# Appendix — Pennzoil Co. v. Associated Gas Distributors > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0500%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1985 - **Citation:** 474 U.S. 847 ## Text 85-139 |. FiteD 1985 No. 85- SOL ed ! CLBRK IN THE Supreme Court of the United States OCTOBER TERM, 1985 ! PENNZOIL COMPANY, et al. Petitioners, Vv. ASSOCIATED GAS DISTRIBUTORS, et al. Respondents. APPENDICES TO PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT AND LIST OF PARENT COMPANIES, SUBSIDIARIES, AND AFFILIATES REQUIRED BY RULE 28.1 CHARLES ALAN WRIGHT 727 East 26th Street Austin, Texas 78705 (512) 471-5151 R. GORDON GOOCH CHARLES M. DARLING, IV THOMAS J. EASTMENT BAKER & BOTTS 1701 Pennsylvania Ave., N.W. Washington, D.C. 20006 (202) 457-5500 [ Additional Of Counsel Listed Inside] BS RRR PMN RL. 7 RRO ENP TREE TS SEE REET. 8 ROSSI ES ATE ATED "REN AEE NESE EERO ERSTAEE! WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001 AMOCO PRODUCTION COMPANY William T. Benham 200 East Randolph Drive Chicago, Illinois 60601 ARCO OIL AND GAS COMPANY DIVISION OF ATLANTIC RICHFIELD COMPANY Michael Maloney P.O. Box 2819 Dallas, Texas 75221 CHAMPLIN PETROLEUM COMPANY B.J. Zimmerman Kerry R. Brittain Constance D. Coleman 801 Cherry Street, M.S. 4010 P.O. Box 7 Forth Worth, Texas 76101 CHEVRON U.S.A. INC. James B. Atkin Pillsbury, Madison & Sutro 1050 17th Street, N.W. Suite 900 Washington, D.C. 20036 CITIES SERVICE OIL AND GAS CORPORATION Carmen Chidester Farrell P.O. Box 300 Tulsa, Oklahoma 74102 Conoco INC. Ernest J. Altgelt, III Carolyn S. Hazel William G. Robb P.O. Box 2197 McLean Building Houston, Texas 77252 EXXON COMPANY, U.S.A. Douglas W. Rasch P.O. Box 2180 Houston, Texas 77001 GULF OIL COMPANY Anthony V. Sorrentino David R. Stevenson P.O. Box 3725 Houston, Texas 77253 MOBIL OIL CORPORATION MOBIL OIL EXPLORATION & PRODUCING SOUTHEAST INC. MOBIL PRODUCING TEXAS & NEW MEXxiIco INC. THE SUPERIOR OIL COMPANY Robert D. Haworth Robert A. Luettgen Jay G. Martin Nine Greenway Plaza Suite 2700 Houston, Texas 77046 Carroll L. Gilliam J. Paul Douglas Kevin M. Sweeney Grove, Jaskiewicz, Gilliam and Cobert 1730 M Street, N.W. Washington, D.C. 20036 MONSANTO OIL COMPANY Walter L. Brignon Kenneth R. Satterly 5051 Westheimer 1300 Post Oak Tower Houston, Texas 77056 PENNZOIL COMPANY John M. Young John B. Chapman Pennzoil Company P.O. Box 2967 Houston, Texas 77001 PHILLIPS PETROLEUM COMPANY PHILLIPS OIL COMPANY C.J. Roberts Larry Pain Jennifer A. Cates 1258 Adams Building Bartlesville, Oklahoma 74004 Phillips Oil Company PLACID OIL COMPANY Ronald D. Hurst 3900 Thanksgiving Tower Dallas, Texas 75201 SHELL OFFSHORE INC. SHELL WESTERN E&P INC. Thomas G. Johnson Eugene V. Callaway One Shell Plaza P.O. Box 2463 Houston, Texas 77001 SUN EXPLORATION AND PRODUCTION COMPANY Charles L. Spann P.O. Box 2880 Dallas, Texas 75221-2880 TENNECO OIL COMPANY HousTON OIL & MINERALS CORPORATION Glen E. Taylor Phyllis G. Rainey P.O. Box 2511 Houston, Texas 77001 TEXACO, INC. Karen A. Berndt Ralph J. Pearson, Jr. P.O. Box 52332 Houston, Texas 77052 UNION OIL COMPANY OF CALIFORNIA Lois Ellen Gold Albert Sylvia III P.O. Box 7600 Los Angeles, California 90051 TABLE OF CONTENTS DESCRIPTION Page APPENDIX A—Opinion of the United States Court of Appeals for the District of Columbia Circuit in Interstate Natural Gas Association of America V. Federal En- ergy Regulatory Commission, Nos. 81- 1690, et al., 756 F.2d 166 (March 5, RES Sul Eats en ec la APPENDIX B—Orders of the Federal Energy Regula- tory Commission issued in Refunds Resulting From Btu Measurement Ad- justments, Docket No. RM84-6 _........... 16a Order No. 399, “Final Rule Under And Order Denying Rehearing Of In- terim Rule,” 49 Fed. Reg. 37735 Nee onscemane 16a Order No. 399-A, “Order Granting In Part and Denying In Part Rehearing,” 49 Fed. Reg. 46353 (Nov. 26, 1984)... 8la Erratum Notice (Nov. 30, 1984) ......... 126a “Order Granting Rehearing For The Purpose Of Further Consideration” NN eee ckapineoeiuace 127a APPENDIX C—Judgment and Orders on Rehearing Of the United States Court of Appeals for the District of Columbia Circuit in Interstate Natural Gas Association of America, et al. v. Federal Energy Reg- ulatory Commission, Nos. 81-1690, i seencenen 130a Judgment (March 5, 1985) ................ 130a Order Denying Rehearing (May 6, ah 132a Order Denying Suggestions For Re hearing En Banc (May 13, 1985) ..... 136a * Circuit Judge Scalia concurred originally, but, on rehearing, withdrew his concurrence and file’ a dissent. Petitioners have printed both of Judge Scalia’s opinions. ii TABLE OF CONTENTS—Continued DESCRIPTION APPENDIX D—Orders of the United States Court of Appeals for the Fifth Circuit in Mobil Oil Exploration & Producing South- east Inc. v. FERC, No. 84-4775 .......... Memorandum To Counsel or Parties Listed Below (Jan. 16, 1985) _............. Order (March 27, 1985) _........0000.0000... Order (March 27, 1985) ....................... Order (March 27, 1985) .............. APPENDIX E—Statutory Provisions _...........-..0-.w... Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3301-3482 (1982) _........... §§ 506(a)-(b), 15 U.S.C. §§ 3416 Sn pg eae All Writs Act, 28 U.S.C. § 1651 RET a eee 28 U.S.C. § 2112 (1982) ................... Federal Power Act, 16 U.S.C. § 791, I I ach §§ 318(a)-(b), 15 U.S.C. §§ 8251 IE shtchilanciacharhiveathcetihains ewisiissicienns Natural Gas Act, 15 U.S.C. § 717, et es SP cr a §§ 19(a)-(b), 15 U.S.C. §§ 717r(a)- | eee Oe eee ne APPENDIX F—List of Parent Companies, Subsidi- aries, and Affiliates Required By Rule A sci bean sivcepaish hcaaaliceies occeadhcaiatins ty ee. Page la APPENDIX A UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 81-1690 INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT MOBIL OIL CORPORATION, ET AL., GENERAL AMERICAN OIL COMPANY OF TEXAS, PHILLIPS PETROLEUM COMPANY, PENNZOIL COMPANY, MISSISSIPPI RIVER TRANSMISSION CORP., SHELL OIL COMPANY, EXXON CORPORATION, LACLEDE GAS COMPANY, GETTY OIL COMPANY, LOUISIANA LAND & EXPLORATION COMPANY, ASSOCIATED GAS DISTRIBUTORS, NORTHERN NATURAL GAS COMPANY, TEXAS GAS TRANSMISSION CORPORATION, TEXACO, INC., TENNECO OIL COMPANY, HOUSTON OIL AND MINERALS CORPORATION, GULF OIL CORPORATION, PLACID OIL COMPANY, AMINOIL, USA, INC., ET AL., INTERVENORS Za No. 81-1680 MICHIGAN WISCONSIN PIPELINE COMPANY, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT MOBIL OIL CORPORATION, ET AL., AMOCO PRODUCTION COMPANY, GENERAL AMERICAN OIL COMPANY OF TEXAS, PHILLIPS PETROLEUM, COMPANY, PENNZOIL COMPANY, EXXON CORPORATION, SHELL OIL COMPANY, TENNECO OIL COMPANY, UNION OIL COMPANY OF CALIFORNIA, LOUISIANA LAND & EXPLORATION COMPANY, GETTY OIL COMPANY, ASSOCIATED GAS DISTRIBUTORS, LACLEDE GAS COMPANY, SuN OIL COMPANY, Arco OIL & GAS COMPANY, PLACID OIL COMPANY, TEXACO, INC. GULF OIL CORPORATION, INTERVENORS No. 81-1691 TRANSCONTINENTAL GAS PIPE LINE CORPORATION, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT MOBIL OIL CORPORATION, GENERAL AMERICAN OIL COMPANY OF TEXAS, PHILLIPS PETROLEUM COMPANY, PENNZOIL COMPANY, SHELL OIL COMPANY, 3a ASSOCIATED GAS DISTRIBUTORS, GETTY OIL COMPANY, LOUISIANA LAND & EXPLORATION COMPANY, TEXACO, INC., EXXON CORPORATION, SUN OIL COMPANY, TENNECO OIL COMPANY, HOUSTON OIL AND MINERALS CORPORATION, GULF OIL CORPORATION, PLACID OIL COMPANY, INTERVENORS No. 81-1692 NATURAL GAS PIPELINE COMPANY OF AMERICA, PETITIONER V. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT MOBIL OIL. CORPORATION, ET AL., GENERAL AMERICAN OIL COMPANY OF TEXAS, PHILLIPS PETROLEUM COMPANY, PENNZOIL COMPANY, SHELL OIL COMPANY, LACLEDE GAS COMPANY, ASSOCIATED GAS DISTRIBUTORS, GETTY OIL COMPANY, LOUISIANA LAND & EXPLORATION COMPANY, TEXACO, INC., SUN OIL COMPANY, CHEVRON, USA, EXXON CORPORATION, TENNECO OIL COMPANY, HOUSTON OIL AND MINERALS CORPORATION, GULF OIL CORPORATION, PLACID OIL COMPANY, INTERVENORS 4a ____No. 81-1696 LONE STAR GAS COMPANY, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT GENERAL AMERICAN OIL COMPANY OF TEXAS, PHILLIPS PETROLEUM COMPANY, PENNZOIL COMPANY, SHELL OIL COMPANY, LACLEDE GAS COMPANY, LOUISIANA LAND & EXPLORATION COMPANY, GETTY OIL COMPANY, ASSOCIATED GAS DISTRIBUTORS, VALERO TRANSMISSION COMPANY, TEXACO, INC., EXXON CORPORATION, SuN OIL COMPANY, TENNECO OIL COMPANY, HOUSTON OIL AND MINERALS CORPORATION, GULF OIL CORPORATION, PLACID OIL COMPANY, PANHANDLE EASTERN PIPE LINE Co., ET AL., INTERVENORS No. 81-1802 LACLEDE GAS COMPANY, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT No. 82-1004 LONE STAR GAS COMPANY, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT EXXON CORPORATION, Conoco INC., 5a GENERAL AMERICAN OIL COMPANY OF TEXAS, PENNZOIL COMPANY, TENNECO OIL COMPANY, UNION OIL Co. OF CALIFORNIA, GETTY OIL COMPANY, AMINOIL USA, INC., GULF OIL CORPORATION, ‘Texaco, INC., MOBIL OIL CORPORATION, ET AL., HOUSTON OIL AND MINERALS CORPORATION, SHELL OIL COMPANY, ATLANTIC RICHFIELD COMPANY, SUN EXPLORATION AND PRODUCTION CO., INTERVENORS No. 82-1177 ASSOCIATED GAS DISTRIBUTORS, PETITIONER Vv. FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT ON MOTION FOR ORDER DIRECTING COMPLIANCE WITH MANDATE Argued January 4, 1985 Decided March 5, 1985 Frederick Moring for petitioner, Associated Gas Dis- tributors, on the Motion for Order Directing Compliance with Mandate. Jerome M. Feit, Solicitor, Federal Energy Regulatory Commission, with whom Joel M. Cockrell, Attorney, Fed- eral Energy Regulatory Commission, was on the Response to the Motion for Order Directing Compliance with the Mandate. 6a John H. Cheatham, III for petitioner, Interstate Natu- ral Gas Association, was on Response to the Motion for Order Directing Compliance with the Mandate. Kenneth J. Neises for petitioner, Laclede Gas Company, was on the Response to the Motion for Order Directing Compliance with Mandate. J. Paul Douglas, Carroll L. Gilliam and Robert D. Haworth for intervenors, Producers, were on the Re- sponse to the Motion for Order Directing Compliance with Mandate. L. Charles Landgraf and Raymond N. Shibley for in- tervenors, Panhandle Eastern Pipe Line Company, et al., were on the Response to the Motion for Order Directing Compliance with Mandate. Glen S. Howard ard Edward J. Grenier, Jr. for inter- venors, Process Gas Consumers Group, et al., were on the Response to the Motion for Order Directing Compliance with Mandate. Robert F. Shapiro and Rigdon H. Boykin for inter- venor, American Paper Institute, Inc., were on the Re- sponse to the Motion for Order Directing Compliance with Mandate. Before: ROBINSON, Chief Judge, MIKVA and SCALIA, Circuit Judges. Opinion for the Court Per Curiam. Concurring Opinion filed by Circuit Judge SCALIA. PER CURIAM: On August 9, 1983, this court issued its opinion in Interstate Natural Gas Association of America v. FERC, 716 F.2d 1 (D.C. Cir), cert. denied, 104 S. Ct. 1615, 1616 (1983) (Interstate). We held that un- der the Natural Gas Policy Act of 1978, 15 U.S.C. § 3301, et seq. (1982), the Federal Energy Regulatory Commis- sion’s “dry” method of measurement of the Btu con- tent of natural gas for wellhead pricing purposes was Ta improper and resulted in prices in excess of those per- mitted under the statute. We instructed FERC to vacate its Order designating the “dry” method. Two conse- quences of our decision were inexorable: implement the proper pricing method for future pricing decisions, and remedy the effects of past use of the improper pricing method at the earliest possible moment. The Interstate parties are before us again, in response to the motion of petitioner Associated Gas Distributors to enforce our mandate in Jnterstate. For the reasons stated below, we direct FERC to implement the refund proce- dures set forth in Order No. 399. I. Following the issuance of our mandate, FERC moved to comply with its terms. FERC issued a rule requiring wet pricing henceforth, 49 Fed. Reg. 3072 (1984). In further implementation of our holding in Interstate, FERC issued Order No. 399 which directed producers to refund the excessive costs arising from use of the im- proper “dry” method of calculation: The Federal Energy Regulatory Commission (Com- mission) is amending and finalizing its regulations that establish refund procedures for overcharges re- sulting from adjustments to the calculation of energy content of natural ‘gas . . . sold pursuant to the Natural Gas Policy Act of 1978. In so doing, the Commission is implementing [this court’s] decision in Interstate Natural Gas Association of America v. Federal Energy Regulatory Commission. 49 Fed. Reg. 37735 (1984) (footnote and citation omit- ted). Order No. 399, issued pursuant to the requisite notice and comment, established a system of refunds that ful- filled the premises of our decision. Under the Order, pro- ducers of natural gas were to refund to pipelines the 8a overcharges made under the improper “dry” method. These refunds were to be paid over by the pipelines to natural gas customers who had, in the first instance, paid these excessive charges. Under the Order, “large pro- ducers” were to have refunded their overcharges on November 5, 1984, while “small producers” were sched- uled to issue their refunds on May 3, 1985. To date, no refunds have been made. FERC explicitly prohibited producers from offsetting their refund obligations against any monies owed them by the pipelines. Order No. 399, 49 Fed. Reg. 37738-39. This prohibition had particular reference to claims the producers had made for additional monies due them un- der Section 110 of the Natural Gas Policy Act. FERC has issued Order No. 94-A allowing producers to collect these “Section 110 costs” from pipelines. 48 Fed. Reg. 5152 (1983). Order No. 94-A is now under review in the United States Court of Appeals for the Fifth Circuit. Texos Eastern Transmission Corp. v. FERC, No. 83-4390 (5th Cir. filed 1983). In rejecting the use of offsets, FERC recognized not only that many of the Section 110 costs owed had not been paid, but also that tying these unrelated and dis- puted costs to refund of the improper “dry charges would delay and disrupt the implementation of our deci- sion. FERC stated in Order 399: The Commission also believes that permitting offsets of section 110 costs and Btu refunds would compli- cate an already difficult process and would make Commission monitoring of Btu refunds more diffi- cult. In addition, the Commission is concerned that permitting pipelines and firstsellers to offset section 110 costs and Btu refunds could prevent the Btu refunds from reaching as many of the customers actually overcharged as possible. Considering that the section 110 orders are also subject to judicial review, the Commission believes it is more appro- 9a priate to segregate the collection of section 110 costs from the Btu refunds. 