Petition for Writ of Certiorari — Transwestern Pipeline Co. v. Federal Energy Regulatory Commission

, ) S mé Court, U.S,

85-1253 e iL ED

sry 23 108

No. 85- mpapayenpticsiinits OL, JRe

CLERK

IN THE .

Supreme Court of the United States

OCTOBER TERM, 1985

ARKLA ENERGY RESOURCES,

a division of Arkla, Inc.

Petitioner,

V

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

PLATT W. Davis III*

VINSON & ELKINS

1101 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 862-6520

BRADFORD G. KEITHLEY

Vice President and General

Counsel— Natural Gas

DALE C. EARWOOD

Assistant General Counsel

ARKLA ENERGY RESOURCES

P. O. Box 21734

Shreveport, Louisiana 71151

GILBERT L. HETHERWICK

BLANCHARD, WALKER, O’QUIN

& ROBERTS

P. O. Drawer 1126

Shreveport, Louisiana 71163

Attorneys for Petitioner

Arkla Energy Resources,

a division of Arkla, Inc.

January 23, 1986 *Counsel of Record

ae Pa

Si, a

ii

QUESTION PRESENTED

Whether the Federal Energy Regulatory Commission,

acting under Section 5 of the Natural Gas Act, can funda-

mentally and permanently alter the service authorized by

longstanding certificates of public convenience and necessity

or can do so, if at all, only under the procedures and stan-

dards of Section 7 of that Act.

lil

PARTIES TO THE PROCEEDING

In addition to Arkla Energy Resources* and the Federal

Energy Regulatory Commission, the following persons were

parties in the court of appeals:

Algonquin Gas Transmission Company

Aluminum Association, The

American Iron and Steel Institute

ANR Pipeline Company

Association of Business Advocating Tariff Equity

Brooklyn Union Gas Company, The

Cascade Natural Gas Company

Chattanooga Gas Company, a division of

Jupiter Industries, Inc.

City Gas Company

Colorado Interstate Gas Company

Columbia Gas Transmission Corporation

Consolidated Gas Supply Corporation

Consumers Power Company

El] Paso Natural Gas Company

Equitable Gas Company

Foothills Pipe Lines (Yukon) Ltd.

Georgia Industrial Gas Group, The

Great Lakes Gas Transmission Company

Illinois Gas Company

Inter-City Gas Corporation

Madison Gas and Electric Company

Michigan Consolidated Gas Company

*Arkla Energy Resources is a division of Arkla, Inc., which is not

affiliated with any companies other than its wholly-owned

subsidiaries. ‘

iv

Michigan Gas Utilities Company

Michigan Public Service Commission, The

Midwestern Gas Transmission Company

MIGC, Inc.

Natural Gas Pipeline Supply Company of America

Northern Illinois Gas Company

Northwest Energy Company, on behaif of

Northwest Pipeline Corporation and

Northwest Central Pipeline Corporation

Northwest Natural Gas Company

Pacific Gas and Electric Company

Pacific Interstate Offshore Company

Pacific Lighting Gas Supply Company

Pacific Offshore Pipeline Company

Pan-Alberta Gas Ltd.

Panhandle Eastern Pipe Line Company

People of the State of California, The

Peoples Gas Light and Coke Company, The

Process Gas Consumers Group, The

Public Service Commission of the State of New York

Public Service Commission of Wisconsin, The

Public Service Electric and Gas Company

Public Utilities Commission of the

State of California, The

Southern California Gas Company

State Corporation Commission of Kansas

State of Michigan, The

Tennessee Gas Pipeline Company, a

division of Tenneco, Inc.

Texas Eastern Transmission Corporation

Texas Gas Transmission Corporation

TransCanada Pipelines Ltd.

Transcontinental Gas Pipe Line Corporation

Vv

Transwestern Pipeline Company

Trunkline Gas Company

Washington Gas Light Company

Washington Natural Gas Company

Wisconsin Fuel and Light Company

Wisconsin Gas Company

Wisconsin Gas and Electric Company

Wisconsin Natural Gas Company

Wisconsin Power and Light Company

Wisconsin Public Service Corporation

vi

TABLE OF CONTENTS

Nn Le aki ek Ws &

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Se Or DD) on 6 nc ck cca skeen ees oe

A.

