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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1987

## Text

EDITOR'S

THE FOLLOWING
TIME OF

POOR HARD COPY
IF AND WHEN A
A NEW FICHE

et FILMING.
BETTER COPY CAN BE OBTAINED,
ISSUED,

ee

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

ii

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

la
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,

2a

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,

3a

WEIRTON STEEL CORPORATION,
WESTCOAST TRANSMISSION COMPANY LIMITED,
WEST VIRGINIA CONSUMER ADVOCATE,
WISCONSIN POWER & LIGHT COMPANY,
UNION OIL COMPANY OF CALIFORNIA,
VALERO TRANSMISSION COMPANY,
UNITED DISTRIBUTION COMPANIES,

UGI CORPORATION,

KANSAS POWER AND LIGHT COMPANY,
STATE OF MICHIGAN AND MICHIGAN PUBLIC
SERVICE COMMISSION,

SOUTH JERSEY GAS COMPANY,
WASHINGTON GAS LIGHT COMPANY,
ARIZONA PUBLIC SERVICE COMPANY,

SUN EXPLORATION AND PRODUCTION COMPANY,
BETHLEHEM STEEL CORPORATION,

Intervenors

AND CONSOLIDATED CASE NOS. 85-1812, 85-1813, 85-1818,
85-1821, 85-1830, 85-1836, 85-1001, 86-1006, 86-1007,
86-1008, 86-1016, 86-1017, 86-1018, 86-1019, 86-1020,
86-1022, 86-1023, 86-1024, 86-1029, 86-1030, 86-1031,
86-1032, 86-1034, 86-1035, 86-1036, 86-1038, 86-1042,
86-1046, 86-1047, 86-1048, 86-1049, 86-1050, 86-1051,
86-1053, 86-1054, 86-1055, 86-1056, 86-1063, 86-1066,
86-1067, 86-1076, 86-1081, 86-1083, 86-1085, 86-1086,
86-1087, 86-1088, 86-1089, 86-1090, 86-1092, 86-1094,
86-1095, 86-1097, 86-1098, 86-1099, 86-1100, 86-1102,
86-1103, 86-1153, 86-1154, 86-1155, 86-1226, 86-1235,
and 86-1246

Petitions for Review of Orders of the
Federal Energy Regulatory Commission

4a
Argued October 14 and 15, 1986
Decided June 23, 1987

William W. Brackett, with whom David F. Collins and
G. Mark Cook were on the brief for ANR Pipeline Co.,
et al., petitioners in Nos. 86-1055 and 86-1067. Terry
O. Vogel, Jeffrey M. Goldsmith, and William M. Lange
entered appearances.

Roberta L. Halladay, with whom Jerome C. Muys and
C. William Cooper for United Distribution Companies,
petitioners in No. 86-1006 and intervenors in Nos. 86-
1811, 86-1016, 86-1067, 86-1087, and 86-1153; William
Warfield Ross and Daniel Koffsky for Consumers Power
Co., petitioner in No. 86-1047 and intervenor in No. 85-
1811, and Thomas Patrick and Karen Cargill for The
Peoples Gas Light and Coke Co. and North Shore Gas
Co., petitioners in No. 86-1155 and intervenors in Nos.
85-1811 and 86-1153, were on the joint brief. Janet M.
Robins for Consumer Power Co., et al. and Mark Mc-
Guire for The Peoples Gas Light and Coke Co., et al. also
entered appearances.

John T. Miller, Jr. for Elizabethtown Gas Co., peti-
tioner in No. 85-1836.

Robert A. Nelson, Jr. for Northwest Gas Co., with
whom Donald K. Darkner and Daniel F. Stenger for CP
National Corp. and Thomas F. Brosnan for Washington
Natural Gas Co. were on the joint brief for petitioners
in No. 86-1097.

Kenneth J. Nieses for Laclede Gas Co., petitioner in
No. 86-1001 and intervenor in No. 85-1811.

