United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 2, 2012 Decided November 27, 2012 

No. 11-1240 

NORTHERN NATURAL GAS COMPANY, 

PETITIONER

v. 

FEDERAL ENERGY REGULATORY COMMISSION, 

RESPONDENT

NORTHERN STATES POWER COMPANY - MINNESOTA, ET AL., 

INTERVENORS

______ 

On Petition for Review of Orders of the 

Federal Energy Regulatory Commission 

______ 

 Frank X. Kelly argued the cause for petitioner. With him 

on the briefs were Steve Stojic, J. Gregory Porter, and 

Dorothy R. Dornan. 

 Beth G. Pacella, Senior Attorney, Federal Energy 

Regulatory Commission, argued the cause for respondent. 

With her on the brief was Robert H. Solomon, Solicitor. 
2

 Robert I. White was on the brief for intervenors Northern 

States Power Company-Minnesota, et al. in support of 

respondent. 

 Before: GARLAND and KAVANAUGH, Circuit Judges, and 

WILLIAMS, Senior Circuit Judge. 

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS. 

WILLIAMS, Senior Circuit Judge: In response to a tariff 

filing by Northern Natural Gas Company, the Federal Energy 

Regulatory Commission issued an interpretation of § 4(f) of 

the Natural Gas Act, 15 U.S.C. § 717c(f). Northern Natural 

Gas Co., 133 FERC ¶ 61,210 (2010), reh’g denied, Northern 

Natural Gas Co., 135 FERC ¶ 61,085 (2011). Northern 

objects to the interpretation, and further argues that even if it 

is correct, its effect, at least vis-à-vis Northern, should be 

prospective only. We reject both claims. 

* * * 

Section 4(a) of the Natural Gas Act requires that a natural 

gas company’s rates be “just and reasonable.” 15 U.S.C. 

§ 717c(a). The Commission has generally understood this to 

mean cost-based rates, with “market-based” rates to be 

allowed only for a firm that showed it lacked market power in 

the relevant market. See, e.g., Alternatives to Traditional 

Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 

FERC ¶ 61,076, at 61,227 (1996). 

In 2005 Congress added § 4(f) to the Act to provide 

another avenue to market rates. It states that 

(1) the Commission may authorize a natural gas 

company . . . to provide storage and storage-related 
3

services at market-based rates for new storage 

capacity related to a specific facility placed in 

service after August 8, 2005, notwithstanding the 

fact that the company is unable to demonstrate that 

the company lacks market power, if the 

Commission determines that— 

(A) market-based rates are in the public interest 

and necessary to encourage the construction of 

the storage capacity in the area needing storage 

services; and 

(B) customers are adequately protected. 

15 U.S.C. § 717c(f) (emphasis added). 

The next year Northern secured from the Commission a 

declaratory order authorizing it to charge market-based rates 

for its services at a new storage expansion project in Iowa. 

Northern Natural Gas Co., 117 FERC ¶ 61,191 (2006). In 

granting the authority, the Commission noted that Northern 

had proposed such rates for shippers that had submitted 

winning bids in an “Open Season” for use of the capacity and 

had signed “precedent agreements,” and that “the use of 

market-based rates does not apply to sales of [Northern’s] 

storage capacity outside of these precedent agreements.” Id. 

at P 9 & n.4 (emphasis added). In its Order on Rehearing, the 

Commission echoed that thought, mentioning at the outset that 

the original order had authorized “market-based rates to the 

initial shippers that submitted winning bids and signed 

precedent agreements.” Northern Natural Gas Co., 119 

FERC ¶ 61,072 at P 1. 

 In 2010, Northern sought to extend its market-based rate 

authority to the “resale of market-based rate capacity . . . to 

the extent that such capacity becomes available [1] through 

expiration of existing market-based rate . . . service 

agreements or [2] upon bankruptcy or another event leading to 

turn back of the capacity.” Joint Appendix (“ J.A.”) 11 
4

(brackets added). The Commission rejected the 

corresponding amendments to Northern’s tariff insofar as they 

related to capacity becoming available on expiration of the 

existing agreements, explaining: 

To qualify for market based rates under [§] 4(f), the 

pipeline must show that the storage capacity for 

which market-based rates is being sought is related 

to new facilities and can demonstrate that the 

granting of market-based rates is ‘necessary to 

encourage the construction of the storage capacity.’ 

Northern Natural Gas Co., 133 FERC ¶ 61,210 at P 11 (2010) 

(“Order”), reh’g denied, Northern Natural Gas Co., 135 

FERC ¶ 61,085 (2011). It went on to emphasize that 

Northern’s request related to “capacity that it has already 

constructed.” Id. (emphasis in original). 

 On the other hand, the Commission approved marketbased rates for the second set of cases for which Northern 

requested them, namely resales of storage “in the event of 

bankruptcy, a default or other turn back during the 20 year 

term” of the original contracts. Order, 133 FERC ¶ 61,085 at 

P 12. 

