Opinion ID: 491453
Heading Depth: 2
Heading Rank: 1

Heading: The Commission's Grounds for the New Abandonment Policy

Text: 38 At the outset, we agree with the FERC that the NGA itself does not mandate a comparative needs test but only a determination that present or future public convenience and necessity permits the abandonment at issue. In other words, by delegating abandonment power in such broad terms, Congress expected that the Commission would develop an appropriate test to fit the regulatory climate. See Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 42, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) ([A]n agency must be given ample latitude to 'adapt [its] rules and policies to the demands of changing circumstances' ) (quoting Permian Basin Area Rate Cases, 390 U.S. 747, 784, 88 S.Ct. 1344, 1369, 20 L.Ed.2d 312 (1968)); NAACP v. FCC, 682 F.2d 993, 998 (D.C.Cir.1982) (Agencies may modify or repeal existing policies and rules as the conditions which they address change, ... and a court should defer to the [agency] as to whether conditions have in fact changed and what action, if any, is now warranted But ... the court should be satisfied both that the agency was aware it was changing its views and has articulated permissible reasons for that change, and also that the new position is consistent with the law.). 39 As the Commission acknowledges, though, it is the reviewing court's duty to ensure that the agency has ... really taken a 'hard look' at the salient problems, and has ... genuinely engaged in reasoned decisionmaking. Greater Boston Television Corp. v. FCC, 444 F.2d 841, 851 (D.C.Cir.1970), cert. denied, 403 U.S. 923, 91 S.Ct. 2229, 29 L.Ed.2d 701 (1971). The issue before us, accordingly, is not whether the FERC may change its abandonment policy, but whether its reasons for doing so in its chosen manner are permissible ones. In its critical discussion of the economic factors favoring a liberalized abandonment policy, the FERC relied heavily upon the several salutory effects resulting from the release of shut-in gas to the spot market: 40 1) It will give other purchasers an opportunity to lower their gas costs by displacing high-cost gas or other fuels with this cheap gas. 41 2) [T]o the extent this cheap gas creates more competition in the marketplace of suppliers, it will exert a pressure on all sellers of gas, be it high or low priced gas, to reduce prices or risk being shut-in. 42 3) If the gas dedicated to an interstate pipeline is likely to be subject to a request for abandonment, that pipeline would be more likely to take this gas, thus lowering its overall cost of gas, or risk losing it forever. 43 4) [I]f cheap gas displaces more expensive gas on a pipeline's system, both the pipeline and high-cost gas producer have an incentive to renegotiate their contracts to reduce take or pay requirements and lower the price of gas, so that it will make economic sense for the pipeline to continue to buy that gas. 44 J.A. at 294-95. 8 We review these reasons seriatim: 45 1) On a theoretical level, the FERC's first reason is sound: an increase in supply of a product will normally lower the cost of that product to consumers. We do not doubt that if the natural gas spot market were an ideal free market, the release of shut-in cheap gas to that market would permit gas purchasers to switch from higher priced gas. Even in the present imperfect natural gas market, there are some fuel-switchable end-users--such as power plants and large industrial companies--that can go with the flow, as it were, and adjust their purchasing portfolios to take advantage of this influx of cheaper gas to the spot market. But at the same time the FERC has not explained how other, captive consumers in the natural gas market will be able to benefit from the new abandonment policy. These less mobile consumers are geographically bound to pipelines that are in turn contractually bound by take-or-pay contracts that make it uneconomical for them to switch to a new market for natural gas, since the pipelines must still pay for the higher priced contractual gas whether or not they take delivery. 9 46 In short, the natural gas market is not a classic free market, where the laws of supply and demand operate ineluctibly for all participants. The FERC's apparent assumption that such standard laws apply across-the-board--or at least its failure to acknowledge the substantial obstacles to free-flowing gas exchange--is troubling. Nonetheless, at least the FERC's first reason for its new policy is valid with regard to some consumers, the fuel-switchable end-users, who will be able to lower their gas costs by virtue of the increased supply of cheap gas. 47 2) The Commission's second reason--that the competition of the new gas will pressure all sellers to lower their prices or risk being shut-in--appears to be merely a corollary of the first, assuming that all the FERC means by a risk [of] being shut-in is the risk of not being able to sell one's gas if purchasers can buy cheaper gas on the spot market. 10 As with the first reason, the implication is that an increase in supply of cheaper gas will lower costs in the end throughout the marketplace. But also as with the first reason, only those consumers who can actually switch to spot market purchases will apply any pressure on producer-sellers. Additionally, as we discuss below with regard to the fourth reason, producer-sellers who benefit from the safety of long-term take-or-pay contracts will feel little pressure from a dip in the spot market price. 