North Baja Pipeline, LLC v. F.E.R.C.

• Decision Date: 09 March 2007
• Docket Number: No. 05-1214.,05-1214.
• Citation: 483 F.3d 819
• Parties: NORTH BAJA PIPELINE, LLC, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

483 F.3d 819

NORTH BAJA PIPELINE, LLC, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent.

No. 05-1214.

United States Court of Appeals, District of Columbia Circuit.

Argued January 11, 2007.

Decided March 9, 2007.

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

Catherine E. Stetson argued the cause for petitioner. With her on the briefs were Lee A. Alexander, Stefan M. Krantz, James Howard, C. Todd Piczak, and Carl M. Fink. Debra H. Rednik entered an appearance.

Lona T. Perry, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were John S. Moot, General Counsel, and Robert H. Solomon, Solicitor.

Before: HENDERSON, RANDOLPH and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

KAVANAUGH, Circuit Judge.

Interstate natural gas pipelines must submit their proposed shipping rates to the Federal Energy Regulatory Commission for approval. This case concerns a rate filing by North Baja, a pipeline that transports natural gas from Arizona to Mexico through California. North Baja proposed a formula for sharing with shippers the costs of so-called force majeure interruptions—interruptions due to uncontrollable and unexpected factors like severe weather. North Baja also proposed to include scheduled maintenance as a force majeure event. FERC determined that (i) North Baja's proposed cost-sharing formula was inconsistent with established FERC policy and (ii) scheduled maintenance was not a force majeure event under FERC precedents. We find FERC's decisions reasonable and reasonably explained, and we therefore deny North Baja's petition for review.

I

1. Natural gas shippers typically pay two fees to transport gas on a pipeline. The first fee, called a "reservation charge," is based on the amount of pipeline capacity reserved by the shipper. The second fee, called a "usage charge," is based on the actual amount of gas transported by the shipper. In accordance with FERC policy, pipelines recover their fixed costs (such as operating expenses) in the reservation charge and their variable costs (primarily the cost of fuel for pipeline compressors) in the usage charge. See Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 636, 57 Fed.Reg. 13,267-02, 13,281 (Apr. 8, 1992), on reh'g, Order No. 636-A, 57 Fed.Reg. 36,128-01, 36,171 (Aug. 3, 1992). When pipeline service is interrupted, shippers generally receive a "reservation charge credit," which (in substance) is a refund of the reservation charge the shipper paid to reserve pipeline capacity.

2. In October 2004, North Baja proposed a formula to share the costs of force majeure occurrences between the pipeline and its shippers. Under North Baja's proposal, shippers would receive no refund for the first ten days of a force majeure interruption. If the interruption persisted longer than ten days, the shippers would receive a percentage refund for each additional day the pipeline was out of service.

FERC rejected North Baja's proposed formula as inconsistent with Commission policy. FERC explained that it had previously approved two refund formulas for force majeure events. See Order Accepting and Suspending Tariff Sheets Subject to Conditions, 109 F.E.R.C. ¶ 61,159, at 61,766 ¶ 14 (Nov. 12, 2004). Under the first, called the Texas Eastern policy, shippers receive no refund for the first ten days and receive a full refund for any days beyond that. Id. (citing Tx. E. Transmission Corp., 62 F.E.R.C. ¶ 61,015 (Jan. 13, 1993), and Natural Gas Pipeline Co. of Am., 106 F.E.R.C. ¶ 61,310 (Mar. 29, 2004)). Under the second, called the Tennessee policy, shippers receive a percentage refund for the entire period of the interruption. Id. (citing El Paso Natural Gas Co., 104 F.E.R.C. ¶ 61,045 (July 9, 2003)). North Baja proposed a "hybrid" that combined the pipeline-favorable aspects of each of the two policies—the ten-day no-refund period of Texas Eastern and the percentage refund of Tennessee. Id. FERC concluded that this hybrid did not satisfy the Commission's standard of fair cost-sharing between pipelines and shippers. Id. at 61,766 ¶ 15.

