United Gas Pipe Line Company, Petitioner, v. Federal Power Commission, Respondent (two Cases), 551 F.2d 460 (D.C. Cir. 1977)

Petitioner, United Gas Pipe Line Company (United), seeks review of two Federal Power Commission (FPC or Commission) orders disallowing certain of United's costs of service included in two of its general rate filings. The issue presented for decision is whether the FPC could reject United's rate items by summary disposition without holding a hearing to determine their lawfulness. We find, for reasons discussed below, that United was entitled to a hearing under section 4(e) of the Natural Gas Act. 15 U.S.C. § 717c (1970).

In 1970 the Commission initiated an advance payment program to stimulate the exploration and development of natural gas supplies for the interstate market.¹  The program, which was terminated at the end of 1975,²  encouraged pipeline companies to provide interest-free loans for exploration and development by gas producers. The pipeline companies were allowed by the Commission to include the amounts so loaned in their rate bases as costs of providing service.

United's rate filings which are the focal point of this litigation included similar costs.³  United developed two alternatives to the FPC's advance payment program. Under the only alternative used,⁴  it entered into "Agreements" with gas producers to help arrange third-party financing of exploration and development, and to pay the cost of that financing. In return, United is entitled to the gas from acreage developed with the funds it has helped raise. The benefits derived from these Agreements were allegedly comparable to those under the advance payment program: interest-free capital for the producer and the right to acquire gas produced from the prospect for United and its customers. United also contends that under its Agreements these benefits are achieved at a significantly reduced cost to the customer and risk to itself. Petitioner's Brief at 10.

The Commission summarily rejected that portion of United's filings covering costs incurred under its Agreements, reasoning that they were not encompassed by the advance payment regulations and therefore contravened established administrative policy. J.A. at 69-70. The Commission explained that the advance payments were necessary to supply capital for gas production whereas under the Agreements, the producers were able to attract exploration and development capital without the assistance of advance payments. J.A. at 70-71. Accepting all of United's allegations as true, the FPC still found United had not made out a prima facie case and a summary disposition was therefore deemed appropriate. J.A. at 70. Rehearing was subsequently denied on this same basis, and United petitioned this court for review. J.A. at 144-45.

Section 4 of the Natural Gas Act⁵  requires pipeline companies to file new schedules for rates or charges with the Commission 30 days prior to their proposed effective date. The Commission's power with respect to a filed increase, such as United's, is clearly set forth in section 4(e), which grants the FPC authority to initiate a hearing as to the lawfulness of the changed rate, to suspend its effectiveness pending decision, and to order refunded that portion of the increase which, after a hearing, it determines to be unlawful.⁶  Consolidated Edison Co. v. FPC, 168 U.S.App.D.C. 92, 512 F.2d 1332, 1339 (1975); Willmut Gas & Oil Co. v. FPC, 111 U.S.App.D.C. 49, 294 F.2d 245, 248-49 (1961), cert. denied, 368 U.S. 975, 82 S. Ct. 477, 7 L. Ed. 2d 437 (1962). The Act does not contemplate then that the Commission may summarily disallow cost of service items included in a new schedule without a hearing. Willmut Gas & Co. v. FPC, supra, 294 F.2d at 249.

The Commission nevertheless argues that no hearing was required in this particular instance because the interest reimbursement provisions in the Agreements contravened the agency's "long-standing policy" of affording rate base treatment only for advance payments necessary to promote capital formation, thus allowing the agency to reject the filing at this early stage. Respondent's Brief at 12, 19-20. While there exists a judicially-recognized exception to United's statutory right to a Commission hearing, it is only applicable to those situations where the facts are not in dispute and the new tariff contravenes valid and explicit FPC regulations or policy. FPC v. Texaco, Inc., 377 U.S. 33, 84 S. Ct. 1105, 12 L. Ed. 2d 112 (1964); United States v. Storer Broadcasting Co., 351 U.S. 192, 76 S. Ct. 763, 100 L. Ed. 1081 (1956); Municipal Light Boards v. FPC, 146 U.S.App.D.C. 294, 450 F.2d 1341 (1971), cert. denied, 405 U.S. 989, 92 S. Ct. 1251, 31 L. Ed. 2d 445 (1972). We find that genuine factual disputes actually do exist between the parties to this litigation and that the interest reimbursement provisions do not on their face contradict any specific Commission policy or regulation. We are constrained to conclude, therefore, that the FPC abused its discretion in refusing to grant United's request for a hearing to consider the lawfulness of its rate filings.

