Opinion ID: 513412
Heading Depth: 2
Heading Rank: 2

Heading: Procedural Setting

Text: 16 The FERC is empowered to regulate the rates charged by natural gas pipelines by virtue of the Natural Gas Act, 15 U.S.C.A. Sec. 717-717w (1976). The regulatory stance of the Act has been interpreted to involve neither [ ] 'ratemaking' nor [ ] 'rate-changing,'  United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 341, 76 S.Ct. 373, 379, 100 L.Ed. 373 (1956): 17 Recognizing the need ... circumstances create for individualized arrangements between natural gas companies and distributors, the Natural Gas Act permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts, which to that end must be filed with the Commission and made public. 18 Id. at 339, 76 S.Ct. at 378. 19 As emphasized in a number of recent decisions in this circuit, 20 [t]hree interrelated sections constitute the 'comprehensive and effective regulatory scheme' Congress created with regard to ratemaking. Section 7 provides that to undertake the 'transportation or sale of natural gas,' an entity must first obtain 'a certificate of public convenience and necessity issued by the Commission.' ... Once rates are authorized under section 7, a natural gas company may file for an increase under section 4.... On the other hand, [in the absence of a rate filing], if rates are unjust or unreasonable, the Commission may adjust them pursuant to section 5. 21 Northern Natural Gas Co. v. FERC, 827 F.2d 779, 781 (D.C.Cir.1987) (quoting Panhandle Eastern Pipe Line Co. v. FERC, 613 F.2d 1120, 1127-28 (D.C.Cir.1979)). 22 All rates established under the Act must be 'just and reasonable'. 15 U.S.C.A. Sec. 717c(a) (1976). Section 4 places the burden on the filing pipeline of proving that proposed rates are just and reasonable. Section 5 imposes the burden of proof on the Commission to demonstrate that existing rates are unjust and unreasonable. Id. at 513. 23 The instant case arises from Tennessee's efforts in a Sec. 4 filing to respond to increased competition in the natural gas industry. In an order that may well come to rank with the three great regulatory milestones of the industry, Associated Gas Distributors v. FERC, 824 F.2d 981, 993 (D.C.Cir.1987), the FERC took steps in 1985 to open the natural gas industry to increased competition by requiring that pipelines transport gas on an open-access basis. Order No. 436, 50 Fed.Reg. 42,408 (1985). The effect of Order No. 436 has been to enable pipeline customers to gain access to the competitive wellhead market for natural gas, thereby reducing gas costs and improving the transmission of market signals between producers and consumers. 24 In connection with its transformation into an open-access transporter, Tennessee filed with the FERC on December 8, 1986 (first filing) new and revised rate schedules to govern the web of modified services it proposed to offer in accordance with Order No. 436. On review here is a component of this filing which affected the rate schedules facing GS customers. Tennessee proposed in this first filing (as the only pipeline connected to its GS customers) to provide transportation services to these customers. Logically, of course, the offer of this new service entailed specifying a rate at which such service would be sold. And, also logically, offering the service meant releasing GS customers from their obligation under the full requirements provision to purchase gas solely from Tennessee. Formally, Tennessee accomplished these steps by (1) modifying the full requirements provision in its GS sales rate schedule to read as follows [proposed changes are shown in italics]: 25 1. This Rate Schedule is available for the purchase from Tennessee Gas Pipeline Company ... of natural gas for resale, to any buyer ... (c) which does not ... (ii) purchase gas direct from other suppliers; except Buyer may receive gas described in ... (ii) by transportation service pursuant to Seller's Rate Schedules FT-A, FT-B and/or IT. 5 26 J.A. 19 and (2) modifying its IT (interruptible transportation) rate schedule to read as follows: 27 The rates for service under the IT Rate Schedule for all customers other than those who also purchase from Seller under its GS Rate Schedule are the applicable IT rates shown on effective Tariff Sheet No. 23; ... The rate for those customers who also purchase under Seller's GS Rate Schedule shall be the commodity rate under the GS Rate Schedule. 28 J.A. 24. 