Court Opinion

ID: 2654065
Source: CourtListenerOpinion
Date Created: 2014-02-21 18:39:49.544417+00
Date Added: 2024-06-11T09:11:32.352537
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2013           Decided February 21, 2014

                       No. 12-1242

          BNP PARIBAS ENERGY TRADING GP,
    FORMERLY KNOWN AS FORTIS ENERGY MARKETING &
                   TRADING GP,
                    PETITIONER

                             v.

       FEDERAL ENERGY REGULATORY COMMISSION,
                    RESPONDENT

     PSEG ENERGY RESOURCES & TRADE LLC, ET AL.,
                   INTERVENORS

          On Petitioner for Review of Order of the
          Federal Energy Regulatory Commission

    Gordon J. Smith argued the cause for petitioner. With
him on the briefs was Matthew T. Rick.

    Ira Megdal was on the briefs for intervenor South Jersey
Resources Group, LLC in support of petitioner. Marc J. Fink
entered an appearance.

     Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were David L. Morenoff, Acting General Counsel,
                               2

and Robert H. Solomon, Solicitor. Judith A. Albert, Attorney,
Federal Energy Regulatory Commission, entered an
appearance.

    Michael J. Thompson argued the cause for intervenors
Transcontinental Gas Pipe Line Company, LLC, et al. With
him on the briefs were David S. Shaffer, David A. Glenn,
James H. Byrd, and James H. Jeffries, IV.

   Before: TATEL, Circuit Judge, and WILLIAMS and
RANDOLPH, Senior Circuit Judges.

   Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

     WILLIAMS, Senior Circuit Judge: Two firms receiving
gas storage service in the Washington Storage Field ceased
taking service and “released” their storage rights to petitioner
BNP Paribas Energy Trading GP and intervenor South Jersey
Resources Group, LLC. (Since they are similarly situated and
advance the same arguments, we’ll refer to the new customers
collectively as “Paribas” or “the replacement shippers.”) At
the time of the release, the departing customers exercised their
contract rights to buy back so-called “base gas” from the
field’s operator, Transcontinental Gas Pipe Line Company,
LLC (“Transco”). Base gas is necessary in such a field to
maintain pressure and thus enable users to extract “top gas”
for shipment to its next destination. Transcontinental Gas
Pipe Line Corp., 125 FERC ¶ 63,020 at P 123 (2008) (“ALJ
Decision”). The buy-back was at contractually agreed low
prices reflecting the era (mid-1970s to early-1980s) when the
original customers had supplied the base gas. Given the buy-
back, Transco had to make new purchases to replenish its base
gas so as to maintain service at the levels prevailing before the
replacement.
                               3

     At the time of the exiting customers’ departure, the
historic customers who remained, and the new replacement
customers, disputed whether the cost of the new base gas
should be charged entirely to the replacement shippers
(“incremental pricing”) or should be charged to all shippers in
proportion to their usage (“rolled-in pricing”). In a decision
purporting to apply the familiar “cost causation” principle, the
Federal Energy Regulatory Commission chose incremental
pricing. Transcontinental Gas Pipe Line Corp., 130 FERC
¶ 61,043 at P 33 (2010) (“Order”); Transcontinental Gas Pipe
Line Corp., 139 FERC ¶ 61,002 at PP 64-68 (2012) (“Order
on Rehearing”). As we’ll see, the Commission failed to offer
an intelligible explanation of how its decision manifested the
cost causation principle. It particularly failed to explain how
or why or in what sense the historic customers’ continued
demand did not share, pro rata, in causing the need for the
new base gas, or, to put the same issue in terms that the
Commission often treats as equivalent, how or why or in what
sense the historic customers did not share proportionately in
the benefits provided by the new base gas. And it brushed off
with a terse “not relevant” Paribas’s invocation of a seemingly
parallel set of the Commission’s own decisions. Accordingly,
we vacate and remand, explaining in detail below.

                            * * *

     In 1975, at the outset of the field’s operation, shippers
intending to use it agreed with Transco on a means of
supplying the necessary base gas. The shippers permitted
Transco to take gas that they were otherwise entitled to
purchase, in a quantity proportionate to each shipper’s future
storage rights in the field. Transco paid for the gas and held
title to it. But the agreement entitled each customer to
repurchase its share of the base gas on terminating service at
the field. Transco enlarged the field several times between
1975 and 1981, each time buying gas that the new shippers
                               4

had been entitled to take themselves, and each time giving
those shippers the right to repurchase the gas at historic cost
on terminating service. On all such occasions Transco’s costs
were rolled into the rate base. Order on Rehearing, 139 FERC
at PP 3-4.

