United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 15, 2010 Decided August 13, 2010
No. 09-1016
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
NEXTERA ENERGY RESOURCES, LLC, ET AL.,
INTERVENORS
Consolidated with 09-1024
On Petitions for Review of Orders
of the Federal Energy Regulatory Commission
Henry S. May Jr. argued the cause for petitioners. With
him on the briefs were James E. Olson, Elizabeth B.
Kohlhausen, Joan Dreskin, Timm L. Abendroth, and Dan
Regan.
Lona T. Perry, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
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With her on the brief were Thomas R. Sheets, General
Counsel, and Robert H. Solomon, Solicitor.
William Thomas Miller, Joshua L. Menter, Andrew K.
Soto, Dena E. Wiggins, and Jack N. Semrani were on the brief
for intervenors American Public Gas Association, et al. in
support of respondent.
Before: BROWN and GRIFFITH, Circuit Judges, and
RANDOLPH, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: In Interstate Natural Gas
Association of America v. FERC, 285 F.3d 18 (D.C. Cir.
2002) (INGAA), we upheld the Federal Energy Regulatory
Commission’s (FERC) decision to lift, for a two-year
experimental period, cost-based price ceilings on natural gas
shippers’ releases of unused firm pipeline transportation
capacity into the short-term (one year or less) market. We
also sustained FERC’s decision to retain price ceilings on
short-term capacity sales by natural gas pipelines. Several
years later, FERC issued new orders permanently lifting the
price ceilings on short-term capacity releases by shippers
while maintaining the ceilings on sales by pipelines. An
industry association and several pipelines now petition for
review of these orders. We conclude FERC’s decision to
retain price ceilings on pipeline capacity sales is consistent
with our decision in INGAA and therefore deny the petitions.
I
Traditionally, an interstate natural gas pipeline “bundled”
its sales and transportation services into a single package to
sell to customers. See United Distrib. Cos. v. FERC, 88 F.3d
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1105, 1125–26 (D.C. Cir. 1996) (UDC). In 1992, FERC,
recognizing that bundling allowed pipelines to exploit their
transportation monopoly to distort the sales market, issued
Order No. 636, which restructured natural gas pipelines to
enhance competition. Pipeline Service Obligations and
Revisions to Regulations Governing Self-Implementing
Transportation Under Part 284 of the Commission’s
Regulations, Order No. 636, 59 FERC ¶ 61,030 (1992), order
on reh’g, Order No. 636-A, January 1991-June 1996 FERC
Stats. & Regs. ¶ 61,272 (1992), reh’g denied, 62 FERC ¶
61,007 (1993), aff’d in part and remanded in part sub nom.
United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 1996),
order on remand, Order No. 636-C, 78 FERC ¶ 61,186
(1997), order on reh’g, Order No. 636-D, 83 FERC ¶ 61,210
(1998). Pursuant to FERC’s authority under the Natural Gas
Act (NGA), Order No. 636 mandated pipelines “unbundle”
their sales and transportation services, effectively
deregulating the sales market while preserving cost-based
regulation of pipelines’ transportation services. See UDC, 88
F.3d at 1125–26. While acknowledging that Congress alone
had authority to deregulate the natural gas market, FERC
“‘institut[ed] light-handed regulation, relying upon market
forces . . . to constrain unbundled pipeline sale for resale gas
prices within the NGA’s “just and reasonable” standard.’” Id.
at 1126 (quoting Order No. 636 at ¶ 30,440). FERC believed
“open-access transportation [and] ‘adequate divertible gas
supplies . . . in all pipeline markets,’ would ensure that the
free market for gas sales would keep rates within the zone of
reasonableness.” Id. (quoting Order No. 636 at ¶ 30,437–43).
Order No. 636 also established a uniform national
capacity release program to allow shippers that contracted
with pipelines for rights to long-term firm transportation
capacity to resell unused capacity directly to other shippers.
See id. at 1149–51. Because FERC was concerned shippers
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could exercise market power over these short-term
transactions, FERC capped the purchase price for capacity
releases by shippers at the same cost-based maximum rates
FERC set for capacity sales by pipelines. See id. at 1150.
