Opinion ID: 362296
Heading Depth: 2
Heading Rank: 1

Heading: Development of Optional Certification Standards

Text: 8 We begin with a brief review of the origin and changes in the optional certification program. 9 Under § 7(e) of the Natural Gas Act of 1938, 15 U.S.C. § 717f (1976), the FPC issues certificates of public convenience and necessity for new sales of natural gas. To do so, the FPC must approve the rates charged for those sales. 4 Since the task of particularized scrutiny of individual sales was too burdensome, in the 1960's the FPC adopted the practice, approved by the Supreme Court, of issuing § 7 certificates without such particularized scrutiny at rates close to the contemporary rates authorized under §§ 4 and 5 of the Act, 15 U.S.C. §§ 717c and 717d (1976). 5 Generally, the FPC would not subsequently require producers to refund rates certified in this way. 6 However, refunds were occasionally ordered, and producers were left in some uncertainty. 7 10 To diminish this producer uncertainty, which had impeded domestic exploration and development, the FPC issued Order No. 455 in 1972. 8 That order established an optional procedure for certification. Under the procedure, the FPC conducts an individualized proceeding which determines both whether a § 7 certificate should issue and also whether the proposed rate is reasonable under § 4. If all determinations are favorable, the proposed rate is a firm refund floor, and no refunds can be ordered. Producers also receive other desirable benefits from such a certificate. 9 11 Order No. 455 did not state what standard would be used in determining the reasonableness under § 4 of proposed rates, or what kind of factors would be considered. The FPC only promised that certification shall conform to the standards of Sections 4 and 7 of the Natural Gas Act. 10 However, the Commission declared in a crucial holding that absent special circumstances, a term of art which invoked very strict standards, 11 it would accept as conclusive the cost findings embodied in our area rate decisions. 12 The Commission also declared in a negative way that proposed rates would be considered notwithstanding that the (proposed) contract rate may be in excess of an area ceiling rate established in a prior opinion or order of this Commission. 13 12 In Moss v. FPC, supra, note 9, we upheld the optional certification procedures. We noted that since no standards for reasonableness had yet been prescribed, we must assume that the Commission will abide by the standards of the statute and the promises it has made. 14 Shortly thereafter, we reviewed the FPC's approval of an optional certificate and its first standards. The FPC made clear that it intended to approve higher rates by optional certification than it had by an areawide ratemaking. It certified a rate of 45 cents per Mcf, at a time when the corresponding area rate was 26 cents per Mcf, relying on a supply project approach with vague standards as to what was reasonable and in consideration of both non-cost factors and national test year cost data. 15 13 In reviewing that certification, we noted that the fundamental notion of a supply project approach requiring the Commission to rely on individualized cost data . . . would have to be reconciled with this court's opinion in Moss, which approved, by implication, the Commission's avowed intent to rely on ' cost findings embodied in our area rate decisions. '  Consumers Union of U.S., Inc. v. FPC, 166 U.S.App.D.C. 276, 278, 510 F.2d 656, 658 (1974). It was unnecessary in Consumers Union to determine whether the Commission had reconciled its new supply project approach with its prior statements because we reversed the certification for failure to consider actual cost data. 14 After oral argument in Consumers Union but before our opinion was issued, the FPC changed to a new set of standards for optional certification. It declared that individual actual cost data would henceforth be relevant in optional procedures. 16 It was apparently intended that the standard for reasonableness henceforth would be whether the proposed rate provided full reimbursement plus a full return on projects' total actual costs. 17 At that time, and in subsequent opinions, the Commission gave almost no justification for its new total-project-cost standard, which was a complete change from the premise of Order No. 455 as originally issued, and a radical departure from the policy of setting reasonable rates based on Average costs of many projects. There was thus no reasoned consideration given to the novel problems of incentive effect and coordination created by a total cost standard for individual projects.