Valley Gas Company, Petitioners, v. Federal Power Commission, Respondents, Tennessee Gaspipeline Company et al., Intervenors, 487 F.2d 1182 (D.C. Cir. 1973)

Harold L. Talisman, Washington, D. C., with whom Harry S. Welch, Houston, Tex., and Harry S. Littman, Washington, D. C., were on the brief, for intervenor Tennessee Gas Pipeline Co.

Francis H. Caskin, Washington, D. C., was on the brief for intervenors New England Gas and Electric Assn. and Air Products and Chemicals, Inc.

John W. Glendening, Jr., New York City, was on the brief for intervenor the Berkshire Gas Co., et al.

Before LEVENTHAL and WILKEY, Circuit Judges, and RONALD N. DAVIES,^*  Senior Judge, United States District Court for the District of North Dakota.

WILKEY, Circuit Judge:

This case arises on petition for review of an order of the Federal Power Commission¹  which permitted the Tennessee Gas Pipeline Company, a division of Tenneco Inc. (Tennessee), to abandon certain liquified natural gas (LNG) facilities²  for the purpose of selling them to the New England Gas and Electric Association and Air Products & Chemicals, Inc. (NEGEA). As the basis for allowing such abandonment, in accordance with Section 7(b) of the Natural Gas Act,³  the Commission found that "the public interest will be best served by granting Tennessee's application."⁴  Finding that conclusion to be supported by substantial evidence, and to have been based on legally appropriate criteria, we affirm the Commission's Order.

On 26 July 1965 the Commission issued a certificate of public convenience and necessity authorizing construction and operation of an in-ground storage LNG facility near Hopkinton, Massachusetts.⁵  This facility had been requested by Tennessee's customers with a view that it would help to provide "peak-shaving"⁶  natural gas service during the winter months, by means of evaporating gas which had been liquified during the off-peak season and stored underground. Not only would such a large centralized facility spare Tennessee's various customers the expense and inconvenience of building their own LNG peaking facilities, it would also, it was hoped, result in a lower overall cost of gas.⁷ 

The liquefaction of natural gas for storage in the in-ground tanks was commenced early in 1967, in anticipation that redelivery of the gas in the form of peaking service to customers who had contracted for such service could start in the fall of 1967. Unfortunately, despite continuous attempts to fill the storage tanks, an unexpectedly high "boil off" rate held the effective storage level to one-sixth of the planned capacity.⁸  Commencement of peaking service was impossible in the face of that technological problem; extensive efforts to find a solution were unsuccessful.

Faced with this failure, Tennessee proposed an additional investment in above-ground tanks of equal capacity and filed an application to amend its certificate to that effect. However, since such a change would add dramatically to the cost of service, Tennessee conditioned its proposal on the willingness of its customers to purchase volumes of natural gas from the aboveground project at higher rates, sufficient to render it economically feasible. The customers were willing to purchase only one-sixth of the necessary volume.⁹  Therefore, Tennessee entered into a contract to sell its facilities to NEGEA,¹⁰  and applied for authority to abandon the original project in order to be in position to sell the facilities.

The only one of Tennessee's customers to oppose abandonment was Valley Gas Company (Valley). Unlike many of the prior customers, Valley was not one of those prior contractors for LNG service who would be receiving peaking service, at least in some amount, from NEGEA.¹¹  Valley claimed that, as a condition of approval of the abandonment, Tennessee should be ordered to provide it with some sort of substitute service essentially equivalent to that which it would have received had Tennessee's project been a success.

On 20 April 1971 the Presiding Examiner ruled that the abandonment application should be unconditionally granted. He deferred disposition of Valley's request for substitute service until the second phase of the administrative proceedings, which would also deal with the proper accounting treatment to be given to Tennessee's unrecovered costs. By order of 21 July 1971 the Commission affirmed and adopted the Examiner's decision. The Commission approved the delay of decision on Valley's claim, noting that the Phase II hearings were by then already completed and that "fairness to New England LNG users compels our prompt decision in Phase I."¹² 

We find that the Commission's order permitting abandonment was supported by substantial evidence and premised on proper criteria. The standard to be applied by the FPC in such cases is hardly a model of clarity and detail. The Natural Gas Act provides that abandonment shall be allowed only if permitted by "the present or future public convenience or necessity."¹³  However, the key elements in the decision must obviously be the provision of the maximum supply of gas, at the lowest possible rate, consistent with the physical and economic realities of the industry. The Commission clearly applied the appropriate test in this case.

There is no question that Tennessee's project, as originally certificated, had foundered on insurmountable physical defects encountered in the structure of the in-ground reservoirs. If the Commission had disallowed abandonment, it would in effect have been deciding to require Tennessee to press its application for amendment of the certificate, despite the fact that Tennessee's new aboveground storage proposal lacked customer support. Given the lack of support, the Commission could not ignore the fact that Tennessee's proposal would have involved greater cost and delay than the readily available alternative represented by an approved sale of the facilities to NEGEA.¹⁴ 

Since the applicable statutory standard is the present or future public interest, the Commission quite properly refrained from recriminations and concentration on hindsight in reaching its decision.¹⁵  The question before the Commission was not what might have or should have been done to make the inground LNG storage project a success, but rather what course was now best for all the customers of gas in the New England region. In that light, the advantages of the NEGEA proposal were just as important as the disadvantages of Tennessee's new plan.

