Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-96-01377/USCOURTS-caDC-96-01377-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Natural Gas Clearinghouse
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 13, 1997 Decided January 16, 1998 

No. 96-1200

SOUTHEASTERN MICHIGAN GAS COMPANY AND 

MICHIGAN GAS COMPANY,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

NORTHERN STATES POWER COMPANY (MINNESOTA), ET AL.,

INTERVENORS

Consolidated with

Nos. 96-1207, 96-1211, 96-1213, 96-1216, 96-1307, 96-1324,

96-1366, 96-1376, 96-1377, 96-1412, 96-1441, 97-1079

________

On Petitions for Review of Orders of the 

Federal Energy Regulatory Commission

Clinton A. Vince argued the cause for joint petitioners and 

supporting intervenors, with whom Deborah A. Swanstrom, 

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Emmitt C. House, Mary Ann Walker, Neil L. Levy, David I. 

Bloom, Randall B. Palmer, Shaheda Sultan, Elizabeth W. 

Whittle, Gordon J. Smith, Ronald N. Carroll, Charles H. 

Shoneman, Eileen G. Stanek, David D'Alessandro, Kelly A. 

Daly, Thomas L. Casey, Solicitor General, State of Michigan, 

Don L. Keskey and Henry Boynton, Assistant Attorneys 

General, Frederick J. Killion, Allan W. Anderson, Jr., and 

David B. Ward were on the joint briefs.

Deborah A. Moss argued the cause for petitioner Consumers Energy Company, with whom William M. Lange was on 

the briefs.

Frederick J. Killion argued the cause for petitioners 

Northern States Power Company, et al., with whom John H. 

Burnes, Jr., and Theresa I. Zolet were on the briefs.

Philip F. Cronin, Jr. argued the cause for petitioner 

Rochester Gas and Electric Corporation, with whom Elizabeth W. Whittle was on the briefs.

William W. Brackett argued the cause for petitioner Midland Cogeneration Venture Limited Partnership, with whom 

Terry O. Brackett was on the briefs.

Joel M. Cockrell, 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.

James D. McKinney, Jr., argued the cause for intervenor 

Great Lakes Gas Transmission Limited Partnership, with 

whom G. William Stafford and John J. Wallbillich were on 

the brief.

Allan W. Anderson, Jr., argued the cause for intervenors in 

support of respondents, with whom David B. Ward, Shaheda 

Sultan, Charles H. Shoneman,and Elizabeth W. Whittle were 

on the brief.

Before: EDWARDS, Chief Judge, GINSBURG and SENTELLE, 

Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

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SENTELLE, Circuit Judge: This case grows out of a longrunning dispute between the Great Lakes Gas Transmission 

Partnership ("Great Lakes"), various factions of its shippers, 

and the Federal Energy Regulatory Commission ("FERC"). 

We first reviewed FERC's resolution of this matter in TransCanada Pipelines Ltd. v. FERC, 24 F.3d 305 (D.C. Cir. 1994), 

where we remanded the case to FERC for further consideration. On remand, FERC abandoned its initial position and 

issued new orders adverse to the parties that had prevailed in 

the pre-TransCanada administrative proceedings. We now 

consider whether FERC's latest ratesetting orders concerning the Great Lakes Natural Gas Transmission Pipeline complied with Section 4 of the Natural Gas Act ("NGA"), see 15 

U.S.C. § 717c, and were not otherwise arbitrary and capricious.

I.

FERC orders issued in 1989 and 1990 authorized Great 

Lakes, which already operated a 2,000-mile interstate pipeline, to build a series of mainline loops that substantially 

enlarged the system's shipping capacity and that increased its 

rate base from $202 million to $953 million. FERC traditionally approved pipelines' proposals to roll expansion costs into 

their general rates (thereby allocating expansion costs to all 

users pro rata regardless of the extent to which they use the 

new facilities) so long as the pipeline could show both that the 

system was integrated and that qualitative benefits accrued 

to all customers as a consequence of the expansion. See 

TransCanada, 24 F.3d at 308 (citing Great Lakes Gas Transmission Co., 45 FERC ¶ 61,237, 61,695 (1988)); Great Lakes 

Gas Transmission L.P., 57 FERC ¶ 61,140, 61,520 (1991),

reh'g denied, 62 FERC ¶ 61,101, 61,713 (1993). When FERC 

reviewed Great Lakes' proposal, however, it abruptly abandoned its traditional standard (called the "Battle Creek test" 

after the case in which we first approved of its application, see 

Battle Creek Gas Co. v. FPC, 281 F.2d 42 (D.C. Cir. 1960)). 

Rather than the two-part Battle Creek test, FERC applied a 

"commensurate benefits" test, in which it compared the cost 

of expansion with the benefits accruing to existing users. 57 

FERC at 61,520-21. Because it found that construction costs 

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far exceeded any consequent benefit to existing users, FERC 

ordered Great Lakes to price its services incrementally (i.e.,

recovering expansion costs only from those customers that 

use the new facilities ("expansion shippers")). See 57 FERC 

at 61,512; Great Lakes Gas Transmission L.P., 57 FERC 

¶ 61,141, 61,534 (1991), reh'g denied, 62 FERC ¶ 61,102, 

61,731 (1993). The expansion shippers petitioned this court 

for relief, claiming that FERC's orders were arbitrary, discriminatory, impermissibly retroactive, and issued in violation 

of the Administrative Procedure Act. See TransCanada, 24 

F.3d at 307.

