Opinion ID: 721438
Heading Depth: 3
Heading Rank: 3

Heading: Allocation of GSR costs among customer classes

Text: 286 Order No. 636 authorizes pipelines to recover their GSR costs from all of their blanket-certificated transportation customers. Petitioners contend that the Commission erred in allocating costs to two specific classes of customers: customers that were not directly responsible for GSR costs under Order No. 636 (i.e., those that did not reduce their pipeline gas purchases in response to mandatory unbundling); and interruptible transportation customers. FERC defends its allocation of GSR costs based on the principles of cost spreading and value of service. It is there that we begin. 287
288 Order No. 500, the immediate successor to Order No. 436, authorized pipelines to recover take-or-pay costs from both their customers that were blanket certificated under the Commission's open-access regime and customers that were individually certificated under NGA § 7(c). The § 7(c) shippers objected that they were merely transportation customers of pipelines, and were therefore not in any way responsible for the fact that the pipelines, in preparing to accommodate their anticipated sales obligations, had incurred take-or-pay liabilities. According to the § 7(c) shippers, the Commission's allocation of take-or-pay costs therefore violated accepted principles of cost causation, under which [p]roperly designed rates should produce revenues from each class of customers which match, as closely as practicable, the costs to serve each class or individual customer, Alabama Electric Coop. v. FERC, 684 F.2d 20, 27 (D.C.Cir.1982) (citation and internal quotation marks omitted). 289 The Commission conceded that its take-or-pay allocation could not be sustained under a narrow view of cost causation. It argued, however, that circumstances surrounding the take-or-pay crisis and the transformation [319 U.S.App.D.C. 122] of the pipeline industry necessitate and justify the crafting of new ratemaking principles. K N Energy v. FERC, 968 F.2d 1295, 1301 (D.C.Cir.1992). Specifically, the Commission defended its policy on grounds of cost spreading and value of service: 290 Under this first notion, allocating take-or-pay costs to transportation customers who admittedly may not have directly caused them is acceptable because, in the Commission's judgment, the extraordinary nature of this problem requires the aid of the entire industry to solve it; there are no other alternatives that would allow a transition to a market-based pipeline industry to be effectuated. Closely related to this rationale is FERC's second: namely that all segments of the industry--including those who may not have caused take-or-pay problems--will nonetheless ultimately benefit from their resolution and the concomitant move toward an open access regime; consequently, all segments can rightly be assessed a portion of take-or-pay costs. 291 Id. 292 In K N Energy, we sustained the Commission's invocation of cost spreading and value of service, id. at 1302, though we made clear that our approval of those principles was limited, see id. (A more searching inquiry may well prove necessary ... if the Commission should attempt to adopt these ratemaking rationales outside the take-or-pay context.). We did not, however, approve of the Commission's conclusion that application of cost spreading and value of service justified billing take-or-pay costs to § 7(c) customers. While the Commission contended that § 7(c) customers benefitted from Order Nos. 436 and 500 through lower transportation rates, the data before the court suggested that those rates had in fact increased. Id. Moreover, the Commission's Orders allocated costs to pipelines' remaining sales customers inconsistently. Id. at 1303. We therefore remanded for further consideration of the manner in which take-or-pay liabilities should be applied to § 7(c) customers. 92 293 In this case, the Commission contends that its assignment of GSR costs to all blanket-certificated shippers was an appropriate application of cost spreading and value of service principles. 294
1.) Limitation to bundled sales customers 295 The Industrial End-Users object to FERC's decision to allow recovery of transition costs from all blanket-certificated transportation customers, including those that were not pipeline sales customers at the time of the implementation of Order No. 636. The ground for their objection is straightforward: GSR costs arose from the contracts between the pipelines and those firm sales customers that they retained after Order No. 436, not from contracts with customers that had previously converted under Order No. 436. Specifically, Order No. 636 required firm sales customers to convert their sales entitlements into firm transportation entitlements. Some of those customers also exercised their option to reduce their pipeline gas purchases, leaving the pipelines with excess sales capacity, purchase obligations, and related costs: 296 Indeed, nearly 65 percent of pipeline capacity was committed to sales customers prior to Order 636 even though pipelines' sales accounted for less than 20% of deliveries by 1991. Transportation customers who had earlier converted under Order 436 and 500 from sales service to transportation service, or who had never been pipeline sales customers, had already negotiated their gas supply arrangements and had previously paid the cost of restructuring prior to Order 636. Significantly, nothing in Order 636 permits these transportation customers to reform their supply or transportation arrangements (or to pass on to others the associated costs). 297 [319 U.S.App.D.C. 123] Industrial End-Users' Br. at 18 (emphasis in original). The contracts of non-sales customers therefore did not directly give rise to Order No. 636 GSR costs. 93 The Industrial End-Users further note that even if customers that had previously converted to firm transportation service benefit from Order No. 636, the Commission made no attempt to correlate the degree of that benefit with its cost allocation decisions. 