Full opinion text
Opinions for the Court filed by LEVEN-THAL, Circuit Judge, and FAHY, Senior Circuit Judge. Opinion dissenting in part by FAHY, Senior Circuit Judge. TABLE OF CONTENTS Opinion for the Court by Circuit Judge LEVENTHAL........•...............1025 I. OVERVIEW AND SCOPE OF REVIEW..............................1027 A. Regulatory Background.........................................1027 B. Procedure in FPC Docket....................................... 1027 • C. Scope of Issues................................................1028 D. Standards of Judicial Review....................................1028 1. General FPC Approach......................................1030 2. Examination of Reasons and Changes...........................1031 3. Experimental and Dynamic Features of Novel Regulation...........1031 II. PROCEDURAL ISSUES ..................'.........................1032 III. REINSTATEMENT OF VINTAGING TO AVOID EXCESSIVE PROFITS .. 1033 IV. COST ALLOWANCE FOR INCOME TAXES PAYABLE ................1034 A. Departure from Prior Policy.....................................1034 B. Use of an Economic Model ......................................1036 C. Specific Objections to the Model..................................1039 1. Consolidated Returns........................................1039 2. Increased Intangible Drilling Costs.............................1040 D. Conclusion....................................................1042 V. PRODUCTIVITY AND GAS RESERVES .............................1043 VI. ATTACKS ON NATIONAL APPROACH TO COSTS AND PRICES .......1049 A. Failure to Distinguish Between Onshore and Offshore Gas Costs........1049 B. Claimed Need for Area Rate Regulation...........................1051 VII. COST IMPACT OF ADVANCE PAYMENTS ..........................1052 VIII. CONTINUATION OF THE OPINION 699 RATE FOR “ROLLOVER” GAS .. 1057 IX. APPLICATION OF BIENNIUM RATES......'........................1061 X. CONCLUSION....................................................1063 Opinion for the Court bv Senior Circuit Judge FAHY.......................1064 XI. THE PROCEDURES FOLLOWED BY THE COMMISSION WERE LAWFUL.................................................1064 XII. THE COMMISSION WAS NOT DISQUALIFIED TO ISSUE OPINION NO. 770-A..............................................1067 Attachment.......................................................1070 Opinion of Senior Circuit Judge FAHY. dissenting in part...................1073 I. THE INCOME TAX COMPONENT ..................................1073 II. PAST ADVANCE PAYMENTS......................................1078 LEVENTHAL, Circuit Judge: This case presents petitions to review the 1976 orders of the Federal Power Commission in the second nationwide natural gas rate proceeding. The pertinent orders embrace Opinion No. 770, issued July 27, 1976; clarifying orders issued in September and October 1976; and Opinion No. 770 — A, on rehearing, issued November 5, 1976. In brief, the FPC’s orders prescribed the following rates: (a) $1.42 per Mcf, for sales of gas from wells commenced on or after January 1, 1975 — with provision for escalation. (b) $0.93 Mcf — reduced from the $1.01 rate prescribed in Opinion 770 — for 1973-1974 biennium gas, i. e., sales of gas from wells commenced on or after January 1, 1973 and prior to January 1, 1975. This rate is also subject to escalation. (c) $0.52 per Mcf, applicable to sales of gas under “renewal contracts” where a contract has expired by its own terms. Again there is escalation. These rates represent increases from the nationwide rate of $.52 per Mcf, established by Opinion No. 699-H, which was upheld in Shell Oil Co. v. FPC, 520 F.2d 1061 (5th Cir. 1975), cert. denied sub nom. California Co. v. FPC, 426 U.S. 941, 96 S.Ct. 2660, 49 L.Ed.2d 394 (1976). The impact of the increase was estimated by the Commission at from $1.49 to $1.78 billions during the next 12 months. Within seconds after Opinion 770-A issued, competing petitions for review were filed in this circuit and in other circuits. A panel of this court heard oral argument on the question of the proper venue for this proceeding and held that although petitions for review had been filed simultaneously in this circuit and the Fifth Circuit, the ultimate standard announced by 28 U.S.C. § 2112(a), “the convenience of the parties in the interest of justice,” dictated that the case be heard in the District of Columbia, American Public Gas Association v. FPC, No. 76-2000, 180 U.S.App.D.C. 380, 555 F.2d 852 (1976). This court issued orders for an expedited briefing schedule. We heard oral argument on March 23 and 24, 1977. All petitioners complain that the FPC orders violate pertinent statutory mandates, lack support in substantial evidence and are arbitrary and capricious. Essentially, the consumer petitioners complain that the rates by the FPC are too high; the producer petitioners complain that those rates are too low. There are also other parties and positions, as will appear. Pending disposition, this court provided for contingent refunds. While Opinion 770 was under reconsideration by the Commission, this court exercised its jurisdiction under the All Writs Act, 28 U.S.C. § 1651 (1970), to preserve the possibility of a refund. See Order of August 9, 1976, American Public Gas Association v. FPC, 177 U.S.App.D.C. 209, 543 F.2d 356 (1976). After issuance of Opinion 770-A, this court stayed the FPC’s orders except as to producers who undertook to refund portions of the rate increases subsequently held unlawful and except as to gas from onshore wells commenced after July 27, 1976. Order of November 9, 1976, amended November 18, 1976, included as appendices to American Public Gas Association v. FPC, No. 76-2000, 180 U.S.App.D.C. 380, 555 F.2d 852 (1976) We have given due consideration to a vast number of issues raised by the various petitioners. We cannot practicably speak separately to each of the issues, but the considerable discussion we provide, for the issues of primary consequence, will fairly identify the bases of our conclusion that the orders before us should be affirmed. For convenience, we have provided a Table of Contents, supra, identifying the topics specifically discussed by the court and in the dissenting opinion of Judge Fahy. I. OVERVIEW AND SCOPE OF REVIEW A. Regulatory Background The FPC’s first venture into a national rate for new natural gas came in its Docket No. R-389-B. This resulted in Opinion 699 and amendments, culminating in Opinion No. 699-H, issued December 4, 1974, which fixed a nationwide base rate of 52$ per Mcf throughout the United States (except Alaska) for new gas (governing wells commenced and deliveries begun after January 1, 1973, and also new contracts replacing expired contracts on “flowing gas”). Opinion 699 and its subsequent clarifications were affirmed in the 1975 Shell opinion of the Fifth Circuit. That opinion sketches, and we do not repeat, the background of previous developments in producer regulation — the FPC’s early abstinence; the 1954 Phillips decision, that the Natural Gas Act provided for regulation of prices charged by natural gas producers in interstate sales; and the FPC’s regulation of producers by regional areas, upheld in the Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). Shortly after beginning Docket R-389-B, the FPC