Transcontinental Gas Pipe Line Corp. v. Federal Power Commission

Opinion for the Court filed by Chief Judge BAZELON.

Dissenting Opinion filed by Circuit Judge MacKINNON.

BAZELON, Chief Judge:

At issue in this case is an interim curtailment plan negotiated by the Transcontinental Gas Pipe Line Corporation (Transco) and its customers, in response to the natural gas shortage said to exist on the Transco pipe line. The plan is designed to allocate this gas shortfall among Transco’s distributor customers. One element of the proposed plan is a compensation scheme, whereby those Transco customers curtailed less than the system-wide average would compensate those curtailed more than the average. The Federal Power Commission found the compensation scheme violative of the Natural Gas Act, and therefore rejected the proposed interim plan. This appeal followed.

On August 1, 1975, this court withheld consideration of this case, “until the Commission has completed its own investigation and report to this court of Transco’s claims of reduced reserves. . . . ” On January 19, 1976, the Supreme Court granted certiorari, vacated this court’s order, and remanded with instructions that we should:

either . . . proceed to the merits of the issues presented by the compensation scheme and only thereafter deal with the adequacy of the record in regard to the evidence of shortage, or immediately remand the case to the Commission for the required inquiry.

423 U.S. 326, 96 S.Ct. 579, 46 L.Ed.2d 533 (1976). On February 6, 1976, we followed the latter course and remanded to the Commission: ¹

[W]ell aware that the Commission has disapproved this compensation scheme rather than approved it, we do not see how we can fairly weigh the legality of that decision unless the record contains a basis for our deciding whether or not the agreement was a truly voluntary response to an actual shortage. No such basis is provided absent the Commission’s investigation of the shortage question and findings of fact on this issue which can be properly reviewed by this court.

Memorandum accompanying Order of February 6, 1976, at 4-5.

Because we find that the information provided by the Commission on return of remand is still inadequate we must, reluctantly, remand the record once again.

I. DEFICIENCIES ON PRIOR REMAND

On remand, in an attempt to expand the record to establish proof of an actual gas shortage, the parties entered into a stipulation of “facts [which] demonstrate that Transco has had, and continues to have, a necessity to curtail service to its customers. . ” Among the recitations was that, “The annual volume of natural gas available from Transco’s producer-suppliers has been declining since 1971 and has been and continues to be, insufficient to enable Transco to satisfy the certificated requirements of its customers. . . . ” In support of the accuracy of this statement, the stipulation summarizes the affidavit of FPC staff witness, Wayne M. Thompson, a geologist in the Gas Supply and Production Section of the Bureau of Natural Gas. Thompson testified that staff initially undertook a review of the delivery capability of 18 fields connected to the Transco pipeline system and responsible for 12% of its supply. Thompson concluded that “Transco’s projections of deliverability are reasonably accurate, although somewhat lower than our own.” Affidavit at 2. He further concluded that “if the fields studied are representative of the entire Transco supply,” then “curtailment on Transco’s system will be necessary, roughly to the extent Transco itself has stated.” The stipulation also recites that Thompson “stated that a further staff review of 19 additional fields accounting for approximately 9% of Transco’s gas supply did not change his opinion. . . . ” Stip. at 2.

The Administrative Law Judge certified the stipulation to the Commission, along with relevant record evidence. On June 25, 1976, the Commission issued an eight-page order with these underlying materials as attachments. The principal Commission finding states,

Upon consideration of the mandate of the remand by the Court of Appeals and the record evidence properly before the Commission we find that a natural gas supply shortage has in the past and continues to exist on Transeo’s system which has necessitated some curtailment of service to Transco’s customers.

