American Gas Ass'n v. F.E.R.C.

• Decision Date: 22 January 2010
• Docket Number: No. 08-1266.,08-1266.
• Citation: 593 F.3d 14
• Parties: AMERICAN GAS ASSOCIATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Interstate Natural Gas Association of America, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

593 F.3d 14

AMERICAN GAS ASSOCIATION, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Interstate Natural Gas Association of America, Intervenor.

No. 08-1266.

United States Court of Appeals, District of Columbia Circuit.

Argued November 17, 2009.

Decided January 22, 2010.

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

Andrew K. Soto argued the cause and filed the briefs for petitioner.

Kathrine L. Henry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were Cynthia A. Marlette, General Counsel, and Robert H. Solomon, Solicitor.

Joan Dreskin, Timm L. Abendroth, and Daniel J. Regan Jr. were on the brief for intervenor Interstate Natural Gas Association of America in support of respondent.

Before: HENDERSON, ROGERS, and BROWN, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge:

The Federal Energy Regulatory Commission (FERC or the Commission) adopted extensive revisions to its financial forms and reporting rules for interstate natural gas pipelines. However, the Commission declined to adopt petitioner's request for additional and more detailed reporting requirements for shipper-supplied gas for pipeline operations. Petitioner, the American Gas Association (AGA)—a national trade association of gas utility companies—argues the Commission failed to engage in reasoned decisionmaking, offering only conclusory and unsupported explanations. Because the Commission failed to respond to the reasonable concerns of a dissenting Commissioner, we grant the petition for review.

I

Pursuant to its authority to ensure "[j]ust and reasonable rates," 15 U.S.C. § 717c(a), the Commission has substantial discretion to prescribe rules and regulations concerning "annual and other periodic or special reports," and to determine "the manner and form in which such reports shall be made," id. § 717i(a). FERC requires natural gas companies to file either FERC Form No. 2 (Form 2), Annual Report for Major Natural Gas Companies, 18 C.F.R. § 260.1, or FERC Form No. 2-A (Form 2-A), Annual Report for Nonmajor Natural Gas Companies, id. § 260.2. All natural gas companies also must file FERC Form No. 3-Q (Form 3-Q), Quarterly Financial Report of Electric Utilities, Licensees and Natural Gas Companies, id. § 260.300.

After determining a pipeline's existing rate is "unjust, unreasonable, unduly discriminatory, or preferential," FERC is authorized to change the pipeline's rates, either upon its own motion or in response to a complaint. 15 U.S.C. § 717d(a). The Commission relies on investigations and complaints under section 5 of the Natural Gas Act (NGA), id., to monitor pipeline rates, especially since the Commission no longer reviews rates triennially, as it once did. See Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission's Regulations, and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 636, Jan. 1991-June 1996 FERC Stats. & Regs. Preambles ¶ 30,939 (1992), order on reh'g, Order No. 636-A, Jan. 1991-June 1996 FERC Stats. & Regs. Preambles ¶ 30, 950 (1992), order on reh'g, Order No. 636-B, 61 FERC ¶ 61,272 (1992) (Order 636); see also Complaint Procedures, Order No. 602, 86 FERC ¶ 61,324, 1999 WL 177650, at *2 (1999) (noting "[c]omplaints enable the Commission to monitor activities in the marketplace and provide an early warning system for identifying potential problems"). FERC or the complaining customer has the burden of showing the existing rate or practice is unjust or unreasonable and that the rate proposed is just and reasonable. See, e.g., Transcon. Gas Pipe Line Corp. v. FERC, 518 F.3d 916, 918 (D.C.Cir.2008). Both rely on pipeline data reported on Forms 2, 2-A, and 3-Q as the basis for initiating section 5 complaints and satisfying their burden of proof. See, e.g., Pub. Serv. Comm'n of N.Y. v. Nat'l Fuel Gas Supply Corp., 115 FERC ¶ 61,299 at 62,072, 2006 WL 1557208 (2006); Panhandle Complainants v. SW Gas Storage Co., 117 FERC ¶ 61,318 at 62,540, 62,542 (2006). If the Commission or the complainant succeeds, FERC can order a new just and reasonable rate to replace the existing one. See 15 U.S.C. § 717d(a).

