United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 16, 2005 Decided December 6, 2005
No. 04-1226
EXXON MOBIL CORPORATION, ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PIEDMONT NATURAL GAS COMPANY, INC., ET AL.,
INTERVENORS
Consolidated with
04-1228
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Thomas J. Eastment argued the cause for petitioners Exxon
Mobil Corporation, et al. With him on the briefs were Melissa
E. Maxwell, Douglas W. Rasch, Bruce A. Connell, and Charles
J. McClees.
2
David A. Glenn, Gregory Grady, and Michael J. Thompson
were on the brief for petitioner Transcontinental Gas Pipe Line
Corporation.
Dennis Lane, Solicitor, Federal Energy Regulatory Com-
mission, argued the cause for respondent. With him on the brief
was Cynthia A. Marlette, General Counsel.
James H. Byrd, Kenneth T. Maloney, Christopher M.
Heywood, and Anne K. Kyzmir were on the brief of intervenors
The Brooklyn Union Gas Company, et al.
Before: GINSBURG, Chief Judge, and BROWN and GRIFFITH,
Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: For the third time before this court,
Transcontinental Gas Pipe Line Corporation (Transco) chal-
lenges the decision by the Federal Energy Regulatory Commis-
sion (FERC) to deny Transco’s proposal for implementing a
“firm to the wellhead” (FTW) rate structure on its natural gas
pipeline.1 When we remanded this case for a second time, we
1
Generating a dozen orders from FERC and now a third
opinion from this court, Transco’s struggle to change its rate structure
has demonstrated the Dickensian potential of energy regulation
disputes:
This scarecrow of a suit has, in course of time, become so
complicated, that no man alive knows what it means. The
parties to it understand it least; but it has been observed that
no two Chancery lawyers can talk about it for five minutes,
without coming to a total disagreement as to all the premises.
Innumerable children have been born into the cause;
innumerable young people have married into it; innumerable
3
instructed FERC to reconcile two arguably inconsistent orders
issued in response to Transco’s rate structure proposals. While
FERC’s new variations on its theme have not rendered this
already convoluted proceeding any less opaque (perhaps an
understandable result of multiple remands), a consistent
principle can still be discerned: prices may be increased, terms
may be altered, but contracts may not be unilaterally amended
to effectively add new service. Accordingly, we hold FERC did
not act arbitrarily and capriciously in its previous orders. We
therefore deny the petitions for review.
I
Transco operates a natural gas pipeline that stretches
northeastward from production areas in the Gulf of Mexico,
terminating in the New York City area. The pipeline is divided
into six zones, three in the “upstream” production area near the
Gulf coast and three in the “downstream” market area. In the
production area zones, the pipeline system consists of both
“supply lateral” lines and a mainline; the supply laterals
transport gas from the gathering areas to the mainline, where the
gas is collected at pooling points. Until the 1980s, Transco and
other pipeline companies acted primarily as gas merchants,
transporting their own gas and selling it to distributors. Begin-
ning in 1985, pipelines were required to start offering customers
the ability to transform their entitlements to sales of gas into
transportation-only service; this allowed the customers to
purchase gas from the pipelines’ competitors while still being
able to transport it. Order No. 636, issued by FERC in 1992,
completed this process by requiring pipelines to unbundle
transportation service from sales of gas; customers would have
old people have died out of it.
Charles Dickens, Bleak House 6 (Modern Library 2002) (1853).
4
equal access to “firm transportation” (FT) service (that is,
guaranteed capacity) regardless of whether they purchased gas
from the pipeline or another company, a change intended to
foster competition in the industry. Pipeline Service Obligations
and Revisions to Regulations Governing Self-Implementing
Transportation; and Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, 57 Fed. Reg. 13,267, 13,270 (Apr.
16, 1992) (“Order No. 636”), on reh’g, 57 Fed. Reg. 36,128
(Aug. 12, 1992) (“Order No. 636-A”), on reh’g, 61 F.E.R.C.
