Iroquois Gas Transmission System, L.P. v. F.E.R.C.
| Decision Date | 21 July 1998 |
| Docket Number | Nos. 97-1276 and 97-1533,s. 97-1276 and 97-1533 |
| Citation | 145 F.3d 398 |
| Parties | , Util. L. Rep. P 14,216, 28 Envtl. L. Rep. 21,497 IROQUOIS GAS TRANSMISSION SYSTEM, L.P., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Joseph S. Koury argued the cause for petitioner. With him on the briefs were James T. McManus, Jeffrey A. Bruner and Paul W. Diehl.
Samuel Soopper, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With him on the brief were Jay L. Witkin, Solicitor, and Susan J. Court, Special Counsel. John H. Conway, Deputy Solicitor, entered an appearance.
Dennis Lane argued the cause for intervenors Public Service Commission of the State of New York, et al. With him on the brief were David W. D'Alessandro, Mary Ann Walker, Neil L. Levy, Richard A. Rapp, Jr., Lillian S. Harris and Kevin J. McKeon.
Before: WALD, WILLIAMS and HENDERSON, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILLIAMS.
Iroquois Gas Transmission System, L.P., ran up substantial legal defense costs as a result of federal investigations into environmental violations committed in its construction of a natural gas pipeline. The Federal Energy Regulatory Commission issued orders excluding these legal costs from the rate base used to calculate Iroquois's permissible charges, explaining that Iroquois had failed to carry the burden of proving that the costs were prudently incurred. Iroquois says the orders were grounded in an impermissible presumption of non-recoverability and asks us to set them aside, relying primarily on our decisions in Mountain States Telephone and Telegraph Co. v. FCC, 939 F.2d 1021 (D.C.Cir.1991) ("Mountain States I") and Mountain States Telephone and Telegraph Co. v. FCC, 939 F.2d 1035 (D.C.Cir.1991) ("Mountain States II"). Because the Commission has failed to come to grips with the questions that Mountain States II said must be answered when addressing a utility's recovery of legal expenses, we remand the case for a more reasoned decision.
* * *
In November 1990 the Commission granted Iroquois a certificate of public convenience and necessity under Section 7 of the Natural Gas Act (the "Act"), authorizing the company to build and operate a new pipeline stretching from the Canadian border to Long Island. The pipeline went into full service in January 1992. Before long, however, Iroquois found itself in trouble for environmental violations. Around November 1991 the U.S. Attorney's Office for the Northern District of New York, in conjunction with the FBI and the Environmental Protection Agency, began an investigation into whether Iroquois's construction activities violated the Clean Water Act. The record suggests that the investigation focused on points where the pipeline crossed creeks and streams in upstate New York, allegedly discharging silt and sediment in violation of Iroquois's Clean Water Act permit, and on Iroquois's alleged failure to build so-called trench breakers, which control soil erosion and pipeline corrosion. An Army Corps of Engineers inspection report from early 1992 cited a potential overall penalty of more than $115,000,000. Civil investigations, presumably closely related, were also undertaken by the U.S. Attorney's offices for the Northern, Eastern, and Southern Districts of New York. In addition, FERC's own enforcement staff launched a separate investigation to determine whether Iroquois had violated the environment-related conditions of its Section 7 certificate. Ultimately an Iroquois affiliate and four of its employees entered into guilty pleas and a civil settlement costing $22 million in fines and penalties, and Iroquois consented to a settlement with the Commission admitting violations of environmental conditions in its certificate and agreeing not to pass the fines and penalties on to its ratepayers. Iroquois Gas Transmission System, L.P., 75 FERC p 61,205 (1996).
In the course of resolving these disputes Iroquois ran up a legal bill of more than $15,000,000. While the various investigations were still under way, Iroquois filed with the Commission for a general rate increase to recover its pipeline construction costs. The rate proceeding culminated in a settlement between Iroquois and its customers resolving all issues except the rate and accounting treatment of the legal defense costs. Hearings on these reserved issues were held before an administrative law judge, who determined that the legal costs were not unrecoverable per se, and observed that "[t]he participants have presented nothing to rebut Iroquois's position that the legal costs were incurred as an appropriate and normal response to investigatory activities arising from the construction undertaken to provide service to the ratepayers." Iroquois Gas Transmission System, L.P., 72 FERC p 63,004, at 65,027 (1995).