commenced a separate Docket No. R-478, to fix nationwide rates for “flowing gas,” from wells drilled prior to January 1, 1973. Opinion No. 749, issued on December 31,1975, established a rate of 23.5$ per Mcf, increasing to 29.5$, as of July 1, 1976, the date when the 22% depletion tax allowance expired for regulated gas production. That is pending on review in the Fifth Circuit. B. Procedure in FPC Docket On December 4, 1974, the same day that Opinion 699-H issued, the FPC instituted Docket RM-75-14, which culminated in the orders and opinions (770 and 770-A) currently under review. The notice projected need for a revision of Opinion 699-H to govern new natural gas for the 1975-1976 biennium and such changes as might further the public interest. The FPC did not propose specific rates in its Notice but stated it would rely on responses by the parties and Commission staff. The order designated as respondents all interstate pipeline companies, and all producers with jurisdictional sales exceeding 10 million Mcf per annum, who have since participated as Indicated Producer Respondents. Ultimately some 46 parties and groups of parties, representing all segments of the natural gas industry and the consuming public, filed written comments and cross-comments on a host of matters. The ability of parties to comment was limited in one respect much stressed to this court — concerning the matter of the Staff’s study of 31 off-shore Louisiana gas leases in order to probe the issue of gas reserves. C. Scope of Issues Opinions 770 and 770A establish rates dramatically higher than the national rates previously established in Opinion 699-H: - a near-tripling for new gas; for the 1973 — 74 biennium, an increase from 52 to 93 cents. As already noted, the Commission estimated an impact of the increase over the next year ranging from $1.49 to $1.78 billions. Commensurate with these figures are the complexity, variety and range of the issues raised by the consumer protests. Nor have the producers been supine. Their complaints against the level of the rates, and their perceived inadequacy, are sharpened by their anguish that the FPC has reverted to the practice — abandoned in Opinion 699-H — of vintaging gas prices according to the period of production; and by resentment that Opinion 770-A, in response to consumer presentations on rehearing, set a price for the 1973-74 biennium of 93 cents instead of the $1.01 set in Opinion 770, and narrowed the eligibility for higher new rates. This is a major case. This court’s 1976 orders provided for submission on a expedited basis. The need for expedition of the decision and opinion has been underscored by the increasing awareness that the country is in the midst of an energy crisis, and is considering measures to cope with it. The court has also sought to expedite issuance of its opinion. All issues tendered have been given careful consideration, although they have not been discussed in the detail used by the parties. Issues not discussed in this opinion are technical; many concern matters where we agree with the disposition in Shell, and they would not account for any significant portion of the rate increase under review. D. Standards of Judicial Review The matrix of a court’s consideration of the validity of a natural gas rate order lies in the scope of and standard for judicial review defined in pertinent decisions. “[Judicial review] begins at the threshold, with enforcement of the requirement of reasonable procedure, with fair notice and opportunity to the parties to present their case.” Greater Boston TV v. FCC, 143 U.S.App.D.C. 383, 392, 444 F.2d 841, 850 (1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971). The de tails and techniques differ, but the essential principles apply even in proceedings governed by notice-and-comment disposition rather than evidentiary hearings. Portland Cement Assn. v. Ruckelshaus, 158 U.S.App.D.C. 308, 486 F.2d 375 (1973), cert. denied, 417 U.S. 921, 94 S.Ct. 2628, 41 L.Ed.2d 226 (1974). In substantive terms, the Administrative Procedure Act describes the principal judicial function with the direction that the reviewing court shall set aside agency action found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The APA’s terms direct inquiry whether the agency is “unsupported by substantial evidence” only in a case subject to 5 U.S.C. §§ 556, 557, or reviewed “on the record of an agency hearing provided by statute.” The Natural Gas Act does not expressly require a hearing on the record. United States v. Florida East Coast Ry., 410 U.S. 224, 93 S.Ct. 810, 35 L.Ed.2d 223 (1973). Section 19(b) of the Natural Gas Act, 15 U.S.C. § 717 et seq., does provide that the “finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive.” The issue of procedure — the permissibility of notice-and-written comment (informal rule making) — is considered separately, in Judge Fahy’s Opinion for the Court. Some commentators have also put it that a statutory reference to “substantial evidence” requires a more rigorous standard of review than the arbitrary-capricious standard. We agree with Judge Friendly that the issue is largely semantic, and that the two criteria “tend to converge” in notice-and-comment rule making. Associated Industries of New York v. Dept. of Labor, 487 F.2d 342, 348-350 (2d Cir. 1973). What is basic is the requirement that there be support in the public record for what is done, City of Chicago v. FPC, 147 U.S.App.D.C. 312, 458 F.2d 731 (1971), cert. denied, 405 U.S. 1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972). The ultimate standard of reasonableness of Federal Power Commission rate-making was given an early gloss by the Supreme Court in terms of the “end result” test. FPC v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944). The decision in Permian Basin Area Rate Cases, 390 U.S. 747, 38 S.Ct. 1344, 20 L.Ed.2d 312 (1968) reshapes that test and guides us as to the principal ingredients of the court’s functions. (a) In assessing the numerous and disparate contentions arising out of a lengthy proceeding, the court has an authority “essentially narrow and circumscribed” and need not examine every detail if the total effect be reasonable. 390 U.S. at 766-67, 88 S.Ct. 1344. (b) A presumption of validity attaches to each exercise of the Commission’s expertise and those who would overturn its judgment have a heavy burden of making a convincing showing that it is unjust and unreasonable in its consequences. 390 U.S. at 767, 88 S.Ct. 1344. (c) However, there is a need for rate criteria, for “reviewing courts will require criteria more discriminating than justice and arbitrariness if they are sensibly to appraise the Commission’s orders.” 390 U.S. at 790, 88 S.Ct. at 1372. (d) There is a “zone of reasonableness” in ratemaking, and within this zone the Commission may employ rates functionally to encourage production. 390 U.S. at 796-8, 88 S.Ct. 1344. In a much-quoted passage Permian summed up the ultimate criteria governing the reviewing court. See 390 U.S. at 791-92, 88 S.Ct. at 1373: It follows that 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")3etermlne '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. 