# Appendix — Federal Energy Regulatory Commission v. Public Service Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1981
- **Citation:** 454 U.S. 879

## Text

80-1939 FILED

Office-Supreme Court, U.S. t

IN THE

Supreme Court of the Anited St —

ALEXANDER L. STEVAS,

OCTOBER TERM, 1980

North Carolina Natural Gas Corporation,
Public Service Company of North Carolina, Inc.
Piedmont Natural Gas Company, Inc.,

Vv.

Petitioners,

The Public Service Commission of the State of New York,
Long Island Lighting Company,
The Brooklyn Union Gas Company, et al.,

Respondents.

APPENDIX TO

, PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIKCUIT

Donald W. McCoy, Esquire
McCoy, Weaver, Wiggins,
Cleveland & Raper

P.O. Box 2129

Fayetteville, N.C, 28302

F. Kent Burns, Esquire

Boyce, Morgan, Mitchell, Burns & Smith, P.A.
P.O. Box 1406
Raleigh, N.C. 27602

Attorneys for

Gregory Grady
Littman, Richter, Wright
& Talisman, P.C.
1050 17th Street, N.W., Suite 600
Washington, D.C. 20036
(202) 331-1194

Jerry W. Amos, Esquire
Brooks, Pierce, McLendon,
Humphrey & Leonard

P.O. Drawer U
Greensboro, N.C. 27402

North Carolina Natural Gas Corporation,
Public Service Company of North Carolina, Inc.
and Pi¢dmont Natural Gas Company, Inc.

NE EE TY
DICESARE - Printing — 3314101 — Washington, D.C. 20006

APPENDIX A

APPENDIX B

APPENDIX C

APPENDIX D

APPENDIX E

APPENDIX F

INDEX TO APPENDIX

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APPENDIX A
l
Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C. Reports. Users are requested

to notify the Clerk of any formal errors in order that corrections may be
made before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Urited States Court of of Appeals

for the District of

No. 79-2184) SEP 2 4 1980

THE PUBLIC SERVICE COMMISSION OF THE
STATE OF NEw YorK, P@MORGE A. FISHER

Original

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

COMMONWEALTH GAS PIPELINE CorP.,
CAROLINA PIPELINE CORPORATION,

TRANSCONTINENTAL GAS PIPE LINE CORPORATION,
INTERVENORS

No. 79-2183

NORTH CAROLINA NATURAL GAS CORPORATION
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INC.
PIEDMONT NATURAL GAS COMPANY, INC., PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

Bills of costs must be filed within 14 days after entry

of judgment. The
court looks with disfavor upon motions to file bills of costs out of time.

CAROLINA PIPELINE COMPANY,
COMMONWEALTH GAS PIPELINE CORPORATION,
PuBLIc SERVICE COMMISSION OF THE
STATE OF NEw YORK,
TRANSCONTINENTAL GAS PIPE LINE CorpP.,
BROOKLYN UNION GAS Co., et al.,
CoLuMBIA GAS TRANSMISSION CorP.,
WASHINGTON GAS LIGHT COMPANY,
ATLANTA GAS LIGHT COMPANY, INTERVENORS

No. 79-2184
NORTH CAROLINA UTILITIES COMMISSION, PETITIONER
Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

CAROLINA PIPELINE COMPANY,
COMMONWEALTH GAS PIPELINE CORPORATION,
PUBLIC SERVICE COMMISSION OF THE
STATE OF NEw YorK,
TRANSCONTINENTAL GAS PIPE LINE CorpP.,
BROOKLYN UNION GAS Co., et al.,
COLUMBIA GAS TRANSMISSION CorpP.,
WASHINGTON GAS LIGHT COMPANY,
ATLANTA GAS LIGHT COMPANY,

NORTH CAROLINA NATURAL GAS CorpP., et al.,
INTERVENORS

No. 79-2195
LONG ISLAND LIGHTING COMPANY, PETITIONER
v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

TRANSCONTINENTAL GAS PIPE LINE Corp.,
NorTH CAROLINA NATURAL GAS CorpP., et al.,
NorTH CAROLINA UTILITIES COMMISSION,
CAROLINA PIPELINE COMPANY,
COMMONWEALTH GAS PIPELINE CORPORATION,
PuBLic SERVICE COMMISSION OF THE
STATE OF NEW YORK,

BROOKLYN UNION GAs COMPANY, et al.,
WASHINGTON GAs LIGHT COMPANY,
ATLANTA GAS LIGHT COMPANY, INTERVENORS

No. 79-2213
THE BROOKLYN UNION GAS COMPANY, et al., PETITIONERS
Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT

TRANSCONTINENTAL GAS PIPE LINE Corp.,
PuBLIC SERVICE COMMISSION OF THE
STATE OF NEW YORK,
COMMONWEALTH GAS PIPELINE CORPORATION,
NorTH CAROLINA NATURAL GAS CorpP., et al.,
NorTH CAROLINA UTILITIES COMMISSION,
WASHINGTON GAs LIGHT COMPANY,
ATLANTA GAS LIGHT COMPANY, INTERVENORS

No. 79-2322

TRANSCONTINENTAL GAS PIPE LINE CORPORATION,
PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENTS

CAROLINA PIPELINE COMPANY,
NorTH CAROLINA NATURAL GAS CorpP., et al.,
BROOKLYN UNION GAS COMPANY, et al., INTERVENORS

Petition for Review of an Order of the
- Federal Energy Regulatory Commission

Argued April 10, 1980
Decided September 24, 1980

Joseph P. Stevens with whom Michael W. Hall and
Steven L. Zilkowitz were on the brief, for The Brooklyn
Union Gas Co., et al., petitioners in No. 79-2213 and
Intervenors in Nos. 79-2182, 79-2183, 79-2184, 79-2195
and 79-2322.

Richard A. Solomon with whom Peter H. Schiff, Gen-
eral Counsel, Public Service Commission of the State of
New York, and Dennis Lane were on the brief, for
Public Service Commission of the State of New York,
petitioner in No. 79-2182 and Intervenors in Nos. 79-
2183, 79-2184, 79-2195, 79-2213 and 79-2322.

Morton L. Simons with whom Barbara M. Simons was
on the brief for North Carolina Utilities Commission,

petitioners in No. 79-2184 and Intervenor in Nos. 79-2195
and 79-2213.

Thomas F. Ryan, Jr., with whom Richard T. Boone
and David J. Evans were on the brief, for Transconti-
nental Gas Pipe Line Corp., petitioners in No. 79-2322
and Intervenors in Nos. 79-2182, 79-2183, 79-2184, 79-
2195 and 79-2213.

Gregory Grady with whom Donald W. McCoy and
F. Kent Burns were on the brief, for North Carolina
Natural Gas Corp., et al., petitioners in No. 79-2183 and
Intervenors in Nos. 79-2184, 79-2195, 79-2213 and 79-
2322.

Barbara J. Weller, Attorney, Federal Energy Regula-
tory Commission with whom Jerome Nelson, Solicitor,
Joshua Z. Rokach and Andrew M. Zack, Attorneys, Fed-
eral Energy Regulatory Commission were on the brief,
for respondent. Howard Shapiro, Attorney, Federal
Energy Regulatory Commission also entered an appear-
ance for respondent.

William I. Harkaway and G. Douglas Essy were on the
brief, for Consolidated Edison Company of New York,
Inc., petitioner in No. 79-2213 and Intervenors in Nos.
79-2182, 79-2183, 79-2184, 79-2195 and 79-2322.

Francis J. McShalley was on the brief, for National
Fuel Gas Supply Corp., petitioner in No. 79-2213 and
Intervenor in Nos. 79-2182, 79-2183, 79-2184, 79-2195
and 79-2322.

John T. Miller, Jr. was on the brief, for Elizabeth Gas
Company, petitioner in No. 79-2213 and Intervenor in
Nos. 79-2182, 79-2183, 79-2184, 79-2195 and 79-2322.

Ira G. Meqdal was on the brief, for South Jersey Gas
Company, petitioner in No. 79-2213 and Intervenor in
Nos. 79-2182, 79-2183, 79-2184, 79-2195 and 79-2322.

William R. Duff was on the brief, for Public Service
and Gas Co., petitioner in No. 79-2213 and Intervenor in
Nos. 79-2182, 79-2183, 79-2184, 79-2195 and 79-2322.

Eugene J. Bradley, Associate Attorney General, was
on the brief, for Philadelphia Electric Co., petitioner in
No. 79-2213 and Intervenor in Nos. 79-2182, 79-2183,
79-2184, 79-2195 and 79-2322.

Robert C. Richards was on the brief, for Long Island
Lighting Co., petitioner in No. 79-2195 and Intervenor in
Nos. 79-2182, 79-2183, 79-2184, 79-2213 and 79-2322.

John E. Holtzinger, Jr., Paul H. Kick and John T.
Stough, Jr. were on the brief, for Atlanta Gas Light Co.,
Intervenor in Nos. 79-2182, 79-2183, 79-2184, 79-2195
and 79-2213.

Stephen J. Small, John M. Hill and Giles D.H. Snyder
were on the brief, for Columbia Gas Transmission Corp.,
Intervenor in Nos. 79-2183 and 79-2184.

Stanley M. Morly also entered an appearance for
Carolina Pipeline Company, Intervenor in Nos. 79-2182,
79-2183, 79-2184, 79-2195 and 79-2322.

Stephen H. Wants, II also entered an appearance for
Commonwealth Gas Pipeline Corp., Intervenor in Nos. 79-
2182, 79-2183, 79-2184, 79-2195 and 79-2213.

Lewis Carroll also entered an appearance for Wash-
ington Gas Light Co., Intervenor in Nos. 79-2182, 79-
2183, 79-2184, 79-2195 and 79-2213.

Before MCGOWAN, WILKEY and WALD, Circuit Judges.
Opinion for the court filed by Circuit Judge McGowan.

McGowan, Circuit Judge: These direct review pro-
ceedings under the Natural Gas Act involve two separate
orders entered by the Federal Energy Regulatory Com-
mission (FERC)—the successor agency to the Federal
Power Commission (FPC), 42 U.S.C. § 7172(a) (1) (C).

One of those orders, reflecting the Commission’s consider-
ation of rate increases filed in 1976 by Transcontinental
Gas Pipe Line Corporation (Transco) with the FPC un-
der section 4 of the Act, is challenged in respect of the
14% rate of return on equity allowed by it. The other
order, entered by the Commission after a hearing initiated
by it under section 5(a) of the Act, is attacked, on both
procedural and substantive grounds, for its imposition of
a new basis for allocating Transco’s costs attributable
to distance. For the reasons appearing hereinafter, we
affirm with respect to the rate of return issue, but set
aside the second order relating to cost allocation.'

I

Transco operates a major long-line natural gas pipe-
line system running from its sources of supply in Texas
and Louisiana through the southern and mid-Atlantic
states to its terminus in the New York metropolitan area.
Its service territory is divided into three sales rate zones:
Mississippi, Alabama, and Georgia are in zone 1, the
Carolinas, Virginia, and the District of Columbia in
zone 2, and Maryland, Delaware, Pennsylvania, New
Jersey, and New York in zone 3.

A 1962 settlement between Transco and its customers
provided that customers in zone 2 would pay 2.8 cents

'Six separate petitions for review were filed, and have
been consolidated by the court for hearing and disposition.
In No. 79-2322, Transco has appealed the rate of return dceter-
mination of the Commission as too low, whereas North Caro-
lina Utilities Commission (NCUC) in its petition in No.
79-2184 asserts that it is too high. In No. 79-2182, the New
York Public Service Commission (NYPSC) challenged
FERC’'s cost allocation determination: and several North
Carolina utilities in No. 79-2183, NCUC in No. 79-2184, Long
Island Lighting Company (LILCO) in No. 79-2195, and a
group of eight utilities in Pennsylvania, New Jersey and New
York in No. 79-2213, have also petitioned for review of that
decision.

per thousand cubic feet (Mcf) more than zone 1 cus-
tomers, and that zone 3 customers would pay 3.6 cents per
Mcf more than zone 2 customers. The 1962 settlement
and subsequent rate settlements incorporating these cost
allocations were approved by the FPC, and the rate dif-
ferentials have been embodied in Transco’s legally effec-
tive rate schedules.

