Appendix — Transwestern Pipeline Co. v. Federal Energy Regulatory Commission

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

TRANSWESTERN PIPELINE COMPANY,

- Petitioner,

V.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

APPENDIX TO THE PETITION

FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

JAMES W. MCCARTNEY*

DAVID T. ANDRIL

Vinson & Elkins

3300 First City Tower

1001 Fannin Street

Houston, Texas 77002

(713) 651-2324

CHERYL M. FOLEY

Transwestern Pipeline

Company

P.O. Box 1188

Houston, Texas 77001

(713) 853-6196

Attorneys for

Transwestern Pipeline Company

*Counsel of Record

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

Appendix G

i

TABLE OF CONTENTS

Opinion of the United States

Court of Appeals for the Fifth

Circuit dated July 7, 1987 .......

Judgment of the United States

Court of Appeals for the Fifth

Circuit dated July 7, 1987 .......

Opinion No. 238 issued by the

Federal Energy Regulatory

Commission dated July 1, 1985...

Opinion No. 238-A issued by the

Federal Energy Regulatory

Commission dated August 4, 1986

Decision of the Administrative

Law Judge dated December 11,

AE OG Site eS ae

Natural Gas Act — selected

I Se ee ee bs.

Administrative Procedure Act —

selected provisions.,............

B-1

C-1

A-1

APPENDIX A

TRANSWESTERN PIPELINE

COMPANY, Petitioner,

Vv.

FEDERAL ENERGY REGULATORY

COMMISSION, Respondent.

Nos. 85-4597, 86-4550.

United States Court of Appeals,

Fifth Circuit.

July 7, 1987.

On Petitions for Review of Orders of the Federal Energy

Regulatory Commission.

Before CLARK, Chief Judge, THORNBERRY, and

HIGGINBOTHAM, Circuit Judges.

CLARK, Chief Judge:

Petitioner Transwestern Pipeline Company (Transwest-

ern) seeks review of Opinion Nos. 238 and 238-A and other

related orders of the Federal Energy Regulatory Commission

(the Commission). See Transwestern Pipeline Company,

Opinion No. 238, 32 FERC 961,009 (1985), reh. denied,

Opinion 238-A, 36 FERC 961,175 (1986): see also Pacific

Gas Transmission Compasy, 28 FERC 9 61,217 (1984), reh.

denied, 32 FERC 961,001 (1985), reh. denied, 36 FERC

61,176 (1986).

In generic Order No. 380,' the Commission eliminated

interstate natural gas pipelines’ minimum commodity bills

to the extent these provisions permitted the recovery of

variable costs. The Commission reasoned that such variable-

' Elimination of Variable Costs from Certain Natural Gas Pipe-

line Minimum Commodity Bill Provisions, Order No. 380, 27

FERC 4 61,318; Order No. 380-A, 28 FERC 9 61,175; Order

No. 380-B, 29 FERC 9 61,076; Order No. 380-C, 29 FERC

461,077; Order No. 380-D, 29 FERC 4] 61,332 (1984).

A-2

cost minimum bills inhibited competition without justifica-

tion by forcing a pipeline’s customers to buy its gas rather

than less costly gas from other sources. This order and its

rationale were approved by the District of Columbia Circuit

in Wisconsin Gas Co. V. Federal Energy Regulatory Commis-

sion (FERC), 770 F.2d 1144 (D.C.Cir.1985), cert. denied,

... US. ..., 106 S.Ct. 1968, 90 L.Ed.2d 653 (1986).

Questions of the lawfulness of the fixed-cost portion of

minimum bills were left to be resolved in individual pipeline

proceedings. This is such a proceeding. Transwestern peti-

tions this court to review orders of the Commission which

eliminated its fixed-cost minimum bills as applied to its two

principal customers and terminated the Commission’s

investigation into the minimum bill practices of other inter-

state pipelines supplying California. The Commission’s con-

clusion that Transwestern’s fixed-cost minimum bills were

unjust and unreasonable because the practice constituted an

unreasonable restraint of trade was based on substantial

evidence. The remedy imposed was a proper exercise of the

Commission’s authority under the Natural Gas Act (NGA)

and was neither arbitrary nor capricious. It was within the

Commission’s discretion to terminate its investigation of the

other pipelines and determine the lawfulness of Transwest-

ern’s fixed-cost minimum bills on the record before it. We

affirm.

I. BACKGROUND

A. FACTS

Transwestern owns and operates an interstate natural gas

pipeline subject to the jurisdiction of the Commission. It

provides firm service to two partial requirements customers,

Southern California Gas Company (SoCal) and Northwest

Central Pipeline Company (Northwest), which account for

more than 99.5 percent of Transwestern’s gas sales. SoCal is

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a local distribution company which sells gas both for resale

and for ultimate consumption within the State of California.

Transwestern competes for natural gas sales to SoCal with

other interstate pipelines and various other sources, includ-

ing gas sold on the spot market. The largest interstate pipe-

line serving California and Transwestern’s primary competi-

tor there is El Paso Natural Gas Company (El Paso).

Northwest is an interstate pipeline which sells primarily to

local distribution companies in the Midwest. The majority

of its sales are to Kansas Power and Light Company serving

the Kansas City, Missouri area.

The Commission first authorized Transwestern to provide

service to SoCal’s affiliate, Pacific Lighting Gas Supply Com-

pany (Pacific),* in 1959, when it issued Transwestern a cer-

tificate of public convenience and necessity pursuant to § 7

of the NGA, 15 U.S.C. §717f, to construct an interstate

pipeline and sell up to 350 million cubic feet (MMcf) of gas

per day. Additional certificates have been issued over the

years to Transwestern to expand facilities and sell 750 MMcf

per day to SoCal. =

The 1959 certificate was conditioned upon Transwestern’s

filing an initial rate schedule based on the Seaboard method’

of cost classification, cost allocation, and rate design. Under

this method, 50 percent of Transwestern’s fixed transmission

costs and all its “‘as billed”’ fixed costs are treated as parts of

the demand charge component of the rate and the remaining

fixed transmission costs plus all fixed production costs and

all its variable costs are classified as parts of the commodity

charge. The demand charge is calculated based on the con-

tract demand quantity, which in SoCal’s case is 750 MMcf

? SoCal and Pacific were both parties in the proceedings before

the Commission. Pacific was recently merged into SoCal. We

will often refer to them jointly as “SoCal.”

Bo gaa Seaboard Corp, Opinion No. 225, 11 FPC 43

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of gas per day. This charge is paid by the customer regardless

of how much gas is taken. The commodity charge calculation

is based on the number of units of gas sold.

The schedule also included a 91 percent minimum annual

commodity bill provision based on the annual contract

quantity, which is calculated by multiplying SoCal’s contract

demand quantity of 750 MMcf per day times 365 days a

year. In effect, the minimum bills obligated SoCal to take gas

pursuant to the rate schedule or pay Transwestern as if it

had taken an average of 682.5 MMcf per day (91 percent of

the contract demand quantity) or such lesser amount as

Transwestern tendered.‘

In 1965, the Commission authorized Transwestern to sell

100 MMcf per day to Northwest’s predecessor, Cities Serv-

ices Gas Company. This amount has since been increased to

250 MMcf per day. While the rates in the initial schedules

for Northwest were developed using a method different from

that used for SoCal, Transwestern’s rate design for both

principal customers now uses the same method. At the time

of Transwestern’s rate filing this was the Seaboard method.

The rates applicable to Northwest also included a 90 percent

minimum annual commodity bill.

There is a significant difference, however, between the

minimum bills applicable to SoCal and those applicable to

Northwest due to a “ratchet” provision in the Northwest

agreements. The contract demand quantity which the

Northwest contracts specified was to be used in calculating

the annual contract quantity did not equal the 250 MMcf

4 After Order No. 380 eliminated variable-cost recovery from ail

interstate pipelines’ minimum bills, SoCal was not required to

pay the full commodity rate for gas not taken, but only the

xed-cost portion. We explain in more detail below.

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per day that Transwestern is authorized to deliver. Trans-

western’s agreements with Northwest provided that if Trans-

western was unable to deliver the daily contract demand

quantity, the average daily quantity actually delivered would

become the new contract demand quantity in calculating the

minimum bill for that year and for every year thereafter.

During the 1970’s, Transwestern was in severe curtailment

and could not deliver 250 MMcf per day to Northwest.

Thus, the contract demand quantity used in calculating

Northwest’s minimum bills was permanently reduced. The

ratchet provision in Northwest’s minimum bill obligation

eventually reduced its take-or-pay requirement to only 59

percent of the 250 MMcf Transwestern is authorized to

deliver.

For years neither SoCal nor Northwest had any com-

plaints about the effect of Transwestern’s minimum bills. In

fact, if the two customers had any complaints it was due to

curtailment of natural gas supply rather than any surplus

which may have been forced upon them. Then in 1982, both

customers had more gas available from Transwestern and

other suppliers than they needed to meet demand. This

oversupply was in part due to the customers’ efforts during

the 1970’s to develop alternative sources of supply in

response to curtailment. Those projects began to produce in

the early 1980’s. The oversupply was also a consequence of

the recession and an increase in gas prices since 1978. In

addition, residential consumers conserved gas and switched

to electricity, and industrial customers switched to fuel oil,

which had become competitive. In short, the natural gas

supply was suddenly much greater than the demand; the

natural gas surplus, however, was not immediately accom-

panied by a decrease in gas prices.

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B. COURSE OF PROCEEDINGS

In August 1981 Transwestern filed increased natural gas

rates for its customers pursuant to § 4 of the NGA, 15 U.S.C.

§ 717c. The Commission set the increased rates for hearing,

and the parties soon settled most of the disputes concerning

the reasonableness of the increased rates. However, they

were unable to settle disputes concerning the reasonableness

of Transwestern’s full-cost minimum bills and its method for

cost allocation and rate design. Hearings on these issues

were held in June and July of 1983.

Recognizing that the Commission’s investigation under

§ 5 of the NGA, 15 U.S.C. § 717d, of other interstate pipe-

lines supplying California raised similar full-cost minimum

bill questions, the Chief Administrative Law Judge (the

Chief ALJ) consolidated the Transwestern proceeding with

these other cases in December 1983. The Commission

affirmed the Chief ALJ’s decision.

On May 25, 1984, the Commission issued Order No. 380

eliminating variable costs from the minimum bills of inter-

state pipelines, including Transwestern. In August 1984, the

Commission suspended the consolidated proceeding which

included Transwestern’s case, in part because Order No. 380

and related rehearings could dispose of many of the issues,

and in part because El Paso, Transwestern’s major competi-

tor in the southern California market, and its customers

reached a settlement setting the fixed-cost minimum bill

provision at 60 percent.’ Transwestern’s docket, however,

5 See Pacific Gas Transmission Co., 28 FERC 961,217 (1984)

(approving most of El Paso settlement). The Commission even-

tually terminated the consolidated proceeding because most of

the issues had been resolved, including the lawfulness of Trans-

western’s fixed-cost minimum bills. See Pacific Gas Transmis-

ma” 32 FERC 961,001 (1985), and 36 FERC 961,176

A-7

was severed for expedited decision since the case had been

ready for decision for over a year.

The presiding Administrative Law Judge (the presiding

ALJ) issued a decision in the severed Transwestern case in

December 1984, reducing Transwestern’s fixed-cost mini-

mum bills to 60 percent and rejecting any change in the rate

design. On review, the Commission totally eliminated the

fixed-cost minimum bills in Opinion No. 238 and denied

rehearing in Opinion No. 238-A.°

The Commission affirmed the presiding ALJ’s finding that

the differences between SoCal’s and Northwest’s minimum

bills constituted undue discrimination. This finding was —

based on the fact that Northwest’s minimum bill obligation

had ratcheted downward to approximately 59 percent of its

actual contract demand quantity while SoCal’s remained at

the 91 percent level. The ALJ’s conclusion that Transwest-

ern’s minimum bills should not be eliminated, but rather

decreased to 60 percent to remedy the discrimination and

place Transwestern’s minimum bills at the same level as

those of its major California competitor, El Paso, was

rejected by the Commission. It found that Transwestern’s

minimum bills unreasonably restrained trade and thus were

unjust and unreasonable. The Commission observed that

Transwestern’s minimum bills forced Northwest and SoCal

to purchase gas from Transwestern even though alternative

lower-cost supplies were available, and it found that the

minimum bills were not justified. In particular, the Commis-

sion concluded that Transwestern’s fixed-cost minimum bills

allowed it to recover certain fixed costs which should not be

guaranteed free from risk—equity return, related taxes, and

fixed production costs. The Commission adopted a new

° Transwestern Pipeline Co., Opinion No. 238, 32 FERC

761,009 (1985), reh. denied, Opinion 238-A, 36 FERC

961,175 (1986).

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modified fixed variable rate design method which would

assure that Transwestern recovered those fixed costs which it

was entitled to recover on a risk-free basis. These fixed

costs—debt costs and depreciation—would be recovered

through the demand charge, which the customer pays based

on its contract demand quantity regardless of gas taken.

II. REVIEW OF THE COMMISSION’S ORDERS

Transwestern petitions this court to review the Commis-

sion’s orders in Opinion Nos. 238 and 238-A which elimi-

nate Transwestern’s minimum bills and the related orders of

the Commission which terminate the investigation of other

interstate pipelines. The Commission declared Transwest-

ern’s fixed-cost minimum bills unlawful and entirely

eliminated such bills pursuant to its authority under §§ 4 and

5 of the NGA to regulate rates, charges, and practices of

natural gas companies under its jurisdiction.

Section 4(a) provides that rates charged by natural gas

companies “‘shall be just and reasonable, and any such rate

or charge that is not just and reasonable is declared to be

unlawful.” 15 U.S.C. §717c(a). Section 5(a) provides the

basis for the Commission’s authority to examine rates to

determine whether they comply with the § 4 standard:

(a) Whenever the Commission, after a hearing had

upon its own motion or upon complaint of any State,

municipality, State commission, or gas distributing

company, shall find that any rate, charge, or classifica-

tion demanded, observed, charged, or collected by any

natural-gas company in connection with any transporta-

tion or sale of natural gas, subject to the jurisdiction of

the Commission, or that any rule, regulation, practice,

or contract affecting such rate, charge, or classification is

unjust, unreasonable, unduly discriminatory, or prefer-

ential, the Commission shall determine the just and

reasonable rate, charge, classification, rule, regulation,

practice, or contract to be thereafter observed and in

force, and shall fix the same by order....

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In reviewing the substance of the Commission’s orders, we

are initially guided by § 19(b) of the NGA, which provides

that the Commission’s factual findings, “if supported by

substantial evidence, shall be conclusive.” 15 U.S.C.

§ 717r(b). The Supreme Court has emphasized that “Con-

gress has entrusted the regulation of the natural gas industry

to the informed judgment of the Commission, and not to the

preferences of reviewing courts. A presumption of validity

therefore attaches to each exercise of the Commission’s

expertise....” In re Permian Basin Area Rate Cases, 390

U.S. 747, 767, 88 S.Ct. 1344, 1360, 20 L.Ed.2d 312 (1968).

In adherence to the principles articulated in Permian Basin

Area Rate Cases, this court reviews the Commission’s

actions on the basis of “‘(1) whether the Commission abused

or exceeded its authority, (2) whether the essential elements

chosen by the Commission for its order are supported by

substantial evidence, and (3) whether the ‘end result’ is

unjust and unreasonable.” Tenneco Oil Co. v. FERC, 571

F.2d 834, 838 (Sth Cir.), petition for cert. dismissed, 439 U.S.

801, 99 S.Ct. 43, 58 L.Ed.2d 94 (1978) (citing Permian Basin

Area Rate Cases, 390 U.S. at 791-92, 88 S.Ct. at 1373);

Cities Service Gas Co. V. FERC, 623 F.2d 1002, 1004-05

(Sth Cir.1980).

A. UNDUE DISCRIMINATION

[1] Transwestern’s first challenge to the substance of

Opinions No. 238 and No. 238-A focuses on the Commis-

sion’s discussion of “undue discrimination.” Transwestern

argues that the Commission’s determination that SoCal and

Northwest were “similarly situated” customers is not sup-

ported by substantial evidence. Transwestern contends that

the Commission has misconstrued the relationship between

private contracts and regulation under the NGA. Transwest-

ern further asserts that the remedy imposed by the Commis-

sion—the total elimination of Transwestern’s minimum

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bills—was arbitrary and capricious since a finding of unlaw-

ful discrimination at most warrants the equalization of the

minimum bill levels between customers, not abrogation.

Because Transwestern identifies this issue as the Commis-

sion’s “‘key finding,” we address it preliminary.

At the outset, we would note that the challenged “undue

discrimination” finding is not an essential element of the

Commission’s ultimate determination. The presiding ALJ

did not declare Transwestern’s minimum bills anti-competi-

tive. Instead, he based his decision on a finding that simi-

larly situated customers were treated differently without jus-

tification. The ALJ eliminated that discrimination by

reducing Transwestern’s minimum bills to a 60 percent level

which would equal El Paso’s minimum bill level to SoCal.

Although the Commission discussed the discrimination

issue and generally affirmed the ALJ’s finding, it did not rest

its decision to eliminate Transwestern’s minimum bills on

the ALJ’s determination. The Commission’s central finding

is that Transwestern’s fixed-cost minimum bills unreason-

ably restrained trade. This finding makes the ALJ’s determi-

nation related to discrimination inmaterial. The remedy

imposed by the Commission does not stem from any differ-

ence between Transwestern’s minimal bills to Northwest and

its minimum bills to SoCal.

