Appendix — Interstate Natural Gas Ass'n of America v. Federal Energy Regulatory Commission
Supreme Court brief1988
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In THE
Supreme Court of the Wet
OCTOBER TERM, 198%
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,
Petitioner,
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
JOINT APPENDIX TO
PETITIONS FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
J. EVANS ATTWELL *
DAVID T. ANDRIL
VINSON & ELKINS
3300 First City Tower
Houston, TX 77002-6760
(713) 651-2122
JuDY M. JOHNSON
General] Counsel
TEXAS EASTERN
TRANSMISSION CORP.
1 Houston Center
P.O. Box 2521
Houston, TX 77252
(713) 759-4141
Attorneys for Texas Eastern
Transmission Corp.
JOHN H. CHEATHAM, III *
EDWARD B. MYERS
INTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA
Suite 601
1660 Street, N.W.
Washington, D.C. 20036
(202) 293-5770
Attorneys for Interstate Natural
Gas Association of America
ARNOLD D. BERKELEY *
RICHARD L. CHAIFETZ
HOWARD L. NELSON
1819 H Street, N.W.
Suite 360
Washington, D.C. 20006
(202) 785-0611
Attorneys for City of Willcox,
Arizona and Arizona Electric
Power Cooperative, Inc.
* Counsel of Record
WILSON - Epes PRINTING Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001
JOINT APPENDIX
TABLE OF CONTENTS
Page
APPENDIX A—Opinions of the United States Court
of Appeais for the District of Columbia Circuit in
Associated Gas Distributors v. Federal Energy
Regulatory Commission, No. 85-1811 ...................... la
APPENDIX B—Excerpts from FERC Order No. 436.... 129a
APPENDIX C—Orders of the United States Court of
Appeals for the District of Columbia Circuit in
Associated Gas Distributors v. Federal Energy
Regulatory Commission, No. 85-1811 ~..................... 139a
APPENDIX D—Statutory Authority —.......0000000000.20...... 153a
la
APPENDIX A
OPINIONS OF THE UNITED STATES COURT
OF APPEAES FOR THE DISTRICT OF COLUMBIA
CIRCUIT IN ASSOCIATED GAS DISTRIBUTORS v.
FEDERAL ENERGY REGULATORY COMMISSION,
No. 85-1811
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
No. 85-1811
ASSOCIATED GAS DISTRIBUTORS,
a Petitioner
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent
AIR PRODUCTS AND CHEMICALS, INC., et al.,
ALGONQUIN GAS TRANSMISSION COMPANY,
ALABAMA-TENNESSEE NATURAL GAS COMPANY,
AMERICAN BAKERS ASSOCIATION,
AMERICAN GAS ASSOCIATION,
AMERICAN PUBLIC GAS ASSOCIATION,
AMERICAN PAPER INSTITUTE, INC.,
ARKLA, INC.,
AMOCO PRODUCTION COMPANY,
ARCO OIL AND GAS COMPANY,
ASHLAND EXPLORATION, INC.,
ARMSTRONG WORLD INDUSTRIES,
ASSOCIATED GAS DISTRIBUTORS,
ASSOCIATION OF TEXAS INTRASTATE
NATURAL GAS PIPELINES,
ATLANTA GAS LIGHT COMPANY,
BALTIMORE GAS AND ELECTRIC COMPANY,
BROOKLYN UNION GAS COMPANY,
CABOT CORPORATION,
CAROLINA UTILITY CUSTOMERS ASSOCIATION, INC.,
2a
CASCADE NATURAL GAS CORPORATION,
CENTRAL ILLINOIS LIGHT COMPANY,
CHAMPLIN PETROLEUM COMPANY,
CHEMICAL MANUFACTURERS ASSOCIATION,
CHEVRON U.S.A. INC.,
CITIES SERVICE OIL AND GAS CORPORATION,
CITIZENS ENERGY CORPORATION,
CiTy oF WILCOX, ARIZONA and ARIZONA ELECTRIC
POWER COOPERATIVE, INC.,
COLUMBIA GAS DISTRIBUTION COMPANIES,
COLUMBIA GAS TRANSMISSION CORPORATION,
COLUMBIA NITROGEN CORPORATION and NIPRO, INC.,
COMMONWEALTH OF KENTUCKY PUBLIC
SERVICE COMMISSION,
Conoco, INC.,
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.,
CONSUMERS POWER COMPANY AND MICHIGAN GAS
STORAGE COMPANY,
DELHI GAS PIPELINE CORPORATION,
DEPARTMENT OF PUBLIC SERVICE COMMISSION
OF THE STATE OF NEW YORK,
DIAMOND SHAMROCK EXPLORATION COMPANY,
EL PASO NATURAL GAS COMPANY,
ENTEX, INC.,
EXXON CORPORATION
FERTILIZER INSTITUTE,
FLORIDA GAS TRANSMISSION COMPANY,
FOOTHILLS PIPE LINES (YUKON) LTD.,
GAS DISTRIBUTORS INFORMATION SERVICE,
STATE OF LOUISIANA,
TENNECO OIL COMPANY,
TENNGASCO CORPORATION,
TEXAS EASTERN TRANSMISSION CORPORATION,
TEXACO, INC.,
TEXAS GAS EXPLORATION CORPORATION,
TEXAS GAS TRANSMISSION CORPORATION,
TRANSCONTINENTAL GAS PIPELINE CORPORATION,
TRANSOK, INC.,
3a
TRANSWESTERN PIPELINE COMPANY,
TRUNKLINE GAS COMPANY,
WEIRTON STEEL CORPORATION,
WESTCOAST TRANSMISSION COMPANY LIMITED,
WEST VIRGINIA CONSUMER ADVOCATE,
WISCONSIN POWER & LIGHT COMPANY,
UNION OIL COMPANY OF CALIFORNIA,
VALERO TRANSMISSION COMPANY,
UNITED DISTRIBUTION COMPANIES,
UGI CORPORATION,
KANSAS POWER AND LIGHT COMPANY,
STATE OF MICHIGAN AND MICHIGAN PUBLIC
SERVICE COMMISSION,
SOUTH JERSEY GAS COMPANY,
WASHINGTON GAS LIGHT COMPANY,
ARIZONA PUBLIC SERVICE COMPANY,
SUN EXPLORATION AND PRODUCTION COMPANY,
BETHLEHEM STEEL CORPORATION,
Intervenors
AND CONSOLIDATED CASE NOs. 85-1812, 85-1813, 85-1818,
85-1821, 85-1830, 85-1836, 85-1001, 86-1006, 86-1007,
86-1008, 86-1016, 86-1017, 86-1018, 86-1019, 86-1020,
86-1022, 86-1023, 86-1024, 86-1029, 86-1030, 86-1031,
86-1032, 86-1034, 86-1035, 86-1036, 86-1038, 86-1042,
86-1046, 86-1047, 86-1048, 86-1049, 86-1050, 86-1051,
86-1053, 86-1054, 86-1055, 86-1056, 86-1063, 86-1066,
86-1067, 86-1076, 86-1081, 86-1083, 86-1085, 86-1086,
86-1087, 86-1088, 86-1089, 86-1090, 86-1092, 86-1094,
86-1095, 86-1097, 86-1098, 86-1099, 86-1100, 86-1102,
86-1103, 86-1153, 86-1154, 86-1155, 86-1226, 86-1235,
and 86-1246
Petitions for Review of Orders of the
Federal Energy Regulatory Commission
4a
Argued October 14 and 15, 1986
Decided June 23, 1987
William W. Brackett, with whom David F. Collins and
G. Mark Cook were on the brief for ANR Pipeline Co.,
et al., petitioners in Nos. 86-1055 and 86-1067. Terry
O. Vogel, Jeffrey M. Goldsmith, and William M. Lange
entered appearances.
Roberta L. Halladay, with whom Jerome C. Muys and
C. William Cooper for United Distribution Companies,
petitioners in No. 86-1006 and intervenors in Nos. 86-
1811, 86-1016, 86-1067, 86-1087, and 86-1153; William
Warfield Ross and Daniel Koffsky for Consumers Power
Co., petitioner in No. 86-1047 and intervenor in No. 85-
1811, and Thomas Patrick and Karen Cargill for The
Peoples Gas Light and Coke Co. and North Shore Gas
Co., petitioners in No. 86-1155 and intervenors in Nos.
85-1811 and 86-1153, were on the joint brief. Janet M.
Robins for Consumer Power Co., et al. and Mark Mc-
Guire for The Peoples Gas Light and Coke Co., et al. also
entered appearances.
John T. Miller, Jr. for Elizabethtown Gas Co., peti-
tioner in No. 85-1836.
Robert A. Nelson, Jr. for Northwest Gas Co., with
whom Donald K. Darkner and Daniel F. Stenger for CP
National Corp. and Thomas F. Brosnan for Washington
Natural Gas Co. were on the joint brief for petitioners
in No. 86-1097.
Kenneth J. Nieses for Laclede Gas Co., petitioner in
No. 86-1001 and intervenor in No. 85-1811.
David B. Robinson, with whom William J. Guste, Jr.,
Attorney General, State of Louisiana, and Theodore L.
Jones for State of Louisiana, petitioners in No. 86-1053
and 86-1051 and intervenor in No. 85-1811; Patrick J.
Nugent, James M. Costan, and Elisa J. Grammer for
Association of Texas Intrastate Natural Gas Pipelines,
intervenor in No. 85-1811; J. Paul Douglas, with whom
5a
Brian J. Heisler and Kevin Sweeney for Amoco Gas Co.,
petitioner in Nos. 86-1081 and 86-1154 and intervenor in
Nos. 85-1811, 86-1016, and 86-1055; C. Burnett Dunn
for Oklahoma Natural Gas Co., intervenor in Nos. 85-
1811, 86-1067, 86-1088, and 86-1153; and William I.
Harkaway for Consolidated Edison of NY, Inc., petitioner
in No. 86-1094 and intervenor in No. 85-1811, were on
the joint brief. Timothy Keegan for Association of Texas
Intrastate Natural Gas Pipelines, Diane Siler for the
State of Louisiana, and Barbara M. Gunther and Steven
I. Kalish for Consolidated Edison of NY, Inc. also entered
appearances.
Edward J. Grenier, Jr., with whom William H. Penni-
man, Glen S. Howard, Gail S. Gilman, James P. Rathvon,
and James M. Bushee for the Process Gas Consumers
Group and the American Iron & Steel Institute, petition-
ers in Nos. 86-1007 and 86-1008 and intervenors in Nos.
85-1811, 86-1226, 86-1235, and 86-1246; Nicholas W. Fels
and David N. Heaps for Air Products & Chemicals, Inc.,
et al., intervenor in Nos. 85-1811, 86-1016, and 86-1017;
Stephen A. Herman and John G. Froemming for the
Fertilizer Institute and American Bakers Association, in-
tervenors in Nos. 85-1811, 86-1016, and 86-1017; Rigdon
H. Boykin and Thomas E. Hirsch, III for American Paper
Institute, petitioner in No. 86-1089 and intervenor in
Nos. 85-1811, 86-1016, and 86-1017; and John W. Hard-
wicke for Maryland Industrial Group, intervenor in Nos.
85-1811, 86-1016, and 86-1017 were on the joint brief.
Thomas G. Johnson, with whom M.G. Brookshier and
Charles McClees, Jr., for Shell Offshore, Ic. and Shell
Western Electric and Power Inc., petitioner in Nos.
86-1016, 86-1017, and 86-1018 and intervenor in Nos.
85-1811, 85-1812, and 85-1813; Harris S. Wood and
Michael G. Maloney for Arco Oil & Gas Co., intervenor
in Nos. 85-1811, 85-1087, and 86-1153; Thomas J. East-
ment and Charles M. Darling IV for Ashland Corp., peti-
tioner in No. 86-1092 and intervenor in No. 85-1811;
Roscoe C. Elmore for Cabot Corp., intervenor in No.
6a
85-1811; James B. Atkin, Norma J. Rosner, and David
J. Evans for Chevron U.S.A., Inc., petitioner in No. 85-
1050 and intervenor in No. 85-1811; Michael L. Pate for
Cities Service Oil and Gas Corp., intervenor in No. 85-
1811; Ernest J. Altgelt, III for Conoco, Inc., intervenor in
Nos. 85-1811 and 86-1016; Edmunds Travis, Jr., Glenn H.
Mapes, Jr., and Douglas W. Rasch for Exxon Corp., peti-
tioner in No. 86-1029 and intervenor in No. 85-1811;
John J. Atkins for Kerr-McGee Corp., petitioner in No.
86-1083; Gary M. Prescott for Marathon Oil Co., inter-
venor in No. 85-1811; Robert D. Haworth, Jay G. Mar-
tin, and Thomas George Wagner for Mobil Oil Corp., et
al., intervenors in Nos. 85-1811, 86-1016, 86-1067, 86-1087,
86-1088, and 86-1153; John B. Chapman, John K. Mc-
Donald, Charles E. Suffling, and Mary Lee Pieper for
Pennzoil Co., et al., petitioners in Nos. 86-1016 and
86-1103 and intervenors in Nos. 85-1811, 85-1812, 85-
1813, and 85-1818; John L. Williford, Larry Pain, and
Jennifer A. Cates for Phillips Petroleum Co., et al., pe-
titioners in No. 86-1087 and intervenors in Nos. 85-1811,
86-1016, 86-1055, and 86-1087; Ronald D. Hurst and
Paul W. Hicks for Placid Oil Co., intervenor in No.
85-1811; JoAnn P. Russell for Sohio Petroleum Co., in-
tervenor in No. 85-1811; Glen E. Taylor, Phillis Rainey,
and F. Nan Wagoner for Tenneco Oil Co., petitioner in
No. 86-1046 and intervenor in No. 85-1811; Karen A.
Berndt, Ralph J. Pearson, Jr., and David Lindberg for
Texaco, Inc., petitioner in No. 86-1088 and intervenor in
No. 85-1811; B. James McGraw and James M. Appelt for
Texas Gas Exploration Corp., intervenor in No. 85-1811;
and Lois Ellen Gold for Union Oil Co., intervenor in Nos.
85-1811 and 86-1016, were on the joint brief. Stephen L.
Teichler for Ashland Exploration, Inc., Paul M. Young
for Cities Service Oil & Gas Corp., William G. Robb for
Conoco, Inc., Steven R. Severy for Marathon Oil Co.,
John M. Young for Pennzoil Co., et al., Nancy J. Shancke
for Sohio Petroleum Corp., Albert Sylvia III for Union
Oil Co., of California, and Joseph G. Stiles for Exxon
Corp. also entered appearances.
Ta
Carmen Legato, with whom Paul J. Kalota, Lynn A.
Monk, and Thomas C. Gorak were on the brief for Mary-
land People’s Counsel, petitioner in Nos. 85-1813 and
86-1246 and intervenor in Nos. 85-1811, 85-1830, and
86-1016.
Harold L. Talisman with whom Jeffrey D. Komarow
for Tennessee Gas Pipeline Co., petitioner in No. 85-1821;
Arnold D. Berkeley and Richard L. Chaifetz for the City
of Willcox, Arizona and Arizona Electric Power Coopera-
tive, Inc., petitioner in Nos. 86-1016, 86-1099, and 85-1102
and intervenor in Nos. 85-1811, 86-1087, 86-1153, and
86-1226; Jack H. Cheatman for Interstate Natural Gas
Association of America, petitioner in No. 85-1818 and
intervenor in Nos. 85-1811 and 86-1153; Paul Mallory
for National Gas Pipe Line Company of America, peti-
tioner in No. 86-1153 and intervenor in Nos. 85-1811,
86-1016, 86-1019, 86-1020, 86-1055, and 86-1226; Ray-
mond N. Shibley and Patrick J. Whittle for Panhandle
Eastern Pipeline Corp. and Trunkline Gas Co., petition-
ers in Nos. 86-1035 and 86-1036 and intervenors in No.
85-1811; John F. Harrington for Texas Gas Transmis-
sion Corp., petitioner in No. 86-1051 and intervenor in
Nos. 85-1811 and 86-1153; Thomas F. Ryan, Jr. for
Transcontinental Gas Pipeline Corp., petitioner in No.
85-1812 and intervenor in Nos. 85-1811, 86-1019, and
86-1020; and Richard P. Bonnifield for Northwest Pipe-
line Corp., intervenor in No. 86-1032, were on the joint
brief. Michael R. Waller, Terence J. Collins, and Kathleen
T. Puckitty for Tennessee Gas Pipeline Co.; Paul FE. Gold-
stein, Roy Robertson, and Emmitt House for Natural Gas
Pipeline Co. of America; John B. Rudolph, Carol M. Lane,
and Stephen K. Schroeder for Northwest Pipeline Corp.;
and William A. Williams for Texas Gas Transmission
Corp., Robert G. Hardy, and Michael J. Fremuth also
entered appearances.
Richard A. Solomon, with whom David D’Alessandro
and David E. Blabey for Public Service of the State of
New York, petitioner in No. 85-1830 and intervenor in
8a
Nos. 85-1811, 86-1088, and 86-1153; Frederick Moring,
Herbert J. Martin, and M. Lisanne Crowley for Associ-
ated Gas Distributors, petitioner in No. 85-1811 and
intervenor in Nos. 85-1812, 85-1818, 85-1818, 86-1016,
86-1067, 86-1087, and 86-1088; and Janice E. Kerr, Jr.,
Calvin Simpson, and Michael B. Day for Public Utilities
Commission of the State of California, petitioner in No.
6-1022 and intervenor in Nos. 85-1811 and 86-1087,
were on the joint brief.
William T. Miller and Susan N. Kelly were on the
brief for American Public Gas Association, petitioner in
No. 86-1042 and intervenor in Nos. 85-1811, 86-1067, and
86-1087. Kathleen A. McKee also entered an appearance.
John E. Holtzinger, Jr., John T. Stough, Jr., and
Jacolyn A. Simmons were on the brief for Atlanta Gas
Light Co., petitioner in Nos. 86-1049 and 86-1226 and
intervenor in No. 85-1811.
Richard M. Merriman and John R. Schaefgen, Jr.
were on the brief for Central Illinois Light Co., et al.,
petitioners in No. 86-1095 and intervenors in No. 85-1811.
Stephen L. Huntoon also entered an appearance.
George H. Lawrence, David J. Muchow, and Carol A.
Smoots were on the brief for American Gas Association,
petitioner in No. 86-1090 and intervenor in No. 85-1811.
Jeffrey M. Petrash, James Holt, David P. Van Note,
and Daniel L. Schiffer were on the brief for Michigan
Consolidated Gas Co., petitioner in No. 86-1085 and in-
tervenor in No. 85-1811.
