Texaco Inc. and various other natural gas shippers that have firm transportation contracts with Mojave Pipeline Company (collectively “Texaco”), petition the court to vacate Federal Energy Regulatory Commission (“FERC” or “Commission”) orders mandating that Mojave set its rates according to the straight fixed-variable method. Because FERC’s findings that such pricing by Mojave would be in the public interest are supported by substantial evidence, we deny the petitions.
I. Background
A. Statutory and Regulatory Framework
Section 7 of the Natural Gas Act (“NGA”), 15 U.S.C. § 717f, “prohibits the construction of certain natural gas pipeline facilities without a certificate of public convenience and necessity issued by the Commission.”
Altamont Gas Transmission Co. v. FERC,
The risk that a pipeline will be unused falls upon whichever party is liable for the pipeline’s fixed costs, which include the costs of its сonstruction and maintenance.
See Transcontinental Gas Pipe Line Corp. v. FERC,
In 1992, FERC issued Order No. 636,
see Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation under Part 281 of the Commission’s Regulations, and Regulation of Natural Gas Pipelines after PaHial Wellhead Decontrol,
FERC Stats. & Regs. ¶ 30,-939 (1992) (“Order 636”), which was designed to promote competition at the natural gas wellhead by increasing the transparency of natural gas pricing.
See Pennsylvania Office of Consumer Advocate v. FERC,
allocate fixed costs to the reservation charge, and variable costs to the usage charge. The Commission mandated SFV so that fixed costs, which vary greatly between pipelines, would no longer affect the usage charge and thus distort the national gas-sales market that Order No. 636 fosters.
See id. at 1129 (footnote omitted).
B. Facts
In 1985, first Mojave and then the Kern River Gas Transmission Co. (“Kern River”) petitioned FERC under section 7 of the NGA for a peimit to build and to operate natural gas pipelines serving southern California. See 15 U.S.C. § 717f(e)(l)(A). Before FERC had completed comparative hearings to determine which company would receive a section 7 license,
see Ashbacker Radio Corp. v. FCC,
Once WyCal had applied for an OEC, both Mojave and Kern Rivеr abandoned their section 7 petitions and filed OEC applications of their own. In its contracts with prospective clients, Mojave agreed to assign most of its fixed costs to the usage fee, thereby assuming the greatest share of the financial risk associated with the construction and maintenance of the pipeline. The rate-setting scheme adopted by Mojave, in which “some of the fixed costs are assigned to the reservation charge, but some of the fixed costs, including return on equity and income taxes, are assigned to the usage charge along with all the variable costs,” is commonly called modified fixed-variable (“MFV”).
Union Pacific Fuels, Inc. v. FERC,
In its November 1992 rate filing, which was submitted shortly after Order 636 had been promulgated, Mojave proposed maintaining its MFV rate structure for existing customers but adopting SFV-based pricing for new customers.
See Mojave Pipeline Co.,
The Compliance Order therefore reassigned the risk of under use from Mojave to the shippers while leaving the contract otherwise intact.
See
Compliance Order,
II. Discussion
Texaco claims that FERC lacked the authority to impose SFV rates on shippers whose contracts specified MFV ratеs. In the alternative, it asserts that FERC’s denial of an exemption from Order 636 to Mojave shippers was arbitrary and capricious, that FERC failed to justify its refusal to adopt an alternative plan presented by one of the petitioners, and that FERC was required to hold a hearing to resolve questions of material fact. We have jurisdiction over Texaco’s petition pursuant to 15 U.S.C. § 717r(b).
A. Standard of Review
As a general matter, we will uphold FERC’s factual findings if supported by substantial evidence and will endorse its orders so long as they are based on reasoned decision making.
See Koch Gateway Pipeline Co. v. FERC,
B. FERC’s Burden of Proof and the Mobile-Sierra Doctrine
1. Applicability of the Mobile-Sierra Doctrine
At the outset, we must determine whether the
Mobile-Sierra
doctrine applies in this case.
See FPC v. Sierra Pacific Power Co.,
Section 4 of the Service Agreement establishes a formula for determining the applicable rates chargeable 'for transportation services; and, in subsection 4.8, Mojave agrees that it “shall not exercise [its] rights under Section 4 of the [NGA, 15 U.S.C. § 717c], to change the rates to be paid by the Shipper.” The Commission nevertheless found that Mojave’s service agreements were not covered by the
Mobile-Sierra
doctrine for two reasons: first, “[b]y expressly prohibiting only unilateral rate changes proposed under NGA section 4, the contracts ... implicitly recognize the Commission’s ability to take the instant section 5 action.” Compliance Order,
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In dicta in a recent opinion,
see Union Pacific Fuels, Inc. v. FERC,
A contract between private parties may preserve FERC’s right to impose new rates by “leav[ing] unaffected the power of the Commission ... to replace not only rates that are contrary to the public interest but also rates that are unjust [or] unreasonable.”
