Baltimore Gas & Elec. Co. v. F.E.R.C.

• Decision Date: 24 June 1994
• Docket Number: 88-1786,92-1147,89-1266,89-1276,89-1274,89-1383,89-1456,Nos. 88-1779,89-1555,93-1258,88-1803,92-1148,88-1899,92-1138,89-1207,88-1796,88-1844,94-1013 and 94-1163,92-1136,89-1351,89-1282,92-1135,88-1909,92-1141,89-1264,88-1885,88-1871,s. 88-1779
• Citation: 26 F.3d 1129
• Parties: BALTIMORE GAS & ELECTRIC COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, UGI Utilities, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1129

26 F.3d 1129

307 U.S.App.D.C. 65

BALTIMORE GAS & ELECTRIC COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, UGI Utilities, et al., Intervenors.

Nos. 88-1779, 88-1786, 88-1796, 88-1803, 88-1844, 88-1871,

88-1885, 88-1899, 88-1909, 89-1207, 89-1264, 89-1266,

89-1274, 89-1276, 89-1282, 89-1351, 89-1383, 89-1456,

89-1555, 92-1135, 92-1136, 92-1138, 92-1141, 92-1147,

92-1148, 93-1258, 94-1013 and 94-1163.

United States Court of Appeals, District of Columbia Circuit.

Argued May 10, 1994.

Decided June 24, 1994.

Timothy N. Black argued the cause for intervenor Columbia Gas Transmission Corp. With him on the brief were John H. Pickering, Susan D. McAndrew, Giles D.H. Snyder and Stephen J. Small.

Mark C. Darrell entered an appearance for intervenor Cities of Charlottesville and Richmond, Virginia.

John S. Schmid entered an appearance for intervenor Delmarva Power & Light Co.

George L. Weber and Kenneth L. Glick entered an appearance for intervenor National Fuel Gas Supply Corp.

Richard S. Shapiro and Steve Stogic entered an appearance for intervenor Mountaineer Gas Co.

Denis E. George entered an appearance for intervenor Dayton Power & Light Co.

Ronald N. Carroll, James E. Coleman, Jr., and Mark J. Leimkuhler entered an appearance for intervenor Columbia Gas Transmission Corp.

Daniel P. Delaney entered an appearance for intervenor Pennsylvania Public Utility Com'n.

Frank H. Strickler, Ralph E. Fisher and Gordon M. Grant entered an appearance for intervenor Washington Gas Light Co.

Joseph E. Killory, Jr., Mark D. Clark and Gary D. Wilson entered an appearance for intervenor Columbia Gas Transmission Corp.

William C. Bingham, Jr. entered an appearance for intervenor South Jersey Gas Co.

Donald K. Danker entered an appearance for intervenor Cent. Hudson Gas & Elec. Corp.

Judy M. Johnson, D. Virginia Smith and F. Nan Todd Wagoner entered an appearance for intervenor Texas Eastern Transmission Corp. Lynne H. Church entered an appearance for intervenor Baltimore Gas & Elec. Co.

Jennifer N. Waters, Baltimore Gas & Electric Co. argued the cause for petitioners. With her on the joint brief of petitioners and intervenors were Robert S. Fleishman, Andrew P. Mosier, Jr., Baltimore Gas & Electric Co., Allan W. Anderson, Jr., Allied-Signal Inc., Frederick J. Killion, Cent. Hudson Gas & Elec. Corp., James J. Mayer, John G. Banner, William A. Williams, Kenneth R. Carretta, John F. Harrington, Cincinnati Gas & Elec. Co. and Union Light, Heat and Power Co., Stanley W. Balis, Cities of Charlottesville and Richmond, Virginia, James P. White, Columbia Small Customer Group, Barbara K. Heffernan, Cheryl L. Jones, Delmarva Power & Light Co. and The Providence Gas Co., Paula M. Carmody, Maryland People's Counsel, John F. Harrington, Mountaineer Gas Co., Jonathan D. Schneider, James C. Beh, New York State Elec. & Gas Corp., Jeffrey G. DiSciullo, Jeanne M. Bennett, North Carolina Natural Gas Corp., Morton L. Simons, North Carolina Utilities Com'n, Barry Cohen, Margaret Ann Samuels, Joseph P. Serio, Office of the Consumers' Counsel, State of Ohio, Nicholas W. Mattia, Jr., Robert A. Nelson, Jr., Orange and Rockland Utilities, Inc., Lawrence F. Barth, Veronica A. Smith, John F. Povilaitis, Pennsylvania Public Utility Com'n, William M. Penniman, Katherine P. Yarbrough, Process Gas Consumers Group, et al., David D'Alessandro, Richard A. Solomon, Kelly A. Daly, Public Service Com'n of the Com. of Kentucky and the Public Service Com'n of the State of New York, Mary E. Baluss, Christopher J. Barr, Kent K. Murphy, UGI Utilities, Inc., James F. Bowe, Jr., O. Julia Weller, Virginia Natural Gas, Inc. and West Ohio Gas Co. and Telemac N. Chryssikos, Washington Gas Light Co.

