Koch Gateway Pipeline Co. v. Federal Energy Regulatory Commission , 136 F.3d 810 ( 1998 )


Menu:
  •                         United States Court of Appeals
    FOR THE DISTRICT OF COLUMBIA CIRCUIT
    Argued January 20, 1998                             Decided February 27, 1998
    No. 97-1024
    Koch Gateway Pipeline Company,
    Petitioner
    v.
    Federal Energy Regulatory Commission,
    Respondent
    Utilities Board, of the City of Atmore, Alabama, et al.,
    Intervenors
    On Petition for Review of Orders of the
    Federal Energy Regulatory Commission
    Michael E. McMahon argued the cause and filed the briefs
    for petitioner.
    Joel M. Cockrell, Attorney, Federal Energy Regulatory
    Commission, argued the cause for respondent, with whom
    Jay L. Witkin, Solicitor, was on the brief.
    Before:  Edwards, Chief Judge, Wald, and Rogers, Circuit
    Judges.
    Opinion for the Court filed by Circuit Judge Wald.
    Wald, Circuit Judge:  In an attempt to comply with the
    restructuring of the natural gas pipeline industry ordered by
    the Federal Energy Regulatory Commission ("FERC" or
    "the Commission"), Koch Gateway Pipeline Company ("Koch"
    or "KGPC") revised its tariff to implement a new procedure
    for resolving imbalances in the amount of gas shipped by its
    transportation customers.  After reviewing Koch's subse-
    quent report detailing how this procedure had worked in
    practice, the Commission held that Koch's accounting system
    was violative of its tariff and ordered Koch to refund over $3
    million in net revenues to its customers.  We now grant
    Koch's petition for review of this decision and hold that while
    the Commission did not err in finding Koch's accounting
    practices to be inconsistent with its tariff, it abused its
    remedial discretion by ordering a refund given that Koch did
    not ultimately garner a windfall in the process.  We therefore
    remand this case to the Commission for reconsideration of its
    refund order in light of the Commission's existing policies and
    goals.
    I. Background
    On April 16, 1992, the Commission issued Order No. 636,1
    its attempt to open the natural gas market to competition by
    allowing all natural gas suppliers to compete for sales on an
    __________
    1 Order No. 636, Pipeline Service Obligations and Revisions to
    Regulations Governing Self-Implementing Transportation Under
    Part 284 of the Commission's Regulations, and Regulation of Natu-
    ral Gas Pipelines After Partial Wellhead Decontrol, F.E.R.C. Stats.
    & Regs. (CCH) p 30,939 (1992); order on reh'g, Order No. 636-A,
    F.E.R.C. Stats. & Regs. (CCH) p 30,950 (1992); order on reh'g,
    Order No. 636-B, 61 F.E.R.C. p 61,272 (1992); aff'd in part, rev'd
    in part, United Distrib. Cos. v. FERC, 
    88 F.3d 1105
    (D.C. Cir.
    1996), cert. denied, 
    117 S. Ct. 1723
    (1997); on remand, Order No.
    636-C, 78 F.E.R.C. p 61,186 (1997).
    equal footing.2  Its primary method for achieving greater
    competition was to require that pipelines unbundle (i.e., sepa-
    rate) their sales services from their transportation services
    instead of providing both as part of the same package.
    Pipelines were thus required to provide transportation service
    at equivalent levels of quality without regard to whether the
    gas had been purchased from the pipeline or from another
    supplier.  See, e.g., Western Resources, Inc. v. FERC, 
    9 F.3d 1568
    , 1573 (D.C. Cir. 1993).
    As we have recently noted, see Pennsylvania Office of
    Consumer Advocate v. FERC ["POCA"], 
    131 F.3d 182
    , 184
    (D.C. Cir. 1997), corrected by No. 93-1662 (D.C. Cir. Feb. 3,
    1998), the mandatory unbundling created a new set of difficul-
    ties.  Because customers were permitted to purchase trans-
    portation as a separate service, and thus would be bringing
    gas purchased elsewhere to the pipeline, pipelines might find
    it difficult to regulate imbalances in the amount of gas that
    was being delivered to, or taken from, the pipeline.  Put
    simply, customers delivering more gas for transportation than
    they took out might threaten system integrity by overloading
    the pipeline;  customers taking more gas than they delivered
    to the pipeline would hinder the pipeline's ability to render
    dependable service to its remaining customers.  See id.;
    Order No. 636, p 30,939, at 30,424 ("All shippers must recog-
    nize that the action or nonaction by a single shipper may
    affect a pipeline's ability to serve all other shippers.").  Antic-
