Full opinion text
PER CURIAM: These petitions for review challenge the validity of the Federal Power Commission’s order, establishing “just and reasonable rates,” under Sections 4 and 5 of the Natural Gas Act, for sales of natural gas in interstate commerce from the Texas Gulf Coast producing area. The court remands the order to the Commission for further consideration. The order is composed of two basic parts. The first is the schedule of base area rates. With respect to this, .Chief Judge Bazelon files an opinion for the court, beginning at page 1087 infra. District Judge CHARLES R. RICHEY concurs in this opinion. Circuit Judge LEVENTHAL dissents for the reasons stated in Part VI of his opinion, pages 1063 to 1067 infra. With respect to the second basic part of the order — the system of incentives —and the remainder of the issues in this case, Circuit Judge LEVENTHAL files an opinion in which Chief Judge BAZELON and District Judge CHARLES R. RICHEY concur. Thus, Parts I through V, pages 1051 to 1063 infra, and Parts'VII and VIII, pages 1068 to 1080 infra, of Circuit Judge LEVEN-THAL’S opinion also constitute the opinion of the court. So ordered. LEVENTHAL, Circuit Judge: In the Order before us for review in this case, establishing “just and reasonable rates” under Sections 4 and 5 of the Natural Gas Act, the Federal Power Commission has provided both base rates and’incentive provisions to govern interstate sales of natural gas produced in the Texas Gulf Coast Area. This area consists of 54 Texas counties stretching along the Gulf of Mexico from Louisiana to Mexico. It also includes over 3,560 square miles of underwater continental shelf within state jurisdiction and 20,000 square miles of underwater shelf within Federal domain. The FPC’s approach of fixing gas producer rates by producing area rather than on a company by company basis was approved by the Supreme Court in the Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 344, 20 L.Ed.2d 312 (1968). The order in this area rate proceeding contains unusual features, which are challenged in the several petitions for review filed pursuant to section 19(b) of the Natural Gas Act, 15 U.S.C. § 717r. We shall first outline these features. The reasoning the FPC used in arriving at its results will be examined subsequently, in considering the challenges lodged against different aspects of the Order. I. PROVISIONS OF THE FPC ORDER The centerpiece of the FPC Order prescribing rates — a term used, for convenience, to identify the ceilings put on producers — is the provision for the Base Area Rates. This consisted of what is referred to as a three-vintage maximum rate system, with different maximum prices applied to casinghead and gas-well gas, depending on the date on which the producers contracted to deliver the gas. The prices per Mcf, determined on the basis of cost and noncost factors, depend on the three vintage periods of the contract, and then on the time of delivery, as follows: (1) Gas sold under contracts dated prior to January 1,1961: (i) 15.0 cents prior to January 1, 1965 (ii) 17.0 cents from January 1, 1965 to September 80, 1968 (iii) 19.0 cents from October 1,1968 to September 30,1973 (iv) 20.0 cents on and after October 1,1973 (2) Gas sold under contracts dated on or after January 1, 1961, and prior to October 1,1968: (i) 18.0 cents prior to January 1, 1965 (ii) 18.5 cents from January 1, 1965 to September 30,1968 (iii) 19.0 cents from October 1,1968 to September 30,1973 (iv) 20.0 cents on and after October 1,1973 (3) Gas sold under contracts dated on or after October 1, 1968: (i) 24 cents prior to October 1, 1973 (ii) 25 cents on and after October 1, 1973 In sum, three “division dates” for contracts are set: 1961, 1968 and post 1968. Gas under contracts in each of these periods is given a different maximum price, depending on the delivery date. Thus the above table means that if gas was contracted for prior to 1961 and delivered in 1965, the maximum price would be 170 per Mcf. These base area rates were combined with a moratorium provision on filing increases above the applicable area rates, until January 1, 1976. The commission also found that “The present critical shortage of all forms of energy in the United States and the anticipated rapid growth of demand for natural gas, in particular, makes it imperative to provide incentives to find gas and dedicate that gas to the interstate market.” In view of the critical shortage, the FPC established two incentives : (1) a credit of one cent per Mcf toward discharge of [a producer’s] refund obligations for each additional Mcf of gas hereafter dedicated to interstate commerce prior to January 1, 1976, by an individual producer; (2) increases in the area rates of gas under contracts dated prior to October 1, 1968, from the time prior to January 1, 1976, that the independent producers as a group have dedicated to interstate commerce more than a specific amount of additional gas from the area. In regard to the refund provision, the' FPC Order provides that reserves dedicated for refund reduction, under paragraph (1), may not be counted toward new dedications needed to make the contingent escalation operative under paragraph (2). The contingent escalation in price applies only to increase the base area rates for gas sold under contracts prior to October 1, 1968, and the increases are made on a group basis; after a gross amount of new dedications are made, all producers with pre-October 1, 1968 contracts receive an increase in price. The total new dedications needed and the corresponding increase are as follows: Total New Dedications Base Area Rate Increase 4.000. 000.000 cubic feet .5 cent per Mcf 6.000. 000.000 cubic feet additional .5 cent per Mcf 10,000,000,000 cubic feet additional 1.0 cent per Mcf II. SUPPLY SHORTAGE Since many features of the FPC Order in this ease, particularly the incentive provisions, concern the supply shortage of natural gas, some assessment of the record evidence on this matter should serve as a backdrop to the contentions of the parties. The Commission found that the demand for natural gas was expected to increase faster than the current rate of production. Total demand for natural gas is expected to reach 28.1 trillion cubic feet by 1975, requiring an annual level of domestic production of 27.2 trillion. The Examiner, the Commission explained, had underestimated the possible shortage of supply in arriving at his price proposals. Thus, his opinion indicated that finding-to-production (F/P) ratios would be above unity in the foreseeable future; yet the Commission found that the F/P ratio has been below unity since 1967, and dropping. A second indicator of supply, reserves-to-production, also indicated a shortage. The (R/P) ratio for interstate pipelines in the Texas Gulf Coast area had declined from 14.9 in 1964 to 11.5 in 1969. Less than 18% of the 1969 interstate production came from new sources of supply, reported in the six-year period commencing in 1964. The Commission found that if demands from the Texas Gulf Coast area during the next five years were to be satisfied, it was essential that jurisdictional sales increase from their 1965-1969 volume of 8 trillion cubic feet to 12.5 trillion cubic feet cumulatively for the period of 1971-1975. The Commission believed that to achieve this desired level, its goal