General Motors Corp. v. Public Service Commission

WILNER, Chief Judge. This appeal is from an order of the Circuit Court for Harford County that affirmed two orders of the Maryland Public Service Commission (PSC). It presents substantive and procedural questions of more than passing significance. The substantive questions have to do with the authority of the PSC to preclude local natural gas companies from passing on to their customers certain charges, known as take-or-pay charges, that the Federal Energy Regulatory Commission (FERC) has allowed their suppliers to pass on to them.

The major procedural question is whether the orders entered by the PSC were immediately appealable to the Circuit Court. A fair consideration of these issues requires some understanding of the context in which they arise. Historical Background The issues now before us proceed ultimately from some major changes that occurred in the natural gas industry within the past 20 years and the responses made to those changes by both Congress and the FERC. We need not attempt to catalog here, much less discourse upon, all of those changes and responses, about which a great deal has been written, but we think it would be helpful to provide at least a summary sketch of them.

There are four major components to the natural gas industry — the producer who extracts the gas, the pipeline company that transports the gas from the wellhead, the ³²⁴ local distribution company (LDC) that receives the gas from the pipeline, and the ultimate consumer who takes the gas from the LDC. In the 1970’s, gas supplies were tight, in part because the wellhead price was Federally controlled at a level below what free market forces would have commanded. In that economic setting, the producers and the pipelines, for their mutual interest, entered into long-term contracts for specific quantities of gas. A common provision of those contracts obligated the pipeline to pay for a specified percentage of the gas it was entitled to receive, whether it took the gas or not.

Those provisions became known as “take or pay” (TOP) clauses. The pipelines, in turn, exacted somewhat similar requirements from their customers, the LDCs. Through what became known as “minimum commodity bills” and “minimum take provisions,” the pipelines required the LDCs to pay for a minimum volume of gas each month. 1 In 1978, through the enactment of the Natural Gas Policy Act, 15 U.S.C. §§ 3301 et seq., Congress partially deregulated the wellhead price of gas, intending to foster increased exploration and production by allowing market forces to have a greater influence on price. Production was indeed increased, but demand did not keep pace.

Conservation measures, a drop in oil prices causing some consumers to switch from gas to oil, and a recession all combined to slacken demand. For a time, prices remained high despite the glut because of the minimum commodity bill and minimum take provisions, but in 1983-84, the FERC found that the collection of variable costs through minimum commodity bill and minimum take clauses in the pipeline-LDC contracts represented unjust and unreasonable rates and therefore disallowed them. Elimination of Variable Costs from Certain Natural Gas Pipeline Minimum Commodity Bill Provisions, Order No. 380, 27 FERC If 61,318; Order No. ³²⁵ 380-A, 28 FERC 1T 61,175; Order No. 380-C, 29 FERC ¶ 61,077 ; Order No. 380-D, 29 FERC It 61,332 (1984). This left the pipelines bound by the TOP obligations in their contracts with the producers but unable to demand similar protection from the LDCs.

In 1985, the FERC put a further squeeze on the pipelines. The gas purchased by the pipelines was sold not only to LDCs, for further distribution to retail customers, but also to large, principally industrial, consumers for their own use. Many of these large end users would have preferred to purchase the gas directly from the producers and simply pay the pipeline company to transport it, but, largely because of the TOP requirements, the pipelines generally refused to transport gas for third parties, at least where that would have the effect of reducing their own purchases from the producer. By Order No. 436, 50 Fed.Reg. 42,408 (1985), the FERC found that practice unduly discriminatory and required the pipelines to transport gas for third parties, even if that transportation would compete with their own purchases and sales.

This was known as the “open access” requirement. The combination of these orders by the FERC, in light of the then-current market conditions, allowed much lower gas prices to the consumers but put the pipelines in a real bind. As noted in Associated Gas Distributors v. F.E.R.C., 824 F.2d 981, 1021 (D.C.Cir.1987), cert. denied, 485 U.S. 1006 , 108 S.Ct. 1468 , 99 L.Ed.2d 698 (1988): “At the heart of the industry’s immediate problem is the discrepancy between the average cost of gas that pipelines have under contract and the much lower price of gas now available at the wellhead. The essence of that discrepancy is the same whether the pipelines buy overpriced gas and sell it at a loss, or decline to buy such gas and thereby incur take-or-pay liabilities.

