Opinion ID: 726048
Heading Depth: 3
Heading Rank: 1

Heading: The Pipelines' Refund Obligations

Text: 24 Our cases establish that a pipeline may recover from a customer costs that the pipeline incurred in the past in order to provide service in the past only if the customer (1) had sufficient notice that it was liable for those costs, or (2) is given notice that future purchases will carry a surcharge. See Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 579-80 (D.C.Cir.1990) (filed rate doctrine violated by direct billing costs incurred to provide service prior to notice that customer would be directly liable); Public Utilities Comm'n of California [CPUC] v. FERC, 988 F.2d 154 (D.C.Cir.1993) (doctrine not violated by recovery of past costs through volumetric surcharge imposed upon future throughput); Western Resources, Inc. v. FERC, 72 F.3d 147, 152 (D.C.Cir.1995) (doctrine not violated by billing based upon current contract demand to recover take-or-pay settlement costs pipeline incurred in past in order to provide service in future; such costs may be treated as current). Of course, even costs that a pipeline has incurred in order to provide current or future service cannot be retroactively billed to customers based upon their past purchasing decisions. Associated Gas Distributors v. FERC, 893 F.2d 349, 354-56 (D.C.Cir.1989). 25 The Pipeline Petitioners claim that if the Commission had disapproved the direct-billing proposals that they submitted in 1985, then the Pipelines could have recovered their Order No. 94 costs from the Customer Petitioners through an alternative that would have provided more certain recovery than the PGA. Specifically, they say that they could have allocated the pre-1985 production-related costs to the Customer Petitioners based upon the customers' then-existing contractual entitlements to purchase gas during the next 12 months, amortizing each customer's share over that period. See, e.g., Panhandle, 69 FERC p 61,065 at 61,279. Indeed, in 1991 the Pipelines asked the Commission to authorize this billing method retroactively by excusing the Pipelines from refunding what they could have recovered had they implemented that method in 1985. See, e.g., Panhandle, 62 FERC p 61,130 at 61,833-34. The Commission declined, initially upon equitable grounds but ultimately upon the ground that the Pipeline Petitioners' 1991 proposal was based upon a cost-recovery method that would have violated the filed-rate doctrine in 1985. 26 The Pipelines challenge that conclusion, and our analysis begins there. After determining whether the Pipelines' recovery of Order No. 94 costs through a demand-based surcharge would have violated the filed rate doctrine, we turn to the other factors that, according to the Pipelines, the Commission failed properly to consider in devising an equitable remedy in this case. 27 (a) The Pipelines' Ability to Recover Order No. 94 Costs through a Demand-Based Surcharge in 1985 28 In its initial ruling on the subject, the Commission characterized the Pipelines' proposals as calling for retroactive increases in their rates for 1985 sales service; the Commission's basis for rejecting these proposals, however, was not the filed rate doctrine. Instead, claiming equitable authority to remedy the consequences of its own legal error by approving retroactive rate changes, the Commission found it more appropriate to order refunds of the erroneously collected [320 U.S.App.D.C. 381] sums. See, e.g. Panhandle, 63 FERC p 61,130 at 61,835. 29 At the heart of the Commission's reasoning were two insights: first, as the proponent of the action held to be erroneous on appellate review, [the Pipelines have] less justification to seek the benefit of the Commission's exercise of [its] equitable remedial authority [ ] than the customers who were required to pay the illegal charge; and second, the Pipelines had undertaken direct-billing with the knowledge that [it] was subject to judicial review. Id. Indeed, the Commission observed that equitable remedies are generally granted in order to make whole the prevailing, not the losing, party in a legal dispute. Id. Finally, the Commission found that the pipelines had failed to establish any significant relationship between the service received by the Customers in 1985 and the Pipelines' incurrence of Order No. 94 costs. Id. 30 On rehearing, however, the Commission shifted the basis for its rejection of the Pipelines' proposal from equity to law: the FERC concluded that the filed rate doctrine would have precluded the Pipeline Petitioners' attempt to recover pre-1985 production-related costs based upon their customers' contract