United States Court of Appeals,
Fifth Circuit.
No. 92-4066.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION, et al., Petitioners,
v.
FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
Aug. 27, 1993.
Petitions for Review of Orders of the Federal Energy Regulatory Commission.
Before REYNALDO GARZA, SMITH, and BARKSDALE, Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Transcontinental Gas Pipe Line Corporation ("Transco") appeals an order of the Federal
Energy Regulat ory Commission ("the Commission" or "FERC") finding that Transco violated the
Natural Gas Act ("NGA") and refusing to allow Transco to pass through $75 million to some of its
customers. Several of Transco's customers have intervened, urging us to restructure the remedy the
Commission crafted. We decline to do so and affirm the Commission's order in all respects.
I.
This case has at its roots the changes that occurred in the natural gas industry in the 1970's
when interstate pipelines started to curtail service upon entering into long-term purchasing
agreements. In 1978, Transco signed long-term contracts to buy gas from its producers. The
contracts included "take-or-pay" provisions that obligated Transco either to take delivery of an
amount of gas or to pay for that amount even if Transco did not take delivery.
In the early 1980's, the price of gas declined. Transco still was bound to take or pay for gas
at prices well above the market rate. The Commission's regulations required Transco to charge all
customers the same price for gas, computed by averaging the cost of all gas Transco purchased; this
is called the weighted average cost of gas purchased for resale ("WACOG"). Partly because of
Transco's take-or-pay contracts, its WACOG was higher than the price of alt ernative fuels or gas
available on the spot market. As a result, Transco started to lose customers, called "non-captive"
customers, who could shift to alternative fuels or buy on the spot market. Customers without access
to lower-priced alternatives, who had to continue to purchase WACOG fuel at a rate filed with the
Commission, were called "captive."
In the mid-1980's, the Commission started encouraging pipelines to devise new ways to
combat their declining sales. In response, Transco set up a program, called a Special Marketing
Program, that the Commission approved—on a temporary, experimental basis—in 1983. Under this
program, Transco released gas subject to high take-or-pay requirements for sale on the spot market.
Transco then could transport the market-priced gas to non-captive customers. In 1984, the
Commission conditioned the extension of the program on Transco's agreeing to grant captive
customers some access to cheaper gas, up to ten percent of the maximum volume of gas that the
captive customers could demand.
Not completely satisfied with the Commission's conditions, Transco proposed its own
Discount Service Program instead. Under this program, all customers could buy up to three percent
of their required gas at market prices and then buy an additional seven percent at market prices if they
purchased a "threshold level" of Transco's more expensive system supply gas. The Commission
approved Transco's Discount Service Program in March 1985, stipulating, however, that the plan not
go into effect until the United States Court of Appeals for the District of Columbia Circuit permitted
Transco to carry out the program.
When the District of Columbia Circuit had not acted by April 1985, Transco, without the
Commission's approval, decided to implement a variation of its Discount Service Program by creating
two subsidiaries, Transco Resources, Inc. ("TRI"), and Transco Energy Marketing Co. ("TEMCO"),
to sell more of its excess gas to non-captive customers at the market rate instead of at Transco's filed
rate of $3.01 per Dth.1 Transco used TRI to sell gas from April until October 1985, and TEMCO
1
Dth = Decatherm, a measure of gas based upon its heat content. One decatherm equals 1,000
cubic feet of gas with the standard heat content. Columbia Gas Transmission Corp. v. FERC,
848 F.2d 250, 251 n. 1 (D.C.Cir.1988).
from June until November 1985.2
Transco arranged for TRI to prepay producers at spot market prices from revenues obtained
from TRI's sale of gas from the Transco system supply. In exchange, the producers released gas to
TRI that had been contracted for by Transco. TRI later returned some volumes of gas to Transco
and bought and sold gas from the spot market to non-captive customers. From April until August
1985, TRI sold gas at an average price of about $2.55 per Dth, $.46 below Transco's filed rate
charged to captive customers.3 From April through July 1985, TRI sold more gas each month than
it purchased.
TEMCO operated in a similar fashion. Transco also set up TEMCO to sell gas to non-captive
customers at market-responsive prices, a function Transco could not perform under the NGA.
TEMCO concurrently sold and prepaid for gas at market rates that Transco released from its pipeline.