49 Fed. Reg. 37739. Two months after issuing Order No. 399, FERC abruptly reversed its postion on offsets, and, in Order No. 399-A, 49 Fed. Reg. 46353 (1984), FERC, without addressing the weighty rationale behind its earlier Order, authorized producers to offset their refund obligations by deducting monies due them under Section 110. II. Associated Gas Distributors has moved this court for an order commanding FERC to comply with our man- date by directing producers to make appropriate refunds to pipelines immediately, as set forth in Order No. 399. A petition for review of Orders No. 399 and 399-A is currently pending in the Fifth Circuit. See Mobil Ou Exploration & Producing Southeast, Inc. v. FERC, No. 84-4775 (5th Cir. filed Nov. 20, 1984). The Fifth Cir- cuit, however, has issued an order delaying filing of the administrative record in Mobil until after this court is- sues its ruling in the present case. Accordingly, juris- diction in the instant matter properly lies in this court. See 15 U.S.C. § 3416(a) (4). The availability of mandamus to confine FERC to the terms of this court’s mandate is fully supported by prece- dent. See, e.g., Briggs v. Pennsylvania R.R., 334 US. 304, 306 (1948); Yablonski v. UMW, 454 F.2d 1036, 1038-39 (D.C. Cir. 1971), cert. denied, 406 U.S. 906 (1972). FERC protests, however, that our mandate did not reach so far as to preclude the offset authorized by Order No. 399-A. We need not enter the debate over the propriety of resort to mandamus in this case, because, in any event, Associated Gas Distributors’ motion to enforce the mandate may be treated as a petition to review that order. 10a Federal appellate courts have broadly recognized that the filing of a paper substantially equivalent to one that formally inaugurates the normal review process may well suffice for that purpose. Thus the need for a notice of appeal may be satisfied by any of a variable host of fil- ings evincing unequivocably an intention to appeal. See, e.g., Belton v. United States, 259 F.2d 811, 814 (D.C. Cir. 1958) (en banc) (letter requesting leave to appeal in forma pauperis) (citing cases); Riffle v. United States, 299 F.2d 802 (5th Cir. 1962) (letter to judge of court of appeals). The reason is that the content re- quirements of a notice of appeal, see Fed. R. App. P. 3(c), may easily be met by a document of similar im- port, and the interests of justice may demand its accept- ance as an effective substitute. See 6 C. Wright, A. Miller, E. Cooper & FE. Gressman, Federal Practice § 3949 at 356-57. Indispensably, any such filing must take place within the period allowed for initiation of an appeal. Alley v. Dodge, 501 F.2d 880, 881-82 (D.C. Cir. 1974) ; see also Johnson v. United States, 405 F.2d 1072, 1073 n.6 (D.C. Cir. 1981). These considerations exert equal force in the situation before us. A petition for review need only “specify the parties seeking review and designate the respondent and the order or part thereof to be reviewed,” Fed. R. App. P. 15(a), and undeniably Associated Gas Distributors’ motion did that. The motion, filed the day following is- suance of Order No. 399-A, was well within the time petitions for review are indulged, and the relief sought is as much obtainable on direct review of the agency’s action as it is in a mandamus proceeding. Indeed, pre- cisely because direct review and mandamus may provide identical relief, these two judicial actions may be sought in the alternative. See, e.g., United States v. Green, 499 F.2d 538, 539-40 & nn.4, 5 (D.C. Cir. 1974); Chase v. Robson, 435 F.2d 1059, 1060, 1062 (7th Cir. 1970). We lla have heretofore held that a petition for mandamus can do service as a petition for review. National Organiza- tion for Reform of Marijuana Laws v. Ingersoli, 497 F.2d 654, 656 n.8 (D.C. Cir. 1974). Similarly, petitions for mandamus have been treated as notices of appeal, United States v. Green, 499 F.2d at 540 n.5; Jordan v. United States District Court, 233 F.2d 362, 365, vacated on other grounds, 352 U.S. 904 (1956), and vice versa, Dellinger v. Mitchell, 442 F.2d 782, 789 (D.C. Cir. 1971); Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190, 197 (3d Cir.), cert. denied, US. (1983). Because the parties to the instant case have amply addressed the merits, no one will be preju- diced by considering Associated Gas Distributors’ motion to enforce the mandate as a petition for review. ITI. Turning then to the substance of the dispute before us, we conclude that the offset provision contained in Order No. 399-A must be set aside. As stated above, FERC issued Order No. 399, in which offsets were ex- plicitly prohibited. Shortly thereafter, FERC issued Order No. 399-A, in which offsets were permitted. While an agency may change its course, it can do so only with a full and complete explanation that would withstand judicial review. FERC’s Order No. 399-A does not meet that requirement. Without such an explanation, the agency’s decision may be arbitrary and capricious. Dun- lop v. Bachowski, 421 U.S. 560, 577 (1975). More fun- damentally, Order No. 399-A defies the teaching of the Supreme Court in FPC v. Tennessee Gas Transmission Co., 871 U.S. 145 (1962) ‘Tennessee Gas). In that case, the Court held that refunds must be implemented expe ditiously : [I]t is the duty of the Commission . . ., where refunds are due, to direct their payment at the earliest possible moment consistent with due process. 12a Id. at 155. The rationale for prompt ordering of refunds is clear: “to afford consumers a complete, permanent and effective bond of protection from excessive rates and charges.” Atlantic Refining Co. v. Public Service Com- mission, 360 U.S. 378, 388 (1959). The Court in Tennes- see Gas required immediate refunds even though delaying refunds would have allowed a more accurate allocation of the burden of payment to the gas pipeline, and the im- mediate payment ordered might have resulted in some loss to the pipeline due to the indccurate allocation. FERC’s prohibition of offsets was well-considered. The controversy over production-related costs to be recouped by producers under Section 110 constitutes unsettled liti- gation wholly separate from the instant case. As such, permitting producers to offset their refund obligations would bring delay and confusion into an already complex area. Moreover, the principles of law and the customers involved in the refund arrangement are far from identi- cal to those implicated in the Section 110 costs proceed- ings. By prohibiting offsets, FERC designed the system most likely to assure that customers will receive refunds due them. Involving disparate issues in a matter on ap- peal to another court can only complicate, delay, and obfuscate the refunds at issue here. The law requires the ordering of refunds at the earliest possible moment. That moment has come and gone. The offset scheme embodied in Order No. 399-A will only fur- ther delay refund of the overcharges, circumventing our mandate in Interstate and the clear instruction of the Supreme Court in Tennessee Gas. We accordingly grant the relief sought by petitioner A sociated Gas Distribu- tors. We hereby direct FERC to vacate the offset portion of Order No. 399-A, for the reasons set forth in its own Order No. 399. It is so ordered. 13a SCALIA, Circuit Judge, concurring: Prior to our deci- sion regarding the unlawfulness of “dry-gas” pricing in Interstate Natural Gas Ass’n of America v. FERC, 716 F.2d 1 (D.C. Cir. 1988), cert. denied, 104 S. Ct. 1615 (1984) (“INGAA”), the Commission had promulgated regulations allowing gas producers to collect from pipe- lines certain delivery and compression costs relating to previously sold gas—so-called “Section 110 costs,” see 15 U.S.C. § 3320(a) (2) (1982). 18 C.F.R. § 271.1104 (1984). When Order No. 399-A was issued, many of those costs had still not been paid, and seemed unlikely to be paid within the time period prescribed by regula- tion. See C.F.R. § 274.1104(e) (3). The Commission feared that customers who had used the gas to which the Section 110 costs pertained might switch pipelines before the costs were paid and reflected in rates, saddling “captive” future customers with the full burden of their pipelines’ obligations. This was of special concern in light of other Commission rulings enabling customers to change pipelines more readily. See Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Commodity Bill Provisions, 49 Fed. Reg. 22,778 (1984) (to be codi- fied at 18 C.F.R. § 154.111). Additionally, decontrol of wellhead prices for large quantities of flowing gas was then pending. See 15 U.S.C. § 3331 (1982). Since a major purpose of decontrol was to rectify the supply- demand imbalance in the interstate gas market, the Com- mission wanted post-1984 prices of new gas to reflect wellhead costs, not to be distorted by Section 110 costs incurred prior to decontrol. These concerns led the Commission in Order No. 399-A to require undisputed Sect:or 110 costs owed by the pipe- lines to the producers to be offset against the dry-gas refund obligations owed by the producers to the pipelines. Because the time periods covered by the refund and Sec- tion 110 proceedings overlap substantially, 49 Fed. Reg. 46,353, 46,356-57 (1984) (to be codified at 18 C.F.R. § 154.38), an offset mechanism promotes “intergenera- 14a tional equity,” id. at 46,357, by allocating effective liabil- ity for Section 110 costs to the consumers who benefitted from the producers’ activities. See id. at 46,356 (offset- ting Section 110 costs against refunds “come[s] closer to matching the customers who are entitled to Btu refunds with the customers who received the benefits or caused the incurrence of section 110 costs”). The offset proce- dure also enables “gas producers . . . to settle their long- past due accounts for section 110 services rendered and their liability for Btu refunds without disrupting current or future natual gas prices,” id. at 46,357, and allows pipelines to “enter the era of decontrol and enhanced competition without the burden of attempting to pass through producers’ bills for services rendered years ago.” Id. In seems to me that the prescription of the Supreme Court and of this court that refunds, when due, be made “fat the earliest possible moment consistent with due process” does not exclude such delay as may be needed to make sure that the refund goes to those customers who, taking all appropriate factors into account, are entitled to it. As described above, the whole purpose of the agency’s action in this case was to insure that those who received unjust enrichment as a result of wrongful fail- ure to assess Section 110 costs do not receive refunds which, on a net basis, they are not entitled to. Moreover, even giving a more stringent interpretation to what “the earliest possible moment consistent with due process” might be, it does not seem to me that this court can properly say that in fact a refund has not been made. Whether the Section 110 debt is being contested in court or not, if it is in fact owed the set-off constitutes im- mediate payment. Here the Commission has found it to be owed (the pending proceedings in the Fifth Circuit do not suspend that determination, see 15 U.S.C. § 3416 (a) (5) (1982) ), and we have no basis for proceeding on any other assumption, in disregard of a valid Commis- sion order. 15a I nonetheless concur in the judgment because I believe that the agency’s action, however well intentioned, consti- tutes an attempt to increase rates retroactively. It is well established that even when past rates were fixed at un- lawfully low levels, the Commission cannot provide for recoupment. See FPC v. Tennessee Gas Co., 371 U.S. 145, 152-53 (1962); Public Service Co. of New Hampshire v. FERC, 600 F.2d 944, 957-61 (D.C. Cir.), cert. denied, 444 U.S. 990 (1979). The rule is important in order to enable distributors to determine their prices for resale— prices which they may not be able to revise retroactively. Just as a refund is no less a refund by virtue of the fact that it is effected through an offset, so a retroactive rate increase is no less a retroactive rate increase when it is achieved in that fashion. See Belco Petroleum Corp. v. FERC, 589 F.2d 680, 687 (D.C. Cir. 1978). I would reverse the Commission’s action on these grounds. l6a APPENDIX B UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION [18 C.F.R. Part 154] Before Commissioners: Raymond J. O’Connor, Chairman; Georgiana Sheldon, A. G. Sousa, Oliver G. Richard III and Charles G. Stalon. Docket Nos. RM84-6-000, RM84-6-001, and RM84-6-002 REFUNDS RESULTING FROM BTU MEASUREMENT ADJUSTMENTS ORDER NO. 399 FINAL RULE AND ORDER DENYING REHEARING OF INTERIM RULE (Issued September 20, 1984) I. INTRODUCTION The Federal Energy Regulatory Commission (Commis- sion) is amending and finalizing its regulations that es- tablish refund procedures for overcharges resulting from adjustments to the ealculation of the energy content of natural gas (measured in terms of British thermal units (Btu’s) )? sold pursuant to the Natural Gas Policy Act of 1978. In so doing, the Commission is implementing the decision in Jnterstate Natural Gas Association of Amer- ica v. Federal Energy Regulatory Commission (INGAA).* 1Each Btv represents the amount of energy needed to raise the temperature of one pound of water one degree Fahrenheit. 2716 F.2d 1 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984). —— ee ee aaa ee aw 17a As a result of the INGAA decision, the Commission issued an interim rule on May 3, 1984, requiring refunds of Btu overcharges.* Briefly stated, the interim rule re- quires first sellers to refund the Btu measurement over- charges by November 5, 1984, or in the case of small first sellers, by May 3, 1985. First sellers amu pipelines may choose whether the refund should be paid in a lump- sum cash payment or in billing adjustments over the re- fund period. In either case, the refund obligation is sub- ject. to the Commission’s interest regulations in §§ 154.67 (c) and 154.102(c) and (d). Interstate pipelines must then pass the refunds through in a lump-sum cash pay- ment to those customers actually overcharged. The in- terim rule also requires both intrastate and interstate pipelines to file refund reports with the Commission de- scribing those refunds received and those refunds still outstanding. This final rule adopts the requirements of the interim rule with major clarifications or modifications in five areas. First, the rule prohibits offsets of the Btu meas- urement overcharges (Btu refunds) and production-re- lated costs permitted under section 110 of the Natural Gas Policy Act of 1978 (NGPA). Second, first sellers may defer payment of Btu refund amounts attributable to royalty interest owners until the first seller receives payment from the royalty interest owner, or November 5, 1986, whichever occurs first. First sellers that defer payment of that portion of the Btu refund attributable to royalty interest owners must notify the pipelines of the deferral before the end of the applicable 6- or 12- month refund period. Third, additional reports will be required from intrastate and interstate pipelines in or- der to monitor these deferred refund amounts. Fourth, the interest owed on Btu refund amounts that were placed in escrow is limited to that interest which accrued 3 Refunds Resulting from Btu Measurement Adjustments, 49 Fed. Reg. 19,298 (May 7, 1984). 