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 given reasoned consideration to each of the pertinent factors. Judicial 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 its assessment of the consequences of its orders for the character and future development of the industry. We are, in addition, obliged at this juncture to give weight to the unusual difficulties of this first area proceeding; we must, however, emphasize that this weight must significantly lessen as the Commission’s experience with area regulation lengthens. We shall examine the various issues presented by the rate structure in light of these interrelated criteria. The Court’s concept of “reasoned deci-sionmaking” is in essence the keystone of the Rule of Administrative Law. “The function of the court is to assure that the agency has given reasoned consideration to all the material facts and issues.” Greater Boston TV v. FCC, 143 U.S.App.D.C. at 393, 444 F.2d at 851. The Permian approach resonates as guidance for reviewing courts. Recent decisions underscore its vitality. The “zone of reasonableness” has been identified as accommodating a wide latitude to integrate cost factors with non-cost and policy considerations. FPC v. Conway, 426 U.S. 271, 96 S.Ct. 1999, 48 L.Ed.2d 626 (1976). Especially significant is Mobil Oil Corp. v. FPC, 417 U.S. 283, 94 S.Ct. 2328, 41 L.Ed.2d 72 (1974), wherein the Court expatiated on the roles of the FPC and reviewing court. The Supreme Court acknowledged that the primary responsibility for judicial review lay in the courts of appeals. It stressed that the equity powers of those courts properly accommodate to agency flexibility, so that, e. g., affirmance of an order may retain agency latitude for modification. 417 U.S. at 311, 94 S.Ct. 2328. The agency’s flexibility is viewed broadly, to permit “pragmatic adjustments” based on exigencies of administration. 417 U.S. at 329, 94 S.Ct. 2328. The FPC may tolerate inequities where it “squarely faced” up to the problem and deemed it less significant than the pursuit of broad advantages to the public interest. 417 U.S. at 321-23, 94 S.Ct. 2328. Throughout Mobil reflects an approach to the “substantial evidence” standard as requiring the reviewing court to respect the agency’s wide latitude for difficult policy choices, and in adjusting that standard “in this time of acute energy shortage” to provide greater freedom for new proposals and techniques. Particular attention is called to the Court’s discussion of the conclusion that refund credits and contingent escalation constituted appropriate means to assist capital formation for exploration. The parties raised a not insubstantial issue. The Court’s response identified the context that the Commission had taken “massive evidence” with voluminous exhibits and various cost estimates in the record, and that the rates fixed, even with incentive increments, were within the range of cost estimates. “Its difficulties, while not minor, did not stem from any failure to seek answers.” 417 U.S. at 318, 94 S.Ct. at 2350-51, referring to n. 48 at p. 313, 94 S.Ct. 2328. That single sentence is a capsule of the requirement of reasoned deci-sionmaking in the context of the novel and exigent problem of seeking to enhance natural gas supply in time of dire shortage while maintaining fairness to consumers. 1. General FPC approach Instructed by these Supreme Court guidelines, and pretermitting discussion of specific contentions, we refer for perspective to the Overview provided by the FPC of its approach. At the outset: “This rate is fully cost-based and justified. Additionally, non-cost factors have been examined to ensure that the cost-based rate is just and reasonable.” (Opinion 770 mimeo at 1-2, R. 2497). The cost factors included “drilling productivity, drilling costs and all of the other costs associated with the production of natural gas.” The non-cost factors included “the price of competitive fuels, the impact upon supply and demand, inflationary pressures, the nation’s natural gas shortage and conservation factors.” (Mimeo at 3, R. 2499). Costs were determined by “a discounted cash flow analysis by costing the average successful well that is drilled in the test year 1976.” A 15% rate of return was allowed. The discounted cash flow analysis used in Opinion No. 699-H and approved in the Shell opinion was modified in certain respects. Drilling costs were changed to reflect higher costs actually incurred during 1973 and 1974. The productivity data were expanded from 7 years (1966-1972) to include the reports for 1973 and 1974. The depletion life was changed from 18 years to 15 years (with a pre-production period of 3 years). In view of the repeal of the percentage depletion allowance, a provision for income taxes payable was inserted, at the marginal tax rate of 48%. Opinion 770’s Overview concluded by allocating the $1.5 billion added to consumers’ costs in the first year (later adjusted in Opinion 770-A). “Of this amount, approximately 55% goes to the Treasury in higher taxes, 25% compensates for higher costs, and 20% accrues to the producers. Over the longer run, we expect consumers will benefit as a result of reduced reliance on expensive alternate fuels. We believe that this decision will lead to increased gas supply and to greater gas conservation.” Mimeo at 5, R. 2500. 2. Examination of reasons and changes These general statements are only prologue. With all the latitude for expertise and specialization of the agency, the court must still probe the essential particulars— to assure itself that the Commission has seriously sought answers and engaged in reasoned decision-making. The court has been particularly alert to consider those aspects in which the FPC’s approach differs from what has been approved. An agency may of course reconsider its approach even in the absence of any new evidence. Mobil Oil Corp. v. FPC, 417 U.S. at 320, 94 S.Ct. 2328. However, the change in policy must be avowed and reasoned. An agency’s view of what is in the public interest may change, either with or without a change in circumstances. But an agency changing its course must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored, and if an agency glosses over or swerves from prior precedents without discussion it may cross the line from the tolerably terse to the intolerably mute. Greater Boston TV v. FCC, 143 U.S.App.D.C. at 394, 444 F.2d at 852. 3. Experimental and dynamic features of novel regulation When regulation features novelty, in subject, technique, or both, the narrow scope of review established by conventional doctrine is further circumscribed. Thus Permian noted that the court tempers its review to take into account the “unusual difficulties” of the first proceeding. Alongside was the countervailing caution that the force of this restraint lessens as the Commission has time and opportunity to gain experience and make adjustments. See 390 U.S. at 792, 88 S.Ct. 1344, quoted above. See also Shell Oil Co. v. FPC, 420 F.2d at 1071, and cases cited. These considerations were stressed in Shell on review of Opinion 699-H, the first nationwide rate order. The court used the metaphor of “kid glove” review as appropriate circumscription in view of the “experimental nature” of the regulation. 520 F.2d at 1071. Extra deference is provided when the Commission articulates a tentative balance on an issue, announcing that it is “prepared to reevaluate the equilibrium it sought to achieve in the biennial review.” 