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Parties Involved:
American Gas Association
Petitioner
Federal Energy Regulatory Commission
Respondent
Interstate Natural Gas Association of America
Intervenor for Respondent

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 17, 2009 Decided January 22, 2010 

No. 08-1266 

AMERICAN GAS ASSOCIATION, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA, 

INTERVENOR

On Petition for Review of Orders 

of the Federal Energy Regulatory Commission 

 Andrew K. Soto argued the cause and filed the briefs for 

petitioner. 

 Kathrine L. Henry, Attorney, Federal Energy Regulatory 

Commission, argued the cause for respondent. With her on 

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

Robert H. Solomon, Solicitor. 

USCA Case #08-1266 Document #1226889 Filed: 01/22/2010 Page 1 of 13
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 Joan Dreskin, Timm L. Abendroth, and Daniel J. Regan 

Jr. were on the brief for intervenor Interstate Natural Gas 

Association of America in support of respondent. 

 Before: HENDERSON, ROGERS, and BROWN, Circuit 

Judges. 

Opinion for the Court filed by Circuit Judge BROWN. 

BROWN, Circuit Judge: The Federal Energy Regulatory 

Commission (FERC or the Commission) adopted extensive 

revisions to its financial forms and reporting rules for 

interstate natural gas pipelines. However, the Commission 

declined to adopt petitioner’s request for additional and more 

detailed reporting requirements for shipper-supplied gas for 

pipeline operations. Petitioner, the American Gas 

Association (AGA)—a national trade association of gas 

utility companies—argues the Commission failed to engage 

in reasoned decisionmaking, offering only conclusory and 

unsupported explanations. Because the Commission failed to 

respond to the reasonable concerns of a dissenting 

Commissioner, we grant the petition for review. 

I 

Pursuant to its authority to ensure “[j]ust and reasonable 

rates,” 15 U.S.C. § 717c(a), the Commission has substantial 

discretion to prescribe rules and regulations concerning 

“annual and other periodic or special reports,” and to 

determine “the manner and form in which such reports shall 

be made,” id. § 717i(a). FERC requires natural gas 

companies to file either FERC Form No. 2 (Form 2), Annual 

Report for Major Natural Gas Companies, 18 C.F.R. § 260.1, 

or FERC Form No. 2-A (Form 2-A), Annual Report for 

Nonmajor Natural Gas Companies, id. § 260.2. All natural 

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gas companies also must file FERC Form No. 3-Q (Form 3-

Q), Quarterly Financial Report of Electric Utilities, Licensees 

and Natural Gas Companies, id. § 260.300. 

After determining a pipeline’s existing rate is “unjust, 

unreasonable, unduly discriminatory, or preferential,” FERC 

is authorized to change the pipeline’s rates, either upon its 

own motion or in response to a complaint. 15 U.S.C. 

§ 717d(a). The Commission relies on investigations and 

complaints under section 5 of the Natural Gas Act (NGA), id., 

to monitor pipeline rates, especially since the Commission no 

longer reviews rates triennially, as it once did. See Pipeline 

Service Obligations and Revisions to Regulations Governing 

Self-Implementing Transportation Under Part 284 of the 

Commission’s Regulations, and Regulation of Natural Gas 

Pipelines After Partial Wellhead Decontrol, Order No. 636, 

Jan. 1991–June 1996 FERC Stats. & Regs. Preambles 

¶ 30,939 (1992), order on reh’g, Order No. 636-A, Jan. 

1991–June 1996 FERC Stats. & Regs. Preambles ¶ 30, 950 

(1992), order on reh’g, Order No. 636-B, 61 FERC ¶ 61,272 

(1992) (Order 636); see also Complaint Procedures, Order 

No. 602, 86 FERC ¶ 61,324, 1999 WL 177650, at *2 (1999) 

(noting “[c]omplaints enable the Commission to monitor 

activities in the marketplace and provide an early warning 

system for identifying potential problems”). FERC or the 

complaining customer has the burden of showing the existing 

rate or practice is unjust or unreasonable and that the rate 

proposed is just and reasonable. See, e.g., Transcon. Gas 

Pipe Line Corp. v. FERC, 518 F.3d 916, 918 (D.C. Cir. 

