Proc Gas Consum v. FERC , 177 F.3d 995 ( 1999 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 22, 1999 Decided May 21, 1999
No. 98-1075
Process Gas Consumers Group, et al.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Tennessee Gas Pipeline Company, et al.,
Intervenors
Consolidated with
No. 98-1089
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Edward J. Grenier, Jr. argued the cause for petitioners.
With him on the briefs were Gregory K. Lawrence, Harvey L.
Reiter, Barbara K. Heffernan and Debra Ann Palmer.
Andrew K. Soto, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and Susan J. Court,
Special Counsel.
Michael J. Fremuth argued the cause for intervenor. With
him on the brief was Shemin V. Proctor. Robert M. Lamkin,
Barbara K. Heffernan and Debra Ann Palmer entered ap-
pearances.
Before: Edwards, Chief Judge, Wald and Rogers, Circuit
Judges.
Opinion for the Court filed by Circuit Judge Wald.
Wald, Circuit Judge: Tennessee Gas Pipeline Company
("Tennessee") filed a tariff revision with the Federal Energy
Regulatory Commission ("FERC" or "Commission") in 1996.
The company sought to change the method it uses to allocate
requests for available capacity on its natural gas pipeline,
switching from "first come-first served" to "net present val-
ue," or "NPV." Over objections, FERC ultimately approved
a twenty-year cap on bids evaluated under NPV. It also
approved the use of NPV to evaluate requests from shippers
to change the primary points at which their gas enters or
leaves the pipeline. Numerous petitioners argue that FERC
failed to engage in reasoned decision making in both instanc-
es in violation of the Administrative Procedure Act ("APA").
Petitioners also contend that Tennessee did not give sufficient
notice that NPV would apply to point change requests. We
agree with both of petitioners' APA claims and therefore
grant the petitions for review, remanding the issues to
FERC, but hold that petitioners lack standing to raise the
notice claim.
I. Background
Tennessee transports natural gas via a pipeline system
from Louisiana, Texas, and the Gulf of Mexico to areas as far
north as New England. Prior to the orders at issue in this
case, Tennessee awarded available firm capacity1 on the
pipeline on a first come-first served basis; the first shipper to
submit a request that satisfied the requirements of Tennes-
see's tariff received the capacity. The pipeline found that
method unsatisfactory:
Under the first come-first served policy, Tennessee must
award capacity to any shipper, even one that requests
service for a very short term (which could be for as little
as just a few days), if the short-term shipper satisfactori-
ly submits its request for service as little as one hour
before a long term shipper submits its request for ser-
vice. Plainly, an efficient market would not function in
this way, as a merchant exercising rational business
judgment would typically favor a creditworthy long-term
customer (even if the long-term customer requested a
reasonable discount) that ... would provide more overall
benefits than those provided by the short-term customer.
Similar inefficiencies arise where a short-haul shipper
submits its request for service prior to another shipper
that wishes to transport gas to points further down-
stream or upstream.
Letter from Marguerite N. Woung, Attorney, Tennessee Gas
Pipeline Company, to Lois D. Cashell, Secretary, FERC 3(June 12, 1996). Pursuant to section four of the Natural Gas
Act, 15 U.S.C. s 717c, Tennessee therefore submitted tariff
revisions to FERC on June 12, 1996, proposing a change from
the first come-first served method of evaluating capacity
requests to the NPV method.2 The change would be accom-
plished through the addition to Tennessee's tariff of a new
__________
1 "Pipelines generally offer two forms of transportation service:
firm transportation, for which delivery is guaranteed, and interrup-
tible transportation, for which delivery can be delayed if all the
capacity on the pipeline is in use." United Distribution Cos. v.
FERC, 88 F.3d 1105, 1123 n.10 (D.C. Cir. 1996); see Municipal
Defense Group v. FERC, 170 F.3d 197, 198 n.1 (D.C. Cir. 1999).
2 The same submission involved another tariff revision--elimina-
tion of the requirement that pipeline service commence within
ninety days of a request for service--that is not at issue here.
section five, entitled "Awards of Generally Available Capaci-
ty." Under NPV, Tennessee would announce an open season
each time it wanted to sell available capacity. The highest
bidder during the open season, based on the net present value
of the bid, would receive the capacity (absent unusual circum-
stances). This approach would take into account differences
in the proposals such as price, volume of gas, and duration of
contract. Using more technical language, Tennessee de-
scribed the NPV of a bid as the "discounted cash flow of
incremental revenues per dekatherm to Transporter pro-
duced, lost or affected...."
