Northern Natural Gas Co., Div. of InterNorth, Inc. v. F.E.R.C., s. 84-1516

• Decision Date: 27 March 1986
• Docket Number: 85-1045,Nos. 84-1516,s. 84-1516
• Citation: 780 F.2d 59
• Parties: NORTHERN NATURAL GAS COMPANY, DIVISION OF INTERNORTH, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. NORTHERN NATURAL GAS COMPANY, DIVISION OF INTERNORTH, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 59

780 F.2d 59

250 U.S.App.D.C. 397

NORTHERN NATURAL GAS COMPANY, DIVISION OF INTERNORTH, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

NORTHERN NATURAL GAS COMPANY, DIVISION OF INTERNORTH, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Nos. 84-1516, 85-1045.

United States Court of Appeals District of Columbia Circuit.

Argued Nov. 4, 1985.

Decided Dec. 31, 1985.

As Amended Dec. 31, 1985.

Rehearing En Banc Granted March 27, 1986. ^*

On Petition for Review of Orders of the Federal Energy Regulatory commission.

David B. Ward, Washington, D.C., with whom Henry C. Rosenthal, Jr., Omaha, Neb., and Allan W. Anderson, Jr., Washington, D.C., were on the brief, for petitioner in Nos. 84-1516 and 85-1045.

Joel M. Cockrell, F.E.R.C., with whom Barbara J. Weller, Deputy Sol., F.E.R.C., Washington, D.C., was on the brief, for respondent in Nos. 84-1516 and 85-1045.

Christopher K. Sandberg, St. Paul, Minn., for intervenor Minnesota Dept. of Public Service in Nos. 84-1516 and 85-1045.

William T. Miller and Susan N. Kelly, Washington, D.C., were on the brief for intervenor Northern States Power Co. in Nos. 84-1516 and 85-1045.

Edward J. Brady entered an appearance for Michigan Power Co., intervenor in No. 84-1516.

Edward J. Grenier, Washington, D.C., entered an appearance for Process Gas Consumers Group, intervenor in No. 84-1516.

Before WRIGHT, BORK and SCALIA, Circuit Judges.

Opinion for the Court filed by Circuit Judge SCALIA.

SCALIA, Circuit Judge:

Northern Natural Gas Company challenges two conditions attached by the Federal Energy Regulatory Commission to a certificate of public convenience and necessity issued to Northern pursuant to Section 7 of the Natural Gas Act ("NGA"), 15 U.S.C. Sec. 717f (1982), authorizing it to sell natural gas to certain customers under discounted rates. The first condition requires Northern to credit all recoveries of fixed costs obtained from these discount sales to its other, non-discount customers. The second requires Northern, after its next rate case, to track its revenues and credit any net overrecovery of fixed costs to non-discount customers. The issues we address are whether the first of these conditions falls outside the scope of the Commission's authority in a Section 7 certification proceeding as delineated by this court's opinion in Panhandle Eastern Pipe Line Co. v. FERC, 613 F.2d 1120 (D.C.Cir.1979), cert. denied, 449 U.S. 889, 101 S.Ct. 247, 66 L.Ed.2d 115 (1980); and whether the second is ripe for review.

I

In April of 1983, the Commission approved an uncontested settlement establishing Northern's general rate structure for natural gas sales. Northern Natural Gas Co., Division of InterNorth, Inc., 23 F.E.R.C. (CCH) p 61,198 (Apr. 28, 1983). Since that time suppliers of alternate fuels in Northern's market area have priced their products at rates that are, for equivalent quantities of energy, below those provided in the settlement. Because many large-scale gas consumers have the capacity to switch to alternate fuels, Northern faces a potentially large loss of sales volume.

To meet this problem, Northern sought from the Commission a certificate of public convenience and necessity, authorizing it to sell natural gas at discounted (i.e., below- settlement) rates to its customers who possess alternate fuel capacity. Under the "flexible pricing schedules" that it proposed, these discount rates would recover all of the variable costs associated with the quantity of gas sold, but less than all of the fixed costs. Following a hearing on Northern's application, the opinion of the administrative law judge noted that a serious question was presented whether Northern's discount program constituted undue discrimination among customers in violation of the NGA, ch. 556, Sec. 4(b), 52 Stat. 821, 822 (codified as amended at 15 U.S.C. Sec. 717c(b) (1982)), since it proposed selling to similarly situated customers at disparate rates. The ALJ said that the program could be justified only if it resulted in net benefits for all such customers. He was of the view that any attempt to produce benefits for non-discount customers by lowering their rates (for example, by crediting a portion of discount sales revenues to costs borne by non-discount customers) was barred by Panhandle. He found, however, that even without such crediting the non-discount customers would benefit from the increased volume of gas sales--which would, among other things, reduce the gas-cost component of their rates by reducing the determinant of that component, Northern's average cost of gas. The ALJ approved Northern's application on an interim basis, subject to one principal condition: in Northern's next rate case, it would be required to track its revenues and credit any net overrecovery of fixed costs from discount sales to its non-discount customers. 26 F.E.R.C. (CCH) p 63,071 (Feb. 24, 1984).

