Opinion ID: 373874
Heading Depth: 4
Heading Rank: 2

Heading: The Scope of the Section 7 Conditioning Power

Text: 41 The actual language of section 7(e) is broad indeed. It states that in granting certificates: The Commission shall have the power to attach to the issuance of the certificate and to the exercise of the rights granted thereunder such reasonable terms and conditions as the public convenience and necessity may require. In the absence of sections 4 and 5 of the Act, this broad mandate conceivably could authorize adjustment of rates not involved in the actual certificate proceeding. But section 7's broad conditioning power must be read in conjunction with sections 4 and 5. In that context, for three reasons we believe that the conditioning power does not extend to adjusting previously approved rates for services not before the Commission in the relevant certificate proceeding. 42
43 First, the more expansive reading would effectively emasculate the role of section 5 in the ratemaking scheme. Any time the Commission had good reason to believe that a pipeline's rates were unjust or unreasonable, it could simply condition the granting of new certificates on the adjustment of those rates, the condition to terminate only when the pipeline filed a new rate proceeding under section 4. There would be no need for the Commission to use section 5 so long as pipelines continued requesting new certificates instead, the Commission could simply condition certificates on rate reductions and shift the burden to the pipelines to show affirmatively that its previous rates continued to be just and reasonable. Section 5 would be reduced to a stopgap device, necessary for reducing unjust or unreasonable rates only when no new certificate filings were being made. We do not think that section 7 was meant to reduce so sharply the role of section 5, and therefore decline to adopt FERC's expansive interpretation of the conditioning power. 44 44
Instability 45 Although the Act's principal purpose is to protect consumers against excessive rates, a corollary purpose is to allow natural gas companies their cost of service and a reasonable rate of return. 45 Recognizing that it is in the public interest that companies receive adequate revenues to maintain high quality service, Congress designed sections 4 and 5 to protect companies against regulatory lag 46 and provide a degree of certainty in their rate schedules. Under section 4, once a company has filed a new rate schedule and the five-month statutory suspension period has elapsed, the rates go into effect subject to a refund obligation. Thus, should administrative proceedings take longer than five months companies are protected against additional loss of revenues. Once rates are approved by certificate or in section 4 proceedings, the Commission may change them only after a section 5 hearing and specific findings that they are unjust or unreasonable. 47 Section 5 rate reduction orders may be prospective only. This ensures rate stability; companies may count on receiving previously approved revenues without the threat of an indefinite refund requirement at a later date. 46 Interpreting the conditioning power to allow adjustment of previously approved rates eliminates both protections in one fell swoop. Rate stability is destroyed because at any time a certificate is filed, immediate reductions may be ordered as to previously approved rates. Protections against revenue loss caused by administrative delay are seriously diluted. In addition to the thirty-day filing period and five-month rate suspension period prescribed by the Act, a pipeline would be deprived of the revenues from previously approved rates during the time necessary to prepare new section 4 filings. 48 Because the Commission's expansive view of the conditioning power would largely extinguish these protections of sections 4 and 5, we refuse to adopt it. 47
48 Finally, we reject the broad interpretation of section 7 because it allows circumvention of section 5 requirements of a hearing and specific findings as to justness and reasonableness of existing rates. The law seems clear that once rates are approved in certificates or rate proceedings, they may only be adjusted by the Commission after a finding that they are unjust, unreasonable, or not the lowest reasonable rate. 49 It would be ironic after rates have been approved as theoretically just and reasonable under section 4 to allow the Commission to reduce them by revenue crediting or other means without a specific finding that the rates are no longer just and reasonable. 50 We therefore decline to adopt the wider construction of section 7 that would do away with the section 5 requirement of hearings and findings before reducing rates. 51 49 For these reasons we hold that FERC may not as a condition on a section 7 certificate require a pipeline to adjust rates previously approved by the Commission for customers not receiving the services to be certificated. 52 (c) Case Law 50 The Commission cites a great many cases to show the considerable breadth of its conditioning authority under section 7(e). The decisions are distinguishable from the case at hand, and we do not find them controlling. 51 FERC initially cites the Supreme Court's seminal opinion in Atlantic Refining Co. v. Public Service Commission (CATCO). 53 There, the Court declared that the Commission should give a most careful scrutiny and responsible reaction to Initial price proposals of producers under § 7. 54 The Court noted that the interminable delay involved in section 5 proceedings, the fact that the Commission was not given the power to suspend initial rates under § 7, and the absence under section 5 of a refund protection make it the more important . . . that 'this crucial sale should not be permanently certificated unless the rate level has been shown to be in the public interest.'  