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Parties Involved:
Alliance Pipeline L.P.
Intervenor for Respondent
Federal Energy Regulatory Commission
Respondent
Iberdrola Renewables, Incorporated
Petitioner
Interstate Natural Gas Association of America
Intervenor for Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 2009 Decided February 26, 2010 

No. 08-1195 

IBERDROLA RENEWABLES, INCORPORATED, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

ALLIANCE PIPELINE L.P. AND INTERSTATE NATURAL GAS 

ASSOCIATION OF AMERICA, 

INTERVENORS

On Petition for Review of an Order 

of the Federal Energy Regulatory Commission 

Mark K. Lewis argued the cause and filed the briefs for 

petitioner. 

Judith A. Albert, Senior Attorney, Federal Energy 

Regulatory Commission, argued the cause for respondent. 

With her on the brief were Cynthia A. Marlette, General 

Counsel, and Robert H. Solomon, Solicitor. 

USCA Case #08-1195 Document #1232316 Filed: 02/26/2010 Page 1 of 12
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Virginia A. Seitz argued the cause for intervenors. With 

her on the brief were Joan Dreskin, Dan Regan, Timm 

Abendroth, and William A. Williams.

Before: SENTELLE, Chief Judge, GRIFFITH, Circuit Judge, 

and SILBERMAN, Senior Circuit Judge. 

Opinion for the Court filed by Circuit Judge GRIFFITH. 

 GRIFFITH, Circuit Judge: Although set against the 

complicated regulatory framework of federal energy law, at 

the end of the day, this petition for review of Federal Energy 

Regulatory Commission (FERC) orders requires only our 

straightforward application of the plain terms of a written 

contract. The question is whether FERC arbitrarily or 

capriciously read a contract to allow a pipeline to change its 

rates without first obtaining FERC’s approval. Because the 

contract expressly excludes such a role for FERC, we deny 

the petition. 

I. 

 Intervenor Alliance Pipeline L.P. operates an 887-mile 

pipeline that transports natural gas from the North DakotaCanada border to the Chicago area. Alliance Pipeline L.P., 

Preliminary Determination on Non-Environmental Issues, 80 

FERC ¶ 61,149, at 61,590 (1997) [hereinafter Preliminary 

Determination]. Before Alliance began service on the 

pipeline, each shipper chose to negotiate the rate it would pay 

and committed that agreement to a written contract. Any 

shipper could have chosen a different option, a non-negotiable 

“recourse rate,” based only on the pipeline’s cost of providing 

service and a FERC-determined profit margin. 

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 That the shipper in this case, predecessor in interest to 

Petitioner, Iberdrola Renewables, Inc., selected a negotiated 

rate is a critical fact that has bearing upon the central issue of 

this petition: whether FERC must approve changes Alliance 

made to the negotiated rate. In the exercise of its duty under 

section 4 of the Natural Gas Act (NGA) to ensure that rates 

are “just and reasonable,” 15 U.S.C. § 717c(a) (2006), the 

Commission automatically reviews proposed changes to 

recourse rates but reviews changes to negotiated rates only 

when the contract requires it.1

 See Alternatives to Traditional 

Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 

FERC ¶ 61,076, at 61,241 (1996) [hereinafter Policy 

Statement]. This approach reflects FERC’s assumption that 

sophisticated parties will bargain for rates that are just and 

reasonable. See id. at 61,241–42. So long as the pipeline 

adjusts the negotiated rate consistently with the terms of the 

written agreement, FERC will accept the rate change without 

reviewing the adjustment for reasonableness. See id. at 

61,238, 61,240. Shippers choosing negotiated rates thus can 

agree to avoid FERC’s review under section 4 and thereby 

“remove themselves from any protection the Commission 

may give customers under recourse rates.” Colo. Gulf 

Transmission Co., 78 FERC ¶ 61,263, at 62,124 (1997). In 

effect, the shippers can bargain away the protection of 

FERC’s prior approval of rate changes in exchange for what 

they see as more favorable rates. 

 

1

 The briefing in this case and FERC’s orders below suggest that 

negotiated rate customers and pipelines could provide in their 

contracts for FERC review of negotiated rate changes. For purposes 

of this case, we assume but do not decide that is so. If negotiated 

rate customers like Iberdrola cannot contract for section 4 review, 

the resolution of this case would be even more straightforward than 

it is because neither party disputes that Alliance and the shippers 

agreed to a negotiated rate. 

USCA Case #08-1195 Document #1232316 Filed: 02/26/2010 Page 3 of 12
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Of course, negotiated rate customers are not left without 

redress if they think the rate has become unjust over time. 

