[Federal Register Volume 63, Number 106 (Wednesday, June 3, 1998)]
[Rules and Regulations]
[Pages 30127-30131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14676]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket Nos. RM91-11-007 and RM87-34-073]


Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation Under Part 284 and 
Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol

Issued May 28, 1998.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Order on Rehearing.

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SUMMARY: This order denies requests for rehearing of Order No. 636-C 
published on March 6, 1997 (62 FR 10204). The Commission issued Order 
No. 636-C to resolve six issues remanded by the decision of the United 
States Court of Appeals for the District of Columbia Circuit in United 
Distribution Cos. v. FERC, 88 F. 3d 1105 (D.C.Cir. 1996), cert. denied, 
117 S.Ct. 1723 (1997), concerning the Commission's rule restructuring 
services in the natural gas industry.

For Further Information Contact:

Richard Howe, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First St., NE, Washington, DC 20426, (202) 208-1274
Ingrid Olson, Office of the General Counsel, Federal Energy Regulatory 
Commission, 888 First St., NE, Washington, DC 20426, (202) 208-2015

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interested persons an opportunity to inspect or copy the contents of 
this document during normal business hours in the Public Reference Room 
at 888 First Street, NE, Room 2A, Washington, DC 20426.
    The Commission Issuance Posting System (CIPS) provides access to 
the texts of formal documents issued by the Commission. CIPS can be 
accessed via Internet through FERC's Homepage (http://www.ferc.fed.us) 
using the CIPS Link or the Energy Information Online icon. The full 
text of this document will be available on CIPS in ASCII and 
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To access CIPS, set your communications software to 19200, 14400, 
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    This document is also available through the Commission's Records 
and Information Management System (RIMS), an electronic storage and 
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after November 16, 1981. Documents from November 1995 to the present 
can be viewed and printed. RIMS is available in the Public Reference 
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    Finally, the complete text on diskette in WordPerfect format may be 
purchased from the Commission's copy contractor, La Dorn Systems 
Corporation. La Dorn Systems Corporation is located in the Public 
Reference Room at 888 First Street, NE, Washington, DC 20426.

    Before Commissioners: James J. Hoecker, Chairman; Vicky A. 
Bailey, William L. Massey, Linda Breathitt, and Curt Hebert, Jr.

    On February 27, 1997, the Commission issued Order No. 636-
C,<SUP>1</SUP> to comply with the Court's decision in United 
Distribution Companies v. FERC (UDC).<SUP>2</SUP> Timely requests for 
rehearing of Order No. 636-C were filed by thirteen 
parties.<SUP>3</SUP> The requests for rehearing are denied, and 
clarification is granted, as discussed below.
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    \1\ 78 FERC para. 61,186 (1997).
    \2\ 88 F.3d 1105 (D.C. Cir. 1996), cert. denied, 117 S.Ct. 1723 
(1997).
    \3\ These parties are American Public Gas Association and 
Decatur Utilities, City of Decatur Alabama, and Huntsville 
Utilities, City of Huntsville, Alabama (APGA); Coastal Companies 
(ANR Pipeline Co., ANR Storage Co., Colorado Interstate Gas Company 
and Wyoming Interstate Ltd.); East Tennessee Group; Interstate 
Natural Gas Association of America (INGAA); Missouri Public Service 
Commission (MoPSC); National Association of Gas Consumers (NAGC); 
National Association of State Utility Consumer Advocates and the 
Pennsylvania Office of Consumer Advocate; National Fuel Gas Supply 
Corporation; Noram Gas Transmission Company and Mississippi River 
Transmission Company; Pacific Gas Transmission Company; Tennessee 
Valley Municipal Gas Association; Texas Eastern Transmission 
Corporation, Panhandle Eastern Pipeline Company, Trunkline Gas 
Company, and Algonquin Gas Transmission Company (PanEnergy 
Companies); and Williams Interstate Natural Gas Company.

