Gas Transmission Northwest Corp. v. Federal Energy Regulatory Commission ( 2007 )


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  • United States Court of Appeals
    FOR THE DISTRICT OF COLUMBIA CIRCUIT
    Argued September 14, 2007           Decided October 16, 2007
    No. 03-1257
    GAS TRANSMISSION NORTHWEST CORPORATION,
    PETITIONER
    v.
    FEDERAL ENERGY REGULATORY COMMISSION,
    RESPONDENT
    PROCESS GAS CONSUMERS GROUP, ET AL.,
    INTERVENORS
    Consolidated with
    04-1065, 04-1066
    On Petitions for Review of Orders of the
    Federal Energy Regulatory Commission
    Catherine E. Stetson argued the cause for petitioners. 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.
    2
    Beth G. Pacella, Attorney, Federal Energy Regulatory
    Commission, argued the cause for respondent. On the brief
    were John S. Moot, General Counsel, Robert H. Solomon,
    Solicitor, and Patrick Y. Lee, Attorney.
    Before: GARLAND and KAVANAUGH, Circuit Judges, and
    SILBERMAN, Senior Circuit Judge.
    SILBERMAN, Senior Circuit Judge: Two interstate natural
    gas pipelines seek review of Federal Energy Regulatory
    Commission (“FERC”) orders that limit the amount of collateral
    pipelines may require from non-creditworthy shippers.
    Petitioners assert that the orders under review are an
    unexplained departure from FERC precedent and, in any event,
    are unreasonable (arbitrary and capricious). We disagree, and
    we deny the petitions for review.
    I.
    Although we encounter a series of FERC orders,1 including
    three orders on rehearing, then a joint request to hold petitions
    in abeyance pending a rulemaking (which FERC terminated,
    relying instead on a policy statement), and finally a remand of
    1
    The orders under review are: PG&E Gas Trans., 
    101 FERC ¶ 61,280
    (2002); e prime, inc. v. PG&E Gas Trans., 
    102 FERC ¶ 61,062
    (2003); North Baja Pipeline, LLC, 
    102 FERC ¶ 61,239
     (2003); e
    prime, inc. v. PG&E Gas Trans., 
    102 FERC ¶ 61,289
     (2003); PG&E
    Gas Trans., 
    103 FERC ¶ 61,137
     (2003); e prime, inc. v. PG&E Gas
    Trans., 
    104 FERC ¶ 61,026
     (2003); North Baja Pipeline, LLC, 
    105 FERC ¶ 61,374
     (2003); PG&E Gas Trans., 
    105 FERC ¶ 61,382
    (2003); North Baja Pipeline, LLC, 
    115 FERC ¶ 61,141
     (2006); North
    Baja Pipeline, LLC, 
    117 FERC ¶ 61,146
     (2006) (“Remand Order”).
    3
    the record at FERC’s request to allow FERC to more fully
    consider petitioners’ arguments, the issue before us is rather
    simple. Petitioners, apparently stung by recent shipper defaults,
    wished to amend their tariffs to require non-creditworthy
    shippers (those who have below investment grade bond ratings)
    to post twelve months’ reservation charges as collateral. The
    Commission determined that petitioners’ proposed tariffs were
    “unjust and unreasonable”; that as a matter of policy FERC
    would ordinarily permit only a requirement of three months’
    reservation charges. The Commission acknowledged that
    certain pipelines had filed tariffs requiring twelve months’
    collateral, but those exceptions to its policy fell into two
    categories: either the tariffs had been filed without protests that
    caused FERC to focus on the issue, or the longer collateral
    requirements were explicitly permitted for newly constructed
    facilities.
    Besides asserting that these exceptions were actually
    inconsistencies in its policy, petitioners contended that a three-
    month reservation charge was inadequate collateral to cover
    their “remarketing risk” – the ability to resell the contracted-for
    pipeline capacity (at the same price). FERC recognized that a
    three-month collateral requirement might not fully cover
    petitioners’ remarketing risk, but it determined that this risk is
    a normal cost of doing business and could be addressed as a
    factor in petitioners’ rate of return.
    Finally, petitioners contended that their particular situations
    – both having suffered defaults in recent years – justified a
    deviation from FERC’s policy. The Commission determined,
    however, that the difficulties petitioners had faced were
    transitory, caused by unusual events such as the Western energy
    crisis.
    4
    II.
