United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 14, 2007 Decided October 16, 2007

No. 03-1257

GAS TRANSMISSION NORTHWEST CORPORATION,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

PROCESS GAS CONSUMERS GROUP, ET AL.,

INTERVENORS

Consolidated with

04-1065, 04-1066

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Catherine E. Stetson argued the cause for petitioners. With

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

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

Rednik entered an appearance.
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The orders under review are: PG&E Gas Trans., 101 FERC ¶ 61,280

(2002); e prime, inc. v. PG&E Gas Trans., 102 FERC ¶ 61,062

(2003); North Baja Pipeline, LLC, 102 FERC ¶ 61,239 (2003); e

prime, inc. v. PG&E Gas Trans., 102 FERC ¶ 61,289 (2003); PG&E

Gas Trans., 103 FERC ¶ 61,137 (2003); e prime, inc. v. PG&E Gas

Trans., 104 FERC ¶ 61,026 (2003); North Baja Pipeline, LLC, 105

FERC ¶ 61,374 (2003); PG&E Gas Trans., 105 FERC ¶ 61,382

(2003); North Baja Pipeline, LLC, 115 FERC ¶ 61,141 (2006); North

Baja Pipeline, LLC, 117 FERC ¶ 61,146 (2006) (“Remand Order”).

Beth G. Pacella, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. On the brief

were John S. Moot, General Counsel, Robert H. Solomon,

Solicitor, and Patrick Y. Lee, Attorney.

Before: GARLAND and KAVANAUGH, Circuit Judges, and

SILBERMAN, Senior Circuit Judge.

SILBERMAN, Senior Circuit Judge: Two interstate natural

gas pipelines seek review of Federal Energy Regulatory

Commission (“FERC”) orders that limit the amount of collateral

pipelines may require from non-creditworthy shippers.

Petitioners assert that the orders under review are an

unexplained departure from FERC precedent and, in any event,

are unreasonable (arbitrary and capricious). We disagree, and

we deny the petitions for review.

I.

Although we encounter a series of FERC orders,1

 including

three orders on rehearing, then a joint request to hold petitions

in abeyance pending a rulemaking (which FERC terminated,

relying instead on a policy statement), and finally a remand of
3

the record at FERC’s request to allow FERC to more fully

consider petitioners’ arguments, the issue before us is rather

simple. Petitioners, apparently stung by recent shipper defaults,

wished to amend their tariffs to require non-creditworthy

shippers (those who have below investment grade bond ratings)

to post twelve months’ reservation charges as collateral. The

Commission determined that petitioners’ proposed tariffs were

“unjust and unreasonable”; that as a matter of policy FERC

would ordinarily permit only a requirement of three months’

reservation charges. The Commission acknowledged that

certain pipelines had filed tariffs requiring twelve months’

collateral, but those exceptions to its policy fell into two

categories: either the tariffs had been filed without protests that

caused FERC to focus on the issue, or the longer collateral

requirements were explicitly permitted for newly constructed

facilities.

Besides asserting that these exceptions were actually

inconsistencies in its policy, petitioners contended that a threemonth reservation charge was inadequate collateral to cover

their “remarketing risk” – the ability to resell the contracted-for

pipeline capacity (at the same price). FERC recognized that a

three-month collateral requirement might not fully cover

petitioners’ remarketing risk, but it determined that this risk is

a normal cost of doing business and could be addressed as a

factor in petitioners’ rate of return. 

Finally, petitioners contended that their particular situations

– both having suffered defaults in recent years – justified a

deviation from FERC’s policy. The Commission determined,

however, that the difficulties petitioners had faced were

transitory, caused by unusual events such as the Western energy

crisis. 
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II.

Petitioners make a half-hearted attempt to suggest that

FERC’s decision to abandon a rulemaking on the collateral issue

somehow suggests that its policy is really an illegal substantive

rule, but there is nothing to their argument. FERC simply

decided that a general policy statement would suffice, leaving

open case by case determinations. But the Commission was,

and is, prepared to defend the application of its policy in

individual cases as it has done here, and an agency’s policy can

just as well be articulated in adjudications as in rulemaking.

