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Parties Involved:
Federal Energy Regulatory Commission
Respondent
Natural Gas Pipeline Company of America
Petitioner
Northern Border Pipeline Company
Intervenor for Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 1997 Decided December 2, 1997 

No. 96-1442

NORTHERN BORDER PIPELINE COMPANY,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

NATURAL GAS PIPELINE COMPANY OF AMERICA,

INTERVENOR 

Consolidated with 

No. 96-1444

On Petitions for Review of Orders of the 

Federal Energy Regulatory Commission

-

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Mark F. Sundback argued the cause for petitioners, with 

whom Peter J. Thompson, Paul Korman, and Philip R. 

Telleen were on the briefs.

Patricia L. Weiss, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent, with whom 

Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solicitor, were on the brief.

Before: SILBERMAN, SENTELLE, and RANDOLPH, Circuit 

Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge: Northern Border Pipeline Company and Natural Gas Pipeline Company of America petition 

for review of orders of the Federal Energy Regulatory Commission directing Northern Border to record the cost of a gas 

pipeline facility it had purchased from Natural in accordance 

with FERC's Uniform System of Accounts. We deny the 

petition.

I.

In the late 1980s, Northern Border and Natural each 

considered building a pipeline to connect the end of Northern 

Border's system in Ventura, Iowa to an existing Natural line 

near Harper, Iowa. This direct link was important because it 

would allow Northern Border to deliver gas directly to Natural facilities, bypassing pipelines operated by a third company, thereby avoiding an additional charge to reach Natural's 

line. Natural began construction on its version of this project 

in June of 1990. Northern Border then dropped its own plan 

and instead reached agreement with Natural to purchase the 

new line. Natural placed the line into service on January 18, 

1991, and thereafter successfully applied to FERC for a 

certificate of public convenience to operate it under Section 

7(c) of the Natural Gas Act, 15 U.S.C. § 717f(c) (1994).

Northern Border, pursuant to the purchase agreement, 

sought the Commission's permission to buy and operate the 

line. Following a proceeding at which Northern Border's 

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customers were provided with an opportunity to comment on 

the proposed transaction, FERC approved Northern Border's 

application to purchase the line from Natural for approximately $78 milliona price that reflected the amount it had 

cost Natural to construct the facilityand granted the company its own Section 7(c) certificate to operate the line. The 

sale was consummated on November 1, 1992, approximately 

20 months after the line had entered into service. As required, both Northern Border and Natural submitted their 

accounting journal entries for the purchase and sale of the 

line to FERC's Chief Accountant. Natural's proposed entries 

reflected a gain of $3,092,388 on the sale, the amount it 

recorded as accumulated depreciation for the 20 months the 

line had been in operation at the time of the sale. But 

Northern Border did not record any accumulated depreciation in its submission.

The specific accounting procedures governing a natural gas 

company's purchase of an existing gas facility are found in 

Gas Plant Instruction No. 5 of the Commission's Uniform 

System of Accounts. 18 C.F.R. pt. 201, at 526-27 (1997). A 

company must record the cost of acquiring a facility in a 

number of steps, one of which is to transfer the depreciation 

applicable to the original cost of the facility to a separate 

account, "Accumulated Provision For Depreciation of Gas 

Utility Plant." Northern Border, despite its acknowledgment 

that the line had depreciated by approximately $3 million at 

the time of the purchase, did not transfer any accumulated 

depreciation.

The Commission, affirming its Chief Accountant, determined that Northern Border had violated its rules and directed petitioner to comply. This is not just a technical 

bookkeeping dispute; the Commission points out that Northern Border's failure to comply with the Uniform System 

resulted in its customers paying immediately higher rates. 

Most companies charge customers according to a "stated 

rate" tariff, a specific numeric rate approved by FERC. 

Northern Border, however, charges its customers according 

to a formula tariff. This means that Northern Border's rate 

is automatically calculated by a FERC-approved formula, 

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which includes the specific cost elements on which charges to 

customers will be based. This ratebase includes capital expenditures for facility acquisition. Because Northern Border 

failed to record the accumulated depreciation, according to 

the Commission the company overstated its ratebase by approximately $3 million, which, in turn raised Northern Border's rates higher than they would have been had the company complied with the Uniform System.1 FERC, therefore, 

ordered Northern Border to refund this overcharge to its 

customers. 

