Tarpon Transmission Co. v. F.E.R.C., 88-1052

• Decision Date: 25 October 1988
• Docket Number: No. 88-1052,88-1052
• Citation: 860 F.2d 439
• Parties: TARPON TRANSMISSION COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Trunkline Gas Co., Sun Exploration and Production Co., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 439

860 F.2d 439

273 U.S.App.D.C. 354

TARPON TRANSMISSION COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Trunkline Gas Co., Sun Exploration and Production Co., Intervenors.

No. 88-1052.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 9, 1988.

Decided Oct. 25, 1988.

Rex E. Lee, Washington, D.C., with whom, Michael J. McDanold, Phillip D. Endom, Houston, Tex., Eugene R. Elrod and Nancy Y. Gorman, Washington, D.C., were on the brief for petitioner. Stephen R. Melton, Washington, D.C., also entered an appearance for petitioner.

Joel M. Cockrell, Atty., F.E.R.C., with whom, Catherine C. Cook, Gen. Counsel and Jerome M. Feit, Sol., F.E.R.C., Washington, D.C., were on the brief for respondent.

Thomas J. Eastment, Washington, D.C., with whom, Charles L. Spann, Dallas, Tex., was on the brief for intervenor, Sun Exploration and Production Co.

Brian D. O'Neill and Bruce W. Neely, Washington, D.C., were on the brief for intervenor Trunkline Gas Co.

Before EDWARDS, BUCKLEY and WILLIAMS, Circuit Judges.

Opinion for the Court filed by Circuit Judge STEPHEN F. WILLIAMS.

STEPHEN F. WILLIAMS, Circuit Judge:

We deal here with a novel effort by a pipeline and its principal customer to provide for retrospective adjustment of rates to reflect current information about the cost of service and the amount and expected lifetime of the reserves to be transported. Finding the Federal Energy Regulatory Commission not to have supported its interpretation of the controlling contract provision with any plausible theory, we grant the petition for review for want of reasoned decisionmaking and remand for further consideration by the Commission.

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Tarpon Transmission Company owns 40.4 miles of pipeline located in the waters of the Outer Continental Shelf, off the Louisiana shore. The pipeline links reserves primarily owned by Trunkline Gas Company with the latter's offshore pipeline, and Trunkline has been Tarpon's principal customer since Tarpon began transporting natural gas in June 1978. ¹ A Transportation Agreement, effective since February 15, 1977, specifies the terms of the relationship between Tarpon and Trunkline and, with its amendments, serves as Tarpon's Tariff with the Commission.

The Agreement sets out to modify some of the conventional principles of cost-based ratemaking. Under the traditional approach, rates are based on projected volumes, with the aim that if service in fact proceeds at those volumes the projected revenue will cover the projected costs. For a pipeline in service, the estimation is derived from experience over a "test-year," with certain adjustments. See 18 C.F.R. Sec. 154.63(e)(2) (1988) (explaining the test-year methodology and adjustments). Where application of this method calls for a change in rates, the change is prospective only. Thus, if it appears in the third year of a project that the throughput has been and will likely be only half the anticipated level, entailing a higher unit rate (so long as all other things are unchanged), no adjustment will be made to enable the pipeline owner to catch up for the under-recovery of costs during the past period. Equally, of course, no retrospective adjustments will be made for excess recoveries due to unexpectedly high volumes. The rates for future volumes transported will, however, reflect the new information.

Article X of the Agreement establishes a special methodology. Section 10.1 establishes a "life-of-the-reserves" method for setting the "initial unit rate." The total cost of service for the estimated life of the reserves (including operating and maintenance expenses, taxes, depreciation and return on investment) is estimated and then divided by the estimated total reserves. This yields the initial rate per thousand cubic feet ("Mcf"). It is not clear whether this aspect of the parties' arrangement differs significantly from what FERC would typically require, and in any event it is not in dispute.

The clear innovation lies in Section 10.5, which governs changes in rates:

10.5 Rate Adjustment. Trunkline or Tarpon upon the giving of ninety (90) days written notice to the other prior to the end of the second (2nd), fourth (4th), sixth (6th) and eighth (8th) years of the primary term hereof, may request that the unit rate currently being utilized to determine the monthly charge and other charges or credits be decreased or increased to reflect changes in costs and/or gas reserves connected to the system. Such rate redetermination shall be based upon a cost of service for the entire life of the reserves transported and to be transported pursuant to this Agreement and other agreements Tarpon may enter into for the utilization of subject facilities, taking into consideration actual revenues collected to date or to be collected prior to the effective date of such unit rate charge; and such rate shall be calculated in the same manner as used in the calculation of the initial unit rate hereunder.