    ipating that such problems would likely occur,3 Order No. 636
    stated that, as part of each pipeline's restructuring process,
    "[t]he pipeline and its shippers need to fashion reasonable,
    __________
    2 As this court has previously noted, "[t]he enormous economies
    of scale involved in the construction of natural gas pipelines tend to
    make the transportation of gas a natural monopoly."  United
    Distribution 
    Cos., 88 F.3d at 1122
    .
    3 Pipelines had already experienced such problems in complying
    with Order No. 436, which allowed pipelines to file "open-access"
    tariffs that offered nondiscriminatory transportation service.  See
    Order No. 436, Regulation of Natural Gas Pipelines After Partial
    Wellhead Decontrol, 50 Fed. Reg. 42,408 (1985); see also 
    POCA, 131 F.3d at 184
    .
    yet effective, methods such as penalties to deter shipper
    behavior inimical to the welfare of the system and other
    shippers."  Order No. 636, p 30,939, at 30,424.  The Commis-
    sion thus intended that each pipeline and its customers would
    "work out individual pipeline solutions, to be considered in
    subsequent pipeline restructuring proceedings."  
    POCA, 131 F.3d at 184
    ;  see also Order No. 636-A, p 30,950, at 30,546-47.
    On November 2, 1992, Koch submitted its revised tariff,
    which included the changes necessary to comply with Order
    No. 636.4  Section 20 of the revised tariff established Koch's
    "cash-in/cash-out" procedure for resolving transportation im-
    balances.  Under this system,5 Koch nets all imbalances
    among each transportation customer's contracts and sends
    each customer a statement with its imbalance for the month
    (month one) on or before the eighth day of the next month
    (month two).  The customer then has until the end of the
    following month (month three) to trade its imbalances with
    another shipper or with a storage customer.  If it fails to do
    so, it receives either a charge (i.e., it must "cash-out") or a
    credit ("cash-in") on its invoice for the next month (month
    four) at month one's "buy" or "sell" price.6  There is there-
    fore a three-month lag between the time when the imbalance
    occurs and the time when the imbalance is finally resolved.
    __________
    4 At the time of its initial submission, Koch was known as United
    Gas Pipe Line Company.  On November 10, 1992, however, Koch
    Industries, Inc., acquired all of United's stock, and on August 24,
    1993, the name of the pipeline was changed to Koch Gateway
    Pipeline Company.  For the sake of convenience, we shall refer to
    the pipeline throughout the proceedings before the Commission as
    "Koch."
    5 Koch's procedure for resolving imbalances underwent several
    revisions from the time the first revised tariff was filed.  See, e.g.,
    United Gas Pipe Line Co., 64 F.E.R.C. p 61,015 (1993); Koch
    Gateway Pipeline Co., 65 F.E.R.C. p 61,338 (1993); Koch Gateway
    Pipeline Co., 66 F.E.R.C. p 61,232 (1994).  We describe here the
    system as it existed at the time of the order under review.
    6 The "buy" and "sell" prices are set at a distance from the
    prevailing market price in order to discourage shippers from allow-
    ing imbalances in the system to occur.
    The Commission's policy is that a pipeline may not retain
    revenues from a cash-in/cash-out system but rather must
    credit these revenues back to its customers.  See, e.g.,
    Williams Natural Gas Co., 64 F.E.R.C. p 61,165, at 62,416
    (1993).7  In accordance with this policy, section 20.1(D) of
    Koch's tariff provided:
    On [a] quarterly basis, KGPC shall credit on a pro rata
    basis to its Customers the net revenues (moneys received
    from shippers under the program less moneys paid out
    by KGPC less cost of gas purchased to balance the
    system) to its transportation customers based upon
    transportation throughput during the applicable period.
    KGPC will begin paying interest on net revenues com-
    puted in accordance with section 154.67(c)(2) of the Com-
    mission's Regulations beginning on the 1st day of the
    next quarter and continuing until the revenues have been
    credited to the shippers.
    Koch Gateway Pipeline Co., 77 F.E.R.C. p 61,161, at 61,617
    (1996).  The Commission approved Koch's tariff, including
    this provision, to be effective on November 1, 1993, subject to
    certain revisions not at issue here.  See United Gas Pipe
    Line Co., 65 F.E.R.C. p 61,006 (1993).
    After Koch had been operating under the cash-in/cash-out
    system for over two years, it filed its first report with the