48 3) We have serious doubts about the validity of the FERC's third reason--that pipelines threatened with abandonment under a more liberal policy will purchase more gas. The FERC's assumption that a pipeline that has hitherto taken only a small percentage of deliverable gas will decide to take most or all of the gas in order to avoid losing it forever only makes sense if demand increases to accommodate such takes, a scenario that seems likely to occur only if enough fuel-switchable energy buyers move from non-gas supplies to the gas market in response to the influx of previously shut-in gas. However, if demand does not increase to cover the volume of abandoned gas that the FERC assumes the affected pipelines will purchase, then those pipelines would be taking low-cost abandoned gas in lieu of high-cost take-or-pay gas while still incurring take-or-pay liability, thus raising, not lowering, their cost of gas. As we discuss in response to the FERC's fourth reason, below, this apparent Commission confusion regarding the effect of its new policy on the take-or-pay problem is a fundamental and pervasive flaw that infects the major part of its reasoning on abandonment. 49 4) As we have indicated at the end of our discussions of the FERC's second and third reasons, the FERC's assumption that the take-or-pay problem will be alleviated by the new policy is highly problematic. The Commission's fourth reason lies at the center of our apprehension in this regard. In both its initial and rehearing opinions, 11 the FERC relied heavily (see quotations in part I.B. and note 7, supra ) on the argument that the existence of more cheap gas on the spot market (which is where the abandoned gas will go) will provide an incentive both to the pipelines and the producers to renegotiate the take-or-pay contracts. The Commission's logic seems to be that the newly released, cheaper gas will entice the pipelines away from the more expensive take-or-pay contract gas, and that, as a result, the producers will be willing to renegotiate those contracts to keep their customers. 50 This reasoning is difficult to understand. A take-or-pay contract is the product of a deal between a producer and a pipeline whereby the pipeline gains the security of a long-term supply contract in exchange for guaranteeing its supplier that it will pay for a minimum volume of gas whether or not it takes delivery of that gas. One of the major problems facing the natural gas industry today is the burden of such expensive take-or-pay contracts on the pipelines in a market with cheap alternative energy supplies. 12 We sympathize with the Commission's desire to alleviate this problem, but it will not be wished away. It seems counterintuitive to argue that pipelines will stop taking gas that they have to pay for anyway and that as a result producers will have an incentive to renegotiate contracts in which they are guaranteed high payments whether or not the customers take the gas. 13 On the contrary: The whole purpose of take-or-pay contracts is to give the producers the same benefit whether or not the gas in question actually leaves the ground. 51 This is not the first time that the FERC has assumed without explanation that in liberalizing one aspect of the natural gas market (here, shut-in gas) it will help resolve the problems of another (take-or-pay contracts). In Order No. 436, 50 Fed.Reg. 42,408 (1985), the FERC expanded greatly the choices available to both producers and customers of pipelines. Having concluded that current gas price distortions have been caused largely by the pipelines' practice of refusing to transport gas purchased from a third party when it would displace their own sales, the FERC instituted a carrot-and-stick incentive plan. The FERC offered the carrot of blanket transportation certification, permitting a pipeline to obtain generic authorization of transportation services without the encumbrance of an unwieldly individual certification process. As a stick, the FERC attached a number of conditions to such blanket certifications; two are of central importance here: A pipeline would have to agree to provide open-access, nondiscriminatory transportation services, thereby eliminating the price distortion problem. Additionally, a pipeline would have to agree to allow its local distribution company (LDC) customers to convert their contract demand (CD)--that is, their contract commitment to purchase gas--from an obligation to purchase gas to an obligation to use, or pay for, transportation services, thereby increasing the ability of LDCs to diversify their energy portfolios and lower their energy costs. (This condition regarding LDCs was dubbed the CD conversion-reduction option.) The combination was irresistible; all parties agreed that in the current deregulated energy market, any pipeline would be under serious competitive pressure to offer blanket certification transportation. 52 At the same time it established this blanket certification/open-access transportation/CD conversion-reduction option program, the FERC declined to include in the package any special provision to relieve pipelines from the burden of take-or-pay contracts providing for prices well above current competitive levels. Associated Gas Distributors v. FERC, 824 F.2d 981, 996 (D.C.Cir.1987). The pipelines argued vehemently that the entire Order No. 436 scheme would be undermined by the FERC's refusal to tackle the take-or-pay problem head on. For one thing, open-access transportation was one of the items a pipeline could previously offer to a producer in exchange for take-or-pay relief; the new program of conditioning blanket certification on open-access transportation would remove that key weapon from the pipelines' arsenal. For another, the CD conversion-reduction option program would result in LDCs taking less contractual gas from pipelines, thereby exacerbating pipelines' take-or-pay liability. See id. at 80; id. at 2 (Mikva, J., concurring in the judgment in part and dissenting in part). 