Opinion ID: 492011
Heading Depth: 3
Heading Rank: 1

Heading: Lack of need for additional steps.

Text: 236 a. Likely effects of Order No. 436 on take-or-pay build-up. FERC accepted an industry estimate of about $7 billion in take-or-pay obligations, J.A. 301-02, though noting the much smaller sum included in pipeline rate bases, J.A. 831, 1069-70. But it made no detailed evaluation of what proportion of these payments--or ones to be made in the future--the pipelines could recoup by later takes of gas. It found that pipelines had been able to buy-out substantial portions of their liabilities for about 20cents on the dollar. J.A. 540. It concluded that these prices were reasonable and that buy-outs were sufficiently widespread to represent a reasonable solution to the problem. 237 FERC also offered several arguments challenging petitioners' death-spiral scenario for pipeline sales service. 238 (a) As to the pipelines' loss of a bargaining chip, FERC observes that the nondiscriminatory access and CD reduction/conversion conditions are not intended to affect such renegotiations or litigation. J.A. 1070. But FERC's intent is not at issue. What is in dispute is the likely consequence of its acts. On that, FERC offers nothing to undermine the challengers' inherently plausible suggestion that these conditions will have an adverse impact on the pipelines' take-or-pay problems. 239 FERC also alludes to the voluntary character of pipeline provision of Order No. 436 transportation. E.g., J.A. 1072. There are two flaws in this. First, refusal of the option may spell bankruptcy: inability to provide blanket-certificate transportation for fuel-switchable users may in current market circumstances cause critical load loss. Of course acceptance of the option may also be fatal. But when a condemned man is given the choice between the noose and the firing squad, we do not ordinarily say that he has voluntarily chosen to be hanged. 240 Second, the argument obscures distinctions between pipelines in the aggregate and alone. To be sure, Order No. 436 gives pipelines an option, blanket-certificate transportation, which as a result of this court's decision in Maryland People's Counsel v. FERC, 761 F.2d 780 (1985) (MPC II ), is not available outside of Order No. 436. But as soon as a single pipeline finds it attractive enough to accept, each competing pipeline will come under competitive pressure to match the first's flexibility. Thus even if only one pipeline actually preferred to use Order No. 436 (hanging rather than being shot), competition might force others--ultimately perhaps all the others--to switch their preference. Thus the Order effectively reduces pipeline ability to face down recalcitrant producers. 241 (b) FERC argues that the CD conversion/reduction provisions may not injure the pipelines at all. 242 [T]he Commission considers it more likely that [the LDCs] will either convert to firm transportation on the same pipeline, or else free up underutilized capacity under uneconomic CDs for use by other customers on the same pipeline. In either case, the pipeline may actually increase throughput and, therefore, gain the net benefits of spreading its fixed costs over greater units of gas service. 243 J.A. 1068-69. 244 But customers' conversion to transportation will clearly aggravate a pipeline's ability to resolve the problem of its overpriced gas inventory. Nor can the Order's CD reduction provision be painless: a pipeline would voluntarily agree to release an LDC whenever it had equally profitable business opportunities for the pipeline capacity thus made available; accordingly, the only cases where Order No. 436 causes CD reduction will be ones where the reduction does injure the pipeline. FERC's analysis provides no reason to suppose that those instances will be negligible. 245 (c) FERC contends that under competitive pressures a pipeline will seek to adjust its gas purchasing practices so as to lower its weighted average cost of gas to all customers. J.A. 1069 (emphasis in original). This reasoning assumes away the problem of the uneconomical contracts to which pipelines are presently bound. All FERC does here is to admit that Order No. 436 dramatically increases the consequences of not getting out from under an uneconomical contract. It seems to confuse the pipelines' incentives to renegotiate contracts with their ability to do so. 246 (d) FERC suggests that [a] pipeline may determine that certain of its existing business arrangements make participation in the new rules unwise or undesirable, and suggests possible alteration of the pipeline's leveraged capital structure and the extent of its non-pipeline business interests. J.A. 1067. To the extent that this implicitly recommends some sort of spin-off of assets or borrowing increase, preparatory to bankruptcy, it seems unrealistic in light of market conditions, the rules against transfers in fraud of creditors, and pierce-the-corporate-veil principles. 