18a in the escrow account on the amount required to be re- funded. Finally, a small first seller must notify pipelines if that first seller is going to use the 12-month refund period. Il. BACKGROUND In INGAA, the court vacated the Commission’s regula- tions that prescribed the method used to calculate the energy content of natural gas for purposes of applying the maximum lawful prices under the NGPA.‘ Those regulations provided that the Btu content of a given volume of natural gas is determined by assuming that the volume of natural gas was under standard test con- ditions when delivered to a pipeline. Once the Btu con- tent of the natural gas was determined assuming stand- ard test conditions, an adjustme»t was permitted to re- flect the number of Btu’s actually delivered to the pipe- line system (dry rule).° In vacating these rules, the court held that the Com- mission’s dry rule was fundamentally at odds with the Congressional intent under the NGPA. Specifically, when the NGPA was passed in 1978, it established maximum lawful prices for several categori-s of natural gas and incorporated in sections 104 and 106(a) of that act area rates that the Commission had established under the Natural Gas Act (NGA). Pursuant to the Commission’s 4 These regulations were adopted in Order Nos. 93 and 93-A. Rules Generally Applicable to Regulated Sales of Natural Gas, 45 Fed. Reg. 49,077 (July 23, 1980) (Order No. 93); Order Denying Rehearing and Clarifying Order No. 93, 46 Fed. Reg. 24,537 (May 1, 1981) (Order No. 93-A). 5 An adjustment was permitted because 1) the gas delivered to a pipeline is seldom saturated with water vapor, as required under standard test conditions; and 2) water vapor contains no valuable heat energy, and its presence in an given volume of natural gas would reduce the Btu content of the gas by displacing energy- producing hydrocarbons. See 18 C.F.R. § 270.204 (1983). rr 19a NGA regulations (wet rule), the Btu content of a given volume of gas was measured under standard test condi- tions (saturated) instead of actual delivery conditions. Although this derivation of Btu content tended to over- state the water vapor content which, in turn, caused an understatement in the number of Btu’s assumed to be in a giveh volume of natural gas delivered to a pipeline, it enjoyed widespread industry acceptance and consistent Commission implementation.® Hence, the court reasoned that the wet rule was the only method Congress knew for measuring Btu content; and, therefore, it held that Con- gress incorporated the Btu measurement technique used under the NGA, i.e., the wet rule, into the pricing struc- ture of the NGPA. The Commission issued a Notice of Inquiry in this docket on January 19, 1984." The interim rule was is- sued on May 3, 1984, and a public hearing was held on May 24, 1984. The Commission received two petitions for rehearing of the interim rule and it granted rehear- ing solely for the purpose of further consideration of those petitions.s In response io its request for comments in the interim rule, the Commission received seventy written comments. Numerous commenters generally support the interim rule and urge that it be adopted as the final rule. One commenter urges the Commission to reconsider all of its options to be sure that a refund rule is necessary. Other commenters complain that it will be impossible to comply ® Prices were established under the NGA in dollars per thousand cubic feet ($$/Mcf). The Commission then permitted adjustments to the area or national rate for the Btu content of gas measured under the wet rule. 7 Refunds Resulting From Btu Measurement Adjustments, 49 Fed. Reg. 3198 (Jan. 26, 1984). 8 Refunds Resulting From Btu Measurement Adjustments; Order Granting Rehearing for the Purpose of Further Consideration, 49 Fed. Reg. 27,935 (July 9, 1984). 20a at reasonable cost with the interim rule’s collection and reporting timetable and that the problems created by the interim rule are insurmountable for small producers. Finally, one commenter states that the realities of the natural gas industry and fundamental fairness warrant changes in the rule. When the Commission promulgated the dry rule, it believed that the dry rule was an appropriate method permitted by Congress for measuring the Btu content of natural gas under the NGPA. The court in INGAA disagreed. We are now left with the task of implement- ing the court’s decision. After careful consideration of the written comments, the views and arguments expressed at the public hearing on May 24, 1984, and the decision in the INGAA case, the Commission believes that the interim rule, as modified by this rule, fairly balances the interests of sellers, purchasers, and consumers of natural gas. III. PRODUCER REFUNDS TO PIPELINE The INGAA decision held that the maximum lawful prices under the NGPA must be calculated using the wet rule. The Commission decided in the interim rule that any person who received a price for the first sale of gas in excess of the NGPA ceiling prices calculated using the wet rule must refund the overcharges. Specifically, any first seller that collected revenues in excess of the product of (a) the applicable maximum lawful price established by the NGPA, and (b) the quantity of MMBtu’s (million Btu’s) determined on the basis of the wet rule (7.e., un- der standard test conditions), must refund any such ex- cess revenues.’ To the extent that revenues collected for gas sold in a first sale under the NGPA are less than or equal to the level of revenues thus calculated, and are ® Section 270.101(e) imposes a general refund obligation on any person that receives a price in excess of the maximum lawful price under the NGPA. 18 C.F.R. §270.101(e) (1983). eae 2la contractually authorized, no excess revenues would have been collected, and no refunds are due.’® Commenters argue that the Commission has the dis- cretion not to order refunds because refunds are not explicitly required by either the NGPA or JINGAA. These commenters assert that the Commission must weigh egq- uity and the public interest in its retroactive application of the INGAA decision and they argue that these con- siderations render full refunds inappropriate for several reasons. First, commenters argue that sellers made count- less investment decisions in good faith reliance on the Commission’s rules adopted in Order Nos. 93 and 93-A. Second, the status quo cannot be restored since insuffi- cient records are available to determine refund liabilities because the records were destroyed, were never kept, or are unorganized. Third, individual consumers will not receive the benefit of the refunds because restitution is not possible. Fourth, the administrative cost of recoup- ing the refunds will be burdensome on first sellers and pipelines. Finally, refunds will discourage new drilling and production and further depress the natural gas pro- duction market. In addition, one commenter states that 10 For purposes of determining the maximum permissible level of revenues for sales of natural gas subject to section 105(b) (1) of the NGPA, the terms of the contract control, unless those terms result in revenues in excess of the level of revenues that would have been coliected based on the product of (a) the NGPA section 102 price, and (b) the quantity of MMBtu’s determined on the basis of the wet rule (i.e. under standard test conditions). In any instance where revenues were collected in excess of the level of revenues determined by the product of (a) and (b), those excess revenues must be refunded. In those instances where the level of revenues collected was less than or equal to the level of revenues determined by the product of (a) and (b), and are contractually authorized, no excess revenues would have been collected, and no refunds are due. In some instances, no refund may be due under this rule but a party may believe a refund is due under the contract. The Com- mission believes that these disputes are a matter of State law to be resolved in State court. 22a there is a serious question whether the Commission has the power to order these refunds because first sellers re- lied on the Commission’s rules. The Commission disagrees with these comments. Un- der the INGAA decision, the NGPA, and the Commis- sion’s implementing NGPA regulations, the Commission believes that it is legally required to order refunds in this situation. Specifically, the NGPA establishes ceiling prices and makes it unlawful for a first seller to receive a price in excess of the maximum lawful price. If the Commission did not make the measurement rule retroac- tive and did not require refunds, it would effectively be establishing a ceiling price higher than the maximum lawful prices prescribed in the NGPA. Since the NGPA does not contain any provision allowing the Commission to change the maximum lawful prices except in very limited circumstances,!! it cannot waive the refund ob- ligation. While the Commission recognizes that there are administrative costs associated with the refund process and that perfect restitution to overcharged customers may not be possible, it believes that the overriding legal considerations require the Commission to establish a re- fund mechanism that attempts to substantially refund overcharges to consumers. Commenters assert that the de minimis principle for pipeline refunds in them interim rule should be expanded and applied to first sellers and royalty interest owners so 11 The Commission does have the authority to establish a higher just and reasonable rate—in other words, a new maximum lawful price—for gas sold under NGPA sections 104, 106, and 109. In addition, the Commission has the authority under NGPA section 107(c) (5) to establish a special price necessary to provide reason- able incentives for producing high-cost gas. However, in order to use these sections as a means of not requiring refunds, the Com- mission must meet the statutory requirement of demonstrating that the new price is just and reasonable, in the case of sections 104, 106, and 109, or necessary to provide incentives under section 107 (c) (5). Ab RA nT Te ene AD Ne weit etm! 23a as to waive the refund obligation for de minimis Btu re- fund amounts. These commenters suggest de minimis amounts of $500 and $2,000 per individual royalty in- terest owner to significantly reduce the inequities of any refund obligation. Although the Commission is sympa- thetic to these requests, the Commission believes, for the reasons discussed above, that the NGPA does not provide any legal mechanism for the Commission to waive the refund requirement. A. Refund Period The interim rule established two refund periods. Spe- cifically, a 12-month refund period was established for those first sellers who sold a total of ten million Mcf (10 Bcf) or less of gas in both the intrastate and interstate markets in 1983 (small first sellers), and a 6-month re- fund period was established for all other first sellers. While many commenters support the 6-month and 12- month refund periods, other commenters argue that these periods were too long. In contrast, some commenters ar- gue that these refund periods are too short to generate refund calculations or to permit verification of the re- fund obligation and that these refund periods will cause cash flow problems. Commenters also suggest alternative refund periods, such as, expanding the deadlines to two years for all producers, but requiring the payment of estimated refunds within 6 months and final adjustments within 24 months. The Commission has carefully balanced the need to refund overcharges to consumers as expeditiously as pos- sible against the administrative burdens and potential cash flow problems associated with the refund process. The Commission believes that the 6-month and 12-month refund schedule is an appropriate compromise between these competing interests. First, the natural gas indus- try has been aware of the pending decision in INGAA, and certainly has had the opportunity to prepare for this 24a contingency, for some time. For example, some first sellers and their purchasers escrowed these funds pend- ing review by the U.S. Court of Appeals and the Supreme Court. Second, the refund periods provide the first seller and the pipeline sufficient time to agree on a repayment schedule and to make the payment, if a schedule has not already been worked out. With respect to “large” first sellers, such sellers gen- erally should have sufficient cash flow from all opera- tions to pay their refund liability within six months, and should generally be able to borrow funds to the ex- tent their operations do not generate sufficient cash flow. However, in order to accommodate problems unique to many “small” first sellers, an extended 12-month refund period was provided for first sellers who sold a total of ten million Mcf (10 Bcf) or less of gas in both the intra- state and interstate markets in 1983. The Commission believes that, on balance, these considerations justify the 6-month and 12-month refund periods. With respect to the definition of small first seller, sev- eral commenters support using the test used under the NGA as opposed to the one defined in the interim rule. They argue that the NGA test is well established, is easy to monitor, and would reduce the administrative burden on pipelines and producers. Another commenter notes that, under the interim rule definition, fewer first sellers will qualify for the 12-month refund period than under the NGA definition because the interim rule defini- tion includes sales made in both interstate and intrastate markets. This commenter suggests raising the threshold to 12.5 Bef to compensate for the inclusion of intrastate sales in the definition. The Commission notes that the NGA definition of small producer and the definition used in the interim rule are intended to serve different purposes. The NGA definition of small producer is used to waive filing requirements under the Commission’s NGA regulations. In contrast, OD erehieents eee ile v0 25a the definition of small first seller in the interim rule is used to determine those first sellers that are most likely to have cash flow problems if required to meet a 6-month refund deadline. This definition, unlike the NGA defini- tion, also includes sales in the intrastate market because the Btu refund obligation applies to intrastate as well as interstate sales. Since the NGA definition and the interim rule definition are intended to serve different purposes, the interim rule definition applies to a different © group of sellers, i.e., first sellers who sold a total of ten million Mecf (10 Bef) or less of gas in both the intrastate and interstate markets in 1983.'2 The commenters do not offer any compelling reasons why the interim rule defini- tion would not serve those purposes. Commenters suggest that the Commission permit pipe- lines to assume a seller is large, unless the first seller notifies the pipeline otherwise. The Commission has adopted this suggestion because it will facilitate the re- fund process and help pipelines complete their refund reports without imposing an undue burden on small first sellers. Hence, the rule requires small first sellers who are not making refunds within the 6-month refund period to notify pipelines in writing of their small first seller status by November 5, 1984. B. Method of Payment Under the interim rule, first sellers are required to make lump-sum cash payments of the overcharged amounts, unless both the first seller and the pipeline 12 For the purpose of determining eligibility as a small first seller, a first seller need not include sales made as a royalty interest owner or by affiliated entities. The Commission is concerned that an operator may not qualify as a small first seller for refund purposes, but that one or more of the sellers that designated that operator may have qualified as a smail first seller as defined in this rule. In this situation, the operator may wait until May 3, 1985, to pay that portion of the Btu refund attributable to those small sellers, but the operator must notify pipelines of this deferral by November 5, 1984. 