The major elements of the settlement are as follows:

(1) Effective April 13, 1990, the fair and equitable rate for section 311 transportation, services performed on the Seagull Shoreline System is 7.5 cents per MMBtu.

(2) Within thirty days of the issuance of a final Commission order, no longer subject to rehearing, approving the settlement, Seagull Shoreline System shall refund, with interest calculated in accordance with the Commission's regulations, amounts collected on or after April 13, 1990 in excess of the settlement rate, for section 311 transportation. Seagull Shoreline System shall file a refund report with the Commission within sixty days after the date of such order.

(3) The Settlement Agreement represents a negotiated settlement, the provisions of which shall not become effective until the Commission's order approving the settlement becomes final and no longer subject to rehearing.

(4) On or before April 13, 1993, Seagull Shoreline System shall file an application pursuant to Part 284 of the Commission's regulations to justify its current rate or to establish a new rate on this system.

This letter order does not relieve Seagull Shoreline System from its obligation to file the required reports under sections 284.126 and 284.148 of the Commission's regulations.

This letter order is without prejudice to any findings or orders which may have been or which may hereafter be made by this Commission, and is without prejudice to any claim or contention which may be made by the Commission, its staff or any other party or person affected by this letter, in any proceeding now pending or hereafter instituted by or against Seagull Shoreline System or any other person or party. The Commission's approval of this settlement does not constitute approval of, or precedent regarding any principle or issue in this proceeding.

I. Introduction and Background

On November 1, 1990, the Commission issued Order No. 5281 in the above-captioned proceedings in response to an order issued on December 28, 1989, by the United States Court of Appeals for the District of Columbia Circuit.2 The Court of Appeals had vacated and remanded the Commission's orders in the Tennessee Gas Pipeline Company proceedings listed above, concluding that the purchase defi

153 FERC 61,163 (1990).

2

Associated Gas Distributors v. FERC, 893 F.2d 349 (D.C. Cir. 1989)(AGD-II), cert. denied sub nom. Berkshire Gas Co. v. Associated Gas Distributors, U.S.59 U.S.L.W. 3271 (Oct. 9, 1990).

3 The purchase deficiency method of cost allocation compares a customer's purchases during a base period (e.g. 1981-1982) with purchases during a subsequent "deficiency" period (e.g. 1983-1986), and allocates take-or-pay settlement costs in proportion to the customer's reductions in purchases in the defi

ciency method for allocating a portion of Tennessee's take-or-pay settlement costs3 violated the filed rate doctrine. Since there were many other contested proceedings in which parties had raised the same objections to the purchase deficiency allocation method of other pipelines that were raised in the Tennessee proceedings, the Commission issued Order No. 528 to deal not only with the remanded Tennessee proceedings, but also with all other such contested proceedings that were directly affected by the

ciency period as compared to other customers' reductions.

4 Under the filed rate doctrine, a pipeline may not charge a rate for service that is different from the rate on file with the Commission for that service during the period in question. See Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 578 (1981); and Columbia Gas Transmission Corp. v. FERC, 831 F.2d 1135 (D.C. Cir. 1987), modified on reh'g, 844 F.2d 879 (D.C. Cir. 1988).

court's ruling. Order No. 528 provided that 30 days after its publication in the Federal Register, the authority of all pipelines (except those listed in Appendix A as not affected by the order) to collect fixed charges based on a purchase deficiency allocation method was stayed. Order No. 528 also permitted pipelines to file revised tariff provisions to replace the stayed provisions, and prescribed certain general principles for evaluating revised allocation methods. Furthermore, the Commission directed affected pipelines to refund all amounts collected under the stayed tariff provisions and to file a report of such refunds within 120 days of issuance of Order No. 528, unless they had filed tariff provisions superseding the stayed provisions by that date. Downstream pipelines were allowed to file refund reports up to 30 days after the upstream pipeline filed its refund report. This order deals with the various requests for rehearing and clarification of Order No. 528,7 except for those matters previously dealt with in separate orders. The order generally denies rehearing, but does grant rehearing in part to cap at 50 percent the amount of costs that can be recovered through volumetric surcharges for costs that were previously included in Order No. 500 [FERC Statutes and Regulations ¶ 30,761] filings.

