Atlantic Seaboard Corporation, Home Gas Company, Kentucky Gas Transmission Corporation, the Manufacturers Light and Heat Company, the Ohio Fuel Gas Company, United Fuel Gas Company, Petitioners, v. Federal Power Commission, Respondent,lynchburg Gas Company, United Gas Improvement Company, Washington Gas Light Company, Commonwealth Natural Gas Company, Dayton Light and Power Company, Intervenors, 404 F.2d 1268 (D.C. Cir. 1968)

Mr. Karl Michelet, Washington, D. C., Attorney for intervenor, Washington Gas Light Company, argued on behalf of all intervenors.

Messrs. James O. Watts, Jr., Lynchburg, Va., Stanley M. Morley, J. David Mann, Jr., and C. Oscar Berry, Washington, D. C., were on the joint brief for intervenors, Commonwealth Natural Gas Co., Lynchburg Gas Co., The United Gas Improvement Co. and Washington Gas Light Co.

Mr. Julian De Bruyn Kops, Dayton, Ohio, was on the brief for intervenor, The Dayton Light and Power Co.

Mr. Robert A. Peavy, Washington, D. C., entered an appearance for intervenor, United Gas Improvement Co.

Mr. Kirk W. Weinert, Washington, D. C., entered an appearance for intervenor, Lynchburg Gas Co.

Before FAHY, Senior Circuit Judge, and BURGER and LEVENTHAL, Circuit Judges.

LEVENTHAL, Circuit Judge:

This is a petition for review of a Federal Power Commission order (Opinion No. 523, 38 FPC 91) in proceedings before the Commission on remand from this court in Lynchburg Gas Co. v. FPC, 119 U.S.App.D.C. 23, 336 F.2d 942 (1964). In Lynchburg the court set aside, for lack of evidence and subsidiary findings supporting the Commission's action, the Commission's order authorizing Atlantic Seaboard, a pipeline affiliate of the Columbia Gas system, to impose a special "partial requirements" rate schedule (PR rates). The PR rates apply only to partial requirements customers, i. e., a customer that obtains gas both from Seaboard and from some other natural gas supplier, and requires such a customer to pay for a minimum volume of gas, both monthly and annually, regardless of whether the gas is used. The minimum purchases so required are determined by application of a formula derived from the customer's percentage usage of its contracted demand from Atlantic Seaboard¹  in a base period prior to its having obtained a second supplier of natural gas.²  The purpose of these PR rates is plain: to restrain the customer from shifting its purchase from its historic supplier to a certified second supplier to the full extent otherwise dictated by the relative costs of gas.

The Commission's original 1962 opinion³  stated that Atlantic Seaboard and the other Columbia Gas subsidiaries⁴  needed these rates to protect them against "deterioration of sales," and that the system's full requirements customers should be protected "from being required to pay the higher rates which may result from the deterioration of some of Columbia's markets." The full requirements customers might need protection because not all of Columbia's fixed costs are recovered by the demand charges. Some fixed costs are recovered by the commodity rate.⁵  Therefore, that part of the pipeline's fixed costs that would have been recovered by higher sales to partial requirements customers will now be spread instead among the continuing purchases, to the economic detriment of the full requirements customers.

In remanding, this court pointed out that the record evidence did not show how many of the Columbia companies' full requirements customers lacked access to a second source or supply; nor did it refute the possibility that any lost sales to partial requirements customers could be made up by sales to other customers, thereby leaving the net market unchanged⁶  and rendering higher rates unnecessary.

On the remand, the Hearing Examiner on his own initiative limited the proceedings to the threshold question whether there was any need whatever for partial requirements rates. The burden of showing a necessity for them was placed on Atlantic Seaboard and the other Columbia companies affected. After hearing extensive evidence from the companies, the Examiner ruled that no such necessity had been demonstrated. In part, his conclusion rested on the fact that Columbia had recently filed restructured tariffs with the Commission — which have since been approved — designed to make the Columbia companies more competitive and to encourage growth of high load factor sales. These tariffs lower the commodity rate and reflect a substantial reduction in the amount of fixed costs allocated to the commodity part of the rates, thus reducing the impact of lost commodity sales on full requirements customers.⁷ 

The Commission upheld the Hearing Examiner's decision. It did not rule out the possibility that "after more experience under its restructured tariff Columbia will be able to design and justify whatever minimum commodity rate, if any, such experience shows to be necessary and desirable." It held merely that Columbia had not provided substantial evidence of its need for such a rate, a burden properly imposed on the rate's proponent. Thus its evidence mainly showed diversions under the old tariffs and was not germane to what could be expected under the new rates. The Commission further stated that Columbia had presented no showing of net loss of base load sales, and that its argument that growth based on peaking service and storage does not serve to offset loss of base load sales was beside the point. At best the evidence showed that the absence of a PR rate might result in a lower growth rate for base load sales than for peaking service, and the Commission held that this was not enough to justify the proposed PR rate.

