Court Opinion

ID: 3066228
Source: CourtListenerOpinion
Date Created: 2015-10-14 23:48:05.994945+00
Date Added: 2024-06-11T11:41:27.323871
License: Public Domain

United States Court of Appeals

                     FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 20, 1998                             Decided February 27, 1998 

                                 No. 97-1024

                       Koch Gateway Pipeline Company, 

                                  Petitioner

                                      v.

                    Federal Energy Regulatory Commission, 

                                  Respondent

          Utilities Board, of the City of Atmore, Alabama, et al., 

                                 Intervenors

                   On Petition for Review of Orders of the 

                     Federal Energy Regulatory Commission

     Michael E. McMahon argued the cause and filed the briefs 
for petitioner.

     Joel M. Cockrell, Attorney, Federal Energy Regulatory 
Commission, argued the cause for respondent, with whom 
Jay L. Witkin, Solicitor, was on the brief.

     Before:  Edwards, Chief Judge, Wald, and Rogers, Circuit 
Judges.

     Opinion for the Court filed by Circuit Judge Wald.

     Wald, Circuit Judge:  In an attempt to comply with the 
restructuring of the natural gas pipeline industry ordered by 
the Federal Energy Regulatory Commission ("FERC" or 
"the Commission"), Koch Gateway Pipeline Company ("Koch" 
or "KGPC") revised its tariff to implement a new procedure 
for resolving imbalances in the amount of gas shipped by its 
transportation customers.  After reviewing Koch's subse-
quent report detailing how this procedure had worked in 
practice, the Commission held that Koch's accounting system 
was violative of its tariff and ordered Koch to refund over $3 
million in net revenues to its customers.  We now grant 
Koch's petition for review of this decision and hold that while 
the Commission did not err in finding Koch's accounting 
practices to be inconsistent with its tariff, it abused its 
remedial discretion by ordering a refund given that Koch did 
not ultimately garner a windfall in the process.  We therefore 
remand this case to the Commission for reconsideration of its 
refund order in light of the Commission's existing policies and 
goals.

                                 I. Background

     On April 16, 1992, the Commission issued Order No. 636,1 
its attempt to open the natural gas market to competition by 
allowing all natural gas suppliers to compete for sales on an 

__________
     1 Order No. 636, Pipeline Service Obligations and Revisions to 
Regulations Governing Self-Implementing Transportation Under 
Part 284 of the Commission's Regulations, and Regulation of Natu-
ral Gas Pipelines After Partial Wellhead Decontrol, F.E.R.C. Stats. 
& Regs. (CCH) p 30,939 (1992); order on reh'g, Order No. 636-A, 
F.E.R.C. Stats. & Regs. (CCH) p 30,950 (1992); order on reh'g, 
Order No. 636-B, 61 F.E.R.C. p 61,272 (1992); aff'd in part, rev'd 
in part, United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 
1996), cert. denied, 117 S. Ct. 1723 (1997); on remand, Order No. 
636-C, 78 F.E.R.C. p 61,186 (1997).

equal footing.2  Its primary method for achieving greater 
competition was to require that pipelines unbundle (i.e., sepa-
rate) their sales services from their transportation services 
instead of providing both as part of the same package.  
Pipelines were thus required to provide transportation service 
at equivalent levels of quality without regard to whether the 
gas had been purchased from the pipeline or from another 
supplier.  See, e.g., Western Resources, Inc. v. FERC, 9 F.3d
1568, 1573 (D.C. Cir. 1993).

     As we have recently noted, see Pennsylvania Office of 
Consumer Advocate v. FERC ["POCA"], 131 F.3d 182, 184 
(D.C. Cir. 1997), corrected by No. 93-1662 (D.C. Cir. Feb. 3, 
1998), the mandatory unbundling created a new set of difficul-
ties.  Because customers were permitted to purchase trans-
portation as a separate service, and thus would be bringing 
gas purchased elsewhere to the pipeline, pipelines might find 
it difficult to regulate imbalances in the amount of gas that 
was being delivered to, or taken from, the pipeline.  Put 
simply, customers delivering more gas for transportation than 
they took out might threaten system integrity by overloading 
the pipeline;  customers taking more gas than they delivered 
to the pipeline would hinder the pipeline's ability to render 
dependable service to its remaining customers.  See id.;  
Order No. 636, p 30,939, at 30,424 ("All shippers must recog-
nize that the action or nonaction by a single shipper may 
affect a pipeline's ability to serve all other shippers.").  Antic-
ipating that such problems would likely occur,3 Order No. 636 
stated that, as part of each pipeline's restructuring process, 
"[t]he pipeline and its shippers need to fashion reasonable, 

