Missouri Public Serv. Comm'n v. Fed. Energy Reg. Comm'n

Citation234 F.3d 36
Decision Date15 December 2000
Docket NumberNo. 99-1203,99-1203
Parties(D.C. Cir. 2000) Missouri Public Service Commission, Petitioner v. Federal Energy Regulatory Commission, Respondent Williams Gas Pipelines Central, Inc., et al., Intervenors
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

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

John E. McCaffrey argued the cause for the petitioner. David D'Alessandro was on brief for the petitioner. Kelly A. Daly and Thomas R. Schwarz, Jr. entered appearances.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for the respondent. John H. Conway, Acting Solicitor, and Timm L. Abendroth, Attorney, Federal Energy Regulaltory Commission, were on brief for the respondent. Susan J. Court, Special Counsel, Federal Energy Regulaltory Commission, entered an appearance.

Michael A. Stosser, Stanley A. Berman and Adelia S. Borrasca were on brief for intervenor Kansas Pipeline Company. Jane E. Stelck entered an appearance.

Gary W. Boyle and Jay V. Allen entered appearances for intervenor Williams Gas Pipelines Central, Inc.

James F. Moriarty entered an appearance for intervenor Missouri Gas Energy. Dana Charles Contratto and Herbert J. Martin entered appearances for intervenor Kansas Gas Service Company.

John Justin McNish, Elizabeth Rose Myers-Kerbal and Richard Greer Morgan entered appearances for intervenor Kansas Corporation Commission.

Before: Edwards, Chief Judge, Sentelle and Henderson, Circuit Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge:

Petitioner Missouri Public Service Commission (MoPSC) seeks review of three orders of the Federal Energy Regulatory Commission (FERC or Commission) setting initial rates for natural gas transportation by the Kansas Pipeline Company (KPC or Company).1 The petitioner argues that FERC failed to demonstrate the approved rates are in the public interest, as required by section 7 of the Natural Gas Act (NGA), 15 U.S.C. § 717f, and failed to reach a conclusion that is the product of reasoned decision making. We agree. Accordingly, we grant the petition for review and remand the case to the Commission for further rate making proceedings.

I.

Section 7(c) of the NGA provides that "[n]o natural-gas company . . . shall engage in the transportation or sale of natural gas, . . . unless there is in force with respect to such natural-gas company a certificate of public convenience and necessity issued by the Commission authorizing such acts or operations." 15 U.S.C. § 717f(c). In order to issue such a certificate, the Commission must find that, among other things, "the proposed service, sale, [or] operation . . . is or will be required by the present or future public convenience and necessity." Id. § 717f(e). Reaching this decision "requires the Commission to evaluate all factors bearing on the public interest." Atlantic Ref. Co. v. Public Serv. Comm'n, 360 U.S. 378, 391 (1959). More specifically, section 7 imposes on the Commission a duty "to engage in 'a most careful scrutiny and responsible reaction to initial price proposals of producers.' That scrutiny demands attentiveness to the evidence presented by the producer with 'price a consideration of prime importance' in the application of the public convenience and necessity standard." Consumer Fed'n of Am. v. Federal Power Comm'n, 515 F.2d 347, 356 (D.C. Cir.) (quoting Atlantic Ref. Co., 360 U.S. at 391), cert. denied, 423 U.S. 906 (1975).

II.

KansOk Partnership (KansOk), Kansas Pipeline Partnership (KPP) and Riverside Pipeline Company (Riverside) engage in the transportation of natural gas. Before November 2, 1995 KPP was regulated by the Kansas Corporation Commission (KCC),2 while KansOk and Riverside were regulated by FERC under section 311 of the Natural Gas Policy Act (NGPA), 15 U.S.C. § 3371. On November 2, 1995 FERC determined that KansOk, KPP and Riverside constituted a single interstate pipeline system subject to FERC jurisdiction under the NGA. See KansOk P'ship, 73 F.E.R.C. p 61,160, at 61,480 (1995). FERC therefore ordered the three entities, collectively KPC, to apply for a certificate of public convenience and necessity under section 7 of the NGA. See id. at 61,488. KPC challenged FERC's assertion of jurisdiction and sought a rehearing, see Kansas Pipeline Co., 81 F.E.R.C. p 61,005, at 61,006 (1997), but, at the same time, on January 23, 1996 filed under protest a certificate application proposing an initial rate base of $100,647,042 and a cost of service of $36,708,843, see id. at 61,006-07, 61,017.

