Washington Water Power Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 23, 1999 Decided February 1, 2000
No. 98-1245
Washington Water Power Company, et al.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Great Lakes Gas Transmission Limited Partnership, et al.,
Intervenors
Consolidated with
98-1249, 98-1251, 98-1274
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Joshua L. Menter argued the cause for petitioners Sierra
Pacific Power Company, et al. With him on the briefs were
John P. Gregg and Channing D. Strother, Jr.
Thomas W. Wilcox argued the cause and was on the briefs
for petitioner Washington Water Power Company.
MaryJane Reynolds argued the cause and filed the briefs
for petitioners Apache Corporation and DEK Energy Corpo-
ration.
Timm L. Abendroth, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and John Conway,
Deputy Solicitor.
Elias G. Farrah argued the cause for intervenors. With
him on the brief were Joseph H. Fagan, Paula E. Pyron and
Harvey Y. Morris.
Bruce W. Neely, Michael C. Dotten, James C. Moffatt,
Theresa I. Zolet, John R. Staffier, David W. Anderson,
Patrick G. Golden, David L. Huard, G. William Stafford,
James D. McKinney, Jr., John J. Wallbillich, James H. Holt,
Sandra E. Rizzo, James F. Walsh, III, Nicholas W. Fels, Lee
A. Alexander, Stefan M. Krantz, Rebecca A. Blackmer and
Peter G. Esposito entered appearances.
Before: Silberman, Ginsburg and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge: These consolidated petitions seek
review of the Federal Energy Regulatory Commission's ap-
proval of a settlement resolving a rate case filed by a natural
gas pipeline serving parts of Oregon, Washington, and Cali-
fornia. Finding petitioners' various challenges without merit,
we deny the petitions.
I
Intervenor PG&E Gas Transmission-Northwest Corpora-
tion ("the pipeline") has owned a natural gas pipeline running
from near British Columbia down through Oregon since the
1960s. For many years, its parent company, Pacific Gas &
Electric ("PG&E"), was the main shipper on the line. In
1980, and again in 1991, FERC granted certificates to expand
the pipeline's capacity. The 1991 expansion, which increased
the pipeline's mainline capacity by approximately 75 percent,
went into service in 1993.
Historically, the pipeline used a rate system in which
shippers who entered into contracts for capacity after expan-
sion ("expansion shippers") bore the entire cost of the expan-
sion; shippers who held capacity on the pipeline prior to
expansion ("original shippers") paid only for the costs associ-
ated with the original pipeline, including any unrecovered
costs of building the original pipeline, depreciation, and asso-
ciated tariffs. According to FERC, this so-called "incremen-
tal" or "vintaged" rate structure is justified because it allows
original shippers to "fully benefit from their earlier long-term
agreements with the pipeline.... [S]hippers pay[ ] higher
rates in the early years which are offset by lower rates in the
later years." Great Lakes Transmission Ltd. Partnership,
62 FERC p 61,101 at 61,718 (1993).
Not surprisingly, the expansion shippers preferred a differ-
ent rate structure: a "rolled-in" rate system in which the
costs of the expansion and any unrecovered costs associated
with the original pipeline are rolled together and divided
equally so that all shippers pay the same rate regardless of
when they obtain their capacity. In late 1992 and early 1993,
when the pipeline filed its tariff sheets addressing other rate
issues, some of the expansion shippers filed comments argu-
ing that the pipeline should adopt a rolled-in rate structure.
FERC, agreeing with the pipeline that the incremental rate
structure should be temporarily maintained, deferred resolu-
tion of the issue raised by the expansion shippers until the
pipeline's next general rate filing. Less than fourteen
months later, the pipeline submitted a rate filing pursuant to
section 4 of the Natural Gas Act, 15 U.S.C. s 717c, in which it
proposed the rolled-in rate structure the expansion shippers
had requested. When PG&E, the primary original shipper,
and its customer, Intervenor the California Public Utilities
Commission ("CPUC"), opposed the proposed rolled-in rate
structure, the issue was set for litigation before FERC.
