UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


SO CA EDISON CO

v.

FERC


97-1450b

D.C. Cir. 1999


*	*	*


Williams, Circuit Judge: Petitioner Southern California  Edison Company
("Edison") is an electric utility, and South- ern California Gas
Company ("SoCal") is a gas distributor--a  local distribution company
or LDC. To supply gas for the  generation of electricity, Edison buys
firm gas transportation  service on the pipeline systems of both El
Paso Natural Gas  Company and SoCal. In a curious way (described
below),  Edison is not only a direct customer of El Paso, but, through
 SoCal, a kind of indirect customer. In 1995 El Paso filed new 
transportation rates with the Federal Energy Regulatory  Commission
under s 4 of the Natural Gas Act, 15 U.S.C.  s 717c, and made an offer
of settlement to which most of its  customers agreed. Edison objected,
raising claims that in a  disputed rate case would have entitled
Edison to a hearing  (according to the unreversed determination of the
administra- tive law judge, El Paso Natural Gas Co., 78 FERC p 63,006 
at 65,131 (1997)). The Commission approved the settlement  as
"uncontested," protecting Edison's interests as a direct  customer by
severing it and allowing it to pursue its objec- tions outside the
settlement. But the Commission denied  Edison any right to either
severance or litigation in its role as  an indirect customer of El
Paso. See El Paso Natural Gas  Co., 79 FERC p 61,028, reh'g denied, 80
FERC p 61,084  (1997). Finding the Commission order inconsistent with


settlement precedents of both the Commission and this court,  we
reverse.


* * *


Edison's role as an indirect customer of El Paso arises  from gas
industry restructuring. SoCal formerly sold gas  both to its "core"
customers (largely residential as we under- stand it) and to non-core
ones such as Edison. As a result of  restructuring, it now sells gas
only to its "core" customers.  SoCal still sells transportation
services to the non-core cus- tomers. Thus Edison buys gas and ships
it via El Paso to  California, and via SoCal to its generating


But because of SoCal's now abandoned sales service to non- core
customers, it had reserved much more capacity on El  Paso and other
interstate pipeline systems than it now needs.  To minimize its loss
on this resource, SoCal sells the surplus  capacity into the secondary
market. Because the available  capacity far exceeds demand, however,
the resulting revenues  fall well below SoCal's cost. See 79 FERC p
61,028 at 61,126.  The California Public Utilities Commission ("CPUC")
allows  it to make up the loss by a charge to its non-core customers 
called the Interstate Transition Cost Surcharge ("ITCS").  See id. at
61,128-29 n.21.


The only issue before us is the propriety of FERC's refusal  either to
hold up the settlement pending resolution of Edi- son's merits claims
as an indirect customer, or to sever  Edison from the settlement in
both its capacities. Edison  argues that the refusal was improper
under both the Commis- sion's precedents and our own. We examine the
two sets of  authorities in turn.


* * *


In United Gas Pipe Line Co., 55 FERC p 61,070 (1991),  reh'g denied, 64
FERC p 61,014 (1993), the Commission al-


lowed indirect customers of a pipeline to block a settlement.  The
Commission here attempted to distinguish United in two  ways. It first
argued that, unlike the indirect customers in  United, whose rates
from direct customers were under  FERC's jurisdiction, Edison "is
concerned about SoCal's rate  to its intrastate customers, ... which
is a matter over which  this Commission has no jurisdiction." 80 FERC
p 61,084 at  61,294. This is blind to Edison's claim. Edison
challenges  the validity of the settlement's allocation of costs to El
Paso's  customers--including SoCal--not the subsequent allocation of 
SoCal's share to Edison. Equally blind is the Commission's  suggestion
that Edison's problems are of its own making, as it  agreed before
CPUC to bear a specified share of the ITSC.  Id. Edison's agreement
before CPUC to bear a share of  costs being determined by FERC cannot
possibly have  waived its rights to challenge the size of the cost it


A similar misunderstanding underlies the Commission's  second proposed
distinction. In United, it said, "[t]he relief  that the objectors
sought would require a different allocation  than the one provided in
the settlement." Id. Rejection of  the settlement was proper because
the indirect customers'  objections went "to the very basis of the
settlement." Id.  Here, by contrast, Edison "can litigate its rate
with El Paso,  without affecting the consenting parties' rate." Id.
This  appears simply to change the subject. Of course the Com-
mission's order lets Edison pursue its objections as a direct 
customer; but that does not enable it to pursue them as an  indirect
customer, even though, so far as appears, they go "to  the very basis
of the settlement" every bit as much as the  objections in United.


