Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-01228/USCOURTS-caDC-04-01228-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Transcontinental Gas Pipe Line Corporation
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2005 Decided December 6, 2005

No. 04-1226

EXXON MOBIL CORPORATION, ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

PIEDMONT NATURAL GAS COMPANY, INC., ET AL.,

INTERVENORS

Consolidated with

04-1228

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Thomas J. Eastment argued the cause for petitioners Exxon

Mobil Corporation, et al. With him on the briefs were Melissa

E. Maxwell, Douglas W. Rasch, Bruce A. Connell, and Charles

J. McClees.

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1Generating a dozen orders from FERC and now a third

opinion from this court, Transco’s struggle to change its rate structure

has demonstrated the Dickensian potential of energy regulation

disputes:

This scarecrow of a suit has, in course of time, become so

complicated, that no man alive knows what it means. The

parties to it understand it least; but it has been observed that

no two Chancery lawyers can talk about it for five minutes,

without coming to a total disagreement as to all the premises.

Innumerable children have been born into the cause;

innumerable young people have married into it; innumerable

David A. Glenn, Gregory Grady, and Michael J. Thompson

were on the brief for petitioner Transcontinental Gas Pipe Line

Corporation.

Dennis Lane, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief

was Cynthia A. Marlette, General Counsel.

James H. Byrd, Kenneth T. Maloney, Christopher M.

Heywood, and Anne K. Kyzmir were on the brief of intervenors

The Brooklyn Union Gas Company, et al.

Before: GINSBURG, Chief Judge, and BROWN and GRIFFITH,

Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge: For the third time before this court,

Transcontinental Gas Pipe Line Corporation (Transco) challenges the decision by the Federal Energy Regulatory Commission (FERC) to deny Transco’s proposal for implementing a

“firm to the wellhead” (FTW) rate structure on its natural gas

pipeline.1 When we remanded this case for a second time, we

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old people have died out of it.

Charles Dickens, Bleak House 6 (Modern Library 2002) (1853).

instructed FERC to reconcile two arguably inconsistent orders

issued in response to Transco’s rate structure proposals. While

FERC’s new variations on its theme have not rendered this

already convoluted proceeding any less opaque (perhaps an

understandable result of multiple remands), a consistent

principle can still be discerned: prices may be increased, terms

may be altered, but contracts may not be unilaterally amended

to effectively add new service. Accordingly, we hold FERC did

not act arbitrarily and capriciously in its previous orders. We

therefore deny the petitions for review.

I

Transco operates a natural gas pipeline that stretches

northeastward from production areas in the Gulf of Mexico,

terminating in the New York City area. The pipeline is divided

into six zones, three in the “upstream” production area near the

Gulf coast and three in the “downstream” market area. In the

production area zones, the pipeline system consists of both

“supply lateral” lines and a mainline; the supply laterals

transport gas from the gathering areas to the mainline, where the

gas is collected at pooling points. Until the 1980s, Transco and

other pipeline companies acted primarily as gas merchants,

transporting their own gas and selling it to distributors. Beginning in 1985, pipelines were required to start offering customers

the ability to transform their entitlements to sales of gas into

transportation-only service; this allowed the customers to

purchase gas from the pipelines’ competitors while still being

able to transport it. Order No. 636, issued by FERC in 1992,

completed this process by requiring pipelines to unbundle

transportation service from sales of gas; customers would have

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equal access to “firm transportation” (FT) service (that is,

guaranteed capacity) regardless of whether they purchased gas

from the pipeline or another company, a change intended to

foster competition in the industry. Pipeline Service Obligations

and Revisions to Regulations Governing Self-Implementing

Transportation; and Regulation of Natural Gas Pipelines After

Partial Wellhead Decontrol, 57 Fed. Reg. 13,267, 13,270 (Apr.

16, 1992) (“Order No. 636”), on reh’g, 57 Fed. Reg. 36,128

(Aug. 12, 1992) (“Order No. 636-A”), on reh’g, 61 F.E.R.C.