26a agree to payment through billing adjustments. This ap- proach was taken because both repayment methods have merit and it permits pipelines and first sellers a degree of flexibility in deciding the most advantageous method to refund the Btu overcharges. One commenter argues that first sellers do not need flexibility because first sellers have had long term use of the money, and have been aware of the pending refund obligation for some time. In addition, another commenter argues that the Commission should permit pipelines flex- ibility to withhold payments they owe first sellers in or- der to retire the refund obligation, because a right to withhold guarantees that all refunds are paid. Although the Commission is aware that first sellers have had long term use of the refund money and that first sellers have been aware of a potential refund obliga- tion for some time, it believes that first sellers should have sufficient flexibility to prevent excessive cash flow problems. Similarly, the Commission will not permit pipelines unilaterally to decide to withhold payments be- cause this procedure may unnecessarily cause first sellers to experience severe cash flow problems. Hence, this rule permits the parties to determine which of these methods of payment is best suited to their financial situations. C. Section 110 Offsets Since 1988, the Commission has permitted first sellers to retroactively collect production-related costs authorized by contract under section 110 of the NGPA (section 110 costs).'* Since the Btu refund period and the surcharge 13 See Regulations Implementing Section 110 of the Natura! Gas Policy Act of 1978 and Establishing Policy Under the Natural Gas Act, 48 Fed. Reg. 5152 (Feb. 3, 1983) (Order No. 94-A) (Final Rule and Order on Rehearing of Order No. 94); 48 Fed. Reg. 24,089 (May 31, 1983) (Order No. 94-C); (Order Denying Rehearing and Denying Petitions for Stay); 49 Fed. Reg. 565 Rasiaeisi™ | eS NORi vA MAA. 27a period for section 110 costs are approximately the same, some commenters propose that the Commission should re- quire, or alternatively, permit, first sellers and pipelines to offset Btu refunds and section 110 costs. Seven commenters oppose the allowance of offsets and nine commenters favor it. In addition, one commenter argues that first sellers have a right to offset section 110 costs and Btu refunds. Those commenters favoring off- sets argue that it will prevent financial difficulties, that it provides an excellent match between those overcharged for Btu refund amounts and those responsible for the section 110 costs, and that section 110 costs and Btu re- funds accrued over the same time period. Those com- menters opposing offsets argue that the Btu refund ques- tion is final while the secticy 110 cost issue is in litiga- tion, that the time periods uffected by these orders are different, and that section 110 costs are decided on a case- by-case basis. The Commission intended the procedures for collecting section 110 costs to be self-implementing. In contrast, the Commission has decided that specific refund proce- dures are necessary for Btu refunds and that this refund procedure should be closely monitored. Because of the strict timetables and other requirements established for the payment of Btu refunds, the Commission is concerned that offsets could undermine contract disputes as to whether a pipeline owes section 110 costs to a first seller. The Commission also believes that permitting offsets of (Jan. 5, 1984) (Order No. 94-E) (Clarification of Order No. 94). See also, Delivery Allowances Under Section 110 of the Natural Gas Policy Act of 1978, and Compression Allowances Under Section 110 of the Natural Gas Policy Act of 1978, 48 Fed. Reg. 5180 (Feb. 3, 1983) (Interim Rule) ; 48 Fed. Reg. 44,495 (Sept. 29, 1983) (Order No. 334, Final Rule and Order Granting in Part and Denying in Part Rehearing of Interim Rule); 49 Fed. Reg. 56 (Jan. 3, 1984) (Order No. 334-A, Order Denying Application for Rehearing Of Order No. 334 and Denying Requests for Stay of Order No. 334). 284 section 110 costs and Btu refunds would complicate an already difficult process and would make Commission monitoring of Btu refunds more difficult. In addition, the Commission is concerned that permitting pipelines and first sellers to offset section 110 costs and Btu refunds could prevent the Btu refunds from reaching as many of the customers actually overcharged as possible. Consid- ering that the section 110 orders are also subject to judi- cial review, the Commission believes it is more appro- priate to segregate the collection of section 110 costs from the Btu refunds. For these reasons, the Commission is prohibiting the offset of section 110 costs and Btu refunds. D. Interest The interim rule adopted the Commission’s refund policy, codified in § 270.101(e) (general refund obliga- tion) that requires the first seller to calculate the refund plus interest under § 154.102(c) of its regulations. The interim rule also continued a longstanding Commission policy of waiving the interest payment for that portion of a refund attributable to payment of royalties or taxes to Federal or State governmental authorities unless those governmental authorities make interest payments on those refunds.’* In addition, a first seller’s refund obliga- tion is not satisfied until the interes. obligation is satis- fied. : Commenters argue that the Comniission should waive the entire interest requirement because first sellers were not unjustly enriched, and the overcharged amounts were 14 See 18 C.F.R. § 273.302(e) (2) (i) (1983); and 49 Fed. Reg. 19,293, 19,299 (May 7, 1984) (to be codified at 18 C.F.R. § 154.102 (d)). In the interim rule, the Commission amended § 154.102 to in- clude a new paragraph (d) that was inadvertently removed by Order No. 47. See 49 Fed. Reg. 19,298, 19,295 n.10 (May 7, 1984). The Commission is finalizing this amendment. a a eee Oe ee An 29a reinvested in exploration, drilling, and production. These commenters characterize the interest obligation as a tre- mendous burden and they state that the interest obliga- tion will drive companies out of business. Other com- menters argue that the rate of interest is too high, and one commenter suggests using the interest rate on 90-day treasury notes. The Commission is not persuaded that a valid reason exists for waiving the interest requirement entirely or generally revising the interest rates. In addition, the Commission believes that fairness to consumers and pipe- lines dictates that first sellers pay interest on the Btu refund amounts at the rate established in the interim rule. As stated in the interim rule, interest charges re- flect a reimbursement to the rightful owner of the value of the use of funds held by first sellers. The Commis- sion’s existing regulations for calculating interest are used because the Commission believes that these regula- tions have already balanced the interests of sellers and purchasers.*® Some commenters suggest that the Commission limit the interest on Btu refund amounts which were paid into escrow to the interest that accrued in the escrow account, because money held in escrow earned a rate of return different from the prime rate. The Commission agrees that the only interest which should be refunded on escrowed amounts should be the accrued interest in the escrow account, since first sellers did not have use of this money and since an escrow procedure protects the in- terests of both the consumer and the seller. The Commis- sion believes these are valid reasons for limiting the interest obligation for money paid into escrow to that interest which accrued in the escrow account on the 15 A table showing the interest rates applicable to the Btu refund is available from the Commission’s Division of Public Information, Rm. 1000, 825 North Capitol Street, N.E., Washington, D.C. 20426, (202) 357-8118. (Ask for “Btu Refund Interest Rate Table’). 30a amount required to be refunded. Moreover, this proce- dure is consistent with § 273.302(e) (2) (ii) of our regu- lations for interim collections of maximum lawful prices by first sellers pending NGPA well category determina- tions.’*® Commenters request clarification on the date interest begins to accrue. Under this rule, interest begins to accrue on the date that the overcharged amount was received by the first seller, except for Btu payments that were paid into escrow and for refunds attributable to payment of royalties or taxes to Federal or State govern- mental authorities. In the latter situation, interest begins to accrue on the date that the first seller receives the refund from the governmental royalty interest owner. E. Refunds for Section 107(c)(5) Gas Under NGPA section 107(b), the Commission has the authority to prescribe a higher incentive price for any first sale of high-cost gas to the extent a higher price is necessary to provide reasonable incentives to produce that gas. The Commission has issued such regulations for high-cost tight formation gas,'’ and production enhance- ment gas.'® In the interim rule, the Commission declined to make the necessary section 107(c) (5) finding for raising the ceiling price for such gas to compensate for Btu over- charges. Commenters state that the section 107(c) (5) price should not be reduced because of INGAA. They argue that the Commission chose the section 103 price as 16 18 C.F.R. § 273.302 (e) (2) (ii) (1988). 17 Regulations Covering High-Cost Natural Gas Produced From Tight Formations, 45 Fed. Reg. 56,034 (Aug. 22, 1980). 18 High-Cost Natural Gas: Production Enhancement Procedures, 45 Fed. Reg. 77,421 (Nov. 24, 1980); 48 Fed. Reg. 45,097 (Oct. 3, 1983) (Order Granting Rehearing in Part and Denying Rehearing in Part). Te ly Sa tn ay A to “ 3la a convenient marker for settting the price for section 107(c) (5) gas and is not bound to that price. The Commission believes it has the authority to estab- lish a maximum lawful price for section 107(c) (5) gas based on the Btu content of the gas as delivered provided the statutory finding in section 107(b) is met. However, in establishing incentive prices, the Commission deter- mined that the incentive ceiling price for tight formation gas is the lesser of the negotiated contract price or 200 percent of the section 103 price and that the incentive ceiling price for production enhancement gas is the lesser of the renegotiated price or the section 109 price. Since the section 107 prices were based on sections 103 and 109, the rules applicable to those sections should apply to the section 107 rates that are pegged to those other ceiling rates. Commenters do not offer any compelling reasons to justify a higher ceiling price for section 107 (c) (5) gas or any factual data to support the statutory requirements in section 107(b). Accordingly, if a first seller has collected these maximum lawful prices based on the dry rule, refunds are due. Of course, if the con- tract price is less than the ceiling price, then the contract price is not changed by this rule. To the extent that contract-related rates are set on a dry basis, they must be converted to a wet basis solely for purposes of making the comparison to ensure that the ceiling rate is not breached. F. Generation of Refund Information Commenters argue that the rule should require pipe- lines to supply first sellers a full and complete data sheet of the information necessary to determine the Btu refund amounts. Commenters note that most first sellers cannot calculate the Btu refunds without information from the pipelines, and they argue that purchasers are in the best position to supply that information. One commenter notes that without an information exchange, the computation 32a and verification of refunds will be a difficult and burden- some task that will cause considerable delay and make the 6-month deadline unrealistic. Other commenters op- pose a standard form mandated by the Commission because any data exchange should be left to the parties. One commenter argues that the rule should require that the amount of Btu overcharge be determined by the party responsible for submitting the invoices that included Btu adjustments. In addition, one commenter argues that purchasers should be required to provide the neces- sary information in sufficient time to meet deadlines. One pipeline states it will invoice its producers, but argues that first sellers must continue to bear the legal obligation to assure that the calculations are accurate and refunds properly paid. Another pipeline states that it will cooperate with first sellers to determine the correct refund amounts owed plus interest. The Commission realizes that pipelines typicaily do the paperwork necessary to prepare the invoices for the gas taken from first sellers. However, we believe that the parties are in the best position to decide who should determine the amounts owed because, in some instances, pipelines require the first seller to do the paperwork to invoice for the gas taken; and in other instances, the first seller may not have sufficient information to calcu- late the refund obiigation without additional information from the pipeline. The Commission