United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 26, 1998 Decided July 17, 1998
No. 93-1515
Texaco Inc. and
Texaco Gas Marketing Inc.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Mojave Pipeline Co., et al.,
Intervenors
Consolidated with
Nos. 93-1593, 93-1604, 93-1789, 93-1808
---------
Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Kim M. Clark (for Burlington Resources Oil & Gas Co.),
with whom Katherine B. Edwards and Nancy J. Skancke (for
Mobil Exploration & Producing U.S., Inc., Texaco Inc., and
Texaco Gas Marketing Inc.), John P. Beall (for Texaco Inc.
and Texaco Gas Marketing Inc.), and Donald Ayer and
Norman A. Pedersen (for Southern California Utility Power
Pool and Imperial Irrigation District), were on the joint
briefs, argued the cause for petitioners. James K. Morse and
Jason F. Leif entered appearances for petitioners.
Susan J. Court, Special Counsel, Federal Energy Regula-
tory Commission ("FERC"), with whom Jay L. Witkin, Solici-
tor, and John H. Conway, Deputy Solicitor, FERC, were on
the brief, argued the cause for respondent.
Richard C. Green and Kenneth M. Minesinger were on the
brief for intervenor Mojave Pipeline Company.
Before Edwards, Chief Judge, Tatel, Circuit Judge, and
Buckley, Senior Circuit Judge.
Opinion for the court filed by Senior Judge Buckley.
Buckley, Senior Judge: Texaco Inc. and various other
natural gas shippers that have firm transportation contracts
with Mojave Pipeline Company (collectively "Texaco"), peti-
tion the court to vacate Federal Energy Regulatory Commis-
sion ("FERC" or "Commission") orders mandating that Mo-
jave set its rates according to the straight fixed-variable
method. Because FERC's findings that such pricing by
Mojave would be in the public interest are supported by
substantial evidence, we deny the petitions.
I. Background
A.Statutory and Regulatory Framework
Section 7 of the Natural Gas Act ("NGA"), 15 U.S.C.
s 717f, "prohibits the construction of certain natural gas
pipeline facilities without a certificate of public convenience
and necessity issued by the Commission." Altamont Gas
Transmission Co. v. FERC, 92 F.3d 1239, 1243 (D.C. Cir.
1996). To satisfy section 7's "public convenience and necessi-
ty" requirement, an applicant must prove that the facility it
proposes to build "is or will be required by the present or
future public convenience and necessity." 15 U.S.C.
s 717f(e). Following promulgation of Regulation of Natural
Gas Pipelines after Partial Wellhead Decontrol, FERC Stats.
& Regs. p 30,665 (1985) ("Order 436"), parties were allowed to
seek optional expedited certificates ("OEC"), which entitled
them to begin construction of a pipeline without first securing
a FERC finding of public convenience and necessity. See id.
at 31,573-85. In exchange for expedited licensing under
Order 436, OEC licensees were obligated to assume the
financial risks associated with building the facility. Associat-
ed Gas Distrib. v. FERC, 824 F.2d 981, 1030-31 (D.C. Cir.
1987).
The risk that a pipeline will be unused falls upon whichever
party is liable for the pipeline's fixed costs, which include the
costs of its construction and maintenance. See Transconti-
nental Gas Pipe Line Corp. v. FERC, 54 F.3d 893, 895 (D.C.
Cir. 1995). A pipeline that operates under a traditional
section 7 license typically recovers between 25 and 50 percent
of its fixed costs through FERC-approved reservation
charges, i.e., monthly fees paid by customers who reserve a
stated transportation capacity within a pipeline, whether or
not they actually use it. See Wisconsin Gas Co. v. FERC,
770 F.2d 1144, 1149-50 (D.C. Cir. 1985). By contrast, OEC
licensees, which had assumed the risks of the pipeline project,
generally recovered most of their fixed costs through usage
charges to their customers, which were based on the volume
of gas shipped. See TransColorado Gas Transp. Co., 67
FERC p 61,301, 62,053 (1994). As a result, under the prevail-
ing OEC licensee rate design, most fixed costs and all varia-
ble costs were recovered through usage charges while only
nominal amounts were recovered through reservation fees.
