ANR Pipeline Co. v. F.E.R.C., 94-1705

• Decision Date: 12 December 1995
• Docket Number: No. 94-1705,94-1705
• Citation: 71 F.3d 897
• Parties: , Util. L. Rep. P 14,071 ANR PIPELINE COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Michigan Consolidated Gas Company, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 897

71 F.3d 897

315 U.S.App.D.C. 189, Util. L. Rep. P 14,071

ANR PIPELINE COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

Michigan Consolidated Gas Company, Intervenor.

No. 94-1705.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 13, 1995.

Decided Dec. 12, 1995.

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

Daniel F. Collins, argued the cause for petitioner, with whom G. Mark Cook and Christine R. Pembroke, were on the briefs.

Katherine Waldbauer, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent, with whom Jerome M. Feit, Solicitor, and Joseph S. Davies, Deputy Solicitor, were on the briefs.

Dennis R. O'Connell, Lois M. Henry and Steven H. Neinast were on the brief for intervenor Michigan Consolidated Gas Company.

Before: HENDERSON, RANDOLPH and ROGERS, Circuit Judges.

ROGERS, Circuit Judge:

Petitioner ANR Pipeline Company ("ANR") appeals from a decision of the Federal Energy Regulatory Commission ("FERC") allowing Michigan Consolidated Gas Company ("MichCon") to use blended rates for interstate service. MichCon, an intrastate gas pipeline company, provides interstate service under FERC jurisdiction pursuant to the Natural Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. Secs. 3301-3432 (1994). ANR, which competes against MichCon to provide the same interstate service, is an interstate gas pipeline company subject to FERC jurisdiction under the Natural Gas Act ("NGA"), 15 U.S.C. Secs. 717-717w (1994). As an interstate pipeline, ANR is required, pursuant to Order No. 636, ¹ to use a straight fixed-variable ("SFV") rate-setting scheme that does not allow rate blending. ANR contends that, in view of FERC's determination in Order No. 636 that blended rates in interstate transportation services are anticompetitive, FERC's refusal to limit MichCon's use of blended rates is arbitrary and capricious. Because FERC is required to ensure, through reasoned consideration, that MichCon's rates for its interstate transportation services are fair and equitable, we grant the petition.

I.

Under the NGA, interstate pipelines such as ANR are subject to FERC regulation while intrastate pipelines operating intrastate generally are not. ² However, in 1978, Congress enacted the NGPA, in part to eliminate the regulatory barriers between the intrastate and interstate markets and to promote the entry of intrastate pipelines into the interstate market. Louisiana Intrastate Gas Corp. v. FERC, 962 F.2d 37, 39 (D.C.Cir.1992); Associated Gas Distributors v. FERC, 824 F.2d 981, 1001 (D.C.Cir.1987) (AGD I ), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988). Thus, the NGPA enabled FERC to " 'facilitate[ ] development of a national natural gas transportation network without subjecting intrastate pipelines, already regulated by State agencies, to [FERC] regulation over the entirety of their operations.' " Associated Gas Distributors v. FERC, 899 F.2d 1250, 1255 (D.C.Cir.1990) (AGD II ) (quoting H.R.REP. NO. 543, 95th Cong., 1st Sess. 45 (1977), reprinted in 1978 U.S.C.C.A.N. 7659, 7712) (alterations in AGD II ).

Section 311 of the NGPA authorizes FERC to allow intrastate pipelines to transport gas "on behalf of" interstate pipelines or local distribution companies served by interstate pipelines so long as their rates are "fair and equitable" and do not "exceed an amount which is reasonably comparable to the rates and charges which interstate pipelines would be permitted to charge for providing similar transportation service." 15 U.S.C. Sec. 3371(a)(2)(A), (B)(i). Thereafter, in Order No. 63, ³ FERC authorized Hinshaw pipelines to apply for certificates of authorization to transport natural gas in interstate commerce to the same extent and in the same manner as intrastate pipelines were allowed to do under Sec. 311 of the NGPA. 18 C.F.R. Sec. 284.224(b)(3) (1995); see also Texas Utils. Fuel Co., 68 F.E.R.C. p 61,027, at 61,095, 61,097 (1994).

Under FERC's Order No. 46, ⁴ adopted in 1978 and 1979 to apply the fair and equitable standard to Sec. 311 service, an intrastate pipeline that has received a blanket certificate to operate "on behalf of" interstate pipelines has three rate-scheme options: it can elect to use rates for comparable service approved by its state utility commission, design its rates based on the methodology approved by its state utility commission for its intrastate rates, or allow FERC to set the rates. 18 C.F.R. Sec. 284.123(b) (1995). Rates elected under any one of these options are "presumed" to be "fair and equitable" under Sec. 311 of the NGPA. Id. Sec. 284.123(d)(1). As part of Order No. 63, FERC also promulgated "look-alike" rules for Hinshaw pipelines, including the rate-election provisions. Id. Sec. 284.224. The regulations for Hinshaw pipelines differ from the regulations for intrastate pipelines in that FERC must further approve any "methodology" rate. Id. Sec. 284.224(e)(2).

