Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-94-01705/USCOURTS-caDC-94-01705-0/pdf.json

Parties Involved:
ANR Pipeline Company
Petitioner
Federal Energy Regulatory Commission
Respondent
Michigan Consolidated Gas Company
Intervenor

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 13, 1995 Decided December 12, 1995

No. 94-1705

ANR PIPELINE COMPANY,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

MICHIGAN CONSOLIDATED GAS COMPANY,

INTERVENOR

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Daniel F. Collins argued the cause for petitioner, with whom G. Mark Cook and Christine R.

Pembroke were on the briefs.

Katherine Waldbauer, Attorney, Federal Energy Regulatory Commission, argued the cause for

respondent, with whom Jerome M. Feit, Solicitor, and Joseph S. Davies, Deputy Solicitor were on

the briefs.

DennisR. O'Connell, Lois M. Henry and Steven H. Neinast were on the brieffor intervenor Michigan

Consolidated Gas Company.

Before: HENDERSON, RANDOLPH and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge: Petitioner ANR Pipeline Company ("ANR") appeals from a decision

of the Federal Energy Regulatory Commission ("FERC") allowing Michigan Consolidated Gas

Company("MichCon")to use blended ratesfor interstate service. MichCon, an intrastate gas pipeline

company, providesinterstate service under FERC jurisdiction pursuant to the NaturalGas PolicyAct

of 1978 ("NGPA"), 15 U.S.C. §§ 3301-3432 (1994). ANR, which competes against MichCon to

provide the same interstate service, is an interstate gas pipeline companysubject to FERC jurisdiction

under the NaturalGas Act ("NGA"), 15 U.S.C. §§ 717-717w (1994). As an interstate pipeline, ANR

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1Pipeline Service Obligations And Revisions To Regulations Governing Self-Implementing

Transportation Under Part 284 Of the Commission's Regulations, and Regulation of National

Gas Pipelines After Partial Wellhead Decontrol, [Current] F.E.R.C. Stats. & Regs. (CCH) ¶

30,939, at 30,389 (1992) ("Order No. 636"), reh'g granted in part and denied in part and

clarified, [Current] F.E.R.C. Stats. & Regs. (CCH) ¶ 30,950, at 30,521 (1992) ("Order No. 636-

A"), reh'g denied and clarified, 61 F.E.R.C. ¶ 61,272, at 30,521 (1992) ("Order No. 636-B"),

reh'g denied, 62 F.E.R.C. ¶ 61,007, at 61,014 (1993) ("Order No. 636-C"), appeal pending sub

nom. United Distribution Cos. v. FERC, No. 92-1485 (D.C. Cir.). 

2Section 1(c) of the NGA, 15 U.S.C. § 717(c), known as the Hinshaw Amendment, exempted

from FERC regulation intrastate pipelines that receive natural gas at their state boundary that is

consumed within the state and subject to state commission regulation. See Interstate Natural Gas

Co. v. FPC, 331 U.S. 682, 690-91 (1947). These pipelines are known as Hinshaw pipelines. The

Hinshaw Amendment overruled FPC v. East Ohio Gas Co., 338 U.S. 464 (1950). See Public

Util. Comm'n v. FERC, 900 F.2d 269, 275 n.4 (D.C. Cir. 1990). 

is required, pursuant to Order No. 636,1to use a straight fixed-variable ("SFV") rate-setting scheme

that does not allow rate blending. ANR contends that, in view of FERC's determination in Order No.

636 that blended ratesin interstate transportation services are anticompetitive, FERC'srefusalto limit

MichCon's use of blended rates is arbitrary and capricious. Because FERC is required to ensure,

through reasoned consideration, that MichCon'sratesfor itsinterstate transportation services are fair

and equitable, we grant the petition.

I.