520 F.2d at 1077. Yet the Fifth Circuit took occasion to sound a caution against the FPC’s assumption that it could continue to support essential elements of its orders “with little more than ipse dixit.” The court said: “We must express our regret, however, that the FPC continues to issue orders which would be inadequate but for our ‘kid glove’ treatment. * * * [a] cautionary note should indicate that as experiment lapses into experience, the courts may well expect the Commission to justify its policies with reasoned projections of that once-prototypic policy’s probable net effect.” In this posture of matters, the court’s rule may require it to affirm an order regardless of misgivings, but to discharge the function of identifying problem areas that call for reconsideration and that cannot be affirmed in subsequent proceedings in the absence of reasoned support grounded in experience. The underlying, principle is broader than natural gas regulation. The en banc opinion in American Airlines v. CAB, 123 U.S.App.D.C. 310, 359 F.2d 624 (1966) presented a judicial approval of the blocked space program as reasonable in projection, taking into account the agency’s capacity and duty to provide reappraisal in the light of experience. (And see p. 319, of 359 F.2d, p. 633 of 359 F.2d: “a month of experience will be worth a year of hearings.”) In United States v. CAB [American Airlines et al., ALPA, et al.], 167 U.S.App.D.C. 313, 511 F.2d 1315 (1975), the court upheld an October 1973 CAB order approving an air carriers’ agreement for capacity reduction as interim or emergency action, but it set aside the July 1974 order of the CAB extending its approval because of the agency’s failure to provide continuing consideration of the matter on a non-emergency basis. The principle has full vitality, however, in the field of natural gas regulation, as is dramatized by this court’s actions concerning the FPC’s program for advance payments to gas producers. In 1972, this court sustained the order as a “justifiable experiment in the continuing search for solutions to our nation’s critical shortage of natural gas.” Public Serv. Comm. of N. Y. v. FPC, 151 U.S.App.D.C. 307, 317, 467 F.2d 361, 371 (1972). The court stressed the need for further evaluation. Subsequently, this court held that the FPC had failed to engage in meaningful review, analysis and evaluation of experience under the program, and declined to affirm an extension, Public Serv. Comm. of N. Y. v. FPC, 167 U.S.App.D.C. 100, 511 F.2d 338 (1975). On remand, the FPC terminated the program as of the end of 1975. The need for flexibility and reevaluation is underscored by the nation’s wide-ranging and comprehensive reevaluation of energy policy. There is no direct impact on the legal issues before us. Yet the reviewing court' acts as a court of equity in appraising the need and method of further consideration of issues. See Mobil Oil Co., 417 U.S. at 311, 94 S.Ct. 2328. Equity historically takes into account changing circumstances. In present context, these may come to include revision of the structure and functions of the Commission whose orders are under review. In the light of this broad perspective, we turn to the more particular contentions raised by the consolidated petitions for review. II. PROCEDURAL ISSUES With varying emphases, the consumer interests have attacked the procedures used by the FPC. The basic question is whether the notice-and-comment procedure of informal rulemaking is permissible for an enterprise of such magnitude and complexity. This issue has been given special attention. Our discussion appears in the opinion of Judge Fahy which approves the FPC’s basic procedural approach. The residual possibility that its procedure may have been inadequate as to particular issues is subsumed under separate sections of this opinion, dealing with the evidence and reasoning pertinent to those issues. Similarly those sections necessarily reflect the court’s consideration of the contention that even where the agency is not required to institute more than a minimal notice and written comment procedure, the court may call for additional procedures as an adjunct enabling it to perform its task of providing “meaningful judicial review of highly technical issues.” The producer interests have raised a different issue of procedure, focusing on whether there has been a Congressional role that has undermined the validity of the adjustments made by the FPC on reconsideration. This issue has also been given special attention in the opinion of Judge Fahy for the Court, in which we reject the producers’ contention that the Commission is disqualified to issue Opinion 770-A. III. REINSTATEMENT OF VINTAGING TO AVOID EXCESSIVE PROFITS We begin discussion of specific objections to the rate order with the producers’ threshold-type contention that the orders are invalid in providing for a vintaging approach, establishing separate rates for 1973-1974 biennium gas and for 1975-1976 biennium gas. The underlying premise of the producers is that natural gas must be regulated as an irreplaceable commodity, not a service, and that vintaging compels the sale of natural gas at prices below the cost of replacing the gas consumed. This was rejected as long ago as the 1968 Permian opinion, where the Court accepted the Commission’s conclusion that “a two-price rate structure will both provide a useful incentive to exploration and prevent excessive producer profits.” 390 U.S. at 798, 88 S.Ct. at 1376. The Court accepted as consistent with the Act a two-price system adopted by the Commission on the premise of a lower price for sales where “price could not serve as an incentive” since any price “above average historical costs, plus an appropriate return, would merely confer windfalls.” Id. at 797, 88 S.Ct. at 1375-76. Subsequent to Permian, the FPC has issued orders diverging from concepts of vin-taging, and these have been approved by the courts. Its Opinion 639 and follow-on interpretations, authorizing new rates as contracts expired, were upheld as a reasonable attempt to phase out “contract vintag-ing.” As we shall see in discussing the “rollover” matter the precise issues are different, but we acknowledge the parallels of theory. However, this is not just a theory, but a balancing of the interests of producers and consumers. Like all issues of rate regulation the key questions are likely to involve “pragmatic adjustments.” That brings us to the producers’ proposition that Opinion No. 699-H’s nationwide pricing exemplified a commitment to a single uniform national rate for all gas, and signaled the end of the “anachronism of vintaging.” The 1975 Shell opinion upheld the trend toward elimination of vin-taging as within the latitude of agencies to reevaluate old experiments. The Commission has latitude to reconsider its experiment in abandoning vintaging. The producers contend that the problem of “excessive rents” was obviously before the Commission when it issued No. 699-H and there was no new evidence to make a difference. In Opinion No. 770, the FPC explained that its change of course was due to the “magnitude of the increase of the rate” prescribed for the post-1974 gas, leading the Commission to conclude it must “abandon its intended policy” and “vintage by a 1973-1974 cost