Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-08-01243/USCOURTS-caDC-08-01243-0/pdf.json

Parties Involved:
Colorado Interstate Gas Company
Petitioner
Federal Energy Regulatory Commission
Respondent

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 5, 2009 Decided March 26, 2010 

No. 08-1243 

COLORADO INTERSTATE GAS COMPANY, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

On Petition for Review of Orders 

of the Federal Energy Regulatory Commission 

Howard L. Nelson argued the cause for petitioner. With 

him on the briefs was Kenneth M. Minesinger. Stephanie D. 

Neal entered an appearance. 

Robert M. Kennedy, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent. With him on 

the brief were Cynthia A. Marlette, General Counsel, and 

Robert H. Solomon, Solicitor. 

Before: GARLAND and GRIFFITH, Circuit Judges, and 

EDWARDS, Senior Circuit Judge. 

Opinion for the Court filed by Circuit Judge GRIFFITH. 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 1 of 12
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 GRIFFITH, Circuit Judge: Petitioner, Colorado Interstate 

Gas Company (CIG) operates a natural gas pipeline that 

includes a gas storage facility in Fort Morgan, Colorado. An 

accidental leak at the Fort Morgan facility led to the loss of a 

substantial amount of gas, which CIG asked its shippers to 

replace. The shippers refused, and the Federal Energy 

Regulatory Commission (FERC) took their side in the orders 

on review. FERC held that under its tariff CIG could only 

recover from its shippers gas that was lost in the course of 

normal pipeline operations, which this was not. We deny 

CIG’s petition for review because FERC’s interpretation of 

the tariff was reasonable, and its conclusion that the loss did 

not result from normal operations was supported by 

substantial evidence. 

I. 

 At 12:30 p.m. on October 22, 2006, CIG learned of a gas 

leak at its Fort Morgan facility when a nearby landowner 

“noticed water coming to the surface within the boundaries” 

of CIG’s facility. Affidavit of Larry D. Kennedy, Jr., at 1. 

CIG immediately initiated its “Emergency Operating 

Procedures” and designated Larry D. Kennedy, Jr., CIG’s 

Manager of Reservoir Services, as its “Incident Response 

Commander.” Id. Two hours after first learning of the leak, 

CIG identified the #26 gas well as the source. At 

approximately 7:00 p.m., CIG inserted a cast iron bridge plug 

into the tank, which prevented additional gas from escaping. 

CIG notified federal, state, and local authorities, as 

required by the various regulations that govern unexpected 

releases of natural gas. In the immediate aftermath of the leak, 

CIG “communicated with the public and local authorities by 

the use of newsletters, E-Mails, and public meetings on a 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 2 of 12
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regular basis,” and the pipeline established a “hot-line” for 

concerned citizens. Id. at 3. Days later, as an added 

precaution, CIG inserted a second plug to ensure the leak was 

completely stopped. During a subsequent investigation, CIG 

discovered that the leak had been caused by a crack in the 

tank’s casing approximately 847 feet below ground level. 

The amount of gas lost at Fort Morgan was substantial—

between 451,000 and 720,000 decatherms—and this dispute 

stems from CIG’s attempt to recover gas from its shippers to 

offset the loss. Whether CIG may recover this loss depends on 

the language of its tariff. 

The amount of gas a shipper delivers to a pipeline will 

never be exactly the same as the amount of gas that arrives at 

the destination. In the course of moving gas from one place to 

another, some of it is lost due to small leaks or metering 

errors. Gas lost in this way is known as lost and unaccountedfor gas. In addition, some gas is used by the pipeline to power 

the compressors that move the shippers’ gas through the 

pipeline. This kind of gas is known as fuel gas. Both of these 

quantities vary substantially and unpredictably, which makes 

it difficult to know in advance what the cost of shipping will 

be. FERC permits a pipeline to adjust its tariff in two ways in 

an effort to provide more certainty to the pipeline’s bottom 

line. Notice of Inquiry, Fuel Retention Practices of Natural 

Gas Companies, 72 Fed. Reg. 55,762, 55,762 (Oct. 1, 2007) 

[hereinafter Notice of Inquiry]; see Am. Gas Ass’n v. FERC,

593 F.3d 14, 17 (D.C. Cir. 2010). Each method involves the 

pipeline retaining a percentage of the gas shipped as a hedge 

against uncertain future costs. 

