Opinion ID: 492011
Heading Depth: 2
Heading Rank: 3

Heading: Adequacy of the Commission's Reasoning in Support of CD Reduction.

Text: 207 Several LDCs attack the Commission's authorization of CD reduction. They contend primarily that it failed to meet the substantial evidence requirements of Sec. 19(b) of the NGA and Sec. 506(a)(4) of the NGPA, which are understood by the parties to be equivalent, in the rulemaking context, to the arbitrary and capricious standard. See Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1156 (D.C.Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1969, 90 L.Ed.2d 653 (1986); Mid-Tex Elec. Coop., Inc. v. FERC, 773 F.2d 327, 338 (D.C.Cir.1985). This standard requires the agency to articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.'  Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 246, 9 L.Ed.2d 207 (1962)). 208 We agree with the challengers that the Commission has failed to develop an adequate rationale in support of CD reduction. Review of the Order on this point is considerably hampered by the Commission's tendency to wrap its justification for CD reduction together with the case for CD conversion. The two almost always appear together, like Rosenkranz and Guildenstern, making it hard to extract the portion of the argument that has any real connection with reduction. This is understandable in terms of the proposals' history. In the NOPR, the Commission offered CD reduction as the sole device by which customers could escape their long-term contracts with pipelines. When the Commission later recognized and embraced CD conversion, its analysis of CD reduction became largely obsolete. Yet it has continued in places to justify it as necessary to effect the goal of providing consumers access to competitively priced gas. E.g., J.A. 407-08. See also J.A. 1055-58. If CD conversion is available, however, this justification fails. Below we review various other purposes asserted by FERC, as well as its treatment of the cost-shifting consequences of CD reduction. 209 (a) FERC argues that [t]he transitional contract demand reduction and conversion options are essential if the goal of non-discriminatory access to transportation is to be achieved when pipelines operate under the new transportation rules. J.A. 407. In a later passage, rejecting a proposal that it afford only CD conversion, the Commission reasoned that a CD option limited in such a way would restrict customers' access to transportation services on the same pipeline and deny them the ability to shop around for unused transportation capacity booked on other pipelines. J.A. 448. 210 As justifications for CD reduction, these arguments seem peripheral to the problem the Commission set out to solve in this rulemaking: access to gas competitively priced at the wellhead. CD reduction would of course help each LDC secure access to all the different producing areas of the country, in addition to the ones from which its existing pipeline supplier(s) draw their gas. But the record contains no suggestion that competitive wellhead prices are subject to important regional variations. While easy LDC access to all producing regions would help correct or prevent regional price variations, the Commission makes no argument that any such variations pose so great a problem as to require such drastic action as 100% CD reduction. 211 Of course, competition among pipelines in transportation services may well be expected to engender lower prices (at any given level of service quality). If so, it would fulfill the general consumer-benefit purposes of the Order. But the Commission does not spell out any such arguments. Moreover, any analysis along these lines would trigger attempted rebuttals, essentially based on the view that in a monopolistic or oligopolistic industry unrestricted consumer choice may lead to duplication of capacity and higher costs for consumers. Without assessing the validity of those arguments or the Commission's authority to adopt rules moving the industry towards more competition in transportation, we simply cannot find any Commission effort to justify CD reduction in such terms. 212 (b) The Commission argues that the levels of sales service that customers have contracted for on a firm basis may no longer correspond to what they desire to purchase. J.A. 406 (footnote omitted). The Commission found that this imbalance between actual needs and contracted-for capacity has caused at least two problems. First, the discrepancy results in an undesirable inequity as on some systems, interruptible transportation is as a practical matter virtually the same quality of service as firm, though available at lower rates. Id. (emphasis in original). Second, the discrepancy also has the effect of unnecessarily denying firm service to some potential users, making the reduction option necessary to allow a freeing up of firm capacity. J.A. 411. See also J.A. 417. 213 While the argument seems highly relevant to CD reduction, it hardly supports the broad remedy adopted. Even in its terms, it refers to a limited portion of the industry. The finding's lack of general application is underscored by the Commission's observations that most firm sales customers need their full contract demand on peak days. J.A. 420. If so, then the obsolescence referred to is clearly far from universal. If such obsolete certificates exist only on some systems, it is unclear why the Commission believes that an industry-wide solution is needed, especially one that permits all LDCs--or rather, all LDCs in their relations with pipelines opting to offer service under Order No. 436--a right to reduce contract demand 100%. 214 The Commission argues that Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C.Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1969, 90 L.Ed.2d 653 (1986), allows it to make Sec. 5 determinations generically. J.A. 412. True but irrelevant. Neither Wisconsin Gas nor any other case of which we are aware supports an industry-wide solution for a problem that exists only in isolated pockets. In such a case, the disproportion of remedy to ailment would, at least at some point, become arbitrary and capricious. This is not to say, of course, that the Commission could not use generic rules to identify a limited class of LDCs to be entitled to reduce CD when special conditions are present. But here the Commission has said nothing to link the asserted obsolescence of CD levels to the broad class of purchasers made eligible. 215 (c) Responding to the complaints of some LDCs that the CD reduction option will force them to bear an additional share of pipelines' capital costs (i.e., the costs now borne by the customers that will exercise the option), the Commission asserts that customers are likely to seek little net CD reduction. J.A. 420. Accordingly there will be little net change, nationwide, in aggregate recovery of costs. Id. 216 The improbability of major aggregate cost-shifting, however, provides little answer to the concerns of captive customers of pipelines that are likely to lose out in the competitive race. While the Commission might justify the losses of such a captive by reference to potential aggregate gains, it has neither confronted the problem nor developed in any detail its reasons to expect the net gains. 217