K N Energy, Inc. v. F.E.R.C.
| Decision Date | 10 July 1992 |
| Docket Number | Nos. 90-1525,90-1577,s. 90-1525 |
| Citation | 968 F.2d 1295 |
| Parties | , 133 P.U.R.4th 607 K N ENERGY, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Western Gas Resources, Inc., Williston Basin Interstate Pipeline Company, Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
John T. Miller, Jr., with whom B.J. Becker was on the brief, for petitioner K N Energy, Inc., in 90-1525.
Robert T. Hall, III, with whom Stephen L. Huntoon and Paul K. Sandness were on the brief, for petitioner Williston Basin Interstate Pipeline Co. in 90-1577 and intervenor in 90-1525. Randall V. Griffin also entered an appearance for petitioner.
Joel M. Cockrell, Atty., F.E.R.C., with whom William S. Scherman, Gen. Counsel, Jerome M. Feit, Sol., and Joseph S. Davies, Deputy Sol., were on the brief, for respondent.
Alan J. Roth, with whom Cynthia S. Bogorad, Douglas Eidahl, and Robert Nelson were on the brief, for intervenors Montana Consumer Counsel, et al. in 90-1525. Robin McHugh and Rise J. Peters also entered appearances for intervenors.
John B. Rudolph, Vera Callahan Neinast, and Lisa M. Tonery were on the brief for intervenor Western Gas Resources, Ltd.
Before EDWARDS, RUTH BADER GINSBURG, and SENTELLE, Circuit Judges.
Opinion for the Court filed by Circuit Judge SENTELLE.
The ongoing struggle over the resolution of take-or-pay claims in the natural gas industry requires us to revisit the Federal Energy Regulatory Commission's ("FERC" or the "Commission") Order No. 500. 52 Fed.Reg. 30,334 (Aug. 14, 1987). This time we must determine whether the Commission may prohibit Williston Basin Interstate Pipeline Company ("Williston Basin") from allocating certain portions of its take-or-pay claims to its sales customers in a commodity rate surcharge, thus requiring the pipeline to spread its costs among transportation and sales customers on a volumetric basis. See Williston Basin Interstate Pipeline Co., 52 FERC (CCH) p 61,096 (July 27, 1990); Williston Basin Interstate Pipeline Co., 53 FERC (CCH) p 61,024 (Oct. 4, 1990).
This question devolves into three discrete inquiries: whether FERC may read its regulations to require such a result; whether the Natural Gas Act ("NGA") itself prohibits such a result, even if FERC's regulations do not; and whether the Commission has provided a reasoned basis for such a result with regard to a particular class of pipeline customers. We conclude that the Commission's decisions survive the first two inquiries, but fail on the third and, thus, require reversal and necessitate a remand.
Williston Basin operates a natural gas pipeline in the four-state region of Montana, Wyoming, North Dakota, and South Dakota. Among its customers is fellow petitioner K N Energy, Inc. ("K N"), a company that engages Williston Basin's pipeline to transport its own natural gas supplies from a field in Montana to a site in Wyoming pursuant to a transportation and exchange service contract. Also among Williston Basin's customers is intervenor Western Gas Resources, Inc. ("Western"), a former § 7(c) customer now converted to open access.
We note at the outset that there are, in fact, three different sorts of pipeline customers: sales customers who purchase gas from pipelines; open access customers who, under FERC's emerging market- based regime, transport their own gas through pipelines under one umbrella contract approved by FERC; and § 7(c) transportation customers such as K N who have been moving their own gas through pipelines for some time under individualized contracts approved and certified by FERC under § 7(c) of the NGA. 15 U.S.C. § 717f(c).
As both Williston and K N point out, this case continues the saga of the natural gas pipeline industry's transition from a merchant function to a transportation function. To understand how this latest chapter unfolds, however, it is necessary first to review a few of the more significant developments in the story line to date.
In 1985, FERC adopted Order No. 436, 50 Fed.Reg. 42,408 (1985), creating a set of "open access" regulations aimed at requiring interstate gas pipelines to transport natural gas owned by others on a nondiscriminatory basis, and overcoming pipelines' general refusal to move gas that would compete with their own sales. This court upheld much of Order No. 436, finding open access to be an important tool in the effort to create a more competitive gas market. See Associated Gas Distributors v. FERC, 824 F.2d 981, 994 (D.C.Cir.1987), cert. denied sub nom. Interstate Natural Gas Ass'n v. FERC, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988) ("AGD I ").
