Tejas Power Corp. v. F.E.R.C.

• Decision Date: 24 July 1990
• Docket Number: Nos. 89-1267,s. 89-1267
• Citation: 908 F.2d 998,285 U.S.App.D.C. 239
• Parties: TEJAS POWER CORPORATION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION. , et al.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 998

908 F.2d 998

285 U.S.App.D.C. 239

TEJAS POWER CORPORATION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION.

Nos. 89-1267, et al.

United States Court of Appeals District of Columbia Circuit.

Argued May 8, 1990.

Decided July 24, 1990.

Petition for Review of Orders of the Federal Energy Regulatory Commission.

Joseph C. Bell, with whom John M. Hopper, Jr., for Tejas Power Corp., Philip M. Marston and Robert Y. Hirasuna, for Hadson Gas Systems, Inc., and Frances McD. Kilborne, for Texaco, Inc., were on the joint brief, for petitioners Tejas Power Corp., et al., in 89-1267, 89-1294, 89-1310, and 89-1379, and intervenors in 89-1373 and 89-1392. Ralph J. Pearson, Jr., and David Lindberg, for Texaco, Inc., also entered appearances, for petitioners.

William H. Penniman, with whom Sterling H. Smith, for Process Gas Consumers Group and American Iron and Steel Institute, were on the joint brief, for petitioners Tejas Power Corp., et al., in 89-1379, and intervenors in 89-1267, 89-1294, 89-1310, 89-1373, and 89-1392.

Mark G. Magnuson for Consolidated Natural Gas Service Corp., Stephen E. Williams, Kevin J. Lipson, and Richard T. Saas, for CNG Transmission Corp., were on the joint brief, for petitioner CNG Transmission Corp., in 89-1392, and intervenor in 89-1267, 89-1294, 89-1310, 89-1373, and 89-1379. John E. Holtzinger, Jr., and Charles C. Thebaud, Jr., for CNG Transmission Corp., also entered appearances, for petitioner.

Dwight C. Alpern, attorney, F.E.R.C., for respondent. Jerome M. Feit and Jill Hall, attorneys, FERC, were on the brief, for respondent. Robert H. Solomon, atty., FERC, also entered an appearance, for respondent in all cases.

Henry S. May, Jr., with whom Judy M. Johnson, and Catherine O'Harra, for Texas Eastern Transmission Corp., John T. Miller Jr., for Elizabethtown Gas Co., Michael W. Hall and David Konick for Brooklyn Union Gas Co., Mary Baluss and Christopher J. Barr, for Philadelphia Elec. Co., Edward B. Myers, for Orange and Rockland Utilities, Inc., Stephen J. Small, for Columbia Gas Transmission Corp., Stanley W. Balis for Municipal Defense Group, Jerome C. Muys, for Somerset Gas Service, and Kevin J. Lipson, John E. Holtzinger, Jr., and Charles C. Thebaud, Jr., for CNG Transmission Corp., were on the joint brief, for intervenors in 89-1267, 89-1294, 89-1310 89-1373, 89-1379, and 89-1392. Richard J. Kruse and J. Evans Attwell, for Texas Eastern Transmission Corp., William E. Mohler, III, and Giles D.H. Snyder, for Columbia Gas Transmission Corp., Demetrios G. Pulas, Jr., for Municipal Defense Group, Harry H. Voigt, M. Reamy Ancarrow, Diane B. Schrotwieser, and Mindy A. Buren, for Orange and Rockland Utilities, Inc., also entered appearances, for intervenors.

James R. Lacey, for Public Service Electric and Gas Company, Don S. Smith and Steven A. Weiler, for Associated Natural Gas Co., Richard A. Solomon and David D'Alessandro, for Public Service Com'n of the State of New York, James F. Bowe, Jr., and Julia Weller for Long Island Lighting Co., Gary E. Guy for Equitrans, Inc., Joseph M. Oliver, Jr., M. Lisanne Crowley, and Nicholas W. Mattia, Jr., for New Jersey Natural Gas Co., William I. Harkaway, Steven J. Kalish, and Barbara M. Gunther, for Consolidated Edison Co. of New York, Richard E. Powers, Jr., John K. McDonald, and John B. Chapman, for Pennzoil Co., Mary E. Baluss, for UGI Corp., John S. Schmid, Gearold L. Knowles, and Mark A. Gallagher, for Bay State Gas Co., et al., John W. Amos for Nashville Gas Co., et al., George L. Weber and Kenneth L. Glick for Nat. Fuel Gas Supply Corp., Charles H. Shoneman for Producer-Marketer Trans. Group, and Ronald E. Christian, for Indiana Gas Co., also entered appearances, for intervenors.

Before WILLIAMS, D.H. GINSBURG, and SENTELLE, Circuit Judges.

