Opinion ID: 360136
Heading Depth: 2
Heading Rank: 1

Heading: Actual Impact

Text: 55 Under the plan prescribed in Opinion 778, some of Transco's wholesale customers are curtailed significantly more than others. This disparity results from the fact that Transco's various wholesale customers serve different mixes of ultimate consumers. Some distributors, for example, serve major metropolitan areas, with heavy concentrations of residential and small commercial consumers, while others serve suburban and semi-rural communities, with low population densities. Some distributors serve heavily industrialized centers, while others serve areas with relatively little industry. Since, under the Opinion 778 plan, Transco's customers are curtailed according to the end use made of gas supplied during the 1972-1973 base period, distributors that served a large percentage of high-priority residential and small commercial users During that period are curtailed less sharply than distributors that served a lower percentage of such users, and distributors that served a high percentage of low-priority industrial customers During that period are curtailed more severely than distributors that served a lower percentage of such customers. 56 These disparities in treatment are in some cases quite pronounced. For example, a study 15 showed that if an Opinion 778-type plan had been implemented in 1974-1975 it would have resulted in levels of curtailment among Transco's distributors ranging from 9.6% To 39.5% On a state-by-state basis: 57 On a regional basis, curtailment levels would have ranged from 20.3% In the Northeast to 38.4% In the Southeast: 58 Zone 1 (Mississippi, Alabama, Georgia) 30.3% 59 Zone 2 (South Carolina, North Carolina, 60 Virginia) 38.4% 61 Zone 3 (District of Columbia, Maryland, Delaware, Pennsylvania, New 62 Jersey, New York) 20.3% 63 Significantly, the 39.5% Projected for North and South Carolina was more than 1.5 times the system-wide average curtailment. Also, North and South Carolina, together with Alabama, Georgia, and Virginia, were the only states with curtailment markedly above the system-wide average. On the other hand, a number of states would be curtailed well below the system-wide average. Moreover, the projected level of curtailment for Zone 2 as a whole was about 1.89 times that of Zone 3 and 1.31 times that of Zone 1. 64 These different levels of curtailment affect not only the distributor companies themselves but their ultimate consumers as well. While high-priority consumers still being served are in a better position than those who have been cut off and denied gas, these remaining consumers must bear a disproportionate financial burden. The natural gas industry is basically capital intensive and the disparate reductions in sales made necessary by an end-use allocation scheme result in a larger proportion of expensive excess capacity for those curtailed above the system-wide average than for those curtailed below the system-wide average. Since such excess capacity carries with it heavy financial obligations, distributors curtailed above the system-wide average must look to remaining consumers to make up the deficiency through payment of substantially higher rates. Thus, the customers of distributors curtailed above the system-wide average will be required to pay higher rates for pipeline gas than the customers of distributors curtailed under the system-wide average. 65 In affirming the Commission's curtailment authority over direct sales, the Supreme Court held in Federal Power Commission v. Louisiana Power & Light Co. 16 that curtailment plans are governed by the substantive standards set forth in § 4(b) of the Natural Gas Act. That section provides: 66 No natural-gas company shall, with respect to any transportation or sale of natural gas subject to the jurisdiction of the Commission, (1) make or grant any Undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage, or (2) maintain any Unreasonable difference in rates, charges, service, facilities, or in any other respect, either as between localities or as between classes of service. 17 67 There is no doubt that the curtailment plan prescribed in Opinion 778 is discriminatory. It confers distinct advantages to certain distributors and to the customers of those distributors. It discriminates against certain localities and certain classes of service. However, § 4(b) does not prohibit discrimination Per se ; it prohibits undue and unreasonable discrimination. The issue thus presented is whether there is a reasonable basis for the disparate treatment accorded distributors and their customers under the Opinion 778 plan. 68 The Commission's position is that the discrimination that exists under the 778 plan is justified by the need for end-use allocation of diminishing natural gas supplies. It contends that end-use allocation is necessary to protect high-priority natural gas uses, that is, to ensure that lower-priority uses are curtailed ahead of higher-priority uses. In Order 778 the Commission states: 69 . . . (W)hile it is true that under the end-use plan Transco's resale customers would be curtailed differently than under pro rata curtailment of contract entitlements, This difference is not unduly preferential or discriminatory because we have found that end-use curtailment is necessary to protect the public interest. 