Northern Mun. Distributors Group v. F.E.R.C., s. 97-1457

• Decision Date: 26 January 1999
• Docket Number: Nos. 97-1457,97-1492,s. 97-1457
• Citation: 165 F.3d 935
• Parties: NORTHERN MUNICIPAL DISTRIBUTORS GROUP, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Terra International, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 935

165 F.3d 935

334 U.S.App.D.C. 148

NORTHERN MUNICIPAL DISTRIBUTORS GROUP, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Terra International, Inc., et al., Intervenors.

Nos. 97-1457, 97-1492.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 3, 1998.

Decided Jan. 26, 1999.

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Thomas C. Gorak argued the cause and filed the briefs for petitioners Northern Municipal Distributors Group and Midwest Region Gas Task Force Association. Carl W. Ulrich entered an appearance.

Frank X. Kelly argued the cause for petitioner Northern Natural Gas Company. With him on the briefs were Steve Stojic, Franklin R. Bay and Dari R. Dornan.

Andrew K. Soto, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. On the brief were Jay L. Witkin, Solicitor, and Susan J. Court, Special Counsel.

Carolyn Y. Thompson argued the cause and filed the brief for intervenor Minnegasco, a Division of NorAm Energy Corporation.

Frank X. Kelly, Steve Stojic, Franklin R. Bay, Dari R. Dornan and Carolyn Y. Thompson were on the joint brief for intervenors Northern Natural Gas Company and Minnegasco, a Division of NorAm Energy Corporation.

Before: RANDOLPH, ROGERS and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

The Federal Energy Regulatory Commission sought in five orders to ensure adequate supplies of gas at Carlton, Minnesota on the Northern Natural Gas Pipeline. A settlement agreement, as modified by the Commission, requires that some shippers supply gas at Carlton and other shippers pay a surcharge to reimburse the supplying shippers. Petitioner Northern Natural Gas ("Northern") contends that it should be permitted to discount the Carlton surcharge in its contracts with customers as it sees fit. Northern maintains that the Commission's decision to limit its ability to discount the surcharge is not well-reasoned, upsets the delicate balance of the settlement agreement, erroneously relies on an inapplicable standard that governs only transition costs, ignores existing policy on discounting of non-transition costs, and ultimately forces Northern to bear the cost of the surcharge despite the principle adopted by the Commission that Northern should act only as a conduit for distributing costs among shippers. Petitioner Northern Municipal Distributors Group ("NMDG") challenges the denial of an exemption from the surcharge, contending that the Order 636 "Global Settlement" expressly exempts small customers like NMDG from all pro rata receipt point allocations occasioned by Order 636 restructuring, and that the Commission has established a policy of exemption for small customers. Because we conclude that the Commission's orders address an operational problem in a well-reasoned manner and NMDG's arguments for exemption fail, we deny the petitions.

I.

After Northern unbundled its transportation and sales services pursuant to the restructuring requirements of Order 636, ¹ Northern and its customers had to decide how to allocate receipt point capacity among the customers. Certain receipt points were more popular than others because gas supplies were cheaper; thus demand at those points was higher. Additionally, certain receipt points require input in order to ensure that gas can be delivered throughout the system serviced by a pipe. Along the Northern pipeline a problem arose when the Farmington, Minnesota receipt point was over-subscribed, causing a bottleneck, while a point one hundred miles north at Carlton, Minnesota was under-subscribed. The concerned parties contemplated two solutions: build facilities to relieve the bottleneck at Farmington or increase inputs at Carlton to ensure sufficient supply at the more northern point.