__________
     2 As this court has previously noted, "[t]he enormous economies 
of scale involved in the construction of natural gas pipelines tend to 
make the transportation of gas a natural monopoly."  United 
Distribution Cos., 88 F.3d at 1122.

     3 Pipelines had already experienced such problems in complying 
with Order No. 436, which allowed pipelines to file "open-access" 
tariffs that offered nondiscriminatory transportation service.  See 
Order No. 436, Regulation of Natural Gas Pipelines After Partial 
Wellhead Decontrol, 50 Fed. Reg. 42,408 (1985); see also POCA,
131 F.3d at 184.

yet effective, methods such as penalties to deter shipper 
behavior inimical to the welfare of the system and other 
shippers."  Order No. 636, p 30,939, at 30,424.  The Commis-
sion thus intended that each pipeline and its customers would 
"work out individual pipeline solutions, to be considered in 
subsequent pipeline restructuring proceedings."  POCA, 131
F.3d at 184;  see also Order No. 636-A, p 30,950, at 30,546-47.

     On November 2, 1992, Koch submitted its revised tariff, 
which included the changes necessary to comply with Order 
No. 636.4  Section 20 of the revised tariff established Koch's 
"cash-in/cash-out" procedure for resolving transportation im-
balances.  Under this system,5 Koch nets all imbalances 
among each transportation customer's contracts and sends 
each customer a statement with its imbalance for the month 
(month one) on or before the eighth day of the next month 
(month two).  The customer then has until the end of the 
following month (month three) to trade its imbalances with 
another shipper or with a storage customer.  If it fails to do 
so, it receives either a charge (i.e., it must "cash-out") or a 
credit ("cash-in") on its invoice for the next month (month 
four) at month one's "buy" or "sell" price.6  There is there-
fore a three-month lag between the time when the imbalance 
occurs and the time when the imbalance is finally resolved.

__________
     4 At the time of its initial submission, Koch was known as United 
Gas Pipe Line Company.  On November 10, 1992, however, Koch 
Industries, Inc., acquired all of United's stock, and on August 24, 
1993, the name of the pipeline was changed to Koch Gateway 
Pipeline Company.  For the sake of convenience, we shall refer to 
the pipeline throughout the proceedings before the Commission as 
"Koch."

     5 Koch's procedure for resolving imbalances underwent several 
revisions from the time the first revised tariff was filed.  See, e.g., 
United Gas Pipe Line Co., 64 F.E.R.C. p 61,015 (1993); Koch 
Gateway Pipeline Co., 65 F.E.R.C. p 61,338 (1993); Koch Gateway 
Pipeline Co., 66 F.E.R.C. p 61,232 (1994).  We describe here the 
system as it existed at the time of the order under review.

     6 The "buy" and "sell" prices are set at a distance from the 
prevailing market price in order to discourage shippers from allow-
ing imbalances in the system to occur.

     The Commission's policy is that a pipeline may not retain 
revenues from a cash-in/cash-out system but rather must 
credit these revenues back to its customers.  See, e.g., 
Williams Natural Gas Co., 64 F.E.R.C. p 61,165, at 62,416 
(1993).7  In accordance with this policy, section 20.1(D) of 
Koch's tariff provided:

     On [a] quarterly basis, KGPC shall credit on a pro rata 
     basis to its Customers the net revenues (moneys received 
     from shippers under the program less moneys paid out 
     by KGPC less cost of gas purchased to balance the 
     system) to its transportation customers based upon 
     transportation throughput during the applicable period.  
     KGPC will begin paying interest on net revenues com-
     puted in accordance with section 154.67(c)(2) of the Com-
     mission's Regulations beginning on the 1st day of the 
     next quarter and continuing until the revenues have been 
     credited to the shippers.