II.

The concept of original cost accounting is a bedrock principle of the Uniform System. Original cost accounting rests on 

the notion that the purchaser of a facility simply inherits the 

previous owner's "claims to a return of and on the capital 

originally devoted to the public service." United Gas Pipe 

Line Co., 25 F.P.C. 26, 64 (1961), rev'd and remanded on 

other grounds sub nom. Willmut Gas and Oil Co. v. FPC, 299 

F.2d 111 (D.C. Cir. 1962). In this case, it required Northern 

Border to report the purchased facility's depreciated original 

cost, defined as the cost to Natural less accumulated depreciation. Under FERC's ratemaking policies, a natural gas 

company's rates are tied to its capital investment in facilities 

used for service. Absent original cost accounting, "all that 

pipelines would have to do to raise rates and obtain greater 

income would be to buy utility properties from another at a 

price higher than original cost and in this very simple way 

increase the cost of service to consumers." Arkla Energy 

Resources, 61 F.E.R.C. ¶ 61,004, at 61,038 (1992). A company, however, is not always prohibited from recovering that 

amount of the purchase price in excess of depreciated original 

cost. It can do so by proving that "consumer benefits 

relative to the excess amount [paid] accrued to rate payers." 

__________

1 Northern Border plugged the entire $78 million purchase 

price into its ratebase, rather than the approximately $75 million 

that should have been used had it properly recorded the accumulated depreciation.

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United Gas Pipe Line, 25 F.P.C. at 63. This is known as the 

United test.

Northern Border puts to us three grounds supporting its 

claim that FERC's orders are arbitrary and capricious. 

First, the company arguesquite implausiblythat its proposed accounting entries actually comply with the Uniform 

System. The Commission's Gas Plant Instruction No. 5B(2) 

requires the recording of a facility's depreciation in a separate account if "applicable to the original cost of the properties purchased." 18 C.F.R. pt. 201, at 526 (1997). Northern 

Border contends that the line's depreciation from the time it 

entered into service until the sale was consummated is somehow "not applicable" to the original cost of the line because 

Natural had never recovered such depreciation costs from its 

ratepayers. FERC had approved Natural's proposal to offer 

service on the line without adding the line's cost to its 

ratebase (the net value of a utility's investment upon which it 

is permitted to earn a rate of return).

FERC, however, does not interpret its own regulations to 

link the "applicability" of a purchased facility's depreciation to 

the question of whether the facility's previous owner has 

recovered any depreciation from its customers. If the facility 

has depreciated below its original cost, that is enough to 

require a separate recording of that depreciation. Since 

"[w]e 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 regulation[s],' " Bluestone Energy Design, Inc. v. 

FERC, 74 F.3d 1288, 1292 (D.C. Cir. 1996) (citations omitted), 

we see nothing unreasonable in FERC's rather straightforward reading of its own Gas Plant Instruction.

Second, and more fundamental to petitioner's challenge, the 

company asserts that it has demonstrated conclusively that 

the acquisition of the line passed the United test by affording 

benefits to consumers. Had Northern Border constructed an 

alternative to the line, it is argued that it would have cost 

$12-22 million more than the $78 million purchase price. 

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tion to purchase and operate the line, FERC found that 

Northern Border's purchase would reduce rates on the entire 

Northern Border pipeline system by approximately eight 

percent. Northern Border Pipeline Co., 58 F.E.R.C. 

¶ 61,085, at 61,305 (1992). The line, we are also reminded, 

allows Northern Border's shippers to reach Natural's system 

directly, thereby avoiding any charge for transportation on a 

third company's system.

FERC does not now take issue with Northern Border's 

arguments. Rather, it maintains that Northern Border must 

demonstrate that it meets the United test in a rate proceeding under Section 4 of the Natural Gas Act, rather than in a 

Section 8 accounting proceeding. The Commission explains 

that accounting proceedings typically involve only FERC and 

the regulated utility because they normally concern compliance with the technical requirements of the Uniform System. 

