Opinion ID: 450683
Heading Depth: 2
Heading Rank: 1

Heading: Minimum Bill Commodity Bills and Their Regulation

Text: 3 United, a major interstate natural gas pipeline company, supplies gas to three classes of customers: (1) interstate pipeline companies, (2) local distribution companies or so-called city gate customers, and (3) end-user industrial or power plant customers. 1 MRT is one of United's principal pipeline customers, and Laclede is MRT's largest customer. 2 United's rate structure consists of separate demand and commodity components. The commodity charge includes the variable costs of supplying customers with natural gas and 75 percent of the fixed costs of providing service. 3 The remainder of United's fixed costs is included in the demand charge. While United's customers are contractually required to pay the demand charge regardless of how much gas they take, the commodity charge is levied on each unit of the gas actually purchased. This two-part rate structure is generally imposed on both partial requirements and full requirements customers. Partial requirements customers, such as United's pipeline customers, do not rely solely on one supplier for their gas supply; instead, they have the ability to swing from one supplier to another in order to purchase the cheapest available gas. Full requirements customers, such as United's city gate customers, generally purchase their entire gas supply from one pipeline and are thereby captive to that pipeline's rates. 4 As FERC has recently observed, the presence of partial requirements and full requirements customers on a pipeline system creates certain difficulties for rate regulation in a competitive market. 5 There is some tension inherent in the relationship between full and partial requirements customers. ... Interstate pipeline systems were designed based on the estimated markets of both full and partial requirements customers. Large scale investments were made to provide physical facilities and long-term supplies of gas to serve both groups. Costs reflecting these commitments have therefore traditionally been considered the responsibility of both groups.... 6 Partial requirements customers have the ability to swing off the system, causing a reduction in expected sales volumes which, in turn, creates an underrecovery of costs. If the pipeline is unable to make up the lost volumes by selling the excess supply elsewhere, it may file new rates to offset the decreased sales. In these new rates, the pipeline's fixed costs will be spread over the lower volumes the pipeline expects to sell, resulting in higher rates on that system. Although the higher rates will apply to all customers, the captive customers have no alternative to paying these rates, at least in the short run, while the swing customers (absent a minimum commodity bill) can avoid higher commodity charges. 7 Order No. 130, Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Bill Provisions, 49 Fed.Reg. 22,778, 22,780 (June 1, 1984), appeal argued sub. nom. Wisconsin Gas Co. v. FERC, No. 84-1358 (D.C.Cir. Apr. 2, 1985) [hereinafter cited as Rulemaking ]. 8 Minimum commodity bills are intended to alleviate this regulatory tension by requiring partial requirements customers to pay some portion of the commodity charge for a contractually specified quantity of gas regardless of whether those customers actually purchase that quantity. Given the competing interests of full requirements and partial requirements customers, such bills can be defended on two general grounds. First, they protect pipeline suppliers from the risk of underrecovering some of the fixed costs allocated to the commodity charge if partial requirements customers choose to purchase large quantitites of cheaper gas from other suppliers. Second, they protect the full requirements customers from bearing a disproportionate share of the supplier's fixed costs if substantial swinging by partial requirements customers forces the supplier to raise its overall rates. See id. at 22,78 0. The Commission has also recognized, however, that minimum commodity bills operate as a substantial barrier to competition because they force partial requirements customers to forego the purchase of less expensive gas from another supplier. See id. at 22,779, 22,782-84. In the long run, then, minimum bills could result in higher rates for all customers on a pipeline system by isolating the major supplier from market competition and reducing its incentive to minimize costs and prices. See id. 9 The general legal framework for minimum bill regulation was developed in the course of a landmark 1960's dispute that produced two rounds of decisions by both the Commission and this court. In Lynchburg Gas Co. v. FPC, 336 F.2d 942 (D.C.Cir.1964), this court reviewed a Commission order approving a minimum commodity bill under the general rationale that such bills protect a supplier's full requirements customers from potential rate increases resulting from swings. After expressing a broad concern that the anticompetitive impact of minimum bills conflicts with the goals of the Act, we concluded that the Commission could not authorize minimum bills under that general rationale in the absence