Acadian Gas Pipeline System v. F.E.R.C., 88-4502

• Decision Date: 03 August 1989
• Docket Number: No. 88-4502,88-4502
• Citation: 878 F.2d 865
• Parties: ACADIAN GAS PIPELINE SYSTEM, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 865

878 F.2d 865

ACADIAN GAS PIPELINE SYSTEM, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 88-4502.

United States Court of Appeals Fifth Circuit.

Aug. 3, 1989.

Priscilla A. Mims, Paul E. Goldstein, Philip R. Telleen, Lombard, Ill., for Acadian Gas Pipeline Sys.

Tim Abendroth, Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., for F.E.R.C.

Petition for Review of an Order of the Federal Energy Regulatory Commission.

Before CLARK, Chief Judge, BROWN, and JOHNSON, Circuit Judges.

JOHNSON, Circuit Judge:

Acadian Gas Pipeline System appeals an order of the Federal Energy Regulatory Commission (Commission) requiring Acadian to file petitions for rate approval under section 284.123(b)(2) of Commission regulations. The Commission's exegesis of this section is that it requires a separate petition for rate approval for each newly instigated service despite previous approval of a systemwide rate. Because we find that this interpretation is arbitrary and capricious, we vacate the Commission's order and remand for further proceedings consistent with this opinion.

REGULATORY OVERVIEW

Section 311(a)(2) of the Natural Gas Policy Act (NGPA) vests the Commission with the power to authorize an intrastate pipeline to transport natural gas on behalf of interstate pipelines without triggering the Commission's jurisdiction under the Natural Gas Act (NGA). The rates the intrastate pipeline may charge for this service are subject to a determination of being fair and equitable. Specifically, a regulation initially adopted by the Commission in 1978, 18 C.F.R. Sec. 284.123 (1987), prescribes the methods available for calculating rates for the transportation of natural gas. Section 284 sets forth a bifurcated system whereby the intrastate pipeline may either elect one of several forms of state-based rates ¹ or, if the pipeline chooses not to employ one of the enumerated state-based methods, the pipeline may file for Commission approval of the proposed rates and charges pursuant to section 284.123(b)(2). This section indicates that if the pipeline

does not choose to make any electon under paragraph (b)(1) of this section, it shall apply for Commission approval, by order, of the proposed rates and charges by filing with the Commission the proposed rates and charges, and information showing the proposed rates and charges are fair and equitable.

In 1984, section 284 was amended to specify that whenever a pipeline elects to apply to the Commission for approval of its proposed rate, it must accompany its filing with a fee. 18 C.F.R. Sec. 284.123(b)(2)(i) (1987).

THE INSTANT CASE

Acadian is an intrastate pipeline operating in southern Louisiana. Acadian (and its predecessor Sugar Bowl Gas Corporation) have been providing section 311 transportation service since 1980. Sugar Bowl first sought approval for its section 311 transportation service in 1980. Sugar Bowl filed two separate applications pursuant to section 284.123(b)(2) for two discrete transactions involving section 311 transportation service for two interstate pipelines. The Commission accepted and approved a rate of 15.5 cents per MMBtu. Sugar Bowl On May 22, 1985, the Commission issued an order authorizing an extension of another section 311 service. ⁴ In this order, the Commission stated that because three years had passed since the last review of Acadian's rate, a new rate proceeding was being instituted in order to determine if the 15.5 cent per MMBtu rate remained fair and equitable. Additionally, the order consolidated all of Acadian's then on-going section 311 transportation services for which initial reports had been filed. The Commission indicated that further transportation in the consolidated dockets would be subject to refund based on the outcome of the rate proceeding being instituted. The Commission, citing Howell Pipeline Co., Inc., 23 FERC at 61,267 (1983), reiterated the Commission's already established policy requiring triennial review of rates determined pursuant to section 284.123(b)(2). Acadian Gas Pipeline System, Docket Nos. ST83-442-001, et al., 31 FERC at 61,195 (1985).