Id.
at 161 (quoting
Papago Tribal Util. Auth. v. FERC,
[T]he parties may contractually eliminate the utility’s right to make immediately effective rate changes ... but leave unaffected the power of the Commission ... to replace not only rates that are contrary to the public interest but also rates that are unjust, unreasonable, or unduly discriminatory or preferential to the detriment of the contracting purchaser.
Papago,
With respect to FERC’s second argument, section 12.6 of the Service Agreement reads:
In performance of this Service Agreement, Shipper and Transporter shall comply with all applicable laws, statutes, ordinances, safety codes and rules and regulations of governmental authorities having jurisdiction.
Although we are bound to respect FERC’s reasonable interpretation of contracts that fall within its jurisdiction,
see Southeastern Michigan Gas Co. v. FERC,
Indeed, the structure of the Mojave contracts confirms the banal nature of section 12.6 and its irrelevance to rate setting. All the contract’s pricing terms are consolidated in section 4, while section 12 is limited to generic contract concerns (e.g., severability and waiver of rights). Because nothing in the agreements suggests that the contracting parties intended to grant Mojave unilateral authority to modify shipment rates, we turn to whether Mojave and the shippers “agree[d] to a specific rate or whether they agree[d] to a rate changeable in a specific manner.”
Richmond Power & Light Co. v. FPC,
The Mojave service agreements expressly enumerate the manner in which transportation fees will be computed and set a maximum charge.
See
Service Agreement §§ 4.1, 4.1.1. The parties therefore “agree[dj to [both] a specific [maximum] rate [and] ... to a [general] rate changeable in a specific manner.”
Richmond Power & Light,
2. Application of Mobile-Sierra Doctrine to the Mojave Service Agreements
Because the
Mobile-Sierra
doctrine applies, FERC’s reformation of the Mojave contracts will be upheld only if FERC has shown that the public interest required it to intervene.
See Metropolitan Edison Co. v. FERC,
Because of these differences, more is required to justify regulatory intervention in a private contract than a simple reference to the policies served by a particular rule. The Commission, however, did not rest its reformation of the Mojave agreements on the generalized public interest goals underlying Order 636. Rather, it determined that the retention of MFV rate design would adversely affect the public interest in two ways: first, it would distort gas market pricing to the detriment of the “integrated national gas sales market,” Compliance Order,
In its Compliance Order, the Commission not only discussed the broad public interest undеrlying its preference for uniform SFV pricing but also explained how Mojave’s retention of some MFV-based charges would threaten the coherence of the national policy and distort the local gas market to the detriment of Mojave’s competitors.
See
Compliance Order,
C. Allegation that FERC’s Imposition of SFV Rate Dеsign was Arbitrary and Capricious
Texaco further contends that FERC’s .decision to impose SFV rate design was arbitrary and capricious.
See
5 U.S.C. § 706(2)(A). It alleges: (1) that compliance with Order 636 arbitrarily reallocated financial risks and compromised the rate stability that were implicit in the OEC process as originally conceived and (2) that adopting the SFV method of cost allocation unfairly hurt consumer interests. We addressed the first argument in
Union Pacific,
where we noted that that case “presented] a paradigmatic еxample of an agency reasonably changing its policies, and implementing the consequences of those changes to the detriment of some parties and the benefit of others.”
Union Pacific,
The second claim amounts to a complaint that Mojave’s customers have lоst the benefit of their bargains. Natural gas shippers always contract in the shadow of the regulato ry state, and they cannot presume that them contracts are immune to its inherent risks. The Commission acted reasonably to implement a policy whose long-term effect will ostensibly improve the efficiency and flexibility of the market as a whole. It cannot be said, then, that FERC acted either arbitrarily or capriciously.
D. FERC’s Unwillingness to Grant Mojave an Exception
Texaco contends that the Mojave shippers were entitled to an exemption from SFV rate design under the Commission’s Order 636-related rules. See Order 636, ¶ 30,939 at 30,434 (stating that FERC will consider alternative rate design when conditions warrant it and the parties agree); Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation under Part 281 of the Commission’s Regulations, and Regulation of Natural Gas Pipelines after Partial Wellhead Decontrol, FERC Stats. & Regs., Regs. Preambles ¶ 30,950, 30,605 (1992) (“Order 636-A”) (holding that parties seeking to be freed from SFV must overcome a rebuttable presumption in SFV’s viability). Tеxaco’s argument is of three parts: (1) competitive pressures in the California market have resulted in such large discounts in usage charges that imposition of SFV-based pricing does not make sense; (2) an exception would prevent Mojave’s reaping a significant windfall from mandatory SFV pricing; and (3) notwithstanding whether the other arguments prove availing, the Mojave service agreements embodied discounts that necessarily survive imposition of Order 636.