¶ 61,272 (1992), reh’g denied, 62 F.E.R.C. ¶ 61,007 (1993),
aff’d in part, United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C.
Cir. 1996).
Order No. 636 also required companies to use a “straight
fixed variable” pricing system for FT service. Id. at 13,293.
Under such a system, pipeline companies would charge a two-
part rate: an initial reservation charge (to guarantee that capacity
would be available), plus a usage charge based on the volume of
gas actually transported. See 18 C.F.R. § 284.7. In an effort to
increase competition and improve transparency in pricing,
FERC required pipelines to recover the “fixed costs” of FT
service through the reservation charge rather than through the
volumetric charge. Order No. 636 at 13,293.
Finally, Order No. 636 implemented a flexible receipt and
delivery point policy under which any customer who paid a
reservation charge for shipping gas within a zone had to be
granted “secondary” rights to deliver or receive gas at points in
that zone other than the “primary” points specified in the
customer’s contract. Id. at 13,290. When a customer used these
secondary rights, shipping capacity would not be guaranteed; the
rights would carry a lower scheduling priority than FT service
purchased by customers with primary rights at the same points.
Order No. 636-A at 36,148. At the same time, the secondary
rights would have higher scheduling priority than a third
5
category of service, “interruptible transportation” (IT) service,
which does not entitle a customer to any guaranteed capacity.
Order No. 636 at 13,290. As higher priority service can take
precedence over IT service, no reservation charge applies to IT
service; hence, a one-part rate based on the volume of gas
actually transported by the customer is charged for IT service.
18 C.F.R. § 284.9.
Most pipeline companies responded to Order No. 636 by
offering “firm to the wellhead” (FTW) service, charging their
customers two-part rates for transporting gas on both the supply
laterals and the mainline. Transco, however, had already
unbundled its service a year earlier, in 1991, through settlement
agreements with its customers. Transcon. Gas Pipe Line Corp.,
55 F.E.R.C. ¶ 61,446 (1991), on reh’g, 57 F.E.R.C. ¶ 61,345
(1991), on reh’g, 59 F.E.R.C. ¶ 61,279 (1992), aff’d in part,
Elizabethtown Gas Co. v. FERC, 10 F.3d 866 (D.C. Cir. 1993),
on remand, 72 F.E.R.C. ¶ 61,037 (1995), reh’g denied, 73
F.E.R.C. ¶ 61,357 (1995). Pursuant to these settlements, Transco
charges two-part FT rates for transporting gas on the mainline;
customers who switched to this service were termed “FT-
conversion shippers.” On the supply laterals, though, Transco
adopted an IT rate structure, charging a one-part rate based on
the volume actually transported (with no separate reservation
charge). Transco does not sell any FT service on the supply
laterals.2 When IT shippers deliver gas to FT-conversion
shippers at receipt points on the mainline, their service on the
laterals is given a higher priority (“IT-Feeder” priority) than
regular IT service.
2
Transco had sold FT service in the production areas to a few
customers prior to offering open access to its transportation services.
While these older service agreements were “grandfathered” through
the settlements—i.e., those customers would have priority over IT
shippers—they are essentially irrelevant to the current issues.
6
In calculating the reservation charge FT-conversion
shippers have to pay for service in a zone, Transco divides the
fixed costs to be recovered (i.e., those fixed costs allocated to
that zone) by the total amount of transportation service projected
for that zone, including both FT and IT service. The resulting
figure determines both the per-unit reservation charge for FT
service and the one-part, per-unit charge for IT-service.3 Thus,
the more IT service shippers demand in a zone, the lower an FT
shipper’s reservation charge will be for that zone.