On July 30, 1976, Transco filed with the FPC an ap-
plication for $81.3 million in higher rates (Docket RP76-
136). On December 30, 1976, Transco, in Docket RP77-
26, proposed an increase in interruptible service rates.
No change in the zone rate differentials was proposed by
Transco in either of these filings. The FPC consolidated
the two petitions. The parties were able to reach a par-
tial settlement on issues not contested here that was ap-
proved by the Commission on June 27, 1978.2 During
the interim, Transco has applied for new rates to take
effect on January 1, 1978. This meant that Transco’s
1976 request for a higher rate of return was limited, or
locked in, to the eleven months between February 1 and
December 31, 1977.°

After a hearing, a FERC administrative law judge
issued an initial opinion establishing 14% as a reasonable
rate of return on Transco’s equity for the locked-in
period.‘ The opinion also stated that the zone of rea-
sonableness for this rate lay between 13.5 and 14.3%.°

2 Order Granting in Part Motion for Reconsideration, Ac-
cepting Settlement Agrcement in Part, and Remanding for
Procedures on Contested Zoning Issue, Docket Nos. RP76-136
and RP77-26 (June 27, 1978), reprinted in Record at 4133-35.

*The cost allocation issue, however, is unaffected by the
later filing.

4 Initial Decision on Reserved Issues, Docket Nos. RP76-136
and RP77-26 (Feb. 13, 1978), reprinted in Record at 3937-
49 [hereinafter referred to as Initial Decision].

5 Jd. at 9-10.

This initial opinion was adopted by the Commission on
August 30, 1979.8 The ALJ relied heavily upon testi-
mony of the Commission’s expert witness, who compared
Transco’s risks and rate of return to those of similar
investments such as other pipelines and electric utilities.
Record at 160-68. Transco’s witness also compared
Transco to such investments, but suggested that the
Commission’s witness had underestimated the risks fac-
ing Transco and concluded that from 161% to 17%
would be a more reasonable rate of return. Record at
29-42, 45-51, 473.

Although Transco had not proposed any change in the
1962 zone allocations, the parties found themselves un-
able to agree on a method of cost allocation during set-
tlement negotiations. Accordingly, the Commission, con-
fronted with a claim that no change in the existing zone
differentials could be made in the absence of a finding
under section 5(a) of the Act that they were unlawful,
ordered a hearing on this question, and, on December
19, 1978, an administrative law judge handed down an

*Order Affirming and Adopting Initial Decision, Docket
Nos. RP76-136 and RP77-26 (Aug. 30, 1979), reprinted in
Record at 4728A. The Commission slightly modified this
order by changing the amount of interest Transco was to pay
on refunds, Order Amending Prior Order, Docket Nos. RP76-
186 and RP77-26 (Sept. 27, 1979), reprinted in Record at
4829-30.

The refunds were ordered because Transco has been charg-
ing rates based upon its requested 17‘; return on equity.
Under the Natural Gas Act, a petitioning company may put
into effect its requested rates subject to refund, although
FERC may suspend the higher rate for up to five months.
Natural Gas Act § 4(d), (e), 15 U.S.C. § 717e(d), (e) (1976).
See note 13 infra.

FERC denied rehearing on the rate of return issue. Notice
of Denial of Application for Rehearing and Motion for Stay,
Docket Nos. RP76-136 and RP77-26 (Oct. 24, 1979), reprinted
in Record at 48389.

10

initial decision endorsing the 1962 zone differentials.’
However, in Opinion No. 59," the Commission rejected
the decision and, without having found the existing dif-
ferentials to be unlawful, ordered cost allocation not by
zones but by the Mcf-mile method, which attributes cost
according to volume and mileage. The change from zones
to Mcf-mile would transfer about $15 million in fixed
costs from customers in zones 1 and 2 to those in zone 3.°

The Commission justified its decision by reference to
Northern Natural Gas Co., 14 FPC 11 (1955), aff'd
sub. nom. Interstate Power Co. v. FPC, 230 F.2d 372
(8th Cir. 1956), cert. denied, 352 U.S. 967 (1957),
where it concluded that distance was the prime determi-
nant of the cost of transporting natural gas.'’° Having
decided on that basis that the Mcf-mile method was
superior to zone allocations, the Commission then con-
sidered whether the cost-shifting effects of the Mcf-mile
system should be mitigated because of (1) the historical
basis of the Transco system, (2) load concentration and

? Initial Decision on Zone Rate Differentials, Docket Nos.
RP76-136 and RP77-26 (Dec. 19, 1978), reprinted in Record
at 4468-75.

8 Opinion No. 59, Opinion and Order Reversing Initial De-
cision and Establishing Zone Rates Based Upon Fully Allo-
cated Costs. Docket Nos. RP76-136 and RP77-26 (Aug. 6,
1979), reprinted in Record at 4706-28 [hereinafter referred
to as Opinion No. 59]. The Commission denied a motion for
rehearing on this issue, Notice of Denial of Application for
Rehearing and Motions for Stay, Docket Nos. RP76-136 and
RP77-26 (Oct. 4, 1979), reprinted in Record at 4869.

* Opinion No. 59 at 19.

10 Jd. at 5-6.

It is perhaps worth noting that this conclusion led the FPC,
in Northern Natural Gas, to allocate costs not by the Mcf-
mile method, but by zones. 14 FPC at 36. The Northern
Natural Gas system had formerly not allocated costs by dis-
tance, Jd. at 20. See section III, B infra.

load factor in zone 3, and (3) storage facilities in zone
3 which benefit zone 2 consumers. NYPSC and the zone
3 customers had argued that these factors militated
against using the Mcf-mile method.

These parties contend that cost allocations on the
Trancey system should reflect the fact that the pipeline
was built thirty years ago to serve customers in zone
3 and that it would not have been built when it was
without those customers. The FERC staff recommended,
on this ground, to calculate costs half on the zone method,
more favorable to zone 3, and half on the Mcf-mile
method. Opinion No. 59 at 7.

The Commission chose not to mitigate the 100% mile-
age cost allocation on this ground because it found that
the capacity of the pipeline had increased by a factor
of eight or nine since its construction and therefore the
historical roots of the Transco system were of little con-
temporary relevance. Id. at 7. It also commented that
it could not impose costs on zone 1 and 2 customers be-
cause of factors unrelated to cost. Finally, the Com-
mission observed that the price increase attributable to
mileaging in zone 3 would not render Transco’s gas less
saleable. Id. at 8-9.

The zone 3 interests also argued that considerations
of load concentration and load factor in their zone should
be used to lessen the effect of Mcf-mile cost allocation.
The pipeline’s ratio of sales in zone 3 to total sales, or
load concentration, was 75%, indicating that zone 3
customers accounted for %4 of Transco’s sales. A high
load concentration in zone 3 suggests that the pipeline’s
economies of scale, such as the use of larger-diameter
pipe, are largely attributable to zone 3 customers. These
customers argued that they should receive the benefit of
costs avoided mostly through their use of the Transco
pipeline. But the Commission declined to modify the
Mcf-mile method, stating that all zones contribute to

12

economies of scale on the Transco system. Opinion No.
59 at 15.

The Commission likewise did not give any weight to
the heavier load factor in zone 3. The load factor,
which is the ratio of average daily demand to maximum
daily demand,'' was 52% in zone 3, compared to 50%
in zone 1 and 36% in zone 2. Opinion No. 59 at 9 n.13.
A higher load factor suggests a more efficient use of
resources, an effect that one expert source states is “quite
pronounced” '? at load factors up to 60%. The FERC
opinion said that the 50% difference in load factors be-
tween zones 2 and 3 was not “extreme” enough to war-
rant a departure from the Mcf-mile method. Id. at 14.

A final consideration offered by zone 3 parties was
the_use of storage facilities in zone 3 to benefit zones
1 and 2. To meet peak demands for gas, Transco pipes
gas sold to zones 1 and 2 in summer into storage in
zone 3. In the winter, this gas is used in zone 3, and
gas sold to zone 3 is delivered to customers in zone 1
and 2. The storage facilities in zone 3 provide system-
wide savings because they obviate the need for increased
capacity to meet peak winter demand. The Commission
chose not to give this factor any weight because it found
that this displacement procedure involved no physical
transport of gas and therefore no material cost. Opinion
No. 59 at 16.

Both zone 2 and zone 3 parties question the Commis-
sion’s determination of which costs will be included in
the Mcf-mile method and thus vary with distance. The
Commission included in its Mcf-mile calculations Transco’s
costs of gathering and transmitting its gas before it
reaches the first customer in zone 1, although it did not

11 This definition in found in P. GARFIELD & W. LOVEJOY,
PuB.Lic UTILITY ECONOMICS 175 (1964).

13 Id.

13

provide any reasons for that allocation in its opinion.
At stake is the proper allocation of $30.5 million in
gathering costs. Record at 292. Both Transco and the
zone 3 petitioners assert that the cost of these gathering
facilities upstream of Transco’s closest customer cannot
possibly vary with distance.

II

Judicial review’ of orders such as these is a delicate
task. In the Permian Basin Area Rate Cases, 390 U.S.
747 (1968), Justice Harlan said that reviewing courts
must carefully scrutinize the Commission’s decisionmak-
ing process, but defer to its expert judgment:

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 it-
self that the Commission has given reasoned con-
sideration to each of the pertinent factors. Judicial
review of the Commission’s orders will therefore
function accurately and efficaciously only if the Com-
mission indicates fully and carefully the methods by
which, the and the purposes for which, it has chosen
ee

390 U.S. at 792. However, Justice Harlan also cau-
tioned courts to remember that

. . . Congress has entrusted the regulation of the
natural gas industry to the informed judgment of
the Commission, and not to the preferences of re-
viewing courts. ...

. . . [CJourts are without authority to set aside
any rate selected by the Commission which is within
a “zone of reasonableness.” FPC v. Natural Gas
Pipeline Co., 315 U.S. 575, 585. No other rule would
be consonant with the broad responsibilities given
to the Commission by Congress; .. .

Id, at 767 (1968).

14

We think the same balance should be struck in this
case. While we must pay proper deference to the ex-
pertise of the agency entrusted with administering the
Natural Gas Act, and while we cannot substitute our
judgment for the Commission’s in weighing the relevant
factors and the proffered evidence, we cannot, as some
of the parties have suggested, limit ourselves to looking
at the result. Our responsibility under the Natura] Gas
Act, $19(b), 15 U.S.C. §717r(b) (1976), is to deter-
mine whether the Commission, in either of these orders,
exceeded or misinterpreted its authority under the Act,
and to ensure that “each of the order[s’] essential ele-
ments is supported by substantial evidence.” 390 U.S.
at 791-92.

III

In 1976, when Transco filed for rate increases, it did
not propose any change in the allocation of costs accord-
ing to distance. It was willing to continue using the
1962 differentials that had been included in many prior
rate settlements approved by the FPC. The Commission’s
decision, because it did not determine that the old zone
rates were unjust or unreasonable and because it did
not provide a ‘reasoned explanation for the departure
from settled practice, cannot withstand our scrutiny.

A. The Commission’s Authority Under Section 5(a) of
the Natural Gas Act

Section 5(a) of the Natural Gas Act, 5 U.S.C. § 717d
(a) (1976), provides in pertinent part:

Whenever the Commission, after a hearing had
upon its own motion or upon complaint . . . shall
find that any rate, charge, or classification . . .
collected by any natural-gas company . . . or that
any... practice . . . affecting such rate... is
unjust, unreasonable, unduly discriminatory, or pref-
erential, the Commission shall determine the just

15

and reasonable rate, . . . classification, [or] practice,
. . and shall fix the same by order... .

The Commission, then, has the power under the Natural
Gas Act to impose its own rates or methods for their
calculation upon regulated companies only after finding
an existing or proposed rate unjust or unreasonable. The
Commission argues that it need not make a section 5(a)
determination because Transco itself has filed for new
rates under section 4 of the Act.'* The zone 3 petitioners

"The relevant portions of section 4 of the Natural Gas
Act, 15 U.S.C. § 717c (1976), provide:

(a) All rates and charges made, demanded, or received
by any natural-gas company for or in connection with
the transportation or sale of natural gas subject to the
jurisdiction of the Commission, and all rules and regula-
tions affecting or pertaining to such rates or charges,
shall be just and reasonable, and any such rate or charge
that is not just and reasonable is declared to be unlawful.

(b) No natural-gas company shall, with respect to
any transportation or sale of natural gas subject to the
jurisdiction of the Commission, (1) make or grant any
undue preference or advantage to any person or subject
any person to any undue prejudice or disadvantage, or
(2) maintain any unreasonable difference in rates,
charges, service, facilities, or in any other respect, either
as between localities or as between classes of service.

(d) Unless the Commission otherwise orders, no
change shall be made by any natural-gas company in such
rate, charge, classification, or service, or in any rule,
regulation, or contract relating thereto, except after
thirty days’ notice to the Commission and to the public.
Such notice shall be given by filing with the Com-
mission... .

