Opinion ID: 721438
Heading Depth: 2
Heading Rank: 1

Heading: Unbundling

Text: 27 The petitioners challenge four aspects of the Commission's unbundling remedy: the rule that customers must retain contractual firm-transportation capacity for which the pipeline receives no other offer; the Commission's policy on pipelines' ability to modify existing storage contracts without abandonment proceedings; the rule that transportation-only pipelines may not acquire capacity on other pipelines; and the eligibility date for no-notice transportation service. 28
29 When the Commission concluded that the pipelines' bundled firm-sales service violated §§ 4(b) and 5(a) of the NGA, Order No. 636, p 30,939, at 30,405, the Commission found also that the continued enforcement of a pipeline sales customer's purchase obligations, agreed to before implementation of unbundling under this rule, is unjust and unreasonable, and unduly discriminatory. Id. at 30,453. Accordingly, all existing bundled firm-sales customers were given the option to reduce or terminate their contractual purchase obligations during the pipeline's restructuring proceedings. 18 C.F.R. § 284.14(d)(1). By contrast, those customers were not relieved of their contractual transportation obligations unless either an alternative, creditworthy shipper offered to assume the capacity at the same or a higher rate (up to the maximum approved rate), or the pipeline agreed to reduce or terminate the transportation obligation. Id. § 284.14(e)(2). If a customer wished to reduce or terminate its transportation obligation, and either a replacement shipper assumed the capacity or the pipeline agreed, then the pipeline was authorized to abandon the service under the prior contract. Id. § 284.14(e)(3). In effect, existing bundled firm-sales customers remained contractually bound to receive firm-transportation service on the pipeline. 30 On rehearing, Northern Indiana Public Service Company (NIPSCO) maintained that the Commission's actions entirely abrogated the existing pipeline-customer bundled firm-sales contracts, and that the Commission could not require the LDCs to enter into new transportation contracts. The Commission denied that it had abrogated the contracts: the pipelines remained contractually obligated to provide separate sales and transportation services. [T]he fact that LDCs have an opportunity to revise their sales entitlements under existing contracts with their pipeline suppliers does not mean they should also have an unqualified right to terminate their obligations for the costs of transportation capacity under those contracts. Order No. 636-A, p 30,950, at 30,638. The Commission also explained that if it released former bundled-sales customers from transportation obligations, these capacity costs could be shifted from the customer who has contracted for the capacity to the pipeline or other customers that have no need for the capacity. Id. at 30,637. 31 NIPSCO, joined by other LDC petitioners, 28 contends that, by holding pipeline [319 U.S.App.D.C. 68] customers to the transportation component of bundled firm-sales contracts, the Commission essentially imposed a new contract upon the customers, which is beyond the Commission's § 5 authority. Section 5(a) provides that, whenever the Commission has found that an existing contract is unjust, unreasonable, unduly discriminatory, or preferential, it shall determine the just and reasonable contract to be thereafter observed and in force, and shall fix the same by order. 15 U.S.C. § 717d(a). NIPSCO contests not the Commission's underlying finding that the bundled firm-sales contracts violated §§ 4(b) and 5(a), but only the remedy imposed under § 5. Our review is limited to whether the Commission's reading of § 5 to authorize it to hold LDCs to the remaining terms of a modified pipeline-customer contract is a reasonable construction of its statutory authority. See AGD I, 824 F.2d at 1001. 32 The bundled firm-sales contracts between pipelines and LDCs were subject to the Commission's § 5 authority. The regulatory structure of the Natural Gas Act is contract-based: it permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts. United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 339, 76 S.Ct. 373, 378, 100 L.Ed. 373 (1956). Under § 5, the Commission has plenary authority to limit or to proscribe contractual arrangements that contravene the relevant public interests. Permian Basin Area Rate Cases, 390 U.S. 747, 784, 88 S.Ct. 1344, 1369, 20 L.Ed.2d 312 (1968). For example, in Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C.Cir.1985), cert. denied, 476 U.S. 1114, 106 S.Ct. 1968, 1969, 90 L.Ed.2d 653 (1986), the court affirmed the Commission's decision in Order No. 380 that minimum bill provisions in existing contracts were unjust and unreasonable under § 5. 29 The court upheld the Commission's remedy, eliminating the minimum bill from the contracts, against the claim that such a remedy unlawfully alter[ed] the terms of existing contracts, on the ground that section 5 gives the Commission authority to alter terms of any existing contract found to be 'unjust' or 'unreasonable.'  Id. at 1153 n. 9. 