Appendix — Shell Offshore Inc. v. Associated Gas Gas Distributors (Nos. 87-976, 87-977, 87-979, 87-1091)

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EDITOR'S

THE FOLLOWING

TIME OF

POOR HARD COPY

IF AND WHEN A

A NEW FICHE

et FILMING.

BETTER COPY CAN BE OBTAINED,

ISSUED,

In THE

Supreme Court of the United States

OCTOBER TERM, 1987

SHELL OFFSHORE INC., et al.,

Petitioners,

Vv.

ASSOCIATED GAS DISTRIBUTORS, et al.,

Respondents.

APPENDICES TO

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

AND LIST OF PARENT COMPANIES, SUBSIDIARIES,

AND AFFILIATES REQUIRED BY RULE 28.1

THOMAS G. JOHNSON *

Attorney for

SHELL OFFSHORE INC.

SHELL WESTERN E&P INC.

One Shell Plaza

P.O. Box 2463

Houston, Texas 77252

(713) 241-4742

(Petitioners Listed on

the Inside Cever)

December 14, 1987

TT RT

NS ME RRR i CS, ARRAS ARENA, PRN ENIS A RR ES CLS SS TERR OR APES ESR?

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

AMOCO PRODUCTION COMPANY

WILLIAM T. BENHAM

P.O. Box 5910-A

Chicago, Illinois 60680

(312) 856-7941

APACHE CORPORATION

CHARLES H. BROWNMAN

One United Bank Center

Suite 1900

1700 Lincoln Street

Denver, Colorado 80203-4519

(303) 837-5074

ARCO OIL AND GAS COMPANY

A Division of Atlantic

Richfield Company

HARRIS S. Woop *

NORMA J. ROSNER

P.O. Box 2819

Dallas, Texas 75221

(214) 880-4869

ASHLAND EXPLORATION, INC.

L. EUGENE DICKINSON

P.O. Box 391-AT6

Ashland, Kentucky 41101

(606) 329-4186

CITIES SERVICE OIL AND GAS

CORPORATION

MICHAEL L. PATE

P.O. Box 300

Tulsa, Oklahoma 74102

(918) 561-4541

Conoco INc.

THOMAS D. CARMEL

ERNEST J. ALTGELT, III *

P.O. Box 2197

Mclean Building

Houston, Texas 77252

(718) 293-2227

EXXON CORPORATION

C. ROGER HOFFMAN *

DOUGLAS W. RASCH

P.O. Box 2180

Houston, Texas 77252-2180

(7138) 656-5544

KERR-MCGEE CORPORATION

JOHNNY J. AKINS

P.O. Box 25861

Oklahoma City, Oklahoma 73125

(405) 270-2864

MARATHON OIL COMPANY

GEORGE H. ROTHSCHILD, JR.

P.O. Box 3128

Houston, Texas 77253

(713) 629-6600

Of Counsel:

JON L. BRUNENKANT *

GROVE, JASKIEWICZ, GILLIAM

AND COBERT

1730 M Street, N.W.

Washington, D.C. 20036

(202) 296-2900

MAXUS ENERGY CORPORATION

DIAMOND SHAMROCK OFFSHORE

PARTNERS LIMITED

PARTNERSHIP

R. BRENT HARSHMAN

LTV Center—Suite 1400

2001 Ross Avenue

Dallas, Texas 75201-2916

(214) 979-5027

MITCHELL ENERGY CORPORATION

RANDOLPH C. BRUTON *

PAUL F. O’KONSKI

P.O. Box 4000

The Woodlands, Texas 77380

(713) 363-5997

MOBIL OIL CORPORATION

MOBIL OIL EXPLORATION &

PRODUCING SOUTHEAST INC.

MoBIL PRODUCING TEXAS &

NEW MEXxIco INC.

MOBIL EXPLORATION AND

PRODUCING NORTH AMERICA

INC.

JAY G. MARTIN *

THOMAS GEORGE WAGNER

Nine Greenway Plaza

Suite 2700

Houston, Texas 77046

(718) 235-1448

PHILLIPS PETROLEUM COMPANY

PHILLIPS 66 NATURAL GAS

COMPANY

LARRY PAIN *

JENNIFER A. CATES

1258 Adams Building

Bartlesville, Oklahoma 74004

(918) 661-6355

PLACID OIL COMPANY

RONALD D. HuRST *

PAUL W. HICKS

3900 Thanksgiving Tower

1601 Elm Street

Dallas, Texas 75201

(214) 880-1260

ROSEWOOD RESOURCES, INC.

LESLIE J. BURTON *

JOHN J. WOLFE

200 Crescent Court

Suite 300

Dallas, Texas 75201

(214) 871-5527

SUN EXPLORATION AND

PRODUCTION COMPANY

CHARLES L. SPANN *

THERESA U. FAY

P.O. Box 2880

Dallas, Texas 75221-2880

(214) 890-5607

* Counsel of Record

TEXACO INC.

