Opinion ID: 721438
Heading Depth: 1
Heading Rank: 4

Heading: Rate Design

Text: 183 Various petitioners raise three major challenges to the rate design portion of the Order No. 636 series. As noted above, FERC ordered a change from the preexisting modified fixed variable (MFV) to a straight fixed variable (SFV) rate design. First, petitioners question whether FERC has authority under the NGA to adopt SFV rate design. Second, they question whether FERC's decision to switch from MFV rate design to SFV rate design was a reasonable one. Third, they question whether the mitigation measures FERC employed to ease the shift to SFV rate design are within FERC's ratemaking discretion. 184
185
186 FERC's authority over rate design in this case derives from NGA § 5, which requires it to replace any unjust, unreasonable, unduly discriminatory, or preferential rate, charge [319 U.S.App.D.C. 99] or classification charged by any natural-gas company in connection with any transportation or sale of natural gas with a just and reasonable rate, charge, [or] classification. 15 U.S.C. § 717d. Under the preexisting MFV design, the pipelines incorporated into commodity charges to their sales customers and usage charges to their transportation customers fixed costs that varied greatly from pipeline to pipeline. Accordingly, the unit prices to gas customers did not accurately reflect the actual variable cost of supplying gas, because producers in different gas fields compete for market share via different pipelines, so that their competitive positions in the market reflected the fixed costs in the pipelines' respective transportation usage charges and not simply the producers' own costs and efficiencies in producing gas. Order No. 636, p 30,939, at 30,434. The Commission concluded that a shift to the SFV rate design, under which the usage charges accurately reflect the actual variable costs of delivering gas, would remove this impediment to efficient competition. 187 The LDC petitioners 79 argue that FERC had no authority to take regulatory action on the basis of MFV rate design's anticompetitive effects on gas producers. They admit that FERC must consider the anticompetitive effects of rate design systems, but contend that FERC can only consider the anticompetitive effects of a system on entities it regulates directly (i.e., pipelines themselves), not on unregulated industries such as gas producers, and they argue that MFV's anticompetitive effect on gas suppliers does not constitute an anticompetitive effect on pipelines. The LDCs cite in support of their position Official Airline Guides, Inc. v. Federal Trade Comm'n, 630 F.2d 920, 927-28 (2d Cir.1980), cert. denied, 450 U.S. 917, 101 S.Ct. 1362, 67 L.Ed.2d 343 (1981), in which the Second Circuit struck down a Federal Trade Commission (FTC) ruling that a monopoly airline guide publisher's refusal to publish flight schedules for certain airlines impaired competition in the airline industry. The Second Circuit held that the FTC Act's power to proscribe anticompetitive conduct did not extend to the restraint of a business's practices solely because of the conduct's incidental effect on competition between third parties in another industry. 188 As the LDCs stress, antitrust policy does not outlaw the practices of a party solely because those practices may indirectly affect competition between other entities with which it does not compete. Though the LDCs' premise is valid, it does not answer the question of whether FERC has the authority to consider anticompetitive effects on unregulated segments of the gas industry in setting rates for the regulated pipelines. The Second Circuit's decision simply does not purport to answer that question. Rather, the Official Airline Guides court was extending the doctrine established in United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465, 468, 63 L.Ed. 992 (1919) (as quoted in Official Airline Guides, 630 F.2d at 925), that, [i]n the absence of any purpose to create or maintain a monopoly, antitrust policy does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal. In fact, the Official Airline Guides court noted the dangers of departing from this principle of independent business judgment: [W]e think enforcement of the FTC's order here would give the FTC too much power to substitute its own business judgment for that of the monopolist in any decision that arguably affects competition in another industry. Official Airline Guides, 630 F.2d at 927. 189 In contrast, FERC's decision in Order No. 636 represents not the rolling back of an independent business judgment because of its anticompetitive effect on an unrelated industry, but rather the substitution of one administratively imposed ratemaking regime for another based on the anticompetitive effect of the preexisting regime on unregulated entities dealing through regulated entities in a partially regulated segment of the economy--that is, the regulated pipeline [319 U.S.App.D.C. 100] segment of the partially regulated natural gas industry. The Commission's express duty under NGA § 5 to set aside rates and practices that it finds unjust, unreasonable, unduly discriminatory, or preferential is not limited to the remedies that the FTC may order in an unregulated market; nor is FERC's basis for the exercise of that authority necessarily as limited as the FTC's bases for enforcement decisionmaking. Antitrust policies governing the FTC in the unregulated market do not exhaust the public interest grounds on which the Commission may order a change in rates under NGA § 5. Here, given that we review the Commission's acts under the deferential substantial evidence standard, 15 U.S.C. § 717r(b); Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C.Cir.1992), we hold that the Commission adequately justified its exercise of its authority when it stated that its ratemaking authority includes the establishing of just and reasonable transportation rates that maximize the benefits of decontrol to gas consumers, Order No. 636-A, p 30,950, at 30,594-95, and that regulated transportation rates should in no way inhibit the creation of a national gas market of efficient gas merchants as envisioned by Congress in enacting the Decontrol Act. Order No. 636, p 30,939, at 30,433. Unlike the FTC in Official Airline Guides, FERC was not attempting to limit the options of a free business actor in order to promote competition in an adjacent industry, but only to prevent the regulatorily imposed price decisions of a regulated industry from creating anticompetitive factors in economically adjacent markets.
