W. VA. PUB. SERV. COM’N v. U.S. DEPT. OF EN., 681 F.2d 847 (D.C. Cir. 1982)

WEST VIRGINIA PUBLIC SERVICES COMMISSION, PETITIONER, v. UNITED STATES DEPARTMENT OF ENERGY, ECONOMIC REGULATORY ADMINISTRATION, RESPONDENT, SOUTHERN NATURAL GAS CO., ETC., COLUMBIA LNG CORP., ETC., UGI CORPORATION, PENNSYLVANIA GAS AND WATER CO., EL PASO ALGERIA CO., CONSOLIDATED SYSTEM LNG COMPANY, DAYTON POWER AND LIGHT COMPANY, COLUMBIA GAS DISTRIBUTION COMPANIES, ETC., ET AL., GEORGIA INDUSTRIAL GAS GROUP AND GENERAL MOTORS CORPORATION, PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, ATLANTA GAS LIGHT COMPANY, INTERVENORS. GEORGIA INDUSTRIAL GROUP AND GENERAL MOTORS CORPORATION, PETITIONERS, v. DEPARTMENT OF ENERGY, CHARLES DUNCAN, SECRETARY OF ENERGY, AND ECONOMIC REGULATORY ADMINISTRATION, HAZEL ROLLINS, ADMINISTRATOR, RESPONDENTS, SOUTHERN NATURAL GAS CO., ETC., UGI CORPORATION, ETC., COLUMBIA LNG CORPORATION, ETC., PENNSYLVANIA GAS AND WATER CO., EL PASO ALGERIA CORPORATION, WASHINGTON GAS LIGHT CO., PEOPLE’S COUNSEL OF MARYLAND, CONSOLIDATED SYSTEM LNG CO., DAYTON POWER AND LIGHT CO., COLUMBIA GAS DISTRIBUTION COMPANIES, ET AL., ALABAMA GAS CORPORATION, CINCINNATI GAS ELECTRIC CO., ET AL., INTERVENORS. CONSUMER FEDERATION OF AMERICA AND CONSUMER ENERGY COUNCIL OF AMERICA, PETITIONERS, v. ECONOMIC REGULATORY ADMINISTRATION AND DEPARTMENT OF ENERGY, RESPONDENTS, SOUTHERN NATURAL GAS CO., ETC., UGI CORPORATION, COLUMBIA LNG CORPORATION, ETC., PENNSYLVANIA GAS AND WATER COMPANY, DAYTON POWER AND LIGHT CO., EL PASO ALGERIA CORPORATION, CONSOLIDATED SYSTEM LNG CO., WASHINGTON GAS LIGHT CO., PEOPLE’S COUNSEL OF MARYLAND, CHATTANOOGA GAS COMPANY, COLUMBIA GAS DISTRIBUTION COMPANIES, ETC., ET AL., ALABAMA GAS CORPORATION, CINCINNATI GAS ELECTRIC CO., ET AL., GEORGIA INDUSTRIAL GAS GROUP AND GENERAL MOTORS CORPORATION, PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, ATLANTA GAS LIGHT COMPANY, GAS LIGHT COMPANY OF COLUMBUS, INTERVENORS.

Nos. 80-1402, 80-1410 and 80-1437.United States Court of Appeals, District of Columbia Circuit.Argued October 22, 1981.
Decided June 18, 1982.

Page 848

Richard E. Hitt, Jackson, Mich., with whom Robert R. Rodecker, Charleston, W. Va., was on the brief, for petitioner West Virginia Public Service Commission in No. 80-1402.

Morton L. Simons, with whom Charles E. Hill, Washington, D.C., was on the brief, for petitioners Consumer Federation of America, et al., in No. 80-1437.

Robert W. Clark, III, with whom Edward J. Grenier, Jr., Richard P. Noland, David A. Gross, Glen S. Howard, Robert P. Varian, Washington, D.C., and Julius Jay Hollis, Detroit, Mich., were on the brief, for Georgia Industrial Group and General Motors Corp., petitioners in No. 80-1410 and intervenors in Nos. 80-1402 and 80-1437.

Arthur S. Weissbrodt, Atty., Dept. of Energy, for respondents.

James J. Flood, Jr., Washington, D.C., with whom William A. Major, Jr., Birmingham, Ala., was on the brief, for intervenors Southern Natural Gas Co. and Southern Energy Co.

John M. Hill, Giles D. H. Snyder, Stephen J. Small, Charleston, W. Va., and John F. Sisson, Wilmington, Del., were on the brief for intervenors Columbia LNG Corp. and Columbia Gas Transmission Corp.

Michael B. Sheppard, Lowell D. Turnbull and Carmen D. Legato, Washington, D.C., were on the brief for intervenor People’s Counsel of Maryland.

Thomas E. Morgan, Wallace R. Barnes and Allan E. Roth, Columbus, Ohio, were on the brief for intervenors Columbia Gas Distribution Companies.

Peter H. Schiff, Albany, N. Y., Richard A. Solomon and Dennis Lane, Washington, D.C., entered appearances for intervenor Public Service Commission of the State of New York.

J. David Mann, Washington, D.C., entered an appearance for intervenor UGI Corp.

Arnold Fieldman, Washington, D.C., entered an appearance for intervenors Pennsylvania Gas and Water Co. and Chattanooga Gas Co.

