Court Opinion

ID: 184984
Source: CourtListenerOpinion
Date Created: 2011-02-05 02:26:25+00
Date Added: 2024-06-11T17:26:12.411724
License: Public Domain

194 F.3d 68 (D.C. Cir. 1999)
Trunkline LNG Company, Petitionerv.Federal Energy Regulatory Commission, Respondent
No. 98-1224
United States Court of AppealsFOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 16, 1999Decided October 15, 1999

On Petition for Review of Orders of theFederal Energy Regulatory CommissionBrian D. O'Neill argued the cause for petitioner.  With  him on the briefs were Bruce W. Neely and F. Nan Wagoner.Merlin E. Remmenga entered an appearance.
Monique Penn-Jenkins, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent.  With  her on the brief were John H. Conway, Deputy Solicitor, and  Susan J. Court, Special Counsel.
Before:  Williams, Sentelle, and Garland, Circuit Judges.
Opinion for the Court filed by Circuit Judge Garland.
Garland, Circuit Judge:

1
In 1977, Trunkline LNG Company ("Trunkline") applied to the Federal Energy Regulatory  Commission (FERC)1 for authority to construct and operate a  liquefied natural gas (LNG) processing plant in Lake Charles,  Louisiana.  Although FERC granted that authority, the high  cost of LNG eventually caused Trunkline to suspend its  service.  In 1996, Trunkline again sought approval for its  LNG operations, as well as for rates that would permit it to  recover depreciation expenses it had been unable to recover  during the period of suspension.  FERC granted Trunkline's  application, but conditioned its approval upon exclusion of the  unrecovered depreciation from Trunkline's rate base.  FERC  also conditioned its approval upon Trunkline filing a study of  its costs and revenues within three years.  Trunkline appeals  both conditions.  We affirm.

2
* Trunkline received authorization in 1977 to construct and  operate the Lake Charles plant and to sell regasified LNG to  a single customer, an affiliate known as Trunkline Gas Company (Trunkline Gas).  As a condition of authorization, FERC  required Trunkline to file a tariff containing minimum bill  provisions intended to allocate the risk of loss that would  arise in the event of a suspension of service.  Under the  provisions of the minimum bill, in a period of interrupted  service the customer would continue to pay rates that would  permit Trunkline to recover its debt service and other  nonequity-related fixed costs (interest and principal repayment, taxes, and fixed operating and maintenance expenses).It would not, however, be permitted to recover equity-related fixed costs (through depreciation expenses or otherwise) except to the extent that it actually provided service.2  In the  Commission's view, this arrangement ensured that Trunkline  would be able to finance the project's construction, while  equitably apportioning the risk of suspended or reduced  operations between Trunkline's stockholders and its customer.  See Trunkline LNG Co., 82 F.E.R.C.  p 61,198, at 61,781  (1998) (order denying rehearing).

3
Trunkline commenced delivery of LNG in 1982.  Due to the  high cost of the LNG it was obtaining from Algeria, however,  Trunkline suspended operations from mid-1984 through 1989.Although Trunkline's customer received no service after the  suspension, it continued to pay the non equity fixed costs  pursuant to the terms of the minimum bill.  Pursuant to the  same terms, Trunkline was unable to recover $106.9 million in  depreciation costs during this period.

4
On October 16, 1996, Trunkline filed the application at issue  in this case, seeking a certificate of public convenience and  necessity under section 7 of the Natural Gas Act (NGA), 15  U.S.C. § 717f.  It once again sought authorization to provide  terminalling services (receipt, storage, regasification, and delivery of LNG) at the Lake Charles plant, this time to  customers other than Trunkline Gas.  Trunkline's proposed  rates were predicated upon a rate base that included the  $106.9 million in depreciation the company had been unable to  recover from 1984 through 1989.

5
Although FERC granted Trunkline's request for a certificate, it imposed two conditions.  First, it required Trunkline  to exclude the $106.9 million in unrecovered depreciation from  its rate base.  Inclusion of those costs, it said, would improperly permit Trunkline to earn a return on the depreciation  expenses it did not recover because of the suspension of  service.  See Trunkline LNG Co., 81 F.E.R.C. p 61,147, at  61,666 (1997) (order issuing certificate).  FERC also directed Trunkline, within three years of the start of operations, "to  make a Natural Gas Act section 4 rate filing to justify its  existing rates or to propose alternative rates."  Id.