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[[Page 30128]]

I. Background

    In Order No. 636,<SUP>4</SUP> the Commission directed pipelines to 
restructure their services in order to improve the competitive 
structure of the natural gas industry. Specifically, the Commission 
required pipelines to unbundle the transportation from the sale of gas, 
to use a straight fixed variable rate design in developing their 
transportation rates, and to permit firm shippers to resell their 
capacity rights. In addition, the Commission took action to promote the 
growth of market centers, and adopted policies to govern the pipeline's 
recovery of the transition costs that would arise from the 
restructuring. In UDC, the Court affirmed the major elements of the 
Commission's restructuring rule, but remanded six issues to the 
Commission for further consideration.<SUP>5</SUP> In Order No. 636-C, 
the Commission addressed the issues remanded by the Court.
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    \4\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation and Regulation of Natural 
Gas Pipelines After Partial Wellhead Decontrol [Regs. Preambles Jan. 
1991-June 1996] FERC Stats. & Regs. para. 30,939 (1992), order on 
reh'g, Order No. 636-A, [Regs. Preambles Jan. 1991-June 1992] FERC 
Stats. & Regs para. 30,950 (1992), order on reh'g, Order No. 636-B, 
61 FERC para. 61,272 (1992), reh'g denied, 62 FERC para. 61,007 
(1993).
    \5\ Specifically, the Court remanded to the Commission issues 
related to eligibility for no-notice transportation, the selection 
of a twenty-year cap in the right of first refusal process, SFV rate 
mitigation, eligibility of small customers on downstream pipelines 
for a small customer rate, the requirement that pipelines allocate 
10 percent of GSR costs to interruptible customers, and the decision 
to exempt pipelines from sharing in GSR costs.
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    The requests for rehearing of Order No. 636-C raise issues 
concerning the term matching cap for the right of first refusal, the 
eligibility date for no-notice service, the appropriate rates for small 
customers of downstream pipelines who became direct customers of the 
upstream pipeline as a result of restructuring, and GSR costs. The only 
parties who sought rehearing of Order No. 636-C's holding that 
pipelines need not absorb a share of the GSR costs have withdrawn their 
rehearing requests. Therefore, that issue is now resolved. The requests 
for rehearing on the other three issues are discussed below.

