Canadian Assoc. of Petroleum Producers v. Fed. Energy Reg. Comm'n, 96-1336

• Decision Date: 13 July 2001
• Docket Number: 99-1488,97-1343,00-1391,00-1019,No. 96-1336,96-1336
• Citation: 254 F.3d 289
• Parties: (D.C. Cir. 2001) Canadian Association of Petroleum Producers, Petitioner v. Federal Energy Regulatory Commission, Respondent Inland Pacific Energy Services Corporation, et al., Intervenors Canadian Association of Petroleum Producers, et al. Petitioners v. Federal Energy Regulatory Commission, Respondent Northwest Pipeline Corporation, et al., Intervenors , and 00-1399
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 289

254 F.3d 289 (D.C. Cir. 2001)

Canadian Association of Petroleum Producers, Petitioner v. Federal Energy Regulatory Commission, Respondent Inland Pacific Energy Services Corporation, et al., Intervenors Canadian Association of Petroleum Producers, et al. Petitioners v. Federal Energy Regulatory Commission, Respondent

Northwest Pipeline Corporation, et al., Intervenors

No. 96-1336, 97-1343, 99-1488, 00-1019, 00-1391, and 00-1399

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 9, 2001

Decided July 13, 2001

[Copyrighted Material Omitted]

On Petitions for Review of Orders of the Federal Energy Regulatory Commission

James H. Holt argued the cause for petitioner Canadian Association of Petroleum Producers and supporting intervenors Northwest Natural Gas Company, et al. in No. 96-1336. With him on the briefs were Jill M. Barker, Robert A. Nelson, Jr. and Paula E. Pyron. Sandra E. Rizzo and Edward A. Finklea entered appearances.

Robert A. Nelson, Jr. argued the cause and filed the briefs for petitioner Northwest Natural Gas Company in No. 97-1343.

Judith A. Albert, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent in Nos. 96-1336 and 97-1343. With her on the brief were Jay L. Witkin, Solicitor at the time the brief was filed, and Susan J. Court, Special Counsel. Janet K. Jones, Attorney, entered an appearance.

Alex A. Goldberg argued the cause for intervenor Northwest Pipeline Corporation in Nos. 96-1336 and 97-1343. With him on the brief was Steven W. Snarr.

Robert A. Nelson Jr. argued the cause for petitioners in No. 99-1488 et al. With him on the briefs were Edward A. Finklea and James H. Holt.

Judith A. Albert, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent in No. 99-1488 et al. With her on the brief was Dennis Lane, Solicitor. Susan J. Court, Special Counsel, entered an appearance

Alex A. Goldberg argued the cause for intervenor Northwest Pipeline Corporation in No. 99-1488 et al. With him on the brief were Steven W. Snarr and Timothy Muller.

Before: Williams, Ginsburg and Rogers, Circuit Judges.

Williams, Circuit Judge:

On October 1, 1992 Northwest Pipeline Corporation ("Northwest") filed for a general rate increase under 4 of the Natural Gas Act, 15 U.S.C. 717c, to cover costs associated with a previously authorized expansion of its natural gas pipeline facilities. The Federal Energy Regulatory Commission rejected certain proposed tariffs, accepted and suspended other proposed tariffs subject to refund, and set an evidentiary hearing. Almost a decade later, in two different consolidated cases, petitioners are seeking review of the relevant rate increase, which because of later filings by Northwest was in effect only from April 1, 1993 through October 31, 1994.

One of the cases involves issues that were resolved before we remanded to the Commission to consider the effect of a Commission policy change, the other involves issues resolved in the course of that remand. The first, Nos. 96-1336 and 97-1343 concerns five orders, the last of which issued in 1997.¹ The next year, in another proceeding, the Commission shifted positions on an important issue relating to the equity rate of return. See Transcontinental Gas Pipe Line Corp., 84 FERC p 61,084 at 61,423 (1998), order on reh'g, 85 FERC p 61,323 (1998), aff'd sub nom. North Carolina Utilities Comm'n v. FERC, 203 F.3d 53 (D.C. Cir. 2000) (unpublished opinion). Because of that shift, we remanded another case to the Commission for consideration of its possible effect. Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d 54, 62-63 (D.C. Cir. 1999). The Commission then sought a remand in this case, which we granted.