    Commission on April 11, 1996, covering the period from
    November 1, 1993, to December 31, 1995.8  The report
    showed that at the end of each quarter in 1995, Koch included
    a line item labeled "Operational Purchases:  Accrual," which
    eliminated any net revenues, and a line item at the beginning
    __________
    7 The rationale behind this policy is to deter pipelines from using
    cash-in/cash-out systems to enhance revenue rather than simply to
    deter system abuse.  See, e.g., United Gas, 64 F.E.R.C. p 61,015, at
    61,135;  Panhandle Eastern Pipe Line Co., 61 F.E.R.C. p 61,357, at
    62,429 (1992).
    8 Although Koch's tariff required it to make the information in
    the report available to its customers upon request, it did not require
    that Koch file such a report with the Commission.  See Koch
    Gateway Pipeline Co., 75 F.E.R.C. p 61,305, at 61,971-72 (1996).
    of the subsequent quarter labeled "Operational Purchases:
    Accrual Reversal," which reinstated the deducted amount.
    As a result of these adjustments, Koch showed no net reve-
    nues at the end of each quarter and thus owed no refund to
    its customers.  A number of gas and oil companies subse-
    quently moved to intervene, requesting that these adjust-
    ments be explained, and on June 17, 1996, the Commission
    granted this request.  See KGPC, 75 F.E.R.C. p 61,305.
    On July 2, 1996, Koch filed supplemental information to
    explain the report.  The "Operational Purchases:  Accrual"
    line, Koch explained, represented "the estimated cost of the
    gas Koch must purchase to replace gas bought from Koch by
    its customers through the imbalance resolution process."
    Joint Appendix 33.  Koch argued that although it supplied
    any needed gas from its own reserves, it would be inefficient
    to require it actually to purchase replacement gas at the end
    of each quarter of 1995 (i.e., at the end of month three), since
    it might be discovered during month four--when the imba-
    lances were resolved--that the purchase would be unneces-
    sary or financially unwise given the current market price.9  It
    therefore contended that it was appropriate to set aside at
    the end of each quarter the amount it would need to spend
    from the cash-in/cash-out fund until these uncertainties were
    resolved.  The Commission rejected these arguments.  Koch
    Gateway Pipeline Company, 76 F.E.R.C. p 61,296 (1996).
    Because, absent the accounting adjustments, Koch showed
    net revenues in the cash-in/cash-out fund at the end of each
    quarter, the Commission held that Koch had violated section
    20.1(D) of its tariff by not returning this revenue to its
    customers.  The Commission thus ordered Koch to refund to
    its customers $3,288,178 in net revenues (the amount of net
    revenues listed for the last quarter of 1995 before the accrual
    adjustment).  
    Id. at 62,485-86.
    Koch subsequently requested a rehearing of this decision,
    arguing that the tariff's language obligated it to credit reve-
    nues to the cash-in/cash-out fund on a quarterly basis but not
    __________
    9 Koch began purchasing replacement gas in January 1996.  Koch
    asserted both before the Commission and at oral argument that
    because of rising market prices, it did not have the necessary funds
    until this time to replenish the gas in its reserves.
    actually to refund them to its customers.  The Commission
    denied Koch's request, stating that while Koch's interpreta-
    tion of the tariff was a possible interpretation, it was not the
    most reasonable one.  "The proper course of action," the
    Commission noted, "was for Koch to go out and actually
    purchase the gas instead of holding the funds."  KGPC, 77
    F.E.R.C. p 61,161, at 61,618.  Koch's petition for review to
    this court followed, pursuant to 15 U.S.C. s 717r(b) (1994).
    II. Analysis
    In general, we uphold FERC's orders if they are " 'sup-
    ported by substantial evidence and reached by reasoned
    decisionmaking--that is, a process demonstrating the connec-
    tion between the facts found and the choice made.' "
    Williams Natural Gas v. FERC, 
    90 F.3d 531
    , 533 (D.C. Cir.
    1996) (quoting ANR Pipeline Co. v. FERC, 
    771 F.2d 507
    , 516
    (D.C. Cir. 1985)); see also 15 U.S.C. s 717r(b) (finding of
    Commission as to the facts are conclusive if supported by
    substantial evidence).  Similarly, because Congress has dele-
    gated to FERC "a broad range of adjudicative powers over
    natural gas rates," National Fuel Gas Supply Corp. v. FERC,
    