First, the pipeline may include in its tariff a provision that 

fixes a percentage of the transported gas that may be retained. 

The percentage must be approved by FERC in a proceeding 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 3 of 12
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under section 4 of the Natural Gas Act. See 15 U.S.C. 

§ 717c(a) (2006). In section 4 proceedings, FERC generally 

considers every element of a pipeline’s cost of providing 

service before approving the proposed retention percentage as 

just and reasonable. See ANR Pipeline Co., 110 FERC 

¶ 61,069, at 61,338 (2005). Under this approach, the retention 

percentage remains constant until the pipeline initiates 

another section 4 proceeding. 

Second, a pipeline may include in its tariff a provision 

known as a fuel tracker, which tracks the amount of gas that is 

reimbursable and permits periodic changes to the retention 

percentage in what is known as a limited section 4 filing 

based upon the difference between what the pipeline 

estimated that amount to be and what it actually turned out to 

be. See 18 C.F.R. § 154.403 (2009); ANR Pipeline Co., 110 

FERC at 61,338–39; Notice of Inquiry, 72 Fed. Reg. at 

55,762. In a limited section 4 proceeding, FERC evaluates the 

reasonableness of the proposed retention percentage based 

solely on the fuel tracker. This accelerated process allows the 

pipeline to quickly account for the gas that is reimbursable by 

avoiding the lengthy process of general section 4 review. 

Tariffs with fuel trackers must also include a “true-up 

provision,” under which the pipeline either remits to the 

shippers any mistakenly retained gas or recovers additional 

gas if the initial retention percentage was insufficient to 

compensate the pipeline. See ANR Pipeline Co., 110 FERC at 

61,338–40. 

 CIG’s tariff includes a fuel tracker, and four months after 

the Fort Morgan accident the pipeline made a limited 

section 4 filing with FERC seeking to increase its fuel 

retention percentage from 0.00% to 0.06%. The lion’s share 

of the gas that CIG sought to recover was lost in the Fort 

Morgan leak. Several shippers protested CIG’s filing, 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 4 of 12
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contending that the Fort Morgan loss was unrecoverable. 

They argued that CIG could only increase its retention 

percentage to account for normal operating losses and not for 

accidents like the Fort Morgan leak. See Colo. Interstate Gas 

Co., 121 FERC ¶ 61,161, at 61,719–20 (2007) [hereinafter 

Order Following Technical Conference]. FERC agreed, 

rejected CIG’s proposed retention percentage, and accepted 

CIG’s limited section 4 filing “subject to the removal of the 

. . . Fort Morgan gas loss.” Id. at 61,724. CIG petitioned for 

rehearing, which FERC denied. FERC elaborated on the 

reasoning in its initial order, concluding that CIG’s 

interpretation of its tariff was unreasonable, contrary to FERC 

precedent, and failed to account for the industry’s usage of the 

term “lost, unaccounted-for” gas to refer to a discrete category 

of gas. Colo. Interstate Gas Co., 123 FERC ¶ 61,183, at 

62,237, 62,240 (2008) [hereinafter Rehearing Order]. 

 CIG timely petitioned this court for review of FERC’s 

decisions. We have jurisdiction under 15 U.S.C. § 717r(b). 

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

(D.C. Cir. 2006). 

II. 

 The disposition of CIG’s petition turns on FERC’s 

interpretation of the tariff’s fuel tracker to bar recovery for the 

gas lost in the Fort Morgan leak. We review a challenge to 

FERC’s interpretation under the Administrative Procedure 

Act’s arbitrary and capricious standard of review, using a 

two-step, Chevron-like analysis. See 5 U.S.C. § 706(2)(A); 

Old Dominion Elec. Coop., Inc. v. FERC, 518 F.3d 43, 48 

(D.C. Cir. 2008). We first “consider de novo whether the 

[tariff] unambiguously addresses the matter at issue. If so, the 

language . . . controls for we must give effect to the 

unambiguously expressed intent of the parties.” Ameren 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 5 of 12
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Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir. 2003) 

(internal quotation marks and citation omitted). “If the tariff 

language is ambiguous, we defer to the Commission’s 

construction of the provision at issue so long as that 

construction is reasonable.” Koch Gateway Pipeline Co. v. 