6
Trunkline sought rehearing with respect to the two conditions imposed on its certificate.  The Commission denied  rehearing, affirming its decision to exclude the depreciation  costs but effectively modifying the three-year filing requirement.  Rather than require Trunkline to make a filing justifying its rates or proposing new ones under NGA section 4, 15  U.S.C. § 717c, FERC simply directed Trunkline to file a cost  and revenue study.  The Commission indicated that it would  review the study and only then determine whether it should  exercise its authority to establish just and reasonable rates  under section 5 of the NGA, 15 U.S.C. § 717d.  See 82  F.E.R.C. at 61,780.

II

7
We review FERC orders under the arbitrary and capricious standard of 5 U.S.C. § 706(2)(A).  See Union Pac.  Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C. Cir. 1997).  We  find nothing arbitrary or capricious about FERC's decisions  here.

8
Trunkline argues that the Commission's refusal to allow it  to include its lost depreciation charges in its rate base represents an unreasonable departure from the Commission's longstanding practice of allowing utilities to earn a return on their  investments.  Trunkline contends that it never had the opportunity to recover the lost depreciation, and hence should not  be denied that opportunity now.

9
What Trunkline's analysis ignores, however, is that it did  have the opportunity to recover that depreciation--if it had  provided service from 1984 through 1989.  Trunkline's failure  to recover is simply a consequence of its failure to provide  that service, a possibility contemplated by the tariff in effect  at the time.  The risk allocation reflected in that tariff was  not an unreasonable one.  Trunkline's shareholders obtained  the benefit of being able to finance the Lake Charles plant  and commence its operations, but bore the risk of losing part of their investment if business did not go well.  Trunkline's  customer obtained the benefit of LNG service, but also bore  part of the risk since it would have to continue to pay under  the minimum bill even if it received no service.

10
Moreover, whatever the rationality of the original 1977  tariff, it is far too late in the day to dispute that tariff now. The only question here is whether anything has changed that  would make it unreasonable to require Trunkline to adhere to  the terms of the arrangement originally struck in that year.In fact, nothing has changed.  To the contrary, the subsequent interruption of service was precisely the circumstance  the tariff anticipated, and the resulting preclusion of depreciation recovery flowed directly from the original risk allocation formula. To permit Trunkline to recover its costs now would  overturn that original allocation, permitting Trunkline's  shareholders to recover a return on their equity notwithstanding the terms of the original arrangement.3

11
Trunkline makes much of the fact that the 1977 minimum  bill was canceled when service to Trunkline Gas was abandoned, and argues that FERC's current open-access regulations now prohibit the imposition of such minimum bills.  See  Trunkline Br. at 26 (citing 18 C.F.R. § 284.8(d)).  Trunkline  failed to preserve this argument by failing to raise it in its  rehearing request.  See 15 U.S.C. § 717r(b);  United Distribution Cos. v. FERC, 88 F.3d 1105, 1170 (D.C. Cir. 1996).  In  any event, it misses the point.  FERC's 1996 order does not  impose a minimum bill on rates charged under the new certificate.  Rather, it simply bars Trunkline from including  in its new rate base those depreciation expenses it lost under  the conditions of the prior tariff.

12
Finally, both Trunkline and FERC make reference to a  1991 settlement agreement which allowed Trunkline to make  accounting entries recording the amount of its unrecovered  depreciation.  See Trunkline LNG Co., 57 F.E.R.C.  p 61,022  (1991) (order approving contested settlement).  That settlement has no consequences for this litigation.  Far from  disputing the import of the settlement, both Trunkline and  FERC vociferously agree that while the settlement permitted  Trunkline to record its lost depreciation, it did not determine  whether the company would be able to recover that depreciation in the future.  Rather, as the settlement order explained,  the accounting treatment was "nothing more than a method  of keeping track of unrecovered depreciation for possible  future application for rate recovery."  Id. at 61,091.  The  settlement agreement itself specifically stated that:

13
Nothing contained in this Stipulation and Agreement shall be taken to reflect a determination as to [Trunk-line's] future right to recover the amount recorded in them emorandum account.  Any such recovery in jurisdictional rates shall be subject to a filing, or filings, by [Trunkline] requesting authority for such recovery which is accepted and allowed to be placed in effect by the Commission....

14
See J.A. at 239.  In short, the settlement did nothing more  than leave the matter open for future dispute.

15
In the instant application, Trunkline requested authority to  include the uncollected depreciation charges in its rate base,  just as the settlement anticipated it would.  FERC, however,  rejected that request as it was equally free to do.  Because  we have found FERC's rejection reasonable, we have no basis  for overturning it.

