HENDERSON, Circuit Judge:
United Gas Pipe Line Company (hereinafter referred to as "United") and the State of Louisiana petition for review of the Federal Energy Regulatory Commission's (hereinafter referred to as "the Commission")
It is the Commission's statutory duty to insure that the rates, charges and practices of natural gas companies are just and reasonable. Natural Gas Act (NGA) §§ 1(b), 4, 5, 15 U.S.C.A. §§ 717(b), 717c, 717d. As this case demonstrates, review of rates and practices is quite complicated and oftentimes appears interminable. The Commission has developed numerous time saving mechanisms in a laudable effort to ease the regulatory burden. Since 1972 it has permitted pipelines to include purchased gas
The Commission accepted United's PGA clause, with certain modifications, in 1972. 48 F.P.C. 413, rehearing denied, 48 F.P.C. 749. United was authorized to adjust its rates twice a year and to allocate its increased costs to jurisdictional customers in proportion to their total purchases from United during the PGA period. The Commission has now ordered United to cease charging the costs of its emergency gas purchases to its customers on a proportional, or rolled-in, basis.
When it became clear that shortages might require pipelines to curtail deliveries, the Commission issued regulations permitting pipelines to make short-term emergency purchases without prior Commission approval. 18 C.F.R. §§ 2.68, 157.29; see 18 C.F.R. §§ 157.45-.52. The regulations permit pipelines to buy emergency gas for system-wide supply, 18 C.F.R. § 157.48(d)(1), or to make purchases at the request of particular customers and assign the associated costs directly to individual requesting customers, 18 C.F.R. § 157.48(d)(2)(i), or to all requesting customers on a weighted average cost basis, 18 C.F.R. § 157.48(d)(2)(ii). The Commission accepted United's PGA clause after issuance of the emergency-gas regulations, and specifically provided that United could recover the costs of its emergency purchases through PGA adjustments. 48 F.P.C. at 414.
United recently encountered such severe supply shortages that it had to cut back deliveries. This court approved a curtailment plan for United in Southern Natural Gas Co. v. FPC, 543 F.2d 530 (5th Cir. 1976). The plan divides United's sales into three classes according to end use — gas ultimately consumed by domestic customers (priority I); gas used as feedstock by direct industrial customers (priority II); and gas for all other industrial purposes, including gas to generate electricity (priority III). United must satisfy all priority I demand before it sells any gas to priority II customers, and must meet all priority II needs before furnishing gas to priority III customers.
On May 16, 1972, United submitted new tariffs for PGA recovery of the cost of emergency gas purchased during the winter. Brooklyn Union Gas Company and Elizabethtown Gas Company petitioned the Commission for permission to intervene. These intervenors are indirect distributor customers of United. They buy gas from pipelines which in turn procure their supply from United. They insisted that in light of United's curtailment plan proportional allocation of the cost of United's emergency purchases among all customers, through PGA recovery, would be unduly discriminatory and, consequently, a violation of the Natural Gas Act. Order of August 11, 1977, at 2. The demand of high priority customers could be satisfied from the gas supply normally available to United,
The Commission granted intervention and conducted an investigation under the authority of N.G.A. § 5, 15 U.S.C.A. § 717d.
Order at 13. The Commission left the door open for modification of the order in the event of changed circumstances. Id.
The petitioners do not maintain that United has an absolute right to recover its emergency-gas expenditures on a rolled-in basis. Nor do they claim that the Commission cannot prevent pipelines from transporting such gas except as brokers for individual customers. They do insist that the Commission has failed to make an adequate explanation, and, more fundamentally, that it has unlawfully discriminated by allowing all other pipelines to purchase emergency gas for system-wide consumption while denying United that option. The Commission did specify its reasons, however, and it has not unfairly discriminated against United.
The parties agree that a regulatory agency must investigate when anticipating significant action and, after considering all the relevant material, articulate the reasoning behind its decision. Our first question focuses on whether the Commission adequately explained the basis of its decision.
Broadly speaking, the Commission found two basic faults in United's pricing system: (1) it resulted in gross discrimination against high priority customers, and (2) it failed to encourage conservation of natural
Section 5(a) of the Natural Gas Act, 15 U.S.C.A. § 717d(a), requires the Commission to ferret out and remedy "unduly discriminatory" practices. Under United's court-ordered curtailment plan "high-priority customers have experienced very little curtailment." Order at 8.
If the finding of discrimination is a corollary of the curtailment plan, the Commission's second consideration — that brokered sales of emergency gas will serve to promote the efficient use of gas by United's customers — may be said to follow from some of the same conclusions that went into the formulation of he plan.
The conflicting interests of those involved and the many, often inconsistent goals the planners would effectuate make the design of a satisfactory curtailment plan extremely difficult. With United's plan the primary determinant of the priority assigned a given class of customers was elasticity of demand. Those with alternative energy sources and those who could most easily reduce consumption or deal with supply disruptions were given the lowest priority and are the first to be curtailed. See Southern Natural Gas Co.