190 The PUCs argue that FERC's ordering of the switch to SFV rate design exceeds its statutory authority. Under the NGA, FERC draws its ratesetting authority from two sections: NGA § 4 (15 U.S.C. § 717c) authorizes FERC to accept or reject rates and rate adjustments filed by natural gas companies; and NGA § 5 (15 U.S.C. § 717d) authorizes FERC after a hearing and upon findings that an existing rate is unjust, unreasonable, unduly discriminatory, or preferential to fix just and reasonable rate[s] ... by order. The PUCs contend, and FERC admits if we reach the merits, that the Commission draws its authority in the present restructuring from § 5, or not at all, as no natural gas company has filed the rate structure which FERC is imposing. The PUCs argue that FERC's order imposing the new rate structure exceeds its authority under § 5 because that section expressly provides [t]hat the Commission shall have no power to order any increase in any rate contained in the currently effective schedule then on file with the Commission. Because the new rate structure will result in an increase in charges to some customers, the PUCs argue that FERC's order violates this provision. 191 FERC first contends that this rate increase argument is not properly before the court because none of these petitioners raised it before the Commission in their requests for rehearing of Order No. 636. As FERC rightly suggests, the party who raises an issue in a petition for review must have raised the same issue in its petition for rehearing before the agency. ASARCO, Inc. v. FERC, 777 F.2d 764, 773-75 (D.C.Cir.1985). However, Atlanta Gas Light Company (Atlanta) and Chattanooga Gas Company (Chattanooga) specifically raised the rate increase argument in their petition for rehearing of Order No. 636. Request of Atlanta Gas Light Company and Chattanooga Gas Company for Rehearing and Clarification at 14-16 (May 8, 1992). And in the LDCs' brief in this court, several LDCs (including Atlanta and Chattanooga) cross-reference the PUCs' presentation of the rate increase argument, thereby incorporating the argument into the LDC brief before us. because Atlanta and Chattanooga raised the rate increase argument in their petition for rehearing before FERC and raise it again in the present proceeding, the argument is properly before us, and we must consider it on its merits. 192 In Order No. 636-A, FERC disposed of the rate increase argument by relying on ANR Pipeline Co. v. FERC, 863 F.2d 959 (D.C.Cir.1988). In that case a pipeline filed a § 4 schedule to implement a rate reduction. Order No. 636-A, p 30,950, at 30,666. FERC, using its § 5 authority, determined that the pipeline's rate design [319 U.S.App.D.C. 101] methodology was unjust and unreasonable (when a pipeline files a § 4 rate schedule, FERC can transform the proceedings into a § 5 action. Western Resources, Inc. v. FERC, 9 F.3d 1568, 1579 (D.C.Cir.1993)), and ordered the company to implement MFV rate design and to eliminate its minimum billing practice. Under the minimum billing practice, certain customers were obligated to pay ANR, in each contract year, an amount equal to the fixed-cost portion of the commodity rate times the greater of (1) the volume actually purchased by the customer, or (2) a 'minimum bill quantity' (MBQ) specified by contract. ANR Pipeline, 863 F.2d at 960; see also supra at 68 n. 29 (describing minimum billing practices). One of ANR's largest customers, Michigan Consolidated Gas Company (MichCon), was paying more than its allocatable share of fixed costs because of the minimum bill requirement. ANR Pipeline, 863 F.2d at 960. Once ANR eliminated the minimum bill in compliance with FERC's order, it recalculated the per-unit share of fixed costs based on the decreased number of total units over which to allocate fixed costs. (After eliminating the minimum bill, the projected number of units over which to allocate fixed costs necessarily decreased for MichCon, since MichCon had not purchased and was not expected to purchase the MBQ of gas.) As a result, the per-unit share of fixed costs incorporated in the commodity charge went up. 193 Although FERC initially rejected ANR's proposed increase in commodity rates as a violation of the filed rate doctrine, we reversed that decision, concluding that FERC had not rationally explained why its requirement that ANR's minimum bill had to be removed would not authorize the removal of volumes attributable to the minimum bill for purposes of calculating the amount of the fixed-cost commodity charge. Order No. 636-A, p 30,950, at 30,667. The Commission therefore reads ANR Pipeline as standing for the proposition that when the Commission orders a pipeline to implement a different rate design method that requires reductions in one component of the pipeline's rates, it must permit the pipeline to implement offsetting increases in some other component simultaneously in order for the pipeline to recover its cost of service. Id. 194 FERC's argument based on ANR Pipeline is a powerful one. Our reasoning in ANR supports a small scale version of the large scale balanced restructuring with offsetting features that FERC has ordered in the present proceeding. ANR is not, however, totally dispositive. The issue in that case came to us at a later stage. In ANR, after the Commission had made its initial § 5 ruling, the pipeline had made a compliance filing. That filing incorporated the contested increase. Reviewing FERC's rejection of the compliance filing, we could not conclude that the Commission had rationally explained why that filing [did] not comport with the earlier instruction to the submitting pipeline. ANR Pipeline, 863 F.2d at 964. We did not therefore purport to authoritatively decide the breadth of the limitation in § 5 providing that the Commission shall have no power to order any increase ... unless such increase is in accordance with a new schedule filed by such natural gas company. 15 U.S.C. § 717d. That is, we did not determine how that section applies in the case of a Commission-initiated rate restructuring which, while reducing rates for some customers, necessarily offsets that reduction by an at least present increase in the share borne by others. Thus, ANR is at best persuasive rather than controlling authority in favor of the Commission's asserted power to order a restructuring that results in increasing some components to the detriment of some pipeline customers. 