Court Opinion

ID: 9464422
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:32:33.854177+00
Date Added: 2024-06-11T17:38:36.841450
License: Public Domain

ORDER ON PETITIONS FOR REHEARING
PER CURIAM.
On consideration of the petitions for rehearing filed by American Public Gas Association, et al.; Austral Oil Company Incorporated and Aztec Oil & Gas Company; Commonwealth of Pennsylvania; and Congressmen petitioners, it is
ORDERED by the Court that the aforesaid petitions are denied.
LEVENTHAL, Circuit Judge
joined by GESELL, District Judge:
The petitions for rehearing that have been filed1 do not require an opinion to supplement or repeat the already long opinion of June 16, 1977.
We write rather to say that the concerns that trouble our distinguished colleague, and occasion a further word from him, also trouble us; but in our view they cannot control the decision in this case.
It is hardly disputed that there will be some considerable increase in taxes paid by the industry. That is what Congress and the people wanted. The only fairly disputable point is — how much? However, if the Commission were confined to a doctrine strictly insisting on evidence of “actual taxes paid,” the plain fact is that, at a time when the nation cannot tolerate any undue block to gas supplies, producers selling to the interstate market would have to forego any price increase whatever notwithstanding an inescapable income tax cost increase of considerable extent.
The court’s opinion sanctions the use of a model as substantial evidence, but it contemplates that this model will be subjected to the test of experience. If a flaw in the model is revealed, then there can be, 186 U.S.App.D.C. pp.---, 567 F.2d 1042-1043, an adjustment for the future, an adjustment readily approached through withholding the benefit of future escalations. While this will not affect prices for gas already delivered, it would have substantial impact, and if error is found would forestall an undue perpetuation. It strikes a balance that is, in our view, in “the interest of justice.” 28 U.S.C. § 2106.2
*1081FAHY, Senior Circuit Judge:
Though a rehearing is denied, I take this opportunity to explain further one aspect of my dissenting views about the income tax components under consideration.
Establishment of nationwide rates for jurisdictional gas unavoidably strains the efficacy of the Natural Gas Act to support the effort; the Act was enacted long prior to contemplation of such a development. Realizing the situation, the court must be as open-minded as is reasonably possible in seeking authority in the Act to accommodate the Commission’s difficulties in such an undertaking. However, the Act is not open-ended; and it remains, as originally purposed, primarily protective of the consumer interest. While the nature of this interest may vary with the times, an inexorable standard binds Commission and court: Essential elements of a rate order must be supported by substantial evidence. This applies to the dollar amount of an essential rate element as well as to the inclusion of the element in the rate structure.
The amount of an income tax component in a nationwide rate must achieve a reasonably close relationship to the amount a representative group of the producers are required to pay, or to assume liability for, as their income taxes. This reasonable relationship may be found consistently with the substantial evidence standard when a tax component is mathematically calculated as an estimate of taxes per Mcf of jurisdictional gas, subject, however, to verification or modification grounded in substantial evidence of actual income tax data.
Here, the record contains no data that the 43.05$ per Mcf tax component included in the rate for 1975 — 76 vintage gas, for example, is reasonably comparable to any income taxes which have been or are being paid or assumed by such a representative group of producers. Concededly, the record contains no data of actual payment or assumption of liability in any tax return filed with the Internal Revenue Service by any producer or by a cross-section of producers representative of the national industry involved. The model does incorporate evidence of certain other costs to be recovered by producers in the rate. On that foundation the model then proceeds to calculate that to enable the producers to recover those costs and also to earn a 15% rate of return they must realize such an amount of income from the rates to be charged as will enable the producer to meet an income tax liability of 43.05$ for each Mcf of jurisdictional gas sold. This calculation does not proceed from or incorporate actual tax data such as I have previously referred to. The resulting component, then, is entitled at most to the status of an estimate of such income taxes as producers might be called upon to assume. I do not now revert to the difficulties mentioned in my dissenting opinion in arriving at definite jurisdictional tax costs under the separate entity theory; those difficulties aside, I now assume ar-guendo that the Natural Gas Act would permit the court, in light of the difficulties encountered by the Commission in establishing a nationwide rate, to accept such an estimate as supported by substantial evidence. By definition, however, in this ongoing context, the estimate is not an acceptable basis for a component unless it is tested for its correctness by the Commission’s resort to what develops factually regarding the actual income taxes of producers. Yet here the Commission, neither by the model nor by any other means, provides for such verification or correction. The model does provide for readjustment of other cost factors in the light of experience, at the next biennial review, but not for readjustment of the income tax component on the basis of the experience of a reasonably representative cross-section of the industry in actually paying, assuming liability for, or in not paying, income taxes as evidenced by returns filed with the Internal Revenue Service or in any other evidentiary manner. To revise the tax component in some other manner, as by simply adjusting the figures for non-tax costs included in the formula originally used to calculate the component, does not test it against actual tax-liability experience and is wholly inadequate to veri*1082fy or correct the estímate. In this situation — in the context of this rate proceeding — I think the court should hold not only that the income tax components lack the support of substantial evidence as a definite reckoning of recoverable tax costs,1 but that neither the Opinion nor the model contains verification or modification requirements which establish the components as legally acceptable - estimates. To permit their continuing and indefinite collection from consumers without testing their accuracy in the manner suggested above I think we should also hold is not within the discretion available to the Commission under the Natural Gas Act.
This problem in my opinion calls for resort to the outstanding and accumulating evidence respecting income taxes, and for its analysis by the Commission in a manner to enable it to reach a satisfactory conclusion respecting the subject on the basis of the most important evidence relevant to it and which is in the possession of the regulated industry or is under its control. One must know what is actually the situation, at least to a reasonable degree, to reach a just and reasonable conclusion about it. It seems to me that simple justice requires that the amount the consumer ultimately pays to enable the producer to recover its income tax must be supported by tax payments or accruals evidenced by tax returns or other supporting data, reasonably representative of the situation. The question in the end is whether such evidence justifies a tax component included a priori in the rate. The integrity of the model as an answer to this question has not yet been established, or required to be established by the Commission or the court. It is neither just nor reasonable in my opinion to make the model the master regardless of those facts.2

