Opinion ID: 489534
Heading Depth: 2
Heading Rank: 4

Heading: Possible Justifications

Text: 49 The Commission found that the probable consequence of Transwestern's imposition of a minimum bill on its two partial-requirements customers would be to foreclose competition and restrain trade. The Commission then considered whether Transwestern's minimum bills were justified. In Atlantic Seaboard Corp., 7 the Commission identified three economic factors which usually justify a minimum commodity rate in a pipeline tariff. First, a minimum bill may be justified as a means of protecting the pipeline against the risk of not recovering fixed costs in the commodity component. Second, a minimum bill may be justified as a means of protecting full-requirements customers from bearing a disproportionate share of fixed costs resulting from swings off the system by partial-requirements customers. And third, a minimum bill may be justified as a means of ensuring equitable recovery from customers of a pipeline's take-or-pay costs.
50 Under the Seaboard method of rate design, the commodity charge includes fixed production costs and 50 percent of fixed transmission costs, which include equity return, related taxes, depreciation, and debt cost. The remaining fixed costs are recovered through the demand charge. The Commission found that Transwestern's fixed-cost minimum bills could not be justified on the basis that they recovered fixed costs because the minimum bills recovered costs which did not warrant risk-free recovery. Specifically, the Commission determined that the costs of depreciation and servicing the debt should be guaranteed, but that equity return, related taxes, and fixed production costs should be subject to risk. 8 Since Transwestern's minimum bills guaranteed recovery of all fixed costs, they could not be justified on this basis. 51 To permit fixed-cost recovery which is warranted, the Commission adopted the modified fixed variable rate design. Under this method, all fixed costs are assessed as parts of the demand charge, except equity return, related taxes, and fixed production costs. Thus, all fixed costs which Transwestern should recover will be recovered through the demand charge without the imposition of a minimum bill. 52 Transwestern responds that the Commission cannot prescribe a new mechanism for the recovery of fixed costs merely because it prefers it. Transwestern asserts that the Commission must first find the existing provision unlawful under Sec. 5 of the NGA. The Commission, however, did not eliminate Transwestern's minimum bills because it preferred the modified fixed variable rate design to the Seaboard method. It first found the minimum bills unlawful because they unreasonably restrained trade. It further found that Transwestern's minimum bills were not justified on the ground that they permitted recovery of fixed costs that should not be guaranteed, not because a new method of rate design would better accomplish the purpose. 53 Transwestern next contends that there was no record evidence that the modified fixed variable rate design would assure the recovery of fixed costs assigned to the commodity component. Transwestern claims there was no evidence that its sales levels without minimum bills would remain sufficient to recover those fixed costs the Commission left at risk. This begs the issue. The point of the Commission's determination was to subject certain fixed costs to market risks. The Commission placed equity return at risk, because it did not think Transwestern should be guaranteed any profit. Rather, Transwestern will earn profits only when it makes sales. Similarly, the Commission's conclusion that fixed production costs should be fully at risk is based on a determination that Transwestern should have the incentive to minimize costs; such an incentive will motivate Transwestern to make prudent gathering and production expenditures. 9 54 Transwestern does not really dispute the underlying determination of cost allocation, but maintains that it should be guaranteed a reasonable opportunity to earn a return on its investment. The Commission's decision here does not deny Transwestern such a reasonable opportunity. The Commission has only refused to protect Transwestern's profit from competition and provided Transwestern what the Commission determined to be the appropriate incentive to run its business efficiently. [R]egulation does not insure that the business shall produce net revenues. FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942). 55
56 Minimum bills may also be justified on the ground that they protect full-requirements customers from bearing a disproportionate share of fixed costs should partial-requirements customers reduce purchases in favor of alternative supplies. Presumably, a substantial swing off the system by one customer could result in higher rates for all customers, since more fixed costs would have to be recovered per unit of gas sold. 57 Transwestern does not argue on appeal that its minimum bills can be justified on the basis of protecting full-requirements customers. Furthermore, Transwestern did not seek to justify its bills before the Commission on this basis. The Commission chose to consider this justification out of fairness to Transwestern's full-requirements customers, even though such full-requirements customers account for less than one-half percent of Transwestern's gas sales and did not intervene before the Commission. We too address the justification to determine that the end result is not unjust. 58 The Commission rejected this possible justification based on evidence that actual rate increases were modest, that any impact on Transwestern's full-requirements customers would be short-term, and that Transwestern has taken numerous steps to reduce its gas costs so that it can compete for sales to its partial-requirements customers. Such cost reduction will benefit full-requirements customers whose rates also reflect gas costs. It is also significant that Transwestern's partial-requirements customers account for 99.5 percent of Transwestern's total gas sales. Since Transwestern will certainly want to maintain sales to these customers, it stands to reason that it will seek to make its gas even more competitive. If it does so, its full-requirements customers will benefit in the long run. In any event, Transwestern's minimum bills cannot be justified on the basis that they are needed to protect full-requirements customers.