For reasons that have never been made clear, Transco’s IT-
Feeder service was not purchased by the FT-conversion shippers
but rather by natural gas suppliers (including the petitioners,
“Indicated Shippers”) who used the service to transport their gas
to the pooling points on the mainline.4 Once the gas arrived at
the mainline, it would be transported by the FT shippers who
purchased the gas from the producers. Eventually, Indicated
Shippers became dissatisfied with this arrangement. They had to
pay approximately $50 million per year in transportation costs
on the supply laterals; producers who used other pipelines did
3
The IT rates are calculated according to a “100 percent load
factor” rate. Under such a calculation, the maximum rate for
transporting one unit of gas via IT service is equivalent to the per-unit
cost incurred by an FT shipper that uses its entire contract entitlement
(and thus pays not only a reservation charge but also an FT per-unit
charge for the entire capacity that it reserved).
4
During oral argument, Indicated Shippers contended that
they purchased the IT-Feeder service because it was, at the time, “the
only game in town”; there was no competitive disadvantage in
purchasing such service until other pipelines began selling FTW
service. The lack of a competitive disadvantage still begs the question
why the Indicated Shippers, rather than the FT-conversion shippers,
decided that it would be in their interest to contract for transportation
service on the laterals.
7
not incur this expense, as their customers subscribed to FTW
service that included transportation on both the supply laterals
and the mainlines. Still, the Indicated Shippers believed they
could not always pass these costs on to their customers, as they
needed to make their rates appear competitive with rates charged
by producers serving other pipelines.
II
Section 4 of the Natural Gas Act (NGA) governs rates and
charges set by natural gas companies for the transportation or
sale of gas; such rates and charges must be “just and reasonable”
to be lawful. 15 U.S.C. § 717c(a). Changes to rates and charges
can only be made after giving FERC notice so that it can hold a
hearing on the legality of the change, if necessary. 15 U.S.C.
§ 717c(d)-(e). In 1995, Transco proposed under § 4 of the NGA
to adopt an FTW rate structure, but FERC rejected this plan.
Transcon. Gas Pipe Line Corp., 72 F.E.R.C. ¶ 63,003 (1995),
modified, 76 F.E.R.C. ¶ 61,021 (1996), on reh’g, 77 F.E.R.C.
¶ 61,270 (1996), on reh’g, 79 F.E.R.C. ¶ 61,205 (1997).
Transco’s proposal would have eliminated IT-Feeder priority
and given FT-conversion shippers flexible rights to use the
supply laterals, though capacity would not be guaranteed at any
specific points on the laterals. 76 F.E.R.C. at 61,054. If multiple
FT-conversion shippers wanted to use a lateral, and it did not
have enough total capacity for their needs, capacity would be
allocated pro rata. Id. Transco would not sell any higher priority
service on the laterals, and a two-part FT rate would be charged
for each zone. The full fixed costs of the supply laterals would
be allocated to the FT shippers’ reservation charges, as demand
for IT service would no longer be taken into account in calculat-
ing that charge. 72 F.E.R.C. at 65,011.
FERC rejected this proposal because the changes modified
Transco’s contracts with its shippers. 76 F.E.R.C. at 61,061. On
8
appeal, we queried whether the proposed changes would be
acceptable under the framework established by the Supreme
Court. Exxon Corp. v. FERC, 206 F.3d 47, 52 (D.C. Cir. 2000).
Under the Mobile-Sierra doctrine, “FERC may modify a
contract rate provision if (but only if) the ‘public interest’ so
requires.” Id. at 49 (discussing United Gas Pipe Line Co. v.
Mobile Gas Serv. Corp., 350 U.S. 332 (1956), and Fed. Power
Comm’n v. Sierra Pac. Power Co., 350 U.S. 348 (1956)).
However, United Gas Pipe Line Co. v. Memphis Light, Gas &
Water Division, 358 U.S. 103, 110-15 (1958), allows pipeline
companies to change their rates if their contracts contain clauses
(now known as “Memphis clauses”) reserving the right to do so.
Exxon, 206 F.3d at 51-52. We remanded the case for FERC to
explain why the alleged changes to Transco’s contracts would
not be permitted under the contracts’ Memphis clauses.
On remand, FERC acknowledged that the Memphis clauses
anticipated changes to the rates, terms, and conditions of
contractual service but concluded the same clauses did not allow
Transco to force customers to accept additional service.