33 NIPSCO also maintains that the Commission has construed its § 5 authority to extend beyond the limits in § 1(b) on the Commission's jurisdiction. Regardless of the Commission's authority to impose modified contractual obligations on pipelines, NIPSCO contends that the Commission lacks such authority over LDCs because LDCs are non-jurisdictional entities. Under § 1(b), the Commission's jurisdiction over the transportation of natural gas in interstate commerce does not apply to the local distribution of natural gas or to the facilities used for such distribution. 15 U.S.C. § 717(b). But the local-distribution exception applies only to the movement of gas within an LDC's local mains and not to the movement of gas in high-pressure interstate pipelines. FPC v. East Ohio Gas Co., 338 U.S. 464, 470-71, 70 S.Ct. 266, 269-70, 94 L.Ed. 268 (1950); see also Louisiana Power & Light, 406 U.S. at 636 & n. 13, 92 S.Ct. at 1836 & n. 13. Thus, for the same reasons that the Commission has jurisdiction over the re-sale of interstate capacity rights by LDCs to local end-users, see infra Part III.B.2, it also has jurisdiction over an LDC's ability to reduce or terminate its contractual interstate-transportation obligation. The pipeline-LDC contracts for transportation through interstate pipelines [319 U.S.App.D.C. 69] do not fall within the local-distribution exception to the Commission's jurisdiction. 34 The Commission cannot use the pipeline-LDC contracts as a jurisdictional hook for non-jurisdictional measures that do not relate to the Commission's § 5 remedial authority over the contracts. 30 As the court has held in a different context, the Commission may not assert its jurisdiction over a party merely because it is involved in a contractual relationship with a jurisdictional pipeline. ARCO Oil & Gas Co. v. FERC, 932 F.2d 1501, 1503 (D.C.Cir.1991). NIPSCO maintains that the Commission has done just that by replacing the agreed-upon contractual terms with entirely new terms of the Commission's own devising, when it would otherwise be without jurisdiction to compel the LDC to receive service in the first instance. But we do not agree that the Commission has overstepped the bounds of its § 5 authority in the first place. First, an LDC may maintain its original bargain by choosing not to exercise its unilateral right to terminate the purchase obligation. The resulting combination of sales service and no-notice firm-transportation service replicates its prior contractual entitlement. Thus, it is somewhat difficult to see the purported compulsion against LDCs in the Commission's decision not to grant them the right to terminate their transportation obligations. Second, the Commission's remedy was appropriately confined to the underlying violation. Because the Commission found the sales component of the bundled contracts to be unjust and unreasonable, Order No. 636, p 30,939, at 30,453, it interfered with existing contracts only to the extent necessary to remedy the effects of pipelines' market power. The Commission has the authority under § 5 to adopt a remedy proportionate to the problem being addressed. AGD I, 824 F.2d at 1019. Finally, § 5 instructs that the Commission shall determine the just and reasonable ... contract to be thereafter observedand in force, and shall fix the same by order. 15 U.S.C. § 717d(a). The limits of the Commission's authority to modify pipeline-LDC contracts under § 5 lie in the requirement that, given the original contract and the Commission's findings of unlawfulness, the resulting contract be just and reasonable. NIPSCO does not contend that the result of unbundling the firm-sales contracts was unjust or unreasonable. We therefore uphold the Commission's § 5 authority to hold LDCs to the transportation component of the modified bundled firm-sales contracts. 35 NIPSCO contends in the alternative that, even if the Commission's action was within its § 5 authority, the Commission acted arbitrarily and capriciously. In NIPSCO's view, the limited nature of the remedy allows pipelines to continue to exercise market power over customers in the transportation contracts, in contravention of the overall goals of Order No. 636. We reject this challenge as well because the Commission has provided a reasonable basis for its decision not to allow customers unilaterally to reduce their contractual transportation obligations. Cf. ARCO, 932 F.2d at 1502. 36 The Commission found in Order No. 636 that the amount of capacity reserved for pipeline firm sales still far exceeds the pipelines' actual sales so that capacity is not available for firm transportation and, as a result, interruptible transportation maintains a significant share of peak period transportation. Order No. 636, p 30,939, at 30,406. In other words, because many firm-sales customers decided to purchase third-party gas and transport it using interruptible service, those customers ended up holding excess reserved capacity. NIPSCO asserts that the effect of the Commission's decision not to allow LDCs unilaterally to reduce their contractual transportation obligations is to perpetuate customers' excessive capacity holdings. NIPSCO is correct insofar as the effect of any contract is to lock in current conditions, and the existence of a long-term contract necessarily slows the transition of a market to a new equilibrium when some underlying condition changes. Moreover, the capacity-release mechanism is an imperfect solution for the LDCs because the existing pipeline customer is unlikely to receive full compensation for released capacity in an excess-capacity [319 U.S.App.D.C. 70] market situation. Yet the problem of capacity excess that the Commission identified was that customers held more capacity in bundled-sales contracts than they purchased gas from the pipeline, not that customers held more firm-transportation capacity than needed for their peak demand. Contrary to NIPSCO's contention, there is no contradiction between the general goal in Order No. 636 of encouraging more efficient use of reserved capacity and the challenged rule that customers may not unilaterally release contractual transportation obligations: the Commission never found that the natural gas industry after mandatory unbundling would be characterized by excess reserved capacity. 