    811 F.2d 1563
    , 1569 (D.C. Cir. 1987), this circuit gives sub-
    stantial deference to its interpretation of filed tariffs, "even
    where the issue simply involves the proper construction of
    language."  Id.; see also Williams Natural Gas Co. v. FERC,
    
    3 F.3d 1544
    , 1549 (D.C. Cir. 1993).10  This deference, as we
    noted in Williams, is simply an acknowledgment that the
    principles set forth by the Supreme Court in Chevron U.S.A.
    Inc. v. Natural Resources Defense Council, Inc., 
    467 U.S. 837
    (1984), extend to all areas in which an agency has been
    delegated power by Congress to act.  See 
    Williams, 3 F.3d at 1549
    .  In a typical Chevron analysis, of course, we first
    __________
    10 We recognize that there are both circuits that agree with our
    view on this point, see, e.g., Northwest Pipeline Corp. v. FERC, 
    61 F.3d 1479
    , 1486 (10th Cir. 1995), and those that disagree, see, e.g.,
    Dayton Power & Light Co. v. FERC, 
    843 F.2d 947
    , 953 & n.12 (6th
    Cir. 1988); Mid Louisiana Gas Co. v. FERC, 
    780 F.2d 1238
    , 1243
    (5th Cir. 1986).
    consider whether Congress, through the statute under consid-
    eration, directly speaks to the "precise question at issue.  If
    the intent of Congress is clear, that is the end of the matter;
    for the court, as well as the agency, must give effect to the
    unambiguously expressed intent of Congress."  
    Chevron, 467 U.S. at 842-43
    .  If Congress has not directly addressed the
    precise question at issue, we then decide whether the agen-
    cy's construction of the statute is reasonable.  
    Id. at 843.
    Our review of the Commission's construction of Koch's tariff
    proceeds in much the same manner.  We first look to see if
    the language of the tariff is unambiguous--that is, if it
    reflects the clear intent of the parties to the agreement.  If
    the tariff language is ambiguous, we defer to the Commis-
    sion's construction of the provision at issue so long as that
    construction is reasonable.  See, e.g., 
    Williams, 3 F.3d at 1551
    ;  Tarpon Transmission Co. v. FERC, 
    860 F.2d 439
    , 442
    (D.C. Cir. 1988) (interpretation must be "the result of rea-
    soned and principled decisionmaking that can be ascertained
    from the record").
    After examining the tariff provision at issue in this case, we
    cannot say that the language is free from ambiguity.  Section
    20.1(D) of Koch's tariff requires that it credit net revenues to
    its transportation customers on a "quarterly basis," a phrase
    that is open to two interpretations.  On the one hand, the
    phrase could mean that Koch's revenues were to be calculated
    and credits issued "quarterly"--i.e., every three months--
    based on whatever information on transportation activity was
    available to Koch at that time.  Alternatively, and equally
    compelling, the phrase could be interpreted to mean that the
    analytical "basis" for the calculation of any refunds due would
    be a three-month period--in other words, that credits had to
    reflect the total activity that occurred during a given quarter,
    even if that information did not become fully available until
    one or two months after the quarter ended.  Neither inter-
    pretation emerges naturally from the language of the tariff,
    and Koch has not presented us with any additional informa-
    tion to aid us in divining the meaning intended at the time the
    tariff was drafted.
    We therefore turn to the Commission's interpretation of
    the tariff provision to determine if it is a reasonable one.  The
    Commission concluded that section 20.1(D), correctly inter-
    preted, requires Koch to calculate its net revenues every
    three months and issue any necessary credits directly to its
    customers on the basis of that calculation.  See KGPC, 77
    F.E.R.C. p 61,161, at 61,617.  It supported this reading by
    looking to the surrounding language.  First, it noted that the
    fact that the credit is to be made on a "pro rata basis"
    suggests that Koch is required to issue individual credits to
    each transportation customer and not in a lump sum to the
    cash-in/cash-out fund.  Second, it noted that the fact that
    Koch is required to pay interest starting on the first day of
    the next quarter suggests that the refund payment is due at
    the end of each quarter and not at some point during the
    following quarter.  
    Id. This method
    of interpretation is
    certainly a reasonable approach, whether or not it yields the
    result we would reach were we interpreting the tariff in the
    first instance.
    Koch, nevertheless, disagrees with the Commission's inter-
    pretation.  First, it argues that the language stating that it
    "shall credit" net revenues to its customers means only that
    Koch need credit the cash-in/cash-out fund rather than its
    customers directly.  Second, it contends that the phrase "to
    balance the system" requires that the fund first be bal-
    anced--i.e., through an accounting adjustment--before net
    revenues are calculated.11  Although Koch's suggested inter-
    pretations are possible readings of the tariff provision, we are
    not convinced that they are more reasonable interpretations
    than the one the Commission puts forward.  As a result, we
    defer to the Commission's interpretation.
    Given this interpretation, it was not wrong for the Commis-
