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Parties Involved:
Enron Capital & Trade Resources Corporation
Intervenor
Federal Energy Regulatory Commission
Respondent
Hadson Gas Systems, Inc.
Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 12, 1995 Decided February 9, 1996

No. 95-1111

HADSON GAS SYSTEMS, INC.,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

ENRON CAPITAL & TRADE RESOURCES CORPORATION,

INTERVENOR

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Philip M. Marston argued the cause and filed the briefs for petitioner.

Jill L. Hall, Attorney, FederalEnergyRegulatoryCommission, withwhomJeromeM.Feit, Solicitor,

was on the brief, argued the cause for respondent. Joel M. Cockrell, Attorney, entered an

appearance.

Leslie J. Lawner entered an appearance for intervenor.

Before: EDWARDS, Chief Judge, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILLIAMS.

WILLIAMS, Circuit Judge: On July 28, 1994 the Federal Energy Regulatory Commission

issued Order No. 567, sweeping away obsolete regulations that had occupied more than 500 pages

of fine print in the Code of Federal Regulations. Order No. 567, Removal of Outdated Regulations

Pertaining to the Sales of Natural GasProduction, 59 Fed. Reg. 40,240 (1994), Order onRehearing,

69 FERC ¶ 61,055 (October 17, 1994), Order on Rehearing, 69 FERC ¶ 61,342 (December 15,

1994). The regulations were obsoleteor, as we shall see, almost all of them werebecause they

existed solelyfor the purpose ofimplementing theCommission's 38-year-old enterprise of controlling

the prices of natural gas at the wellhead, which it had pursued from the Supreme Court's decision in

Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954), to January 1, 1993, when all such

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controls came to an end. See Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"),

Pub. L. No. 101-60, 103 Stat. 157 (1989). Tucked away in this mass was a single sentence, 18 CFR

§ 270.203(c), which, though enacted solely for purposes of the price controlregime, appearsto have

material collateral importance. Hadson claims that because of these collateral effects, the

Commission was required by § 553 of the Administrative Procedure Act to give affected parties

notice and an opportunity to comment, in order to consider (1) argumentsfor retaining § 270.203(c)

or at least (2) ways of mitigating the impact of its removal.

We deny the petition for review. Because the controlling statute left the Commission no

authority to retain § 270.203(c), notice and comment could not have served the first purpose

suggested by Hadson. As to the second, at least in these circumstances we do not think that § 553

requires an agency to delay formal removal of a legally defunct regulation while it canvasses all

possible regulatory impacts. We note, however, that because Hadson has shown that formal removal

may have substantialripple effects, to the point of undermining implicit premises of other regulations,

it may have established grounds requiring the Commission to open a rulemaking proceeding for

purposes of adjusting those regulations to the new realities. We do not, of course, pass on any such

claim, which at this point is hypothetical.

* * *

Although the paradigm sale to which Phillips extended the Commission's regulatory power

under the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717 et seq., was the wellhead sale, the Natural

Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. §§ 3301 et seq., which largely supplanted the

Commission's pre-NGPA rules, used a different term, "first sale." It made two critical consequences

turn on a transaction's classification as such. First, Title I of the statute subjected every first sale to

the NGPA system of price controls. See 15 U.S.C. §§ 3312-19, repealed effective Jan. 1, 1993, Pub.

L. No. 101-60, § 2(b). Second, it generally removed first sales of gas from the Commission's

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1The NGPA contained certain exclusions, such as for gas "committed or dedicated to interstate

commerce" on the day before the date of enactment. These exclusions were eliminated by the

Decontrol Act. See Decontrol Act, § 3(b)(7), amending NGPA § 601(a)(1), 15 U.S.C. §

3431(a)(1). 

jurisdiction (apart from its enforcement of the NGPA ceiling prices).1 See, e.g., NGPA §

601(a)(1)(A), 15 U.S.C. § 3431(a)(1)(A). This relieved parties engaged in a first sale of the serious

regulatory burdens that would otherwise have been applicable under Phillips: the needs for a

certificate of "public convenience and necessity" for initiation of a sale, as required by NGA § 7(c),

15 U.S.C. § 717f(c), for a certificate of abandonment for itstermination, as required by NGA § 7(b),

15 U.S.C. § 717f(b), and for Commission review of the price under the "just and reasonable"

standard, as required by NGA §§ 4 & 5, 15 U.S.C. §§ 717c & 717d.

