Opinion ID: 531196
Heading Depth: 1
Heading Rank: 3

Heading: compliance with agd

Text: 111 We see no need to resolve the issue of whether, due to the length of time since the Commission issued it, Order No. 500 has become a de facto final rule, such that it should no longer be reviewed under the standards we set in Mid-Tex for evaluating an interim rule. Assuming that it is possible to determine when an interim rule achieves practical finality of effect, and to calibrate accordingly the scrutiny with which we review it, the results we reach here would not be affected thereby. By promulgating a sunset provision that has forced rapid settlements under a regime of uncertain validity, and then allowing more than two years to elapse without issuing a reasoned final order, the Commission has not only failed to satisfy the Mid-Tex requirement that it address our concerns on an interim basis by preserving its ability in a final rule to remedy any harm done; it has also disregarded the underlying mandate of AGD regarding the issuance and the content of a final rule. 112 The AGD mandate was straightforward: it required that the Commission give a reasoned explanation for its decisions to act or not to act in particular ways. We instructed the Commission either to take steps to address the take-or-pay problem, explaining the reasoning behind the mechanism it chose and the reasons for preferring that mechanism over others, or to justify its decision not to take those steps. Nonetheless, during the two years since we decided AGD, the Commission has not done so; it has failed to engage in reasoned decisionmaking, either in promulgating an interim rule in Order No. 500, or by issuing a final rule. 113
114 In AGD we particularly required the Commission to reassess its refusal to act [against uneconomic contracts] under Sec. 5, and to explain its reasons for inaction ... clearly enough for us to determine the legality of its analysis. 824 F.2d at 1028. The Commission has done nothing that even purports to comply with these requirements. To be sure, when the Com mission issued the data request in Order No. 500, it held out this promise of compliance: The Commission will aggregate the data submitted and analyze it promptly. If the information demonstrates that action under NGA section 5 ... would contribute to solving pipeline take-or-pay problems, the Commission will then consider such action. 52 Fed.Reg. at 30,341. To this day, that is the Commission's last word on the Sec. 5 issue, apart from its order extending the deadline for pipelines to submit the required data. 115 The Commission does not now argue that it needs any further data upon which to base a reasoned decision. Instead, FERC defends its non-action on the question of its inaction under Sec. 5 by stating, with utmost complacency, that it has not yet acted in a final manner because what appears to be occurring in a sustained way is 'an equitable sharing of take-or-pay costs among all segments of the industry.'  FERC Brief at 82 (quoting Order No. 500, 52 Fed.Reg. at 30,342). If the Commission believes that no Sec. 5 action is necessary, however, its burden is to provide a reasoned basis for that conclusion in a final rule; that burden is not discharged by avoiding the issue whilst time and the workings of its interim rule conspire to moot the issue. 116 As we said in Mid-Tex, the agency must convince us ... that it is not engaging in dilatory tactics during the interim period, 822 F.2d at 1132. Its half-explained cunctation here convinces of the opposite, and worse, that it delays in order to avoid having to do the analysis that we required in AGD until after the take-or-pay problem has disappeared, i.e., until such time as the agency will have accomplished its purpose regardless of whether it can warrant its authority. 117
118 We now turn to assertions by various petitioners that the Commission lacks authority to promulgate the crediting mechanism of Order No. 500, and that the mechanism is not only arbitrary and capricious, but ineffective to boot. 119
120 The Commission has clearly failed to support its authority to apply the crediting mechanism to contracts governed by the NGA. Order No. 500 does not even reveal the basis upon which it asserts this power. Only in its brief does FERC rely upon Sec. 7 of the NGA, which gives the Commission the power to attach to the issuance of the certificate and to the exercise of the rights granted thereunder such reasonable terms and conditions as the public convenience and necessity may require. 15 U.S.C. Sec. 717f(e). 