also believes that pipelines and first sellers should cooperate. Specifically, first sellers are liable for the refunds, but pipelines have an obligation under the NGA as part of prudent manage- ment to ensure that first sellers pay these refunds, promptly and properly. G. Refund Payments by Royalty Owners Many first sellers of natural gas have a contractual agreement with a landowner to pay that owner a royalty payment based on a certain percentage of the proceeds ee ee tt ee a 38a the first seller receives for the natural gas. The interim rule provided that a seller incurs a refund liability for all the proceeds received in a first sale, and that he must refund the entire overpayment, including that percentagé originally paid to the royalty owner. However, in those cases where several sellers have designated an operator to both collect revenues and disburse payments covering working interests and royalty interests, the interim rule designates the operator as the one responsible for repay- ment of the entire refund. Seme commenters argue that operators should not be responsible for refunds attributable to royalty interest owners. Other commenters argue that it is unclear whether royalty interest owners must pay this refund. One commenter asserts that the refund obligation should be placed on the royalty interest owners where it belongs. Commenters also complain that collecting refunds from royalty interest owners will be impossible because royalty interest owners may have become judgment-proof, the well may have changed ownership, or the well may have been plugged. Other commenters suggest that first sellers and operators should be required to collect refunds on a “vest-efforts” basis, and that operators should not be responsible for refunds if the royalty interest owner is unable to pay, if the refund is uncollectible by law, or if the refund is not otherwise collectible from a royalty interest owner. Two commenters complain that while the amount they are owed by royalty interest owners is large, the cost of collection may exceed this amount. Another commenter argues that operators she'd be permitted an offset for the costs of collection. Fis. .y, commenters note that one State, Wyoming, is refusing to make any refunds of over- payments of royalties; and that the Department cof In- terior has time-consuming procedures and may refuse to pay portions of the overpayment of royalties. These com- menters argue that the rule should exempt or defer re- 34a fund amounts attributable to States and the Department of Interior until they pay the royalty amounts they owe. The Commission recognizes the problems that first sellers may have in recovering money from royalty in- terest owners. However, receipt of a first sale price in excess of the statutorily-set maximum lawful price is a violation of the NGPA, and the Commission has no au- thority to adjust these ceilings, except in certain limited circumstances not applicable here.’® Numerous first sel- lers collected first sale prices in excess of the maximum lawful prices under the NGPA, since they priced gas based on the Btu content of the gas delivered to the pipe- line. Therefore, these sellers incurred a refund liability, and it is their responsibility to refund the entire over- payment, including that percentage paid to royalty in- terest owners. Some sellers may have placed the Btu overcharge amounts in escrow pending a decision in INGAA, and do not face the task of securing refunds from royalty interest owners. For other sellers who failed to forsee this contingency, the Commission believes that securing refunds is a part of doing business. In addition, the Commission does not have jurisdiction over royalty interest owners, and, therefore, it cannot order royalty interest owners to make refunds.” Hence, the Commission is not changing the requirement that first sellers are responsible for the entire Btu refund.*' How- ever, the Commission is aware that operators change and working interests in wells are assigned to others. There- fore, the Commission is clarifying that an operator is 19 See n.11, supra. 20 See Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir. 1972), cert. denied, 406 U.S. 976 (1972), reh’g denied, 409 U.S. 902 (1972), and reh’g denied, 409 U.S. 903 (1972). 21In addition, the Commission has also held single parties re- sponsible for all refunds in other circumstances under the NGA. See Tenneco Oil Company v. FPC, 442 F.2d 489 (5th Cir. 1971); and Sauder v. DOE, 648 F.2d 1341 (Temp. Emer. Ct. App. 1981). responsible for refunds only during that period of time he operated a well and a first seller is responsible for refunds only during that period of time he owned an in- terest in a well, except as provided otherwise by contract, deed, or lease. While the Commission is not relieving first sellers of their responsibility for the entire Btu refund, the Com- mission is concerned that first sellers may have difficulty making timely collection of that portion of the Btu re- fund amounts attributable to some royalty interest own- ers, including some States and the Department of In- terior. In order to permit first sellers sufficient time to collect these monies, the Commission is permitting first sellers to defer that portion of the Btu refund attribut- able to royalty interest owners until the first seller re- ceives payment from the royalty interest owner or No- vember 5, 1986, whichever occurs first. However, the Commission stresses that first sellers should make every effort to collect and pay the entire Btu refund within the appropriate 6- or 12-month time limits. The Commission expects that the Department of Interior will make most of the refunds it owes in a timely manner, especially those refund amounts attributable to the period after November 9, 1981.°° Those first sellers who defer the royalty interest owner portion of the Btu refund must notify pipelines of the deferral before the end of the applicable 6- or 12-month refund period. The Commission realizes that a few first sellers who are diligently seeking refunds from royalty interest own- ers will be unable to meet the November 5, 1986, time limit. In these situations, a first seller may always seek a further deferral of the refund under section 502(c) of 2 be SX hianlath tahoe Senso en es cn 22 See Refund Procedures and Order to Pay Royalties, 49 Fed. : Reg. 31,779 (Aug. 8, 1984). See also 88 Int. Dec. 1090 (1981). Commission staff will also initiate talks with the Department of Interior to help facilitate payment of the refunds owed by the In- terior Department. ial inaiiiiaeiaeieneallll 36a the NGPA. However, the Commission is not inclined to grant such applications unless the circumstances and in- equities require it. In any event, the first seller must pay interest under the provisions of this rule until the entire Btu refund is paid to the purchaser. H. Refund Reports by Interstate and Intrastate Pipe- lines The interim rule requires, interstate and intrastate pipelines that are purchasers in a first sale to file two refund reports. These reports describe the status of the first seller’s refund obligation by detailing 1) those first sellers that have mace refunds and the amount of re- funds received, and 2) those first sellers that have not made refunds, the amount owed, and the reasons for non- payment. The first report would be filed by December 18, 1984, which is 45 days after the last day of the six- month first seller refund period. The second report would be filed by July 3, 1985, which is 60 days after the last day of the 12-month refund period. Because the State regulatory agencies will be interested in monitoring the refund process, the interim rule requires intrastate pipe- lires to file a copy of their report with the State agency having jurisdiction over intrastate sales. The interim rule requests comments on the reporting requirements imposed on intrastate pipelines. Most commenters addressing the intrastate reporting requirements support these requirements because they properly balance the interests of the States, participants and the public. Due to the magnitude of the refunds, the complexity associated with monitoring them, and the long term nature of the overcharges, the Commission is adopting the interim rule reporting requirements for in- terstate and intrastate pipelines already discussed with the modifications discussed below.** Specifically, the Com- 23 The authority to require these reports is encompassed within the Commission’s general authority in section 501(a) of the NGPA 37a mission recognizes that it would be administratively in- feasible to monitor refunds from all natural gas first sellers without the aid of refund reports from interstate and intrastate pipelines. In addition, the Commission in- tends to institute a comprehensive audit program for all refunds that are still unpaid at the end of the appropri- ate refund period. The interim rule also requests comments on the Com- mission’s decision not to require refund reports from all first sale purchasers. Commenters argue that reporting requirements should not be expanded to Hinshaw pipe- lines or local distribution companies (LDCs). They state that most State commissions already have strict require- ments for refunds by LDCs and that the Commission lacks jurisdiction over LDCs to order refund reports. In addition, these commenters assert that refund reports by Hinshaw pipelines and LDCs wouid impose unnecessary costs and serve no valid purpose, since pipeline reports and Commission audits are sufficient to monitor compli- ance; and that refund reports would place duplicative and perhaps conflicting demands on LDCs. In contrast, other commenters argue that the final rule should require re- fund reports from all first sale purchasers in order to monitor the flow of refund monies. The Commission does not believe that reports from every first sale purchaser are necessary to properly moni- tor this refund process. In addition to those reasons stated by the commenters, the Commission believes that refund reports from all first sale purchasers are unneces- sary because sales of natural gas which are not made to interstate aud intrastate pipelines comprise a small pro- portion of the total sales made in the natural gas market. “to perform any and all acts * * * as it may find necessary or appropriate to carry out its functions” under the NGPA, which functions include ensuring that the maximum lawful »rices are not exceeded in any first sale transaction. 38a \ One commenter argues that the refund reports should be expanded to include a statement of the total amount due from each first seller with amounts broken down by principal and interest. The Commission believes that the refund reports should separately state principal and in- terest and that this information is necessary to properly monitor the refund process. Consequently, the reporting requirements are modified to require that refund reports show the amounts of principal and interest received. As discussed previously, this rule extends the period during which sellers may pay refunds from royalty in- terest owners. In view of this extension, an additional report will be necessary at the end of that two-year de- ferral period in order to facilitate the monitoring by the Commission of the refund process. Hence, intrastate and interstate pipelines must file a third and final refund report by January 5, 1987, detailing 1) those first sellers from whom refunds have been received since May 3, 1985, and 2) those first sellers from whom refunds have not been recovered and the reason for the nonpayment.” One commenter argues that any reports by intrastate pipelines should be made only to the appropriate State regulatory agency and not the Commission. Other com- menters suggest removing the requirement to give rea- sons for nonpayment by producers, since the pipeline may not know and finding out will be burdensome and point- less. These arguments are rejected because the Commis- sion needs refund reports from intrastate pipelines to en- sure that first sellers comply with this rule. Similarly, the Commission requires pipelines to provide the reasons for nonpayment by a first seller because that information is necessary to monitor Btu refunds and pipelines are in 24 This report will be due 60 days after November 5, 1986, or January 5, 1987. But, the second report will be due by June 17, 1985, which is 45 days, instead of 60 days, from May 3, 1985, because the second report is no longer the final refund report. Ss = eae Ne ee aE 39a the best position to obtain that information from the first seller. IV. PIPELINE REFUNDS TO CUSTOMERS Under the NGA, the Commission has jurisdiction over the rates that interstate pipelines charge to their cus- tomers. This rule expands and clarifies the regulations promulgated by the interim rule to pass through any re- funds pipelines receive from first sellers and other pipe- lines. A. Refund Period and Method of Payment for Inter- state Pipelines The interim rule notes that each pipeline has a mecha- nism in its purchase gas adjustment clause (PGA) to pass through refunds received from first sellers by re- ducing the pipeline’s unrecovered purchased gas costs, which costs would normally be recovered from the pipe- line’s customers over the next 6-month period. But, be- cause the Btu refund was accrued over a 5-year period and because the refund amounts are large, the interim rule requires interstate pipelines to make lump-sum cash payments to those customers actually overcharged from December 1, 1978, instead of adjusting their current rates. Commenters argue that, in addition to those reasons stated in the interim rule, the Commission should use the PGA mechanism for several reasons. First, the PGA mechanism permits pipelines to retain markets by reduc- ing current costs. Second, it reduces accounting and ad- ministrative burdens, since pipelines need not establish new procedures to verify, allocate and distribute the Btu refunds. In contrast, other commenters argue that pass- ing the refunds through the PGA mechanism will distort the current and future costs of gas, will cause serious inequities (especially to past customers who do not cur- rently purchase gas), and will delay signals to producers 40a that the market cannot bear the nigh gas prices already being charged. Similarly, some commenters support the lump-sum re- fund mechanism based on historical purchases. They ar- gue that lump-sum refunds avoid allocation problems, prevent unfairness, are more accurate, avoid market dis- tortions and provide State commissions with maximum flexibility. Other commenters describe the lump-sum method as fair, equitable and reasonable. In addition, one commenter notes that the lump-sum mechanism will benefit those customers whose conservation efforts de- creased their use of gas. The Commission believes that the use of the PGA mechanism to pass through these refunds could result in inequities. For example, customers which do not now purchase gas from 4n interstate pipeline would not re- ceive a refund with a PGA pass-through, and it would be unfair if the customers actually overcharged did not re- ceive a refund in the same proportion to their over- charges, given the magnitude and long-term nature of the overcharges. In contrast, the Commission believes that the lump- sum mechanism is a fair and equitable procedure. Spe- cifically, the lump-sum mechanism ensures that refunds will be made to those customers who overpaid the pipe- lines, and this mechanism will return the refunds to the ultimate consumer more quickly. Finally, the Commis- sion recognizes that the Btu refund may temporarily disrupt the current gas market. But, the Commission believes that a lump-sum cash payment requirement will disrupt the current natural gas market less than the use of the PGA mechanism, since a lump-sum cash payment is made to those overcharged and does not adjust current prices. For these reasons and for the reasons stated in the interim rule, this rule requires interstate pipelines to make lump-sum cash payments to those customers actually overcharged from December 1, 1978. 