Opinion ID: 492011
Heading Depth: 2
Heading Rank: 3

Heading: Transportation Policies.

Text: 333 The Industrial End User Group also argues that FERC acted unreasonably in refusing to require pipelines not electing to operate under Order No. 436 to publish their transportation policies in their tariffs. This issue is currently pending in an individual rate case now on review before the Commission from an administrative law judge's initial decision, Transcontinental Gas Pipe Line Corp., 33 F.E.R.C. p 63,035 (1985). The Group has not met the heavy burden of establishing the inadequacy of resolution in that forum. See NLRB v. Bell Aerospace Co., 416 U.S. 267, 294-95, 94 S.Ct. 1757, 1771-72, 40 L.Ed.2d 134 (1974).D. Construction of Facilities for Use in Sec. 311 Transportation. 334 Maryland People's Counsel asserts that Order No. 436 violates the NGA by leaving in place a prior regulation making clear that construction of facilities for use solely in providing Sec. 311 transportation does not require Sec. 7 certification. See 18 C.F.R. Sec. 284.3(c) (The [NGA] shall not apply to facilities utilized solely for transportation authorized by section 311(a)....). The crux of MPC's argument is that Order No. 436 expands Sec. 311 transportation to the point where it is indistinguishable from Sec. 7 transportation. Relying on legislative history indicating that Congress adopted Sec. 7 in order to assure that consumers were protected from having to bear the costs of uneconomic construction, MPC contends that FERC must, in effect, extend the construction certification requirements of Sec. 7 to Sec. 311. 335 MPC's claim turns on the premise that Order No. 436 makes Sec. 311 transportation a clone of transportation under Sec. 7. We find this exaggerated. As Congress specified, Sec. 311 transportation is limited to transportation on behalf of an LDC or a pipeline. Other petitioners call our attention to instances where that requirement appears to be fulfilled more in name than reality. 39 We are told that in one case the contact with an LDC consists only of transportation through a six-foot stretch of pipe. Brief of Southern Indiana Gas & Elec. Co. at 13. Despite this episode, we do not believe that petitioners have shown a sufficient identity between Sec. 311 and Sec. 7 transportation to call FERC's judgment into question. 40 First, we are shown no evidence that Sec. 311 transportation frequently--much less uniformly--pivots on a merely nominal connection with an LDC or other pipeline. Second, Sec. 7(h) gives the holder of a Sec. 7 certificate a power of eminent domain to acquire right-of-way to implement the Commission-approved plan; no such power accompanies authorization under Sec. 311. 336 Thus, MPC would have us order the Commission to graft regulatory burdens mentioned only in the NGA onto Sec. 311 merely because transportation under the two sections overlaps to some degree. This Congress did not intend; in the NGPA it declined to require a system of certification akin to that of Sec. 7. Congress clearly recognized that consumer protection purposes can be achieved without control over entry. It selected for Sec. 311 transportation a system paralleling its choice for oil pipelines: control over price but not entry. See NGPA Sec. 311(a)(1)(B), 15 U.S.C. Sec. 3371(a)(1)(B) (1982) (providing power over rates for service); 42 U.S.C. Sec. 7172(b) (1982) (transferring to FERC regulatory power to establish rates and charges of oil pipelines). Congress underscored this distinction in NGPA Sec. 601(a)(2), providing that transportation in interstate commerce under Sec. 311 shall not trigger the Commission's NGA jurisdiction. This seems an unequivocal expression of intent that NGPA regulation should not replicate the burdens of the NGA. 337 E. Grandfathering Decisions. 338 In Order No. 436 FERC grandfathered a number of existing transportation arrangements for varying periods of time. These are attacked as too short or too long, or as being unjustified in comparison to the treatment of other arrangements. 339 All grandfathering decisions necessarily involve a trade-off between the values of stability on one side and of promptly securing a new rule's benefits on the other. FERC undoubtedly has power to make such adjustments; no petitioner questions it. Although FERC must exercise the power in a reasoned manner, such exercises are necessarily arbitrary to some extent. Capital Cities Communications, Inc. v. FCC, 554 F.2d 1135, 1139 (D.C.Cir.1976). 340 Michigan Consolidated Gas Co. (MichCon) complains that the Commission's decision to grandfather blanket certificates previously authorized under Sec. 311 and Sec. 7 is an unreasoned one. It attacks both the decision to grandfather these transactions at all and the duration of the exemptions, which in the case of some Sec. 7 certificates can run as long as 10 years from their start (the latest of which presumably originated shortly before promulgation of Order No. 436). Most acutely, MichCon argues that termination of these arrangements will not interrupt anyone's supply of gas. As the pipelines are more than able to satisfy any displaced sales from their supplies, the functional effect is merely to provide the presently-favored parties continued access to low-priced gas and to increase the probability that others will not secure such access. (The grandfathered authorizations tend to relax the pressure on pipelines to accept Order No. 436.) FERC conceded as much in rejecting the high-priority users' pleas for a permanent exemption. J.A. 506-07 (there is no need to retain special procedures for a limited group of shippers). So far as appears, however, FERC grandfathered these transactions with no more than references to the desirability of a smooth transition to a new order, J.A. 273, to the reliance the parties placed on this transportation, J.A. 491-95, and to the authorized duration of the transactions and the need to avoid undue infringement on them, J.A. 1183. 