Opinion ID: 701297
Heading Depth: 2
Heading Rank: 2

Heading: The Refund Order

Text: 33 Having determined that the Commission reasonably interpreted Section 14.8 to require the inclusion of bundled transportation volumes in the FRP calculation, we now must consider whether the Commission properly ordered Northwest to refund the overcharges to its unbundled customers, or whether the order violated the proscription against retroactive ratemaking.
34 The primary purpose of the Natural Gas Act, 15 U.S.C. Secs. 717-717w (NGA), is to protect consumers from exploitation at the hands of natural gas companies. Colorado Interstate Gas Co. v. F.E.R.C., 791 F.2d 803, 806 (10th Cir.1986) (CIG ) (citing Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944)), cert. denied, 479 U.S. 1043, 107 S.Ct. 907, 93 L.Ed.2d 857 (1987). In furtherance of this policy, Congress has declared that rates subject to regulation pursuant to the NGA are unlawful unless they are just and reasonable. 15 U.S.C. Sec. 717c(a); see Office of Consumers' Counsel v. F.E.R.C., 783 F.2d 206, 213 (D.C.Cir.1986). 35 The NGA empowers the Federal Energy Regulatory Commission to regulate the rates charged by interstate natural gas pipelines. However, the NGA also prescribes how the Commission may exercise that power. Sea Robin Pipeline Co. v. F.E.R.C., 795 F.2d 182, 183 (D.C.Cir.1986). The Commission's power is set forth in two sections of the NGA relevant to this case--Section 4(e), which deals with ratemaking, and Section 5(a), which deals with Commission-ordered rate adjustment. 15 U.S.C. Secs. 717c(e), 717d(a); see United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 341, 76 S.Ct. 373, 379, 100 L.Ed. 373 (1956). 36 As a general rule, pipelines may only change their rates in the context of a formal rate case. Pursuant to Section 4 of the NGA, pipelines are required to file their rates and rate changes with the Commission in tariffs supported by detailed cost information. 15 U.S.C. Sec. 717c(c); 18 C.F.R. Sec. 154.63 (1994); see Consolidated Edison Co. v. F.E.R.C., 958 F.2d 429, 431 (D.C.Cir.1992). In so doing, the pipeline opens up its entire rate structure to scrutiny, see Federal Power Comm'n v. Tennessee Gas Transmission Co., 371 U.S. 145, 152, 83 S.Ct. 211, 215, 9 L.Ed.2d 199 (1962); CIG, 791 F.2d at 807, and, if challenged, it bears the burden of proving that its rate structure is just and reasonable. 15 U.S.C. Sec. 717c(e); see Sea Robin, 795 F.2d at 183. 37 Commission authority under Section 4 is limited to acceptance (in whole or in part) or rejection of the pipeline's proposed rate; the Commission is not empowered to substitute its own design for the rates proposed by the pipeline. Id.; see Public Serv. Comm'n v. F.E.R.C., 642 F.2d 1335, 1344 (D.C.Cir.1980), cert. denied, 454 U.S. 879, 880, 102 S.Ct. 360, 362, 70 L.Ed.2d 189 (1981). This restriction ensures that rates will be set in the first instance by the pipelines themselves. However, the Commission retains broad remedial authority under Section 4. It may accept the proposed rate conditionally, and suspend the rate for up to five months pending Commission investigation. 15 U.S.C. Sec. 717c(e). If the Commission determines, following such an investigation, that the filed rate is unjust and unreasonable, it may order refunds effective as of the date the proposed rate change became effective. 15 U.S.C. Sec. 717c(e); see Natural Gas Pipeline Co. of Am. v. F.E.R.C., 904 F.2d 1469, 1471 (10th Cir.1990). The D.C.Circuit has termed this refund procedure the only statutory exception to [the NGA's general rule] prohibiting retroactive rate changes. East Tenn. Natural Gas Co. v. F.E.R.C., 863 F.2d 932, 941-42 (D.C.Cir.1988) (Wald, C.J.). This exception, according to the court, arises in order to accommodate the realities of administrative delay. Id. at 942; see Natural Gas Pipeline Co., 904 F.2d at 1471. Thus, the refund procedure allows the pipeline to charge the proposed rate while Commission proceedings on the rate change are in progress, while at the same time providing notice to the pipeline that its rate ultimately may be subject to a refund order. 38 In contrast to Section 4 proceedings, proceedings under Section 5 are not initiated by the regulated entity, but instead are initiated by the Commission, upon its own motion, or upon the complaint of a third party. Under this section, the Commission examines rates already in effect and it may set aside and modify any rate which is determined, after hearing, to be unjust, unreasonable, unduly discriminatory, or preferential. 