Petition for Writ of Certiorari — Indicated Expansion Shippers v. Federal Energy Regulatory Commission
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-~ Supreme Court, U.S.
(\ ) FILED
961179 JAN 22 1997
Case NOs. oc ut cisek
IN THE
Supreme Court of the United States
1996 OCTOBER TERM
ALTAMONT GAS TRANSMISSION COMPANY, et al.,
y Petitioner,
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
On Petition for Writ of Certiorari to the
United States Court of Appeals
for the District of Columbia Circuit
PETITION FOR A WRIT OF CERTIORARI
OF INDICATED EXPANSION SHIPPERS
Roger A. Berliner, Esq.
John M. Binetti, Esq.*
Brady & Berliner
1225 - 19th Street, N.W., Suite 800
Washington, D.C. 20036
Attorney for Indicated
Expansion Shippers
(*Counsel of Record)
January 22, 1997
\ ry \
;
i
QUESTIONS PRESENTED FOR REVIEW
Whether the U.S. Court of Appeals for the District of
Columbia Circuit in Altamont Gas Transmission Company, et al,
v. Federal Energy Regulatory Commission, 320 U.S. App. D.C. 98,
92 F. 3d 1239 (D.C. Cir. 1996)(“Altamont’’) correctly construed
the application of the Hinshaw Amendment to the Natural Gas
Act, § 1(c) of the Natural Gas Act, 15 U.S.C. § 717(c), to the
jurisdiction of Federal Energy Regulatory Commission in
Pacific Gas Transmission Company, FERC Docket Nos.
CP89-4360-000, et al., by determining that the Federal Energy
Regulatory Commission may not even consider the jurisdic-
tional implications of orders issued by the California Public
Utilities Commission that effectively created a tying alrange-
ment between interstate and intrastate pipeline capacity which
unduly discriminated against interstate Shippers of natural gas.
Whether the decision of U.S. Court of Appeals for the
District of Columbia Circuit in Altamont construes the Hinshaw
Amendment to the Natural Gas Act, § 1(c) of the Natural Gas
Act, 15 U.S.C. § 717(c), in a manner that does violence to the
Supremacy Clause of the U.S. Constitution.
Whether the Federal Energy Regulatory Commission is
precluded from considering the effects of a State regulatory
order directed at a Hinshaw Pipeline that results in undue
discrimination against interstate shippers of natural gas, in
violation of sections 4, 5 and 7 of the Natural Gas Act, 15
U.S.C. §§ 717c, 717d and 717£, in determining the public conve-
nience and necessity of a natural gas transmission facility, sub-
ject to the jurisdiction of FERC under section 7 of the Natural
Gas Act, 15 U.S.C. § 717f.
ii
PARTIES TO THE PROCEEDING
IN THE COURT OF APPEALS
The following are parties, intervenors and amici to the
proceeding before the United States Court of Appeals for the
District of Columbia Circuit in Altamont Gas Transmission
Company, et al, v. Federal Energy Regulatory Commission, 320
U.S. App. D.C. 98, 92 F 3d 1239 (D.C. Cir. 1996):
Altamont Gas Transmission Co.
Amoco Production Co. and Amoco Canada Petroleum
Co. Ltd.
California Public Utilities Commission
Canwest Supply Inc/U.S.A.
Cascade Natural Gas Corp.
Chevron U.S.A., Inc.
El] Paso Natural Gas Co.
Foothills Pipe Lines Ltd.
Great Lakes Gas Transmission
Imperial Irrigation District Limited Partnership
Independent Petroleum Assn. Of America
Norcen Marketing, Inc.
North Canadian Oils Ltd.
Northern CA Power Agency
Pacific Gas & Electric Co.
Pacific Gas Transmission Co.
Pan-Alberta Gas Ltd.
PanCanadian Petroleum Co.
Petro-Canada Hydrocarbons, Inc.
Southern CA Edison Co.
Southern California Gas Co.
Southern California Utility Power Pool
Suncor, Inc.
Turlock Irrigation District
Union Pacific Resources Co.
Washington Energy Exploration, Inc.
Petitioner, Indicated Expansion Shippers (IES), is an ad
hoc group of shippers which hold firm capacity on the Pacific
Gas Transmission Company Expansion Project. The member-
ship of IES is comprised of North Canadian Oils Limited,
Norcen Marketing, Inc., and Chevren U.S.A.
Norcen Marketing, Inc., is a Delaware corporation,
engaged in the production and marketing of natural gas, and is
a wholly owned subsidiary of Norcen Explorer, Inc., also a
Delaware corporation. Norcen Explorer, Inc., is a U.S. subsidi-
ary of Norcen Energy Resources Limited, a company incorpo-
rated under the laws of Canada with its principal place of
business in Calgary, Alberta, Canada. Both Norcen Marketing,
Inc. and Norcen Explorer, Inc. have their principal places of
business in Houston, Texas.
At the time of the filing of the docketing statement in the
proceeding before the Circuit Court in this case, North Cana-
dian Oils Limited was a Canadian natural gas exploration,
production, and marketing company, incorporated under the
laws of Canada, with its principal place of business in Calgary,
Alberta, Canada. On April 1, 1993, approximately 50.5% of the
stock of North Canadian Oils Limited was acquired by Norcen
Energy Resources Limited. The remaining stock was widely
held. On May 25, 1995, North Canadian Oils Limited was
amalgamated with Norcen Energy Resources Limited.
The only non-wholly owned subsidiary of Norcen Energy
Resources Limited is its propane marketing division, Superior
Propane, Inc., a Canadian corporation.
Chevron U.S.A., Inc. is engaged in the exploration, devel-
opment and production of natural gas. Chevron U.S.A., Inc. is
also a large consumer of natural gas in California in enhanced
oil recovery and refining operations as well as a shipper of
significant volumes of gas into California on various interstate
pipelines including Pacific Gas Transmission Company.
Chevron U.S.A., Inc. Is a wholly owned subsidiary of
Chevron Corporation. The non-wholly owned subsidiaries of
Chevron U.S.A., Inc. are Atlas Supply Company, Chevron do
Brasil Ltda., Chevron Mineral Corporation of Ire!and, Servicios
iv
Chevron, S.A. de C.V., Companiea Minera Chevron Domini-
cana, S.A., Felix Oil Company, Gulf Oil Zaire S.A.R.L., NGC
Corp., and Pembroke Capital Company, Inc.,
v
TABLE OF CONTENTS
Section
Questions Presented For Review................
Parties To The Proceeding In The Court of Appeals.
Me ES oa ns C46 dekh CR Rae ber R Bs
PN EE TI oo ic aces kaduses oevsand bs
ee UN ooo cs oi ose sc ova ea 6 Cae
Statutory Provision Involved in This Case.........
SOMONE OE TG Gone ck hea eco ecccses
ee Pe Or eae rae
Facts Material to Consideration of the
Questions Presented .......ccccscesens
Reasons For Granting Certiorari................
I. The U.S. Court of Appeals for the District of
Columbia Circuit has Decided An
Important Question of Federal Law In
This Case Which Has Not, But Should Be,
Settled By The Supreme Court ......... 7
A. Summary of Argument ............ 7
B. The Decision of The Circuit Court Is
Unprecedented and Misconstrues
the Scope of the Hinshaw
Amendment to the Natural
SP Cb ee okie Kio ke oa )
C. The Decision of The Circuit Court
Inverts Federal Preemption Law
And Does Violence To The
Supremacy Clause of the U.S.
RO hbk Fe haw ech aceees 14
D. The Crossover Ban is Not a Mere
“Bookkeeping Convention”, But a
Device By Which A State
Regulatory Body Has Preempted
Federal Regulation.............. 17
Fy
~] WG Ww wre be Eo.
vi
E. The Circuit Court Decision Reverses
An Inappropriate Remedy Ordered
By FERC By Allowing State
Preemption Of Federal Statutory
Protections For Interstate Natural
Say WEE 6 £00094 40) beans 20
a CUINIOR, 5s 3 hak dead os 4x4 cae 22
Appendix
Decision of the U.S, Court of Appeals ..... App. 1
bse Bin eeng, PEE OR EET Ee Per te aee App. 2
vii
TABLE OF AUTHORITIES
Court Cases Page
Altamont Gas Transmission Company, et
al, v, Federal Energy Regulatory
Commission, 320 U.S. App. D.C. 98, 92
F. 3d 1239 (D.C. Cir. 1996) .......... 1,2,8,9,10,11,12
ANR Pipeline Co. v. FERC, 876 F.2d 124
CR Se se eh eae e us 12,13,20
ANR Pipeline Co. v. FE.R.C., 71 F3d 897
i SO io i es 16
Associated Gas Distributors v. FERC
(AGD I), 824 F.2d 981 (D.C. Cir. 1987). 20
Atlantic Refining Co. v. Public Service
Comm'n, 360 U.S, 378 (1959)......... 16
City of Mishawaka v. American Electric
Power Co., Inc., 616 F.2d 976 (7th Cir.
COLE Winn ONSEN eK K kee cans 15
FPC v. Conway Corp., 426 U.S. 271
CRPNNE Sah wu bub ale acces Kec os 10,11,12,16
FPC v. Transcontinental Gas Pipe Line
Co., 36S US. 1 (1961)... iceescvess 12,13,16
Illinois Commerce Commission v. Interstate
Commerce Commission, 749 F.2d 875
Ete RIOD ie hx ro ee eee ek 16
Louisiana Power & Light Co. v. FPC, 483
F.2d 623 (Sth Cir. 1973), cert. denied,
SD WB. FIG CGM) ccc ccc ccccccvers 8
Maryland People’s Counsel v. FERC, 761
F.2d 780 (D.C. Cir. 1985) ............ 14,16
Northern Natural Gas Co. v. State
Corporation Commission of Kansas, 372
RP EERE G05 hs oo ooo vow Kak 8
Northwest Central Pipeline v. State Corp.
Comm'n, 489 U.S. 493 (1989)......... 20
Office of Consumers Counsel v. FERC, 655
F.2d 1132 (D.C, Cir. 1980)... icc. 13
Panhandle Eastern Pipeline Co. v. FPC,
TO TIS. GS CI) ces cnsivccdsccess 16
Plaquemines Oil and Gas Company v.
FERC, 450 F.2d 1334 (D.C. Cir. 1971)... 21
Public Utilities Commission of California v.
FERC, 900 F.2d 269 (D.C. Cir. 1990)... 8
United Distribution Companies, et al. v.
FERC, 319 U.S. App. D.C. 42, 88 F.3d
SES COA OBE, TONG) vo shea see 'ee vai 7,8,15,16
Schenidwind v. ANR Pipeline Co., 485
Sas A LAPOE) 60 sc eKKATN EERIE 20
Agency Cases
CPUC Decision 91-06-053, issued June
DS re re ee ok Poe pe ap aeee 5
“Preliminary Determination on
Nonenvironmental Issues,” 54 FERC
T 61035 (Jam. 22, 1994) ois tivecece’s 1,4
Pacific Gas Transmission Company,
“Order Issuing Certificate, Granting and
Denying In Part Rehearing and
Clarification,” 56 FERC {1 61,192 (Aug.
Si ReeEd: 4 eA pe bapa ede kis kne’ 1,5,18
Pacific Gas Transmission Company,
“Order on Report and Modifying Prior
Order,” 57 FERC 9 61,097 (Oct. 24,
SOME? Aes pbb ok 2 or ed ene ake 1,5,18
Page
‘ a
160 a AN a a a Nk CEL ON
Senet nese at ce ed itis aa ale
6 conn saber oes
a a ee
Pacific Gas Transmission Company,
“Order Granting In Part and Denying In
Part Requests for Rehearing and
Clarification,” 62 FERC 9 61,243
ORC ER EI in 5 ES Si ws cess 1,6
Union Pacific Fuels, et al. v. Southern
California Gas Company, 76 FERC
1 61,300 (September 19, 1996) ........ 8
Constitution
Supremacy Clause of the U.S.
Consitution, U.S. Const., Art. VI, cl.2.. 14,16,19,21
Statutes
Hinshaw Amendment to the Natural Gas
Act, § 1(c) of the Natural Gas Act, 15
Oe TATURE cs Vina od we OR Cu sd e's s 2,6,7,8,14,16,19,21
Section 4 of the Natural Gas Act, 15
a TA ha oe eh oie ov haw ed ss 7
Section 5 of the Natural Gas Act, 15
RPT thes, on wink Woo Kn ow 7
Section 7(c) of the Natural Gas Act, 15
SS TAPE Deb db deca e kis be 3,7,10,13
Section 7(e) of the Natural Gas Act, 15
RAan Ee PRMD GA bv a 6 4 6's he oka 8 7,10,13
Section 19(b) of the Natural Gas Act, 15
FEM hi 55 os Sb oN Sd ee ho 3
PONIES 6 ook ek 2
Other Authorities
S. Rep. No. 817, 83rd Cong. 1st Sess.
(1953), reprinted in 1954 U.S. Code
Cong. & Admin. News 2101.......... 16
“ aie 2 . ‘ » ee . ¥ = . . ny a eis aes f ¥ Pe ce
1
RULINGS UNDER REVIEW
The citation of the opinion of the U.S. Court of Appeals
for the District of Columbia Circuit in this case is Altamont Gas
Transmission Company, et al., v. Federal Energy Regulatory Com-
mission, 320 U.S. App. D.C. 98, 92 F. 3d 1239 (D.C. Cir. 1996).
The citations of the opinions of the Federal Energy Regu-
latory Commission under review by the U.S. Court of Appeals
in this case are:
Pacific Gas Transmission Company, “Preliminary Determi-
nation on Nonenvironmental Issues,” 54 FERC 1% 61,035
(Jan. 22, 1991)(“FERC January 22 Order”) ;
Pacific Gas Transmission Company, “Order Issuing Certifi-
cate, Granting and Denying In Part Rehearing and Clarifica-
tion,” 56 FERC { 61,192 (Aug. 1, 1991)(“FERC August 1
Order”);
Pacific Gas Transmission Company, “Order on Report and
Modifying Prior Order,” 57 FERC 1% 61,097 (Oct. 24,
1991)(“FERC October 24 Order”); and
Pacific Gas Transmission Company, “Order Granting In
Part and Denying In Part Requests for Rehearing and Clarifica-
tion,” 62 FERC 9 61,243 (March 16, 1993)(“FERC March 16
Order’”’).
2
BASIS FOR JURISDICTION
The Judgement of the U. S. Court of Appeals for the
District of Columbia Circuit in Altamont Gas Transmission
Company, et al. v. Federal Energy Regulatory Commission, 320
U.S. App. D.C. 98, 92 F. 3d 1239 (D.C. Cir. 1996) was issued on
August 23, 1996. Per Curium Orders denying petitions for
rehearing, including the petition for rehearing filed by Indi-
cated Expansion Shippers, were issued on October 24, 1996.
The jurisdiction of the Supreme Court in this case is based
upon 28 U.S.C. § 1254(1).
STATUTORY PROVISION INVOLVED
IN THIS CASE
The Hinshaw Amendment to the Natural Gas Act,
§1(c) of the Natural Gas Act (or “NGA”), 15 U.S.C. § 717(c),
states as follows:
(c) The provisions of this chapter shall not apply to
any person engaged in or legally authorized to engage in
the transportation in interstate commerce or the sale in
interstate commerce for resale, of natural gas received by
such person from another person within or at the boundary
of a State if all the natural gas so received is ultimately
consumed within such State, or to any facilities used by
such person for such transportation or sale, provided that
the rates and service of such person and facilities be sub-
ject to regulation by a State commission. The matters
exempted from the provisions of this chapter by this sub-
. section are declared to be matters primarily of local con-
cern and subject to regulation by the several States. A
certification from such State commission to the Federal
Power Commission that such State commission has regula-
tory jurisdiction over rates and service of such person and
facilities and is exercising such jurisdiction shall constitute
conclusive evidence of such regulatory power or
jurisdiction.
3
STATEMENT OF THE CASE
Basis for Federal Jurisdiction
in the U.S. Court of Appeals
The U.S. Court of Appeals for the District of Columbia
Circuit was vested with jurisdiction over the petition for review
filed by Indicated Expansion Shippers in D.C. Circuit Case No.
91-1369 under section 19(b) of the Natural Gas Act, 15 U.S.C.
§ 717r(b).
Facts Material to Consideration
of the Questions Presented
Pacific Gas Transmission (PGT) is an interstate pipeline
that transports gas from the Canadian border to the northern
California border at Malin, Oregon, where it interconnects with
the California pipeline facilities of its parent, Pacific Gas &
Electric Company (PG&E). As such, PGT is a natural gas
company subject to the jurisdiction of FERC within the mean-
ing of Section 1 of the NGA. PGT was built by and is wholly
owned by PG&E, which purports to be a Hinshaw Pipeline
within the meaning of Section 1(c) of the NGA and thereby
exempt from FERC’s jurisdiction. Until the in-service date of
the PGT Expansion, PG&E held exclusive rights to all firm
PGT capacity from the international border to the California
border at Malin, Oregon and dominated sales of natural gas
within northern California.
The Petitioners and Intervenors before the U.S. Court of
Appeals were comprised of a competitive pipeline project seek-
ing to also serve southern California markets, and domestic and
Canadian producers and marketers who wanted to compete
with PG&E for gas sales in northern California by selling gas to
their own end-use customers in that service area.
In 1988, PGT filed an application pursuant to Section
7(c) of the NGA, to expand its interstate facilities in order to
transport additional quantities of natural gas for utilities in
southern California and in the Pacific Northwest. Initially, the
4
Project limited capacity solely to utilities in southern California
and the Pacific Northwest. It was only when PGT was unable to
fully subscribe the project that it opened it to independent gas
sellers who wanted to compete with PG&E in the northern
California market. However, PGT refused to permit these gas
sellers to deliver and sell gas at the delivery point for northern
California—Malin, Oregon. Rather, these shippers were
required to also contractually commit to firm transportation
services on PG&E’s proposed expansion facilities and transport
gas to southern California—even if they only sought to serve
markets in northern California in competition with PG&E.