341 These phrases do not seem to us to meet the modest standard implicit in the concept of reasoned decisionmaking. See Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Automobile Ins. Co., 463 U.S. 29, 42-43, 103 S.Ct. 2856, 2866-67, 77 L.Ed.2d 443 (1983). Thanks to the delays of the legal process (for which we acknowledge our share of responsibility), the grandfathering that expires October 9, 1987 is nearly moot and scarcely worth mentioning. Matters are different for transactions whose unlawfulness is extended into the mid-1990s. Perhaps these are rare enough, or involve so little volume, that the grandfathering will only trivially encourage pipeline resistance to the concept of nondiscrimination. Or perhaps the equities of the participants are stronger than appear. We cannot, however, discern the path by which the Commission has reconciled such grandfathering to its acknowledged mandate to stamp out discrimination. Cf. Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-86, 95 S.Ct. 438, 441-42, 42 L.Ed.2d 447 (1974). 342 The intrastate pipelines attack from the other side, challenging FERC's failure to preserve all preexisting Sec. 311 authorizations for their full authorized terms. Order No. 436 permits previously authorized Sec. 311 transactions to continue until the earlier of their expiration or two years after the Order's effective date. The two-year grandfather period allows previously authorized Sec. 311 transactions to come to a natural end, as FERC generally limited such transactions to two-year terms. 18 C.F.R. Sec. 284.102(b)(1)(i) (pre-Order No. 436 version). In some instances, however, FERC provided for longer terms, see id. Sec. 284.102(b)(2); the two-year grandfathering limit will cut some of these short. The petitioners contrast this with FERC's decision to grandfather existing Sec. 7 certificates for their full terms. 343 There are two elements to the intrastate pipelines' attack on FERC's distinction between Sec. 311 and Sec. 7 grandfathering. First, they implicitly attack the existence of any line between the two at all, and here we cannot agree. In imposing the two-year ceiling on these Sec. 311 extensions, FERC relied on its regulation, adopted at the outset of Sec. 311 authorization, expressly making such certificates subject to prospective change. See Order No. 46, 44 Fed.Reg. 52,179, 52,181-82 (1979) (codified in pertinent part at 18 C.F.R. Sec. 284.5); J.A. 1180-81. In its brief (though not in the rulemaking itself) the Commission contrasts that explicit warning with its absence in the Sec. 7 context, suggesting greater likelihood of justifiable reliance in the latter. We think the point strong enough to explain non-identical treatment. 344 Insofar as the intrastate pipelines challenge the size of the discrepancy in treatment, we must agree. Above we found inadequate FERC's explanation for allowing the continuation of Sec. 7 transportation for five- and ten-year terms. The discrepancy in treatment of Sec. 311 authorizations deepens our mystification. 345 We can find no merit in petitioner Tenneco's lament that the Commission did nothing to allow continuation of the sales underlying the SMPs invalidated in Maryland People's Counsel v. FERC, 761 F.2d 768 (D.C.Cir.1985) (MPC I ). The entire thesis of MPC I was that the Commission had failed to assure that transportation for those purposes did not unduly discriminate. Order No. 436 is the Commission's answer. It allows those sales to continue, so long as the transportation is provided on a nondiscriminatory basis. We can detect no reason why the Commission should even consider finding an especially soft berth for the SMP gas. Such a view would nullify this court's time limit on continuation of the SMPs. See Maryland People's Counsel v. FERC, 768 F.2d 450, 455 (D.C.Cir.1985) (MPC III ). 346 F. System Supply Limitation. 347 Prior to Order No. 436 a FERC regulation limited Sec. 311 transportation to gas delivered to an LDC, an intrastate pipeline, or an interstate pipeline for its 'system supply for resale.'  J.A. 504 (referring to 18 C.F.R. 284.102(b)). As part of Order No. 436 FERC amended this regulation to permit transportation under Sec. 311 in any case where it is on behalf of an intrastate pipeline or LDC, J.A. 505, thus incorporating the standards of the statute itself, NGPA Sec. 311(a)(1)(A), 15 U.S.C. Sec. 3371(a)(1)(A) (1982). Southern Indiana Gas and Electric Company contends that this change impermissibly opens the way for interstate pipelines to invade the core markets of LDCs without prior FERC approval or the approval of the state regulatory commission. Brief of Southern Indiana at 12. 