Although not raised by the Commission, another possible  distinction
suggests itself. The Commission's order denying  rehearing in United,
after recognizing the general interest of  indirect customers in the
allocation of costs to their immedi- ate upstream suppliers, see 64
FERC p 61,014 at 61,097,  noted the particular unfairness possible if
that settlement  were approved over the indirect customers' objection:
since  the downstream cost-allocation proceedings had not yet oc-


curred, the indirect customers could have challenged the  direct
customers' acceptance of the settlement there, which if  the challenge
were successful would have left these direct  customers "trapped" with
higher costs than they could pass  on. Id. at 61,097-98. But the
current situation seems to  present at least as compelling a scenario:
instead of the  customer in the middle being stuck because of the
upstream  settlement, the indirect customer (Edison) will be stuck
with  the fait accompli of the costs SoCal has agreed to bear.


While United might perhaps be distinguished here, the  Commission has
not done so.


* * *


This court has also found indirect customers entitled to  contest
Commission-approved settlements. Tejas Power  Corp. v. FERC, 908 F.2d
998 (D.C. Cir. 1990), held that the  Commission erred in approving a
settlement, over the objec- tions of indirect customers, solely on the
basis of the direct  customers' approval. We found that these indirect
custom- ers' challenge "triggers the Commission's obligation, under  s
7 of the NGA and s 385.602(h)(1)(i) of its rules, to examine  the
potential impact of the [settlement] upon [the indirect  customers']
interests and to support its conclusions with  substantial evidence."
Id. at 1003.


Of course the Commission might satisfy that obligation  either by
deciding on the merits any genuine issue of material  fact or, if it
were possible, executing a severance that would  fully protect the
objecting party's interests. But Tejas Power  allowed an alternative,
saying that "the Commission must, at  a minimum, address the question
of whether the [direct  customers'] interests are sufficiently likely
to be congruent  with those of ultimate consumers that it may rely
upon the  [direct customers'] agreement as dispositive of the
consumers'  interests." Id. at 1004.


The Commission points to no such congruence of inter- ests here. It
mentioned three sets of parties that agreed to 


the settlement: CPUC and its Nevada regulatory counter- part, El Paso's
customers generally, and SoCal. FERC's  emphasis on the state
commissions' agreement seems to be  based on a misreading of Tejas
Power. We did in fact direct  the Commission to look to the role of
the states, but only in  their capacity as downstream rate-setters,
and thus as possi- ble wielders of power to protect the ultimate
consumers from  being "saddled with unwarranted expenses that the LDC
may  have had little incentive to avoid." See id. at 1004. The 
probability of such protection here has certainly not been 
established. Nor do we see, given the usual limits of agency  staff
resources, why CPUC's approval could be deemed to  rest on any more
penetrating scrutiny than that of FERC  itself.


The support for the settlement from the bulk of El Paso's  customers,
while entitled to "some weight" with the Commis- sion, Laclede Gas Co.
v. FERC, 997 F.2d 936, 946 (D.C. Cir.  1993), is itself not enough,
and would not be even if unani- mous, id.; see also Tejas Power, 908
F.2d at 1003.


As to SoCal, finally, the Commission attempted to make a  showing that
met the standard of Tejas Power for using a  direct customer as a
surrogate for indirect ones--i.e., a  finding that it had interests so
"likely to be congruent with  those of ultimate consumers that [the
Commission] may rely  upon [its] agreement as dispositive of the
consumers' inter- ests, notwithstanding the claim of some large and
sophisticat- ed consumers to the contrary." 908 F.2d at 1004.
Endeavor- ing to show such alignment, the Commission wrote:


We believe there is merit in El Paso's contention that as  a result of
recent decisions by the CPUC and the Califor- nia legislature,
electric energy sold in the future in  California is likely to be
subject to market competition.  LDCs in California may no longer be
able to assume that  they will be able to automatically pass through
genera- tion costs, including gas costs, that they have incurred,  and
any regulatory shield that those LDCs might have  enjoyed in the past
may be diminished. Thus, LDCs, at 


least in California, have an incentive, as do end-users, to  negotiate
the most favorable interstate rate.


79 FERC p 61,028 at 61,130 (footnotes omitted). This seems  to us too
confused to pass muster. First, when the Commis- sion (or its
opinion-writing staff) writes of an LDC having  "incurred" "generation
costs," it leads one to suspect it has  not decided what industry it
is describing--gas distribution or  electricity generation. Second,
competition at the electricity  generation level is completely
consistent with the gas distrib- utor's possessing a monopoly. The
Commission's murmur- ings here are not enough to show a substantial
congruity of  interests.


* * *


The Commission has neither adequately distinguished its  own precedents
nor fulfilled the minimum requirements of  ours. We accordingly grant
the petition for review and  remand the case.


So ordered.