ELIZABETHTOWN GAS COMPANY, Petitioner,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent,
Columbia Gas Transmission Corporation, Washington Gas Light
Company, Transcontinental Gas Pipe Line Corporation, The
City of Danville, Virginia, The Process Gas Consumers Group,
et al., South Jersey Gas Company, South Carolina Pipeline
Corporation, Sun Company, Inc., ANR Pipeline Company, The
Brooklyn Union Gas Company, Piedmont Natural Gas Company,
Inc., Dakota Gasification Company, and Transco Municipal
Group, et al., Intervenors.
Nos. 92-1030, 92-1059.
United States Court of Appeals,
District of Columbia Circuit.
Argued Feb. 23, 1993.
Decided Dec. 17, 1993.
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John T. Miller, Jr. for petitioner Elizabethtown Gas Co.
Edward J. Grenier, Jr., with whom Sterling H. Smith and Roger D. Williams were on the brief for petitioners Process Gas Consumers Group, American Iron and Steel Institute, and Georgia Industrial Group.
Timm L. Abendroth and Eric L. Christensen, Attys., FERC, with whom William S. Scherman, General Counsel, and Jerome M. Feit, Solicitor, FERC, were on the brief for respondent.
Michael J. Fremuth, with whom Anthony J. Ivancovich, Michael W. Hall, Mary Jane Reynolds, Randall R. Conklin, David A. Glenn, John K. Keane, Jr., Telemac N. Chryssikos, and Robert B. Evans were on the joint brief for intervenors Transcontinental Gas Pipe Line Corp., Dakota Gasification Co., The Brooklyn Union Gas Co., and Washington Gas Light Co.
Thomas J. Eastment and Alan W. Tomme entered appearances for intervenor Union Pacific Resources Co.
James F. Bowe, Jr. and O. Julia Weller entered appearances for intervenors Virginia Natural Gas, Inc., and Long Island Lighting Co.
Cheryl L. Jones and Barbara K. Heffernan entered appearances for intervenor Delmarva Power & Light Co.
Michael J. Thompson and Wade H. Hargrove entered appearances for intervenor Public Service Company of N.C., Inc., Michael J. Thompson and Donald W. McCoy entered appearances for intervenor North Carolina Natural Gas Corp.
Steven A. Taube, entered an appearance for intervenor Philadelphia Gas Works.
F. Nan Wagoner entered an appearance for intervenor Texas Eastern Transmission Corp.
James H. Byrd, James R. Choukas-Bradley, L. Clifford Adams, Jr. entered appearances for intervenors Transco Municipal Group and the Municipal Gas Authority of Georgia.
Kenneth D. Brown entered an appearance for intervenor Atlanta Gas Light Co.
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Thomas J. Eastment and Charles F. Hosmer entered appearances for intervenor ARCO Oil and Gas Co., Thomas J. Eastment and David R. Stevenson entered appearances for intervenor Chevron U.S.A. Production Co., Thomas J. Eastment and J. Paul Douglas entered appearances for intervenor Conoco, Inc., Thomas J. Eastment and C. Roger Hoffman entered appearances for intervenor Exxon Corp., Thomas J. Eastment and John S. Carr entered appearances for intervenor Mobil Natural Gas, Inc., Thomas J. Eastment and Michael L. Pate entered appearances for intervenor OXY USA, Inc., Thomas J. Eastment entered an appearance for intervenor Shell Gas Trading Co., Thomas J. Eastment and Ralph J. Pearson, Jr. entered appearances for intervenor Texaco, Inc. and Texaco Marketing, Inc.
R.J. Clark entered an appearance for intervenor UGI Corp.
Marye L. Wright, Giles D.H. Snydеr, and Stephen J. Small entered appearances for intervenor Columbia Gas Transmission Corp.
Robert B. Evans, John K. Keane, Jr., and Telemac N. Chryssikos entered appearances for Washington Gas Light Co.
Michael J. Fremuth, Anthony J. Ivancovich, David A. Glenn, and Randall R. Conklin entered appearances for intervenor Transcontinental Gas Pipe Line Corp.
Frederick H. Ritts entered an appearance for intervenor The City of Danville, Virginia.