B.

C.

I ae ne Oak rae ce orc ee

The Commission Sip ila Rae Bakes 6

eer eee

a I eo LG Ve k's

REASONS FOR GRANTING THE WRIT

THIS CASE PRESENTS A QUESTION OF FIRST IMPRES-

SION CRITICAL TO THE ADMINISTRATION OF THE NAT-

RN ed re a kak ews

A.

The Commission’s Minimum Take Orders

Effect a Fundamental Change in Certificated

SR, Si OStend ooiray ote Cap ree PE oC

. NGA Section 5 Does Not Authorize Funda-

mental Changes in Existing Certificates .....

. Resolution of the Commission’s Authority to

Modify Existing Certificates is Necessary to

End Industry Confusion that Jeopardizes

Future Financing of Pipeline Facilities ......

Ne ee uke 6 ree

APPENDIX

10

vil

TABLE OF AUTHORITIES

JUDICIAL DECISIONS:

Atlantic Refining Co. v. Public Service Comm'n

ee Te Ie I 6 oA NAGASE Cea CE Kena

CAB vy. Delta Air Lines, Inc., 367 U.S. 316 (1961)

FPC v. Louisiana Power & Light Co., 406 U.S. 621

SE a Sch cae Ome Kies kane Cake aAR Ss

FPC v. Sierra Pacific Power Co., 350 U.S. 348

| SIR AES pe AY CAM et oe ee

Michigan Power Co. v. FPC, 494 F.2d 1140 (D.C.

+ pee re yee ery ee ee

Mobil Oil Corp. v. FPC, 463 F.2d 256 (D.C. Cir.

1971), cert. denied, 406 U.S. 976 (1972)......

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

CR SAR chee Cee ens MLA R ORs Cres ca

Reynolds Metals Co. v. FPC, 534 F.2d 379 (D.C.

Ck WN cs bc ee eeGe CRAMER SAC cKwh ena

United Gas Pipe Line Co. v. Mobile Gas Service

Corp., S60 US. SBS (RGB) onc ca ccccnncccess

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

PB, RRR PE 2A ah nr tna ee

ADMINISTRATIVE DECISIONS:

Cities Service Gas Co., 38 F.P.C. 364 (1967) ....

Northwest Central Pipeline Corp. v. Arkansas

Louisiana Gas Co., 28 FERC 461,211 (1984). .

Trunkline LNG Co., 22 FERC { 63,028, aff’d, 22

Pees WUD WES sak ae shake cu cbecess

Page

Viii

TABLE OF AUTHORITIES

STATUTES: Page

Administrative Procedure Act:

5 U.S.C. § 551(7) (1982) .................05. 11

5 U.S.C. § 561(8) (1962) ...............005.. 11

5 U.S.C. § 551(9) (1982) .................8.. il

6 USL. § GEBle) (ISEB) .. www ccensensccsens 11

Natural Gas Act:

Section 4, 15 U.S.C. § 717c (1982) ........... 12

Section 5, 15 U.S.C. § 717d (1982) ........... 12

Section 7(b), 15 U.S.C. § 717f(b) (1982) ...... 11

Section 7(c)(1)(A), 15 U.S.C. § 717f(c)(1)(A)

RCE Fey en Pe ee ee eee 10

Section 7(e), 15 U.S.C. § 717f(e) (1982)....... 10

Section 19(b), 15 U.S.C. § 717r(b) (1982) ..... 6

ADMINISTRATIVE REGULATION:

Regulation of Natural Gas Pipelines After Partial

Wellhead Deregulation, 50 Fed. Reg. 52217, 52224

0 reer TT TTT? Tere Terr Teer 13

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1985

No. 85-

ARKLA ENERGY RESOURCES,

a division of Arkla, Inc.

Petitioner,

Vv

FEDERAL ENERGY REGULATORY

COMMISSION,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT

OF APPEALS FOR THE DISTRICT OF

COLUMBIA CIRCUIT

Arkla Energy Resources (“Arkla”), a division of Arkla,

Inc.,! seeks a writ of certiorari to review a decision of the

United States Court of Appeals for the District of Columbia

Circuit to the extent that decision upheld orders of the

Federal Energy Regulatory Commission (“Commission”)

precluding the enforcement of minimum take obligations in

interstate natural gas pipeline company tariffs. The effect of

those orders was to alter, fundamentally and permanently,

the service provided by Arkla and others under long-stand-

ing certificates of public convenience and necessity issued

under the Natural Gas Act (“NGA”).

