Muni Def Grp v. FERC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 20, 1999 Decided March 26, 1999

No. 97-1673

Municipal Defense Group,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Texas Eastern Transmission Corporation, et al.,

Intervenors

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Stanley W. Balis argued the cause and filed the briefs for
petitioner.

Andrew K. Soto, 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.

Before: Edwards, Chief Judge, Williams and Randolph,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Randolph.

Randolph, Circuit Judge: On May 1, 1997, Texas Eastern
Transmission Corporation filed tariff revisions with the Fed-
eral Energy Regulatory Commission proposing to implement
a change in the method by which the gas pipeline allocated
forward-haul firm capacity that became available on its sys-
tem, primarily due to contract expiration. In the past, Texas
Eastern had allocated available firm capacity1 to its custom-
ers on a first-come, first-served basis. Now it proposed to
grant that capacity to the customer whose request would
generate the greatest net present value to Texas Eastern. In
determining net present value, only the customer's reserva-
tion charge would be considered. The Commission accepted
Texas Eastern's filing in an order on May 29, 1997, and
affirmed its decision in an order on rehearing on September
11, 1997. See Texas Eastern Transmission Corp., 79
F.E.R.C. p 61,258 (1997); Texas Eastern Transmission Corp.,
80 F.E.R.C. p 61,270 (1997). The Municipal Defense Group
("MDG"), a group of publicly-owned gas distribution compa-
nies which take service under Texas Eastern's small customer
transportation service rate schedule ("rate schedule SCT"),
petitioned this court for review of the Commission's orders.
MDG argues that the orders unduly discriminate against
Texas Eastern's small customers, and that the Commission
failed to meet the requirements of s 5 of the Natural Gas
Act, 15 U.S.C. s 717d. For the following reasons, we sustain
the Commission's resolution of these contentions.

__________
1 Firm transportation service or "firm capacity" is a type of
transportation service for which delivery is guaranteed, as opposed
to interruptible transportation, "for which delivery can be delayed if
all the capacity on the pipeline is in use." See United Distribution
Cos. v. FERC, 88 F.3d 1105, 1123 n.10 (D.C. Cir. 1996); 18 C.F.R.
ss 284.8(a)(3), 284.9(a)(3).

I

Texas Eastern's small customers obtain firm transportation
service under rate schedule SCT, a two-part discounted rate.
The pipeline provides this rate schedule pursuant to a settle-
ment with its small customers, reached during Order No. 636
restructuring. See Texas Eastern Transmission Corp., 62
F.E.R.C. p 61,015, at 61,086 (1993). Texas Eastern defines a
small customer as one with a maximum contract demand
quantity of 5,987 Dth (dekatherms) per day.2 See id. at
61,085. Within that service level requirement, Texas Eastern
offered the discounted rate to those who either were custom-
ers of Texas Eastern under certain rate schedules as of
October 31, 1992 or had purchased firm sales service from an
interstate pipeline which in turn purchased a firm sales
service from Texas Eastern under certain rate schedules as of
May 18, 1992. See id. at 61,085-86. By the terms of rate
schedule SCT, small customers pay a discounted reservation
charge representing approximately 40% of the charge large
customers pay under rate schedule CDS.3 See id. at 61,086 &
n.38. Small customers also pay a usage charge equal to the
usage charge for service under Texas Eastern's rate schedule
IT-1, a rate developed at the 100% load factor, exclusive of
gas supply realignment costs.4 See id. at 61,086, 61,072.

Rate schedule SCT is an exception to the general rate
structure Texas Eastern adopted following Order No. 636.
Pursuant to that order, Texas Eastern switched from a
modified fixed/variable ("MFV") to a straight fixed/variable
("SFV") rate design. See id. at 61,084; Order No. 636,

__________
2 A dekatherm is a metric system measurement that is roughly
equivalent to 1,000 cubic feet of gas.

3 Rate schedule CDS is a no-notice transportation service where-
by a customer may increase deliveries up to its maximum daily
quantities at any time. See Texas Eastern Transmission Corp., 62
F.E.R.C. p 61,015, at 61,072 (1993).