II. Discussion

A. Commission's Authority

Many of the applicants for rehearing argue that the Commission lacked authority to issue Order No. 528 without having first issued a notice of proposed rulemaking and entertained comments in accordance with the requirements of the Administrative Procedure Act (APA) for the promulgation of agency regulations. 10 The

5 On January 7, 1991, the United States Court of Appeals for the District of Columbia Circuit remanded a group of such proceedings to the Commission. Alabama-Tennessee Natural Gas Company v. FERC et al., No. 88-1864 et al.

6 Order No. 528 was published in the Federal Register on November 16, 1990 (55 Fed. Reg. 47,863). Accordingly, the stay became effective December 16, 1990.

7 The requests for rehearing are listed in the Appendix to this order.

8 Eastern Shore Natural Gas Company, 53 FERC ¶61,369 (1990), Texas Eastern Transmission Corp., 53 FERC 61,375 (1990), Michigan Gas Storage Co., 53 FERC¶ 61,376 (1990), and Mechanisms for Passthrough of Pipeline Take-or-Pay Buyout and Buydown Costs, 53 FERC ¶ 61,380 (1990)(order on requests for clarification of applicability of stay). These orders disposed of pending requests for determinations of the applicability of Order No. 528.

9 Transwestern Pipeline Company, Northern Natural Gas Company, and Florida Gas Transmission

applicants contend that notice and comment were required both before the Commission adopted the stay and refund requirements of Order No. 528 and before the Commission adopted the guidelines it will use in evaluating revised allocation methods. For example, the Natural Gas Supply Association (NGSA) argues that Order No. 528 clearly constitutes a substantive rule under section 551 of the APA, as an "agency statement of general or particular applicability and future effect designed to implement, interpret or prescribe law or policy." NGSA argues that Order No. 528 invalidates existing effective tariff provisions, unconditionally requires either new rate filings or refunds and the removal of tariff provisions previously filed and accepted by the Commission, and establishes a series of binding principles to be applied to future rate filings, all within strict time limits. All these features of Order No. 528 are, according to NGSA, binding, substantive rules subject to the notice and comment requirements of the APA.12

The Commission believes that Order No. 528 was properly issued without prior notice and comment. Order No. 528 was issued pursuant to a remand from a Court of Appeals in the Tennessee proceedings listed above, holding that the purchase deficiency method of allocating take-or-pay settlement costs to fixed charges violated the filed rate doctrine. While the court's decision addressed Tennessee's passthrough mechanism, the issue upon which the court ruled affected the proceedings of numerous other pipelines because it involved an interpretation of the Commission's statutory authority. The allocation method used by Tennessee has been required by the Commission in numerous take-or-pay filings pursuant to the statement of policy in Order No. 500.13 Chal

Company (filing jointly as "Enron"), National Fuel Supply Corporation, Natural Gas Supply Association, and Central Hudson Gas & Electric Corporation.

10 5 U.S.C. § 553 (1988).

11 5 U.S.C. § 551(4) (1988).

12 Request of the NGSA for Rehearing pp. 6-8.

13 Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 52 Fed. Reg. 30,334 (Aug. 14, 1987)(Interim Rule), FERC Statutes and Regulations 30,761, extension granted, Order No. 500-A, FERC Statutes and Regulations 30,770, modified, Order No. 500-B, FERC Statutes and Regulations 30,772, modified further, Order No. 500-C, FERC Statutes and Regulations ¶ 30,786 (1987), modified further, Order No. 500-D, FERC Statutes and Regulations 30,800, reh'g denied, Order No. 500-E, 43 FERC 61,234, modified further, Order No. 500-F, FERC Statutes and Regulations 30,841 (1988), reh'g denied, Order No. 500-G, 46 FERC ¶ 61,148 (1989), American Gas Association v. FERC, 888 F.2d 136 (D.C. Cir. 1989)(remanding interim rule), Order No. 500-H, FERC Statutes and Regulations ¶ 30,867

