# Petition for Writ of Certiorari — Indicated Expansion Shippers v. Federal Energy Regulatory Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0157%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1997 - **Citation:** 520 U.S. 1204 ## Text -~ 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 % 3 4 4 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 standards. Commission Response As we stated in the August 1, 1991 order, we have no objection to PGT’s unconditionally assuming the burden of meeting its shippers’ gas quality specifications (a burden previ- ously assumed by the shippers). However, as we previously explained in response to the proposed provisions of section 5.3, we do object to tariff provisions that result in disparate treat- ment of Expansion shippers depending on whether they ship gas downstream on PG&E or on another pipeline. Without the proviso that PGT apply section 9 “universally,’ the only Expan- sion shippers to benefit will be those that also ship gas on PG&E. Therefore, we affirm that to retain section 9, PGT must 73 56 FERC 4 61,192, at p. 61,719. 55 make the same gas quality specification commitment to any upstream or downstream pipeline at any other delivery point. Section 6.2, Capacity Assignment The August 1, 1991 order directed PGT to remove the capacity assignment provision of sections 6.1 and 6.2 from Rate Schedule T-3. We also noted that the reference in section 6.2 to paragraph 19.2 of the General Terms and Conditions was inap- propriate as paragraph 19.2 did not address matters related to capacity allocation. We affirmed our finding in the March 15, 1991 order that issues relating to capacity brokering should await resolution of PGT’s capacity brokering program in Docket No. CP90-1031-000.” San Diego requests that section 6.2 be reinstated in order “to preserve the standard contract right to assign contractual rights which is distinct from capacity brokering.””5 Commission Response San Diego states that the General Terms and Conditions section 19.2, Assignability, “relates not to capacity brokering but to the traditional contract principle of assigning contract rights and the process therefore.”” We concur. We find that the section 6.2 of Rate Schedule T-3 need not be reinstated as requested in order to preserve the right of assignment, since ™ $2 FERC 4 62,075 (1990) (Order Issuing Blanket Certificate). The 1990 order did not address capacity brokering, since PGT filed an applica- tion for a transportation assignment program in Docket No. CP90-1031-001. PGT’s pending application was dismissed following Order No. 636 on the grounds that PGT’s proposal did not sufficiently comply with the generically applicable requirements under Order No. 636. North- ern Natural Gas Company, et al., 59 FERC 4 61,362 (1992), reh’g denied, 60 FERC 1 61,235 (1992). Issues of capacity brokering are appropriately addressed in PGT’s restructuring p ing. 7$ San Diego’s Motion for Rehearing and Clarification at p. 25 (Sep- tember 3, 1991). 6 Id. 56 that right is retained in section 19.2 of the General Terms and Conditions. Therefore, San Diego’s request is denied. Ordering Paragraph (M) In the August 1, 1991 order, we issued PGT a certificate for the construction and operation of the Expansion Project, but in Ordering Paragraph (M) prohibited PGT from commenc- ing construction “until the Commission is assured that the PGT shippers are receiving nondiscriminatory treatment as to access to the California markets by means other than on the PG&E expansion.””’ We stated that “[w]ithout this condition, we could make no public convenience and necessity finding.””® Rehearing requests by the CPUC, PGT, Edison, and San Diego oppose the construction condition in Ordering Para- graph (M). PGT claims the Commission’s “withholding” of PGT’s license to commence construction constitutes a sanction within the meaning of the Administrative Procedure Act and is improperly imposed. The October 24, 1991 order acknowledged that the Expan- sion shippers remained subject to discriminatory treatment, but upon reconsideration we found that, on balance, the need to assure timely deliveries of gas supplies to the growing California market outweighed our concerns regarding potential undue discrimination. Accordingly, the construction ban was lifted. At the same time, we lowered PGT’s rate of return on equity from 12.50 to 10.13 percent until such time as PGT demonstrates its and PG&E’s rates or transportation policies do not result in unduly discriminatory restraints on shippers’ access to transpor- tation in order to provide PGT with an incentive to work towards the eradication of all discriminatory practices. PGT asserts that the Commission is imprecise and vague in specifying what actions would suffice to eradicate the undue 77 56 FERC { 61,192, at p. 61,728. 78 Id. at p. 61,726. 57 discrimination and thereby result in a restoration of the higher rate of return. Altamont, Amoco, the California Gas Producers, El Paso, IES, Kern River, and the Producers Association argue the October 24, 1991 modification of Ordering Paragraph (M) is improper in principle and inadequate in practice. Rather than authorize then penalize the Expansion Project, the parties pro- pose that the Commission either immediately reinstate the construction ban or preclude operation until unduly discrimina- tory practices are eliminated. The parties assert that the Commission’s rationale for reversing its August 1, 1992 position and lifting the construction ban was insufficient as a matter of law, since the discriminatory conditions found to be unacceptable in the previous order remain unchanged. The parties contend that once the Commis- sion identified discrimina Ty practices, then until such prac- tices are corrected, NGA sections 4, 5, and 7 preclude a finding that the Expansion Project is or will be required by the present or future public convenience and necessity. The Commission’s concern with “ensuring the timely consideration and construc- tion of new gas facilities to meet growing gas demand”” does not constitute a reasoned explanation supported by substantial evidence justifying approval of a discriminatory and anticompe- titive project. The reduced rate of retum on equity does not eradicate the undue discrimination, therefore, the Expansion Project cannot be in the public convenience and necessity and the Commission’s modification of Ordering Paragraph (M) is arbitrary and capricious. Further, the reduced rate of return is characterized as inconsequential in comparison to the advan- tages of enhanced market power the certificated facilities and service will provide PGT. Finally, the parties note the Commis- sion’s obl [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0157%3A1. Public record. Not legal advice.