FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER V. ASSOCIATED GAS
DISTRIBUTORS, ET AL.

   No. 89-2016

   In The Supreme Court Of The United States

   October Term, 1989

   The Acting Solicitor General, on behalf of the Federal Energy
Regulatory Commission, respectfully petitions for a writ of certiorari
to review the judgment of the United States Court of Appeals for the
District of Columbia Circuit in this case.

   Petition For A Writ Of Certiorari To The United States Court Of
Appeals For The District Of Columbia Circuit

                       PARTIES TO THE PROCEEDING

   In addition to the Federal Energy Regulatory Commission, the
parties to the proceedings in the court of appeals were:

         Alabama-Tennessee Natural

         American Iron and Steel Institute

         American Paper Institute, Inc.

         Arco Oil and Gas Company

         Arkla, Inc.

         Associated Gas Distributors

         Baltimore Gas & Electric Company

         Berkshire Gas Company, et al.

         Brooklyn Union Gas Company

         Cabot Corporation

         Central Hudson Gas and Electric Corp.

         Chattanooga Gas Company

         Cities of Clarksville, Springfield and Portland, Tennessee,
      and Humphreys County Utility District

         CNG Transmission Corporation

         Columbia Gas Distribution Companies

         Columbia Gas of Kentucky, et al.

         Columbia Gas Transmission Corp.

         Connecticut Natural Gas Corp.

         Consolidated Edison Company of New York, Inc.

         Dayton Power & Light Company

         East Tennessee Group

         Equitable Gas Company

         Inland Gas Company, Inc.

         Long Island Lighting Company

         Maryland People's Counsel

         Nashville Gas Company

         National Fuel Gas Supply Corp.

         New York State Electric & Gas Corporation

         North Carolina Utilities Comm.

         North Penn Gas Co.

         Northern Illinois Gas Co.

         Northern Indiana Public Service Company

         Office of Consumers' Counsel, State of Ohio

         Orange & Rockland Utilities

         Niagara Mohawk Power Corp.

         Pennsylvania Gas & Water Company

         Pennsylvania Public Utility Commission

         Peoples Natural Gas

         Peoples Gas Light and Coke Co.

         Process Gas Consumers Group

         Public Service Commission of New York

         Public Service Electric & Gas Company

         Rochester Gas & Electric Corp.

         Shell Offshore Inc. and Shell Western E&P Inc.

         Southern Natural Gas Company

         Tennessee Gas Pipeline Company

         Tennessee Small General Service Customer Group

         Texas Eastern Transmission Corporation

         Transcontinental Gas Pipe Line Corporation

         United Gas Pipe Line Company

         Washington Gas Light Company

         Western Kentucky Gas Company

            TABLE OF CONTENTS
   Question Presented
   Parties To The Proceedings
   Opinions below
   Jurisdiction
   Statutory provisions involved
   Statement
     A. Statutory framework
     B. The background of the take-or-pay problem
     C. The proceedings in this case
   Reasons for granting the petition
   Conclusion

                            OPINIONS BELOW

   The opinion of the court of appeals (App., infra, 1a-25a) is
reported at 893 F.2d 349.  The opinions on denial of rehearing en banc
(App., infra, 137a-142a) are not reported.  The orders of the Federal
Energy Regulatory Commission dated February 8, May 27, July 8, and
July 28, 1988 (App., infra, 26a-136a) are reported at 42 F.E.R.C.
Paragraph 61,175, 43 F.E.R.C. Paragraph 61,329, 44 F.E.R.C. Paragraph
61,039, and 44 F.E.R.C. Paragraph 61,155, respectively.

                             JURISDICTION

   The judgment of the court of appeals (App., infra, 143a-144a) was
entered on December 28, 1989, and petitions for rehearing were denied
on March 30, 1990 (App., infra, 137a-142a).  The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).

                     STATUTORY PROVISIONS INVOLVED

   Sections 4 and 5 of the Natural Gas Act of 1938, 15 U.S.C. 717c and
717d, are reproduced at App., infra, 145a-149a.

                          QUESTION PRESENTED

   This case involves the validity of orders of the Federal Energy
Regulatory Commission that establish a prospective change in rates
charged by a natural gas pipeline to its customers to reflect current
costs incurred by the pipeline in settling its liability under
"take-or-pay" clauses in its contracts with natural gas producers.  A
take-or-pay clause obligates the pipeline to purchase a certain amount
of gas from the producer and to pay a specified price for that amount
even if the pipeline does not take the gas.

   The question presented is:

   Whether the Commission orders violate the provisions of Sections 4
and 5 of the Natural Gas Act of 1938, 15 U.S.C. 717c and 717d, that
comprise the "filed rate doctrine," because the orders allocate the
pipeline's costs of settling its take-or-pay liability among its
current customers based on the extent to which a past decline in each
customer's purchases from the pipeline contributed to the pipeline's
"take-or-pay" liability to producers.

                               STATEMENT

   The court of appeals in this case held that orders issued by the
Federal Energy Regulatory Commission, which establish prospective
rates to be charged by a pipeline to recover a portion of the costs
incurred in settling contractual liabilities to gas producers, violate
the "filed rate doctrine." App., infra, 6a-11a.  This Court has
described that doctrine as "forbid(ding) a regulated entity to charge
rates for its services other than those properly filed with the
appropriate federal regulatory authority." Arkansas Louisiana Gas Co.
v. Hall (Arkla), 453 U.S. 571, 577 (1981).  At bottom, the filed rate
doctrine is simply a label attached by the courts and others to
describe provisions in various regulatory Acts of Congress that
prescribe the procedures and substantive standards to be followed in
setting rates and the effect that must be given to those rates.  See,
e.g., Arkla, 453 U.S. at 577-578.  For this reason, a case involving
the filed rate doctrine is nothing more or less than a case of
statutory construction.  See Maislin Industries U.S., Inc. v. Primary
Steel, Inc., No. 89-624 (June 21, 1990), slip op. 9, 10-11, 12-13,
14-15.  It therefore is useful at the outset to describe the statutory
framework under which the present case arises.

   A. The Statutory Framework

   Natural gas companies as an initial matter set their own rates for
the sale or transportation of gas, typically by contract with their
customers.  United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350
U.S. 332, 341 (1956).  However, Section 4(a) of the Natural Gas Act of
1938 (NGA), 15 U.S.C. 717c(a), provides that all rates received by a
natural gas company in connection with the sale or transportation of
gas subject to the jurisdiction of the Commission shall be "just and
reasonable," and "any such rate or charge that is not just and
reasonable is declared to be unlawful." Section 4(a) does not confer a
right enforcable by the courts in the first instance.  Rather, "the
prescription of the statute is a standard for the Commission to
apply," and "the right to a reasonable rate is the right to the rate
which the Commission files or fixes." Montana-Dakota Utilities Co. v.
Northwestern Public Service Co., 341 U.S. 246, 251 (1951).