Thus the definition of first sale was critical:

(21) First sale

(A) General rule

The term "first sale" means any sale of any volume of natural gas

(i) to any interstate pipeline or intrastate pipeline;

(ii) to any local distribution company;

(iii) to any person for use by such person;

(iv) which precedes any sale described in clauses (i), (ii), or (iii); and

(v) which precedes or follows any sale described in clauses (i), (ii),

(iii), or (iv) and is defined by the Commission as a first sale in order

to prevent circumvention of any maximum lawful price established

under this chapter.

(B) Certain sales not included

Clauses (i), (ii), (iii), or (iv) ofsubparagraph (A) shall not include the

sale of any volume of natural gas by any interstate pipeline, intrastate

pipeline, or local distribution company, or any affiliate thereof, unless such

sale is attributable to volumes of natural gas produced by such interstate

pipeline, intrastate pipeline, or local distribution company, or any affiliate

thereof.

NGPA § 2(21), 15 U.S.C. § 3301(21) (emphasis added).

Two aspects of this elaborate definition are relevant for our purposes. First, the opening

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clause of § 2(21)(B) denies first-sale treatment to sales by affiliates of interstate or intrastate

pipelines, or of local distribution companies, thereby exposing them to the regulatory entanglements

of the NGA. Hadson is affiliated with two intrastate pipelines and a local distribution company, so

the first clause of § 2(21)(B) excludesits gassalesfromclassification asfirst sales. The second clause

of § 2(21)(B), to be sure, makes an exception from the first clause's exclusion, saying (once we

account for the double negatives) that sales by such affiliates of their own gas production can be first

sales. But Hadson made clear at oral argument that that exception was of little or no use to it.

Hadson appears, moreover, to be typical of an array of gas marketers that have the sort of affiliation

that bars their sales from first-sale treatment under the first clause of § 2(21)(B).

Second, § 2(21)(A)(v) grants the Commission authority to add sales to Congress's first-sale

definition, i.e., to turn some transactions not otherwise covered into first sales, "in order to prevent

circumvention of anymaximumlawfulprice established under this chapter." In 1979 the Commission

saw a risk of precisely such circumvention, and to avert it, adopted the sentence at stake here:

(c) Circumvention rule for certain sales by affiliates. Any sale by an affiliate

of an interstate pipeline, intrastate pipeline, or local distribution company, that is not

itselfsuch a pipeline or local distribution company isthat affiliate'sfirst sale under the

NGPA unless the Commission, on application, determines not to treat such sale as a

first sale.

18 CFR § 270.203(c). Thus the Commission used its § 2(21)(A)(v) power to give first-sale status

to the sort ofsales currently engaged in on a large scale byHadson and similar firmssales otherwise

excluded from first-sale status by § 2(21)(B). In part thanks to the shelter of § 270.203(c), Hadson

and similarly affiliated gas marketers have annually conducted billions of dollars worth of natural gas

business as first sales.

When it adopted § 270.203(c), the Commission made clear that it was acting solely under §

2(21)(A)(v), not under the NGPA's generic grant of power "to define" terms used in the NGPA, §

501(b), 15 U.S.C. § 3411(b). See Final Rule Governing the Maximum Lawful Price for Pipeline,

Distributor or Affiliate Production ("Final Rule"), 44 Fed. Reg. 66577, 66579-80 (1979). It

explained that, in part because of its own narrow definition of "attributable" (as the term is used in

§ 2(21)(B)), see 18 CFR § 270.203(a), sales by gatherers who were affiliated with pipelines or

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distributors would, but for action by the Commission under § 2(21)(A)(v), "be excluded from first

sale treatment where the gatherer did not produce all of the gas sold." Final Rule, 44 Fed. Reg. at

66580/1. Hadson does not dispute that in adopting § 270.203(c) the Commission relied solely on §

2(21)(A)(v).

This might seem to end the case. Although the Decontrol Act did not delete § 2(21)(A)(v)

itself, it did eliminate the entire system of "maximum lawful price[s]," thereby removing the

Commission'ssole reason for creating § 270.203(c) and mooting the sole basis given by§ 2(21)(A)(v)

for Commission additions to first-sale status. If Congress pulled the rug out from under §

270.203(c), by eliminating the sole stated justification for its existence, must it not fall to earth, i.e.,

lose all effectiveness, whether or not the Commission actually deleted it from the pages of the Code

of Federal Regulations? If so, would not deletion be simply a ministerial task, unsuited to notice and

comment procedures intended for substantive regulatory changes in which the agency has some

authority? See Sheppard v. Sullivan, 906 F.2d 756, 761-62 (D.C. Cir. 1990) (finding it at most

"harmless error" for an agency to modify a regulation without notice and comment when the statute

leaves the agency no choice). Indeed, the Commission frames this argument as one of standing,

saying that Hadson's injury, if any, is due to Congress's decision, not to the Commission's action.

