Opinion ID: 493601
Heading Depth: 2
Heading Rank: 1

Heading: The Commission's Case

Text: 26 Our review of the Commission's interpretation of its authority under section 7 is governed by Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). It is undisputed that the Act is silent or ambiguous with respect to the specific issue of the lawfulness vel non of the revenue-crediting condition. Id. at 843, 104 S.Ct. at 2782. Under Chevron, we must therefore determine whether the Commission's interpretation is reasonable. Id. at 844, 104 S.Ct. at 2783. 27 The Commission presents two arguments for why its interpretation is reasonable, both of which are directed to perceived errors in the Panhandle court's analysis. 7 First, the Commission contends that the factual premise for that decision (viz. that the Commission was altering rates through the section 7 condition) was simply erroneous: [t]he Commission--through its revenue crediting condition--did not seek to adjust other rates not before it in the certificate proceeding. Rather, the Commission proposed a particular method of treating the additional revenues generated through the discount rate sales. 8 28 Second, the Commission contends that the revenue-crediting condition is valid because the Commission's goal in imposing it is to prevent the pipeline from reaping an unjustified windfall in the period prior to the next section 4 rate review of the pipeline's services: 29 In evaluating [a section 4 rate] filing, the Commission takes into account a pipeline's historical and projected revenues and costs and sets just and reasonable rates allowing the pipeline a fair rate of return. However, between rate cases, a pipeline may well generate additional revenues. 30 In this setting, gas pipelines have sought and obtained Commission certificates to perform services for which they would receive significant additional revenues which were not part of the cost of service upon which current rates were based. In a Panhandle type circumstance, a pipeline was granted a certificate to perform a transportation service for which it would receive unanticipated revenues.... [I]n cases such as Northern, pipelines have sought to retain customers with alternative fuel capability by filing innovative discount certificate applications. 31 It is the Commission's view that since revenues so obtained are not part of the cost of service upon which a pipeline's presently effective rates were set, to permit the pipeline to retain these revenues would present an unjustified windfall wholly at odds with proper regulatory treatment.... 32 Absent revenue crediting, a pipeline's other customers would be forced to bear all of the pipeline's fixed costs, even if these customers are barred from using the new service. The revenue crediting condition is a mechanism for using the revenues from a new service to offset the cost burden assigned to these other customers in the last rate case. Since the revenues and costs for new services will not be included in a pipeline's overall rate design until its next rate case, revenue crediting is the only practical means of preventing a windfall. 9 33 According to the Commission, this revenue-condition conforms with Atlantic Refining Co. v. Public Service Commission, 360 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312 (1959), in which the Supreme Court approved the Commission's practice of imposing a temporary rate condition upon section 7 certificates. To support this interpretation, the Commission quotes from the dissent in Panhandle which, citing that Supreme Court decision, characterized the revenue-crediting condition as the classic situation in which the Commission employs the Section 7 conditioning power--to 'hold the line,' or maintain the status quo --until a full cost-of-service proceeding is completed. 10 34 The Panhandle court rejected this view, reasoning that such a condition, assuming arguendo it served a legitimate regulatory goal, exceeded the Commission's authority under section 7 because it would undermine sections 4 and 5 of the Act. 11 The dissent in Panhandle, on the other hand, contended that the court misunderstood the respective roles of those provisions and that, upon proper analysis, the Commission could use all three provisions to ensure that natural gas companies earn a just and reasonable rate of return 12 : 35 The majority assumes that the revenue flow-through requirement here imposed would have been permissible pursuant to a Section 4 proceeding, but that for some reason it could not be imposed in a Section 7 proceeding. This misconceives the differences between the two sections. Section 4 has no magical property that affords the Commission greater powers than it otherwise would have. Rather, the main difference between the sections is that Section 4 is the mechanism for evaluating changes in the costs associated with already certificated services, while Section 7 provides the mechanism for pricing and conditioning new services. Under Section 7 FERC has ample authority to ensure that certification of a new service--such as transportation--does not create an imbalance in the pipeline company's overall profit structure. 13 36 Because the revenue-crediting condition before the court did not yield an overall lowering of the rate of return earned by Panhandle, the dissent concluded that the Commission had [not] overstepped its authority under section 7. 14