In 1992, FERC issued Order No. 636, see Pipeline Service
Obligations and Revisions to Regulations Governing Self-
Implementing Transportation under Part 284 of the Com-
mission's Regulations, and Regulation of Natural Gas Pipe-
lines after Partial Wellhead Decontrol, FERC Stats. & Regs.
p 30,939 (1992) ("Order 636"), which was designed to promote
competition at the natural gas wellhead by increasing the
transparency of natural gas pricing. See Pennsylvania Office
of Consumer Advocate v. FERC, 131 F.3d 182, 183 (D.C. Cir.
1997), modified by 134 F.3d 422 (D.C. Cir. 1998); United
Distrib. Cos. v. FERC, 88 F.3d 1105, 1125-27 (D.C. Cir. 1996),
cert. denied, 117 S. Ct. 1723 (1997) ("UDC"). Order 636
required, in part, that pipelines set their charges by the
straight fixed-variable ("SFV") method, according to which
pipelines were required to
allocate fixed costs to the reservation charge, and varia-
ble costs to the usage charge. The Commission mandat-
ed SFV so that fixed costs, which vary greatly between
pipelines, would no longer affect the usage charge and
thus distort the national gas-sales market that Order No.
636 fosters.
See id. at 1129 (footnote omitted).
B. Facts
In 1985, first Mojave and then the Kern River Gas Trans-
mission Co. ("Kern River") petitioned FERC under section 7
of the NGA for a permit to build and to operate natural gas
pipelines serving southern California. See 15 U.S.C.
s 717f(c)(1)(A). Before FERC had completed comparative
hearings to determine which company would receive a section
7 license, see Ashbacker Radio Corp. v. FCC, 326 U.S. 327,
333-34 (1945) (requiring comparative hearings to determine
assignment of an exclusive license where there is more than
one applicant), the Wyoming-California Pipeline Co.
("WyCal") petitioned for an OEC to build and operate a
pipeline substantially similar to those proposed by Mojave
and Kern River. Because OEC applicants agree to assume
the financial risk associated with under use, FERC permits
multiple OEC licensees to build facilities for the same market
without first conducting Ashbacker hearings. See Questar
Pipeline Co., 59 FERC p 61,307, 62,140-41 (1992) (holding
that Ashbacker proceedings are unnecessary in OEC cases).
Once WyCal had applied for an OEC, both Mojave and
Kern River abandoned their section 7 petitions and filed OEC
applications of their own. In its contracts with prospective
clients, Mojave agreed to assign most of its fixed costs to the
usage fee, thereby assuming the greatest share of the finan-
cial risk associated with the construction and maintenance of
the pipeline. The rate-setting scheme adopted by Mojave, in
which "some of the fixed costs are assigned to the reservation
charge, but some of the fixed costs, including return on equity
and income taxes, are assigned to the usage charge along
with all the variable costs," is commonly called modified fixed-
variable ("MFV"). Union Pacific Fuels, Inc. v. FERC, 129
F.3d 157, 159 (D.C. Cir. 1997); see Transcontinental Gas, 54
F.3d at 895 ("Under MFV, a portion of the pipeline's fixed
costs--return on equity and related income taxes--is included
in the commodity charge, not the demand charge."); see also
Mojave's Service Agreement Applicable to Transportation
Service Under Rate Schedules FT-1 and IT-1 s 4.1(a) ("Ser-
vice Agreement"). FERC issued a license to Mojave in 1989.
See Mojave Pipeline Co., 56 FERC p 61,282 (1991); Mojave
Pipeline Co., 50 FERC p 61,069 (1990).
In its November 1992 rate filing, which was submitted
shortly after Order 636 had been promulgated, Mojave pro-
posed maintaining its MFV rate structure for existing cus-
tomers but adopting SFV-based pricing for new customers.
See Mojave Pipeline Co., 62 FERC p 61,195, 62,362 (1993)
("Compliance Order"). Acting pursuant to its authority un-
der section 5 of the NGA, 15 U.S.C. s 717d(a), FERC reject-
ed Mojave's plan to retain MFV in part and ordered the
pipeline to file a new rate schedule applying SFV rates to all
its customers. Id. at 62,364-66. FERC found that permit-
ting Mojave to compute any of its charges according to MFV
would distort the pricing information signals that Order 636
was designed to regularize. Id. at 62,365. The Commission
affirmed its decision in two subsequent opinions denying
rehearing. See Mojave Pipeline Co., 64 FERC p 61,047
(1993) ("First Rehearing Order"); Mojave Pipeline Co., 65
FERC p 61,059 (1993) ("Second Rehearing Order").