Under §5 of the NGA, once the Commission found

Transwestern’s minimum bill practice unlawful, it had the

authority to “determine the just and reasonable rate, charge,

classification, rule, regulation, practice, or contract to be

thereafter observed and in force. ...” Transwestern’s con-

tention that the elimination of its minimum bills was an

arbitrary and capricious remedy is thus without merit.

B. SUBSTANTIAL EVIDENCE

The Commission’s determinations that Transwestern’s

fixed-cost minimum bills were anti-competitive and should

silence

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be entirely eliminated were based on evidence in the record

of the past operation of the minimum bills and their effect

on competition as well as the probable consequence such

provisions would have in the future. The record in this case

was closed before Order No. 380 eliminated variable-cost

recovery from interstate pipelines’ minimum bills. Prior to

that elimination, Transwestern’s minimum bills forced the

customer to take or pay the full commodity rate for any

minimum bill volume not taken.

The past operation of these full-cost minimum bills is

generally not disputed. It is clear, for example, that the

purpose of a full-cost minimum bill is to prevent customers

from purchasing less expensive alternative supplies. Trans-

western’s Senior Vice President testified that the minimum

bill was intended to assure that sales will continue to be

made when the purchaser has available to it alternative

supplies at lower costs. Furthermore, evidence in the record

established that Transwestern’s full-cost minimum bills

prevented SoCal’s affiliate Pacific from purchasing lower-

cost gas from El Paso in 1982 because of Pacific’s commit-

ment to Transwestern to pay the full commodity rate for its

minimum bill volume.

Referring to the general situation, the Commission found

in Opinion No. 238 that

both Pacific and Northwest Central had to reduce their

purchases from their suppliers. And they had to reduce

the price at which they sold their gas. Since Transwest-

ern was a high cost supplier for both, they should have

reduced their purchases from Transwestern and

increased their purchases from their lower cost sup-

pliers. But they did not because of the necessity of

meeting Transwestern’s minimum bill obligations. The

net effect of Pacific’s and Northwest Central’s doing so

was that consumers paid more for gas than they might

otherwise have and competitors were excluded from the

markets. (footnotes omitted)

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Transwestern does not take issue with this finding of com-

petitive harm. The anti-competitive effect of full-cost mini-

mum bills was decided in Order No. 380 and upheld by the

D.C. Circuit in Wisconsin Gas Co., a proceeding in which

Transwestern participated.

However, variable costs constituted about 90 perce..t of

the commodity charge in Transwestern’s rates. After Order

No. 380, Transwestern’s minimum bills only required cus-

tomers to pay about ten percent of the full commodity

charge for minimum bill volume not taken. Recognizing that

the record was closed before Order No. 380 eliminated

variable costs from minimum bill recovery, the Commission

based its finding on the anti-competitive impact of Trans-

western’s fixed-cost minimum bills on a prediction of how

those minimum bills would operate in the future in markets

served by Transwestern.

The Commission based this prediction on evidence in the

record, its knowledge of the industry, and common sense.

Specifically, the Commission identified three factors. First,

gas supplies available in the southern California and Kansas

City markets had exceeded demand for the past few years,

and the oversupply was likely to continue. Second, the Com-

mission analogized this situation to the treatment of require-

ments contracts under antitrust law. Where supply exceeds

demand, a requirements contract by its very nature fore-

closes competition. As an example, the Commission referred

to the situation in 1982 when lower-cost supplies were avail-

able from El Paso, yet Pacific was forced to purchase its

minimum bill volume from Transwestern. Third, the Com-

mission observed that a fixed-cost minimum bill would con-

tinue to compel a customer to buy gas from Transwestern

rather than from a lower-cost competitor. If the customer

bought gas from another supplier, it would still have to pay

the supplier for that gas and, in addition, pay Transwestern

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for the fixed-cost portion of the minimum bill volume not

taken. The customer who purchased alternative supplies

would suffer an economic loss unless the cost of such sup-

plies were lower by more than the amount of the fixed-cost

minimum bill—in other words, by more than ten percent of

Transwestern’s commodity charge. -

C. THE COMMISSION’S BALANCE

In its initial response to the Commission’s central conclu-

sion that Transwestern’s minimum bills unreasonably

restrained trade, Transwestern charges that the Commission

misunderstands the relationship between contracts and com-

petition. Transwestern claims that the Commission has mis-

applied antitrust concepts in its effort to demonstrate the

unlawfulness of Transwestern’s minimum bills. Transwest-

ern refers us to Justice Brandeis’ words of caution in Board

of Trade Vv. United States, 246 U.S. 231, 238, 38 S.Ct. 242,

244, 62 L.Ed. 683 (1918), that “[e]very agreement concern-

ing trade, every regulation of trade, restrains.” Transwestern

apparently feels that the Commission applied a per se rule to

strike down any contract which affected competition in natu-

ral gas sales.

Had the Commission simply determined that Transwest-

ern’s contracts with SoCal and Northwest restrained its cus-

tomers’ options to purchase gas from other suppliers, with-

out more, we would be unable to approve the Commission’s

reasoning. The Commission did not, however, apply such a

per se rule to eliminate Transwestern’s minimum bill

restraints. Instead, it used the very same “rule of reason”

analysis articulated by Justice Brandeis in Board of Trade.

The Commission explained its analysis in Opinion

No. 238-A:

[Bjefore we may find a contract term to be an unreason-

able restraint of trade we must carefully balance the

competitive harm the term causes against the term’s

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objectives in light of the alternatives available for

achieving those objectives. Only if on balance the term

causes more harm than is warranted in light of the

term’s objectives and the available alternatives, can we

find the term to be an unreasonable restraint of trade. It

was only after finding that on balance Transwestern’s

minimum bills caused more harm than was warranted

that we concluded that the minimum bills unreasonably

restrained trade and hence were unjust and unreason-

able. (footnotes omitted)

Transwestern urges that its contracts with its customers

constitute a “reasonable” restraint of trade. Transwestern

argues that its minimum bills are “considerably less

restraining” than exclusive dealing contracts or full-require-

ments contracts which courts have upheld under the anti-

trust laws. This invocation of court-made antitrust standards

is unpersuasive. The Commission does not enforce or apply

the antitrust laws. Cf California v. Federal Power Commis-

sion (FPC), 369 U.S. 482, 484-90, 82 S.Ct. 901, 903-06, 8

L.Ed.2d 54 (1962).

[2] The Commission’s authority to declare a practice

unlawful and to prescribe an appropriate remedy stems from

§§ 4 and 5 of the NGA. The fact that the Commission may

employ.a “rule of reason” analysis similar to that developed

by courts in antitrust cases does not subject its determina-

tion to a court rebalancing of the factors it deemed relevant.

When we review the Commission’s actions we are not free to

apply antitrust standards. Rather, our review examines the

Commission’s order to assure that it has given reasoned

consideration to the relevant evidence and factors before it,

not “to supplant the Commission’s balance of these interests

with one more nearly to [our] liking.” Permian Basin Area

Rate Cases, 390 U.S. at 792, 88 S.Ct. at 1373 (1968).

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D. POSSIBLE JUSTIFICATIONS

The Commission found that the probable consequence of

Transwestern’s imposition of a minimum bill on its two

partial-requirements customers would be to foreclose com-

petition and restrain trade. The Commission then consid- n

ered whether Transwestern’s minimum bills were justified.

In Atlantic Seaboard Corp.,’ the Commission identified three

“economic factors which usually justify a minimum com-

modity rate in a pipeline tariff.’ First, a minimum bill may

be justified as a means of protecting the pipeline against the

risk of not recovering fixed costs in the commodity com-

ponent. Second, a minimum bill may be justified as a means

of protecting full-requirements customers from bearing a

disproportionate share of fixed costs resulting from swings

off the system by partial-requirements customers. And third,

a minimum bill may be justified as a means of ensuring

equitable recovery from customers of a pipeline’s take-or-

pay costs.

1. FIXED-COST RECOVERY

[3] Under the Seaboard method of rate design, the com-

modity charge includes fixed production costs and 50

percent of fixed transmission costs, which include equity

return, related taxes, depreciation, and debt cost. The

remaining fixed costs are recovered through the demand

charge. The Commission found that Transwestern’s fixed-

cost minimum bills could not be justified on the basis that

they recovered fixed costs because the minimum bills

recovered costs which did not warrant risk-free recovery.

Specifically, the Commission determined that the costs of

depreciation and servicing the debt should be guaranteed,

but that equity return, related taxes, and fixed production

’ Atlantic Seaboard Corp., Opinion No. 553, 38 FPC 91,

(1967), affd, 404 F.2d 1268 (D.C.Cir. 1968) (an opinion i

rate from the Seaboard rate design opinion, supra note. 3).

A-16

costs should be subject to risk.* Since Transwestern’s mini-

mum bills guaranteed recovery of all fixed costs, they could

not be justified on this basis.

To permit fixed-cost recovery which is warranted, the

Commission adopted the modified fixed variable rate design.

Under this method, all fixed costs are assessed as parts of the

demand charge, except equity return, related taxes, and fixed

production costs. Thus, all fixed costs which Transwestern

should recover will be recovered through the demand charge

without the imposition of a minimum bill.

Transwestern responds that the Commission cannot pre-

scribe a new mechanism for the recovery of fixed costs

merely because it prefers it. Transwestern asserts that the

Commission must first find the existing provision unlawful

under § 5 of the NGA. The Commission, however, did not

eliminate Transwestern’s minimum bills because it preferred

the modified fixed variable rate design to the Seaboard

method. It first found the minimum bills unlawful because

they unreasonably restrained trade. It further found that

Transwestern’s minimum bills were not justified on the

ground that they permitted recovery of fixed costs that

should not be guaranteed, not because a new method of rate

design would better accomplish the purpose.

Transwestern next contends that there was no record evi-

dence that the modified fixed variable rate design would

assure the recovery of fixed costs assigned to the commodity

component. Transwestern claims there was no evidence that

its sales levels without minimum bills would remain suffi-

cient to recover those fixed costs the Commission left at risk.

This begs the issue. The point of the Commission’s determi-

nation was to subject certain fixed costs to market risks. The

Commission placed equity return at risk, because it did not

§ See Texas Eastern Transmission Corp., 30 FERC 961,144, reh.

granted in part and denied in part, 32 FERC 961,056 (1985).

A-17

think Transwestern should be guaranteed any profit. Rather,

Transwestern will earn profits only when it makes sales.

Similarly, the Commission’s conclusion that fixed produc-

tion costs should be fully at risk is based on a determination

that Transwestern should have the incentive to minimize

costs; such an incentive will motivate Transwestern to make

prudent gathering and production expenditures.’

Transwestern does not really dispute the underlying deter-

mination of cost allocation, but maintains that it should be

‘guaranteed a reasonable opportunity to earn a return on its

investment.”” The Commission’s decision here does not deny

Transwestern such a reasonable opportunity. The Commis-

sion has only refused to protect Transwestern’s profit from

competition and provided Transwestern what the Commis-

sion determined to be the appropriate incentive to run its

business efficiently. “[R]egulation does not insure that the

business shall produce net revenues.” FPC v. Natural Gas

* The Commission discussed this allocation and classification of

fixed costs at greater length in the Texas Eastern Transmission

Corp. order, see supra note 9. The Commission reasoned:

In the unregulated competitive world, profits are earned

and maximized only if the business manages its operations

efficiently and is capable of reading and acting upon price

signals to determine the appropriate level of customer

demand. As we move to increasing competition in the gas

pipeline industry, there is no economic reason to assure

pipeline profits where sales are not made. If equity return

and associated taxes are included in the commodity com-

ponent to be recovered over annual throughput, Texas East-

ern will earn profits only when it makes sales and transports

gas and will maximize its earnings by meeting and exceeding

its volume projections. This classification of profits holds the

pipeline responsible for its management decisions and pro-

vides necessary incentive to Texas Eastern to purchase gas

both at the quantity and at the price demanded by its cus-

tomers. We will therefore adopt a modified fixed variable

methodology ...in which the full equity return and associ-

ated taxes are at risk in the commodity charge of Texas

Eastern’s rates.

30 FERC 961,144 at 61,283 (footnote omitted).

A-18

Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed.

1037 (1942).

2. PROTECTION OF FULL-REQUIREMENTS

CUSTOMERS

[4] Minimum bills may also be justified on the ground

that they protect full-requirements customers from bearing a

disproportionate share of fixed costs should partial-require-

ments customers reduce purchases in favor of alternative

supplies. Presumably, a substantial swing off the system by

one customer could result in higher rates for all customers,

since more fixed costs would have to be recovered per unit of

gas sold.

Transwestern does not argue on appeal that its minimum

bills can be justified on the basis of protecting full-require-

ments customers. Furthermore, Transwestern did not seek

to justify its bills before the Commission on this basis. The

Commission chose to consider this justification out of fair-

ness to Transwestern’s full-requirements customers, even

though such full-requirements customers account for less

than one-half percent of Transwestern’s gas sales and did not

intervene before the Commission. We too address the justifi-

cation to determine that the end result is not unjust.

The Commission rejected this possible justification based

on evidence that actual rate increases were “modest,” that

any impact on Transwestern’s full-requirements customers

would be short-term, and that Transwestern has taken

numerous steps to reduce its gas costs so that it can compete

for sales to its partial-requirements customers. Such . ost

reduction will benefit full-requirements customers whose

rates also reflect gas costs. It is also significant that Trans-

western’s partial-requirements customers account for 99.5

percent of Transwestern’s total gas sales. Since Transwestern

will certainly want to maintain sales to these customers, it

stands to reason that it will seek to make its gas even more

A-19

competitive. If it does so, its full-requirements customers

will benefit in the long run. In any event, Transwestern’s

minimum bills cannot be justified on the basis that they are

needed to protect full-requirements customers.

3. TAKE-OR-PAY OBLIGATIONS

[5] Transwestern’s third possible justification is the most

superficially appealing. It concerns the recovery of take-or-

pay obligations governing wellhead sales between it and its

producers. Under a take-or-pay contract, a pipeline must

take or pay for a minimum amount of gas. If partial-require-

ments customers purchase gas from another supplier, the

pipeline may be unable to sell as much gas as it is obligated

to purchase. The pipeline will then have to pay producers for

gas it does not take. Take-or-pay liabilities, if prudently

incurred, become a fixed cost on the system and can be

passed on to customers in the form of increased rates. A

minimum bill can be justified as a means of ensuring equita-

ble recovery of take-or-pay costs from all customers. In

Order No. 380, the Commission recognized that this justifi-

cation is another way of assuring protection of full-require-

ments customers from the actions of partial-requirements

customers. The Commission has always given such take-or-

pay questions “special consideration,” as it has done here.

The Commission recognized that a minimum bill may be

permissible if used to ensure that carrying costs associated

with take-or-pay liabilities will be borne by the customers

that caused the liabilities to be incurred. The Commission,

however, found no connection between the minimum bill

payments the customers made under Transwestern’s rate

schedules and the carrying costs associated with take-or-pay

liabilities that Transwestern could legitimately recover from

its partial-requirements customers. Accordingly, the Com-

mission found that Transwestern’s minimum bills were not

justified on the ground that they ensured equitable recovery

A-20

from Transwestern’s customers of costs associated with take-

or-pay liabilities.

Transwestern does not really argue that its minimum bills

are necessary to ensure equitable recovery of take-or-pay

costs from all customers. Rather, Transwestern asserts that it

has enormous take-or-pay obligations and that its minimum

bills, even though “not precisely calibrated” to the level of

its take-or-pay liability, still serve the purpose of recovering

the cost of take-or-pay payments.

Transwestern acknowledges that the Commission has

instituted alternative approaches to an industry-wide take-

Or-pay crisis, but asserts that the Commission is avoiding its

responsibility to deal adequately with the dilemma. Trans-

western claims that the Commission in Order No. 380 used

the same “alternative approaches” argument to postpone its

duty to find an adequate solution. In Wisconsin Gas Co., 770

F.2d at 1159-60, the D.C. Circuit deferred to the Commis-

sion’s discretion to deal with take-or-pay issues in separate

proceedings.

The take-or-pay issue posed here is a separate matter

which is being addressed in other proceedings before the

Commission and through other means. Indeed, Transwest-

ern currently has a proposal before the Commission to allo-

cate costs of settling take-or-pay liability directly to the

customers who caused such costs to be incurred. The Com-

mission is not ignoring the issue. None of Transwestern’s

contentions invoke any proper take-or-pay justification.

The take-or-pay question is, moreover, a hypothetical

issue on the record in this case. No evidence advanced

indicates that Transwestern has actually made any payments

to producers under its take-or-pay contracts. The Commis-

sion’s decision to confront the potential take-or-pay problem

through alternative approaches and in other cases has not

been shown to be unreasonable, arbitrary, or capricious.

A-21

4. OTHER JUSTIFICATIONS

[6] The presiding ALJ considered an additional justifica-

tion for Transwestern’s imposition of a minimum bill. El

Paso had settled on, and the Commission had approved, a

60 percent minimum bill for SoCal. Accordingly, the ALJ set

Transwestern’s minimum bill level at 60 percent, the same

level as its major competitor. The basis of this determina-

tion was that Transwestern should not be placed in eco-

nomic jeopardy.

