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05/13/83 Associated Gas v. Federal Energy Regulatory

May 13, 1983





Petition for Review of Orders of the Federal Energy Regulatory Commission.


Mikva and Edwards, Circuit Judges, and Swygert,* Senior Circuit Judge, United States Court of Appeals for the Seventh Circuit. Opinion for the Court filed by Circuit Judge Mikva.


The petitioner in this case, Associated Gas Distributors , intervened in a purchased gas adjustment proceeding before respondent, the Federal Energy Regulatory Commission (FERC or Commission), brought by Texas Eastern Transmission Corporation (Texas Eastern), a major interstate natural gas pipeline company. AGD contends that as a customer of Texas Eastern it has a statutory right to examine the contracts between Texas Eastern and its producer-suppliers on which Texas Eastern bases its request for a PGA rate increase, even though there is no legal requirement that such contracts be filed with the Commission. Alternatively, AGD argues that, even if it has no statutory right to examine the contracts in a PGA proceeding, the Commission abused its discretion in denying AGD's request to examine the contracts in this case. The Commission denied AGD's request, ruling that, absent specific allegations of fraud or abuse, a PGA proceeding is not the appropriate forum for inspection and review of these contracts. Because AGD is entitled to challenge these rates and to obtain any refunds due in different proceedings and because AGD failed to allege any specific wrongdoing, we uphold the Commission's decision to deny AGD's request.


A. The Statutes

The sale and transportation of natural gas in interstate commerce is regulated by the Commission under two statutes, the Natural Gas Act of 1938 , 15 U.S.C. §§ 717-717w (1976 & Supp. V 1981), and the Natural Gas Policy Act of 1978 , 15 U.S.C. §§ 3301-3432 (Supp. V 1981). Under the NGA, the setting of rates and charges is governed by section 4, which provides, inter alia, that all rates charged by either a pipeline or a producer must be just and reasonable, that the rates must receive prior approval from the Commission, that the burden of proof rests with the pipeline or producer, and that all contracts relating to these rates must be filed with the Commission. 15 U.S.C. § 717c(c), (d) (1976). The section further directs that whenever a pipeline or a producer requests a rate change the Commission may, either on its own initiative or following a complaint, hold a hearing to determine the lawfulness of that rate change. 15 U.S.C. § 717c(e).

In 1978 Congress substantially altered these requirements with the enactment of the NGPA. Section 601 of that Act states that the prices a pipeline must pay for certain specified types of gas (dubbed in the literature as "new gas") are no longer subject to regulation under section 4 of the NGA. 15 U.S.C. § 3431(a)(1). The section states that the prices are deemed to be just and reasonable if they do not exceed the congressionally-mandated maximum lawful price or if the gas has been deregulated. 15 U.S.C. § 3431(b)(1). Consequently, it is no longer necessary that these prices receive prior approval or that the contracts on which they are based be filed with the Commission. The rates at which a pipeline sells its gas are still subject to section 4, but the pipeline is entitled to pass through the prices at which it bought the gas unless "the Commission determines that the amount paid was excessive due to fraud, abuse, or similar grounds." 15 U.S.C. 3431(c)(2).

B. The PGA Proceeding

In the early 1970's, long before the passage of the NGPA, it became apparent that the lengthy and complicated procedures of full-scale section 4 review were not the most efficient method of handling the growing volume of rate increase filings. Accordingly, in 1972, the Commission created a streamlined alternative -- the PGA proceeding -- which allows a pipeline to facilitate recovery of costs by including a purchased gas cost adjustment clause in the rates it files with the Commission. See 18 C.F.R. § 154.38(d)(4) (1982). The stated purpose of this time-saving proceeding was to prevent rate increase filings from becoming "pancaked," i.e., piled up on top of one another such that new ones were filed before the old ones were approved. 47 F.P.C. 1049, 1050 (1972). As established by the Commission, this procedure is optional and its use must receive prior approval. To obtain a PGA rate increase, a pipeline must file a report focusing on the purchased gas component of the pipeline's costs and detailing each pipeline purchase by contract, contract date, projected volume, rates to be paid, and total cost of the purchased gas under the contract for the period encompassed by the filing. 18 C.F.R. § 154.38(d)(4)(v) (1982). In exchange for this expedition of the rate increase process, moreover, a pipeline must agree to submit all of its costs and revenues to full review under section 4 at least once every three years. Id. § 154.38(d)(4)(vi) (1982).

Because the PGA procedure is conducted pursuant to the Commission's power under section 4, the customers of a pipeline are entitled to file a complaint concerning the lawfulness of the pipeline's PGA rate increase. Since the enactment of the NGPA and its provision for the pass-through of the producer's prices, however, the scope of that complaint is limited, assuming the producer's prices are within the mandated limits, to a determination whether the amount paid by the pipeline to the producer is excessive due to fraud or abuse. The NGPA further limited the efficacy of a section 4 complaint by reducing the information available to a complainant. Prior to 1978 a customer could easily verify whether the cost of the "new gas" reported by the pipeline in its PGA filing corresponded with the underlying contracts because they were routinely filed with the Commission. Since 1978, however, this verification has been made more difficult because the underlying contracts no longer need to be filed.

C. The Facts

On July 2, 1981 Texas Eastern filed a PGA rate increase with the Commission pursuant to section 4 of the NGA and 18 C.F.R. 154.38(d)(4). The proposed rate was to go into effect on August 1, 1981 for six months and was to increase charges to Texas Eastern's customers by $312 million. The Commission issued a notice of proposed changes in tariffs on July 10 and undertook its review of the filing. Twelve days later, AGD sought leave to intervene on the ground that many of its member companies were customers of Texas Eastern. The gist of AGD's claim was that the underlying contracts should be scrutinized with care because the contractual authority for the proposed PGA rates might not exist. Accordingly, AGD requested that the Commission direct Texas Eastern to furnish those ...

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