Opinion ID: 457816
Heading Depth: 1
Heading Rank: 2

Heading: the legality of the commission's decision

Text: 22 FERC's ultimate interpretation of the minimum bill provision rests on two findings: that the provision is ambiguous and that the LNG companies are unable to deliver gas when deliveries fall below base load deliveries within the broad parameters of historical deliveries and will not resume at those levels in fairly short order. Based on these two premises, the Commission concluded that the minimum bill should have been invoked by both LNG companies on May 31, 1980. In reviewing this tariff interpretation, we must accord appropriate deference, though not of course conclusive validity, to the judgment of the expert agency that deals with such contracts regularly. Papago Tribal Utility Authority v. FERC, 723 F.2d 950, 953 (D.C.Cir.1983), cert. denied, --- U.S. ----, 104 S.Ct. 3511, 82 L.Ed.2d 820 (1984). FERC's order, like all Commission orders under the Natural Gas Act, is to be accorded a presumption of validity. Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S.Ct. 1344, 1360, 20 L.Ed.2d 312 (1968). After reviewing the opinions and the record to assur[e] that the Commission's decisionmaking is reasoned, principled, and based upon the record, Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C.Cir.1979), we affirm FERC's interpretation of the tariff.
23 Whether the minimum bill provision is ambiguous is a matter of law for this court to decide. Clayman v. Goodman Properties, Inc., 518 F.2d 1026, 1034 (D.C.Cir.1973). A tariff or contract is ambiguous when it is 'reasonably susceptible of different constructions or interpretations.'  Lee v. Flintkote Co., 593 F.2d 1275, 1282 (D.C.Cir.1979) (footnote omitted). If a contract is not ambiguous, extrinsic evidence cannot be used as an aid to interpretation. Id. at 1281 (quoting Clayman v. Goodman Properties, Inc., 518 F.2d 1026, 1034 (D.C.Cir.1973)). 24 The LNG companies argue that the tariff is not ambiguous and so its plain meaning controls. The plain meaning put forth by the LNG companies and adopted by the ALJ is that the minimum bill is triggered by the inability to deliver gas. Under this interpretation, the minimum bill need never have been triggered because the Cove Point terminal was full of LNG which the companies were able to deliver even though they chose not to make deliveries in more than boil-off quantities. ALJ Op. at 65,190-91. FERC rejected this interpretation as placing total control over the triggering of the minimum bill into the hands of the LNG companies, frustrating the provision's purpose as a mechanism of risk allocation between the customers and the companies. Op. 202-A at 61,168. Instead, FERC found the unable to deliver gas language to be ambiguous. 25 FERC's analysis is properly the starting point for our assessment of the minimum bill language. In determining whether the minimum bill provision is ambiguous, we accord FERC's finding of ambiguity the same degree of deference ... as we accord it with regard to the ultimate question of the meaning of the contract. Papago, 723 F.2d at 955. In Opinion 202-A the Commission concluded that the phrase unable to deliver gas was ambiguous, citing three reasons. First, after looking to other portions of the tariff establishing contract demand levels, FERC found that the word gas was susceptible of differing interpretations as to what was intended with respect to quantity. Op. 202-A at 61,166. Second, FERC considered the purpose of the tariff when proposed--certificating a base load facility in response to a gas shortage--in light of changed circumstances which might make the tariff ambiguous as applied. Finally, FERC considered Columbia LNG's prior conduct in invoking the minimum bill after an explosion at the terminal in 1979. Id. at 61,167. 26 FERC properly looked at portions of the tariff other than the minimum bill, including the service agreements, in assessing the ambiguity of the word gas in the phrase unable to deliver gas. In construing tariffs, courts and agencies must look to the four corners of the tariff and consider the entire instrument as a whole. United States v. Missouri-Kansas-Texas Railroad, 194 F.2d 777, 778 (5th Cir.1952). In light of anticipated daily delivery levels in the tariff of at least 300,000 Mcf/day, 10 FERC properly found that the word gas implicitly intended some quanitity of gas, but was susceptible of different interpretations a to how much. 27 FERC also discerned ambiguity in the minimum bill provision when it examined the original purposes underlying the tariff in light of changed circumstances. The purposes for which a tariff was imposed should be considered when interpreting the tariff, for to decide the question of the scope of [a] tariff without