Opinion ID: 381344
Heading Depth: 1
Heading Rank: 2

Heading: the commission's shift from the seaboard formula to the

Text: UNITED FORMULA 20 The Natural Gas Act does not specify any specific formula for the Commission to use in arriving at just, reasonable and nondiscriminatory rates. 27 We have recognized that, (i)n 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.'  28 But where, as here, the Seaboard formula has been used for many years, it is a starting point in determining overall reasonableness of pipeline rates. 29 Thus, in this case, the Commission must not only show that the substitution of United for Seaboard results in rates that meet the standards of § 4 of the Act; 30 the Commission must also provide a reasoned explanation for its decision to depart from the Seaboard formula, which it has applied to the Texas Gas pipeline for nearly twenty-five years. 31 21 A. Use of the United formula for cost classification and allocation among the pipeline's rate zones. 22 Initially, we note that the allocation of costs among rate zones and the design of rates to recover those costs within a zone are two separate and distinct matters, 32 that sometimes turn on conceptually different considerations. Cost classification and allocation for the Texas Gas pipeline involve determining the pipeline's total costs of rendering service and the portion of those costs incurred by each of the four rate zones. 33 Rate design, on the other hand, involves recovering from individual customers within each rate zone their respective share of the zone's cost responsibility. 34 23 The undisputed effect of the Commission's decision to use the United formula for cost allocation is to shift more than $3 million in cost responsibility from the jurisdictional customers 35 in Rate Zones 1, 2, and 3 (in the southern part of the system) to the jurisdictional customers in Rate Zone 4 (at the northern terminus of the system). 36 The Commission itself noted that this substantial inter-zone reallocation of cost responsibility is the most significant impact resulting from the use of the United method. 37 Yet the Commission fails to provide an adequate explanation for or any evidence in support of this geographical shifting of costs. Instead the Commission offers only the conclusory finding that 24 (t)he United method of cost classification and cost allocation is appropriate for use on Texas Gas' system because it appropriately allocates costs . . . among Texas Gas' four rate zones. 38 1. Curtailment The Commission indicates that 25 the primary reason for the adoption of the United method in this case is the impact of the current natural gas shortage on the nation as a whole, and on Texas Gas and its customers in particular. Ratemaking concepts appropriate to a period when natural gas pipelines were struggling to find markets are not appropriate . . . in the present era of curtailments. 39 26 In support of its position, the Commission relies on our decision in Consolidated, 40 in which we upheld, for the first time, the Commission's use of the United formula. 41 Petitioners, however, contend (as did the ALJ) that certain factual conditions critical to our rationale in Consolidated are absent from the record in the present case. 27 The record in Consolidated demonstrated that the United pipeline system was experiencing substantial peak-day curtailment, 42 i. e., even on peak-days, curtailment resulted in unused pipeline capacity. 43 The limiting factor on demand thus became gas supply instead of pipeline capacity. We therefore concluded that since the demand charge on the United pipeline no longer (had) the same vitality as a premium for reserving priority use of a scarce resource, 44 the Commission had demonstrated a reasonable basis for reducing the pipeline's demand charge. 28 The record now before us, however, does not provide the Commission with an analogous basis for reducing the demand charge on the Texas Gas pipeline. Peak-day use has not been curtailed on peak-days full pipeline capacity is used. 45 The Commission fails to confront the implications of this difference. Instead the Commission argues that Consolidated is applicable here because both the Texas Gas and United pipelines also have experienced annual curtailment. The Commission relies on its bare assertion that the result it reached is at most an extension of (the United ) policy, 46 thereby avoiding the issue raised by lack of peak-day curtailment. The Commission's failure to explain why the absence of peak-day curtailment is irrelevant undermines the adequacy of its justification for extending Consolidated to the facts of this case. 47 29 The record contains substantial, unrebutted evidence showing that annual curtailment, alone, does not diminish the vitality of the demand charge (as did peak-day curtailment in Consolidated ). 48 On the Texas Gas pipeline, each customer remains free on any given day to take its full contract demand, even on peak-days, so long as its annual entitlement is not exceeded. 49 Volumetric demands on peak-days have not decreased, notwithstanding annual curtailment. 