RALPH J. PEARSON, JR.*

DAVID B. LINDBERG

P.O. Box 52332

Houston, Texas 77052

(713) 650-4297

UNION OIL COMPANY OF

CALIFORNIA

KENNETH L. RIEDMAN, JR.

Union Oil Center—Room 1120

P.O. Box 7600

Los Angeles, California 90051

(213) 977-6282

UNION PACIFIC RESOURCES

COMPANY

KERRY R. BRITTAIN *

PHILIP D. GETTIG

Mail Station No. 4010

P.O. Box 7

Fort Worth, Texas 76101-0007

(817) 877-7540

UNION TEXAS PETROLEUM

CORPORATION

F. NAN WAGONER

P.O. Box 2120

Houston, Texas 77252-2120

(713) 968-2856

TABLE OF CONTENTS

Page

APPENDIX A

Opinion of the United States Court of Appeals for

the District of Columbia Circuit in Associated Gas

Distributors v. FERC, Nos. 85-1811, et al., 824 F.2d

pc cscsocsceiabnsstnncensian la

APPENDIX B

Orders of the Federal Energy Regulatory Commis-

sion issued in Regulation of Natural Gas Pipelines

after Partial Wellhead Decontrol, Docket No.

RM85-1: a

Order No. 436, 50 Fed. Reg. 42408 (Oct. 18, 1985)

SEEN SEIS EE Ae 129a

Order No. 436-A, 50 Fed. Reg. 52217 (Dec. 23,

TE SE ee 145a

APPENDIX C

Judgment and Orders of the United States Court

of Appeals for the District of Columbia Circuit

in Associated Gas Distributors v. FERC, Nos.

85-1811, et al.:

Jadement (Jane SS, 1067) ........................................ 164a

Order Aisending Opinion (July 1, 1987) ................. 168a

Order Amending Opinion (J SS.) eee 170a

Order Denying Suggestions for Rehearing en banc

a atasisaeuncionownncs 17la

Letter to General Counsel of Federal Energy Reg-

ulatory Commission in lieu of formal mandate

transmitting certified copies of the opinion and

judgment filed on June 23, 1987 -_...........-.-............ 172a

TABLE OF CONTENTS—Continued

Page

APPENDIX D

Statutory Provisions:

Natural Gas Act of 1938, 15 U.S.C. §§717, et

DOE canncccnsesechapreestninieninnensnstenennccnasaennsnatinanstiinsantabasinnisstiaiene 173a

OM BH TE, GTEC icc ssn esnsnins 173a

§ 5, 15 U.S.C. § 7174 ............-..-....-2.------s-cseesssccsccseensenee 175a

BA Li TOR G | |, seeene ee enene iene aan DENT ST NETSnE nn 176a

§ 16, 165 U.S.C. § T1700... -..--.-.--.------nsennnnnnrncennonaneas 180a

$19, 15 U.S.S. § TUGr «.....--.--.---.--.-2.-...-.-.-nsensaacnnecosess 18la

Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3301,

I i caiihicitcacnsticcilphaiaccteanstaininnnamicinhtsesensianeiatadaais 183a

EERE! Sd Foe & , : Eee eeeennrn rere 183a

$601, 16 USAC. $3681 191la

APPENDIX E

List of Parent Companies, Subsidiaries, and Affili-

ates required by Rule 28.1 ...............--.----------eeseeeeeeee- 197a

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 85-1811

ASSOCIATED GAS DISTRIBUTORS,

Petitioner

Vv.

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.,

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.,

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

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

paditeheecianteiaduaataasiataatana i diactaainaciaiaiaieaea

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, Inc. 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 Cerp., intervenor in No.

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-

1818, 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.

Carmen Leyato, 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

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, 85-1813, 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

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 E] 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 Corp., 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 Assoc.ation, 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-

1153.

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 C. 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 Transmission 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.

l4a

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.

Wiliam 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:

II.

Il.

IV.

15a

TABLE OF CONTENTS

a ae a

I a aiaieccbiticipidaiaphaleencithineiindatoentnsiacasainininmsnnie

Regulatory and Economic Context ~-------

OPEN-ACCESS REQUIREMENTS ----------------

Claimed Deficiencies in Statutory Authority

to Require Open Access ............-....-

1, FRR GE BE wine ntisindann AGRE EP PRE I

2. Natural Gas Policy Act ...........----

Alleged Failure to Comply with Mandate of

Outer Continental Shelf Lanas Act --------

Claims of Arbitrariness and Caprice ------

1. Failure to impose the nondiscriminatory

access conditions on §7(c) transporta-

Fi I vids nschcttittentinbowativtiisinsins

2. Capacity allocation on a “first-come, first-

SGI. SE ncinccticnnitntnsipeeihaias

Ta a i

Ss wo On >

Absence of Finding that Prior Rates Were

IIE. actuts seth cticstliainsincantnantaenncaibathibdiiiaticiae

Allowance of Discounting Generally ~__-~_-

Potential Discrimination Between Bundled

and Unbundled Transportation _._..____-_-_

. Selective as Opposed to Uniform Discounts_

. Consistency of “Value-of-Service” Discount-

ee WEE TPG Oe Site cctcddcuekociwewe.