    Petitioners make a half-hearted attempt to suggest that
    FERC’s decision to abandon a rulemaking on the collateral issue
    somehow suggests that its policy is really an illegal substantive
    rule, but there is nothing to their argument. FERC simply
    decided that a general policy statement would suffice, leaving
    open case by case determinations. But the Commission was,
    and is, prepared to defend the application of its policy in
    individual cases as it has done here, and an agency’s policy can
    just as well be articulated in adjudications as in rulemaking.
    SEC v. Chenery Corp., 
    332 U.S. 194
    , 202-03 (1947). In short,
    FERC has not sought to rely on the policy statement, but rather
    to defend its policy in the challenged orders. Guardian Fed.
    S&L Ass’n v. Fed. S&L Ins. Corp., 
    589 F.2d 658
    , 666 (D.C. Cir.
    1978).
    Petitioners’ alleged inconsistencies in FERC’s decision are,
    in our view, adequately explained. With regard to the
    unchallenged filings, FERC said:
    [I]n the absence of protests, the Commission may
    simply have accepted these provisions without
    examining whether they conformed to Commission
    policy and precedent. Under such circumstances,
    accepting another pipeline’s provisions does not
    necessarily establish a generic Commission policy or
    precedent regarding similar tariff provisions.
    Remand Order, 
    117 FERC ¶ 61,146
     at 61,786 (2006). We think
    that position is eminently reasonable. FERC’s acceptance of a
    pipeline’s tariff sheets does not turn every provision of the tariff
    into “policy” or “precedent.” See, e.g., Alabama Power v.
    5
    FERC, 
    993 F.2d 1557
    , 1565 n.4 (D.C. Cir. 1993); Nevada
    Power Co., 
    113 FERC ¶ 61,007
     at 61,013-14 (2005) (refusing to
    treat a rate calculation from a prior tariff as precedent because
    “the issue was not raised, and the Commission did not discuss
    it or rule on it”). When a proposed tariff with more than a three-
    month collateral requirement has been challenged by shippers,
    FERC has required pipelines to amend their filing to comply
    with its policy. See Valero Interstate Trans. Co., 
    62 FERC ¶ 61,197
     at 62,397 (1993).
    Petitioners nevertheless contend that FERC’s practice puts
    them at a competitive disadvantage vis-a-vis pipelines whose
    nonconforming collateral provisions in their tariffs escaped
    scrutiny. But as FERC’s counsel assured us at oral argument, if
    petitioners, or anyone filing a complaint, challenged those tariff
    provisions, the Commission would apply its three-month policy.
    Apparently, however, two pipelines in direct competition
    with petitioners (Alliance Pipeline and Northern Border
    Pipeline) have twelve-month collateral requirements that are not
    subject to challenge. That is because they fall within another
    exception to FERC’s policy. The Commission, as we noted,
    permits pipelines to impose a twelve-month collateral
    requirement on newly constructed facilities, and those pipelines
    are such. Petitioners contend that this policy is arbitrary and
    capricious because the Commission has not adequately
    explained its differential treatment of new pipelines and existing
    pipelines. To be sure, FERC’s initial explanation for treating
    tariffs on new facilities differently is, as petitioners recognized,
    economically faulty. FERC said, “[O]nce the pipeline is in
    service, the construction costs are sunk (have already been
    expended), so the ongoing financial risk to the pipeline is less
    . . . .” PG&E Gas Trans., 
    103 FERC ¶ 61,137
     at 61,472 (2003).
    6
    Actually the financial risk is the same whether the pipeline is
    already built or not. But in its rehearing order, FERC explained
    reasonably that pipelines and their financing institutions’
    reliance interests for new investment justify the longer collateral
    requirement. “[T]he pipeline is under no obligation to construct
    facilities, and the pipeline as well as its lenders have an interest
    in ensuring a reasonable amount of collateral from the initial
    shippers supporting the project before committing funds to the
    project.” PG&E Gas Trans., 
    105 FERC ¶ 61,382
     at 62,700
    (2003).
    ***
    Alternatively, petitioners re-argue before us that the
    Commission’s policy ordinarily limiting collateral to three
    months’ reservation charges is unreasonable because it does not
    cover the remarketing risk. Petitioners concede that a pre-paid
    three-month charge will typically protect the pipeline against a
    non-payment risk because normally the pipeline will be able to
    discontinue service to the shipper in default within three
    months.2 But that does not cover the pipeline against its
    remarketing risk. If the pipeline cannot find a replacement for
    the defaulting shipper, it would have unused capacity. The
    Commission acknowledges that the pipelines have this risk, but
    FERC concluded that it was an ordinary business risk and
    therefore should be factored into the pipeline’s rate of return –
    which is another way of saying the cost of that risk should be
    spread over all the pipeline’s customers. Petitioners assert that
    2
    The pipeline would have to seek the Commission’s approval before
    it terminated service to the shipper in default, termed an abandonment.