2008). Both rely on pipeline data reported on Forms 2, 2-A, 

and 3-Q as the basis for initiating section 5 complaints and 

satisfying their burden of proof. See, e.g., Pub. Serv. Comm’n 

of NY v. Nat’l Fuel Gas Supply Corp., 115 FERC ¶ 61,299 at 

62,072 (2006); Panhandle Complainants v. SW Gas Storage 

Co., 117 FERC ¶ 61,318 at 62,540, 62,542 (2006). If the 

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Commission or the complainant succeeds, FERC can order a 

new just and reasonable rate to replace the existing one. See

15 U.S.C. § 717d(a). 

II 

In February 2007, the Commission opened an inquiry to 

determine “whether the . . . annual and quarterly financial 

forms provide[d] sufficient information to the public to 

permit an evaluation of the filers’ jurisdictional rates, and 

whether these forms should otherwise be modified to improve 

their usefulness.” Assessment of Information Requirements 

for FERC Financial Forms, 118 FERC ¶ 61,108, 2007 WL 

494954, at *1 (2007). Seven months later, the Commission 

proposed rules amending the financial reporting requirements 

of natural gas companies. See Revisions to Forms, 

Statements, and Reporting Requirements for Natural Gas, 72 

Fed. Reg. 54,860 (proposed Sept. 20, 2007) (to be codified at 

18 C.F.R. pts. 158, 260) (NOPR). The stated purpose of the 

proposed amendments was to “provide pipeline customers, 

state commissions, and the public the information they need 

to assess the justness and reasonableness of pipeline rates.” 

Id. at 54,860. Noting the decline in section 4 filings since the 

elimination of triennial rate review, the Commission affirmed 

its reliance on section 5 complaints and concluded a section 5 

complainant “must have access to the information needed to 

meet [the burden of proof].” Id. at 54,861. Specifically, the 

Commission determined the data on Forms 2, 2-A, and 3-Q 

“must be sufficient to support a complaint.” Id. 

Pipelines consume fuel when they operate equipment that 

transports gas through pipelines and in and out of storage 

facilities, but they also incur a certain amount of lost-andunaccounted-for gas through leakage and meter errors. Years 

ago, FERC required interstate pipelines to “unbundle” the 

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transportation and sales components of their services and 

separately state the rates and charges for the services they 

provide. See Order 636. In the Commission’s view, 

customers should only pay for the services they use. See 

Panhandle Eastern Pipeline Co., 61 FERC ¶ 61,172 at 61,628 

(1992). FERC generally allows pipelines to recover 

separately the cost of fuel used to provide various services by 

requiring customers to pay a fuel charge equal to a certain 

fuel retention percentage. 

In an earlier proceeding FERC asked whether fuel cost 

recovery policies should be modified. See Fuel Retention 

Practices of Natural Gas Companies, 120 FERC ¶ 61,255, 

2007 WL 2758903 (2007). The Commission found pipelines 

were retaining or carrying over enormous fuel costs ($711 

million in 2005) beyond what was consumed, lost, or 

unaccounted for. See id. at *3. The Commission, however, 

declined to take any immediate action, instead stating it 

would rely on section 5 complaints from pipeline customers 

to monitor over-recovery. Fuel Retention Practices of 

Natural Gas Companies, 125 FERC ¶ 61,213, 2008 WL 

4962560, at *3 (2008). 

In the NOPR here, the Commission noted that with 

increased gas prices, the disposition of fuel has become an 

important component of pipelines’ cost of transportation. See

NOPR, 72 Fed. Reg. at 54,865–66. The Commission 

therefore proposed adding a new schedule to Forms 2, 2-A, 

and 3-Q (new pages 521a and 521b) requiring pipelines to 

report detailed information regarding the acquisition and 

disposition of shipper-supplied gas. Id. at 54,866. The new 

schedule, the Commission believed, would help users of the 

Forms more readily determine whether pipelines are overrecovering their revenue requirements. Under the proposed 

rule, pipelines would be required to report: (1) the difference 

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between the volume of gas received from shippers and the 

volume of gas consumed in pipeline operations each month; 

(2) the disposition of any excess gas and the accounting 

recognition given to such disposition, including the basis of 

valuing the gas and the specific accounts charged or credited; 

and (3) the source of gas used to meet any deficiency and the 

accounting recognition given to the gas used to meet the 

deficiency, including the accounting basis of the gas and the 

specific accounts charged or credited. Id. In addition, “in 

order to provide more clarity for gas purchase activity,” the 

Commission also proposed requiring pipelines, which had 

previously only been required to report volumes of gas 

purchases in the aggregate, to report the volumes applicable 

to each of their gas purchase expense accounts. Id. 

The Commission also acknowledged that additional 

reporting might be necessary to protect pipeline customers 

from cross-subsidization of discounted, negotiated, or 

recourse rates. See. id. at 54,867. Although FERC permits 

pipelines to discount their generally applicable rates where 

competitive market conditions warrant, see 18 C.F.R. 

