Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-97-01215/USCOURTS-caDC-97-01215-0/pdf.json

Parties Involved:
ANR Pipeline Company
Petitioner
Federal Energy Regulatory Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 11, 1998 Decided June 23, 1998

No. 97-1214

Colorado Interstate Gas Company and

ANR Pipeline Company,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

UGI Utilities, Inc., et al.,

Intervenors

Consolidated with

No. 97-1215

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Richard W. Miller argued the cause for petitioners. With

him on the briefs was Daniel F. Collins.

Edward S. Geldermann, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With

him on the brief was Jay L. Witkin, Solicitor, and Susan J.

Court, Special Counsel.

Before: Wald, Williams and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Under the regulatory regime

now applicable to interstate pipelines, not only pipelines but

other actors in the gas industry (such as independent marketers) may hold entitlements to pipeline capacity. Non-pipeline

actors are free to acquire additional capacity entitlements

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without advance approval by the Federal Energy Regulatory

Commission. But in the decisions under review here, the

Commission ruled that an interstate pipeline seeking to acquire capacity rights on another pipeline ("offsystem capacity") could do so only with the advance approval of the

Commission. Because the Commission failed to offer a reasoned explanation for this difference in treatment, we remand

the case for further proceedings.

* * *

Historically, natural gas pipelines bought natural gas at the

wellhead and carried it to various markets for resale. As

part of its effort to shift to "light-handed regulation" of the

gas industry under the Natural Gas Act, the Commission in

its Order No. 636 required interstate pipelines to "unbundle"

their sales role from their transportation role. The Commission's purpose was to ensure that pipelines' natural monopoly

over the transportation grid did not give them an unfair

advantage over non-pipeline sellers of gas. See generally

United Distribution Companies v. FERC, 88 F.3d 1105,

1125-27 (D.C. Cir. 1996) (describing Order No. 636). To

facilitate the unbundling process, Order No. 636 required

pipelines to assign the capacity rights they held on upstream

pipelines (i.e., on pipelines closer to the point of production) to

their existing firm transportation customers, except for a

limited amount of capacity needed for operational purposes

such as keeping line pack in balance.1 See Order No. 636-A,

FERC Stats. & Regs. p 30,950, at 30,566-67 (Aug. 3, 1992).

FERC reasoned that if pipelines were allowed to retain

upstream capacity on other pipelines, they could inhibit the

development of a competitive sales market by favoring their

sales function or otherwise making it more difficult for downstream customers to buy from producers at competitive

prices. See UDC, 88 F.3d at 1136.

Texas Eastern Transmission Company asked FERC for a

declaration that Order No. 636 did not establish a per se rule

prohibiting interstate pipelines from holding capacity on other

pipelines. On January 31, 1996 the Commission issued an

order agreeing with Texas Eastern. Texas Eastern Transmission Corp., 74 FERC p 61,074, at 61,220 (1996) ("January

Order"). It observed that Order No. 636's rationale for

requiring pipelines to assign upstream capacity had lost much

of its force, since most pipelines had already implemented the

unbundling requirement. Id. "The transition to unbundled

sales is now complete," the Commission found, "and pipelines

and their shippers have become more accustomed to doing

business in the unbundled environment." Id. Further,

FERC recognized that "pipelines and their shippers face a

dynamic and rapidly changing market," in which "acquisition

of new upstream or downstream capacity may offer a mechanism for interstate pipelines to provide shippers with access

to new supply and market areas." Id. A per se ban on

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acquisition of offsystem capacity would force pipelines interested in serving new markets to physically expand their own

capacity, a decision that "could result in duplicative and

unnecessary facilities contrary to the Commission's goal of

meeting new demand with both the least cost and least

environmental impact." Id. Allowing pipelines to acquire

offsystem capacity could also produce benefits for the acquir-

__________

1 Line pack is defined as the quantity of natural gas that is

necessary to fill the pipeline itself, so as to maintain the necessary

operating pressures. Kern River Gas Transmission Company, 50

FERC p 61,069, at 61,156 (1990).

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ing pipeline's shippers, the Commission concluded, allowing

them to deal with a single pipeline and thus "avoid the

administrative burdens of contracting, billing, scheduling,

nominating, balancing, and dealing with penalties on multiple

pipelines." Id.

Nonetheless, the Commission said that any pipeline intending to acquire upstream or downstream capacity must secure

advance Commission approval of the proposed service. Id. at

61,221. The Commission justified this requirement by reference to a variety of concerns. There appeared to be four

basic ones. First, the acquiring pipeline might control customer choices or tie use of the acquired capacity to other

pipeline or pipeline affiliate services. Second, depending on

the treatment of the costs, rate changes might result that had

adverse impacts on customers of the acquiring pipelines, on

firms competing with the acquiring pipeline's marketing affiliate, or on customer choices among supply basins. Third,

there might be preferential treatment of the acquiring pipeline over the customers of the selling pipeline (presumably by

the selling pipeline, but the Commission does not identify the

actor). Fourth, some adverse effects might flow from the

way the capacity would be managed or otherwise integrated

into the existing open access operations of the acquiring

pipeline. Here the Commission expressed particular concern

about access to receipt and delivery points on the acquired

capacity. Id. at 61,220-21.