Edward J. Grenier, Jr. and Sterling H. Smith entered appearances for intervenors The Process Gas Consumers Group, The American Iron and Steel Institute, and Georgia Industrial Group.
William C. Bingham, Jr., entered an appearance for intеrvenor South Jersey Gas Co.
Joel F. Zipp and Morley Caskin entered appearances for intervenor South Carolina Pipeline Corp.
Paul W. Diehl entered an appearance for intervenor Sun Co., Inc. (R & M).
J. Gordon Pennington and Daniel F. Collins entered appearances for intervenor ANR Pipeline Co.
Michael W. Hall entered an appearance for intervenor The Brooklyn Union Gas Co.
Jerry W. Amos entered an appearance for intervenor Piedmont Natural Gas Co., Inc.
Mary Jane Reynolds entered an appearance for intervenor Dakota Gasification Co.
Before EDWARDS, D.H. GINSBURG, and RANDOLPH, Circuit Judges.
Opinion for the Court filed by Circuit Judge D.H. GINSBURG.
D.H. GINSBURG, Circuit Judge:
The petitioners, a group of industrial gas consumers and a local distribution company (LDC), challenge orders of the Federal Energy Regulatory Commission approving two settlements between the Transcontinental Gas Pipeline Corporation (Transco) and its customers. See Transcontinental Gas Pipe Line Corp., 55 FERC p 61,446, reh'g denied, see 57 FERC p 61,345. The petitioners are Transco customers that did not join in the settlements. They contend that the agreements are inconsistent with the Natural Gas Act (NGA), the Natural Gas Policy Act (NGPA), and the Commission's own policies. We reject these contentions in large part, but remand the case for the Commission to reconsider whether the customers that benefit from the priоrity curtailment provision in one of the agreements should be required to compensate the customers that are harmed by virtue of that provision.
I. BACKGROUND
The Restructuring Settlement calls for Transco to "unbundle" its regulated transportation service from its natural gas sales or merchant service, which by the terms of the settlement is to be priced at market rates. The Transportation Settlement establishes the rates, terms, and conditions of transportation service on the Transco pipeline, using cost-based pricing principles.
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Under the Restructuring Settlement, Transco will no longer sell gas bundled with transportation service (i.e., delivered gas); instead it will sell gas at the wellhead or pipeline receipt point, to be transported as the buyer sees fit. Transco's sales are to be market-based; that is, the rates are to be negotiated or arbitrated between Transco and its customers.
As initially submitted to the FERC, the Restructuring Settlement also contained a "pro rata curtailment provision," which provided that in times of supply shortage Transco would reduce its deliveries "in proportion to each customer's daily entitlement to Transco gas." The Commission rejected this provision on the ground that it did not protect certain high-priority customers (e.g., agriculturalists) "to the maximum extent prаcticable," as required by Title IV of the NGPA, 15 U.S.C. Secs. 3391-94. On rehearing, petitioner Elizabethtown Gas Company challenged this conclusion; in the alternative it argued that if priority distribution is to be permitted then high priority customers should at least be required to compensate lower priority customers for their loss of gas. The FERC rejected these arguments on the ground that such "policy arguments do not overcome the legal requirements under NGPA Sec. 401(a) to give curtailment priority to certain high priority users."
Finally, the Restructuring Settlement imposes a 2.3 cent "volumetric surcharge" upon all sales and transportation customers. The purpose of the surcharge is to enable Transcо to recover costs it incurred in connection with its Great Plains coal gasification project.
B. The Transportation Settlement
The Transportation Settlement provides that rates for transportation services on Transco's pipelines are to be based upon cost-of-service pricing principles. The settlement allocates various costs among classes of transportation customers for the purpose of determining the prices each must pay. The petitioners challenge the allocation of two types of costs.
The first consists of certain fixed costs, such as taxes and return on equity, that are allocated among all the users of the piрeline through a so-called "load factor." An interruptible customer is charged a 100% load factor. A firm customer, however, is charged a 100% load factor only if it uses its full demand entitlement; a firm customer that uses less than its full entitlement pays a greater load factor. The second allocation involves "gathering and storage" costs and costs recorded in Account No. 858 of the Commission's Uniform System of Accounts.