The basic reason for the Commission's refusal to afford United a hearing, as explained in its Order Granting Staff's Motion for Summary Disposition, was that the advance payments were necessary to supply capital for gas production whereas the producers involved in the Agreements were demonstrably capable of independently attracting capital for their exploration and development projects. J.A. at 69-72. This supposition is flawed in two ways, however. Firstly, there is no evidence whatsoever in the record to support the FPC's assumption that these producers could have obtained the necessary capital without the help of the interest reimbursement clauses contained in the Agreements. These clauses were integral parts of a highly complex financing arrangement. Petitioner's Brief at 9, 20. There is no evidence in the record which might indicate either that the Agreements made the producers' capital formation possible, or that the loans would have been forthcoming without such an incentive. This is one factual dispute, then, which might well have been resolved in a hearing.

Secondly, and perhaps more importantly, we have found nothing in the Commission's orders setting up the advance payment program to indicate that the producers who were given such payments had to demonstrate an actual need for them. It is apparent that the Commission instituted the advance payment program merely as a means to enhance significantly the supply of natural gas in the interstate system during a period of critical nationwide gas shortages.⁷  It declared that the program was expected to intensify the development of new sources of natural gas supplies and thus alleviate the supply shortage, but it never expressly mandated that a producer show that but for the advance payments it would not be able to obtain the necessary exploration and development capital.⁸  We think it unreasonable for the Commission now to adopt such a standard for United's interest reimbursement arrangements when they apparently constitute an alternative means of attaining the same goal as the Commission's own advance payment program.⁹  As the FPC orders implementing the advance payment program do not explicitly prohibit this alternative method of providing interest-free capital to producers, and the Commission has not shown that a "policy" of need is inherent in the program or that such a policy is in fact contravened by the Agreements, there is no proper basis for avoiding the statutory hearing requirement.

We note that in its brief to this court, the Commission for the first time proffers still another justification for its summary disposition. It now argues that United's Agreements violated its longstanding rate policy prohibiting suppliers from burdening consumers with costs from which they do not benefit. Respondent's Brief at 13-16. The Commission did not consider this argument in reaching its decision in this case, however; thus, for purposes of this litigation it amounts to nothing more than post hoc rationalization. The Supreme Court has explicitly cautioned that

we cannot "accept appellate counsel's post hoc rationalizations for agency action"; for an agency's order must be upheld, if at all, "on the same basis articulated in the order by the agency itself."

FPC v. Texaco, Inc., 417 U.S. 380, 397, 94 S. Ct. 2315, 2327, 41 L. Ed. 2d 141 (1974), quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168-69, 83 S. Ct. 239, 9 L. Ed. 2d 207 (1962). See also SEC v. Chenery Corp., 332 U.S. 194, 196, 67 S. Ct. 1575, 91 L. Ed. 1995 (1947); City of Cleveland v. FPC, 174 U.S.App.D.C. 1, 525 F.2d 845, 853 (1976). We might also add that the Commission's argument apparently would apply with equal force to its own advance payment program in effect from 1970 through 1975.

We are confident that on remand the Commission will afford United a full and complete opportunity to prove its contentions: for example, that the Agreements effected the same result as the advance payment program and did so at a lower cost to the consumer and at less risk to the pipeline; and that the costs involved were prudently incurred. The Commission, of course, should view the Agreements in the context of the time which produced them--a time of severe natural gas shortage when experimental programs fashioned to alleviate this problem were being implemented. A too restrictive view of alternative methods of meeting this crisis advanced by parties other than the Commission certainly would not be in the public interest.¹⁰ 

As there are genuine issues of material fact yet to be determined, and as the interest reimbursement arrangements, on their face, do not violate any FPC regulation or policy, this case must be remanded to the Commission for evidentiary hearings.

So ordered.