Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-97-01644/USCOURTS-caDC-97-01644-0/pdf.json

Parties Involved:
Colorado Interstate Gas Company
Intervenor
Federal Energy Regulatory Commission
Respondent
Montana Consumer Counsel
Intervenor for Respondent
Montana Public Service Commission
Intervenor for Respondent
Public Utilities Commission of South Dakota
Intervenor for Respondent
Williston Basin Interstate Pipeline Company
Petitioner

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 19, 1998 Decided January 22, 1999

No. 97-1644

Williston Basin Interstate Pipeline Company,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Colorado Interstate Gas Company, et al.,

Intervenors

On Petition for Review of Orders of the Federal

Energy Regulatory Commission

Robert T. Hall, III argued the cause for petitioner. With

him on the briefs were John R. Schaefgen, Jr., and Paul K.

Sandness.

Susan J. Court, Special Counsel, Federal Energy Regulatory Commission, argued the cause for respondent. With her

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 1 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

on the brief was Jay L. Witkin, Solicitor. John H. Conway,

Deputy Solicitor, Larry D. Gasteiger and Patricia L. Weiss,

Attorneys, entered appearances.

Alan J. Roth was on the brief for intervenors Public

Utilities Commission of South Dakota, et al.

Before: Edwards, Chief Judge, Williams and Randolph,

Circuit Judges.

Opinion for the Court filed by Chief Judge Edwards.

Edwards, Chief Judge: Petitioner Williston Basin Interstate Pipeline Company ("Williston Basin") seeks review of

multiple orders of the Federal Energy Regulatory Commission ("FERC" or "Commission") in connection with a general

rate increase filed by Williston Basin under s 4 of the Natural Gas Act ("NGA" or "Act"), 15 U.S.C. s 717c. The Commission found that Williston Basin had not satisfied its burden of demonstrating that various components of its proposed

rate increase were lawful, and it therefore ordered certain

adjustments to Williston Basin's filing. In this petition for

review, Williston Basin takes issue with the Commission's

findings insofar as they concern the rate of return on common

equity, ad valorem tax expense, throughput projection, depreciation allowance, and cost of long-term debt. The Public

Utilities Commission of South Dakota, Montana Consumer

Counsel, and Montana Public Service Commission ("State

Agencies") have intervened in support of the Commission's

position.

We find that Williston Basin's challenges to the Commission's depreciation and cost of long-term debt determinations

are plainly without merit, and, therefore, warrant no discussion. The Commission's decisions require no amplification on

these two issues. However, for the reasons provided below,

we grant Williston Basin's petition for review and remand to

the Commission for further proceedings on the issues related

to the rate of return on common equity, ad valorem tax, and

throughput.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 2 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

I. Background

A.Regulatory Framework

This case involves the Commission's authority, pursuant to

the NGA, to regulate "the transportation of natural gas in

interstate commerce." 15 U.S.C. s 717(b) (1994). Section

4(a) of the Act requires that rates charged by natural gas

pipelines within the Commission's jurisdiction be just and

reasonable. See id. s 717c(a). Consistent with this mandate,

pipelines must file all proposed rates with the Commission for

a determination as to their reasonableness. See id. s 717c(c).

The pipeline bears the burden of demonstrating that a proposed rate change is reasonable. See id. s 717c(e). The

Commission may suspend the operation of a proposed new

rate for up to five months pending a reasonableness determination. See id. If the Commission fails to reach a determination before the end of the suspension period, it must allow

the filed rate to go into effect subject to an ultimate decision,

which may be made retroactive. See id.

B.Commission Rate-Setting Practices

The Commission sets pipeline rates by dividing revenue

requirements by projected demand to attain a dollar-per-unitof-service figure. To begin, the Commission sets a pipeline's

basic costs by totaling operation and maintenance expenses,

depreciation, and taxes, including ad valorem taxes. As it is

ordinarily impossible for a pipeline to know at the time of

filing what its actual costs will be during the effective period

of the filed rates, the Commission has adopted a "test period"

approach for this stage of rate making. Under this approach,

a pipeline submits data in support of its rate proposal that

reflects actual experience over the most recent twelve consecutive months (the "base period"), adjusted for changes that

are known and measurable with reasonable accuracy at the

time of filing, and that will become effective within nine

months after the last month of actual experience (the "adjustment period"). See 18 C.F.R. s 154.303(a)(4) (1998). (Separate test period regulations govern rate setting in the electric

utility context. See id. s 35.13.) Under certain circumstances, the Commission has discretion to make adjustments

in light of actual, post-test period data. See Exxon Corp. v.

FERC, 114 F.3d 1252, 1263 (D.C. Cir. 1997). For the most

part, however, the Commission develops rates using the

representative cost data available at the time of filing. The

test period underlying the rates in this case consisted of a

twelve-month base period ending January 31, 1992 and a

nine-month adjustment period ending October 31, 1992.

Next, the Commission adds to this basic cost of service

figure a reasonable profit, computed by multiplying the rate

base by the rate of return. See Boston Edison Co. v. FERC,

885 F.2d 962, 964 (1st Cir. 1989). The rate base, which is not

at issue in the present case, represents "total historical

investment minus total prior depreciation." Id. (internal

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 3 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

quotation omitted). The rate of return, which is very much at

issue in the present case, represents a weighted average of

the costs of the three elements comprising the pipeline's

capital structure: long-term debt, preferred stock, and common equity. See North Carolina Utils., Comm'n v. FERC, 42

F.3d 659, 661 (D.C. Cir. 1994). The cost of common equity is

frequently, as it is here, a point of contention in rate making.

Nepco Mun. Rate Comm. v. FERC, 668 F.2d 1327, 1335 (D.C.

Cir. 1981).

To calculate a pipeline's rate of return on common equity,

the Commission first develops a "zone of reasonableness,"

which gauges returns experienced in the industry, ordinarily

by reference to a proxy group of publicly-traded companies

for which market data is available. North Carolina, 42 F.3d

at 661-62. To arrive at this zone of reasonableness, the

Commission favors a discounted cash flow ("DCF") model,

which projects investor growth expectations over the long

term by adding average dividend yields to estimated constant

growth in dividends over the indefinite future. The premise

of the DCF model is that the price of a stock is equal to the

stream of expected dividends, discounted to their present

value. Once the Commission has defined a zone of reasonableness in this manner, it then assigns the pipeline a rate

within that range to reflect specific investment risks associated with that pipeline as compared to the proxy group compaUSCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 4 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

nies. See id. at 661. This figure, combined with the longterm debt and preferred stock figures, represents the overall

rate of return used to calculate the pipeline's profit allowance.

