Cities Service Gas Company v. Federal Energy Regulatory Commission, 627 F.2d 1027, 10th Cir. (1980)
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Scribd Government DocsCities Service Gas Company v. Federal Energy Regulatory Commission, 627 F.2d 1027, 10th Cir. (1980)
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Scribd Government Docs627 F.
2d 1027
CITIES SERVICE GAS COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
No. 78-2009.
United States Court of Appeals,
Tenth Circuit.
Argued May 7, 1980.
Decided July 7, 1980.
Rehearing Denied Oct. 6, 1980.
Gregory Grady, Washington, D. C. (Dale A. Wright and James R. Schroll,
Washington , D. C., with him on brief) of Littman, Richter, Wright &
Talisman, P. C., Washington, D. C. (Alfred O. Holl, Oklahoma City, Okl.,
R. James Leithead, Tulsa, Okl., Wm. J. Sears and Ron W. Fry, Cities
Service Gas Co., Oklahoma City, Okl., with them on brief), for petitioner.
Barbara J. Weller, Atty., Washington, D. C. (Robert R. Nordhaus, Gen.
Counsel, and Jerome Nelson, Sol., Federal Energy Regulatory
Commission, Washington, D. C., with her on brief), for respondent.
Before BARRETT, SEYMOUR and PECK, * Circuit Judges.
BARRETT, Circuit Judge.
Cities Service Gas Company (Cities) petitions this Court to review and set aside
the Federal Energy Regulatory Commission's (Commission) Opinions Nos. 24
and 24-A issued August 29, 1978 and October 31, 1978 respectively.
Cities is a natural gas pipeline company which purchases natural gas from
producers, and sells it to various customers in a number of midwestern states.
Cities' sales for resale of natural gas in interstate commerce come within the
Commission's rate jurisdiction.
The cost of purchased gas constitutes the largest single component of a pipeline
The cost of purchased gas constitutes the largest single component of a pipeline
company's cost of service and it is an expense of doing business which is
recovered by the pipeline in the rates it charges to customers. Commission
regulations allow pipelines to include provisions within their tariffs for
purchased gas cost adjustments (PGA clauses) whereby a pipeline's changes in
purchased gas costs are monitored and adjusted every six months without the
need for rate proceedings every time producer prices increase. PGA
adjustments reflect, on a six month basis, the current cost of purchased gas.
Increases in purchased gas costs which occur between PGA filing adjustments
are recorded in an unrecovered purchased gas account and are recovered
through a surcharge filed with the next PGA adjustment.
During periods of increasing producer prices, pipelines, of necessity, incur
substantial increases in their unrecovered purchased gas account balances.
Furthermore, during the time period in question herein, the Commission's PGA
regulations did not permit the collection of carrying charges on balances for
unrecovered purchased gas costs. This policy was changed, however, on
January 1, 1979, at which time the Commission adopted regulations effective
prospectively allowing pipeline companies to collect carrying charges accrued
on balances for unrecovered purchased gas costs. This policy change was
undertaken after the Commission "found that pipelines were incurring greater
balances in their deferred accounts for purchased gas costs. 18 C.F.R. 154.38(d)
(4)(c)". (Commission's Brief at p. 4).
It is important to recognize that PGA adjustments reflect changes only in
purchased gas costs and act to supplement, rather than to supplant, general rate
increase filings in which a pipeline is allowed to adjust its rates to reflect
changes in all of its costs.
The instant proceedings were initiated by Cities on July 23, 1973 when it filed a
general rate increase. By order of August 22, 1973, the Commission suspended
the rate filing for five months and permitted it to become effective, subject to
refund on January 23, 1974. These rates, at issue here, were thereafter in effect
from that date until April 22, 1975, when they were suspended by another rate
proceeding.
By stipulation and agreement Cities and Commission resolved the majority of
the issues relative to Cities' rate levels for the period affected. Agreement was
not reached, however, on the propriety of including unrecovered purchased gas
costs as working capital in Cities' rate base.
It is uncontested that during the January 23, 1974 to April 22, 1975 period, the
cost of purchased gas to Cities rose dramatically due to producer price increases
allowed by the Commission. These increases, in turn, substantially increased
Cities' unrecovered purchased gas account during this period to an average
annual balance of $10,915,352.00, reflecting carrying costs of approximately $2
million annually.