¶ 61,272 (1992), reh’g denied, 62 F.E.R.C. ¶ 61,007 (1993),

aff’d in part, United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C.

Cir. 1996).

Order No. 636 also required companies to use a “straight

fixed variable” pricing system for FT service. Id. at 13,293.

Under such a system, pipeline companies would charge a twopart rate: an initial reservation charge (to guarantee that capacity

would be available), plus a usage charge based on the volume of

gas actually transported. See 18 C.F.R. § 284.7. In an effort to

increase competition and improve transparency in pricing,

FERC required pipelines to recover the “fixed costs” of FT

service through the reservation charge rather than through the

volumetric charge. Order No. 636 at 13,293.

Finally, Order No. 636 implemented a flexible receipt and

delivery point policy under which any customer who paid a

reservation charge for shipping gas within a zone had to be

granted “secondary” rights to deliver or receive gas at points in

that zone other than the “primary” points specified in the

customer’s contract. Id. at 13,290. When a customer used these

secondary rights, shipping capacity would not be guaranteed; the

rights would carry a lower scheduling priority than FT service

purchased by customers with primary rights at the same points.

Order No. 636-A at 36,148. At the same time, the secondary

rights would have higher scheduling priority than a third

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2Transco had sold FT service in the production areas to a few

customers prior to offering open access to its transportation services.

While these older service agreements were “grandfathered” through

the settlements—i.e., those customers would have priority over IT

shippers—they are essentially irrelevant to the current issues.

category of service, “interruptible transportation” (IT) service,

which does not entitle a customer to any guaranteed capacity.

Order No. 636 at 13,290. As higher priority service can take

precedence over IT service, no reservation charge applies to IT

service; hence, a one-part rate based on the volume of gas

actually transported by the customer is charged for IT service.

18 C.F.R. § 284.9.

Most pipeline companies responded to Order No. 636 by

offering “firm to the wellhead” (FTW) service, charging their

customers two-part rates for transporting gas on both the supply

laterals and the mainline. Transco, however, had already

unbundled its service a year earlier, in 1991, through settlement

agreements with its customers. Transcon. Gas Pipe Line Corp.,

55 F.E.R.C. ¶ 61,446 (1991), on reh’g, 57 F.E.R.C. ¶ 61,345

(1991), on reh’g, 59 F.E.R.C. ¶ 61,279 (1992), aff’d in part,

Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C. Cir. 1993),

on remand, 72 F.E.R.C. ¶ 61,037 (1995), reh’g denied, 73

F.E.R.C. ¶ 61,357 (1995). Pursuant to these settlements, Transco

charges two-part FT rates for transporting gas on the mainline;

customers who switched to this service were termed “FTconversion shippers.” On the supply laterals, though, Transco

adopted an IT rate structure, charging a one-part rate based on

the volume actually transported (with no separate reservation

charge). Transco does not sell any FT service on the supply

laterals.2

 When IT shippers deliver gas to FT-conversion

shippers at receipt points on the mainline, their service on the

laterals is given a higher priority (“IT-Feeder” priority) than

regular IT service.

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3The IT rates are calculated according to a “100 percent load

factor” rate. Under such a calculation, the maximum rate for

transporting one unit of gas via IT service is equivalent to the per-unit

cost incurred by an FT shipper that uses its entire contract entitlement

(and thus pays not only a reservation charge but also an FT per-unit

charge for the entire capacity that it reserved).

4During oral argument, Indicated Shippers contended that

they purchased the IT-Feeder service because it was, at the time, “the

only game in town”; there was no competitive disadvantage in

purchasing such service until other pipelines began selling FTW

service. The lack of a competitive disadvantage still begs the question

why the Indicated Shippers, rather than the FT-conversion shippers,

decided that it would be in their interest to contract for transportation

service on the laterals.

