Opinion ID: 577178
Heading Depth: 2
Heading Rank: 1

Heading: Public Convenience and Necessity

Text: 28 Under section 7(c) of the NGA, a jurisdictional pipeline must obtain a certificate of public convenience and necessity before constructing or extending facilities for the transportation or sale of natural gas. 15 U.S.C. § 717f(c). That is, the Commission must determine that the construction or extension is or will be required by the present or future public convenience and necessity. 15 U.S.C. § 717f(e). In making that determination, the Commission must consider all factors bearing on the public interest, not simply those immediately relating to the objects of its jurisdiction. Atlantic Ref. Co. v. Public Serv. Comm'n of N.Y., 360 U.S. 378, 391, 79 S.Ct. 1246, 1255, 3 L.Ed.2d 1312 (1959); FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 81 S.Ct. 435, 5 L.Ed.2d 377 (1961). 29 In reviewing the Commission's determination, we will not review the Commission's factual conclusions if they are supported by substantial evidence. 15 U.S.C. § 717r(b). Nor will we enforce our own notions of good policy by evaluating the Commission's determination as if we were the administrators originally called upon to approve the application. E.g., Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 558, 98 S.Ct. 1197, 1219, 55 L.Ed.2d 460 (1978). Our task is merely to determine whether the Commission's action was arbitrary, capricious, ... or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). See Colorado Interstate Gas Co. v. FERC, 904 F.2d 1456, 1459 (10th Cir.1990). We must uphold the Commission's determination if it is based on consideration of the relevant facts and articulates a rational connection between the facts found and the choice made. See, e.g., Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42-43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983). Given this highly deferential standard of review, we cannot find that the Commission committed error in this case. 10 30 In recent bypass cases the Commission has articulated the policy of accepting applications for bypass construction, absent a showing of unfair competition or undue discrimination. See, e.g., Northern Natural Gas Co., 46 F.E.R.C. p 61,270, reh'g denied, 48 F.E.R.C. p 61,232 (1989). The Commission has also stated that it will not shield the LDCs against competitive pressures. Id. The Commission believes that its policy of competition is in the public interest, justifying certification under section 7(c) of the NGA: 31 The Commission has given careful consideration to the effects of its competitive policies, including the fact the bypasses may occur, and has, thus far, concluded that the benefits which will accrue to the public as a result of competition in the natural gas industry outweigh any adverse impacts on particular parties. 32 Northwest Pipeline Corp., 51 F.E.R.C. at 61, 912. 33 The Commission has more fully explained the theory upon which this conclusion rests. 34 The benefits of our policy include clear and diverse pressures and opportunities assuring the availability of gas services at lowest reasonable costs. The policy allows increased direct access to transportation and supply markets; encourages responsiveness to supply and price signals; imposes upon the LDC, which often has monopoly power, the need to discipline its costs to maintain its customer base and the incentive to unbundle its services; allows pipelines to compete for markets served inefficiently while protecting against undue discrimination against LDCs; promotes market participation by larger numbers of players, thus providing new supply options and leverage to parties seeking to obtain services priced efficiently; indicates the desirability of renegotiation of contracts executed under substantially different market conditions, and thus assures that the benefits of competition will inure to all market participants, even those customers remaining on an LDC system when a bypass does occur. 35 Northern Natural Gas Co., 48 F.E.R.C. p 61,232. 36 Here, petitioners challenged the proposed bypass on several grounds. The Commission considered and, relative to the standards by which we review its determination, adequately responded to each, deciding ultimately that this particular bypass approval was a proper application of its general policy and therefore in the public interest. 11 37
38 Petitioners argue that the Commission's determination of public convenience and necessity was arbitrary and capricious in light of its failure to accept their arguments of unfair competition between Cascade and Northwest and of undue discrimination between various classes of consumers. Cascade cannot fairly compete, according to petitioners, (1) because it is required to offer transportation rates set by the state, which will not necessarily reflect the costs of providing local transportation; (2) because it must incur the costs of providing transportation services to any customer that desires it, while Northwest may cherry-pick the customers for which it will construct facilities; and (3) because any consumer that uses Cascade to transport gas locally will pay a total price reflecting (and greater than) the transportation rates charged by Northwest, and therefore it will always be cheaper to receive gas directly from Northwest. 39 In response, the Commission noted that at least the WUTC cannot complain of a competitive disadvantage created by present rate structures because this obstacle falls squarely within the WUTC's power to change. The WUTC may design cost-based rates tailored to the individual consumers seeking transportation services, eliminating the first two grounds for the claim of unfair competition. The Commission also found with regard to the second, cream-skimming allegation, that here it was the consumers who first approached Northwest and agreed to compensate it for construction of the facility. Further, the Commission responded that even if Northwest offers its services to select customers, this encourages the LDCs and state commissions to respond competitively to the needs of those consumers. 51 F.E.R.C. at 61,913. 40 Importantly, as Weyerhaeuser and Norpac urge in response to the third allegation, it is not a foregone conclusion that Cascade can never compete with direct delivery from Northwest. These consumers argue that a large capital investment must be made to construct and maintain the facilities required to receive direct deliveries. Presumably, since Cascade has already made and recovered its capital investment in similar facilities, it could discourage consumers from leaving its distribution system by offering cost-based, unbundled services. The Commission attributes the success of other LDCs in retaining customers to this type of action. 53 F.E.R.C. at 61,053. 12 41 Petitioners also argue that the Commission's policy unduly discriminates between high-volume consumers that by happenstance are located near an interstate pipeline and those located where it is not economically feasible to construct a bypass. In fact, the result of FERC's current bypass policy is to reserve for only select customers, like Weyerhaeuser and Norpac, access to reasonably priced natural gas service. Opening Brief of the Petitioner WUTC at 34-35. While this characterization implies that customers currently required to utilize Cascades services receive gas at unreasonable prices, the Commission responded with the sufficient explanation that its policies were designed to benefit even these consumers in the long run. 53 F.E.R.C. at 61,053. Further, the Commission indicated that Cascade may continue to approach the Commission and seek a remedy if Northwest engages in anti-competitive or discriminatory behavior. 51 F.E.R.C. at 61,913. 42 In light of these considerations, we cannot say that the Commission's approval of the bypass, in spite of these objections, was arbitrary or capricious.