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

D.H. GINSBURG, Circuit Judge:

Over the past decade, the Federal Energy Regulatory Commission has taken a number of steps to make the market for the sale of natural gas more competitive. One such step has been to encourage pipeline companies to implement a gas inventory charge (GIC). As the Commission explained in a statement of policy made in the course of Order No. 500, Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 52 Fed.Reg. 30,334 (1987), record remanded on other grounds, American Gas Ass'n v. FERC, 888 F.2d 136 (D.C.Cir.) (hereinafter AGA I ), on remand, Order No. 500-H, 54 Fed.Reg. 52,344 (1989), reh'g granted in part and denied in part, Order No. 500-I, 55 Fed.Reg. 6605, review pending, American Gas Ass'n v. FERC, 888 F.2d 136 (D.C.Cir.1990), the GIC is intended "[t]o enable pipelines to avoid the future recurrence of take-or-pay problems" by establishing a mechanism by which they "may file to recover the costs of maintaining supply for their customers." Id. at 30,346.

In AGA I we did not review a facial challenge to the Commission's policy statement on GICs because it was not ripe, in that form, for review. Review would be appropriate, we said, only when "the GIC policy precipitates a concrete case on a settled record." 888 F.2d at 152. In our first review of a Commission decision approving a particular GIC, we were again unable, for the most part, to reach the merits because the issues were rendered moot when both of the pipeline's customers declined to nominate service under the GIC. Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 574-76, 581-82 (1990).

Today we review on the merits the Commission's approval of the GIC proposed by Texas Eastern Transmission Corp. 44 FERC p 61,413 (1988), reh'g denied, 47 FERC p 61,100 (1989). This GIC departs, in some important respects, from the model envisioned in the Order No. 500 policy statement, and is seemingly at odds with other Commission decisions regarding GICs. The Commission approved it nonetheless, and defends it on a number of grounds, most prominently that all twelve of Texas Eastern's resale customers, which are local distribution companies (LDCs), agreed to its terms as part of a general settlement filed in response to the Commission's earlier decision to set Texas Eastern's GIC proposal for hearing.

We are unable to uphold the FERC's approval of this GIC because the Commission has failed to justify its heavy reliance upon the LDCs' having agreed to its terms. We also conclude that the Commission has not adequately explained its approval of two particular features of the GIC.

I. FACTS

In November 1987, Texas Eastern filed tariff sheets with the Commission proposing to implement open-access transportation, pursuant to Order No. 500, and a GIC to be paid by firm sales customers that execute new service agreements. The Commission accepted the open-access proposal subject to conditions; noting that the GIC would result in a "significant change in [Texas Eastern's] service relationship" with its customers, however, it severed that aspect of the filing and set it down for a hearing. Texas Eastern Transmission Corp., 41 FERC p 61,373, at 62,018 (1987). The Commission observed that the proposal was inconsistent with its Order No. 500 policy statement in a number of respects: it did not provide for customers freely to nominate their annual contract quantities (ACQs); it did not include a price cap or allow customers to change their level of service if Texas Eastern increased the GIC or the commodity rate; and it contained exculpatory language to the effect that the pipeline company did not guarantee its customers the gas supplies for which, presumably, they were to pay the GIC. Therefore, the Commission stated, it required a hearing in order to determine either that the proposed GIC was cost-based or that "market forces [could] be relied upon to maintain rates within the just and reasonable range." Id. at 62,019.

Texas Eastern and its wholesale customers then began settlement discussions, which culminated in their filing a joint offer of settlement in May 1988. The settlement, which is identical in most respects to Texas Eastern's original proposal, provides that customers may initially "specify new contract demand ["CD"] levels for firm sales service under Rate Schedules CD-1 and CD-2[,] reduce their contract demand levels to zero or convert some or all of that contract demand to firm transportation service." 44 FERC at 62,324. A customer may also elect to stay with its existing service agreement, in which case it retains its rights, under Order No. 500, to open-access transportation and to partial CD conversion. A customer electing the new CD-1 service may later convert firm sales to firm transportation at a rate of up to 10 percent per year, subject to overall caps of 25 percent each during the first six and the next four years. Insofar as any customer does not exercise all of its conversion rights, Texas Eastern will offer those rights, pro rata, to other customers. A customer may, in addition, elect to receive standby sales service, which allows it, on a daily basis, to convert up to 50 percent of its firm sales entitlement to firm transportation.

Some aspects of Texas Eastern's GIC appear to be less favorable to customers than would be a GIC that conformed to the model of the policy statement in Order No. 500. For example, under the GIC, customers are not able, at least to the extent contemplated by the Commission in Order No. 500, "to nominate levels of service freely within their firm sales entitlements or otherwise employ a mechanism for the renegotiation of levels of service at regular intervals." Order No. 500, 52 Fed.Reg. at 30,346. In addition, because the GIC is in the form of a deficiency charge to be assessed against any customer that purchases less than 60 percent of its ACQ, which petitioners claim (for a reason we need not detail here) is equal to about 90 percent of its average annual contract demand, a customer is less likely to purchase gas from another supplier than it would be if its GIC were a fixed...