305 F. 2d 763 - Panhandle Eastern Pipe Line Company v. Federal Power Commission

Petitioner Panhandle Eastern Pipe Line Company seeks to review two orders of the Federal Powere Commission disallowing rate increases filed by it, and requiring it, for the periods in question, to file newly computed lower rate schedules-- on the basis of which refunds to customers are to be made. The total amount of the increases, collected subject to refund, is over $40,000,000.

The earlier of the two rate proceedings before the Commission, which dealt with the period from February 20, 1952, to December 31, 1954, was the subject of this court's decision in City of Detroit, Michigan v. Federal Power Commission, 97 U.S.App.D.C. 260, 230 F.2d 810 (1955), cert. denied, 352 U.S. 829, 77 S.Ct. 34, 37, 1 L.Ed.2d 48 (1956). In that case the Commission had approved rate increases sought by Panhandle, and had allowed Panhandle to include in its cost of service the so-called 'field price,' or 'commodity value,' for its own produced gas, rather than a rate for such gas computed under the conventional utility cost rate base method.1 The Commission also had ruled that Panhandle's profitable hydrocarbon extraction operations2 at Sneed, Texas, and Liberal, Kansas, constituted a separate business, so that neither the costs nor the revenues of the extraction operations should be reflected in rates fixed for petitioner's regulated activities. We held that the record and findings did not support these rulings. While not denying the Commission's power to deviate from the traditional ratebase method, we pointed out that 'it is essential in such a case as this' to use the rate base approach 'at least as a point of departure.' Supra at 268, 230 F.2d at 818. We also deemed insufficient the Commission's justification for refusing to credit Panhandle's hydrocarbon extraction revenues. Accordingly, we set aside the Commission's order and remanded it for further proceedings not inconsistent with our opinion. As to the field price issue, we permitted the Commission, 'if it so desires, to seek to supplement the record and findings.' Supra at 269, 230 F.2d at 819. On April 27, 1961, the Commission issued an opinion and order (269-A, G-1116) modifying its former opinion (269) to accord with our decision in the City of Detroit case. This is the first of the two orders that Panhandle here seeks to have reviewed.

Prior to this court's decision and remand in the City of Detroit case, Panhandle had also filed an application for increased rates to become effective August 1, 1954. These rates were suspended by the Commission in its order issued December 13, 1954, which permitted Panhandle to file substitute rates at a lower level, effective January 1, 1955. This interim order was affirmed by the Third Circuit. Panhandle Eastern Pipe Line Co. v. Federal Power Commission, 236 F.2d 606 (1956). Panhandle's lower substituted rates were permitted to be collected under bond from January 1, 1955, through August 31, 1958. Hearings were held at various times from October 1955 to January 1957. On February 10, 1959, the Examiner rendered a decision holding, inter alia, that Panhandle had failed to justify an allowance greater than that computed by traditional rate base methods, and denying the rate increase which had been collected under bond. On January 14, 1960, the Commission reopened the proceedings to take additional evidence on the commodity value issue. The reopened hearings were concluded on March 11, 1960, and the Commission issued its opinion and order (Opinion 344) on April 27, 1961. This is the second of the two Commission orders here under review and contains the most lengthy exposition of the reasoning relied on in both decisions of the Commission. (269-A and 344).

Panhandle vigorously defends the rate increases it sought. It contends that in order to encourage exploration and development, and to maintain its production of gas, it should have been granted an additional allowance for this purpose above that accorded by the Commission.3 Panhandle has two principal arguments.

First, Panhandle says the Commission erred when it found that Panhandle had not justified a claimed commodity value (weighted average field price) allowance for company produced gas, and when it denied permission to charge a rate above that computed under the cost rate base formula. Panhandle is, however, under the Commission's rulings, receiving for exploration and development an allowance covering out-of-pocket operating expenses, unproductive exploration and development expenses, and depreciation and depletion, plus a 6 per cent rate of return on its production properties.4 Panhandle claims that these allowances are insufficient for a wasting asset industry in which costs are rising, because they do not provide the funds needed for replacing either the gas or the gas pressure consumed. Panhandle argues that the current cost of finding and replenishing its gas reserves is much more than the original cost of the gas withdrawn, so that depreciation and depletion based on original costs will not be sufficient to cover the cost of replacement. An allowance based on field price would, says Panhandle, provide a fair and proper measure of return, and an incentive to exploration and development.

Second-- on a basis closely related to the first argument-- Panhandle contends that it should be allowed certain development costs which it says it was entitled to incur, even though it never actually did incur them.5 Panhandle says that it could reasonably have spent some $20,000,000 on an expanded program of exploration and development during the period in question, beyond what it did in fact spend. This amount, when added to the amount allowed by the Commission for company-produced gas, would closely approximate an allowance based on the weighted average field price. Panhandle insists that the field-price method of computing its costs-- or the equivalent method of computation based on the expense of an expanded program of exploration and development-- will maintain its ability to deliver gas, and thus will benefit the consuming public.

