Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-01203/USCOURTS-caDC-99-01203-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Kansas Corporation Commission
Intervenor
Kansas Gas Service Company
Intervenor
Kansas Pipeline Company
Intervenor
Missouri Gas Energy
Intervenor
Missouri Public Service Commission
Petitioner
Williams Gas Pipelines Central, Inc.
Intervenor for Petitioner

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 16, 2000 Decided December 15, 2000

No. 99-1203

Missouri Public Service Commission,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Williams Gas Pipelines Central, Inc., et al.,

Intervenors

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

John E. McCaffrey argued the cause for the petitioner.

David D'Alessandro was on brief for the petitioner. Kelly A.

Daly and Thomas R. Schwarz, Jr. entered appearances.

Lona T. Perry, Attorney, Federal Energy Regulatory

Commission, argued the cause for the respondent. John H.

Conway, Acting Solicitor, and Timm L. Abendroth, Attorney,

Federal Energy Regulaltory Commission, were on brief for

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the respondent. Susan J. Court, Special Counsel, Federal

Energy Regulaltory Commission, entered an appearance.

Michael A. Stosser, Stanley A. Berman and Adelia S.

Borrasca were on brief for intervenor Kansas Pipeline Company. Jane E. Stelck entered an appearance.

Gary W. Boyle and Jay V. Allen entered appearances for

intervenor Williams Gas Pipelines Central, Inc.

James F. Moriarty entered an appearance for intervenor

Missouri Gas Energy.

Dana Charles Contratto and Herbert J. Martin entered

appearances for intervenor Kansas Gas Service Company.

John Justin McNish, Elizabeth Rose Myers-Kerbal and

Richard Greer Morgan entered appearances for intervenor

Kansas Corporation Commission.

Before: Edwards, Chief Judge, Sentelle and Henderson,

Circuit Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge: Petitioner Missouri Public Service Commission (MoPSC) seeks review of

three orders of the Federal Energy Regulatory Commission

(FERC or Commission) setting initial rates for natural gas

transportation by the Kansas Pipeline Company (KPC or

Company).1 The petitioner argues that FERC failed to demonstrate the approved rates are in the public interest, as

required by section 7 of the Natural Gas Act (NGA), 15

U.S.C. s 717f, and failed to reach a conclusion that is the

product of reasoned decisionmaking. We agree. Accordingly, we grant the petition for review and remand the case to

the Commission for further ratemaking proceedings.

I.

Section 7(c) of the NGA provides that "[n]o natural-gas

company . . . shall engage in the transportation or sale of

natural gas, . . . unless there is in force with respect to such

natural-gas company a certificate of public convenience and

__________

1 The orders under review are Kansas Pipeline Co., 87 F.E.R.C.

p 61,020 (Apr. 2, 1999); Kansas Pipeline Co., 83 F.E.R.C. p 61,107

(Apr. 30, 1998); Kansas Pipeline Co., 81 F.E.R.C. p 61,250 (Nov. 25,

1997).

necessity issued by the Commission authorizing such acts or

operations." 15 U.S.C. s 717f(c). In order to issue such a

certificate, the Commission must find that, among other

things, "the proposed service, sale, [or] operation . . . is or

will be required by the present or future public convenience

and necessity." Id. s 717f(e). Reaching this decision "requires the Commission to evaluate all factors bearing on the

public interest." Atlantic Ref. Co. v. Public Serv. Comm'n,

360 U.S. 378, 391 (1959). More specifically, section 7 imposes

on the Commission a duty "to engage in 'a most careful

scrutiny and responsible reaction to initial price proposals of

producers.' That scrutiny demands attentiveness to the evidence presented by the producer with 'price a consideration

of prime importance' in the application of the public convenience and necessity standard." Consumer Fed'n of Am. v.

Federal Power Comm'n, 515 F.2d 347, 356 (D.C. Cir.) (quotUSCA Case #99-1203 Document #563020 Filed: 12/15/2000 Page 2 of 10
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ing Atlantic Ref. Co., 360 U.S. at 391), cert. denied, 423 U.S.

906 (1975).

II.