121 As we have seen, the Producers contend the Commission cannot lawfully base the crediting mechanism upon Sec. 7 because the take-or-pay contracts are not before the Commission when it grants a blanket certificate to a pipeline under Order No. 500. See Northern Natural Gas Co., above; Panhandle Eastern Pipe Line Co. v. FERC, 613 F.2d 1120, 1133 (D.C.Cir.1979) (FERC may not compel flow-through of revenues to customers of services not under consideration in that proceeding for certification.). FERC and the LDCs suggest that the access condition differs from the conditions at issue in the cases just cited because they involved an attempt by the Commission to reduce rates that it had already approved. In contrast, they assert, this case does not involve the agency modifying any rates; instead, the Commission is authorizing pipelines to place a condition upon the transportation service under consideration in the proceeding before it. In addition, the LDCs assert that there is a causal nexus between the certificate sought and the condition imposed because open access exacerbates the take-or-pay problem. 122 We decline to resolve this issue now because the Commission has not expressed its reasoning in support of invoking Sec. 7. Counsel for FERC may point to distinctions between this case and others, but the Commission has not explained why, in its view, if indeed that is its view, these differences justify the result in the service of which they are now marshaled. On remand, the Commission must do so if it would rely upon Sec. 7. If the Commission rests the conditioning mechanism upon authority other than Sec. 7, of course, it must give us its basis for doing that. 123
124 The Commission need not engage in further explanation specifically to support its reliance upon Sec. 311 of the Natural Gas Policy Act with respect to contracts governed by that statute. Section 311(c) states: Any authorization granted under this section shall be under such terms and conditions as the Commission may prescribe. 15 U.S.C. Sec. 3371(c). As we noted in AGD, the premises of the Panhandle doctrine are absent here. 824 F.2d at 1015. 125 Nevertheless, the Producers claim that the Commission may not invoke Sec. 311 because conditioning access does not promote the NGPA goal of fostering reliance upon the forces of competition. If conditioning access is a necessary part of a scheme that is procompetitive overall, however, then it does not violate the NGPA even if it may seem to be anticompetitive when viewed in isolation. 126
127 The Commission also fails adequately to support its authority to require credits for gas transported on the OCS. In Order No. 509, the Commission interpreted Secs. 5(e) and 5(f) of the OCSLA, 43 U.S.C. Sec. 1334(e)-(f), to require open access on that portion of any pipeline lying on the OCS. FERC Stats. & Regs., Regs. Preambles (1982-1987) (CCH) p 30,842 (1988), reh'g denied, 46 FERC (CCH) p 61,177 (1989). FERC's only response to the Producers' argument that the Commission cannot make conditional the access that the statute guarantees them is that [t]here is no basis for interpreting this requirement to bar a regulatory provision (i.e., crediting) that ... is consistent with essentially the same nondiscriminatory requirement in the Commission's open-access regulations. FERC Brief at 36 n. 26. 128 The Commission's point seems to be that if crediting is consistent with open access as established by regulation, then it is equally consistent with open access as established by statute. This implicit reliance upon the principle of transitivity works only if it is also true that the two sources of open access can be equated; the whole of the Producers' point, however, is that their right of access exists by virtue of a higher, not an equal, authority; thus, it arguably cannot be qualified by the Commission. If, on remand, the Commission determines that the crediting requirements should apply to OCS pipelines, then in order to justify its assertion of power, it must set out a legal theory that is responsive to the Producers' argument. 129
130 We conclude that the exception to the crediting mechanism for casinghead gas is not the product of reasoned decisionmaking. In Order No. 500-C, the Commission's sole justification for the exemption is that a pipeline's failure to take casinghead gas would likely require the producer either to shut in the oil production or flare the casinghead gas, resulting either in increased dependence upon foreign oil or in the waste of natural gas. In their applications to rehear Order No. 500-C, the Natural Gas Association, El Paso Natural Gas Co., and Natural Gas Pipeline Co. of America argued that applying credit to a pipeline's obligation to take casinghead gas will have neither of the effects that the Commission fears because the producer can simply sell into the market whatever gas is not purchased by the pipeline. Although this point, if true, would seem to be compelling, the Commission did not even address it in its Order Denying Rehearing, No. 500-E. On remand, the Commission must either justify the exemption in light of this reasoning or, if it cannot, then withdraw it. 131
