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Hercules Inc. v. Federal Power Commission

filed: January 5, 1977.



Aldisert and Gibbons, Circuit Judges, H. Curtis Meanor,*fn* District Judge.

Author: Gibbons

GIBBONS, Circuit Judge

This petition for review of an order issued by the Federal Power Commission (FPC) brings to this Circuit its first exposure to the meandering efforts of that agency to deal equitably with the allocation of natural gas among customers of regulated natural gas pipelines in a period of chronic, nationwide natural gas shortages.*fn1 Although we have heretofore been spared the experience of such exposure, jurisdiction and venue are properly here because Delaware is the state of incorporation of Panhandle Eastern Pipeline Co. (Panhandle), which is the supplier of Hercules Incorporated (Hercules), the petitioner.*fn2 The order which we review, issued April 1, 1976, was entered in three separate, but interrelated, dockets: (1) Docket No. RP71-119, a curtailment proceeding in which the FPC sought to establish a permanent curtailment plan for Panhandle; (2) Docket No. RP74-31-22, a proceeding in which Hercules sought relief from Panhandle's curtailment plan that was in effect pending the completion of hearings as to its reasonableness; and (3) Docket No. RP76-75, a complaint proceeding by Hercules against Panhandle, challenging the latter's interpretation of its delivery obligations to Hercules. More specific references will be made hereafter to the nature of each of these proceedings.

The effect of the FPC's order of April 1, 1976, is to reduce substantially the amount of natural gas to which Hercules would be entitled by virtue of FPC Opinion No. 754, issued February 27, 1976. Opinion No. 754 found that Panhandle's previous curtailment plan was unreasonable because it turned availability of gas to a customer on whether the customer had contracted for a "firm" or "interruptible" supply.*fn3 Accordingly, it established a new curtailment plan for Panhandle whereby the rationing of gas was based exclusively on the end use by the ultimate consumer.

Under this new plan Hercules is entitled to receive greater volumes of gas than under the previous curtailment plan. However, the FPC order under review held that Hercules could not receive its full volumes of gas under the new plan until Hercules discharged certain natural gas "payback" obligations. These payback obligations had been imposed by the FPC as a condition precedent to Hercules' receipt of emergency volumes of gas, in excess of its entitlements under the previous curtailment plan. Hercules challenges the FPC order as arbitrary and capricious. It argues that since FPC Opinion No. 754 found Panhandle's previous curtailment plan to be unjust and unreasonable, the FPC cannot reduce Hercules' entitlements under the new plan in order to satisfy payback obligations incurred as a direct result of unlawful features of the previous curtailment plan. We agree.


A. FPC's Statutory Authority

Because of a nationwide shortage of natural gas a number of pipeline companies have been forced to ration gas among their customers.*fn4 Such rationing is carried out in accordance with natural gas curtailment plans that the pipelines file with the FPC as part of their tariff. In FPC v. Louisiana Power & Light Co., 406 U.S. 621, 642, 32 L. Ed. 2d 369, 92 S. Ct. 1827 (1972), the Court held that the FPC had the statutory authority to regulate such curtailment plans. This authority, the Court held, arises from the FPC's transportation jurisdiction*fn5 and § 16 of the Natural Gas Act,*fn6 which empowers the agency to take steps "necessary or appropriate to carry out the provisions" of the Act. In regard to the FPC's evaluation of curtailment plans the court said:

The substantive standard governing FPC evaluation of curtailment plans is found in § 4(b) of the Act:

"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." 15 U.S.C. § 717c(b).

Two procedural mechanisms are available to enforce this antidiscriminatory provision of § 4(b). As to a tariff already on file and in effect, the FPC may proceed under § 5(a).*fn7 The § 5(a) procedure has substantial disadvantages, however, rendering it unsuitable for the evaluation of curtailment plans. The FPC must afford interested parties a full hearing on the reasonableness of the tariff before taking any remedial action, and as we have observed, "the delay incident to determination in § 5 proceedings through which initial certificated rates [as well as 'practices ' and 'contracts '] are reviewable appears nigh interminable. ". . . FPC has therefore chosen to process curtailment plans under § 4(c), (d) and (e).*fn8 Under these provisions, a pipeline's tariff amendments filed with the FPC go into effect in 30 days unless suspended by the Commission. If a filing is challenged or the FPC of its own motion deems it appropriate, it may suspend the amended tariff for up to five months, at the end of which time the amended tariff becomes effective pending the completion of hearings. In these hearings, the pipeline has the burden of proving that its plan is reasonable and fair.