for dedications of new reserves from the Texas Gulf Coast to the interstate market should be 20 trillion cubic feet during the 1971-1975 period. The supply shortage of interstate gas reflects, inter alia, the fact that intrastate sales of natural gas are unregulated by the FPC. The demands from the intrastate market, particularly in the consuming states of the Texas Gulf Coast, increased 44% from 1963 to 1969, while interstate production was constant. Taking into account the fact that intrastate prices were often higher than those in interstate sales, due to the unregulated nature of the former market, the FPC stated it had to consider prices which would make interstate demands more competitive. Not only was there a deteriorating reserves-to-production ratio in the area, but the absolute number of proven reserves available for interstate sale was. low — about 1 trillion, as compared with the 20 trillion cubic feet of new reserves the Commission wants dedicated to the interstate market in the 1971-75 period. The supply shortage was the reason given by the Commission in setting its base prices, and in devising its incentive provisions in the proposed rate order. III. STANDARDS OF JUDICIAL REVIEW We turn to the Permian Basin Area Rate Case, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968), to lay the foundation for the standards of judicial review to be used in assessing the merits of the challenges before us. Generally, we must be mindful of our duty to sustain Commission rate levels which are within a “zone of reasonableness.” “A presumption of validity therefore attaches to each exercise of the Commission’s expertise, and those who would overturn the Commission’s judgment undertake ‘the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences’.” These standards, as applied to a particular rate order are a carte blanche for Commission discretion. As Justice Harlan, writing for the majority in Permian, made clear, these broad principles could further be concre-tized as follows: [The] responsibilities of a reviewing court are essentially three. 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 forseeable. Above all, the Court pointed out that “[j]udicial review of the Commission’s orders will therefore function accurately and efficaciously only if the Commission indicates fully and carefully the methods by which, and the purposes for which, it has chosen to act, as well as the consequences of its orders for the character and future development of the industry.” Most of the challenges to the Commission Order in this case involve issues relating to the inclusion of non-cost factors in pricing which are justified on the basis of the shortage of supply. While the task of justifying price methods which depart from pure costs poses difficult problems, due to the difficulty in understanding demand and supply elasticities of natural gas, this state of the art cannot be used as an excuse to offer no reasons for adopting these measures, or to supply reasons which have no basis in evidence and underlying reasoning. Whatever the problems of limitations on availablé knowledge, the Commission is under a duty to apply what knowledge is available, with a bona fide effort to identify both the scope and limitations of available knowledge, and the Commission’s pertinent reasoning. This opinion is organized as follows: In Part IV, we summarize the issues presented. In Part V, we examine producers’ challenges to the general methodology, principally attacking the use of cost based methodology, and specific challenges of particular cost items, as well as other challenges to the rate structure. In Part VII we examine the validity of the Commission’s use of non-cost based incentives, contingent escalation and refund “work-off”, in the rate structure. IV. THE SCOPE OF ISSUES AND THE POSITIONS OF THE PARTIES The Order has been challenged from a multiplicity of points of view. We here set forth a brief overview of the disparte contentions. Subsequently we shall examine the challenges seriatim. The rate structure has been attacked by the parties on a number of grounds: (1) the adoption of a cost-based pricing method is an inadequate response to the gas shortage, and prices on gas were set too low; (2) certain specific elements in the cost-derived prices were unreasonable; (3) the adoption of the moratorium in light of the shortage was unreasonable; and (4) the division date for new gas prices, October 1, 1968, was unreasonable. This last contention is made by the New York Public Service Commission (hereafter “New York”); the others are presented by producer petitioners. As will appear from the opinion of Chief Judge Bazelon, the majority of the court construes the applications for rehearing and the petitions for review filed by both the producers and Public Service Commission of the State of New York as challenging the base rate structure on an additional ground: that, assuming a cost premise for rates, the upward adjustments in the FPC’s determination of costs and in its choice of rate from within the variable range of costs were not shown to be rationally related to the supply problem, either in concept or in amount. Petitioner Blanco Oil Company raises a distinct issue which we shall consider in a separate opinion. Challenges to the incentive provisions of the Order — the contingent escalation of rates on flowing gas, and the provision allowing credits on existing refund obligations — have been made, on different grounds, by New York and by producers. The contingent escalations are claimed by New York to discriminate against new entrants who will not receive the gain realized by old producers on gas already under contract. Old producers without refund liability, such as Mobil Oil, contend that they are subject to unreasonable discrimination because their dedication of new reserves will earn escalations for the entire industry, while other producers, with refunds, will both get an individual benefit from their dedications, by reducing their refund obligation, and share in the industry-wide dedications due to the efforts of other producers. . It is further contended by New York that the bonus arrangement discriminates among pipelines and their customers. They allege that since the bonus for finding new gas is chargeable to gas consumers in proportion to the existing contracts of the pipelines upon which they rely, whether or not their pipeline actually secures any of the new dedications the bonus produces, the provision is unreasonable in failing to correlate higher consumer prices with additional new gas reserves secured by distributors. As to the refund provision, certain producers contend that the reduction provision unfairly discriminates against those who have already made refunds, since they would have obtained reductions, if they had awaited the outcome of this proceeding. This argument is given another edge by the contention that the FPC Order, in effect, prefers the largest refund accumulators. New York argues that new entrants are also disadvantaged by the reduction measure, since they have no existing liabilities which can be reduced by new dedications. Further, New York contends that the provision discriminates against those owéd past refunds, since the FPC Order provides that only 50% of the new dedications used to discharge refund liability is