In 1980, MichCon, a local distribution company that qualifies as a Hinshaw pipeline, applied for and received a blanket certificate authorizing it to engage in the interstate transportation of gas subject to FERC's jurisdiction under Sec. 311 of the NGPA. Michigan Consol. Gas Co., 12 F.E.R.C. p 61,044, at 61,069-70 (1980); see 18 C.F.R. Sec. 284.224(b). Initially, because MichCon had no rates on file with its state regulatory agency for comparable intrastate service, it used a rate methodology for other intrastate service authorized by the Michigan Public Service Commission and approved by FERC. Michigan Consol. Gas Co., 12 F.E.R.C. p 61,044, at 61,069-70; see 18 C.F.R. Secs. 284.123(b)(1)(i), 284.224(e)(2). MichCon gave notice to FERC in 1994 that it now had a rate on file with the Michigan Public Service Commission for comparable service, and that it was changing its rate election from the "methodology" rate to the new rate on file with the state commission. See 18 C.F.R. Secs. 284.123(b)(1)(ii), 284.224(e)(2). FERC issued a public notice of the proposed rate election, invited comments by intervenors or protestors, see Notice, 59 Fed.Reg. 15,406 (1994), and subsequently granted ANR's motion to intervene.

In commenting on MichCon's election of state rates, ANR argued that FERC should not approve MichCon's petition because the rates on file with the state commission were blended rates otherwise prohibited to interstate competitors of MichCon, such as ANR. Specifically, ANR sought to have FERC condition its approval of MichCon's application of its blended rate authority in a manner consistent with FERC's SFV rate design. Under current FERC regulations adopted in Order No. 636, interstate gas companies must recover all fixed costs related to a customer's gas transportation service through monthly demand, or reservation, fees. ⁵ 18 C.F.R. Sec. 284.8(d) (1995). In the past, under the modified fixed-variable ("MFV") rate design, all variable costs, as well as some portions of a company's fixed costs, were recoverable through usage, or commodity, fees. Order No. 636, at 30,431-35. Thus, a company could "blend" rates by shifting more or less of its fixed costs to the usage component of its rate, thereby having "differing levels of fixed costs in pipeline usage charges." Id. at 30,433. ANR asserts that rate blending gives a company the ability to "discount" its reservation fee, while still recovering fixed costs through the usage component of the rate. By contrast, under the new SFV rate design imposed on interstate pipelines in Order No. 636 to replace the MFV design, an interstate company can no longer "blend" rates. Under SFV, an interstate pipeline cannot shift any of its fixed transportation costs to the usage component of its rate, but must assign all such costs that it wishes to recover to the reservation fee. 18 C.F.R. Sec. 284.8(d); Order No. 636, at 30,434. According to FERC, the prohibition on rate blending promotes Congress' goal, in the Natural Gas Wellhead Decontrol Act of 1989, Pub.L. No. 101-60, 103 Stat. 157 (1989), of a national gas market. Order No. 636 at 30,434. ANR sought to have FERC impose the same condition on MichCon, so that, like ANR, MichCon could no longer recover any fixed costs through usage charges.

During restructuring under Order No. 636, ANR had sought permission to continue to blend rates. However, FERC strictly enforced the SFV requirement on the ground that rate blending would hinder competition among gas sellers. ANR Pipeline Co., 64 F.E.R.C. p 61,140, at 61,996, 62,014-16 (1993). Consequently, in the MichCon proceeding, ANR maintained that, because blended rates would permit MichCon to have the anticompetitive flexibility in discounting the reservation portion of its rate that interstate pipelines did not have, ANR was at a competitive disadvantage, contrary to FERC's statutory obligation to ensure that MichCon's rates for jurisdictional service are fair and equitable.

FERC approved MichCon's election of the blended rates without condition and denied ANR's request for reconsideration. ⁶ Michigan Consol. Gas Co., 68 F.E.R.C. p 61,090, at 61,539 (1994), reh'g granted in part and denied in part, 68 F.E.R.C. p 61,311, at 62,291 (1994). Initially, FERC simply took the position that MichCon had the right under the regulations to elect the state rates; thus, were FERC to modify that rate it would be taking away that right and "imposing a Commission-established rate." Id. at 61,542. On rehearing, FERC explained that, although it had determined in Order No. 636 that SFV was the preferred rate design and had placed a heavy burden on companies proposing an alternative rate design, it had not required intrastate or local distribution companies transporting gas under Sec. 311 of the NGPA to use an SFV rate design and declined to do so now. 68 F.E.R.C. p 61,311, at 62,293. Historically, FERC pointed out, it had never specified any rate design for Sec. 311 pipelines; nor had...