Opinion ID: 392942
Heading Depth: 1
Heading Rank: 1

Heading: the great plains proposal and ferc action

Text: 12 Great Plains is a partnership 2 formed to construct a facility which will manufacture synthetic gas from coal (a coal gasification plant). The plant is designed to produce an average of 125,000 Mcf 3 of synthetic gas per day when fully operational, and is estimated to cost over $1 billion to build. 4 It will utilize both the so-called Lurgi process 5 and the Menthanation process 6 to convert lignite coal feedstock from nearby surface mines into high-Btu, 7 pipeline quality gas. Great Plains proposes to contract with the Great Lakes Gas Transmission Company (Great Lakes) to transport the manufactured gas through a pipeline to be constructed from the tailgate of the plant to a point on Great Lakes' existing pipeline system near Thief River Falls, Minnesota. There the synthetic gas would be commingled with natural gas and then transported through Great Lakes' facilities to a point near Crystal Falls, Michigan. 8 At Crystal Falls, Great Plains would sell equal quantities of commingled synthetic and natural gas 9 to each of five customer pipeline companies. The gas would then be delivered by those companies to consumers. FERC Opinion No. 69, at 4. 13 The original proposal for a coal gasification plant in Mercer County was filed in March, 1975 by Michigan Wisconsin Pipeline Company (Michigan Wisconsin) and ANG Coal Gasification Resources Company (ANG), both affiliates of American Natural Resources Company (American Natural). These applicants proposed a plant capable of producing 250,000 Mcf of synthetic gas per day for the purpose of alleviating a shortage of natural gas on the Michigan Wisconsin system. Later, during administrative hearings on the proposal held in 1976, the applicants scaled down the plant production capability to 125,000 Mcf during the first phase of a proposed two phase construction program. In November, 1976, after those hearings had been substantially completed, applicants requested that the Administrative Law Judge defer ruling on their proposal because federal loan guarantees which they had counted on to provide essential support for the debt portion of the project's financing had not yet been approved by Congress. The Administrative Law Judge granted applicants' request, and on May 9 and August 8, 1977, amended applications were filed by the American Natural affiliates, joined by Peoples Gas Company (Peoples), in which American Natural and Peoples agreed to share both the burden of financing and the plant's output. However, the amended application continued to assume the availability of Federal loan guarantees. FERC Opinion No. 69, at 11. 14 Additional hearings were held on the amended application, but once again applicants declared that they wanted to substantially restructure their proposal because of inadequate financing. Mr. Arthur K. Seder, Jr., Chairman and President of American Natural, testified before the Administrative Law Judge that (f)or the past several years our principal efforts to arrange debt financing for the project have centered around obtaining Federal loan guarantees. Joint Appendix (hereinafter J.A.) at 26. He went on to state that we were getting some encouragement to believe that the Administration might ... simply go directly to Congress and ask for authority to grant loan guarantees toward (the) project. J.A. at 38-9. Now, however, it appeared to Mr. Seder that the Department of Energy (DOE) would not do that, and other possibilities for federal loan guarantees were unpromising. According to Mr. Seder,it (was) suggested by officials of the Department of Energy that if other gas pipeline companies are brought into the project and a consortium is formed, DOE would recommend the approval by FERC of tariff and financing conditions that would provide consumer credit support against the risks of project failure and would otherwise contribute to the financeability of the project. In light of that suggestion, American Natural and Peoples have decided to inquire whether other pipeline systems are willing to join in such a consortium .... 15 J.A. at 27 (emphasis supplied). Thus, at DOE's suggestion the ratepayer financing scheme was born, 10 and applicants were permitted by the Administrative Law Judge to restructure their proposal to include additional sponsors 11 and ratepayer financing. It was this amended application by the new Great Plains Gasification Associates that formed the basis for the FERC action now here for review. 16 The Great Plains application made two significant alterations in the proposals of American Natural and Peoples. First, the project would be justified before FERC not as a gas supply project, but instead as a demonstration project designed to test the technical, environmental and economic viability of a coal gasification plant. 12 Second, and more important, the consumer ratepayers of the partnership companies would shoulder the burden of critical financing costs. They would guarantee the debt investment in the project under all circumstances, and would guarantee the sponsors' equity investment in the project with a 15% return under most circumstances, FERC Opinion No. 69, at 60, 70. Further, they would be required to pay a surcharge during construction to cover all interest expenses on debt, financing charges, taxes, and other carrying charges, together with the 15% return on the sponsor's equity investment during that period, id. at 67. 17 The Administrative Law Judge, agreeing with the Commission staff recommendation, rejected this financing proposal and in his Initial Decision, supra, n.12, held that the requested certificate of public convenience and necessity must be denied. In analyzing the financing plan the Administrative Law Judge found: 18 Under any view, the Mercer County project will confer no special benefits upon the ratepayers. Even if it is entirely successful, the project will not serve as a true source of supply for the ratepayers, as the sponsors acknowledge for it will manufacture only a small volume of gas which will then have to be divided among the sponsors' pipelines. On the other hand, if the project fails, the ratepayers will receive nothing at all other than learning along with the rest of America that we cannot rely on this technology in the future. 