United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 16, 1998 Decided December 11, 1998
No. 97-1450
Southern California Edison Company,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Public Utilities Commission of the
State of California, et al.,
Intervenors
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
John G. Roberts, Jr. argued the cause for petitioner. With
him on the briefs were Kevin J. Lipson, Richard T. Saas,
Catherine E. Stetson and Stephen E. Pickett.
Larry D. Gasteiger, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and Susan J. Court,
Special Counsel.
Richard C. Green argued the cause for intervenors El Paso
Natural Gas Company, et al. With him on the brief were
Judy A. Johnson, Kenneth M. Minesinger, James R. McCot-
ter, David L. Huard, Patrick G. Golden, Joel L. Greene, John
P. Gregg, Michael Hall, Kelly A. Daly, James H. McGrew,
James F. Moriarty, Katherine B. Edwards, John C. Walley,
Douglas M. Canter and Barbara S. Jost. David W.
Anderson and Kim M. Clark entered appearances.
Before: Edwards, Chief Judge, Williams and Ginsburg,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Petitioner Southern California
Edison Company ("Edison") is an electric utility, and South-
ern California Gas Company ("SoCal") is a gas distributor--a
local distribution company or LDC. To supply gas for the
generation of electricity, Edison buys firm gas transportation
service on the pipeline systems of both El Paso Natural Gas
Company and SoCal. In a curious way (described below),
Edison is not only a direct customer of El Paso, but, through
SoCal, a kind of indirect customer. In 1995 El Paso filed new
transportation rates with the Federal Energy Regulatory
Commission under s 4 of the Natural Gas Act, 15 U.S.C.
s 717c, and made an offer of settlement to which most of its
customers agreed. Edison objected, raising claims that in a
disputed rate case would have entitled Edison to a hearing
(according to the unreversed determination of the administra-
tive law judge, El Paso Natural Gas Co., 78 FERC p 63,006
at 65,131 (1997)). The Commission approved the settlement
as "uncontested," protecting Edison's interests as a direct
customer by severing it and allowing it to pursue its objec-
tions outside the settlement. But the Commission denied
Edison any right to either severance or litigation in its role as
an indirect customer of El Paso. See El Paso Natural Gas
Co., 79 FERC p 61,028, reh'g denied, 80 FERC p 61,084
(1997). Finding the Commission order inconsistent with the
settlement precedents of both the Commission and this court,
we reverse.
* * *
Edison's role as an indirect customer of El Paso arises
from gas industry restructuring. SoCal formerly sold gas
both to its "core" customers (largely residential as we under-
stand it) and to non-core ones such as Edison. As a result of
restructuring, it now sells gas only to its "core" customers.
SoCal still sells transportation services to the non-core cus-
tomers. Thus Edison buys gas and ships it via El Paso to
California, and via SoCal to its generating stations.
But because of SoCal's now abandoned sales service to non-
core customers, it had reserved much more capacity on El
Paso and other interstate pipeline systems than it now needs.
To minimize its loss on this resource, SoCal sells the surplus
capacity into the secondary market. Because the available
capacity far exceeds demand, however, the resulting revenues
fall well below SoCal's cost. See 79 FERC p 61,028 at 61,126.
The California Public Utilities Commission ("CPUC") allows
it to make up the loss by a charge to its non-core customers
called the Interstate Transition Cost Surcharge ("ITCS").
See id. at 61,128-29 n.21.
The only issue before us is the propriety of FERC's refusal
either to hold up the settlement pending resolution of Edi-
son's merits claims as an indirect customer, or to sever
Edison from the settlement in both its capacities. Edison
argues that the refusal was improper under both the Commis-
sion's precedents and our own. We examine the two sets of
authorities in turn.
* * *
In United Gas Pipe Line Co., 55 FERC p 61,070 (1991),
reh'g denied, 64 FERC p 61,014 (1993), the Commission al-
lowed indirect customers of a pipeline to block a settlement.
The Commission here attempted to distinguish United in two
ways. It first argued that, unlike the indirect customers in
United, whose rates from direct customers were under
FERC's jurisdiction, Edison "is concerned about SoCal's rate
to its intrastate customers, ... which is a matter over which
this Commission has no jurisdiction." 80 FERC p 61,084 at
61,294. This is blind to Edison's claim. Edison challenges
the validity of the settlement's allocation of costs to El Paso's
customers--including SoCal--not the subsequent allocation of
SoCal's share to Edison. Equally blind is the Commission's
suggestion that Edison's problems are of its own making, as it
agreed before CPUC to bear a specified share of the ITSC.
Id. Edison's agreement before CPUC to bear a share of
costs being determined by FERC cannot possibly have
waived its rights to challenge the size of the cost it has
agreed to share.
A similar misunderstanding underlies the Commission's
second proposed distinction. In United, it said, "[t]he relief
that the objectors sought would require a different allocation
than the one provided in the settlement." Id. Rejection of
the settlement was proper because the indirect customers'
objections went "to the very basis of the settlement." Id.
