133 F.3d 34 (D.C. Cir. 1998), 96-1441, Southeastern Michigan Gas Co. v. F.E.R.C.

Docket Nº:96-1441, & 97-1079.
Citation:133 F.3d 34
Party Name:SOUTHEASTERN MICHIGAN GAS COMPANY and Michigan Gas Company, Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Northern States Power Company (Minnesota), et al., Intervenors Nos. 96-1200, 96-1207, 96-1211, 96-1213, 96-1216, 96-1307, 96-1324,96-1366, 96-1376, 96-1377, 96-1412,
Case Date:January 16, 1998
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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133 F.3d 34 (D.C. Cir. 1998)

SOUTHEASTERN MICHIGAN GAS COMPANY and Michigan Gas Company, Petitioners



Northern States Power Company (Minnesota), et al., Intervenors

Nos. 96-1200, 96-1207, 96-1211, 96-1213, 96-1216, 96-1307,

96-1324,96-1366, 96-1376, 96-1377, 96-1412,

96-1441, & 97-1079.

United States Court of Appeals, District of Columbia Circuit

January 16, 1998

Argued Nov. 13, 1997.

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Clinton A. Vince argued the cause for joint petitioners and supporting intervenors, with whom Deborah A. Swanstrom, Emmitt C. House, Mary Ann Walker, Neil L. Levy, David I. Bloom, Randall B. Palmer, Shaheda Sultan, Elizabeth W. Whittle, Gordon J. Smith, Ronald N. Carroll, Charles H. Shoneman, Eileen G. Stanek, David D'Alessandro, Kelly A. Daly, Thomas L. Casey, Solicitor General, State of Michigan, Don L. Keskey and Henry Boynton, Assistant Attorneys General, Frederick J. Killion, Allan W. Anderson, Jr., and David B. Ward were on the joint briefs.

Deborah A. Moss argued the cause for petitioner Consumers Energy Company, with whom William M. Lange was on the briefs.

Frederick J. Killion argued the cause for petitioners Northern States Power Company, et al., with whom John H. Burnes, Jr., and Theresa I. Zolet were on the briefs.

Philip F. Cronin, Jr. argued the cause for petitioner Rochester Gas and Electric Corporation, with whom Elizabeth W. Whittle was on the briefs.

William W. Brackett argued the cause for petitioner Midland Cogeneration Venture Limited Partnership, with whom Terry O. Brackett was on the briefs.

Joel M. Cockrell, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent, with whom Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solicitor, were on the brief.

James D. McKinney, Jr., argued the cause for intervenor Great Lakes Gas Transmission Limited Partnership, with whom G. William Stafford and John J. Wallbillich were on the brief.

Allan W. Anderson, Jr., argued the cause for intervenors in support of respondents, with whom David B. Ward, Shaheda Sultan, Charles H. Shoneman,and Elizabeth W. Whittle were on the brief.

Before: EDWARDS, Chief Judge, GINSBURG and SENTELLE, Circuit Judges.

SENTELLE, Circuit Judge:

This case grows out of a long-running dispute between the Great Lakes Gas Transmission Partnership ("Great Lakes"), various factions of its shippers, and the Federal Energy Regulatory Commission ("FERC"). We first reviewed FERC's resolution of this matter in TransCanada PipeLines Ltd. v. FERC, 24 F.3d 305 (D.C.Cir.1994), where we remanded the case to FERC for further consideration. On remand, FERC abandoned its initial position and issued new orders adverse to the parties that had prevailed in the pre-TransCanada administrative proceedings. We now consider whether FERC's latest ratesetting orders concerning the Great Lakes Natural Gas Transmission Pipeline complied with Section 4 of the Natural Gas Act ("NGA"), see 15 U.S.C. § 717c, and were not otherwise arbitrary and capricious.


FERC orders issued in 1989 and 1990 authorized Great Lakes, which already operated a 2,000-mile interstate pipeline, to build a series of mainline loops that substantially enlarged the system's shipping capacity and that increased its rate base from $202 million to $953 million. FERC traditionally approved pipelines' proposals to roll expansion costs into their general rates (thereby allocating expansion costs to all users pro rata regardless of the extent to which they use the new facilities) so long as the pipeline could show both that the system was integrated and that qualitative benefits accrued to all customers as a consequence of the expansion. See TransCanada, 24 F.3d at 308 (citing Great Lakes Gas Transmission Co., 45 FERC p 61,237, 61,695 (1988)); Great Lakes Gas Transmission L.P., 57 FERC * 37 61,140, 61,520 (1991), reh'g denied, 62 FERC p 61,101, 61,713 (1993). When FERC reviewed Great Lakes' proposal, however, it abruptly abandoned its traditional standard (called the "Battle Creek test" after the case in which we first approved of its application, see Battle Creek Gas Co. v. FPC, 281 F.2d 42 (D.C.Cir.1960)). Rather than the two-part Battle Creek test, FERC applied a "commensurate benefits" test, in which it compared the cost of expansion with the benefits accruing to existing users. 57 FERC at 61,520-21. Because it found that construction costs far exceeded any consequent benefit to existing users, FERC ordered Great Lakes to price its services incrementally (i.e., recovering expansion costs only from those customers that use the new facilities ("expansion shippers")). See 57 FERC at 61,512; Great Lakes Gas Transmission L.P., 57 FERCp 61,141, 61,534 (1991), reh'g denied, 62 FERC p 61,102,61,731 (1993). The expansion shippers petitioned this court for relief, claiming that FERC's orders were arbitrary, discriminatory, impermissibly retroactive, and issued in violation of the Administrative Procedure Act. See TransCanada, 24 F.3d at 307.