Numerous protests were filed with FERC alleging that
PGT’s application was seeking to protect its parent PG&E from
competition by denying direct access to the northern California
market at Malin, Oregon. The protestants argued that prospec-
tive shippers on PGT could not be compelled to take expensive
additional transportation service on PG&E as a condition of
obtaining interstate capacity to the northern California border.
FERC issued a preliminary order on January 22, 1991, which
found PGT’s initial allocation of capacity and its single rate
proposal requiring transportation on PG&E’s proposed pipe-
line facilities in California to be discriminatory. FERC January
22 Order, 54 FERC 9 61,035 (1991). FERC ordered PGT to
hold a new open season, to remove the discriminatory language
from its tariff, and to establish Malin, Oregon as a delivery
point on PGT’s system at the California border. Jd. at 61,154.
After FERC’s January 22 order, petitioner-shippers (and
intervenor-shippers below) signed binding 30-year service
agreements with PGT for transportation services on the PGT
Expansion Project. Those contractual agreements became bind-
ing on April 25, 1991. However, two days before the 30 year
transportation service agreements were deemed binding,
PG&E requested its state regulatory body, the California Public
Utilities Commission (CPUC), to restrict access by PGT Expan-
sion shippers to PG&E’s existing intra-California transportation
facilities. The CPUC approved PG&E’s request for a “cross-
over ban” in June of 1991, requiring that any gas delivered to
5
the terminus of the PGT Expansion at the California border at
Malin utilize the PG&E Expansion for transportation within
California. CPUC Decision 91-06-053, issued June 19, 1991.
Rather than selling f.o.b. at Malin, and thereby incurring
only PGT’s transportation charge, PGT expansion shippers
were now required to pay PG&E an additional amount, approx-
imately equal to the PGT Expansion tariff, to pay for PG&E’s
expansion facilities despite the fact that PGT Expansion ship-
pers neither desired nor needed to use those facilities. By
contrast, no other interstate shipper, including interstate ship-
pers on PGT’s non-expansion facilities, is required to pay for
any intrastate facilities as a condition of interstate service.
In August of 1991, FERC found that the CPUC’s action
had retied the PGT and PG&E expansions, effectively eliminat-
ing the ability of an interstate PGT shipper to sell gas at the
California border without also paying for the unwanted intra-
State facilities. FERC concluded that the discriminatory
arrangement between PGT and PG&E frustrated federal juris-
diction and that it could not “find the public convenience and
necessity served until the anticompetitive nature of the tying
arrangement is eradicated.” FERC August 1 Order, 56 FERC
1 61,192 at 61,725. Accordingly, FERC used its conditioning
authority under Section 7(e) of the NGA to forbid commence-
ment of construction of the PGT Expansion until the Commis-
sion could be assured “that PGT shippers are receiving nondis-
criminatory treatment as to access to the California markets by
means other than on the PG&E expansion.” Jd. at 61,726.
_ Without making further findings, FERC issued a further
order on October 24, 1991, nafrowly approved by a 3-2 vote,
which radically altered the condition imposed on PGT’s certifi-
cate. FERC October 24 Order, 57 FERC 9 61,097. Although
FERC admitted that PGT had not demonstrated that shippers
would not be subject to unduly discriminatory restraints, FERC
argued, for the first time, that the need to construct the facili-
ties in a timely manner required a modification of the condi-
tion. FERC replaced the ban on construction with a modest
6
penalty attached to PGT’s return on equity. Jd. at 61,361. Two
commissioners, Trabandt and Langdon, dissented, the latter
commenting that the order “not only fails to stamp out discrim-
ination where it has been discovered, but goes further awry by
actually authorizing the implementation of that unduly discrimi-
natory practice.” Jd. at 61,361-362.
Rehearing of the FERC October 24 Order was sought by
petitioners on the grounds that FERC had abdicated its statu-
tory responsibility under the NGA to protect shippers. Those
requests were denied by the Commission on March 16, 1993.
FERC March 16 Order, 62 FERC 9 61,243.
Indicated Expansion Shippers filed a timely petition with
the U.S. Court of Appeals for the District of Columbia Circuit
seeking review of the series of FERC orders in the Pacific Gas
Transmission Company proceeding. These petitioners argued to
the Court that FERC abdicated its obligations to interstate
shippers of natural gas on the mistaken basis that the source of
the discriminatory practices inhibited its authority or ability to
protect interstate shippers. Petitioners’ brief also argued that
FERC could have stopped short of halting construction if it
adopted other remedies that would equally protect interstate
shippers from the effects of the undue discrimination.
In separate petitions for review of the FERC Orders that
were ultimately consolidated with the review proceeding initi-
ated by Indicated Expansion Shippers, both PGT and CPUC
contended that by imposing the rate of return condition FERC
had exceeded its jurisdiction and that the findings of anticom-
petitive or unduly discriminatory acts are unsupported by the
record.
In its opinion disposing of the consolidated cases, the U.S.
Court of Appeals did not reach the issues raised by Indicated
Expansion Shippers. Similarly, it did not determine whether the
PGI-PG&E arrangement was unduly discriminatory. The sole
basis upon which the Court’s opinion rested was that FERC had
overstepped its jurisdictional bounds as stated in the Hinshaw
Amendment to the NGA.
—_—,
7
REASONS FOR GRANTING CERTIORARI
I. The U.S. Court of Appeals for the District of Columbia
Circuit Has Decided An Important Question of Federal Law
In This Case Which Has Not, But Should Be, Settled By The
Supreme Court.
A. Summary of Argument
This case presents a fundamental jurisdictional conflict
between federal and state authority. Specifically, it addresses
the scope of FERC’s authority under Sections 4,5, and 7 of the
NGA, 15 USC §§ 717c, 777d and 717£, to consider the jurisdic-
tional ramifications upon interstate natural gas shippers of state
actions taken under color of the Hinshaw Amendment, as set
forth in section 1(c) of the NGA. Similar issues were recently
presently to the U.S. Court of Appeals for the District of
Columbia Circuit in United Distribution Companies, et al. y.
FERC, 319 U.S. App. D.C. 42, 88 E3d 1105 (D.C. Cir. 1996)
(“United Distribution”), wherein the Court upheld FERC’s
NGA authority where it conflicted with a claimed Hinshaw
exemption, reaching a result directly opposite to that reached
by the Court in this case. In light of the importance of the
question of Federal law presented by this case, the conflict of
decisions within the District of Columbia Circuit on this issue,
the “murkiness” of the issue, and the unprecedented resolution
of the issue by the Circuit Court in this case, IES respectfully
petition’s the Supreme Court to issue a writ of certiorari to the
Circuit Court below in order to fully and clearly resolve the
' A petition for rehearing and Suggestion for rehearing en banc was
filed by LDC Petitioners in United Distribution Companies on August 30,
1996, in response to the Circuit Co ’s per curiam opinion issued July 16,
1996, which determined that FERC appropriately asserted jurisdiction
over LDC transactions involving release of interstate pipeline capacity.
limits to the FERC.”
8
current uncertainty in the natural gas industry regarding the
delineation between Federal and State regulatory authority
under the Hinshaw Amendment to the NGA.
Since the enactment of the Hinshaw Amendment in 1954,
the courts and FERC have continued to define the demarcation
between Federal and State jurisdiction, and to determine when
State authority is preempted by the broad powers mandated by
the NGA.? As both the Altamont and United Distribution cases
make clear, the tension between State and Federal authority
has been exacerbated by Federal and State policy initiatives
which have promoted open access transportation services, bro-
kering and transferring of capacity rights, and pipeline expan-
sions. Both of these cases attempt to define the scope of
Federal/State authority when those jurisdictions intersect or
conflict, and yet both reach different conclusions. Conflict con-
tinues to abound at the FERC as well. In a very recent case
which also sought to define FERC’s authority in light of a
Hinshaw exemption, one commissioner called the law in this
area “admittedly murky.”
The Circuit Court in Altamont concluded that PG&E’s
Hinshaw status prevents the FERC from considering the effects
of a state regulation:
Although the Commission ordinarily has the authority
to consider a matter beyond its jurisdiction if the
matter affects jurisdictional sales—at least if there
would otherwise be a regulatory gap—here there is no
2 See, ¢.g., Northern Natural Gas Co. v. State Corporation Commission of
Kansas, 372 U.S. 84 (1963); Louisiana Power & Light Co. v. FPC, 483 F.2d
623 (Sth Cir. 1973), cert. denied, 416 U.S. 974 (1974); Public Utilities
Commission of California v. FERC, 900 F.2d 269 (D.C. Cir. 1990).
3 See Union Pacific Fuels, et al. v. Southern California Gas Company, 76
FERC { 61,300 (September 19, 1996), Commissioner Hoecker dissenting
in part. In Union Pacific, the Commissioner rejected an argument, relying
on Southern California Gas’ Hinshaw status, that a charge levied by
SoCal on interstate shippers was not within FERC’s interstate
jurisdiction.
9
such gap but, on the contrary, an express congres-
sional reservation of jurisdiction to another body. That
places the matter off-limits to the FERC.
Altamont, 92 F.3d at 1248.
Petitioners respectfully submit that by defining FERC’s
NGA jurisdiction so narrowly, the Hinshaw exemption so
broadly, and the crossover ban so mechanically, the Circuit
Court has significantly reduced FERC’s ability to protect inter-
state shippers subject to its jurisdiction. As a result of the
Circuit Court’s opinion, the balance between State and Federal
regulation has been fundamentally altered. As a result of the
Circuit Court’s opinion, FERC is stripped of its ability to even
consider the consequences on interstate shippers of natural gas
simply by virtue of the source of those consequences. The
logical, yet incongruous, outcome of this theory is that the
Hinshaw exemption is so inclusively insulative that a Hinshaw
pipeline and/or its State regulatory body could promulgate any
variety of policies antithetical to the rights of interstate ship-
pers, and by clothing those policies in the guise of “rate design”,
remain “off-limits” to FERC consideration. The Circuit Court’s
opinion thus leaves interstate shippers bereft of the protections
accorded by the Natural Gas Act under Sections 4,5, and 7 and
should be reviewed by the Supreme Court.
B. The Decision of the Circuit Court Is Unprecedented
and Misconstrues the Scope of the Hinshaw Amendment to
the Natural Gas Act
The Circuit Court’s decision renders FERC powerless to
protect interstate shippers of natural gas from unduly discrimi-
natory and anticompetitive conditions if those conditions are
imposed by a State agency in the guise of “rate policies”
regarding a Hinshaw pipeline. Indeed, the decision goes so far
as to prohibit FERC from even considering whether the result
ol the State’s action frustrates its interstate jurisdiction—the
entire matter is “off limits”. This holding is without precedent
and inverts the balance of power over interstate natural gas
transportation intended by the Natural Gas Act.
10
As characterized by the Circuit Court, the “pivotal ques-
tion” in this case is “whether the Commission may exercise its
power over and interstate pipeline in a manner intended to
influence a state agency’s regulation of a Hinshaw pipeline”.
Altamont, 92 F.3d at 1247. Petitioners fundamentally disagree
with the Circuit Court’s characterization of the central issue of
this case as a matter of analyzing the motive or intent of FERC.
Rather, the central issue here is better characterized as
delineating the permissible scope of FERC’s consideration of
the impact of nonjurisdictional transactions on matters clearly
within the scope of FERC’s jurisdiction, the issuance of a
certificate of public convenience and necessity under Section 7
of the Natural Gas Act, 15 U.S.C. § 717f. The nonjurisdictional
transaction involved here is a regulatory order of the CPUC
directed at PG&E, an entity FERC found to be a Hinshaw
pipeline. However, the subject matter of that regulatory order
encompasses, and is specifically designed to affect, interstate
shippers of natural gas utilizing the PGT Expansion facility, the
jurisdictional facility that was the subject of PGT’s Section 7
application before the FERC. Thus, the question is whether
FERC can consider the unduly discriminatory impact of the
CPUC order on interstate shippers utilizing the jurisdictional
PGT facility. As is more fully discussed below, the issue con-
cerning the specific remedial action taken by FERC based on
that consideration is an entirely separate matter that does not
affect the question of FERC’s jurisdiction presented in this
case.
Nevertheless, the Circuit Court recognized that, even as
characterized in its decision, the answer to the “pivotal” issue in
this case can and should be readily discerned from a proper
interpretation of the Supreme Court’s decision in FPC v, Con-
way Corp., 426 U.S. 271 (1976) (“Conway”), as was argued by
FERC. However, in addition to mischaracterizing the “pivotal”
issue in this case, the Circuit Court rejected FERC’s central
argument by subjecting Conway to a misdirected interpretation.
When discussing FERC’s authority to consider the jurisdic-
tional implications of nonjurisdictional transactions, the Circuit
11
Court, citing Conway, stated that “it could only do so ‘{if] the
undue preference or discrimination is . . . traceable to the level
of the jurisdictional rate.’” Altamont, 92 F.3d at 1247 (quoting
Conway, 426 U.S. at 277). This selective use of language from
Conway results in a very narrow interpretation of FERC
authority in this context. However, a fuller reading of what the
Supreme Court actually stated results in a very broad interpre-
tation of Commission authority.
If the undue preference or discrimination is in any way
traceable to the level of the jurisdictional rate, it is
plain enough that the section would to that extent
apply; and to that extent the Commission would have
power to effect a remedy under § 206 by an appropri-
ate order directed to the jurisdictional rate.
Conway, 426 U.S. at 277 (emphasis added).
Thus, Conway held that FERC was within its authority to
consider nonjurisdictional matters as long as the undue discrim-
ination was traceable “in any way” to FERC’s jurisdictional
rates, a critical phrase, broadly construing FERC’s authority,
that the Circuit Court’s decision literally deletes. In this case,
the crossover ban was explicitly aimed at gas arriving at Malin
under PGT’s Expansion firm rate schedule, a linkage that more
than satisfies the Supreme Court’s requirements in Conway.
Thus, the only question left unanswered by Conway, and the
issue the Circuit Court did not address, is whether the rationale
of Conway is equally applicable when the nonjurisdictional
matter at issue is a State regulatory agency order directed at a
Hinshaw pipeline. It is that issue, whether the Hinshaw Amend-
ment precludes FERC consideration of the impact of a state
regulatory order directed at a Hinshaw pipeline that imposes
undue discrimination on interstate shippers utilizing a jurisdic-
tional facility seeking a certificate of public convenience and
necessity, that has not been previously addressed by the
Supreme Court, and on which Petitioners now base this petition
for a writ of certiorari.
12
After disposing of Conway and its clear impact on the
“pivotal” issue in this case, the Circuit Court’s principal author-
ity for this ground breaking decision, already seized upon by
State regulated entities in their arguments before the Circuit
Court in United Distribution, is nothing more than what it
characterizes as “a logical implication” arising from language in
ANR Pipeline Co. v. FERC, 876 F.2d 124, 132 (D.C. Cir. 1989)
(“ANR”), which the Circuit Court claims puts the Supreme
Court decision, FPC v. Transcontinental Gas Pipe Line Co., 365
U.S. 1 (1961) (“Transco”), “in perspective”.
[I]n Transco, despite the sale’s impact on jurisdictional
Sales, no . . . agency had any direct voice over whether
it satisfied the public interest. We think it would be a
considerable stretch from there to say that, in certify-
ing transportation that is necessary to Carry out a sale,
the Commission is required to reconsider the very
aspects of the sale that have been assessed by an
agency specifically vested by Congress with authority
over the subject.
Altamont, 92 F.3d at 1247-1248 (quoting ANR, 876 F.2d at 132)
Petitioners believe that the Circuit Court entirely miscon-
strued ANR.. First, the Circuit Court conceded that the cited
language is “couched in terms of what the Commission is
required to consider”, rather than what it is strictly prohibited
from considering. Jd. at 1248. More importantly, the entire
subject matter of ANR relates to whether FERC is required to
reconsider the exact same issues that were previously consid-
ered by another arm of the U.S. Department of Energy. ANR
does not address, nor is it “logical” to extend ANR to a radically
different context of conflicting Federal-State jurisdiction. It is
not logical, or supportable, to conclude from ANR that FERC is
absolutely prohibited from considering the entirely different
issue relatipg. to the jurisdictional impact on interstate shippers
13
of State policies.‘ In fact, on this latter point, the Circuit Court
in ANR was quite clear:
[W]e do not understand FERC to suggest that it
would not independently examine any effects claimed
to be due to the specific transportation proposed, as
opposed to effects inherent in the importation and
sale of the gas in the United States as a whole. Indeed,
in this very case the Commission has shown alertness
to the implications of the specific transaction, limiting
the duration of the transportation certificates because
of concern over their anticompetitive potential.
ANR, 876 F.2d at 132.
Far from supporting the Circuit Court’s unprecedented
conclusion limiting FERC’s authority to consider the jurisdic-
tional impact of matters reserved to other jurisdictions, ANR
supports FERC’s authority to “independently examine any
effects claimed to be due to” the crossover ban. Accordingly,
ANR does nothing to limit the applicability of the essential
holding in Transco. The essential holding in Transco is that “the
Commission’s power under Section 7 to consider the public
interest when deciding whether to issue a certificate for jurisdic-
tional facilities extends generally to all factors bearing on the
public interest, and specifically extends to permit FERC to look
into matters excluded from the Commission’s direct regulatory
jurisdiction”. Office of Consumers Counsel v. FERC, 655 F.2d
1132, 1147 (D.C. Cir. 1980).
* Petitioners have attempted to clearly distinguish their position with
respect to the jurisdictional issue at stake in this case from the specific
action FERC took. The issue of FERC’s authority to consider the matter
is itself distinct form whether FERC may use the fruits of that considera-
tion to “induc{e] a change [of state] policy”. The latter it may not do. The
former, it must.