The Commission affirmed the ALJ's initial decision, but with one crucial modification. The Commission noted that, for the most part, non-discount customers would be helped by Northern's program only in the future, and expressed the view that they were entitled to a "more immediate benefit." In addition, the Commission apparently believed that Northern's revenues from non-discount customers would fully cover fixed costs, ¹ wherefore any recovery of fixed costs from discount sales would constitute a "windfall." The Commission therefore added a further condition to the certificate: Northern would be required to credit all recovery of fixed costs from discount sales to its non-discount customers. 27 F.E.R.C. (CCH) p 61,299, at 61,554 (May 25, 1984). On rehearing, the Commission rejected Northern's argument that Panhandle barred this condition. 28 F.E.R.C. (CCH) p 61,230 (Aug. 21, 1984). Northern now appeals under the NGA, Sec. 19, 15 U.S.C. Sec. 717r.

II

We turn first to the condition added to the ALJ's disposition by the Commission, requiring Northern to credit all fixed cost recovery from present discount sales to its non-discount customers.

In Panhandle Eastern Pipe Line Co. v. FERC, 613 F.2d 1120 (D.C.Cir.1979), cert. denied, 449 U.S. 889, 101 S.Ct. 247, 66 L.Ed.2d 115 (1980), we reviewed the Commission's attachment of a similar condition to a pipeline's application for a Section 7 certificate authorizing it to use idle system capacity to transport another company's natural gas. Because the pipeline's existing gas rates had been set at levels deemed sufficient to compensate the pipeline for its costs, the Commission believed that any revenues received from the transportation service would constitute a double recovery. The Commission therefore attached to its authorization a condition requiring the pipeline to reduce the rates of its gas customers by crediting all transportation revenues to costs borne by them. In passing upon the validity of this condition, we acknowledged that the Commission is empowered by the NGA, Sec. 7(e), 15 U.S.C. Sec. 717f(e), to "attach to the issuance of the certificate ... such reasonable terms and conditions as the public convenience and necessity may require," including a rate ceiling for the new service, see, e.g., Atlantic Refining Co. v. Public Service Commission 60 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312 (1959). We concluded, however, that there was a fundamental distinction between imposing conditions on the terms of the proposed service itself and imposing conditions on the terms of services not directly before the Commission in the Section 7 certification proceeding. To permit the latter, we felt, would expand Section 7 beyond its intended purpose, into a means of circumventing the protections afforded to pipelines under the NGA's normal rate-adjustment provisions, Sections 4 and 5, 15 U.S.C. Secs. 717c, 717d. Panhandle, 613 F.2d at 1129-33. Accordingly, we held that "[t]he Commission may not ... order adjustments in previously approved rates for services not before it in the certificate proceeding." Id. at 1133.

In its order denying rehearing and in this appeal, the Commission distinguished Panhandle on the basis that that case involved the flow-through of revenue between distinct classes of customers--transportation customers and gas-purchase customers--while this case involves customers of the same class. Thus, the Commission argues, here, unlike in Panhandle, the appellant's non-certificated sales were "before" the Commission in the Section 7 proceeding, since the reasonableness and nondiscriminatoriness of the discount-sale rates for which approval was sought hinged upon the non-discount rates to the same class of customer. In other words, Northern's general rate structure for gas-purchase customers was necessarily brought into question.

It would be idle to pretend that there is no force to this distinction. Once it is acknowledged that the Commission has authority to fix some rates under Section 7, see Atlantic Refining, supra, one is merely arguing over how much Section 7 will be permitted to override the purposes of Sections 4 and 5. Drawing the line at rates for the very services sought in the Section 7 proceeding is not inevitable (and not necessarily required by the result in Panhandle ). A more intelligent reconciliation of the sections, the Commission suggests, would draw the line at rates which must be considered by the Commission in making the Section 7 rate determination. Obviously, the argument goes, the rates to Northern's non-discount customers had to be considered here, since the main issue was the impact of the new service upon those rates and the existence or nonexistence of a benefit to those customers.

As elegant as the suggestion seems, we must reject it. The distinction the Commission would draw ultimately rests upon differences of degree rather than kind, and injecting it into our Panhandle analysis would pursue an illusory perfection at high cost in uncertainty and hence litigation. To...