Opposition Brief — Transwestern Pipeline Co. v. Federal Energy Regulatory Commission

Supreme Court, U.S,

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~) cS) 7 } ae 2 MAR 24 1988

d 85-1252 F. SPANIOL, JR.

Nos. 85-1219, 85-1236, 85-1237, 85-1250 a

IN THE

Suprene Cot of the United States

OCTOBER TERM, 1985

TRANSWESTERN PIPELINE COMPANY, et al.,

Petitioners,

V.

FEDERAL ENERGY REGULATORY COMMISSION, et al.,

Respondents.

On Petitions for a Writ of Certiorari to the United States

Court of Appeals for the District of Columbia Circuit

BRIEF FOR RESPONDENT

NORTHERN ILLINOIS GAS COMPANY IN OPPOSITION

TO PETITIONS FOR A WRIT OF CERTIORARI

DAvip I. BLoom *

MAYER, BROWN & PLATT

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 463-20) )

ROBERT A. HELMAN

STEPHEN M. SHAPIRO

WENDELL H. ADAIR, JR.

MAYER, BROWN & PLATT

231 South LaSalle Street

Chicago, Illinois 60604

Attorneys for

Northern Illinois Gas Company

March 24, 1986 * Counsel of Record

ate

WILSON - Epes PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether the Federal Energy Regulatory Commis-

sion (the “Commission’”’) has authority under the

Natural Gas Act, 15 U.S.C. §§ 717-717w (1982),

to regulate and modify the rates charged by nat-

ural gas pipelines under minimum commodity bill

provisions included in tariffs on file with the Com-

mission.

2. Whether the court of appeals acted correctly in

upholding the decision of the Commission to order

the elimination of all variable costs from the rates

charged under minimum commodity bills.

3. Whether the Commission may modify the rate

provisions of tariffs on file with it on the basis of

a record compiled in an informal rulemaking pro-

ceeding.

(i)

ii

STATEMENT PURSUANT TO RULE 28.1

Northern Illinois Gas Company is a subsidiary of

NICOR Ince., a publicly-held company. NICOR Inc.

is not affiliated with any companies other than its

wholly-owned subsidiaries.

TABLE OF CONTENTS

Page

as sacaseteenianenneemeinwanicnonnin 1

aria cclicebiiatietbinantnnbecigoecbeatnecaanniennenetion 2

STATEMENT . ee sialic 2

REASONS FOR DENYING THE PETITIONS............. 9

a aid cnicaseneenivecbncnrveneacenene 21

(iii)

iv

TABLE OF AUTHORITIES

JUDICIAL DECISIONS: Page

Atlantic Refining Co. v. Public Service Commis-

sion of New York, 360 U.S. 378 (1959) ............. 12

Atlantic Seaboard Corp. v. F.P.C., 404 F.2d 1268

Ses EARN. SI Sccocstcascoaitiinsicdepianantabtialsacpinmseenanitbadarss 15

Columbia Gas Transmission Corp. v. F.E.R.C., 628

ee Cs es DUO wininsintierwretseniowssiacinincinces 3

F.P.C. v. Hope Natural Gas Co., 320 U.S. 591

tReet de acieres neeer ien en Goer tae 16

F.P.C. v. Louisiana Power and Light Co., 406 US.

ES | eRe ecta Ree Oe DOM ADEN verner Ae ean ee ee A OeRe 14

F.P.C. v. Natural Gas Pipeline Co., 315 U.S. 575

SSA Aan SRR Reser IAI Rc IR UN ree OREN Ene ti PR 15

F.P.C. v. Sierra Pacific Power Co., 350 U.S. 348

I cic escatcacce cu ck nicelecigtlin laconic ahaa tadveidamadiate 12

Lynchburg Gas Co. v. F.P.C., 336 F.2d 942 (D.C.

EN REE OR ween tsesn ee oe eo NNN 15

Mississippi River Transmission Corp. v. F.E.R.C.,

759 F.2d 945 (D.C. Cir. 1985) .......... PEN en EER 15

Mobil Oil Corp. v. F.P.C., 417 U.S. 283 (1974) -....... 11

Northern Natural Gas Co. v. F.P.C., 399 F.2d 953

(Et RR, _: SRCESEN SS Reore ene veh io Oe re a aT oR 15

Otter Tail Power Co. v. United States, 410 U.S.