required to go to those to whom the refunds were due. We shall proceed to examine the various challenges. V. CHALLENGES TO THE RATE STRUCTURE A. Challenges to General Methodology The Use of Cost Methodology The most broad-based attack on the rate order challenges the use of cost methodology as an appropriate means of pricing gas under supply shortage conditions. It is argued that a price would be justified for new gas only if it would reasonably be expected to meet the supply objectives formulated by the Commission, and that the “new gas” price in this order does not accomplish this end. Producer petitioners adduce evidence that prices in the intrastate market, which competes with the demand of the interstate market, were as high as 30 cents on new contracts negotiated in the July 1, 1970 to 1971 period. It is argued that the desired level of dedications to the interstate market of 20 trillion cubic feet needed to supply both the interstate and intrastate markets, is not a credible target in light of the fact that total reserve additions in the area for the entire ten-year period of 1961-1970 were only 28.7 trillion cubic feet. We are not prepared to follow these concerns to the point of overturning the methodology adopted by the Commission. First, the Commission did consider the effect that intrastate demand and prices would have on the supply available to the interstate market. The last data available to the Commission showed intrastate prices as high as 24.38 cents per Mcf for a contract dated in 1970. Whereas it is certainly true, as petitioners argue, that the Commission recognized that “the trend of intrastate prices is upward,” the general rate order does provide for a price increase to 25 cents for new gas in 1973. Moreover, the contingent escalation provision means the effective yield on new gas contracts could be much higher, and may lead producers to make interstate contracts even though the price on such contracts will be below that available in the intrastate market. Second, we are not sure what the producers want to put in the place of the cost-based pricing used here by the Commission. Two other techniques of pricing, a discounted cash flow method and a price based on a theory of supply elasticity, formulated in an econometric model, were found by the Examiner to have serious predictive and reliability problems which had led to their rejection in other area proceedings. There is a burden on producers to show that alternative price techniques will lead to a “just and reasonable price.” Third, an analysis of the Commission’s approach, contained in the Appendix to this opinion, shows the 24 cent price is not a purely cost-based price. The supply shortage was reflected in the calculation of the variable ranges for each cost item, particularly the rate of return, and played a central role in the choice of the particular price within the range. Those who may be interested in this point can turn to the Appendix for amplification. In its modification of the Examiner’s methodology, the Commission did depart from the strict cost-based price system used in Permian, but this approach was suggested in the Supreme Court’s opinion in Permian, and specifically approved by the Fifth Circuit in its initial review of the Southern Louisiana Area Rate Proceeding. The Commission used the strict cost-based price as an “anchor,” following our reasoning in the context of individual ratemaking proceedings. The producers’ major point was that they wanted the FPC to discard costs entirely, offering instead an “econometric” approach that would focus on the prices needed to bring out increments of supply. The FPC responded that not enough was known of the methodology of such an economic approach to make it a reliable means of regulation. We cannot say this was error. In the last analysis, as we understand the matter, the underlying principle of economics requires that the determination of price needed to induce desired supply levels requires both some premise of profit necessary to spark management investment and effort, and also some determination or assumption of cost — whether of average cost, or the cost of the (bulk-line) increment of supply, etc. Another option does remain— that of setting the price of natural gas at the market price, or of allowing the market price to govern the “just and reasonable price” of natural gas. A variant of this contention is the submission by the producers that in time of supply shortage, regulation for an area that serves not only an interstate market but also an (unregulated) intrastate market must set the regulated prices as high as the unregulated in order to prevent diversion to the. intrastate market. However, so long as the legislature has assigned the agency the function of regulation of rates, it cannot legitimately execute that function in a fashion which, in fact, is tantamount to total deregulation or non-regulation. Congress did not provide for agency action and court review as a charade. The Commission -has moved closer to this approach with Order 455, adopting an “Optional Procedure for Certificating New Producer Sales of Natural Gas.” This procedure provides that under § 7 of the Natural Gas Act, sellers can negotiate prices on contracts in excess of rates provided in the area rate system for: A contract covering the sale of natural gas in interstate commerce [which] has been executed for gas produced from a well or wells commenced after April 6, 1972; or a contract covering the sale of natural gas in interstate commerce [which] has been executed for gas not previously sold in interstate commerce. . Although we do not reach the merits of the legitimacy of the Optional Order 455, giving sway to market forces, we do note that its combination with the cost-based pricing system of the Rate Proceeding is significant in coping with objections of producers. B. Calculation of “Flowing Gas” Costs The second major, producer challenge concerns whether the price calculated for flowing gas is a “just and reasonable” maximum rate. Claims of alleged failure to resolve disputed cost items The producers object that the FPC failed to resolve disputed cost items. This contention is emmeshed in a stale data problem, caused here by the protracted nature of the proceedings. The producers object that, in updating the Examiner’s cost data, the FPC failed to make updated findings on each cost element for the rate base on flowing gas. “Staleness of the record, however, is not itself a reason for reversal.” Moreover, the FPC eoncededly made an adjustment for the stale data problem;it updated, as a whole, the costs used by the Examiner, first by increasing his base price, and then by escalating this base price over time. The producers argue that each cost item must be updated separately. Whereas recalculation of individual cost items may be desirable, we see no showing that it has led to an unjust and unreasonable ceiling, to an “end result” contrary to the statute or Constitution. The producers made no proffer that updating calculations made one by one would have led to a result significantly different from that reached by the FPC. Claims of lack of findings that rates cover revenue requirements Another contention of the producers, challenging the lack of a finding that prescribed rates will cover revenue requirements, fails for