Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-05-01214/USCOURTS-caDC-05-01214-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
North Baja Pipeline, LLC
Petitioner

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 11, 2007 Decided March 9, 2007

No. 05-1214

NORTH BAJA PIPELINE, LLC,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Catherine E. Stetson argued the cause for petitioner. With

her on the briefs were Lee A. Alexander, Stefan M. Krantz,

James Howard, C. Todd Piczak, and Carl M. Fink. Debra H.

Rednik entered an appearance.

Lona T. Perry, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on the

brief were John S. Moot, General Counsel, and Robert H.

Solomon, Solicitor.

Before: HENDERSON, RANDOLPH and KAVANAUGH, Circuit

Judges.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

USCA Case #05-1214 Document #1027241 Filed: 03/09/2007 Page 1 of 9
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KAVANAUGH, Circuit Judge: Interstate natural gas

pipelines must submit their proposed shipping rates to the

Federal Energy Regulatory Commission for approval. This case

concerns a rate filing by North Baja, a pipeline that transports

natural gas from Arizona to Mexico through California. North

Baja proposed a formula for sharing with shippers the costs of

so-called force majeure interruptions – interruptions due to

uncontrollable and unexpected factors like severe weather.

North Baja also proposed to include scheduled maintenance as

a force majeure event. FERC determined that (i) North Baja’s

proposed cost-sharing formula was inconsistent with established

FERC policy and (ii) scheduled maintenance was not a force

majeure event under FERC precedents. We find FERC’s

decisions reasonable and reasonably explained, and we therefore

deny North Baja’s petition for review.

I

1. Natural gas shippers typically pay two fees to transport

gas on a pipeline. The first fee, called a “reservation charge,” is

based on the amount of pipeline capacity reserved by the

shipper. The second fee, called a “usage charge,” is based on

the actual amount of gas transported by the shipper. In

accordance with FERC policy, pipelines recover their fixed

costs (such as operating expenses) in the reservation charge and

their variable costs (primarily the cost of fuel for pipeline

compressors) in the usage charge. See Pipeline Service

Obligations and Revisions to Regulations Governing SelfImplementing Transportation; and Regulation of Natural Gas

Pipelines After Partial Wellhead Decontrol, Order No. 636, 57

Fed. Reg. 13,267-02, 13,281 (Apr. 8, 1992), on reh’g, Order No.

636-A, 57 Fed. Reg. 36,128-01, 36,171 (Aug. 3, 1992). When

pipeline service is interrupted, shippers generally receive a

“reservation charge credit,” which (in substance) is a refund of

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the reservation charge the shipper paid to reserve pipeline

capacity. 

2. In October 2004, North Baja proposed a formula to share

the costs of force majeure occurrences between the pipeline and

its shippers. Under North Baja’s proposal, shippers would

receive no refund for the first ten days of a force majeure

interruption. If the interruption persisted longer than ten days,

the shippers would receive a percentage refund for each

additional day the pipeline was out of service. 

FERC rejected North Baja’s proposed formula as

inconsistent with Commission policy. FERC explained that it

had previously approved two refund formulas for force majeure

events. See Order Accepting and Suspending Tariff Sheets

Subject to Conditions, 109 F.E.R.C. ¶ 61,159, at 61,766 ¶ 14

(Nov. 12, 2004). Under the first, called the Texas Eastern

policy, shippers receive no refund for the first ten days and

receive a full refund for any days beyond that. Id. (citing Tx. E.

Transmission Corp., 62 F.E.R.C. ¶ 61,015 (Jan. 13, 1993), and

Natural Gas Pipeline Co. of Am., 106 F.E.R.C. ¶ 61,310 (Mar.

29, 2004)). Under the second, called the Tennessee policy,

shippers receive a percentage refund for the entire period of the

interruption. Id. (citing El Paso Natural Gas Co., 104 F.E.R.C.

¶ 61,045 (July 9, 2003)). North Baja proposed a “hybrid” that

combined the pipeline-favorable aspects of each of the two

policies – the ten-day no-refund period of Texas Eastern and the

percentage refund of Tennessee. Id. FERC concluded that this

hybrid did not satisfy the Commission’s standard of fair costsharing between pipelines and shippers. Id. at 61,766 ¶ 15.

In the same order, FERC concluded that events within North

Baja’s control – such as scheduled maintenance – are not force

majeure events. Id. at 61,765 ¶ 11. FERC directed North Baja

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either to change its proposal to conform with the Commission’s

rulings or to offer additional support for it. Id. at 61,766 ¶ 15. 