Koch Gateway Pipeline Co., 77 F.E.R.C. p 61,161, at 61,617 
(1996).  The Commission approved Koch's tariff, including 
this provision, to be effective on November 1, 1993, subject to 
certain revisions not at issue here.  See United Gas Pipe 
Line Co., 65 F.E.R.C. p 61,006 (1993).

     After Koch had been operating under the cash-in/cash-out 
system for over two years, it filed its first report with the 
Commission on April 11, 1996, covering the period from 
November 1, 1993, to December 31, 1995.8  The report 
showed that at the end of each quarter in 1995, Koch included 
a line item labeled "Operational Purchases:  Accrual," which 
eliminated any net revenues, and a line item at the beginning 

__________
     7 The rationale behind this policy is to deter pipelines from using 
cash-in/cash-out systems to enhance revenue rather than simply to 
deter system abuse.  See, e.g., United Gas, 64 F.E.R.C. p 61,015, at 
61,135;  Panhandle Eastern Pipe Line Co., 61 F.E.R.C. p 61,357, at 
62,429 (1992).

     8 Although Koch's tariff required it to make the information in 
the report available to its customers upon request, it did not require 
that Koch file such a report with the Commission.  See Koch 
Gateway Pipeline Co., 75 F.E.R.C. p 61,305, at 61,971-72 (1996).

of the subsequent quarter labeled "Operational Purchases:  
Accrual Reversal," which reinstated the deducted amount.  
As a result of these adjustments, Koch showed no net reve-
nues at the end of each quarter and thus owed no refund to 
its customers.  A number of gas and oil companies subse-
quently moved to intervene, requesting that these adjust-
ments be explained, and on June 17, 1996, the Commission 
granted this request.  See KGPC, 75 F.E.R.C. p 61,305.

     On July 2, 1996, Koch filed supplemental information to 
explain the report.  The "Operational Purchases:  Accrual" 
line, Koch explained, represented "the estimated cost of the 
gas Koch must purchase to replace gas bought from Koch by 
its customers through the imbalance resolution process."  
Joint Appendix 33.  Koch argued that although it supplied 
any needed gas from its own reserves, it would be inefficient 
to require it actually to purchase replacement gas at the end 
of each quarter of 1995 (i.e., at the end of month three), since 
it might be discovered during month four--when the imba-
lances were resolved--that the purchase would be unneces-
sary or financially unwise given the current market price.9  It 
therefore contended that it was appropriate to set aside at 
the end of each quarter the amount it would need to spend 
from the cash-in/cash-out fund until these uncertainties were 
resolved.  The Commission rejected these arguments.  Koch 
Gateway Pipeline Company, 76 F.E.R.C. p 61,296 (1996).  
Because, absent the accounting adjustments, Koch showed 
net revenues in the cash-in/cash-out fund at the end of each 
quarter, the Commission held that Koch had violated section 
20.1(D) of its tariff by not returning this revenue to its 
customers.  The Commission thus ordered Koch to refund to 
its customers $3,288,178 in net revenues (the amount of net 
revenues listed for the last quarter of 1995 before the accrual 
adjustment).  Id. at 62,485-86.

     Koch subsequently requested a rehearing of this decision, 
arguing that the tariff's language obligated it to credit reve-
nues to the cash-in/cash-out fund on a quarterly basis but not 

__________
     9 Koch began purchasing replacement gas in January 1996.  Koch 
asserted both before the Commission and at oral argument that 
because of rising market prices, it did not have the necessary funds 
until this time to replenish the gas in its reserves.

actually to refund them to its customers.  The Commission 
denied Koch's request, stating that while Koch's interpreta-
tion of the tariff was a possible interpretation, it was not the 
most reasonable one.  "The proper course of action," the 
Commission noted, "was for Koch to go out and actually 
purchase the gas instead of holding the funds."  KGPC, 77 
F.E.R.C. p 61,161, at 61,618.  Koch's petition for review to 
this court followed, pursuant to 15 U.S.C. s 717r(b) (1994).