14
Similarly, there is no authority for the proposition that
Congress, in expressly reserving certain matters to the states
through the Hinshaw Amendment, intended to in any way
nullify FERC’s ability to consider jurisdictional consequences
that lie at the core of its regulatory authority, any more than
FERC is prohibited from considering the jurisdictional impacts
of matters over which it never had authority. See, e.g., Maryland
People’s Counsel v. FERC, 761 F.2d 780, 786-787 (D.C. Cir.
1985). While it may be true that if the source of the unduly
discriminatory practices is a State agency action with regard to a
Hinshaw pipeline, FERC’s ability to directly rectify the matter
is limited, FERC nevertheless retains all the jurisdiction that is
required over interstate shippers to fashion an appropriate
remedy to counter otherwise unduly discriminatory practices.
As FERC recently stated, “[t]he Hinshaw exemption exempts
from Commission jurisdiction the person receiving the gas
within the state, not the person delivering the gas.” Union
Pacific Fuels, Inc. v. Southern California Gas Company, 76 FERC
1 61,300 at p. 62,496 (Sept. 19, 1996).5
C. The Decision of The Circuit Court Inverts Federal
Preemption Law And Does Violence To The Supremacy
Clause of the U.S. Constitution
The very circumstances of this case demonstrate the dan-
gerous inversion of Federal/State regulatory authority inherent
in the Circuit Court’s decision. FERC had previously found that
the tying of specific interstate and intrastate Capacity unlawfully
discriminated against interstate shippers. Accordingly, it
ordezed the projects untied by requiring PGT to delete those
provisions of its tariff and to hold a new open season for
capacity that would allow interstate shippers the right to deliver
5In Union Pacific, a case very analogous to this case, FERC found that
an interconnection charge levied by a Hinshaw pipeline, Southern Cali-
fornia Gas Company, and approved by the State regulatory body, the
CPUC, against interstate shippers moving gas over the Kern/Mojave
interstate pipeline was not jurisdictional to the CPUC by virtue of the
Hinshaw exemption accorded to SoCal Gas, but was within the scope of
FERC’s jurisdiction over the interstate transportation of natural gas. Jd.
eee ae aR i Ne AMARA ata PTA LINES eS BE 08! Sod i a end STA rt y ey
15
gas at Malin, Oregon without any additional obligation to take
capacity within California on the PG&E Expansion. In direct
response to FERC’s ruling, the CPUC adopted the crossover
ban, which FERC properly found retied the projects, thereby
reimposing the same unduly discriminatory condition FERC
had previously rejected in another form. According to the
Circuit Court, the fact that the same unduly discriminatory
result was achieved through state action completely removes the
matter from FERC’s consideration. Thus, the Circuit Court’s
decision elevates form over substance to the detriment of inter-
state shippers who are completely dependent upon the Federal
government to shield them from unduly discriminatory condi-
tions affecting interstate natural gas transportation.‘
Moreover, the Circuit Court’s determination in this case is
at odds with the Circuit Court’s conclusion in United Distribu-
tion Companies. There, the Circuit Court determined that
FERC’s preclusion of the CPUC-approved “buy-sell” programs
was proper because it was “grounded in the [transportation]
transaction itself” and that FERC’s authority preempted the
state approved programs which conflicted with that jurisdiction.
United Distribution Companies, 88 F.3d at 1157. Yet, here, where
FERC’s concern that interstate transportation not be encum-
bered or tied to other obligations was also unquestionably
“grounded in the transportation transaction”governed by
FERC, the Circuit Court concluded that FERC is precluded by
law from even considering the matter.
6 Petitioners agree with the Circuit Court that FERC could have
“avoided any Hinshaw constraint upon its jurisdiction by concluding that
PGT and PG&E undertook this project as a single company”, a proposi-
tion for which there was more than sufficient evidence. The Circuit Court,
however, fails to acknowledge that there is any other more limited means
by which the Commission may take cognizance of the fact that “[t]he dual
regulatory process is being taken undue advantage of by the utility,
thwarting the intended balance of federal and state regulation.” City of
Mishawaka v. American Electric Power Co., Inc., 616 F2d 976, 983 (7th Cir.
1980).
16
This result is not only conflicting, but stands starkly
outside the mainstream of legal precedent on this issue. As was
recognized by the Circuit Court in as recent a case as United
Distribution Companies, the Hinshaw Amendment, while carv-
ing out an area of exclusive State regulatory authority, does not
overturn fundamental precepts of Federal preemption of con-
flicting State law under the Supremacy Clause of the Constitu-
tion. Jd. 88 F3d at 1155-1157. Certainly, the weight of prece-
dents cited by FERC and IES support this view. See M
People’s Council v. FERC, 761 F.2d 780 (D.C. Cir. 1985); FPC v.
Conway Corp., 426 U.S. 271 (1976); FPC v. Transcontinental Gas
Pipe Line Corp., 365 U.S. 1 (1961); Atlantic Refining Co. v.
Public Service Comm’n, 360 U.S. 378 (1959); Panhandle Eastern
Pipeline Co. v. FPC, 324 U.S. 635 (1945). However, although the
Circuit Court did not specifically so hold, the manner in which
the decision has been applied creates an area of the law
wherein State regulation preempts conflicting Federal regulatory
directives.
Accordingly, Petitioners respectfully submit that the inter-
pretation of the Circuit Court in Altamont places a judicial gloss
on the Hinshaw Amendment whereby it completely inverts
established principles of Federal preemption law. As such the
decision elevates a statutory provision that was intended to be
an exception to Federal preemption, to the level of a provision
that broadly reverses Federal preemption law, thereby overrid-
ing the otherwise applicable effects of the Supremacy Clause of
the U.S. Consitution. This was not the intent of Congress in
enacting the Hinshaw Amendment’ and should not be institu-
tionalized by the Circuit Court’s decision in this case.
The Circuit Court decision raises a serious question as to
the reasonable limits of interpreting the scope of a statutory
exception to the Supremacy Clause of the U.S. Constitution.
Compare Illinois Commerce Commission v. Interstate Commerce
7 See S. Rep. No. 817, 83rd Cong., 1st Sess, 2 (1953), reprinted in 1954 US.
Code Cong. & Admin. News 2101, 2103; See also ANR Pipeline Co. v. FERC,
71 F.3d 897, 903 (D.C. Cir. 1995).
Pais tychicatirieieh is 2s
17
Commission, 749 F.2d 875 (D.C. Cir. 1984). To the extent this
precise issue has not previously been specifically addressed by
the Supreme Court, the precedent established by the decision
of the Circuit Court in this case creates such conflict and
confusion in this critical area of the law that it is indeed
appropriate and desirable that the Supreme Court clarify this
point in this case.
D. The Crossover Ban is Not a Mere “Bookkeeping
Convention”, But a Device By Which A State Regulatory
Body Has Preempted Federal Regulation
The Circuit Court appears to rely heavily, if not exclu-
sively, upon its characterization of the crossover ban as a mere
“bookkeeping” matter that was part and parcel of “PG&E’s
rate design” as the essential predicate to its determination that
the matter was “off-limits” to FERC’s consideration. Petition-
ers respectfully submit that the description of the crossover ban
is not the issue—the issue is the effect upon interstate shippers
of the crossover ban. The effect of the crossover ban on inter-
state shippers is to impose upon them an additional and unduly
discriminatory obligation downstream of the terminus of the
interstate system. It is in that sense that the Circuit Court’s
characterization of the crossover ban as a bookkeeping conven-
tion or an element of PG&E’s rate design obscures its repercus-
sions on interstate commerce.
While the Circuit Court is correct when it states that under
the CPUC’s rate design, “a new user is billed at the rate
applicable to the new facilities while an existing user is billed at
the rate applicable to existing facilities”, a rate policy with
which Petitioners do not take issue, the Circuit Court fails to
apprehend that what distinguishes the crossover ban from this
tate policy, what makes the crossover ban independent of this
rate policy, is the absolute requirement that interstate shippers of
natural gas in the PGT Expansion must become “new users” of
PG&E’s facilities.
As FERC stated in its brief to the Circuit Court, “[tJhe
crossover ban undeniably ties the PG&E expansion and the
18
PGT expansion; that is its express purpose. It tied the two
services together as surely as did PGT’s Original tariff and
contracts with shippers”. FERC Brief at p. 36. This tying, FERC
found, meant that “PGT shippers will not be able to use PGT
freely.” 56 FERC 4 61,192 at p. 61,725. It “has the same
anticompetitive effects as an interstate pipeline’s refusing to
untie or unbundle its transportation services from its sales
services”, and reveals “practices that deny transportation access
in an unduly discriminatory manner”. 57 FERC 61,097 at p.
61,361.
This issue—the tying of interstate and intrastate capac-
ity—is totally distinct from rate design issues such as incremen-
tal and postage stamp rates. Petitioners have not chailenged
here the CPUC’s right to allocate costs of new facilities to the
new users of those facilities, or to require shippers to pay a
single rate for the use of the facilities, whether the service is for
one mile or four hundred miles. To the extent the Circuit Court
reads FERC as challenging those policies, the Circuit Court was
correct to find FERC Overstepping its bounds. Those matters
clearly lie at the heart of the state’s jurisdiction.
The relationship between the crossover ban and the
CPUC’s rate design policies is, in its most favorable light,
explicitly attenuated, and in reality, nonexistent: “without a
requirement such as the crossover ban, some incremental
volumes would migrate to existing facilities’ thereby circum-
venting the policy underlying the incremental rate structure.”
This assertion made by the CPUC is, and always has been a non
sequitur. The CPUC’s incremental rate design policy, as the
Circuit Court has correctly characterized it, “assures that
Expansion customers, for whose benefit the new facilities were
constructed, pay the cost of those facilities”. If IES shippers
choose to become PG&E Expansion customers, then they
should and will pay the cost of those facilities. On the other
hand, if IES members sell their gas at the Malin delivery point,
just as other non-PGT Expansion shippers do, they will noi
become PG&E Expansion customers. The whole point of the
crossover ban was to force PGT Expansion shippers to become
%
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19
customers of the PG&E Expansion over their objections.* This
is neither a legitimate element of a rate design nor a bookkeep-
ing convention.
No manner of description, however benign, can alter the
inescapable conclusion that the crossover ban imposes on PGT
Expansion shippers, solely by virtue of their being interstate
shippers, a separate and additional obligation to pay for intra-
State facilities neither contracted for nor wanted. The Circuit
Court decision has the unfortunate effect of allowing a State to
clothe its actions in the rubric of rate design, and however
hollow the claim, completely shield itself from FERC’s consid-
eration of the effect of those actions on its jurisdiction over the
interstate transportation of natural gas. Where, as here, the
result of the State’s act was to directly negate a prior Federal
requirement that the transportation of interstate natural gas
shall not be encumbered with any additional downstream obli-
gations solely by virtue of the specific interstate transportation
provided, and that Malin, Oregon must be a true, not a fictional
delivery point, FERC was not only within its authority to con-
sider the matter, it was obligated to do so.
By this device the CPUC, with the blessing of the Circuit
Court, has instituted a practice by which State regulatory agen-
cies can preempt clear and specific Federal regulatory directives
based upon Federal statutory regulatory standards. Certainly,
FERC should not be permitted to do indirectly what it could
not do directly in contravention of the Hinshaw Amendment,
attempt to dictate CPUC rate design policy. However, Petition-
ers urge the Court to clearly explain the import of its prior
decisions construing FERC’s jurisdiction under the NGA, the
Hinshaw Amendment and their relationship to Federal pre-
emption law under the Supremacy Clause. That is, the CPUC
should not be able to do indirectly what it could not do directly,
® PG&E was at risk for the recovery of the costs associated with the
PG&E Expansion. PG&E considered the crossover ban essential to
assure itself that those rev-nues were recovered.
20
override Federal regulatory policy concerning the nondiscrimi-
natory interstate transportation of natural gas. See Schenidwind
v. ANR Pipeline Co., 485 U.S. 293 (1988); Northwest Central
Pipeline v. State Corp. Comm'n, 489 US. 493, 512 (1989)
(“Neither state nor federal regulatory body was to encroach
upon the jurisdiction of the other.”).
E. The Circuit Court Decision Reverses An
Inappropriate Remedy Ordered By FERC By Allowing State
Preemption of Federal Statutory Protections For Interstate
Natural Gas Shippers
Petitioners agree with the Circuit Court’s conclusion that
FERC may not adopt a remedy with the intent to “influence a
State agency’s regulation of a Hinshaw Pipeline.” As noted
above however, this failure on the part of FERC does not lead
to the conclusion that FERC failed by considering the matter in
the first instance. As the Commission stated, in the absence of a
Proper condition, it could not find that the certification applica-
tion met the public convenience and necessity. That the Com-
mission ultimately imposed an improper condition—one
irected to influence the CPUC rather than directed to protect-
ing interstate shippers—does not affect FERC’s obligation to
consider the unduly discriminatory condition in reaching its
fundamental finding on public convenience and necessity. Peti-
tioners respectfully submit that the Circuit Court failed to
distinguish FERC’s underlying responsibility from the means by
which it regrettably chose to enforce it.
It is the position of Petitioners, argued extensively in its
briefs below, that it is the Commission’s absolute duty to
“stamp out” undue discrimination where it is found to exist.9 If
the Commission is prevented from Stamping it out because it
was imposed by a State agency upon a Hinshaw pipeline, it must
nonetheless ensure that those shippers that would otherwise be
9 Associated Gas Distributors v. FERC (AGD I), 824 F.2d 981 (D.C. Cir.
1987).
a —
as
}
i
i
4
|
;
21
harmed by the unduly discriminatory practices are fully pro-
tected if it is to find a certificate application to be in the public
convenience and necessity. While Petitioners believe that the
FERC August 1 Order remedy— preventing construction until
FERC could make a finding that shippers would not face
unduly discriminatory practices—was lawful, it was not the only
means by which the Commission, then or now, could protect
shippers. !°
However, the Circuit Court went far beyond preventing
FERC from imposing an unlawful remedy for the unduly dis-
criminatory practices it found to exist. It precluded FERC from
any consideration of the impact of CPUC directives. This
wholesale abnegation of FERC’s authority to protect interstate
natural gas shippers from undue discrimination by Hinshaw
pipelines reverses the central precept underlying the preexisting
balance between State regulatory authority under the Hinshaw
Amendment to the Natural Gas Act and Federal regulatory
authority over the interstate movement of natural gas under
that same act. That central precept must be that Federal regula-
tory authority, validly based upon the Commerce Clause of the
Constitution, must preempt conflicting State regulatory author-
ity by operation of the Supremacy Clause of the Constitution,
and specific statutory exceptions to that preemption, such as the
Hinshaw Amendment, should not be construed so broadly so as
to create an exception that swallows the rule.
10 See Plaquemines Oil and Gas Company v. FERC, 450 E2d 1334,
1337-1338 (D.C. Cir. 1971) (The Commission has the “equitable power
“to regard as being done that which should have been done’ by recreating
the past, insofar as is reasonably possible, to reflect compliance with the
Act and to order refunds to be paid if necessary to achieve that goal.”).
II. Conclusion
For the foregoing reasons, Petitioners pray that this Hon-
orable Court issue a Writ of Certiorari to the U.S. Court of
22
Appeals for the District of Columbia Circuit in this case.
Dated: January 22, 1997
Respectfully submitted,
Roger A. Berliner, Esq.
John M. Binetti, Esq.
Brady & Berliner, PC.
1225 Nineteenth Street, N.W.
Suite 800
Washington, D.C. 20036
Attorneys for Petitioners
Indicated Expansion Shippers
(*Counsel of Record)
= i as Kish gaia ial nab ee ee a bil iX. < x oI -
Appendix 1
Decision of the U.S. Court of Appeals
St AAA 8 he PAB Be Ly Diet cint =
ee ee een
a 4
United States Court of Appeals
DISTRICT OF COLUMBIA CIRCUIT
Argued Nov. 14, 1995. Decided Aug. 23, 1996
No. 91-1369
ALTAMONT GAS TRANSMISSION COMPANY, ET AL.,
= Petitioner,
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent,
GREAT LAKES GAS TRANSMISSION LIMITED PARTNERSHIP,
Intervenor
Consolidated with
93-1241, 93, 1295, 93-1308, 93-1309 and 93-1317
On Petitions for Review of an Order of the
Federal Energy Regulatory Commission.
Roger A. Berliner, Washington, DC, argued the cause for
petitioners Indicated Expansion Shippers and Frederic G. Ber-
ner, Jr, Washington, DC, argued the cause for petitioners
Altamont Gas Transmission Company, et al., with whom Jane E.
Stelck and James F. Bendernagel, Jr., Washington, DC, for peti-
tioners Altamont Gas Transmission Company, et al., Thomas D.
Oliver, Houston, TX, for petitioner Chevron U.S.A. Inc., and
John Leslie, for PanCanadian Petroleum Company, et al., were
on the joint briefs. David R. Stevenson, New Orleans, LA,
entered an appearance for petitioner Chevron U.S.A. Inc.
Mark Fogelman, San Francisco, CA, argued the cause for
petitioner Public Utilities Commission of the State of Califor-
nia, with whom Edward W. O’Neill was on the briefs.
Bills of costs must be filed within 14 days after entry of judgment. The
court looks with disfavor upon motions to file bills of costs out of time.
:
;
a
‘
£
;
;
4
3
Michael F. McBride, Washington, DC, argued the cause for
petitioner and intervenor Pacific Gas Transmission Company,
with whom Elias G. Farrah, Bruce W. Neely, Washington, DC,
Keith T: Sampson, Portland, OR, Joseph H. Fagan and Michael J.
McDanold, Washington, DC, were on the briefs. Jack F Fallin,
Frank R. Lindh, Howard V. Golub, Patrick G. Golden, David W.
Anderson, San Francisco, CA, and Raymond N. Shibley, Wash-
ington, DC, entered appearances.
Timm L. Abendroth, Federal Energy Regulatory Commis-
sion, argued the cause for respondent, with whom Jerome M.
Feit, Solicitor, and Randolph L. Elliott, were on the brief. Wil-
liam S. Scherman, Washington, DC, entered an appearance.