They can always challenge an established rate under section 5 

of the NGA on the ground that the rate is “unjust, 

unreasonable, unduly discriminatory, or preferential.” 15 

U.S.C. § 717d(a). A section 5 review differs from a section 4 

review in two significant ways. First, section 5 provides for 

FERC review of a rate only after it has taken effect. By 

contrast, FERC may only review a rate under section 4 at the 

time it is filed. See Sea Robin Pipeline Co. v. FERC, 795 F.2d 

182, 183–84 (D.C. Cir. 1986) (discussing the salient 

differences between NGA section 4 and section 5). Second, 

the pipeline bears the burden to show the proposed rate is 

reasonable in a section 4 action, whereas the shipper bears the 

burden to show an established rate is not in a section 5 case. 

Thus, shippers seeking to involve FERC in the review of their 

rates have three options: ex ante, they can (1) elect a recourse 

rate, which FERC will automatically review at the time it is 

filed, or (2) negotiate for FERC approval of rate changes in 

their contract; ex post, they can (3) pursue a section 5 action 

after the negotiated rate has taken effect. 

This petition requires the court to determine whether the 

negotiated contract between Alliance and its shippers calls for 

FERC approval of a rate change, and the history of the 

contract bears upon our analysis. The earliest form of the 

agreement was executed while the pipeline’s application was 

pending for the certificate of public convenience and 

necessity that would allow it to operate. In this preliminary 

contract, called the Precedent Agreement, the parties agreed 

to a negotiated rate in lieu of a recourse rate. The agreement 

provided that “[c]hanges in [Alliance’s] operating costs will 

be reflected in its rates from time to time.” Open Season 

Precedent Agreement, sched. C., at 3. No language in the 

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Precedent Agreement called for FERC approval of changes to 

the negotiated rate. 

Even so, the proposed tariff Alliance filed with its 

Certificate Application suggested that Alliance would need 

FERC’s approval for any changes to the negotiated rate based 

on changes in its operating costs: “The Negotiated Rates are 

determined using actual operating and maintenance costs . . . 

approved by the FERC from time to time.” Certificate 

Application, Pro Forma Sheet 8 (emphasis added). FERC 

directed Alliance to remove that language from its tariff, 

explaining that such a provision belongs more appropriately 

in the parties’ Transportation Agreement, which they would 

sign after FERC issued Alliance its certificate. Preliminary 

Determination, 80 FERC at 61,599. Thus, if the parties 

wished, they could provide for FERC review of negotiated 

rate changes in their contract. See id. Otherwise, prior 

approval from FERC would not be forthcoming. After FERC 

awarded Alliance its certificate, the parties executed the 

Transportation Agreement, replacing the Precedent 

Agreement. Alliance and its shippers included no language in 

that contract providing for FERC review of negotiated rate 

changes. Rather, the Transportation Agreement simply 

repeated the language previously agreed to: “Changes in 

[Alliance’s] operating costs will be reflected in its rates from 

time to time.” Transportation Agreement, App. B. 

 Since pipeline service began in 2000, Alliance has 

charged the negotiated rate, which it has periodically 

increased—without FERC’s prior approval—to reflect 

changes in its operating costs. From 2003 to 2007, these 

annual increases averaged 2.5%. Each year the recourse rate 

was higher than the negotiated rate, until late 2007 when 

Alliance sought to increase the negotiated rate by about 6%. 

For the first time, the negotiated rate exceeded the recourse 

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rate. And for the first time, PPM Energy, Iberdrola’s 

predecessor in interest, asked FERC to reject the filing on the 

grounds that Alliance’s proposed rate increase “failed to 

satisfy both the rate-change requirements under the negotiated 

rate agreements and FERC’s basic requirements for such 

filings.” Petitioner’s Br. at 11–12. 

 FERC denied PPM’s request, concluding that the 

Transportation Agreement, as did the Precedent Agreement 

before it, allowed Alliance to change the negotiated rates to 

keep pace with increases in operating costs without prior 

review from FERC. See Alliance Pipeline, L.P., 121 FERC 

¶ 61,309, at 62,681 (2007). The Commission reminded PPM 

that FERC had “specifically stated in its certificate order that 

it would not review the level of Alliance’s negotiated rates 

nor the method by which they were calculated.” Id. PPM 

requested rehearing, arguing that despite what was put into 

the written agreement both parties understood that Alliance 

could only change the rate if FERC first approved the new 

operating costs. See Alliance Pipeline, L.P., 122 FERC 

¶ 61,250, at 62,428 (2008) [hereinafter Rehearing Order]. 

Denying rehearing, FERC explained that negotiated rate 

customers are entitled to what they bargained for and no 

more. Id. at 62,431. The Transportation Agreement did not 

entitle PPM to FERC review of the proposed rate increase 

before it took effect, though PPM could still challenge the rate 

under section 5. See id.

 After succeeding to PPM’s rights under the Transportation 

Agreement, Iberdrola filed a timely petition for review in this 

court, which we have jurisdiction to consider under 15 U.S.C. 