Transcon. Gas Pipe Line Corp., 95 F.E.R.C. ¶ 61,322, at 62,140,
on reh’g, 96 F.E.R.C. ¶ 61,142 (2001). If Transco’s FTW
proposal were accepted, FERC reasoned, the FT shippers would
be required to pay for service on the supply laterals, although
they had not contracted for this service. On appeal from that
remand, we again remanded the case to FERC for further
explanation. Exxon Mobil Corp. v. FERC, 315 F.3d 306 (D.C.
Cir. 2003) (Exxon Mobil I). We found FERC’s arguments to be
plausible but detected within those arguments a possible conflict
with an earlier FERC order, issued in 1999, where FERC
rejected Transco’s proposal to implement a “firm transportation
supply lateral” (FTSL) rate structure. Transcon. Gas Pipe Line
Corp., 86 F.E.R.C. ¶ 61,175, reh’g denied, 88 F.E.R.C. ¶ 61,135
(1999). In the 1999 proposal, Transco sought to replace its IT-
Feeder service on the supply laterals with uninterruptible FTSL
9
service; Transco would charge a two-part rate (a reservation
charge and a volumetric charge) for use of the laterals rather
than the one-part rate currently in place for IT service. 86
F.E.R.C. at 61,607. The maximum rate charged for FTSL
service on the supply laterals in a zone would be the same as the
maximum rate charged for FT service on the mainline in that
zone. Id. at 61,608. However, within each zone, shippers
purchasing FTSL capacity would only have flexible access to
secondary points on the supply laterals (not the mainline), and
FT-conversion shippers would only have flexible access to
secondary points on the mainline (not the supply laterals). Id.
FERC objected to this plan because both sets of shippers would
pay the full reservation charge for service in a zone; thus, under
Order No. 636, both should receive flexible access to secondary
points throughout the zone. Id. at 61,609.
In Exxon Mobil I, we spotted a possible inconsistency: In
denying the FTSL proposal, FERC appeared to indicate that if
Transco eliminated its IT-Feeder service, then the FT-conver-
sion shippers would be entitled to flexible access to the supply
laterals without a contract change; however, in rejecting the
1995 FTW proposal, FERC had concluded that providing
flexible access to the supply laterals would abrogate the con-
tracts of FT-conversion shippers. Exxon Mobil I, 315 F.3d at
310-11. This apparent contradiction led to our second remand.
III
We must set aside FERC’s actions if they are arbitrary,
capricious, or otherwise not in accordance with law. 5 U.S.C.
§ 706(2)(A). We are “particularly deferential to the Commis-
sion’s expertise” in ratemaking cases, which involve “complex
industry analyses and difficult policy choices.” Ass’n of Oil Pipe
Lines v. FERC, 83 F.3d 1424, 1431 (D.C. Cir. 1996). After we
remanded this case for a second time, FERC issued another
10
order in which it explained why the rejection of both plans was
consistent. Transcon. Gas Pipe Line Corp., 104 F.E.R.C.
¶ 61,171 (2003), on reh’g, 107 F.E.R.C. ¶ 61,156 (2004).
FERC frames much of its argument in terms of the distinc-
tion between “primary” and “secondary” rights, stating that
while secondary access rights could be given to a shipper
without requiring contract modification, forcing a shipper to
receive and pay for additional primary service would
impermissibly modify the shipper’s contract. 104 F.E.R.C. at
61,637. Because Transco’s FTW proposal granted primary
rights on the supply laterals to FT-conversion shippers, FERC
concluded the FTW proposal would require the shippers’
contracts to be modified. Id. at 61,637-39. On the other hand, in
denying Transco’s FTSL proposal, FERC noted that FT-
conversion shippers would be entitled to only secondary rights
on the supply laterals if the IT-Feeder service were eliminated.
Id. at 61,639. Transco and Indicated Shippers dispute FERC’s
use of the terms “primary” and “secondary,” claiming the FTW
proposal would only give FT-conversion shippers secondary
rights on the supply laterals.