When a curtailment plan groups customers according to their ability and willingness to find substitute fuel, the goal of encouraging efficient utilization of gas will be further served by allocating high cost gas to low priority customers. Although the Commission was not free to uncritically impose high cost gas on low priority customers, cf. Elizabethtown Gas Co. v. FERC, 575 F.2d 885 (D.C.Cir.1978); Fort Pierce Util. Auth. v. FPC, 526 F.2d 993 (5th Cir. 1976); Mississippi Pub. Serv. Comm'n v. FPC, 522 F.2d 1345 (5th Cir. 1975), cert. denied, 429 U.S. 870, 97 S.Ct. 181, 50 L.Ed.2d 149 (1976) (Commission has jurisdiction to order high priority customers to compensate curtailed low priority customers for their off-line purchases, and must develop its record on the issue), here the Commission specifically found that allocating high cost emergency gas to United's low priority customers will encourage them to find substitute fuels and make more efficient use of the gas they do receive. Order at 8.
This brings us to the petitioners' second major contention that the Commission unfairly singled out United from among all other pipelines.
To a great extent the Commission's decision was predicated on assumptions that could be broadly applied to the area it regulates. The petitioners point out that if these assumptions are valid with respect to United they are equally true for all other pipelines. Hence, they insist, the Commission cannot with any degree of consistency allow all other pipelines to continue using rolled-in pricing of emergency gas while denying United the same privilege.
United would have us characterize the order as the Commission's first departure from a long established practice of allocating pipeline costs to consumers on a rolled-in basis. To be sure, the order itself noted that as a general matter "The Commission has historically favored the rolled-in approach for cost allocation [citations omitted]." Order at 10. However, as the Commission also noted, where a pipeline's compensable services have benefitted particular customers to the exclusion of the rest, the associated costs have been placed directly on the served customers. Order at 11; Order of August 11, 1977, at 3. The Commission's point is well taken. Its reported opinions show that it has not hesitated to require direct cost allocation rather than "blindly adhere to a principle [of rolled-in pricing that would] lead to unfair and inequitable results." Colorado Interstate Gas Co., 19 F.P.C. 1012, 1021 (1958); accord, United Gas Pipe Line Co., 31 F.P.C. 1180, 1197 (1964) (rolled-in pricing too disruptive although usually favored); Natural Gas Pipeline Co. of America, 12 F.P.C. 708, 720-21 (1953) (new customers pay for new gas); see Battle Creek Gas Co. v. FPC, 281 F.2d 42, 47 (D.C.Cir.1960); Panhandle Eastern Pipe Line Co., 13 F.P.C. 53 (1954) (segregated facilities). It is true that these cases did not govern allocation of the cost of emergency gas, but they do evidence Commission recognition that the administrative convenience of rolled-in pricing cannot justify unfair results.
The regulations give a pipeline the option of brokering emergency gas for specific customers, and, as United admits, several pipelines already sell gas as brokers. United mentions that those pipelines still have an option that it has been denied — i. e. to include emergency gas in system-wide supply. What the petitioners seem to miss is that by brokering high cost gas other pipelines have avoided the rate discrimination condemned by the Natural Gas Act. The Commission probably cannot eliminate all discrimination in service, but it should, and under the Act must, eliminate such substantial discrimination as existed under United's rate schedule.
The Commission was also motivated by its desire to encourage efficient use of natural gas. If the Commission's analysis is correct, the efficient use of scarce resources will always be encouraged by charging higher prices to those users who can cut consumption or find less expensive alternatives. Cf. Subchapter II of the Natural Gas Policy Act, 15 U.S.C.A. §§ 3341-3348 (1980 Supp.) (pipelines to pass through cost of some deregulated gas to boiler fuel users). It does not follow that those customers assigned to a curtailment plan's lowest priority will always have a highly elastic demand for gas. Some users are placed in a particular curtailment class not because of their ability to secure alternative sources of energy, but because of the perceived contribution of their activities to the public good. Thus, a fertilizer producer with no alternative feedstock may find itself in line behind a hospital which could locate alternative sources of heat, albeit at a substantial cost. Compare FPC v. Louisiana Power & Light Co., 406 U.S. 621, 92 S.Ct. 1827, 32 L.Ed.2d 369 (1972), with Southern Natural Gas Co. (boiler fuel used to produce electricity). As pricing priority should follow curtailment priority only to the extent that curtailment priority was developed with reference to elasticity of demand, a detailed examination of a pipeline's entire operations is appropriate before the Commission precludes rolled-in pricing.
SAM D. JOHNSON, Circuit Judge, specially concurring:
Although this writer joins in the majority opinion in this case, I wish to specially concur, not on a point of law, but on a matter of policy. Rather than permit the pipeline to "roll in" the cost of emergency gas supply purchases to all its customers, FERC ordered the pipeline either to incrementally
FERC's order is but one example of an increased willingness to experiment with market-like allocations within a regulatory framework, all toward the goal of refining and improving traditional administrative regulation of the allocation of scarce resources. This trend of innovation has already been approvingly commented on in the legal literature.
H. Williams & C. Meyers, Oil and Gas Terms 508-09 (4th ed. 1976).
The Commission also observed that the curtailment plans of United's pipeline customers, who can still use rolled-in pricing, may result in similarly situated end users paying different prices for gas. The Commission felt that in this case, where the resulting disparity was "far less severe" than that existing under United's rate tariff, this inequality could be overlooked. Order at 10. Should the problem prove to be more severe, the Commission may choose to make adjustments. In any case, there can be no argument that such disparity justifies illegal discrimination by United.