As the "rolled-in" versus "incremental" rate debate raged,
PG&E permanently transferred or "released" part of its
excess capacity to other shippers pursuant to 18 C.F.R.
s 284.243. Section 284.243 provides the mechanism by which
a shipper that has contracted for capacity that it no longer
needs (the "releasing shipper") can reallocate that capacity to
another shipper (the "replacement shipper"): "The pipeline
must allocate released capacity to the person offering the
highest rate (not over the maximum rate) and offering to
meet any other terms and conditions of the release." 18
C.F.R. s 284.243(e). Although "maximum rate" is not de-
fined in the text of the regulation, Order No. 636, the
preamble to section 284.243, explains that "[t]he regulations
require the pipeline to allocate released capacity to the per-
son offering the highest rate not over the maximum tariff
rate the pipeline can charge to the releasing shipper." Pipe-
line Service Obligations and Revisions to Regulations Gov-
erning Self-Implementing Transportation Under Part 284 of
the Commission's Regulations, and Regulation of Natural
Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg.
13267, 13285 (1992) (emphasis added). Under the capacity
release regulation, replacement shippers in this case obtained
capacity at the rate that PG&E had been paying. As a
result, replacement shippers on the incrementally priced pipe-
line paid significantly lower rates than expansion shippers
even though those replacement shippers had obtained their
capacity at a later date. This result conformed to FERC's
then-existing policy as set forth in Great Lakes Transmission
Ltd. Partnership, 64 FERC p 61,017 at 61,155, 61,157 (1993)
("Great Lakes I"). In that case, the Commission, rejecting
complaints from expansion shippers that it was unfair to allow
replacement shippers to pay less, held that the maximum rate
for released capacity was "the applicable maximum tariff rate
for the service being released" and that "[t]he expansion
shippers are assessed an incremental rate because their
service request caused facilities to be constructed for their
benefit." Id.
In 1996, the parties to the still-pending rate proceeding
reached a settlement agreement under which the pipeline
would phase in a rolled-in rate system. During the first (and
uncontested) phase lasting until November 1, 1996, the exist-
ing incremental rate structure was maintained. During the
second period, running from the later of November 1, 1996 or
the date the Commission approves the settlement until the
pipeline's next rate filing, expansion costs are rolled in so that
all shippers end up paying the same base rate--26.28 cents
per Decatherm ("cents/Dth"). Because that base rate repre-
sents a steep increase for PG&E and other original shippers
who had not previously been paying for the pipeline's expan-
sion, the settlement provides for mitigation during the interim
period: until November 1, 2002, PG&E pays only 75 percent
of the base rate, or 19.91 cents/Dth. The settlement also
provides for mitigation of replacement shippers' rates, al-
though less so: they pay approximately 92 percent of the
base rate, or 24.28 cents/Dth. Expansion shippers pay the
base rate plus a 6.5 cent surcharge to offset the rate mitiga-
tion provided to PG&E and replacement shippers, or a total
of 32.74 cents/Dth. The settlement gives PG&E several
other benefits, including rebates on certain surcharges that it
had paid and an entitlement to obtain refunds when it perma-
nently or temporarily releases capacity.
Most of the parties, including PG&E, CPUC and most
expansion shippers, either supported the settlement or did
not oppose it. Over the objections of several replacement
shippers and petitioner Washington Water Power, FERC
approved the settlement. Pacific Gas Transmission Co., 76
FERC p 61,246 (1996). Replacement shippers filed a petition
for rehearing, arguing that under FERC's existing case law,
primarily Great Lakes I, 64 FERC p 61,017 (1993), they could
not be charged rates higher than PG&E, the shipper from
whom they obtained their capacity. Denying the petition for
rehearing, the Commission not only overruled the part of
Great Lakes I on which petitioners had relied, but also
articulated a new policy: replacement shippers obtaining
released capacity post-expansion on an incrementally priced
system are similarly situated to expansion shippers, not to
releasing shippers. PG&E Gas Transmission, Northwest
Corp., 82 FERC p 61,289 at 62,123 (1998). Applying that new
policy, the Commission rejected replacement shippers' chal-
lenges.
II
Several replacement shippers, petitioners Sierra Pacific
Power Co., Sierra Pacific Resources, and Engage Energy US,
L.P. ("replacement shipper petitioners"), argue that FERC's
new policy is inconsistent with its price cap regulation, 18
C.F.R. s 284.243, as interpreted in Order No. 636. They also
argue that application of the new policy to them is impermis-
sibly retroactive and contrary to FERC precedent. FERC
argues that replacement shipper petitioners cannot challenge
the reasoning in the order denying rehearing because they
failed to seek further rehearing of that order. FERC ignores
our holding in Southern Natural Gas Co. v. FERC, 877 F.2d
1066, 1073 (D.C. Cir. 1989). "[W]hen FERC makes no
change in the result, but merely supplies a new improved
rationale upon realizing that its first one won't wash, it does
not thereby transform its order denying rehearing into a new
'order' requiring a new petition for rehearing before a party
may obtain judicial review. Otherwise, we would 'permit an
endless cycle of applications for rehearing and denials,' limit-
ed only by FERC's ability to think up new rationales." Id.