18 70 While end use is an appropriate consideration for purposes of curtailment, 19 Discrimination resulting from an end-use plan can be justified only to the extent that the plan actually does protect high-priority uses from curtailment ahead of low-priority uses. 71 We find that the Commission's conclusion that the Opinion 778 plan is just and reasonable Cannot be sustained in light of the Commission's failure to make findings as to the impact the plan would actually have on ultimate consumers. The fact of the matter is that the Commission does not know what impact the plan will have on ultimate consumers, and therefore it is not in a position to justify the discrimination resulting from the plan as necessary to achieve end-use objectives. Indeed, it is quite likely that the plan is an end-use plan in name only, and that, in fact, it allocates gas on a basis that Does not reasonably ensure the protection of high-priority end uses. 72 As already noted, any end-use plan must contain two essential components: a priority ranking of end uses from highest to lowest, and an allocation mechanism for assuring that higher-priority uses are protected from curtailment ahead of lower-priority uses. The priority rankings adopted by the Commission in Opinion 778 are not the problem here. Rather, it is the allocation mechanism chosen by the Commission that makes it difficult to assess the impact of this particular end-use system. 73 There are two defects in the plan's allocation mechanism. First, the plan allocates gas on the basis of stale base-period data that may not accurately reflect the true market profiles of Transco's customers. Second, the plan does not take into account the fact that some customers are totally dependent on Transco while others purchase substantial quantities from pipelines supplying much higher percentage of demands. 74 The distortions caused by the first of these defects are easy to perceive. The Opinion 778 plan allocates Transco's current supply on the basis of each customer's end use during an historical fixed-base period from May 1972 through April 1973. Since allocations of Transco's supply for, say, the summer of 1978 will be based on the end uses each customer was serving in the summer of 1972, it necessarily follows that the Opinion 778 plan will result in a true end-use allocation Only to the extent that each customer's 1978 end use in each priority category is identical with its 1972 end use. This manifestly is not the case, however. It is not only possible, it is Probable, that market profiles of Transco's customers have changed significantly over the past six years. It is likely that some of Transco's customers, particularly those in the Southeast, are serving a larger percentage of high-priority residential and small commercial customers today than they did six years ago. It is also likely that some of Transco's customers are serving a smaller percentage of such customers than they did six years ago. The result, then, of tying curtailment to stale market profiles is that pipeline gas may be taken from distributors already curtailing high-priority categories and diverted to distributors still serving lower priorities. This result is directly contrary to end-use principles. 2 75 The second defect in the curtailment plan perhaps causes even more serious distortions. The vast majority of Transco's customers are served by more than one pipeline. In Consolidated Edison Co. of N.Y., Inc. v. F.P.C. (Consolidated Edison I) 21 this Court continued a stay in effect in order to prevent the Commission from imposing an end-use type plan on the Transco system even on an interim basis. One of our specific criticisms of the plan was that it failed to take into account the fact that some customers are wholly dependent on Transco while others have other pipeline sources. We now find this same defect carried over in the plan here under review. Under the 778 plan the base period end-use is allocated between Transco and the customer's other pipeline suppliers in proportion to the supply provided by each pipeline during the 1972-1973 base period. Since, under the 778 plan, allocations of Transco's supply for the current season will be based, for dually served customers, on Transco's 1972 share of each customer's end uses, it necessarily follows that the 778 plan will result in a true end-use allocation Only to the extent that it is assumed that Transco's supply has declined no more than that of the other pipeline suppliers. However, This assumption is demonstrably false, since, as the hearing examiner found in August 1975, the Transco system represents the Commission's premier disaster area, 22 and Transco's supply has continued to deteriorate sharply since. Thus, the exceedingly deep end-use curtailment under the 778 plan is cushioned for those customers having alternate suppliers, but falls with unmitigated harshness on customers who are wholly dependent upon Transco. 