Tennessee Gas Pipeline Co. v. F.E.R.C.

• Decision Date: 11 March 2005
• Docket Number: No. 03-1452.,03-1452.
• Citation: 400 F.3d 23
• Parties: TENNESSEE GAS PIPELINE COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent PSEG Energy Resources & Trade LLC, et al., Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 23

400 F.3d 23

TENNESSEE GAS PIPELINE COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent PSEG Energy Resources & Trade LLC, et al., Intervenors

No. 03-1452.

United States Court of Appeals, District of Columbia Circuit.

Argued February 18, 2005.

Decided March 11, 2005.

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

Howard L. Nelson argued the cause and filed the briefs for petitioner. Janice A. Alperin entered an appearance.

Dennis Lane, Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief was Cynthia A. Marlette, General Counsel. Lona T. Perry, Attorney, entered an appearance.

Before: EDWARDS and ROGERS, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge.

Tennessee Gas Pipeline Company petitions for review of three Orders of the Federal Energy Regulatory Commission requiring revision of its tariff to provide that shippers are not responsible for full reservation charges after service is suspended. In effect, Tennessee challenges the propriety of the Commission's determination that, as a matter of policy, it will not allow pipelines to collect full reservation charges from shippers whose service has been suspended. Because the Commission's policy is not arbitrary or capricious or contrary to law, we deny the petition.

I.

On August 16, 2002, Tennessee made a filing under section 4 of the Natural Gas Act ("NGA"), 15 U.S.C. § 717c (2000), to amend its tariff. Among other revisions, it sought to clarify the credit evaluation provisions by adding the following provision: "Regardless of whether Shipper is insolvent, has lost its creditworthiness status or does not desire to continue service with Transporter, Shipper shall continue to be liable for all charges due under its service agreement and associated rate schedule." Following a technical conference and public comment, the Commission conditionally accepted Tennessee's creditworthiness proposal, subject to Tennessee filing revised tariff sheets incorporating certain modifications. Tenn. Gas Pipeline Co., 102 F.E.R.C. ¶ 61,075, 2003 WL 241378 (Jan. 29, 2003) ("First Order"). The Commission stated:

While Tennessee's tariff does not give it the right to collect charges for service after a contract is terminated, it is unclear what happens when a contract is suspended. When service is suspended, a shipper's service is stopped and that shipper should not be held responsible for future charges. Certainly the shipper must pay Tennessee for service up to the date service was suspended, but they [sic] are not responsible for charges after Tennessee suspended service. Tennessee is required to revise its tariff to provide that shipper's [sic] are not responsible for charges after service is suspended.

Id. at 61,195.

Tennessee sought rehearing on the ground that the Commission failed to meet its burden under section 5 of the NGA, 15 U.S.C. § 717d, to show that Tennessee's then-current tariff language was unjust or unreasonable and that the Commission's proposed change was not unjust and unreasonable. Tennessee argued that "[r]eserving the firm capacity without payment of the reservation charge is at complete odds not only with the fundamental premise of a firm transportation contract, but with the whole Part 284 regulatory scheme." Request for Rehearing, at 5 (Feb. 28, 2003). The Commission denied rehearing, affirming that Tennessee shippers should not be billed for reservation charges after service is suspended. Tenn. Gas Pipeline Co., 103 F.E.R.C. ¶ 61,275, 2003 WL 21293953 (June 4, 2003) ("Second Order"). The Commission explained: "If the pipeline elects to suspend service, it cannot bill for service that it does not offer to provide, but the pipeline would be able to sue the shipper for the consequential, unmitigated damages caused by its contractual breach." Id. at 62,066. The Commission noted that it "has affirmed its policy in two recent order[s]," id. at 62,066 n. 70 (citing PG & E Gas Transmission, Northwest Corp., 103 F.E.R.C. ¶ 61,137, 2003 WL 21026796 (2003); Gulf South Pipeline Co., 103 F.E.R.C. ¶ 61,129 (2003)). While ruling that section 5 of the NGA was inapplicable because "Tennessee points to no current tariff provision that permits it to bill during service suspension, which is consistent with Commission policy," id. at 62,067, and requiring Tennessee's tariff, in order to ensure that tariff silence would not be misunderstood, specifically to reflect "the status quo" that Tennessee has no authority to bill shippers for service during suspension, id., the Commission also ruled that "for the reasons discussed," see id. at 62,066, billing shippers during suspension is unjust and unreasonable under section 5 of the NGA, id. at 62,067. The Commission, in relevant part, denied Tennessee's further request for rehearing. Tenn. Gas Pipeline Co., 105 F.E.R.C. ¶ 61,120, 2003 WL 22424964 (Oct. 24, 2003) ("Third Order"). Tennessee petitions for review of the three Orders.