Impact of Discounting on Pipeline Solvency_

CONTRACT DEMAND (“CD”) ADJUSTMENT __-~-

RARE SE ciiienitinclicteintebdcitinnie matic

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 III] __-------~---~--

16a

V. PRODUCER-PIPELINE CONTRACTS _____________

VI.

Vil.

The Commission’s Prior Activity and Its In-

activity in This Proceeding .......________

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-

COUN ecitmidieciieanadisintnimiune

2. Policy considerations militating against

OO Te; ea data ck

3. Reasons for rejection of specific pro-

DONE citi nedlattetnniditccniae

a. Section 5 action against jurisdictional

GRIND Ghtdebdaibindiintacnnnenne

b. Conditioning producer access ______

Se Mick

GIRS Ie SS 2 ee ee

Legality of the Presumption ___.__________

1. Alleged disregard of legally relevant fac-

IRR) 2S SS a) DN

2. Unsupported assumptions ~__.________

3. Alleged failures of reasoned decisionmak-

Re SRR REI SE OE lee

MISCELLANEOUS ARGUMENTS ____.___..._..____

QA FAP

. Pipeline Sales Service Issues _____________

. Construction of Facilities for Use in § 311

po ge LE eee ee

fee RA at: SAE Eee MS Oe Tet

103

111

112

113

114

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. 1t 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 et 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

? 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 §8§ 102,

103, 121(a) & (c), 15 U.S.C. §§ 3312, 3313, 3331(a) &

(ec) (1982). In fact, current market prices at the well-

head are significantly 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. § 717c(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 ares mable 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 Context.

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 128 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 243 (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 hai 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.

(3) 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 (i.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

aia ll

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. 486 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.

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) ). A

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 Cung., 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. § 717c¢

(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 680 (D.C.

Cir. 1976); National Ass’n of Regulatory Utility Com-

missioners v. FCC, 583 F.2d 601 (D.C. Cir. 1976). Such

eases 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” (i.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., 1st 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).

Si saan

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 (i.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. Id.

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 of 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.

306; (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, 2d 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,

* Attacks on the Order for failure to take account of prefer-

ences based on pipeline contracts with particular customers are

8la

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).

ceil

32a

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.” Id.

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 extent 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

33a

from losses inflicted by market conditions. In Market

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

84a

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 agency,

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.” /d.

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 subject 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

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. Jd. § 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.

* 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. §§ 38362(c) or 8363(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. 397 (1967). We are therefore

under Chevron bound to uphold the Commission.

A parallel attack on Order No. 436 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. 486 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

by Order No. 436 by no means encompass all the burdens

of NGA jurisdiction. (1) New service under § 311 does

not require § 7 certification, and Order No. 4386 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

3 311 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. (8) § 811 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

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, 48 U.S.C. §§ 1884(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

7 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 shall 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

prevention 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. § 13834(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 reac-

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

j |

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. ¥. 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 transportation

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 treat-

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. 7d. 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.” Jd. at 1095-96 (emphasis in

original). But see El Paso Natural Gas Co., 35 F.E.R.C.

| 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 Tcef 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, e.g., El

Paso Natural Gas Co., 35 F.E.R.C. $61,440 (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 administrative 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 Cemmission’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 cf sup-

ply of LDCs; and (3) disregards equities based on prior

payments for pipeline capacity. See, e.g., Brief of Inter-

state 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

(1967). 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,” 7.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, 7.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).

———

era, |

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 8. 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 that 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 Commission’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.

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 Conswmers 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. Zd. 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 1181, 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 sugges: that the Commissicn’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

priort. 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 II’), 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 II. 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’ differing

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 (i.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 II. 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,

Ine. 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).

——-

56a

We have answered the claims that the rate provisions

of Order No. 436 put it in violation of our 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(e) (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

1 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.

18 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.

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 held,

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 problem 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 pipe-

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, amd 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., 394 F.2d 728, 764 (D.C. Cir. 1981) (other por-

tions vacated and reconsidered en banc, 694 F.2d 1778

(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.” 17 CP National and

others fault the Commission for failing to make various

specific findings said td be subsidiary parts of that con-

clusion. They cite, for example, Transcontinental Gas

Pipe Line Corp. v. FPC, 488 F.2d 1825, 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 T'ransconti-

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

18In 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 (1983) (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

IV.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 (i.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. 7

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-

olistie in some markets, fairly competitive in others.”

J.A. 281. Historically, in fact, 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.

21The 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 8. 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, to 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.

—————— a

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. Id. (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. 486—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.

the CD reduction option will force them to bear an addi-

tional share of pipelines’ capital costs (i.e., the costs now

73a

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 consideration of the sug-

gestion would eliminate a potential problem.

75a

V. 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 in the balance 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

17a

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 Sét 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. Id. 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

Amt

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. 436 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

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