A. The Twenty-Year Cap
Tennessee's initial proposal did not include or discuss a cap
on the length of a bid that would be considered in NPV
calculations. A cap may prevent an end run around the
maximum rates approved by FERC, a concern when monopo-
ly conditions are present. See United Distribution Cos. v.
FERC, 88 F.3d 1105, 1140 (D.C. Cir. 1996) ("UDC") ("Com-
peting bidders who come up against the rate ceiling for this
scarce resource--capacity on constrained pipelines--may bid
up the length of the contract term to try to win the auction.
In effect, bidding for a longer contract term becomes a
surrogate for bidding beyond the maximum rate level."). A
cap functions like this: under a ten year cap, two shippers
who want to submit otherwise identical fifteen and twelve
year bids cannot; they are limited to ten year bids, producing
the same NPV, and a tiebreaker determines the winner.3
Without the cap, the fifteen year bidder wins. The goal of a
cap in a monopoly situation, just as with the setting of
maximum rates, is to simulate the end product of a competi-
tive market. See Stephen G. Breyer & Richard B. Stewart,
Administrative Law and Regulatory Policy 237 (3d ed. 1992)
("In principle, ratemaking might be thought to have as its
__________
3 A cap could function somewhat differently, permitting the filing
of the fifteen and twelve year bids but only counting the first ten
years in the NPV calculation. The winner would then obtain a
contract for longer than ten years. Tennessee's cap does not
appear to work this way.
object the setting of prices equal to those that the firm would
set if it did not have monopoly power; i.e., to replicate a
'competitive price.' "). Bids in a competitive market limited
in duration to ten years thus help to prevent a pipeline's
market power from causing market distortions.
A month after its June 12 filing, Tennessee addressed
concerns raised by Process Gas Consumers Group ("Process
Gas"), an association of industrial users of natural gas and
one of the petitioners here, about the lack of a cap. Instead
of incorporating a cap in the tariff itself, however, Tennessee
stated that it would "include a cap on the duration of any bid
as part of the open season posting ... that is applicable to
the particular service being offered." Response of Tennessee
Gas Pipeline Company to Protests to NPV Filing at 6.
FERC ruled on Tennessee's proposed revisions on July 31,
1996, generally approving of the switch from first come-first
served to NPV:
A net present value evaluation ... allocates capacity to
the shipper who will produce the greatest revenue and
the least unsubscribed capacity. As such, it is an eco-
nomically efficient way of allocating capacity and is con-
sistent with Commission policy.
Tennessee Gas Pipeline Company, 76 F.E.R.C. p 61,101, at
61,522 (1996) ("Tennessee Gas I"). FERC was not wholly
satisfied, however, and while it accepted the filing (with a
minimal suspension period), it did so subject to certain condi-
tions. One condition involved the cap: "Tennessee should
explain why it proposes to vary the cap on a transaction by
transaction basis rather than include a uniform cap in its
tariff." Id. at 61,519. In response, Tennessee proposed a
twenty-year cap: "Since bids beyond the 20th year are un-
likely to have a significant impact on the NPV analysis,
Tennessee is willing to include in its tariff a 20-year limita-
tion on the NPV bids." Letter from Marguerite N. Woung,
Attorney, Tennessee Gas Pipeline Company, to Lois D. Ca-
shell, Secretary, FERC 6 (Aug. 15, 1996).
During the same time period, a cap had become an issue in
a different circumstance arising out of FERC's Order No.
636, part of the restructuring of the natural gas industry. In
our review of Order No. 636, we addressed a twenty-year cap
selected by FERC in the right-of-first-refusal context.4 Be-
cause FERC failed to adequately explain why twenty years
would protect shippers from pipelines' market power and why
it relied on the lengths of one specific type of contract (those
involving the construction of new facilities) in coming up with
that figure, we remanded the cap for a better justification.
