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Transcontinental Gas Pipe Line Corp. v. Federal Energy Regulatory Commission

decided as corrected: August 27, 1993.


Petitions for Review of Orders of the Federal Energy Regulatory Commission. D.C. DOCKET NUMBER FERC DOCKET NOS. TA85-3-29. ETAL

Before Reynaldo Garza, Smith, and Barksdale, Circuit Judges.

Author: Smith

JERRY E. SMITH, Circuit Judge:

Transcontinental Gas Pipe Line Corporation ("Transco") appeals an order of the Federal Energy Regulatory Commission ("the Commission" or "FERC") finding that Transco violated the Natural Gas Act ("NGA") and refusing to allow Transco to pass through $75 million to some of its customers. Several of Transco's customers have intervened, urging us to restructure the remedy the Commission crafted. We decline to do so and affirm the Commission's order in all respects.


This case has at its roots the changes that occurred in the natural gas industry in the 1970's when interstate pipelines started to curtail service upon entering into long-term purchasing agreements. In 1978, Transco signed long-term contracts to buy gas from its producers. The contracts included "take-or-pay" provisions that obligated Transco either to take delivery of an amount of gas or to pay for that amount even if Transco did not take delivery.

In the early 1980's, the price of gas declined. Transco still was bound to take or pay for gas at prices well above the market rate. The Commission's regulations required Transco to charge all customers the same price for gas, computed by averaging the cost of all gas Transco purchased; this is called the weighted average cost of gas purchased for resale ("WACOG"). Partly because of Transco's take-or-pay contracts, its WACOG was higher than the price of alternative fuels or gas available on the spot market. As a result, Transco started to lose customers, called "non-captive" customers, who could shift to alternative fuels or buy on the spot market. Customers without access to lower-priced alternatives, who had to continue to purchase WACOG fuel at a rate filed with the Commission, were called "captive."

In the mid-1980's, the Commission started encouraging pipelines to devise new ways to combat their declining sales. In response, Transco set up a program, called a Special Marketing Program, that the Commission approved--on a temporary, experimental basis--in 1983. Under this program, Transco released gas subject to high take-or-pay requirements for sale on the spot market. Transco then could transport the market-priced gas to non-captive customers. In 1984, the Commission conditioned the extension of the program on Transco's agreeing to grant captive customers some access to cheaper gas, up to ten percent of the maximum volume of gas that the captive customers could demand.

Not completely satisfied with the Commission's conditions, Transco proposed its own Discount Service Program instead. Under this program, all customers could buy up to three percent of their required gas at market prices and then buy an additional seven percent at market prices if they purchased a "threshold level" of Transco's more expensive system supply gas. The Commission approved Transco's Discount Service Program in March 1985, stipulating, however, that the plan not go into effect until the United States Court of Appeals for the District of Columbia Circuit permitted Transco to carry out the program.

When the District of Columbia Circuit had not acted by April 1985, Transco, without the Commission's approval, decided to implement a variation of its Discount Service Program by creating two subsidiaries, Transco Resources, Inc. ("TRI"), and Transco Energy Marketing Co. ("TEMCO"), to sell more of its excess gas to non-captive customers at the market rate instead of at Transco's filed rate of $3.01 per Dth.*fn1 Transco used TRI to sell gas from April until October 1985, and TEMCO from June until November 1985.*fn2

Transco arranged for TRI to prepay producers at spot market prices from revenues obtained from TRI's sale of gas from the Transco system supply. In exchange, the producers released gas to TRI that had been contracted for by Transco. TRI later returned some volumes of gas to Transco and bought and sold gas from the spot market to non-captive customers. From April until August 1985, TRI sold gas at an average price of about $2.55 per Dth, $.46 below Transco's filed rate charged to captive customers.*fn3 From April through July 1985, TRI sold more gas each month than it purchased.

TEMCO operated in a similar fashion. Transco also set up TEMCO to sell gas to non-captive customers at market-responsive prices, a function Transco could not perform under the NGA. TEMCO concurrently sold and prepaid for gas at market rates that Transco released from its pipeline. TEMCO sold this gas before the producers actually produced any gas. From June until November 1985, TEMCO sold gas to non-captive customers at an average price of about $2.23 per Dth. During this time, TEMCO sold more gas than it purchased, creating what Transco termed a "transportation imbalance," the difference between receipts and deliveries under a transportation agreement.