C. The 1992 Rate Case
In March 1992 Transco filed a new rate case in which it proposed to make changes in its rate structure but to retain basically the same cost allocations as those made in the Transportation Settlement. In particular, the new rate proрosal again allocated a 100% load factor to interruptible rate customers and allocated gathering and storage costs and Account No. 858 costs to both transportation and sales customers. The present petitioners renewed their objections to these cost allocations in the 1992 Rate Case.
On May 14, 1993 the Commission issued an order in the 1992 Rate Case upholding several of the petitioners' challenges to Transco's rate design. See Transcontinental Gas Pipe Line Corporation, 63 FERC p 61,194. First, with respect to gathering costs, the Commission held that "their inclusion in transportation rates is inconsistent with [the agency's] general rate policy that such services should [
II. ANALYSIS
The Process Gas Consumers Group, the American Iron and Steel Institute, and the Georgia Industrial Group (collectively referred to below as petitioners) challenge the lawfulness of the market-based pricing called for in the Restructuring Settlement, as well as the aforementioned cost allocations established in the Transportation Settlement. Petitioner Elizabethtown Gas challenges the Commission's rejection of the pro rata gas curtailment plan included in the original Restructuring Settlement.
A. Market-based pricing
The petitioners contend that the FERC's approval of market-based pricing for Transco's merchant service constitutes "virtual deregulation" and is "utterly at odds with its NGA obligation to insure that rates are cost-based so that consumers will be protected from abuse at the hands of natural gas companies." Pointing to the Supreme Court's statement that "the prevailing price in the market cannot be the final measure of 'just and reasonable' rates mandated by the Act," FPC v. Texaco, Inc.,
In our view, that is not a tenable position. First, nothing in FPC v. Texaco, Inc. precludes the FERC from relying upon market-based pricing. The Supreme Court's point in that case was only that where the Congress has "subject[ed] producers to regulation because of anticompetitive conditions in the industry," id.
Second, the Supreme Court "has repeatedly held that the just and reasonable standard does not compel the Commission to use any single pricing formula ...," Mobil Oil Exploration v. United Distribution Co.,
Here the Commission specifically found that "Transco's markets are sufficiently competitive [
In their reply brief, the рetitioners alter the focus of their argument, contending that the Restructuring Settlement is inconsistent with the various reporting requirements of the NGA. See 15 U.S.C. Secs. 717c(c) & (d) (requiring pipelines to file rate schedules and give advance notice of rate changes). This contention appears nowhere in the petitioners' original brief and they cite no reference to it in their various pleadings before the FERC. Accordingly, pursuant to Sec. 19(b) of NGA, we do not reach this contention. 15 U.S.C. Sec. 717r(b).
B. Cost allocations
The Transportation and Restructuring Settlements purport to implement the principle that in setting transportation rates prices should be based upon costs. The petitioners contend that the settlements violate this principle by allocating certain sales costs to transportation customers and certain firm customer costs to interruptible customers.
1. The 100% load factor.
The petitioners first argue that applying the same 100% load factor to interruptible and firm service is inconsistent with the Commission's Policy Statement on cost allocation. See Policy Statement Providing Guidance with Respect to the Designing of Rates, 47 FERC p 61,295, (May 30, 1989), ord. on reh'g and clarif., 48 FERC p 61,122 (July 12, 1989). In that Policy Statement the Commission indicates that the costs associated with a particular class of users should be allocated to those users so that rates serve efficiently to ration pipelinе capacity. In particular, the FERC states there that a firm customer should usually pay a higher rate than an interruptible customer because it is more costly to provide guaranteed service on demand. See Clarifying Policy Statement,
The petitioners also argue that, in allocating a 100% load factor to interruptible customers, the Commission unreasonably ignored its own commitment to consider the quality of service in setting relative transportation rates. See generally,
The petitioners' position is by no means illogical, but it proceeds from an erroneous premise. Firm customers as a class are in fact charged a higher rate than interruptible customers under the pricing structure approved in the Transportation Settlement, reflecting the cost and quality differentials between the two classes of customers. The 100% load factor is only the lowest per unit rate that a firm customer can in principle pay, i.e., if it takes 100% of its demand entitlement. Because many firm customers do not take all of their entitlements, firm customers overall end up paying a greater load factor than interruptible customers, who never pay more than the 100% load factor. See
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2. Gathering, storage, and Account No. 858 costs.