See UDC, 88 F.3d at 1140-41. On February 27, 1997, FERC
acknowledged on remand that it could not offer a more
adequate basis for a twenty-year cap, see Order No. 636-C,
Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation Under Part
284 of the Commission's Regulations, Regulation of Natural
Gas Pipelines After Partial Wellhead Decontrol, 78 F.E.R.C.
p 61,186, at 61,773 (1997) ("Order No. 636-C") ("The Commis-
sion can find no additional record evidence, not previously
cited to the Court, that would support a cap as long as the
twenty-year cap chosen in Order No. 636."), and reduced the
cap to a five-year one. See id. at 61,774.5 Process Gas,
__________
4 We described that context as follows:
The right-of-first-refusal mechanism consists principally of two
matching requirements: rate and contract term. Near the end
of a long-term firm-transportation contract, the existing cus-
tomer may notify the pipeline that it intends to exercise its
right of first refusal. The pipeline must post the availability of
that capacity on its electronic bulletin board and, in accordance
with the criteria set forth in its tariff, identify the "best bid"
offered by any competing shippers. The customer then has the
right to match the competing bid's rate, up to the maximum
"just and reasonable" rate that the Commission has approved
for that service, and the competing bid's contract term. Com-
peting shippers may choose to bid for only a portion of the
capacity in the expiring contract.
UDC, 88 F.3d at 1138 (internal citations omitted).
5 A petition for review of the cap selected in Order No. 636-C is
currently pending. See Interstate Natural Gas Ass'n of America v.
FERC, No. 98-1333 (D.C. Cir. filed July 22, 1998) (in abeyance).
which asked for a cap of ten years in a June 24, 1996 response
to Tennessee's initial filing and in an August 30, 1996 request
for rehearing of Tennessee Gas I, reduced its request to five
years in light of Order No. 636-C on April 11, 1997.6
FERC approved the twenty-year cap for NPV on June 3,
1997:
Differing economic environments may dictate differing
durations of service if Tennessee is to generate maximum
use of its system and maximum revenues. Market forces
can be the determinant of duration of service, and to
place a uniform cap in place could stifle those forces.
Protesters have not offered persuasive arguments for
either a uniform cap, or for a cap shorter than twenty
years. The Commission disagrees with Process Gas that
the policy justifications of Order No. 636-C apply simi-
larly to this situation. As Tennessee points out, in Order
No. 636-C, the five-year cap is imposed to protect exist-
ing customers from being forced into longer-term con-
tract extensions than they desire under the right-of-first-
refusal. Here, there is no reason for the Commission to
impose a shorter cap for new capacity, unlike the case of
capacity subscribed under existing contracts. Under the
instant proposal, market forces can determine the dura-
tion of service for the new, or newly available capacity
within whatever cap Tennessee proposes for that particu-
lar transaction. Bidders are not forced into the maxi-
mum duration which in any event is limited to no more
than twenty years. Rather, the primary issue here, is
whether when two shippers both desire new capacity
should that capacity go to a shipper who values it more,
i.e., for a longer term, than another shipper who might
value it less. The Commission will accept Tennessee's
proposal.
Tennessee Gas Pipeline Company, 79 F.E.R.C. p 61,297, at
62,339 (1997) ("Tennessee Gas II") (footnote omitted). In a
footnote, FERC added:
__________
6 Process Gas was not the only party to argue that Tennessee's
proposed twenty-year cap was too long.
The Commission considers twenty years to be the maxi-
mum length of time that can be considered reasonable in
this context. Any longer or the consideration of unlimit-
ed periods of time would be allowing an unduly discrimi-
natory exercise of monopoly power.
Id. at 62,339 n.11. Rehearing of Tennessee Gas I was denied
at the same time. See id. at 62,334. On January 14, 1998,
FERC denied rehearing of Tennessee Gas II and again
rejected objections to a cap length of twenty years:
The Commission does not find the application of the 20-
year NPV criteria to be an application of monopoly
power in and of itself. Even though Tennessee has
monopoly power irrespective of the length of the contract
term, it still must have a rational way of allocating
available capacity. Process Gas simply raises speculation
that the cap will lead to unreasonable results. A 20-year
cap is consistent with Commission policy of allowing
those who value capacity the highest, including those who
value longer-term contracts, to acquire the capacity. In
fact, we believe that with the lower turnover in contracts
with such a cap, economic efficiency is increased, and the
public interest is better served. Nor is the right-of-first-
refusal matching procedure relevant. The right-of-first-
refusal procedure was formulated with the purpose of
protecting the existing shipper. Here, the existing ship-
per has no more stake in the outcome of the bidding
process regarding newly available capacity than any oth-
er shipper and has no right to that capacity which
requires protection. Accordingly, based on the forego-
ing, and without any evidence that 20 years is unjust and
unreasonable in this context, we find that the 20-year
cap is adequately supported.
Tennessee Gas Pipeline Company, 82 F.E.R.C. p 61,008, at
61,026-27 (1998) ("Tennessee Gas III") (footnotes omitted).
