Opinion ID: 721438
Heading Depth: 3
Heading Rank: 4

Heading: Pipelines' exemption from GSR costs

Text: 306 To this point, petitioners' objections to the distribution of GSR costs have involved the allocation of those costs among groups of pipeline transportation customers. As a separate matter, petitioners forcefully contend that the Commission erred in not requiring the pipelines themselves to absorb any GSR costs. They note the remarkable similarities between Order No. 636 GSR costs and Order No. 436 take-or-pay costs, and contend that the pipelines should absorb GSR costs just as they do take-or-pay costs. While we do not conclude that the Commission necessarily was required to assign the pipelines responsibility for some portion of their GSR costs, we do agree with petitioners that the Commission's stated reasons for exempting the pipelines do not rise to the level of reasoned decisionmaking. We therefore remand the issue to the Commission for further consideration. 307 Initially, we agree with petitioners that the Commission's stated rationale for allocating take-or-pay costs to pipelines substantially applies in the context of GSR costs as well. As we explained above, see supra Part V.A, take-or-pay and GSR costs both arise from the same provisions in producer-pipeline contracts and result from pipelines' former firm sales customers reducing their gas purchases. We therefore find it instructive that in the take-or-pay context, the Commission itself concluded that pipelines should bear some of the burden, reasoning that 308 allowing a pipeline to recover 100 percent of its settlement costs through a fixed charge would be inconsistent with the Commission's holding in Order No. 500 that all segments of the natural gas industry should share in the burden of resolving the take-or-pay problem, since no single segment of the industry was to blame for its take-or-pay problem. 309 Order No. 500-H, p 30,867, at 31,575. In Order No. 636 as well, the Commission acknowledged that GSR costs had arisen at least in part due to the conduct of the pipelines, characterizing bundled sales arrangements, which arose in substantial part from pipelines' market power, as an unreasonable and unlawful restraint of trade. Order No. 636, p 30,939, at 30,405. Moreover, according to the Commission, the pipelines benefit from Order No. 636, in that they will presumably receive more favorable prices or other valuable consideration resulting from contract reformation. Order No. 636-A, p 30,950, at 30,643; cf. id. at 30,642 ([Petitioners] generally allege that since Order No. 636 will benefit all segments of the gas industry, all segments should bear the costs. The Commission believes that the benefits of Order No. 636 indeed will be widespread.). 310 The Commission nevertheless puts forward a wide variety of arguments for exempting pipelines from paying GSR costs, which we will address on the merits seriatim. We begin, however, by noting that, as a general matter, the Commission's arguments seem directed toward proving the wrong point. FERC allocated Order No. 636 GSR costs to customers based on the principles of cost spreading and value of service discussed above, see supra Part V.E.3.a. When it exempted the pipelines from those costs, however, the Commission reverted to traditional concepts of cost causation, or to use its characterization, returned to first principles holding that a utility is entitled to the opportunity to recover all of its prudently incurred costs in providing public service. 98 It is important to emphasize that these are competing models for allocating the industry's costs of service. Cost causation correlates costs with those customers for whom a service [319 U.S.App.D.C. 126] is rendered or a cost is incurred. For example, as we noted above, see supra Part V.E.3.b.1, the Industrial End-Users argue that under a cost causation model, the only customers who should be required to pay GSR costs are those that reduced their pipeline gas purchases in response to Order No. 636. Cost spreading and value of service, in contrast, take a much wider view, assigning the costs of service to those classes of industry participants that either are at fault for the take-or-pay dilemma or benefit from its resolution. Applying these latter principles, we sustained the Commission's determination that GSR costs should be paid by all blanket-certificated transportation customers, even those that did not directly cause the pipelines to incur liabilities under their supply contracts. See supra Part V.E.3.b.1. 311 If the Commission intends to assign GSR costs according to these cost spreading and value of service principles, it must do so consistently or explain the rationale for proceeding in another manner. 99 We approved the invocation of those principles in K N Energy because FERC had concluded that the take-or-pay crisis could be resolved only by spreading costs throughout the entire industry, 968 F.2d at 1301 (emphasis added), and because we recognized that all segments of the industry ... will benefit, id. (emphasis added), from restructuring. Cf. Order No. 636-A, p 30,950, at 30,650 ([I]n the Commission's judgment, [Order No. 636] continues the general goal of spreading the costs of industry restructuring.). 