Maryland People's Counsel v. F.E.R.C., 84-1090

• Citation: 761 F.2d 780
• Decision Date: 10 May 1985
• Docket Number: No. 84-1090,84-1090
• Parties: , 66 P.U.R.4th 542 MARYLAND PEOPLE'S COUNSEL, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Associated Gas Distributors, Process Gas Consumers Group and American Iron and Steel Institute, Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 780

761 F.2d 780

245 U.S.App.D.C. 377, 66 P.U.R.4th 542

MARYLAND PEOPLE'S COUNSEL, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent,

Associated Gas Distributors, Process Gas Consumers Group and

American Iron and Steel Institute, Intervenors.

No. 84-1090.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 22, 1985.

Decided May 10, 1985.

Carmen D. Legato, Washington, D.C., with whom Thomas M. Lemberg, Washington, D.C., John K. Keane, Jr. and Thomas C. Gorak, Baltimore, Md., were on brief, for petitioner.

Andrea Wolfman, Atty., F.E.R.C., Washington, D.C., with whom Barbara J. Weller, Deputy Solicitor, F.E.R.C., Washington, D.C., was on brief, for respondent. Jerome M. Feit and A. Karen Hill, Attys., F.E.R.C., Washington, D.C., entered appearances for respondent.

William H. Penniman, Washington, D.C., with whom Edward J. Grenier, Jr., Washington, D.C., was on brief, for intervenors Process Gas Consumers Group, et al. Richard A. Oliver, Washington, D.C., entered an appearance for intervenors Process Gas Consumers Group, et al.

Frederick Moring and Herbert J. Martin, Washington, D.C., were on brief, for intervenor Associated Gas Distributors.

Before MIKVA, GINSBURG and SCALIA, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge:

This case is a companion to Maryland People's Counsel v. FERC, 761 F.2d 768 (D.C.Cir.1985) (MPC I ); ¹ it features Federal Energy Regulatory Commission (Commission or FERC) "blanket" permission for interstate transportation of natural gas sold directly by producers to end users. The Commission action challenged here is part of the agency's response to the unanticipated swing from the natural gas shortages of the 1970's to the "deliverability surplus" of the 1980's. Notably, the surplus has not been attended by lower prices to most natural gas consumers. ² Instead, between the inception of the surplus in 1981 and the second quarter of 1984, rates paid by residential gas users rose by almost 23% in real-dollar terms. See ASSISTANT SECRETARY FOR POLICY, SAFETY, & ENV'T, U.S. DEP'T OF ENERGY, INCREASING COMPETITION IN THE NATURAL GAS MARKET: THE SECOND REPORT REQUIRED BY SECTION 123 OF THE NATURAL GAS POLICY ACT OF 1978, at 8 table 1-3, 17 (DOE/PE-0069 Jan. 1985) [hereinafter cited as DOE REPORT]. ³

In the orders at issue, ⁴ FERC expanded interstate pipelines' authority for the carriage of direct-sale gas ⁵ to encompass transportation to "any end user, including those who use gas as a boiler fuel." 48 Fed.Reg. 34,872 (1983). ⁶ The controversy before us is sparked by the thrust of FERC's action: the orders permit pipelines to transport gas at lowered prices to "noncaptive consumers"--large industrial end users capable of switching to alternative fuels--without any obligation to provide the same service to "captive consumers," a group that includes local distribution companies (LDCs) and their residential customers.

The Commission, we conclude, has not adequately attended to the agency's prime constituency--the consumers whom the Natural Gas Act (NGA) was designed "to protect ... against exploitation at the hands of natural gas companies." FPC v. Hope Natural Gas Co., 320 U.S. 591, 610, 64 S.Ct. 281, 291, 88 L.Ed. 333 (1944). Principally, the Commission has slighted its charge by failing to evaluate the anticompetitive consequences of its action. We therefore vacate the "blanket certificate" orders insofar as they permit transportation to fuel-switchable end users without requiring pipelines to provide the same service to LDCs and captive consumers on nondiscriminatory terms, and we remand the matter to the Commission for renewed consideration.

I.

Acute gas shortages during the 1970's prompted Congress to enact the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. Secs. 3301-3432 (1982). To stimulate the interstate flow of gas, the NGPA substantially terminated Commission wellhead price regulation. ⁷ Mindful of the lean years, interstate pipelines promptly tied themselves to long-term contracts with producers at decontrolled prices; many of these contracts provided for automatic price escalations. But the market forecasts leading pipelines to high-price contracts that ran for years proved incorrect. Mild winters, conservation habits acquired in curtailment days, and the lower prices of competing fuels contributed to a decline in demand. FERC became particularly concerned about the ability of large industrial fuel users to shift to alternative fuels cheaper than the gas purchased by pipelines under long-term contracts: fuel-switchable customers' departure from the system, the Commission feared, would saddle pipelines' "captive" customers with larger shares of the pipelines' fixed costs and dull producers' appetite for future exploration and development. See 48 Fed.Reg. at 34,872.