4la The interim rule also requires interstate pipelines to pay Btu refunds to those customers actually overcharged within 15 days of receipt of the refunds from a first seller, or pay interest from the first day the refund was received from the first seller until paid. In order to reduce the administrative burden on pipelines, the interim rule permits pipelines to defer lump-sum payment to its customers until it has accumulated refunds equivalent to one mill per Mcf or Dkt for the pipeline’s 1983 annual sales. In no event could the pipeline defer payment for more than 120 days or 30 days after the last refund period. If the pipeline defers payment more than 15 days, the pipeline is liable for interest from the date it receives the refunds from the first seller until the pipeline paid its jurisdictional customers. The interim rule also notes that, to the extent a pipe- line’s refunds are de minimis, it may request a waiver of the lump-sum payment requirement. In addition, if a pipeline has already paid the first seller the Order No. 93 costs, but has not yet amortized those paid costs, then the interim rule permits the pipeline to offset these un- amortized amounts against the jurisdictional portion of the refunds received. Because of the magnitude of the refunds, and for the reasons discussed below, the Com- mission is adopting these requirements with minor modifi- cation. The Commission notes that pipelines were apparently confused about how to allocate refunds to their customers actually overcharged. Specifically, two commenters argue that pipelines must allocate refunds based on the histori- cal sales made by a pipeline during the period of Order No. 93 overpayments. One commenter will base a cus- tomer’s refund on the customer’s pro rata portion of total purchases during the PGA periods in which Order No. 93 amounts were collected.2*> Another commenter asks 25 Texas Eastern Transmission Corporation (Texas Eastern) requested clarification, or in the alternative, rehearing of the 42a whether each customer’s share of refunds may be based on sales during a representative period compared to total sales during that period. Similarly, commenters are ap- parently confused on the method for processing refunds received from other pipelines. Specifically, three com- menters state that the Commission should clarify or prescribe standards for processing refunds received from other pipelines. Some commenters argue that the Commission intended for pipelines to refund amounts received from other pipe- lines in lump sums within 15 days of receipt. One com- menter suggests arriving at this result by defining funds received from downstream pipelines from another pipeline as within the definition of Btu refunds. Another com- menter argues that second pipelines are not exempt from lump-sum refunds because the administrative burden is no greater than for first seller refunds. Another com- menter asserts that the interim rule is silent on the proper manner to handle refunds received from other pipelines and argues that the PG» mechanism is the best method because it avoids the administrative hardship of continuous lump-sum refunds. In contrast, one commenter argues that using the PGA mechanism for refunds re- ceived from other pipelines is contrary to the Commis- sion’s goal of distributing refunds to those customers actually overcharged. interim rule (Docket No. RM84-6-002). Specifically, Texas Eastern asked whether the interim rule permits pipelines to spread the Btu refunds among customers based on each customer’s pro rata share of purchases, for the period that significant amounts of Order No. 93-A dollars were included in the PGA. If the interim rule did not permit this approach, Texas Eastern requested that the Commis- sion grant rehearing and issue rules in conformity with Texas Eastern’s interpretation of the interim rule. Since Texas Eastern’s interpretation is a permissible procedure for determining the re- funds owed to its jurisdictional customers, the Commission is not treating its filing as a rehearing request. The specifics of Texas Eastern’s proposed refund plan which was filed by Texas Eastern in Docket No. RP84-89-000 will be addressed by a separate order to be issued by the Commission in Docket No. RP84-89-000. | ne 43a The Commission believes that a pipeline and its juris- dictional customers are in the best position to work out a procedure that 1) determines the portion of the aggregate amount of Btu refunds which are due a pipeline’s juris- dictional customers actually overcharged based on the proportion of the total Btu refunds originally paid by those jurisdictional customers; and 2) refunds this amount to each jurisdictional customer in the same proportion that each jurisdictional customer originally paid the Btu refund amounts. For example, it may be appropriate for a pipeline to allocate the aggregate of all Btu refunds received from both first sellers and other pipelines based on each customer’s purchases during the PGA periods in which Order No. 93 amounts were col- lected compared to the total sales during that period. Pipelines would then pay this refund to those customers in a lump-sum cash payment. In any event, pipelines are to process Btu refunds received from other pipelines in the same manner as Btu refunds received from first sellers because this procedure will return the Btu refund amounts to those customers actually overcharged. Pipelines characterize the 15-day refund period as burdensome, unrealistically brief, impractical, intolerable, and an unreasonable burden. Other commenters argue that 15 days is insufficient time to verify, allocate and distribute the refunds. Commenters suggest several alter- native payment schedules that provided longer refund periods. These scheclules ranged from 20 days to 12 months. The Commission is not persuaded by these comments. Fifteen days should be sufficient time to determine *he proportion of the aggregate amount of the Btu refunds which are due the pipeline’s jurisdictional customers actu- ally overcharged based on the proportion of the total Btu refunds originally paid by those jurisdictional cus- tomers and to pay the necessary refund amount. Pipe- lines that meet this 15-day refund period will have use 44a of this money without reimbursing the rightful owner of the value of the use of these funds. Alternatively, pipe- lines may always take longer than the 15-day refund period (subject to a maximum 120-day holding period), but they must pay interest from the date of receipt until payment is made to its jurisdictional customers. The Commission believes the requirement that pipelines pay interest from the date of receipt until payment is made, if payment is not made within 15 days, fairly balances the competing interests of consumers and pipelines. One commenter suggests that the rule permit pipelines to flow through the principle amount of any de minimis refunds without interest because the interest calculations are so complex. This rule does not adopt this suggestion. The Commission believes that it would be unfair to con- sumers to waive interest on de minimis amounts, since the Commission does not believe that these interest calcu- lations will be overly burdensome on the pipelines. Finally, while the Commission does not intend to treat pipelines as guarantors of refunds, the Commission urges the interstate pipelines to actively pursue any refunds owed by first sellers. The Commission believes that these pipelines have an obligation under the Natural Gas Act as part of prudent management to ensure that these refunds are paid promptly and properly. B. Refund Reports In addition to those refund reports described earlier, the interim rule requires interstate pipelines to file two additional reports describing the refund payments made to interstate pipeline cust.mers by detailing 1) the actual amounts received, and 2) the total amount the interstate pipeline paid its customers and the basis used to appor- tion the Btu refund amount among those customers. These reports are due December 18, 1984, and July 3, 1985. These reporting requirements are necessary to en- 45a sure that all interstate pipeline customers have received their refunds. In addition, these reports will assist the Commission as well as the interstate pipeline customers in reviewing the refund payments.*® Commenters argue that the final rule should require refund reports from every person purchasing gas for re- sale in order to monitor the flow of refund monies and to assure that refunds have been properly and fairly allo- cated. In contrast, other commenters argue that report- ing requirements should not be expanded to LDCs. In addition, one commenter argues that refund reports con- cerning customers should show the total amount paid each of the pipeline’s customers and the interest due each of the customers as of the date of the report. The Commission believes it can monitor the flow of Btu refunds without requiring reports from every person purchasing gas fer resale. In addition, the Commission believes that the States are in a better position to moni- tor the LDCs. Hence, the Commission is adopting the interim rule reporting requirements with two modifica- tions. First, the reporting requirements are modified to require that refund reports show the amounts of principal and interest paid. Second, the Commission is requiring an additional refund report from interstate pipelines because first sellers may defer payment of the Btu refund amounts attributable to royalty interest owners. This report is necessary to monitor the refund process to its completion. Thus, interstate pipelines must file refund reports by December 18, 1984, June 17, 1985, and Janu- ary 5, 1987, detailing 1) the actual Btu refund amounts received by the pipeline and 2) the total Btu refund amounts that the interstate pipeline paid its jurisdic- tional customers and the basis used to apportion the *¢ The authority to require these reports is section 501(a) of the NGPA. See n.28, supra. 46a refund amounts among those customers.*7 The Commis- sion believes that this approach provides the Commission sufficient information to track the refund process without unduly interfering with the traditional jurisdiction of the States over retail sales of natural gas. V. Refunds at the State Level Although the Commission stresses its intention that re- funds should reach the ultimate consumer, the ‘nterim rule only requires refunds as far as intrastate pipelines and interstate pipeline’s jurisdictional customers.” One commenter argues that the Commission has the authority and should exercise that authority to return refunds, subject to a rule of reason, to the consumers actually overcharged in the same proportion that those customers were overcharged. Another commenter argues that the absence of State rate regulation over the inter- state pipelines’ direct sale transactions underscores the need for the Commission to ensure that refunds are paid to direct sale end-users. Other commenters argue that, if States are allowed to determine the methods, proce- dures, and timing of refunds, there are no assurances that the ultimate consumer will benefit. Alternatively, 27 The last report is due 60 days after November 5, 1986. The second report is due by June 17, 1985, which is 45 days, instead of 60 days, from May 3, 1985, because the second report is no lenger the final report. *8 The Process Gas Consumers Group, the American Iron and Steel Institute, the Council of Industrial Boiler Owners, The Brick Institute of America, and Kimberly-Clark Corporation (Docket No. RM84-6-001) requested rehearing. Specifically, they requested that the Commission modify the interim rule, pursuant to the au- thority delegated in NGPA sections 501 and 504, to require that all Btu adjustment refunds be flowed through to end-users in the same proportion that such users were originally overcharged due to the impiementation of the “dry” rule. The Commission denies their petition for rehearing for those reasons discussed in the text that follows. eo centile ee ee ee ee eed ut the bb. DS: a pNirteh es APRA, PARC AC a ir iil ICD, 60 0 Nib se ee 47a commenters suggest that the Commission strongly advise the States or provide guidance to the States on how intra- state pipelines and LDCs should refund overcharges to the ultimate consumer. In contrast, commenters argue that the Commission lacks jurisdiction to order refunds by LDCs. Other commenters argue that refunds by LDCs are best left to State agencies. While the Commission stresses that these Btu refunds should be passed through to the ultimate consumer, it has decided against establishing specific refund procedures for LDCs to flow through these refunds. States are better attuned to the needs of its consumers and to local market conditions, and are better equipped to establish and moni- tor the local refund procedures necessary for the different problems facing a particular State. In addition, establish- ing specific procedures to flow through refunds at the State level would unnecessarily and unreasonably inter- fere with the traditional jurisdiction of State commis- sions over retail sales of natural gas, while imposing significant administrative burdens on this Commission. The Commission has also decided not to establish refund procedures for refunding monies to an interstate pipe- lines’ direct sale customers because it believes that these customers have sufficient direct contact with the pipeline to negotiate a refund schedule. VI. MISCELLANEOUS A. Section 502(c) Adjustments Commenters note that while relief from provisions of this refund order is available under section 502(c) of the NGPA, the Commission should not view the theoretical possibility of this relief as a remedy for any special hard- ships or inequities which could result from this refund order, but rather, should amend the interim rule to remove such hardships or inequities. The Commission has sought to implement a refund mechanism that will minimize hardships and inequities. 