Before: Edwards, Chief Judge; Buckley, and Ginsburg, Circuit Judges.
FOR THE DISTRICT OF COLUMBIA CIRCUIT
National Fuel Gas Distribution Corporation, et al., Intervenors
On Petition for Review of Orders of the Federal Energy Regulatory Commission
Opinion for the Court filed by Circuit Judge Ginsburg.
National Fuel Gas Supply Corporation petitions for review of the Federal Energy Regulatory Commission's decision retroactively to apply this court's vacatur of an earlier Commission order allowing National to reduce its contractual obligation to purchase natural gas from the Tennessee Gas Pipeline Company. National argues that (1) the Commission's decision is arbitrary, capricious, and not the product of reasoned decision-making, and (2) the Commission should have held a formal hearing before making its decision. Finding no merit to either of those claims, we deny the petition for review.
This case is only the latest episode in the saga of the Commission's efforts to introduce greater competition into the market for natural gas. Here we recount only those background facts necessary to an understanding of National's petition for review; for a more complete account of the events leading up to this case, see Associated Gas Distributors v. FERC, 824 F.2d 981, 993-97, 1013-21 (D.C. Cir. 1987) (AGD), and American Gas Association, 888 F.2d 136, 142-46 (D.C. Cir. 1989) (AGA).
A. Order No. 436 and National's Election
In Order No. 436, 50 Fed. Reg. 42,408 (1985), the Commission concluded that, by refusing to transport gas for producers with which they competed in the sale of gas, integrated pipelines often made it difficult for their customers (local distribution companies or LDCs) to purchase competitively priced gas. The Commission decided that competition would be increased if the pipelines "unbundled" their merchant and transportation services; it therefore created an incentive for a pipeline to provide "open access," i.e., to transport gas upon a non-discriminatory basis.
The Commission also concluded that "open access" would have little impact upon competition in the market for gas if LDCs remained bound by their contractual commitments to purchase gas from the pipelines. Those contracts gave the LDC the right to demand, and obligated the pipeline to deliver, a certain quantity of natural gas per day (a/k/a the LDC's "contract demand" or CD); the LDC paid a "demand charge" regardless whether it took any gas and a "commodity charge" for such gas as it actually purchased. As long as an LDC remained bound to pay the "demand charge," it would find the purchase of gas under its CD, for which it would pay only the "commodity charge," significantly less expensive than even competitively priced gas on the open market. Therefore, in order to assure a healthy demand for producers' gas, the Commission required that open-access pipelines allow each LDC customer: (1) to reduce its CD by a specified percentage; or (2) to convert the same percentage of its CD from gas purchase (i.e., fully bundled service) to gas transportation alone.
When Order No. 436 issued on October 9, 1985, National was contractually obligated to purchase nearly 300,000 Dth/day of gas from Tennessee. On December 10, 1986 Tennessee opted to become an open access pipeline and shortly thereafter, on January 24, 1987, National elected to reduce its CD commitment to the maximum extent permitted by Order No. 436. Under the regulations promulgated in that order, the CD reduction would become effective 150 days after National's election, on June 23, 1987. See 18 C.F.R. Section(s) 284.10(c)(2)(B) (1986).
B. AGD, Order No. 500, and AGA
It was also on June 23, 1987, by coincidence, that this court held that Order No. 436 was unlawful in part. In particular, we held that the CD reduction and conversion provisions "suffer[ed] from a want of both legal authority and reasoned decision-making." AGD, 824 F.2d at 1044. Moreover, although the court approved much of the rest of Order No. 436, it concluded that the unlawful provisions could not be severed from the lawful provisions, and therefore vacated the order in its entirety. Id. at 981.
The Commission quickly moved to minimize the disruptive impact of the vacatur of Order No. 436. First, on July 2, 1987 the Commission asked this court for leave to stay the effective date of its regulations authorizing LDCs to adjust their CD until after the Commission issued a new order in lieu of Order No. 436. See Regulation of Natural Gas Pipelines After Practical Wellhead Decontrol, "Order Staying Effectiveness of Regulations," FERC Stats. & Regs. (CCH) Para(s) 30,754 at 30,745 (1987), which we granted on July 17, 1987. AGD, No. 85-1811 (D.C. Cir. July 17, 1987).
Second, on August 7, 1987 the Commission issued an interim rule, Order No. 500, 52 Fed. Reg. 30,334 (1987), which became effective upon this court's issuance of the AGD mandate on September 15, 1985. See 52 Fed. Reg. 35,539 (1987). Order No. 500 re-adopted most of Order No. 436, with various provisions added and deleted in an effort to respond, on an interim basis, to our decision in AGD. In particular, Order No. 500 retained the CD conversion provision of Order No. 436, but dropped the CD reduction option (while reserving the possibility that the Commission would revisit the subject).
Interpreting AGD and Order No. 500 as a retroactive vacatur of the CD reduction provision, Tennessee refused to recognize National's election to reduce its CD. Shortly thereafter, however, the Commission opined that CD reductions made prior to the issuance of Order No. 500 were still valid, unaffected either by our decision in AGD vacating Order No. 436 or by the Commission's issuance of Order No. 500. See Interstate Power Co. v. Natural Gas Pipeline Co. of America, 41 FERC Para(s) 61,096, at 61,256 (Oct. 30, 1987), reh'g denied, 42 FERC Para(s) 61,049 (1988).
More than two years after this court's decision in AGD, the Commission had not yet issued a final order to succeed interim Order No. 500 when this court heard the petitions for review of that order that a number of parties had filed. Tennessee, as one such party, argued that the Commission had erred in Interstate:
[T]he Commission should have retroactively nullified customers' requests for CD reductions, because this court vacated, and the Commission then decided that it did not have adequate support in the record to repromulgate, ...