Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-04-01437/USCOURTS-caDC-04-01437-0/pdf.json

Parties Involved:
Columbia Gas Transmission Corporation
Intervenor
Federal Energy Regulatory Commission
Respondent
Virginia Natural Gas, Inc.
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 20, 2006 Decided May 12, 2006

No. 04-1374

COLUMBIA GAS TRANSMISSION CORPORATION,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

VIRGINIA NATURAL GAS, INC., ET AL.,

INTERVENORS

Consolidated with

04-1437

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Catherine E. Stetson argued the cause for petitioner

Virginia Natural Gas, Inc. With her on the briefs were Lee A.

Alexander, Stefan M. Krantz, James Howard, and C. Todd

Piczak.

Barbara K. Heffernan argued the cause for petitioner

Columbia Gas Transmission Corporation. With her on the briefs

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were Debra Ann Palmer, William S. Lavarco, Stephen R.

Melton, and Kurt L. Krieger.

Patrick Y. Lee, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on the

brief were John S. Moot, General Counsel, and Robert H.

Solomon, Solicitor.

Lee A. Alexander, Catherine E. Stetson, Stefan M. Krnatz,

James Howard, C. Todd Piczak were on the brief for intervenor

Virginia Natural Gas, Inc. in support of respondent.

Barbara K. Heffernan, Debra A. Palmer, William S.

Lavarco, Stephen R. Melton, Kurt L. Krieger were on the brief

for intervenor Columbia Gas Transmission Corporation in

support of respondent.

Before: GINSBURG, Chief Judge, and SENTELLE and

GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: This case arises out of a

mechanical failure that interrupted the provision of liquefied

natural gas (“LNG”) at a plant owned by Columbia Gas

Transmission Corp. (“Columbia”) in Chesapeake, Virginia

during February 2003. Virginia Natural Gas (“VNG”)—one of

Columbia’s affected customers—filed a complaint before the

Federal Energy Regulatory Commission (“FERC” or “the

Commission”), seeking damages under the Natural Gas Act, 15

U.S.C. §§ 717-717w (“NGA” or “the Act”). Columbia raised a

force majeure defense, which FERC rejected. However, the

Commission concluded that a state court (not FERC) should

measure the extent of Columbia’s liability. Both Columbia and

VNG petition for review. Because FERC reasonably rejected

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Columbia’s force majeure defense, we deny Columbia’s

petition. However, because FERC failed to explain its decision

to defer to a state court on the remedial phase of these

proceedings, we grant VNG’s petition in part.

I

Columbia’s LNG facility in Chesapeake, Virginia stores

natural gas in its liquid state at a temperature of minus 260

degrees Fahrenheit. When a customer (such as VNG) requests

gas, the LNG is pumped from Columbia’s storage tank to

vaporizers, which convert the LNG into gaseous natural gas.

The tank-and-pump system is designed to maintain a certain

minimum level of LNG inventory—both to ensure that there is

enough gas to meet customers’ demands and to ensure that the

pumps operate effectively. The facility also has a ventilation

system, which vents LNG vapor. The vents are essential

because the LNG system pumps liquefied natural gas, not

gaseous natural gas. If LNG vapor enters the pumps, the pumps

will malfunction (a problem known as “cavitation”).

During a record-cold winter in 1993, Columbia’s

Chesapeake facility suffered a bout of cavitation. After an

investigation, Columbia determined that the cavitation coincided

with a spike in LNG demand and a corresponding dip in

Columbia’s LNG inventory (to the relatively low level of 30

feet). Apparently, when the storage tank’s inventory falls, it

becomes harder to keep the gas liquefied, which in turn

increases the likelihood of vapor entering the pumps and causing

cavitation. Pursuant to the advice of an independent consultant,

Columbia installed a new ventilation system in July 1997, which

was designed to vent LNG vapor more effectively at low

inventory levels. Columbia never conducted a “full draw-down”

test to determine the precise inventory level at which its new

pumps would fail. Nonetheless, the new ventilation system

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operated effectively until 2003, when customers’ demands for

LNG again spiked during another record-cold winter.

On February 19, 2003, Columbia’s pumps again

malfunctioned. The facility operator noticed that the LNG

inventory level had fallen to 23 feet, which is “a record low

level for [the Chesapeake] facility.” The facility operator further

noticed that the LNG pumps were operating in the “start-up”

mode, as opposed to the “continuous-run” mode, the latter of

which appears to be more effective at venting vapor and might

have decreased the risks of cavitation. 