30 Since the facilities constructed to meet peak-day demands continue to be used at pre-curtailment levels, petitioners contend that the Commission's reallocation of fixed costs is unjustified. The Commission's opinion fails to answer this contention. The Commission does not explain why the investments that created adequate capacity for peak-day service and the fixed charges associated with these investments now afford less benefit to customers that require peak period service than they did prior to annual curtailment. 50 Before annual curtailment, vel non, can justify a substantial shift in system-wide pipeline cost responsibility to the commodity component, the Commission must provide an explanation for its assertion that annual curtailment has diminished the vitality of the demand charge. 31 Merely citing to Consolidated without a discussion of the significant factual differences between the United and Texas Gas pipelines is inadequate to discharge the Commission's obligation to explain its change. 51 Rather, what is required is an inquiry by the Commission into the function served by the $3 million in fixed transmission costs that adoption of United formula would reallocate to Zone 4. 52 The Commission's assertion that gas supply now places limits on the operation of the Texas Gas pipeline restates the obvious. It leaves unanswered the petitioners' contention that the relative importance of the pipeline's demand and commodity functions has not changed in a way which would justify departure from the Seaboard formula. 53 On remand, the Commission must set out findings of fact sufficient to enable a reviewing court to discern whether a rational relationship exists between the Commission's reallocation of costs among the pipeline's rate zones and the respective cost responsibilities presently incurred by the zones. 2. Storage 32 The Commission's decision to adopt United for cost allocation (thus shifting $3 million in cost responsibility from Zones 1, 2, and 3 to Zone 4) is particularly troubling here since the end use profiles of customers in all four zones are substantially similar. 54 The principal difference between Zone 4 and the other zones is that customers in Zone 4 (both industrial and city-gate) have invested substantial sums in storage, thus increasing their load factors. 55 It is precisely because Zone 4 customers have invested in storage (an action encouraged by the Commission, which benefits all of the pipeline's customers) that they are required to assume additional costs with the switch from Seaboard to United. 56 33 The Commission responds that users who built storage have benefited from lower than average unit costs of gas, a benefit they will continue to receive under the United formula, only to a lesser degree, 57 and that the claim of Columbia and Consolidated, to have benefited the system by not requiring more peak-day capacity, was too speculative to justify any formula other than United. 58 34 We agree with the Commission that the existence of the Zone 4 storage facilities, alone, is insufficient to preclude the Commission from altering a pipeline's cost allocation formula. However, as in Consolidated, we are concerned that the storage issue does not seem to have been given adequate consideration or analysis. 59 Moreover, where other record evidence in support of the Commission's action is deficient, equitable considerations, such as storage, loom larger. Thus, we cannot say that the Commission's analysis represents reasoned decisionmaking given the record now before us. Section 4 of the Natural Gas Act does not permit the Commission to reduce the cost responsibilities of one geographical area at the expense of another, without benefit of substantial evidence showing that a change in the relative costs of providing service to the area has occurred 60 or that a new and permissible policy objective would thereby be facilitated. 61 35 B. Use of the United formula to design rates within each rate zone. The Commission concluded that 36 (t)he United rate design method is appropriate for use on the Texas Gas system because it reflects a more equitable distribution of costs among its jurisdictional customers based upon the levels of curtailment now existing on the system. 62 37 The Commission contends that our decision in Consolidated supports its use of United for rate design as well as for allocation. 63 Our previous discussion of the factual differences between the Texas Gas and United pipelines, which rendered the application of Consolidated questionable for cost allocation in this case, applies with equal force to rate design and need not be repeated. 64 38 Moreover, to the extent that the Texas Gas pipeline curtails volumes on an annual basis, it gives customers demand charge credits. 