Numerous parties from the natural gas industry filed
petitions for review of Order No. 636. In UDC, we generally
upheld FERC’s regulatory reforms. In particular, we
dismissed the argument made by several shippers that FERC
impermissibly had restricted the maximum allowable rate for
shipper capacity releases to the same rate as pipeline capacity
sales, accepting the Commission’s response that it had an
insufficient factual record to resolve the issue. Id. at 1160.
After studying the effects of Order No. 636 on the natural
gas market, FERC discovered the cost-based price ceilings
imposed on the capacity release market might be harming the
very shippers they were meant to protect. See INGAA, 285
F.3d at 30. During periods of peak demand, for instance, the
ceilings prevented shippers willing to pay market prices for
short-term capacity from purchasing unused capacity held by
other shippers willing to sell it at market prices. Id.
Therefore, in 2000, FERC issued Order No. 637, which, inter
alia, modified the capacity release program by eliminating,
for an experimental two-year period, the price ceilings on
shipper releases of long-term firm capacity into the short-term
market. Regulation of Short-Term Natural Gas
Transportation Services, and Regulation of Interstate Natural
Gas Transportation Services, Order No. 637, FERC Stats. &
Regs. ¶ 31,091, 65 Fed. Reg. 10156 (2000), order on reh’g,
Order No. 637-A, FERC Stats. & Regs. ¶ 31,099 (2000),
order denying reh’g, Order No. 637-B, 92 FERC ¶ 61,062
(2000), aff’d in relevant part sub nom. INGAA v. FERC, 285
F.3d 18 (D.C. Cir. 2002). Nevertheless, FERC maintained the
price ceilings on pipeline capacity sales.
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The Interstate Natural Gas Association of America
(INGAA) and other parties challenged Order No. 637 before
this court in INGAA. There, we upheld FERC’s decision to
lift the price ceilings on shippers in light of three principles.
First, we noted FERC was due “special deference” for its
experiment. INGAA, 285 F.3d at 30. Second, we observed
that “the basic premise of the NGA is the understanding that
natural gas pipeline transportation is generally a natural
monopoly,” so FERC faced an “uphill fight” to justify
market-based rates under those circumstances. Id. at 30–31.
Finally, we noted our decision in Farmers Union Central
Exchange, Inc. v. FERC, 734 F.2d 1486 (D.C. Cir. 1984),
provided “general guidance for our review of FERC’s
decision to elect more relaxed[,] ‘lighthanded’ . . . regulation
than traditional cost-based ceilings, in the context of a
mandate to set ‘just and reasonable’ rates in an industry
generally thought to have the features of a natural monopoly.”
INGAA, 285 F.3d at 31. Applying the Farmers Union test, we
concluded “in this context competition has every reasonable
prospect of preventing seriously monopolistic pricing,” and
“together with the non-cost advantages . . . and the
experimental nature of this particular ‘lighthanded’
regulation,” FERC’s decision did not violate the NGA and
was not arbitrary and capricious. Id. at 35.
We also considered whether FERC’s decision to maintain
the price ceilings on pipelines while lifting them on shippers
was discriminatory or arbitrary and capricious. We concluded
FERC’s purportedly discriminatory treatment of pipelines was
“not unreasonable” because it rested on a “reasonable
distinction[] . . . between pipelines and other holders of
unused capacity, based on probable likelihood of wielding
market power.” Id. at 35–36. We therefore sustained FERC’s
decision to regulate pipeline sales at cost-based rates.
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In August 2006, two shippers petitioned FERC to modify
its rate cap regulations by lifting the price ceilings on shipper
capacity releases. FERC responded in January 2007 by
seeking comment on whether changes to the capacity release
program could improve market efficiency. Pacific Gas &
Elec. Co., Request for Comments, 118 FERC ¶ 61,005
(2007). Later that year, FERC proposed permanently
removing the price ceiling on short-term capacity release
transactions of one year or less by shippers. Promotion of a
More Efficient Capacity Release Market, Notice of Proposed
Rulemaking, 121 FERC ¶ 61,170 (2007). Once again, FERC
indicated it did not intend to lift the ceilings for pipelines. Id.
at ¶¶ 46–52. More than sixty entities from the natural gas
industry commented on FERC’s proposed rule.