37 Moreover, the Commission provided in Order No. 636-A a coherent rationale for its decision. Because a pipeline's rate structure is predicated upon levels of reserved capacity, providing customers with the unilateral option to reduce those levels would either reduce the pipeline's cost recovery or force the pipeline to increase rates for the remaining customers. 31 Order No. 636-A, p 30,950, at 30,637. Because someone has to bear the costs of unfavorable contractual capacity obligations, the Commission reasoned that the customer who voluntarily assumed those obligations by entering into the contract should bear those costs rather than spreading them over all of the pipeline's customers. 38 The Commission decided to modify the set of contracts that forms the structure of the natural gas industry only as much as necessary to alleviate the anti-competitive sales component of the bundled contracts. The Commission is not required to exercise its § 5 authority beyond the limits of the problem it has identified, see AGD I, 824 F.2d at 1019, and its cost-shifting rationale was a well-reasoned justification for its decision not to go further. We therefore uphold this portion of the rules. 39
40 Because the Commission found that pipelines' superior rights with respect to access and control provide them with several advantages over other gas merchants with no access to storage for their gas, it required pipelines to offer access to their storage capacity on an open-access basis. Order No. 636, p 30,939, at 30,425-26. By defining transportation to include storage, 18 C.F.R. § 284.1(a), the Commission made storage subject to the same non-discrimination requirements as capacity rights. Id. §§ 284.8(b), 284.9(b). Although pipelines were allowed to retain storage capacity for system management and in order to ensure the delivery of no-notice service, they were required to offer remaining storage capacity on an open-access contractual basis for customer-owned gas. Order No. 636, p 30,939, at 30,426-27. The Commission granted former bundled firm-sales customers a priority right to that storage capacity. Order No. 636-A, p 30,950, at 30,578. 41 In its request for rehearing of Order No. 636, CNG Transmission Corporation, a pipeline company, explained that the changes involving open-access storage would create difficulties for it in providing the contractual levels of service to its existing contract-storage customers. Because current contract storage injection and withdrawal schedules, and other related operational protocols, are based upon current levels of contract storage service, CNG requested the ability to modify existing storage customers' contractual rights to inject or withdraw gas. The Commission responded that its 42 intent was that current contract storage customers retain their full right to capacity as specified in their contracts. The Commission did not mean to infer [sic] that the terms and conditions associated with their rights could not be changed if they proved unreasonable in light of Order No. 636's requirements of no-notice transportation and open access contract storage. This, of [319 U.S.App.D.C. 71] course, is a pipeline specific matter and must be addressed in the restructuring proceeding. 43 Order No. 636-A, p 30,950, at 30,579. Upon further rehearing, however, the Commission went further, stating that, 44 while it has authorized pipelines to propose to change existing storage arrangements, if necessary, to provide no-notice transportation service, the pipeline must still show that the changes are necessary and reasonable. This includes an impact of a change on current contract storage customers. The Commission has not authorized any reduction in contract storage capacity. The Commission views changes to injection and withdrawal schedules as changes to terms and conditions, rather than to the level of certificated service. Hence, the Commission concludes that changes to existing contract storage terms and conditions will not need action under NGA section 7(b). 45 Order No. 636-B, p 61,272, at 62,011. 46 A group of LDC petitioners 32 challenges the Commission's statement that changes to contract-storage withdrawal and injection schedules do not require a § 7(b) abandonment proceeding. We agree with the petitioners that it is difficult to discern exactly what the Commission's position is on this issue, and we grant the petitioners relief insofar as the Commission stated in Order No. 636-B that any change to injection and withdrawal schedules can be effected without a § 7(b) abandonment proceeding. 