The Compliance Order therefore reassigned the risk of
under use from Mojave to the shippers while leaving the
contract otherwise intact. See Compliance Order, 62 FERC
at 62,361 (binding pre-Order 636 shippers to their contracts
unless they were able to sell them to other prospective
shippers).
II. Discussion
Texaco claims that FERC lacked the authority to impose
SFV rates on shippers whose contracts specified MFV rates.
In the alternative, it asserts that FERC's denial of an exemp-
tion from Order 636 to Mojave shippers was arbitrary and
capricious, that FERC failed to justify its refusal to adopt an
alternative plan presented by one of the petitioners, and that
FERC was required to hold a hearing to resolve questions of
material fact. We have jurisdiction over Texaco's petition
pursuant to 15 U.S.C. s 717r(b).
A. Standard of Review
As a general matter, we will uphold FERC's factual find-
ings if supported by substantial evidence and will endorse its
orders so long as they are based on reasoned decision mak-
ing. See Koch Gateway Pipeline Co. v. FERC, 136 F.3d 810,
814 (D.C. Cir. 1998). We will also defer to the agency's
reasonable interpretation both of its own regulations and of
contracts that are subject to its rules. See Udall v. Tallman,
380 U.S. 1, 16 (1965); Williams Natural Gas Co. v. FERC, 3
F.3d 1544, 1550-51 (D.C. Cir. 1993).
B.FERC's Burden of Proof and the Mobile-Sierra Doc-
trine
1. Applicability of the Mobile-Sierra Doctrine
At the outset, we must determine whether the Mobile-
Sierra doctrine applies in this case. See FPC v. Sierra
Pacific Power Co., 350 U.S. 348, 354-55 (1956); United Gas
Pipe Line Co. v. Mobile Gas Serv. Corp., 350 U.S. 332, 344
(1956). That doctrine holds that where parties have negotiat-
ed a natural gas shipment contract that sets firm prices or
dictates a specific method for computing shipping charges and
that denies either party the right to change such prices or
charges unilaterally, FERC may abrogate or modify the
contract only if the public interest so requires. See City of
Oglesby v. FERC, 610 F.2d 897, 899-900 (D.C. Cir. 1979);
Appalachian Power Co. v. FPC, 529 F.2d 342, 348 (D.C. Cir.
1976); see also Pennzoil Co. v. FERC, 645 F.2d 360, 373 (5th
Cir. 1981) (noting that the NGA "did not displace but only
superimposed federal regulation on private contractual ar-
rangements").
Section 4 of the Service Agreement establishes a formula
for determining the applicable rates chargeable for transpor-
tation services; and, in subsection 4.8, Mojave agrees that it
"shall not exercise [its] rights under Section 4 of the [NGA,
15 U.S.C. s 717c], to change the rates to be paid by the
Shipper." The Commission nevertheless found that Mojave's
service agreements were not covered by the Mobile-Sierra
doctrine for two reasons: first, "[b]y expressly prohibiting
only unilateral rate changes proposed under NGA section 4,
the contracts ... implicitly recognize the Commission's ability
to take the instant section 5 action." Compliance Order, 62
FERC at 62,365, stating that section 5 of the NGA permits
FERC to set aside rates that it finds unjust or unreasonable);
second, "the contracts specifically provide that Mojave and
the Shippers must comply with all applicable Commission
regulations in the performance of the contracts." Id. (citing
section 12.6 of the Service Agreement). We address each of
these positions in turn.
In dicta in a recent opinion, see Union Pacific Fuels, Inc. v.
FERC, 129 F.3d 157 (D.C. Cir. 1997), we inadvertently lent
support to the inference that FERC now draws from the
parties' failure to state explicitly, in their service agreements,
that the Commission was precluded from ordering alterations
of the rate design for reasons other than that such changes
were required by the public interest. In that case, we stated:
A contract between private parties may preserve
FERC's right to impose new rates by "leav[ing] unaf-
fected the power of the Commission ... to replace not
only rates that are contrary to the public interest but
also rates that are unjust [or] unreasonable."
