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Parties Involved:
Federal Energy Regulatory Commission
Respondent
Pacific Gas and Electric Company
Intervenor
Public Utilities Commission of the State of California
Intervenor
Transwestern Pipeline Company
Intervenor
Western Resources, Inc.
Petitioner
Williams Natural Gas Company
Intervenor

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 30, 1995 Decided December 22, 1995

No. 93-1642

WESTERN RESOURCES, INC.,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

PACIFIC GAS AND ELECTRIC COMPANY, ET AL.,

INTERVENORS

Consolidated with 

94-1316

-

On Petition for Review of an Order of the Federal Energy Regulatory Commission

-

Martin J. Bregman argued the cause and filed the briefs for petitioner.

Susan J. Court, Special Counsel, Federal Energy Regulatory Commission, with whom Jerome M.

Feit, Solicitor, was on the brief, argued the cause for respondent. Joel M. Cockrell, Attorney,

entered an appearance.

Steve Stojic, with whom Frank X. Kelly, Joseph R. Hartsoe, and Dianne H. Russo, for intervenor

Transwestern Pipeline Company, Edward W. O'Neill and Arocles Aguilar, for intervenor Public

Utilities Commission of the State of California, and Randall R. Morrow, for intervenor Southern

California Gas Company, were on the brief, argued the cause for intervenors Transwestern Pipeline

Company, et al. Sherrie N. Rutherford, Maria K. Pavlou and Martin J. Marz entered appearances

for intervenor Transwestern Pipeline Company. David L. Huard entered an appearance for

intervenor Southern California Gas Company.

Gregory Grade and John H. Cary entered appearances for intervenor Williams Natural Gas

Company.

David W. Anderson and Patrick G. Golden entered appearances for intervenor Pacific Gas and

Electric Company.

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Before: WALD, SILBERMAN and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

WILLIAMS, Circuit Judge: In 1985 the Federal Energy Regulatory Commission embarked on

a policy of "unbundling" the sale and transportation of natural gas. See Order No. 436, Regulation

of Natural Gas Pipelines After Partial Wellhead Decontrol, 50 Fed. Reg. 42,408 (1985). Its goal

was to give gas consumers direct access to the competitive gas prices available at the wellhead.

Because of the market power of interstate pipelines controlling transportation of the gas, and the

inadequacy of their incentives to get the best wellhead prices, their customers had not

previouslyeven though the Commission held the pipelines to prices based on costenjoyed the

benefit of competitive prices. Indeed, as of 1985 the pipelines were subject to billions of dollars of

"take-or-pay" obligationsduties under their gas purchase contracts either to take (and pay for)

specified quantities of gas or to pay for them without taking them, at prices on average well above

then-current market levels. See, e.g., Associated Gas Distributors v. FERC, 824 F.2d 981, 995 (D.C.

Cir. 1987) ("AGD I").

While the unbundling policy gave customers direct access to the wellhead market for the

future, a side effect was largely to disable the pipelines from recovering their existing

supra-competitive contract costs. Customers could avoid these costs by buying directly in the gas

market and using the pipelines only for transportation. Id. at 1025-26. In AGD I, we concluded that

Order No. 436 had "abruptly and retroactively subjected [the pipelines to] risk." Id. at 1027. We

therefore remanded the order to the Commission to consider possible actions to mitigate the burden

of take-or- pay liabilities on the pipelines.

The Commission responded to our remand in AGD I with Order No. 500, Regulation of

Natural Gas Pipelines After Partial Wellhead Decontrol, 52 Fed. Reg. 30,334 (1987), which

provided for recoveryoftake-or-paycoststhroughwhat the Commission called an "equitable sharing

mechanism." Under such a mechanism, a pipeline could, in exchange for agreeing to absorb a specific

amount of itstake-or-pay costs, recover an equal amount by means of a "direct bill" to its customers,

i.e., a flat one-time charge as opposed to an increase in its commodity or demand charge. In Order

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No. 500 the Commission said that this surcharge would be allocated among a pipeline's customers

on the basis of "purchased gas deficiencies" during past periods, i.e., the difference between their

purchases in a "deficiency period" and their purchases in a prior "base period." See Associated Gas

Distributors v. FERC, 893 F.2d 349, 353 (D.C. Cir. 1989) ("AGD II").