FERC, 136 F.3d 810, 814–15 (D.C. Cir. 1998). 

We start by asking if the tariff clearly addresses whether 

CIG is entitled to increase its retention percentage due to the 

losses from the Fort Morgan leak. In a number of its 

provisions, the tariff describes circumstances in which the 

pipeline may recover from the shipper losses incident to the 

transportation of gas. We begin with Article 6.1, which states, 

“Shipper shall furnish Fuel Reimbursement as defined in 

Article 1 of the General Terms and Conditions.” Colo. 

Interstate Gas Co., FERC Gas Tariff, at Fourth Revised Sheet 

No. 92. “Fuel Reimbursement,” as defined in Article 1.30, 

“shall mean the compressor Fuel Gas and Lost, Unaccounted 

For and Other Fuel Gas as described in Article 42 of the 

General Terms and Conditions.” Id. at Thirteenth Revised 

Sheet No. 230A. Neither party challenges that the tariff 

permits reimbursement for fuel gas, leaving for our resolution 

the meaning of the phrase “Lost, Unaccounted For and Other 

Fuel Gas as described in Article 42.” Article 42, which is the 

tariff’s fuel tracker, is entitled “Fuel and L&U” and describes 

the gas eligible for reimbursement as “Lost, Unaccounted For 

and Other Fuel ‘(L & U and Other Fuel).’” Id. at First Revised 

Sheet No. 380F, Original Sheet No. 380G. All gas eligible for 

reimbursement will be “stated in terms of a percentage of 

Receipt Quantities, computed and adjusted quarterly.” Id. at 

First Revised Sheet No. 380F. This is the retention 

percentage. 

CIG contends that these provisions clearly define the 

kinds of losses for which CIG may increase its retention 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 6 of 12
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percentage. According to CIG, the comma that appears 

between “Lost” and “Unaccounted For” in Article 1.30 

reveals that the tariff describes a three-item list of the types of 

gas that qualify for reimbursement: (1) lost gas; 

(2) unaccounted-for gas; and (3) other fuel gas.1 See 

Petitioner’s Br. at 26. CIG argues that the gas lost in the Fort 

Morgan leak is subject to reimbursement because it was 

“lost.” This is a reasonable reading of Article 1.30, but it is 

incomplete. It fails to take into account the way Article 42 

suggests that “lost, unaccounted-for” gas is a single category. 

In both its title, “Fuel and L&U,” and its parenthetical, “L & 

U and Other Fuel,” Article 42 uses the abbreviation “L&U” in 

ways that suggest “lost, unaccounted-for” gas is a discrete 

classification. 

But neither view is compelling to the exclusion of the 

other. The tariff simply does not provide a clear answer to the 

question of whether a pipeline may recover any gas that is 

merely “lost.” On this issue, the tariff is “reasonably 

susceptible of different constructions or interpretations,” 

Ameren Servs. Co., 330 F.3d at 499 (internal quotation marks 

omitted), and does not unambiguously establish what losses 

justify an increase in CIG’s retention percentage. 

We thus proceed to the second step of our Chevron-like

analysis and assess the reasonableness of FERC’s 

interpretation. FERC gave three reasons for its conclusion that 

CIG’s tariff does not permit recovery for the Fort Morgan gas. 

 

1

 “Other fuel gas” is gas that the pipeline uses for its own 

operations, excluding gas used to power machinery to transport gas. 