The later consolidated case, No. 99-1488 et al., involves the five orders issued after the remand.² On July 14, 1999 the Commission promulgated the first such order, finding that Northwest was entitled to a re-weighting of the shortand long-term growth rates in the equity return calculation. 88 FERC p 61,057 (1999) ("Initial Post Remand Order"). The Commission ordered Northwest to file a recalculation of its rates, a plan to impose surcharges to recover excess refunds under the previous rates, and pro forma tariff sheets that established the appropriate surcharges. Id. at 61,146. The Commission denied requests for rehearing. 88 FERC p 61,298 (1999) ("Initial Post Remand Order on Rehearing"). Northwest filed its tariff sheets in August 1999, using for its rate of equity return the median rate of the proxy group. On February 11, 2000 the Commission rejected Northwest's compliance filing because it used the wrong long-term growth rate, but approved its use of the median return on equity, stating that current Commission policy required the Commission to select the median of the range of reasonable returns on equity instead of the midpoint that had been used earlier in the rate-making proceeding. 90 FERC p 61,146 at 61,468 69 (2000) ("Median Rate Order"). The parties then agreed to a long-term growth rate. The Commission denied rehearing on the median rate issue. 92 FERC p 61,038 (2000) ("Median Rate Order on Rehearing").

Two parties, Northwest Natural Gas Company ("Northwest Natural"), a buyer of Northwest's gas, and the Canadian Association of Petroleum Producers ("CAPP"), a representative of buyers, assert a variety of errors in the Commission's decisions. We review the Commission's determinations under the Administrative Procedure Act's arbitrary and capricious standard. See Missouri Public Service Comm'n v. FERC, 215 F.3d 1, 3 (D.C. Cir. 2000); 5 U.S.C. 706(2)(A). We dismiss one claim for want of jurisdiction, we reverse and remand with respect to another claim, and we affirm on the remaining issues. All of the petitioners' claims not addressed here have been considered and rejected.

* * *

The "just and reasonable" rates calculated by the Commission under 15 U.S.C. 717c(a) are typically based on a pipeline's costs. Because several of the issues here revolve around one component, the cost of equity capital, we pause briefly to explain it. Each year that a durable utility asset is in use imposes on the utility the annual cost of the capital used for its construction (net of amounts already recovered in depreciation charges). In order to attract capital, a utility must offer a risk-adjusted expected rate of return sufficient to attract investors. This return to investors is the cost to the utility of raising capital. For the portion of capital acquired through bonds, the cost is comparatively easy to compute--the interest the company must pay its bondholders. Common equity is more complicated, for equity investors do not have a legally fixed return. To calculate the rate of return necessary to attract them, the Commission measures the return enjoyed by the company's equity investors by the discounted cash flow ("DCF") model, which assumes that a stock's price is equal to the present value of the infinite stream of expected dividends discounted at a market rate

commensurate with the stock's risk. With simplifying assumptions, this can be summarized by the formula

P = D/(r-g)

where P is the price of the stock at the relevant time, D is the dividend to be paid at the end of the first year, r is the rate of return and g is the expected growth rate of the firm. See Illinois Bell Telephone Co. v. FCC, 988 F.2d 1254, 1259 (D.C. Cir. 1993); see also A. Lawrence Kolbe et al., The Cost of Capital: Estimating the Rate of Return for Public Utilities 53-55 (1984). Since r is what the Commission is seeking, the equation is rearranged to the form

r = D/P + g

Illinois Bell, 988 F.2d at 1259.

For a company that is not publicly traded, marketdetermined figures for P and D will be missing, and the Commission has recourse to calculating the implicit rate of return on companies that are comparable (or at least companies whose business is predominately the operation of natural gas pipelines) and publicly traded. These companies are called the "proxy group." The Commission then makes adjustments for specific characteristics of the company whose rates are in question. Here, one of the issues involves a contention that Northwest's business risk was comparatively low (so that, petitioners argue, the Commission should have chosen a rate at the low end of those of the proxy group). Another issue involves calculation of the expected growth rates for the proxy group. And a third, assuming that Northwest belongs in the middle of the proxy group, involves how to pick a number best representing the middle.

* * *

1. Inclusion of Over-Run Costs in Rate Base

In its expansion project Northwest added considerable mainline pipeline and compressor facilities and services. Its original filing included $371.2 million in project costs but it ultimately persuaded the Commission to include about $61 million more. Because of decisions adverse to Northwest on

other issues, the rates approved were lower than those for which it had originally filed. See 71 FERC p 61,253 at 61,992-95 (1995)("Opinion No. 396"), reversed in part and remanded, 76 FERC p 61,068 at 61,420-24 (1996) ("Opinion No. 396-A").

Northwest Natural claims that Northwest should not be permitted to incorporate into its rate base costs that were not included in its original filing. Its back-up position is that even if consideration of those costs was proper, the Commission should have reopened proceedings to consider its claim that about $48 million in costs was not actually paid within the "test period" (twelve consecutive months used, with adjustments, in estimating a pipeline's costs) and should have been excluded.

On the first claim, Northwest Natural argues that an earlier Commission decision, Natural Gas Pipeline Co. of America, 38 FPC 1136 (1967), governs how the Commission must deal with cost figures that differ from those of the initial filing. It places special reliance on a phrase of that...