' Arkla’s petition for review was filed in the court below under the

name of Arkansas Louisiana Gas Company, a division of Arkla, Inc.

Following the submission of briefs, the Commussion authorized the

corpany to change the name under which it operated its facilities

subject to federa! regulation to Arkla Energy Resources, a division of

Arkla, Inc.

2

OPINIONS BELOW

The opinion of the court of appeals is reported at 770

F.2d 1144 and is reproduced in the Appendix.” Of the five

Commission orders reviewed in that opinion, three are offi-

cially reported. IIT Fed. Energy Guidelines (CCH) 49 30,571,

30,584, 30,607 (Order Nos. 380, 380-A and 380-C, respec-

tively). All five orders are reproduced in the Appendix.

JURISDICTION

The judgment of the court of appeals was entered on

August 20, 1985. Requests for rehearing and suggestions for

rehearing en banc were denied October 25, 1985. The juris-

diction of this Court is invoked under 28 U.S.C. §§ 1254(1),

2350 (1982).

STATUTES INVOLVED

The principal statutory provisions involved are NGA

Sections 5 and 7, 15 U.S.C. §§ 717d, 717f (1982), relevant

portions of which are reproduced in the Appendix.

STATEMENT OF TBE CASE

A. Background

This petition is necessitated by a court of appeals deci-

sion that upheld Commission orders limiting the continued

effectiveness of “minimum bill” provisions and precluding

2 The opinions of the court of appeals and the Commission are

contained in the Appendix to the petition for certiorari filed by

Transwestern Pipeline Company (“Transwestern”) that seeks review

of the same court of appeals decision. Transwestern Pipeline Co. v.

FERC, No. 85-1219 (petition filed January 21, 1986). References to

those opinions herein are to that Appendix, and are designated by

“App. .” Arkla adopts Transwestern’s Appendix as its own. In

addition, Arkla has appended materials to this Petition as a supple-

ment to that Appendix.

3

the enforcement of “minimum take” obligations in existing

interstate natural gas pipeline tariffs. “Minimum bill” provi-

sions are intended to assure the pipeline of a minimum

revenue stream. They require that a pipeline customer pay

the full tariff rate for a specified quantity of gas, either

monthly or annually, whether or not the customer actually

takes that minimum bill quantity. As a result, a purchaser

can be billed under such a provision for gas it does not take

and the pipeline is therefore not required to purchase. Fail-

ure to take the minimum bill quantity is not a breach of

contract, it simply activates the minimum bil! provision.

Because changes in a pipeline’s rates affect the potential

dollar impact of the minimum bill provision, a minimum bill

is closely related to a pipeline’s rates.

A “minimum take” obligation, in contrast, represents a

purchaser’s absolute commitment to take delivery of a mini-

mum volume of gas each day. Failure to take the specified

volume constitutes a violation of the applicable certificate,

tariff and contract, and the purchaser can be compelled to

accept that volume. Minimum take obligations are typically

included in pipeline sales contracts in order to accommodate

the pipeline’s need for operational stability? and to permit

the efficient design of the pipeline’s facilities.4 Thus, a

minimum take obligation is a fundamental feature of the

service undertaken by the pineline. Because the extent of a

3 These operational considerations are complex and vary from sys-

tem to system. In many instances, pipelines receive supplies from

thousands of wells spread over several states, rendering rapid regula-

tion of system intake impossible. In addition, large portions of a

pipeline’s available gas supplies may be produced in conjunction with

oil, causing gas availability to be subject to oil production. The need to

protect certain gas reservoirs from geological damage may also necessi-

tate a customer’s agreement to purchase specified minimum volumes.

4 For example, the pipeline is often able to avoid the construction of

storage facilities that would otherwise be required to meet wide and

sudden fluctuations in the purchaser’s daily demand for gas.

4

customer’s “minimum take” obligation is unaffected by rate

change filings, it is not a rate provision.

