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


MUNI DEF GRP

v.

FERC


97-1673a

D.C. Cir. 1999


*	*	*


Randolph, Circuit Judge: On May 1, 1997, Texas Eastern  Transmission
Corporation filed tariff revisions with the Fed- eral Energy
Regulatory Commission proposing to implement  a change in the method
by which the gas pipeline allocated  forward-haul firm capacity that
became available on its sys- tem, primarily due to contract
expiration. In the past, Texas  Eastern had allocated available firm
capacity1 to its custom- ers on a first-come, first-served basis. Now
it proposed to  grant that capacity to the customer whose request
would  generate the greatest net present value to Texas Eastern. In 
determining net present value, only the customer's reserva- tion
charge would be considered. The Commission accepted  Texas Eastern's
filing in an order on May 29, 1997, and  affirmed its decision in an
order on rehearing on September  11, 1997. See Texas Eastern
Transmission Corp., 79  F.E.R.C. p 61,258 (1997); Texas Eastern
Transmission Corp.,  80 F.E.R.C. p 61,270 (1997). The Municipal
Defense Group  ("MDG"), a group of publicly-owned gas distribution
compa- nies which take service under Texas Eastern's small customer 
transportation service rate schedule ("rate schedule SCT"), 
petitioned this court for review of the Commission's orders.  MDG
argues that the orders unduly discriminate against  Texas Eastern's
small customers, and that the Commission  failed to meet the
requirements of s 5 of the Natural Gas  Act, 15 U.S.C. s 717d. For the




__________

n 1 Firm transportation service or "firm capacity" is a type of 
transportation service for which delivery is guaranteed, as opposed 
to interruptible transportation, "for which delivery can be delayed if
 all the capacity on the pipeline is in use." See United Distribution 
Cos. v. FERC, 88 F.3d 1105, 1123 n.10 (D.C. Cir. 1996); 18 C.F.R.  ss
284.8(a)(3), 284.9(a)(3).


I


Texas Eastern's small customers obtain firm transportation  service
under rate schedule SCT, a two-part discounted rate.  The pipeline
provides this rate schedule pursuant to a settle- ment with its small
customers, reached during Order No. 636  restructuring. See Texas
Eastern Transmission Corp., 62  F.E.R.C. p 61,015, at 61,086 (1993).
Texas Eastern defines a  small customer as one with a maximum contract
demand  quantity of 5,987 Dth (dekatherms) per day.2 See id. at 
61,085. Within that service level requirement, Texas Eastern  offered
the discounted rate to those who either were custom- ers of Texas
Eastern under certain rate schedules as of  October 31, 1992 or had
purchased firm sales service from an  interstate pipeline which in
turn purchased a firm sales  service from Texas Eastern under certain
rate schedules as of  May 18, 1992. See id. at 61,085-86. By the terms
of rate  schedule SCT, small customers pay a discounted reservation 
charge representing approximately 40% of the charge large  customers
pay under rate schedule CDS.3 See id. at 61,086 &  n.38. Small
customers also pay a usage charge equal to the  usage charge for
service under Texas Eastern's rate schedule  IT-1, a rate developed at
the 100% load factor, exclusive of  gas supply realignment costs.4 See


Rate schedule SCT is an exception to the general rate  structure Texas
Eastern adopted following Order No. 636.  Pursuant to that order,
Texas Eastern switched from a  modified fixed/variable ("MFV") to a
straight fixed/variable  ("SFV") rate design. See id. at 61,084; Order
No. 636, 




__________

n 2 A dekatherm is a metric system measurement that is roughly 
equivalent to 1,000 cubic feet of gas.


3 Rate schedule CDS is a no-notice transportation service where- by a
customer may increase deliveries up to its maximum daily  quantities
at any time. See Texas Eastern Transmission Corp., 62  F.E.R.C. p
61,015, at 61,072 (1993).