The Commission found that setting the pipeline’s mini-

mum bill on the basis of other pipelines’ minimum bills

ignores the consumers. If a 60 percent minimum bill is anti-

competitive it cannot be justified on the basis that it meets

one other competitor. If that were not so El Paso could

justify its SoCal minimum bills on the basis of Transwest-

ern’s at its next rate hearing. This ping-pong effect could

mean that consumers would never be free of the unwar-

ranted cost. We are similarly convinced that there is no basis

for this justification. Finally, the record shows that as part of

an approved settlement, El Paso’s minimum bills will be

placed at the same level as Transwestern’s, which means

they both will be eliminated.

E. SUFFICIENCY OF THE RECORD

[7] Transwestern’s principle attack on the substance of

the Commission’s determination actually centers on what it

considers to be a deficient record due to the modification of

its minimum bills to exclude variable-cost recovery after

Order No. 380. Since the record was created on the assump-

tion that the lawfulness of full-cost niinimum bills were at

issue, Transwestern claims that there was no evidence before

the Commission with respect to the competitive impact of

fixed-cost minimum bills.

A-22

In its opinions, the Commission acknowledged that the

variable-cost portion of Transwestern’s minimum bills had

been eliminated pursuant to Order No. 380. The Commis-

sion, however, was not without record evidence to rule on

the lawfulness of the fixed-cost portion of Transwestern’s

minimum bills. Fixed costs are part of full-cost minimum

bills. The question whether full-cost minimum bills should

be entirely eliminated necessarily encompasses the question

whether the fixed-cost portion should be eliminated also.

The issues were squarely presented in the hearings before the

record was closed. Kansas Power and Light Company, an

intervenor before this court and a party before the Commis-

sion, supported only the elimination of variable costs, while

the Commission staff and the Governor of California (also

parties to the proceedings) argued for the elimination of

both variable and fixed costs.

Transwestern had a full, fair opporfunity to present evi-

dence on the lawfulness of its fixed cost minimum bills. The

Commission was not obligated to postpone a decision on the

lawfulness of Transwestern’s minimum bills until the record

was supplemented with evidence of Transwestern’s actual

experience with only fixed-cost recovery. The Commission

fulfilled its responsibility to make “‘a conscientious effort to

take into account what is known as to past experience and

what is reasonably predictable about the future.” Wisconsin

Gas, 770 F.2d at 1158 (quoting American Public Gas Asso-

ciation V. FPC, 567 F.2d 1016, 1037 (D.C. Cir. 1977), cert.

denied, 435 U.S. 907, 98 S.Ct. 1456, 55 L.Ed.2d 499 (1978)).

The evidence was sufficient to support the Commission’s

finding that even fixed-cost minimum bills could coerce

SoCal and Northwest into purchasing higher-cost gas from

Transwestern instead of alternative, lower-cost supplies.

eee rey

A-23

F. THE TERMINATION OF THE INVESTIGATION

OF THE OTHER PIPELINES

[8] Another issue raised by Transwestern which is

related to the sufficiency of the record upon which the Com-

mission rendered its decision involves the Commission’s

investigation of the other interstate pipelines supplying

California.'° Transwestern contends that the Commission’s

competitive impact findings were lacking in support because

evidence of Transwestern’s competitors’ minimum bills was

not before the Commission. Transwestern submits that the

Chief ALJ consolidated the Transwestern proceeding with

the investigation of these other pipelines and with the

El Paso proceeding so that the question of the lawfulness of

Transwestern’s minimum bills would not be decided in a

vacuum. Transwestern charges that the Commission, which

initially affirmed the Chief ALJ’s consolidation decision,

discontinued its investigation without adequate explanation

why it was reversing the Chief ALJ’s findings. Transwestern

argues that this action along with the Commission’s refusal

to reopen the record after the entry of Order No. 380 was

arbitrary, an abuse of discretion, and a denial of due process.

In Opinion No. 238-A, the Commission correctly rejected

these additional claims that the record was deficient. The

possible competitive effect of the other pipelines’ minimum

bills cannot alter the determination that Transwestern’s

minimum bills had an adverse cost effect on its customers.

This finding is supported by substantial evidence in the

record. Just as was the case with regard to El Paso, Trans-

western’s minimum bills cannot be justified by the existence

of other pipelines’ minimum bills.

'0These other pipelines are distributor-affiliated pipelines; they

include Pacific Gas Transmission Co.; Pacific Interstate Trans-

mission Co.; Pacific Offshore Production Co.; and Pacific Inter-

state Offshore Co.

A-24

[9] Furthermore, the Commission possesses broad dis-

cretion to organize its case-load and to determine which

issues are to be decided. Fort Pierce Utility Authority Vv. FPC,

526 F.2d 993, 999 (Sth Cir.1976); Louisiana Power & Light

Co. V. FPC, 526 F.2d 898, 910 (Sth Cir.1976). The Commis-

sion severed the Transwestern proceeding and terminated its

investigation because tt determined that Order No. 380,

related rehearings, and other events had mooted most of the

issues in the consolidated proceeding. The Commission

determined that it was more efficient to deal with the issue of

the lawfulness of fixed-cost minimum bills on an individual

basis. This action was neither arbitrary nor an abuse of the

Commission’s administrative discretion.

Transwestern also claims that the Commission’s actions

denied it due process but offers no legal basis for this asser-

tion, and we can find none. To the contrary, the record

demonstrates that Transwestern had a full, fair opportunity

to address and submit evidence on the lawfulness of its

fixed-cost minimum bills.

G. BURDEN OF PROOF

In Opinion No. 238, the Commission erroneously held

that Transwestern bore the burden of proving that its mini-

mum bills were lawful. In Opinion No. 238-A, the Commis-

sion corrected this holding in reliance on ANR Pipeline Co.

Vv. FERC, 771 F.2d 507, 514 (D.C.Cir.1985), and placed the

burden of proof on the parties supporting a change in Trans-

western’s minimum bills. Transwestern contends that the

Commission has attempted to obscure the burden of proof

issue and that, despite its formal correction, it really did

place the burden on Transwestern to justify its minimum

bills.

[10] The Commission required that the parties challeng-

ing Transwestern’s minimum bills demonstrate that the

fixed-cost minimum bills restrained trade. Transwestern

A-25

submits that this is no burden at all because every contract

restrains trade. But, as we discussed in a previous section,

the Commission did not simply determine that Transwest-

ern’s minimum bills constituted a restraint; rather, the Com-

mission found the minimum bills were shown to be anti-

competitive based on evidence in the record concerning

their purpose, past experience with Transwestern’s full-cost

minimum bills, and the probable consequence that fixed-cost

minimum bills would have in the future. This evidence

satisfied the challenging parties’ burden of showing that the

inclusion of minimum bills in Transwestern’s rate schedules

would cause competitive harm. The Commission then

looked to see whether Transwestern had demonstrated jus-

tifications for the minimum bills. The burden placed on

Transwestern was not a burden of persuasion. Transwestern

was not required to prove by a preponderance of the evi-

dence that its minimum bills were justified. Rather, it was a

burden of production under which Transwestern was obli-

gated merely to proffer justifications for its minimum bills.

The ultimate burden of proving competitive harm remained

on the parties challenging Transwestern’s minimum bills

and seeking their elimination.

Before the Commission, Transwestern did not attempt to

justify its minimum bills on the ground that they protected

full-requirements customers from cost-shifting due to fixed

costs prudently incurred or even costs associated with take-

or-pay payments. Yet, the Commission thoroughly consid-

ered each of those_justifications, as well as Transwestern’s

assertions that it should recover all its fixed-costs through

the guaranteed mechanism of a minimum bill. The Commis-

sion found that Transwestern’s minimum bills were not

justified, in light of the competitive harm. There was no

impermissible shift of the burden of proof to Transwestern.

A-26

H. STATUTORY AUTHORITY >

[11, 12] Transwestern challenges the Commission’s stat-

utory authority to impose the remedy of total elimination of

minimum bills on the basis that abrogation of its minimum

bills constitutes an unlawful revocation or modification of

its certificate of public convenience and necessity issued

under § 7 of the NGA. The D.C. Circuit rejected this argu-

ment in Wisconsin Gas Co., 770 F.2d at 1153 n. 9, and we

reject it here. Section 7 does not guarantee that the original

conditions upon which the certificate was authorized will

never change. See Atlantic Refining Co. v. Public Services

Commission, 360 U.S. 378, 389, 79 S.Ct. 1246, 1253, 3

L.Ed.2d 1312 (1959). Section 5 of the NGA expressly

empowers the Commission to change rates or practices, such

as the fixed-cost minimum bills at issue here, if such provi-

sions become unjust and unreasonable. While elimination of

the minimum bills alters rates, it does not affect Transwest-

ern’s authorized service under its certificate.

Il. SUMMARY

We uphold the Commission’s orders which eliminated

Transwestern’s minimum bills and which terminated the

Commission’s investigation into the minimum bill practices

of the other interstate pipelines supplying California. The

Commission’s conclusion that Transwestern’s minimum

bills unreasonably restrained trade was based on substantia!

evidence. It was not necessary for the Commission to delay

its decision in order to permit supplementation of the record

with evidence of the effects of operations after the modifica-

tion of Transwestern’s fixed-cost minimum bills by Order

No. 380. The Commission did not abuse its discretion by

terminating the other investigations. The Commission’s

decision to eliminate Transwestern’s minimum bills in their

entirety was neither arbitrary nor capricious, but was a

A-27

proper exercise of the Commission’s authority to regulate

rates and practices of interstate pipelines under the Natural

Gas Act.

The Commission’s opinions in Nos. 238 and 238-A and its

related orders which terminated the investigation of other

interstate pipelines are

AFFIRMED.

B-1

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Nos. 85-4597 and 86-4550

TRANSWESTERN PIPELINE COMPANY,

Petitioner,

versus

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

ON PETITIONS FOR REVIEW OF ORDERS OF THE

FEDERAL ENERGY REGULATORY COMMISSION

Before CLARK, Chief Judge, THORNBERRY, and

HIGGINBOTHAM, Circuit Judges.

JUDGMENT

This cause came on to be heard on the petitions of the

Transwestern Pipeline Company for review of orders of the

Federal Energy Regulatory Commission, and was argued by

counsel.

ON CONSIDERATION WHEREOF. It is now here

ordered and adjudged by this Court that the petitions for

review of orders of the Federal Energy Regulatory Commis-

sion in this cause are granted, and the orders of the Federal

Energy Regulatory Commission are affirmed.

July 7, 1987

ISSUED AS MANDATE: | July 29, 1987

—————

C-1

APPENDIX C

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

PIPELINE RATES: MINIMUM BILLS

RATE DESIGN

Before Commissioners: Raymond J. O’Connor,

Chairman;

Georgiana Sheldon, A. G. Sousa

and Charles G. Stalon.

Transwestern Pipeline Company

Docket Nos. RP81-130-007,

RP81-130-017,

RP81-130-018,

RP81-130-019,

RP81-130-020,

RP81-130-022,

and RP83-25-000

OPINION NO. 238

OPINION AND ORDER ELIMINATING MINIMUM

COMMODITY BILLS AND ESTABLISHING A

JUST AND REASONABLE RATE DESIGN

4 (Issued July i, 1985)

I. INTRODUCTION

Before us for review are exceptions to an administrative

law judge’s initial decision.’ The principal issues raised by

these exceptions are:

(1) Should the minimum commodity bills in Transwest-

ern Pipeline Company’s (Transwestern) rate schedule

be modified or eliminated?

(2) If the minimum commodity bills are modified or

eliminated, should the method Transwestern uses to

' Transwestern Pipeline Co., 29 FERC 4 63,054 (1984).

C-2

classify and allocate costs and design its rates be

modified?

Based on our review of the record we hold that the mini-

mum bills should be eliminated. We also hold that the

méthod Transwestern uses to classify and allocate costs and

design its rates should be changed and find that Transwest-

ern should use the modified fixed-variable method advo-

cated by the Commission staff.

II. PROCEDURAL HISTORY

The procedural history of this case is tortured. But the

essentials of the story can be rather simply told. The case

began on August 28, 1981, when Transwestern filed, pursu-

ant to section 4 of the Natural Gas Act, increased rates for

its customers. The Commission suspended the effectiveness

of the increased rates for five months, the maximum suspen-

sion permitted by the Act, allowed the increased rates to

become effective subject to refund on February 28, 1982,

and directed that a hearing be held concerning the reason-

ableness of the increased rates.2 The increased rates

remained in effect until June 1, 1983, when they were super-

seded by the increased rates Transwestern filed in Docket

No. RP83-25.

After numerous discussions the parties settled most of the

disputes concerning the reasonableness of the increased

rates. The parties, however, were unable to settle disputes

concerning, among other things, the reasonableness of

Transwestern’s minimum commodity bills and its method

for classifying and allocating costs and designing rates. The

parties accordingly agreed that these disputes would be

reserved for hearing and Commission decision. Specifically,

the parties agreed that “the outcome of the reserved issues

2 Transwestern Pipeline Co., 16 FERC 961,240 (1981).

C-3

shall be prospective from the date on which a Commission

order determining such issues becomes final.’”

This settlement was filed with the Commission on

February 25, 1983, and approved by the Commission on

May 2, 1983.* Hearings on the reserved issues were held in

June and July of 1983. The law judge issued an initial

decision on some of the reserved issues, which are not here

material, on January 10, 1984.° The law judge issued his

initial decision concerning the issues now before us on

December 11, 1984.

Ill. THE FACTS

Transwestern provides firm service to two partial require-

ments customers, Pacific Lighting Gas Supply Company

(Pacific) and Northwest Central Gas Company (Northwest

Central).° The Commission first authorized Transwestern to

provide service to Pacific in 1959 when it issued a certificate

of public convenience and necessity to Transwestern to con-

struct a pipeline from the Permian Basin and the Texas-

Oklahoma Panhandle area to Needles, California, and sell

up to 350,000 Mcf per day to Pacific.’ Pacific, in turn, was to

deliver Transwestern’s gas, along with gas it purchased from

El Paso Natural Gas Company (El Paso) and other suppliers,

to its affiliates — now consolidated into one company,

Southern California Gas Company (SoCal) — which would

3 Exh. 106, p. 14 (Art. V).

* Transwestern Pipeline Co., 23 FERC 9 61,209 (1983).

> Transwestern Pipeline Co., 26 FERC 4] 63,008. aff'd, 27 FERC

9 61,255 (1984).

° Pacific and Northwest Central are, for all practical purposes,

Transwestern’s only customers. Historically, their purchases

have accounted for about 99 percent of Transwestern’s sales.

Exh. 85, p.4.

’ Transwestern Pipeline Co., Opinion No, 328, 22 FPC 391,

modified, Opinion No. 328-A, 22 FPC 542 (1959).

C-4

resell the gas at retail and wholesale throughout the southern

California market.’ Over the years the Commission has

issued additional certificates to Transwestern to expand

facilities and to sell 750,000 Mcf per day to Pacific.’

The Commission authorized Transwestern to provide

service to Northwest Central in 1965 when it issued a certifi-

cate to Transwestern to construct certain facilities and to sell

100,000 Mcf per day to Cities Services Gas Company, which

is now Northwest Central.'° Northwest Central was, in turn,

~ to deliver the gas, along with gas it purchased from other

suppliers, in its market area of eastern Kansas and western

Missouri but principally to the Gas Service Company (GSC),

which distributes gas in the Kansas City metropolitan area. _

In 1967 the Commission issued Transwestern another certif-

icate that authorized Transwestern to sell an additional

150,000 Mcf per day to Northwest Central.’

In issuing the 1959 certificate for service to Pacific and the

two certificates for service to Northwest Central, the Com-

mission granted the request of Transwestern and its cus-

tomers to condition each certificate on Transwestern’s filing

an initial rate schedule. The rates in the initial schedule for

service to Pacific, now known as CDQ-1, were developed

using the Seabord method” of cost classification, cost allo-

cation, and rate design.'? Under this method 50 percent of

* Historically, SoCal has served about 99 percent of the total gas

needs of the southern California market. Exh. 48, p. 2.

° Transwestern Pipeline Co., Opinion No. 500, 36 FPC 176,

modified, Opinion No. 500-A, 36 FPC 1010 (1966); Transwest-

ern Pipeline Co., 41 FPC 134 (1969). ;

'0 Transwestern Pipeline Co., Opinion No. 472, 34 FPC 659

(1965).

'! Transwestern Pipeline Co., Opinion No. 472, 34 FPC 659

(1965).

'2 Atlantic Seaboard Corp., Opinion No. 225, 11 FPC 43 (1952).

'3 Transwestern Pipeline Co., 22 FPC at 394.

C-5

Transwestern’s fixed transmission costs and all its ‘‘as-

billed” fixed costs are classified to the demand component

while its remaining fixed transmission costs plus ali its fixed

production costs and all its variable costs are classified to the

commodity component. A demand rate is then developed to

recover the costs included in the demand component, and a

commodity rate is developed to recover the costs included in

the commodity component. The schedule also included a 91

percent minimum annual commodity bill provision’ and, in

effect, because Pacific had agreed to take no less than 75

percent of its daily contract demand, a monthly minimum

bill."

The rates in the initial schedules for Northwest Central,

now known as CDQ-2 and CDQ-3,'° were developed using a

method upon which Transwestern and Northwest Central

had agreed.'’ Both schedules also included 90 percent mini-

mum annual commodity bills.

Over the years, there have been some changes in the three

rate schedules since Transwestern first filed them in compli-

ance with its certificates. But only two are of note. First,

Transwestern now uses the same method to develop

Northwest Central’s rates as it does to develop Pacific’s

rates. That method has generally been the Seabord method."*

'4 Transwestern Pipeline Co., 22 FPC at 394, 543.

'S Td. at 410.