SEC v. Chenery Corp., 332 U.S. 194, 202-03 (1947). In short,

FERC has not sought to rely on the policy statement, but rather

to defend its policy in the challenged orders. Guardian Fed.

S&L Ass’n v. Fed. S&L Ins. Corp., 589 F.2d 658, 666 (D.C. Cir.

1978).

Petitioners’ alleged inconsistencies in FERC’s decision are,

in our view, adequately explained. With regard to the

unchallenged filings, FERC said:

[I]n the absence of protests, the Commission may

simply have accepted these provisions without

examining whether they conformed to Commission

policy and precedent. Under such circumstances,

accepting another pipeline’s provisions does not

necessarily establish a generic Commission policy or

precedent regarding similar tariff provisions.

Remand Order, 117 FERC ¶ 61,146 at 61,786 (2006). We think

that position is eminently reasonable. FERC’s acceptance of a

pipeline’s tariff sheets does not turn every provision of the tariff

into “policy” or “precedent.” See, e.g., Alabama Power v.
5

FERC, 993 F.2d 1557, 1565 n.4 (D.C. Cir. 1993); Nevada

Power Co., 113 FERC ¶ 61,007 at 61,013-14 (2005) (refusing to

treat a rate calculation from a prior tariff as precedent because

“the issue was not raised, and the Commission did not discuss

it or rule on it”). When a proposed tariff with more than a threemonth collateral requirement has been challenged by shippers,

FERC has required pipelines to amend their filing to comply

with its policy. See Valero Interstate Trans. Co., 62 FERC ¶

61,197 at 62,397 (1993).

Petitioners nevertheless contend that FERC’s practice puts

them at a competitive disadvantage vis-a-vis pipelines whose

nonconforming collateral provisions in their tariffs escaped

scrutiny. But as FERC’s counsel assured us at oral argument, if

petitioners, or anyone filing a complaint, challenged those tariff

provisions, the Commission would apply its three-month policy.

Apparently, however, two pipelines in direct competition

with petitioners (Alliance Pipeline and Northern Border

Pipeline) have twelve-month collateral requirements that are not

subject to challenge. That is because they fall within another

exception to FERC’s policy. The Commission, as we noted,

permits pipelines to impose a twelve-month collateral

requirement on newly constructed facilities, and those pipelines

are such. Petitioners contend that this policy is arbitrary and

capricious because the Commission has not adequately

explained its differential treatment of new pipelines and existing

pipelines. To be sure, FERC’s initial explanation for treating

tariffs on new facilities differently is, as petitioners recognized,

economically faulty. FERC said, “[O]nce the pipeline is in

service, the construction costs are sunk (have already been

expended), so the ongoing financial risk to the pipeline is less

. . . .” PG&E Gas Trans., 103 FERC ¶ 61,137 at 61,472 (2003).
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The pipeline would have to seek the Commission’s approval before

it terminated service to the shipper in default, termed an abandonment.

But, contrary to petitioners’ contentions, there is no reason to believe

that FERC would not grant a pipeline’s abandonment request if a noncreditworthy shipper failed to post the required amount of collateral.

Actually the financial risk is the same whether the pipeline is

already built or not. But in its rehearing order, FERC explained

reasonably that pipelines and their financing institutions’

reliance interests for new investment justify the longer collateral

requirement. “[T]he pipeline is under no obligation to construct

facilities, and the pipeline as well as its lenders have an interest

in ensuring a reasonable amount of collateral from the initial

shippers supporting the project before committing funds to the

project.” PG&E Gas Trans., 105 FERC ¶ 61,382 at 62,700

(2003).

