350

$11 FEDERAL REPORTER, 2d SERIES

and workoff credit provision intended to
"help in generating capital funds" was
recently upheld by the Supreme Court in
Mobil Oil." Second, in addition to these
area rate increases, the Commission has
engaged in national programs to raise
prices for the purpose of enhancing sup-
ply: its 1972 optional certification proce-
dure and its 1974 national base rates.
Third, New York points to the emer-
gence of massive "drilling funda" assem-
bled by producers from the general pub-
lic as another post-1970 development
which calls into question the importance
of providing capital through advance
payments,"

In Order 441, the FPC explicitly re-
ferred to its Southern Louisiana and
Texas Gulf Coast opinions and noted
that the just and reasonable rates estab-

77. See 94 S.Ct. at 2350.

78. See Optional Procedure for Certificating
New Producer Sales of Natural Gas, Docket
No. R-441, Order No. 455, 48 FPC 218 (Aug.
3, 1972) (establishing the optional certification
under which gas from welis sunk after April
6, 1972, may qualify for rates substantially in
excess of prevailing area rates). That order
had recently been upheld, with minor excep
tions, by this court in Moss v. FPC, 164 U.S.
App.D.C., 502 F.2d 461 (1974) (upholding
the optional pricing procedure in new Section
2.75 of the Commission's General Policy and
Interpretations with the exception of subsec-
tion (e) which was invalidated).

The FPC first employed the optional pricing
procedure in approving contracts between
three producers and Tennessee Gas Pipeline
Co establishing a basic rate which exceeded
the area celling by 19e per Mcf and included
additional annual escalations. See Belco Pe-
troleum Corp., Docket No. CP73-293, Opinion
No. 659 (May 39, 1973), reversed and remand-
ed. Consumers Union v. FPC, U.S.App.
D.C., 510 F.2d 656 (1974) (decision based
on FPC's use of faulty cost estimate ranges
and test year). The Commission has sanc-
tioned higher prices under the optional pricing
policy in a number of other instances. See
Comptroller General of the United States,
Need for Improving the Regulation of the Nat-
ural Gas Industry and Management of Inter-
nal Operations 28 (1974) (between August 25,
1972, and March 5. 1974, 24 of the 77 applica
tions filed by producers for gas sales under
the optional certificate procedures were grant-
ed. 39 were still pending. 11 had been with-
drawn and 3 had been denied).

Another action elevating the level of rates
above that prevailing in area determinations

lished therein reflected "the required
level of capital formation" needed to
elicit "requisite gas supply." The
Commission went on to conclude that the
existing difficulty in capital formation
"supports our continuation for the limit.
ed period [until December 31, 1972] of
the rate treatment of advance pay-
ments." Despite this recognition that
changes in rate structures would affect
the need to extend the experimental ad-
vance payments program, neither of the
two subsequent Commission orders con-
tinuing rate base treatment included a
reassessment of the availability of ade-
quate investment capital for gna devel-
opment. In its opinion denying rehear
ing in Order 465, the FPC asserted that
the extension of the program was "a
necessary complement to our other cf-
was taken on June 21, 1974, when Opinion
No. 699 established a single national base rate
of 424 per Mcf for jurisdictional sales of gas
from wells drilled after January 1, 1973, and
for gas first dedicated to the interstate market
pursuant to contracts executed on or after
January 1, 1973. The national rate is de-
signed to provide "the incentives to stimulate
and encourage the unprecedented exploration
and development efforts that will be neces
sary to find and produce the requisite level of
new natural gas supplies." Opinion No. 699,
at 24. On December 4, 1974, the Commission
Issued an order increasing the national rate
for such gas to 50% per Mef. Washington
Post, Dec 6, 1974, at 1. col. 2-4.

These national rate base orders were not in
existence at the time of the latest action un-
der review, Order 499 in which the FPC de-
nied rehearing on February 22, 1974. But it
should be taken into account in the proceed-
ings on remand now ordered by this court.

The Commission has also utilized its power
to grant special relief from area rates to in-
duce further gas exploration and development.
See George Mitchell & Associates, Opinion
No. 649, issued February 21, 1973, remanded
for further proceedings, Macdonald v. FPC.
supra note 75.

79. See Brief for Petitioner New York at 19-
20 & n. 16.

80. See 46 FPC at 1179. See also Macdonald,

supra note 75, 165 U.S.App.D.C. at, 505
F.2d at 364 (noting that the area rate struc-
tures have been set "to provide producers
with a necessary but not excessive profit in-
centive for gas exploration.").