TEMCO sold this gas before the producers actually produced any gas. From June until November
1985, TEMCO sold gas to non-captive customers at an average price of about $2.23 per Dth. During
this time, TEMCO sold more gas than it purchased, creating what Transco termed a "transportation
imbalance," the difference between receipts and deliveries under a transportation agreement.
Transco would have faced a large underrecovery had it set up TRI and TEMCO to repay
Transco in cash for the gas they sold at the market rate. To avoid such a loss, Transco arranged for
its subsidiaries to repay Transco in gas. Transco then sold this gas to its captive customers at the filed
rate of $3.01 per Dth, despite the fact that TRI and TEMCO had originally paid market rates of
between about $2.23 and $2.55 per Dth for this gas. Transco thus created an inflated differential
between its actual and projected costs. This showed up as a projected under-recovery in the spring
2
In May 1985, the District of Columbia Circuit issued its opinions in the Maryland People's
Counsel cases. In Maryland People's Counsel v. FERC, 761 F.2d 768 (D.C.Cir.1985) ("MPC I
"), Maryland People's Counsel v. FERC, 761 F.2d 780 (D.C.Cir.1985) ("MPC II "), and
Maryland People's Counsel v. FERC, 768 F.2d 450 (D.C.Cir.1985) ("MPC III "), the court
disallowed a special marketing program approved by FERC, one very similar to Transco's,
stressing that it unduly discriminated against captive customers by denying them the same access
to lower-priced gas that non-captive customers enjoyed.
3
Actually, most of the captive customers paid slightly below the filed rate because they had
access to at least three percent of their gas at the market rate.
of 1986 of $81.3 million.
Transco's filed rate of $3.01 per Dth was based upon projected costs calculated in early 1985.
It turned up the $81.3 million underrecovery when it figured its actual costs. These figures allegedly
revealed that Transco really paid about $3.30 per Dth for the gas it sold in 1985 and 1986. Under
the Commission's regulations, Transco was allowed to seek recovery of the difference between the
rate it collected and its actual costs by imposing a surcharge on its customers.
In April 1986, Transco requested the Commission to allow it to recoup a $75 million
"passthrough."4 The Commission permitted Transco to collect the refund, on a deferred basis, subject
to Transco's refunding whatever it collected upon the outcome of hearings on the propriety of the
amount. Transco collected about $48.5 million before the Commission issued its final order.
An administrative law judge ("ALJ") issued an initial decision (called Phase I), addressing only
the issue of liability, on August 29, 1988,5 concluding that Transco and its affiliates, TEMCO and
TRI, should be viewed as a single entity. Accordingly, sales by TRI and TEMCO were sales by
Transco, below-cost sales in violation of the filed rate requirements of section 4(d) of the NGA, 15
U.S.C. § 717c(d).6 Because some of these sales were to customers to whom Transco did not have
4
In a May 1986 offer of settlement, Transco proposed to limit its recovery to $75 million,
rather than $81.3 million.
5
In February 1987, another ALJ had issued a decision purporting to resolve the case. In
September 1987, FERC remanded to a different ALJ for a more thorough development of the
record.
6
Section 4(d) provides,
Unless the Commission otherwise orders, no change shall be made by any
natural-gas company in any such rate, charge, classification, or service, or in any
rule, regulations, or contract relating thereto, except after thirty days' notice to the
Commission and to the public. Such notice shall be given by filing with the
Commission and keeping open for public inspection new schedules stating plainly
the change or changes to be made in the schedule or schedules then in force and
the time when the change or changes will go into effect. The Commission, for
good cause shown, may allow changes to take effect without requiring the thirty
days' notice herein provided for by an order specifying the changes so to be made
and the time when they shall take effect and the manner in which they shall be filed
and published.
authorization to sell, it violated section 7(c) of the NGA, 15 U.S.C. § 717f.7
The ALJ based his single entity determination upon the fact that the composition of the
corporate hierarchies of the TRI, TEMCO, and Transco were almost identical. All of TRI's officers,
and all except for one of TEMCO's officers, also were Transco officers. Six of TEMCO's seven
directors were directors at Transco. TRI, TEMCO, and Transco all had the same address. TRI had
no employees, and TEMCO had but eighteen employees, all of whom were former Transco
employees. Corporate distinctions were ignored in dealings among the three groups, and no legal
instruments governed transactions among the three groups.