(e) Whenever any such new schedule is filed the Com-
mission shall have authority, either upon complaint of
any State, municipality, State commission or gas dis-
tributing company, or upon its own initiative without
complaint, at once, and if it so orders, without answer or

16

argue that the Commission must comply with section
5(a) ard that its failure to do so denies “Transco's ex-
isting zone differentials the substantive consideration
they deserved.” Zone 3 Customers’ Br. at 12. We agree.

formal pleading by the natural-gas company, bui upon
reasonable notice, to enter upon a hearing concerning the
lawfulness of such rate, charge, classification, or service;
and, pending such hearing and the decision thereon, the
Commission, upon filing with such schedules and deliver-
ing to the natural-gas company affected thereby a state-
ment in writing of its reasons for such suspension, may
suspend the operation of such schedule and defer the use
of such rate, charge, classification, or service, but not
for a longer period than five months beyond the time
when it world otherwise go into effect; and after full
hearings, either completed before or after the rate,
charge, classification, or service goes into effect, the Com-
mission may make such orders with reference thereto as
would be proper in « proceeding initiated after it had
become effective. If the proceeding has not been concluded
and an order made at the expiration of the suspension
period, on motion the natural-gas company making the
filing, the proposed change or rate, charge, classification,
or service shal! go into effect. Where increased rates or
charges are thus made effective, the Commission may, by
order, require the natural-gas company to furnish a bond,
to be approved by the Commission to refund any amounts
ordered by the Commission, to keep accurate accounts in
detail of all amounts received by reason of such increase,
specifying by whom and in whose behalf such amounts
were paid, and, upon completion of the hearing and
decision, to order such natural-gas company to refund,
with interest, the portion of such increased rates or
charges by its decision found not justified. At any hear-
ing involving a rate or charge sought to be increased, the
burden of proof to show that the increased rate or charge
is just and reasonable shall be upon the natural-gas com-
pany, and the Commission shall give to the hearing and
decision of such questions preference over other questions
pending before it and decide the same as speedily us

possible.

17

The Commission seems to be operating under the no-
tion that it has the choice of proceeding under section
4 or section 5 of the Act. But this court and others have
consistently interpreted the Natural Gas Act as offering
no such choice. Justice Harlan said, almost a quarter
of a century ago, that

. the very premise that §§ 4/d) and (e) and 5(a)
are alternative rate-changing “procedures” is itself
based on a misconception of the structure of the
Act. These sections are simply parts of a single
statutory scheme under which all rates are estab-
lished initially by the natural gas companies, .. .
and all rates are subject to being modified by the
aaa upon a finding that they are unlaw-
_ ee

The powers of the Commission are defined by §$% 4
fe) and 5(a). The basic power of the Commission
is that given it by §5(a) to set aside and modify
any rate or contract which it determines, . . . to
be “unjust .. .”. This is neither a “ratemaking”
nor a “rate-changing” procedure. It is simply the
power to review rates and contracts made in the
first instance by natural gas companies, and if they
are determined to be unlawful, to remedy them.

United Gas Pipe Line Co. v. Mobile Gas Service Corp.,
350 U.S. 332, 340-41 (1956). This interpretation is in
accord with the legislative history of the Natural Gas
Act, which states that it is section 5(a) that “authorizes
the Commission . . . to fix charges and reasonable rates.
...” H.R. Rep. No. 709, 75th Cong., Ist Sess. at 5
(1937).

The decisions of this and other courts and of the
Federal Power Commission itself have recognized that
the Commission’s power to set rates or their method of
calculation is derived from section 5(a). This court has
said, in the context of gas supply curtailment, that “[f]or
the purpose of imposing an alternate plan, section 5 is

18

necessary .... [NJowhere in section 4 is there granted
the power to impose alternate rates.” City of Willcox
v. FPC, 567 F.2d 394, 402 (D.C. Cir. 1977), cert. denied,
434 U.S. 1012 (1978)."* The Fifth Circuit, in Southern
Natural Gas Co. v. FPC, 547 F.2d 826, 832 (5th Cir.
1977), declared that the FPC “had no statutory authority
to impose its own curtailment plan . . . absent its com-
pliance with the procedural and substantive standards
of section 5.” The Commission itself, in its landmark
case establishing zoned cost allocations, Northern Natural
Gas Co., 14 FPC 11 (1955), recognized that its power
to reject NNG’s existing uniform rates and substitute
its own zone rates was based upon section 5(a). 14
FPC at 19. The FPC also said that “(t]he fact that
this proceeding was initiated under the primary au-
thority of section 4(e) of the Act is immaterial.” Id.
at 19 n.8.

The confusion over the statutory powers of the FPC
and its successor, FERC, is perhaps based upon the cur-
tailment cases and the context in which they arose.
The FPC, to avoid the delays in processing curtailment
plans that would be engendered under section 5, had
ordered natural gas companies to file their own cur-
tailment plans under section 4, giving itself the option
of converting the section 4 filing to a section 5(a) pro-
ceeding if it found the proposed plans unfair or dis-
criminatory. FPC v. Louisiana Power & Light Co., 406
U.S. 621, 643-45 (1972). In later years, the FPC con-
tinued this practice, but reviewing courts closely moni-
tored the Commission’s orders to file plans to ensure that

% For other cases following this interpretation of section
5(a), see, e.g., FPC v. Louisiana Power & Light, 406 U.S.
621 (1972); Sebring Utilities Comm’n v. FERC, 591 F.2d
1003 (5th Cir.), cert. denied, 100 S.Ct. 167 (1979) ; State of
Louisiana v. FPC, 503 F.2d 844, 861 (5th Cir. 1974) ; Ameri-
can Smelting and Refining Co. v. FPC, 494 F.2d 925, 933
(D.C. Cir.), cert. denied, 419 U.S. 882 (1974).

19

they were not so “coercive” as to dictate a particular
plan to a natural gas company. See, e.g., Sebring Utili-
ties Comm’n v. FERC, 591 F.2d 10038, 1015-16 (5th
Cir.), cert. denied, 100 S.Ct. 167 (1979). The courts
were concerned lest the Commission impose its own cur-
tailment plans without following the formalities pre-
scribed by section 5(a). To prevent section 5(a) from
being undermined, reviewing courts approved curtail-
ment plans filed under section 4 only if they were the
product of the company’s own decision. When reviewing
courts found that the plans had in fact been dictated
by the Commission and that section 5(a) procedures had
not been followed, they did not hesitate to vacate those
plans. See, e.g., State of Louisiana v. FPC, 503 F.2d
844, 861 (5th Cir. 1974). The Commission, therefore,
never had the choice of imposing its own curtailment
plans under section 4 or section 5(a). The curtailment
cases approved only the Commission’s authority to order
regulated companies to file their own, not the Commis-
sion’s, plans under section 4.

The Commission contends that it need not observe sec-
tion 5(a) procedures because this case was commenced
by Transco’s filing for higher rates under section 4(e),
which places the burden of proof upon the petitioner. But
section 4(e) places upon the petitioner the burden of
justifying its higher rates only when the petitioner has
proposed an increase in rates.'® Therefore, we agree
that Transco had the burden of proof on the rate of
return question,’* but we cannot accept the proposition
that because a company files for higher rates, it bears the
burden of proof on those portions of its filing that rep-
resent no departure from the status quo.

15 See FPC v. Louisiana Power & Light Co., 406 U.S. 621,
645 (1972); FPC v. Tennessee Gas Co., 371 U.S. 145, 152
(1962) ; American Louisiana Pipe Line Co. v. FPC, 344 F.2d
§25, 529-30 (D.C. Cir. 1965).

16 See note 27 infra.

20

The Commission's reading of section 4(e) is inconsis-
tent with the text of the statute, the legislative history,
and sound regulatory policy. Section 4(e) states that
“the burden of proof to show that the increased rate or
charge is just and reasonable shall be upon the natural-
gas company, . .”. The emphasis is on making the peti-
tioner justify the changes in rates, not the constant ele-
ments. With like import, the legislative history states
that the “burden of proof is placed upon the natural-gas
company to justify increase in rates.” H.R. No. 709,
75th Cong., 1st Sess. at 5 (1937). The zone allocations
in dispute here were no part of Transco’s argument for
higher rates. Forcing the petitioning company to justify
not only the novel portions of its petitions but the un-
changed parts as well would seriously increase the bur-
den upon these regulated companies without any corres-
ponding improvement in reasoned decisionmaking.

Even if we assume that Transco bore the burden of
proof in justifying its existing zone allocations, we would
be unable to find the Commission’s action outside the
ambit of section 5(a). At most, section 4{e) would give
the Commission authority to vacate a submission in
favor of the prior rate schedule. It can never be used by
F™RC as authority to impose any new rate for which
a regulated company did not petition. If the Commission
seeks to institute its own rates, it has no alternative
save compliance with section 5(a).

We must now decide whether the Commission followed
the procedures of section 5 in replacing zoned cost alloca-
tions with the Mcf-mile method. Before the Commission,
consistent with section 5/a), could move to the Mcf-mile
method, it had to determine that the previous zone dif-
ferentials were “unjust, unreasonable, unduly discrimina-
tory, or preferential,” a determination that must be sup-
ported by substantial evidence and in respect of which
the Commission bears the burden of proof.

21

At the outset we are confronted by the Commission’s
failure in Opinion No. 59 to conclude explicitly that the
old zone differentials are unjust or unreasonable. The
opinion did state that “[t]he Commission . . . finds that
no adequate or proper basis has been shown to justify
the continued application of previously negotiated settle-
ment rate differentials. . .” Opinion No. 59 at 5. We
think that this statement does not qualify as a finding
that the zone differentials can be voided under section
5(a), because section 5fa) places the onus of invalidat-
ing the existing method on the Commission. It is not
enough that the petitioners failed to prove that the
zone differentials are just and reasonable. It is the
Commission which must adduce substantial evidence tend-
ing to show that the existing zone rates are unjust and
unreasonable. Its failure to do so is fatal,’ because it
lacks the authority to substitute one rate for another
without adhering to the requirements of section 5(a).

B. The Commission’s Burden Under the Columbia Gas
Rule

Last year this court held that the Federal Energy
Regulatory Commission “bears the burden of explaining
the reasonableness of any departure from a long stand-

17 The Commission argues on appeal that the zoned rates
are facially unfair and unjust because they are nothing more
than agreed-upon numbers without any basis in cost alloca-
tion methodology. The mere fact that these numbers resulted
from settlement is not enough to prove that they are unjust
or unreasonable when evidence has been introduced tending
to show that they more accurately reflect cost incurrence on
the Transco system than the Mcf-mile method. Sce section
III, B infra.

In addition, we would have serious difficulty upholding the
Commission on the basis of this argument, because it was
first explicitly made by the Commission’s lawyers on appeal.
SEC v. Chenery Corp., 318 U.S. 80, 87 (1943).

ing practice, and any facts underlying its explanation
must be supported by substantial evidence.” Columbia
Gas Transmission Corp. v. FERC, No. 77-1627, at 14
n.31 (D.C. Cir. May 17, 1979).

We are faced with the threshold issue of the relevance
of the Co’umbia Gas rule to this proceeding. The Com-
mission urges that Columbia Gas is inapplicable here be-
cause the 1962 differentials were merely numbers that
did not reflect a recognized methodology and because
Commission approval of settlements incorporating the
zone allocations does not constitute a settled practice.

The purported distinction between a recognized method
and an agreed-upon set of numbers cannot suffice to
remove this case from the ambit of Columbia Gas, be-
cause the same type of agreed-upon numbers were at
issue there. In Columbia Gas, the Commission had de-
parted from use of the Seaboard method, which allocated
costs equally between the demand charge, which is a
fixed charge, and the commodity charge, which varies
with the volume of gas consumed, and had instead
adopted the United method, which changed the split to
25% -75%. Columbia Gas at 7 n.12, 9-13. The FERC
decision was remanded because this court found that the
Commission had not provided a “reasoned explanation”
for the switch. Jd. at 14. But the Seaboard cost-allocation
method is nothing more than the 50-50 split: an ar-
bitrary number which has been criticized as having little
relation to actual cost incurrence."*

Nor is it of any significance that the zone differentials
in the instant case are the result of a settlement. The
application of the Seaboard numbers to the Texas Gas
Transmission Corp., the petitioner in the Columbia Gas

1® See Lorne, Natural Gas Pipeline, Peak Load Pricing, and
the Federal Power Commission, 1972 Duke L. J. 85, 99.

23

case, was also a result of a settlement. See Texas Gas
Transmission Corp., 52 FPC 1930 (1974).

We can now turn to the Commission’s Opinion No.
59 to search for the reasoned decisionmaking that jus-
tifies the deviation from zone allocations to the Mcf-
mile method. Again, it is not sufficient that the peti-
tioners have not justified the existing zone differentials.
It is the Commission that must provide the substantial
evidence to support its departure from long-standing
practice.