4 A pipeline charges a reservation or "demand" charge for reserv- ing
firm transportation capacity and a usage charge for the actual 
transportation of gas. See United Distribution Cos., 88 F.3d at  1129


F.E.R.C. Stats. & Regs. (CCH) p 30,939, at 30,434 (1992). A  pipeline
using an MFV rate design places fixed costs in both  the reservation
and usage charges; an SFV rate design  confines fixed costs to the
reservation charge and variable  costs to the usage charge. See United
Distribution Cos. v.  FERC, 88 F.3d 1105, 1128-29 & n.25 (D.C. Cir.
1996). In  Order No. 636, the Commission ordered all pipelines to
adopt  a straight fixed/variable transportation rate design in order
to  achieve its goal: "to ensure that all shippers have meaningful 
access to the pipeline transportation grid so that willing  buyers and
sellers can meet in a competitive national market  to transact the
most efficient deals possible." See Order No.  636-C, 78 F.E.R.C. p
61,186, at 61,766 (1997); see also City  of Nephi v. FERC, 147 F.3d
929, 931 (D.C. Cir. 1998). The  Commission believed the MFV rate
design distorted the unit  delivered prices of gas, and thereby
hindered the develop- ment of an efficient national market for gas.
See Order No.  636-A, F.E.R.C. Stats. & Regs. (CCH) p 30,950, at
30,596  (1992); see also United Distribution Cos., 88 F.3d at


The Commission recognized, however, that adoption of the  SFV rate
design could shift costs among classes of a pipe- line's customers.
See Order No. 636, F.E.R.C. Stats. & Regs.  (CCH) p 30,939, at 30,435
(1992). Low load factor customers  in particular would pay a higher
share of the pipeline's fixed  costs under SFV than they had under the
MFV rate design.5  See id.; see also United Distribution Cos., 88 F.3d
at 1170- 71. To offset these cost shifts, the Commission required 
pipelines to adopt several mitigation measures. If the transi- tion to
SFV rates resulted in an increase of 10% or more in  revenue
responsibility for any specific class of customers, the  pipeline was
required to phase in the new rates over a four- year period. See Order
No. 636, F.E.R.C. Stats. & Regs.  (CCH) p 30,939, at 30,435-36 (1992);




__________

n 5 A customer's "load factor" is the ratio between its average and 
peak usage. Customers with seasonal usage fluctuations have low  load
factors; customers with constant usage throughout the year  have high
load factors. See United Distribution Cos., 88 F.3d at  1129 n.26.
Most small customers are also low load factor custom- ers.


s 284.14(b)(3)(ii)(B)(1995) (rescinded)6; see also City of Ne- phi,
147 F.3d at 932. Pipelines who offered sales or firm  transportation
service to small customers on a one-part volu- metric basis, at an
imputed load factor, as of May 18, 1992,  were required to continue to
offer firm and no-notice service  on the same basis.7 See Order No.
636-A, F.E.R.C. Stats. &  Regs. (CCH) p 30,950, at 30,600 (1992); 18
C.F.R.  s 284.14(b)(3)(iv)(A) (1995) (rescinded); see also United Dis-
tribution Cos., 88 F.3d at 1171. Although Texas Eastern and  its small
customers designed their own measure--the dis- counted SCT rate
schedule--it also "represent[ed] a mitiga- tion against
cost-shifting." See Texas Eastern Transmission  Corp., 62 F.E.R.C. p


Order No. 636 did not address how pipelines should allocate  their own
available capacity. The issue was to be considered  in future
restructuring proceedings. See Order No. 636-A,  F.E.R.C. Stats. &
Regs. (CCH) p 30,950, at 30,548 (1992).  Before its May 1997 filing,
Texas Eastern had allocated firm  capacity that became available on
its system on a first-come,  first-served basis, with the Commission's
approval. See Tex- as Eastern Transmission Corp., 78 F.E.R.C. p
61,154, at  61,644 (1997). Small customers could obtain available
capaci- ty at their rate schedule SCT as long as they were first in 
line. When MDG protested Texas Eastern's proposal to  allocate
capacity based on the net present value of a custom- er's request,
considering only the customer's reservation 




__________

n 6 18 C.F.R. s 284.14 was rescinded in October 1995, following the 
completion of the restructuring process. See Filing and Reporting 
Requirements for Interstate Natural Gas Company Rate Schedules  and
Tariffs, 60 Fed. Reg. 52,960, 53,058 (1995).