    sion to conclude that Koch's accounting adjustment violated
    the terms of its tariff.  Koch argues that the Commission's
    __________
    11 As the Commission notes, Koch takes the phrase "to balance
    the system" out of context.  The tariff defines net revenues as
    monies received by Koch, less monies paid out, less "the cost of gas
    purchased to balance the system" (emphasis added).  In other
    words, the tariff appears to contemplate that Koch's system will be
    balanced through an actual gas purchase, not through a mere
    accounting adjustment.
    conclusion and order of a refund were inconsistent with its
    decision in Williams Natural Gas Co., 75 F.E.R.C. p 61,040
    (1996), and thus were arbitrary and capricious.  As an admin-
    istrative agency, FERC is subject to the constraints of the
    Administrative Procedure Act and consequently is forbidden
    from acting in a way that is "arbitrary, capricious, an abuse of
    discretion, or otherwise not in accordance with law."  5
    U.S.C. s 706(2)(A) (1994).  Thus, if the two cases were indeed
    treated differently without a sufficient justification, Koch's
    contention would deserve consideration, since we have noted
    that where an agency treats similar situations differently
    without a reasoned explanation, its decision will be vacated as
    arbitrary and capricious.  ANR Pipeline Co. v. FERC, 
    71 F.3d 897
    , 901 (D.C. Cir. 1995).  In fact, however, the two
    cases were handled similarly; any differences between the
    two cases, as the Commission noted, "[did] not warrant a
    difference in outcome."  KGPC, 77 F.E.R.C. p 61,161, at
    61,618.  Williams Natural Gas Company ("WNG") was oper-
    ating under a tariff provision similar to Koch's section
    20.1(D).  Like Koch, WNG had offset its refund obligation by
    an amount set aside for projected gas purchases.  The com-
    pany then stated that it found it unnecessary to make these
    purchases but requested that it be able to defer any obli-
    gation to adjust its records until a purchase was made.  The
    Commission denied this request, noting that WNG's tariff
    contained no provision permitting it to net actual revenues
    received against projected future costs.  WNG, 75 F.E.R.C.
    p 61,040, at 61,127.  It therefore directed WNG to refund its
    net revenues to its customers.  Koch reads the Commission's
    decision to mean that WNG was granted one opportunity to
    defer its refund obligations, an opportunity Koch claims it
    was denied.  But this is not the case:  Both companies were
    permitted to offset their refund obligations in one reconcilia-
    tion period 12 with the projected cost of gas purchases;  once it
    was discovered in the next period that a gas purchase would
    not actually be made, the Commission required both compa-
    nies to adjust their records and refund the net revenues to
    __________
    12 WNG's reconciliation period was one year; Koch's, as inter-
    preted by the Commission, was three months.
    their customers.  The Commission therefore did not act
    arbitrarily in interpreting Koch's tariff to require a return of
    net revenues at the end of each quarter or in determining
    that Koch's accounting methods violated its tariff.
    This is not to say, however, that the Commission's choice of
    remedy for that violation--the ordering of a refund--was
    appropriate in Koch's case.13  In general, we defer to FERC's
    decisions in remedial matters, respecting that " 'the difficult
    problem of balancing competing equities and interests has
    been given by Congress to the Commission with full knowl-
    edge that this judgment requires a great deal of discretion.' "
    Columbia Gas Transmission Corp. v. FERC, 
    750 F.2d 105
    ,
    109 (D.C. Cir. 1984) (quoting Arizona Elec. Power Coop., Inc.
    v. FERC, 
    631 F.2d 802
    , 809 (D.C. Cir. 1980)).  As a result, we
    do not ordinarily interfere with FERC's exercise of this
    discretion " 'so long as the agency's determination has a
    rational basis.' "  
    Id. If, however,
    we conclude that FERC
    has failed to establish that its decision represents a "reason-
    able accommodation of the relevant factors" and that the
    refund is "equitable in the circumstances," Laclede Gas Co. v.
    FERC, 
    997 F.2d 936
    , 944 (D.C. Cir. 1993) (internal quotes
    omitted), we must vacate FERC's action and remand for
    reconsideration.  See, e.g., Gulf Power Co. v. FERC, 
    983 F.2d 1095
    (D.C. Cir. 1993) (court upholds FERC's interpretation of
    regulation but vacates penalty as arbitrary and capricious).14
    We find that in this case, the Commission's decision to
    order a refund constituted an abuse of discretion.  It is true
    __________
    13 Because WNG is not a party to this action, we offer no opinion
    on the propriety of a refund in WNG's case.
    14 In assessing the propriety of FERC's remedial orders, we have
    in past cases alluded both to an abuse of discretion standard of
    review, see, e.g., Columbia 
    Gas, 750 F.2d at 112
    ; Office of Consum-
    ers' Counsel v. FERC, 
    783 F.2d 206
    , 233-34 (D.C. Cir. 1986), and to
    an arbitrary and capricious standard, see, e.g., Gulf 
    Power, 983 F.2d at 1102
    ; Associated Gas Distribs. v. FERC, 
    824 F.2d 981
    , 1019
    (D.C. Cir. 1987).  Because both standards, at least in the context of
    FERC's remedial authority, require FERC to have a rational basis
    for its actions, we see no reason to distinguish between them here.