     In the late 1990s Transco filed an amended tariff that
obliged it to meet any new base gas needs on its own, and to
maintain enough base gas to support the field’s total top gas.
Because storage at the Washington field is fully subscribed,
the need to purchase new gas would arise from the departure
of an historic customer (assuming it took away its share of the
base gas) followed by the arrival of a replacement shipper
(which, with the end of the prior system, would not be
providing its share of the base gas). On the other hand, an
historic shipper’s termination of service and repurchase of
base gas, with no replacement shipper stepping in, would not
in itself automatically require Transco to secure new base gas.
Id. at PP 7-9.

     Events in 2005 and 2006 triggered what appear to be the
first applications of the new requirement that Transco
purchase base gas outside the old purchase-repurchase
arrangement. Two historic shippers, PSEG Energy Resources
and Trade LLC and South Jersey Gas Company, “released”
their Washington field rights to the replacement shippers now
before us and exercised their right to repurchase their share of
the base gas at historic cost—roughly $0.89 per dekatherm.
At the time of repurchase the price of gas was roughly $6 per
dekatherm. Id. at PP 11-12.

     Transco responded by proposing a new, bifurcated tariff.
The historic shippers would continue to pay a “rolled-in” rate
reflecting their proportionate share of the low-cost historic
base gas. Paribas, however, would pay an “incremental rate”
reflecting the cost of 3.4 million dekatherms of additional gas,
                               5

most of which would have been unnecessary in the absence of
replacement shippers. Id. at P 12-13. (According to FERC
staff, 1.32 million dekatherms would have been needed even
without the replacement customers. ALJ Decision, 125 FERC
at PP 101-02). The parties eventually settled all issues except
for the rate applicable to Paribas.

      An administrative law judge rejected the proposal after
finding that Transco failed to meet its burden to show that the
proposed rate was just and reasonable. Id. at P 180. The ALJ
observed that since “all base gas as a whole serves the top gas
capacity and deliverability needs of all customers as a whole,
it is impossible to attribute any portion of base gas to any one
or more customers in any way other than pro rata according
to each customer’s top gas volume.” Id. at P 129. And
“[w]hen base gas is injected or withdrawn, the top gas
capacity and deliverability needs of all customers are affected
equally.” Id. at P 130. As statements of physical reality,
these propositions are, so far as appears, undisputed. And the
ALJ noted specifically that consultations by Transco with the
remaining historic customers might well have led them to take
less gas and thus to require acquisition of less replacement
base gas. Id. at P 133. Thus the ALJ concluded that the
newly purchased gas was “as crucial to meeting the needs of
[Transco’s] existing customers as it was to meeting the needs
of [Paribas],” id. at P 138, and that “no one customer’s top gas
allotment can be said to ‘cause’ more base gas cost than any
other customer’s,” id. at P 129.

    In the orders under review, the Commission reversed and
approved Transco’s rate filing, with reasoning that we will
analyze below.
                               6

                            * * *

     We review the Commission’s ratemaking decisions under
the APA’s familiar arbitrary and capricious standard.
Transcontinental Gas Pipe Line Corp. v. FERC, 518 F.3d
916, 919 (D.C. Cir. 2008). That standard requires us to ensure
that the Commission “considered the relevant factors and
articulated a rational connection between the facts found and
the choice made.” Id. (quoting Nat’l Ass’n of Clean Air
Agencies v. EPA, 489 F.3d 1221, 1228 (D.C. Cir. 2007)). Part
of that requirement of course requires the Commission to
provide an adequate explanation before it treats similarly
situated parties differently. Petroleum Commc’ns, Inc. v.
FCC, 22 F.3d 1164, 1172 (D.C. Cir. 1994).

     The Natural Gas Act requires that rates be just and
reasonable and not unduly discriminatory.            15 U.S.C.
§ 717c(a)-(b). The Commission has “added flesh to these bare
statutory bones” through adoption of the “cost causation”
principle, which requires that rates “reflect to some degree the
costs actually caused by the customer who must pay them.”
K N Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C. Cir.
1992). This typically translates into a process of “comparing
the costs assessed against a party to the burdens imposed or
benefits drawn by that party.” Midwest ISO Transmission
Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir. 2004). The
flip side of the principle is that the Commission generally may
not single out a party for the full cost of a project, or even
most of it, when the benefits of the project are diffuse. See
Illinois Commerce Comm’n v. FERC, 576 F.3d 470, 476 (7th
Cir. 2009); Pac. Gas & Elec. Co. v. FERC, 373 F.3d 1315,
1320-21 (D.C. Cir. 2004).