similar reasons. The Examiner found that a 13.4 to 13.7 cents per Mcf rate would cover costs. The FPC found that costs were higher and raised rates accordingly. This cost calculation of course included the profit element of “return” to the regulated producers. The Commission made a further allowance for the generation of capital for future exploratory efforts, both in setting the flowing gas base rate, and in the refund-forgiveness and contingent escalation provisions which supplement the rate structure. This goes to the substance of revenue requirements, and we cannot strain for formalities. Return on flowing gas The producers contend, in the alternative, that the FPC did not actually calculate a rate of return for flowing gas, and the rate of return should be 15%, the same rate allowed for new gas. The Examiner included a 10.5% rate of return in the costs used to calculate the 17.4 to 17.8 cents per Mcf that became the basis of the price on flowing gas for the 1961-68 period. In increasing the base price and allowing for escalations, the Commission, among other justifications, cited increased costs and the need for “a proper rate of return.” 45 FPC at 707. It .is, therefore, difficult to say whether the increased price was based on an increased rate of return or merely increased costs, or what proportion of each. Despite the problem, we can say that there is substantial evidence that the effective rate of return arrived at is at least 10.5% Rate of return is calculated on the base of production investment. That base includes successful well costs, lease acquisitions and other production facilities, but the record makes it reasonably clear that the FPC did not consider these items, for flowing gas, to have increased significantly The result of this analysis of the record (see note 41) establishes that the FPC’s rate of return for flowing gas was at least the 10.5% allowance used by the Examiner. We turn to the alternative argument of the producers, that 10.5% is insufficient, and should be 15%, the same as rate of return allowed on new gas. We pass by both the prospect that the FPC’s prices will yield a rate of return for flowing gas exceeding 10.5%, and the circumstance that the Examiner used the same rate of return for both flowing and new gas. We see no immutable principle that the rate of return on both flowing and new gas must be equal. The time-honored standard for rate of return, formulated in Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 692, 43 S.Ct. 675, 679, 67 L.Ed. 1176 (1923), and approved again in FPC v. Hope Natural Gas Co., 320 U.S. at 603, 64 S.Ct. 281, provides that “return” should be “equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.” This “comparable earnings” standard, which has vitality for rate regulation, was used by the Examiner in calculating a 10.5% rate of return for both flowing and new gas. The Commission increased this figure to 15% for new gas because of its desire to provide an extra incentive for new gas exploration. The same was obviously not required for flowing gas, which did not reflect an investment made “at the same time.” C. Producer Challenges to Specific Cost Items Various producers challenge specific aspects of the FPC’s cost calculations. We discuss the four most significant points they raise. Successful well costs The producers’ attack on calculation of the items of successful well costs is not insubstantial, but does not warrant an upset of this feature of the rate base. They object to the variable cost range of 2.70-4.10 cents per Mcf used by the FPC for new gas on the basis of what it considers underestimated drilling cost per foot figures. The FPC estimated that drilling costs could range from $22.22 to $24.66 per foot, depending on the method of trending data for increased costs. The producers argue that the $22.22 figure was derived from the 1967 Census figure of $24.39, which the FPC adjusted downward for unreported drilling costs of small producers. The FPC made this adjustment on the basis of data reported to Census that these costs were 40% lower than those of the large producers, even though Census did not adjust its own figures because it considered the data based on an inadequate sample and of such poor quality as to be unreliable. The issue does not warrant reversal. The Bureau of Census and the FPC have different functions. Census has the obligation of reporting facts of our economy which may be put to a host of unknown and unknowable uses, and properly errs on the side of conservatism in reporting as fact only that which is knowable. The FPC, engaged in rate fixing, has room for judgment in its use of data beset by infirmities. The FPC proceeded on the premise that for every item of cost, there is a range of reliability in underlying data. The FPC established a variable cost range— to give a better idea of various possibilities it believed could justly be supported by the data. The objecting producers did not deny that small producers have lower drilling costs than large producers, even though the 40% extent of the differential was not reliably supported. Even the $24.39 figure proposed by producers is within the variable range used by the FPC. The FPC chose the high side of the variable range in calculating its new gas price. We see no substantial prejudice. As for the producers’ claim that the high side of the range should be 30 dollars per foot, this is a conclusory statement supported only by a speculative estimate of how high drilling costs are likely to go in the future. Exploration and development costs The producers challenge exploration and development (E & D) costs, as calculated by the FPC for the flowing gas rate. They attack the method the FPC used in sorting out E & D costs assignable to gas exploration from those incurred on oil. This is an old and difficult problem. The FPC adopted the Examiner’s method, allocating costs in proportion to Btu’s produced during a test year, with the Btu’s of liquids increased by a multiplier of 3.4 to indicate comparative values. The producers make two alternative contentions: (1) that the multiplier is arbitrary, or (2) a method of allocation utilizing direct assignments of exploration and development costs, as used in other proceedings, should have been adopted here. As the FPC brief points out, the use of the “modified Btu method” in Permian and Southern Louisiana I, and the direct assignment method in Southern Louisiana II, led the FPC to conclude in those cases that the new methods changed the cost result by only one cent, and that this possible one cent error is more than accounted for “by the range of estimates implicit in the flowing-gas cost methodology.” Compare Other Southwest Area Rate Case, supra, slip/op. at 26 suggesting, but not requiring, Commission reconsideration, where the FPC did not respond to the factual allegation that the direct assignment method would have made a 6.17(5 difference in the flowing-gas rate. Rate regulation is unavoidably approximate in nature. We cannot dictate a choice of formulas. The use of the “Btu adjustment method” was not arbitrary in light of its use in the past, the fact that its results approached those achieved with the newer direct assignments method, and in the context of the broad adjustments used by the FPC in its price determinations. Royalties The producers argue that in arriving at a royalty cost of 14% of the price set for gas, as applied to both the new and flowing gas rate, the FPC assumed, as it had held in Opinion No.