We turn now to a discussion of the guiding principles that we consider applicable to this case — which arises this time on the petition of Atlantic Seaboard and the other Columbia companies, rather than the consumers — to set aside the Commission's action.

From the preceding statement of the background it is apparent that the Commission's holding was narrowly confined: it did not set forth broad rules to govern these difficult questions of pipeline competition; it merely held that the limited evidence put forward by Columbia, not tested by experience under recently restructured tariffs themselves designed to make shifts of pipeline suppliers unnecessary and uneconomical,⁸  at best showing slower growth rates of base load sales, did not justify these partial requirements rates. It also held that there was not yet sufficient experience under the restructured rates to permit the Commission's staff to suggest some other form of minimum commodity provision.

2. Petitioners contend that in making this determination the Commission felt itelf bound to apply as "law of the case" a "net market loss" test fashioned by this court's opinion in Lynchburg: namely that no PR rates could be justified unless it were established that the Columbia companies' losses to newly certificated competition would not be made up by increased sales elsewhere. Petitioners further contend that this court had no intention of imposing such a test on the agency by its opinion in Lynchburg, and that, if it did, such a judicial imposition of standards would be contrary to well-settled limits on the scope of judicial review of agency exercise of administrative discretion. FCC v. Pottsville Broadcasting Co., 309 U.S. 134, 60 S. Ct. 437, 84 L. Ed. 656 (D.C., 1940); FPC v. Idaho Power Co., 344 U.S. 17, 73 S. Ct. 85, 97 L. Ed. 15 (D.C., 1952).

With the latter two contentions, we are entirely in accord. Problems of inter-pipeline competition are emerging as important substantive questions requiring application of the Commission's expertise.⁹  The considerations are complex and competing. The high fixed costs and immobility of pipeline facilities are economic characteristics of the natural gas industry precluding the sort of competition expected as a norm elsewhere in the economy. However, the Commission may properly look to the existence of some competition, even if entry is limited by legal barriers and regulatory necessity, as an important and effective tool in increasing economic efficiency and quality of service. A primary goal of the Natural Gas Act is cheap gas for the ultimate consumer.¹⁰  A cross-current appears when cheap gas to one group of consumers results in higher prices to another. The extent of this impact will vary depending on innumerable factors, the very reason why the determination of standards is properly for the Commission in the exercise of its regulatory expertise, and not for the courts. Indeed as we have recently noted, fair apportionment of burdens among a utility's varied customers is a problem in many ways more complex and challenging than the question of fair return.

Lynchburg's "net market loss" test was not intended to bind the Commission in its consideration of the nature and extent of economic consequences that may warrant protection of a historical supplier, and full requirements customers dependent on it, from the impact of competition, from a second source of supply — from competition that the Commission must determine serves the public interest.¹¹  As the Columbia companies point out, in economic terms "net market loss" cannot be a decisive test, since the historic suppliers may be hurt in an economic sense by loss of historical sales regardless of whether their growth in other sales brings them back to the pre-competitive level.¹²  Undoubtedly loss of growth confronts a company with economic disadvantage.

The point is, however, that a policy favoring effective competition necessarily brings with it the reality of economic pinch, present or threatened. The presence of a second seller means that the historic supplier loses out on sales it would have otherwise had — assuming the same ardor in promoting sales in a non-competitive setting. It is through the enhanced efforts made by the supplier in response to such pressure that competition reaps its benefits. The hard problem then is not whether competition may hurt but rather where and how to draw the lines of acceptable range of competition and hurt, in response to the economic characteristics and interrelationships of the industry that require regulation in the first place.

In its 1962 opinion the Commission stated it was drawing lines based on protection of full requirements customers from deterioration of their pipeline suppliers' markets, thereby requiring an increase in rates. This court was obliged to remand because the record did not bear out the hypothesis of increase in rates. Nothing indicated whether other sales might not make up for the loss of contribution to fixed costs attributable to decline in commodity purchases by partial requirements customers. If the need for PR rates turns decisively on that consideration of increased rates, then the concept of "net market loss" has broader regulatory significance, particularly for regulation of an industry that is growing fast, and provides a meaningful concept to focus on the realistic possibility that substitute sales may effectively avoid the need for rate increase.¹³  It was the Commission, not the court, that cast the need for protection in terms of avoiding rate increases. And of course the Commission may modify its doctrine¹⁴  or even change its policy.¹⁵ 

Petitioners make the further point that there may be economic disadvantage not only to the supplier but also to the full requirements customers even if no rate increases are required. The point is, simply, that curtailment of sales to the partial requirements customers may keep the rates from being lowered. Full requirements customers and the consumers they serve, are denied the lower price of gas that would obtain if total usage were enhanced by insisting that the partial requirements customers maintain their historical load factor usage. That result may well follow.¹⁶  However, it is often true of legal rules that they define the nature and extent of a protected interest, and compensate for the injury done to that interest, without regard to whether this corresponds to the exact economic injury sustained.¹⁷  Just as competition may pinch the Columbia Gas System, so too may it pinch the full requirements customers tied to that system.