   To preserve the Commission's primary jurisdiction over this and
other statutory prescriptions, Section 4(c) of the NGA, 15 U.S.C.
717c(c), requires a gas company to file with the Commission all
proposed rates and contracts for the sale or transportation of gas,
which then may be modified or rejected by the Commission.  Under
Section 4(d), a gas company may not make any change in a filed rate,
classification, or service, or in any rule, regulation, or contract
relating thereto, "except after thirty days' notice to the Commission
and to the public." 15 U.S.C. 717c(d).  If a rate change is one the
gas company has the contractual power to make, it is "completed upon
compliance with the notice requirement and the new rate has the same
force as any other rate -- it can be set aside only upon being found
unlawful by the Commission." Mobile Gas, 350 U.S. at 342.  The
Commission does, however, have authority under Section 4(e) of the
NGA, 15 U.S.C. 717c(e), to preserve the status quo pending its review
of a new rate by suspending the proposal for not more than five
months, and thereafter to make its order retroactive to the date the
change became effective and to order a refund of any proposed rates
found to be unjust or unreasonable.  See Mobile Gas, 350 U.S. at 341.

   The Commission also is empowered to review existing rates and
practices of natural gas companies.  Section 5(a) of the NGA, 15
U.S.C. 717d(a), provides that if the Commission finds after a hearing
that any rate charged by a gas company, or any rule, practice or
contract affecting a rate or classification, is unjust, unreasonable,
unduly discriminatory, or preferential, "the Commission shall
determine the just and reasonable rate, charge, classification, rule,
regulation, practice, or contract to be thereafter observed and in
force, and shall fix the same by order." The Commission cannot,
however, impose a retroactive rate alteration under Section 5(a), and
it has no power to order payment of reparations if it finds that rates
previously in effect were unjust or unreasonable.  See Arkla, 453 U.S.
at 578;  FPC v. Sunray DX Oil Co., 391 U.S. 9, 24 (1968);  FPC v. Hope
Natural Gas Co., 320 U.S. 591, 618 (1944).  Under the statutory
standard of "just and reasonable" in Section 5(a), like that in
Section 4(a), "it is the result reached not the method employed which
is controlling.  * * * If the total effect of the rate order cannot be
said to be unjust and unreasonable, judicial inquiry under the Act is
at an end." Hope Natural Gas Co., 320 U.S. at 602.  See also Permian
Basin Area Rate Cases, 390 U.S. 747, 767 (1968);  Duquesne Light Co.
v. Barasch, 109 S. Ct. 609, 617 (1989).

   B. The Background Of The Take-Or-Pay Problem

   1. This case arises from the Commission's attempts to address the
problem of "take-or-pay" clauses in contracts that many pipelines
entered into with producers between 1977 and 1982, when the price of
natural gas was much higher than it is today.  See Order No. 500-H,
Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol,
FERC Stats. & Regs., Regulations Preambles Paragraph 30,867, at 31,509
(Dec. 13, 1989).  A take-or-pay clause obligates a pipeline to
purchase a certain amount of gas at a specified price and to pay for
the gas even if it is not taken.  Such clauses permit a pipeline to
make up a deficiency by purchasing additional gas over a succeeding
period, typically five years.  Transcontinental Gas Pipe Line Corp. v.
State Oil & Gas Board, 474 U.S. 409, 412 (1986).

   By 1982, the supply of natural gas began to exceed demand,
primarily because of the price incentives and phased deregulation
schedule for "new" gas under the Natural Gas Policy Act of 1978
(NGPA), 15 U.S.C. 3301 et seq.  Demand for natural gas then began to
fall, due to warm winters, a recession, and customers' switching to
alternative fuels when world oil prices fell dramatically.  As a
result, by the end of 1983, the take-or-pay exposure of pipelines
already exceeded $5 billion.  Order No. 500-H, FERC Stats. & Regs. at
31,510.

   The price of natural gas continued to rise even as demand fell,
because pipelines generally had monopoly power over their service
areas.  At the time, most pipelines were essentially merchants:  they
purchased gas from producers, transported the gas, and then resold it
to local distribution companies (LDCs) or, in some instances, to other
interstate pipelines or end users.  Typically, the LDCs in a given
area were served by only one pipeline, which refused to transport gas
that LDCs and end users purchased directly from producers if to do so
would compete with the pipeline's own sales.  This regime was
maintained by the "minimum bill" provisions in many tariffs, which
obligated LDCs to pay a portion of the pipeline's costs, including the
cost of gas, even if the LDCs did not purchase gas from the pipeline.
"These practices frustrated the move toward a competitive wellhead
market initiated by Congress in the NGPA, since purchasers could not
obtain access to cheaper sources of supply than those provided by the
pipelines, for example, by purchasing directly from the producer."
Order No. 500-H, FERC Stats. & Regs., at 31,510.

   In the early 1980s, the Commission, in an effort to effectuate the
more competitive wellhead market instituted by the NGPA, moved to
eliminate the minimum bill arrangement between pipelines and their
customers, finding it anticompetitive.  Order No. 380 /1/ required
pipelines to eliminate their variable costs from all minimum bills.
That order was essentially sustained in Wisconsin Gas Co. v. FERC, 770
F.2d 1144 (D.C. Cir. 1985), cert. denied, 476 U.S. 1114 (1986).
Minimum bills thereafter were eliminated altogether on a case-by-case
basis.  Order No. 500-H, FERC Stats. & Regs., at 31,510-31,511;  see,
e.g., East Tennessee Natural Gas Co. v. FERC, 863 F.2d 932 (D.C. Cir.
1988);  Transwestern Pipeline Co. v. FERC, 820 F.2d 733 (5th Cir.
1987), cert. denied, 484 U.S. 1005 (1988).  As a result, customers
were no longer legally obligated to purchase a certain amount of gas
from a particular pipeline, and pipelines were no longer guaranteed a
minimum amount of revenue.

   Elimination of the minimum-bill device did not immediately free
LDCs and other pipeline customers to obtain gas from other sources to
supply.  Pipelines retained their monopoly positions in local markets
and refused to transport gas that would displace their own sales and
thereby increase their take-or-pay liability.  The Commission
initially sought to address this problem by granting pipelines the
incentive of blanket certificates to transport gas, albeit only on
behalf of lower-priority customers who could readily switch to other
fuels and who could therefore leave the pipeline system altogether.
These orders were invalidated by the D.C. Circuit because the
Commission had not adequately explained why the benefit of free access
to competitively priced gas at the wellhead was not extended to
captive customers of the pipeline.  Maryland People's Counsel v. FERC,
761 F.2d 768 (D.C. Cir. 1985), and 768 F.2d 450 (D.C. Cir. 1985).  See
Order No. 500-H, FERC Stats. & Regs. at 31,511.

