Opinion ID: 721438
Heading Depth: 1
Heading Rank: 3

Heading: Capacity Release

Text: 113 In this part of the opinion, we address challenges to the voluntary capacity release [319 U.S.App.D.C. 86] provisions of Order No. 636, which permit holders of firm transportation rights on a gas pipeline to resell them. 18 C.F.R. § 284.243 (1995). 53 Petitioners challenge the Commission's jurisdiction to institute its capacity release program generally, as well as its jurisdiction over (1) LDCs' capacity sales to their local end-users; (2) capacity sales by municipal LDCs; and (3) state-regulated buy/sell transactions. Petitioners also challenge the exclusion of individually certificated shippers from the capacity release program, the standards that FERC promulgated for determining the prevailing bidder in the capacity release transaction, and the mechanism for crediting interruptible transportation revenues. We conclude that each of petitioners' claims is either incorrect on the merits or is not suited for review in these proceedings.
114 Among the central goals of Order Nos. 436 and 636 has been the conversion of bundled sales arrangements into separate transportation and gas sales transactions. On the transportation side, the Commission recognized that while much of the nation's interstate pipeline capacity was reserved for firm transportation, those transportation rights ultimately were not being utilized. See supra Part I.C. FERC therefore sought to develop an active secondary transportation market, with holders of unutilized firm capacity rights reselling them in competition with any capacity offered directly by the pipeline. 54 According to the Commission: 115 Capacity reallocation will promote efficient load management by the pipeline and its customers and, therefore, efficient use of the pipeline capacity on a firm basis throughout the year. Because more buyers will be able to reach more sellers through firm transportation capacity, capacity reallocation comports with the goal of improving nondiscriminatory, open-access transportation to maximize the benefits of the decontrol of natural gas at the wellhead and in the field. 116 Order No. 636, p 30,939, at 30,418. Understanding petitioners' challenges to the capacity release program requires a brief review of related policies that the Commission has employed in the past to accomplish a similar end. 117 If a firm capacity holder does not ship gas under its transportation right, it pays the pipeline a reservation fee, but does not pay a usage fee. Historically, FERC prohibited such holders of unutilized firm capacity rights from transferring those rights to other shippers, and shippers were therefore able to purchase capacity rights only directly from pipelines. See generally United Gas Pipe Line Co., 46 F.E.R.C. p 61,060 (1989) (approving first experimental capacity brokering program). Beginning with the Texas Eastern Transmission Corp. proceedings, 48 F.E.R.C. p 61,248, order on reh'g, 48 F.E.R.C. p 61,378 (1989), order on reh'g, 51 F.E.R.C. p 51,170, order on reh'g, 52 F.E.R.C. p 61,273 (1990), however, the Commission authorized shippers on some pipelines to engage in nondiscriminatory capacity brokering. Brokering arrangements allowed a holder of firm capacity rights (the releasing shipper) to sell those rights to a replacement shipper. The transaction took place directly between the two parties, and the replacement shipper essentially stepped into the shoes of the releasing shipper. 118 Three years later, in the Order No. 636 and companion Algonquin Gas Transmission Corp. proceedings, 59 F.E.R.C. p 61,032 (1992), FERC concluded that it could not ensure that the extant capacity brokering programs were operating in a nondiscriminatory manner. When transactions occurred directly and privately between shippers, there was no way to verify that certain purchasers were not being favored unreasonably over others. Simply put, there [were] too many potential assignors of capacity and too [319 U.S.App.D.C. 87] many different programs for the Commission to oversee capacity brokering.... Order No. 636, p 30,939, at 30,416. In FERC's view, fairness could be secured only if capacity resale transactions were both centralized on each pipeline and subject to open bidding. Moreover, uniformity among the various pipelines was necessary to prevent any pipeline or firm shipper from achieving an undue advantage, or incurring an undue disadvantage, compared to firm shippers on other pipelines. Id. 119 Accordingly, in Order No. 636, the Commission instituted a uniform national capacity release program, and exercised its power under NGA § 5 to conform pipelines' existing capacity brokering certificates to that program. 55 Id. While both capacity brokering and capacity release arrangements involve the releasing shipper's decision to sell excess capacity, capacity release requires the central involvement of the pipeline in the transaction. Specifically, under capacity release, each interstate pipeline is required to establish and administer an electronic bulletin board (EBB), which is a computer through which putative releasing and replacement shippers may communicate. Id. at 30,418. The EBB carries information about available and consummated capacity release transactions. For example, holders of excess firm capacity rights may post their available capacity on the EBB. Further, they may establish nondiscriminatory conditions on the sale, including a minimum price and any terms under which the release may continue. 