Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-00-01005/USCOURTS-caDC-00-01005-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Northwest Pipeline Corporation
Amicus Curiae
Pan-Alberta Gas (U.S.) Inc.
Petitioner
Pan-Alberta Gas, Ltd.
Petitioner
Southwest Gas Corporation
Intervenor

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 2, 2001 Decided June 1, 2001

No. 00-1005

Pan-Alberta Gas, Ltd. and Pan-Alberta Gas (U.S.) Inc.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Southwest Gas Corporation,

Intervenor

On Petition for Review of Orders of the Federal

Energy Regulatory Commission

John R. Staffier argued the cause for petitioner. With him

on the brief was Marisa A. Sifontes.

Dennis Lane, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. On the brief were

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John H. Conway, Deputy Solicitor, Timm L. Abendroth and

Monique L. Penn-Jenkins, Attorneys.

Alex A. Goldberg argued the cause for amicus curiae

Northwest Pipeline Corporation. With him on the brief were

Steven W. Snarr and Tim W. Muller.

Before: Edwards, Chief Judge, Ginsburg and Tatel,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Pan-Alberta Gas, Ltd. and an

affiliate petition for review of orders of the Federal Energy

Regulatory Commission authorizing Northwest Pipeline Corporation to add capacity to its natural gas pipeline and to sell

that capacity to Duke Trading and Marketing, LLC and its

affiliate. Pan-Alberta argues that the orders are not based

upon substantial evidence in the record, arbitrary and capricious, and contrary to both Commission policies and Northwest's tariff. Because each of these arguments lacks merit,

we deny Pan-Alberta's petition.

I. Background

In 1999 the Commission granted Northwest a certificate of

public convenience and necessity authorizing the company to

expand by 50,000 dekatherms per day ("Dth/d") the physical

capacity of a segment of its natural gas pipeline in Oregon

and Washington. Northwest Pipeline Corp., 87 F.E.R.C.

p 61,227 at 61,914 (1999) ("Order"); see also Northwest Pipeline Corp., 89 F.E.R.C. p 61,172 (1999) ("Rehearing Order"

denying Pan-Alberta's requests for rehearing and clarification

of the Order). The Commission also approved Northwest's

sale of this new capacity to Duke, which agreed to pay

Northwest an annual "reservation Facility Charge" that

"would compensate Northwest for the incremental cost-ofservice attributable to the additional facilities." Order at

61,915. In addition, the Commission approved Duke's and

Northwest's agreement to amend 19 existing contracts.

Those contracts, which in the aggregate provided firm capacity for the transport of 50,000 Dth/d of gas between two points

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in Colorado, would be amended to provide instead (with no

change in financial terms) for transport between points in

Oregon and in Washington. Order at 61,914. Duke's total

payments to Northwest for the Washington-Oregon capacity

would thus consist of two elements: the charge for the

capacity itself, as provided in the 19 amended contracts (and

sometimes called the "reservation charge," see, e.g., 18 C.F.R.

s 284.7(e); Order at 61,918), plus the newly agreed upon

"reservation Facility charge," see Order at 61,915.

The 19 contracts involved in this transaction arose out of

Duke's application of the "capacity release/segmentation process" to what had been a single contract between Duke and

Northwest for 40,000 Dth/d of firm capacity along a segment

of Northwest's pipeline in Colorado. Rehearing Order at

61,521 n.2, 61,523; accord Order at 61,914 & n.5. Both

"capacity release" and "segmentation" require some explanation.

"Capacity release" describes a transaction in which the

holder of a contract for firm transport (the "releasing" shipper) sells that capacity to a "replacement" shipper. The

releasing and replacement shippers may agree upon any price

up to the applicable reservation charge -- the maximum price

per unit of firm capacity established in the pipeline's tariff. A

shipper seeking to release capacity may either auction it to

the highest bidder on a public bulletin board maintained by

the pipeline or bypass the auction to contract at the reservation charge with a replacement shipper of its choosing. See

18 C.F.R. s 284.8(a)-(e). Once a deal to release capacity has

been struck, the replacement shipper pays the agreed-upon

price not to the releasing shipper but to the pipeline, with

which it enters into a new capacity contract. The pipeline

then credits payments received from the replacement shipper

to the account of the releasing shipper; and the releasing

shipper continues to pay the price stated in the original

contract, which remains in force. See id. s 284.8(f). The

pipeline therefore gains nothing from a capacity release

transaction; its income is fixed at the price originally agreed

upon with the releasing shipper, regardless of the terms of

the capacity release agreement.

