United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 17, 1999 Decided April 13, 1999
No. 98-1081
Iroquois Gas Transmission System, L.P.,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Iroquois Non-Owner Shipper Group, et al.,
Intervenors
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Lee A. Alexander argued the cause for petitioner. With
him on the briefs were Beth L. Webb, Stefan M. Krantz and
Jeffrey A. Bruner.
Timm L. Abendroth, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
were Jay L. Witkin, Solicitor, and Susan J. Court, Special
Counsel.
Kevin J. McKeon argued the cause for intervenors. With
him on the brief were Lillian S. Harris, Mary Ann Walker,
Neil L. Levy, David W. D'Alessandro, Kelly A. Daly and
Richard A. Rapp, Jr.
Before: Williams, Rogers and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Iroquois built a pipeline to bring
gas from the United States-Canadian border down to the
New York City region. The pipeline was so constructed that
its capacity could be expanded rather cheaply; adding com-
pressor stations would (or at least could) bring down average
cost. In early 1996 Iroquois held an auction to find out
whether demand was strong enough to justify such an ex-
pansion. At the time its maximum tariff rate was
$0.695/dekatherm ("DTh"). Iroquois set the minimum bid
for the additional capacity at $0.50/DTh, which it says with-
out contradiction is the minimum rate at which it could
recover the cost of building the compressor and yield a
surplus that could be used to reduce rates for existing
shippers. The only shippers submitting viable bids that met
the $0.50 threshold were Coastal Gas Marketing Co. and
ProGas U.S.A., Inc., which bid $0.50 and $0.54, respectively,
for the new service.
Iroquois applied in mid-1996 for the certificate of public
convenience and necessity required for construction of the
compressor station. It proposed use of the auction rates for
the new shippers, and, as we understand from oral argument,
committed in the application to include a modest reduction in
rates for the earlier shippers--not down to the auction lev-
els--in its next rate case under s 4 of the Natural Gas Act,
15 U.S.C. s 717c. The Federal Energy Regulatory Commis-
sion issued a certificate in mid-1997, see Iroquois Gas Trans-
mission System, L.P., 79 FERC p 61,394 (1997), but denied
Iroquois's request to discount the rates below those charged
existing shippers. Iroquois petitioned for rehearing on the
discount issue, FERC denied the petition for rehearing, see
Iroquois Gas Transmission System, L.P., 82 FERC p 61,086
(1998) ("Order on Rehearing"), and this appeal followed.
While this appeal was pending, Iroquois accepted the certif-
icate and constructed the facilities. While construction pro-
ceeded, a FERC rate order reduced the maximum tariff rate
to $0.46/DTh, below the rejected discount price. See Iro-
quois Gas Transmission System, L.P., 84 FERC p 61,086
(1998), reh'g denied in relevant part, 86 FERC p 61,261
(1999). On November 2, 1998 Iroquois began service to
Coastal and ProGas at the new maximum rate.
* * *
The Commission argues that Iroquois is not "aggrieved," as
required for our jurisdiction both under the Constitution and
the statute. See Lujan v. Defenders of Wildlife, 504 U.S.
555, 560 (1992) (holding "injury in fact" element of "irreduci-
ble constitutional minimum" for standing); 15 U.S.C.
s 717r(b) (providing that any party "aggrieved by an order
issued by the Commission" may obtain judicial review). Two
of the theories of non-aggrievement are frivolous. First,
FERC suggests that because Iroquois objects to a floor
under its rates rather than a ceiling over them, it suffers no
injury. This seems to rest on the assumption that a firm can
always increase its profits by raising prices--a proposition
which, if true, would cause every firm to charge an infinite
price.1 The second frivolous theory is that because Iroquois
accepted the certificate, it follows that it is not harmed. But
in practical terms it seems self-evident that a firm may be
worse off (or may reasonably perceive itself as worse off)
under a conditioned certificate than under the same certifi-
cate without conditions. Its acceptance of the conditioned
certificate may show that it would be still worse off with no
certificate at all, but that comparison is irrelevant. We have
in fact previously heard the claims of parties who accepted
__________
1 Agency briefs sometimes seem to contain ideas that would not
see the light of day if there were any consultation between the brief
writers and the agency's policy staff. This appears to be such.
conditioned licenses from FERC and objected to the condi-
tions. See Transcontinental Gas Pipe Line Corp. v. FERC,
54 F.3d 893, 895-96 (D.C. Cir. 1995).
More serious is FERC's argument that the rate order
mentioned above, reducing the maximum rate to less than the
proposed discount rate, removed any effective injury. FERC
has not worded this theory as one of mootness, though it
appears in effect to be such a claim: a supervening event has,
in FERC's theory, rendered the apparent injury a nullity.