North Baja filed a request for clarification and rehearing

before the Commission. North Baja argued that FERC had made

two mistakes in the initial order. First, North Baja questioned

whether the Texas Eastern and Tennessee formulas were the only

permissible alternatives for a force majeure refund. Second,

North Baja contended that FERC erred in determining that

scheduled maintenance was not a force majeure event “without

first considering North Baja’s unique physical and operational

characteristics.” Joint Appendix 60.

FERC issued an Order on Rehearing, Clarification, and

Compliance. 111 F.E.R.C. ¶ 61,101 (Apr. 19, 2005). The

Commission stated plainly that the Texas Eastern and Tennessee

policies were not the only permissible approaches to force

majeure interruptions and that the Commission was “open to

alternative approaches if fully justified and supported.” Id. at

61,493 ¶ 20. North Baja’s formula did not meet that

requirement. 

FERC also did not accept North Baja’s argument on the

scheduled maintenance issue. Id. at 61,492-61,493 ¶¶ 17-19.

FERC explained that an interruption “from planned or scheduled

maintenance is a non-force majeure event that requires the

pipeline to provide full credits.” Id. at 61,492 ¶ 17. Although

some maintenance may be unavoidable, FERC did “not agree

that the pipeline has no ‘control’ over how and when it performs

such maintenance . . . . These are activities over which North

Baja exercises a degree of control, unlike acts of God in typical

force majeure situations.” Id. at 61,492 ¶ 18. In addition, FERC

explained, “since such maintenance is planned, the pipeline

should have provided for such maintenance interruptions in its

rates.” Id. at 61,493 ¶ 18.

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North Baja filed a timely petition for review of the orders in

this Court. 15 U.S.C. § 717r(b). 

II

We review the FERC decisions at issue here under the

Administrative Procedure Act’s arbitrary and capricious standard

of review. See 5 U.S.C. § 706(2)(A). FERC’s conclusions

therefore must be reasonable and reasonably explained. See

Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 839 (D.C.

Cir. 2006). We undertake that inquiry recognizing that we are

“particularly deferential to the Commission’s expertise in

ratemaking cases, which involve complex industry analyses and

difficult policy choices.” Exxon Mobil Corp. v. FERC, 430 F.3d

1166, 1172 (D.C. Cir. 2005) (internal quotation omitted). 

1. With respect to the cost-sharing formula, FERC

reasonably rejected North Baja’s proposal as inconsistent with

agency policy. FERC has previously determined that two costsharing arrangements – Texas Eastern’s full credit after ten days

and Tennessee’s percentage credit over the entire interruption

period – are equitable. See generally Natural Gas Pipeline Co.

of Am., 106 F.E.R.C. ¶ 61,310, at 62,208 ¶ 5 (Mar. 29, 2004).

Both alternatives incorporate a careful balancing of risk between

shippers and pipelines. The problem here is that North Baja

effectively cherry-picked the most pipeline-favorable aspects of

each formula by combining Texas Eastern’s ten-day no-refund

period with Tennessee’s percentage refund. 

North Baja argues that its proposal should be measured

against the general principle that pipelines and shippers must

equitably share the risk of force majeure interruptions – and not

measured against any previously approved policy. It is true that

the Commission has evaluated proposals against the principle

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that both pipelines and shippers should bear “some portion of the

risk associated with force majeure interruptions, so that

[pipelines] have an incentive to act expediently to cure a force

majeure interruption.” Tenn. Gas Pipeline Co., order on reh’g,

80 F.E.R.C. ¶ 61,389, at 62,296 (Sept. 29, 1997). But there is

nothing unreasonable about the Commission comparing North

Baja’s proposal to previously approved policies to determine if

the proposal equitably shares the risk between North Baja and its

shippers. The Commission has simply instructed North Baja to

choose the Texas Eastern or Tennessee formulas, or to propose

a formula that achieves an equitable cost-sharing in the same

ballpark as the Texas Eastern and Tennessee policies. 

North Baja also questions whether the Commission will in

fact consider any approaches other than the specific Texas

Eastern and Tennessee policies. In the order on rehearing below,

however, the Commission made clear that it remained open to

alternative mechanisms. See 111 F.E.R.C. ¶ 61,101, at 61,493

¶ 20. FERC’s decision did not turn, moreover, on the proposal’s

failure to exactly mirror either the Texas Eastern or the

Tennessee policy, but rather on the fact that North Baja’s “hybrid

of the two policies” altered the responsibility for force majeure

events in favor of the pipeline and against the shippers. 109

F.E.R.C. ¶ 61,159, at 61,766 ¶ 14. As the order on rehearing

states, FERC remains open to other approaches that achieve a

similar sharing of risk as the two previously approved policies.