grouping to preclude exaction of excessive and unjustifiable economic rent from flowing gas.” (Mimeo at 12, R. 2507). It referred to Opinion 699-H, stating “we did not anticipate at that time such a dramatic increase in costs and decrease in productivity.” (R. 2508). There was thus an explicit acknowledgment of change, no stealthy deviation. This change, say the producers, is only a difference in degree from the situation before the FPC in 1975. Differences in degree may become so wide as to justify difference in outlook and response. It was within the policy latitude of the Commission, in its balance of interests, to emphasize, as it did here, its “responsibility to minimize severe and harmful economic dislocation due to increased rates.” The producers say this approach is at odds with the function of rate regulation whereby the government simulates what would have been achieved in a free market. In support of this contention the producers cite, inter alia, FPC v. Texaco, Inc., 417 U.S. 380, 94 S.Ct. 2315, 41 L.Ed.2d 141 (1974). That is ironic because that opinion specifically held Order No. 428 was not vulnerable because it set different levels of just and reasonable rates for small producers and large producers. 417 U.S. at 390, 94 S.Ct. 2315. Not unexpectedly the Court relied on Permian. In Texaco the Court rejected the contention that the Commission was free to rely exclusively on market prices when it was the legislative premise of regulation that there was no free competitive market in the oil and gas industry. Simulation of what would obtain in a free competitive market is a premise of rate regulation but often a speculative one, and one that is neither conclusive nor dominant over the need to strive with pragmatic adjustments for a fair balance of producer and consumer interests. IV. COST ALLOWANCE FOR INCOME TAXES PAYABLE We examine initially the Commission’s treatment of the impact of federal income taxes on natural gas operations. The increment to price allowed for income taxes payable constitutes the largest portion of the increase in price over that allowed in Opinions 699 and 699-H. Opinion 770 allows 43 cents per Mcf to cover the cost of income taxes on gas within the 1975-76 biennium. This constitutes 26.7% of the total price of $1.61 and is somewhat less than the amount allowed for profits (48 cents). The discounted cash flow methodology used by the Commission adjusts for the impact of the federal tax code in two ways. First, the model credits the producers with the value of tax benefits which the producers can obtain by deducting their various intangible drilling costs. The model assumes that these costs will be expensed at the earliest possible time, and that the producer of the model well will have other taxable income which these preproduction deductions could offset. In order to reflect the tax savings which the producer gains from a deductible expense, the model reduces the gross cash outlay for that expense by 48%, the statutory tax rate. Thus, when the net outlay is adjusted by the discount factor to obtain its present value, the consumer also gains the present value of the tax deduction. The second adjustment made by the Commission was to allow for the cost of paying income tax at 48% of profits. This, too, is discounted to obtain its present value. As previously noted, the increment to price consisting of an allowance to cover these taxes is 43$. We now turn to the consumers’ objections, beginning with the generalized and moving to the specific. A. Departure from Prior Policy The consumers challenge the Commission’s treatment of tax effects on the ground that the Commission’s methodology constitutes an unexplained departure from the methodology of Opinion 699 and previous Commission opinions. In Opinion 699 the Commission had reduced costs to reflect tax credits generated by deductions but had allowed for the payment of income taxes only to the extent of those credits. Where an individual producer incurred a tax liability in excess of his credits, he could petition for special relief, and could obtain it upon showing with his actual tax return that he had in fact paid tax. The consumers contend that the Commission’s movement from the Opinion 699 procedure, which assumes that the producers will have no net tax liability, to the 770 model, which gives an allowance for income taxes at the statutory rate, constitutes an unexplained and unjustifiable change in agency policy. We find no merit in this contention. As we have already noted, Greater Boston TV Corp. v. FGG holds: “An agency’s view of what is in the public interest may change, either with or without a change in circumstances,” as long as the agency changing its course supplies a “reasoned analysis indicating that prior policies are being deliberately changed, not casually ignored.” 143 U.S.App.D.C. at 384, 444 F.2d at 852. In this case the Commission’s modification of methodology is justified both because it is responsive to changes in circumstance and because it is the product of a conscientious reexamination of the tax issue. The Tax Reduction Act of 1975 reduced taxes for most individuals, but was intended to increase taxes for the oil and gas industry. Effective July 1, 1976, it repealed the percentage depletion allowance with respect to most producers, and limited the use of foreign tax credits to foreign related income. As the consumers recognize, the repeal of the depletion allowance will alone have a substantial impact on the producers’ tax liability. The Commission estimates that 27$ of the 43$ allowed for taxes is attributable to the repeal of the depletion allowance. Others might provide different estimates. But it is clear that this congressional action significantly affects the tax setting in which current drilling is taking place. In Opinion 770A, the Commission explained: That action required a reconsideration of the overall impact of the income tax law on the producer rate-making methodology. The reconsideration of the issue revealed that the premises on which prior decisions were founded were inaccurate at the outset, eroded by change in law, or properly accounted for in the new gas costing model. R. 3636. This kind of thoroughgoing reexamination of the tax issue was by no means precluded by the analysis in Opinion 699 or in the judicial opinion affirming it. In Shell Oil Co. v. FPC, 520 F.2d 1061, 1081 (1975), the Fifth Circuit upheld the Commission’s “policy choice” to exclude an average tax component on the ground that the variation of tax liability between individual producers was more significant than the overall industry liability. Reconsideration of this point was clearly necessary in light of the increase in producer liability under the 1975 Act. The Court then went on to say: The Commission also took note of the complexity of federal income taxes provisions for gas producers, the ability of producers in some circumstances to indefinitely postpone tax liability and the impending reduction of depletion allowances, all good reasons for eschewing a simple tax component which would be cemented into ratemaking for a long time to come. These points were not cited in the Shell opinion as confirming the accuracy of the 699 model, but as reasons for eschewing a tax component which might unfairly become permanent. They