The Commission tried to justify the switch to Mcf-
mile by stating, as general principles, that “distance of
transmission has long been regarded as having the most
constant and predictable relation to cost,” and that “dis-
tance is the prime determinant of . . . cost.” Opinion
No. 59 at 5-6. While this may well be true, it is simply
not relevant to any discussion of the comparative merits
of zone and Mcf-mile cost allocation on the Transco
system. The question that the Commission faced was
not whether it should allocate costs according to distance,
but whether, given the particular circumstances of the
Transco system, the Mcf-mile method did a better job of
accurately reflecting those distance-related costs than
did the existing zone differentials."*

The proper place for considering the cost-based issues
raised by zone 3 parties, such as load factor, load con-
centration, and zone 3 storage, is in choosing between
zone allocations and some other method. In this case,
however, the Commission decided first that the Mcf-
mile method was superior and then rejected challenges

1° We do not wish to suggest that the Commission may only
consider accurate reficction of costs in making these decisions.
But if it wishes its order to reflect other ends it must so
state. Opinion No. 59 suggests that the Commission was only
interested in accurate cost allocation.

24

to that.” That technique begs the question to which all
parties have a right to an answer: on the Transco sys-
tem, were the zone allocations more accurate than the
alternatives?

We do not concur in the Commission’s argument on
appeal that the zone allocations were obviously inac-
curate because they were the result of a 1962 compromise,
rather than of methodical calculation. The fact that
parties with adverse interests agreed to those numbers,
and continued to do so in later years gives rise to the

20 We can pretermit any extended discussion of the Com-
mission’s treatment of these mitigating factors because we
cannot agree with its initial conclusion to move to Mcf-mile
cost allocation. But we have reservations about the Commis-
sion’s handling of some of these matters. While their con-
clusion that variations in load factor were not “extreme”
enough to warrant a departure from Mcf-mile is an exercise
of their expert judgment and thus difficult for us to disturb,
their discussion of load concentration and zone 3 storage
suggests flaws in the Commission’s decisionmaking.

The Commission refused to attach weight to the 75°- load
concentration in zone 3 because it said that all zones con-
tribute substantially to economies of scale on the Transco
system. But this is not altoyether responsive to the argu-
ments of zone 3 customers, because the issue is not whether
all zones contribute, but the relative contributions of the
three zones. The inference that the economies of scale are
mostly attributable to zone 3 remains unrebutted by the Com-
mission’s reasoning.

The Commission also refused to take the zone 3 storage
facilities into account, stating that the displacement procedure
involved no material cost. But the importance of the zone 3
storage lies not in costs incurred, but in costs avoided. The
FPC has in the past, with the approval of this court, allocated
terminal zone storage costs to all zones because the use of
the facilities for displacement saved all customers money.
Consolidated Gas Supply Corp. v. FPC, 520 F.2d 1176 (D.C.
Cir. 1975). If these facilities save Transco and its customers
money, it would seem proper that zone 3 customers get some
of the benefits.

25

not unreasonable inference that many parties thought
them fair at one time, although, of course, the inability
of those numbers to win assent in this proceeding sug-
gests that some of the parties now think otherwise.
Further, we do not understand why the Mcf-mile method
is obviously superior to the zone method when applied
to Transco. While it may be true that cost increases
with distance, the Mcf-mile method assigns cost by dis-
tance and volume. If there are any economies of scale
on the Transco system, then the relationship between cost
and distance will be far more direct than between cost
and volume.*'

In addition, the inclusion of upstream gathering fa-
cilities in the mileaging calculation appears to distort
significantly the cost allocation imposed on the Transco
system by Mcf-mile. The Commission, in its Opinion
No. 59, does not provide any basis for concluding that
Transco incurs more upstream costs in serving zone 3
than zone 2 customers. Although we remain deferential
to reasoned decisionmaking by an expert agency, it would
appear that costs incurred upstream of Transco’s first
customer vary little, if at all, with the comparative dis-
tances of Transco customers.”

21 We recognize that the zone system also allocates costs by
distance and volume. But the existence of economies of scale
on the Transco system suggests that costs should not rise
quite as rapidly for increases in volume as for distance.
Thus, the lesser differentials of the zone system may reflect
more closely, although still inaccurately, the ameliorative
effect of economies of scale than would the Mcf-mile method.

22 We need not decide the question of the allocation of ad-
ministrative and general transmission costs by volumetric,
rather than Mcf-mile, calculation, because we have not been
able to uphold the Commission’s determination that any form
of Mcf-mile cost allocation is appropriate on the Transco

system.

26

Finally, the record contains evidence that tends to
prove the relative superiority of the zone allocation sys-
tem as a more accurate reflection of cost incurrence. See
Record at 1026-30, 2497. While this evidence is cer-
tainly open to dispute, it does suggest that the zone
allocation figures are not facially absurd and that they
deserve the reasoned consideration that the Columbia
Gas rule seeks to provide.

We conclude, therefore, that the Commission’s order
directing the change to a mileage-McF allocation of costs
is invalid. That is so in the first instance because of the
Commission’s disregard of the procedural requirements
of section 5(a). The Commission erred in (1) placing
the burden of proof on the opponents of the change in
cost allocation rather than upon itself and (2) failing to
make the findings that the existing zone rates legally
in effect were unlawful. Without such findings, section
5(a) does not empower the Commission to prescribe a
different method of cost allocation affecting differential
rates. In any event, the evidence of record supporting
that prescription falls short of substantiality.

IV

The Commission determination of 14% as a reason-
able return on Transco equity for the eleven-month
“locked-in” period faces attack from two sides. On one
flank, NCUC argues that the rate of return is too gene-
rous because the decision did not take into account
Transco’s allegedly inept management and unused fa-
cilities. On the other, Transco contends that the Com-
mission’s determination is neither supported by substan-
tial evidence nor consonant with Columbia Gas.

The Commission dismissed NCUC’s contentions of
inept management and unused facilities on the grounds
that the petitioner had not introduced any evidence to
support these claims. Initial Decision at 7 n.5. NCUC

27

had argued that the depth of curtailment of service on
the Transco system suggested both conclusions, but the
Commission concluded that mere curtailment, even to
509¢ capacity, did not of itself establish bad management
or idle facilities. We find nothing in the record to war-
rant our disturbance of the Commission’s judgment.

In support of its claim that the 14% is too low,
Transco first argues that it is not possible to trace
the path by which the ALJ, and thus the Commission
by adoption of the ALJ initial decision, arrived at the
14% figure. We think it is. We begin with the testi-
mony, on which the ALJ primarily relied, of the staff’s
expert witness, who had himself concluded that 14%
was a reasonable figure.

The staff expert compared the risks facing Transco
with those facing other regulated companies. He divided
risks between the possibility of business reverses, which
is called business risk, and financial risk, which varies
with the amount of debt and preferred stock and thus
with the size of the firm’s interest and dividend obliga-
tions. Record at 163-64. While it is not in dispute that
Transco’s relatively thin equity ratio™ of 24.1% indi-
cates a higher level of fizancial risk and thus justifies
a higher level of return ca equity than other pipelines,
there is considerable disagreement concerning the degree
of business risk that Transco faces.

The staff witness suggested that the two types of
risk are related: a regulated utility such as a pipeline
company with a relatively low business risk but a rela-
tively higher financial risk may still attract investors.
Record at 164. This appears sensible, since a company

23 Equity ratio is the percentage of common equity to total
capital. Transco’s capital structure in 1977 was 63°7 long-
term debt, 13°7 preferred stock, and 24°7 common stock.
Initial Opinion at 6 n.4.

>

28

looking forward to consistent profitability can worry less
about high fixed interest charges or dividends that would
constitute a threat to the solvency of the firm should
profits evaporate. Thus, a high level of financal risk
is relatively less important to a firm, such as a regu-
lated pipeline, with a relatively low business risk.

The staff witness found that Transco’s business risks,
chiefly related to the possibility of gas supply shortages,
were lessening because the company’s exploration pro-
gram was expected to produce improved supplies. Record
at 167-68. However, the staff witness found Transco’s
business risks to be slightly above average. Having
found Transco’s business and financial risks to be some-
what higher, although not remarkably so, than other
pipelines whose allowed rates of return fell between
13.5% and 13.75%, the staff witness recommended a
rate of return of 14%.*‘ Record at 168; Initial Opinion
at 9-10.

* Transco assigns as error the ALJ’s dismissal of Transco’s
evidence. The ALJ had refused to credit the Transco wit-
ness’s comparison of Transco with electric utilities because,
according to the ALJ, electric utilities are entitled to a higher °
rate of return because of their greater capital requirements.
Transco on appeal claims that the Commission had tradi-
tionally thought of gas pipelines as riskier than electric
utilities and thus the ALJ’s reasoning is unsupportable.

We do not think that the ALJ’s assertion, if it is in fact
flawed, would be fatal to the Commission, because substantial
evidence supports the portions of the ALJ’s decision that
justify a 14% return. The staff witness’s estimate was
adopted, and the Transco witness’s estimate was not, because
the ALJ and the Commission concluded in an exercise of their
expert judgment that the staff witness’s estimate of the risks
facing Transco compared to those facing other gas pipelines
was superior to the estimate made by Transco’s witness. The
dispute facing the ALJ turned on Transco’s risk to investors,
not whether this risk was more or less than that of electric
utilities.

29

The Initial Opinion also takes note of Transco’s “mod-
est prosperity” despit chronic natural gas shortages as
justifying a rate of return no higher than 14%. Id. at 9.
By this the ALJ is apparently referring to Transco’s
earnings compared to those of other major pipeline com-
panies. Except for 1974, an aberrationally bad year,
Transco consistently earned more on its equity than the
pipeline average, Exhibit No. 17 at 2.*% Its earnings
per share also increased from 1974 to 1976. Record at
482.

Transco presented its own witness who came to rather
different conclusions. The Transco witness found the
company’s business risks related to gas supplies “five
[or] ten—fifteen years down the road” more significant
than had the staff witness. Record at 464. The ALJ,
noting that the rates in question were locked in for only
an eleven-month period, refused to attach weight to the
possibilities of natural gas shortages five to fifteen years
from the time when the rates in this docket were
applicable.

Transco objects that the Commission is departing from
past practices in refusing to consider long-term risks in
a locked-in rate proceeding. We think that Transco mis-
perceives the thrust of the relevant cases it cites.** Those
cases held that the Commission should look to the long-
term cost of raising capital and other pertinent risks

*3 There were two minor errors in the first version of this
exhibit which, when corrected, indicated that comparable
pipelines actually earned less on their equity than had been
first stated. Thus, the corrected version makes Transco’s
performance relative to comparable pipelines look even better.

**See Municipal Light Boards v. Boston Edison Co., 53
FPC 1543, 1556 (1975); American Louisiana Pipe Line Co.,
28 FPC 482, 486 (1962). It is also possible that the practice
is not quite as settled as Transco contends, given the number
of relevant cases to which it could point.

30

even when it is considering locked-in rates. The rationale
of these cases is unexceptionable: a regulated company
faces the same long-term problems regardless of the
frequency of its rate filings. To look only at short-term
risks and costs in considering a locked-in rate raises the
possibility that the company will never be adequately
compensated for long-term risks and costs present during
the locked-in period.

But the administrative law judge did not dismiss the
risk of gas supply shortages solely because he was de-
ciding a locked-in rate. He concluded that the risk was
not likely to arise at all during the locked-in period.
The long-term costs of raising capital and the pertinent
risks of confronting the company when it makes its re-
quest are ongoing factors present during the locked-in
period. The risk of gas supply shortages ten or fifteen
years from the locked-in period may well not concern
investors at all during the locked-in period. The ALJ’s
opinion also suggests that he found the risk too specula-
tive and thus not pertinent to Transco’s petition. Given
the testimony of the staff’s witness that Transco’s supply
situation should improve, the ALJ was acting well within
his expert judgment in disregarding the conjectures of
Transco’s witness.

Transco also attempts to persuade us that the Com-
mission’s 14% determination is deficient under the Co-
lumbia Gas rule,*’ because the Commission had thrice

27 We think that the Commission complied with the re-
quirements of sections 4(c) and 5(a) of the Natural Gas Act
in making its rate-of-return determination. Reading sections
4(e) and 5(a) together, we conclude that the Commission is
not obliged to bear the burden of proving a change resulting
from higher rates unjust. It need only conclude that the peti-
tioner has failed to carry its burden of proof. Against a
background of obvious conflict in credible testimony, the con-
clusion that Transco failed to carry its burden is inherent in

31

before approved Transco settlements that included a
14.75% rate of return and had allowed pipelines with
thicker equity ratios returns between 13.59 and 13.759.
We do not think that Columbia Gas can be applied as
Transco has suggested.