   2. These events led to the much broader approach the Commission
took in 1985 in Order No. 436, /2/ which "envisage(d) a complete
restructuring of the natural gas industry." Associated Gas
Distributors v. FERC (AGD I), 824 F.2d 981, 993 (D.C. Cir. 1987),
cert. denied, 485 U.S. 1006 (1988).  In Order No. 436, the Commission
instituted a program to encourage open access to all major pipelines,
so that LDCs and other customers could purchase gas directly from
producers.  The Commission found the pipelines' practice of refusing
to transport gas in competition with their own sales to be unduly
discriminatory because it denied consumers access to gas at the lowest
reasonable prices.  The Commission also found that the practice was
frustrating the NGPA's goal of relying on a competitive wellhead
market in reducing prices.  To correct that situation, Order No. 436
required pipelines seeking blanket authorization for transportation to
become open-access pipelines, prohibited pipelines from refusing to
transport gas in competition with their own sales, and required
open-access pipelines to allow their firm-sales customers to convert
their contract demand rights (the right to purchase a specified amount
of gas from the pipeline) into a right to firm transportation of gas
by the pipeline.  See AGD I, 824 F.2d at 996, 1016-1018;  Order No.
500-H, FERC Stats. & Regs., at 31,512.

   The D.C. Circuit sustained most features of Order No. 436 in AGD I,
but remanded for further proceedings on certain issues.  In
particular, the D.C. Circuit held that the Commission had erred in
failing either to address the pipelines' take-or-pay problems in
connection with its new open-access policy or to explain adequately
its reasons for not doing so.  The court was concerned that Order No.
436 would enable more pipeline customers to purchase cheaper gas
directly from producers, thereby increasing the pipelines' take-or-pay
exposure, and would deny pipelines bargaining leverage in settling
their take-or-pay liability with producers.  See AGD I, 824 F.2d at
1020-1030.

   On remand following AGD I, the Commission adopted Order No. 500, an
interim rule that instituted a policy of "equitable sharing" of
take-or-pay liability across the natural gas industry -- i.e., among
producers, pipelines, and customers.  The final version of this rule,
Order No. 500-H, was issued on December 13, 1989.  /3/ Order No. 500-H
essentially retains the provisions of Order No. 436 that prescribe
incentives for pipelines to assume open-access status and permit
customers to convert contract demand rights to transportation rights.
See 18 C.F.R. 284.10.  Order No. 500-H also encourages producers and
pipelines to enter into settlements under which the pipelines would
"buy down" their existing take-or-pay contracts by reforming the
pertinent provisions and "buy out" their accrued liability under those
contracts.  To furnish an incentive for producers to agree to such
settlements, the Order permits a pipeline to refuse to transport gas
unless the producer agrees (with certain exceptions) to credit the
transported gas against the pipeline's take-or-pay liability.  Order
No. 500-H, FERC Stats. & Regs. at 31,525-31,536;  see 18 C.F.R.
284.8(f), 284.9(f).

   Order No. 500-H also encourages pipelines and their customers to
share the cost of payments made by pipelines for the portion of their
take-or-pay exposure that producers do not absorb.  The Order permits
a pipeline to pass its prudently incurred buydown and buyout costs
through to customers in their commodity sales rates, the traditional
means of recovering costs.  18 C.F.R. 2.108(a).  However, the
Commission was concerned that open-access pipelines' loss of sales
might accelerate if the price of gas was substantially increased by a
straight surcharge.  The Commission therefore designed an alternative
mechanism for open-access pipelines to share with their customers a
portion of the costs incurred in settling their take-or-pay liability.
 Under this alternative, if the pipeline agrees to absorb between 25%
and 50% of the buydown and buyout costs, it may recover an equal
amount by means of a direct charge to its customers, rather than a
surcharge on gas sold.  /4/ The pipeline then may attempt to recover
the balance, if any, by means of a volumetric surcharge on both sales
and transportation of gas.  Order No. 500-H, FERC Stats. & Regs. at
31,574-31,576.  /5/

   The Commission determined that the costs not absorbed by the
pipeline under the alternative method should be allocated fairly among
its customers based upon their responsibility for the pipeline's
incurring the take-or-pay liability.  Accordingly, the direct charge
imposed upon each customer is based generally upon the cumulative
deficiency of purchases by that customer in recent years, as compared
with its purchases during a representative prior period when the
pipeline had not yet begun to accrue take-or-pay liability.  App.,
infra, 4a, 85a;  see 18 C.F.R. 2.104(b).  Under this approach, known
as the "purchase deficiency" method of allocation, customers who
reduced their purchases from the pipeline to buy cheaper gas at the
wellhead bear a greater share of the cost of resolving the pipeline's
take-or-pay liability than more captive customers whose purchase
levels remained relatively constant.  Order No. 500-I, FERC Stats. &
Regs., Regulations Preambles Paragraph 30,880, at 31,720 (Feb. 12,
1990);  /6/ Order No. 500, FERC Stats. & Regs. at 30,785,
30,786-30,787.

   3. The Commission's "equitable sharing" policy has furnished a
substantial impetus for producers and pipelines to settle the latter's
take-or-pay liabilities.  Through such settlements, pipelines have
been able to reduce their current take-or-pay liabilities by $16
billion and, through contract reformation, to obtain future relief in
the amount of $28 billion.  At the end of 1989, pipelines had paid
producers approximately $8.6 billion to obtain this relief, or an
average of 18.6 cents on each dollar of liability.  Of this $8.6
billion, pipelines have absorbed 39.3% ($3.4 billion), received an
equivalent amount through direct billing of their customers under the
"purchase deficiency" method, and assessed the remainder through
volumetric surcharges on both sales and transportation.  Order No.
500-H, FERC Stats. & Regs. at 31,522-31,523.

   C. The Proceedings In This Case

   1. This case involves an application of the Commission's "equitable
sharing" policy to a particular pipeline, Tennessee Gas Pipeline.
Under the Commission's final orders on Tennessee's settlement
proposal, Tennessee is to absorb 50% of the payments it makes to
producers to settle its take-or-pay liability, and the remainder is to
be passed through to its customers according to the
purchase-deficiency method of allocation.  In applying that method,
the Commission established the base period (prior to the sharp
decrease in customer demand for Tennessee's gas) as 1981-1982, and the
deficiency period (when the declines took place) as 1983-1986.  Each
customer's purchase deficiency, and thus its responsibility for a
portion of the take-or-pay costs incurred by Tennessee, is calculated
by comparing its purchases in the deficiency period with its purchases
in the base period.  App., infra, 4a-5a, 84a-87a, 90a-93a, 122a-124a.
/7/ Tennessee's customers may either pay this direct charge over a
period of several years of current gas service or discharge their
liability in a lump sum payment to Tennessee.  Id. at 113a-114a,
130a-131a.  The Commission also imposed a $650 million cap on
Tennessee's recoveries from its customers.  Id. at 39a-41a, 76a-81a.

   The Commission rejected the contention by several of Tennessee's
customers that because its order allocated take-or-pay costs among
customers on the basis of past purchasing patterns, the order
constituted "retroactive ratemaking" and therefore violated the filed
rate doctrine.  App., infra, 47a-49a, 94a.  The Commission reasoned
that its order does not impose a rate increase for gas already sold or
permit Tennessee to recover past costs that should have been included
in rates for a prior period.  Instead, the Commission explained, the
order prescribes an appropriate allocation of Tennessee's current
settlement payments incurred in connection with current gas service,
just as the costs of resolving any contract dispute are typically
included in the pipeline's next rate filing.  The Commission observed
that "(i)f pipeline recovery of take-or-pay costs at the time they are
paid were retroactive rate-making merely because the costs relate back
to some past event, a pipeline could never lawfully recover those
costs under any rate treatment." Id. at 48a.  /8/

   2. A number of parties sought judicial review of the Commission's
orders in the D.C. Circuit.  Certain of Tennessee's customers
challenged the purchase-deficiency method of cost allocation on two
grounds.  First, they argued that allocation of responsibility for
take-or-pay costs on the basis of past purchasing patterns violates
the filed rate doctrine because it constitutes a retroactive change in
rates without advance notice.  Second, the customers argued that even
if the filed rate doctrine is not violated, the purchase-deficiency
mechanism is not "just and reasonable" within the meaning of Sections
4 and 5 of the NGA.  The court held that the purchase-deficiency
method violates the filed rate doctrine, App., infra, 6a-11a, and it
therefore did not reach the question whether that method is "just and
reasonable."