Here, by contrast, Edison "can litigate its rate with El Paso,
without affecting the consenting parties' rate." Id. This
appears simply to change the subject. Of course the Com-
mission's order lets Edison pursue its objections as a direct
customer; but that does not enable it to pursue them as an
indirect customer, even though, so far as appears, they go "to
the very basis of the settlement" every bit as much as the
objections in United.
Although not raised by the Commission, another possible
distinction suggests itself. The Commission's order denying
rehearing in United, after recognizing the general interest of
indirect customers in the allocation of costs to their immedi-
ate upstream suppliers, see 64 FERC p 61,014 at 61,097,
noted the particular unfairness possible if that settlement
were approved over the indirect customers' objection: since
the downstream cost-allocation proceedings had not yet oc-
curred, the indirect customers could have challenged the
direct customers' acceptance of the settlement there, which if
the challenge were successful would have left these direct
customers "trapped" with higher costs than they could pass
on. Id. at 61,097-98. But the current situation seems to
present at least as compelling a scenario: instead of the
customer in the middle being stuck because of the upstream
settlement, the indirect customer (Edison) will be stuck with
the fait accompli of the costs SoCal has agreed to bear.
While United might perhaps be distinguished here, the
Commission has not done so.
* * *
This court has also found indirect customers entitled to
contest Commission-approved settlements. Tejas Power
Corp. v. FERC, 908 F.2d 998 (D.C. Cir. 1990), held that the
Commission erred in approving a settlement, over the objec-
tions of indirect customers, solely on the basis of the direct
customers' approval. We found that these indirect custom-
ers' challenge "triggers the Commission's obligation, under
s 7 of the NGA and s 385.602(h)(1)(i) of its rules, to examine
the potential impact of the [settlement] upon [the indirect
customers'] interests and to support its conclusions with
substantial evidence." Id. at 1003.
Of course the Commission might satisfy that obligation
either by deciding on the merits any genuine issue of material
fact or, if it were possible, executing a severance that would
fully protect the objecting party's interests. But Tejas Power
allowed an alternative, saying that "the Commission must, at
a minimum, address the question of whether the [direct
customers'] interests are sufficiently likely to be congruent
with those of ultimate consumers that it may rely upon the
[direct customers'] agreement as dispositive of the consumers'
interests." Id. at 1004.
The Commission points to no such congruence of inter-
ests here. It mentioned three sets of parties that agreed to
the settlement: CPUC and its Nevada regulatory counter-
part, El Paso's customers generally, and SoCal. FERC's
emphasis on the state commissions' agreement seems to be
based on a misreading of Tejas Power. We did in fact direct
the Commission to look to the role of the states, but only in
their capacity as downstream rate-setters, and thus as possi-
ble wielders of power to protect the ultimate consumers from
being "saddled with unwarranted expenses that the LDC may
have had little incentive to avoid." See id. at 1004. The
probability of such protection here has certainly not been
established. Nor do we see, given the usual limits of agency
staff resources, why CPUC's approval could be deemed to
rest on any more penetrating scrutiny than that of FERC
itself.
The support for the settlement from the bulk of El Paso's
customers, while entitled to "some weight" with the Commis-
sion, Laclede Gas Co. v. FERC, 997 F.2d 936, 946 (D.C. Cir.
1993), is itself not enough, and would not be even if unani-
mous, id.; see also Tejas Power, 908 F.2d at 1003.
As to SoCal, finally, the Commission attempted to make a
showing that met the standard of Tejas Power for using a
direct customer as a surrogate for indirect ones--i.e., a
finding that it had interests so "likely to be congruent with
those of ultimate consumers that [the Commission] may rely
upon [its] agreement as dispositive of the consumers' inter-
ests, notwithstanding the claim of some large and sophisticat-
ed consumers to the contrary." 908 F.2d at 1004. Endeavor-
ing to show such alignment, the Commission wrote:
We believe there is merit in El Paso's contention that as
a result of recent decisions by the CPUC and the Califor-
nia legislature, electric energy sold in the future in
California is likely to be subject to market competition.
LDCs in California may no longer be able to assume that
they will be able to automatically pass through genera-
tion costs, including gas costs, that they have incurred,
and any regulatory shield that those LDCs might have
enjoyed in the past may be diminished. Thus, LDCs, at
least in California, have an incentive, as do end-users, to
negotiate the most favorable interstate rate.
79 FERC p 61,028 at 61,130 (footnotes omitted). This seems
to us too confused to pass muster. First, when the Commis-
sion (or its opinion-writing staff) writes of an LDC having
"incurred" "generation costs," it leads one to suspect it has
not decided what industry it is describing--gas distribution or
electricity generation. Second, competition at the electricity
generation level is completely consistent with the gas distrib-
utor's possessing a monopoly. The Commission's murmur-
ings here are not enough to show a substantial congruity of
interests.
* * *
The Commission has neither adequately distinguished its
own precedents nor fulfilled the minimum requirements of
ours. We accordingly grant the petition for review and
remand the case.
So ordered.