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NATIONAL FUEL GAS DISTRIBUTION CORPORATION v. PENNSYLVANIA PUBLIC UTILITY COMMISSION (08/04/83)

decided: August 4, 1983.

NATIONAL FUEL GAS DISTRIBUTION CORPORATION, PETITIONER
v.
PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT. WILLIAM WELCH ET AL., INTERVENORS. NATIONAL FUEL GAS DISTRIBUTION CORPORATION, PETITIONER V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT. SHARON STEEL CORPORATION ET AL., INTERVENORS. NATIONAL FUEL GAS DISTRIBUTION CORPORATION, PETITIONER V. PENNSYLVANIA PUBLIC UTILITY COMMISSION, RESPONDENT



Appeals from the Orders of the Pennsylvania Public Utility Commission in cases of Pennsylvania Public Utility Commission v. National Fuel Gas Distribution Corporation, Docket Nos. R-79090956 and M-FACG8004.

COUNSEL

Michael W. Gang, with him W. Russel Hoerner, Morgan, Lewis & Bockius, and Heino H. Prahl, Phillips, Lytle, Hitchock, Blain & Huber, for petitioner.

Charles F. Hoffman, Chief Counsel, with him Allison K. Turner, Assistant Counsel, Steven A. McClaren, Deputy Chief Counsel, and Albert W. Johnson, for respondent.

Philip M. McClelland, with him Daniel Clearfield and Norman J. Kennard, for intervenor, Walter W. Cohen, Consumer Advocate.

George M. Schroeck, with him Howard L. Rubenfield and Stephen A. George, Buchanan, Ingersoll, Rodewald, Kyle & Buerger, for intervenor, Sharon Steel Corporation et al.

Mary Ann Rastatter, with her Kenneth C. Springirth, for intervenor, William Welch et al.

President Judge Crumlish, Jr. and Judges Rogers, Blatt, Williams, Jr. and Doyle. Opinion by Judge Rogers.

Author: Rogers

[ 76 Pa. Commw. Page 105]

In these consolidated cases, the National Fuel Gas Distribution Corporation (NFG) seeks review of four orders of the Pennsylvania Public Utility Commission (Commission) entered, respectively, August 28, 1980; September 4, 1980; October 20, 1980; and December 30, 1981.

The Commission's order entered August 28, 1980, disposes of the matter of NFG's Pennsylvania Gas Tariff No. 19, filed by the utility on November 29, 1979, and requesting authorization to collect from its customers additional annual revenues of $21,390,527. The Commission found the proposed rates to be unreasonable and permitted NFG instead to file a tariff or tariff supplement designed to produce an increase in annual operating revenues of $8,549,761. The Commission additionally ordered NFG to submit a proposal for the refund to ratepayers of 80% of its profits from off-system gas sales during a specified period in 1979 and 1980. NFG seeks review of that portion of the order requiring a refund of off-system sales profits.

The Commission's orders entered August 28, 1980, September 4, 1980, and October 20, 1980, refused NFG's request that the increased rates above described be made applicable to service rendered after August 28, 1980, the last day of the seven-month tariff suspension period authorized by Section 1308(d) of the Pennsylvania Public Utility Code (Code), 66 Pa. C.S. § 1308(d) and instead ordered that the increased rates be effective as of October 4, 1980. NFG challenges this decision.

Finally, the Commission's orders entered August 28, 1980, and December 30, 1981, require NFG to refund

[ 76 Pa. Commw. Page 106]

    to its consumers $13,886,062 representing costs associated with the purchase of synthetic natural gas (SNG) from Ashland Oil Company of Tonawanda, New York, which costs the Commission found to be imprudently incurred. NFG also contests this refund order.

Many issues have been raised and thoroughly briefed by the parties. Of these, there appears to be general agreement that the most difficult and important to the parties is that of the refunds ordered on account of the SNG purchases referred to above. We will, therefore, begin with a discussion of the issues related to the SNG purchases, will next address the issue of NFG's off-system sales and we will conclude briefly with a reiteration of our view, recently expressed in another decision of this Court, of the effect of Section 1308(d) of the Code with respect to the effective date of rate increases following a suspension. For the reasons that will appear, a number of other issues do not at this time require our resolution.