The Commission reversed the ALJ's initial decision and held that Iroquois's legal defense costs could not be included in its rate base. Iroquois Gas Transmission System, L.P., 77 FERC p 61,288 (1996). "Allowing recovery of Iroquois' litigation expenses," the Commission concluded,
would fail to recognize the interests of Iroquois' ratepayers, shared by the Commission, that emanate from Section 7 of the NGA. These interests are to ensure that the pipeline is built in compliance with all applicable federal environmental and safety laws so as to prevent any future personal injuries or environmental damage.
Id. at 62,280. The Commission based its disallowance of recovery on Iroquois's failure to demonstrate any countervailing economic or non-economic benefit to ratepayers from the activities that gave rise to the investigations. The Commission denied Iroquois's request for rehearing, Iroquois Gas Transmission System, L.P., 78 FERC p 61,216 (1997), and later rejected similar claims in a second rate case filed by Iroquois. Iroquois Gas Transmission System, L.P., 77 FERC p 61,352, at 62,538 (1996), rehearing denied, 80 FERC p 61,199, at 61,797-98 (1997). Iroquois petitioned for review in this court.
At the outset the Commission concedes two propositions, one general and one specific to this case. First, the Commission admits that although the Act gives the natural gas company the burden of showing that a proposed rate increase is just and reasonable, 15 U.S.C. § 717c(e), as a matter of FERC practice "a natural gas company is ordinarily not required to show that all of its expenditures were prudent unless serious doubts are raised regarding the prudence of those costs." FERC Br. at 24. See, e.g., Trans World Airlines, Inc. v. CAB, 385 F.2d 648, 657 (D.C.Cir.1967); Minnesota Power & Light Co., 11 FERC p 61,312, at 61,645 (1980). Second, the Commission does not seriously contest that it effectively raised a presumption against recovery in this case, putting the burden on Iroquois to demonstrate that its expenditures were prudently incurred. See 78 FERC at 61,927 (). Indeed, at times the Commission seemed to erect something close to an irrebuttable presumption against recovery. See id. ("Iroquois placed itself in the untenable position of arguing that its illegal activities, supposedly taken to save time and money during construction, were in the interests of its ratepayers, and, therefore, just and reasonable.") (emphasis added).
The Commission contends, however, that it adequately justified its decision to invert the normal presumption in this case, because Iroquois's legal costs by their very nature raised a serious doubt as to prudence (i.e., because they grew out of civil and criminal violations). 1 See FERC Br. at 24. One immediate problem with this approach is that as of the time the hearing was held before the ALJ no violations had been proven or admitted; the investigations were still ongoing and the precise contours of any eventual charges were still uncertain. But even if that problem is put aside, the Commission runs into another barrier: our decisions in the Mountain States cases.
In Mountain States I we held that the Federal Communications Commission had failed to provide a reasoned justification for its presumption that antitrust litigation expenses incurred by AT&T could not be recovered from ratepayers. 939 F.2d at 1029-35. "Illegality of carrier conduct from which an antitrust litigation expense stems," we concluded, "does not inexorably compel or warrant either rejection or stigmatization of the expense as a factor in rate calculations." Id. at 1031. We noted that in two tax decisions the Supreme Court had described litigation expenses--even those incurred in a losing cause--as ordinary and legitimate costs of doing business. Id. at 1031-32 ().
In Mountain States II, issued the same day as Mountain States I, we reviewed a new FCC regulation governing the accounting treatment of litigation expenses generally. The new rule attached a presumption of non-recoverability to all litigation expenses that resulted in an adverse final judgment or post-judgment settlement in any federal statutory case, unless the regulated company could show that ratepayers benefited from the underlying activity. 939 F.2d at 1039. Holding that "the FCC may disallow any expense incurred as a result of carrier conduct that cannot reasonably be expected to benefit ratepayers," id. at 1043, we found the new rule quite sensible in the context of antitrust violations, since the effect of such violations is typically to injure consumers. But we went on to say that the FCC had inadequately...
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