II. Right of First Refusal

A. Background

    Order No. 636 authorized pre-granted abandonment of long-term firm 
transportation contracts, subject to a right of first refusal for the 
existing shipper. Under the right of first refusal, the existing 
shipper can retain service by matching the rate and the term of service 
in a competing bid. The rate is capped by the pipeline's maximum tariff 
rate, and in Order No. 636, the Commission capped the term of service 
at twenty years. In UDC, the Court approved the concept of a right of 
first refusal with a term-matching cap as ``a rational means of 
emulating a competitive market for allocating firm transportation 
capacity,'' <SUP>6</SUP> but found that the Commission's explanation 
for selecting a twenty-year cap, as opposed to some other term, 
inadequate. The Court concluded that the Commission had failed to 
explain why the twenty-year cap ``adequately protects against 
pipelines' preexisting market power, which they enjoy by virtue of 
natural monopoly conditions;'' <SUP>7</SUP> and why the twenty-year cap 
will ``prevent bidders on capacity constrained pipelines from using 
long contract duration as a price surrogate to bid beyond the maximum 
approved rate to the detriment of captive customers.'' <SUP>8</SUP> The 
Court accordingly remanded this issue for further consideration.
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    \6\ UDC, 88 F.3d at 1140.
    \7\ Id.
    \8\ Id.
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    On remand, in Order No. 636-C, the Commission reexamined the record 
of the Order No. 636 proceedings, as well as data concerning contract 
terms that had become available since restructuring. The Commission 
found that this information suggested that since the issuance of Order 
No. 636, the industry trend appeared to be contract terms of much less 
than twenty years. The Commission noted that many of the commenters in 
the Order No. 636 rulemaking had proposed a cap of five years, and 
found that five years was approximately the median length of long term 
contracts entered into since January 1, 1995. Therefore, in Order No. 
636-C, the Commission established the contract matching term cap at 
five years, and directed pipelines to amend their tariffs accordingly, 
regardless of whether the issue was preserved in the individual 
restructuring proceedings. The Commission thought that the five-year 
cap would avoid customers' being locked into long-term arrangements 
with pipelines that they do not really want, and therefore was 
responsive to the Court's concerns, and that the five-year cap also has 
the advantage of being consistent with the industry trend of short-term 
contracts. The Commission stated that it would consider on a case-by-
case basis whether any relief is necessary in connection with contracts 
that had been renewed since Order No. 636, and that it would entertain 
requests to shorten a contract term if a customer renewed a contract 
under the right-of-first-refusal process since Order No. 636, and can 
show that it agreed to a longer term renewal contract than it otherwise 
would have because of the twenty-year cap.
    On rehearing, the pipelines object to the five-year cap. INGAA, 
National Fuel, Noram and MRT, PanEnergy, PGT, and Williams argue that 
the five year cap interferes with the market forces that Order No. 636 
sought to encourage. They assert that because of the five year cap, it 
is unlikely that any existing shipper will renew a contract for a term 
longer than five years. Therefore, they argue, allocation will be 
determined not by the market, but by regulatory controls and by the 
status of a party as an existing customer or a new customer. They 
further assert that existing customers will be shielded from 
competition and given unwarranted control over pipeline capacity 
rights. The pipelines also argue that the five year cap creates an 
imbalance in the risks assumed by pipelines and shippers, and is too 
short to meet the legitimate needs of the pipeline industry.
    In addition, the pipelines argue that the five year cap is not 
supported by substantial evidence, and that the Commission erred in 
establishing the cap based on recent data showing that the median 
length of contracts is five years. These parties argue that the use of 
a median, based on less than two years experience since January 1995, 
to determine the maximum contract length is not appropriate. They state 
that the long term average term of previously effective long term 
contracts is over 20 years, and the average term of all such contracts 
is over ten years.
    Several pipelines also argue that the order is procedurally infirm 
because the Commission did not provide an adequate opportunity for 
interested partes to comment and develop a complete record before 
adopting this rule, and because the Commission failed to evaluate the 
alternatives to a five year cap. Several of these parties also argue 
that the five year renewal term conflicts with the Commission's 
decision in Order No. 888-A, where the Commission adopted a ROFR 
provision without a maximum renewal term. The pipelines also argue that 
Order No. 636-C is not responsive to the Court's remand, and that the 
twenty-year cap withstands the inquiries posited by the Court. They 
argue that the Commission should return to the rationale that it 
originally expressed in Order No. 636, i.e., that under the ROFR, 
capacity rights should go to the party that values them most.

[[Page 30129]]

