Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-09-01204/USCOURTS-caDC-09-01204-0/pdf.json

Parties Involved:
Apache Corporation
Petitioner
Chesapeake Energy Corporation
Intervenor for Respondent
Enogex LLC
Intervenor for Respondent
Federal Energy Regulatory Commission
Respondent
Midcontinent Express Pipeline LLC
Intervenor for Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 15, 2010 Decided December 28, 2010 

No. 09-1204 

APACHE CORPORATION, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

ENOGEX LLC, CHESAPEAKE ENERGY CORPORATION, AND 

MIDCONTINENT EXPRESS PIPELINE LLC, 

INTERVENORS

On Petition for Review of Orders of the 

Federal Energy Regulatory Commission 

Seth P. Waxman argued the cause for petitioner. With 

him on the briefs were Jonathan E. Nuechterlein, Heather M. 

Zachary, and Kenneth E. McNeil. 

Carol J. Banta, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent. With her on 

the brief were Thomas R. Sheets, General Counsel, and Robert 

H. Solomon, Solicitor. 

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James F. Bowe, Jr., Brett A. Snyder, David I. Bloom, 

Adam C. Sloane, James F. Moriarty, Thomas E. Knight, and 

Shannon Grewer were on the brief for intervenors in support 

of respondent. 

Before: TATEL, GARLAND, and KAVANAUGH, Circuit 

Judges. 

Opinion for the Court filed by Circuit Judge

KAVANAUGH. 

KAVANAUGH, Circuit Judge: Pursuant to its 

congressionally assigned authority, the Federal Energy 

Regulatory Commission regulates the transmission of oil, 

electricity, and natural gas. Its goals are to promote 

competition and help American consumers gain access to 

reliable and affordable energy. This case involves three 

regulated entities in the natural gas market: Apache, a natural 

gas producer; Enogex, an intrastate natural gas pipeline; and 

Midcontinent, an interstate natural gas pipeline. All three 

companies have operations in Oklahoma, where Apache 

produces natural gas that is shipped over Enogex’s pipeline. 

In 2006, the two pipelines agreed to a lease that would 

enable the larger, interstate pipeline (Midcontinent) to 

transport natural gas over the smaller, intrastate pipeline 

(Enogex). As required by statute, the pipelines sought 

FERC’s approval. Apache, a customer that uses Enogex’s 

pipeline, objected to the lease, claiming that it was 

discriminatory and would harm existing Enogex customers. 

The Commission rejected those arguments and approved the 

lease. 

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In this Court, Apache challenges FERC’s approval as 

contrary to the Commission’s regulations and precedents. We 

find that the Commission did not adequately explain one 

aspect of its decision to approve the lease, and we therefore 

remand for the Commission to clarify its ruling. But we do 

not vacate FERC’s order; its approval of the EnogexMidcontinent lease remains in effect and legally binding. We 

deny the petition in part and remand for further explanation. 

I 

 Natural gas producers find deposits underground and 

bring the gas up to wellheads. Pipelines then transport the gas 

from wellheads to local distribution companies. 

Because building a duplicative natural gas pipeline 

usually does not make economic sense, the owner of a 

pipeline typically possesses a monopoly in its respective 

region. Acting pursuant to its statutory authority, FERC has 

long sought to prevent abuses of that monopoly power. See 

Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 834-35 

(D.C. Cir. 2006). FERC now achieves that goal through 

“open access” mandates. Commission Orders 436 and 636, 

for example, require pipelines to provide producers with nondiscriminatory “open access” to natural gas transportation. 

See id. at 835; Assoc. Gas Distribs. v. FERC, 824 F.2d 981, 

997 (D.C. Cir. 1987). 

 Apache is a natural gas producer that operates wellheads 

in Oklahoma. Enogex operates an intrastate natural gas 

pipeline in Oklahoma and also offers limited interstate 

transportation services under Section 311 of the Natural Gas 

Policy Act of 1978. See 15 U.S.C. § 3371. Apache transports 

nearly all of its Oklahoma gas over Enogex’s pipeline. 

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Apache and Enogex have contracted only for “interruptible” 

service, meaning that Apache’s shipments may be interrupted 

(that is, must wait) if another Enogex customer has a prior 

claim or higher priority. See 18 C.F.R. § 284.9. 

 Midcontinent is an interstate natural gas pipeline that 

recently constructed a line extending from Bennington, 

Oklahoma, to Butler, Alabama. In 2006, before Midcontinent 

completed its new pipeline, Midcontinent and Enogex entered 

into a lease agreement. Under the agreement, Midcontinent 

would lease part of Enogex’s pipeline capacity, allowing 

Midcontinent to transport gas from various points in 

Oklahoma to Bennington and, from there, into Midcontinent’s 

interstate system. 

 As required by law, Enogex and Midcontinent requested 

FERC’s approval of the lease. Concerned that the EnogexMidcontinent lease would reduce its own access to Enogex’s 

pipeline, Apache objected. The Commission concluded, 

however, that the proposed arrangement did not unduly 

discriminate against Apache and that the agreement satisfied 

FERC’s standards for approval of pipeline leases. FERC thus 

approved the lease and subsequently denied Apache’s petition 

for rehearing. 