James C. Moffatt, Shippen Howe and John R. Staffier, Wash-
ington, DC, entered appearances for intervenors Foothills Pipe
Lines Ltd., et al. David L. Huard, Los Angeles, CA, entered an
appearance for intervenor Southern California Gas Company.
Thomas B. Magee, Washington, DC, Frederick T. Kolb, New
Orleans, LA, and Jon L. Brunenkant, Washington, DC, entered
appearances for intervenors Amoco Production Company and
Amoco Canada Petroleum Company Ltd. Kenneth L. Glick and
Narinder J. Kathuria, Detroit, MI, entered appearances for
intervenor Great Lakes Gas Transmission Limited Partnership.
Jennifer B. Corwin, Washington, DC, entered an appearance for
intervenor Southern California Edison Company. Britton White,
Jr., El Paso, TX, Charles G. Fox, Albany, NY, Mark F. Sundback,
Washington, DC, and Phillip D. Endom, El Paso, TX, entered
appearances for intervenor E] Paso Natural Gas Company.
Thomas D. Clarke, Oakton, VA, entered an appearance for
intervenor Pacific Interstate Transmission Company. David P
Yaffe, Los Angeles, CA, entered an appearance for intervenor
Northern California Power Agency. Norman A. Pedersen, Los
Angeles, CA, entered an appearance for intervenors Southern
California Utility Power Pool and Imperial Irrigation District.
Keith L. Kutler, Salem, OR, entered an appearance for inter-
venor Oregon Public Utility Commission. David R. Stevenson
entered an appearance for intervenor Chevron U.S.A. Inc.
4
Before: GINSBURG, ROGERS AND TATEL, Circuit Judges.
Opinon for the court filed by Circuit Judge GINSBURG.
GINSBURG, Circuit Judge: The Federal Energy Regulatory
Commission authorized petitioner Pacific Gas Transmission to
build and operate a pipeline from the Canadian border to the
Oregon-California border at Malin, Oregon, where it connects
to the intrastate facilities of PGT’s parent, Pacific Gas & Elec-
tric. The California Public Utilities Commission, also a peti-
tioner, authorized PG&E to expand its facilities in order to
receive the new gas from PGT for distribution within California.
Because it determined that the rate structure proposed by
PGT-PG&E discriminated against interstate shippers seeking
access to the California market via PGT-PG&E’s facilities, the
Commission initially postponed the start of PGT’s construction.
In order to meet increased demand for gas, however, the Com-
mission subsequently authorized PGT to begin construction but
lowered the pipeline’s allowed rate of return to 10.13% from
12.75% until PGT could demonstrate that its rates and policies
no longer discriminated against interstate shippers.
Petitioners Altamont Gas Transmission and other inter-
state shippers (collectively, the Expansion Shippers), which
compete with PG&E to sell gas in California, support the
Commission’s exercise of jurisdiction in this case. They contend,
however, that the PGT-PG&E arrangement is unduly discrimi-
natory; the Commission should not have certificated PGT’s
expansion in its present form; and the rate of return adjustment
ordered by the Commission is arbitrary and capricious.
Both PGT and the CPUC contend that by imposing the
rate of return condition the Commission exceeded its jurisdic-
tion, and they deny that the CPUC’s rate orders sanction
anticompetitive or unduly discriminatory acts. For its part, PGT
supports the Commission’s decision to lift the original construc-
tion ban but argues that the rate of return condition is an
unreasonable penalty that is unsupported by the record and
unconnected to PGT’s allegedly discriminatory acts.
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We hold that the Commission did indeed overstep its
jurisdictional bounds, interfering in an area that the Congress
has expressly reserved to the states. Accordingly, we do not
decide whether the PGT-PG&E arrangement is unduly discrim-
inatory, nor whether the Commission should have certificated
PGT’s expansion in its present form, nor whether the Commis-
sion’s decision to adjust PGT’s rate of return is arbitrary and
capricious.”
L. Background
In January 1991 the Commission preliminarily authorized
PGT to build and operate a pipeline from the Canadian border
to Malin, Oregon, subject to two conditions: First, PGT would
have to offer its new transportation capacity to all shippers
rather than allocate the bulk of the capacity to California
utilities before offering it to interstate shippers. Second, PGT
would have to revise its contractual relationships with the
Expansion Shippers to eliminate a “tie-in” that required them
to use PG&EP’s expansion facilities within California. The tie-in
subjected the Expansion Shippers to circuitous routing and
higher overall rates in order to transport their gas to its final
* We do have one housekeeping matter to resolve: PGT asks that a
certain requirement in the Commission’s January 1991 order be vacated
as moot. The Commission initially directed PGT to use a 95% load factor
in designing its usage charge. Later the Commission authorized PGT to
use a demand-based rate design instead of a usage-based design. Thus
PGT’s load factor became a non-issue and, for that reason, the Commis-
sion did not vacate the requirement. The Supreme Court has held that a
moot agency directive should be vacated in order to clear the path for
relitigation and to remove an unreviewed judgment. United States v.
Munsingwear, Inc., 340 U.S. 36, 39-40, 71 S.Ct. 104, 106-07, 95 L.Ed. 36
(1950). The Commission, however, points out that PGT did not raise this
issue in its request for rehearing of the August order. Instead, PGT simply
asked the Commission to “clarify that this throughput component no
longer exists.” Therefore, asserts the Commission, PGT cannot raise the
question on appeal. See 15 U.S.C. § 717r(b). Under the circumstances,
this is an excessively fastidious reading of PGT’s request for rehearing.
We hereby vacate the load factor requirement.
6
destination. Expansion Shippers serving northern California
could not take delivery of their gas at Malin; instead, they had
to pay for transportation to PG&E’s Kern River Station in
southern California and then pay a separate charge on PG&E’s
intrastate system for transportation back to northern California.
The Commission agreed that once PGT satisfied the two
conditions, it could proceed with construction under an
approved rate structure that included a return on equity of
12.75%—not far from the midpoint of the 10.13-15.80% “zone
of reasonableness.” Subsequently, PGT did in fact comply with
both conditions, altering its initial capacity allocation and mak-
ing gas available for delivery at Malin by eliminating the con-
tractual requirement that Expansion Shippers use PG&E’s
expansion facilities.
In August 1991 the Cou.mission issued PGT a certificate,
but the certificate did not authorize PGT to begin construction
immediately. Rather, the FERC expressed continuing concern
over decisions of the CPUC that, in the Commission’s view,
effectively perpetuated the tie-in between the new PGT pipeline
and PG&E’s expansion facilities. First, the CPUC had required
the Expansion Shippers to use PG&E’s expansion facilities
before they could “cross over” to its pre-existing facilities.
Second, the Expansion Shippers had to pay PG&E a flat (so-
called postage stamp) rate for use of its expansion facilities
regardless of the distance over which they shipped and then pay
an additional demand charge to reserve delivery capacity on the
existing system from Kern River to northern California (a so-
called double backbone transmission charge). The Commission
concluded that these state regulatory requirements embedded
in PG&E’s rate structure were anticompetitive, just as PGT’s
original contractual tie-in had been. The Commission refused
to allow PGT to go forward with construction until the pipeline
guaranteed nondiscriminatory treatment to interstate shippers.
PGT and several of its customers then requested that the
Commission allow construction to begin so that PGT could
meet the increasing market demand for gas. The CPUC also
7
asked the Commission to allow construction to proceed, but on
the ground that the FERC could not lawfully condition PGT’s
certificate upon a change in PG&E’s intrastate rates. The
Expansion Shippers, however, opposed the Commission’s lifting
the condition until PGT provided assurance that the tie-in
would be eliminated. In October 1991 the Commission permit-
ted construction to go forward in order to satisfy the growing
demand for gas but it reduced PGT’s return on equity to
10.13%, the low end of the zone of reasonableness, until PGT
eliminated undue discrimination against interstate shippers.
PGT, the CPUC, and Altamont, an interstate natural gas
pipeline, all requested rehearing of the August order; PGT and
the Expansion Shippers requested rehearing of the October
order. In March 1993 the Commission denied all rehearing
requests. Although the CPUC had by then eliminated the
double backbone portion of PG&E’s transmission charge, the
Commission concluded that this change alone “d[id] not pro-
vide a sufficient remedy.” The Commission expressed particular
concern that, because of the crossover prohibition and PG&E’s
postage stamp rate, an interstate shipper that used PGT’s new
pipeline could not get the benefit of the lower rate PG&E
charged for use of its pre-existing facilities even if capacity
became available on those facilities. In conditionally lowering
the return that PGT was authorized to earn on its new pipeline,
the Commission hoped to “accommodate and balance conflict-
ing objectives by permitting construction to go forward along
with providing an appropriate incentive to continue to work to
eliminate undue discrimination.”
Section 7 of the Natural Gas Act, 15 U.S.C. § 717f, prohib-
its the construction of certain natural gas pipeline facilities
without a certificate of public convenience and necessity issued
by the Commission; section 7(¢) authorizes the Commission “to
attach to the issuance of the certificate and to the exercise of
the rights granted thereunder such reasonable terms and condi-
tions as the public convenience and necessity may require.”
PGT contends that the Commission exceeded its authority
8
under § 7(e€) by conditioning PGT’s certificate upon the pipe-
line earning the minimum reasonable rate of return, 10.13%.
The Hinshaw Amendment, § 1(c) of the NGA, 15 U.S.C.
§ 717(c), provides that intrastate rates and services, such as
those of PG&E in this case, are exempt from Commission
scrutiny. The amendment applies to any state-regulated pipe-
line that receives interstate gas “within or at the boundary of a
state if all of the gas so received is ultimately consumed within
such state.” Both the CPUC and PGT argue that under the
amendment the CPUC retains exclusive authority over the
Tates, services, and facilities of PG&E; accordingly, by condi-
tioning PGT’s certificate upon a change in PG&E’s practices
the Commission was attempting to do indirectly what it could
not do directly.
In exercising its supervisory authority over PG&E’s rates,
the CPUC directed the company to adopt an incremental rate
structure—that is, one in which the added cost of the expansion
facilities is assessed against expansion customers only (as
rate structure. Finally, a postage stamp rate is equitable as
applied to the shipments destined for northern California,
according to the CPUC, because the expansion facilities would
not have been built but for the need to serve the increased
demand for gas in southern California; absent that demand,
“[s]hippers wishing to deliver gas ultimately to northern Cali-
fornia would have no means of bringing additional Canadian
gas into the state.”
The Commission acknowledges that an incremental rate
structure allocates the cost of a new facility to the customers
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9
who benefit from using it. On the facts of this case, however,
the Commission suggests that an incremental rate structure
would be unduly discriminatory because it would require inter-
State shippers to pay a higher rate for the intrastate expansion
facilities than is warranted by the mileage they use. Therefore,
the Commission wants PG&E to (1) adopt a rolled-in structure,
or (2) eliminate the crossover ban, or (3) abandon its postage
stamp rate in favor of a rate that varies with mileage. Because
PG&E has not taken one or more of these steps, the Commis-
sion maintains that PG&E obtains an unfair advantage over
interstate shippers that use PG&E’s facilities but are also its
competitors for sales in the California market. Because it pays a
non-distance-sensitive rate, a shipper selling gas in northern
California subsidizes the companies that serve the southern
California market, which is further from Malin. That same
shipper would also appear to be put at a competitive disadvan-
tage relative to PG&E in northern California; the fixed rate the
shipper pays for the use of PG&E’s expansion facilities exceeds
PG&E’s cost (as reflected in the rate) for the use of its older
facilities.
Il. Analysis
As a threshold matter, the Commission contends that the
CPUC does not have standing to seek review of the August and
October 1991 orders. In the case of the August order the CPUC
got what it wanted—the Commission lifted the construction ban
that had been in effect against PGT—and in the case of the
October order the CPUC did not seek rehearing, which is a
jurisdictional prerequisite for judicial review. The CPUC
responds that it challenged the August order with respect both
to the construction ban and to the Commission’s underlying
finding of undue discrimination and, in this latter regard, that
order continues to impede the CPUC in its exercise of regula-
tory authority. Additionally, the CPUC asserts that it is not
required to seek rehearing of a supplemental order that leaves
intact the pertinent parts of a prior order of which it did request
rehearing.
10
We take no position on this question of standing. The
CPUC asks for relief that is in all relevant respects congruent
with the relief requested by PGT, and for the same underlying
reason. Because we grant PGT’s petition in sufficient part to
give the CPUC all the relief it seeks, and because the other
issues that the CPUC raises are not necessary to our disposition
of this case, whether the CPUC has standing is of no
consequence.
We begin our analysis of the Commission’s jurisdictional
bounds with an inquiry into the applicability of the Hinshaw
Amendment to affiliated companies. Then we examine the
principal contention of PGT and the CPUC—that the Commis-
sion interseded in an area expressly reserved to the states.
Section 1(c) of the NGA, 15 U.S.C. § 717(c), is of course central
to both questions. It provides in relevant part:
The provisions of [the NGA] shall not apply to any
person engaged in or legally authorized to engage in the
transportation in interstate commerce or the sale in inter-
state commerce for resale, of natural gas received by such
person from another person within or at the boundary of a
State if all the natural gas so received is ultimately con-
sumed within such State, or to any facilities used by such
person for such transportation or sale, provided that the
rates and service of such person and facilities be subject to
regulation by a State commission. The matters exempted
... by this subsection are declared to be matters primarily
of local concern and subject to regulation by the several
States.
A. The Applicability of the Hinshaw Amendment to Affiliated
Companies
According to the Expansion Shippers, the PGT-PG&E
pipeline is a single, integrated interstate transmission facility
owned in part directly and in part indirectly by PG&E. When
the CPUC required interstate shippers to use PG&E’s expan-
sion facilities before crossing over to its pre-existing facilities,
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PGT and PG&E (with the help of the CPUC) were able to
bifurcate their expansion project into an interstate component
subject to regulation by the Commission and an intrastate
component which evaded federal supervision. This duality shel-
tered PG&E from the competition of the interstate shippers
notwithstanding that the “Congress did not intend the [Hin-
shaw Amendment] to relieve the Commission of jurisdiction
over local branches of integrated interstate systems.” Louisiana
Power & Light Co. v. FPC, 483 F.2d 623, 633 (Sth Cir.1973).
Altamont takes the position that, on the facts of this case,
the Hinshaw Amendment does not even apply to PG&E.
Because PGT and PG&E are effectively one and the same
company (according to Altamont) their transfer of gas at the
Oregon-California border does not satisfy the threshold
requirement of s 717(c) that gas be received by one person
“from another person.”
The Commission, however, found that although the PGT-
PG&E expansion was coordinated as to management, financ-
ing, and contracting, their integration in these areas did not
make the two companies into one for the purpose of the NGA.
In its August order, the Commission concluded that without
proof of undue discrimination there is “nothing inappropriate
about such coordinated activities,” and Altamont did not
demonstrate that the areas of coordinated activity were the
source of such undue discrimination as the agency had
identified.
In past decisions the Commission has arguably taken a
harder look at nonjurisdictional services provided by the affili-
ate of an interstate pipeline. See, e.g., Arkla Gathering Servs. Co.,
69 FERC {4 61,280 at 62,087 (1994) (Commission may treat
jurisdictional pipeline and nonjurisdictional gatherer as single
entity where services are tied), affd in relevant part, Conoco Inc.
v. FERC, 90 F3d 536 (D.C.Cir.1996). In the recent case of
KansOk Partnership, 73 FERC { 61,160 (1995), the Commission
held that it would treat three affiliated pipelines as a single
interstate system because their corporate structure was
12
designed specifically to avoid federal regulation. Jd. at 61,486.
“[W]here it is necessary to protect the public interest,” the
Commission said, it “will disregard the separate corporate sta-
tus of entities that would otherwise be considered nonjurisdic-
tional.” Jd. at 61,484. Closer in point is another decision issued
the same day as KansOk, in which the Commission found that
three affiliates—including a Hinshaw pipeline—that had coor-
dinated their construction proposals constituted an interstate
pipeline subject to the NGA. Louisiana Gas Sys. Inc., 73 FERC
¥ 61,161 (1995). The Commission indicated that the jurisdic-
tional status of any one of the pipelines might not have been an
issue, but because “the actual effect of the construction project
contemplated here will be to give pipeline affiliates a competi-
tive advantage in the transportation of gas ... this would sub-
vert the purposes of the NGA.” Id. at 61,502. The Commission
determined not to allow the companies “to balkanize into a
chain of affiliates subject to the regulations of various states.”
Id. at 61,503.
Given a proper evidentiary record, the Commission might
have avoided any Hinshaw constraint upon its jurisdiction by
concluding that PGT and PG&E undertook this project as a
single company. The Commission did not reach this conclusion,
however, and the court cannot on this record hold that the
Commission was unreasonable—that is, that PGT and PG&E
unduly discriminated against interstate shippers by coordinating
their activities. We are of course mindful that the Commission’s
choice not to pursue a given line of inquiry “often involves a
complicated balancing of a number of factors which are pecu-
liarly within [the agency’s] expertise.” Heckler v. Chaney, 470
U.S. 821, 831, 105 S.Ct. 1649, 1655-56, 84 L.Ed.2d 714 (1985).
We therefore treat PGT and PG&E as distinct companies, as
did the Commission, for purposes of the Hinshaw analysis.
