Process Gas Consumers Group v. Federal Energy Regulatory Commission

                        United States Court of Appeals


                     FOR THE DISTRICT OF COLUMBIA CIRCUIT


            Argued September 11, 1998   Decided October 23, 1998 


                                 No. 93-1405


                       Process Gas Consumers Group and 

                     American Iron and Steel Institute, 

                                 Petitioners


                                      v.


                    Federal Energy Regulatory Commission, 

                                  Respondent


                National Fuel Gas Supply Corporation, et al., 

                                 Intervenors


                              Consolidated with 

                                 No. 93-1739


                  On Petitions for Review of Orders of the 

                     Federal Energy Regulatory Commission


---------



     John T. Miller, Jr. argued the cause for petitioners.  With 
him on the briefs were Edward J. Grenier, Jr., and William 
H. Penniman.  Sterling H. Smith entered an appearance.

     John H. Conway, Deputy Solicitor, Federal Energy Regu-
latory Commission, argued the cause for respondent.  With 
him on the brief were Jay L. Witkin, Solicitor, and Susan J. 
Court, Special Counsel.

     Stanley W. Balis argued the cause for intervenors Munici-
pal Defense Group and Texas Eastern Transmission Corpora-
tion.  With him on the brief were Richard J. Kruse, Henry S. 
May, Jr., Judy M. Johnson and Catherine O'Harra.  F. Nan 
Todd Wagoner entered an appearance.

     Before:  Williams, Sentelle and Rogers, Circuit Judges.

             Opinion for the Court filed by Circuit Judge Williams.

     Williams, Circuit Judge:  In Order No. 636, FERC exer-
cised its authority under s 5 of the Natural Gas Act, 15 
U.S.C. s 717d, to require that natural gas pipeline companies 
unbundle their gas transportation and sales services and file 
tariffs in compliance with the order.1  The tariff filing at issue 
here provides that in the event of certain curtailments cus-
tomers with specified emergency conditions can secure ex-
emption from curtailment.  This of course increases the 
curtailment of the pipeline's other customers, which would 
otherwise have been pro rata.  The tariff also calls for some 
compensation to be paid by the exempted customers to the 
customers who are additionally deprived.  But the petitioners 
argue that the compensation approved by the Commission is 

__________
     1 Order No. 636, "Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation;  and 
Regulation of Natural Gas Pipelines After Partial Wellhead Decon-
trol," FERC Stats & Regs. (CCH) p 30,939, 57 Fed. Reg. 13267, 
codified at 18 CFR Part 284, reh'g granted in part, Order No. 
636-A, FERC Stats & Regs. (CCH) p 30,950, 57 Fed. Reg. 36128, 
reh'g denied, Order No. 636-B, 61 FERC p 61,272 (1992), aff'd in 
part, rev'd in part, United Distribution Cos. v. FERC, 88 F.3d 1105 
(D.C. Cir. 1996), on remand, 78 FERC p 61,186 (1997), reh'g 
pending.


so limited that it gives customers inadequate incentives to 
plan ahead to reduce the likelihood and severity of gas-
curtailment emergencies.  As the Commission's explanation 
fails to come to grips with the petitioners' contentions, we 
remand the case for want of reasoned decisionmaking.

                                    * * *


     Texas Eastern Transmission Corporation ("Tetco") made 
its compliance filing in 1992.  The proposed tariff would have 
allowed Tetco to curtail service--even to "firm" transporta-
tion customers--in certain situations of force majeure or 
operational necessity.  Such "capacity curtailment" was to be 
borne pro rata with two exceptions:  first, to protect high-
priority end-uses, as defined by ss 401 and 402 of the Natu-
ral Gas Policy Act, 15 U.S.C. ss 3391-92, and second, to 
provide gas to customers for "emergency" situations, defined 
as ones where gas was necessary "to avoid irreparable injury 
to life or property (including environmental emergencies) or 
to provide for minimum plant protection."  Prompted by the 
comments of NUI Corporation (Elizabethtown Gas Division) 
("NUI/Elizabethtown"), the Commission rejected Tetco's first 
proposed exception to pro rata curtailment, finding that the 
priorities in the NGPA did not apply to capacity curtailment.  
See Texas Eastern Transmission Corp., 62 FERC p 61,015 at 
61,119 (1993).  The Commission allowed the second exception, 
but required that Tetco's revised tariff "include compensation 
by the customer seeking the short term [emergency] excep-
tion to any other customer receiving more than its pro rata 
share of the capacity curtailment."  Id.  Tetco filed a revised 
tariff, including such a compensation measure, in February 
1993.