The ALJ next determined that the transactions at issue were sales, not "transportation
imbalances." Defining a sale as the "transfer of title for a price" (in accord with U.C.C. § 2-106(1)),
the ALJ found that one company (Transco through TRI and TEMCO) simply transferred its gas to
customers in exchange for money. The ALJ concluded that Transco deliberately used TRI and
TEMCO to circumvent the filed rate requirements of section 4(d) of the NGA. He refused to allow
a company bound by a filed rate to create a subsidiary to sell gas at lower rates.
The ALJ finally found that Transco discriminated against captive customers by providing
access to lower-price gas only to non-captive customers. The ALJ determined that Transco had not
met its burden of proving that the discrimination was not "undue" within the meaning of section 4(b)
of the NGA, 15 U.S.C. § 717c(b),8 and Transco had not shown that discriminatory pricing was the
only way to lower prices.
On December 15, 1989, the ALJ issued a decision on remedies, called Phase II. First, the ALJ
adopted part of a remedy suggested by a Commission accountant, Robert Fulton, who recalculated
7
Section 7(c) prohibits a gas company from selling gas in interstate commerce for resale
without an outstanding certificate.
8
Section 4(b) provides,
No natural-gas company shall, with respect to any transportation or sale of natural
gas subject to the jurisdiction of the Commission, (1) make or grant any undue
preference or advantage to any person or subject any person to any undue
prejudice or disadvantage, or (2) maintain any unreasonable difference in rates,
charges, service, facilities, or in any other respect, either as between localities or as
between classes of service.
Transco's costs using the actual spot market prices TRI and TEMCO had paid instead of the $3.01
rate Transco claimed. This recalculation showed that Transco underrecovered about $2.6 million,
not $81.3 million. Since Transco already had agreed to lower its claim from $81 million to $75
million, effectively foregoing $6.3 million, Fulton's recalculation reduced Transco's claim to zero.
The ALJ ordered Transco to refund the $48.5 million passthrough it already had collected,
finding that the recalculation remedied Transco's violation of forcing its captive customers to
subsidize the illegal, market-price sales to non-captive customers. All customers that had paid the
passthrough would receive these refunds.
The ALJ based t he second part of the remedy upon a proposal by a Commission auditor,
Gloria Halstead, who suggested a refund of about $26 million9 of profits that Transco had realized
on the transportation of gas that it had sold illegally. She urged that Transco pay $15.7 million to
customers who had paid an average price for gas above the average price of all gas sold by Transco,
TEMCO, and TRI. She then urged that Transco refund the remaining $10.3 million pro rata to all
captive customers.
On September 12, 1990, the Commission issued an order affirming the ALJ's decisions. First,
the Commission affirmed the ALJ's finding that the contested transactions were sales, not
transportation imbalances. The Commission reasoned that the transactions had "all the hallmarks of
a sale," that Transco had developed and operated the affiliates solely as a vehicle to sell discounted
Transco gas, and that while Transco's transportation tariff required the elimination of imbalances
within thirty days, the imbalance at issue lasted thirteen months. The Commission also concluded that
the ALJ correctly had relied upon the MPC cases in finding that Transco could not justify its
discriminatory pricing.
Finally, the Commission determined that the ALJ properly imposed remedies. They were not
penalties, nor did they deny Transco its right to recover its costs. The disgorgement simply forced
Transco to surrender "profits realized in the transportation of gas that was sold under conditions that
9
After calculating interest, this amount becomes about $36 million.
were unduly discriminatory and not sold at the pipeline's filed sales rate."10 The Commission also
denied Transco's request for oral argument.
At some point in late 1990 or early 1991, one of Transco's attorneys asked the Commission's
General Counsel to hear oral argument on Transco's motion for rehearing of the September 15, 1990,
order. Oral argument was heard on April 16, 1991.
On January 15, 1992, the Commission issued its order on rehearing, affirming part of its
previous order but reversing part as well. Specifically, the Commission affirmed its previous
determination that Transco had violated sections 4(b), 4(d), and 7(c) of the NGA because the
transactions in question were not certificated, were below the filed rate, and were unduly
discriminatory. The alleged benefits of the transactions and the circumstances affecting the gas
industry at the time did not overcome the unduly discriminatory nature of the transactions.
