Opinion ID: 339939
Heading Depth: 2
Heading Rank: 3

Heading: The Decision to Conventionalize

Text: 44 In reviewing action by the Commission within its jurisdiction under the Natural Gas Act, we exercise an essentially narrow and circumscribed function. 187 The Act provides unequivocably that [a] finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive. 188 And, equally plainly, a Commission ruling on a nonfactual question is to be sustained if there is a rational basis for the conclusion it achieves. 189 It is by these standards that we must test the Commission's decision to condition the certificates of public convenience and necessity awarded Texas Eastern and the producers so as to conventionalize some of the features of the lease-sale. 45 As early as 1963, when Order No. 378 190 addressed the requests for certification of the lease-sale, it was clear to the Commission from the record of this case that it is not in the public interest for this Commission to certificate a transaction such as the one presented to us on this record. 191 And as the presiding examiner observed in his Phase I decision in 1968, [t]he reason ... was that it would be impossible to regulate, or even ascertain, what the producers were getting for the gas or what the cost to the pipeline would be. 192 For, in the beginning, a major unknowable was the volume of gas which the transferred reserves would ultimately yield, and consequently the eventual unit price which Texas Eastern would pay for the yield. 193 46 After opinion No. 378 was announced, the producers sought to eliminate the risk of possible over-estimation of the reserves by guaranteeing that they would supply Texas Eastern with a designated minimum volume of gas. 194 With this single change in the transaction, the parties again presented the lease-sale to the Commission with requests for unconditional certification. 195 The examiner decided that certification should be accompanied by an imposition of conditions, 196 and the Commission adopted and has consistently adhered to that position. 197 47 Like the examiner, the Commission in Opinion No. 565 was of the view that the reserve guaranty did not reduce much of the cost-price hazard inherent in the lease-sale. 198 [T]here are, the Commission said, numerous other factors which can have a substantial impact upon the cost of the gas to Texas Eastern and its customers under the lease-sale, such as the value and quantity of the liquids, the rate of production of the gas and liquids, the rate of return Texas Eastern is entitled to throughout the life of the wells, and associated taxes, variations in operating expenses and uncertainty of delivery. 199 So great was the peril that the Commission felt that were the lease-sale still executory, it might well reject it. 200 48 When, however, the Commission came in Opinion No. 565 to again consider the lease-sale on its merits, it had long since ceased to be entirely executory. By the end of 1968, almost half of the estimated recoverable gas had been taken, and most of the contract price had been paid to the producers. 201 In this milieu, the Commission deemed it appropriate to compare the estimated cost of the lease-sale as a whole to Texas Eastern and its customers with the cost of a conventional gas purchase arrangement. 202 The Commission admonished that [i]n making this comparison, however, we must keep in mind the continuing substantial uncertainties as to the lease-sale arrangement and could only find it is required by public convenience and necessity, as contrasted with a conventionalized sale, if the comparison were significantly in its favor. 203 And on scrutiny the Commission found that the comparison is not favorable to the lease-sale, even without considering the uncertainties thereof. 204 49 Opinion No. 565, as we read it, predicated that finding on two bases. One was a cost comparison of the lease-sale with a conventional gas-sale, which disclosed a difference of some $6 million in favor of the latter. 205 To the purchase price of $134,395,700 the Commission added Texas Eastern's other net Rayne Field costs and, using the producers' estimates of gas and liquid takes, computed a total cost to Texas Eastern of $168,900,000 over the expected life of the reserves. 206 On the other hand, the Commission ascertained that a conventional sale of the gas priced at 20 cents per Mcf from the start of the flow until October 1, 1968, 207 and at 18.5 cents thereafter, would cost Texas Eastern a total of $186,537,000. 208 But when these two totals were discounted at 5 percent for the time value of Texas Eastern's advances to the producers, the Commission learned that the effective cost was $122,403,000 under the lease-sale and $116,270,000 by a conventional approach. 209 As the Commission noted, the difference would be greater if a discount rate of 6 percent were employed. 