In the final rate-making step, the Commission divides the

total revenue requirement--cost of service plus reasonable

profit--by the total demand. Demand corresponds with

throughput volume on the pipeline system, which, like cost of

service, is computed by reference to a test period. See

Exxon Corp., 114 F.3d at 1263-64. This calculation yields the

per-unit price necessary to cover the pipeline's revenue requirement, which, in turn, represents a reasonable price that

the Commission will permit the pipeline to recover. See

Boston Edison, 885 F.2d at 964.

C.Commission Proceedings

The procedural history of this case, which spanned more

than five years and spawned six Commission orders and two

administrative law judge ("ALJ") decisions, does not bear

exhaustive recitation here. To put the relevant issues into

context, we need only summarize the Commission's determinations, as relevant to the rate of return on common equity,

ad valorem tax, and throughput issues.

Williston Basin is a natural gas company that operates a

pipeline system within the states of Montana, North Dakota,

South Dakota, and Wyoming. On April 30, 1992, Williston

Basin filed tariff sheets with the Commission in order to

implement a proposed general rate increase under s 4 of the

NGA, to be effective on June 1, 1992. On May 29, 1992, the

Commission accepted Williston Basin's filing, suspended the

rates until November 1, 1992, and made the increase subject

to refund, various conditions, and the outcome of a hearing on

cost-of-service and throughput issues. See Williston Basin

Interstate Pipeline Co., 59 F.E.R.C. p 61,237 (1992). Subsequently, on September 30, 1992, Williston Basin filed a superceding rate increase to reflect firm service conversions,

from sales to transportation, on its system. Because this

filing relied on the same cost of service and allocations as the

earlier rate case, the two proposals raised several identical

issues. The Commission accepted the revised rates, suspended them until November 1, 1992, and consolidated the new

filing with the pending proceeding. See Williston Basin

Interstate Pipeline Co., 61 F.E.R.C. p 61,129 (1992). In the

meantime, Williston Basin filed revised tariff sheets in connection with its restructuring pursuant to FERC Order No.

636. By order dated February 12, 1993, the Commission set

various issues in the restructuring proceeding for hearing, to

be addressed in the ongoing proceedings in the 1992 dockets.

See Williston Basin Interstate Pipeline Co., 62 F.E.R.C.

p 61,144 (1993). The Commission thereafter permitted Williston Basin to implement its restructuring as of November 1,

1993, subject to certain conditions. Consequently, the orders

under review affect Williston Basin's rates from June 1, 1992

through December 31, 1995, the effective date of its next rate

case.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 5 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

On July 19, 1994, following an evidentiary hearing on the

matters raised by the Commission, the presiding ALJ issued

an initial decision in these proceedings, finding, with respect

to the issues relevant here, that Williston Basin had adequately supported the ad valorem tax and throughput components of its rate proposal, but had failed to justify the return

on common equity element. See Williston Basin Interstate

Pipeline Co., 68 F.E.R.C. p 63,007 (1994). On July 25, 1995,

the Commission issued an order affirming in part and reversing in part the ALJ's decision. The Commission concluded

that Williston Basin had not met its burden as to any of these

issues. See Williston Basin Interstate Pipeline Co., 72

F.E.R.C. p 61,074 (1995) ("July 1995 Order").

With respect to the rate of return on common equity, the

Commission focused on the appropriate data to be used for

the dividend growth rate in the DCF model. In its filing,

Williston Basin had proposed a return on equity of 15 percent, based on five-year earnings forecasts published by the

Institutional Brokers Estimate System ("IBES") for the relevant proxy group companies. Rejecting this single-stage

approach to the dividend growth estimate, the Commission

relied instead on the two-stage approach articulated in several recent rate cases. See Williston Basin, 72 F.E.R.C. at

61,376. The Commission looked in particular to Ozark Gas

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 6 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Transmission System, 68 F.E.R.C. p 61,032 (1994), where it

had recognized that exclusive reliance on short-term growth

projections is inconsistent with the DCF model, which assumes dividend growth for an indefinite period of time. The

Commission concluded, therefore, that Williston Basin's dividend growth projection must reflect estimates of both longand short-term growth. See Williston Basin, 72 F.E.R.C. at

61,376. Because the Commission found that the proposals

before it lacked sufficient evidence of long-term growth rates,

it took official notice of Data Resources, Inc./McGraw Hill

("DRI") projections for retail gas consumption and prices,

which had been used to represent long-term growth in Ozark,

and averaged those data with the IBES five-year projections.

See id. When added to the average dividend yields for the

proxy companies, these data produced a zone of reasonableness for the rate of return on common equity of 10.97 to 13.43

percent, from which the Commission adopted the midpoint of

12.20 percent for Williston Basin. See id.

With respect to the ad valorem tax expense, the Commission found that test period principles precluded Williston

Basin's proposal to include in its cost estimate increased

amounts that it anticipated owing to Montana and South

Dakota in connection with various plant additions. See id. at

61,363. The Commission found that, although the plant additions occurred during the test period, the effect of these

additions "is not known and could not be measured with

reasonable accuracy during the test period." Id. The Commission reasoned that, because "[t]he determination of the

exact ad valorem tax effect is a local matter involving local

valuation and tax assessment procedures," the projected adjustment to ad valorem tax liability was too speculative. Id.

The Commission also attempted to distinguish a previous

Williston Basin rate proceeding, on the ground that the

adjustment permitted there was not speculative. See id.

Finally, with respect to throughput, the Commission rejected, also on test period principles, Williston Basin's proposal to

reduce the projected volume to reflect two major bypasses to

its pipeline system. See id. at 61,382-83. At the time of its

filing, Williston Basin had expected these bypasses to occur

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 7 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

during the nine month "adjustment" portion of the test

period; however, the bypasses in fact occurred during the

four months following the close of the test period. See id.

Thus, although Williston Basin's estimates were reasonable

when made, the Commission relied instead on the most

updated actual data for the test period that was available

before the rates took effect. See id. According to the

Commission, where the bypasses were known not to have

occurred during the test period, and where the actual time

that they would occur could not have been known then, the

fact that the bypasses did subsequently occur could not be

considered. See id.