19 .... 20 There may well be a national need to get on with efforts to develop a coal gasification technology, but the costs have to be borne by America's taxpayers, not some of its ratepayers. After all, whatever benefits are to be derived from this project will be shared by the entire country, not merely some ratepayers. It would simply be inequitable to have perhaps one-third of the country pay all the costs of the project, including paying for the modest volumes of coal gas to be obtained if the project is successful, while the benefits of learning whether or not it is practicable to manufacture and market coal gas would inure to the nation as a whole. 21 J.A. at 427, 404. Thus the Administrative Law Judge held that the ratepayer financing arrangement failed to meet the statutory public convenience and necessity standard. 22 In the alternative, the Administrative Law Judge held that (e)ven if it could be found that these ratepayers alone should bear the project costs, part of the sponsor's financing plans still does not comport with public convenience and necessity. Id. at 404. The Administrative Law Judge isolated three specific features of the scheme which were objectionable. First, he held there should be no automatic recovery of the sponsors' equity in the event the project should fail. Instead such recovery should await completion of hearings before FERC at which the sponsors could attempt to show that specific circumstances made it appropriate for ratepayers to reimburse them for their investment in the failed project. Id. at 431. Second, he held that sponsors' request for a minimum 15% guaranteed return for the entire life of the project should be denied in favor of a fluctuating return on equity to become effective after the first twelve months of operations. Id. at 432-33. Third, he rejected the sponsors' application for a pre-operational surcharge to cover the cost of debt and equity capital during construction. Id. at 433-35. 23 On November 21, 1979, FERC, by a vote of 2-1 (two Commissioners not voting), reversed the decision of its Administrative Law Judge, rejected the recommendations of its own staff, 13 approved the applicants' financing plan with minor modifications, and granted a certificate of public convenience and necessity to Great Plains authorizing the requested sales for resale in interstate commerce. 14 Regarding the basic objection that a relatively small group of ratepayers would be financing a project whose benefits, if any, would not accrue primarily to them, the Commission responded: 24 This project will be supported by consumers of approximately one-third of the Nation's interstate gas and any burden will be small and will be justified by the benefits to those consumers. We hold this to be satisfactory for a finding that there is a sufficient sharing of costs and benefits so that, assuming the other requirements are met, the public convenience and necessity will be served by granting the requested certificates. 25 FERC Opinion No. 69, at 47. 26 FERC's belief that the project was entitled to support through this admittedly extraordinary, atypical and unprecedented financing scheme, id. at 60, was based 27 in substantial part on the determination that the public convenience and necessity requires the commercial demonstration of coal gasification. The Mercer County project will aid the public interest by providing data as to the availability of this process as a supplemental energy source. Just as certain pipelines have been certificated, at least in part, for the reason they would encourage exploration and development in new production areas, the proposal here may lead to the construction of numerous coal gas plants resulting in a significant additional amount of gas available to consumers.... (O)ur decision here reflects, not only an evaluation of the specific component elements of the project advanced by the applicants but also and unquestionably of even wider significance the potential importance of the project in evaluating the feasibility of converting the Nation's abundant coal reserves into pipeline quality gas. 28 Id. at 58. 29 FERC's determination that the commercial demonstration of coal gasification was in the public interest was purportedly reached in accordance with Federal Power Commission Order No. 566, 15 which set out procedures and guidelines for advance assurance of rate treatment for research, development and demonstration (RD&D) expenditures by jurisdictional companies. While admitting that (t)he Commission's RD&D regulations (such as Order No. 566) envision rate filings under Section 4 of the Natural Gas Act rather than certificate applications under Section 7 as are involved here, FERC Opinion No. 69, at 48-9, see generally p. 25 infra, the Commission went on to state that if this project falls under the RD&D rubric the case for treatment different from that accorded ordinary pipeline investments is stronger.... (A)s a minimum Order No. 566 stands for the Commission's willingness to consider permitting ratepayer support of demonstration projects to advance our knowledge about new sources of gas. Id. at 49, 53. After concluding that different rate treatment was appropriate for the Great Plains project pursuant to Order No. 566, FERC proceeded to approve most of the sponsors' specific financing proposals, including, inter alia, ratepayer guarantees for repayment of debt if the project should fail for any reason, id. at 63, but see note 39 infra; ratepayer guarantees for repayment of sponsors' equity investment together with a 13% annual return (rather than 15%) even if the project should fail, so long as sponsors' investments are prudent, id. at 65, 75; and a ratepayer surcharge during construction as requested by the applicants, see supra at 9. Id. at 69, 75. FERC subsequently denied all applications for rehearing 16 and petitions for review in this court followed. 30