We held that FERC failed to provide a "reasoned explanation" for having abandoned the Battle Creek test and remanded the case. See 24 F.3d at 310. While not holding that the 

commensurate benefits test was itself invalid, we nonetheless 

found that FERC's sudden abandonment of Battle Creek

required more elaborate explanation and more substantial 

consideration of the consequences.1See id. at 311.

On remand FERC again altered its course. Rather than 

elaborate its rationales for adopting the commensurate benefits test, FERC reverted to the Battle Creek test and held 

that rolled-in pricing would be more equitable than incremental pricing. See Great Lakes Gas Transmission L.P., 72 

FERC ¶ 61,081, 61,423 (1995). FERC's Chair dissented, 

arguing that the outcome was inequitable and not mandated 

by TransCanada. See id. at 61,431-33. The FERC majority 

justified its return to Battle Creek by finding that the expansion parties had reasonably relied at the time of construction 

on an expectation that FERC would apply the Battle Creek

standard. See id. at 61,427. FERC concluded that its initial 

__________

1 FERC has since issued a rule that establishes a presumption in 

favor of incremental pricing when rolling in expansion costs would 

increase rates to existing customers more than five percent. See 

Pricing Policy for New and Existing Facilities Constructed by 

Interstate Natural Gas Pipelines, 75 FERC ¶ 61,105 (1996). Because FERC issued its rule after this case had begun and did not 

rely on it in this proceeding, we do not consider what effect its 

application would have had.

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decision to apply a commensurate benefits test was "legal 

error" and ordered "Great Lakes to refund to the expansion 

shippers the principal amounts that they paid in excess of the 

lawful systemwide rolled-in rate.... [FERC also] permit[ted] Great Lakes to impose offsetting surcharges on the 

pre-expansion shippers." Id. at 61,430. FERC found that, in 

the interests of equity, interest charges should not apply 

retroactively (though a dispute exists over when interest 

began to accumulate). See id.

Nonexpansion customers filed a petition for rehearing. 

FERC rejected the petition, see Great Lakes Gas Transmission L.P., 75 FERC ¶ 61,089, 61,268 (1996), affirming its 

earlier decision, reemphasizing the significance of the expansion shippers' reliance interest in the application of the Battle 

Creek standards, and permitting Great Lakes to retain a 

$15.7 million difference between surcharges and refunds. Id.

(The surplus was later recomputed to be $17.5 million. See 

Great Lakes Gas Transmission L.P., 76 FERC ¶ 61,157, 

61,935 n.29 (1996).) Furthermore, FERC clarified that 

rolled-in pricing applied to all nonexpansion shippers, regardless of the nature of their shipping contracts. See 75 FERC 

at 61,293-94. FERC's Chair again dissented. FERC later 

granted Great Lakes' motion to clarify the interest provisions 

of the earlier orders, see 76 FERC ¶ 61,926, and held, among 

other things, that interest began to accrue on all surcharges 

on October 1, 1995, when rolled-in rates took effect. Id. at 

61,936-38. Various parties now petition for review of nearly 

every element of FERC's orders.

II.

In TransCanada, we remanded the case to FERC to 

permit it to elaborate its factual findings and to explain its 

decision to apply the commensurate benefits test retroactively. See TransCanada Pipelines, 24 F.3d at 310-11; cf. 

Checkosky v. SEC, 23 F.3d 452, 465 (D.C. Cir. 1994) (Silberman, J., concurring) (stating that remand without vacating is 

proper when court is "unsure and [wants] ... clarification of 

[the agency's] position and the rationale therefor"). On reUSCA Case #96-1377 Document #324140 Filed: 01/16/1998 Page 5 of 23
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mand, FERC abandoned the commensurate benefits test and 

readopted the Battle Creek test. Natural Gas Pipeline of 

America and a number of other natural gas shippers (collectively "Natural") challenge both FERC's authority to return 

to the Battle Creek test and its application thereof.

A.

Natural initially contends that FERC's decision to readopt 

the Battle Creek test was arbitrary and capricious because it 

misinterpreted TransCanada's mandate, arguing that in 

TransCanada we remanded solely to permit FERC to clarify 

its reasoning. While Natural is correct that the remand 

provided that option, once FERC reacquired jurisdiction, it 

had the discretion to reconsider the whole of its original 

decision. See Radio Televisión S.A. de C.V. v. FCC, No. 

96-1438, 1997 WL 761854, at *6 (D.C. Cir. Dec. 12, 1997). 

We therefore reject Natural's contention that FERC misunderstood the ambit of its authority following the TransCanada remand.

Natural next argues that FERC lacked substantial evidence to support its finding that Great Lakes and the expansion shippers had a settled expectation that FERC would 

apply the Battle Creek test to its review of their Section 4 

ratesetting petition. Natural again misunderstands FERC's 

position. FERC does not purport to have made factual 

findings regarding the parties' reliance interests. Rather, 

FERC inferred from the significant costs incurred by Great 

Lakes in building the expansion facilities that it and the 

expansion shippers anticipated application of Battle Creek at 

the time that they undertook construction. See 75 FERC at 

61,274 & n.40. Because such a conclusion is not a factual 

finding, it did not require specific evidentiary underpinnings. 

Thus, we adopt the same standard of review we applied in 

Adelphia Comm. Corp. v. FCC, 88 F.3d 1250 (D.C. Cir. 1996), 

where we reviewed a Federal Communications Commission 

presumption that was premised upon Commission experience 

rather than factual findings to ensure that it was not arbitrary or capricious.

