General Motors Corp. v. Public Service Com'n of Maryland

• Decision Date: 01 September 1990
• Docket Number: No. 1080,1080
• Citation: 589 A.2d 982,87 Md.App. 321
• Parties: , 123 P.U.R.4th 510, Util. L. Rep. P 26,069 GENERAL MOTORS CORPORATION, et al. v. PUBLIC SERVICE COMMISSION OF MARYLAND, et al
• Court: Court of Special Appeals of Maryland

Page 321

87 Md.App. 321

589 A.2d 982, 123 P.U.R.4th 510, Util. L.

Rep. P 26,069

GENERAL MOTORS CORPORATION, et al. v. PUBLIC SERVICE COMMISSION OF MARYLAND, et al.

No. 1080 Sept. Term, 1990.

Court of Special Appeals of Maryland.

May 13, 1991.

Paul S. Buckley (John M. Glynn, on the brief), Baltimore, for appellant, People's Counsel.

Robert R. Morrow (Earle H. O'Donnell and Sutherland, Asbill and Brennan, on the brief), Washington, D.C., for appellant, GMC.

Sander L. Wise, Allan J. Malester, Charles R. Bacharach and Gordon, Feinblatt, Rothman, Hoffberger & Hollander, on the brief, Baltimore, for appellant, Maryland Indus. Group.

Susan S. Miller (Bryan G. Moorhouse, on the brief), Baltimore, for appellee PSC.

Mark A. MacDougall (Francis X. Wright, Baltimore, Andrew J. Sonderman and Marjorie H. Brant, on the brief), Columbus, Ohio, for appellees, BG & E and Columbia Gas.

John K. Keane, Jr. and Monte R. Edwards, on the brief, Washington D.C., for appellee, Maryland Natural Gas and Frederick Gas Co., Inc.

Argued before WILNER, C.J., and ALPERT and DAVIS, JJ.

WILNER, Chief Judge.

This appeal is from an order of the Circuit Court for Harford County that affirmed two orders of the Maryland Public Service Commission (PSC). It presents substantive and procedural questions of more than passing significance. The substantive questions have to do with the authority of the PSC to preclude local natural gas companies from passing on to their customers certain charges, known as take-or-pay charges, that the Federal Energy Regulatory Commission (FERC) has allowed their suppliers to pass on to them. The major procedural question is whether the orders entered by the PSC were immediately appealable to the Circuit Court. A fair consideration of these issues requires some understanding of the context in which they arise.

Historical Background

The issues now before us proceed ultimately from some major changes that occurred in the natural gas industry within the past 20 years and the responses made to those changes by both Congress and the FERC. We need not attempt to catalog here, much less discourse upon, all of those changes and responses, about which a great deal has been written, but we think it would be helpful to provide at least a summary sketch of them.

There are four major components to the natural gas industry--the producer who extracts the gas, the pipeline company that transports the gas from the wellhead, the local distribution company (LDC) that receives the gas from the pipeline, and the ultimate consumer who takes the gas from the LDC. In the 1970's, gas supplies were tight, in part because the wellhead price was Federally controlled at a level below what free market forces would have commanded. In that economic setting, the producers and the pipelines, for their mutual interest, entered into long-term contracts for specific quantities of gas. A common provision of those contracts obligated the pipeline to pay for a specified percentage of the gas it was entitled to receive, whether it took the gas or not. Those provisions became known as "take or pay" (TOP) clauses. The pipelines, in turn, exacted somewhat similar requirements from their customers, the LDCs. Through what became known as "minimum commodity bills" and "minimum take provisions," the pipelines required the LDCs to pay for a minimum volume of gas each month. ¹

In 1978, through the enactment of the Natural Gas Policy Act, 15 U.S.C. §§ 3301 et seq., Congress partially deregulated the wellhead price of gas, intending to foster increased exploration and production by allowing market forces to have a greater influence on price. Production was indeed increased, but demand did not keep pace. Conservation measures, a drop in oil prices causing some consumers to switch from gas to oil, and a recession all combined to slacken demand. For a time, prices remained high despite the glut because of the minimum commodity bill and minimum take provisions, but in 1983-84, the FERC found that the collection of variable costs through minimum commodity bill and minimum take clauses in the pipeline-LDC contracts represented unjust and unreasonable rates and therefore disallowed them. Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Commodity Bill Provisions, Order No. 380, 27 FERC p 61,318; Order No 380-A, 28 FERC p 61,175; Order No. 380-C, 29 FERC p 61,077; Order No. 380-D, 29 FERC p 61,332 (1984). This left the pipelines bound by the TOP obligations in their contracts with the producers but unable to demand similar protection from the LDCs.