FERC contends the rights granted under the FTW proposal
are properly characterized as “primary” because Transco would
be forced to reserve capacity on the supply laterals for the FT-
conversion shippers. Therefore, as no higher priority service
would be sold, the FTW plan would shift the fixed costs
allocated to the supply laterals solely onto the FT-conversion
shippers, whereas granting “secondary” rights would not do so.
Id. This rationale is at the heart of the case (i.e., the allocation of
the annual $50 million cost has motivated the past dozen years
of litigation); much of the rest of the debate over the meaning
and applicability of the terms “primary” and “secondary”
obscures the real substance of the dispute.
11
Under Transco’s current rate structure, the one-part rate
charged to IT shippers for each unit transported is equal to the
total two-part rate that an FT-conversion shipper pays per unit.5
One component of that two-part FT rate is the reservation
charge, which guarantees the availability of shipping capacity.
The reservation charge for a zone is calculated by dividing the
fixed costs allocated to the zone by the total amount of
service—both FT and IT—expected in the zone. Hence, the
more gas projected to be shipped through a zone via IT service,
the lower the FT-conversion shippers’ reservation charge will
be. The burden of those savings is then effectively shifted to the
IT shippers; because the one-part rate for IT service mirrors the
two-part FT rate (including the reservation charge), the charge
for IT service incorporates some of the function of recovering
fixed costs. In essence, Transco recovers part of the fixed costs
for each zone through the FT-conversion shippers’ reservation
charges, and the rest of the fixed costs through the IT shippers’
one-part charges.
Under the FTW proposal, though, IT-Feeder service on the
supply laterals is eliminated. FT-conversion shippers would be
given flexible access to the supply laterals, but their reservation
charges would also increase, as IT shippers would no longer be
bearing part of the fixed costs of the zone. The result of this
change would be the same as if Transco were to add service in
a new zone onto existing contracts—FT service would be
expanded to new parts of the pipeline system, but a greater
reservation charge would be required, in order to recover that
new area’s fixed costs. In this sense, the supply laterals are
5
The two rates are equal assuming the FT-conversion shipper
uses all the capacity it reserved. If the FT-conversion shipper did not
use its entire reserved capacity, its average per-unit cost would be
higher, as it would have already paid a larger reservation charge than
necessary.
12
virtually a separate zone in the present system. Though the
laterals are designated as parts of Transco’s existing zones,
paying the reservation charge for FT service in a zone does not
currently give a shipper access to supply laterals within that
zone; nor does paying for access to a supply lateral give an IT
shipper the right to use the mainline in the same zone. Two
transactions are required to purchase capacity for shipping gas
on the supply laterals and the mainline within one zone.
Hence, requiring FT-conversion shippers to pay an in-
creased reservation charge for access to the laterals is equivalent
to forcing them to accept service in an additional zone, for
which they would have to pay a new reservation charge.
Regardless of the labels placed on the proposed change, the
substantive effect of the FTW plan would be to require FT-
conversion shippers to take on a new service. Although they
benefit from the existence of the IT-Feeder priority, the FT-
conversion shippers never contracted for service on the supply
laterals. Because the FTW proposal would effectively add
service to these shippers’ contracts, not merely change contrac-
tual rates or terms, the scope of the change exceeds that which
is permitted under Memphis clauses. See Exxon Mobil I, 315
F.3d at 310.
This analysis is consistent with FERC’s denial of Transco’s
FTSL proposal. Order No. 636 requires that any FT shipper who
pays the reservation charge for a zone be afforded flexible
secondary access to other points in the zone. As FT-conversion
shippers as a class are not currently paying the “full” reservation
charge for each zone (i.e., the IT shippers also pay part of the
fixed costs for each zone—the part allocated to the laterals),
they are not currently entitled to flexible access to secondary
points on the supply laterals. Flexible access may be acquired,
if a shipper desires it, through purchasing separate IT service.