In calculating the reservation charge FT-conversion

shippers have to pay for service in a zone, Transco divides the

fixed costs to be recovered (i.e., those fixed costs allocated to

that zone) by the total amount of transportation service projected

for that zone, including both FT and IT service. The resulting

figure determines both the per-unit reservation charge for FT

service and the one-part, per-unit charge for IT-service.3

 Thus,

the more IT service shippers demand in a zone, the lower an FT

shipper’s reservation charge will be for that zone.

For reasons that have never been made clear, Transco’s ITFeeder service was not purchased by the FT-conversion shippers

but rather by natural gas suppliers (including the petitioners,

“Indicated Shippers”) who used the service to transport their gas

to the pooling points on the mainline.4

 Once the gas arrived at

the mainline, it would be transported by the FT shippers who

purchased the gas from the producers. Eventually, Indicated

Shippers became dissatisfied with this arrangement. They had to

pay approximately $50 million per year in transportation costs

on the supply laterals; producers who used other pipelines did

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not incur this expense, as their customers subscribed to FTW

service that included transportation on both the supply laterals

and the mainlines. Still, the Indicated Shippers believed they

could not always pass these costs on to their customers, as they

needed to make their rates appear competitive with rates charged

by producers serving other pipelines.

II

Section 4 of the Natural Gas Act (NGA) governs rates and

charges set by natural gas companies for the transportation or

sale of gas; such rates and charges must be “just and reasonable”

to be lawful. 15 U.S.C. § 717c(a). Changes to rates and charges

can only be made after giving FERC notice so that it can hold a

hearing on the legality of the change, if necessary. 15 U.S.C.

§ 717c(d)-(e). In 1995, Transco proposed under § 4 of the NGA

to adopt an FTW rate structure, but FERC rejected this plan.

Transcon. Gas Pipe Line Corp., 72 F.E.R.C. ¶ 63,003 (1995),

modified, 76 F.E.R.C. ¶ 61,021 (1996), on reh’g, 77 F.E.R.C.

¶ 61,270 (1996), on reh’g, 79 F.E.R.C. ¶ 61,205 (1997).

Transco’s proposal would have eliminated IT-Feeder priority

and given FT-conversion shippers flexible rights to use the

supply laterals, though capacity would not be guaranteed at any

specific points on the laterals. 76 F.E.R.C. at 61,054. If multiple

FT-conversion shippers wanted to use a lateral, and it did not

have enough total capacity for their needs, capacity would be

allocated pro rata. Id. Transco would not sell any higher priority

service on the laterals, and a two-part FT rate would be charged

for each zone. The full fixed costs of the supply laterals would

be allocated to the FT shippers’ reservation charges, as demand

for IT service would no longer be taken into account in calculating that charge. 72 F.E.R.C. at 65,011.

FERC rejected this proposal because the changes modified

Transco’s contracts with its shippers. 76 F.E.R.C. at 61,061. On

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appeal, we queried whether the proposed changes would be

acceptable under the framework established by the Supreme

Court. Exxon Corp. v. FERC, 206 F.3d 47, 52 (D.C. Cir. 2000).

Under the Mobile-Sierra doctrine, “FERC may modify a

contract rate provision if (but only if) the ‘public interest’ so

requires.” Id. at 49 (discussing United Gas Pipe Line Co. v.

Mobile Gas Serv. Corp., 350 U.S. 332 (1956), and Fed. Power

Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956)).

However, United Gas Pipe Line Co. v. Memphis Light, Gas &

Water Division, 358 U.S. 103, 110-15 (1958), allows pipeline

companies to change their rates if their contracts contain clauses

(now known as “Memphis clauses”) reserving the right to do so.

Exxon, 206 F.3d at 51-52. We remanded the case for FERC to

explain why the alleged changes to Transco’s contracts would

not be permitted under the contracts’ Memphis clauses.

On remand, FERC acknowledged that the Memphis clauses

anticipated changes to the rates, terms, and conditions of

contractual service but concluded the same clauses did not allow

Transco to force customers to accept additional service.