48a However, it recognizes that, given the amount of refunds and the extensive number of buyers and sellers involved in the refund process, hardships or inequities may occur. The Commission believes that section 502(c) will provide an appropriate mechanism to remedy any hardships and inequities, which may occur, on a case-by-case basis. Al- though the Commission may not use section 502(c) to change statutory requirements, such as the maximum lawful prices under the NGPA or to reduce the Btu refund amount owed, parties may seek relief under sec- tion 502(c) from provisions of these refund procedures which they believe cause special hardships, inequities, or an unfair distribution of burdens. However, the Commis- sion expects few applications of this type and is not inclined to grant them unless the applicant’s claim for relief is supported by compelling reasons. B. Identity of First Seller One commenter suggests that whenever there are two consecutive “first sales’ or an accounting for gas for payment purposes after processing, any Btu refunds should be based on the second “first sale.” Specifically, the one delivering the residue gas at the tailgate of the plant to the pipeline-purchaser should be responsible for the refunds because of the difficulty of tracing revenues from the wellhead. Another commenter asserts that the rule should be clarified to apply to every kind of “first sale.” The Commission recognizes that in some instances there may be a string of consecutive first sales because of gathering, processing, and transportation agreements. In these situations, the Commission has decided that the refund obligation applies to every kind of first sale, as a first sale is defined under the NGPA,” since the Com- mission has jurisdiction over all first sellers and it would be unfair to hold one first seller responsible for the re- 2° See section 2(21) of the NGPA, 15 U.S.C. § 3301(21) (1982). 49a fund from a string of first sales. Hence, if the seller in a first sale receives revenues in excess of the product of the applicable maximum lawful price under the NGPA and the quantity of MMBtu’s determined on the basis of the wet rule, a refund is owed. VII. PAPERWORK REDUCTION ACT The refund reports required under Ordering Para- graph Nos. E, F, and G and §§ 154.38(h) (3) (vi), (vii), and (viii) are information collection requirements that are being submitted to the Office of Management and Budget (OMB) for its approval under the Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520 (1982) and OMB’s regulations, 5 C.F.R. Part 1320 (1984). Comments on these provisions should be sent to the Office of Informa- tion and Regulatory Affairs of OMB (Attention: Desk Officer for the Federal Energy Regulatory Commission). Interested persons can obtain information on the infor- ‘mation collection provisions by contacting the Federal Energy Regulatory Commission, 825 North Capitol Street, N.E., Washington, D.C. 20426 (Attention: Joseph Hart- soe, (202) 357-8033). VIll. EFFECTIVE DATE The Commission incorporates the reasoning and find- ings in the interim rule that good cause exists under the Administrative Procedure Act (APA), 5 U.S.C. § 553 (b) (1982), for finding that a notice of proposed rulemaking is unnecessary, impracticable and contrary to the public interest. Because this rule adopts and modifies the in- terim rule and the interim rule is already in effect, the Commission is concerned that, if this final rule were not effective upon issuance, first sellers and pipelines might apply the interim rule in a manner inconsistent with this final rule before this rule becomes effective. Therefore, the Commission finds that good cause exists under the APA, 5 U.S.C. § 553(d) (1982), to make this rule effec- tive upon issuance, except for the requirements to file 6-month, 12-month, and 30-month refund reports. These 50a refund reports are information collection requirements under the Paperwork Reduction Act and are subject to OMB approval. Accordingly, the refund report require- ments (set forth in Ordering Paragraph Nos. E, F, and G and §§ 154.38(h) (3) (vi), (vii), and (viii) of this rule) will become effective December 1, 1984. If OMB’s approval and control number have not been received by this effective date, the Commission will issue a notice temporarily suspending the effective date of the refund reporting requirements. IN CONSIDERATION OF THE FOREGOING, THE COMMISSION ORDERS: (A) Any first seller that collected revenues in excess of the product of (a) the applicable maximum lawful price established by the NGPA, and (b) the quantities of MMBtu’s determined on the basis of § 270.204, shall re- fund any such excess revenues. This refund shall be paid in full by November 5, 1984, unless the first seller is a small first seller, i.e., a first seller that sold a total of ten mill Mef or less of gas, in both the interstate and intrastate markets, during 1983. A small first seller shall pay the refunds in full by May 3, 1985, but must notify in writing any pipeline to which he owes refunds that he is a small first seller by November 5, 1984, to qualify for this extension. To the extent that revenues for gas sold in a first sale under the NGPA are less than or equal to the level of revenues based on the product of (a) and (b), and are contractually authorized, no refunds are due. (B) First sellers may defer payment of that portion of the Btu refund attributable to royalty interest owners until the first seller receives payment from the royalty interest owner or November 5, 1986, whichever occurs first. Those first sellers that defer payment of that por- tion of the Btu refund attributable to royalty interest owners must notify pipelines that some royalty payments are deferred before the end of the applicable 6- or 12- month refund period. 5lia (C) The parties to the first sale transaction may choose the method of payment of this refund except that pipe- lines and first sellers may not offset Btu refunds and production-related costs permitted under section 110 of the NGPA. Those pipelines that have already begun to collect refunds by using billing adjustments without the consent of the seller can continue this method of payment only if the seller agrees. If the parties cannot agree, payment shall be made in a lump-sum cash payment. (D) Interest shall be caleu‘ated in accordance with §§ 154.102(c) and (d) of the Commission’s regulations for refunds except that the interest obligation for money paid into escrow is that interest which accrued in the escrow account on the amount required to be refunded. (E) By December 18, 1984, intrastate and interstate pipelines shall file a refund report with the Commission detailing (1) those first sellers that have made refunds, anc the refund amounts that have been received by the pipeline by separately stating the principal and interest received from each first seller; and (2) those first sellers that have not make refunds, and the refund amounts that have not been received by the pipeline by separately stating the principal and interest due from each first seller, and the reasons for such nonreceipt. Of those first sellers who are small first sellers, as defined in this order, only those who have paid the refund amounts in full need to be identified. Intrastate pipelines shall also file a copy of the report with the State regulatory agency having jurisdiction over such pipeline. (F) By June 17, 1985, intrastate and interstate pipe- lines shall file a refund report with the Commission detailing (1) those small first sellers not previously iden- tified that have made refunds, and the refund amounts that have been received by the pipeline by separately stating the principal and interest received from each small first seller, and (2) those small first sellers that have not made refunds, and the refund amounts that have not been received by the pipeline by separately 52a stating the principal and interest due from each small first seller, and the reasons for such nonreceipt. Addi- tionally, any payments received since the date of the pipeline’s last report from other than small first sellers shall be included in this report by providing the informa- tion required in paragraph (E) above. Intrastate pipe- lines shall also file a copy of this report with the State regulatory agency having jurisdiction over such pipeline. (G) By January 5, 1987, intrastate and interstate pipe- lines shall file a refund report with the Commission detail- ing 1) those first sellers that have made refunds after May 3, 1985, and the refund amounts received by the pipeline by separately stating the principal and interest received from each first sellers, and 2) those first sellers that have not made refunds, the refund amounts that have not been received by the pipeline by separately stating the principal and interest due from each first seller, and the reason for such nonreceipt. In addition, intrastate pipelines shall file a copy of this report with the State regulatory agency having jurisdiction over such pipeline. List of Subjects 18 C.F.R. Part 154 Natural gas (H) the regulations in Part 154, Subchapter E, Chap- ter I, Title 18, Code of Federal Regulations are amended as set forth below. By the Commission. Commissioner Richard dissented in part, with a separate statement to be issued later. /s/ Kenneth F. Plumb KENNETH F. PLUMB Secretary [SEAL] 53a 1. The authority citation for Part 154 is revised to read as follows: Authority: Department of Energy Organization Act, 42 U.S.C. §§ 7101-7352 (1982); Executive Order 12,009, 3 C.F.R. 142 (1978); Administrative Procedure Act, 5 U.S.C. §§ 551-557 (1982); Natural Gas Act, 15 U.S.C. $$ 717-717w (1982); Federal Power Act, 16 U.S.C. $§ 79la-828e (1982); Natural Gas Policy Act, 15 U.S.C. §§ 3301-3432 (1982); Public Utility Regulatory Policies Act, 16 U.S.C. §§ 2601-2645 (1982); Interstate Com- merce Act, 49 U.S.C. §§ 1-27 (1976). 2. Section 154.88(h) is revised to read as follows: § 154.38 Composition of rate schedule. * * * * (h) Pipeline recovery of the Btu Measurement Adjust- ments. (1) A pipeline which receives Btu refunds shall make refunds in accordance with the provisions of this para- graph, notwithstanding any pipeline tariff provisions to the contrary. (2) For the purposes of this paragraph, “Btu refunds” means those monies held in escrow accounts and those monies received by the pipeline which are attributable to refunds and interest accrued thereon due in accordance with the August 9, 1983, Court of Appeals decision in Interstate Natural Gas Association of America v. Fed- eral Energy Regulatory Commission, 716 F.2d 1 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984). (3) A pipeline subject to paragraph (h) (1) shall refund Btu refunds to those jurisdictional customers actually overcharged from December 1, 1978, in ac- cordance with the following: (i) The pipeline shall first determine the portion of the aggregate amount of the Btu refunds which are due 54a its jurisdictional customers actually overcharged based on the proportion of the total Btu refunds originally paid by those jurisdictional customers; (ii! The pipeline shall then refund the amount deter- mined in paragraph (h) (3) (i) to each jurisdictional customer actually overcharged in the same proportion that each jurisdictional customer originally paid the Btu refund amounts; (iii) This refund shall be made in a lump-sum pay- ment to each jurisdictional customer; (iv) Interest shall be computed in accordance with § 154.67(c) of the Commission’s regulations from the date of receipt from a first seller or supplying pipeline to the date the amount is disbursed to its jurisdictional custom- ers, if a pipeline fails to refund the jurisdictional portion of the Btu refunds within 15 days after receipt from a first seller or suppiying pipeline; (v) The pipeline may defer the payment of the juris- dictional portion of any Btu refunds refunded to it until it has accumulated such Btu refunds which cumulatively equal one null per Mef (or Dkt) for the pipeline’s annual sales during calendar year 1983, at. which point the pipe- line shall refund the jurisdictional portion of all Btu refinds received in accordance with paragraphs (h) (3) (i), (ii), and (iii) of this section. However, in no event may the pipeline hold such Btu refunds for a period greater than the earlier of 120 days from the date of receipt or 30 days after November 5, 1986. Such de ferral shall be subject to the interest requirement in paragraph (h) (3) (iv) of this section; (vi) The pipeline shall submit to the Commission no later than December 18, 1984, a refund report showing, for each source from which Btu refunds are obtained, the following information: pee we OD eo Pe ed A ele cis 55a (A) The total amount of the Btu refunds the pipeline received ; (B) The total amount of interest the pipeline received; (C) the date(s) the pipeline received the refund (s) ; (D) The total amount the pipeline paid to each of its jurisdictional customers; (E) The total amount of interest the pipeline paid to each of its jurisdictional customers; (F) The date(s) of the payment(s) ; (G) The basis used to determine the payment(s) for each of the pipeline’s jurisdictional customers. (vii) The pipeline shall submit, no later than June 17, 1985, a refund report describing, for each source from which Btu refunds are obtained, those refunds received or paid (including deferred amounts paid) since filing the report under paragraph (h) (8) (vi) of this section. For those refunds subject to this paragraph, this report should show all the information enumerated in para- graph (h) (8) (vi). (viii) The pipeline shall submit, no later than January 5, 1987, a final refund report describing, for each source from which Btu refunds are obtained, those refunds re- ceived or paid (including deferred amounts paid) since filing the reports under paragraphs (h) (3) (vi) and (vii) of this section. For those refunds subject to this para- graph, this report should show all the information enu- merated in paragraph (h) (3) (vi). 8. Section 154.102 is amended to make the amendment in the interim rule final by adding a new paragraph (d) to read as follows: 56a $ 154.102 Suspended changes in rate schedules; motions to make effective at end of period of suspen- sion; procedure. * * * * (d) No interest is required to be paid on any portion of a refund which represents payments of royalties or taxes to Federal or State governmental authorities, ex- cept to the extent that such authorities pay interest to the first seller when refunding overpayments of royalties or taxes. 