Pennsylvania Office of Consumer Advocate v. F.E.R.C.

• Decision Date: 19 December 1997
• Docket Number: 93-1666,Nos. 93-1662,s. 93-1662
• Citation: 131 F.3d 182
• Parties: , Util. L. Rep. P 14,184 PENNSYLVANIA OFFICE OF CONSUMER ADVOCATE, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Carnegie Natural Gas Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 182

131 F.3d 182

327 U.S.App.D.C. 332, Util. L. Rep. P 14,184

PENNSYLVANIA OFFICE OF CONSUMER ADVOCATE, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Carnegie Natural Gas Company, et al., Intervenors.

Nos. 93-1662, 93-1666.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 14, 1997.

Decided Dec. 19, 1997.

On Petition for Review of Orders of the Federal Energy Regulatory Commission.

Denise C. Goulet, Harrisburg, PA, argued the cause for petitioners, with whom Irwin A. Popowsky, Lawrence F. Barth and John F. Povilaitis were on the briefs. Veronica A. Smith entered an appearance.

Timm L. Abendroth, Attorney, Federal Energy Regulatory Commission, Washington, DC, argued the cause for respondent, with whom Jay L. Witkin, Solicitor, John H. Conway, Deputy Solicitor, and Susan J. Court, Attorney, were on the brief. Joel M. Cockrell, Attorney, entered an appearance.

Before: EDWARDS, Chief Judge, WALD and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Chief Judge HARRY T. EDWARDS.

HARRY T. EDWARDS, Chief Judge:

At issue in this case is a claim by the Pennsylvania Office of Consumer Advocate ("Consumer Advocate") and the Pennsylvania Public Utility Commission ("Public Utility Commission") (collectively "petitioners") that the Federal Energy Regulatory Commission ("FERC" or "Commission") erred in approving restructured tariff provisions submitted by Carnegie Natural Gas Company ("Carnegie") under section 5 of the Natural Gas Act ("Act"), 15 U.S.C. § 717d (1994). In particular, the petitioners contend that Carnegie should not be allowed to retain revenues resulting from the pipeline's assessment of penalties against customers, because this will give Carnegie an unjust windfall in revenues. In petitioners' view, FERC should require Carnegie to flow through penalty revenues to customers of the pipeline who are not assessed penalties. The Commission, however, followed established policy in allowing Carnegie to retain penalty revenues. The assumption underlying this policy is that penalties are designed to deter wrongful customer behavior, not generate significant additional sums for a pipeline. FERC saw no good reason to deviate from this policy in the instant case.

On the record at hand, there is no basis upon which to overturn FERC's decision. Accordingly, the petitions for review are hereby denied.

I. BACKGROUND

A. Regulatory Background

In Order No. 636, ¹ FERC culminated a decade-long effort to revamp its regulations to create a more efficient market for natural gas at the wellhead. The principal innovation of Order 636 was the mandatory unbundling of pipelines' sales and transportation services, thereby requiring pipelines to sell gas and transportation services separately and allowing purchasers to obtain only the services they require. See United Distrib. Cos. v. FERC, 88 F.3d 1105, 1125-27 (D.C.Cir.1996) ("UDC"), cert. denied,--- U.S. ----, 117 S.Ct. 1723, 137 L.Ed.2d 845 (1997); Order No. 636, p 30,939, at 30,404-13; Order No. 636-A, p 30,950, at 30,527-46.

Order No. 636, and its "unbundled" regime, did not come without operational challenges to pipelines. Under the new regulatory regime, pipelines have reduced flexibility to adjust when customers unexpectedly deviate from their shipping schedules, and they cannot easily compensate for imbalances between volumes tendered to the pipeline and taken by a customer. Thus, a pipeline with a limited merchant function facing an overrun might be unable to sustain enough pressure ("line pack") to provide efficient and reliable transportation service to its other customers. See Carnegie Natural Gas Compliance Filing, Docket No. RS92-30-000 (Dec. 1, 1992) ("Compliance Filing"), at 35, reprinted in Joint Appendix ("J.A.") 35. A customer might also arrange to have tendered to the pipeline more gas than the customer ultimately takes within a specified time-frame. In this scenario, if the pipeline lacks the ability to reduce tenders from other sources of supply or to deliver gas to other points, the pressure build-up on the pipeline could threaten system integrity. Id.; see generally NorAm Gas Transmission Co., 79 F.E.R.C.p 61,126, at 61,543, reh'g denied, 80 F.E.R.C. p 61,100 (1997) (describing pipeline's operational problems that result from overruns).