   The court found it irrelevant for purposes of the filed rate
doctrine that the Commission's orders allocate Tennessee's current
costs (those incurred in its current buyout and buydown of take-or-pay
liability), rather than past costs, and that the orders do so by a
prospective increase in the filed rate.  /9/ In the court's view, the
decisive question "is not which costs are 'current' and which are
'past.' Rather, the appropriate inquiry seeks to identify the purchase
decisions to which the costs are attached." App., infra, 9a.
Accordingly, the court held that costs could not be allocated among
Tennessee's customers on the basis of their purchase decisions during
the base period (1981-1982) and the deficiency period (1983-1986),
which they could no longer change.  In so ruling, the court expressed
the view that "(p)roviding the necessary predictability is the whole
purpose of the well established 'filed rate doctrine'." Id. at 10a
(citations omitted).  In a related vein, the court also concluded that
Tennessee's customers did not have sufficient notice (at least prior
to publication of Order No. 380 in June 1984) that they might later
have to pay rates based in part on their purchases during that period.
 App., infra, 9a-10a.  /10/

   3. Petitions for rehearing en banc filed by the Commission and
numerous other parties were denied by the court of appeals, with Chief
Judge Wald and Judges Mikva and Edwards dissenting.  App., infra,
137a-142a.  In a statement on behalf of the three dissenters, Chief
Judge Wald pointed out that the conversion provisions of Order No. 436
had enabled many customers to avoid their obligations to purchase a
specified amount of gas from pipelines, and that, because those
customers took advantage of the open-access regulatory regime to
purchase gas elsewhere, they were responsible for the pipelines'
accrual of take-or-pay liability.  App., infra, 141a-142a.  She
continued (id. at 141a):

      The FERC, then, did not "revise" these rates;  circumstances
      subsequent to the signing of the contracts between the consumers
      and the pipelines altered the deal -- and, in effect, the rate
      -- originally agreed to by the consumers.  The FERC's decision
      to reallocate some of these current costs did not violate the
      filed rate doctrine because the deal originally agreed to by the
      consumers had already been abrogated by the FERC.  Neither the
      purchase decisions to which the consumers' original costs were
      attached nor the rates pursuant to them were still valid.  It
      was a brand new world:  there were no "old rates" to change.

   The dissenting judges further observed that "(i)n a time when the
structure of the natural gas industry is undergoing a sea change, the
FERC must be granted considerable discretion to ensure that the
transition period is handled in a manner that minimizes the disruption
in the industry." App., infra, 141a.  Indeed, they noted that in
remanding Order No. 436, the D.C. Circuit in AGD I instructed the
Commission "to do something about the pervasive take-or-pay contracts"
that "hindered" pipelines from moving to open-access status, and in
their view, Order No. 500 was "a good faith, and not unreasonable,
response to the mandate." Id. at 141a-142a.  By contrast, "(t)he
panel's overly rigid interpretation of the filed rate doctrine * * *
leaves the FERC essentially powerless to take care of the take-or-pay
crisis," because a pipeline's prices would increase to a
non-competitive level if take-or-pay costs were added as a surcharge
to future sales, and even if some costs could be passed on in this
manner, "that would still mean that total losses would be allocated
inequitably." Id. at 142a.  For these reasons, the dissenting judges
concluded that the panel's decision will have a "significant effect *
* * on the functioning of the industry and on the FERC's ability to
regulate this 'quiet revolution' in the gas industry." Ibid.

                   REASONS FOR GRANTING THE PETITION

   The court of appeals has invalidated a central feature of the
policy adopted by the Federal Energy Regulatory Commission to resolve
the problem of "take-or-pay" contracts that has pervaded the natural
gas industry for a number of years.  The court has done so, moreover,
by adopting a view of the "filed rate doctrine" that is divorced from
the text and purposes of the relevant provisions of the Natural Gas
Act and from this Court's explanation of those provisions and the
filed rate doctrine in Arkansas Louisiana Gas Co. v. Hall, 453 U.S.
571 (1981).  As a result, the court has expanded the doctrine well
beyond its traditional bounds to impose rigid limitations on the
allocation of concededly current costs, a subject that heretofore has
been governed by the necessarily flexible principles embodied in the
"just and reasonable" standard of rate regulation.  The court also
subordinated cardinal principles of regulation under the just and
reasonable standard that seek to assign cost responsibility among
customers based on cost incurrence.  The decision below therefore
raises fundamental and far-reaching questions, not previously
considered by this Court, regarding the rights and obligations imposed
upon the Commission and other agencies, as well as the entities they
regulate, by the statutory provisions that embody the filed rate
doctrine.

   The decision below also is of enormous practical importance.  The
"equitable sharing" policy adopted by the Commission to spread the
cost of resolving the take-or-pay crisis over all segments of the
natural gas industry has thus far proven to be quite successful,
resulting in the settling of approximately $44 billion of the
pipelines' present and future take-or-pay exposure and other related
relief at a cost to the pipelines of approximately $9 billion.  Of
that $9 billion, almost $3.4 billion has been passed through to
pipeline customers under the purchase-deficiency method of allocation.
 If the decision below is permitted to stand, much of this passthrough
will have to be undone, and the Commission will have to conduct still
further proceedings in this case and many others, as well as its
generic Orders Nos. 500-H and 500-I, to come up with and institute
another means of allocating take-or-pay costs among pipeline
customers.  During such proceedings, the problem of take-or-pay
liability will continue to pervade the relationship between pipelines
and their customers, and thereby disrupt and delay a smooth transition
to the truly competitive market Congress intended when it enacted the
Natural Gas Policy Act of 1978 and the Natural Gas Wellhead Decontrol
Act of 1989, Pub. L. No. 101-60, 103 Stat. 157.  An appellate decision
so far-reaching and disruptive in its effect, and so unsupported by
legal precedent, should not go unreviewed by this Court.