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According to Natural, FERC's invocation of the reliance 

rationale was an abuse of discretion because the expansion 

shippers could not reasonably have relied either on the 

outcome of administrative proceedings or on the standard 

that would be applied. FERC did not premise readoption of 

Battle Creek on the expansion shippers' reliance upon the 

outcome of the Battle Creek test; it merely concluded that 

the expansion shippers were entitled to rely on their expectation that FERC would apply that test to Great Lakes' Section 

4 petition. Thus, we review only FERC's justification of its 

return to Battle Creek on that basis. The nonexpansion 

parties' objection to FERC's invocation of the reliance rationale is without foundation. In a long line of cases beginning 

with Retail, Wholesale & Dep't Store Union v. NLRB, 466 

F.2d 380 (D.C. Cir. 1972), we have held that, in some circumstances, parties are entitled to rely on the consistent application of administrative rules. See, e.g., Williams Natural Gas 

Co. v. FERC, 3 F.3d 1544, 1554-55 (D.C. Cir. 1993). So long 

as courts are permitted to consider parties' reliance on old 

rules in determining whether the retroactive application of a 

new rule is arbitrary and capricious, it follows that agencies 

may consider the benefits of doctrinal stability when deciding 

whether to apply new rules retroactively.

Natural also contends that Great Lakes and the expansion 

shippers were on notice of pending changes to FERC's rate 

design policy, see Pricing Policy, 75 FERC ¶ 61,105, when 

they decided to build their new facilities and that such 

knowledge bars them from now claiming that they relied on 

the application of the Battle Creek test. In fact, there was no 

notice of pending changes in the applicable standard (or at 

least none to which we have been referred) at the time of the 

original Section 7 proceeding, and notice of imminent administrative recalibration therefore cannot be the basis for challenging the reliance rationale in this instance. Compare 

Chadmoore Comm., Inc. v. FCC, 113 F.3d 235, 240 (D.C. Cir. 

1997) (noting that adjudication under review was part of 

broaderand already publicizedplan to modify the distribution of construction licenses).

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Finally, Natural asserts a vague claim that FERC violated 

the pre-expansion shippers' constitutional rights by inducing 

the very reliance upon which FERC ultimately justified application of the Battle Creek test. Before Great Lakes began 

construction of the expansion facilities, some pre-expansion 

shippers moved FERC to consolidate Great Lakes' Section 7 

permitting and Section 4 ratesetting proceedings. FERC 

refused and instead granted the construction permits and 

deferred ratesetting until after construction was complete. 

See Great Lakes Gas Transmission L.P., 48 FERC ¶ 61,127 

(1990); Great Lakes Gas Transmission L.P., 48 FERC 

¶ 61,273 (1989). Natural claims that FERC's decision to 

permit construction prior to resolution of the rate issue, 

coupled with its later invocation of the reliance rationale, 

made the outcome of the Section 4 proceeding a foregone 

conclusion and thereby denied the nonexpansion shippers a 

meaningful hearing.

Not only does Natural fail to refer us to any applicable 

constitutional provision, but it also mistakes FERC's conclusion that Great Lakes relied on the application of Battle 

Creek for a finding that Great Lakes relied on the outcome of 

the Battle Creek test. Even if FERC's disaggregation of the 

Section 4 and Section 7 proceedings induced the expansion 

shippers to rely on application of the Battle Creek test, 

FERC's invocation of the reliance rationale was wholly unrelated to its disposition of the merits of Great Lakes' petition. 

In short, Natural does not refer us to any procedural irregularity in its application, let alone any procedural or substantive shortcoming of constitutional dimension in FERC's hearings.

FERC's readoption of the Battle Creek test was a permissible exercise of administrative discretion, and we therefore 

turn to whether FERC correctly applied the test.

B.

Natural further contends that even if FERC was entitled to 

readopt Battle Creek, FERC erred in its application of the 

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test.2 While our standard for reviewing ratesettings is deferential, see Time Warner Entertainment Co. v. FCC, 56 F.3d 

151, 163 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 911 (1996), it 

is "not ... an empty gesture." Northern States Power Co. v. 

FERC, 30 F.3d 177, 180 (D.C. Cir. 1994); see Tarpon Transmission Co. v. FERC, 860 F.2d 439, 442 (D.C. Cir. 1988) 

(stating that we will not "rubberstamp[ ] unsupported, and 

perhaps unsupportable, agency decisions").

The Battle Creek test permits rolled-in pricing when expansion facilities are part of an integrated pipeline system and 

when the expansion provides system-wide benefits, such as 

additional capacity, increased reliability, or enhanced expansibility. See Battle Creek, 281 F.2d at 47. Section 4 of the 

NGA, pursuant to which FERC has the authority to regulate 

natural gas sales and transportation pricing, mandates "just 

and reasonable" rates. 15 U.S.C. § 717c(a). Natural and 

FERC disagree over whether application of the Battle Creek

test in this instance generated "just and reasonable" rates. 

Natural argues both that FERC neglected to satisfy its 

statutory obligation to ensure the equity of its orders and 

that, even if the rates in question here were reasonable, 

FERC's application of the test was infected with error.

Natural claims at the outset that FERC failed to comply 

with its statutory mandate to ensure "just and reasonable 

rates" because its application of Battle Creek was mechanical 

and failed to consider the equity of the additional costs with 

which the nonexpansion parties would be saddled after rates 

were rolled in. Although Natural is, of course, correct that 

__________

2 At oral argument, Natural contended that because of the affiliate relationship between Great Lakes and TransCanada Pipelines 

Ltd., which is also Great Lakes' largest customer and the largest 

expansion shipper, FERC should have exercised heightened scrutiny over the effects of rolling in rates. After relegating this 

argument to a single footnote in its briefs, Natural referred to it 

repeatedly at argument. Natural's tactic smacks of sandbagging, 

and we need "not resolve issues raised so fecklessly." Koger v. 

