Opinion ID: 492011
Heading Depth: 1
Heading Rank: 3

Heading: rate conditions

Text: 142 With the stated intention of imposing on pipelines more of the risk and responsibility for their own business decisions, the Commission has established a system of flexible rates. See 18 C.F.R. Secs. 284.7, 284.8(d), 284.9(d). 10 Tariffs are to provide for ceilings and floors, with the pipeline free to charge anywhere within that band. Each maximum rate is to be based on what is typically known as fully allocated cost, i.e., a rate such that, if the pipeline carries projected volume at the specified unit price, it should exactly recover all costs allocable to the relevant service for the period. See 18 C.F.R. Sec. 284.7(c)(3). Minimum rates are to be based on average variable cost. See 18 C.F.R. Sec. 284.7(d)(4)(ii). The maximum rates are to vary depending on whether the service is in a peak or off-peak period, and on whether it is firm or interruptible service. A pipeline discounting any service from the maximum rate must, within 15 days of the close of the billing period, report the maximum rate for the transaction, the rate actually charged, the shipper's identity, and any corporate affiliation between pipeline and shipper. 18 C.F.R. Sec. 284.7(d)(5)(iv). 143 Pipelines may charge a reservation fee for firm service. Otherwise shippers could request whatever volume they liked, without cost and regardless of intent to use. As requests would vastly exceed capacity, the pipeline could not rationally plan capacity allocation. See J.A. 457-60. Apart from the reservation fee, pipelines are required to charge on a volumetric basis, i.e., a simple charge per unit actually transported, without a demand charge or minimum bill. 144
145 The Interstate Pipeline Group objects that the Commission did not make specific findings that any rates charged by individual pipelines were unlawful before imposing the new rate conditions. The Commission is not required to make individual findings, however, if it exercises its Sec. 5 authority by means of a generic rule. See, e.g., Wisconsin Gas Co. v. FERC, 770 F.2d 1144, 1165-68 (D.C.Cir.1985), cert. denied, --- U.S. ----, 106 S.Ct. 1969, 90 L.Ed.2d 653 (1986). The pipelines seek to distinguish Wisconsin Gas on the ground that it involved specific findings as to a single billing term, to wit, minimum bill provisions that included variable costs. (Minimum bills charge for specific portions of contract demand even as to gas that is not taken; the Commission believed that inclusion of variable costs in such bills imposed an unjustifiable restriction on customer choice of gas supply and improperly sheltered pipelines from competition.) The distinction is irrelevant. What justified the generic approach in Wisconsin Gas was the Commission's conclusion that any tariff violating the rule would have such adverse effects on the interstate gas market as to render it unjust and unreasonable within the meaning of Sec. 5. That is precisely what the Commission has concluded here. 146 The pipelines may be claiming that the Commission's failure to adduce evidence meeting the standards of adjudication breaches the substantial evidence requirement of Sec. 19 of the NGA, 15 U.S.C. Sec. 717r (1982). Again Wisconsin Gas is dispositive. There the court reaffirmed the court's conclusion in American Public Gas Ass'n v. FPC, 567 F.2d 1016 (D.C.Cir.1977), that Sec. 19's reference to substantial evidence, located as it is in the provision guiding judicial review, does not dictate the procedure to be employed in FERC's notice-and-comment rulemakings. Wisconsin Gas, 770 F.2d at 1167-68. 147 Finally, the pipelines' complaint may be that the Commission adopted its new rate criteria without factual submissions tracing a relationship between rate practices formerly permitted and the evils that it sought to correct. There may be circumstances in which such a claim would prevail. In Electricity Consumers Resource Council v. FERC, 747 F.2d 1511, 1514 (D.C.Cir.1984), for example, this court declared that mere reliance on an economic theory cannot substitute for substantial record evidence and the articulation of a rational basis for an agency's decision. In fact, however, the court in Electricity Consumers was persuaded that the Commission had inexplicably distorted the theory that it claimed to apply. Id. Here the pipelines point to no such inexplicable distortion. 148 Promulgation of generic rate criteria clearly involves the determination of policy goals or objectives, and the selection of means to achieve them. Courts reviewing an agency's selection of means are not entitled to insist on empirical data for every proposition on which the selection depends. Wisconsin Gas made that clear. For example, in the rulemaking proceeding parties had objected that curtailment of the minimum bill would result in the pipelines shifting costs to its most captive customers. The Commission responded in part with a prediction that the increased incentive to compete vigorously in the market would eventually lead to lower prices for all consumers. 770 F.2d at 1161. The court accepted this without record evidence, presumably because it viewed the prediction as at least likely enough to be within the Commission's authority. Clearly nothing in Electricity Consumer's reference to economic theory was intended to invalidate agency reliance on generic factual predictions merely because they are typically studied in the field called economics. Agencies do not need to conduct experiments in order to rely on the prediction that an unsupported stone will fall; nor need they do so for predictions that competition will normally lead to lower prices. 149 In support of this objection the pipelines do not identify any factual proposition, relied on by the Commission, that they regard as requiring additional support. Accordingly, the objection cannot succeed. 150