132 The petitioners' objections to the other exceptions to the crediting mechanism are adequately met in the Commission's orders; we need not elaborate here upon the points and counterpoints in order to accept the Commission's reasoning. We do not decide, however, whether the mechanism as a whole, given its exceptions and limitations, adequately responds to the mandate of AGD. As in that case, the parts of the Order under review are interdependent, and the gaps in the Commission's reasoning taint[ ] the package. 824 F.2d at 1044. Thus, we are unable to say at this time whether the crediting mechanism, in conjunction with the rest of Order No. 500, effectively deals with the concerns we raised in AGD. 133
134 The Commission has not satisfactorily addressed the claim that it illegally failed to relieve Tennessee Gas Pipeline of the CD reductions for which its customers had opted prior to the decision in AGD. Following our vacatur of Order No. 436, based in part upon the Commission ha[ving] failed to develop an adequate rationale in support of CD reduction, id. at 1018, the Commission concluded that it did not have enough support in the record to warrant repromulgating the provision. Nevertheless, it has purported to give effect to those reductions requested prior to our decision, without ever engaging in the analysis that Huson, 404 U.S. at 106-08, 92 S.Ct. at 355-56, requires before a court decision may be given prospective-only application. The Commission does not mention the retroactivity issue in Order No. 500, nor even respond in Order No. 500-B to Tennessee Gas Pipeline's request for a rehearing on this issue; the Commission also failed to apply Huson when it first announced that its decision not to repromulgate CD reduction should be of prospective effect only, see Interstate Power Co. v. Natural Gas Pipeline Co. of America, 41 FERC (CCH) p 61,096, at 61,256 (1987), reh'g denied, 42 FERC (CCH) p 61,049 (1988). 135 FERC argues that this court's order of July 17, 1987, which permitted the Commission to stay the effectiveness of its CD adjustment (i.e., conversion and reduction) provisions, supports its decision here. The order stated: As we read FERC's proposed Order, all it plans on doing is prospectively staying the CD adjustment provisions. It does not purport to undo elections previously made. AGD, No. 85-1811, Mem.Op. at 2 n. 1. That observation does not bear upon the issue before us, however, because it was addressed to a materially different situation. At the time, the Commission had not yet concluded that the CD reduction provision was unsupportable in the record upon which it was ostensibly based, nor decided to drop it rather than to seek such support by reopening that record. 136 On remand, in order to overcome the presumption that our vacatur of the CD reduction provision is to be applied retroactively, the Commission must consider the three factors identified by the Supreme Court: 137 First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which the litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed. Second, it has been stressed that we must ... weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. Finally, we have weighed the inequity imposed by retroactive application.... 138 Huson, 404 U.S. at 106-07, 92 S.Ct. at 355 (citations omitted). When engaging in this analysis, the Commission may not rely upon the unsubstantiated assumption that these customers must have made alternative arrangements for gas supplies. FERC Brief at 77. Weighing the equities under the third prong of the Huson test will necessarily require the Commission to consider whether individual customers in fact relied upon Order No. 436 by taking on alternative gas purchase obligations, and if so, whether there is any reason in equity to bind Tennessee Gas Pipeline to a provision that this court vacated and that the Commission was unable to support on the record before it.IV. THE COST-RECOVERY MECHANISM 139 We consider next challenges to the time limit for filing to take advantage of the cost-recovery mechanism and to the allocation of take-or-pay costs between pipelines and end-users under Order No. 500. 140 A. The Sunset Provision. 141 The alternative mechanism for recovering take-or-pay costs that the Commission innovated in Order No. 500 was to be available only until December 31, 1988. Order No. 500-F extended that deadline to March 31, 1989. The Commission's only asserted reason for having a sunset provision was to encourage the rapid elimination of the take-or-pay deterrent to competitive natural gas markets. 52 Fed.Reg. at 30,346. 142 The Commission's reason is not without some weight: if take-or-pay liability impedes the realization of a competitive gas market, then all other things being equal, its elimination is better done sooner rather than later. As usual, however, all other things are not equal: imposition of the sunset provision has contributed greatly to the risk that we sought to avoid in AGD, viz. that an unlawful (because legally indefensible) rule will have the force of law. The sunset provision has exacerbated the problem because it has forced rapid settlements prior to the issuance of a lawful final rule. By withholding the issuance of a final rule until after the deadline for favorable treatment of settlements under the interim rule, the Commission has pressured the participants in the natural gas industry to dispose of much of the take-or-pay problem without its ever taking a final, reasoned position on how this should be done. Furthermore, it has done so in a manner that may have been highly prejudicial to the bargaining power of pipelines which, unlike the producers, were facing the deadline. 