* * * 

 We review the Commission’s interpretation of § 4(f) for 

reasonableness under the familiar standard of Chevron, USA, 

Inc. v. NRDC, Inc., 467 U.S. 837 (1984), which as specified in 

Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208, 218 (2009), 

means (within its domain) that a “reasonable agency 

interpretation prevails.” 

The Commission’s interpretation is fully consistent with 

the obvious meaning of the statute. Subsection 4(f)(1)(A) 

conditions the approval of market rates under § 4(f) on the 
5

Commission’s finding that such rates are “necessary to 

encourage the construction of the storage capacity in the area 

needing storage services.” The Commission’s first reading of 

§ 4(f)—which preceded Northern’s market-based rates 

petition—echoed this statutory requirement. Rate Regulation 

of Certain Natural Gas Storage Facilities., 115 FERC 

¶ 61,343 at P 130 (2006). It then spelled the point out in even 

more direct terms: It observed that the Commission’s goal 

under the statute was to provide an “incentive to build new 

storage infrastructure,” id. at P 167, and said that a favorable 

ruling even on the “public interest” requirement of the section 

would reflect consideration of all aspects of proposals, 

“including . . . the strength of the applicant’s showing that the 

facilities would not be built but for market-based rate 

treatment,” id. at P 128. 

It seems obviously reasonable as a general matter that a 

special benefit aimed at encouraging an investment can 

perform that function only with respect to investments not yet 

made when the favorable treatment is promised. How can a 

benefit be an incentive to specific conduct if the conduct has 

already occurred? There can be, of course, special cases 

where targeting prospective conduct only is too costly to 

implement. Suppose Congress decides that preferential tax 

rates for capital gains will encourage investment. It might 

limit the preference to investments made after the favorable 

rate was assured; but the costs of sorting out the exact timing 

of investments, and the need to apply multiple layers of rates 

as Congress periodically adjusts them up and down, stand in 

the way of such precision. In such a case, application of the 

incentives to gains realized on prior investments may make 

sense. The application of § 4(f), however, seems not to 

present any comparable difficulty. Certainly Northern 

identifies none. 

We noted that the Commission had ruled in favor of the 

second element of Northern’s request, namely for the right to 
6

charge market rates on the resale of storage “in the event of 

bankruptcy, a default or other turn back during the 20 year 

term” of the initial contracts. Order, 133 FERC ¶ 61,210 at 

P 12. Northern, of course, does not complain about that 

aspect of the Order, but its presence poses a potential question 

as to whether the Commission really means to apply the 

incentive rationale that it adopted at the outset and in the 

challenged Order. We think the two—the incentive rationale 

and this element of the Order—can be reconciled. It makes 

sense for FERC to interpret its grant of market rates for the 

original 20-year contracts as encompassing replacement 

contracts that merely fill in a gap caused by the fortuitous 

failing of one of the original shippers. To be sure, the 

Commission might have taken the view that Northern did not 

explicitly raise the issue in its initial request and that the 

resulting order should be understood to preclude any such 

gap-filling. But the Commission could readily have seen 

good reason to avoid that stance. After all, an incentive tends 

to be less effective if the party extending it gains a reputation 

for sharp practice. 

At oral argument Northern stressed the risks associated 

with the storage capacity in question, risks that may involve 

substantial future expenses. The Commission offers an 

answer—namely that the risky character was readily 

knowable in advance and that if market rates for more than 20 

years were necessary, Northern could have held out for 

approval of such rates either for longer original contracts or 

for successor contracts after the initial 20 years. Of course it 

is possible that new (previously unforeseeable) circumstances 

will arise requiring heavy additional investment. In some 

such cases, that additional investment might qualify as the sort 

of investment that market rates would be “necessary to 

encourage,” and thus (if the other statutory criteria were 

satisfied) be eligible under § 4(f). There are, in short, answers 
7

to Northern’s stated anxiety—answers that fit properly within 

the statutory language and the Commission’s interpretation. 

* * * 

Northern argues in the alternative that the effect of the 

Commission’s interpretation should be, at least as to its Iowa 

storage expansion project, prospective only. It rests this 

argument on language the Commission used in an order 

resolving one of the many proceedings occasioned by the 

project. Northern Natural Gas Co., 120 FERC ¶ 61,233 at 

P 18 (2007) (“2007 Order”). The proceeding revolved around 

a service agreement that Northern filed with the Commission 

and that contained a clause granting shippers a “right of first 

refusal for the capacity stated in the agreement, . . . subject to 

any rate authority applicable at the time of contract 

expiration.” One of the shippers protested inclusion of the 

proviso (the “subject to” clause) and asked the Commission to 

clarify whether it would allow Northern to charge marketbased rates indefinitely. Northern contended that the 

Commission had no need to reach the question, arguing that 

“[w]hether Section 4(f) would authorize such authority is not 

an issue in this proceeding,” and that by the proviso “Northern 

was merely providing the expansion shippers the right to 

retain their firm storage capacity at the end of their 

agreements, at whatever rate is applicable at that time.” J.A. 