Hadson says no, on two grounds. First, although it does not argue that § 270.203(c) is

consistent with § 2(21)(B) of the statute (once the § 2(21)(A)(v) prop is rendered moot), it suggests

that the Commission's power under NGPA § 501(b), 15 U.S.C. § 3411(b), "to define, by rule,

accounting, technical, and trade terms used in this chapter," enables it to preserve § 270.203(c). It

buttresses this reliance on § 501(b) with citations to various prior general statements by the

Commission about the breadth of its § 501(b) powers and even instancesnone endorsed by a court,

so far as appearsof creative interpretative work by the Commission, such as construing "not" to

mean "is," see 18 CFR § 271.803(b), and "and" to mean "or," see "Interpretive Rule; Commission

Interpretation of Section 314 of the NGPA," 44 Fed. Reg. 18,966 (1989).

Because the Commission's standing defense is logically indistinguishable from the parties'

dispute over § 501(b), we turn directly to that dispute over the merits, see Brotherhood of Railway

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Carmen v. ICC, 917 F.2d 1136, 1137-38 (8th Cir. 1990), and reject Hadson's contention. The

Commission points out that § 501(b) goes on to state a qualification (which in any event would

probably be inferred), that its definitions "shall be consistent with the definitions set forth in this

chapter." NGPA § 501(b), 15 U.S.C. § 3411(b). In its Order on Rehearing of Order No. 567 the

Commission noted the express qualification and said:

For the Commission to define first sales for purposes other than circumvention [i.e.,

the purpose authorized in § 2(21)(A)(v) and invoked in the promulgation of §

270.203(c)] would be inconsistent with the definition of first sales established by

Congress in section 2(21) of the NGPA. The Commission cannot exceed the

authority granted to it by the statute in performance of its duties.

69 FERC ¶ 61,342 at 62,285 (December 15, 1994). Unless § 501(b) grants the Commission power

completely to disregard the statutory languagedubious in general but unthinkable in the case of a

statute with the Byzantine detail of the NGPAthe Commission is right. Section 2(21)(B) is an

insuperable obstacle to achieving the result desired by Hadson, and § 501(b) is not an all-purpose

escape hatch.

Hadson offers a fallback theory for requiring notice and comment. It argues that removal of

§ 270.203(c) exposes as hopelessly inadequate, the Commission's earlier efforts to reconcile the

application of the NGA to affiliated marketers' business with the realities of the present natural gas

market by means of various "blanket" certification provisions. See Order No. 547, Regulations

Governing Blanket Marketer Sales Certificates, 57 Fed. Reg. 57,952, rehearing denied, 62 FERC

¶ 61,239 (1992). Accordingly, the Commission should have provided notice and an opportunity to

comment in order to consider what regulatory amendments might be necessary in order to cushion

the blow effected by removal of § 270.203(c).

Hadson points out, for example, that some of the partiesto whom it wishesto sell gas ask for

an affirmation that purchase ofthe gas willnot subject the buyer to the Commission'sjurisdiction, and

for a warranty against any adverse consequences of such classification. The buyers' practice is

understandable. Under Commission rulings, gas that is sold in a jurisdictional transaction continues

to be jurisdictional gas in the buyer's hands, i.e., subjectsthe buyer's sale or transportation of the gas

to Commission jurisdiction. Delhi Gas Pipeline Corp., 19 FERC ¶ 61,189 (1982). Hadson evidently

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believes that while § 270.203(c) was on the books (though moribund), it could make the necessary

claim as to its gas. And purchasers would evidently accept the claim. Deletion of § 270.203(c),

however, reduces the plausibility of a claim of nonjurisdictional status to zero. While it may seem

unlikely that purchasers would be ready to rely on so frail a reed as § 270.203(c), or on warranties

of nonjurisdictional status based thereon, Hadson's claim suggests that the deletion of § 270.203(c)

on paper, however formalistic it may seem on its face, has real-world effects.