 Apache now seeks review of FERC’s decision in this 

Court. 

II 

 

 Apache raises two challenges to the Commission’s 

decision. 

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First, Apache contends that the Enogex-Midcontinent 

lease is discriminatory and that FERC’s approval subverts the 

“open access” regulatory regime for natural gas 

transportation. According to Apache, Enogex has given a 

better deal to fellow pipeline Midcontinent than it has to 

producers like Apache. As a result, according to Apache, the 

lease discriminates against Apache and in favor of 

Midcontinent. 

Apache did not raise this claim in its petition for 

rehearing to the Commission, and we therefore do not reach 

the issue here. The Natural Gas Act provides that “[n]o 

objection to the order of the Commission shall be considered 

by the court unless such objection shall have been urged 

before the Commission in the application for rehearing unless 

there is reasonable ground for failure so to do.” 15 U.S.C. 

§ 717r(b). In its petition for rehearing to the Commission, 

Apache argued that the lease discriminated against it in favor 

of Midcontinent’s customers, not that the lease discriminated 

against it in favor of Midcontinent itself. Request of Apache 

Corp. for Reh’g at 9, Nos. CP08-6-000, CP08-9-000 (Aug. 

25, 2008), reprinted in Joint Appendix 212. Indeed, Apache’s 

petition for rehearing expressly disavowed Apache’s current 

claim, emphasizing that “[t]he discrimination is not between 

Midcontinent the lessee, and the other Enogex shippers.” Id. 

Given that Apache did not advance – and in fact affirmatively 

disclaimed – the discrimination argument it now articulates, 

we do not consider Apache’s undue discrimination claim. 

 

Second, Apache alternatively argues that the EnogexMidcontinent lease did not meet the Commission’s standard 

for approval of pipeline leases. 

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 Since 2002, the Commission’s practice has been to 

approve a pipeline lease if: “(1) there are benefits for using a 

lease arrangement; (2) the rate under the lease is less than 

comparable transportation service; and (3) the lease 

arrangement does not adversely affect existing customers.” 

Islander East Pipeline Co., 100 FERC ¶ 61,276, at ¶ 69 

(2002) (emphasis added). FERC dutifully cited that test in its 

order approving the Enogex-Midcontinent lease. See 

Midcontinent Express Pipeline LLC and Enogex Inc., 124 

FERC ¶ 61,089, at ¶ 31 (2008). But the problem here, as 

Apache correctly points out, is that the Commission never 

concluded that the Enogex-Midcontinent lease would not 

adversely affect existing customers, the third prong of the test. 

Instead, FERC simply found that the lease would “not have an 

unduly adverse impact on Enogex’s existing services.” Id.

¶ 43 (emphasis added). The Commission further determined 

that the lease’s benefits “outweigh any potential harm to 

Enogex’s customers.” Id. ¶ 32. 

 The confusion arises because FERC’s analysis – with its 

focus on whether the lease would cause any undue adverse 

effects – is inconsistent with FERC’s pre-existing test for 

pipeline leases, which examined whether the lease would 

cause any adverse effects. There is a difference between 

adverse effects and undue adverse effects. The former inquiry 

focuses on a single factor in isolation; the latter inquiry entails 

a balancing of multiple factors. 

 FERC might have tried to explain its decision in one of at 

least two ways. First, FERC counsel suggests here that 

diminished interruptible service does not constitute an 

“adverse effect” for purposes of pipeline lease analysis 

because interruptible service is inherently subject to 

disruption and therefore cannot be “adversely affected” by a 

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lease. Alternatively, the Commission might have modified its 

pipeline lease test to preclude only “undue” adverse effects 

and to expressly permit balancing of benefits against burdens 

– either for all leases, or for a smaller subset that includes the 

Enogex-Midcontinent lease. (FERC of course also could 

have expressly relied in the alternative on both grounds.) 

We do not decide the reasonableness of either of these 

rationales because the Commission followed neither in the 

order under review. It instead purported to follow its 

precedents but then failed to apply the standard set forth in 

those decisions. Because FERC has not provided a reasoned 

explanation for its decision, we must remand for clarification. 

See Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. 

Co., 463 U.S. 29, 43-44 (1983). 

After FERC settles on an approach on remand, Apache of 

course may file a new petition for review if it believes 

FERC’s chosen path to be unlawful. Applying our precedents 

on remand without vacatur, however, we find no basis at this 

point for vacating FERC’s order approving the EnogexMidcontinent lease. There is “a serious possibility that the 

Commission will be able to substantiate its decision on 

remand.” Allied-Signal, Inc. v. U.S. Nuclear Regulatory 

Comm’n, 988 F.2d 146, 151 (D.C. Cir. 1993). And “the 

disruptive consequences of vacating” are substantial. Id. The 

FERC order approving the Enogex-Midcontinent lease thus 

remains in effect and legally binding. Because we are not 

vacating the order approving the lease, we expect and direct 

FERC to provide the necessary clarification without undue 

delay. 

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* * * 

 We deny Apache’s petition in part and remand for further 

explanation. 

 

So ordered. 

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