Although Arkla is adversely affected by both the mini-

mum bili and minimum take aspects of the Commission’s

orders, Arkla seeks Court review only of that portion of those

orders which precludes enforcement of minimum take

obligations.

B. The Commission’s Orders

In August 1983, the Commission proposed through an

exercise of its powers under NGA Section 5 to eliminate the

variable cost portion® of minimum bill provisions in inter-

state pipeline tariffs. Following the receipt of comments, the

Commission issued Order No. 380, which precluded pipe-

lines from collecting through their minimum bill provisions

more than the portion of the pipeline’s rate attributable to

_-fixed costs. On rehearing, the Commission claimed it had

also intended its rule to preclude the enforcement of mini-

mum take obligations. Because its original notice of pro-

posed rulemaking had not raised this issue, the Commission

requested comments on its new proposal. App. 131-33.

In Order Nos. 380-C and 380-D, the Commission

applied its minimum bill rule to minimum take obligations.

As a result, if a pipeline customer fails to take the minimum

volume specified by contract, the pipeline can only require

the customer to pay the fixed cost portion of the rate attribu-

table to the deficient volumes. In essence, the Commission’s

orders have converted minimum take obligations into mini-

mum bill provisions.

> The overwhelming majority of variable costs reflected in pipeline

rates are amounts paid by the pipeline to its gas suppliers. For exam-

ple, in Arkla’s case, those purchased gas costs represent almost 99.5%

of Arkla’s total variable costs.

C. The Impact on Arkla

Since 1968, Arkla has sold gas to Northwest Central

Pipeline Corporation (“Northwest Central”) and its prede-

cessors under a contract containing both a minimum bill

provision and a minimum take obligation. Under that agree-

ment, Northwest Central could take as much as 132,270 Mcf

per day and had a minimum take obligation of 74,593 Mcf

per day. The minimum bill provision required that North-

west Central pay for an annual average of 99,457 Mcf per

day, whether or not it took that volume. Performance of the

contract required Arkla to construct a major extension of its

facilities into Missouri for the sole purpose of making the

sale. Afiur extensive hearings, the Commission issued a cer-

tificate authorizing Arkla to perform the proposed service in

accordance with the the terms of that contract. Cities Ser-

vice Gas Co., 38 F.P.C. 364 (1967).

At the time of Order No. 380, Arkla and Northwest

Central had on file with the Commission a proposed settle-

ment eliminating Arkla’s right to recover purchased gas costs

through the minimum bill provision. That settlement specif-

ically confirmed that, under the contract and applicable

certificate, Northwest Central had a daily minimum take

obligation of 74,593 Mcf per day. Following the issuance of

Order No. 380-A, the Commission approved the settlement.

Northwest Central Pipeline Corp. v. Arkansas Louisiana

Gas Co., 28 FERC 4 61,211, at 61,390 (1984).

Because the Arkla-Northwest Central contract already

contains a minimum bill provision, the effect of the Commis-

sion’s Order Nos. 380-C and 380-D is to eliminate the mini-

mum take provision from the contract. Arkla’s maximum

delivery obligation is unaffected, however. Thus, Arkla must

deliver up to 132,270 Mcf on any Jay Northwest Central so

demands, but Northwest Central has no obligation to pur-

chase any gas. Northwest Central continues to demand full

daily contract volumes whenever its system operations so

6

require. Since the issuance of Order No. 380-C, however,

Northwest Central at other times takes at levels well below

the minimum take volume.® The service provided by Arkla

has therefore been fundamentally altered and Arkla has been

precluded from rendering the type of service it agreed to

provide when it accepted the certificate to sell to Northwest

Central.

D. The Decision Below

The court of appeals’ failed to distinguish between min-

imum take obligations and minimum bill provisions, treating

the two as synonymous and referring to both as “minimum

bills.” Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1150 n.3

(D.C. Cir. 1985), App. 19. As a result, in responding to

numerous challenges to the Commission’s authority under

NGA Section 5 to modify existing minimum bill provisions

and minimum take obligations, the court of appeals spoke

only in terms of the Commission’s authority under Section 5

to modify “minimum bills.”