I ar ed 15

Permian Basin Area Rate Cases, 390 U.S. 747

| Ea RAISSRN Cne me eee ie ark est Sos Pe Donen passim

Phillips Petroieum Co. v. F.P.C., 475 F.2d 842

(10th Cir. 1973), cert. denied, 414 U.S. 1145

| SORES SE Ne tree leny SUNN na AeA TOD. NGO ener ee 18

SEC v. Chenery Corp., 332 U.S 194 i) 18

Tenneco Oil Co. v. F.E.R.C., 571 F.2d 834 (5th

Cir.), cert. dismissed, 439 U.S. 801 (1979)........ 18

United Gas Pipe Line Co. v. Mobile Gas Service

i Te eae eI So cevcesnecniccneteareceresmens 12,14

United States v. El Paso Natural Gas Company,

gk SE Gs | |, GR erenemn ee nemnenN 14

United States v. Florida East Coast Ry. Co., 410

I SE I ca ae lcci Sec ldlladadiiiie 18, 20

v

TABLE OF AUTHORITIES—Continued

Page

United States v. Seatrain Lines, Inc., 329 U.S. 424

) 5 RERRORSPREET Nae actos oven earn ee a RS 12

Vermont Yankee Nuclear Power Corp. v. Natural

Resources Defense Council, Inc., 485 U.S. 519

MITE sicaacricktconeapicinelcneseisbsnenanseinhaeiecenGhsstibiniadaiessdaueadiigebcsgieit passim

ADMINISTRATIVE DECISIONS:

Tennessee Gas Pipeline Co., 32 F.E.R.C. § 61,311

IE selcaiehclpl sheds sch idemacehgedadebbtahins 19

Transwestern Pipeline Co., 32 F.E.R.C. { 61,009

IIIT sn <ccitesstie.s siesta ubtehccacheasle asaminapinsieaiaierclecacieden 19

STATUTES:

Department of Energy Organization Act

Section 403(c), 42 U.S.C. § 7173(c) (1984).... 17, 20

Natural Gas Act

35 an on? eee, (ie passim

Section 4, 15 U.S.C. § 717c (1982) ...................... 2,5, 7

Section 5, 15 U.S.C. § 717d (1982) ..................... passim

Section 7, 15 U.S.C. § 717f (1982) .............00.... 2. 12, 17

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

Nos. 85-1219, 85-1236, 85-1237, 85-1250 and 85-1252

TRANSWESTERN PIPELINE COMPANY, et al.,

Petitioners,

v.

FEDERAL ENERGY REGULATORY COMMISSION, et al.,

Respondents.

On Petitions for a Writ of Certiorari to the United States

Court of Appeais for the District of Columbia Circuit

BRIEF FOR RESPONDENT

NORTHERN ILLINOIS GAS COMPANY IN OPPOSITION

TO PETITIONS FOR A WRIT OF CERTIORARI

OPINIONS BELOW

The opinion of the court of appeals is reported at

770 F.2d 1144 and appears at Pet. App. A-1.' The

court of appeals’ orders denying rehearing and re-

1 References to “Pet. App. ——” appearing herein are to

the Appendix to the Petition for Writ of Certiorari to the

United States Court of Appeals for the District of Columbia

Circuit filed January 21, 1986 in Transwestern Pipeline Co.

v. Federal Energy Regulatory Commission, No. 85-1219.

2

hearing en banc, are not officially reported and ap-

pear at Pet. App. A-57 and A-69, respectively. The

orders of the Federal Energy Regulatory Commission

(the “Commission”) were issued in Docket No.

RM83-71-000 and are identified as Order Nos. 380

(Pet. App. A-71), 380-A (Pet. App. A-129), 380-B

(Pet. App. A-226), 380-C (Pet. App. A-231) and

380-D (Pet. App. A-271).

JURISDICTION

The decision of the court of appeals and its judg-

ment in this case were entered August 20, 1985. A

timely petition for rehearing and a suggestion for

rehearing en banc were denied on October 25, 1985.

This Court has jurisdiction to review the decision

below pursuant to 15 U.S.C. § 717r(b) and 28 U.S.C.

§ 1254(1).

STATEMENT

1. Under the Natural Gas Act (“NGA”), 15

U.S.C. §§ 717-717w (1982), sales of natural gas for

resale by interstate pipelines are subject to the com-

prehensive jurisdiction of the Commission. No such

sales can take place unless the Commission has issued

a certificate of public convenience and necessity un-

der Section 7 of the NGA. 15 U.S.C. § 717f£(1982).

Once the service is commenced, Section 4(a) of the

NGA provides that the rates and charges are “sub-

ject to the jurisdiction of the Commission, and all

rules and regulations affecting or pertaining to such

rates or charges, shall be just and reasonable, and

any such rate or charge that is not just and reason-

able is declared to be unlawful.” 15 U.S.C. § 717e(a)

(1982). Under Section 5(a) of the NGA, if the

Commission finds that “any rate, charge, or classifi-

3

cation. .. . or that any rule, regulation, practice, or

contract affecting such rate, charge, or classification

is unjust, unreasonable, unduly discriminatory, or

preferential,” the Commission may fix by order the

‘just and reasonable rate, charge, classification, rule,

reculation, practice or contract to be thereafter ob-

served, and in force... .” 15 U.S.C. § 717d(a)

(1982).