65 Revenues equivalent to the amount of the demand charge credits then are recouped through a commodity surcharge. As a consequence, fixed costs are automatically reclassified from demand to commodity in direct relationship to the degree of annual curtailment on the system. The Commission eliminated a similar provision from the United pipeline tariff and its United decision was, in part, based on this fact. 66 Here the Commission dismisses this difference by stating that 39 this further shifting of costs is consistent with the Commission's goals of shifting costs to reflect curtailments on Texas Gas' system and is not a reason (for) retaining Seaboard. 67 40 The Commission's statement simply acknowledges that use of the United formula for rate design, when coupled with a system of demand charge credits, results in recovery of more than 75% of the fixed storage and transmission costs through the commodity charge. It does not explain why the Commission found this result was just and reasonable under section 4 of the Natural Gas Act. 68 41 In addition, the Commission offers two policy arguments in support of its decision to use the United formula for rate design. The Commission claims that use of the United formula will discourage industrial use of natural gas by reducing the price discounts high load factor customers receive under the Seaboard formula, 69 and, secondarily, by narrowing the gap between the price of natural gas used for industrial purposes and that of alternative fuels. 70 We recognize that the Commission may . . . reconsider its approach even in the absence of any new evidence if the change in policy (is) avowed and reasoned. 71 However, the record now before us fails to demonstrate that these objectives, which the Commission finds consonant with an era of natural gas shortages, will be achieved by use of the United formula for rate design on the Texas Gas pipeline. Petitioners and respondent both agree that 42 (t)he objective of rate design is to determine rates that enable the pipeline to sell its gas at charges which recover from the various types of loads their reasonably associated costs of service, keeping in mind the factors pertinent in this regard. 72 43 The parties also agree that the United formula will reduce the price differential between high load and low load factor customers in a given rate zone by shifting costs to the former. Columbia and Consolidated, however, object that the Commission has not demonstrated that this admitted shift in costs to high load factor customers is supported by a change in the relative cost of providing service to the higher load factor customers as compared to the lower load factor customers within each rate zone. Secondly, they reiterate that, contrary to the Commission's belief, not all high load factor users are industrial users. City-gate customers, such as Louisville, that have built storage, also take gas at a high load factor. 73 Thus, the record fails to demonstrate that reducing the differential between high load factor and low load factor customers will discourage industrial sales. 74 At best, application of United to Texas Gas will discourage high load factor sales, both industrial and city-gate. 44 We are also unable to find evidence in the record supporting the Commission's contention that use of United for rate design will accomplish the Commission's secondary objective of narrowing the gap between the price of natural gas and alternative fuels. 75 Elsewhere the Commission has recognized that rate design is, at most, a limited means of reduc(ing) industrial gas use under present day circumstances, 76 because the prices of the alternative fuels greatly exceed the price of natural gas. Based on the record before us, it appears that use of the United formula for rate design, as for cost allocation, will simply shift costs in each zone from wholesale customers without storage to those with storage rather than reduce the price gap. 45 Judicial scrutiny under the National Gas Act is limited to assuring that the Commission's decisionmaking is reasoned, principled, and based upon the record. For a reviewing court to perform this task, it is imperative that the Commission articulate the critical facts upon which it relies when it decides to reallocate fixed cost responsibility. Similarly, when the Commission finds it necessary to make predictions or extrapolations from the record, it must fully explain the assumptions it relied on to resolve unknowns and the public policies behind those assumptions. 77 Where the Commission balances competing interests in arriving at its decision, it must explain on the record the policies which guide it. Only if the Commission observes these minimum standards can we be confident that missing facts, gross flaws in agency reasoning, and statutorily irrelevant or prohibited policy judgments will come to a reviewing court's attention. Moreover, by requiring that the Commission fully articulate the basis for its decision, we assure the Commission, itself, the first opportunity to correct any defects which may emerge from such disclosure. 46 Since the Commission has failed to comply with these standards, we vacate the Commission's order insofar as the order adopts the United formula for cost classification, allocation, and rate design, and remand the case to the Commission for further proceedings on these matters consistent with this opinion. 47 It is so ordered.