143 Since forcing rapid settlements is the Commission's only justification for the sunset provision, and the regime under which later settlements are penalized and early settlements rewarded may yet prove to be unlawful, the effect of the sunset provision is to frustrate the mandate of AGD. Accordingly, we conclude that the provision is arbitrary and capricious. 144 In the unusual circumstances of this case--in which the Commission's dilatoriness in responding to our demand for an adequate statement of reasons raises the real possibility that the Commission long ago concluded that it could not justify its position--any deadline short of judicial review of the final rule in turn raises the prospect that the pipelines will be put under pressure to comply with an unlawful regime. In order to avoid this problem, we hold that the Commission may not impose any deadline upon applications for the cost passthrough mechanism at least until there has been judicial review of the explanation it issues in response to this decision. If the Commission decides to impose a deadline calculated to fall sometime after judicial review, it must justify that deadline sufficiently to overcome our concern that pipelines will still be unable to appeal Commission decisions rejecting their take-or-pay passthrough proposals because review will come after the new filing deadline. 145 B. Equitable Sharing or Absorption. 146 Having determined that the sunset provision is arbitrary and capricious and must be stricken, we find that absent the constraint of that deadline, challenges to the substantive aspects of the cost recovery mechanism are not ripe for review. The ripeness doctrine is designed to 147 prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties. The problem is best seen in a twofold aspect, requiring us to evaluate both the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration. 148 Abbott Laboratories v. Gardner, 387 U.S. 136, 148-49, 87 S.Ct. 1507, 1515-16, 18 L.Ed.2d 681 (1967). Neither the fitness nor the hardship criterion favors review now. 149 Whether the cost absorption requirement of the Commission's equitable sharing approach to cost recovery unlawfully denies to pipelines a reasonable opportunity to recover their prudent costs is a nice question, but at this juncture a somewhat abstract one. The policy does not have an immediate and significant impact upon petitioners, Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 48 (D.C.Cir.1974), none of which is here challenging the Commission's denial of a particular proposed level of recovery. Thus, there is no concrete decision before us, nor any record upon which to evaluate the policy. 150 In addition, the Commission presented the cost recovery mechanism as a policy statement, not a definitive rule, and we have no basis upon which to dispute that characterization. There is a strong norm against our reviewing tentative agency positions, lest the court deny the agency a full opportunity to apply its expertise and to correct errors or modify positions in the course of a proceeding; moreover judicial economy is disserved because judicial review might prove unnecessary if persons seeking such review are able to convince the agency to alter a tentative position. Public Citizen Health Research Group v. Commissioner, 740 F.2d 21, 31 (D.C.Cir.1984); see also Friends of Keeseville, Inc. v. FERC, 859 F.2d 230, 235 (D.C.Cir.1988) (The central judicial interest in deferring resolution of this question lies in the possibility that if the issue is not adjudicated at this time, it may not require adjudication at all.). 151 We do not foresee any significant hardship to the parties as the result of our deferring review. The Pipelines have asserted only that the deadline puts them at risk of not getting any recovery at all if they appeal the agency's decision to deny them full recovery. Because we have concluded that the sunset provision is invalid, however, that risk no longer looms. At least until the completion of our review of the Commission's final order, a pipeline that loses on appeal can safely reapply for 50% cost recovery under the Commission's alternative recovery mechanism. Thereafter, a pipeline's ability to reapply will be governed by such conditions as the Commission may impose in the final rule and we may approve as nonarbitrary. 152 We reject the Pipelines' argument that review is appropriate now so that they will not lose the time value of their eventual recovery. Consideration of that interest would displace the ripeness doctrine quite generally, which we have neither the inclination nor the authority to do. We therefore conclude that review of the cost recovery policy, other than the sunset provision, is premature at this time.