. By APGA, et al.; Congressmen petitioners (Abourezk, et al.); Commonwealth of Pennsylvania; and by Austral Oil Co. and Aztec Oil and Gas.
The Austral-Aztec petition, which deals with replacements for indefinite term contracts, questions whether its contention can soundly be rejected on a theory of preserving a bargain. This particularized question may merit further reflection, but in the last analysis the court is of the view that there are considerations both ways and the primary responsibility for decision must be left to the agency.

. The reference to § 2106 does not imply, as some petitioners for rehearing suppose, that the court has discarded the requirement of substantial evidence to support the Commissioners’ findings and result. The court does feel bound in application of that standard to give deference to the Commission if it has asked the right questions and sought answers, and if it relies on material that is reasonably regarded as substantial in finding the answers. In the circumstance and with the information at hand, the economic model is substantial evidence. In the light of experience, the standard of substantial evidence might require the agency to take a different course.

. In the context of this proceeding, where the most relevant facts as to income taxes are in the possession of the producers, but not available to the Commission in arriving at the income tax components, a fair application of the substantial evidence standard requires the court in my opinion to withhold deciding that the standard is complied with unless and until this evidence, which may refute the accuracy of the components, is made available.

. The court’s opinion states in its footnote 33 that natural gas consumers should not “pay less” for gas simply because, for example, a producer such as Mobil loses money in a nonju-risdictional enterprise. This simplistic justification for the present tax components based upon the separate entity theory used to estab-Iish them ignores the failure of the producer to adopt that theory in computing its income tax. When a consolidated return is filed, losses due to nonjurisdictional non-gas activities are used to reduce taxes which the single entity theory would require to be paid. Moreover, the court assumes that the present “pay more” rate borne by the consumer for the purpose of covering the producer’s income-tax cost has already been validly established in an amount comparable to that cost. My concern is also that the “pay more” component may be used by the producer, in whole or in part, not to pay its income tax, but to recoup losses as to which neither Commission nor court has knowledge whether such losses are related to the cost of producing and marketing jurisdictional gas.