In 1985, the FERC put a further squeeze on the pipelines. The gas purchased by the pipelines was sold not only to LDCs, for further distribution to retail customers, but also to large, principally industrial, consumers for their own use. Many of these large end users would have preferred to purchase the gas directly from the producers and simply pay the pipeline company to transport it, but, largely because of the TOP requirements, the pipelines generally refused to transport gas for third parties, at least where that would have the effect of reducing their own purchases from the producer. By Order No. 436, 50 Fed.Reg. 42,408 (1985), the FERC found that practice unduly discriminatory and required the pipelines to transport gas for third parties, even if that transportation would compete with their own purchases and sales. This was known as the "open access" requirement.

The combination of these orders by the FERC, in light of the then-current market conditions, allowed much lower gas prices to the consumers but put the pipelines in a real bind. As noted in Associated Gas Distributors v. F.E.R.C., 824 F.2d 981, 1021 (D.C.Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988):

"At the heart of the industry's immediate problem is the discrepancy between the average cost of gas that pipelines have under contract and the much lower price of gas now available at the wellhead. The essence of that discrepancy is the same whether the pipelines buy over-priced gas and sell it at a loss, or decline to buy such gas and thereby incur take-or-pay liabilities. The price discrepancy represents a sunk loss of billions of dollars (doubtless reflected in actual drilling expenses). At issue among the parties is who should bear it. All actors in the natural gas industry--producers, pipelines, LDCs and consumers--are candidates for this dismal position."

Indeed, it was precisely because FERC had failed to address the producer-pipeline contracts and thus "the likelihood that pipelines will play the fall guys" (id. at 1021) that the Associated Gas Distributors Court, though affirming most of Order No. 436, remanded that aspect of the matter to the Commission for further proceedings.

In response to the Court's directive, FERC adopted an "Interim Rule and Statement of Policy" in the form of Order No. 500, 52 Fed.Reg. 30,334 (1987), in which it attempted to deal with the TOP problem. The order is long and complex, but its most relevant features, in terms of this case, were these: First, with certain exceptions, it required producers seeking open access to the pipelines (i.e., requiring the pipeline to transport gas sold directly to an end consumer) to credit the gas so transported against the pipeline's TOP obligation. Second, it provided alternative methods by which pipelines could recover from their customers at least a portion of the costs incurred in settling their TOP obligations. One method, which was both risky to the pipeline and to some extent unworkable, was to allow the pipeline to recover all or some of those costs through individual rate proceedings.

The alternative method, designed to encourage a rapid renegotiation of TOP contracts, allowed a pipeline transporting on an open access basis to recover from its customers, through a fixed charge, from 25% to 50% of its TOP settlement costs provided it agreed not to pass through to its customers an equal percentage of those costs. As part of this alternative method, which represented what the FERC regarded as an "equitable sharing" approach to cost recovery, the pipelines could attempt to recover the remainder of their TOP settlement costs through volumetric surcharges on all gas transported. Both approaches rested on the notion that at least a portion of these costs would be regarded by the Commission as a cost of the commodity prudently incurred by the pipeline; the alternative approach, in effect, created a rebuttable presumption that if the pipeline agreed to absorb at least 25% of the cost, the remainder could be passed through as prudently incurred without the need for independent examination. The alternative approach initially adopted in Order No. 500 was a temporary one; it was to expire December 31, 1988.

Following the issuance of Order No. 500, and several fine-tunings of it (Orders Nos. 500-A through 500-G), the producers and pipelines in fact renegotiated most of their TOP contracts, to the point that, by the end of 1988, most of the pipelines' potential TOP liability, which at the end of 1985 was estimated to be over $9 billion, had been resolved. But the potential liability remaining still amounted to between $850 million and $2.1 billion, depending on whose figures were accepted.

Orders No. 500 through 500-G were also challenged, and, once again, the Court found fault with what FERC had done in a number of respects. See American Gas Ass'n v. F.E.R.C., 888 F.2d 136 (D.C.Cir.1989), cert. denied, 498 U.S. 952, 111 S.Ct. 373, 112 L.Ed.2d 335 (1990). As to the cost recovery mechanism, the Court declared the sunset provision attached to the alternative approach invalid but declined to pass on the validity of the approach itself on the ground that such review was premature. The Court noted, at 152, that the mechanism was regarded by the Commission as a "policy statement" rather than a "definitive rule" and that the...