56 Pipelines are also required to post on the EBB any firm capacity that they have available for sale, where the capacity competes for buyers against capacity made available for resale by shippers. Potential purchasers of capacity will then be able to choose from among the pipeline and the releasers the service that best suits their needs. Id. at 30,419. In addition, shippers that wish to acquire firm capacity rights may post offers to purchase capacity on the EBB. 18 C.F.R. § 284.243(d); Order No.636-A, p 30,950, at 30,565. 120 With two exceptions, the pipeline must sell the capacity to the highest bidder. First, short-term transactions, i.e., those for capacity releases of less than one month, 57 may be arranged between shippers without competitive bidding. 58 18 C.F.R. § 284.243(h)(1); Order No. 636-A, p 30,950, at 30,554. Second, a releasing shipper may identify a replacement shipper on its own and enter into a pre-arranged deal. 18 C.F.R. § 284.243(b); Order No. 636, p 30,939, at 30,418. In such a transaction, the selected replacement shipper need only match--rather than outbid--the highest offer made by any other shipper. 18 C.F.R. § 284.243(e). The net effect is that a shipper may ensure that it will receive certain capacity by entering into a pre-arranged deal that both conforms to the releasing shipper's conditions and matches the maximum allowable rate for the capacity. No matter what form the capacity release transaction takes, however, the purchase price for released capacity may not exceed the maximum rate set by FERC for the capacity. 18 C.F.R. § 284.243(e); Order No. 636, p 30,939, at 30,420. 121 After the replacement shipper has been identified, the pipeline enters into a contract [319 U.S.App.D.C. 88] with it for firm capacity rights. 59 The pipeline then may elect to excuse completely the releasing shipper's obligation to pay the reservation fee and related costs. Order No. 636, p 30,939, at 30,419. Otherwise, the releasing shipper is credited for those costs unless the replacement shipper defaults. 18 C.F.R. § 284.243(f); Order No. 636-A, p 30,950, at 30,553. In no instance, however, is the releasing shipper liable for costs associated with the replacement shipper's transportation of gas. 122 We now turn to petitioners' varied challenges to the Commission's capacity release program.
123 Various petitioners challenge both FERC's jurisdiction to institute a uniform capacity release program and its jurisdiction over specific transactions and entities. We begin, then, by outlining the Commission's jurisdiction under § 1(b) of the Natural Gas Act of 1938. Ultimately, we conclude that FERC's capacity release program is a legitimate exercise of its jurisdiction over the interstate transportation of natural gas. 124 In the early part of this century, state regulatory agencies actively involved themselves in structuring the natural gas industry. The Supreme Court, however, severely cabined those efforts in a series of decisions that interpreted the dormant Commerce Clause to preclude state regulation of both the interstate transportation of natural gas and its ensuing sale in wholesale markets. 60 Congress enacted the Natural Gas Act of 1938 to fill the resulting regulatory gap. The Act, as provided in § 1(b), applies 125 to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, but [does] not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas. 126 15 U.S.C. § 717(b). 127 Petitioners' jurisdictional challenges require us to interpret the first and fifth provisions of § 1(b), which address the interstate transportation and local distribution of natural gas. 61 In truth, the two provisions are a unity. It is well established that the [local distribution] proviso was added to the Act merely for clarification and was not intended to deprive [FERC] of any jurisdiction otherwise granted by § 1(b). Louisiana Power & Light, 406 U.S. at 637 n. 14, 92 S.Ct. at 1837 n. 14; see also East Ohio Gas, 338 U.S. at 469-70, 70 S.Ct. at 269 ([W]hat Congress must have meant by 'facilities' for 'local distribution' was equipment for distributing gas among consumers within a particular local community, not the high-pressure pipe lines transporting the gas to the local mains.). As explained in the House Report on the Act: 128 That part of the negative declaration that the act shall not apply to the local distribution of natural gas is surplusage by reason of the fact that distribution is made only to consumers in connection with sales, and since no jurisdiction is given to the Commission to regulate sales to consumers [319 U.S.App.D.C. 89] the Commission would have no authority over distribution, whether or not local in character. 129 H.R.REP. NO. 709, 75th Cong., 1st Sess. 3 (1937). And, as this circuit has concluded: 130 Insofar as congressional committees spoke to the matter, therefore, they appear to have viewed distribution as confined to its parceling out function and (probably) even more narrowly, to parceling out accompanied by retail sales. As § 1(b) gave the Commission jurisdiction only over sales for resale, the states had unquestioned authority over retail sales anyway, making the reservation for distribution surplusage. 131 Public Utils. Comm'n v. FERC, 900 F.2d 269, 276 (D.C.Cir.1990). 132 We now consider whether FERC has done more than its interstate transportation jurisdiction permits. 133