Order of June 25, 1976, at 8.²

We find that the record here, even as supplemented on remand, lacks the “ ‘substantial evidence’ . . . necessary to support any such finding [of shortage] by the Commission.” 423 U.S. 331, 96 S.Ct. 582 (1976). This court has previously suggested that the existence and legitimacy of shortage on the Transco system could best be proven by thorough examination of the pipeline’s proved reserves. But the Commission order on remand, while finding that a natural gas supply shortage has existed and continues to exist, does so exclusively in terms of “deliverability.” The Commission states that “deliverability (the amount of gas capable of delivery in a fixed time period) evidence is more relevant to the issue of need for curtailment than is evidence on total proved reserves.” Order, supra, at 7. Deliverability may, indeed, be “more relevant” to the question of whether curtailment is required on any given day; however, it seems clear that at least some explanation of the relationship between Transco’s present deliverability crisis and its proved reserves, and the reasons for Transco’s alleged inability to bring sufficient gas onstream, is required in order for the Commission and a reviewing court to be able to assess the nature, extent, and duration of shortage.

Diminished deliverability does not necessarily constitute substantial evidence of actual and legitimate long-term shortage if, for example, a pipeline or producer could, by more or less simple acts, make its proved reserves more deliverable. Similarly, diminished proved reserves may not support a finding of long-run shortage if by physically and economically achievable acts lying entirely within the control of a pipeline or producer, sizeable reservoirs of gas might be moved from the “possible” or “probable” categories into the category of “proved reserves”.³

In a related context, the Commission has noted that the need for curtailment may arise in two legally distinct situations. In the first, reduction of service comes about because of government-ordered curtailment “necessary as a result of the [legitimate] gas shortage.” In the second, “the pipeline’s need to curtail resulted from its own negligence, bad faith, or other wrongful conduct.” See United Gas Pipeline Co., 49 F.P.C. 1211, 1220 (1973). We fail to see how the Commission can distinguish between these two shortfall conditions employing deliverability data alone.

However, even assuming that the deliver-ability data now in the record constituted proof of Transco’s immediate shortage sufficient to justify curtailment of some sort, a determination of the legality of compensation would require a broader base of information.

II. SCOPE OF THE PRESENT REMAND OF RECORD

Because of ambiguities in the Commission orders of November 12, 1974, and January 10, 1975, we are unable to determine whether the Commission concluded that all like compensation plans employed in the context of end-use curtailment would be barred by the Act, or whether instead it concluded only that this particular plan is improper.⁴ But whether the opinions are intended to be read broadly or narrowly, we believe it is clear that any proposed compensation plan cannot be measured against the strictures of § 4 of the Act⁵ without substantial information regarding the duration, shape and causation of the alleged shortage on the Transco system. Such information is simply not provided by deliver-ability data alone. We believe that the legality of compensation may well turn, at least in part, on answers to the following sorts of questions: Are sufficient volumes of gas available as proved or provable reserves so that greater total deliverability can be foreseen in the short-term future? Are present levels of curtailment likely to continue for the indefinite future, or to deepen? And more specifically: will compensation be a short-term financial adjustment between customers of the pipeline to keep some of those customers financially afloat until the supply situation stabilizes, or will it be a permanent cross-subsidization? We believe that without such information, neither the Commission nor the court can hope to give meaning to statutory terms such as “rates,” “charges,” and “classes of service” in a regulatory landscape vastly altered by end-use curtailment.

III. CONCLUSION

In remanding the case to this court, the Supreme Court noted, “. . . it is at least conceivable that the Court of Appeals could determine that the lawfulness of the proposed compensation scheme is partially' a function of the actual severity of the shortage.” 423 U.S. 334, 96 S.Ct. 584 (1976). This court has so determined, as we suggested in our order of February 6, 1976. The additional information we now require in this second remand of the record is necessary to determine how Transco is marshaling its resources and proved and provable reserves to produce maximum deliverability in the future. Only when the anticipated duration and shape of the shortage is in better perspective will this court be able to assess the legality of the compensation scheme at issue here. The Clerk is instructed to remand the record herein to the Federal Power Commission for supplementation in accordance with this opinion.

So ordered.

1 . Notwithstanding our local Rule 13(d) governing remands “of the record” and “of the case” or the specific Supreme Court language we quoted in our February 6 order, and in light of the Supreme Court’s purpose here of remand for supplementation of the record, we do not read our prior order as surrendering jurisdiction. Upon the Commission’s motion to lodge its order of June 25, 1976 and attached documents, the court determines to treat the motion as a motion to file and to supplement the record in a case over which it has on-going jurisdiction, and as such grants it.