81. See 46 FPC at 1180.

PUBLIC SERV. COM'N, STATE OF N. Y. v. FEDERAL POWER CO. 351
Cite as 311 F.2d 339 (1975)

forts to obtain additional supplies of nat-
ural gas for the interstate market."
This assertion was not accompanied by
any findings or references to evidence in
the record. Moreover, the FPC did not
address New York's argument, prosented
in comments filed in the rulemaking
which culminated in Order 499 and based
on submissions in other FPC proceedings
which indicated that there was no longer
a shortage of capital-at least with re-
gard to crucially significant offshore are-
as, where reserves are massive in extent,
and may be committed by the federal
government to the interstate market.M
Like the defect in its analysis of the
data summary of the reports by pipe-
lines, the Commission's failure to assess
the impact of its other responses to the
gas crisis identified above (see text at
footnotes 77 and 78) precluded its recent
orders from constituting a meaningful
review and evaluation of the advisability
of extending the advance payments pro-
gram. Instead of "coming to grips with
issues" of central importance to the rule-
making, the Commission seemed content
to rely on interested parties' approval of
the program." The Commission could
not faithfully discharge its responsibility
to provide "'appropriate protection' to
the public interest in not paying prices
for gas substantially in excess of those

82. Order of Clarification, supra note 65, at 4:
JA 113.

83. This FPC order, as well as all of the others
dealing with rate base treatment of advance
payments, contains no discussion of the na-
ture and extent of the capital formation prob-
lems of gas producers or the probable impact
of various programs, see notes 76-78 supra
and accompanying text on the capital position
of the producers. However, there is some
indication in the record that small producers
face capital shortages for which advance pay-
ments provide an important source of relief.
See, e. g. Order 465, 48 FPC at 1551 (citing
comments filed by pipelines and small pro-
ducers). Statement of the Independent Petro-
leum Association of America in Docket No.
R-466 [sic]), at 3-4, JA 106, 107.

needed to induce production of an ade
quate gas supply" while ignoring the
present capital position of the gas pro-
ducers."

3. Advance Payments for Offshore
Exploration and Development
[7] We turn to the Commission's
treatment of advances made in connee-
tion with offshore production. Although
New York repeatedly noted important
factors that differentiate offshore from
onshore advances, the Commission virtu-
ally ignored the problem. The denial of
rehearing in Order 465 and the discus
sion in Order 499 responded to New
York's argument by a bare reference to
the total volume of proven reserves
"from onshore as well as offshore." 7
The Commission's order denying rehear
ing in Order 499 indicates that it feels
no separate problem is presented by off-
ahore advances.

New York alleges that the Commis-
sion has again failed to distinguish be
tween onshore and offshore advances.
This argument has been considered in
Order No. 499 as well as in the order
denying rehcaring of Order No. 465,
issued February 23, 1973 (mimeo, pp.
3-4) and needs no further discussion
herein.

mission.

The FPC's brief seems to place considerable
emphasis on the steps taken to assure that all
interested parties have the opportunity to
present their views of the program and to
comment on the data compiled by the Com-
See Brief for Respondent at 23-24
However, our prior decision contemplated that
the Commission would do more than provide
a forum for further debate. It assumed that
the FPC would listen carefully to the argu-
ments advanced, collect any necessary supple
mental data, and subject the whole to "mean-
ingful review, analysis, and evaluation" before
extending the advance payments program be-
yond December 31, 1972. See 151 U.S.App.
D.C. at 317, 467 F.2d at 371.

86. See Macdonald, supra note 75, 165 U.S.
App.D.C. at 505 F.2d at 363

87. See Order 499, supra note 6, at 5. Supp
JA 136; Order of Clarification, supra note 65.
at 3-4. JA 112-13.

68. Accounting and Rate Treatment of Ad vances included in Account No. 166, Advance

352

511 FEDERAL REPORTER, 2d SERIES

The Commission's treatment of ad-
vances related to offshore gas blandly
sidesteps all and any mention of the crit-
ical fact of its plenary power to prevent
diversion of gas from wells on leases in
the federal domain to the interstate
market." Whatever role advance pay-
ments may play in attracting onshore
gas from the intrastate and to the inter-
state market, this justification is absent
in the case of advances to offshore pro-
ducers. Any reasoned assessment of the
relation of costs and benefits of the ad-
vance payments program involves mani-
festly different calculations for offshore
and onshore advances. The complete
failure on the part of the FFC to focus
on this issue is a failure to seck answers

Moreover, the Commission declined to
respond to submissions by New York
which cast doubt on the need for ad-
vances to spur acceleration of the explo
ration and development of offshore re-
Berves In the most recent proceeding
New York cited the statement of a ma-
jor pipeline executive that the need to
recoup amounts expended on offshore
leases generated strong pressures for
prompt development of reserves. This
is in addition to New York's reference to
an Exxon statement that there is no
"shortage of exploration and develop-
ment capital for the offshore areas of
the United States," " The significance
of the Commission's failure to come to
grips with the separate problems posed
by offshore advances is highlighted by
the data that the great bulk of total
advance payments has been concentrated
in the Southern Louisiana Area, a region

that includes substantial offshore gas production."