‘© Rate Schedule CDQ-2 governs deliveries to Northwest Central

Oklahoma; Rate Schedule CDQ-3 governs deliveries in

exas.

'’ Transwestern Pipeline Co., 34 FPC at 663, 680.

'8 For a brief period in the late 1970’s and early 1980’s Trans-

western developed its rates using the United method. It did so

in Docket Nos. RP77-19, RP78-88, and in this case. Under the

United method 25 percent of the fixed transmission costs are

classified to the demand component and 75 percent to the

commodity component. See United Gas Pipeline Co., Opinion

No. 671, 50 FPC 1348 (1972).

C-6

Secondly, the monthly minimum bill for Pacific was modi-

fied because Pacific had agreed to an 80 percent minimum

daily take obligation.'’

Thus, for a number of years the customers’ payments have

been determined in the following way: In each month Pacific

and Northwest Central pay both a demand charge and a

commodity charge. The demand charge is determined by

multiplying the demand rate by each customer’s contract

demand by the days in the month. The contract demand

equals the amount of gas Transwestern is obligated by its

certificates to deliver each day to its customers. In the case of

Pacific this amount is 750,000 Mcf, and in the case of

Northwest Central it is 250,000 Mcf. The commodity charge

is determined by multiplying the commodity rate by the

amount of gas each customer takes in the month. Because it

is obligated to take each day 80 percent of its contract

demand, Pacific’s monthly commodity charge is based on a

take of at least 600,000 Mcf per day.”

In addition to these basic charges, each customer may pay

minimum annual bill charges to Transwestern. There are,

however, significant differences between the charges the two

customers may pay. The minimum annual bill in the rate

schedule for Pacific provides that in each year Pacific will

pay at a minimum the demand charge for each month plus

an amount equal to 91 percent of the annual contract quan-

tity (ACQ) multiplied by the commodity rate. The ACQ is

In its most recent rate case, Docket No. RP83-25, Transwestern

has returned to the Seabord method. See Transwestern Pipeline

Co., Docket No. 83-25 (July 1, 1983) (letter order). Since our

order in this proceeding will be prospective, the currently effec-

tive Seabord method is, as the law judge correctly noted, 29

Seay at 65,154, the relevant methodology to be considered in

this case.

19 See Exh. 22.

20.80 X 750,000 Mcf = 600,000 Mcf).

C-7

simply the daily contract demand quantity of 750,000 Mcf

multiplied by the days in the years, or 273,750,000 Mcf. If

Transwestern is unable to deliver at least 91 percent of this

amount, Pacific must pay an amount equal to the amount

Transwestern actually delivers. Thus, over the course of the

year Pacific must take or pay as if it had taken an average of

682,500 Mcf per day or such lesser amount as Transwestern

tenders.

The minimum annual bill applicable to Northwest Central

provides that in each year Northwest Central will pay the

demand charge for each month plus an amount equal to 90

percent of the contract demand quantities specified in the

service agreements multiplied by the number of days in the

year multiplied by the commodity rate. This is only slightly

different from the minimum annual bill applicable to

Pacific, which requires it to take or pay for 91 percent of its

annual contract quantity. A more significant difference, how-

ever, is that the contract demand quantities the service

agreements specify to be used in calculating the minimum

commodity bills do not equal the 250,000 Mcf Transwestern

is obligated to deliver. Both service agreements provide that,

if over the course of a year Transwestern is unable for

various reasons to deliver on average the daily contract

demand quantity, the average daily quantity Transwestern

was able to deliver shall be the new contract demand quan-

tity used in calculating the minimum bill for that year and

every year thereafter. During the 1970’s Transwestern was in

severe curtailment and hence was unable to deliver any-

where near 250,000 Mcf per day to Northwest Central.”'

Thus, the contract demand used in calculating Northwest

Central’s minimum bills is now significantly less than

250,000 Mcf per day. According to Transwestern and

21In 1978 Transwestern’s curtailment was 39.6 percent of its

total certificate obligations. Exh. 1, p. 5.

C-8

Northwest Central, the minimum annual bills require

Northwest Central to take or pay as if it had taken only

about 59 percent of the 250,000 Mcf Transwestern is obli-

gated to deliver.”

IV. TRANSWESTERN’S MINIMUM BILLS ARE

UNLAWFUL

For a number of years the customers had few complaints

about the operation of Transwestern’s rate schedules. This

changed in 1982. In that year both Pacific and Northwest

Central had more gas available from Transwestern and their

_ other suppliers than they needed to meet demand.” There

22 During the hearing there was a dispute concerning the interpre-

tation of the two service agreements. The staff's witness con-

cluded that, because of a difference in the wording of the two

agreements, Northwest Central’s minimum bill obligation was

considerably higher than 59 percent. Exh. 85, p. 35.

The difference of opinion between the staff, on the one hand,

and Transwestern and Northwest Central, on the other, was

resolved after the hearing when, in his first initial decision,

26 FERC at 65,0171-18, the judge ordered Transwestern to file

a contract between it and Northwest Central. Exh. 92. This

contract provides that the service agreements will be inter-

preted as providing that the amounts Transwestern delivered to

Northwest Central in 1978 are the contract demands to be used

in calculating the minimum bills. See alse Exh. 67, p. 4 and the

judge’s initial decision in this part of the case, 29 FERC at

65,154. Since this contract is now on file, it is controlling.

3 For Pacific it is quite clearly established that 1982 represented

a change in the relationship of its supply to its demand. See

Exh. 55, p. 16; Exh. 60; Exh. 82, p. 3. According to SoCal’s

operating records for 1982, surplus supplies available to it

directly or indirectly through Pacific exceeded sales by about

oa = per day an average for the whole year. Exh. 82, p. 4;

xh. 83.

The ry surplus for Northwest Central may have begun

before 1982. The record is not sufficiently well-developed con-

cerning Northwest Central’s situation to permit us to be pre-

cise. But it is clear that in 1982 Northwest Central’s supplies

exceeded its demand. In that year Northwest Central met its

total demand while only purchasing about 55 percent of the gas

available to it from Transwestern. Exh. 67, p. 4.

C-9

were a number of reasons for that. In part it was an after-

effect of Transwestern’s curtailment in the 1970’s. In

response to being curtailed, both customers developed other

sources of supply.”* Those projects began to produce in the

early 1980s.” In part the oversupply was also a consequence

of the recession.”*° And in part it was also a consequence of

the increase in gas prices since 1978. Residential customers

conserved gas and switched to electricity,”’ while industrial

customers switched to fuel oil, which had become

competitive.”

Thus, both Pacific and Northwest Central had to reduce

their purchases from their suppliers. And they had to reduce

the price at which they sold their gas. Since Transwestern

was a high cost supplier for both, they should have reduced

*4For Pacific, see Exh. 51, p. 4; for Northwest Central, see

Exh. 69, p. 6; Tr. 3173.

25 For Pacific, see Exh. 51, pp. 4-5. For Northwest Central, see

Tr. 3167.

= Te. S392.

27 The record shows that SoCal’s residential customers’ average

annual usage per meter declined from 101 Mcf in 1973 to 77

Mcf in 1982. Exh. 48, P. 6. The record does not provide

comparable information for residential customers that buy gas

from Northwest Central’s customers, such as GSG. But we

assume that consumers in Kansas and Missouri are no different

from consumers in southern California.

8 Exh. 48, p. 4; Exh. 67, p. 6: Tr. 3196.

SoCal has six utility electric generating (UEG) customers. Each

has the ability to switch from gas to fuel oil. SoCal’s second

largest UEG customer, the Los Angeles Department of Water

and Power, took relatively little gas after May, 1982, when it

switched from gas to oil for most of its “‘non-episodic days”

operation. Tr. 2606. Because of the loss of this load SoCal’s

total sales in 1982 were reduced by 25-30 Bcf. Jd. And in

January and February, 1983, SoCal’s largest UEG customer,

Southern California Edison Company, switched from gas to oil.

Exh. 48, p. 4. This switch alone reduced SoCal’s sales by 12

Bcf. Tr. 2576. Northwest Central’s experience was similar. See

Exh. 67, p. 6.

C-10

their purchases from Transwestern and increased their

purchases from their lower cost suppliers.” But they did

not” because of the necessity of meeting Transwestern’s

minimum bill obligations.*! The net effect of Pacific’s and

Northwest Central’s doing so was that consumers paid more

for gas than they might otherwise have” and competitors

were excluded from the markets.”

29 Of the six suppliers available to Pacific and SoCal, Transwest-

ern had the second highest price. Exh. 55, p. 14. And of the five

sources of supply available to Northwest Central, Transwestern

also had the second highest price. See Tr. 3166-69, 3217-18.

30 For example, in the fourth quarter of 1982, Pacific and SoCal

purchased on average 657 MMcf per day from Transwestern

and 1,270 MMcf per day from El Paso although El Paso could

have supplied far more gas and at a lower price. Exh. 38, p. 8.

Northwest Central also had availabie to it gas at a price lower

than Transwestern’s. Tr. 3169.

31 See Exh. 38, p. 8.

* According to one estimate, in 1982 consumers in southern

California paid about $49 million in increased gas costs as a

result of Transwestern’s minimum bill. Exh. 82, p. 6; Exh. 84.

The record does not provide a similar estimate for Northwest

Central. But the same appears to be true for the consumers in

Kansas and Missouri it serves. In 1982 Transwestern supplied

about 16 percent of Northwest Central’s gas. But Transwest-

ern’s gas constituted about 21 percent of Northwest Central’s

gas costs. Exh. 67, p. 4.

33 For example, in November, 1982, when Pacific and SoCal were

buying gas from Transwestern to meet its minimum bill

requirements, SoCal sold 78,765 MMcf. Of this total SoCal

purchased 43.4 percent, or 34,323 MMcf, from El Paso and

27.3 percent, or 21,561 MMcf, from Transwestern. Exh. 83.

Yet El Paso could have supplied 66.7 percent, or 52,573 MMcf.

Id. Thus, since the price of El Paso’s gas was lower than

Transwestern’s, Transwestern’s minimum bill foreclosed El

Paso from about 23.3 percent of the southern California gas

market. And for the eight months in 1982 after the southern

California market changed to a demand constrained market,

Transwestern’s minimum bill foreclosed El Paso from about

15.2 percent of the market. /d.

C-11

Since it is likely that for some vears in the future both

Pacific and Northwest Central will continue to have availa-

ble more gas than they need to meet demand, both had

reason to complain about Transwestern’s minimum bills.”

And they did, along with some of their customers, suppliers,

affected state commissions, and our staff. At the hearing and

in their briefs to the judge they all argued that Transwest-

ern’s minimum bill and minimum take provisions were

unlawful. This is so, they satd, because the minimum bill

and minimum take provisions:

(1) Restrain trade by forcing Pacific and Northwest Cen-

tral to buy gas from Transwestern when they could

buy gas at a lower price from other suppliers.

(2) Require Pacific and Northwest Central to pay

Transwestern for costs it does not incur in providing

service to them. This is necessarily so because

Transwestern’s minimum bills take effect only when

its customers do not buy gas. In such situations

Transwestern incurs no variable costs. Yet the com-

modity rate used in calculating the minimum bills

recovers variable costs.

(3) Unduly discriminate against Pacific and unduly favor

Northwest Central.*°

Transwestern of course took the opposite position.

In his initial decision, the law judge did not address the

intervenors’ and the staffs first two arguments. Though not

expressly stated, the reason the judge did not is readily

apparent. It is because we addressed and resolved these

rguments on a generic basis before the judge issued his

34 See infra note 71.

** All the intervenors made the first argument, and some also

made the second while others made the third. The staff made

all three arguments.

C-12

decision.** We did so in Order No. 380.*’ In that order, we

held that all minimum commodity bill provisions that, like

Transwestern’s, operate to recover variabie costs and all

provisions that, like the minimum take provision in Trans-

western’s service agreement with Pacific, compel a customer

to take and pay for a specified minimum volume of gas are

unlawful because they permit piplelines to charge customers

for costs not actually incurred and restrain, without ade-

quate justification, competition among pipelines by forcing

the customers of one pipeline to buy gas from it when less

costly gas is available from other pipelines. Accordingly, we

ruled that all existing rate schedules and tariffs shall be

inoperative to the extent they provide for a minimum com-

modity bill that recovers variable costs or require a customer

to physically take a minimum amount of gas.

The judge, however, did address the argument that Trans-

western’s minimum bill and minimum take provisions

unduly discriminated against Pacific and unduly favored

Northwest Central. He found that they did. Because they did

so, the judge concluded that Transwestern’s minimum bills

“in their entirety” were unlawful and had to be modified.

The judge also noted that, because of the settlement, Trans-

western’s minimum bills would be modified on a prospective

basis only. Transwestern, our staff, the California Public

Utilities Commission (CPUC), GSC, Northwest Central,

and Pacific except.

36 See 29 FERC at 65,156.

37 Elimination of Variable Costs from Certain Natural Gas Pipe-

line Minimum Commodity Bill Provisions, Order No. 380, 27

FERC 961,318, FERC Stats. & Regs. 9 30,571; Order No.

380-A, 28 FERC 961,175, FERC Stats. & Regs. 9 30,584;

Order No. 380-B, 29 FERC 961.076; Order No. 380-C, 29

FERC 461,077, FERC Stats. & Regs. 9 30,606; Order No.

380-D, 29 FERC 461,332 (1984), appeal docketed sub nom.

ger ry Gas Co. v. FERC No. 84-1358 et al. (D.C. Cir. July

a ).

C-13

GSC contends that the judge erred in failing to address the

argument that Transwestern’s minimum bills are unlawful

because they require customers to pay Transwestern for

costs it does not incur. In making this argument GSC

recognizes, as it must, that in Order No. 380 we held that all

minimum bills are unlawful to the extent they require cus-

tomers-to pay for costs not incurred. Nevertheless, GSC

argues that the judge should have made that same finding

based on the record here. The argument is that a case-

specific finding is necessary to provide Transwestern’s cus-

tomers with “the additional protection that a case-specific

determination of the applicability of relief equivalent to that

of Order No. 380 to Transwestern would provide” if Order

No. 380 is overturned on appeal.”

The problem with this argument, however, is that we

resolved by rule the issue concerning the inclusion of vari-

able costs in the rate used to calculate minimum bills in part

to simplify numerous cases then pending before us and our

administrative law judges.*? Hence we cannot fault the judge

for doing what we intended.*’ And we cannot see what is to

8 Brief on Exceptions for GSC at 17.

*° Order No. 380, slip op. at 46; Order No. 380-A, slip op. at 51.

4° GSC disputes this point. It argues that in light of Order No. 380

the judge had a “duty” to consider the argument concerning the

inclusion of variable costs in the rate. To support this argument

GSC quotes our statment in Order No. 380, slip op. at 51, that

ongoing cases “will obviously be affected.... This does not

mean, however, that any of these cases will necessarily be

terminated. ...[T]he Commission expects ongoing cases to

continue and leaves to the respective Administrative Law

Judge the ordinary responsibility for managing each case.”

This argument is disingenuous. GSC has taken our statement

out of context. When read in full our statement makes clear

that ongoing cases will continue because they present issues,

such as the type of fixed costs to be included and the volumes to

which the minimum bill applies, in addition to the issue of the

inclusion of variable costs in the minimum bill’s commodity

rate.

C-14

be gained now by covering in this case the same ground we

have already covered in Order No. 380.*'

GSC, our staff, Northwest Central, the CPUC, and Pacific,

argue that the judge erred in interpreting the settlement as

precluding retroactive relief.** Whether there is any merit to

these exceptions is a question we need not answer. After the

parties filed their briefs, they entered into an uncontested

settlement that provides in pertinent part that our decision

on Transwestern’s minimum bills will not be effective before

we issue a final order. Since for reasons set forth below we

have decided to approve the settlement, there is no retroac-

tive relief we can order with respect to Transwestern’s mini-

mum bills. Accordingly, the exceptions to the judge’s hold-

ing that there will be no retroactive relief are moot.

Transwestern’s exceptions are more extensive. It first con-

tends that the judge’s order exceeds the Commission’s

authority. Its argument is this: “The minimum bill provi-

sions define the character of the service we provide. Since

that service is provided pursuant to certificates, the judge

has partially revoked our certificate. That he cannot do

4! As we pointed out in Order No. 380, slip op. at 49 n. 53, if we

were “to proceed case-by-case to consider every minimum bill

in every existing pipeline tariff, the issues would boil down to

the same ones considered in this rule, and the results could be

expected to be the same as the result reached in this rule.” This

case is not an exception.

*? Pacific made known its position on this point in its brief on

exceptions, which, pursuant to Rule 71 1(a)(1)(iii), was filed on

the same day as briefs opposing exceptions. Transwestern has

asked us to permit it to file a supplement to its brief opposing

exceptions in order to respond to some new facts and argu-

ments in Pacific’s brief. We have examined the supplement and

will permit the first two pages to be filed. In these pages Trans-

western simply responds to the new matters in Pacific’s brief.

The remaining four pages, however, go beyond anything in

Pacific’s brief. Accordingly, we will not permit these pages to be

filed and will not consider them.

C-15

except after a proceeding held under section 7 of the Natural

Gas Act. This was not such a proceeding.” We disagree.

