Opinion ID: 492011
Heading Depth: 2
Heading Rank: 2

Heading: Adequacy of the Commission's Reasoning in Support of CD Conversion.

Text: 194 Pipelines attack CD conversion as arbitrary and capricious, focusing mainly on its impact on preexisting supply arrangements. They entered into these arrangements primarily in response to their Commission-imposed obligations to maintain sources of supply adequate to meet their sales commitments, 18 see 18 C.F.R. Sec. 2.61, and in reliance on their ability to recoup the costs through firm sales contracts. The arrangements consist largely of long-term supply contracts with producers, but also include investments in expensive facilities for the importation of liquefied natural gas (LNG), see Trunkline LNG Co. (Opinion No. 796), 58 F.P.C. 726 (1977); Trunkline LNG Co. (Opinion No. 796-A), 58 F.P.C. 2935 (1977). 19 In addition to arguing that the rule defeats their justifiable reliance on their sales contracts, the pipelines argue that the Order is shortsighted: seeing their treatment in this situation, pipelines will hardly jump to meet any future shortage or come to the assistance of a converting LDC that later finds itself in trouble when the market tightens. 195 An assertion that agency conduct was arbitrary and capricious requires the court to explore the links between that conduct and the agency's statutory authority. We must examine the agency's reasoning to determine whether it considered the relevant factors and drew a 'rational connection between the facts found and the choice made.'  Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 246, 9 L.Ed.2d 207 (1962)). Here we are hampered because, insofar as the Commission has attached the CD conditions to Sec. 7 blanket certificate transportation, its asserted statutory basis, Sec. 7(e), is legally insufficient. See supra part IV.A.1. However, in attaching the condition to Sec. 311 transportation, the Commission plainly invokes the authority of Sec. 311(c), which allows it to prescribe terms and conditions. Section 311 itself states no explicit standards for the exercise of the power, but the overall purposes of the NGPA provide a standard--somewhat amorphous, to be sure--against which we can and must measure the Commission's decision. See, e.g., Permian Basin Area Rate Cases, 390 U.S. 747, 776, 88 S.Ct. 1344, 1364, 20 L.Ed.2d 312 (1968). Given the overlap in the purposes of the NGA and the NGPA this process will have implications for possible future exercises of the Commission's NGA authority, presumably Sec. 5, but in view of the Commission's disclaimer of reliance on Sec. 5, our analysis does not directly apply to such an exercise. 196 Unilateral abrogation of a contract is an extreme measure. This is true even where the abrogation is partial, as it is under the conversion option, and even though common law doctrines of impracticability and impossibility shift the risk allocation nominally arrived at by the parties. (They may well do so only to arrive at the allocation the parties would have made had they considered in advance the risk that eventuated. Posner & Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. Legal Stud. 83 (1977).) Nonetheless, we find the reasoning underlying CD conversion persuasive. 197 Unlike the typical contract, those at issue here necessarily reflect the pipelines' monopoly power. The Commission found the transportation network highly monopolistic in some markets, fairly competitive in others. J.A. 281. Historically, in fact, many customers have been served by only one pipeline. J.A. 279. This is not disputed. Until the recent partial unbundling of pipeline sales and transportation service, the pipelines were the only parties from whom LDCs might practicably buy gas. Once the unbundling of services began, the LDCs' position changed little, as the pipelines wielded their monopoly power over transportation to deny them the ability to purchase from would-be competing suppliers. J.A. 318, 352 (finding practice unduly discriminatory and preferential). Absent these market restraints, there is no reason to believe that the LDCs would have agreed to the long-term sales contracts binding them to pay rates based on the pipelines' costs, whatever those might be. 20 Yet, by virtue of these arrangements, the LDCs found themselves denied access to the spot market, which offers prices at least 20% below the pipelines' average gas costs. 21 See supra part I. 198 FERC thus found that to remedy these effects, it was essential to permit limited LDC abrogation of pipeline sales contracts: 199 The transitional contract demand reduction and conversion options are essential if the goal of nondiscriminatory access to transportation is to be achieved.... With such an option, full-requirements customers--especially small, sole-supplied local distribution companies ...--will have access to competitively-priced supplies of the gas commodity. 200 Thus, they will no longer be dependent on a single merchant for their gas supplies.... 201 J.A. 407-08. See also J.A. 424 (only through conversions can sole-supplied customers have access ... to the national market). Failing to provide such an option, FERC concluded, would be to condone the fundamental form of undue discrimination by monopoly power which the NGA intended to prohibit. J.A. 426. 202 Thus while the CD conversion option partially denies pipelines the benefits of their contracts, it does so only because those contracts are vestiges of their monopoly power, and only in order to correct the consequences of that power. This action therefore conforms to the purposes of the NGPA. In Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Board, 474 U.S. 409, 106 S.Ct. 709, 88 L.Ed.2d 732 (1986), the Supreme Court declared that enactment of the NGPA left as the aim of federal regulation ... to assure adequate supplies of natural gas at fair prices, id., 106 S.Ct. at 716, and referred to Congress's determination that the supply, the demand, and the price of high-cost gas [the type at issue there] be determined by market forces, id. at 716-17. Congress's continued concern for the market power of pipelines is expressly reflected in NGPA Sec. 601(b)(1)(E), providing that the price of gas purchased by a pipeline at the wellhead from its affiliate is deemed just and reasonable only to the extent that it does not exceed independents' prices in comparable sales. 203 Thus it would appear that the Commission has been correct in its belief that under Sec. 311 it should assert the traditional regulatory approach in areas where it is needed to protect the public from market dominance by natural gas companies. J.A. 271. Provision of the CD conversion option for customers of pipelines offering Sec. 311 transportation properly implements that view. Any principle quashing the Commission's chosen remedy would seem to block pro-competitive regulatory reform and run counter to a long judicial tradition favoring agency development of whatever pro-competitive policies are consistent with the agency's enabling act. See, e.g., Gulf States Utils. Co. v. FPC, 411 U.S. 747, 760, 93 S.Ct. 1870, 1878, 36 L.Ed.2d 635 (1973); Denver & Rio Grande W.R.R. Co. v. United States, 387 U.S. 485, 492-93, 87 S.Ct. 1754, 1759-60, 18 L.Ed.2d 905 (1967). 204 CD conversion may to a degree shift the costs of overpriced gas and take-or-pay liability to those pipeline customers least able to switch to reliance on the wellhead market. But circumstances limit the pipelines' power to shift the costs. Any customer of a pipeline electing to provide transportation under Order No. 436 has, by definition, the power to go out into the market to secure gas and unbundled transportation. That strategy has its costs--including, of course, the management costs of negotiating and coordinating long-term supplies, or fees to brokers for doing so. But these costs form the ceiling on what pipelines may charge. Accordingly we see no basis for rejecting FERC's conclusion that the cost-shifting risk was tolerable. 205 We accept FERC's conclusion that the relevant factors under Sec. 311 tilt in favor of the CD conversion option. 206