94 298 FERC's approach in Order No. 636, however, is valid under the value-of-service and cost-spreading rationales approved by this court in the K N Energy decision. Even those customers not directly responsible for GSR costs benefit from the availability of lower priced transportation in the unbundled marketplace. Moreover, the Commission's options in spreading out costs to pre-Order No. 636 firm sales customers are substantially limited by the filed rate doctrine and the bar to retroactive ratemaking; FERC simply cannot reach backwards through time in a truly equitable manner. While the Industrial End-Users correctly note that to date we have approved the Commission's departure from traditional cost-causation principles in only limited circumstances, those circumstances are squarely presented in this case. GSR costs under Order No. 636 are the functional equivalent of take-or-pay costs under Order No. 436, and the Commission has not betrayed its obligations to the NGA or precedent by employing these ratemaking principles in its attempt to bring closure to the take-or-pay drama, K N Energy, 968 F.2d at 1302. 2.) Interruptible transportation customers 299 The Industrial End-Users challenge the Commission's decision to allocate 10% of a pipeline's GSR costs to interruptible transportation customers. 95 They contend that unbundling confers no real benefit on that class of customers, who therefore should not be responsible for paying GSR costs. They further contend that interruptible transportation customers in fact may receive inferior service after Order No. 636 because the higher volume of firm transportation expected to result under the Commission's capacity release program may displace interruptible transportation services. Moreover, given that less gas is transported by interruptible than firm transportation, the GSR surcharges applied to interruptible transportation in some cases may exceed those charges applied to firm transportation. 300 The Small Distributors and Municipalities concur that FERC should have better spread the costs of restructuring throughout the industry, but take the contrary position that additional costs should have been allocated to interruptible transportation. Invoking benefit of service principles, 96 the brunt of [319 U.S.App.D.C. 124] their claim is a relatively complex economic analysis of why interruptible transportation customers stand to gain a great deal under Order No. 636. In sum, their theory is that the customers who receive the most benefit under Order No. 636 are those with elastic demands, i.e., those most likely to use interruptible transportation. 301 Our concerns here mirror those in our review of the application of take-or-pay costs to § 7(c) customers in K N Energy. The fact that interruptible transportation customers are part of the natural gas industry is not, standing alone, sufficient to assign them GSR costs; even the cost spreading and value of service principles that we have approved allow for the imposition of costs only upon those entities that either bear some responsibility for the costs or derive some benefit from the solution imposed. See K N Energy, 968 F.2d at 1302-04. We are quite sensitive to the Commission's expert conclusion that interruptible transportation customers do derive benefits from unbundling under Order No. 636; an active market for firm transportation would seem likely to drive down the cost of less desirable interruptible transportation, and while the additional use of firm transportation under Order No. 636 may crowd out some interruptible transportation, that results at least in part from customers converting from interruptible to firm service. Moreover, unlike our review of Order No. 500, we are not presented in this case with evidence that the Commission's prediction of reduced costs was wrong as a factual matter. Further still, interruptible transportation customers do clearly benefit from Order No. 636 through access to low cost transportation that is available through the Commission's capacity release mechanism. 302 More troubling, however, is the Commission's apparently stringent adherence to the 10% figure in all instances. FERC elected to allocate GSR costs to interruptible transportation (IT) in response to claims by some pipelines that they would not be able to recover all of their transition costs from firm customers alone. It completely failed, however, to explain why it chose 10% rather than 5% or 15%, and why that 10% figure should be applied to every pipeline; the Orders and FERC's brief simply do not attempt to defend that figure whatsoever. For example, we are presented with absolutely no explanation of why IT should contribute 10% of GSR costs even on those pipelines on which IT constitutes less than 10% of throughput. And, while the Commission correctly points out that courts have recognized the inherent ambiguities in ratemaking, that does not immunize an agency from engaging in reasoned decisionmaking that is susceptible of appellate review. As we explained in reviewing Order No. 500: 303 While we owe the Commission substantial deference in matters predictive and economic, we cannot ignore the Commission's unwillingness to address an important challenge to its stated benefit rationale for charging transportation customers. It most emphatically remains the duty of this court to ensure that an agency engage the arguments raised before it--that it conduct a process of reasoned decisionmaking. The deference we owe FERC's expert judgment does not strip us of that responsibility. Indeed, ... we will uphold an agency's decision if, but only if, we can discern a reasoned path from the facts and considerations before the [agency] to the decision it reached. 304 Id. at 1303 (citations omitted) (second emphasis added). 305 In this instance, we cannot discern the Commission's path from its view that interruptible transportation customers should bear some of the burden for GSR costs to the conclusion that the share should be 10%. Cf. WALT WHITMAN, LEAVES OF GRASS, Darest Thou Now O Soul (Darest thou now O soul, Walk out with me toward the unknown region, Where neither ground is for the feet nor any path to follow?). And, while we are sympathetic to the Commission's view that [t]he task of determining fair allocations of transition costs is ultimately thankless, even though [it] bring[s] all [its] experience and best judgment to bear on it, Order No. 636-B, p 61,272, at 62,034, the law requires more [319 U.S.App.D.C. 125] than simple guesswork. 97 We therefore remand the issue to the Commission for further consideration.