                                 II. Analysis

     In general, we uphold FERC's orders if they are " 'sup-
ported by substantial evidence and reached by reasoned 
decisionmaking--that is, a process demonstrating the connec-
tion between the facts found and the choice made.' "  
Williams Natural Gas v. FERC, 90 F.3d 531, 533 (D.C. Cir. 
1996) (quoting ANR Pipeline Co. v. FERC, 771 F.2d 507, 516 
(D.C. Cir. 1985)); see also 15 U.S.C. s 717r(b) (finding of 
Commission as to the facts are conclusive if supported by 
substantial evidence).  Similarly, because Congress has dele-
gated to FERC "a broad range of adjudicative powers over 
natural gas rates," National Fuel Gas Supply Corp. v. FERC, 
811 F.2d 1563, 1569 (D.C. Cir. 1987), this circuit gives sub-
stantial deference to its interpretation of filed tariffs, "even 
where the issue simply involves the proper construction of 
language."  Id.; see also Williams Natural Gas Co. v. FERC, 
3 F.3d 1544, 1549 (D.C. Cir. 1993).10  This deference, as we 
noted in Williams, is simply an acknowledgment that the 
principles set forth by the Supreme Court in Chevron U.S.A. 
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 
(1984), extend to all areas in which an agency has been 
delegated power by Congress to act.  See Williams, 3 F.3d at 
1549.  In a typical Chevron analysis, of course, we first 

__________
     10 We recognize that there are both circuits that agree with our 
view on this point, see, e.g., Northwest Pipeline Corp. v. FERC, 61
F.3d 1479, 1486 (10th Cir. 1995), and those that disagree, see, e.g., 
Dayton Power & Light Co. v. FERC, 843 F.2d 947, 953 & n.12 (6th 
Cir. 1988); Mid Louisiana Gas Co. v. FERC, 780 F.2d 1238, 1243 
(5th Cir. 1986).

consider whether Congress, through the statute under consid-
eration, directly speaks to the "precise question at issue.  If 
the intent of Congress is clear, that is the end of the matter;  
for the court, as well as the agency, must give effect to the 
unambiguously expressed intent of Congress."  Chevron, 467
U.S. at 842-43.  If Congress has not directly addressed the 
precise question at issue, we then decide whether the agen-
cy's construction of the statute is reasonable.  Id. at 843.  
Our review of the Commission's construction of Koch's tariff 
proceeds in much the same manner.  We first look to see if 
the language of the tariff is unambiguous--that is, if it 
reflects the clear intent of the parties to the agreement.  If 
the tariff language is ambiguous, we defer to the Commis-
sion's construction of the provision at issue so long as that 
construction is reasonable.  See, e.g., Williams, 3 F.3d at 
1551;  Tarpon Transmission Co. v. FERC, 860 F.2d 439, 442 
(D.C. Cir. 1988) (interpretation must be "the result of rea-
soned and principled decisionmaking that can be ascertained 
from the record").

     After examining the tariff provision at issue in this case, we 
cannot say that the language is free from ambiguity.  Section 
20.1(D) of Koch's tariff requires that it credit net revenues to 
its transportation customers on a "quarterly basis," a phrase 
that is open to two interpretations.  On the one hand, the 
phrase could mean that Koch's revenues were to be calculated 
and credits issued "quarterly"--i.e., every three months--
based on whatever information on transportation activity was 
available to Koch at that time.  Alternatively, and equally 
compelling, the phrase could be interpreted to mean that the 
analytical "basis" for the calculation of any refunds due would 
be a three-month period--in other words, that credits had to 
reflect the total activity that occurred during a given quarter, 
even if that information did not become fully available until 
one or two months after the quarter ended.  Neither inter-
pretation emerges naturally from the language of the tariff, 
and Koch has not presented us with any additional informa-
tion to aid us in divining the meaning intended at the time the 
tariff was drafted.