lenges to the use of that method based on the same statutory grounds were pending on appeal before the court, and had been stayed pending final disposition of the court's ruling in AGD-II.14 No serious contention has been raised that the court's holding concerning Tennessee's allocation method does not apply equally to the purchase deficiency allocation methods used by all the other pipelines.15 Indeed, on January 7, 1991, following Order No. 528 and the filing of the rehearing requests, the court remanded to the Commission all pending appeals and expressly directed that the Commission "conduct further proceedings consistent with this court's mandate in" AGD II. Thus, the legality of the purchase deficiency allocation method has been fully litigated in the Tennessee proceeding, and with the issuance of the court's mandate following the Supreme Court's denial of the requests for certiorari and the remand of the other pending appeals, the sole remaining question is how to implement the court's remands concerning the passthrough of take-or-pay settlement costs in light of the court's decision that the purchase deficiency allocation method violates the filed rate doctrine embodied in the statute.

Order No. 528 represented the Commission's initiation of proceedings to remedy the situation in light of the court's decision. The relevant take-or-pay filings were made in many different proceedings initiated by the pipelines pursuant to section 4 of the Natural Gas Act. However, the volume of those filings, together with the filings by secondary (downstream) pipelines to pass through take-or-pay charges from primary pipelines, made it difficult for the Commission to list every pipeline, and each proceeding of every pipeline, that was affected by the court remand. Consequently, the Commission issued a generic order under a style ordinarily used for rulemaking proceedings, and simply described the kinds of take-or-pay filings that were affected directly by the court remand and those that were not. The Commission listed various proceedings in Appendix A to Order No. 528 that the Commission had

(Footnote Continued)

(1989)(Final Rule), modified, Order No. 500-I, FERC Statutes and Regulations ¶ 30,880 (1990), aff'd in part and remanded in part, American Gas Association v. FERC, 912 F.2d 1496 (D.C. Cir. 1990).

14 See Appendix B to Order No. 528.

15 Panhandle Eastern Pipe Line Company and Trunkline Gas Company, on rehearing, raise the theoretical possibility that pipelines other than Tennessee might have given their customers proper notice that they intended to allocate costs based on purchase deficiencies prior to the base and deficiency periods they use to calculate purchase deficiencies, and thus such pipelines' use of the purchase deficiency method

determined were not subject to the court remand and invited any other pipeline that believed it belonged on the list to file with the Commission indicating that and the basis for its position.

In initiating proceedings to address the pipelines' allocation methods in light of the court's decision, the Commission took two separate steps. The first was designed to promptly bring to an end the pipelines' recovery of take-or-pay costs under the purchase deficiency allocation method found unlawful by the court. Thus, the Commission stayed, effective 30 days after publication of the order in the Federal Register, any further recovery of fixed charges allocated based on purchase deficiencies (with certain exceptions discussed below), and the Commission required that the pipelines subject to the stay refund all fixed charges previously collected within 120 days of the issuance of Order No. 528, unless within that time they have filed revised allocation methods together with "some plan for crediting, distributing, or allocating amounts previously collected."16 The second step the Commission took in Order No. 528 was to give the pipelines and interested parties initial guidance on the development of new allocation methods to replace the unlawful purchase deficiency allocation method. The Commission permitted pipelines to make filings proposing new allocation methods and adopted certain principles which the Commission would use to evaluate the proposed revised allocation methods. The Commission finds that neither of these steps required prior notice and comment. However, since the reasons for the Commission's holdings with respect to the two steps differ, the Commission will discuss each separately.

1. Stay and refund requirement

The allegations that the Commission erred by not following the procedures required for rulemaking proceedings in adopting the stay and refund requirement miss the mark. These are not the type of actions to which the notice and comment provisions of the Administrative

might not violate the filed rate doctrine. However, neither Panhandle nor Trunkline, nor any other party, has alleged any specific facts suggesting that any pipeline in fact gave such notice. Indeed, since all pipelines' base and deficiency periods began prior to the issuance of Order No. 500 and the filing of any pipeline proposals to allocate costs on this basis, it appears that no pipeline gave the required notice to satisfy the court's interpretation of NGA section 4 and that all pipelines' use of the purchase deficiency method thus violated the filed rate doctrine under the court's decision.

16 Slip op. at 10.

Procedure Act apply.17 The stay and refund requirements did not themselves establish any new allocation method for fixed charges, either on an interim or final basis. Thus, they do not represent the establishment of a specific new rule to replace the Commission's previous policy concerning the allocation method which the court had invalidated.

