Opinion for the Court filed by Circuit Judge WALD.
WALD, Circuit Judge:
The petitioners in these consolidated cases seek review of a Federal Energy Regulatory Commission ("FERC" or "the Commission") order authorizing United Gas Pipe Line Company ("United") to impose a so-called minimum commodity bill on one class of its customers. The minimum bill requires United's pipeline customers to pay a penalty if they do not purchase a minimum quantity of gas from United each year. The petitioners, Mississippi River Transmission Corporation ("MRT") and Laclede Gas Company ("Laclede"), argue that the minimum bill does not constitute a "just and reasonable" charge under the Natural Gas Act ("the Act") and that it unlawfully discriminates among United's customers. See 15 U.S.C. §§ 717c(a), (b). Although we uphold the Commission's rejection of the petitioners' discrimination claim, we conclude that FERC's approval of United's minimum bill under its own regulatory standards was not based on substantial record evidence. We therefore set aside the Commission's order and remand for further proceedings consistent with this opinion.
I. THE BACKGROUND
A. Minimum Bill Commodity Bills and Their Regulation
United, a major interstate natural gas pipeline company, supplies gas to three
As FERC has recently observed, the presence of partial requirements and full requirements customers on a pipeline system creates certain difficulties for rate regulation in a competitive market.
Order No. 130, Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Bill Provisions, 49 Fed.Reg. 22,778, 22,780 (June 1, 1984), appeal argued sub. nom. Wisconsin Gas Co. v. FERC, No. 84-1358 (D.C.Cir. Apr. 2, 1985) [hereinafter cited as Rulemaking].
Minimum commodity bills are intended to alleviate this regulatory tension by requiring partial requirements customers to pay some portion of the commodity charge for a contractually specified quantity of gas
The general legal framework for minimum bill regulation was developed in the course of a landmark 1960's dispute that produced two rounds of decisions by both the Commission and this court. In Lynchburg Gas Co. v. FPC, 336 F.2d 942 (D.C.Cir.1964), this court reviewed a Commission order approving a minimum commodity bill under the general rationale that such bills protect a supplier's full requirements customers from potential rate increases resulting from swings. After expressing a broad concern that the anticompetitive impact of minimum bills conflicts with the goals of the Act, we concluded that the Commission could not authorize minimum bills under that general rationale in the absence of specific "subsidiary findings based on the record." Lynchburg, 336 F.2d at 947. In particular, we held that the Commission could not simply assume that a particular minimum bill reasonably accommodated the competing interests of a pipeline supplier's customers without an evidentiary showing that the supplier could not accommodate swings without raising its rates and that specific captive customers will suffer the consequences of increased rates. See id. at 947-48; see also id. at 950 (Washington, J., concurring). We also concluded that the Commission must ensure that the particular minimum bill before it is carefully designed to balance the conflicting interests of full and partial requirements customers and that it is "no more restrictive than necessary." Id. at 947 (quoting White Motor Co. v. United States, 372 U.S. 253, 270, 83 S.Ct. 696, 705, 9 L.Ed.2d 738 (1963) (Brennan, J., concurring)).
In response to the concerns articulated in Lynchburg, the Commission developed its own minimum bill standards on remand. The Commission determined that a minimum bill could be justified if the supplier could demonstrate, on the basis of substantial evidence, that the bill was specifically and narrowly designed to meet one of three goals: "(1) the recovery of that portion of a pipeline's rates which allocates fixed costs to the commodity component, (2) the protection of customers with no alternate supply from having to bear the costs of facilities constructed for a customer which obtains an alternative source, and (3) [the recovery of] the minimum take or pay obligation which a pipeline has to its suppliers." Atlantic Seaboard Corp., 38 F.P.C. 91, 95 (1962), aff'd, 404 F.2d 1268 (D.C.Cir.1968).
In Atlantic Seaboard Corporation v. FPC, 404 F.2d 1268 (D.C.Cir.1968), this court affirmed the Commission's bottom line ruling that the supplier had not justified the imposition of a minimum bill. See id. at 1274-75. We did not, however, hold that the Commission's Atlantic Seaboard standards were mandated by the Act or even that the Commission would necessarily discharge its responsibilities under the Act by determining that minimum bills satisfied those criteria. Instead, we stated that the Commission must ensure that specific minimum bills do not discourage the appropriate level of competition on a particular pipeline system.