Stephen J. Small and Ronald N. Carroll were on the
brief for Columbia Gas Transmission Corp., petitioner
in No. 86-1023 and intervenor in Nos. 85-1811 and 86-
1153. Richard L. Gottlieb also entered an appearance.
Judy M. Johnson, Platt W. Davis, David T. Andril,
Bolivar C. Andrews, and Carl W. Ulrich were on the
brief for Texas Eastern Transmission Corp., petitioner
in Nos. 86-1019, 86-1020, and 86-1235 and intervenor in
9a
Nos. 85-1811, 86-1067, 86-1087, 86-1088, and 86-1153.
James M. McCartney and J. Evans Attwell also entered
appearances.
Daniel W. McGill, Paul K. Brooks, and George A.
Porch were on the brief for Southern Indiana Gas and
Electric Co., petitioner in No. 86-1098 and intervenor in
Nos. 85-1811 and 86-1153. Ronald E. Christian and
Thomas C. Tokos also entered appearances.
Glenn W. Letham and Kenneth M. Albert entered
appearances for Memphis Light, Gas and Water Division,
petitioner in No. 86-1024 and intervenor in No. 85-1811.
Christopher K. Sandberg entered an appearance for
Minnesota Public Utilities Commission, et al., petitioners
in No. 86-1030 and intervenors in No. 85-1811.
Charles D. Gray entered an appearance for National
Association of Regulatory Utility Commissioners, peti-
tioner in No. 86-1031.
Dale A. Wright and James T. McManus entered an
appearance for Northwest Central Pipeline Corp., peti-
tioner in No. 86-1034.
Rush Moddy, Jr., William J. Grealis, Jeffrey G. Di-
Sciullo, Donald J. Maclver, and Richard C. Green, en-
tered appearances for El] Paso Natural Gas Co., peti-
tioner in No. 86-1038 and intervenor in Nos. 85-1811,
86-1067, 86-1088, and 86-1153.
William A. Major, Jr., Donna J. Bailey, and James
J. Flood, Jr. entered appearances for Southern Natural
Gas Co., petitioner in No. 86-1048.
Byron A. Thomas and Robert W. Baker entered ap-
pearances for Louisiana Intrastate Gas Cofp., petitioner
in No. 86-1054 and intervenor in Nos. 85-1811 and 86-
1153.
Phillip D. Endom entered an appearance for United
Gas Pipe Line Co., petitioner in No. 86-1056.
10a
James G. Beste entered an appearance for Monterey
Pipeline Co., petitioner in No. 86-1063.
George J. Meiburger, Frank X. Kelly, and Steve Stojic
entered appearances for Northern Natural Gas Co., peti-
tioner in No. 86-1066.
Thomas D. Clarke and David L. Hubard for Southern
California Gas Co., petitioner in No. 86-1076.
Howard V. Golub, Steven F. Greenwald, and Patrick G.
Golden entered appearances for Pacific Gas and Electric
Co., petitioner in No. 86-1086 and intervenor in No.
86-1153.
Mark G. Magnuson also entered an appearance for
Consolidated Gas Transmission Corp., petitioner in No.
86-1100 and intervenor in Nos. 85-1811, 86-1067, and
86-1088.
Andrea Wolfman, Attorney and Philip M. Marston,
Special Advisor, Federal Energy Regulatory Commis-
sion, with whom Jerome M. Feit, Solicitor and John N.
Estes III, Attorney, Federal Energy Regulatory Com-
mission, were on the brief for respondent.
Jennifer M. Waters, Robert B. Cooper, and Robert
Fleischman entered appearances for intervenor Baltimore
Gas and Electric Co. in Nos. 85-1811, 85-1812, 85-1813,
85-1818, 86-1016, 86-1055, 86-1067, and 85-1153.
Michael J. Manning, Patrick J. Keeley, and James F.
Moriarty entered appearances for intervenor, Extex, Inc.
in Nos. 85-1836, 86-1001, 86-1006, 85-1007, 86-1016, 86-
1055, and 86-1153.
Joel L. Greene and Barbara S. Jost were on the brief
for Arizona Public Service Co., Phelp Dodge Corp., Salt
River Project Agricultural Improvment, and Power
District and Gas Distributors Information Service, inter-
venors in Nos. 85-1811, 86-1067, and 86-1153. Robert J.
Haggerty, Tamara Huddleston, Herbert L. Zinn, and
Richard H. Silverman entered appearances.
lla
John L. Shailer was on the brief for Columbia Gas
Transmission Corp., intervenor in No. 85-1811. Roger
C. Post entered an appearance.
John T. Ketcham and Joseph O. Fryxell entered ap-
pearances for intervenors Algonquin Gas Transmission
Co. and Cascade Natural Gas Corp. in No. 85-1811.
Stanley M. Morley, Joel Zippand, and Paul W. Diehl
entered appearances for Alabama-Tennessee Natural Gas
Co., Producer’s Gas Co., et al., and South Carolina Pipe-
line Corp., intervenors in No. 85-1811.
Cecil W. Talley entered an appearance for Arkla, Inc.,
intervenor in Nos. 85-1811, 86-1067, 86-1087, and 86-
1153.
Michael W. Hall entered an appearance for Brooklyn
Union Gas Co., intervenor in No. 85-1811.
Keith R. McCrea and James L. Trump entered appear-
ances for Carolina Utility Customers Association, inter-
venor in No. 85-1811.
Bernard A. Foster III entered an appearance for Cham-
plin Petroleum Co., intervenor in No. 85-1811.
David F. Zoll entered an appearance for Chemical
Manufacturers Association, intervenor in No. 85-1811.
Jeffrey T. Sprung entered an appearance for Citizens
Enegry Corp in No. 85-1811.
Frederic G. Berner, Jr., Michael J. McDonald, and
James L. Clegg entered appearances for Columbia Nitro-
gen Corp., intervenor in No. 85-1811.
Stephen R. Melton entered an appearance for Delhi
Gas Pipeline Corp., intervenor in No. 85-1811.
William V. Allison entered an appearance for Florida
Gas Transmission Co., intervenor in No. 85-1811.
George W. McHenry, Jr. and John H. Burnes, Jr.
entered appearances for intervenors Foothills Pipe Lines
12a
and Westcoast Thansmission Company Limited, inter-
venors in Nos. 85-1811, 86-1067, 86-1087, 86-1088, and
86-1153.
Donald C. Shelper entered an appearance for K.N.
Energy, Inc., intervenor in No. 85-1811.
Robert C. Platt entered an appearance for MESA Op-
erating Limited Partnership and Panhandle Producers
and Royalty Owners Association, intervenors in No. 85-
1811.
David I. Bloom and Wendell H. Adair, Jr. entered ap-
pearances for Northern Illinois Gas Co., intervenor in
Nos. 85-1811, 86-1153, and 86-1087.
M. Howard Petricoff entered an appearance for Ohio
Oil and Gas Association, intervenor in Nos. 85-1811,
86-1016, and 86-1017.
J. Michael Reidenbach and Joseph S. Englert, Jr. en-
tered appearances for Pacific Gas Transmission Co., in-
tervenor in No. 85-1811.
John R. Staffier and John H. Burnes, Jr. entered ap-
pearances for Pan-Alberta Gas, Ltd., intervenor in Nos.
85-1811, 86-1067, 86-1087, 86-1088, and 86-1153.
Robert A. McDonnell entered an appearance for Phila-
delphia Electric Co., intervenor in Nos. 85-1811 and 86-
1088.
Jerry W. Amos entered an appearance for Piedmont
Natural Gas Co., intervenor in No. 85-1811.
James R. Lacey and Shawn P. Leyder entered appear-
ances for Public Service Electric and Gas Co., intervenor
in Nos. 85-1811, 86-1226, 86-1235, and 86-1246.
Michael D. Gayda entered an appearance for Southern
California Gas Co., intervenor in Nos. 85-1811 and 86-
1158.
13a
R. David Hendrickson and Donna J. Bailey entered ap-
pearances for Southern Natural Gas Co., intervenor in
No. 85-1811.
Brian J. Moline and Dana L. Gorman entered appear-
ances for State Corporation Commission of the State of
Kansas,-intervenor in No. 85-1811.
Robert W. Baker entered an appearance for Tenngasco |
Corp., intervenor in Nos. 85-1811 and 86-1153.
Ralph Simon, Jr. entered an appearance for Transok,
Inc., intervenor in No. 85-1811.
Joseph C. Bell entered an appearance for Citizen En-
ergy Corp., intervenor in Nos. 86-1067, 86-1088, and
86-1153.
Sherrie N. Rutherford entered an appearance for
Transwestern Pipeline Co., intervenor in No. 85-1811.
Frank H. Strickler and Gordon M. Grant entered ap-
pearances for Washington Gas Light Co., intervenor in
No. 85-1811.
Richard A. Oliver and Mary Ann Oliver entered ap-
pearances for Weirton Steel Corp. and Bethlehem Steel
Corp., intervenors in No. 85-1811.
Denise. Goulet entered an appearance for West Vir-
ginia Consumer Advocate, intervenor in No. 85-1811.
Bruce F. Kiely and Catherine G. Wakelyn entered ap-
pearances for Wisconsin Power & Light Co., intervenor
in No. 85-1811.
M. Frazier King, Jr. and Thomas George Wagner en-
tered appearances for Valero Transmissiun Co., inter-
venor in No. 85-1811.
Frank P. Saponaro, Jr. and Jennifer K. Walter en-
tered appearances for UGI Corp., intervenor in No. 85-
1811.
14a
Henry J. Boyton, Assistant Attorney General, State
of Michigan, Louis J. Caruso, Don L. Kiskey, Ronald D.
Eastman, and Lynda S. Mounts entered appearances for
State of Michigan and Michigan Public Service Commis-
sion, intervenors in No. 85-1811.
Joseph M. Oliver entered an appearance for South Jer-
sey Co., intervenor in No. 85-1811.
David L. Konick entered an appearance for Brooklyn
Union Gas Co., intervenor in No. 86-1067 and 86-1087.
John F. Povilaitis and Charles F. Hoffman entered ap-
pearances for Pennsylvania Public Utility Commission,
intervenor in Nos. 86-1087 and 86-1153.
William B. Gundling, Simon Lazarus, and Clement R.
Gagne III entered appearances for State of Connecticut
and Northern Valley Environmental Council, amici
curiae in No. 85-1811.
Before: MIKVA, BoRK, and WILLIAMS, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILLIAMS.
Opinion concurring in the judgment in part and dis-
senting in part filed by Circuit Judge MIKVA.
WILLIAMS, Circuit Judge:
15a
TABLE OF CONTENTS
RS AOS EROS RD gn
II.
Il.
IV.
A.
B.
EGRET EP EDS SE eye
Regulatory and Economic Context ~_----~-
OPEN-ACCESS REQUIREMENTS -_--------------
A.
Claimed Deficiencies in Statutory Authority
1 Becuire Open Access ..................
SS EAS
pees Gane Pouer Act...
Alleged Failure to Comply with Mandate of
Outer Continental Shelf Lands Act --_-----
Claims of Arbitrariness and Caprice ~-----
1. Failure to impose the nondiscriminatory
access conditions on §7(c) transporta-
I ik nscinicechlpiide-teubtiiniciairenende cane
2. Capacity allocation on a “first-come, first-
TE. acai asacass nibh antdammenenanomchencnere
EL ee ee eee
+ Ho An >
. Absence of Finding that Prior Rates Were
ee is Ci tnaohangmne
Allowanee of Discounting Generally ~--__-
Potential Discrimination Between Bundled
and Unbundled Transportation ___________
Selective as Opposed to Uniform Discounts_
Consistency of ‘“Value-of-Service” Discount-
al ic dh iclctediiedentin an
Impact of Discounting on Pipeline Solvency_
CONTRACT DEMAND (“CD”) ADJUSTMENT _-__-_
A.
wpe mnemenes
1. Violation of Panhandle doctrine _______-_
2. Alleged lack of compliance with § 7(b)~-
Adequacy of the Commission’s Reasoning in
Support of CD Conversion ...........____
. Adequacy of the Commission’s Reasoning in
Support of CD Reduction ________________
Insufficiency Under MPC II] __--------_--~-
V.
VI.
VII.
16a
PRODUCER-PIPELINE CONTRACTS ----------~--_
A. The Commission’s Prior Activity and Its In-
activity in This Proceeding ___._._._________
B. Analysis of FERC’s Decision ____._________
1. Lack of need for additional steps _____-
a. Likely effects of Order No. 436 on
take-or-pay build-up ~------______-
b. Pipeline ability to shift costs down-
ARETE aS E SSE A hc aR
2. Policy considerations militating against
RF I enti bnch entekaiedine
3. Reasons for rejection of specific pro-
a ES ED, ee fe ee ARES ane Ir
a. Section 5 action against jurisdictional
ED Gercetchca ns taabiae iendtit ne mitentnen
b. Conditioning producer access ______
Cs MI Cancel ck
OPTIONAL EXPEDITED CERTIFICATION ____-_____
ye iE aha a eR A eS
B. Legality of the Miannseitin sataiscieiteharblidibamsiasanas
1. Alleged disregard of legally relevant fac-
papi A IS see a
2. Unsupported assumptions ~_____.____~_
3. Alleged failures of reasoned decisionmak-
BF OMES PS AER deen pe ac eo
MISCELLANEOUS ARGUMENTS ________________
. Pipeline Sales Service Issues ___.__________
I ia i a
aremepertation Policies ..................
. Construction of Facilities for Use in § 311
- SS a
Ath caAWb>
a
97
103
103
111
112
113
113
114
115
115
117
120
122
17a
I. INTRODUCTION
On October 9, 1985 the Federal Energy Regulatory
Commission (“FERC”) issued Order No. 436, 50 Fed.
Reg. 42,408 (1985) (codified at scattered sections of
18 C.F.R.). The Order envisages a complete restructur-
ing of the natural gas industry. It may well come to
rank with the three great regulatory milestones of the
industry: the passage of the Natural Gas Act, 15 U.S.C.
§§ 717 et seg. (1982) (“NGA”) in 1938, the imposi-
tion of price controls on independent producers’ well-
head sales under Phillips Petroleum Co. v. Wisconsin, 347
U.S. 672 (1954), and adoption of the Natural Gas Policy
Act (“NGPA”), 15 U.S.C. §§ 3301 ec seg. (1982) in 1978.
At stake is the role of interstate natural gas pipelines.
Although they are obviously transporters of gas, they
have until recently operated primarily as gas merchants.
They buy gas from producers at the wellhead and resell
it, mainly to local distribution companies (“LDCs”) but
also to relatively large end users. The Commission has
concluded that a prevailing pipeline practice—particu-
larly their general refusal to transport gas for third
parties where to do so would displace their own sales
(Joint Appendix (“J.A.”) 318-19)—has caused serious
market distortions. It has found this practice “unduly
discriminatory” within the meaning of § 5 of the NGA.
Order No. 436 is its response.
The essence of Order No. 436 is a tendency, in the
industry metaphor, to “unbundle” the pipelines’ trans-
portation and merchant roles. If it is effective, the pipe-
lines will transport the gas with which their own sales
1 References to the Commission also include its predecessor,
the Federal Power Commission, where appropriate. See Execu-
tive Order No. 12,009, 42 Fed. Reg. 46,267 (1977) (implementing
portions of Department of Energy Organization Act, Pub. L. No.
95-91, 91 Stat. 565 (1977), terminating the FPC and transferring
its duties to FERC, an independent agency within the Department
of Energy).
18a
compete; competition from other gas sellers (producers
or traders) will give consumers the benefits of a com-
petitive wellhead market.
Virtually every sector of the natural gas industry has
challenged the Order, asserting a dazzling array of
errors and omissions. They have filed some 85 briefs
totaling about 2,000 pages. Oral argument spanned two
days in a well-filled courtroom.? We here uphold most
elements of the Order, but remand the case to the
Commission on certain issues.
A. Parties.
The bulk of the petitions for review are filed by repre-
sentatives of the main actors in the industry: (1) pro-
ducers, (2) pipelines, (3) LDCs and (4) end users. A
word follows as to the varieties and regulatory status of
each, and as to the developments underlying the Commis-
sion’s decision.
Producers are primarily independents, in the sense of
being unaffiliated with any pipeline. Pipelines and pipe-
line affiliates produce only about 11% of the gas sold by
pipelines in the interstate market. Interstate Natural
Gas Ass’n of America, “The Gas Contracts Problem:
Results of an INGAA Survey” 13 (Policy Analysis 83P-
1, May 1983) (cited at J.A. 301 n.34; data for 1982).
The producers typically operate under oil-and-gas leases
with owners of the land or mineral interests, subject to
a duty to pay royalty and at some risk of losing their
leases if production ceases.
Producers’ interstate wellhead sales have, through the
operation of law or economics, achieved virtually complete
2 A lawyer in the natural gas industry once urged that the only
beneficiaries of the Phillips decision were lawyers. See C. Hawkins,
The Field Price Regulation of Natural Gas 205 (1969). The fallout
from that decision appeals still to provide a rich lode.
19a
release from binding price controls. The NPGA provided
this almost immediately for certain categories of “high
cost” gas. NGPA § 121(b), 15 U.S.C. § 3331(b) (1982).
For most “new” gas, the NGPA established new ceilings,
higher than those previously set by the Commission, and
provided for gradual increases until scheduled deregula-
tion on January 1, 1985 or July 1, 1987. NGPA §§ 102,
103, 121(a) & (c), 15 U.S.C. §§ 3312, 3313, 3331(a) &
(ce) (1982). In fact, current market prices at the well-
head are significantiy below the ceilings remaining in
these categories. Compare Selected National Average
Natural Gas Prices, Natural Gas Monthly 10 (Jan. 1987)
(average price at wellhead for March 1986 $2.16) with
Natural Gas Ceiling Prices by Category of Gas, Type of
Sale, or Contract, Natural Gas Monthly 30 (Jan. 1987)
(ceiling price for § 102 and § 103 gas for same period
ranged from $3.083 to $4.216). The NGPA made no pro-
vision for deregulation of “old” interstate gas, but, be-
sides allowing escalation to reflect general price inflation,
authorized the Commission to raise the former ceilings to
higher “just and reasonable” levels. (The Commission
actually exercised this authority on June 6, 1986, in Order
No. 451, III FERC Status & Regulations { 30,701, at
30,197 (1986).)