Transcon. Gas Pipe Line Corp., 95 F.E.R.C. ¶ 61,322, at 62,140,

on reh’g, 96 F.E.R.C. ¶ 61,142 (2001). If Transco’s FTW

proposal were accepted, FERC reasoned, the FT shippers would

be required to pay for service on the supply laterals, although

they had not contracted for this service. On appeal from that

remand, we again remanded the case to FERC for further

explanation. Exxon Mobil Corp. v. FERC, 315 F.3d 306 (D.C.

Cir. 2003) (Exxon Mobil I). We found FERC’s arguments to be

plausible but detected within those arguments a possible conflict

with an earlier FERC order, issued in 1999, where FERC

rejected Transco’s proposal to implement a “firm transportation

supply lateral” (FTSL) rate structure. Transcon. Gas Pipe Line

Corp., 86 F.E.R.C. ¶ 61,175, reh’g denied, 88 F.E.R.C. ¶ 61,135

(1999). In the 1999 proposal, Transco sought to replace its ITFeeder service on the supply laterals with uninterruptible FTSL

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service; Transco would charge a two-part rate (a reservation

charge and a volumetric charge) for use of the laterals rather

than the one-part rate currently in place for IT service. 86

F.E.R.C. at 61,607. The maximum rate charged for FTSL

service on the supply laterals in a zone would be the same as the

maximum rate charged for FT service on the mainline in that

zone. Id. at 61,608. However, within each zone, shippers

purchasing FTSL capacity would only have flexible access to

secondary points on the supply laterals (not the mainline), and

FT-conversion shippers would only have flexible access to

secondary points on the mainline (not the supply laterals). Id.

FERC objected to this plan because both sets of shippers would

pay the full reservation charge for service in a zone; thus, under

Order No. 636, both should receive flexible access to secondary

points throughout the zone. Id. at 61,609.

In Exxon Mobil I, we spotted a possible inconsistency: In

denying the FTSL proposal, FERC appeared to indicate that if

Transco eliminated its IT-Feeder service, then the FT-conversion shippers would be entitled to flexible access to the supply

laterals without a contract change; however, in rejecting the

1995 FTW proposal, FERC had concluded that providing

flexible access to the supply laterals would abrogate the contracts of FT-conversion shippers. Exxon Mobil I, 315 F.3d at

310-11. This apparent contradiction led to our second remand.

III

We must set aside FERC’s actions if they are arbitrary,

capricious, or otherwise not in accordance with law. 5 U.S.C.

§ 706(2)(A). We are “particularly deferential to the Commission’s expertise” in ratemaking cases, which involve “complex

industry analyses and difficult policy choices.” Ass’n of Oil Pipe

Lines v. FERC, 83 F.3d 1424, 1431 (D.C. Cir. 1996). After we

remanded this case for a second time, FERC issued another

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order in which it explained why the rejection of both plans was

consistent. Transcon. Gas Pipe Line Corp., 104 F.E.R.C.

¶ 61,171 (2003), on reh’g, 107 F.E.R.C. ¶ 61,156 (2004).

FERC frames much of its argument in terms of the distinction between “primary” and “secondary” rights, stating that

while secondary access rights could be given to a shipper

without requiring contract modification, forcing a shipper to

receive and pay for additional primary service would

impermissibly modify the shipper’s contract. 104 F.E.R.C. at

61,637. Because Transco’s FTW proposal granted primary

rights on the supply laterals to FT-conversion shippers, FERC

concluded the FTW proposal would require the shippers’

contracts to be modified. Id. at 61,637-39. On the other hand, in

denying Transco’s FTSL proposal, FERC noted that FTconversion shippers would be entitled to only secondary rights

on the supply laterals if the IT-Feeder service were eliminated.

Id. at 61,639. Transco and Indicated Shippers dispute FERC’s

use of the terms “primary” and “secondary,” claiming the FTW

proposal would only give FT-conversion shippers secondary

rights on the supply laterals.