The contract between the situation facing the decision-
maker in Columbia Gas and in this case is illuminating.
In Columbia Gas, the Commission was choosing between
present practice and a discrete alternative. Here the
ALJ faced an infinitude of choices from a low of 13.5%
to a high of 17% without any distinct point of departure.
He was confronted with evidence and precedent sug-
gesting that almost any figure he chose in that range
would find some support. Based on expert testimony, he
picked 14% as the most reasonable rate within a zone
of reasonableness extending from 13.5% to 14.3%.

It could not be said that earlier practice had been
opposed to his judgment. The Commission approved set-
tlements of 14.75% rate as just and reasonable, but did
not indicate that neighboring figures might not also be
just and reasonable, or even more just and reasonable.
The other cases all involved facts to some extent differ-
ent from those at issue here; the weight to give those
differences was ultimately unquantifiable and reserved
for expert judgment.”

the Commission’s determination that any rate hicher than
14.3% falls outside the zone of reasonableness.

However, when the Commission not only voids a proposed
rate increase, but institutes a rate of its own under section
5(a) rather than continuing the old rate in effect, it must
adduce substantial evidence to prove (1) that the old rate is
unjust and unreasonable and (2) the Commission's proposed
rate is just and reasonable. The Commission's conclusion that
only rates between 13.57 and 14.3% are just and reasonable
and the substantial evidence that supports it fulfill the re-
quirements of section 5(a) on both necessary findings.

** The relevance of FERC approval of rates of return of
between 13.5°¢ and 13.75 on equity ratios of 36‘; to 37°

32

Extension of Columbia Gas in the manner suggested
by Transco would lead the Commission into a swamp of
past decisions of varying degrees of relevance with widely
scattered outcomes. The Commission could be caught in
a withering cross-fire, with some litigants demanding
adherence to past settlements involving this company, and
others demanding adherence to rates involving similar
firms, or even, as Transco asks here, substantial de-
parture from rates granted to dissimilar firms on the
grounds that failure to pay adequate heed to the dif-
ferences constitutes departure from settled practices.

We think that the burden this court placed upon the
Commission in Columbia Gas to explain its switch from
one method to a discrete alternative was reasonable. We
think that making the Commission explain why it did
not choose every other plausible result when it is faced
with a multitude of possible outcomes and with prece-
dents whose relevance is a matter of judgment and
which do not suggest any one settled practice is both
unreasonable and unlikely to advance the cause of rea-
soned decisionmaking.

Our task in reviewing the reasonableness of a par-
ticular rate of return, therefore, is not to see whether
it nestles closely to past decisions on a plot of rates of
return against equity ratios, but to ensure that the
Commission’s judgment is supported by substantial evi-
dence and that the methodology used in arriving at that
judgment is either consistent with past practice or ade-
quately justified under the Columbia Gas decision. Hav-

in other cases is especially suspect. The staff’s expert had
said that variations in financial risk vary in importance with
the degree of business risk. Having found Transco’s business
risk just slightly above average for pipelines. and thus far
safer than unregulated enterprises, the ALJ acted reasonably
in granting only a slightly higher rate of return for Transco’s
markedly thinner equity ratio.

33

ing concluded that the Commission decision was sup-
ported by substantial evidence, we need only examine
whether the methodology used by the Commission was
in keeping with past practice. In this case, there is no
dispute that the Commission’s expert witness used the
traditional comparable earnings and risk tests. Indeed,
Transco’s witness used the same methodology, Transcu
Br. at 15-17, but arrived at different conclusions be-
cause he judged the risks rather differently. The Com-
mission’s reliance upon settled methodology is all that
is required to fulfill the standards of Columbia Gas.

V.

The partial stay of December 11, 1979 provided that
the higher rates collected from zone 3 customers would
be held by Transco in an escrow fund, to be distributed
to customers in zones 1 and 2 if Opinion No. 59 were to
. be upheld and to zone 3 customers if Opinion No. 59 were
to be reversed. Since we have reached the conclusion that
FERC’s rate of return order may stand, while its cost
allocation order and opinion must be reversed,” the De-
cember 11 order requires those monies, plus earnings,
held in escrow by Transco be distributed, as contemplated
by the court, to the customers in sales zone 3.

It is so ordered.

2° Our reversal on the cost allocation issue allows us to pre-
term't resolution of the propriety of the exclusion of LILCO’s
marginal cost evidence from the proceedings leading up to the
adoption of the Mcf-mile method. Sec Record at 745-46, 760-
83. Similarly, we are not confronted with the Commission’s
refusal to apply the lower Mcf-mile rates retrospectively in
zones | and 2.

APPENDIX B
34

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION

OPINION NO. 59

Transcontinental Gas ) Docket Nos. RP76-136
Pipe Line Corporation ) and RP77-26

OPINION AND ORDER REVERSING
INITIAL DECISION AND ESTABLISHING
ZONE RATES BASED UPON FULLY
ALLOCATED COSTS

Issued: August 6, 1979

35

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION

_ Transcontinental Gas ) Docket Nos. RP76-136
Pipe Line Corporation ) and RP77-26

OPINION NO. 59

APPEARANCES
Thomas F. Ryan, Jr., Robert G. Hardy and Brian E. O’Niell for
Transcontinental Gas Pipe Line Corporation

John D. Daly, Jr., and Giles D. H. Snyder for Columbia Gas
Transmission Corporation

Paul W. Fox and John S. Schmid for Delmarva Power & Light
Company

Norman A. Flanigan, Charles R. Brown and George L. Weber
for Consolidated Natural Gas Service Company, Inc.

Henry P. Sullivan for Consolidated Gas Supply Corporation

Edward S. Kirby, James R. Lacey, William R. Duff and Carl W.
Ulrich for the Public Service Electric & Gas Company

Joseph P. Stevens, Barbara M. Gunther and Michael W. Hall
for The Brooklyn Union Gas Company

John T. Miller, Jr., for Elizabethtown Gas Company

Stephen H. Watts Il for Commonwealth Natural Gas
Corporation

William 1. Harkaway, Garrett Austin, G. Douglas Essy and
John M. Cutler, Jr., for Consolidated Edison Company of
New York, Inc.

Richard A. Solomon, Sheila S. Hollis, Peter H. Schiff and
Dennis Lane for the Public Service Commission of the State
of New York

36

Dale A. Wright and Gregory Grady for Public Service
Company of North Carolina, North Carolina Natural Gas
Corporation, and Piedmont Natural Gas Company, Inc.

Susan A. Low for Washington Gas Light Company

James S. D. Eisenhower III for National Fuel Gas Supply
Corporation

John B. Gontrum and James A. Pine for the Maryland Public
Service Commission

John T. Stough, Jr., for Atlanta Gas Light Company
Ira G. Megdal for South Jersey Gas Company
Jack M. Irion for United Cities Gas Company

Linda $. Mounts and Ronald D. Eastman for Burlington
Industries, Inc.

Richard A. Oliver, Richard P. Noland and Edward J. Grenier,
Jr., Cannon Mills Company, Cone Mills Corporation,
Nabisco, Inc., Pine Hall Brick & Pipe Corporation

Edward G. Bauer, Jr., Eugene J. Bradley and Donald Blanken
for Philadelphia Electric Company

William J. Benham for Texaco, Inc.

Barry J. Hart and Stephen Schachman for Philadelphia Gas
Works

Stephen Watts for CNG Transmission Company
Morton L. Simons for North Carolina Utilities Commission

Keith R. McCrea and Wayne W. Whitney for Corning Glass
Works, Lithium Corporation of America, Sayles Biltmore
Bleacheries, Inc., and The Torrington Company

Frederick H. Ritts for the City of Danville, Dan River, Inc., and
Philip Morris, Inc.

John J. Lahey, Norman A. Pedersen and Michael A. Kelley for
the Staff of the Federal Energy Regulatory Commission

37

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Charles B. Curtis, Chairman;
Georgiana Sheldon, and
Matthew Holden, Jr.

Transcontinental Gas ) Docket Nos. RP76-136
Pipe Line Corporation ) and RP77-26

OPINION NO. 59

OPINION AND ORDER REVERSING
INITIAL DECISION AND ESTABLISHING
ZONE RATES BASED UPON FULLY
ALLOCATED COSTS

(Issued August 6, 1979)

This proceeding was initiated on July 30, 1976, when
Transcontinental Gas Pipe Line Corporation (Transco)
tendered for filing in Docket No. RP76-136 a general rate
application requesting an increase of $81.3 million annually
for jurisdictional natural gas sales and services.! On August
30, 1976, the FPC accepted the proposed increase for filing,
suspended its use for five months until February 1, 1977, and
set the matter for hearing. Transco’s filing in Docket No.
RP77-26, propo ng an increase in interruptible
transportation rates, was submitted on December 30, 1976,
and was suspended and set for hearing by the FPC on January
31, 1977. The FPC consolidated the two proceedings for
purposes of hearing and decision.

By order of June 27, 1978, the Commission approved a
settlement agreement in these proceedings, but set the zone

'This proceeding was commenced before the Federal Power
Commission (FPC). By the joint regulation of October 1, 1977 (10 CFR §
1000.1), it was transferred to the FERC. The term “Commission” when used
in the context of action taken prior to October 1, 1977, refers to the FPC;
when used otherwise, the reference is to the FERC.

38

rate differential issue for hearing.? Following the hearing and
submission of briefs, the judge issued his initial decision on
the zone rate differential issue on December 19, 1978. The
judge approved the historical zone rate differentials which
have been in effect on Transco’s system since 1962. These
differentials amounting to 2.8 cents per Mcf between zones 1
and 2 and 3.6 cents per Mcf between zones 2 and 3, were
approved by the FPC as part of a settlement of Transco’s rate
proceedings in Docket No. RP61-13, 27 FPC 187 (1962), and
have remained in effect since that time.? Zone 3 interests‘

2The settiement resolved all issues in these proceedings except four: (1)
rate base treatment of certain advance payments, (2) rate base treatment
for unsuccessful alternate gas supply costs, (3) rate of return on equity and
(4) carrying charges on unrecover demand charge credits. The issue of rate
base treatment for certain advance payments was severed from this
proceeding by order issued October 21, 1977, and is to be resolved in the
consolidated proceeding in Transcontinental Gas Pipe Line Corporation,
Docket Nos. RP74-48 and RP75-3 (AP76-1) et al. The unsuccessful alternate
gas supply costs issue was decided on June 20, 1979, when the United States
Court of Appeals for the District of Columbia Circuit, in Transcontinental
Gas Pipe Line Corporation v. Federal Energy Regulatory Commission, No.
77-1712, affirmed the Commission in excluding from Transco’s rate base
expenditures for unsuccessful alternative gas supply projects. The
remaining two issues of rate of return and carrying charges on
unrecovered curtailment credits are the subjects of an initial decision
issued February 13, 1978. These two issues will be considered in a separate
order.

3ITransco’s system is a major long-line natural gas transmission system
originating in the Texas and Louisiana gas supply areas and extending,
through three sales rate zones, to its terminus in the New York City
metropolitan area. Zone 1 extends from approximately the
Mississippi-Louisiana border through Alabama to the Georgia-South
Carolina border. Zone 2 includes South Carolina, North Carolina, Virginia,
and Washington, D.C. Zone 3 includes Maryland, Delaware, Pennsylvania,
New Jersey and New York.

‘New York Public Service Commission, Delmarva Power and Light
Company, Philadelphia Gas and Water Company, Philadelphia Gas Works,
and the Zone 3 Customer Group (The Brooklyn Union Gas Company,
Consolidated Edison Company of New York, Inc., Elizabethtown Gas
Company, Long Island Lighting Company, Philadelphia Electric Company,
Public Service Electric and Gas Company, and South Jersey Gas Company,
all distributor customers of Transco, and National Fuel Gas Supply
Corporation, a pipeline customer of Transco).

39

support the judge’s decision. Zone 1 and zone 2 interests‘
oppose the continued use of the historical differentials and
advocate instead unadjusted zone rates resulting from an
Mcf-mile® (or dekatherm-mile)’ allocation of transmission
costs to zones. The staff, in its brief on exceptions, continues
to favor a compromise approach which would give 50
percent weight to mileage and 50 percent weight to the
historical rate differentials. Transco strikes a neutral posture,
with its primary concern being that any change in the
historical differentials be applied prospectively so as to avoid
the danger of undercollections. For the reasons set forth
below, we reverse the judge’s decision and hold that the
rates for each of Transco’s three sales rate zones should be
based upon fully allocated costs without regard to the
settlement based differentials previously in effect.

DISCUSSION

The single issue before us is what should be the zone rate
difterentials on the Transco system. Upon review of the
record in this proceeding, the Commission finds that rates
resulting from the allocation of Transco’s transmission costs
to zones using the Mcf-mile method are just and reasonable

5North Carolina Utilities Commission, Atlanta Gas Light Company, and
the North Carolina Companies (Piedmont Natural Gas Company, Inc.,
Public Service Company of North Carolina, Inc., and North Carolina
Natural Gas Company).