Moreover, Transco made no showing that the alleged benefits could not have been attained through
non-discriminatory pricing.
The Commission then addressed the remedies. It first retained the remedy requiring Transco
to forego recovery of $75 million in unrecovered gas costs because the remedy was "closely related"
to the illegal sales. Since Transco had calculated its $75 million in unrecovered costs by using only
Transco's WACOG, once the ALJ found that Transco, TRI, and TEMCO were but one company,
Transco had to compute its WACOG as that of TRI, TEMCO, and itself. Because this yielded
unrecovered costs that were $78.6 million lower than claimed, Transco was not entitled to any
recovery and had to refund the $48.5 million it already had collected. The Commission once again
rejected Transco's argument that its sales method inflicted no harm, finding instead that all customers
were harmed because they all eventually paid $3.01 per Dth for gas that had cost less.
The Commission, however, reversed itself on another part of the remedy, eliminating the
requirement that Transco disgorge the $26 million in profits from transportation revenues (the
Halstead remedy), reasoning as follows:
10
The ALJ also denied Transco recovery of $853,000 in costs associated with sales by its
subsidiaries to non-captive customers and ordered Transco to refund that amount. FERC
eliminated this part of the remedy.
Any further equitable remedy is unnecessary, particularly in light of the market circumstances
and industry-wide problems under which Transco acted.... At the remedial stage of a
proceeding the Commission exercises its discretion to take into account a broader range of
factors, including equitable circumstances, than it does at the violation stage.... [T]he primary
reason for limiting the remedy to the recalculation of the allowable unrecovered gas costs is
a recognition of the circumstances at the time....
Finally, the Commission discussed its decision to hear oral argument in the case. It found that even
if Transco's attorney's oral request for oral argument was considered an ex parte communication, it
caused no harm. All parties were allowed to argue; no party requested rehearing of the order setting
oral argument. Two dissenting commissioners found that since the communication was procedural
in nature, unrelated to the merits, it was not an ex parte communication.
Several of Transco's customers, including North Carolina Utilities Commission ("NCUC") and
Long Island Lighting Company ("LILCO"), filed motions urging rehearing of the Commission's
January 15 order. NCUC objected to the elimination of the $26 million transportation revenue
remedy. LILCO objected to the elimination of the allocation scheme that would have refunded more
than a pro rata share of refunds to captive customers most affected by price discrimination. LILCO
asked the Commission to allocate about $15 million of the $75 million remedy to those customers.
On March 16, 1992, the Commission issued another order denying both rehearing requests.
The Commission refused to reinstate the $26 million in transportation revenues because
around the time of the Transco transactions at issue here the Commission itself had authorized
other pipelines to engage in special marketing programs that had discriminatory effects similar
to those of Transco's transactions in this case. However, in the Maryland People's Counsel
cases the Court of Appeals found the Commission had not adequately justified the
discrimination. Although the specific Transco transactions here do not have the veneer of
Commission authorization, as those at issue in the Maryland People's Counsel cases,
nonetheless, it does not appear to be equitable to penalize Transco further for discrimination
similar to that which the Commission itself did not think was undue prior to the ruling of the
Court of Appeals in the Maryland People's Counsel cases.
On appeal to this court, Transco asks us to reverse the Commission's remedy disallowing its
recovery of $75 million. NCUC and LILCO urge us to revise the remedy. The Commission seeks
enforcement of its final order in full.
II.
Our jurisdiction to review the Commission's orders arises under section 19(b) of the NGA,
15 U.S.C. § 717r(b), which states that the Commission's factual findings shall be conclusive if
supported by substantial evidence. We review the Commission's orders to prevent an "arbitrary
result." Borden, Inc. v. FERC, 855 F.2d 254, 258 (5th Cir.1988).