Reno, 98 F.3d 631, 634 (D.C. Cir. 1996); cf. DiCola v. FDA, 77 F.3d 

504, 506 n.* (D.C. Cir. 1996) ("As the parties have argued the issue 

in the margins, so too do we dispose of it.").

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all FERC ratemaking is "subject to the statutory 'fair and 

equitable' standard," ANR Pipeline Co. v. FERC, 71 F.3d 

897, 902 (D.C. Cir. 1995), fairness and equity do not require 

FERC to compute the actual costs and benefits accruing to 

each shipper before approving or modifying proposed rates. 

See TransCanada, 24 F.3d at 309.

Natural argues that our decision in Algonquin Gas Transmission Co. v. FERC, 948 F.2d 1305 (D.C. Cir. 1991), mandates that FERC compute quantitative costs and benefits in 

determining the equity of a rate scheme and that because 

FERC did not consider the actual costs and benefits associated with the expansion facilities, its decision was arbitrary and 

capricious. The Algonquin opinion is composed of two parts. 

In the first section of the opinion, which addressed the 

proposed roll-in of facilities expansion costs, we held that 

when FERC imposes rates of its own design (rather than 

merely reviewing those submitted by the parties) under Section 5 of the NGA, see 15 U.S.C. § 717d, it must "offer more 

than a conclusionary statement that the existence of systemwide benefits renders it unjust to allocate facilities costs 

incrementally." Id. at 1313. We held that FERC must 

"show[ ] that the incremental facilities produce specific, system-wide benefits...." Id. at 1314. FERC's remand orders 

in the present case reviewed the various benefits that would 

accrue to all users from Great Lakes' expansion, and FERC 

thereby satisfied this element of Algonquin. See 75 FERC 

at 61,280-83.

As both parties noted at oral argument, our decision in 

TransCanada seems in some tension with the second section 

of Algonquin. In that portion of Algonquin, we addressed 

FERC's decision to permit the roll-in of increased gas costs 

caused by increased demand from new customers and the gas 

company's consequent use of higher-priced suppliers. We 

held that where FERC rejects the parties' pricing scheme 

and instead mandates a pricing plan that causes existing 

customers to pay more for service that is unchanged from 

that which they received before the ratemaking, FERC must 

"explicitly consider the cost shifting that its order might 

effect." Algonquin, 948 F.2d at 1315. In TransCanada, we 

stated that:

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Algonquin undoubtedly does require a reasonably specific qualitative description of the systemwide benefits of an 

integrated facility. But the Court was careful not to 

require a balancing of costs and benefits (much less a 

quantification thereof), and indeed confirmed that the 

general test for rolling-in was the same that Great Lakes 

discerns in Commission precedent [relying on Battle 

Creek].

TransCanada, 24 F.3d at 309. Our TransCanada holding 

therefore seems to accentuate the first Algonquin holding to 

the detriment of the second. The two holdings, however, are 

reconcilable upon consideration of their underlying factual 

bases.

In Algonquin, we held that FERC had to consider the costshifting effect of its order because existing users in that case 

got no benefit in exchange for increased rates. See Algonquin, 948 F.2d at 1314-15. When FERC approves a rate 

application under the Battle Creek standard, it must have 

found that expansion provided existing users with qualitative 

benefits. See TransCanada, 24 F.3d at 308 (pointing out the 

two Battle Creek prongs). Thus, where no discernable difference existed between pre- and post-expansion service, FERC 

was obligated to consider the cost shifting implicit in its 

order, see Algonquin, 948 F.2d at 1315, but where benefits 

accrue to nonexpansion customers, there is no cost shifting

rather, existing users merely are being charged for the 

quantum of the new facilities and its attendant benefits 

attributable to their demand. The second part of Algonquin

involved a roll-in of gas costs rather than facilities costs, and 

the result in Algonquin depends critically upon the unique 

nature of gas as a fungible commodity. In most ratesettings, 

including the one currently before us, changes to an integrated system's facilities lead to qualitative improvements in 

service to all customers, and the Battle Creek test will apply. 

The cost-shifting portion of Algonquin therefore is consistent 

with the Battle Creek requirement that a transporter show 

qualitative benefits that accrue to existing users before 

rolling in expansion costs. Compare id. with Battle Creek,

281 F.2d at 47-48.

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As for Natural's claim that the statute requires a specific 

finding that rates are equitable, FERC addressed the question when it noted that:

Under the Battle Creek test, once facilities are found to 

be integrated into the mainline system and to provide a 

positive benefit to all customers, the costs of those facilities are considered to be part of the pipeline's cost of 

serving all its customers. That is because the demand of 

all customers for system capacity creates the need for 

system expansion.

75 FERC at 61,284 (emphasis added). Because every shipper 

is economically marginal, the costs of increased demand may 

equitably be attributed to every user, regardless when it first 

contracted with the pipeline. See 1 Alfred E. Kahn, The 

Economics of Regulation 140 (1970). Thus, when an expansion is both integrated and to the benefit of existing users, 

FERC is not bound to study the quantitative effect of rollingin construction costs.