See Colo. Interstate Gas Co., 128 FERC ¶ 61,117 at 61,614 n.5 

(2009) (“‘[O]ther fuel gas’ . . . reflects gas consumed in processing 

activities, and is different from compressor fuel gas.”). 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 7 of 12
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First, FERC applied the industry understanding of the 

phrase “lost, unaccounted-for” gas. Rebutting CIG’s argument 

that it may recover any gas that is merely “lost,” FERC 

concluded that the comma between the words “lost” and 

“unaccounted-for” “does not change the trade usage and tariff 

understanding of L&U as a single term.” Rehearing Order, at 

62,241; see also Transwestern Pipeline Co., 51 FERC 

¶ 61,343, at 62,116 n.3 (1990) (“Lost and unaccounted for gas 

occurs from leakage, variations in metering at different 

locations and other reductions in the volume of gas 

transmitted . . . . incurred as part of a pipeline’s daily 

operations.”). Relying on the trade usage of the term is 

appropriate, as construing terms in light of their commonly 

understood meaning is a hallmark of reasonable 

interpretation. See Indep. Petrochemical Corp. v. Aetna Cas. 

& Sur. Co., 944 F.2d 940, 945 (D.C. Cir. 1991); see also

United States v. Martinez-Noriega, 418 F.3d 809, 815 (8th 

Cir. 2005) (“Trade usage of a term is also highly relevant to a 

determination of the parties’ intended meaning.”). We have 

consistently required that FERC interpret tariffs in light of 

their “commercial . . . context,” and the Commission did so 

here. Consol. Gas Transmission Corp. v. FERC, 771 F.2d 

1536, 1547 (D.C. Cir. 1985) (internal quotation marks 

omitted). CIG counters that FERC should never have 

considered trade usage because the terms of the tariff clearly 

establish the kinds of gas losses that are recoverable. See 

Reply Br. at 4. But as we have just explained, the tariff was 

not clear on this point, and FERC rightly looked to this kind 

of extrinsic evidence. With such ambiguity, we afford FERC 

“substantial deference . . . even where the issue simply 

involves the proper construction of language.” Koch Gateway, 

136 F.3d at 814 (internal quotation marks omitted). FERC 

relied on its understanding of industry parlance and 

reasonably construed the tariff’s use of “L&U.” 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 8 of 12
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Second, FERC’s interpretation of the fuel tracker ensures 

that no provision of the tariff lacks legal effect. FERC noted 

that CIG’s contrary interpretation would render meaningless 

the Commission’s “review of CIG’s quarterly L&U and fuel 

gas reimbursement percentage true-ups” under Article 42.5. 

Order Following Technical Conference, at 61,722. Article 

42.5 of CIG’s tariff requires the pipeline to reconcile the 

actual amount of gas retained under the prevailing retention 

percentage with the amount of gas that qualifies under the fuel 

tracker. If CIG could recover any loss at all—including 

catastrophic, abnormal losses—FERC would never need to 

examine CIG’s data offered in connection with its true-ups. 

See id. CIG’s proposed interpretation renders the true-up 

provision of the fuel tracker a nullity, whereas FERC’s 

interpretation does not. FERC reasonably gave effect to all the 

tariff’s provisions—yet another maxim of reasonable 

interpretation. See RESTATEMENT (SECOND) OF CONTRACTS

§ 203(a) (2009) (“[A]n interpretation which gives a 

reasonable, lawful, and effective meaning to all the terms is 

preferred to an interpretation which leaves a part . . . of no 

effect.”). 

Third, FERC’s construction of CIG’s tariff is consistent 

with how FERC has approached recovery claims for lost, 

unaccounted-for gas under other fuel trackers. In particular, 

FERC employed the test announced in Williams Natural Gas 

Co., 73 FERC ¶ 61,394, at 61,215 (1995), which involved the 

application of a similar fuel tracker. In Williams, FERC “put 

forth a standard for recovering losses in tracking mechanisms 

that described two categories of losses: losses resulting from 

normal pipeline operations, which are recoverable; and losses 

resulting from the malfunction of underground storage 

mechanics, which are not recoverable in an L&U tracking 

mechanism.” Rehearing Order, at 62,239. Following 

Williams, FERC determined that the key factual determination 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 9 of 12
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in this case was whether the Fort Morgan loss more closely 

approximated a normal operating loss, which is recoverable, 

or an abnormal malfunction of underground storage 

mechanics, which is not. We give deference to FERC’s 

interpretations of its own precedents and conclude that it was 

reasonable for FERC to use the approach sanctioned in 

Williams to determine the outcome here. See NSTAR Elec. & 

Gas Corp. v. FERC, 481 F.3d 794, 799 (D.C. Cir. 2007). 