   In a critical section of its Order on Rehearing the
Commission set out to explain its “Consistency with Cost
Causation Principle.” Order on Rehearing, 139 FERC at PP
                               7

64-68. It saw the case as “present[ing] alternative methods of
analyzing cost causation, depending upon whether the focus is
on the pipeline’s operations or on the events enabling each
customer to join the system.” Id. at P 64. It acknowledged
the validity of the ALJ’s finding that because the field was
operated on an integrated basis, “all base gas injected into the
field serves the top gas deliverability needs of all . . .
customers, regardless of when each shipper joined the
system.” Id.

     But in its “alternative” view of causation, the
Commission saw the exiting historic shippers’ releases to the
replacement shippers as “the ‘most immediate and proximate’
cause” of the need to buy new base gas, as those releases
obligated Transco to provide service to the replacement
shippers for the remaining terms of the exiting shippers’
contracts. Id. at P 65.

     On its face, this alternative focus on the exiting shippers’
release doesn’t seem to support the Commission’s idea that
the replacement shippers’ demand is the cause of the need for
the additional 3.4 million dekatherms of base gas. It still
places the replacement shippers in the position of any new
customer whose demand, coupled with that of the prior
customers, necessitates some new investment. Thus the
Commission’s characterization of both alternative views as
“factually accurate,” id. at P 66, seems highly questionable.

     Having reached this point of supposed indeterminacy, the
Commission went on to say that accordingly the weight to be
given each theory of “cause” should turn on “equitable
factors,” id., which it identified primarily as the fact of the
historic shippers’ having “provided essential support [for
Transco’s developing the field] by providing the necessary
base gas out of their gas purchase entitlements during a period
of severe gas shortages,” id. at P 67.
                               8

     By way of background, three observations about cost
causation are relevant. First, the cost causation principle
generally calls for giving the same treatment to new and
continuing customers, based on a straightforward economic
rationale. Where “all customers cause the incurrence of the
costs . . . , whether by adding or merely continuing their
usage,” Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC,
475 F.3d 1277, 1285 (D.C. Cir. 2007); Town of Norwood v.
FERC, 962 F.2d 20, 24 n.1 (D.C. Cir. 1992), assignment of
the costs to all customers (both continuing and new) forces
each set “to weigh the marginal benefits of the capacity to
them against the marginal costs they impose on society by
continuing to make demands.”          1 Alfred Kahn, The
Economics of Regulation 140 (1988); Southeastern Michigan
Gas Co. v. FERC, 133 F.3d 34, 41 (D.C. Cir. 1998) (citing
Kahn); cf. PJM Interconnection, LLC, 128 FERC ¶ 61,157 at
P 102 (2009) (recognizing, on the supply side, equivalence
between new entrants and existing suppliers).

    Second, the cost causation principle itself manifests a
kind of equity. This is most obvious when we frame the
principle (as we and the Commission often do) as a matter of
making sure that burden is matched with benefit. See, e.g.,
Midwest ISO Transmission Owners, 373 F.3d at 1368;
Southeastern Michigan Gas Co., 133 F.3d at 41 (as “every
shipper is economically marginal, the costs of increased
demand may equitably be attributed to every user”).

     Third, despite those propositions, we have recognized
that equitable factors (independent of those inherent in the
cost causation principle itself) may on occasion trump that
principle. Town of Norwood, 962 F.2d at 24 n.1.

     Notwithstanding the Commission’s undoubted power to
rest on “equitable” principles, its moves here reveal two flaws.
First, as we saw above, its basis for imputing an exclusive or
                                9

even primary causal role to the replacement shippers’ demand
is uncertain at best. Thus its chosen bridge to reliance on
“equity” is shaky. Second, the Commission doesn’t explain
why the historic shippers’ earlier support for the project
(which left them entitled to buy back their gas and resell it at
current prices) gives them a special equitable claim in
perpetuity. Equity’s conscience is famously “as long as the
chancellor’s foot”; to reconcile its use with the APA’s
rejection of arbitrariness requires both that the justification for
shifting to “equity” and the reasons that make an outcome
equitable be set forth with clarity and logic. They are missing
here, and the Commission doesn’t really advance its judgment
that the replacement shippers’ demand can be viewed as the
sole cause of the base gas need by pinning on that demand the
undefined label “immediate and proximate cause.”

