Opinion ID: 370388
Heading Depth: 2
Heading Rank: 3

Heading: The Critical Timing Requirement

Text: 26 Distilled to its essence, this case involves two questions: (1) whether the rate base treatment contemplated by the program was inherently limited to advance payments made no more than a reasonable time prior to their appropriate expenditure; and, (2) whether, if such a limitation existed, the Commission acted within its discretion in defining the permissible interval solely in terms of traditional line-of-credit financing practices. 27 The timing element has assumed paramount importance due to the response of both pipelines and producers to the realities of the natural gas market in the context of the advance payment program. In an unregulated economic environment, a period of supply shortage may be expected to stimulate a rise in price until supply and demand are once again in equilibrium. But on sales of natural gas within FERC jurisdiction, both producers and pipelines are foreclosed from an unencumbered response to economic forces. Unless specifically excepted, producers must sell gas, and pipelines must buy it, at regulated rates that may fall well below a free-market price. 28 Further, the law imposes on the pipelines an enforceable obligation to resist any temptation to acquiesce in unlawful producer demands and to bid against each other for available supplies of gas by offering higher prices or their equivalents. 29 Still, the sanctions available to the FERC have their limitations, and even in the regulatory context market pressures retain some vitality. 30 28 The advance payment orders did not specify the permissible interval between the advance and its appropriate expenditure. Perhaps emboldened by this indefiniteness, producers pressed their bargaining advantage, inducing pipelines to make advances long before the funds were used for qualifying expenditures. These advances, certain of which the Commission has labeled extravagant, and which we refer to as extended front-end advances, gave producers valuable interest-free funds for their unrestricted use during the interim period. By this mechanism the price of natural gas effectively was raised above the regulatory ceiling. 31 Competition for needed gas supplies motivated pipelines to acquiesce in exorbitant producer demands. The belief (or hope) that the Commission would permit rate-base treatment of extended front-end advances, thus passing on the competitive cost to the rate payers, may have contributed to the pipelines' weakened resistance. Whatever the causes, extended front-end advance payments emerged in the market and are referred to in the testimony of witnesses for the pipelines as a term of trade arising during the period relevant to these cases. 32 29 The Commission has administered the advance payment program to defer inclusion in rate base of a pipeline's front-end advances until the test period in which those advances were used by the recipient producers for appropriate purposes. The Commission has relied on its construction of the general objectives of the program and on the administrative discretion inherent in an announced general policy that it would include in the rate base only those advances found reasonable and appropriate. 30 The initial advance payment order established Account 166, Advance Payments for Gas, and provided that advance payments for gas would be recorded as prepayments and unrecovered advance payments would be included in the rate base as part of working capital. 33 Various express conditions limited the advance payments that would be considered for inclusion in rate base. Some of these conditions were modified in the subsequent advance payment orders. 34 Each of the orders stated that the Commission plans to consider those amounts recorded in Account 166, Advance Payments for Gas, as rate base items, where found reasonable and appropriate. 35 Thus, properly recording an advance in Account 166 was a necessary, but not a sufficient, condition for inclusion in the rate base. The Commission also had to be satisfied that the advance was reasonable and appropriate. 31 There has been no dispute that the advance payments at issue in these cases complied with the express conditions in the pertinent advance payment orders. What is contested is the Commission's discretion to interpret and administer the reasonable and appropriate guideline. 32 Two orders govern the advance payments in these cases. Order No. 465, issued December 20, 1972, governs advance payment contracts made during 1973. It contains an unelaborated statement of the reasonable and appropriate standard. 36 On December 28, 1973, the Commission issued Order No. 499, which governs advance payment contracts made during 1974-75. In that order, responding to public comments raising the critical timing issue, the Commission emphasized the applicability of the reasonable and appropriate standard to that issue. It did not adopt a strict timing rule, but instead stated that as a general policy advances must be appropriately expended by the producer within a reasonable time. 37 33 Huge sums in extended front-end advances were transferred to producers under contracts subject to Order No. 465. Despite the Commission's signal in Order No. 499 that it intended to focus on the critical timing requirement, the flood did not abate. 38