David B. Robinson, with whom William J. Guste, Jr.,
Attorney General, State of Louisiana, and Theodore L.
Jones for State of Louisiana, petitioners in No. 86-1053
and 86-1051 and intervenor in No. 85-1811; Patrick J.
Nugent, James M. Costan, and Elisa J. Grammer for
Association of Texas Intrastate Natural Gas Pipelines,
intervenor in No. 85-1811; J. Paul Douglas, with whom

paditeheecianteiaduaataasiataatana i diactaainaciaiaiaieaea

5a

Brian J. Heisler and Kevin Sweeney for Amoco Gas Co.,
petitioner in Nos. 86-1081 and 86-1154 and intervenor in
Nos. 85-1811, 86-1016, and-86-1055; C. Burnett Dunn
for Oklahoma Natural Gas Co., intervenor in Nos. 85-
1811, 86-1067, 86-1088, and 86-1153; and William I.
Harkaway for Consolidated Edison of NY, Inc., petitioner
in No. 86-1094 and intervenor in No. 85-1811, were on
the joint brief. Timothy Keegan for Association of Texas
Intrastate Natural Gas Pipelines, Diane Siler for the
State of Louisiana, and Barbara M. Gunther and Steven
I. Kalish for Consolidated Edison of NY, Inc. also entered
appearances.

Edward J. Grenier, Jr., with whom William H. Penni-
man, Glen S. Howard, Gail S. Gilman, James P. Rathvon,
and James M. Bushee for the Process Gas Consumers
Group and the American Iron & Steel Institute, petition-
ers in Nos. 86-1007 and 86-1008 and intervenors in Nos.
85-1811, 86-1226, 86-1235, and 86-1246; Nicholas W. Fels
and David N. Heaps for Air Products & Chemicals, Inc.,
et al., intervenor in Nos. 85-1811, 86-1016, and 86-1017;
Stephen A. Herman and John G. Froemming for the
Fertilizer Institute and American Bakers Association, in-
tervenors in Nos. 85-1811, 86-1016, and 86-1017; Rigdon
H. Boykin and Thomas E. Hirsch, III for American Paper
Institute, petitioner in No. 86-1089 and intervenor in
Nos. 85-1811, 86-1016, and 86-1017; and John W. Hard-
wicke for Maryland Industrial Group, intervenor in Nos.
85-1811, 86-1016, and 86-1017 were on the joint brief.

Thomas G. Johnson, with whom M.G. Brookshier and
Charles McClees, Jr., for Shell Offshore, 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.

6a

85-1811; James B. Atkin, Norma J. Rosner, and David
J. Evans for Chevron U.S.A., Inc., petitioner in No. 85-
1050 and intervenor in No. 85-1811; Michael L. Pate for
Cities Service Oil and Gas Corp., intervenor in No. 85-
1811; Ernest J. Altgelt, III for Conoco, Inc., intervenor in
Nos. 85-1811 and 86-1016; Edmunds Travis, Jr., Glenn H.
Mapes, Jr., and Douglas W. Rasch for Exxon Corp., peti-
tioner in No. 86-1029 and intervenor in No. 85-1811;
John J. Atkins for Kerr-McGee Corp., petitioner in No.
86-1083; Gary M. Prescott for Marathon Oil Co., inter-
venor in No. 85-1811; Robert D. Haworth, Jay G. Mar-
tin, and Thomas George Wagner for Mobil Oil Corp., et
al., intervenors in Nos. 85-1811, 86-1016, 86-1067, 86-1087,
86-1088, and 86-1153; John B. Chapman, John K. Mc-
Donald, Charles E. Suffling, and Mary Lee Pieper for
Pennzoil Co., et al., petitioners in Nos. 86-1016 and
86-1103 and intervenors in Nos. 85-1811, 85-1812, 85-
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.

Ta

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

8a

Nos. 85-1811, 86-1088, and 86-1153; Frederick Moring,
Herbert J. Martin, and M. Lisanne Crowley for Associ-
ated Gas Distributors, petitioner in No. 85-1811 and
intervenor in Nos. 85-1812, 85-1813, 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

9a

Nos. 85-1811, 86-1067, 86-1087, 86-1088, and 86-1153.
James M. McCartney and J. Evans Attwell also entered
appearances.

Daniel W. McGill, Paul K. Brooks, and George A.
Porch were on the brief for Southern Indiana Gas and
Electric Co., petitioner in No. 86-1098 and intervenor in
Nos. 85-1811 and 86-1153. Ronald E. Christian and
Thomas C. Tokos also entered appearances.