Joel M. Cockrell, Atty., Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Jerome M. Feit, Sol., and Joseph S. Davies, Deputy Sol., Federal Energy Regulatory Commission. Jill L. Hall, Atty., Federal Energy Regulatory Commission, entered an appearance.

Michael J. Manning entered an appearance for intervenor Columbia Small Customer Group.

Harry H. Voight, M. Reamy Ancarrow, Mindy A. Buren and Diane B. Schratwieser entered an appearance for intervenor Orange and Rockland Utilities, Inc.

Michael J. Thompson and Donald W. McCoy entered an appearance for intervenor North Carolina Natural Gas Corp.

John K. Keane, Jr. and Robert B. Evans entered an appearance for intervenor Washington Gas Light Co.

O. Julia Weller and James F. Bowe, Jr. entered an appearance for People's Natural Gas Co.

Before: EDWARDS, GINSBURG and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge EDWARDS.

HARRY T. EDWARDS, Circuit Judge:

This case presents yet another chapter in the story of the "take-or-pay" debacle in the natural gas pipeline industry. Petitioners are a group of local distribution companies and end-users that purchase natural gas from intervenor Columbia Gas Transmission Company ("Columbia"), an interstate pipeline regulated by the Federal Energy Regulatory Commission ("FERC" or "Commission"). During the early 1980s, petitioners commenced litigation against Columbia, claiming that the cost of gas purchased by petitioners from Columbia was excessive due to imprudent gas purchasing practices by Columbia. In 1985, a settlement agreement (the "1985 settlement") was reached whereby Columbia was relieved of significant potential liabilities to petitioners in exchange for the pipeline's agreement to forego its right to recover certain costs from them.

Beginning in 1986, the Commission issued a series of more than forty orders interpreting the 1985 settlement, in an attempt to resolve disputes between Columbia and petitioners as to whether the settlement permitted Columbia to pass through to petitioners various costs it incurred from upstream pipelines. At issue here are surcharges imposed on Columbia by upstream pipelines for losses they incurred as a result of their take-or-pay obligations during the first half of the 1980s. Columbia seeks to pass on these costs to petitioners. Petitioners argue that a significant portion of these surcharges are covered by the 1985 settlement and, as such, are not properly chargeable to them. In its most recent attempt to resolve this dispute, FERC ruled that, although the disputed charges arose solely by virtue of take-or-pay obligations incurred within the settlement period, these charges could be attributed to gas purchases made by Columbia after the settlement period; under this theory, FERC found that the surcharges were not barred by the 1985 settlement and that Columbia could therefore pass them on to petitioners. In the same proceedings, FERC also ruled that petitioners were barred by the 1985 settlement from challenging the prudence of Columbia's purchasing practices that led to the disputed liabilities. Petitioners challenge both of these determinations.

The principal issue in this case presents a straightforward question of contract interpretation: whether the 1985 settlement prohibits Columbia from passing on the disputed costs to petitioners. Although FERC defends its ruling by reference to a purported policy of spreading take-or-pay liabilities across the natural gas pipeline industry, such concerns are irrelevant here. FERC may be able to spread the burden of take-or-pay costs, but not as to parties who have provided for a different result by means of a lawful settlement agreement.

The language of the 1985 settlement provides that Columbia may not pass through take-or-pay costs "applicable to" the settlement period. On the record in this case, it is undisputed that a significant portion of the disputed surcharges were caused by Columbia's settlement period purchases and exist only because of those purchases. These costs plainly are "applicable to" the settlement period, and petitioners gave consideration to avoid precisely such costs. The Commission cannot negate this agreed-upon result simply by "recasting" these costs so as to make them attributable to post-settlement gas purchases. The fact remains that the take-or-pay costs at issue are the same liabilities that petitioners contracted to avoid in the 1985 settlement. Accordingly, we hold that Columbia may not pass through that portion of the surcharges incurred as a result of settlement period purchasing practices.

On the second issue before us, we uphold the Commission's ruling that the 1985 settlement bars petitioners from challenging the prudence of the purchasing decisions that caused Columbia to incur the settlement period take-or-pay liabilities which are now embodied in the disputed surcharges.

I. BACKGROUND

A. FERC Orders Nos. 500 & 528

This court has addressed FERC's attempts to resolve the natural gas pipeline industry's take-or-pay problems in several previous decisions, and so we need only briefly sketch that story here. "Take-or-pay costs are incurred when a pipeline, in order to maintain inventories for its sales customers, enters into a contract with the producer in which it promises either to take or to pay for the gas it has contracted to buy." Public Util. Comm'n of Cal. v. FERC, 988 F.2d 154, 157 (D.C.Cir.1993) ("PUC" ). In the 1980s, pipelines built up large liabilities for gas they could not use but were obligated to pay for under these contracts. Inventory surpluses were exacerbated by FERC's "unbundling" of gas sales and pipeline transport sales in Order No. 436, ¹ issued in 1985, because pipelines found it difficult to sell their relatively high-priced gas to customers who could more cheaply transport other gas via these same pipelines. Id. In Associated Gas Distributors v. FERC, 824 F.2d 981 (D.C.Cir.1987) ("AGD I" ), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988), this court remanded Order No. 436 in part, on the ground that FERC had failed adequately to consider the order's impact on take-or-pay liabilities.

In response to AGD...