Natural next contends that FERC's application of the 

Battle Creek test was infected with bad faith (and is therefore 

arbitrary and capricious) because the remand orders' findings 

contradict FERC's pre-TransCanada findings on the same 

factual record. FERC responds that whatever tension exists 

between its original findings and those it made on remand 

reflects only that the Battle Creek standard is less exacting 

than the commensurate benefits test. Natural refers the 

court specifically to four of FERC's findings: reliance, crosssubsidization, efficiency, and capacity. The first three findings may be dealt with summarily because it is plain that any 

alleged contradictions are the direct consequence of FERC's 

readoption of the more lenient Battle Creek standard on 

remand. For example, on the cross-subsidization findings, 

while Natural is correct that FERC initially found impermissible cross-subsidization, the standard applied on remand 

required only that the expansion parties show some qualitative improvement to satisfy the system-wide benefits element 

of the Battle Creek test. On both a theoretical and practical 

basis, it is perfectly possible for both cross-subsidization and 

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system-wide benefits to exist on the same facts. Indeed, both 

can logically be said to occur any time that a system change 

benefits all customers but to differing degrees. Thus, the 

first series of orders' finding of cross-subsidization is not 

inconsistent with the remand orders' finding that some qualitative system-wide benefits may accrue to all shippers.

The fourth alleged contradiction, which concerned FERC's 

findings regarding system capacity, gives us greater pause

indeed FERC's own counsel conceded at oral argument that 

"[m]aybe [FERC] misspoke a little on capacity." In its 

original orders, FERC found that "it has not been shown that 

the additional capacity will inure to the benefit of existing 

customers by providing additional interruptible and overrun 

["I/O"] capacity." 57 FERC at 61,524. In the remand 

orders, however, FERC made two capacity-related findings: 

(1) expansion "will accommodate greater variation in demands 

on the system," and (2) it will "increase the opportunity for 

overrun and interruptible service for all of Great Lakes' 

customers." 72 FERC at 61,428. FERC's first finding on 

remand is not inconsistent with its original findings. That 

additional I/O capacity does not exist does not necessarily 

imply that the system could not accommodate greater variation in demand (e.g., increased ability to moderate supply 

when undertaking maintenance). See 75 FERC at 61,281. 

As for the second finding, FERC supports its conclusion with 

specific references to the testimony of one of Great Lakes' 

experts, Mr. Elkouri. Mr. Elkouri testified that the expansion facilities increase capacity for existing users. And that 

is, of course, trueincreased demand with no increase in 

capacity would decrease every shipper's capacity to use the 

pipeline at some point (no contract is perpetual), and to the 

extent that there is greater capacity, there is consistently 

more opportunity for its use by I/O shippers (regardless of 

projected load, intermittent capacity will inevitably arise). 

Whatever apparent contradictions are embedded in the record are therefore the product of a change in the governing 

legal standard and of FERC's reexamination of the administrative record. See Troy Corp. v. Browner, 120 F.3d 277, 283 

(D.C. Cir. 1997) ("we only determine whether the decision 

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was arbitrary and capricious, or otherwise contrary to law. 

In so doing, we examine whether the decision was based on 

the relevant factors and was not 'a clear error of judgment.' " 

(quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401 

U.S. 402, 416 (1971))).3

III.

After it had applied the Battle Creek test and concluded 

that Great Lakes' proposal to roll in expansion costs was 

reasonable, FERC found that the expansion shippers should 

be refunded the difference between the amount they were 

charged when rates were incremental and that which they 

would have been charged if expansion costs had been rolled 

in. FERC therefore required Great Lakes to reimburse the 

expansion shippers for their excess costs and permitted Great 

Lakes to charge nonexpansion shippers an offsetting surcharge. FERC further held that interest accrued on refunds 

and surcharges only as of October 1, 1995, when rolled-in 

prices took effect.

A.

Natural contends that FERC improperly awarded the expansion shippers a retroactive remedy because of a mistaken 

__________

3

In its reply brief, Natural appears to contest the sufficiency of 

the factual bases for FERC's findings regarding integration and the 

existence of system-wide benefits. Natural claims that those findings have been in dispute throughout this proceeding. In support 

of its argument, Natural refers us to the administrative record. We 

have consistently held that "[c]onsidering an argument advanced for 

the first time in a reply brief ... is not only unfair to an appellee 

but also entails the risk of an improvident or ill-advised opinion on 

the legal issues tendered." McBride v. Merrell Dow & Pharmaceuticals, Inc., 800 F.2d 1208, 1211 (D.C. Cir. 1986) (citations omitted). 

A party does not preserve factual issues on appeal by raising them 

in the administrative proceeding and then referring to them without 

elaboration in a reply brief. Not only does the opposing party lose 

its opportunity to contest the merits of the factual challenge, but 

the court does not get the benefit of the adversarial process. 

Natural has forfeited any factual objections to FERC's orders.

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belief that its original orders were infected with legal error. 

See, e.g., 72 FERC at 61,430. According to Natural, because 

TransCanada did not mandate readoption of the Battle Creek

test, the original FERC orders were not "erroneous," and on 

remand, FERC was free to choose any pricing scheme. 

Thus, contrary to FERC's orders, the expansion parties were 

not "entitled" to be "made whole," and FERC was not 

authorized to impose a retroactive remedy.

Natural misapprehends the nature of FERC's original error. Regardless of whether incremental rates could have 

been justified, they were not. FERC's failure to explain 

itself was itself error, see TransCanada, 24 F.3d at 309-10, 

and the rates it imposed without adequate reasoning therefore were invalid. Thus, although Natural is correct that 

incremental rates were not per se impermissible, their application was erroneous in this case. And because FERC may 

"undo what [was] wrongfully done by virtue of [a prior] 

order," United Gas Improvement Co. v. Callery Properties, 

Inc., 382 U.S. 223, 229 (1965), its decision to approve a 

retroactive remedy was within its discretion. See Natural 

Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073-74 (D.C. 

Cir. 1992) (noting presumption in favor of retroactive remedies for erroneous FERC decisions).

B.

In its July 26, 1995, Order, FERC held that "refunds and 

surcharges shall not include interest." 72 FERC at 61,430. 