With regard to those customers who would be receiving LNG service from NEGEA (largely Worcester and New Bedford-but many others as well for a while), there was an advantage in cost.¹⁶  By buying Tennessee's liquefaction facilities, and building its own storage tanks, the NEGEA group was eliminating the middleman as to those functions.

It is true that those customers, most importantly Valley, who would not receive any LNG service from the Hopkinton plant, if abandonment were approved, found this reduction in cost to their neighbors cold comfort. However, the alternatives available at the crucial time were not higher cost gas to all as opposed to lower cost gas to a few. To the contrary, Tennessee's LNG plant remained in its moribund state,¹⁷  unable to commence operation in the near future-whereas NEGEA's purchase of the plant promised to allow much more rapid utilization of these facilities than would have been possible even under Tennessee's proposed amendment authorizing above-ground storage operations, to the greater good of all New England gas customers.

The advantages of more rapid commencement of service from NEGEA stemmed from legitimate and very real considerations. Tennessee would have had to commence construction of aboveground tanks from scratch once its application for amendment was granted, a process requiring approximately 19 months.¹⁸  In contrast, NEGEA already had adequate above-ground tanks in construction near the site.¹⁹  Although Tennessee had obtained authority from the Massachusetts Department of Public Utilities in 1965 for its in-ground LNG reservoirs, it had not received similar authority for its above-ground proposal. Nor, in the alternative, had it obtained a variance from the Zoning Board of Appeals of the Town of Hopkinton, as required by Massachusetts law.²⁰  In contrast, NEGEA's above-ground storage tanks had received all necessary approvals.²¹ 

In addition to the cost and timing advantages of NEGEA's proposed project, the Commission also properly considered the lack of a market adequate to support Tennessee's proposal at the increased rates required by the additional investment in above-ground tanks. We accept Valley's contention that in an abandonment proceeding the applicant (Tennessee) bears the burden of showing absence of market support, just as an application for amendment of a certificate of public convenience and necessity normally requires an affirmative showing of the degree of market support which exists for the change.²²  No matter where the burden rested, the record amply supports only one possible conclusion-Tennessee could not obtain adequate customer commitment at the increased rates. On being apprised of the cost of the new proposal, the vast majority of the prospective customers decided to make alternative arrangements for peaking service, at least for most of their required supply. In light of that situation, compelling Tennessee to proceed with its application for amendment of the certificate would have been an illegal exercise in futility.

To support its claim that the Commission's order was founded on legally impermissible criteria, Valley cites Michigan Consolidated Gas Company v. FPC.²³  In that case, the court found that abandonment of gas service could not be legally justified merely because the pipeline, Panhandle, "prefer [red] to use that gas for more profitable unregulated sales, or because it want [ed] to be rid of what it consider [ed] a vexatious servitude."²⁴  However, Michigan Consolidated involved a supply of gas which had already been committed, on a long term basis, to an established service. Further, there were "strong indications that one of Panhandle's primary purposes in seeking abandonment [was] to shift gas from regulated to unregulated sales."²⁵  Michigan Consolidated, the only affected customer, vigorously opposed the abandonment and pointed out that uncommitted gas was available to meet the pipeline's contractual obligation. In contrast, Tennessee seeks abandonment of a service which was not even begun, the difficulties with which obviously stem from technological problems rather than a desire to avoid regulation, in the context of bona fide gas shortage requiring general refusals of new service commitments,²⁶  and with the support of all but one of its prospective customers.

As previously mentioned, the Commission ordered the proceeding split into two parts.²⁷  Valley further ascribes as error the Commission's approval of the Examiner's decision to defer resolution of Valley's claim to substitute service until Phase II.

The basic phasing order was not timely challenged,²⁸  nor do we think it could have been opposed successfully, given the imperative need to rule on NEGEA's plan in time for the 1971-72 winter season.²⁹  As to substitute service, there are indications that the Examiner and the FPC would have decided against Valley if resolution of Valley's claim could not have been deferred.³⁰  But we do not put our decision on that ground, for we think it was entirely reasonable, so far as Valley's objection was concerned, to defer that matter. This deferral gave Valley an opportunity to amplify the record so as to show that it was in a class that was equitably entitled to better treatment than Tennessee proposed, even though, as Tennessee convincingly showed, neither the certificate nor any contractual obligation bound it to supply Valley with LNG peaking service, or a substitute therefor.

We uphold the ultimate determination on this issue in Tennessee's favor in No. 72-2106, Valley Gas Company v. FPC, issued today, and we there also reject Valley's contention that the delay resulted in an improper shift of the burden of proof. Although deferring Valley's substitute service claim did create some potential procedural problems, we find there was no error prejudicial to Valley Gas.IV. Conclusion

In its approval of the Examiner's decision in Phase I, the Commission properly put great emphasis on the amply supported finding that operation of the facilities by NEGEA presented the prospect of a full, immediate, and less costly use to supply peaking service to the New England consuming public, whereas an order to Tennessee to proceed would have led to further delay of a project already convincingly lacking in market support. Accordingly, the Commission's order is

Affirmed.