It is of course true that the Commission, acting pursuant

to section 7(e) of the Act, conditioned the issuance of Trans-

western’s certificates on the inclusion of the minimum bills

in Transwestern’s initial rates.*’ Still, the minimum bill pro-

visions are tariff provisions. Consequently, as we held in

Order No. 380-A,*” these provisions are fully subject to our

power under sections 4 and 5 of the Natural Gas Act “to

review rates and contracts made in the first instance by the

natural gas companies and, if they are determined to be

unlawful, to remedy them.’”*

Second, Transwestern contends that the law judge erred in

failing to recognize that the minimum bill and minimum

take provisions were established by agreements with Pacific

and Northwest Central. According to Transwestern, this fact

means the provisions can only be modified upon a showing

of “‘unequivocal public necessity” or “extraordinary circum-

stances’’, specifically a showing that the minimum bill and

minimum take provisions have impaired the financial ability

of Pacific and Northwest Central to provide service to their

customers, cast an excessive burden upon other customers,

or are unduly discriminatory. To support this proposition

Transwestern relies on United Gas Pipe Line Co. v. Mobile

Gas Service Corp., 350 U.S. 332 (1956) and FPC v. Sierra

Pacific Power Co., 350 U.S. 348 (1956).*

3 See supra pp. 5-6.

“4 Order No. 380-A, slip op. at 8-9.

45 United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S.

332, 341 (1956).

*©In its brief on exceptions, at pages 27-28, Transwestern relies

on a number of other cases: Permian Basin Area Rate Cases,

390 U.S. 747, 822 (1968); Arkansas Louisiana Gas Co. v. Hall,

453 U.S. 571, 582 (1981); City of Oglesby v. FERC, 610 F.2d

897, 903 (D.C. Cir. 1980); Metropolitan Edison Co. v. FERC,

C-16

This argument is without merit. The two cases upon which

Transwestern relies establish a simple doctrine, known as

the Mobile-Sierra doctrine. The doctrine applies where the

natural gas company has bargained away the freedom it has

under section 4 of the Act to file unilaterally changes in its

tariff. In such a situation the Mobile-Sierra doctrine provides

that the Act does not empower the Commission to relieve

the company of its bargain except where the bargain is

inconsistent with the public interest, as where the bargain

impairs the ability of the company to provide service, casts

an excessive burden on other customers, or is unduly

discriminatory.“

Thus, for the Mobile-Sierra doctrine to apply the agree-

ment between the company and the customer must provide

that no changes will be made in the tariff.** Transwestern’s

agreements with Pacific and Northwest Central provide just

the opposite. Each provides that Transwestern may change

the rate or the form of the tariff at any time and that the

customer may also seek to have the rate reduced.*” Hence the

Mobile-Sierra doctrine with its stringent burden of proof

does not apply here.

595 F.2d 851, 856 (D.C. Cir. 1979); Town of Alexandria v.

FPC, 555 F.2d 1020, 1030 n.55 (D.C. Cir. 1977). These cases

add nothing but a string cite to the argument. Each simply

applies the doctrine established by the two cases cited in the

text.

47 Sierra Pacific Power Co. v. FPC, 350 U.S. at 355.

48 United Gas Pipe Line Co. v. Memphis Light, Gas and Water

Div., 358 U.S. 103 (1958).

49 See Art. 3.2 in each of the service agreements. Exh. 91.

The service agreement underlying Rate Schedule CDQ-2, dated

October 15, 1965, provides that neither Transwestern nor

Northwest Central can seek a change in rate during the first six

years of the contract. Thus, during that period the Mobile-

Sierra doctrine did apply. But it no longer does.

C-17

Third, Transwestern contends that the initial decision is

fatally flawed because the law judge placed the burden of

proof on it. According to Transwestern, it does not bear the

burden of proof because it did not seek to change its mini-

mum bill provisions. Instead, Transwestern argues, the bur-

den is on the intervenors and the staff because they seek to

change the minimum bill provisions. We disagree.

Transwestern started this case by filing increased rates

pursuant to section 4 of the Act. The minimum bill provi-

sions are, as the law judge held, integral to the manner in

which the increased rates are charged. In a circumstance

such as this the Act places the burden of justifying the

minimum bill provisions on Transwestern.”

But this is really an academic point. Even if the burden

were on the intervenors and the staff to show that the mini-

mum bill provisions are unlawful, that burden has been met.

The record shows beyond any serious doubt that, as the

judge concluded, Transwestern’s minimum bill provisions

unduly discriminate against Pacific and unduly favor

Northwest Central.*' It is to this evidence that we now turn.

50 North Penn Gas Co. v. FERC, 707 F.2d 763 (3rd Cir. 1983);

Lacleade Gas Co. v. FERC, 670 F.2d 38 (Sth Cir. 1982): Cities

of Batavia v. FERC, 672 F.2d 64 (D.C. Cir. 1982).

*! In reaching this conclusion the judge relied in part on the fact

that Pacific was required to take physically at least 80 percent

of its daily contract demand while Northwest Central was not

so required. Transwestern argues the judge erred even in con-

sidering the physical take requirement applicable to Pacific.

Transwestern argues that the lawfulness of this requirement

was not one of the issues the settlement reserved for trial.

We need not address this argument. In Order No. 380 and

Order No. 380-C, we held that all provisions that require a

customer to take a minimum amount of gas are unlawful and

hence inoperative. Our order became effective on November 1,

1984. Since our order in this case will be effective prospectively

only, nothing we do here will have any effect on the minimum

take requirement applicable to Pacific. It is already gone.

C-18

;

/

4

}

%

%

Transwestern is obligated to deliver about 1,000 MMcf

per day to two customers, 750 MMcf per day to Pacific and

250 MMcf per day to Northwest Central. On an annual basis

Northwest Central must take or pay for 90 percent of the

contract demand; Pacific must take or pay for 91 percent. In

addition, the contract demand used to calculate Northwest

Central’s minimum bills can be, and has been, reduced

because of Transwestern’s failure to deliver on average in

any year the daily contract amount; Pacific’s contract

demand remains fixed. Thus, Northwest Central’s obligation

to Transwestern is to purchase on an annual basis anywhere

from 59 percent to 100 percent of the 25 percent of Trans-

western’s annual supply of gas dedicated to it; Pacific’s obli-

gation is to purchase on an annual basis anywhere from 91

percent to 100 percent of the 75 percent of Transwestern’s

annual supply dedicated to it.

baba or tic ase

eeuth Weiter:

Sieh Taae Wa ane ey

These are significant differences that disadvantage Pacific.

Unless justified by the facts, these differences are unlawful

under section 4(b) of the Act. But, as the judge correctly

held, they have not been. j

wh ARE di aed

Hence we need not and will not determine here whether the

requirement is unduly discriminatory.

52 Public Service Company of Indiana v. FPC, 575 F.2d 1204,

1212 (7th Cir. 1978).

Under section 4(b) no showing need be made that the discrimi-

nation injures the victim before the company is required to :

justify discrimination. “The essence of the principle is that H

those who are similarly situated must be treated equally regard- ;

less of their ability to survive otherwise.” Florida Gas Trans-

mission Co., Opinion No. 807, reh’g denied, Opinion No.

807-A, affd sub nom. Sebring Utilities Comm’n v. FERC, 591

F.2d 1003 (Sth Cir. 1979), cert. denied, 444 U.S. 879 (1979).

Nevertheless, the injury to Pacific and ultimately the con-

suners in southern California the discrimination causes is

clear. It is worth pointing out at least one aspect of the injury.

Transwestern does not have sufficient firm supplies available to

it to meet its obligations to deliver 1,000 MMcf per day to its

two customers. In 1982 it had only about 750 MMcf of firm

C-19

Transwestern, Northwest Central, and GSC except to this

conclusion. They argue that the difference is justified. Their

primary argument is that Pacific and Northwest Central are

not similarly situated customers. They point out that these

supplies. Tr. 1217, 1224. If that supply were divided between

Pacific and Northwest Central in proportion to Transwestern’s

obligations to each, Transwestern would deliver about 562.5

MMcf per day to Pacific, which is far below its minimum bill

obligation of 682.5 MMcf per day (.91 X 750 MMcf), and about

187.5 MMcf to Northwest Central, which is above its mini-

mum bill obligation of about 147.5 MMcf per day (.59 & 250

MMcf). If Transwestern had delivered only 562.5 MMcf per

day to Pacific in 1982, the minimum bill would have required

Pacific to take or pay for all of it. See supra p. 8. But Pacific

could then have bought more lower priced gas from El Paso

than it did. Since Northwest Central had lower-priced gas

available to it and needed only to take or pay for 147.5 MMcf

per day, it could and did reject without penalty about 40 MMcf

per day. This enabled Transwestern to deliver an additional 40

MMcf per day to Pacific, which, under the minimum bill, had

to take the gas or pay for it. This reduced Pacific’s ability to buy

cheaper gas from El Paso. Thus, the consequence of the dis-

crimination was to increase the cost of Pacific’s and SoCal’s gas

and ultimately, of course, the cost to consumers in southern

California.

Even more egregious, Transwestern bought interruptible gas to

meet its total certificate obligations. Exh. 1, p. 13. (In 1982

interruptible gas accounted for 14 percent of Transwestern’s

purchases. Jd.) By its very nature this is gas that Transwestern

need not take to avoid incurring take-or-pay liabilities to its

producers. Tr. 1027, 1105. The price of this gas is higher than

Transwestern’s system average gas costs. Tr. 1230-34. Since

Northwest Central did not have to take all of the firm supplies

available to it from Transwestern, it did not take any of the

interruptible gas Transwestern had bought in part to meet its

certificate obligation to Northwest Central. This enabled Trans-

western to deliver enough gas to meet its minimum bill obliga-

tions of delivering at least 682.5 MMcf per day to Pacific. (In

fact Transwestern’s deliveries to Pacific in 1982 amounted to

about 733 MMcf per day on average. Exh. 83.) As a conse-

quence Pacific’s minimum bill was fully in force. Thus, the

result of the discrimination was that Pacific had to reduce its

purchases of lower priced gas so that it could take higher priced

interruptible gas that Transwestern itself did not have to take.

C-20

customers operate in entirely different markets, half a con-

tinent apart. They also point out that Pacific sells all its gas

to its affiliate, SoCal, which is served by other pipelines and

is regulated by the CPUC. Northwest Central, on the other

hand, has, according to Transwestern, “‘a large base of low-

cost gas in the Hugoton field. It is regulated by the FERC. It

also has substantial commitment with producers involving

take requirements not affected by Order Nos. 380, et seq.”

This argument is not persuasive. There are two problems

with it. The evidence of record shows that Northwest Cen-

tral and Pacific are similarly situated. Both receive firm

service from Transwestern. Both also buy gas from

producers and other pipelines, some of which sell gas at a

lower price than Transwestern does. And both now have

more gas available from their suppliers than they need to

meet demand. Second, although the differences Transwest-

ern and its supporters point to undoubtedly exist, nothing in

the record or even in the briefs explains why these differ-

ences justify any difference in the minimum bills applicable

to Pacific and Northwest Central, let alone the specific differ-

ences that do exist. Without the latter showing we cannot

find the differences justified.”

Transwestern also contends that the short answer to the

law judge’s holding is that all its ‘“‘supply arrangements were

filed with, reviewed and approved by the Commission.”

This is true. But it is irrelevant. The question of whether

Transwestern’s minimum bill provisions unduly dis-

criminated against Pacific does not appear to have been

53 Brief an Exceptions for Transwestern at 31.

54 Public Service Company of Indiana v. FPC, 575 F.2d at 1212

(The Commission “must show not only that factual differences

justify some rate difference, but also that the factual differences

justify the specific rate differences permitted.”’)

‘5 Brief on Exeptions for Transwestern at 31 (footnote omitted).

C-21

raised in the prior proceedings, and we have never consid-

ered the issue before.”

Finding then that the differences between Transwestern’s

minimum bills applicable to Pacific and Northwest Central

have not been justified, we affirm the judge and hold that

Transwestern’s minimum bills are unduly discriminatory

and therefore unlawful.*’

V. THE REMEDY

Having found Transwestern’s minimum bills unlawful, the

law judge had to decide what, if anything, should be put in

their place. On this question the near unanimity of the

parties broke down. Their proposals pretty much covered

the field. The major contenders for the judge’s attention,

however, were four:

(1) El Paso recommended that the minimum bills and

minimum take requirements be reduced to 60

percent of contract demand. In conjunction with this

proposal El Paso recommended a change in the way

56In any event, the Commission’s prior approval of Transwest-

ern’s tariffs neither limits our power to find undue discrimina-

_tion now nor prevents us from remedying the undue discrimi-

nation found to exist. See, e.g., North Penn Gas Co. v. FERC,

707 F.2d at 767.

‘’ Transwestern argues that the record not only lacks evidence

showing the minimum bills to be unlawful but also shows the

minimum bills to be lawful because they enable Transwestern

to remain a viable supplier, avoid take or pay problems, and

contract for gas supplies. Brief on Exceptions for Transwestern

at 31-32. The problem with this argument is that, even if the

record showed what Transwestern contends it shows, this evi-

dence would not justify the unlawful discrimination between

Pacific and Northwest Central.

Equally unavailing is Transwestern’s argument that the judge’s

holding is unsupported because the record does not contain any

evidence on the impact of Order No. 380. The unlawful dis-

crimination between the minimum bills applicable to Pacific

and Northwest Central exists whether or not variable costs are

included in the minimum bills’ commodity rates.

C-22

Transwestern’s costs are classified and allocated and

its rates designed. According to El Paso, all of Trans-

western’s fixed costs except for return on equity and

related income taxes should be classified to the

demand component and recovered through the

demand rate. Return on equity and related income

taxes, together with all variable costs, would be classi-

fied to the commodity component and recovered

through the commodity rate.*

(2) Pacific and the CPUC recommended that the mini-

mum bill and minimum take provisions be reduced

to 35 percent of the contract demand.” Pacific also

recommended that the method used to classify and

allocate Transwestern’s costs and design its rates be

changed in the same way El Paso recommended.

Finally, Pacific recommended that the sales volumes

used to calculate the commodity rate be set to pro-

vide Transwestern with an incentive to keep the price

of the gas low and that a special, lower commodity

rate be applied to any sales above the design level.”

(3) Northwest Central recommended that the minimum

bill be reduced to 50 percent of the contract demand

quantity used in calculating the minimum bill.°'

Since the contract demand quantity used in calculat-

ing Northwest Central’s minimum bill is only about

59 percent of the volumes Transwestern is required

to deliver under its certificate, adoption of this rec-

ommendation would mean that Northwest Central’s

obligation undef the Minimum bill would be to take

or pay for only about 30 percent of the volumes

Transwestern is required to deliver. Under this rec-

ommendation Pacific’s obligation, however, would

be to take or pay for 50 percent of the volumes.

i SHEEN Ste el PBR

58 See Exh. 55, pp. 22-24.

59 See Exh. 38, p. 13; Exh. 45; Exh. 46; Exh. 84, p. 7.

60 See Exhs. 45 and 46.

61 Exh. 67.

62 Td. at p. 7.

C-23

(4) The staff and the Governor of California recom-

mended that the minimum bills and minimum take

provisions be eliminated.® The staff also recom-

mended, however, a change in the way Trans-

western’s costs are classified and allocated and its

rates designed. The staffs proposal was similar to

El Paso’s. But there were two significant differences.

First, the staff classified fixed production costs as well

as return on equity and related income taxes to the

commodity component. Second, the staff allocated

only 50 percent of the demand costs on the basis of

peak responsibility. The other 50 percent the staff

allocated on the basis of annual usage to recognize

the fact that demand costs are incurred to provide

service at peak as well as service throughout the

year.“

The judge concluded that none of these recommendations

was supported by the record evidence. Accordingly, the

judge rejected them all. Nevertheless, the judge adopted a

variant of El Paso’s recommendation. Specifically, he held

that Transwestern’s minimum bill should be reduced to 60

percent of the contract demand.®°

The reason the judge adopted a 60 percent minimum bill

was because he concluded that Transwestern and El Paso

should be placed on an equal footing to permit them to

63 Exh. 85, p. 40; Exh. 70.

6 Exh. 85, pp. 22-25.

65 29 FERC at 65,164. The judge did not adopt El Paso’s recom-

mendation to change the way Transwestern’s costs are classi-

fied and allocated and its rates designed. Jd. With respect to

Northwest Central, the initial decision is not explicit on

whether the contract demand to which the 60 percent mini-

mum bill would apply is the reduced contract demand pres-

ently used in calculating the minimum bill or the unadjusted

contract demand of 250,000 Mcf per day. Nevertheless, the

judge’s ruling is clear. He intended the latter. This is so because

he intended to eliminate the undue discrimination between

Pacific and Northwest Central. 29 FERC at 65,163. Using the

reduced contract demand would perpetuate the discrimination.

(24

compete freely in the southern California market.® Because

El Paso had conditionally agreed to put into effect a 60

percent minimum bill for Pacific, the judge held that Trans-

western’s minimum bill had to be reduced to 60 percent.*’

Transwestern, our staff, the Governor of California, and

the CPUC except.® They argue that for a variety of reasons

the judge erred by imposing this minimum bill requirement.

We agree.

The fundamental problem with the judge’s recommenda-

tion, as well as the recommendations of El Paso, Pacific, and

Northwest Central, is that it continues to impose a mini-

mum bill.

The effect of a minimum bill is to restrain trade, for it

forces a customer to buy gas from one pipeline rather than

other pipelines, thereby foreclosing competition for that cus-

tomer’s business. In certain situations this restraint may, if

there is inadequate justification for it, amount to an unrea-

sonable and therefore unlawful restraint of trade.” In Order

66 Jd., at 65,163.

67 29 FERC at 65,158.