* * *

Alternatively, petitioners re-argue before us that the

Commission’s policy ordinarily limiting collateral to three

months’ reservation charges is unreasonable because it does not

cover the remarketing risk. Petitioners concede that a pre-paid

three-month charge will typically protect the pipeline against a

non-payment risk because normally the pipeline will be able to

discontinue service to the shipper in default within three

months.2

 But that does not cover the pipeline against its

remarketing risk. If the pipeline cannot find a replacement for

the defaulting shipper, it would have unused capacity. The

Commission acknowledges that the pipelines have this risk, but

FERC concluded that it was an ordinary business risk and

therefore should be factored into the pipeline’s rate of return –

which is another way of saying the cost of that risk should be

spread over all the pipeline’s customers. Petitioners assert that
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FERC’s approach is inconsistent with its policy of ordinarily

attributing a pipeline cost to the one shipper who is responsible

for the cost. But FERC has never proclaimed that as an absolute

rule. See K.N. Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C.

Cir. 1992) (noting that pipeline rates must reflect “to some

degree” the costs caused by the customer paying the rates).

FERC rejected a collateral charge of more than three

months in the normal situation because a greater charge was

thought to hinder the Commission’s policy of eliminating entry

barriers and promoting “open access” to pipeline services. Of

course, “open access” is just another way of saying that the

Commission seeks to maximize the number of shippers in order

to increase the country’s supply of natural gas. Here, FERC

chose to promote this policy by encouraging the noncreditworthy marginal shipper’s entry into the market. Some

remarketing risk may be spread to creditworthy shippers, but the

Commission believes its policy is justified by the beneficial

effects on open access, and the resulting increase in the supply

of natural gas. That strikes us as the sort of policy call entrusted

to the Commission – not to us.

Petitioners complain, however, that they have no assurance

– despite FERC’s claim – that they will be adequately

compensated in the rate of return for remarketing risk. Counsel

for the Commission assured us, however, that it was a legitimate

factor to be considered, and it is certainly premature for

petitioners to speculate that FERC will not permit them an

adequate rate of return. In at least one prior case, FERC has

considered the effects of remarketing risk while determining the

proper rate of return for a natural gas pipeline. In the Ozark

ratemaking proceeding, the Commission set Ozark Gas

Transmission’s return on equity “at the top of the zone of
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reasonableness” because of several factors related to credit risk.

Ozark Gas Trans. Sys., 68 FERC ¶ 61,032 at 61,107-08 (1994).

FERC noted that “one of Ozark’s two principal customers . . . is

involved in bankruptcy proceedings, and at this point, still could

choose to reject its contract with Ozark.” Id. at 61,108. Ozark

also had “substantial excess capacity” and faced “considerable

competition” from other pipelines in the region. Id. In other

words, the Commission was willing to increase Ozark’s rate of

return to compensate the pipeline for its relatively high credit

risk and remarketing risk.

* * *

Finally, petitioners claim that they face unique challenges.

GTN complains that it has faced twelve defaults in recent years,

and its primary markets (Northern California and the Pacific

Northwest) are likely to experience slower growth in the future.

But FERC determined that the defaults by GTN’s shippers were

“isolated,” and “appear to be related to or a result of an unusual

event, the western energy crisis.” Remand Order, 117 FERC at

61,784-85. The Commission also emphasized that “GTN has

failed to show that northern California markets will not be

steady or continue to grow over time, regardless of the isolated

bankruptcies of a handful of shippers.” Id. at 61,785. We see

no reason to second guess these factual determinations, since

“[t]he court properly defers to policy determinations invoking

the Commission’s expertise in evaluating complex market

conditions.” Tennessee Gas Pipeline Co. v. FERC, 400 F.3d

23, 27 (D.C. Cir. 2005).

North Baja, for its part, claimed that it faced a default from

one out of five shippers, or 20% of its customer base. The

Commission responded that despite this default, North Baja was

“95 percent subscribed for long term firm capacity.” Remand
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Order, 117 FERC at 61,785. Given that the pipeline was

operating at nearly full capacity, FERC rejected reasonably

North Baja’s assertion that it was in a “tenuous position” with

respect to credit risk.

III.

For the aforementioned reasons, the petitions for review are

Denied.