consideration of the factors and purposes underlying the terminology employed would make the process of adjudication little more than an exercise in semantics. United States v. Western Pacific Railroad, 352 U.S. 59, 67, 77 S.Ct. 161, 167, 1 L.Ed.2d 126 (1956). In addition, in interpreting contracts and tariffs, extrinsic evidence is admissible to remove and explain any ambiguity in the contract as applied. Ambiguity easily arises when the contract is applied to its subject matter in changed circumstances. Pennzoil Co. v. FERC, 645 F.2d 360, 388 (5th Cir.1981) (citation omitted). The Cove Point terminal had been certificated as a base load facility in response to a severe shortage of natural gas, Op. 622 at 1636-37, and FERC properly concluded that ambiguity arose in applying tariffs drafted for such a facility when circumstances had changed and the terminal was no longer supplying base load quantities of gas. 11 28 FERC also based its finding of ambiguity on the prior conduct of a party ... arguably inconsistent with that party's present interpretation of the same language. Op. 202-A at 61,167. Following an explosion at Cove Point in 1979, Columbia LNG invoked its minimum bill provision although small amounts of gas were delivered to Columbia Transmission. (Consolidated LNG invoked the provision only when no deliveries were made.) A Columbia vice president stated in testimony before the Economic Regulatory Administration that the provision had been invoked  'when the plant was not capable of sending out significant quantities of gas.'  Id.; see J.A. at 261. FERC's use of this prior conduct is questionable, however, for two reasons. First, prior inconsistent actions by Columbia LNG should not necessarily affect the interpretation of Consolidated LNG's tariff if Consolidated has always acted consistently with its current interpretation. Second, the parties' interpretations may be irrelevant if the language was drafted by the Commission rather than by the parties. 12 29 We need not decide whether Columbia LNG's prior conduct can be used as a basis for finding the contract to be ambiguous, however. Other language within the four corners of the tariff, the purposes of the tariff and minimum bill provisions, and changed circumstances suffice to support the Commission's conclusion that the language of the minimum bill provision is ambiguous. 30
31 Once a contract or tariff is found to be ambiguous, extrinsic evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. Pennzoil, 645 F.2d at 388. The Commission considered several extrinsic factors in interpreting the ambiguous phrase unable to deliver gas, including the earlier opinions certificating the LNG terminal and the surrounding factual context. 13 Op. 202-A at 61,167. Based on this evidence FERC concluded that the minimum bill provision had to be invoked whenever the LNG companies failed to make base load deliveries within the broad parameters of historical deliveries, id. at 61,069, for more than a few days when gas deliveries would not resume at normal levels in fairly short order, Op. 202-B at 61,097-98. 14 32 The key to interpreting the minimum bill provision is an understanding of the reasons why the FPC required the provision in the tariff as a condition of the certificate of public convenience and necessity for the Cove Point terminal. In interpreting a contract or tariff, the court looks to the language of the contract and its commercial (or in this case, regulatory) context. Pennzoil, 645 F.2d at 388. FERC properly based its interpretation of unable to deliver gas on the two primary purposes underlying the minimum bill provision: certificating a base load facility and allocating costs in the event of non-delivery. 33 First, as FERC noted, the whole purpose of the LNG importation projects and the FPC's approval of them was to provide substantial, base load supplies of gas at a time when conventional gas supplies were very short. Op. 202-A at 61,167. Despite the absence of daily contract demand levels in the service agreements, see supra note 10, the regasification facility was unquestionably certificated as a base load unit. Initial Dec. at 1696; Op. 622-A at 725; see also Columbia LNG Corp., 57 F.P.C. 354, 365 (1977). The tariffs and service agreements reflect the base load nature of the Cove Point facility, providing for large annual contract quantities and for firm service not subject to interruption or curtailment. J.A. at 72, 95, 197, 211. The terminal was not, however, supplying base load quantities to the pipeline companies for much of the period following the embargo, a changed circumstance which created ambiguity when the language of the minimum bill provision was applied. FERC's interpretation of unable to deliver gas resolved this ambiguity and reflected the base load nature of the Cove Point Facility by linking invocation of the minimum bill to an end to base load deliveries, as indicated by significant decreases in deliveries for more than a minimal period of time with no resumption forseeable in fairly short order. 