Williston Basin sought rehearing as to each of these issues.

By order dated July 19, 1996, the Commission addressed

further, but declined to rehear, the ad valorem tax and

throughput issues. See Williston Basin Interstate Pipeline

Co., 76 F.E.R.C. p 61,066 (1996) ("July 1996 Order"). However, the Commission granted rehearing on the issue of the

long-term growth factor to be used in calculating the rate of

return on common equity. Commenting that the data of

which it took official notice in the previous proceeding was not

widely available, the Commission concluded that:

[t]he parties need an opportunity to cross-examine the

proponents of using the DRI data, or any other long

term growth projection, to determine whether the projections are properly used. At an evidentiary hearing,

parties will have the opportunity both to present their

own testimony concerning the appropriate data to use in

projecting long term growth and to ascertain the basis of

any other party's reliance on the DRI or other data.

Williston Basin, 76 F.E.R.C. at 61,390 (footnote omitted).

Accordingly, the Commission ordered a hearing for "the sole

purpose of determining the appropriate long term growth

rate to be applied" in the two-stage DCF analysis approved

by the Commission in the July 1995 Order. Id. On October

8, 1996, following a hearing in which all parties presented

testimony on this issue, the ALJ rendered a decision, essentially adopting the approach taken by the Commission in its

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 8 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

previous order--i.e., use of DRI data for the retail gas

commodity. See Williston Basin Interstate Pipeline Co., 77

F.E.R.C. p 63,001, at 65,006 (1996).

By order dated June 11, 1997, the Commission reversed the

ALJ, concluding "that a projection of long-term growth for

the specific pipeline companies in the proxy group or for the

pipeline industry as a whole cannot reasonably be developed

based on available data sources." Williston Basin Interstate

Pipeline Co., 79 F.E.R.C. p 61,311, at 62,388 (1997) ("June

1997 Order"). The Commission found that Williston Basin's

proposal, which advocated the sole use of IBES five-year

earnings forecasts in the DCF model, was at odds with the

two-stage DCF approach announced in Ozark, as well as the

approach to long-term growth used by large investment

brokerage houses. See id. at 62,388. Furthermore, it determined that the FERC staff's approach, which used DRI

projections of growth in retail gas consumption as its basis

for determining long-term growth in pipeline earnings, was

also deficient, for there was no reason to assume the necessary correlation between gas commodity and gas transmission

revenues. See id.

Based on the evidence presented at the hearing, the Commission abandoned the industry-specific approach to longterm growth estimates and adopted, as an alternative, "the

long-term growth rate of the economy as a whole, as measured by the gross domestic product." Williston Basin, 79

F.E.R.C. at 62,387. The Commission provided four reasons

for its decision to use economy-wide growth estimates: first,

the record showed that, as companies reach maturity, their

growth rates approach that of the economy as a whole;

second, it is reasonable to predict that, in the long run, a

regulated firm will grow at the rate of an average firm in the

economy, because regulation will moderate profitability in

good and bad economic periods; third, whereas the record

did not show that investors rely on the approaches suggested

by the parties in determining long-term growth, there was

evidence that two large brokerage firms, Merrill Lynch and

Prudential-Bache, use the long-term growth of the economy

in conducting DCF analyses for investment purposes; and

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 9 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

fourth, the FERC staff witness in this case, and witnesses in

other cases, have used the long-term growth of the economy

to confirm the results of their analyses conducted using

industry- or firm-specific estimates of growth. See id. at

62,389-90.

After relying on investment houses to support its shift to

an economy-wide approach to long-term growth, the Commission declined to adopt the particular long-term growth models

used by Merrill Lynch or Prudential-Bache. The Commission acknowledged that the use of gross domestic product

("GDP") differed from the methodologies of the investment

houses, but explicitly made this choice, because it found that

the three-stage approaches used by these firms demanded

more "involved" calculations, which depended on "the exercise

of subjective judgment." Id. at 62,390. Although no party

had discussed or advocated GDP data at the hearing, an

exhibit to the FERC staff's testimony contained, as background, estimates of long-term GDP growth from both DRI

(5.37 percent) and Energy Information Administration

("EIA") (6.33 percent). The Commission averaged these

estimates to yield a long-term growth figure of 5.85 percent

and an adjusted zone of reasonableness of 10.5 to 12.96

percent. See id. Accordingly, the Commission ordered Williston Basin to use the midpoint of 11.73 percent--ironically, a

figure even lower than that reached in the July 1995 Order--

in its compliance filing. See id.

Williston Basin once again sought rehearing, reiterating its

opposition to the use of any long-term growth projections in

the DCF analysis, and challenging on multiple grounds the

Commission's adoption of the GDP as the long-term growth

factor. See Request for Rehearing of Williston Basin Interstate Pipeline Company ("Rehearing Request"), reprinted in

Joint Appendix ("J.A.") 201-27. On October 16, 1997, the

Commission rejected these challenges in the final order under

review, reaffirming the two-stage methodology underlying its

rate of return determination and defending its choice of GDP

as the long-term growth factor to be used in the DCF

analysis. See Williston Basin Interstate Pipeline Co., 81

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 10 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

F.E.R.C. p 61,033, at 61,174-77 (1997) ("October 1997 Order").

This petition for review followed.

II. Analysis

A.Standard of Review

We review FERC orders under the Administrative Procedure Act's ("APA") arbitrary and capricious standard. See

Union Pac. Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C. Cir.

1997); 5 U.S.C. s 706(2)(A) (1994). Our role in this context is

"limited to assuring that the Commission's decisionmaking is

reasoned, principled, and based upon the record." Pennsylvania Office of Consumer Advocate v. FERC, 131 F.3d 182,

185 (D.C. Cir. 1997) (citations and internal quotation marks

omitted). To this end, we examine the orders on review to

ensure that the Commission has considered the relevant data

and "articulate[d] ... 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).