   1. In announcing its expansive view of the filed rate doctrine, the
court below fundamentally misapplied the governing statutory
provisions and ignored its duty under Chevron U.S.A. Inc. v. NRDC,
Inc., 467 U.S. 837 (1984), to defer to the reasonable interpretation
of those provisions by the Commission.

   a. The court of appeals invalidated the Commission orders at issue
here without even discussing the terms of the statutory provisions
under which they were issued, Sections 4 and 5 of the Natural Gas Act
(NGA), 15 U.S.C. 717c and 717d.  See App., infra, 6a-11a.  The court
proceeded instead as if the "filed rate doctrine" were a judicially
fashioned rule that can be expanded by the courts in a common-law
manner, according to their own perception of its underlying
"purposes." In fact, however, the term "filed rate doctrine" is merely
a label attached to a set of statutory provisions in the NGA and
similar Acts of Congress that prescribe the procedures and substantive
standards to be followed in setting rates and the effect that such
rates must be given by the courts and others.  The court below
therefore should have grounded its analysis in the statutory
provisions through which Congress articulated the particular rules
that comprise what has come to be known as the "filed rate doctrine."
The Commission's orders in this case are fully consistent with the
text and purposes of those provisions.

   As relevant here, the filed rate doctrine is principally embodied
in Section 4 of the NGA.  Section 4(a) provides that all charges made
or received by a natural gas company, and all rules and regulations
affecting such rates or charges, shall be "just and reasonable," and
any rate or charge that is not just and reasonable is deemed unlawful.
 Section 4(c) requires every natural gas company to file with the
Commission "schedules showing all rates and charges for any
transportation or sale subject to the jurisdiction of the Commission,"
the classifications, practices, and regulations affecting such rates
and charges, and contracts affecting rates, charges, classifications
and services.  Section 4(d) provides that unless the Commission
otherwise orders, no change shall be made by a gas company in any
rate, charge, classification or service, except after 30 days' notice
to the Commission and the public.

   These requirements were fully met here.  First, the court of
appeals did not question that the purchase-deficiency method of
allocating take-or-pay costs among a pipeline's customers satisfies
the "just and reasonable" standard of Section 4(a).  Second, Tennessee
Pipeline complied with Section 4(c) by filing tariffs with the
Commission that set forth its proposed allocation method;  those
tariffs were modified by the Commission pursuant to Section 5(a), and
Tennessee filed new tariffs to implement the rates on a prospective
basis.  Third, Tennessee is in full compliance with Section 4(d)
because it is collecting only those rates that have been filed with
and approved by the Commission.

   The legislative history of the NGA does not elaborate upon these
provisions of Section 4, and therefore does not suggest that they
should be construed to impose further restrictions not specified in
the text of the Act itself.  See H.R. Rep. No. 709, 75th Cong., 1st
Sess. 4-5 (1937);  S. Rep. No. 1162, 75th Cong., 1st Sess. 4 (1937).
Nor is there any such suggestion in this Court's articulation in Arkla
of the principles embodied in these statutory provisions:  (1) rates
filed with the Commission are lawful only if they are just and
reasonable;  (2) the authority to determine whether rates are just and
reasonable is vested in the Commission;  (3) no court may substitute
its judgment for that of the Commission on the justness and
reasonableness of rates;  (4) "the right to a reasonable rate is the
right to the rate which the Commission files or fixes" (quoting
Montana-Dakota, 341 U.S. at 251);  and (5) except where the Commission
permits a waiver, "no regulated seller of natural gas may collect a
rate other than the one filed with the Commission" (citing Section
4(d)).  453 U.S. at 577.  The Court explained that "(t)hese
straightforward principles underlie the 'filed rate doctrine,' which
forbids a regulated entity to charge rates for its services other than
those properly filed with the appropriate federal regulatory
authority." Ibid.  The Commission fully respected these
"straightforward principles" here;  and Tennessee did nothing that the
doctrine resting on these principles "forbids," since it charged only
rates that were "properly filed" with the Commission.

   Finally, the Commission's orders comport with what Arkla identified
as the underlying purposes of the filed rate doctrine:  "preservation
of the agency's primary jurisdiction over reasonableness of rates and
the need to insure that regulated companies charge only those rates of
which the agency has been made cognizant." 453 U.S. at 577-578
(quoting City of Cleveland v. FPC, 525 F.2d 845, 854 (D.C. Cir.
1976)).  See also Nantahala Power & Light Co. v. Thornburg, 476 U.S.
953, 963 (1986) (the doctrine is "a rule of administrative law
designed to ensure that federal courts respect the decisions of
federal administrative agencies").  Here, there was no interference
with the primary jurisdiction of the Commission (since it reviewed
Tennessee's proposed rates), and the Commission obviously was "made
cognizant" of those rates.  /11/

   b. The court of appeals nevertheless believed that the Commission's
orders violate the filed rate doctrine because, in its view, they
impose a retroactive rate increase on Tennessee's customers.  App.,
infra, 9a-11a.  This conclusion likewise is not rooted in the relevant
statutory provisions.  The prohibition against retroactive ratemaking
derives from Sections 4(d) and 5(a) of the NGA.  Section 4(d)
essentially requires a pipeline to charge the rates it has filed with
the Commission and prohibits it from changing its rates without giving
30 days' notice to the Commission and the public (except where the
Commission waives the latter requirement for good cause shown).  As we
have explained, Tennessee fully complied with these requirements.
Section 5(a) provides that when the Commission finds a gas company's
rate, practice or contract unreasonable, it "shall determine the just
and reasonable rate, * * * practice, or contract to be thereafter
observed and in force, and shall fix the same by order" (emphasis
added).  The Commission fully complied with this requirement because,
after disapproving Tennessee's initial proposal, it fixed the rates
and practices to be thereafter observed by Tennessee to recover a
portion of its take-or-pay costs.

   The Court explained in Arkla that Section 5(a) "bars the
Commission's retroactive substitution of an unreasonably high or low
rate with a just and reasonable rate," and "prevents the Commission
itself from imposing a rate increase for gas already sold," at least
absent a waiver by the Commission.  453 U.S. at 578 & n.8.  But the
Commission did neither of those things here:  it did not retroactively
substitute a higher rate for the one previously charged by Tennessee
for past services, and it did not order Tennessee's customers to pay a
higher price for gas they actually purchased during either the base
period (1981-1982) or the deficiency period (1983-1986).  The
Commission instead ordered customers to pay a new rate on a
prospective basis to cover a portion of the costs of Tennessee's
settlement of its take-or-pay exposure, and it allocated those current
costs among Tennessee's customers on the basis of the relative amounts
of gas they did not purchase during the deficiency period.

   The purpose of allocating take-or-pay costs in this manner is not
to punish the customers who decreased their purchases from Tennessee
during the deficiency period.  The purpose, rather, is the essentially
remedial one of allocating the additional costs Tennessee has now
incurred as a result of those purchasing patterns.  For this reason,
and contrary to the court of appeals' belief, the fact that
Tennessee's customers had a legal right to purchase gas elsewhere
during the deficiency period does not absolutely preclude the
Commission from taking these past purchasing patterns into account in
fashioning an appropriate method for allocating current take-or-pay
liability.  That instead is one factor to be considered by the
Commission in determining whether Tennessee's rates and practices for
recovering a portion of its take-or-pay costs are "just and
reasonable" -- the central regulatory standard under the Act.