B. Discussion

    The Commission has decided not to modify the five-year cap in this 
proceeding. The record in the Order No. 636 proceeding consists of data 
and arguments presented to the Commission in 1991 and 1992, before 
restructuring had been implemented, and some limited information 
regarding contract terms that became available after restructuring. 
Based on that record, the five-year cap is responsive to the Court's 
concern that a twenty year matching cap may not adequately protect 
consumers against the exercise of the pipelines' monopoly power. As the 
Court pointed out, most of the commenters in this proceeding advocated 
a term of less than twenty years, such as five years.<SUP>9</SUP> 
Further, the record in this case also shows that the trend in the 
industry in the months after restructuring was toward shorter 
contracts, and the five year cap is consistent with this industry 
trend. As the Commission explained in Order No. 636-C, the selection of 
a particular matching cap involves weighing several factors, and, as 
the Court recognized, is necessarily somewhat arbitrary. The record in 
this proceeding supports the finding that the five year cap reasonably 
protects captive customers from having to match competing bids that 
offer longer terms than the bidder would have to bid in a competitive 
market without the pipeline's natural monopoly. Therefore, the requests 
for rehearing are denied.
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    \9\ Id. at 1141.
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    Nevertheless, the pipelines have raised legitimate concerns about 
the practical effects of the five year term matching cap on the 
restructured market as it continues to evolve. Information subsequent 
to the period covered in this record suggests that the five year cap 
results in a bias toward short-term contracts, with possible adverse 
economic consequences for both pipelines and captive customers. The 
Commission is currently analyzing these and other issues related to 
both short term and long term gas markets as part of a comprehensive 
review of its gas policies. This ongoing review will develop a record 
containing information on the pipeline industry in the post-
restructured environment, and will provide an opportunity for 
interested parties to submit information and comments on future 
regulatory policies, including whether the term matching cap in the 
right of first refusal should be lengthened or removed altogether. In 
contrast, the record in this proceeding contains no information 
concerning current conditions in the natural gas industry. Therefore, 
any change that may be made in the Commission's current policy 
concerning the right of first refusal would be better addressed in the 
context of a new gas policy initiative, where all long-term issues can 
be considered and a new record can be developed concerning current 
conditions in the natural gas industry.
    Several parties seek clarification of the mechanism for providing 
case-by-case relief to shippers who had already renewed their contracts 
pursuant to the right of first refusal prior to the issuance of Order 
No. 636-C. Coastal Companies asks the Commission to clarify that the 
Commission will not shorten the term of an already renewed contract if 
the renewal took place pursuant to a pipeline's tariff procedures that 
were established in an order that is non-appealable.<SUP>10</SUP> This 
is particularly important, Coastal argues, where, as in the case of 
CIG, the twenty year cap is part of a comprehensive settlement. If the 
Commission denies clarification and rehearing, Coastal asks the 
Commission to clarify that in addressing a shipper's request to shorten 
the term of a contract, the Commission will consider all pertinent 
factors, such as whether business decisions were made in reliance on 
that provision. Similarly, Noram argues that the Commission should not 
disturb matching caps established by individual pipelines. On the other 
hand, NAGC asserts that the Commission properly reduced the cap to five 
years, but erred in not requiring that all existing contracts under 
Order No. 636 for 20 years could be modified at the request of the 
adversely affected customers without the necessity of extensive 
proceedings before the Commission.<SUP>11</SUP>
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    \10\ Coastal states that the Commission took a similar approach 
in Order No. 528, 53 FERC para. 61,163 at 61,594 (1990).
    \11\ In addition, APGA and Cities ask the Commission to clarify 
that those pipeline customers whose long term firm transportation 
contracts expire before the end of the 180-day period for complying 
with Order No. 636-C will not be required to match bids of longer 
than five years to retain their capacity during the right-of-first 
refusal process. Alabama-Tennessee Natural Gas Co. (now Midcoast 
Interstate Transmission) filed an answer to APGA and Cities. Issues 
concerning the exercise of the right of first refusal on Alabama-
Tennessee by these parties were addressed in several complaint 
proceedings, and need not be addressed here. See, e.g., Decatur 
Utilities v. Midcoast Interstate Transmission, 81 FERC para. 61,034 
(1997).
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    The problem of shippers exercising the right of first refusal 
during the time period between the issuance of Order No. 636 and Order 
No. 636-C has not been significant. The issue has been raised in only 
three proceedings.<SUP>12</SUP> The Commission clarifies that any case 
specific relief from contract terms will be dependent on a factual 
finding that the party entered into a longer term contract than it 
otherwise would have because of the 20 year cap, consistent with the 
Commission's approach in Horsehead Resource Development Co., Inc. v. 
Transcontinental Gas Pipeline Co.,<SUP>13</SUP> and Williams Natural 
Gas Co.<SUP>14</SUP> The Commission further clarifies that in 
determining whether a contract term should be reduced under this 
standard, the Commission will consider all pertinent factors, including 
whether the term was part of a settlement package.
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    \12\ Horsehead Resource Development Co., Inc. v. 
Transcontinental Gas Pipeline Co., 81 FERC para. 61,293 (1997); 
Williams Natural Gas Co., 81 FERC para. 61,350 (1997); and Utilicorp 
United Inc., Docket No. RP98-189-000 (filed April 17, 1998).
    \13\ 81 FERC para. 61,293 (1997). In Horsehead Resources, the 
Commission found that the specific facts in that case supported a 
finding that the shipper agreed to a longer term than it otherwise 
would have because of the twenty year cap requirement, and 
therefore, granted the requested relief subject to the outcome of 
the requests for rehearing of Order No. 636-C. The Commission then 
stated that it would be preferable to wait until it had acted on the 
requests for rehearing of Order No. 636-C to reduce the term of the 
contract. That term can now be reduced.
    \14\ 81 FERC para. 61,350 (1997).
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III. Eligibility Date for No-Notice Service

