Corning Glass Works, Petitioner, v. Federal Energy Regulatory Commission, Respondent,columbia Gas Transmission Corporation, Ugi Corporation,washington Gas Light Corporation, Intervenors.public Utilities Commission of Ohio, Petitioner, v. Federal Energy Regulatory Commission, Respondent,people's Counsel of Maryland, Public Service Commission Ofmaryland, Ugi Corporation, Baltimore Gas and Electriccompany, Washington Gas Light Company, Public Servicecommission of the State of New York, Columbia Gastransmission Corporation, Intervenors, 675 F.2d 392 (D.C. Cir. 1982)

INTRODUCTION

In response to the 1970s shortage in interstate natural gas supplies, Columbia Gas Transmission Corporation (Columbia), an interstate natural gas pipeline company, introduced into its system revaporized liquefied natural gas (LNG) imported from Algeria.¹  This Algerian LNG has a higher heating value and specific gravity than the domestic natural gas Columbia historically supplied to its customers.²  Absent modification of the gas by Columbia, or adjustments of systems or equipment by distributors or end users, these qualities of the LNG could adversely affect customers who received more than a de minimis amount.³  Modification of the LNG prior to its introduction into the pipeline would have entailed large costs. See J.A. 12-13, 94. Columbia therefore made no modifications itself. It introduced the LNG directly into its pipeline system and left the necessary conversion costs to affected customers. The adjustments required could be made by the distributor, Columbia's direct (wholesale) customer, or by indirect (retail) customers, those who purchased Columbia's gas from a distributor. Due to the configuration and flow characteristics of the Columbia system, relatively few local distribution systems received the LNG. Most continued to receive gas from Columbia's traditional source in the Southwest.

In a multi-faceted proceeding on rate increases proposed by Columbia, the Federal Energy Regulatory Commission (FERC or Commission) considered whether the costs incurred as a result of the introduction of LNG should be spread systemwide. The Commission reasoned that all who received Columbia's gas had benefited from the increased supply. It therefore determined that distributors (wholesale customers) who incurred conversion costs to accommodate the LNG should be reimbursed by Columbia; in turn, Columbia was to allocate and recoup these costs pro rata from all of its wholesale customers. Distributors may be reimbursed under FERC's order if they paid conversion costs themselves, or if a state commission requires them to reimburse conversion costs paid by their retail customers. FERC declined to order reimbursement to distributors for conversion costs paid by retail customers where the distributor had incurred no expense and the state commission had not directed the distributor to reimburse the retail customer.⁴ 

The petitions before us do not challenge major portions of FERC's decision-the determination to spread among all distributors LNG-associated costs directly incurred by the distributors whose systems received the Algerian gas, the standard governing reimbursement, application of that standard to distributors who presented costs for reimbursement, and the mechanism for verification of costs later claimed. Nor is it disputed that Columbia chose the least costly means of handling the LNG supply. The toll systemwide would have been considerably higher had Columbia itself essayed the modifications. J.A. 12-13, 94. The controversy we face is limited to the Commission's treatment of costs incurred by the distributors' customers, retail purchasers of Columbia's gas. On that aspect of FERC's disposition, the petitioners take diametrically opposite positions.

The Public Utilities Commission of Ohio (Ohio P.U.C.) maintains that FERC has no authority at all to deal with LNG conversion costs incurred by retail customers; FERC is powerless to act, Ohio P.U.C. argues, even when a state commission directs the distributor to pick up the tab. Corning Glass Works (Corning), in contrast, urges that FERC may and should establish a basis for cost recovery by all distributors whose retail customers incurred conversion costs, whether or not state action has been taken to shift the costs to the distributor. Ohio P.U.C. would have us cut back FERC's order and confine it to costs directly incurred by distributors. Corning would have us instruct the Commission to enlarge its order to provide for reimbursement to distributors, even when they are not out-of-pocket, if their retail customers incurred conversion expenses.

We conclude that FERC appropriately exercised its authority under section 1(b) of the Natural Gas Act, 15 U.S.C. § 717(b), to regulate "the sale in interstate commerce of natural gas for resale," but not "the local distribution of natural gas." See infra note 9. Accordingly, we join the presiding administrative law judge, who rendered the initial decision, and the Commission in rejecting the opposing positions tendered to us in the petitions for review.⁵ 

Ohio P.U.C. asserts, and the Commission does not dispute,⁶  that FERC lacks statutory authority to regulate local distribution companies and their retail customers, to decide initially whether the retail customer or the distributor should bear the costs of conversion, or to order Columbia to reimburse retail customers directly for their conversion expenses. Relying on these premises, and arguing that FERC may not "accomplish indirectly that which is beyond its authority to accomplish directly," Ohio P.U.C. concludes that the Commission is powerless to "remedy the inequities perceived." Ohio P.U.C. Brief 12, 13. FERC has no back door jurisdiction, Ohio P.U.C. insists, to follow up a state commission order directing a distributor to recompense conversion costs paid by its retail customers with a FERC order directing the pipeline to reimburse the distributor. The state commission order is action wholly within the state's domain and such state action, Ohio P.U.C. contends, is untouchable by FERC.

