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05/14/80 East Tennessee Natural Gas v. Federal Energy Regulatory

May 14, 1980

EAST TENNESSEE NATURAL GAS COMPANY, PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT, TENNESSEE NATURAL GAS LINES, INC., EAST TENNESSEE GROUP, TENNESSEE PUBLIC SERVICE COMMISSION, INTERVENORS; TENNESSEE NATURAL GAS LINES, INC., PETITIONER

v.

FEDERAL ENERGY



Before TAMM and MIKVA, Circuit Judges, and JOYCE HENS GREEN,* United States District Judge for the District of Columbia.

UNITED STATES COURT OF APPEALS, DISTRICT OF COLUMBIA CIRCUIT

REGULATORY COMMISSION, RESPONDENT, TENNESSEE

PUBLIC SERVICE

COMMISSION, INTERVENOR

Nos. 79-1413, 79-1442 1980.CDC.103

Petitions for Review of an Order of the Federal Energy Regulatory commission.

APPELLATE PANEL:

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE TAMM

These two cases, consolidated for review, bring before us an order of the Federal Energy Regulatory Commission requiring two intermediate sellers of natural gas to pass through to their customers certain credits they received from their pipeline supplier when it failed to deliver all of its minimum contractual obligations in 1974 and 1975. The petitioners argue that the Commission could not lawfully order any form of pass-through and that, even if a pass-through is permissible, the Commission allocated it among the petitioners' customers according to an inappropriate formula. We affirm the Commission's decision in all respects. I. BACKGROUND

The petitioners, East Tennessee Natural Gas Company (East Tennessee) and Tennessee Natural Gas Lines, Inc. (Tennessee Natural), are natural gas companies subject to federal regulation under the Natural Gas Act, 15 U.S.C. §§ 717-717w (1976). *fn1 Both companies purchase gas from a single interstate pipeline company, Tennessee Gas Pipeline Company (the pipeline supplier), and resell it in Tennessee and Virginia to various jurisdictional customers i.e., resellers and non-jurisdictional customers i.e., end-users. *fn2

The Natural Gas Act permits natural gas companies subject to the Commission's jurisdiction to charge only just and reasonable rates; unjust and unreasonable rates are unlawful. Id. § 4(a), 15 U.S.C. 717c(a). Each natural gas company must file with the Federal Energy Regulatory Commission *fn3 schedules showing all its rates. Id. § 4(c), 15 U.S.C. § 717c(c). If the Commission determines that a rate is unjust or unreasonable, it may adjust the rate to a lawful level. Id. § 5(a), 15 U.S.C. § 717d(a). *fn4 A company's rate schedules, together with the forms it uses for its service agreements with customers, constitute its tariff, 18 C.F.R. § 154.14 (1979), and no company may charge its customers more than the rates that the Commission has permitted to take effect and that appear in the tariff, id. § 154.21.

Because the cost of purchasing its gas usually is the major element in a natural gas company's expenses, an increase in the price of gas historically has prompted a company to seek an increase in its rates. With fluctuations in gas prices becoming more common in the early 1970's, the Commission in 1972 amended its regulations to permit companies to include in their tariffs a "purchased gas cost adjustment" provision. See Purchased Gas Cost Adjustment Provision, 47 F.P.C. 1049 (1972) (amending 18 C.F.R. § 154.38(d)). Under a PGA clause, a company may pass through to its customers increases in the cost of the gas it purchases without obtaining Commission approval for each change in charges. To protect the same customers, however, the Commission's 1972 order required all PGA clauses to provide that cost decreases also be passed through in the form of rate reductions. See id. at 1050-51. By using PGA clauses, companies can avoid the delay and expense of repeated filings with the Commission that simply "track" supplier price changes. This savings in time and money ultimately benefits natural gas consumers by reducing sellers' administrative expenses. See generally id. at 1050.

The cases before us now concern the tariffs in effect for East Tennessee and Tennessee Natural in 1974 and 1975. During this period, the service agreements between the pipeline supplier and each of the petitioners and between the petitioners and their jurisdictional customers assumed a form typical of contracts in the industry. The agreements required the seller (the pipeline supplier or one of the petitioners, as the case might be) to make available to the purchaser a specified minimum amount of gas each day. The purchaser also could buy more if it desired and if the seller could deliver it. Reflecting this arrangement, the pipeline supplier's and the petitioners' tariffs adopted a two-part rate structure. First, the purchaser would pay a fixed "demand charge" that would entitle it to demand the minimum amount per day. Second, the purchaser also would pay a "commodity charge," a set amount per thousand cubic feet of gas actually delivered. In theory, the demand charge recoups the fixed costs incurred by the seller in providing a transmission mechanism of sufficient capacity to meet the customer's peak-load minimum entitlement. These costs include pipeline construction, maintenance, depreciation, and taxes. The commodity charge, on the other hand, covers the seller's variable costs; for example, the gas itself and compression expenses. *fn5 The service agreements between the petitioners and their customers also included PGA provisions.

Due to the natural gas shortage that began in the early 1970's, the pipeline supplier started curtailing its deliveries late in 1973. During the period in question, the pipeline supplier was unable to meet its minimum delivery obligations under its service agreements with the petitioners, which in turn were prevented from meeting all the entitlements of their own customers. Due to this reduction, the pipeline supplier gave its customers, including both petitioners, "demand charge credits" reflecting its failure to supply their full entitlements. *fn6 To recover the funds lost by crediting demand charges, it added a surcharge to its commodity rate. In this manner, it would recover all its costs despite the reduction in revenues from demand charges. This system of demand charge credits recouped through commodity surcharges is designed to redistribute the economic burden of the curtailment more evenly among ...


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