43 Petitioners further maintain that the Commission arbitrarily failed to take into account the local effects of the bypass. 44 Traditionally, state regulatory agencies like the WUTC have designed the rates a LDC may charge based on the average cost of providing service to all consumers within the service area that may desire them. This system of rate design acts as a tax upon high-volume consumers who pay rates much higher than the LDC's costs of providing them service and serves to subsidize the provision of services to other consumers within a service area. Presumably, when high-volume consumers like Weyerhaeuser and Norpac leave the distribution system, the LDC can no longer depend on the high profit margins from these customers to achieve the same rate of return it previously received, even though the variable costs associated with providing services to these consumers disappear. The state regulatory commission has two choices: it can force the LDC to swallow its loss, or it can attempt to guarantee to the LDC the same rate of profit by raising the rates of the remaining consumers. 45 Petitioners argued before the Commission that approval of this and other bypasses in the region would increase the rates of services to remaining customers. Petitioners offered no evidence or made no specific allegation as to the degree to which this might possibly occur. 46 In its order denying a rehearing, the Commission offered several reasons for not denying Northwest's application on these grounds. First, it reiterated its claim that after careful consideration it concluded that the benefits which will accrue to the public as a result of competition in the natural gas industry outweigh any adverse impacts on particular parties. 53 F.E.R.C. at 61,052. Second, having noted previously that it was speculative whether remaining consumers would be harmed, because that decision would depend on the WUTC, the Commission noted that the petitioners offered no new evidence to support the claim that adverse effects outweighed the overall benefits of the Commission's policies to the nation as a whole. Id. Third, the Commission reserved the right in future bypass cases to conclude at some later date that the circumstances obtaining in a particular region of the country or the adverse impact on a particular LDC warrant a different approach. Id. Fourth, the commission noted that presently 47 nothing in the record of this case, or in other recent by-pass cases, leads the Commission to conclude that there is a need at this time to protect one party from the pressures of a competitive market. We note that although Northwest has proposed several transactions which by-pass LDCs, these by-passes will occur in Washington and Oregon and involve more than one LDC. Thus, the adverse effects, if any, are not likely to fall on only one LDC or group of consumers. 48 Id. Finally, the Commission noted that local authorities like the WUTC can discourage consumers from bypassing the LDCs by promoting rate designs and other policies that will make service provided by LDCs efficient, competitive and, therefore, economical. Id. at 61,053. If rates to industrial end-users are [consequently] lowered, the state commissions have alternatives which would not necessarily result in rate increases to residential customers. Moreover, it may be in certain circumstances that an increase in rates to residential customers will not be unjust or unreasonable. Id. See also Associated Gas Distrib. v. FERC, 824 F.2d 981, 1036-38 (D.C.Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988). 49 While this response perhaps demonstrates insensitivity to the state's current strategy of subsidizing services to residential consumers, again, there is nothing in this response that would allow us to label the Commission's determination as devoid of a rational basis and therefore arbitrary and capricious. 50
51 This answer applies equally to the petitioners' related claim that the Commission's sole reliance on the private pecuniary interests of two consumers, promoted at the expense of all other local consumers, was not adequate to justify approval. It is clear that the Commission does not view the intended class of beneficiaries so narrowly. The Commission is convinced that in the long run all consumers will benefit from [its] pro-competitive policies. 53 F.E.R.C. at 61,053. Its theory is that these policies, promoted in this instance, will among other things require Cascade and other LDCs to discipline their costs and unbundle their services, promote market participation by larger numbers of players, and stimulate production and competition at the wellhead, all of which will lead in the long run to more reasonably priced services for all consumers. Whether FERC's model is 'faulty' or not, which we do not decide, we are not at liberty to replace FERC's economic reasoning, supported by its technical expertise, with our own. Michigan Consol. Gas Co. v. FERC, 883 F.2d 117, 123 (D.C.Cir.1989).
52 Petitioners also argue that the waste of duplicate facilities justified a denial of the application. The apparent concern with duplicate facilities is that regulated industries charging cost-based rates have little economic disincentive to avoid waste and may easily pass on unnecessary costs to the consuming public--costs that could have been avoided by an appropriate regulatory strategy. See Kansas Power & Light Co. v. FERC, 891 F.2d 939, 943 (D.C.Cir.1989). However, the Commission found, upon sufficient evidence, that Norpac and Weyerhaeuser would bear the cost of construction, not utility rate payers. As to the $35,000 of Northwest's costs attributable to construction of the meter station, the Commission found that this would have an insignificant effect on its ratepayers. 51 F.E.R.C. at 61,913.