Court Opinion

ID: 185456
Source: CourtListenerOpinion
Date Created: 2011-02-05 02:32:19+00
Date Added: 2024-06-11T17:26:16.034562
License: Public Domain

251 F.3d 173 (D.C. Cir. 2001)
Pan-Alberta Gas, Ltd. and Pan-Alberta Gas (U.S.) Inc., Petitionersv.Federal Energy Regulatory Commission, RespondentSouthwest Gas Corporation, Intervenor
No. 00-1005
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 2, 2001Decided June 1, 2001

On Petition for Review of Orders of the Federal  Energy Regulatory Commission
John R. Staffier argued the cause for petitioner.  With him  on the brief was Marisa A. Sifontes.
Dennis Lane, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent.  On the brief were John H. Conway, Deputy Solicitor, Timm L. Abendroth and  Monique L. Penn-Jenkins, Attorneys.
Alex A. Goldberg argued the cause for amicus curiae  Northwest Pipeline Corporation. With him on the brief were  Steven W. Snarr and Tim W. Muller.
Before:  Edwards, Chief Judge, Ginsburg and Tatel,  Circuit Judges.
Opinion for the Court filed by Circuit Judge Ginsburg.
Ginsburg, Circuit Judge:

1
Pan-Alberta Gas, Ltd. and an  affiliate petition for review of orders of the Federal Energy  Regulatory Commission authorizing Northwest Pipeline Corporation to add capacity to its natural gas pipeline and to sell  that capacity to Duke Trading and Marketing, LLC and its  affiliate.  Pan-Alberta argues that the orders are not based  upon substantial evidence in the record, arbitrary and capricious, and contrary to both Commission policies and Northwest's tariff.  Because each of these arguments lacks merit,  we deny Pan-Alberta's petition.

I. Background

2
In 1999 the Commission granted Northwest a certificate of  public convenience and necessity authorizing the company to  expand by 50,000 dekatherms per day ("Dth/d") the physical  capacity of a segment of its natural gas pipeline in Oregon  and Washington.  Northwest Pipeline Corp., 87 F.E.R.C.  p 61,227 at 61,914 (1999) ("Order");  see also Northwest Pipeline Corp., 89 F.E.R.C. p 61,172 (1999) ("Rehearing Order"  denying Pan-Alberta's requests for rehearing and clarification  of the Order).  The Commission also approved Northwest's  sale of this new capacity to Duke, which agreed to pay  Northwest an annual "reservation Facility Charge" that  "would compensate Northwest for the incremental cost-ofservice attributable to the additional facilities."  Order at  61,915.  In addition, the Commission approved Duke's and  Northwest's agreement to amend 19 existing contracts. Those contracts, which in the aggregate provided firm capacity for the transport of 50,000 Dth/d of gas between two points in Colorado, would be amended to provide instead (with no  change in financial terms) for transport between points in  Oregon and in Washington.  Order at 61,914.  Duke's total  payments to Northwest for the Washington-Oregon capacity  would thus consist of two elements:  the charge for the  capacity itself, as provided in the 19 amended contracts (and  sometimes called the "reservation charge," see, e.g., 18 C.F.R.  § 284.7(e);  Order at 61,918), plus the newly agreed upon  "reservation Facility charge," see Order at 61,915.

3
The 19 contracts involved in this transaction arose out of  Duke's application of the "capacity release/segmentation process" to what had been a single contract between Duke and  Northwest for 40,000 Dth/d of firm capacity along a segment  of Northwest's pipeline in Colorado.  Rehearing Order at  61,521 n.2, 61,523;  accord Order at 61,914 & n.5.  Both  "capacity release" and "segmentation" require some explanation.

4
"Capacity release" describes a transaction in which the  holder of a contract for firm transport (the "releasing" shipper) sells that capacity to a "replacement" shipper.  The  releasing and replacement shippers may agree upon any price  up to the applicable reservation charge -the maximum price  per unit of firm capacity established in the pipeline's tariff.  A  shipper seeking to release capacity may either auction it to  the highest bidder on a public bulletin board maintained by  the pipeline or bypass the auction to contract at the reservation charge with a replacement shipper of its choosing.  See  18 C.F.R. § 284.8(a)-(e).  Once a deal to release capacity has  been struck, the replacement shipper pays the agreed-upon  price not to the releasing shipper but to the pipeline, with  which it enters into a new capacity contract.  The pipeline  then credits payments received from the replacement shipper  to the account of the releasing shipper;  and the releasing  shipper continues to pay the price stated in the original  contract, which remains in force.  See id. § 284.8(f).  The  pipeline therefore gains nothing from a capacity release  transaction;  its income is fixed at the price originally agreed  upon with the releasing shipper, regardless of the terms of  the capacity release agreement.