FERC further justified its approval by stating that "[i]t is
still common to find longer lengths of commitment for new
service." Id. at 61,026 n.6. In support of that proposition,
FERC cited three of its previous decisions involving ten and
fifteen year agreements, known in the industry as "precedent
agreements," between shippers and pipelines for capacity on
yet to be constructed facilities.7 See id. The pipelines,
seeking authority from FERC to proceed with the planned
construction, submitted the agreements to demonstrate de-
mand for the new capacity.
B. Meter Amendments
When natural gas is shipped through a pipeline, the points
at which the gas enters and leaves the system are called
"receipt" and "delivery" points, respectively. A firm trans-
portation shipper selects "primary" receipt and delivery
points; these points are part of its contract with the pipeline.
Designating a point as primary guarantees the shipper use of
the point, an important right when the pipeline lacks suffi-
cient capacity at the point to satisfy demand. Firm shippers
can select other points on a secondary basis, but can only use
those points if there is sufficient capacity beyond that taken
by shippers using them on a primary basis. A change in a
primary receipt or delivery point is sometimes referred to as
a "meter amendment" because gas is measured at these
points. Section 4.7 of Tennessee's relevant rate schedule
discusses meter amendments:
Change of Primary Points: Subject to agreement by
Transporter, a Shipper may elect to substitute new
points for the Primary Delivery or Receipts in its service
agreement. Such changes may be affected by prior
notice to Transporter of 30 days if in writing or 15 days if
by the TENN-Speed 2 [electronic bulletin board] sys-
tem. All such changes must be reflected in an amended
service agreement and shall be effective at commence-
ment of the following month. Transporter shall not be
required to accept an amendment if there is inadequate
__________
7 FERC miscited the third of these decisions. The correct cita-
tions are: Transcontinental Gas Pipe Line Corp., 81 F.E.R.C.
p 61,104 (1997); Tennessee Gas Pipeline Co. and Distrigas of
Massachusetts Corp., 79 F.E.R.C. p 61,375 (1997); Northern Natu-
ral Gas Co., 79 F.E.R.C. p 61,046 (1997).
capacity available to render the new service or if the
change would reduce the reservation charges applicable
to the agreement.
In Tennessee Gas I, issued on July 31, 1996, FERC did not
discuss the effect of the change from first come-first served to
NPV on the meter amendment process. Nor had the matter
been explicitly addressed to that point by Tennessee or other
interested parties. On August 21 or 22, 1996, however, in a
posting on its electronic bulletin board Tennessee made crys-
tal clear that it would apply the new method to primary point
change requests. A meter amendment request would trigger
an open season and the requestor would have to compete with
other interested shippers on the basis of NPV.
A number of parties protested, arguing, inter alia, that
applying NPV to meter amendment requests is inconsistent
with FERC's professed aim of assuring that firm shippers
have receipt and delivery point flexibility, see Tennessee Gas
II, 79 F.E.R.C. at 62,335-36 & n.5, and that the change would
"give new customers a priority over existing customers since
the existing customers['] NPV will be zero."8 Id. at 62,337.
FERC disagreed:
The Commission considers that the NPV criteria may
be rightfully applied to requests for changes in receipt
and delivery points. A request for a change in a receipt
or delivery point is a request for capacity that is general-
ly available at that new point. To apply the NPV criteria
is to allocate that capacity to the entity that values it the
most, and this is consistent with Commission policy. The
Commission has previously discussed the desirability of
__________
8 The source of existing shippers' difficulty under NPV is that
Tennessee calculates the magic NPV number by looking at the net
or incremental gain in revenue that the award of the capacity at the
designated point will produce. If an existing shipper seeks merely
to change from one primary point to another in the same zone, its
payments to the pipeline will not change and the NPV of its bid will
be zero; the amount it was already obligated to pay under the
contract counts for nothing.
the economic efficiency achieved by allocating capacity to
parties who value it the most. Here, Tennessee seeks to
allocate available receipt and delivery point capacity to
the parties who value it the most, a proposal that is not
inconsistent with Commission policy. Existing shippers
have the right to bid on the generally available receipt
and delivery point capacity, just as new or other existing
shippers do. There is no reason to grant a preferential
right to unsubscribed capacity to existing shippers.
Moreover, nothing in these changes affects the rights of
parties to use these points on a secondary basis. The
Commission considers that in responding to short term
changes, such as a temporary force majeure event (as in
New England's example of a hurricane), use of an open
receipt point on [a] secondary basis would be both logical
and unaffected by the NPV proposal.
Id. (footnotes omitted).