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"Segmentation" describes a transaction in which an owner

of firm capacity sells that capacity piecemeal. To use the

Commission's example, a shipper that owns the right to

transport 10,000 Dth/d between the Gulf of Mexico and New

York City could release to one replacement shipper the right

to transport 10,000 Dth/d from the Gulf to Atlanta, and

release to another replacement shipper the right to transport

10,000 Dth/d from Atlanta to New York. See Pipeline Service Obligations, and Revisions to Regulations Governing

Self-Implementing Transportation Under Part 284 of the

Commission's Regulations, Order 636-B, 61 F.E.R.C. p

61,272 at 61,997 (1992). Because Northwest charges a "postage stamp" rate -- that is, a shipper purchasing capacity at

the reservation charge pays the same price to ship gas across

the country as it does to ship gas across town, see Northwest

Pipeline Corp., 82 F.E.R.C. p 61,158 at 61,576 (1998) -- a

shipper that resells its capacity in segments can realize

multiples of what it paid for that capacity.

An owner of firm capacity also has the right under the

Commission's regulations to change the specified segment of

the pipeline along which that capacity is to be provided (the

so-called "service path"); for example, in this case Duke, the

owner of firm capacity for the transport of gas between two

points in Colorado, sought to amend its contract to provide

instead for the same amount of capacity between Oregon and

Washington. See Rehearing Order at 61,523. Because capacity is sold at a postage stamp rate, such an amendment

does not entail a change in the price paid by the shipper.

Like a segmentation transaction, a change in service path is

limited by the operational constraints of the pipeline, see 18

C.F.R. s 284.7(d). Because the Northwest pipeline is bidirectional, however, the net effect of all existing gas flows on the

pipeline (so-called net "displacement") may enable a shipper

to introduce gas into and remove gas from the pipeline at

newly designated points without Northwest having the physical capacity for that gas to traverse the path between the two

points. See, e.g., Order at 61,914.

With these techniques available to it, one can see how "a

sequence of long-term, segmented releases, and subsequent

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receipt and delivery point amendments," Northwest Application for Certificate of Public Convenience and Necessity,

FERC Docket No. CP-96-554, at 9 (May 1998), could enable

Duke, without increasing its total payments to Northwest, to

convert its original contract for 40,000 Dth/d of capacity into

multiple contracts, including 19 or more contracts that in the

aggregate provide it with firm capacity of 50,000 Dth/d or

more. See Order at 61,914 n.5. The release and replacement

of segmented contracts allow a shipper to increase its total

capacity under a firm transportation contract without incurring a price increase, and service path amendments permit a

shipper to transform a short path into a long one that can be

further segmented and the parts sold, thus creating what

Northwest calls a "daisy chain" of transactions. Indeed, the

transaction approved in the Order is but the latest service

path amendment in Duke's "daisy chain." Like its predecessors, this transaction does not affect the reservation charge

Duke pays for its capacity, which remains fixed at the price in

the original contract for 40,000 Dth/d. It differs from the

others in the chain only in that Duke agreed to pay a facilities

charge to Northwest in addition to the reservation charge.

Pan-Alberta registered various objections to this transaction before the Commission, see Order at 61,916, and upon

issuance of the Order reiterated them in a request for rehearing and clarification, which the Commission denied. PanAlberta here seeks review of both the Order and the Rehearing Order, and Northwest appears as amicus curiae in support of the Commission.

II. Analysis

Pan-Alberta argues that the Commission based its determination of the public convenience and necessity upon a misunderstanding of how much capacity Duke controlled on Northwest's pipeline. According to Pan-Alberta, the Commission

lacked substantial evidence to support its conclusion that

Duke had effective control over only 50,000 Dth/d of capacity,

making the Commission's answer to the "fundamental question" of the extent of Duke's holdings "inherently arbitrary

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and capricious." See Wisconsin Valley Improvement Co. v.

FERC, 236 F.3d 738, 745 (D.C. Cir. 2001) (agency decision is

arbitrary and capricious if factual determinations lack substantial evidence). In the alternative, Pan-Alberta argues

that the orders under review violate both Northwest's tariff

and the Commission's policy regarding release and replacement.

The Orders are indeed less than pellucid about how much

capacity Duke controls, and the parties' briefs do nothing to

clarify the situation. Particularly confusing is the Commission's failure in the Orders, and all the parties' failure in their

briefs, unequivocally to state whether Duke's 19 contracts for

50,000 Dth/d of capacity are the sole progeny of the original

40,000 Dth/d contract between Northwest and Duke or

whether they are but a subset of the contracts resulting from

the "daisy chain" of transactions based upon the original

agreement. This confusion is exacerbated by the Commission's statement in the Rehearing Order (at 61,523) that Duke

has effectively transferred its contractual obligation for

40,000 Dth a day of capacity to the northern segment of

Northwest's system [i.e., from Oregon to Washington].

This frees up 40,000 Dth a day of capacity on the

southern segment [i.e., in Colorado].

In fact, the transfer "frees up" 50,000 Dth/d, not 40,000 Dth/d,

of capacity on the southern segment. Pan-Alberta suggests

this shows that the Commission mistakenly believed itself to

be approving a transfer of the original 40,000 Dth/d of

capacity at the root of the daisy chain rather than the 50,000

Dth/d that blossomed from it, or at least that the Commission

was confused regarding the amount of capacity at issue. The

Commission insists that it fully understood the transaction,

but concedes in its brief that some confusion could have been

avoided had it described the "transfer" in terms of the larger

quantity.