     The compensation provided, however, was quite limited.  
The tariff calls for increases in the exempted customer's bill 
by "the aggregate curtailment adjustment quantity requested 
by the Customer pursuant to [the emergency exemption] 
multiplied by the Reservation Charge Adjustment for the 
applicable rate schedule per Dth [Dekatherm] for the applica-
ble zone";  this amount is then distributed to the customers 
who were curtailed more than pro rata because of the exemp-
tion.  As we understand this, it means that although the 



advantaged customers have already paid a reservation charge 
for their entitlement to transportation, they pay a premium, 
proportional to that charge, for the transportation they enjoy 
above pro rata curtailment levels by virtue of their emergen-
cy condition.  The proceeds go to the more deprived custom-
ers, in proportion to their deprivation.

     Despite the protests of NUI/Elizabethtown, The Process 
Gas Consumers Group, and The American Iron and Steel 
Institute (the latter two collectively "the Industrial Groups") 
that the compensation provided was inadequate, the Commis-
sion accepted Tetco's filing.  See Texas Eastern Transmis-
sion Corp., 63 FERC p 61,100 (1993).  Upon denial of their 
request for rehearing on this issue, see Texas Eastern Trans-
mission Corp., 64 FERC p 61,305 (1993), NUI/Elizabethtown 
and the Industrial Groups petitioned for review in this court.  
See 15 U.S.C. s 717r.

                                    * * *

     Petitioners objected below on two grounds.  NUI/Eliza-
bethtown argued that the compensation was inadequate, par-
ticularly for local distribution companies ("LDCs").  The in-
creased curtailment for non-exempt customers removes these 
customers' regular access to part of their gas supply;  this 
supply must be rerouted or replaced, often at a much higher 
cost.  If no replacement can be found, the LDC customers 
lose the profit they would have made on the resale of the gas.  
NUI/Elizabethtown therefore proposed setting compensation 
either by these actual damage amounts (net replacement cost 
or lost margin) or by a "generic cost" calculated as "a stated 
percentage in excess of the spot gas price."  The Industrial 
Groups raised an additional argument:  that Tetco's compen-
sation scheme gave bad incentives to its customers.  Because 
an emergency exemption aids only customers without some 
backup capabilities of their own (such as "peak shaving" 
facilities),2 the low compensation rate allows these customers 
to free-ride on the costly contingency preparations of others.  
Between the grasshopper and the ant, in other words, Tet-

__________
     2 Section 4.2(D)(4) of Tetco's tariff requires a customer seeking an 
exception to attest that "no alternative fuel could be utilized or is 
available to be utilized to prevent the emergency situation."


co's scheme favors the grasshopper and thus encourages his 
feckless ways.  To correct this incentive problem, the Indus-
trial Groups proposed compensation at "a predetermined 
amount that exceeds the cost of the most expensive gas 
sources or alternative fuels available to customers."

     The Commission gave two reasons for rejecting these 
suggestions.  First, the Commission pointed to the tariff's 
imbalance resolution procedures as an "adequate remed[y]" 
for the loss of gas supply.  63 FERC p 61,100 at 61,496;  64 
FERC p 61,305 at 63,301.  This seems to be a red herring.  
So far as appears, the imbalance procedures impose no cost 
on customers receiving emergency relief.

     Second, the Commission claimed that "[n]o party has put 
forth a plausible compensation scheme that could be ade-
quately monitored by the Commission."  64 FERC p 61,305 
at 63,301.  But the Commission's two opinions say nothing to 
explain how any of the petitioners' proposals is either implau-
sible or impractical to monitor.  And, so far as concerns 
NUI/Elizabethtown's spot gas proposal, the Commission itself 
has in related contexts embraced a compensation device tied 
to the spot gas price:  first in the very same proceeding, as 
the cash-out price used to resolve imbalances, see 62 FERC 
p 61,015 at 61,116-17, and second, in a later case, as compen-
sation paid by those enjoying an emergency exemption from 
gas supply curtailment, see Transcontinental Gas Pipe Line 
Corp., 72 FERC p 61,037 at 61,237-38 (1995).  While we 
recognize that capacity curtailment and supply curtailment 
are not identical, see, e.g., City of Mesa v. FERC, 993 F.2d 
888, 894-95 (D.C. Cir. 1993), the Commission has nowhere 
explained why the differences render use of a spot-price 
solution inappropriate here.  Cf. Florida Gas Transmission 
Co., 70 FERC p 61,017 at 61,063 (1995) (approving settlement 
providing capacity curtailment compensation based on alter-
native fuel cost).  Nor, to repeat, has it offered any explana-
tion of the supposed deficiencies of the petitioners' other 
proposals.

     If the Commission had grounds to reject petitioners' pro-
posed alternatives, it has not revealed them.  We accordingly 
remand the case for reconsideration.

                                                                     So ordered.