Opinion ID: 489534
Heading Depth: 3
Heading Rank: 3

Heading: Take-or-Pay Obligations

Text: 59 Transwestern's third possible justification is the most superficially appealing. It concerns the recovery of take-or-pay obligations governing wellhead sales between it and its producers. Under a take-or-pay contract, a pipeline must take or pay for a minimum amount of gas. If partial-requirements customers purchase gas from another supplier, the pipeline may be unable to sell as much gas as it is obligated to purchase. The pipeline will then have to pay producers for gas it does not take. Take-or-pay liabilities, if prudently incurred, become a fixed cost on the system and can be passed on to customers in the form of increased rates. A minimum bill can be justified as a means of ensuring equitable recovery of take-or-pay costs from all customers. In Order No. 380, the Commission recognized that this justification is another way of assuring protection of full-requirements customers from the actions of partial-requirements customers. The Commission has always given such take-or-pay questions special consideration, as it has done here. 60 The Commission recognized that a minimum bill may be permissible if used to ensure that carrying costs associated with take-or-pay liabilities will be borne by the customers that caused the liabilities to be incurred. The Commission, however, found no connection between the minimum bill payments the customers made under Transwestern's rate schedules and the carrying costs associated with take-or-pay liabilities that Transwestern could legitimately recover from its partial-requirements customers. Accordingly, the Commission found that Transwestern's minimum bills were not justified on the ground that they ensured equitable recovery from Transwestern's customers of costs associated with take-or-pay liabilities. 61 Transwestern does not really argue that its minimum bills are necessary to ensure equitable recovery of take-or-pay costs from all customers. Rather, Transwestern asserts that it has enormous take-or-pay obligations and that its minimum bills, even though not precisely calibrated to the level of its take-or-pay liability, still serve the purpose of recovering the cost of take-or-pay payments. 62 Transwestern acknowledges that the Commission has instituted alternative approaches to an industry-wide take-or-pay crisis, but asserts that the Commission is avoiding its responsibility to deal adequately with the dilemma. Transwestern claims that the Commission in Order No. 380 used the same alternative approaches argument to postpone its duty to find an adequate solution. In Wisconsin Gas Co., 770 F.2d at 1159-60, the D.C. Circuit deferred to the Commission's discretion to deal with take-or-pay issues in separate proceedings. 63 The take-or-pay issue posed here is a separate matter which is being addressed in other proceedings before the Commission and through other means. Indeed, Transwestern currently has a proposal before the Commission to allocate costs of settling take-or-pay liability directly to the customers who caused such costs to be incurred. The Commission is not ignoring the issue. None of Transwestern's contentions invoke any proper take-or-pay justification. 64 The take-or-pay question is, moreover, a hypothetical issue on the record in this case. No evidence advanced indicates that Transwestern has actually made any payments to producers under its take-or-pay contracts. The Commission's decision to confront the potential take-or-pay problem through alternative approaches and in other cases has not been shown to be unreasonable, arbitrary, or capricious.