Process Gas Consumers Group v. F.E.R.C., 01-1151.

• Decision Date: 14 June 2002
• Docket Number: No. 01-1151.,01-1151.
• Citation: 292 F.3d 831
• Parties: PROCESS GAS CONSUMERS GROUP, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Tennessee Gas Pipeline Company and East Tennessee Group, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

292 F.3d 831

PROCESS GAS CONSUMERS GROUP, et al., Petitioners v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Tennessee Gas Pipeline Company and East Tennessee Group, Intervenors.

No. 01-1151.

United States Court of Appeals, District of Columbia Circuit.

Argued May 14, 2002.

Decided June 14, 2002.

On Petition for Review of Orders of the Federal Energy Regulatory Commission.

James M. Bushee argued the cause for petitioners and supporting intervenors. With him on the briefs were Barbara K. Heffernan, Debra Ann Palmer, Roy R. Robertson Jr., Jennifer N. Waters, Edward J. Grenier Jr. and Joshua L. Menter.

Lona T. Perry argued the cause for respondent. On the brief were Cynthia A. Marlette, General Counsel, Federal Energy Regulatory Commission, Dennis Lane, Solicitor, and Laura J. Vallance, Attorney.

G. Mark Cook and Howard L. Nelson were on the brief for intervenor Tennessee Gas Pipeline Company. Shemin V. Proctor entered an appearance.

Before: GINSBURG, Chief Judge, RANDOLPH and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

Petitioners challenge the Federal Energy Regulatory Commission's approval of Tennessee Gas Pipeline Company's proposed method for awarding pipeline capacity and allocating meter amendments. Finding that the Commission engaged in reasoned decision making with respect to both issues, we affirm.

I.

The Natural Gas Act ("NGA"), 15 U.S.C. §§ 717, et seq., requires that natural gas companies charge "just and reasonable" rates for the transportation and sale of natural gas. Id. § 717c(a). To promote compliance with this mandate, the Act requires gas pipelines to file rate schedules with the Federal Energy Regulatory Commission and to notify the Commission of any subsequent changes in rates and charges. Id. § 717c(c), (d). On submission of a tariff revision, the Commission may hold a hearing to determine whether the pipeline has met its burden to show that the amended rates and charges are "just and reasonable." Id. § 717c(e).

This case involves a proposed tariff revision that Tennessee Gas Pipeline Company ("Tennessee") filed with FERC in 1996. In that revision, the company proposed adopting a net present value, or "NPV," method to allocate pipeline capacity and to process so-called "meter amendments." Two aspects of the revision are relevant here: whether Tennessee must impose a cap on the length of bids for pipeline capacity, and whether it must credit existing gas shippers' contracts for mainline capacity in evaluating meter amendment requests. We considered both issues in Process Gas Consumers Group v. FERC ("PGC I") and, finding FERC's reasoning defective, remanded to the Commission for further proceedings. 177 F.3d 995, 997 (D.C.Cir.1999). Here, we explain each issue in turn, first outlining FERC's original position, then summarizing our decision in PGC I, and finally describing the Commission's orders on remand — the subject of this petition.

Capacity Allocation

Tennessee transports natural gas through a pipeline system stretching from the Gulf of Mexico to New England. Historically, the company awarded "firm capacity" — transportation for which the pipeline guarantees delivery, as distinct from "interruptible capacity," for which delivery can be delayed if and when the pipeline has insufficient capacity to meet all customers' demands, see PGC I, 177 F.3d at 997 n. 1 (internal quotation marks and citation omitted) — on a first-come, first-served basis. The first shipper to submit a request received the available capacity, even if the shipper requested service for only a few days or weeks while others sought transportation for longer periods.

Recognizing the inefficiency of this capacity allocation method, Tennessee's 1996 tariff revision proposed adoption of an NPV method, under which the company would announce an "open season" whenever it wanted to sell capacity, accept a range of bids, compare the bids by discounting the value of each bid to the present, and accept the bid with the highest NPV. This new system, the pipeline argued, would permit it to award firm capacity to those shippers who value the capacity most — that is, since rates are capped, to those shippers offering the longest contracts.

Responding to Tennessee's proposal, various parties, including petitioner Process Gas Consumers Group, an association of industrial users of natural gas, warned that although FERC sets the maximum rate Tennessee may charge for transporting gas, the pipeline could exercise its market power to induce shippers to bid for longer contracts than they would in a competitive market. In other words, the commenters worried that shippers would "us[e] long contract duration as a price surrogate to bid beyond the maximum approved rate," United Distribution Cos. v. FERC, 88 F.3d 1105, 1140 (D.C.Cir.1996) ("UDC"), thereby giving Tennessee insurance against future instability in the natural gas market. The commenters urged FERC to address this concern by capping the duration of bids Tennessee could consider in its NPV calculations, "to simulate the end product of a competitive market." PGC I, 177 F.3d at 998.

