Opinion ID: 658297
Heading Depth: 2
Heading Rank: 2

Heading: Cost allocations

Text: 43 The Transportation and Restructuring Settlements purport to implement the principle that in setting transportation rates prices should be based upon costs. The petitioners contend that the settlements violate this principle by allocating certain sales costs to transportation customers and certain firm customer costs to interruptible customers. 44
45 The petitioners first argue that applying the same 100% load factor to interruptible and firm service is inconsistent with the Commission's Policy Statement on cost allocation. See Policy Statement Providing Guidance with Respect to the Designing of Rates, 47 FERC p 61,295, (May 30, 1989), ord. on reh'g and clarif., 48 FERC p 61,122 (July 12, 1989). In that Policy Statement the Commission indicates that the costs associated with a particular class of users should be allocated to those users so that rates serve efficiently to ration pipeline capacity. In particular, the FERC states there that a firm customer should usually pay a higher rate than an interruptible customer because it is more costly to provide guaranteed service on demand. See Clarifying Policy Statement, 48 FERC at 61,446. 46 The petitioners also argue that, in allocating a 100% load factor to interruptible customers, the Commission unreasonably ignored its own commitment to consider the quality of service in setting relative transportation rates. See generally, 47 FERC at 62,058. Transco's interruptible service is decidedly inferior to its firm service, they claim in their brief, because market capacity is severely constrained and no interruptible service at all [can] be scheduled for long periods. 47 The petitioners' position is by no means illogical, but it proceeds from an erroneous premise. Firm customers as a class are in fact charged a higher rate than interruptible customers under the pricing structure approved in the Transportation Settlement, reflecting the cost and quality differentials between the two classes of customers. The 100% load factor is only the lowest per unit rate that a firm customer can in principle pay, i.e., if it takes 100% of its demand entitlement. Because many firm customers do not take all of their entitlements, firm customers overall end up paying a greater load factor than interruptible customers, who never pay more than the 100% load factor. See 55 FERC at 62,355-56; 57 FERC at 62,121. See also Orange and Rockland Utilities, Inc. v. FERC, 905 F.2d 425, 427-28 (D.C.Cir.1990) (accepting as plausible FERC's argument that 100% load factor accounts for quality difference between firm and interruptible service because a firm customer would pay as little per unit only if it bought its full contract quantity) (emphasis in original). Therefore, we reject the petitioners' objection to the 100% load factor allocation scheme in the Transportation Settlement. 48 [304 U.S.App.D.C. 97] Additionally, the petitioners argue that the FERC's summary disposition of the 100% load factor issue in Transco's 1992 Rate Case is inconsistent with (1) the agency's assurance in its brief in this case that it would reexamine this issue in the pipeline's next rate case and (2) other pipeline restructuring orders, in which the Commission has held a separate hearing in order to develop a record on the proper load factor. The petitioners' objections, however, properly relate to the 1992 Rate Case, not to the orders under review. The Commission never represented in the orders under review that it would revisit, much less hold an evidentiary hearing on, the load factor issue. In any event, as we noted above, the FERC has since agreed to hold an evidentiary hearing on the proper load factor. Thus, the petitioners will have a forum for the presentation of evidence bearing upon the load factor issue, but not in this case. 49
50 The petitioners next contend that, by approving transportation rates that bundle gathering, storage, and Account No. 858 costs into generally applicable transportation rates, the FERC acted in complete disregard of its regulations, stated rate policies, and decisions in other cases, i.e. arbitrarily and capriciously or otherwise contrary to law. According to the petitioners, these cost allocations work classic cross-subsidies because they require some customers to pay the cost of services they do not use ..., in derogation of the Commission's general commitment to allocating costs to the users that cause the pipeline to incur them. 51 a. Gathering costs: The FERC refused to require that gathering costs be unbundled on the ground that unbundling would be unfair to producers located behind Transco's Tilden processing plant who would suffer a sudden 18.4 cent per Dt erosion in their netback value, whereas bundling gathering costs into transportation rates would have no noticeable effect upon any producer. 55 FERC at 62,356. The petitioners argue that the FERC's approach interferes with market signals without creating any systemwide benefit and is therefore impermissible. 52 It is the FERC's established policy to consider equitable factors in designing rates, and to allow for phasing in of changes where appropriate. In its Clarifying Policy Statement, the Commission stressed that it would make pragmatic adjustments in the event a particular method is theoretically consistent with the Commission's objectives but leads to undesirable or inequitable results. 48 FERC at 61,442; see also Policy Statement, 47 FERC at 62,054. It is hardly arbitrary or capricious so to temper the dictates of theory by reference to their consequences in practice. Cf. Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 109 (D.C.Cir.1984) (recognizing that the Commission has broad authority to fashion remedies so as to do equity consistent with the public interest). 