§ 717r(b). See Nat’l Fuel Gas Supply Corp. v. FERC, 468 

F.3d 831, 839 (D.C. Cir. 2006). 

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II. 

Iberdrola argues that the parties intended that FERC 

would review Alliance’s rate changes under section 4 at the 

time they are filed. FERC and Alliance argue that Iberdrola’s 

predecessor in interest bargained away such review in the 

Transportation Agreement when it chose a negotiated rate 

over the recourse rate and made no provision for FERC 

review. Absent such an agreement, FERC would only review 

the rate in a section 5 challenge, which Iberdrola has not 

made. In the orders on review, FERC found that the parties 

had agreed that FERC would not review Alliance’s rate 

changes, and we must decide whether that interpretation was 

arbitrary or capricious under the Administrative Procedure 

Act. See 5 U.S.C. § 706(2)(A); Old Dominion Elec. Co-op., 

Inc. v. FERC, 518 F.3d 43, 48 (D.C. Cir. 2008). We begin by 

“consider[ing] de novo whether the [contract] unambiguously 

addresses the matter at issue. If so, the language of the 

agreement controls for we must give effect to the 

unambiguously expressed intent of the parties.” Ameren 

Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir. 2003) 

(internal quotation marks and citation omitted). If we find the 

contract ambiguous, “we give Chevron-like deference to 

[FERC’s] reasonable interpretation” of the agreement. 

Entergy Servs., Inc. v. FERC, 568 F.3d 978, 982 (D.C. Cir. 

2009). 

 FERC read the Transportation Agreement to allow 

Alliance to alter its negotiated rates to keep pace with 

changed operating costs without FERC’s prior approval. The 

contract states, “Changes in [Alliance’s] operating costs will 

be reflected in its rates from time to time.” Transportation 

Agreement, App. B. This language indicates that Alliance will 

adjust the rate as its operating costs fluctuate. No mention is 

made of a role for FERC. This contrasts sharply with the 

USCA Case #08-1195 Document #1232316 Filed: 02/26/2010 Page 7 of 12
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phrasing of the recourse rate provision in the Precedent 

Agreement, which acknowledged FERC’s role in approving 

rate changes: “Shippers electing recourse rates agree to pay 

such rates, subject to changes determined by the FERC from 

time to time.” Open Season Precedent Agreement, sched. C., 

at 3 (emphasis added). Of course, Iberdrola neither chose the 

recourse rate nor bargained for similar language in the 

negotiated rate agreement. Because the parties made no 

provision for FERC approval of changes to the negotiated 

rate, we agree with FERC. The Transportation Agreement 

does not require that Alliance obtain FERC’s approval before 

adjusting its rates, and FERC correctly declined to do so. 

 In the face of this plain language, Iberdrola argues in its 

briefs that the contract is nevertheless unclear. Iberdrola finds 

ambiguity not in what the contract says, but in what it does 

not say. Iberdrola argues that the lack of any mechanism to 

challenge how Alliance calculates its operating costs, which 

can trigger rate increases, creates ambiguity. See Petitioner’s 

Br. at 43; Oral Arg. Recording at 9:46–10:13. But a contract 

is only ambiguous if it is “reasonably susceptible of different 

constructions or interpretations.” Ameren Servs., 330 F.3d at 

499 (internal quotation marks omitted). We do not doubt that 

such a mechanism would be of benefit to this shipper and 

might lead to greater clarity regarding the basis of the rate 

change. But that is not the deal that was struck, and we fail to 

see how Iberdrola’s argument casts any doubt on the question 

before us: whether FERC must approve such rate changes. In 

any event, at oral argument, Iberdrola effectively contradicted 

its briefs and conceded that the contract is unambiguous. The 

court asked Iberdrola’s counsel, “So you have to go outside 

[the Transportation Agreement] to find ambiguity?” Iberdrola 

responded, “Yes.” See Oral Arg. Recording at 6:23–:30. 

USCA Case #08-1195 Document #1232316 Filed: 02/26/2010 Page 8 of 12
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 Iberdrola finds ambiguity outside the contract in the 

previously discussed language from Alliance’s Certificate 

Application, which indicated that Alliance would seek 

FERC’s approval before adjusting the negotiated rate. This 

argument fails as a matter of law. “If a contract is not 

ambiguous, extrinsic evidence cannot be used as an aid to 

interpretation.” Consol. Gas Transmission Corp. v. FERC, 

771 F.2d 1536, 1544 (D.C. Cir. 1985). “[I]f the intent of the 

parties on the particular issue is clearly expressed in the 

document, ‘that is the end of the matter.’” Nat’l Fuel Gas 

Supply Corp. v. FERC, 811 F.2d 1563, 1572 (D.C. Cir. 1987) 

(quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council, 

Inc., 467 U.S. 837, 842 (1984)). Such is the case here. The 

contract’s plain language settles this matter. Even if we were 

to consider this extrinsic evidence, it is of no help to 

Iberdrola. Both parties were aware that FERC had instructed 

Alliance to remove that language from its tariff and to include 

it in the Transportation Agreement if the parties wanted 

FERC approval for any negotiated rate changes. They were, 

therefore, on notice that FERC would only review rate 

changes if the parties included such a provision in their 

contract. Their knowledge of how FERC would read the 

contract is the most probative piece of extrinsic evidence of 

the parties’ intent, and it cuts strongly against Iberdrola. 