Patrick Zailckas-Kremers, Houston, Tex., entered an appearance for intervenor El Paso Algeria Corp.

Lewis Carroll, Birmingham, Ala., Gordon M. Grant and Monte R. Edwards, Washington, D.C., entered appearances for intervenor Washington Gas Light Co.

George L. Weber, Washington, D.C., entered an appearance for intervenor Consolidated System LNG Co.

Richard M. Merriman and Robert S. Waters, Washington, D.C., entered appearances for intervenor Dayton Power and Light Co.

Harold L. Talisman, Washington, D.C., and A. S. Lacy, Birmingham, Ala., entered appearances for intervenor Alabama Gas Corp.

Page 849

James J. Mayer, Cincinnati, Ohio, entered an appearance for intervenor Cincinnati Gas and Electric Co.

John E. Holtzinger, Jr., Washington, D.C., entered an appearance for intervenor Atlanta Gas Light Co.

Petition for Review of an Order of the Economic Regulatory Administration of the Department of Energy.

Before MacKINNON, WILKEY and WALD, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILKEY.

WILKEY, Circuit Judge:

[1] Petitioners in these consolidated cases challenge an order issued by the Economic Regulatory Administration (ERA) of the Department of Energy (DOE) amending a prior authorization to import liquified natural gas (LNG) from Algeria. In granting the authorization the ERA approved renegotiated price terms which amended an existing long-term supply contract by greatly increasing the base price for the LNG and by tying price escalation to the price of imported oil. Because we find that vital elements of the agency’s decision are not supported by substantial evidence, we vacate the ERA’s order and remand for further consideration.

[2] I. BACKGROUND[3] A. The Initial Agreement
[4] In 1969 Sonatrach,[1] the Algerian national oil and gas company, contracted to supply LNG over a twenty-five year period to El Paso Algeria Corporation (El Paso), an American enterprise, at a rate of 1,000,000 Mcf[2] per day, delivered at Arzew, Algeria. El Paso, in turn, would transport the LNG by cryogenic tanker to the east coast of the United States for resale at Elba Island, Georgia, to Southern Energy Company and at Cove Point, Maryland, to Columbia LNG Corporation and Consolidated LNG Corporation.[3] The LNG would be regasified at these points, ultimately finding its way to consumers throughout the regions serviced by these companies.

[5] The 1969 import contract (“Initial Agreement”), as approved in 1972 by the Federal Power Commission (FPC),[4] called for an initial base price of $.0305/MMBTu,[5] f. o. b. Arzew. Twenty percent of this base price was subject to periodic escalation according to an inflation-based formula utilizing two Bureau of Labor Statistics indices.[6] The project required the applicants to construct terminal storage and vaporization facilities at Cove Point and Elba Island (at a combined cost of over $600 million) and the purchase by El Paso of LNG tankers and associated facilities (costing $1.6 billion).[7] For its part, the Algerian government was to construct a liquefaction plant and storage facilities at Arzew. [6] At the time the Initial Agreement was negotiated, the parties anticipated that the construction of Sonatrach’s LNG facilities

Page 850

would cost about $540 million and that deliveries would begin in 1973 or 1974. As it turned out, the Arzew facilities cost over $2.2 billion and initial deliveries, which were still below the contracted volumes, were not made until March 1978.[8] This same time period witnessed dramatic changes in the entire character of world energy supply and demand, driving affected prices skyward at a rate all too familiar to American consumers. The price of LNG followed this spiral, and by early 1979 El Paso was paying Sonatrach only one-fifth as much as other U.S. concerns were paying for natural gas from every other import project.

[7] B. The Amended Agreement
[8] In January 1979, ten months after deliveries had commenced under the Initial Agreement, Sonatrach made it clear to El Paso and the importing companies that Algeria would continue to provide LNG for the project only if the contract price were renegotiated to reflect the sudden and greatly increased prices of energy on the world market. Negotiations between Sonatrach and El Paso ensued, yielding an 11 May 1979 “Amendment Agreement” which provided for an interim increase in the LNG base price from 1 July to 31 December 1979 and established new pricing formulae and provisions to take effect on 1 January 1980. The “Interim Price” was set at $1.75/MMBtu, reduced by a “discount” of $0.60/MMBtu, to an f. o. b. price of $1.15. The base price was to be adjusted on 1 January 1980, and on each July and January thereafter, to reflect changes in the base price of “competing fuel oils.”[9] [9] C. Proceedings before the ERA
[10] Joint application for agency approval of the amended contract was made by the three importing companies on 18 May 1979. Acting against rigid deadlines set by the Amendment Agreement,[10] the ERA issued, on 22 August 1979, an opinion and order[11]

Page 851

approving the interim price provisions of the renegotiated contract. At the same time, it announced that no decision concerning other aspects of the Amendment Agreement would be made without a further examination of the many issues involved.

[11] A prehearing conference was held on 13 September 1979 “to explore and delineate procedures which may be appropriate to identify and resolve the range of issues . . . which the parties believe may be appropriate for hearing and decision.”[12] The ERA concluded that procedural due process required an evidentiary hearing — which also had been demanded by the intervenors in the case — but at the same time made it clear that it would not permit such a hearing to interfere with meeting the 31 December deadline for decision.[13] The prehearing order established a schedule for the development and submission of testimony and exhibits and set forth four principal issues, as well as examples of encompassed subissues, as to which evidence could be submitted: [12] (1) the reasonableness of the price term contained in the Amendment Agreement:

(a) the availability of reasonably priced alternate supplies in sufficient quantity to replace the gas supply;
(b) the availability of such alternate supplies in the appropriate time period;
(c) the effects of disapproval of the contract amendment on the applicants, their supplier and customers, and the end-users of this gas supply.

