the function of a just and reasonable rate for independent producers to elicit requisite gas supply, and that costs, in economic terms, reflect the required level of capital formation to elicit that level. In other words, the just and reasonable area rate in these recent opinions did not consider non-cost items. Having acknowledged, as we do, that provisions for special rate treatment of advance payments by pipelines have been justified in the past on the basis of providing additional incentives in this experimental undertaking, we nevertheless seek to avoid separate, non-price incentives as much as possible. 55 A critical shortage of gas exists in the United States; capital formation for gas development is difficult. The objectives of providing capital to accelerate the addition of new gas supplies supports our continuation for the limited period of the rate treatment of advance payments provided herein. We recognize that the just and reasonable area rates for independent producers will hopefully alleviate this gas supply shortage over the long-run; however, for the immediate term, (namely through 1972) our advance payments policy has been designed to increase directly the funds available for the necessary exploration and development effort. It is our intention that rate base treatments for advances included in Account 166 be terminated for advances resulting from contracts executed after December 31, 1972, unless otherwise ordered. 56 The Commission's starting point was its recognition of the role of just and reasonable area rates for producers in elicit(ing) requisite gas supply. For the long-run, the articulated policy was to incorporate in the certificated rate all required incentives to assure requisite supply; non-price incentives were to be avoided as much as possible. Contrary to this long-term policy, advance payments embodied a non-price incentive in the bonus inherent in the interest-free loan of capital. Nevertheless, since the Commission recognized that a critical shortage of gas exist(ed) and capital formation for gas development was difficult, the objective of providing capital to accelerate the addition of new gas supplies justified continuation for the immediate term of a policy designed to increase directly the funds available for the necessary exploration and developmental effort. It was apparent on the face of the order that the purpose of an advance payment was to provide reasonable and appropriate developmental capital for qualify ing expenditures. Yet, the pipelines argue that the orders approved all extended front-end advances, contrary to the Commission's view that for the extended period between receipt and expenditure many of these advances made no such contribution of developmental capital while providing producers with a non-price incentive of the type the program explicitly sought to avoid as much as possible. In the face of such a clear expression of limited purpose, we find untenable the argument of the pipelines for carte blanche authority to make advances. 57 One of petitioners' arguments that figures prominently in any defense of the pipelines' behavior asserts that the advance payment program contemplated competition among pipelines for available gas through the use of extended front-end advance payments, which would effectively raise the price of natural gas and thus inevitably contribute, in an indirect way, to the alleviation of the natural gas shortage. The fatal weakness in this argument is that it confuses an incentive with a justification. Certainly the Commission contemplated that the prospect of obtaining additional gas reserves for an individual gas distribution system would encourage a pipeline to offer advance payments. 58 But the mere fact that an advance payment made good business sense to the advancing pipeline was not alone sufficient to authorize its use. Advance payments were not an end in themselves. They were legitimate only insofar as and to the extent that they provided producers with a source of developmental capital for use in qualifying expenditures. In the passage from Order No. 441 quoted above, the stimulating effect on gas supply of the price-incentive aspect of advance payments was expressly Excluded by the Commission as an objective of the advance payment program; rather, the price-incentive aspect was tolerated as a necessary and subsidiary adjunct to the capital-formation objective. 58 The conclusion that the Commission had no intention of encouraging internecine bidding among gas-starved pipelines is fortified by the pervasive tone of the advance payment orders, exemplified by the above-quoted passage, that the overall goal in both the long-run and the immediate-term was to elicit requisite gas supply for the nation As a whole, not for any particular pipeline system at the expense of others. 59 In another provision of Order No. 441, the Commission showed a particularized concern that advances should not be used for competitive purposes but rather should be cost-justified in terms of the consumer benefit derived from furtherance of the program's objectives: 59 60 Our review of the various comments and available data has persuaded us that advances for exploration and lease acquisition have not (been) shown to be an effective vehicle For stimulating the widespread participation in natural gas production for which their encouragement was intended. Moreover, there is some indication that the availability of advances for such purposes by creating competition among pipelines to make such advances may be having the effect of increasing the amounts expended on lease acquisition without a proportionate improvement in gas supply. 61 The Commission excluded from the category of qualifying expenditures advance payments for exploration and lease acquisition since they could be identified as an entire category that did not further the justifying objectives of the program, but were instead fostering undesirable competition among pipelines without an offsetting consumer benefit. When this court affirmed the program in PSC (Advanced Payments) I, we highlighted this adjustment as an example of the Commission's flexibility and willingness to modify the program, which we considered a prerequisite to sound administration. 60 62 In PSC (Advance Payments) I, we unambiguously understood the program's objective to be the creation of an additional source of capital to facilitate the natural gas development and production necessary to alleviate the gas shortage. In one illustrative passage, we noted: 61 63 The rationale behind this decision is that the advance payments will help to give the gas producers the necessary investment capital to finance the development and production needed to alleviate the gas shortage, and the pipelines will be encouraged to make such advance payments if they are allowed to include the payments in their rate base, thus virtually simultaneously shifting the cost of the advance payments to the pipelines' customers, the natural gas consumers. 