   Applying that standard, the Commission permissibly concluded that
the customers who caused Tennessee to accrue take-or-pay exposure by
reducing their purchases should contribute proportionately to meeting
a portion of the costs incurred by Tennessee in settling its
liability.  After all, Tennessee agreed to the take-or-pay clauses in
to assure a source of supply for the gas it expected those customers
to purchase under the then-existing regulatory regime.  See note 6,
supra.  Moreover, the purchase-deficiency method of cost allocation
serves the broader regulatory principle, consistently followed by the
Commission and approved by the courts under the "just and reasonable"
standard, of matching rates with responsibility for the underlying
costs.  See Cities of Riverside and Colton v. FERC, 765 F.2d 434, 439
(5th Cir. 1985);  Public Systems v. FERC, 709 F.2d 73, 76 (D.C. Cir.
1983);  Alabama Electric Cooperative, Inc. v. FERC, 684 F.2d 20, 27
(D.C. Cir. 1982).  The court of appeals therefore improperly utilized
a rigid, judicially fashioned version of the filed rate doctrine to
intrude upon the Commission's discretion under the statutory "just and
reasonable" standard "to devise methods of regulation equitably
reconciling diverse and conflicting interests." Permian Basin Area
Rate Cases, 390 U.S. 747, 767 (1968).

   c. The court of appeals rejected the straightforward view of the
filed rate doctrine as embodied in the relevant statutory provisions,
as well as the compelling considerations underlying the Commission's
regulatory approach in this case, on the ground that whether costs are
"current" or "past" is not significant;  rather, in its view, the
critical inquiry concerns the "purchase decisions to which the costs
are attached," since "(p)roviding the necessary predictability is the
whole purpose of the * * * filed rate doctrine." App., infra, 9a, 10a.
 Apparently, the court believed that if Tennessee's customers had been
apprised before they made their past purchasing decisions that a
future rate would be based on those decisions, the filed rate doctrine
would have been satisfied.  But this was to require the impossible.

   Tennessee could not have included any potential costs associated
with its take-or-pay exposure in an earlier rate filing because it did
not actually pay any monies to producers in settlement of that
exposure -- and therefore did not actually incur any costs -- until
shortly before its rate filing here.  See note 9, supra.  As a result,
this is not a case in which "(t)he company having initially filed the
rates and either collected an illegal return or failed to collect a
sufficient one must, under the theory of the Act, shoulder the hazards
incident to its action including not only the refund of any illegal
gain but also its losses where its filed rate is found to be
inadequate." FPC v. Tennessee Gas Co., 371 U.S. 145, 153 (1962).  To
the contrary, Tennessee sought to collect an entirely new charge to
recover current costs, based on circumstances that were dramatically
different from those in existence when its earlier rates were on file.

   Whatever role the "predictability" notion properly may play in
construing the statutory provisions that embody the filed rate
doctrine, the court below erred in relying on that notion to extend
the scope of the filed rate doctrine so as to prohibit Commission
actions that are fully consistent with the governing statutory
provisions themselves.  /12/ Moreover, the court's notion of
predictability in this context is based on the unrealistic assumption
that clear purchasing choices always exist, and that customers can
freely move from one pipeline system to another to avoid the payment
of prudently incurred costs.  Prior to open access, a customer's major
purchasing decision was made when it signed a firm service sales
contract with a pipeline.  As a result, each pipeline's array of
customers remained fairly constant, and the pipeline exercised its NGA
authority to file rate increases for recovery of newly incurred costs.

   As the court below acknowledged, the Commission often utilizes
"accurate historical data" in exercising its authority under Sections
4 and 5 of the NGA.  See App., infra, 8a.  /13/ For example, in City
of Willcox v. FPC, 567 F.2d 394, 408-412 (1977), cert. denied, 434
U.S. 1012 (1978), the D.C. Circuit endorsed the use, for the
allocation of scarce supplies of natural gas, of base periods
precisely like those at issue in this case.  The court of appeals
recognized as much, but sought to distinguish City of Willcox on the
ground that a "curtailment plan is not a rate change." App., infra,
7a, 10a.  This asserted distinction is unfounded.  Section 4(d) of the
NGA applies not only to rates, but also to "classifications" and
"services," which include curtailment plans.  A curtailment plan
therefore is governed by the same statutory principles that comprise
the rate doctrine.  See also Nantahala, 476 U.S. at 966 ("the filed
rate doctrine is not limited to rates per se").

   The court below also erred in rejecting the Commission's reliance
on the precedent of minimum bills, which likewise involve fixed
charges that are not based on current or future takes of natural gas.
The court acknowledged that in Atlantic Seaboard Corp. v. FERC, 404
F.2d 1268, 1269-1270 (D.C. Cir. 1968), it affirmed a minimum bill that
was created through the use of a base period prior to the date on
which the buyer commenced purchasing from another source -- virtually
the same type of base utilized here -- but it sought to downplay that
similarity by observing that the "charge was avoidable simply by
keeping takes above the minimum bill volume." App., infra, 11a.  The
true comparison, however, is that both Atlantic Seaboard and the
instant case dealt with fixed charges based upon past purchasing
practices, not with a true sales commodity rate.  The court of appeals
thus converted predictability into a principle of cost avoidance,
which has no grounding in the relevant statutory provisions and which
in this case clashes with other basic precepts of utility rate-making.
 /14/

   d. As we have explained, nothing in Sections 4 and 5 of the NGA
imposes the rigid limitation on the Commission's allocation of current
take-or-pay costs that the court of appeals announced in this case.
Accordingly, because the purchase-deficiency method of allocation is
consistent with the basic "just and reasonable" standard under the
NGA, it is permitted by the Act.  However, if the court of appeals
believed that Sections 4 and 5 of the NGA are ambiguous in this
regard, it should have deferred, under Chevron, 467 U.S. at 842-845,
to the Commission's reasonable interpretation of those provisions as
not imposing an absolute prohibition against the purchase-deficiency
method of allocation.  See also PBGC v. LTV Corp., No. 89-390 (June
18, 1990), slip op. 12-17.  Yet the court of appeals did not even
mention this principle.  Such deference is especially appropriate
here, because the Commission must balance the impact on various
customers of Tennessee against other statutory policies, including
those favoring a competitive market and the policy consistently
followed by the Commission and endorsed by the courts of allocating
costs to those who caused them to be incurred.

   2. For a number of reasons, the erroneous ruling by the court of
appeals warrants review by this Court.

   a. The decision below is not an isolated misapplication of the
statutory provisions that comprise the filed rate doctrine.  Since the
decision was rendered, the D.C. Circuit has applied its novel and
expansive view of the filed rate doctrine to invalidate other
Commission orders that were designed to allocate costs in a just and
reasonable manner during periods of transition experienced by natural
gas pipelines.  See Public Utilities Comm'n v. FERC, 894 F.2d 1373,
1382-1383 (D.C. Cir. 1990);  Transwestern Pipeline Co. v. FERC, 897
F.2d 570, 576-581 (D.C. Cir. 1990);  see also Columbia Gas
Transmission Corp. v. FERC, 895 F.2d 791, 793-795 (D.C. Cir. 1990).
/15/ The view of the filed rate doctrine adopted by the D.C. Circuit
in these cases is of nationwide significance and particular concern,
because any party may seek review of any Commission order in that
court.  See 15 U.S.C. 717r(a).

   b. The decision below seriously undermines the Commission's efforts
to deal with the take-or-pay problem in a just and reasonable manner.
The Commission's "equitable sharing" policy serves to spread the costs
of resolving that problem over all segments of the industry.  The
purchase-deficiency method of allocating costs among pipeline
customers -- and the closely related provisions of Order No. 500-H
that are designed to resolve the take-or-pay problem without extensive
proceedings regarding the prudence of those costs (see note 5, supra)
-- are essential features of this policy, because they seek to match
cost responsibility with cost incurrence and to ensure that the
transition from pervasive governmental intervention in the natural gas
market to greater reliance on market forces will be accomplished in an
equitable fashion and with reasonable dispatch.