Here, too, although the order denying rehearing abandoned
the reasoning of the earlier order approving the settlement,
FERC reached precisely the same result. Replacement ship-
per petitioners therefore had no obligation to seek further
rehearing.
On the merits, these petitioners fare less well. They
challenge neither the logic behind FERC's ruling that they
are similarly situated to expansion shippers--the prior policy
was unfair to expansion shippers--nor the Commission's au-
thority to overrule Great Lakes I. Instead, they complain
that insofar as the new policy may require replacement
shippers to pay more than releasing shippers, that policy
conflicts with Order No. 636, the preamble to section 284.243
of the Commission's regulations.
Replacement shipper petitioners read Order No. 636, which
states that "the pipeline [must] allocate released capacity to
the person offering the highest rate not over the maximum
tariff rate the pipeline can charge to the releasing shipper,"
to require that they pay the same rate as PG&E. 57 Fed.
Reg. at 13285 (emphasis added). According to the Commis-
sion, a subsequent order, Order No. 636-A, made clear that
the sentence from Order No. 636 on which petitioners rely
does not apply to incrementally priced systems. Because
FERC's position represents an interpretation of its own
regulations, we give it "controlling weight unless it is plainly
erroneous or inconsistent with the regulation." Exxon Corp.
v. FERC, 114 F.3d 1252, 1258 (D.C. Cir. 1997) (internal
quotation marks omitted). Petitioners have not come close to
meeting this heavy burden.
The Commission's position rests on the following sequence
of events. After FERC issued Order No. 636, several peti-
tions for rehearing "raise[d] questions about the maximum
rate for released capacity." Order No. 636-A, 57 Fed. Reg.
36,128, 36,149 (1992). Those petitions observed that shippers
holding expansion capacity on a pipeline with an incremental
rate system would have a difficult time releasing that capacity
because the maximum rate for capacity released by shippers
on pipelines with rolled-in rates would be significantly lower.
Id. at 36,150. Petitioners suggested several ways to address
this problem, including giving priority to incremental releases
or establishing a floor for prices at the incremental rate.
Responding to these comments in Order No. 636-A, FERC
refused to "make a generic determination on the various
methodologies proposed [in the comments] since resolution of
such issues may depend on the characteristics of the pipeline
and the services it offers. The parties in restructuring
proceedings involving incremental rates should consider and
propose methodologies to ensure that the capacity release
mechanism operates efficiently and that all parties are treat-
ed fairly and equitably, without undue discrimination." Id. at
36,150. Order No. 636-A thus "left open the issue of how to
price capacity releases in the context of a system with incre-
mental rates." PG&E Gas Transmission, Northwest Corp.,
82 FERC p 61,289 at 62,129. Put another way, Order No.
636-A made clear that Order No. 636's definition of "maxi-
mum rate" does not apply to incrementally priced rate struc-
tures. Petitioners have given us no basis for concluding that
the Commission's interpretation of Order Nos. 636 and 636-A
is either "plainly erroneous" or inconsistent with section
284.243.
Equally without merit is replacement shipper petitioners'
argument that by adopting the new policy, the Commission
impermissibly departed from prior cases in which it refused
to remove or raise the section 284.243 rate cap in individual
proceedings. See, e.g., Tennessee Gas Pipeline Co., 70 FERC
p 61,076, 61,200 (1995). As the Commission observed, it did
not remove or raise the rate cap in this case; instead, it
defined the term "maximum rate" in the context of an incre-
mentally priced vintaged system as the maximum rate under
the tariff sheets that the expansion shippers could be
charged. PG&E Gas Transmission, Northwest Corp., 82
FERC p 61,289 at 62,131. To be sure, the Commission held
in Great Lakes I that the maximum rate was the releasing
shipper's maximum tariff rate, but the Commission has now
overruled that part of Great Lakes I. See id. Because
replacement shippers have not argued that the Commission
could change the Great Lakes I policy only through notice
and comment rulemaking rather than through adjudication,
we have no reason to address that issue.