On February 20, 2003, Columbia issued a “Notice of

Interruption of Service” to its affected customers, including

VNG. Under the parties’ service tariff, Columbia is obligated

to provide VNG with liquefaction, storage, regassification, and

delivery of up to 52,090 Dekatherms of LNG per day. However,

on account of the cavitation mishap, Columbia reduced VNG’s

supply of LNG to 25% of its contractual entitlement.

Columbia’s violation of the terms of its service tariff with VNG

lasted 41 days (between February 19 and March 31, 2003).

Over the same period, Columbia periodically violated two other

agreements that prescribe the minimum pressures at which

Columbia must deliver LNG to VNG. 

In the aftermath of Columbia’s service failure, VNG

demanded $37 million in damages—only $7 million of which

VNG allegedly incurred during the 41-day period of reduced

LNG output from Columbia’s Chesapeake plant. The other $30

million in damages reflected “the return of demand charges and

contributions in aid of construction paid out over more than a

decade.” “Demand charges” are “nonrefundable deposit

payments required to reserve pipeline capacity.” Amoco Prod.

Co. v. Watson, 410 F.3d 722, 730 (D.C. Cir. 2005).

“Contributions in aid of construction” (“CIACs”) are fees a

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customer pays to a supplier to ensure that a pipeline is built to

handle customers’ LNG demands, even during “critical

periods.” After Columbia failed to uphold its end of the bargain,

VNG demanded a refund of its pre-2003 expenditures, in

addition to the $7 million it claimed it had lost during the 41-day

service interruption.

Columbia admitted that it failed to meet its firm-service

obligations to VNG under the applicable tariffs. However,

Columbia mounted a defense based on the force majeure clause

in its contract with VNG. The clause reads:

The term force majeure means an event that creates an

inability to serve that could not be prevented or overcome

by the due diligence of the party claiming force majeure.

Such events include, but are not defined by or limited to,

acts of God, strikes, lockouts, acts of a public enemy, acts

of sabotage, wars, blockades, insurrections, riots,

epidemics, landslides, earthquakes, fires, hurricanes,

storms, tornadoes, floods, washouts, civil disturbances,

explosions, accidents, freezing of wells or pipelines, partial

or entire electronic failure . . ., mechanical or physical

failure that affects the ability to transport gas or operate

storage facilities, or the binding order of any court,

legislative body, or governmental authority which has been

resisted in good faith by all reasonable legal means.

General Terms & Conditions (“GT&C”) § 15.1 (emphases

added). Columbia argued that it should not be liable to VNG

because the former’s breach of its service tariffs was caused by

a “mechanical or physical failure” that “could not be prevented

or overcome by [Columbia’s] due diligence.” 

FERC rejected Columbia’s force majeure argument,

assigning three reasons. See Virginia Natural Gas, Inc. v.

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Columbia Gas Transmission Corp., 108 FERC ¶ 61086 (2004)

(“Initial Order”). First, FERC concluded that Columbia should

have performed a “full draw-down” test to verify the plant’s

performance capabilities after its pumps malfunctioned in 1993.

Id. at 61441. Second, because Columbia’s pumps previously

failed when inventory dipped to 30 feet, the gas supplier was on

notice that its pumps are the Chesapeake facility’s “weak link,”

which could be broken by a plunge in its LNG inventory. Id. at

61442. Third, when its inventory fell to an all-time low of 23

feet, Columbia failed to exercise due diligence by leaving its

pumps in the “start-up” mode instead of switching its pumps to

the “continuous-run” mode. Id. at 61441-42. Nevertheless,

FERC declined to award compensatory damages to VNG

because the Commission concluded that the company’s

entitlement to monetary relief (if any) was based on “a violation

of the terms of its service agreement with Columbia. A court of

law is the most appropriate forum for determining damages due

to a breach of contract claim. VNG will therefore need to bring

such claims before an appropriate court.” Id. at 61442.

Both Columbia and VNG filed timely requests for

rehearing, both of which FERC denied. See Virginia Natural

Gas, Inc. v. Columbia Gas Transmission Corp., 109 FERC ¶

61090 (2004) (“Rehearing Order”). In the Rehearing Order,

FERC again found that Columbia breached its service

obligations to VNG, id. at 61379, again rejected Columbia’s

force majeure defense, id. at 61384, and again refused to award

damages to VNG, id. at 61385. Both sides filed timely petitions

for review. 