Id. at 1272-73. Thus we insisted that the Commission determine, on the basis of substantial record evidence, that a minimum bill is actually necessary to protect the supplier and its customers from too painful a "pinch" of unrestrained competition and that the particular minimum bill proposed is specifically designed to do so. See id. at 1273-74.
The Commission has subsequently attempted to fulfill this mandate by applying its Atlantic Seaboard standards to minimum bill proposals. To conform to our Lynchburg and Atlantic Seaboard opinions, we believe that those standards must be read to require two inquiries concerning any proposed minimum bill. First, the Commission must determine, on the basis of substantial record evidence, that a supplier in fact requires a minimum bill to remedy a regulatory difficulty recognized in Atlantic Seaboard. Second, the Commission must ensure that the particular minimum bill proposed is specifically designed to achieve that remedy, but nothing more. See e.g., Manufacturer's Light & Heat Co., 44 F.P.C. 1219, 1238-41 (1970) (rejecting a proposed minimum bill because the supplier had failed to sustain its "burden of justification" that any bill was necessary to recover fixed costs or to protect full requirements customers and had failed to show that its particular minimum bill was specifically designed to remedy a problem recognized in Atlantic Seaboard).
B. The Proceedings in This Case
Against this regulatory backdrop, United sought to impose a far-reaching minimum commodity bill on its partial requirements customers in 1981. Under that initial bill, United proposed to collect the full commodity charge — including both fixed and variable costs — for at least two-thirds of each pipelines' maximum daily quantity
In an initial decision issued on June 29, 1983, the ALJ rejected virtually every aspect of United's proposed minimum bill. See United Gas Pipe Line Co., 23 F.E.R.C. ¶ 63,125 (1983) [hereinafter cited as ALJ Opinion]. Although the ALJ found that United could impose a minimum bill only on its pipeline customers without violating the anti-discrimination sections of the Act, he concluded that the proposed minimum bill was "fatally flawed at the threshold" because United had not produced substantial evidence that its proposal satisfied the Atlantic Seaboard standards. See id. at 65,349. The ALJ found that United had not produced substantial evidence that it would be unable to recover fixed costs in the absence of a minimum bill. See id. at 65,351. He also concluded that United had failed to demonstrate that it needed a minimum bill to protect its full requirements customers from rate increases or that its specific proposal was narrowly designed to do so. See id. Although the ALJ suggested that United's proposed bill constituted an impermissible restraint on competition in light of Lynchburg, he based his rejection on United's failure to show that any minimum bill was necessary under the Commission's Atlantic Seaboard standards. See id.
After the ALJ's decision, United withdrew its proposal and entered into settlement negotiations with its pipeline customers. Shortly thereafter, United filed a substantially revised offer of settlement concerning minimum bill charges. The settlement bill differs from United's initially proposed tariff in three ways: (1) it collects only the fixed costs allocated to the commodity charge rather than both fixed and variable costs, (2) it computes minimum purchasing obligations on an annual rather than a monthly basis, and (3) it bases minimum quantity obligations on each pipeline's historical purchasing patterns rather than on a percentage of a pipeline's maximum daily quantity. The settlement bill also relieves the pipeline customers of a portion of their minimum payment obligations whenever United goes into curtailment. After United filed the proposed agreement, MRT and Laclede decided to oppose the settlement bill. In its comments, MRT pointed out that United had not developed any evidence concerning the effects of the settlement bill and that the ALJ had specifically found that United had failed to justify the imposition of any minimum bill under the Atlantic Seaboard standards. See Comments of Mississippi River Transmission Corporation in Opposition to Stipulation and Agreement Relating to Minimum Commodity Bill, Docket No. RP82-16-000 (August 18, 1983), Joint Appendix ("JA") at 519-34.
On October 18, 1983, the Commission, without taking additional evidence on the settlement proposal, approved United's minimum bill over MRT's and Laclede's objections. See United Gas Pipe Line Co., 25 F.E.R.C. ¶ 61,088 (1983) [hereinafter cited
In their petition to this court, MRT and Laclede argue that FERC failed to justify the anticompetitive impact of United's minimum bill, that FERC's assertion that the bill satisfied its own Atlantic Seaboard test was not supported by substantial record evidence, and that the bill unduly discriminates among United customers. Although the Commission enjoys substantial discretion in balancing the competing interests involved in natural gas pipeline regulation, see, e.g., Atlantic Seaboard, 404 F.2d at 1271-72, we agree with the petitioners that FERC failed to base the application of its Atlantic Seaboard test to United's bill on substantial record evidence.