B. The Commission’s Consideration of Nonjurisdictional Issues
Next we turn to the argument, advanced both by PGT and
by the CPUC, that under the Hinshaw Amendment the Com-
mission lacks the power to condition a certificate of public
ee, OA EE
13
convenience and necessity upon an interstate pipeline’s intra-
state affiliate changing its rate structure. We have held that the
Commission may not use the conditioning authority of § 7(e) to
circumvent a limitation imposed upon its ratemaking authority
by §§ 4 and 5 of the NGA, nor a fortiori to do anything that is
specifically proscribed by the Act. American Gas Ass’n v. FERC,
912 F.2d 1496, 1510 (1990) (AGA). See also Northern Natural
Gas Co. v. FERC, 827 F.2d 779, 781 (1987) (en banc). The
CPUC and PGT contend that the Hinshaw Amendment puts
PG&E’s intrastate rates outside the Commission’s legitimate
area of concern. Both PG&E’s postage stamp rate and its
crossover ban are, in effect, rate policies approved or required
by the CPUC. The crossover ban is a bookkeeping, not an
operating, convention; regardless how the gas flows through the
existing and the expansion facilities, a new user is billed at the
rate applicable to the new facilities while an existing user is
billed at the rate applicable to existing facilities. That is why, as
the Commission acknowledged, a rolled-in rate would render
the crossover ban irrelevant.
Because they are elements of PG&E’s rate design, both
the postage stamp rate and the crossover ban are within the
jurisdiction of the CPUC. Yet in its March 1993 order denying
rehearing, the Commission described the CPUC’s decision to
eliminate the double backbone portion of PG&E’s transmission
charge while retaining both the postage stamp rate and the
crossover ban as “not provid[ing] a sufficient remedy” to satisfy
the FERC that PG&E’s rates were not unduly discriminatory.
Then, recognizing that it could not lawfully regulate PG&E’s
rates, the Commission moved indirectly but frankly to “inducfe]
a change to a policy beyond [its] jurisdictional purview” by
attaching a rate-of-return condition to PGT’s certificate.
Although the Commission has broad authority to consider all
relevant factors in deciding whether and upon what terms to
issue a certificate, the rate structure of an affiliated Hinshaw
pipeline is not a relevant factor. On the contrary, in § 717(c) the
Congress expressly withdrew it from the purview of the agency.
14
In FPC v. East Ohio Gas Co., 338 U.S. 464, 467, 70 S.Ct.
266, 268, 94 L.Ed. 268 (1950), the Supreme Court held that a
company receiving gas at a state border from an interstate
pipeline and transporting that gas for sale within the state is
engaged in interstate commerce subject to the NGA. The Hin-
shaw Amendment was intended to overrule East Ohio in part by
foreclosing Commission jurisdiction over the rates, services, and
facilities within the state where the gas is finally consumed—
they are “declared to be matters primarily of local concern” —
so long as a state regulatory authority assumes such jurisdiction.
According to the CPUC, the appropriate way for the Commis-
sion to assert its interests is therefore to appear before the
CPUC, just as the CPUC appears before the FERC in matters
within the Commission’s jurisdiction. Alternatively, the Com-
mission may institute federal-state cooperative procedures
under 15 U.S.C. § 717p(b). The Commission took neither
course here.
The Commission counters that its action was confined to
lowering the rates charged by PGT for interstate transporta-
tion—clearly a subject matter within its jurisdiction. The agency
asserts that it simply created an incentive (by conditionally
reducing PGT’s rate of return) for the CPUC and PG&E to
behave in a manner that advances the public interest, ie, to
revise PG&E’s rate structure. See AGA, 912 F2d at 1511 (Com-
mission may “establish [ ] certificate conditions with an eye to
inducing changes in transactions that are beyond its direct
grasp”). According to the Commission, while the Hinshaw
Amendment restricts its “primary grant of jurisdiction over
interstate transportation and sales for resale,” it does not
restrict the Commission’s authority to consider a nonjurisdic-
tional matter—even one subject to state regulation—if it is
relevant to an issue within its immediate domain. See, €.8.,
Maryland People’s Counsel v. FERC, 761 F2d 780, 786-87
(D.C.Cir.1985) (Commission may consider anticompetitive
effect of nonjurisdictional activity).
The Commission invokes two Supreme Court cases in
support of its position. In FPC v. Transcontinental Gas Pipe Line
aii a
Ss a ial 5 att ih Aha pe Ero Sere
15
Co., 365 U.S. 1, 81 S.Ct. 435, 5 L.Ed.2d 377 (1961) (Transco),
the Supreme Court upheld the Commission’s denial of a certifi-
cate for transportation of gas to be sold at retail, although such
sales are not subject to regulation by the Commission. The
Court reasoned that the price at which the retail sales would be
consummated might occasion an escalation in the price of
certain wholesale transactions that were within the Commis-
sion’s jurisdiction. Jd. at 7, 81 S.Ct. at 438-39. In FPC v. Conway
Corp., 426 U.S. 271, 96 S.Ct. 1999, 48 L.Ed.2d 626 (1976), an
electric utility engaged in both (jurisdictional) wholesale inter-
state sales and in (nonjurisdictional) industrial retail sales.
Some of the utility’s wholesale customers competed against the
utility by reselling the gas to industrial users. These customers
alleged that the wholesale price was inflated to prevent them
from competing for the retail business. The Court held that the
Federal Power Act authorized the Federal Power Commission
to examine the entire factual context surrounding the wholesale
rates, including facts related to the nonjurisdictional retail
transactions. Jd. at 280, 96 S.Ct. at 2005.
The pivotal question raised in the present case is not
whether the Commission has jurisdiction over a Hinshaw pipe-
line—the Commission concedes that it does not—but whether
the Commission may exercise its power over an interstate pipe-
line in a manner intended to influence a state agency’s regula-
tion of a Hinshaw pipeline. In Conway the Supreme Court
precisely delineated the Commission’s authority to explore the
jurisdictional implications of a nonjurisdictional transaction; it
could do so only “[i]f the undue preference or discrimination is
... traceable to the level of the jurisdictional rate.” 426 U.S. at
277, 96 S.Ct. at 2003-04. In this case the alleged anticompetitive
pricing is traceable not to PGT’s jurisdictional rate but to
PG&E's nonjurisdictional rate. Conway provides the Commis-
sion no comfort at all.
As for Transco, the CPUC correctly characterizes it as a
case in which the nonjurisdictional sale fell into a regulatory
gap, not one in which the nonjurisdictional sale was regulated
by an agency other than the Commission. As the Supreme
16
Court explained: “[W]hen we are presented with an attempt by
the federal authority to control a problem [i.e., an increase in
the wholesale rates of an interstate natural gas pipeline] that is
not, by its very nature, one with which state regulatory commis-
sions can be expected to deal, the conclusion is irresistible that
Congress desired regulation by federal authority rather than
nonregulation.” 365 U.S. at 28, 81 S.Ct. at 449-50. Our opinion
in ANR Pipeline Co. v. FERC, 876 F2d 124, 132 (1989), puts
Transco in proper perspective:
[I}n Transco, despite the sale’s impact on jurisdictional
Sales, no ... agency had any direct voice over whether it
Satisfied the public interest. We think it would be a consid-
erable stretch from there to say that, in certifying transpor-
tation that is necessary to carry out a sale, the Commission
is required to reconsider the very aspects of the sale that
have been assessed by an agency recifically vested by
Congress with authority over the subject.
Although ANR is couched in terms of what the Commis-
sion is required to consider, a logical implication is that when
the Congress explicitly reserves jurisdiction over a matter to the
States, as here, the Commission has no business considering
how to “induc[e] a change [of state] policy” with respect to that
matter. In any event, the Commission offers no contrary
authority.
Instead, the Commission insists that it has merely lowered
PGT’s jurisdictional rates without intruding upon the authority
of the CPUC. This claim rings hollow indeed. The Commission
lowered PGT’s return on equity specifically and only to
“induc[e] a change to a policy beyond [its] jurisdictional pur-
view,” i.e. to pressure the CPUC to regulate PG&E as the
Commission desired but could not itself require. Under the
circumstances, the Commission was indeed attempting to do
indirectly what it could not do directly, that is, intercede in a
matter that the Congress reserved to the State. See Northwest
Central Pipeline v. State Corp. Comm’n, 489 U.S. 493, 512, 109
S.Ct. 1262, 1275, 103 L.Ed.2d 509 (1989) (“The NGA was
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designed to supplement state power and to produce a harmoni-
ous and comprehensive regulation of the industry. Neither state
nor federal regulatory body was to encroach upon the jurisdic-
tion of the other”).
If. Conclusion
In conceding that PG&E is a Hinshaw pipeline, the Com-
mission expressly declined to look behind the pipeline com-
pany’s corporate structure and to treat PG&E and PGT as a
single company. We uphold that step as reasonable and must
therefore hold that PG&E’s California rates are exempt from
the jurisdiction of the Commission. Although the Commission
ordinarily has the authority to consider a matter beyond its
jurisdiction if the matter affects jurisdictional sales—at lcast if
there would otherwise be a regulatory gap—here there is no
such gap but, on the contrary, an express congressional reserva-
tion of jurisdiction to another body. That places the matter off-
limits to the FERC.
We therefore grant PGT’s petition for review insofar as it
challenges the Commission’s authority under § l(c) of the
NGA, 15 U.S.C. § 717(c). Accordingly, we also dismiss as moot
the petition filed by the CPUC (without resolving whether the
agency has standing to complain) and we deny the petition filed
by Altamont and the Expansion Shippers.
So ordered.
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[7 61,243]
Pacific Gas Transmission Company Docket Nos.
CP89-460-008, CP89-460-009, CP90-1-002 and CP90-1-003
Order Granting in Part and Denying in Part Requests for
Rehearing and Clarification
(Issued March 16, 1993)
Before Commissioners: Elizabeth Anne Moler, Chair;
Jerry J. Langdon, and Martin L. Allday.
This order addresses requests for rehearing and clarifica-
tion of an August 1, 1991 order,! and an October 24, 1991
order.? The August 1, 1991 order issued a certificate authorizing
Pacific Gas Transmission Company (PGT) to construct and
operate a substantial expansion of its existing pipeline system
(Expansion Project) and to provide firm interstate transporta-
tion service for various Expansion shippers, but prohibited
construction until PGT demonstrated certain unduly discrimi-
natory conditions had been eliminated. The October 24, 1991
order modified the August 1, 1991 order, permitting PGT to
commence construction. This order grants in part and denies in
part requests for rehearing and clarification.
Background
On December 8, 1988, PGT filed an application in Docket
No. CP89-460-000, pursuant to section 7(c) of the Natural Gas
Act (NGA), for a certificate to construct and operate its Expan-
sion Project and to provide firm interstate transportation for
certain large utility customers located in the Pacific Northwest
and California. PGT requested authority to transport up to 710
MMcf per day of gas, on a firm basis, from Kingsgate, British
Columbia. Under the proposal, approximately 150 MMcf per
day of gas would be delivered on a firm basis to the Pacific
Northwest and 600 MMcf per day of gas on a firm basis would
1 156 FERC 1 61,192 (1991).
2 57 FERC 4 61,097 (1991).
20
PG&E system.
October 1989 Amendment
Subsequently, on October 3, 1989, PGT filed in Docket
No. CP89-460-001 an amendment to its application to reflect
provide seasonal service. The revised facility proposal included
430 miles of 42-inch diameter looping on PGT’s existing system,
instead of the 36-inch diameter looping as proposed in its initial
application. Under the amendment, PGT also planned to add
additional delivery points in order to Provide interruptible
transportation service and to revise its proposed receipt and
delivery points.
Offer of Settlement
On November 8, 1989, PGT filed in Docket No.
CP89-460-001 an Offer of Settlement (Settlement) reached by
PGT and the transportation customers to be served by the
Expansion Project. The Settlement included a Stipulation and
Agreement between PGT and its Expansion shippers, although
no other parties Participated in the settlement negotiations.
Application for Presidential Permit and Section 3 Authorization
On October 3, 1989, PGT filed in Docket No. CP90-1-000
an application for NGA section 3 authorization and a Presiden-
tial Permit to construct, operate, maintain, and connect pro-
posed additions or modifications to its facilities operated at the
international boundary between Canada and the United States
for the service Proposed in Docket No. CP89-460-000 et al.
* PG&E is the parent corporation of PGT.
Ae ca ii i aa
21
January 22, 1991 Preliminary Determination
In an order issued on January 22, 1991,4 we prelimina-
tily approved PGT’s proposed new facilities. Upon comple-
tion, the Expansion Project will allow PGT to receive on a
firm annual basis: (1) approximately 872 MMcf per day of
natural gas at Kingsgate, British Columbia, and (2) approx-
imately 62 MMcf per day of gas at Stanfield, Oregon. PGT
would then be authorized to deliver approximately 150
MMcf per day of gas to customers in the Pacific Northwest
and approximately 766 MMcf per day of gas to an existing
interconnection with PG&E at Malin, Oregon. The 62
MMcf per day of gas received at Stanfield would require
upstream transportation by Northwest Pipeline Corpora-
tion (Northwest). Rates were based on the full maximum
daily quantity level proposed by PGT. The Commission
stated that whether or not the capacity constructed by PGT
for transportation of the gas to be supplied by Northwest at
Stanfield will be considered used and useful, and thus
subject to inclusion in PGT’s rate base, will be subject to
the Commission’s granting Northwest authorization to
expand its existing system to accommodate the transporta-
tion of the 62 MMcf per day of gas.°
The January 22, 1991 order rejected the Settlement but
preliminarily approved PGT’s application for NGA section 3
authorization and a Presidential Permit. In addition, in view of
our determination that PGT had unduly discriminated against
* 54 FERC { 61,035 (1991).
> On December 31, 1990, Northwest filed application for a certificate
of public convenience and necessity in Docket No. CP91-780-000, which
included the construction of facilities to provide the transportation of the
62 MMcf per day of gas to PGT at Stanfield, Oregon. On June 5, 1992, in
Docket No. CP91-780-000, et al. , the Commission issued Northwest a final
certificate for an expansion of its existing transmission system that specifi-
cally included the 62 MMcf/d capacity to be available for transportation
on behalf of PGT’s Expansion shippers. 59 FERC 61,289. Whether the
capacity constructed by PGT will be considered used and useful will be
established in the context of a future rate proceeding.
22
non-utility shippers in its allocation of initial capacity, PGT was
directed to establish new open season procedures for the initial
allocation of the firm Expansion capacity, and to include such
procedures in its tariff. Final certificate authority was reserved
pending completion of the environmental review of PGT’s
proposal.
Further Certificate Amendment Application
On May 10, 1991, PGT filed a further amendment to its
application. PGT stated that, in compliance with the directive of
the January 22, 1991 order, it conducted a new open season
from February 21, 1991, to March 22, 1991. PGT asserted that
as a result of the open season, the Expansion is fully subscribed
by utilities, marketers, and producers. PGT stated that one
purpose of its amendment is to reflect the names of all the new
open season shippers, their contract quantities, and related
receipt and delivery points. The total PGT Expansion involves
927,410 MMBtu per day of gas.
PGT noted that it previously requested authorization to
make deliveries in the Pacific Northwest at Spokane, Washing-
ton; Wallula, Washington; Stanfield, Oregon; and Hermiston,
Oregon, with the possibility of adding additional delivery points
based on the needs of specific customers. PGT stated that it
allowed the bidders in the new open season to tender bids to
any existing delivery point on the PGT system.
August 1, 1991 Order Issuing Certificate
On August 1, 1991, the Commission issued an order condi-
tionally authorizing the Expansion Project. Among other things,
the August 1, 1991 order granted PGT a certificate of public
convenience and necessity authorizing PGT to construct and
operate the Expansion facilities and to provide firm transporta-
tion service for various Expansion shippers. PGT’s construction
activities, however, were subject to various conditions. Ordering
Paragraph (M) precluded PGT from initiating construction
“until the Commission is assured that the Expansion Project
shippers would receive nondiscriminatory treatment as to
¥
t
—
~aO
ete he AEP A: iS SIBERIA 4
————
23
access to the California markets by means other than on
PG&E’s Expansion Project facilities.”6 The Commission felt
this condition necessary out of concern that the PGT shippers
will not be able to use PG&E’s facilities freely. In this regard,
the Commission stated that interstate jurisdiction is frustrated
by the discriminatory arrangements between PGT and PG&E.
Thus, under the circumstances, the Commission could not find
the public convenience and necessity served until the anticom-
petitive nature of the tying alrangement is eradicated. We
directed PGT to submit a report evidencing the eradication of
discriminatory conditions.
October 24, 1991 Order on Report
After consideration of PGT’s report and the comments
submitted therewith, the Commission determined that, on bal-
ance, the public convenience and necessity would not be served
by further delay in PGT’s commencement of construction of its
Expansion Project as this could prevent the timely delivery of
additional gas supplies to the Pacific Northwest and California.
Therefore, on October 24, 1991, the Commission issued an
order that modified the prohibition on construction imposed by
Ordering Paragraph (M) of the August 1, 1991 order, and
authorized construction and operation of the Expansion Pro-
ject. As an incentive for PGT to work toward the elimination of
unduly discriminatory conditions limiting the Expansion ship-
pers’ access to the California markets, the Commission reduced
PGT’s approved rate of return on equity from the previously
approved 12.50 percent to 10.13 percent until such time that
PGT demonstrates its and PG&E’s rates or transportation poli-
cies do not result in unduly discriminatory restraints on ship-
pers’ access to transportation on the Expansion Projects. Upon
removal of the construction condition, PGT promptly accepted
its certificate and commenced construction in December 1991.
6 56 FERC 1 61,192, at p. 61,728,
Requests For Rehearing
Timely requests for rehearing of the August 1, 1991 order
have been filed by Altamont Gas Transmission Company
(Altamont), El Paso Natural Gas Company (El! Paso), Indicated
Expansion Shippers (IES), Kern River Gas Transmission Com-
pany (Kern River), PGT, Pacific Interstate Transmission Com-
pany (PITCO) jointly with Southern California Gas Company
(SoCalGas), the Producer Associations, the Public Service
Commission of the State of California (CPUC), San Diego Gas
and Electric (San Diego), Southern California Edison Company
(Edison), and Union Pacific Resources Company (Union
Pacific).
Timely requests for rehearing of the October 24, 1991
order have been filed by Altamont, Amoco Production Com-
pany jointly with Amoco Canada Petroleum Company, Ltd.
(Amoco), California Gas Producers Association (California
Producers), El] Paso, IES, Kern River, PGT, and the Producer
Associations.
