Opinion ID: 527537
Heading Depth: 2
Heading Rank: 3

Heading: The Minimum Commodity Bill

Text: 64 FERC adopted the ALJ's findings and ruling on elimination of Panhandle's minimum commodity bill. The ALJ declared the minimum bill anticompetitive, reasoning that it discourages partial requirements customers from taking advantage of offers of lower priced gas from competing suppliers and thus would block price signals from getting to producers. Opinion No. 265, 38 F.E.R.C. at 61,455. 1 The Commission explicitly embraced the following explanation from the ALJ's decision: the MFV method placed certain elements of Panhandle's fixed costs (return on equity, associated taxes, and production-related costs) in Panhandle's commodity component in the expectation that leaving Panhandle's return at risk would give Panhandle incentives to lower gas costs so that it could maximize sales and thereby earn its allowed return; to turn around and allow Panhandle assured recovery of these same fixed costs via a minimum bill would defeat the purposes of the MFV method. Opinion No. 265, 38 F.E.R.C. at 61,455. FERC accordingly concluded that the MFV method was discordant with minimum commodity bills, id., and correspondingly adjudged Panhandle's minimum bills to be unjust and unreasonable. Opinion No. 265-A, 40 F.E.R.C. at 61,597. 65 This court, in East Tennessee, 863 F.2d at 937-38 & n. 9, acknowledged that FERC retains the ultimate burden of proving an existing minimum bill unlawful; we held, however, that the Commission could (1) reasonably conclude that minimum bills are anticompetitive and therefore prima facie unlawful, and accordingly (2) shift to the pipeline the burden of producing evidence that the minimum bill at issue meets at least one of the three remedial justifications set out in Atlantic Seaboard Corp., 38 F.P.C. 91 (1967), aff'd, 404 F.2d 1268 (D.C.Cir.1968). See Tennessee Gas Pipeline Co. v. FERC, 871 F.2d 1099, 1104 (D.C.Cir.1989). Atlantic Seaboard, 38 F.P.C. at 95, recognized that a minimum bill could rectify (1) the inadequate recovery of fixed costs; (2) the excessive shifting of costs to customers with no alternative supply; or (3) the inadequate recovery of take-or-pay obligations. A particular minimum bill may be justified if specifically designed to achieve [one of the stated remedial ends], but nothing more. Mississippi River Transmission Corp. v. FERC, 759 F.2d 945, 950 (D.C.Cir.1985). In this case, FERC rejected arguments based on each of the three Atlantic Seaboard justifications. Panhandle, in its challenges to FERC's orders before this court, presses arguments only as to the first two justifications. 2 66 Concerning the first Atlantic Seaboard justification, the one based on inadequate recovery of fixed costs, the Commission stated: Under the MFV method, the pipeline is assured recovery of all fixed costs for which a guarantee of recovery is appropriate through the demand component. A minimum bill, therefore, is unnecessary.... Opinion No. 265-A, 40 F.E.R.C. at 61,598. This court, in East Tennessee, accepted the Commission's logic: FERC's adoption of an 'incentive theory,' that exposure of the fixed costs attributable to a return on equity will improve the competitiveness of the natural gas industry, is a judgment well within its discretion in deciding what is a just and reasonable rate. 863 F.2d at 939; see Tennessee Gas, 871 F.2d at 1104. 3 67 Panhandle argues, however, that the underlying rationale for putting recovery at risk does not apply to certain of its fixed costs. In particular, Panhandle maintains that FERC may place costs relating to gathering facilities at risk when such facilities are exempted from FERC jurisdiction and thus are not subject to FERC's prior review in a certificate proceeding. Final Brief for Petitioner, Panhandle Eastern Pipe Line Company at 42-43. But Panhandle's gathering facilities were subject to FERC's prior review and certification, the pipeline alleges; thus there is no need to put recovery of these costs at risk to ensure prudent investment. FERC's limited ability to check investments in production and gathering facilities, however, was merely a secondary factor in support of the Commission's long-standing policy of classifying all production and gathering costs to the commodity component; the classification follows primarily from the nexus between costs related to gas purchased and gas produced. ALJ Decision, 32 F.E.R.C. at 65,285 (production and gathering costs are directly related to the annual volumes of gas produced and sold). That is, because gathering lines and other facilities associated with production are so closely related to the purchasing of gas from producers, the fixed costs attributable to these facilities should be classified as commodity costs just as purchased gas costs are so classified. See Texas Eastern, 30 F.E.R.C. at 61,269 (the close nexus continues to exist between all costs related to purchased and produced gas and the commodity cost of gas itself). 4 FERC therefore properly rejected Panhandle's arguments regarding the recovery of fixed costs. 68 As to the second Atlantic Seaboard justification, Panhandle maintained that it will lose partial requirements customers, and the fixed costs that those customers would have paid will be shifted to full requirements customers; FERC rejected these objections because they assume that Panhandle will not take the steps necessary to keep its gas prices competitive. Opinion No. 265, 38 F.E.R.C. at 61,455. The record, the Commission said, supports the contrary conclusion, i.e., that the elimination of minimum bills will have the desired effects[;] [t]he record fails to show that the load swings are likely as a consequence of the elimination of minimum bills. Id. at 61,455-56 (footnotes omitted); accord Opinion No. 265-A, 40 F.E.R.C. at 61,598. 5 69 Panhandle asserts that FERC unreasonably assumes that reductions in gas costs lead ineluctably to increased sales; yet since 1982, even while Panhandle has reduced its costs, its sales have dropped. Final Brief for Petitioner, Panhandle Eastern Pipe Line Company at 44. The Commission, however, surely does not claim that its policies will, or indeed should, protect pipeline profits regardless of all exogenous market conditions. A drop in market demand, the Commission no doubt appreciates, may cause sales to drop even as costs fall; it suffices for FERC's incentive theory, however, that lower costs lead to increased sales all other things being equal. Such assumptions are the type of reasonable economic propositions accepted in East Tennessee, 863 F.2d at 939-40, and in Associated Gas Distributors, 824 F.2d at 1008-09 (Agencies do not need to conduct experiments in order to rely on ... predictions that competition will normally lead to lower prices.). 70 Panhandle's objection, FERC reiterated, assumes that the fixed costs which are at risk in the minimum bill will necessarily be recovered from somebody. Opinion No. 265, 38 F.E.R.C. at 61,456. There is no reason to assume that the Commission will guarantee recovery of those costs [from remaining customers] in the event that the pipeline loses partial requirements customers. Indeed, if recovery ... were guaranteed, the Commission's intention that these costs be at risk would be defeated.... Id. (footnote omitted). Under East Tennessee, 863 F.2d at 940, FERC's arguments are reasonable [ones] for rejecting the second Seaboard justification. 71 In sum, Panhandle has failed to produce sufficient evidence to rebut FERC's prima facie case. See Mississippi River, 759 F.2d at 954-55; Tennessee Gas, 871 F.2d at 1105. Here, as in East Tennessee, 863 F.2d at 940, this court owes deference to FERC's regulatory expertise, reflected in its prediction that, faced with the need to compete more effectively in order to recover its costs, [the pipeline] will take steps to reduce costs to attract new customers or retain its present ones, bringing benefits to all customers. FERC's predictions in this regard go to Panhandle's claims on both the first and second Atlantic Seaboard justifications. The Commission's position is adequately grounded; Panhandle has not provided persuasive evidence to show inadequate allowance of fixed cost recovery or excessive cost-shifting from partial requirements to full requirements customers.