59 Transwestern's third possible justification is the most superficially appealing. It concerns the recovery of take-or-pay obligations governing wellhead sales between it and its producers. Under a take-or-pay contract, a pipeline must take or pay for a minimum amount of gas. If partial-requirements customers purchase gas from another supplier, the pipeline may be unable to sell as much gas as it is obligated to purchase. The pipeline will then have to pay producers for gas it does not take. Take-or-pay liabilities, if prudently incurred, become a fixed cost on the system and can be passed on to customers in the form of increased rates. A minimum bill can be justified as a means of ensuring equitable recovery of take-or-pay costs from all customers. In Order No. 380, the Commission recognized that this justification is another way of assuring protection of full-requirements customers from the actions of partial-requirements customers. The Commission has always given such take-or-pay questions special consideration, as it has done here. 60 The Commission recognized that a minimum bill may be permissible if used to ensure that carrying costs associated with take-or-pay liabilities will be borne by the customers that caused the liabilities to be incurred. The Commission, however, found no connection between the minimum bill payments the customers made under Transwestern's rate schedules and the carrying costs associated with take-or-pay liabilities that Transwestern could legitimately recover from its partial-requirements customers. Accordingly, the Commission found that Transwestern's minimum bills were not justified on the ground that they ensured equitable recovery from Transwestern's customers of costs associated with take-or-pay liabilities. 61 Transwestern does not really argue that its minimum bills are necessary to ensure equitable recovery of take-or-pay costs from all customers. Rather, Transwestern asserts that it has enormous take-or-pay obligations and that its minimum bills, even though not precisely calibrated to the level of its take-or-pay liability, still serve the purpose of recovering the cost of take-or-pay payments. 62 Transwestern acknowledges that the Commission has instituted alternative approaches to an industry-wide take-or-pay crisis, but asserts that the Commission is avoiding its responsibility to deal adequately with the dilemma. Transwestern claims that the Commission in Order No. 380 used the same alternative approaches argument to postpone its duty to find an adequate solution. In Wisconsin Gas Co., 770 F.2d at 1159-60, the D.C. Circuit deferred to the Commission's discretion to deal with take-or-pay issues in separate proceedings. 63 The take-or-pay issue posed here is a separate matter which is being addressed in other proceedings before the Commission and through other means. Indeed, Transwestern currently has a proposal before the Commission to allocate costs of settling take-or-pay liability directly to the customers who caused such costs to be incurred. The Commission is not ignoring the issue. None of Transwestern's contentions invoke any proper take-or-pay justification. 64 The take-or-pay question is, moreover, a hypothetical issue on the record in this case. No evidence advanced indicates that Transwestern has actually made any payments to producers under its take-or-pay contracts. The Commission's decision to confront the potential take-or-pay problem through alternative approaches and in other cases has not been shown to be unreasonable, arbitrary, or capricious.
65 The presiding ALJ considered an additional justification for Transwestern's imposition of a minimum bill. El Paso had settled on, and the Commission had approved, a 60 percent minimum bill for SoCal. Accordingly, the ALJ set Transwestern's minimum bill level at 60 percent, the same level as its major competitor. The basis of this determination was that Transwestern should not be placed in economic jeopardy. 66 The Commission found that setting the pipeline's minimum bill on the basis of other pipelines' minimum bills ignores the consumers. If a 60 percent minimum bill is anti-competitive it cannot be justified on the basis that it meets one other competitor. If that were not so El Paso could justify its SoCal minimum bills on the basis of Transwestern's at its next rate hearing. This ping-pong effect could mean that consumers would never be free of the unwarranted cost. We are similarly convinced that there is no basis for this justification. Finally, the record shows that as part of an approved settlement, El Paso's minimum bills will be placed at the same level as Transwestern's, which means they both will be eliminated.