The price discrepancy represents a sunk loss of billions of dollars (doubtless reflected in actual drilling expenses). At issue among the parties is who should bear it. All actors in the ³²⁶ natural gas industry — producers, pipelines, LDCs and consumers — are candidates for this dismal position.” Indeed, it was precisely because FERC had failed to address the producer-pipeline contracts and thus “the likelihood that pipelines will play the fall guys” (id. at 1021) that the Associated Gas Distributors Court, though affirming most of Order No. 436, remanded that aspect of the matter to the Commission for further proceedings. In response to the Court’s directive, FERC adopted an “Interim Rule and Statement of Policy” in the form of Order No. 500, 52 Fed.Reg. 30,334 (1987), in which it attempted to deal with the TOP problem.

The order is long and complex, but its most relevant features, in terms of this case, were these: First, with certain exceptions, it required producers seeking open access to the pipelines (i.e., requiring the pipeline to transport gas sold directly to an end consumer) to credit the gas so transported against the pipeline’s TOP obligation. Second, it provided alternative methods by which pipelines could recover from their customers at least a portion of the costs incurred in settling their TOP obligations. One method, which was both risky to the pipeline and to some extent unworkable, was to allow the pipeline to recover all or some of those costs through individual rate proceedings. The alternative method, designed to encourage a rapid renegotiation of TOP contracts, allowed a pipeline transporting on an open access basis to recover from its customers, through a fixed charge, from 25% to 50% of its TOP settlement costs provided it agreed not to pass through to its customers an equal percentage of those costs.

As part of this alternative method, which represented what the FERC regarded as an “equitable sharing” approach to cost recovery, the pipelines could attempt to recover the remainder of their TOP settlement costs through volumetric surcharges on all gas transported. Both approaches rested on the notion that at least a portion of these costs would be regarded by the Commission as a cost of the commodity ³²⁷ prudently incurred by the pipeline; the alternative approach, in effect, created a rebuttable presumption that if the pipeline agreed to absorb at least 25% of the cost, the remainder could be passed through as prudently incurred without the need for independent examination. The alternative approach initially adopted in Order No. 500 was a temporary one; it was to expire December 31, 1988. Following the issuance of Order No. 500, and several fine-tunings of it (Orders Nos. 500-A through 500-G), the producers and pipelines in fact renegotiated most of their TOP contracts, to the point that, by the end of 1988, most of the pipelines’ potential TOP liability, which at the end of 1985 was estimated to be over $9 billion, had been resolved.

But the potential liability remaining still amounted to between $850 million and $2.1 billion, depending on whose figures were accepted. Orders No. 500 through 500-G were also challenged, and, once again, the Court found fault with what FERC had done in a number of respects. See American Gas Ass’n v. F.E.R.C., 888 F.2d 136 (D.C.Cir.1989), cert. denied, — U.S. -, 111 S.Ct. 373 , 112 L.Ed.2d 335 (1990). As to the cost recovery mechanism, the Court declared the sunset provision attached to the alternative approach invalid but declined to pass on the validity of the approach itself on the ground that such review was premature.

The Court noted, at 152, that the mechanism was regarded by the Commission as a “policy statement” rather than a “definitive rule” and that the orders were interim ones. With the sunset provision stricken, the Court found no reason to interfere with what it concluded was a “tentative agency position,” and therefore deferred review until adoption of a final order. The Commission reconsidered the matter once more and, on December 13, 1989, adopted a “final rule” in the form of Order No. 500-H, Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, FERC Stats. & Regs. ³²⁸ ¶ 30,867 (1989). With some additional fine-tuning, 2 that Order essentially confirmed the pass-through provisions included in the earlier interim orders, and, with exceptions not relevant here, that Order was affirmed in American Gas Ass’n v. F.E.R.C., 912 F.2d 1496 (D.C.Cir.1990).

The More Immediate Context The pass-through provisions of the Order No. 500 series, as we have seen, focused on the relationship between the pipelines and their immediate customers — the LDCs and the large end users. By one of the two alternative methods, the pipelines were permitted to recover from their customers at least part of their TOP costs. Although the FERC, whose jurisdiction extends only to the interstate aspects of the industry, made no attempt to determine whether, or to what extent, the LDCs could further pass through those costs to their customers, it did briefly comment on that matter. In its original interim order, No. 500, the Commission stated that “all segments of the industry should shoulder some of the burden of resolving the [take-or-pay] problem” and that “[t]he method and extent of flowthrough by local distribution companies will be determined by the responsible state regulatory agencies consistent with applicable law.” In a footnote to that last statement, FERC cited Nantahala Power & Light v. Thornburg, 476 U.S. 953 , 106 S.Ct. 2349 , 90 L.Ed.2d 943 (1986), without page reference or further explanation.

