United Distribution Companies v. Federal Energy Regulatory Commission

In the 1970s, the Federal Energy Regulatory Commission (the commission) (defendant) adopted end-use curtailment plans to protect high-priority customers from natural-gas-supply interruptions in times of natural-gas shortages. These plans were designed to ensure natural-gas availability for high-priority customers (based on the customers’ end use of the electricity) like schools, hospitals, residences, and other users for whom a reduction in natural-gas service could endanger health or property. Essential agricultural uses and essential industrial process or feedstock uses were the second highest priority. All other uses were in the third and lowest priority level. Until the commission issued Order No. 436, it had not distinguished between supply curtailment (i.e., a reduction in gas supply) and capacity curtailment (i.e., a reduction in available pipeline capacity). After the issuance of Order No. 436, the commission permitted pipelines to curtail delivery of natural gas pro rata (in proportion to the amount each user had reserved) rather than giving priority based on end use if curtailment was caused by a capacity interruption but not a supply interruption. The commission reasoned that supply shortages lasted longer and affected a broader group of customers. Capacity shortages were shorter, affected a smaller segment of customers, and could more easily be mitigated by self-help measures. As part of its decade-long restructuring and deregulation of the natural-gas industry, the commission issued Order No. 636. The order continued the commission’s curtailment policies unchanged. In its order, the commission offered several market-based alternatives for customers facing reductions in natural-gas deliveries due to limited pipeline capacity such as making arrangements with other pipelines or gas sellers. The commission found that curtailment based on end use was not required in all circumstances because the natural-gas industry had not experienced significant shortages since the 1970s and that the deregulation of the industry made market-based alternatives to end-use curtailment viable for customers. Order No. 636 was challenged in the United States Court of Appeals for the District of Columbia Circuit.