B.Rate of Return on Common Equity

We begin with the most vigorously contested issue in this

case: the rate of return on common equity. Although all

parties to the proceeding have embraced the DCF model for

calculating Williston Basin's return on equity, they dispute

the appropriate methodology and data sources for determining the dividend growth rate to be used in this analysis. In

the orders below, the Commission adopted a two-stage

growth factor, using IBES data for the short-term growth

rate and GDP data for the long-term growth rate. As we

view it, Williston Basin's litany of challenges to this determination boils down to two core arguments: (1) the Commission

erred in requiring the DCF analysis to include a long-term

growth factor at all; and, (2) even assuming that some longterm growth factor was appropriate, the Commission improperly adopted the two GDP figures that happened to be in the

record but were not discussed at the hearing.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 11 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

1.Use of a Two-Stage Dividend Growth Factor in the

DCF Model

One of Williston Basin's principal concerns is the Commission's decision to follow Ozark and other Commission precedent and include a two-stage growth factor in its DCF model.

Williston Basin suggests that the applicability of the DCF

methodology is unjustified for lack of clarity in FERC precedent. We have a very different view of the matter. The

Commission squarely addressed the application of its new

policy to the particular context of Williston Basin's ongoing

proceeding: following a hearing devoted expressly to longterm growth issues, the Commission entertained and rejected

Williston Basin's arguments on this point, explaining in full its

decision to require a long-term growth estimate in conformity

with the Ozark methodology. See Williston Basin, 77

F.E.R.C. at 65,005; Williston Basin, 79 F.E.R.C. at 62,388;

Williston Basin, 81 F.E.R.C. at 61,173-76. In short, whatever questions Williston Basin had regarding the use of some

two-stage growth factor in the DCF model were answered by

FERC.

Williston Basin, for its part, was intractable in its position

that the Commission should rely exclusively on the shortterm IBES forecasts in projecting dividend growth. Indeed,

when the Commission established a hearing for the sole

purpose of determining the appropriate long-term growth

rate, Williston Basin proposed no objective measure of longterm growth, arguing instead that long-term growth was

irrelevant, and that, even if it was relevant, IBES five-year

data was the best estimate thereof. See Rehearing Request

at 21-22, reprinted in J.A. 221-22. This tactic proved to be

fruitless, for the Commission reasonably decided to adhere to

its two-stage DCF model after concluding that it properly

applied in this context. See Michigan Wis. Pipe Line Co. v.

FPC, 520 F.2d 84, 89 (D.C. Cir. 1975) ("There is no question

that the Commission may attach precedential, and even controlling weight to principles developed in one proceeding and

then apply them under appropriate circumstances in a stare

decisis manner."). Thus, to the extent that Williston Basin's

arguments on this score reflected efforts to skirt or modify,

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 12 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

rather than comply with, the Commission's preferred DCF

policy, the Commission acted reasonably in rejecting them.

In summary, we find that the question of whether the DCF

model must incorporate some long-term growth factor was

clearly raised, considered, and resolved by the Commission.

We conclude, therefore, that Williston Basin is not entitled to

yet another opportunity to oppose the application of that

policy to this rate case.

Our inquiry does not end here, however, for a critical issue

remains with regard to the Commission's implementation of

its two-stage growth projection--specifically, the appropriate

weight to be given to the short- and long-term data in this

model. In performing the DCF analysis in this case, the

Commission averaged these data, relying on the general

approach used in prior proceedings. The Commission supported this method by explaining that it lacked the information necessary to predict the duration of the short and long

terms, as well as the rate at which growth would transition to

maturity. See Williston Basin, 81 F.E.R.C. at 61,176. As a

result, the Commission decided "to give [these periods] equal

weight" in applying the "well-accepted constant growth model

... to determine an average constant growth over time." Id.

During the pendency of this appeal, however, the Commission shifted course, finding in the context of a different

proceeding that short-term growth projections should receive

a two-thirds, rather than one-half, weighting in this analysis.

See Transcontinental Gas Pipe Line Corp., 84 F.E.R.C.

p 61,084, at 61,423 (1998). The Commission concluded that:

While determining the cost of equity nevertheless requires that a long-term evaluation be taken into account,

long-term projections are inherently more difficult to

make, and thus less reliable, than short-term projections.

Over a longer period, there is a greater likelihood for

unanticipated developments to occur affecting the projection. Given the greater reliability of the short-term

projection, we believe it is appropriate to give it greater

weight. However, continuing to give some effect to the

long-term growth projection will aid in normalizing any

distortions that might be reflected in short-term data

limited to a narrow segment of the economy.

Id. In other words, the Commission essentially found that

the method of averaging short- and long-term projections

used in this case gave undue weight to the long-term data.

Because Transcontinental appears to reflect a significant

shift in Commission policy with regard to the DCF analysis,

we conclude that the Commission is obligated to reconsider

the application of that policy to Williston Basin. See Panhandle E. Pipe Line Co. v. FERC, 890 F.2d 435, 438-39 (D.C. Cir.

1989). In Panhandle, the Commission had rejected the pipeline's tariff sheets, based in part on the agency's policy

against "capacity brokering." While the matter was on apUSCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 13 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

peal to this court, the agency revised its policy, determining

that capacity brokering should be considered on a case-bycase basis. See id. at 438. We held that "[w]hen an agency

changes a policy or rule underlying a decision pending review,

the agency should immediately inform the court and should

either move on its own for a remand or explain how its

decision can be sustained independently of the policy in

question." Id. at 439 (citation omitted).

Notwithstanding the admonishment in Panhandle, Commission counsel contended at oral argument that Transcontinental does not require a remand in the present case. Rather, according to counsel, Transcontinental has no bearing on

this case, because Williston Basin never discussed how the

growth factors should be weighted in the DCF model. We

reject this view as too simplistic. While preserving the basic

two-stage approach of Ozark, the Commission in Transcontinental explicitly determined that long-term growth projections can be unreliable and therefore should be given a lesser

weight in the DCF model. See Transcontinental, 84

F.E.R.C. at 61,423. Similarly, Williston Basin, although it did

not propose a re-weighting of the growth projections per se,

relied in large part on the shortcomings of long-term data in

advocating sole reliance on the IBES data. See Rehearing

Request at 13, reprinted in J.A. 213. Clearly subsumed

within the argument that the long-term data should receive

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 14 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

no weight is the argument that the long-term data should

receive a lesser weight.

