Hadson Gas Systems, Inc. v. F.E.R.C., 95-1111

• Decision Date: 09 February 1996
• Docket Number: No. 95-1111,95-1111
• Parties: , Util. L. Rep. P 14,088 HADSON GAS SYSTEMS, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Enron Capital & Trade Resources Corporation, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 680

75 F.3d 680

316 U.S.App.D.C. 98, Util. L. Rep. P 14,088

HADSON GAS SYSTEMS, INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Enron Capital & Trade Resources Corporation, Intervenor.

No. 95-1111.

United States Court of Appeals, District of Columbia Circuit.

Argued Dec. 12, 1995.

Decided Feb. 9, 1996.

Philip M. Marston, Washington, DC, argued the cause and filed the briefs, for petitioner.

Jill L. Hall, Attorney, Federal Energy Regulatory Commission, Washington, DC, with whom Jerome M. Feit, Solicitor, was on the brief, argued the cause, for respondent. Joel M. Cockrell, Attorney, entered an appearance.

Leslie J. Lawner, Houston, TX, entered an appearance, for intervenor.

Before: EDWARDS, Chief Judge, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge STEPHEN F. WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

On July 28, 1994 the Federal Energy Regulatory Commission issued Order No. 567, sweeping away obsolete regulations that had occupied more than 500 pages of fine print in the Code of Federal Regulations. Order No. 567, Removal of Outdated Regulations Pertaining to the Sales of Natural Gas Production, 59 Fed.Reg. 40,240 (1994), Order on Rehearing, 69 FERC p 61,055 (October 17, 1994), Order on Rehearing, 69 FERC p 61,342 (December 15, 1994). The regulations were obsolete--or, as we shall see, almost all of them were--because they existed solely for the purpose of implementing the Commission's 38-year-old enterprise of controlling the prices of natural gas at the wellhead, which it had pursued from the Supreme Court's decision in Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954), to January 1, 1993, when all such controls came to an end. See Natural Gas Wellhead Decontrol Act of 1989 (the "Decontrol Act"), Pub.L. No. 101-60, 103 Stat. 157 (1989). Tucked away in this mass was a single sentence, 18 CFR § 270.203(c), which, though enacted solely for purposes of the price control regime, appears to have material collateral importance. Hadson claims that because of these collateral effects, the Commission was required by § 553 of the Administrative Procedure Act to give affected parties notice and an opportunity to comment, in order to consider (1) arguments for retaining § 270.203(c) or at least (2) ways of mitigating the impact of its removal.

We deny the petition for review. Because the controlling statute left the Commission no authority to retain § 270.203(c), notice and comment could not have served the first purpose suggested by Hadson. As to the second, at least in these circumstances we do not think that § 553 requires an agency to delay formal removal of a legally defunct regulation while it canvasses all possible regulatory impacts. We note, however, that because Hadson has shown that formal removal may have substantial ripple effects, to the point of undermining implicit premises of other regulations, it may have established grounds requiring the Commission to open a rulemaking proceeding for purposes of adjusting those regulations to the new realities. We do not, of course, pass on any such claim, which at this point is hypothetical.

* * *

Although the paradigm sale to which Phillips extended the Commission's regulatory power under the Natural Gas Act ("NGA"), 15 U.S.C. §§ 717 et seq., was the wellhead sale, the Natural Gas Policy Act of 1978 ("NGPA"), 15 U.S.C. §§ 3301 et seq., which largely supplanted the Commission's pre-NGPA rules, used a different term, "first sale." It made two critical consequences turn on a transaction's classification as such. First, Title I of the statute subjected every first sale to the NGPA system of price controls. See 15 U.S.C. §§ 3312-19, repealed effective Jan. 1, 1993, Pub.L. No. 101-60, § 2(b). Second, it generally removed first sales of gas from the Commission's jurisdiction (apart from its enforcement of the NGPA ceiling prices). ¹ See, e.g., NGPA § 601(a)(1)(A), 15 U.S.C. § 3431(a)(1)(A). This relieved parties engaged in a first sale of the serious regulatory burdens that would otherwise have been applicable under Phillips: the needs for a certificate of "public convenience and necessity" for initiation of a sale, as required by NGA § 7(c), 15 U.S.C. § 717f(c), for a certificate of abandonment for its termination, as required by NGA § 7(b), 15 U.S.C. § 717f(b), and for Commission review of the price under the "just and reasonable" standard, as required by NGA §§ 4 & 5, 15 U.S.C. §§ 717c & 717d.