FERC contends the rights granted under the FTW proposal

are properly characterized as “primary” because Transco would

be forced to reserve capacity on the supply laterals for the FTconversion shippers. Therefore, as no higher priority service

would be sold, the FTW plan would shift the fixed costs

allocated to the supply laterals solely onto the FT-conversion

shippers, whereas granting “secondary” rights would not do so.

Id. This rationale is at the heart of the case (i.e., the allocation of

the annual $50 million cost has motivated the past dozen years

of litigation); much of the rest of the debate over the meaning

and applicability of the terms “primary” and “secondary”

obscures the real substance of the dispute.

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5The two rates are equal assuming the FT-conversion shipper

uses all the capacity it reserved. If the FT-conversion shipper did not

use its entire reserved capacity, its average per-unit cost would be

higher, as it would have already paid a larger reservation charge than

necessary.

Under Transco’s current rate structure, the one-part rate

charged to IT shippers for each unit transported is equal to the

total two-part rate that an FT-conversion shipper pays per unit.5

One component of that two-part FT rate is the reservation

charge, which guarantees the availability of shipping capacity.

The reservation charge for a zone is calculated by dividing the

fixed costs allocated to the zone by the total amount of

service—both FT and IT—expected in the zone. Hence, the

more gas projected to be shipped through a zone via IT service,

the lower the FT-conversion shippers’ reservation charge will

be. The burden of those savings is then effectively shifted to the

IT shippers; because the one-part rate for IT service mirrors the

two-part FT rate (including the reservation charge), the charge

for IT service incorporates some of the function of recovering

fixed costs. In essence, Transco recovers part of the fixed costs

for each zone through the FT-conversion shippers’ reservation

charges, and the rest of the fixed costs through the IT shippers’

one-part charges.

Under the FTW proposal, though, IT-Feeder service on the

supply laterals is eliminated. FT-conversion shippers would be

given flexible access to the supply laterals, but their reservation

charges would also increase, as IT shippers would no longer be

bearing part of the fixed costs of the zone. The result of this

change would be the same as if Transco were to add service in

a new zone onto existing contracts—FT service would be

expanded to new parts of the pipeline system, but a greater

reservation charge would be required, in order to recover that

new area’s fixed costs. In this sense, the supply laterals are

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virtually a separate zone in the present system. Though the

laterals are designated as parts of Transco’s existing zones,

paying the reservation charge for FT service in a zone does not

currently give a shipper access to supply laterals within that

zone; nor does paying for access to a supply lateral give an IT

shipper the right to use the mainline in the same zone. Two

transactions are required to purchase capacity for shipping gas

on the supply laterals and the mainline within one zone.

Hence, requiring FT-conversion shippers to pay an increased reservation charge for access to the laterals is equivalent

to forcing them to accept service in an additional zone, for

which they would have to pay a new reservation charge.

Regardless of the labels placed on the proposed change, the

substantive effect of the FTW plan would be to require FTconversion shippers to take on a new service. Although they

benefit from the existence of the IT-Feeder priority, the FTconversion shippers never contracted for service on the supply

laterals. Because the FTW proposal would effectively add

service to these shippers’ contracts, not merely change contractual rates or terms, the scope of the change exceeds that which

is permitted under Memphis clauses. See Exxon Mobil I, 315

F.3d at 310.

This analysis is consistent with FERC’s denial of Transco’s

FTSL proposal. Order No. 636 requires that any FT shipper who

pays the reservation charge for a zone be afforded flexible

secondary access to other points in the zone. As FT-conversion

shippers as a class are not currently paying the “full” reservation

charge for each zone (i.e., the IT shippers also pay part of the

fixed costs for each zone—the part allocated to the laterals),

they are not currently entitled to flexible access to secondary

points on the supply laterals. Flexible access may be acquired,

if a shipper desires it, through purchasing separate IT service.