‘The Mcf-mile method treats a pipeline’s transmission system as an
integrated whole with transmission costs varying in relation to distance. It
uses as the basis of cost that of the entire system, and, as the basis of
allocation, the volumes of sales weighted by the distance the gas travels to
each delivery point.

71n this proceeding Transco changed its tariffs from a volume (Mcf) basis
for measurement of gas to an energy (dekatherm) basis of measurement. A
dekatherm (Dth) is a thermal unit of energy equal to 1,000,000 Btu and is
equivalent of one Mcf having a heating content of 1000 Btu. In this opinion
we refer to both Mcf’s and Dth’s since not all of the data in the record are
stated in dekatherms. Accordingly, references to Mcf are intended to
emcompass references to Dth and, in this case, this has no effect on our
disposition of the issue at hand.

40

and represent a proper apportionment of transmission cost
responsibility between and among Transco’s customers. The
Commission further finds that no adequate or proper basis
has been shown to justify the continued application of
previously negotiated settlement rate differentials or the cost
allocation methods implicit in the use of such differentials.

The Mcf-mile method is the cost allocation method which
has most often been employed by the Commission for the
purpose of allocating transmission costs on major long-line
natural gas transmission systems such as Transco’s.® Of all the
factors which bear on this issue for a system like Transco’s,
distance of transmission has long been regarded as having
the most constant and predictable relation to cost. In
Northern Natural, 14 FPC 11, the FPC observed that distance
of haul is a principal factor relied upon by the Interstate
Commerce Commission in setting transportation rates for
common carriers subject to its jurisdiction.® The FPC likewise
concluded that distance is the primary determinant of the
cost of transporting natural gas."° The FPC expressed its
decision on this matter as follows:

..it is a simple economic fact that the delivery
cost of natural gas increases in close proportion to
the length of the transmission line of any given size.
Therefore, unless other circumstances are present
which outweigh the importance of the length of

"See Texas Eastern Transmission Corporation, Opinion No. 21 issued
August 9, 1978, Docket No. RP74-41; Texas Gas Transmission Corporation,
Opinion No. 792 issued April 11, 1977, Docket No. RP75-19, vacated and
remanded on other grounds Columbia Gas Transmission Corporation et
al., Nos. 77-1627 and 77-1631 (D.C. Cir. May 17, 1979); Southern Natural Gas
Company, Opinion No. 379, 29 FPC 323 (1963); Tennessee Gas Transmission
Company, Opinion No. 352, 27 FPC 202 (1962); and Northern Natural Gas
Company, Opinion No. 281, 14 FPC 11 (1955).

914 FPC 11 at 23.
Wid. at 24.

41

transmission required to effect delivery, the
distance factor is the prime determinant of the cost
of rendering service. Since in our view of this
record there are no such circumstances present to
counter-balance the distance factor, we conclude
that the distance of transmission required to effect
deliveries at the various points of sale by Northern
reflects with reasonable accuracy the relative cost
of providing service to its customers. (14 FPC at 24).

Thus, distance is the prime determinant of the cost of
rendering transmission service unless some other factor or
combination of factors can countervail the importance of the
length of transmission. In this proceeding the zone 3 interests
argue that factors which countervail distance include (1)
historical considerations, (2) load concentration and load
factor, and (3) the value of storage fields located in zone 3.
We shall consider these arguments seriatim.

HISTORICAL FACTORS

Zone 3 witness Benson testified that the Transco system
was originally certificated in 1948 to provide sales and service
to the terminal zone markets in New York, New Jersey, and
Pennsylvania and that the pipeline would not have been built
were it not for these markets. (Tr. 277). Zone 3 argues this
contribution must be recognized and considered in deciding
the zone rate differential issue.

The Commission cannot agree. To give serious
consideration to this non-cost factor in a rate proceeding
approximately 30 years later would be inequitable and
illogical. As pointed out by zone 2 witness Clay, the original
certificated capacity of the line was 340,000 Mcf per day and
has gone up by a factor of 8 or 9 since then. (Tr. 681; 1156).
Transco’s revenue requirements result from the expenses
and investments associated with the facilities in service
during the locked-in period involved here.’ The cost

"The rates in this proceeding went into effect February 1, 1977 and
remained in effect until January 1, 1978, when they were superseded by the
rates filed by Transco in Docket No. RP77-108.

42

consequences of such facilities and their operation should be
fully reflected in rates absent some countervailing
consideration or policy. Zone 3’s origin-of-the-system
argument does not, in the Commission’s judgment, provide
an adequate basis for departing from the principle of cost
based rates.

The staff proposed an approach which would give 50
percent weight to mileage and 50 percent weight to historical
zone rate differentials. The staff was concerned, among other
things, that in using a 100 percent Mcf-mile method, virtually
all of Transco’s rate increase would be assigned to zone 3
customers. The staff argues that its recommendation would
mitigate the impact of a 100 percent Mcf-mile allocation and
would give some recognition to the historical development
of the system. (Tr. 119-120). However, the staff’s witness later
testified with reference to zone 3’s historical argument that
“while it makes interesting reading, | don’t believe that you
could apply that to the situations that exist today.” (Tr. 914).
The staff’s primary concern appeared to be in mitigating the
impact on zone 3 customers of the Mcf-mile allocation
method.

Upon review of this matter, the Commission declines to
give any substantial weight to historical considerations such
as those cited by zone 3 interests.’2 In addition to our
comments above concerning the origin of the system, we
note that the historical zone rate differentials were the result
of negotiated settlements among Transco and its customers.
There is no persuasive evidence on this record that the
historical differentials are based upon or adequately reflect
cost considerations and they are impaired by that
inadequacy. The FPC’s prior approval of the historic zone
rate differentials in the original and succeeding settlements
cannot be accorded precedential weight.

As to the staff’s concern for mitigating the impact of a 100
percent Mcf-mile method, we find no such mitigation is

"See Texas Eastern, supra, at 14-19, where we also rejected similar
arguments.

43

warranted. It is not equitable, absent some significant policy
consideration, to mitigate the effect of cost based rates on
the zone 3 customers by imposing unjustified costs on zone 1
and zone 2 customers. Where the Commission has in prior
cases modified an Mcf-mile approach by giving some
weight to historical rate design, it has done so primarily to
avoid unduly disrupting the pipelines’ marketing patterns
and ability to compete with alternate fuels. Southern Natural
Gas Company, 29 FPC 323, 348 (1963); Tennessee Gas
Transmission Company, 27 FPC 202, 213 (1962). No such
concerns are present on this record. Approval of Transco’s
historical rate differentials would result in an increase in zone
3 rates of approximately $31 million or about 8 percent over
present zone 3 revenues of $373 million. Under the rates
resulting from Mcf-mile cost allocation, the increase to zone
3 will be approximately $46 miilion or about 12 percent.
(Exhibit 51, Appendix A, page 7 of 10). The impact of the
staff’s compromise recommendation would fall roughly in
between. There is no evidence that the shift in cost
responsibility under the Mcf-mile method of allocation
would render Transco’s natural gas service in zone 3
uneconomical, that Transco would be likely to lose any of its
zone 3 markets, or that its marketing patterns would be
unduly disrupted. Neither Transco nor any other party makes
such a claim. It is therefore clear that the rationale underlying
the FPC’s decision in Southern Natural and Tennesee Gas is
not applicable in this case.

LOAD CONCENTRATION AND LOAD FACTOR

The zone 3 interests do not, and indeed cannot, deny the
inescapable reality of distance as a significant factor in
establishing zone rate differentials on a long-line system such
as Transco. However, they contend that the high load
concentration and load factor in the terminal zone are of
such a magnitude as to offset the importance of distance in
determining the cost allocation and related rate differential

44

issues."? This is so, they argue, because substantial economies
of construction costs and operation expenses are
experienced in cases where the pipeline’s principal markets
are concentrated at or near the terminus of the pipeline. (Tr.
277).

Zone 1 and zone 2 argue that load concentration should be
taken into account in deciding whether or not to zone a
particular system but should not be used to modify the rates
resulting from the approved cost allocation method. (Tr.
681-682). As to economies of scale, zone 1 and 2 argue that
such economies occur on Transco’s system upstream from
zone 3 where the combined loads of all 3 zones exist. (Tr. 686,
and 1083-1085).

Zones 1 and 2 argue that the proper place to consider load
factor is in the context of the cost classification issue which is
a settled issue in this proceeding. They further note that their
load factors are artifically lower now due to the effect of
curtailment.

Finally, zones 1 and 2 point out that load factor and load
concentration have only been given significant weight by the
Commission on those systems where a mileage-weighted
method of cost allocation was difficult or impossible to
implement due to the characteristics of individual pipelines,
particularly those which have been found to operate as a grid
system rather than a long-line system.

The staff agrees with the zone 1 and zone 2 parties that
curtailment has artificially affected load concentration and
load factor on the Transco system, and that the effect of the

“The record reflects a load concentration of approximately 75% in the
terminal zone. (Tr. 993). Zone 3 witness Benson computed the load factor
for the various zones based on test year contract demand sales as follows:
Zone 1 (49.89%); Zone 2 (36.12%); Zone 3 (53.35%); and system average as
48.24%. (See Tr. 281). Mr. Benson did another load factor calculation based
on comparative billing demands and annual quantities of Transco’s
contract demand customers by zones when all sales and services (including
storage and peaking services) are included on a composite basis. The
results were as follows: Zone 1(20.69%); Zone 2(28.50%); Zone 3 (33.05%);
and system average as 31.16%. (See Tr. 283).

45

cost classifiction methodology, which is a settled issue in this
proceeding, should not be allowed to offset distance of
transmission in determining the proper cost allocation
method. The staff also takes the position that the judge’s
initial decision contravenes Commission precedent holding
that distance of transmission is the primary determinant of
the cost of transporting natural gas on a long-line system such
as Transco. As previously noted, however, the staff would
modify the Mcf-mile method solely for the purpose of
softening the rate impact of that allocation.

We note at the outset that the issue of cost classification has
been settled by the parties in this proceeding using the so
called United method." (Exhibit 51)

We further note that load concentration and load factor
play a significant role in the establishing of zones on a
particular system. However, no party has sought a change in
Transco’s rate zones and that question is not an issue in this
proceeding.

Insofar as the issues of load concentration and load factor
may be considered as bearing upon the Commission’s
decision in this case, the Commission is aware that in certain
prior cases the FPC has cited these factors in determining cost

“United Gas Pipe Line Company, 50 F PC 1348 (1973) rehearing denied 51
FPC 1014; aff'd sub nom Consolidated Gas Supply Corp. v. F.P.C., 172 U.S.
App. D.C. 162 (1975), 520 F.2d 1176 (D.C. Cir. 1975). The United method
designates 25 percent of the fixed transmission and storage costs and all “as
billed” demand charges to the demand category and all remaining fixed
costs together with all variable costs are classified to the commodity
category. Costs assigned to the demand category—sometimes referred to
as “demand costs” —are paid by those customers who have contracted for
the right to demand a given quantity at a certain time, whether or not
delivery is made. The commodity category of costs relate to costs of gas
actually delivered.

We further observe that the United formula issue was litigated in the
prior case, Opinion 801, Transcontinental Gas Pipe Line Corporation, FPC
Docket Nos. RP74-48 and RP75-3, issued May 31, 1977, and Opinion 801-A,
issued July 29, 1977. None of the parties sought judicial appeal of this issue,
although other matters from those proceedings were appealed.

46

allocation methods and rates for other pipelines. However a
careful review of these decisions reveals that where extreme
variation in load size and load factor were given significant
weight in the decision, other factors were present which
demonstrated that the Mcf-mile method was difficult or
impossible to implement in light of the physical charac-
teristics and operations of the pipelines involved.

For example, in Michigan Wisconsin Pipe Line Company,
34 FPC 621 (1965), the FPC approved the allocation of costs on
a system-wide basis and held that separate rate zones should
not be established. Heavy load concentration (approximately
95%) and a high load factor (approximately 91%) were found
in the proposed terminal zone of the system. Michigan
Wisconsin also had substantial storage in the proposed
terminal zone which benefited the entire system by
displacement just like Transco. However, Michigan
Wisconsin also had other factors which impaired the logic of
giving primary emphasis to distance and the Commission
gave great weight to these factors. These factors included: (1)
the fact that at periods of peak demand the flow of some of
the gas reversed; and (2) the fact that the system was
operated as a grid with natural gas flowing into the system at
divergent points and in significant amounts (over 36% of the
system’s supply) in the proposed terminal zone.