64 There was no hint in PSC (Advance Payments) I that a justifying objective of the program was the encouragement of competition among pipelines for scarce supplies of gas. On the contrary, by consistently referring to producers, pipelines and consumers throughout the opinion, we evidenced our conviction that the relevant interests were nationwide in scope, not those of any particular pipeline or its customers. 65 It is a crucial aspect of this case, refuting the pipelines' basic retroactive rule making contention, that the limited purposes of the advance payment program were unambiguously articulated, in both Order No. 441 and in the affirming opinion of this court, well prior to the date of any advance payment contract involved in these cases. 66 In PSC (Advance Payments) I we had made clear that continued approval of the program was dependent on the Commission's ongoing modification and evaluation to assure that the program was accomplishing its ultimate purposes alleviation of the gas shortage at an acceptable cost to the natural gas consumer. This process was undertaken in both Order No. 465 and Order No. 499. In the opening sentence of each, the Commission stated that the focus of its inquiry was to determine whether the advance payment program (was) stimulating activity toward increasing the supply of natural gas sufficiently to justify the extension of rate base treatment of advances. 62 In Order No. 465 the Commission concluded: in view of our analysis of all the responses . . . and our review of the program of advances in general, we find that rate base treatment of advances to producers has 'represented a justifiable experiment in the continuing search for solutions to our nation's critical shortage of natural gas.'  (Quoting from PSC (Advance Payments) I ) 63 In Order No. 499 the Commission stated: review of the data . . . indicates that the advance payment program has continued to meet its objectives of bringing additional gas supplies into the interstate market at an acceptable cost to the nation's gas consumers, and that pipeline advances have continued to accelerate the capital formation which led to the exploration, development and dedication of 10.27 Tcf of proven reserves of natural gas as well as 9.57 Tcf of potential reserves of natural gas to the interstate market. 64 Neither Order No. 465 nor Order No. 499 severed the tie between the objective of capital formation and the authorized use of advance payments. Each Order continued to assess the program in terms of nationwide gas supply, not improvement for some pipeline systems at the expense of others. Again, there was direct evidence that competition among pipelines was not a desirable nor intended effect of the program. 65 Although we found the Commission's review of the data inadequate in PSC (Advance Payments) II, we found no inconsistency of purpose in the Commission's orders and reiterated our understanding of the program as expressed in PSC (Advance Payments) I and in the previous orders. 66 67 The Commission consistently referred to the purpose of capital formation to accelerate improvement in overall gas supply as the purpose of the program and never put forward the purpose of facilitating for its own sake the enhancement of producer prices through competition among pipelines for available gas supplies. Had the Commission advocated such an objective, we discern no basis on which we would have approved it as permissible under the Natural Gas Act. 68 3. Legal infirmity of a program approving all front-end advances. The Natural Gas Act requires the Commission to anchor its regulation of producers in the maintenance of just and reasonable rates. In Texaco, 67 which issued at a time when the strain of natural gas shortage was acute, the Supreme Court held that the Commission had acted impermissibly in exempting small producers from direct rate regulation and rejected as inadequate the Commission's contention that it was sufficient to regulate small producers indirectly, by reason of the consequences of regulation of pipelines and of large producers. Indirect regulation was permissible, but only when and if the Commission developed safeguards to ensure that the rates paid by pipelines, and ultimately borne by consumers, remained just and reasonable. 68 69 In Consumer Federation of America v. FPC, 69 we disapproved a program in which the Commission attempted to authorize competitive bidding for needed gas supplies by pipelines experiencing critical short-term supply difficulties. That program granted producers 180-day exemptions from rate limitations and permitted them to enter into contracts with eligible pipelines without risk of refund. The order provided that gas costs shown to have been required by the public interest were to be passed on to consumers. 70 We invalidated the program, even though it was proffered as an experiment responding to a supply crisis, since it failed to provide adequate assurance that just and reasonable rates would be maintained. We concluded: 71 70 (T)he Commission has exceeded its authority under the Act. In essence, it has attempted to remedy the shortfall of supply in the interstate market by authorizing a supplemental injection of large quantities of gas through sales freed from the constraints of meaningful regulation. We reject the FPC's claim that § 7(c) (of the Natural Gas Act) supports this substantial, partial deregulation, and find that the Commission has neglected its rate control responsibilities under the Act. Congress has yet to embrace proposals for deregulation of new gas supplies. Until it acts to alter the present system of regulation by an agency subject to court review, the courts may not abandon their responsibility by acquiescing in a charade or a rubber stamping of nonregulation in agency trappings. 71 To adopt petitioners' contention, which would validate any timing arrangement that a pipeline found justified as a matter of business judgment were it to compete successfully for gas supply in a shortage crisis, would be nothing more nor less than acceptance of a deregulatory approach, a ruling that cannot be reconciled with the teaching of Texaco and Consumer Federation. A producer receiving an extended front-end advance, to use without restriction for a significant period prior to expenditure, is in effect given a sum of money. There is no meaningful distinction between receipt of unrestricted funds for a period and receipt of a sum equivalent to the return (at a minimum, interest) procurable from use of the funds. In both circumstances producers will be compensated in excess of certificated rates. The business-judgment rule would permit pure competitive bidding by pipelines using the device of extended front-end advance payments. 