Opinion ID: 721438
Heading Depth: 2
Heading Rank: 3

Heading: Curtailment

Text: 81 When supply shortages arose in the natural gas industry during the 1970s, the Commission adopted end-use curtailment plans to protect high-priority customers from an interruption of supply. See generally Consolidated Edison Co. v. FERC, 676 F.2d 763, 765-67 (D.C.Cir.1982); North Carolina v. FERC, 584 F.2d 1003, 1006-08 (D.C.Cir.1978). In 1973, the Commission found itself  'impelled to direct curtailment on the basis of end use rather than on the basis of contract simply because contracts do not necessarily serve the public interest requirement of efficient allocation of this wasting resource.'  Order No. 467, 49 F.P.C. 85, 86 (quoting Arkansas Louisiana Gas Co., 49 F.P.C. 53, 66 (1973)), order on reh'g, 49 [319 U.S.App.D.C. 80] F.P.C. 217, order on reh'g, 49 F.P.C. 583 (1973), petitions for review dismissed sub nom. Pacific Gas & Elec. Co. v. FPC, 506 F.2d 33 (D.C.Cir.1974). The Commission's end-use curtailment schemes were essentially enacted into law by title IV of the Natural Gas Policy Act of 1978 (NGPA), 49 which establishes the following priority system: 82 Whenever there is an insufficient supply, under the Act first in line to receive gas are schools, small business, residences, hospitals, and all others for whom a curtailment of natural gas could endanger life, health, or the maintenance of physical property. After these high-priority users have been satisfied, next in line are those who will put the gas to essential agricultural uses, followed by those who will use the gas for essential industrial process or feedstock uses, followed by everyone else. 83 Process Gas Consumers Group v. United States Dep't of Agric., 657 F.2d 459, 460 (D.C.Cir.1981) (Process Gas I); see also 18 C.F.R. §§ 281.201-281.215 (the Commission's regulations implementing NGPA § 401). 84 With the introduction of stand-alone firm-transportation service in Order No. 436, the Commission distinguished for the first time between supply curtailment and capacity curtailment. Transportation service can suffer from a capacity interruption (such as a force majeure loss of capacity due to pipeline system failure or a pipeline's overbooking of capacity), whereas sales service can suffer from a shortage in the supply of gas. See Order No. 436, p 30,665, at 31,515; Order No. 436-A, p 30,675, at 31,652. The Commission's subsequent approach was to allow pipelines to adopt pro rata capacity curtailment (allocation proportional to the amount reserved, without regard to end use), see, e.g., Texas Eastern Transmission Corp., 37 F.E.R.C. p 61,260, at 61,692-93, 1986 WL 215099 (1986), order on reh'g, 41 F.E.R.C. p 61,015 (1987), aff'd sub nom. Texaco, Inc. v. FERC, 886 F.2d 749 (5th Cir.1989), unless the parties agreed to end-use capacity curtailment on a particular pipeline, see, e.g., Florida Gas Transmission Co., 51 F.E.R.C. p 61,309, at 62,010-11, order on reh'g, 53 F.E.R.C. p 61,396 (1990). 85 In City of Mesa v. FERC, 993 F.2d 888 (D.C.Cir.1993), the court reviewed a proceeding in which the Commission had approved end-use curtailment for supply shortages but pro rata curtailment for capacity interruption. El Paso Natural Gas Co., 54 F.E.R.C. p 61,316, at 61,928-29, order on reh'g, 56 F.E.R.C. p 61,290, at 62,153-54 (1991). First, the court upheld the Commission's interpretation of the word deliveries in § 401(a) of the NGPA to refer only to pipelines' sale of gas, so that the statutory end-use curtailment scheme in title IV applied only to supply curtailment. 