II

We need not linger long over Columbia’s petition for

review because FERC’s rejection of the force majeure defense

was easily supported by “substantial evidence.” “The

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‘substantial evidence’ standard requires more than a scintilla,

but can be satisfied by something less than a preponderance of

the evidence.” FPL Energy Maine Hydro LLC v. FERC, 287

F.3d 1151, 1160 (D.C. Cir. 2002). Columbia argues that FERC

flunks this deferential standard of review because it is “sheer

speculation” to assume that Columbia could have done anything

to avert the 2003 cavitation-generated system failure. We

disagree. 

FERC reasonably concluded that cavitation could have been

“prevented or overcome by [Columbia’s] due diligence.”

GT&C § 15.1. The record includes evidence that (i) the

Chesapeake facility experienced cavitation in 1993 when its

inventory levels fell to 30 feet; (ii) Columbia concedes inventory

levels in 2003 fell even lower (to 23 feet); (iii) Columbia did not

test its facilities before the 2003 event to determine whether

cavitation sets in at a particular inventory level; and (iv) VNG

submitted evidence that in the wake of the 2003 event,

“Columbia indicated that there was a basic engineering flaw

with the plant design which prevented the proper operation of

the pumps when the tank liquid level fell beneath approximately

30 feet.” Although Columbia vigorously denies this last piece

of evidence, and although Columbia denies that low inventory

levels are the sole cause of cavitation, there is certainly “more

than a scintilla” of evidence that suggests the two are correlated.

In fact, Columbia admits as much. See Joint Appendix 234, ¶ 18

(Aff. of Chesapeake Facility Operator Randy Shivley)

(admitting that low inventory levels, amongst other variables,

cause cavitation). Thus, even if FERC cannot be sure that

Columbia’s due diligence would have prevented the cavitation,

the Commission nonetheless reasonably concluded that

cavitation “could [have been] prevented or overcome by

[Columbia’s] due diligence.” GT&C § 15.1 (emphasis added).

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In the final analysis, there is some uncertainty surrounding

the cause of Columbia’s cavitation, and Columbia might be

correct that “operation in continuous run mode would [not]

have, in fact, made a different [sic].” Reply Br. at 9. “The

question we must answer, however, is not whether record

evidence supports [Columbia’s] version of events, but whether

it supports FERC’s.” Florida Mun. Power Agency v. FERC, 315

F.3d 362, 368 (D.C. Cir. 2003). The record supports FERC’s

conclusion that Columbia could have “prevented or overcome”

the pump failure. We therefore deny Columbia’s petition for

review. 

III

A

VNG’s petition for review has two parts, one of which is

essentially frivolous. VNG argues that Columbia unlawfully

“abandoned” its service obligations, in violation of NGA § 7(b),

15 U.S.C. § 717f(b), when it temporarily cut back its LNG

operations at the Chesapeake plant. However, our precedents

make it abundantly clear that “[a]n ‘abandonment’ within the

meaning of section 7(b) occurs whenever a natural gas company

permanently reduces a significant portion of a particular

service.” Reynolds Metals Co. v. FPC, 534 F.2d 379, 384 (D.C.

Cir. 1976) (emphasis added); see also United Distrib. Cos. v.

FERC, 88 F.3d 1105, 1134-35 (D.C. Cir. 1996) (same). VNG

never suggests that Columbia’s service interruption was

“permanent”: It is undisputed that Columbia’s services returned

to normal at the end of March 2003. Unsurprisingly, VNG

points to no case that suggests that a temporary service

interruption constitutes an “abandonment” under NGA § 7. We

easily reject VNG’s abandonment claim.

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B

The second part of VNG’s petition is meatier. VNG claims

that the Commission unlawfully refused to award a monetary

remedy after finding that Columbia breached its service

obligations. In a footnote to the Initial Order, FERC justified its

remedial (non-)decision by noting that VNG’s request for relief

includes “remedies beyond those typically contemplated by the

Commission.” 108 FERC at 61442 n.24. However, after VNG

petitioned for rehearing and asked FERC to clarify its footnote,

the Commission did not do so. See Rehearing Order, 109 FERC

at 61380-81. After noting that it could exercise its remedial

authority under the NGA, FERC explained simply that “the

interests of efficiency and consistency would be best served by

having all of VNG’s various claims heard and decided in one

place and at one time, namely, before a [state] court competent

to award or reject each of the proposed the [sic] remedies.” Id.

at 61381. VNG argues that FERC’s failure to explain its

abdication of its remedial authority is arbitrary and capricious.