Traditionally, gas has flowed "from producer to pipeline to distributor to consumer, with title passing at each change of possession." Pierce, supra note 2, at 348. But FERC surveyed a situation in which producers had excess gas on their hands while pipelines locked into disadvantageous contracts with producers were "seemingly ... unable to respond to price competition from alternative fuels." 48 Fed.Reg. at 34,872. The Commission saw promise in arrangements whereby pipelines would simply transport gas sold directly by producers, at prices competitive with alternative fuels, to end users who might otherwise exit the system. Cf. MPC I (gas released from contract between producer and pipeline with corresponding reduction of pipeline's "take-or-pay" liability). FERC therefore decided to facilitate such arrangements.

Section 7(c)(2) of the NGA, see supra note 5, authorizes FERC to permit interstate transportation of direct-sale gas "used by any person for one or more high-priority uses, as defined, by rule, by the Commission." 15 U.S.C. Sec. 717f(c)(2) (1982). ⁸ The Commission had previously implemented this authority in regulations governing certificates for transportation of direct-sale gas to certain high-priority users, including hospitals, schools, and parties proposing to put the gas to an "essential agricultural use." See Certification of Pipeline Transportation for Certain High Priority Uses, 44 Fed.Reg. 24,825, 24,828 (1979) (Order No. 27) (codified at 18 C.F.R. Secs. 157.100-.105 (1984)). FERC had also issued a kindred order (based on section 311(a) of the NGPA, 15 U.S.C. Sec. 3371(a) (1982)) approving a temporary transportation program to wean certain fuel-switchable end users off then scarce fuel oil. See Transportation Certificates for Natural Gas for the Displacement of Fuel Oil, 44 Fed.Reg. 30,323 (1979) (Order No. 30) (expired 1981). In the action challenged here, the Commission invoked section 7(c)(2) to broaden pipelines' transportation authority in two significant respects.

First, Order No. 319 streamlines section 7 certification procedures by establishing criteria for the issuance of "blanket certificates" for the transportation of direct-sale gas. ⁹ Any transportation program meeting the order's criteria is "generically" authorized to proceed on a "self-implementing" basis. This means that a full-dress section 7 inquiry into the "public convenience and necessity" is required neither for the entire program nor for the separate transactions the program comprises. Blanket certificates for transportation to "high-priority" end users (a category that Order No. 319 expands, see 48 Fed.Reg. at 34,877) are good for ten years if the gas is "owned and developed" by the end user, for five years if not. Authorization for longer periods may be obtained pursuant to simplified "notice and protest" procedures. See 18 C.F.R. Sec. 157.205 (1984) (automatic authorization if no protests are filed within forty-five days of publication in the Federal Register ). Among further streamlining prescriptions, Order No. 319 provides that two-year blanket certificates for transportation to LDCs--made possible by preexisting regulations, see id. Sec. 284.102--may be supplemented by authorization for longer periods if notice-and-protest procedures are followed. See id. Sec. 157.209(a)-(b); 48 Fed.Reg. at 34,876, 34,879.

Order No. 319 is not attacked in this case--indeed it is applauded--to the extent that it merely shrinks regulatory obstacles to transportation of lower priced gas to LDCs and high-priority end users. In conjunction with Order No. 234-B, however, the procedural simplifications take on a different cast. Order No. 234-B, issued the same day as Order No. 319, swells the ranks of end users eligible for direct-sale gas by permitting "transportation under the blanket certificate for any end user, including those who use gas as a boiler fuel." 48 Fed.Reg. at 34,872. Blanket certificates allow such transportation to proceed on a self-implementing basis for 120 days; as in the case of transportation to high-priority end users, longer-running authorization may be sought in notice-and-protest proceedings. Id. at 34,874. The order states that low-priority end users are to be included in the blanket certificate program "during a two-year experimental period extending through June 30, 1985," id. at 34,873; several weeks ago, FERC proposed an enlargement of this trial period until December 31, 1985, see supra note 6.

The Commission initially offered this declaration of its hope that Order No. 234-B might be good for what ails the gas market:

[A]uthorization of interstate pipeline transportation would be greatly expedited, and the Commission hopes that this flexibility will more easily permit gas to reach markets at prices reflective of the supply and demand characteristics of those markets. In addition, it may mitigate the pressures being felt by interstate pipelines ... and shield customers without alternative fuel capability from increased pipeline fixed costs. The Commission believes that this designation will encourage...