Id. at 161 (quoting Papago Tribal Util. Auth. v. FERC, 723
F.2d 950, 953 (D.C. Cir. 1983)) (emphasis added). That
quotation from Papago is misleading, and it does not repre-
sent the law. In discussing alternative contractual ap-
proaches for the revision of rates, the Papago court said:
[T]he parties may contractually eliminate the utility's
right to make immediately effective rate changes ... but
leave unaffected the power of the Commission ... to
replace not only rates that are contrary to the public
interest but also rates that are unjust, unreasonable, or
unduly discriminatory or preferential to the detriment of
the contracting purchaser.
Papago, 723 F.3d at 953. The court did not suggest that the
parties' failure to explicitly foreclose the Commission's au-
thority to replace rates would leave it intact. The law is quite
clear: absent contractual language "susceptible to the con-
struction that the rate may be altered while the contract[ ]
subsist[s]," the Mobile-Sierra doctrine applies. Appalachian
Power Co., 529 F.2d at 348.
With respect to FERC's second argument, section 12.6 of
the Service Agreement reads:
In performance of this Service Agreement, Shipper and
Transporter shall comply with all applicable laws, stat-
utes, ordinances, safety codes and rules and regulations
of governmental authorities having jurisdiction.
Although we are bound to respect FERC's reasonable inter-
pretation of contracts that fall within its jurisdiction, see
Southeastern Michigan Gas Co. v. FERC, 133 F.3d 34, 44
(D.C. Cir. 1998), the Commission's interpretation of this
language is unreasonable. Section 12.6 is merely a generic
contract clause compelling both parties to adhere to the law.
See, e.g., Huntzinger v. Hastings Mutual Ins. Co., 143 F.3d
302, ----, 1998 WL 205240 at *1 (7th Cir. Apr. 28, 1998)
(quoting nearly identical term in land purchase contract);
Bradshaw v. United States, 83 F.3d 1175, 1184 n.2 (10th Cir.
1995) (quoting nearly identical term in liquidation agreement);
Yellow Taxi Co. v. NLRB, 721 F.2d 366, 379 (D.C. Cir. 1983)
(quoting identical term in leasing agreement).
Indeed, the structure of the Mojave contracts confirms the
banal nature of section 12.6 and its irrelevance to rate setting.
All the contract's pricing terms are consolidated in section 4,
while section 12 is limited to generic contract concerns (e.g.,
severability and waiver of rights). Because nothing in the
agreements suggests that the contracting parties intended to
grant Mojave unilateral authority to modify shipment rates,
we turn to whether Mojave and the shippers "agree[d] to a
specific rate or whether they agree[d] to a rate changeable in
a specific manner." Richmond Power & Light Co. v. FPC,
481 F.2d 490, 497 (D.C. Cir. 1973). If they did either, the
Mobile-Sierra doctrine applies.
The Mojave service agreements expressly enumerate the
manner in which transportation fees will be computed and set
a maximum charge. See Service Agreement ss 4.1, 4.1.1.
The parties therefore "agree[d] to [both] a specific [maxi-
mum] rate [and] ... to a [general] rate changeable in a
specific manner." Richmond Power & Light, 481 F.2d at 497.
Thus the prerequisites for invoking the Mobile-Sierra doc-
trine have been met.
2.Application of Mobile-Sierra Doctrine to the Mojave
Service Agreements
Because the Mobile-Sierra doctrine applies, FERC's refor-
mation of the Mojave contracts will be upheld only if FERC
has shown that the public interest required it to intervene.