195 Also relevant to our determination of the issue is our decision in Western Resources Inc. v. FERC, 9 F.3d 1568 (D.C.Cir.1993). In that case, the existing schedule included a forward-haul rate of approximately 20.05 cents per Mcf and a backhaul rate of one cent per Mcf. Id. at 1571. The pipeline filed a § 4 revised tariff sheet featuring increases in both the forward-haul and backhaul rates, making them equal to one another at a level above the former 20.05 cents per Mcf forward-haul rate. Id. FERC approved the forward-haul rate increase, but set the new backhaul rate at one-half the forward-haul [319 U.S.App.D.C. 102] rate. Id. at 1571-72. We remanded the case to FERC, however, holding that it had failed to sufficiently justify its decision as to the forward-haul rate and that it had improperly concluded that it could use its § 4 authority to grant half the requested backhaul increase. We determined that FERC's decision to increase the backhaul rate to only half the level requested was so far removed from the requested increase that it constituted an exercise of § 5 authority and not § 4. See id. at 1578-79. We remanded the backhaul increase on the grounds that FERC had not met the burden of proof imposed on it by § 5. See id. at 1580. Our opinion in Western Resources is susceptible of two interpretations. First, because we remanded for further consideration rather than vacating altogether a Commission order that amounted to a restructuring under § 5 including component increases, we implicitly concluded that FERC had the general authority to conduct such restructuring and only remanded for a determination as to FERC's use of that authority on the specific rate before it. In Western Resources, the turning point of our decision was that FERC had erroneously purported to use § 4 authority where it was unavailable. As § 5 authority was the only authority left, if FERC had acted properly at all, it must have been under § 5. Our Western Resources opinion is also subject to the interpretation that in that case we remanded to FERC for the possibility of a rate decrease under § 5, considering the relevant baseline to be the pipeline's § 4 submission, which proposed rates higher than those that the Commission was willing to approve. Under the first of these possible interpretations, our remand to the Commission to reconsider its action under § 5 may carry some implication that we deemed it to have the authority it purports to use now, but that implication is not a strong one, and again, our existing circuit law at most inclines us toward FERC's position but does not compel us to adopt it. Under the second possible interpretation of Western Resources, the case is simply not on point at all. 196 We therefore today for the first time authoritatively determine the issue of whether a § 5 rate restructuring that includes an increase in some rate components to the detriment of some customers amounts to a prohibited rate increase under § 5 itself. As FERC claims this authority under the Natural Gas Act, a statute committed to its administration, we review the Commission's decision under the deferential standard dictated in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). At the first step of that familiar two-step inquiry, we ask whether Congress has directly spoken to the precise question at issue. Id. at 842, 104 S.Ct. at 2781. That is the point at which our inquiry ends if we can come to the unmistakable conclusion that Congress had an intention on the precise question at issue, Nuclear Information Resource Service v. NRC, 969 F.2d 1169, 1173 (D.C.Cir.1992) (in banc) (internal quotations and citations omitted). This is not such a case. 197 In reaching that conclusion we have examined first the plain language of the statute. The relevant text states: [T]he Commission shall have no power to order any increase in any rate contained in the currently effective schedule of such natural gas company on file with the Commission, unless such increase is in accordance with a new schedule filed by such natural gas company. 15 U.S.C. § 717d(a). At first reading, it may be most natural to suppose that Congress included within the prohibition against any increase in any rate a preclusion of Commission orders for rate restructuring that would ultimately lead to rate increases for some pipeline customers. However, supposition and first reading are not the stuff of unambiguous expressions of intent, and the plain language does not convince us that Congress unambiguously intended the interpretation petitioners support. To further inform our inquiry into congressional intent, we examine the complete statutory scheme. Davis v. Michigan Dep't of the Treasury, 489 U.S. 803, 809, 109 S.Ct. 1500, 1504, 103 L.Ed.2d 891 (1989) (It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.). The scheme considered under the NGA today contemplates that [319 U.S.App.D.C. 103] FERC must act consistently with the Natural Gas Wellhead Decontrol Act of 1989, Pub.L. No. 101-60, 103 Stat. 157 (1989), as well. That enactment contemplates a considerably changed natural gas world in which regulation plays a much reduced role and the free market operates at the wellhead. While a court construing congressional intent in one enactment should not be too greatly influenced by the enactments of a later Congress, we must necessarily consider the duties faced by an agency in examining its construction of its enabling acts. While this part of our analysis usually occurs at the second step of Chevron, it is not irrelevant to the first. A commission charged with the regulation of the rates of an industry may be expected to restructure its general mandates when its world changes. If the enabling act under which it operates can be construed so as to give it that authority, that construction should not be ruled out in the absence of a genuinely unambiguous expression of a congressional intent to the contrary. The general language prohibiting rate increases under § 5 is not so plainly directed at such a preclusion. 198 Insofar as legislative history is an appropriate guide to the unambiguous intent of Congress, the little available in the present instance argues against rather than for the claim of unambiguous congressional intent advanced by petitioners. At the time of the adoption of the NGA, Representative Clarence Lea, a principal sponsor of the NGA and chairman of the committee which reported it to the House, declared that [t]he purpose of [the amendment creating the § 5 rate increase prohibition] was to prevent any company's rates being raised over their objection, with the idea of stifling competition with a competitor. 83 CONG. REC. 9101 (1938) (Statement of Rep. Lea). Under this interpretation, the prohibition was included not so much for the protection of gas consumers from rate increases, but to protect a pipeline disfavored by FERC from suffering under FERC-imposed rate increases that would harm the pipeline's ability to compete. While it is not of course impossible for a statute to have two purposes, the intent advanced by Lea supports the proposition that Congress did not unambiguously intend that § 5 would protect customers from restructured rate designs ultimately leading to increased charges. In short, § 5 is not unambiguous. The provision may easily be read to prohibit FERC from ordering increases in specific filed rates while leaving it free to order the restructuring of rates as it has attempted to do here. 199 As we have found that the statute is not unambiguous with respect to the specific issue before us, we proceed to the second step of the Chevron analysis. At this stage, we defer to the agency's interpretation of the statute if it is reasonable and consistent with the statute's purpose. Nuclear Information Resource Service, 969 F.2d at 1173 (internal quotations and citation omitted). Having already observed in our step one analysis that the Commission's interpretation is consistent with the structure and purpose of the statute, we have no difficulty in finding that interpretation a reasonable one at step two. The petitioners' proffered interpretation is also a reasonable, indeed, perhaps a more natural interpretation of the statutory