II.

The court may set aside the Commission's orders only if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A) (2000). "[T]he Commission must be able to demonstrate that it has `made a reasoned decision based upon substantial evidence in the record.'" Northern States Power Co. (Minnesota) v. FERC, 30 F.3d 177, 180 (D.C.Cir.1994) (quoting Town of Norwood v. FERC, 962 F.2d 20, 22 (D.C.Cir.1992)). The court's review of Commission policy is "highly deferential" because "`the breadth of agency discretion is, if anything, at [its] zenith when the action assailed relates primarily... to the fashioning of policies, remedies and sanctions.'" Columbia Gas Transmission Corp. v. FERC, 750 F.2d 105, 109 (D.C.Cir.1984) (alteration in original) (quoting Niagara Mohawk Power Corp. v. FPC, 379 F.2d 153, 159 (D.C.Cir.1967)); see also Northern Mun. Distribs. Group v. FERC, 165 F.3d 935, 941 (D.C.Cir.1999).

Because the Commission acknowledged in the Second Order, 103 F.E.R.C. at 62,066 n. 70, that it had established a policy in the First Order, the court need not examine Tennessee's challenge to the Commission's determination that Tennessee's pre-existing tariff did not allow it to collect full reservation charges from a shipper whose service had been suspended, nor whether the Commission was required to proceed under sections 4 or 5 of the NGA in ordering Tennessee to modify its tariff. Even assuming the Commission has the burden of proof, as it would under section 5, we hold that the Commission's policy is reasonable and entitled to deference.

Reservation charges are the portion of a two-part rate (with usage charges being the other component) through which a pipeline may collect fixed costs attributable to firm transportation service. See 18 C.F.R. § 284.7(e) (2004). According to Tennessee, the Commission generally requires pipelines to utilize a straight fixed variable ("SFV") rate design under which all fixed costs are included in the reservation charge and all variable costs are included in the usage charge. "A firm transportation customer must pay the reservation charge on the capacity it reserves whether or not it uses the capacity. It pays the usage charge only to the extent it actually uses its reserved capacity." Altamont Gas Transmission Co., 69 F.E.R.C. ¶ 61,034, 61,134, 1994 WL 557407 (1994). "Therefore, under SFV, the pipeline's fixed costs are at risk only to the extent it has unreserved capacity." Id. However, Tennessee states that its rates vary from SFV because twelve percent of its transmission cost of service is recovered in the usage charge. See Tenn. Gas Pipeline Co., 77 F.E.R.C. ¶ 61,083, 61,355-59, 1996 WL 808139 (1996). Tennessee therefore maintains that during a suspension it will lose even more revenues than a pipeline whose rates are based on a pure SFV rate design.

During suspension, a shipper cannot transport gas on the pipeline although it remains entitled to the contracted capacity. Northern Natural Gas Co., 103 F.E.R.C. ¶ 61,276, 62,076, 2003 WL 21293955 (2003). Under Tennessee's tariff, once a shipper loses its creditworthiness status, it may continue to use its reserved capacity so long as it provides at least one of four assurances to the pipeline, such as an irrevocable letter of credit verifying the shipper's creditworthiness or a prepayment for service. See Tennessee Tariff § 4.4; First Order, 102 F.E.R.C. at 61,193. Consequently, the key difference between the entitlements of the suspended shipper and unsuspended shipper is that service for the suspended shipper is subject to the shipper in some way filling whatever apparent gap in creditworthiness caused the suspension, sometimes including making an advance payment to the pipeline in order to use reserved capacity.

Tennessee's position is that it should be allowed to collect the reservation charge during a shipper's suspension because the pipeline must reserve capacity, which will be available to the shipper when it cures its contractual default. The obligation to reserve shipper capacity, Tennessee maintains, is a continuing service of value that the pipeline provides to the suspended shipper, and the shipper, as the recipient of that "hold" service, should be required to pay the reservation (or demand) charge. Otherwise, Tennessee asserts, it will suffer a non-recoverable loss because it is foregoing its ability to resell capacity to another firm shipper. Imposing reservation charges during suspension is reasonable, Tennessee contends, because the pipeline should be paid for the service it continues to provide; conversely, a shipper is not responsible for usage charges during a period of suspension. Tennessee's position that a suspended shipper should pay the reservation charge is, then, a claim for payment of the full reservation charge during suspension...