The seminal case discussing an appellate court's review of the Commission's orders under the
NGA is Permian Basin Area Rate Cases, 390 U.S. 747, 790-92, 88 S.Ct. 1344, 1372-73, 20 L.Ed.2d
312 (1968), instructing reviewing courts to examine (1) whether the Commission abused or exceeded
its authority; (2) whether each of the essential elements of the order is supported by substantial
evidence; and (3) whether the Commission has given reasoned consideration to each of the pertinent
factors in balancing the needs of the industry with the relevant public interests. Id. Our duty "is not
to supplant the Commission's balance of these interests with one more nearly to [our] liking, but
instead to assure [ourselves] that the Commission has given reasoned consideration to each of the
pertinent factors." Id. at 792, 88 S.Ct. at 1373. The " "ult imate issue' " in our review is the "
"requirement of "reasoned consideration." ' " Borden, 855 F.2d at 258-59 (quoting Consolidated Gas
Supply Corp. v. Federal Power Comm'n, 520 F.2d 1176, 1185 n. 45 (D.C.Cir.1975)).
A review of the record and the Commission's order convinces us that the result the
Commission reached is not arbitrary. The Commission gave careful and reasoned consideration to
the controversy before it. Substantial evidence supports its conclusion that Transco violated the
NGA, and the remedy the Commission imposed was well within its equitable powers.
III.
A.
Both the ALJ and the Commission determined that Transco had violated sections 7(c), 4(d),
and 4(b) of the NGA by selling gas to customers without the requisite certification, by selling gas at
a price below its filed rate, and by making unduly discriminatory sales.
The ALJ found, and the Commission agreed, that Transco, TRI, and TEMCO were a single
entity. Substantial evidence supports this finding. The composition of the three companies' corporate
boards was almost identical. All of TRI's officers also were Transco officers; six of TEMCO's seven
directors were on Transco's board. Transco, TRI, and TEMCO had the same address. In addition,
agreements among the three were wholly informal, and no legal documents governed transactions
among them. A Transco witness testified that TRI was "really operated as an adjunct" of Transco.
Transco's attorney told the ALJ that Transco created TRI and TEMCO "to sell at the spot price"
because, under the NGA, Transco could not.
In General Tel. Co. v. United States, 449 F.2d 846, 855 (5th Cir.1971), we declared, "Where
the statutory purpose could thus be easily frustrated through the use of separate corporate entities,
the Commission is entitled to look through corporate form and treat the separate entities as one and
the same for purposes of regulation." (Citations omitted.) Under this test, the ALJ and the
Commission correctly looked behind corporate forms and found that the three companies really were
one. Fo r the Commission not to have investigated further would frustrate a statutory purpose by
allowing Transco to set up subsidiaries to sell gas at prices at which the company could not legally
sell.
Transco argues that the transactions at issue were transportation imbalances, not sales as the
ALJ and the Commission found. Once again, substantial evidence supports the Commission's finding.
Title to the gas transferred from Transco to its customers. Once a customer received gas from
Transco, it paid money to Transco. In addition, while Transco's transportation tariff required
elimination of imbalances within thirty days, the "imbalance" here lasted thirteen months. Finally,
Transco never informed its customers of the existence of imbalances, even though the customers
would have been financially accountable for them.
Transco asserts the Commission has no precedent for reconstituting the transactions as it did.
It claims that Granite State Transmission, Inc., 47 FERC ¶ 61,429 (1989), supports its position that
the transactions at issue were sales because in that case the agency found an imbalance when a
pipeline intentionally had overpurchased gas to pursue a lower-cost strategy. Granite State, however,
is distinguishable, as the imbalances there resulted from operational or accounting inefficiencies, not
an intentional marketing strategy as was the case here. So, we do not agree with Transco's assertion
that the Commission previously has approved of similar imbalances and now may not characterize
Transco's imbalances as sales.
The ALJ and the Commission found that Transco's sales of gas to non-captive customers at
a lower rate than to captive customers constituted undue price discrimination. Transco admitted to
the ALJ that discrimination existed: "[S]ure there is discrimination here. There is no question.
Captive customers were charged a different price than non-captive customers." Once the
Commission shows that discrimination exists, the pipeline has the burden of showing that the
discrimination was not undue. ANR Pipeline Co., 41 FERC ¶ 61,043, ¶ 61,126 (1987).
In MPC I, 761 F.2d 768, 770 (D.C.Cir.1985), the Commission sought approval of a plan that
would allow pipelines to sell gas to non-captive custom ers at cheaper prices than to captive
customers. While the pipelines argued that the plan would lead to reduced take-or-pay liability and
overall cheaper gas, the captive customers countered that the plan would increase their gas costs.