II

In February 2007, the Commission opened an inquiry to determine "whether the . . . annual and quarterly financial forms provide[d] sufficient information to the public to permit an evaluation of the filers' jurisdictional rates, and whether these forms should otherwise be modified to improve their usefulness." Assessment of Information Requirements for FERC Financial Forms, 118 FERC ¶ 61,108, 2007 WL 494954, at *1 (2007). Seven months later, the Commission proposed rules amending the financial reporting requirements of natural gas companies. See Revisions to Forms, Statements, and Reporting Requirements for Natural Gas, 72 Fed.Reg. 54,860 (proposed Sept. 20, 2007) (to be codified at 18 C.F.R. pts. 158, 260) (NOPR). The stated purpose of the proposed amendments was to "provide pipeline customers, state commissions, and the public the information they need to assess the justness and reasonableness of pipeline rates." Id. at 54,860. Noting the decline in section 4 filings since the elimination of triennial rate review, the Commission affirmed its reliance on section 5 complaints and concluded a section 5 complainant "must have access to the information needed to meet [the burden of proof]." Id. at 54,861. Specifically, the Commission determined the data on Forms 2, 2-A, and 3-Q "must be sufficient to support a complaint." Id.

Pipelines consume fuel when they operate equipment that transports gas through pipelines and in and out of storage facilities, but they also incur a certain amount of lost-and-unaccounted-for gas through leakage and meter errors. Years ago, FERC required interstate pipelines to "unbundle" the transportation and sales components of their services and separately state the rates and charges for the services they provide. See Order 636. In the Commission's view, customers should only pay for the services they use. See Panhandle Eastern Pipeline Co., 61 FERC ¶ 61,172 at 61,628 (1992). FERC generally allows pipelines to recover separately the cost of fuel used to provide various services by requiring customers to pay a fuel charge equal to a certain fuel retention percentage.

In an earlier proceeding FERC asked whether fuel cost recovery policies should be modified. See Fuel Retention Practices of Natural Gas Companies, 120 FERC ¶ 61,255, 2007 WL 2758903 (2007). The Commission found pipelines were retaining or carrying over enormous fuel costs ($711 million in 2005) beyond what was consumed, lost, or unaccounted for. See id. at *3. The Commission, however, declined to take any immediate action, instead stating it would rely on section 5 complaints from pipeline customers to monitor over-recovery. Fuel Retention Practices of Natural Gas Companies, 125 FERC ¶ 61,213, 2008 WL 4962560, at *3 (2008).

In the NOPR here, the Commission noted that with increased gas prices, the disposition of fuel has become an important component of pipelines' cost of transportation. See NOPR, 72 Fed.Reg. at 54,865-66. The Commission therefore proposed adding a new schedule to Forms 2, 2-A, and 3-Q (new pages 521a and 521b) requiring pipelines to report detailed information regarding the acquisition and disposition of shipper-supplied gas. Id. at 54,866. The new schedule, the Commission believed, would help users of the Forms more readily determine whether pipelines are over-recovering their revenue requirements. Under the proposed rule, pipelines would be required to report: (1) the difference between the volume of gas received from shippers and the volume of gas consumed in pipeline operations each month; (2) the disposition of any excess gas and the accounting recognition given to such disposition, including the basis of valuing the gas and the specific accounts charged or credited; and (3) the source of gas used to meet any deficiency and the accounting recognition given to the gas used to meet the deficiency, including the accounting basis of the gas and the specific accounts charged or credited. Id. In addition, "in order to provide more clarity for gas purchase activity," the Commission also proposed requiring pipelines, which had previously only been required to report volumes of gas purchases in the aggregate, to report the volumes applicable to each of their gas purchase expense accounts. Id.

The Commission also acknowledged that additional reporting might be necessary to protect pipeline customers from cross-subsidization of discounted, negotiated, or recourse rates. See, id. at 54,867. Although FERC permits pipelines to discount their generally applicable rates where competitive market conditions warrant, see 18 C.F.R. § 284.10(c)(5); see also United Distrib. Cos. v. FERC, 88 F.3d 1105, 1142 (D.C.Cir.1996), and to negotiate individualized rates, see Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61,076, 1996 WL 694658 (1996), FERC regulations restrict pipelines' ability to charge a different fuel rate than the generally applicable one established in the tariff. With respect to discounted rates, pipelines cannot discount the fuel use component unless they can demonstrate the relevant service does not use fuel. See, e.g., Ozark Gas Transmission, LLC, 122 FERC ¶ 61,295, 2008 WL 825306, at *3 (2008). Moreover, under FERC's "negotiated rate" policy, pipelines cannot impose cross-subsidized fuel costs on their existing, non-negotiated rate customers. See generally Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61,076. Instead, pipelines must bear the cost of any under-recovery of their costs themselves. See Dominion Transmission, Inc. v. FERC, 533 F.3d 845, 849 n. 4 (D.C.Cir. 2008)....