Generally, an interstate pipeline will have entered

into a contract with each resale customer requiring

the pipeline to provide, upon request on any given

day, a maximum quantity of natural gas (the “daily

contract quantity”). The rates for services to be

charged under the contract will be contained in tariffs

on file with and subject to the review of the Commis-

sion. To compensate the pipeline for the costs ‘asso-

ciated with providing gas sales service on demand,

the tariff will require each customer to pay a monthly

demand charge, based on the contract quantity,

which recovers a portion of the fixed costs incurred

by the pipeline in providing the service.* A customer

must pay the demand charge, whether er not it ac-

tually requests or receives service during any billing

period and irrespective of the level of service actually

received. A customer also is required to pay a com-

modity charge based on the actual volume of gas

purchased from the pipeline. The commodity charge

is designed to recover the remaining portion of the

pipeline’s fixed costs and all variable costs, including

purchased gas costs.

2 The exact portion depends upon the rate design used by

the pipeline. The portions range from 25% to 70% of a

pipeline’s total fixed costs. Pet. App. A-76 n.14. See generally

Columbia Gas Transmission Corp. v. F.E.R.C., 628 F.2d 578

(D.C. Cir. 1979).

4

In addition, some pipeline tariffs impose an addi-

tional charge, known as a minimum commodity bill.

Minimum commodity bills require a customer to pay

a charge for any shortfall in purchases below a spec-

ified level, ranging from 50% to 90% of the monthly

or annual contract quantity, even though the cus-

temer does not actually purchase that quantity of

gas.* Prior to the issuance of Order No. 380, most

minimum bill charges were set at the level of the

pipeline’s commodity charge, including purchased

gas costs. Thus, a pipeline customer purchasing only

at the pipeline minimum bil! level could never replace

a unit of those purchases with alternate, less expen-

sive supplies because the true cost of that unit,

which would include the pipeline minimum bill

charge, could never be less than the pipeline com-

modity price. Minimum commodity bills therefore es-

tablished an effective floor on purchases by a cus-

tomer from its supplying pipeline and placed a sub-

stantial restraint on the forces of competition.

2. In August 1983, the Commission issued a No-

tice of Proposed Rulemaking in which it proposed to

remove all variable costs, including the cost of pur-

chased gas, from the rates charged under minimum

commodity bills. It noted that variable costs are not

incurred when a pipeline does not make sales and

therefore tentatively concluded that current mini-

mum bills might allow pipelines to recover a “wind-

fall.” It also concluded that minimum commodity

’The nonthly quantity generally equals the daily contract

quantity tirnes the number of days in the applicable month.

If a customer’s entitlement to firm sales volumes is less than

the daily contract quantity times the days in the applicable

period, the percentage requirement of the minimum com-

modity bill usually is applied to that lower volume.

5

bills served as barriers to competition by preventing

pipeline customers from purchasing less expensive

sources of supply. After receiving an initial round

of comments, the Commission allowed interested par-

ties to file reply comments.

Thereafter, the Commission promulgated Order

No. 380, based on its findings that minimum com-

modity bills recovered costs that were not actually

incurred, Pet. App. A-82 to A-85, and, further, were

“anticompetitive.” Pet. App. A-85 to A-92. To im-

plement these conclusions, the Commission promul-

gated a new section to its regulations, 18 C.F.R.

§ 154.111, effective August 30, 1984, which required

all costs of purchased gas to be excluded from the

rate charged when customers did not purchase gas

at full minimum bill levels. Pet. App. A-123 to A-

124.* All other variable costs were required to be

eliminated from the minimum commodity bill when

each pipeline made its next general rate filing under

Section 4 of the NGA. Ibid. The Commission de-

clined to adopt the suggestion of some parties that

minimum commodity bills be eliminated in their en-

tirety or be applied to a lesser percentage of contract

quantity. Pet. App. A-114 to A-115. It therefore

left intact the volumetric level of minimum commod-

ity bills and the fixed cost portion of the rates

charged thereunder.

* The Commission also applied this provision to “minimum

take provisions,” which require customers physically to re-

ceive a specified amount of gas. The court of appeals upheid

the Commission’s decision to apply 18 C.F.R. § 154.111 to

both minimum bill and minimum take provisions, holding

that “there is no difference between the two types of clauses

with respect to the Commission’s rationale for the rule. . .”

Pet. App. A-35 n.18.

6

The Commission’s decision to leave intact the fixed

cost portion of the rate charged under minimum

commodity bills has several effects. First, it pro-

vides affected pipelines with continued assurances of

recovery of the fixed costs contained in their com-

modity charges. Pet. App. A-22, A-138, A-143. Thus,

pipelines will continue to have a full and fair oppor-

tunity to recover all costs actually incurred in meet-

ing their contractual obligations to their customers.

Second, by retaining the pre-existing floor on the

contribution to fixed cost recovery by each customer

(i.e., the demand charge plus commodity fixed costs

for volumes up to the minimum bill level), the Com-

mission’s rule protects pipeline customers against the

full impact of cost-shifting if purchase levels shift in

response to Order No. 380.

