Transwestern Pipeline Co. v. F.E.R.C., s. 94-1298

• Decision Date: 14 July 1995
• Docket Number: Nos. 94-1298,94-1295,s. 94-1298
• Citation: 59 F.3d 222
• Parties: , Util. L. Rep. P 14,051 TRANSWESTERN PIPELINE COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Conoco, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 222

59 F.3d 222

313 U.S.App.D.C. 226, Util. L. Rep. P 14,051

TRANSWESTERN PIPELINE COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Conoco Inc., et al., Intervenors.

Nos. 94-1298, 94-1295.

United States Court of Appeals District of Columbia Circuit.

Argued May 8, 1995.

Decided July 14, 1995.

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

Harvey Y. Morris, argued the cause for petitioner Public Utilities Com'n of the State of California and intervenors. With him on the briefs were Edward W. O'Neill and Arocles Aguilar for petitioner, Randall R. Morrow for intervenor Southern California Gas Co., Bruce A. Connell for intervenor Conoco, Inc.

Steve Stojic, argued the cause for petitioner Transwestern Pipeline Co., with him on the briefs were Frank X. Kelly, Joseph R. Hartsoe and Maria K. Pavlou.

Joel M. Cockrell, Atty., F.E.R.C., argued the cause for respondent, with him on the briefs were Jerome M. Feit, Sol., and Joseph S. Davies, Jr., Deputy Sol., F.E.R.C.

Martin J. Bregman entered an appearance for intervenor Western Resources, Inc. Gregory Grady, John H. Cary and Lois M. Henry entered appearances for intervenor Williams Natural Gas Co. David W. Anderson and Patrick G. Golden entered appearances for intervenor Pacific Gas and Elec. Co. F. Nan Todd Wagoner and Richard J. Kruse, Jr. entered appearances for intervenor Texas Eastern Transmission Corp.

Before: WILLIAMS, GINSBURG and RANDOLPH, Circuit Judges.

STEPHEN F. WILLIAMS, Circuit Judge:

On May 11, 1988 the Federal Energy Regulatory Commission approved a certificate filed by Transwestern Pipeline Company under which Transwestern would switch its method for recovering its costs of gas sold from a Purchased Gas Adjustment ("PGA") to a Gas Inventory Charge. The certificate provided among other things that if both of Transwestern's customers nominated purchases of zero under the new certificate, Transwestern could bill them for any gas sales costs it had not recovered under the PGA system. Under the Commission's accounting regulations, these costs had been collected in Transwestern's "Account No. 191". By the time Transwestern's PGA system ended on September 30, 1989, both customers had in fact nominated zero purchases under the new system, thus triggering liability under the so-called "direct bill". In Transwestern Pipeline Co. v. FERC, 897 F.2d 570 (D.C.Cir.1990) ("Transwestern I "), we held that this direct bill of the final Account No. 191 balance violated the filed rate doctrine insofar as it included gas costs that had accrued before the Commission's approval of the certificate on May 11, 1988. Id. at 576-81. Accordingly we remanded the case to FERC for it to "determine what portion of the Account No. 191 deficiency accrued" after May 11, 1988. Id. at 581.

The Commission thus set out on remand to calculate any amounts in Transwestern's Account No. 191 on September 30, 1989 that could not be billed under our decision in Transwestern I. This involved two operations. First, the Commission had to remove from the September 30 balance any PGA costs "accrued" before May 11, 1988. In this process the Commission excluded about $6.4 million (plus interest) for amounts Transwestern had paid after May 11 to settle pricing disputes with suppliers related to gas purchased before May 11, as well as other adjustments to Account No. 191 made after May 11 but related to pre-May 11 purchases. Transwestern Pipeline Co., 64 FERC p 61,217 at 62,622-25 (1993); 66 FERC p 61,350 at 62,171-74 (1994). This reduced the September 30, 1989 deficiency to about $34.9 million. See 64 FERC at 62,628. Transwestern objects to these exclusions, claiming that the costs the Commission removed were eligible for recovery under our order in Transwestern I (even though they related to pre-May 11 purchases) because these amounts had been "booked" into the PGA accounts after May 11, 1988.