of specific subsidiary findings based on the record. Lynchburg, 336 F.2d at 947. In particular, we held that the Commission could not simply assume that a particular minimum bill reasonably accommodated the competing interests of a pipeline supplier's customers without an evidentiary showing that the supplier could not accommodate swings without raising its rates and that specific captive customers will suffer the consequences of increased rates. See id. at 947-48; see also id. at 950 (Washington, J., concurring). We also concluded that the Commission must ensure that the particular minimum bill before it is carefully designed to balance the conflicting interests of full and partial requirements customers and that it is no more restrictive than necessary. Id. at 947 (quoting White Motor Co. v. United States, 372 U.S. 253, 270, 83 S.Ct. 696, 705, 9 L.Ed.2d 738 (1963) (Brennan, J., concurring)). 10 In response to the concerns articulated in Lynchburg, the Commission developed its own minimum bill standards on remand. The Commission determined that a minimum bill could be justified if the supplier could demonstrate, on the basis of substantial evidence, that the bill was specifically and narrowly designed to meet one of three goals: (1) the recovery of that portion of a pipeline's rates which allocates fixed costs to the commodity component, (2) the protection of customers with no alternate supply from having to bear the costs of facilities constructed for a customer which obtains an alternative source, and (3) [the recovery of] the minimum take or pay obligation which a pipeline has to its suppliers. Atlantic Seaboard Corp., 38 F.P.C. 91, 95 (1962), aff'd, 404 F.2d 1268 (D.C.Cir.1968). 4 In order to justify the restraint on competition imposed by minimum bills, the Commission reasoned, a pipeline supplier must demonstrate that it actually needs a minimum bill to protect its system in light of these substantive economic factors, id., and that its particular bill is specifically and narrowly designed to perform that function. See id. at 96 (In designing a justifiable minimum commodity rate, [the supplier] should carefully consider [these] factors ... and should avoid one designed to discourage customers from seeking another source of supply.). The Commission eventually concluded that the Lynchburg supplier's bare evidence concerning decreased sales and the presence of some full requirements customers on its system could not justify the imposition of a minimum bill under these standards. See id. 11 In Atlantic Seaboard Corporation v. FPC, 404 F.2d 1268 (D.C.Cir.1968), this court affirmed the Commission's bottom line ruling that the supplier had not justified the imposition of a minimum bill. See id. at 1274-75. We did not, however, hold that the Commission's Atlantic Seaboard standards were mandated by the Act or even that the Commission would necessarily discharge its responsibilities under the Act by determining that minimum bills satisfied those criteria. Instead, we stated that the Commission must ensure that specific minimum bills do not discourage the appropriate level of competition on a particular pipeline system. 12 [A] policy favoring effective competition necessarily brings with it the reality of economic pinch, present or threatened. The presence of a second seller means that the historic supplier loses out on sales it would have otherwise had.... It is through the enhanced efforts made by the supplier in response to such pressure that competition reaps its benefits. The hard problem then is not whether competition may hurt but rather where and how to draw the lines of acceptable range of competition and hurt, in response to the economic characteristics and interrelationships of the industry that require regulation in the first place. 13 Id. at 1272-73. Thus we insisted that the Commission determine, on the basis of substantial record evidence, that a minimum bill is actually necessary to protect the supplier and its customers from too painful a pinch of unrestrained competition and that the particular minimum bill proposed is specifically designed to do so. See id. at 1273-74. 14 The Commission has subsequently attempted to fulfill this mandate by applying its Atlantic Seaboard standards to minimum bill proposals. To conform to our Lynchburg and Atlantic Seaboard opinions, we believe that those standards must be read to require two inquiries concerning any proposed minimum bill. First, the Commission must determine, on the basis of substantial record evidence, that a supplier in fact requires a minimum bill to remedy a regulatory difficulty recognized in Atlantic Seaboard. Second, the Commission must ensure that the particular minimum bill proposed is specifically designed to achieve that remedy, but nothing more. See e.g., Manufacturer's Light & Heat Co., 44 F.P.C. 1219, 1238-41 (1970) (rejecting a proposed minimum bill because the supplier had failed to sustain its burden of justification that any bill was necessary to recover fixed costs or to protect full requirements customers and had failed to show that its particular minimum bill was specifically designed to remedy a problem recognized in Atlantic Seaboard ).