4 A pipeline charges a reservation or "demand" charge for reserv-
ing firm transportation capacity and a usage charge for the actual
transportation of gas. See United Distribution Cos., 88 F.3d at
1129 n.24.

F.E.R.C. Stats. & Regs. (CCH) p 30,939, at 30,434 (1992). A
pipeline using an MFV rate design places fixed costs in both
the reservation and usage charges; an SFV rate design
confines fixed costs to the reservation charge and variable
costs to the usage charge. See United Distribution Cos. v.
FERC, 88 F.3d 1105, 1128-29 & n.25 (D.C. Cir. 1996). In
Order No. 636, the Commission ordered all pipelines to adopt
a straight fixed/variable transportation rate design in order to
achieve its goal: "to ensure that all shippers have meaningful
access to the pipeline transportation grid so that willing
buyers and sellers can meet in a competitive national market
to transact the most efficient deals possible." See Order No.
636-C, 78 F.E.R.C. p 61,186, at 61,766 (1997); see also City
of Nephi v. FERC, 147 F.3d 929, 931 (D.C. Cir. 1998). The
Commission believed the MFV rate design distorted the unit
delivered prices of gas, and thereby hindered the develop-
ment of an efficient national market for gas. See Order No.
636-A, F.E.R.C. Stats. & Regs. (CCH) p 30,950, at 30,596
(1992); see also United Distribution Cos., 88 F.3d at 1167-68.

The Commission recognized, however, that adoption of the
SFV rate design could shift costs among classes of a pipe-
line's customers. See Order No. 636, F.E.R.C. Stats. & Regs.
(CCH) p 30,939, at 30,435 (1992). Low load factor customers
in particular would pay a higher share of the pipeline's fixed
costs under SFV than they had under the MFV rate design.5
See id.; see also United Distribution Cos., 88 F.3d at 1170-
71. To offset these cost shifts, the Commission required
pipelines to adopt several mitigation measures. If the transi-
tion to SFV rates resulted in an increase of 10% or more in
revenue responsibility for any specific class of customers, the
pipeline was required to phase in the new rates over a four-
year period. See Order No. 636, F.E.R.C. Stats. & Regs.
(CCH) p 30,939, at 30,435-36 (1992); 18 C.F.R

__________
5 A customer's "load factor" is the ratio between its average and
peak usage. Customers with seasonal usage fluctuations have low
load factors; customers with constant usage throughout the year
have high load factors. See United Distribution Cos., 88 F.3d at
1129 n.26. Most small customers are also low load factor custom-
ers.

s 284.14(b)(3)(ii)(B)(1995) (rescinded)6; see also City of Ne-
phi, 147 F.3d at 932. Pipelines who offered sales or firm
transportation service to small customers on a one-part volu-
metric basis, at an imputed load factor, as of May 18, 1992,
were required to continue to offer firm and no-notice service
on the same basis.7 See Order No. 636-A, F.E.R.C. Stats. &
Regs. (CCH) p 30,950, at 30,600 (1992); 18 C.F.R.
s 284.14(b)(3)(iv)(A) (1995) (rescinded); see also United Dis-
tribution Cos., 88 F.3d at 1171. Although Texas Eastern and
its small customers designed their own measure--the dis-
counted SCT rate schedule--it also "represent[ed] a mitiga-
tion against cost-shifting." See Texas Eastern Transmission
Corp., 62 F.E.R.C. p 61,015, at 61,086 (1993).