247 (e) FERC finds two affirmative advantages for pipelines in Order No. 436. First, the Order affords producers a procedure for expedited abandonment (i.e., extinction of the legal commitment of the gas to the seller named in the producer's certificate under the NGA) where a take-or-pay settlement has been reached or where a producer experiences substantially reduced takes without payment. 18 C.F.R. Secs. 2.76(e), 2.77. In the latter case, it argues, abandonment will enable the pipeline to invoke contract defenses against a producer that resells the gas, specifically mitigation of damages. J.A. 1071-72. It is unclear how useful this may be, for the pipelines' whole problem is the excess of the contract price over the current market price. That differential is the source of pipeline vulnerability, and expedited abandonment does little or nothing to cure it. 28 248 Second, the Commission suggests that Order No. 436 might aid the resolution of take-or-pay problems by not precluding 249 any gas shipper, whether end-user, LDC, or independent broker, from negotiating on its own behalf a condition in a self-help gas sales contract which would require the producer-seller to grant take-or-pay relief to the shipper's pipeline supplier before the shipper takes delivery of the gas. 250 J.A. 1073-74 (emphasis in original). Assuming FERC will stand by the underscored phrase, the scenario seems most unlikely. No reason appears why any of those persons would, in its bargaining with a supplier, sacrifice anything of value in order to secure a benefit for the pipeline. (Nor would the supplier agree to it without securing something in exchange.) 251 In sum, FERC's seeming blindness to the possible impact of Order No. 436 on take-or-pay liability, and its tendency to elevate into affirmative benefits what are at best palliatives, seem impossible to square with the requirement of reasoned decisionmaking. 252 b. Pipeline ability to shift costs downstream. The Commission suggests that pipeline complaints about Order No. 436 are undercut by its having reserved the ability to shift costs downstream to customers. 253 To the extent a pipeline in fact incurs additional take-or-pay liability due to transportation services under Order No. 436, nothing in Order No. 436 is intended to preclude the Commission from determining the appropriate allocation of revenue responsibility among the pipeline and its customers in an individual rate case filed to reflect the adjustments in sales and transportation service. 254 J.A. 1070-71. 255 While it is unclear what weight the Commission attaches to this possibility, it seems important to call to mind two legal limits on the Commission. On one hand, simply moving costs downstream to customers must at some point conflict with the Commission's duty to adequately attend [ ] to the agency's prime constituency--the consumers whom the [NGA] was designed 'to protect ... against exploitation at the hands of natural gas companies.'  MPC II, 761 F.2d at 781 (quoting FPC v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944)). On the other hand, the Commission's power to directly restrict pipelines from passing costs through is limited: it can limit passthrough of gas purchase costs made in compliance with the NGPA only if the payments arose out of fraud or abuse, NGPA Sec. 601(c)(2), 15 U.S.C. Sec. 3431(c)(2) (1982), and it can limit passthrough of other costs (including, under the Commission's view, take-or-pay settlement costs), only to the extent not prudently incurred, see 18 C.F.R. Sec. 2.76(d). 256 Despite these constraints on the Commission's power to limit passthrough by decree, t has considerable ability to protect consumers by bringing about market conditions that prevent a pipeline from passing costs forward. The NGPA's legal limits on restricting passthrough clearly do not bar rules tending to generate such market conditions. Cf. supra part IV.B. Indeed, that is the principle underlying Order No. 436. At least two other factors, however, restrict the Commission's room for maneuver here. (1) To the extent that the Commission allows gas costs in a pipeline's rate base for transportation purposes, a possibility that it seems to leave open, J.A. 423, the costs will flow through the customers despite open access. (2) To the extent that it allocates large take-or-pay liabilities exclusively to gas costs, it seems likely to eradicate the pipelines as merchants, for under such a rule all customers would convert their entire contract demand, except for a limited class of customers: those who find it unusually costly to arrange their own nonpipeline sources of supply or who are pressured by state regulatory commissions to adhere to reliance on pipeline supplies. 257 In sum, the Commission seems to exaggerate passthrough to customers as a solution to the problem of uneconomic contracts. If Order No. 436 works as intended, economic constraints will make passthrough impossible, except for customers--likely not accounting for a large proportion of the interstates' total gas sales--that are exceptionally sclerotic about purchasing gas from brokers or producers. 258