[13] (2) The reasonableness of the proposed escalator:

(a) the reasonableness of the Platt’s OIL-GRAM price indices;
(b) the accuracy of the price of No. 2 and No. 6 low sulphur fuel oil in New York Harbor as a reflection of the cost of alternative energy sources in the areas served by the applicants.

[14] (3) The reasonableness of the bases for amending the 1969 Initial Agreement including:

(a) the suppliers’ increased costs;

(b) other factors which warrant an increased price; and
(c) the public benefits from approval of the Amendment Agreement.

[15] (4) The impact on the U.S. balance of payments.[14] [16] The prehearing order placed upon the applicants the burden of demonstrating, upon these issues, that approval of the application would be consistent with the public interest. The order also permitted any party advocating incremental pricing of the LNG to submit evidence in support of that position, and placed upon them the burden of demonstrating that any such pricing was practicable and in the public interest, to include addressing at least two issues:

1. Whether this gas would clear the market if it were incrementally priced, and
2. The effect of incremental pricing on end-users.[15]

[17] Evidentiary hearings commenced on 30 October 1979 and continued for nine days. Two additional weeks were permitted for party briefs, and opportunity for oral argument was denied. [18] On 29 December 1979 the agency issued DOE/ERA Opinion No. 11,[16] announcing the ERA’s determination that, on balance, the price terms of the Amended Agreement were reasonable and that the LNG importation as revised was not inconsistent with

Page 852

the public interest.[17] The agency thereby approved the amendment to the prior import authorization, conditioned only upon a requirement that the imported LNG would be subject to incremental pricing under rules issued by the Federal Energy Regulatory Commission pursuant to Title II of the Natural Gas Policy Act of 1978.[18] Imports beginning 1 January 1980 were base priced, per the contract, at $1.94/MMBtu.

[19] As it turned out, the effects of the ERA’s approval were short-lived. Deliveries under the contract were unilaterally suspended by the Algerian government around 1 April 1980, when El Paso refused to agree to yet further price increases demanded by Sonatrach. Government-level negotiations are currently underway.

[20] II. DISCUSSION
[21] Although no single petitioner or intervenor disagrees with all aspects of the ERA’s decision in Opinion No. 11, there are few (if any) elements of that decision which have escaped the collective challenge of the many parties before this court who oppose the Amendment Agreement. Rather than to discuss the many contentions separately — an approach which would lead to issues which need not be resolved at this time — we adopt a more structured approach of first defining the standards guiding our review and then scrutinizing the ERA’s process and decision against those standards.

[22] A. The Standard of Judicial Review
[23] We are faced here with an agency decision which is lodged firmly in that “hybrid” area of administrative action which is neither pure adjudication or fact-finding on the one hand, nor pure policy-making on the other. Our consideration of the matter therefore must be governed by two basic principles: The first is that we must recognize the broad policy-making role of the ERA and afford the agency “the same deference to its expertise that courts generally owe to the specialized boards and commissions created by the Congress to deal with complex and difficult problems in the field of economic regulation.”[19] The second, a limiting gloss on the first, is provided by the relevant Natural Gas Act itself: “The finding of the Commission [read Administration] as to the facts, if supported by substantial evidence, shall be conclusive.”[20] Thus, the deference owed to the ERA’s fact-finding function is limited to those aspects of the decision which are supported by substantial evidence. [24] At their essence, these two rules are simply particularized applications of a third principle, founded in the fundamental requirements of the APA and applicable to our review of all agency activity, that an administrative finding, conclusion, or action must be held unlawful if it is, inter alia, “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[21]

Page 853

[25] The net result is a “mixed” approach, calling on the one hand for scrutiny of the evidentiary support for the Administrator’s findings of fact, but tempered on the other hand by a recognition that when Congress decided that regulation of the natural gas industry was necessary, it entrusted it “to the informed judgment of the [then Federal Power] Commission, and not to the preferences of reviewing courts.”[22] The Supreme Court has offered the following summation of a court’s responsibilities in reviewing agency action under the Natural Gas Act:

First, it must determine whether the Commission’s order, viewed in light of the relevant facts and of the Commission’s broad regulatory duties, abused or exceeded its authority. Second, the court must examine the manner in which the Commission has employed the methods of regulation which it has itself selected, and must decide whether each of the order’s essential elements is supported by substantial evidence. Third, the court must determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable.[23]