In denying rehearing of Tennessee Gas II, FERC again
rejected objections to its approval of Tennessee's application
of the new NPV allocation method to meter amendment
requests, see Tennessee Gas III, 82 F.E.R.C. at 61,027-29,
despite arguments by existing shippers that using NPV se-
verely degrades their service because of increased difficulty
in obtaining point changes. The shippers also argued on
rehearing that using NPV for meter amendment requests is
unduly discriminatory because even a de minimus bid from a
new shipper creates some incremental value while a point
change request from an existing shipper produces an NPV of
zero. See id. at 61,028.
As we understand it, FERC's response reflects two propo-
sitions. First, allocating capacity to the highest bidder is
appropriate because it is efficient. Second, existing shippers,
at least in some cases, are able to compete with new shippers
on the basis of NPV for capacity at a receipt or delivery
point. With respect to the latter, FERC stated:
Moreover, there are other ways an existing shipper's bid
can render incremental value. If it is paying a discount-
ed rate, it can increase the rate offered. It also can
increase the amount of overall capacity requested or
extend the zones its service covers.
Id. at 61,028 n.17. Responding to the example of the de
minimus bidder who would trump the existing shipper of
whatever amount, FERC replied that "[i]t is economically
more efficient to award the capacity to the bidder who is
willing to pay something extra for that capacity." Id. at
61,029.
II. Discussion
Process Gas filed a petition for review of Tennessee Gas I,
Tennessee Gas II, and Tennessee Gas III on February 23,
1998.9 Numerous parties, including Tennessee, intervened.
Bay State Gas Company ("Bay State") and other natural gas
companies that operate in the northernmost zone of Tennes-
see's pipeline system filed another petition for review on
March 12, 1998. These cases were consolidated along with a
third, City of Clarksville v. FERC, No. 98-1099 (D.C. Cir.
filed Mar. 16, 1998), later severed. See Process Gas Consum-
ers Group v. FERC, No. 98-1075 (D.C. Cir. Apr. 29, 1998).
Petitioners argue that FERC violated the APA by failing to
adequately support its decisions to approve (1) the twenty-
year cap and (2) Tennessee's use of the NPV method for
evaluating meter amendment requests. They argue further
that Tennessee did not provide adequate notice under 15
U.S.C. s 717c(d) that its proposal affected meter amendment
requests.
A. The Twenty-Year Cap
The natural gas transportation industry is a natural monop-
oly; pipelines maintain an economically powerful position in
relation to their customers. See, e.g., UDC, 88 F.3d at 1122.
Congress sought to address this problem in 1938 by enacting
the Natural Gas Act, ch. 556, 52 Stat. 821 (1938) (codified as
amended at 15 U.S.C. ss 717-717(w)) ("NGA"), the "primary
__________
9 An earlier petition for review filed by Process Gas was dis-
missed as premature. See Process Gas Consumers Group v.
FERC, No. 97-1458 (D.C. Cir. Nov. 4, 1997).
aim" of which is "to protect consumers against exploitation at
the hands of natural gas companies." Federal Power
Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 610 (1944);
see also Public Sys. v. FERC, 606 F.2d 973, 979 n.27 (D.C.
Cir. 1979) ("control of the economic power of utilities that
enjoy monopoly status" is the focus of regulation under the
NGA and the Federal Power Act). In exercising the authori-
ty granted by the NGA to review rate changes proposed by
pipelines, FERC must remain attuned to the status of the
affected market vis-a-vis monopoly and competition.10 If the
market is not a monopolistic one, market-based prices are
presumed to be proper. See Elizabethtown Gas Co. v. FERC,
10 F.3d 866, 870 (D.C. Cir. 1993) ("when there is a competi-
tive market the FERC may rely upon market-based prices
... to assure a 'just and reasonable' result"). If the market
is dominated by one or a few companies, FERC uses devices
such as a rate ceiling that compensate for the imbalance in
market power. This same concern is present as well when
__________
10 The statutory standards FERC uses to assess rate proposals
are found in 15 U.S.C. s 717c(a)-(b):
(a) Just and reasonable rates and charges
All rates and charges made, demanded, or received by any
natural-gas company for or in connection with the transporta-
tion or sale of natural gas subject to the jurisdiction of the
Commission, and all rules and regulations affecting or pertain-
ing to such rates or charges, shall be just and reasonable, and
any such rate or charge that is not just and reasonable is
declared to be unlawful.