Under the NGA, interstate pipelines such as ANR are subject to FERC regulation while

intrastate pipelines operating intrastate generally are not.2 However, in 1978, Congress enacted the

NGPA, in part to eliminate the regulatory barriers between the intrastate and interstate markets and

to promote the entryofintrastate pipelinesinto the interstatemarket. Louisiana Intrastate GasCorp.

v. FERC, 962 F.2d 37, 39 (D.C. Cir. 1992); Associated Gas Distributors v. FERC, 824 F.2d 981,

1001 (D.C. Cir. 1987) (AGD I), cert. denied, 485 U.S. 1006 (1988). Thus, the NGPA enabled FERC

to " "facilitate[ ] development of a national natural gas transportation network without subjecting

intrastate pipelines, already regulated by State agencies, to [FERC] regulation over the entirety of

their operations.' " Associated Gas Distributors v. FERC, 899 F.2d 1250, 1255 (D.C. Cir. 1990)

(AGD II) (quoting H.R. REP. NO. 543, 95th Cong., 1st Sess. 45 (1977), reprinted in 1978

U.S.C.C.A.N. 7659, 7712) (alterations in AGD II).

Section 311 of the NGPA authorizes FERC to allow intrastate pipelines to transport gas "on

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3Certain Transportation, Sales and Assignments by Pipeline Companies not Subject to

Commission Jurisdiction Under Section 1(c) of the Natural Gas Act, [Reg. Preambles 1977-81]

F.E.R.C. Stats. & Regs. (CCH) ¶ 30,118, at 30,824, 30,825 (1980) ("Order No. 63"). 

4

Interim Regulations Implementing the Natural Gas Policy Act of 1978, [Reg. Preambles

1977-81] F.E.R.C. Stats. & Regs. (CCH) ¶ 30,026, at 30,125 (1978); Sales and Transportation

of Natural Gas, [Reg. Preambles 1977-81] F.E.R.C. Stats. & Regs. (CCH) ¶ 30,081, at 30,534

(1979) ("Order No. 46"). 

behalf of " interstate pipelines or local distribution companies served by interstate pipelines so long

as their rates are "fair and equitable" and do not "exceed an amount which is reasonably comparable

to the rates and charges which interstate pipelines would be permitted to charge for providing similar

transportation service." 15 U.S.C. § 3371(a)(2)(A), (B)(i). Thereafter, in Order No. 63,3 FERC

authorized Hinshaw pipelines to apply for certificates of authorization to transport natural gas in

interstate commerce to the same extent and in the same manner as intrastate pipelines were allowed

to do under § 311 of the NGPA. 18 C.F.R. § 284.224(b)(3) (1995); see also Texas Utils. Fuel Co.,

68 F.E.R.C. ¶ 61,027, at 61,095, 61,097 (1994).

Under FERC's Order No. 46,4adopted in 1978 and 1979 to apply the fair and equitable

standard to § 311 service, an intrastate pipeline that has received a blanket certificate to operate "on

behalf of " interstate pipelines hasthree rate-scheme options: it can elect to use rates for comparable

service approved by itsstate utility commission, design itsrates based on the methodology approved

by its state utility commission for its intrastate rates, or allow FERC to set the rates. 18 C.F.R. §

284.123(b) (1995). Rates elected under any one of these options are "presumed" to be "fair and

equitable" under § 311 of the NGPA. Id. § 284.123(d)(1). As part of Order No. 63, FERC also

promulgated "look-alike" rules for Hinshaw pipelines, including the rate-election provisions. Id. §

284.224. The regulations for Hinshaw pipelines differ from the regulations for intrastate pipelines

in that FERC must further approve any "methodology" rate. Id. § 284.224(e)(2).

In 1980, MichCon, a local distribution company that qualifies as a Hinshaw pipeline, applied

for and received a blanket certificate authorizing it to engage in the interstate transportation of gas

subject to FERC's jurisdiction under § 311 of the NGPA. Michigan Consol. Gas Co., 12 F.E.R.C.

