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03/19/70 Pennsylvania Gas and Water v. Federal Power Commission

March 19, 1970

PENNSYLVANIA GAS AND WATER COMPANY, PETITIONER

v.

FEDERAL POWER COMMISSION, RESPONDENT, MANUFACTURERS LIGHT AND HEAT COMPANY AND HOME GAS COMPANY, INTERVENORS 1970.CDC.50



Bazelon, Chief Judge, and Wright and Leventhal, Circuit Judges.

UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petition for Rehearing Denied May 25, 1970.

APPELLATE PANEL:

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE LEVENTHAL

This case presents questions relating to the justification required for issuance of temporary certificates, without a hearing, under § 7(c) of the Natural Gas Act. Petitioner, Pennsylvania Gas and Water Company (Penn Gas), seeks review of the Federal Power Commission's letter order issued March 17, 1969 granting a temporary certificate to The Manufacturers Light and Heat Company (Manufacturers) and Home Gas Company (Home) to coordinate their operations pending hearing and decision on their joint application filed June 20, 1968, for a permanent certificate, authorizing coordinated operations.

Manufacturers and Home are wholly owned subsidiaries of the Columbia Gas System. Manufacturers sells gas at wholesale to a number of distribution companies in Pennsylvania, Ohio, and West Virginia, including petitioner, Penn Gas, which sells natural gas at retail in certain areas of Pennsylvania. Manufacturers also sells to its affiliate Home, which operates a pipeline and storage facilities in New York. Petitioner was permitted to intervene in opposition to their application for a permanent certificate, and under the Natural Gas Act a hearing is required.

The temporary certificate granted without a hearing presents the issue whether the applicants presented a situation appropriate for Commission exercise of the unusual authority conferred by section 7(c) of the Natural Gas Act, 15 U.S.C. § 717f(c), to "issue a temporary certificate in cases of emergency, to assure maintenance of adequate service or to serve particular customers, without notice or hearing, pending the determination of an application for a certificate . . .." We conclude that the Commission exceeded its authority under section 7(c), and vacate the order granting the temporary certificate. I

The background of the case includes, notably, a proposed rate settlement that Home filed on July 4, 1968, with the Commission, which significantly altered its natural gas rate structure. The settlement was approved in Home Gas Co., 40 FPC 1008 (1968). Home's settlement altered its two-part tariff so as to increase the demand charge, paid for the entitlement to receive every day a certain quantity of gas (the contract demand), and to decrease the commodity charge, which the buyer must pay, in addition to the demand charge, for the gas actually delivered.

The contract demand is the volume which the seller is contractually obliged to deliver, each and every day of the year, and which the buyer is contractually obligated to take -- in the sense that it is paid whether he takes the gas or not. The buyer sets contract demand in light of his peak needs, and for that security pays the demand charge for the entitlement to receive the gas whether or not it is in fact used.

The buyer who buys his full demand entitlement every day operates at 100% load factor and receives the most gas for the money. The higher the demand charge is in relation to the commodity charge, the steeper is the penalty to the buyer who pays a demand charge for gas not used.

Thus one effect of Home's new rate structure was to increase the incentive for Home's customers to purchase more of the gas to which they were entitled by virtue of the contract demand specified. Two of Home's customers, Orange and Rockland Utilities, Inc. (Rockland) and Central Hudson Gas and Electric (Central Hudson) had been purchasing at a load factor of about 40%, i.e., average daily volumes were about 40% of contract demand. The new Home rate made it desirable for them to purchase natural gas not only for space heating -- the demand for which is greatest in the winter -- but also for the generating of electricity, a type of demand that is strong, under modern conditions of usage (air conditioning), in the "valley" summer months that are generally low in gas demand. These customers had advised Home in 1968, prior to Home's filing of its tariff change, that if Home dropped its commodity charge from 34.5 cents per Mcf to 31 cents or less they would increase substantially their off-peak summer purchases so as to bring their future purchases from Home close to a 100% load factor. And in accordance with this advance indication they determined, when Home changed its rate structure, to purchase each day nearly 100% of the gas to which they were entitled.

To supply this additional gas Home had to increase its purchases from Manufacturers. Home, however, was already in a position where it bought from Manufacturers nearly 100% of its contract demand each day. Home could do this because it could place the large quantities of "valley" gas bought in the off-peak summer season into its storage fields, and could draw on this gas in storage to make delivery during the winter. If as a result of increased summer demands from Rockland and Central Hudson, Home were to purchase additional gas from Manufacturers, Manufacturers' applicable rate schedule would have required Home to pay both a commodity charge and a demand charge for the additional gas purchased. To Home, however, whose customers had already paid the demand charge, the additional gas now being taken would result in the additional payment of only the commodity charge. Thus Home faced incurring a new demand charge cost for which there would be no offsetting increase in demand charge revenue. Home was confronted with the prospect of paying Manufacturers 39.86 cents per Mcf (the sum of the commodity and demand charges) for gas for which it would receive additional revenues of only 30.98 cents (commodity charge).

The joint application for a permanent certificate for coordinated operation presented the claim that if Home and Manufacturers continued as separate entities, Home's need for the additional volume (6.6 million Mcf per year) projected upon approval of the rate settlement meant that Home would have to increase its contract demand with Manufacturers by 20,500 Mcf per day. *fn1 It was asserted that Manufacturers in turn would have to increase its contract demand with its affiliated supplier, United Fuel Gas Company, by 11,000 Mcf per day, and to construct 10.1 miles of 20-inch loop pipeline in order to handle the increase in peak day deliveries from United Fuel.

The application asserted that the comparative economics would be benefited if Home and Manufacturers functioned as a single unit for Manufacturers had a "valley" in its summertime purchases from United Fuel that was sufficient to accommodate the amount of increased summer volumes projected for Rockland and Central Hudson. Under coordinated operations, it was asserted, Manufacturers would have available to it the storage capacity on the Home system, which would be "idled" if the summer purchases which Home previously transported to storage fields were instead transmitted to Rockland and Central Hudson.

When Manufacturers and Home filed on June 30, 1968, their joint application for a permanent certificate authorizing coordination of operations, they were on notice that this would be opposed by petitioner Penn Gas on the ground of adverse cost consequences to the customers of Manufacturers. Indeed the record indicates that when Manufacturers conducted its March and April 1968 rate settlement conferences, paralleling the Home settlement, it undertook to secure the agreement of its customers to coordinated operations, and when this was not forthcoming the coordinated operations feature of the program was withdrawn from the rate settlements with advice to the conferees that a certificate application would be filed at a later date. *fn2

On July 26, Penn Gas filed its application to intervene. It objected to the cancellation of the separate tariffs of Manufacturers and Home and their replacement by a joint tariff, asserting that the proposals raised complex and important issues requiring full exploration in a hearing, and alleging that the application as filed would substantially increase the cost of gas purchased by Penn Gas from Manufacturers. The intervention petition specifically noted that one of the proposals in the application would impose on Manufacturers' customers a new minimum commodity ...


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