Opinion ID: 492011
Heading Depth: 2
Heading Rank: 5

Heading: Consistency of Value-of-Service Discounting with MPC II.

Text: 160 The American Public Gas Association and others contend that the general consent to selective discounting violates this court's decision in Maryland People's Counsel v. FERC (MPC II), 761 F.2d 780 (D.C.Cir.1985). The attack is directed especially to Commission suggestions--in supporting statements, not the rule itself--that discounting intended to meet competition from alternative fuels or indeed from other pipelines is not per se unduly discriminatory. J.A. 476. 161 Petitioners misconceive the scope of MPC II. Pipelines were using their market power in the transportation market to discriminate (indirectly) in the sale of gas, a commodity that Congress had concluded was produced under roughly competitive conditions. In the sale of such a commodity there is no economic justification for charging different prices based on the purchasers' differing access to substitutes (i.e., their price elasticity of demand). Indeed, if a product is produced under competitive conditions, such price discrimination cannot occur unless a bottleneck with market power stands between it and the customers. By contrast, pipeline transportation service is marked by a degree of natural monopoly, J.A. 305-06, 352, 481 (i.e., longrun average costs decline in the relevant range of production). See 2 A. Kahn, The Economics of Regulation: Principles and Institutions 119-23 (1971). In such an industry, value-of-service ratemaking (i.e., rates varying on the basis of differing demand characteristics) has an established place, 12 though not an uncontested one. 13 The equitable argument in favor of such differentials is that they may benefit captive customers by making a contribution to fixed costs that otherwise would not be made at all. (The efficiency argument is that such differentials will raise total volume closer to the level it would attain if all sales were priced at marginal cost.) 162 These justifications were missing in MPC II. There the court found that the then-existing blanket certificate regulations allowed pipelines to deny captive consumers access to the spot market for gas, while providing it for the non-captives. 761 F.2d at 788. This allowed pipelines to preserve the revenues attributable to transportation of gas to fuel-switchable customers, while continuing to sell their inventory of overpriced gas to captive customers. The Commission advanced an argument that the pipelines' receipt of transportation revenues would redound to the benefit of captive customers--an argument that sounds like the one advanced above. The court said no. First, we said that the Commission had offered no reason to think that the captives could not enjoy the fuel switchables' contribution to fixed costs even if the Commission conditioned the program on equal access for captive consumers--precisely what the Commission has done here. Id. Second, we pointed out that the Commission had nowhere answered the petitioners' argument that the captives' loss through lack of access to the wellhead market would greatly exceed their gain through the fuel-switchables' contribution to fixed costs. Id. Here, of course, the Commission is providing access to the spot market. Thus the facts here obviate our two reasons for rejecting the Commission's argument on contributions to fixed costs. 163 To read MPC II as a rule that price differentials based on demand conditions are always unduly discriminatory would render the decision a defiant and unreasoned exception to the general pattern. The judicial acceptance of such price differentials is longstanding. For nearly 100 years, for example, the courts have interpreted the antidiscrimination provisions of the Interstate Commerce Act to allow the ICC to approve differentials justified exclusively by competition. See, e.g., Texas & Pacific Ry. v. ICC, 162 U.S. 197, 218-19, 16 S.Ct. 666, 674-75, 40 L.Ed. 940 (1896); Dresser Industries, Inc. v. ICC, 714 F.2d 588 (5th Cir.1983) (review under three different anti-discrimination provisions); National Gypsum Co. v. United States, 353 F.Supp. 941, 946-49 (W.D.N.Y.1973) (enumerating cases following this view). Indeed, the Supreme Court has even struck down an ICC finding of unlawful discrimination where it appeared to be based on an absolute rule that competitive conditions could never justify a rate differential. Eastern-Central Motor Carriers Ass'n v. United States, 321 U.S. 194, 64 S.Ct. 499, 88 L.Ed. 668 (1944). 164 We have answered the claims that the rate provisions of Order No. 436 put it in violation of our mandate in MPC II. This is not to say, of course, that the Commission is free to uphold every price distinction based on different demand elasticities. It has long been contended, for example, that rate differentials based exclusively on competition between transporters with similar cost functions may end up forcing captive customers to bear disproportionate shares of fixed costs without any offsetting gain in efficiency. See, e.g., 1 A. Kahn, The Economics of Regulation: Principles and Institutions 159-81, esp. 170 (1970). The contention is not self-evidently true: if the demand of buyers with access to competing carriers is at all price elastic, the price reductions they enjoy will raise their demand close to competitive levels. In any event, the Commission may properly defer its ultimate resolution of these issues to another day and another proceeding. Cf. American Commercial Lines, Inc. v. Louisville & Nashville R.R., 392 U.S. 571, 88 S.Ct. 2105, 20 L.Ed.2d 1289 (1968) (finding broad discretion in ICC to choose format in which to resolve issues of price discounting in competition between railroads and barge-truck combinations). 165