15 U.S.C. Sec. 717d(a). Under Section 5(a), the moving or complaining party bears the burden of proving that the previously established rate is unjust and unreasonable, see CIG, 791 F.2d at 806, and any relief from an unjust rate ordered by the Commission is prospective only; it may not have retroactive effect. See 15 U.S.C. Sec. 717d(a) (when Commission finds rate unreasonable, it shall determine the just and reasonable rate ... to be thereafter observed and in force); CIG, 791 F.2d at 806. 39 The relationship between Sections 4 and 5 of the NGA was described by the Supreme Court in United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956): 40 The powers of the Commission are defined by Secs. 4(e) and 5(a). The basic power of the Commission is that given it by Sec. 5(a) to set aside and modify any rate or contract it determines, after hearing, to be unjust, unreasonable, unduly discriminatory, or preferential. This is neither a rate-making nor a rate-changing procedure. It is simply the power to review rates and contracts made in the first instance by the natural gas companies and, if they are determined to be unlawful, to remedy them. Section 5(a) would of its own force apply to all the rates of a natural gas company, whether long-established or newly changed, but in the latter case the power is further implemented by Sec. 4(e). All that Sec. 4(e) does, however, is to add to this basic power, in the case of a newly changed rate or contract (except industrial rates), the further powers (1) to preserve the status quo pending review of the new rate by suspending its operation for a limited period, and (2) thereafter to make its order retroactive, by means of the refund procedure, to the date the change became effective. The scope and purpose of the Commission's review remains the same--to determine whether the rate fixed by the natural gas company is lawful. 41 Id. at 341, 76 S.Ct. at 379. While the underlying goal of both sections is the same--to protect the customer against unjust and unreasonable rates--each provision is responsive to different circumstances, and is subject to different restrictions; the Commission is not free to blend, or pick and choose at will between its sections 4 and 5 authority. Sea Robin, 795 F.2d at 183. While Sec. 4's refund provision protects the customers from a rate that is unreasonably high when filed (examined as of the filing), Sec. 5's requirement that relief be prospective only assures the utility that rates passing scrutiny under Sec. 4 will not be undone. Associated Gas Distribs. v. F.E.R.C., 898 F.2d 809, 810 (D.C.Cir.1990) (Williams, J.) (concurring in denial of rehearing and rehearing in banc ), cert. denied, 498 U.S. 907, 111 S.Ct. 277, 278, 112 L.Ed.2d 232, 233 (1990).
42 The controversy in this case centers around whether the Commission's order was issued pursuant to Section 4 or Section 5. Northwest filed its general tariff in 1985 in the context of a full Section 4 rate case. Included in the general filing was the fuel reimbursement clause contained in Section 14.8. Northwest takes the position that once the Commission accepted the general filing, then the rates contained therein became established and could only be challenged subsequently in the context of a Section 5 proceeding. The annual filing of FRP tariff sheets, Northwest argues, is merely ministerial; an annual adjustment to the already approved FRP mechanism. Therefore, according to Northwest, Northwest Natural's 1991 challenge to the FRP calculation (and the Commission's subsequent action) could only have arisen in the context of a challenge to an already existing rate; a challenge which could only have been initiated pursuant to Section 5(a). Thus, Northwest concludes, even if the Commission determined that the FRP had been calculated erroneously, it could only order prospective relief, and its order that Northwest refund overcharges back to April 1, 1991 amounts to retroactive ratemaking, in direct violation of the NGA. See Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 578, 101 S.Ct. 2925, 2930-31, 69 L.Ed.2d 856 (1981) (rule against retroactive ratemaking bars 'the Commission's retroactive substitution of an unreasonably high or low rate with a just and reasonable rate.'  (quoting City of Piqua v. F.E.R.C., 610 F.2d 950, 954 (D.C.Cir.1979))); Natural Gas Pipeline Co., 904 F.2d at 1473-74; Office of Consumers' Counsel v. F.E.R.C., 826 F.2d 1136, 1138-39 (D.C.Cir.1987). 43 The Commission, on the other hand, argues that the annual updates to Northwest's FRP, while not formal Section 4 general rate case filings, nevertheless were filed pursuant to Section 4. 12 As such, and in light of the fact that the 1991 and 1992 FRP filings at issue were accepted and suspended by the Commission and explicitly made subject to refund, the Commission argues that the refund order is clearly within the agency's Section 4 authority.