34 The Commission also relied on the risk allocation purpose of the minimum bill provision in interpreting the tariff. The ALJ recognized at the start that the Cove Point facility involved an additional risk because of the possibility of a supply interruption, which would be peculiarly applicable to the source of supply in the instant proceedings. Initial Dec. at 1695. The Commission required insertion of the minimum bill provision as an equitable apportionment of the risk between customers and stockholders and in order to assure the financing of the project on reasonable terms to the consumer. Op. 622-A at 730. 35 Allocating risks is not, however, the same as allocating blame. FERC's first opinion improperly focused on the prudence of the transmission companies' actions, Op. 202 at 62,008, as the Commission later realized, Op. 202-A at 61,166 (the question of prudence (of either the pipelines or their LNG affiliates) is ... immaterial in these proceedings.). Similarly unavailing are the LNG companies' arguments that the husbanding program was prudent or that it is not inherently unreasonable for them to earn a return on their investment except when they are literally unable to deliver gas. As this court noted recently, 36 At bottom [the company's] claim is that because it acted prudently, it cannot fairly be punished by non-recovery of its expenses. But the problem of risk allocation in this case is not a problem of fault.... The Natural Gas Act simply does not guarantee the shareholders of even a prudently managed utility that ratepayers can always be stuck with the bill for supply projects that turn out to be total failures....Natural Gas Pipeline Company of America v. FERC, 765 F.2d 1155, 1163-64 (D.C.Cir.1985). 37 FERC's interpretation of the minimum bill accurately reflects the allocation of risk established by the FPC in 1972. The Commission designed the conditions on the certificate to ensure that ratepayers will not have to sustain the economic burden of projects that are not economically viable.... Our objective is, and must be, to protect the ultimate consumer. Op. 622 at 1640. When the FPC subsequently modified the tariffs and added the minimum bill, it reaffirmed that the changes were designed to make the project economically viable while at the same time preserving those conditions which we find to be essential for the protection of the consumers of gas in the United States. Op. 622-A at 725. The FERC interpretation rightly protects consumers from bearing all the risks of a project that, since the Algerian cut-off, has not been serving as an economically viable base load facility. 38 The minimum bill was designed to allocate the risks of the LNG project and to protect gas consumers from paying a return on equity when the facility was not supplying base load quantities of gas. FERC's interpretation of the phrase unable to deliver gas reflects this purpose and is hereby affirmed. 15
39 The Commission's reasoning was at its most mercurial in the selection of a refund date. The three opinions specified three different dates: April 24, 16 June 30, and May 31. FERC's final choice of a refund date was, however, a product of reasoned decisionmaking, not an unprincipled about-face to reach a predetermined result. See Consolidated Brief at 17. As FERC correctly points out, a number of different dates could have been selected by the Commission, all subject to some weaknesses. There is no clearly correct date upon which the LNG companies should have invoked their minimum bill provisions. FERC Brief at 32. The Supreme Court has acknowledged that such a problem can occur and held that the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence. Consolo v. Federal Maritime Commission, 383 U.S. 607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966) (citations omitted). We find the choice of May 31 as the date on which the minimum bill should have been invoked to be supported by substantial evidence. 