134 Petitioners' first jurisdictional challenge is the claim of the LDCs that FERC lacks any authority whatsoever to regulate shippers' resale of firm capacity rights. LDCs' capacity assignments, they maintain, involve sales of LDCs' rights to transportation service but do not involve interstate transportation or sale for resale of gas itself. As we understand their position, the LDCs would limit FERC's regulatory authority over transportation to the rendition of interstate gas transportation services, as opposed to authority over the rights to receive those services. As their theory goes, the Commission has jurisdiction over the pipelines' initial sales of transportation capacity--given that it is the pipelines that render transportation services--but is without jurisdiction over resales of those same capacity rights by third parties--given that those third parties do not render transportation services. 135 Initially, we believe that the distinction drawn by the LDCs between the rights to and rendition of  interstate transportation services is not a meaningful one. While the pipeline provides transportation only when a party utilizes capacity rights to transport gas, the pipeline provides transportation services throughout the capacity release process. Specifically, the pipeline operates the electronic bulletin board on which all prospective transactions are posted and consummated. The pipeline also selects the winning bidder in the transaction. Moreover, unlike capacity brokering arrangements, which occur directly between releasing and replacement shippers, capacity release requires the pipeline to contract with the replacement shipper. In effect, the pipeline is temporarily abandoning service to the releasing shipper and instituting service to the replacement shipper. Both of these activities are subject to the Commission's jurisdiction under NGA section[ ] 1(b).... Order No. 636-A, p 30,939, at 30,551. In sum, the capacity release regulations operate as a term or condition of pipeline service, with which its customers must comply. 136 As an entirely separate matter, the Commission's jurisdiction attaches to the subject of the capacity resale transaction: interstate transportation rights. By controlling such capacity, the assignors are effectively determining by whom, and under what circumstances, gas will be transported and are using the pipeline's facilities as if they were the assignors' facilities. Id. (quotation marks, alteration, and citation omitted). In contrast, under the regulatory system envisioned by the LDCs, holders of capacity rights could engage in resales without regard to the principles of open access and nondiscrimination that are at the heart of the uniform capacity release system. Such a result is directly contrary to Congress' intent in enacting the Natural Gas Act. Responding to the Supreme Court's conclusion that the Constitution's dormant Commerce Clause prohibited state regulation of the interstate transportation of natural gas, see supra at 88, the federal government interceded to ensure stability and protect the interests of the consuming public. It thereby occupied the field, which necessarily includes both the sale and resale of interstate transportation rights. 137
138 Several petitioners make more limited claims that specific classes of entities and [319 U.S.App.D.C. 90] transactions must be exempted from the Commission's control over capacity resales. First, the PUCs and LDCs together argue that FERC lacks jurisdiction over capacity sales by LDCs to their own end-users. Such transactions, they maintain, fall within the NGA's local distribution exemption. Specifically, according to petitioners, the Commission has always recognized that the states have jurisdiction to regulate bundled sales of natural gas by LDCs to their end-users, which necessarily involves some indirect influence over the interstate transportation element of the sale. State authority remains intact for LDCs' rebundled sales of gas and transportation even after the implementation of Order No. 636. They contend that there is no functional difference between that jurisdictional arrangement and state regulation of LDCs' sales of unbundled gas and--more relevant here--transportation to local end-users. In particular, petitioners contend that state regulatory commissions need the freedom to control LDCs' assignment of capacity so that local end-users will be ensured of access to pipeline service. 139 But, as we have already explained, petitioners' reading of NGA § 1(b)'s reference to local distribution is flawed; the proviso does not withdraw from FERC's jurisdiction any aspect of the interstate transportation of natural gas. In this regard, we find the Commission's explanation of the regulatory environment far more convincing. States have been--and are still--permitted to regulate LDCs' bundled sales of natural gas to end-users because those transactions include transportation over local mains and the retail sale of gas. In contrast, states have never regulated the terms and conditions of interstate pipeline transportation. When the gas sales element is severed-- i.e., unbundled--from the transaction, FERC retains jurisdiction over the interstate transportation component. 62 140
