Opinion ID: 527537
Heading Depth: 2
Heading Rank: 1

Heading: The Sole Supplier Issue

Text: 35 We address first FERC's elimination of the condition that made Panhandle's G schedule available only to customers as to which Panhandle was the sole supplier. The condition at issue here requires the customer to purchase only from Panhandle and permits the customer to purchase gas in excess of its contract demand volume from another source only if Panhandle refuses to increase the customer's contract demand. Panhandle has no express contractual obligation to provide the increased volume. The sole supplier label distinguishes the provision from full requirements provisions under which a pipeline undertakes to provide all of the customer's requirements. See Opinion No. 265, 38 F.E.R.C. at 61,471. Panhandle argues that the condition is not in fact anticompetitive; that FERC erred in permitting Panhandle's partial requirements LS schedule customers to switch to its G schedule; and that FERC failed to consider the consequences of the change it imposed. We must remand this issue because the Commission's opinion does not establish adequately the justness and reasonableness of its result. 36 Panhandle argues that FERC erroneously determined that the sole supplier limitation on the availability of the G schedule is anticompetitive, but we find no error in this respect. FERC based its decision in part on the inconsistency of the sole supplier provision with FERC's policy in recent years of encouraging price competition within the natural gas industry, as we noted in section I.A. of this opinion. That policy has been shaped and evidenced not only by Congress' deregulation of producer sales under the Natural Gas Policy Act of 1978, but also by FERC's Order No. 380 eliminating variable costs from minimum commodity bills, by its Order No. 380-C eliminating minimum physical take provisions, by its Order No. 436 implementing non-discriminatory open-access transportation, and by other factors tending to permit pipeline customers to make gas-purchase decisions primarily on the basis of commodity price. Opinion No. 265, 38 F.E.R.C. at 61,470 (citing NGPA, 15 U.S.C. Secs. 3301-3432; Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Commodity Bill Provisions, 27 F.E.R.C. p 61,318 (Order No. 380), modified, 29 F.E.R.C. p 61,077 (Order No. 380-C), reh'g denied, 29 F.E.R.C. p 61,332 (1984) (Order No. 380-D), aff'd in pertinent part sub nom. Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C.Cir.1985); Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 50 Fed.Reg. 42,408 (1985) (Order No. 436), vacated sub nom. Associated Gas Distribs. v. FERC, 824 F.2d 981 (D.C.Cir.1987), cert. denied, --- U.S. ---- 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988), modified on remand, 52 Fed.Reg. 30,33 4 (1987) (Order No. 500), appeal pending sub nom. American Gas Ass'n v. FERC, No. 87-1588 (D.C.Cir. filed Oct. 19, 1987)). 37 FERC found that Panhandle's sole supplier provision inhibited CILCO, the complaining customer, from purchasing lower-priced gas from a competing pipeline because to do so would disqualify CILCO from continued use of Panhandle's G schedule. Without the G schedule's summer step-down in contract demand levels, CILCO would have to contract for demand upon Panhandle (if at all) at a constant monthly contract demand level under Panhandle's partial requirements LS schedule. In reliance on the G schedule's step-down, CILCO had not developed sufficient storage capacity to coordinate its seasonal variations in need with the program of level monthly deliveries necessary to take advantage of the LS schedule. The prospect of such level contract demand charges exerted, and the actuality of such charges would continue to exert, an inhibiting influence on CILCO's consideration of otherwise price-competitive gas sources. Such inhibitions plainly are evils under current FERC policy, and FERC has adequately identified that policy and demonstrated how the sole supplier provision tends to thwart that policy. Cf. Tennessee Gas Pipeline Co. v. FERC, 860 F.2d 446, 458 (D.C.Cir.1988) (Commission failed to demonstrate that alternative schedule was effectively unavailable). 38 Panhandle's protests do not call into question the fundamental soundness of this aspect of FERC's decision. Panhandle is correct that Order No. 436-A contemplated that a former full requirements customer might become a partial requirements customer by using Order No. 436 transportation and declined to prevent that result by rule. Order No. 436-A, 50 Fed.Reg. 52,217, 52,240, reprinted in FERC Stats. & Regs., [1982-85 Transfer Binder] Regs.Preambles p 30,675, at 31,669. FERC's action there, however, does not endorse the validity of sole supplier clauses and does not insulate particular sole supplier clauses from review. See Order No. 436, 50 Fed.Reg. 42,408, 42,445, reprinted in FERC Stats. & Regs., [1982-85 Transfer Binder] Regs.Preambles p 30,665, at 31,530. Nor is Panhandle correct that FERC's decisions in Consolidated Gas Transmission Corp., 38 F.E.R.C. p 61,150, modified, 41 F.E.R.C. p 61,130 (1987), and Transcontinental Gas Pipe Line Corp., 38 F.E.R.C. p 61,165 (1987), are inconsistent with the decision under review. It is true that FERC permitted those pipelines, over the objections of affected customers, to require their full requirements customers seeking open-access transportation to switch from full requirements schedules to less advantageous partial requirements rate schedules. The schedules at issue in Transcontinental and Consolidated Gas, however, were one-part volumetric rates that exposed the pipelines to the risk of fixed cost under-recovery if the full requirements customers swung off system. Consolidated Gas, 38 F.E.R.C. at 61,404-05; Transcontinental, 38 F.E.R.C. at 61,489-90. Panhandle's contract demand charge, on the other hand, assures substantial recovery of its fixed costs even when a customer fails to purchase the reserved volume. See Tennessee Gas, 860 F.2d at 459-60. The distinction is not an arbitrary one, and passes our review for purposes of determining that a restraint exists. 