Opinion ID: 726048
Heading Depth: 2
Heading Rank: 1

Heading: The Commission's Apportionment of Liability between the Pipelines and the Customers

Text: 21 The Pipelines, the Customers, and the Commission all agree that following the remand in Columbia II the Commission's task was equitably to allocate the production-related costs at issue between the Pipelines and the Customers. No Petitioner disputes that doing so required the agency to make some attempt to ascertain and then restore the parties to the positions in which they would have been but for the FERC's legal error in 1985, nor does anyone doubt that the agency's discretion in fashioning an equitable remedy is very broad. The Petitioners argue, however, that the Commission has violated the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) and (E), by determining the equities in an arbitrary and capricious manner and without the support of substantial evidence in the record. 22 As we have seen, the Commission purported to resolve the dispute between the Pipelines and the Customers by first holding the Pipelines liable to the Customers for the monies improperly collected but then excusing the Pipelines from paying interest on those sums. Because the principal and interest at stake are roughly equal, however, the result is roughly the same as it would be if the Commission had ordered the Pipelines to refund only half of what they unlawfully collected, plus interest. The Commission adopted the solution it did primarily because the agency found that there is no way to restore the parties to the positions they would have occupied had there been no Commission error; the agency could not determine [320 U.S.App.D.C. 380] what the parties would have done if the Commission had not accepted the unlawful direct bill proposal. See, e.g., Panhandle, 70 FERC p 61,167 at 61,522. 23 There are two ways to attack the Commission's reasoning, and each group of Petitioners has tried both. First, each group argues that the Commission could have ascertained how the production-related costs would have been allocated but for the agency's error. (Of course, each side presents an analysis that would entitle it to a better than even split of the total amount in dispute.) Second, each group presents equitable claims that, as we understand them, are in essence arguments that the Commission should have allocated the burden of uncertainty more to one side than to the other. We take up the Pipelines' pair of arguments first, and then the Customers'.
24 Our cases establish that a pipeline may recover from a customer costs that the pipeline incurred in the past in order to provide service in the past only if the customer (1) had sufficient notice that it was liable for those costs, or (2) is given notice that future purchases will carry a surcharge. See Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 579-80 (D.C.Cir.1990) (filed rate doctrine violated by direct billing costs incurred to provide service prior to notice that customer would be directly liable); Public Utilities Comm'n of California [CPUC] v. FERC, 988 F.2d 154 (D.C.Cir.1993) (doctrine not violated by recovery of past costs through volumetric surcharge imposed upon future throughput); Western Resources, Inc. v. FERC, 72 F.3d 147, 152 (D.C.Cir.1995) (doctrine not violated by billing based upon current contract demand to recover take-or-pay settlement costs pipeline incurred in past in order to provide service in future; such costs may be treated as current). Of course, even costs that a pipeline has incurred in order to provide current or future service cannot be retroactively billed to customers based upon their past purchasing decisions. Associated Gas Distributors v. FERC, 893 F.2d 349, 354-56 (D.C.Cir.1989). 25 The Pipeline Petitioners claim that if the Commission had disapproved the direct-billing proposals that they submitted in 1985, then the Pipelines could have recovered their Order No. 94 costs from the Customer Petitioners through an alternative that would have provided more certain recovery than the PGA. Specifically, they say that they could have allocated the pre-1985 production-related costs to the Customer Petitioners based upon the customers' then-existing contractual entitlements to purchase gas during the next 12 months, amortizing each customer's share over that period. See, e.g., Panhandle, 69 FERC p 61,065 at 61,279. Indeed, in 1991 the Pipelines asked the Commission to authorize this billing method retroactively by excusing the Pipelines from refunding what they could have recovered had they implemented that method in 1985. See, e.g., Panhandle, 62 FERC p 61,130 at 61,833-34. The Commission declined, initially upon equitable grounds but ultimately upon the ground that the Pipeline Petitioners' 1991 proposal was based upon a cost-recovery method that would have violated the filed-rate doctrine in 1985. 26 The Pipelines challenge that conclusion, and our analysis begins there. After determining whether the Pipelines' recovery of Order No. 94 costs through a demand-based surcharge would have violated the filed rate doctrine, we turn to the other factors that, according to the Pipelines, the Commission failed properly to consider in devising an equitable remedy in this case. 27 (a) The Pipelines' Ability to Recover Order No. 94 Costs through a Demand-Based Surcharge in 1985 28 In its initial ruling on the subject, the Commission characterized the Pipelines' proposals as calling for retroactive increases in their rates for 1985 sales service; the Commission's basis for rejecting these proposals, however, was not the filed rate doctrine. Instead, claiming equitable authority to remedy the consequences of its own legal error by approving retroactive rate changes, the Commission found it more appropriate to order refunds of the erroneously collected [320 U.S.App.D.C. 381] sums. See, e.g. Panhandle, 63 FERC p 61,130 at 61,835. 