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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 14, 2004 Decided November 2, 2004

No. 03-1153

CHEVRONTEXACO EXPLORATION & PRODUCTION CO.,

A DIVISION OF CHEVRON U.S.A. INC., ET AL.,

PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

DUKE ENERGY TRADING AND MARKETING, L.L.C., ET AL.,

INTERVENORS

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Jon L. Brunenkant argued the cause for petitioners. With

him on the briefs were Cheryl J. Walker, Carolyn S. Hazel,

Charles J. McClees, Jr., Frederick T. Kolb, and Douglas W.

Rasch.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
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Lona T. Perry, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on

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

Dennis Lane, Solicitor.

Before: GINSBURG, Chief Judge, and RANDOLPH and ROGERS,

Circuit Judges.

Opinion for the Court filed by Chief Judge GINSBURG.

GINSBURG, Chief Judge: ChevronTexaco and other shippers

of natural gas (‘‘Shippers’’) petition for review of two orders

in which the Federal Energy Regulatory Commission, pursuant to § 4 of the Natural Gas Act, 15 U.S.C. § 717c, held the

ANR Pipeline Company had properly calculated and was

entitled to collect its annual cashout surcharge for 2001. The

Commission also concluded, however, that the approved

method of calculation prescribed in the pipeline’s filed tariff

was ‘‘not producing just and reasonable results,’’ and it

therefore initiated a proceeding under § 5 of the Natural Gas

Act to devise a new method. The Shippers argue that

because the Commission found the prescribed method of

calculating the surcharge led to an unjust and unreasonable

result, the Commission was bound either to reject the surcharge or to accept it subject to refund.

A method or formula for calculating a rate, also called a

‘‘rate rule,’’ when enshrined in an approved tariff, is itself a

‘‘filed rate’’; it is therefore subject to change at the instance

of the Commission pursuant only to § 5 of the NGA, which

authorizes the Commission to establish the rate ‘‘to be thereafter observed.’’ 15 U.S.C. § 717d(a). Therefore, we hold

the Commission correctly confined itself, in reviewing the

pipeline’s proposed 2001 surcharge, to determining whether

(1) the costs to be recovered were prudently incurred and (2)

the surcharge was calculated in accordance with the approved

method.

I. Background

When the volume of natural gas a shipper puts into the

ANR pipeline does not match the volume it takes out over a
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specified period of time, that shipper must either eliminate

the imbalance by trading with other shippers or ‘‘cashout’’ the

imbalance by buying gas from or selling gas to the pipeline

itself, at a price pegged to certain market indices. For each

dekatherm (Dth) of gas reconciled through the cashout system, the shipper must also pay ANR a surcharge, which is

calculated and set annually at an amount determined to allow

the pipeline company to recover its costs of operating the

cashout system for the previous year. ANR calculates the

surcharge rate for each year according to the method prescribed in its tariff and files the surcharge rate with the

Commission for approval.

On May 1, 2002 ANR filed a proposed surcharge rate of

$.4464/Dth to recover its 2001 costs. The Shippers objected

to the new surcharge, which was nearly three times the

surcharge for the previous year. Pursuant to § 4 of the

NGA, the Commission then accepted but suspended the surcharge for up to five months. The Shippers challenged the

pipeline’s claimed cost of operating the cashout system and

proposed a new way of calculating the surcharge. The Commission, however, finding the pipeline’s costs in operating the

cashout system were prudently incurred and the surcharge

had been calculated in accordance with the rate rule in the

pipeline’s tariff, ultimately approved the new surcharge.

ANR Pipeline Co., 101 F.E.R.C. ¶ 61,123 (2003).

The Commission went on, nonetheless, to hold that the

approved method of calculating the surcharge had become

‘‘unjust and unreasonable in at least two respects.’’ First, it

did not allow some shippers, including the petitioners, ‘‘an

adequate opportunity to resolve their imbalances’’ and, second, the carryforward provision allowed for ‘‘wide swings in

the surcharge from year to year.’’ Because the Commission

did not believe it then had ‘‘sufficient facts before [it] to

devise a just and reasonable mechanism pursuant to section 5

of the Natural Gas Act,’’ the agency opened a further proceeding to remedy those defects.

The Shippers petitioned for rehearing, requesting that the

Commission reject the $.4464/Dth surcharge and ‘‘instead
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require ANR to keep in effect its previously effective surcharge of $0.1508/Dth until a new just and reasonable surcharge is derived.’’ Alternatively, the Shippers sought ‘‘clarification that the $0.4464/Dth surcharge [was] being collected

subject to refund.’’