    The Commission held in Order No. 636 that pipelines were required 
to provide no-notice service only to those customers that were bundled 
sales customers on May 18, 1992, the effective date of Order No. 636. 
In UDC, the Court held that the Commission had not adequately explained 
why former bundled firm sales customers who had converted to 
transportation before issuance of Order No. 636 should not also have a 
right to receive no-notice service. Accordingly, the Court remanded the 
issue to the Commission for a further explanation of which customers 
should be eligible for no-notice service. In Order No. 636-C, the 
Commission modified its no-notice policy on a prospective basis and 
held that if a pipeline offers no-notice service, it must offer that 
service on a non-discriminatory basis to all customers that request it. 
The Commission explained that at the time of Order No. 636, there was 
considerable uncertainty as to whether pipelines would be able to 
perform no-notice service on a widespread basis, but that post-
restructuring experience had not realized these concerns.
    No party seeks rehearing of the Commission's requirement that 
pipelines offering no-notice service must do so on a nondiscriminatory 
basis. Only NAGC requests rehearing, and only on the issue of 
retroactivity.

[[Page 30130]]

NAGC asserts that the Commission erred in denying refunds to customers 
who, in the past, were not eligible for no-notice service. NAGC argues 
that, although the Commission's authority under section 5 of the NGA is 
only prospective, the courts have held that refunds effective at the 
time of the original error by the Commission are permissible in a case 
like this where, NAGC asserts, the Commission's order never became 
final and has been overturned by a reviewing court.<SUP>15</SUP> NAGC 
asks the Commission to revise Order No. 636-C insofar as it limits the 
effectiveness of this ruling to prospective periods, and order refunds 
to put petitioners in the same position they would have occupied had 
the alleged error not been made.
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    \15\ NAGC cites U.S. Improvement Co. v. Callery Properties, 382 
U.S. 223, 229 (1985); Consumer Counsel, State of Ohio v. FERC, 826 
F.2d 1136, 1138-39 (D.C.Cir. 1988); Mid-Louisiana Gas Co. v. FERC, 
780 F.2d 1238, 1247 (5th Cir. 1986); and Tennessee Valley Municipal 
Gas Ass'n. v. FPC, 470 F.2d 446, 452 (D.C.Cir. 1972).
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    In Order No. 636-C, the Commission made a prospective change in its 
policy on this issue based on then current circumstances in the gas 
industry showing that early concerns about the pipelines' ability to 
provide no-notice service to a broader group of customers were 
unfounded. Order No. 636-C did not find, as NAGC suggests, that the 
original holding in Order No. 636 was in error. Moreover, the 
Commission explained in Order No. 636-C that it cannot retroactively 
change Order No. 636's limitation on the pipeline's obligation to 
provide no-notice service because it is impossible to change past 
service. Because no notice service, as a premium service, is generally 
more expensive than the alternatives, issues concerning refunds to 
customers who did not receive no notice service before Order No. 636-C 
should not arise in most instances.<SUP>16</SUP>
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    \16\ The Commission is aware of only one pipeline where the 
issue of refunds arose. Kansas Cities, one of the municipal 
customers included in NAGC, filed a complaint against Williams 
Natural Gas Company alleging that Williams was engaging in unlawful 
discrimination by giving converting sales customers preferential 
access to no-notice service. The Commission denied Kansas Cities' 
complaint in large part because it was a collateral attack on Order 