did not preclude a new look in the light of the provisions of the 1975 Act that served to simplify as well as to increase the producers’ liability. The court’s opinion is permeated with an awareness that the tax problems were influx, and with a willingness to tolerate the Commission’s tentative treatment so as not to preclude a more refined analysis in the future. This point was highlighted when the Shell panel issued an opinion on rehearing for the sole purpose of stating that its decision “should in no way be construed to foreclose a de novo review of federal income tax in the current biennial review proceeding in FPC Docket No. RM 75-14.” Shell Oil Co. v. FPC, 525 F.2d 1261, 1263 (5th Cir. 1976) (denying petition for rehearing). In conducting its rethinking of the tax issue, the Commission took into account not only the changes in the tax code but also the increasingly grave shortage of natural gas disrupting our national economy. The Commission reasoned that “new supplies come from decisions to explore for and develop new fields,” and the “[m]arginal income therefrom is likely to be taxed at the 48% rate.” Opinion 770 at 85, R. 2580. Hence the Commission felt that it was particularly appropriate to include a tax component at the full statutory rate. A commission may estimate costs on the high side of a practical range and still stay within the limits of reasonableness. That is the message of Permian and Mobil, particularly taking into account the need to conduct cost-based ratemaking with due regard for the non-cost factor of encouraging exploration for natural gas. Were this court to construct a methodology for national ratemaking, we might find it more elegant and theoretically proper to include such incentives for exploration solely within the factor for rate of return. But that is not our task, and we cannot say that the Commission was arbitrary or capricious in taking account of this public need within the context of its calculation of the tax component. We recognize that not all of the 43$ increase in allowance for taxes can be explained by changes in circumstances. Some part of it is undoubtedly due to the change in method of accounting. But the judicially enforced requirement that the agency explain any changes in policy is not intended to bind the agency to prior methods. As circumstances change and analytical techniques improve, methods of accounting which once seemed sound enough to guide agency action may be perceived as imperfect. Precedent cannot be allowed to block the search for a model more reflective of economic reality. Here, where the agency had both meaningful reasons for changing its methodology and, as we develop more fully below, a logical explanation for the new approach it adopted, the law does not hold the agency fast to its prior policy. B. Use of an Economic Model As a second objection to the Commission’s treatment of the tax component, the consumers contend that there can be no substantial evidence supporting an allowance for income taxes unless the producers’ current tax returns are put into evidence and subjected to comment. APGA complains that “the producers prefer to rely on economic models, which tell you nothing about the real world. . . . ” Brief at 38 n.2. Elsewhere APGA asserts “Economic ‘models’, dreamed up by producer-sponsored consultants and untested by cross-examination, do not begin to rise to the status of ‘substantial evidence.’ ” Brief at 41 n.3. With this contention we must express fundamental disagreement. Reasoned decisionmaking can use an economic model to provide useful information about economic realities, provided there is a conscientious effort to take into account what is known as to past experience and what is reasonably predictable about the future. In the world of today, model-building is not merely a sport of youngsters and tiny planes. Models are central to the forecasts and programs evolved by members of the executive and legislative branches, concerned with such searching questions as inflation and stabilization, production and unemployment, and other problems of national policy. These economic models are robed in the elegance of high-speed computers, but they are at base extrapolations from past experience, projections that must undergo continual examination and revision. They do not always have the reassuring concreteness of empirical observations, but they are the best we have to work with in casting our programs. Provided that the assumptions on which a model is based are adequately explained and justified, we see no reason why this type of evidence may not be used in support of a ratemaking application. The Supreme Court has emphasized that the Commission must have considerable latitude in developing a methodology responsive to its regulatory challenge: We must reiterate that the breadth and complexity of the Commission’s responsibilities demand that it be given every reasonable opportunity to formulate methods of regulation appropriate for the solution of its intensely practical difficulties. 390 U.S. at 790, 88 S.Ct. at 1372. In Permian and subsequent decisions, courts have approved the use of regional and national averages, which include a hypothetical cost projection for some producers, as a means of arriving at a reasonable individual rate. E. g., City of Chicago v. FPC, 147 U.S.App.D.C. 312, 337, 458 F.2d 731, 756 (1971), cert. denied, 405 U.S. 1074, 92 S.Ct. 1495, 31 L.Ed.2d 808 (1972). More recently, the Fifth Circuit sustained the use of a discounted cash flow methodology as a basis for national ratemaking. 520 F.2d at 1079-80. In each of these cases the key question was not the extent to which the Commission methodology consisted of empirical observations, but whether its premises were supported by substantial evidence and whether its reasoning was sound. These are the demands which are appropriately made of the Commission in this case. Further, in the context of this particular ratemaking, the Commission’s use of an economic model to estimate tax liability reflects a well-reasoned choice of methodology. The Commission specifically found that because of the percentage depletion allowance and the low return on investment prior to this ratemaking, “it is very unlikely that any meaningful historical average tax would be derived” from a study of the producers’ tax returns. 