III

16
Trunkline also disputes the second condition imposed in  FERC's initial order:  the condition that Trunkline make,within three years, "a Natural Gas Act section 4 rate filing to  justify its existing rates or to propose alternative rates."  81  F.E.R.C. at 61,666.  Trunkline argues that such a condition is  in contravention of our holding in Public Serv. Comm'n v.  FERC (PSC), that FERC may not require a natural gas  company to periodically refile its rates pursuant to section 4.See 866 F.2d 487, 492 (D.C. Cir. 1989).  As we noted in PSC, FERC may, at any time, conduct an examination of a company's rates pursuant to section 5 of the NGA, 15 U.S.C.  § 717d.  Under that section, however, the burden of proof is  on the Commission to show that the rates in question are not  just and reasonable.  See PSC, 866 F.2d at 488.  By contrast,  a section 4 filing and proposed rate change is initiated by the  company, and it is the company that bears the burden of  proving that its proposed rates are just and reasonable.  See  15 U.S.C. § 717c(e).  Accordingly, we held that FERC may  not require periodic refilings under section 4, because such a  procedure would effectively shift the burden of proof established under section 5.  See PSC, 866 F.2d at 490.

17
We need not determine whether FERC's initial order in  Trunkline would have contravened our PSC decision, because  FERC apparently had second thoughts prior to its order  denying rehearing.  In the latter order, the Commission  explained that it was not really requiring Trunkline to propose a change in its rates under section 4, but "merely"  requiring it to file a "cost and revenue study" that would  provide the basis for a section 5 filing by the Commission  should it conclude one were necessary.  82 F.E.R.C. at  61,780.  The Commission agrees that if it decides to go  forward after reviewing the study, it will bear the burden of  proof.  Hence, the rehearing order does not implicate our  holding in PSC.

18
Trunkline further contends that even if there is no section 4  problem, the requirement of a cost and revenue study is  improper because it is unreasonable.  There is no question  that FERC has the authority to require Trunkline to submit  such a study.  Indeed, Trunkline conceded at oral argument  that such a study is within FERC's power under section 10(a)  of the NGA to require natural gas companies to file "such annual and other periodic or special reports as the Commission may ... prescribe as necessary or appropriate to assist  the Commission."  15 U.S.C. § 717i(a).4  FERC imposed the  requirement because Trunkline had no recent history of  continuous operation, and there was thus no relevant experience upon which to base forecasts of future costs or service  levels.  See 82 F.E.R.C. at 61,780.  The Commission believed  that within three years there would be such a history, which  it could then review to determine whether Trunkline's rates  were just and reasonable.  As there is nothing arbitrary or  capricious about that conclusion, we uphold the reporting  condition as well.

IV

19
We conclude that the conditions FERC imposed upon  Trunkline's certificate are reasonable and in accordance with  law.  Accordingly, FERC's orders, as modified in the order  denying rehearing, are affirmed and the petition for review is  denied.

Notes:

1
 Trunkline's original application was filed with the Federal Power Commission (FPC).  The FPC ceased to exist on September 30,  1977 and most of its functions were transferred to FERC.  See  Department of Energy Organization Act, Pub. L. No. 95-91, sec.  402, 91 Stat. 565, 583 (1977) (codified at 42 U.S.C. § 7172(a));  Exec.  Order No. 12,009, 42 Fed. Reg. 46,267 (1977).

2
 During periods in which operations were reduced but not suspended, the tariff provided for a proportionate reduction of Trunkline's return on equity.  See Trunkline LNG Co., 82 F.E.R.C.p 61,198, at 61,781 (1998).

3
 In its initial order, FERC ruled not only that inclusion of the  lost depreciation in Trunkline's rate base was unjustified, but that it  was also prohibited by a FERC regulation, 18 C.F.R.  § 284.7(c)(5)(iii).  See 81 F.E.R.C. at 61,666.  That regulation states  that a "pipeline may not file a revised or new rate designed to  recover costs not recovered under rates previously in effect."  In its  order denying rehearing, however, FERC concluded that because  inclusion of the depreciation was unjustified, it was "unnecessary to  address whether the regulation would otherwise prohibit" it.  82  F.E.R.C. at 61,782.  Because FERC did not rest its decision on the  regulation, we need not address that question either, notwithstanding Trunkline's request that we do so.

4
 Section 10(a) authorizes FERC to "require that such reports  shall include, among other things, full information as to ... gross  receipts, interest due and paid, depreciation, amortization, ... cost  of facilities, cost of maintenance and operation of facilities ... , and  sale of natural gas."  15 U.S.C. § 717i(a).