Second, the Commission had to choose some metric for matching amounts Transwestern had recovered in its PGA between May 11, 1988 and September 30, 1989 with Transwestern's accumulated costs; the more Transwestern's PGA collections in that period were allocable to its May 11, 1988 deficiency in Account No. 191, the less the outstanding September 30, 1989 balance would be attributable to pre-May 11 sales. The Commission chose to adopt a FIFO rule--first in, first out--under which each dollar Transwestern recovered through its PGA after May 11, 1988 would retire the oldest dollar in the account as of that date. The Commission found that Transwestern's May 11, 1989 Account No. 191 balance was about $38.7 million, and its collections between May 11, 1988 and September 30, 1989 were about $38.2 million. Applying FIFO, the Commission removed the difference, about $500,000, from the $34.9 million that was left in Account No. 191 after the operation described above, and allowed Transwestern to direct bill the resulting sum, about $34.4 million. The customers--the California Public Utility Commission, as representative of the ultimate customers, supported by several intervenors--object that this latter exclusion was far too small. Because of the mechanics of Account No. 191 recovery as previously carried out under the Commission's regulations (mechanics that involve a complex array of sub-accounts that we will describe below), they say that FIFO misdescribes the historic process of PGA recovery. Using the historic procedure, they say, the Commission should have found that $8.4 million of pre-May 11 deficiency could not have been recovered as of September 30, 1989; thus $8.4 million, rather than $500,000, should have been subtracted from the $34.9 million to compute the sum that could lawfully be direct billed.

Except for a portion not yet final (which we therefore do not review), the Commission's ultimate order, Transwestern Pipeline Co., 66 FERC p 61,350 (1994), is consistent with our mandate on remand, and not otherwise unlawful. Accordingly, we deny the petitions.

The Accrual Issue

We first address Transwestern's claim that sums "booked" to Account No. 191 after May 11, 1988 but relating to pre-May 11 gas purchases should be classified as having "accrued" after May 11 as we used the term in Transwestern I. The Commission found, "in light of the court's overall decision and the court's view of the filed rate doctrine", that "accrued" embodies a general principle of matching costs with the purchase of gas to which those costs relate. 64 FERC p 61,217 at 62,623-24 (1993). We find no error in the Commission's choice.

As an accounting concept, the core purpose of accrual is appropriate matching. In the usual context, the goal is to produce an accurate statement of net income, so that expenses associated with specific revenue (e.g., cost of goods sold) are reflected in the books in the same period where the specific revenue is reflected, regardless of when the firm actually paid the expenses. See, e.g., Glenn L. Johnson & James A. Gentry, Jr., Finney & Miller's Principles of Accounting 104-05 (8th ed. 1980).

The goal of the computation for which we remanded to the Commission, of course, was not to derive an accurate statement of Transwestern's income. But our repeated use of the term "accrued" obviously reflected the idea that the task before the Commission was not a mechanical one, and might well require adjustments to the figures produced by the Commission's historic methods for making adjustments to Account No. 191. Our decision in Transwestern I, dividing the permissible from the impermissible portions of the direct bill, was explicitly based on the notice afforded by the Commission's May 11, 1988 approval of Transwestern's certificate. See 897 F.2d at 577-80. And although we recognized that pipeline customers often have very limited options in responding to notice of an applicable rate, id. at 579, we still insisted on notice as a requirement for the application of a rate consistent with the filed rate doctrine. As a general matter, the customer seems likely to be most concerned with notice of gas costs at the time of specific decisions to take gas: if at the time of any such decision the pipeline was buying gas at higher prices than the price reflected in its current cost of gas sold, the customer would know that down the pike there would be an upward adjustment to cover the discrepancy. Moreover, matching of this sort is a normal aspect of application of the filed rate doctrine. Thus, in Associated Gas Distributors v. FERC, 893 F.2d 349 (D.C.Cir.1989), we found a violation of the filed rate doctrine in a direct bill that forced customers "to pay a surcharge, over and above the rates on file at the time of sale, for gas they had already purchased." Id. at 355-56 (citation omitted). In reaching that result we pointed out that it was necessary under the filed rate doctrine "to identify the purchase decisions to which the costs are attached." Id. at 355. See also Public Utilities Comm'n of California v. FERC, 988 F.2d 154, 160 (D.C.Cir.1993).

Accordingly, we think the Commission reasonably sought to fulfill both the letter and the spirit of Transwestern I when it excluded the costs at issue here--the pricing dispute settlement costs, prior period adjustments, and associated interest--on the ground that they "were incurred in connection with Transwestern's ... service before [May 11, 1988], not its service after that date.... Customers' takes after May 11, 1988, had nothing to do with the costs." 64 FERC at 62,624.

Transwestern makes much of the fact that we equated the word "incurred" with the word "accrued" in footnote 7 of the Transwestern I opinion, 897 F.2d at 580 n. 7 ("Given our conclusion that the filed rate doctrine is no bar to Transwestern's collection of unrecovered purchased gas costs incurred after May 11, 1988, this argument only applies to costs in Account No. 191 which were incurred prior to that date.") (emphasis added )....