Glenn W. Letham and Kenneth M. Albert entered
appearances for Memphis Light, Gas and Water Division,
petitioner in No. 86-1024 and intervenor in No. 85-1811.

Christopher K. Sandberg entered an appearance for
Minnesota Public Utilities Commission, et al., petitioners
in No. 86-1030 and intervenors in No. 85-1811.

Charles D. Gray entered an appearance for National
Association of Regulatory Utility Commissioners, peti-
tioner in No. 86-1031.

Dale A. Wright and James T. McManus entered an
appearance for Northwest Central Pipeline Corp., peti-
tioner in No. 86-1034.

Rush Moddy, Jr., William J. Grealis, Jeffrey G. Di-
Sciullo, Donald J. Maclver, and Richard C. Green, en-
tered appearances for 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

A.
B.

I a aiaieccbiticipidaiaphaleencithineiindatoentnsiacasainininmsnnie
Regulatory and Economic Context ~-------

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

A.

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 __-~-

A.

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.

A.

B.

C.

A.
B.

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 _____________

i

. Construction of Facilities for Use in § 311

po ge LE eee ee

fee RA at: SAE Eee MS Oe Tet

95

97
103

103
111

112

113

113
114
115

115
117
120

122

17a

I. INTRODUCTION

On October 9, 1985 the Federal Energy Regulatory
Commission (“FERC”) issued Order No. 436, 50 Fed.
Reg. 42,408 (1985) (codified at scattered sections of
18 C.F.R.). The Order envisages a complete restructur-
ing of the natural gas industry. 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

a

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
(c) or section 3363(b), (c), (d), or (i) of this
title; or

(2) authorized by the Commission under sec-
tion 3371(a) of this title [section 311(a) of the
NGPA].

15 U.S.C. § 3432(b) (1982).

Petitioners read this language as stultifying any effort
by the Commission to control discrimination where that
effort imposes on pipelines a duty—even though it be a
conditional one—equivalent to the common carrier’s duty
to provide nondiscriminatory service. We believe this
interpretation is incorrect.

It seems to us that § 602(b)(2) was a congressional
effort to protect § 311(a) from the consequences of pipe-
line concern that service thereunder would expose them
generally to classification as common carriers, most likely
by states, and thus to an unprecedented range of legal
burdens. If pipelines shied away from use of § 311(a),
its purpose would be defeated. Section 602(b) (2) could
protect against that threat by assuaging the pipelines’
concern. A duty not to discriminate, imposed by the Com-
mission on the basis of findings that the duty is necessary
to assure consumers access to competitively priced gas, is
utterly different. The imposition of the duty here facili-
tates the accomplishment of Congress’s purposes. At
least it will do so if the gains in enhanced access offset
whatever losses may result from the disincentive effect

36a

on pipelines. The judgment balancing those consequences
is for the Commission to make, and it has made it in

favor of imposing the duty.*®

Congress had ample reason to fear that the risk of
extraneous legal burdens would chill pipeline interest.
Take the laws of Texas. Two years before enactment of
the NGPA a Texas court ruled that “{w]hether the busi-
ness conducted by a pipe line company is actually that of
a common carrier is a question of fact,” which would
depend on the court’s perception of whether “the line is
available to all producers seeking its service.” China-
Nome Gas Co. v. Riddle, 541 S.W.2d 905, 908 (Tex. Civ.
App. 1976). A pipeline’s transportation under § 311(a)
would expose it to the risk of such “fact” findings, and
thus enmesh it in state regulations. In Texas, for ex-
ample, such classification would subject it to the jurisdic-
tion of the Railroad Commission, see Op. Atty. Gen. No.
M-175 (1967), to certain health requirements; see Tex.
Civ. Stat. Ann. § 4477-1(1) & (22) (Vernon 1976 &
Supp. 1987), and to such duties and liabilities as a court
might find the common law to prescribe, see id. §§ 882-
884 (Vernon 1964 & Supp. 1987). Most notably, a firm
declared a common carrier is required under Texas law
to carry, for anyone, any goods of the type for which
it is suited. 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.

eo

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

ee

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 belo

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0550%3A2. Public record. Not legal advice.