Commission counsel also attempted to distinguish Panhandle by characterizing that case as involving a "reversal,"

rather than a mere "revision," of Commission policy. We find

this argument equally unavailing. For one thing, in Panhandle, we referred to the intervening policy change as a "revision," see 890 F.2d at 439, which belies the suggestion that

the relevance of that case is limited to instances in which an

agency makes an about-face. Moreover, the instant case

itself implicates important policy matters that have concerned

the Commission in multiple rate adjudications over the course

of the past half decade. See, e.g., Northwest Pipeline Corp.,

79 F.E.R.C. p 61,309 (1997); Williams Natural Gas Co., 77

F.E.R.C. p 61,277 (1996); Panhandle E. Pipe Line Corp., 71

F.E.R.C. p 61,228 (1995); Ozark Gas Transmission Sys., 68

F.E.R.C. p 61,032 (1994). While the Commission's paramount

change in policy was its incorporation of a two-stage growth

rate in the DCF model, its determination of the appropriate

weights to be assigned the various growth projections is

central to any application of this policy. On this score, even

the Commission conceded that a re-weighting of the shortand long-term growth factors would have a substantial impact, in dollar terms, on Williston Basin's rates.

Thus, we find that, in light of the Commission's recent

refinement of its two-stage DCF model, Williston Basin may

be entitled to a re-calculation of its rate of return on common

equity. Accordingly, we remand this matter to the Commission so that the agency can reconsider whether the IBES

five-year projections advocated by Williston Basin should

receive a greater weighting in the DCF analysis, and, if so, to

implement this change. Cf. NLRB v. Food Store Employees

Union, Local 347, 417 U.S. 1, 10 n.10 (1974) ("[A] court

reviewing an agency decision following an intervening change

of policy by the agency should remand to permit the agency

to decide in the first instance whether giving the change

retrospective effect will best effectuate the policies underlying

the agency's governing act."); National Fuel Gas Supply

Corp. v. FERC, 899 F.2d 1244, 1249-50 (D.C. Cir. 1990)

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 15 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

(referring, in another context, to the "general principle that

an agency should be afforded the first word on how an

intervening change in law affects an agency decision pending

review").

2.Adoption of GDP as the Long-Term Growth Factor

Bearing in mind our earlier conclusion that the Commission

properly required Williston Basin's rate of return on common

equity to reflect long-term, as well as short-term, growth

expectations, we turn now to the Commission's particular

selection of the GDP for that purpose. According to Williston

Basin, the Commission's July 1997 Order adopting GDP as its

measure of long-term growth was a "bolt from the blue"--an

unexpected outcome that was untested at the hearing and

unsupported by the record. Thus, Williston Basin's contentions reduce essentially to a claim of inadequate notice concerning the possibility that the Commission would reach the

result that it did, as well as several subsidiary claims challenging the result itself.

In its July 1996 Order, the Commission established a

hearing for the purpose of determining the appropriate longterm growth factor to be used in the DCF model. See

Williston Basin, 76 F.E.R.C. at 61,390. In particular, the

Commission found that the parties "need[ed] an opportunity

to cross-examine the proponents of using the DRI data, or

any other long term growth projection, to determine whether

the projections are properly used." Id. (footnote omitted).

Following this hearing, however, the Commission shifted tack.

Notwithstanding the fact that it had summarily adopted the

DRI data in its July 1995 Order, that the ALJ had accepted

the DRI data after considering the parties' positions at the

hearing, and that the DRI data had been used in Ozark, the

Commission determined to use instead an economy-wide projection based on GDP data. Moreover, notwithstanding its

earlier position that a hearing was needed concerning the

suitability of DRI data for the two-stage DCF model, the

Commission refused Williston Basin's request for such a

hearing on the use of GDP data.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 16 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

It is well-established that "[a] party is entitled ... to know

the issues on which decision will turn and to be apprised of

the factual material on which the agency relies for decision so

that he may rebut it. Indeed, the Due Process Clause forbids

an agency to use evidence in a way that forecloses an

opportunity to offer a contrary presentation." Bowman

Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S.

281, 288 n.4 (1974); see also Hatch v. FERC, 654 F.2d 825,

835 (D.C. Cir. 1981) (same); United Gas Pipe Line Co. v.

FERC, 597 F.2d 581, 586-87 (5th Cir. 1979) ("The law will not

tolerate ... after-the-fact, in fact retroactive, imposition of

standards," especially where there is "no evidence either to

support or justify" the new standard.). Our present concern

centers, then, on whether the Commission's order setting the

long-term growth matter for hearing provided Williston Basin

with adequate notice of the issues that would be considered,

and ultimately resolved, at that hearing. In particular, we

question whether Williston Basin had reason to know that an

economy-wide projection based on GDP data was at issue

and, also, whether the Commission's judgment on this score

followed logically from the testimony and other evidence

adduced at the hearing. In addition, we question whether

substantial record evidence supports the actual GDP figure

adopted by the Commission for use in calculating Williston

Basin's rate of return on common equity.

As we perceive it, the Commission's decision progressed in

two relatively distinct steps: first, the Commission expanded

the scope of its long-term growth factor from the natural gas

industry to the economy as a whole, as reflected in the GDP;

and second, the Commission adopted the average of two GDP

estimates contained in a record exhibit as the long-term

growth factor to be used for the newly-defined DCF model in

this case. The Commission's first step--its decision to adopt

an economy-wide approach--reflected a well-reasoned and

supported outgrowth of the matter under consideration,

namely, the appropriate long-term growth factor to be used in

the DCF analysis. The Commission established the hearing

in broad terms, inviting the parties both to advocate the

appropriate data to be used in general, and to challenge the

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 17 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

use of DRI data in particular. See Williston Basin, 76

F.E.R.C. at 61,390. Moreover, the testimony adduced at the

hearing demonstrated that major investment houses used an

economy-wide approach to projecting long-term growth, that

such an approach was supported by practical economic considerations, and that existing industry-specific approaches

imperfectly reflected investor expectations and made unfounded economic assumptions. See Williston Basin, 79

F.E.R.C. at 62,388-90. Finally, whether or not it is true, as

Commission counsel now suggests, "that GDP [is] virtually

synonymous with the economy as a whole," Brief for Respondent at 42, we have little doubt that GDP is among the most

commonly used and widely available measures of economywide growth. In short, we are convinced that FERC's decision to expand the scope of its long-term analysis reflected a

reasoned progression from the issues set for hearing, and

that the data informing that decision was in the record and

discussed at the hearing.