§ 284.10(c)(5); see also United Distrib. Cos. v. FERC, 88 

F.3d 1105, 1142 (D.C. Cir. 1996), and to negotiate 

individualized rates, see Alternatives to Traditional Cost-ofService Ratemaking for Natural Gas Pipelines, 74 FERC 

¶ 61,076 (1996), FERC regulations restrict pipelines’ ability 

to charge a different fuel rate than the generally applicable 

one established in the tariff. With respect to discounted rates, 

pipelines cannot discount the fuel use component unless they 

can demonstrate the relevant service does not use fuel. See, 

e.g., Ozark Gas Transmission, LLC, 122 FERC ¶ 61,295, 

2008 WL 825306, at *3 (2008). Moreover, under FERC’s 

“negotiated rate” policy, pipelines cannot impose crosssubsidized fuel costs on their existing, non-negotiated rate 

customers. See generally Alternatives to Traditional Cost-ofUSCA Case #08-1266 Document #1226889 Filed: 01/22/2010 Page 6 of 13
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Service Ratemaking for Natural Gas Pipelines, 74 FERC 

¶ 61,076. Instead, pipelines must bear the cost of any underrecovery of their costs themselves. See Dominion 

Transmission, Inc. v. FERC, 533 F.3d 845, 849 n.4 (D.C. Cir 

2008). The Commission therefore proposed adding a new 

schedule requiring pipelines to report the revenues and 

volumes applicable to discounted and negotiated rate 

services. See NOPR, 72 Fed. Reg. at 54,867. The 

requirement, the Commission stated, would help customers 

identify the level of services provided under each rate 

schedule and thus protect them against cross-subsidization. 

See id. 

In its comments, petitioner agreed the proposed reporting 

revisions would help parties assess whether pipeline rate and 

fuel charges remained just and reasonable. See Comments of 

the Am. Gas Ass’n at 3, Docket No. RM07-9-000 (Nov. 13, 

2007). However, petitioner argued “greater clarity regarding 

gas purchase and sales activities can be achieved.” Id. at 4. 

Petitioner therefore requested that the Commission also 

require the information on the new fuel schedule to be broken 

out by function (e.g., transportation, storage, gathering) and 

that pipelines be required to include, by function, the amount 

of fuel waived or reduced as part of a discounted or 

negotiated rate agreement. Id. at 5. This information, 

petitioner argued, was necessary to help customers determine 

whether pipelines were engaging in any inappropriate crosssubsidization. Id. 

The Commission rejected petitioner’s proposals, deciding 

instead to adopt only the new reporting requirements 

contained in the NOPR. See Revisions to Forms, Statements, 

and Reporting Requirements for Natural Gas Pipelines, 

Order No. 710, 73 Fed. Reg. 19,389 (proposed Mar. 21, 2008) 

(to be codified at 18 C.F.R. pts. 158, 260) (Order 710). In 

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response to petitioner’s requests, the Commission stated that 

“[t]he information broken out by function (e.g., 

transportation, storage, gathering, etc.) sought by AGA is 

available in Form 2 at page 520,” id. at 19,391–92; that “[t]he 

NOPR’s proposals are designed to provide needed 

transparency but also to reflect a fair balance between the 

need for the information and the additional burden on the 

pipeline,” id. at 19,392; and that “[w]e believe that the new 

schedules (pages 521a and 521b) proposed in the NOPR 

reflect this balance,” id. Petitioner filed a timely request for 

rehearing; the Commission once again declined to require the 

additional information. See Revisions to Forms, Statements, 

and Reporting Requirements for Natural Gas Pipelines, 123 

FERC ¶ 61,278 at 62,702 (2008) (“Order 710-A,” and, 

together with Order 710, the “Orders”). The Commission 

balanced the need for greater transparency with the additional 

burdens placed on pipelines, id. at 62,704, and decided the 

exclusion of the additional data sought by petitioner would 

not “preclude the Commission’s or customers’ ability to 

assess the justness and reasonableness of pipeline rates,” id. 

The Commission also rejected petitioner’s request for 

functionalized data regarding the amount of fuel waived, 

discounted, or reduced as part of a negotiated rate agreement, 

deeming the request “unnecessary and burdensome.” Id. 

Commissioner Wellinghoff dissented from the Order. See id. 

at 62,708–09 (Wellinghoff, Comm’r, dissenting). 

III 

“We review FERC’s orders under the arbitrary and 

capricious standard and uphold FERC’s factual findings if 

supported by substantial evidence.” Fla. Mun. Power Agency 

v. FERC, 315 F.3d 362, 365 (D.C. Cir. 2003); see 15 U.S.C. 