Thus the definition of first sale was critical:

(21) First sale

(A) General rule

The term "first sale" means any sale of any volume of natural gas--

(i) to any interstate pipeline or intrastate pipeline;

(ii) to any local distribution company (iii) to any person for use by such person;

(iv) which precedes any sale described in clauses (i), (ii), or (iii); and

(v) which precedes or follows any sale described in clauses (i), (ii), (iii), or (iv) and is defined by the Commission as a first sale in order to prevent circumvention of any maximum lawful price established under this chapter.

(B) Certain sales not included

Clauses (i), (ii), (iii), or (iv) of subparagraph (A) shall not include the sale of any volume of natural gas by any interstate pipeline, intrastate pipeline, or local distribution company, or any affiliate thereof, unless such sale is attributable to volumes of natural gas produced by such interstate pipeline, intrastate pipeline, or local distribution company, or any affiliate thereof.

NGPA § 2(21), 15 U.S.C. § 3301(21) (emphasis added).

Two aspects of this elaborate definition are relevant for our purposes. First, the opening clause of § 2(21)(B) denies first-sale treatment to sales by affiliates of interstate or intrastate pipelines, or of local distribution companies, thereby exposing them to the regulatory entanglements of the NGA. Hadson is affiliated with two intrastate pipelines and a local distribution company, so the first clause of § 2(21)(B) excludes its gas sales from classification as first sales. The second clause of § 2(21)(B), to be sure, makes an exception from the first clause's exclusion, saying (once we account for the double negatives) that sales by such affiliates of their own gas production can be first sales. But Hadson made clear at oral argument that that exception was of little or no use to it. Hadson appears, moreover, to be typical of an array of gas marketers that have the sort of affiliation that bars their sales from first-sale treatment under the first clause of § 2(21)(B).

Second, § 2(21)(A)(v) grants the Commission authority to add sales to Congress's first-sale definition, i.e., to turn some transactions not otherwise covered into first sales, "in order to prevent circumvention of any maximum lawful price established under this chapter." In 1979 the Commission saw a risk of precisely such circumvention, and to avert it, adopted the sentence at stake here:

(c) Circumvention rule for certain sales by affiliates. Any sale by an affiliate of an interstate pipeline, intrastate pipeline, or local distribution company, that is not itself such a pipeline or local distribution company is that affiliate's first sale under the NGPA unless the Commission, on application, determines not to treat such sale as a first sale.

18 CFR § 270.203(c). Thus the Commission used its § 2(21)(A)(v) power to give first-sale status to the sort of sales currently engaged in on a large scale by Hadson and similar firms--sales otherwise excluded from first-sale status by § 2(21)(B). In part thanks to the shelter of § 270.203(c), Hadson and similarly affiliated gas marketers have annually conducted billions of dollars worth of natural gas business as first sales.

When it adopted § 270.203(c), the Commission made clear that it was acting solely under § 2(21)(A)(v), not under the NGPA's generic grant of power "to define" terms used in the NGPA, § 501(b), 15 U.S.C. § 3411(b). See Final Rule Governing the Maximum Lawful Price for Pipeline, Distributor or Affiliate Production ("Final Rule"), 44 Fed.Reg. 66577, 66579-80 (1979). It explained that, in part because of its own narrow definition of "attributable" (as the term is used in § 2(21)(B)), see 18 CFR § 270.203(a), sales by gatherers who were affiliated with pipelines or distributors would, but for action by the Commission under § 2(21)(A)(v), "be excluded from first sale treatment where the gatherer did not produce all of the gas sold." Final Rule, 44 Fed.Reg. at 66580/1. Hadson does not dispute that in adopting § 270.203(c) the Commission relied solely on § 2(21)(A)(v).

This might seem to end the case. Although the Decontrol Act did not delete § 2(21)(A)(v) itself, it did eliminate the entire system of "maximum lawful price[s]," thereby removing the Commission's sole reason for creating § 270.203(c) and mooting the sole basis given by § 2(21)(A)(v) for Commission additions to first-sale status. If Congress pulled the rug out from under § 270.203(c), by eliminating the sole stated justification for its existence, must it not fall to earth, i.e., lose all effectiveness, whether or not the Commission actually deleted it from the pages of the Code of Federal Regulations? If so, would not deletion be simply a ministerial task, unsuited to notice and comment procedures intended for substantive regulatory changes in which the agency has some authority? See Sheppard v. Sullivan, 906 F.2d 756, 761-62 (D.C.Cir.1990) (finding it at most "harmless error" for an agency to modify a regulation without notice and comment when the statute leaves the agency no choice). Indeed, the Commission frames this argument as one of standing, saying that Hadson's injury, if any, is due to Congress's decision, not to the Commission's action.

Hadson says no, on two grounds. First, although it does not argue that § 270.203(c) is consistent with § 2(21)(B) of the statute (once the § 2(21)(A)(v) prop is rendered...