Union Pacific Fuels, Inc. v. F.E.R.C.
| Decision Date | 07 November 1997 |
| Docket Number | Nos. 93-1463,93-1595,93-1601 and 93-1603,93-1505,s. 93-1463 |
| Citation | 129 F.3d 157 |
| Parties | , Util. L. Rep. P 14,179 UNION PACIFIC FUELS, INC., et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Transwestern Pipeline Company, et al., Intervenors. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
On Petitions for Review of Orders of the Federal Energy Regulatory Commission.
Katherine B. Edwards, Washington, DC, argued the cause for petitioners, with whom Nancy J. Skancke, Donald Ayer and Norman A. Pedersen were on the briefs. Kerry R. Brittain entered an appearance.
Susan Court, Special Counsel, Federal Energy Regulatory Commission, Washington, DC, argued the cause for respondent, with whom Jay L. Witkin, Solicitor, John H. Conway, Deputy Solicitor, and Eric Lee Christensen, Attorney, were on the brief.
Jeffrey D. Komarow, Michael J. Thompson, Paul M. Flynn and Mark C. Moench, Washington, DC, were on the brief for intervenor Kern River Gas Transmission Company.
Before: EDWARDS, Chief Judge, GINSBURG and TATEL, Circuit Judges.
Opinion for the Court filed by Chief Judge HARRY T. EDWARDS.
In January 1990, the Federal Energy Regulatory Commission ("FERC") approved the construction of a pipeline by Kern River Gas Transmission Company ("Kern River") that would transport natural gas from the Wyoming "Overthrust Region" to California. Kern River negotiated long term contracts with purchasers of its transportation services ("shippers") using the rate structure prevailing in the industry at the time. The rate structure in the gas pipeline industry passes on pipeline costs to shippers in two components: a reservation charge covering fixed costs, and a usage charge covering variable costs. Under "straight fixed/variable" rating (hereinafter "straight f/v"), all fixed costs are assigned to the reservation charge, which does not vary with use, and all variable costs are assigned to the usage charge, which does. Under "modified fixed/variable" rating (hereinafter "modified f/v"), some of the fixed costs are assigned to the reservation charge, but some of the fixed costs, including return on equity and income taxes, are assigned to the usage charge along with all the variable costs. In 1990, modified f/v prevailed in the pipeline industry; Kern River's contracts with its shippers used modified f/v.
In 1993, implementing Congress' gradual deregulation of the natural gas industry, FERC issued its landmark Order No. 636, 1 which changed the basic rate structure in the gas pipeline industry from modified f/v to straight f/v in order to enhance competition between gas producers. In two successive subsequent orders, FERC required Kern River to replace the modified f/v rate design for which it had contracted with straight f/v. Kern River Gas Transmission Company, Docket No. RS92-65-000, et al.: "Order on Compliance with Restructuring Rule," issued March 2, 1993, 62 FERC (CCH) p 61,191; "Order Accepting Revised Compliance Filing, Denying Rehearing and Granting Clarification," issued July 9, 1993, 64 FERC (CCH) p 61,049 (collectively, "Kern River orders"). Petitioners, shippers who contracted with Kern River to use its transportation services, challenge the rate change on the grounds that it arbitrarily and unjustifiably reallocates risk away from Kern River and onto them, and on the grounds that FERC may not abrogate existing contracts unless imperatively demanded by the public interest.
We deny the petition for review. The Kern River orders do not abrogate the parties' contracts, but rather alter some of their terms in a permissible manner anticipated by the contracts themselves. While the orders do reallocate risk at the expense of Petitioners, FERC articulated a rational, nonarbitrary policy basis for its decision.
FERC authorized construction of the Kern River pipeline to transport gas from the Wyoming "Overthrust Region" to California under special "Optional Certificate" procedures authorized by the Natural Gas Act ("NGA") § 7, 15 U.S.C. § 717f. See Kern River Gas Transmission Co., 50 FERC 61,069 (1990). These Optional Certificate procedures allow a pipeline builder to forgo a lengthy showing of a pipeline's usefulness and necessity when the builder assumes the economic risks associated with undertaking the project. Kern River negotiated contracts of various terms with Petitioners for a total of 98% of its capacity for fifteen years using the modified f/v rate that prevailed at the time. Joint Initial Brief of Petitioners 21.