Rather, the stay and refund requirements were solely an exercise of the Commission's equitable authority, in response to the court's remand, to terminate the recovery of fixed charges that the court found to violate the filed rate doctrine embodied in section 4 of the Natural Gas Act. Thus, the stay and refund requirements merely implemented the principle that, once a court has held that a particular activity or method is unlawful, the entities before the court, such as the Commission, must comply with the court's ruling by terminating the actions or methods found to have been unlawful. Thus, the Commission's order on remand from the court sought to give appropriate effect to the AGD II mandate.

In addition, the pipelines have been on notice since the issuance of the AGD II decision on December 28, 1989, that, should the various attempts to obtain rehearing or certiorari of AGD II fail, the collection of fixed charges based on purchase deficiencies would have to cease.

Moreover, while as explained above the Commission for convenience issued a generic order under a style ordinarily used in rulemaking proceedings, in fact the Commission's stay and refund requirements represent the initiation of various individual proceedings on remand. The pipelines' unlawful recovery occurred pursuant to tariffs accepted subject to refund in individual rate cases initiated by the pipelines pursuant to section 4 of the Natural Gas Act, and the Commission is acting in response to the court's remands of those orders. Accordingly, Order No. 528 sought to initiate the required individual proceedings with respect to each pipeline affected by the AGD II decision by imposing the stay and refund requirements and by permitting those pipelines to make filings in their individual cases to revise their allocation methods, together with plans for crediting, distributing, or allocating amounts previously collected. Any refunds that pipelines are ultimately required to make will be determined

17 See Interpretative Rule for Btu Measurement Standard under the Natural Gas Policy Act of 1978, FERC Statutes and Regulations, Regulations Preambles 1982-1985 ¶30,532 (1984) (Order No. 356) (interpretative rule issued without notice and comment under APA to implement court ruling that NGPA precluded adoption of "dry rule" for measuring Btu content of natural gas).

in those pipelines' individual cases and will be required pursuant to the refund requirements imposed by the Commission in those cases. Also, each pipeline's revised allocation method to replace the allocation method found unlawful by the court will be developed on a case-bycase basis in the pipelines' individual rate cases pursuant to sections 4 and 5 of the Natural Gas Act, and all parties will have full opportunity for comment in those individual cases. Thus, the stay and refund requirements of Order No. 528 are not part of a general rulemaking requiring notice and comment, but are intended to initiate individual proceedings concerning the revision of each pipeline's allocation method, and a full opportunity for consideration of all issues will be provided in those individual cases once each pipeline files its revised allocation method.

Consistent with the fact that Order No. 528 initiates individual proceedings concerning the revision of each pipeline's allocation method, Order No. 528 provided each pipeline an opportunity to make a filing with the Commission concerning whether, in light of its specific circumstances, the Order No. 528 stay and refund requirements should be applied to it. In spite of the fact that all pipelines' purchase deficiency allocation methods violated the filed rate doctrine, not all pipelines are necessarily affected by the court's decision; those pipelines whose allocation methods were final and nonappealable, or those whose allocation methods had been agreed to in settlements approved by the Commission, have not been required to revise their allocation methods. Accordingly, while the Commission listed in Appendix A of Order No. 528 those pipelines that it was able to identify as fitting in these categories, 18 it invited pipelines not listed in Appendix A to indicate any basis for a ruling that their proceedings were likewise not subject to the remand. A number of pipelines did submit requests for rulings that, based on the specific facts of their individual cases, the stay and refund provisions of Order No. 528 should not be applied to them. Thus, all pipelines have had the opportunity to make filings with the Commission concerning whether the stay and refund requirements should be applied to them, and the Commission ruled, on an individual case-by-case basis, on all requests filed prior to the effective date of the stay.19

18 No rehearing applicant contests the Commission's determination that the ten pipelines listed in Appendix A were unaffected by the court's decision. Nor do they contest the Commission's holding that any pipeline which fits into the two categories described above should be exempt from the stay.