Third, the scope of the Commission’s action limits

its competitive impact. Rather than exposing pipe-

lines to the full brunt of gas-on-gas competition, the

orders leave pipelines with a partial shield against

competition. Under the rule, a pipeline’s sales to a

customer will drop below the minimum commodity

bill level in response to competition only if the rates

of competitors are lower than the pipeline’s rates by

an amount greater than the fixed costs contained in

the pipeline’s commodity charge. Even if that condi-

tion is met and a pipeline actually loses sales, the

pipeline will remain shielded from the full financial

impact of that competition because it will continue

to recover those fixed costs.

Fourth, to the extent that sales are lost and take-

or-pay liability results,’ the Commission left undis-

5 Under certain gas purchase contracts, a purchaser must

take a specified amount of gas, or pay for that amount even

if not taken. Pet. App. A-20 to A-21.

7

turbed those provisions of its regulations which al-

low a pipeline to recover the carrying-costs associ-

ated with take-or-pay liability. Pet. App. A-105 n.47.

It also invited pipelines to file proposals to target

those costs on specific customers if such proposals

could be justified. Pet. App. A-106.

3. After petitions for rehearing were denied by

the Commission, several parties petitioned the United

States Court of Appeals for the District of Columbia

Circuit for review of the Commission’s orders, pur-

suant to 15 U.S.C. § 717r(b) (1982). The court of

appeals affirmed the Commission, holding that the

Commission had the statutory authority to issue the

rule, because “Sections 4 and 5 of the Natural Gas

Act empower the Commission to regulate rates,

charges, and practices of natural gas companies un-

der its jurisdiction.” Pet. App. A-24 to A-25. The

court of appeals also concluded that “[t]he Commis-

sion has provided abundant evidence that the recov-

ery of variable costs through minimum bill and mini-

mum take clauses prevents customers from shopping

for low-cost gas, thereby insulating pipelines from

market forces that would otherwise drive gas prices

down.” Pet. App. A-36. The court of appeals, after

review of the record, then determined that “the Com-

mission adequately addressed the concerns of captive

customers,” Pet. App. A-42, that “each of the order’s

essential elements is supported by substantial evi-

dence,” ibid., and therefore that it was not its “pro-

vince ‘to supplant the Commission’s balance of these

interests with one more nearly to four] liking.’

Permian Basin, 390 U.S. at 792.” Ibid. The court

of appeals also held that the Commission was author-

ized to promulgate the rule after informal notice

8

and comment rulemaking because “the decision

whether to proceed by rulemaking or adjudication lies

within the broad discretion of the agency,” Pet. App.

A-51, and “the ‘substantial evidence’ provision in the

Natural Gas Act does not affect the procedure the

Commission is required to follow.” Pet. App. A-54

(emphasis in original).

4. Northern Illinois Gas Company (“NI-Gas’’), a

respondent in this case, is a local distribution com-

pany engaged in the sale and distribution of natural

gas to over 1,500,000 customers in northern Illinois.

Historically, NI-Gas has purchased close to 100% of

its supply from interstate pipelines, three of which

have minimum commodity bills in the tariffs appli-

cable to NI-Gas. Because these minimum commodity

bills had increased the cost of gas to the consumers

served by NI-Gas, NI-Gas actively supported the

proposed rule and defended the final rule before the

court of appeals. At the time the Commission was

receiving comments in the rulemaking that resulted

in Order No. 380, NI-Gas estimated that its con-

sumers would save tens of millions of dollars per

year as a direct result of the additional flexibility to

substitute lower priced sources of gas for higher

priced gas which NI-Gas previously had been forced

to purchase. Because the rule increases NI-Gas’ op-

tions for buying gas and the competition among pipe-

lines and other sources of gas, NI-Gas anticipates

that the combined impact of its increased flexibility

and increased industry-wide competition will result

in rates charged to its consumers that are tens of

millions of dollars below the level which would pre-

vail absent Order No. 380.

9

REASONS FOR DENYING THE PETITIONS

The unanimous decision of the court of appeals is

correct and does not conflict with any decision of this

Court or any other court of appeals. The court of

appeals properly applied well-established standards

for review of Commission action. After careful con-

sideration of the record below, the court of appeals

determined that the Commission’s findings were sup-

ported by substantial evidence and that the Com-

mission’s actions were within its substantive author-

ity and in accord with appropriate procedural safe-

guards. Petitioners’ challenges to the decisions of the

court of appeals and the Commission boil down to

dissatisfaction with the application of settled legal

principles to the facts of this particular record, and

do not merit review by this Court. |

I.

The decision below evidences no confusion as to

the appropriate standards of review. It applies long-

standing principles of judicial review of agency ac-

tion in a carefully reasoned opinion. Having prop-

erly articulated these standards, the decision then ap-

plies them to a voluminous record, and determines

that the actions of the Commission satisfy those

standards. Thus, while the rule promulgated by the

Commission might have broad impact, the review af-

forded by the court of appeals was sufficient to dis-

pose of all of petitioners’ contentions.