141 We now turn to the claim of the municipally owned local distribution companies (municipalities) that FERC does not have jurisdiction to require them to comply with its capacity release regulations. Petitioners parse the terms of the Natural Gas Act as follows: 142 Municipalities are exempt from the Commission's jurisdiction under the NGA. The Commission's NGA jurisdiction extends only to natural gas companies. A natural gas company is defined in NGA Section 2(6) as a person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale. NGA Section 2(1) defines a person as an individual or a corporation. NGA Section 2(2) defines a corporation as inter alia, any corporation, partnership or association, but the definition expressly excludes municipalities. 143 Small Distributors' and Municipalities' Br. at 11-12 (footnotes omitted). 144 Of course, as discussed above, see supra Part III.B.1, NGA § 1(b) extends the Commission's jurisdiction over not only natural-gas companies but also the interstate transportation of natural gas. FERC, however, has twice rejected the suggestion that it should invoke its transportation jurisdiction over municipalities. 63 See Tennessee Gas Pipeline Co., 69 F.E.R.C. p 61,239, at 61,906-07 (1994), reh'g denied, 70 F.E.R.C. p 61,329 (1995); Texas Eastern Transmission Corp., 51 F.E.R.C. p 61,170, at 61,453-54 (1990). Accordingly, FERC wholly agrees with [petitioners [319 U.S.App.D.C. 91] that municipalities are beyond [its] jurisdiction. Order No. 636-A, p 30,950, at 30,551. 64 145 That notwithstanding, FERC may, consistent with the NGA, require municipalities to comply with its capacity release regulations. As we explained above, see supra Part III.B.1, FERC's transportation jurisdiction extends as a separate matter over capacity release given the involvement of interstate gas pipelines. 65 The pipelines' role in capacity release is absolutely central, 66 and the transaction itself controls access to interstate transportation capacity, entirely independent of the jurisdictional nature of the releasing and replacement shippers. 67 146 The analogy drawn by the Commission, and the one we find most persuasive, is to the pipeline curtailment regime. As explained in Judge Rogers' opinion for the court, see supra Part II.C, pipelines at times must interrupt and redistribute their service based on shortages of both gas supply and pipeline capacity. The Supreme Court has expressly approved the Commission's authority to regulate such curtailments pursuant to its § 1(b) interstate transportation jurisdiction. See Louisiana Power & Light Co., 406 U.S. at 640-41, 92 S.Ct. at 1838-39. The Commission's capacity release program is strikingly similar to its curtailment regulations, in that both involve the pipelines' allocation of transportation capacity among their shippers in compliance with federally mandated strictures. As the municipalities are subject to the curtailment regulations, so too must they comply with FERC's standards for capacity release. 147 We also find compelling the acknowledged jurisdictional arrangement prior to the implementation of either capacity brokering or capacity release. At that time, shippers acquired firm capacity rights directly from pipelines on a first-come, first-served basis. Resales of capacity by shippers, including municipalities, simply did not occur. We therefore conclude that the Commission has jurisdiction to require open, nondiscriminatory capacity release by municipalities. 148
149 The final jurisdictional challenge to the capacity release mechanism involves buy/sell transactions, which FERC professed to bar 68 in Order No. 636 and the companion El Paso Natural Gas Co. proceedings, 59 F.E.R.C. p 61,031, reh'g denied, 60 F.E.R.C. p 61,117 (1992). Buy/sells occur in three stages. First, an end-user of gas either purchases or identifies certain natural gas at the [319 U.S.App.D.C. 92] point of production. The LDC that services the end-user then purchases the gas and transports it first under its own transportation rights on an interstate pipeline and later across its local distribution facilities. 69 The end-user then receives the gas from the LDC. The buy/sells reviewed by the Commission in the El Paso proceedings were conducted under the authority and oversight of the California Public Utility Commission. 150 FERC acknowledges that buy/sell transactions implicate legitimate state regulatory interests. El Paso Natural Gas Co., 60 F.E.R.C. p 61,117, at 61,383-84. That said, given the transactions' intermediate stage--in which the end-user expressly arranges for the interstate transportation of specifically identified gas--the Commission contends that it has authority to preempt such state regulation. We therefore begin by setting forth settled principles of federal preemption. 151
152 The Constitution provides that the laws of the federal government shall be the supreme Law of the Land; ... any Thing in the Constitution or Laws of any state to the Contrary notwithstanding. U.S. CONST. art. VI. That principle of supremacy is implemented through the doctrine of federal preemption, 70 under which state and local law may be stripped of its effect. Federal preemption may occur in a variety of circumstances: 153 It is well established that within constitutional limits Congress may pre-empt state authority by so stating in express terms. Absent explicit pre-emptive language, Congress' intent to supersede state law altogether may be found from a scheme of federal regulation so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it, because [ (a) ] the Act of Congress may touch a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject, or [ (b) ] because the object sought to be obtained by the federal law and the character of obligations imposed by it may reveal the same purpose. Even where Congress has not entirely displaced state regulation in a specific area, state law is pre-empted to the extent that it actually conflicts with federal law. Such a conflict arises when compliance with both federal and state regulations is [ (a) ] a physical impossibility, or [ (b) ] where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. 