See Metropolitan Edison Co. v. FERC, 595 F.2d 851, 855-56
(D.C. Cir. 1979). FERC relies in part on the public interest
rationale articulated in Order 636 to justify its modification of
the Mojave contracts. See First Rehearing Order, 64 FERC
at 61,383. But the "public interest" that permits FERC to
modify private contracts is different from and more exacting
than the "public interest" that FERC seeks to serve when it
promulgates its rules. Compare 15 U.S.C. s 717(a) ("Federal
regulation in matters relating to the transportation of natural
gas and the sale thereof in interstate and foreign commerce is
necessary in the public interest.") with Sierra Pacific, 350
U.S. at 355 (stating that "the sole concern of the Commission
would seem to be whether the rate is so low as to adversely
affect the public interest--as where it might impair the
financial ability of the public utility to continue its service,
cast upon other consumers an excessive burden, or be unduly
discriminatory"). FERC's rulemaking authority requires
only that it point to a generic public interest in favor of a
proposed rule; the public interest necessary to override a
private contract, however, is significantly more particularized
and requires analysis of the manner in which the contract
harms the public interest and of the extent to which abroga-
tion or reformation mitigates the contract's deleterious effect.
Cf. id. (permitting modification of firm contracts only if "the
scheme of regulation imposed is necessary in the public
interest" (citation and internal quotations omitted)); Papago,
723 F.2d at 954.
Because of these differences, more is required to justify
regulatory intervention in a private contract than a simple
reference to the policies served by a particular rule. The
Commission, however, did not rest its reformation of the
Mojave agreements on the generalized public interest goals
underlying Order 636. Rather, it determined that the reten-
tion of MFV rate design would adversely affect the public
interest in two ways: first, it would distort gas market
pricing to the detriment of the "integrated national gas sales
market," Compliance Order, 62 FERC at 62,365-66; and
second, it "would be particularly anti-competitive" because it
would harm Mojave's main competitor, Kern River, "in Cali-
fornia and elsewhere." Id. at 62,366 (internal quotations and
footnote omitted). The Commission also determined that to
the extent that permitting both Mojave and Kern River to
retain MFV pricing might mitigate the second problem, it
would exacerbate the first. Because the length of their
pipelines differ and they transport gas from different regions,
FERC concluded that "allowing Mojave and Kern River to
remain on MFV would distort competition between different
producing regions in the very manner that the Commission is
seeking to avoid through its [Order 636] SFV policy." First
Rehearing Order, 64 FERC at 61,389.
In its Compliance Order, the Commission not only dis-
cussed the broad public interest underlying its preference for
uniform SFV pricing but also explained how Mojave's reten-
tion of some MFV-based charges would threaten the coher-
ence of the national policy and distort the local gas market to
the detriment of Mojave's competitors. See Compliance Or-
der, 62 FERC at 62,365-66. FERC therefore satisfied its
obligation to articulate supportable and reasonable explana-
tions for how the public interest required modification of a
private contract.
C.Allegation that FERC's Imposition of SFV Rate Design
was Arbitrary and Capricious
Texaco further contends that FERC's decision to impose
SFV rate design was arbitrary and capricious. See 5 U.S.C.
s 706(2)(A). It alleges: (1) that compliance with Order 636
arbitrarily reallocated financial risks and compromised the
rate stability that were implicit in the OEC process as
originally conceived and (2) that adopting the SFV method of
cost allocation unfairly hurt consumer interests. We ad-
dressed the first argument in Union Pacific, where we noted
that that case "present[ed] a paradigmatic example of an
agency reasonably changing its policies, and implementing
the consequences of those changes to the detriment of some
parties and the benefit of others." Union Pacific, 129 F.3d
at 162. Order 636 and its application to Mojave were prem-
ised on well articulated policies favoring transparency in
shipping charges. See Compliance Order, 62 FERC at
62,365-66. The risk of uncertainty is inherent in regulated
industries, and as the Union Pacific court noted, was in fact
taken into account by the Commission in this instance. See
129 F.3d at 163.
The second claim amounts to a complaint that Mojave's
customers have lost the benefit of their bargains. Natural
gas shippers always contract in the shadow of the regulatory
state, and they cannot presume that their contracts are
immune to its inherent risks. The Commission acted reason-
ably to implement a policy whose long-term effect will osten-
sibly improve the efficiency and flexibility of the market as a
whole. It cannot be said, then, that FERC acted either
arbitrarily or capriciously.