     We therefore turn to the Commission's interpretation of 
the tariff provision to determine if it is a reasonable one.  The 

Commission concluded that section 20.1(D), correctly inter-
preted, requires Koch to calculate its net revenues every 
three months and issue any necessary credits directly to its 
customers on the basis of that calculation.  See KGPC, 77 
F.E.R.C. p 61,161, at 61,617.  It supported this reading by 
looking to the surrounding language.  First, it noted that the 
fact that the credit is to be made on a "pro rata basis" 
suggests that Koch is required to issue individual credits to 
each transportation customer and not in a lump sum to the 
cash-in/cash-out fund.  Second, it noted that the fact that 
Koch is required to pay interest starting on the first day of 
the next quarter suggests that the refund payment is due at 
the end of each quarter and not at some point during the 
following quarter.  Id.  This method of interpretation is 
certainly a reasonable approach, whether or not it yields the 
result we would reach were we interpreting the tariff in the 
first instance.

     Koch, nevertheless, disagrees with the Commission's inter-
pretation.  First, it argues that the language stating that it 
"shall credit" net revenues to its customers means only that 
Koch need credit the cash-in/cash-out fund rather than its 
customers directly.  Second, it contends that the phrase "to 
balance the system" requires that the fund first be bal-
anced--i.e., through an accounting adjustment--before net 
revenues are calculated.11  Although Koch's suggested inter-
pretations are possible readings of the tariff provision, we are 
not convinced that they are more reasonable interpretations 
than the one the Commission puts forward.  As a result, we 
defer to the Commission's interpretation.

     Given this interpretation, it was not wrong for the Commis-
sion to conclude that Koch's accounting adjustment violated 
the terms of its tariff.  Koch argues that the Commission's 

__________
     11 As the Commission notes, Koch takes the phrase "to balance 
the system" out of context.  The tariff defines net revenues as 
monies received by Koch, less monies paid out, less "the cost of gas 
purchased to balance the system" (emphasis added).  In other 
words, the tariff appears to contemplate that Koch's system will be 
balanced through an actual gas purchase, not through a mere 
accounting adjustment.

conclusion and order of a refund were inconsistent with its 
decision in Williams Natural Gas Co., 75 F.E.R.C. p 61,040 
(1996), and thus were arbitrary and capricious.  As an admin-
istrative agency, FERC is subject to the constraints of the 
Administrative Procedure Act and consequently is forbidden 
from acting in a way that is "arbitrary, capricious, an abuse of 
discretion, or otherwise not in accordance with law."  5 
U.S.C. s 706(2)(A) (1994).  Thus, if the two cases were indeed 
treated differently without a sufficient justification, Koch's 
contention would deserve consideration, since we have noted 
that where an agency treats similar situations differently 
without a reasoned explanation, its decision will be vacated as 
arbitrary and capricious.  ANR Pipeline Co. v. FERC, 71
F.3d 897, 901 (D.C. Cir. 1995).  In fact, however, the two 
cases were handled similarly; any differences between the 
two cases, as the Commission noted, "[did] not warrant a 
difference in outcome."  KGPC, 77 F.E.R.C. p 61,161, at 
61,618.  Williams Natural Gas Company ("WNG") was oper-
ating under a tariff provision similar to Koch's section 
20.1(D).  Like Koch, WNG had offset its refund obligation by 
an amount set aside for projected gas purchases.  The com-
pany then stated that it found it unnecessary to make these 
purchases but requested that it be able to defer any obli-
gation to adjust its records until a purchase was made.  The 
Commission denied this request, noting that WNG's tariff 
contained no provision permitting it to net actual revenues 
received against projected future costs.  WNG, 75 F.E.R.C. 
p 61,040, at 61,127.  It therefore directed WNG to refund its 
net revenues to its customers.  Koch reads the Commission's 
decision to mean that WNG was granted one opportunity to 
defer its refund obligations, an opportunity Koch claims it 
was denied.  But this is not the case:  Both companies were 
permitted to offset their refund obligations in one reconcilia-
tion period 12 with the projected cost of gas purchases;  once it 
was discovered in the next period that a gas purchase would 
not actually be made, the Commission required both compa-
nies to adjust their records and refund the net revenues to 

__________
     12 WNG's reconciliation period was one year; Koch's, as inter-
preted by the Commission, was three months.

their customers.  The Commission therefore did not act 
arbitrarily in interpreting Koch's tariff to require a return of 
net revenues at the end of each quarter or in determining 
that Koch's accounting methods violated its tariff.