In the same order, FERC concluded that events within North Baja's control— such as scheduled maintenance—are not force majeure events. Id. at 61,765 ¶ 11. FERC directed North Baja either to change its proposal to conform with the Commission's rulings or to offer additional support for it. Id. at 61,766 ¶ 15.

North Baja filed a request for clarification and rehearing before the Commission. North Baja argued that FERC had made two mistakes in the initial order. First, North Baja questioned whether the Texas Eastern and Tennessee formulas were the only permissible alternatives for a force majeure refund. Second, North Baja contended that FERC erred in determining that scheduled maintenance was not a force majeure event "without first considering North Baja's unique physical and operational characteristics." Joint Appendix 60.

FERC issued an Order on Rehearing, Clarification, and Compliance. 111 F.E.R.C. ¶ 61,101 (Apr. 19, 2005). The Commission stated plainly that the Texas Eastern and Tennessee policies were not the only permissible approaches to force majeure interruptions and that the Commission was "open to alternative approaches if fully justified and supported." Id. at 61,493 ¶ 20. North Baja's formula did not meet that requirement.

FERC also did not accept North Baja's argument on the scheduled maintenance issue. Id. at 61,492-61,493 ¶¶ 17-19. FERC explained that an interruption "from planned or scheduled maintenance is a non-force majeure event that requires the pipeline to provide full credits." Id. at 61,492 ¶ 17. Although some maintenance may be unavoidable, FERC did "not agree that the pipeline has no `control' over how and when it performs such maintenance . . . . These are activities over which North Baja exercises a degree of control, unlike acts of God in typical force majeure situations." Id. at 61,492 ¶ 18. In addition, FERC explained, "since such maintenance is planned, the pipeline should have provided for such maintenance interruptions in its rates." Id. at 61,493 ¶ 18.

North Baja filed a timely petition for review of the orders in this Court. 15 U.S.C. § 717r(b).

II

We review the FERC decisions at issue here under the Administrative Procedure Act's arbitrary and capricious standard of review. See 5 U.S.C. § 706(2)(A). FERC's conclusions therefore must be reasonable and reasonably explained. See Nat'l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 839 (D.C.Cir. 2006). We undertake that inquiry recognizing that we are "particularly deferential to the Commission's expertise in ratemaking cases, which involve complex industry analyses and difficult policy choices." Exxon Mobil Corp. v. FERC, 430 F.3d 1166, 1172 (D.C.Cir.2005) (internal quotation omitted).

1. With respect to the cost-sharing formula, FERC reasonably rejected North Baja's proposal as inconsistent with agency policy. FERC has previously determined that two cost-sharing arrangements—Texas Eastern's full credit after ten days and Tennessee's percentage credit over the entire interruption period—are equitable. See generally Natural Gas Pipeline Co. of Am., 106 F.E.R.C. ¶ 61,310, at 62,208 ¶ 5 (Mar. 29, 2004). Both alternatives incorporate a careful balancing of risk between shippers and pipelines. The problem here is that North Baja effectively cherry-picked the most pipeline-favorable aspects of each formula by combining Texas Eastern's ten-day no-refund period with Tennessee's percentage refund.

North Baja argues that its proposal should be measured against the general principle that pipelines and shippers must equitably share the risk of force majeure interruptions—and not measured against any previously approved policy. It is true that the Commission has evaluated proposals against the principle that both pipelines and shippers should bear "some portion of the risk associated with force majeure interruptions, so that [pipelines] have an incentive to act expediently to cure a force majeure interruption." Tenn. Gas Pipeline Co., order on reh'g, 80 F.E.R.C. ¶ 61,389, at 62,296 (Sept. 29, 1997). But there is nothing unreasonable about the Commission comparing North Baja's proposal to previously approved policies to determine if the proposal equitably shares the risk between North Baja and its shippers. The Commission has simply instructed North Baja to choose the Texas Eastern or Tennessee formulas, or to propose a formula that achieves an equitable cost-sharing in the same ballpark as the Texas Eastern and Tennessee policies.

North Baja also questions whether the Commission will in fact consider any approaches other than the specific Texas Eastern and Tennessee policies. In...