Opinion ID: 329424
Heading Depth: 2
Heading Rank: 2

Heading: The Commission's Authority To Discourage End Use

Text: 28 The ALJ rejected the contentions of certain intervenors 29 that a departure from Seaboard could be justified solely by the need to discourage low-priority industrial uses. He cited F.P.C. v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 (1944), in which a challenger sought to set aside an order by the FPC on the ground inter alia that the Commission was required to set a rate that would discourage industrial users. The Supreme Court had said, we fail to find in the (§ 4) power to fix 'just and reasonable' rates the power to fix rates which will disallow or discourage resales for industrial use. 320 U.S. at 616, 64 S.Ct. at 294. This holding was referred to and followed in Fuels Research Council, Inc. v. FPC, 374 F.2d 842, 854 (7th Cir. 1967); which distinguished the Commission's authority to weigh end use in deciding whether to issue a certificate under section 7 of the Natural Gas Act. 29 The FPC was not willing to accept the limitations on its authority that the ALJ found in Hope : 30 An important consideration (in shifting fixed costs to the commodity category and requiring the rate design to reflect this shift) is to increase the cost to low priority direct and interruptible customers, who are able to use competitive fuels. We do not think that in the light of the exigencies of present circumstances the narrow holding in Hope prevents our accomplishing a result which we are convinced is in the national interest. In any case the history of litigation under the Gas Act shows that the Courts have given a broad interpretation to our rate-making powers under the Gas Act . . . 30 31 However, the Commission found that such a conclusion of law is not required to support our finding that a revision of rate design and cost classification is just and reasonable, 31 and that the record . . . calls for a change in the method of cost classification entirely apart from the question of end use. 32 32 The petitioners purchasing from United, directly or indirectly, contend that the ALJ was correct in holding that the Hope decision precludes the design of rate structures that set high rates in order to restrict the use of natural gas for certain purposes, and that this rationale has vitality under today's condition of shortage, just as it did when we lived in an age of Hope and ample supply, because the Commission has authority to impose direct restrictions on the use of gas for industrial purposes, 33 and therefore has no need to warp traditional costing and pricing procedures. 33 In its analysis, the Commission recognized that any reallocation would have only a limited effect on end use. Its opinion pointed out that the cost of alternative industrial fuels is so much greater than that of natural gas 34 that the reallocation of fixed costs cannot of itself raise natural gas rates to the level where other fuels become competitive. 35 It stated that a change in the direction of volumetric allocation would nevertheless narrow the gap between gas and other fuels, eliminate price discounts for large gas customers, and tend to stabilize rates of residential and commercial customers at a time when price incentives are raising the price of gas. 36 34 In seeking reconsideration, United's pipeline customers and those who purchase from them attacked the conception that enhancing their burden through increasing commodity charges can be justified as increasing the burden on ultimate industrial purchasers. Consolidated and Columbia, for example, pointed out that it is their storage facilities that enable them to buy at high load-factors and that they resell at low load-factors to commercial and residential consumers. They argued that the rate increase created by shifting more of United's costs to its interstate transmission pipeline customers like Texas Eastern and Texas Gas will be passed on by those pipeline companies, under their fuel adjustment clauses that automatically flow through increased purchased gas costs, on an across-the-board basis, so that the same increase in unit cost will be experienced by all ultimate consumers, whether they are commercial, residential, or industrial. In its opinion denying rehearing, the Commission acknowledged this problem and stated: Such operation of the purchased gas adjustment clauses will be subject to our review and approval. 37 It expressed its objective that the new rate design would encourage successive sellers to tilt their own rates toward the commodity com- ponent. 38 35 Ultimately it appears that the FPC does not rely on any diminution of industrial uses to support the order under review, and would find the order sound even assuming the percentage of industrial use was unaffected. Since we find independent support in the record for the Commission's result, we need not and do not rule on its authority to discourage end use when prescribing rates in a shortage situation. 36 C. The FPC's Finding that Its Revision of the Seaboard Formula is Just and Reasonable 37 The 25%-75% formula devised by the FPC is primarily challenged by United's high load-factor interstate transmission pipeline customers (Texas Eastern and Texas Gas) and by those who purchase gas from them (notably Consolidated and Columbia). The FPC's order puts an economic burden on these customers, a burden shifted from United's city-gate customers. And this comes at a time when the FPC's curtailment orders have also operated to burden United's pipeline customers more heavily than United's city-gate customers. 39 The increase in burden is not in dispute. The issue is whether the order is reasonable or whether it is arbitrary and capricious.