29 At the heart of the Commission's reasoning were two insights: first, as the proponent of the action held to be erroneous on appellate review, [the Pipelines have] less justification to seek the benefit of the Commission's exercise of [its] equitable remedial authority [ ] than the customers who were required to pay the illegal charge; and second, the Pipelines had undertaken direct-billing with the knowledge that [it] was subject to judicial review. Id. Indeed, the Commission observed that equitable remedies are generally granted in order to make whole the prevailing, not the losing, party in a legal dispute. Id. Finally, the Commission found that the pipelines had failed to establish any significant relationship between the service received by the Customers in 1985 and the Pipelines' incurrence of Order No. 94 costs. Id. 30 On rehearing, however, the Commission shifted the basis for its rejection of the Pipelines' proposal from equity to law: the FERC concluded that the filed rate doctrine would have precluded the Pipeline Petitioners' attempt to recover pre-1985 production-related costs based upon their customers' contract demand in 1985. See, e.g., Panhandle, 64 FERC p 61,218 at 62,634 (1993); reh'g denied 69 FERC p 61,065 (1994). The Commission concluded that, although not a direct bill, the Pipeline Petitioners' proposed demand surcharge would have violated the filed rate doctrine because it recovered costs incurred in order to provide sales service rendered before the Customer Petitioners had notice that the Pipelines could pass along the costs to them in any way other than through the PGA. See, e.g., 69 FERC p 61,065 at 61,279. The Commission therefore found the Pipeline Petitioners' 1991 proposal indistinguishable from the direct bill that this court had rejected in Transwestern, 897 F.2d at 579-80. Id. at 61,277-78. 31 The Pipeline Petitioners argue that the Commission's conclusion is inconsistent with its own orders and a decision of this court permitting pipelines to recover take-or-pay settlement costs through a contract demand surcharge. See, e.g., Western Resources, 72 F.3d at 152. The Commission points out, however, that the take-or-pay settlement costs at issue in those cases, although incurred prior to giving notice of the contract demand surcharge, related to sales service to be performed thereafter and for that reason could be treated as a current cost as of the time of notice. Id. 32 The Commission, of course, declined to treat the production-related costs at issue here as current. Here's why: 33 [T]he Order No. 94 costs have none of the attributes of the take-or-pay settlement costs that have permitted the Commission to treat take-or-pay costs as current costs. The Order No. 94 costs represent additional charges by producers to [the Pipeline Petitioners] for gas that they actually purchased and resold to their sales customers during the 1980-1985 period. Unlike the take-or-pay settlement costs, [the Pipeline Petitioners] did not, through their incurrence of the Order Nos. 94 and 473 costs obtain any future benefits such as the termination or reformation of its gas purchase contracts. Also, the Order Nos. 94 and 473 costs were incurred based solely on [the Pipeline Petitioners'] purchases from the producers during the 1980-1985 period. Unlike the situation with respect to take-or-pay, they obtained no future make-up rights to take gas in the future through their incurrence of the Order Nos. 94 and 473 costs. The Order Nos. 94 and 473 costs thus bear no relationship to [the Pipeline Petitioners'] performance of post-1984 sales service. [I]t is this fact that would have rendered any direct bill or demand surcharge to the sales customers, even if proposed in 1985, a surcharge for the 1980-1985 service. 34 Panhandle, 69 FERC p 61,065 at 61,279-80; see also, e.g., Texas Gas, 69 FERC p 61,068 at 61,296-97. 35 In response, the Pipelines assert that Order No. 94 costs relate to the future [ ] in precisely the same way as take-or-pay costs. The assertion is supported, however, only by an inapposite finding made by the Commission in National Fuel Gas Supply Corp., 44 FERC p 61,293 at 62,059 (1988), and the Pipelines' own observation that the point of [320 U.S.App.D.C. 382] permitting natural gas producers to recover Order No. 94 costs was to spur increases in natural gas production. So it was, but that gets the Pipelines nowhere. The prospect of recovering production costs incurred from 1980 to 1983 no doubt did spur production during that time, but not thereafter. The Pipelines have identified no basis upon which the Commission could have treated Order No. 94 costs incurred between 1980 and 1983 as current in 1985. 