                Gas Corp., 18 FERC at 62,284 (1984).  Thereafter, Sugar Bowl, and later Acadian, 2 continued to utilize the 15.5 cent rate, and to report such rate to the Commission in the initial reports filed to establish new services. 3   Until the transactions involved in the case sub judice occurred, neither Acadian nor Sugar Bowl filed separate petitions for rate approval for each new service provided
                

Acadian filed for rehearing of the ST83-442-001 order, requesting that the rate proceeding be held in abeyance pending the outcome of the Commission's ruling on Acadian's rate election in another transaction. Without addressing the merits of Acadian's request for rehearing, the Commission entered a letter order on September 18, 1985, in Docket Nos. ST83-442-001 et al., which approved the 15.5 cent systemwide rate and extinguished any existing refund obligation. The order accepted Acadian's proposed rate and indicated that "Acadian may charge a transportation rate of up to 15.5 cents per MMBtu for transportation in all Section 311 transactions." The order further admonished that "[w]ithin three years from the date of this order, Acadian shall file an application pursuant to Section 284.123(b)(2) of the regulations to justify its existing system-wide transportation rate approved herein or to justify a changed system-wide transportation rate." Acadian Gas Pipeline System, 32 FERC p 61,499 at 62,141 (1985).

Shortly before the issuance of the September 18 letter order, ⁵ Acadian filed initial reports for new section 311 transportation services. On October 9, 1985, the Director sent a letter to Acadian stating that if Acadian was not eligible for the self-implementing state rate options described in section 284.123(b)(1), then Acadian must file a petition for rate approval pursuant to Sec. 284.123(b)(2). Acadian responded by citing to the September 18 letter order: it argued that since the Commission had just approved a 15.5 cent rate, the petition for rate approval was not necessary. Thereafter, the Director issued an order rejecting the initial reports filed by Acadian for the reason that the filing was not consistent with Commission regulations since no

                petition for rate approval was included. 6   Acadian appealed the Director's action to the Commission, which denied the appeal.  Acadian Gas Pipeline System, 35 FERC p 61,132 (1986).  On May 20, 1988, the Commission rejected Acadian's application for rehearing, Acadian Gas Pipeline System, 43 FERC p 61,296 (1988), and this appeal followed
                

SUMMARY OF THE ISSUES

Acadian contends that the Commission erred on either of two alternative grounds. First, it argues that the Commission's holding that section 284.123(b)(2) requires petitions for rate approval be filed for each new section 311 transportation service, even where a systemwide rate has been approved, is a new substantive rule of general applicability to which the Administrative Procedure Act (APA) and the Regulatory Flexibility Act (RFA) apply. Alternatively, Acadian argues that the Commission's interpretation of that section is inconsistent with past practice and serves no valid purpose; because the Commission failed to justify its departure from past practice, the new interpretation cannot be imposed against Acadian.

The function of judicial review of agency action is to determine the authority of the agency, compliance by the agency with the appropriate procedural requirements, and to review any claim that agency action is arbitrary, capricious, or an abuse of discretion. ⁷ Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). Because we ultimately agree with Acadian that the Commission's newly stated interpretation is an arbitrary, capricious departure from past practice, we decline to reach the issue of APA or RFA applicability.

DISCUSSION

It is well settled that an agency's interpretation of its own regulations is owed substantial deference. Udall v. Tallman, 380 U.S. 1, 16, 85 S.Ct. 792, 801, 13 L.Ed.2d 616 (1965); Clevepak Corp. v. E.P.A., 708 F.2d 137 (4th Cir.1983). While the judiciary begins with a presumption that agency action is valid, a court's review should not be categorized as a summary endorsement of the agency's actions. A reviewing court does not serve the function of a mere rubberstamp of agency decisions. See United States v. Garner, 767 F.2d 104 (5th Cir.1985); Lead Industries Assoc., Inc. v. E.P.A., 647 F.2d 1130 (D.C.Cir.1980); Diplomat Lakewood, Inc. v. Harris, 613 F.2d 1009 (D.C.Cir.1979). Rather, a court's review of agency actions should be searching and careful. NAACP v. FCC, 682 F.2d 993 (D.C.Cir.1982). While an agency interpretation of a regulation is entitled to due deference, the interpretation must rationally flow from the language of the regulation, and any departure from past interpretations of the same regulation must be adequately explained and justified.

Where an agency has acted arbitrarily or capriciously, a reviewing court is bound to set aside the agency action. Where an agency fails to distinguish past practice, its actions may indicate that lack of reasoned articulation and responsibility that vitiates the deference the reviewing court would otherwise show. See, e.g., Local 777, Democratic Union Organizing Committee v. NLRB, 603 F.2d 862 (D.C.Cir.1978).

In the instant case, the Commission has failed to acknowledge even that a departure from past practice has occurred despite acknowledging that, prior to the transactions involved in the instant case, Acadian was not required to file separate petitions for rate approval in order to instigate new section 311 services. Rather, the Commission, in its Order Denying Rehearing, pointed to an underlying change in the filing fee requirements as justification for requiring separate petitions for rate approval. The...