El Paso initially proposed to reduce the minimum bill in a

settlement in Pacific Gas Transmission Company, Docket No.

RP83-113. By an order issued this day we have finally

oooree the settlement. Pacific Gas Transmission Co., 31

68 Northwest Central also excepts to this aspect of the initial

decision. It argues that the judge erred in not adopting a

settlement between it and Transwestern. We need not address

this argument, for Northwest Central has since withdrawn the

settlement. See infra note 108.

6? A minimum bill is in effect a requirements contract. A require-

ments contract is unlawful under section 3 of the Clayton Act,

15 U.S.C. ; 14 (1982), if the effect of the contract “may be to

substantially lessen competition or tend to create a monopoly

in any line of commerce.” A requirement contract may also be

unlawful under section | of the Sherman Act, 15 U.S.C. § 1, if

it amounts to a “restraint of trade” within the meaning of that

act.

C-25

No. 380 we found that minimum bills did unreasonably

restrain trade to the extent they permitted pipelines to

recover costs not incurred and required customers physically

to take a specified amount of gas. We therefore ordered

pipelines to modify their minimum bills accordingly.”

That we have ordered pipelines to modify their minimum

bills to exclude variable costs from the commodity rate and

eliminate physical take provisions does not mean we can

assume the minimum bills that remain, such as Transwest-

ern’s, are reasonable and lawful. They still may adversely

affect competitors and consumers by foreclosing competi-

tion and restraining trade. And that will be the probable

consequence of imposing a minimum bill on Transwestern’s

It has long been recognized that requirements contracts may

serve useful functions. Standard Oil Co. v. United States, 337

U.S. 293, 306-7 (1949). Hence the courts have not subjected

requirements contracts to a per se analysis, which would con-

demn all requirements contracts. Rather, the courts have sub-

jected them to a rule of reason analysis. Under this type of

analysis a requirements contract is unlawful only if it is ““more

restrictive than necessary to meet an objective meriting anti-

trust recognition.” 3 Areeda and Turner, Antitrust Analysis

4] 731 (1980).

The Commission also uses the rule of reason analysis in assess-

ing the reasonable of a requirements contract in a rate schedule

or tariff, modifying it only to the extent that we must in order

to take into account objectives meriting recognition under our

own statutes in light of the alternatives available for meeting

those objectives. See Kentucky Utilities Co., Opinion No. 169,

23 FERC 4 61,317, at 61,675, reh’g denied, Opinion No. 169-A,

25 FERC 461,205 (1983), appeal on other issues docketed,

No. 84-3014 (6th Cir. Jan. 6, 1984).

0 See supra pp. 14-15.

In Order No. 380-A, slip op. at 49-50, the Commission

expressly noted that Transwestern’s minimum bills had caused

serious problems for its customers and competitors. The record

in se ee amply supports that conclusion. See supra

pp. 10-12.

C-26

two customers.’' Hence any minimum bill recommendation

7! Since Order No. 380 was issued after the record in this case

closed, this judgment is not based on the specific testimony of

any one witness. But we do not need to have such testimony to

form a judgment. See Market St. Ry. Co. v. R.R. Comm’n of

California, 324 U.S. 548, 559-61 (1948). The evidence in the

record, our knowledge of the industry, and common sense lead

to the conclusion that any minimum bill for Transwestern will

have adverse consequences for its competitors and customers.

The factors that lead us to this conclusion are:

(1) As we have shown above, supra pp. 10-11, gas supplies

available in the southern California and Kansas City markets

have exceeded demand for the past few years. This situation is

likely to continue. (Pacific estimates that during the five year

period from 1983 through 1987 SoCal will need on average

every day between 2,620 MMcf and 2,925 MMcf. Exh. 43. The

gas available to Pacific during these years is estimated to be

over 3,000 MMcf per day, specifically 1,750 MMcf from El

Paso, 750 MMcf from Transwestern, 240 MMcf from Pacific

Interstate Transmission Company, Exh. 51, p. 4 and Tr. 3059,

about 200 MMcf from intrastate producers, Exh. 43, and about

70 MMcf from Federal Offshore producers, Tr. 2238-40. The

record is not as well developed with respect to Northwest

i nothing in the record suggests a turn around in its

market.

(2) In situations where a market’s supply equals its

demand, a requirements contract may not be competitively

significant. Its effect may be simply to shift the pattern of

buyer-seller relationships, for a seller that is committed to

supply the requirements of one customer has that much less

supply to devote to others. 3 Areeda and Turner, supra note 69,

at 4 732(c). But in a situation where supply exceeds demand a

requirements contract has competitive significance, for the

effect is to foreclose competitors from the market. El Paso’s

experience in the southern California market in 1982 amply

demonstrates this point. See supra p. 12.

(3) It is not certain that a minimum bill that recovers only

fixed costs will have the same effect as Transwestern’s mini-

mum bills had in 1982. But it may. Assume, as the record

suggest, Exh. 33, that with no minimum bill Pacific would buy

at least 413 MMcf per day, or about 55 percent of its ACQ.

Assume further that a minimum bill is imposed, which like the

judge’s recommendation, would require Pacific to take or pay

for 450 MMcf per day, or 60 percent of the ACQ. Pacific would

buy the 37 MMcf difference from another supplier only if it

could save money. And Pacific could save money only if the

OLR LEI ELL AIOE PG GOOLE LODE AEN AP

C-27

for Transwestern must be justified. But none has been on

- this record.

The Commission has identified three factors that may

_ justify a minimum bill.” First, a minimum bill may be

_ justified as a means of protecting the pipeline against the risk

of not recovering the fixed costs in the commodity com-

ponent. Second, a minimum bill may be justified as a means

of protecting full requirements customers from bearing a

disproportionate share of the fixed costs resulting from

swings off the system by partial requirements customers.

And third, a minimum bill may be justified as a means of

protecting customers from take-or-pay liabilities the pipeline

might otherwise incur. Since Pacific and Northwest Central

are partial requirements customers, the second possible jus-

tification is not applicable here. Hence we need only con-

sider the first and third possible justifications.

total of the commodity charges it would pay the alternate

supplier and the minimum bill it would pay Transwestern is

less than the commodity charges it would pay to Transwestern.

If Transwestern gas costs are significantly higher than its com-

petitor’s, the penalty a fixed cost only minimum bill would

impose may not be high enough to deter Pacific from buying

from another supplier. Thus, the minimum bill may not fore-

close the market to the other supplier. But even if the minimum

bill does not have this effect, it still will have adverse conse-

quences on competition. To become competitive Transwestern

will not have to reduce the price of its gas to the level of its

competitor’s price. Instead, all Transwestern will have to do is

to reduce the price of its gas so that it equals the price of its

competitor’s gas plus the minimum bill payments. This will

result in an inefficient allocation of resources. This needs to be

justified.

Order No. 380, slip op. at 9. See also Notice of Proposed

Rulemaking, FERC Stats. & Regs. 4] 32,334, at 32,669 (1983),

and Atlantic Seaboard Corp., Opinion No. 553, 38 FPC 91, 95

(1967), aff'd, 404 F.2d 1268 (D.C. Cir. 1968).

C-28

The minimum bill proposals before us appear to satisfy

the first justification. Transwestern developed the rates pres-

ently in effect using the Seaboard method.” Under this

method, as we have noted, 50 percent of Transwestern’s

fixed transmission costs are recovered through the commod-

ity component. The minimum bill proposals assure recovery

of these costs up to a certain limit. But in fact the proposals

do not satisfy this justification. There are two reasons.

First, the point of this justification is not simply to assure

the recovery of fixed costs. If it were, a 100 percent mini-

mum bill would be justified in all cases. That is obviously

incorrect.’”* And no one contends otherwise. Instead, the

point of the justification is to balance the incentives to

minimize long term costs competition provides against the

fact that gas pipelines have high fixed costs.’ The problem

we have with the minimum bill proposals before us is that

we cannot determine whether they strike a reasonable bal-

ance. Simply put, they are too crude. In light of the justifica-

tion’s purpose, the most that can be said about the amount

of fixed costs whose recovery should be assured is that the

amount should be no greater than the costs of depreciation

and of servicing the debt. It must also be said that in light of

the justification’s purpose the amount of fixed costs whose

recovery should be assured should in no way act to assure

recovery of the return on equity, related income taxes, and

fixed production costs. These elements of the cost of service

should be at risk to give the pipeline an incentive to

73 See supra note 18.

4 In Transwestern Pipeline Co., Opinion No. 328, 22 FPC at 394,

the Commission rejected Transwestern’s proposal to include a

100-percent minimum in its initial rate schedule for Pacific.

5 See Atlantic Seaboard Corp. v. FPC, 404 F.2d at 1272-73.

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C-29 ~

minimize its costs.” The minimum bill proposals before us,

however, do not attempt to limit the payments to be made

under the minimum bills to amounts that reflect the costs of

depreciation and of servicing the debt. Instead, they simply

multiply the fixed costs included in the commodity com-

ponent by a certain figure. Nothing in this record allows us

to conclude that payments determined in this way will be no

greater than are warranted by the justification.

Moreover, a minimum bill is unnecessary to assure recov-

ery of the amount of fixed costs Transwestern should

recover. The staff, Pacific, and El Paso have proposed using

a modified fixed-variable methodology to develop Trans-

western’s rates. Under this method all fixed costs except

return on equity, related income taxes, and, perhaps, pro-

duction related costs, are classified to the demand com-

ponent and recovered through the demand rate. Thus,

Transwestern would be assured of recovering all of the fixed

costs it should recover without having to impose a minimum

bill.”

76 See Texas Eastern Transmission Corp., 30 FERC 4 61,144, at

61,269 and 61,283, reh’g granted for purposes of further consid-

eration, 31 FERC 4 61,049 (1985); Natural Gas Pipeline Co., 25

FERC 961,176 at 61,482-83 (1983), reh’g denied 26 FERC

161,203 (1984), appeal docketed sub nom. Northern Indiana

fo Serv. Co. v. FERC, No. 84-1416 (7th Cir. March 19,

l ).

”7 We note that the Court of Appeals for the District of Columbia

Circuit recently reversed this Commission’s order approving a

fixed cost only minimum bill in part because there was no

evidence showing that the minimum bill was needed to recover

fixed costs. Mississippi River Transmission Corp. V. FERC, No.

84-1046, et al. (April 19, 1985). It can be argued that the court’s

decision requires more evidence to justify a minimum bill than

we have required here. We have not applied the court’s deci-

sion to this case for two reasons. First, we still are assessing the

decision. Secondly, even under the arguably less stringent stan-

dard we have used here, we find the minimum bill proposals do

not satisfy the first justification.

C-30

With respect to the third possible justification, there is a

great deal of confusing argument and disputed evidence

concerning the take-or-pay liabilities Transwestern might

incur if its minimum bills, as they existed when this proceed-

ing began, were changed. The judge concluded that, because

the changes in Transwestern’s minimum bills wrought by

Order No. 380 were not reflected in the evidence, none of it

could be relied on.” This is largely true.””? Transwestern

argues that because this is so, the record is incomplete.

Hence, Transwestern contends, our only alternatives are

either to approve its minimum bills as they now stand or to

re-open the record. We disagree. The evidence is irrelevant.

It is used either to argue or to rebut the argument that

minimum bills of a certain level are justified because they

will foreclose competition for Pacific’s and Northwest Cen-

tral’s business and thereby prevent Transwestern from incur-

ring take-or-pay liabilities. This is not the point of the third

justification.” Rather, the point of the justification is that a

minimum bill may be permissible if it is used to ensure that

the carrying costs associated with take-or-pay liabilities will

be borne by the customers that caused the liabilities to be

incurred.*!

This subject the parties have declined to address. The

reason for their silence is not mysterious. Anything they did

7829 FERC at 65,162.

79 But see Exhs. 32 and 33 (discussed supra note 71).

80 Indeed, in Order No. 380, slip op. at 42, the Commission stated

that to the extent minimum bills have the effect of preventing

pipelines from incurring take-or-pay liabilities by foreclosing

competition, they are “anti-competitive, unjust, and un-

reasonable.”

8! In Order No. 380, slip op. at 9, the Commission stated that the

third possible justification is really an “‘outgrowth”’ of the sec-

ond justification. The second possible justification is that mini-

mum bills may be justified as a means of ensuring equitable

cost recovery from both full and partial requirements

customers.

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C-31

say would be merely a statement of the obvious, for there is

no connection between the minimum bill payments the cus-

tomers would make and the carrying costs associated with

take-or-pay liabilities Transwestern could legitimately

recover from them. For example, suppose Pacific reduced its

purchases below minimum bill level, be it 91 percent,

60 percent, 50 percent, or 35 percent of its ACQ. This

reduction might not cause Transwestern to incur any take-

or-pay liability to its suppliers. But Pacific would neverthe-

less incur a minimum bill liability to Transwestern.*? More-

over, even if Transwestern did incur take-or-pay liabilities as

a result of Pacific’s reducing its purchases, there is no con-

nection between the costs Transwestern could legitimately

recover from Pacific and the minimum bill payments it

would receive. In short, there has been no showing here that

any of the minimum bills proposed for Transwestern are

justified on the grounds that they will assure equitable recov-

ery of the carrying costs of take-or-pay liabilities.

In addition to these traditional justifications for minimum

bills, the judge has added another. It is that in order to avoid

placing a pipeline in economic jeopardy by subjecting it to a

governmentally-created competitive disadvantage a pipeline

must be placed on an equal footing with its competitor.*

Hence, if a pipeline’s competitor has a minimum bill at a

certain level, the pipeline should have a minimum bill at the

same level. Following this theory the judge held that, since

Transwestern’s major competitor in the southern California

market, El Paso, had agreed to use a 60 percent minimum

bill in its rate scheduies for sales to Pacific, Transwestern

should have a 60 percent minimum bill. To support his

82 Conversely, Transwestern might incur, as it has asserted it

would, take-or-pay liabilities even if Pacific purchased gas at

minimum bill levels. But Pacific would then not incur any

minimum bill liability to Transwestern.

8°29 FERC at 65,162-63.

C-32

justification the judge relied on the fact that, when the

Commission first issued a certificate to Transwestern to sell

gas to Pacific in 1959, it granted Transwestern’s request to

include a 91 percent minimum bill in the initial rate sched-

ule because El Paso also had a 91 percent minimum bill.*

This justification has some appeal. Nevertheless, we

decline to adopt it. We do so because the reasons that can be

offered in support of it are themselves either unsupportable

or unsupported.

One reason is fairness. It is this that gives the justification

its appeal. But in this area of the law the general rule is that a

just and reasonable minimum bill for a pipeline must be

based on the facts of that pipeline, not the minimum bills of

its competitors.* The reason for the rule is obvious. To set

just and reasonable rates requires a decision as to what is fair

to both the pipeline and consumers.** To set the pipeline’s

minimum bill on the basis of the minimum bills other pipe- -

lines have eliminates consumers as a factor to be considered.

This we decline to do.

Another reason is that in 1959 the Commission allowed

Transwestern to put into effect a minimum bill of 91 percent

because El Paso had a 91 percent minimum bill. The

problem with this reason is that the Commission’s 1959

84 Transwestern Pipeline Co., Opinion No. 328-A, 22 FPC at 543.

85 Atlantic Seaboard Corp., 38 FPC at 96.

’° This principle is of ancient lineage. It was recognized as early as

1912 by Justice Holmes, who said that regulation “has to steer

between Scylla and Charybdis. On the one side, if the franchise

is taken to mean that the most profitable return that could be

got, free from competition, is protected by the Fourteenth

Amendment, then the power to regulate is null. On the other

hand, if the power to regulate withdraws the protection of the

amendment altogether, then the property is nought. This is not

a matter of economic theory, but of fair interpretation of a

bargain. Neither extreme can have been meant. A midway

between them must be hit.” Cedar Rapids Gas Light Co. v.

Cedar Rapids, 223 U.S. 655, 669 (1912).

C-33

decision was not a pronouncement that Transwestern and El

Paso should always have the same minimum bills. Rather,

the Commission’s decision was necessitated by, and based

on, the specific circumstances existing at that time. In 1959

Transwestern was a new pipeline company proposing to

enter a market that had for some time been dominated by

one major supplier, El Paso, which could sell gas at a lower

price than Transwestern. In a situation like that, it is appar-

ent that, if Transwestern were to have a chance of securing

financing to build its pipeline and thereby introduce some

competition into the southern California gas market, it

needed, as it then argued to the Commission, the assurance

of a market for its gas that a minimum bill equal to El Paso’s

would provide.*’ And that is all the Commission held. It

stated simply that a minimum bill equal to El Paso’s “‘would

protect Transwestern from discrimination in the event of

market fluctuations and insure the financing of its

erosect....""

Moreover, the conditions that in 1959 required allowing

Transwestern a minimum bill equal to El Paso’s no ionger

exist. Transwestern is no longer a neophyte in the gas busi-

ness needing, like any other beginner, a helping hand. It is

now an established pipeline. It has been in business for

25 years.. Nearly 50 percent of its plant has been

depreciated.® The securities it issued to construct its pipe-

line have largely been retired.” It has not expanded its

*’ Exh. 87, p. 14 (Application for Rehearing for Transwestern

Pipeline Company in Docket No. G-14871).

Transwestern there stated that its financial advisors had

informed it that it could not economically or feasibly market its

securities with a minimum bill less than El Paso’s.

88 22 FPC at 543.