    that, given the language of its tariff and the problems it
    experienced in complying with that language, Koch should
    have informed the Commission of its difficulties and attempt-
    ed to seek a resolution or revision of the tariff rather than
    proceeding blindly with an accounting adjustment not antici-
    pated by its customers.  The justification for requiring a filed
    tariff and for the filed rate doctrine--which prohibits regulat-
    ed companies from charging rates that differ from those in its
    properly filed tariff, see, e.g., Western Resources, Inc. v.
    FERC, 
    72 F.3d 147
    , 149 (D.C. Cir. 1995)--is to ensure that
    customers can rely on a pipeline's compliance with its tariff in
    conducting their own business activities and thus "know in
    advance the consequences of the purchasing decisions they
    make."  Transwestern Pipeline Co. v. FERC, 
    897 F.2d 570
    ,
    577 (D.C. Cir. 1990).  As we noted in Towns of Concord,
    Norwood & Wellesley, Massachusetts v. FERC, 
    955 F.2d 67
    ,
    75 (D.C. Cir. 1992), however, any assessment of the Commis-
    sion's remedial actions must be "based upon a considered
    analysis of the facts of [the] case and the precise purposes of
    the filed rate doctrine."  Koch's actions, even if technically
    violative of its tariff, did not truly implicate the doctrine's
    concerns.
    To begin with, as counsel for the Commission acknowl-
    edged at oral argument, because Koch replaced the needed
    gas from its own reserves, it did not gain a windfall from its
    failure to refund the revenues in the cash-in/cash-out fund.
    As we noted in Concord, "[c]ustomer refunds are a form of
    equitable relief, akin to restitution, and the general rule is
    that agencies should order restitution only when money was
    obtained in such circumstances that the possessor will give
    offense to equity and good conscience if permitted to retain
    it."  
    Id. (internal quotes
    omitted).  The funds retained by
    Koch in this case were to be used to purchase replacement
    gas--and, indeed, they eventually were, as Koch's figures for
    1996 bear out.
    Moreover, it is not at all clear that a refund in this case
    would further the policy of the Commission as expressed in
    Order No. 636.  The Order directed pipelines to establish
    mechanisms to deter abuses of the system--to discourage
    shippers from threatening pipeline integrity by under- or
    overdelivering.  Koch's cash-in/cash-out system attempted to
    achieve this goal by passing on the costs of transportation
    imbalances to those shippers responsible for the shortfall.
    Issuing a refund in this case would work counter to Order
    No. 636's directive, in that a refund returns to those shippers
    who took additional gas from Koch the very amounts they
    were charged as a result of their miscalculations, leaving the
    pipeline's shareholders to swallow these costs.  We cannot
    conclude that the Commission's discretion, properly exer-
    cised, would encompass what would amount to a contraven-
    tion of its stated policy for what was, in essence, a technical
    error.
    We were presented with an analogous situation in Gulf
    Power.  In response to rising coal prices, Gulf bought out its
    old coal contracts and entered into new ones, saving its
    customers approximately $4.3 million over the life of the
    contracts.  Gulf then sought to pass on to its customers not
    only the savings realized but also the cost of the buyouts.
    FERC subsequently issued an order in another case declar-
    ing that although buyout costs could not automatically be
    passed on to customers under the applicable regulations (the
    "fuel adjustment clause" regulations), it would grant a waiver
    from the regulations if the utility could show that the buyout
    provided "ongoing benefits" to its customers.  Gulf 
    Power, 983 F.2d at 1097
    .  Despite this notice, Gulf continued to pass
    on its costs and did not request a waiver until FERC discov-
    ered, after a routine audit, that Gulf had failed to seek one.
    Although FERC eventually granted Gulf's waiver request, it
    declined to grant the waiver retroactively.  It thus ordered
    Gulf to refund, with interest, the buyout costs it had previous-
    ly charged its customers, a total of $2.7 million.
    Although we agreed with FERC that Gulf "committed at
    least a ministerial error" in failing to seek either a waiver or
    guidance from FERC, we found the refund order to be
    "wholly disproportionate to the error Gulf committed."  
    Id. at 1098.
     FERC's order, we noted, disregarded several impor-
    tant considerations.  To begin with, Gulf received no windfall
    by passing on the costs; rather, it recovered only those costs
    incurred to produce a benefit for its customers.  
    Id. at 1100.
    FERC's order, by contrast, "forced Gulf to give its customers
    a windfall refund ... in addition to the savings it had already
    provided them through reduced rates."  
    Id. at 1101.
     More-
    over, FERC failed to explain why it had ordered a refund in
    Gulf's case but had declined to do so in other cases.  
    Id. at 1100.
     And finally, we noted that FERC had failed to consid-
    er alternative remedies, such as civil penalties.  
    Id. at 1101.
    We thus vacated FERC's denial of Gulf's retroactive waiver
    request and remanded for reconsideration.