See 5 U.S.C. § 706(2)(A); Sithe/Indep. Power Partners, L.P. v.

FERC, 165 F.3d 944, 948 (D.C. Cir. 1999). We agree. 

Nowhere—not in the Initial Order, not in the Rehearing

Order, and not in its briefs—does FERC explain its conclusion

that VNG’s requested relief includes “remedies beyond those

typically contemplated by the Commission.” 108 FERC at

61442 n.24. To be sure, FERC notes that its remedial authority,

even “exercised at its zenith, does not extend to imposing civil

penalties or reparations.” Rehearing Order, 109 FERC at 61380

& nn.6-7. However, FERC does not explain how or why VNG’s

requested relief includes verboten “civil penalties” or

“reparations.”

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1

 Without explaining which provision of the NGA Columbia

violated, FERC notes that “compensation for Columbia’s LNG service

shortfalls may be awarded by the Commission pursuant to NGA

section 16 . . . .” Rehearing Order, 109 FERC at 61381. Because the

Commission has remedial authority under § 16 only if Columbia

violated one of the NGA’s substantive provisions, see New England

Power Co. v. FPC, 467 F.2d 425, 430-31 (D.C. Cir. 1972), aff’d, 415

U.S. 345 (1974), the Commission’s assertion of its § 16 power

necessarily implies an independent violation of the NGA. We express

no opinion on this issue. On remand, FERC should make plain the

basis for its authority to award remedies (if any). 

Assuming (as FERC does) that Columbia violated the

NGA,1 at least some of VNG’s damage demands appear to fall

within FERC’s understanding of its remedial authority. See,

e.g., Sunoco v. Transco, 111 FERC ¶ 61400, 2005 WL 1414290,

*7 (June 16, 2005) (requiring an offending pipeline to pay

consequential damages for its breach of a service agreement).

Of course, after considering VNG’s demands on the merits,

FERC might conclude that VNG’s claims are overbroad.

However, that possibility does not absolve FERC from making

a choice and explaining it. See Motor Vehicle Mfrs. Ass’n v.

State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (An

agency must “examine the relevant data and articulate . . . a

rational connection between the facts found and the choice

made.” (internal quotation marks and citation omitted)); SEC v.

Chenery Corp., 332 U.S. 194, 196-97 (1947) (“It will not do for

a court to be compelled to guess at the theory underlying the

agency’s action; nor can a court be expected to chisel that which

must be precise from what the agency has left vague and

indecisive.”); Commc’ns & Control, Inc. v. FCC, 374 F.3d 1329,

1335-36 (D.C. Cir. 2004) (holding a conclusion supported “with

no explanation” is the epitome of “arbitrary and capricious”

decisionmaking (emphasis in original)). 

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If part of VNG’s damage demand is beyond the

Commission’s remedial authority, FERC should have so ruled

—or at least should have explained why it would defer in this

case even if the demand were within its authority. Cf. Arkansas

Louisiana Gas Co. v. Hall, 7 FERC ¶ 61175, 61321-22 (1975)

(concluding FERC should defer to pending remedial

proceedings in a state court). Given that the Commission has

suggested that VNG’s demands straddle the remediableunremediable border, see, e.g., Rehearing Order, 109 FERC at

61381, it is incumbent upon the Commission to explain which

fall where. A tight-lipped punt will not do. 

Finally, we hasten to emphasize one limit on today’s

decision. VNG argues that “once a violation of the NGA has

been found, the Commission must take action to remedy the

violation—the Commission’s [remedial] duty is ‘mandatory.’”

We need not and do not go so far. In addition to the fact that it

is unclear whether Columbia violated the NGA, see supra note

1, it is also irrelevant for present purposes whether FERC must

remedy every NGA violation. The Commission’s failure to

explain itself renders its decision in this case arbitrary and

capricious. 

IV

For the reasons stated above, Columbia’s petition for review

is denied, and VNG’s petition for review is granted in part and

denied in part. 

So ordered.

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