¶ 61,044, at 61,069-70 (1980); see 18 C.F.R. § 284.224(b). Initially, because MichCon had no rates

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5Rates charged by gas companies for the transportation of natural gas have two components: 

the reservation, or demand, component and the usage, or commodity, component. The

reservation component is the amount paid by a customer to allocate a certain quantity of natural

gas that it might need each month. The usage component is the amount paid by that customer for

each unit of natural gas actually shipped for the relevant period. See Columbia Gas Transmission

Corp. v. FERC, 628 F.2d 578, 582 n.12 (D.C. Cir. 1979). 

on file with its state regulatory agency for comparable intrastate service, it used a rate methodology

for other intrastate service authorized by the Michigan Public Service Commission and approved by

FERC. Michigan Consol. Gas Co., 12 F.E.R.C. ¶ 61,044, at 61,069-70; see 18 C.F.R. §§

284.123(b)(1)(i), 284.224(e)(2). MichCon gave notice to FERC in 1994 that it now had a rate on

file with the Michigan Public Service Commission for comparable service, and that it was changing

its rate election from the "methodology" rate to the new rate on file with the state commission. See

18 C.F.R. §§ 284.123(b)(1)(ii), 284.224(e)(2). FERC issued a public notice of the proposed rate

election, invited comments by intervenors or protestors,see Notice, 59 Fed. Reg. 15,406 (1994), and

subsequently granted ANR's motion to intervene.

In commenting on MichCon's election of state rates, ANR argued that FERC should not

approve MichCon's petition because the rates on file with the state commission were blended rates

otherwise prohibited to interstate competitors of MichCon, such as ANR. Specifically, ANR sought

to have FERC condition its approval of MichCon's application of its blended rate authority in a

manner consistent with FERC's SFV rate design. Under current FERC regulations adopted in Order

No. 636, interstate gas companies must recover all fixed costs related to a customer's gas

transportation service through monthly demand, or reservation, fees.518 C.F.R. § 284.8(d) (1995).

In the past, under the modified fixed-variable ("MFV") rate design, all variable costs, as well assome

portions of a company'sfixed costs, were recoverable through usage, or commodity, fees. Order No.

636, at 30,431-35. Thus, a company could "blend" rates by shifting more or less of its fixed costs

to the usage component of its rate, thereby having "differing levels of fixed costs in pipeline usage

charges." Id. at 30,433. ANR asserts that rate blending gives a company the ability to "discount"

its reservation fee, while still recovering fixed costs through the usage component of the rate. By

contrast, under the new SFV rate design imposed on interstate pipelinesin Order No. 636 to replace

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6FERC did deny MichCon's request to use state-approved market-based rates for contract

storage rates because FERC's regulations required the use of cost-of-service rates, 18 C.F.R. §

284.1(b) (1995), and MichCon failed to show that the market for the use of storage facilities

would impose limitations on the exercise of market power in a similar manner as cost-of-service

rates. 68 F.E.R.C. ¶ 61,090, at 61,541-42. 

the MFV design, an interstate company can no longer "blend" rates. Under SFV, an interstate

pipeline cannot shift any of itsfixed transportation coststo the usage component of itsrate, but must

assign allsuch coststhat it wishesto recover to the reservation fee. 18 C.F.R. § 284.8(d); Order No.

636, at 30,434. According to FERC, the prohibition on rate blending promotes Congress' goal, in

the Natural Gas Wellhead Decontrol Act of 1989, Pub. L. No. 101-60, 103 Stat. 157 (1989), of a

national gas market. Order No. 636 at 30,434. ANR sought to have FERC impose the same

condition on MichCon, so that, like ANR, MichCon could no longer recover any fixed coststhrough

usage charges.

During restructuring under Order No. 636, ANR had sought permission to continue to blend

rates. However, FERC strictly enforced the SFV requirement on the ground that rate blending would

hinder competition among gas sellers. ANR Pipeline Co., 64 F.E.R.C. ¶ 61,140, at 61,996, 62,014-

16 (1993). Consequently, in the MichCon proceeding, ANR maintained that, because blended rates

would permit MichCon to have the anticompetitive flexibility in discounting the reservation portion

of itsrate that interstate pipelines did not have, ANR was at a competitive disadvantage, contrary to

FERC's statutory obligation to ensure that MichCon's rates for jurisdictional service are fair and

equitable.

