Opinion ID: 721438
Heading Depth: 4
Heading Rank: 1

Heading: Cost spreading and value of service

Text: 288 Order No. 500, the immediate successor to Order No. 436, authorized pipelines to recover take-or-pay costs from both their customers that were blanket certificated under the Commission's open-access regime and customers that were individually certificated under NGA § 7(c). The § 7(c) shippers objected that they were merely transportation customers of pipelines, and were therefore not in any way responsible for the fact that the pipelines, in preparing to accommodate their anticipated sales obligations, had incurred take-or-pay liabilities. According to the § 7(c) shippers, the Commission's allocation of take-or-pay costs therefore violated accepted principles of cost causation, under which [p]roperly designed rates should produce revenues from each class of customers which match, as closely as practicable, the costs to serve each class or individual customer, Alabama Electric Coop. v. FERC, 684 F.2d 20, 27 (D.C.Cir.1982) (citation and internal quotation marks omitted). 289 The Commission conceded that its take-or-pay allocation could not be sustained under a narrow view of cost causation. It argued, however, that circumstances surrounding the take-or-pay crisis and the transformation [319 U.S.App.D.C. 122] of the pipeline industry necessitate and justify the crafting of new ratemaking principles. K N Energy v. FERC, 968 F.2d 1295, 1301 (D.C.Cir.1992). Specifically, the Commission defended its policy on grounds of cost spreading and value of service: 290 Under this first notion, allocating take-or-pay costs to transportation customers who admittedly may not have directly caused them is acceptable because, in the Commission's judgment, the extraordinary nature of this problem requires the aid of the entire industry to solve it; there are no other alternatives that would allow a transition to a market-based pipeline industry to be effectuated. Closely related to this rationale is FERC's second: namely that all segments of the industry--including those who may not have caused take-or-pay problems--will nonetheless ultimately benefit from their resolution and the concomitant move toward an open access regime; consequently, all segments can rightly be assessed a portion of take-or-pay costs. 291 Id. 292 In K N Energy, we sustained the Commission's invocation of cost spreading and value of service, id. at 1302, though we made clear that our approval of those principles was limited, see id. (A more searching inquiry may well prove necessary ... if the Commission should attempt to adopt these ratemaking rationales outside the take-or-pay context.). We did not, however, approve of the Commission's conclusion that application of cost spreading and value of service justified billing take-or-pay costs to § 7(c) customers. While the Commission contended that § 7(c) customers benefitted from Order Nos. 436 and 500 through lower transportation rates, the data before the court suggested that those rates had in fact increased. Id. Moreover, the Commission's Orders allocated costs to pipelines' remaining sales customers inconsistently. Id. at 1303. We therefore remanded for further consideration of the manner in which take-or-pay liabilities should be applied to § 7(c) customers. 92 293 In this case, the Commission contends that its assignment of GSR costs to all blanket-certificated shippers was an appropriate application of cost spreading and value of service principles. 294