-562 (42 FPC 164), that the royalty interest, just like the producers’ working interest, is subject to FPC jurisdiction, and that Commission’s prescribed “area rate” ceilings are equally controlling on the royalty owner. This jurisdictional assumption, as producers correctly point out, was upset in Mobil Oil Corporation v. FPC, 149 U.S.App.D.C. 310, 463 F.2d 256 (1971), cert, denied, 406 U.S. 976, 92 S.Ct. 2413, 32 L.Ed. 2d 676 (1972). The producers extrapolate from our Mobil decision by contending that we held that royalty owners could maintain collateral suits to recover payments based on alleged “current market values,” and therefore royalty payments will exceed the FPC’s assumptions of cost levels. But we observed in Mobil, without reaching the issue, that the fact that “market rate” royalty contracts would be left to the courts, did not portend a necessarily unavoidable conflict with area rates. Indeed, we noted: Without purporting to rule on the matter in any way, we can certainly visualize the possibility that a court confronted with a contention of entitlement to a market price basis higher than the producer’s ceiling would consider it to. run counter to the intention of the parties, unless there is something to rebut the fair presumption that they contemplated interstate movement and market prices compatible therewith [footnote omitted]. Petitioners’ claims are premature. The FPC could not meaningfully reflect an unknown and unknowable increment in royalty costs. “50 BTU gap” The final costing contention involves what producers have labelled as the “50 BTU gap.” In Texaco Inc., 33 FPC 1228 (1964), followed in the Permian proceeding, the Commission established the general principle that a price adjustment is appropriate for varying Btu content of both new and flowing gas: ah upward adjustment, for premium quality, from a level of 1050 Btu per cubic feet, and a downward adjustment, for shortfall in quality, from a level of 1000 Btu per cubic foot. Producers argue that these levels are not supported by the record, and that Btu adjustments both upward and downward should be made from the base of 1000 Btu per cubic foot. The paradigm for the calculation of levels was developed in Southern Louisiana 7. In that proceeding the FPC adopted a base range rather than an exact base, as lessening the need for continual ceiling adjustments and agency monitoring; used the 1000 Btu base as a minimum notwithstanding average deliveries were at 1037 Btu, in order to avoid disturbing established industry practice; and balanced the savings thus accruing to producers by setting an upper level above 1037, put at 1050 as a matter of judgment. This justification for use of a range is reasonable. As'to the location of the range, the producers show even less prejudice in the present case, in view of the Examiner’s finding that the. weighted average of deliveries was at 1047 Btu, even assuming, as the producers contend, that the trend is downward. As for the use of 1000 Btu in Hugo-ton-Anadarko Rate Proceeding, 44 FPC 761 (September 8, 1970), that was a settlement, and did not adopt a principle that must thenceforth be maintained as a standard. D. Challenges to the Division Date and Moratorium, Division Date New York Public Service Commission contends that the October 1, 1968, division date between flowing and new gas is unreasonable, and argues for a later date, giving consumers a lower price (the 19 cents flowing gas rate) on more contract years of gas. The contention is that the allowance for incentive factors to achieve increased supply included in the new gas price of 24 cents can servg no purpose to elicit discovery for gas already discovered and under contract. We have difficulty with the FPC’s rejection of this contention on the basis of “administrative convenience,” that this same division date has consistently been adopted in other area rate proceedings. While it might permit a certain standardization in forms for keeping track of information, certainly any mechanical difficulty involved in keeping in mind different dates of the various rate vintages of gas for the several areas cannot seriously be urged as a legitimate reason for putting a 25% rate increase (between 19 and 24 cents) in effect for deliveries during a two and a half year period. While Permian referred to administrative convenience, that went merely to the eight day period between the start of the Permian Basin Area Rate Proceeding and the date fixed for the commencement of new gas rates. ' We do, however, think that this case may be brought within the reasoning of Permian sustaining the non-correspondence between the division date and the prospective application of the rate order. The Court approved the Commission’s action there establishing a price for new gas in 1965 applicable to gas committed to interstate commerce since January 1, 1961. Although stating (390 U.S. at 798-799) that “[i]t is difficult to see how the higher rate could reasonably have been expected to encourage, retrospectively, exploration and production that had already occurred,” the. Court noted the Commission’s argument that its Statement of Policy issued on September 28, 1960 establishing a 16-cent guideline price .for new gas sales in Permian, plus the commencement of the Permian area rate proceeding itself on December 23, 1960, had created expectations of higher rates among producers which fairness required it to satisfy in fixing the starting date for its new gas-well gas rate. The Court concluded, 390 U.S. at 799, 88 S.Ct. 1344, that these factors provided a “permissible basis” for the Commission’s choice. In 1968, the same year that Permian issued, the FPC stated in Southern Louisiana I that the use of the same division date as was used in the Permian Basin will ensure equality of treatment in this respect among producers operating in different pricing areas — a producer should not be penalized by having a later division date exclude its gas from the new gas category solely because he chanced to be in one area rather than another, unless strong and sufficient reasons are shown for the different treatment. While an argument based on the same treatment for producers in different areas has a certain surface appeal, we think it cannot be pushed too far. The very concept of area rate proceedings produces unequal treatment to some extent: even though nationwide cost figures are used, the Commission has not adopted nationwide prices. Given the time lag in area proceedings, the 1968 division date could recede farther and farther behind the date of an FPC order issued to encourage “new” gas. However, given the 1968 ruling in Permian and the expectations generated by the FPC’s 1968 statement in Southern Louisiana I, (even if not wholly sound), and taking into account the need for some cost increase above 1961 prices if a different division date is taken for new gas, we think an upholding of the FPC action as an application of Permian’s fairness concept marks the course most appropriate for this court. This is not wholly logical, but the Supreme Court knew that in Permian. The Supreme Court noted that it was acting with reluctance; we likewise note our