Confining its discussion of that authority to a single

footnote, the court of appeals asserted that the Commission

could modify “minimum bills” under NGA Section 5 for two

reasons: First, “elimination of minimum bills has no effect

on the pipeline’s authorized service...[and] merely

addresses the rates the pipeline may charge its customers”

and, second, NGA Section 5, by providing the Commission

authority to alter the terms of existing contracts found to be

“unjust and unreasonable,” empowers the Commission to

6 For a period of time following Order No. 380-C, Northwest Central

took no gas from Arkla. Now, Northwest Central generally purchases

an average of 50,000 Mcf per day during the five-month winter season

and 35,000 Mcf per day during the remainder of the year.

7 Arkla petitioned for review of the Commission’s orders pursuant

to NGA Section 19(b), 15 U.S.C. § 717r(b) (1982).

7

modify “minimum bills.” 770 F.2d at 1153 n.9 (emphasis in

original), App. 25-26.8

REASONS FOR GRANTING THE WRIT

This Case Presents a Question of First Impression

Critical to the Administration of the Natural

Gas Act.

When attempting to give effect to its current view

regarding the appropriate role of minimum take obligations,

the Commission must adhere to the statutory limits placed

on its authority. “Congress did not give the Commission

carte blanche to take whatever action it might consider

appropriate” in the regulation of the natural gas industry.

Mobil Oil Corp. v. FPC, 463 F.2d 256, 263 (D.C. Cir. 1971),

cert. denied, 406 U.S. 976 (1972).

By eviscerating minimum take obligations, the Com-

mission effected a fundamental change in Arkla’s existing

certificated service. Now Arkla is required to render a ser-

vice it never agreed to provide.

Although the Commission has authority under NGA

Section 5 to alter certain terms and conditions of service, the

Commission is not given the power under that provision to

alter permanently the service itself. Fundamental and per-

manent changes in certificated authority can be accom-

plished, if at all, only under NGA Section 7, which specifi-

cally addresses reductions and increases in service.

The precise scope of the Commission’s authority to alter

certificated service is a question of first impression and the

8The only cases cited by the court of appeals in support of its

conclusions involved the well-settled principle thet NGA Section 5

empowers the Commission to modify rates in existing contracts and

tariffs. Permian Basin Area Rate Cases, 390 U.S. 747, 783-84 (1968);

Atlantic Refining Co. v. Public Service Comm’n, 360 U.S. 378, 389

(1959). These decisions do not address the Commission’s authority to

modify existing certificates.

8

source of substantial confusion within the industry. In the

past, the Commission questioned its authority to make any

unilateral changes in certificated service. Beginning with the

orders below, however, the Commission has asserted, with

virtually no analysis, the authority to effect such fundamen-

tal changes in existing certificates under NGA Section 5. To

the extent it may be said to have addressed the issue at all,

the Commission appears to have relied on an erroneous

interpretation of this Court’s decision in FPC v. Louisiana

Power & Light Co., 406 U.S. 621 (1972). The court of appeals

failed to address the issue because of its unexplained insis-

tence on treating minimum bills and minimum take obliga-

tions as identical in substance.

If left unresolved, the uncertainty regarding the stability

of existing certificates will inhibit, or substantially increase

the cost of, investment in natural gas pipeline facilities. The

Court should therefore exercise its certiorari jurisdiction to

review this unprecedented invasion of existing certificates

and to clarify the extent of the Commission’s authority

under NGA Sections 5 and 7.

A. The Commission’s Minimum Take

Orders Effect A Fundamental Change

in Certificated Service.

The court of appeals failed to recognize that this case

presents the issue of the Commission’s authority to alter

existing certificates. Elimination of Northwest Central’s

minimum take obligation, however, has clearly caused a

fundamental change in the service Arkla offered, and was

authorized, to provide.

Arkla agreed to make available an annual average of

99,457 Mcf per day. Northwest Central needed flexibility to

take higher volumes during the winter when its heating load

increased and lower volumes when its system demand

dropped in the summer. In return for providing Northwest

Central flexibility to swing up to 132,270 Mcf on any day,

9

Arkla required that Northwest Central take no less than

74,593 Mcf on any day, and designed its pipeline facilities

accordingly. Absent this limitation, Arkla would have been

required either to lower the maximum volume that could be

taken under the contract or to design Arkla’s pipeline system

and gas purchase arrangements in a way that accommodated

the wide swings otherwise possible under the agreement.