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In the FTSL proposal, Transco sought to sell FT service on

the supply laterals. In each zone, FTSL customers would have

been charged the same two-part rate as the FT-conversion

shippers; thus, all FT shippers within a zone (whether using the

mainline or the supply laterals) would be paying the same

reservation charge. Unlike the FTW plan, the FTSL plan would

not have forced existing FT-conversion shippers to bear the full

fixed costs of a zone on their own, as they would share this

burden with the FTSL shippers. At the same time, the fixed

costs for the whole zone would be divided up among all the FT

shippers in the zone proportionally, through equal reservation

charges. Therefore, the supply laterals would no longer have

been virtually a separate zone under this plan. Under Order No.

636, then, all the zone’s FT shippers—both FT-conversion

shippers and FTSL shippers—would be entitled to flexible

access to secondary points everywhere within the zone, on the

mainline and the supply laterals, because as a class they would

be paying the full reservation charge for the zone (by bearing all

the fixed costs).

This key difference between the FTW and the FTSL

proposals explains why FERC rejected both—although for

different reasons. In a system where FT shippers are paying for

the full fixed costs of a zone (such as the FT-conversion

shippers and the FTSL shippers together would have done under

the FTSL proposal), all of them would be entitled to flexible

access to secondary points throughout the zone. The FTSL

proposal was rejected because this flexible intra-zone access was

not included. In Transco’s current system, on the other hand, the

FT shippers are not bearing the full fixed costs of the zone;

while the FT-conversion shippers bear some of the costs, the IT

shippers bear the rest. In the FTW proposal, IT volume would

no longer be included in the calculation of reservation charges,

yet no new group of FT shippers (such as the FTSL shippers)

would be added to share the FT-conversion shippers’ burden in

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bearing the fixed costs for the zone. Thus, rather than “giving”

the FT-conversion shippers flexible secondary access to points

in the zone, Transco would be extending the FT-conversion

shippers’ FT service in essentially the same manner as if an

extra stretch of pipeline (with the attendant fixed costs) were

being added to the zone.

In this light, FERC’s orders rejecting the FTW and FTSL

proposals were consistent. Under the FTSL proposal, the fixed

costs of the supply laterals would have been borne by a new

group of shippers (rather than the IT shippers); hence, the FTconversion shippers would not be effectively forced to accept

new service, even if those shippers had been given flexible

access to the supply laterals. On the other hand, the practical

effect of the FTW proposal would have been to extend FTconversion shippers’ service to include virtually a new

zone—the supply laterals—as no other shippers would have

contributed to bearing the added fixed costs. Transco would

essentially be obliged to reserve capacity on the supply laterals

for the FT-conversion shippers as a class. As this would

effectively add service obligations to existing contracts, the

proposal exceeded Transco’s ability to change rates, terms, and

conditions under the Memphis clauses.

IV

Transco and Indicated Shippers contest FERC’s use of the

terms “primary” and “secondary,” claiming the FTW proposal

would only give the FT-conversion shippers “secondary” service

on the supply laterals. They point out that no specific access

points would be granted, while primary rights are generally

granted at specific points. Similarly, the FT-conversion shippers’ access would only have the highest priority as a class;

individual shippers’ requests for capacity would be subject to

pro rata allocation with requests from other FT-conversion

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6Even if the FT-conversion shippers were “indirectly” paying

for access to the supply laterals, however, that cost-shifting would not

shippers if demand is high. However, these arguments are only

relevant to the quality of the service on the laterals—whether the

service is as “firm” as service on the mainline—not whether

forcing the FT-conversion shippers to pay for the service would

entail contractual change. Cf. El Paso Natural Gas Co., 99

F.E.R.C. ¶ 61,244, at 62,001 (2002) (stating that daily pro rata

allocation of capacity is unacceptable for service that is supposed to be “firm”). In other words, these arguments by Transco

and Indicated Shippers merely question the categorization of the

rights as “primary”; yet, even if we were to decide that the rights

were neither purely “primary” nor purely “secondary,” but a

hybrid of the two, that decision would not be dispositive. The

label attached to the rights does not affect whether the plan

would effectively add service to the contracts.