Transco would have faced a large underrecovery had it set up TRI and TEMCO to repay Transco in cash for the gas they sold at the market rate. To avoid such a loss, Transco arranged for its subsidiaries to repay Transco in gas. Transco then sold this gas to its captive customers at the filed rate of $3.01 per Dth, despite the fact that TRI and TEMCO had originally paid market rates of between about $2.23 and $2.55 per Dth for this gas. Transco thus created an inflated differential between its actual and projected costs. This showed up as a projected under-recovery in the spring of 1986 of $81.3 million.

Transco's filed rate of $3.01 per Dth was based upon projected costs calculated in early 1985. It turned up the $81.3 million underrecovery when it figured its actual costs. These figures allegedly revealed that Transco really paid about $3.30 per Dth for the gas it sold in 1985 and 1986. Under the Commission's regulations, Transco was allowed to seek recovery of the difference between the rate it collected and its actual costs by imposing a surcharge on its customers.

In April 1986, Transco requested the Commission to allow it to recoup a $75 million "passthrough."*fn4 The Commission permitted Transco to collect the refund, on a deferred basis, subject to Transco's refunding whatever it collected upon the outcome of hearings on the propriety of the amount. Transco collected about $48.5 million before the Commission issued its final order.

An administrative law Judge ("ALJ") issued an initial decision (called Phase I), addressing only the issue of liability, on August 29, 1988,*fn5 concluding that Transco and its affiliates, TEMCO and TRI, should be viewed as a single entity. Accordingly, sales by TRI and TEMCO were sales by Transco, below-cost sales in violation of the filed rate requirements of section 4(d) of the NGA, 15 U.S.C. § 717c(d).*fn6 Because some of these sales were to customers to whom Transco did not have authorization to sell, it violated section 7(c) of the NGA, 15 U.S.C. § 717f.*fn7

The ALJ based his single entity determination upon the fact that the composition of the corporate hierarchies of the TRI, TEMCO, and Transco were almost identical. All of TRI's officers, and all except for one of TEMCO's officers, also were Transco officers. Six of TEMCO's seven directors were directors at Transco. TRI, TEMCO, and Transco all had the same address. TRI had no employees, and TEMCO had but eighteen employees, all of whom were former Transco employees. Corporate distinctions were ignored in dealings among the three groups, and no legal instruments governed transactions among the three groups.

The ALJ next determined that the transactions at issue were sales, not "transportation imbalances." Defining a sale as the "transfer of title for a price" (in accord with U.C.C. § 2-106(1)), the ALJ found that one company (Transco through TRI and TEMCO) simply transferred its gas to customers in exchange for money. The ALJ concluded that Transco deliberately used TRI and TEMCO to circumvent the filed rate requirements of section 4(d) of the NGA. He refused to allow a company bound by a filed rate to create a subsidiary to sell gas at lower rates.

The ALJ finally found that Transco discriminated against captive customers by providing access to lower-price gas only to non-captive customers. The ALJ determined that Transco had not met its burden of proving that the discrimination was not "undue" within the meaning of section 4(b) of the NGA, 15 U.S.C. § 717c(b),*fn8 and Transco had not shown that discriminatory pricing was the only way to lower prices.

On December 15, 1989, the ALJ issued a decision on remedies, called Phase II. First, the ALJ adopted part of a remedy suggested by a Commission accountant, Robert Fulton, who recalculated Transco's costs using the actual spot market prices TRI and TEMCO had paid instead of the $3.01 rate Transco claimed. This recalculation showed that Transco underrecovered about $2.6 million, not $81.3 million. Since Transco already had agreed to lower its claim from $81 million to $75 million, effectively foregoing $6.3 million, Fulton's recalculation reduced Transco's claim to zero.

The ALJ ordered Transco to refund the $48.5 million passthrough it already had collected, finding that the recalculation remedied Transco's violation of forcing its captive customers to subsidize the illegal, market-price sales to non-captive customers. All ...

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