We note that, on occasion, petitioners present issues and
arguments duplicative of those previously raised before and
resolved by the Commission in our earlier orders in this pro-
ceeding. To the extent those parties requesting rehearing raise
essentially the same issues and merely repeat essentially the
same arguments, reiterating their dissatisfaction with our previ-
ous decisions, their requests for rehearing are denied, and we
direct those parties to the prior orders for resolution of those
issues.
Several parties have petitioned for review of the orders in
this proceeding in the United States Court of Appeals for the
District of Columbia Circuit.’ Once a Commission order is
appealed and the Commission forwards the record in the case
to court, the Commission no longer has jurisdiction to act in the
7 Altamont Gas Transmission Company v. FERC, No. 91-1369, and
consolidated cases Nos. 91-1393, 91-1477, and 91-1480.
So a= wt
RO TS SB CT RLS OI
25
case.® We will, therefore, address the requests for rehearing and
clarification subject to obtaining leave of the court. Those issues
which final agency action has rendered ripe for judicial
review—e.g., the assertion of Amoco, El Paso, Kern River, and
the Producers Association that the Commission should have
disregarded the Hinshaw status of PG&E and assumed regula-
tory jurisdiction over the PG&E’s proposed expansion in Cali-
fornia—will not be further considered in the context of this
rehearing.
Request to Take Official Notice of Separate Proceeding
On February 9, 1993, El Paso filed a motion requesting the
Commission take official notice of a proposal by SoCalGas and
San Diego to construct pipeline facilities that would permit
transportation of gas from the Kern River Station to the Mexi-
can border (Project Vecinos).9 El Paso states that the facilities
proposed by SoCalGas and San Diego will interconnect with
the PG&E Expansion facilities at the Kern River Station. Alleg-
edly, Project Vecinos will thereby cause a portion of the PGT/
PG&E expansion volumes to be transported to and consumed
in Mexico (either directly or by displacement). El] Paso argues
that under these circumstances, PG&E would no longer qualify
for exemption from the Commission’s jurisdiction under the
NGA section 1(c) Hinshaw provision, since PG&E would no
longer meet the statutory requirement that all the natural gas it
receives be ultimately consumed within the State of California.
SoCalGas and San Diego filed an answer arguing that
Project Vecinos will not affect the jurisdictional status of
PG&E’s facilities and, therefore, is irrelevant to the instant
proceeding. PGT filed an answer asserting that E] Paso’s
motion (1) is procedurally defective as an untimely request for
rehearing and (2) improperly seeks official notice of speculative
$15 U.S.C. § 717r(b) (1988).
9 See Docket Nos. CP93-117-000 and CP93-119-000, filed on Decem-
ber 16, 1992.
26
assertions concerning the outcome of an ongoing proceeding,
rather than “facts.”!¢
Speculation concerning the outcome in Docket Nos.
CP93-117-000 and CP93-119-000 is premature; the Commission
has yet to reach any determination in those separate proceed-
ings that would affect PG&E’s Hinshaw status. Further, we find
that El Paso’s assertions based on the proposed project in
Docket Nos. CP93-117-000 and CP93-119-000 do not raise any
issues material to our decision in the instant proceeding. There-
fore, we will deny El Paso’s request for official notice. The
immaterial filings in Docket Nos. CP93-117-000 and
CP93-119-000 will not become part of the record in this
proceeding."
Several parties request an evidentiary hearing or that we
initiate discovery procedures. We note such measures are
required only when the written submissions do not afford an
adequate basis for resolving disputes about material facts.!* We
affirm our finding, as discussed at length in the August 1, 1991
order, that all material issues of fact in dispute are capable of
being resolved on the basis of the existing record. Therefore,
requests for an evidentiary hearing and for discovery are
denied.
We affirm our prior finding that PITCO’s and SoCalGas’
concerns regarding PGT’s initial rates and cost allocation, and
whether PGT will be able to later impose additional costs on
existing customers, are appropriately addressed in a future
section 4 or section 5 rate proceeding. Accordingly, we deny the
parties’ request to institute a crediting mechanism in relation to
the Expansion Project’s initial rates.
10 See 18 C.ER. § 385.508(d) (1992).
11 See 18 CER. § 385.509(a) (1992).
12 Louisiana Ass’n of Independent Producers and Royalty Owners v.
FERC, 958 F.2d 1101,1113-15 (D.C. Cir. 1992); Air Lines Pilots Ass’n v.
Dept. of Transportation, 791 F.2d 172, 179 (D.C. Cir. 1986).
27
Request for Confidential Information
In requests for rehearing of the August 1, 1991 order,
Altamont and Union Pacific contend that PGT has not provided
adequate market data to support its application. The parties
request access to certain market and supply information filed by
PGT under the provisions of section 388.112 of the Commis-
sion’s regulations.'3 El Paso, in motions filed July 24, 1990, and
June 24, 1991, sought access to the same information.
The Commission has received and reviewed PGT’s market
and supply information on two separate occasions. Our initial
review of PGT’s market data found adequate evidence of mar-
ket need. However, our consideration of PGT ’s market data
following PGT’s second open season found that PGT relied, in
part, on interruptible sales by marketers as evidence of market
need. In response, we stated that if PGT’s anticipated volumes
do not materialize, “PGT is not guaranteed cost recovery and
would not necessarily be allowed to allocate the cost of the
facilities to other customers unless it could show that the facili-
ties were in fact being used for the benefit of these
customers,”’!4
Public disclosure of this information could cause competi-
tive harm to PGT and the Expansion shippers by revealing
terms of agreements under negotiation between the shippers
and their markets or suppliers. We affirm our previous denial of
the rehearing requests and motions that similarly sought disclo-
sure of the market and supply data submitted by PGT under the
provisions of section 388.112. We conclude, as we did in the
August 1, 1991 order, in response to an identical rehearing
request, that “we see no need to divulge PGT’s customer data
to competitors in order to resolve the issues presented here.”
13 18 CER. § 388.112 (1992).
14 56 FERC 1 61,192, at p. 61,681.
At-Risk Conditions
At the time of the August 1, 1991, and October 24, 1991
orders, the Commission contemplated the issuance of a con-
struction rule in Docket No. RM90-1-000 to consider, inter alia,
aspects of risk allocation, capacity allocation, and rates. There-
fore, the Commission elected to toll or defer certain issues in
anticipation of the final construction rule.’ We find issues
previously tolled or deferred in our earlier orders may be
resolved without reliance upon that rule. In response to a
request by Edison, we clarify that the at-risk conditions and the
approved rate of return will apply immediately to the Expan-
sion Project’s initial rates.
Traditional Section 7(c) Certificate v. Optional Certificate
Altamont and Kern River assert the Commission acted
arbitrarily in authorizing the Expansion Project, since PGT
could not satisfy each of the Kansas Pipe Line’ criteria applica-
ble in a traditional NGA section 7(c) application. Petitioners
contend that their optionally certificated projects and PGT’s
traditionally certificated project are competitors seeking to
serve the same California market and complain that by applying
differing standards of certification to the similarly situated
projects, the Commission has discriminated in favor of PGT.
Altamont and Kern River request that the Commission impose
upon PGT’s Expansion Project the same rate and risk require-
ments which were imposed upon their optionally certificated
projects.’ Kern River alternatively requests it be offered the
15 The construction rule has since issued but has yet to take effect. The
Commission stayed the effective date until 30 days after publication in the
Federal Register of an order on rehearing. 57 FERC 9 61,195 (1991).
Order No. 555, Revisions to Regulations Governing Authorizations for
Construction of Natural Gas Pipeline Facilities, FERC Statutes and Regula-
tions 7 30,928 (1991).
16 Kansas Pipe Line & Gas Company, et al., 2 FPC 29 (1939).
17 Kern River Gas Transmission Company, 56 FERC 1 61,194 (1991),
clarified, 57 FERC # 61,069 (1991); Altamont Gas Transmission Company,
(footnote continues)
29
Opportunity to operate under rates and terms similar to those
granted to PGT. Altamont alternatively requests that the Com-
mission dismiss PGT’s application for failure to Satisfy the
requirements for a traditional NGA section 7(c) certificate.
Commission Response
The optional certificate procedure was adopted to provide
pipelines with the ability to offer new service and construct new
facilities on a timely basis by easing the barrier to entry posed
by the traditional NGA section 7(c) certification process.!* In
return for assuming the full economic risk of a project, the
applicant for an optional certificate enjoys a rebuttable pre-
sumption that its proposal satisfies NGA section 7(e) and is
required by public convenience and necessity. Optional certifi-
cate applications need not await the outcome of the Commis-
sion’s measured evaluation of the Kansas Pipe Line standards
(footnote continued)
Regulations, Regulations Preambles 1982-1985 4 30,665, at pp. 31,569-570
(1985), vacated and remanded, Associated Gas Distributors v. FERC, 824
F.2d 981 (D.C. Cir. 1987), cert. denied, 485 U.S. 1006 (1988), readopted on
an interim basis, Order No. 500, 52 Fed. Reg. 30334 (Aug. 14, 1987),
FERC Statutes and Regulations, Regulations Preambles 1986-1990 30,761
(1987), remanded, American Gas Association v. FERC, 888 F.2d 136 (D.C.
Cir. 1989), readopted, Order No. 500-H, 54 Fed. Reg. 52344 (Dec. 21,
1989), FERC Statutes and Regulations, Regulations Preambles 1986-1990
1 30,867 (1989), reh’g granted in part and denied in part, Order No. 500-I,
55 Fed. Reg. 6605 (Feb. 26, 1990), FERC Statutes and Regulations, Regula-
tions Preambles 1986-1990 1 30,880 (1990), affd in part and remanded in
part, American Gas Association v. FERC, 912 F.2d 1496 (D.C. Cir. 1990),
cert. denied, 111 S.Ct. 957 (1991), stayed in part on remand, Order No.
500-J, 56 Fed. Reg. 6962 (February 21, 1991) [FERC Statutes and Regula-
tions 1 30,915]. See Part 157, subpart E, 18 CER. § §157.100-157.106
30
and of competing projects; instead, an optional certificate appli-
cant benefits from an expedited procedure that “enables pipe-
lines to make an occasional endrun around the costs and delays
of ordinary certification.”!9 An optional certificate application,
for example, will not be held up for resolution of the issue of
duplicative facilities since the authorization does not provide
for an exclusive certificate.
Ordinary certificate applicants are expected to submit the
documentation specified in section 157.14 of the Commission’s
regulations (the codification of the Kansas Pipe Line criteria) in
order to demonstrate a proposed project will be required by the
public convenience and necessity. However, since the 1939
Kansas Pipe Line decision, the gas industry has evolved. Con-
sumers increasingly have multiple, competitive sources from
which to purchase gas, rather than a monopolistic single source.
In addition, as acknowledged and addressed in Order No. 636,
the market to be served has increasingly been determined by
nonpipeline shippers transporting gas for end-users rather than
by pipelines offering bundled services.” Considering these
changed circumstances, rigid adherence to the historical supply
and market analysis may no longer serve the public interest
because the imposition of such requirements could impede the
19 American Gas Distributors v. FERC, 824 F.2d 981, 1033 (D.C. Cir.
1987), cert. denied, 485 U.S. 1006 (1988).
20 Pipeline Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation; and Regulation of Natural Gas Pipelines
After Partial Wellhead Decontrol, 57 Fed. Reg. 13267 (April 16, 1992),
FERC Statutes and Regulations 4 30,939, at pp. 30,396-397 (April 8, 1992);
order on. reh’g, Order No. 636-A, 57 Fed. Reg. 36128 (August 12, 1992),
FERC Statutes and Regulations 1 30,950 (August 3, 1992); order on reh’g
Order No. 636-B, 57 Fed. Reg 57911 (December 8, 1992), 61 FERC
{ 61,272 (November 27, 1992). The Final Rule requires significant altera-
tions in the structure of interstate natural gas pipeline services and
provides a schedule for implementing that restructuring. The rule applies
to all pipelines that provide open-access transportation service. Nothing
in this order should be construed as in any way diminishing the obliga-
tions of PGT to comply fully with the requirements of Order Nos. 636,
636-A, and 636-B.
EEO
eee ee
31
availability of new sources of competitively priced and environ-
mentally preferable energy.
In response, we have, on a case-by-case basis, granted
traditional section 7(c) certificate authorization where the gas
supply or market showing is not as strong as once required. To
assure the public interest is protected in such cases, we have,
pursuant to our section 7(e) authority, granted certificates sub-
ject to conditions placing the pipeline at risk for a shortfall in
cost recovery due to a supply or market failure.2 Because under
such a condition the certificate applicant voluntarily shoulders
the full financial risk, there is no additional need to protect
ratepayers by requiring the same extensive showing that a pro-
posed project is necessary and feasible.
In this case, the Commission determined PGT’s gas supply
and market data were insufficient to meet the Kansas Pipe Line
standards (see discussion below). To assure that the public
interest would not be adversely affected, the Commission insu-
lated the ratepayer by placing PGT at risk for the recovery of
those costs associated with an inadequate supply or market.
Although the results of PGT’s first open season adequately
demonstrated market need, we found the results of PGT’s
second open season relied in part on what appeared to be new
shippers’ spot sales to justify market need. We stated that even
though contracts are signed, there is always the possibility that
interruptible and spot sales may not materialize. As a result, we
found the results of the second open season insufficient to
support a finding of market need. Therefore, PGT will remain
at risk for the recovery of the costs of these facilities. The
21 See, ¢.g, Transwestern Pipeline Company, 54 FERC { 61,031, at
Pp. 61,093 (1991), order on reh’g, 56 FERC { 61,196 (1991) (authorizing the
construction of facilities in the absence of executed firm contracts with
shippers, but placing the pipeline at risk for costs associated with the new
facilities in the event the new capacity is not subscribed under firm
contracts at the time the pipeline files to include the costs in their rates).
22 56 FERC { 61,192, at p. 61,681.
32
allocation of the costs and risk of these facilities will be consid-
ered when PGT files a rate case under NGA section 4. In view
of the above, we will deny Altamont’s request that we dismiss
PGT’s application for failure to satisfy the requirements for a
traditional NGA section 7(c) certificate.
The claim that the Commission’s issuance of an optional
certificate along with an economically mutually exclusive tradi-
tional certificate violates fundamental fairness and the spirit of
Ashbacker Radio Corporation v. FCC (Ashbacker)* was rejected,
because “[o]bviously applicants under the [optional expedited
certificate] and traditional § 7 procedures are not similarly
situated.” We find the similar effort to equate the terms and
conditions of optional certificates with a traditional certificate
to be inappropriate. Pipelines elect to apply for the type of
authorization best suited to a particular project. Under certain
circumstances (e.g., where the evidence showing satisfaction of
the Kansas Pipe Line criteria is marginal), a pipeline may even
choose to submit simultaneously applications for optional and
traditional certificates for the same project.>
Since our consideration of optional and traditional appli-
cations proceeds on different tracks, subject to separate criteria
and conditions, the authorization of PGT’s Expansion Project in
no way precluded Altamont and Kern River from receiving a
full opportunity for the consideration of their optional certifi-
cate applications on the merits. The proper forum for Altamont
or Kern River to pursue modification of their optional certifi-
cates or to seek to vacate their optional certificates in favor of a
traditional certificate would be in a pending rehearing of the
23 326 U.S. 327, 90 L.Ed. 108 (1945) (holding that before an agency
grants a license, it must grant a full comparative hearing to each applicant
that has filed for a mutually exclusive permit or license); Midwestern Gas
Transmission Company v. FPC, 258 F.2d 660, 666 (D.C. Cir. 1958) (apply-
ing Ashbacker to applications under the NGA).
24 Public Utilities Commission of the State of California v. FERC, 900
F.2d 269, 278 (D.C. Cir. 1990).
25 We would not issue redundant dual certificate authority. See Mojave
Pipeline Company, et al., 55 FERC § 61,179, at p. 61,572 (1991).
33
order in which the optional certificate was issued, or in a new
proceeding. In view of the regulatory distinctions separating
optional from traditional certificates, we deny the requests to
collapse the differences between these types of certificates by
proscribing identical rate and risk requirements for each of the
projects.
Adequacy of Gas Supply
In the January 22, 1991 Preliminary Determination, we
found that while there appeared to be sufficient supplies of
Canadian gas, due to the incomplete supply arrangements of
PGT’s shippers, PGT would be placed at risk for any shortfall in
cost recovery due to inadequate National Energy Board (NEB)
export or Department of Energy, Office of Fossil Energy
(DOE/FE) import authorization. Repeating arguments previ-
ously presented, Altamont and Kern River contend that PGT
has not, under traditional certificate requirements, shown ade-
quate gas supplies to support its proposed Expansion Project.
Commission Response
As part of PGT’s section 7(c) application, we examined
evidence of the extent of the Canadian producers’ gas reserves
available to PGT’s Expansion shippers and concluded, based on
the best available estimates at that time, that the reserves were
adequate to provide natural gas for the Expansion Project’s
anticipated 30-year economic life.’ Considering the record evi-
dence indicating the existence of adequate and reliable Cana-
dian gas supplies, and considering that the petitioners have not
presented evidence to contradict the earlier showing of suffi-
cient supplies, we will not alter our initial determination.
For the reasons previously discussed, we are not per-
suaded that the Altamont and Kern River proposals to
impose identical risk conditions on the potentially competi-
tive pipeline projects are justified.
26 $4 FERC 1 61,035, at pp. 61,157-158.
7 Id.; 56 FERC 61,192, at pp. 61,701-702.
Adequacy of Markets
The January 22, 1991 Preliminary Determination found
that PGT had adequately demonstrated market need for the
Expansion Project under the traditional Kansas Pipe Line crite-
ria.22 However, the results of PGT’s second open season did not
support the same showing of market need since some of new
shippers, who had partially displaced the original utility and
LDC shippers intending to serve their own firm markets, are
marketers serving the interruptible spot market.” We found
that reliance on spot market sales is inappropriate to justify a
market for case-specific section 7(c) transportation authority. In
response, we determined that in the event the anticipated sales
volumes do not materialize:
PGT is not guaranteed cost recovery and would not
necessarily be allowed to allocate the cost of the facilities
to other customers unless it could show that the facilities
were in fact being used for the benefit of these customers.*”
In addition, we conditioned the certificate of public conve-
nience and necessity to assure that existing pipeline customers
are protected against subsidizing or insuring the Expansion
Project by placing PGT at risk for market shortfalls and pre-
scribing an initial incremental rate treatment for the Expansion
facilities.