The Commission denied rehearing, holding that ‘‘ANR is

entitled to continue recovering the rates provided for in its

approved tariff until the Commission acts under NGA § 5 to

fix the just and reasonable rate ‘to be thereafter observed.’ ’’

As the pipeline had not proposed to change the method of

calculating the surcharge, ‘‘any modification in these rates TTT

would occur pursuant to NGA § 5,’’ which provides only

prospective relief. Accordingly, ‘‘there can be no refund.’’

ANR Pipeline Co., 103 F.E.R.C. ¶ 61,065, 61,205 (2003).

II. Analysis

The Natural Gas Act requires that ‘‘[a]ll rates and charges

made, demanded, or received by any natural-gas company TTT

be just and reasonable,’’ and declares ‘‘any such rate or

charge that is not just and reasonable TTT unlawful.’’ 15

U.S.C. § 717c(a). To make good this policy, the Commission

is given two distinct powers: it may accept or reject a

pipeline’s rate filings under § 4, and it may set rates upon its

own initiative under § 5.

Pursuant to § 4, ‘‘pipelines must file with the Commission

all rates and any change they propose in their rates.’’ Sea

Robin Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir.

1986). The pipeline bears the burden of showing its proposed

rate is just and reasonable. Id. If the Commission harbors

any doubt on that score, it may hold ‘‘a hearing concerning

the lawfulness of such rate,’’ 15 U.S.C. § 717c(e), but in the

end its options are limited to ‘‘acceptance (in whole or in part)

or rejection of the pipeline’s proposed rate[ ].’’ Sea Robin,

795 F.2d at 183. Further, ‘‘[t]he Commission need not confine rates [under the NGA] to specific, absolute numbers but

may approve,’’ as it had done here, ‘‘a tariff containing a rate

‘formula’ or a rate ‘rule.’ ’’ Transwestern Pipeline Co. v.

FERC, 897 F.2d 570, 578 (D.C. Cir. 1990).
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When the Commission finds that a previously accepted rate

has become ‘‘unjust, unreasonable, unduly discriminatory, or

preferential,’’ the Commission, pursuant to § 5, ‘‘determine[s]

the just and reasonable rate TTT to be thereafter observed

and in force.’’ 15 U.S.C. § 717d(a). In proceeding under

§ 5, however, the Commission bears the burden of adducing

substantial evidence to prove (1) the pipeline’s existing rate is

unjust and unreasonable and (2) the rate determined by the

Commission is just and reasonable. ‘‘Complex’’ Consol. Edison Co. of N.Y., Inc. v. FERC, 165 F.3d 992, 1003 (D.C. Cir.

1999); Pub. Serv. Comm’n of N.Y. v. FERC (Transco), 642

F.2d 1335, 1345 (D.C. Cir. 1980). As we held in Sea Robin,

these limitations apply as well to rate rules: ‘‘a Commissioninitiated change in either the rates or their method of calculation can be accomplished only upon the agency’s compliance

with the strictures of section 5.’’ 795 F.2d at 186.

In this case the Shippers argue that ‘‘once [the Commision]

determined TTT that ANR’s cashout surcharge mechanism

was ‘unjust and unreasonable,’ [it] should TTT have rejected

ANR’s proposed increase in its cashout surcharge.’’ Their

seemingly straightforward claim is that because the $.4464/

Dth surcharge was calculated according to a mechanism the

Commission held to be unjust and unreasonable, the surcharge must also be unjust and unreasonable, and the Commission was therefore bound to reject it as unlawful pursuant

to § 4. For its part, the Commission argues that, when a

pipeline has filed and the Commission has approved a method

for calculating a particular rate, the pipeline’s subsequent

filing of a specific numerical value calculated by that method

must be evaluated pursuant to § 4, which in this context

limits the agency ‘‘to assuring that the TTT calculations conformed to the previously approved tariff mechanism.’’ Consequently, ‘‘changes to the approved tariff mechanism itself

could only be made in accordance with the strictures of NGA

§ 5.’’