Seeking to follow the Commission's guidance in Order No. 500, Transwestern filed a tariff

October 17, 1988, which culminated in a December 16, 1988 Commission order allowing

Transwestern to impose a direct billbased on purchased gas deficiencies. Transwestern PipelineCo.,

45 FERC ¶ 61,427 (1988) (the "1988 Order"). In AGD II, however, we held that use of the

purchased gas deficiency method violated 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." 893 F.2d at 354-57; Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577 (1981). The

Commission then issued Order No. 528, Mechanisms for Passthrough of Pipeline Take-or-Pay

Buyout and Buydown Costs, 53 FERC ¶ 61,163 (1990), authorizing pipelines to allocate the

take-or-pay burden in accordance with buyers' "current contract demand." Id. at 61,597.

Transwestern accordingly refiled its tariff, seeking in effect to have the now-invalid 1988 Order

replaced with one permitting a direct bill based on its customers' 1988 contract demand. The

Commission approved the filing. Transwestern Pipeline Co., 54 FERC ¶ 61,356 (1991) (the "1991

Order"),reh'g granted in part and denied in part, 64 FERC ¶ 61,145 (1993),reh'g denied, 66 FERC

¶ 61,287 (1994).

Petitioner Western Resources, Inc. is a customer of Williams Natural Gas Company, which

in turn was a customer of Transwestern at the time of the 1988 Order, and remained a customer until

February 1, 1989. Because of Commission rulings not here in dispute, Western will be subject to a

direct bill from Williams for its share of the take-or-pay costs allocated to Williams under the 1991

Order. Western objects to the 1991 Order on the grounds of the filed rate doctrine. As a central

purpose of the doctrine is to enable purchasers to "know in advance the consequences of the

purchasing decisionsthey make," Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 577 (D.C. Cir.

1990) ("Transwestern I"); see also Towns of Concord, Norwood, & Wellesley v. FERC, 955 F.2d

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67, 75 (D.C. Cir. 1992) (same), it requiresthat customersreceive adequate notice of a rate in advance

of the service to which it relates, see, e.g., Columbia Gas Transmission Corp. v. FERC, 831 F.2d

1135, 1140 (D.C. Cir. 1987), order on reh'g, 844 F.2d 879 (1988).

Western argues first that the 1991 Order cannot be given effect because the 1988 Order it

replaces failed to give timely notice. The 1988 Order, Western says, was conditional on

Transwestern's withdrawal of its judicial appeal of an earlier Commission ruling, and in fact

Transwestern withdrew the appeal only on March 2, 1989after Williams had ceased to be a

customer ofTranswestern. Thus, according to Western, Williams (and Western itself) did not receive

adequate notice of the direct bill in the 1988 Order until after Williams had stopped buying gas from

Transwestern altogether. Second, Western argues, as the direct bill in the 1991 Order uses 1988

contract demand, not the purchased gas deficiency method, the bill approved in 1991 so differs from

that approved in 1988 that, again, there was no notice of the direct bill until after Williams had left

the Transwestern system. Finally, as Williams at best had notice only on December 16, 1988 of any

direct billfor take-or-pay liabilities, it (and Western) should be liable only for liabilities accruing after

that date and before its departure from the system. We reject these contentions and affirm the

Commission's decision.

* * *

Fulfillment of Condition in 1988 Order.

The 1988 Order approved Transwestern's filing subject to the condition that Transwestern

"inform the Commission within five business days ... of its election to pursue this filing or to pursue

its pending judicial appeal...." 45 FERC ¶ 61,427 at 62,348 (emphasis added). Transwestern

responded to the Commission's order with a December 23, 1988 letter notifying the Commission of

its election not to pursue the judicial appeal. The appeal was formally withdrawn March 2, 1989, see

64 FERC ¶ 61,145 at 62,161, after Williams had left the Transwestern system. Western argues that

thissequence isfatal: it did not have unconditional notice of the recovery of take-or-pay costs under

the 1988 filing until it was no longer a Transwestern customer.