Two interstate pipelines, Colorado Interstate Gas Company

and ANR Pipeline Company, petitioned for rehearing. They

contended that the Commission's case-by-case authorization

requirement discriminated against pipelines, since the Commission permits non-pipeline shippers to acquire capacity and

ship gas on any pipeline without prior approval. They pointed to existing regulatory safeguards by which the Commission can guard against the concerns that purportedly justify

the prior authorization requirement, arguing that these safeguards already place greater controls on pipelines than on

non-pipeline shippers. The delay and uncertainty engendered by the pre-approval requirement, they said, would

inflict a competitive disadvantage on the pipelines, hobbling

their efforts to make prompt commitments to firm deals.

In the second order under review the Commission denied

the rehearing petition, repeating many of the arguments on

which it relied in its initial order. Texas Eastern Transmission Corp., 78 FERC p 61,277, at 62,161-62 (1997) ("Rehearing Order"). In addition, it reasoned that because a pipeline's

acquisition of offsystem capacity was an alternative to construction of duplicate facilities, Commission review was appropriate for the reasons justifying advance review of such

construction. Id. at 62,161. CIG and ANR petitioned for

review in this court.

* * *

The Commission does not seriously contest that the delay

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associated with case-by-case authorization practically eliminates any opportunity for pipelines to compete in the increasingly important market for short-term transportation services. Even for long-term transactions, the requirement

hinders pipelines' efforts to make prompt and reliable commitments. And it generally hampers their ability to participate in the Commission's "capacity release" program, under

which shippers who hold firm transportation capacity can

release it to others when it is unneeded. See 18 CFR

s 284.243.

The Commission's justification of the prior authorization

requirement presents two difficulties. First, in pointing to

the various possible hazards of pipeline acquisitions of offsystem capacity, the Commission never explains why these concerns are more severe when the acquisitions are made by a

pipeline than by a non-pipeline--so much more severe that

advance application and approval are needed only for the

former. For example, the Commission said that a pipeline

acquiring offsystem capacity might manipulate customer

choices, perhaps by conditioning access to the acquired capacity on the customer's use of the pipeline's services or those of

its affiliates. The scale of this risk would seem to turn on the

extent to which, for any origin-and-destination pair, the acquired link afforded its holder market power. The risk may

be substantial, but the Commission has not explained--and

nothing in the record indicates--why it is more severe when

pipelines rather than gas marketers get hold of the capacity.

Particularly in light of the Commission's own finding that the

"transition to unbundled sales is now complete," January

Order, 74 FERC at 61,220, it must give a fuller explanation of

why these unbundled pipelines nonetheless continue to pose

greater hazards to competition than do other holders of

transportation capacity.

Second, the Commission fails to address the petitioners'

argument that regulatory mechanisms already exist to control

any hazards that might arise when a pipeline is the acquiring

entity. This failure to address existing controls on pipeline

behavior applies to all of the risks identified by the Commission. Its concern about the rate impact of capacity acquisition is especially puzzling, since a pipeline can only charge

rates stated in a Commission-approved tariff. So far as rates

for the service itself are concerned, we infer that the pipeline

would have to charge according to some previously approved

formula (including whatever flexibility is available under

Commission rules, such as its authorization of discount rates,

see 18 CFR s 284.7(c)(5)(ii)(A)). As for possible rate effects

on customers not using the acquired capacity, any attempt to

shift the costs of the acquired capacity apparently has to run

the gauntlet of a rate change filing under s 4 of the Act,

which would enable the Commission to protect any otherwise

adversely affected customers. The Commission seemed to

recognize this fact in its Rehearing Order, only to brush it

aside without discussion:

Conceivably, these types of [anticompetitive] issues, to

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the extent they implicate subsidization or improper allocation of costs, could be addressed when the pipeline

filed a rate case to recover the costs of offsystem capacity. Still, we believe the public interest is best served if

proposals by pipelines to acquire capacity, like proposals

to construct it, are reviewed beforehand.

Rehearing Order, 78 FERC at 62,162.

At oral argument Commission counsel seemed to suggest

that it might be difficult for the Commission to say no in a

s 4 proceeding once the pipeline had incurred the costs of

acquisition. Why the Commission would be so tenderUSCA Case #97-1215 Document #361701 Filed: 06/23/1998 Page 6 of 9
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hearted to the pipeline is unclear. In any event, rather than

singling out pipelines for the competitive disadvantage of

preclearance, the Commission could establish a general rule

that pipelines must bear the risk of loss from capacity acquisitions. Cf. Associated Gas Distributors v. FERC, 824 F.2d

981, 1033-38 (upholding "optional expedited certification" process establishing rebuttable presumption of Section 7 approval for pipelines willing to assume full economic risk of new

ventures).