This Court has defined the responsibilities of a

court reviewing agency actions taken under the

NGA in the following terms:

First, it must determine whether the Commis-

sioner’s order, viewed in light of the relevant

10

facts and of the Commission’s broad regulatory

duties, abused or exceeded its authority. Second,

the court must examine the manner in which the

Commission has employed the methods of regu-

lation which it has itself selected, and must de-

cide whether each of the order’s essential ele-

ments is supported by substantial evidence.

Third, the court must determine whether the

order may reasonably be expected to maintain

financial integrity, attract necessary capital, and

fairly compensate investors for the risks they

have assumed, and yet provide appropriate pro-

tection to the relevant public interests... . The

court’s responsibility is not to supplant the Com-

mission’s balance of these interests with one

more nearly of its liking, but instead to assure

itself that the Commission has given reasoned

consideration to each of the pertinent factors.

Permiun Basin Area Rate Cases, 390 U.S. 747, 791-

792 (1968). As described more fully in Parts II and

III of this brief, the court of appeals properly applied

each of these standards in reviewing the actions of

the Commission. First, the court of appeals consid-

ered whether the actions of the Commission were

within its substantive authority under the NGA and

properly concluded that they were. Second, the court

of appeals reviewed the record and determined that

each of the essential elements of Crder No. 380 was

fully supported by substantial evidence. Third, the

court of appeals determined that Order No. 380 ade-

quately protected investors by maintaining the fixed

cost portion of minimum commodity bills and pro-

viding a fair opportunity for pipelines to recover all

prudently incurred costs.

Thus, the present case involves a routine review of

administrative action under well-established legal

11

principles. As this Court has made clear, the respon-

sibility for assessing a record to determine whether

agency findings are supported by substantial evi-

dence “is not ours,” but that of the “courts of ap-

peals.” “This Court will intervene only in what

ought to be the rare instance where the standard ap-

pears to have been misapprehended or grossly mis-

applied.” Mobil Oil Corp. v. F.P.C., 417 U.S. 288,

309-310 (1974).

II.

The court of appeals concluded that the Commis-

sion had explicit statutory authority to take the ac-

tions herein challenged. Pet. App. A-25. Section

5(a) of the NGA, 15 U.S.C. § 717d(a) (1982), states

that if the Commission “find[s] that any rate, charge.

.. or any rule, regulation, practice, or contract af-

_fecting such rate, charge, or classification is unjust,

unreasonable,” the Commission shall fix by order “the

just and reasonable rate, charge, classification, rule,

regulation, practice or contract to be thereafter ob-

served. . .” Minimum commodity bills establish the

“just and reasonable rate” to be paid by a pipeline

customer when it fails to achieve a contractually |

agreed-upon level of purchases. Pet. App. A-25 n.9.

The Commission’s rule did not alter those levels or a

customer’s obligation to compensate a pipeline for the

prudently incurred costs of providing service. The

orders merely concluded that a rate for shortfalls

of purchases below a pipeline’s minimum bill level

which recovers costs not actually incurred is “unjust

[and] unreasonable” within the meaning of Section

5 of the NGA, 15 U.S.C. § 717d(1982), and therefore

prohibited that practice on a prospective basis. Such

regulation of rates and charges is precisely the au-

12

thority granted the Commission by Section 5 of the

NGA.*®

Petitioners’ efforts to portray the Commission ac-

tions as a prohibited alteration of certificates were

properly rejected by the court of appeals, Pet. App.

A-25 n.9,’ and petitioners’ reliance on cases such as

United States v. Seatrain Lines, Inc., 329 U.S. 424

(1947), is misplaced. A certificate of public conven-

ience and necessity issued under Section 7 of the

NGA confers upon the recipient the right and obliga-

tion to provide a specific service. Absent a certificate,

a party is prohibited from providing the specified

service. However, the determination of the just and

reasonable rate level for a particular service, which

must recognize the financial interests of the pipeline,

is a far different matter from revoking a pipeline’s

right to provide that service. The orders of the Com-

mission, which operate on a prospective basis enly,

leave intact the service rights and obligations of pipe-

lines, including each customer’s obligation to com-

6 Petitioners’ reliance on United Gas Pipe Line Co. v. Mo-

bile Gas Service Corp., 350 U.S. 332 (1956), and F.P.C. v.

Sierra Pacific Power Co., 350 U.S. 348 (1956), is entirely

misplaced. E£.g., No. 85-1219 Pet. at 8-11. Those cases deal

only with the burden of proof and do not question the Com-

mission’s substantive ratemaking authority under Section 5

of the NGA when adequate findings are made by the Com-

mission.

7 The court of appeals also properly concluded that a cer-

tificate confers no guarantee that the initial terms of an ap-

proved service will not be changed, citing Atlantic Refining

Co. v. Public Service Commission of New York, 360 U.S. 378,

389 (1959). Upon appropriate showings, “the Commission

has plenary authority to limit or to proscribe contractual ar-

rangements that contravene the relevant public interests.”