Forceful as Panhandle's contentions are, we are not persuaded that the Commission has erred. We think that the Commission was not obliged on the record made to grant a larger allowance than it did, and that it left the door open for a more liberal treatment in future years on a more persuasive record. Certainly it was entitled to reject the claim based on hypothetical development costs not actually incurred. Especially is this so in light of Panhandle's failure in fact to carry out a full exploration program, the availability of other methods of financing development, and the difficulty of insuring that the funds from a rate increase attributable to granting the requested development allowance would actually go into exploration and development.

The issues raised here involve a delicate balancing by the Commission of the interests of the company, its shareholders, the consumer, and the public. After careful consideration, we are unable to say that the method of computation selected by the Commission was unjust, unreasonable, or not conducive to proper exploration and development. Cf. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944).6

Alternatively, Panhandle asks that it be allowed to include in its cost of service the amount of tax savings derived from the gas and oil depletion and intangible well-drilling costs provisions of Sections 613 and 263(c) of the Internal Revenue Code of 1954, 26 U.S.C.A. 613, 263(c), thus translating the tax savings into additional company profits. The Commission, however, elected to treat Panhandle's rate of return as a separate question from that of tax allowances, and in effect passed on to the consumer the tax savings. In so doing, we think that the Commission acted consistently with both congressional intent and prior judicial decisions. As the Fifth Circuit said in El Paso Natural Gas Co. v. Federal Power Commission, 281 F.2d 567, 573 (5th Cir. 1960), cert. denied sub nom. California v. Federal Power Commission, 366 U.S. 912, 81 S.Ct. 1083, 6 L.Ed.2d 236 (1961):

'We think, in short, that there is no statutory authority for the Commission to treat actual savings in taxes to which natural gas companies are entitled any differently than savings in any other cost of service. It is the obligation of all regulated public utitities to operate with all reasonable economies. This applies to tax savings as well as economies of management. The net result of this, of course, is that such savings as are effected are passed on to the consuming public. This we consider to be the natural and necessary consequence of rate regulation.'

See also Cities of Lexington, etc. Ky. v. Federal Power Commission, 295 F.2d 109 (4th Cir. 1961).

Finally, Panhandle argues that the Commission should not have credited all of the revenues from the Liberal and Sneed hydrocarbon and gas extraction plans to the pipeline cost of service, and that only that proportion of the extraction business which improves the pipeline's efficiency should be credited to the pipeline business. Put another way, Panhandle seems to claim (1) that extraction operations which improve pipeline dfficiency must be treated as within the Commission's jurisdiction, while those that do not should be treated as non-jurisdictional, and (2) that when jurisdictional and non-jurisdictional operations use the same facilities, the operating cost of these facilities should be allocated beteeen them. We have found no real authority for these propositions advanced by Panhandle. On the contrary, the treatment of the extraction revenues here utilized by the Commission has been followed in numerous cases. See, e.g., In the Matter of City of Cleveland v. Hope Natural Gas Co., 3 F.P.C. 150, 178 (1942); In the Matter of Cities Service Gas Co., 3 F.P.C. 459, 480-81 (1943). The Commission's action in both of these cases has received judicial sanction. See Hope Natural Gas Co. v. Federal Power Commission, 134 F.2d 287, 307-08 (4th Cir. 1943), reversed on other grounds, 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944); Cities Service Gas Co. v. Federal Power Commission, 155 F.2d 694, 703 (10th Cir.), cert. denied, 329 U.S. 773, 67 S.Ct. 191, 91 L.Ed. 664 (1946). In sum, crediting revenues such as those in issue to the operating expenses of the pipeline business is the 'normal' and judicially approved method employed by the Commission. In the City of Detroit case, the Commission departed from this practice because it feared to base rates 'in part upon the fluctuating and unregulated prices of natural gasoline and other liquid hydrocarbons.' See 97 U.S.App.D.C. at 269, 230 F.2d at 819. On appeal, we stated that this was an unacceptable reason. Since the Commission had not demonstrated a basis for its conclusion that the extraction business should be treated as non-jurisdictional, we said that 'credit for these revenues should be given.' 97 U.S.App.D.C. at 271, 230 F.2d at 821.7 There is little doubt that the City of Detroit decision would, under certain circumstances, permit the Commission to allocate costs among a company's pipeline and extraction operations. But the Commission is hardly compelled to make such an allocation. We construe the City of Detroit case as not foreclosing the question of allocation as a matter within the Commission's reasonable discretion. However, there is a serious doubt in this case as to whether the Commission so understood the City of Detroit decision. Inteed, there are strong indications that the Commission believed that City of Detroit requires, where extraction operations in some way improve the efficiency of a transmission system, that the entire extraction revenues be credited to the pipeline.8

For this reason, we will remand to the Commission to reach an independent determination, in light of our opinion in the City of Detroit case, as to whether there should be an allocation of the extraction plant profits at Sneed and Liberal. We find no error with regard to the remaining contentions advanced by petitioner.

So ordered.