No. 636.65 FERC para. 61,221 (1993), reh'g, 66 FERC para. 61,315 
(1994). Kansas Cities appealed the Commission's denial of its 
complaint in Kansas Municipals v. FERC (D.C.Cir. No. 93-1656), and 
argued to the Court that it should receive refunds. On May 12, 1998, 
the Court found that the petition was not ripe for review and 
remanded the case to the Commission for further consideration in 
light of the decision in the instant proceeding. The Commission will 
address the application of its ruling in this proceeding to Kansas 
Municipals in the remanded proceeding in Williams Natural Gas Co., 
RS92-12-008, et al.
    Also, in Williams Natural Gas Co., 80 FERC para. 61,158 (1997), 
Kansas Cities argued that it had been harmed by its ineligibility to 
receive no notice service because, Kansas Cities alleged, it was 
required to pay more on an annual basis than it would have paid if 
it had received no notice service. The Commission denied the request 
for refunds, and Kansas Cities did not appeal the Commission's 
decision.
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    In any event, even if the Commission had erred in Order No. 636 by 
limiting no notice service, refunds would not be an appropriate remedy 
in these circumstances. Refunds would be difficult to determine because 
if the class of no notice customers had been larger, both the no notice 
and non-no notice rates would likely have been different, and it would 
be impossible to determine what service choices other customers would 
have made if the rates had been different. Further, unless the 
Commission were to order surcharges to counterbalance the refunds, the 
pipelines would suffer losses simply for complying with the 
Commission's order. It is for this reason that the Commission does not 
order refunds for rate design changes if the pipeline made a good faith 
effort to implement the Commission's rate design goals.<SUP>17</SUP> 
Nothing in the cases cited by NAGC suggests that refunds must be 
ordered for a change in rate design directed by the Commission in a 
rulemaking proceeding where pipelines complied with the Commission's 
directive pending judicial review.<SUP>18</SUP> No-notice service is 
now available on a non-discriminatory basis to all shippers on any 
pipeline that offers no-notice service. Refunds are a discretionary 
remedy, and the Commission concludes that refunds are not appropriate 
in these circumstances. The request for rehearing is therefore denied.
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    \17\ Williams Natural Gas Co., 80 FERC para. 61,158 at 61,692 
(1997); Opinion No. 369-A, Panhandle Eastern Pipe Line Co., 59 FERC 
para. 61,244 at pp. 61,845, 61,849 (1990; ANR Pipeline Co., 50 FERC 
61,091 at p. 61,257 (1990), reh'g denied, 51 FERC 61,038 at p. 
61,075; Mississippi River Transmission Corp., 50 FERC para. 61,092, 
reh'g denied, 51 FERC para. 61,111 at p. 61,259 (1990); Trunkline 
Gas Co. 50 FERC para. 61,085 (1990).
    \18\ Further, NAGC's characterization that in UDC, the Court 
found that the restriction in Order No. 636-B on no-notice service 
was unlawfully discriminatory, and that in Order No. 636-C, the 
Commission agreed with the Court that its action in promulgating 
that restriction was unlawful, is inaccurate. The Court remanded the 
issue to the Commission for further consideration, and in Order No. 
636-C, the Commission removed the restriction based on experience 
with no-notice service.
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    NAGC also asks the Commission to clarify Order No. 636-C by 
expressly eliminating the language in Order No. 636 that limits the 
eligibility to no-notice service. The Commission has clearly removed 
the restriction on no-notice service and has held that no-notice 
service must now be offered on a nondiscriminatory basis. Since there 
is no regulation text at issue, nothing further is needed to effect 
this change.