In considering the possible attention paid to a formally conclusive but substantively hollow

provision, we recognize that from the Phillips decision forward (right through to the present, if

Hadson's contentions are correct), jurisdictional gas was like a disastrous virushighly communicable

and, if not fatal, at least debilitating. For example, where a gathering company collects gas from

several producers, commingles the gas, and sells some in-state and some out-of-state, even the

in-state sales are jurisdictional, see Consolidated Oil & Gas Inc. v. FERC, 806 F.2d 275 (D.C. Cir.

1986), subject to some limited exceptions, see City of Farmington v. FERC, 820 F.2d 1308 (D.C.

Cir. 1987). In the past, as we noted before, jurisdictional status brought with it the whole suffocating

apparatus of Commission regulation over initiation of and termination of a sale, and the "justness"

and "reasonableness" of the price. The Commission does not dispute that in today's highly

competitive, fast-moving gas market, it would be fatal to a gas marketer's business to be exposed to

such regulation in itstraditionalform. Accordingly, it is not implausible that deletion of § 270.203(c)

may make some of the parties with whom Hadson deals more skittish.

Moreover, Hadson suggests that there are glitches in the Commission's blanket certificate

regulations, which before the removal of § 270.203(c) were only "amusing points of academic

interest," but which became "very real" problems on its deletion. For example, it argues that the

Commission's provision of blanket certification for certain parties that "release" capacity on an

interstate pipeline, 18 CFR § 284.243(g), a practice in which marketers will evidently have to engage

as a normal concomitant of their business, implies that any such party is engaged in jurisdictional

transportation, i.e., making it equivalent to an interstate pipeline. Yet, it says, under Order No. 547,

interstate pipelines are ineligible for blanket marketer certificates. See 18 CFR § 284.402(a).

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Implicit inHadson'sfallback argument isthe viewthat notice and comment are required where

a regulatory deletion, even though legally necessary, may create strong policy reasonsfor regulatory

alterations elsewhere. It would follow that an agency with a legally obsolete regulation on the

bookswhich it in some sense might be seen as legally bound to excise from the Code of Federal

Regulations as soon as possiblewould need to (1) ask itself whether removal of the whited

sepulchre might leave some parties adversely affected in ways that might be mitigated by regulatory

changes elsewhere; (2) start a proceeding inviting commentary of that sort; and then, presumably,

(3) start whatever extra rounds of notice-and-comment might be necessary to address the various

proposed collateral changes. Meanwhile, there might be parties whose interests would be advanced

by the agency's conforming its regulations to the statute, who would lose that benefit while all this

goes on.

We think the problem of persons in Hadson's position is better satisfied by another device

under the APAthe entitlement to petition the agency to open a rulemaking to amend existing

regulations. See 5 U.S.C. § 553(e). Although such a reopening is within the discretion of the

Commission, its denial of reopening is judicially reviewable. American Horse Protection Ass'n v.

Lyng, 812 F.2d 1, 3-4 (D.C. Cir. 1987). And although the review is under the deferential

arbitrary-and-capriciousstandard, perhapsthe strongest case for initiating such a rulemaking is where

"a petition has sought modification of a rule on the basis of a radical change in its factual premises."

Id. at 5; see also Geller v. FCC, 610 F.2d 973 (D.C. Cir. 1979); WWHT, Inc. v. FCC, 656 F.2d 807,

819 (D.C. Cir. 1981). While there is no indication that § 270.203(c)'s limit on the scope of

jurisdictional transactions was an explicit assumption of the Commission's blanket certificate rules,

Hadson's arguments suggest that its removal indeed exposes enormous gaps. These arguments are

expressed most acutely in itsreplybrief, to which theCommission has had no opportunity to respond,

but, if unrebutted, they would seem to make out a promising case for an amendatory rulemaking.

Accordingly, we suggest that the Commission treat Hadson's submissions in this case, and/or such

other papers as Hadson may think useful, as a petition to open a rulemaking. But we reject Hadson's

contention that the possible need for such collateral amendments makes notice-and-comment an

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obligatory condition of an agency's deletion of a regulation that it has no authority to maintain.

Hadson also argues that § 502(b) of the NGPA, 15 U.S.C. § 3412(b), requiring an

opportunity for an oral presentation with respect to any proposed rule "[t]o the maximum extent

practicable," compels the Commission to afford such an opportunity. Again, however, the

Commission's complete lack of choice in the matter of excising § 270.203(c) either renders that

provision inapplicable or makes its disregard harmless error.

The petition for review is

Denied.

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