Even apart from rate matters, existing regulations appear

to guard more thoroughly against the risks of anticompetitive

behavior by pipeline holders of offsystem capacity than

against similar risks posed by non-pipeline holders of capacity. Interstate pipelines are governed by the terms of their

blanket certificates of public convenience and necessity,

granted under s 7 of the Natural Gas Act. See 18 CFR

s 284.221. These require the pipeline to make its transportation service available on a nondiscriminatory basis under open

access tariffs determined by the Commission. 18 CFR

s 284.8. By contrast, non-pipeline shippers are not limited

by the non-discrimination and open access requirements of

the blanket certificate regulations.

Thus, if the Commission is concerned that a pipeline selling

capacity might favor an acquiring pipeline over its other

customers, it can address the issue by enforcing the selling

pipeline's obligation to comply with the blanket certificate

regulations and its open access tariff. Likewise, if it is

concerned about whether the acquired capacity will be managed or integrated into existing open access operations in a

manner harmful to shippers, it can enforce the open access

tariff of the acquiring pipeline.

Perhaps the Commission reasonably fears that, even taking

these safeguards into account, pipeline acquisitions of offsystem capacity pose such grave threats that without preclearance it will be unable to perform its protective mission. If so,

the Commission must explain the basis of that fear. Alternatively, given the pipelines' wish to participate flexibly and

responsively in the market, especially in the emerging spot

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markets, the Commission may explain itself on remand by

identifying ways the pipelines can satisfy the pre-approval

requirement and still achieve that goal.

We can find no merit in the Commission's theory that,

because pipeline arrangements for acquiring existing capacity

on other systems are substitutes for new construction, such

acquisitions similarly require advance review. Mere transfers of existing capacity rights do not raise the issues that

justify FERC review of construction certificate applications--

avoiding duplication of facilities, environmental disturbance,

and waste of resources.

We reject, however, CIG and ANR's claim that 18 CFR

s 284.223(a) independently confers on pipelines a right to

acquire offsystem capacity without prior Commission approval. That regulation provides that "any interstate pipeline

issued [a blanket certificate] ... is authorized, without prior

notice to or approval by the Commission, to transport natural

gas for any duration for any shipper for any end-use by that

shipper or any other person." CIG and ANR read this

language in conjunction with the January Order's observation

that once a downstream pipeline has acquired capacity on an

upstream pipeline it "will be the shipper on the upstream

pipeline." January Order, 74 FERC at 61,220. From this, as

we understand it, they infer that the downstream pipeline is a

"shipper" for purposes of s 284.223(a), so that when a pipeline moves gas on capacity acquired from an upstream pipeline, the latter is in effect exercising its authority under the

regulation "to transport natural gas ... for any shipper,"

here the downstream pipeline.

The Commission's answer, in effect, is that there are

shippers and shippers. In s 284.223(a) the term "shipper,"

read against the backdrop of FERC's Order 636-A, refers

only to an entity that holds title to gas while it is being

transported. And the January Order, in the same passage

cited by CIG and ANR, specifically noted that downstream

pipelines holding capacity on upstream pipelines would occupy a "limited exception" to this dominant understanding of

the term "shipper," since they would "not hold title when the

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gas is being shipped." January Order, 74 FERC at 61,221

(emphasis added).

We of course "afford substantial deference to the Commission's interpretations of its own regulations, deferring to the

agency unless its interpretation is plainly erroneous or inconsistent with the regulations." Northern Border Pipeline Co.

v. FERC, 129 F.3d 1315, 1318 (D.C. Cir. 1997) (citation and

internal quotation marks omitted). Here the reasonableness

of the Commission's interpretation of s 284.223(a) seems no

different from that of its overall differential treatment of

pipelines and non-pipelines with respect to pre-approval. Put

another way, on FERC's view a downstream pipeline only

becomes a "shipper" (in a limited, non-titleholding sense) once

it has satisfied the Commission through the prior authorization process that acquisition of upstream capacity is permissible. Assuming that the Commission on remand can provide

adequate reasons for its decision to impose this process on

pipelines alone, those reasons should also suffice to deny

pipelines, alone among "shippers," the benefits of

s 284.223(a).

In summary, although FERC enjoys broad discretion in

establishing procedures to cope with issues presented by

deregulation, see Mobil Oil Exploration & Producing Southeast, Inc. v. United Distribution Companies, 498 U.S. 211,

230 (1991), it must state reasoned justifications for the procedures it establishes. Because it has not adequately explained

its decision to treat pipelines and non-pipelines differently in

a context where they appear similarly situated, we remand

the case to the Commission for a fuller explanation.

So ordered.

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