II. FERC's APPLICATION OF THE Atlantic Seaboard STANDARDS
United bore the burden of demonstrating that its proposed minimum bill was just and reasonable under the Act. See 15 U.S.C. § 717c(e); Transcontinental Gas Pipe Line Corp., 11 F.P.C. 94, 97 (1952). After considering the extensive record compiled in the initial hearing, the ALJ concluded that "United ha[d] not presented reliable, probative and substantial evidence to show that the proposed minimum commodity bill comports with the standards adopted by the Commission in the Atlantic Seaboard case." ALJ Opinion, 23 F.E.R.C. at 65,351. Although the ALJ was primarily concerned with United's initial proposal, he found that United had failed to produce substantial evidence demonstrating that any minimum bill was necessary to ensure fixed cost recovery or to protect United's full requirements customers. See id. As we explain below, that threshold finding applies with equal force to the settlement bill, and the Commission has neither pointed to any record evidence disputing the ALJ's findings nor explained how the settlement bill cured the evidentiary deficiencies that compelled the ALJ to reject United's initial proposal.
A. Fixed Cost Recovery
As we indicated earlier, see supra p. 948, United's current rate structure guarantees that it will recover at least 25 percent of its fixed costs through the demand charge. United thus theoretically risks underrecovering a portion of the 75 percent of its fixed costs collected by the commodity charge if its overall sales decline dramatically. As FERC has recently noted, minimum bills "have protected pipelines from the risk of underrecovering fixed costs in the commodity component of rates, up to a particular level. As such, they have acted as a kind of additional demand charge." Rulemaking, 49 Fed.Reg. at 22,780. In order to justify a minimum bill under the fixed cost recovery theory embodied in the first Atlantic Seaboard standard, a supplier must at least show that it actually risks substantial underrecovery of fixed costs in the absence of such a bill.
In approving United's minimum bill, however, FERC simply restated the general Atlantic Seaboard rationale without discussing any such showing.
FERC Opinion, 25 F.E.R.C. at 61,297. FERC thus did not point to any record evidence indicating that United was unable to recover "the greater portion" of its fixed costs in the absence of a minimum bill. At the hearing on United's initial proposal, however, FERC's staff witness stated that nothing "in this docket would indicate that United would be unable to recover its fixed costs under its existing tariff without a minimum bill." Winfield Testimony, JA at 836; see also FERC Staff Brief at vii, 11, 17, JA at 315, 329, 335 (noting that United had failed to produce evidence of possible fixed cost underrecovery). The record also suggests that United itself did not seek a minimum bill to shield against the possibility of fixed cost underrecovery.
United advances two arguments why the settlement minimum bill satisfies the fixed cost recovery standard despite the ALJ's ruling. First, United suggests that the ALJ's analysis is largely irrelevant to the FERC order under review because United's initial proposal sought to recover the variable costs as well as the fixed costs allocated to the commodity charge. Yet United must demonstrate a substantial risk of fixed cost underrecovery in order to justify the imposition of any minimum bill, including the settlement bill, under the first Atlantic Seaboard test. See Atlantic Seaboard, 38 F.P.C. at 95. The fact that the settlement bill is narrower than the initial proposal thus cannot alter the ALJ's conclusion that United had failed to make a threshold showing under the fixed cost recovery standard. Significantly, neither party has cited this court to any record evidence indicating that United actually risks substantial fixed cost underrecovery without a minimum bill or supporting FERC's conclusion that the settlement bill was necessary to recover the "greater portion" of United's fixed costs.
Second, United suggests that the settlement bill should be deemed just and reasonable because its current rate schedule is predicated on the fixed cost recovery guaranteed by the bill.