In short, FERC’s decision on the cost-sharing issue was entirely

reasonable. 

2. With respect to the Commission’s determination that

scheduled maintenance is not a force majeure event, FERC

applied its longstanding and consistent definition of what

constitutes a force majeure interruption. More than ten years

ago, the Commission analyzed this issue at length. See Tenn.

Gas Pipeline Co., Opinion No. 406, 76 F.E.R.C. ¶ 61,022 (July

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3, 1996). In that opinion, the Commission ruled that a pipeline

was required to issue full refunds for scheduled maintenance. Id.

at 61,084-61,089. FERC explained that “[b]ecause a pipeline is

responsible for operating its system so that it can meet its

contractual obligations, if the pipeline must curtail firm service

due to an event within its control, or management, the

Commission finds it inequitable for the pipeline’s customers to

bear the risk associated with such mismanagement.” Id. at

61,086. Furthermore, requiring a pipeline to pay for scheduled

maintenance interruptions “provide[s] an incentive for the

pipeline to manage its system so that it can avoid interruptions

that it could have avoided if it had better managed its system.”

Id.

As a general matter, FERC has repeatedly reiterated that

scheduled maintenance is not a force majeure event. See Fl. Gas

Transmission Co., 107 F.E.R.C. ¶ 61,074, at 61,245 ¶¶ 28-29

(Apr. 20, 2004); Alliance Pipeline L.P., 84 F.E.R.C. ¶ 61,239, at

62,214 (Sept. 17, 1998). In El Paso Natural Gas Co., moreover,

the Commission decided that the rule applies even to pipelines

with little excess capacity. See 105 F.E.R.C. ¶ 61,262, at 62,350

¶ 7, 62,352 ¶ 15 (Nov. 28, 2003). FERC explained that “[t]he

Commission’s policy on this issue as set forth in the Florida Gas

decision is not dependent upon specific operating conditions on

the pipeline.” Id. at 62,352 ¶ 15. 

In its orders here, FERC expressly relied on these precedents

and applied its well-established and reasonable definition of a

force majeure event to the case before it. 111 F.E.R.C. ¶ 61,101,

at 61,492 ¶ 17 & nn.12-13; see also Bellevue Hosp. Ctr. v.

Leavitt, 443 F.3d 163, 176 (2d Cir. 2006).

North Baja argues that Opinion 406 emphasized “control”

and contends that a pipeline, when it operates at full capacity,

cannot avoid interrupting service at some point to perform

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necessary maintenance. In North Baja’s view, “[o]n a single-line

system with virtually no excess capacity, such as North Baja, the

pipeline has no control over the occurrence of service

interruptions, regardless of when the maintenance activities take

place. Certain mainline maintenance cannot be performed on a

single-line system, like North Baja’s, without either taking the

entire pipeline out of service or reducing its throughput . . . .”

Petitioner’s Br. at 22-23. Therefore, at least for a pipeline that

has little or no excess capacity, North Baja contends that FERC

policy dictates that scheduled maintenance must be considered

a force majeure event. Moreover, North Baja argues that FERC

was obligated to consider the specific factual circumstances of

North Baja – in particular, that it was operating at full capacity

and that scheduled maintenance outages were therefore

uncontrollable. Cf. Williston Basin Interstate Pipeline Co. v.

FERC, 358 F.3d 45, 48-49 (D.C. Cir. 2004); Mich. Wis. Pipe

Line Co. v. FPC, 520 F.2d 84, 89 (D.C. Cir. 1975). 

In Opinion 406, however, the Commission defined force

majeure events as events that are not only uncontrollable, but

also unexpected. As the Commission wrote, “neither Tennessee,

nor its shippers are at fault for force majeure interruptions,

because these are unexpected and uncontrollable events.” 76

F.E.R.C. ¶ 61,022, at 61,088. Although some scheduled

maintenance interruptions may be uncontrollable, they certainly

are not unexpected. There is nothing unreasonable about

FERC’s policy that pipelines’ rates should incorporate costs

associated with a pipeline “operating its system so that it can

meet its contractual obligations,” and that a cost-sharing

mechanism should be reserved for uncontrollable and

unexpected events that temporarily stall service. The

Commission here reasonably determined that North Baja’s

circumstances did not exempt it from the Commission’s

longstanding policy regarding scheduled maintenance. 

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III

Although North Baja has capably advanced its arguments to

this Court, we find FERC’s decisions reasonable and reasonably

explained for purposes of our deferential review under the

Administrative Procedure Act. We therefore deny North Baja’s

petition.

So ordered.

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