44 Neither the NGA nor Commission regulations specifically address FRP adjustments. Thus, we must determine whether the annual FRP adjustments filed by Northwest constitute a proposed rate change, thus triggering Commission review under Section 4(e), or whether the Commission seeks to impose a rate change not proposed by the company, in which case Section 5(a) is applicable. ANR Pipeline Co. v. F.E.R.C., 771 F.2d 507, 513 (D.C.Cir.1985). 45 As an initial matter, we note that the form of Northwest's annual FRP filings comply with filing requirements set forth in Commission regulations implementing Section 4. 13 Furthermore, the Commission's response to the filing--accepting and suspending the new rate--is consistent with Commission action which may be taken pursuant to Section 4. See 15 U.S.C. Sec. 717c(e). Thus, we believe that both Northwest and the Commission viewed the annual FRP adjustments as rate changes filed pursuant to Section 4. 46 The phrase FERC gas tariff, as used in Northwest's form notice, filed pursuant to 18 C.F.R. Sec. 154.28 (1994), is defined as a compilation, either in book form or on electronic media, of all the effective rate schedules of a particular natural gas company. 18 C.F.R. Sec. 154.14 (1994). Thus, in its annual FRP filings Northwest sought a change to its effective rate schedule. By the clear language of the NGA, any such change must be filed pursuant to Section 4. See 15 U.S.C. Sec. 717c(d). 47 Notwithstanding this prior course of conduct, Northwest now claims that the annual FRP filings were not made pursuant to Section 4. Northwest argues that Commission approval of a rate is not always confined to the approval of a specific numeric value, but may instead extend to the approval of a calculational formula or rate rule which, once approved, is established for purposes of the NGA. While specific numeric input data to such a formula may vary from year to year, Northwest's position is that the formula itself does not change and therefore may be attacked only in the context of a Section 5 proceeding. To be sure, there is some support for such a position. See Transwestern Pipeline Co. v. F.E.R.C., 897 F.2d 570, 578-79 (D.C.Cir.), cert. denied, 498 U.S. 952, 111 S.Ct. 373, 112 L.Ed.2d 335 (1990). But see Public Serv. Co. v. F.E.R.C., 832 F.2d 1201, 1225 (10th Cir.1987); Electrical Dist. No. 1 v. F.E.R.C., 774 F.2d 490, 492 (D.C.Cir.1985) (holding that rate is fixed within the meaning of the Federal Power Act once the rate itself is specified). 48 However, we believe that in the context of this case, Northwest's argument misses the point. The Commission's order did not effect a change in the mechanism by which the FRP is calculated. Rather, it simply directed Northwest to calculate the FRP correctly, in compliance with Section 14.8. And, as we have just held, we defer to the Commission's interpretation of what constitutes a correct FRP calculation. Thus, the Commission's order did not direct Northwest to calculate the FRP differently, it simply ordered Northwest to calculate the FRP correctly. Section 5, therefore, simply finds no application in this case. 49 Nor do we accept Northwest's argument that the Commission's refund order violates the filed rate doctrine. 14 The filed rate doctrine simply does not extend to cases in which buyers are on adequate notice that resolution of some specific issue may cause a later adjustment to the rate being collected at the time of service. Natural Gas Clearinghouse v. F.E.R.C., 965 F.2d 1066, 1075 (D.C.Cir.1992); see Columbia Gas Transmission Corp. v. F.E.R.C., 895 F.2d 791, 797 (D.C.Cir.), cert. denied, 498 U.S. 907, 111 S.Ct. 278, 279, 112 L.Ed.2d 233 (1990). Certainly, this same reasoning is especially applicable where, as here, it is the pipeline, rather than the natural gas customer, who is put on notice that its requested rate increase may be subject to refund. In this case, Northwest was on notice when the Commission accepted and suspended the 1991 FRP filing that a refund may be ordered. Thus, the Commission's order was not in violation of the filed rate doctrine. 50 Having determined that the Commission's order was not issued pursuant to Section 5, and that the order did not violate the filed rate doctrine, we now must consider whether the Commission properly exercised its refund authority pursuant to Section 4. We conclude that it did. 51 Although neither Commission regulations nor the NGA specifically address FRPs, the Commission has adopted an analogous adjustment mechanism for purchase gas adjustments (PGA). The PGA proceeding allows a pipeline to facilitate recovery of costs by including a purchase gas adjustment clause in the rates it files with the Commission. See 18 C.F.R. Secs. 154.301-154.310 (1994). Qualified companies may then adjust their rates to reflect changes in costs by submitting PGA filings quarterly. 15 In exchange, the companies must agree to submit all costs and revenues to the Commission for a full scale Section 4 review at least every three years. Significantly, rate changes ordered by the Commission pursuant to a Section 4 review are retroactive. See South Carolina Pipeline Corp. v. F.E.R.C., 868 F.2d 650, 651 (3d Cir.1989); Associated Gas, 706 F.2d at 345-46; Laclede Gas Co. v. F.E.R.C., 670 F.2d 38, 41-42 (5th Cir. Unit A 1982). 52 The PGA adjustment mechanism allows a pipeline to adjust its rates on a quarterly basis without the necessity for a full scale Section 4 rate case. This allows for more streamlined, less cumbersome, routine adjustments to recoverable costs. However, a pipeline employing the PGA adjustment mechanism must nevertheless justify its periodic adjustments, and the pipeline is on notice that a refund may be ordered if it fails to carry its burden. See Associated Gas, 706 F.2d at 346 (Because the PGA procedure is conducted pursuant to the Commission's power under section 4, the customers of a pipeline are entitled to file a complaint concerning the lawfulness of a pipeline's PGA rate increase.). 