Permian Basin Area Rate Cases, supra, 390 U.S. at 783-84.

13

pensate the pipelines, and the orders deal solely with

the rates charged for one element of service. Thus,

Seatrain, even if read as broadly as petitioners con-

tend, is not relevant to the present case.

III.

Petitioners, in various guises, also argue that the

Commission’s rule “abrogates” contracts, destroys

the “mutuality” of contracts, or denies pipelines the

constitutionally-mandated fair opportunity to recover

their costs. E.g., No. 85-1250 Pet. at 9-10; No. 85-

1236 Pet. at 9; No. 85-1237 Pet. at 10. As the court

of appeals properly concluded, these arguments are

devoid of merit. Pet. App. A-25 n. 9.

Under Order No. 380, pipeline customers remain

obligated to pay a demand charge to compensate their

supplying pipelines for standing ready to provide

service up to the daily contract quantity specified in

the contracts. Customers remain obligated to pay

commodity charges for actual purchases and fixed

costs for any minimum bill deficiency volumes. Sim-

ply put, pipeline customers remain obligated to com-

pensate pipelines for costs prudently incurred to pro-

vide the contracted-for service, preserving mutuality

between the providers and recipients of gas sales

services. All the Commission did, by invoking its au-

thority under Section 5 of the NGA, was to hold that

it is “unjust [and] unreasonable” for a pipeline to

charge customers for costs which it has not incurred.

This decision by the Commission is clearly within

the power granted by the NGA and its finding that

the previous rate structure for minimum commodity

bill charges is unjust and unreasonable fully sat-

isfies the requirements established by the Court in

the Mobile-Sierra doctrine. The Mobile-Sierra line of

14

cases recognizes the primary role played by contracts

under the NGA. It does not, however, prohibit the

Commission from exercising its powers under Sec-

tion 5 of the NGA to prescribe just and reasonable

rates. The ability of the Commission to modify con-

tractually specified rates is beyond peradventure.

“The basic power of the Commission is that given it

by §5(a) to set aside and modify any rate or con-

tract which it determines after hearing, to be ‘unjust,

unreasonable, unduly discriminatory, or preferen-

tial’.” United Gas Pipe Line Co. v. Mobile Gas Serv-

ice Corp., supra, 350 U.S. at 341. See also F.P.C. v.

Louisiana Power and Light Co., 406 U.S. 621, 646-47

(1972).

The finding of the Commission that rainimum bill

charges which recover unincurred costs are unjust

and unreasonable cannot be characterized as arbi-

trary or capricious. The two essential elements of

the Commission’s findings, that minimum bills au-

thorize the recovery of unincurred costs and inhibit

competition, are uncontroverted. Petitioners do not

dispute the conclusion of the Commission that pur-

chased gas costs are not incurred. At most, they

argue that other costs, primarily take-or-pay costs

which may be claimed by producers under gas pur-

chase contracts, may be incurred if the orders re-

main in effect. They further argue that while mini-

mum commodity bills admittedly restrain competi-

tion, such bills provide pipelines with both the con-

stitutionally-protected fair opportunity to recover

their prudently-incurred costs and the additional

right to retain a fixed market share, irrespective of

any other factors, citing United States v. El Paso

Natural Gas Company, 376 U.S. 651, 659-660

(1964).

15

However, this claim misstates the law and the im-

pact of the Commission rule. While minimum com-

modity bills have been justified for several reasons,*

an absolute grant of immunity from competition is

not one of those reasons. The Commission may pro-

mote competition to better serve the public interest.’

The sole issue is whether its actions properly recog-

nize the financial interests of pipelines and fairly

compensate investors. Permian Basin Area Rate

Cases, supra, 390 U.S. at 790-91; F.P.C. v. Natural

Gas Pipeline Co., 315 U.S. 575 (1942); Lynchburg

Gas Co. v. F.P.C., supra, 336 F.2d at 949-50 (Wash-

ington, J., concurring).

The Commission’s rule, as found by the court of

appeals, strikes a reasonable balance between effec-

tive competition and the expectations of investors in

a manner consistent with the requirements estab-

lished by this Court. The final Commission rule pro-

vides each affected pipeline with a full and fair op-

portunity to recover its cost of service, including the

costs associated with any increased take-or-pay lia-

bility. Demand charges, which recover a significant

portion of pipeline fixed costs, are unaffected by the

rule. The fixed costs recovered through the pipeline’s

commodity charge are also unaffected because the

8 See generally Mississippi River Transmission Corp. v.

F.E.R.C., 759 F.2d 945 (D.C. Cir. 1985); Atlantic Seaboard

Corp. v. F.P.C., 404 F.2d 1268 (D.C. Cir. 1968) ; Lynchburg

Gas Co. v. F.P.C., 336 F.2d 942 (D.C. Cir. 1964). Both the

Commission and the court of appeals concluded that Order

No. 380 satisfied the standards set forth in those cases.