Altamont asserts that the deficiencies in PGT’s market
data are not cured by the at-risk condition imposed in the
August 1, 1991 order. Altamont and Kern River request that on
rehearing the Commission either impose risk conditions on
PGT like those imposed on Altamont and Kern River or dis-
miss PGT’s application for failure to satisfy traditional certifi-
cate requirements.
28 54 FERC f 61,035, at p. 61,157.
29 56 FERC 1 61,192, at p. 61,681.
»® 56 FERC 4 61,192, at p. 61,681.
35
Union Pacific contends the condition putting PGT at risk
for cost recovery and allocation is insufficient assurance that
ratepayers will be protected from the costs of market failure.
Union Pacific asserts that the evidence presented in this pro-
ceeding shows the Expansion Project is not required to serve
the future needs of the California market. Union Pacific aggre-
gates the volumes potentially available upon the completion of
the proposed projects of Kern River and Mojave Pipeline Com-
pany,*' Transwestern Pipeline Company,*? and Altamont,”? then
compares this sum of nearly 3 bef per day to the lesser sum of
900 MMcf per day by 1995 and 1.6 to 2.1 bef per day by 2005,
which it states the CPUC predicts will be California’s needed
new capacity. Union Pacific states that PGT’s transportation
agreements may not be honored and therefore do not substanti-
ate market need.
Commission Response
PGT has demonstrated, and we have confirmed, that
extensive additional capacity will be required in the markets the
Expansion Project wili serve.“ The Commission determined
that approximately one-third of the expansion volumes will be
used to satisfy new market demand in California, with the rest
displacing current supplies on existing pipelines. This displace-
ment should serve to encourage supply diversity, enable inter-
ruptible shippers to firm-up service, and increase natural gas
competition throughout California. The condition putting PGT
at risk for cost recovery and allocation should ensure that
present and future customers do not make an inappropriate
contribution to the costs associated with the Expansion Project.
31 50 FERC 1 61,069 (1990) (Order Issuing Certificates).
32.54 FERC 1 61,031 (1991) (Preliminary Determination); 56 FERC
1 61,196 (Order Issuing Certificate) (1991).
3354 FERC 61,028 (1991) (Preliminary Determination); 56 FERC
7 61,199 (1991) (Order Issuing Certificates).
* 54 FERC 1 61,035, at p. 61,157; 56 FERC 1 61,192, at pp. 61,702-703.
36
By considering the several projects’ proposed capacities,
Union Pacific is, in effect, conducting an ad hoc Ashbacker-type
comparison that overlooks the regulatory demarcation between
optionally and traditionally certificated projects. Further, we
disagree with the methodology of evaluating market need
merely by totaling up the potential volumes of other projects.*
Union Pacific asserts that the various pipeline projects are
destined to serve an identical market. However, the PGT
Expansion will serve markets in the Pacific Northwest, an area
other projects are not expected to reach. Moreover, other
projects are designed to principally serve the enhanced oil
recovery (EOR) operations in central and southern California,
whereas PGT has stated it does not propose to serve the EOR
market.
We have previously determined that PGT’s proposed
Expansion Project is not similarly situated to other proposed
projects and, therefore, does not trigger an Ashbacker compara-
tive hearing. We have confined our evaluation of market need
to the projected market demand and to PGT’s transportation
agreements. Following PGT’s second open season we have, as
noted above, placed PGT at risk in the event its anticipated
sales volumes do not materialize. We affirm this condition is
adequate to protect the public interest. As previously noted, we
are not persuaded that the Altamont and Kern River proposals
to impose identical risk conditions on the potentially competi-
tive pipeline projects are justified.
Import and Export Authority
Notwithstanding our confidence in the existence of ade-
quate Canadian natural gas supplies, the August 1, 1991 order
expressed our concern that the majority of PGT’s expansion
35 We note that Altamont has announced its intention to delay the
scheduled in-service date for its pipeline by one year, until
November 1994.
37
Shippers lacked long-term export and import authority and
imposed the following at-risk condition:
PGT shall be required to bear the responsibility for
any shortfall in cost recovery if the Canada NEB fails to
grant export authority of sufficient duration and volumes
to allow for the recovery of the costs of the facilities
approved herein. In that event, the applicants are explicitly
prohibited from shifting any of the costs associated with
the facilities authorized herein onto any of their other
customers. This same provision shall apply to the import
authority ultimately granted by DOE/FE to the shippers if
that import authority proves to be of shorter duration Or a
lower volume than necessary for the recovery of costs
associated with the facilities and services authorized
herein.%
PGT requests that we remove this condition, arguing that
the Expansion shippers, not PGT, are responsible for obtaining
the necessary authorizations. PGT also requests we confirm that
PGT will not be at risk for the recovery for the reservation
charges under its contracts with its Expansion shippers.
Altamont asserts this at-risk condition imposes no risk at
all if gas supplies are not obtained or simply fail, and that even
if NEB export or DOE/FE import authorization is deficient,
PGT would continue to recover its fixed costs under contracts
with its Expansion shippers.
Commission Response
While the shippers bear the responsibility of obtaining
export and import authorizations, PGT remains responsible for
presenting evidence that its proposed project will be supplied
with sufficient volumes of transportable natural gas. As noted
above, the record evidence indicates that there are adequate
and available Canadian gas supplies. Recently, in Great Lakes
Gas Transmission Limited Partnership v. FERC (Great Lakes),
% 56 FERC 1 61,192, at p. 61,702.
38 -
the United States Court of Appeals for the District of Columbia
Circuit stated that once an applicant has made a satisfactory
showing concerning Canadian gas supplies then, absent a rea-
soned explanation, imposing an NEB at-risk condition on trans-
porters of Canadian gas is inappropriate since it is “over and
above the accessibility showing [the Commission] typically
requires of transporters of domestic gas.”*’ The court describes
this condition as effectively requiring a pipeline transporting
Canadian gas to remain at risk for the full cost recovery period
of the pipeline, and notes the depreciable life can extend
beyond the ten year contracts the Commission accepts as evi-
dence of a pipeline’s long-term utility. In accordance with Great
Lakes, we will remove the NEB export authorization at- risk
condition. In addition, we will also remove the at-risk condition
for DOE/FE import authorization. We can reasonably be
assured that DOE/FE will continue to grant the necessary
import authorizations, since the Energy Policy Act of 1992,
amends NGA section 3 to require that all applications for
authorization to import natural gas from “a nation with which
there is in effect a free trade agreement requiring national
treatment for trade in natural gas ... shall be deemed consistent
with the public interest, and ... shall be granted without modifi-
cation or delay.” Further, we note that DOE/FE has recently
accelerated consideration of requests for import authorization
in response to the Energy Policy Act.*
The Commission finds that each shipper voluntarily
accepted the financial risk of its failure to obtain adequate
37 Case No. 91-1394, slip op. at p. 13 (D.C. Cir., decided January 22,
1993). Typically, the Commission requires facilities transporting domsstic
gas to show the proposed capacity is subscribed under contract for ten
years. See Northwest Pipeline Corporation, 58 FERC 14 61,079, at
pp. 61-271-272 (1992) (citing cases), on reh’g, 59 FERC % 61,289 (1992).
38 Pub. L. No. 102-486, § 201, 106 Stat. 2776 (1992). See National Fuel
Gas Company, 62 FERC # 61,041 (1993).
39 See, e.g., DOE/FE Order No. 90-04-NG (Rochester Gas and Electric
Company) and Order No. 89-33-NG (Niagara Mohawk Power
Corporation).
39
export or import authorization. Absent a showing of bad faith,
it would be inappropriate to set aside agreements reflecting the
parties’ informed allocation of risk.4° Therefore, we clarify that
to the extent PGT’s applicable tariffs and transportation service
agreements shift the financial responsibility for obtaining export
or import authorization to the Expansion shippers, PGT may
recover the specified reservation charges during the term of
each of the shippers’ contracts.*1 We differ with Altamont’s
interpretation of this at-risk condition since, in the event the
supply of gas is prematurely depleted, PGT will continue to
bear the financial burden of sustaining service until such time as
abandonment is authorized pursuant to NGA section 7(b).
Downstream Capacity
The August 1, 1991 order stated that “PGT and its ship-
pers should be solely at risk for adequate downstream capac-
ity.”*? Edison and San Diego Gas & Electric assert that this is
unreasonable in that it requires an individual shipper to assume
the risk that other shippers will fail to arrange for adequate
downstream capacity. Edison and San Diego Gas & Electric
request the Commission eliminate the words “and its shippers.”
IES states that, in the event PG&E fails to construct its
companion expansion facilities, PGT’s Expansion shippers will
experience cutbacks and a bottleneck at the Malin, Oregon
delivery point. IES requests that under such circumstances,
PGT be placed at risk for the possible underutilization of its
Expansion Project, or alternatively, be required to certify under
oath that sufficient take-away Capacity exists to support its
Expansion.
“0 See Tennessee Gas Pipeline Company v. FERC, 824 F.2d 78, 82 (D.C.
Cir. 1987).
*! See, e.g, Northwest Pipeline Corporation, 59 FERC 61,289, at pp.
62,058-059 (1992); Iroquois Gas Transmission System, L.P, et al, 57 FERC
1 61,089, at pp. 61,322-323 (1991); Iroquois Gas Transmission System, L.P,
et al, 57 FERC { 61,350, at pp. 62,146-147 (1991), order on reh’g, 59
FERC 1 61,094 (1992).
42 56 FERC 1 61,192, at p. 61,727.
Commission Response
While we do not require a pipeline to show that all its
contract shippers have adequate gas supplies committed under
contract, we do require a pipeline to show that gas supplies are
generally available and accessible to it and its shippers.” In
order to demonstrate that gas will flow through a proposed
facility, we have required both firm, long-term contracts and a
showing that upstream or downstream barriers to the flow of
gas do not exist. Where long- term NEB authority is uncertain,
we have imposed an at-risk condition (see above). Where the
existence of downstream capacity is uncertain, we have required
the upstream pipeline to assume the risk of underutilization in
order to ensure that present and future customers do not make
inappropriate contribution to the costs associated with the
unused capacity.“
We clarify that each shipper is responsible only for its own
failure to secure adequate downstream capacity for its con-
tracted capacity on the PGT expansion. An individual shipper
will not be at risk for the failure of another shipper to arrange
for adequate downstream capacity where the actions of the
other shipper are beyond the control of the individual shipper.
Rates
Edison requests clarification that the actual costs of the
Expansion Project will be subject to scrutiny in PGT’s next
section 4 rate case and further requests the Commission not
preclude future refunds or adjustments if the estimated costs
prove higher than the actual costs. We clarify that actual costs
will be included in our considerations in a future rate case. We
note that we have accepted updated estimates of the PGT’s
43 See, e.g., Northwest Pipeline Corporation, 58 FERC {i 61,079, at pp.
61,271-272 (1992), order on reh’g, 59 FERC 4 61,289 (1992).
44 See, e.g., Northwest Pipeline Corporation, 56 FERC { 61,300, at pp.
62,267-268 (1991), supplementing, 56 FERC 1 61,006 (1991), amended, 58
FERC ]}nb61,079 (1992), order on reh’g, 59 FERC 4 61,289 (1992).
41
projected project costs and clarify that any subsequent modifi-
cations to PGT’s initial rates will apply prospectively.
Rate of Return on Equity
PGT previously proposed a rate design based on a 14.00
percent rate of return on equity and a 100 percent reservation
charge. The January 22, 1991 Preliminary Determination
approved a rate of return of 12.75 percent and an enhanced
fixed variable (EFV) rate design. The August 1, 1991 order
replaced the EFV rate design with the 100 percent reservation
charge originally negotiated between PGT and the Expansion
shippers for Rate Schedule T-3 transportation. Correspond-
ingly, PGT’s rate of return on equity was reduced from 12.75
percent to 12.50 percent in accordance with the Commission’s
determination that a 25-basis-point reduction in the rate of
return appropriately reflects the reduction in risk in shifting
from the modified fixed variable (MFV) to a straight fixed
variable (SFV) rate design.‘
PGT asserts that the Commission: (1) failed to reconsider
the 14.00 percent rate of return it had proposed in its 1989
amended application, (2) improperly derived the 12.75 percent
rate of return recommended in the January 22, 1991 Prelimi-
nary Determination by comparing PGT’s proposed pipeline
project with existing pipelines not exposed to the same risks,
(3) “rather summarily” reduced the 12.75 percent rate of return
on equity to 12.50 percent upon altering the rate design meth-
odology from EFV to a 100 percent reservation charge in its
August 1, 1991 order, and (4) established a 10.13 percent rate of
return in its October 24, 1991 order that is both too low and
improperly derived. PGT characterized the Commission’s
action in approving a 10.13 percent rate of return as an
improper “attempt to dictate or exercise veto control over
intrastate rates and transportation policies.”4
4S See, e.g, Texas Eastern Transmission Corporation, et al, 55 FERC
1 61,477 (1991), order on reconsideration, 58 FERC 9 61,254 (1992).
“© PGT Petition of November 25, 1991, at p. 5.
42
In the October 24, 1991 order, PGT’s rate of return was
reduced from 12.50 to 10.13 percent, the lower end of the zone
of reasonableness previously determined by the Commission for
return on common equity. This rate was intended to provide an
incentive for PGT to work toward the elimination of unduly
discriminatory conditions and was to remain in effect until PGT
demonstrated that neither its rates or transportation policies, or
those of PG&E, would result in unduly discriminatory restraint
on shippers’ access to transportation service.
Altamont, Amoco, the California Producers, E] Paso, IES,
and Kern River assert that reducing the rate of return on equity
from 12.50 to 10.13 percent is inconsequential since 10.13 per-
cent remains within the zone of reasonableness. The parties
argue the lowered rate will not act as an adequate incentive to
motivate PGT to try to alter the existing discriminatory condi-
tions; therefore, there is no justification for lifting the construc-
tion ban imposed in Ordering Paragraph (M) of the August 1,
1991 order. PGT repeats its prior complaints that (1) the zone
of reasonableness is improperly derived, (2) a 10.13 rate of
return on equity is insufficient compensation for the risks
assumed and (3) the approved rate of return may not allow
PGT to maintain its credit and attract capital. (Rehearing
requests concerning the Commission’s authority to attach con-
ditions to the issuance of a certificate are discussed below in
Ordering Paragraph (M).)
Commission Response
14.00 to 12.50 percent
A 12.75 percent rate of return was established after com-
paring the Expansion Project proposal with eight similar certifi-
cated pipelines. The January 22, 1991 order determined that:
Based on a [discounted cashflow] study, the median
investor return for the pipelines in the proxy
group is 13.02 and the average 13.12 percent, on an
approximately 40-percent equity ratio and an MFV rate
design. The 12.75 percent rate of return recommended for
43
PGT reflects that the lower risk of the EFV rate design is
somewhat offset by a higher risk posed by its lower 30-per-
cent equity ratio.‘*’
A discounted cashflow analysis of the proxy group resulted in a
rate of return zone of reasonableness between 10.13 and 15.80
percent.
We recognize that no pipeline proxy group can exactly
match the characteristics of PGT’s proposed project; however,
the Commission attempted to minimize differences in selecting
a group composed of predominately transmission companies
with a profile resembling PGT. Further, as we noted at the time,
the derived rate “is in line with returns allowed by the Commis-
sion for existing pipelines and with estimated investor expected
returns for industrial companies.’“* Therefore, we affirm the
12.75 percent rate recommended in January 22, 1991 Prelimi-
nary Determination.
Since the August 1, 1991 order, in which we ordered the
25-basis-point reduction to reflect the changed rate design,
Order No. 636 has been issued. In that order, we required
pipelines to recover their transportation costs under the SFV
rate design methodology, unless permitted otherwise.“ In insti-
tuting this generic change, we did not require pipelines to make
a corresponding 25-basis-point reduction in their rate of return.
In view of this change in our regulatory policy, we find it would
be inequitable to hold PGT to a 25-basis-point reduction in its
rate of return as a result of previously adopting our subse-
quently mandated rate design.% Therefore, we will grant
rehearing of PGT’s request and establish 12.75 percent as the
Expansion Project’s approved rate of return on equity. How-
ever, we affirm the October 24, 1991 order’s finding that this
‘7 54 FERC 4 61,005, at pp. 61,151-152.
“8 Id. at pp. 61,151-152. (Footnotes omitted.)
“9 FERC Statutes and Regulations 4 30,939, at pp. 30,431-435.
50 See Tennessee Gas Pipeline Company, et al., 59 FERC 1 61,199 (1992)
(authorizing a 100 percent demand charge by Algonquin Gas Transmis-
sion Company without requiring a reduction in its rate of return).
as
12.75 rate is not just and reasonable in light of the unduly
discriminatory restraint on shippers’ access to transportation
service on the PGT/PG&E system. ~
Edison requests that we state whether the 25-basis-point
reduction in the rate of return on equity and PGT’s initial rates
will be affected by Order Nos. 555 and 636. We clarify that
PGT’s initial rates may be modified prospectively in the context
of a future rate proceeding or in PGT’s restructuring
proceeding.
12.50 to 10.13 percent
As previously discussed, we find a 10.13 percent rate of
return offers a reasonable assurance that the Expansion Projecc
will be financially feasible. Further, the approved rate design
provides PGT greater confidence that it will recover costs.
Consequently, we deny PGT’s request for an increased rate of
return on equity.