In Nantahala and in the later case of Miss. Power & Light Co. v. Miss. Ex Rel. Moore, 487 U.S. 354 , 108 S.Ct. 2428 , 101 L.Ed.2d 322 (1988), the Supreme Court had made clear that, under the Federal supremacy and preemption doctrines, the States “may not bar regulated utilities from passing through to retail customers FERCmandated wholesale rates.” Miss.

Power & Light Co., ³²⁹ supra, at 372, 108 S.Ct. at 2439 . This precept, known as the “filed rate doctrine,” was described in Nantahala, 476 U.S. at 970 , 106 S.Ct. at 2358-59 , as follows: “The filed rate doctrine ensures that sellers of wholesale power governed by FERC can recover the costs incurred by their payment of just and reasonable FERC-set rates. When FERC sets a rate between a seller of power and a wholesaler-as-buyer, a State may not exercise its undoubted jurisdiction over retail sales to prevent the wholesaler-as-seller from recovering the costs of paying the FERC-approved rate____ Such a ‘trapping’ of costs is prohibited.” A number of parties saw the seeds of inconsistency between the filed rate doctrine, as enunciated in Nantahala, and what the PSC later referred to as the “Delphic-like statement” that State Commissions could provide for the “method and extent” of a further pass-through of the FERC-approved TOP costs, and asked for clarification. In one of its subsequent interim orders, the FERC said that it did not believe that Nantahala “precludes state regulators from designing LDC rates, or, in appropriate circumstances, from reviewing the prudence of LDCs’ purchasing decisions insofar as they affect take-or-pay costs.” Apart from a review of prudence, the FERC observed that although the pipelines were allowed to pass through the TOP costs as a fixed charge, those costs were not really fixed costs but were instead related to the acquisition of gas supply.

Accordingly, it said: “[T]he Commission believes state regulators could consider reclassifying take-or-pay costs billed as a fixed charge as commodity costs and incorporating such costs into LDC sales or transportation rates, or both, thereby spreading such costs to the maximum possible extent as well as subjecting them to market forces. Alternatively, state agencies may wish to consider the option of not reclassifying fixed take-or-pay charges and instead allocating such charges to the LDC’s customers based on their cumulative purchase deficiencies.” ³³⁰ These further statements seemed to reserve for State regulation only two limited aspects of a further pass-through to end users: whether the LDC was prudent in purchasing its gas from a pipeline that accrued the costs and whether the pass-through should be in the form of a fixed charge or a volumetric surcharge. Nothing in that clarification suggested that a State could deny the pass-through for any other reason. In its final order (No. 500-H), however, the FERC, after iterating what it had said earlier, added that “state regulatory agencies may implement, as some have, an equitable sharing mechanism similar to that established by the Commission which requires LDCs to absorb a portion of the costs if they desire to assess a fixed charge.” The Commission said nothing about whether an LDC could be made to absorb any part of the cost, other than for imprudence, if it chose to pass the cost through by volumetric surcharges.

These Proceedings On July 20, 1988, the Baltimore Gas and Electric Company filed with the PSC a supplement to its tariff to allow it to recover TOP costs that it was required to pay to its supplier, Columbia Gas Transmission Corporation. The company informed the PSC that Columbia was passing through the TOP costs in the form of both volumetric and non-volumetric charges, that it proposed to pass through the volumetric charges on a volumetric basis to its customers, and that it .proposed to do likewise with respect to the non-volumetric charges. As to the latter, it expressed the belief that “no single class of customers should singularly bear or be excluded from bearing these non-volumetric surcharges,” and so it proposed to apply them to “both sales and Delivery Service,” i.e., to both its retail customers and to the large end users who purchased the gas from the producer and were paying only for transportation and delivery services. This was apparently the first filing with the PSC following FERC Order No. 500, and, upon preliminary consideration of it, the PSC, through Order No; 68197, ³³¹ “determined that a generic proceeding should be instituted to consider jurisdictional, legal and policy issues associated with the recovery by local distribution companies of the take-or-pay costs and charges and that the initial procedure to be followed in this proceeding is to be the filing of briefs on those issues by all Maryland gas distribution companies and other interested persons and the opportunity for replies to those submissions.” That is how the case then proceeded.

There were no evidentiary hearings; instead, all interested parties were permitted to present argument with respect to the scope of the PSC’s authority under the filed rate doctrine, the FERC orders, and the Maryland statutes to regulate the extent to which and the method by which the LDCs could pass through their TOP costs to their sales and delivery customers. On December 2, 1988, the PSC issued a comprehensive order in the matter. Order No. 68269, Re Jurisdictional and Policy Issues Relevant to the Recovery by Local Distribution Companies of Pipeline/Producer Take-or-Pay Costs and Charges, 79 Md. PSC 436, 99 PUR 4th 23 (1988). It concluded that, under both Federal and State law, it had no authority to preclude the LDCs from passing through their TOP costs except to the extent that those costs arose from imprudent purchases by the LDCs.