We need not here addressthe issues of the degree to which conditional notice may satisfy the

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filed rate doctrine. Cf. Transwestern I, 897 F.2d at 577-79 (noting principles under which a formula

rate satisfies the filed rate doctrine even though the absolute numbers may be unknown at the time

the customer buys). Western's argument does not get past the starting gate. The condition imposed

by the 1988 Order was to "inform" the Commission within five business days of its choice between

pursuing the take-or-pay recovery method approved in that order and pursuing its earlier judicial

appeal; and that is exactly what Transwestern's December 23, 1988 letter did. Indeed, because

Western (under its former name, Kansas Power and Light Company) had intervened in the

Commission proceeding involving Transwestern's 1988 filing, see 45 FERC ¶ 61,427 at 62,344, it

was served with a copy of the letter. See Addendum D to Brief for Respondent at 2 (certificate of

service indicating service on each person designated on the official service list for the proceeding).

Accordingly, Western's argument here turns entirely on its mischaracterizing the condition as

requiring that Transwestern actually "withdraw" the appeal. As the only requirement was that

Transwestern inform the Commission of its election, and it did so both within the time specified and

well before Williams left the Transwestern system, the objection need detain us no longer.

Substitution of Contract Demand for Purchased Gas Deficiency.

As we have said, our decision in AGD II invalidated the purchased gas deficiency method

embodied in the 1988 Order. Order No. 528 approved instead the use of "current" contract demand,

and accordingly Transwestern sought, and the Commission in its 1991 Order approved, a direct bill

using customers' 1988 contract demand. See 54 FERC ¶ 61,356 at 62,171. Western argues that the

filed rate doctrine precludes Transwestern from allocating costs based on 1988 contract demand,

since the 1988 Order did not put Western on notice ofsuch an allocation; indeed, nothing did so until

after Williams had left Transwestern's system February 1, 1989.

In a number of cases, however, we have held that where a pipeline is induced by a

Commission decision to file tariffs for recovery of costs by one method, and a judicial decision

invalidates a key element of the Commission's approach, the presence of the court challenge may

adequately notify customers, for purposes of the filed rate doctrine and the rule against retroactive

ratemaking, both of the possible invalidity of the pipeline's initial approach and of the likelihood of

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an alternative tariff to recover the costs in question. See Pub. Util. Comm'n of the State of Cal. v.

FERC, 988 F.2d 154, 161-66 (D.C. Cir. 1993) ("Transwestern III"); Natural Gas Clearinghouse

v. FERC, 965 F.2d 1066, 1073-75 (D.C. Cir. 1992) (per curiam) (affirming FERC's "remedial

authority" to impose "retroactive surcharges upon purchasers of pipeline transport service in order

to allow the pipeline to collect a rate that was erroneously disallowed by the Commission"); see also

Transwestern Pipeline Co. v. FERC, 59 F.3d 222, 228-29 (D.C. Cir. 1995) (similar). Were the

Commission not able to take remedial action to correct its errors, "pipelines would be substantially

and irreparably injured by [Commission] errors, and judicial review would be powerless to protect

them from [many] of the losses so incurred." Natural Gas Clearinghouse, 965 F.2d at 1074-75.

While our cases have often focused on claimsthat the Commission'sremedial action violated the rule

against retroactive ratemaking, see, e.g., Transwestern III, 988 F.2d at 161-66, we have recognized

that this rule and the filed rate doctrine "serve[ ] the same purposes" and "often overlap." Id. at 164

n.9. Indeed, in Transwestern III, the precedents on which we drew in analyzing the adequacy of

notice involved primarily the filed rate doctrine rather than the rule against retroactive ratemaking.

Id. at 161-66.

Western argues, however, that theCommission lacked the authority to accept Transwestern's

modified filing here because Order No. 500 did not require Transwestern to use the purchased gas

deficiency method struck down in AGD II but instead left it free to recover its take-or-pay costs

through traditional commodity charges. Western's attempted distinction fails for two reasons. First,

as Western itself acknowledges, an extra commoditycharge would have rendered Transwestern's gas

prices less competitivethe very problem that accounted for this court's remand in AGD I. Thus,

in practice, it appears undisputed that Transwestern had little choice but to rely on the allocation

method approved by the Commission in Order No. 500.

Second, Transwestern III explicitlyrejected the customers' argument thatremedialretroactive

action wasimpermissible in the absence of a FERC order that "compelled" the pipeline to pursue the

course it did. See 988 F.2d at 163. There we thought it sufficient that "the illegal order induced,

even if it did not compel" the prior pipeline filings. Id. Given the mandate of Order No. 500 and the

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market constraints on a simple commodity charge increase, the inducement standard was clearly

satisfied here. The situation is thus quite different from one in which the pipeline enjoys uncabined

discretion in rate-setting and, "having initially filed the rates and either collected an illegal return or

failed to collect a sufficient one must ... 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).