[26] The third “element” of this process — a limited substantive review — is not to be mistaken for a responsibility to rebalance the competing interests at stake in a particular application proceeding. As Justice Harlan made clear in the next sentence, “The Court’s responsibility is not to supplant the Commission’s balance of these interests with one more nearly to its liking, but instead to assure itself that the Commission has give reasoned consideration to each of the pertinent factors.”[24]
This court itself has described this reasoned consideration as “the ultimate issue in judicial review of [agency] determination.”[25] [27] In resolving this “ultimate issue” in this case, we recognize that the ERA’s decision to permit the LNG imports in question was a product of a detailed and difficult analysis of both fact and policy. However, and notwithstanding the deference owed to the agency’s consideration, we cannot allow the ERA’s order to stand. Although we cannot say that the agency’s action, taken in the abstract, necessarily exceeded its broad statutory authority, we do find that factual conclusions vital to the agency’s detailed consideration are not supported by substantial record evidence, as they must be. [28] B. The ERA’s Authority under the Natural Gas Act
[29] Before turning to a discussion of our concerns over the evidentiary basis for the ERA’s decision to approve imports under the Amendment Agreement, it is helpful to examine the statutory basis for ERA activity. [30] The authority and relevant standards guiding the ERA’s regulation of natural gas imports, originally the responsibility of the FPC,[26] are rooted in the plain language of

Page 854

section 3 of the Natural Gas Act (NGA) of 1938. Section 3 provides,

After six months from June 21, 1938 no person shall export any natural gas from the United States to a foreign country or import any natural gas from a foreign country without first having secured an order of the Commission authorizing it to do so. The Commission shall issue such order upon application, unless, after opportunity for hearing, it finds that the proposed exportation or importation will not be consistent with the public interest. The Commission may by its order grant such application, in whole or in part, with such modification and upon such terms and conditions as the Commission may find necessary or appropriate, and may from time to time, after opportunity for hearing, and for good cause shown, make such supplemental order in the premises as it may find necessary or appropriate.[27]

[31] Although the history of the NGA does not fully reveal Congress’ intent in enacting the particulars of section 3,[28] there is no

Page 855

reason to believe that the purposes behind the grant of broad regulatory authority over the importation and exportation of natural gas are in any way inconsistent with the general purposes of the NGA — to protect the consuming public from exploitative practices of the natural gas companies.[29]

[32] Section 3 is for the most part unchanged from the earliest drafts of the Act,[30] and although Committee reports and congressional debates offer no explanation for even the few changes that were made, including modifications to the standard guiding Commission action under the section, the changes are not such that they resist the processes of common sense. For example, whereas under earlier drafts the agency’s power extended only to exportation of natural gas (under “transportation to a foreign country”), the section as finally adopted included both exportation and importation. Thus, the standard under initial drafts that the Commission could deny an application only upon a finding that “the proposed transportation would impair the sufficiency of the supply of natural gas within the United States,”[31] was changed to one obviously more consistent with the requirements of agency review of both export and import proposals: denial of an application must be based on a finding that “the proposed importation or exportation will not be consistent with the public interest.” [33] The Supreme Court has stated that “public interest” is properly framed by the purposes of the pertinent regulatory statute: “Thus, in order to give content and meaning to the words ‘public interest’ as used in the Power and [Natural] Gas Acts, it is necessary to look to the purposes for which the Acts were adopted.”[32] As stated briefly above, the courts have long recognized that the purposes of the Natural Gas Act, including section 3, are to “protect consumers against exploitation at the hands of natural gas companies.”[33] In other words, Congress’ intent was to “afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.”[34] [34] While many cases calling for a review of agency action against this intent relate specifically to the regulatory power, now in the FERC, over the sale price of natural gas in interstate commerce under section 7 of the Act, this court has observed that “[t]he

Page 856

Commission has long regarded Section 3’s `public interest’ standard and Section 7’s `public convenience and necessity’ standard as substantially equivalent.”[35] This is not to say, however, that there are not important differences remaining in how the standards are to be applied to actions taken under the respective sections.

[35] Agency authorization is a statutory prerequisite, under section 3, to any importation or exportation of natural gas, just as a certificate of public convenience and necessity is required by section 7 before a party may engage in interstate activity in the industry. Contrary to section 7, however, section 3 sets out a general presumption favoring such authorization, by language which requires approval of an application unless there is an express finding that the proposed activity would not be consistent with the public interest. Section 3 therefore differs significantly from other sections under the NGA which condition agency approval upon a positive finding that the proposed activity will be in the public interest.[36] This distinction was recognized early by the Fifth Circuit in Cia Mexicana de Gas v. FPC,[37] which offered the following comparison between the relative standards under sections 7 and 3:

A certificate of public convenience and necessity [under section 7] requires as a condition to its granting that the commission make a positive finding of consistency with the public interest.
An export [or import] permit [under section 3], on the other hand, must be issued unless the commission makes a negative finding, and it may not be doubted, that the authority of the commission to grant a . . . permit is certainly as broad as its authority under the certificate section.[38]

[36] Furthermore, that portion of the section which empowers the regulating agency to grant an application “in whole or in part, with such modification and upon such terms and conditions as the Commission may find necessary or appropriate,”[39] affords the ERA an obvious and significant flexibility in its basic approval function. [37] This court recognized the broad scope of section 3’s regulatory authority in Distrigas v. FPC,[40] a case involving the FPC’s jurisdiction over a company which it had authorized to import Algerian LNG. The controversy

Page 857

in Distrigas was rooted in a 1948 case, Border Pipe Line Co. v. FPC,[41] in which this court had distinguished “interstate commerce” from “foreign commerce” for purposes of the NGA, and had reversed an FPC finding that a pipeline company located in Texas and exporting gas to a customer in Mexico was subject to the certification requirements of section 7. Although we held in Border that the FPC’s sole source of regulatory jurisdiction over exported gas was section 3, and thereby rejected the Commission’s argument that foreign commerce was to be counted as interstate commerce for purposes of the Act and that a certificate of public convenience and necessity for both the export service and the pipeline facilities involved was necessary under section 7, we did not outline any requirements for review of an application under section 3.