FERC permitted non-expansion parties to amortize their 

payments, but if they chose amortization, they were liable for 

interest "for the amortization period." Id. FERC declined 

to require interest for the entire period because it hoped to 

"ease the adverse effects of [its] legal error on non[expansion] 

shippers, while also ensuring that Great Lakes is kept whole." 

75 FERC at 61,294. Great Lakes moved for clarification of 

whether interest accumulated on all balances from October 1, 

1995 (when rolled-in rates took effect) or whether it did not 

begin to accumulate until 90 days after Great Lakes' amended 

compliance filing, which occurred roughly ten months later. 

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See 76 FERC at 61,937. FERC held that it intended only to 

exclude the accrual of interest until October 1, 1995. Interest 

accumulated every day after that, regardless of whether 

payment was ultimately lump-sum or amortized. Id. Petitioners challenge both FERC's interest exemption and its 

imposition of interest on all payments made after October 1, 

1995.

Midland Cogeneration Venture Limited Partnership 

("MCV"), one of the expansion shippers, asserts that FERC's 

decision to deny interest on the period prior to October 1, 

1995 was legal error and was an abuse of discretion. 15 

U.S.C. § 717c(e), provides that

the Commission may, by order, require the natural-gas 

company to furnish a bond, to be approved by the 

Commission, to refund any amounts ordered by the 

Commission, to keep accurate accounts in detail of all 

amounts received by reason of such increase, specifying 

by whom and in whose behalf such amounts were paid, 

and, upon completion of the hearing and decision, to 

order such natural-gas company to refund, with interest, 

the portion of such increased rates or charges by its 

decision found not justified.

MCV claims that FERC misread this statutory provision to 

permit it discretion in the award of interest. See MCV br. at 

4. MCV contends that while the award of remedial damages 

is discretionary, the imposition of interest is not. Thus, as 

MCV reads the statute, the auxiliary verb "may" serves 

"order" but not "with interest," which itself modifies only 

"refund." See 15 U.S.C. § 717c(e). Second, MCV refers the 

court to FERC's own regulations, which state that:

Any natural gas company that collects rates or charges 

... must refund that portion of any increased rates or 

charges ... found by the Commission not to be justified 

... together with interest as required in paragraph (d) of 

this section.

18 C.F.R. § 154.501(a)(1). Paragraph (d) requires that interest be computed from the date of collection to the date of 

refund. Id. at § 154.501(d). FERC argues that the statute 

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gives it discretion whether to award interest and that case 

law supports its authority not to award interest. See Estate 

of French v. FERC, 603 F.2d 1158, 1162-63 (5th Cir. 1979).

There is no doubt that section 717c(e) is ambiguous

indeed if read literally, the clause would permit FERC "by 

order[ ] [to] require the natural gas company ... to order 

such natural gas company to refund, with interest, the 

portion of such increased rates ... found not justified." 15 

U.S.C. § 717c(e) (emphasis added). Because the statute is at 

best unclear (and at worst incomprehensible), obedient to 

Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 843 (1984), we 

defer to the agency's reasonable interpretation, which in this 

case is embodied in 18 C.F.R. § 154.501.

FERC, however, ignored its own regulation when interpreting the statute. As we have previously held, "[t]he 

Commission may not ... rely solely on its equitable discretion to justify straying from well-established rules and procedures. [It] must articulate valid reasons for its departure." 

FERC v. Triton Oil & Gas Corp., 750 F.2d 113, 116 (D.C. Cir. 

1984). In the instant case, FERC decided to exclude interest 

payments because it sought to "ease the adverse effects on 

the pre-expansion shippers of [its] legal error, while also 

ensuring that Great Lakes is kept whole." 72 FERC at 

61,430. In its disposition of the interest issue, FERC did not 

mention its regulation governing refunds and surcharges. 

Because FERC failed to give a "valid reason[ ] for ... 

depart[ing] [from the regulation]," Triton Oil, 750 F.2d at 

116, its decision to exempt the nonexpansion shippers from 

paying interest for the whole period was error. Furthermore, because FERC has had ample opportunities to resolve 

this matter on its own but has neither heeded its own 

regulation nor explained its failure to do so, we reverse 

FERC's decision to exempt the refunds and surcharges from 

interest assessments and hold that interest shall be assessed 

on all surcharges for the entire period that incremental rates 

were in effect. Because we decide this matter in favor of 

MCV, we need not consider Natural's petition challenging 

FERC's decision to require interest on all payments made 

after October 1, 1995.

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IV.

In 1991 FERC held that Great Lakes' proposal to price I/O 

service at $0.275 per thousand cubic feet ("Mcf"), which 

reflected a 100 percent load factor rate (i.e., equivalent to the 

rate paid by shippers with firm contracts), was unreasonable 

because "the maximum [load factor] rate is always higher 

than needed to ration daily usage." 57 FERC at 61,548. 

FERC instead fixed the I/O rate at a 140 percent load factor 

or $0.16 per Mcf. See id. at 61,547-49. In the remand 

orders, FERC retroactively modified the I/O rate, applying 

the 140 percent load factor to the full rolled-in price and 

consequently imposed $0.10 per Mcf surcharge for I/O service 

prior to the rolling in of expansion costs. The resulting price 

for I/O service, $0.26 per Mcf, was only $0.015 lower than the 

price rejected by FERC in 1991.4In its remand orders, 

FERC held that when I/O shippers agreed to pay the "maximum rate" in their contracts and were aware of the pending 

Section 4 proceedings, their final rates were contingent on the 

outcome of the underlying rate proceedings. See 75 FERC 

at 61,297.