    But, contrary to petitioners’ contentions, there is no reason to believe
    that FERC would not grant a pipeline’s abandonment request if a non-
    creditworthy shipper failed to post the required amount of collateral.
    7
    FERC’s approach is inconsistent with its policy of ordinarily
    attributing a pipeline cost to the one shipper who is responsible
    for the cost. But FERC has never proclaimed that as an absolute
    rule. See K.N. Energy, Inc. v. FERC, 
    968 F.2d 1295
    , 1300 (D.C.
    Cir. 1992) (noting that pipeline rates must reflect “to some
    degree” the costs caused by the customer paying the rates).
    FERC rejected a collateral charge of more than three
    months in the normal situation because a greater charge was
    thought to hinder the Commission’s policy of eliminating entry
    barriers and promoting “open access” to pipeline services. Of
    course, “open access” is just another way of saying that the
    Commission seeks to maximize the number of shippers in order
    to increase the country’s supply of natural gas. Here, FERC
    chose to promote this policy by encouraging the non-
    creditworthy marginal shipper’s entry into the market. Some
    remarketing risk may be spread to creditworthy shippers, but the
    Commission believes its policy is justified by the beneficial
    effects on open access, and the resulting increase in the supply
    of natural gas. That strikes us as the sort of policy call entrusted
    to the Commission – not to us.
    Petitioners complain, however, that they have no assurance
    – despite FERC’s claim – that they will be adequately
    compensated in the rate of return for remarketing risk. Counsel
    for the Commission assured us, however, that it was a legitimate
    factor to be considered, and it is certainly premature for
    petitioners to speculate that FERC will not permit them an
    adequate rate of return. In at least one prior case, FERC has
    considered the effects of remarketing risk while determining the
    proper rate of return for a natural gas pipeline. In the Ozark
    ratemaking proceeding, the Commission set Ozark Gas
    Transmission’s return on equity “at the top of the zone of
    8
    reasonableness” because of several factors related to credit risk.
    Ozark Gas Trans. Sys., 
    68 FERC ¶ 61,032
     at 61,107-08 (1994).
    FERC noted that “one of Ozark’s two principal customers . . . is
    involved in bankruptcy proceedings, and at this point, still could
    choose to reject its contract with Ozark.” 
    Id. at 61,108
    . Ozark
    also had “substantial excess capacity” and faced “considerable
    competition” from other pipelines in the region. 
    Id.
     In other
    words, the Commission was willing to increase Ozark’s rate of
    return to compensate the pipeline for its relatively high credit
    risk and remarketing risk.
    ***
    Finally, petitioners claim that they face unique challenges.
    GTN complains that it has faced twelve defaults in recent years,
    and its primary markets (Northern California and the Pacific
    Northwest) are likely to experience slower growth in the future.
    But FERC determined that the defaults by GTN’s shippers were
    “isolated,” and “appear to be related to or a result of an unusual
    event, the western energy crisis.” Remand Order, 117 FERC at
    61,784-85. The Commission also emphasized that “GTN has
    failed to show that northern California markets will not be
    steady or continue to grow over time, regardless of the isolated
    bankruptcies of a handful of shippers.” 
    Id. at 61,785
    . We see
    no reason to second guess these factual determinations, since
    “[t]he court properly defers to policy determinations invoking
    the Commission’s expertise in evaluating complex market
    conditions.” Tennessee Gas Pipeline Co. v. FERC, 
    400 F.3d 23
    , 27 (D.C. Cir. 2005).
    North Baja, for its part, claimed that it faced a default from
    one out of five shippers, or 20% of its customer base. The
    Commission responded that despite this default, North Baja was
    “95 percent subscribed for long term firm capacity.” Remand
    9
    Order, 117 FERC at 61,785. Given that the pipeline was
    operating at nearly full capacity, FERC rejected reasonably
    North Baja’s assertion that it was in a “tenuous position” with
    respect to credit risk.
    III.
    For the aforementioned reasons, the petitions for review are
    Denied.