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

Heading: Nature of Front-end Advance Payments

Text: 22 The central controversy in these cases involves the temporary exclusion from rate base of certain front-end advance payments made in the United States. 25 These are a particular class of advance payments. In general, the program provided for advance payments in the sense that the payments were authorized to be made in advance of the delivery of gas supplies. The focus of concern in these cases is the so-called front-end advance payment, which identifies a transfer to the producer not only prior to gas deliveries, but also prior to any producer expenditures associated with ultimate production of the gas. 23 An advance payment has two aspects, and provides a dual benefit to the recipient producer. First, it is a Source of capital, which supplements the funds available to producers for development and production expenditures. It is a loan, but one shaped as a pre-payment to be credited against the purchase price of gas that will flow from successful development efforts. Second, it is an Interest-free loan. When an advance payment substitutes for capital raised in financial markets, it relieves the producer of financing costs. There is an extra benefit to the producer in that the rate set for the producer by the Commission incorporates an allowance for financing cost, and no reduction in that rate is required on account of the fact that part of the producer's financing is cost-free. 26 Thus, advance payments provide a bonus to producers in the amount of the interest factor, an amount which is never refunded. 24 In the Commission's view, the objective of the advance payment program was to expedite the development of gas supply through the mechanism of providing producers an additional Source of capital. In theory, the increased availability of capital would encourage investment, which in turn would yield additional gas supply. The interest factor, and the bonus which it provided to producers, has been construed as a subsidiary element designed to provide incentive for producer participation, a necessary cost to achieve the desired benefit. 27 25 The Commission has come to focus on front-end advance payments as providing a still further bonus to the producer not only the interest-free availability of funds during use for gas development, but their availability for some period prior to the time of qualifying expenditure by the producer. The Commission has recognized that capital formation and the pertinent qualifying expenditure may be facilitated by the transfer of an advance to the producer a reasonable time prior to the expenditure. However, the Commission has endeavored through administration of the program to protect rate payers from the cost of advance payments held by producers for any unreasonable front-end period. Advance payments that were made (in the Commission's view) an unreasonable time prior to their appropriate expenditure have been labeled extravagant by the agency. Since the term extravagant begs the question, these payments will be referred to in this opinion as extended front-end advance payments or extended front-end advances.