993 F.2d at 892-94; see also Atlanta Gas Light Co. v. FERC, 756 F.2d 191, 196-97 (D.C.Cir.1985). The court found that different treatment of supply and capacity curtailment was reasonable because high-priority users can generally 'fend for themselves'  to protect against capacity interruption: 86 Supply shortages usually lead to prolonged periods in which there is simply too little gas to serve the needs of all users. In contrast, capacity constraints occur when there is enough gas in the market but an unexpected event has caused a brief interruption in the movement of the gas to consumers. Additionally, capacity constraints, unlike supply shortages, may only affect the movement of gas on part of a pipeline, thereby allowing customers to receive their quota of gas by using alternate routes that skirt the pipeline bottleneck. These differences mean that pipeline customers can more easily adopt self-help measures to protect their high-priority end-users against the harmful effects of [319 U.S.App.D.C. 81] capacity curtailments than supply shortages. 87 City of Mesa, 993 F.2d at 894-95. 88 Although City of Mesa upheld the limitation of title IV of the NGPA to supply shortages, the court acknowledged that the NGA provided protections for capacity shortages. The court stated that implicit in th[e] consumer protection mandate [of NGA §§ 4 and 7(e) ] is a duty to assure that consumers, especially high-priority consumers, have continuous access to needed supplies of natural gas. 993 F.2d at 895. This duty arises because  '[n]o single factor in the Commission's duty to protect the public can be more important to the public than the continuity of service provided.'  Id. (quoting Sunray Mid-Continent Oil Co. v. FPC, 239 F.2d 97, 101 (10th Cir.1956), rev'd on other grounds, 353 U.S. 944, 77 S.Ct. 792, 1 L.Ed.2d 794 (1957)). The court emphasized that since the NGA gives the FERC no specific guidance as to how to apply its broad mandates in a particular case, our review of the FERC's actions here is, again, quite limited. Id. In City of Mesa, the court concluded that the Commission had failed to engage in reasoned decision making when it approved a curtailment plan that protected most high-priority users rather than all such users. Id. at 896-97. The court noted that in Order No. 636-A the Commission had held that self-help strategies were generally sufficient to assure protection of end-users and thus to meet NGA mandates but did not further examine whether self-help measures were adequate to protect against capacity curtailment. Id. at 897. 89 In Order No. 636, which was issued before the court's decision in City of Mesa, the Commission continued without change its curtailment policies since Order No. 436. First, the Commission acknowledged that, as a policy matter, it chafed at the title IV end-use curtailment scheme for supply shortages but stated that it was bound by the statute. Order No. 636, p 30,939, at 30,430; see also Transcontinental Gas Pipe Line Corp., 57 F.E.R.C. p 61,345, at 62,117 (1991). The Commission reiterated its reading of § 401(a) that limited its scope to pipelines' sale of gas. Order No. 636-A, p 30,950, at 30,586-89. Second, the Commission maintained that self-help measures would allow the consumer-protection mandate of the NGA to be satisfied by pro rata capacity curtailment: 90 The Commission believes that with deregulated wellhead sales and a growing menu of options for unbundled pipeline service, customers should rely on prudent planning, private contracts, and the marketplace to the maximum extent practicable to secure both their capacity and supply needs. In today's environment, LDC's [sic] and end-users no longer need to rely exclusively on their traditional pipeline supplier. Rather, to an ever-increasing degree they rely on private contracts with gas sellers, storage providers, and others; a more diverse portfolio of pipeline suppliers, where possible; local self-help measures (e.g., local production, peak shaving and storage); and their own gas supply planning through choosing between an increasing array of unbundled service options. 91 Id. at 30,590. 92 The Commission's curtailment policies are challenged from both sides. Elizabethtown Gas Company contends that the Commission should have adopted pro rata curtailment for shortages in the supply of pipeline gas, and a group of small distributors contends that the Commission should have adopted end-use curtailment for capacity interruption and for shortages in the supply of third-party gas.