154 Pacific Gas & Elec. Co. v. State Energy Resources Conserv. & Devel. Comm'n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 752 (1983) (internal citations, quotation marks, and ellipses omitted). 155 Moreover, federal preemptive authority may be exercised not only through federal statutes but also regulations issued by administrative agencies. 71 When an agency announces its intent to pre-empt state authority in a particular area, 156 the correct focus is on the federal agency that seeks to displace state law and on the proper bounds of its lawful authority to [319 U.S.App.D.C. 93] undertake such action. The statutorily authorized regulations of an agency will pre-empt any state or local law that conflicts with such regulations or frustrates the purposes thereof. Beyond that, however, in proper circumstances the agency may determine that its authority is exclusive and pre-empts any state efforts to regulate in the forbidden area. It has long been recognized that many of the responsibilities conferred on federal agencies involve a broad grant of authority to reconcile conflicting policies. Where this is true, the Court has cautioned that even in the area of pre-emption, if the agency's choice to pre-empt represents a reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, we should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned. 157 City of New York v. FCC, 486 U.S. 57, 64, 108 S.Ct. 1637, 1642, 100 L.Ed.2d 48 (1988) (citations and quotation marks omitted) (emphasis added). 158
159 We consider petitioners' arguments regarding buy/sell transactions under the branch of pre-emption doctrine that concerns conflicts between state and federal law, and particularly state law that stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress, Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941). The Commission's goal in preempting buy/sell transactions was to preserve the integrity of its uniform capacity release program. See El Paso Natural Gas, 60 F.E.R.C. p 61,117, at 61,385. Specifically, the Commission concluded that buy/sells offer a ready means of circumventing the open, nondiscriminatory bidding process central to capacity release. Under Order No. 636, an end-user seeking firm interstate transportation for gas that it has identified or acquired at the point of production must attempt to purchase capacity by contracting on the open market. In a buy/sell transaction, in contrast, the end-user can contract with an LDC without being forced to compete with other shippers that value the capacity. FERC reasoned that because buy/sells occur without open bidding, and result in the tying-up of interstate pipeline capacity, they circumvent and distort the transportation market envisioned by Order No. 636. 72 160 The LDCs contend that preemption is inappropriate in this instance because the Commission's prohibition on buy/sells constitutes a regulation of the retail sale of natural gas, which Congress reserved to the jurisdiction of state regulatory bodies. While the Commission emphasizes the intermediate, transportation stage of the transaction, the LDCs focus on the terminal stage, describing buy/sell agreements as a classic instance of an LDC making a retail sale to a retail customer. Cf. AGD I, 824 F.2d at 995 (LDCs purchase gas for resale to end users, large and small. Their services and prices are subject to state regulation but not to that of FERC.). As the LDCs characterize the transaction: 161 A retail customer participating in a buy/sell arrangement with an LDC purchases the same product purchased by other retail gas customers: natural gas, delivered to the point of consumption, at a state-regulated price that includes the cost of (a) the gas; (b) the inter-and intrastate transportation required to move the gas from the market or production area to the point of consumption; and, (c) all other local distribution services, such as balancing and metering costs. 162 LDCs' Reply Br. at 8. Further, given the express terms of NGA § 1(b), the LDCs maintain that the Commission's jurisdiction [319 U.S.App.D.C. 94] cannot arise merely by means of some effect of buy/sell agreements on interstate transportation; such an interpretation of the Act would dramatically expand FERC's jurisdiction because almost all gas travels interstate and therefore almost all retail sales of gas affect interstate transportation. See also Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 308, 108 S.Ct. 1145, 1155, 99 L.Ed.2d 316 (1988) (Of course, every state statute that has some indirect effect on rates and facilities of natural gas companies is not preempted.). Thus, conflict pre-emption analysis must be applied with particular care in those instances in which the Commission seeks to preempt state regulation merely because it has some effect on the interstate transportation of natural gas. Northwest Central Pipeline v. State Corp. Comm'n, 489 U.S. 493, 515-16 & n. 12, 109 S.Ct. 1262, 1276-77 & n. 12, 103 L.Ed.2d 509 (1989). 163 We believe that the LDCs have confused two separate issues. While the Commission's rationale in preempting buy/sells is the transactions' effect on interstate transportation--namely, that buy/sells facilitate circumvention of the capacity release program--the Commission's authority is grounded in the transaction itself. 