Though we approved the open access concept, we nonetheless vacated portions of Order No. 436 because FERC had failed to address some fundamental and pressing concerns--most notably the rule's effect on pipelines' take-or-pay problems. See AGD I, 824 F.2d at 1023-25. Take-or-pay problems had arisen from clauses in gas purchase contracts between pipelines purchasing--not merely transporting--gas and the producers of that gas. These clauses required pipelines "either to purchase a specified percentage of the producer's deliverable gas or to make 'prepayments' for that percentage anyway." Id. at 1021. Between 1977 and 1982, pipelines undertook take-or-pay contracts at prices above then-current market levels, anticipating that the cost of gas would rise. This anticipation proved flatly wrong. By 1982, it had become painfully obvious that pipelines had committed themselves to prices well in excess of what the market actually required, resulting in a sunk cost for the pipeline industry of several billion dollars.
We held that the advent of a competitive open access system, while generally acceptable, would have "adverse consequences" on the pipelines' ability to solve their take-or-pay problems; in fact, it would make cost recovery through commodity rates "impossible." Id. at 1044. FERC's blindness to the possible impact of open access on the capacity of many pipelines to cover their take-or-pay costs while remaining economically viable was, we found, incompatible with our requirement of reasoned decisionmaking. Id. at 1025. Consequently, we remanded the take-or-pay issue, asking FERC to reconsider its treatment of this discrete transition problem, and noting that "candidates for th[e] dismal position" of bearing the cost of take-or-pay losses, included "[a]ll actors in the natural gas industry," except "fuel-switchable users, who can employ the cheapest fuel competing with gas and thus cannot be induced to pay more than the current competitive price." Id. at 1021.
FERC shortly thereafter issued Order No. 500. In it, the Commission recognized that "no one segment of the natural gas industry or particular circumstance appears wholly responsible" for the take-or-pay problem and, thus, that "all segments should shoulder some of the burden of resolving the problem." Order No. 500, 52 Fed.Reg. at 30,337. Accordingly, FERC provided that pipelines could continue to recover their take-or-pay costs either through the traditional sales commodity rate method or through a new "equitable sharing" mechanism. Equitable sharing dictated that if pipelines willingly absorbed between 25 and 50 percent of their take-or-pay costs, they could require their sales customers to match that amount in a fixed charge. Moreover, if any residuum remained (and there could be as much as 50 percent or as little as none), pipelines could recover it either through a commodity rate surcharge or a volumetric surcharge. FERC codified the equitable sharing principle announced in Order No. 500 at 18 C.F.R. § 2.104(a).
Upon review, we invalidated the fixed charge portion of Order No. 500. We did so because the charge was itself calculated by reference to the "purchase deficiency" method whereby a customer's purchases in years when take-or-pay liabilities were incurred was subtracted from that customer's purchases during a base period before take-or-pay liabilities. 18 C.F.R. § 2.104(b). Such a method of calculation, we found, stood in plain contradiction to the dictates of the filed rate doctrine. Associated Gas Distributors v. FERC, 893 F.2d 349, 355 (D.C.Cir.1989), cert. denied sub nom. Berkshire Gas Co. v. Associated Gas Distributors, --- U.S. ----, 111 S.Ct. 277, 112 L.Ed.2d 232 (1990) ("AGD II ").
In response, FERC has drawn up yet another set of guidelines governing allocation of take-or-pay costs to replace the defective Order No. 500. See Order No. 528, 53 FERC (CCH) p 61,163 (Nov. 1, 1990). Petitions for rehearing of Order No. 528 are pending before the Commission, and a petition for judicial review has been filed with this court, but not yet heard. Tennessee Gas Pipeline Co. v. FERC, No. 91-1069 (D.C.Cir. filed Feb. 8, 1991).
The present problem arises under the now-replaced Order No. 500. The Commission continues to apply that scheme in the orders before us--rather than the new Order No. 528--because neither Williston Basin nor K N challenged the purchase deficiency methodology that resulted in our AGD II holding and the need for Order No. 528. While we might have expected the Commission to apply Order No. 528 across the field, we have not ordered it to do so.
In fact, the arguments petitioners raise today in no way revolve around the purchase deficiency mechanism. Rather, they focus narrowly on a separate component of the equitable sharing scheme: the commodity rate surcharge mechanism. Petitioners object to both the fashion in which FERC has defined the scope of the surcharge and the justifications it has offered for its definition.
Following the announcement of Order No. 500, Williston Basin formulated a plan for resolving its take-or-pay costs requiring it to absorb 25 percent of these costs itself, forcing sales customers to pay another 25...
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