Northern States Power ("NSP") and other I/O shippers 

assert on appeal that FERC's decision was arbitrary and 

capricious because it conflicts with the earlier FERC finding 

that $0.275 was "too high at all times" and because the I/O 

shippers' contracts with Great Lakes do not permit retroactive modification. FERC never held that $0.275 per Mcf was 

per se excessive. Rather, FERC decided in 1991 that a 100 

percent load factor rate was too high; the consequent price 

per Mcf was incidental. NSP confuses the rate that it pays 

(i.e., the price per Mcf) with the load factor according to 

which the price is computed. In its remand orders, FERC 

imposed a surcharge on the basis of a load factor of 140 

percent, which is consistent with its 1991 decision. See 76 

FERC at 61,934 ("Great Lakes' interruptible rate for all 

periods is volumetric, and the only issue is what that volumet-

__________

4 Although Northern States Power claims that the $0.015 per Mcf 

difference is de minimis, we need not decide whether that 6 

percent difference in the price per Mcf is significant.

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ric rate should be."). As to whether the I/O shippers' contracts with Great Lakes permitted retroactive changes in 

pricing, we defer to FERC's reasonable interpretation of 

contracts within its jurisdiction. See Williams, 3 F.3d at 

1549. FERC's decision that the I/O shippers' agreement to 

pay the "maximum rates plus all applicable surcharges," see

76 FERC at 61,934, subjected them to retroactive surcharges 

is eminently reasonable. See Clearinghouse, 965 F.2d at 

1075-76.

V.

Between 1991 and 1994, Great Lakes received three Section 7 certificates to build facilities to serve Rochester Gas & 

Electric ("RG&E"). See Great Lakes Gas Transmission, 

L.P., 56 FERC ¶ 61,052 (1991); Great Lakes Gas Transmission, L.P., 56 FERC ¶ 61,051 (1991); Great Lakes Gas Transmission, L.P., 66 FERC ¶ 61,115 (1992). The third order is 

not at issue here. Both certificates issued by FERC stated 

that RG&E would be liable for "the currently effective maximum applicable FT rate." 76 FERC at 61,929 (internal 

quotations omitted); see 56 FERC at 61,205; 56 FERC at 

61,210. The second order also stated that "[t]he initial rate 

... shall be subject to the Commission's final determination 

in Docket Nos. RP89-186-000 and RP90-20-000." 56 FERC 

at 61,210. Despite the different wording of the orders, they 

were consolidated into a single contract, which provided that 

RG&E would "pay ... the rates and charges in effect from 

time to time under Rate Schedule FT, or any effective 

superseding rate schedule...." Rate Schedule FT was defined elsewhere in the contract as the "FERC Gas Tariff ... 

as filed with the Commission and as changed and adjusted 

from time to time by [Great Lakes] in accordance ... with 

any final Commission order affecting such rates." 76 FERC 

at 61,931.

In the remand orders, FERC held that because RG&E's 

rate was contingent on the current FT price, the pending 

proceedings applied retroactively to RG&E as if it were a 

pre-expansion shipper. See 76 FERC at 61,928-29. On 

appeal, RG&E makes a series of arguments whose underlying 

principle is the same: the rate set in the underlying orders 

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and contract was not contingent, and retroactive application 

of the rolled-in rate therefore is impermissible. Resolution of 

that issue turns upon the meaning of the phrase "maximum 

FT rate" in RG&E's contract with Great Lakes and in 

FERC's certificate orders authorizing service. "FERC's interpretation of [a] contract[ ] [within its jurisdiction] is entitled to deference under the principles articulated in Chevron

...." Williams, 3 F.3d at 1549. Thus, the agency's interpretation will be upheld "as long as [it] is reasonable." 

LILCO v. FERC, 20 F.3d 494, 497 (D.C. Cir. 1994). The 

court similarly "sustain[s] the Commission's interpretation of 

[an][o]rder if it is reasonable." Natural Gas Clearinghouse 

v. FERC, 108 F.3d 397, 399 (D.C. Cir. 1997).

The two certificate orders were issued on the same day, 

and their incorporation into a single consolidated contract 

suggests that the parties saw no material difference between 

them. Although only the second order includes a clause 

stating explicitly that the "authorized rate ... shall be subject to the Commission's final determination in [certain pending dockets]," 56 FERC at 61,210, FERC may reasonably 

have read the orders together and concluded that the more 

specific language of the second order clarified the ambiguity 

in the first order.

RG&E argues that the clause in the second order noting 

the reservation of the right to modify rates refers only to the 

cost-of-service settlement rather than to the roll-in proceedings. FERC disposed of that argument in the remand orders 

by finding that "the settlement [to which RG&E claims that 

the provision refers] expressly reserved for litigation the 

pricing issue ultimately resolved in the remand order [in 

favor of rolled-in rates]." Id. at 61,932. FERC's reading of 

the clause's reservation is reasonable. Where a rate is set by 

reference to a pending proceeding, the substance of that 

proceeding may reasonably be read into the order. Cf. 

Clearinghouse, 965 F.2d at 1075 (holding that "there could be 

no violation of the filed rate doctrine so long as the users of 

Tarpon's service received adequate notice that the rate stated 

in Tarpon's 1987 filing might replace the Commission-ordered 

rate even for service originally provided under the latter").

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VI.