 Iberdrola argues in the alternative that even if it loses on 

the contract interpretation issue, FERC has unlawfully 

abdicated its obligations under section 4 by permitting 

Alliance to update its negotiated rates without prior approval. 

See Petitioner’s Br. at 26–32. But this argument ignores the 

fact that the premise of the negotiated rate regime is that 

FERC will not review freely negotiated rates, which are 

presumed to be reasonable when a recourse rate is also 

offered. See Policy Statement, 74 FERC at 61,239 (stating that 

FERC “would dispense with cost-of-service regulation for an 

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individual shipper when mutually agreed upon by the pipeline 

and a shipper”); cf. Dominion Transmission, Inc. v. FERC, 

533 F.3d 845, 852–53 (D.C. Cir. 2008) (noting that FERC 

must “presume that the rate set out in a freely negotiated . . . 

contract meets the ‘just and reasonable’ requirement imposed 

by law”). By selecting a negotiated rate, Iberdrola’s 

predecessor intentionally avoided section 4 review to obtain 

greater rate flexibility and (at the time) lower rates. FERC’s 

requirement that Alliance offer the recourse rate gave 

Iberdrola the choice of a FERC-reviewed rate. Iberdrola’s 

predecessor rejected that option, and Iberdrola raises no 

argument that persuades us to part company from the wellestablished rule that freely negotiated rates are presumed just 

and reasonable. 

 Iberdrola also argues that the FERC orders are unlawful 

because they permit a rate change pursuant to a contract that 

does not satisfy the NGA’s “specificity” requirement. This 

rule mandates that a pipeline’s tariff include either a clearly 

specified rate formula or the actual rate being charged. See 

NorAm Gas Transmission Co., 75 FERC ¶ 61,091, at 61,309 

(1996). The specificity requirement exists to ensure that other 

shippers can observe prevailing rates so that they might detect 

unlawful price discrimination. Cf. Maislin Indus., U.S., Inc. v. 

Primary Steel, Inc., 497 U.S. 116, 126 (1990) (noting that the 

“duty to file rates with the Commission . . . [has] always been 

considered essential to preventing price discrimination”). 

Iberdrola’s argument fails because Alliance has, in its tariff, 

filed the actual rate being charged at all times. That was all 

Alliance was required to do. Any shipper could view 

Alliance’s tariff and determine the prevailing rates, which 

were filed in advance of any new rate taking effect. See 

Rehearing Order, 122 FERC at 62,429. 

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 Finally, Iberdrola contends that FERC’s interpretation 

provides Alliance carte blanche to raise its rates at will, 

suggesting that Alliance may have manipulated the 

calculation of its operating costs to artificially increase the 

negotiated rate. See Petitioner’s Br. at 30–31. But even this 

possibility does not entitle Iberdrola to the section 4 review its 

predecessor bargained away. Nonetheless, Iberdrola is not 

without a remedy. Iberdrola can always obtain relief from the 

courts in a breach of contract action. Likewise, Iberdrola can 

always challenge a rate change it thinks unreasonable in a 

section 5 action. At the end of the day, Iberdrola wants more 

than the FERC scrutiny of Alliance’s new rate available in a 

section 5 challenge. Iberdrola wants the section 4 review that 

its predecessor failed to include in its contract with Alliance. 

We cannot vitiate a properly executed contract, which one 

party now regrets having entered. 

 By electing a negotiated rate, Iberdrola’s predecessor in 

interest calculated that the bargained-for rate would offer a 

more profitable arrangement than the recourse rate. That the 

negotiated rate now exceeds the recourse rate does not entitle 

Iberdrola to FERC review of Alliance’s rate changes. 

Iberdrola’s predecessor executed an unambiguous contract, 

leaving the shipper exposed to Alliance’s reported changes in 

operating costs. As Alliance appropriately notes, “The fact 

that Iberdrola, in hindsight, considers its predecessor’s 

bargain unwise is no reason to disregard the contract’s clear 

meaning.” Intervenor’s Br. at 22. FERC enforced the contract 

as written. The Commission, therefore, did not act arbitrarily 

or capriciously by rejecting Iberdrola’s protest of Alliance’s 

negotiated rate change. 

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III. 

 For the foregoing reasons, the petition for review is 

 Denied. 

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