IV. Small Customer Rates for Customers of Downstream Pipelines

    In Order No. 636, the Commission required pipelines to offer a one-
part small customer transportation rate to their customers that were 
eligible for a small customer sales rate on the effective date of 
restructuring. On rehearing of Order No. 636-A, the issue arose as to 
whether the Commission should require upstream pipelines to offer their 
small customer rate to the small customers of downstream pipelines who 
became direct customers of the upstream pipelines as a result of 
unbundling. In Order No. 636-B, the Commission held that this issue 
should be considered on a case-by-case basis in the individual pipeline 
restructuring proceedings. In UDC, the Court found that the Commission 
had made an arbitrary distinction between former indirect small 
customers of an upstream pipeline and small customers who were direct 
customers of the upstream pipelines, and remanded this issue for 
further explanation.
    In Order No. 636-C, the Commission again concluded that downstream 
customer eligibility for a one-part rate should be determined on a 
pipeline-by-pipeline basis, rather than in a generic rulemaking. The 
Commission explained that the determination of the small customer class 
size and eligibility criteria requires consideration of the individual 
circumstances present on each pipeline system because changes in the 
eligibility requirements for the small customer rate upset the prior 
cost allocation among the classes of customers. Order No. 636-C 
discussed the circumstances on Tennessee Pipeline Co. (Tennessee) to 
illustrate some of the factors that should be taken into account with 
respect to determining small customer class and eligibility. In 
Tennessee's restructuring proceeding,<SUP>19</SUP> the Commission held 
that the eligibility level for Tennessee's former downstream customers 
should be 5,300 Dth/day or less,<SUP>20</SUP> while the eligibility 
level for its directly connected small customers would remain at 
Tennessee's pre-existing eligibility level of 10,000 Dth/day or less.
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    \19\ Tennessee Pipeline Co., 65 FERC para. 61,224 (1993), reh'g. 
denied, 66 FERC para. 61,317 (1994)(Tennessee), remanded, TVMGA v. 
FERC, (D.C. Cir. April 21, 1998).
    \20\ The highest criteria used in the tariffs of Tennessee's 
downstream pipelines was 5,300 Dth/day.
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    The only parties seeking rehearing of Order No. 636-C on this issue 
are the

[[Page 30131]]

East Tennessee Group (East Tennessee) and the Tennessee Valley 
Municipal Gas Authority (TVMGA), downstream small customers of 
Tennessee. This issue therefore has now been narrowed solely to the 
treatment of downstream customers on Tennessee. On rehearing of Order 
No. 636-C, East Tennessee and TVMGA argue that the Commission failed to 
remove the arbitrary distinction between the two classes of small 
customers or to support the distinction with substantial evidence. 
Further, TVMGA argues that the Commission erred in Order No. 636-C by 
using the Tennessee case as an example because the Commission 
misapplied its own review standard in Tennessee. TVMGA asserts that 
while Order No. 636-C states that the Commission should review the 
economic impact and cost shift of granting small customer rate 
treatment to newly qualifying small customers, in Tennessee, the 
Commission considered only their contract demand entitlement as a 
percentage of the total system. TVMGA alleges that this caused the 
Commission to substantially overestimate the economic impact of 
allowing the indirect downstream customers to qualify for small 
customer status on Tennessee based on Tennessee's 10,000 Dth/day or 
less standard. TVMGA asserts that if the Commission had actually 
examined the economic impact of any cost shift of according equal 
treatment to all small customers in Tennessee, as it states in Order 
No. 636-C that it will do, it would have concluded that any effect 
would be de minimis.
    East Tennessee and TVMGA also appealed the Commission's decision on 
this issue in the Tennessee restructuring case to the D.C. 
Circuit.<SUP>21</SUP> In their appeal, East Tennessee and TVMGA made 
arguments very similar to their arguments on rehearing in this 
proceeding. On April 21, 1998, the Court issued its decision in TVMGA 
v. FERC,<SUP>22</SUP> and remanded the portion of the Commission's 
order in Tennessee dealing with the small customer rate to the 
Commission. The Court recognized that the issues before it on appeal of 
the Tennessee decision were essentially the same as those before the 
Commission on rehearing of Order No. 636-C, and therefore directed the 
Commission to consider this aspect of the case in light of the order on 
rehearing of Order No. 636-C.
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    \21\ Tennessee Valley Municipal Gas Ass'n v. FERC, (D.C. Cir. 
No. 93-1566).
    \22\ Id.
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    The Commission continues to believe that the small customer issue 
should be decided on a case-by-case basis for the reasons explained in 
Order No. 636-C. The Commission can better address concerns regarding 
eligibility and discrimination in the context of a proceeding that 
takes into account the specific circumstances of the pipeline. The 
requests for rehearing on this issue indicate that the parties' general 
concerns cannot be adequately addressed without reference to the 
specifics of the Tennessee proceeding. For example, a key issue raised 
in the requests for rehearing involves the cost shifts that would 
result from allowing indirect customers to qualify for Tennessee's 
10,000 Dth/day limit. That issue is more appropriately addressed in the 
Tennessee proceeding than in this generic rulemaking. Therefore, the 
Commission upholds the general proposition that issues related to small 
customer rates should be decided in specific rate proceedings. The 
Commission will address the issues raised in the requests for rehearing 
concerning downstream small customer on Tennessee, including the 
allegations of discrimination, in its order on remand in the Tennessee 
proceeding.