(b) Undue preferences and unreasonable rates and charges
prohibited
No natural-gas company shall, with respect to any transporta-
tion or sale of natural gas subject to the jurisdiction of the
Commission, (1) make or grant any undue preference or ad-
vantage to any person or subject any person to any undue
prejudice or disadvantage, or (2) maintain any unreasonable
difference in rates, charges, service, facilities, or in any other
respect, either as between localities or as between classes of
service.
FERC looks at pipeline-shipper contract terms other than
price. See UDC, 88 F.3d at 1140 (increased contract length
can be a surrogate for bidding over the maximum approved
rate); Tejas Power Corp. v. FERC, 908 F.2d 998, 1004 (D.C.
Cir. 1990) ("[i]n a competitive market, where neither buyer
nor seller has significant market power, it is rational to
assume that the terms of their voluntary exchange are rea-
sonable"); Tennessee Gas II, 79 F.E.R.C. at 62,342 ("both the
Commission and the courts carefully scrutinize use of [length
of term] and place limits on it to be sure that there is not
undue exercise of monopoly power").
In this case FERC acknowledges that the market served
by Tennessee's pipeline has monopolistic characteristics. See
Tennessee Gas III, 82 F.E.R.C. at 61,026; Tennessee Gas II,
79 F.E.R.C. at 62,339 n.11. The question for us then is
whether FERC has adequately justified its conclusion that a
twenty-year cap will function to assure that the NPV method
of awarding available capacity is "just and reasonable." 15
U.S.C. s 717c(a). That is, whether it will prevent the NPV
method from compelling shippers to offer the pipeline longer
contracts than they would in a competitive market. We have
recognized that a cap is "necessarily [a] somewhat arbitrary
figure," but that acknowledgment does not free FERC of its
obligation to "provide[ ] substantial evidence to support its
choice and respond[ ] to substantial criticisms of that figure."
UDC, 88 F.3d at 1141 n.45. Reasoned decision making, which
we find absent here in several respects, remains a regulatory
essential, even when the agency tools are rough ones.
As previously noted, FERC supported its approval of the
twenty-year cap by pointing to three previous Commission
decisions involving ten and fifteen year precedent agree-
ments. Because every market for natural gas pipeline trans-
portation does not suffer from monopoly conditions, see Al-
ternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 74 F.E.R.C. p 61,076 (1996), consider-
ing the range of negotiated firm transportation contract
lengths can be a defensible way of determining the adequacy
of a particular cap. Of course, when FERC approves a cap
the contract data it relies on must support its decision. Here
FERC's orders fall short by neglecting to explain why the
existence of ten and fifteen year precedent agreements sup-
ports a twenty-year cap. Given these numbers, we might
have expected FERC to refuse to allow Tennessee to use a
cap of more than fifteen years, not twenty years; assuming
that competitive market contracts typically run to no more
than fifteen years, a twenty-year cap would allow Tennes-
see's market power to induce excessively long bids. We do
not mean to say that a twenty-year cap can never be justified
from these numbers, only that there must be some (rational)
explanation of the link between the numbers and the cap.
We see none here.
FERC must also explain its choice of a data set in the face
of an objection. See UDC, 88 F.3d at 1141 (cap remanded in
part because FERC looked at the lengths of contracts involv-
ing the construction of new pipeline facilities and then failed
to respond to the objection that this was the wrong type of
contract to consider). Petitioners called for the same five-
year cap as the Commission selected on remand from UDC in
Order No. 636-C for the right-of-first-refusal context, asking
that the data relied on in that proceeding be used in the
evaluation of Tennessee's cap. In that order, FERC went
well beyond a cursory citation to a few contracts and re-
viewed data from pipelines' quarterly electronic filings. See
Order No. 636-C, 78 F.E.R.C. at 61,773. It summarized the
data as follows:
For pre-Order No. 636 long-term contracts, the average
term was approximately 15 years. The data show that
since Order No. 636, pipelines have entered into substan-
tially shorter contracts than before. Post-Order No. 636
long-term contracts had an average term of 9.2 years for
transportation, and 9.7 years for storage. For all cur-
rently effective contracts (both pre- and post-Order No.
636), the average term is 10.3 years for transportation
and 10 years for storage. Moreover, ... the trend
toward shorter contracts is continuing. About one quar-
ter to one third of contracts with a term of one year or
greater, entered into since Order No. 636, have had
terms of one to five years. However, nearly one half of
such contracts entered into since January 1, 1995, have
had terms of one to five years....
The industry trend thus appears to be contract terms
that are much shorter than twenty years.