72 Had the Commission articulated the approach now advanced by the petitioners as an interpretation, we would have disapproved it as an abdication of the agency's regulatory responsibilities. This is not to say that the deployment of funds must be instantaneous. What is inappropriate is unrestricted transfer for more than a reasonable period a concept to which we shall return. 73 Any permission to transfer advances prior to gas delivery (even as to funds used immediately or in a reasonable time for qualifying developmental expenditures) entailed some variance from the previous situation, in terms of benefit to producer and of cost to pipeline and customer. However, the ultimate cost to the consumer was projected to remain within the just and reasonable range because of the compensating benefit of expedited gas development, and the maintenance of restrictions relating the cost to the benefit. 72 This justification, and these safeguards, were lacking as to the extended front-end advances made without restriction other than the competitive business-judgment rule. 74 4. Claim of retroactive rule making. The foregoing analysis undercuts petitioners' contention that a reasonable timing requirement amounted to retroactive rule making. The pipelines had fair notice both of traditional regulatory principles and that the advance payment program exception was put forward and affirmed on a basis that did not encompass the departure asserted by petitioners. 75 In Natural Gas Pipeline Co. v. FERC, 73 the Seventh Circuit recently ruled that the Commission's interpretation of the reasonable and appropriate standard to impose a relatively inflexible 30-day rule constituted impermissible retroactive rule making. It viewed the case as falling within a doctrine, articulated in Bell Aerospace Co. v. NLRB, 74 whereby an agency's broad discretion to announce policy in adjudication is subject to an exception in a case of severe impact and justifiable reliance on contrary agency pronouncements. 75 It stated: 76 76 The consequences to the appellant of denying rate base treatment to the advances are very severe. It would mean the imposition of a large liability with regard to the advances in the present case. Furthermore, the appellant's entering into these agreements, under these terms, was in reliance upon the prior orders of the Commission, and the policies reflected in those orders, specifically the policies encouraging the advance payment program, with few restrictions, and the promulgation of a flexible standard with regard to the advance-expenditure time relationship. We believe that the aforementioned facts require that the Commission's discretion to proceed by adjudication as opposed to by rulemaking be restricted so as to prevent the imposition of a 30 day rule in this proceeding. 77 We differ from the Seventh Circuit in that, in our appraisal, the Commission's current interpretation of the limited purpose of the advance payment orders does not reverse a policy that had been the subject of reasonable reliance. 78 The Commission's rulings on appeal are rooted in basic principles of regulation and in petitioners' notice of the limited purpose of the advance payment exception. We do not discern the substantial claim of justifiable reliance that is needed to invoke the Bell Aerospace exceptions. 77 79 In support of its ruling the Seventh Circuit cited our decision in Consumer Federation: 78 80 While the factual pattern of Consumer Federation of America, supra, is not identical to the present case, the opinion does demonstrate an effort being made to protect the pipeline companies from the squeeze which results if the pipeline incurs expenses for emergency gas which is not refundable. A very similar type of problem to that discussed in Consumer Federation of America, supra, is present in this case. Through Order No. 499, and the four previous orders, the Commission encouraged a program of advances by interstate pipelines to producers to secure commitments of natural gas. Furthermore, inherent within the Commission's orders was an attitude of experimentation and flexibility as reflected in the reasonable time standard which the Commission chose to include in Order No. 499. Nevertheless, in electing to utilize a reasonable time standard, by itself, the Commission failed to furnish the pipelines with any sort of guidelines which might be followed in contracting with producers for commitments of gas reserves. Then after the agreements are entered into and the advances made, the Commission wants a reasonable time to be defined as 30 days, with the obvious effect of such action being that the pipeline would be forced to absorb huge costs which are not capable of being reflected in its rate base. To follow the course set forth by the Commission would be to contravene the policy expressed by the court in Consumer Federation of America, supra. 81 The Seventh Circuit's citation of our opinion in Consumers Federation is a subsidiary point in its approach, dependent on its major premise of justified reliance. In any event, we did not intend Consumers Federation to express a general solicitude for all pipelines caught in a squeeze to obtain gas. In that case there was a wholesale deregulation of producers, and we found that the indefinite indication that pipelines would be held to a public interest limit on prices paid was not enough to assure maintenance of just and reasonable rates. In the present case, there was a continuing regulation, not a deregulation, and the advance payment order that was judicially approved articulated a reasonable and appropriate standard which the Commission, and this court, find was not discarded, as to the matter of timing of payments, in favor of a competitive business judgment rule. 82 While we differ from the Seventh Circuit both on the issue of justifiable reliance and on the meaning of Consumers Federation, we agree with that court in its disapproval of the Commission's relatively rigid 30-day rule. We concur in its view that inherent within the Commission's orders was an attitude of experimentation and flexibility, 79 which in turn involves flexibility in administration. We develop our views in the next section of this opinion, but interpolate at this point that the remand which we order can be implemented by the Commission with results that do not violate the remand by the Seventh Circuit. 83