Id. at 772. The court refused to approve this plan, "since it would harm rather than help precisely
those customers—the ones vulnerable to pipeline monopoly [captive customers]—over which it was
the purpose of the Natural Gas Act to protect." Id. at 779. Additionally, in Associated Gas Distribs.
v. FERC, 824 F.2d 981, 1010 (D.C.Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99
L.Ed.2d 698 (1988), the court pointed out that in the sale of gas, "there is no economic justification
for charging different prices, based on the purchasers' differing access to substitutes...."
Transco's plan was quite similar to the plan rejected in MPC I. The alleged benefits—reduced
take-or-pay liability and overall cheaper gas—were similar. The price discrimination against captive
customers was the same. Transco knew the result of the previous cases decided by the District of
Columbia Circuit, yet still it chose to pursue its plan.
Transco did not make any showing that discriminatory pricing was the only way to achieve
the alleged benefits it sought, nor did it show why the cheaper gas could not be used to lower the
price of gas to the captive customers. Through reasoned decisionmaking and supported by
substantial evidence, the ALJ and the Commission properly concluded that Transco did not make the
high showing that the discrimination was not undue.
The ALJ's and the Commission's considered determinations that Transco violated the NGA
are supported by substantial evidence in the record. In short, because they logically concluded that
Transco, TRI, and TEMCO were one entity, sales by a subsidiary were sales by Transco. Many of
these sales were made to customers to which Transco could not sell because it lacked proper
certification, in violation of section 7(c). Transco, through TRI and TEMCO, sold gas at a rate
below its filed rate of $3.01 per Dth, in violation of section 4(d). Finally, Transco sold gas to captive
customers at a higher rate than to non-captive customers, engaging in undue discrimination in
violation of section 4(b).
B.
In Phase II of his opinion, the ALJ refused to allow Transco to pass through $75 million to
its customers and ordered Transco to disgorge $26 million in profits it had made transporting illegally
sold gas. In its final order, the Commission upheld its refusal to pass through $75 million but rejected
the $26 million disgorgement.
Transco argues that the Commission properly eliminated the $26 million part of the remedy
but incorrectly continued to refuse the passthrough. Transco first attacks the continued imposition
of this remedy as contrary to Coastal Oil & Gas Corp. v. FERC, 782 F.2d 1249 (5th Cir.1986). It
argues that the remedy the Commission imposed here actually is a civil penalty, forbidden by Coastal.
In Coastal, 782 F.2d at 1253, we said that the NGA "does not give the Commission the authority to
impose civil penalties." (Citations omitted.) The Commission's remedy there required a seller of
natural gas first to refund all profits from its illegal sale of gas and then to refund "any payment
whatsoever" for the gas, including its costs. Id. While we rejected a remedy that called for a refund
of any payment made, we did point out that a remedy that restored the status quo ante and prevented
unjust enrichment was appropriate. Id.
Transco's argument that the remedy here violates our decision in Coastal is unavailing. In
Coastal, we held that a remedy that forces a company to give up all payment for gas is a penalty. The
remedy the Commission approved here does not force Transco to give up all payment for gas it sold.
Rather, it allowed Transco to recover its actual cost of gas, specifically taking into account the lower
prices TRI and TEMCO paid for gas, but it refused to allow Transco to recover money it lost when
it illegally sold gas at prices below its filed rate through TRI and TEMCO. This is a far cry from the
"civil penalty" we rejected in Coastal.
The final Commission order approving the $75 million remedy found an appropriate
relationship between the remedy and the violation, namely that the denial of Transco's $75 million
passthrough was closely related to Transco's illegal sale of gas. Customers who were harmed by
paying Transco's filed rate of $3.01 per Dth for gas that actually cost less will not be harmed further
by having to pay an extra $75 million to Transco.
Transco retorts that the remedy is flawed because its customers did not overpay for gas, since
an examination of Transco's overall receipts between April 1985 and April 1986 shows that Transco
received from all its cust omers about $80 million less than it paid for gas. It also asserts that its
customers benefitted from purchasing cheap gas from TRI and TEMCO at the outset of the
transactions, to the point that it counterbalanced any "harm" involved in pricing gas TRI and TEMCO
returned to Transco at the higher WACOG rate it later sold to customers and now tries to pass
through. Implicitly, Transco argues that it was trying to arrange creative legal solutions to a dilemma
brought on by an industry in a state of turmoil and uncertainty.