76 The anti-end-use vice inherent in the Commission's failure to take account of the fact that some of Transco's customers are served by more than one pipeline can be illustrated by the following hypothetical. Company A and Company B have identical requirements by priority. If Company A obtained half of its gas from Transco during the 1972-1973 base period and half from Pipeline X, Transco would be assigned half of each of Company A's priorities. If Transco curtailed at 40% And Pipeline X curtailed at 20%, Company A's curtailment would be 30% Of its total supply. If Company B were supplied entirely by Transco, it would be curtailed 40%. If the priority 1 and 2 requirements of each were 65% Of its total requirements, Company A would be able to supply all of its priority 1 and 2 needs and have 5% Of its total supply available for lower priorities. Company B, on the other hand, would have to curtail its priority 2 market by 5% Of its total supply (which may be substantially more than 5% Of just its priority 2 market). The effect then is that Company B must curtail a portion of its priority 2 market in order that Company A can sell inexpensive pipeline gas to its priority 3 market. Clearly in such a situation the whole concept of protecting high priority end users is violated. 23 77 While any base-period curtailment plan will, by its very nature, produce results inconsistent with the end-use goals it is ostensibly designed to serve, this unhappy result is particularly true with the Opinion 778 plan on the Transco system. This is so because the customers having lower-than-system-average base period market profiles (e. g., the North Carolina companies) are precisely the customers solely dependent on Transco for their supply. Viewed from the opposite side, those customers having the highest profiles (and hence receiving more than their proportionate share from Transco) are the very customers who have alternate pipeline suppliers who are not curtailing as deeply as Transco. 78 Thus, an analysis of Transco's tariff sheets 24 filed 29 October 1976 pursuant to Opinion No. 778, reveals that, as compared with a straight pro rata plan, the Commission's plan will, during its first year of operation, take some 50 Bcf, mainly from North Carolina customers (30 Bcf) and Con Edison (10 Bcf), so that five customers may receive more than their proportionate share (Brooklyn Union, 19 Bcf; Public Service Electric & Gas, 10 Bcf; Long Island Lighting, 6.7 Bcf; Philadelphia Gas, 5.7 Bcf; and Washington Gas, 4.3 Bcf). But each of these five favored customers has two or three pipeline suppliers, and the Commission made no finding that, without the shift effected in the name of end use by the 778 plan, any of the five favored customers would have insufficient pipeline gas to serve high-priority uses which could be served by the disfavored customers absent the transfer. 79 When these facts were called to the Commission's attention 25 it simply shrugged the matter off as a complex problem requiring detailed impact analysis and suggested that it might, in the future, issue a notice of proposed statement of policy. 26 80 The Commission's failure to determine the impact of its order is not, as the Commission's actions seem to indicate, a matter that is optional, at the Commission's discretion. From the very beginning of the Natural Gas Act, the courts have held that it is Not the theory of a rate order But its impact that determines its legality. 27 Here, the Commission, entranced by the End-use theory of its order, has not come to terms with the Anti-end-use impact of its method of implementation. 28 81 At oral argument counsel for the Commission flatly acknowledged that because of its use of stale base-period data and its failure to take alternative pipeline suppliers into account, the Commission simply did not know what kind of impact its plan would actually have on distributors and ultimate consumers. However, the only justification offered by the Commission for allocation of natural gas by Transco on a basis other than a pro rata curtailment is that some portion of the pipeline's supply is purportedly needed to serve a higher priority of customers. If gas is not actually required to serve these high priority customers, then the whole basis for curtailment evanesces. What the Commission has done is simply to Adopt a discriminatory curtailment plan and attempt to justify the plan on an end-use theory, when it Admittedly has no knowledge of the plan's impact on actual end use. The discrimination among customers that admittedly results from the Opinion 778 plan becomes undue, within the statutory meaning, precisely because the Commission has not justified the discrimination as necessary to assure parity of treatment for equivalent end uses. 82 We remand the matter to the Commission. The Commission should, first, Determine, and, second, Consider the impact of its opinion on ultimate users in the implementation of a curtailment plan for the Transco system.