100 The Commission therefore cannot, without explanation, burden blanket-certificated transportation customers on the ground that they will benefit from Order No. 636, and then ignore that same factor as it relates to the pipelines. For example, the fact that both pipelines and customers will benefit from expanded open-access transportation is one argument in favor of applying GSR costs to both. On the other hand, it is not particularly relevant that GSR costs will total only approximately $1.7 billion, while take-or-pay costs were $10 billion, for that proves nothing about the relative responsibility of various segments of the industry for those costs. On the same footing is the Commission's recognition that pipelines have already paid $3.6 billion in take-or-pay costs; petitioners are quite right when they note that consumers have in the end paid nearly twice that amount. The relevant question is instead whether the $3.6 billion dollar figure should be even larger--recognizing that the figure for consumers is sure to grow--because the pipelines are in part responsible for GSR costs and will benefit from Order No. 636. 312 This is not to say, however, that it is impossible, or even improbable, that the Commission on remand can establish a convincing rationale for exempting the pipelines. For example, arguably, the pipelines' contribution to the costs of theindustry's transition has already been so disproportionately large vis-a-vis consumers that they are entitled to be excused from further responsibility. It also may be that unbundling under Order No. 636 benefits consumers so much more than it does the pipelines that the pipelines should bear few or no GSR costs. Such issues, however, require a fuller airing in the administrative proceedings on remand than is evident from the record developed in the initial go-round. 313 Two final arguments raised by the Commission merit separate attention. First, it notes that unbundling under Order No. 436 was voluntary while under Order No. 636 it is mandatory. It is unclear in the Order No. 636 series, however, how the voluntariness of the reduction in pipeline gas purchases correlates with the pipelines' responsibility for the resulting costs. The fact that certain [319 U.S.App.D.C. 127] pipelines made an economic choice to convert to open-access transportation and thereby almost certainly incur take-or-pay costs under Order No. 436 does not make other pipelines less responsible for the same type of costs when the Commission ultimately decided that it had to force the final stages of industry restructuring. Moreover, we rejected that very distinction when we vacated Order No. 436: 314 FERC also alludes to the voluntary character of pipeline provision of Order No. 436 transportation. 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.... 315 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 ... 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. 316 AGD I, 824 F.2d at 1024. 317 The Commission also notes that under Order No. 500, but not Order No. 636, those pipelines that paid take-or-pay costs received a heightened presumption that those liabilities were prudently incurred. 101 As with voluntariness, however, the Order No. 636 series does not explain how the presumption of prudence correlates with FERC's cost-spreading and value-of-service rationales. The Orders' differing treatment of prudence stems from the fact that Order No. 500 and its successors allowed pipelines to recover some, but not all, of their take-or-pay liabilities through a fixed charge on transportation if and only if they absorbed some of those costs themselves. The presumption of prudence created an incentive for the pipelines to engage in cost absorption in that it reduced expenses they might later incur in litigating the appropriateness of their take-or-pay liabilities. Order No. 636 needs no such incentive because pipelines can directly bill transportation customers for 100% of GSR costs, an option that was never available under Order No. 500. And, of course, were the Commission on remand to assign some proportion of GSR costs to pipelines, it could apply the same presumption of prudence that it used in the take-or-pay context. 318 In sum, we cannot conclude from the record now before us that the Commission's decision to exempt pipelines completely from paying GSR costs was the product of reasoned decisionmaking. Order No. 636 is based on principles of cost spreading and value of service that are, in turn, premised on the notion that all aspects of the natural gas industry must contribute to the transition to an unbundled marketplace. In addressing pipelines' liability for GSR costs, however, the Commission at the very least undervalued those considerations. We leave it to the Commission on remand to consider whether the pipelines should nonetheless continue to be exempted from such costs in light of the factors we have identified.[319 U.S.App.D.C. 128] F. Conclusion 319 With respect to stranded costs, we hold that FERC's interpretation of the used and useful doctrine is supported by substantial evidence. We reject petitioners' argument that FERC inadequately addressed the LDC bypass issue, and we also reject petitioners' challenges to the volumetric surcharge for above-market Great Plains gas. 320 Turning to GSR costs, we first conclude that petitioners' challenges are ripe for review. Next, we hold that FERC did not err by failing to exercise its NGA § 5 authority so as to force gas producers to bear part of the transition costs. Furthermore, we sustain the Commission's application of GSR costs to the full range of blanket-certificated transportation customers. We remand the case to the Commission, however, for further consideration of the appropriate share of those costs to be paid by interruptible transportation customers and the gas pipelines.