Maryland People's Counsel v. F.E.R.C.
| Decision Date | 10 May 1985 |
| Docket Number | No. 84-1019,84-1019 |
| Citation | 761 F.2d 768,245 U.S.App.D.C. 365 |
| Parties | , 66 P.U.R.4th 529 MARYLAND PEOPLE'S COUNSEL, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Public Service Commission of the State of New York, Washington Gas Light Company, Pennsylvania Gas and Water Company, Baltimore Gas and Electric Company, UGI Corporation, Columbia Gas Transmission Corporation, et al., Process Gas Consumers Group, Public Service Commission of West Virginia, City of Charlottesville, Virginia, Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Carmen D. Legato, Washington, D.C., with whom John K. Keane, Jr. and Thomas C. Gorak, Baltimore, Md., were on brief, for petitioner.
Joanne Leveque, Atty. F.E.R.C., Washington, D.C., with whom Barbara J. Weller, Deputy Solicitor, F.E.R.C., were on brief, for respondent. Jerome M. Feit, Solicitor, F.E.R.C., Washington, D.C., entered an appearance for respondent.
Stephen J. Small, Charleston, W.Va., with whom Giles D.H. Snyder, Charleston, W.Va., was on brief, for intervenors Columbia Gas Transmission Corp., et al.
Frank P. Saponaro, Jr. and Jennifer K. Walter, Washington, D.C., were on brief, for intervenor UGI Corp.
Frederick Moring, Jennifer N. Waters, Washington, D.C., Hodges B. Childs and Charles A. Herndon, Jr., Baltimore, Md., were on brief, for intervenor Baltimore Gas and Elec. Co.
Edward J. Grenier, Jr., William H. Penniman and Richard A. Oliver, Washington, D.C., entered appearances for intervenor Process Gas Consumers Group.
Glenn W. Letham and Channing D. Strother, Jr., Washington, D.C., entered appearances for intervenor Pennsylvania Gas and Water Co.
Richard E. Hitt entered an appearance for intervenor Public Service Com'n of West Virginia.
Stanley W. Balis, Washington, D.C., entered an appearance for intervenor City of Charlottesville, Va.
Richard A. Solomon and David D'Alessandro, Washington, D.C., entered appearances for intervenor Public Service Com'n of the State of N.Y. Lewis Carroll, Washington, D.C., entered an appearance for intervenor Washington Gas Light Co.
Before MIKVA, GINSBURG and SCALIA, Circuit Judges.
Opinion for the Court filed by Circuit Judge SCALIA.
This is a challenge to the Federal Energy Regulatory Commission's approval of what it described as an "experimental increase in [natural gas] pipeline competition." That increase was to be achieved by agreement of a pipeline and its producers to amend the high-priced gas purchase contracts entered into between them in earlier years, so as to permit the producers to sell the committed gas elsewhere (at current market prices), crediting the volume of such sales against the pipeline's high-priced purchase obligations. This challenge is brought, curiously enough, not by the competing pipelines or producers to whose flanks this new spur of competition is being applied, but by representatives of the putative beneficiaries, customers of the pipeline system. Their complaint is that, under the arrangements approved by the Commission, the only customers eligible to purchase the cheaper released gas are industrial users who would, at the higher gas prices agreed to in the original contracts, switch to an alternate fuel. They claim that because of this limitation "captive customers" of the pipeline--those who do not have alternate fuel sources to which they may turn--receive no net benefit, but to the contrary suffer a net loss from the arrangement. The principal issue before us is whether the Commission set forth a reasonable basis for believing that the program it approved will benefit all pipeline ratepayers.
A modest understanding of the complex regulatory background of this dispute is necessary to evaluate the arguments made before us. 1 Pipelines regulated by the Natural Gas Act transport natural gas from producers to distributors and end-users in other states. Ordinarily (though not invariably) they purchase the gas on their own account and resell it to their customers. While they may transport gas purchased directly by distributors or end-users from producers, they have no common-carrier obligation to do so. Their rates to distributors (but not to end-users) are regulated by FERC. However, while that portion of the rate attributable to transportation costs (the fixed and incremental costs of constructing and operating the pipeline) is determined by standard public utility rate-making techniques, the much larger portion attributable to the cost of the transported gas is effectively unregulated at the pipeline stage. FERC permits that cost to be passed through, without assuring that the purchase price was a prudent one. A pipeline's purchase costs for all the gas it acquires are averaged to determine the appropriate gas-cost component of its rates.