Yet FERC itself seems unready even to assert the factual
prediction necessary for this to be true. At oral argument it
was unwilling to say that the rate order established mootness,
evidently sharing Iroquois's belief that there is considerable
probability that over the course of the current contracts the
contested no-discount ruling will constrain Iroquois. Indeed,
such constraint seems highly probable, perhaps certain. Iro-
quois contemplates additional compressor stations like the
one whose addition precipitated this dispute. The ability to
price the additional capacity incrementally--to set rates for
newly available service higher than incremental cost but
lower than those for existing shippers--seems likely to be
extremely valuable to Iroquois in its efforts to exploit the
business opportunities inherent in such capacity expansions.
See Great Lakes Gas Transmission v. FERC, 984 F.2d 426,
430-31 (D.C. Cir. 1993) (pipeline presently injured by "at-
risk" condition in certificate because of impact on negotiating
strategy).
On the merits, it is common ground that the Commission
has embraced the theoretical soundness of allowing certain
kinds of rate discounting and has in fact formally approved
such discounting, both in the form of generic grants of
authority and in specific cases. See FERC Regulation of
Natural Gas Pipelines after Partial Wellhead Decontrol, ("Or-
der No. 436"), 50 Fed. Reg. 42,408, 42,451-55 (1985); Associ-
ated Gas Distributors v. FERC, 824 F.2d 981, 1009-13 (D.C.
Cir. 1987); Southern Natural Gas Co., 67 FERC p 61,155 at
61,456 (1994) (on rehearing); see also Alternatives to Tradi-
tional Cost-of-Service Ratemaking for Natural Gas Pipelines,
74 FERC p 61,076 at 61,238-42 (1996) (expressing Commis-
sion readiness to entertain, on a shipper-by-shipper basis,
requests to implement negotiated rates, even where the pipe-
line has market power, where customers retain the ability to
choose cost-of-service based tariff rate). Pointing to South-
ern, Iroquois argues that FERC's controlling principle has
been that if a competitively justified discount transaction will
benefit the non-discount customers by bringing about reduced
rates for the capacity they use, FERC will approve the
discount. FERC's contention is that Iroquois's application
for a certificate presented a completely new problem, that of
injury to existing customers as sellers in end-use markets;
thus, it says, Southern and its other pro-discounting acts are
in no way precedents against its decision here. We will
return to this, the core issue, after briefly pursuing a prelimi-
nary substantive matter.
The parties dispute the extent to which a pipeline in
Iroquois's position, seeking certification of new construction
and of service on a discounted basis, must demonstrate a
competitive necessity for the discounts. But we cannot read
the Commission's decision here as resting on any deficiency in
Iroquois's showing on this score. Iroquois initially relied
primarily on its having conducted an auction for the proposed
new capacity and having received no viable bids higher than
$0.54/DTh. (Although some shippers placed higher bids, they
were not willing to execute the required precedent agree-
ments.) See Iroquois Gas Transmission System, L.P., 79
FERC p 61,394 at 62,690. It argues that this shows that
competitive forces of some sort, such as other pipelines
transporting gas to the area of destination, or the availability
of alternative fuels in the area of destination, have in fact
driven the maximum extractable price down to that level.
The Commission's brief argues that the Commission insists,
and is entitled to insist, on proof of competition from pipe-
lines (without explaining why that affects the case for dis-
counting). Iroquois responds that FERC has said that it was
a "reasonable presumption that a pipeline will always seek
the highest possible rate from non-affiliated shippers,"
Williams Natural Gas Co., 77 FERC p 61,277 at 62,206
(1996), and has explicitly recognized that an auction helps "to
ensure that prices reflect competitive market forces," Notice
of Proposed Rulemaking, Regulation of Short-Term Natural
Gas Transportation Services, 63 Fed. Reg. 42,982, 42,998/2
(1998).
In the end, however, the Commission's disposition of Iro-
quois's petition for rehearing refutes its claim that some
deficiency in the showing of competition was determinative.
With its petition for rehearing Iroquois proffered evidence of
competition from another pipeline, and the Commission de-
clined to accept it--not on some theory that it was too late in
the game to offer such evidence, but on the ground that the
affidavits were "immaterial." Order on Rehearing, 82 FERC
at 61,334 n.14. Indeed, the body of the Commission's order
contains no attack on Iroquois's showing of competitive forces
and appears to rest entirely on other grounds.