demand in 1985. See, e.g., Panhandle, 64 FERC p 61,218 at 62,634 (1993); reh'g denied 69 FERC p 61,065 (1994). The Commission concluded that, although not a direct bill, the Pipeline Petitioners' proposed demand surcharge would have violated the filed rate doctrine because it recovered costs incurred in order to provide sales service rendered before the Customer Petitioners had notice that the Pipelines could pass along the costs to them in any way other than through the PGA. See, e.g., 69 FERC p 61,065 at 61,279. The Commission therefore found the Pipeline Petitioners' 1991 proposal indistinguishable from the direct bill that this court had rejected in Transwestern, 897 F.2d at 579-80. Id. at 61,277-78. 31 The Pipeline Petitioners argue that the Commission's conclusion is inconsistent with its own orders and a decision of this court permitting pipelines to recover take-or-pay settlement costs through a contract demand surcharge. See, e.g., Western Resources, 72 F.3d at 152. The Commission points out, however, that the take-or-pay settlement costs at issue in those cases, although incurred prior to giving notice of the contract demand surcharge, related to sales service to be performed thereafter and for that reason could be treated as a current cost as of the time of notice. Id. 32 The Commission, of course, declined to treat the production-related costs at issue here as current. Here's why: 33 [T]he Order No. 94 costs have none of the attributes of the take-or-pay settlement costs that have permitted the Commission to treat take-or-pay costs as current costs. The Order No. 94 costs represent additional charges by producers to [the Pipeline Petitioners] for gas that they actually purchased and resold to their sales customers during the 1980-1985 period. Unlike the take-or-pay settlement costs, [the Pipeline Petitioners] did not, through their incurrence of the Order Nos. 94 and 473 costs obtain any future benefits such as the termination or reformation of its gas purchase contracts. Also, the Order Nos. 94 and 473 costs were incurred based solely on [the Pipeline Petitioners'] purchases from the producers during the 1980-1985 period. Unlike the situation with respect to take-or-pay, they obtained no future make-up rights to take gas in the future through their incurrence of the Order Nos. 94 and 473 costs. The Order Nos. 94 and 473 costs thus bear no relationship to [the Pipeline Petitioners'] performance of post-1984 sales service. [I]t is this fact that would have rendered any direct bill or demand surcharge to the sales customers, even if proposed in 1985, a surcharge for the 1980-1985 service. 34 Panhandle, 69 FERC p 61,065 at 61,279-80; see also, e.g., Texas Gas, 69 FERC p 61,068 at 61,296-97. 35 In response, the Pipelines assert that Order No. 94 costs relate to the future [ ] in precisely the same way as take-or-pay costs. The assertion is supported, however, only by an inapposite finding made by the Commission in National Fuel Gas Supply Corp., 44 FERC p 61,293 at 62,059 (1988), and the Pipelines' own observation that the point of [320 U.S.App.D.C. 382] permitting natural gas producers to recover Order No. 94 costs was to spur increases in natural gas production. So it was, but that gets the Pipelines nowhere. The prospect of recovering production costs incurred from 1980 to 1983 no doubt did spur production during that time, but not thereafter. The Pipelines have identified no basis upon which the Commission could have treated Order No. 94 costs incurred between 1980 and 1983 as current in 1985. 36 The Pipeline Petitioners also emphasize the distinction between a direct bill based upon past purchases and a surcharge based upon existing contract demand. Panhandle, 69 FERC p 61,065 at 61,279. Although the Commission may establish, and [ ] alter prospectively, fixed charges such as demand charges, Transwestern, 897 F.2d at 579, the Pipeline Petitioners offer no persuasive reason why the Commission could have treated Order Nos. 94 and 473 costs as fixed; they were in fact, as the Commission pointed out, solely ... costs of performing sales service during the period 1980-1985. Panhandle, 69 FERC p 61,065 at 61,279. As they were not fixed costs, the Pipeline Petitioners (in 1985) could have recovered them only through the PGA, of which the Customers already had notice, or through some other allocation method based upon the Customers' future purchasing decisions, see CPUC, 988 F.2d at 160 (the relevant inquiry [is] to 'identify the purchase decisions to which the costs are attached' ), quoting Associated Gas, 893 F.2d at 353, even if the Customers had no practical alternatives to purchasing gas from these pipelines, see Transwestern, 897 F.2d at 579. 