29 The rate at which Tennessee proposed to provide interruptible transportation service to GS customers (the GS-IT rate) differed from the rate charged all other customers making use of this service. Tennessee proposed to charge GS customers the GS commodity rate, a rate charged per-unit of gas sold to GS customers under the firm sales schedule. Thus, under Tennessee's proposal, GS customers would continue to make their payments toward demand charges on a per-unit basis for every unit of gas they used, regardless of whether they purchased that gas from Tennessee or merely transported gas purchased from other suppliers on Tennessee's pipeline. 30 Tennessee argues that since it is still obligated to supply the GS customers' entitlements on demand, it incurs the same level of fixed costs associated with that obligation regardless of whether GS customers purchase from Tennessee or other suppliers. Brief for Petitioner at 23. The demand charge compensates Tennessee for these fixed costs; had GS customers been ordinary firm sales customers, they would have continued to pay the same flat demand charge whether or not they chose to take advantage of transportation services. However, because of the special one-part design of the GS sales rate, reductions in actual deliveries to GS customers reduce the demand charge collected. To avoid this lost recovery of a portion of the fixed cost incurred in its obligation to provide firm sales, Tennessee argues, it needs to continue to collect the imputed per-unit demand charge on transported gas. 31 The FERC rejected Tennessee's proposal in an order issued January 7, 1987. Tennessee Gas Pipeline Co., 38 F.E.R.C. p 61,004 (January 7, 1987) (first order). The FERC found three deficiencies in Tennessee's proposed GS-IT rate: failure to specify maximum and minimum rates in accordance with 18 C.F.R. Sec. 284.7(d)(5)(i) (1988); failure to separately identify transmission, storage and gathering components as required by 18 C.F.R. Sec. 284.7(d)(1) (1988); and discrimination in that the regular IT rate computed mileage charges based on the distance over which gas was transported whereas the GS-IT rate computed mileage based on sales zones, i.e., the distance between Tennessee's supply point and the delivery point, not the distance between the actual supply point and the customer. 38 F.E.R.C. at 61,017. Based on these deficiencies, the FERC required Tennessee to amend its tariff sheets to eliminate the GS-IT rate. Because the GS rate had been styled as an exception in the IT rate schedule available to other customers, this revision made the regular IT rate for transportation available to all customers. Moreover, because the Commission's order accepted the GS sales schedule without revision, it reflected the provision that GS sales customers could purchase gas from alternative suppliers pursuant to the Seller's Rate Schedule[ ] ... IT. Thus the Commission's first order, while rejecting Tennessee's own proposal for providing interruptible transportation to GS customers, effectively required such transportation services to be provided at the regular IT rate and eliminated Tennessee's long-standing full requirements provision from its specially-tailored GS sales rate schedule. 32 Tennessee responded to this order in three ways. First, it amended its tariff sheets as required, subject to its right to seek rehearing, thus putting the IT service for GS customers at the regular IT rate into effect as of the effective date of the filing (December 10, 1986). Second, Tennessee made a new filing on January 16, 1987 (second filing). This filing corrected the first two (technical) deficiencies in its first filing, but left in place the proposal to offer IT service to GS customers at the GS commodity rate. The filing also proposed an alternative in the event that the Commission again rejected the GS-IT rate: restoration of the full-requirements provision to the GS sales schedule. In its cover letter accompanying this filing, Tennessee argued that the regular IT rate for GS transportation was discriminatory with respect to Tennessee's other customers and resulted in underrecovery of fixed costs as a result of the interaction between the special one-part rate design and the elimination of the full requirements provision. 6 Third, Tennessee filed for rehearing of the first order, reiterating its argument that the GS-IT rate it had proposed was necessary to avoid discrimination against other customers and the underrecovery of fixed costs. Tennessee emphasized that it did not read Order No. 436 to require that it provide IT service to full-requirements customers but only that it allow such customers to switch to partial-requirements status (paying the regular two-part rate) in order to make use of transportation services. 