770-A mimeo at 65, R. 3630. There is substantial foundation for this as a reasoned conclusion when one considers that the tax return reflects an aggregate of matters, and that it would be well nigh impossible to undertake the task of segregating gas operations from oil operations, operations involving jurisdictional gas from those involving nonjurisdictional gas, associated gas from nonassoeiated gas, and then differentiating between the various vintages of nonassoeiated jurisdictional gas. Given the clear need for an allowance to cover the liability imposed by the 1975 Act, and the difficulty — if not the impossibility — of obtaining a meaningful tax figure from an historical study, the Commission was clearly justified in seeking to account for taxes through the use of a model. The consumers would condemn the Commission’s effort to estimate the producers’ tax liability on the ground that the Commission has departed from the well-settled principle of regulation that rates provided to cover tax costs must be based on “actual taxes paid.” The consumers interpret this principle to mean that an increment for taxes may be included in the price only after tax returns have been used to demonstrate tax liability. This involves misunderstanding of the case law dealing with that principle. Although there are a number of cases in this area, we may usefully proceed from the summarizing discussion in City of Chicago v. FPC, 458 F.2d at 754-57 (1971). There we explained that the producers had for a long time argued that the proper tax element of their rates was the tax that would have been paid but for certain deductions, chiefly those for depletion, intangible expenses and accelerated depreciation. The producers contended that because these deductions were intended to provide an incentive for participation in the production of a wasting asset, the companies should be allowed to retain any tax savings. The courts held, however, that since the ratemaking structure already included an allowance both for incentive and for depletion, the proper tax element was taxes actually paid. Tax savings were to be passed through the companies to the consumers. The Commission’s model is entirely consistent with this principle. At the very earliest date that the producers incur the cost of production, i. e. the pre-production expense of lease acquisition and drilling, the producers must reduce yield through a current credit for current tax savings. All applicable types of tax deductions are included. Hence, we find no deviation from the “actual taxes paid principle” in the Commission’s use of an economic model. In rate regulation there is no mystique requiring that expenses be actually “paid.” Regulated companies are routinely permitted to set up reserves against the probable expenses of obligations undertaken now yet falling due in the future even when the amount of obligation is subject to revision — as in the case of a bus company that has switched from street car to bus operations and has an obligation to take up the street car tracks. Depreciation reserves are everywhere based on a service life that is only estimated and often exceeded; and while these have the safeguard of costs originally paid out, there is a substantial difference in rates needed to cover a current expense as against a fair return on plant in service. Thus, there is no historical basis for petitioners’ simplistic interpretation of the “actual taxes paid” principle. But even if that principle had been stated in the past as rigidly as petitioners suppose, it would not preclude a different approach by the agency for the future. During the years that the “taxes actually paid” doctrine emerged there was experience under the tax laws in being, and a forecast for the future rising to the level of strong probability, that to a large extent taxes would either never be paid, or would arise for actual payment in a future too remote for present acknowledgement. Given the workings of the compound interest table, or the equivalent discount tables, an event 40 years hence can be ignored for the present in many practical concerns. But the 1975 change in tax law announces a policy and determination that marks a significant change. Perhaps its exact consequences cannot be spelled out in mathematical detail, but the combination of the higher probability that substantial taxes will be paid and the likelihood that there will not be acquiescence in indefinite deferral of tax revenue makes a difference real enough to support a change in policy as rational. In sum, the Commission’s reliance on an economic model for computation of the tax component was consistent with regulatory theory and fully justified in light of the specific evidence available. C. Specific Objections to the Model The third type of argument pressed by the consumers against the Commission’s treatment of the tax issue is that the Commission’s model fails to account for several phenomena which are likely to reduce the producers’ tax liability. We take these specific objections to the workings of the Commission’s model most seriously, for in the absence of empirical confirmation of accuracy, we believe that the Commission is obligated to provide a complete analytical defense of its model — to respond to each objection with a reasoned presentation. Nevertheless, after careful study, we believe that the Commission’s Opinions fully answer or account for all points raised by the consumers. 1. Consolidated Returns The consumers contend that the Commission’s model fails to account for any tax saving which may occur from the filing of consolidated tax returns covering both jurisdictional and nonjurisdictional activities. They argue that the Supreme Court’s decision in FPC v. United Gas Pipe Line Co., 386 U.S. 237, 87 S.Ct. 1003, 18 L.Ed.2d 18 (1967), requires that the consumer receive the benefit of any reduction in taxes arising from the combination of jurisdictional gains with nonjurisdictional losses. The consumers point out that Commission opinions following a different course have never received judicial approval. The Commission responds that the United Gas Pipe Line decision, supra, did not mandate a specific formula for the allocation of tax savings but merely reversed a court of appeals which had refused to defer to Commission discretion. In support of this interpretation the Commission cites the Supreme Court’s second decision in the United Gas Pipe Line case, 393 U.S. 71, 89 S.Ct. 55, 21 L.Ed.2d 55 (1968), which again reversed the court of appeals, this time for netting the losses of other affiliates against the nonjurisdictional gains of the United affiliate, without giving the Commission an opportunity to consider the issue. The Commission claims that it is within its discretion to hold that “regulated activities are properly viewed as a separate corporate entity and the Federal income tax allowance computed accordingly.” Opinion 770 at 83, R. 2578 quoting Opinion 749-C. We do not find it necessary to reach the legal issues raised by these arguments for we agree with the Commission that in the context of this national ratemaking proceeding, the savings which some producers may obtain from consolidation will not have industry-wide significance. Even the broadest reading of the decisions cited by the consumer interests could not reasonably preclude the Commission from making a net calculation on unregulated activities (setting losses off against gains from other nonjurisdictional activities) before combining the net figure with profits from jurisdictional sales. Thus, before a reduction of the tax component could be required, there would have to be a projection of a net nonjurisdictional loss on an industry-wide basis. The Commission specifically considered this possibility and dismissed it as neither supported by evidence nor “plausible” as a projection. [I]f any tax losses from non-jurisdictional activities are to be first allocated to offset non-jurisdictional profits, we would be required to find that the overall petroleum industry has sufficient tax losses to offset all income from production, refining, and marketing petroleum products and any other related or unrelated business activity. There is no evidence to support such a conclusion nor is it plausible. Opinion 770-A at 83, R. 3648. This is the kind of determination that must be challenged head on if at all, but we find no such challenge by any of the petitioners. Hence we need not rule on whether or under what circumstances the Commission would be obligated to reduce “cost” of natural gas production because of nonju-risdictional loss. We hold that the implausibility of net nonjurisdictional loss for the producers — at least in the absence of contrary evidence from the petitioners — renders unnecessary any inquiry into savings from consolidated returns. 