36 The Pipeline Petitioners also emphasize the distinction between a direct bill based upon past purchases and a surcharge based upon existing contract demand. Panhandle, 69 FERC p 61,065 at 61,279. Although the Commission may establish, and [ ] alter prospectively, fixed charges such as demand charges, Transwestern, 897 F.2d at 579, the Pipeline Petitioners offer no persuasive reason why the Commission could have treated Order Nos. 94 and 473 costs as fixed; they were in fact, as the Commission pointed out, solely ... costs of performing sales service during the period 1980-1985. Panhandle, 69 FERC p 61,065 at 61,279. As they were not fixed costs, the Pipeline Petitioners (in 1985) could have recovered them only through the PGA, of which the Customers already had notice, or through some other allocation method based upon the Customers' future purchasing decisions, see CPUC, 988 F.2d at 160 (the relevant inquiry [is] to 'identify the purchase decisions to which the costs are attached' ), quoting Associated Gas, 893 F.2d at 353, even if the Customers had no practical alternatives to purchasing gas from these pipelines, see Transwestern, 897 F.2d at 579. 37 In their reply brief the Pipeline Petitioners point, for the first time, to the Commission's decision in Transwestern Pipeline Co., 67 FERC p 61,237, reh'g denied 73 FERC p 61,091 (1995), which they say is inconsistent with the agency's reasoning in this case. As the Commission has not had a proper opportunity to respond to the argument, however, we shall not take it up here. See Forman v. Korean Air Lines Co., Ltd., 84 F.3d 446, 448 (D.C.Cir.1996) (Ordinarily, we will not entertain arguments or claims raised for the first time in a reply brief). 38 Having failed to establish that they had a means other than the PGA mechanism for recovering the production-related costs that they incurred prior to 1985, the Pipelines cannot demonstrate that they would have come out better, but for the Commission's error in 1985, than they do in the orders under review. They do not dispute the Commission's findings that market conditions might well have prevented full recovery of the costs through the PGA and that it is possible that the settlements [with other customers] that the Commission has already approved have enabled [the Pipelines] to recover as much, or more, of these costs than [they] could have recovered in the absence of the Commission's error. Panhandle, 64 FERC p 61,218 at 62,636-37. 39 (b) Equitable Factors Regarding the Risk of Uncertainty: The Pipelines' Argument 40 The Pipeline Petitioners' other equitable arguments do not establish any compelling reason why the Commission must allocate more of the burden of uncertainty to the Customers. That the Commission's policy in 1985 induced the Pipeline Petitioners to pursue the unlawful direct-billing scheme does not implicate the Customers. Nor is the Pipeline Petitioners' entitlement under § 601(c)(2) of the NGPA to passproduction-related costs through to their customers a guarantee of full cost-recovery. That provision instructs the Commission not to deny cost-recovery to interstate pipelines, but it neither requires nor permits the FERC to approve a cost-recovery method that the Congress elsewhere prohibited. The only method of cost-recovery that would have passed muster under the filed rate doctrine was the PGA mechanism, and the Commission's undisputed finding is that, had the Pipeline Petitioners used the PGA, the market might have left them no better off than they are now. 41 Two other claims made by the Pipeline Petitioners are simply false. First, the Pipelines claim they were merely accounting conduits that did not benefit from or retain for their own use the funds collected [from the Customers] to cover Order No. 94 costs. [320 U.S.App.D.C. 383] The Commission endorsed this characterization of the Pipelines' role, see, e.g., Panhandle, 69 FERC p 61,065 at 61,283, but it would be accurate only if the Pipelines' obligation to pay Order No. 94 costs to the producers from which they purchased natural gas were contingent upon their recovering sufficient funds from the Customers. As the Pipeline Petitioners' current predicament shows, that is not the case. 42 Second, the Pipeline Petitioners say that the Customers caused [them] to incur the Order No. 94 costs. Although the Customers received the gas and in that sense benefitted from the production-related costs at issue, the Pipeline Petitioners do not allege that the Customers in any way required the Pipeline Petitioners to purchase gas that was subject to Order No. 94 deferred charges rather than find other, cheaper sources. 43 Moreover, although the Customers did benefit from their use of the gas, it is far from clear that, as the Pipelines suggest, the Commission's orders leave the Customers any better off than they would have been had the Commission not erred in 1985. The Customers may have initially underpaid by more than $40 million, but the Commission's decision to deny them interest on the sums unlawfully collected from them effects a transfer from the Customers to the Pipeline Petitioners of more than $38 million. As we have already noted, the result is roughly the same as if the Commission had permitted the Pipelines to bill the Customers directly for half of the $40 million, and the Pipelines have not established that they could have recovered even that, let alone more, in the market and legal circumstances of the time. The Pipeline Petitioners are in no position to argue that the Commission has turned a deaf ear to equity on this point. See, e.g., Panhandle, 69 FERC p 61,065 at 61,282 (no equitable reason why Columbia should receive the windfall of escaping all liability simply because of the Commission's error).