I. Costs Related to the Purchase of Synthetic Natural Gas

A. Factual Background

In the early 1970's, Pennsylvania and, indeed, the whole of the United States, faced a projected natural gas supply shortage of unprecedented dimensions which it was believed would persist for at least a decade. The Commission, on February 1, 1972, following investigation, concluded:

Nationwide . . . gas supplies are estimated to equal only 72%, 63% and 55% of the projected demand in the years 1975, 1980 and 1985; respectively. Apparently, demand will exceed supply unless new sources of gas are developed.

Iroquois Gas Corporation (NFG's corporate predecessor) responded in 1972 to the call for development

[ 76 Pa. Commw. Page 107]

    of new gas supplies by entering into a contract with Ashland Oil Company, an unregulated petroleum refiner, by which Ashland agreed to manufacture and Iroquois agreed to purchase for distribution and resale up to 60,000 MCF*fn1 daily of synthetic natural gas to be manufactured from liquid petroleum feedstocks at Ashland's Tonawanda, New York refinery. The term of the agreement was ten years and the initial price to Iroquois of the SNG was fixed at $1.21 per MCF; this price to rise in accordance with formulae contained in the agreement as Ashland's costs of raw materials and other production costs should increase.

Contemporaneously with a corporate reorganization in which NFG assumed Iroquois' contractual liabilities, extensive plant facilities were constructed by Ashland*fn2 and, on May 14, 1974, the agreement became effective. Thereafter, for more than four years, Ashland produced and NFG distributed to its Pennsylvania and New York customers,*fn3 SNG produced pursuant

[ 76 Pa. Commw. Page 108]

    to this agreement. It is undisputed that during at least part of this period SNG suppliers avoided the necessity of curtailing the supply of gas to NFG's Pennsylvania customers. The Administrative Law Judge, in his recommended decision dated July 16, 1980, evaluated these first years of the agreement's operation as follows:

The subsequent history through the winter of 1978 indicates that management of National Fuel Gas Company was farsighted in arranging for alternate sources of natural gas at a time of severe shortage.

The forces which impelled the Commission to examine the agreement between Ashland and NFG in these cases were economic. On December 1, 1978, federal legislation*fn4 relaxing certain pricing controls had the effect of greatly increasing supplies of natural gas to large interstate distributors like NFG and, at about this time, concerted controls on oil price and supply imposed by the Organization of Petroleum Exporting Countries had the effect of greatly increasing the price of the liquid petroleum feedstocks from which Ashland manufactured the SNG. Thereafter, with supplies of natural gas at least temporarily restored and with the price of SNG escalating to over $6.00 per MCF (more than twice the prevailing price for natural gas), NFG's ten-year contractual commitment to purchase Ashland SNG appeared less beneficial than originally envisioned, although NFG's managers persisted in their belief that the SNG supplies produced pursuant to the agreement were necessary safely

[ 76 Pa. Commw. Page 109]

    to meet NFG's projected customer demand for the fuel.

Sometime in 1978, NFG commenced negotiations with Ashland for lower prices for the SNG supplied or for a supplement to the parties' agreement reducing the amount of SNG which NFG was required to purchase. A proposed supplement reducing NFG's required SNG purchases from 18.2 BCF to 14.1 BCF was executed by the parties and submitted to the Commission for approval on April 5, 1979. A similar submission was made to the New York Public Service Commission which regulates NFG's rates and service to its New York customers. No action on the proposed supplement was taken by the Pennsylvania Commission but the New York Commission, by order issued July 13, 1979, disapproved the supplement and further expressed its intention to deny to NFG any future recovery of costs associated with the purchase of Ashland SNG beyond the $.50 per MCF charge in lieu of purchase provided in Paragraph 4.3 of the 1972 contract which is as follows:

The parties, in recognition of Seller committing itself to the manufacture of gas from petroleum feedstocks for sale to Buyer pursuant to this Agreement rather than engaging in other commercial endeavors with respect to such feedstocks, and further, in view of the parties hereby recognizing the difficulty in ascertaining and proving appropriate damages, agree that unless Buyer is relieved from accepting and purchasing gas under other provisions . . . Buyer agrees to pay Seller in accordance with the terms of Article IX hereof for all gas which Buyer is obligated to purchase hereunder but does not accept and purchase the sum of Fifty Cents (50 cents) for each Mcf of such unaccepted and unpurchased quantity of gas

[ 76 Pa. Commw. Page 110]

    which Seller could produce from the Plant Facilities under normal operating conditions.

Thereafter, further negotiations produced a second proposed contractual supplement reducing NFG's annual SNG purchase obligation to 10 BCF with a $.50 per MCF penalty for each of the 8.2 million MCF in reduced annual purchases that this figure represented. In late September, 1979, the second supplement was submitted to both the Pennsylvania and New York Commissions for approval. NFG represented in an accompanying letter that in the light of certain characteristics of Ashland's overall operations, the second supplement "reflect[ed] the currently irreducible minimum cost of retaining Ashland SNG as a supply source." In its order dated October 4, 1979, the New York Commission did not take issue with NFG's assessment but formulated the question before it as:

Whether the security of SNG availability over the next year is worth the present cost of approximately $18 million dollars.

This question was answered in the negative; the New York Commission reasoning in pertinent part:

While we recognize that the [second supplement] now before us offers about $10 million more in savings to consumers than the one rejected in our July 13 Order, we are not persuaded that approval of it would be in the best interest of National Fuel's ratepayers. It remains our view that National Fuel's 1972 contract with Ashland can reasonably be construed to give it the right to reduce the contract quantities of SNG that it takes from Ashland in return for payment of 50 cents per MCF for gas not taken. Moreover, it is clear that National Fuel does not now need to take any SNG from

[ 76 Pa. Commw. Page 111]

Ashland to meet the needs of its customers. It is also apparent from the latest supplement that Ashland is still unwilling to lower its price of SNG to a level more competitive with pipeline gas and that National Fuel is either unwilling or unable to sell the gas at the price being charged by Ashland. It could only market the SNG by averaging its high cost with the lower cost of other supplies requiring its customers, in effect, to subsidize the off-system sales the SNG makes possible. By accepting the latest supplement in these circumstances, we would be requiring National Fuel's ratepayers now to pay a premium of approximately $18 million dollars annually for SNG with the only clear potential benefit to them being some assurance that this source of supply would be available if needed, sometime in the future. Ashland's price for this is simply too high. In sum, we can find no economically sound justification for the continued purchase of SNG at Ashland's price, particularly in light of the terms of the original contract.*fn5

[ 76 Pa. Commw. Page 112]

Following the New York Commission's disapproval, NFG arranged for a meeting with staff members of the Pennsylvania Commission which meeting was conducted on October 15, 1979, and attended by NFG's

[ 76 Pa. Commw. Page 113]

President and Ashland's Group Vice President. There is some disagreement between the parties to the instant appeal as to what, precisely, occurred at this meeting but it can safely be said that members of the Commission's staff advised NFG to obtain a ruling by the Commission on the matter of the proposed second contractual supplement by means of an application by NFG for Commission approval of a revised Gas Cost Rate*fn6 incorporating the SNG quantity and price figures

[ 76 Pa. Commw. Page 114]

    proposed in the supplement.*fn7 The suggested application for Commission action on a Revised Gas Cost Rate Statement No. 2 (GCR -- 2) was made to the Commission by NFG the next day, October 16, 1979, and was approved by the Commission subject to the following caveat on November 18, 1979:

Approval of this reduced rate does not constitute any determination regarding the reasonableness of National Fuel's contract to purchase synthetic natural gas from Ashland Oil,

[ 76 Pa. Commw. Page 115]

Inc. or any supplements thereto. Furthermore, this approval does not affect the Commission's power to undertake any subsequent investigations regarding any of the matters here involved.