In the initial order on remand, FERC mandated that 

Great Lakes refund expansion shippers the difference between what they had paid when rates were incremental and 

what they should have paid had expansion costs been rolled 

in. See 72 FERC at 61,430. FERC consequently permitted 

Great Lakes to collect an offsetting surcharge from nonexpansion shippers. See id. In a motion for rehearing, various 

nonexpansion shippers objected to the $15.7 million surplus 

(reflecting the difference between projected surcharges and 

refunds) that Great Lakes proposed to retain after distribution of all refunds. See 75 FERC at 61,295. FERC held that 

Great Lakes was entitled to retain whatever funds remained 

after all refunds were disbursed. See id. at 61,296. Based on 

revised estimates of the amount that Great Lakes would 

collect in surcharges, the projected surplus was later recomputed to be $17.5 million. See 76 FERC at 61,935 n.29. 

RG&E and Consumers Energy Company ("Consumers") 

challenge Great Lakes' authority to retain the $17.5 million 

difference. They contend that FERC acted arbitrarily and 

capriciously and ignored the terms of its own orders when it 

permitted Great Lakes to retain the surplus.

FERC explains that "[v]irtually all of th[e] [surplus] was 

due to the addition of new customers after the cost-of-service 

rate design settlement was approved." 76 FERC at 61,935; 

see 75 FERC at 61,296. FERC supports that finding by 

reference to Great Lakes' "May 10 revised refund/surcharge 

plan." See id. at 61,935 n.29. That finding is corroborated 

by RG&E's briefRG&E, which was a "new customer," 

claims that it will be liable for an additional $8 million in 

surcharges. See RG&E br. at 4. Furthermore, Great Lakes' 

November 1, 1995 filing shows that an additional $3.7 million 

is attributable to additional service to ANR Pipeline. This 

prong of Consumers' argument is therefore a restatement of 

RG&E's claim. To the extent that RG&E and similarly 

situated petitioners agreed to rates that would incorporate 

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the rate setting at issue in this appeal, they are apparently 

subject to the remand orders. See Part V. supra.

Consumers next contends that Algonquin Gas Transmission Co., 63 FERC ¶ 61,326, 63,170 (1993), compels FERC to 

ensure that surcharges and refunds exactly match. Any 

other outcome, according to Consumers, is inconsistent with 

Commission policy and unsupported by sound reasoning. In 

its orders, FERC distinguished the situation in Algonquin

from the one at issue here. See 75 FERC at 61,296. In 

Algonquin, FERC required exactly offsetting surcharges and 

refunds because "the pipeline ... failed to submit workpapers 

reflecting the ... rate design for the appropriate time frame, 

and ... generally [failed to] support[ ] its refund and surcharge calculations." Id. (citing 63 FERC at 63,180). Consumers responds that Algonquin is indistinguishable from the 

instant case and that the reasons for which FERC required 

exactly offsetting charges in Algonquin apply with equal 

force here.

FERC is correct that its Algonquin holding was premised 

upon Algonquin's inadequate explanation of its proposed surcharges and refunds. See 63 FERC at 63,180 ("We ... find 

Algonquin's plan more counter-intuitive and less supportable 

(given the paucity of explanation that has been so far provided) ... than a more straightforward, common-sense approach 

that provides for an equal dollar amount of refunds and 

surcharges."). By contrast, Great Lakes' plan and FERC's 

rationales for approving it explain in detail why Great Lakes 

should be permitted to retain the surplus. See 75 FERC at 

61,296-97 (noting that the surplus is due in large part to the 

introduction of new services and that no party disputes Great 

Lakes' computations). Because FERC's distinction is reasonable, its decision to depart from Algonquin was not arbitrary 

or capricious.

Consumers reads the term "offsetting discharges" as a 

narrow mandate for Great Lakes to assess surcharges and to 

distribute refunds only if they were exactly offsetting. 

FERC's initial order permitted Great Lakes to devise the 

means by which rates would be assessed in order to minimize 

harm to Great Lakes and to place all parties in as nearly as 

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possible the position in which they would have been absent 

the original imposition of incremental rates. See 75 FERC at 

61,295-97. FERC's later explanation of that order should be 

upheld if it is reasonable. See Natural Gas Clearinghouse,

108 F.3d at 399; K N Energy, Inc. v. FERC, 968 F.2d 1295, 

1299 (D.C. Cir. 1992). Because the word "offset" is not 

unambiguous and because FERC's policy rationales support 

the reasonableness of its reading of "offset," its interpretation 

of the phrase "offsetting discharge" is valid.

Consumers' final contention is that permitting Great Lakes 

to retain the $17.5 million would allow it to exceed its 

permissible rate of return in violation of the NGA. Because 

FERC approved all the rate orders that contained contingent 

pricing schemes, the assessment did not violate the NGA. 

Despite Consumers' contention that a new Section 4 rate 

proceeding was required to increase rates to account for new 

service, the roll-ins were not truly retroactive"notice ... 

'changes what would be purely retroactive ratemaking into a 

functionally prospective process by placing the relevant audience on notice at the outset that the rates being promulgated 

are provisional only and subject to later revision.' " Clearinghouse, 965 F.2d at 1075 (quoting Columbia Gas Transmission Corp. v. FERC, 895 F.2d 791, 797 (D.C. Cir. 1990)). 

Thus, as FERC points out, Consumers' disagreement with 

the legality of the retroactive application of the roll-in is 

really disapproval of the underlying rate, which, as we have 

already held, is permissible.

Conclusion

For the reasons stated above, we deny all the petitions 

except MCV's. We grant MCV's petition and reverse 

FERC's decision not to award interest for the entire period to 

which surcharges and refunds apply. The joint petitioners 

also have moved to strike Addendum A of MCV's brief. Joint 

petitioners' motion is granted. Addendum A is beyond the 

scope of the issue that MCV was entitled to brief, and its 

content is inconsistent with Circuit Rule 28(a)(3).

So ordered.

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