40 The May 31 refund date is based on two conclusions. The first is that April 1 was the date on which the LNG companies recognized the supply cessation by reducing their delivery volumes substantially. Op. 202-B at 61,099. The second is that the LNG companies would need a six to eight week period to plan and implement shutdown procedures and deplete the remaining LNG entirely. Id. 41 The April 1 date is consistent with the Commission's interpretation of the minimum bill provision and is based on substantial evidence in the record. The LNG companies argue that the April 1 date is an unreasonable benchmark because it is based on an implicit finding by FERC that the decision to husband the LNG as of that date was not prudent. Such a finding, they argue, is not reasonable or based on substantial evidence because as of April 1 the last shipment of LNG had not yet arrived and United States-Algerian negotiations had not yet begun. FERC, however, explicitly disavowed reliance on whether or when the LNG companies knew that the embargo would continue indefinitely. Op. 202-B at 61,097. FERC's decision to focus on decreases in deliveries after which normal deliveries would not resume in fairly short order was designed to exclude variations in deliveries lasting only a few days, Op. 202-B at 61,098, not to re-introduce the issue of the companies' subjective expectations as to the length of the service disruption. The April 1 date was chosen because it marked the point at which the companies' actions created a significant drop in deliveries such that base load deliveries 'within the broad parameters of historic deliveries'  were no longer being made. Id. at 61,098-99. The record supports the finding that April 1 was the beginning of the husbanding program, J.A. at 103-04, and therefore the end of base load operation at the Cove Point terminal. 42 FERC found that an eight week period following April 1 would have been necessary to allow the LNG companies to develop and implement new technical procedures for emptying and de-cooling the terminal in an orderly, but not unreasonably attenuated, manner. Op. 202-A at 61,169. This finding was based on testimony by a Columbia LNG witness that the earliest date by which all the LNG could have been sent out from the Cove Point terminal was the end of May. Mr. Max Levy, a senior vice president, explained that [w]e had no procedures to rid the offshore piping of LNG. We had never envisioned a need to do that. So we would have had to have developed procedures.... J.A. at 16. Intervenors argue that FERC should not have allowed for this shutdown period because the LNG companies would have had procedures in place if they had acted prudently, in which case deliveries could have continued at the same level and the LNG tanks would have been empty by April 24, as stipulated. J.A. at 61,189. 43 Like Commissioner Richard, we believe that FERC's decision to allow an eight week shutdown period was a close call. Op. 202-A at 61,172 (Comm'r Richard concurring). In reviewing FERC's choice of a refund date, however, we must remember that [b]y giving the agency discretionary power to fashion remedies, Congress places a premium on agency expertise. Consolo, 383 U.S. at 621, 86 S.Ct. at 1027. Our standard of review for FERC's relief orders is highly deferential [because] '[t]he breadth of agency discretion is, if anything, at its zenith when the action assailed relates ... to the fashioning of policies, remedies and sanctions.'  Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 109 (D.C.Cir.1984) (quoting Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 (D.C.Cir.1967)). If the Cove Point terminal had been operating as a base load facility, it would not necessarily cease to so operate when the time came to shut down. Had the embargo never occurred, the terminal would have shut down at some point in the future and under a reasonable interpretation of the minimum bill provision the LNG companies could have billed under the cost-of-service tariff until the final day of operation. The intervenors' arguments that the shutdown could have taken place faster had plans been in place goes to the prudence of the LNG companies' actions, an issue we and FERC have found to be irrelevant to the interpretation of the minimum bill. See supra at p. 1547-48. FERC's use of the eight week period is a rational decision based on record evidence and is therefore affirmed. 44 Several parties argue that the minimum bill should have been invoked on April 24, based on the parties' stipulation that the LNG in storage at Cove Point would have been exhausted on April 23 had deliveries continued at the average daily delivery level for March, 1980. J.A. at 61, 189. The calculation in this stipulation, however, is based on a stricter interpretation of the minimum bill than that adopted by FERC because it effectively bars any variations from historical levels. Under FERC's interpretation, the minimum bill is triggered by deliveries falling below the broad parameters of historical deliveries without resuming at normal levels in fairly short order. FERC properly rejected the refund date based on the stipulation and other contrary constructions of the refund date. We affirm the Commission's selection of the May 31 refund date as a rational exercise of its broad remedial powers.