The pipelines are either intrastate or interstate. Since
enactment of the NGA, the interstate pipelines have been
subject to pervasive Commission regulation. Before per-
forming any significant act—construction of new facilities
or initiation of new transportation service or new sales
for resale—they must secure a certificate of convenience
and necessity from the Commission. NGA §7(c), 15
U.S.C. § 717f(c) (1982). They also require Commission
approval when they abandon any “certificated” facility,
transportation or sale. NGA § 7(b), 15 U.S.C. § 717f(b)
(1982). Finally, the Commission limits to “just and
reasonable” levels the prices at which the interstates sell
gas for resale or provide transportation service. NGA
$ 4(a), 15 U.S.C. § 717e(a) (1982). Under conventional
20a
public utility principles this allows the pipelines, at least
in theory, to recover no more than cost of service, includ-
ing a reasonable return on investment.
LDCs purchase gas for resale to end users, large and
small. Their services and prices are subject to state
regulation but not to that of FERC.
End users run the gamut both in size and in ability to
use substitutes. At one end is the ordinary householder,
who even in the intermediate run in limited to such ex-
pedients as installing better insulation, wearing more
sweaters, or turning the thermostat down. At the other
end of the spectrum are users that need only flick a
switch to replace gas with oil.
B. Regulatory and Economic Contect.
The Natural Gas Act has the fundamental purpose of
protecting interstate gas consumers from pipelines’ monop-
oly power. See Sen. Doc. No. 92, part 84A, 70th Cong.,
1st Sess. 588-91 (FTC Utility Corporations Rep. 1935).
By the early 1980s, a number of developments suggested,
for the first time since enactment, that assuring customer
access to the wellhead market could be an important po-
tential ingredient in Commission fulfillment of that goal.
First, by then a nationwide pipeline network had ma-
tured. J.A. 279, 284-92. This made it physically possible,
for the first time, for consumers to acquire gas supplies
from virtually any region. It also ended, or at least
sharply reduced, pipeline monopsony power over wellhead
purchases, a power that had the tendency to keep well-
head prices below competitive levels. See S. Breyer, Regu-
lation and its Reform 243 (1982) ; cf. Note, Federal Price
Control of Natural Gas Sold to Interstate Pipelines, 59
Yale L.J. 1468, 1478-79 (1950).
Second, the removal of wellhead price controls greatly
increased an underlying risk of the regulatory system—
that pipelines’ gas purchase costs would rise above com-
petitive market levels. For while cost-based price regula-
2la
tion at least in principle prevented pipelines from enjoy-
ing monopoly profits, the combination of market power
and regulation tended to blunt their incentives for careful
gas purchasing. The pipelines’ market power dampened
any fear of being unable to recover exorbitant costs;
regulation dampened any hope of direct profit from
thrifty purchases, as it prevented them from making any
mark-ups not based on cost. Cf. Pierce, Reconsidering
the Roles of Regulation and Competition in the Natural
Gas Industry, 97 Harv. L. Rev. 345, 357-65 (1983). As
it proved, this lulling effect of regulation—coupled with
the gyrations of the energy market from 1973 to the
present—brought on the phenomenon of embedded con-
tract prices well above competitive levels at the wellhead.
For example, the Commission has recently estimated aver-
age prices paid by pipelines at the wellhead at about
$2.50 per thousand cubic feet (“Mcf”), compared with
less than $2 per Mcf in the spot market. See Order No.
451, III FERC Statutes & Regulations { 30,701, at 30,210
(1986). (If the volume of the interstate market is about
seven trillion cubic feet (“Tcf”), this would amount to a
$3.5 billion price discrepancy.) The Commission’s esti-
mate of the price specified in long-term new contracts as
of mid-1986 was about the same as the average price
then being paid by the pipelines (about $2.50), see id.;
but the pipelines attained their figure for average price
actually paid in part. by refusing to take high-priced gas
and thus subjecting themselves to a build-up of very
substantial take-or-pay liability (discussed immediately
below).
Third, the conditions under which the NGPA began to
relax wellhead price controls—namely acute gas shortage
and sharply rising prices for alternative fuels—tended to
divert pipeline attention from the hazards of incurring
long-term obligations to buy high-priced gas. Under
pressure from the Commission, the pipelines had typically
purchased gas under contracts for very long terms. See,
e.g., 18 C.F.R. § 2.61 (requiring pipelines to maintain
22a
supply reserves of up to 12-years’ projected demand) ;
Columbia Gas Transmission Corp., 21 F.E.R.C. § 61,026,
at 61,160-61 (1982) (example of long-term supply ar-
rangements pipeline must make in order to extend new
service); Department of Energy, The First Report Re-
quired by Section 123 of the National Gas Policy Act of
1978 3-2 (1984) (producer-pipeline contracts for 10 or
more years are common). Besides incorporating high
prices (and provisions for escalation upward), the con-
tracts commonly included “take-or-pay” provisions, re-
quiring the pipeline to pay for some specified percentage,
say 75%, of the deliverable gas even if it took less. While
usually subject to recoupment later, and while a per-
fectly natural allocation of risk between producer and
purchaser, the take-or-pay provisions effectively com-
mitted the pipelines to high gas costs in what by 1982
proved to be a time of falling prices, both for competing
fuels and for substitute supplies of gas not covered by
contract.
Fourth, various economic forces, including exhaustion
of the cheaper supplies and the decline of pipeline monop-
sony at the wellhead, see S. Breyer, Regulation and Its
Reform 248 (1982), raised the wellhead price—and
thereby the potential loss to consumers if they should be
saddled with the results of pipelines’ readiness to bid high
prices. After hovering in the range of $.50 (in constant
1984 dollars) per million British thermal units (“Btu’’)
from 1930 to 1973, it rose to over $2.50 by 1982. See
Energy Information Administration, An Analysis of the
Department of Energy’s Notice of Proposed Rulemaking
(NOPR), “Ceiling Prices: Old Gas Pricing Structure” 3
(1986). While the wellhead price in 1972 represented
only about 28% of the delivered price to consumers, by
1981 that fraction had risen to 57%. Id. at 5.
These developments lie in the background of the key
Commission findings in support of Order No. 436. (1)
Despite the growth of a competitive wellhead market, the
23a
interstate pipelines retain market power in gas transpor-
tation. J.A. 306. (2) Pipelines have generally declined
to transport gas in competition with their own sales (ex-
cept for transportation to customers that can switch to
alternative fuels at little or no extra cost). J.A. 318-19.
(8) Pipeline discrimination in transportation has denied
consumers access to gas at the lowest reasonable rates.
J.A. 320, 352.
Thus the early 1980s created the likelihood, for the
first time, that the Commission could best fulfill the
purposes of the NGA by adopting rules enabling custom-
ers to buy gas at the wellhead and to overcome the inter-
state pipelines’ general refusal to move gas that would
compete with their own sales. Besides protecting consum-
ers from the burden of the pipelines’ purchase contracts
at supra-market prices, such rules would have the long-
term effect of subjecting pipelines to the ordinary con-
straints of a middleman under competitive conditions.
This the Commission set out to achieve in Order No. 436.
The Order’s regulatory package includes these ele-
ments: (1) If a pipeline seeks to take advantage of
“blanket certification” of transportation (7.e., a certifi-
cate authorizing transportation services generically and
thus obviating the need for unwieldy individual certifica-
tion), it must commit itself to provide transportation on
a nondiscriminatory basis (and thus become an “open-
access” pipeline). (2) When demand outruns capacity
for open-access transportation, the open-access pipeline
shall allocate capacity on a “first-come, first-served” basis.
(3) Rate regulation for open-access transportation will
take the form of ceilings and floors, with the pipeline free
to adjust rates within that band. (4) Any open-access
pipeline, by applying for certification, agrees to allow
its LDC customers to convert their “contract demand”
(“CD”) (i.e. contract commitment to purchase gas)
from an obligation to purchase gas to an obligation to
use (or pay for) transportation services. The point of
24a
the option is to make open access a reality for the pipe-
lines’ LDC customers despite long-term contractual serv-
ice arrangements previously certificated by the Commis-
sion. The Order also requires an open-access pipeline to
give its LDC customers the option to reduce contract de-
mand. (5) The Commission will issue “Optional, Expe-
dited Certificates” for new facilities, services and opera-
tions where the pipeline undertakes the entire economic
risk of the project. The Commission declined to include
in the package any special provision to relieve pipelines
from the burden of take-or-pay contracts providing for
prices well above current competitive levels.
Each component of the package contains many details
not given above, some of them the source of challenges in
this case. The details will be developed as appropriate in
the opinion.
II. OPEN-ACCESS REQUIREMENTS
A. Claimed Deficiencies in Statutory Authority to Re-
quire Open Access.
Order No. 436 imposes an “open-access” commitment
on any pipeline that (1) secures a “blanket certificate”
to provide gas transportation, pursuant to § 7 of the NGA,
15 U.S.C. § 717f (1982), or (2) actually provides trans-
portation under § 311 of the NGPA, 15 U.S.C. § 3371
(1982). See 18 C.F.R. §§ 284.8(b), 284.9(b).* Several
pipelines and others attack these conditions as beyond the
scope of the Commission’s authority under the two stat-
utes. The arguments under both statutes rely on the
proposition that the “open-access” condition is equivalent
to a “common carriage” requirement, as both the condi-
tion and common carriage have at their core a duty to
accept shipments from all would-be shippers. The two
3 Except where indicated otherwise all citations to the Code
of Federal Regulations are to the 1986 edition.
See a
25a
statutes differ radically in their languages, however, so we
treat the claims separately, rejecting both.
1. Natural Gas Act.
The pipelines can point to no language in the NGA
barring the Commission from imposing common carrier
status on natural gas pipelines, and certainly none barring
it from imposing upon the pipelines a specific duty that
happens to be a typical or even core component of such
status. They seek to overcome the statutory silence by
means of legislative history. The task is uphill; “courts
have no authority to enforce principles gleaned solely from
legislative history that has no statutory reference point.”
IBEW, Local No. 474 v. NLRB, 814 F.2d 697, 712 (D.C.
Cir. 1987) (emphasis deleted) (citing United States v.
American College of Physicians, 106 S. Ct. 1591, 1598
(1986) ).
The legislative history here consists entirely of congres-
sional inaction. In 1906, when Congress brought oil pipe-
lines under the wing of the Interstate Commerce Commis-
sion, it amended the Interstate Commerce Act to exclude
natural gas pipelines from the category of common car-
rier, thus making clear that they were not covered by the
extension of jurisdiction. Pub. L. No. 59-397, § 1, 34 Stat.
584, 584 (codified as amended at 49 U.S.C. §§ 10,102,
10,501 (1982)). In 1913 a bill was introduced in the
Senate that would have reversed the 1906 decision, see
S. 3345, 63d Cong., 2d Sess., 50 Cong. Rec. 5847-49
(1913), but it was never enacted. Finally, in 1935 a bill
presaging the NGA—-similar to the ultimate statute but
explicitly imposing common carrier duties—died in com-
mittee. See H.R. 5423, 74th Cong., 1st Sess., 70 Cong.
Rec. 1624 (1935).
This history provides strong support only for the point
that Congress declined itself to impose common carrier
status on the pipelines—a proposition that is unques-
tioned and is evident from the language of the statute
26a
itself. The chain of inference gets steadily weaker as we
move toward more relevant issues. The history supplies
modest support for the view that Congress did not intend
the Commission to impose common carriage conditions at
will. It affords weak—almost invisible—support for the
idea that the Commission could under no circumstances
whatsoever impose obligations encompassing the core of
a common carriage duty.
The weakness of the legislative history is underscored
when we examine the very component of “common car-
riage” on which the challenging pipelines rest their case:
the duty to carry without discrimination. Insofar as they
argue that a concern about discrimination has been a
driving force behind legislative imposition of common
carriage regulation, history is on their side. See, e.g.,
Louisville & Nashville R.R. v. United States, 282 U.S.
740, 749-50 (1931); L. Gorton, The Concept of the Com-
mon Carrier in Anglo-American Law 42-48 (1971). But
in the NGA Congress affirmatively addressed itself to
that issue, giving the Commission power to stamp out
undue discrimination; it is precisely that power that the
Commission has here sought to exercise.
The Act fairly bristles with concern for undue dis-
crimination. Section 4 prohibits any “undue preference’”’
and any “unreasonable difference in rates, charges, serv-
ice, facilities, or in any other respect,” and empowers the
Commission to review tariffs filed by pipelines in order
to reject ones violating the prohibition. 15 U.S.C. § 717¢
(1982). Section 5—the primary authority invoked by the
Commission here—directs the Commission to adopt cor-
rective measures whenever it finds a “rate, charge or
classification,” or any “rule, regulation, practice, or con-
tract” affecting the same, to be “unjust, unreasonable,
unduly discriminatory, or preferential.” Jd. § 717d.
The issue seems to come down to this: Although Con-
gress explicitly gave the Commission the power and the
duty to achieve one of the prime goals of common carriage
27a
regulation (the eradication of undue discrimination), the
Commission’s attempted exercise of that power is invalid
because Congress, in 1906 and 1914 and 1935 and 1938
itself, refrained from affixing common carrier status di-
rectly onto the pipelines and from authorizing the Com-
mission to do so. And this proposition is said to control
no matter how sound the Order may be as a response to
the facts before the Commission. We think this turns
statutory construction upside down, letting the failure to
grant a general power prevail over the affirmative grant
of a specific one.
Thus we find little relevance in cases relied on by the
pipelines for the proposition that a duty to provide service
to all comers is the essence of common carriage. In each
of those cases the court was construing the term as used
in a statute, in one instance stating that a particular
class of persons “shall not... be deemed a common
carrier,” FCC v. Midwest Video Corp., 440 U.S. 689,
699-702 (1979), in the others prohibiting agency exercise
of jurisdiction over activities of certain persons classi-
fied as common carriers, see National Ass’n of Regula-
tory Utility Commissioners v. FCC, 525 F.2d 630 (D.C.
Cir. 1976); National Ass’n of Regulatory Utility Com-
missioners v. FCC, 583 F.2d 601 (D.C. Cir. 1976). Such
cases are not helpful on the issue of whether Congress’s
omission of the term common carrier significantly under-
cuts its explicit provision of authority to prevent or cor-
rect undue discrimination.
Petitioners cite Florida Power & Light Co. v. FERC,
660 F.2d 668 (5th Cir. 1981), and Richmond Power &
Light v. FERC, 574 F.2d 610 (D.C. Cir. 1978), for the
following proposition: that any order by the Commission
conditioning its approval of any “wheeling” (7.e., trans-
mission of electricity owned by another) on the utility’s
agreement to wheel for all constitutes an attempt by the
Commission to impose indirectly duties that the Federal
Power Act prevents it from imposing directly, namely
28a
common carriage. As the Federal Power Act establishes
a regulatory scheme for electricity paralleling that which
the NGA creates for gas, see, e.g., FPC v. Sierra Pacific
Power Co., 350 U.S. 348, 353 (1956), petitioners contend
that the Richmond and Florida cases compel invalidation
of the Comission’s open-access condition.
We think petitioners read Richmond and Florida far
too broadly. First, we note that the legislative history
of the two acts is, on this point, materially different. In
its deliberations on the bill that ultimately emerged as
the Federal Power Act, Congress considered and rejected
a provision that would have “empowered the Federal
Power Commission to order wheeling if it found such
action to be ‘necessary or desirable in the public in-
terest.’” Otter Tail Power Co. v. United States, 410 U.S.
366, 374 (1973) (quoting S. 1725, 74th Cong., Ist Sess.).
The evidence as to the NGA (surveyed above) is less
direct: it consists exclusively of various occasions on
which Congress did not adopt proposals actually making
the natural gas pipelines into common carriers.
Second, neither Richmond nor Florida comes anywhere
near stating that the Commission is barred from imposing
an open-access condition in all circumstances. In Florida,
the court expressly left open the question whether the
Commission would be entitled to use open-access conditions
as a remedy for anti-competitive conduct. 660 F.2d at
677-79. It stressed the failure of the Commission, in the
orders under review, to “make any findings of anti-
competitive activities or violations.” Jd. at 678. Evi-
dently because no party raised the issue, the court did not
address the Commission’s power to exact such conditions
as a remedy for undue discrimination. Cf. FPC v. Con-
way Corp., 426 U.S. 271, 276-77 (1976) (accepting as-
sumption that the Commission could not remedy a utility’s
discrimination between wholesale (jurisdictional) rates
and retail (nonjurisdictional) rates by ordering increases
in the latter).
i eat die
29a
In Richmond the Commission had repulsed Richmond
Power & Light’s demand that it condition approval of any
transmission by either of two large interstate systems on
their agreeing to transmit for all. In upholding the Com-
mission we said little more than that unwillingness to
transmit for all comers could not be automatically deemed
an undue discrimination:
Thus Richmond spurned the opportunity to demon-
strate that particular activities were unreasonably
anticompetitive or discriminatory and claimed in-
stead that the mere failure to wheel energy to and
from Richmond while wheeling for any other utility
was unlawful discrimination.
574 F.2d at 623. We went on to say that the Commis-
sion’s rejection of a per se rule (2.e., a rule that selective
transmission was necessarily undue discrimination) fol-
lowed logically from Congress’s refusal to impose common
carrier duties on electric utilities. Jd.
Petitioners’ reading of Richmond, moreover, is belied
by this court’s later decision in Central Iowa Power Coop.
v. FERC, 606 F.2d 1156 (D.C. Cir. 1979). Pursuant to
§ 205 of the Federal Power Act, 15 U.S.C. § 824d (1982)
(paralleling §4 of the NGA), the Commission had re-
viewed the terms of a power-pooling agreement that es-
tablished two classes of membership, one of them entitled
to fewer privileges than the other. Finding the distinc-
tion discriminatory on its face, the Commission condi-
tioned its approval on removal of the membership cri-
teria that prevented the inferior class of participants
from enjoying the privileges of the favored ones. We
upheld the decision as a proper exercise of its power to
prevent undue discrimination. 606 F.2d at 1170-72. See
Reiter, Competition and Access to the Bottleneck: The
Scope of Contract Carrier Regulation Under the Federal
Power and Natural Gas Acts, 18 Land & Water L. Rev.
1, 47-50 (1983). The Commission’s open-access condi-
tion relies on precisely that principle.
30a
It is true that in Central Iowa the court rejected South
Dakota’s claim that the Commission should have condi-
tioned approval of the power-pooling agreement on the
parties agreeing to wheel for nongenerating electrical
systems. See 606 F.2d at 1169. Such a condition would
in effect have forced on the participants a broad extension
of their agreement to wheel for each other. See id. at
1160 n.7. Though the court brushed the request aside in
fairly sweeping language, its approval of the Commis-
sion’s elevation of the inferior class of members clearly
limits the negative impact vf the discussion. The case
upholds the power of the Commission to subject approval_...
of a set of voluntary transactions to a condition that
providers open up the class of permissible users.
