KENT. W. VA. GAS v. PENN. PUBLIC UTILITY COM'N

• Decision Date: 23 December 1986
• Docket Number: Civ. A. No. 85-1514.
• Citation: 650 F. Supp. 659
• Parties: KENTUCKY WEST VIRGINIA GAS COMPANY, and Equitable Gas Company, a division of Equitable Resources, Inc., Plaintiffs, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Linda C. Taliaferro, Frank Fischl, and Bill Shane, Commissioners, Federal Energy Regulatory Commission, Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

650 F. Supp. 659

KENTUCKY WEST VIRGINIA GAS COMPANY, and Equitable Gas Company, a division of Equitable Resources, Inc., Plaintiffs, v. PENNSYLVANIA PUBLIC UTILITY COMMISSION, Linda C. Taliaferro, Frank Fischl, and Bill Shane, Commissioners, Federal Energy Regulatory Commission, Defendants.

Civ. A. No. 85-1514.

United States District Court, M.D. Pennsylvania.

December 23, 1986.

Thomas & Thomas, Harrisburg, Pa., William A. Mogel, Ross, Marsh & Foster, Washington, D.C., for plaintiffs.

Eric N. Wise, Arlington, Va., for American Gas Assoc.

Joanne Leveque, Washington, D.C., for Federal Energy Reg. Com.

Charles Hoffman, Chief Counsel, Pa. PUC, Alphonso Arnold, Jr., Harrisburg, Pa., for defendants.

Michael Finio, Eugene Waye, Harrisburg, Pa., for Atty. Gen., intervener.

H. Kay Dailey, Robert P. Haynes, III, Harrisburg, Pa., for Consumer Advocate, intervener.

MEMORANDUM

CALDWELL, District Judge.

I. Introduction.

Plaintiff, Equitable Gas Company (Equitable), a division of Equitable Resources, Inc., produces, purchases, transports and sells natural gas in both interstate and intrastate commerce. As part of its business, it retails natural gas to approximately 240,000 customers in southwestern Pennsylvania. During the twelve month period ending June 30, 1984, Equitable purchased quantities of gas from one of its suppliers, Kentucky West Virginia Gas Company (Kentucky West), a wholly-owned subsidiary of Equitable Resources, Inc., to meet the demands of its Pennsylvania customers. In a subsequent proceeding before the Pennsylvania Public Utility Commission (PUC) Equitable sought to recover the cost of the purchased gas by increasing the rates charged to retail customers. The PUC disallowed the requested rates because it concluded that Equitable could have obtained less expensive gas from its own production and from quantities available from other suppliers. Equitable and Kentuckey West thereafter filed this lawsuit, contending that the PUC action violated the commerce clause¹, the supremacy clause², and the first, fifth, and fourteenth amendments³, along with two federal statutes, the Natural Gas Act (NGA), 15 U.S.C. § 717 et seq. and the Natural Gas Policy Act (NGPA), 15 U.S.C. § 3301 et seq. Plaintiffs seek a permanent injunction against the PUC, prohibiting it from inquiring into Equitable's choice of natural gas from among competing gas suppliers. This request is bottomed upon the approval by the Federal Energy Regulatory Commission (FERC) of Kentucky West's gas rates as just and reasonable for the purposes of federal law. Plaintiffs also seek, among other things, a declaratory judgment that the Pennsylvania legislation, the Act of May 31, 1984, Act No. 1984-74 (hereinafter "Act 74"), enabling the PUC to disallow Equitable's purchased gas costs is unconstitutional.⁴

A hearing on the appropriateness of preliminary injunctive relief was held on October 30, 1985. Thereafter, we abstained from exercising our jurisdiction. See Kentucky West Virginia Gas Co. v. Pennsylvania Public Utility Commission, 620 F.Supp. 1458 (M.D.Pa.1985). The Court of Appeals for the Third Circuit reversed that determination, 791 F.2d 1111 (3d Cir.1986), and remanded the case to us for a disposition on the merits. A hearing was held for that purpose on August 21, 22 and 28, 1986 and thereafter the parties briefed the issues which are now ripe for disposition. For the reasons set forth below, we will grant judgment in favor of defendants on all of the plaintiffs' claims.⁵

II. Background.

From the testimony at the hearings and the stipulation of facts that the parties have been able to agree upon, the following is the background of this litigation.⁶

As noted previously, Equitable sells natural gas at retail in southwestern Pennsylvania. It has approximately 240,000 customers in Pennsylvania which include residential and industrial users. Equitable also retails gas in West Virginia and Kentucky on a much smaller scale. Its West Virginia customers number 11,000 and its Kentucky customers approximately 4,000. Equitable's retail sales in these three states are regulated by the appropriate state administrative body; in Pennsylvania, the PUC, in West Virginia, the West Virginia Public Service Commission, and in Kentucky, the Kentucky Public Service Commission. These retail sales are not subject to FERC approval.