8° Specifically, as of December 31, 1982, Transwestern’s net plant

was 52.2 percent of its gross plant. Tr. 1502

weet. Sate

C-34

system significantly during the five year period from 1978

through 1982.*' Hence Transwestern has not had to issue

long-term debt or equity since 1981.*? What little construc-

tion it has undertaken has been financed with internally

generated funds.*’ As a consequence, Transwestern’s debt is

only about 6 percent of its total capitalization.™ In addition

to these changes in its financial position Transwestern’s dis-

advantage in terms of the price at which it sells gas has

disappeared. In 1959 Transwestern’s gas sold at a price

about 40 percent higher than E! Paso’s.* At the time of the

hearing it sold for about 3.6 percent more.” And now it sells

for less.” Given these facts it is hard to see why Transwest-

ern still needs a helping hand to compete.

A third reason is that without a minimum bill equal to El

Paso’s, Transwestern will be placed in economic jeopardy.

We think this is unlikely. The evidence we have just

reviewed does not show a company that is in economic

*! Statement O(3).

Of more importance is Transwestern’s capital expansion in the

future. We have almost no idea of what that will be. Our lack of

knowledge on this score is not caused by an inadequate record.

It is because Transwestern does not know. When asked about

Transwestern’s capital expansion plans, Transwestern’s chief

financial officer testified that, ““we can’t figure out what we are

doing in 1983. We certainly don’t know what we are doing in

1984.” Tr. 2405.

2 Tr. 2412.

3 Tr. 2410-11. o

** According to Transwestern’s Form 2 for 1982, Transwestern’s

capitalization consisted of $18,525,000 in debt, $21,641,500 in

preferred, and $263.901,000 in common equity. Tr. 2409.

In addition to these sums Transwestern had about $46 million

in accrued but unpaid refunds, id., that it used to finance its

capital expansion. Tr. 2410.

* Tr. 1494.

* Id.

* See Order No. 380-C. slip op. at 14 n. 13.

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C-35

jeopardy. And we cannot assume Transwestern’s existence

will be jeopardized. Transwestern estimated that even if it

had no minimum bill in 1982, Pacific would still have taken

about 55 percent of its annual contract quantity.” That

estimate was made at a time when Transwestern’s gas was

priced above El Paso’s. Now, as we have noted, Transwest-

ern’s gas is priced below El] Paso’s. Hence it is difficult for us

to imagine that Transwestern will not sell substantial

amounts of gas in the southern California market even if it

has no minimum bill.

Finally, there are two wholly independent reasons we must

reject the judge’s justification. El Paso’s minimum bill was

established in a settlement of limited duration. That settle-

ment resolved many issues in addition to the minimum bill

issue and no doubt involved considerable give and take on

all issues. We neither can nor should require Transwestern

to live by one aspect of the compromise El] Paso found

acceptable to it. Moreover, if we were to adopt the judge’s

justification, we would have to hold in El Paso’s next rate

case, should the issue arise, that El Paso is entitled to a

60 percent minimum bill because Transwestern has a

60 percent minimum bill.” Thus, as if by transmutation, an

uncontested settlement on the minimum bill issue that we

accepted to resolve a case would become the just and reason-

able minimum bill for El Paso. We will not allow ourselves

to be so bound.

To sum up, we find that: (1) the probable effect of includ-

ing a minimum bill in Transwestern rate schedules will be to

foreclose competition or increase prices to consumers or

both; (2) the only possible justification on this record for

% See Exhs. 32 and 33.

% El Paso has recently filed a general section 4 rate case. Docket

No. RP85-58-000. We suspended the effectiveness of the

increased rates until July 1, 1985, and set the matter for hear-

ing. El Paso Natural Gas Co., 30 FERC 4 61,097 (1985).

C-36

including minimum bills in the rate schedules is that they

are needed to assure recovery of fixed costs; and (3) there is

an alternative means of assuring recovery of fixed costs.

Accordingly, we hold that the inclusion of minimum bills in

Transwestern’s rate schedules is not justified and that none

should be included.

A number of the parties, including Transwestern, argue

that, if a substantial change is made in Transwestern’s mini-

mum bills, there should be a change made in the method by

which Transwestern’s costs are classified and allocated and

its rates designed.'” As we have noted, the staff, El Paso, and

Pacific put forth recommendations as to what the new

method should be. Each of these involved some form of the

modified fixed-variable method.'”'

The judge rejected these recommendations. He did so

because he found that the recommendations were unsup-

ported and because there had been no showing that the

Seaboard method, which was used to develop the rates now

in effect, was unjust, unreasonable, unduly discriminatory,

or preferential.'”

We disagree with the judge’s findings on this issue. First,

there is adequate support for the recommendations. This is

certainly so for the staff's recommendations. It has been

described in detail by the staff's witness.'° This is also true

100 No party argued that the present method used to classify and

allocate Transwestern’s costs and design its rates should remain

unchanged if the minimum bills are substantially changed.

'01No party opposed using some form of the modified fixed-

variable method or proesnes a different method, and, subse-

quent to the filing of their breiefs, the parties entered into an

uncontested settlement in which they agreed to use the staff's

version of the modified fixed-variable method. We address the

settlement below. See infra pp. 50-55.

102229 FERC at 65,163-64.

1033 See Exh. 85, pp. 24-25, and Exh. 101, p. 3-5.

C-37

of El Paso’s recommendations™ and to a certain extent of

Pacific’s.'"°* Second, eliminating the minimum bill is a

change in circumstances that renders the Seaboard method

unjust and unreasonable. As we have noted above, supra

p. , under the Seaboard method 50 percent of Transwest-

ern’s fixed costs are recovered through the demand rate and

50% through the commodity rate. With a high minimum bill

Transwestern has been guaranteed recovery of almost all iis

fixed costs. Continuing to use the Seaboard method but

eliminating the minimum bill would suddenly expose Trans-

western to significantly greater risks of not recovering its

fixed costs. We think this is unreasonable since the fixed

costs that would be at risk include the cost of servicing debt

and depreciation.

Thus, we must now decide what method should be used to

- Classify and allocate Transwestern’s costs and design its

rates. The staffs recommendation is the most fully devel-

oped method. This is recognized by the other parties. They

accept most of the staff's recommendation, departing from it

on only two limited points.

First, El Paso, Pacific, and Transwestern challenge the

staff's recommendation to the extent it classifies fixed pro-

duction and gathering costs to the commodity component.

These parties argue that fixed production and gathering costs

should be classified to the demand component because these

costs are fixed. We disagree. In two recent cases, we recently

reviewed the question of how fixed production costs should

be classified.' We there re-affirmed the Commission’s long-

standing policy of classifying these costs to the commodity

104 Exh. 55, pp. 24-25, Exh. 64-A, pp. 3-8.

105 Exh. 38, pp. 14-15, Exh. 45.

10 Texas Eastern Transmission Corp., 30-FERC at 61,269; Natu-

ral Gas Pipeline Co., 25 FERC at 61,482.

C-38 an

component. We see nothing in this case that would cause us

to depart from that conclusion.

Second, Pacific challenges the staffs recommendation to

the extent it develops the commodity rate using test period

sales volumes and applies the resulting commodity rate to all

sales, be they lower or higher than the test period sales level.

Pacific recommends that the sales level should be higher and

that the commodity rate to be applied to sales above this

level should be based on the cost of purchased gas and fuel

plus five cents instead of all the fixed costs classified to the

commodity component.

We will not adopt this recommendation. The general rule

is that the sales volumes used to develop the commodity rate

is selected on the basis of a projection of the sales the

pipeline is to make during the test year. Pacific argues that a

higher sales level should be used to give Transwestern an

incentive to reduce the price of gas. That may be appropri-

ate. But Pacific has not explained how we should adjust the

test period sales level to give Transwestern the appropriate

amount of incentive.'°’ Nor has Pacific explained, let alone

supported, the five cents figure used in the commodity rate

that would apply toe any sales above whatever sales level is

adopted. Finally, the proposal is ill-conceived. It would

place upon Transwestern the risk of not earning its return if

it did not sell the volumes used in developing the rates. But

if Transwestern in fact sold more gas than the sales level, the

proposal would prevent Transwestern from earning a higher

return. Under such circumstances Transwestern would have

little incentive to provide service beyond the test period

volumes used to develop the commodity rate.

'07 During cross-examination Pacific’s witness suggested using a

sales volume of 800 MMcf per day. Tr. 2643. But this was an

off-the-cuff estimate without any explanation as to why this

level would be appropriate.

rR . >

mt eae BOR IC ik ee So

iia el

‘Raa in mance a

C-39

VI. OTHER MATTERS

There are two other matters that require attention. The

first concerns the various settlements pending before us. By

our count there are four settlements pending before us. Two

of the settlements, both between Transwestern and

Northwest Central, were certified to us by the law judge in

October of 1984. Each of these settlements is opposed by

several parties and our staff. We need not, however, address

the arguments for and against these settlements, for the

settlements have been superseded by the two other settle-

ments, which were filed with us on May 6, 1985 and May 9,

1985.'% Hence we need only consider the two latter

settlements.

The settlement filed on May 6, 1985, is between Trans-

western and Northwest Central. The settlement provides

essentially that Transwestern will waive the minimum bills

in the two rate schedules applicable to Northwest Central to

the extent the minimum bills recover non-incurred gas costs.

This waiver is effective from July 1, 1982, until the earlier of

the date Transwestern has been permitted to place into effect

rates which have been filed to reflect our decision here

concerning the minimum bills or June 1, 1986. The settle-

ment also provides that Northwest Central will be allowed to

include in its PGA account the fixed cost minimum bill

amounts as a current gas cost.

There is no opposition to this settlement, and it appears to

us that it is fair, reasonable, and in the public interest.

Accordingly, we shall accept and approve it.

'0 On May 6, 1985, Transwestern and Northwest Central moved

to withdraw one of the earlier settlements the judge certified to

us, and on May 10, 1985, they moved to withdraw the other.

Both motions are granted.

C-40

The settlement filed on May 9, 1985, is more complex. Its

major provisions are:

(1)

(2)

(3)

(4)

(5)

The reasonableness of Transwestern’s minimum bills

will be determined by Commission opinion and

order in this proceeding.

The Commission’s decision in this proceeding con-

cerning Transwestern’s minimum bills, cost classifi-

cation, cost allocation, and rate design will have pro-

spective effect only from the later of the date the

order becomes final o1 the date Transwestern is per-

mitted to place into effect rates designed to reflect the

decision.'”

Transwestern will reduce its minimum bills to 60

percent from July 1, 1985, until the Commission’s

order in this proceeding becomes effective.

Transwestern will waive its minimum bills to the

extent they recover non-incurred gas costs. This

waiver is effective on February 28, 1982, and will last

until the later of the date the court issues its mandate

in the pending appeal of Order No. 380 or June 1,

1986."'

Transwestern will also waive the minimum take pro-

vision applicable to Pacific from February 28, 1982,

until the court issues its mandate in the pending

appeal of Order No. 380-C.

Effective July 1, 1985, Transwestern will reduce its

cost of service by $5,424,054.

109 The settlement defines “final” to mean an order that is no

longer subject to rehearing.

10 This waiver period is somewhat woos than the waiver period

in the settlement filed on May 6, 19

5. The settlement filed on

May 9, 1985, makes clear that, where there is an inconsistency

between the two settlements, the terms of the May 9th settle-

ment control. Hence the waiver period for Northwest Central

begins on February 28, 1982, rather than on July 1, 1982, and

will end on the later of the date the court issues its mandate in

the pending appeal of Order No. 380 or June 1, 1986.

35 RE Re ie adic

ee iy i ‘

Bh rt eds.

(6)

(7)

(8)

(9)

C-4]

Effective July 1, 1985, Transwestern will classify and

allocate its costs and design its rates according to the

staffs recommended modified _fixed-variable

method.'"'

Transwestern may redesign its rates to reflect sales

volumes that are consistent with our decision con-

cerning the minimum bills.

Transwestern will file as part of the setthement an

incentive sales rate schedule that will enable the pipe-

line to discount the price of volumes sold in excess of

minimum bill levels by reducing the commodity

charge to not less than Transwestern’s variable costs,

including gas costs.''? Transwestern will file any such

discount. Such a filing will be deemed not to be a

general section 4 filing under the Natural Gas Act.

Accordingly, no filing fees need be paid. Acceptance

of the settlement constitutes acceptance of the incen-

tive rate schedule.

Transwestern will be permitted to discount the other-

wise applicable transportation rate for its sales cus-

tomers under Rate Schedule TS-1. Any such discount

will come out of Transwestern’s profit and will be

made available to all sales customers. If Transwestern

discounts the transportation rate, Transwestern will

file such discount. Any such filing will not be deemed

to be a general section 4 rate filing. Accordingly, no

filing fees will be paid. Since the rates in Rate Sched-

ule TS-1 are based on representative volumes, Trans-

western will retain any revenues above the represen-

tative volumes. In _ addition to _ providing

transportation to sales customers, Transwestern will

provide transportation to non-sales customers under

Rate Schedule TS-2. Since the rates in Rate Schedule

''! The resulting rates are set forth in the Twenty-Ninth Revised

Sheet No. 5 to the Second Revised Volume No. | of Transwest-

oe FERC Gas Tariff, which Transwestern filed on May 21,

1 ’

'!2 The incentive sales rate schedule, Original Sheet No. 35 to the

Second Revised Volume No. | of Transwestern’s FERC Gas

Tariff, is appended to the settlement as Appendix C.

C-42

TS-2 are not based on representative levels, Trans- ’

western will retain $.01 per MMBtu in accordance 3

with 18 C.F.R. § 284.103(d) and credit appropriate

amounts to Pacific and Northwest Central.

(10) The service agreement between Transwestern and

Northwest Central that underlies Rate Schedule

CDQ-2 will be extended from November 4, 1985

through May 31, 1986.

This settlement is supported by Pacific, Northwest Cen-

tral, GSC, the CPUC, and our staff and is opposed by no

party. Our review of the settlement convinces us that, sub-

ject to three minor modifications, the settlement is fair,

reasonable, and in the public interest.

The first modification that is necessary concerns the effec- 3

tive date of our decision. The settlement provides that our

decision will be effective upon the later of the date the order

becomes final or the date Transwestern is allowed to place

into effect rates that reflect our decision. We have no dif-

ficulty with postponing the effective date of our decision

until the order becomes final. That is reasonable. Our dif- }

ficulty is with postponing the effectiveness of our decision

until Transwestern is allowed to place in effect rates that

reflect it. If we were to permit this, Transwestern could delay

the effective date of our decision by delaying the filing of

revised rates. Though we have no reason to believe Trans-

western will do so, experience persuades us that it is best not

to let the subject of our decision determine when it will

become effective.

The second modification concerns the provisions of the

settlement stating that Transwestern will pay no fees when it

files to change the rate under either Rate Schedule ISR or

Rate Schedule TS-1. Our policy on this question is clear.''?

When the pipeline files a change to its sales or transportation

'13 Southern Natural Gas Co., 31 FERC 4 61,295 (1985).

« in

a

gd

fs

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38

C-43

rates, the filing fee is due unless the pipeline satisfies the

requirements of 18 C.F.R. § 381.106, which provides that

the filing fee will be waived only where the “applicant is

suffering from severe economic hardship at the time of the

application which makes the applicant economically unable

to pay the appropriate fee.”” No such showing has been made

here. Accordingly, the settlement must be modified to elimi-

nate the provision that no filing will be paid where a dis-

count to either Rate Schedule ISR or Rate Schedule TS-1 is

filed.''*

The third modification required is to Rate Schedule ISR

and Rate Schedule TS-1 themselves. Both rate schedules

provided in essence that Transwestern may discount the

stated rate at anytime. In addition Rate Schedule TS-1 pro-

vides that Transwestern need not give any notice at all to

either its customers or to us before the discount takes

effect.''’ We have previously considered a company’s dis-

count rate schedule similar to Transwestern’s. Southern Nat-

ural Gas Co., 31 FERC 9 61,295 (1985). We there held that

the company should not be permitted to discount the stated

rate more frequently than once a month and that notice of

the discount must be given to us at least five days before the

discount is to take effect. We see no reason to depart from

that holding here. In conformity with this conclusion we will

waive the requirement that any change in rate be preceded

by 30 days notice.

In light of the foregoing we shall accept and approve the

May 9th settlement subject to the three modifications.

The other matter is Transwestern’s motion of May 31,

1985, to reopen the record to reflect changes that have

''* Our holding here is without prejudice to Transwestern’s seek-

ing a waiver of the filing fee when it files a discount.

''S Rate Schedule ISR provides that Transwestern will give cus-

tomers five days notice of any discount.

C-44

occurred since the close of the record in July of 1983.'* The

motion is opposed by Pacific. the CPUC. Northwest Central.

GSC, and our staff and supported by the East of California

customers of El Paso.

We may grant the motion if we find “good cause” exists

for reopening the record.'' We do not find that “good cause”

exists.

In sc holding we recognize of course that changes have

occurred since the close of the record.''' But such changes

always occur. Yet litigation must come to an end at some

point. Hence the general rule is that the record once closed

will not be reopened.'’* We think it is both necessary and fair

to adhere to that rule here.

‘'* Transwestern’s motion reiterates in part and expands in part

On previous requests it has made to reopen the record. See its

Bnef on Exceptions at 28-29, 33-37, 49 and its Answer to

Motion to Expedite. filed on April 5. 1985.

"18 C.FLR. § 385.716 (1984).