Neither Florida nor Richmond presented the extreme
factual circumstances that are now present in the gas in-
dustry. Here the Commission has found (a) that pipe-
lines continue to possess substantial market power, J.A.
366; (b) that they have exercised that power to deny
their own sales customers, and others without fuel-
switching capability, access to competitively priced gas,
J.A. 318; and (c) that this practice has denied consumers
access to gas at the lowest reasonable rates, J.A. 318-
21, 352. Thus, despite the removal of regulation over the
price and non-price aspects of wellhead transactions, and
the evolution of an interconnected nationwide pipeline
grid, discrimination in transportation has denied gas
users, and the economy generally, the benefits of a com-
petitive wellhead market.
Despite a sweeping suggestion that the Order is “un-
supported,” Brief of Interstate Pipeline Group at 35, the
pipelines do not in fact challenge these factual findings.
Their objection is rather on matters of policy, grounded
on beliefs that the kind of discrimination here prohibited
is not “undue” within the meaning of the NGA.* Indeed,
4 Attacks on the Order for failure to take account of prefer-
ences based on pipeline contracts with particular customers are
sla
the burden of their attack on the Order is precisely that
it may disable them from passing on to customers gas
purchase costs that they incur under contracts entered
into years ago under premises now obsolute. Jd. at 37-
38. In other words, enforcement of Order No. 436 will
expose them to competition that their discriminatory
practices enable them to avoid. Their claim thus tends
to substantiate the Commission’s views (1) that in the
absence of Order No. 436 competition will be thwarted
and (2) that the practices controlled by Order No. 436
are indeed anticompetitive and discriminatory.
The electricity cases cited thus provide only very weak
support for the challenge. In contrast, our decision in
Maryland People’s Counsel v. FERC, 761 F.2d 780 (D.C.
Cir. 1985) (“MPC IT’), came about as close to endorsing
the Commission’s approach as Article III permits. There
we vacated orders of the Commission that had established
“blanket certificate” transportation without any specific
effort to prevent pipelines from offering such transporta-
tion on a discriminatory basis. We did not, of course,
explicitly find “undue discrimination” such as would ob-
ligate the Commission to act under § 5. But we did find
that the petitioners there had made a strong enough
showing to require the Commission to address the issue.
Specifically, we made it clearthat blanket-certificate
transportation, unconstrained by any nondiscriminatory
access provision, might well require remedial action under
§ 5. We ended by saying:
discussed below in consideration of problems of capacity alloca-
tion. See infra part II.C.2. Insofar as the pipelines claim that
prohibitions of undue discrimination must be based upon indi-
vidualized findings, the cases on which they rely, American Smelt-
ing & Rfg. Co. v. FPC, 494 F.2d 925, 939-41 (D.C. Cir.), cert.
denied, 419 U.S. 882 (1974); Louisiana Power & Light Co. v. FPC,
526 F.2d 898, 905-07 (5th Cir. 1976), are plainly inapposite. See
Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1165-68 (D.C. Cir.
1985), cert. denied, 106 S. Ct. 1969 (1986).
—_——
ccleaner eaciiaeeiecmaaunll
82a
We vacate the challenged orders to the extent that
they allow transportation of direct-sale gas to fuel-
switchable, non-“high-priority” end users without re-
quiring pipelines to furnish the same service to
LDCs and captive consumers on nondiscriminatory
terms.
761 F.2d at 789 (footnote omitted).
Our holding in MPC II obviously did not require the
Commission to make the findings that it has. It surely
carried the implication, however, that if it did make sup-
portable findings of undue discrimination in pipeline use
of the old blanket certificates, it would have the authority
to employ suitable remedies. And it carried the further
implication that among them might be a requirement that
any pipeline offering blanket-certificate transportation
agree to serve “LDCs and captive consumers on non-
discriminatory terms.” Jd.
The interstate pipelines appear to suggest that Order
No. 436’s impact on their financial integrity is so grave
as to be equivalent to a rule denying them the legal right
to pass on costs, and invalid as such a rule would be. It
is true that the Commission has only very limited power
to deny the pipelines the legal right to pass gas purchase
costs through to customers. See § 601(c) (2) of the NGPA,
15 U.S.C. § 3431(c) (2) (1982) (providing that the Com-
mission must allow interstate pipelines to pass through
gas costs not violating NGPA wellhead ceilings “except to
the ex: at the Commission determines that the amount
paid was excessive due to fraud, abuse, or similar
grounds”) ; Office of Consumers’ Counsel v. FERC, 783
F.2d 206 (D.C. Cir. 1986). But petitioners have called
our attention to nothing that bars the Commission from
devising rules that remedy a lack of competition by ex-
posing pipelines to competition and its normal conse-
quences. The Supreme Court has made clear, for ex-
ample, that the due process clause affords no protection
Ania
33a
from losses inflicted by market conditions. In Morket
Street Ry. v. Railroad Comm’n, 324 U.S. 548 (1945),
it said of its decision in FPC v. Hope Natural Gas Co.,
320 U.S. 591 (1944):
All that was held was that a company could not
complain if the return which was allowed made it
possible for the company to operate successfully.
There was no suggestion that less might not be al-
lowed when the amount allowed was all the company
could earn. ... The due process clause .. . has not
and cannot be applied to“insure values or to restore
values that have been lost by the operation of eco-
nomic forces.
324 U.S. at 566-67. Similarly, nothing in the NGA pro-
tects the pipelines from the market forces to which
Order No. 436 subjects their gas marketing business,
even though those forces are derived in part from a re-
striction on their discrimination in transportation.
It is finally argued that the Commission’s not having
imposed any requirements like those of Order No. 436 in
the period from enactment in 1938 until the present
demonstrates the lack of any power to do so. Cf. FPC v.
Panhandle Eastern Pipe Line Co., 337 U.S. 498, 513-14
(1949). But as our introductory review of the economic
background sought to illustrate, the Commission here
deals with conditions that are altogether new. Thus no
inference may be drawn from prior non-use.
While the Supreme Court’s decision in Chevron U.S.A.
Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984), it is not a wand by which courts can turn
an unlawful frog into a legitimate prince, the case
bolsters our conclusion. Congress has given the Com-
mission in § 5 of the NGA a broad power to stamp out
undue discrimination; in § 7 the power to approve cer-
tificates of service subject to “such reasonable terms and
conditions as the public convenience and necessity may
34a
require”; and in § 16 the power to “perform any and all
acts, and to prescribe . . . such orders, rules, and regula-
tions as it may find necessary or appropriate to carry
out the [NGA’s] provisions.” The alleged negative re-
striction on this power is at best ambiguous, if indeed it
exists at all. Under these circumstances, Chevron binds
us to defer to. Congress’s decision to grant the ayency,
not the courts, the primary authority and responsibility
to administer the statute. The Commission’s view repre-
sents “a reasonable interpretation” of the Act, for which
we may not substitute our view. 467 U.S. at 844.
2. Natural Gas Policy Act.
In enacting the NGPA Congress endeavored to break
down the regulatory barriers between the interstate and
intrastate markets. Sections 311 and 602(b)(2) were
added to “facilitate[] development of a national natural
gas transportation network without subjecting intrastate
pipelines, already regulated by State agencies, to FPC
regulation over the entirety of their operations.” H.R.
Rep. No. 543, 95th Cong., 1st Sess. 45 (1977). See also
Public Service Comm’n v. Mid-Louisiana Gas Co., 463
U.S. 319, 342-43 (1983). Thus, §311(a) permits the
Commission to authorize transportation by an interstate
pipeline on behalf of an intrastate or LDC and by an
intrastate on behalf of an interstate or LDC. 15 U.S.C.
§ 3371(a) (1982). The Commission has exercised this
authority, permitting such transportation as a general
matter. See 18 C.F.R., part 284, subparts B and C. It
has also exercised the authority provided by § 311(c),
15 U.S.C. § 3371/c) (1982), to prescribe terms and con-
ditions.’ Order No. 436 would add to these the require-
ment that any interstate or intrastate pipeline offering
such transportation shall do so on a nondiscriminatory
basis. 18 C.F.R. §§ 284.8(b) and 284.9(b). Petitioners
challenge these open-access conditions, relying here on
5“Any authorization granted under this section shall be under
such terms and conditions as the Commission may prescribe.” 1/d.
nF
85a
express statutory language. Section 602 of the NGPA,
captioned “Effect on State Laws,” provides in subsection
(b) :
(b) Common carriers.
No person shall be subiect to regulation as a com-
mon carrier under any provision of Federal or State
law by reason of any transportation—
(1) pursuant to any order under section 3362
(ec) or section 3363(b), (c), (d), or (i) of this
title; or
(2) authorized by the Commission under sec-
tion 3371(a) of this title [section 311(a) of the
NGPA].
15 U.S.C. § 3432(b) (1982).
Petitioners read this language as stultifying any effort
by the Commission to control discrimination where that
effort imposes on pipelines a duty—even though it be a
conditional one—equivalent to the common carrier’s duty
to provide nondiscriminatory service. We believe this
interpretation is incorrect.
It seems to us that § 602(b)(2) was a congressional
effort to protect § 311(a) from the consequences of pipe-
line concern that service thereunder would expose them
generally to classification as common carriers, most likely
by states, and thus to an unprecedented range of legal
burdens. If pipelines shied away from use of § 311(a),
its purpose would be defeated. Section 602(b) (2) could
protect against that threat by assuaging the pipelines’
concern. A duty not to discriminate, imposed by the Com-
mission on the basis of findings that the duty is necessary
to assure consumers access to competitively priced gas, is
utterly different. The imposition of the duty here facili-
tates the accomplishment of Congress’s purposes. At
least it will do so if the gains in enhanced access offset
whatever losses may result from the disincentive effect
36a
on pipelines. The judgment balancing those consequences
is for the Commission to make, and it has made it in
favor of imposing the duty.®
Congress had ample reason to fear that the risk of
extraneous legal burdens would chill pipeline interest.
Take the laws of Texas. Two years before enactment of
the NGPA a Texas court ruled that “[w]hether the busi-
ness conducted by a pipe line company is actually that of
a common carrier is a question of fact,” which would
depend on the court’s perception of whether “the line is
available to all producers seeking its service.” China-
Nome Gas Co. v. Riddle, 541 S.W.2d 905, 908 (Tex. Civ.
App. 1976). A pipeline’s transportation under § 311(a)
would expose it to the risk of such “fact” findings, and
thus enmesh it in state regulations. In Texas, for ex-
ample, such classification would subject it to the jurisdic-
tion of the Railroad Commission, see Op. Atty. Gen. No.
M-175 (1967), to certain health requirements, see Tex.
Civ. Stat. Ann. § 4477-1(1) & (22) (Vernon 1976 &
Supp. 1987), and to such duties and liabilities as a court
might find the common law to prescribe, see id. §§ 882-
884 (Vernon 1964 & Supp. 1987). Most notably, a firm
declared a common carrier is required under Texas law
to carry, for anyone, any goods of the type for which
it is suited. Zd. § 884.
Pipeline fear of such extraneous burdens might well
have rendered § 311 a dead letter. Though we have not
identified similar federal hazards, we believe that Con-
gress might well have included the reference to federal
law out of anxiety that some overlooked federal provision
would operate to thwart § 311’s purposes. Viewed in this
light, § 602 has nothing to do with a Commission decision
to impose a duty of nondiscrimination.
6 Thus we reject attacks predicated merely on a view that pipe-
lines will prefer to give up § 311 transportation altogether rather
than submit to the conditions that Order No. 436 imposes. See,
e.g., Brief of the American Gas Ass’n at 37-41.
37a
The structure of § 602 favors this reading over the
broader one urged by the petitioners. Section 602 also
provides that no one shall be subject to regulation as a
common carrier by reason of providing transportation
under 15 U.S.C. §§ 3862(c) or 8868(b), (c), (d), or (i),
which involve presidential orders to transport in a natural
gas supply emergency. The President’s emergency powers
are extremely broad, and their exercise could well impose
duties quite like those of common carriage, with the
President dictating detailed priorities about whom the
pipelines should serve. See id. § 3363. If the President
determined that imposition of something like common
carriage were necessary to meet such an emergency, it is
hardly credible that § 602 would stand in the way. By
the same token, that section must not flatly bar the Com-
mission from imposing similar conditions on gas trans-
portation under § 311.
Congress may conceivably have intended § 602 to bar
FERC from conditioning § 311 transportation upon as-
surances of nondiscrimiantion. We doubt it. But apart
from our independent conclusion that it has no such pur-
pose, we regard FERC’s interpertation as reasonable.
The reasonableness is underscored by FERC’s broad du-
ties to assure consumers access to natural gas at prices
such as would prevail in the absence of pipeline market
power and its conclusion that under the present circum-
stances fulfillment of that duty requires such condition-
ing. Cf. American Trucking Ass’ns, Inc. v. Atchison,
T. & S.F. Ry., 387 U.S. 897 (1967). We are therefore
under Chevron bound to uphold the Commission.
A parallel attack on Order No. 486 stresses § 601 (a)
(2)(A) of the NGPA, 15 U.S.C. § 3481(a) (2) (A)
(1982), providing that transportation under § 311 (or
under the Presidential emergency powers discussed above)
shall not constitute “transportation in interstate com-
merce” within the meaning of § 1(b) of the NGA. But for
this provision, a transporting intrastate pipeline would
38a
fall prey to the Commission’s NGA jurisdiction. Several
petitioners argue that Order No. 436 imposes burdens
substantially identical to those encompassed by NGA
jurisdiction. Thus, they argue, application of the open-
access condition to intrastate pipelines is an impermissible
interference with state regulatory authority. See Brief
of the American Gas Ass’n at 42-43; Brief of Intrastate
Petitioners & Intervenors at 22-29.
Again consideration of the purpose of the provision
refutes the attack. Section 602(a) (2) (A) is clearly in-
tended to assure that pipelines’ fear of the automatic
imposition of the burdens of NGA jurisdiction does not
make them so chary of § 311 that it languishes unused.
This is altogether different from regulatory burdens im-
posed by the Commission in the exercise of its discretion
under § 311(c) in order to make sure that § 311 trans-
portation operates in harmony with the congressional pur-
pose. Thus, even if it were true that the regulatory im-
pact of Order No. 436 were identical to that of NGA
jurisdiction, the decision to condition § 311 on acceptance
of those burdens would not violate § 601(a) (2) (A).
In fact, of course, the nondiscrimination duties imposed
vy Order No. 486 by no means encompass all the burdens
of NGA jurisdiction. (1) New service under § 311 does
not require § 7 certifieation, and Order No. 436 carries
that distinction forward where a pipeline brings itself
under the Order: operations under a § 7 blanket trans-
portation certificate entail notice-and-protest procedures
more burdensome than the reporting requirements for
$311 transportation. See infra part VII.B. (2) Con-
struction of facilities to be used exclusively for § 311
transportation requires no certification or FERC review
at all. See infra part VII.D. (3) § 311 transportation
does not subject an intrastate pipeline to the detailed
accounting provisions applicable to a natural gas com-
pany under the NGA. Compare 18 C.F.R. part 201. (4)
Intrastate pipelines may provide firm or interruptible
ee er
39a
service without providing both, while interstate pipelines
providing one type must also provide the other. Compare
18 C.F.R. §§ 284.8(a) (1) & 284.9(a) (1) with id. §§ 284.8
(a) (2) & 284.9(a) (2).
B. Alleged Failure to Comply with Mandate of Outer
Continental Shelf Lands Act.
The Petitioner Industrial Groups (the Process Gas Con-
sumers Group and American Iron and Steel Institute)
claim that under §§ 5(e) and 5(f) of the Outer Conti-
nental Shelf Lands Act, 43 U.S.C. §§ 1834(e) & (f)
(1982), the Commission must require every gas pipeline
operating in the OCS to provide nondiscriminatory access
for others’ OCS gas throughout the entire system of the
“pipeline entity.”
Congress included § 5(e)* in OCSLA at the time of
original adoption, and then sought to “strengthen[]”’ it *
in 1978 by adding § 5(f):
(f) Competitive Principles Governing Pipeline Opera-
tion
%
T Section 5(e) provides:
Rights-of-way through the submerged lands of the outer
Continental Shelf, whether or not such lands are included in a
lease maintained or issued pursuant to this subchapter, may
be granted by the Secretary for pipeline purposes for the
transportation of oil, natural gas, .. . upon the express con-
dition that oil or gas pipelines shail transport or purchase
without discrimination, oil or natural gas produced from sub-
merged lands or outer Continental Shelf lands in the vicinity
of the pipelines in such proportionate amounts as the Federal
Energy Regulatory Commission, in consultation with the Sec-
retary of Energy, may, after a full hearing with due notice
thereof to the interested parties, determine to be reasonable
taking into account, among other things, conservation and the
preventiori of waste.
43 U.S.C. § 1834(e) (1982).
8H. Conf. Rep. No. 95-1474, 95th Cong., 2d Sess. 87, reprinted
in [1978] U.S. Code Cong. & Admin. News 1674, 1686.
40a
(1) Except as provided in paragraph (2) [the
gathering exemption], every permit, license, ease-
ment, right-of-way, or other grant of authority
for the transportation by pipeline on or across
the other Continental Shelf of oil or gas shall
require that the pipeline be operated in accord-
ance with the following competitive principles:
(A) The pipeline must provide open
and nondiscriminatory access to both
owner and nonowner shippers... .
43 U.S.C. § 1834 (f) (1982).
_ The language will not bear the proposed load. The
statute demands that any permit for transportation by
pipeline on the OCS require that “the pipeline” be oper-
ated according to specified principles. The natural read-
ing is that the subject pipeline is the physical facility in
the OCS, not every facility owned or operated by the cor-
poration operating that facility. The petitioners call our
attention to remarks on the Senate floor reflecting con-
cern about pipeline discrimination. See, for example,
Senator Kennedy’s observation, “This amendment seeks
to insure that OCS pipelines are true common carriers.”
123 Cong. Rec. 23,252 (July 15, 1977). But none of the
remarks supports petitioners’ proposed inference. All are
completely consistent with a focus on what Congress had
before it—the OCS.®
®The same petitioners object to the Commission’s allowing a
pipeline to offer blanket certificate transportation under § 311
without offering it under § 7 as well. See 18 C.F.R. part 284, sub-
parts B and G. This allows a pipeline to provide open access to
pipelines and LDCs without offering it directly to end users. In
the absence of evidence that this decision will seriously impede
access for the sort of end user that can buy gas for itself in the
wellhead market, we decline to interfere with the Commission’s
distinction between transportation under the NGPA and trans-
portation under the NGA—a distinction that the pipelines assert
has eroded too much.
| |
4la
C. Claims of Arbitrariness and Caprice.
1. Failure to impose the nondiscriminatory access
conditions on § 7(c) transportation certificates.