9
On February 7, 1977, an administrative law judge (ALJ) denied Cities' proposal
to earn a return on its unrecovered purchased gas costs by including that
amount as working capital in its rate base. In so doing the ALJ observed:
.10. . a comparison of Exhibit 2 (on which Cities Service's rates were based) with
Exhibit 37 (on which the approved settlement was based) reveals that with
unrecovered purchased gas costs excluded from each exhibit the total of the several
elements conceded to comprise working capital dropped from $27.7 million (12
months ended March 31, 1973, as adjusted) to $19.2 million (12 months ended
January 31, 1975) a drop of $8.5 million. Accordingly, even assuming, arguendo, the
validity of Cities Service's general philosophy as to the working-capital-nature of the
expenditures involved, it is highly possible if not totally probably (sic) that the
decreases with respect to the uncontested elements in working capital provided
Cities Service with the funds for the so-called unrecovered purchased gas costs.
(R.Jt. App. at p. 67).
11
The Commission affirmed the ALJ's refusal to permit Cities to earn a return on
its unrecovered purchased gas costs but based its denial on different reasons.
The Commission held, inter alia : Carrying charges on unrecovered purchased
gas balances were prohibited by its regulations; whereas it had previously
waived the regulations on two occasions and permitted carrying charges, both
cases presented "unusual circumstances"; Cities failed to establish the average
balance in its unrecovered purchased gas account was a representative figure;
and Cities failed to justify its proposed return on unrecovered purchased gas
costs through its rates.
12
On appeal Cities contends: (1) the Commission unlawfully prohibited it from
earning a return on an investment (unrecovered purchased gas costs) prudently
and necessarily incurred in serving its customers; and (2) the Commission's
purported "reasons" for denying cost recovery are illogical, arbitrary,
capricious, and otherwise unlawful. Because of their direct interrelationship,
these issues will be considered simultaneously.
13
Under 15 U.S.C.A. 717c Cities has the burden of establishing that a proposed
rate increase is "just and reasonable". Once a pipeline company has met this
burden, the Commission is then obligated to determine and fix "just and
reasonable" rates:
14
The history of the Commission's early experience with the Natural Gas Act, 15
U.S.C. 717 et seq., has been fully developed in our first area rate opinion,
Permian Basin, supra (390 U.S. 747) at 755-759 (88 S.Ct. 1344, 1353-1356, 20
L.Ed.2d 1312) and may be merely summarized here. With the passage of the
Act in 1938, 52 Stat. 821, Congress gave the Commission authority to
determine and fix "just and reasonable rate(s)," 5(a), 15 U.S.C. 717d(a), for
the "sale in interstate commerce of natural gas for resale for ultimate public
consumption for domestic, commercial, industrial, or any other use . . . ."
1(b), 15 U.S.C. 717(b). The Act was patterned after earlier regulatory statutes
that applied to traditional public utilities and transportation companies, and that
provided for setting rates equal to such companies' costs of service plus a
reasonable rate of return. Mobil Oil Corporation v. Federal Power Commission,
417 U.S. 283 (1974) at p. 301, 94 S.Ct. 2328 at p. 2342, 41 L.Ed.2d 72
(Footnotes omitted).
15
See also: Federal Power Commission v. United Gas Pipe Line Co., 386 U.S.
237, 87 S.Ct. 1003, 18 L.Ed.2d 18 (1967).
16
Once the Commission has rendered a decision on a particular rate increase, a
court's review, under Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct.
1344, 20 L.Ed.2d 1312 (1968), is structured rather narrowly:
17
It follows that the responsibilities of a reviewing court are essentially three.