When Tarpon began operations in 1978, reserves were estimated to have a life of 8.25 years and a volume of 103,573,000 Mcf. These figures and other data as to Tarpon's costs yielded an initial rate of 31.64 cents per Mcf. The Commission approved the rate but required Tarpon to initiate a new rate proceeding within three years. See Tarpon Transmission Co., 59 FPC 1516, 1519 (1977).

Accordingly, in 1981 Tarpon and Trunkline set a new rate of 18.10 cents per Mcf. For no apparent reason, they did not employ Section 10.5, but rather the traditional test-year method. The Commission approved the new rate but again required Tarpon to file a notice of rate change within three years.

On May 25, 1984 Tarpon filed a notice of a rate change with FERC, proposing to reduce its rate to 16.88 cents per Mcf. Again Tarpon used the test-year approach rather than that of Section 10.5. Joint Appendix ("J.A.") 473. ² On this occasion, however, the Commission found that Tarpon had not demonstrated that the proposed rate was just and reasonable as required by the Natural Gas Act, 15 U.S.C. Sec. 717c(a) (1982). It allowed the rate to take effect on July 10, 1984, subject to a refund if Tarpon could not prove the rate was just and reasonable in subsequent rate proceedings. Tarpon Transmission Co., 28 FERC p 61,027 (1984). Dispute over details in the application of the traditional method were mooted, however, when all concerned concluded that Section 10.5 of the Agreement should control. ³

An administrative law judge accepted the interpretation of Section 10.5 advanced by Tarpon and ruled that the proposed rate of 16.88 cents was just and reasonable. Tarpon Transmission Co., 32 FERC p 63,020 (1985). Although the Section 10.5 approach (as construed by Tarpon) yielded a rate of about 25 cents per Mcf, ⁴ Tarpon claimed only the rate originally asserted in its 1984 Notice of Rate Change, and accordingly that was what the ALJ approved. Here, too, Tarpon claims only the 16.88 cents.

The Commission's staff filed exceptions to the ALJ's decision, and the Commission reversed. Tarpon Transmission Co., 41 FERC p 61,044 (1987). Although the Commission agreed that the rate should be determined according to Section 10.5, it accepted the staff's interpretation of the contract provision. Id. at 61,136. Under this interpretation, Tarpon's proposed rate was not just and reasonable, and FERC ordered Tarpon to recalculate the rate using the staff's interpretation. That approach yielded a rate of 4.02 cents per Mcf.

The Commission denied Tarpon's motion for a rehearing, Tarpon Transmission Co., 42 FERC p 61,050 (1988), and this appeal followed.

Scope of Review

Although the interpretation of Section 10.5 is a matter of contract law, we nonetheless owe deference to the Commission's view. In National Fuel Gas Supply v. FERC, 811 F.2d 1563, 1569 (D.C.Cir.), cert. denied, --- U.S. ---- 108 S.Ct. 200, 98 L.Ed.2d 151 (1987), this court read Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), as requiring judicial deference to the Commission's interpretation of language in a settlement agreement resolving certain rate disputes. The court identified two factors militating in favor of deference. First, Congress explicitly delegated to FERC broad powers over ratemaking, including the power to analyze relevant contracts. 811 F.2d at 1569. In this case, the Commission was involved with the Agreement from the time of its initial approval of the contract as Tarpon's tariff.

Second, the Commission has greater technical expertise relevant to the interpretive problem. Id. at 1570; Southern California Edison Co. v. FERC, 805 F.2d 1068, 1072 (D.C.Cir.1986). Under National Fuel the Commission's expertise calls for deference even though Section 10.5 is novel and the agency is not experienced in interpreting its language. There the court rejected the idea that deference was appropriate to an agency's contract interpretation only when it was clear that the interpretation rested on expertise. "We think that the better view ... is that deference should be given because the congressional grant of authority to the agency indicates that the agency's interpretation typically will be enhanced by technical knowledge." National Fuel, 811 F.2d at 1570.

Nonetheless, the courts still play a vital role in reviewing an agency interpretation of a technical contract provision. To fulfill that role, this court must ask whether the interpretation is "amply supported both factually and legally." Vermont Dep't of Public Service v. FERC, 817 F.2d 127, 134 (D.C.Cir.1987). We cannot accept an agency determination unless it is the result of reasoned and principled decisionmaking that can be ascertained from the record. Columbia Gas Transmission Corp. v. FERC, 628 F.2d 578, 593 (D.C.Cir.1979). To do otherwise would transform judicial review into a process of rubberstamping unsupported, and perhaps unsupportable, agency decisions.

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