[38] The particular controversy in Distrigas arose over the FPC’s requirement that Distrigas file for a section 7 certificate to construct and operate LNG import facilities which, unlike the facilities at issue in Border, were also linked to interstate pipeline networks.[42] Distrigas argued that the FPC’s requirement violated the foreign commerce/interstate commerce distinction made in Border, that the Commission had no jurisdiction over the facilities under section 7 and therefore that it could not require a certificate of public convenience. The FPC argued, on the other hand, that “unless its interstate commerce jurisdiction [was] held to extend to all sales of imported natural gas and the facilities related thereto,” there would result “the sort of `attractive regulatory gap’ that Congress intended the Natural Gas Act to fill.”[43] It contended that if the Border opinion unavoidably contributed to this regulatory gap, it should be overruled.[44] [39] This court declined to accept the FPC’s urgings that Border’s
foreign commerce/interstate commerce distinction should be overruled,[45] but we also rejected Distrigas’ position that the Commission had no power to require the certificates. We concluded that the broad authorization under section 3 to modify import authorization as required by the public interest afforded the FPC all the jurisdiction necessary to require certification as it had:

Under Section 3, the Commission’s authority over imports of natural gas is at once plenary and elastic. . . . [W]e find it fully within the Commission’s power, so long as that power is responsibly exercised, to impose on imports of natural gas the equivalent of Section 7 certification requirements both as to facilities and — what we suspect is of more vital concern to the Commission and to petitioners — as to sales within and without the state of importation. Indeed, we think that Section 3 supplies the Commission not only with the power necessary to prevent gaps in regulation, but also with flexibility in exercising that power — flexibility far greater than would be the case were we to hold that imports are interstate commerce,

Page 858

automatically and compulsorily subject to the entire panoply of Section 7’s requirements.[46]

[40] Clearly, the use of such power is to be governed by section 3’s own standards, rather than those of other sections. [41] The DOE Act’s restructuring of the administrative framework did not alter the flexibility of this statutory authority under section 3. The FPC’s broad general power to condition permits as “necessary or appropriate” was transferred to the Secretary of Energy, who included it in his delegation to the ERA.[47] The language of this delegation evidences an anticipation that the ERA might impose conditions which would overlap with areas — such as the pricing structure of natural gas — over which FERC normally would have jurisdiction:

In exercising the functions [of determining whether importation or exportation of natural gas is not inconsistent with the public interest], the Administrator may attach such terms and conditions as he shall determine to be necessary to make the import or export not inconsistent with the public interest, which terms and conditions the FERC shall include in any order it may issue which authorizes the import or export pursuant to Delegation Order No. 0204-26.[48]

[42] The Supreme Court has recognized this need for regulatory flexibility in more general terms:

[An agency] created to protect the public interest must be free, “within the ambit of [its] statutory authority, to make practical adjustments which may be called for by particular circumstances.”[49]

Page 859

[43] We have found it unnecessary in the past, even as we do now, to attempt to define the precise bounds of this flexibility.[50]
Rather, as this court noted in Distrigas,

[i]t is for the Commission in the first instance to determine, after reasoned consideration and on the basis of substantial evidence, whether and in what manner to exercise its flexible Section 3 power, and this determination will in turn be subject to the normal review processes provided in the Act.[51]

[44] We now arrive at the critical point. The decisive issue here is that the “normal review processes” encompass a determination of whether necessary findings are based on substantial evidence, and whether, in all other respects, the decision was the product of a deliberate and reasonable process. It is to this examination that we now turn. [45] C. The Substantial Evidence Requirement of NGA’s Section 19
[46] As this court has before stated, it is the concept of “reasoned decisionmaking” that is “in essence the keystone of the Rule of Administrative Law.”[52] It is therefore this court’s ultimate function, in reviewing administrative decisions, “to assure that the agency has given reasoned consideration to all the material facts and issues.”[53] This scrutiny must include, in actions taken under the NGA, a determination of “whether each of the order’s essential elements is supported by substantial evidence.”[54] While the substantial evidence requirement of NGA section 19(b) does not empower us to criticize the wisdom of the fundamental policy judgments which may underlie an agency’s decision, we may, and do, require that an agency rely on more than unadorned assertions that it has exercised its expertise on a particular issue. The findings of fact necessary to the agency’s analysis and decision must be supported on the record. [47] It is apparent, upon considering the ERA’s discussion of the many (admittedly difficult) issues raised in its examination of the Amendment Agreement, that the ultimate rationale for “reauthorizing” imports from the El Paso project was the agency’s determination that there was an overall national need, particularly in light of worldwide energy shortages, for increased supplies of natural gas. It is this conclusion coupled with an obvious concern that the entire project would be jeopardized by any action that would give the Algerian government an excuse to cut off deliveries, which is used to support virtually every element of the ERA’s decision, from the approval of a renegotiated contract excusing Algerian performance at lower prices,[55] to its approval of the renegotiated price and escalation

Page 860

provisions themselves.[56] It follows from the extent of the agency’s reliance on this single conclusion that, if the ERA’s finding of a justifying national need is not sustainable on the record, the entire analytical structure of its rationale is without foundation and the decision must fall.

