Opposition Brief — Associated Gas Distributors v. Federal Energy Regulatory Commission

y ry 3) APR.10 1997

/

a

Nos. 96-1186, 96-1187, 96-1188

In the Supreme Court of the Giuted States __

OCTOBER TERM, 1996

ASSOCIATED GAS DiSTRIBUTORS, ET AL., PETITIONERS

as

FEDERAL ENERGY REGULATORY COMMISSION

AMERICAN PUBLIC GAS ASSOCIATION AND CITIZENS

GAS & COKE UTILITY, PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

NEW YORK PUBLIC SERVICE COMMISSION, ET AL.,

PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

AND UNITED STATES OF AMERICA

BURLINGTON RESOURCES OIL & GAS COMPANY,

PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITIONS FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE

FEDERAL ENERGY REGULATORY COMMISSION

IN OPPOSITION

WALTER DELLINGER

ee ey Acting Solicitor General

SUSAN TOMASKY Department of Justice

General Counsel Washington, D.C. 20530-0001

JOSEPH S. DAVES 202) 514-2217

Acting Solicitor

SUSAN J. COURT

ERIC LEE CHRISTENSEN

Attorneys

Federal Energy

Regulatory Commission

Washington, D.C. 20426

QUESTIONS PRESENTED

Order No. 636 of the Federal Energy Regulatory

Commission (FERC) requires the unbundling of

interstate natural gas transportation service from

sales service in order to facilitate competition in the

national market for gas at the wellhead and ensure

equal access to transportation services. The ques-

tions presented are:

1. Whether FERC’s jurisdiction over interstate

transportation of natural gas under the Natural Gas

Act, 15 U.S.C. 717 et seqg., supports application to local

natural gas distribution companies and municipally

owned natural gas companies of FERC regulations

governing transfer of rights to capacity on interstate

natural gas pipelines.

2. Whether FERC correctly concluded that, pur-

suant to its program for reallocation of pipeline capac-

ity under long-term transportation contracts, it could

not require natural gas pipelines to accept bids lower

than the maximum just and reasonable rate for trans-

portation capacity.

(1)

TABLE OF CONTENTS

Page

oe, LNA TER SIR NES SPREE LIS SONS CA ee MM 2

on, NEE RRE NAISAERE E RA AGO Rn Se 2

Be EERE Ce LRN ROTC SN DEN ae eR 2

a a OER ERSTE Ta Us See, SO RST OO EAA NE SOT 8

ace RT NTS SOO MEE ED REET CPE MRR GD TO 24

TABLE OF AUTHORITIES

Cases:

Algonquin Gas Transmission Co., 59 F.E.R.C. (CCH)

{ 61,032 (Apr. 8, 1992), reh’g denied, 60 F.E.R.C.

(CCH) 4 61,113 (Aug. 8, 1992) .............ccccccccessceoseeee 4,5

Altamont Gas Transmission Co. v. FERC, 92 F.3d

1239 (D.C. Cir. 1996), petition for cert. pending,

ROO ME ER sarc tais orciclcaiscaiec sanagubgnecked-kesoisss., 17

Arcadia v. Ohio Power Co., 498 U.S. 73 (1990) ....... 23

Associated Gas Distribs. v. FERC, 824 F.2d 981

(D.C. Cir. 1987), cert. denied, 485 U.S. 1006

IE perk cas tiierescaradunenkcpusscumscaabethisesbicradcctkenus.ihas., 22

Atlantic Ref. Co. v. Public Serv. Comm., 360 U.S.

MOND Fiicehlains pial deal Na ssintdcasepsaidbbiecdbsacickscgiaiies «adie 9

California v. Lo-Vaca Gathering Co., 379 U.S. 366

Ce ue Ee OUR ARSORIRS DUS BEB i EIA ED Sot Oe ORE 17

California v. Southland Royalty Co., 436 U.S. 519

II beh Svtseuincadiapeccean a chbelinatie dedi uaaacibicbbadivns ccamsesna 18

Cascade Natural Gas Corp. v. FERC, 955 F.2d

PERE ARUN Ge MED enlsahases sxincnsovsaccesacvsnibiccsxcen 13, 14, 17

Corning Glass Works v. FERC, 675 F.2d 392 (D.C.

CN ca EEE EES TCS ION a es ae PO COTE 11

FPC vy. East Ohio Gas Co., 338 U.S. 464 (1950) . 12, 13,

14, 16, 18

FPC v. Hope Natural Gas Co., 320 U.S. 591

Rs hphchsbatircstuatobehacivees Uesmicsasccpsesciscccieinuas cis 22

(IIT)

IV

Cases—Continued: Page

FPC vy. Louisiana Power & Light Co., 406 U.S. 621

OTE ccisctacagiivcuaaeuseene 10, 11, 13, 17, 18

FPC vy. Southern California Edison Co., 376 U.S.

BOS CADOG) viccnsssccicntinsitepssvenssndsarvviiaevciaptulapiatiapehaciend 10

FPC vy. Transcontinental Gas Pipe Line Corp., 365

AD ACE CEU? dorastiacsbacsnncemis transi hacneisiaieds 10-11, 18

Fort Pierce Util. Auth. v. FPC, 526 F.2d 993 (5th

OTH SPER i icodcbinsedeccncuistciestaieveuadonke citivinidossivatibiices 11

Louisiana Power & Light Co. v. FPC, 483 F.2d

623 (5th Cir. 1973), cert. denied, 416 U.S. 974

SLi: 37) PDR SEGA catatonia BR neh he ORCS EN tone ats rrp habe 16

Michigan Consol. Gas Co. v. FERC, 883 F.2d 117

(D.C. Cir. 1989), cert. denied, 494 U.S. 1079

COE ei yeutaaic acinar Cucicaaatianerckinnes ns 13

Mississippi Pub. Serv. Co m’n vy. FPC, 552 F.2d

1345 (5th Cir. 1975), cert. denied, 429 U.S. 870

CLIP FOY srscccantestss tenths cansssssdecerabeabsbunctuceep encaebepoaberbenbuns 11

vississippi River Transmission Corp. v. FERC,

O69 FZ 2216 (D.C. Cite TGR) oiviciccscsssccctossisenisenioase 13

Mobil Oil Exploration & Producing Southeast, Inc.

v. United Distribution Cos., 498 U.S. 211 (1991) ... 21

National Ass’n of Regulatory Util. Comm’rs v.

