Notice & Comment

A Belated Contribution to the Symposium on Federal Agency Guidance and the Power to Bind

I have learned a lot from the articles in which Nick Parrillo summarized and built on the valuable empirical study of guidance documents that he conducted for ACUS and from the many comments on Nick’s work that scholars have published in the Notice and Comment symposium on Nick’s work. I hope to add to that conversation by describing the process I used as a practitioner to challenge the policy statement that was the basis of the D.C. Circuit’s opinion in Pacific Gas & Electric Co. v. Federal Power Commission, 506 F. 2d 33 (D.C. Cir. 1974). I think that my description of my hands on experience in addressing the issues discussed in this symposium in the context of one of the major precedents will support and reinforce the belief of all participants in this discussion that guidance documents raise challenging issues.

In 1970, the ill-conceived idea of regulating the price of natural gas at the wellhead created a large shortage that persisted and grew for a decade. Along the way it caused lots of problems, including the closure of hundreds of industrial facilities. General Motors (GM)—then the largest company in the world—asked the law firm where I was an associate to help it deal with the growing gas shortage. GM was mainly concerned about retaining access to gas for use in equipment that required a gaseous fuel.

In 1973, the Federal Power Commission (FPC) issued a “statement of policy” in which it urged interstate pipelines to adopt a set of priorities for allocating scarce gas among customers. The next to the lowest priority was assigned to customers who used gas as a boiler fuel. Pacific Gas & Electric (PG&E) disliked the policy because it used gas entirely as a boiler fuel. GM liked the decision to put boiler fuel in a low priority because it is easy to use a non-gaseous alternative fuel, like oil or coal, to fuel a boiler.

GM disliked the policy statement because it placed customers who purchase gas under “interruptible” contracts in the lowest category. GM had over one hundred plants that purchased gas under “firm” contracts, but it was most concerned about gas service to its two foundry division plants that purchased gas under “interruptible” contracts. Those were the only plants that made the motors that GM used in its cars. If it lost gas service to those two plants it would have to close them, since it used gas in those plants to operate equipment that could not be converted to another fuel. If GM had to close its foundry division plants for any significant period of time, it would have to close all of its other plants due to lack of motors to install in its cars.

GM did not choose “interruptible” service at its foundry division plants voluntarily. The sole supplier of gas to those plants had a policy of refusing to serve any direct industrial customer under a “firm” contract. GM reluctantly acquiesced in the supplier’s policy. The interruptible nature of GM’s gas service at the two plants did not cause it serious problems during the years before the gas shortage. Interruptions in service were rare and brief. They occurred only when unusually cold weather created unusually high demand for gas among residential and commercial customers.

The existence of a large and growing shortage of gas changed the situation dramatically. If GM’s gas service was cut off before service to customers who used gas for boiler fuel, it would have to close all of its plants for long periods of time. That result could be avoided easily by cutting off service to customers who used gas as a boiler fuel. The pipeline that supplied gas to GM’s two foundry division plants sold most of its gas to distributors who, in turn, sold lots of gas to customers who bought it under “firm “ contracts and used it for boiler fuel.

That is why GM sought pre-application review of the FPC policy statement. Since it was unlikely that a court would review and reject the policy itself in the abstract context of a pre-application challenge, GM urged the court to reject the policy as a procedurally invalid rule. GM thought it had a decent chance of prevailing because, while FPC claimed that the policy statement was not legally binding, it used the language of command, coupled with veiled threats, to encourage pipelines to “comply” with the policy.

GM’s loss in the D.C. Circuit had the potential to impose disastrous costs on GM by requiring it to close all of its plants for months every year. Each of the twenty-nine FPC-regulated pipelines except one responded to the FPC’s “non-binding” policy statement by filing a curtailment plan that placed “interruptible” customers in the lowest priority. Those filings were all “voluntary” but many pipeline lawyers acknowledged the obvious in their conversations with me. Their clients “complied” with the policy statement because they feared retribution from FPC in rate cases if they failed to “comply” “voluntarily”   with the “non-binding” policy statement.

GM was encouraged by the D.C. Circuit’s statement that FPC could not rely on its policy statement to support its action in any case. It could support the application of its policy to a pipeline only by providing substantial evidence to support every element of its policy. GM intervened in every case in which FPC and a pipeline attempted to support FPC’s stated policy of placing gas purchased under “interruptible” contracts in the lowest priority. As I detail in the 100-page version of this story, GM prevailed in each of those cases, albeit by spending a lot of money litigating the issue in scores of cases. See The Choice Between Adjudicating and Rulemaking for Formulating and Implementing Energy Policy, 31 Hastings L. J. 1 (1979).

The story of FPC’s unsuccessful attempt to implement its policy statement supports some generalizations. First, agencies often issue policy statements (or interpretative rules) to avoid the delay and cost of the notice and comment process. Given the large and rapidly growing gas shortage, FPC thought that it could not afford to delay announcement of its policy during the pendency of a lengthy notice and comment proceeding.

Second, FPC’s policy statement was a good example of what Bob Alexander called a “practically binding” statement. Only one of the twenty-nine pipelines regulated by FPC failed to “comply” with the non-binding policy. FPC would have been successful in implementing its policy if it were not for GM’s ability and willingness to spend millions of dollars fighting the policy in multiple agency hearings and court challenges to FPC’s attempts to implement the policy.

Third, FPC was not at all “flexible” with respect to its policy. GM had to defeat FPC in a dozen court cases before FPC capitulated and changed its policy. Pre-application judicial review of the policy would have been ineffective because of the lack of a record. GM could defeat FPC in court only by building an evidentiary record and arguing successfully that FPC lacked substantial evidence to support its placement of gas purchased under an “interruptible” contract in the lowest priority. Pre-application judicial review of a guidance document can further two important goals—to require an agency to provide a plausible explanation for a policy and to insure that the policy is not clearly unlawful. It cannot further the goal of assuring that a policy is consistent with the underlying facts.

Richard J. Pierce, Jr. is the Lyle T. Alverson Professor of Law at George Washington University.

This post is part of a symposium on federal agency guidance. The rest of the posts in this symposium can be viewed here.

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