Williams Natural Gas Co. v. F.E.R.C., s. 88-1079

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Citation872 F.2d 438
Docket Number88-1251 and 88-1264,Nos. 88-1079,s. 88-1079
PartiesWILLIAMS NATURAL GAS COMPANY, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Southern California Gas Company, Texaco Inc., ARCO Oil and Gas Co., Pacific Gas and Electric Co., Enserch Exploration, Inc., Exxon Corporation, Texas Eastern Transmission Corp., Intervenors. TEXAS EASTERN TRANSMISSION CORPORATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, ARCO Oil and Gas Co., Enserch Exploration, Inc., Williams Natural Gas Company, Intervenors. TEXAS GAS TRANSMISSION CORPORATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Enserch Exploration, Inc., ARCO Oil and Gas Co., Williams Natural Gas Company, Intervenors.
Decision Date07 April 1989

Michael E. Small, Washington, D.C., with whom John H. Cary, William Douglas Field, Jr., Owensboro, Ky., and Judy M. Johnson, Houston, Tex., were on the brief, for petitioners in No. 88-1079, et al.

Dale A. Wright and James T. McManus, Washington, D.C., also entered appearances for petitioner in No. 88-1079.

John S. Carr also entered an appearance for petitioner in No. 88-1251 and for intervenor Texas Eastern Transmission Corp. in No. 88-1079.

Robert W. Perdue, Washington, D.C., also entered an appearance for petitioner in No. 88-1264.

Samuel Soopper, Atty., F.E.R.C., with whom Catherine C. Cook, General Counsel, F.E.R.C., and Jerome M. Feit, Atty., F.E.R.C., Washington, D.C., were on the brief, for respondent in No. 88-1079, et al.

John Conway also entered an appearance for respondent in Nos. 88-1079, 88-1251 and 88-1264.

Carroll L. Gilliam, Kevin M. Sweeney, Catherine E. Bocskor, Washington, D.C., Jack M. Wilhelm, New Orleans, La., Harris S. Wood, Kathleen E. Magruder, Ralph J. Pearson, Jr. and John P. Beall, Houston, Tex., were on the joint brief of intervenors Amoco Production Co., Arco Oil and Gas Co., Div. of Atlantic Richfield Co., Enserch Exploration Inc., as Managing General Partner of EP Operating Co. and Texaco Inc., in support of respondent in No. 88-1079, et al.

E.R. Island and David L. Huard, Los Angeles, Cal., entered appearances for intervenor Southern California Gas Co. in No. 88-1079.

Charles F. Hosmer, Jr., Dallas, Tex., also entered an appearance for intervenor ARCO Oil and Gas Co. in Nos. 88-1079, 88-1251 and 88-1264.

J. Paul Douglas, Washington, D.C., also entered an appearance for intervenor ARCO Oil and Gas Co. in No. 88-1079.

Joshua Bar-Lev, Steven F. Greenwald and Lindsey How-Downing, San Francisco, Cal., entered appearances for Pacific Gas and Elec. Co. in No. 88-1079.

George C. Garikes, Washington, D.C., also entered an appearance for intervenor Enserch Exploration Inc. in Nos. 88-1079, 88-1251 and 88-1264.

C. Roger Hoffman and Douglas W. Rasch, Houston, Tex., entered appearances for intervenor Exxon Corp. in No. 88-1079.

Judy M. Johnson, Houston, Tex., also entered an appearance for intervenor Texas Eastern Transmission Corp. in No. 88-1079.

Dale A. Wright, Michael E. Small, Washington, D.C., and John H. Cary also entered appearances for intervenor Williams Natural Gas Co. in Nos. 88-1251, 88-1264.

Maria M. Jackson, Washington, D.C., entered an appearance for intervenor Williams Natural Gas Co. in No. 88-1264.

Before WALD, Chief Judge, and WILLIAMS and D.H. GINSBURG, Circuit Judges.

Opinion for the Court filed by Chief Judge WALD.

WALD, Chief Judge:

Petitioners Williams Natural Gas Company, Texas Eastern Transmission Corporation, and Texas Gas Transmission Corporation (collectively "Williams") seek review of an order of the Federal Energy Regulatory Commission ("FERC" or "the Commission"). That order terminated an ongoing rulemaking; by terminating the docket, FERC maintained an incentive price for certain "tight formation" natural gas regulated under the Natural Gas Policy Act ("NGPA" or "the Act"). Williams contends that the Commission, by failing to complete the rulemaking, has acted arbitrarily and capriciously and in contravention of its statutory obligations. Because we conclude that the agency has failed to justify its termination of the rulemaking, we remand for further consideration by the Commission.