D.FERC's Unwillingness to Grant Mojave an Exception
Texaco contends that the Mojave shippers were entitled to
an exemption from SFV rate design under the Commission's
Order 636-related rules. See Order 636, p 30,939 at 30,434
(stating that FERC will consider alternative rate design when
conditions warrant it and the parties agree); Pipeline Service
Obligations and Revisions to Regulations Governing Self-
Implementing Transportation under Part 284 of the Com-
mission's Regulations, and Regulation of Natural Gas Pipe-
lines after Partial Wellhead Decontrol, FERC Stats. &
Regs., Regs. Preambles p 30,950, 30,605 (1992) ("Order
636-A") (holding that parties seeking to be freed from SFV
must overcome a rebuttable presumption in SFV's viability).
Texaco's argument is of three parts: (1) competitive pres-
sures in the California market have resulted in such large
discounts in usage charges that imposition of SFV-based
pricing does not make sense; (2) an exception would prevent
Mojave's reaping a significant windfall from mandatory SFV
pricing; and (3) notwithstanding whether the other argu-
ments prove availing, the Mojave service agreements embod-
ied discounts that necessarily survive imposition of Order 636.
In Order 636, FERC stated that it would not
rigidly preclude the pipeline, its customers, and interest-
ed state commissions, producers, marketers, brokers,
end-users, and others from agreeing to an alternative
method that deviates from SFV and may be appropriate
to that particular pipeline system. If the parties affected
by a pipeline's rate design agree to a different method,
the Commission will consider giving effect to the parties'
agreement.... [A]ny party ... advocating something
other than SFV carries a heavy burden of persuasion.
Order 636, p 30,939 at 30,434. In this instance, FERC found
that Texaco failed to satisfy its "heavy burden of persuasion"
because it failed to address FERC's concern that however low
the usage rates might be, so long as they reflected any
element of the pipeline's fixed costs, they would obscure the
relative costs of producing the gas the pipelines carried. See
First Rehearing Order, 64 FERC at 61,389.
As we have previously noted, "[t]he natural gas industry is
functionally separated into production, transportation, and
distribution." UDC, 88 F.3d at 1122. Order 636 was de-
signed to foster competition among natural gas producers by
ensuring that commodity prices reflected the difference in
extraction costs at the wellhead. See First Rehearing Order,
64 FERC at 61,388. FERC intended that disaggregation of
transportation and production charges would encourage con-
sumers to purchase gas from the lowest cost producer, that
market demand would create an incentive for more low-cost
gas production, and that producers' desire to satisfy that
demand would result in an increase in the amount of low cost
gas available to consumers. See Order 636, p 30,939 at
30,434-35. It is therefore irrelevant how low usage rates
may be at a given time so long as the intermingling of
pipelines' fixed and variable costs obscures differences in
producer costs. Thus, contrary to Texaco's claims, the preva-
lence of low transportation charges in the market that Mojave
serves does not moot the purpose of Order 636.
Texaco next contends that FERC has granted exceptions to
similarly situated transporters in the past and that it has
repeatedly permitted pipelines to retain non-SFV negotiated
rates since issuing the orders challenged in this case. We are
satisfied that the non-Order 636 cases upon which Texaco
relies are inapposite, and exceptions granted after issuance of
the orders under review in this case "play no role in our
determination of the orders' legality." Union Pacific, 129
F.3d at 164.
Texaco also claims that the imposition of SFV pricing
provided Mojave with a windfall. Mojave's profits have no
bearing on this dispute. Order 636 was promulgated and the
orders under review were issued to promote a national gas
policy and to ensure that Mojave's rate design did not frus-
trate that purpose. Regulatory evolution is endemic to the
natural gas market, see, e.g., Southeastern Michigan, 133
F.3d at 45-46, and that it might occur should have been
anticipated by the shippers, see Union Pacific, 129 F.3d at
163.
Finally, Texaco contends that the service agreements em-
bodied pre-Order 636 discounts that should survive its imple-
mentation. In Order 636, FERC stated that it would not
disturb pre-existing discounts that had been "negotiated and
included in [a] contract either [as] a fixed rate or [as] some
permanent form of discount, such as ninety percent of the
maximum rate." Order 636, p 30,939 at 30,454. Texaco
maintains that Mojave's MFV rate design was itself a "dis-
count."