93 Elizabethtown contends that because § 402(a) of the NGPA requires end-use curtailment only to the maximum extent practicable, 15 U.S.C. § 3392(a), the declining role of pipelines as gas merchants renders end-use curtailment for shortages of pipeline gas no longer practicable. The court recently rejected this argument, made by the same petitioner, in Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C.Cir.1993) (Elizabethtown III): 94 This argument makes no sense to us. Even if [the pipeline] supplies a smaller share of the gas bought by each of the LDCs, the gas it does deliver to them could still in times of shortage go first to [319 U.S.App.D.C. 82] high-priority users. Accordingly, it seems entirely practicable to increase the level of protection for high priority users above that provided by the pro rata plan. 95 Id. at 874; see also Process Gas Consumers Group v. United States, 694 F.2d 778, 787-92 (D.C.Cir.1982) (en banc) (Process Gas II) (holding that the phrase to the maximum extent practicable gives the Commission broad powers). Although Elizabethtown contends that the near-elimination of pipelines as gas merchants following Order No. 636 requires us to reconsider our holding in Elizabethtown III, this change in the industry does not affect our reasoning that end-use curtailment remains practicable no matter how small the pipelines' share of the gas-sales market. The Commission recognized that the limitation of title IV of the NGPA to pipelines' sale of gas means that pipelines are disadvantaged vis-a-vis other gas merchants, but explained that it remained bound by the statute. Order No. 636, p 30,929, at 30,430. Because we have already decided this question in Elizabethtown III, we affirm the Commission's decision that title IV of the NGPA mandates end-use curtailment for shortages in the supply of pipeline gas. 96 Elizabethtown also maintains that the Commission acted arbitrarily in not requiring high-priority users to compensate pipeline customers who lose gas supply under end-use curtailment. In Elizabethtown III, the court held that a compensation provision is not necessarily inconsistent with § 401(a). 10 F.3d at 875. Indeed, this court has long held that the Commission retains the authority under title IV of the NGPA to adopt a compensation scheme. See Consolidated Edison Co. v. FERC, 676 F.2d 763, 767 (D.C.Cir.1982); cf. Elizabethtown Gas Co. v. FERC, 575 F.2d 885, 887-89 (D.C.Cir.1978) (Elizabethtown I) (holding that the Commission has authority under the NGA to adopt a curtailment compensation plan). In Elizabethtown III, the court remanded with instructions for the Commission to consider Elizabethtown's request for a curtailment compensation scheme. Id. In the Order No. 636 series, decided before the court's decision in Elizabethtown III, the Commission stated that its 97 position on curtailment compensation plans is that the parties in the individual restructuring proceedings must explore the development of such schemes ... in the context of developing their individual curtailment plans and in the development of voluntary emergency contractual arrangements between shippers. However, the Commission believes that it would be contrary to the concept of the restructuring proceeding process and the negotiation and development of individually tailored curtailment allocation procedures and emergency mechanisms for it to mandate a generic compensation scheme. 98 Order No. 636-A, p 30,950, at 30,592; see also Order No. 636, p 30,929, at 30,430. The comments by the Commission in the Order No. 636 series continue the Commission's pattern of avoiding the question of curtailment compensation and do not exhibit the reasoned consideration of curtailment compensation that the court subsequently requested in Elizabethtown III. 99 The Commission has reconsidered the issue of curtailment compensation, however, on remand from Elizabethtown III. See Transcontinental Pipe Line Corp., 72 F.E.R.C. p 61,037, reh'g denied, 73 F.E.R.C. p 61,357 (1995). In those proceedings, the Commission 100 conclude[d] that compensation is needed to render Transco's gas supply curtailment plan just and reasonable. The priority curtailment plan affects the contractual rights of Transco's customers by altering the pro rata allocation of curtailed supplies so that higher priority customers can obtain gas that would otherwise go to lower priority customers. 101 72 F.E.R.C. p The Commission rejected Elizabethtown's proposed compensation scheme, however, in favor of requiring the higher-priority customer to pay: (1) 150% of the spot market price for gas if the lower-priority customer was unable to cover (locate replacement gas on the spot market), or (2) the difference between the cover price and the original contract price if [319 U.S.App.D.C. 83] the lower-priority customer was able to cover. Id. at 61,237-38. 102 In light of the Commission's Transcontinental decision, the issue of curtailment compensation is not ripe for review. The Commission enjoys broad discretion whether to adopt a compensation scheme on a generic basis or in pipeline-specific proceedings. See Mobil Oil, 498 U.S. at 230, 111 S.Ct. at 627. If Elizabethtown remains aggrieved by the Commission's decision to accept its general argument but fashion a different compensation mechanism, then it may seek relief in review of the Transcontinental decision. We therefore express no opinion on the appropriateness of any particular curtailment compensation plan.