     This is not to say, however, that the Commission's choice of 
remedy for that violation--the ordering of a refund--was 
appropriate in Koch's case.13  In general, we defer to FERC's 
decisions in remedial matters, respecting that " 'the difficult 
problem of balancing competing equities and interests has 
been given by Congress to the Commission with full knowl-
edge that this judgment requires a great deal of discretion.' "  
Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 
109 (D.C. Cir. 1984) (quoting Arizona Elec. Power Coop., Inc. 
v. FERC, 631 F.2d 802, 809 (D.C. Cir. 1980)).  As a result, we 
do not ordinarily interfere with FERC's exercise of this 
discretion " 'so long as the agency's determination has a 
rational basis.' "  Id.  If, however, we conclude that FERC 
has failed to establish that its decision represents a "reason-
able accommodation of the relevant factors" and that the 
refund is "equitable in the circumstances," Laclede Gas Co. v. 
FERC, 997 F.2d 936, 944 (D.C. Cir. 1993) (internal quotes 
omitted), we must vacate FERC's action and remand for 
reconsideration.  See, e.g., Gulf Power Co. v. FERC, 983 F.2d
1095 (D.C. Cir. 1993) (court upholds FERC's interpretation of 
regulation but vacates penalty as arbitrary and capricious).14

     We find that in this case, the Commission's decision to 
order a refund constituted an abuse of discretion.  It is true 

__________
     13 Because WNG is not a party to this action, we offer no opinion 
on the propriety of a refund in WNG's case.

     14 In assessing the propriety of FERC's remedial orders, we have 
in past cases alluded both to an abuse of discretion standard of 
review, see, e.g., Columbia Gas, 750 F.2d at 112; Office of Consum-
ers' Counsel v. FERC, 783 F.2d 206, 233-34 (D.C. Cir. 1986), and to 
an arbitrary and capricious standard, see, e.g., Gulf Power, 983 F.2d 
at 1102; Associated Gas Distribs. v. FERC, 824 F.2d 981, 1019 
(D.C. Cir. 1987).  Because both standards, at least in the context of 
FERC's remedial authority, require FERC to have a rational basis 
for its actions, we see no reason to distinguish between them here.

that, given the language of its tariff and the problems it 
experienced in complying with that language, Koch should 
have informed the Commission of its difficulties and attempt-
ed to seek a resolution or revision of the tariff rather than 
proceeding blindly with an accounting adjustment not antici-
pated by its customers.  The justification for requiring a filed 
tariff and for the filed rate doctrine--which prohibits regulat-
ed companies from charging rates that differ from those in its 
properly filed tariff, see, e.g., Western Resources, Inc. v. 
FERC, 72 F.3d 147, 149 (D.C. Cir. 1995)--is to ensure that 
customers can rely on a pipeline's compliance with its tariff in 
conducting their own business activities and thus "know in 
advance the consequences of the purchasing decisions they 
make."  Transwestern Pipeline Co. v. FERC, 897 F.2d 570, 
577 (D.C. Cir. 1990).  As we noted in Towns of Concord, 
Norwood & Wellesley, Massachusetts v. FERC, 955 F.2d 67, 
75 (D.C. Cir. 1992), however, any assessment of the Commis-
sion's remedial actions must be "based upon a considered 
analysis of the facts of [the] case and the precise purposes of 
the filed rate doctrine."  Koch's actions, even if technically 
violative of its tariff, did not truly implicate the doctrine's 
concerns.