§ 717r(b). In general, “judicial scrutiny under the [NGA] is 

limited to assuring that the Commission’s decisionmaking is 

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reasoned, principled, and based upon the record.” Penn. 

Office of Consumer Advocate v. FERC, 131 F.3d 182, 185 

(D.C. Cir. 1997) (internal quotation marks omitted). “A 

passing reference to relevant factors, however, is not 

sufficient to satisfy the Commission’s obligation to carry out 

‘reasoned’ and ‘principled’ decisionmaking.” Mo. Pub. Serv. 

Comm’n v. FERC, 234 F.3d 36, 41 (D.C. Cir. 2000). The 

Commission must “fully articulate the basis for its decision.” 

Id. (internal quotation marks omitted). 

We recognize the Commission enjoys broad discretion to 

invoke its expertise in balancing competing interests and 

drawing administrative lines. See ExxonMobil Gas Mktg. Co. 

v. FERC, 297 F.3d 1071, 1085 (D.C. Cir. 2002) (stating 

FERC “has wide discretion to determine where to draw 

administrative lines,” and thus courts “are generally unwilling 

to review line-drawing performed by the Commission unless 

a petitioner can demonstrate that lines drawn . . . are patently 

unreasonable, having no relationship to the underlying 

regulatory problem” (internal quotation marks omitted)); Pub. 

Serv. Comm’n of the State of NY v. FPC, 543 F.2d 757, 806 

(D.C. Cir. 1974) (noting that “a vital function delegated to the 

Commission by the [NGA] is the maintenance of the balance 

between producer, pipeline, and consumer interests at the 

point of just and reasonable rates”). The Commission’s 

discretion is, however, bounded by the requirements of 

reasoned decisionmaking. See, e.g., Interstate Natural Gas 

Ass’n of Am. v. FERC, 494 F.3d 1092, 1096 (D.C. Cir. 2007). 

In cases where parties raise reasonable alternatives to the 

Commission’s position, we have held that reasoned 

decisionmaking requires considering those alternatives. See 

Laclede Gas Co. v. FERC, 873 F.2d 1494, 1498 (D.C. Cir. 

1989) (“[W]here a party raises facially reasonable alternatives 

to FERC’s decision . . . the agency must either consider those 

alternatives or give some reason, within its broad discretion 

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. . . for declining to do so.” (internal citation omitted)). We 

have applied this requirement to include dissenting 

commissioners. See Chamber of Commerce v. SEC, 412 F.3d 

133, 137–38 (D.C. Cir. 2005). In Chamber of Commerce, 

two dissenting commissioners of the Securities and Exchange 

Commission (SEC) articulated a well-defined, serious option 

that the majority ignored. We held the SEC’s failure to 

consider the rulemaking alternative violated the 

Administrative Procedure Act. Id. at 144. Although the SEC 

would be excused for failing to consider an alternative that 

was, “for whatever reason, unworthy of consideration,” the 

alternative proposed by the dissenting commissioners was 

“neither frivolous nor out of bounds.” Id. at 145. The SEC, 

therefore, “had an obligation to consider it.” Id. (citing 

Laclede Gas, 873 F.3d at 1498). While the SEC might 

ultimately have decided the alternative did not sufficiently 

serve the interests of the parties involved, we held the 

commission nonetheless had a duty to “bring[] its expertise 

and its best judgment to bear upon that issue.” Id. 

Accordingly, while FERC is not required to agree with 

arguments raised by a dissenting Commissioner, see id., it 

must, at a minimum, acknowledge and consider them. The 

Commission failed to do so here. Like the concerns raised in 

Chamber of Commerce, the points raised by Commissioner 

Wellinghoff were “neither frivolous nor out of bounds,” yet 

the Commission provided no direct response. 

With respect to the request to break out by function the 

new information provided on pages 521 a/b, the Commission 

noted some fuel information is broken out by function on 

page 520 of Form 2. See Order 710-A, 123 FERC at 62,704. 

Commissioner Wellinghoff, however, argued that is not 

enough: “[U]nless Sheets 521 a/b are broken out by function, 

a shipper cannot match the revenues generated by the sale of 

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excess fuel with the functionalized costs.” Id. at 62,709 