The parties entered into interim agreements but eventually came to the Commission for a final solution. Northern proposed four alternatives, two of which involved some or all shippers, excluding small customers, being required to source at Carlton and two of which involved building facilities. In the first order under review, the Commission, noting that "this is a highly contentious issue," resolved that sourcing at Carlton rather than building facilities would be the preferred solution. 76 FERC p 61,180, at 62,000 (1996). The Commission observed that the parties seemed to agree that the Carlton Resolution, "whereby sufficient volumes would be available to meet Northern's contractual delivery obligations north of Farmington, is less expensive, and, thus, preferable to Northern building additional facilities to relieve the Farmington bottleneck." Id. Accordingly, shippers would be required or encouraged to source their gas at Carlton. Because the required sourcing at Carlton was "in lieu of building additional facilities," the costs of solving this systemic problem would be borne by all shippers. Id. at 62,001. Because it was inefficient to require all shippers to source at Carlton, especially if they already had receipt and delivery points south of Farmington, the Commission reasoned:

The most efficient solution is to require only the shippers most directly affected, those ... downstream [i.e. north] of Farmington, to source gas at Carlton on a pro rata basis. These shippers should then be compensated by the other shippers on Northern's system for the additional costs they incur because they must buy the higher priced gas for delivery at Carlton.

Id. Regarding the small customers, the Commission noted that although these entities could encounter operational problems in sourcing small quantities, they had the options of assigning their sourcing obligations to other shippers and/or amalgamating their responsibilities into larger buying blocks. In any event, the Commission saw no reason why small shippers "or any other shipper should not shoulder its proportionate share of the costs of [the Carlton problem]." Id.

In the second order, the Commission addressed the various exemptions sought by parties in response to Northern's filing of proposed tariff sheets and a draft of a Carlton Resolution that was not the product of an agreement between the affected parties. See 77 FERC p 61,022 (1996). ² Rejecting a small customer exemption, the Commission explained that the Global Settlement on restructuring under Order 636, see 64 FERC p 61,073 (1993), determined that certain shippers would not have a pro rata allocation at every receipt point because "small customers [should] not be allocated an unusable sliver of capacity at many receipt points." 77 FERC at 61,081. As a result, small customers, unlike other shippers, could have all of their capacity at one point. However, the Commission distinguished between the broad policy of allocation associated with restructuring and the particular problem of system integrity at Carlton. The Carlton-type problem could arise only in a certain part of the year at one particular receipt point. Under "these limited circumstances," the Commission concluded that small customers would not be "unduly burdened in assisting to ensure that their own services continue to be provided." Id.

As to Northern's customers' concerns about discounts and the effect of the Carlton surcharge, the Commission decided that Northern could collect the surcharge from a shipper unless specifically prohibited by Northern's contract with that customer. ³ See id. at 61,083. Further, if Northern did discount its rates, it would be required to reflect discounts to the Carlton surcharge after base rates but before transition costs. See id. The Commission applied the reasoning of its decision in Natural Gas Pipeline Company of America, 69 FERC p 61,029 (1994) ("Natural"), which established that discounts would be attributed to transition costs last. ⁴ The Commission thereby prioritized which costs would be deemed recovered and increased the likelihood that shippers forced to source at Carlton would be reimbursed.

The Commission rejected Northern's "deviations" from the guidelines set forth in its previous order, concluding that Northern did not meet the guidelines when it decided to require all market area shippers--rather than only those shippers downstream of Farmington--to receive the necessary volumes at Carlton. 77 FERC at 61,084-85. This arrangement was contrary to the requirement that the fewest number of shippers and only those nearest Carlton would receive gas there, see id. at 61,085, because it would enable Northern to avoid its duty to compensate one class of shippers for the cost of sourcing at Carlton. The Commission also rejected Northern's attempt to exempt various classes of customers as undercutting the goal that the Carlton Resolution have the same effect as new construction. See id. The Commission likewise was unpersuaded by Northern's complaints that a reimbursement system was unworkable because it was too difficult to determine incremental cost and the appropriate timing of the reimbursement. See id. at 61,086.

Thereafter, Northern and its customers, save one, reached a settlement supported to varying degrees by the parties affected. The proposed settlement would obligate certain market area customers to source at Carlton based on their current entitlement. These shippers could source or participate in a bidding process whereby they would opt out of their obligation to source; a "Carlton Account" would settle the costs of sourcing amongst these shippers. Shippers not obligated to source at Carlton would pay a surcharge of $0.04 that Northern would recover only where it could contractually collect the surcharge; the amount collected would be reimbursed on a pro rata basis to the shippers who sourced at Carlton. Small customers had the option to buy out of their sourcing obligations at a rate of $.60 multiplied by their daily sourcing obligation and a specified number of days.

Numerous parties...