Id. at 61,774 (footnotes omitted). In Tennessee Gas II and
III, FERC rejected the proposition that this discussion in
Order 636-C is relevant to the instant situation. It reasoned
that the right-of-first-refusal process protects existing ship-
pers as opposed to the present circumstances where Tennes-
see is conducting an open season for generally available
capacity and there are no existing shippers that stand to lose
their capacity and thus require protection. This, however,
seems to us a distinction without a difference. The NGA
aims to protect all shippers and potential shippers from
pipelines' excessive market power, not just existing shippers
faced with an expiring contract. If the data relied on in
Order No. 636-C is not relevant in this context, FERC has
yet to tell us why.
Apart from these concerns, we find FERC's reasoning on
the cap to be unpersuasive and largely conclusory. In the
orders under review, FERC frequently refers to its goal of
encouraging the allocation of pipeline capacity to parties
willing to pay the most for it. See, e.g., Tennessee Gas II, 79
F.E.R.C. at 62,337 ("The Commission has previously dis-
cussed the desirability of the economic efficiency achieved by
allocating capacity to parties who value it the most." (footnote
omitted)). We do not quarrel with that goal, but remind
FERC of its admitted need to balance the goal with its duty
to prevent exploitation of Tennessee's monopoly power.
FERC appears to have forgotten the latter in its focus on
maximizing pipeline revenue:
Under the instant proposal, market forces can determine
the duration of service for the new, or newly available
capacity within whatever cap Tennessee proposes for
that particular transaction.
...
[T]he primary issue here, is whether when two shippers
both desire new capacity should that capacity go to a
shipper who values it more, i.e., for a longer term, than
another shipper who might value it less.
Id. at 62,339.
A 20-year cap is consistent with Commission policy of
allowing those who value capacity the highest, including
those who value longer-term contracts, to acquire the
capacity.
Tennessee Gas III, 82 F.E.R.C. at 61,026 (footnote omitted).
To the limited extent that FERC answered claims that the
cap is too long given the market power problem, its state-
ments appear to be disconnected and on occasion contradicto-
ry:
Bidders are not forced into the maximum duration which
in any event is limited to no more than twenty years.
Any longer or the consideration of unlimited periods of
time would be allowing an unduly discriminatory exercise
of monopoly power.
Tennessee Gas II, 79 F.E.R.C. at 62,339 & n.11.
The Commission does not find the application of the 20-
year NPV criteria to be an application of monopoly
power in and of itself.
Tennessee Gas III, 82 F.E.R.C. at 61,026. Once the Commis-
sion acknowledged that there is a monopoly problem, it was
obligated to take the problem seriously and confront it with a
forthright explanation of why a twenty-year cap would not
augment that power. Cf. Laclede Gas Co. v. FERC, 997 F.2d
936, 947 (D.C. Cir. 1993) (in determining whether to accept a
proposed settlement, it is appropriate for FERC to consider
the possibility of protracted litigation; however, it "must
indicate why the interest in avoiding lengthy and difficult
proceedings warrants acceptance of this particular settle-
ment"). Instead, the orders seem to suggest that FERC
approved the twenty-year cap because, functionally, twenty
years would amount to no cap at all. This is hardly rational
decision making.
B. Meter Amendments
As with the twenty-year cap, FERC's explanation for ap-
plying NPV to meter amendments emphasized the maximiza-
tion of pipeline revenue. Once again, however, the Commis-
sion fell short in addressing an important countervailing
concern--this time, the ability of existing shippers to change
primary points. Throughout the administrative proceedings,
petitioners stressed the importance of receipt and delivery
point flexibility to shippers and their belief that, under NPV,
much flexibility would be lost due to the inability of existing
shippers seeking new meter points under changed market
circumstances to outbid new shippers. Petitioners cited the
example of a shipper whose original source of natural gas has
dried up necessitating a change of a receipt point to a
different supplier at a different location. The inability to
switch points to meet such exigencies can cause disruptions
not just for shippers, but for end users as well.
FERC's response was that, contrary to petitioners' claims,
in many cases existing shippers actually can compete with
new bidders for changed meter points on the basis of NPV.
