United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 23, 1999 Decided April 9, 1999
No. 97-1699
Southern California Edison Company,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Kern River Gas Transmission Company, et al.,
Intervenors
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
David G. Leitch argued the cause for petitioner. With him
on the briefs was Douglas Kent Porter. Kevin J. Lipson and
Richard T. Saas entered appearances.
Andrew K. Soto, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
were Jay L. Witkin, Solicitor, Susan J. Court, Special Coun-
sel, and Laura J. Vallance, Attorney.
David L. Huard and Michael W. Hall were on the brief for
intervenor Southern California Gas Company.
Before: Williams, Randolph and Rogers, Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Petitioner Southern California
Edison Co. ("Edison") challenges FERC's refusal to look into
allegations that Southern California Gas Company ("SoCal")
had abused its market power in the "secondary release"
market for gas pipeline capacity. The Commission decided
that SoCal's compliance with the maximum tariff rate made
any inquiry into such issues unnecessary, and dismissed the
complaint brought by Edison under s 5 of the Natural Gas
Act, 15 U.S.C. s 717d. Southern California Edison Co. v.
Southern California Gas Co., 79 FERC p 61,157, reh'g de-
nied, 80 FERC p 61,390 (1997). We disagree and remand the
case.
* * *
Edison's complaint, filed in March of 1997, set out the facts
as follows: Two interstate pipelines carry gas from the San
Juan Basin to the California border. SoCal is the dominant
holder of firm capacity on these lines and has market power
in that transportation market. Of the 1450 MMcf/day of firm
capacity that it holds (representing 30-40% of the total capac-
ity), SoCal uses 1057 MMcf/day to provide gas to its "core"
customers--that is, residential and small commercial users.1
The remaining 393 MMcf/day has been and is available for
release into a secondary market. See 79 FERC p 61,157 at
61,661.
By Edison's account, SoCal has exercised such market
power by releasing capacity to one of its subdivisions at
below-market rates and offering additional capacity only at an
__________
1 Pursuant to gas industry restructuring, SoCal no longer
provides interstate transportation service to "non-core" customers.
above-market minimum bid price. This overpricing of the
capacity nominally offered to others costs SoCal nothing, says
Edison, because the state regulatory agency allows SoCal to
recover, by means of an Interstate Transportation Cost Sur-
charge ("ITCS"), the difference between the cost of the
capacity to it, approximately $12 per MMBtu/month, and
anything it may recover by releases in the secondary market
($0.00 for capacity not released, and $1.20 for capacity re-
leased to its affiliate). According to Edison, SoCal set a
minimum of $4.20 per MMBtu/month for releases to others.
The Commission, finding no violation of its capacity release
regulations, 18 CFR s 284.243, dismissed Edison's complaint
without factual inquiry. 79 FERC p 61,157. It then denied
rehearing, rejecting Edison's contention that the agency had
to evaluate alleged abuses of market power even absent a
violation of these regulations. 80 FERC p 61,390. Edison
filed this petition in November 1997.
* * *
FERC makes much of the here-uncontested finding that no
regulation was violated. It points particularly to the regula-
tory requirement--satisfied here--that secondary release
prices be no higher than the maximum tariff rate (that is, the
maximum rate the Commission allows a pipeline--the pri-
mary seller of capacity--to charge). See 18 CFR
s 284.243(e), (h)(1). Because that maximum was fixed as a
"just and reasonable" rate, FERC argues, Edison has no
basis for its complaint.
It is clear that, as a statutory matter, the Commission's
duties are not so limited. Section 5 of the Natural Gas Act
gives FERC jurisdiction not only over "unjust" and "unrea-
sonable" "rate[s]" but also over unjust and unreasonable
"practice[s]", as well as "unduly discriminatory" or "preferen-
tial" rates or practices. 15 U.S.C. s 717d(a). That the rate
charged in a particular instance is just and reasonable still
leaves in place these other possible grounds for Commission
action.
Nor was it enough for the Commission to point to SoCal's
compliance with the established maximum rate for released
capacity. Here FERC reasoned by analogy to its treatment
of pipelines. They are "presumed to have market power," yet
are allowed to charge up to the maximum just and reasonable
rate without further scrutiny; FERC apparently believed
that a releasing shipper could not be better situated to abuse
market power than a pipeline. 80 FERC p 61,391 at 62,302.
This reasoning probably makes sense ordinarily, but here
overlooks the ITCS. While revenue losses on unmade sales
constrain an ordinary monopolist's ability to reduce output
and raise prices, the ITCS enables SoCal to give its own units
artificially low prices, and to price sales to others at unaccep-
table prices, with no sacrifice of transportation revenue what-
ever.
FERC's final rationale--that shippers might refuse to par-
ticipate in the capacity release program at all if they knew
they would be subjecting themselves to market power scruti-
ny and the possible remedies therefor, see id.--also fails to
account for the distinguishing fact of the ITCS. There is no
reason why a decision to examine market power issues here
need expose all shippers to possible scrutiny: the Commis-
sion could, by the terms of its decision, simply limit possible
objects of investigation to those capacity-holders who are
faced with the same perverse incentives as SoCal with the
ITCS. Assuming that the ill effects of greater intervention
justify the Commission's general reliance on compliance with
maximum rates, they do not necessarily do so in the special
case of the ITCS, and the Commission's assumption that they
do is unexplained.
* * *
Because the Commission's decision not to examine the
market power issues raised by Edison was arbitrary and
capricious, we remand the case. We note, however, that the
facts underlying Edison's claimed aggrievement are now un-
clear. At the time of the initial complaint through the filing
of the petition for review, Edison owned a number of gas-
fired electricity generation plants, and was harmed in this
capacity by higher gas prices. Pursuant to state law, howev-
er, Edison sold these plants in 1998; it now purchases
electricity for distribution from the California Power Ex-
change ("PX"). Although Edison continues to generate pow-
er from non-gas sources such as nuclear, coal and hydroelec-
tric, it is a net buyer from the PX. Because gas often is the
fuel for marginal electricity supply, according to Edison's
affidavit, gas prices drive PX electricity prices, and Edison
continues to be adversely affected by gas price increases.
This and other standing issues (such as Edison's possible
injury as a firm that funds the ITCS) should be aired before
the Commission, so that we may better evaluate standing if
the Commission's decision on the merits leads Edison to
petition for review again.
SoCal, as Intervenor, points to other changes in circum-
stance--its merger with San Diego Gas & Electric and the
latter's sale of its gas-fired plants--as signs that the incentive
structure no longer favors the kind of market power abuse
alleged by Edison. But manipulation of the downstream
electricity-generation market does not exhaust the possible
benefits to SoCal from abuse of its market power in the gas
transportation market. Edison points to the energy futures
markets and to competition between electricity and core gas
services. We leave these to be considered by the Commis-
sion.
We grant Edison's petition and remand the case to FERC.
So ordered.