FERC, 923 F.2d 1377 (10th Cir. 1987) .................... 11

Northwest Cent. Pipeline Corp. v. State Corp.

Comm'n, 489 U.S, 498 (1089) «.....cccccsccncsnssocescecnestcens 9

Panhandle Eastern Pipe Line Co. v. FPC:

232 F.2d 467 (3d Cir.), cert. denied, 352 U.S.

PS TEE nilocs cca caucnstbor sacs hokseecniecanedoca ese 11

SES TEER BOF CHGS isin carck ansassasabtacdasoriatesiacnsecess 11

Permian Basin Area Rate Cases, 390 U.S. 747

GRAIOIED. ssccischsiacaviaasonsskacasdocansadedseeaembnitonsmuaaiancaas 22, 23

Public Utils. Comm’n v. FERC, 900 F.2d 269

CERES TOG sesciscccigci cates ecmesatictasaamaeies 13-14, 17

Schneidewind v. ANR Pipeline Co., 485 U.S. 293

CRIES Ss acindasrncaveetisceninsie ond owes cbech ids deaokens bea eiadabeies 10, 11

V

Cases—Continued: Page

Texas Eastern Transmission Corp.:

48 F.E.R.C. (CCH) 4 61,248 (Aug. 28, 1989) ........... 19

51 F.E.R.C. (CCH) § 61,170 (May 11, 1990) ............ 19

Texas Gas Transmission Corp., 55 F.E.R.C. (CCH)

DN UR FR TB) ikcsvines caecdstsvsieanccacscintcscsccenes 19

Transcontinental Gas Pipe Line Corp. v. State Oil

& Gas Bd. of Mississippi, 474 U.S. 409 (1986) ....... 10

United Gas Pipe Line Co., 46 F.E.R.C. (CCH)

{ 61,060 Jan. 24, 1989), modified on other grounds,

49 F.E.R.C. (CCH) ¥ 61,166 (Nov. 7, 1989) ............. 19

United Gas Pipe Line Co. v. FERC, 824 F.2d 417

SIRES CAs RUMELE i chcstdvccossucoveiasasie ccbhciusmalaisiahemaiedion, 11, 13

United Gas Pipe Line Co. v. McCombs, 442 U.S. 529

ERAGE ccubeui bine ccskiniis vas Ghcek bovkaotinaielosd idea alemuacceias 10

Statutes and regulations: |

Natural Gas Act, amendment (Hinshaw Amendment),

Pub. 1), 40, BEB, CS Stak, BB ao cesscsascosicsinssdensceacssvecas 15, 16

Natural Gas Act, 15 U.S.C. 717 et seq. .......cccccccscsseeee 3

OC). 15 OB. TES cicsssisicetccrcss 10, 12, 138, 14, 18, 19

OF BG Er aes, Fo RIOD nosis sckdeeniciaavedsbinbisieanuase ee 17

Py ae MPs. SAMI bask saicirvce donkatacctaceccnconcdeciace, 17

2 FB, FEO iscsi cha seas 21

Be Be EB 2 wih 2 & » UAE REARS CIA pam TIA OT 12, 19

© FRE RO el ts Te RD akrciconicdtdnendnseskeceen 6, 11, 12

© TEN, SB eas Ck ekki aveonsentatoseeedckins 11, 12, 16, 19

© ROC, ZA EAD AS. TE OP cis sckiiadevahnccccecceincacacecudscsse 15

18 C.F.R.:

PUCEMANE SPU MC MUIND is son cisnskcendaneca tecesheaebadiauiidas bis 6-7

SORT: MME chs ists sh sucodncticecabiecabecaduaias iddeSeucacccams 5

Miscellaneous:

Robert Crandall & Jerry Ellig, Economic Deregula-

tion and Customer Choice: Lessions for the Electric

FIRE CEO: siseniccstenastnscindacian bein sdccsniagdiuuaboccuatsices 9

H.R. Rep. No. 709, 75th Cong., Ist Sess. (1987) ......... 13

Howard R. Williams, Manual of Oil & Gas Terms

COUR WE, SOS ba scccanitddneniicrsedeiccentedcsninsetoceiaiines 7

In the Supreme Court of the United States

OCTOBER TERM, 1996

No. 96-1186

ASSOCIATED GAS DISTRIBUTORS, ET AL., PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

No. 96-1187

AMERICAN PUBLIC GAS ASSOCIATION AND

CITIZENS GAS AND COKE UTILITY, PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

No. 96-1188

NEW YORK PUBLIC SERVICE COMMISSION, ET AL.,

PETITIONERS

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

AND UNITED STATES OF AMERICA

No. 96-1189

BURLINGTON RESOURCES OIL & Gas COMPANY,

PETITIONER

Vv.

FEDERAL ENERGY REGULATORY COMMISSION

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

BRIEF FOR THE

FEDERAL ENERGY REGULATORY COMMISSION

IN OPPOSITION

(1)

OPINIONS BELOW

The opinion of the court of appeals (Pet. App.

la-174a)! is reported at 88 F.3d 1105. The orders of

the Commission are reported in Order No. 636, Pipe-

line Service Obligations and Revisions to Regula-

tions Governing Self-Implementing Transportation

Under Pt. 284 of the Commission’s Regulations, and

Regulation of Natural Gas Pipelines After Partial

Wellhead Decontrol, F.E.R.C. Stats. & Regs. (CCH)

{ 30,939 (Pet. App. 175a-407a), order on reh’g, Order

No. 636-A, F.E.R.C. Stats. & Regs. (CCH) ¥ 30,950

(Pet. App. 408a-812a), order on reh’g, Order No. 636-B,

61 F.E.R.C. (CCH) J 61,272 (Pet. App. 813a-998a),

reh’g denied, 62 F.E.R.C. (CCH) ¢ 61,007 (Pet. App.

999a-1000a) (Order No. 636).