103 The small distributor petitioner group, on the other hand, contends that pro rata capacity curtailment violates the consumer-protection mandate of the NGA. We review the Commission's policy on pro rata curtailment to determine whether it is just and reasonable under § 4 and whether it serves the present or future public convenience and necessity under § 7(e). See City of Mesa, 993 F.2d at 895. The Commission decided that the consumer-protection mandate of the NGA did not require it to adopt end-use capacity curtailment across the board and promised to address the issue in each pipeline restructuring proceeding. Order No. 636-A, p 30,950, at 30,591-92. Indeed, the Commission has broad latitude on whether to effectuate its policies in generic rulemakings or in individual-pipeline adjudications. Mobil Oil, 498 U.S. at 230, 111 S.Ct. at 627. The issue presented to us, then, is whether the Commission's decision that the NGA does not require end-use curtailment in all circumstances is  'reasoned, principled, and based upon the record.'  Great Lakes Gas Transmission Ltd. Partnership v. FERC, 984 F.2d 426, 432 (D.C.Cir.1993) (quoting Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C.Cir.1979)). 104 The Commission explained that Order No. 636 had allowed the development of market structures that would enable customers to take independent, market-based steps to avoid the need for Commission-mandated end-use curtailment. Order No. 636-A, p 30,950, at 30,590. Moreover, the Commission found that since the enactment of the NGPA in 1978 the industry has not experienced shortages beyond isolated, short-lived dislocation, id. at 30,591, and gas has always flowed according to the dictate of the market, i.e., to the heat sensitive users who need it most and who are thus willing to pay the prevailing market price for it. Id. at 30,592. This experience with the industry provides substantial evidence for the Commission's conclusion that end-use curtailment is not required in all circumstances. 105 We are unpersuaded, particularly in light of the Commission's own actions in the restructuring proceedings, that pro rata capacity curtailment would adequately protect all high-priority customers on all pipelines. Cf. City of Mesa, 993 F.2d at 896-97. The Commission's market-based alternatives for customers to avoid curtailment fall into the following categories: (1) arrangements with other pipelines; (2) arrangements with other gas sellers; (3) arrangements for gas storage; (4) arrangements with other customers (including the capacity-release mechanism); and (5) peak shaving. 50 First, arrangements with other pipelines are more widely available after Order No. 636, such as by using different pipelines that connect to one market center, but a capacity constraint on a pipeline will still cut off delivery to any captive customers, no matter how many transportation options some other customers may have. Second, arrangements with other gas sellers are by definition relevant only to supply curtailment, not to capacity curtailment. Third, arrangements for gas storage are unhelpful if the capacity interruption occurs at a point between the contract-storage area and the customer's receipt point. Fourth, obtaining gas from other customers, whether through the capacity-release mechanism or otherwise, depends upon the willingness of lower-priority customers to forgo deliveries. Fifth, practices such as peak [319 U.S.App.D.C. 84] shaving (letting a little gas go a longer way) can temporarily help to alleviate curtailment problems but cannot ensure continuous service if the interruption lasts too long. None of these market-based solutions, therefore, can guarantee continuous service to all high-priority customers in cases of capacity interruptions. Many of the market-based solutions fail to acknowledge that many customers have far less control over access to pipeline capacity than they do over gas supply. In addition, some of the self-help mechanisms will be more readily available to larger pipeline customers. City of Mesa, 993 F.2d at 897 n. 7. 106 Yet the Commission has not applied Order No. 636 in the restructuring proceedings to preclude the development of curtailment plans that provide more protection to higher-priority users. For example, on remand from City of Mesa, the Commission reiterated its general policy that customers can, and should, avail themselves of self-help methods to obtain their needed supplies but, in light of the decision in City of Mesa, ordered El Paso to includ[e] provisions giving relief to any high priority shipper when that shipper has exercised all other self-help remedies in times of bona fide emergencies. El Paso Natural Gas Co., 69 F.E.R.C.p 61,164, at 61,624 (1994), order on reh'g, 72 F.E.R.C.p 61,042, reh'g denied, 73 F.E.R.C. p 61,074 (1995). In another restructuring proceeding, the Commission approved a settlement and found its curtailment plan consistent with City of Mesa because it provides an exemption from pro rata curtailment whenever necessary to avoid irreparable injury to life or property. Florida Gas Transmission Co., 70 F.E.R.C. p 61,017, at 61,061 (1995). On occasions, the Commission has suggested that there may be extraordinary circumstances when reasonable self-help efforts are insufficient, even for large customers, such that some emergency protections may always be required for certain force majeure capacity interruptions. El Paso, 69 F.E.R.C. p 61,164, at 61,624; see also United Gas Pipe Line Co., 65 F.E.R.C. p 61,006, at 61,092, reh'g denied sub nom. Koch Gateway Pipeline Co., 65 F.E.R.C. p 61,338, at 62,630-31 (1993). 107 We need not reach the issue whether the adoption of a pure pro rata capacity-curtailment scheme on a generic basis would comply with the Commission's duty under the NGA to ensure that high-priority consumers[ ] have continuous access to needed supplies of natural gas. City of Mesa, 993 F.2d at 895. All the Commission did in Order No. 636 was to decide not to require end-use capacity curtailment for all pipelines. Because the Commission expressly declared that it would re-examine the suitability of pure pro rata capacity curtailment for customers on each pipeline, Order No. 636-A, p 30,950, at 30,591-92, we construe any indications that pro rata curtailment will be the default as unreviewable policy statements under § 4(b)(A) of the Administrative Procedure Act, 5 U.S.C. § 553(b)(A). See Pacific Gas & Elec. Co. v. FPC, 506 F.2d 33, 39 (D.C.Cir.1974). The manner in which the Commission has applied its curtailment policy in the restructuring proceedings supports our conclusion that any preference for pro rata schemes is not suitable for review. See Public Citizen, Inc. v. NRC, 940 F.2d 679, 682-83 (D.C.Cir.1991). Accordingly, the compliance of specific curtailment plans with the NGA's consumer-protection mandate remains open on review of the restructuring proceedings. 108 We uphold the Commission's decision not to require end-use curtailment on a generic basis for capacity curtailment but to proceed instead on a case-by-case basis.