73 In the intermediate stage of a buy/sell transaction, the LDC carries the gas identified by the end-user on its own firm capacity and under its own title on an interstate pipeline. Contrary to the LDCs' characterization, FERC's jurisdiction arises from the transportation itself; interstate transportation of gas selected by the end-user is a central element of the parties' agreement. As FERC states in its brief, buy/sells are at bottom nothing more than agreements by which firm shippers allocate space on an interstate pipeline to customers who negotiate their own wellhead transactions. Transactions that do not include this transportation element are not buy/sells and are not preempted. 164 In a standard retail sale, by contrast, the end-user purchases gas from an LDC at the local delivery point without regard to aspects of gas transportation at points further upstream. See id. at 97 (Traditional LDC retail sales consisted of sales of gas to local customers from generic system supply through local distribution facilities after the gas had completed its interstate journey.). Order No. 636 does not prohibit or condition such sales. Nor does the Order preempt state regulatory agencies from modifying an LDC's rate structure to accommodate differences in local conditions. Further still, LDCs remain free to sell gas to retail customers under the terms and conditions set by state regulators. Under Order No. 636, an end-user that would previously have engaged in a buy/sell transaction will still purchase the gas from the producer and still receive the gas at its delivery point. The crucial difference is that the end-user must purchase capacity rights from the LDC in the open market through the capacity release mechanism rather than by transferring title to the gas to the LDC and regaining title at the local delivery point. 165 Accordingly, we sustain the Commission's determination to pre-empt state regulation of buy/sell transactions. FERC's effort to avoid circumvention of its capacity release regulations represents a reasonable accommodation of conflicting policies that were committed to [its] care under the Natural Gas Act. City of New York, 486 U.S. at 64, 108 S.Ct. at 1642. Further, given that the regulations do not impinge upon state control over retail gas sales, it appears that the Commission's accommodation is one that Congress would have sanctioned. See id.
166
167 In Order No. 636-A, the Commission concluded that only Part 284 blanket[319 U.S.App.D.C. 95] certificated shippers would be permitted to engage in capacity release and utilize flexible receipt and delivery points. Order No. 636-A, p 30,950, at 30,565. The Electric Generator Petitioners (Electric Generators) contend that FERC's exclusion of Part 157 individually certificated shippers 74 was arbitrary and capricious. Their theory is that capacity release and flexible receipt and delivery points were intended to compensate for the greater costs of straight-fixed-variable rate design, which both Part 284 and Part 157 shippers are subject to; excluding Part 157 shippers from capacity release therefore allegedly deprives them of a necessary and equivalent means of cost mitigation. They also contend that subjecting Part 157 shippers to SFV rate design while excluding them from capacity release is unduly discriminatory, given that both SFV rate design and capacity release were intended to develop a national natural gas market. 168 The Commission's decision to exclude Part 157 shippers from capacity release and flexible receipt and delivery points was not arbitrary and capricious. While capacity release does ameliorate the costs of SFV rate design, it was never intended as the central cost-mitigation measure, see Order No. 636-A, p 30,950, at 30,594, 30,597-98, for there are specific mechanisms in place intended to address the particular costs associated with SFV, including alternative ratemaking techniques, phase-in measures, and the continued use of one-part rates for small customers. See infra Part IV.C.1. Moreover, allowing individually certificated shippers to utilize capacity release would in effect require Part 284 shippers to subsidize their Part 157 counterparts, given that Part 284 shippers pay costs that Part 157 shippers do not. 75 Specifically, Part 157 shippers are not required to pay the transition costs of Order No. 636, and their transportation arrangements are not subject to pre-granted abandonment. Further, the Commission prohibits Part 157 shippers, which do not operate under open-access provisions, from including unique terms and conditions in their contracts in order to avoid undue discrimination. For that very reason, the Commission prohibits Part 157 shippers from granting discounts, which itself presents a major obstacle to Part 157 shippers' participation in capacity release because competitive bidding presumes the ability to offer a lower price. 169 The Electric Generators reply that these factors have no connection to the cost-mitigation effects of the capacity release program. The more salient issue, however, is whether the factors identified by either the Commission or the Electric Generators have any intrinsic connection to SFV rate design; they do not. Fundamentally, the petitioners contend that they are entitled to release capacity as one way of making up for the costs of SFV. FERC replies, quite sensibly, that while capacity release would reduce the Electric Generators' costs, including costs associated with SFV, the Electric Generators are already receiving cost benefits not available to Part 284 customers, and are not entitled to further benefits. 