language. That, however, is not the standard. Even if we were convinced that the petitioners' interpretation were the better one, we are not free to impose our own construction on the statute, as would be necessary in the absence of an administrative interpretation. Id. (internal quotations, brackets, and citation omitted). The only question is whether the agency's interpretation is reasonable and consistent with the statutory purpose. The answer to that question is yes. FERC undoubtedly has the authority to restructure pipeline rate calculation mechanisms, as long as it does so in an otherwise lawful manner and supports its actions with substantial evidence. Any restructuring, even if it does not alter a pipeline's revenues by one cent, will virtually always increase by some amount the charges that some individual customers pay and decrease the charges to some others. Reading § 5 in such a way that these increases for some customers constitute prohibited rate increases leads to the conclusion that FERC has no authority to restructure pipeline rates at all. FERC is not required to so interpret the statute.[319 U.S.App.D.C. 104] B. SFV Rate Design and Substantial Evidence 200 1. MFV rate design's distortions of the natural gas market 201 For several decades, FERC's ratemaking regime has included some portion of a pipeline's fixed costs in the pipeline's commodity and usage charges. Over the years, it varied the specific percentage of fixed costs actually included in those charges, but it generally followed the principle that some portion of fixed costs should be recouped through quantity-dependent charges. 80 In 1986, the Seventh Circuit upheld FERC's 1983 adoption of the MFV rate design in use prior to the promulgation of Order No. 636. See Order No. 636, p 30,939, at 30,432 (citing Northern Indiana Pub. Serv. Co. v. FERC, 782 F.2d 730 (7th Cir.1986)). The PUCs argue that FERC cannot depart from this approved use of MFV rate design without giving a reasonable justification for doing so, and that FERC has failed to do so in the Order No. 636 series. They claim that FERC's determination that MFV distorts the gas market is inconsistent with prior FERC decisions and court rulings approving of MFV. Essentially, they maintain that if MFV was good in the past, it must still be good today. Additionally, the PUCs find plenty of evidence of competitive markets under MFV rate design, and they maintain that dropping MFV rate design is therefore improper. Finally, they stress that the full incorporation of fixed costs in variable charges seems to work well for the oil pipeline industry, so it should also work in the case of gas pipelines. 202 As the Supreme Court has noted, [a]llocation of costs is not a matter for the slide-rule. It involves judgment on a myriad of facts. Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 589, 65 S.Ct. 829, 833, 89 L.Ed. 1206 (1945). Although the relevant technology has changed since Colorado Interstate Gas, the point that [r]ate-making is essentially a legislative function, id., has not. Our task, then, is not to determine whether MFV rate design is superior to SFV rate design, but merely to determine whether FERC has made a reasoned decision based upon substantial evidence in the record in departing from MFV rate design. Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C.Cir.1992). 203 Initially, we note that the PUCs have mischaracterized FERC's decision to depart from MFV rate design. As FERC notes in its brief, modifying pipeline rate design to promote competition is nothing new. The switch from MFV rate design to SFV rate design does not represent a reversal in ratemaking policy. FERC simply ordered a reallocation of fixed costs in pipeline rate design. The fact that the old system was labeled MFV and the new system SFV does not mean that the new system represents a radical departure from precedent. Rather, the change in Order No. 636 is simply one more adjustment, albeit a significant one, in a decades-long series of adjustments in rate design. See, e.g., Canadian River Gas Co., 3 FPC 32 (1942), aff'd, Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206 (1945); Mississippi River Fuel Corp., 4 FPC 340 (1945), aff'd in part and remanded, Mississippi River Fuel Corp. v. FPC, 163 F.2d 433 (D.C.Cir.1947); Atlantic Seaboard Corp., 11 FPC 43 (1952); State Corp. Comm'n v. FPC, 206 F.2d 690 (8th Cir.1953), cert. denied, 346 U.S. 922, 74 S.Ct. 307, 98 L.Ed. 416 (1954); Fuels Research Council, Inc. v. FPC, 374 F.2d 842 (7th Cir.1967); United Gas Pipe Line Co., 50 FPC 1348 (1973), reh'g denied, 51 FPC 1014 (1974), aff'd sub nom. Consolidated Gas Supply Corp. v. FPC, 520 F.2d 1176 (D.C.Cir.1975); Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578 (D.C.Cir.1979); Northern Indiana Pub. Serv. Co. v. FERC, 782 F.2d 730 (7th Cir.1986) (NIPSCO). 204 Like past changes in rate design, FERC initiated the departure from MFV in response to changing market conditions. Specifically, the agency determined that continued adherence to MFV rate design would inhibit the goal of the development of a competitive, national gas market and, therefore, [319 U.S.App.D.C. 105] ... [would] not comport with the goals set forth in Order No. 636. Order No. 636, p 30,939, at 30,433. For various reasons, pipelines prior to Order No. 636 had differing amounts of fixed costs in their commodity and usage charges. As FERC determined, [t]his situation ... can hinder competition between gas sellers at the wellhead because competition is not based on the seller's costs and therefore on their ability to compete directly with each other. Id.; see also supra Part IV.A.1. 205 The PUCs' objection that FERC has used MFV pricing in the past does not come to terms with the fact that the natural gas industry is being reorganized at Congress' direction and that FERC is now attempting to structure the rate design system to favor the development of a nationwide, competitive natural gas marketplace. FERC reasonably determined that, because in its current assessment of the prevalent economic and market circumstances it believes the goal of achieving an efficient, national gas market is the factor that should control the selection of the appropriate rate design method, Order No. 636-A, p 30,950, at 30,605, its departure from the strict terms of MFV rate design as approved in 1986 was justified. Similarly, the PUCs' reliance on the practices in the oil pipeline industry is misplaced. The same goals, problems, and solutions may or may not apply to oil pipelines, 81 but there is no requirement that rate design function in the same manner across both industries. Finally, as FERC stresses, the Order No. 636 regime permits parties to seek approval of non-SFV rate design methods in individual rate proceedings. See Order No. 636, p 30,939, at 30,434; Order No. 636-A, p 30,950, at 30,605. For all these reasons, we hold that FERC has supported its determination to abandon MFV rate design with substantial evidence in the record. 2. FERC's choice of SFV rate design 206 Several petitioners raise challenges to FERC's determination that SFV is the appropriate rate design method for the natural gas market. The LDCs argue that the commodity and usage charges under SFV rate design will not reflect differences in transportation costs for different pipelines, thus sending improper price signals to gas purchasers. The PUCs argue that under SFV rate design, pipelines will recover all of their fixed costs through reservation and demand charges and will hence have no incentive to maximize pipeline throughput. The Electric Generators argue that FERC failed to consider adequately an alternative rate design method proposed by Arizona Electric. Finally, the Small Distributors argue that the switch to SFV will result in an increase in gas prices at the wellhead, and that FERC has failed to demonstrate that such an increase is necessary to assure an adequate supply of gas. As we noted in the previous section, our task is not to determine whether SFV is in fact the best rate design method available, but merely to determine whether FERC can support its choice with substantial evidence in the record. 207