Order No. 636 did not address how pipelines should allocate
their own available capacity. The issue was to be considered
in future restructuring proceedings. See Order No. 636-A,
F.E.R.C. Stats. & Regs. (CCH) p 30,950, at 30,548 (1992).
Before its May 1997 filing, Texas Eastern had allocated firm
capacity that became available on its system on a first-come,
first-served basis, with the Commission's approval. See Tex-
as Eastern Transmission Corp., 78 F.E.R.C. p 61,154, at
61,644 (1997). Small customers could obtain available capaci-
ty at their rate schedule SCT as long as they were first in
line. When MDG protested Texas Eastern's proposal to
allocate capacity based on the net present value of a custom-
er's request, considering only the customer's reservation

__________
6 18 C.F.R. s 284.14 was rescinded in October 1995, following the
completion of the restructuring process. See Filing and Reporting
Requirements for Interstate Natural Gas Company Rate Schedules
and Tariffs, 60 Fed. Reg. 52,960, 53,058 (1995).

7 A one-part volumetric rate combines both the reservation
charge and the usage charge into one usage charge payable when a
customer actually ships gas, and "reflects an 'imputed load factor'
that is higher than the customer's anticipated use of the pipeline."
See City of Nephi, 147 F.3d at 931 n.5. Before restructuring, Texas
Eastern offered rate schedule SGS, a one-part volumetric rate, to
its small customers, due to the small amount of service those
customers required. See Texas Eastern Transmission Corp., 32
F.E.R.C. p 61,056, at 61,155 (1985).

charge, Texas Eastern and MDG discussed the matter and
came to an agreement. Texas Eastern then submitted a pro
forma tariff sheet containing language the parties had agreed
upon: Texas Eastern would deem a small customer's request
for available capacity at the maximum SCT rate to generate a
net present value equal to a request for capacity for an equal
term at the maximum rate under rate schedules FT-1 and
CDS.8 A small customer's request at the maximum SCT rate
would be deemed to generate a greater net present value
than a request under FT-1 or CDS at less than the maximum
rate for an equal or shorter contract term.

Because it was submitted too late for review, the Commis-
sion did not consider Texas Eastern's submission in its initial
order. The Commission approved the pipeline's original fil-
ing as an "economically efficient way of allocating capacity
and consistent with Commission policy." See Texas Eastern
Transmission Corp., 80 F.E.R.C. p 61,270, at 61,978 (1997).
In its compliance filing, Texas Eastern again submitted the
pro forma tariff sheet and the Commission rejected it in its
order on rehearing. Reviewing Texas Eastern's original
filing and the proposed modification under s 4 of the Natural
Gas Act, 15 U.S.C. s 717c, the Commission determined that
small customers currently contract for capacity at a subsi-
dized rate and are not entitled to that subsidized rate when
they seek to expand their capacity. See id. at 61,977-78.
Texas Eastern later complied with the Commission's decision
and moved to place its original filing, without the revision,
into effect. The pipeline has now intervened in this case in
support of the Commission.

II

We first take up petitioner's claim that s 5 and not s 4 of
the Natural Gas Act applies to Texas Eastern's proposal to

__________
8 Rate schedule FT-1 is an open-access, instantaneous transporta-
tion service. Unlike CDS no-notice service, changes in scheduled
volumes must be requested a minimum of 24 hours in advance. See
Texas Eastern Transmission Corp., 62 F.E.R.C. p 61,015, at 61,072
(1993).

allocate available capacity based on the net present value of a
customer's request for capacity. Section 4 governs a pipe-
line's proposal to change an existing tariff and requires the
pipeline to prove that the proposed rate or charge increase it
seeks is just and reasonable. See 15 U.S.C. s 717c(e). Sec-
tion 5 permits the Commission to determine and fix by order
a just and reasonable rate or practice if it finds, "any rate ...
or ... practice ... affecting such rate [to be] ... unjust,
unreasonable, unduly discriminatory, or preferential." See 15
U.S.C. s 717d(a). If the Commission acts on its own initia-
tive, it bears the burden of proof; it must show not only that
its proposed rates or charges are just and reasonable, but
that those it would alter are not. See Public Serv. Comm'n v.
FERC, 866 F.2d 487, 488 (D.C. Cir. 1989).

