Opinion ID: 777086
Heading Depth: 2
Heading Rank: 2

Heading: Narrowing of the right of first refusal

Text: 150 At the same time that the Commission expanded the degree of protection offered by right of first refusal by decreasing the maximum term that a protected shipper might be required to match, it also narrowed the right's scope in certain respects. Specifically, Order No. 637 denied the right to all shippers operating under discounted rate contracts, i.e., contracts with rates below the maximum approved by FERC. It also excluded negotiated rate contracts, i.e., ones whose terms differ in some respect from simple application of FERC-approved tariffs, and whose rates may fall below, at, or above the FERC-approved maximum rate. (Both parties assume the existence of contracts with rates above the FERC ceiling, but neither explains how such a contract would even be lawful.) Order No. 637 at 31,337; Order No. 637-A at 31,631-35. The order grandfathered [e]xisting discounted contracts, so as to protect expectations based on the prior rule. Order No. 637 at 31,341-42. 151 In support of this modification the Commission offered two general grounds. First, it portrayed the amendment as driven by the right of first refusal's original purpose to protect long-term captive customers from the pipeline's monopoly power. Order No. 637 at 31,337. If the customer is truly captive, the Commission reasoned, it is likely that its contract will be at the maximum rate. Id. And shippers who have alternatives in the marketplace, as typically evidenced by their ability to negotiate discounts below the just and reasonable rate, do not need this type of regulatory protection. 152 Second, because the right of first refusal necessarily creates a disincentive for a shipper to enter into long-term contracts with the pipeline, and thus tends to saddle the pipeline with an unshared and uncompensated long-term investment risk, see id. at 31,336, the Commission also thought that limiting the right of first refusal to those shippers paying the maximum rates was needed to better balance the risks between the shipper and the pipeline, id. at 31,337. 153 Petitioners objecting to the change assert that it is not supported by substantial evidence in the record, because the agency relied virtually entirely on its own supposition that truly captive shippers are likely to be paying maximum rates. Furthermore, they say, the Commission rejected their examples to the contrary, which indicated that pipelines do sometimes offer discounted or negotiated rates to captive shippers. 154 The FERC order indeed cited no studies or data. But its conclusions seem largely true by definition. Rate ceilings are set at the Commission's estimate of cost, thus roughly paralleling what would occur in a competitive market. The rates protect shippers whose choices are, by hypothesis, so limited that otherwise they would be ready to pay supra-competitive rates. If they are paying even less than the cost-based rates, it appears a fair inference that they have better choices than are supposed by the system of agency-controlled rates. 155 Or so one would think in the absence of specific, compelling rebuttal evidence. What petitioners offer can hardly be called compelling, given the Commission's need to devise rules of general application. To be sure, their comments listed several situations in which, they claimed, pipelines might offer long-term shippers discounted rate contracts even where they had market power. For instance, a discount may be given in consideration of entering into a settlement of a rate case or complaint proceeding, or for an agreement of the shipper to shift to a less desirable or underutilized receipt point, or to sign a longer contract, or to take an additional volume, or when a shipper is captive only for a part of his total load, or to assist [an] industrial customer during times of financial troubles in order to keep the facility viable, or in response to a perceived competitive threat from the proposed construction of a new pipeline. Order No. 637-A at 31,633 & n.218. Most of these appear to be cases that any shipper aware of FERC's rule can readily avoid; this should be all affected shippers, as the rule applies only to contracts entered after its adoption. 156 Petitioners in fact offer us no reasons to believe that their counter-examples are anything more than sporadic exceptions to the general rule on which FERC relied. Generalizations are not automatically rendered invalid by examples to the contrary — the Commission is plainly entitled to respond with a general solution to general findings of a systematic condition or problem, rather than proceed with a case-by-case approach. AGD, 824 F.2d at 1008 (stating that when FERC acts under its rulemaking authority to promulgate generic rate criteria, it is not required to adduce empirical data for every proposition on which the selection depends); TAPS, 225 F.3d at 687-88 (approving FERC's open access rules on the basis of general findings of systemic monopoly conditions and the resulting potential for anti-competitive behavior, rather than evidence of monopoly and undue discrimination on the part of individual utilities). As petitioners have presented no data on how widespread the occurrence of discounting unrelated to market power is, they fail to undermine FERC's conclusion that  generally [] discounts are given to obtain or retain load that the pipeline could not transport at the maximum rate because of competition. Order No. 637-A at 31,633 (emphasis added). Further, nothing they say suggests that shippers on notice of the rule will be unable to avoid its consequences and enjoy the right of first refusal — so long as they are willing to pay the price. 157 As to FERC's second argument, relating to the balancing of risk, petitioners say only that they can see no problem in a pipeline being required to provide continuing service at maximum rates. Br. of Petitioners Opposing Limitations on the Right of First Refusal at 11. But the Commission apparently was persuaded by pipeline commenters, who asserted that the prior regime place[d] disproportionate risks on the pipelines because the pipeline must bear the risk of standing ready to serve the existing shipper indefinitely, while the shipper has no such obligation. Order No. 637 at 31,336. This seems clear to us: We see how the Commission could find imbalance where one party, even though ready to commit itself to only a relatively short term (one year), thereby secures a perpetual right to service. FERC clearly believed that limiting the right of first refusal to maximum rate contracts was a fair means of apportioning the risk, so that those customers who place a premium on the assured continuity of service must now pay for that protection by foregoing discounts, to which, of course, they have no regulatory entitlement. Order No. 637-A at 31,634. 158 Petitioners finally object that a discounted or negotiated rate is determined at the outset of the contract and thus has no relationship to the market the long-term shipper faces at its end. This seems to be beside the point. The risk that market conditions would change always exists — the only issue is how it should be divided. Under the new rules, any long-term shipper who wants the benefits of a right of first refusal can secure them by simply choosing to take service under the standard just and reasonable rates set by FERC. The same goes for negotiated rates — all shippers are entitled to service under the generally applicable maximum tariffs, and pipelines cannot require captive customers to enter into negotiated rate agreements. Order No. 637-B at 61,173. No captive shipper is thus deprived of regulatory protection — all of them have the entitlement to place themselves within the protected class by simply paying agency-approved, cost-based rates. As these are designed around existing levels of pipeline risk, they presumably include something approximating the necessary premium for the long-term rights these customers prefer.