13
In the FTSL proposal, Transco sought to sell FT service on
the supply laterals. In each zone, FTSL customers would have
been charged the same two-part rate as the FT-conversion
shippers; thus, all FT shippers within a zone (whether using the
mainline or the supply laterals) would be paying the same
reservation charge. Unlike the FTW plan, the FTSL plan would
not have forced existing FT-conversion shippers to bear the full
fixed costs of a zone on their own, as they would share this
burden with the FTSL shippers. At the same time, the fixed
costs for the whole zone would be divided up among all the FT
shippers in the zone proportionally, through equal reservation
charges. Therefore, the supply laterals would no longer have
been virtually a separate zone under this plan. Under Order No.
636, then, all the zone’s FT shippers—both FT-conversion
shippers and FTSL shippers—would be entitled to flexible
access to secondary points everywhere within the zone, on the
mainline and the supply laterals, because as a class they would
be paying the full reservation charge for the zone (by bearing all
the fixed costs).
This key difference between the FTW and the FTSL
proposals explains why FERC rejected both—although for
different reasons. In a system where FT shippers are paying for
the full fixed costs of a zone (such as the FT-conversion
shippers and the FTSL shippers together would have done under
the FTSL proposal), all of them would be entitled to flexible
access to secondary points throughout the zone. The FTSL
proposal was rejected because this flexible intra-zone access was
not included. In Transco’s current system, on the other hand, the
FT shippers are not bearing the full fixed costs of the zone;
while the FT-conversion shippers bear some of the costs, the IT
shippers bear the rest. In the FTW proposal, IT volume would
no longer be included in the calculation of reservation charges,
yet no new group of FT shippers (such as the FTSL shippers)
would be added to share the FT-conversion shippers’ burden in
14
bearing the fixed costs for the zone. Thus, rather than “giving”
the FT-conversion shippers flexible secondary access to points
in the zone, Transco would be extending the FT-conversion
shippers’ FT service in essentially the same manner as if an
extra stretch of pipeline (with the attendant fixed costs) were
being added to the zone.
In this light, FERC’s orders rejecting the FTW and FTSL
proposals were consistent. Under the FTSL proposal, the fixed
costs of the supply laterals would have been borne by a new
group of shippers (rather than the IT shippers); hence, the FT-
conversion shippers would not be effectively forced to accept
new service, even if those shippers had been given flexible
access to the supply laterals. On the other hand, the practical
effect of the FTW proposal would have been to extend FT-
conversion shippers’ service to include virtually a new
zone—the supply laterals—as no other shippers would have
contributed to bearing the added fixed costs. Transco would
essentially be obliged to reserve capacity on the supply laterals
for the FT-conversion shippers as a class. As this would
effectively add service obligations to existing contracts, the
proposal exceeded Transco’s ability to change rates, terms, and
conditions under the Memphis clauses.
IV
Transco and Indicated Shippers contest FERC’s use of the
terms “primary” and “secondary,” claiming the FTW proposal
would only give the FT-conversion shippers “secondary” service
on the supply laterals. They point out that no specific access
points would be granted, while primary rights are generally
granted at specific points. Similarly, the FT-conversion ship-
pers’ access would only have the highest priority as a class;
individual shippers’ requests for capacity would be subject to
pro rata allocation with requests from other FT-conversion
15
shippers if demand is high. However, these arguments are only
relevant to the quality of the service on the laterals—whether the
service is as “firm” as service on the mainline—not whether
forcing the FT-conversion shippers to pay for the service would
entail contractual change. Cf. El Paso Natural Gas Co., 99
F.E.R.C. ¶ 61,244, at 62,001 (2002) (stating that daily pro rata
allocation of capacity is unacceptable for service that is sup-
posed to be “firm”). In other words, these arguments by Transco
and Indicated Shippers merely question the categorization of the
rights as “primary”; yet, even if we were to decide that the rights
were neither purely “primary” nor purely “secondary,” but a
hybrid of the two, that decision would not be dispositive. The
label attached to the rights does not affect whether the plan
would effectively add service to the contracts.
