Opinion ID: 531196
Heading Depth: 2
Heading Rank: 2

Heading: From AGD to the Present.

Text: 91 In the wake of AGD, the Commission concluded that an interim rule was necessary in order to avoid uncertainty and disruption in gas transportation while it adopted a final rule that responded to the court's critique of Order No. 436. Accordingly, on August 7, 1987, the Commission issued Order No. 500, 52 Fed.Reg. 30,334 (1987), which became effective upon this court's issuance, on September 15, 1985, of the AGD mandate, 52 Fed.Reg. 35,539 (1987). Order No. 500 readopted most of Order No. 436, but added and deleted various provisions in an effort to respond, on an interim basis, to the AGD mandate sufficiently to comply with the standards set forth in Mid-Tex Electric Cooperative v. FERC, 822 F.2d 1123 (D.C.Cir.1987). 92 Order No. 500 contains a new crediting mechanism that the Commission added in order to mitigate any increase in the take-or-pay liability of pipelines that the open-access requirement might cause. The rule requires a producer seeking open-access transportation to agree to credit transported gas against the transporting pipeline's take-or-pay liability. A pipeline need not show any actual displacement of its own sales in order to get the credit, and it can apply the credit against any take-or-pay obligations it has with the transporting producer, i.e., not just against the particular sales contract that the transportation has displaced. 93 The crediting requirement of Order No. 500 is subject to several limitations and exceptions. First, a pipeline cannot apply credits against an obligation arising from a contract executed after the issuance of the AGD decision, because the Commission believes that by that time pipelines should no longer have been entering into uneconomic contracts. Second, no credits are earned for any liability incurred before January 1, 1986, because pipelines transported little gas under Order No. 436 before that time, so that most liabilities incurred before then could not have been caused by the open-access requirement. Third, pipelines must transport, but do not receive credits for, gas presently not committed to the pipeline by contract which it previously purchased under a terminated take-or-pay contract and ... gas it released from a contract containing a market-out clause that allows the pipeline to terminate the contract at its discretion. 52 Fed.Reg. at 30,339. These provisions were intended to encourage producers to agree to the buyout of existing uneconomic take-or-pay contracts and to the inclusion of market-out clauses in existing contracts, and to extend equal treatment to producers that had already done so. Id. 94 Order No. 500 also adopted a policy, based upon an earlier proposed policy statement and the comments received thereon, concerning acceptable passthrough mechanisms by which pipelines would be allowed, in the context of individual rate proceedings, to recover take-or-pay buyout and buydown costs from their customers. As always, of course, a pipeline may recover all prudently incurred costs in [its] sales commodity charges. Id. at 30,341. Under a newly created alternative approach, however, a pipeline that transports under the open-access regime of Order No. 500 may recover from 25% to 50% of its take-or-pay settlement costs through a fixed charge if it agrees to absorb, i.e., not to pass through, an equal percentage; it may then attempt to recover the remainder through sales and transportation surcharges. In order to avoid extended hearings, there is a rebuttable presumption that the uncontested buyout and buydown costs of a pipeline that has agreed to some absorption are prudent, and contested settlements are to be approved if there is substantial evidence of their prudence. In order to encourage early settlements, this alternative approach was made subject to a sunset provision; the deadline for filing for recovery of settlement costs was originally set at December 31, 1988. 95 In order to avoid take-or-pay problems from recurring in the future, the Commission adopted another policy statement approving, in general, a pipeline's use of a gas inventory charge (GIC) levied for standing ready to supply gas to sales customers. A pipeline must announce the GIC prior to its acceptance by a customer, and allow the customer to renegotiate, at regular intervals, the level of service it wants. In return for the GIC, the pipeline waives the right to recover by any other method take-or-pay costs accruing after the effective date of Order No. 500. 96 Although Order No. 500 retained the provision of Order No. 436 that enabled a customer to convert its CD volumes from gas purchases to transportation services, the Commission did decide to drop the CD reduction option (while reserving the possibility of revisiting the subject). Subsequently, it explained that CD reductions made prior to the issuance of Order No. 500 were not meant to be affected by this change. Interstate Power Co. v. Natural Gas Pipeline Co. of America, 41 FERC (CCH) p 61,096, at 61,256 (1987), reh'g denied, 42 FERC (CCH) p 61,049 (1988). 