38 The court's role in reviewing a rate order issued by the Federal Power Commission is essentially narrow and circumscribed. Permian Basin Area Rate Cases, 390 U.S. 747, 766, 88 S.Ct. 1344, 20 L.Ed.2d 312 (1968). The Natural Gas Act, in § 19(b), 40 requires that (t)he finding of the Commission as to the facts, if supported by substantial evidence, shall be conclusive. And the Supreme Court has repeatedly stressed that Congress has entrusted the regulation of the natural gas industry to the informed judgment of the Commission, and not to the preferences of reviewing courts. A presumption of validity therefore attaches to each exercise of the Commission's expertise. 41 If the order viewed in its entirety and measured by its end results 42 is not arbitrary or unreasonable, judicial inquiry under the Act is at an end. 43 39 Finding it obvious that reviewing courts will require criteria more discriminating than justice and arbitrariness if they are sensibly to appraise the Commission's orders, Justice Harlan, in Permian Basin, outlined the responsibilities of the reviewing court more specifically to determine whether the Commission's order . . . abused or exceeded its authority; to examine the manner in which the Commission has employed the methods of regulation which it has itself selected and to decide whether each of the order's essential elements is supported by substantial evidence;  and to determine whether the order may reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable. 44 These three responsibilities coalesce in Justice Harlan's insistence that the court assure itself that the Commission has given reasoned consideration to each of the pertinent factors. 45 40 Within the limits imposed by the requirement of reasoned decision-making, 46 the Commission is free to modify 47 or even reverse its established policy. 48 41 The legal system does not compel rigidity, or bureaucratic inflexibility, least of all in an area like energy policy where flexibility may be essential in the public interest. It is the genius of the administrative process to be flexible in response to observed developments, and an agency may switch rather than fight the lessons of experience. 49
42 In reviewing orders concerning cost allocation the courts have been particularly reluctant to devise technical requirements that would impose unrealistic standards of precision on the administrative process. In Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 65 S.Ct. 829, 89 L.Ed. 1206 (1945), for example, the Supreme Court refused to require the segregation of physical property that functioned as an integrated whole but provided both jurisdictional and nonjurisdictional service. Admitting that (a)llocation of costs is not a matter for the slide-rule, but (a) judgment on a myriad of facts, 50 the Court held that the appropriateness of the formula employed by the Commission in a given case raises questions of fact not of law. 51 43 When Congress . . . fails to provide a formula for the Commission to follow courts are not warranted in rejecting the one which the Commission employs unless it plainly contravenes the statutory scheme of regulation. . . . Mr. Justice Brandeis, speaking for the Court in Groesbeck v. Duluth, S.S. & A.R. Co., 250 U.S. 607, 614-15, 40 S.Ct. 38, 41, 63 L.Ed. 1167, noted that it is much easier to reject formulas presented as being misleading than to find one apparently adequate. 52 44 In setting rates the Commission is free, within the ambit of (its) statutory authority to make the pragmatic adjustments which may be called for by particular circumstances. 53 45 The percentage distribution of fixed costs within the framework of a two-part allocation and rate structure has never been considered inviolate. In Atlantic Seaboard, the Commission, recalling the words of the Court in Colorado Interstate, stressed that it was making a judgment determination in deciding to divide the fixed costs equally between demand and commodity. 54 The Seventh Circuit, rebuffing a challenge to a substantial deviation from the 50%-50% formula, noted that the Commission's orders have deviated markedly from Seaboard since that case was decided and found that the Commission is to be extended this discretion and . . . we are not to substitute our judgment except in cases of clear abuse. 55 46 We cannot say that the result reached by the Commission in allocating one quarter of fixed costs to demand and three quarters to commodity is unreasonable. The Commission realistically acknowledged the conclusion in Seaboard that the assignment of costs could not be done by mathematical computation but involves judgment. 56 The courts cannot fairly demand the perfect at the expense of the achievable. 57 47 The development of extreme gas shortages 58 and the resulting existence of large unused pipeline capacity provides a reasonable basis for reducing the demand component of the tariff charge and moving away from a marked peak differential. 48 To the extent that fixed costs are attributed to demand, rather than to commodity, additional gas purchases are encouraged, for a customer paying a demand charge incurs, on an incremental basis, only the commodity charge as to any additional purchases. High load-factor buying is also encouraged, for high load-factor customers bear a relatively smaller share of the demand charges. In the past, all customers benefitted from these effects, for they led to a more efficient use of the pipeline facilities and a consequent reduction in unit costs for all. As gas prices increased relative to the costs of other fuels, the Commission found it necessary to depart from Seaboard and to increase the relative attribution of fixed costs to the demand side, 59 in order to maintain high efficiency and retain industrial customers. Due to the increasing costs of coal and oil and the growing scarcity of natural gas, it is no longer necessary to lure industrial customers with relatively low commodity charges. 49 Also, since some pipeline capacity now goes unused even on peak days, the demand charge no longer has the same vitality as a premium for reserving priority use of a scarce resource. A given customer may have a right to a greater share of the gas available on peak days, but that is subject, not only to the limitations of supply, but to the strictures of the curtailment programs. 60 A customer does not pay a premium for the guarantee of a place when he knows that the train, or theatre, or whatever, will be partly empty in any event. 50 Under these circumstances, we cannot say that the Commission's increased allocation of fixed costs to the commodity component represents an abuse of discretion. 61 Our ruling in this case affirming the 25%-75% classification of fixed costs decreed by the Commission does not require that we embrace or approve the Commission's view that a 100% classification of fixed costs to the commodity component would be proper.