53 In like fashion, the FRP mechanism allows for annual adjustment to a pipeline's system fuel costs. The expedited nature of this proceeding, however, does not mean that the adjustment should escape close scrutiny by the Commission pursuant to Section 4. We are unable to discern any relevant distinction between quarterly PGAs and annual FRP adjustments which would warrant subjecting one to Section 4 scrutiny, while treating the other simply as a ministerial filing. Thus, we believe the reasoning of the District of Columbia Circuit--that the filing of a PGA is a filing made pursuant to Section 4--is equally appropriate as applied to an annual FRP filing. Both mechanisms effect a change in the rate a customer pays, and therefore, by the clear terms of the NGA, both are appropriately subject to review under Section 4(e). 54 Practical considerations further support our holding. In this case, Northwest was put on notice, once the Commission accepted and suspended the 1991 tariff sheets, that its proposed change to the FRP ultimately might be deemed unjust and unreasonable and made subject to refund. 16 This is precisely the goal of Section 4--to put the pipeline on notice that the rate may be subject to refund, while allowing the rate to become effective pending completion of the Commission's review. Such an approach recognizes the inherent delay in administrative review, while granting the pipeline some leeway; that is, while the pipeline bears the ultimate burden of justifying the rate increase as being just and reasonable, the accept and suspend provision of Section 4(e) embodies an implicit presumption that, in most cases, the pipeline will in the end be able to satisfy that burden. 55 Northwest's position, on the other hand, would likely lead to administrative paralysis. Because any Commission order directing a pipeline to comply with the terms of its tariff could only have prospective effect, there would be no suspension of rates. Rather, the Commission would be forced to examine the FRP adjustment, hold hearings, and conduct its investigation prior to acceptance or rejection of the FRP adjustment. Such a cumbersome process would invariably lead to the same type of pancaking of FRP adjustments that the PGA mechanism was intended to remedy in the context of purchase gas adjustments. See Associated Gas, 706 F.2d at 345. 17 56 Finally, we believe that Northwest's position runs completely counter to the policy of the Natural Gas Act. The rate in question in this case is Northwest's annual adjustment to the FRP. There is no question that the charge to a given unbundled customer changes from year to year, based on the total fuel used to operate the system, the amount of lost and unaccounted for gas, and the total volume of gas transported through the pipeline. There also can be no question that input data for the FRP calculation lies within the exclusive control of Northwest Pipeline; that is, Northwest controls how much system gas is lost or otherwise unaccounted for, and Northwest controls how much fuel is used in system operations. The pipeline is permitted to recover these costs from its customers, but it is always under the obligation in the first instance to ensure that its costs are prudently incurred and that its rates are just and reasonable. If Northwest mismanages its operation and loses an inordinate amount of fuel one year or incurs unusually high transmission costs, should the burden fall to the customer to show that such costs are unjust and unreasonable, or should the burden rest with the pipeline to explain its higher-than-usual costs and justify why it is nonetheless entitled to recover these costs? We believe that the latter approach more faithfully embodies the policy of the NGA to protect consumers from exploitation at the hands of natural gas companies. CIG, 791 F.2d at 806 (citing Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944)). 57 We simply are unable to subscribe to Northwest's proposal that a customer challenging the annual FRP filing bears the burden of establishing that the rate is unjust and unreasonable, a burden that the customer would bear under Section 5(a). Rather, we conclude that the policy underlying the NGA, as reflected in the plain language of the statute, requires the natural gas pipeline to justify its rate change in the context of a Section 4 proceeding--whether the rate change is part of an adjustment to the overall rate structure, or whether the rate change merely is part of an annual FRP adjustment. 58 In sum, therefore, when Northwest filed its tariff sheets requesting a change in its FRP on February 28, 1991, it did so pursuant to Section 4 of the NGA. The filing was accepted and suspended by the Commission pursuant to Section 4(e), given an effective date of April 1, and explicitly made subject to refund. Consequently, the Commission's order that Northwest refund overcharges from the effective date was properly issued pursuant to the Commission's refund authority under Section 4(e). Further, because the Commission's refund order did not effect a modification to Northwest's rate, or the FRP calculational mechanism, the Commission's order cannot be considered as having issued pursuant to Section 5. And finally, because Northwest was on notice that its filed FRP adjustment may be subject to refund, the Commission's ordering of a refund did not violate the rule against retroactive ratemaking. 59 For the foregoing reasons, we AFFIRM the order of the Commission.