Opinion ID: 360136
Heading Depth: 2
Heading Rank: 1

Heading: Pro Rata and End-Use Curtailment

Text: 28 When a pipeline company's natural gas supplies become inadequate to meet contractual commitments to customers, there must be provision through a curtailment plan for apportioning the diminishing gas supply among the customers. There are essentially two basic approaches for allocating supplies in a period of shortage. 29 By the pro rata approach available supplies are allocated in proportion to each customer's firm, Commission-certificated contract entitlement from the pipeline. Under this approach the impact of the shortage is distributed evenly among the pipeline's customers in relation to prior contractual commitments. 30 By the end-use approach various uses of natural gas are ranked according to their essentiality or desirability, and allocation is first made to the highest priority use, then if supplies are sufficient, to the next highest use, and so on down the line until supplies are exhausted. Most pipeline customers are distributor companies which resell the gas to ultimate consumers; therefore, under the end-use approach, the extent to which a pipeline's distributor customers are curtailed depends on the mix of each distributor's own customers. Distributors who have a large percentage of high priority customers theoretically will not be curtailed as deeply as those who have a small percentage of such customers, and distributors who have a large percentage of low priority customers will be curtailed more sharply than those who have a small percentage of such customers. The object of an end-use plan is to ensure that higher priority uses are completely supplied before lower priority uses are served. 31 It is clear that a successful end-use plan must have two elements: first, a priority ranking of particular end uses from highest to lowest and, second, an allocation mechanism for assuring that higher-priority uses are protected from curtailment ahead of lower priority uses. The first of these elements is relatively easy to devise. It is only necessary to classify the various uses of natural gas and then to rank these uses in order of priority. The second element of an end-use plan the allocation mechanism designed to ensure high-priority use ahead of low-priority use is somewhat more difficult. The permanent curtailment plan challenged in this case is ostensibly an end-use plan, and the controversy focuses precisely on the effectiveness of the plan's allocation mechanism; opponents of the plan argue that its allocation scheme does not actually protect high priority uses ahead of low priority uses. 32 In 1970 natural gas shortages developed on a number of pipeline systems in the United States. In April 1971 the Federal Power Commission promulgated Order No. 431, a Statement of General Policy, 3 requiring every jurisdictional pipeline to report to the Commission whether curtailment of its deliveries to customers would be necessary because of inadequate supply of natural gas. A pipeline anticipating the necessity for curtailment was required to file a revised tariff to control deliveries to all customers under Section 4 of the Natural Gas Act. The Order hinted that curtailment should be based on the end use of the gas rather than on prior contractual commitments and stated that plans approved by the Commission will control in all respects notwithstanding inconsistent provisions in (prior) sales contracts. . . . 4 In response to Order No. 431, numerous pipeline companies submitted curtailment plans for Commission approval. The plans reflected a wide range of views as to the proper priorities for delivery. Some plans were based on end use; others, on contract entitlement. 33 Sensing a need for guidance in the curtailment area, the Commission issued Order No. 467 5 in January 1973. In essence the Order stated that it was the Commission's policy to require curtailments on the basis of the uses made of the gas (end uses) rather than on the basis of prior contractual commitments (pro rata), and it set forth nine priority-of-service categories based on end use. The Order required full curtailment of the lower priority category volumes to be accomplished before curtailment of any higher priority volumes is commenced. 6 Highest priority was assigned to residential customers; large commercial users and various categories of industrial users completed the list. Since the Order purported to be a general policy statement rather than a rule of binding effect, the Commission declined to order pipelines to file conforming tariffs. At the same time, though, it stated that tariffs not in accord with its priorities would be subject to suspension and that any curtailments under nonconforming tariff sheets which have not received Commission approval may be found to be unjust and unreasonable. 7