Northern Natural Gas Co., Div. of InterNorth, Inc. v. F.E.R.C.

• Decision Date: 21 August 1987
• Docket Number: 85-1045,Nos. 84-1516,s. 84-1516
• Citation: 827 F.2d 779
• Parties: NORTHERN NATURAL GAS COMPANY, DIVISION OF INTERNORTH, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Michigan Power Company, Northern States Power Company, et al., Process Gas Consumers Group, Energy Issues Intervention Office of the Minnesota Department of Public Service, Intervenors. 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 779

827 F.2d 779

264 U.S.App.D.C. 128

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

Michigan Power Company, Northern States Power Company, et

al., Process Gas Consumers Group, Energy Issues

Intervention Office of the Minnesota

Department of Public Service,

Intervenors.

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 En Banc Dec. 2, 1986.

Decided Aug. 21, 1987.

Petitions 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 Cockrell, Atty., F.E.R.C., with whom Jerome M. Feit, 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., entered appearances for intervenor, Northern States Power Company 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 and Glen S. Howard, Washington, D.C., entered appearances for Process Gas Consumers Group, intervenor in No. 84-1516.

Thomas C. Gorak, on the brief, for Md. People's Counsel, amicus curiae in Nos. 84-1516 and 85-1045.

Before WALD, Chief Judge, MIKVA, EDWARDS, RUTH BADER GINSBURG, BORK, STARR, SILBERMAN, BUCKLEY, WILLIAMS and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge D.H. GINSBURG.

Dissenting opinion filed by Chief Judge WALD, with whom Circuit Judge MIKVA joins.

D.H. GINSBURG, Circuit Judge:

In this case, we are asked to determine whether the Federal Energy Regulatory Commission (Commission), in issuing a certificate of public convenience and necessity to Northern Natural Gas (Northern) for a proposed discount resale service, exceeded the authority granted it by section 7 of the Natural Gas Act of 1938 ¹ (the "Act") to impose "reasonable terms and conditions" upon such certificates. Specifically, we must decide whether the Commission lawfully imposed upon the certificate the condition that Northern credit fixed-cost related revenues from its proposed discount resale service to the customers of its existing non-discount resale service, with the aim of lowering the portion of shared fixed costs that those non-discount customers must bear.

Applying this court's holding 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), in which we found a similar condition unlawful in light of sections 4 and 5 of the Act, ² the panel in this case invalidated the revenue-crediting condition. Northern Natural Gas v. FERC, 780 F.2d 59, rehearing granted and opinion vacated in part, 780 F.2d 64 (D.C.Cir.1985). Although constrained to follow Panhandle, the panel nevertheless indicated some doubt whether that case was properly decided. Upon motions of the Commission and an intervenor, ³ the court en banc voted to grant rehearing on the question "whether this Court should continue to adhere to [the] decision in [Panhandle ], and, if not, in what respects it should depart therefrom." Accordingly, we vacated Part II and the last paragraph of the panel's opinion.

After reviewing the Act and interpretive case law from this court and the Supreme Court, we now reaffirm Panhandle and hold that the revenue-crediting condition that the Commission imposed in this case is unlawful for the reasons given in that decision.

I. THE Panhandle DECISION AND THE Northern PANEL OPINION

To understand the holding in Panhandle, we must review the relevant provisions from the Act; in doing so, we may rely upon the following discussion in Panhandle itself:

Three interrelated sections constitute the "comprehensive and effective regulatory scheme" Congress created with regard to ratemaking. Section 7 provides that to undertake the "transportation or sale of natural gas," an entity must first obtain "a certificate of public convenience and necessity issued by the Commission." In issuing such certificates, the Commission has "the power to attach ... such reasonable terms and conditions as the public convenience and necessity may require." Once rates are authorized under section 7, a natural gas company may file for an increase under section 4. The company must file its rates thirty days before they go into effect. The Commission may then suspend the new rate schedule for five months. Thereafter the increased rates may be collected but the Commission may require a bond to ensure refunds of "increased rates or charges by its decision found not justified." The burden of proof in section 4 proceedings is on the natural gas company.

On the other hand, if rates are unjust or unreasonable, the Commission may adjust them pursuant to section 5. This section provides that "[w]henever the Commission, after a hearing ... shall find that any rate ... is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just and reasonable rate ... and shall fix the same by order." Section 5 rate adjustments may be prospective only, and the Commission may not order rate increases unless the company has filed a new rate schedule.

613 F.2d at 1127-28 (citations omitted). ⁴

In Panhandle, this court held that the Commission exceeded its conditioning authority in imposing a revenue-crediting condition similar to that in the instant case. The panel opinion in this case summarized the Panhandle decision as follows:

In [Panhandle ], 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, 360 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.

780 F.2d at 61-62.

The Panhandle court had offered three reasons for why it concluded that the Commission's broad interpretation of its authority to impose the revenue-crediting condition was "unreasonable" (613 F.2d at 1126):

(1) if the Commission could use section 7 for this purpose, then "[s]ection 5 would be reduced to a stopgap device, necessary for reducing unjust or unreasonable rates only when no new certificate filings were being made. We do not think that section 7 was meant to reduce so sharply the role of section 5, and therefore decline to adopt FERC's expansive interpretation of the conditioning power." 613 F.2d at 1129 (footnote omitted);

(2) the rate-setting provisions in sections 4 and 5 were designed to protect against regulatory lag and rate instability; if the Commission could use section 7 to lower existing rates, then "[r]ate stability is destroyed ... [and] [p]rotections against revenue loss caused by administrative delay are seriously diluted." Id. at 1129-30; and

(3) if the Commission could lower rates for previously certificated services through imposing section 7 conditions, then it could avoid the section 5 requirements that a hearing be afforded and that it find that the existing rates are not "just and reasonable." Id. at 1130.

In the instant case, the panel was confronted with a similar revenue-crediting condition, and had to decide whether that condition violated the rule announced in Panhandle. Of relevance here are the following facts as set forth in the panel's opinion:

In April of 1983, the Commission approved an uncontested [section 4] settlement establishing Northern's general rate structure for natural gas sales. 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...