57a UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION October 22, 1984 Docket Nos. RM84-6-000, RM84-6-001, and RM84-6-002 REFUNDS RESULTING FRoM BTU MEASUREMENT ADJUSTMENTS TO ALL PARTIES: Attached is Commissioner Richard’s statement to Or- der No. 399 issued September 20, 1984, in the above referenced proceeding. /s/ Kenneth F. Plumb KENNETH F. PLUMB, Secretary. 58a UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION [18 C.F.R. Part 1534] Docket Nos. RM84-6-000, RM84-6-001, and RM84-6-002 REFUNDS RESULTING FROM BTU MEASUREMENT ADJUSTMENTS (Issued October 22, 1984) RICHARD, Commissioner, dissenting in part: I agree with the Commission majority on this point: refunds are due. I strongly disagree, however, with the Commission’s position that it has no option but to insure that every dollar paid under Order No. 93 and 93-A be returned to the consumer, even if those dollars must be subsidized by producers who never had their use. I also disagree with the refusal to offset section 110 allowances that are due and payable under Order No. 94, et al. In Interstate Natural Gas Association of America v. Federal Energy Regulatory Commission, 716 F. 2d 1 (D.C. Cir. 1983), cert. denied, 104 S. Ct. 1616 (1984) (INGAA), the United States Court of Appeals for the District of Columbia Circuit vacated the Commission’s regulations adopted in Order Nos. 93 and 93-A. The Court’s opinion was silent, however, as to the question of refunds. In considering the question of mandatory refunds, the Commission in its Final Rule refers to the maximum lawful ceiling prices established by the NGPA and to the provision in § 504(a) of the NGPA which makes it un- lawful for any person to sell natural gas at a first sale ee ee ee ee ee ee eer rer rh eee eee eee 59a price in excess of any applicable maximum lawful price (MPL). The Commission reasons that: If the Commission did not make the measurement rule retroactive and did not require refunds, it would effectively be establishing a ceiling price higher than the maximum lawful prices prescribed in the NGPA. Since the NGPA does not contain any pro- vision allowing the Commission to change the maxi- mum lawful prices, except in very limited circum- stances, it cannot waive the refund obligation.’ I have several problems with the Commission’s analysis. First of all, § 504 of the NGPA gives the Commission permissive authority to pursue certain civil and criminal actions against people who are in violation, or about to be in violation, of the Natural Gas Policy Act. The Commis- sion is allowed to pursue, in a civil action, injunctive or other equitable relief; it is given permission to transmit evidence to the Attorney General for consideration of criminal action; and, finally, the Commission is given the option of imposing a penalty of not more than $5,000 per violation on anyone who knowingly violates any pro- vision of the Natural Gas Policy Act.? It would seem that the edict in § 504(a) declaring a first sale in excess of the maximum lawful price unlawful is a vehicle for establishing an array of remedies which the Commission is then allowed to pursue if it chooses. The Commission seems to interpret this section as a demand for strict compliance without any discretion at all. I disagree. The argument that the Commission’s failure to recover all of the principal dollars involved in this refund obliga- tion constitutes a de facto sanction of prices in excess of the NGPA maximum lawful price entails a leap of logic that is not dictated by the statute. It is misguided to 128 FERC { 61,379. 2 § 504, Natural Gas Policy Act of 1978. 60a assume that, should the Commission be unable to enforce the collection of every cent exchanged under the BTU Rule, the Commission is actively or implicitly sanction- ing prices in excess of the MLP. Certainly, for purposes of resolving contract disputes over price, no party should expect to argue successfully that the Commission had raised the statutory ceiling prices applicable over this period of time. In fact, by virtue of ordering refunds at all, the Commission recognizes that collections under the vacated rule were in excess of the maximum lawful price. The Commission should order refunds. However, I believe we should consider the policy implications of our decision in the context of other Commission final rules with an eye toward easing the transition iniw the more decontrolled environment after January 1, 1985. Although admonished at our meeting that the Consumer Federal of America v. FPC,* arose under the Natural Gas Act, the Court’s language on the subject of refunds does give, I feel, this Commission guidance as to our policy parameters on refunds. We express no opinion on the refund issue, beyond saying that, in our view, it involves complex and difficult questions which must be presented to and addressed by the Commission in the first instance. In matters of prospective and retroactive effect, there are large questions of equity and public in- terest—both for agencies and for courts. While full refund under an invalid order is a sound basic rule, it may be offset, at least in part, by the lack of a mechanism to restore the full status quo ante, the fact that consumers may have had the benefit of some increase ‘i supply that would not have been forth- coming under Section 7 procedures, albeit purchased at an excessive price ....‘ [Emphasis added.] 8515 F.2d 347 (D.C. Cir. 1975). 4 Id. at 359. 6la Unlike the majority however, I would suggest alterna- tive ways to deal with the refunds that I believe would better balance our total resvonsibility under both the Natural Gas Act and the Natural Gas Policy Act’s strictures of providing consumers the least cost reliable supply. OFFSETS WITH ORDER 94 COSTS Several commentors proposed that the Commission per- mit producers to be able to require an offset of any BTU refunds against monies owed them for production-related cost reimbursements pursuant to Order No. 94, et al.® Commentors argue that such an offset would mitigate against many of the financial difficulties imposed upon producers by the refund rule.° I believe from a policy perspective the recommendation is a good one. In fact, production-related costs were col- lected during roughly the same time period. In many cases, there is a symmetry of parties with regard to pay- ments owing under Order Nos. 93 and 93-A and Order Nos. 94, et al. It would seem that where such symmetry * exists, and the pipeline and producer can agree, an offset would be an equitable and efficient means of effecting the exchange of money owed. Because of the short lengths of the refund periods and the long period of time over which these payments were made, it would behoove the Commission to recognize *® that, from an equity perspec- tive, an offset would give producers a chance to offset lawfully owed money with a lawfully compelled refund. 5 See e.g. Comments of Indicated Producers, Pennsylvania Nat- ural Gas Associates, and Tennessee Gas Pipeline. All comments are to the Interim Rule. ®See e.g. Comments of Panhandle Eastern/Trunkline and TIPRO. T See e.g. Comments of Panhandle Eastern, Trunkline, and Ten- nessee Gas Pipeline. 8 Production-related costs were finally allowed by this Commission five years after passage of the NGPA. 62a Although offsets other than Order No. 94 amounts were suggested,® I would recommend at a minimum only these costs because their size and existence are relatively easy to ascertain. Would pipelines with Btu refunds bargain less aggres- sively with producers trying to collect production-related costs if offsets are allowed? I think they would be foolish to do so from a competitive and a regulatory perspective. The Commission in implementing its statutory duty under Section 110 carefully, through a series of orders, allowed only certain cost-justified amounts to be collected from pipelines and their customers. Essentially, the Order 94 series requires that, before a producer may collect production-related costs, express contractual authority must be present. This assumes the activity is in fact being performed and that only amounts necessary to recover the costs are collected. In the case of compression and gathering amounts, to insure the statutory requirement is met, the Commission developed limits on the amounts producers can charge based on studies of these costs.’ In its Interim Regulations, the Commission ordered that individual application be made for production-related costs. To remove this burden and to remove unwarranted delay in sellers receiving adjustments under Section 110, the Commission allowed a self-implementing scheme. However, to protect purchasers and “mindful of the potential for abuse inherent in any self-implementing regulatory scheme,” the Commission warned that field audits will ensure sellers adhere to the rules." ® See Comments by TIPRO, pages 3-5 “. . . existing contract or existing state law governing such contract, permits... the offset.” 10 Order No. 94-A. 11Jd. at 44. The Commission, to avoid any misunderstanding as to its enforcement authority, stressed that the collection of an idilbinciide) Ge er Oe so GL, 99a the burden of attempting to pass through producers’ bills for services rendered years ago. The Commission’s concern with this issue is evidenced by a filing of Tennessee Gas Pipeline Company in Docket No. RP85-3-000, dated October 3, 1984, for a procedure to permanently revise its FERC Gas Tariff PGA provi- sions to establish an extraordinary gas subaccount to record amounts in excess of $1 million which Tennessee would be required to pay for gas supplies as a result of Commission or court action. Under this proposal, Ten- nessee would calculate individual customer surcharges based on Tennessee’s sales to that customer during the period to which the extraordinary payment pertained. Tennessee’s two justifications for this proposal were that radical changes in purchase patterns will occur for some of its customers since the period to which the retroactive charges apply and that the recovery of such large retro- active payments through the current PGA mechanism would result in a distortion of the current gas markets. In support of its proposal, Tennessee noted Columbia Gas Transmission, a pipeline customer, purchased ap- proximately 14 percent of the gas sold by Tennessee to jurisdictional customers during August 1980-1983, com- pared to only seven percent in the first six months of 1984. Use of the normal Account 191 mechanism to re- cover Order No. 94-A retroactive payments would allow customers with relatively declining purchases to bear less than their “fair share,” and require customers with relatively higher purchases to bear more than their “fair share.” Consolidated Gas Transmission Corporation intervened in support of Tennessee’s proposal with this qualifica- tion: While Movant supports Tennessee’s proposed meth- odology, the simplest and most efficient approach to this problem is to permit pipelines to offset Order 100a No. 94 payments against Order No. 93 refunds re- ceived from producers.”® Another intervenor, Niagara Mohawk Power Corpora- tion, expressed concern that absent the direct billing mechanism, its customers “would be paying a share of the retroactive costs properly attributable to past sales to Columbia’s customers. The retroactive costs are de- cidedly different than normal refunds that would be flowed through in PGA filings.” *" On November 5, 1984, in Docket No. RM85-14, Nat- ural Gas Pipeline Company of America (Natural) filed a petition for authority to institute a special, one-time, lump sum billing procedure to recover from Natural’s customers retroactive payments for “production-related costs” paid by Natural to producers by December 31, 1984. Natural proposes to recover approximately $140 million in retroactive payments from its customer; 15 days after the latter of February 1, 1985, or the date on which both the Docket No. RP83-68 and South Georgia refunds have been made. Natural asserts that, because approximately $120 million is owed its customers in these proceedings and another $60 million in Btu refunds will be refunded to its customers, its customers would have sufficient funds to make this payment. Natural’s justifi- cation for this approach is similar to that offered by Tennessee. In anticipation of statutory changes on January l, 1985, considerable negotiations will occur between pipe- lines and producers and between producers and end users. This contract price negotiation should result in a relatively undistorted market price for gas. To the ex- 26 Motion of Consolidated Gas Transmission Corporation for Leave to Intervene in Support of Direct Billing Proposal in Docket No. RP85-3-000 at page 3. 27 Petition to Intervene of Niagara Mohawk Power Corporation in Docket No. RP85-3-000 at page 3. 10la tent that historical costs are a'’.- to be included in these contract price negotiations and will be reflected in the base price from which these negotiations stem, con- sumers will be ill-served. The Commission’s concern is that without an offset, legitimate production-related gas costs incurred in the past would not be paid by custom- ers in the system during the period of incurrence, but rather would be paid by present and future customers who received no economic benefits. Those costs, while authorized under the Order No. 94-A series and owed under contracts, are nonetheless inappropriate signals to the market in 1985, and, therefore, inconsistent with the Commission’s goal of achieving a balance in supply and demand through the workings of a competitive market at the wellhead. The Commission’s attempts to work toward an undis- torted market price for gas at the wellhead is reflected in this Order Nos. 380 and 380-A which removed vari- able costs from pipelines’ minimum commodity bills. Prior to Order No. 380, minimum commodity bills in- sured pipelines that their customers would pay for a minimum amount of gas and system capacity regardless z their needs and whether or not cheaper gas was avail- able. By removing the variable costs from minimum com- modity bills, Order Nos. 380 and 380-A significantly changed the bases for purchasing decisions across the industry. Essentially, the economic penalty for changing suppliers was substantially reduced. Consequently, par- tially supplied customers and customers with alternate fuel capability are much freer to make purchasing deci- sions based on price, and, in fact, have probably done so. The data to demonstrate this phenomenon are not yet available. However, in seeking a stay from th [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_0500%3A2. Public record. Not legal advice.