7 A one-part volumetric rate combines both the reservation  charge and
the usage charge into one usage charge payable when a  customer
actually ships gas, and "reflects an 'imputed load factor'  that is
higher than the customer's anticipated use of the pipeline."  See City
of Nephi, 147 F.3d at 931 n.5. Before restructuring, Texas  Eastern
offered rate schedule SGS, a one-part volumetric rate, to  its small
customers, due to the small amount of service those  customers
required. See Texas Eastern Transmission Corp., 32  F.E.R.C. p 61,056,
at 61,155 (1985).


charge, Texas Eastern and MDG discussed the matter and  came to an
agreement. Texas Eastern then submitted a pro  forma tariff sheet
containing language the parties had agreed  upon: Texas Eastern would
deem a small customer's request  for available capacity at the maximum
SCT rate to generate a  net present value equal to a request for
capacity for an equal  term at the maximum rate under rate schedules
FT-1 and  CDS.8 A small customer's request at the maximum SCT rate 
would be deemed to generate a greater net present value  than a
request under FT-1 or CDS at less than the maximum  rate for an equal
or shorter contract term.


Because it was submitted too late for review, the Commis- sion did not
consider Texas Eastern's submission in its initial  order. The
Commission approved the pipeline's original fil- ing as an
"economically efficient way of allocating capacity  and consistent
with Commission policy." See Texas Eastern  Transmission Corp., 80
F.E.R.C. p 61,270, at 61,978 (1997).  In its compliance filing, Texas
Eastern again submitted the  pro forma tariff sheet and the Commission
rejected it in its  order on rehearing. Reviewing Texas Eastern's
original  filing and the proposed modification under s 4 of the
Natural  Gas Act, 15 U.S.C. s 717c, the Commission determined that 
small customers currently contract for capacity at a subsi- dized rate
and are not entitled to that subsidized rate when  they seek to expand
their capacity. See id. at 61,977-78.  Texas Eastern later complied
with the Commission's decision  and moved to place its original
filing, without the revision,  into effect. The pipeline has now
intervened in this case in  support of the Commission.


II


We first take up petitioner's claim that s 5 and not s 4 of  the
Natural Gas Act applies to Texas Eastern's proposal to 




__________

n 8 Rate schedule FT-1 is an open-access, instantaneous transporta-
tion service. Unlike CDS no-notice service, changes in scheduled 
volumes must be requested a minimum of 24 hours in advance. See  Texas
Eastern Transmission Corp., 62 F.E.R.C. p 61,015, at 61,072  (1993).


allocate available capacity based on the net present value of a 
customer's request for capacity. Section 4 governs a pipe- line's
proposal to change an existing tariff and requires the  pipeline to
prove that the proposed rate or charge increase it  seeks is just and
reasonable. See 15 U.S.C. s 717c(e). Sec- tion 5 permits the
Commission to determine and fix by order  a just and reasonable rate
or practice if it finds, "any rate ...  or ... practice ... affecting
such rate [to be] ... unjust,  unreasonable, unduly discriminatory, or
preferential." See 15  U.S.C. s 717d(a). If the Commission acts on its
own initia- tive, it bears the burden of proof; it must show not only
that  its proposed rates or charges are just and reasonable, but  that
those it would alter are not. See Public Serv. Comm'n v.  FERC, 866
F.2d 487, 488 (D.C. Cir. 1989).