Maryland People’s Counsel finds Order No. 436 defec-
tive in that it (potentially) allows a pipeline to provide
transportation under an individual certificate issued
under § 7(c) without agreeing to provide the same on a
nondiscriminatory basis.
We lack jurisdiction over the claim. Section 19(a) of
the NGA, 15 U.S.C. §717r(a) (1982), prohibits any
“proceeding to review” an order of the Commission in
the absence of an application for rehearing filed within
30 days after issuance of the order, setting forth specifi-
cally the ground on which the application is based. The
Commission addressed the problem of individual § 7 cer-
tificates in Order No. 436, stating in its analysis of com-
ments that it did not intend to apply the nondiscrimina-
tory access provision “on a generic basis to all section 7
certificates at this time.” J.A. 388. MPC did not file
an application raising the point until March 1986, long
after expiration of the 30 days from issuance of Order
No. 436 on October 9, 1985.
MPC acknowledges the jurisdictional difficulty, but
states that it could not have realized, until February
1986, that the Commission’s refusal encompassed certifi-
cates for transportation to fuel-switchable customers.
At that time, in Texas Gas Transmission Corp., 34
F.E.R.C. 61,203 (1986), the Commission actually did
issue such a certificate without open-access conditions.
MPC argues that, in view of the obligations imposed by
MPC II, and language of the Commission elsewhere in
Order No..436, it was entitled to believe that the Com-
mission’s statement referred only “to transport in sup-
port of [the pipelines’] merchant function (e.g., where
one pipeline transports gas owned by another pipeline) or
in ways that would not create the discrimination that the
42a
Commission found unlawful in Order No. 436 (e.g,
transportation for high priority customers . . .).” Reply
Brief of MPC at 4.
We must reject MPC’s reading of Order No. 436’s
disclaimer. The statement is broadly phrased to encom-
pass “section 7 transportation certificates,” and is justi-
fied in terms of the Commission’s opportunity to scru-
tinize “individual section 7 transportation arrangements
_. . on a case-by-case basis when [the certificates] are
applied for.” J.A. 388. Both the language and the expla-
nation are fully as applicable to transportation to fuel-
switchable users as to any other transportation. MPC of
course remains free to challenge the policy by seeking
review of individual § 7 orders in which the Commission
applies it.
The Commission briefly sought to refute MPC’s con-
tention in Order No. 436-D, issued on March 28, 1986.
Such discussion was merely dictum, as MPC’s March
1986 application was time-barred under §19 and the
Commission so recognized. In any event, the Commission
cannot waive the jurisdictional bar of §19 by selective
discussion of belated rehearing applications. See Boston
Gas Co. v. FERC, 575 F.2d 975, 979-80 (1st Cir. 1978).
2. Capacity allocation on a “first-come, first-served”
basis.
Several parties attack as arbitrary and capricious the
Commission’s “first-come, first-served” formula for deter-
mining priorities among those who seek transportaticn
service under the Order.
The Commission did not announce this formula in any
regulation but merely in material supporting the regula-
tions. See J.A. 342, 401-04. It also said that certain
claims on pipeline capacity might enjoy favored trea:-
ment, “outside the general first-come, first-served rule.”
J.A. 400. These preferred claims include those of “a firm
43a
sales customer,” on the grounds that such a customer
“has already booked the transportation capacity currently
‘bundled’ with . . . the sale.” Jd. (emphasis in original).
A similar special priority applies to LDCs that exercise
the CD conversion option discussed in part IV of this
opinion. Jd. at 401. Further, the “first-come, first-served”
concept is evidently not to apply in cases of sudden ca-
pacity interruption, but only to the process of “contract-
ing for available capacity.” Id. at 1095-96 (emphasis in
original). But see El Paso Natural Gas Co., 35 F.E.R.C.
J 61,440, at 62,061 (June 27, 1986).
Apart from introducing the complexity of these excep-
tions and superior claims, Order No. 436 and its support-
ing statements contain no guidance about how pipelines
are to implement this formula. “First come, first served”
is an easy principle to apply in a bakery where each
customer pulls a numbered ticket on entering and is
served in that order. But in an industry such as natural
gas transportation it may often be difficult to say who
“comes first.”
Here are a few sample questions that the rule fails
to resolve: (1) Suppose that A, an end user, contracts
with a pipeline for the right to transmit up to five billion
Btu per day for five years. At the end of four years A
seeks to renew the contract on the same terms. But
others have earlier filed requests that in the aggregate
exceed the pipeline’s capacity. Does A go to the end of
the line? Such a result would probably disrupt most no-
tions of ordinary business arrangements in this market.
But if A and persons similarly situated enjoy a sort of
super-priority, open access will be an empty promise for
new would-be users. (The Commission appears to lay
great stress on the date on which a request is filed, J.A.
1191, but the full implications are nowhere spelled out.)
(2) What of efforts by A to secure not merely continued
but additional transportation at the end of a fixed-term
contract? Would A go to the end of the line for the
44a
increment? (See El Paso Natural Gas Co., supra, at
62,060.) (3) What is the impact of a minor change in
point of receipt? If such a change forces the user to go
to the end of the line, then an LDC or end user may find
it hard to shift from one supplier to another. See Brief
of Baltimore Gas & Elec. Co. at 17. (4) May a pipeline
charge a fee for accepting requests for service? If not,
how can it prevent all potential users from filing im-
mediately for virtually unlimited claims on capacity for
an indefinite period of time?
The most potent objection to the Commission’s treat-
ment of the problem—and one that is unquestionably
ripe—is the contention that it leaves an intolerable gap
in the regulatory structure. That gap creates some risk
that pipelines may use the resulting leeway to persist
in the discrimination that Order No. 436 nominally for-
bids. It leaves even the most willing pipeline uncertain
as to what full compliance requires. On the other side,
shippers cannot know what steps they must take to secure
adequate priority status or what should guide them in
choosing between bundled and unbundled service.
The Commission’s brief treats the problem dismissively,
noting that aggregate annual gas consumption has fallen
from a peak of 22.6 trillion cubic feet in 1973 to only
about 17-18 Tef currently. FERC Brief at 101. This
comment seems utterly irrelevant: the problem is surely
capacity at peak periods. The Commission expressly con-
cedes that generally pipelines have operated at capacity
during the winter peak. See FERC Brief at 103 n.3;
J.A. 280.
Nonetheless, as each pipeline elects to become an open-
access transporter, it must file tariffs with the Commis-
sion to govern the service, which tariffs must include any
“operational conditions” the pipeline proposes to apply.
18 C.F.R. §§ 284.7(a), 284.8(c), 284.9(c). See, eg., El
Paso Natural Gas Co., 35 F.E.R.C. 761,440 (June 27,
1986). These filings afford the Commission an opportu-
45a
nity to develop standards of permissible capacity alloca-
tion. Accordingly, the essential legal issue is the validity
of the Commission’s choice to address the problem in that
format rather than in the format of generic rulemaking.
It is clear that this choice “lies primarily in the in-
formed discretion of the admjnistrative agency.” SEC v.
Chenery Corp., 332 U.S. 194,-203 (1947). The Supreme
Court has noted that such resolution is appropriate where
problems arise that the agency could not reasonably fore-
see, or where its experience makes adoption of a “hard-
and-fast” rule unsuitable, or where the problem is so
specialized and variable as to be “impossible of capture
within the boundaries of a general rule.” Jd. at 202-03.
See also NLRB v. Bell Aerospace, 416 U.S. 267, 294
(1974). While the Commission has said little or nothing
to explain why it is sensible to postpone these decisions
to the stage of review of individual proposals, the neces-
sity of its conducting that review seems to us, at this
point, an adequate ground for deferring to its judgment.
This is not to say, however, that the Commission may
endlessly postpone the necessary decisions. Failure to
make the rule reasonably determinate by the time a pipe-
line starts Order No. 436 operations would severely con-
strain the Commission’s authority to enforce the Order
against the pipeline. Such failure would at least com-
plicate actions seeking injunctive relief against pipelines
under § 20 of the NGA, 15 U.S.C. § 717s (1982), and
would probably make impossible any effort to secure pen-
alties under § 21, 15 U.S.C. § 717t (1982). See NLRB v.
Majestic Weaving Co., 355 F.2d 854, 860 (2d Cir. 1966)
(Friendly, J.) (“the [judicial] hackles bristle still more
when a financial penalty is assessed for action that might
well have been avoided if the agency’s changed disposition
had been earlier made known, or might even have been
taken in express reliance on the standard previously es-
tablished”). Cf. Boyce Motor Lines, Inc. v. United States,
342 U.S. 337, 340 (1952) ‘requirement of adequate
46a
notice for criminal enforcement of administrative regula-
tions). Moreover, if the Commission approves plans of
compliance so vague that enforcement is impaired, its
posture will be essentially that found fatally defective in
MPC II: it will have authorized blanket certificate trans-
portation under rules not adequately grappling with the
potentially discriminatory effects.
The Commission’s oracular procrastination (a blend of
Delphi and Fabius) makes challenges to the specifics of
“first come, first served” unripe. These challenges include
assertions that the policy (1) gives inadequate attention
to contractual commitments or to “dependency” as bases
of distinction; (2) unduly threatens the security of sup-
ply of LDCs; and (3) disregards equities based on prior
payments for pipeline capacity. See, e.g., Brief of Inter-
stete Pipeline Group at 35-36; Brief of Associated Gas
Distributors at 39-41. One intervenor also poses a care-
fully reasoned attack on the Commission for its failure
to consider alternatives such as an auction system. See
Brief of Baltimore Gas & Elec. Co. at 19-20. Though
the point is much closer, the Commission’s vagueness and
lack of commitment are such that even this attack ap-
pears unripe. The ripeness doctrine seeks to
prevent the courts, through avoidance of premature
adjudication, from entangling themselves in abstract
disagreements over administrative policies, and also
to protect the agencies from judicial interference un-
til an administrative decision has been formalized
and its effects felt in a concrete way by the challeng-
ing parties.
Abbott Laboratories v. Gardner, 387 U.S. 136, 148-49
(1267). As the Commission confined its disposition of the
issue to some general remarks in its supporting state-
ment, our involvement in the merits at this stage would
defy these principles.
47a
III. RATE CONDITIONS
With the stated intention of imposing on pipelines more
of the risk and responsibility for their own business deci-
sions, the Commission has established a system of flexible
rates. See 18 C.F.R. §§ 284.7, 284.8(d), 284.9(d).%
Tariffs are to provide for ceilings and floors, with the
pipeline free to charge anywhere within that band. Each
maximum rate is to be based on what is typically known
as “fully allocated cost,” i.e, a rate such that, if the
pipeline carries projected volume at the specified unit
price, it should exactly recover all costs allocable to the
relevant service for the period. See 18 C.F.R. § 284.7(c)
(3). Minimum rates are to be based on average variable
cost. See 18 C.F.R. § 284.7(d) (4) (ii). The maximum
rates are to vary depending on whether the service is
in a peak or off-peak period, and on whether it is firm
or interruptible service. A pipeline discounting any serv-
ice from the maximum rate must, within 15 days of the
close of the billing period, report the maximum rate for
the transaction, the rate actually charged, the shipper’s
identity, and any corporate affiliation between pipeline
and shipper. 18 C.F.R. § 284.7(d) (5) (iv).
Pipelines may charge a “reservation fee” for firm
service. Otherwise shippers could request whatever vol-
ume they liked, without cost and regardless of intent to
use. As requests would vastly exceed capacity, the pipe-
line could not rationally plan capacity allocation. See
J.A. 457-60. Apart from the reservation fee, pipelines
are required to charge on a “volumetric” basis, i.e., a
10 These sections govern permissible rates for transportation by
interstate pipelines under §7 blanket certificates and under § 311.
Rates charged by intrastate pipelines under §311 are required
to be “fair and equitable.” See NGPA § 311(b) (2) (A), 15 U.S.C.
§ 3371(b) (2) (A) (1982); 18 C.F.R. §$§ 271.101-.1106 (1985). Order
No. 436 also requires intrastate pipelines to adhere to the restric-
tions on reservation fees that Order No. 436 imposes on interstate
pipelines’ transportation. See 18 C.F.R. § 284.123(b).
48a
simple charge per unit actually transported, without a
“demand charge” or “minimum bill.”
A. Absence of Finding that Prior Rates Were Unlawful.
The Interstate Pipeline Group objects that the Com-
mission did not make specific findings that any rates
charged by individual pipelines were unlawful before im-
posing the new rate conditions. The-Commission is not
required to make individual findings, however, if it exer-
cises its § 5 authority by means of a generic rule. See,
e.g., Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1165-
68 (D.C. Cir. 1985), cert. denied, 106 S. Ct. 1969 (1986).
The pipelines seek to distinguish Wisconsin Gas on the
ground that it “involved specific findings as to a single
billing term,” to wit, minimum bill provisions tnat in-
cluded variable costs. (Minimum bills charge for specific
portions of contract demand even as to gas that is not
taken; the Commission believed that inclusion of variable
costs in such bills imposed an unjustifiable restriction on
customer choice of gas supply and improperly sheltered
pipelines from competition.) The distinction is irrelevant.
What justified the generic approach in Wisconsin Gas
was the Commissicn’s conclusion that any tariff violating
the rule would have such adverse effects on the interstate
gas market as to render it “unjust and unreasonable”
within the meaning of §5. That is precisely what the
Commission has concluded here.
The pipelines may be claiming that the Commission’s
failure to adduce evidence meeting the standards of
adjudication breaches the substantial evidence require-
ment of § 19 of the NGA, 15 U.S.C. § 717r (1982). Again
Wisconsin Gas is dispositive. There the court reaffirmed
the court’s conclusion in American Public Gas Ass’n v.
FPC, 567 F.2d 1016 (D.C. Cir. 1977), that § 19’s refer-
ence to “substantial evidence” located as it is in the pro-
vision guiding judicial review, does not dictate the pro-
cedure to be employed in FERC’s notice-and-comment
rulemakings. Wisconsin Gas, 770 F.2d at 1167-68.
il
49a
Finally, the pipelines’ complaint may be that the Com-
mission adopted its new rate criteria without “factual”
submissions tracing a relationship between rate practices
formerly permitted and the evils that it sought to correct.
There may be circumstances in which such a claim would
prevail. In Electricity Consumers Resource Council v.
FERC, 747 F.2d 1511, 1514 (D.C. Cir. 1984), for ex-
ample, this court declared that “mere reliance on an eco-
nomic theory cannot substitute for substantial record
evidence and the articulation of a rational basis for an
agency’s decision.” In fact, however, the court in Elec-
tricity Consumers was persuaded that the Commission
had “inexplicably distorted” the theory that it claimed to
apply. Jd. Here the pipelines point to no such inexpli-
cable distortion.
Promulgation of generic rate criteria clearly involves
the determination of policy goals or objectives, and the
selection of means to achieve them. Courts reviewing an
agency’s selection of means are not entitled to insist on
empirical data for every proposition on which the selection
depends. Wisconsin Gas made that clear. For example,
in the rulemaking proceeding parties had objected that
curtailment of the minimum bill would result in the pipe-
lines shifting costs to its most captive customers. The
Commission responded in part with a prediction that “the
increased incentive to compete vigorously in the market
would eventually lead to lower prices for all consumers.”
770 F.2d at 1161. The court accepted this without record
evidence, presumably because it viewed the prediction as
at least likely enough to be within the Commission’s
authority. Clearly nothing in Electricity Consumer’s ref-
erence to “economic theory” was intended to invalidate
agency reliance on generic factual predictions merely be-
cause they are typically studied in the field called eco-
nomics. Agencies do not need to conduct experiments in
order to rely on the prediction that an unsupported stone
will fall; nor need they do so for predictions that com-
petition will normally lead to lower prices.
50a
In support of this objection the pipelines do not identify
any factual proposition, relied on by the Commission,
that they regard as requiring additional support. Accord-
ingly, the objection cannot succeed.
B. Allowance of Discounting Generally.
Several petitioners object that the Commission’s allow-
ing pipelines to discount from the maximum rates is in
effect an approval of “undue preference[s]” and “undue
discrimination” in violation of §§ 4 and 5 of the NGA.
But “the mere fact of a rate disparity” is not enough to
constitute unlawful discrimination. Cities of Bethany v.
FERC, 727 F.2d 1131, 1139 (D.C. Cir.), cert. denied,
469 U.S. 917 (1984). The reporting system will enable
the Commission to monitor behavior and to act promptly
when it or another party detects behavior arguably fall-
ing under the bans of §$4 and 5. This provision for
flexibility conforms to Congress’s intention in the NGA
to allow a vital role for private contracting between the
parties. See United Gas Pipe Line Co. v. Mobile Gas
Service Corp., 350 U.S. 332, 338-39 (1956) ; see also Sea-
Land Service, Inc. v. ICC, 738 F.2d 1311, 1316-19 (D.C.
Cir. 1984) (rejecting proposition that “contract rates,”
based on individual contract but available to similarly
situated shippers of like commodities, are automatically
violative of nondiscrimination principle). Accordingly,
given the Commission’s broad latitude to choose between
rulemaking and adjudication, see SEC v. Chenery Corp.,
332 U.S. 194 (1947) ,"! we could find the provisions illegal
only if they carried such a risk of allowing undue dis-
crimination or preferences as to be arbitrary and capri-
cious. We do not find the risk so high.
The Associated Gas Distributors call our attention to
the problem of discounts in favor of a pipeline’s gas
11 See also supra part II.B.3.
5la
trading affiliate. We recognize that such transactions
may carry more than the usual risk of undue discrimina-
tion. Cf. NGPA § 601(b) (1) (E), 15 U.S.C. § 3431(b)
(1)(E) (1982) (imposing a special limit on pipeline
recovery of cost of gas purchased from affiliate). But we
see no reason to think that such a discount should be per
se unduly discriminatory. If a pipeline gives its gas
trading affiliate discounts identical to those given to un-
affiliated parties in identical circumstances, the discount
would not be unlawful merely on account of the affilia-
tion. Accordingly, the risk of such discounts proving
invalid is insufficient to justify invalidation of the rule.
C. Potential Discrimination Between Bundled and Un-
bundled Transportation.
Other petitioners suggest that the Commission’s rate
regulations are invalid because they sanction undue dis-
crimination between unbundled transportation and the
transportation component of a bundled sales transaction.