151 Several petitioners object that the Commission's allowing pipelines to discount from the maximum rates is in effect an approval of undue preference[s] and undue discrimination in violation of Secs. 4 and 5 of the NGA. But the mere fact of a rate disparity is not enough to constitute unlawful discrimination. Cities of Bethany v. FERC, 727 F.2d 1131, 1139 (D.C.Cir.), cert. denied, 469 U.S. 917, 105 S.Ct. 293, 83 L.Ed.2d 229 (1984). The reporting system will enable the Commission to monitor behavior and to act promptly when it or another party detects behavior arguably falling under the bans of Secs. 4 and 5. This provision for flexibility conforms to Congress's intention in the NGA to allow a vital role for private contracting between the parties. See United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 338-39, 76 S.Ct. 373, 377-78, 100 L.Ed. 373 (1956); see also SeaLand Service, Inc. v. ICC, 738 F.2d 1311, 1316-19 (D.C.Cir.1984) (rejecting proposition that contract rates, based on individual contract but available to similarly situated shippers of like commodities, are automatically violative of nondiscrimination principle). Accordingly, given the Commission's broad latitude to choose between rulemaking and adjudication, see SEC v. Chenery Corp., 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947), 11 we could find the provisions illegal only if they carried such a risk of allowing undue discrimination or preferences as to be arbitrary and capricious. We do not find the risk so high. 152 The Associated Gas Distributors call our attention to the problem of discounts in favor of a pipeline's gas trading affiliate. We recognize that such transactions may carry more than the usual risk of undue discrimination. Cf. NGPA Sec. 601(b)(1)(E), 15 U.S.C. Sec. 3431(b)(1)(E) (1982) (imposing a special limit on pipeline recovery of cost of gas purchased from affiliate). But we see no reason to think that such a discount should be per se unduly discriminatory. If a pipeline gives its gas trading affiliate discounts identical to those given to unaffiliated parties in identical circumstances, the discount would not be unlawful merely on account of the affiliation. Accordingly, the risk of such discounts proving invalid is insufficient to justify invalidation of the rule. 153
154 Other petitioners suggest that the Commission's rate regulations are invalid because they sanction undue discrimination between unbundled transportation and the transportation component of a bundled sales transaction. That the criteria governing permissible rates in the two categories are different, however, does not establish discrimination between them. Most notably, the petitioners point to no reason to suppose that, as a whole, unbundled transportation service will recover a lower proportion of its costs than will the transportation component of unbundled sales. Indeed, the rate provisions specify that the maximum rates for each subcategory of unbundled transportation are to be designed to recover solely those costs which are properly allocated to the service to which the rate applies. 18 C.F.R. Sec. 284.7(d)(4)(i). That the pipelines may offer discounts does not alter the case. They do so at their own risk, see especially id. at Sec. 284.7(a)(5)(iii) (disallowing any rate seeking to recover losses from a prior period); pipeline managements will presumably aim at a pricing strategy that will, in fact, fully recover costs allocable to unbundled transportation. We cannot evaluate the rule on the basis of an assumption that they will not succeed. (We address below a claim that the rate provisions disable pipelines from full recovery of unbundled transportation costs.) 155 The claim of discrimination in favor of unbundled transportation contains a more subtle argument (or at least the seeds of such an argument): even though such rates may recover exactly the cost of service (just as for the transportation component of sales service), perhaps the flexibility afforded pipelines will in effect give unbundled transportation an advantage over sales service. The possibility is hardly one that we may rule out a priori. But we think it a problem that the Commission should be free to solve if and when it develops. As the Commission points out, the historical problem has been that unbundled transportation rate provisions put it at a disadvantage as against sales service. J.A. 318. No one appears to dispute that finding. It seems wholly suitable for the Commission to experiment with one rate structure in this specialized area; if it proves a triumphant success, the Commission will doubtless have opportunities to extend it to sales. 156