I. FACTS
A. The Natural Gas Policy Act

Enacted in 1978, the Natural Gas Policy Act, 15 U.S.C. Sec. 3301 et seq., "comprehensively and dramatically changed the method of pricing natural gas produced in the United States." Public Service Commission v. Mid-Louisiana Gas Co., 463 U.S. 319, 322, 103 S.Ct. 3024, 3027, 77 L.Ed.2d 668 (1983). The Act defines several categories of natural gas and sets ceiling prices for "first sales" in each category. Congress recognized, however, that the recovery of some gas reserves might not be economically feasible if producers were limited to the maximum prices established by the statute. The Act therefore provided that "[t]he Commission may, by rule or order, prescribe a maximum lawful price, applicable to any first sale of any high-cost natural gas, which exceeds the otherwise applicable maximum lawful price to the extent that such special price is necessary to provide reasonable incentives for the production of such high-cost natural gas." NGPA Sec. 107(b), 15 U.S.C. Sec. 3317(b). The Act specifically identified four sources from which gas produced would be deemed "high-cost natural gas." NGPA Sec. 107(c)(1)-(4), 15 U.S.C. Sec. 3317(c)(1)-(4). The statute further provided the Commission with the authority to prescribe incentive prices for any gas "produced under such other conditions as the Commission determines to present extraordinary risks or costs." NGPA Sec. 107(c)(5), 15 U.S.C. Sec. 3317(c)(5).

The ceiling prices established by the statute were not intended to remain in perpetuity. The Act itself provided that maximum prices for the different categories of gas would rise from month to month in compliance with a statutorily-determined formula. Moreover, the maximum prices were intended to be transitional only: most natural gas was deregulated as of January 1, 1985.

The NGPA was enacted against a backdrop of growing demand for natural gas and rising prices for energy generally. The Act was intended to ensure producers an adequate return on their investment, and thereby to ensure that sufficient supplies of natural gas would be available. But the Congress which passed the Act quite plainly supposed that the statutory ceiling prices would be lower than those which would obtain in an unregulated market.. See FERC v. Martin Exploration Management Co., 486 U.S. 204, 108 S.Ct. 1765, 1769, 100 L.Ed.2d 238 (1988) ("Not one participant in the legislative process suggested that producers should receive higher prices than deregulation would afford them"). That expectation, however, has proved to be inaccurate. Since the passage of the Act, market-clearing prices for natural gas have plummeted, due in large measure to a drop in prices for alternative fuels; by 1984 they were lower than the regulated price ceilings established by the statute. See Martin Exploration, 108 S.Ct. at 1768.

If agreements between producers and pipelines were renegotiated on a day-to-day basis, then the drop in natural gas prices would make the price ceilings irrelevant: the parties would presumably base their transactions on the current market-clearing rate, which is presently lower than the ceiling itself. A price ceiling, after all, can be expected to affect prices only if it is lower than the rate which would otherwise be charged. Contracts for the purchase of natural gas are not, however, frequently renegotiated to reflect changing market conditions. These agreements typically span very long periods of time, and the price is often contractually tied to the price ceiling established by the statute or regulations. Thus, the NGPA's program of price ceilings has become a de facto system of price supports, since many pipelines are obligated by contract to pay a "ceiling" price which is far in excess of the market rate. As the Supreme Court has noted:

[T]hese [long-term] contracts had one clause setting the price if the gas were regulated and another clause setting the price if it were deregulated. The contract price for regulated gas was typically close to the price ceiling; the contract price for deregulated gas was typically based on market prices or left open to renegotiation. Because by 1984 the market price of natural gas had plunged below the regulated price ceilings, these producers stood to reap higher contractual prices if their gas was regulated than if it were deregulated.

Martin Exploration, 108 S.Ct. at 1768.

B. Order No. 99

As noted earlier, NGPA Sec. 107(c)(5) gives the Commission the power to prescribe an incentive price for high-cost natural gas which does not fit within the categories enumerated in Sec. 107(c)(1)-(4). On July 16, 1979, President Carter recommended the establishment of incentives for the production of "tight formation" natural gas. 1 After conducting a rulemaking, the Commission promulgated regulations establishing incentive prices for tight formation gas.

Order No. 99 both defined the gas to which the incentive price would apply and established the appropriate ceiling. Not all tight formation gas was made eligible for this special price. Rather, the incentive price is available only if the contract contains a "negotiated contract price," defined by the regulations as "any price established by a contract provision that specifically references the incentive pricing authority of the Commission under Section 107 of the NGPA, by a contract provision that prescribes a specific fixed rate, or by the operation of a fixed escalator clause." 18 C.F.R. Sec. 271.702(a)(1). A contract which simply referenced the NGPA without specifically mentioning Sec. 107 would not be sufficient to allow collection of the incentive price. The agency explained "that it must limit the...

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