That the criteria governing permissible rates in the two
categories are different, however, does not establish dis-
crimination between them. Most notably, the petitioners
point to no reason to suppose that, as a whole, unbundled
transportation service will recover a lower proportion of
its costs than will the transportation component of un-
bundled sales. Indeed, the rate provisions specify that
the maximum rates for each subcategory of unbundled
transportation are to be designed to recover “solely those
costs which are properly allocated to the service to which
the rate applies.” 18 C.F.R. § 284.7(d) (4) (i). That the
pipelines may offer discounts does not alter the case.
They do so at their own risk, see especially id. at § 284.7
(a) (5) (iii) (disallowing any rate seeking to recover
losses from a prior period); pipeline managements will
presumably aim at a pricing strategy that will, in fact,
fully recover costs allocable to unbundled transportation.
We cannot evaluate the rule on the basis of an assump-
tion that they will not succeed. (We address below a claim
52a
that the rate provisions disable pipelines from full re-
covery of unbundled transportation costs. )
The claim of discrimination in favor of unbundled
transportation contains a more subtle argument (or at
least the seeds of such an argument): even though such
rates may recover exactly the cost of service (just as for
the transportation component of sales service), perhaps
the flexibility afforded pipelines will in effect give un-
bundled transportation an advantage over sales service.
The possibility is hardly one that we may rule out a
priori. But we think it a problem that the Commission
should be free to solve if and when it develops. As the
Commission points out, the historical problem has been
that unbundled transportation rate provisions put it at
a disadvantage as against sales service. J.A. 318. No
one appears to dispute that finding. It seems wholly
suitable for the Commission to experiment with one rate
structure in this specialized area; if it proves a tri-
umphant success, the Commission will doubtless have op-
portunities to extend it to sales.
D. Selective as Opposed to Uniform Discounts.
Some parties accept the concept of price discounting
but argue that the Commission should allow only “uni-
form” discounting (in effect requiring a pipeline to pro-
mulgate in advance the criteria under which it would
provide discounts). The Commission, however, made the
judgment that such a rule would unduly stifle discount-
ing. J.A. 478-83. It saw substantial gains from such
discounts: cheaper fuel supplies for the price-elastic
customers receiving the discounts; reduced revenue short-
falls for pipelines that would otherwise lose the business
altogether; and protection for non-favored customers
from rate increases that would ultimately occur if pipe-
lines lost volume through inability to respond to com-
petition. J.A. 483.
53a
For much the same reasons that courts allow adminis-
trative agencies the leeway to choose between rulemaking
and adjudication (variability of circumstances, difficulties
of foresight), we think that the Commission was within
its power to allow pipelines a parallel choice. But, just
as courts insist on a degree of agency consistency, see,
e.g., Local 32, American Federation of Gov’t Employees v.
FLRA, 774 F.2d 498, 502 (D.C. Cir. 1985), we expect
that the Commission will exact from the pipelines as much
consistency of application as is necessary for both to be
in conformity with §§ 4 and 5.
E. Consistency of “Value-of-Service”’ Discounting with
MPC II.
The American Public Gas Association and others con-
tend that the general consent to selective discounting vio-
lates this court’s decision in Maryland People’s Counsel
v. FERC (“MPC IT’), 761 F.2d 780 (D.C. Cir. 1985).
The attack is directed especially to Commission sugges-
tions—in supporting statements, not the rule itself—that
discounting intended to meet competition from alternative
fuels or indeed from other pipelines is not per se unduly
discriminatory. J.A. 476.
Petitioners misconceive the scope of MPC IJ. Pipelines
were using their market power in the transportation
market to discriminate (indirectly) in the sale of gas, a
commodity that Congress had concluded was produced
under roughly competitive conditions. In the sale of such
a commodity there is no economic justification for charg-
ing different prices based on the purchasers’ C*ffering
access to substitutes (7.e., their price elasticity of de-
mand). Indeed, if a product is produced under competi-
tive conditions, such price discrimination cannot occur
unless a bottleneck with market power stands between it
and the customers. By contrast, pipeline transportation
service is marked by a degree of natural monopoly, J.A.
305-06, 352, 481 (2.e., longrun average costs decline in the
54a
relevant range of production). See 2 A. Kahn, The Eco-
nomics of Regulation: Principles and Institutions 119-23
(1971). In such an industry, “value-of-service” rate-
making (1.e., rates varying on the basis of differing de-
mand characteristics) has an established place,’* though
not an uncontested one.** The equitable argument in favor
of such differentials is that they may benefit captive
customers by making a contribution to fixed costs that
otherwise would not be made at all. (The efficiency argu-
ment is that such differentials will raise total volume
closer to the level it would attain if all sales were priced
at marginal cost.)
These justifications were missing in MPC IJ. There
the court found that the then-existing blanket certificate
regulations allowed pipelines to deny captive consumers
access to the spot market for gas while providing it for
the non-captives. 761 F.2d at 788. This allowed pipelines
to preserve the revenues attributable to transportation of
gas to fuel-switchable customers, while continuing to sell
their inventory of overpriced gas to captive customers.
The Commission advanced an argument that the pipelines’
12 See E. Gellhorn & R. Pierce, Regulated Industries 185-89
(1987).
13 See Tye & Leonard, On the Problems of Applying Ramsey
Pricing to the Railroad Industry with Uncertain Demand Elastici-
ties, 17A Transportation Research 439 (1983); Tye, Ramsey Pric-
ing and Market Dominance Under the Staggers Rail Act of 1980,
24 Transportation Research Forum 667 (1983); Meyer & Tye,
Toward Achieving Workable Competition in Industries Undergoing
a Transition to Deregulation (March 19, 1987) (unpublished).
We do not understand these critics to attack rate differentials where
application of some apparently egalitarian principle, such as an
equal revenue-to-variable-cost ratio, would result in prices for
some customers or commodities above what the profit-maximizing
monopolist would charge. See Tye, Ramsey Pricing and Market
Dominance Under the Staggers Rail Act of 1980, 24 Transporta-
tion Research Forum at 669-70; Henderson, Price, Discrimination
Limits in Relation to the Death Spiral, 7 Energy Journal (No. 3)
33, 37 (1986).
55a
receipt of transportation revenues would redound to the
benefit of captive customers—an argument that sounds
like the one advanced above. The court said no. First,
we said that the Commission had offered no reason to
think that the captives could not enjoy the fuel switch-
ables’ contribution to fixed costs even if the Commission
conditioned the program on equal access for captive con-
sumers—precisely what the Commission has done here.
Id. Second, we pointed out that the Commission had
nowhere answered the petitioners’ argument that the cap-
tives’ loss through lack of access to the wellhead market
would greatly exceed their gain through the fuel-switch-
ables’ contribution to fixed costs. Jd. Here, of course, the
Commission is providing access to the spot market. Thus
the facts here obviate our two reasons for rejecting the
Commission’s argument on contributions to fixed costs.
_To read MPC II as a rule that price differentials based
on demand conditions are always unduly discriminatory
would render the decision a defiant and unreasoned excep-
tion to the general pattern. The judicial acceptance of
such price differentials is longstanding. For nearly 100
years, for example, the courts have interpreted the anti-
discrimination provisions of the Interstate Commerce Act
to allow the ICC to approve differentials justified ex-
clusively by competition. See, e.g., Texas & Pacific Ry. v.
ICC, 162 U.S. 197, 218-19 (1896); Dresser Industries,
Inc. v. ICC, 714 F.2d 588 (5th Cir. 1983) (review under
three different anti-discrimination provisions) ; National
Gypsum Co. v. United States, 353 F. Supp. 941, 946-49
(W.D.N.Y. 1973) (enumerating cases following this
view). Indeed, the Supreme Court has even struck down
an ICC finding of unlawful discrimination where it ap-
peared to be based on an absolute rule that competitive
conditions could never justify a rate differential. Eastern-
Central Motor Carriers Ass’n v. United States, 321 U.S.
194 (1944).
iia ie
56a
We have answered the claims that the rate provisions
of Order No. 486 put it in violation of qur mandate in
MPC II. This is not to say, of course, that the Commis-
sion is free to uphold every price distinction based on
different demand elasticities. It has long been contended,
for example, that rate differentials based exclusively on
competition between transporters with similar cost func-
tions may end up forcing captive customers to bear dis-
proportionate shares of fixed costs without any offsetting
gain in efficiency. See, e.g., 1 A. Kahn, The Economics
of Regulation: Principles and Institutions 159-81, esp.
170 (1970). The contention is not self-evidently true: if
the demand of buyers with access to competing carriers
is at all price elastic, the price reductions they enjoy will
raise their demand close to competitive levels. In any
event, the Commission may properly defer its ultimate
resolution of these issues to another day and another pro-
ceeding. Cf. American Commercial Lines, Inc. v. Louis-
ville & Nashville R.R., 392 U.S. 571 (1968) (finding
broad discretion in ICC to choose format in which to
resolve issues of price discounting in competition between
railroads and barge-truck combinations).
F. Impact of Discounting on Pipeline Solvency.
Petitioners ANR Pipeline Company and Colorado In-
terstate Gas Company fault the regulations for allowing
the pipeline to discount below the ceilings but never to
charge more. To the Commission’s defense that the dis-
counting mirrors the world of unregulated firms, they
respond that in such a world the circumstances where
market conditions force a firm to discount are likely to be
matched by ones allowing the charge of a premium. (In
equilibrium firms will earn a normal profit.) Here, they
argue, the rules parallel only the downside of the un-
regulated market. As a result, they say, return will nec-
essarily be less than in other industries with correspond-
ing risks, in violation of FPC v. Hope Natural Gas Co.,
320 U.S. 591, 603 (1944).
57a
We can imagine a rate methodology under which this
contention would be sound. Suppose that a pipeline has a
capacity for transporting 120,000 units a year, that each
year’s share of fixed costs amounts to $90,000, and that
variable costs are $.10 per unit. In an initial rate case,
the Commission projects volume at 100,000 units, and
thus sets a maximum price of $1.00 per unit ($.90 as a
share of fixed costs and $.10 for variable costs) .
While those rates are in effect, suppose the firm in
fact carries 100,000 units at $1.00, but, spotting market
opportunities, carries another 10,000 units at $.20 per
unit for customers who would switch to alternative fuels
if the transportation charge rose above $.25 per unit.
(If the pipeline knew that $.25 was the switchover point,
it would charge that, but it may not know exactly.)
In the next rate case, suppose the Commission projects
use at 110,000 units, and accordingly sets the maximum
price at $.92 per unit ($.10 for variable costs and $.82
($90,000/110,000) for fixed costs). Such a rate would be
sufficient to recover costs only if the pipeline carried
110,000 at the maximum rate; but the evidence over-
whelmingly suggests that it will not be able to do so—
the extra 10,000 units of business were due to the dis-
count. Unless some change in circumstances saves the
pipeline, revenue will be $94,000 ($92,000 for 100,000
units transported at the maximum rate plus $2,000 for
10,000 units at $.20), against costs of $101,000 ($90,000
fixed and $11,0000 variable).
We see no reason, however, to suppose that the Com-
mission intends such calculations. Its only statement
relating to projections, 18 C.F.R. § 284.7(¢) (3), indi-
cates the contrary:
The pipeline’s revenue requirement allocated to
firm and interruptible services should be attained by
providing the projected units of service in peak and
off-peak periods at the maximum rate for each
service.
58a
In its commentary, the Commission pointed to this pass-
age as proof of its agreement with MPC’s suggestion that
“revenue projections in rate filings [should] assume that
all sales and transportation volumes will be charged at
the maximum rate.” J.A. 484. Thus, it appears that
“rate” in § 284.7(c) (3) refers to the maximum unit
price, not to projected throughput. This would appear to
undermine any fear that the Commission might employ
the dubious procedure hypothesized above.
* * * *
Thus we find no legal defect in the rate provisions of
Order No. 436.
IV. CONTRACT DEMAND (“CD”) ADJUSTMENT
Local distribution companies require a firm supply of
gas. Typically they have looked to pipeline sales service
to fill this need. Firm sales contracts give the customer
the right to demand, and obligate the pipeline at all times
to stand ready to deliver, a certain quantity of gas per
day, generally known in the industry as “Contract De-
mand” or “CD.” Once the arrangement receives the neces-
sary certificate under § 7 of the NGA, the LDC’s entitle-
ment and the pipeline’s obligation acquire a legal exist-
ence independent of the contract and persist until the
Commission issues formal approval of “abandonment.”
See California v. Southland Royalty Co.. 436 U.S. 519
(1978); Panhandle Eastern Pipe Line Co. v. Michigan
Consolidated Gas Co., 177 F.2d 942, 945 (6th Cir. 1949).
For a “full requirements” customer, relying on a single
pipeline, the CD will amount to its entire anticipated gas
needs; “partial requirements” customers, as the name
suggests, rely on more than one pipeline.
“Demand charges” are based on CD and are payable
regardless of the customer’s actual use; having thus com-
mitted itself to partial payment for the gas covered by
its CD, a customer pays only a “commodity charge” when
59a
it actually takes gas."* Thus, if the demand charge is $1
and the commodity charge $3, the customer will switch
to an alternative supply only when the alternative’s total
cost (transportation and gas) is under $3, even though
(in a sense) gas at $3.50 would be a better bargain. (It
is better only “in a sense” because the customer gets a
security of supply from its pipeline supplier that it does
not get in the spot market.) The relation with a regular
pipeline supplier thereby constrains the customer’s prac-
tical freedom to take advantage of open access to the
wellhead market. The higher the CD in relation to its
total usage, and the higher the demand charge as a pro-
portion of total price, the more severe is the constraint.
To make the customers’ access meaningful, Order No.
436 provides customers a limited right to unilaterally
modify their contracts with pipelines who elect to operate
under the Order. It entitles any party with a firm sales
contract on the date the pipeline becomes subject to
Order No. 436° to (a) convert specified percentages of
its CD from gas purchase (i.e., fully bundled service) to
unbundled gas transportation or (b) reduce its CD by the
same percentages.
The entitlement to convert or reduce ** is 15% for each
of the first and second years, 20% for the third year, and
14 Order No. 436 largely retains this two-tiered rate structure,
with firm transportation customers paying a “reservation” fee for
the guaranteed right to call on a certain amount of the pipeline’s
capacity and a “volumetric” fee to cover the variable cost of pro-
viding the service actually called for. See supra part III.
15 A pipeline becomes subject to the provisions of Order No. 436
for these purposes when it accepts a blanket certificate, provides
service under the §311 regulations after a certain date, or com-
mences or continues transportation of OCS gas under a blanket
certificate. 18 C.F.R. § 284.10.
S
16 A customer may elect both to convert and to reduce, but the
total adjustment to CD cannot exceed the customer’s accrued en-
titlement. 18 C.F.R. § 284.10(e).
60a
25% for each of the fourth and fifth years. The entitle-
ments are cumulative. For example, a firm customer
could reduce contract demand not at all in the first two
years and then reduce by 50% in the third year. Or it
could refrain from exercising the option at all in the first
four years, and then reduce by 100% in the fifth year or
any year thereafter. See Order 436-C, J.A. 1355-60.
Petitioners attack the Commission’s CD adjustment
program on several fronts. A number of pipelines assert
that the conditions violate the rule of Panhandle Eastern
Pipe Line Co. v. FERC, 613 F.2d 1120 (D.C. Cir. 1979),
cert. denied, 449 U.S. 889 (1980), restricting the use of
the Commission’s power to impose conditions on certifi-
cates issued under § 7. In addition, the pipelines attack
the sufficiency of the Commission’s reasoning for adopting
CD conversion and CD reduction. With-respect to CD
reduction a number of LDCs lend their voices to the
attack. Finally, Maryland People’s Counsel contends that
this court’s opinion in Maryland People’s Counsel v.
FERC, 768 F.2d 450 (D.C. Cir. 1985) (“MPC III”),
compels the Commission to permit customers to convert
100% of their CD to transportation immediately.
A. Legal Authority.
1. Violation of Panhandle doctrine.
Several pipelines contend that the Commission’s cre-
ation of the CD conversion /reduction options violates the
principle established by this court in Panhandle, supra.
Panhandle had applied for certification under § 7(c) of
new transportation service to an industrial gas user.
Exercising its § 7(e) authority to attach “such reason-
able terms and conditions as the public convenience and
necessity may require,” the Commission approved the
certification subject to a condition requiring Panhandle to
“flow” the resulting revenues through to its wholesale gas
customers. The condition effectively gave the latter a rate
reduction equal to the new revenues. The Commission’s
6la
theory was that the wholesale gas customers had already
paid for the capacity used to provide the service to the
industrial user ‘or had obligated themselves to do so
under existing rates). 613 F.2d at 1123. This court heid,
however, that such a use of the Commission’s § 7 condi-
tioning authority was an illegal circumvention of § 5.
The latter authorizes the Commission to modify pipeline
rates and charges when it finds them “unjust, unreason-
able, unduly discriminatory, or preferential,” but only
after notice and hearing in which, it is well established,
the Commission bears the burden of proof. See, e.g., Sea
Robin Pipeline Co. v. FERC, 795 F.2d 182, 184 (D.C.
Cir. 1986).
In the present case, the Commission’s creation of the
CD conversion/reduction option similarly modifies previ-
ously approved arrangements that are separate from the
transportation authority that a pipeline would seek under
Order No. 436. On its face, it appears to challenge
Panhandle’s strictures against extensions of the § 7(e)
conditioning power that would erode substantive or pro-
cedural limits on the Comission’s power.
The Commission has taken high ground, which we think
quite untenable. It argues that since application for a
blanket certificate under §7 is entirely voluntary, there
is no need for it to point to any express congressional
grant of power. It asserts that in the CD modification
conditions it was “not requiring the adjustment of
previously-certificated service. .. .”. FERC Brief at 107
n.1 (emphasis added). Obviously the suggestion that Pan-
handle presents no protiem because the application for
certification is voluntary is unacceptable. As all §7
applications are voluntary in a legal sense, the Commis-
sion’s theory would extirpate the Panhandle doctrine.
Apart from the voluntariness theory, the Commission
notes that it has invoked § 7/b), authorizing it to permit
natural gas companies to abandon certificated service.
In 18 C.F.R. § 284.10(f) (3) it expressly finds that pive-
62a
line abandonments of service, pursuant to customer elec-
tions under the Order, are “permitted by the present or
future public convenience and necessity.” But this finding
looks only to the pipeline’s obligation, as is fitting under
§7(b). Neither that section nor the finding thereunder
supports the Commission’s relieving customers of their
contract obligations.