   By contrast, the court of appeals' rejection of the
purchase-deficiency method, if allowed to stand, would have a number
of adverse consequences:  (1) it would cause the Commission to depart
from the accepted principle of cost responsibility, because other
potentially available alternatives (e.g., the volumetric surcharge and
contract demand methods) /16/ are not based on that principle;  (2) it
would unfairly burden those LDCs and other customers that were
captives of the pipeline when other customers were able to buy cheaper
gas elsewhere;  (3) it would create an incentive for customers who are
able to do so to leave Tennessee and other systems that have
substantial take-or-pay exposure in order to avoid the higher prices
that would be imposed under alternative allocation methods, thereby
exacerbating the take-or-pay problem;  and (4) it would preserve
distortions in the current market by misallocating costs resulting
from past purchasing decisions.  The dimension of these impacts is
demonstrated by the amount of money at stake.  Pipelines have already
passed through to their customers under the purchase-deficiency method
approximately $3.4 billion in costs they have incurred in buying out
or buying down take-or-pay liability, and this case alone involves the
allocation of $650 million in such liability.

   The Commission has been struggling with the take-or-pay issue for
some time in the context of the transition to a truly competitive
market for natural gas, and the courts have kept prodding it to take
action.  Indeed, it was the D.C. Circuit, in AGD I, that most
prominently faulted the Commission for not addressing the take-or-pay
issue (in connection with Order No. 436, which approved the
open-access policy for pipelines), and it was AGD I that led to the
Commission's approach in Order No. 500 and here.  Similarly, in
another major case, the Fifth Circuit invalidated the Commission's
Order No. 451, which set a higher price ceiling for "old" gas, in part
because the Commission had not first resolved the pipelines'
take-or-pay problems.  Mobil Oil Exploration & Producing Southeast,
Inc. v. FERC, 885 F.2d 209, 223-224 (1989), cert. granted, No. 89-1453
(June 4, 1990).  Yet if the decision below is permitted to stand,
uncertainties generated by those problems will continue to pervade the
industry and hinder the Commission's regulatory efforts while it
undertakes further proceedings on the allocation of take-or-pay costs.

   c. Finally, the purchase-deficiency approach is both a logical
outgrowth and an integral part of the major transformation of the
natural gas industry that Congress, the Commission, and market forces
have wrought over the past 12 years.  That method of cost allocation
serves to reduce the windfall that certain pipeline customers would
otherwise realize by virtue of their having been in a position to take
advantage of some steps in that transformation (the elimination of
minimum billing practices) by switching to cheaper sources of natural
gas.  If this particular component of the Commission's efforts to
provide for a fair transition to a restructured and competitive
natural gas market is struck down, the overall transition will be
infected with a substantial inequity.

   The legislative history of the Wellhead Decontrol Act of 1989,
which lifted price controls on wellhead sales of "old" gas beginning
in January 1993, discusses with approval the various Commission
measures, including Orders Nos. 436 and 500, that were designed to
bring about a more competitive market for natural gas and that made
appropriate the enactment of the Wellhead Decontrol Act.  See S. Rep.
No. 38, 101st Cong., 1st Sess. 5 (1989);  H.R. Rep. No. 29, 101st
Cong., 1st Sess. 6 (1989).  Because the D.C. Circuit's decision here
effectively invalidates a central feature of Order No. 500, it
eliminates one of the regulatory premises on which Congress acted in
removing the last statutory obstacle to a fully competitive natural
gas market by lifting controls on "old" gas.  The Court should grant
certiorari because the decision below invalidates a significant
administrative measure undergirding the legislatively mandated
transition to a competitive market.

                              CONCLUSION

   The petition for a writ of certiorari should be granted.

   Respectfully submitted.

   JOHN G. ROBERTS, JR.

      Acting Solicitor General /17/

   LAWRENCE G. WALLACE

      Deputy Solicitor General

   EDWIN S. KNEEDLER

      Assistant to the Solicitor General

   WILLIAM S. SCHERMAN

      General Counsel

   JEROME M. FEIT

      Solicitor

   JOEL M. COCKRELL

      Attorney Federal Energy Regulatory Commission

   JUNE 1990

   /1/ Elimination of Variable Costs From Certain Natural Gas Pipeline
Minimum Commodity Bill Provisions, FERC Stats. & Regs., Regulations
Preambles (1982-1985) Paragraph 30,571 (June 1, 1984).

   /2/ Order No. 436, Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, FERC Stats. & Regs., Regulations Preambles
(1982-1985) Paragraph 30,665 (Oct. 9, 1985).

   /3/ Order No. 500 was issued as an interim final rule and policy
statement in August 1987.  FERC Stats. & Regs., Regulations Preambles
Paragraph 30,761.  Order No. 500-H was issued on the limited remand in
American Gas Ass'n v. FERC, 888 F.2d 136 (D.C. Cir. 1989) (AGA), in
which the court considered challenges to Order No. 500.  Order No.
500-H, as modified on rehearing by Order No. 500-I, FERC Stats. &
Regs., Regulations Preambles Paragraph 30,880 (Feb. 12, 1990), is now
pending on judicial review in AGA, following that limited remand.

   /4/ A direct charge is a monthly bill from the pipeline to its
customer over a defined period, perhaps between two and five years,
that does not vary based on the amount of gas purchased (or not
purchased) by the customer during the collection period.

   /5/ Order No. 500-H establishes a presumption that the portion of a
pipeline's take-or-pay costs it does not absorb were prudently
incurred.  If a customer agrees to accept the settlement under Order
No. 500-H, it cannot challenge that presumption.  This procedure was
designed to avoid lengthy hearings on prudence or blame for the
take-or-pay problem.  App., infra, 4a;  AGA, 888 F.2d at 144;  Order
No. 500, FERC Stats. & Regs. at 30,787-30,788.

   /6/ The Commission explained on rehearing in Order No. 500-I, at
31,720:

         The Commission continues to believe that purchase deficiency
      allocation is the most equitable method for allocating the
      take-or-pay costs included in the fixed take-or-pay charge among
      pipeline customers because that method, while not perfect, most
      closely matches cost causation with cost incurrence.  The
      pipelines entered into take-or-pay contracts to serve their firm
      customers' anticipated demand for gas.  Accordingly, those
      customers' subsequent reduced demands for gas have caused the
      incurrence of the pipelines' take-or-pay costs.  Other potential
      allocation methods do not match cost causation with cost
      incurrence as well as the purchase deficiency method because
      they are related solely to current demand levels or purchases
      and shipments of gas.