V. Recovery of GSR Costs

    In UDC, the Court did not question the basic principle that 
pipelines should be able to recover their GSR costs, but remanded two 
aspects of the Commission's recovery policy for further consideration. 
First, the Court found that the Commission had failed to explain 
adequately its decision to allocate 10 percent of the GSR costs to the 
pipeline's interruptible transportation customers. Second, the Court 
held that the Commission had not adequately explained it decision to 
exempt pipelines altogether from the absorption of any GSR costs.
    In Order No. 636-C, the Commission provided a further explanation 
of its conclusion that pipelines should be able to recover 100 percent 
of prudently incurred GSR costs, and reaffirmed that conclusion. MoPSC 
and NASUCA/POCA sought rehearing of this ruling, but subsequently 
withdrew their requests for rehearing. This issue is therefore 
resolved.
    With regard to the issue of the recovery of GSR costs from IT 
customers, in Order No. 636-C, the Commission determined not to require 
that the percentage of GSR costs allocated to IT customers be 10 
percent for all pipelines. Instead, the Commission required each 
individual pipeline, whose GSR proceeding had not been resolved, to 
propose the percentage of the GSR costs that its interruptible 
customers should bear in light of the circumstances on its system. 
Therefore, the Commission directed pipelines that had filed to recover 
GSR costs before the date Order No. 636-C was issued, and whose GSR 
recovery proceedings had not been resolved by settlement or final and 
non-appealable Commission order, to file proposals for allocation of 
costs to IT customers in their respective proceedings within 120 days 
of the issuance of Order No. 636-C.
    No party seeks rehearing of the basic policy that determination of 
the appropriate allocation of GSR costs to IT customers should be done 
on a case-by-case basis, but the Coastal Companies seek clarification 
of the order. The Coastal Companies request the Commission to clarify 
that where the provisions in a pipeline's tariff that set forth the 
allocation of GSR costs to interruptible transportation were approved 
by a final, non-appealable Commission order, any change from the 
existing ten percent allocation will be applied prospectively from the 
date of an order approving a subsequent tariff sheet that incorporates 
the new allocation percentage. The Coastal Companies also ask the 
Commission to clarify that the calculations <SUP>23</SUP> in Order No. 
636-C were merely illustrative, and that the Commission will consider 
all pertinent factors in determining the appropriate level of GSR costs 
to allocate to IT. These clarifications are consistent with the intent 
of Order No. 636-C and are therefore granted.
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    \23\ In Order No. 636-C, the Commission provides examples to 
comparing the percentage of interruptible throughput to overall 
throughput for several pipelines. Order No. 636-C, slip op. at 
76n.170.
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The Commission Orders

    The requests for rehearing are denied, and the requests for 
clarification are granted and denied, as set forth in this order.

    By the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.
[FR Doc. 98-14676 Filed 6-2-98; 8:45 am]
BILLING CODE 6717-01-P


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