109 Finally, the small distributor petitioners contend that the consumer-protection mandate of the NGA requires the Commission to adopt end-use curtailment for shortages in the supply of third-party gas. The petitioners concede that title IV of the NGPA applies only to pipelines' sale of gas, but urge that §§ 4 and 7(e) of the NGA require some form of end-use curtailment for the sale of gas by producers and other third parties. The Commission declined to impos[e] ... the industry-wide, end-use supply curtailment scheme envisioned by the petitioners because the best protection against, and remedy for, supply shortages [i]s to allow the [319 U.S.App.D.C. 85] market to establish the price for gas. Order No. 636-A, p 30,950, at 30,591. 110 As an initial matter, a group of intervenors in support of the Commission maintains that the Commission lacks jurisdiction under § 1(b) to enact a curtailment plan for third-party gas. But the Supreme Court has held expressly that curtailment plans are aspects of [the Commission's] 'transportation' and not its 'sales' jurisdiction. Louisiana Power & Light, 406 U.S. at 641, 92 S.Ct. at 1839 (citing Panhandle Eastern Pipe Line Co. v. Public Serv. Comm'n, 332 U.S. 507, 523, 68 S.Ct. 190, 198, 92 L.Ed. 128 (1947)). The intervenors rely on a Fifth Circuit case, Sebring Utilities Commission v. FERC, 591 F.2d 1003 (5th Cir.), cert. denied, 444 U.S. 879, 100 S.Ct. 167, 62 L.Ed.2d 109 (1979), in which the court indicated that the Commission would not have jurisdiction to order curtailment of gas not owned by a statutory natural-gas company. Id. at 1016-19. However, the ownership of the gas is not relevant to the Commission's transportation jurisdiction because in adopting a curtailment scheme the Commission exercises its jurisdiction over the pipeline, which incorporates any curtailment plan into its tariff. 51 If we were to follow Sebring, then the Commission would also lack jurisdiction to regulate capacity curtailment of third-party gas--a proposition implicitly rejected by the City of Mesa court, which in remanding on the capacity-curtailment issue assumed that the Commission had jurisdiction over curtailment plans for third-party gas. 993 F.2d at 895-98. Moreover, Sebring was decided before the unbundling of sales from transportation, at a time when virtually all gas was pipeline-owned. 52 Under the principles of Louisiana Power & Light, the Commission's transportation jurisdiction extends to supply curtailment of third-party gas. 111 The Commission decided that an end-use supply curtailment plan for third-party gas was not required to ensure high-priority customers continuous access to needed supplies of natural gas. City of Mesa, 993 F.2d at 895. As discussed with respect to capacity curtailment, see supra at 83-84, the Commission provided a list of market-based alternatives to secure the continuous supply of gas that is convincing in the context of supply curtailment. Although the petitioners posit a force majeure supply shortage that the market-based protections would not cover, namely a freeze-off  of wells that would prevent all producers from producing sufficient quantities of gas during cold weather, the petitioners have provided no evidence that such an event has ever occurred or is likely to occur in the future. The Commission's decision that such an occurrence is unlikely given foreseeable supply conditions is reasonable. Order No. 636-A, p 30,950, at 30,591. In addition, the Commission noted that title III of the NGPA, 15 U.S.C. §§ 3361-3364, authorizes the President to declare a natural gas supply emergency in the event of a severe natural gas shortage, endangering the supply of natural gas for high-priority uses. Id. § 3361(a); see Order No. 636-A, p 30,950, at 30,591. 112 Thus, the Commission has complied with the continuity-of-service guarantee of the NGA, as articulated in City of Mesa, with respect to supply shortages of third-party gas.