[48] 1. The ERA’s Finding of “Need”
[49] The ERA admitted in its opinion that, notwithstanding that

[a]ny attempt to evaluate the need for specified volumes of LNG at the proposed increased rate over an 18-20 year period is an attempt at fortune telling, . . . it is both necessary and appropriate to evaluate as best we can, particularly for the near future, whether there is a need for this supply of LNG at the increased price.[57]

[50] In previous cases involving the importation of LNG, the DOE/ERA made clear that the “need” necessary to justify approval of a particular project could be established only by a clear showing of regional need — i.e., a need on the applicants’ particular pipeline systems that cannot be met by domestic gas supplies. Thus, while not ruling out the importation of LNG, the ERA stated in a December 1978 opinion[58] that care must be taken in authorizing any new LNG imports to ensure that the gas supply was clearly necessary to meet domestic gas consumption requirements.[59] The agency described as the preferred test of regional need a demonstration that distribution companies would be willing to contract directly for the imported supplies. It expressly rejected as insufficient the companies’ showings or projections of contractual obligations to deliver gas:

[W]here regional need is assessed, ERA will look for a demonstration of end-user market need, as opposed to a showing of an interstate pipeline company’s contractual obligations to deliver gas. The latter evidence would generally be an unreliable indicator of regional need, insofar as it does not reflect impacts of energy conservation measures, conversion to alternate fuels by low priority customers, and self-help measures taken by end-users and gas distribution companies.[60]

[51] Elsewhere, the ERA noted,

[T]he best test of a particular regional or subregional market for an import is the degree to which gas distribution utilities will directly contract for the proffered gas supplies. Moreover, reliance on decisions by state-regulated entities whose utility obligations tie them directly to consumer and community needs will promote flexibility; whereas exercising Federal authority to impose the consequences of pipeline companies’ LNG purchases on their consumers tends to stifle competition. Accordingly, ERA maintains a presumption in favor of directly committing imported LNG to state-regulated distribution companies or end-users, unless

Page 861

there is a clear, overriding national need shown for a different project structure.[61]

[52] In addition, the ERA stated that it must be demonstrated that the imports would not adversely affect the development of proximate domestic supplies, the rapid development of which was described as the highest priority of national energy policy.[62] [53] The agency gave no indication at the outset of this case that it intended to deviate from this precedent. To the contrary, the only need-related issue included in the ERA’s pre-hearing order as “appropriate for submission of evidence at the . . . hearing” was obviously regional in nature: “What would be the effects of disapproval of the contract amendment on the applicants, their supplier and customers, and the end-users of this gas supply.”[63] Ultimately, however, the agency’s decision was not based on a conclusion that the applicant pipelines needed the LNG. Reliance was placed instead upon a finding, based only upon official notice, that there was a national need for the gas. [54] We are not satisfied that this conclusion justifies the ERA’s otherwise unexplained break with precedent. The failure of such justification calls into question the reasonableness of its entire decision in this case. [55] Clearly, the evidence offered in the application proceedings did not establish for each of the applicants a regional need for the LNG, even to the ERA’s satisfaction. The ERA noted that “there is no uniformity among the three applicants regarding need for this LNG, according to the evidence in the record.”[64]
Among the three applicants, only one — Southern — demonstrated any then-current need for the imported LNG. Although Consolidated and Columbia both offered projections that the LNG would be needed in the future, the ERA concluded that these supply and requirement projections were “likely to have overstated the potential need for LNG due to conservative assumptions regarding availability of gas from domestic sources, . . . and a decrease in consumption resulting from increased conservation.”[65] In fact, according to the agency itself, the record showed not only a surplus of available natural gas but also that the applicants’ prior importations of LNG had restrained domestic gas production.[66] Consolidated had turned back available domestic gas in quantities equivalent to the LNG it was importing and was decelerating its efforts to develop domestic natural gas from leaseholds in Appalachia and Louisiana.[67] Columbia had similarly turned back relatively inexpensive domestic natural gas from the Southwest and had not availed itself of the opportunity to purchase domestic gas in the intrastate market, despite encouragement from the ERA and FERC that such purchases be made to relieve an oversupply that was threatening to shut in domestic gas production.[68] [56] Not only were projections of delivery commitments from at least Consolidated and Columbia deemed by the ERA to be insufficient to justify the LNG importation, but customer surveys by each of the companies showed a marked unwillingness by distribution companies to contract directly for the purchase of the Algerian gas.[69] Under Tenneco, the applicants’ failure to demonstrate a regional need in the form of a willingness by these companies to purchase the imported LNG directly should have led the agency to deny the application. It did not. In the final analysis, the agency granted the import authority in spite of
the

Page 862

applicants’ failure to demonstrate a collective need for the LNG It simply substituted for the otherwise required showing of regional need its own finding of a national need for the gas.
The opinion’s conclusion on the issue is telling:

[W]hile it has not been shown conclusively that all three of the applicants’ systems need these gas supplies at this time, we find that the incremental increase in the total U.S. energy supply as a result of these LNG deliveries is important in fulfilling an overall national need for additional gas supplies, and that these particular supplies will directly or indirectly find their way to regions of the country where a need for additional supplies exists.[70]