Transco and Indicated Shippers also claim that replacing the
IT-Feeder system with the FTW plan merely continues a service
FT-conversion shippers were already paying for “directly or
indirectly.” This argument is relevant but inaccurate. In a sense,
the IT-Feeder priority does act as a substitute for the flexible
point access otherwise required by Order No. 636; FT-conver-
sion shippers benefit from the scheduling superiority that IT-
Feeder priority gives relative to other IT service. Under the
current plan, FT-conversion shippers would be able to acquire
capacity in the supply laterals by purchasing IT service. If they
had all done so, then transforming that IT service into FT service
subject to pro rata allocation would essentially be continuing the
same service. However, producers—rather than the FT-conver-
sion shippers—have actually purchased the IT service. If the
producers were able to pass that cost on to the FT-conversion
shippers, then perhaps the FT-conversion shippers would be
“indirectly” paying for access to the supply laterals already.6 In
6
Even if the FT-conversion shippers were “indirectly” paying
for access to the supply laterals, however, that cost-shifting would not
16
reality, though, “Transco and the Indicated Shippers assert that
they are often forced to absorb the expense . . . to ensure that
their prices appear competitive with producers on other pipe-
lines.” Exxon Mobile I, 315 F.3d at 308. While Indicated
Shippers (and therefore Transco) are understandably dissatisfied
with the arrangement, the claimed losses directly contradict the
suggestion that the FT-conversion shippers are already “indi-
rectly” paying for service on the supply laterals.
Finally, Transco and Indicated Shippers suggest Transco
should be allowed to convert to an FTW rate structure because
FERC allows the rest of the industry to use such systems. This
argument would be persuasive if Transco were just now
unbundling its service; however, when it did unbundle its
service back in 1991, Transco entered into settlement agree-
ments with its shippers. The obligations imposed by the settle-
ment agreements cannot be ignored. The FTW proposal would
alter Transco’s existing contracts, regardless of whether it would
have been an acceptable system to implement in the initial
settlements.
In summary, the FTW proposal would have required
Transco to reserve capacity on the supply laterals for the FT-
conversion shippers, as no higher-priority service on the supply
laterals would be sold. As the FT-conversion shippers would
thus be forced to bear the entire burden of the fixed costs for
each zone, without the addition of another group of FT shippers,
Transco would essentially be amending their contracts to require
them to take service in a new area. Granting “secondary” rights
necessarily be legally relevant. Whether or not the producers are able
to pass on the cost of IT service through higher gas prices, the FT-
conversion shippers are not obligated by their contracts with Transco
to pay for IT service. Requiring them to take such service would alter
their contracts.
17
on the laterals, with a higher-priority service being sold to
another group of shippers, would avoid this problem; FERC’s
rejection of the FTSL proposal was consistent with this reason-
ing. Hence, FERC did not act arbitrarily or capriciously in
rejecting Transco’s NGA § 4 filing.
V
Under § 5 of the NGA, FERC may find existing rates or
charges for the transportation or sale of natural gas to be unjust
or unreasonable; FERC may then determine what the just and
reasonable rate should be. 15 U.S.C. § 717d(a). If the proposed
change would require a modification to a contract rate provision,
FERC may order the change, pursuant to the Mobile-Sierra
doctrine, “if (but only if) the ‘public interest’ so requires.”
Exxon, 206. F.3d at 49. Indicated Shippers argue that even if the
FTW proposal is not a contract modification permitted by the
FT-conversion shippers’ Memphis clauses, FERC’s refusal to
exercise its power under § 5 to require a contract modification
was arbitrary because the IT rates are unjust and unreasonable
and because the FTW proposal is in the public interest. We did
not reach this issue in either Exxon or Exxon Mobil I, deferring
our analysis until the NGA § 4 issues were resolved. See Exxon,
206 F.3d at 48-49; Exxon Mobil I, 315 F.3d at 311.
Order No. 636 specifies that pipeline companies should
offer FT service, charging a two-part rate; all the fixed costs
allocated to that service should be recovered through the
reservation fee. Order No. 636 at 13,293; see also 18 C.F.R.