     To begin with, as counsel for the Commission acknowl-
edged at oral argument, because Koch replaced the needed 
gas from its own reserves, it did not gain a windfall from its 
failure to refund the revenues in the cash-in/cash-out fund.  
As we noted in Concord, "[c]ustomer refunds are a form of 
equitable relief, akin to restitution, and the general rule is 
that agencies should order restitution only when money was 
obtained in such circumstances that the possessor will give 
offense to equity and good conscience if permitted to retain 
it."  Id. (internal quotes omitted).  The funds retained by 
Koch in this case were to be used to purchase replacement 
gas--and, indeed, they eventually were, as Koch's figures for 
1996 bear out.

     Moreover, it is not at all clear that a refund in this case 
would further the policy of the Commission as expressed in 
Order No. 636.  The Order directed pipelines to establish 
mechanisms to deter abuses of the system--to discourage 

shippers from threatening pipeline integrity by under- or 
overdelivering.  Koch's cash-in/cash-out system attempted to 
achieve this goal by passing on the costs of transportation 
imbalances to those shippers responsible for the shortfall.  
Issuing a refund in this case would work counter to Order 
No. 636's directive, in that a refund returns to those shippers 
who took additional gas from Koch the very amounts they 
were charged as a result of their miscalculations, leaving the 
pipeline's shareholders to swallow these costs.  We cannot 
conclude that the Commission's discretion, properly exer-
cised, would encompass what would amount to a contraven-
tion of its stated policy for what was, in essence, a technical 
error.

     We were presented with an analogous situation in Gulf 
Power.  In response to rising coal prices, Gulf bought out its 
old coal contracts and entered into new ones, saving its 
customers approximately $4.3 million over the life of the 
contracts.  Gulf then sought to pass on to its customers not 
only the savings realized but also the cost of the buyouts.  
FERC subsequently issued an order in another case declar-
ing that although buyout costs could not automatically be 
passed on to customers under the applicable regulations (the 
"fuel adjustment clause" regulations), it would grant a waiver 
from the regulations if the utility could show that the buyout 
provided "ongoing benefits" to its customers.  Gulf Power,
983 F.2d at 1097.  Despite this notice, Gulf continued to pass 
on its costs and did not request a waiver until FERC discov-
ered, after a routine audit, that Gulf had failed to seek one.  
Although FERC eventually granted Gulf's waiver request, it 
declined to grant the waiver retroactively.  It thus ordered 
Gulf to refund, with interest, the buyout costs it had previous-
ly charged its customers, a total of $2.7 million.

     Although we agreed with FERC that Gulf "committed at 
least a ministerial error" in failing to seek either a waiver or 
guidance from FERC, we found the refund order to be 
"wholly disproportionate to the error Gulf committed."  Id. at 
1098.  FERC's order, we noted, disregarded several impor-
tant considerations.  To begin with, Gulf received no windfall 
by passing on the costs; rather, it recovered only those costs 

incurred to produce a benefit for its customers.  Id. at 1100.  
FERC's order, by contrast, "forced Gulf to give its customers 
a windfall refund ... in addition to the savings it had already 
provided them through reduced rates."  Id. at 1101.  More-
over, FERC failed to explain why it had ordered a refund in 
Gulf's case but had declined to do so in other cases.  Id. at 
1100.  And finally, we noted that FERC had failed to consid-
er alternative remedies, such as civil penalties.  Id. at 1101.  
We thus vacated FERC's denial of Gulf's retroactive waiver 
request and remanded for reconsideration.

     Given the affinity between Gulf's and Koch's situations, we 
are persuaded to issue a similar directive in this case.  Al-
though Koch, like Gulf, erred in forging ahead without seek-
ing the Commission's guidance,15 that error did not justify a 
$3 million refund.  As in Gulf Power, the Commission failed 
to consider that Koch received no windfall as a result of its 
actions.  If Koch is required to issue a refund in this case, 
thus diminishing the purchase funds available, Koch's share-
holders, rather than the shippers, will ultimately bear the 
burden of replenishing Koch's gas reserves.