FERC approved MichCon's election ofthe blended rates without condition and denied ANR's

request for reconsideration.6 Michigan Consol. Gas Co., 68 F.E.R.C. ¶ 61,090, at 61,539 (1994),

reh'g granted in part and denied in part, 68 F.E.R.C. ¶ 61,311, at 62,291 (1994). Initially, FERC

simply took the position that MichCon had the right under the regulations to elect the state rates;

thus, were FERC to modify that rate it would be taking away that right and "imposing a

Commission-established rate." Id. at 61,542. On rehearing, FERC explained that, although it had

determined in Order No. 636 that SFV was the preferred rate design and had placed a heavy burden

on companies proposing an alternative rate design, it had not required intrastate or local distribution

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companies transporting gas under § 311 of the NGPA to use an SFV rate design and declined to do

so now. 68 F.E.R.C. ¶ 61,311, at 62,293. Historically, FERC pointed out, it had never specified any

rate design for § 311 pipelines; nor had it "attempted to achieve complete uniformity between

interstate and intrastate pipelines in this regard." Id. Thus, notwithstanding the disparity between

MichCon's and ANR's rate schemes with regard to the discounting of reservation charges, FERC

concluded: "ANR fails ... to articulate why the rate design approved for MichCon's intrastate service

is unfair and inequitable when applied to MichCon'ssection 311 service. Interstate pipelines utilizing

an SFV rate design have the ability to discount rates to stay competitive." Id. FERC noted that its

"focus has been to ensure that the rates charged by an intrastate pipeline for interstate service are fair

and equitable when compared with the rates charged by the pipeline for its intrastate service." Id.

ANR appeals.

II. 

Initially, we addresstwo procedural arguments FERC makes as to why this court should not

reach the merits of ANR's petition.

First, FERC maintains that ANR's challenge to MichCon's election of state rates is an

impermissible collateral attack on Order No. 46 and the resulting regulations implementing § 311 of

the NGPA, which made clear that intrastate companies providing interstate services would not be

treated the same as interstate companies regulated under the NGA and that state-approved rates

would be presumed fair and equitable. See, e.g., JEM Broadcasting Co. v. FCC, 22 F.3d 320, 325

(D.C. Cir. 1994). However, FERC mischaracterizes ANR's petition. Just as FERC treated ANR's

claim, ANR's petition in this court does not attack the § 311 regulations but rather FERC's order

allowing MichCon to charge blended rates. It is too late for FERC to recast its view of ANR's claim.

See Placid Oil Co. v. FERC, 666 F.2d 976, 982 n.15 (5th Cir. 1982) (citing Burlington Truck Lines,

Inc. v. United States, 371 U.S. 156 (1962)); see also Western Resources, Inc. v. FERC, 9 F.3d 1568,

1576 (D.C. Cir. 1993). On remand, FERC could either amend the order or attempt to reconcile it

with the reasoning underlying the § 311 regulations. As neither resolution requires invalidating the

regulations, FERC cannot properly cast ANR's petition as a collateral attack on those regulations.

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Second, FERC maintains that ANR's appeal of its Order No. 636 restructuring proceeding

would provide a better avenue for considering ANR's challenge to MichCon's election. ANR has a

pending petition for review in this court of FERC's decision to deny ANR permission to use blended

rates or to "grandfather" its existing blended rates. Wisconsin Distributor Group v. FERC, No. 93-

1602 (D.C. Cir.). Yet regardless of how this court handles that petition, ANR's claim in the instant

case that FERC hasfailed to justify its different treatment of MichCon will be unaffected. Therefore,

FERC has shown no reason for this court to defer deciding the merits of ANR's petition.

III.

ANR contends that, by refusing to limit MichCon's authority to blend its interstate rates,

FERC acted contrary to its determination in Order No. 636 that rate blending is anticompetitive and

contrary to Congress' goal for a national gas market, without providing a reasoned explanation.