19 See note 8, supra.

Furthermore, consistent with the fact that any refunds pipelines must make will be made in their individual cases, Order No. 528 initiated procedures that will give each pipeline and other interested parties a full opportunity, in those individual cases, to comment on the appropriate plan for crediting, distributing, or allocating amounts previously collected by each pipeline pursuant to the purchase deficiency allocation method. Thus, Order No. 528 does not specify any general rule concerning the refund or crediting plan to be used by pipelines filing to revise their allocation methods. Rather, it requires those pipelines to include in their filings "some plan for crediting, distributing, or allocating amounts previously collected," on which the pipeline's customers may then comment. A deadline for making refunds in the event no revised allocation plan is filed was established to ensure that those pipelines whose tariff provisions were unlawful under AGD-II, and who were subject to that decision, propose some plan whereby billings under the unlawful provisions would be refunded or credited.20 The Commission does not anticipate that any pipeline affected by the court's filed rate doctrine rulings will fail to file a revised allocation method by the 120-day deadline. Therefore, as a practical matter, Order No. 528 does not establish any generic method for making refunds, but institutes caseby-case review of refund proposals from each affected pipeline.

Finally, the stay and refund requirements have no permanent effect on the pipelines' opportunity to recover take-or-pay costs, apart from terminating the illegal purchase deficiency allocation method; however, the permanent prohibition on that allocation method is the result of the court decision, not Order No. 528. Moreover, the pipelines had it within their control to file revised tariffs to prevent any interruption in the collection of take-or-pay costs. Thus, interruption in the pipelines' actual collection of take-or-pay costs, if any, as

20 The Commission only required automatic refunds where a pipeline fails to file an alternative tariff provision and reconciliation plan before the 120-day deadline. In that circumstance, there would be no lawful allocation of fixed charges in effect against which prior collections could be credited, and thus no issue concerning crediting would arise.

21 See Mid-Tex Electric Co-op, Inc. v. FERC, 822 F.2d 1123 (D.C. Cir. 1987), holding that a rule's temporally limited scope is among the key considerations in evaluating an agency's finding under section 553(b)(3)(B) of the APA that "for good cause notice and public procedure

are impracticable, unnecessary, or contrary to the public interest." In Mid-Tex, the court upheld the Commission's adoption, without notice and comment, of a new substantive

a result of the stay and refund requirements should be temporary until pipelines file and the Commission accepts revised allocation methods.21 It must be emphasized that all pipelines had an opportunity to avoid the stay and refund requirements altogether by filing revised allocation methods in time to take effect before the effective date of the stay, and three pipelines (ANR, Natural, and Tennessee) did just that. Any interruption in the collection of costs by other pipelines should be short lived, unless a pipeline voluntarily decides to delay its filing of a revised allocation method 22

2. General principles

The Commission now turns to the appropriateness of adopting, without notice and comment, general guidelines to be applied in the individual sections 4 and 5 proceedings in which revised allocation methods will be developed. Section 553(a) of the Administrative Procedure Act permits the Commission to issue "general statements of policy" without prior notice and comment. The United States Court of Appeals for the District of Columbia Circuit discussed in detail the distinction between substantive rules requiring notice and comment and general statements of policy, which do not, in Pacific Gas & Electric Co. v. FPC23:

The critical distinction between a substantive rule and a general statement of policy is the different practical effect that these two types of pronouncements have in subsequent proceedings. A properly adopted substantive rule establishes a standard of conduct which has the force of law. . . . A general statement of policy, on the other hand, does not establish a "binding norm." It is not finally determinative of the issues or rights to which it is addressed. The agency cannot apply or rely upon a general statement of policy as law because a general statement of policy only announces what the agency seeks to establish as policy. A policy statement announces the agency's tentative intentions for the future.

rule to be in effect on an interim basis while the Commission developed a permanent rule in response to a court remand. Here, there is even less reason for notice and comment, since as discussed above, the stay and refund requirements, unlike the interim rule in Mid-Tex, do not involve the adoption of a new substantive rule, but merely require the termination of the use of an unlawful method.

22 While the Commission has not waived the 30-day notice requirement of NGA section 4 to allow revised allocation methods to take effect on less than 30 days notice, the Commission has consistently exercised its discretion to suspend the effectiveness of the revised allocation methods for the minimum period.

23 506 F.2d 33, 38 (D.C. Cir. 1974).