In 2008, FERC issued its final rule, Promotion of a More
Efficient Capacity Release Market, Order No. 712, 123 FERC
¶ 61,286 (2008) (“Order No. 712”), and an order on rehearing,
Promotion of a More Efficient Capacity Release Market,
Order No. 712-A, 125 FERC ¶ 61,216 (2008) (“Order No.
712-A”) (collectively the “Orders”). Predictably, Order No.
712 lifted the price ceilings for short-term capacity releases
by shippers but retained the ceilings for capacity sales by
pipelines. INGAA and two pipelines, Spectra Energy
Transmission, LLC and Spectra Energy Partners, LP, then
filed the instant petitions for review.
II
A
This court reviews FERC’s orders under the
Administrative Procedure Act’s (APA) arbitrary and
capricious standard and upholds FERC’s factual findings if
supported by substantial evidence. See Wash. Gas Light Co.
7
v. FERC, 532 F.3d 928, 930 (D.C. Cir. 2008). We generally
limit our review under the NGA “to assuring that the
Commission’s decisionmaking is reasoned, principled, and
based upon the record.” Am. Gas Ass’n v. FERC, 593 F.3d
14, 19 (D.C. Cir. 2010). And we afford FERC “broad
discretion to invoke its expertise in balancing competing
interests and drawing administrative lines.” Id. In particular,
when FERC’s “orders involve complex scientific or technical
questions, . . . we are particularly reluctant to interfere with
the agency’s reasoned judgments.” B&J Oil & Gas v. FERC,
353 F.3d 71, 76 (D.C. Cir. 2004). “Nevertheless, [FERC]
must examine the relevant data and articulate a satisfactory
explanation for its action, including a rational connection
between the facts found and the choice made.” Motor Vehicle
Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983).
Petitioners do not challenge FERC’s decision to lift the
price ceilings for shippers. Therefore, we need only address
whether FERC also should have lifted the price ceilings for
pipelines. In this regard, Petitioners argue INGAA is
inapplicable because FERC’s decision to lift the price ceilings
in Order No. 637 was an experimental step in a gradual
process of reform, while Order No. 712 reflects a permanent
change in the Commission’s policies.
Petitioners correctly observe that in INGAA we noted we
“give[] special deference to agency development of . . .
experiments . . . because of the advantages of data developed
in the real world.” INGAA, 285 F.3d at 30. However,
Petitioners are mistaken when they suggest INGAA is
therefore distinguishable from the matter now before us. The
special deference we afford to FERC’s experiments is merely
intended to give the agency a chance to generate “real world”
data on which to base more lasting policies. See Pub. Serv.
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Comm’n of State of N.Y. v. Fed. Power Comm’n, 463 F.2d
824, 828 (D.C. Cir. 1972) (affirming agency’s experimental
policy to increase the interstate flow of natural gas because
record did not show policy “will not work”). Once the data is
available, FERC may adjust or reaffirm its policies. Id.
FERC followed this course in Order No. 712 when it adopted
on a permanent basis the regulations it had implemented on an
experimental basis in Order No. 637. But this shift does not
make INGAA irrelevant. The relevant distinction between
INGAA and the instant petitions is that here we expect FERC
to support its decision with substantial record evidence to
justify a permanent change in policy, rather than a temporary
experiment.
In any event, we did not find the “extra layer of
deference” dispositive in INGAA, just as we did not consider
the NGA’s presumption in favor of cost-based regulation to
have settled the matter. INGAA, 285 F.3d at 30–31. Instead,
our analysis in INGAA turned on whether FERC’s decision to
adopt more light-handed, market-based regulation was
consistent with Farmers Union, id. at 31–35, and whether
FERC’s disparate treatment of shippers and pipelines was
based on a reasonable distinction, id. at 35–36. Order No.
712 concerns similar issues, and we therefore apply the
framework we announced in INGAA.
B
Petitioners’ objections to the Orders arise from
misconceptions about FERC’s authority under the NGA.