Precluded by the Commission’s orders from enforcing

Northwest Central’s minimum take obligation, Arkla is now

required to provide a substantially different kind of service.

Viewed from one perspective, Arkla’s service obligation has

been reduced to a type of peaking? service available at

Northwest Central’s demand. From another perspective,

Arkla’s obligations have been enlarged, requiring it to

accommodate swings in demand far greater than those to

which it committed.!° Under either view, the service origi-

nally agreed to when Arkla accepted its certificate has been

fundamentally altered.

9 A peaking service is intended to accommodate wide fluctuations in

a customer’s demand generally related to sharply increased require-

ments during cold weather. Peaking service is generally more expen-

sive because the capacity required to meet peak demands remains idle

for considerable portions of the year. In contrast, baseload service,

such as Arkla agreed to provide Northwest Central, affords the cus-

tomer with a steady level of service throughout the year, which is

deliverable at lower per unit costs because pipeline capacity is more

fully utilized. Not only do these differences in service affect how a

pipeline is designed and built, but they also compel different gas

acquisition policies.

10 The Commission's orders have also affected the reliability of

Arkla’s service and impaired Arkla’s ability to manage its gas supply in

a rational manner. For example, Northwest Central sharply increases

its demands for gas at times of peak winter demand on Arkla’s system.

Because Arkla’s purchases cannot be increased and moved to market

fast enough to meet these peak demands, Arkla has been required to

curtail deliveries to several customers, including Northwest Central.

This problem did not arise when Northwest Central adhered to the

moré narrow range of variations in demand permitted when the mini-

mum take obligation was in effect.

10

The delivery and take obligations under a gas sales

contract are at the core of the contract between the parties

and, thus, central to the service certificated by the Commis-

sion. The court below was wrong, therefore, in concluding

that the elimination of one such core obligation had no effect

on authorized service.!!

B. NGA Section 5 Does Not Authorize

Fundamental Changes in Existing Certificates.

The Commission’s attempt to eliminate minimum take

obligations through the exercise of its NGA Section 5

authority is unlawful. That Section’s authorization to

change terms and conditions of service if they are ‘unjust

and unreasonable,” does not extend to fundamental and

permanent changes in existing certificates. Such alterations

of the fundamental character of certificated service, particu-

larly when that change transforms the transaction into a

wholly new type of service, can be accomplished, if at all,

only under NGA Section 7.

Section 7 is the only portion of the NGA that authorizes

enlargements or reductions in certificated service. Before

jurisdictional service can be enlarged, the Commission must

issue a certificate authorizing the expanded service. NGA

Section 7(c)(1)(A), 15 U.S.C. § 717f(c)(1)(A) (1982). The

Commission must find that the pipeline is “willing and able”

to provide the service and may attach conditions to its

authorization to assure that any new service will meet the

“public convenience and necessity.” NGA Section 7(e), 15

11 The court below also erred in suggesting that minimum take

obligations only affect pipeline rates. Wisconsin Gas Co. v. FERC, 770

F.2d 1144, 1153 n.9 (D.C. Cir. 1985), App. 25-26. Minimum take

obligations, as distinguished from minimum bill provisions, are not

rate-related. Minimum take obligations require that a customer take a

specific volume. No money is paid for gas not taken and there is no

argument that the purchaser may be required to pay more than a just

and reasonable rate for the gas it purchases.

11

U.S.C. § 717f(e) (1982). Nevertheless, the Commission may

not compel a company to render service on terms the com-

pany finds unacceptable. Even though it may have been

“willing and able” to perform the service it proposed, the

company may reject the certificate as conditioned by the

Commission and decline to provide the service. Atlantic

Refining Co. v. Public Service Comm’n, 360 U.S. 378, 387-88

(1959).

Once a certificate has been accepted and service has

commenced, the company may not alter or abandon that

service without the prior approval of the Commission. NGA

Section 7(b), 15 U.S.C. § 717£(b)(1982). Permanent reduc-

tions in delivery and take obligations represent significant

alterations of certificated service and can only be accom-

plished under NGA Section 7(b). Reynolds Metals Co. v.

