United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 24, 1999 Decided January 18, 2000
No. 98-1603
Midcoast Interstate Transmission, Inc.,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Huntsville Utilities Gas System,
City of Huntsville, Alabama, et al.,
Intervenors
Consolidated with
98-1604, 99-1047, 99-1090
Petitions for Review of Orders of the Federal
Energy Regulatory Commission
---------
Bernard A. Foster III, with whom Marvin T. Griff was on
the briefs, argued the cause for petitioner Midcoast Interstate
Transmission, Inc.
Marvin T. Griff argued the cause and filed the briefs for
petitioners GASP Coalition and Citizens Opposing North
Alabama Pipeline Project.
Monique Penn-Jenkins, Attorney, Federal Energy Regu-
latory Commission, with whom Jay L. Witkin, Solicitor, and
Susan J. Court, Special Counsel, FERC, were on the briefs,
argued the cause for respondent.
Knox Bemis, with whom R. David Hendrickson, James J.
Cleary, Glenn W. Letham, James R. Choukas-Bradley, Josh-
ua Menter, Edward J. Grenier, and Gregory K. Lawrence
were on the briefs, argued the cause for intervenors. Wen-
dell B. Hunt, Channing D. Strother, Jr., Jeffrey D. Komarow,
John T. Stough, Jr., Kevin M. Downey, and Joseph M.
Marcoux entered appearances.
Before Ginsburg and Randolph, Circuit Judges, and
Buckley, Senior Circuit Judge.
Opinion filed by Senior Judge Buckley.
Buckley, Senior Judge: Midcoast Interstate Transmission,
Inc., and two unincorporated associations have filed petitions
for review of Federal Energy Regulatory Commission orders
granting Southern Natural Gas Company's application to
construct a natural gas pipeline and denying Midcoast's alter-
native proposals for serving the same markets. Petitioners
claim that the Commission failed to make a reasoned evalua-
tion of the competing environmental and economic factors and
that its approval of "rolled-in" rates for Southern's project
ignored the agency's own policy and precedent. Because we
conclude that the Commission neither abused its discretion
nor acted contrary to law, we deny the petitions.
I. Background
A. Statutory and Regulatory Framework
Under section 7 of the Natural Gas Act ("NGA"), 15 U.S.C.
ss 717-717z (1997), a company seeking to construct and
operate any portion of an interstate gas pipeline must apply
to the Federal Energy Regulatory Commission ("FERC") for
a certificate of public convenience and necessity. 15 U.S.C.
s 717f(c)(1)(A). Such a certificate
shall be issued to any qualified applicant therefor ... if it
is found that the applicant is able and willing properly to
do the acts and to perform the service proposed ... and
that the proposed service ... is or will be required by
the present or future public convenience and necessity.
Id. s 717f(e). In evaluating certificate applications, FERC
employs "a flexible balancing process, in the course of which
all the factors are weighed prior to final determination."
FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 23
(1961). Congress and the Commission have both stated that
the promotion of competition in the natural gas industry is
one of the Commission's regulatory goals. See General Mo-
tors Corp. v. Tracy, 519 U.S. 278, 283-84 (1997).
Section 4 of the NGA provides that "[a]ll rates and
charges" of a natural gas pipeline must be "just and reason-
able." 15 U.S.C. s 717c(a). A pipeline may not change its
rates "except after thirty days' notice to the Commission and
to the public." Id. s 717c(d). When a pipeline files a new
rate, FERC may, upon receiving a complaint or on its own
initiative, "enter upon a hearing concerning the lawfulness of
such rate ...; and, pending such hearing and the decision
thereon, the Commission ... may ... defer the use of such
rate" for up to five months. Id. s 717c(e).
When an interstate pipeline proposes to expand its business
through the construction of new facilities ("expansion facili-
ties"), FERC has the authority to establish the initial rates
that will be charged customers who will be served by those
facilities. See United Gas Improvement Co. v. Callery Prop-
erties, Inc., 382 U.S. 223, 227 (1965) (holding that Commission
may establish initial rates as condition to issuing certificate
"pending determination of a just and reasonable rate"
through a section 4 proceeding). In May 1995, the Commis-
sion issued a policy statement governing how the cost of new
pipeline construction should be "priced," i.e., reflected in the
pipeline's rate structure. See generally Pricing Policy For
New and Existing Facilities Constructed By Interstate Natu-
ral Gas Pipelines, 71 FERC p 61,241 (1995) ("Pricing Poli-
cy"). The cost of construction may be recovered in either of
two ways: through "incremental" pricing, which imposes an
additional charge payable solely by customers who are direct-
ly served by the expansion facilities ("expansion customers");
or "rolled-in" pricing, in which the cost of the new facilities
are added to the pipeline's total rate base and reflected in
rates charged to all customers system-wide. See TransCana-
da Pipelines Ltd. v. FERC, 24 F.3d 305, 307 n.1 (D.C. Cir.
1994).