Although Texas Eastern filed the initial proposal to change  its
capacity allocation method, petitioner insists that s 5  governed the
proceedings. Because Texas Eastern twice  submitted a pro forma tariff
sheet altering its initial filing,  petitioner contends that Texas
Eastern essentially discarded  its original filing and supported the
revision only. As peti- tioner sees things, the Commission's
acceptance of the origi- nal filing transformed the Commission into
the proponent of  rate reform and required it to meet the standards of


To accept petitioner's contention would be to contradict  Consolidated
Edison Co. v. FERC, 165 F.3d 992 (D.C. Cir.  1999) (per curiam). Texas
Eastern was the source of the  proposed change and, as we held in that
case, the Act makes  the source decisive when choosing between the two
sections.  See id. at 1008. The Commission's acceptance of Texas 
Eastern's original proposal placed the proceeding in s 4. See  Western
Resources, Inc. v. FERC, 9 F.3d 1568, 1574 (D.C.  Cir. 1993); City of
Winnfield v. FERC, 744 F.2d 871, 875  (D.C. Cir. 1984). Texas Eastern
never withdrew its initial  filing and it did not seek rehearing of
the Commission's May  1997 order accepting that filing instead of the
modification.  See Texas Eastern Transmission Corp., 79 F.E.R.C. p
61,258  (1997). After the Commission's order on rehearing, Texas 
Eastern moved to place its original filing, without the modifi-


cation, into effect. Therefore, s 4 applied and the Commis- sion was
not required to establish that Texas Eastern's prior  allocation
method was unjust or unreasonable.


III


Petitioner's remaining challenge is on the basis that Texas  Eastern's
new allocation method unduly discriminates against  small customers by
effectively barring them from obtaining  available capacity at their
rate schedule SCT. Texas Eastern  will allocate capacity based on the
net present value of a  customer's request, taking into account the
customer's reser- vation charge but not its usage charge. Because
small cus- tomers pay a discounted reservation charge under rate
sched- ule SCT, they will generally lose to larger customers who 
request capacity under rate schedules CDS or FT-1, which  have higher
reservation charges. This "effective bar" alleg- edly caps small
customer capacity at the amount the small  customers had contracted
for as of May 29, 1997, the date of  the Commission's order in this
case. The Commission ac- knowledged the difficulty facing small
customers bidding for  available capacity at their rate schedule. See
Texas Eastern  Transmission Corp., 80 F.E.R.C. p 61,270, at 61,977
(1997).  But it reasonably determined that they should compete for 
available capacity on the same terms as Texas Eastern's  other


MDG does not challenge Texas Eastern's new allocation  method as a
general matter. It argues that small customers  are a separate class
on Texas Eastern's system, and should  therefore receive special
treatment with respect to allocation  of available pipeline capacity.
The argument rests, at least  partly, on the small customers'
agreement with Texas East- ern, approved by the Commission, which
entitles small cus- tomers to take capacity under the discounted,
preferential  rate schedule SCT. A customer requiring up to 5,987 Dth 
per day may contract for capacity under that schedule. MDG  claims
that by effectively barring small customers from re- ceiving available
capacity above their current contract  amounts, up to the maximum
available under their rate  schedule, the Commission has precluded
them from enjoying  the benefits of their agreement.


The trouble is that the small customers' agreement with  Texas Eastern
simply permits them to receive capacity under  the discounted rate
schedule if their service level require- ments fall within the 5,987
dth maximum. See Texas Eastern  Transmission Corp., 62 F.E.R.C. p
61,015, at 61,085 (1993).  The small customers were not guaranteed
full ceiling capaci- ty, as the Commission correctly recognized. See
Texas East- ern Transmission Corp., 80 F.E.R.C. p 61,270, at 61,979 
(1997). They must bid in competition with unsubsidized  bidders. This
will doubtless make it more difficult for small  customers to obtain
additional service under the subsidized  rate schedule, but there is
no reason why the Commission  should have commanded other pipeline
customers to subsidize  them.