For that, it appears one must turn to § 5 of the NGA,
which allows the Commission to set aside any unjust, un-
reasonably or unduly discriminatory “contract affecting”
rates and charges. Much of the Commission’s reasoning
suggests a belief that under present circumstances in-
flexible CDs in fact qualify as “unjust, unreasonable, [or]
unduly discriminatory” terms. But the Commission has
expressly declined to rely on § 5, and has not explained
why not. J.A. 1059.
The “voluntariness” theory and the invocation of §7
(b) appearing inadequate, and the Commission having
disclaimed reliance on any other provision (notably § 5),
the CD modifications are without basis in law insofar as
they condition blanket certificate transportation under the
NGA on release of customers from contract obligations.
(Immediately below we address the issue of transportation
under § 311.) On -remand,the Commission can proceed
under such grants of power as it believes are relevant
undistracted by the notion that its power under § 7(e)
entitles it to sweep aside the substantive and procedural
constraints of the NGA. In so doing, of course it may
employ rulemaking. Cf. Wisconsin Gas Co. v. FERC, 770
F.2d 1144 (D.C. Cir. 1985), cert. denied, 106 S. Ct. 1969
(1986).
CP National and other LDCs contend that the Com-
mission is without authority to impose the CD conversion /
reduction option as a condition of authority to transport
under § 311 of the NGPA. No analysis is offered in
support of the claim. The premises of the Panhandle doc-
trine are absent here. Perhaps because of its expectation
63a
that § 311 would operate simply to forge interstitial links
between the hitherto separate interstate and intrastate
markets, see Public Service Comm’n of the State of New
York v. Mid-Louisiana Gas Co., 463 U.S. 319, 342 (1983) ;
Process Gas Consumers Group v. United States Dep’t of
Agric., 694 F.2d 728, 764 (D.C. Cir. 1981) (other por-
tions vacated and reconsidered en banc, 694 F.2d 778
(D.C. Cir. 1982)), cert. denied, 461 U.S. 905 (1983),
Congress never created for § 311 transportation any
elaborate structure paralleling that of the NGA. This
claim fails.
In summary, the Commission has failed to ground the
CD adjustment provisions in any adequate section of the
NGA. Because the conditions can legally apply to § 311
transportation, however, and because we have no reason
to expect that the Commission’s interest in attaching the
options to §7 transportation has waned, we proceed to
address a number of other attacks.
2. Alleged lack of compliance with § 7(b).
As noted above, the Commission has, in the CD modi-
fication provisions, identified circumstances under which
pipelines are automatically entitled to abandonment of
service—namely, when the customer exercises the elec-
tion provided. In support of this it has made the neces-
sary finding under § 7(b) that such abandonment serves
the “public convenience or necessity.” ‘7 CP National and
others fault the Commission for failing to make various
specific findings said to be subsidiary parts of that con-
clusion. They cite, for example, Transcontinental Gas
Pipe Line Corp. v. FPC, 488 F.2d 1325, 1329-30 (D.C. Cir.
17 We see no procedural objection to the Commission’s identi-
fication of circumstances, in an otherwise valid rulemaking, which
automatically trigger its approval of abandonment (i.e., establish
a system of “pre-granted” abandonment approval). Cf. Wisconsin
Gas Co. v. FERC, 770 F.2d 1144 (D.C. Cir. 1985), cert. denied, 106
S. Ct. 1969 (1986) (approving modification of tariffs in a generic
§5 proceeding).
64a
1973), cert. denied, 417 U.S. 921 (1974), overturning the
Commission’s decision to permit certain producers to
abandon sales to an interstate pipeline. In that context,
the court held that the Commission must study various
factors and make a “broadly conceived comparison of the
needs of the two natural gas systems [the current pur-
chaser and the producers’ intended substitute] and the
public markets they serve.” Jd. at 1330 (footnote omit-
ted).
The petitioners implicitly assert that the substantive
ingredients of the “public convenience or necessity” are
the same regardless of the type of abandonment. This
makes no sense. Clearly the substantive concerns rele-
vant to terminations at the option of LDCs are altogether
different from those relating to producers’ abandonment
of their sales to pipelines in a period of acute shortage,
as was the case in Transcontinental.
Elizabethtown Gas Company derives from Transconti-
nental the proposition that the Commission cannot wholly
defer to private parties’ choice. Jd. at 1328-29. We see
no conflict between that precept and the Commission’s
action here: nothing in Transcontinental prevents the
Commission from identifying circumstances which, when
coupled with the purchaser’s election, satisfy the public
convenience and necessity.
B. Adequacy of the Commission’s Reasoning in Support
of CD Conversion.
Pipelines attack CD conversion as arbitrary and ca-
pricious, focusing mainly on its impact on preexisting
supply arrangements. They entered into these arrange-
ments primarily in response to their Commission-imposed
obligations to maintain sources of supply adequate to
meet their sales commitments,’*® see 18 C.F.R. § 2.61, and
18Tn some cases these commitments were not freely entered
into, but are the product of Commission orders under NGA § 7(a)
that the pipeline extend service to a particular customer.
65a
in reliance on their ability to recoup the costs through
firm sales contracts. The arrangements consist largely of
long-term supply contracts with producers, but also in-
clude investments in expensive facilities for the importa-
tion of liquefied natural gas (“LNG”), see Trunkline
LNG Co. (Opinion No. 796), 58 F.P.C. 726 (1977);
Trunkline LNG Co. (Opinion No. 796-A), 58 F.P.C. 2935
1977).’° In addition to arguing that the rule defeats
their justifiable reliance on their sales contracts, the pipe-
lines argue that the Order is shortsighted: seeing their
treatment in this situation, pipelines will hardly jump to
meet any future shortage or come to the assistance of a
converting LDC that later finds itself in trouble when
the market tightens. |
An assertion that agency conduct was arbitrary and
capricious requires the court to explore the links between
that conduct and the agency’s statutory authority. We
must examine the agency’s reasoning to determine whether
its considered the relevant factors and drew “a ‘rational
connection between the facts found and the choice made.’ ”
Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto-
mobile Ins. Co., 463 U.S. 29, 43 (1988) (quoting Burling-
ton Truck Lines, Inc. v. United States, 371 U.S. 156,
168 (1962) ). Here we are hampered because, insofar as
the Commission has attached the CD conditions to § 7
blanket certificate transportation, its asserted statutory
basis, §7(e), is legally insufficient. See supra part
[V.A.1. However, in attaching the condition to § 311
19 Panhandle and Trunkline seek to supplement the reliance argu-
ment by noting that the investments were made on the assumption
that “rolled-in” pricing (7.e., charges by pipelines based on average
gas cost rather than marginal cost) would enable the pipelines to
recover the costs. The Commission approved the investments, and
in doing so acknowledged that average pricing was essential to
cost recovery: no customer would buy the LNG at its full price.
Opinion No. 796-A, 58 F.P.C. at 2940. The point does not enhance
their claim; rolled-in pricing remains. The pipelines’ problem is
that even when prices are rolled in, their embedded contract costs
for gas exceed what the current market will bear.
66a
transportation, the Commission plainly invokes the au-
thority of § 311(c), which allows it to prescribe “terms
and conditions.” Section 311 itself states no explicit
standards for the exercise of the power, but the overall
purposes of the NGPA provide a standard—somewhat
amorphous to be sure—against which we can and must
measure the Commission’s decision. See, e¢.g., Permian
Basin Area Rate Cases, 390 U.S. 747, 776 (1968). Given
the overlap in the purposes of the NGA and the NGPA
this process will have implications for possible future
exercises of the Commission’s NGA authority, presum-
ably § 5, but in view of the Commission’s disclaimer of
reliance on § 5, our analysis does not directly apply to
such an exercise.
Unilateral abrogation of a contract is an extreme
measure. This is true even where the abrogation is
partial, as it is under the conversion option, and even
though common law doctrines of impracticability and im-
possibility shift the risk allocation nominally arrived at
by the parties. (They may well do so only to arrive at
the allocation the parties would have made had they con-
sidered in advance the risk that eventuated. Posner &
Rosenfield, Impossibility and Related Doctrines in Con-
tract Law: An Economic Analysis, 6 J. Legal. Stud. 83
(1977).) Nonetheless, we find the reasoning underlying
CD conversion persuasive.
Unlike the typical contract, those at issue here neces-
sarily reflect the pipelines’ monopoly power. The Com-
mission found the transportation network “highly monop-
olistic in some markets, fairly competitive in others.”
J.A. 281. Historically, infact, many customers have been
served by only one pipeline. J.A. 279. This is not dis-
puted. Until the recent partial unbundling of pipeline
sales and transportation service, the pipelines were the
only parties from whom LDCs might practicably buy gas.
Once the unbundling of services began, the LDCs’ position
changed little, as the pipelines wielded their monopoly
67a
power over transportation to deny them the ability to
purchase from would-be competing suppliers. J.A. 318,
352 (finding practice “unduly discriminatory and pref-
erential”). Absent these market restraints, there is no
reason to believe that the LDCs would have agreed to
the long-term sales contracts binding them to pay rates
based on the pipelines’ costs, whatever those might be.”°
Yet, by virtue of these arrangements, the LDCs found
themselves denied access to the spot market, which offers
prices at least 20% below the pipelines’ average gas costs.”
See supra part I.
FERC thus found that to remedy these effects, it was
essential to permit limited LDC abrogation of pipeline
sales contracts:
The transitional contract demand reduction and con-
version options are essential if the goal of non-
discriminatory access to transportation is to be
achieved .... With such an option, full-requirements
customers—especially small, sole-supplied local dis-
tribution companies . . .—will have access to com-
petitively-priced supplies of the gas commodity.
20 The Commission rightly acknowledged that the circumstances
justifying the extraordinary remedy of unilateral contract adjust-
ment were transitional. It afforded the conversion right only to
firm sales customers on the date a pipeline becomes subject to
Order No. 436. 18 C.F.R. § 284.10(b); J.A. 440-41. Any customer
entering into a sales agreement thereafter will have had the option
of nondiscriminatory access by virtue of Order No. 436; accord-
ingly, it will be held to such a commitment. See id.
21 The spot market is, of course, not adequate as an exclusive
source of gas for an intermediary selling to non-fuel-switchable
consumers. But even a price of $2.50 for gas under long-term con-
tracts (the price available as of mid-1986, see supra part I) would
represent a saving over the pipelines’ embedded contract price. The
latter includes not merely the average price being paid by pipelines
at the wellhead (about $2.50 as of mid-1986, accordingly to FERC,
see supra part I), but also the build-up in take-or-pay liability
deriving from reduced takes of higher-priced gas.
68a
Thus, they will no longer be dependent on a single
merchant for their gas supplies... .
J.A. 407-08. See also J.A. 424 (“only through conver-
sions can sole-supplied customers have access . . . to the
national market”). Failing to provide such an option,
FERC concluded, would be “to condone the fundamental
form of undue discrimination by monopoly power which
the NGA intended to prohibit.” J.A. 426.
Thus while the CD conversion option partially denies
pipelines the benefits of their contracts, it does so only
because those contracts are vestiges of their monopoly
power, and only in order to correct the consequences of
that power. This action therefore conforms to the pur-
poses of the NGPA. In Transcontinental Gas Pipe Line
Corp. v. State Oil & Gas Board, 106 S. Ct. 709 (1986),
the Supreme Court declared that enactment of the NGPA
left as the “aim of federal regulation . . . to assume ade-
quate supplies of natural gas at fair prices,” id. at 716,
and referred to Congress’s “determination that the sup-
ply, the demand, and the price of high-cost gas [the type
at issue there] be determined by market forces,” id. at
716-17. Congress’s continued concern for the market
power of pipelines is expressly reflected in NGPA § 601
(b) (1) (E), providing that the price of gas purchased
by a pipeline at the wellhead from its affiliate is deemed
just and reasonable only to the extent that it does not
exceed independents’ prices in comparable sales.
Thus it would appear that the Commission has been
correct in its belief that under § 311 it should assert “the
traditional regulatory approach in areas where it is
needed to protect the public from market dominance by
natural gas companies.” J.A. 271. Provision of the CD
conversion option for customers of pipelines offering § 311
transportation properly implements that view. Any prin-
ciple quashing the Commission’s chosen remedy would
seem to block pro-competitive regulatory reform and run
counter to a long judicial tradition favoring agency devel-
69a
opment of whatever pro-competitive policies are consistent
with the agency’s enabling act. See, e.g., Gulf States
Utils. Co. v. FPC, 411 U.S. 747, 760 (1973); Denver
& Rio Grande W.R.R. Co. v. United States, 387 U.S.
485, 492-93 (1967).
CD conversion may to a degree shift the costs of over-
priced gas and take-or-pay liability to those pipeline cus-
tomers least able to switch to reliance on the wellhead
market. But circumstances limit the pipelines’ power to
shift the costs. Any customer of a pipeline electing to
provide transportation under Order No. 436 has, by defi-
nition, the power to go out into the market to secure gas
and unbundled transportation. That strategy has its
costs—including, of course, the management costs of ne-
gotiating and coordinating long-term supplies, or fees to
brokers for doing so. But these costs form the ceiling
on what pipelines may charge. Accordingly we see no
basis for rejecting FERC’s conclusion that the cost-
shifting risk was tolerable.
We accept FERC’s conclusion that the relevant factors
under § 311 tilt in favor of the CD conversion option.
C. Adequacy of the Commission’s Reasoning in Support
of CD Reduction.
Several LDCs attack the Commission’s authorization of
CD reduction. They contend primarily that it failed to
meet the “substantial evidence” requirements of § 19(b)
of the NGA and § 506(a) (4) of the NGPA, which are
understood by the parties to be equivalent, in the rule-
making context, te the “arbitrary and capricious” stand-
ard. See Wisconsin Gas Co. v. FERC, 770 F.2d 1144,
1156 (D.C. Cir. 1985), cert. denied, 106 S. Ct. 1969
(1986) ; Mid-Tex Elec. Coop. Inc. v. FERC, 773 F.2d
327, 338 (D.C. Cir. 1985). This standard requires
the agency to “articulate a satisfactory explanation for
its action including a ‘rational connection between the
facts found and the choice made.’” Motor Vehicle Mfrs.
70a
Ass’n v. State Farm Mutual Automobile Ins. Co., 463
U.S. 29, 43 (1983) (quoting Burlington Truck Lines,
Inc. v. United States, 371 U.S. 156, 168 (1962) ).
We agree with the challengers that the Commission has
failed to develop an adequate rationale in support of CD
reduction. Review of the Order on this point is consid-
erably hampered by the Commission’s tendency to wrap
its justification for CD reduction together with the case
for CD conversion. The two almost always appear to-
gether, like Rosenkranz and Guildenstern, making it hard
to extract the portion of the argument that has any real
connection with reduction. This is understandable in
terms of the proposals’ history. In the NOPR, the Com-
mission offered CD reduction as the sole device by which
customers could escape their long-term contracts with
pipelines. When the Commission later recognized and
embraced CD conversion, its analysis of CD reduction be-
came largely obsolete. Yet it has continued in places to
justify it as necessary to effect the goal of providing con-
sumers access to competitively priced gas. E.g., J.A.
407-08. See also J.A. 1055-58. If CD conversion is avail-
able, however, this justification fails. Below we review
various other purposes asserted by FERC, as well as its
treatment of the cost-shifting consequences of CD reduc-
tion.
(a) FERC argues that “[t]he transitional contract de-
mand reduction and conversion options are essential if
the goal of non-discriminatory access to transportation is
to be achieved when pipelines operate under the new
transportation rules.” J.A. 407. In a later passage, re-
jecting a proposal that it afford only CD conversion, the
Commission reasoned that a CD option limited in such
a way would restrict customers’ access to “transportation
services on the same pipeline” and deny them the ability
to shop around for unused transportation capacity booked
on other pipelines. J.A. 448.
As justifications for CD reduction, these arguments
seem peripheral to the problem the Commission set out to
Tla
solve in this rulemaking: access to gas competitively
priced at the wellhead. CD reduction would of course
help each LDC secure access to all the different produc-
ing areas of the country, in addition to the ones from
which its existing pipeline supplier(s) draw their gas.
But the record contains no suggestion that competitive
wellhead prices are subject to important regional varia-
tions. While easy LDC access to all producing regions
would help correct or prevent regional price variations,
the Commission makes no argument that any such varia-
tions pose so great a problem as to require such drastic
action as 100% CD reduction.
Of course, competition among pipelines in transpor-
tation services may well be expected to engender lower
prices (at any given level of service quality). If so, it
would fulfill the general consumer-benefit purposes of the
Order. But the Commission does not spell out any such
arguments. Moreover, any analysis along these lines
would trigger attempted rebuttals, essentially based on
the view that in a monopolistic or oligopolistic industry
unrestricted consumer choice may lead to duplication of
capacity and higher costs for consumers. Without assess-
ing the validity of those arguments or the Commission’s
authority to adopt rules moving the industry towards
more competition in transportation, we simply cannot find
any Commission effort to justify CD reduction in such
terms.
(b) The Commission argues that the levels of sales
service that customers have contracted for on a firm basis
“may no longer correspond to what they desire to pur-
chase.” J.A. 406 (footnote omitted). The Commission
found that this imbalance between actual needs and
contracted-for capacity has caused at least two problems.
First, the discrepancy results in an undesirable inequity
as “on some systems, interruptible transportation is as
a practical matter virtually the same quality of service
as firm,” though available at lower rates. Jd. (emphasis
72a
in original). Second, the discrepancy also has the effect
of unnecessarily denying firm service to some potential
users, making the reduction option necessary “to allow a
freeing up of firm capacity.” J.A. 411. See also J.A. 417.
While the argument seems highly relevant to CD re-
duction, it hardly supports the broad remedy adopted.
Even in its terms, it refers to a limited portion of the
industry. The finding’s lack of general application is
underscored by the Commission’s observations that most
firm sales customers need their full contract demand on
peak days. J.A. 420. If so, then the obsolescence referred
to is clearly far from universal. If such obsolete certifi-
cates exist only “on some systems,” it is unclear why the
Commission believes that an industry-wide solution is
needed, especially one that permits all LDCs—or rather,
all LDCs in their relations with pipelines opting to offer
service under Order No. 436—a right to reduce contract
demand 100%.
The Commission argues that Wisconsin Gas Co. v.
FERC, 770 F.2d 1144 (D.C. Cir. 1985), cert. denied,
106 S. Ct. 1969 (1986), allows it to make § 5 determina-
tions generically. J.A. 412. True but irrelevant. Neither
Wisconsin Gas nor any other case of which we are aware
supports an industry-wide solution for a problem that
exists only in isolated pockets. In such a case, the dis-
proportion of remedy to ailment would, at least at some
point, become arbitrary and capricious. This is not to
say, of course, that the Commission could not use generic
rules to identify a limited class of LDCs to be entitled to
reduce CD when special conditions are present. But
here the Commission has said nothing to link the as-
serted obsolescence of CD levels to the broad class of
purchasers made eligible.