We correspondingly find that a 10.13 rate of return strikes
an appropriate balance between approving a financially feasible
project and the unduly discriminatory rate treatment imposed
upon PGT. There is no question that this rate of return deprives
PGT of substantial earnings as long as the lowered rate remains
in effect. For this reason, we affirm our previous finding that
this lower rate of return will serve as a strong incentive for all
interested parties—especially PGT and the CPUC—to work
toward the elimination of what this Commission finds to be
unduly discriminatory conditions affecting interstate commerce.
As a result, we reject petitioners’ assertion that, due to
steadily falling interest rates, the lower end of the zone of
reasonableness, based on the yield of Baa public utility bonds in
1990,5! is now unduly generous. We recognize the financial
markets have changed since the 1991 Preliminary Determina-
tion; however, it is impossible to repetitively revisit our earlier
calculations in an ongoing effort to account for continually
51 54 FERC 4 61,035, at p. 61,151.
45
changing conditions. By way of compensation, all parties are
equally exposed to the risk of fluctuations in market. An NGA
section 4 or 5 proceeding is the proper forum in which to seek
redress in response to changed market circumstances. More-
over, we find that this rate of return strikes a reasonable
balance: it allows a project the Commission has found to be in
the public convenience and necessity to proceed while seeking
to redress the unduly discriminatory rate issues discussed ear-
lier. Therefore, we will not reconsider the previously estab-
lished zone of reasonableness in this section 7 proceeding.
100 Percent Reservation Charge
PGT’s amended application, filed October 3, 1989, pro-
posed a Rate Schedule T-3 consisting of six mileage-based, one-
part monthly reservation charges designed to recover the total
incremental fixed costs allocated to firm transportation. The
January 22, 1991 Preliminary Determination approved an incre-
mental rate but rejected the 100 percent reservation charge.
Instead, in order to achieve consistency between PGT’s initial
rates for its incremental facilities and the EFV rate design
currently effective for PGT’s existing facilities, we directed PGT
to use the same EFV rate design for its Expansion Project.5? We
reconsidered this decision in the August 1, 1991 order, and
replaced the EFV rates with the milage-based, 100 percent
reservation charge rates originally negotiated between PGT and
its Expansion shippers. The rates were adjusted to reflect our
approval of a 12.50 rate of return on equity and an updated
estimate of the cost of the Expansion Project.
The August 1, 1991 order referred to the approved Rate
Schedule T-3 as being based on a “100 percent reservation
charge” and also as being based on a “straight fixed variable”
rate design. Several parties claimed these references to the rate
design are inconsistent or ambiguous. The Producer Associa-
tiems state that they assume the Commission intended a 100
82 $4 FERC 4 61,035, at p. 61,149.
53 56 FERC { 61,192, at pp. 61,705-61,707.
46
percent reservation charge; Union Pacific states that it assumes
the Commission intended a SFV rate. Altamont requests the
Commission clarify that the August 1, 1991 order approved an
SFV rate design and, as a result, requests the Commission
establish an appropriate throughput level for the purpose of
calculating the SFV component usage charge. PGT interprets
approval of a 100 percent demand charge as requiring the
rejection of all requests to set a throughput level.
Edison asserts that it is inequitable for the Commission to
find PGT’s existing Expansion shippers agreed to rates designed
using a 100 percent reservation charge. Edison states that
Edison and the cities of Burbank, Glendale, and Pasadena,
California (the Cities) objected to PGT’s inclusion of alterna-
tive tariff sheets, reflecting a 14.00 percent rate of return and a
100 percent demand charge, in PGT’s prior application and in
its request for rehearing of the January 22, 1991 Preliminary
Determination.
Commission Response
Rate Schedule T-3 specifies that shippers pay a single,
fixed monthly reservation charge per Mcf for firm transporta-
tion on PGT’s Expansion Project. This is described in the
tariff as a 100 percent reservation charge; there is no usage
charge. In other words, on a monthly basis, a shipper will be
billed the same whether it transports all of its reserved capacity
or none.*> We clarify that references in our prior orders to Rate
Schedule T-3 as based on an SFV rate or as a 100 percent
demand charge, are intended to designate the above-described
100 percent reservation charge.
54 PGT will provide interruptible transportation on an open-access
basis using its currently effective system-wide interruptible transportation
rate. The Expansion Project will provide transportation services only, not
sales.
55 The only charges in addition to the 100 percent reservation charge
are for compressor fuel and line losses. Rate Schedule T-3, section 5.6.
47
The August i, 1991 order noted that the change from the
EF'V rate design approved by the January 22, 1991 order ren-
dered PGT’s objection to the 95 percent throughput level
moot.** However, the August 1, 1991 order also deferred a
request by Kern River that the Commission clarify whether the
95 percent throughput condition established along with the
EFV rate would be a permanent certificate condition.5’ Since
the approved 100 percent reservation charge does not require a
throughput condition for the purpose of calculating a usage
charge (because there is no additional usage charge), requests
that we further consider a throughput level are dismissed as
moot.
The Cities’ objection to PGT’s filing of tariff sheets reflect-
ing a 100 percent reservation charge was addressed in the
August 1, 1991 order. We noted that our acceptance of the 100
percent reservation charge on rehearing rendered the Cities’
argument moot.* The Cities did not request rehearing of the
August 1, 1991 order. Edison does not object to the adoption of
the 100 percent reservation charge rate design. The Cities and
Edison have executed 30-year transportation service agree-
ments based on a 100 percent reservation charge rate design. In
view of the above, we do not consider it inequitable to have
found that the Expansion shippers voluntarily agreed to a 100
percent demand charge and to approve PGT’s proposed rate
design based, in part, on that finding.
Cost Allocation
Kern River states, without further elaboration, that the
Commission has allowed PGT to derive rates without any allo-
cation to the Expansion of the costs of existing facilities that will
be used by the new shippers and that PGT has underallocated
Operation and maintenance costs to the Expansion Project.
6 FERC 1 61,192, at p. 61,707.
57 56 FERC 4 61,192, at p. 61,703.
$8 56 FERC 1 61,192, at p. 61,723.
48
PITCO and SoCalGas raise similar issues. It would be prema-
ture to reply to these allegations at this time. As noted in the
Preliminary Determination, in reply to the same complaints by
PITCO, “These issues relate to how the project may affect rates
that are not before the Commission in this proceeding. They
are more appropriately raised in PGT’s next rate case.”*? We
repeat that questions concerning the propriety of cost alloca-
tions for existing facilities and the extent to which each of
PGT’s various customers benefit from the existing and Expan-
sion facilities will be addressed in detail in PGT’s next NGA
section 4 or section 5 rate proceeding.
Rate Tilt
The January 22, 1991 order directed PGT to use an EFV
rate design, rather than PGT’s proposed 100 percent reserva-
tion charge. Rehearing of that decision was sought on the
grounds that the EFV rate would allegedly create a “rate tilt”
favoring Canadian over domestic gas by virtue of an artificial
(ie., not market based) regulatory advantage. We fully
addressed this issue in the August 1, 1991 order and rejected
any remedial rate revision.
The Producer Associations and Union Pacific complain
the change in rate design from EFV rates to a 100 percent
reservation charge will amplify the alleged rate tilt. The rehear-
ing requests restate or incorporate the arguments previously
presented. Petitioners contend that the rate design approved in
the August 1, 1991 order is inequitable as it will place pipelines
transporting domestic gas, sold on the basis of an MFV rate, at
a disadvantage in competing for the California market against
PGT, transporting Canadian gas sold on an SFV basis. The
parties propose the Commission, within its wide latitude to
evaluate all factors bearing on the public interest, take notice of
the competitive disadvantage induced by PGT’s rate methodol-
ogy and compensate by adjusting the transportation rates on
PGT’s Expansion Project.
$9 54 FERC 4 61,035, at p. 61,145.
49
Opinion Nos. 256 and 256-A® sought to assure that
United States pipeline rates would treat Canadian gas costs no
differently than domestic gas costs. The parties argue that, to
this end, the Commission may, under its “extremely broad”
NGA section 7 conditioning authority,® reclassify and reallo-
cate pipeline costs between demand and commodity charges in
setting rates for imported gas once it enters the United States
to compensate for the disparity between the Canadian SFV and
domestic MFV rate designs,® without intruding on the terms of
the contracts between the Canadian suppliers and the local
distribution companies (LDCs), and without interfering with
the import authorization of DOE/FE. The Producer Associa-
tions state that there is no basis for assuming PGT’s Expansion
Project transportation rates were freely negotiated.
Commission Response
In Opinion No. 256 [37 FERC 61,215], the Commission
adjusted a domestic interstate pipeline’s rates in order to offset
a Canadian purchase price that passed through Canadian rates
to United States customers by incorporation into a domestic
sales contract in order to ensure that the costs included in
demand charges were comparable in import and export
arrangements. The Expansion Project involves the certification
of pipeline facilities which will be utilized solely for the trans-
portation of gas within the United States and, in that context,
the transportation of gas owned by third parties. Unlike the
pipeline in Opinion No. 256, PGT is not a Party to the gas sales
contracts. PGT is merely charging shippers a cost-of-service
transportation fee; here there is no purchase price pass-through
® Natural Gas Pipeline Company of America, 37 FERC 4 61,215 (1986)
(Opinion No. 256), reh’g granted in part and denied in part, 39 FERC
1 61,218 (1987) (Opinion No. 256-A), aff'd sub nom., TransCanada Pipe-
Lines Lid, et al. v. FERC, 878 F.2d 401 (D.C. Cir. 1989) (TransCanada).
*! Citing Transcontinental Gas Pipe Line Corporation v FERC, 589 F.2d
186, 190 (Sth Cir. 1979), cert. denied, 445 U.S. 915 (1980). See also Atlantic
Refining Company v. Public Service Commission, U.S. 378, 391 (1959).
6 TransCanada, 878 F.2d 401, 410.
50
since PGT is not purchasing Canadian gas for resale. We find
no evidence that the contracts at issue were not negotiated at
arm’s-length and entered into in good faith. We affirm that
PGT and PG&E, although affiliates, are independent entities,
therefore, we reject the Producer Associations’ proposal to
apply Opinion No. 256 to expansion volumes transported by
PGT on behalf of PG&E.
The Commission has no direct jurisdiction over the pur-
chase arrangements in Canada between United States LDCs
and Canadian producers applicable to gas transported over the
PGT expansion pipeline® and has hesitated to adjust rates in
order to avoid jurisdictional conflict with the Canadian and
state regulatory authorities and DOE/FE® and to adhere to
obligations under the Canada—U.S. Free Trade Agreement
(FTA).®
The Commission faced an analogous situation in Jroquois
Gas Transmission System, L.P, et al., (Opinion No. 357)® and
found Order No. 256 inapplicable. We stated that our policy is
“to encourage proposals which increase the supply options of
gas buyers and enhance competition,” not to “protect existing
suppliers from competition.” We do not attempt to adjust for all
63 56 FERC 4 61,192, at p. 61,708; TransCanada, 878 F.2d 401, 407.
64 DOE/FE considers competitiveness, need, and security of supply in
determining whether a proposed import is consistent with the public
interest. See New Policy Guidelines and Delegation Orders from Secre-
tary of Energy to Economic Regulatory Administration and FERC Relat-
ing to the Regulation of Imported Natural Gas, 49 Fed. Reg. 6684,
6687-88 (February 22, 1984). See also TransCanada, 878 F.2d 401, at p.
407.
65 The FTA’s “national treatment” obligation prohibits the Commission
from treating Canadian gas supplies less favorably than domestic gas
supplies. Part 1, Chapter 1, Article 105, Part 2, Chapter 5, Article 501, 27
LL.M. 281, at pp. 294, 314 (1988) (incorporating the definition of
“national treatment” in Part II, Article III of the General Agreement on
Tariffs and Trade, 61 Stat. A5, A18-A19 (1947)).
6 Iroquois Gas Transmission System, L.P, et al., 53 FERC 9 61,194
(1990) (Opinion No. 357).
51
rate differentials between competing pipelines, since such dif-
ferentials may exist for a variety of reasons and are administra-
tively difficult to identify. The Commission’s policy is simply to
ensure that a new pipeline’s rate design does not give it an
“unfair advantage.”67 We have accepted varying rates between
Canadian and domestic transportation as we have accepted
varying rates for transportation of exclusively domestic gas
where there are legitimate reasons for the rate differentials.®
“The market doesn’t always treat all market participants
equally. The Commission’s statutory responsibility is to insure
that its regulatory policies do not frustrate the market from
producing results most beneficial to consumers,” We declined
to alter Iroquois’ rates, concluding to do so would be inconsis-
tent with obligation under the Canada—United States FTA,
administratively impractical, and would result in a regulatory
morass. Our decision was recently upheld on appeal.” The issue
of international inconsistencies in rate design, and the need for
Commission action to adjust for as costs passed through on an
as-billed basis, are not relevant to PGT’s proposed project.
Therefore, we affirm our prior decision not to alter the Expan-
sion Project rates.
We note the implementation of Order No. 636 should
serve to harmonize the ratemaking methodologies between
United States and Canadian Pipelines and among domestic
interstate pipelines and, in part, restructuring will supersede the
rationale upon which petitioners base their request. Order No.
636 specifies that unless the Commission permits otherwise,
pipelines are to recover their transportation costs under the
SFV method.” To now attempt, while in midst of a transition
97 53 FERC 61,194, at pp. 61,701-702,
“ Tennessee Gas Pipeline Company, 51 FERC 4 61,113, at p. 61,284
(1990) (NIPPS II).
© 53 FERC 1 61,194, at p. 61,702, quoting, 51 FERC 4 61,113, at
p. 61,284.
7 Louisiana Ass'n of Independent Producers and Royalty Owners v.
FERC, 958 F.2d 1101, 1123 (D.C. Cir. 1992).
"| FERC Statutes and Regulations 4 30,939, at pp. 30,434-435,
52
from MFV to SFY, to readjust PGT’s transportation rates in
order to account for the alleged discriminatory differential with
the MFV-designed rate on competing domestic pipelines, would
be to take futile aim at a moving target and potentially frustrate
realization of the Commission restructuring goals. Additionally,
we note the proposed North American Free Trade Agreement,
Article 606(2), requires each country to ensure that its energy
regulatory bodies “avoid disruption of contractual relationships
to the maximum extent practicable.” In view of the above, we
conclude it would be inappropriate to extend our regulatory
authority to the Expansion shippers’ purchase arrangements.
Tariff Provisions of Rate Schedule T-3
Section 8, Curtailments and Interruptions
The August 1, 1992 order directed PGT to revise its pro-
posed section 8 of Rate Schedule T-3 in order to avoid the
possibility of a new service jeopardizing the capacity rights of
existing shippers without their participation and concurrence.
Initially, section 8 stated that in the event of curtailments “PGT
shall use the remaining available firm capacity on its entire
combined system, to the extent reasonable within the opera-
tional limitations of that system.” This language was replaced to
allow the Expansion shippers, in the event of curtailment, to use
excess capacity on the existing system “so long as the use of
such excess capacity ... does not disrupt service to the existing
shippers.”
PGT requests we reinstate the language of its initially
proposed section 8 of its tariff, arguing that existing customers
will benefit from the Expansion facilities and it would be
impractical to differentiate between existing and expansion
volumes in a curtailment situation. Edison and San Diego
explain that the revised language does not distinguish between
firm and interruptible shippers and request the Commission
clarify the references to expansion and existing shippers.
72 56 FERC # 61,192, at pp. 61,717-718.
Commission Response
Firm transportation service enjoys a priority over inter-
ruptible transportation service. This distinction would be dis-
turbed if existing interruptible shippers were to enjoy a priority
over firm expansion shippers. Therefore, we will require PGT to
revise the relevant portion of section 8 of Rate Schedule T-3 to
read as follows:
If excess capacity is available at that time on the
existing system, that excess capacity may also be used to
provide transportation service to the firm expansion ship-
pers, as long as the use of such excess capacity for that
purpose does not disrupt service to the firm existing
shippers.
Section 5.3, Reservation Charge Credit—PG&E CT-1 Service
Formerly, section 5.3 of Rate Schedule T-3 provided that if
a shipper receives firm transportation service from PG&E
under PG&E’s Rate Schedule CT-1, then that shipper shall be
entitled to a reservation charge credit from PGT in certain
situations. In the August 1, 1992 order, we noted that this credit
was available only to shippers on PGT’s Expansion that
employed PG&E for further downstream transportation. In
order to preclude a potential tying arrangement and avoid
undue rate preferences, we directed PGT to either delete this
section or provide the same reservation charge credit to any
downstream transportation.
Edison, San Diego, and PGT urge retention of the PG&E
credit. They state that the motive in providing the credit was
not to favor PG&E, but was included as an incentive for PGT
and PG&E to efficiently coordinate the operations of the two
pipelines. PGT states that requiring it to make similar arrange-
ments with unaffiliated pipelines would require it to eliminate
this benefit. Edison and San Diego argue similar operational
efficiencies are not attainable between PGT and other unaffili-
ated downstream pipelines and, therefore, mandating a similar
credit would serve no purpose and “seems unfair.”
54
Commission Response
Even granting petitioners’ assertion that the intention
behind the credit is benign, the outcome nonetheless results in
unwarranted preferential treatment for those Expansion ship-
pers that agree to employ both PGT and PG&E for its transpor-
tation. We affirm the reasoning and the result of our August 1,
1992 order.
Section 9, Gas Quality
Section 9 of Rate Schedule T-3 provides that once a
shipper delivers gas to meet the requirements of the upstream
pipeline, PGT unconditionally agrees to redeliver an equivalent
quality of gas to PG&E at Malin, Oregon. The August 1, 1991
order required that PGT “must make the same gas quality
specification commitment to any upstream or downstream pipe-
line at any other delivery point.””? PGT states that requiring it
to make similar assurances to unaffiliated pipelines would
require it to eliminate this benefit. Edison and San Diego object
that making section 9 “universal” fails to recognize the special
circumstances facing certain shippers to southern California
that must comply with gas quality standards in excess of PGT’s
standar
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