The petitioners next contend that, by approving transportation rates that bundle gathering, storage, and Account No. 858 costs into generally applicable transportation rates, the FERC acted in "complete disregard of its regulations, stated rate policies, and decisions in other cases," i.e. arbitrarily and capriciously or otherwise contrary to law. According to the petitioners, these cost allocations work "classic cross-subsidies" because they require some "customers to pay the cost of services they do not use ...," in derogation of the Commission's general commitment to allocating costs to the users that cause the pipeline to incur them.
a. Gathering costs: The FERC refused to require that gathering costs be unbundled on the ground that unbundling would be "unfair to producers located behind Transco's Tilden processing plant who would suffer a sudden 18.4 cent per Dt erosion in their netback value," whereas bundling gathering costs into transportation rates would have no noticeable effect upon any producer.
It is the FERC's established policy to consider equitable factors in designing rates, and to allow for phаsing in of changes where appropriate. In its Clarifying Policy Statement, the Commission stressed that it would make "pragmatic adjustments in the event a particular method is theoretically consistent with the Commission's objectives but leads to undesirable or inequitable results."
Nor has the Commission made an open-ended commitment to preserve the few producers located behind the Tilden рrocessing plant from the burdens that in principle should be theirs. On the contrary, the FERC acted on a strictly interim basis in the "context of [an] overall settlement," in which "regulation cannot always be as precise as theory"; indeed, the Commission said that it "expect[ed] to fine tune the rates in Transco's next rate case."
b. Storage costs: The petitioners likewise object to the FERC's approval of the settlement insofar as costs associated with the Hester storage field were included in generally applicable transportation rates, on the ground that "shippers who stay in balance, have reliable suppliers, or have their own storage have no need for storage on Transco and no reason to pay for services they do not use." The petitioners' contention that they receive no benefit because they do not use Transco's storage is not necessarily sound, however. For as the venerable Milton said (in quite another context, to be sure), "They [
The Commission noted in the 1991 Order that "at least some [storage] costs will be incurred for a major long haul pipeline to provide Part 284 transportation service."
The FERC also reasoned that unbundling storage costs before experience was gained under the restructured system would be impractical because it would be difficult if not impossible to anticipate how much Transco would use its storage capacity for sales as opposed to transportation customers. Id. Noting that "Transco's settlement is a substantial advance in the direction of unbundling storage costs," the FERC invited the petitioners to "raise the issue [of further unbundling] in Transco's next rate case," "by which time the parties and the Commission will have the benefit of actual experience under the new penalty provisions." Id. Such an approach represents a reasonable response to the difficulties presented by the move from bundled to unbundled service. Therefore, we hold that the FERC acted permissibly in refusing to require the unbundling of storage costs at the Hester facility.
c. Account No. 858 costs: The petitioners next object to Transco's bundling its Account No. 858 costs into its transportation rates. The costs in question are the demand charges that Transco pays to the upstream pipelines that agreed to let Transco assign its entitlements to its shippers. The petitioners argue that insofar as they do not use upstream transportation services, the bundling of these costs into transportation rates subsidizes Trаnsco and its sales customers at the expense of its transportation customers.
The Commission noted that interruptible customers who actually use the upstream facilities will pay for Account No. 858 capacity through the IT Rate. It upheld the inclusion of such costs in firm transportation rates "because firm transportation customers have chosen to obtain the benefits of being able to rely on Account No. 858 capacity on a firm basis."
As we have noted, the Commission promised to revisit these allocation issues in Transco's 1992 rate case, did so, and ultimately reversed itself. We are satisfied, however, that the FERC's refusal to unbundle gathering, storage, and Account No. 858 costs in its 1991 order was reasonable when made.