    Given the affinity between Gulf's and Koch's situations, we
    are persuaded to issue a similar directive in this case.  Al-
    though Koch, like Gulf, erred in forging ahead without seek-
    ing the Commission's guidance,15 that error did not justify a
    $3 million refund.  As in Gulf Power, the Commission failed
    to consider that Koch received no windfall as a result of its
    actions.  If Koch is required to issue a refund in this case,
    thus diminishing the purchase funds available, Koch's share-
    holders, rather than the shippers, will ultimately bear the
    burden of replenishing Koch's gas reserves.
    Moreover, although the Commission acted consistent with
    its decision in Williams Natural Gas in ordering a refund, it
    failed to distinguish these cases from the Gulf Power-type
    cases, in which FERC, on remand, waived strict compliance
    with its regulations given the absence of harm suffered by the
    utilities' customers.  See, e.g., Central Ill. Pub. Serv. Co. v.
    FERC, 
    941 F.2d 622
    (7th Cir. 1991) (court upholds FERC's
    interpretation of regulation governing recovery of litigation
    expenses but vacates refund and remands for reconsidera-
    tion), on remand, 58 F.E.R.C. p 61,186 (1992); Minnesota
    Power & Light Co. v. FERC, 
    852 F.2d 1070
    (8th Cir. 1988)
    __________
    15 The Commission's decision in Williams Natural Gas was is-
    sued on April 10, 1996, one day before Koch filed its first report
    with the Commission.  Although it might be unrealistic to suggest
    that Koch should have been aware of the Commission's decision at
    the time it filed its report, it is not irrational to say that Koch
    should have acknowledged the order's import by the time it filed its
    supplemental report on July 2, 1996.
    (same), on remand, 45 F.E.R.C. p 61,369 (1988).  Significant-
    ly, after our decision in Gulf Power, FERC modified its policy
    to provide for a case-by-case analysis of the propriety of a
    refund when a utility violated the fuel adjustment clause.  See
    Western Resources, Inc., 65 F.E.R.C. p 61,271 (1993).16  This
    precedent requires a better explanation for the Commission's
    refund order than it provided in Koch's case.
    In remanding this case, we note particularly that Koch's
    tariff is still undergoing revisions in response to the Commis-
    sion's 1996 decision.  This, we think, reflects the view of all
    parties--including Koch's customers, who have continued to
    offer comments on Koch's proposed revisions--that determin-
    ing the best method of addressing Order No. 636's concerns
    about system abuses is a difficult process.  A particular
    proposal that appears appropriate in theory may reveal itself,
    as it did in Koch's case, to be inadequate in practice.  Even
    the Commission itself acknowledged during its proceedings
    on Koch's tariff that the revisions were something of a work
    in progress:
    We find that it is in the best interests of all parties that
    KGPC have a final restructuring plan in place, and to
    continue to make minor adjustments and readjustments
    to the operating provisions, based on speculation as to
    problems that might arise, is contrary to that goal.  It
    may very well be that the plan is not perfect and that as
    the pipeline and its customers gain experience operating
    in the restructured environment, additional fine-tuning of
    the procedures may be necessary.  The Commission will
    make those adjustments at that time.
    __________
    16 The Commission noted that it would be guided by "whether the
    Commission has:  (1) allowed, (2) rejected, or (3) not ruled on fuel
    adjustment clause recovery for the cost in question" as well as
    "whether the customers:  (1) enjoyed savings, or (2) suffered losses
    from the utility's unilateral action."  65 F.E.R.C. p 61,271, at 62,252.
    Applying these standards to Western Resources, the Commission
    ordered the utility to refund only the interest it had accumulated on
    the funds recovered from its customers.  
    Id. Koch Gateway
    Pipeline Co., 66 F.E.R.C. p 61,232, at 61,547
    (1994).  In subsequent proceedings before the Commission,
    Koch has, for example, been permitted to alter its tariff so
    that it is required to reconcile and refund net revenues on an
    annual, rather than on a quarterly, basis.  See, e.g., Koch
    Gateway Pipeline Co., 80 F.E.R.C. p 61,005 (1997); Koch
    Gateway Pipeline Co., 79 F.E.R.C. p 61,127 (1997); Koch
    Gateway Pipeline Co., 77 F.E.R.C. p 61,332 (1996).  We trust
    that this change will aid Koch in resolving the problems it has
    experienced in administering its system and is representative
    of the Commission's willingness to engage in "additional fine-
    tuning."  Given the Commission's flexible approach through-
    out these later proceedings, its refund order was an inappro-
    priate response to Koch's first report on the implementation
    of its revised tariff.
    III. Conclusion
    Although we find that the Commission did not act arbitrari-
    ly in concluding that Koch violated the terms of its tariff, we
    hold that the Commission abused its discretion in ordering
    Koch to refund over $3 million to its transportation customers
    as a remedy for this violation.  We therefore grant Koch's
    petition for review, vacate the Commission's decision as to the
    refund, and remand to the Commission for reconsideration.
    It is so ordered.
    