KansOk Partnership (KansOk), Kansas Pipeline Partnership (KPP) and Riverside Pipeline Company (Riverside) engage in the transportation of natural gas. Before November

2, 1995 KPP was regulated by the Kansas Corporation Commission (KCC),2 while KansOk and Riverside were regulated

by FERC under section 311 of the Natural Gas Policy Act

(NGPA), 15 U.S.C. s 3371. On November 2, 1995 FERC

determined that KansOk, KPP and Riverside constituted a

single interstate pipeline system subject to FERC jurisdiction

under the NGA. See KansOk P'ship, 73 F.E.R.C. p 61,160, at

61,480 (1995). FERC therefore ordered the three entities,

collectively KPC, to apply for a certificate of public convenience and necessity under section 7 of the NGA. See id. at

61,488. KPC challenged FERC's assertion of jurisdiction and

sought a rehearing, see Kansas Pipeline Co., 81 F.E.R.C.

p 61,005, at 61,006 (1997), but, at the same time, on January

__________

2 KPP operated as a "Hinshaw" pipeline exempt from FERC

jurisdiction pursuant to 15 U.S.C. s 717(c).

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23, 1996 filed under protest a certificate application proposing

an initial rate base of $100,647,042 and a cost of service of

$36,708,843, see id. at 61,006-07, 61,017.

On October 3, 1997 the Commission confirmed its November 2, 1995 decision asserting jurisdiction over KPC.3 See id.

at 61,036. FERC then proceeded to examine KPC's proposed initial rates, terms and conditions and concluded that

the rates were not in the public interest. See id. at 61,017.

In the end, FERC adopted a rate base of $39,011,785 and a

cost of service of $21,817,483. See id.

On November 3, 1997 KPC sought rehearing of the October

3, 1997 order. The Company argued that the rates established by the order would drive KPC into bankruptcy because

they did not allow KPC to recover its operating expenses and

make payments on two outstanding loans. On November 10,

1997 KPC sought a stay of the October 3, 1997 order, which

the Commission granted on November 25, 1997. See Kansas

Pipeline Co., 81 F.E.R.C. p 61,250, at 62,136 (1997).

On February 27, 1998 KPC filed with the Commission a

document titled "Motion of Kansas Pipeline Company Acceding to FERC Jurisdiction, and Requesting Interim Relief, Or,

in the Alternative, Request for a Rehearing" in which it made

the following proposal: KPC would dismiss its appeal challenging FERC's jurisdiction, see supra note 3, if FERC

permitted KPC to continue charging the contractual rates

that had been agreed to by KPC and its customers and had

been approved by KPC's prior regulators (Motion Rates)

until such time as section 4 rates were approved by FERC.

FERC agreed with KPC's proposal and on April 30, 1998

issued an order permitting KPC to grandfather its old rates

pending a section 4 proceeding. See Kansas Pipeline Co., 83

F.E.R.C. p 61,107, at 61,518 (1998). In support of its decision

FERC declared: "As discussed below, the Commission has

determined that granting the motion is in the public interest

__________

3 On December 2, 1997 KPC filed a petition for review with this

court challenging FERC's decision. See Kansas Pipeline P'ship v.

FERC, No. 97-1710 (D.C. Cir. Dec. 2, 1997) (voluntarily dismissed

on May 8, 1998).

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because it will result in rates that are in the public interest,

will remove the jurisdictional issue from the proceeding, and

preserve the financial integrity of the applicant." Id. at

61,505.

FERC's conclusion that the rates are "in the public interest" warrants some explanation. At the beginning of its

analysis, the Commission noted that KPC's November 3, 1997

request for rehearing of the October 3, 1997 order was

"largely moot" in light of its approval of the Motion Rates.

Nevertheless FERC proceeded to discuss the issues raised by

the rehearing request in order to "provide a context for our

decision to grant the applicant's February 27 motion." Id. at

61,506. In the discussion, FERC reversed its October 3, 1997

position on several issues. See id. at 61,506-09. Ultimately,

FERC concluded that, if the initial rates set by the October 3,

1997 order were adjusted "based on the rehearing arguments

that the Commission found to be persuasive," those rates

(Rehearing Rates) would be higher than KPC's Motion Rates.

Id. at 61,511. Because approval of the Motion Rates also

resolved the jurisdictional issue, the Commission concluded

that "it is in the public interest to grant Kansas Pipeline's

motion." Id.

Petitioner MoPSC sought a rehearing of FERC's April 30,

1998 order, challenging FERC's conclusion that the Rehearing Rates would be higher than the Motion Rates.4 MoPSC

asserted that FERC's analysis was plagued by numerous

errors and unexplained departures from settled FERC polices. On April 2, 1999 FERC denied rehearing, explaining

that in the April 30, 1998 order it had not relied strictly on a

comparison of the Motion Rates and the Rehearing Rates but

rather had "concluded that the motion rates were in the

public interest because they were negotiated among the parties and approved by the prior regulatory regime." Kansas

__________

4 MoPSC has standing in this case pursuant to section 15 of the

NGA. See 15 U.S.C. s 717n ("In any proceeding before it, the

Commission in accordance with such rules and regulations as it may

prescribe, may admit as a party any interested . . . State commission, . . . whose participation in the proceeding may be in the public

interest."); see also 18 C.F.R. s 385.214 (FERC rules of practice

and procedure).

