MGUA v. PSC

• Decision Date: 20 October 1998
• Docket Number: No. WD 53810.,WD 53810.
• Citation: 976 S.W.2d 485
• Parties: STATE of Missouri, ex rel. MIDWEST GAS USERS' ASSOCIATION, Appellant, v. PUBLIC SERVICE COMMISSION OF THE STATE OF MISSOURI, Respondent, Missouri Gas Energy, Intervenor-Respondent.
• Court: Missouri Court of Appeals

976 S.W.2d 485

STATE of Missouri, ex rel. MIDWEST GAS USERS' ASSOCIATION, Appellant, v. PUBLIC SERVICE COMMISSION OF THE STATE OF MISSOURI, Respondent, Missouri Gas Energy, Intervenor-Respondent.

No. WD 53810.

Missouri Court of Appeals, Western District.

June 2, 1998.

As Modified September 1, 1998.

Application for Transfer Denied October 20, 1998.

Stuart W. Conrad, Jeremiah D. Finnegan, Finnegan, Conrad & Peterson, L.C., Kansas City, for appellant.

Gary W. Duffy, Brydon, Swearengen & England, P.C., Jefferson City, for Intervenor-Respondent Missouri Gas Energy.

Penny G. Baker, Deputy Gen. Counsel, Jefferson City, for Respondent Public Service Commission.

Before SPINDEN, P.J., and LAURA DENVIR STITH and EDWIN H. SMITH, JJ.

LAURA DENVIR STITH, Judge.

Relator Midwest Gas Users' Association appeals the decision of the Missouri Public Service Commission ("PSC") allowing Missouri Gas Energy to use its purchased gas adjustment/ actual cost adjustment ("PGA/ ACA") clause to charge its transportation customers—that is, customers who use its lines only to transport gas bought elsewhere —for costs which Relator says should be borne only by those who actually purchase gas from Missouri Gas Energy. We find that the PSC was within its authority in permitting Missouri Gas Energy to use a PGA/ACA clause to pass on the costs at issue, that it acted reasonably and within its authority in permitting those costs to be passed on to both transportation and sales customers, and that the record supported the determinations of the PSC. Accordingly, we affirm.

I. FACTUAL AND PROCEDURAL BACKGROUND

The general background facts about the natural gas industry necessary to an understanding of this case are the same as those which are necessary to an understanding of our decision in the companion case also handed down today, State ex rel. Midwest Gas Users' Ass'n v. Public Service Comm'n, 976 S.W.2d 470 (Mo.App.1998). Because of the complexity of these facts and their importance to our decision, rather than simply referring the reader to the companion case we again set out herein the key background facts about the natural gas industry nationally,¹ and in Missouri. See Sections I.A. and I.B. below. Those facts which are peculiarly relevant to this case are set out in Section I.C to I.E. below and in the legal analysis contained in Sections III and IV below.

A. Federal Regulation of the Natural Gas Industry by the Federal Power Commission and Adoption of Federal PGA Clause.

Traditionally, the natural gas industry was divided into three groups: producers, transporters, and distributors. A producer extracted the gas from a well and sold it to a transporter. The transporter moved the gas through a pipeline using one of two forms of transportation service: firm transportation, for which delivery is guaranteed; or interruptible transportation, for which delivery can be delayed if the pipeline's capacity is completely in use. The transporter then resold the fuel to a local distribution company, such as Missouri Gas Energy, hereinafter referred to as "MGE." The local distribution company, sometimes called an "LDC," in turn distributed the gas through its local lines to residential customers, as well as to industrial users such as the members of Midwest Gas Users' Association, hereinafter referred to as "MGUA."

Because of economies of scale, pipelines have what amounts to a natural monopoly over the transportation of natural gas. In addition, many customers are "captive" in the sense that they are served by only a single pipeline. In order to protect consumers from exploitation of the pipelines' monopoly power, the government began regulating the natural gas industry. In 1938, Congress passed the Natural Gas Act, which gave the Federal Power Commission the authority to regulate the interstate transportation of gas and the sale of gas which was for resale in interstate commerce, but gave the states jurisdiction to regulate the local distribution of gas.

Instead of solely regulating transportation, the source of the monopoly power in the industry, the Federal Power Commission also regulated the prices charged by producers to transporters. The pipelines passed increases or decreases in the cost of gas to their sales customers through use of a purchased gas adjustment ("PGA") clause. The PGA clause permitted the pipelines to automatically adjust the rates they charged local distribution companies in proportion to the change in the rate they had to pay for gas from their suppliers.

B. Partial Deregulation of Natural Gas Industry by Federal Energy Regulatory Commission and Creation of Take-or-Pay Clauses and Resultant Costs.

