Opinion ID: 658297
Heading Depth: 2
Heading Rank: 1

Heading: Market-based pricing

Text: 38 The petitioners contend that the FERC's approval of market-based pricing for Transco's merchant service constitutes virtual deregulation and is utterly at odds with its NGA obligation to insure that rates are cost-based so that consumers will be protected from abuse at the hands of natural gas companies. Pointing to the Supreme Court's statement that the prevailing price in the market cannot be the final measure of 'just and reasonable' rates mandated by the Act, FPC v. Texaco, Inc., 417 U.S. 380, 397, 94 S.Ct. 2315, 2326, 41 L.Ed.2d 141 (1974), the petitioners maintain that the FERC was required to adhere to its historical policy of basing rates upon the cost of providing service plus a fair return on invested capital. See Alabama Electric Coop. v. FERC, 684 F.2d 20, 27 (D.C.Cir.1982). 39 In our view, that is not a tenable position. First, nothing in FPC v. Texaco, Inc. precludes the FERC from relying upon market-based pricing. The Supreme Court's point in that case was only that where the Congress has subject[ed] producers to regulation because of anticompetitive conditions in the industry, id. 417 U.S. at 399, 94 S.Ct. at 2327, the market cannot be the final arbiter of the reasonableness of a price. 417 U.S. at 397, 94 S.Ct. at 2326. In Texaco, the Commission had failed even to mention the just and reasonable standard; it appeared to apply only the standard of the marketplace in reviewing the reasonableness of a rate. 417 U.S. at 396-97, 94 S.Ct. at 2325-26. Here, in contrast, the FERC has made it clear that it will exercise its Sec. 5 authority (upon its own motion or upon that of a complainant) to assure that a market (i.e., negotiated) rate is just and reasonable. 57 FERC at 62,113. 40 Second, the Supreme Court has repeatedly held that the just and reasonable standard does not compel the Commission to use any single pricing formula ..., Mobil Oil Exploration v. United Distribution Co., 498 U.S. 211, 224, 111 S.Ct. 615, 624, 112 L.Ed.2d 636 (1991), and we have indicated that when there is a competitive market the FERC may rely upon market-based prices in lieu of cost-of-service regulation to assure a just and reasonable result. See Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C.Cir.1990) (In a competitive market, where neither buyer nor seller has significant market power, it is rational to assume that the terms of their voluntary exchange are reasonable, and specifically to infer that the price is close to marginal cost, such that the seller makes only a normal return on its investment). See also Farmers Union Central Exchange v. FERC, 734 F.2d 1486, 1510 (D.C.Cir.1984). 41 Here the Commission specifically found that Transco's markets are sufficiently competitive [304 U.S.App.D.C. 96] to preclude it from exercising significant market power in its merchant function.... 55 FERC at 62,334. In support of this conclusion, the FERC noted that Transco will be providing comparable transportation service with respect to all gas supplies whether purchased from Transco or its competitors and that adequate divertible gas supplies exist to assure that Transco will have to sell at competitive prices. Id. The petitioners point to no record evidence to the contrary. It appears, therefore, that Transco will not be able to raise its price above the competitive level without losing substantial business to rival sellers. Id. Such market discipline provides strong reason to believe that Transco will be able to charge only a price that is just and reasonable within the meaning of Sec. 4 of the NGA. 42 In their reply brief, the petitioners alter the focus of their argument, contending that the Restructuring Settlement is inconsistent with the various reporting requirements of the NGA. See 15 U.S.C. Secs. 717c(c) & (d) (requiring pipelines to file rate schedules and give advance notice of rate changes). This contention appears nowhere in the petitioners' original brief and they cite no reference to it in their various pleadings before the FERC. Accordingly, pursuant to Sec. 19(b) of NGA, we do not reach this contention. 15 U.S.C. Sec. 717r(b).