Opinion ID: 405902
Heading Depth: 3
Heading Rank: 1

Heading: The ERA's Finding of Need

Text: 77 The ERA admitted in its opinion that, notwithstanding that 78 (a)ny attempt to evaluate the need for specified volumes of LNG at the proposed increased rate over an 18-20 year period is an attempt at fortune telling, ... it is both necessary and appropriate to evaluate as best we can, particularly for the near future, whether there is a need for this supply of LNG at the increased price. 57 79 In previous cases involving the importation of LNG, the DOE/ERA made clear that the need necessary to justify approval of a particular project could be established only by a clear showing of regional need-i.e., a need on the applicants' particular pipeline systems that cannot be met by domestic gas supplies. Thus, while not ruling out the importation of LNG, the ERA stated in a December 1978 opinion 58 that care must be taken in authorizing any new LNG imports to ensure that the gas supply was clearly necessary to meet domestic gas consumption requirements. 59 The agency described as the preferred test of regional need a demonstration that distribution companies would be willing to contract directly for the imported supplies. It expressly rejected as insufficient the companies' showings or projections of contractual obligations to deliver gas: 80 (W)here regional need is assessed, ERA will look for a demonstration of end-user market need, as opposed to a showing of an interstate pipeline company's contractual obligations to deliver gas. The latter evidence would generally be an unreliable indicator of regional need, insofar as it does not reflect impacts of energy conservation measures, conversion to alternate fuels by low priority customers, and self-help measures taken by end-users and gas distribution companies. 60 81 Elsewhere, the ERA noted, 82 (T)he best test of a particular regional or subregional market for an import is the degree to which gas distribution utilities will directly contract for the proffered gas supplies. Moreover, reliance on decisions by state-regulated entities whose utility obligations tie them directly to consumer and community needs will promote flexibility; whereas exercising Federal authority to impose the consequences of pipeline companies' LNG purchases on their consumers tends to stifle competition. Accordingly, ERA maintains a presumption in favor of directly committing imported LNG to state-regulated distribution companies or end-users, unless there is a clear, overriding national need shown for a different project structure. 61 83 In addition, the ERA stated that it must be demonstrated that the imports would not adversely affect the development of proximate domestic supplies, the rapid development of which was described as the highest priority of national energy policy. 62 84 The agency gave no indication at the outset of this case that it intended to deviate from this precedent. To the contrary, the only need-related issue included in the ERA's pre-hearing order as appropriate for submission of evidence at the ... hearing was obviously regional in nature: What would be the effects of disapproval of the contract amendment on the applicants, their supplier and customers, and the end-users of this gas supply. 63 Ultimately, however, the agency's decision was not based on a conclusion that the applicant pipelines needed the LNG. Reliance was placed instead upon a finding, based only upon official notice, that there was a national need for the gas. 85 We are not satisfied that this conclusion justifies the ERA's otherwise unexplained break with precedent. The failure of such justification calls into question the reasonableness of its entire decision in this case. 86 Clearly, the evidence offered in the application proceedings did not establish for each of the applicants a regional need for the LNG, even to the ERA's satisfaction. The ERA noted that there is no uniformity among the three applicants regarding need for this LNG, according to the evidence in the record. 64 Among the three applicants, only one-Southern-demonstrated any then-current need for the imported LNG. Although Consolidated and Columbia both offered projections that the LNG would be needed in the future, the ERA concluded that these supply and requirement projections were likely to have overstated the potential need for LNG due to conservative assumptions regarding availability of gas from domestic sources, ... and a decrease in consumption resulting from increased conservation. 65 In fact, according to the agency itself, the record showed not only a surplus of available natural gas but also that the applicants' prior importations of LNG had restrained domestic gas production. 66 Consolidated had turned back available domestic gas in quantities equivalent to the LNG it was importing and was decelerating its efforts to develop domestic natural gas from leaseholds in Appalachia and Louisiana. 67 Columbia had similarly turned back relatively inexpensive domestic natural gas from the Southwest and had not availed itself of the opportunity to purchase domestic gas in the intrastate market, despite encouragement from the ERA and FERC that such purchases be made to relieve an oversupply that was threatening to shut in domestic gas production. 68 87 Not only were projections of delivery commitments from at least Consolidated and Columbia deemed by the ERA to be insufficient to justify the LNG importation, but customer surveys by each of the companies showed a marked unwillingness by distribution companies to contract directly for the purchase of the Algerian gas. 69 Under Tenneco, the applicants' failure to demonstrate a regional need in the form of a willingness by these companies to purchase the imported LNG directly should have led the agency to deny the application. It did not. In the final analysis, the agency granted the import authority in spite of the applicants' failure to demonstrate a collective need for the LNG. It simply substituted for the otherwise required showing of regional need its own finding of a national need for the gas. The opinion's conclusion on the issue is telling: 88 (W)hile it has not been shown conclusively that all three of the applicants' systems need these gas supplies at this time, we find that the incremental increase in the total U. S. energy supply as a result of these LNG deliveries is important in fulfilling an overall national need for additional gas supplies, and that these particular supplies will directly or indirectly find their way to regions of the country where a need for additional supplies exists. 70 89 Unfortunately, this finding of an overall national need for additional gas supplies is made without reference to any supporting record evidence. The agency's opinion states simply that the realistic conclusion as to the need for this gas was the result of official notice, which the agency felt compelled to take, of some fundamental features of today's energy situation. 71 Although the opinion does not make clear what fundamental features it was officially noticing, it does refer briefly to the tight international energy supply situation, which may potentially be further exacerbated by recent events in Iran and elsewhere. 