Each contract contained a "Memphis clause," so named for United Gas Pipe Line Co. v. Memphis Light, Gas and Water Div., 358 U.S. 103, 79 S.Ct. 194, 3 L.Ed.2d 153 (1958). The Memphis clause specified that "rates, charges, classifications and service" were subject to FERC regulation, and allowed Kern River to request and implement rate changes. Joint Appendix ("J.A.") 113-14. Two of the contracts, those between Kern River and Petitioners Mobil Exploration & Production U.S., Inc. ("Mobil") and Union Pacific Fuels, Inc. ("Union Pacific") expressly guaranteed that Kern River would not, without consent, "seek to change ... the modified fixed variable rate design." J.A. 28, 33. The other contracts guaranteed what the parties call "most favored nations" status, under which purchasers would receive a rate as good as the most favorable rate negotiated by any other party. The contracts, negotiated at arm's length, functioned in part as an allocation of risk between Kern River and Petitioners. The more of the fixed cost paid in reservation fees by Petitioners, purchasers of transportation services, the greater the percentage of risk assumed by them.
In 1992, FERC adopted Order No. 636, which effected a variety of changes in the natural gas market. For purposes of this case, the significant aspect of Order No. 636 was its alteration of the required rate design from modified f/v to straight f/v. See 18 C.F.R. § 284.8(d). This court upheld the rate design change in United Distrib. Cos. v. F.E.R.C., 88 F.3d 1105, 1161-76 (1996) (per curiam), cert. denied --- U.S. ----, 117 S.Ct. 1723, 137 L.Ed.2d 845 (1997). FERC intended the rate change to facilitate the creation of a competitive, national gas market. Gas from different producers is carried on different pipelines, each of which has different fixed costs. When pipelines use modified f/v, the price paid by the purchaser varies depending on the fixed costs associated with the particular pipeline. When pipelines use straight f/v, the price to the customer more closely reflects the incremental cost of producing and transporting the gas, and thus, in FERC's view, will lead to a more competitive and efficient market. See Order No. 636, III F.E.R.C. Stats. & Regs. at 30,434.
In August 1992, after Order No. 636 took effect, Kern River applied to FERC to adopt straight f/v rate design for all of its shippers except Mobil and Union Pacific. J.A. 1. FERC responded by requiring straight f/v for all Kern River's shippers. 62 FERC at 62,262. Various parties, including Petitioners, filed for rehearing; Kern River asked for further clarification. In its second Kern River order, FERC concluded once more that straight f/v should be required for all customers. 64 FERC at 61,406. Although Order No. 636 permits exceptions to the straight f/v policy, FERC refused to make an exception for Kern River. It reasoned that the modified f/v rate design would artificially inflate the usage charges upon which gas purchasers base their buying decisions. This would distort the market in natural gas by creating an incentive for end purchasers to buy gas transported through straight f/v pipelines. 62 FERC at 62,257-58, 64 FERC at 61,407-08.
This challenge followed. The gravamen of Petitioners' complaint is that modified f/v places the risk of the pipeline's failure primarily on the pipeline owner, while straight f/v spreads this risk by assigning virtually all the fixed costs to shippers such as Petitioners, who pay reservation charges to guarantee themselves pipeline capacity. If, as here, the shippers reserve nearly all of a pipeline's capacity for a given period, a pipeline using straight f/v rate design will recover its fixed costs during that period irrespective of how much capacity the shippers actually use. In other words, although Order No. 636 aimed to rationalize pricing of natural gas for end purchasers, implementing straight f/v in this case had a coincidental, different effect: it altered the original risk allocation for which the parties contracted, placing a higher burden on the shippers and reducing significantly the burden on Kern River. Petitioners seek to escape this alteration in risk allocation that will bind them for the length of the contracts.
We review FERC orders under the arbitrary and capricious standard of 5 U.S.C. § 706(2)(A). City of Seattle v. F.E.R.C., 883 F.2d 1084, 1087 (D.C.Cir.1989). Petitioners argue that the orders here must also satisfy the higher Mobile-Sierra standard. See United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332, 76 S.Ct. 373, 100 L.Ed. 373 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348, 76 S.Ct. 368, 100 L.Ed. 388 (1956). Mobile-Sierra doctrine construes FERC's authority under NGA § 5 to order just and reasonable rates where FERC has found existing rates unjust and unreasonable. 15 U.S.C. § 717d. Under Mobile-Sierra, FERC may exercise this rate-making authority to abrogate existing contracts only where the public interest "imperatively demands" such action. Metropolitan Edison Co. v. F.E.R.C., 595 F.2d 851, 856 n. 29 (D.C.Cir.1979).
Whether Mobile-Sierra doctrine applies is a question of contract interpretation:
The rule of Sierra, Mobile, and Memphis is refreshingly simple: The contract between the parties governs the legality of the filing....
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