We held that FERC failed to provide a "reasoned explanation" for having abandoned the Battle Creek test and remanded the case. See 24 F.3d at 310. While not holding that the commensurate benefits test was itself invalid, we nonetheless found that FERC's sudden abandonment of Battle Creek required more elaborate explanation and more substantial consideration of the consequences. 1 See id. at 311.

On remand FERC again altered its course. Rather than elaborate its rationales for adopting the commensurate benefits test, FERC reverted to the Battle Creek test and held that rolled-in pricing would be more equitable than incremental pricing. See Great Lakes Gas Transmission L.P., 72 FERC p 61,081, 61,423 (1995). FERC's Chair dissented, arguing that the outcome was inequitable and not mandated by TransCanada. See id. at 61,431-33. The FERC majority justified its return to Battle Creek by finding that the expansion parties had reasonably relied at the time of construction on an expectation that FERC would apply the Battle Creek standard. See id. at 61,427. FERC concluded that its initial decision to apply a commensurate benefits test was "legal error" and ordered "Great Lakes to refund to the expansion shippers the principal amounts that they paid in excess of the lawful systemwide rolled-in rate.... [FERC also] permit[ted] Great Lakes to impose offsetting surcharges on the pre-expansion shippers." Id. at 61,430. FERC found that, in the interests of equity, interest charges should not apply retroactively (though a dispute exists over when interest began to accumulate). See id.

Nonexpansion customers filed a petition for rehearing. FERC rejected the petition, see Great Lakes Gas Transmission L.P., 75 FERC p 61,089, 61,268 (1996), affirming its earlier decision, reemphasizing the significance of the expansion shippers' reliance interest in the application of the Battle Creek standards, and permitting Great Lakes to retain a $15.7 million difference between surcharges and refunds. Id. (The surplus was later recomputed to be $17.5 million. See Great Lakes Gas Transmission L.P., 76 FERC p 61,157, 61,935 n. 29 (1996).) Furthermore, FERC clarified that rolled-in pricing applied to all nonexpansion shippers, regardless of the nature of their shipping contracts. See 75 FERC at 61,293-94. FERC's Chair again dissented. FERC later granted Great Lakes' motion to clarify the interest provisions of the earlier orders, see 76 FERC p 61,926, and held, among other things, that interest began to accrue on all surcharges on October 1, 1995, when rolled-in rates took effect. Id. at 61,936-38. Various parties now petition for review of nearly every element of FERC's orders.

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In TransCanada, we remanded the case to FERC to permit it to elaborate its factual findings and to explain its decision to apply the commensurate benefits test retroactively. See TransCanada PipeLines, 24 F.3d at 310-11; cf. Checkosky v. SEC, 23 F.3d 452, 465 (D.C.Cir.1994) (Silberman, J., concurring) (stating that remand without vacating is proper when court is "unsure and [wants] ... clarification of [the agency's] position and the rationale therefor"). On remand, FERC abandoned the commensurate benefits test and readopted the Battle Creek test. Natural Gas Pipeline of America and a number of other natural gas shippers (collectively "Natural") challenge both FERC's authority to return to the Battle Creek test and its application thereof.


Natural initially contends that FERC's decision to readopt the Battle Creek test was arbitrary and capricious because it misinterpreted TransCanada's mandate, arguing that in TransCanada we remanded solely to permit FERC to clarify its reasoning. While Natural is correct that the remand provided that option, once FERC reacquired jurisdiction, it had the discretion to reconsider the whole of its original decision. See Radio Television S.A. de C.V. v. FCC, 130 F.3d 1078, 1082-83 (D.C.Cir.1997). We therefore reject Natural's contention that FERC misunderstood the ambit of its authority following the TransCanada remand.

Natural next argues that FERC lacked substantial evidence to support its finding that Great Lakes and the expansion shippers had a settled expectation that FERC would apply the Battle Creek test to its review of their Section 4 ratesetting petition. Natural again misunderstands FERC's position. FERC does not purport to have made factual findings regarding the parties' reliance interests. Rather, FERC inferred from the significant costs incurred by Great Lakes in building the expansion facilities that it and the expansion shippers anticipated application of Battle Creek at...

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