890 F.2d 435 (D.C. Cir. 1989), 88-1623, Panhandle Eastern Pipe Line Co. v. F.E.R.C.

• Citation: 890 F.2d 435
• Party Name: PANHANDLE EASTERN PIPE LINE COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Case Date: November 17, 1989
• Court: United States Courts of Appeals, U.S. Court of Appeals — District of Columbia Circuit

Page 435

890 F.2d 435 (D.C. Cir. 1989)

PANHANDLE EASTERN PIPE LINE COMPANY, Petitioner,

v.

FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 88-1623.

United States Court of Appeals, District of Columbia Circuit.

November 17, 1989

Argued Sept. 11, 1989.

Brian D. O'Neill, with whom Raymond N. Shibley, Michael F. McBride and Bruce W. Neely, Washington, D.C., were on the brief, for petitioner.

Dwight Alpern, Atty., FERC, with whom Catherine C. Cook, Gen. Counsel, Joseph S. Davies, Deputy Sol., Washington, D.C., and Ethel Lenardson Morgan, Atty., FERC, were on the brief, for respondent.

Page 436

Before EDWARDS, RUTH BADER GINSBURG and SILBERMAN, Circuit judges.

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

HARRY T. EDWARDS, Circuit Judge:

Panhandle Eastern Pipe Line Company ("Panhandle") challenges two Federal Energy Regulatory Commission ("FERC" or "Commission") orders summarily dismissing certain tariff sheets filed by Panhandle. See Panhandle E. Pipe Line Co., 43 F.E.R.C. p 61,121 (1988), reh'g granted in part and denied in part, 43 F.E.R.C. p 61,530 (1988). The tariff sheets proposed a scheme for allocating pipeline capacity between Panhandle and its wholly owned subsidiary, Trunkline Gas Company ("Trunkline"), as a means of implementing the rights of Panhandle customers to convert entitlements to receive gas purchased from Panhandle into entitlements to transport gas purchased directly from gas producers. The Commission found that the proposal violated both the right to nondiscriminatory transportation services and a Commission policy against "capacity brokering." Panhandle petitions for review on the ground that the Commission's orders are arbitrary and capricious.

On the record before us, we find merit in the petition for review. During the pendency of this appeal, the Commission significantly revised one of the legal norms on which its decision rested, making it impossible for the court to determine the status of Panhandle's tariffs. Even apart from this change in agency policy, moreover, the Commission's rejection of Panhandle's tariffs is not supported by reasoned decisionmaking. Consequently, the petition for review is granted and the case is remanded for further proceedings.

1. BACKGROUND

   1. Regulatory Framework

      This case arises from Panhandle's attempt to comply with Commission Order No. 436, 50 Fed.Reg. 42,408 (1985), F.E.R.C. Stats. & Regs., Regulations Preambles 1982-1985 p 30,665 (codified in scattered sections of 18 C.F.R.). ¹ Recognized as one of the "great[est] regulatory milestones of the [natural gas] industry," Associated Gas Distribs. v. FERC, 824 F.2d 981, 993 (D.C.Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988), this regulation seeks to guarantee that the competitive conditions that now obtain in the "wellhead" or gas-production market will redound to the benefit of gas consumers. The order incorporates into FERC's licensing regime a variety of provisions intended to induce pipelines not to discriminate against customers who seek pipeline service to transport gas bought directly from gas producers rather than from the pipelines themselves. In the Commission's terms, Order 436 "unbundles" the pipelines' merchant and transportation functions. See generally F.E.R.C. Stats. & Regs., Regulations Preambles 1982-1985 p 30,665, at 31,474.

      A central component of Order No. 436 is the right of pipeline customers--predominantly local distribution companies--to convert their contractual entitlement to receive gas purchased from the pipelines into a

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      contractual entitlement to transport gas purchased from producers. See 18 C.F.R. Sec. 284.10 (1988). Encouraged by Commission regulations and policies, many distribution companies entered into long-term "firm demand" contracts that obligate the pipelines to guarantee delivery of up to a particular amount of gas on demand ("contract demand") in return for a fixed fee ("demand charge") paid by the distribution companies regardless of how much gas they actually consume. See generally Associated Gas Distribs., 824 F.2d at 1013. ² Both the duration of these contracts and their demand-charge terms operate to discourage distribution companies from purchasing cheap gas directly at the wellhead. To eliminate this problem, Order No. 436 makes certification to provide pipeline transportation services conditional on a pipeline company's agreement to permit its firm-sales customers to convert their entitlement to purchase and receive a particular amount of gas from the pipeline into an entitlement merely to transport a "volumetrically equal amount" of gas. See 18 C.F.R. Sec. 284.10(c)(1). ³