Pipeline Co., 87 F.E.R.C. p 61,020, at 61,064 (1999). FERC

also emphasized the advantage of the Company's concession

on the jurisdiction issue as well as the importance of preserving the Company's financial integrity. See id. Unsatisfied,

MoPSC filed this petition for review.

III.

We review FERC's orders under the familiar arbitrary and

capricious standard of the Administrative Procedure Act.

See 5 U.S.C. s 706(2)(A); Williston Basin Interstate Pipeline

Co. v. FERC, 165 F.3d 54, 60 (D.C. Cir. 1999). Although

"[j]udicial scrutiny under the National Gas Act is limited to

assuring that the Commission's decisionmaking is reasoned,

principled, and based upon the record," Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C. Cir. 1979);

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accord Williston Basin Interstate Pipeline Co., 165 F.3d at

60, the Commission's orders must nonetheless articulate "a

rational connection between the facts found and the choice

made." Association of Oil Pipe Lines v. FERC, 83 F.3d

1424, 1431 (D.C. Cir. 1996) (citations and internal quotation

marks omitted). To carry out our reviewing task,

it is imperative that the Commission articulate the critical facts upon which it relies when it decides [the relevant rates]. Similarly, when the Commission finds it

necessary to make predictions or extrapolations from the

record, it must fully explain the assumptions it relied on

to resolve unknowns and the public policies behind those

assumptions. Where the Commission balances competing interests in arriving at its decision, it must explain on

the record the policies which guide it. Only if the

Commission observes these minimum standards can we

be confident that missing facts, gross flaws in agency

reasoning, and statutorily irrelevant or prohibited policy

judgments will come to a reviewing court's attention.

Moreover, by requiring that the Commission fully articulate the basis for its decision, we assure the Commission,

itself, the first opportunity to correct any defects which

may emerge from such disclosure.

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Columbia Gas Transmission Corp., 628 F.2d at 593 (footnote

omitted); accord Great Lakes Gas Transmission Ltd. P'ship

v. FERC, 984 F.2d 426, 432 (D.C. Cir. 1993).

Defending its approval of the Motion Rates as in the public

interest, FERC asserts that it relied on the following

grounds: (1) approval of the Motion Rates ended the jurisdictional dispute, thus eliminating regulatory uncertainty and

avoiding protracted litigation; (2) the Motion Rates had been

negotiated among the parties; (3) the Motion Rates had been

approved by KPC's prior regulators; (4) the Commission's

adjustment of the October 3 rates preserved KPC's financial

integrity and prevented KPC's bankruptcy; and (5) the Motion Rates were lower than the Rehearing Rates. MoPSC

challenges each ground.5

In evaluating the Commission's arguments, we bear in

mind the "time-honored rule that a reviewing court 'must

judge the propriety of [agency] action solely by the grounds

invoked by the agency.' " Western Resources, Inc. v. FERC,

9 F.3d 1568, 1576 (D.C. Cir. 1993) (quoting SEC v. Chenery

Corp., 332 U.S. 194, 196 (1947)). The court does not "give an

agency the benefit of a post hoc rationale of counsel." Louisiana Ass'n of Indep. Producers & Royalty Owners v. FERC,

958 F.2d 1101, 1123 n.12 (D.C. Cir. 1992).

In our view, the record does not manifest that FERC

originally invoked all of the grounds it now relies on to

__________

5 FERC argues that MoPSC is precluded from mounting a challenge to the first four grounds because it failed to make those

arguments in its petition for rehearing as required by section 19(a)

of the NGA. See 15 U.S.C. s 717r(a) ("The application for rehearing shall set forth specifically the ground or grounds upon which

such application is based."). We find no merit in FERC's argument. As is clear from our discussion infra, the Commission's April

30, 1998 order did not include all of the grounds it asserts here and,

therefore, the petitioner had no reason to question unaddressed

matters in seeking rehearing. See 15 U.S.C. s 717r(b) ("No 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." (emphasis added)).

support its action. First, the Commission did not use the

second and third rationales in its April 30, 1998 order.

FERC's entire discussion of these two points is contained in

one sentence: "In its motion, [KPC] proposes to charge rates

that have been negotiated among the parties and approved by

the prior regulatory regime, until such time as the Commission directs [KPC] to file a NGA Section 4 rate case."

Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,510. The

order does not explain the significance of the two rationales

or how they relate to the choice made by the Commission.