The heart of those other grounds appears to us as follows:
First (and most critically), the diminutive drop in the rates to
be paid by the non-discount shippers (according to our back-
of-the-envelope calculations, perhaps 0.5 to 1 percent at most)
is overwhelmingly offset by the injury that they would suffer
in end-use markets, being exposed to competition from new
shippers who would benefit from considerably lower transpor-
tation costs. Second, the Commission regards this impact as
particularly unjustifiable because it was the existing shippers'
commitments that made construction of the pipeline possible.
And, it said, at the time the commitments were made
there was much less potential for competition between
marketers of gas and LDCs [local distribution compa-
nies] and the Commission's regulations and policies
would not have offered these Iroquois shippers the op-
portunity to assure by contract negotiation that the
benefits of the cheap expansibility of the system would
accrue to them.
Id. at 61,335.
Each of these theories seems vulnerable. First is the
asserted assumption of the irrelevance of end-use market
competition in prior cases. Shippers do not have gas carried
around aimlessly; they have it carried in order to sell (or use)
it at the point of destination. Iroquois accordingly argues
that these competitive impacts have, presumably, been perva-
sive. Except to the extent that discounts may have been
based on a specific class of end-users having a more elastic
demand, gas carried for new shippers at lower cost than for
existing shippers would seem sure to fill demand that the
latter would otherwise have filled, or had a chance to try to
fill, in the absence of the new discounted service. When the
shippers in Southern objected before the Commission to a
proposal that (as here) lowered their transport costs (but
enabled new shippers to ship at even better rates), their
objection seems likely to have been based on the impact in
the end-use market. In the Order on Rehearing the Com-
mission addressed this issue only in the following passage:
Discounting does not always have the effect it would in
this case, where [1] the expansion shippers would be
competing in the existing shippers' markets and [2] the
existing shippers are the very ones who made the cheap
expansibility of the pipeline possible.
Id. at 61,334 (emphasis added).
The force of this answer seems uncertain. First, it is
unclear just how the non-competitive relation referred to in
the first explanation would come about. The incremental gas
will be shipped only if it can be sold in the destination market,
and it would seem, therefore, most likely to compete either
for sales previously being made by, or potentially to be made
by, the existing shippers. But even if entirely true, the
assertion that discounting does not "always" involve the dis-
count shippers competing in the existing shippers' market is
rather weak--perfectly consistent with the intuitively plausi-
ble proposition that it does so in the mine run of cases. Thus
it does not really contradict Iroquois's contention that the
Commission's standard view in favor of discounts was indif-
ferent to (or even enthusiastic about) the prospect of addition-
al competition in the end-use market.
Nor, as a matter of logic, is it apparent how it will not
universally be the case that the expansion shippers will be
using capacity made possible by the existing shippers. A
non-cost-based discount seems by definition to mean that the
favored shippers make a smaller unit contribution to covering
the fixed costs of capacity than do the disfavored ones. See
Southern Natural Gas Co., 67 FERC at 61,456-57 (rejecting
contention that there is necessarily any improper cross-
subsidization from competition-based discount, even though
customers' unit contributions to fixed costs differ). We do
not understand how in this respect the present case is
different from the universal case in any economically material
way.
Let us return to the Commission's discussion of changes in
competition and regulatory environment since the existing
shippers negotiated their contracts in the '80s:2
At that time [when the existing shippers came onto the
system], there was much less potential for competition
between marketers of gas and LDCs, and the Commis-
sion's regulations and policies would not have offered
these Iroquois shippers the opportunity to assure by
contract negotiation that the benefits of the cheap expan-
sibility of the system would accrue to them.
Order on Rehearing, 82 FERC at 61,335.