FPC, 534 F.2d 379, 384 (D.C. Cir. 1976).

The purpose of NGA Section 7 would be undermined if,

once certificated, service could be transfigured under NGA

Section 5 without reference to the standards of NGA Section

7. The Commission would be relieved of its obligation to find

that the service is consistent with the “public convenience

and necessity” and to find the company “willing and able” to

perform the service as modified.!?

The court below failed to address these issues. Whatever

the validity of its conclusion that minimum bill provisions

can be altered under NGA Section 5, that conclusion cannot

be extended to minimum take obligations.

12 The rulemaking procedures utilized by the Commission in the

orders under review are not appropriate for NGA Section 7 actions.

The Administrative Procedure Act (““APA”) provides that proceedings

affecting licenses are adjudications and generally subject to the same

statutory safeguards provided for in other formal adjudicatory pro-

ceedings. 5 U.S.C. §§ 551(7), 551(8), 558(c) (1982). Certificates issued

under the NGA are licenses within the meaning of the APA. 5 U.S.C.

§ 551(9) (1982). These provisions of the APA are reproduced in the

Appendix to this Petition.

12

Although the Commission did not directly address the

impact of its minimum take orders on existing certificates, it

appears to have relied on this Court’s opinion in FPC v.

Louisiana Power & Light Co., 406 U.S. 621 (1972)

(‘LP&L”), as authority for its action. App. 135,

248-49. The LP&L case, however, involved the Commis-

sion’s utilization of NGA Section 4, 15 U.S.C. § 717c (1982),

not NGA Section 5, 15 U.S.C. § 717(d) (1982). 406 U.S. at

644. Furthermore, in LP&L the Court was addressing

changes in curtailment provisions to be applied during a

“temporary” nationwide natural gas shortage. Jd. at 626.

LP&L did not involve permanent alterations of certificated

service, which can be accomplished, if at all, only under NGA

Section 7. Reynolds Metals Co. v. FPC, 534 F.2d 379, 384

(D.C. Cir. 1976); Michigan Power Co. v. FPC, 494 F.2d 1140,

1144 (D.C. Cir. 1974)(distinguishing LP&L).

In Order No. 380-A, the Commission also asserted with

respect to its minimum bill orders that it had the “authority

to alter the terms and conditions of certificated service even

though the affected parties, acting alone, could not have

changed them.” App. 135. The Commission does have the

authority under NGA Section 5 to alter terms and conditions

that the pipeline could not alter under NGA Section 4

because of contractual limitations. Compare FPC vy. Sierra

Pacific Power Co., 350 U.S. 348 (1956) with United Gas Pipe

Line Co. v. Mobile Gas Service Corp., 350 U.S. 332 (1956).

There is no precedent, however, in support of the proposi-

tion that the Commission, acting under NGA Section 5, may

alter terms and conditions that a pipeline could only alter

under NGA Section 7. Permanent and significant changes in

certificated service can be accomplished, if at all, only under

the procedures and standards of NGA Section 7.

13

C. Resolution of the Commission’s Authority to

Modify Existing Certificates is Necessary to End

Industry Confusion that Jeopardizes Future

Financing of Pipeline Facilities.

The scope of the Commission’s authority under the

NGA to alter certificated service permanently has never been

before this Court. As discussed above, however, the NGA

does not explicitly provide such authority. In the context of

other statutes that did not explicitly confer authority to

upset existing certificates, this Court has refused to imply

any such authority. United States v. Seatrain Lines, Inc.,

329 U.S. 424, 429-32 (1947); CAB v. Delta Air Lines, Inc. 367

U.S. 316, 322-25 (1961).

Until recently, the Commission had never asserted any

authority to modify existing certificate obligations perma-

nently. Indeed, not long before the issuance of Order No.