Transco and Indicated Shippers also claim that replacing the

IT-Feeder system with the FTW plan merely continues a service

FT-conversion shippers were already paying for “directly or

indirectly.” This argument is relevant but inaccurate. In a sense,

the IT-Feeder priority does act as a substitute for the flexible

point access otherwise required by Order No. 636; FT-conversion shippers benefit from the scheduling superiority that ITFeeder priority gives relative to other IT service. Under the

current plan, FT-conversion shippers would be able to acquire

capacity in the supply laterals by purchasing IT service. If they

had all done so, then transforming that IT service into FT service

subject to pro rata allocation would essentially be continuing the

same service. However, producers—rather than the FT-conversion shippers—have actually purchased the IT service. If the

producers were able to pass that cost on to the FT-conversion

shippers, then perhaps the FT-conversion shippers would be

“indirectly” paying for access to the supply laterals already.6

 In

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necessarily be legally relevant. Whether or not the producers are able

to pass on the cost of IT service through higher gas prices, the FTconversion shippers are not obligated by their contracts with Transco

to pay for IT service. Requiring them to take such service would alter

their contracts.

reality, though, “Transco and the Indicated Shippers assert that

they are often forced to absorb the expense . . . to ensure that

their prices appear competitive with producers on other pipelines.” Exxon Mobile I, 315 F.3d at 308. While Indicated

Shippers (and therefore Transco) are understandably dissatisfied

with the arrangement, the claimed losses directly contradict the

suggestion that the FT-conversion shippers are already “indirectly” paying for service on the supply laterals.

Finally, Transco and Indicated Shippers suggest Transco

should be allowed to convert to an FTW rate structure because

FERC allows the rest of the industry to use such systems. This

argument would be persuasive if Transco were just now

unbundling its service; however, when it did unbundle its

service back in 1991, Transco entered into settlement agreements with its shippers. The obligations imposed by the settlement agreements cannot be ignored. The FTW proposal would

alter Transco’s existing contracts, regardless of whether it would

have been an acceptable system to implement in the initial

settlements.

In summary, the FTW proposal would have required

Transco to reserve capacity on the supply laterals for the FTconversion shippers, as no higher-priority service on the supply

laterals would be sold. As the FT-conversion shippers would

thus be forced to bear the entire burden of the fixed costs for

each zone, without the addition of another group of FT shippers,

Transco would essentially be amending their contracts to require

them to take service in a new area. Granting “secondary” rights

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on the laterals, with a higher-priority service being sold to

another group of shippers, would avoid this problem; FERC’s

rejection of the FTSL proposal was consistent with this reasoning. Hence, FERC did not act arbitrarily or capriciously in

rejecting Transco’s NGA § 4 filing.

V

Under § 5 of the NGA, FERC may find existing rates or

charges for the transportation or sale of natural gas to be unjust

or unreasonable; FERC may then determine what the just and

reasonable rate should be. 15 U.S.C. § 717d(a). If the proposed

change would require a modification to a contract rate provision,

FERC may order the change, pursuant to the Mobile-Sierra

doctrine, “if (but only if) the ‘public interest’ so requires.”

Exxon, 206. F.3d at 49. Indicated Shippers argue that even if the

FTW proposal is not a contract modification permitted by the

FT-conversion shippers’ Memphis clauses, FERC’s refusal to

exercise its power under § 5 to require a contract modification

was arbitrary because the IT rates are unjust and unreasonable

and because the FTW proposal is in the public interest. We did

not reach this issue in either Exxon or Exxon Mobil I, deferring

our analysis until the NGA § 4 issues were resolved. See Exxon,

206 F.3d at 48-49; Exxon Mobil I, 315 F.3d at 311.

Order No. 636 specifies that pipeline companies should

offer FT service, charging a two-part rate; all the fixed costs

allocated to that service should be recovered through the

reservation fee. Order No. 636 at 13,293; see also 18 C.F.R.