Petitioners' remaining arguments with respect to the new
policy relate to whether the Commission could apply it to
their existing contracts. Having entered into contracts for
released capacity prior to the settlement of this case, replace-
ment shipper petitioners argue that applying the new policy
to them now is impermissibly retroactive. Because petition-
ers have failed to establish that they relied on the Commis-
sion's prior policy to their detriment--in other words, that
they would not have entered into these contracts had they
known that the Commission would change its policy--they
cannot prevail on this argument. See Public Service Co. of
Colorado v. FERC, 91 F.3d 1478, 1490 (D.C. Cir. 1996) (in
determining that it was permissible for Commission to apply
new interpretation of law, "the apparent lack of detrimental
reliance ... is the crucial point"). In February 1994, when
petitioner Engage Energy, the first replacement shipper
petitioner to contract for PG&E's released capacity, executed
its contract, FERC had already announced that the incremen-
tal versus rolled-in rate issue would be addressed when the
pipeline submitted its next rate filing in late 1994 or early
1995. All replacement shipper petitioners therefore should
have been fully aware of the possibility that the pipeline
would adopt rolled-in rates. In fact, by the time petitioner
Sierra Pacific executed its contracts in February and June
1995, the pipeline had already proposed rolled-in rates.
Moreover, the mitigation replacement shippers receive during
the interim period produces a lower rate than those shippers
would have paid under a fully rolled-in rate system. Because
they are paying rates lower than the rates to which they
should have known they were exposed, they cannot show
detrimental reliance. The only plausible detrimental reliance
argument that these petitioners could have made is that by
paying rates higher than PG&E, they suffered some sort of
competitive injury vis-A-vis PG&E that they had not antici-
pated. But none of these petitioners alleges competitive
injury; the only replacement shipper to have done so did not
petition for review. By way of a record reference to a portion
of a brief filed with FERC, petitioners suggest that they
relied on PG&E to oppose vigorously and litigate the rolled-in
rate issue. Absent a more direct mention of this at best
attenuated reliance interest, however, we see no need to
address it. See Washington Legal Clinic for the Homeless v.
Barry, 107 F.3d 32, 39 (D.C. Cir. 1997) (refusing to reach
issue where party offered only "bare-bones arguments").
Replacement shipper petitioners fare no better with their
argument that by applying the new policy to them, FERC
departed from Great Lakes Transmission Ltd. Partnership,
72 FERC p 61,081 at 61,427 (1995) ("Great Lakes II"), peti-
tions for review denied in part and granted in part, South-
eastern Michigan Gas Co. v. FERC, 133 F.3d 34 (D.C. Cir.
1998), where the Commission refused to apply a new policy
retroactively. In denying rehearing in this case, FERC took
great pains to distinguish Great Lakes II: The policy that the
Commission changed in Great Lakes II had been "consistent-
ly applied" for thirty years, whereas the Commission's new
policy here overruled only one case, Great Lakes I, decided
just five years prior to the decision in this case. 82 FERC
p 61,289 at 62,127. We agree with the Commission that these
differences distinguish Great Lakes II from the situation
presented in this case.
Replacement shipper petitioners next argue that even if
replacement shippers as a general rule are similarly situated
to expansion shippers, they are not similarly situated to
expansion shippers in the circumstances of this case. This is
so, they contend, because as replacement shippers they paid
millions of dollars in tariffs when the incremental rate system
was in place--tariffs for which expansion shippers were not
responsible. As intervenors point out, however, the rate paid
by these replacement shippers under the incremental rate
system, even including the additional tariffs, was still signifi-
cantly lower than the rate paid by expansion shippers. Since
replacement shippers are similarly situated to expansion ship-
pers for purposes of determining rates and since it is undis-
puted that they paid less than expansion shippers for the
period in question, petitioners have no cause to complain now
about the tariffs.
Replacement shipper petitioners also contend that the set-
tlement is unduly discriminatory because PG&E enjoys a
greater degree of mitigation and a number of other "special
benefits." In order to prevail on an undue discrimination
claim, petitioners must demonstrate not only differential rates
between two classes of customers but also "that the two
classes of customers are similarly situated for purposes of the
rate." "Complex" Consolidated Edison Co. of New York v.