However, we find that the Commission's second step, by

which it reached the precise long-term growth estimate of

5.85 percent, lacked adequate support in the record. As

discussed above, we do not take issue with the Commission's

decision, on a general level, to use GDP data in estimating

long-term growth. The problem, in our view, is that there

are conceivably a number of estimates of GDP created by

different entities and based on different economic assumptions. Yet, FERC, after substantially modifying the scope of

its long-term analysis, and without forewarning to the parties,

simply teased two GDP figures from the background

section to a single exhibit to reach the result here at issue.

See J.A. 315; Williston Basin, 79 F.E.R.C. at

62,390. This was a bizarre conclusion to the hearing. It is

undisputed that the record in the hearing had been created

largely in response to a specific concern over the suitability of

industry-specific DRI data for use in the DCF model. No

party at the hearing had presented, advocated, or even mentioned the use of GDP data. In light of these circumstances,

we find that the Commission neither explained nor supported

its choice of the DRI and EIA estimates of GDP contained in

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 18 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

the existing record. Accordingly, we remand to the Commission for further proceedings on this issue.

C.Ad Valorem Taxes

Next, we address Williston Basin's proposed ad valorem tax

expense, which the Commission rejected as inconsistent with

test period principles. In its filing, Williston Basin sought to

recover the additional ad valorem taxes associated with plant

increases during the test period by applying the effective tax

rate for the 1991 year in each state in which it owned

property to its total capital investment in those states, as

adjusted for additions during the test period. Williston Basin

contended that this represented a proper adjustment to reflect changes that were "known and measurable" within the

meaning of the Commission's regulations. See 18 C.F.R.

s 154.303(a)(4). The plant additions occurring during the

test year will, it argued, produce higher tax assessments by

the relevant states for the effective period of the rates.

The Commission refused to approve this approach, however, requiring instead that Williston Basin support its filing

with the actual ad valorem tax liability incurred during the

test period. See Williston Basin, 76 F.E.R.C. at 61,384. In

reversing the ALJ on this point, the Commission explained

that Williston Basin's proposed tax liability was too speculative:

While the plant additions occurred within the test period,

the effect on [Williston Basin's] ad valorem taxes of the

installation of those facilities is not known and could not

be measured with reasonable accuracy during the test

period in this case. The determination of the exact ad

valorem tax effect is a local matter involving local valuation and tax assessment procedures. Further, because

of depreciation, existing facilities may generate lower ad

valorem tax liability than as reflected in the test period

data, thereby offsetting in some unknown way the potential ad valorem tax liability.

Williston Basin, 72 F.E.R.C. at 61,363. According to the

Commission, "the actual costs for any expense or tax during

the test period generally reflects the best evidence of what

the company can expect to incur in the future." Williston

Basin, 76 F.E.R.C. at 61,384.

The Commission's ruling on this issue reduces to its basic

position that Williston Basin's proposed calculation was "conjecture," because "too many variables" could influence Williston Basin's actual tax liability during the effective period of

the rates. Id. Williston Basin counters that it obviated these

concerns by assuming the tax rate in effect during the test

period and adjusting only that variable--plant balance--for

which changes were known and measurable at the time of

filing. According to Williston Basin, this approach is consistent with the methodology approved by the Commission in a

prior Williston Basin proceeding, Williston Basin Interstate

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 19 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Pipeline Co., 56 F.E.R.C. p 61,104 (1991) ("1991 Order").

In the prior proceeding on which Williston Basin relies,

Montana had significantly increased the allocation of Williston

Basin's pipeline property to that state, but had allowed a

phase-in of the higher allocation percentage over a three-year

period, from 1986 through 1988. The Commission apparently

found that this phase-in produced known and measurable

increases in the allocation on which the taxes that Williston

Basin owed Montana were based. On this ground, the Commission approved a methodology reflecting the increases that

occurred during the applicable test period, which ended January 31, 1988. This approach involved two steps: first, the

1987 ad valorem taxes paid were divided by the 1986 year-end

plant balance to determine the relevant tax rate; and second,

that rate was applied to a tax base representing the plant

balance as of December 31, 1987. See Williston Basin, 56

F.E.R.C. at 61,382-83. As we see it, the new plant capital at

issue in this case is analytically equivalent to the phase-in of

property allocation permitted in the earlier Williston Basin

proceeding. Therefore, the upward adjustment allowed by

the Commission in the 1991 Order to reflect increases in plant

balance during the test year is apparently of the same variety

proposed by Williston Basin in the present case.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 20 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Although the Commission was not strictly bound to follow

the methodology approved in the prior Williston Basin proceeding, it was obligated to articulate a principled rationale

for departing from that methodology. See Gilbert v. NLRB,

56 F.3d 1438, 1445 (D.C. Cir. 1995) ("It is ... elementary that

an agency must conform to its prior decisions or explain the

reason for its departure from such precedent."); National

Conservative Political Action Comm. v. FEC, 626 F.2d 953,

959 (D.C. Cir. 1980) (same). In other words, "[r]easoned

decisionmaking requires treating like cases alike." Hall v.

McLaughlin, 864 F.2d 868, 872 (D.C. Cir. 1989). The Commission's task on this score was not unduly onerous, for we

have held that "[w]here the reviewing court can ascertain that

the agency has not in fact diverged from past decisions, the

need for a comprehensive and explicit statement of its current

rationale is less pressing." Id. Thus, an agency's findings

will be upheld, "though of less than ideal clarity, if the

agency's path may reasonably be discerned." Greater Boston

Television Corp. v. FCC, 444 F.2d 841, 851 (D.C. Cir. 1970).

In this case, the Commission failed to satisfy even this

relatively forgiving standard.

The Commission purported to distinguish the prior Williston Basin proceeding, holding that

the salient finding by the Commission was that the State

of Montana had prescribed higher tax rates and that it

had allowed a phase-in of those rates. Therefore, there

was ample rationale for finding there that the expenses

claimed by [Williston Basin] were based on adjustments

for known and measurable changes that would occur

during the period the rates were to be in effect. Here,

this is simply not the case. While the plant additions

occurred within the test period, the effect on [Williston

Basin's] ad valorem taxes ... is not known and could not

be measured with reasonable accuracy during the test

period.

