Opinion ID: 586801
Heading Depth: 2
Heading Rank: 1

Heading: The Continuing Take-or-Pay Saga

Text: 6 In 1985, FERC adopted Order No. 436, 50 Fed.Reg. 42,408 (1985), creating a set of open access regulations aimed at requiring interstate gas pipelines to transport natural gas owned by others on a nondiscriminatory basis, and overcoming pipelines' general refusal to move gas that would compete with their own sales. This court upheld much of Order No. 436, finding open access to be an important tool in the effort to create a more competitive gas market. See Associated Gas Distributors v. FERC, 824 F.2d 981, 994 (D.C.Cir.1987), cert. denied sub nom. Interstate Natural Gas Ass'n v. FERC, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988) (AGD I ). 7 Though we approved the open access concept, we nonetheless vacated portions of Order No. 436 because FERC had failed to address some fundamental and pressing concerns--most notably the rule's effect on pipelines' take-or-pay problems. See AGD I, 824 F.2d at 1023-25. Take-or-pay problems had arisen from clauses in gas purchase contracts between pipelines purchasing--not merely transporting--gas and the producers of that gas. These clauses required pipelines either to purchase a specified percentage of the producer's deliverable gas or to make 'prepayments' for that percentage anyway. Id. at 1021. Between 1977 and 1982, pipelines undertook take-or-pay contracts at prices above then-current market levels, anticipating that the cost of gas would rise. This anticipation proved flatly wrong. By 1982, it had become painfully obvious that pipelines had committed themselves to prices well in excess of what the market actually required, resulting in a sunk cost for the pipeline industry of several billion dollars. 8 We held that the advent of a competitive open access system, while generally acceptable, would have adverse consequences on the pipelines' ability to solve their take-or-pay problems; in fact, it would make cost recovery through commodity rates impossible. Id. at 1044. FERC's blindness to the possible impact of open access on the capacity of many pipelines to cover their take-or-pay costs while remaining economically viable was, we found, incompatible with our requirement of reasoned decisionmaking. Id. at 1025. Consequently, we remanded the take-or-pay issue, asking FERC to reconsider its treatment of this discrete transition problem, and noting that candidates for th[e] dismal position of bearing the cost of take-or-pay losses, included [a]ll actors in the natural gas industry, except fuel-switchable users, who can employ the cheapest fuel competing with gas and thus cannot be induced to pay more than the current competitive price. Id. at 1021. 9 FERC shortly thereafter issued Order No. 500. In it, the Commission recognized that no one segment of the natural gas industry or particular circumstance appears wholly responsible for the take-or-pay problem and, thus, that all segments should shoulder some of the burden of resolving the problem. Order No. 500, 52 Fed.Reg. at 30,337. Accordingly, FERC provided that pipelines could continue to recover their take-or-pay costs either through the traditional sales commodity rate method or through a new equitable sharing mechanism. Equitable sharing dictated that if pipelines willingly absorbed between 25 and 50 percent of their take-or-pay costs, they could require their sales customers to match that amount in a fixed charge. Moreover, if any residuum remained (and there could be as much as 50 [297 U.S.App.D.C. 16] percent or as little as none), pipelines could recover it either through a commodity rate surcharge or a volumetric surcharge. FERC codified the equitable sharing principle announced in Order No. 500 at 18 C.F.R. § 2.104(a). 10 Upon review, we invalidated the fixed charge portion of Order No. 500. We did so because the charge was itself calculated by reference to the purchase deficiency method whereby a customer's purchases in years when take-or-pay liabilities were incurred was subtracted from that customer's purchases during a base period before take-or-pay liabilities. 18 C.F.R. § 2.104(b). Such a method of calculation, we found, stood in plain contradiction to the dictates of the filed rate doctrine. Associated Gas Distributors v. FERC, 893 F.2d 349, 355 (D.C.Cir.1989), cert. denied sub nom. Berkshire Gas Co. v. Associated Gas Distributors, --- U.S. ----, 111 S.Ct. 277, 112 L.Ed.2d 232 (1990) (AGD II ). 11 In response, FERC has drawn up yet another set of guidelines governing allocation of take-or-pay costs to replace the defective Order No. 500. See Order No. 528, 53 FERC (CCH) p 61,163 (Nov. 1, 1990). Petitions for rehearing of Order No. 528 are pending before the Commission, and a petition for judicial review has been filed with this court, but not yet heard. Tennessee Gas Pipeline Co. v. FERC, No. 91-1069 (D.C.Cir. filed Feb. 8, 1991).