44 Like the Pipeline Petitioners, the Customers argue that the Commission unreasonably rejected their argument that, but for the agency's legal error in 1985, the Customers would have fared better than they do under the orders here challenged. We turn to that claim first, and then to the Customers' other equitable arguments suggesting that even if the Commission could not determine the precise effect of its error, the Pipelines should bear more of the burden of uncertainty than should the Customers. 45
46 The Customers argue that the Commission unreasonably disregarded evidence demonstrating that under the only cost-recovery method available to the Pipeline Petitioners in 1985 (i.e., the PGA) the Customers would have paid in some cases nothing and in others far less than the cost that the Commission effectively imposed upon them when it denied them interest. The Customers do not dispute, however, that their presentations to the Commission were based upon two assumptions that the Commission declined to adopt. Panhandle, 69 FERC p 61,048 at 61,190-91, reh'g denied 70 FERC p 61,167; Trunkline, 69 FERC p 61,047 at 61,184-85, reh'g denied 70 FERC p 61,166; Panhandle, reh'g denied 69 FERC p 61,065. 47 First, the Customers assumed that even if the Commission had not endorsed direct-billing as the appropriate method of cost recovery, the pipelines would not have turned to the PGA any earlier than the dates on which they filed for authorization to bill the Customers directly. The Commission reasonably rejected this assumption. The Customers offered no reason to believe that, if the Commission had rejected rather than approved direct billing proposals in January and June of 1985, see 30 FERC p 61,138; Tennessee Gas Pipeline Co., 31 FERC p 61,308 (1985), the Pipelines would not have turned immediately to their PGAs as the only lawful means of recovering Order No. 94 costs. Second, the Commission rejected the Customers' assumption that the Pipelines would have amortized their past Order No. 94 costs over a single year. The Customers offer no reason why the Pipeline Petitioners would not have proposed and the Commission would not have authorized a longer amortization period in order to keep the [320 U.S.App.D.C. 384] Pipelines from pricing themselves out of the market. 48 As the Commission made clear, without the benefit of these assumptions the Customers cannot show that they would have paid little or nothing, as they variously claim, had the Pipelines attempted to recover their Order No. 94 costs through the PGA rather than by direct billing. Therefore, their charge that the Commission departed without explanation from its own general rule--that a customer entitled to a refund should also be awarded interest in order to make it whole--is beside the point. If the Commission could not reasonably determine what would make each party whole, and had no reason to impose a greater share of the burden of uncertainty upon one party than the other, then ordering a refund of principal without interest at a time when the principal and interest are of roughly equal value is a reasonable compromise. See Consumer Federation of America v. FPC, 515 F.2d 347, 358 (D.C.Cir.1975) (While full refund under an invalid order is a sound basic rule, it may be offset, at least in part, by the lack of a mechanism to restore the full status quo ante). 49
50 As a threshold matter, the Customers argue that we should not defer to the Commission's discretionary decision to deny interest because the agency reversed its position in this case without explanation. The challenged orders, however, quite plainly manifest the Commission's reasoning: faced with the impenetrable uncertainty regarding the effect that its legal error had visited upon all the Pipeline Petitioners, the Commission did the best that it could to muddle through. The Customers do not deny that they benefitted from the gas for which the Pipelines incurred the production-related costs now at issue, and they have failed to establish that but for the Commission's legal error they would have incurred a lesser cost than the FERC imposed upon them by denying them interest on the sums unlawfully taken from them. 51 The Customers' strongest argument for requiring the Pipeline Petitioners to shoulder a greater share of the burden of uncertainty is that the Pipelines created the uncertainty when in 1985 they sought authority for direct billing in order to serve their own interests. Indeed, as noted earlier, the Commission initially ordered full refunds with interest, in part upon the equitable ground that as the proponent[s] of the action held to be erroneous on appellate review, [the Pipeline Petitioners have] less justification to seek the benefit of the Commission's exercise of [its] equitable remedial authority [ ] than the customers who were required to pay the illegal charge, and that the Pipeline Petitioners had undertaken to bill directly with the knowledge that [it] was subject to judicial review. See, e.g. Panhandle, 63 FERC p 61,130 at 61,835. 