reluctance. If the point is extended too far, it can become a mockery; but if that point has been neared in the cáse before us, it has not been passed. However, it is incumbent on the FPC to reexamine its policies, with a view to breaking this expectation-fulfillment cycle if it serves no legitimate end, if the requirement of reasoned decision-making is to be observed, and the function assigned to FPC of produce rate regulation is to be fulfilled in accordance with law. Moratorium The question remains whether FPC’s imposition of a moratorium on price increase filings until January 1, 1976, was a permissible exercise of its authority. In Permian the Supreme Court accompanied approval of a similar moratorium with the caution, “we intimate no views on the propriety of moratoria created in circumstances of changing costs,” 390 U.S. at 781, 88 S.Ct. at 1367, a circumstance now concededly the forecast for the Texas Gulf Coast Area. Individual producers are not prevented by the moratorium from seeking relief from the maximum rates, as appears from the provisions for special exemptions and the availability of motions for modification or termination. Producers may be correct in arguing that the automatic and contingent escalation provisions on flowing gas do not provide enough flexibility in rates, and will not adequately cover anticipated cost increases. Yet the rate order’s determination of the “just and reasonable price” will only come into conflict with the moratorium provision when, and if, increased costs are not adequately covered by the rates and no relief is granted by the Commission. We need not anticipate a change in circumstances before it occurs. VI. CHALLENGES TO BASE RATES In this part of the opinion I explain why I disagree with .the decision of the majority, reflected in the opinion filed by Chief Judge Bazelon. The reader will have to read Judge Bazelon’s opinion before considering this Section VI of my opinion. If I understand it correctly, the majority has decided to remand the base area rate to the Commission on the ground that the FPC’s increase in the base rate chargeable by producers in the Texas Gulf Coast area is not adequately justified, since the FPC’s selection of a reference point in the zone of cost data was influenced by supply considerations without any determination of the amount of increased supply projected as ascribable to the resulting increase in base rate. Much of what is said in Judge Baze-lon’s opinion is interesting, and should be of interest to the legislators who may come to consider whether the Natural Gas Act of 1938, as previously amended, should be further amended or perhaps repealed. The history of natural gas regulation is particularly valuable for those who have not lived through it, and I confess to a middle-aged and sentimental yearning for the simpler days of yore, and for the problems that were being discussed when I was engaged for a few years in teaching natural gas regulation at New Haven during the late 1950’s. ■ 1. My problem is to discern what Judge Bazelon’s opinion has to say for the ease before us. It might be relevant if there were a petition to review filed by New York on the ground that the base rate -was too low and was inadequately justified. But as is plain from the record, and recognized in one of Judge Bazelon’s footnotes, New York does not present any objection to the base rates, either for new gas or flowing gas. While New York’s application for rehearing did present to the Commission its objection that the Commission had provided “an over-generous price for new gas” (point 9), and had provided only a few conelusory statements that were inadequate to discharge its responsibility “to' discuss in detail the supply to be elicited at the rates established” (point 10) it has not preserved any objection to the base rate in its petition for review. New York stated in its brief (p. 11): The Federal Power Commission in this case has established maximum prospective rate ceilings for new and flowing gas produced in the Texas Gulf Coast area at 24 cents per Mef and 19 cents per Mcf respectively. Thesé rates are each approximately 5.-3 cents in excess of the rates proposed for new and old gas-well gas by its Presiding Examiner in his Initial Decision. However, while New York does not agree with much of the methodology utilized by the Commission in reaching these results, or with a number of the specific findings or absence of' findings made by- the Commission in support thereof, New York has, with the limited exceptions noted below, chosen not to challenge this portion of the Commission’s determination. We have reached this conclusion in the light of the current gas supply situation, which has caused the New York Public Service Commission to impose moritoria on many types of new sales by New York distributors and has resulted in serious curtailment by the interstate pipelines of existing firm obligations of their New York customers, and our belief that levels approximating those here fixed by the Commission could be justified by a proper decision upon a more up to date record. A federal court exists to decide only cases or controversies. When a case enters the federal court system by a prayer to a circuit court of appeals to reverse an order of a federal agency, it is the pleading containing this prayer that presents the controversy between the petitioner (or appellant) and the agency. That pleading of New York contains no objection to the base rate. New York does not ask this court to engage in an academic exercise, and I think settled rules of judicial functioning and administration indicate we should neither do so ourselves, nor require the Commission to do so. 2. Judge Bazelon says that an objection to the base rate has been preserved by the producers. Section 19(b) of the Natural Gas Act provides: “Nc objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission in the application for rehearing unless there is reasonable ground for failure to do so.” This provision is faithfully applied by the courts, see, e. g., Permian Basin Area Rate Cases, supra, 390 Ü.S. at 825, n. 116, 88, S. Ct. 1344 (1968). The objection found meritorious in Judge Bazelon’s opinion is that the FPC erred in selecting a cost predicate for the base rate, albeit within the range of costs as elicited from the testimony (with suitable up-dating), because the “supply” - reason of the FPC for its choice within that range were not adequately supported in its opinion. I now set forth the presentations made by the producers, which show, I think, as to the objection raised by Judge Bazelon, that “such objection” is not the one that was presented by the producers to the FPC. There are numerous produeer-interve-nors before us: While their applications for rehearing differ somewhat one from another, the objections made by the producers adequately appear from the following sample, italics having been added for emphasis. Humble’s application for rehearing states: Although this Application for Rehearing sets out in detail matters which the Commission should, in our view, reconsider, we wish to express at the outset our basic agreement with the approach utilized by the Commission in Opinion 595. For the first time in area rate regulation, the Commission has recognized that the cost calculations on the record are not mathematically