3. Great Plains surcharge.
Finally, the petitioners object on cost-causation grounds to the 2.3 cent "volumetric surcharge" to be levied upon all sales and transportation services as part of the Restructuring Settlement. The Commission approved the surcharge in order to enable Transco to recover a portion оf the "above market" costs it incurred in connection with the now abandoned Great Plains coal gasification project. The agency reasoned that, because the expected "technological benefits would have redounded to all future gas users ... by increasing the supply of available gas," all of Transco's customers should share in the cost of this failed project.
In response, the FERC refers us to K N Energy, Inc. v. FERC,
Upon the precedent of K N Energy, the Great Plains surcharge at issue in the present case is lawful. As the Commission noted, had the Great Plains plant succeeded in increasing the supply of natural gas, it would have contributed also to reducing the price of natural gas, to the benefit of all natural gas customers. (Indeed, buyers of competing fuels would have benefited, too.) Transco's transportation customers would have benefited because they are by definition purchasers of natural gas--whether from Transco or from another supplier. Accordingly, we uphold as reasonable the volumetric surcharge included in the Restructuring Settlement.
C. Pro rata curtailment provision
Elizabethtown Gas contends that by insisting upon priority curtailment, rather than pro rata curtailment as provided in the original Restructuring Settlement, and by refusing to require compensation for low priority users, the Commission misinterpreted Sec. 401(a) of the NGPA, 15 U.S.C. Sec. 3391(a), and acted in an arbitrary and capricious manner. First, Elizabethtown claims that the original pro rata plan was proper under the terms of Sec. 401(a) because it provided the greatest "practicable" protection for high priority users, such as agriculturalists. Greater protection for those users is not practicable because, we are told, Transco's firm sales are greatly reduced under the Restructuring Settlement and "Transco will cease to be the dominant firm supplier" to its LDC customers. This argument makes no sense to us. Even if Transco supplies a smaller share of the gas bought by each of the LDCs, the gas it does deliver to them could still in times of shortage go first to "high-priority users." Accordingly, it seems entirely "practicable" to increase the level of protection for high priority users above that provided by the pro rata plan.
Second, Elizabethtown argues that the FERC's decision is arbitrary because the Commission has approved prior Transco settlements that did not protect high priority users. In 1978 the FERC approved a settlement agreement that made no provision for the protection of high priority users; indeed it did so notwithstanding an admitted lack of information about "whether the then existing curtailment plans of interstate pipelines can adequately protect essential agricultural users from curtailment." Transcontinental Gas Piрe Line Corp., 6 FERC p 61,050, at 61,112, reh'g denied, 8 FERC p 61,117 (1979). Further, in 1989 the FERC approved an Interim Restructuring Settlement that made specific provision for priority curtailment.
Those prior decisions are not controlling in this case, however, because the lawfulness of the treatment afforded high priority users was not contested in either of them. In the first case, the FERC found that in the particular circumstances there present the interests of high priority users were not put at risk by virtue of the settlement. See
Elizabethtown's third argument is that the FERC should have required high priority customers to compensate low priority customers if the former group benefits at the expense of the latter during a period of curtailment. Responding in its order on rehearing, the Commission stated only that "[t]he petitioners' policy arguments do not overcome the legal requirement under NGPA Sec. 401(a) to give curtailment priority to certain high priority users. Until Congress changes the statute, the statutory priority must be observed."
As Elizabethtown points out, however, this court has clearly held that a compensation provision is not necessarily inconsistent with Sec. 401(a). In Consolidated Edison Co. v. FERC,
The Commission's only response is that Elizabethtown did not raise the compensation issue with sufficient clarity in its petition for rehearing to preserve the point for review. Elizabethtown's petition, as restated by the Commission itself in the course of denying rehearing, see
III. CONCLUSION
We uphold the FERC's approval of the Restructuring Settlement with respect to the unbundling of sales and transportation services and market-based pricing of sales. We also uphold the allocation under the Transportation Settlement of a 100% load factor to interruptible customers; the allocation of gathering, storage, and Account No. 858 costs to transportation as well as sales customers; and the allocation under the Restructuring Settlement of the Great Plains surcharge to both sales and transportation customers. We remand this matter to the Commission to consider whether customers that benefit from priority curtailment should be required to compensate lower-priority customers.
So ordered.