Philadelphia Gas Works v. F.E.R.C.

• Citation: 989 F.2d 1246
• Decision Date: 16 April 1993
• Docket Number: No. 91-1478,91-1478
• Parties: , Util. L. Rep. P 13,934 PHILADELPHIA GAS WORKS and Long Island Lighting Company, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Texas Eastern Transmission Corporation, UGI Corporation, Public Service Electric & Gas Company, Municipal Defense Group, Bay State Gas Company, et al., Equitrans, Inc., The Brooklyn Union Gas Company, Intervenors.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1246

989 F.2d 1246

300 U.S.App.D.C. 374, Util. L. Rep. P 13,934

PHILADELPHIA GAS WORKS and Long Island Lighting Company, Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Texas Eastern Transmission Corporation, UGI Corporation Public Service Electric & Gas Company, Municipal Defense Group, Bay State Gas Company, et al., Equitrans, Inc., The Brooklyn Union Gas Company, Intervenors.

No. 91-1478.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 8, 1993.

Decided April 16, 1993.

Petition for Review of an Order of the Federal Energy Regulatory Commission.

Robert A. MacDonnell, with whom Allen Weinberg, Laureto A. Farinas, O. Julia Weller, and Benga L. Farina were on the brief, for petitioners.

Timm L. Abendroth, Atty., F.E.R.C., with whom William S. Scherman, Gen. Counsel, and Jerome M. Feit, Sol., F.E.R.C., were on the brief, for respondent.

Henry S. May, Jr., with whom F. Nan Wagoner, Judy M. Johnson, D. Virginia Smith, and Charles F. Caldwell were on the brief, for intervenor Texas Eastern Transmission Corp.

Mary E. Baluss and J.R. Clark entered appearances, for intervenor UGI Corp.

Kenneth D. Brown entered an appearance, for intervenor Public Service Elec. & Gas Co.

Mark C. Darrell and Stanley W. Balis entered appearances, for intervenor Mun. Defense Group.

Cheryl L. Jones and Gearold L. Knowles entered appearances, for intervenor Bay State Gas Co., et al.

Frank H. Markle entered an appearance, for intervenor Equitrans, Inc.

Roderick D. Strickland entered an appearance, for intervenor The Brooklyn Union Gas Co.

Before: MIKVA, Chief Judge, SILBERMAN and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Dissenting opinion filed by Circuit Judge RANDOLPH.

SILBERMAN, Circuit Judge:

Petitioners, a pipeline's customers, challenge FERC's approval of the pipeline's charge via the purchased gas adjustment (PGA) mechanism for overrun penalties that the pipeline paid to its suppliers. We remand to the Commission for a fuller explanation of its decision and particularly so that FERC may reconcile a prior case.

I.

During the 1960's and 1970's United Gas Pipeline Company (United) was one of Texas Eastern Transmission Corporation's (Texas Eastern) principal suppliers of gas. By the late 1980's, however, Texas Eastern had shifted to other sources and relied on United only for infrequent purchases. For the 1989-1990 winter heating season, Texas Eastern reserved enough gas to supply its customers during an average winter from sources other than United. Texas Eastern then considered whether to reserve any gas from United to deal with the possibility of an unusually cold winter. United apportions its fixed costs among its customers based in part on the amount of gas a customer actually uses (D-1 charges) and in part on the quantity that United must stand ready to supply (D-2 charges). See Panhandle Eastern Pipe Line Co. v. FERC, 881 F.2d 1101, 1106, 1110-13 (D.C.Cir.1989). Although some other pipelines allow a customer to reserve gas without paying D-2 charges, under United's tariff, a customer must make a D-2 nomination and incur D-2 charges to guarantee a quantity of gas. See United Gas Pipe Line Co., 46 F.E.R.C. p 61,314 (1989). Furthermore, under that tariff if a customer subsequently purchases more gas than it has nominated (reserved), United assesses an overrun penalty (which, per unit, is much larger than D-2 charges) on the purchase of unreserved gas. The overrun penalties, along with the risk of unavailability, obviously provide customers with a disincentive to attempt to avoid their share of the supplier's fixed costs by nominating a lower amount than they expect to need.

Based on United's rate structure, Texas Eastern contemplated two approaches in planning for an abnormally cold winter. Texas Eastern could have made a sizeable D-2 nomination with United, which would have guaranteed Texas Eastern access to enough gas for even the coldest winter but would have obligated it to pay a percentage of United's fixed costs without regard to the amount of gas ultimately purchased. Alternatively, Texas Eastern could have declined to make any D-2 nomination, which would have required Texas Eastern to pay the substantial per unit overrun penalty for any gas that it ordered from United, but would have involved no up front D-2 charges. Although it was conceivable that in an unprecedentedly cold winter Texas Eastern would need to purchase enough gas from United that the total payment under the second option (gas cost plus overrun penalties) might exceed the D-2 fee, Texas Eastern estimated that in most years, even if it needed extra units from United, it would be better off making a D-2 nomination of zero. ¹ Texas Eastern took the second option and hoped for a mild winter.