By the late 1970s, Congress became dissatisfied with the existing method of regulation of producers' prices and found it caused distortions in the natural gas sales market. Thus, in 1977, it created the Federal Energy Regulatory Commission ("FERC"). The latter replaced the Federal Power Commission as the entity regulating the gas industry at the federal level. In 1978, in response to the severe gas shortage of the late 1970's, Congress enacted the Natural Gas Policy Act. It provided for the gradual elimination of regulation of the producers' prices for natural gas.

In the late 1970's and early 1980's, while producers' prices were still in the process of deregulation, the energy crisis led many pipeline companies to become concerned that their supply of natural gas would not be sufficient to meet their demand. To ensure the long-term availability of an adequate supply of gas, many pipeline transporters entered into 20-year contracts for gas. These contracts contained what are known as "takeor-pay" clauses. The latter required the pipelines to purchase minimum quantities of gas from producers at a cost that, while perhaps reasonable when the contracts were entered, turned out to be much higher than the market price of gas once the energy crisis ended. The clauses got their name as "take-or-pay" clauses because, if the pipelines failed to "take" all the gas called for by these contracts, they had to "pay" very substantial penalties.

By the 1980's, in order to restrain the pipelines' monopoly over transportation and eliminate anti-competitive conditions, FERC took various actions to directly regulate the pipelines sale and transport of gas. Pipeline sales customers purchase their gas from the pipeline. In contrast, pipeline transportation customers, typically large industrial and commercial consumers, purchase their gas directly from suppliers, and only arrange for transportation through the pipeline company's pipe system.

In Order No. 436, issued in 1985, FERC began to limit pipelines to the transportation of gas and remove them from the business of selling gas. Open-access pipelines therefore were required to allow existing firm-sales customers to convert to firm-transportation customer. This meant they had the option of buying gas directly from the wellhead rather than from the pipeline, and then simply using the pipeline to transport the gas purchased elsewhere. Because pipelines were still paying higher-than-market rates under their "take-or-pay" contracts, many former sales customers of the pipelines took advantage of this opportunity; they bought their gas elsewhere and became mere transportation customers of the pipelines. The pipelines thus had fewer buyers for their gas, yet they still had to either buy the amount they had previously contracted for or pay huge penalties under their "take-or-pay" contracts. To resolve this problem, they had to either "buydown" or "buyout" their contracts.

C. Account 191 and GSR Transition Costs of Deregulation and the Pass-through of these Costs and of Take-or-Pay Costs at the State Level.

In 1992, in Order No. 636, FERC also mandated that pipelines completely separate, or "unbundle," their sales and transportation services in an effort to eliminate the distortion in the sales market the pipelines' monopoly over transportation created. This transition of pipelines from selling gas to simply transporting gas and mandatory "unbundling" of services caused a number of types of transition costs for interstate pipelines, two of which are at issue here: "Account 191 costs" and gas supply realignment, or "GSR costs."²

"Account 191 costs" represent unrecovered costs or credits from the pipelines' earlier purchase of natural gas for resale. "GSR costs" are the costs incurred by the pipelines in reforming or cancelling take-or-pay contracts when terminating their sales function. FERC allowed pipelines to direct bill their local distribution company customers—companies such as MGE—for Account 191 costs and GSR costs.

D. Regulation of Gas Utilities at the State Level and Pass-Through of Take-or-Pay and other Costs Through State PGA Clause.

Pursuant to tariffs approved by FERC, the pipelines passed on their transition costs to local distribution companies like MGE. Under the "filed rate doctrine" the States may not prohibit MGE or other local distribution companies from, in turn, passing on these FERC-approved costs to their customers. Mississippi Power and Light Co. v. Mississippi ex. rel. Moore, 487 U.S. 354, 108 S.Ct. 2428, 101 L.Ed.2d 322 (1988); Nantahala Power and Light Co. v. Thornburg, 476 U.S. 953, 106 S.Ct. 2349, 90 L.Ed.2d 943 (1986). However, the Natural Gas Act allows the local regulatory authority to determine just how the local distribution company will be permitted to allocate those costs among its customers. The state regulatory agencies, such as Missouri's PSC, also have the authority to review the prudence of a local distribution company's decision to enter into a particular contract when a less costly alternative is available. American-National Can Co. v. Laclede Gas Co., 30 Mo. P.S.C. (N.S.) 32 (1989), quoting, Pike County Light and Power Co. v. Pennsylvania Public Utility Comm'n, 77 Pa.Cmwlth. 268, 465 A.2d 735 (1983).

The subject of the present controversy is...