We inquired at oral argument just what regulatory obsta-
cles there may have been to contract clauses assuring treat-
ment at least as favorable as any other shipper. Petitioner
unsurprisingly denied that any record evidence showed that
barriers existed, and neither Commission nor Intervenors'
counsel contradicted him or explained what such barriers
might have been. As to the difference in competitive environ-
ment, we do not doubt that with Order No. 636 and kindred
actions the Commission has advanced the role of competition
__________
2 The deal appears to have been closed in the very late '80s. A
20-year agreement among New York shippers, New Jersey ship-
pers, Iroquois, and Texas Eastern was evidently executed January
25, 1989. See Iroquois Gas Transmission System, L.P., 52 FERC
p 61,091 at 61,351 n.31 (1990). It is not clear whether that is the
pertinent date for these purposes.
in the industry. But Order No. 436 embraced the desirability
of gas-on-gas competition, see 50 Fed. Reg. 42,411/2 (claiming
order "secures to consumers the benefits of competition in
natural gas markets"); see also id. at 42,453/1 (noting that
discounting enables pipelines to compete with each other and
respond to commodity traders), and also explicitly favored
value-of-service discounts, id. at 42,453/1-2, so to the extent
that the Commission suggests that parties negotiating in the
wake of Order No. 436 could not have anticipated competition
between marketers and LDCs, we think more detailed expla-
nation is in order.
In short, the Commission appears to have treated Iro-
quois's proposal as a special case by noting characteristics
that appear in their essence to hold true for a wide range of
discounted service. And in suggesting that it was merely
filling in a contract clause that the parties would have arrived
at had they anticipated the issue and been able to deal with it
contractually, FERC has not explained either why they would
not have anticipated it, what obstructed a contractual resolu-
tion, or why FERC believes the parties would have arrived at
the hypothesized provision if they had foreseen and been able
to address the problem.
At oral argument and in the briefs a number of additional
arguments were mooted that could not be a basis for affir-
mance because they were never suggested by the Commission
in its orders. See Sithe/Independence Power Partners, L.P.
v. FERC, 165 F.3d 944, 950 (D.C. Cir. 1999) (citing SEC v.
Chenery Corp., 318 U.S. 80, 87 (1943)). Nor, for the reasons
discussed below, do they seem to help us discern the Commis-
sion's likely path. Cf. Bowman Transportation, Inc. v. Ar-
kansas-Best Freight System, Inc., 419 U.S. 281, 286 (1974)
(upholding decision because agency's "path may reasonably
be discerned," despite explanation of "less than ideal clari-
ty.").
The Intervenor suggests a distinction between existing
shippers being exposed to competition in "new" end use
markets (which counsel appeared to acknowledge as common
in prior situations) and their being exposed to competition in
old ones (the present case). It is not clear why such a
distinction would make a principled difference. If the Com-
mission relied on such a distinction it would need to explain
why end-users served by existing shippers should be denied
the benefits of competition while new end-users may enjoy its
benefits.
Intervenor also alluded to a possible distinction between
using discounts to fill existing capacity (prior situations) and
using them to fill new capacity that can be added at a cost
lower than the resulting incremental revenue (current situa-
tion). See Intervenor Br. at 24, Oral Arg. Tr. 31-34. Yet on
the surface in both cases the discounts seem to address
essentially the same problem--that of neglected profitable
opportunities. Again the force of the distinction is obscure.
We note that classic analysis of non-cost-based discounting
by carriers has turned on differences in the price-elasticity of
demand for the carried product. It pursues the goal of an
optimal trade-off between the desirability of maximizing out-
put and the necessity of the utility's recovering all its costs.
See Order No. 436, 52 Fed. Reg. at 42,453; Associated Gas
Distributors, 824 F.2d at 1010-11. It may be that where the
only differences between the shippers are (1) time of signing
up for the service, and (2) contractual commitment of the
customers who signed up early, the standard analysis is in
some way inapplicable.3 But the Commission has not ad-
vanced such a theory of inapplicability, nor has it made clear
the relation between its order here and prior policy. We do
not at this stage know if the Commission's decision is a
__________
3 We have recognized that in a situation where increasing
volume raises unit costs, each customer's contribution to the peak
load "causes" the associated costs, regardless of whether it is a new
customer adding load or an old one not cutting its load. Sithe/Inde-
pendence Power Partners, L.P. v. FERC, 165 F.3d 944, 951-52
(D.C. Cir. 1999) (quoting Town of Norwood v. FERC, 962 F.2d 20,
24 n.1 (D.C. Cir. 1992)). Superficially, this case appears the con-
verse: putting aside the contract point, the new shippers' load does
not seem to "enable" the pipeline to attain the lower unit costs
anymore than does that of the earlier shippers. Thus there does
not seem to be a cost-based theory for the discount.
response to a true novelty (and if so in what the novelty lies),
or if it is a change in response to some new understanding of
the situation (and if so, what the new understanding may be).
Because the Commission decision does not clearly enough
reveal its grounds for judicial review to be meaningful, see
Chenery, 318 U.S. at 87, the case is remanded to the Commis-
sion.
So ordered.