2 . This finding negates the dissenter’s view that “If Transco has curtailed its customers in the past, or does so in the future, because of any shortage which is fictitious or self-induced, or in any way wrongful, it can be sued for damages.” Dissent at 4. We note that a recent FPC news release indicates that in the gas year just ended (April 1975-March 1976), Transco was curtailing 35% of firm requirements systemwide. FPC Report of June 18, 1976 on 1976-77 Projected Natural Gas Pipeline Curtailments, Schedule I of Bureau of Natural Gas Staff Report. For the current gas year (April 1976-March 1977), Transco projects a deficiency of 42.98% of firm requirements. Id. Plainly the question of whether a shortage is “fictitious,” “self-induced,” or “in any way wrongful” is not simply a related or future question, but goes to the heart of the propriety of compensation.

3 . Gas which could be so moved into “proved reserves” will be termed “provable” throughout this opinion.

4 . There would appear to be serious questions about the validity of a broad ban on all compensation plans. See Mississippi Public Service Commission v. FPC, 522 F.2d 1345 (5th Cir. 1975), cert. denied, 429 U.S. 870, 97 S.Ct. 181, 50 L.Ed. 149. In that case the Fifth Circuit set aside an FPC order denying extraordinary relief from a curtailment plan. The relief sought consisted of a compensation plan, and the Commission denied the relief because it concluded that it lacked jurisdiction to order or approve any plan of compensation. The court disagreed, holding that “the imposition of compensation payments as a condition for the receipt of higher priority gas is within the statutory power of the FPC . . . Id. at 1350.

5 . The overarching requirement of the Natural Gas Act is that all rates and charges by natural gas companies subject to FPC jurisdiction, and all governing rules and regulations, must be “just and reasonable,” and those that are not are deemed unlawful. § 4(a). Under the compensation plan at issue in the instant case, the pipeline’s distributor customers would pay differing prices for gas depending upon whether they were being curtailed more or less than the systemwide average. A threshold determination, therefore, would be whether the financial burdens and benefits related to compensation constitute “rates” or “charges” within the reach of § 4(a) for regulatory purposes.

Although we need not now reach this issue, we note that the Fifth Circuit has determined that such payments do not constitute “rates”: “[C]ompensation payments are not ‘rates’ but in the nature of surcharges imposed in the context of a curtailment plan to insure that the burdens of curtailment are spread evenly and equitably among those affected . . . Mississippi Public Service Commission, supra, at 1350. The court suggested that “compensation plans are more analogous to the penalty payments included by the Commission in various curtailment plans to deal with the problem of overtakes.” Id. “Surcharges” and “penalty payments,” however, suggest limited application of a pricing mechanism for a short duration to achieve a clearly defined purpose; higher prices for gas sold as emergency relief or improperly taken in excess of curtailment, may not necessarily be analogous to varying permanent prices for gas allocated by the curtailment plan itself.

Assuming that compensation payments were found to be regulable “rates” or “charges,” they would have to meet the non-discrimination requirements of § 4(b) of the Act, as well as the “just and reasonable” test of § 4(a). Section 4(b) provides:

(b) No natural-gas company shall, with respect to any transportation or sale of natural gas subject to the jurisdiction of the Commission, (1) make or grant any undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage, or (2) maintain any unreasonable difference in rates, charges, service, facilities, or in any other respect as between localities or classes of service.

15 U.S.C. § 717c. Determining whether compensation fees (if held to be regulable “rates” or “charges”) constitute undue preference or disadvantage, or involve unreasonable differences as between localities or classes of service would be difficult. It is unclear, in the context of deep end-use curtailment, what the statutory phrase “classes of service” has come to mean. For example, when two distributor customers of a pipeline have vastly different consumer loads, one with mostly high priority volumes and transacting near-normal business, the other selling almost no gas because its mostly low priority volumes have been fully curtailed, are they similarly situated from the perspective of § 4(b)(2) simply because the underlying contractual terms of sale from the regulated pipeline are identical? Upon decision of this question may turn the lawfulness of differing gas prices charged those distributor customers under compensation.