333-34. In its 2007 Order the Commission effectively took 

Northern up on that idea, holding that the question of which 

rates should govern the contracts set to expire some 20 years 

later would be determined at the point of expiration and not 

before. In what appears to be dictum, however, the 

Commission also said that 

if sometime before the expiration of the contract, 

Northern proposes additional protections against the 

exercise of market power relating to the sale of 
8

capacity after the expiration of the primary term of 

the service agreements, the Commission will 

determine at that time whether the protections are 

adequate and the extent to which market-based rates 

should apply beyond the primary term of the service 

agreement. 

2007 Order, 120 FERC ¶ 61,233 at P 18. The Commission 

added that “[i]f Northern should satisfy the requirements for 

extending market-based rates,” the protesting shipper’s claim 

to a right of first refusal at regulated rates would fail. Id. 

Northern now argues that it reasonably and detrimentally 

relied on this paragraph, invoking the principle that “when 

there is a substitution of new law for old law that was 

reasonably clear, the new rule may justifiably be given 

prospectively-only effect in order to protect the settled 

expectations of those who relied on the preexisting rule.” 

Pub. Serv. Co. of Colorado v. FERC, 91 F.3d 1478, 1488 

(D.C. Cir. 1996) (citation and internal quotation marks 

omitted). We agree with Northern that the language cited 

appears to suggest that a grant of market rates in the out years 

was at least a serious possibility, whereas under the Order 

such a grant would be impossible (subject, arguably, to 

scenarios such as the one mentioned at the end of our 

discussion of the main interpretive issue). Nevertheless, for 

two reasons we do not agree that the Iowa expansion project 

should be exempted from Commission’s current 

interpretation. First, Northern has not shown that it relied on 

the language of the 2007 Order in making its investment. 

Second, it has not demonstrated that, even if it did, such 

reliance would have been reasonable. 

Northern’s only real argument tracing its investment to 

the 2007 Order is chronological: it began construction after 

the 2007 Order, but before the current order. While the 

construction schedule may be necessary to show detrimental 
9

reliance, it is surely not sufficient—it fails to show that the 

Commission’s statement was the, or even a, deciding factor in 

its decision to proceed. The multiple proceedings actually 

gave Northern an opportunity to lay the groundwork for such 

a claim, which Northern in fact seized with respect to other 

issues. Northern moved for clarification on certain issues, but 

not on the availability of market rates after expiration of the 

initial contracts. See Northern Natural Gas Co., 122 FERC ¶ 

61,227, order on reh’g and clarification, 122 FERC ¶ 61,270 

(2008). It maintained, in the clarification proceeding, that it 

was “at a definitive decision point (i.e., ‘go or no go’)” and 

could not proceed without the desired clarification. J.A. 381. 

Northern’s failure to call for assurance on availability of 

market rates after 20 years is obviously telling. 

Even if Northern had offered evidence that it 

detrimentally relied on the 2007 Order, the limitation it 

proposes would be inappropriate. Reliance must be not only 

detrimental, but also reasonable. Pub. Serv. Co. of Colorado,, 

91 F.3d at 1490. Northern could not reasonably have 

expected to secure market-based rates past the expiration of 

the initial contracts on the basis of the final paragraph of the 

2007 Order. First, the language in the 2007 Order is arguably 

dictum. The Commission accepted Northern’s view that there 

was no immediate need to decide the nature of the rates to 

which the right of first refusal would apply. The 

Commission’s aside was superfluous. 

Second, even on its own terms, the language does not 

suggest that market-based rates would necessarily be 

available. The Commission stated that it would “determine 

[at the contract’s expiration] whether the protections are 

adequate and the extent to which market-based rates should 

apply beyond the primary term of the service agreement.” 

120 FERC ¶ 61,233 at 61,974 (2007) (emphasis added). The 

2007 Order thus did not pass judgment on that “extent.” 
10

This is not to say that the 2007 Order made clear that the 

Commission would, a few years later, reject Northern’s 

petition for an extension of its ability to charge market rates. 

To the contrary, the Commission’s language may well have 

been misleading. Dictum is at least as risky for the 

Commission as it is for courts. But, for the reasons discussed 

above, the misleading characterization of Northern’s future 

options does not provide a basis for precluding the 

Commission from applying to the Iowa project the 

interpretation that is demanded by § 4(f) and that it has 

uniformly embraced except for the utterance in the 2007 

Order. 

* * * 

The petition for review is therefore 

Denied