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North Penn Gas Co. v. Federal Energy Regulatory Commission

May 13, 1983

NORTH PENN GAS COMPANY, PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, CONSOLIDATED GAS SUPPLY CORPORATION, CORNING NATURAL GAS CORPORATION, NEW YORK STATE ELECTRIC & GAS CORPORATION, INTERVENORS



ON PETITION FOR REVIEW OF ORDERS OF THE FEDERAL ENERGY REGULATORY COMMISSION DATED JANUARY 16, 1981 and MARCH 29, 1982

Author: Weis

Before: SEITZ, Chief Judge and WEIS and BECKER, Circuit Judges

Opinion OF THE COURT

WEIS, Circuit Judge.

In arriving at the fair rate a natural gas company may charge its customers, the value of the product in its inventory is a significant factor. In this petition for review, a pipeline company contends that its current higher costs for gas should be used to determine the value of its "stockpile." The Federal Energy Regulatory Commission determined that the original cost of the gas should be used instead, and ordered refunds of rates based on the company's higher valuation. Finding the agency's action to be within its statutory authority, we deny the petition for review.

On April 30, 1979, petitioner North Penn Gas Company filed revised tariff sheets with the FERC seeking an increase in its rates for the sale of natural gas. The Commission suspended implementation of the proposed increase until November 1, 1979 and set the matter for hearing. The parties resolved all of the issues by stipulation except the amount of working capital allowance for gas in storage. After receiving evidence and testimony on that matter, an ALJ determined that North Penn's formula for valuing its gas inventory was not appropriate for rate-making purposes. He prescribed a modification that resulted in a lower rate increase than that proposed by the company.

The Commission affirmed the ALJ's decision in January 1981 and directed that North Penn make refunds for the overvaluation of gas inventory for the period after November 1, 1979. On March 29, 1982, the Commission denied the company's application for rehearing.

North Penn appeals, contending that the FERC erred in rejecting its computation of the stored gas allowance in favor of the one adopted by the ALJ. The company also argues that the Commission lacked authority to order a refund in this case. We consider the contentions seriatim.

I

Over the years, North Penn has accumulated a substantial amount of natural gas which it keeps in storage. During the winter months, when customer demand is highest, the company draws on its stored supply to supplement gas bought for immediate resale. In the warmer months the inventory represents a substantial investment by the company and fair rates must provide for a return through inclusion in the rate base of an allowance designated as part of the working capital.

The price of natural gas has increased substantially in recent years, and this has triggered the controversy between the parties. In simplistic terms, the dispute is whether the beginning gas inventory should be valued at the higher, current price as North Penn contends, or at the lower, original cost as the FERC decided.

The component of the working capital allowance attributable to stored gas is set out in an FERC regulation as "the average of 13 monthly balances of . . . gas for current delivery from underground storage." 18 C.F.R. ยง 154.63(f) (Statement E) (1982). A beginning balance and the balance in each of the succeeding twelve months provide the thirteen monthly balances used in the formulation.*fn1 Gas purchased and placed into storage is referred to as "an injection"; gas removed from storage for sale is "a withdrawal."

The computation begins with North Penn's volume of gas in storage as of December 31. The Commission uses the original cost of that volume as the beginning value balance. For each month during the ensuing year, the amount of injections into and withdrawals from storage are valued at the average LIFO*fn2 cost of gas for the test year. To determine the worth of the total gas in storage at the end of each month, an adjustment based on the net value of injections and withdrawals for the month is made to the previous month's balance.*fn3 Since injections and withdrawals average out over the years, the balance of gas remaining in storage at the end of a year is assumed to be the same as in the beginning.*fn4 The balance for each of the twelve months and the beginning balance are then added together and the sum is divided by thirteen to produce the working capital component.

North Penn followed a somewhat similar method, with the significant difference that the gas in storage was valued at current prices, not actual cost. The company used as the beginning balance the current value of the gas in storage as of December 31. The balance for each of the other months was determined by taking the amount of gas in storage at the end of the previous month, adjusting it by the net amount of injections and withdrawals ...


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