210 50 This difference in cost was not, however, the only consideration motivating the Commission to disapprove the lease-sale as presented. A second factor which loomed large was the Commission's belief that despite the reserve guaranty, the lease-sale was fraught with uncertainties which precluded a confident evaluation of its economic impact, and that the public interest would hardly be served thrusting the risk of an excessive price on consumers. Opinion No. 565 set forth a summary of the uncertainties, to which we have adverted, 211 and the Commission's overall conclusion: 51 [T]he lease-sale arrangement produces a lack of certainty over the life of the field and, as the record indicates, a higher cost than a conventional sale at 20 cents per Mcf. Because of these features of the lease-sale transaction, it is imperative for the Commission to take steps within its jurisdiction, which will protect consumers from paying excessive rates. This can be done, we believe effectively, through regulating the payments made by Texas Eastern to the Producers by conditioning the lease-sale arrangement. 212 52 The uncertainty factor reappeared as a topic of discussion in Opinion No. 565-A. The producers contended that uncertainty is an element in many projects submitted for Commission approval, and that the uncertainties remaining in the lease-sale transaction after the reserve guaranty was made did not exceed reasonable bounds. The Commission disagreed, responding: 53 While, of course, there is always uncertainty, more is involved here, for the proposal is to commit Texas Eastern to a fixed price of $134,395,000 for the life of the field, and that is not true in the conventional certificate proceeding where the price is subject to regulation. The essence of our objection to the lease-sale transaction is its inflexibility. If the price turns out to be too high in the light of changing circumstances, it fails to protect the consumers; if it is too low the producers will not receive an adequate return and this, in turn, may affect their ability to serve the market. 213 54 Before the Commission the producers also argued, as they have here, that the advantageous features of the lease-sale demanded consideration conjunctively with cost data in determining whether it was that arrangement or a conventionally-converted sale that best served the public convenience and necessity. 214 We agree that the price of the Rayne Field gas was not the only relevant criterion, and that the Commission was required to evaluate all factors bearing on the public interest, 215 but we cannot agree that the Commission was derelict in that duty. On the contrary, the Commission, in both of its opinions on the subject of conventionalization, 216 addressed the noncost factors which the producers advanced and found them insufficient to warrant unconditional approval of the lease-sale. 217 In addition to the reserve guaranty, 218 the producers pointed out that Texas Eastern and its customers obtained a large supply of gas in a single package close by its pipeline, with resultant savings in gathering and transportation costs. The Commission felt that that did not make for a unique situation, since large and well located reserves are features of many conventional sale transactions. 219 The producers pointed to the further fact that Texas Eastern secured the Rayne Field gas at a firm price, and to the potential saving from the absence of price escalations; but, as the Commission responded, the price was in any event subject to the Southern Louisiana area rate. 220 The producers also called attention to the flexibility of operations--another cost saver--which Texas Eastern gained under the lease-sale arrangement. As the Commission responded, however, Texas Eastern was taking the gas at a normal rate, and would be required to continue to do so in the future. 221 These factors, said the commission, do not justify the price of gas to Texas Eastern under the contract which may be excessive even on the basis of the entire life of the field. 222 55 When this litigation was previously before this court, we extended to the Commission the option to reopen the record in the certificate proceeding to permit Texas Eastern to establish by adequate evidence that the acquisition costs which it proposes to incur will be consistent with the public convenience and necessity. 223 And when the Commission elected to do so and properly asserted jurisdiction over the lease-sale, 224 it concluded that the public interest would be ill-served by certification of a transaction in which the unit cost of the involved gas could not be accurately determined. 225 Conventionalization of the lease-sale developed for the Commission as the appropriate, and we think as a rational, method of enabling the Commission to discharge its statutory responsibilities. 56 In reviewing the Commission's decision to conventionalize, we have remained advertent to the difficulty of the problem which it faced and to the appeal which some of the parties' arguments had for a minority of its members. 226 Those arguments, in large measure, have been repeated here in a forceful effort to persuade us to a result opposite to that thrice reached by a Commission majority. 227 But Congress has entrusted the regulation of the natural gas industry to the informed judgment of the Commission, and not to the preferences of reviewing courts. 228 And [a] presumption of validity ... attaches to each exercise of the Commission's expertise, and those who would overturn the Commission's judgment undertake 'the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences.'  229 We have witnessed ample support in the evidence for the Commission's factual findings, 230 and ample support in reason for its nonfactual conclusions. 231 We hold that the Commission's action on this branch of the litigation must stand.