5
"Segmentation" describes a transaction in which an owner  of firm capacity sells that capacity piecemeal.  To use the  Commission's example, a shipper that owns the right to  transport 10,000 Dth/d between the Gulf of Mexico and New  York City could release to one replacement shipper the right  to transport 10,000 Dth/d from the Gulf to Atlanta, and  release to another replacement shipper the right to transport  10,000 Dth/d from Atlanta to New York.  See Pipeline Service Obligations, and Revisions to Regulations Governing  Self-Implementing Transportation Under Part 284 of the  Commission's Regulations, Order 636-B, 61 F.E.R.C. p  61,272 at 61,997 (1992).  Because Northwest charges a "postage stamp" rate -that is, a shipper purchasing capacity at  the reservation charge pays the same price to ship gas across  the country as it does to ship gas across town, see Northwest  Pipeline Corp., 82 F.E.R.C. p 61,158 at 61,576 (1998) -a  shipper that resells its capacity in segments can realize  multiples of what it paid for that capacity.

6
An owner of firm capacity also has the right under the  Commission's regulations to change the specified segment of  the pipeline along which that capacity is to be provided (the  so-called "service path");  for example, in this case Duke, the  owner of firm capacity for the transport of gas between two  points in Colorado, sought to amend its contract to provide  instead for the same amount of capacity between Oregon and  Washington.  See Rehearing Order at 61,523.  Because capacity is sold at a postage stamp rate, such an amendment  does not entail a change in the price paid by the shipper. Like a segmentation transaction, a change in service path is  limited by the operational constraints of the pipeline, see 18  C.F.R. § 284.7(d).  Because the Northwest pipeline is bidirectional, however, the net effect of all existing gas flows on the  pipeline (so-called net "displacement") may enable a shipper  to introduce gas into and remove gas from the pipeline at  newly designated points without Northwest having the physical capacity for that gas to traverse the path between the two  points.  See, e.g., Order at 61,914.

7
With these techniques available to it, one can see how "a  sequence of long-term, segmented releases, and subsequent receipt and delivery point amendments," Northwest Application for Certificate of Public Convenience and Necessity,  FERC Docket No. CP-96-554, at 9 (May 1998), could enable  Duke, without increasing its total payments to Northwest, to  convert its original contract for 40,000 Dth/d of capacity into  multiple contracts, including 19 or more contracts that in the  aggregate provide it with firm capacity of 50,000 Dth/d or  more.  See Order at 61,914 n.5.  The release and replacement  of segmented contracts allow a shipper to increase its total  capacity under a firm transportation contract without incurring a price increase, and service path amendments permit a  shipper to transform a short path into a long one that can be  further segmented and the parts sold, thus creating what  Northwest calls a "daisy chain" of transactions. Indeed, the  transaction approved in the Order is but the latest service  path amendment in Duke's "daisy chain."  Like its predecessors, this transaction does not affect the reservation charge  Duke pays for its capacity, which remains fixed at the price in  the original contract for 40,000 Dth/d.  It differs from the  others in the chain only in that Duke agreed to pay a facilities  charge to Northwest in addition to the reservation charge.

8
Pan-Alberta registered various objections to this transaction before the Commission, see Order at 61,916, and upon  issuance of the Order reiterated them in a request for rehearing and clarification, which the Commission denied.  Pan Alberta here seeks review of both the Order and the Rehearing Order, and Northwest appears as amicus curiae in support of the Commission.

II. Analysis

9
Pan-Alberta argues that the Commission based its determination of the public convenience and necessity upon a misunderstanding of how much capacity Duke controlled on Northwest's pipeline.  According to Pan-Alberta, the Commission  lacked substantial evidence to support its conclusion that  Duke had effective control over only 50,000 Dth/d of capacity,  making the Commission's answer to the "fundamental question" of the extent of Duke's holdings "inherently arbitrary and capricious."  See Wisconsin Valley Improvement Co. v.  FERC, 236 F.3d 738, 745 (D.C. Cir. 2001) (agency decision is  arbitrary and capricious if factual determinations lack substantial evidence).  In the alternative, Pan-Alberta argues  that the orders under review violate both Northwest's tariff  and the Commission's policy regarding release and replacement.

10
The Orders are indeed less than pellucid about how much  capacity Duke controls, and the parties' briefs do nothing to  clarify the situation.  Particularly confusing is the Commission's failure in the Orders, and all the parties' failure in their  briefs, unequivocally to state whether Duke's 19 contracts for  50,000 Dth/d of capacity are the sole progeny of the original  40,000 Dth/d contract between Northwest and Duke or  whether they are but a subset of the contracts resulting from  the "daisy chain" of transactions based upon the original  agreement.  This confusion is exacerbated by the Commission's statement in the Rehearing Order (at 61,523) that Duke

11
has effectively transferred its contractual obligation for 40,000 Dth a day of capacity to the northern segment of Northwest's system [i.e., from Oregon to Washington]. This frees up 40,000 Dth a day of capacity on the southern segment [i.e., in Colorado].

12
In fact, the transfer "frees up" 50,000 Dth/d, not 40,000 Dth/d,  of capacity on the southern segment.  Pan-Alberta suggests  this shows that the Commission mistakenly believed itself to  be approving a transfer of the original 40,000 Dth/d of  capacity at the root of the daisy chain rather than the 50,000  Dth/d that blossomed from it, or at least that the Commission  was confused regarding the amount of capacity at issue.  The  Commission insists that it fully understood the transaction,  but concedes in its brief that some confusion could have been  avoided had it described the "transfer" in terms of the larger  quantity.