53 Although upholding most elements of Order No. 436, id. at 18, this court in Associated Gas Distributors vacated the order and remanded the record to the Commission. At the core of the panel's concern was its conclusion that the FERC's decision [to take no action on the take-or-pay problem] reflects questionable legal premises and fails to meet the requirement of 'reasoned decisionmaking.'  Id. at 80. Even though it affirmed independently most of the elements of the Order, the Associated Gas Distributors court nonetheless held in the end that 54 [t]he parts of Order No. 436 are interdependent. The nondiscriminatory access and CD adjustment provisions aggravate the pipelines' jeopardy from take-or-pay liability. When coupled with take-or-pay liability, those provisions may bring about a wasteful imbalance between pipeline sales and unbundled transportation service. Thus the Commission's apparent insouciance on take-or-pay taints the package. 55 Id. at 125. 56 The FERC's argument in Order No. 436 was strikingly similar to the one it makes here, viz, that the new competitive pressures of the increasingly deregulated natural gas market will lead pipelines to attempt to adjust their gas purchasing practices so as to lower their overall cost of gas. Judge Williams, writing for the panel in Associated Gas Distributors, emphatically rejected the FERC's assumption that pipelines would be successful in this cost-lowering maneuver: 57 This reasoning assumes away the problem of the uneconomical contracts to which pipelines are presently bound. All FERC does here is to admit that Order No. 436 dramatically increases the consequences of not getting out from under an uneconomical contract. It seems to confuse the pipelines' incentives to renegotiate contracts with their ability to do so. 58 Id. at 83 (emphasis in original). 59 In this case, the FERC's fourth reason for its new abandonment policy--and implications arising from the FERC's second and third reasons as well--indicate that the Commission is still confusing the pipelines' incentives to renegotiate contracts--admittedly great--with their ability to do so--increasingly slim. In both cases, the FERC has embarked on an essentially deregulatory path to bring the natural gas marketplace into line with 1987 economic reality. In both cases, the FERC claims that the take-or-pay problem not only will not suffer as a result of its maneuvers, but also that it will benefit. In both cases, however, the increased power given to producers and consumers appears at least on first glance to give them fewer incentives to help out pipelines with their take-or-pay worries. Following the lead of the Associated Gas Distributors opinion, which remands an order most elements of which it would otherwise uphold, due to the unexplained take-or-pay rationale, we, likewise, remand this case for the same pervasive defect, although given proper bases we might well uphold it. Similarly, like the Associated Gas Distributors opinion, we acknowledge that the FERC may reach the same result if it explains adequately how it intends to deal with the take-or-pay problem. 60 Of course, it may be argued that the predicted mitigation of the take-or-pay problem is but one reason given for the new policy, and that therefore we may affirm on the basis of the other, legitimate grounds. The general rule in this area is clear: an administrative order cannot be upheld unless the grounds upon which the agency acted in exercising its powers were those upon which its action can be sustained. SEC v. Chenery Corp., 318 U.S. 80, 95, 63 S.Ct. 454, 462, 87 L.Ed. 626 (1943); see Friendly, Chenery Revisited: Reflections on Reversal and Remand of Administrative Orders, 1969 Duke L.J. 199, 222-23 (factual as well as legal error may support a Chenery remand). This black-letter statement of the law, however, does not resolve the familiar dilemma of what to do when an agency has given multiple reasons for a new policy, some of which are acceptable, some of which are not. Here, the FERC has provided what amounts to one acceptable reason and one unacceptable one for its new policy: Because more gas will flow to the spot market, producers of the abandoned gas will make more sales and those consumers able to purchase this newly available gas will benefit from the resultant price dip. However, precisely because producers will benefit from selling the previously shut-in gas, it seems that there will be less, not more, pressure on them to renegotiate take-or-pay contracts. The critical question is how to tell whether the FERC would have made the same policy shift given a more thorough consideration of the effect on take-or-pay contracts. 61 Ultimately, we decide to remand the policy for reconsideration because of the nature and implications of the bad reason given by the Commission. It is not some minor misstatement of law or fact that can be passed over as an unfortunate lapse. Rather, it reflects a pervasive frame of mind of the Commission about a crucial problem in the natural gas industry, repeated in Order No. 436, i.e., a refusal to face the fact that the burdensome take-or-pay contracts will not go away through deregulatory actions that, while aiding much of the industry, actually appear to place more pressure on the pipelines. Because of the FERC's insistence that freeing up cheap gas will alleviate the problems associated with these contracts, we can not be at all sure that the FERC would have adopted its new abandonment policy absent its unexplained take-or-pay reasoning; this justification appears to be infusing much of the Commission's work these days. In the circumstances, we think the wiser course is to remand for the Commission to take a new, and we hope, harder look at the purported benefits of the looser abandonment policy. Ultimately, of course, the difficult questions of distributional equity that are necessarily implicated in a resolution of the take-or-pay problem are for the FERC, and not the courts, to answer.