     The failings of the Commission’s approach here are
underscored by its non-response to a specific point that
Paribas raised in the administrative proceedings. There it
argued that the Commission’s decision was inconsistent with
its application of cost causation to an analogous case in the
electricity sector, namely when integration of a new electricity
generator requires upgrades to the transmission network.
Paribas says that in that case the Commission does not permit
transmission operators to mechanically assign the cost of the
upgrade to the generator that precipitated the expense, but
instead requires consideration of the benefits to all parties on
the integrated system. See, e.g., Midwest Indep. Transmission
Sys. Operator, Inc. & the Midwest ISO Transmission Owners,
129 FERC ¶ 61,060 at PP 53-56 (2009); Order No. 2003-A,
Standardization of Generator Interconnection Agreements &
Procedures, 106 FERC ¶ 61,220 at PP 585-86 (2004); Re
Public Service Co. of Colorado, 62 FERC ¶ 61,013, 61,061
(1993). It inquires whether the upgrade benefits all users of
the grid or just the additional generator, and does not “require
the Generator to bear costs incurred for the development of
                              10

equipment that benefits all users of the network.” Entergy
Services, Inc. v. FERC, 391 F.3d 1240, 1243 (D.C. Cir. 2004).
Yet when Paribas pointed out the apparent inconsistency
between FERC’s action here and its management of the
electricity sector, the Commission brushed it off as “not
relevant to this case.” Order on Rehearing, 139 FERC at P
77; see FERC Br. 21. Such an opaque dismissal of an analogy
falls well short of the APA’s requirement that the Commission
“provide an adequate explanation to justify treating similarly
situated parties differently,” Comcast Corp. v. FCC, 526 F.3d
763, 769 (D.C. Cir. 2008); accord Am. Min. Cong. v. EPA,
907 F.2d 1179, 1191 (D.C. Cir. 1990).

     Whatever the reason for rejecting the analogy from
electricity regulation (if there is one), it cannot be that the
distinctions between gas and electricity, or between the
Natural Gas Act and the Federal Power Act, ipso facto put an
electricity analysis out of court. We have routinely relied on
the two statutes’ rough equivalence, looking to natural gas
analogs when assessing electricity regulation and vice-versa.
Transmission Access Policy Study Grp. v. FERC, 225 F.3d
667, 686 (D.C. Cir. 2000) (applying principles of natural gas
regulation to electricity); Am. Gas Ass’n v. FERC, 912 F.2d
1496, 1506 (D.C. Cir. 1990) (applying principles of electricity
regulation to natural gas). To be clear, we are not suggesting
that the Commission must always regulate the natural gas and
electricity industries identically. Indeed, it often does not.
E.g., Re Northeast Utilities Service Co., 62 FERC ¶ 61,294,
62,923 (Mar. 26, 1993). FERC may point to distinguishing
facts or established policy, but it may not dismiss a material
argument out-of-hand.

     Transco, intervening in support of the Commission,
appears to suggest that any error is immaterial because even in
the case of a network upgrade the Commission permits
incremental rates in certain circumstances. Transco Br. 27-28.
                               11

Even assuming those circumstances to be present here, the
Commission’s reliance on the exception would have given
Paribas a chance to argue against its applicability. But the
Commission’s outright dismissal of Paribas’s analogy
provides no rationale for us to review.

    In short, the Commission has failed to offer a reasoned
basis for its conclusion.

                             * * *

     Although we find that the Commission’s response to
Paribas’s contentions was arbitrary and capricious, we do not
mean to suggest that on remand the Commission is to ignore
the complex history of the Washington field. The historic
shippers have consistently refrained from leaving the field and
reaping the potential windfall from exercising their contingent
option to purchase their share of the base gas. By so
refraining, they annually incur, as a cost of continuing to take
service, the foregone return on the proceeds of selling that
gas. It may be that the Commission could, consistent with
regarding all shippers as causing the need for the purchase of
additional base gas in proportion to their use of the field,
nevertheless require the replacement shippers to pay the
incremental cost, while allowing the historic shippers to pay
the previously calculated rate and continue to forego the
annualized return from exercise of their buy-back option. If
this analysis is correct, such a rate treatment could subject all
shippers to similar incentives for similar use of the field. As
the Commission did not broach such an analysis, it would
obviously be inappropriate for us to adopt it. SEC v. Chenery
Corp., 318 U.S. 80, 87 (1943). But we cannot affirm on the
basis of a Commission rationale that fails to respond to critical
arguments raised before the agency. Accordingly, the
Commission’s order is
12

 Vacated and remanded.