First, Petitioners contend the short-term capacity market
is a single market and argue that because FERC lifted the
price ceilings on one category of market participants
(shippers), it had to lift the ceilings for all market participants,
9
including pipelines. Petitioners argue FERC’s failure to lift
the ceilings for pipeline sales has resulted in impermissible
asymmetric regulation. Petitioners’ argument is based on the
flawed premise that FERC must regulate every category of
market participant in precisely the same manner. As we
discussed in INGAA, the NGA authorizes FERC to treat
pipelines and shippers differently based on “reasonable
distinctions.” INGAA, 285 F.3d at 36; see, e.g., TransCanada
Pipelines Ltd. v. FERC, 878 F.2d 401, 413 (D.C. Cir. 1989)
(“The NGA prohibits ‘unreasonable differences in rates . . .
as between classes of service.’” (quoting 15 U.S.C. §
717c(b)(2) (emphasis added))). We “ha[ve] held that
differences in rates based on relevant, significant facts which
are explained are not contrary to the NGA . . . [and thus]
different rate treatment by FERC that is based on relevant,
significant facts which are explained would not be arbitrary
and capricious.” TransCanada, 878 F.2d at 413–14.
Here, FERC acknowledged it was treating shippers and
pipelines differently in Order No. 712, but it offered a
reasonable explanation for this disparate treatment. See Order
No. 712 ¶¶ 95–102. Prior to Order No. 712, FERC already
offered pipelines pricing flexibility, including negotiated and
seasonal rates, and FERC thus sought to offer pricing
flexibility to shippers as well. However, FERC explained it
could not give identical pricing flexibility to pipelines because
of concerns the pipelines could wield market power. We
found this distinction between pipelines and shippers to be
reasonable in INGAA, and we reach the same conclusion here.
See INGAA, 285 F.3d at 35 (“[W]hereas the uncontracted
capacity of a pipeline is presumptively available for the short-
term market, no such presumption makes sense for the non-
pipeline capacity holders: they presumably contracted for the
capacity in anticipation of actually using it.”).
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FERC offered another important reason for treating
pipelines and shippers differently. If pipelines could charge
market-based rates in the short-term market, they might
withhold construction of new capacity to take advantage of
the opportunity to earn scarcity rents in the short-term market.
See, e.g., Order No. 712 ¶ 85. Petitioners claim their
construction decisions are not influenced by prices in the
short-term market, but this claim relies on nothing more than
assertions in an expert’s affidavit. Petitioners did not adduce
evidence contradicting FERC’s plausible concern, informed
by economic theory, that “if pipelines with market power find
that maintaining scarce pipeline capacity increases their
profits, then they will have much less incentive to construct
long-term capacity because such capacity could result in
lower profitability.” Order No. 712-A ¶ 36. On this record,
we defer to the Commission’s view. See TransCanada, 878
F.2d at 412–13.
Next, Petitioners suggest FERC was obligated to remove
the price ceiling for pipelines because the Commission found
the short-term capacity release market was “generally
competitive.” Order No. 712 ¶ 39. If the market is truly
competitive, say Petitioners, pipelines should be able to
charge market-based rates. Petitioners have taken FERC’s
statement out of context. The key to properly interpreting
FERC’s finding is in the modifier “generally.” Based on the
evidence before it, FERC explained it could not conclude the
short-term market would remain competitive if the price
ceilings were removed from pipeline sales. See, e.g., Order
No. 712 ¶¶ 61, 88; Order No. 712-A ¶¶ 22–28. The
Commission thus found it necessary to retain the price
ceilings on pipeline sales because, absent the recourse rate,
pipelines might take advantage of their customers by
exploiting market power. Order No. 712 ¶¶ 83, 88, 91, 102.
FERC reached this conclusion by analyzing data it had
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collected during the experimental period of Order No. 637, id.
¶¶ 42–44, and more recent data that confirmed contemporary
market conditions were consistent with conditions FERC had
observed under Order No. 637, id. ¶¶ 45–47. This data is just
the sort of “real world” information we expected FERC to
glean from its experiment in Order No. 637, and it provides
substantial support for the Commission’s policy. See INGAA,
285 F.3d at 30. There is no conflict between FERC’s
evidentiary finding and the regulatory choice it made.