By contrast, the Commission and the ALJ found that Transco devised a strategy that allowed
it to bill its captive customers for losses it incurred when TRI and TEMCO sold gas below its filed
rate. They found, and the record confirms, that Transco incurred losses when TRI and TEMCO sold
gas to non-captive customers at the market rate, presumably because their actual cost of gas was
greater than this rate. When TRI and TEMCO repaid to Transco gas that Transco had "loaned" to
them, Transco accounted for this at a rate of $3.01 per Dth, instead of the actual lower cost of about
$2.40 per Dt h at which TRI and TEMCO received this gas. Transco thus inflated the cost of the
"return" gas in order to recover some of the cost of the gas it had sold illegally.
The Commission's reasoning then—that the illegal sales and the resulting purchases were
linked so that refusing to allow Transco the $75 million passthrough was a correct remedy—is based
upon substantial evidence in the record, evidence that shows that Transco tried to inflate its WACOG
by recording the price of gas at a higher rate than it actually paid. The Commission's decision to limit
Transco's passthrough to the actual cost of the replacement gas thus was a reasoned one: The
Commission refused to penalize Transco's customers for losses Transco suffered as a result of its
damaging pre-existing contracts or its plan to escape them.
Transco's argument that the Commission should allow the passthrough because Transco
implemented its plan as a way of coping with chaotic industry situations is no more persuasive.
Although the Commission initially approved Transco's first Special Marketing Program, it gave only
contingent approval to Transco's revised Discount Service Program. Final approval hinged on a
decision by the District of Columbia Circuit. Not content to wait for the requisite approval, Transco
implemented a variation of its Discount Service Program, selling gas through TRI and TEMCO in
April 1985.
In May 1985, the District of Columbia Circuit issued its first opinions in the MPC cases. Even
though these decisions rejected programs very similar to the one Transco devised, Transco continued
to sell gas through TRI and TEMCO. Despite this notice, Transco plowed ahead in its own effort
to address problems affecting it. In the face of its insistence to continue, without authorization, a
program disallowed by the court of appeals, Transco cannot now be heard to say that an industry's
state of flux excuses its illegal behavior.
IV.
Two further criticisms of the Commission's remedy remain. LILCO argues that the decision
to order Transco to refund the $48.5 million it already has collected is not a reasoned decision. It
asserts that the refunds will be made pro rata to some customers who paid less than the captive
customers. Therefore, the captive customers continue to be denied benefits from the discounted
sales. LILCO maintains, for example, that because it paid an average price of $2.94 per Dth for its
gas, while the average price for all Transco gas was $2.87 per Dth, it paid $2,893,436 more than it
should have. A pro rata remedy, LILCO insists, does not redress its actual harm.
Although LILCO's argument has some superficial appeal, it does not defeat the Commission's
response. Transco already has collected about $48.5 million from specific customers. In its order,
the Commission states that "fairness and equity require that the surcharge amounts already collected
shall be refunded to the Transco customers who paid such amounts." The customers who paid the
surcharge should recover what they paid. This is logical as well as legal, as "the Commission has
broad authority to fashion equitable remedies in a variety of settings." Columbia Gas Transmission
Corp. v. FERC, 750 F.2d 105, 109 (D.C.Cir.1984).
The ALJ initially included a second remedy, ordering Transco to disgorge about $26 million
in net transportation revenues it had collected for carrying gas that it then sold illegally. About $15.7
million would go to those customers who had paid discriminatory prices and $10.3 million would go
to customers who paid the filed rate. Although the Commission approved of this remedy in its first
order, finding that it simply required Transco to disgorge profits on transportation of illegally sold
gas, it eliminated this remedy in its January 15, 1992, and March 16, 1992, orders, reasoning that
market circumstances in 1985 were confusing and that the Commission originally thought schemes
like Transco's were acceptable.
NCUC contends that this is not reasoned decisionmaking. It maintains that this was the only
remedy specifically geared to provide restitution for victims of price discrimination, and the
Commission arbitrarily eliminated it without articulating any proper justification; its elimination fails
to leave any remedy for those directly affected by Transco's illegal actions. NCUC also attacks
FERC's "market circumstances" reasoning, pointing out that Transco started its program without the
Commission's approval, in contrast to other pipelines that started their programs earlier than Transco,
yet still sought the Commission's approval.