B.

Treatment of Advance Payments
Which Result in Acquisition of a
Working Interest

[8] In successive orders, the Commis-
sion has reversed its position whether to
give rate base treatment to advances
which lead to the acquisition of a work-
ing interest by the pipeline. In Novem-
ber 1971, Order 441 denied rate base
treatment to all such advances." In De-
cember 1972, Order 465 allowed the in-
clusion in the pipeline's rate base
account of advances resulting in a work-
ing interest in producers affiliated with
the pipeline." In December 1973, Order
499 authorized rate hase treatment for
advances yielding a working interest in
either independent or affiliated produc-
crs,"

New York consistently opposed
rate base benefits where a working in-
terest was obtained because that work-
ing interest "compensates the pipeline
for its expenditure, and there is no basis
for contending that the cost of the pipe-
line's investment should be borne by its
consumers." N

New York alternatively requested that
inclusion of advances in the rate base be
accompanied by a corresponding credit
reducing pipelines cost of service in the
event a working interest procured with
the advance generated a return, all to
the end that the pipeline's stockholders
would not benefit at the expense of con-
sumers."7
In Order 441 the Commission
required a reduction in the pipeline's cost
of service for any realization resulting

for $975,000,000 of the $1,269,000,000 total
advances committed); Southern Louisiana
Area Rate Proceeding. 40 FPC 530, 545
(1968)

93. See 46 FPC at 1180

PUBLIC SERV. COM'N, STATE OF N. Y. v. FEDERAL POWER CO. 353

Cite as 511 F.2d 3 (1975)

from "[e]conomic interests other than
working interests received as a result of
making advance payments, where the re-
lated advance payments have been ac-
corded rate base treatment." "
The
FPC found that "while it is equitable for
the companies to earn on advance pay-
ments necessary to contracts for sup-
plics, it would, however, be inequitable
to deny any excess benefit from such
advances to the companies' consumers
through reduction of the
of
cost
service." "
In denying a similar credit
for the benefits of a working interest
atemming from advances included in the
pipeline's rate base, the FPC did not ad-
dress the problem of inequity or attempt
to explain how it distinguished working
interests from other economic interests.
All the Commission stated was this:

Most of the parties responding [to]
the proposal to credit the benefits of a
working interest to a pipeline's cost-of-
service opposed the provision. We
In order to stimulate and en-
agree.
courage pipeline production, the pipe-
lines should be permitted to retain
these benefita.

Order 499 is not objectionable merely be-
cause the rate base treatment given to
working interest advances reflects a
change of policy. The legal system docs
not compel rigidity, or bureaucratic in-
flexibility, least of all in an area like
energy policy where flexibility may be
essential in the public interest. It is
the genius of the administrative process
to be flexible in response to observed
developments, and an agency may
"switch rather than fight the lessons of
experience." 183

101.

However, the process of change in
agency policy must be one that serves
and does not erode the principle of rea-
soned decision making. We quote from
an carlier decision of this court:

An agency's view of what is in the
public interest may change, either
with or without a change in cireum-
stances. But an agency changing its
course must supply a reasoned analysis
indicating that prior policies and
standards are being deliberately
changed, not casually ignored, and if
ал agency glosses over or swervea
from prior precedent without discus-
sion it may cross the line from the
tolerably terse to the intolerably

mute, 194

While here the agency's vice was not
complete inattention to its prior policies,
its discussion is so perplexing as to sow
doubt whether this is a process of ren-
soned policy making, with a change in
direction put in effect for a navigational
objective, or the confusion of an agency
that is rudderless and adrift.

Specifically, the FPC relied on the
same policy-of providing equal treat-
ment to pipeline producers and independ-
ent producers-to justify each of the
three different positions taken in Orders
441, 465 and 499. In Order 441 the Com-
mission relied on the policy of equal
treatment (announced in Opinion 568) to
withhold rate treatment from all work-
ing interest advances. Order 465 in-
terpreted Opinion 568 as resting on a
desire to encourage "intensified explora-
tion by pipeline producers,' 194 and found
that this desire, and the limited freedom
of pipeline-affiliated producers to negoti

103. See New Castle County Airport Comm'n
v. CAB, 125 US App.D.C. 268, 270, 371 F.2d
733, 735 (1966), cert. denied. 387 U.S. 930, 87
S.Ct. 2052, 18 L.Ed.2d 001 (1967).
104. Greater Boston Television Corp v FCC.
supra note 51, 143 U.S App D.C. at 394, 444
F 2d at 832 (footnotes omitted)
103.