JURISDICTION

The judgment of the court of appeals was entered on

July 16, 1996. A petition for rehearing was denied on

October 29, 1996. Pet. App. 1008a-1004a. The peti-

tions for a writ of certiorari were filed on January 27,

1997. The jurisdiction of this Court is invoked under

28 U.S.C. 1254(1).

STATEMENT

1. In the rule at issue here, Order No. 636, the Fed-

eral Energy Regulatory Commission (FERC or Com-

mission) completed the natural gas deregulatory pro-

gram it had initiated almost a decade earlier. Order

No. 636 mandates the “unbundling” of interstate natu-

ral gas sales service from transportation service, re-

quiring that those services be sold separately to

1 All references to “Pet. App.” are to the appendix to the

petition in No. 96-1186.

3

natural gas purchasers. FERC adopted its manda-

tory unbundling policy in order to “improve the com-

petitive structure of the natural gas industry to

facilitate the operation of a national wellhead market

as envisioned by Congress,” Pet. App. 229a; to “en-

sure equality of transportation: service between gas

sold by pipelines or their affiliates and gas sold by

other sellers,” id. at 234a; and, ultimately, to “provide

natural gas consumers with access to an adequate

supply of clean and abundant natural gas at reason-

able prices,” id. at 229a. Order No. 636 imposes

“capacity-release” requirements that allow holders of

firm transportation rights on interstate pipelines to

resell those rights under uniform terms. Jd. at 244a-

252a.” The order also imposes right-of-first refusal

(ROFR) requirements, which allow existing shippers

with long-term transportation contracts to retain

their rights to pipeline capacity if they agree to

match the highest bid for that service from alterra-

tive purchasers, up to the maximum cost-based trans-

portation rate for the service approved by the Com-

mission under the Natural Gas Act (NGA), 15 U.S.C.

717 et seg. Pet. App. 671a-692a.

2. In 1985, FERC initiated a deregulatory program

designed to encourage the voluntary unbundling of

pipeline gas sales from pipeline transportation ser-

vices. Whereas pipelines had traditionally bought gas

at the wellhead and transported it before turning it

over to the purchaser, the Commission dramatically

2 Transportation is referred to as “firm” when delivery is

guaranteed without interruption, as distinguished from “inter-

ruptible” ivansportation, which may be interrupted to accom-

modate the requirements of firm shippers. See Pet. App. lla

n.10.

changed the natural gas industry by enabling pipe-

lines to offer gas sales and transportation services

separately, thereby affording customers the opportu-

nity to purchase gas from one company and hire a

separate company’s pipeline to transport it. See Pet.

App. 10a-15a (discussing background to Order No.

636). To further enhance the efficiency of the natural

gas market, the Commission encouraged pipeline cus-

tomers, through a variety of mechanisms, to sell or

release their unwanted firm transportation capacity

to other shippers.

The partial unbundling of sales and transportation

service that resulted from the voluntary program pre-

sented serious inefficiencies in allocation of unused

transportation capacity. For example, because bun-

dled firm service had often provided superior reliabil-

ity, many customers continued to pay reservation

fees to retain that service, while in most instances

using cheaper interruptible service to transport their

wellhead gas. See Pet. App. 15a-l6a. The secondary

transportation market that resulted from partial

unbundling produced such a wide variety of capacity-

reallocation arrangements that it became impossible

for FERC to monitor those programs adequately in

order to “ensure that all allocations are nondiscrimi-

natory”; there were “simply too many potential as-

signors of capacity” for FERC to assure that capac-

ity was allocated “in a manner consistent with the

public convenience and necessity.” Algonquin Gas

Transmission Co., 59 F.E.R.C. (CCH) § 61,032, at

61,095 (Apr. 8, 1992), reh’g denied, 60 F.E.R.C. (CCH)

{ 61,113 (Aug. 3, 1992).° Accordingly, the Commission

3 In the Algonquin orders, which were issued as companion

orders to Order No. 636, the Commission revoked the certifi-

ieceecenseieeaaitiaialiiaan iain

5

found that the continued operation of the voluntary

capacity reallocation programs it had previously *P-

proved “would frustrate the goal of * *

remedy[ing] an unreasonable restraint of trade” and

would therefore be “unjust and unreasonable and con-

trary to the public interest.” 59 F.E.R.C. (CCH) 9

61,032, at 61,096-61,097.

3. To address the problems that arose from partial,

voluntary unbundling, FERC’s Order No. 636 man-

dates the complete unbundling of pipeline sales from

transportation service and institutes a number of

requirements to achieve a fair and open market for

transportation rights, and to prevent undue discrimi-

nation. See Pet. App. 15a-18a (summarizing Order

No. 636).

FERC established, inter alia, a uniform capacity-

release rule to ensure that unneeded transportation

capacity on interstate pipelines is allocated fairly and

efficiently. See Pet. App. 7la-108a, as amended by

Pet. App. 1001la-1002a, 244a-252a. Under FERC’s

rule, any shipper desiring to release firm capacity

must notify the affected interstate pipeline. The

pipeline must then post the available capacity, along

with applicable conditions, on an electronic bulletin

board for a reasonable period of time, and assign the

capacity to the shipper making the best offer for the

capacity, up to the maximum just and reasonable price

established by the Commission. Id. at 245a-247a. A

cates of public convenience and necessity it had previously

issued for capacity reallocation programs and required instead

that pipelines abide by the uniform capacity reallocation pro-

gram of Order No. 636. Review of those orders was consoli-

dated with review of Order No. 636. Pet. App. 19a & n.20.

* FERC’s capacity-release rule is codified at 18 C.F.R.

284.243.

6

shipper releasing firm capacity transportation rights

may designate a specific party to receive those rights,

but the pipeline must post such a prearrangement on

the electronic bulletin board, and the designated party

can receive the transfer only if no other party makes

a better offer. Id. at 244a-247a. If the designated ship-

per bids at the ceiling rate, however, it automatically

receives the transportation rights. Jd. at 245a.

In addition, FERC recognized that, if the wellhead

market for natural gas is to function effectively,

transportation should be made equally available to all

gas purchasers, regardless of whether the wellhead

merchant is affiliated with the pipeline. Pet. App.