33 On February 13, the FERC rejected both of the proposals made in Tennessee's second filing: it rejected the technically-corrected GS-IT rate and it rejected Tennessee's proposal to return the full-requirements provision to the GS sales rate schedule. Tennessee Gas Pipeline Co., 38 F.E.R.C. p 61,154 (February 13, 1987) (second order.) In rejecting the GS-IT rate, the Commission noted only that the GS-IT rate continued to reflect mileage charges based on sales zones rather than mileage blocks and thus continued to discriminate against GS customers. 38 F.E.R.C. at 61,434. The Commission did not address Tennessee's arguments regarding the discriminatory effect of the first order (now the status quo). In rejecting Tennessee's alternative proposal, to restore full requirements, the Commission treated this proposal as one to change the status quo established by its first order. It thus placed the burden on Tennessee of proving why a full requirements provision was just and reasonable, independent of its historic use and Commission precedent. The Commission stated only: 34 Tennessee has filed to become an open-access transporter pursuant to Order No. 436. Transportation services provided thereunder must be made available on a non-discriminatory basis. Adoption of Tennessee's proposed alternate tariff sheets would preclude GS customers from availing themselves of open-access transportation services. This would result in undue discrimination against Tennessee's GS customers. 35 Id. The Commission did not address Tennessee's argument that the FERC in Order No. 436 had specifically found that full-requirements provisions were not summarily violative of the open-access mandate. See Order No. 436, 50 Fed.Reg. at 42,445. 36 Tennessee filed for rehearing of this order also. Recognizing that the two orders dealt with essentially the same Commission action, the FERC issued a single order denying rehearing of both. Tennessee Gas Pipeline Co., 41 F.E.R.C. p 61,137 (November 4, 1987) (rehearing order.) In this order, for the first time, the Commission addressed Tennessee's arguments on discrimination and the recovery of fixed costs. The Commission stated that 37 Tennessee may not recover costs through its transportation rate which are allocated to sales.... Whether the GS rate is subsidized as Tennessee implies is not at issue here, where we are concerned with open-access transportation rates. 38 41 F.E.R.C. at 61,343-44. 39 While recognizing the thrust of Tennessee's arguments, the Commission simply rejected them as irrelevant. It thus upheld the remedy fashioned by the first order: elimination of the full requirements provision and GS transportation at the regular IT rate. 40 With respect to the rejection in the second order of the alternative proposal--restoration of the full requirements provision--the Commission elaborated on its analysis of why the full requirements provision was discriminatory. It found that Tennessee had not proved its argument that full requirements customers could switch to partial requirements status, and thus were not prevented from gaining access to transportation services; the Commission stated that the partial requirements schedule was not designed to accommodate the characteristics of Tennessee's small full requirements customers, id. at 61,344, and thus effectively precluded them from transportation. The Commission then argued that in addition, id., to the inappropriate design of the partial-requirements schedule, the full-requirements provision was a barrier to access because GS customers are served by only one pipeline: 41 We believe that Tennessee's full requirements provision is a barrier to access to competitively priced gas. There is no pipeline-to-pipeline competition because Tennessee is the only pipeline serving these customers. However, other gas suppliers cannot compete for sales, and GS customers cannot purchase from other suppliers. 42 Id. 43 Although the Commission stated that our ruling in this case [does not] mean that all full requirements clauses are improper, id. at 61,345, it held that 44 in this case, where a customer has no real opportunity to pursue the benefits afforded by competition in the gas market, the barrier to that opportunity is unacceptable. 45 Id. (emphasis added). 46 Since the Commission found that the highlighted condition was met by virtue of the fact that Tennessee is the only pipeline serving GS customers, its decision could be read as a per se holding that where there is a single pipeline connection, full-requirements provisions are in violation of Order No. 436's open-access mandate.