Although Texas Eastern filed the initial proposal to change
its capacity allocation method, petitioner insists that s 5
governed the proceedings. Because Texas Eastern twice
submitted a pro forma tariff sheet altering its initial filing,
petitioner contends that Texas Eastern essentially discarded
its original filing and supported the revision only. As peti-
tioner sees things, the Commission's acceptance of the origi-
nal filing transformed the Commission into the proponent of
rate reform and required it to meet the standards of s 5.

To accept petitioner's contention would be to contradict
Consolidated Edison Co. v. FERC, 165 F.3d 992 (D.C. Cir.
1999) (per curiam). Texas Eastern was the source of the
proposed change and, as we held in that case, the Act makes
the source decisive when choosing between the two sections.
See id. at 1008. The Commission's acceptance of Texas
Eastern's original proposal placed the proceeding in s 4. See
Western Resources, Inc. v. FERC, 9 F.3d 1568, 1574 (D.C.
Cir. 1993); City of Winnfield v. FERC, 744 F.2d 871, 875
(D.C. Cir. 1984). Texas Eastern never withdrew its initial
filing and it did not seek rehearing of the Commission's May
1997 order accepting that filing instead of the modification.
See Texas Eastern Transmission Corp., 79 F.E.R.C. p 61,258
(1997). After the Commission's order on rehearing, Texas
Eastern moved to place its original filing, without the modifi-

cation, into effect. Therefore, s 4 applied and the Commis-
sion was not required to establish that Texas Eastern's prior
allocation method was unjust or unreasonable.

III

Petitioner's remaining challenge is on the basis that Texas
Eastern's new allocation method unduly discriminates against
small customers by effectively barring them from obtaining
available capacity at their rate schedule SCT. Texas Eastern
will allocate capacity based on the net present value of a
customer's request, taking into account the customer's reser-
vation charge but not its usage charge. Because small cus-
tomers pay a discounted reservation charge under rate sched-
ule SCT, they will generally lose to larger customers who
request capacity under rate schedules CDS or FT-1, which
have higher reservation charges. This "effective bar" alleg-
edly caps small customer capacity at the amount the small
customers had contracted for as of May 29, 1997, the date of
the Commission's order in this case. The Commission ac-
knowledged the difficulty facing small customers bidding for
available capacity at their rate schedule. See Texas Eastern
Transmission Corp., 80 F.E.R.C. p 61,270, at 61,977 (1997).
But it reasonably determined that they should compete for
available capacity on the same terms as Texas Eastern's
other customers.

MDG does not challenge Texas Eastern's new allocation
method as a general matter. It argues that small customers
are a separate class on Texas Eastern's system, and should
therefore receive special treatment with respect to allocation
of available pipeline capacity. The argument rests, at least
partly, on the small customers' agreement with Texas East-
ern, approved by the Commission, which entitles small cus-
tomers to take capacity under the discounted, preferential
rate schedule SCT. A customer requiring up to 5,987 Dth
per day may contract for capacity under that schedule. MDG
claims that by effectively barring small customers from re-
ceiving available capacity above their current contract
amounts, up to the maximum available under their rate
schedule, the Commission has precluded them from enjoying
the benefits of their agreement.

The trouble is that the small customers' agreement with
Texas Eastern simply permits them to receive capacity under
the discounted rate schedule if their service level require-
ments fall within the 5,987 dth maximum. See Texas Eastern
Transmission Corp., 62 F.E.R.C. p 61,015, at 61,085 (1993).
The small customers were not guaranteed full ceiling capaci-
ty, as the Commission correctly recognized. See Texas East-
ern Transmission Corp., 80 F.E.R.C. p 61,270, at 61,979
(1997). They must bid in competition with unsubsidized
bidders. This will doubtless make it more difficult for small
customers to obtain additional service under the subsidized
rate schedule, but there is no reason why the Commission
should have commanded other pipeline customers to subsidize
them.