Williston Basin, 72 F.E.R.C. at 61,363. The Commission

elaborated on rehearing that "there was nothing speculative

in the increase because the same valuation of the properties

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 21 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

was used and only the percentage allocation to Montana was

changed. That type of change is different than an increase in

the value of the property which [Williston Basin] claims in

this proceeding." Williston Basin, 76 F.E.R.C. at 61,384.

The 1991 Order may indeed be distinguishable on the basis

of property valuation, which is a critical step in assessing ad

valorem tax liability. Property valuation is performed by

individual states in accordance with local practice and, often,

the discretion of individual assessors. FERC may be right

that valuation was speculative in the present case, because

the new plant additions had not yet been assessed by the

relevant states. In fact, Williston Basin proposed to rely

solely on its own investment in plant facilities, even though

the valuation process almost certainly includes consideration

of other factors. Thus, the impact of the plant increases here

may not have been "known and measurable," as required by

the test period regulations. By contrast, at least as we see it,

the "plant addition" at issue in the 1991 Order resulted

simply from the phased-in allocation of existing plant, which

had presumably already been valued. In that case, then,

there was nothing uncertain: the Commission took the known

Montana tax rate during the test period and applied that

rate to the known tax base--a higher percentage of the

previously-assessed value of Williston Basin's property--during the test period.

Assuming the facts as we do, and assuming that our

reasoning mirrors the Commission's intended reasoning, we

think that this distinction may be compelling. The sticking

point for us, then, is the extent to which the Commission's

orders compel us to make such assumptions. In other words,

we are simply unable, on the record as it now exists, to assure

ourselves either that this distinction holds water, or that this

analysis does, in fact, capture the Commission's reasoning.

For example, the Commission described the 1991 Order

variably as involving a phase-in of tax rates and a phase-in of

property allocation. Yet, tax rates are not at issue here,

because Williston Basin voluntarily assumed the tax rate in

effect during the test period.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 22 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Moreover, even assuming that we have correctly identified

the distinction upon which the Commission relied, we are not

confident that the record supports this distinction. Our

uncertainty derives principally from the lack of clarity in the

1991 Order, and the Commission's failure to explain that

order here. Specifically, because we do not know the precise

calculations and dollar amounts involved in the prior case, we

are not sure that the Commission's prior ruling was based

solely upon the phase-in of plant allocation. Indeed, our own

rough calculations suggest that approximately $67,000 in disputed ad valorem tax expenses is not explained by the phasein. The logic of the Commission's holding in the 1991 Order,

particularly as it is couched in broad language, might support

the inference that this discrepancy reflects additional plant

increases of the nature involved in this case. If that is the

case, the supposed distinction, based on the uniquely known

and measurable character of the phased-in plant allocation,

rings hollow.

On its face, the 1991 Order refutes the broad principle on

which the Commission relied in rejecting Williston Basin's ad

valorem tax expense in this case--namely, that a pipeline may

only use taxes actually paid during the test period to support

its estimate of taxes in its compliance filing. Particularly in

light of this contradiction, we believe that the Commission

failed to provide a clear and well-supported explanation of

why the methodology used in the 1991 proceeding was not

appropriate here. We recognize that the Commission may, in

fact, have a persuasive ground for distinguishing this case

from the 1991 Order. On remand, then, FERC will have an

opportunity to offer a coherent rationale to support its judgment and, also, to show that the cited rationale is supported

by the record.

D.Throughput

Finally, we turn to the Commission's decision to reject

Williston Basin's proposed throughput volume. In its filing,

Williston Basin sought to adjust its base period data to

account for decreases in throughput resulting primarily from

bypasses of its transmission system by two major suppliers.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 23 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

At the time of filing, Williston Basin expected these bypasses

to occur before the adjustment period ended on October 31,

1992. Thus, it argued that they represented "known and

measurable" changes to its actual experience during the test

period, which could properly be reflected in its rate filing.

See 18 C.F.R. s 154.303(a)(4).

The source of contention here arises from the fact that the

bypasses did not actually occur until after the test period had

ended. In other words, due to the timing of these rate

proceedings, actual adjustment and post-test period data was

available by the time the Commission considered the matter.

This data showed that the bypasses were not completed

during the test period, but were completed very shortly

thereafter. Thus, if Williston Basin was permitted to include

this adjustment, it would over-recover for three or four

months of the rate period commencing November 1, 1992.

However, if Williston Basin was not permitted to include this

adjustment, it would under-recover for eight or nine months

of that rate period (assuming, that is, that it did not file a new

rate case to cover that period).

The crux of Williston Basin's position is that the Commission should accept its throughput projection, because the

estimate was reasonable when made. The ALJ agreed, concluding that "under established Commission precedent, a test

year projection may be set aside only if its is shown to have

been unreasonable when made." Williston Basin, 68

F.E.R.C. at 65,069. Both Williston Basin and the ALJ relied

chiefly upon Public Service Co. of Indiana, 7 F.E.R.C. p 61,-

319 (1979), aff'd sub nom. Indiana Municipal Electric Ass'n

v. FERC, 629 F.2d 480 (7th Cir. 1980), a proceeding in which

the Commission accepted an electric utility's test period costof-service estimate--even though a particular component of

its projection ultimately proved exaggerated--because the

estimate was reasonable when made and did not yield unreasonable results. See Public Service, 7 F.E.R.C. at 61,701-02.

The Commission, however, rejected this view in the orders

below, holding that whether or not Williston Basin's projecUSCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 24 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

tion was reasonable when made, "where the pipeline ...

projects an event to occur before the end of the test period,

but in fact that event does not become effective within the

required time period, the Commission generally requires that

event not be reflected in the pipeline's rates." Williston

Basin, 72 F.E.R.C. at 61,382. In the Commission's view, the

alleged reasonableness of Williston Basin's estimate went

only to its compliance with filing requirements under 18

C.F.R. s 154.303. See id. It did not "preclude the Commission from considering updated data in deciding the ultimate

question of what rates should be found just and reasonable

for the relevant periods," id.; nor did it "endow [the bypasses] with the required characteristics to be allowed as an

adjustment." Williston Basin, 76 F.E.R.C. at 61,388. Thus,

the Commission refused the proposed adjustment, adopting

instead the FERC staff's proposal, which based throughput

levels on actual data for the twelve months immediately

preceding the effective date of the rates. See Williston

Basin, 72 F.E.R.C. at 61,382.