We agree with the Commission that, notwithstanding their

expository shortcomings, the Orders do enable one accurately

to understand the transaction and do not show that the

Commission misunderstood any material fact. The Orders

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make clear that Duke began with a single contract for 40,000

Dth/d of firm capacity, that it parlayed that contract into

multiple contracts for a total of 50,000 Dth/d of capacity, and

that it sought in the subject transaction to amend the service

path for that 50,000 Dth/d from one in Colorado to a route

between Oregon and Washington, along a segment of the

pipeline that Northwest had agreed to expand. See Order at

61,914 & n.5. As the Commission points out, its above-quoted

description of the transfer, although confusing, is entirely

consistent with this understanding and in no way inaccurate:

Duke has in fact "effectively transferred" its original 40,000

Dth/d contract to give it control over 50,000 Dth/d of capacity

on "the northern segment of Northwest's system." Rehearing Order at 61,523.

Pan-Alberta suggested before the Commission that "Duke's

capacity will increase [as a result of the Order] from the

original 40,000 Dth a day under its original primary contracts

to as much as 90,000 Dth a day (50,000 Dth a day of new

capacity on the expansion facilities plus the original 40,000

Dth a day in Colorado)." Id. As Northwest explains, however, the 90,000 Dth/d figure is an artifact of the arrangement

whereby the contract of a releasing shipper continues in force

even as that shipper cedes effective control of its capacity to

the replacement shipper. See above at 3. Duke, which is

both the releasing and the replacement shipper in the disputed transaction, thus emerges from the Order with contracts

for 90,000 Dth/d of capacity: as the replacement shipper it

controls 50,000 Dth/d of capacity in the north, while as the

releasing shipper it nominally maintains its original contract

for 40,000 Dth/d of capacity in the south. Of course, by

releasing its capacity Duke has ceded any right actually to

ship gas along the Colorado service path; its 90,000 Dth/d of

contracts notwithstanding, it effectively controls only 50,000

Dth/d of capacity. This account is again fully consistent with

the Orders.

Indeed, because any release of capacity generates a new

contract between the pipeline and the replacement shipper

while leaving the releasing shipper's contract in force, a daisy

chain of transactions necessarily creates a corresponding

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daisy chain of contracts. Depending upon the number of

links in the chain, Duke may well be party to contracts that

formally give it the rights to even more than 90,000 Dth/d of

capacity, over much of which it has no effective control.

We also reject Pan-Alberta's claim that the total amount of

capacity that Duke controls is a fact "fundamental" to whether the transaction at issue serves the public interest and

necessity. As the Commission points out, the orders under

review do not address let alone ratify the transactions by

which Duke parlayed its 40,000 Dth/d of capacity into 50,000

Dth/d; they address only whether Duke and Northwest may

"change the primary service path[ ]" for the 50,000 Dth/d of

capacity that Duke had secured previously. Order at 61,914.

Even if the daisy chain in fact yielded contracts that in the

aggregate gave Duke effective (not just formal) control over

more than 50,000 Dth/d of capacity, such additional capacity

would be immaterial to the transaction now in suit. For the

same reason, we do not consider Pan-Alberta's claim that the

daisy chain of transactions by which Duke parlayed its 40,000

Dth/d into 50,000 Dth/d is inconsistent with the Commission's

policy that "releasing and replacement shippers do not have a

right to obtain more capacity than that which the releasing

shipper initially held." Transcontinental Gas Pipe Line

Corp. (Transco), 89 F.E.R.C. p 61,167 at 61,503 (1999) (citing

Tennessee Gas Pipeline Co., 85 F.E.R.C. p 61,052 at 61,163

(1998)). Because the daisy chain transactions were not at

issue when the Orders were before the Commission, PanAlberta may not challenge their validity in this case. Cf.

Southwest Gas Corp. v. FERC, 145 F.3d 365, 370 (D.C. Cir.

1998) ("The Commission need not revisit the reasoning of a

general order every time it applies it to a specific circumstance").

Finally, Pan-Alberta claims that the arrangement under

which Duke pays usage charges only on its original 40,000

Dth/d of capacity rather than on the 50,000 Dth/d violates the

requirement of Northwest's tariff that the shipper pay a

reservation charge for each Dth/d of capacity it controls. As

the Commission notes, however, this requirement is satisfied

because Duke makes payments on each of its two distinct

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contracts with Northwest -- one as a releasing shipper with

respect to 40,000 Dth/d, and one as a replacement shipper

with respect to 50,000 Dth/d. See Order at 61,918. The tariff

is not violated merely because the payments Duke makes on

its replacement contract for 50,000 Dth/d are credited to its

account in its role as releasing shipper. See id.

III. Conclusion

For the foregoing reasons, the petition for review is

Denied.

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