72 90 We recognize that the expertness of an agency, expressed as official notice or in some other form, may in some instances be an adequate substitute for substantial evidence where this standard applies, as it does here. This has been held to be so, for example, for judgmental or predictive facts where complete factual support in the record for an agency's judgment is not possible. 73 We do not find this principle applicable in this case, however. The finding of national need is so fundamental to the entire posture adopted by the ERA in this case, including its departure from analysis and policy announced in prior cases, that it must be based on identifiable factual evidence. 91 We are not insensitive to the difficulties inherent in the ERA's decision. The agency was obviously under some time pressures and no doubt proceeded as it did with an eye to the possibility that even a perfectly acceptable contract could be jeopardized-and the entire El Paso project with it-by undue delays in the administrative process. In this context, the apparent haste with which the evidentiary proceedings were held, and even the agency's reliance on its conclusion of national need for the LNG, might have been understandable-perhaps even barely supportable-had the energy situation been as critical as the opinion presumes. There are important indications, however, independent of our 20-20 hindsight, 74 that even at the time of the ERA's deliberation in this case, the national energy picture, particularly that of natural gas, and DOE policy relative thereto were such that they offer no justification for the ERA's hasty, and in many ways haphazard and overly presumptive analysis. 92 We cannot overlook that the ERA's reliance only on the fundamental features of today's energy situation to find a national need for the expensive Algerian LNG departs in many ways from DOE policy, evidenced only a year prior, calling for close evaluation of proposals to import natural gas. Although an agency is not necessarily bound to precedent, 75 it is consistent with protecting the public from arbitrary and capricious decisions 76 to require at least a reasonable and contemporaneous justification for departures therefrom. 77 The ERA break with precedent and policy in this case is not sustainable on the record. 93 Shortly after passage of the National Energy Act, 78 the DOE determined that it was necessary to review and publicize the gas import policy in light of (1) the enhanced development and production of domestic gas expected as a result of the Natural Gas Policy Act, 79 (2) the reduced demand for gas resulting from the prohibitions on gas use under the Fuel Use Act of 1978, 80 and (3) the efforts in gas conservation prompted by higher natural gas prices. This policy was evidenced in two December 1978 opinions denying applications to import LNG. 81 The ERA not only announced that approval of an application to import gas supplies was dependent upon a showing of regional need, 82 but it also required applicants to demonstrate that the imports would not affect the development of proximate domestic supplies. 83 94 The ERA sought to distinguish this case from the Tenneco decision on grounds that the El Paso project was not new, but had already been authorized by the FPC and substantial investments committed thereto. We agree that the commitments and interests of investors should not be ignored, 84 and that the reliance of customers, if it exists, on an established source of gas might also be made part of the agency's balancing of relevant considerations. However, these factors, inherent as they may be in the ERA's attempt in this case to distinguish precedential decisions merely on the basis that the project was not new, do not satisfy the fundamental inquiry of whether there is a need for the gas. The ERA itself admitted that the finding of need made earlier by the FPC was irrelevant to its reevaluation of the import contract; 85 that it had to find that there was still a need for the imported quantities at the higher price. Thus, as far as need was concerned the project was a new one. 95 The Secretary of Energy authoritatively reaffirmed the policy approach taken in the Tenneco and El Paso Eastern decisions in an address on 9 January 1979, 86 stating that close examination of the need for and impact of (LNG) imports was a deliberate and carefully thought-out change from the more permissive attitude that prevailed prior to passage of the National Energy Act. The rationale offered for this shift included language which deprives the ERA of any justification which it might have found even a year earlier in its notice of a critical national energy shortage: 96 After the 1973-74 embargo and the natural gas shortage of 1976-77, an attitude of desperation developed with regard to gas supplies which made long-haul, high-cost LNG appear more attractive than was truly the case. The overall cost of LNG may be no lower in the long run than synthetic gas, domestically produced. The balance of payments costs and the potential risks are obvious.... LNG has the potential disadvantage of shutting in lower-cost domestic production. Overall this is a prospect markedly less attractive than the others. We should not shut the door to LNG, but we should turn to it only if other, more attractive, lower-cost sources of supply do not materialize. 97 ... Above all, we must recognize-as we failed to recognize before the passage of the Natural Gas Policy Act-that we are under no immediate pressure. We have the opportunity to develop our policies intelligently, as uncertainties about domestic supply are reduced, and as our understanding about prices and availability of alternative supplies is enhanced. 87 98 The Secretary thus attached little continuing importance, as a matter of policy, on a worldwide energy shortage. In fact, he described as essential a goal of ridding the national market of a short-term natural gas surplus of one trillion cubic feet, brought about in large part by the Natural Gas Policy Act, in order to prevent a dampening effect on incentives for domestic production. 88 99 We do not purport to offer these observations as dispositive of the issue of national need. We intend by our reference to the Secretary's statement only to demonstrate that, even if official notice might have properly been taken of the tight energy markets of the 1970's, this notice alone was an inadequate substitute for the substantial evidence upon which the ERA's finding of national need-which provided the binding thread to the whole of its rationale for approving the Amendment Agreement-should have been based. The issue of national need was not even included in the prehearing order and the agency gave no indication whatsoever that it would take official notice of the matter. There was therefore no offering of evidence by any party on either side of the issue of national need. 89 It is not a matter of the weight of the evidence; there was simply no record evidence to weigh. 100 It is apparent that the agency simply moved too quickly on the issue of need-evidencing more an attitude of desperation than the careful examination and judgment which this key issue required. 101