N. Natural Gas Co. v. Fed. Energy Regulatory Comm'n
| Decision Date | 27 November 2012 |
| Docket Number | No. 11–1240.,11–1240. |
| Parties | NORTHERN NATURAL GAS COMPANY, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Northern States Power Company–Minnesota, et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
OPINION TEXT STARTS HERE
On Petition for Review of Orders of the Federal Energy Regulatory Commission.
Frank X. Kelly argued the cause for petitioner. With him on the briefs were Steve Stojic, J. Gregory Porter, and Dorothy R. Dornan.
Beth G. Pacella, Senior Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief was Robert H. Solomon, Solicitor.
Robert I. White was on the brief for intervenors Northern States Power Company–Minnesota, et al. in support of respondent.
Before: GARLAND and KAVANAUGH, Circuit Judges, and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge WILLIAMS.
In response to a tariff filing by Northern Natural Gas Company, the Federal Energy Regulatory Commission issued an interpretation of § 4(f) of the Natural Gas Act, 15 U.S.C. § 717c(f). Northern Natural Gas Co., 133 FERC ¶ 61,210 (2010), reh'g denied, Northern Natural Gas Co., 135 FERC ¶ 61,085 (2011). Northern objects to the interpretation, and further argues that even if it is correct, its effect, at least vis-à-vis Northern, should be prospective only. We reject both claims.
* * * Section 4(a) of the Natural Gas Act requires that a natural gas company's rates be “just and reasonable.” 15 U.S.C. § 717c(a). The Commission has generally understood this to mean cost-based rates, with “market-based” rates to be allowed only for a firm that showed it lacked market power in the relevant market. See, e.g., Alternatives to Traditional Cost–of–Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61,076, at 61,227 (1996).
In 2005 Congress added § 4(f) to the Act to provide another avenue to market rates. It states that
(1) the Commission may authorize a natural gas company ... to provide storage and storage-related services at market-based rates for new storage capacity related to a specific facility placed in service after August 8, 2005, notwithstanding the fact that the company is unable to demonstrate that the company lacks market power, if the Commission determines that—
(A) market-based rates are in the public interest and necessary to encourage the construction of the storage capacity in the area needing storage services; and
(B) customers are adequately protected.
15 U.S.C. § 717c(f) (emphasis added).
The next year Northern secured from the Commission a declaratory order authorizing it to charge market-based rates for its services at a new storage expansion project in Iowa. Northern Natural Gas Co., 117 FERC ¶ 61,191 (2006). In granting the authority, the Commission noted that Northern had proposed such rates for shippers that had submitted winning bids in an “Open Season” for use of the capacity and had signed “precedent agreements,” and that “the use of market-based rates does not apply to sales of [Northern's] storage capacity outside of these precedent agreements.” Id. at P 9 & n. 4 (emphasis added). In its Order on Rehearing, the Commission echoed that thought, mentioning at the outset that the original order had authorized “market-based rates to the initial shippers that submitted winning bids and signed precedent agreements.” Northern Natural Gas Co., 119 FERC ¶ 61,072 at P 1.
In 2010, Northern sought to extend its market-based rate authority to the “resale of market-based rate capacity ... to the extent that such capacity becomes available [1] through expiration of existing market-based rate ... service agreements or [2] upon bankruptcy or another event leading to turn back of the capacity.” Joint Appendix (“J.A.”) 11 (brackets added). The Commission rejected the corresponding amendments to Northern's tariff insofar as they related to capacity becoming available on expiration of the existing agreements, explaining:
To qualify for market based rates under [§ ] 4(f), the pipeline must show that the storage capacity for which market-based rates is being sought is related to new facilities and can demonstrate that the granting of market-based rates is ‘necessary to encourage the construction of the storage capacity.’
Northern Natural Gas Co., 133 FERC ¶ 61,210 at P 11 (2010) (“Order”), reh'g denied, Northern Natural Gas Co., 135 FERC ¶ 61,085 (2011). It went on to emphasize that Northern's request related to “capacity that it has already constructed.” Id. (emphasis in original).
On the other hand, the Commission approved market-based rates for the second set of cases for which Northern requested them, namely resales of storage “in the event of bankruptcy, a default or other turn back during the 20 year term” of the original contracts. Order, 133 FERC ¶ 61,085 at P 12.
* * *
We review the Commission's interpretation of § 4(f) for reasonableness under the familiar standard of Chevron, USA, Inc. v. NRDC, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), which as specified in Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208, 218, 129 S.Ct. 1498, 173 L.Ed.2d 369 (2009), means (within its domain) that a “reasonable agency interpretation prevails.”
The Commission's interpretation is fully consistent with the obvious meaning of the statute. Subsection 4(f)(1)(A) conditions the approval of market rates under § 4(f) on the Commission's finding that such rates are “necessary to encourage the construction of the storage capacity in the area needing storage services.” The Commission's first reading of § 4(f)—which preceded Northern's market-based rates petition—echoed this statutory requirement. Rate Regulation of Certain Natural Gas Storage Facilities., 115 FERC ¶ 61,343 at P 130 (2006). It then spelled the point out in even more direct terms: It observed that the Commission's goal under the statute was to provide an “incentive to build new storage infrastructure,” id. at P 167, and said that a favorable ruling even on the “public interest” requirement of the section would reflect consideration of all aspects of proposals, “including ... the strength of the applicant's showing that the facilities would not be built but for market-based rate treatment,” id. at P 128.
It seems obviously reasonable as a general matter that a special benefit aimed at encouraging an investment can perform that function only with respect to investments not yet made when the favorable treatment is promised. How can a benefit be an incentive to specific conduct if the conduct has already occurred? There can be, of course, special cases where targeting prospective conduct only is too costly to implement. Suppose Congress decides that preferential tax rates for capital gains will encourage investment. It might limit the preference to investments made after the favorable rate was assured; but the costs of sorting out the exact timing of investments, and the need to apply multiple layers of rates as Congress periodically adjusts them up and down, stand in the way of such precision. In such a case, application of the incentives to gains realized on prior investments may make sense. The application of § 4(f), however, seems not to present any comparable difficulty. Certainly Northern identifies none.
We noted that the Commission had ruled in favor of the second element of Northern's request, namely for the right to charge market rates on the resale of storage “in the event of bankruptcy, a default or other turn back during the 20 year term” of the initial contracts. Order, 133 FERC ¶ 61,210 at P 12. Northern, of course, does not complain about that aspect of the Order, but its presence poses a potential question as to whether the Commission really means to apply the incentive rationale that it adopted at the outset and in the challenged Order. We think the two—the incentive rationale and this element of the Order—can be reconciled. It makes sense for FERC to interpret its grant of market rates for the original 20–year contracts as encompassing replacement contracts that merely fill in a gap caused by the fortuitous failing of one of the original shippers. To be sure, the Commission might have taken the view that Northern did not explicitly raise the issue in its initial request and that the resulting order should be understood to preclude any such gap-filling. But the Commission could readily have seen good reason to avoid that stance. After all, an incentive tends to be less effective if the party extending it gains a reputation for sharp practice.
At oral argument Northern stressed the risks associated with the storage capacity in question, risks that may involve substantial future expenses. The Commission offers an answer—namely that the risky character was readily knowable in advance and...
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