(Natural was the only intervenor in the accounting proceeding, whereas many of Northern Border's customers who were 

interested in the rate issues associated with the line intervened in the Section 7 certificate proceeding. See Northern 

Border at ¶¶ 61,312-13.) Section 4 rate proceedings, by 

contrast, are specifically designed to receive customer views 

as to whether a pipeline's proposed rate change is just and 

reasonable. They provide for specific notice, hearing, and 

refund procedures so that the issues relating to the proposed 

rate change are properly addressed.

The application of the United test involves a fact-specific 

assessment of the benefits that Northern Border's customers 

received from the company's acquisition of the line. We 

believe it is entirely appropriate, therefore, for FERC to 

defer administration of the United test until the company's 

customers have an opportunity to offer their views. The 

question of "how best to handle related, yet discrete, issues in 

terms of procedures" is a matter committed to agency discretion. See Mobil Oil Exploration & Producing Southeast v. 

United Distribution Cos., 498 U.S. 211, 230 (1991). FERC 

has previously explained its policy of making United determiUSCA Case #96-1444 Document #312715 Filed: 12/02/1997 Page 6 of 8
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nations in ratemaking, rather than accounting, proceedings. 

See Minnesota Power & Light Co., 43 F.E.R.C. ¶ 61,104 

(1988). It has not deviated from that policy.2

Third, Northern Border argues that FERC actually approved the company's accounting treatment in its Section 7 

certificate proceeding. FERC's regulations require that applicants for certificate authorization file an Exhibit S, which 

includes, among other information, the "amount at which 

applicant proposes to record the facilities upon its books" as 

well as "the amount of the original cost to be recorded." 18 

C.F.R. § 157.16(c)(5) (1997). Northern Border's Exhibit S 

stated that the "amount of accumulated provision for depreciation related to the original cost of the facilities to be 

acquired is not applicable." (Emphasis added.) The Exhibit 

also said that "Northern Border will pay Natural the original 

cost ... of the facilities acquired." FERC did not object at 

that time to Northern Border's proposed accounting treatment so the company contends that the Commission was 

foreclosed from raising an objection during the subsequent 

accounting proceeding.

To be sure, a utility may seek a United determination from 

FERC during a Section 7 certificate proceeding. See, e.g., 

Cities Service Gas Co., 4 F.E.R.C. ¶ 61,268 (1978), amended 

on other grounds, 23 F.E.R.C. ¶ 61,192 (1983). Like a Section 4 rate proceeding, a Section 7 certificate proceeding 

typically involves all interested parties and provides them 

with an opportunity to be heard. In this case, however, 

__________

2 Northern Border's related assertion that FERC acted unreasonably in adding a new requirement to the United testthat 

Northern Border prove Natural had never collected revenues from 

customers offsetting the approximately $3 million in accumulated 

depreciationis similarly without merit. Contrary to petitioner, 

FERC never included a "depreciation offset requirement" in its 

formulation of the United test. In fact, Northern Border raised the 

issue. The Commission merely observed in a footnote of its opinion 

that the company had yet to prove its contention. Northern Border 

Pipeline Co., 73 F.E.R.C. ¶ 61,286, at 61,782 n.20 (1995). In any 

event, FERC never purported to apply the United test in the 

accounting proceeding and therefore could not have added an 

additional element to the test.

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Northern Border never even reported in its application that 

the line's purchase price exceeded its depreciated original 

cost. Nor did the company specifically request FERC's 

permission to recover in rates the amounts by which the 

purchase price exceeded depreciated original cost or to account for the purchase in a manner inconsistent with the 

Uniform System. Although it is possible to read Exhibit S as 

indicating that Northern Border was not planning to record 

the accumulated depreciation in a manner consistent with the 

Uniform System, it certainly was not obvious and it is hardly 

unreasonable for the Commission to require an applicant to 

clearly signal its intention to put such an issue in play.

It is, of course, open to Northern Border to demonstrate in 

a Section 4 rate proceeding that it should be allowed to 

recover the full purchase price of the line. As FERC has 

made clear, its accounting decision was made without prejudice to such further action by Northern Border. Northern 

Border Pipeline Co., 73 F.E.R.C. ¶ 61,286, at 61,782 (1995). 

But the Commission reasonably insists that Northern Border 

seek a United determination in a proceeding where all of its 

customers will be on notice and able to participate. Petitioner rather obviously seeks to circumvent that procedure; its 

petition is denied.

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