High load concentration (80.5%) and high load factor
(almost 100%) in the terminal zone were mentioned as
significant factors in El Paso Natural Gas Company, 22 FPC 260
(1959). But again there the Commission put heavy stress on
the fact that the El Paso system was operated as a grid and
therefore found “‘little logic’ in giving primary emphasis to
distance. However, unlike the Michigan Wisconsin case,
supra, the Commission did use zones (with differences in
rates as applied to the various zones) so as to give some

SE] Paso, supra at 278.

47

recognition to the distance of haul.’

A further example cited by zone 3 parties in support of
discounting the element of distance is Consolidated Gas
Supply Corporation, Docket Nos. RP73-107 et al., Opinion
No. 819, issued August 12, 1977. This case clearly does not
support zone 3’s argument. Here the Commission found that
the maximum distance of haul was only slightly greater than
the distance of haul in one zone on a long-line pipeline
system, that Consolidated has supply inputs throughout its
service area, and that gas flows in different directions within
Consolidated’s system. For these reasons the Commission
found the Mcf-mile method could not be applied to
Consolidated.

In contrast Transco’s gas supply is introduced into the
system exclusively in the Louisiana and Texas supply areas
and is transported in a single direction from there north and
east to the markets located along the system. Transco’s
system possesses none of the characteristics of a grid system,
and in this respect its operations are clearly distinguishable
from systems like those of Michigan Wisconsin, El Paso, and
Consolidated.

In Tennessee Gas, supra, the FPC again stated its policy that
distance of transmission is the primary cost determinant and
approved the Mcf-mile method in allocating Tennessee’s
transmission costs. The FPC indicated, however, that the

%The Commission stated as follows:

...El Paso’s system is an integrated one. Not only does gas pass from
the Southern Division to the Northern Division, but either division,
in effect, bears loads that would have to be carried by the other one.
Therefore, there is little logic in computing the exact distance that
gas travels from the various producing sources to the various
customers. Furthermore, to attempt to determine just what gas goes
to each of the several customers would lead toa result discriminatory
in application and inherent with discrimination. An appropriate
method of regulating this system therefore is to treat it as a unit, and
in the first instance to allocate costs irrespective ot the source ot the
gas and irrespective ot the distance traveled and then if necessary, as
we shall show below, provide differences in rates as applied to the
various zones. (E/ Paso, supra, at 278).

48

distance factor might be discounted if there were an
“extreme” variation in load concentration and load factor
between zones.’”

Upon review of this matter, the Commission concludes
that the variations in load concentration and load factor
present on this record among Transco’s rate zones are not
“eytreme’’'® and therefore do not warrant a departure from
or adjustment to the Mcf-mile method of allocation.

In reaching this decision the Commission notes that load
concentration and load factor were also recently rejected asa
basis for modifying the Mcf-mile cost allocations method ina
similar case involving Texas Eastern, supra, wherein the
Commission stated (mimeo p. 16):

... even where there exists a concentration of
high load factor sales on the downstream portion of
a system, that has not necessarily discredited a
mileage-related allocation of transmission costs.
Thus, for example, in Texas Gas, supra, the FPC
adopted an Mcf-mile allocation of transmission
costs notwithstanding the high load factor sales
existing in the northern zones of the system and the
lower load factor sales in the southern zones (Texas
Gas, at 17).

Finally, zone 3’s basic argument is that the load factor and
load concentration in the terminal zone result in substantial
economies of scale which are of such a magnitude as to offset
the importance of distance in this case.1? We do not find this

"Tennessee Gas, supra, at 209.
"See footnote 13 supra.

"We note that delivery of gas at a high load factor improves system
efficiency and reduces unit costs. This fact is explained in P. Garfield and W.
Lovejoy, Public Utilities Economics (1964) at page 186 as follows:

..for a given length of pipeline, with any given load factor, the
average unit transmission cost declines as the diameter of the
pipeline increases. This follows from that fact that, although costs
increase approximately in proportion (or a little more) with increases
in diameter, the capacity increases more than proportionately; thus,
for example, the capacity of a 24-inch line is about three times that of
a 16-inch line.

49

to be the case. The record reflects (Tr. 681-682, 686, and
1083-1085) that all three zones contribute significantly to
economies of scale on the Transco system. The system is
designed to provide the capacity needed to service larger
customers found throughout the system, with, in many
instances, proportionately smaller facilities located
downstream of the delivery points of such larger customers.
(Tr. 682).7°

THE VALUE OF DISPLACEMENT DUE
TO THE STORAGE LOCATED IN ZONE 3

Zone 3 parties argue that the physical location of storage in
the terminal zone benefits the entire system by
displacement.”" They point out that such storage makes
possible the elimination of the physical back haul
(displacement) of gas to zones 1 and 2 which would
otherwise be necessary. They contend this contribution must
be recognized and considered in deciding the zone rate
differential issue.

Zone 1 and 2 interests note that Transco owns or has use of
important storage fields in Louisiana, Mississippi and
Pennsylvania. They do not dispute the fact that the zone 3
storage fields in Pennsylvania benefit the entire integrated
Transco system by displacement. However, they state that
while the availability of this storage service obviates the need

For example, if requirements of the Atlanta market were not served in
zone 1, and if the requirements of the North Carolina market were not
served in zone 2, but rather had those markets been added to those served
in the New York City metropolitan area, more facilities, resulting in
substantial additional costs, would have been needed. (Tr. 682).

21For example, during the winter heating season, gas from the main
transmission facilities is diverted to the zone 1 and zone 2 customers. This
gas is replaced downstream in zone 3 with gas from storage located in zone
3. This benefits the entire integrated Transco system. It makes unnecessary
the building of additional transmission facilities which would otherwise be
necessary to move all of the peak day requirements from the supply areas
to the market areas.

50

to construct additional transmission facilities (with the
capacity to move all of the peak day requirements from the
supply area to the market area), the present transmission
facilities do fully provide the annual capacity for all gas which
must be transported from the supply areas, including the gas
which will be stored after transportation from the supply
areas. (Tr. 683). Zone 1 and 2 further point out that the storage
service rates issue is a settled issue in this proceeding and
clearly should not be used to undermine a proper allocation
of transmission costs to zones. (Tr. 684).

The Commission agrees with the zones 1 and 2 position on
this issue. While it is true that the storage located in zone 3
makes possible the elimination of the physical back haul
(displacement) of gas to zones 1 and 2, it is also true that this
transportation by displacement represents no material cost.
Zone 3 admits this. (Tr. 1030). Inasmuch as the record reflects
no compelling or equitable reasons to deviate from cost
based rates, we reject zone 3’s value of service argument.

Summary Of Our Rationale In Selecting
The Mcf-Mile Methodology

We reiterate the factors we have considered in reaching
our decision to allocate costs on a 100 percent Mcf-mile
basis:

(1) Transco is one of the major long-line natural gas
transmission systems in the country. It extends all the way
from the South Texas Gulf Coast all the way to the New York
City metropolitan area. (Tr. 173).

(2) The gas flows in a single direction and in a
unidirectional mode (the gas does not have reversed flows).
The system is not operated as a grid with gas flowing into the
system at divergent points and in significant amounts. The
system does not have operational characteristics which
— impair the jogic of giving importance to the distance
actor.

(3) The system’s heaviest load concentration and highest
load factor are in the terminal zone. However, these two
factors are not of such a magnitude as to modify our
conclusion that distance of transmission is the controlling

51

factor on a major lineal trunk transmission system like
Transco.??

(4) The terminal zone storage benefits the entire system by
displacement. However, while this displacement is very
valuable to the system, there is no material cost to
transportation by displacement. (Tr. 1030).

(5) The cornerstone of Commission policy on the issue of
transmission cost allocation by natural gas pipelines was set
forth in 1955 in Northern Natural, supra, where the Federal
Power Commission stated:

..it is a simpie economic fact that the delivery
cost of natural gas increases in close proportion to
the length of the transmission line of any given size.
Therefore, unless other circumstances are present
which outweigh the importance of the length of
transmission required to effect delivery, the
distance factor is the prime determinant of the cost
of rendering service.

The record here reflects no such circumstances which would
counterbalance the distance factor.

(6) In our most recent cases?? involving the zone rate
differential issue, we have reaffirmed the basic policy of
Northern Natural.

Administrative and General Expenses

A question has arisen as to whether administrative and
general expenses (A&G) allocated to the transmission
function should be given mileage effect. Commission
precedent on this question is conflicting. In Southern
Natural, 29 FPC 323 (1963), the FPC gave mileage effect to
allocated transmission overhead costs, thus treating these
costs the same as all other transmission costs. In Northern

“The record (Tr. 681-682, 686, and 1083-1085) reflects, as discussed above,
that all three zones contribute significantly to economies of scale on the
Transco system.

2Texas Gas (Opinion 792), Texas Eastern (Opinion 21), and Great Lakes
Gas Transmission Company, Opinion No. 51, issued July 30, 1979.

52

Natural, 14 FPC 11 (1955) and Florida Gas Transmission
Company, 47 FPC 341 (1972), however, A&G transmission
costs were not weighted by mileage.

In this proceeding the staff recommends that the A&G
expenses not be given mileage effect since these costs
represent only allocated portions of general overhead
expenses and are not specifically mileage related. The
Commission concurs with the staff’s recommendation on this
issue. Accordingly, in applying the Mcf-mile method of
allocation, A&G expenses shall not be given any mileage
effect.

Effective Date

The last remaining question concerns when the
Commission’s decision in this case should be made effective.
The North Carolina Utilities Commission (North Carolina)
and the Commission staff argue that the decision should be
made effective retroactively as of February 1, 1977, the
effective date of Transco’s rates in Docket No. RP76-136. This
decision would subject Transco to potential
undercollections theoretically equal to the amount of costs
shifted from zones 1 and 2 to zone 3 by this decision. This
amounts to approximately $15 million annually, exclusive of
interest. The undercollections would result because, under
the Commission’s decision, Transco’s proposed rates in
zones 1 and 2 would be reduced while the proposed rate in
zone 3 would be increased. Transco would be required to
refund the overcollections to zones 1 and 2 customers, but
would be unable retroactively to collect the higher zone 3
rates.

Transco, of course, urges that the Commission’s decision
be made effective prospectively from the date of decision so
as to avoid the problem of undercollections. The North
Carolina Companies recommend a third alternative, namely
that the decision should be made effective as of January 1,
1978, the effective date of Transco’s succeeding general rate
increase in Docket No. RP77-108.

The Commission finds on the facts of this case that this
order should be made effective propsectively from the date

53

of decision. While the Commission is, of course, tree to make
the new rates effective as of the date the rates in this docket
became effective, subject to refund after suspension,” in the
Commission’s judgement a retroactive application of this
order has not been shown to be reasonable or necessary. To
the contrary such action would, in the Commission’s
judgement based upon the circumstances of this case be
arbitrary and grossly unfair. Determining refunds frequently
involves the exercise of judgement and the Commission has
discretion to consider pertinent facts and circumstances such
as those discussed above in deciding whether refunds should
be ordered in a particular case. Placid Oil Co. v. F.P.C., 483
F.2d 880 (5th Cir. 1973). In this instance the Commission finds
that refunds are unnecessary and unwarranted. Accordingly,
this order shall be effective prospectively from the date of
this decision.

The Commission orders:

(A) The presiding judge’s decision, issued on December 19,
1978, is reversed.

(B) Transco’s zone rates shall be determined in accordance
with the terms of this order.

(C) This decision shall be effective as ot the date of
issuance.

(D) Within 75 days from the date of this order, Transco shall
file, together with supporting statements, any necessary
amendments to its rate schedules in lieu of those at issue
herein, in accordance with the findings and conclusions of
this decision and with the Commission’s Rules and
Regulations.

By the Commission.
(SEAL)

Lois D. Cashell,
Acting Secretary.

“F_P.C. v. Tennessee Gas Co., 371 U.S. 145 (1962).

APPENDIX C
54

UNITED STATES COURT OF APPEALS
For the District of Columbia Circuit

No. 79-2182 September Term, 1980

The Public Service Commission of the
State of New York, Petitioner

Vv.