® See generally Otter Tail Power Co. v. United States, 410

U.S. 366 (1973); Atlantic Seaboard Corp. v. F.P.C., supra,

404 F.2d at 1272; Northern Natural Gas Co. v. F.P.C., 399

F.2d 953, 964-65 (D.C. Cir. 1968).

16

minimum commodity bills continue in effect, at pre-

existing levels, for such fixed costs. Only variable

costs, which by definition are not incurred when pur-

chases are not made, are excluded from recovery

through the minimum bill charge.

Petitioners argue, however, that these unincurred

variable costs are a proxy for take-or-pay costs which

are an inevitable result of Order No. 380. This argu-

ment overlooks the fact that if a pipeline loses sales

due to the rule and therefore incurs take-or-pay lia-

bility to producers, those costs may be reflected in its

rates. Such payments, if prudently incurred, are

placed im the pipeline’s rate base and the pipeline

may recover in its rates the carrying costs associated

with that rate base account. Pet.App. A-105 n. 47.

Thus, the pipeline receives a full and fair opportunity

to recover its costs. The consumers’ interests are

therefore balanced with the pipeline’s financial health.

Cf., Permian Basin Area Rate Cases, supra, 390 U.S.

at 792; F.P.C. v. Hope Natural Gas Co., 320 U.S.

591, 6038 (1944). Arguments that the Commission’s

rule creates a new market structure or results in

confiscatory rate structures are completely without

merit.

Certain petitioners also argue that the rule is arbi-

trary because it will foster cost-shifting among cus-

tomers. FH.g., No. 85-1236 Pet. at 11. But the con-

tinued availability of demand charges and fixed cost

minimum commodity bills limits the potential for

the shifting of fixed costs among customers. The

sole potential for such cost-shifting arises if and

when the pipeline reflects in its rates take-or-pay

costs caused by the rule. To the extent any misalloca-

tion results, the Commission has invited: pipelines to

17

propose allocations which properly assign such costs.

Pet. App. A-106.

Thus, pipelines will continue to be fairly compen-

sated for all costs prudently incurred in providing

sales service up to the maximum contract quantities

embodied in the service agreements. The financial

obligations of pipeline customers remain tied to the

same benchmarks. The Commission’s rule merely

seeks to promote competition by prohibiting pipelines

from recovering costs which they themselves must

acknowledge are not incurred.

IV.

The Commission adopted its rule after an informal

notice and comment process, allowing for the filing of

reply comments as well as the statutorily authorized

petitions for rehearing. The court of appeals af-

firmed this use of informal rulemaking proceedings

as consistent with the statutes, its precedents, and

the decisions of this Court.

The statutes and precedents authorize the Commis-

sion to establish rates pursuant to rulemaking pro-

cedures.”® Section 403(c), of the Department of En-

ergy Organization Act, 42 U.S.C. § 7178(c) (1982)

(“DOE Act’’), states: “Any function. . . . which re-

lates to the establishment of rates and charges under

the. .. . Natural Gas Act, may be conducted by rule-

making procedures.”’ Moreover, this Court has clearly

sanctioned agency discretion in selecting its proce-

dures:

10 Petitioners argue that, in promulgating the rule, the Com-

mission was not exercising its ratemaking authority. No. 85-

1219 Pet. at 22-25; No. 85-1252 Pet. at 10-12. We have re-

sponded to this argument on pp. 11-18, supra.

18

Absent constitutional constraints or extremely

compelling circumstances the “administrative

agencies ‘should be free to fashion their own

rules of procedure and to pursue methods of in-

quiry capable of permitting them to discharge

their multitudinous duties’.” FCC v. Schreiber,

381 U.S., at 290, 85 S. Ct. at 1467, quoting from

FCC v. Pottsville Broadcasting Co., 309 U.S., at

143, 60 S. Ct., at 441. Indeed, our cases could

hardly be more explicit.

Vermont Yankee Nuclear Power Corp. v. Natural

Resources Defense Council, Inc., 435 U.S. 519, 543-44

(1978). An agency may choose to proceed through

either adjudication or rulemaking proceedings, SEC

v. Chenery Corp., 332 U.S. 194, 201-03 (1947), and

it must “be given every reasonable opportunity to

formulate methods of regulation appropriate for the

solution of its intensely practical difficulties.” Per-

mian Basin Area Rate Cases, supra, 390 U.S. at 790.

The statutory requirement of a hearing may be sat-

isfied by written comments. United States v. Florida

East Coast Ry. Co., 410 U.S. 224, 241 (1973). Given

the Court’s decisions in Vermont Yankee and Florida

East Coast Ry., the courts of appeals in this case and

others consistently have concluded that the Commis-

sion may proceed by rulemaking in carrying out its

responsibilities under the NGA. E.g., Pet. App. A-50

to A-56; Phillips Petrolewm Co. v. F.P.C., 475 F.2d .