53 Nor has the Commission made an open-ended commitment to preserve the few producers located behind the Tilden processing plant from the burdens that in principle should be theirs. On the contrary, the FERC acted on a strictly interim basis in the context of [an] overall settlement, in which regulation cannot always be as precise as theory; indeed, the Commission said that it expect[ed] to fine tune the rates in Transco's next rate case. 55 FERC at 62,357. (That was not an empty promise either; as recounted above, in the 1992 Rate Case the Commission held that gathering costs could not be included in transportation rates, invoking its general policy that a customer should pay only for the services and facilities that it uses.) 54 b. Storage costs: The petitioners likewise object to the FERC's approval of the settlement insofar as costs associated with the Hester storage field were included in generally applicable transportation rates, on the ground that shippers who stay in balance, have reliable suppliers, or have their own storage have no need for storage on Transco and no reason to pay for services they do not use. The petitioners' contention that they receive no benefit because they do not use Transco's storage is not necessarily sound, however. For as the venerable Milton said (in quite another context, to be sure), They [304 U.S.App.D.C. 98] also serve who only stand and wait. Cf. Clarifying Policy Statement, 48 FERC at 61,452 (the Commission's statement that 'a pipeline should only charge for gathering and storage services actually performed for a customer' should not be read to mean that rates cannot contain costs relating to a service which is not used but which benefits a customer). 55 The Commission noted in the 1991 Order that at least some [storage] costs will be incurred for a major long haul pipeline to provide Part 284 transportation service. 55 FERC at 62,356. More specific to this case, the Commission pointed out that all shippers benefit from Transco's agreement to use its storage facilities in order to handle daily imbalances, which allowed Transco to eliminate daily scheduling and balancing penalties. Id. at 62,357. 56 The FERC also reasoned that unbundling storage costs before experience was gained under the restructured system would be impractical because it would be difficult if not impossible to anticipate how much Transco would use its storage capacity for sales as opposed to transportation customers. Id. Noting that Transco's settlement is a substantial advance in the direction of unbundling storage costs, the FERC invited the petitioners to raise the issue [of further unbundling] in Transco's next rate case, by which time the parties and the Commission will have the benefit of actual experience under the new penalty provisions. Id. Such an approach represents a reasonable response to the difficulties presented by the move from bundled to unbundled service. Therefore, we hold that the FERC acted permissibly in refusing to require the unbundling of storage costs at the Hester facility. 57 c. Account No. 858 costs: The petitioners next object to Transco's bundling its Account No. 858 costs into its transportation rates. The costs in question are the demand charges that Transco pays to the upstream pipelines that agreed to let Transco assign its entitlements to its shippers. The petitioners argue that insofar as they do not use upstream transportation services, the bundling of these costs into transportation rates subsidizes Transco and its sales customers at the expense of its transportation customers. 58 The Commission noted that interruptible customers who actually use the upstream facilities will pay for Account No. 858 capacity through the IT Rate. It upheld the inclusion of such costs in firm transportation rates because firm transportation customers have chosen to obtain the benefits of being able to rely on Account No. 858 capacity on a firm basis. 57 FERC at 62,123. As it did with regard to storage costs, that is, the Commission determined that the right to use a facility inures to the benefit of those who may not in the event avail themselves of that right. Although the principle obviously must have its limits, both logical and temporal, we do not think the Commission acted arbitrarily in invoking it in the context of this interim decision. 59 As we have noted, the Commission promised to revisit these allocation issues in Transco's 1992 rate case, did so, and ultimately reversed itself. We are satisfied, however, that the FERC's refusal to unbundle gathering, storage, and Account No. 858 costs in its 1991 order was reasonable when made. 60
61 Finally, the petitioners object on cost-causation grounds to the 2.3 cent volumetric surcharge to be levied upon all sales and transportation services as part of the Restructuring Settlement. The Commission approved the surcharge in order to enable Transco to recover a portion of the above market costs it incurred in connection with the now abandoned Great Plains coal gasification project. The agency reasoned that, because the expected technological benefits would have redounded to all future gas users ... by increasing the supply of available gas, all of Transco's customers should share in the cost of this failed project. 55 FERC at 62,341. The petitioners challenge this decision as another departure from the principle that customers should pay rates based only upon the costs they cause the pipeline to incur. 62 In response, the FERC refers us to K N Energy, Inc. v. FERC, 968 F.2d 1295, 1300-1302 (D.C.Cir.1992), for the proposition that [304 U.S.App.D.C. 99] in certain unusual circumstances it may abandon the cost-causation principle and instead base rates upon cost-spreading and value-of-service rationales. In K N Energy the Commission approved a volumetric surcharge for certain transportation customers in order to help resolve the take-or-pay crisis in the pipeline industry. See id. at 1301. The Commission explained both that it was necessary, because of the magnitude of that crisis, to spread the cost of its resolution across the entire natural gas industry, and that it was proper that all segments of the industry, including those that did not cause the take-or-pay problem, share in the cost of its resolution, as all would benefit therefrom. This court accepted the FERC's general principle that cost-spreading and value-of-service considerations could justify a volumetric surcharge that could not be justified as a matter of cost causation. We remanded the case only because the FERC had not provided a sufficient explanation for its decision to rely upon those considerations in the circumstances of that case. 63 Upon the precedent of K N Energy, the Great Plains surcharge at issue in the present case is lawful. As the Commission noted, had the Great Plains plant succeeded in increasing the supply of natural gas, it would have contributed also to reducing the price of natural gas, to the benefit of all natural gas customers. (Indeed, buyers of competing fuels would have benefited, too.) Transco's transportation customers would have benefited because they are by definition purchasers of natural gas--whether from Transco or from another supplier. Accordingly, we uphold as reasonable the volumetric surcharge included in the Restructuring Settlement.