157 Some parties accept the concept of price discounting but argue that the Commission should allow only uniform discounting (in effect requiring a pipeline to promulgate in advance the criteria under which it would provide discounts). The Commission, however, made the judgment that such a rule would unduly stifle discounting. J.A. 478-83. It saw substantial gains from such discounts: cheaper fuel supplies for the price-elastic customers receiving the discounts; reduced revenue short-falls for pipelines that would otherwise lose the business altogether; and protection for non-favored customers from rate increases that would ultimately occur if pipelines lost volume through inability to respond to competition. J.A. 483. 158 For much the same reasons that courts allow administrative agencies the leeway to choose between rulemaking and adjudication (variability of circumstances, difficulties of foresight), we think that the Commission was within its power to allow pipelines a parallel choice. But, just as courts insist on a degree of agency consistency, see, e.g., Local 32, American Federation of Gov't Employees v. FLRA, 774 F.2d 498, 502 (D.C.Cir.1985), we expect that the Commission will exact from the pipelines as much consistency of application as is necessary for both to be in conformity with Secs. 4 and 5. 159
160 The American Public Gas Association and others contend that the general consent to selective discounting violates this court's decision in Maryland People's Counsel v. FERC (MPC II), 761 F.2d 780 (D.C.Cir.1985). The attack is directed especially to Commission suggestions--in supporting statements, not the rule itself--that discounting intended to meet competition from alternative fuels or indeed from other pipelines is not per se unduly discriminatory. J.A. 476. 161 Petitioners misconceive the scope of MPC II. Pipelines were using their market power in the transportation market to discriminate (indirectly) in the sale of gas, a commodity that Congress had concluded was produced under roughly competitive conditions. In the sale of such a commodity there is no economic justification for charging different prices based on the purchasers' differing access to substitutes (i.e., their price elasticity of demand). Indeed, if a product is produced under competitive conditions, such price discrimination cannot occur unless a bottleneck with market power stands between it and the customers. By contrast, pipeline transportation service is marked by a degree of natural monopoly, J.A. 305-06, 352, 481 (i.e., longrun average costs decline in the relevant range of production). See 2 A. Kahn, The Economics of Regulation: Principles and Institutions 119-23 (1971). In such an industry, value-of-service ratemaking (i.e., rates varying on the basis of differing demand characteristics) has an established place, 12 though not an uncontested one. 13 The equitable argument in favor of such differentials is that they may benefit captive customers by making a contribution to fixed costs that otherwise would not be made at all. (The efficiency argument is that such differentials will raise total volume closer to the level it would attain if all sales were priced at marginal cost.) 162 These justifications were missing in MPC II. There the court found that the then-existing blanket certificate regulations allowed pipelines to deny captive consumers access to the spot market for gas, while providing it for the non-captives. 761 F.2d at 788. This allowed pipelines to preserve the revenues attributable to transportation of gas to fuel-switchable customers, while continuing to sell their inventory of overpriced gas to captive customers. The Commission advanced an argument that the pipelines' receipt of transportation revenues would redound to the benefit of captive customers--an argument that sounds like the one advanced above. The court said no. First, we said that the Commission had offered no reason to think that the captives could not enjoy the fuel switchables' contribution to fixed costs even if the Commission conditioned the program on equal access for captive consumers--precisely what the Commission has done here. Id. Second, we pointed out that the Commission had nowhere answered the petitioners' argument that the captives' loss through lack of access to the wellhead market would greatly exceed their gain through the fuel-switchables' contribution to fixed costs. Id. Here, of course, the Commission is providing access to the spot market. Thus the facts here obviate our two reasons for rejecting the Commission's argument on contributions to fixed costs. 