52 In Public Utilities Comm'n of Calif. v. FERC, 988 F.2d 154, 163 (D.C.Cir.1993), we held that the Commission may exercise its remedial authority to relieve a party from the predicament caused by that party's reliance upon an illegal order even if the illegal order merely induced rather than compelled the party to act. Here the Customer Petitioners challenge the Commission's finding that the agency's legal error even induced the Pipeline Petitioners to pursue authority for direct billing. 53 In January 1985 the Commission approved Natural Gas Pipeline Company's largely unopposed proposal for direct billing. See 30 FERC p 61,138. The Commission's order includes no express endorsement of direct billing as the preferred method for recovering Order No. 94 costs, however. 54 In June 1985 the Commission authorized another pipeline to bill customers directly for production-related costs that the pipeline had incurred under § 110 of the NGPA. Tennessee Gas Pipeline, 31 FERC p 61,308. The Customers do not dispute that this order could have induced the Pipeline Petitioners to pursue direct-billing authorization in order to recover their Order No. 94 costs. 55 These two orders seem to be all the Commission-generated inducement that Texas Eastern had when it, first among the Pipeline [320 U.S.App.D.C. 385] Petitioners, filed for direct-billing authorization in July 1985. See Texas Eastern, 66 FERC p 61,035, reh'g denied 69 FERC p 61,064 (1994). In finding that Texas Eastern should not be blamed for pursuing this course because the Commission's acceptance of other pipelines' Order No. 94 direct bill proposals placed Texas Eastern under competitive pressures to propose a similar recovery mechanism, 69 FERC p 61,064 at 61,270, the Commission did not cite its January and June 1985 orders. It did do so, however, in reaching a similar conclusion regarding Texas Gas, which applied for direct-bill authorization a few weeks later, in August 1985. Texas Gas, 69 FERC p 61,068 at 61,300 n. 42, denying reh'g of 66 FERC p 61,033 (1994). The Commission also cited two orders issued very shortly after these pipelines filed their direct-bill petitions. 69 FERC p 61,068 at 61,300 nn.42 & 43, citing 32 FERC p 61,230 (August 1985) and 32 FERC p 61,433 (September 1985). While Texas Eastern and Texas Gas obviously did not rely upon those orders, they are evidence of the contemporaneous policy that, the Commission found, induced the Pipeline Petitioners to pursue direct billing authority. That Texas Eastern and Texas Gas succeeded in obtaining Commission approval for their direct-bill proposals suggests that they had correctly sensed a policy shift in the January and June orders. In any event, the Commission's assessment of the competitive climate created by its own orders merits substantial deference; we therefore hold that the Commission reasonably concluded that it induced the Pipeline Petitioners to jump on the direct-bill bandwagon. 56 Next the Customer Petitioners point to the Commission's finding that the Pipelines' settlements with other customers may have given them greater cost-recovery than the PGA mechanism would have. See, e.g., Panhandle, 64 FERCp 61,218 at 62,636-37. This possibility, however, provides no basis (either descriptive or normative) for the conclusion that the Customers draw, namely, that as a result of these settlements, the Pipeline Petitioners had voluntarily assumed the risk that they might not recover any production-related costs from Columbia, MichCon, and MGU. 57 The Customers make two final points. First, they argue that even if the Pipeline Petitioners experienced a decrease in gas sales after the Commission approved their proposals for direct-billing, see, e.g., Panhandle, 69 FERC p 61,048 at 61,193, they avoided the competitive disadvantage entailed in having to recover their costs by increasing their commodity price. Second, the Customers contend that the FERC erred when it found that the Pipelines did not have use of the monies they unlawfully collected from the Customers. Each point provides a good reason to impose substantial costs upon the Pipeline Petitioners--as the Commission did--but neither provides a reason for holding the Pipeline Petitioners more responsible than the Customers for the uncertainty that hangs over this case. 58 The Commission gave each group of Petitioners an opportunity to demonstrate that, but for the agency's legal error, they would have fared better than they do under the orders challenged here. Neither has succeeded; the uncertainty is simply too great. 59