Ohio P.U.C. misperceives the nature of the Commission action at issue. Under section 4 of the Natural Gas Act, 15 U.S.C. § 717c, it is FERC's charge to insure that all rates within its purview are just and reasonable⁷  and that no rate is unduly discriminatory.⁸  In the decisions under review, FERC concluded that unless the LNG conversion costs directly or indirectly incurred by a distributor were spread systemwide, Columbia's rates as to that distributor would be unduly discriminatory, unjust and unreasonable. J.A. 30, 37-38, 93, 124. It therefore ordered such distributors reimbursed. See supra pp. 393-394. FERC's action, correctly comprehended, is clearly within its statutory authority; in essence, the Commission did nothing more than set the rate for a "sale in interstate commerce of natural gas for resale for ultimate public consumption...." 15 U.S.C. § 717(b).⁹ 

From the vantage point of assuring that Columbia's rates to distributors are just and reasonable and not unduly discriminatory, it is immaterial whether the LNG conversion costs were initially incurred by the distributor or by an end user to whom reimbursement from a distributor was ordered by a state commission. The result in both situations is the same: the distributor has shouldered alone a financial burden that other distributors, with no right to preferential treatment, have escaped. And FERC's remedy for the undue preference in both instances is the same: spread the costs systemwide to insure that Columbia's interstate wholesale rates are just and reasonable and not unduly discriminatory.¹⁰  It is well settled that the Commission may consider nonjurisdictional activities and transactions (here, the retail customer's costs and the reimbursement order of the state commission) "when it fixes the rates for interstate wholesale sales which are subject to its jurisdiction." Panhandle Eastern Pipe Line Co. v. FPC, 324 U.S. 635, 646, 65 S. Ct. 821, 826, 89 L. Ed. 1241 (1945). Cf. FPC v. Conway Corp., 426 U.S. 271, 96 S. Ct. 1999, 48 L. Ed. 2d 626 (1976).¹¹ 

We therefore conclude that the Commission did not act beyond its authority when it decided that a distributor is entitled to reimbursement if a state commission orders the distributor to bear conversion costs initially incurred by end users. We now turn to Corning's contention that the Commission erred in failing to order reimbursement when the state commission has not ordered the distributor to recompense its retail customers.

Corning accepts for purposes of its current controversy with the Commission¹²  FERC's lack of authority to "directly order a wholesale customer (distribution company) of a regulated pipeline company to reimburse the distribution company's customers (consumers)...." Corning Brief 37. Accordingly, Corning did not seek a Commission decree ordering Columbia or the distribution company that sold Columbia's gas to Corning, Shenandoah Natural Gas Company (Shenandoah), to reimburse Corning for its conversion costs. Id. at 38; J.A. 118. Rather, Corning urged FERC to adjust, to the extent Corning had incurred conversion expenses, the price Columbia charged Shenandoah for LNG even though Shenandoah has not, voluntarily or pursuant to direction by state authority, reimbursed Corning.¹³ 

Because Shenandoah has borne no loss, the Commission declined to make the adjustment Corning sought. FERC agreed with the analysis of the administrative law judge, J.A. 98, who reasoned that only after state authority had imposed the end user's costs on the distributor could such costs "create undue discrimination with respect to other direct wholesale customers of Columbia.... (T)he Commission then could find that such costs should be reimbursed by Columbia and spread system-wide to eliminate the undue discrimination." Id. at 21. However, until the distributor is out-of-pocket, the Commission could not conclude that the wholesale rate the distributor paid Columbia occasioned undue discrimination. In so viewing the matter, FERC recognized that it is for the states to say whether rates charged by distributors to retail customers are just and reasonable. In respecting state regulatory authority and declining to forecast action by state commissions, FERC, approving the ALJ's initial decision, exercised "sound discretion." See id. We believe FERC displayed proper sensitivity to the federal-state regulatory ambits involved and did not err in refusing to alter the wholesale rate before a distributor has borne any loss.¹⁴ 

Texas Eastern Transmission Corp. v. FPC, 414 F.2d 344 (5th Cir. 1969) (Texas Eastern II), cert. denied, 398 U.S. 928, 90 S. Ct. 1817, 26 L. Ed. 2d 89 (1970), cited by Corning, does not warrant a different result. During the period 1961-64, Texas Eastern, an interstate pipeline carrier of natural gas, had paid rate increases to its suppliers. Texas Eastern had not passed these rate increases on to its distributor-customers in the form of higher prices. Ultimately the suppliers' rate increases were held unlawful; the suppliers were ordered to refund the amounts collected pursuant to these excessive rates. See Texas Eastern Transmission Corp. v. FPC, 357 F.2d 232, 233-35 (5th Cir. 1966) (Texas Eastern I) .

The FPC then concluded that Texas Eastern had earned more than a reasonable rate of return for the years in question. It therefore ruled that Texas Eastern was not entitled to the refunds and ordered the pipeline to pass them on to its distributors, through rates within the Commission's jurisdiction. The Commission believed that by ordering this pass on, "it was serving the statutory purpose of the Act of benefitting ultimate consumers by placing the refunds within the jurisdiction of the state regulatory authorities so as to place them in position to benefit the ultimate consumers." Texas Eastern II, 414 F.2d at 350. The Fifth Circuit affirmed this order both as an action within the FPC's statutory authority and as a product of rational decisionmaking. Id. at 348-50.¹⁵ 

The Commission here has ruled that the rate paid by a distributor to Columbia is not unduly discriminatory, unjust or unreasonable if that distributor has not incurred, directly or indirectly, any modification costs. In contrast to the situation in Texas Eastern,¹⁶  there are currently no refunds to be disbursed as a result of Columbia's sales to Shenandoah. FERC determined that a reallocation of costs among the pipeline's wholesale customers fairly should depend on assurance that distributors awarded reimbursement are in fact obligated to pay the amount reimbursed. We find that determination both consistent with the Commission's responsibilities under the Natural Gas Act and a rational solution to the part of the problem generated by Columbia's introduction of Algerian LNG that is before us for review.

CONCLUSION

For the foregoing reasons, the opinions under review in this case are

Affirmed.