Opinion ID: 721438
Heading Depth: 3
Heading Rank: 1

Heading: Prohibition on unilateral customer release of transportation capacity

Text: 29 When the Commission concluded that the pipelines' bundled firm-sales service violated §§ 4(b) and 5(a) of the NGA, Order No. 636, p 30,939, at 30,405, the Commission found also that the continued enforcement of a pipeline sales customer's purchase obligations, agreed to before implementation of unbundling under this rule, is unjust and unreasonable, and unduly discriminatory. Id. at 30,453. Accordingly, all existing bundled firm-sales customers were given the option to reduce or terminate their contractual purchase obligations during the pipeline's restructuring proceedings. 18 C.F.R. § 284.14(d)(1). By contrast, those customers were not relieved of their contractual transportation obligations unless either an alternative, creditworthy shipper offered to assume the capacity at the same or a higher rate (up to the maximum approved rate), or the pipeline agreed to reduce or terminate the transportation obligation. Id. § 284.14(e)(2). If a customer wished to reduce or terminate its transportation obligation, and either a replacement shipper assumed the capacity or the pipeline agreed, then the pipeline was authorized to abandon the service under the prior contract. Id. § 284.14(e)(3). In effect, existing bundled firm-sales customers remained contractually bound to receive firm-transportation service on the pipeline. 30 On rehearing, Northern Indiana Public Service Company (NIPSCO) maintained that the Commission's actions entirely abrogated the existing pipeline-customer bundled firm-sales contracts, and that the Commission could not require the LDCs to enter into new transportation contracts. The Commission denied that it had abrogated the contracts: the pipelines remained contractually obligated to provide separate sales and transportation services. [T]he fact that LDCs have an opportunity to revise their sales entitlements under existing contracts with their pipeline suppliers does not mean they should also have an unqualified right to terminate their obligations for the costs of transportation capacity under those contracts. Order No. 636-A, p 30,950, at 30,638. The Commission also explained that if it released former bundled-sales customers from transportation obligations, these capacity costs could be shifted from the customer who has contracted for the capacity to the pipeline or other customers that have no need for the capacity. Id. at 30,637. 31 NIPSCO, joined by other LDC petitioners, 28 contends that, by holding pipeline [319 U.S.App.D.C. 68] customers to the transportation component of bundled firm-sales contracts, the Commission essentially imposed a new contract upon the customers, which is beyond the Commission's § 5 authority. Section 5(a) provides that, whenever the Commission has found that an existing contract is unjust, unreasonable, unduly discriminatory, or preferential, it shall determine the just and reasonable contract to be thereafter observed and in force, and shall fix the same by order. 15 U.S.C. § 717d(a). NIPSCO contests not the Commission's underlying finding that the bundled firm-sales contracts violated §§ 4(b) and 5(a), but only the remedy imposed under § 5. Our review is limited to whether the Commission's reading of § 5 to authorize it to hold LDCs to the remaining terms of a modified pipeline-customer contract is a reasonable construction of its statutory authority. See AGD I, 824 F.2d at 1001. 32 The bundled firm-sales contracts between pipelines and LDCs were subject to the Commission's § 5 authority. The regulatory structure of the Natural Gas Act is contract-based: it permits the relations between the parties to be established initially by contract, the protection of the public interest being afforded by supervision of the individual contracts. United Gas Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 339, 76 S.Ct. 373, 378, 100 L.Ed. 373 (1956). Under § 5, the Commission has plenary authority to limit or to proscribe contractual arrangements that contravene the relevant public interests. Permian Basin Area Rate Cases, 390 U.S. 747, 784, 88 S.Ct. 1344, 1369, 20 L.Ed.2d 312 (1968). For example, in Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C.Cir.1985), cert. denied, 476 U.S. 1114, 106 S.Ct. 1968, 1969, 90 L.Ed.2d 653 (1986), the court affirmed the Commission's decision in Order No. 380 that minimum bill provisions in existing contracts were unjust and unreasonable under § 5. 29 The court upheld the Commission's remedy, eliminating the minimum bill from the contracts, against the claim that such a remedy unlawfully alter[ed] the terms of existing contracts, on the ground that section 5 gives the Commission authority to alter terms of any existing contract found to be 'unjust' or 'unreasonable.'  Id. at 1153 n. 9. 33 NIPSCO also maintains that the Commission has construed its § 5 authority to extend beyond the limits in § 1(b) on the Commission's jurisdiction. Regardless of the Commission's authority to impose modified contractual obligations on pipelines, NIPSCO contends that the Commission lacks such authority over LDCs because LDCs are non-jurisdictional entities. Under § 1(b), the Commission's jurisdiction over the transportation of natural gas in interstate commerce does not apply to the local distribution of natural gas or to the facilities used for such distribution. 15 U.S.C. § 717(b). But the local-distribution exception applies only to the movement of gas within an LDC's local mains and not to the movement of gas in high-pressure interstate pipelines. FPC v. East Ohio Gas Co., 338 U.S. 464, 470-71, 70 S.Ct. 266, 269-70, 94 L.Ed. 268 (1950); see also Louisiana Power & Light, 406 U.S. at 636 & n. 13, 92 S.Ct. at 1836 & n. 13. Thus, for the same reasons that the Commission has jurisdiction over the re-sale of interstate capacity rights by LDCs to local end-users, see infra Part III.B.2, it also has jurisdiction over an LDC's ability to reduce or terminate its contractual interstate-transportation obligation. The pipeline-LDC contracts for transportation through interstate pipelines [319 U.S.App.D.C. 69] do not fall within the local-distribution exception to the Commission's jurisdiction. 