Opinion ID: 184604
Heading Depth: 2
Heading Rank: 4

Heading: FERC's Unwillingness to Grant Mojave an Exception

Text: 35 Texaco contends that the Mojave shippers were entitled to an exemption from SFV rate design under the Commission's Order 636-related rules. See Order 636, p 30,939 at 30,434 (stating that FERC will consider alternative rate design when conditions warrant it and the parties agree); Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation under Part 284 of the Commission's Regulations, and Regulation of Natural Gas Pipelines after Partial Wellhead Decontrol, FERC Stats. & Regs., Regs. Preambles p 30,950, 30,605 (1992) (Order 636-A) (holding that parties seeking to be freed from SFV must overcome a rebuttable presumption in SFV's viability). Texaco's argument is of three parts: (1) competitive pressures in the California market have resulted in such large discounts in usage charges that imposition of SFV-based pricing does not make sense; (2) an exception would prevent Mojave's reaping a significant windfall from mandatory SFV pricing; and (3) notwithstanding whether the other arguments prove availing, the Mojave service agreements embodied discounts that necessarily survive imposition of Order 636. 36 In Order 636, FERC stated that it would not 37 rigidly preclude the pipeline, its customers, and interested state commissions, producers, marketers, brokers, end-users, and others from agreeing to an alternative method that deviates from SFV and may be appropriate to that particular pipeline system. If the parties affected by a pipeline's rate design agree to a different method, the Commission will consider giving effect to the parties' agreement.... [A]ny party ... advocating something other than SFV carries a heavy burden of persuasion. 38 Order 636, p 30,939 at 30,434. In this instance, FERC found that Texaco failed to satisfy its heavy burden of persuasion because it failed to address FERC's concern that however low the usage rates might be, so long as they reflected any element of the pipeline's fixed costs, they would obscure the relative costs of producing the gas the pipelines carried. See First Rehearing Order, 64 FERC at 61,389. 39 As we have previously noted, [t]he natural gas industry is functionally separated into production, transportation, and distribution. UDC, 88 F.3d at 1122. Order 636 was designed to foster competition among natural gas producers by ensuring that commodity prices reflected the difference in extraction costs at the wellhead. See First Rehearing Order, 64 FERC at 61,388. FERC intended that disaggregation of transportation and production charges would encourage consumers to purchase gas from the lowest cost producer, that market demand would create an incentive for more low-cost gas production, and that producers' desire to satisfy that demand would result in an increase in the amount of low cost gas available to consumers. See Order 636, p 30,939 at 30,434-35. It is therefore irrelevant how low usage rates may be at a given time so long as the intermingling of pipelines' fixed and variable costs obscures differences in producer costs. Thus, contrary to Texaco's claims, the prevalence of low transportation charges in the market that Mojave serves does not moot the purpose of Order 636. 40 Texaco next contends that FERC has granted exceptions to similarly situated transporters in the past and that it has repeatedly permitted pipelines to retain non-SFV negotiated rates since issuing the orders challenged in this case. We are satisfied [331 U.S.App.D.C. 245] that the non-Order 636 cases upon which Texaco relies are inapposite, and exceptions granted after issuance of the orders under review in this case play no role in our determination of the orders' legality. Union Pacific, 129 F.3d at 164. 41 Texaco also claims that the imposition of SFV pricing provided Mojave with a windfall. Mojave's profits have no bearing on this dispute. Order 636 was promulgated and the orders under review were issued to promote a national gas policy and to ensure that Mojave's rate design did not frustrate that purpose. Regulatory evolution is endemic to the natural gas market, see, e.g., Southeastern Michigan, 133 F.3d at 45-46, and that it might occur should have been anticipated by the shippers, see Union Pacific, 129 F.3d at 163. 42 Finally, Texaco contends that the service agreements embodied pre-Order 636 discounts that should survive its implementation. In Order 636, FERC stated that it would not disturb pre-existing discounts that had been negotiated and included in [a] contract either [as] a fixed rate or [as] some permanent form of discount, such as ninety percent of the maximum rate. Order 636, p 30,939 at 30,454. Texaco maintains that Mojave's MFV rate design was itself a discount. 43 Texaco's argument rests upon a misunderstanding of the nature of the exempted discounts to which Order 636 referred and upon a misinterpretation of a series of unrelated Commission pronouncements. First, FERC reasonably construed its reference to rate discounts in Order 636 to mean a markdown on an otherwise generally applicable rate. See Second Rehearing Order, 65 FERC at 61,469. Mojave's rate design included lower reservation fees (and commensurately higher usage charges), but the reservation fee was not discounted from the otherwise applicable rate. Texaco confuses MFV rate design with rate abatement. 44 Second, Texaco argues that FERC's reference to Mojave's discounted reservation fee in an earlier licensing proceeding, see Mojave Pipeline Co., 56 FERC p 61,282, 62,102 (1991), binds it in the current matter. In its Second Rehearing Order, however, the Commission distinguished between discounts subject to the Order 636 exemption and its use of similar language in the licensing order. See Second Rehearing Order, 65 FERC at 61,469. Because FERC's explanation of the distinction is reasonable, we defer to its construction of the two orders. See Natural Gas Clearinghouse v. FERC, 108 F.3d 397, 399 (D.C.Cir.1997) (holding that Commission's reasonable interpretation of its own orders will be upheld). 45 Third, Texaco asserts that FERC's denial of the exemption contradicted its precedent. In El Paso Natural Gas Co., 63 FERC p 61,139 (1993), upon which Texaco relies, the Commission permitted the pipeline to retain discounts on its maximum backhaul rate for shippers whose contracts included such discounts prior to promulgation of Order 636. See id. at 61,939, 61,940-41. Contrary to Texaco's claim, however, the El Paso case is inapposite: it concerned discounting the maximum applicable rate and not an alternative rate design. 46