234a-235a. The principle of “transportation equality”

protects captive customers—i.e. those connected to

only one pipeline, who typically have long-term con-

tracts—from the pipeline’s market power. To imple-

ment that principle, Order No. 636 imposes, inter

alia, a “right-of-first-refusal” (ROFR) process allow-

ing competitive allocation of capacity at the expira-

tion of long-term contracts for pipeline transporta-

tion, while protecting customers with expiring con-

tracts who remain dependent upon continued trans-

portation service. See id. at 43a-56a.

As a condition of granting pipelines authority, un-

der Section 7(b) of the NGA, 15 U.S.C. 717f(b), to

abandon contracts at the end of their terms, FERC

required pipelines to institute a ROFR mechanism

inviting renewal of any long-term contract if the

existing shipper matches the highest offer (up to a

maximum just and reasonable rate) from any compet-

ing bidder for the transportation capacity. 18 C.F.R.

7

284.221(d); Pet. App. 668a-673a.° FERC reasoned that,

in general, “a pipeline’s service obligation * * *

should be determined, in the first instance, by the

contract negotiated by the parties,” id. at 312a, and

pipeline transportation capacity is most efficiently al-

located if it is sold to those willing to pay the highest

price for the capacity, id. at 675a. The Commission

recognized, however, that where contracts for longer

than one year are involved, existing customers may

rely on continued service and require some assurance

that their current long-term contracts can be ex-

tended.

The Commission concluded that the ROFR mecha-

nism “strikes the appropriate balance between the

needs of customers for continued service and the

benefits of competition in establishing the terms of

service.” Pet. App. 325a.

4. The court of appeals upheld in large part

FERC’s Order No. 636, remanding only issues not

relevant here. The court concluded that FERC’s

plenary jurisdiction over interstate transportation of

gas on interstate pipelines gives it the authority to

regulate the exchange of interstate transporta-

tion capacity. Pet. App. 7la-94a. Uniform capacity-

release requirements “operate as a term or condition

of pipeline service” that FERC may apply to all par-

ties engaged in such interstate transactions, includ-

ing parties that otherwise are exempt from FERC

jurisdiction as local distribution companies (LDCs)

° A pipeline must also extend a contract if it contains either

an evergreen or a rollover clause. Such clauses allow parties to

extend their contract for a specified term upon the contract’s

expiration. See Howard R. Williams, Manual of Oil & Gas

Terms 406-407, 1083-1084 (8th ed. 1991).

8

or municipally-owned natural gas distributors (mu-

nicipals). Jd. at 80a. The court rejected petitioners’

asserted distinction between “rights to” and “rendi-

tion of” service, concluding that, “[wJhile the pipeline

provides transportation only when a party utilizes

capacity rights to transport gas, the pipeline provides

transportation services throughout the capacity re-

lease process.” Jbid. (emphasis in original).

The court also rejected several challenges to the

ROFR mechanism. Pet. App. 43a-56a.° The court

upheld the Commission’s conclusion that it could not

require pipelines considering existing customers’

bids under the ROFR mechanism to accept rates be-

low the maximum just and reasonable rate. Jd. at 53a-

56a. The court also concluded that the Commission

had included adequate safe,ards in Order No. 636

against pipeline manipulation of bids, that there was

no basis upon which to require pipelines to accept bids

at less than the approved rate, and that the Com-

mission had provided proper incentives in the ROFR

process to encourage pipelines to accept discounted

rates. Ibid.

ARGUMENT

Petitioners challenge the court of appeals’ decision

upholding the capacity-release and ROFR require-

ments of Order No. 636. That decision is consistent

with the well established principle that the NGA

6 Although the court generally affirmed the Commission’s

ROFR mechanism, it remanded for further consideration the

requirement that, in order to retain their existing pipeline

capacity, existing shippers must match bids for terms of up to

20 years duration. Pet. App. 49a-53a. On remand, the Com-

mission shortened the maximum term to five years. Order No.

636-C, 78 F.E.R.C. (CCH) § 61,186 (Feb. 27, 1997).

seca

9

granted FERC “exclusive jurisdiction ‘over the sale

and transportation of natural gas in interstate com-

merce,’” Northwest Cent. Pipeline Corp. v. State

Corp. Comm’n, 489 U.S. 498, 510 (1989), and with the

decisions of this and other courts construing that

grant of jurisdiction. Further review is not war-

ranted.’

1. Petitioners Associated Gas Distributors, et al.

(AGD) (No. 96-1186), the New York Public Service

Commission, et al. (NYPSC) (No. 96-1188) and the

American Public Gas Association, et. al. (APGA) (No.

96-1187) challenge the court’s affirmance of the

capacity-release requirements in Order No. 636. The

court of appeals correctly concluded that FERC’s

capacity-release program is a legitimate exercise of

its plenary jurisdiction under the NGA to regulate

the transportation of gas in interstate commerce.

a. There is no merit to petitioners’ contentions

(96-1186 Pet. 18-24; 96-1188 Pet. 13-16) that the Com-

’ Order No. 636 comports with FERC’s obligation under the

NGA to ensure consumers a supply of gas “at the lowest possi-

ble reasonable rate.” Atlantic Ref. Co. v. Public Serv. Comm’n,

360 U.S. 378, 388 (1959). As recent studies demonstrate, con-

sumers have reaped substantial benefits from the Commission’s

decade-long restructuring of the natural gas industry, of which

Order No. 636 represents the “latest step.” Pet. App. 6a.

Specifically, adjusted for inflation, prices paid by local utilities

for gas at the “city gate” dropped by 52% in the last decade,

prices paid by residential and commercial customers dropped

32% and 38%, respectively, and prices paid by industrial and

electric utility customers fell by approximately 60%. Those

figures demonstrate that “open access has placed strong pres-

sures on interstate pipelines to reduce their costs and pass the

savings through to their customers.” Robert Crandall & Jerry

Ellig, Economic Deregulation and Customer Choice: Lessons

for the Electric Industry 10-11 (1997).