34 The Commission cannot use the pipeline-LDC contracts as a jurisdictional hook for non-jurisdictional measures that do not relate to the Commission's § 5 remedial authority over the contracts. 30 As the court has held in a different context, the Commission may not assert its jurisdiction over a party merely because it is involved in a contractual relationship with a jurisdictional pipeline. ARCO Oil & Gas Co. v. FERC, 932 F.2d 1501, 1503 (D.C.Cir.1991). NIPSCO maintains that the Commission has done just that by replacing the agreed-upon contractual terms with entirely new terms of the Commission's own devising, when it would otherwise be without jurisdiction to compel the LDC to receive service in the first instance. But we do not agree that the Commission has overstepped the bounds of its § 5 authority in the first place. First, an LDC may maintain its original bargain by choosing not to exercise its unilateral right to terminate the purchase obligation. The resulting combination of sales service and no-notice firm-transportation service replicates its prior contractual entitlement. Thus, it is somewhat difficult to see the purported compulsion against LDCs in the Commission's decision not to grant them the right to terminate their transportation obligations. Second, the Commission's remedy was appropriately confined to the underlying violation. Because the Commission found the sales component of the bundled contracts to be unjust and unreasonable, Order No. 636, p 30,939, at 30,453, it interfered with existing contracts only to the extent necessary to remedy the effects of pipelines' market power. The Commission has the authority under § 5 to adopt a remedy proportionate to the problem being addressed. AGD I, 824 F.2d at 1019. Finally, § 5 instructs that the Commission shall determine the just and reasonable ... contract to be thereafter observedand in force, and shall fix the same by order. 15 U.S.C. § 717d(a). The limits of the Commission's authority to modify pipeline-LDC contracts under § 5 lie in the requirement that, given the original contract and the Commission's findings of unlawfulness, the resulting contract be just and reasonable. NIPSCO does not contend that the result of unbundling the firm-sales contracts was unjust or unreasonable. We therefore uphold the Commission's § 5 authority to hold LDCs to the transportation component of the modified bundled firm-sales contracts. 35 NIPSCO contends in the alternative that, even if the Commission's action was within its § 5 authority, the Commission acted arbitrarily and capriciously. In NIPSCO's view, the limited nature of the remedy allows pipelines to continue to exercise market power over customers in the transportation contracts, in contravention of the overall goals of Order No. 636. We reject this challenge as well because the Commission has provided a reasonable basis for its decision not to allow customers unilaterally to reduce their contractual transportation obligations. Cf. ARCO, 932 F.2d at 1502. 36 The Commission found in Order No. 636 that the amount of capacity reserved for pipeline firm sales still far exceeds the pipelines' actual sales so that capacity is not available for firm transportation and, as a result, interruptible transportation maintains a significant share of peak period transportation. Order No. 636, p 30,939, at 30,406. In other words, because many firm-sales customers decided to purchase third-party gas and transport it using interruptible service, those customers ended up holding excess reserved capacity. NIPSCO asserts that the effect of the Commission's decision not to allow LDCs unilaterally to reduce their contractual transportation obligations is to perpetuate customers' excessive capacity holdings. NIPSCO is correct insofar as the effect of any contract is to lock in current conditions, and the existence of a long-term contract necessarily slows the transition of a market to a new equilibrium when some underlying condition changes. Moreover, the capacity-release mechanism is an imperfect solution for the LDCs because the existing pipeline customer is unlikely to receive full compensation for released capacity in an excess-capacity [319 U.S.App.D.C. 70] market situation. Yet the problem of capacity excess that the Commission identified was that customers held more capacity in bundled-sales contracts than they purchased gas from the pipeline, not that customers held more firm-transportation capacity than needed for their peak demand. Contrary to NIPSCO's contention, there is no contradiction between the general goal in Order No. 636 of encouraging more efficient use of reserved capacity and the challenged rule that customers may not unilaterally release contractual transportation obligations: the Commission never found that the natural gas industry after mandatory unbundling would be characterized by excess reserved capacity. 37 Moreover, the Commission provided in Order No. 636-A a coherent rationale for its decision. Because a pipeline's rate structure is predicated upon levels of reserved capacity, providing customers with the unilateral option to reduce those levels would either reduce the pipeline's cost recovery or force the pipeline to increase rates for the remaining customers. 31 Order No. 636-A, p 30,950, at 30,637. Because someone has to bear the costs of unfavorable contractual capacity obligations, the Commission reasoned that the customer who voluntarily assumed those obligations by entering into the contract should bear those costs rather than spreading them over all of the pipeline's customers. 38 The Commission decided to modify the set of contracts that forms the structure of the natural gas industry only as much as necessary to alleviate the anti-competitive sales component of the bundled contracts. The Commission is not required to exercise its § 5 authority beyond the limits of the problem it has identified, see AGD I, 824 F.2d at 1019, and its cost-shifting rationale was a well-reasoned justification for its decision not to go further. We therefore uphold this portion of the rules. 39