208 The LDCs 82 claim that the switch to SFV rate design will undermine gas purchasers' ability to make economically efficient choices of gas suppliers because the per unit gas price they face from a supplier will not reflect the distance which the gas must travel over a pipeline to reach the customer. In consequence, a gas purchaser might choose to buy from supplier A, who transmits gas over pipeline AA for a distance of 1,000 miles, when the economically efficient outcome would have been for the purchaser to buy from supplier B, who transmits slightly more expensive gas over pipeline BB for a distance of only 500 miles. The LDCs' analysis, however, overlooks two important facts. First, as FERC points out, the variable cost of transportation--basically the cost of fuel [319 U.S.App.D.C. 106] for pipeline compressors, will still be included in the commodity and usage charges. So gas purchasers will receive the proper signal regarding the actual differences among suppliers in variable transportation costs. See Order No. 636, p 30,939, at 30,437. Furthermore, gas purchasers will still take differences in fixed transportation costs into account, because those cost components will be included in the reservation and demand charges. Id. As FERC notes, [l]ocational advantages will continue to matter, because long-distance transportation generally will require more facilities, and thus will have higher fixed costs, than shorter-distance arrangements. 209 The LDCs argue, citing Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 648 n. 10, 100 S.Ct. 1925, 1928 n. 10, 64 L.Ed.2d 580 (1980) (per curiam), that FERC's removal of transportation costs from per unit charges at the supplier level amounts to base point pricing, which, they argue, would be [a] per se violation [ ] of the antitrust laws, if done by agreement among private parties to fix the price of transportation added to the price of products. While we have concluded that FERC's response to this argument is adequate, we further note that the base point pricing cases have involved private agreement in otherwise unregulated markets, and commodities such as cement, expensive to transport as contrasted with natural gas, a product which not only is the subject of pricing regulation but also is extraordinarily inexpensive to transport over pre-existing pipelines. Cf. FTC v. Cement Institute, 333 U.S. 683, 697, 68 S.Ct. 793, 801, 92 L.Ed. 1010 (1948). We accordingly reject the LDCs' challenge to FERC's decision to implement SFV rate design. 210
211 The PUCs argue that the switch to SFV rate design will frustrate, rather than promote, the goals of maximizing efficiency and competition. Their complaint centers on the claim that because pipelines under SFV rate design will be able to collect all their fixed costs, including return on investment and taxes, in the demand charge, they will have no incentive to assure that gas actually flows through the pipeline under firm service arrangements. That is, because a pipeline will recover no fixed costs or return on investment through the commodity or usage charge, it will have no incentive to transport any gas. 212 FERC recognized this potential incentive problem in Order No. 636, but determined that the pipelines will now have much less influence on the use of their systems because they are transporting gas to, rather than selling gas at, the city-gate. Order No. 636, p 30,939, at 30,436. Accordingly, [t]ransportation volumes will mainly be a function of the needs of gas purchasers and the prices offered by gas sellers in the production areas. Id. In any case, the goals to be accomplished via SFV outweigh generally the goal of allocating fixed costs to annual throughput. Order No. 636-A, p 30,950, at 30,606. We find these explanations sufficiently convincing to meet the substantial evidence standard for rate design in the face of the PUCs' incentive argument. 213
214 The Electric Generators argue that FERC failed to consider adequately the demand-responsive volumetric charge system proposed by Arizona Electric Power Cooperative, Inc. (AEPCO), as an alternative to SFV rate design. They claim that AEPCO's proposed system does a better job of rationing scarce capacity during peak demand. However, FERC correctly counters that the fact that AEPCO may have proposed a reasonable alternative to SFV rate design is not compelling. The existence of a second reasonable course of action does not invalidate an agency's determination. See Cities of Batavia v. FERC, 672 F.2d 64, 84 (D.C.Cir.1982) ([T]he billing design need only be reasonable, not theoretically perfect.). Although an administrative agency must respond to comments which, if true, ... would require a change in an agency's proposed rule, American Mining Congress v. EPA, 907 F.2d 1179, 1188 (D.C.Cir.1990) (internal quotation marks and citations omitted), [319 U.S.App.D.C. 107] FERC has met that standard as to AEPCO's proposal. FERC noted the generator's concerns, but concluded that its own plan would better avoid the distorting influences on the gas market experienced during MFV ratemaking. Order No. 636-A, p 30,950, at 30,606-07. Though AEPCO and FERC each briefly debate the merits of the two proposals, we see no basis for voiding FERC's ruling, which appears based on substantial evidence in the record. 215
216 The Small Distributors and Municipalities argue that the effect of SFV rate design is to increase gas prices at the wellhead. They further claim that FERC failed to demonstrate that such an increase is necessary to assure adequate supply. FERC points out that this argument is not properly before the court because petitioners did not raise it in the administrative proceedings in their request for rehearing of Order No. 636. As we noted earlier, see supra Part IV.A.2, 15 U.S.C. § 717r(b) (NGA § 19(b)) clearly states that [n]o objection to the order of the Commission shall be considered by the court unless such objection shall have been urged before the Commission in the application for rehearing unless there is reasonable ground for failure so to do. See also ASARCO, 777 F.2d at 773-75 (elaborating on the significance of the § 717r(b) requirement that the objection be raised before FERC). Finding no mention of this price increase objection in the petitioner's rehearing request, and hearing no explanation by the petitioner of a reasonable ground for this omission, we conclude that the price increase objection is not properly before the court and decline to reach it.