   /7/ Tennessee initially proposed to absorb only 20% of its
take-or-pay costs.  The administrative law judge recommended that the
proposal be modified so that Tennessee would absorb 50% of the costs
and pass through the remainder to its customers.  App., infra,
28a-29a.  After the Commission issued Order No. 500, Tennessee filed a
settlement proposal that generally tracked that Order.  In its
February 8, 1988, decision on review of the ALJ's decision, id. at
26a-66a, the Commission adopted the 50-50 division but approved a
method for allocating costs among Tennessee's customers that departed
from Order No. 500:  the cost of buying out take-or-pay liabilities
that had already accrued was to be allocated under a modified version
of the purchase-deficiency method, while the cost of buying down
(reforming) uneconomical contract provisions on a prospective basis
was to be allocated based on the maximum amount Tennessee was
obligated to deliver to the customer as of January 1, 1986.  Id. at
28a, 30a, 46a-49a.  In its May 27, 1988, order on rehearing, id. at
67a-108a, the Commission modified the formula to allocate the entire
passthrough amount using the purchase-deficiency method.  The
Commission explained that since Order No. 500 was issued, it had
approved four other proposals that allocated costs to customers under
the purchase-deficiency method, and it found no sufficient basis to
depart from that approach here.  Id. at 82a-91a, 122a-124a.

   /8/ The Commission likewise rejected the retroactive-ratemaking
objection in Order No. 500.  There, it noted that Commission measures
enabled pipeline customers to purchase gas from alternative sources at
lower prices while pipelines accrued take-or-pay liability, and it
found it "reasonable that the beneficiaries of Commission initiatives
to increase competition in the natural gas industry should share in
the transition costs which accompany the industry's restructuring."
Order No. 500, FERC Stats. & Regs. at 30,787.

   /9/ Under traditional ratemaking principles and Commission rulings,
pipelines could not have charged their customers for take-or-pay
liability as it accrued;  only when the costs were incurred, through
payment or settlement, could the costs be passed on.  See Order No.
410, 44 F.P.C. 1142, 1143 (1970), aff'd sub nom. Public Service Comm'n
v. FPC, 467 F.2d 361, 370 (D.C. Cir. 1972);  Panhandle Eastern Pipe
Line Co., 32 F.E.R.C. Paragraph 63,085, at 65,303 (1985).

   /10/ The court of appeals also addressed several other issues.
First, ruling in the Commission's favor, it held that a pipeline's
payments to a producer to buy out or buy down take-or-pay costs are
not subject to the price ceiling in the NGPA.  App., infra, 12a-17a.
Second, the court held that the Commission should have either ordered
that two customers be given credit for amounts they paid in prior
settlements of their liability for certain of Tennessee's take-or-pay
costs, or explained more completely its refusal to do so.  Id. at
17a-23a.  The court declined to resolve two other issues -- whether
the Commission should limit take-or-pay costs of sales subject to its
jurisdiction pursuant to Section 5(a) of the NGA, and whether the
March 31, 1989, sunset date for allocating take-or-pay liability is
arbitrary and capricious -- because those issues are raised on
judicial review of Order No. 500 in the AGA case, which was (and is
again) pending in the D.C. Circuit (see note 3, supra).  App., infra,
23a-24a.

   /11/ In Arkla, the Court held that, under governing preemption
principles, the provisions of the NGA that comprise the filed rate
doctrine require state courts to give effect to rates filed with the
Commission and to decisions of the Commission concerning those rates.
In Nantahala, which arose under the parallel provisions of the Federal
Power Act, 16 U.S.C. 824d, the Court similarly held that once the
Commission sets the wholesale rate, a state commission is barred from
concluding that that rate is not just and reasonable.  Accord,
Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S.
354, 371-372 (1988).  Questions concerning the effect to be given
Commission decisions pursuant to the federal statutory provisions
comprising the filed rate doctrine in the preemption context are not
presented in this case, which involves a challenge to the actions of
the Commission itself, not those of a state court or agency in a
proceeding under state law.

   /12/ This Court in Arkla did not suggest that predictability for
customers is, in itself, an enforceable tenet of the filed rate
doctrine, especially where, as here, the requirements of the relevant
statutory provisions have been satisfied.  The notion of
predictability was first articulated by the D.C. Circuit in Electrical
District No. 1 v. FERC, 774 F.2d 490, 492-493 (1985).  In Electrical
District, however, the court held only that the Commission failed to
comply with the requirement under Section 206(a) of the Federal Power
Act, 16 U.S.C. 824e(a) (which is identical for present purposes to
Section 5(a) of the NGA), to make a new rate prospective, because it
permitted the utility to collect the new rate as of a date prior to
the Commission's acceptance of the utility's compliance filing.  Thus,
Electrical District relied on the predictability notion in construing
the express terms of the statute.  It did not suggest that a court may
rely on its own perceptions of the importance of predictability to
extend the filed rate doctrine in a manner divorced from the statutory
text.

   /13/ The Commission's regulations require pipelines to submit with
their rate-change applications data "based upon a test period which
shall consist of a base period of 12 consecutive months of most
recently available actual experience, adjusted for changes in revenues
and costs which are known and are measurable with reasonable accuracy
at the time of the filing * * *." 18 C.F.R. 154.63(e)(2).

   /14/ The court of appeals apparently was also concerned that past
customers who did not currently buy gas from Tennessee might have to
pay their share of take-or-pay liability, although the court expressly
declined to rest its decision on that ground.  App., infra, 9a, 11a
n.1.  It is undisputed, however, that no customers of Tennessee who
were assessed take-or-pay liability had left the system, and the
Commission has informed us that, as a general matter, relatively few
customers have abandoned all service obligations with their pipeline
suppliers.  If any customer of an interstate pipeline did abandon its
service obligations before the pipeline sought to pass through
take-or-pay costs, it is not assessed any liability.  But where a
downstream pipeline customer did not abandon those obligations prior
to the upstream pipeline's filing of take-or-pay passthrough tariff
sheets, the Commission, in allocating costs in a just and reasonable
manner, has required abandoning downstream pipeline customers to share
in the payment of the take-or-pay liabilities to which they
contributed.  See United Gas Pipe Line Co., 47 F.E.R.C. Paragraph
61,163 (1989).

   /15/ In Transwestern, the court appeared to recognize the flaws in
relying on predictability as an independent standard for reviewing
Commission orders.  The court stated that its suggestion in prior
decisions, including the instant case, that "a rate violates the filed
rate doctrine because a customer cannot respond in some way that
enables it to escape the charge" was "clearly inconsistent" with the
Commission's power to permit a pipeline to change its rates under
Section 4(d), even though customers cannot avoid the charges unless
they undertake "the elaborate process of securing abandonment under
Section 7 of the Act." 897 F.2d at 579.  The court nevertheless denied
rehearing en banc in the instant case just one week later.

   /16/ The contract demand method would allocate take-or-pay
liability on the basis of the amount of gas a customer is entitled to
demand under its contract with a pipeline, irrespective of how much
gas the customer actually purchases.

   /17/ The Solicitor General is disqualified in this case.