10

mission lacks jurisdiction to apply its capacity-

release rules to capacity on interstate pipelines held

by LDCs. As the court of appeals concluded,

“FERC’s capacity release program is a legitimate

exercise of its jurisdiction over the interstate trans-

portation of natural gas.” Pet. App. 77a. Section 1(b)

of the NGA grants the Commission jurisdiction over

three distinct aspects of the natural gas industry: (1)

“the transportation of natural gas in interstate com-

merce,” (2) “the sale in interstate commerce of natu-

ral gas for resale for ultimate public consumption,”

and (3) “natural-gas companies engaged in such trans-

portation or sale.” 15 U.S.C. 717(b); see FPC v. Lou-

isiana Power & Light Co., 406 U.S. 621, 636 (1972)

(LP&L). As this Court has emphasized, the Commis-

sion’s transportation jurisdiction is “plenary” and

extends to all transactions “except those which Con-

gress has made explicitly subject to regulation by the

States.” FPC v. Southern California Edison Co.,

376 U.S. 205, 216 (1964). Further, as this Court has

repeatedly stressed, the Commission’s power extends

to regulating transactions that, if left unregulated,

could interfere with the achievement of the goals of

the NGA. Schneidewind v. ANR Pipeline Co., 485

U.S. 293, 310 (1988); Transcontinental Gas Pipe Line

Corp. v. State Oil & Gas Bd. of Mississippi, 474 U.S.

409, 423-424 (1986); United Gas Pipe Line Co. v.

McCombs, 442 U.S. 529, 538 (1979).

The court of appeals’ conclusion that the uniform

capacity-release requirements are an appropriate ex-

ercise of FERC’s jurisdiction over interstate trans-

portation of natural gas (Pet. App. 79a-86a) follows

naturally from this Court’s rulings that the Com-

mission’s transportation jurisdiction extends to, for

example, the end-use of the transported gas, see F PC

ee =

11

v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1,

7-8, 22 (1961), interruption of interstate transporta-

tion service, see Panhandle Eastern Pipe Line Co. v.

FPC, 332 U.S. 507, 523 (1947), curtailment of gas

sales, see LP&L, 406 U.S. at 641, financing of inter-

state pipelines, see Schneidewind, 485 U.S. at 306,

and gas storage, see id. at 295 n.1. The court of

appeals’ decision is consistent with the decisions of

all the other circuits that have addressed challenges

to PERC '’s exercise of its transportation jurisdic-

tion.

Moreover, the court of appeals correctly noted that,

“(als an entirely separate matter,” FERC’s jurisdic-

tion over abandonments of service supports its regu-

lation of capacity-release transactions because, “{i]n

effect, the pipeline is temporarily abandoning service

to the releasing shipper and instituting service to the

replacement shipper.” Pet. App. 80a. Under Section

7(b) and (c) of the NGA, neither abandonment nor ren-

8 Other circuits have unanimously held that FERC’s juris-

diction extends broadly to all aspects of transportation, includ-

ing the “initiation, curtailment, quality, quantity, and termina-

tion” of gas deliveries. National Ass’n of Regulatory Util.

Comm’rs v. FERC, 823 F.2d 1377, 1385 (10th Cir. 1987). See,

e.g., United Gas Pipe Line Co. v. FERC, 824 F.2d 417, 425 (5th

Cir. 1987) (limiting liability for curtailments); Fort Pierce Util.

Auth. v. FPC, 526 F.2d 993, 996-998 (5th Cir. 1976) (curtail-

ment of retail gas sales); Corning Glass Works v. FERC, 675

F.2d 392, 394-396 (D.C. Cir. 1982) (spreading of costs of liqui-

fied natural gas plant built by LDC to service customers within

its territory); Mississippi Pub. Serv. Comm’n v. FPC, 522 F.2d

1345, 1350 (5th Cir. 1975) (compensating end users for losses

caused by curtailments), cert. denied, 429 U.S. 870 (1976);

Panhandle E. Pipe Line Co. v. FPC, 232 F.2d 467, 472 (3d Cir.)

(control over the functioning of a pipeline’s facilities), cert.

denied, 352 U.S. 891 (1956).

12

dition of new service may occur without permission

and prior approval of the Commission. 15 U.S.C.

717f(b) and (c).’

b. Petitioners incorrectly assert (96-1186 Pet. 18-

21; 96-1188 Pet. 14-16) that regulation of LDCs’ as-

signment of transportation capacity rights to gas

consumers operating within the LDCs’ service areas

is tantamount to regulation of local distribution.

Capacity-release involves assignment of rights to

use firm interstate transportation capacity on high-

pressure trunk lines. Those lines are not “local dis-

tribution facilities” within the meaning of Section

1(b) of the NGA. See FPC v. East Ohio Gas Co., 338

U.S. 464, 470 (1950). FERC has not in Order No. 636

asserted jurisdiction over any activity occurring

behind the city gate after the LDC has received gas

from an interstate pipeline. Capacity release does not

solely affect LDC capacity assignments to end-users

located in local service areas, but enables ail firm

capacity holders, including LDCs, end-users, and

marketers, to deliver gas to any existing, out-of-state

delivery point on the interstate pipeline upstream of

its city gate or usual delivery point. See Pet. App.

271a, 555a. Deliveries of gas to those out-of-state

locations under assigned capacity rights cannot be

deemed local distribution of gas, nor can any State

9 Petitioner NYPSC asserts (96-1188 Pet. 16), without

authority, that the court of appeals erred in concluding that

the Commission could regulate partial abandonments of service

under Section 7 of the NGA. Petitioner’s argument that par-

tial abandonments cannot be regulated would create a serious

gap in the Commission’s regulatory powers and, in any event,

ignores the plain requirement of Section 7(b) that a pipeline

may not abandon “any service,” 15 U.S.C. 717f(b) (emphasis

added), without Commission approval.

ooo

13

regulate those out-of-state capacity assignments.

See Mississippi River Transmission Corp. v. FERC,

969 F.2d 1215, 1218 (D.C. Cir. 1992); Michigan Consol.

Gas Co. v. FERC, 883 F.2d 117, 121 (D.C. Cir. 1989),

cert. denied, 494 U.S. 1079 (1990).