We begin our analysis of this issue by recognizing a point

that, while seemingly semantic, may bear on the relative

merit of the parties' arguments--that is, who sought the

"adjustment" in this case? On the one hand, from the

Commission's standpoint, Williston Basin asked for an adjustment to its base period data to reflect a decline in throughput

that was projected to, but did not, occur during the applicable

"adjustment period." Under this view, the Commission's

decision was apparently consistent with the test period regulations governing pipelines, which on their face allow only

adjustments for changes that will occur before the end of the

test period. See 18 C.F.R. s 154.303(a)(4). Not only is it

undisputed that the changes in this case did not occur during

the test period, but the Commission actually noted that,

"[h]ad the bypasses taken place in the test period, ... the

adjustment would have been permitted." Williston Basin, 76

F.E.R.C. at 61,388. However, the Commission found that,

because the bypasses did not occur during the test period,

and because it could not be known during the test period

exactly when they would occur, the use of post-test period

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 25 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

data showing that they did occur shortly after that time

expired was "too much in the nature of hindsight." Williston

Basin, 72 F.E.R.C. at 61,383. Moreover, it determined that

the position advocated by Williston Basin would give pipelines

an incentive to selectively project only adjustments that

would prove favorable to them if they actually occurred--i.e.,

increases in costs and decreases in throughput, see Williston

Basin, 76 F.E.R.C. at 61,388--which is, in fact, what Williston

Basin appears to have done in this case.

On the other hand, however, Williston Basin labels the

Commission as the party that sought an adjustment, because

Williston Basin wanted to use the estimate it made upon filing

this rate case, while the Commission wanted to adjust that

estimate to account for actual data during the adjustment

portion of the test period. Under this view, the Commission's

ruling appears less reasonable, for Williston Basin is quite

correct in observing that the Commission in the past has

declined to disturb test period estimates that were proven

inaccurate in light of later data if those estimates were

reasonable when made and did not produce unreasonable

consequences. See, e.g., Indiana & Mich. Mun. Distribs.

Ass'n v. FERC, 659 F.2d 1193, 1198-99 (D.C. Cir. 1981);

Public Service, 7 F.E.R.C. at 61,701. In this case, the

Commission conceded that Williston Basin's throughput projection was reasonable when made, and did not even attempt

to explain why the projection, although it in fact occurred

within a short time after the test period, was so erroneous as

to yield unreasonable results. Yet, it refused to let Williston

Basin's projection stand. Thus, instead of analyzing Williston

Basin's claim under the framework of the above cases, the

Commission simply ignored them, citing them only insofar as

it summarized the parties' arguments, and leaving us to guess

as to why they should not apply here.

As with the ad valorem tax issue, we once again find

ourselves able to surmise a solid basis for distinction. Here,

it is the simple fact that the vast majority of cases espousing

the principle of "reasonable when made" involved electric

utilities, rather than natural gas pipelines. See, e.g., Public

Service, 7 F.E.R.C. p 61,319. Although the Commission emUSCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 26 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

ploys a test period methodology for setting rates in both

contexts, the applicable regulations differ considerably in

their treatment of estimates. As noted, the rates for pipelines are based on actual data for a one-year period, as

adjusted to reflect known and measurable changes that will

occur over the following nine months. See 18 C.F.R.

s 154.303. These pipeline regulations do not appear to make

use of estimates at all; indeed, they require test period

projections to be updated with actual data for the adjustment

period as it becomes available. See id. s 154.311(a), (b). By

contrast, the rates for utilities are derived from two distinct

periods: actual data for the year known as "Period I" and

estimated data for the year known as "Period II." See id.

s 35.13(d)(1), (2). These utility regulations do not explicitly

require that Period II estimates are known and measurable,

or that they will in fact occur during the test year. See id.

s 35.13(d)(2)(i).

As we interpret them, then, the regulations applying to

utilities vest far greater weight in estimates than do the

regulations governing pipelines. It is plainly rational to infer

from these differences in regulatory context that the "reasonable when made" formulation applies only to a utility's Period

II estimates and not to a pipeline's projected adjustments.

In short, applying the rule of Public Service comports with

the plain language of the utility regulations, but would require the Commission to recognize an exception to the pipeline regulations. The Commission may therefore reasonably

have determined that Public Service was inapposite in this

context.

This explanation for the Commission's decision would be

satisfactory but for two shortcomings. First, although this

distinction may seem fairly obvious once recognized, the fact

remains that the Commission itself did not articulate, or even

allude to, it in the orders below. See American Pub. Transit

Ass'n v. Lewis, 655 F.2d 1272, 1278 (D.C. Cir. 1981) (citing

SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)). Second,

both the Commission and courts have, in the past, essentially

ignored this issue, citing test period precedent interchangeably in utility and pipeline cases. See, e.g., Exxon, 114

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 27 of 28
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

F.3d at 1263 & n.23; Distrigas of Mass. Corp. v. FERC, 737

F.2d 1208, 1220 (1st Cir. 1984); National Fuel Gas Supply

Corp., 51 F.E.R.C. p 61,122, at 61,334 & n.53 (1990). Thus,

we have no way of knowing whether the Commission's desired approach is to recognize this broad distinction between

the regulations, or to intentionally skate over the differences

in the terms of the regulations, intending instead that the test

period concept operate identically in the utility and pipeline

contexts.

By failing to distinguish the authority on which Williston

Basin relied in support of its position, and which at least

superficially contravened the Commission's ruling, the agency

appeared to "gloss[ ] over or swerve[ ] from prior precedents

without discussion," Greater Boston, 444 F.2d at 852, thereby

foregoing reasoned decision making. It may well be that the

Commission had in mind this, or another, rational explanation

for its ruling. But as we have noted in the past, "[w]ithout

any explicit recognition by the Commission that the standard

has been changed, or any attempt to forthrightly distinguish

or outrightly reject apparently inconsistent precedent, we are

left with no guideposts for determining the consistency of

administrative action in similar cases, or for accurately predicting future action by the Commission." Hatch, 654 F.2d at

834-35 (footnote omitted). As such, we must remand to the

Commission on this issue as well.

III. Conclusion

For the foregoing reasons, Williston Basin's petition for

review is granted in part and denied in part, and the matter

is remanded to the Commission for further proceedings.

So ordered.

USCA Case #97-1644 Document #411201 Filed: 01/22/1999 Page 28 of 28