Equitable has three main sources of gas. First, Equitable has its own production from wells it controls in West Virginia and Pennsylvania. Second, gas is acquired from independent producers in those states under contracts with Equitable. Third, Equitable receives gas from three interstate pipelines, Kentucky West, Texas Eastern Transmission Corporation (Texas Eastern) and Tennessee Gas Pipeline Company (Tennessee).

Kentucky West, Texas Eastern and Tennessee, natural gas companies under section 1 of the NGA, 15 U.S.C. § 717, sell gas in interstate commerce. They receive supplies of gas from producers at the well-head. FERC controls the pipelines' tariffs. That federal agency approves many different tariffs for the sale of natural gas and the price at which gas is sold under each tariff may be different. Approval of the tariffs, or rates at which a pipeline sells gas, does not guarantee the pipeline any particular sales volume. Kentucky West sells approximately 70% of its gas to Equitable.

Equitable has long term contracts with each of its interstate pipeline suppliers. The contracts contain the following two provisions, typically included in contracts for the wholesale purchase of natural gas. One provision entitles Equitable to purchase a maximum amount of gas per day, "a maximum daily volumetric entitlement." The other provision is a "minimum commodity bill," requiring Equitable, for a portion of the period relevant to this action, to pay the full commodity charge for a minimum volume of gas regardless of whether Equitable actually needs or wants the gas.⁷ A minimum commodity bill does not require Equitable to physically take the gas paid for. See Wisconsin Gas Co. v. FERC, 244 U.S.App.D.C. 349, 758 F.2d 669, 672 (D.C.Cir.1985) (per curiam).

The minimum commodity bill is similar to a provision pipelines have in their own contracts with producers of natural gas. Called a "take or pay" provision, it "requires a pipeline to take a specified percentage of the gas which it is contracturally obligated to purchase, or to pay for such gas." Id. at 673 n. 8 (brackets added).

As noted previously, Equitable made certain purchasing decisions during 1983 and 1984, taking from among the sources of gas available to it, a certain quantity from its affiliated pipeline, Kentucky West. On March 1, 1985, Equitable sought approval of new rates for its retail customers in Pennsylvania by filing a computation of Annual Purchased Gas Adjustment pursuant to 66 Pa.Con.Stat. § 1307(f)(1), a part of Act 74.

The PUC investigated the justness and reasonableness of the new rates pursuant to section 1307(f)(2) and under the standard promulgated in 66 Pa.Con.Stat. § 1318.⁸ It concluded that Equitable had not pursued "a least cost fuel procurement policy" as required by section 1318, and that its proposed rates were accordingly not just and reasonable. Specifically, in an opinion and order, adopted August 28, 1985, the PUC concluded that Equitable, for the period betwen July 1, 1983 and June 30, 1984, had unnecessarily purchased more expensive gas from Kentucky West when it had available to it lower priced local production and its own supplies. It imputed to Equitable the purchase of the less expensive gas and disallowed the rates it had requested based upon its actual gas purchases. This action resulted in a failure to recover $14.3 million in purchased gas costs for gas already delivered to and consumed by Pennsylvania customers. The PUC also concluded for the then upcoming period between September 1, 1985 and August 31, 1986, that Equitable should increase its purchases from Texas Eastern and reduce purchases from Tennessee. Concerned about the close corporate relationship between Kentucky West and Equitable, the PUC also ordered those entities to retain separate counsel and separate support staff in Kentucky West's future FERC proceedings. This lawsuit followed.

In the meantime, Equitable has complied with the PUC Order. It has reduced its purchases from Tennessee and increased its purchases from independent gas producers in Pennsylvania and West Virginia.

III. Discussion.

A. Act 74 Does Not Violate the Supremacy Clause.

We preface our discussion of the supremacy clause claim with the following remarks by the Supreme Court on the "dilemma" often presented by federal and state regulation of utilities:

Maintaining the proper balance between federal and state authority in the regulation of electric and other energy utilities has long been a serious challenge to both judicial and congressional wisdom. On the one hand, the regulation of utilities is one of the most important of the functions traditionally associated with the police power of the States. See Munn v. Illinois, 94 US 4 Otto 113, 24 L Ed 77 (1877). On the other hand, the production and transmission of energy is an activity particularly likely to affect more than one State, and its effect on interstate commerce is often significant enough that uncontrolled regulation by the States can patently interfere with broader national interests. See FERC v Mississippi, 456 US 742, 755-757, 72 L Ed 2d 532, 102 S Ct 2126 2135-36 (1982); New England Power Co. v New Hampshire, 455 US 331, 339, 71 L Ed 2d 188, 102 S Ct 1096 1100 (1982).

Arkansas Electric Cooperative Corp. v. Arkansas Public Service Comm'n, 461 U.S. 375, 377, 103 S.Ct. 1905, 1908-09, 76 L.Ed.2d 1, 6 (1983).

We turn now to the supremacy clause claim and note that it must be judged against the following standard:

It is a familiar and well-established principle that the Supremacy Clause, US Const, Art VI, cl 2, invalidates state laws

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