As it happened, Texas Eastern's service area suffered through a prolonged cold snap in December of 1989. Texas Eastern initially sought to persuade United to waive the overrun penalties, but after United refused, Texas Eastern purchased gas from United and incurred the penalties. United eventually accepted $8.2 million as a settlement for these charges. The weather moderated during the remainder of the 1989-1990 winter season, and Texas Eastern shifted back to its other suppliers. At the end of the season, Texas Eastern calculated that, despite the overrun penalties, it had saved money by not making a D-2 nomination.

Although pipelines gain approval of their base tariffs in a rate proceeding under section 4 of the Natural Gas Act, 15 U.S.C. § 717c, they can alter those rates through a PGA filing which does not involve the cumbersome data production and procedural requirements of a formal section 4 proceeding. See Consolidated Edison Co. v. FERC, 958 F.2d 429, 432 (D.C.Cir.1992). FERC created this more flexible procedure because it recognized that the rates that pipelines charge are largely a function of the cost of gas, which fluctuates frequently. Accordingly, suppliers can take advantage of the expedited procedure to recover "gas costs," but only gas costs. In the fall of 1990, Texas Eastern included the overrun penalties as a recoverable cost of gas in its PGA filing. A group of Texas Eastern's customers, the Municipal Defense Group (MDG), objected. FERC, relying on its earlier decision in North Penn Gas Co., 29 F.E.R.C. p 61,275 (1984), determined that the overrun penalties were not a cost of gas and ordered Texas Eastern to remove the penalties from its PGA filing. See Texas Eastern Transmission Corp., 54 F.E.R.C. p 61,078 (January 31, 1991) (Texas Eastern I ). FERC observed that Texas Eastern could attempt to recover the overrun penalties through a section 4 proceeding. See id. at 61,258.

After FERC issued the order, MDG met with Texas Eastern, and based on their discussions, MDG formally withdrew its protest. Texas Eastern thereupon filed a request for rehearing and/or clarification attacking the original order. FERC granted the rehearing and issued a new order allowing Texas Eastern to include the overrun penalties in its PGA filing. See Texas Eastern Transmission Corp., 55 F.E.R.C. p 61,353 (June 3, 1991) (Texas Eastern II ). After detailing the chain of events that led Texas Eastern to incur the penalties, FERC justified its reversal by stating that, "given MDG's withdrawal of its protest, and under the unique facts and circumstances in this case, granting rehearing on this issue is warranted." Id. at 62,048. FERC did not mention the North Penn precedent on which it relied in its original order. Commissioner Trabandt dissented and criticized the majority for replacing the " 'no penalties in PGA' bright line test with a results oriented test based on purported customer savings." Id. at 62,049.

FERC's rehearing order prompted Philadelphia Gas Works and Long Island Lighting Company, both customers of Texas Eastern, to renew MDG's original argument that North Penn compelled FERC to exclude overrun penalties from the PGA mechanism. FERC denied this second request for rehearing. See Texas Eastern Transmission Corp., 56 F.E.R.C. p 61,204 (August 2, 1991) (Texas Eastern III ). FERC reiterated that the "unique facts and circumstances" of the case justified the recovery of the overrun penalties through the PGA mechanism. In rejecting petitioners' argument that North Penn controlled, FERC observed that, "[i]n determining issues before it, the Commission has discretion to determine whether the facts require that equity be applied in deciding those issues. Nothing in North Penn changes this." Id. at 61,828. Commissioner Trabandt again dissented. Philadelphia Gas Works and Long Island Lighting Company petition for review of FERC's orders permitting Texas Eastern to include the overrun penalties in its PGA filing.

II.

Petitioners claim that when FERC reversed its position on rehearing, it changed course without any real explanation. According to petitioners, North Penn stated broadly that pipelines could not pass on to their customers, through the PGA mechanism, penalty fees incurred under suppliers' tariffs because those fees were not "gas costs." Indeed, in its initial order in this case FERC itself relied squarely on North Penn to deny Texas Eastern's PGA filing. It noted that the pipeline could attempt to recover its costs in a formal section 4 filing, but not through the simplified PGA procedure. We were told at oral argument, however, that it is not at all clear whether Texas Eastern will be able to recover its full costs in a section 4 filing. ² That issue is, of course, not before us, but suffice it to note that FERC's decision would have increased Texas Eastern's procedural burdens and might have barred recovery entirely. FERC responds that the petitioners and the dissenting Commissioner have overread North Penn: it is a narrow decision limited to its facts and should not be interpreted broadly.

Although North Penn and the previous orders in that...