FERC, 165 F.3d 992, 1012 (D.C. Cir. 1999). Because replace-
ment shipper petitioners are similarly situated to expansion
shippers rather than to PG&E, and because their rates are
lower than the rates of expansion shippers, the undue dis-
crimination argument fails.
Finally, replacement shipper petitioners challenge a provi-
sion of the settlement agreement under which the pipeline
will refund a certain percentage of the tariffs paid by PG&E
in exchange for an agreement by CPUC, PG&E's primary
customer, to withdraw two appeals that it had filed in this
court challenging the Commission's determination that the
pipeline could recover certain transition costs. Petitioners
maintain first that this provision is unfair because PG&E paid
only a portion of the tariffs but receives all of the refund, and
second that the Commission ignored Southern California
Edison Co., 49 FPC 717, 721 (1973), a decision of the Com-
mission's predecessor refusing to approve a settlement that
included a provision settling an ancillary appeal pending
before this court. As the Commission pointed out in denying
rehearing in this case, however, giving PG&E the benefit of
the refund is consistent with its policy of facilitating settle-
ments to resolve the difficult issues raised by transition cost
disputes. See 82 FERC p 61,289 at 62,142. Moreover, unlike
in Southern California Edison Co., even with the refund
provided under the settlement, PG&E still pays "a signifi-
cantly higher proportionate amount" of the transition cost
tariffs than any other shipper. See 82 FERC p 61,289 at
62,143.
III
The remaining two petitions require only brief discussion.
Claiming that a new volume-based charge included in the
settlement will increase its rate by 16 percent and that FERC
has a general policy of requiring mitigation where a shipper's
rate increases by more than 10 percent, petitioner Washing-
ton Water Power Co. maintains that FERC should not have
approved the settlement without requiring additional mitiga-
tion. FERC responds that it has no such "general" rate
shock policy. Denying rehearing, FERC explained that its
rate shock policy applies only when the rate shock results
either from a straight fixed-variable rate design or from a
transition from incremental to rolled-in rates. 82 FERC
p 61,289 at 62,144. Washington Water's increased rate re-
sults from neither. Instead, the rate increase results from a
new non-mileage based charge. Having cited no authority
either supporting its assertion that the Commission has re-
quired mitigation in such a situation or leading us to question
the Commission's explanation that it has no general rate
shock policy outside of the two situations mentioned above,
Washington Water's argument fails.
Petitioners DEK Energy Corp. and Apache Corp. (collec-
tively "DEK"), expansion shippers who failed timely to file
their comments on the settlement, now contest the settle-
ment's mitigation provisions. DEK participated neither in
the litigation of the pipeline's section 4 rate filing nor in the
settlement negotiations. After submission of the settlement,
DEK filed comments stating that it had no opposition to the
rolled-in rate structure. It registered no opposition to the
settlement's mitigation provisions. Then, over two months
after the final deadline for filing comments on the settlement,
DEK filed a "clarification," asserting for the first time that
the mitigation provided to PG&E and the replacement ship-
pers under the settlement was unjust and unfair. Several
parties opposed DEK's "clarification" on timeliness grounds,
and the Commission said nothing about DEK's comments in
its September 1996 order approving the settlement. Denying
DEK's petition for rehearing, the Commission found that
DEK's comments were untimely. 82 FERC p 61,289 at
62,138. Although the Commission also addressed the "factual
inaccuracy underlying DEK's position," PG&E Gas Trans-
mission, Northwest Corp., 83 FERC p 61,251 at 62,066 (1998),
it noted that
[a]ddressing DEK's opposition now, in light of extended
settlement conferences and resolution of the case in a
manner acceptable to all other similarly situated to DEK,
would unfairly disrupt and detract from the compromises
of parties that did participate. This is especially true
considering that DEK's initial comments were silent on
the issues raised in its 'clarification' and request for
rehearing. Consideration of the late opposition would be
similar to allowing an eleventh hour intervention by a
person that had chosen not to comment at all, and would
lend uncertainty to the settlement negotiation process
which thrives, in part, on the timely filing of positions.
82 FERC p 61,289 at 62,138. Agreeing with the Commis-
sion's sound reasons for finding DEK's opposition to the
settlement untimely, we find it unnecessary to reach DEK's
arguments that the Commission erred in its assessment of the
factual inaccuracies inherent in DEK's position.
IV
The petitions for review are denied.
So ordered.