Previously, lack of gas price regulation at the pipeline stage would have made little difference, since FERC (or more accurately its predecessor, the Federal Power Commission) regulated gas prices (for interstate gas) at the wellhead, controlling the maximum prices that producers could charge. Because it fixed those prices well below market, a large discrepancy developed between the price for interstate gas and the price for unregulated intrastate gas, and gas production was withheld from the interstate market. After the interstate gas shortages and curtailments of 1976-77, Congress almost entirely terminated Commission wellhead-price regulation, and provided in the Natural Gas Policy Act of 1978, 15 U.S.C. Secs. 3301-3432 (1982) ("NGPA"), statutorily prescribed wellhead price ceilings for various categories of gas, in both inter-state and intra-state markets. Certain categories of gas (notably, so-called "deep gas" from wells below 15,000 feet) were immediately deregulated; so-called "old interstate gas" (generally, gas dedicated to interstate commerce from wells producing in commercial quantities before April 20, 1977) was left forever regulated, subject to a price ceiling close to the old regulated price with an adjustment only for inflation; 2 and so-called "new gas" (generally, gas from wells first producing in commercial quantities after April 20, 1977) was made subject to constantly increasing price ceilings that would eventually reach a figure predicted to approximate the market price in 1985, at which point new gas also would be deregulated.
The problem ultimately giving rise to the present litigation is that the 1978 predictions of the 1985 market were much in error. Factors ranging from the increased wellhead prices and impending total decontrol, to greater energy conservation, to the lower prices of competing fuels, have turned the natural gas shortages of the 1970's into a natural gas surplus. Thus, as early as the summer of 1983--a year and a half before the scheduled deregulation of new gas--the formulary statutory maximum price for new gas had already reached or exceeded the market-clearing price in many geographic markets. See N. CLARK & G. CLARK, supra, at 16 (). Pipelines, however, by reason of their practice of entering into long-term contracts with producers, were already locked into purchases, for years to come, of NGPA unregulated gas and new gas in volumes and at prices based upon the 1978 expectations.
If all natural gas customers were as a practical matter compelled to buy gas, the consequence of this miscalculation would merely be that they would be paying more for the gas they purchase than it is now "worth." In fact, however, many existing customers (and many would-be customers whose new business was contemplated in the pipelines' long-term purchases) can shift to alternate fuels that are cheaper than the gas that has been purchased by the pipelines (though not cheaper than the current market price of gas). The departure of these customers imposes two added burdens upon the customers that remain: (1) the "fixed cost" component of their rates will rise, because it must now be divided among a smaller number of ratepayers, and (2) the gas cost component of their rates will rise even further above its already-inflated level, since the pipelines' average gas cost per unit volume will be substantially increased by "take-or-pay" liabilities to producers--that is, liabilities under standard provisions of their long-term contracts requiring payment for a minimum volume of purchase whether or not it is in fact taken. Of course these additional increases make it worthwhile for even more customers to leave the system, so that the situation becomes still worse.
To meet this situation, which has been described as placing the natural gas industry in "chaos" and "turmoil," N. CLARK & G. CLARK, supra, at 16 & 17, one pipeline, Columbia Gas Transmission Corporation ("Columbia"), invoked the force majeure provisions of its gas purchase contracts with all of its suppliers to reduce its purchase liability of gas below "take-or-pay" and minimum daily purchase levels for the period commencing April 1983 through at least November 1983. Recognizing that this unilateral action would prompt litigation about whether force majeure principles properly applied, Columbia sought to conclude negotiated contract modification agreements with its suppliers. On June 3, 1983, it concluded such an agreement with its largest supplier, Exxon Corporation. The core of the agreement was that Columbia would release its contract rights to certain categories of gas in specified Exxon fields (subject to retraction if Columbia should need the gas to fulfill its customer obligations), and would transport that released gas to direct purchasers from Exxon on Columbia's system; in exchange for which Exxon would credit Columbia's take-or-pay liability with the volume...
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