Texaco's argument rests upon a misunderstanding of the
nature of the exempted discounts to which Order 636 referred
and upon a misinterpretation of a series of unrelated Commis-
sion pronouncements. First, FERC reasonably construed its
reference to rate discounts in Order 636 to mean a markdown
on an otherwise generally applicable rate. See Second Re-
hearing Order, 65 FERC at 61,469. Mojave's rate design
included lower reservation fees (and commensurately higher
usage charges), but the reservation fee was not discounted
from the otherwise applicable rate. Texaco confuses MFV
rate design with rate abatement.
Second, Texaco argues that FERC's reference to Mojave's
"discounted reservation fee" in an earlier licensing proceed-
ing, see Mojave Pipeline Co., 56 FERC p 61,282, 62,102
(1991), binds it in the current matter. In its Second Rehear-
ing Order, however, the Commission distinguished between
discounts subject to the Order 636 exemption and its use of
similar language in the licensing order. See Second Rehear-
ing Order, 65 FERC at 61,469. Because FERC's explanation
of the distinction is reasonable, we defer to its construction of
the two orders. See Natural Gas Clearinghouse v. FERC,
108 F.3d 397, 399 (D.C. Cir. 1997) (holding that Commission's
reasonable interpretation of its own orders will be upheld).
Third, Texaco asserts that FERC's denial of the exemption
contradicted its precedent. In El Paso Natural Gas Co., 63
FERC p 61,139 (1993), upon which Texaco relies, the Com-
mission permitted the pipeline to retain discounts on its
maximum backhaul rate for shippers whose contracts includ-
ed such discounts prior to promulgation of Order 636. See id.
at 61,939, 61,940-41. Contrary to Texaco's claim, however,
the El Paso case is inapposite: it concerned discounting the
maximum applicable rate and not an alternative rate design.
E.FERC's Refusal to Adopt an Alternative Hybrid Plan
Texaco claims that the Commission arbitrarily rejected one
of the Mojave shippers' proposals for a hybrid MFV/SFV rate
design in which the shippers would pay the contracted MFV-
based reservation charge for unused capacity and a higher
SFV-based reservation charge for used capacity. In its Sec-
ond Rehearing Order, in which it rejected the proposal,
FERC noted that, under the proposed scheme,
payment of the pipeline's fixed costs would vary depend-
ing upon its usage of the pipeline. The more it used its
capacity, the more fixed costs it would incur.... [Thus,]
just as under MFV, the rate charged for each additional
unit of gas shipped on Mojave's system would include
fixed costs, and not, as under SFV, just the variable costs
associated with shipping that unit of gas.
65 FERC at 61,468. Texaco now claims that the Commis-
sion's rejection of the alternative proposal betrayed its igno-
rance of local market conditions and is therefore suffused
with error.
The hybrid proposal, however, contains the same erroneous
assumption we noted earlier. To the degree that a pipeline's
rate structure includes any portion of its fixed costs in its
usage fees, it will be more difficult to determine and compare
the wellhead costs of the gas it carries. As FERC noted in
its Second Rehearing Order and repeats on appeal, the
hybrid rate proposal is impermissible not because of its effect
upon gas consumers but because it fails to remedy the market
problem inherent in undifferentiated natural gas pricing. See
Second Rehearing Order, 65 FERC at 61,468.
F. Necessity of a Factual Hearing
Texaco claims that the existence of facts unique to Mojave
and the California gas market required FERC to hold an
evidentiary hearing before ruling on its application for an
exemption from Order 636's SFV rate design. This argument
fails because the facts upon which Texaco based its claim
were part of the paper record before FERC, and FERC
accepted their validity. See First Rehearing Order, 64
FERC at 61,390. Nor has Texaco referred the court to any
issue of "motive, intent, [ ] credibility ... [or] past occur-
rence," Louisiana Ass'n of Independent Producers & Royalty
Owners v. FERC, 958 F.2d 1101, 1113 (D.C. Cir. 1992), that
would require the Commission to hold a hearing rather than
decide the case on the basis of the paper record. Under the
circumstances, we cannot quarrel with the Commission's con-
clusion that none was required. See id. at 1113-14.
III. Conclusion
For the foregoing reasons, the petitions for review are
denied.
So ordered.