Indeed, where an agency departs from established precedent without a reasoned explanation, its

decision will be vacated as arbitrary and capricious. Pontchartrain Broadcasting Co. v. FCC, 15

F.3d 183, 185 (D.C. Cir. 1994); Graphic Communications Int'l Union, Local 554 v. Salem-Gravure,

843 F.2d 1490, 1493 (D.C. Cir. 1988), cert. denied, 489 U.S. 1101 (1989). In determining whether

an agency has provided a reasoned explanation for departing from precedent or treating similar

situations differently, the court looks only to the reasons given by the agency. SEC v. Chenery

Corp., 318 U.S. 80, 88 (1943); Western Resources, 9 F.3d at 1575-76; Placid Oil Co., 666 F.2d

at 982 n.15.

In Order No. 636, FERC explained that adopting the SFV rate design promoted the

congressional goal of a national gas market and "goes hand-in-hand with the equality principle."

Order No. 636, at 30,434. According to FERC:

This approach is as essential to the shipment of gas on even terms as is equality in the

qualityofservice with respect to gastransportation. SFV would, therefore, maximize

the benefits of wellhead decontrol by increasing the nationwide competition among

gas merchants (including pipelines). This should result in head-to-head, gas-on-gas

competition where the firmtransportation rate structure is not a potentially distorting

factor in the competition among merchants for gas purchasers at the wellhead and in

the field.

Id. FERC also concluded that the SFV rate design would maximize the volume of

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pipeline-transported gas because gas would be able to compete with alternative fuels. Id. at 30,435.

In FERC's words: "[I]t is beyond doubt that it is in the national interest to promote the use of clean

and abundant natural gas over alternate fuels such as foreign oil. SFV is the best method for doing

that." Id. (footnote omitted). Consequently, because the MFV design "is not in the public interest,

unreasonably hinders competition among gas sellers, and is unjust and unreasonable under NGA

section 5," FERCrequires anyone "advocating something other than SFV [to] carr[y] a heavy burden

of persuasion." Id. at 30,434.

Moreover, when, in the course ofrestructuring to implement Order No. 636, ANR attempted

to retain the authority to blend rates, FERC responded that "[t]he flexibility proposed byANR would

undermine the intended generic effect of using SFV rates to minimize volumetric charges to avoid

interfering with the competitive wellhead market." ANR Pipeline Co., 62 F.E.R.C. ¶ 61,079, at

61,519, 61,536 (1993) (emphasis added), reh'g granted in part and denied in part, 64 F.E.R.C. ¶

61,140, at 61,996 (1993). FERC maintained that ANR had failed to demonstrate what benefits would

"justify such a potentially significant change from what the Commission has determined to be the

proper rate design to promote a national gas transportation grid and fair competition among

merchants on a level playing field." Id. On reconsideration, FERC reiterated:

In Order No. 636, we found that any level of fixed costs in a pipeline's commodity

rates can hinder competition among gas sellers. The fact that the blended rate on

ANR would be capped such that it cannot exceed the combined demand and

commodity rates on a 100 percent load factor basis does not mean that the blended

rate would be any less anti-competitive.

ANR Pipeline Co., 64 F.E.R.C. ¶ 61,140, at 62,015. FERC concluded that "Order No. 636 clearly

requires use of the SFV methodology and finds other rate design methods which place fixed costs in

the commodity rates to be unjust and unreasonable." Id. at 62,015-16.

Nevertheless, FERC has approved MichCon's election of blended rates, Michigan Consol.

Gas Co., 68 F.E.R.C. ¶ 61,090, at 61,542, without addressing the determinations in Order No. 636

regarding the detrimental effect of blended rates onthe interstate transportationmarket, orsuggesting

how MichCon would overcome the heavy burden that an interstate pipeline company would have to

bear under Order No. 636 to use blended rates. See, e.g., Natural Gas Pipeline Co., 73 F.E.R.C. ¶

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61,050, at 61,124, 61,129-30 (1995). In its regulations adopted in Order No. 46, FERC has provided

that a state-approved rate is "presumed" to be "fair and equitable" under § 311 of the NGPA. 18

C.F.R. § 284.123(d). In its decision here, FERC appeared to treat that presumption as rebuttable,

in that it denied ANR'srequest because ANR had "fail[ed]... to articulate why" MichCon'srates were

not "fair and equitable" as applied. 68 F.E.R.C. ¶ 61,311, at 62,293. And in its brief, FERC

reiterates that ANR failed to make a sufficient showing to "overcome th[e] presumption" in §

284.123(d). Respondent's Brief at 32. The treatment of the presumption as rebuttable is an

appropriate interpretation of FERC's own regulations. See 15 U.S.C. § 3371(c); North Am. Fund

Management Corp. v. FDIC, 991 F.2d 873, 875 (D.C. Cir.), cert. denied, 114 S. Ct. 418 (1993).

