Opinion ID: 721438
Heading Depth: 3
Heading Rank: 2

Heading: The twenty-year contract term

Text: 71 The petitioners also contend that the contract term-matching condition allows pipelines to exercise market power inconsonant with pre-granted abandonment. Thus, oncapacity-constrained pipelines existing customers may be forced to match competing bids for twenty years' duration, which would not be the outcome in a competitive market without pipelines' natural monopoly. Competing bidders who come up against the rate ceiling for this scarce resource--capacity on constrained pipelines--may bid up the length of the contract term to try to win the auction. In effect, bidding for a longer contract term becomes a surrogate for bidding beyond the maximum rate level. Especially with the new capacity-release mechanism, a competing bidder could bid for a longer contract term than it would contract for in a competitive market, release the excess capacity at a discount, and absorb the loss just as though it had bid an above-maximum rate for a shorter term. 72 The Commission acknowledged the reality that contract duration is a measure of value when it declared that its policy was for the capacity to go to the person who values it the most, as evidenced by its willingness to bid the highest price for the longest reasonable time. Order No. 636-A, p 30,950, at 30,630. As a general matter, in a perfectly competitive market, a long-term contract incorporates a premium for stability, and a pipeline naturally values a longer-term transportation contract more highly, ceteris paribus. Order No. 636, p 30,939, at 30,450. Thus, the contract term-matching condition is a rational means of emulating a competitive market for allocating firm-transportation capacity. There are obvious drawbacks--the industrial petitioners provide the example of a factory owner with a productive asset that has only a short useful life. Order No. 636-A, p 30,950, at 30,629-30. But industrial end-users are also far more likely to have ready access to alternative fuels than do the residential consumers served by LDCs. See AGD I, 824 F.2d at 995. 73 For purposes of pre-granted abandonment, however, the issue is whether the Commission has shown that its choice of a twenty-year term-matching cap protects consumers against the exercise of pipeline market power. The petitioners note that longer-term contracts lock in customers and serve as a barrier to entry into the pipeline market by potential competitors. Rival pipelines will not build extensions to their system if the market for additional capacity has been foreclosed by long-term contracts with the existing pipeline. The Commission responds only that the pipeline plays no role in the competitive bidding process and thus cannot exercise market power. In the Commission's view, its choice of a twenty-year period reflects a reasonable weighing of the relative interests in preventing market constraint and encouraging market stability. None of these explanations, however, supports a finding that the twenty-year term-matching cap adequately protects against pipelines' pre-existing market power, which they enjoy by virtue of natural-monopoly conditions. The Commission has not explained why the twenty-year cap will prevent bidders on capacity-constrained pipelines from using long contract duration as a price surrogate to bid beyond the maximum approved rate, to the detriment of captive customers. If the maximum approved rate artificially limits a rival shipper's ability to outbid the existing shipper, the rival shipper may offer a higher-value contract by bidding up the contract duration instead. 44 74 [319 U.S.App.D.C. 78] A further concern with the Commission's choice of a twenty-year cap is the Commission's reasoning in selecting twenty years. Most of the commentators before the agency had proposed much shorter contract-term caps, such as five years. 45 The Commission relied on the fact that twenty-year contracts have been traditional in the natural-gas industry. Order No. 636-A, p 30,950, at 30,631 n.437. However, numerous commentators on rehearing of Order No. 636-A, as well as Commissioner Moler, id. at 30,679, pointed out that twenty-year contracts have been traditional only for contracts involving the construction of new facilities, where the pipeline requires a long-term contract to secure financing for the project, but not for contracts for the continuation of service after contract expiration. Indeed, both of the decisions that the Commission cited for the proposition that twenty-year contracts are customary were for new facilities. 46 Also, renewal contracts appear more similar to the situation in the right-of-first-refusal mechanism. The Commission in its brief responds that the term-matching cap was designed not to determine the length of typical gas contracts, but to establish a reasonable outer boundary for contract length, within which the ROFR might reasonably function. The petitioners' claim, however, is that because the Commission looked to the wrong type of contract to determine the typical contract length it may have selected an outer boundary that is longer than it would have been if the Commission had examined the duration of renewal contracts. The Commission failed to respond to this objection in the Order No. 636 series. 75 Both of these reasons--the Commission's failure to explain why the twenty-year cap will protect against pipelines' market power, and the failure to explain why it looked at new-construction contracts in arriving at the twenty-year figure--persuade us to remand the length of the contract term-matching condition to the Commission for further consideration. 47 The right-of-first-refusal mechanism, incorporating the twin matching conditions of rate and contract term, is sufficiently justified. We remand only as to the Commission's reasons for adopting a twenty-year cap.