Missouri Public Service Com'n v. F.E.R.C.

• Decision Date: 12 August 2003
• Docket Number: No. 02-1132.,02-1132.
• Citation: 337 F.3d 1066
• Parties: MISSOURI PUBLIC SERVICE COMMISSION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Enbridge Pipelines, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

337 F.3d 1066

MISSOURI PUBLIC SERVICE COMMISSION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Enbridge Pipelines, et al., Intervenors.

No. 02-1132.

United States Court of Appeals, District of Columbia Circuit.

Argued May 6, 2003.

Decided August 12, 2003.

COPYRIGHT MATERIAL OMITTED

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

John E. McCaffrey argued the cause for petitioner. With him on the brief was David W. D'Alessandro. Kelly A. Daly entered an appearance.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were Cynthia A. Marlette, General Counsel, and Robert H. Solomon, Deputy Solicitor.

James P. White and William A. Williams were on the brief for intervenor Enbridge Pipelines.

Before: Edwards, SENTELLE, and GARLAND, Circuit Judges.

Opinion for the court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge:

For the second time, petitioner Missouri Public Service Commission seeks review of initial rates approved by the Federal Energy Regulatory Commission (FERC) for natural gas transportation by the Kansas Pipeline Company. On the last occasion, we rejected as arbitrary and capricious the reasons FERC gave for approving the challenged rates. On remand, the Commission reaffirmed the same rates, albeit emphasizing different rationales. We once again find FERC's reasoning arbitrary and capricious. Accordingly, we vacate its orders and remand the case for further proceedings consistent with this opinion.

I

The lengthy and complex procedural history of this case is explained in detail in the FERC orders under review, and in our previous opinion, Missouri Public Service Commission v. FERC, 234 F.3d 36 (D.C.Cir.2000) [hereinafter Missouri I]. We provide only a brief summary here.

The Natural Gas Act (NGA) grants FERC jurisdiction over the transportation of natural gas in interstate commerce. 15 U.S.C. § 717(b); see also 42 U.S.C. § 7172(a)(1)(C). Section 7 of the NGA bars the "transportation or sale of natural gas[ ] subject to the jurisdiction of [FERC]," except under a "certificate of public convenience and necessity issued by the Commission." 15 U.S.C. § 717f(c)(1)(A). The section further gives the Commission the "power to attach to the ... certificate ... such reasonable terms and conditions as the public convenience and necessity may require." Id. § 717f(e). Under that authority, FERC employs a "public interest" standard to determine the initial rates that a pipeline may charge for newly certificated service. See Atlantic Refining Co. v. Public Serv. Comm'n, 360 U.S. 378, 391, 79 S.Ct. 1246, 1255, 3 L.Ed.2d 1312 (1959). Those initial rates "offer a temporary mechanism to protect the public interest until the regular rate setting provisions" of § 4 of the NGA, 15 U.S.C. § 717c, come into play. Algonquin Gas Transmission Co. v. Federal Power Comm'n, 534 F.2d 952, 956 (D.C.Cir.1976); see Atlantic Refining, 360 U.S. at 391-92, 79 S.Ct. at 1255-56. Section 4 requires rates to be "just and reasonable," 15 U.S.C. § 717c, rather than merely in the "public interest" as required by § 7. See Atlantic Refining, 360 U.S. at 390-91, 79 S.Ct. at 1254-55.

In 1995, FERC determined that three affiliated and interconnected natural gas pipelines of the Kansas Pipeline Company system (KPC or "Kansas Pipeline") constituted a single interstate pipeline system subject to FERC jurisdiction under the NGA. KansOk P'ship, 73 F.E.R.C. ¶ 61,160, 1995 WL 644180 (1995). The Commission ordered KPC to file an application for § 7 certification to operate the pipeline system and transport gas in interstate commerce. In 1998, FERC approved KPC's existing contractual rates (the "Motion Rates") as the pipeline's initial rates for service under NGA § 7, pending completion of a rate case under NGA § 4 to determine just and reasonable rates. See Kansas Pipeline Co., 83 F.E.R.C. ¶ 61,107, 1998 WL 211812 (1998) [hereinafter 1998 Order]. The Missouri Public Service Commission ("Missouri PSC") — a Missouri agency with jurisdiction to regulate rates and charges for the sale of natural gas to consumers within the State of Missouri — sought rehearing. FERC denied the rehearing request, reaffirming its approval of the existing rates. See Kansas Pipeline Co., 87 F.E.R.C. ¶ 61,020, 1999 WL 179911 (1999) [hereinafter 1999 Rehearing Order].

