Distrigas of Massachusetts Corporation v. Federal Energy Regulatory Commission, Boston Gas Company, Brooklyn Union Gas Company and Bay State Gas Company, Intervenors

Citation: 751 F.2d 20Docket: 84-1307

Court: Court of Appeals for the First Circuit; January 31, 1985; Federal Appellate Court

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The case involves Distrigas of Massachusetts Corporation (DOMAC) challenging a refund obligation imposed by the Federal Energy Regulatory Commission (FERC) under Section 4 of the Natural Gas Act. The refund pertains to overcharges made to eleven gas distributor customers from July 1979 to August 1981, a period during which DOMAC's prices exceeded a previously established lawful rate. While the parties agree that the refund should reflect the excess amount charged during this "locked-in" period, they dispute FERC's method of calculating the refund by splitting the period into three sub-periods. FERC calculated the refund based only on the second and third sub-periods, ignoring a loss DOMAC incurred during the first sub-period where the new rates yielded less revenue than the old rates. DOMAC contends that this division was arbitrary and unfairly inflated its refund obligation. The court agrees with DOMAC, finding FERC’s action to be arbitrary and the refund calculation unlawful. The court also notes the factual context, detailing that DOMAC's charges were initially lawful and that FERC later determined the rates were unlawfully high, necessitating a refund of the excess charges. DOMAC's pricing for liquefied natural gas (LNG) varied based on sales within a twelve-month contract year.

DOMAC previously charged a tariff of $0.65 per MMBtu for the first 7.5 million MMBtu sold, reduced to $0.55 per MMBtu for the next 23.5 million MMBtu, and then to $0.18 per MMBtu thereafter. Under a new proposed rate structure, DOMAC increased the first and second tier rates, with a new first tier rate of $1.05 per MMBtu for the first 8.1 million MMBtu, $0.615 per MMBtu for the next 14 million MMBtu, and maintaining $0.18 per MMBtu thereafter. The intent behind the new rates was to generate approximately $1.3 million in additional revenue when sales exceeded 30 million MMBtu in a contract year. Although the new rates took effect on July 5, 1979, DOMAC began counting sales for tier changes from April 1, 1979. Consequently, the new rates resulted in $1.5 million less revenue than the old rates during the 1979-1980 contract year, but earned $7.4 million more in subsequent years, netting an overall increase of $5.9 million during the locked-in period.

FERC determined that the "just and reasonable" rate was lower than both the new and old rates and required DOMAC to issue refunds. DOMAC proposed $5.9 million in refunds, but two customers contested this, seeking a refund based on the entire revenue from the locked-in period, leading FERC to order approximately $7.4 million in refunds. DOMAC appealed this decision, arguing that it was unlawful for FERC to require refunds exceeding the additional revenue it generated from the rate increase. The Supreme Court's precedent supports the notion that refunds should not exceed the additional amounts received due to the rate increase.

FERC's actions do not align with Section 4 of Sunray or previous opinions, lacking any special circumstances that would justify an exception to Sunray's general rule. In this case, all DOMAC customers experienced rate increases during the locked-in period, thus qualifying for refunds. The central issue is whether these refunds should be limited to the amount of the increase. Sunray established that refunds should be based on the increases paid, regardless of DOMAC's varying revenues across contract years. The Commission's rationale for segmenting the locked-in period into three contract years is unconvincing; it fails to provide substantive reasons for this subdivision beyond referencing DOMAC's contract year calculations and a suggestion from Boston Gas for larger refunds. The first reason does not adequately justify the Commission's approach, and the second indicates an attempt to circumvent the Sunray precedent. Sunray clarifies that Section 4 limits refunds to the extra revenues collected, maintaining that a utility should not be worse off for requesting a rate increase. This principle aligns with traditional rate-making practices, which typically restrict regulatory adjustments to future rates.

The Commission's ability to segment the "investigatory" period into sub-periods allows it to circumvent limitations set by Sunray and Section 4, potentially leading to disproportionate refund obligations by only accounting for periods of higher charges while ignoring those of lower charges. This could unjustly inflate the refund amount beyond the utility's actual net gain from the rate increase. The text questions whether the argument for larger refunds can justify such subdivisions, suggesting it contradicts Sunray's intent to limit refunds. 

Several cited cases, including FPC v. Tennessee Gas Transmission Co. and Gillring Oil Co. v. FERC, do not support the Commission's approach as they do not involve the same "inter-customer offset" issues and did not address the statutory "rate floor" relevant to Sunray. The Tennessee Gas case concerned a utility's concerns about potential future rate adjustments during an ongoing investigation, while Gillring involved a refund for overcharges without the utility claiming that offsets would leave it below its lawful revenue. 

Additionally, Belco Petroleum Corp. v. FERC is cited but similarly does not apply; it dealt with a company's attempt to offset losses from a rate suspension with refund amounts rather than addressing the Sunray refund limitations. Overall, the arguments presented lack sufficient justification under existing legal precedents.

DOMAC is not attempting to collect revenues lost during a five-month suspension period, but contends that excluding the entire locked-in period from refund calculations would lead to a refund that exceeds the lawful rate in effect during that time. The argument asserts that the situation does not involve a rate floor as established in Belco, which is deemed inapplicable. The case Air Transport Association of America v. CAB is also considered irrelevant due to differing statutory contexts. FERC’s claim that acknowledging DOMAC's 1979 revenue loss constitutes an unlawful retroactive rate increase is rejected; the determination of differences in revenue should be based on the entire locked-in period rather than splitting it into parts. 

The commission's action is criticized as arbitrary and unlawful, as it has not justified any deviation from the established refund principles outlined in the Sunray principle. The document indicates that a Section 4 refund should reflect only the utility’s collected amounts under increased rates compared to what it would have received under prior lawful rates. The case is remanded to the Commission for further proceedings consistent with these findings. Additionally, the excerpt includes references to the Natural Gas Act, particularly Section 4, highlighting the requirements for rates and the need for just and reasonable charges by natural-gas companies.

The Commission may permit changes to take effect without the standard thirty days' notice if it issues an order detailing the changes, effective date, and filing requirements. Upon filing a new schedule, the Commission can initiate a hearing on the lawfulness of the proposed rate, charge, classification, or service in response to complaints or on its own initiative, without requiring formal pleadings from the natural-gas company, but with reasonable notice. The Commission can suspend the new schedule for a maximum of five months while the hearing is underway, provided it files a written statement explaining the suspension. If the hearing is not concluded by the end of the suspension period, the proposed changes will take effect upon request from the natural-gas company. In cases of increased rates or charges, the Commission may require the company to provide a bond to refund any unjustified amounts and maintain detailed records of the increased revenues. The natural-gas company bears the burden of proving that any increase is just and reasonable, and the Commission will prioritize these hearings for prompt resolution.