precise, but contain arbitrary judgments as to allocation procedures and a wide margin of error in both data and methods utilized (pp. 10-11). The Commission has' also clearly recognized in Opinion 595 that area ceiling prices should serve a supply-eliciting function and that the gap between gas supply and demand has reached crisis proportions (pp. 11-14). The Commission properly found a wide range of current costs as constituting the “zone of reasonableness” for area ceiling prices, and selected a price which it believed to be supply-eliciting (p. 35). These are principles which the undersigned producers have long advocated, and we fully support the Commission’s adoption of them. The concept of escalating prices for gas delivered under pre-1961, and 1961-1968, contracts for different time periods is sound and is supported by the increase in costs which has occurred over this time period as well as by the increasing need for internally generated capital for additional gas exploration. The cutoff dates selected by the Commission are also valid and appropriate, assuming different vintaging is required. The specifications of error which follow deal with what we believe to be improper applications of these principles. (R. 42,025) The Commission correctly recognizes that there is no reliable manner in which it, or anyone else, can forecast the amount of new gas reserves that would be committed to the interstate market as a result of any specific change in rates (p. 14). In this respect the Commission gave recognition to recent evidence concerning the levels of prices in the intrastate markets in the Texas Gulf. Coast Area. As a result of the Commission’s investigation in Docket No. R-389, it was determined that in the' first half of 1970 intrastate prices ranged up to 24.38 cents per Mcf. The Commission recognized that the trend of intrastate prices in the area is upward (p. 37). The Commission’s action in establishing new gas rates at 24 cents per Mcf is clearly erroneous in light of (1) the understatement of the range of new gas cost estimates from which such level was selected; (2) the minimal increase (after adjustment for inflation) which such rate represents over rates which have failed to elicit sufficient supplies; and (3) the inadequacy of such rate to enable the interstate market to obtain gas supplies in this area. (R. 42,028-29) Continental Oil Co.’s application for rehearing concludes (JA 793-4): In view of the critical gas shortage, the need for drastic surgery on previous ineffectual and inadequate efforts is urgent. The Commission needs to re-evaluate its entire area price approach and reject completely the hypocritical pretence of costing. A new regulatory method more in line with the economic realities of the industry needs to be devised. Fundamental to such new method must be recognition of a single price system whereby all gas is priced on a value basis. The price level set by the commission must be sufficient to give incentive for finding new gas. While such incentive may be a matter of judgment, followed by trial and error, it must be at least 30-35$ on Mcf in order to begin to complete [sic] with intrastate levels. Evidence since the close of the record may indicate that such levels are even higher. WHEREFORE, for the foregoing reasons, the Commission should grant rehearing of Opinion No. 595 and upon rehearing modify its area pricing to provide a single price for all gas for all periods of time, regardless of date of contract. Such price should be higher than the “new gas” vintage level established in Opinion No. 595, for the reasons set forth in the Application for Rehearing of Indicated Respondents, and at least in the 30-35$ range to provide any hope of incentive. (R. 42,142-43) The joint brief filed by the indicated producer petitioners states (pp. 32-33): Despite the fact that the Commission recognized that the gas supply shortage was rapidly growing more serious and that this shortage was engendered at least in part by inadequate regulated field prices, it nonetheless “elected to go through the methodology used in earlier cases” (R. 41,884) and utilized the Permian methodology as a “point of departure” (R. 41,885). Having found that such costs are inaccurate within the range noted, the Commission should have discarded them as a point of departure. Failure to do so had the effect of depressing the ceiling rate levels below what the supply evidence indicated, amounting to an abuse of the Commission’s discretion. Should the Court find that the use of such costs is discretionary, then we would further show that the Commission understated the range of costs, and that the limits of the range are actually much higher than noted in the opinion, as disclosed by evidence in the record. Finally, because of the rapidly worsening supply shortage the Commission should have prescribed ceiling rates reflecting the upper end of the range, rather than at the middle or lower end. Under the circumstances here, this was an abuse of the Commission’s discretion requiring a remand. The fact that producers filed an objection or objections to the base rates on the ground of inadequacy of FPC methodology does not mean that it is the same objection as that on which the court is ruling, so that the court can fairly say that “such objection” was presented to the FPC. Judge Bazelon says that the FPC did not adequately set forth a forecast of the new reserves that would be committed. But as the foregoing applications show, the producers’ view is that the FPC correctly recognized that there is no reliable way of forecasting the reserves that can be committed as a result of the price change; and their objection, starting with that premise, is that since basically there must be an exercise of judgment, combined with trial and error, the interstate price must at least be equal to the intrastate price; that the cost range would permit a higher base price; that an incentive price should be nearer the high point of the true cost range; and that a contrary approach is in excess of the FPC’s permissible discretion. AH these objections are far different from the objection found justified in Judge Bazelon’s opinion. 3. If the objection constructed by Judge Bazelon were properly before us, I would not agree with what Judge Ba-zelon has done. It seems to me that what the FPC has done, as a matter of methodology, is not beyond the range of discretion that is properly the Commission’s and is not unreasonable; that there are large areas of government regulation of industry that call for judgment and necessarily admit of considerable imprecision within the “zone of reasonableness”; and that Judge Bazelon’s opinion would constrain the Commission to seek a refinement in methodology that it has fairly indicated is not ascertainable and available. For clarity, I emphasize that I am not here speaking to a situation in which an agency increases a ceiling price for supply reasons without any reference point in costs. This the FPC did not do — and, as stated elsewhere in this opinion, there is firm support for its conclusion that the econometric principles propounded by producers had an appearance of scientific support that was belied by the sponginess of the assumptions and techniques on close examination. If I may put the matter in my own words, raising prices to obtain