Even where an LDC assigns its firm capacity on an

interstate pipeline to a local end-user, settled prece-

dent makes clear that such a transaction does not

constitute local distribution of gas. Indeed, the “local

distribution” exception to FERC transportation ju-

risdiction is “confined to [an LDC’s] parcelling out

function and (probably) even more narrowly, to parcel-

ling out accompanied by retail sales.” Public Utils.

| Comm’n v. FERC, 900 F.2d 269, 276 (D.C. Cir. 1990).

Thus, contrary to petitioners’ assertions (96-1186

Pet. 16; 96-1188 Pet. 19-20), the court of appeals’ appli-

cation here of Section 1(b)’s established construction

is consistent with the holdings of this Court, e.g.,

LP&L, 406 U.S. at 637-638; East Ohio, 338 U.S. at 469-

470, and other courts of appeals, Cascade Natural Gas

Corp. v. FERC, 955 F.2d 1412, 1418 (10th Cir. 1992);

United Gas Pipe Line Co. v. FERC, 824 F.2d 417, 425

(5th Cir. 1987), and plainly expressed congressional

intent, H.R. Rep. No. 709, 75th Cong., 1st Sess. 3

(1937) (“local distribution * * * is made only to con-

sumers in connection with sales” (emphasis added;

internal quotation marks omitted)).

c. Petitioner AGD incorrectly asserts (96-1186

Pet. 21-24) that FERC has used unbundling to inter-

fere with matters that are traditionally controlled by

the States. Petitioner ignores the pivotal fact that

States have never regulated the terms and conditions

of interstate pipeline transportation. As the Dis-

trict of Columbia Circuit explained in Public Utils.

Comm’n, 900 F.2d at 276-277:

14

In an era when transporters almost invariably

bought gas at one end of the pipeline and sold it at

the other, gas would normally reach an end user

only after a pipeline’s retail sale to that user, a

transaction unquestionably under the state’s

control, or after conventional distribution and sale

by a local distributor, again clearly subject to

state control. * * * Under modern conditions, by

contrast, where the end user often owns the gas

and uses the pipeline solely for transportation,

application of Hast Ohio removes this fulcrum for

state powel.

See East Ohio, 338 U.S. at 469-470; Cascade Natural,

955 F.2d at 1421.

Petitioners’ contentions (96-1186 Pet. 24-28; 96-1188

Pet. 13-14) that capacity release interferes with state

regulation of the LDCs’ traditional role as local sup-

plier of natural gas are similarly unfounded. An

LDC’s use of the capacity-release program is volun-

tary and is aimed at unused (and presumably un-

needed) capacity. See Pet. App. 244a-245a. FERC

does not regulate any aspect of the rates for an LDC’s

retail sale of its system supply or the use of its own

facilities; it regulates only the LDC’s use of in-

terstate transportation capacity. As the court of

appeals observed, Section 1(b) “does not withdraw

from FERC’s jurisdiction any aspect of the interstate

transportation of natural gas.” Pet. App. 82a.

Contrary to NYPSC’s assertions (96-1188 Pet. 13-

14), the uniform capacity-release mechanism is not

unfair to end-users who have “paid” for LDC “pipeline

capacity” through “state-approved rates.” Under

Order No. 636, an LDC’s customer can guarantee as-

signment of the LDC’s interstate capacity rights by

15

contracting with the LDC at the FERC-approved,

cost-based transportation rate, or at any lower rate

that trumps competing offers. Pet. App. 485a. By

allowing LDCs to shed unused capacity and thereby

lower costs, the capacity-release mechanism benefits

consumers.

AGD incorrectly contends (96-1186 Pet. 27-28) that

the capacity-release program impairs state efforts to

require LDCs to unbundle local transportation ser-

vice from retail sales. Rather than imposing obsta-

cles, however, FERC’s rule facilitates local unbun-

dling by guaranteeing end-users access not only to

their own LDCs’ released capacity, but also to the

capacity released by any other capacity holder who

holds rights to a delivery point at or downstream of

the LDC’s position on the interstate pipeline. See

Pet. App. 271a-272a, 495a-497a.”

d. AGD also errs in asserting (96-1186 Pet. 14-18)

that the Hinshaw Amendment to the NGA, Pub. L.

No. 323, 68 Stat. 36, exempts LDCs from the uniform

capacity reallocation mechanism. The Hinshaw

Amendment exempts from FERC regulation any per-

son engaged in the transportation or sale in inter-

AGD argues (96-1186 Pet. 27) that Order No. 636 inter-

feres with “blended” capacity programs now being offered by

the States. That argument was neither raised before nor

addressed by the Commission or the court of appeals, and there

is no factual basis in the record to support it. That claim

therefore is not properly presented to this Court. See 15

U.S.C. 717r(b) (“No objection to the order of the Commission

shall be considered by the court unless such objection shall have

been urged before the Commission in the application for re-

hearing.”); see also Sullivan v. Louisiana, 508 U.S. 275, 279 n.1

(1993) (stating that this Court does not ordinarily review issues

not raised below).

16

state commerce of natural gas received “within or at

the boundary of a State” and “ultimately consumed

within such State.” 15 U.S.C. 717(c). Congress

enacted the Hinshaw Amendment “to preserve state

control over local distributors who purchase gas from

interstate pipelines * * * [but] Congress did not

intend the amendment to relieve the Commission of

jurisdiction over * * * integrated interstate

systems.” Louisiana Power & Light Co. v. FPC, 483

F.2d 623, 633 (5th Cir. 1973), cert. denied, 416 U.S. 974

(1974). As the court of appeals explained, “the Com-

mission’s authority to regulate capacity release

arises from its jurisdiction over the interstate pipe-

line that consummates the transaction and the

subject of the transaction, the interstate transporta-

tion of gas, entirely independent of its jurisdiction

over the releasing or replacement shippers.” Pet.

App. 82a n.62. Moreover, in order for the Hinshaw

Amendment to apply, the service at issue would have

to be subject to effective state regulation. The States

cannot effectively regulate the transactions at issue

here because they cannot prevent interstate pipelines

from discriminating in favor of in-state users at the

expense of out-of-state users. The Hinshaw Amend-

ment accordingly has no application to the interstate

transactions at issue here.