In Missouri I, we reviewed the 1998 Order and 1999 Rehearing Order. Counsel for FERC defended the orders' approval of the existing rates on five grounds, arguing that: (1) approval of the existing rates ended the dispute over whether the pipeline was properly subject to FERC's interstate jurisdiction; (2) the existing rates had been negotiated among the parties; (3) the existing rates had been approved by KPC's prior state regulator; (4) the existing rates preserved KPC's financial integrity and prevented KPC's bankruptcy; and (5) the existing rates were lower than the rates FERC would otherwise have approved on rehearing (the "Rehearing Rates"). See Missouri I, 234 F.3d at 40. We found that the second and third rationales (that the existing rates had been negotiated by the parties and had been approved by KPC's prior regulator) could not sustain FERC's determination because FERC had not actually relied on those grounds in its orders. Id. at 41 (citing SEC v. Chenery Corp., 332 U.S. 194, 196, 67 S.Ct. 1575, 1577, 91 L.Ed. 1995 (1947)). We further held that, although FERC had mentioned the first and fourth rationales (that approval of the rates would end the jurisdictional dispute and would preserve KPC's financial integrity), it had done so only in a "passing reference" that was "not sufficient to satisfy the Commission's obligation to carry out `reasoned' and `principled' decisionmaking." Id.

That left only the fifth rationale, which we regarded as the Commission's "primary reason" for approving the existing rates: the argument that those rates were lower than the rates that FERC would otherwise have approved had it granted a rehearing. Id. at 42. We rejected that rationale as well, finding that the Commission had not even attempted to defend its computation of the rates it would otherwise have approved — a fact that made it impossible for us to accept the use of those rates as a benchmark for comparing the existing rates. Id. Ruling that "FERC ha[d] not adequately explained how the rationales, alone or together, satisfy the `public interest' standard of section 7," we remanded to the agency for further proceedings. Id. We noted, however, that with proper support, some of the rationales found wanting in Missouri I might serve as justifications for § 7 rates in an appropriate case. Id.

On remand, the Commission reaffirmed the rates that it had initially approved in its 1998 Order. See Kansas Pipeline Co., 97 F.E.R.C. ¶ 61,168, 2001 WL 1397222 (2001) [hereinafter 2001 Remand Order]. In so doing, FERC abandoned the primary justification it had offered in Missouri I and turned to an array of other rationales. 2001 Remand Order, 97 F.E.R.C. at 61,779, 61,784-85. Missouri PSC sought rehearing, which FERC denied in 2002. See Kansas Pipeline Co., 98 F.E.R.C. ¶ 61,343, at 62,457, 2002 WL 471187 (2002) [hereinafter 2002 Rehearing Order]. The 2002 Rehearing Order clarified the Commission's reasoning, listing three supporting rationales. According to the Commission, approval of the existing rates: (1) preserved KPC's financial integrity, by ensuring compliance with a condition of a major loan agreement; (2) was fair to KPC's shippers because those rates had been negotiated by the shippers and approved under the prior state regulatory regime; and (3) would resolve the jurisdictional issue, because KPC had agreed to drop its challenge to FERC's jurisdiction if the existing rates were adopted. See 2002 Rehearing Order, 98 F.E.R.C. at 62,457.

Missouri PSC filed a timely petition for review, and Enbridge Pipelines, the successor to KPC, intervened in support of FERC's decision. In the meantime, FERC has completed § 4 proceedings for the pipeline, and the § 4 rates — which are substantially lower than the rates that FERC approved under § 7 — have gone into effect. Our decision in this case, therefore, will have no prospective effect; it will determine only whether KPC's customers were overcharged and whether FERC should consider a refund for the rates assessed during the interim period.

II

We review FERC's orders under the arbitrary or capricious standard of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A). Missouri I, 234 F.3d at 40.¹ To satisfy that standard, there must be "a rational connection between the facts found and the choice made" by the Commission. Id. (internal quotation marks omitted). FERC must "articulate the critical facts upon which it relies," and when it "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 those assumptions." Id. (quoting Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C.Cir.1979)). Similarly, when "the Commission balances competing interests in arriving at its decision, it must explain on the record the policies which guide it." Id. (quoting Columbia Gas, 628 F.2d at 593). Finally, the Commission's factual findings are "conclusive" if, but only if, they are "supported by substantial evidence" in the record. NGA § 19(b), 15 U.S.C. § 717r(b).

There is no dispute that the "public interest" standard of NGA § 7 is less exacting than the "just and reasonable" requirement of § 4. See Atlantic Refining, 360 U.S. at 390-91, 79 S.Ct. at 1254-55. But both the Supreme Court and this circuit have made clear that the Commission has a duty to use its § 7 power to protect consumers. See id. ("[T]he inordinate delay... in the processing of § 5 proceedings requires a most careful scrutiny and responsible reaction to initial price...