[57] Unfortunately, this finding of an overall national need for additional gas supplies is made without reference to any supporting record evidence. The agency’s opinion states simply that the “realistic conclusion as to the need for this gas” was the result of official notice, which the agency felt “compelled” to take, of “some fundamental features of today’s energy situation.”[71] Although the opinion does not make clear what “fundamental features” it was officially noticing, it does refer briefly to “the tight international energy supply situation, which may potentially be further exacerbated by recent events in Iran and elsewhere.”[72] [58] We recognize that the expertness of an agency, expressed as official notice or in some other form, may in some instances be an adequate substitute for substantial evidence where this standard applies, as it does here. This has been held to be so, for example, for “judgmental or predictive” facts where complete factual support in the record for an agency’s judgment is not possible.[73] We do not find this principle applicable in this case, however. The finding of national need is so fundamental to the entire posture adopted by the ERA in this case, including its departure from analysis and policy announced in prior cases, that it must be based on identifiable factual evidence. [59] We are not insensitive to the difficulties inherent in the ERA’s decision. The agency was obviously under some time pressures and no doubt proceeded as it did with an eye to the possibility that even a perfectly acceptable contract could be jeopardized — and the entire El Paso project with it — by undue delays in the administrative process. In this context, the apparent haste with which the evidentiary proceedings were held, and even the agency’s reliance on its conclusion of national need for the LNG, might have been understandable — perhaps even barely supportable — had the energy situation been as critical as the opinion presumes. There are important indications, however, independent of our 20-20 hindsight,[74] that even at the time of the ERA’s deliberation in this case, the national energy picture, particularly that of natural gas, and DOE policy relative thereto were such that they offer no justification for the ERA’s hasty, and in many ways haphazard and overly presumptive analysis. [60] We cannot overlook that the ERA’s reliance only on the “fundamental features of today’s energy situation” to find a national need for the expensive Algerian LNG departs in many ways from DOE policy, evidenced only a year prior, calling fo close evaluation of proposals to import natural

Page 863

gas. Although an agency is not necessarily bound to precedent,[75] it is consistent with protecting the public from arbitrary and capricious decisions[76] to require at least a reasonable and contemporaneous justification for departures therefrom.[77] The ERA break with precedent and policy in this case is not sustainable on the record.

[61] Shortly after passage of the National Energy Act,[78] the DOE determined that it was necessary to review and publicize the gas import policy in light of (1) the enhanced development and production of domestic gas expected as a result of the Natural Gas Policy Act,[79] (2) the reduced demand for gas resulting from the prohibitions on gas use under the Fuel Use Act of 1978,[80] and (3) the efforts in gas conservation prompted by higher natural gas prices. This policy was evidenced in two December 1978 opinions denying applications to import LNG.[81]
The ERA not only announced that approval of an application to import gas supplies was dependent upon a showing of regional need,[82] but it also required applicants to demonstrate that the imports would not affect the development of proximate domestic supplies.[83] [62] The ERA sought to distinguish this case from the Tenneco
decision on grounds that the El Paso project was not new, but had already been authorized by the FPC and substantial investments committed thereto. We agree that the commitments and interests of investors should not be ignored,[84] and that the reliance of customers, if it exists, on an established source of gas might also be made part of the agency’s balancing of relevant considerations. However, these factors, inherent as they may be in the ERA’s attempt in this case to distinguish precedential decisions merely on the basis that the project was not new, do not satisfy the fundamental inquiry of whether there is a need
for the gas. The ERA itself admitted that the finding of need made earlier by the FPC was irrelevant to its reevaluation of the import contract;[85] that it had to find that there was still a need for the imported quantities at the higher price.

Page 864

Thus, as far as “need” was concerned the project was a new one.

[63] The Secretary of Energy authoritatively reaffirmed the policy approach taken in the Tenneco and El Paso Eastern decisions in an address on 9 January 1979,[86] stating that close examination of the need for and impact of (LNG) imports was a deliberate and carefully thought-out change from the more permissive attitude that prevailed prior to passage of the National Energy Act. The rationale offered for this shift included language which deprives the ERA of any justification which it might have found even a year earlier in its notice of a critical national energy shortage:

After the 1973-74 embargo and the natural gas shortage of 1976-77, an attitude of desperation developed with regard to gas supplies which made long-haul, high-cost LNG appear more attractive than was truly the case. The overall cost of LNG may be no lower in the long run than synthetic gas, domestically produced. The balance of payments costs and the potential risks are obvious. . . . LNG has the potential disadvantage of shutting in lower-cost domestic production. Overall this is a prospect markedly less attractive than the others. We should not shut the door to LNG, but we should turn to it only if other, more attractive, lower-cost sources of supply do not materialize.
. . . Above all, we must recognize — as we failed to recognize before the passage of the Natural Gas Policy Act — that we are under no immediate pressure. We have the opportunity to develop our policies intelligently, as uncertainties about domestic supply are reduced, and as our understanding about prices and availability of alternative supplies is enhanced.[87]

[64] The Secretary thus attached little continuing importance, as a matter of policy, on a worldwide energy shortage. In fact, he described as “essential” a goal of ridding the national market of a short-term natural gas surplus of one trillion cubic feet, brought about in large part by the Natural Gas Policy Act, in order to prevent a “dampening effect on incentives” for domestic production.[88] [65] We do not purport to offer these observations as dispositive of the issue of national need. We intend by our reference to the Secretary’s statement only to demonstrate that, even if official notice might have properly been taken of the tight energy markets of the 1970’s, this notice alone was an inadequate substitute for the substantial evidence upon which the ERA’s finding of national need — which provided the binding thread to the whole of its rationale for approving the Amendment Agreement — should have been based. The issue of national need was not even included in the prehearing order and the agency gave no indication whatsoever that it would take official notice of the matter. There was therefore no offering of evidence by any party on either side of the issue of national need.[89] It is not a matter of th weight of

Page 865

the evidence; there was simply no record evidence to weigh.