Pipelines had faced related operational problems after the Commission's initial attempt in Order No. 436 to unbundle pipelines' transportation and sales services. See Order No. 436, Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 50 Fed.Reg. 42,408 (1985). Under that earlier order, pipelines filed "open-access" tariffs with the Commission offering to provide transportation service on a non-discriminatory basis. Pursuant to the Commission's regulations authorizing pipelines to propose reasonable operating conditions for open-access service, see 18 C.F.R. §§ 284.8(c) and 284.9(c) (1997), pipelines proposed penalty provisions that were designed to deter shippers from abusing their contractual rights to pipeline capacity. The Commission approved scheduling and imbalance penalties where pipelines could demonstrate a need to deter conduct that would undermine system integrity. See, e.g., El Paso Natural Gas Co., 35 F.E.R.C. p 61,440, at 62,066-70 (1986).

In Order No. 636, the Commission anticipated that pipelines would face additional operational problems in connection with the pipelines' heightened transportation function under the mandatory unbundling requirement. The Commission concluded that "[t]he pipeline and its shippers need to fashion reasonable, yet effective, methods such as penalties to deter shipper behavior inimical to the welfare of the system and other shippers." Order No. 636, p 30,939, at 30,424. Order No. 636 thus directed pipelines and shipper customers to work out individual pipeline solutions, to be considered in subsequent pipeline restructuring proceedings. Id.

B. Carnegie's Compliance Filing

Carnegie owns and operates a natural gas pipeline system in West Virginia and Pennsylvania. On December 2, 1991, Carnegie filed tariff sheets with the Commission to comply with Order No. 636. See Compliance Filing, J.A. 1-214. Fearing a loss of operational flexibility as a result of its new, unbundled structure and reduced merchant role, Carnegie proposed to assess penalties against customers whose actions threatened the operational integrity of Carnegie's system. In particular, Carnegie proposed penalties for violations of Operational Flow Orders--orders, which Carnegie was authorized to issue under the new regime, directing customers to take actions that would help keep the pipeline system in balance. Carnegie also proposed imbalance penalties, to be assessed against customers whose deliveries to the system fail to match their withdrawals, within a five percent overrun or underrun tolerance, where the customers fail to take timely corrective action after notification. See id. 34-37.

Shortly after Carnegie's submission, Consumer Advocate filed comments, urging the Commission, inter alia, to condition acceptance of Carnegie's filing on a requirement that the company credit back the revenues garnered from penalties to customers who did not engage in wrongful behavior. See Pennsylvania Office of Consumer Advocate's Comments and Limited Protest On Compliance Filing, Docket No.RS92-30-000 (Dec. 22, 1992) ("Comments"), at 28-30, reprinted in J.A. 242-44. Consumer Advocate argued that Carnegie should not be allowed to retain penalty revenues, because various other provisions of Carnegie's tariff afforded the company full protection against the improper actions of customers. In Consumer Advocate's view, Carnegie's retention of penalty revenues would result in a windfall to the pipeline, at the expense of those customers who bore the risk of degraded service caused by the offending customers. See id. at 243-44. Finally, Consumer Advocate argued that the established penalty-retention policy should not be followed under Order No. 636, because the new regime presented greater incentives for pipelines to assess penalties in circumstances beyond those contemplated by the traditional policy. Id.

In an order entered on April 22, 1993, the Commission rejected Consumer Advocate's request that all penalty revenues be credited to firm customers. See Carnegie Natural Gas Company, Docket No. RS92-30-000, "Order on Compliance with Restructuring Rule" (April 22, 1993), 63 F.E.R.C. p 61,103, at 61,645-46 (1993) ("April 1993 Order"). The Commission stated that it was "not convinced that the level of Carnegie's proposed penalties [was] unreasonable, nor that significant revenues will be generated from penalties." Id. The Commission announced, however, that it would revisit the issue in the future should Carnegie recover significant penalty revenues. Id. Moreover, the Commission ordered Carnegie to make modifications to its penalty provisions, the details of which are irrelevant to the issues before us, to provide for the crediting of revenues to customers under certain circumstances.

On May 21, 1993, Consumer Advocate and Public Utility Commission requested rehearing of the April 1993 Order. J.A. 302-35. In a subsequent order, the Commission again declined to order Carnegie to credit back all penalty revenues to non-offending customers. See Carnegie Natural Gas Company, Docket Nos. RS92-30-001 and -002, "Order on Compliance with Restructuring Rule, Granting Clarification, and Granting and Denying Rehearing" (August 2, 1993), 64 F.E.R.C. p 61,164, at 62,367-68 (1993) ("August 1993 Order"). The Commission justified its position, as it had in previous decisions addressing the revenue retention issue, "on the assumption that properly designed penalties will be successful in their goal of deterring violations and that therefore penalties will not generate significant revenues." Id. at 62,367 (citing, e.g., Florida Gas Transmission Co., 63...