On October 3, 1997 the Commission confirmed its November 2, 1995 decision asserting jurisdiction over KPC.3 See id. at 61,036. FERC then proceeded to examine KPC's proposed initial rates, terms and conditions and concluded that the rates were not in the public interest. See id. at 61,017. In the end, FERC adopted a rate base of $39,011,785 and a cost of service of $21,817,483. See id.

On November 3, 1997 KPC sought rehearing of the October 3, 1997 order. The Company argued that the rates established by the order would drive KPC into bankruptcy because they did not allow KPC to recover its operating expenses and make payments on two outstanding loans. On November 10, 1997 KPC sought a stay of the October 3, 1997 order, which the Commission granted on November 25, 1997. See Kansas Pipeline Co., 81 F.E.R.C. p 61,250, at 62,136 (1997).

On February 27, 1998 KPC filed with the Commission a document titled "Motion of Kansas Pipeline Company Acceding to FERC Jurisdiction, and Requesting Interim Relief, Or, in the Alternative, Request for a Rehearing" in which it made the following proposal: KPC would dismiss its appeal challenging FERC's jurisdiction, see supra note 3, if FERC permitted KPC to continue charging the contractual rates that had been agreed to by KPC and its customers and had been approved by KPC's prior regulators (Motion Rates) until such time as section 4 rates were approved by FERC. FERC agreed with KPC's proposal and on April 30, 1998 issued an order permitting KPC to grandfather its old rates pending a section 4 proceeding. See Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,518 (1998). In support of its decision FERC declared: "As discussed below, the Commission has determined that granting the motion is in the public interest because it will result in rates that are in the public interest, will remove the jurisdictional issue from the proceeding, and preserve the financial integrity of the applicant." Id. at 61,505.

FERC's conclusion that the rates are "in the public interest" warrants some explanation. At the beginning of its analysis, the Commission noted that KPC's November 3, 1997 request for rehearing of the October 3, 1997 order was "largely moot" in light of its approval of the Motion Rates. Nevertheless FERC proceeded to discuss the issues raised by the rehearing request in order to "provide a context for our decision to grant the applicant's February 27 motion." Id. at 61,506. In the discussion, FERC reversed its October 3, 1997 position on several issues. See id. at 61,506-09. Ultimately, FERC concluded that, if the initial rates set by the October 3, 1997 order were adjusted "based on the rehearing arguments that the Commission found to be persuasive," those rates (Rehearing Rates) would be higher than KPC's Motion Rates. Id. at 61,511. Because approval of the Motion Rates also resolved the jurisdictional issue, the Commission concluded that "it is in the public interest to grant Kansas Pipeline's motion." Id.

Petitioner MoPSC sought a rehearing of FERC's April 30, 1998 order, challenging FERC's conclusion that the Rehearing Rates would be higher than the Motion Rates.4 MoPSC asserted that FERC's analysis was plagued by numerous errors and unexplained departures from settled FERC polices. On April 2, 1999 FERC denied rehearing, explaining that in the April 30, 1998 order it had not relied strictly on a comparison of the Motion Rates and the Rehearing Rates but rather had "concluded that the motion rates were in the public interest because they were negotiated among the parties and approved by the prior regulatory regime." Kansas Pipeline Co., 87 F.E.R.C. p 61,020, at 61,064 (1999). FERC also emphasized the advantage of the Company's concession on the jurisdiction issue as well as the importance of preserving the Company's financial integrity. See id. Unsatisfied, MoPSC filed this petition for review.

III.

We review FERC's orders under the familiar arbitrary and capricious standard of the Administrative Procedure Act. See 5 U.S.C. § 706(2)(A); Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d 54, 60 (D.C. Cir. 1999). Although "[j]udicial scrutiny under the National Gas Act is limited to assuring that the Commission's decisionmaking is reasoned, principled, and based upon the record," Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C. Cir. 1979); accord Williston Basin Interstate Pipeline Co., 165 F.3d at 60, the Commission's orders must nonetheless articulate "a rational connection between the facts found and the choice made." Association of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1431 (D.C. Cir. 1996) (citations and internal quotation marks omitted). To carry out our reviewing task,

it is imperative that the Commission articulate the critical facts upon which it relies when it decides [the relevant rates]. Similarly, when the Commission finds it necessary to make predictions or extrapolations from the record, it must fully explain the assumptions it relied on to resolve unknowns and the public policies behind it those assumptions. Where the Commission balances competing interests in arriving at its decision, it must explain on the record the policies which guide it. Only if the Commission observes these minimum standards can we be confident that missing facts, gross...

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