[66] It is apparent that the agency simply moved too quickly on the issue of need — evidencing more an attitude of desperation than the careful examination and judgment which this key issue required. [67] 2. “National Need” and “Public Interest”
[68] The lawfulness of the ERA’s reliance on a broad national need for increased quantities of natural gas is questionable for reasons other than the failure of substantial evidence. As noted at the outset of our analysis, the ERA’s regulation of natural gas imports or exports is limited — as well as guided — by a standard of a consumer-based “public interest.” It is true that the ultimate standard is consistency with, and not necessarily direct service to, this “public interest,” and we do not suggest that the ERA necessarily acted outside its statutory power in attempting to satisfy what it perceived to be a broad national interest in greater supplies of natural gas. Certainly there is a broad range of factors besides the ultimate costs to the consumers which must play a part in the ERA’s decisions on import applications. These factors include the security of supply, effects on U.S. balance of payments, and national and regional needs, as well as costs.[90] Nevertheless, the delicate balance which must be struck among these several factors does not excuse the basic standard. The very fact that it is in a position to make energy policy and decisions which may impact on broad international relations and economics, or on national interests other than consumer welfare within limited geographic areas, makes it even more important for the ERA to keep at least one eye upon the consumers likely to be affected by a proposed action. That does not mean that the consumers’ interests must always prevail. But they must be recognized. There is every indication that this class was ignored altogether in this case. [69] Inherent in the ERA’s conclusion that the El Paso LNG would satisfy a national — even if not a regional — energy need, was a presumption that the domestic natural gas turned back by the pipelines purchasing the imported LNG under the Agreement would naturally find its way into areas where there was a need for the natural gas.[91] [70] Although the argument is raised by intervenor PCM and others that this presumption is unsupportable on the record,[92] we find greater fault in the ERA’s failure either to acknowledge or to justify the effect that the substantial price increases under the new import authorization would have

Page 866

on consumers within at least the Consolidated and Columbia systems.[93]

[71] Even if we were to adopt the presumption that domestic gas displaced regionally by the imported El Paso LNG would then be made available to meet needs in other areas, the consumers ultimately benefitted by this turn-back — i.e., those who actually need the gas — would bear none of the economic burden of the increased costs of the imports. The ERA’s decision thus has the highly inequitable effect of imposing the full cost of the expensive imported gas, not upon those who actually need the increased supplies, but upon consumers in areas where cheaper domestic gas is available. The ERA’s attention to a broad “national interest” simply caused it to ignore its ultimate responsibility to a geographically narrower “public interest.” [72] In short, the ERA seems to have taken significant liberties with the consuming public in order to preserve the El Paso project, no doubt concerned for the extensive investments made. Of course, the fact of considerable American investment should not be ignored. It is possible, at least in the hypothetical instance, that the amount of the potential loss of investment in such a massive undertaking as the El Paso project, a portion of which may be passed on to consumers in the form of certain fixed costs,[94] may, when added to any adverse effects of losing the supply itself, exceed the burden on those same consumers of increased commodity costs. But if this is to be the rationale for a decision to salvage a project by meeting the supplier’s demands, then the agency must say so, and justify it. The potential burdens of project failure are noted in the agency’s opinion, but no comparison of these costs with the burdens of increased natural gas prices resulting from the ERA’s approval of the renegotiated contract is ever offered.

[73] III. CONCLUSION
[74] Parties challenging the ERA’s decision in this case have raised many more issues than we have addressed in this opinion. It is unnecessary for us to answer all questions raised to determine that the agency’s order cannot stand on the justification offered in the lengthy opinion. Except to the extent that the ERA has relied on national energy needs, its departure from precedent and prior natural gas policy are unexplained. And to the extent that findings of a national need for the imported LNG are necessary to the decision, it is not supported by substantial evidence. Although the ERA did not exactly rubberstamp the amendment to the import contract, it also did not give the scrutiny to it which the situation required. It simply failed to put the parties to their proof, especially as to what the true supply situation was in this country in 1979. The agency simply moved too quickly, and did so at a time when such haste was unnecessary. The ERA is bound under section 3 to protect the American consumer and there is little evidence that it did so in this case.

[75] Although we vacate the ERA’s order in this case, we expressly offer no opinion as to the ultimate rights of the consumers who have challenged the agency’s action. Were it not for the fact that deliveries at the increased prices under the amended contract were actually made over a three-month period in early 1980, this case would clearly have been mooted by the Algerians’ subsequent refusal to honor even the amended contract. There is no doubt among the parties that any new supply contract resulting from government-level negotiations now underway will require a new application to and full examination by

Page 867

the ERA.[95] The only question awaiting resolution of this case is whether or not the affected consumers are entitled to a refund of “excessive charges” paid for gas delivered between January and April 1980. This issue may now be directed by proper procedure to the appropriate agency.

[76] Order Vacated and Case Remanded.