     Moreover, although the Commission acted consistent with 
its decision in Williams Natural Gas in ordering a refund, it 
failed to distinguish these cases from the Gulf Power-type 
cases, in which FERC, on remand, waived strict compliance 
with its regulations given the absence of harm suffered by the 
utilities' customers.  See, e.g., Central Ill. Pub. Serv. Co. v. 
FERC, 941 F.2d 622 (7th Cir. 1991) (court upholds FERC's 
interpretation of regulation governing recovery of litigation 
expenses but vacates refund and remands for reconsidera-
tion), on remand, 58 F.E.R.C. p 61,186 (1992); Minnesota 
Power & Light Co. v. FERC, 852 F.2d 1070 (8th Cir. 1988) 

__________
     15 The Commission's decision in Williams Natural Gas was is-
sued on April 10, 1996, one day before Koch filed its first report 
with the Commission.  Although it might be unrealistic to suggest 
that Koch should have been aware of the Commission's decision at 
the time it filed its report, it is not irrational to say that Koch 
should have acknowledged the order's import by the time it filed its 
supplemental report on July 2, 1996.

(same), on remand, 45 F.E.R.C. p 61,369 (1988).  Significant-
ly, after our decision in Gulf Power, FERC modified its policy 
to provide for a case-by-case analysis of the propriety of a 
refund when a utility violated the fuel adjustment clause.  See 
Western Resources, Inc., 65 F.E.R.C. p 61,271 (1993).16  This 
precedent requires a better explanation for the Commission's 
refund order than it provided in Koch's case.

     In remanding this case, we note particularly that Koch's 
tariff is still undergoing revisions in response to the Commis-
sion's 1996 decision.  This, we think, reflects the view of all 
parties--including Koch's customers, who have continued to 
offer comments on Koch's proposed revisions--that determin-
ing the best method of addressing Order No. 636's concerns 
about system abuses is a difficult process.  A particular 
proposal that appears appropriate in theory may reveal itself, 
as it did in Koch's case, to be inadequate in practice.  Even 
the Commission itself acknowledged during its proceedings 
on Koch's tariff that the revisions were something of a work 
in progress:

     We find that it is in the best interests of all parties that 
     KGPC have a final restructuring plan in place, and to 
     continue to make minor adjustments and readjustments 
     to the operating provisions, based on speculation as to 
     problems that might arise, is contrary to that goal.  It 
     may very well be that the plan is not perfect and that as 
     the pipeline and its customers gain experience operating 
     in the restructured environment, additional fine-tuning of 
     the procedures may be necessary.  The Commission will 
     make those adjustments at that time.

__________
     16 The Commission noted that it would be guided by "whether the 
Commission has:  (1) allowed, (2) rejected, or (3) not ruled on fuel 
adjustment clause recovery for the cost in question" as well as 
"whether the customers:  (1) enjoyed savings, or (2) suffered losses 
from the utility's unilateral action."  65 F.E.R.C. p 61,271, at 62,252.  
Applying these standards to Western Resources, the Commission 
ordered the utility to refund only the interest it had accumulated on 
the funds recovered from its customers.  Id.

Koch Gateway Pipeline Co., 66 F.E.R.C. p 61,232, at 61,547 
(1994).  In subsequent proceedings before the Commission, 
Koch has, for example, been permitted to alter its tariff so 
that it is required to reconcile and refund net revenues on an 
annual, rather than on a quarterly, basis.  See, e.g., Koch 
Gateway Pipeline Co., 80 F.E.R.C. p 61,005 (1997); Koch 
Gateway Pipeline Co., 79 F.E.R.C. p 61,127 (1997); Koch 
Gateway Pipeline Co., 77 F.E.R.C. p 61,332 (1996).  We trust 
that this change will aid Koch in resolving the problems it has 
experienced in administering its system and is representative 
of the Commission's willingness to engage in "additional fine-
tuning."  Given the Commission's flexible approach through-
out these later proceedings, its refund order was an inappro-
priate response to Koch's first report on the implementation 
of its revised tariff.

                                III. Conclusion

     Although we find that the Commission did not act arbitrari-
ly in concluding that Koch violated the terms of its tariff, we 
hold that the Commission abused its discretion in ordering 
Koch to refund over $3 million to its transportation customers 
as a remedy for this violation.  We therefore grant Koch's 
petition for review, vacate the Commission's decision as to the 
refund, and remand to the Commission for reconsideration.

It is so ordered.