The Commission’s position in the orders under review is

consistent with its precedent. In Dakota Gasification Co., 77

F.E.R.C. ¶ 61,271, 62,146 (1996), it explained:
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[W]hen a pipeline has an approved mechanism in its

tariff for the flowthrough of a particular type of cost and

the pipeline makes a limited section 4 filing to recover

newly incurred costs pursuant to that mechanism, the

Commission’s refund authority is very limited. Since the

pipeline’s limited section 4 filing would not propose to

change the approved flowthrough mechanism, the Commission would have to proceed under section 5 to make

any change in that mechanismTTTT The only rate

change initiated by the pipeline in such a limited section

4 filing is the inclusion in the approved flowthrough

mechanism of newly incurred costs. The Commission

could, therefore, order refunds of the resulting proposed

rate increase, in the limited circumstance of a finding

that the costs were not of the type authorized for recovery under the approved flowthrough mechanism or that

the pipeline was imprudent in incurring the new costs.

The Commission is surely correct that it could not change

the mechanism in ANR’s tariff except in a § 5 proceeding, for

a rate rule in a tariff is itself a filed rate. And nothing in § 4

‘‘gives the Commission the authority to reject, post hoc, a

previously accepted [tariff] provision or to specify what

should replace it.’’ Sea Robin, 795 F.2d at 187.

The precise question here, however, is whether under § 4

the Commission could, as the Shippers maintain, nevertheless

reject the pipeline’s correctly calculated surcharge filing because the Commission no longer regarded the method of

calculation to be just and reasonable. We agree with the

Commission that it could not.

By allowing the pipeline first to file a rate rule, which it did

in 1993, later to be followed by annual calculations according

to that rule, the Commission effectively bifurcated its inquiry

into the reasonableness of the resulting rates. When it

initially approved the rate rule for ANR’s cashout surcharge,

the agency determined that it would produce just and reasonable results. Thereafter, the Commission properly reviewed

the pipeline’s surcharge filings only for compliance with the

rate rule in its tariff; if the costs to be collected were
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prudently incurred and the surcharge was calculated correctly, then the pipeline’s § 4 filing was properly deemed just and

reasonable.

In the course of the 2002 proceeding, the Shippers persuaded the Commission that the previously filed rate rule had

proved to be unjust and unreasonable. Because the Commission had already approved it, however, the agency could

change the underlying rule only by following the procedures

prescribed in § 5.

The Tenth Circuit addressed a related question in Northwest Pipeline Corp. v. FERC, 61 F.3d 1479 (1995). There,

the pipeline argued that

Commission approval of a ‘rate’ is not always confined to

the approval of a specific numeric value, but may instead

extend to the approval of a calculational formula or ‘rate

rule’ which, once approved, is established for purposes of

the NGA. While specific numeric input data to such a

formula may vary from year to year TTT the formula

itself does not change and therefore may be attacked

only in the context of a Section 5 proceeding.

61 F.3d at 1490. In ruling for the Commission, the court did

not reject the pipeline’s reasoning, but held instead that ‘‘the

Commission’s order did not direct Northwest to calculate the

[rate] differently, it simply ordered Northwest to calculate

the [rate] correctly.’’ Id.

Our holding today is the opposite side of the same coin:

When the Commission finds a pipeline did calculate a rate

correctly according to the rate rule in its tariff, the Commission must accept the § 4 filing despite any perceived flaws in

the rate rule and may only then proceed under § 5 — as it

has since done with respect to ANR’s annual cashout surcharge, see ANR Pipeline Co., 107 F.E.R.C. ¶ 63,006

(2004) — to devise and substitute a just and reasonable rate

rule ‘‘to be thereafter observed.’’

Finally, the Shippers argue, in the alternative, that the

Commission should have accepted the surcharge subject to

refund. Pending its decision under § 4, the Commission may
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‘‘suspend the operation TTT and defer the use’’ of a proposed

rate for up to five months. Thereafter the rate ‘‘shall go into

effect,’’ but ‘‘the Commission may, by order, require the

natural-gas company TTT to refund any amounts’’ later found

by the Commission to be unjust and unreasonable. 15 U.S.C.

§ 717c(e). This provision for acceptance of a rate subject to

refund, which is the ‘‘only statutory exception to the rule

prohibiting retroactive rate changes,’’ is but ‘‘a necessary

compromise to accommodate delays in the approval process.’’

East Tenn. Natural Gas Co. v. FERC, 863 F.2d 932, 942

(D.C. Cir. 1988). Both the structure of and the rationale for

the refund provision, therefore, make it inapplicable where

the Commission lacks the authority to reject the rate filing as

unjust and unreasonable. Hence the Commission properly

held that ‘‘there can be no refund’’ when a pipeline files a

calculation consistent with an approved rate rule. ANR

Pipeline Co., 103 F.E.R.C. at 61,205.

III. Conclusion

For the foregoing reasons, the petition for review is

Denied.