Because FERC found in Order No. 636 that blended rates are anticompetitive, ANR can rebut the

presumption without presenting further economic analysis.

Our disposition of this appeal thusrests on the fundamental change in rate design required by

FERC for interstate transportation pipelinesin Order No. 636. That change, and the determinations

underlying it, may or may not require FERC to reexamine some of the assumptions under which it

has dealt with intrastate and Hinshaw pipelines operating in interstate commerce under § 311 of the

NGPA. Suffice it to say that, in addressing ANR's concerns about MichCon's use of blended rates,

FERC must provide a reasonable justification for excluding MichCon from the SFV requirements,

in view of FERC's conclusions about rate blending and about the necessity of the SFV rate method

to promoting congressional directives for a national natural gas market.

The reasons given by FERC fail to explain why MichCon's blended rates would not present

the illsthat FERC concluded in Order No. 636 would result from continued authority to blend rates.

First, FERC deferred to MichCon's right to elect the state-approved rates and relied on its historical

practice. 68 F.E.R.C. ¶ 61,090, at 61,542. However, any "right" that MichCon has under Order Nos.

46 and 63 to elect rates is subject to the statutory "fair and equitable" standard. 15 U.S.C. §

3371(a)(2)(B)(i). FERC cannot avoid its continuing responsibility for determining whether a

Hinshaw pipeline's interstate rates are fair and equitable. See AGD II, 899 F.2d at 1256. Indeed, the

regulations adopted by FERC to carry out § 311 reflect this understanding. The blanket certificate

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simply authorizes a Hinshaw pipeline to operate subject to FERC'sjurisdiction under the NGA to the

same extent (except as to the method of setting rates) as an interstate pipeline. See 18 C.F.R. §

284.224(b)(3). Because the presumption in § 284.123(d) that the elected rates are "fair and

equitable" isrebuttable, FERC's historical practice alone cannot suffice to explain why MichCon can

elect rates that FERC has more recently described as anticompetitive and contrary to congressional

goals. Indeed, if the presumption were not rebuttable and FERC declined to scrutinize rate elections

to determine whether the rates were "fair and equitable," FERC would be shirking its statutory duty

under § 311 of the NGPA.

Second, FERC maintains in its brief that the Hinshaw exemption, 15 U.S.C. § 717(c), and §

311 of the NGPA reveal a distinction between the interstate service provided by Hinshaw pipelines

and that provided by interstate pipelines that justifies their disparate treatment. FERC has strictly

construed theHinshaw exemption, consistent with the congressionalpurpose "to exemptfromfederal

jurisdiction "matters primarily of local concern' and not to disturb the interstate character of Natural

Gas Act jurisdiction." Boston Gas Co., 57 F.E.R.C. ¶ 61,054, at 61,215 (1991) (quoting S.REP.NO.

817, 83rd Cong., 1st Sess. 2 (1953), reprinted in 1954 U.S.C.C.A.N. 2101, 2103); see also

Interstate Natural Gas Co., 331 U.S. at 689-91. FERC provided no reason in its decision for why

the Hinshaw exemption is relevant to interstate service such as that at issue in MichCon's rate

election. Section 311 of the NGPA sets forth a different standard for interstate rates promulgated

by intrastate pipelinesfromthe standard for interstate pipelines"fair and equitable" rather than "just

and reasonable." 15 U.S.C. § 3371(a)(1)(B), (a)(2)(B)(i). Although we have no occasion to decide

whetherthese two standards are substantivelydifferent,see Louisiana Intrastate GasCorp., 962 F.2d

at 43; but cf. United Gas Pipe Line Co. v. FERC, 707 F.2d 1507, 1514-15 (D.C. Cir. 1983) (Wilkey,

J., dissenting), FERC did not explain in its decision why the concernsin Order No. 636 did not carry

over into the consideration under the "fair and equitable" standard. Hence, neither the Hinshaw

exemption nor § 311 of the NGPA suffices to explain different treatment of Hinshaw and intrastate

pipelines in the face of the generic change in rate setting for interstate service under Order No. 636.