37 In their reply brief the Pipeline Petitioners point, for the first time, to the Commission's decision in Transwestern Pipeline Co., 67 FERC p 61,237, reh'g denied 73 FERC p 61,091 (1995), which they say is inconsistent with the agency's reasoning in this case. As the Commission has not had a proper opportunity to respond to the argument, however, we shall not take it up here. See Forman v. Korean Air Lines Co., Ltd., 84 F.3d 446, 448 (D.C.Cir.1996) (Ordinarily, we will not entertain arguments or claims raised for the first time in a reply brief). 38 Having failed to establish that they had a means other than the PGA mechanism for recovering the production-related costs that they incurred prior to 1985, the Pipelines cannot demonstrate that they would have come out better, but for the Commission's error in 1985, than they do in the orders under review. They do not dispute the Commission's findings that market conditions might well have prevented full recovery of the costs through the PGA and that it is possible that the settlements [with other customers] that the Commission has already approved have enabled [the Pipelines] to recover as much, or more, of these costs than [they] could have recovered in the absence of the Commission's error. Panhandle, 64 FERC p 61,218 at 62,636-37. 39 (b) Equitable Factors Regarding the Risk of Uncertainty: The Pipelines' Argument 40 The Pipeline Petitioners' other equitable arguments do not establish any compelling reason why the Commission must allocate more of the burden of uncertainty to the Customers. That the Commission's policy in 1985 induced the Pipeline Petitioners to pursue the unlawful direct-billing scheme does not implicate the Customers. Nor is the Pipeline Petitioners' entitlement under § 601(c)(2) of the NGPA to passproduction-related costs through to their customers a guarantee of full cost-recovery. That provision instructs the Commission not to deny cost-recovery to interstate pipelines, but it neither requires nor permits the FERC to approve a cost-recovery method that the Congress elsewhere prohibited. The only method of cost-recovery that would have passed muster under the filed rate doctrine was the PGA mechanism, and the Commission's undisputed finding is that, had the Pipeline Petitioners used the PGA, the market might have left them no better off than they are now. 41 Two other claims made by the Pipeline Petitioners are simply false. First, the Pipelines claim they were merely accounting conduits that did not benefit from or retain for their own use the funds collected [from the Customers] to cover Order No. 94 costs. [320 U.S.App.D.C. 383] The Commission endorsed this characterization of the Pipelines' role, see, e.g., Panhandle, 69 FERC p 61,065 at 61,283, but it would be accurate only if the Pipelines' obligation to pay Order No. 94 costs to the producers from which they purchased natural gas were contingent upon their recovering sufficient funds from the Customers. As the Pipeline Petitioners' current predicament shows, that is not the case. 42 Second, the Pipeline Petitioners say that the Customers caused [them] to incur the Order No. 94 costs. Although the Customers received the gas and in that sense benefitted from the production-related costs at issue, the Pipeline Petitioners do not allege that the Customers in any way required the Pipeline Petitioners to purchase gas that was subject to Order No. 94 deferred charges rather than find other, cheaper sources. 43 Moreover, although the Customers did benefit from their use of the gas, it is far from clear that, as the Pipelines suggest, the Commission's orders leave the Customers any better off than they would have been had the Commission not erred in 1985. The Customers may have initially underpaid by more than $40 million, but the Commission's decision to deny them interest on the sums unlawfully collected from them effects a transfer from the Customers to the Pipeline Petitioners of more than $38 million. As we have already noted, the result is roughly the same as if the Commission had permitted the Pipelines to bill the Customers directly for half of the $40 million, and the Pipelines have not established that they could have recovered even that, let alone more, in the market and legal circumstances of the time. The Pipeline Petitioners are in no position to argue that the Commission has turned a deaf ear to equity on this point. See, e.g., Panhandle, 69 FERC p 61,065 at 61,282 (no equitable reason why Columbia should receive the windfall of escaping all liability simply because of the Commission's error).