406 U.S. at 642-45 (footnotes in quoted text renumbered and printed in margin).

While the § 4 procedure is superior to that of § 5 for the processing of curtailment plans because a plan may become effective upon filing as a tariff, it has the disadvantage that the FPC cannot order pipeline companies to file curtailment plans adhering to predetermined FPC policies on curtailment practices. Section 4 was designed for the implementation of industry initiated changes in rates, charges, classifications, or services.*fn9 In contrast, § 5 grants the FPC the power to order a pipeline company to adopt a FPC designed curtailment plan, but only at the conclusion of hearings in which the pipeline's existing plan is found to be unreasonable.*fn10

B. FPC's Response to the Natural Gas Shortage

The necessity for prompt implementation of a regulatory scheme for pipeline curtailment practices prompted the FPC to choose to process curtailment plans under § 4 rather than § 5.*fn11 Having no power under § 4 to impose its own curtailment plans upon the pipelines, it resorted to a jawboning strategy whereby pipelines were urged to establish curtailment priorities in accordance with FPC policy guidelines.*fn12

Pursuing this strategy the FPC issued an initial general policy statement, Order No. 431.*fn13 This order instructed pipeline companies expecting periods of gas shortages to file tariff schedules containing a curtailment plan. Order No. 431 implied that curtailment priorities should be based on the end use made of the gas and indicated that such plans, if approved, "will control in all respects notwithstanding inconsistent provisions in [prior] sales contracts . . ."*fn14

The curtailment plans filed in response to Order No. 431 reflected conflicting views as to proper curtailment priorities. In an attempt to obtain greater uniformity the FPC issued more specific curtailment priority guidelines in Order No. 467.*fn15 That order stated that it was the FPC's policy to require curtailment on the basis of the ultimate consumer use of the gas (end use), and established nine priority of service categories based on such use. These priorities ranged from highest for residential, small commercial, and other "human need" uses through moderate for industrial processing use down to lowest priority for boiler use.*fn16 The order required full curtailment of lower priority customers before curtailment of higher priority customers.*fn17 Since Order 467 purported to be only a statement of policy and was adopted without notice and hearing, the FPC could not direct the pipelines to file conforming curtailment plans.*fn18 However, it warned that any nonconforming curtailment plans might be found to be unjust and unreasonable.*fn19

C. The Firm-Interruptible Distinction

Under Order No. 467's nine priority of service categories a distinction is drawn between customers who have contracted to receive gas on the basis of "firm" service as opposed to "interruptible" service.*fn20 Interruptible service, as opposed to firm service, may be terminated by the pipeline company on short notice during periods of peak demand.*fn21 Arkansas Power & Light Co. v. FPC, 170 U.S. App. D.C. 393, 517 F.2d 1223, 1229-31 (1975). On the basis of this distinction Order No. 467 placed gas used for essential industrial uses in Category 2 when the user had contracted to receive gas on a firm basis, and in Category 3 when the user has contracted to receive gas on an interruptible basis.*fn22

Prior to the period of sustained gas shortage, interruptible service customers were infrequently subjected to a cut-off of their gas supply. When such a cut-off occurred it was usually of a brief duration during the winter when cold weather drove up the demand for gas.*fn23 In making a service priority distinction between firm and interruptible service, while at the same time expressing a policy that the national interest would be best serviced by assigning priorities on the basis of end use, the FPC assumed that interruptible service arrangements were for the most part predicated on end use considerations. As stated by the FPC:

We have determined that interruptible sales are for the most part, predicated on end-use considerations; those customers, be they direct sales or indirect sales, who require gas for human needs, service or non-substitutable industrial service do not contract on an interruptible basis. Interruptible service, at the lower rates charged for such service, envisions interruption. And accordingly, interruptible customers can most reasonably be expected to have alternate fuel facilities already operational. We conclude, therefore, that curtailment should first fall on those who have not historically borne the full-fixed costs of providing gas service, particularly since these customers are best prepared to accept interruptions in service and clearly do not require uninterrupted service for protection of life or property.*fn24

Since Order No. 467 was enacted without benefit of notice and hearing there was no immediate opportunity to test the accuracy of the assumptions underlying the firm-interruptible distinction. In Pacific Gas and Electric Co., supra, the D.C. Circuit held that Order No. 467 was only a general statement of policy and thus was exempt from the notice and hearing requirements of the Administrative Procedure Act,*fn25 and unreviewable under § 19(b) of the Natural Gas Act.*fn26 In so holding, however, the court emphasized that the validity of the curtailment policies enunciated in Order No. 467 would be ...

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