Moreover, FERC's own conclusion shows no reliance on these

factors.6 Thus, we reach the inescapable conclusion that

FERC's reference to the negotiations among parties and to

the approval by prior regulators was merely descriptive of the

Motion Rates rather than a declaration of what FERC now

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sion.

As to the first and fourth rationales, the April 30, 1998

order does include them as grounds for the decision. See

Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,505 ("[T]he

Commission has determined that granting the motion . . .

will remove the jurisdictional issue from the proceeding, and

preserve the financial integrity of the applicant."). A passing

reference to relevant factors, however, is not sufficient to

satisfy the Commission's obligation to carry out "reasoned"

and "principled" decisionmaking. We have repeatedly required the Commission to "fully articulate the basis for its

decision." Columbia Gas Transmission Corp., 628 F.2d at

__________

6 FERC's conclusion reads:

A comparison of [the Rehearing Rates] with the proposed

motion rates shows that the combined motion rates for the

three zones are lower. In addition, approving the motion rates

would remove the jurisdictional issue from the proceeding,

since [KPC] has agreed to accede to federal jurisdiction if its

motion is granted. Under these circumstances, the Commission concludes that it is in the public interest to grant [KPC's]

motion.

Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,511.

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593; accord Great Lakes Gas Transmission Ltd. P'ship, 984

F.2d at 432; City of Charlottesville v. FERC 661 F.2d 945,

950 (D.C. Cir. 1981). Here, the Commission fell short of

meeting the "minimum standards" with which it is required to

comply. Columbia Gas Transmission Corp., 628 F.2d at 593.

Having addressed the first four rationales upon which the

Commission relies on appeal, we turn now to the Commission's hypothetical calculation of the Rehearing Rates. The

April 30, 1998 order concludes that the Motion Rates are

lower than the rates FERC would have approved had it

granted a rehearing. See Kansas Pipeline Co., 83 F.E.R.C.

p 61,107, at 61,511. The record makes clear this was the

Commission's primary reason for approving the Motion

Rates. Nevertheless, both in its April 2, 1999 order and

before this court, FERC has avoided defending its computation of the Rehearing Rates, dismissing it as mere "context."

See Kansas Pipeline Co., 87 F.E.R.C. p 61,020, at 61,064.

Indeed, during oral argument, FERC counsel could not even

assure this court that the Commission's arithmetic in calculating the adjusted hypothetical cost of service was correct.

Given that the only record basis on which FERC's decision

could be affirmed is minimized by the Commission itself, we

are compelled to remand the case to the Commission so that

it can reach a conclusion that is the product of reasoned

decisionmaking.7

__________

7 In view of the Commission's own limited defense of its calculations, we need not reach the merits of MoPSC's related calculations

arguments (e.g., rate of return computation, debt prepayment treatment, reliance on stale data) raised in its request for rehearing of

the April 30, 1998 order. On remand, if the Commission decides to

recalculate the Rehearing Rates, it should consider MoPSC's arguments and, if it chooses to depart from existing applicable ratemaking policies, it must explain its reasoning on the record. See Great

Lakes Gas Transmission Ltd. P'ship, 984 F.2d at 433 ("A full and

rational explanation is especially important to this court when the

condition imposed reflects a shift in FERC's policy or a departure

from its typical manner of granting certificates and imposing conditions.").

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We note, however, that our decision does not mean that at

least some of the rationales offered by FERC could not

support the approval of initial section 7 rates pending a

section 4 proceeding. See Atlantic Ref. Co., 360 U.S. at 391

(approval of certificate of public convenience and necessity

"requires the Commission to evaluate all factors bearing on

the public interest"); Tejas Power Corp. v. FERC, 908 F.2d

998, 1003 (D.C. Cir. 1990) ("[T]his court has consistently

required the Commission to give weight to the contracts and

settlements of the parties before it.") (citing Union Elec. Co.

v. FERC, 890 F.2d 1193, 1194-95 (1989)); Jersey Cent. Power

& Light Co. v. FERC, 810 F.2d 1168, 1177-78 (D.C. Cir. 1987)

("In reviewing a rate order courts must determine whether or

not the end result of that order constitutes a reasonable

balancing, based on factual findings, of the investor interest in

maintaining financial integrity and access to capital markets

and the consumer interest in being charged non-exploitative

rates."); cf. Arctic Slope Regional Corp. v. FERC, 832 F.2d

158, 167-68 (D.C. Cir. 1987) (upholding FERC decision that

termination of lengthy litigation served public interest). In

this case, however, the rationales fail because FERC has not

adequately explained how the rationales, alone or together,

satisfy the "public interest" standard of section 7.

For the foregoing reasons, we remand to FERC for further

proceedings consistent with this opinion.

So ordered.

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