13
We agree with the Commission that, notwithstanding their  expository shortcomings, the Orders do enable one accurately  to understand the transaction and do not show that the  Commission misunderstood any material fact.  The Orders make clear that Duke began with a single contract for 40,000  Dth/d of firm capacity, that it parlayed that contract into  multiple contracts for a total of 50,000 Dth/d of capacity, and  that it sought in the subject transaction to amend the service  path for that 50,000 Dth/d from one in Colorado to a route  between Oregon and Washington, along a segment of the  pipeline that Northwest had agreed to expand.  See Order at  61,914 & n.5.  As the Commission points out, its above-quoted  description of the transfer, although confusing, is entirely  consistent with this understanding and in no way inaccurate: Duke has in fact "effectively transferred" its original 40,000  Dth/d contract to give it control over 50,000 Dth/d of capacity  on "the northern segment of Northwest's system."  Rehearing Order at 61,523.

14
Pan-Alberta suggested before the Commission that "Duke's  capacity will increase [as a result of the Order] from the  original 40,000 Dth a day under its original primary contracts  to as much as 90,000 Dth a day (50,000 Dth a day of new  capacity on the expansion facilities plus the original 40,000  Dth a day in Colorado)."  Id.  As Northwest explains, however, the 90,000 Dth/d figure is an artifact of the arrangement  whereby the contract of a releasing shipper continues in force  even as that shipper cedes effective control of its capacity to  the replacement shipper.  See above at 3.  Duke, which is  both the releasing and the replacement shipper in the disputed transaction, thus emerges from the Order with contracts  for 90,000 Dth/d of capacity:  as the replacement shipper it  controls 50,000 Dth/d of capacity in the north, while as the  releasing shipper it nominally maintains its original contract  for 40,000 Dth/d of capacity in the south.  Of course, by  releasing its capacity Duke has ceded any right actually to  ship gas along the Colorado service path;  its 90,000 Dth/d of  contracts notwithstanding, it effectively controls only 50,000  Dth/d of capacity.  This account is again fully consistent with  the Orders.

15
Indeed, because any release of capacity generates a new  contract between the pipeline and the replacement shipper  while leaving the releasing shipper's contract in force, a daisy  chain of transactions necessarily creates a corresponding daisy chain of contracts.  Depending upon the number of  links in the chain, Duke may well be party to contracts that  formally give it the rights to even more than 90,000 Dth/d of  capacity, over much of which it has no effective control.

16
We also reject Pan-Alberta's claim that the total amount of  capacity that Duke controls is a fact "fundamental" to whether the transaction at issue serves the public interest and  necessity.  As the Commission points out, the orders under  review do not address let alone ratify the transactions by  which Duke parlayed its 40,000 Dth/d of capacity into 50,000  Dth/d;  they address only whether Duke and Northwest may  "change the primary service path[ ]" for the 50,000 Dth/d of  capacity that Duke had secured previously.  Order at 61,914. Even if the daisy chain in fact yielded contracts that in the  aggregate gave Duke effective (not just formal) control over  more than 50,000 Dth/d of capacity, such additional capacity  would be immaterial to the transaction now in suit.  For the  same reason, we do not consider Pan-Alberta's claim that the  daisy chain of transactions by which Duke parlayed its 40,000  Dth/d into 50,000 Dth/d is inconsistent with the Commission's  policy that "releasing and replacement shippers do not have a  right to obtain more capacity than that which the releasing  shipper initially held."  Transcontinental Gas Pipe Line  Corp. (Transco), 89 F.E.R.C. p 61,167 at 61,503 (1999) (citing  Tennessee Gas Pipeline Co., 85 F.E.R.C. p 61,052 at 61,163  (1998)).  Because the daisy chain transactions were not at  issue when the Orders were before the Commission, Pan Alberta may not challenge their validity in this case.  Cf.  Southwest Gas Corp. v. FERC, 145 F.3d 365, 370 (D.C. Cir.  1998) ("The Commission need not revisit the reasoning of a  general order every time it applies it to a specific circumstance").

17
Finally, Pan-Alberta claims that the arrangement under  which Duke pays usage charges only on its original 40,000  Dth/d of capacity rather than on the 50,000 Dth/d violates the  requirement of Northwest's tariff that the shipper pay a  reservation charge for each Dth/d of capacity it controls.  As  the Commission notes, however, this requirement is satisfied  because Duke makes payments on each of its two distinct contracts with Northwest -one as a releasing shipper with  respect to 40,000 Dth/d, and one as a replacement shipper  with respect to 50,000 Dth/d.  See Order at 61,918.  The tariff  is not violated merely because the payments Duke makes on  its replacement contract for 50,000 Dth/d are credited to its  account in its role as releasing shipper.  See id.

III. Conclusion

18
For the foregoing reasons, the petition for review is

19
Denied.