41 As noted above, it points to a case where the LDC on whose behalf the gas is transported itself carries the gas for only six feet. Id. at 13. Southern Indiana argues that elimination of the test is a perversion of Sec. 311 because it will enable pipelines to bypass an LDC. 348 We disagree with Southern Indiana's contention that Sec. 311 was expressly intended to benefit LDCs. Id. The purpose of Sec. 311--so far as we are able to discern--is not to bestow special benefits on any of the parties on whose behalf it authorizes transportation (i.e., interstate pipelines and intrastate pipelines as well as LDCs), but to reduce the barriers between the interstate and intrastate gas markets. See Public Service Comm'n of the State of New York v. Mid-Louisiana Gas Co., 463 U.S. 319, 342, 103 S.Ct. 3024, 3037, 77 L.Ed.2d 668 (1983); Process Gas Consumers Group v. United States Dep't of Agric., 694 F.2d 728, 764 (D.C.Cir.1981) (other portions vacated and reconsidered en banc, 694 F.2d 778 (D.C.Cir.1982)), cert. denied, 461 U.S. 905, 103 S.Ct. 1874, 76 L.Ed.2d 807 (1983). The many comments received on this issue, including those of LDCs, indicate that the system-supply test frustrated this purpose by placing LDCs at a severe disadvantage as against pipelines serving industrial end users directly under Sec. 7 certificates. J.A. 504 & n. 119. The Commission's decision to eliminate the test in favor of a rule more closely tracking the language of the statute--and thereby rendering the legal barrier far more permeable--was well within its powers.G. Transportation for Fuel-Switchable End Users. 349 Laclede Gas Company contends that by adopting a program that permits fuel-switchable end users access to self-implementing transportation, FERC has impermissibly undermined the incremental pricing provisions of Title II of the NGPA, 15 U.S.C. Secs. 3341-48 (1982). We reject the claim. 350 Congress sought to achieve two purposes in providing for incremental pricing. The first was to protect high-priority end users from a portion of NGPA-permitted price increases by shifting those costs to industrial users. See Ohio Ass'n of Community Action Agencies v. FERC, 654 F.2d 811, 813 (D.C.Cir.1981). The second--the market-ordering purpose--was to maximize pipelines' incentive to bargain with producers. Congress recognized that the system of pricing tiers (low ceilings for old gas, higher ceilings for new and none for certain high-cost gas) could lead pipelines to bid more for new or high-cost gas than their estimates of the long run market-clearing price. (Simplifying, pipelines would use the savings on old gas to finance purchases of new or high-cost gas; though paying supra-market prices for the latter, it would be able to recover the cost by selling at average prices. See National Regulatory Research Institute, State Regulatory Options for Dealing with Natural Gas Wellhead Price Deregulation 40-51 (1983). But see Niskanen, Natural Gas Price Controls: An Alternative View, Regulation 46 (Nov./ Dec.1987).) Incremental pricing would supposedly cure this by forcing the pipelines to bid no more for high-cost or new gas than the price-elastic segment of the market would bear. See, e.g., Rule Required Under Section 202 of the Natural Gas Policy Act; Incremental Pricing, 45 Fed.Reg. 31,622, 31,623 (1980); Natural Gas Policy Act; Incremental Pricing; Phase II, 48 Fed.Reg. 55,294, 55,295-96 (1983). The principle has largely collapsed. Falling oil prices have made it impossible to load any significant portion of NGPA-permitted increases onto fuel-switchable consumers. 48 Fed.Reg. at 55,296. 42 351 Laclede's thesis is that elimination of the system supply test will facilitate industrial end users' efforts to purchase gas directly from producers rather than through pipelines or LDCs. This, it suggests, will evade the intent of Congress in establishing incremental pricing, as incremental pricing only operates on pricing by pipelines and LDCs, not on direct producer sales to end users. 352 Laclede's theory extrapolates far too much from the incremental pricing provisions. If accepted, it would seem to require invalidation of all blanket-certificate transportation for users possibly subject to incremental pricing, perhaps even case-specific certification. Further, Order No. 436 constitutes in itself an alternative mechanism for achieving the purposes of incremental pricing. First, it will give LDCs direct access to wellhead market prices considerably lower than pipelines' embedded contract gas costs. See supra part I. Second, by affording all parties access to a competitive wellhead market it prevents pipelines from passing through--and therefore from bidding--prices exceeding their estimates of the long run market-clearing price. Where the Commission has devised methods for effecting Congress's goals in Title II of the NGPA, it would be extraordinary for a court to spin out a remote inference from those provisions to strike down a portion of its handiwork. 353 Moreover, Congress was deeply concerned lest incremental pricing cause fuel-switchable end users to bolt the system, exposing high-priority customers to higher prices as a result of load loss. See Ohio Ass'n of Community Action Agencies v. FERC, 654 F.2d at 821-22. Order No. 436 in general, and elimination of the system supply test in particular, respond to that interest. By promoting fuel-switchable end users' use of pipeline transportation service, they make it possible for captive customers to bear a smaller portion of the pipelines' fixed costs.