(Wellinghoff, Comm’r, dissenting). Thus, without the 

additional functionalized data, customers cannot determine 

whether pipelines are over-recovering their fuel costs for 

particular functions and whether their rates are just and 

reasonable. Id. (Wellinghoff, Comm’r, dissenting). As the 

Commission acknowledged in Order 710, the purpose of the 

rulemaking here was to “provide pipeline customers and the 

public the information they need to assess the justness and 

reasonableness of pipeline rates.” Order 710, 73 Fed. Reg. at 

19,389. The dissent argued such an assessment is impossible 

without accommodating petitioner’s requests, see Order 710-

A, 123 FERC at 62,709 (Wellinghoff, Comm’r, dissenting), 

yet the Commission’s only response was that it had balanced 

the burdens and benefits of petitioner’s request. See Order 

710, 73 Fed. Reg. at 19,392; Order 710-A, 123 FERC at 

62,704. The Commission apparently concluded the 

objections of some pipelines to the burdens of additional 

reporting were enough to justify rejecting petitioner’s 

requests without further explanation. Nowhere in the Orders 

did the Commission claim either that customers do not need 

to be able to match excess fuel revenues with functionalized 

costs or that customers already have enough information to do 

so. Indeed, counsel for the Commission at oral argument 

acknowledged the Commission “d[id] not address that 

particular point.” Oral Arg. Recording at 18:12–15. 

With respect to the request to break out by function the 

amount of fuel waived, discounted, or reduced as part of a 

negotiated rate, Commissioner Wellinghoff argued “it is 

important to know the level of services provided under each 

rate structure in order to protect against cross-subsidization.” 

Order 710-A, 123 FERC at 62,709 (Wellinghoff, Comm’r, 

dissenting). “[F]uel costs and revenues of the different types 

of rate structures broken down by function,” he argued, “are 

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critical to assessing the justness and reasonableness of the 

pipeline’s fuel rates.” Id. (Wellinghoff, Comm’r, dissenting). 

Thus, the dissent was concerned not only that pipelines are 

over-recovering their excess fuel costs, but also that pipelines 

are disadvantaging existing customers by forcing them to 

subsidize negotiated and discounted rates provided to other 

customers. While the Commission proffered several 

justifications for its decision to reject petitioner’s request for 

the additional discounted and negotiated rate data, the 

Commission never mentioned cross-subsidization. The 

Commission might reasonably have concluded existing data 

reported on Form 2 adequately protect customers against 

cross-subsidization, but the Commission failed even to make 

that claim, instead choosing to ignore the dissent’s concern 

entirely. 

Finally, addressing the potential burden imposed on 

pipelines by petitioner’s requests, Commissioner Wellinghoff 

argued: “The pipeline maintains this information by function 

in order to change its fuel rate either in a tracking mechanism 

or its next section 4 rating filing, and to assure that its existing 

customers are not subsidizing the negotiated rate program. 

The increased burden is related solely to inputting the data in 

the Form 2.” Id. (Wellinghoff, Comm’r, dissenting) (footnote 

omitted). The Commission’s only statement regarding the 

availability of the functionalized data was that “[i]t is unlikely 

that all pipelines would have this information readily 

available since many pipelines do not periodically file to 

adjust fuel rates and may not keep records of this type of 

information.” Id. at 62,704. The Commission said nothing 

about how it reached that conclusion. The Commission thus 

failed to acknowledge, much less substantively address, the 

dissent’s point that pipelines do maintain the data requested. 

Indeed, counsel for the Commission once again admitted the 

majority “d[id] not respond specifically” to the point. Oral 

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Arg. Recording at 20:00–05. According to its counsel, the 

Commission was not obligated to respond since doing so was 

not necessary to accomplish the purpose of the rulemaking, 

which, counsel claimed, was to ensure pipelines were not 

over-recovering for excess fuel costs. Our holdings in 

Chamber of Commerce and Laclede Gas suggest otherwise: 

Where a dissenting Commissioner raises a reasonable 

alternative, the majority is obligated to consider it. See 

Chamber of Commerce, 412 F.3d at 145; Laclede Gas, 873 

F.2d at 1498. 

Moreover, the Commission acknowledged in Order 710 

that “it is important for the Commission and the pipeline 

customer to know the level of services provided under each 

rate schedule in order to protect against cross-subsidization 

and to ensure that recourse rates remain just and reasonable.” 

Order 710, 73 Fed. Reg. at 19,393–94. The Commission thus 

recognized providing customers with additional information 

to undergird section 5 complaints was necessary to protect 

customers not only from fuel cost over-recovery, but also 

from cross-subsidization. The dissent raised several concerns 

related to cross-subsidization, yet the Commission responded 

to none of them. 

For the foregoing reasons, we grant the petition for 

review and remand to the Commission for further 

proceedings. On remand, the Commission may again 

conclude the burdens of the additional reporting requirements 

requested by petitioner outweigh their benefits, but the 

Commission must do so in a reasoned decision that 

acknowledges the concerns raised by the dissenting 

Commissioner. 

It is so ordered. 

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