Most important, FERC has not explained how its determinations in Order No. 636 are

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7Similarly, for many aspects of the quality of interstate service, FERC requires that intrastate

pipelines abide by the same rules as interstate pipelines. 18 C.F.R. §§ 284.123(b)(1), 284.8,

284.9. 

inapplicable to MichCon's use of blended ratesfor itsinterstate transportation services. In Order No.

636, FERCcompleted the restructuring ofservices provided byinterstate naturalgas pipelines. Order

No. 636 at 30,392-94. FERC acknowledged that SFV represented a "generic change in pipeline

transportation rates to eliminate potential competitive distortions in pipeline rate structures." Id. at

30,431. As part of Order No. 636, FERC adopted "regulations to ensure that all gas supplies are

moved to market on even terms."7Id. at 30,433. FERC also stated that its conclusion with respect

to the rejected MFV design "applies equally to other methods that recover fixed costs in the usage

charge." Id. Specifically, FERC stated:

This situation of differing levels of fixed costs in pipeline usage charges can

hinder competition between gas sellers at the wellhead because competition is not

based on the seller's costs and therefore on their ability to compete directly with each

other. Rather, competition for sales customers is influenced by the fixed costs in the

pipeline transportation usage charges.... The MFV cost classification method results

in the shipment of gas on uneven, rather than on even, terms and will inhibit the

development of a national market which "will yield lower prices and more abundant

supplies" by "over time forc[ing] the evolution of a set of lowest-cost producers" as

envisioned by Congress in decontrolling the price of gas at the wellhead and in the

field. Accordingly ... the Commission concludes that MFV is not in the public

interest, unreasonably hinders competition among gas sellers, and is unjust and

unreasonable under NGA section 5.

Id. at 30,433-34 (quoting H.R. REP. NO. 29, 101st Cong., 1st Sess. 7 (1989), reprinted in 1989

U.S.C.C.A.N. 51, 57) (alteration in Order No. 636). Therefore, FERC prohibited interstate

companies from recovering any fixed transportation costs through their usage fees. Id. at 30,434.

FERC's suggestion that ANR and other interstate pipelines can remain competitive by discounting

their rates misses the point. 68 F.E.R.C. ¶ 61,311, at 62,293. A pipeline that cannot blend rates is

unable to recover fixed costs foregone as a result of discounting its demand charges. Conversely, a

pipeline with the ability to blend rates can recover such fixed costs by shifting them from the demand

charge to the usage charge.

FERC inexplicably focused, not on ANR's objection relating to the lack of comparability to

interstate service governed by the SFV rate design, but rather on comparability to MichCon's

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intrastate service. FERC concluded that MichCon's elected interstate rates, although allowing rate

blending, were "fair and equitable" because the Michigan Public Service Commission had approved

those rates for MichCon's comparable service to its intrastate customers. Id.; see 18 C.F.R. §

284.123(b)(1). Yet FERC has also concluded in Order No. 636 that such rate blending contravenes

congressional goals for all gas merchants in the national market. Order No. 636, at 30,434.

Accordingly, because FERC'sreasons, individuallyand collectively, for approving MichCon's

unconditionaluse ofblended ratesfailto confront FERC's determination ofthe anticompetitive nature

of blended rates in interstate transportation service, we grant the petition, reverse the decisions in

Michigan Consolidated Gas Co., 68 F.E.R.C. ¶ 61,090 and 68 F.E.R.C. ¶ 61,311, except with

respect to the denial ofMichCon'sstorage-rate request, and remand the case for further proceedings.

USCA Case #94-1705 Document #168161 Filed: 12/12/1995 Page 12 of 12