170 [319 U.S.App.D.C. 96] Nor was the Commission's decision to exclude Part 157 shippers unduly discriminatory. The Commission applied SFV rate design to both Part 284 and Part 157 shippers because both generally have been subject to the same rate design. See Order No. 636-B, p 61,272, at 61,992. Even if the goal of both SFV rate design and capacity release is the creation of a national gas market, that does not mean that FERC's decision to apply only one to Part 157 shippers constitutes undue discrimination. [T]he competitive rationale for adopting SFV rate design as a means to promote the development of a national gas market applies equally to [Part 284 and] Part 157 rates. Id. While allowing Part 157 shippers to engage in capacity release might expand the national gas marketplace, as we have explained, it would also give them an unfair subsidy over Part 284 shippers. As FERC notes in its brief, [g]iven the significant differences between these two forms of service under Order No. 636, it was not unreasonable to confine the capacity release program to Part 284 open access service. We see no reason to disturb the Commission's conclusion that those cost considerations outweighed any benefit to the national gas marketplace and disentitled Part 157 shippers from engaging in capacity release. 171 Moreover, as the Commission explains, the Electric Generators may receive access to capacity release and flexible receipt and delivery points by converting to Part 284 service. This does not mean, as petitioners contend, that the Commission is unlawfully attempting to leverage the Electric Generators' conversion. Here, we reject petitioners' reliance on National Fuel Gas Supply Corp. v. FERC, 909 F.2d 1519 (D.C.Cir.1990). In National Fuel, this court turned back an effort by FERC to condition its certification of a Part 157 shipper's gas services on the shipper's obtaining a blanket Part 284 certificate as well. Our ruling there was based on the fact that the Commission had already determined that a Part 157 certificate was required by the public convenience and necessity when it nonetheless attempted to add the additional condition of acquiring a Part 284 certificate. Given the Commission's conclusion that the shipper was already entitled to a Part 157 certificate, [i]t was thus clear at the outset that the Commission considered certification ... to be in the public interest regardless of whether the pipeline also accepted a blanket transportation certificate. Id. at 1522. FERC therefore lacked authority to deny the shipper a Part 157 certificate. In this case, in contrast, the Electric Generators do not contend that the Commission has determined that Part 157 shippers have the right to engage in a certain service, but is nonetheless denying them the right to engage in it. Moreover, even under the petitioners' far more expansive reading of National Fuel, this is not an instance in which FERC is attempting to coerce a conversion from Part 157 to Part 284 service; the Commission is simply pointing out that conversion offers the Electric Generators one means of cost-mitigation. 172
173 The LDCs and Industrial End-Users raise three challenges to the methods selected by the Commission for determining the prevailing bidder and price in the capacity release transaction. In Order No. 636, FERC concluded that conditions set by LDCs on their release of capacity must not prefer any shipper, such as an end-user, over other shippers, and cannot take into account the use of the LDC's own facilities. Order No. 636-B, p 61,272, at 61,997. The LDCs maintain that, in a market sense, this rule prohibits them from selecting what is truly the best bid, i.e., one that reflects [the] greatest economic benefit to the releasing shipper. Specifically, the LDCs want the right to favor their own end-users in capacity sales, a practice that ultimately would reduce the LDCs' own costs. But that is not a right to which they are entitled under the Natural Gas Act. The LDCs' claim is at bottom nothing more than an objection to FERC's open-access, nondiscrimination policy. The goal of capacity release is to create a uniform national market for transportation, not to maximize the benefit to LDCs. Only by utilizing nondiscriminatory factors in determining the prevailing bid can FERC ensure that the shipper that places the highest value on capacity receives it. 174 [319 U.S.App.D.C. 97] The Industrial End-Users make the related argument that FERC acted arbitrarily in refusing to grant a bidding preference to LDCs' existing end-users. In particular, they note that FERC did grant existing end-users a preference in acquiring capacity released by upstream pipelines under the section 284.242 mandatory capacity release program. As with the immediately preceding claim, however, the standard set by FERC fundamentally is part of its nondiscrimination and open-access policy. Moreover, as FERC notes, an end-user can be sure of receiving capacity by entering into a pre-arranged deal with its LDC at the maximum allowable price. 76 The preference granted under the mandatory program, in contrast, is unrelated to the development of a transportation market through capacity release; it is specifically intended to ensure that when pipelines engage in unbundling, their end-users are not deprived of the transportation necessary to fulfill their pre-existing gas needs. 