55 Without appropriate rate conditions in the certificate, a windfall for the natural gas company with a consequent squall for the consumers could result. The Court found that (t)his the Congress did not intend. 56 52 The Court continued, 53 There is, of course, available in such a situation, a method by which the applicant and the Commission can arrive at a rate that is in keeping with the public convenience and necessity. The Congress, in § 7(e), has authorized the Commission to condition certificates in such manner as the public convenience and necessity may require. Where the proposed price is not in keeping with the public interest because it is out of line or because its approval might result in a triggering of general price rises or an increase in the applicant's existing rates by reason of favored nation clauses or otherwise, the Commission in the exercise of its discretion might attach such conditions as it believes necessary. 57 54 The Court noted that in allowing the Commission to attach rate conditions on certificates,  § 7 is given only that scope necessary for 'a single statutory scheme under which all rates are established initially by the natural gas companies . . . subject to being modified by the Commission.'  58 Further, (s)ection 7 procedures in such situations thus act to hold the line awaiting adjudication of a just and reasonable rate. 59 55 The other decisions cited us generally expand or refine this section 7(e) conditioning power regarding rates and contractual provisions for the services to be certificated. 60 As to rate conditions, the decisions accord with the principle that Section 7 may be used to hold the line awaiting adjudication of a just and reasonable rate. 61 56 Here, the Commission has not acted just to hold the line on certificated rates, but to adjust other, previously approved rates as well. 62 FERC has not cited, and our own research does not disclose, any judicial authority holding that the Commission may tinker with rates previously found just and reasonable in conditioning a certificate dealing with other sales or services. For the reasons already mentioned, we decline to so extend the Commission's conditioning powers. 57 In addition, we note that the considerations mandating the use of section 7 to set initial rates for certificated sales or services do not require its use to adjust previously approved rates for other services. As the Supreme Court noted in CATCO, when initial rates are set the only protection consumers have against excessive rates, other than the Commission's section 7 scrutiny of proposed rates, is the possibility of a subsequent section 5 proceeding to lower rates. 63 The delay, lack of suspension power, and lack of power to order retroactive relief in section 5 proceedings make it important for the Commission to hold the line (by certificate condition) awaiting adjudication of just and reasonable rate(s). 64 Here, just and reasonable rates have already been adjudicated, at least by settlement approved by the Commission. The resale customers have had the protection of a section 4 proceeding with its refund and suspension provisions, and as well have continuing protection of section 5, inadequate though it may be of itself. The rates have already been approved as theoretically just and reasonable, and therefore the spectre of a windfall for the natural gas company with a consequent squall for the consumers is not so ominous in the absence of certificate conditioning, as it is where initial rates are proposed. Since the public interest here seems to be adequately protected by sections 4 and 5, we do not feel that the cited cases require us to extend the scope of section 7 to allow adjustment of previously approved rates for services not involved in the pertinent certificate proceeding. 58 (d) Conclusion as to Section 7 Authority 59 Because we believe a contrary interpretation would emasculate the role of section 5, dilute the protections provided in sections 4 and 5 against regulatory lag and rate instability, and eliminate section 5 protections of hearings and specific findings as to justness and reasonableness of rates prior to a rate reduction order, and in the absence of binding contrary precedent, we hold that the Commission does not have authority under section 7 to compel flow-through of revenues to customers of services not under consideration in that proceeding for certification. 65 60 In so doing, we do not mean to intimate that FERC may not take a company's overall rate structure into consideration in issuing certificate orders. It may evaluate that and myriad other factors as they bear on the public convenience and necessity. The Commission may not, however, order adjustments in previously approved rates for services not before it in the certificate proceeding. 61 We recognize that there may be instances where certification of essentially cost-free transportation services will push a company's rate of return over the just and reasonable level. Nevertheless, we do not believe the solution to the problem is to ignore the policies and protections of sections 4 and 5 and forbid companies to keep revenues pending a section 4 filing. We think a more acceptable and equitable solution would be the adoption by the Commission in appropriate proceedings 66 of some sort of tracker system for transportation revenues and costs similar to the PGA clause. 67 A tracker system would avoid the infirmities of the Commission's order here it would not eliminate the role of section 5, it would avoid revenue loss caused by administrative lag and provide rate stability, and it would not run afoul of the section 5 policies of hearings and findings. Further, such a tracker would allow resale customers to receive the benefits and bear the burdens of transportation services provided by and for other companies. We cannot force the Commission to adopt such a system, but today's holding certainly should not be viewed as precluding use of transportation tracking clauses as approved in appropriate proceedings. 68