In Order 636, FERC stated that it would not
rigidly preclude the pipeline, its customers, and interested state commissions, producers, marketers, brokers, end-users, and others from agreeing to an alternative method that deviates from SFV and may be appropriate to that particular pipeline system. If the parties affected by a pipeline’s rate design agree to a different method, the Commission will consider giving effect to the parties’ agreement.... [A]ny party ... advocating something other than SFV carries a heavy burden of persuasion.
Order 636, ¶ 30,939 at 30,434. In this instance, FERC found that Texаco failed to satisfy its “heavy burden of persuasion” because it failed to address FERC’s concern that however low the usage rates might be, so long as they reflected any element of the pipeline’s fixed costs, they would obscure the relative costs of producing the gas the pipelines carried.
See
First Rehearing Order,
As we have previously noted, “[tjhe natural gas industry is functionally separated into production, transportation, and distribution.”
UDC,
Texaco next contends that FERC has granted exceptions to similarly situated transporters in the past and that it has repeatedly permitted pipelines to retain non-SFV negotiated rates since issuing the orders challenged in this case. We are satis
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fied that the non-Order 636 cases upon which Texaco relies are inapposite, and exceptions granted after issuance of the orders under review in this case “play no role in our determination of the orders’ legality.”
Union Pacific,
Texaco also claims that the imposition of SFV pricing provided Mojave with a windfall. Mojave’s profits have no bearing on this dispute. Order 636 was promulgated and the orders under review were issued to promote a national gas policy and to ensure that Mojave’s rate design did not frustrate that purpose. Regulatory evolution is endemic to the natural gas market,
see, e.g., Southeastern Michigan,
Finally, Texaco contends that the service agreements embodied pre-Order 636 discounts that should survive its implementation. In Order 636, FERC stated that it would not disturb pre-existing discounts that had been “negotiated and included in [a] contract either [as] a fixed rate or [as] some permanent form of discount, such as ninety percent of the maximum rate.” Order 636, ¶ 30,939 at 30,454. Texaco maintains that Mojave’s MFV rate design was itself a “discount.”
Texaco’s argument rests upon a misunderstanding of the nature of the exempted discounts to which Order 636 referred and upon a misinterpretation of a series of unrelated Commission pronouncements. First, FERC reasonably construed its reference to rate discounts in Order 636 to mean a markdown on an otherwise generally applicable rate.
See
Second Rehearing Order,
Second, Texaco argues that FERC’s reference to Mojave’s “discounted reservation fee” in an earlier licensing proceeding,
see Mojave Pipeline Co.,
Third, Texaco asserts that FERC’s denial of the exemption contradicted its precedent. In
El Paso Natural Gas Co.,
E. FERC’s Refusal to Adopt an Alternative Hybrid Plan
Texaco claims that the Commission arbitrarily rejected one of the Mojave shippers’ proposals for a hybrid MFV/SFV rate design in which the shippers would pay the contracted MFV-basеd reservation charge for unused capacity and a higher SFV-based reservation charge for used capacity. In its Second Rehearing Order, in which it rejected the proposal, FERC noted that, under the proposed scheme, ■
payment of the pipeline’s fixed costs would vary depending upon its usage of the pipeline. The more it used its capacity, the more fixed costs it would incur.... [Thus,] just as under MFV, the rate charged for each additional unit of gas shipped on Mojave’s system would include fixed costs, and not, as under SFV, just the variable costs associated with shipping that unit of gas.
The hybrid proposal, however, contains the same erroneous assumption we noted earlier. To the degree that a pipeline’s rate structure includes any portion of its fixed costs in its usage fees, it will be more difficult to determine and compare the wellhead costs of the gas it carries. As FERC noted in its Second Rehearing Order and repeats on appeal, the hybrid rate proposal is impermissible not because of its effect upon gas consumers but because it fails to remedy the market problem inherent in undifferentiated natural gas pricing.
See
Second Rehearing Order,
F. Necessity of a Factual Hearing
Texaco claims that the existence of facts unique to Mojave and the California gas market required FERC to hold an evidentiary hearing before ruling on its application for an exemption from Order 636’s SFV rate design. This argument fails because the facts upon which Texaco based its claim were part of the paper record before FERC, and FERC accepted them validity. See First Rehearing Order,
III. Conclusion
For the foregoing reasons, the petitions for review are denied.
So ordered.