Opinion ID: 586801
Heading Depth: 2
Heading Rank: 2

Heading: Statutory and Precedential Arguments

Text: 29 Petitioners level an attack not only on FERC's interpretation of § 2.104(a), but also on its relationship to statutory and precedential authority. They argue that, as FERC reads the regulation, § 2.104(a) cannot be squared with the ratemaking principles found in the NGA and Commission caselaw. 30 Section 4 of the NGA is the touchstone in any legal analysis of FERC-approved rate schemes. Its spartan language requires only that rates be just and reasonable. 15 U.S.C. § 717c(a). 1 Significantly, however, FERC and the courts have added flesh to these bare statutory bones, establishing what has become known in Commission parlance as the cost-causation principle. Simply put, it has been traditionally required that all approved rates reflect to some degree the costs actually caused by the customer who must pay them. As we stated in Alabama Electric Cooperative, Inc. v. FERC, 684 F.2d 20, 27 (D.C.Cir.1982): 31 While neither statutes nor decisions of this court require that the Commission utilize a particular formula or a combination of formulae to determine whether rates are just and reasonable, it has come to be well established that ... rates should be based on the costs of providing service to the utility's customers plus a just and fair return on equity. FERC itself has stated that [i]t has been this Commission's long standing policy that rates must be cost supported. Properly designed rates should produce [297 U.S.App.D.C. 19] revenues from each class of customers which match, as closely as practicable, the costs to serve each class or individual customer. 32 (footnotes omitted) (emphasis retained). 33 Petitioners argue that, as regards Order No. 500's treatment of take-or-pay liability, FERC has abandoned the cost-causation principle. They submit that § 7(c) transportation customers did not--in any conceivable fashion--cause the take-or-pay crisis, but are asked, under the volumetric surcharge option, to help pay for its resolution. 34 FERC does not appear to dispute petitioners' analysis on this point. It has seemingly acknowledged that, in terms of cost-causation, those most responsible for the take-or-pay crisis are the pipelines themselves and their sales customers. See, e.g., Natural Gas Pipeline Company of America, 43 FERC (CCH) p 61,194, 61,515 (Apr. 29, 1988). 2 Further, on rehearing the Commission itself failed even to dispute the premise that the transportation customers did not cause the incurrence of the costs. Williston Basin Interstate Pipeline Co., 53 FERC (CCH) at 61,094. 35 FERC has instead taken the position that circumstances surrounding the take-or-pay crisis and the transformation of the pipeline industry necessitate and justify the crafting of new ratemaking principles. FERC has, thus, replaced cost-causation as the operative ratemaking rationale under Order No. 500 with two new principles: a cost-spreading concept and a value-of-service concept. Under the 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. 36 Petitioners ask us to invalidate Order No. 500 to the extent it would allow recovery from § 7(c) transportation customers based on these rationales. In their view, a cost-spreading and benefit-based ratemaking scheme cannot be squared with FERC's statutory mandate to impose only just and reasonable rates. 37 We cannot oblige petitioners on this score. This court has already made plain in the language of AGD I, and our actions in AGD II, that the ratemaking rationales of Order No. 500 can be reconciled with the NGA, given the unusual circumstances surrounding the take-or-pay problem, and the limited nature--both in time and scope--of the Commission's departure from the cost-causation principle. FERC rightly notes that this court remanded Order No. 436 on the grounds that FERC needed to spread take-or-pay costs more broadly than it had proposed. We there made plain that [a]ll actors in the natural gas industry are proper candidates for absorbing take-or-pay liability, except likely fuel-switchers. AGD I, 824 F.2d at 1021 (emphasis added). This is because, as we explicitly acknowledged, pipelines might be unable to recover their costs solely from sales customers who, under an open access regime, can readily switch to other suppliers. Likewise, by setting aside the Commission's purchase deficiency allocation method for assigning the fixed charge in AGD II--a mechanism meant to match cost responsibility with cost incurrence as closely as possible--this court declined to suggest that FERC was forbidden from temporarily foregoing a cost-causation analysis in order to resolve the take-or-pay problem. 38 [297 U.S.App.D.C. 20] In the long haul, Order No. 500 may represent only a minor departure from the cost-causation principle; indeed, the benefit principle may simply prove to be another prism through which to view the question of cost causation--one that admittedly extends the chain of causation further than FERC has done traditionally. That is, rather than focusing us on the most immediate and proximate cause of the cost incurred, the benefit principle may only ask us to look at a host of contributing causes for the cost incurred (as ascertained by a review of those who benefit from the incurrence of the cost) and assign them liability too. Simply, it may be a proxy for an extension of the chain of causation. 39 Intervenors Montana Consumer Counsel, Montana Public Service Commission, and the Public Utilities Commission of South Dakota (the utility intervenors) point out that FERC and this court have employed a rather broad view of causation in the past--perhaps one as broad as that proposed here. For example, a pipeline may decide to enlarge or extend its facilities in order to serve a major new customer; we have held that, if those facilities are potentially useful to existing customers, the cost may be rolled into the rate base of all pipeline customers without violating the cost-causation principle, on the grounds that all customers enjoy the benefits of the entire system. Battle Creek Gas Co. v. FPC, 281 F.2d 42, 46 (D.C.Cir.1960). 40 We see no need to explore further the Commission's power to impose rates based on cost-spreading and value-of-service rationales. A more searching inquiry may well prove necessary when Order No. 528 comes before this court, or if the Commission should attempt to adopt these ratemaking rationales outside the take-or-pay context. Indeed, we do not purport to suggest the proper outcome in such cases. We hold only--and quite narrowly--that in the context of Order No. 500 the Commission has not betrayed its obligations to the NGA or precedent by employing these ratemaking principles in its attempt to bring closure to the take-or-pay drama. 41