Federal Energy Regulatory Commission,
Respondent

Commonwealth Gas Pipeline Corp.,
Carolina Pipeline Corporation,
Transcontinental Gas Pipe Line Corporation, Intervenors

79-2183

North Carolina Natural Gas Corporation
Public Service Company of North Carolina, Inc.
Piedmont Natura! Gas Company, Inc., Petitioners

v.
Federal Energy Regulatory Commission, Respondent

Carolina Pipeline Company,

Commonwealth Gas Pipeline Corporation,

Public Service Commission of the State of New York,
Transcontinental Gas Pipe Line Corp.,

Brooklyn Union Gas Co., et al.,

Columbia Gas Transmission Corp.,

Washington Gas Light Company,

Atlanta Gas Light Company, Intervenors

79-2184

55

North Carolina Utilities Commission, Petitioner
Vv.
Federal Energy Regulatory Commission, Respondent

Carolina Pipeline Company,
Commonwealth Gas Pipeline Corporation,
Public Service Commission of the

State of New York
Transcontinental Gas Pipe Line Corp.,
Brooklyn Union Gas Co., et al.,
Columbia Gas Transmission Corp.,
Washington Gas Light Company,

Atlanta Gas Light Company,
North Carolina Natural Gas Corp., et al., Intervenors

79-2195
Long Island Lighting Company, Petitioner
v.
Federal Energy Regulatory Commission, Respondent

Transcontinental Gas Pipe Line Corp.,
North Carolina Natural Gas Corp., et al.,
North Carolina Utilities Commission,
Carolina Pipeline Company,
Commonwealth Gas Pipeline Corporation,
Public Service Commission of the

State of New York,
Brooklyn Union Gas Company, et al.,
Washington Gas Light Company,
Atlanta Gas Light Company, Intervenors

79-2213

The Brooklyn Union Gas Company, et al., Petitioners
v.

Federal Energy Regulatory Commission, Respondent

Transcontinental Gas Pipe Line Corp.,
Public Service Commission of the
State of New York,

56

Commonwealth Gas Pipeline Corporation,
North Carolina Natural Gas Corp., et al.,
North Carolina Utilities Commission,
Washington Gas Light Company,

Atlanta Gas Light Company, Intervenors

79-2322
Transcontinental Gas Pipe Line Corporation, Petitioner
v.
Federal Energy Regulatory Commission, Respondent

Carolina Pipeline Company,
North Carolina Natural Gas Corp., et al.,
Brooklyn Union Gas Company, et al., Intervenors

PETITIONS FOR REVIEW OF ORDERS OF THE FEDERAL
ENERGY REGULATORY COMMISSION

Before: MCGOWAN, WILKEY and WALD, Circuit Judges
JUDGMENT

These causes came on to be heard on the petitions for
review of orders of the Federal Energy Regulatory
Commission and were argued by counsel. On consideration
of the foregoing, it is

ORDERED AND ADJUDGED by this court, that the order of
the Federal Energy Regulatory Commission on review
herein which pertains to the rate of return issue is affirmed,
and the order of the Commission on review herein dealing
with cost allocation is set aside, all in accordance with the
opinion of this Court filed herein this date.

Per Curiam
For the Court

George A. Fisher

Date: September 24, 1980 cin
Opinion for the Court filed by Circuit Judge McGowan.

APPENDIX
$7 2

UNITED STATES COURT OF APPEALS
For the District of Columbia Circuit

September Term, 1980
No. 79-2182

The Public Service Cummission of
the State of New York,

Petitioner
v.
Federal Energy Regulatory Commission,
Respondent

Commonwealth Gas Pipeline Corp.
Carolina Pipeline Corporation,
Transcontinental Gas Pipe Line
Corporation
Intervenors

AND CONSOLIDATED CASES
Before: McGowan, Wilkey and Wald, Circuit Judges
ORDER

Upon consideraton of the petition for rehearing filed by
respondent Federal Energy Regulatory Commission, it is
hereby

ORDERED, by the Court, that the Opinion for the Court,
filed on September 24, 1980, be amended as follows:

On page 20 of the slip opinion, strike the second paragraph
and insert in lieu thereof the following:

Transco’s filing of a rate change continued to
incorporate the existing zone rate differentials.
Had Transco proposed any changes in them, the
Commission, acting under section 4(e), could have
approved the changes in whole or in part. Section
4(e), however, cannot be used by the Commission .
to institute any change in a ratemaking component,
such as cost allocation, that does not represent at
least partial approval of the change for which the
enterprise had petitioned in its filing. If the
Commission seeks to make such changes, it has no

58

alternative save compliance with the strictures of
section 5(a).

FURTHER ORDERED, by the Court, that, except
as the Opinion for the Court is being amended by
this order, respondent Commission’s petition for
rehearing is denied.

Per Curiam
For the Court:

GEORGE A. FISHER
Clerk

59

UNITED STATES COURT OF APPEALS
For the District of Columbia Circuit

September Term, 1980

No. 79-2182

The Public Service Commission of
the State of New York
Petitioner

Vv.

Federal Energy Regulatory Commission,
Respondent

Commonwealth Gas Pipeline Corp.
Carolina Pipeline Corporation,
Transcontinental Gas Pipe Line
Corporation
Intervenors

AND CONSOLIDATED CASES
Before: McGowan, Wilkey and Wald, Circuit Judges
ORDER

Upon consideration of the petitions for rehearing filed by
petitioner Transcontinental Gas Pipe Line Corporation,
North Carolina Natural Gas Corporation, et al., and North
Carolina Utilities Commission, and of the petition for
rehearing filed by intervenor Atlanta Gas Light Company, it is

ORDERED, by the Court, that the aforesaid petitions for

rehearing are denied.
Per Curiam
For the Court:

GEORGE A. FISHER
Clerk

APPENDIX E
60

§ 717c. Rates and charges; schedules; suspension of new
rates.

(a) All rates and charges made, demanded, or received by
any natural-gas company for or in connection with the
transportation or sale of natural gas subject to the jurisdiction
of the Commission, and all rules and regulations affecting or
pertaining to such rates or charges, shall be just and
reasonable, and any such rate or charge that is not just and
reasonable is declared to be unlawful.

(b) No natural-gas company shall, with respect to any
transportation or sale of natural gas subject to the jurisdiction
of the Commission, (1) make or grant any undue preference
or advantage to any person or subject any person to any
undue prejudice or disadvantage, or (2) maintain any
unreasonable difference in rates, charges, service, facilities,
or in any other respect, either as between localities or as
between classes of service.

(c) Under such rules and regulations as the Commission
may prescribe, every natural-gas company shall file with the
Commission, within such time (not less than sixty days from
June 21, 1938) and in such form as the Commission may
designate, and shall keep open in convenient form and place
for public inspection, schedules showing all rates and
charges for any transportation or sale subject to the
jurisdiction of the Commission, and the classifications,
practices, and regulations affecting such rates and charges,
together with all contracts which in any manner affect or
relate to such rates, charges, classifications, and services.

(d) Unless the Commission otherwise orders, no change
shall be made by any natural-gas company in any such rate,
charge, classification, or service, or in any rule, regulation, or
contract relating thereto, except after thirty days’ notice
to the Commission and to the public. Such notice shall be
given by filing with the Commission and keeping open for
public inspection new schedules stating plainly the change

61

or changes to be made in the schedule or schedules then in
force and the time when the change or changes will go into
effect. The Commission, for good cause shown, may allow

changes to take effect without requiring the thirty days’
notice herein provided for by an order specifying the

changes so to be made and the time when they shall take
effect and the manner in which they shall be filed and
published.

(e) Whenever any such new schedule is filed the
Commission shall have authority, either upon complaint of
any State, municipality, State commission or gas distributing
company, or upon its own initiative without complaint, at
once, and if it so orders, without answer or formal pleading
vy the natural-gas company, but upon reasonable notice, to
enter upon a hearing concerning the lawfulness of such rate,
charge, classification, or service; and, pending such hearing
and the decision thereon, the Commission, upon filing with
such schedules and delivering to the natural-gas company
affected thereby a statement in writing of its reasons for such
suspension, may suspend the operation of such schedule and
defer the use of such rate, charge, classification, or service,
but not for a longer period than five months beyond the time
when it would otherwise go into effect; and after full
hearings, either completed before or after the rate, charge,
classification, or service goes into effect, the Commission
may make such orders with reference thereto as would be
proper in a proceeding initiated after it had become
effective. If the proceeding has not been concluded and an
order made at the expiration of the suspension period, on
motion of the natural-gas company making the filing, the
proposed change of rate, charge, classification, or service
shall go into effect. Where increased rates or charges are thus
made effective, the Commission may, by order, require the
natural-gas company to furnish a bond, to be approved by
the Commission, to refund any amounts ordered by the
Commission, to keep accurate accounts in detail of all
amounts received by reason of such increase, specifying by

62

whom and in whose behalf such amounts were paid, and,
upon completion of the hearing and decision, to order such
natural-gas company to refund, with interest, the portion of
such increased rates or charges by its decision found not
justified. At any hearing involving a rate or charge sought to
be increased, the burden of proof to show that the increased
rate or charge is just and reasonable shall be upon the
natural-gas company, and the Commission shall give to the
hearing and decision of such questions preference over
other questions pending before it and decide the same as
speedily as possible.

June 21, 1938, c. 556 § 4, 52 Stat. 822; May 21, 1962, Pub.L.
87454, 76 Stat. 72.

§ 717d. Fixing rates and charges; determination of cost of
production or transportation

(a) Whenever the Commission, after a hearing had upon
its own motion or upon complaint of any State, municipality,
State commission, or gas distributing company, shall find that
any rate, charge, or classification demanded, observed,
charged, or collected by any natural-gas company in
connection with any transportation or sale of natural gas,
subject to the jurisdiction of the Commission, or that any
rule, regulation, practice, or contract affecting such rate,
charge, or classification is unjust, unreasonable, unduly
discriminatory or preferential, the Commission shall
determine the just and reasonable rate, charge, classification,
rule, regulation, practice, or contract to be thereafter
observed and in force, and shall fix the same by order:
Provided, however, that the Commission shall have no
power to order any increase in any rate contained in the
currently effective schedule of such natural gas company on
file with the Commission, unless such increase is in
accordance with a new schedule filed by such natural gas
company; but the Commission may order a decrease where
existing rates are unjust, unduly discriminatory, preferential,
otherwise unlawful, or are not the lowest reasonable rates.

63

(b) The Commission upon its own motion, or upon the
request of any State Commission, whenever it can do so
without prejudice to the efficient and proper conduct of its
affairs, may investigate and determine the cost of the
production or transportation of natural gas by a natural-gas
company in cases where the Commission has no authority to
establish a rate governing the transportation or sale of such
natural gas.

June 21, 1938, c. 556, § 5,52 Stat. 823.

APPENDIX F

§ 554. Adjudications

(a) This section applies, according to the provisions
thereof, in every case of adjudication required by statute to
be determined on the record after opportunity for an agency
hearing, except to the extent that there is involved—

(1) a matter subject to a subsequent trial of the law and the
facts de novo in a court;

(2) the selection or tenure of an employee, except a
hearing examiner appointed under section 3105 of this title;

(3) proceedings in which decisions rest solely on
inspections, tests, or elections;

(4) the conduct of military or foreign affairs functions;

(5) cases in which an agency is acting as an agent for a
court; or

(6) the certification of worker representatives.

(b) Persons entitled to notice of an agency hearing shall be
timely informed of—

(1) the time, place, and nature of the hearing;

(2) the legal authority and jurisdiction under which the
hearing is to be held; and

(3) the matters of fact and law asserted.

When private persons are the moving parties, other parties to
the proceeding shall give prompt notice of issues
controverted in fact or law; and in other instances agencies
may by rule require responsive pleading. In fixing the time
and place for hearings, due regard shall be had for the
convenience and necessity of the parties or their
representatives.

(c) The agency shall give all interested parties opportunity
for—

(1) the submission and consideration of facts, arguments,
offers of settlement, or proposals of adjustment when time,
the nature of the proceeding, and the public interest permit;
and

65

(2) to the extent that the parties are unable so to determine
a controversy by consent, hearing and decision on notice and
in accordance with sections 556 and 557 of this title.

(d) The employee who presides at the reception of
evidence pursuant to section 556 of this title shall make the
recommended decision or initial decision required by
section 557 of this title, unless he becomes unavailable to the
agency. Except to the extent required for the disposition of
©x parte matters as authorized by law, such an employee may
not—

(1) consult a person or party on a fact in issue, unless on
notice and opportunity for all parties to participate; or
(2) be responsible to or subject to the supervision or
direction of an employee or agent engaged in the
performance of investigative or prosecuting functions for an
agency.
An employee or agent engaged in the performance of
investigative or prosecuting functions for an agency in acase
may not, in that or a factually related case, participate or
advise in the decision, recommended decision, or agency
review pursuant to section 557 of this title, except as witness
or counsel in public proceedings. This subsection does not
apply—
(A) in determining applications for initial licenses;
(B) to proceedings, involving the validity or application
of rates, facilities, or practices of public utilities or
carriers; or
(C) to the agency or a member or members of the body
comprising the agency.
(e) The agency, with like effect as in the case of other
orders, and in its sound discretion, may issue a declaratory
order to terminate a controversy or remove uncertainty.

Pub.L. 89-554, Sept. 6, 1966, 80 Stat. 384.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2126%3A2. Public record. Not legal advice.