Along the same lines, Western argues that our reference in Columbia Gas to an "existing

method for recovering ... costs," see 831 F.2d at 1138, somehow implies that the existence of an

alternative recoverymethod in that case transformed the charge in question into an invalid retroactive

rate, and thereby established a principle that the existence ofsuch an alternative barsthe Commission

from protecting a pipeline that has acted in reliance on a Commission error. But the reference in

ColumbiaGas appearsintended simplyto distinguishforward-looking ratesfroma backward-looking

direct bill, see id. at 1139 (noting the "contrast"), not to suggest an alternative course of action open

to the pipelines. Indeed, the court expressly refrained from deciding whether the Commission could

have allowed advance collection of amounts based on estimates of the costsin question. Id. at 1141.

We note that whereasin Transwestern III it wasthe pipeline (among others) that had brought

the challenges leading to judicial reversal of the Commission's initial decisions, see 988 F.2d at 159,

hereWesternwas among the partiesthatsuccessfullychallenged the purchased gas deficiencymethod

in AGD II, precisely on the grounds that it violated the filed rate doctrine. Western also sought

rehearing of the Commission's 1988 approval of Transwestern's use of that method. See 66 FERC

¶ 61,287 at 61,821. We see no reason why the customer's initiation of the challenge should disable

the Commission from corrective action. Either way, the challenge puts customers on notice of the

tentative character of the initially filed rate.

Charges for Take-or-pay Liabilities Accrued Before the 1988 Order.

Western arguesthat even if the Commission could retroactively impute the contract demand

standard to the 1988 Order as a correction of its legal error, that Order "would have been the first

effective announcement that direct billing based on contract demand levels was an option for recovery

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of take-or-pay settlement costs." Brief for Petitioner at 14. Western then points to Transwestern I,

where we struck down a Commission decision permitting recovery of "Account No. 191

balances"shortfalls between pipelines' actual and projected gas costsfrom customers that had

since left the system, to the extent that the recovery encompassed balances accrued before any

announcement that customers would be liable after their departure. See 897 F.2d at 579-80.

Accordingly, Western says, only take-or-pay liabilities accruing after the 1988 Order (issued

December 16, 1988) can be included in the direct bill.

The Commission responded to this argument by observing that it had regularly treated

take-or-pay costs "as current costs as of the date of the pipeline's filing to recover them." 66 FERC

¶ 61,287 at 61,824 n.32. Treatment of the costs as current was proper, it said, as they were

essentially costs ofmaking the transition to open accesstransportation (i.e., the unbundling launched

byOrder No. 436), a transition that benefitted Williams and Western byenabling Williamsto abandon

sales service and secure cheaper gas supplies elsewhere. Id. In fact, Williams's decision to abandon

servicereflected in its notice given February 1, 1988influenced Transwestern's settlement

decisions, as Williams's decision reduced the amount of gas Transwestern could take. As the

Commission said:

Now Transwestern had to shed at least the supplies previously maintained to serve

Williams. Accordingly, the costs in the October 17 [1988] filing were very much

related to Williams' post-filing departure. An allocation to Williams based on its filing

date sales contract demand, that it subsequently abandoned, appropriately allocates

to Williams costs incurred by Transwestern that were directly related to the current

and future benefits that Williams, and its customers, received from open access

transportation on and after the date of the October 17, 1988 filing.

Id. at 61,824.

Western contests none of these points. In Transwestern III we observed that the take-or-pay

costs in question "have accumulated less through mismanagement or miscalculation by the pipelines

than through an otherwise beneficial transition to competitive gas markets." 988 F.2d at 166. The

Commission'streatment of the take-or-pay costs at issue here as "current" as ofthe date offiling, and

as relating to Williams's own sharing in the benefits of the transition, distinguishes the case from

Transwestern I. Here the Commission's action is, as was true in Transwestern III, "an acceptable

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cost-spreading decision requiring those who benefit from the transition to a competitive natural gas

market to absorb some of the costs." Id. at 169.

* * *

Accordingly, the petition for review is

Denied.

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