First, it must determine whether the Commission's order, viewed in light of the
relevant facts and of the Commission's broad regulatory duties, abused or
exceeded its authority. Second, the court must examine the manner in which the
Commission has employed the methods of regulation which it has itself
selected, and must decide whether each of the order's essential elements is
supported by substantial evidence. Third, the court must determine whether the
order may reasonably be expected to maintain financial integrity, attract
necessary capital, and fairly compensate investors for the risks they have
assumed, and yet provide appropriate protection to the relevant public interests,
both existing and foreseeable. The court's responsibility is not to supplant the
Commission's balance of these interests with one more nearly to its liking, but
instead to assure itself that the Commission has given reasoned consideration to
each of the pertinent factors. Judicial review of the Commission's orders will
therefore function accurately and efficaciously only if the Commission
indicates fully and carefully the methods by which, and the purposes for which,
it has chosen to act, as well as its assessment of the consequences of its orders
for the character and future development of the industry. We are, in addition,
obliged at this juncture to give weight to the unusual difficulties of this first
area proceeding; we must, however, emphasize that this weight must
significantly lessen as the Commission's experience with area regulation
lengthens. 390 U.S. at pp. 791-792, 88 S.Ct. at p. 1373. (Emphasis supplied).
18
Thereafter, when the application of these criteria do not establish that the order
produced an arbitrary result, the Commission must be sustained. Mobil Oil
Corp., supra, 417 U.S. at p. 308, 94 S.Ct. at pp. 2345-2346. A court cannot
substitute its judgment for that of the Commission. Kansas-Nebraska Natural
Gas Company, Inc. v. Federal Power Commission, 534 F.2d 227 (10th Cir.
1976); Pan American Petroleum Corporation v. Federal Power Commission,
352 F.2d 241 (10th Cir. 1965).
19
Furthermore, even though the Commission is not obligated to automatically
afford relief from rising costs, Federal Energy Regulatory Commission v.
Pennzoil Producing Co., 439 U.S. 508, 99 S.Ct. 765, 58 L.Ed.2d 773 (1979),
nevertheless it must render decisions predicated on "present day conditions".
United Railways v. West, 280 U.S. 234, 50 S.Ct. 123, 74 L.Ed. 390 (1930).1
And although the broad responsibilities of the Commission demand a generous
construction of its statutory authority, Amoco Production Company v. Federal
Power Commission, 465 F.2d 1350 (10th Cir. 1972), Commission rate
determinations are subject to judicial review, Amoco Production Company v.
Federal Power Commission, 491 F.2d 916 (10th Cir. 1973) and the
Commission is not empowered to deny specific rights in rate proceedings under
the guise of its expertise. Colorado Interstate Gas Company v. Federal Power
Commission, 370 F.2d 777 (10th Cir. 1967).
20
Applying these standards, we must hold that the Commission action in
excluding Cities' actual average balance of unrecovered purchased gas costs for
the locked-in period here involved from Cities' rate base was arbitrary.
21
At the outset we observe that Commission does not dispute that Cities, of
necessity, prudently incurred and invested an average annual balance of
$10,915,352 in unrecovered purchased gas costs in serving its customers.
Commission acknowledges, as it must, that these actual costs and the related
capital investment incurred and occasioned by Cities, were, for the most part,
caused directly by Commission approved producer price increases.
22
Under such circumstances, Commission's argument that its traditional rate
making principles do not permit Cities to earn a return on purchased gas costs
and that such costs do not constitute an "investment" upon which Cities is
entitled to a return, cannot pass judicial muster. Neither are we impressed with
Commission's contention that Cities has not established a showing of "adverse
economic consequences", when, as here, it is undisputed that Cities' carrying
costs on the aforementioned balance approximated $2 million per year.
23
We cannot condone Commission action which, on the one hand, allows
producer price increases to pipeline companies, and, on the other hand, denies
the pipeline companies a return on the investments they necessarily incur in
servicing their customers while simultaneously incurring the increased
producer prices.
24
We deem it somewhat ironic that the Commission, after amending its PGA
regulations on June 1, 1979, allowing the recovery of carrying costs, persists, at
this juncture, in denying Cities its requested relief. The Commission must, as
observed by the Court in United Railways, supra, predicate its decisions on
"present day conditions" and be guided thereby rather than by pursuing
traditional ratemaking principles in derogation of "present day conditions."
25
But for the Commission's own repeated actions, approving producer price
increases, pipeline companies serving customers would not have incurred
substantial unrecovered purchased gas cost balances and the capital investments
directly related thereto.
26
Commission Opinions Nos. 24 and 24-A issued August 29, 1978 and October
31, 1978, respectively, are set aside.
The Honorable John W. Peck, Senior Judge of the Sixth Circuit Court of
Appeals, sitting by designation
Although the Court's remarks in this case were directed to a state commission,
we believe they are equally appropriate herein