To recapitulate: the question is where the lines are to be drawn in defining the range of acceptable competition, remembering that the consequence of not permitting any competition is to force higher cost gas on partial requirements customers and the consumers they serve. All that Lynchburg held was that, given the Commission's statement as to the consequence of competition it deemed impermissible, its order was not justified by the evidence. Lynchburg does not forbid the Commission to change its criteria, and does not require — either in the context of devising minimum commodity provisions, or in the context of considering certification of a second supplier¹⁸  — that the historic supplier's "net market" position must be damaged or threatened to warrant protection of the supplier in the public interest. The task of determining what interests should be protected, and to what extent, is a policy matter for the agency, utilizing its expertise, to state, defend and apply, subject to the settled rules of judicial review according deference to its standards and applications insofar as they are supported by substantial evidence and are not inconsistent with the statute.

3. We return, in the light of this discussion, to petitioners' contention that the Commission's action reflects a misunderstanding of Lynchburg.

We begin by noting that it is impossible on the record made before the Hearing Examiner to determine how much the Columbia companies will be damaged in the absence of a PR rate by diversions due to presently certificated competition. The extent and consequences of these diversions — both on the Columbia companies and their full requirements customers — cannot fairly be ascertained because there has not been sufficient experience under the restructured tariffs filed by Columbia after the Commission reopened the PR proceedings for further evidence. As stated earlier, these new rates markedly reduce the commodity component of the rate schedule, narrowing the gap between Columbia and its competitors. Restrictions on boiler fuel usage were eliminated. New Winter Service schedules were established permitting summer nominations for winter delivery, and alleviating the purchaser's high cost of meeting winter peaks occasioned by the growth in space heating load. The increase in demand component of the tariff also makes low load factor use of the facilities more expensive. Even the dissenting Commissioner agreed that "this record hardly permits an adequate evaluation of Columbia's proposed partial requirements schedules."¹⁹ 

Therefore, on its face, the Commission's action, refusing to approve the proposed PR rates at this time, but leaving the question open for a time where there has been greater experience with the problem, has all the earmarks of sound administrative action: identifying a problem, deciding that the gas companies affected by it will not collapse by failing to settle it at once and for all time, and leaving the problem for application of administrative expertise when raised again in the light of more experience and more complete facts. Compare American Airlines, Inc. v. CAB, 123 U.S. App.D.C. 310, 359 F.2d 624 (en banc), cert. denied 385 U.S. 843, 87 S. Ct. 73, 17 L. Ed. 2d 75 (1966). That approach in this case still permits the Columbia companies to seek protection against future diversions by intervention in the certification proceeding authorizing competition.²⁰  Furthermore, the required funds for past collections under these rates is small.

It is against that setting that we must consider petitioners' claim that, because of a misunderstanding of Lynchburg, the Commission failed to exercise its expertise. In Lynchburg we held that no evidence other than mere speculation supported the Commission's application of its own substantive standards for justifying a PR rate. We did not challenge those standards. There is nothing to indicate that the Commission changed its position on the remand, as to what economic factors justify a PR rate. The Commission's opinion on remand states that the court in Lynchburg had "identified those substantive economic factors which usually justify a minimum commodity rate." That these usual factors reflect the Commission's requirements, and not the court's, is apparent from the fact that one of them — the minimum take-or-pay obligation which a pipeline has to its suppliers — is not even mentioned in the court's Lynchburg opinion.

The Commission's references to the Lynchburg opinion have sometimes been less than felicitous. For example, in denying rehearing in this case, (J.A. 356): "The court made it clear that a partial requirements tariff would require justification under the criteria which we explained in our opinion." Did the Commission mean that this court was mandating the retention of those criteria — in contravention of well-known principles of the function of a reviewing court? We think not. What we think was meant was that taking as given the criteria explained in the Commission's opinion, the court made it clear that the PR tariff required justification under those criteria. So it does, and so it should. And when and if the agency refines or changes its criteria, rate proposals will have to be justified under them. The nub of this case is that the Commission has held, correctly, that a line proposing a tariff with a requirements feature has a burden of justification. In this case it was held that Columbia had not met that burden as of this time, without prejudice to future application in the light of experience. We think this decision should be

Affirmed.