217 The Regulatory Flexibility Act, 5 U.S.C. §§ 601-612 (RFA), requires that an agency conduct a regulatory flexibility analysis (or small entity impact analysis) for any rule that will have a significant economic impact on a substantial number of small entities. 5 U.S.C. § 605(b). The PUCs argue that the RFA required that FERC perform a small entity impact analysis for Order No. 636 because of its significant economic effect on LDCs. However, in Mid-Tex Elec. Co-op., Inc. v. FERC, 773 F.2d 327, 340-43 (D.C.Cir.1985), we conducted an extensive analysis of the RFA provisions governing when a regulatory flexibility analysis is required and concluded that no analysis is necessary when an agency determines that the rule will not have a significant economic impact on a substantial number of small entities that are subject to the requirements of the rule. Id. at 342 (emphasis added). FERC has no jurisdiction to regulate the local distribution of natural gas. 15 U.S.C. § 717(b) (The provisions of this chapter ... shall not apply to ... the local distribution of natural gas or to the facilities used for such distribution.). Accordingly, the allegation that Order No. 636 may have a significant economic impact on LDCs (an assertion FERC disputes) is not sufficient to trigger the mandate of the RFA. FERC had no obligation to conduct a small entity impact analysis of effects on entities which it does not regulate. 218 C. FERC's Discretion to Adopt Mitigation Measures 1. Background 219 FERC recognized that the adoption of SFV rate design could result in cost shifting among pipeline customers because of their differing load factors. Order No. 636, p 30,939, at 30,435; Order No. 636-A, p 30,950, at 30,601-03; Order No. 636-B, p 61,272, at 62,015-16. The adoption of SFV will, at least arguably, shift costs to low load factor customers in two ways: first by removing all fixed charges from the usage charge; and second by measuring usage solely based on peak demand, rather than annual usage. To elaborate, a low load factor customer transports most of its gas during the winter heating season; therefore, its average daily usage of its capacity entitlement is significantly below its usage on a peak day. As a result of this demand structure for low load factor customers, they usually pay proportionately more in reservation and demand fees than do [319 U.S.App.D.C. 108] high load factor customers. This result follows logically when reservation fees are constant throughout the year for a high and a low load factor customer who each have the same capacity entitlement. The low load factor customer purchases a lower annual volume of gas; hence, a larger proportion of its payments to the pipeline are made up of reservation fees. The existence of this phenomenon means that, once the pipeline has switched to SFV, the low load factor customers will pay a higher share of pipeline fixed costs than they did under MFV. Under MFV, low load factor customers could escape some of the fixed costs by not purchasing their full entitlement of gas because the per unit price of the gas contained some fixed costs. Additionally, under SFV, FERC has determined that the reservation and demand charges will no longer vary with annual usage, as they did under MFV. Order No. 636-A, p 30,950, at 30,599. 220 To offset these cost shifts likely to result from Order No. 636, FERC adopted several mitigation measures. First, it required that pipelines use some measure, such as seasonal contract quantities, in calculating reservation and demand fees when the switch to SFV rate design causes significant cost shifts to individual customers. Order No. 636-A,p 30,950, at 30,599. If, even after the seasonal adjustments, the switch to SFV still resulted in a ten percent or greater rate increase under SFV for a particular customer class, FERC required that the pipeline phase in SFV rate design over four years for that customer class, allowing the customer class to avoid rate shock. Order No. 636, p 30,939, at 30,435-46; Order No. 636-A, p 30,950, at 30,603-04. FERC also sought to retain the protection for small customers that the old regime offered by requiring all pipelines that offered service under a one-part volumetric rate at an imputed load factor on May 18, 1992, to offer transportation service under a similar rate structure to all customers who were eligible on that date for such an arrangement. Order No. 636-A,p 30,950, at 30,600; Order No. 636-B, p 61,272, at 62,018-22. We will label this mitigation measure the small customer discount. 221 Petitioners bring several different challenges to the adoption of these mitigation measures and to various aspects of their implementation. We now consider each of these challenges. 2. Justifications for mitigation measures 222 The high load factor LDCs object to FERC's requirement of a small customer discount and to the use of seasonal adjustments for low load factor customers. They argue that the small customer discount results in high load factor customers having to pay higher unit charges than would be the case without the requirement. They also maintain that the use of seasonal adjustments for low load factor customers eliminates the incentive for these customers to flatten their demand over the course of the year. Seasonal adjustments also allegedly penalize high load factor customers for their foresight in using storage and other peak shaving tools in winter months to flatten their demand. The LDCs claim that the higher charges to high load factor customers resulting from these mitigation measures unduly discriminate against residential customers of high load factor LDCs and give preferential treatment to customers of low load factor LDCs in violation of NGA § 5(a). 223 FERC responds to the LDCs' claims by stressing that the effect of the mitigation measures is to preserve as much of the status quo as possible with respect to cost allocation. The intervenors point out that the LDCs' attack on the mitigation measures improperly assumes that SFV rate design is a baseline from which any mitigation measures should be judged. Both FERC and the intervenors are correct. The LDCs' claim of discrimination is based on the assertion that they, and ultimately their customers, will have to pay a larger share of fixed costs than they would pay without the mitigation measures. But the LDCs have no sustainable argument for why this should invalidate the measures. There is no neutral or inherently fair allocation of fixed costs, as the history of rate design amply demonstrates. The LDCs assume that allocating fixed costs according to a straight SFV methodology is the fair way of doing [319 U.S.App.D.C. 109] things, a curious position in light of the LDCs' opposition throughout these proceedings to the adoption of SFV rate design. But there is no fair baseline from which to judge a particular cost allocation scheme. 224 In any case, FERC correctly points out that it has long rejected the position that fixed costs should be allocated solely on the basis of peak day demand, as would apparently result under a straight SFV system with no mitigation measures. The courts have concurred in FERC's rejection of such a regime. See NIPSCO, 782 F.2d at 742 ([T]he Commission long ago with judicial approval rejected the argument that fixed costs should only be allocated and recovered solely on the basis of peak day demands.). As for the LDCs' argument that the seasonal adjustments remove the incentive for low load factor customers to flatten their demand throughout the year, we note that this incentive is greatly magnified under a pure SFV system as compared to an MFV system. Under MFV, the low load factor customers could have avoided part of the fixed costs during periods of low demand because part of the per unit gas charge included fixed costs. Reducing the stronger incentive to flatten demand that would otherwise exist under SFV is not problematic because, as we have just explained, a pure SFV system is not a proper baseline from which to judge the appropriateness of mitigation measures. 