47 If the Commission has permitted the pipelines to abandon a service rendered by means of ... facilities certificated by the Commission, then it has failed to comply with § 7(b), which requires a due hearing and a Commission finding that the present or future public convenience or necessity permit such abandonment. 15 U.S.C. § 717f(b). In general, the test for § 7 abandonment is whether the certificate-holder permanently reduces a significant portion of a particular service. Reynolds Metals Co. v. FPC, 534 F.2d 379, 384 (D.C.Cir.1976); see also Kansas Power & Light Co. v. FERC, 851 F.2d 1479, 1481 (D.C.Cir.1988). By comparison, the withholding of gas delivery to an interruptible-transportation customer is not an abandonment, because the customer has no right to guaranteed delivery under its contract or the certificate of service. Cerro Wire & Cable Co. v. FERC, 677 F.2d 124, 129-30 (D.C.Cir.1982). Although the court has reserved the issue whether a § 7(b) abandonment occurs when only the identity of the customer changes, an abandonment does take place when there is a reduction or alteration in overall service. Tennessee Gas Pipeline Co. v. FERC, 972 F.2d 376, 384 (D.C.Cir.1992). 48 According to the submissions by the Associated Gas Distributors in the administrative record, a customer who contracts for storage is concerned with two elements: capacity (how much gas can be stored) and deliverability (how much gas can be withdrawn on a given day). 33 The AGD attached affidavits from six member LDCs who stated that changes to injection and withdrawal schedules could reduce deliverability, with adverse consequences on their ability to meet residential customers' demands. Elizabethtown Gas Company, in its opposition to CNG's compliance filing in its restructuring proceeding, objected to CNG's specific proposals to reduce withdrawal amounts when contract-storage customers had low gas inventories in storage, to maintain elevated minimum inventory levels during the early winter months, to limit monthly withdrawal amounts to less than the total of the daily amounts, to [319 U.S.App.D.C. 72] reduce firm withdrawal rights to best-efforts rights, and to impose minimum inventory turnovers. 49 It is impossible, on the current record, to determine on a generic basis what changes to injection and withdrawal schedules would permanently reduce[ ] a significant portion of contract-storage service. Reynolds Metals, 534 F.2d at 384. Because contractual deliverability entitlements are an integral part of the customer's contract-storage rights, modifications that affect those rights could in some instances constitute a § 7 abandonment. On the other hand, under other circumstances an adjustment to an injection or withdrawal schedule could be sufficiently minor or temporary that no abandonment would occur. Whether an abandonment proceeding is necessary depends on the individual customer's storage contract and on the pipeline's proposed modifications, none of which are before us now. 50 To the extent that the Commission issued in Order No. 636-B a sweeping statement that no modifications to injection and withdrawal schedules for a contract-storage customer require an abandonment proceeding, such a statement is inconsistent with § 7. In its brief, however, the Commission denies that it has taken any such steps to degrade contract-storage rights. Instead, the Commission maintains that it has merely allowed pipelines to propose necessary and reasonable changes in the restructuring proceedings, Order No. 636-B, p 61,272, at 62,011, for which the Commission has authority under § 5. In the restructuring proceedings, the Commission has followed this approach, approving proposed modifications to withdrawal and injection schedules if the pipeline can prove that the changes are necessary and reasonable. 34 51 The Commission's theory that it has the authority to proceed in the restructuring proceedings under § 5 rather than in abandonment proceedings under § 7(b) is explained nowhere in the Order No. 636 series. See Order No. 636-A, p 30,950, at 30,579; Order No. 636-B, p 61,272, at 62,011. Under § 7(b), the Commission must hold a due hearing and must make a finding that the present or future public convenience or necessity permit such abandonment. 15 U.S.C. § 717f(b). By contrast, under § 5 the Commission need hold only a hearing and must find that an existing contract is unjust, unreasonable, unduly discriminatory, or preferential. Id. § 717d(a). We need not decide whether compliance with the procedures in § 5 could in certain circumstances satisfy the applicable statutory requirement in § 7(b). The Commission has assured us in its brief that its approach under § 5 will be consistent with the § 7 requirements. But without any explanation in the Order No. 636 decisions for why the Commission's procedures satisfy § 7(b), we cannot accept the Commission's suggestion that its exercise of its § 5 authority in the restructuring proceeding would obviate the need for abandonment hearings. 52 On the other hand, any claim that a particular pipeline's modification to contract-storage withdrawal and injection schedules requires a § 7(b) abandonment proceeding is premature and should be raised, if at all, in the review of individual restructuring proceedings. 35 53