Ultimately, FERC approved Tennessee's proposed switch from the first-come, first-served to the NPV approach. Tenn. Gas Pipeline Co., 76 F.E.R.C. ¶ 61,101, at 61,522 (1996). In response to the commenters' market power concerns, however, the Commission suggested that the pipeline "include a uniform cap" on the length of bids submitted during open seasons. Id. at 61,519. Acquiescing, Tennessee proposed a twenty-year cap, explaining that it chose such a high cap because "bids beyond the [twentieth] year are unlikely to have a significant impact on the NPV analysis." PGC I, 177 F.3d at 998-99 (internal quotation marks and citation omitted).

Following another comment period, FERC approved the twenty-year cap. The Commission dismissed Process Gas's objection that the cap was too long to provide adequate protection against the pipeline's market power on the ground that "`[b]idders are not forced into the maximum duration [of twenty years].... Rather, the primary issue here, is ... when two shippers both desire new capacity should that capacity go to a shipper who values it more, i.e., for a longer term, than another shipper who might value it less.'" Id. at 999-1000 (quoting Tenn. Gas Pipeline Co., 79 F.E.R.C. ¶ 61,297, at 62,339 (1997)). Unsatisfied with this response, Process Gas filed a petition for review, contending that FERC "failed to engage in reasoned decision making" in accepting the twenty-year cap. Id. at 997.

In our first encounter with these issues in PGC I, we found Process Gas's argument persuasive. Noting FERC's acknowledgment that "the market served by Tennessee's pipeline has monopolistic characteristics," we held that the Commission had not adequately justified its conclusion that a twenty-year cap would "prevent the NPV method from compelling shippers to offer the pipeline longer contracts than they would in a competitive market." Id. at 1003. We pointed out that the data on which FERC based its approval of the cap — "three previous Commission decisions involving ten and fifteen year ... agreements" — in fact suggested that "competitive market contracts typically run to no more than fifteen years." Id. In light of that evidence, we continued, "a twenty-year cap would allow Tennessee's market power to induce excessively long bids." Id. We recognized the legitimacy of FERC's "goal of encouraging the allocation of pipeline capacity to parties willing to pay the most for it," but reminded the Commission of its "need to balance th[at] goal with its duty to prevent exploitation of Tennessee's monopoly power." Id. at 1004. Observing that "the orders suggest... FERC approved the twenty-year cap because, functionally, twenty years would amount to no cap at all," we remanded to the Commission, directing it to "take the problem [of Tennessee's monopoly power] seriously and confront it with a forthright explanation of why a twenty-year cap would not augment that power." Id. at 1005.

FERC then took an entirely different tack. Noting that when orders are remanded, an agency generally has "discretion to reconsider the whole of its original decision," Tenn. Gas Pipeline Co., 94 F.E.R.C. ¶ 61,097, at 61,398 (2001) ("Rehearing Order") (internal quotation marks and citation omitted), aff'g 91 F.E.R.C. ¶ 61,053 (2000) ("Remand Order"), FERC not only declined to impose a shorter cap on capacity bids, but removed the cap altogether, explaining that, for various reasons, there is little risk that Tennessee will exercise its monopoly power to force shippers into excessively long contracts. Process Gas sought rehearing, but the Commission denied its petition. Rehearing Order, 94 F.E.R.C. at 61,401.

Meter Amendments

The second relevant aspect of Tennessee's 1996 tariff revision involves meter amendments. PGC I explained this term as follows:

When natural gas is shipped through a pipeline, the points at which the gas enters and leaves the system are called "receipt" and "delivery" points, respectively. A firm transportation shipper selects "primary" receipt and delivery points ... [as] part of its contract with the pipeline. Designating a point as primary guarantees the shipper use of the point, an important right when the pipeline lacks sufficient capacity at the point to satisfy demand. Firm shippers can select other points on a secondary basis, but can only use those points if there is sufficient capacity beyond that taken by shippers using them on a primary basis. A change in a primary receipt or delivery point is ... referred to as a "meter amendment" because gas is measured at these points.

177 F.3d at 1000.

The issue here concerns Tennessee's method for allocating new primary points as they become available. Historically, Tennessee permitted existing shippers to switch primary points on a first-come, first-served basis as long as...