842 (10th Cir. 1973), cert. denied, 414 U.S. 1146

(1974); Tenneco Oil Co. v. F.E.R.C., 571 F.2d 834

(5th Cir.), cert. dismissed, 439 U.S. 801 (1979).

Petitioners nonetheless argue that Florida East

Coast Ry. and Vermont Yankee prohibit the use of

informal rulemaking procedures in this context be-

cause “disputed facts” were raised and the Commis-

19

sion was “making a ‘quasi-judicial’ determination by

which a very small number of persons are ‘excep-

tionally affected, in each case, upon individual

grounds, ...’” No. 85-1237 Pet. at 12, citing Ver-

mont Yankee Nuclear Power Corp. v. Natural Re-

sources Defense Council, Inc., supra, 435 U.S. at

542. This argument is meritless because the present

case clearly raises “policy-type rules or standards”

applicable to all competitors in a regulated industry."

The conclusion of the Commission that minimum com-

modity bills permit the recovery of unincurred costs

cannot be disputed, nor can the conclusion that such

minimum commodity bills adversely affect competi-

tion. And the balance to be struck between competi-

tion and other values under the NGA, within consti-

tutional and statutory limits, is plainly a matter for

industry-wide application. Indeed, any attempt to

resolve these industry-wide issues on a case by case

basis would have had significantly greater impact on

individual pipelines.

Despite petitioners’ attempt to fabricate new legal

standards, the law requires only that substantial evi-

dence support the essential elements of the Commis-

In its Order on Rehearing, the Commission specifically

considered and addressed the arguments raised by the in-

dividual pipelines. Pet. App. E. This careful consideration

of the individual circumstances of the pipelines satisfies any

procedural rights due to them. Furthermore, while the Com-

mission concluded that all minimum bills which recover vari-

able costs are unjust and unreasonable, it also concluded that

it would not eliminate fixed cost minimum bills on a generic

basis. Pet. App. A-115. The Commission has continued to

consider fixed cost minimum commodity bills on their in-

dividual merits. E£.g., Tennessee Gas Pipeline Co., 32 F.E.R.C.

761,311 (1985); Transwestern Pipeline Co., 32 F.E.R.C.

{ 61,009 (1985).

20

sion’s order. It must be stressed that, as well as rul-

ing on the procedure followed by the Commission, the

court of appeals specifically found that “each of the

order’s essential elements is supported by substantial

evidence.” Pet. App. A-42. The court of appeals

found that the procedures adopted by the Commis-

sion produced an adequate record, specifically includ-

ing substantial evidence to support each essential ele-

ment of the Commission’s decision. The capacity of

procedures to produce substantial evidence, not the

procedural method itself, is the relevant issue. As

this Court has held, “Congress .. . . specified neces-

sary components of the ultimate decision, but it did

not specify the method by which the Commission

should acquire information about these components.”

United States v. Florida East Coast Ry. Co., supra,

410 U.S. at 235.

The DOE Act specifically authorizes the use of

rulemaking procedures in ratemaking matters. 42

U.S.C. § 7173(c) (1982). The court of appeals found

that the essential elements of the Commission’s deci-

sions are supported by “substantial evidence’, thereby

satisfying the mandates of the NGA. Thus, the con-

clusion of the court of appeals that the “substantial

evidence” standard of the NGA “does not dictate the

procedure to be followed .... [but] has to do with

a court’s review of the adequacy vel non of the evi-

dence relied upon to support a finding, whatever the

kind of hearing,” Pet. App. A-55 (citing American

Public Gas Association v. F.P.C., 567 F.2d 1016,

1067 (D.C. Cir. 1977) ), was mandated by the deci-

sion of this Court in Vermont Yankee:

[T]he adequacy of the “record” in this type of

proceeding is not correlated directly to the type

of procedural devices employed, but rather turns

on whether the agency has followed the statutory

.

21

mandate of the Administrative Procedure Act or

other relevant statutes. .. In short, nothing in

the APA, NEPA, the circumstances of this case,

the nature of the issues being considered, past

agency practice, or the statutory mandate under

which the Commission operates permitted the

court to review and overturn the rulemaking

proceeding on the basis of the procedural devices

employed (or not employed) by the Commission

so long as the Commission employed at least the

statutory minima, a matter about which there

is no doubt in this case.

Vermont Yankee Nuclear Power Corp. v. Natural

Resources Defense Council, Inc., supra, 435 U.S. at

547-48.

CONCLUSION

The petitions for a writ of certiorari should be de-

nied.

Respectfully submitted,

DAVID I. BLooM *

MAYER, BROWN & PLATT

2000 Pennsyivania Ave., N.W.

Washington, D.C. 20006

(202) 463-2000

ROBERT A. HELMAN

STEPHEN M. SHAPIRO

WENDELL H. ADAIR, JR.

MAYER, BROWN & PLATT

231 South LaSalle Street

Chicago, Illinois 60604

Attorneys for

Northern Illinois Gas Company

* Counsel of Record

March 24, 1986