54 A central part of the Commission's unbundling program is the requirement [319 U.S.App.D.C. 73] that all pipelines assign to their firm-transportation customers the firm-transportation capacity that the pipelines held on upstream pipelines. 18 C.F.R. § 284.242. Now that customers can buy gas directly from the producers, they may bear the responsibility of reserving capacity both on upstream and downstream pipelines. 36 If the downstream pipeline were allowed to retain the capacity on the upstream pipeline, the Commission reasoned, it would inhibit the formation of a competitive gas-sales market by preventing downstream customers from gaining access to the new opportunity to purchase gas directly from the producers. Order No. 636, p 30,939, at 30,417-18. 55 Two pipeline petitioners, ANR Pipeline Company and Colorado Interstate Pipeline Company, urge the Commission to carve out an exception for transportation-only pipelines--pipelines that do not offer any gas sales. For example, a downstream pipeline may wish to offer a customer a package of firm-transportation capacity on its pipeline as well as on a connecting upstream pipeline; the customer may well prefer not to have to contract separately with the upstream pipeline. 56 This petition for review has been rendered moot by an intervening declaratory order. In Texas Eastern Transmission Corp., 74 F.E.R.C. p 61,074, at 61,220 (1996), reh'g pending, Docket No. CP 95-218, the Commission declared that the successful completion of unbundling under Order No. 636, with the separation of pipelines' merchant and transportation functions, had alleviated the Commission's former concerns that pipelines would obstruct access to production areas to favor their merchant functions. Accordingly, the Commission announced that it would decide whether to allow pipelines to acquire upstream or downstream capacity on a case-by-case basis. Id. The Commission's intervening action appears to have provided the pipeline petitioners with the relief that they had sought; any further relief is available in review of the declaratory-order proceeding. 57
58 In its new regulation, the Commission requires interstate pipelines that provided a firm sales service on May 18, 1992 to offer no-notice transportation service. 18 C.F.R. § 284.8(a)(4). In Order No. 636-A, the Commission clarified that [t]he pipelines are required to offer no-notice transportation service only to customers that were entitled to receive a no-notice firm, city-gate, sales service on May 18, 1992. Order No. 636-A, p 30,950, at 30,573. Although several commentators requested the Commission to require pipelines to extend no-notice transportation service to customers who had already converted from bundled firm-sales service under Order No. 436 and consequently no longer received such service on May 18, 1992, the Commission denied rehearing. The Commission offered three reasons: first, that it was prudent to begin the experiment with no-notice transportation on a limited basis; second, that customers who were not receiving bundled firm-sales service on May 18, 1992, were not relying on that service; and third, that such customers could not reasonably expect to receive no-notice transportation in the future because neither Order No. 436 nor the Notice of Proposed Rulemaking for Order No. 636 had contemplated it. Order No. 636-B, p 61,272, at 62,007. 59 The National Association of Gas Consumers (NAGC) contends that the ineligibility of former bundled firm-sales customers who converted to open-access transportation under Order No. 436 to receive no-notice transportation is unduly discriminatory. 37 NAGC relies on the Commission's own regulation, [319 U.S.App.D.C. 74] promulgated by Order No. 436, which requires an open-access pipeline to offer service without undue discrimination. 18 C.F.R. § 284.8(b)(1). And as NAGC points out, the Commission found in Order No. 636 that the pipelines' open-access firm-transportation service under Order No. 436 was unlawfully discriminatory because it did not provide the same quality of transportation service as was available with bundled firm-sales service. Order No. 636, p 30,939, at 30,402. Now, customers who converted under Order No. 436 remain limited to stand-alone firm-transportation service subject to scheduling and balancing requirements and other penalties. Thus, NAGC maintains that the Commission must extend eligibility for no-notice transportation service to customers who converted before Order No. 636 in reliance on the non-discrimination provisions. 60 We find the Commission's justifications in Order No. 636-B unconvincing. The Commission's desire to proceed cautiously with no-notice transportation, rather than require pipelines to offer it to all customers, cannot explain the disadvantaging of former bundled firm-sales customers who converted under Order No. 436. Although those customers had no right to expect to receive no-notice transportation service under Order No. 636, neither did customers who did receive bundled firm-sales service on May 18, 1992. Finally, the Commission has not provided substantial evidence to support its assumption that bundled firm-sales customers who retained bundled service relied more heavily on reliability of transportation service than did customers who switched to open-access transportation. We therefore remand this issue to the Commission for further explanation of which customers should be eligible for no-notice transportation service.