In contrast, CIG argues that FERC has departed from its 

precedents. CIG reads these cases to limit FERC’s inquiry to 

the prudence of the pipeline’s actions when considering if lost 

gas is eligible for reimbursement. See Petitioner’s Br. at 20–

24. But CIG misreads those decisions. In the case upon which 

CIG relies most, High Island Offshore System, LLC (HIOS), 

118 FERC ¶ 61,256 (2007), FERC permitted the pipeline to 

change its retention percentage because the reported level of 

lost and unaccounted-for gas was “not an anomaly.” Id. at 

62,235. Critically, however, the Commission in HIOS did not 

purport to describe the types of costs that are eligible for 

recovery, whereas Williams provided just such a holding. By 

following the rule outlined in Williams, FERC did not 

unlawfully diverge from its precedents. 

Additionally, CIG maintains that FERC’s interpretation 

was unreasonable because the Williams distinction between 

“normal” and “unusual” is not rationally related to whether a 

pipeline could increase its retention percentage. The pipeline 

argues that this standard “deprives CIG of an opportunity to 

recover its prudently incurred costs.” See Petitioner’s Br. at 

14. This argument fails for two reasons. First, it wrongly 

implies that such losses are never recoverable. The decisions 

below made no such prohibition and concluded simply that 

CIG could not recover these costs through a limited section 4 

filing. FERC left open the possibility that a pipeline could 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 10 of 12
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recover losses like those at Fort Morgan in a regular section 4 

case.2 See Rehearing Order, at 62,240. Second, the standard 

announced in Williams and applied below is rationally related 

to whether a pipeline can use an accelerated procedure 

without the lengthy investigation entailed in a section 4 case. 

By only permitting recovery for normal operating losses, 

FERC and the parties save the time and resources required to 

undertake a general rate case for frequently recurring 

expenses. The pipeline and its shippers reasonably anticipate 

that normal costs will occur each year, and the limited section 

4 filing ensures that both parties can quickly resolve these 

claims. 

III. 

We turn finally to CIG’s contention that FERC was 

arbitrary and capricious in determining that the Fort Morgan 

loss was not a normal operating event. This court “uphold[s] 

FERC’s factual findings if supported by substantial 

evidence.” Wash. Gas Light Co. v. FERC, 532 F.3d 928, 930 

(D.C. Cir. 2008) (internal quotation marks omitted). 

“Substantial evidence is ‘such relevant evidence as a 

reasonable mind might accept as adequate to support a 

conclusion.’” Butler v. Barnhart, 353 F.3d 992, 999 (D.C. 

Cir. 2004) (quoting Richardson v. Perales, 402 U.S. 389, 401 

(1971)). 

The circumstances of the Fort Morgan incident amply 

support FERC’s finding that this accident, which led to 

substantial gas loss over the period of a few days, was not 

 

2

 As part of a prior settlement agreement, CIG has agreed to a 

moratorium on section 4 actions. See Petitioner’s Br. at 4 n.1. That 

CIG has voluntarily taken that option off the table has no impact on 

what FERC is required to do under the law. 

USCA Case #08-1243 Document #1236831 Filed: 03/26/2010 Page 11 of 12
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normal. FERC reasonably described the accident as “a totally 

unexpected non-routine malfunction of underground storage 

mechanics . . . not associated with routine maintenance or 

other normal operations activity.” Order Following Technical 

Conference, at 61,723. Indeed, CIG responded by initiating 

“Emergency Operating Procedures” and establishing a hotline for concerned residents of the area. A reasonable person 

could accept this evidence as adequate to conclude the Fort 

Morgan incident was not part of CIG’s “normal pipeline 

operations.” FERC’s determination was supported by 

substantial evidence. 

IV. 

For the foregoing reasons, the petition for review is 

Denied.

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