      During the comment period for Order No. 436, pipeline companies expressed concern over how this conversion right would affect demand for pipeline capacity. Notwithstanding the right of customers effectively to withdraw from long-term firm-demand contracts, pipeline companies remain obligated--contractually and otherwise, see Associated Gas Distribs., 824 F.2d at 1013--to satisfy the demand of those customers who choose to continue to purchase their gas from the pipelines. In promulgating Order No. 436, the Commission reasoned that "unbundling" the transportation and merchant functions of the pipelines would not interfere with the pipeline companies' legal obligation to service their remaining sales customers, because any customer exercising its conversion right would have "already booked the transportation capacity currently 'bundled' with" its entitlement to receive a particular amount of gas. Order No. 436, F.E.R.C. Stats. & Regs., Regulations Preambles 1982-1985 p 30,665, at 31,517.

      The Commission subsequently recognized, however, "that in some cases a customer w[ould] seek[ ] to use different segments of the pipeline system," thus potentially interfering with a pipeline's ability to meet its remaining firm-sales obligations. The Commission therefore announced that allocation problems would "be dealt with on a case-by-case basis." Order No. 436-A, F.E.R.C. Stats. & Regs., Regulations Preambles 1982-1985 p 30,675, at 31,664. The Commission has subsequently made clear through adjudication that a pipeline "company [may] impose reasonable operating conditions" on a customer's conversion right in order effectively to manage pipeline capacity. ANR Pipeline Co., 39 F.E.R.C. p 61,029, at 61,072 (1987); see also Columbia Gulf Transmission Co., 34 F.E.R.C. p 61,408, at 61,775 (1986). ⁴

   2. Proceedings Before the Commission

      On March 28 and March 30, 1988, Panhandle filed for Commission approval a series of tariff schedules relating to the conversion rights of Panhandle's customers. The major issue addressed by the tariffs was allocation of pipeline capacity. ⁵ The "integrated Panhandle system"--to use Panhandle's language--consists of Panhandle's own "West End" pipeline originating

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      in Kansas, ⁶ and Trunkline's pipeline originating in the Gulf of Mexico. The two systems converge in Tuscola, Illinois, from which Panhandle serves customers throughout the Midwest. See Joint Appendix ("J.A.") 61-62. ⁷ Panhandle asserted before the Commission that it would be unable to meet its contract-demand obligations if forced to accommodate all transportation conversion requests solely on its West End line. See id. 43. It therefore proposed in its tariff that its customers' conversion entitlements be apportioned between West End and Trunkline on a 61:39 ratio, consistent with the percentage of gas contributed by each to the Panhandle line serving customers east of Tuscola. See id. 21. A customer's unused transportation entitlement on Trunkline would, on request, be honored on the West End pipeline on a first-come, first-served basis, as capacity became available. See id.

      The Commission summarily rejected Panhandle's tendered tariffs, ruling that "Panhandle must provide capacity on its West End System for all conversions up to that system's capacity." Panhandle E. Pipeline Co., 43 F.E.R.C. p 61,530, at 62,318 (1988). ⁸ Panhandle's proposal to allocate transportation capacity between West End and Trunkline, the Commission found, was "unjust and unreasonable" because it denied Panhandle's customers access to the major gas wells served by the West End line. See id. at 62,318. "In addition," the Commission announced, "capacity brokering is not allowed under current policy." Id. Finally, the Commission reasoned that Panhandle's attempt "to force customers to use Panhandle's capacity on Trunkline" distinguished the major precedent relied on by Panhandle, Columbia Gulf Transmission Co., 34 F.E.R.C. p 61,408 (1986). Panhandle E. Pipeline Co., 43 F.E.R.C. at 62,318.

2. ANALYSIS

   1. Change in Governing Law

      During the pendency of this appeal, the Commission revised one of the legal norms supporting its rejection of Panhandle's tariffs: FERC's policy against "capacity brokering." Capacity brokering is the practice whereby a party entitled to transportation services on a particular pipeline assigns or "brokers" that entitlement to another party; in this case, the Commission rejected Panhandle's tariffs on the ground that Panhandle was proposing to assign a fraction of its transportation entitlement on Trunkline's pipeline to Panhandle customers who exercise their transportation-conversion rights. Following the issuance of its decision in this case, however, the Commission has indicated through adjudication that it now "believes that capacity brokering ... should be addressed in individual cases," and even "encourage[d]" in appropriate circumstances. Interstate Natural Gas Pipeline Rate Design, 48 F.E.R.C. p 61,122, at 61,448 n. 64 (July 27, 1989); see, e.g., United Gas Pipe Line Co., 46 F.E.R.C. p 61,060, at 61,263 (January 24, 1989).

      Because we cannot determine how FERC's change in policy affects the status of Panhandle's tariffs, we are obliged to remand the case for further proceedings....