Document Info

Docket Number: 97-1024

Citation Numbers: 136 F.3d 810, 329 U.S. App. D.C. 70, 1998 U.S. App. LEXIS 3137, 1998 WL 80174

Judges: Edwards, Wald, Rogers

Filed Date: 2/27/1998

Precedential Status: Precedential

Modified Date: 10/19/2024

Authorities (23)

national-fuel-gas-supply-corporation-v-federal-energy-regulatory , 811 F.2d 1563 ( 1987 )

arizona-electric-power-cooperative-inc-v-federal-energy-regulatory , 631 F.2d 802 ( 1980 )

central-illinois-public-service-company-v-federal-energy-regulatory , 941 F.2d 622 ( 1991 )

util-l-rep-p-14056-northwest-pipeline-corporation-v-federal-energy , 61 F.3d 1479 ( 1995 )

Williams Natural Gas Company v. Federal Energy Regulatory ... , 90 F.3d 531 ( 1996 )

Minnesota Power & Light Company v. Federal Energy ... , 852 F.2d 1070 ( 1988 )

Chevron U. S. A. Inc. v. Natural Resources Defense Council, ... , 104 S. Ct. 2778 ( 1984 )

anr-pipeline-company-v-federal-energy-regulatory-commission-great-lakes , 771 F.2d 507 ( 1985 )

Towns of Concord, Norwood, and Wellesley, Massachusetts v. ... , 955 F.2d 67 ( 1992 )

williams-natural-gas-company-v-federal-energy-regulatory-commission , 3 F.3d 1544 ( 1993 )

Gulf Power Company v. Federal Energy Regulatory Commission, ... , 983 F.2d 1095 ( 1993 )

Pennsylvania Office of Consumer Advocate v. Federal Energy ... , 131 F.3d 182 ( 1997 )

Columbia Gas Transmission Corporation v. Federal Energy ... , 750 F.2d 105 ( 1984 )

associated-gas-distributors-v-federal-energy-regulatory-commission-air , 824 F.2d 981 ( 1987 )

Tarpon Transmission Company v. Federal Energy Regulatory ... , 860 F.2d 439 ( 1988 )

Mid Louisiana Gas Company v. Federal Energy Regulatory ... , 780 F.2d 1238 ( 1986 )

the-dayton-power-and-light-company-v-federal-energy-regulatory-commission , 843 F.2d 947 ( 1988 )

United Distribution Companies v. Federal Energy Regulatory ... , 88 F.3d 1105 ( 1996 )

transwestern-pipeline-company-v-federal-energy-regulatory-commission-the , 897 F.2d 570 ( 1990 )

Western Resources, Inc. v. Federal Energy Regulatory ... , 72 F.3d 147 ( 1995 )

View All Authorities »