‘'* Some of the changes Transwestern points to add only detail to

the record. For example. Transwestern points out that El Paso’s

minimum bill will be 60 percent as of July 1. 1985. Transwest-

em that the record needs to be supplemented on this

point use E] Paso’s minimum bill will affect Transwest-

ern’s ability to compete in the southern California market. But

during the hearing the ies discussed extensively the prob-

lems that would arise if one of the interstate pipelines in the

southern California market had a minimum bill higher than the

other. We have considered the whole question and have found

that it does not justify the retention of the Transwestern mini-

mum bills. See supra pp. 39-44.

Other changes Transwestern points to are new. But they are

not yO For example, Transwestern points out that

Order No. 380, et seg. was issued after the close of the record.

Transwestern argues that the record needs to be supplemented

by evidence on the effect of the Order No. 380 et seg. As we

have explained above. however. this evidence is irrelevant. See

supra note 57.

>See ICC v. Jersey City, 322 U.S. 503. 514-15 (1984): Air

ve & Chemicals. Inc. v. FERC. 650 F.2d 687 (5th Cir.

1931).

C-45

First. several of the changes Transwestern contends should

be reflected in the record are themselves subject to change.

For example, Transwestern makes much of the December

28, 1984, decision of the CPUC concerning sequencing. But

we are also told that the CPUC is contemplating changes in

that decision in the “near future.’’'”? Hence, if we were to

reopen the record to reflect the CPUC’s sequencing decision,

there is every reason to believe that the supplemented record

would be out of date by the time we had a chance to consider

it. Hence to reopen the record to take account of the CPUC’s

sequencing decision creates the possibility that our decision

will be considerably delayed.'?' That cannot be permitted.

Second, by this point any delay in the decision of this case

is intolerable. Minimum bills affect the purchasing decisions

of the pipelines’ customers. This has certainly been true of

Pacific. To enable it to conduct its business in an efficient

manner the question of Pacific’s minimum bill obligations

should be resolved as quickly as possible.'*

Third, the reason there is such a large gap between the

close of the record and now is because we consolidated this

proceeding with another proceeding.'** We did that at Trans-

western’s request.'** Hence the staleness of the record is

-- Answer of Transwestern to Motion to Expedite, at note 1.

-' The CPUC’s sequencing decision is not the only change Trans-

western wants reflected in the record that could considerably

delay our decision. Evidence on El Paso’s minimum bill could

have the same effect. El Paso’s 60 percent minimum bill is

being considered in the hearing in Docket No. RP85-58. Our

decision might change the mimimum bill. Should we do so we

would have to reopen the supplemented record made concern-

ing the effect of El Paso’s 60 percent minimum bill.

-- See Pacific’s Motion to Expedite, filed on March 21, 1985; see

also Pacific Gas Transmission Co., 28 FERC at 61,404.

-* As we have noted previously, the net effect of the consolidation

was to delay any progress in this proceeding by about one year.

Pacific Gas Transmission Co., 28 FERC at 61,404.

-* Pacific Gas Transmission Co., 26 FERC 961,111 (1984).

ts C-46

largely of Transwestern’s own making. Though we do not

fault Transwestern for seeking consolidation, we do think it

must live with the consequences of its own actions.

Finally, to decide this case now in no way precludes

Transwestern from bringing to our attention in another case

the changed circumstances it relies on in its motion. Gener-

ally, our decisions in rate cases do not have any res judicata

effect.'*> That is true with respect to our decision here. All we

have held is that based on this record Transwestern’s mini-

mum bills are unlawful and that no evidence has been pro-

vided to justify any minimum bill. Thus, if Transwestern

thinks the changes since the record closed justify minimum

bills for its customers, it is free to file rate schedules that

include a minimum bill and argue that changed circum-

stances warrant approval of the minimum bills.'”°

The Commission orders:

(A) The initial decision is affirmed to the extent it is

not inconsistent with this order.

(B) Within 30 days from the issuance of the opinion

and order Transwestern shall file revised rate schedules

in compliance with the terms of this opinion and order.

(C) The joint motions of Transwestern and

Northwest Central to withdraw settlements certified on

October 4, 1984, are granted.

(D) The settlement between Transwestern and

Northwest Central filed on May 6, 1985, is approved.

'25 Comm’r v. Sunnen, 333 U.S. 591, 601-602 (1948); Louisiana

Power & Light Co., Opinion No. 110, 14 FERC 961,075, at

61,137 n. 86, reh’g denied, Opinion No. 110-A, 15 FERC

961,297 (1981), affd mem. sub nom. Cities of Winnfield v.

FERC, 683 F. 2d 415 (Sth Cir. 1982).

126 We of course intimate no view on the reasonableness of such a

filing. ‘

——EeEeEeEeEeEeE———EeEeE——EEE

C-47

(E) The settlement filed on May 9, 1985, is approved

subject to the terms of this opinion and order.

(F) The Twenty-Ninth Revised Sheet No. 5 and the

Original Sheet No. 35 to the Second Revised Volume

No. 1 of Transwestern’s FERC Gas Tariff are accepted

for filing to become effective on July 1, 1985.

(G) Transwestern’s motion for oral argument is

denied.

(H) Transwestern’s motion to file a Supplemental

Brief Opposing Exceptions is granted to the extent that

the first two pages of the Supplemental Brief may be

filed.

(I) Transwestern’s motion to reopen the record is

denied.

(J) Exceptions not granted are denied.

By the Commission.

(SEAL)

Lois D. Cashell,

Acting Secretary.

4

2

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:

BRP RO EAR Se

D-1

APPENDIX D

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

PIPELINE RATES: BURDEN OF PROOF,

MINIMUM BILLS,

UNDUE

DISCRIMINATION

Before Commissioners: Anthony G. Sousa, Acting

Chairman;

Charles G. Stalon and

C. M. Naeve.

Transwestern Pipeline Company Docket Nos. RP81-130-

024 through

RP81-130-026

OPINION NO. 238-A

OPINION AND ORDER DENYING REHEARING

(Issued August 4, 1986)

I.

Transwestern Pipeline Company (Transwestern), El Paso

Natural Gas Company (El Paso), and a group of El Paso’s

customers, known as the EOC Companies, seek rehearing of

Opinion No. 238.' In that Opinion we held that Transwest-

ern’s minimum bills were unjust, unreasonable, unduly dis-

criminatory, and preferential and hence should be

eliminated. We find nothing in the arguments of Transwest-

ern, E] Paso, or the EOC Companies that warrants a change

in that conclusion. Accordingly, we shall deny rehearing.

There are, however, several arguments that require

discussion.

Il.

Transwestern has two partial requirements customers —

Pacific Lighting Gas Supply (Pacific) and Northwest Central

'32 FERC 4 61,009 (1985).

D-2

Pipeline Corporation (Northwest Central). The rate sched-

ules for both customers have for some time included mini-

mum commodity bills, which require the customers to take a

certain amount of gas or pay the minimum commodity bill.

But the minimum commodity bills applicable to the two

customers are different. Pacific must take or pay for 91

percent of its annual contract quantity. Northwest Central,

however, must take or pay for only about 59 percent. A

number of parties and our trial staff argued that this differ-

ence is unduly discriminatory and preferential.

In addressing this argument in Opinion No. 238 we first

held that Transwestern bore the burden of proof. We based

this holding on the facts that Transwestern had started this

case by filing increased rates pursuant to section 4 of the

Natural Gas Act and that the minimum bills were integral to

the manner in which the increased rates are charged.’ In its

application for rehearing Transwestern argues that in so

holding we erred. We agree. Transwestern proposed no

change in its minimum bills. The burden of proof was there-

fore on the persons challenging the minimum bills. ANR

Pipeline Co. V. F.E.R.C., 771 F. 2d 507 (D.C. Cir. 1985).

But this error was harmless. In Opinion No. 238 we

assumed the intervenors and the trial staff had the burden of

proof, assessed the evidence-accordingly, and concluded that

they had met their burden.’

Transwestern contends, however, that we in fact did not

assess the evidence on the assumption that the intervenors

and the staff bore the burden of proof. To support this

2 Opinion No. 238, 32 FERC at p. 61,028.

3 Id. (“Even if the burden [of proof] were on the intervenors and

the staff to show that the minimum bills are unlawful, that

burden has been met. The record shows beyond any serious

doubt that, as the judge concluded, Transwestern’s minimum

bill provisions unduly discriminate against Pacific and unduly

favor Northwest Central.’’)

Pee ee rae 2a NS ass

i Taw

D-3

contention, Transwestern points out that in concluding our

discussion of the discrimination issue in Opinion No. 238

we said:

Finding then that the differences between Transwest-

ern’s minimum bills applicable to Pacific and Northwest

Central have not been justified, we affirm the judge and

hold that Transwestern’s minimum bills are unduly

discriminatory.‘

Transwestern argues that by saying “‘the differences . . . have

not been justified . . .”. we imposed the burden of proof on it.

We disagree. The argument confuses the burden of proof in

the sense of the burden of persuasion, which is the meaning

the phrase has in ANR Pipeline Co. Vv. F.E.R.C., with the

burden of proof in the sense of the burden of producing

evidence.

Undue discrimination is in essence an unjustified differ-

ence in treatment of similarly situated customers.’ The com-

plainant alleging that existing rate schedules unduly dis-

criminate against a customer bears the burden of persuading

us that the rate schedules do so. And the complainant must

always do so; the burden of persuasion never shifts. The

complainant also bears the initial burden of producing evi-

dence to substantiate its allegation. The complainant satis-

fies this burden by coming forward with evidence showing

that the customers are similarly situated and that they are

being treated differently. Once the complainant does so, the

‘Td. at p. 61,029.

> See, c.g., Leigh Portland Cement Co. v. Florida Gas Transmis-

sion Co., Opinion No. 807, 58 FPC 2795, 2802, reh’g denied,

Opinion No. 807-A, 59 FPC 2156 (1977), affd sub nom.,

Sebring Utilities Comm’n v. F.E.R.C., 591 F.2d 1003 (Sth Cir.),

cert. denied, 444 U.S. 879 (1979); St. Michaels Utilities

Comm’n v. F.P.C., 377 F.2d 912, 915 (4th Cir. 1967); quoting

SST AISaON” v. Chicago Heights Trucking Co., 310 U.S. 344,

D-4

burden of producing evidence shifts to the pipeline “to

justify [the] disparity on the basis of factual differences.’”

In this case the intervenors and the staff met their burden

of producing evidence by showing that Pacific and

Northwest Central are similarly situated and that the mini-

mum bills applicable to each are different. Hence it was

incumbent on Transwestern to produce evidence “‘to justify

[the] disparity...” But it did not. Our statement in Opinion

No. 238 that the difference between the minimum bills

applicable to Pacific and Northwest Central had not been

justified simply recognized this fact. Thus, we did not

impose on Transwestern the burden of persuasion.

Transwestern also disagrees with our findings that Pacific

and Northwest Central are similarly situated customers and

that the difference in the treatment of these two customers

has not been justified. With respect to the finding that Pacific

and Northwest Central are similarly situated customers,

Transwestern makes two points. First, Transwestern points

out that this finding is based on the facts that:

Both receive firm service from Transwestern. Both also

buy gas from producers and other pipelines, some of

which sell gas at a lower price than Transwestern does.

And both now have more gas available from their sup-

pliers than they need to meet demand.’

Transwestern argues that these facts are insufficient to show

that Pacific and Northwest Central are similarly situated.

Transwestern cites as support two cases: Michigan Consoli-

dated Gas Co. v. F.P.C., 203 F.2d 895, 901 (3rd Cir. 1953)

6 City of Frankfort v. F.E.R.C., 678 F.2d 699, 705 (7th Cir.

1983), quoting, Publ. Serv. Co. of Indiana V. F.E.R.C., 575 F.2d

1204, 1212 (7th Cir. 1978); see also, Publ. Serv. Co. of Indiana,

8 FERC 49 61,223, at p. 61,731 (1979); Boston Edison Co., 8

FERC 961,217 at p. 61,725 (1979).

7Opinion No. 238, 32 FERC at p. 61,029.

D-5

and Carolina Pipeline Co. v. Southern Natural Gas Co., 31

FPC 705, 707 (1964). We disagree.

First, the two cases Transwestern relies on are not to the

contrary. Neither case established general principles or

standards for determining when customers are similarly situ-

ated. Each case stands simply for the proposition that on the

facts shown the customers were dissimilar.

Second, the facts cited in Opinion No. 238 are more than

enough to show that Pacific and Northwest Central are simi-

larly situated customers. Indeed, as the judge concluded,

these facts “‘clearly”’ show the two customers to be similarly

situated.* But these facts were rather baldly stated in Opin-

ion No. 238. Therefore, since the question of the adequacy

of these facts has been raised, we will explain why they show

Pacific and Northwest Central to be similarly situated.

Transwestern’s arguments, however, require us to make a

preliminary point. The inquiry into the question of whether

the two customers are similarly situated is not simply a

search for any facts that show the Customers to be similar or

dissimilar. The inquiry is more structured than that. This

structure is provided by two standards. First, because we

regulate pipelines on a cost-of-service rather than on a value-

of-service basis, the inquiry must focus on “‘the impact the

provision of utility services to specific customers has on the

supplying utility.”’ Second, the inquiry must focus on facts

that are relevant to the difference in treatment at issue.

In light of these standards the first task is to define with

particularity the difference in treatment. By virtue of our

829 FERC 4] 63,054 at p. 65,160 (1984).

* Pierce, Allison, and Martin, Economic Regulation: Energy,

Transportation and Utilities 300 (1980).

D-6

minimum bill rule,'® Transwestern’s minimum bills are

restricted to recovering fixed costs included in the commod-

ity charge. As such, they act like additional demand charges

in that they guarantee the recovery of fixed costs. Conse-

quently, the effect of the difference in the minimum bills is

to guarantee that Transwestern will recover a far larger

percentage of its fixed commodity costs from Pacific than

from Northwest Central. The second task before us is there-

fore to determine whether there are any differences between

Pacific and Northwest Central that affect Transwestern in

such a way that it should be assured of recovering a larger

percentage of its fixed commodity costs from one customer

than the other. To do so, three specific questions must be

asked. ~

The first question is whether there are any differences in

the service Transwestern provides the two customers. There

are no such differences. Transwestern’s certificate and con-

tractual obligation to Pacific and Northwest Central are in

all material respects the same. Transwestern is obliged to

stand ready to sell gas to each every day of the year. The

maximum amount Transwestern must sell to each is speci-

fied and does not vary over the course of the year. In short,

Transwestern provides firm service to both.

The second question is whether there are any differences

in the way the rates for the two customers are developed and

paid that would warrant Transwestern recovering a larger

'0 Elimination of Variable Costs from Certain Natural Gas Pipe-

line Commodity Bill Provisions, Order No. 380, FERC Stat-

utes and Regulations, Regulations Preambles 1982-1985

49 30,571; Order No. 380-A, FERC Statutes and Regulations,

Regulations Preambles 1982-1985 § 30,584, Order No. 380-B,

29 FERC 4 61,076; Order No. 380-C, FERC Statutes and Reg-

ulations, Regulations Preambles 1982-1985 9 30,606; Order No.

380-D, 29 FERC 61,332 (1984), afd in relevant part sub nom.,

Wisconsin Gas Co. V. F.E.R.C., 770 F.2d 1144 (D.C. Cir.

1985), cert. denied. — U.S. — (May 9, 1986) [hereinafter cited

as Order No. 380, Order No. 380-A. efc., as appropriate].

Sin me

D-7

percentage of its fixed commodity costs from Pacific than

from Northwest Central. There are no such differences. The

cost classification and rate design method used to establish

the rates for both is the same.'!

Under this method some of the fixed costs Transwestern

incurs in providing service to each customer are classified to

the demand component and recovered through the demand

charge. The remaining fixed costs are classified to the com-

modity component and recovered through the commodity

component.”

Because of the way the demand charge is designed, Trans-

western is guaranteed recovery of the fixed costs classified to

the demand component. So there is no difference in the

amount of fixed demand costs Transwestern will recover

from Pacific and Northwest Central.

But there can be a difference in the amount of fixed

commodity costs Transwestern may recover from each. This

is sO because the stated commodity charge is determined by

dividing each customer’s expected purchases into the com-

modity costs allocated to each. The commodity revenues

each customer pays, however, is determined by multiplying

the commodity charge by the customer’s actual purchases. if

one of the customers can avoid purchasing gas from Trans-

western at the level used to design the rates and does so,

'! See Opinion No. 238, 32 FERC at pp. 61,024-25. Traditionally,

the method of cost classification and rate design used to estab-

lish rates for Pacific and Northwest Central has been the

Seaboard method, Id. at p. 61,039, n. 18. In Opinion No. 238

we held that the Seaboard method was unjust and unreasonable

and that Transwestern should use the modified fixed-variable

method of cost classification and rate design. Jd. at pp. 61,034-

45. This change, however, does not affect the point at issue

here, for the modified fixed-variable method will be used to

develop the rates for both Pacific and Northwest Central.

'2 7d. at pp. 61,024-25. We were there describing the Seaboard

method. But the modified fixed-variable method is in this

respect the same.

D-8

Transwestern will not recover all the fixed commodity costs

allocated to the customer. A minimum bill is intended to

assure that Transwestern recovers a portion of those costs by

requiring the customer to pay a portion of the commodity

charge whether or not it buys any gas. Hence, where there is

a difference in minimum bills, a relevant question to ask is

whether the customers differ in their ability to buy less gas

than expected. For example, it is not unduly discriminatory

for a pipeline to impose a minimum bill on its partial

requirement customers but not on its full requirement cus-

tomers. The customers are different in that the partial

requirement customers can control their purchases while the

full requirement customers cannot."

But agai

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