Opinion ID: 529314
Heading Depth: 2
Heading Rank: 3

Heading: Take or Pay

Text: 94 The take or pay problem was born during the 1970s when critical shortages of natural gas allowed producers to virtually dictate the terms and conditions of contracts for sale of natural gas to pipelines. During those years, the prevailing thought was that natural gas supply shortages would continue for quite some time and pipelines were frequently unable to procure enough gas to meet consumer demand. As a result, pipelines entered into take or pay contracts which typically required the pipeline to take a specified volume of gas from the producer or, in the event the gas was not taken, pay for the specified volume agreed to be taken but not taken. Additionally, take or pay contracts frequently contained automatic price escalation clauses which obligated the pipeline to pay either the highest price allowed by law or the highest price paid in a specific geographic area. 95 Pipelines today are faced with a market vastly different from the market in the 1970s. Conditions now are such that numerous pipelines simply are unable, in many circumstances, to take the quantity of gas required by existing take or pay contracts. Additionally, the natural gas market of today is characterized by oversupply, substantially lower rates for natural gas, and competition. Accordingly, pipelines with high liability take or pay contracts must pay prices for natural gas that are substantially in excess of current market prices. The end result is that both interstate and intrastate pipelines are currently burdened with take or pay contracts which potentially threaten their very existence as public utilities. At stake may be the spectre of unacceptable rate increases, of unpredictable price movements and even of the unavailability of gas supply. 96 The petitioners contend that the Commission effectively ignored take or pay issues in Order No. 451 notwithstanding its obligation to resolve the problem. In Order No. 451, the Commission stated that it believes that the natural forces of competition will resolve the issues surrounding high cost contracts. Order No. 451 at 76. In further deference to forces outside its ambit of control, the Commission, in Order No. 451, reaffirmed its previous position that problem contracts are primarily a matter for resolution between the parties involved. (footnote omitted). 31 Id. Continuing, the Commission emphasized that [f]or largely the same reasons expressed in Order Nos. 436 and affirmed in 436-A, the Commission ... has confidence that the free operation of market forces will provide a resolution of this issue. Id. at 76-77 (footnotes omitted) (emphasis supplied). 97 In Associated Gas Distributors v. FERC, 824 F.2d 981 (D.C.Cir.1987), the D.C. Circuit, vacating Order No. 436, rejected the Commission's adoption of the above rationale because it failed to effectively address the take or pay problem. The Court observed that the rationale reflects questionable legal premises and fails to meet the requirement of 'reasoned decisionmaking.'  Id. at 1023. We agree with the D.C. Circuit and conclude that the Commission's continued inaction on the take or pay problem is regrettable and unwarranted. As the D.C. Circuit remarked, the Commission's failure to take action on the take or pay problem reflects a pervasive frame of mind of the Commission about a crucial problem in the natural gas industry. Consolidated Edison, 823 F.2d at 641-42. It simply cannot and will not be wished away. Id. at 639. 98 The Commission also takes the position that the provisions of Order No. 451 will serve to facilitate the renegotiation of high cost contracts. In support of that contention, the Commission projects that under Order No. 451, pipelines will be able to offer higher old gas prices in return for reductions in new gas prices, and that contract reformations will thus ensue. 32 We are persuaded, however, by the petitioners' contention that the producers with the new gas problem contracts and the producers with the old gas contracts differ markedly. Petitioners' Brief at 63 (footnote omitted). More directly, the producers with the least amount of old gas have the largest amount of nonmarket responsive contracts. Additionally, even if a contract provides for the sales of old and new gas, the pipeline would probably not get much benefit at the bargaining table since only one-third of all new gas is contained in the multi-vintage contracts that the pipeline can bring to the table. 99 Most damaging to the Commission's position, however, is the previously discussed one-sided nature of the GFN process. Surely producers would not initiate the GFN process if by so doing, they ran the risk of giving up more on new gas contracts than they would receive in return for their old gas. As we view the operation of Order No. 451, it would not, as the Commission asserts, alleviate the take or pay problem. Rather, the prospect for exacerbating the take or pay problem runs rampant throughout the provisions of Order No. 451. Accordingly, we conclude that the Commission's inaction on the take or pay problem is based on a rationale which is arbitrary and unsupportable. 33