B. The Protection of Full Requirements Customers
In order to justify a minimum bill under the second Atlantic Seaboard standard, a supplier must specifically demonstrate that particular full requirements or captive customers are likely to bear higher overall rates as a result of off-system purchases by partial requirements customers. See Lynchburg, 336 F.2d at 947; Atlantic Seaboard, 38 F.P.C. at 95; supra p. 950. In this case, however, the Commission merely recited the general hypothesis that if United's pipeline customers substantially reduce their purchases from United, its city gate customers might face higher rates if United is unable to increase sales to its other customers, including its nonjurisdictional customers. See FERC Opinion, 25 F.E.R.C. at 61,297. FERC did not attempt to evaluate this general rationale in light of any record evidence concerning the actual effects of swings by United's pipeline customers or United's ability to accommodate such swings without raising its rates. In particular, FERC did not even mention the ALJ's conclusion that "there is no evidence in this record to connect the load loss experienced by United with swings by the [pipeline] customers to justify a minimum commodity bill to protect the full requirements customers from higher rates necessary to recover fixed costs." ALJ Opinion, 23 F.E.R.C. at 65,352 (emphasis added). As we unequivocally held in Lynchburg, FERC cannot justify a particular minimum bill by merely stating the general regulatory rationale for such bills.
As the ALJ found, moreover, the record in this case is devoid of substantial evidence indicating that United needs a minimum bill to protect its full requirements customers from the adverse effects of swings by the pipelines. To begin with, United failed to demonstrate that pipeline swings have been responsible for United's recent load losses. United did present evidence concerning fluctuations in takes by its customers as a whole and load losses in general. See Borque Testimony, JA at 81-98, 100-21, 1023-34. The record also contains evidence indicating that United sells a large portion of its gas to its pipeline customers and that those customers have the capacity to seek cheaper gas supplies from alternative suppliers. See ALJ Opinion, 23 F.E.R.C. at 65,343-44. Yet United made no attempt to quantify, even with minimal accuracy, the extent to which its sales fluctuations have resulted from swings by partial requirements customers rather than from other factors outside the control of its customers. See id. at 65,349.
Similarly, the Commission did not cite any record evidence suggesting that United cannot accommodate pipeline swings without raising its overall rates. Pipeline swings would not force United to raise its overall rates if United could decrease its unit fixed costs or increase its systemwide sales. Cf. ALJ Opinion, 23 F.E.R.C. at 65,344, 65,350-51; see also Lynchburg, 336 F.2d at 947. This court concluded in Lynchburg that "the Commission could not simply assume that disapproval of the [minimum bill] would result in such a serious deterioration of [the supplier's] markets as to necessitate an increase in [the supplier's] general rates and thus place an unfair burden upon [the supplier's] less favorably situated customers.... [T]he validity of [a minimum bill] must be supported by more than judicial speculation that it is justified." Lynchburg, 336 F.2d at 948. By failing to discuss the ALJ's findings or to point to any record evidence concerning the actual applicability of the second Atlantic Seaboard standard to United's minimum bill, the Commission repeated the same mistake it made in Lynchburg.
We therefore conclude that the Commission failed to base its Atlantic Seaboard analysis on substantial record evidence.
III. THE DISCRIMINATION CLAIM
The petitioners also argue that FERC's decision authorizing United to impose its minimum bill on United's pipeline customers, but not on its city gate customers, constitutes unlawful discrimination under the Act.
FERC Opinion, 25 F.E.R.C. at 61,298; see also ALJ Opinion, 23 F.E.R.C. at 65,352 (finding that the record supports the claim that a minimum bill applied only to the pipeline customers does not unreasonably discriminate among United's customers). Substantial record evidence supports this subsidiary finding. See, e.g., Borque Testimony, JA at 914-43, 1154-55; Smith Testimony, JA at 706-18.
Courts have consistently held that differential rate structures do not constitute unreasonable discrimination where substantial evidence indicates relevant differences among general classes of pipeline customers. See, e.g., United Mun. Distribs. Group v. FERC, 732 F.2d 202, 212 (D.C.Cir.1984); Elizabethtown Gas Co. v. FERC, 636 F.2d 1328, 1334 (D.C.Cir.1980); Michigan Consol. Gas Co. v. FERC, 203 F.2d 895, 901 (3d Cir.1953). Accordingly, we uphold FERC's rejection of the discrimination claim. On remand, however, FERC should feel free to revisit this issue in light of its recent actions authorizing two of United's city gate customers to purchase cheaper gas from suppliers other than United. See Southern Natural Gas Co., 30 F.E.R.C. ¶ 61,027 (1985); Natural Gas Pipeline Co., of Am., 30 F.E.R.C. ¶ 61,017 (1985). These actions may indicate that at least some of United's city gate customers are currently not as captive as the Commission concluded. Of course, we intimate no view as to the proper resolution of that issue.