supplies without any foundation in cost analysis comes close to bargaining with the sellers solely in terms of asking at what price they would be willing to sell. While that may be appropriate for an unregulated market, it has no serious place in a program of government regulation. Similarly, the Act does not permit a charade of regulation that rests in truth on a premise of nonregulation (see supra p. 1057), e. g., by rubber-stamping the prices reached in an unregulated market. As to the issue before us, on the other hand, there are pertinent cost estimates. Now if the evidence shows a reasonably firm cost prediction in a range of, say, 24 cents to 26 cents per Mcf, I see' no objection in principle to a determination by a Government agency along these lines: The range is between 24 cents and 26 cents per Mcf. No exact answer is possible, and the determination requires the exercise of judgment. We cannot know exactly how much more supply will be available at 26 cents than at 24 cents. Any investigation along those lines would reduce itself in the last analysis to an inquiry of sellers, and that is impracticable in view of their claim that a still higher price is what is really needed for supply — a claim that undercuts any meaningful answer as to willingness to sell at the lower price provided by even the highest point in the cost range. Under the circumstances, it is a responsible exercise of judgment to stay within the anchor of a cost range, but within that range to veer to the high side to avoid taking unnecessary risks of curtailing supply, at least at a time of shortage when the interest of consumers as well as the general public lies in avoiding unnecessary risk to supply. It seems to me to lie within the discretion of the agency, and the domain of responsible regulation, to make a determination that reflects such an approach without undertaking a kind of meaningless and diversionary make-work effort at quantification. 4. Even the remand required by my opinion for the unanimous court opens the way to an agency’s reformulation of base rates. The FPC might well say that it had set a base rate on the assumption of conditions the court has found improper, and that if it is not to have the premise of such conditions, it finds another base rate appropriate. But that would have been a matter of administrative latitude in the exercise of the agency’s on-going function following a judicial remand. What causes me to differ from Judge Bazelon’s opinion is my concern lest it operate to require a remand proceeding that is unrealistically and unnecessarily refined, in pursuit of a regulatory will of the wisp. I fear that Judge Bazelon is turning from Socrates, and his concern with the limits of knowledge, to Plato, and his quest for the ideal. Judges, however, must deal with the workaday world. In judicial review of administrative regulation courts have a dual role, of supervision of administrative agencies, and of responsible partnership in the public interest. They cannot fairly demand the perfect at the expense of the achievable. VII. CHALLENGES TO INCENTIVE PROVISIONS The FPC established non-cost based incentives to reduce the critical supply shortage. First, a contingent escalation in flowing gas prices for producers as a group, when certain specified new dedications of natural gas were made to the interstate market. Second, a credit of one cent per Mcf, toward discharge of refund obligations, for each additional Mcf of new dedications- — subject to a provision to avoid double counting of dedications. A number of challenges to both of these provisions are reviewed below. A. Contingent Escalations The provisions for contingent escalation are attacked as (1) adopted on inadequate hearing procedures; (2) lacking findings that these incentives will materially improve the supply situation; and (3) having a discriminatory and anti-competitive effect. Hearing procedures Area rate proceedings conducted under Sections 4 and 5 require a hearing and decision “supported by substantial evidence,” under § 19(b) of the Natural Gas Act. Petitioner Mobil Oil Corporation contends that both incentive provisions were not subject to development through a hearing, and thus are not based on record evidence. The Examiner’s voluminous findings were based on hearings which began after the institution of the proceeding on November 27, 1963 and extended until his initial decision issued September 16, 1968. Some 25,000 pages of Joint Record were developed in hearings held jointly with the Hugoton-Anadarko Area Rate Proceeding, with another 5000 pages added in separate hearings pertaining only to the Texas Gulf Coast Area. The working assumption throughout was that prices were to be cost-based, and that adjustments for an increased level of supply would be accomplished through the uniform pricing system. Thus, there was no presentation on incentive provisions, or such issues as (1) the size of such escalations needed to produce a given supply, (2) the relationship between such provisions and the incentives contained within the uniform price system, or (3) the actual returns different producers with different quantities of “flowing gas” might realize from these contingent provisions. The incentive provisions were adopted ab initio by the FPC in its Opinion No. 595, (issued May 6, 1971) and were justified principally on the basis of record evidence indicating the shortage of supply. The FPC stated: The present critical shortage of all forms of energy in the United States and the anticipated rapid growth of demand for natural gas in particular makes it imperative to provide incentives to find gas and dedicate that gas to the interstate market .... Accordingly, we believe it necessary and desirable in the public interest that incentives be offered independent producers of natural gas above and beyond the price we have fixed in this proceeding. In Opinion No. 595-A, and “Order Modifying and Clarifying Prior Order [595] and Denying Rehearing,” the Commission’s' only response to this challenge was that “[t]he rate and rate design issues raised in this hearing” were similar to those raised on rehearing in another area rate proceeding, Southern Louisiana II, and that it-was “unnecessary to repeat what we said in that opinion.” In briefs and oral argument, Commission counsel lean heavily on the Southern Louisiana II opinion to support the incentive provisions adopted here. Need, for substantial support in the record Even assuming the FPC’s shift from adjudicatory to rulemaking procedures survives judicial scrutiny here and in other proceedings as a permissible interpretation of the Natural Gas Act and Administrative Procedure Act, nevertheless the Natural Gas Act, with the provisions in § 19 that Commission decisions be reviewed under a “substantial evidence” standard, contemplates that the agency decision be made “on the record.” In United States v. Florida East Coast Railway Co., Justice Rehnquist, speaking for the majority, decided that adjudicatory procedures afforded by the Administrative Procedure Act, 5 U.S.C. § 556, would not automatically be available, unless the basic statute — there section 1(14) (a) of the Interstate Commerce Act — expressly specified that the rule in question was to be made “on the record after opportunity for an agency hearing.” Even if the rationale of Fl