51 Petitioners argue that there is a need and justification for differentials between those customers who take large amounts at a single place on a high load-factor basis and those who take comparable volumes in small amounts at many delivery locations. The ALJ found that service to pipeline customers as a group is cheaper because it is more efficiently performed via longer diameter pipes, to fewer delivery points. 62 He also found evidence that the average unit cost of transporting gas for high load-factor customers was significantly lower. 63 52 However, on this record we cannot say that the FCP's 25%-75% classification gives insufficient consideration to any such differences in cost. United is admittedly an integrated system, 64 and there is some testimony that small diameter pipelines are not exclusively associated with city-gate customers, or large-diameter lines with pipeline customers. 65 United's proposed tariff continued the Seaboard approach of splitting fixed costs equally between demand and commodity components. Neither United nor any of its customers asked the Commission to adopt a differential based on greater volume at fewer delivery points. No developed cost studies have been presented to define the different costs associated with different customers. 53 The formula adopted by the FPC provides for a peak differential that will, to some extent, reflect any cost savings attributable to high load-factor customers. The Commission has indicated that it will be open to receive properly framed evidence that that differential is inadequate to reflect differences in physical factors of delivery. 66 We cannot assign error on the record as it stands.
54 A more difficult question is posed by those customers, particularly Columbia Gas and Consolidated Gas Supply, who have equipped themselves to take at high load factors by installing storage facilities. 55 In measuring a change of agency policy, the Rule of Law requires not only that the new standards flow rationally from findings that are reasonable inferences from substantial evidence, but that the agency give due consideration to the equities, if any, arising out of commitments based on previous rul- ings. 67 The Atlantic Seaboard formula encouraged the building of storage by offering a discount to high-volume purchasers. 56 All of United's customers benefitted when some of them constructed storage facilities rather than contract for demand levels that would require the addition of more expensive pipeline peaking capacity that would be idled during the summer slack. The ability of some customers to draw on storage volumes during peak periods also makes more gas available during peak seasons to those who do not have similar facilities. The Commission acknowledged analogous systemwide benefits in adopting the ALJ's decision to allocate the costs associated with United's own storage facilities, located primarily in the North, to the system as a whole. 68 57 The FPC rejected the appeal of those who built storage facilities with a terse statement noting that they had been favored with lower unit costs under the Seaboard method: We have determined that under United's gas supply situation the cost of its pipeline system is more directly related to annual rather than peak day operations. 69 58 While we do not say that a claim based upon action taken in response to FPC encouragement (investing in storage facilities to produce high load-factors) is conclusive, we are concerned that it does not seem to have been given any consideration or analysis whatever. However, we cannot say on this record that the FPC order is unreasonable, for customers whose storage permits them to take at high load-factors still receive a significant price discount. 59 Commissioner Moody, in his concurrence to Opinion No. 671, suggests a special rate for gas sold into storage. 70 That alternative is not before us, for the Commission was not presented by the parties in this proceeding with a specific storage discount provision. Instead, it was urged to reject any departure from the 50%-50% formula, 71 a step we cannot say was required as a matter of law.
60 United argues that the Commission's orders deprive United of a reasonable opportunity to recover fixed costs allocated to its jurisdictional customers, 72 because volumes will shrink between the test year, when unit rates for commodity charges are calculated, and the actual sales which determine recovery through the commodity charge. 61 This risk of underrecovery is inherent to some extent whenever any fixed costs are allocated to the commodity component. The Commission has leeway to protect pipelines by adjusting the test-period volumes for fluctuations that may reasonably be projected to occur in the future. We cannot say on this record that the FPC's shift to a 25%-75% allocation will necessarily produce a confiscatory result. 62 In a separate proceeding 73 United has proposed a volume variation adjustment clause (VVAC), which would allow United to adjust its commodity component to reflect variations from test-year volumes. No similar proposal was included in the tariff submitted in these proceedings.