The Commission has broad discretion to fashion a remedy. Columbia Gas Transmission
Corp., 750 F.2d at 109. See also Mesa Petroleum Co. v. Federal Power Comm'n, 441 F.2d 182, 186
(5th Cir.1971) (The Commission's predecessor, the Federal Power Commission, had authority to
structure remedy.). In this case, it rationally and reasonably decided that the $75 million remedy
sufficiently addressed any harm. It was allowed to take the market conditions into account in
determining that "limiting the remedy to the recalculation of the allowable unrecovered gas costs" was
in best keeping with the chaotic circumstances of the time.11
11
NCUC argues that where the facts demonstrate injury to the customer, FERC is obliged to
impose a remedy. Unfortunately, the cases it cites do not support such a conclusion. In Atlantic
Refining Co. v. Public Serv. Comm'n, 360 U.S. 378, 79 S.Ct. 1246, 3 L.Ed.2d 1312 (1959), the
Court was not concerned with providing a remedy for harm to customers. It instead focused on
the jurisdiction and discretion of the Federal Power Commission under § 7(e) of the NGA. Id. at
Finally, NCUC asserts that illicit ex parte contacts between Transco's attorneys and the
Commission's attorneys led to the Commission's hearing oral argument on a petition for rehearing.
NCUC implies that secret information passed hands, leading to the Commission's unusual grant of
oral argument. NCUC continues that some undisclosed "critical secret documents" show that
attorneys for Transco and the Commission discussed something more than just a request for oral
argument.
Transco and the Commission reject this argument. Transco asserts that its attorney simply
reiterated his prior written request for oral argument. The Commission points out that the request
led only to a procedural result—an opportunity for all sides to present their arguments orally. NCUC
gives no evidence whatsoever to bolster its position that something else transpired. In its opinion
resolving the ex parte issue, the Commission concluded that even if it treated the communication as
ex parte, no harm resulted, and no damage was done to the decisionmaking process.
Although the request for oral argument should have been in writing, with notice to all parties,
we agree with the Commission's determination that NCUC provides no evidence that any improper
activity took place. Nor was NCUC prejudiced in any way. NCUC was allowed to file briefs and
argue its case. The Commission correctly chose to hear oral argument.
V.
In conclusion, we find that substantial evidence supports the reasoned Commission's order.
380, 79 S.Ct. at 1249. Similarly, in Public Serv. Comm'n v. FERC, 543 F.2d 757, 811
(D.C.Cir.1974), cert. denied, 424 U.S. 910, 96 S.Ct. 1106, 47 L.Ed.2d 314 (1976), the court held
that when refunds are due, they must be made promptly. The court did not find an affirmative
duty to order refunds. Finally, Gulf Oil Corp. v. FERC, 706 F.2d 444 (3d Cir.1983), cert.
denied, 464 U.S. 1038, 104 S.Ct. 698, 79 L.Ed.2d 164 (1984), does not apply to our case. Gulf
Oil concentrates on the support in the record for FERC's calculation of a refund, not the
mandatory nature of refunds. Id. at 447.
In Towns of Concord, Norwood, & Wellesley v. FERC, 955 F.2d 67, 72
(D.C.Cir.1992), the court addressed the question of whether sections of the Federal
Power Act (parallel to the NGA sections applicable here) confer on FERC the discretion
to refuse to order refunds when a company has violated the filed rate doctrine and passed
on costs to its customers. The court decided that FERC was not obligated to impose a
refund. Id. at 76. It "refused to constrain agency discretion by imposing a presumption in
favor of refunds.... The agency need only show that it "considered relevant factors and ...
struck a reasonable accommodation among them.' " Id. (quoting Los Cruces TV Cable v.
Federal Communications Comm'n, 645 F.2d 1041, 1047 (D.C.Cir.1981)).
Transco violated sections 4(b), 4(d), and 7(c) of the NGA. As a remedy, the Commission approved
part of an ALJ's opinion refusing to allow Transco to pass through $75 million to its customers. The
Commission also eliminated an additional remedy that ordered Transco to disgorge an additional $26
million. This was all within FERC's discretion, supported by substantial evidence, and based upon
reasoned decisionmaking. We therefore DENY t he petitions for review and AFFIRM the
Commission's order in full.