225 The same reasoning applies to the LDCs' claim that the mitigation measures unfairly penalize those LDCs whose foresight led them to invest in peak-shaving facilities before Order No. 636. The mitigation measures only look like an unprecedented subsidy flowing from high load factor customers to low load factor customers when one compares the Order No. 636 regime to a straight SFV regime with no mitigation measures at all. Once again, a strict SFV regime is not the proper baseline. When one compares the Order No. 636 system with the pre-Order No. 636 system, in which low load factor customers escaped part of their share of fixed costs by reducing purchases in low demand periods, the mitigation measures make sense in light of FERC's goal of avoiding sudden and shocking departures from the status quo with respect to cost allocation. In short, low load factor customers avoided some fixed costs in low demand periods before Order No. 636, and they are still avoiding some fixed costs in low demand periods after Order No. 636. LDCs which adopted peak-shaving techniques are no worse off than they were before Order No. 636. It is therefore improper to say that FERC has penalized them. 85 226 There being no neutral standard or baseline to guide the court in evaluating mitigation measures, the only relevant question is whether FERC has made a reasonable allocation of fixed costs supported by substantial evidence. Considering the Order No. 636 series as a whole and bearing in mind FERC's regulatory goals and history, we are convinced that FERC has supported its adoption of mitigation procedures with substantial evidence. We now turn to the various challenges raised by petitioners to specific aspects of the mitigation measures. 3. Non-permanence of mitigation measures 227 As we noted above, see supra Part IV.C.1, FERC ordered that under certain circumstances, pipelines must phase in SFV rate design over four years for a customer class, allowing the customer class to avoid rate shock. Order No. 636, p 30,939, at 30,435-46; Order No. 636-A, p 30,950, at 30,603-04. The Small Distributors and Municipalities 86 contend that, rather than phasing in new rates, FERC should have adopted permanent mitigation of their rates. They argue that [u]nreasonable rates do not become just and reasonable by phasing them in over a four-year period. Mitigation is no less [319 U.S.App.D.C. 110] vital four years later when the Commission's four-year 'remedy' expires. But FERC responds that the purpose of the four-year phase in period was not to protect the customer class from cost shifting altogether, but merely to avoid the shock of allowing it to happen all at once. FERC's response is perfectly sensible, and we hold that the Commission has justified under the substantial evidence standard the four-year phase in period in the circumstances in which Order No. 636 requires it.
228 The PUCs argue that FERC should have reduced the pipelines' rate of return because the pipelines will be able to recover all of their fixed costs and return on investment through demand and reservation charges instead of facing the uncertainty of recovering a portion of their fixed costs and return through gas sales throughout the year. See supra Part IV.B.2.b (describing reduced pipeline uncertainty under SFV rate design). Specifically, the PUCs contend that FERC should have followed its decision in Transcontinental Gas Pipe Line Corp., 56 FERC p 61,037, modified in part, 57 FERC p 61,331 (1991), 62 FERC p 61,221 (1993), 64 FERC p 61,099 (1993), rev'd in part on other grounds, Transcontinental Gas Pipe Line Corp. v. FERC, 54 F.3d 893 (D.C.Cir.1995), and imposed a 25 basis point reduction in pipelines' return on equity to reflect the lower risk under SFV rate design. However, FERC stresses that it deferred any such adjustments in rates of return to the individual restructuring proceedings in light of the fact that pipeline risk is a matter for pipeline-specific analysis in light of all risks. Order No. 636, p 30,939, at 30,437. As we have said before, setting a rate of return is an intensely practical affair requiring the conversion of inexact data into exact rates or limits upon rates. Matson Navigation Co. v. Federal Maritime Comm'n, 959 F.2d 1039, 1043 (D.C.Cir.1992) (citations and internal quotation marks omitted). Nothing in the law requires that FERC take a shotgun approach to the problem of decreased pipeline risk by ordering an across-the-board rate reduction, much less that the court do so. We note in this regard that Transcontinental Gas, the decision upon which petitioners rely, was itself an individual pipeline rate making decision. FERC easily meets its burden of supporting its decision to defer rate of return adjustments to individual restructuring proceedings.
229 FERC required that pipelines use measures such as seasonal contract adjustments to avoid significant cost shifting for individual customers. If, after application of these mitigation measures, the use of SFV still results in a 10 percent or greater increase in revenue responsibility for any historic customer class, then the pipelines are required to phase in the increase over four years. Order No. 636-B, p 61,272, at 62,016 (emphasis added). The Pipeline Petitioners argue that the mitigation measures short of four-year phase in should also have been required on the basis of customer class rather than on the basis of SFV's effects on individual customers. 230 In deciding to base the initial mitigation measures on SFV rate design's effects on individual customers rather than customer class, FERC cited several recent decisions in individual pipeline restructuring proceedings. Id. at 62,016 n. 140. However, these rulings simply implement Order No. 636 and order studies on the effect of SFV rate design on individual customers, anticipating the adoption of mitigation measures on a customer-by-customer basis. But relying on these orders as a justification for the customer-by-customer basis would be a classic case of bootstrapping, amounting to a conclusion that Order No. 636 properly requires the customer-by-customer approach since several decisions implementing Order No. 636 take that approach. Nothing in any of the decisions justifies the basic determination in favor of the individual customer approach. Significantly, FERC cites no other support for its decision in Order No. 636-B to favor the individual customer approach. 231 [319 U.S.App.D.C. 111] The Pipeline Petitioners also raise an important question about the danger of the individual customer approach with respect to pipeline cost recovery: 232 [R]ates are determined on the basis of costs incurred and billing quantities during a specified test period. While it is reasonable to expect that the actual billing quantities of all customers in each class during the period the rates are in effect will approximate those experienced by the class during the test period, it is likely that individual customers may experience larger variances in billing quantities. The establishment of rates on a customer-by-customer basis therefore increases the risk that a pipeline will fail to collect its total costs during the period in which rates are in effect. 233 Pipeline Petitioners' Brief at 27. They also argue that FERC's order fails to take into account potential customer cost reductions under Order No. 636 that are not directly related to the switch to SFV rate design, and that the individual customer method increases the likelihood for discrimination in rates to similarly situated customers in violation of Sections 4 and 5 of the Natural Gas Act. 234 FERC has provided, in response to our request at oral argument, several citations to Order Nos. 636-A and 636-B which supposedly explain FERC's decision to implement the initial mitigation measures on a customer-by-customer basis. However, after examination of these citations, we conclude that the discussions cited on this question are ambiguous at best and incomplete at worst. FERC has failed to address adequately, in either the Order No. 636 series or in its brief, the Pipeline Petitioners' objections which we have outlined above. Because, as previously noted, the Commission has failed to provide any reasoned justification for its decision on this issue, and because the petitioners' objections raise serious questions about the appropriateness of FERC's ruling, we conclude that the Commission has failed to support its decision on this issue with substantial evidence. We therefore remand to the Commission the question of whether the initial mitigation measures should be implemented on the basis of customer class for further examination. 235