See 46 FPC at 1180, referring to Pipeline
Production Area Rate Proceeding. Opinion
No. 368. Docket No. RP66 24. 42 FPC 7.38
(1969), aird sub nom City of Chicago v FPC.
supra e 49

106.

See 45 FPC at 1553

354

511 FEDERAL REPORTER, 2d SERIES

ate agreements to develop gas with others, made rate base treatment appropriate when a working interest was retained by a pipeline affiliate. In Order 499 the Commission pulled itself up by its bootstraps, and combined the change authorized in Order 465 and the policy of equal treatment of Opinion 568 to justify rate base treatment of advances result ing in working interests in independent producers. Other than noting that the cost to the consumer was no greater, the FPC did not explain why the special considerations which arguably pertain to pipeline producers call for rate base treatment in the distinct case of working interest advances to independent produc

We cannot say on the basis of the
present record that the Commission has
given reasoned consideration to the
treatment which should be given ad-

107. See Order 499, supra note 6, at 6-7, Supp. JA 137, 138.

108. Mobil Oil v. FPC, 417 US. 283, 94 S.Ct. 2328, 2356, 41 L.Ed.2d 72 (1974), quoting Permian Basin Area Rate Cases, 330 US 747, 767, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). 109. See, eg, Greater Boston Television Corp.. v. FCC, supra note 51, 143 U.S.App.D.C. at 393, 444 F.2d at 851.

vances resulting in the acquisition of working interests.

UNITED STATES v. DAVID
Cito as 611 F.2d 305 (1975)

has neglected to provide a reasoned and
responsive explanation of its decision to
continue the advance payments program
and to expand the scope of the advances
eligible for rate base treatment.

[11] Petitioner urges that these ina-
dequacies and the accelerating cost of
the program to the gas consumer require
that we couple any remand to the Com-
mission with a prohibition against capi-
talization of certain types of advances
pending Commission findings with sub-
stantial record support. In response to
this suggestion, it suffices to adapt the
words of the Morgan cases, and to say
that a reviewing court should not view
the agency with a hostile eye, like an
"intruder"; but rather consider that
court and agency combined are "collabo-
rative instrumentalities of justice," each
acting in the performance of its duty
with due regard to the appropriate fune-
tioning of the other in sccuring the stat-
utory objectives. The distinctive author-
ity of the courts of appeals to review the
adequacy of record support for the agen-
cy's orders is coupled with an obligation
to combine supervision with restraint.114
It would not be in the public interest for
us to exercise our judicial authority to
scuttle in their entirety agency programs
which may have certain aspects that pro-
vide a beneficent impact on the gas sup-
ply. It is our expectation that the Com-
mission's on-going evaluation of the ef-
fectiveness of the program will enable it
to give prompt and careful attention to
the problem arcas identified in this opin-

112. See Supplemental Brief for Petitioner
New York at 23. New York requests that
any remand be accompanied with a prohibi-
tion of rate base treatment of future advances
involving (1) offshore areas, (2) acquisition of
a working interest, (3) exploration advances,
and (4) agreements which do not require all
gas to be dedicated to the advancing pipeline.
113.

United States v. Morgan, 313 U.S. 403,
422, 61 S.Ct. 999, 85 L.Ed. 1429 (1941) (Jus-
tice Frankfurter); United States v. Morgan,
307 U.S. 183, 191, 59 S.Ct. 795, 83 L.Ed. 1211
(1939) (Justice Stone).

355

Defendant was convicted before the
United States District Court for the Dis-
trict of Columbia, June L. Green, J., of
assault with intent to commit rape while
armed, taking indecent libertics with a
minor, and sodomy. The defendant ap-
pealed. The Court of Appeals, Bazelon,
Chief Judge, held that in making a com-
petency determination it may be very
useful for trial judge to question both
the defendant and his counsel concerning
the defendant's ability to consult with
his lawyer and to understand the course
of legal proceedings; that detailed inter-

115. In Order No. 499 the Commission an-
nounced a general policy of limiting amounts
includable in the rate base to the producer's
total costs for exploration, development and
production incurred within a reasonable time
after the date of the advances. See note 39
and accompanying text supra. We commend
the Commission's attempt to place an outer
bound on the program by denying rate treat-
ment to excessive advances However, even

if this general policy were refined and en-
forced, it would not justify the continuation
of the program in the absence of substantial
record support.

Leasing ebbs, but drilling to hold high in U.S. gulf

1970-75 -1,068 $11,905,647,283 48 $759,159,527 150,759 2,266.2-14 $164,300,587901 $8,710,166,422 105 $2,272,020,647

TH. CH. AND GAS JOURNAL -JUNE 2.1.