§ 284.7. This policy was intended to promote transparency in

pricing, with the goal of encouraging competition between

pipelines. Order No. 636 at 13,293. However, this requirement

was not to be “rigidly” enforced. Id.; see also 18 C.F.R.

§ 284.7(e) (stating that FERC may permit a pipeline to recover

some fixed costs through a volumetric charge). As FERC aptly

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7Similarly, a company “is not typically ‘entitled to be relieved

of its improvident bargain.’” Transmission Access Policy Study Group

v. FERC, 225 F.3d 667, 710 (D.C. Cir. 2000) (quoting Sierra, 350

U.S. at 355). “Despite recent cynicism, sanctity of contract remains an

important civilizing concept”; moreover, “‘the general rule of freedom

stated during oral arguments, the policies in Order No. 636 are

not sacrosanct.

Transco initially proposed the FTW plan as a method of

complying with the requirements of Order No. 636, because

implementing FT service and two-part rates on the supply

laterals would increase transparency in pricing; nonetheless,

FERC rejected the proposal. Transcon. Gas Pipe Line Corp., 63

F.E.R.C. ¶ 61,194, on reh’g, 65 F.E.R.C. ¶ 61,023 (1993). As

discussed above, the FTW plan attempts to shift costs from one

group of shippers to another. Significantly, this contract change

would require more than a mere change in rate design, see, e.g.,

Texaco Inc. v. FERC, 148 F.3d 1091 (D.C. Cir. 1998) (upholding FERC’s abrogation of private contracts and upholding

conversion from modified fixed variable to straight fixed

variable pricing), but instead would impose new firm service

upon the FT-conversion shippers. Under § 5, FERC may reject

unjust and unreasonable rates and prescribe a new rate that is

just and reasonable. It may not, however, require distributors to

accept or to pay for additional service. See Alabama-Tennessee

Natural Gas Co. v. Fed. Power Comm’n, 417 F.2d 511, 514-15

(5th Cir. 1969) (“[T]he Commission has no authority to require

a local distributor to contract for, purchase, or accept delivery of

natural gas.”).

Under Mobile-Sierra, “a heavy burden must be met before

a customer . . . can be deprived against his will of the benefits of

his bargain.” Town of Norwood v. FERC, 587 F.2d 1306, 1310

(D.C. Cir. 1978).7

 Indicated Shippers have not shown that the

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of contract includes the freedom to make a bad bargain.’” Morta v.

Korea Ins. Corp., 840 F.2d 1452, 1460 (9th Cir. 1988) (citations

omitted). While Indicated Shippers may regret purchasing Transco’s

IT service, “‘[w]ise or not, a deal is a deal,’” and therefore “people

must abide by the consequences of their choices.” Id. (alteration in the

original) (citations omitted).

public interest in price transparency outweighs the harm of the

cost reallocation that the FTW plan would entail, although they

do argue that the FT-conversion shippers should be forced to

pay for the benefit they receive from the IT-Feeder priority. The

circumstances under which § 5 of the NGA allows FERC to

order rate changes that are “in the public interest” include

circumstances such “as where it might impair the financial

ability of the public utility to continue its service, cast upon

other consumers an excessive burden, or be unduly discriminatory.” Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S.

348, 355 (1956). Indicated Shippers have not demonstrated that

one of these situations, or anything comparable, is present to

justify contract abrogation. Moreover, FERC has clearly

acknowledged that Transco could implement FT service on the

supply laterals without requiring the FT-conversion shippers to

accept service for which they have not contracted. For example,

Transco could officially establish the supply laterals as a

separate zone and allow shippers to purchase FT or IT service in

that new zone. See 104 F.E.R.C. at 61,640. Hence, even if the

public interest in the policies behind Order No. 636 did rise to

the level that would justify contract alterations, this situation

does not require that one policy be sacrificed to satisfy the other.

FERC did not abuse its discretion in deciding not to implement

the FTW plan under § 5 of the NGA.

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VI

For the foregoing reasons, the petitions for review are

denied.

So ordered.

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