Petitioners also argue that the pricing flexibility FERC
offered shippers in Order No. 712 gives them an unfair
competitive advantage over pipelines and that FERC has
ignored the pipelines’ alleged economic injuries. FERC
responds that Petitioners are adequately compensated on a
cost-of-service basis and that any extra revenues a pipeline
could earn by charging market-based rates would be subject
to adjustment during the pipeline’s next NGA section 4 rate
case. Petitioners insist this issue is not ripe for review and in
the alternative assert FERC is wrong on the merits.
Petitioners believe that if FERC lifted the price ceilings from
pipeline sales, any revenues the pipelines earned in the short-
term market would be unregulated revenues. We decline to
resolve this issue but note Petitioners’ argument reinforces the
concern that motivated FERC to retain the price ceilings on
pipelines. Without the price ceilings in place, pipelines might
exercise market power, and FERC might be unable to remedy
the resulting harm to customers.
Petitioners also argue Order No. 712 creates a bifurcated
gas transportation market in which the capped pipeline prices
will artificially inflate prices in the uncapped market for
shipper-released capacity. This is a familiar argument. In
INGAA, we noted that “distortions of [the market] seem likely
in any such compromise, [which] is within the Commission’s
12
purview so long as it rests on reasonable distinctions.”
INGAA, 285 F.3d at 36. We again find FERC’s distinction,
which is “based on probable likelihood of [pipelines] wielding
market power,” to be reasonable. Id. FERC acknowledged
the risk of market distortion in Order No. 712 but observed it
had taken steps to reduce the cost of arbitrage, thereby
encouraging shippers to resell capacity to other shippers that
would place a higher value on the capacity. See Order No.
712 ¶¶ 103–06. Furthermore, by “balancing the risks of
creating a somewhat bifurcated market against the possibility
of the exercise of market power by the pipelines in the short-
term market,” FERC made a reasonable judgment to “err on
the side of enhanced protection against market power.” Id. ¶
108. FERC’s decision is consistent with the NGA’s
“fundamental purpose . . . to protect natural gas consumers
from the monopoly power of natural gas pipelines.” Nat’l
Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 833 (D.C. Cir.
2006).
Trying another tack, Petitioners assert FERC was
arbitrary and capricious because the Commission failed to
address the affidavit by their expert witness, Dr. Edward C.
Gallick (Gallick Affidavit). Although FERC did not
specifically refer to the Gallick Affidavit in the Orders, we do
not find this troubling. In a rulemaking, FERC is not
obligated to address expert witnesses by name so long as the
Commission provides a reasoned response to all significant
comments. See Interstate Natural Gas Ass’n v. FERC, 494
F.3d 1092, 1096 (D.C. Cir. 2007) (holding FERC has a “duty
to give reasoned responses to all significant comments in a
rulemaking proceeding”). The Gallick Affidavit was attached
to the comments submitted by Petitioners Spectra Energy
Transmission, LLC and Spectra Energy Partners, LP
(“Spectra”). FERC sufficiently considered and responded to
the Gallick Affidavit when responding to specific comments
13
by Spectra, INGAA, and other commenters. See Order No.
712 ¶¶ 87–108 (responding to specific comments about the
evidentiary record, infrastructure incentives, competitive
market structure, differences in regulatory treatment of
pipeline capacity and shipper released capacity, and risk of
bifurcated markets); Order No. 712-A ¶¶ 13–53 (responding
to requests for rehearing regarding competitive market
findings, withholding construction of needed pipeline
infrastructure, pricing flexibility, and bifurcated markets).
Finally, Petitioners’ contention that FERC failed to
adequately consider proposed alternatives has no merit. See
id. ¶¶ 54–56 & n. 63 (rejecting alternatives proposed by
Spectra on rehearing).
III
FERC’s decision to retain cost-based price ceilings on
short-term capacity sales by pipelines is consistent with the
framework set forth in INGAA and is supported by substantial
evidence. Therefore, the petitions are
Denied.