(c) Responding to the complaints of some LDCs that
the CD reduction option will force them to bear an addi-
tional share of pipelines’ capital costs (1.e., the costs now
78a
borne by the customers that will exercise the option), the
Commission asserts that customers are likely to seek
little net CD reduction. J.A. 420. Accordingly there will
be little net change, nationwide, in aggregate recovery
of costs. Id.
The improbability of major aggregate cost-shifting,
however, provides little answer to the concerns of captive
customers of pipelines that are likely to lose out in the
competitive race. While the Commission might justify
the loss of such a captive by reference to potential
aggregate gains, it has neither confronted the problem
nor developed in any detail its reasons to expect the net
gains.
D. Insufficiency Under MPC III.
Maryland People’s Counsel argues that under the prin-
ciple established in Maryland People’s Counsel v. FERC,
768 F.2d 450 (D.C. Cir. 1985) (“MPC III’), the Com-
mission was required to afford firm customer an im-
mediate option to convert any purchase obligation com-
pletely.” We find the claim unpersuasive.
In MPC III this court addressed the validity of certain
“special marketing programs” (“SMPs”), successors to
the SMPs held invalid in Maryland People’s Counsel v.
FERC, 761 F.2d 768 (D.C. Cir. 1985) (“MPC I’’). The
SMPs reviewed in MPC I authorized the following ap-
proach to the mounting problem of high gas subject to
high take-or-pay burdens: A producer would resell, at
market rates, high-cost gas previously committed to a
pipeline. A limited class of persons was eligible to pur-
chase, and that class excluded captive consumers. The
producer would credit the pipeline’s take-or-pay liability
for the sale, and the pipeline would transport the gas to
the new purchaser. This court held the program invalid
because it excluded captive consumers from the class of
22 MPC does not challenge the phase-in of CD reduction.
74a
eligible new purchasers, without adequate consideration
of possible anti-competitive and anti-consumer conse-
quences. FERC then amended the program to permit
anyone with a firm contractual entitlement to purchase
a pipeline’s gas to nominate up to 10% of its contract
demand to be purchased under the SMP. Thus the second-
generation SMPs gave “captive” customers access to gas
at competitive wellhead prices, but only up to the 10%
figure. This court overturned the second-generation
SMPs, finding them to be “of a piece with” the first. |
MPC III, 768 F.2d at 455. |
We think that MPC finds more in MPC III than it
contains. The Commission there made no effort to justify
the 10% option in the second-generation SMPs by ref-
erence to classical “grandfathering” values. Here, by
contrast, it invokes those values emphatically and we
think plausibly, arguing that the pipelines require time
to adjust to the new dispensation, particularly to resolve
the take-or-pay problems presented by the producer-pipe-
line contracts. J.A. 1152. The specific phase-in period
.~ and percentages and election procedures resulted from
detailed consideration of various options.** See J.A. 1145-
55. In the event that the Commission modifies its dispo-
sition of the producer-pipeline contracts in light of our
treatment of the take-or-pay issue or for any other rea-
‘ son, however, the Commission may wish to reconsider the
phase-in of the conversion option.
— —
23 We note that the Commission never explicitly responded to
the proposals by the Department of Public Service of the State of
New York that LDCs be required to give notice of their future
gas purchase plans, with some sort of sanctions for deviation
from projections. The Commission may have believed that its dis-
cussion of the need for customer flexibility addressed this issue.
Arguably it did; the cursory response in FERC’s brief did not
address the issue of what the Commission had considered in the
rulemaking (as opposed to what counsel later thought). FERC
Brief at 104-05 n.1. On remand explicit coi sideration of the sug-
gestion would eliminate a potential problem.
a
75a
VY. PRODUCER-PIPELINE CONTRACTS
As noted above, certain contracts entered into by pro-
ducers and pipelines between 1977 and 1982 have been
at the root of the Commission’s endeavor in Order No.
436. These problem contracts provide for prices far in
excess of current market levels. They contain take-or-
pay clauses requiring the pipelines either to purchase a
specified percentage of the producer’s deliverable gas or
to make “prepayments” for that percentage anyway.
The contracts typically permit the buyer to recoup pre-
payments by applying those amounts to subsequent
“takes” of gas occurring within a limited period after
prepayment. See 18 C.F.R. § 154.103 (mandating that
purchase contracts for gas to be transported in inter-
state commerce carry a minimum five-year make-up
period).
Although all parties refer to the problem posed by
these contracts as the issue of take-or-pay, it is the com-
bination of high prices with take-or-pay clauses that
causes the difficulty. A 100% take-or-pay contract for
gas priced at $1.00 per Mcf would usually cause the pur-
chaser no trouble; gas purchased at the wellhead for
$5.00 per Mcf, however, cannot be resold at that price
(plus normal transportation mark-ups) .
Between 1977 and 1982 the pipelines “rolled in” high-
priced gas with low-priced gas (the latter largely due
to wellhead ceilings imposed under Phillips Petroleum
Co. v. Wisconsin, 347 U.S. 672 (1954)), selling at an
average price that was competitive with alternative fuels.
But drops in the price of the latter exposed the pipelines
to intense market pressure. This was soon reflected in
reductions in the wellhead price for newly available gas
(i.e., gas not hitherto subject to contract). Pipelines re-
duced their takes of high-priced gas, and in 1983 prepay-
ment liabiliites for the period between 1982 and 1985
were predicted to reach $7 billion. J.A. 301 & n.34.
76a
At the heart of the industry’s immediate problem is
the discrepancy between the average cost of gas that
pipelines have under contract and the much lower price
of gas now available at the wellhead. The essence of that
discrepancy is the same whether the pipelines buy over-
priced gas and sell it at a loss, or decline to buy such
gas and thereby incur take-or-pay liabilities. The price
discrepancy represents a sunk loss of billions of dollars
(doubtless reflected in actual drilling expenses). At issue
among the parties is who should bear it. All actors in
the natural gas industry—producers, pipelines, LDCs
and consumers—are candidates for this dismal position.
There is one exception: fuel-switchable users, who can
employ the cheapest fuel competing with gas and thus
cannot be induced to pay more than the current competi-
tive price.
By enabling pipeline customers (and some end users)
to obtain gas at current wellhead prices and thus escape
the supra-competitive contract prices, Order No. 436 ap-
pears to relieve consumers from the threat. Conversely,
it heightens the likelihood that pipelines will play the
fall guys. Considered in this section of the opinion is
whether FERC’s lack of direct action as to the uneco-
nomic contracts is permissible, particularly in light of
Order No.—436’s shift insthe-belanee of forces.
A. The Commission’s Prior Activity and Its Inactivity
in This Proceeding.
In April 1985, shortly before issuing the Notice of
Proposed Rulemaking (the “NOPR’) that culminated
in Order No. 436, the Commission issued a policy state-
ment on the regulatory treatment that it would give
payments made by pipelines to extinguish take-or-pay
liabilities (referred to as “buy-out” payments). Regula-
tory Treatment of Payments Made in Lieu of Take-or-
Pay Obligations, 50 Fed. Reg. 16,076 (1985) (codified
at 18 C.F.R. § 2.76). The policy statment provides:
(a) take-or-pay buy-out payments are not counted
77a
toward NGPA price ceilings (i.e., contracts to buy gas
at NGPA ceilings do not breach the ceilings when the
pipeline pays the producer in exchange for relief from
take-or-pay obligations) ; (b) pipelines may file to include
buy-out payments in their rate bases; (c) the method of
cost recovery and the allocation among customers will be
determined on a case-specific basis; (d) customers will
maintain their NGA §4 right to question the prudence
and apportionment of buy-out payments; and (e) where
the take-or-pay buy-out covers “jurisdictional” gas,”
FERC will handle requests for the certificate amend-
ments or abandonments terminating the producer’s legal
obligation with respect to such gas on an expedited basis.
Subsection (a) removes one potential difficulty to take-
or-pay settlement (the price ceiling issue) and subsection
(b) holds out to the pipeline the possibility of recovering
the cost. Subsection (e) promises a reduction in red
tape. Otherwise the policy is pretty noncommittal, and,
more important, does nothing whatever to prevent the
cost from flowing downstream to consumers.
The NOPR proposed more drastic action. It would
have created “a rebuttable ‘safe harbor’ presumption of
prudence for certain one-time payments made to extin-
guish all minimum payment or purchase obligations in
certain qualifying contracts.” J.A. 529. Qualification
would require that the buy-out payment not exceed some
percentage of the take-or-pay liability discharge. (The
Commission did not specify the percentage in the NOPR.
See J.A. 536-37.) The responses to this proposal were
overwhelmingly negative and reflected a fear that the
24 The Phillips decision found wellhead sales of gas for resale
in interstate commerce to be within the Commission’s NGA juris-
diciton. The NGPA removed some instances of existing wellhead
sales from the Commission's jurisdiction, and provided, in effect,
that its jurisdiction would extend to no future ones except for sales
from the outer continental shelf. See NGPA §121, 15 U.S.C.
§ 3331 (1982).
78a
safe harbor would merely establish a floor for take-or-
pay settlements. J.A. 529-40. FERC regarded these
complaints as valid and withdrew the safe harbor pro-
posal.
FERC also considered a number of alternate pro-
posals for dealing with the take-or-pay problem. Most
prominent of these were proposals that FERC (a) di-
rectly invoke its power under § 5 to set aside the take-or-
pay clauses of contracts for jurisdictional gas,” see J.A.
330-33, 1119-21, or (b) condition producer access to
Order No. 436 transportation on the granting of take-
or-pay relief, J.A. 381-83, 1065-74.°° FERC rejected
25 No party here presents any argument for a view that FERC
could exercise its §5 power directly to modify non-jurisdictional
wellhead contracts.
26 A broad coalition of pipelines and LDCs also advances two
less prominent proposals made and rejected during the rulemaking.
Brief of Indicated Petitioners and Intervenors on Take-or-Pay
Contracts Issue at 31 & n.1. First, petitioners contend that certain
take-or-pay provisions in wellhead sales contracts might be deemed
in violation of the NGPA. For example, the Commission might find
that a contract that provided for sale at the NGPA ceiling and
allowed a producer to keep take-or-pay prepayments even after
it has resold the gas to another party, was in effect a contract
for sale at a price in excess of the NGPA ceiling. Jd. We find
this premise somewhat improbable. In enacting the NGPA ceil-
ings, Congress must have been aware that producers and pipelines
would incorporate these ceilings into long-term contracts, and that
the contracts would include remedies for producers. Obviously
the remedial rights would constitute value. If any such value put
into breach of the NGPA a contract nominally at the NGPA
ceiling, the NGPA would provide a most uncertain guide. Con-
gress may well have supposed that state rules against penalty
clauses would suffice to prevent exorbitant remedial provisions.
Even assuming arguendo that clauses restricting recoupment would
violate NGPA ceilings, we do not believe that FERC was obliged
to consider the issue in this proceeding in the absence of reason
to believe that the economic value of these obligations forms a
major portion of the discrepancy between pipeline average contract
prices and the wellhead price for newly available gas. See Motor
79a
these proposals. Concluding that further regulatory ac-
tion on problem contracts was neither necessary nor de-
sirable, it made only a trivial adjustment in the April
1985 policy statement.?*
Virtually all parties other than producers attack
FERC’s refusal to directly address the producer-pipeline
contracts. The essential thesis is this: (1) Order No.
436 denies pipelines much of their leverage over pro-
ducers—the threat to refuse a producer transportation of
new gas when the producer refuses to compromise lia-
bilities under old contracts—at excessive prices. (2)
Many pipeline customers will take advantage of open
access and CD conversion to escape from dependence on
their pipeline suppliers. (3) The escapes will have a
spiralling effect—as each additional LDC drops bundled
service the gas cost burden will grow, driving still others
off. (4) The only LDCs who will remain as pipeline sales
customers will be the least nimble—those for whom it
is most costly to develop secure supplies from non-pipeline
sources. (5) As a result, the consumers who purchase
from these LDCs will be stuck with the burden of the
overpriced gas, thus defeating the purpose of the Order
Vehicle Mfrs. Ass’n v. State Farm Mutual Automobile Ins. Co.,
463 U.S. 29, 51 (1983).
Second, petitioners suggest that the Commission require pipe-
lines to file tariffs expressing a “cutback policy,” pursuant to which
the pipeline would not buy gas priced above some specified figure.
Brief of- Indicated Petitioners and Intervenors on Take-or-Pay
Contracts Issue at 31 n.1. If such tariffs were to be legally binding
on producers, they would, as the Commission argued, see J.A. 332,
essentially substitute FERC price controls for the wellhead market,
a move clearly forbidden by the NGPA. See Transcontinental Gas
Pipe Line Corp. v. State Oil & Gas Board, 106 S. Ct. 709, 716-17
(1986). To the extent that such tariffs would not bind producers,
it is hard to see what they would accomplish.
27 FERC expanded § 2.76(e) to provide that interstate pipelines
participating in a take-or-pay settlement shall be deemed to have
waived any objection to the producer’s application for abandonment,
80a
and violating the consumer-protective purposes of the
NGA. See, e.g., Atlantic Ref. Co. v. Public Serv.
Comm’n, 360 U.S. 378, 388 (1959); FPC v. Hope Nat-
ural Gas Co., 320 U.S. 591, 610 (1944). Further, FERC’s
inaction will permanently distort the structure of the
natural gas market: by creating an artificial advantage
for unbundled transportation service, it will cause the
pipelines’ merchant role to atrophy, despite the greater
efficiency of bundled service. (The greater efficiency de-
rives from pipelines’ incurring lower transaction costs
in providing a full range of service, including load-
balancing service, than would any non-pipeline entity.)
We conclude that FERC’s decision to do nothing more
than reaffirm the April 1985 policy statement reflects
questionable legal premises and fails to meet the require-
ment of “reasoned decisionmaking.” Accordingly, we
reverse and remand for further proceedings.
B. Analysis of FERC’s Decision.
FERC made several contentions in support of its deci-
sion against further direct action on the uneconomic con-
tracts. First, it determined that further action was not
necessary because Order No. 486 would not cause take-or-
pay liabilities to increase, or if it did, the increased lia-
bilities could be shuffled from the pipelines to consumers.
Second, FERC invoked a number of policy reasons gen-
erally militating against regulatory relief for pipelines.
Third, FERC found flaws with the leading alternative
proposals advanced by participants in the rulemaking,
namely that it use its § 5 power to modify contracts in-
volving jurisdictional gas, and that it condition producer
access on the granting of some measure of take-or-pay
relief (or allow the pipelines to impose such conditions).
We address each of these findings in turn.
1. Lack of need for additional steps.
a. Likely effects of Order No. 436 on take-or-pay
build-up. FERC accepted an industry estimate of about
8la
$7 billion in take-or-pay obligations, J.A. 301-02, though
noting the much smaller sum included in pipeline rate
bases, J.A. 831, 1069-70. But it made no detailed eval-
uation of what proportion of these payments—or ones to
be made in the future—the pipelines could recoup by
later “takes” of gas. It found that pipelines had been
able to buy-out substantial portions of their liabilities
for about 20¢ on the dollar. J.A. 540. It concluded that
these prices were reasonable and that buy-outs were suf-
ficiently widespread to represent a reasonable solution to
the problem.
FERC also offered several arguments challengingg peti-
tioners’ death-spiral scenario for pipeline sales service.
(a) As to the pipelines’ loss of a bargaining chip,
FERC observes that the nondiscriminatory access and CD
reduction/conversion conditions “are not intended to af-
fect such renegotiations or litigation.” J.A. 1070. But
FERC’s intent is not at issue. What is in dispute is the
likely consequence of its acts. On that, FERC offers
nothing to undermine the challengers’ inherently plaus-
ible suggestion that these conditions will have an adverse
impact on the pipelines’ take-or-pay problems.
FERC also alludes to the “voluntary” character of
pipeline provision of Order No. 436 transportation. £.v.,
J.A. 1072. There are two flaws in this. First, refusal
of the option may spell bankruptcy: inability to provide
blanket-certificate transportation for fuel-switchable users
may in current market circumstances cause critical load
loss. Of course acceptance of the option may also be
fatal. But when a condemned man is given the choice
between the noose and the firing squad, we do not ordi-
narily say that he has “voluntarily” chosen to be hanged.
Second, the argument obscures distinctions between
pipelines in the aggregate and alone. To be sure, Order
No. 436 gives pipelines an option, blanket-certificate
transportation, which as a result of this court’s decision
82a
in Maryland People’s Counsel v. FERC, 761 F.2d 780
(1985) (“MPC II’), is not available outside of Order
No. 486. But as soon as a single pipeline finds it attrac-
tive enough to accept, each competing pipeline will come
under competitive pressure to match the first’s flexibility.
Thus even if only one pipeline actually preferred to use
Order No. 436 (hanging rather than being shot), com-
petition might force others—ultimately perhaps all the
others—to switch their preference. Thus the Order ef-
fectively reduces pipeline ability to face down recalcitrant
producers.
(b) FERC argues that the CD conversion/reduction
provisions may not injure the pipelines at all.
(T]he Commission considers it more likely that [the
LDCs] will either convert to firm transportation on
the same pipeline, or else free up underutilized ca-
pacity under uneconomic CDs for use by other cus-
tomers on the same pipeline. In either case, the
pipeline may actually increase throughput and, there-
fore, gain the net benefits of spreading its fixed costs
over greater units of gas service.
J.A. 1068-69.
But customers’ conversion to transportation will
clearly aggravate a pipeline’s ability to resolve the prob-
lem of its overpriced gas inventory. Nor can the Order’s
CD reduction provision be painless: a pipeline would
voluntarily agree to release an LDC whenever it had
equally profitable business opportunities for the pipeline
capacity thus made available; accordingly, the only cases
where Order No. 486 causes CD reduction will be ones
where the reduction does injure the pipeline. FERC’s
analysis provides no reason to suppose that those in-
stances will be negligible.
(c) FERC contends that under competitive pressures
a pipeline “will seek to adjust its gas purchasing prac-
tices so as to lower its weighted average cost of gas
83a
to all customers.” J.A. 1069 (emphasis in original). This
reasoning assumes away the problem of the uneconomical
contracts to which pipelines are presently bound. All
FERC does here is to admit that Order No. 436 dramat-
ically increases the consequences of not getting out from
under an uneconomical contrac
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