IV. CONCLUSION
Assuming that the Atlantic Seaboard criteria constitute reasonable regulatory standards, we hold the Commission failed to base its application of those standards to United's minimum bill on substantial record evidence. The Commission did not cite or discuss the record that convinced the ALJ to reject United's proposal to impose a minimum bill on its pipeline customers. Neither did it subject United's second proposal to a new hearing despite the petitioners' protests that United had failed to produce record evidence justifying a minimum bill under the Atlantic Seaboard standards. Although the Commission was not required to hold a full scale hearing on the settlement bill, it was unquestionably obliged to support its order through subsidiary findings based on substantial evidence in the record as a whole. See Lynchburg, 336 F.2d at 947; Atlantic Seaboard, 404 F.2d at 1274. The Commission most assuredly did not do that here. On remand, the Commission can develop further evidence concerning United's minimum bill or it can attempt to base its decision on the current record. To fulfill its responsibilities under the Act, however, FERC must apply its minimum bill standards to the actual record evidence concerning United's proposal.
So Ordered.
FootNotes
See FERC Rule 602(h), 18 C.F.R. § 385.602(h) (1984). See generally United Mun. Distribs. Group v. FERC, 732 F.2d 202, 207-210 (D.C.Cir.1984) (discussing Rule 602(h)). Although FERC was thus free to develop further evidence on the contested settlement bill, see e.g., Potomac Edison Co., 17 F.E.R.C. ¶ 61,167 (1981), it decided to approve United's bill on the merits under its Atlantic Seaboard test. See FERC Opinion, 25 F.E.R.C. at 61,298; FERC's Brief at 15 n. 19.
In order to determine that intervening relief or events have mooted a case or controversy, a court must at least be able to conclude "with assurance that `there is no reasonable expectation' that the violation will recur." County of Los Angeles v. Davis, 440 U.S. 625, 631, 99 S.Ct. 1379, 1383, 59 L.Ed.2d 642 (1979) (quoting United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897, 97 L.Ed. 1303 (1953)). Outside the class action context, the defendant must therefore demonstrate that "the same complaining party [will not] be subjected to the same action again." Weinstein v. Bradford, 423 U.S. 147, 149, 96 S.Ct. 347, 348, 46 L.Ed.2d 350 (1975). As the Supreme Court has emphasized, moreover, "the burden of demonstrating mootness `is a heavy one.'" Id. (quoting Grant, 345 U.S. at 632-33, 73 S.Ct. at 897-98). See generally Doe v. Harris, 696 F.2d 109, 111-14 (D.C.Cir.1982) (discussing the Davis standard).
The Commission has not demonstrated that the presence of the reopener clause in the contested settlement agreement satisfies this standard. FERC has given us absolutely no indication that the petitioners will not again be subject to the alleged violation challenged in this case, namely the Commission's failure to account for the anticompetitive impact of United's bill and its failure to base its Atlantic Seaboard analysis on substantial evidence. The fact that FERC has the authority to remedy its alleged shortcomings in reopened proceedings provides no assurance that it will actually do so. Cf. Harris, 696 F.2d at 112-13 & n. 6. See generally Coleman v. Califano, 631 F.2d 324 (4th Cir.1980) (holding that an agency's voluntary decision to reconsider a challenged action does not render a case moot absent a reasonable assurance that the wrong will not be repeated).
Moreover, nothing in the Act requires that pipeline suppliers be insulated from risk or competition through a guarantee of total fixed cost recovery, see FPC v. Natural Gas Pipeline Co. of Am., 315 U.S. 575, 590, 62 S.Ct. 736, 745, 86 L.Ed. 1037 (1942); Consolidated Gas Supply Corp. v. FPC, 520 F.2d 1176, 1180 (D.C.Cir.1975), and a minimum bill that guaranteed complete or substantially complete fixed cost recovery would significantly reduce United's incentives to minimize long-term costs and prices. Cf. United Gas Pipe Line Co., 26 F.E.R.C. ¶ 61,287 at 61,652-53 (noting that United's rate structure is presently designed to result in some cost underrecovery so that United will be forced to cut costs and improve its sales and transportation performance). In this case, the Commission has not explained whether the level of fixed cost recovery ensured by the settlement bill strikes a reasonable balance between the preservation of market incentives for United and its need for a reasonable opportunity to recover prudently incurred fixed costs.
15 U.S.C. 717c(b).
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