236 In requiring a continuation of the pre-Order No. 636 small customer discounts, FERC only mandated that downstream pipelines offer the discount to the class of customers eligible for it on May 18, 1992. But the Small Distributors 88 argue that FERC should have required upstream pipelines to provide the discounts to any customers of downstream pipelines who received the discounts on May 18, 1992. The downstream pipeline customers were indirect customers of the upstream pipelines under the old regime and now are direct customers of these upstream pipelines. The Small Distributors argue that these former downstream pipelines customers are now indistinguishable from the upstream pipeline's other small customers, with whom they compete directly for markets. FERC's failure to account for this fact results in undue discrimination between similarly-situated small customers on the same pipeline solely on the basis of whether they used to be served through a downstream pipeline prior to Order [No.] 636. Although FERC did indicate in Order No. 636-B that the former downstream pipeline customers' need for discounts should be examined in individual restructuring proceedings, the Small Distributors contend that it is unfair and unreasonable to make them demonstrate such a need in restructuring proceedings when that need has already been presumed for other small customers. 237 The Small Distributors raise excellent points. FERC's failure to counter them with anything but its insistence that former downstream customers can raise their need for small customer discounts in upstream pipeline restructuring proceedings (perhaps they can, although the Small Distributors dispute the effectiveness of such a course of action), does not address the core of the Small Distributors' argument. FERC has made an [319 U.S.App.D.C. 112] arbitrary distinction between former indirect small customers of upstream pipelines (who are now direct small customers) and small customers who have always been direct customers of the same pipelines. Because FERC has not supported this distinction with substantial evidence in the record, we remand this issue to the Commission for further consideration of whether or not the small customer benefits should be made available to the former downstream small customers.
238 In Order No. 636-A, FERC abandoned the requirement of triennial rate review, which it had formerly imposed on many pipelines in exchange for granting the pipelines certain powers over their rates. FERC explained that the only reason it had formerly required triennial rate review was because of the power it had granted the pipelines. Specifically, under the purchased gas adjustment (PGA) regulatory scheme, participating pipelines had discretion to change the gas supply cost element of their rates. In exchange for this ability, pipelines had to agree to a reexamination of all their costs and rates at three year intervals to assure that gas cost increases were not offset by decreases in other costs. Order No. 636-A, p 30,950, at 30,671; see also 18 C.F.R. § 154.303(e) (laying out triennial rate review requirement). Under the Order No. 636 regime, pipelines have no special rate adjustment mechanism comparable to the PGA scheme, so FERC concluded that triennial rate review was unnecessary. In Order No. 636-B, FERC even raised the question of whether it had the discretion to order triennial rate review under the Order No. 636 regime, noting that there are limits to the authority of the Commission to require pipelines to periodically justify their existing rate levels. Order No. 636-B, p 61,272, at 62,044-45 (citing Public Serv. Comm'n v. FERC, 866 F.2d 487 (D.C.Cir.1989) (PSCNY) (holding that requiring periodic filings under NGA § 4 is beyond FERC's statutory authority)). 239 The LDCs 89 argue that FERC should not have abandoned triennial rate review. First, they claim that FERC ignored that the market-based sales rate authority granted pipelines under Order [No.] 636 is a 'special rate adjustment mechanism'  justifying a periodic rate review. In any case, they argue that FERC certainly does have the authority to impose triennial rate review under the Order No. 636 regime. In their view, PSCNY simply means that FERC cannot impose [a periodic filing] requirement except as a condition of some other benefit voluntarily accepted by the pipeline. Because Order No. 636 conferred several benefits on pipelines, the LDCs contend that FERC's failure to attach periodic rate review to at least one of those benefits was unjustified. FERC, however, contends that the benefits to pipelines cited by the LDCs are not nearly so certain: there is no reason to believe that by allowing a pipeline to sell gas at market-based rates, rather than regulated cost-based rates, Order No. 636 makes it more likely that rates for unbundled transportation service will become unjust and unreasonable. 240 The PUCs also argue in favor of retaining triennial rate review, restating the LDCs' argument that FERC has conferred a benefit on pipelines by instituting SFV rate design and can accordingly require periodic rate review. They also point out that, under SFV, as long as fixed costs continue to decline, pipelines will have no incentive to file NGA § 4 rate cases since they will be recovering all of their fixed costs through reservation and usage fees. Consumers will then be left with an NGA § 5 complaint as their only option for protecting themselves, but a § 5 complaint is less satisfactory than a § 4 rate case because under § 5 the burden is on the complainant to establish the unjustness or unreasonableness of the rate. Also, § 5 relief is prospective only; § 4 relief can encompass a refund order. FERC responds that traditional ratemaking tools are available to take account of long-run declining costs, and a three-year review [is] unnecessary.[319 U.S.App.D.C. 113] FERC's position that it lacks authority to impose triennial rate review is quite strong. The LDCs' claim that the market-based sales authority granted to pipelines is a benefit to which triennial rate review may be attached rings hollow in light of the fact that pipelines are leaving the gas sales business in favor of gas transportation under Order No. 636. Furthermore, whatever the benefits of SFV rate design to pipelines, they are not benefits voluntarily accepted by the pipelines and so cannot be the basis for the imposition of periodic rate review. See PSCNY, 866 F.2d at 492 (noting that FERC's authority to impose triennial rate review in the PGA context obviously rests on pipeline consent to triennial rate review in exchange for automatic PGA adjustment authority). In any case, in the presence of these serious doubts about FERC's authority to impose periodic rate review in the Order No. 636 context and in view of the alternative procedures available to the Commission for ensuring reasonable rates, we hold that petitioners have failed to show that FERC has not supported its decision to drop triennial rate review with substantial evidence.