AGD places great weight on its contention (96-1186

Pet. 17) that the Hinshaw Amendment overruled this

Court’s decision in East Ohio, 338 U.S. at 461. Al-

though East Ohio’s holding—that FERC had jurisdic-

tion over an interstate gas pipeline operating in only

one State—is no longer the law, the Hinshaw Amend-

ment did not affect the Court’s analysis in Kast Ohio

of the scope of the Commission’s jurisdiction over

pipelines that transport gas across state lines. See

17

Altamont Gas Transmission Co. v. FERC, 92 F.3d

1239, 1246 (D.C. Cir. 1996), petition for certiorari

pending, No. 96-1179 (filed Feb. 11, 1997); Public Utils.

Comm’n, 900 F.2d at 275 n.4. Notwithstanding the

particular change brought about by the Hinshaw

Amendment, this Court and the courts of appeals have

continued consistently to rely on East Ohio as a

correct and otherwise still valid interpretation of the

NGA. E.9., LP&L, 406 U.S. at 636-637 & n.13; Califor-

nia v. Lo-Vaca Gathering Co., 379 U.S. 366, 369

(1965); Cascade Natural, 955 F.2d at 1416-1421; Public

Utils. Comm’n, 900 F.2d at 275.

e. APGA similarly contends (96-1187 Pet. 9-11)

that the court of appeals erred in concluding that

municipally owned gas companies must comply with

the uniform capacity reallocation mechanism when

they seek to reassign interstate pipeline capacity.

APGA reasons that, because Section 2 of the NGA

excludes municipals from the definition of “persons”

regulated as “natural gas companies” under the Act,

15 U.S.C. 717a(1)-(3) and (6), FERC may not require

that they comply with the terms of FERC’s capacity-

release program. 96-1187 Pet. 7-8. The court of

appeals correctly concluded, however, that “FERC

may, consistent with the NGA, require municipalities

to comply with its capacity release regulations”

because “FERC’s transportation jurisdiction extends

aS a Separate matter over capacity release * * *

entirely independent of the jurisdictional nature of

the releasing and replacement shippers.” Pet. App.

84a-85a.

Although FERC lacks jurisdiction to regulate mu-

nicipals as such, the Commission’s jurisdiction over

interstate transportation is not limited to natural-gas

companies or “persons” engaged in transportation.

18

Instead, it extends to all interstate transportation of

gas, regardless of the parties involved in such trans-

portation. This Court has rejected the contention

“that the word ‘transportation’ in § 1(b) must be con-

strued as applying only to companies engaged in the

business of transporting gas in interstate com-

merce,” concluding that “the Act’s language did not

express any such limitation.” Hast Ohio, 338 U.S. at

468. Indeed, the courts have long recognized that mu-

nicipalities, although not “natural-gas companies” or

“persons” under the Act, are nonetheless subject to

NGA regulation under those NGA provisions that are

not exclusively directed at “natural-gas companies.”

See, e.g., California v. Southland Royalty Co., 436

U.S. 519, 528 (1978); Public Serv. Co. v. FERC, 587

F.2d 716, 719 (D.C. Cir. 1979). Thus, as tue court of

appeals observed (Pet. App. 85a), this Court has con-

cluded that the Commission may properly regulate

the curtailments of both gas supply and capacity to

municipals under its transportation jurisdiction, see

Transcontinental Gas, 365 U.S. at 20-22; LP&L, 406

U.S. at 640—a situation involving allocation of trans-

portation capacity among shippers in compliance with

federal mandates that is “strikingly similar” to ca-

pacity release. Pet. App. 85a.”

1 APGA argues (96-1188 Pet. 13-14) that there is a distinc-

tion between transactions in the primary and secondary market

for pipeline capacity. As we have noted, pages 10-11, supra,

however, the Commission’s jurisdiction over transportation ex-

tends to all aspects of interstate pipeline operation. Further, to

declare such secondary transactions beyond the Commission’s

jurisdiction would create an anomalous gap in the comprehen-

sive regulation intended by Congress in enacting the NGA.

See LP&L, 406 U.S. at 631-632.

19

APGA further contends (96-1187 Pet. 12-19) that

FERC’s regulation of municipalities under its trans-

portation jurisdiction conflicts with FERC’s own

policy established in Texas Eastern Transmission

Corp., 51 F.E.R.C. (CCH) ¥ 61,170 (May 11, 1990). The

court of appeals correctly rejected that contention.

Pet. App. 84a & n.64. In Texas Eastern, the Com-

mission authorized firm transportation customers of

an interstate pipeline to broker capacity to third

parties without the involvement of the carrying pipe-

line itself. The Commission required such customers

to obtain “limited jurisdiction” certificates under

Section 7(c) of the NGA because, as brokers, they

were within the meaning of NGA Section 1(b). The

Commission, however, ruled that municipals were

exempt transporting gas from any such certification

requirement because they were not “natural gas

companies” and therefore not subject to Section 7.

See 48 F.E.R.C. (CCH) ¥ 61,248, at 61,873-61,875 (Aug.

22, 1989); 51 F.E.R.C. (CCH) ¢ 61,170, at 61,453-61,454.

The capacity brokering arrangements in Texas East-

ern were performed by capacity holders themselves

without pipeline involvement; under Order No. 636, in

contrast, FERC regulates capacity assignment by

pipelines. The court of appeals tnus correctly held

that the Texas Eastern approach is inapplicable, and

that FERC may require municipals’ compliance with

capacity-release rules as it may require their com-

pliance with other pipeline terms or conditions of

interstate transportation service. Pet. App. 84a-85a.”

2 Texas Gas Transmission Corp., 55 F.E.R.C. (CCH) 4

61,208 (May 13, 1991), and United Gas Pipe Line Co., 46

F.E.R.C. (CCH) 4 61,060 (Jan. 24, 1989), modified on other

grounds, 49 F.E.R.C. (CCH) 4 61,166 (Nov. 7, 1989), followed

20

Finally, there is no merit to APGA’s assertion (96-

1187 Pet. 19-20) that the Commission’s capacity-

release mechanism is merely a sham designed to

expand its jurisdiction. As the court of appeals

observed, under Order No. 636, “[tJhe pipelines’ role in

capacity release is absolutely central, and the

transaction itself controls access to interstate

transportation capacity.” Pet. App. 84a-85a (footnote

omitted). Order No. 636 requires pipelines to

maintain electronic bulletin boards upon which

proposed transactions are posted, administer the

rules for operation of the bidding system, and select

the successful bidder. In short, as the court observed,

capacity release necessarily involves movement of

gas in interstate commerce by the assignee of

capacity rights because “[bly controlling such

capacity, the assignors are effectively determining by

whom, and under what circumstances, gas will be

transported and are using the pipeline’s facilities as if

they were the assignors’ facilities.” Jd. at 81a.