Historically, small customers on Texas Eastern's system  have been
treated as a separate class and so MDG thinks  they should have been
treated as such in this proceeding.  See, e.g., Texas Eastern
Transmission Corp., 57 F.P.C. 500,  508-09 (1977), aff'd sub nom.
Elizabethtown Gas Co. v.  FERC, 636 F.2d 1328, 1334 (D.C. Cir. 1980).
But as MDG  must acknowledge, small customers are already receiving 
preferential treatment--they contract for capacity under a  discounted
rate schedule. The Commission reasonably con- cluded that Texas
Eastern need not extend the subsidy  beyond the bounds of its
agreement with the small customers.  See Texas Eastern Transmission
Corp., 80 F.E.R.C. p 61,270,  at 61,978 (1997). A Commission order
requiring the pipeline  to do so would have had to confront the
principles underlying  Order No. 636. The SCT rate schedule
"represent[ed] a  mitigation against cost shifting" to small customers
during  restructuring. See Texas Eastern Transmission Corp., 62 
F.E.R.C. p 61,015, at 61,086 (1993). Although the SCT rate  schedule
is not a one-part volumetric charge (the mitigation  measure required
for small customers), it serves the same  general purpose and the
Commission approved it for that  reason. See id. Such mitigation
measures were not meant  as "a permanent shield to increased costs."
See City of  Nephi, 147 F.3d at 932. They simply sought "to preserve


took effect. See id. Pipelines were required to "grandfa- ther[ ] [in]
in existing small customer discount rates" only;  they were not
required to give additional discounts or prefer- ences. See id. at
931. MDG complains that small customers  are effectively grandfathered
in at their current levels of  capacity under the discounted SCT rate
schedule, but it does  not explain why small customers are entitled to
acquire  additional available capacity at a discounted rate intended
to  serve as a mitigation measure. The Commission points out 
repeatedly, and, we think, correctly, that small customers who 
already obtain subsidized capacity have no entitlement to  increase
their capacity at the same subsidized rate.9 See  Texas Eastern
Transmission Corp., 80 F.E.R.C. p 61,270, at  61,977-79 (1997).


We also believe it significant that the SCT rate is itself an 
exception to the SFV rate design that Order No. 636 general- ly
requires, and is therefore somewhat at odds with the  Order's broader
goal of encouraging competition in the na- tional gas market. Texas
Eastern's small customer SCT rate  is a two-part rate in which fixed
costs are placed in both the  reservation and the usage charges, the
same rate structure  rejected by the Commission in Order No. 636 as
contrary to  its goals. See Order No. 636, F.E.R.C. Stats. & Regs.
(CCH)  p 30,939, at 30,433-34 (1992). Given those general goals, it 
was certainly reasonable to confine application of the SCT  rate
design to capacity that Texas Eastern's small customers  have
contracted for and to require small customers seeking  additional,
available capacity to bid on an equal footing with  larger customers
taking capacity under a straight fixed/varia-




__________

n 9 Petitioner also contends that the SCT rate is not a "subsidized" 
rate, because small customers make a substantial contribution to 
fixed costs through the usage charge despite their discounted 
reservation charge. But because small customers also do not pay  gas
supply realignment costs and because their usage charge is  based on a
100% load factor, they pay less in fixed costs for the  same amount of
capacity than a large customer, even at a relatively  high load
factor. Their rate does not reflect a full allocation of fixed  costs
and is therefore a subsidized rate. Texas Eastern Transmis- sion
Corp., 80 F.E.R.C. p 61,270, at 61,979 (1997).


ble, unsubsidized rate design. Small customers are not cate- gorically
barred from obtaining available capacity above that  which they
currently contract for. They simply must com- pete for it on equal
terms with other customers on Texas  Eastern's system.


The petition for judicial review is denied.