380, one of the Commission’s law judges concluded that the

Commission lacked the authority unilaterally to revoke, sus-

pend or adversely modify existing certificates. Trunkline

LNG Co., 22 FERC 463,028, at 65,135-39, aff'd, 22 FERC

{ 61,245 (1983). Although finding that determination “schol-

arly and well-reasoned,” the Commission found it did not

need to reach this “difficult question.” 22 FERC 461,245, at

61,442. With virtually no discussion, however, the Commis-

sion in Order No. 380-C directed the eradication of mini-

mum take obligations. App. at 248-49. More recently, the

Commission has asserted the power under NGA Section 5

unilaterally to order changes in the contract demand

volumes in existing certificates. Regulation of Natural Gas

Pipelines after Partial Wellhead Deregulation, 50 Fed. Reg.

52217, 52224 (1985). As previously discussed, this recent

attempt to expand the Commission’s authority appears to be

based on an erroneous interpretation of this Court’s LP&L

decision.

14

The importance to the industry of resolving the scope of

the Commission’s authority is manifest. The law judge in

Trunkline, following an extensive hearing, succinctly

explained the problem as follows:

[M]assive investments must be and are

made to construct facilities in reliance on

the conditions and permanence for the pre-

scribed term of the certificates issued by

the Commission. Without . . . security, bus-

inessmen and investment institutions

would not enter into such projects nor lend

the necessary funds to make the projects

possible. The record in this case leaves

absolutely no doubt that investment funds

will not be available if certificates, in the

absence of violations, can be revoked by the

granting agency at will for political or other

reasons such as supply changes, pricing,

etc.

22 FERC 463,028, at 65,138 (emphasis in original). On

Commission review, two commissioners argued for a clear

finding that the Commission does not possess the authority

to “unilaterally modify or revoke a Section 7 certificate.” 22

FERC at 61,445. The purpose of this plea was to avoid the

chilling effect of regulatory uncertainty on investment in

natural gas facilities. Jd. Absent the Court’s resolution of this

uncertainty, that chilling effect will remain a formidable

deterrent to pipeline financing, to the ultimate detriment of

natural gas consumers throughout the nation.

15

CONCLUSION

For the reasons set forth above, this Court should issue

a writ of certiorari to review the judgment and opinion of the

United States Court of Appeals for the District of Columbia

Circuit.

January 23, 1986

Respectfully submitted,

PLATT W. Davis III*

VINSON & ELKINS

1101 Connecticut Aveaue, N.W.

Washington, D.C. 20036

(202) 862-6520

BRADFORD G. KEITHLEY

Vice President and General

Counsel

DALE C. EARWOOD

Assistant General Counsel

ARKLA ENERGY RESOURCES

P. O. Box 21734

Shreveport, Louisiana 71151

GILBERT L. HETHERWICK

BLANCHARD, WALKER, O’QUIN

& ROBERTS

P. O. Drawer 1126

Shreveport, Louisiana 71163

Attorneys for Petitioner

Arkla Energy Resources

a division of Arkla, Inc.

*Counsel of Record

APPENDIX

ADMINISTRATIVE PROCEDURE ACT

§ 2, 5 U.S.C. § 551 (1982)

a * * * * *

(7) “adjudication” means agency process for the formu-

lation of an order;

(8) “license” includes the whole or a part of an agency

permit, certificate, approval, registration, charter, member-

ship, statutory exemption or other form of permission;

(9) “licensing” includes agency process respecting the

grant, renewal, denial, revocation, suspension, annulment,

withdrawal, limitation, amendment, modification, or condi-

tioning of a license;

§ 9, 5 U.S.C. § 558 (1982)

* * * * * *

(c) When application is made for a license required by

law, the agency, with due regard for the rights and privileges

of all the interested parties or adversely affected persons and

within a reasonable time, shall set and complete proceedings

required to be conducted in accordance with sections 556

and 557 of this title or other proceedings required by law and

shall make its decision. Ex-:2pt in cases of willfulness or

those in which public health, interest, or safety requires

otherwise, the withdrawal, suspension, revocation, cr avnul-

ment of a licerse is lawful only if, before the institution of

agency proceedings therefor, the licensee has been given:

(1) notice by the agency in writing of the facts or con-

duct which may warrant the action; and

(2) opportunity to demonstrate or achieve compliance

with all lawful requirements.

When the licensee has made timely and sufficient appli-

cation for a renewal or a new license in accordance with

agency rules, a license with reference to an activity of a

continuing nature does not expire until the application has

been finally determined by the agency.