175 The Electric Generators finally contend that FERC should not uniformly have set the maximum allowable rate for resales of capacity at the originally determined maximum rate. They contend that this will in some instances result in discrimination against shippers who pay higher initial incremental rates. 77 The Commission responds that this issue is too complex and fact-bound to address in the overarching Order No. 636 proceedings, and that it should be deferred to the restructuring proceedings, where a better record can be developed. See Order No. 636-A, p 30,950, at 30,561 ([T]he parties in restructuring proceedings involving incremental rates should consider and propose methodologies to ensure that the capacity release mechanism operates efficiently and that all parties are treated fairly and equitably, without undue discrimination.). We agree. The Electric Generators' explication of their claim in these proceedings is far too sparse to allow for reasoned evaluation, primarily because the relevant factual record is not before us. Their claim may properly be evaluated by the Commission in individual restructuring proceedings where further facts can be developed. 176
177 After the implementation of capacity release under Order No. 636, the number of firm transportation sellers in the marketplace substantially increased. As a result, it became difficult for pipelines to determine how much demand there will be for interruptible transportation (IT) service. In turn, it is difficult for the pipelines to determine what portion of their costs to recoup through billings to IT (as opposed to firm) service. In the Order No. 636 proceedings, FERC suggested that a pipeline 178 might decide to attribute no revenue responsibility to interruptible transportation. Since the pipeline's firm shippers would be responsible for all pipeline costs, revenues from the sale of interruptible transportation would [later] be credited to the firm shippers. 179 Order No. 636-A, p 30,950, at 30,563. Under true cost accounting, 100% of IT revenues would be credited to firm shippers, because firm customers are essentially being overcharged until the pipeline can figure out how much money it is recovering from IT service. The Commission suggested, however, that pipelines might adopt a 90/10 mechanism, under which only 90% of IT revenues would be credited to firm shippers. This 10% difference was thought by FERC to be a necessary incentive for pipelines to market interruptible transportation. Without it, pipelines would be assured of recovering their costs through firm sales charges, and therefore would have no reason to maximize IT throughput. 180 [319 U.S.App.D.C. 98] The Industrial End-Users, who utilize interruptible transportation, challenge the Commission's endorsement of a 90/10 IT revenue crediting mechanism on two grounds. First, they argue that the 10% gain creates an insufficient incentive for pipelines to market IT. The Industrial End-Users note that FERC rejected proposals for revenue crediting under Order No. 436, because they give[ ] the pipeline little or no incentive to provide service under the rule. Order No. 436, p 30,665, at 31,537. Second, they argue that the 90/10 mechanism reduces other shippers' incentive to release capacity; shippers know that if they do not put their firm capacity on the market, thereby forcing other companies to utilize IT service, they will receive some portion of the IT revenues through the crediting mechanism anyway. 181 We conclude that the Industrial End-Users' challenge to the IT revenue crediting mechanism is premature. Order No. 636-A expressly provides that pipelines might adopt this potential approach, and that parties to the restructuring proceedings also may consider whether other methods are needed. Order No. 636-A, p 30,950, at 30,563; see also Order No. 636-B, p 61,272, at 62,000 ([T]he parties to the restructuring proceedings could consider a variety of approaches, such as agreeing on an appropriate level of throughput for interruptible transportation or some type of revenue crediting mechanism.). 78 Our concerns are magnified given that the Industrial End-Users maintain that the 10% pipeline credit does not provide pipelines with a sufficient incentive to market IT, but provide no data or explanation of why that is the case. The only way to evaluate their claim is in the light of the particular facts presented in individual pipelines' restructuring proceedings. See id. (The petitioners requesting rehearing have not been aggrieved by the suggestion that the Commission would consider a revenue crediting approach proposed in a specific restructuring proceeding. In implementing its regulations, the Commission will not adopt rigid rate-making methodologies that fail to reflect the reality of the market or the intent of its regulations.). We therefore defer resolution of the Industrial End-Users' IT revenue crediting challenge to the individual pipeline restructuring proceedings.
182 We deny the petitions for review insofar as they dispute the Commission's jurisdiction over capacity release transactions. We further deny the petitions for review insofar as they challenge (1) the exclusion of Part 157 shippers from the capacity release program, (2) the mechanism chosen by the Commission for determining the best bid in capacity release transactions, and (3) the Commission's suggestion that a 90/10 mechanism is an appropriate means of crediting interruptible transportation revenues. We specifically defer to later proceedings consideration of the merits of both the revenue crediting mechanism and the Commission's treatment of incremental rates.