45 The LNG companies argue that FERC lacked the statutory authority to order the refunds in this case. The companies correctly point out that remedies ordered pursuant to Sec. 4(a) of the Natural Gas Act, 15 U.S.C. Sec. 717c(a) (1982), after a finding that a rate is illegal, can only be prospective. Public Service Co. v. FERC, 600 F.2d 944, 957-58 (D.C.Cir.), cert. denied, 444 U.S. 990, 100 S.Ct. 520, 62 L.Ed.2d 419 (1979). The companies are also correct in noting that they filed no rate increase pursuant to Sec. 4(e), 15 U.S.C. Sec. 717c(e) (1982), which the Commission suspended so it could subsequently order refunds. Neither of these provisions, however, was relied on by the Commission in this case. 17 46 FERC was interpreting a tariff provision imposed to condition a certificate of public convenience and necessity issued pursuant to Sec. 7 of the Natural Gas Act, 15 U.S.C. Sec. 717f(c), (e) (1982), and its refund order was designed to enforce that condition. 18 We hold that FERC has the authority under Sec. 16 of the Natural Gas Act to order retroactive refunds to enforce conditions in certificates. That section gives the Commission authority to perform any and all acts, and to prescribe, issue, make, amend, and rescind such orders, rules and regulations as it may find necessary or appropriate to carry out the provisions of this chapter. 15 U.S.C. Sec. 717o (1982). While the proper interpretation of the breadth of FERC's remedial powers under Sec. 16 has been disputed, all of the cases are in agreement that the section, at a minimum, gives the Commission authority to remedy violations of other substantive sections of the Natural Gas Act. 47 This court recently evaluated FERC's remedial authority under the Natural Gas Act and concluded that [t]he principle fairly drawn from prior cases is that the Commission has broad authority to fashion remedies so as to do equity consistent with the public interest. Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 109 (D.C.Cir.1984). In construing a provision of the Federal Power Act analagous to Sec. 16, this court has held that such 'necessary or appropriate' provisions ... authorize an agency to use means of regulation not spelled out in detail, provided the agency's action conforms with the purposes and policies of Congress and does not contravene any terms of the Act. Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 158 (D.C.Cir.1967). Section 16 is not, however, an unrestricted grant of authority: it merely augment[s] existing powers conferred upon the agency by Congress, [but] do[es] not confer independent authority to act. New England Power Co. v. FPC, 467 F.2d 425, 430-31 (D.C.Cir.1972) (footnote omitted), aff'd, 415 U.S. 345, 94 S.Ct. 1151, 39 L.Ed.2d 383 (1974). Thus, this court has held that the FPC was not authorized by Sec. 16 to alter its procedures for setting rates because that section cannot enlarge the choice of permissible procedures beyond those that may fairly be implied from the substantive sections and the functions there defined. Mobil Oil Corp. v. FPC, 483 F.2d 1238, 1257 (D.C.Cir.1973). 48 Our precedents and those of other circuits have been read inconsistently, however, in previous attempts to define the scope of Commission authority under Sec. 16. While all the cases reach the same conclusion--that Sec. 16 at least gives the Commission remedial authority when it has acted pursuant to other substantive sections of the Natural Gas Act--these courts fail to recognize that consistency. In Mesa Petroleum Co. v. FPC, 441 F.2d 182 (5th Cir.1971), the Fifth Circuit relied heavily on Niagara Mohawk in concluding that Sec. 16 provided enough authority for the Commission to carry out its duties of certification under Sec. 7 and correct a company's failure to comply with the certificate provisions of the Natural Gas Act. Id. at 186-89. The court went further, however, and implied that Sec. 16 created authority even when no other specific section of the Act is involved. Id. at 188. The Third Circuit gave Mesa this broader reading in Gulf Oil Corp. v. FPC, 563 F.2d 588 (3d Cir.1977), cert. denied, 434 U.S. 1062, 98 S.Ct. 1235, 55 L.Ed.2d 762 (1978), found the positions taken by Mesa and Mobil Oil to be irreconcilable, and staked out an intermediate position that Sec. 16 at least gives the Commission power to take reasonable, temporary measures to assure compliance with its orders. Id. at 607-08. The court upheld a retroactive refund order as an efficient, fair, and reasonable exercise of discretion to compel compliance with section 7(c) of the Natural Gas Act. Id. at 607. 49 These cases present no dispute as to FERC's authority under Sec. 16 to act to remedy violations of other substantive provisions of the Natural Gas Act. We therefore find that FERC had the authority in this case, pursuant to sections 7 and 16 of the Natural Gas Act, to order retroactive refunds when a gas company had improperly collected money under a tariff which conditions a certificate of public convenience and necessity.