The supplement then went into effect and delivery of approximately 3.6 BCF of Ashland SNG was accepted by NFG during the period from November, 1979, through February, 1980. On March 4, 1980, in an order deciding issues raised by a previous tariff revision filing of NFG, the Commission ordered that the matter of the 1972 contract between NFG and Ashland be the subject of full investigation on the occasion of the utility's next general rate increase request.

The opportunity for this investigation was presented in the context of the general rate increase request earlier filed by NFG on November 29, 1979, in which NFG proposed the terms of a revised tariff intended to increase its annual operating revenues by about $21 million. The proposed new rates were suspended by the Commission, an investigation was commenced into their legality and reasonableness, and a decision by Administrative Law Judge (ALJ) Michael A. Nemec -- recommending an annual revenue increase of some $7 million -- was issued on July 16, 1980. This decision, 142 pages in length and dealing in great detail with the many issues of property valuation, rate of return, and operating expenses raised by NFG's tariff filing, further recommends with respect to NFG's purchases of Ashland SNG action similar to that taken by the New York Commission, namely, allowance of recovery in rate charges of costs related to SNG purchases up to and including the period of the GCR -- 2 approved by the Commission on November 18, 1979, but prospective disallowance of costs associated with any future purchases beyond the $.50 per MCF referred to in para. 4.3 of the 1972 agreement.

[ 76 Pa. Commw. Page 116]

The Administrative Law Judge rejected NFG's contention that it should be permitted to continue to make SNG purchases until the end of the contract term in 1984 at the reduced quantities described in its second contract supplement. In support of continued purchases, NFG argued that maintenance of the Ashland gas supply source was necessary to meet anticipated customer demand and that the utility's failure to make such purchases would expose it and, ultimately, its Pennsylvania customers, to unacceptable liability in case Ashland should then bring suit for breach of the 1972 agreement.

On these matters the Administrative Law Judge wrote:

I recommend this Commission in essence adopt the position advocated by OCA [Office of the Consumer Advocate]. No active party to this proceeding, with the possible exception of the Erie complainants, fault [NFG] or [NFG's] predecessor, for originally entering into the contract with Ashland. Both OCA and the New York Commission believe that the contract as initially conceived was appropriate and even commendable under the circumstances then existing. It is simply too much, to my mind, to have expected the management of National Fuel Gas Company in 1972 to have anticipated the coming together of the foreign oil producing states into a powerful block which would then be able to control the price of oil at will. Indeed, the subsequent history through the winter of 1978 indicates that management of National Fuel Gas Company was far-sighted in arranging for alternate sources of natural gas at a time of severe shortage.

I justify my recommendation on the basis that it is no longer reasonable to pass on the

[ 76 Pa. Commw. Page 117]

    costs of Ashland SNG to Pennsylvania ratepayers. . . . [It] is evident from Trial Staff's calculations of the impact of the removal of SNG from the GCR that under present supply conditions, SNG is simply too expensive.

This Commission has never adopted or approved in any manner the NFG/Ashland contract. This Commission has, however, in the past, permitted the recovery of the costs associated with the SNG as being fair and reasonable. It is also far too speculative at this juncture to speculate on [NFG's] potential liability to Ashland. My recommendation is that this Commission exclude all costs of Ashland SNG from the rates to be set in this proceeding and from the GCR3, to be considered in August, 1980. I further recommend that the question of refunds resulting from alleged unreasonableness of the price of SNG in the past, raised by the Erie complainants and Trial Staff, be reserved until [NFG's] liability, if any, is determined.

The Erie complainants . . . seek a total refund in excess of $56 million on a theory that virtually none of the purchases of Ashland SNG have been reasonable or economically justifiable.

In response to the Erie complainants' claim for refunds, NFG has, in addition to a vigorous defense of the reasonableness of the contract with Ashland, plead a four year limitation on the collection of refunds, Public Utility Code, § 1312, and, further stated that all refunds sought here are barred on a theory or principle of Commission made rates.

Trial Staff also urges a refund, but one related to GCR2 as revised ...


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