97 Noting that [t]he court [in AGD ] directed that the Commission reassess its decision not to invoke its power under NGA section 5 to modify or set aside jurisdictional contracts with troublesome take-or-pay provisions, FERC announced that it was undertaking such an inquiry. Accordingly, it requested extensive data from pipelines on their take-or-pay liabilities. Forty-five data requests were served on August 26, 1987, barely a month after AGD issued. Pipelines were required to respond within thirty days of the date of the request. 98 Since issuing Order No. 500, the Commission has modified it several times and extended various deadlines. The first such step came on October 14, 1987, when the Commission extended to November 1, 1987, the deadline for responses to its data request. Order No. 500-A, 52 Fed.Reg. 39,507. 99 On October 16, the Commission placed an additional limitation on the crediting scheme. Order No. 500-B, 52 Fed.Reg. 39,630 (1987). Concerned that a pipeline might deny access to gas jointly owned by several parties if any owner refused to credit transported volumes against the pipeline's take-or-pay obligation, the Commission decided that if owners accounting for at least 85% of the volume of gas to be transported agree to the crediting, the pipeline must provide access. The Commission concluded that this adjustment would not significantly reduce, and in some cases would increase, the benefit of crediting to pipelines because it would remove an impediment to open-access transportation, and hence to the receipt of credits against take-or-pay liability. 100 Order No. 500-C, issued on December 23, added several new exceptions, some relevant here, to the crediting requirement. 52 Fed.Reg. 48,986 (1987). First, a pipeline may not apply credits against an obligation to take casinghead gas, which is produced jointly with oil. The Commission was concerned that if a pipeline did not take all of the casinghead gas that it has committed to take, the producer would have either to stop the accompanying oil production or to flare the gas; either oil production would decline or gas would be wasted. The Commission called for comments on the effect of this exception, including an assessment of how much of the pipelines' take-or-pay liability involves casinghead gas. Second, in order to avoid reducing the incentive for a producer to develop new gas supplies, a pipeline is required to transport new gas, as defined by the Order, without receiving any credit, and it may not apply any credits earned by transporting other gas against its obligation to take or pay for new gas. Third, an exception to the crediting requirement was created for certain gas transported by both an intrastate pipeline and an interstate pipeline: a producer does not have to credit the interstate pipeline for transporting gas that has been released from a contract between the intrastate pipeline and the producer if the release agreement provides for crediting the intrastate pipeline. 101 The exceptions for casinghead gas and for gas released by an interstate pipeline were both scheduled to expire on April 1, 1988, apparently because the Commission believed it would promulgate a final rule by that time. On March 8, 1988, however, the Commission announced that it was not practicable for [it] to issue a final rule in this proceeding by April 1, 1988. Order No. 500-D, 53 Fed.Reg. 7893. The Commission determined that it needed more time in order to consider the extensive comments it had received and to hold a hearing, which it scheduled for April 11-12. It therefore extended the effect of the crediting exceptions until the issuance of a final rule. 102 Finally, on December 9, 1988, the Commission extended the deadline for use of the fixed-charge passthrough mechanism to March 31, 1989, from December 31, 1988. Order No. 500-F, 53 Fed.Reg. 50,924 (1988), reh'g denied, Order No. 500-G, 54 Fed.Reg. 7400 (1989). With regard to a contract in litigation as of March 31, 1989, however, a pipeline may file for recovery of take-or-pay costs whenever the litigation ends. 103 Since the Commission issued Order No. 500, producers and pipelines have renegotiated a substantial portion of their take-or-pay contracts. By the end of 1987, almost 80% of pipelines' potential liability had been resolved. INGAA, A Comparison of the INGAA and NGSA 1988 Take-or-Pay Analyses 5 (May 1988). The Producers intervening in support of respondent assert that, by the end of 1988, this figure had risen to 95%, leaving $850 million in outstanding potential liability among twenty-three major pipelines surveyed. NGSA, A Status Report on the Interstate Pipeline Take-or-Pay Situation: Substantial Resolution Through Year-End 1988, at 1 (May 1989). The petitioning Pipelines contend that there was $2.1 billion of such liability outstanding among the 21 pipelines that the INGAA surveyed at the end of March 1989. INGAA, Fact Sheet on Take-or-Pay in 1988: An Interim Report (July 10, 1989). Whatever the precise figures, however, the Pipelines and the Producers agree that the potential outstanding take-or-pay liability has fallen substantially over the last few years. 104 Meanwhile, the Commission has neither taken action under Sec. 5 of the NGA, explained why it has not done so, nor made public its analysis of the data that it required the pipelines to submit. Nor has the Commission issued a final order to succeed the interim rule of Order No. 500.