§ 284.7. This policy was intended to promote transparency in
pricing, with the goal of encouraging competition between
pipelines. Order No. 636 at 13,293. However, this requirement
was not to be “rigidly” enforced. Id.; see also 18 C.F.R.
§ 284.7(e) (stating that FERC may permit a pipeline to recover
some fixed costs through a volumetric charge). As FERC aptly
18
stated during oral arguments, the policies in Order No. 636 are
not sacrosanct.
Transco initially proposed the FTW plan as a method of
complying with the requirements of Order No. 636, because
implementing FT service and two-part rates on the supply
laterals would increase transparency in pricing; nonetheless,
FERC rejected the proposal. Transcon. Gas Pipe Line Corp., 63
F.E.R.C. ¶ 61,194, on reh’g, 65 F.E.R.C. ¶ 61,023 (1993). As
discussed above, the FTW plan attempts to shift costs from one
group of shippers to another. Significantly, this contract change
would require more than a mere change in rate design, see, e.g.,
Texaco Inc. v. FERC, 148 F.3d 1091 (D.C. Cir. 1998) (uphold-
ing FERC’s abrogation of private contracts and upholding
conversion from modified fixed variable to straight fixed
variable pricing), but instead would impose new firm service
upon the FT-conversion shippers. Under § 5, FERC may reject
unjust and unreasonable rates and prescribe a new rate that is
just and reasonable. It may not, however, require distributors to
accept or to pay for additional service. See Alabama-Tennessee
Natural Gas Co. v. Fed. Power Comm’n, 417 F.2d 511, 514-15
(5th Cir. 1969) (“[T]he Commission has no authority to require
a local distributor to contract for, purchase, or accept delivery of
natural gas.”).
Under Mobile-Sierra, “a heavy burden must be met before
a customer . . . can be deprived against his will of the benefits of
his bargain.” Town of Norwood v. FERC, 587 F.2d 1306, 1310
(D.C. Cir. 1978).7 Indicated Shippers have not shown that the
7
Similarly, a company “is not typically ‘entitled to be relieved
of its improvident bargain.’” Transmission Access Policy Study Group
v. FERC, 225 F.3d 667, 710 (D.C. Cir. 2000) (quoting Sierra, 350
U.S. at 355). “Despite recent cynicism, sanctity of contract remains an
important civilizing concept”; moreover, “‘the general rule of freedom
19
public interest in price transparency outweighs the harm of the
cost reallocation that the FTW plan would entail, although they
do argue that the FT-conversion shippers should be forced to
pay for the benefit they receive from the IT-Feeder priority. The
circumstances under which § 5 of the NGA allows FERC to
order rate changes that are “in the public interest” include
circumstances such “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 discrimina-
tory.” Fed. Power Comm’n v. Sierra Pac. Power Co., 350 U.S.
348, 355 (1956). Indicated Shippers have not demonstrated that
one of these situations, or anything comparable, is present to
justify contract abrogation. Moreover, FERC has clearly
acknowledged that Transco could implement FT service on the
supply laterals without requiring the FT-conversion shippers to
accept service for which they have not contracted. For example,
Transco could officially establish the supply laterals as a
separate zone and allow shippers to purchase FT or IT service in
that new zone. See 104 F.E.R.C. at 61,640. Hence, even if the
public interest in the policies behind Order No. 636 did rise to
the level that would justify contract alterations, this situation
does not require that one policy be sacrificed to satisfy the other.
FERC did not abuse its discretion in deciding not to implement
the FTW plan under § 5 of the NGA.
of contract includes the freedom to make a bad bargain.’” Morta v.
Korea Ins. Corp., 840 F.2d 1452, 1460 (9th Cir. 1988) (citations
omitted). While Indicated Shippers may regret purchasing Transco’s
IT service, “‘[w]ise or not, a deal is a deal,’” and therefore “people
must abide by the consequences of their choices.” Id. (alteration in the
original) (citations omitted).
20
VI
For the foregoing reasons, the petitions for review are
denied.
So ordered.