Despite the disadvantage faced by existing shippers stem-
ming from the pipeline's focus on incremental revenue only,
FERC suggested ways in which an existing shipper can
generate a bid with a positive value: "If it is paying a
discounted rate, it can increase the rate offered. It also can
increase the amount of overall capacity requested or extend
the zones its service covers."11 Tennessee Gas III, 82
F.E.R.C. at 61,028 n.17. But the petitioners make a good
case that these options are largely illusory in the majority of
cases. It is often impossible to offer a higher rate or to
request more capacity because the only pipeline capacity that
could be of any use to the existing customer is al-
ready spoken for. Extending zones is impossible for shippers
using delivery points in the northernmost zone and receipt
points in the southernmost and commercially infeasible for
__________
11 The pipeline is evidently divided into seven zones, numbers
zero through six.
many other shippers. Even when an existing shipper can
produce an NPV higher than zero, it is easier for a new
shipper to go even higher than for an existing shipper. By
improperly minimizing the difficulty that existing shippers
will face in the NPV process when they request meter
amendments, FERC failed to seriously address the problems
that the use of NPV might cause for existing shippers.
FERC also suggested that shippers unable to obtain a
point on a primary basis can use it on a secondary basis.12
This secondary option has substantially diminished utility
because it does not guarantee access to the point over any
fixed period of time.
At the end of the day, though, FERC's position is that
regardless of the ability of existing shippers to compete on
the basis of NPV or to meet their needs by using secondary
points, it is best to award primary point capacity on the basis
of the amount of additional revenue generated for Tennessee.
If existing shippers are injured, so be it. The orders under
review suggest this bottom line and at oral argument FERC
counsel appeared to endorse it. While awarding capacity to
the party who will increase the pipeline's revenues the most is
certainly one proper consideration in establishing a new price
regime, we think it was unreasonable for FERC to ignore the
serious potential problems for existing shippers highlighted
by petitioners. Existing shippers into entered into their
contracts with Tennessee with an expectation of a certain
amount of primary point flexibility. When the pipeline pro-
poses to take away that flexibility altogether or reduce it
substantially, FERC is obligated to provide a better explana-
tion of why the shippers' resultant loss cannot be taken into
account in a more balanced application of the NPV pricing
system. This includes explaining why an alternative ap-
proach suggested by petitioners--crediting to a bid some
portion of the payments already obligated instead of incre-
__________
12 The NPV capacity allocation method does not affect secondary
points.
mental revenue only--is not preferable to the approach
FERC approved.
C. Notice of Change in Meter Amendment Process
Petitioners also contend that Tennessee's initial filing failed
to give adequate notice that NPV would be applied to re-
quests for meter amendments. They say that they only
realized Tennessee's intent when they read the pipeline's
electronic bulletin board posting in the latter part of August
1996. The notice requirement is imposed by 15 U.S.C.
s 717c(d):
Unless the Commission otherwise orders, no change shall
be made by any natural-gas company in any such rate,
charge, classification, or service, or in any rule, regula-
tion, or contract relating thereto, except after thirty
days' notice to the Commission and to the public. Such
notice shall be given by filing with the Commission and
keeping open for public inspection new schedules stating
plainly the change or changes to be made in the schedule
or schedules then in force and the time when the change
or changes will go into effect.
FERC twice rejected the claim of inadequate notice. See
Tennessee Gas III, 82 F.E.R.C. at 61,027; Tennessee Gas II,
79 F.E.R.C. at 62,337.
We agree with FERC that petitioners lack standing to
raise this issue because they fail to satisfy standing's injury
prong; the injury they allege is too speculative. See Office of
the Consumers' Counsel v. FERC, 808 F.2d 125, 128-29 (D.C.
Cir. 1987) (to have standing, a party seeking judicial review of
a FERC order must allege a non-speculative harm). Peti-
tioners assert that, "had Tennessee's customers received pri-
or notice of the tariff change FERC ultimately approved,
they might well have made changes to their primary receipt
or delivery points before the tariff change took effect." Joint
Reply Br. for Pet'rs at 20 (emphasis in original). "Might well
have" sounds speculative, especially in this context. The
method used by Tennessee to evaluate point change requests
would seem to have little or no effect on the need or even
desirability, from the standpoint of a shipper, of a point
change. Thus, we expect that any point change request that
"might well have" been made before the tariff change was
implemented on August 1, 1996, would have been lodged
before or after that date. Yet petitioners point to no such
point change requests that were denied. If opportunities for
meter amendments were actually missed, petitioners should
have been able to cite them.
III. Conclusion
The petitions for review are granted. We remand to the
Commission to better explain or modify its approval of the
twenty-year cap and of Tennessee's use of the NPV method
of allocating pipeline capacity in the context of requests from
existing shippers for meter amendments. We do not reach
petitioners' notice claim for lack of standing.