Historically, small customers on Texas Eastern's system
have been treated as a separate class and so MDG thinks
they should have been treated as such in this proceeding.
See, e.g., Texas Eastern Transmission Corp., 57 F.P.C. 500,
508-09 (1977), aff'd sub nom. Elizabethtown Gas Co. v.
FERC, 636 F.2d 1328, 1334 (D.C. Cir. 1980). But as MDG
must acknowledge, small customers are already receiving
preferential treatment--they contract for capacity under a
discounted rate schedule. The Commission reasonably con-
cluded that Texas Eastern need not extend the subsidy
beyond the bounds of its agreement with the small customers.
See Texas Eastern Transmission Corp., 80 F.E.R.C. p 61,270,
at 61,978 (1997). A Commission order requiring the pipeline
to do so would have had to confront the principles underlying
Order No. 636. The SCT rate schedule "represent[ed] a
mitigation against cost shifting" to small customers during
restructuring. See Texas Eastern Transmission Corp., 62
F.E.R.C. p 61,015, at 61,086 (1993). Although the SCT rate
schedule is not a one-part volumetric charge (the mitigation
measure required for small customers), it serves the same
general purpose and the Commission approved it for that
reason. See id. Such mitigation measures were not meant
as "a permanent shield to increased costs." See City of
Nephi, 147 F.3d at 932. They simply sought "to preserve the
status quo" for small customers at the time Order No. 636

took effect. See id. Pipelines were required to "grandfa-
ther[ ] [in] in existing small customer discount rates" only;
they were not required to give additional discounts or prefer-
ences. See id. at 931. MDG complains that small customers
are effectively grandfathered in at their current levels of
capacity under the discounted SCT rate schedule, but it does
not explain why small customers are entitled to acquire
additional available capacity at a discounted rate intended to
serve as a mitigation measure. The Commission points out
repeatedly, and, we think, correctly, that small customers who
already obtain subsidized capacity have no entitlement to
increase their capacity at the same subsidized rate.9 See
Texas Eastern Transmission Corp., 80 F.E.R.C. p 61,270, at
61,977-79 (1997).

We also believe it significant that the SCT rate is itself an
exception to the SFV rate design that Order No. 636 general-
ly requires, and is therefore somewhat at odds with the
Order's broader goal of encouraging competition in the na-
tional gas market. Texas Eastern's small customer SCT rate
is a two-part rate in which fixed costs are placed in both the
reservation and the usage charges, the same rate structure
rejected by the Commission in Order No. 636 as contrary to
its goals. See Order No. 636, F.E.R.C. Stats. & Regs. (CCH)
p 30,939, at 30,433-34 (1992). Given those general goals, it
was certainly reasonable to confine application of the SCT
rate design to capacity that Texas Eastern's small customers
have contracted for and to require small customers seeking
additional, available capacity to bid on an equal footing with
larger customers taking capacity under a straight fixed/varia-

__________
9 Petitioner also contends that the SCT rate is not a "subsidized"
rate, because small customers make a substantial contribution to
fixed costs through the usage charge despite their discounted
reservation charge. But because small customers also do not pay
gas supply realignment costs and because their usage charge is
based on a 100% load factor, they pay less in fixed costs for the
same amount of capacity than a large customer, even at a relatively
high load factor. Their rate does not reflect a full allocation of fixed
costs and is therefore a subsidized rate. Texas Eastern Transmis-
sion Corp., 80 F.E.R.C. p 61,270, at 61,979 (1997).

ble, unsubsidized rate design. Small customers are not cate-
gorically barred from obtaining available capacity above that
which they currently contract for. They simply must com-
pete for it on equal terms with other customers on Texas
Eastern's system.

The petition for judicial review is denied.