2. Increased Intangible Drilling Costs The next major criticism leveled by the consumers against the Commission model is that it does not fully take into account the tax savings which the producers may achieve by taking as deductions the higher intangible drilling costs which will result in future production. The consumers assert that the Commission’s model of the cash flow of the average well operates “in a vacuum” — that the Commission assumes that the producer will be paying income tax on the revenues generated by that well when, in fact, those revenues will be offset by the deductions from the drilling of additional wells. APGA Brief at 47. Pushing the point a bit further, APGA visualizes “constantly increasing amounts of exploration and development in the future resulting in real resource growth which would generate additional tax deductions” (APGA Brief at 48), and the Public Service Commission of New York refers to the possibility of “a series of staggered deferrals resulting] in a permanent reduction in the company’s tax obligations.” N.Y. Reply Brief at 24. The Commission addressed itself to this consumers’ contention. Initially, in Opinion 770, the Commission put it that increases in unit costs arising from inflation or decreased productivity would be reflected in the rate calculations for subsequent biennia and that an assumption of constantly increasing real resource growth for the industry was unrealistic. Opinion 770 at 84-5, R. 2579-80. On reconsideration, in Opinion 770-A, the Commission articulated its position that the validity of its model is not dependent on assumptions about the real resource growth of the industry, one way or the other. Further consideration leads to the conclusion that the methodology employed in Opinion 770 takes account of all future increases in intangible drilling costs deductions whether caused by increasing unit costs or real resource growth, (emphasis added) Opinion 770-A at 78, R. 3643. In explaining this conclusion the Commission stressed that its model gave the consumer the full time value of every tax deduction, and that as the model was applied in future biennial ratemaking proceedings, the consumer would fully recoup any tax savings which the companies had gained from increased expenses: Whenever a producer makes future investment for the exploration or development of new gas, the value of the tax deductions resulting therefrom will be subtracted from the gross outlays used to compute the just and reasonable rate for gas from wells drilled at that time. Thus the time value of the deferral in tax liability obtained by that investment will be returned to the consumer' through the price of that gas, consistent with the decision in Alabama-Tennessee Natural Gas Co. v. FPC. Opinion 770-A at 78, R. 3643. The soundness of this position of the Commission is reflected in the opinion of Commissioner Smith. Although, he disagreed with several of the Commission’s other major conclusions, he concurred in the Commission’s treatment of taxes. His concern lay only in the need for assurance that there be forward consistency in this income tax analysis to assure reasonableness of future rates: It is mandatory that this treatment of the income tax deductions continues in the future. If the methodology were changed in the future to account for the value of income tax deductions on a capitalization or “carry-forward” basis, as was argued in this proceeding, the future rates would be unduly and unjustly biased upward. 770-A Dissenting Opinion at 3, R. 3814. After careful study, we conclude that the Commission’s discounted cash flow methodology fully accounts for any tax savings from potential increases in intangible drilling costs. Initially, we consider the APGA’s assertion that the Commission model operates “in a vacuum.” If this is only another way of saying that rate regulation can never proceed by constructing a model, we merely reiterate our prior discussion. If this means that the particular model has the defect of treating test period production in isolation from the rest of producers’ activities, it is inaccurate. Opinion 770-A at 79, R. 3644. The model well postulated by the Commission’s methodology produces no revenues during its preproduction years, yet the analysis assumes that the expenses generated in those years yield a current tax savings, in other words, assumes there will be other income, and that the tax due on that other income will be reduced. In this way the model takes into account the interaction between wells with overlapping lifetimes. Assume, for example, that Well I has reached its productive period, and is producing taxable income. During this period drilling for Well II is commenced, and intangible drilling costs are incurred in connection therewith. It is true that the tax deductions generated by Well II may be applied against the income from Well I, and may reduce or eliminate the tax liability for Well I during those years. It is also true that this savings will not be reflected in the rate calculation for Well I. But because the model assumes that prepro-duction deductions will be used to offset income from other activities, the tax savings from the overlap of the two wells will be reflected in the rate calculation for Well II. Moreover, because the model recognizes the full time value of this savings, the consumer gains the full benefit of the deferral of the tax obligation. Once this fundamental point is understood, it is easier to see why the reasons for increases in intangible drilling costs are irrelevant to the validity of the model. If for some reason the unit cost of drilling increases, it will produce a larger tax savings per Mcf and that larger tax savings will be reflected in the rate calculations for gas from the wells that are being drilled. This point is entirely sound, and recognized as such in the thoughtful brief filed by the New York Public Service Commission. Even projecting there may be no change in the unit cost of drilling for gas, and that there will be an increase in gross tax deductions arising solely from real resource growth in the natural gas industry, the consequent tax savings would still be reflected in ratemaking under the Commission methodology. In that circumstance, the tax saving reflected in the price of each Mcf of gas produced in future biennia would not be any greater, but because there would be more Mcf of gas produced and sold, the greater aggregate tax savings would be fully recouped. In short, under the Commission model every time a tax deduction is taken, the value of the savings is noted, increased to reflect its value over time, and reflected in the price of subsequently produced gas. The Commission’s methodology is fully capable of handling a long series of tax deferrals. In the sam