2. Petitioner Burlington Resources Oil & Gas

Company (Burlington) (No. 96-1189) argues that the

court of appeals erred in affirming FERC’s conclu-

sion that pipelines allocating long-term transporta-

tion rights under the ROFR mechanism do not have

to accept bids at less than the maximum, cost-based

just and reasonable rate established by the Commis-

sion under the NGA. Burlington asserts (96-1189

Pet. 7-9) that the ROFR rule violates the Commis-

sion’s obligation under the NGA to protect consum-

ers. As the court of appeals concluded, however, “the

basic structure of the [ROFR] mechanism provides

the Texas Eastern approach, and APGA’s reliance on those

decisions (96-1186 Pet. 14) similarly fails to support the petition.

21

the [customer] protections from pipeline market

power required for pre-granted abandonment under

[NGA] § 7.” Pet. App. 49a; see also id. at 54a-55a. The

ROFR procedure “guarantees that existing cus-

tomers may have continued service,” and “affords pro-

tection to the existing customer against any exercise

of monopoly power,” id. at 933a (emphasis added),

because the customer will be required to pay, at most,

the cost-based just and reasonable rate established by

the Commission in a ratemaking proceeding, id. at

679a. As the court of appeals observed, the NGA

“protect[s] customers against loss of service only if

the customer is willing to pay the maximum rate

approved in a rate proceeding.” Jd. at 55a. The

Commission concluded that the ROFR mechanism

“provides more than adequate protection that pipe-

lines will not be able to charge monopoly rates for

their service.” Id. at 672a. This Court approved a

very similar pricing mechanism in Mobil Oil Explo-

ration & Producing Southeast, Inc. v. United Distri-

bution Cos., 498 U.S. 211 (1991) (upholding FERC

rule setting maximum “just and reasonable” rate for

gas sold under Natural Gas Policy Act price ceilings,

but allowing sellers voluntarily to accept lower prices

if market conditions dictate)."

Contrary to Burlington’s assertions (96-1189 Pet.

11-12), FERC’s decision to leave to pipelines’ discre-

tion whether to accept below-ceiling bids voluntarily

does not encourage anti-competitive behavior. The

8 If a pipeline elects to leave capacity idle rather than

accept a below-ceiling bid for that capacity, the shipper may

also file a petition with the Commission under Section 5 of the

NGA claiming that the pipeline’s action is “unjust, unrea-

sonable, unduly discriminatory, or preferential.” 15 U.S.C.

717d(a).

Commission cannot require a pipeline to accept rates

below the cost-based just and reasonable rate ceiling

under the Commission’s ROFR program. Those

rates are, by definition, the lowest rates that ensure

pipelines an adequate return on their investment;

requiring pipelines to accept a lower rate would put

them at risk of under-recovery in violation of the

Commission’s duty to ensure pipelines sufficient

returns and adequate capitalization. See FPC v.

Hope Natural Gas Co., 320 U.S. 591, 603 (1944) (rates

must “assure confidence in the financial integrity” of

the regulated entity “so as to maintain its credit and

attract capital”); Permian Basin Area Rate Cases,

390 U.S. 747, 792 (1968) (rates must “maintain finan-

cial integrity, attract necessary capital, and fairly

compensate investors for the risks they have as-

sumed, and yet provide appropriate protection for the

relevant public interests”); Associated Gas Distribs.

v. FERC, 824 F.2d 981, 1007-1013 (D.C. Cir. 1987),

cert. denied, 485 U.S. 1006 (1988).

Burlington also errs in arguing (96-1189 Pet. 12-15)

that FERC should have imposed a rate within the

zone of approved rates, but below the maximum just

and reasonable rate. Burlington relies chiefly on

Associated Gas. The pricing mechanism approved in

Associated Gas established a cost-based just and

reasonable rate, but allowed pipelines to “consent to

selective discounting” down to prescribed minima. 824

F.2d at 1010. That voluntary discounting approach is

precisely the approach taken here.”

4 Burlington misconstrues cases holding that FERC may

establish rates within a “zone of reasonableness.” See 96-1189

Pet. 14. That test applies to judicial review of the Commis-

sion’s rates, not to the establishment of those rates in the first

23

Finally, Burlington errs in asserting (96-1189 Pet.

18-20) that FERC failed to provide a rationale for its

decision not to require pipelines to accept discounted

rates under the ROFR process, and that the court of

appeals supplied its own rationale. The Commission’s

statement that pipelines “are not required to accept

any offer at less than the maximum rate,” Pet. App.

673a, correctly reflects existing law on that point.

See page 22, swpra. Each of the rationales relied upon

by the court of appeals was also articulated in the

Commission’s orders. See Pet. App. 671la-673a, 935a-

937a, In any event, a reviewing court retains the

power to identify the proper construction of the gov-

erning law, even if not argued by the Commission.

Arcadia v. Ohio Power Co., 498 U.S. 73, 77 (1990).

instance. See Permian Basin, 390 U.S. at 767. Burlington also

asserts (96-1189 Pet. 16) that the NGA does not guarantee

pipelines cost recovery, but only affords them thé opportunity

to recover their costs. That opportunity, however, must in-

clude the possibility of recovering adequate returns on capital

investment, which, by definition, turns on the cost-based rate

established by the Commission.

24

CONCLUSION

The petitions for a writ of certiorari should be

denied.

Respectfully submitted.

WALTER DELLINGER

Acting Solicitor General

SUSAN TOMASKY

General Counsel

JOSEPH S. DAVES

Acting Solicitor

SUSAN J. COURT

ERIC LEE CHRISTENSEN

Attorneys

Federal Energy

Regulatory Commission

APRIL 1997