The underpinning of both conclusions — that based on Federal and that based on State law — was the PSC’s perceived inability to declare an FERC-approved charge unjust or unreasonable. The Nantahala and Mississippi Power cases,, said the PSC, simply confirmed the previously established principle that “states cannot question the reasonableness of FERC-filed or fixed wholesale rates” and that it could not “accomplish the same result (without using the word ‘reasonable’) by declaring that it would be ‘equitable,’ for reasons other than imprudence of the LDCs, if Maryland LDCs bear some portion of the TOP costs passed through to them by their pipeline suppliers.” In discussing the question of Federal preemption, the PSC concluded that, ³³² when the FERC orders were read as a whole, there was no evidence that FERC intended to delegate any of its exclusive jurisdiction to the States, even if legally it could do so. The alternative conclusion expressed by the PSC, “[a]ssuming, arguendo, that the filed rate doctrine and federal pre-emption is not a bar to our denying passthrough of all or a portion of prudently incurred TOP costs,” was that State law bars that denial. Md.Ann.Code art. 78, §§ 54 and 54D permit the PSC to allow LDCs to establish a sliding scale for the adjustment of its costs of purchased gas, subject to monthly verification and an evidentiary hearing at least once every six months.

The PSC has done so. Section 54D directs the PSC to disallow any gas charge that it finds unjustified upon the failure of the company to follow competitive practices in the procurement and purchasing of the purchased gas “or upon a showing that the company was unreasonable in its fuel procurement and purchasing practices.” Those limitations go to prudence, the PSC noted; thus, “[i]f these costs are permitted to be included in the PGA [purchased gas allowance], Section 54D(a) does not permit the Commission to deny an LDC the recovery of prudently incurred TOP costs in order to effectuate an ‘equitable’ sharing of those costs.” The same result, the PSC concluded, was dictated by § 69(a) of art. 78, which defines “just and reasonable rates” —those which the PSC must allow. Under that section, an LDC is entitled to a level of revenue that, after reasonable deduction for depreciation and other “necessary and proper expenses” and reserves, will yield a reasonable return on the fair value of the company’s used and useful property. “[A]t a minimum,” the PSC held, “it would be contrary to public policy to deny an LDC the opportunity to recover ‘necessary and proper’ expenses which, we believe, include prudently incurred TOP costs.” LDC-specific issues, including questions of prudence and “the appropriate allocation of those TOP costs, especially the direct-billed fixed monthly TOP charges, among customer classes,” the PSC said, can be raised in LDC-specific ³³³ proceedings, some of which had already been instituted pursuant to § 54D. But “pending our final decision in the LDC-specific proceedings we have previously instituted or will institute,” the PSC determined, “[f]or all of the reasons discussed above,” that “TOP costs are sufficiently related to the costs of purchased gas so that they may continue to be collected through the PGA tariffs of each of the Maryland LDCs____” The actual Order of the PSC was that “the findings and principles set forth in the body of this Opinion and Order shall be controlling in the proceedings previously instituted, or to be instituted, to review the incurrence by Maryland gas companies of take-or-pay costs and the passthrough of those costs to end users.” Aggrieved by these conclusions, appellants — Md. People’s Counsel, the Md. Industrial Group, and General Motors Corporation — asked for and received a rehearing before the PSC.

On January 27, 1989, the Commission issued an Opinion and Order clarifying one aspect of its earlier order but otherwise affirming what it had previously said and done. Order No. 68330, Re Recovery by Local Distribution Companies of Pipeline/Producer Take-or-Pay Costs and Charges, 80 Md. PSC 16, 101 PUR 4th 320 (1989). It again made clear that its decision rested on both Federal and State law, either of which would require the result, and that LDC-specific issues could be raised in the LDC-specific proceedings: “Under all of the above noted circumstances, we do not believe it was unreasonable to state that unless a party in an LDC-specific proceeding could present evidence, apart from evidence of imprudence, that would justify a disallowance of passthrough of all or a portion of TOP costs by an LDC, such a denial would be unlawful under the PSC Law. In short, although we could have, we have not closed the door in the LDC-specific proceedings against any other arguments based on record evidence, except for those legal arguments we have already rejected ... which might justify or result in the denial of passthrough of less than 100 percent of an LDC’s TOP