39 The existence of a restraint, however, does not settle the matter. See Transwestern Pipeline Co. v. FERC, 820 F.2d 733, 740 (5th Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 696, 98 L.Ed.2d 648 (1988). FERC has disclaimed announcing a per se rule against sole supplier clauses. Opinion No. 265, 38 F.E.R.C. at 61,471. See also Tennessee Gas, 860 F.2d at 460 (Panhandle does not support the broad holding that the provision is unjust and unreasonable per se ....); Consolidated Gas, 38 F.E.R.C. at 61,404-05 (sustaining use of sole supplier clause where pipeline met customers' full requirements without contract demand limitation and set rates accordingly); Transcontinental, 38 F.E.R.C. at 61,489-90 (sustaining use of sole supplier clause on schedule with favorable one-part volumetric rate equal to contract demand rate at 100% load factor). The Commission must establish, then, that in this case the provision constitutes an unreasonable restraint. As FERC previously has acknowledged, such rule-of-reason analysis must rest on a careful balancing of the competitive harm the term causes against the term's objectives in light of the alternatives available. Kentucky Utilities Co., 23 F.E.R.C. p 61,317, at 61,675 (1983) (footnote omitted), remanded on other grounds, 766 F.2d 239 (6th Cir.1985). The decisions before us for review, however, contain no adequate rule-of-reason analysis. Because this issue arose on CILCO's complaint, it is one on which FERC bears the ultimate burden of demonstrating the unjustness and unreasonableness of the provision. 15 U.S.C. Sec. 717d; see Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 183-84 (D.C.Cir.1986); see also Tennessee Gas Pipeline Co. v. FERC, 871 F.2d 1099, 1104 (D.C.Cir.1989) (FERC established prima facie case that minimum bill was anti-competitive; therefore, production burden shifted to pipeline to justify bill; but ultimate burden of proving existing bill (which pipeline itself did not propose to change) unlawful remained with Commission). Accordingly, the issue must be remanded for reconsideration by FERC. 40 In particular, FERC has failed to explain why the unique benefits offered G schedule customers do not render reasonable the imposition of the sole supplier clause; nor does FERC adequately explain the justness and reasonableness of the tariff it has dictated. The Commission bears the burden of demonstrating that its remedy is just and reasonable, see Tennessee Gas, 860 F.2d at 457, and it was incumbent on the Commission to demonstrate affirmatively that it is just and reasonable to release all of Panhandle's customers from the G schedule's sole supplier condition while permitting them to receive the undoubted benefits of its customer-designated contract demand step-down and contract-demand billing ratchet. 41 In this connection, we note that the Commission contends that there is no relation between the sole supplier limitation and the G schedule's benefits because Panhandle did not seek the limitation in exchange for the benefits when the basic structure presently under review was established. See Opinion No. 265, 38 F.E.R.C. at 61,469. It is true that Panhandle sought the summer step-down so it could meet a particular customer's need for summer gas. It does not follow, however, that the sole supplier limitation and the summer step-down are unrelated. Panhandle sought a summer step-down fixed at 30% and apparently applicable to all customers. Opinion No. 214, 10 F.P.C. 185, 193 (1951). The Federal Power Commission, FERC's statutory predecessor, instead imposed the instant customer-designated step-down program--and expressly limited its availability to customers on the general service schedule subject to the sole supplier condition. Id. at 197. (At the same time, in order to permit orderly planning, id. at 200, on a system that had experienced problems of excessive demand upon its capacity, the FPC approved the reasonable peak volumetric limitations, id., now cited by FERC to distinguish the instant case from the full requirements schedules in Consolidated Gas and Transcontinental. See Opinion No. 265, 38 F.E.R.C. at 61,471.) The FPC's opinion is not express, to say the least, but there is a discernible linkage between the sole supplier clause and the Commission-created customer-designated step-down mechanism. 42 In sum, because the sole supplier clause is linked to provisions favorable to customers, as were the full requirements schedules in Consolidated Gas and Transcontinental, the clause may be reasonable despite the restraint it effects. Even if Panhandle did not originally offer the step-down provisions in exchange for the sole supplier obligation, as FERC maintains, under present market conditions those provisions may now be of such benefit to G schedule customers that it is not unreasonable for Panhandle currently to tie them to the sole supplier clause. The present Commission should give additional consideration to this subject on remand.