163 To read MPC II as a rule that price differentials based on demand conditions are always unduly discriminatory would render the decision a defiant and unreasoned exception to the general pattern. The judicial acceptance of such price differentials is longstanding. For nearly 100 years, for example, the courts have interpreted the antidiscrimination provisions of the Interstate Commerce Act to allow the ICC to approve differentials justified exclusively by competition. See, e.g., Texas & Pacific Ry. v. ICC, 162 U.S. 197, 218-19, 16 S.Ct. 666, 674-75, 40 L.Ed. 940 (1896); Dresser Industries, Inc. v. ICC, 714 F.2d 588 (5th Cir.1983) (review under three different anti-discrimination provisions); National Gypsum Co. v. United States, 353 F.Supp. 941, 946-49 (W.D.N.Y.1973) (enumerating cases following this view). Indeed, the Supreme Court has even struck down an ICC finding of unlawful discrimination where it appeared to be based on an absolute rule that competitive conditions could never justify a rate differential. Eastern-Central Motor Carriers Ass'n v. United States, 321 U.S. 194, 64 S.Ct. 499, 88 L.Ed. 668 (1944). 164 We have answered the claims that the rate provisions of Order No. 436 put it in violation of our mandate in MPC II. This is not to say, of course, that the Commission is free to uphold every price distinction based on different demand elasticities. It has long been contended, for example, that rate differentials based exclusively on competition between transporters with similar cost functions may end up forcing captive customers to bear disproportionate shares of fixed costs without any offsetting gain in efficiency. See, e.g., 1 A. Kahn, The Economics of Regulation: Principles and Institutions 159-81, esp. 170 (1970). The contention is not self-evidently true: if the demand of buyers with access to competing carriers is at all price elastic, the price reductions they enjoy will raise their demand close to competitive levels. In any event, the Commission may properly defer its ultimate resolution of these issues to another day and another proceeding. Cf. American Commercial Lines, Inc. v. Louisville & Nashville R.R., 392 U.S. 571, 88 S.Ct. 2105, 20 L.Ed.2d 1289 (1968) (finding broad discretion in ICC to choose format in which to resolve issues of price discounting in competition between railroads and barge-truck combinations). 165
166 Petitioners ANR Pipeline Company and Colorado Interstate Gas Company fault the regulations for allowing the pipeline to discount below the ceilings but never to charge more. To the Commission's defense that the discounting mirrors the world of unregulated firms, they respond that in such a world the circumstances where market conditions force a firm to discount are likely to be matched by ones allowing the charge of a premium. (In equilibrium firms will earn a normal profit.) Here, they argue, the rules parallel only the downside of the unregulated market. As a result, they say, return will necessarily be less than in other industries with corresponding risks, in violation of FPC v. Hope Natural Gas Co., 320 U.S. 591, 603, 64 S.Ct. 281, 288, 88 L.Ed. 333 (1944). 167 We can imagine a rate methodology under which this contention would be sound. Suppose that a pipeline has a capacity for transporting 120,000 units a year, that each year's share of fixed costs amounts to $90,000, and that variable costs are $.10 per unit. In an initial rate case, the Commission projects volume at 100,000 units, and thus sets a maximum price of $1.00 per unit ($.90 as a share of fixed costs and $.10 for variable costs). 168 While those rates are in effect, suppose the firm in fact carries 100,000 units at $1.00, but, spotting market opportunities, carries another 10,000 units at $.20 per unit for customers who would switch to alternative fuels if the transportation charge rose above $.25 per unit. (If the pipeline knew that $.25 was the switchover point, it would charge that, but it may not know exactly.) 169 In the next rate case, suppose the Commission projects use at 110,000 units, and accordingly sets the maximum price at $.92 per unit ($.10 for variable costs and $.82 ($90,000/110,000) for fixed costs). Such a rate would be sufficient to recover costs only if the pipeline carried 110,000 at the maximum rate; but the evidence overwhelmingly suggests that it will not be able to do so--the extra 10,000 units of business were due to the discount. Unless some change in circumstance saves the pipeline, revenue will be $94,000 ($92,000 for 100,000 units transported at the maximum rate plus $2,000 for 10,000 units at $.20), against costs of $101,000 ($90,000 fixed and $11,000 variable). 170 We see no reason, however, to suppose that the Commission intends such calculations. Its only statement relating to projections, 18 C.F.R. Sec. 284.7(c)(3), indicates the contrary: 171 The pipeline's revenue requirement allocated to firm and interruptible services should be attained by providing the projected units of service in peak and off-peak periods at the maximum rate for each service. 172 In its commentary, the Commission pointed to this passage as proof of its agreement with MPC's suggestion that revenue projections in rate filings [should] assume that all sales and transportation volumes will be charged at the maximum rate. J.A. 484. Thus, it appears that rate in Sec. 284.7(c)(3) refers to the maximum unit price, not to projected throughput. This would appear to undermine any fear that the Commission might employ the dubious procedure hypothesized above. 173   Thus we find no legal defect in the rate provisions of Order no. 436.