Under the Pricing Policy, when FERC grants a certificate
of public convenience and necessity, it either sets an incre-
mental rate to be paid by consumers served by the new
facilities or establishes a presumption that the facilities will
be of sufficient benefit to existing customers to permit the
pipeline to roll their cost into its system-wide rates. See
Pricing Policy, 71 FERC at 61,915. If the Commission issues
a certificate with a presumption of rolled-in pricing, the
expansion customers will initially pay the pipeline's existing
system-wide rates. Otherwise, they will be required to pay
an incremental rate fixed by the Commission at the time the
certificate issues. Id. at 61,918 n.12. Those rates will remain
in place until superceded by new ones established in accor-
dance with section 4 of the NGA.
To determine whether a pipeline qualifies for rolled-in
pricing, FERC "look[s] to the extent to which the new
facilities are integrated with the existing facilities and to the
specific system benefits produced by the project." Id. at
61,915-16. Where the pipeline can establish that the new
facilities will provide system-wide benefits and that the rolled-
in rate would constitute an increase of five percent or less to
existing customers, a rebuttable presumption is created in
favor of rolled-in rates. Id. at 61,916-17. In such instances,
the Pricing Policy requires the Commission to approve rolled-
in rates in the next section 4 proceeding absent evidence of a
"significant change in circumstance." Id. at 61,918.
While this case was pending, FERC issued a new policy
statement on the certification of pipeline projects that argu-
ably would have required incremental pricing for the expan-
sion facilities that are the subject of this case. See generally
Certification of New Interstate Natural Gas Pipeline Facili-
ties, 88 FERC p 61,227 (1999). The new policy, however, has
no bearing on these proceedings because it does not apply
retroactively. See id. at 61,750; Southeastern Michigan Gas
Co. v. FERC, 133 F.3d 34, 37 n. 1 (D.C. Cir. 1998) ("Because
FERC issued its [new pricing] rule after this case had begun
and did not rely on it in this proceeding, we do not consider
what effect its application would have had.").
B. Facts
On January 11, 1996, the municipalities of Huntsville and
Decatur, Alabama, (collectively, "the Cities") entered into
twenty-year gas supply contracts with Southern Natural Gas
Company ("Southern") to become effective following comple-
tion of a proposed North Alabama Pipeline and ancillary
facilities ("North Alabama Pipeline Project"). At the time,
the Cities were being served by Midcoast Interstate Trans-
mission's predecessor, Alabama-Tennessee Natural Gas Com-
pany (collectively, "Midcoast"). Shortly thereafter, Southern
filed an application with FERC, under section 7 of the NGA,
for a certificate of public convenience and necessity to con-
struct and operate these facilities. Southern's proposed pipe-
line would extend northward 118 miles from Southern's exist-
ing west-to-east natural gas pipeline to the Cities. To reach
those markets, the new pipeline would have to cross the
Tennessee River and Wheeler National Wildlife Refuge.
In July 1996, FERC made a preliminary determination,
contingent on the outcome of an ongoing environmental re-
view, that Southern's proposed pipeline was required by the
public convenience and necessity. Southern Natural Gas Co.,
76 FERC p 61,122, 61,628, 61,647-48 (1996) ("Preliminary
Determination"). In it, FERC found that "absent significant
changes, [Southern would be allowed] to roll-in the costs of
the facilities in its next rate case." Id. at 61,637.
During the course of the environmental review of South-
ern's proposal, FERC considered various system and route
options, including the Alabama-Tennessee System Alterna-
tive ("Alabama-Tennessee Alternative") for which Midcoast
had filed a certificate application. Southern Natural Gas Co.,
79 FERC p 61,280, 62,200, 62,205 (1997) ("Certificate Order");
Alabama-Tennessee Natural Gas Co., 79 FERC p 61,283,
62,237 (1997) ("Order on Application"). This alternative con-
sisted, essentially, of improving the capacity and efficiency of
Midcoast's existing system through the addition of two com-
pressors and related facilities. These would enable Midcoast
to increase delivery pressures, lower rates, and meet the
Cities' increasing demands for gas. Approval of the
Alabama-Tennessee Alternative would render the Southern
project superfluous.
The Final Environmental Impact Statement ("FEIS") for
Southern's proposal was released on May 23, 1997. Although
it noted that FERC, the Environmental Protection Agency,
and the Department of the Interior all agreed that the
Alabama-Tennessee Alternative was environmentally prefera-
ble to Southern's proposed pipeline, it nevertheless found the
adverse impact of Southern's proposed pipeline to be limited,
and that, with the adoption of the recommended mitigation
measures, the project would be environmentally acceptable.
FEIS at S-1. In an order citing this conclusion, FERC
approved the construction of the North Alabama Pipeline
Project subject to certain conditions, including compliance
with specified environmental requirements. Certificate Or-
der, 79 FERC at 62,208, 62,222-23. While it acknowledged
the environmental superiority of the Alabama-Tennessee Al-
ternative, the Commission declared that it was approving
Southern's project "for countervailing policy reasons." Id. at
62,205. It described its decision as "providing for the first
time in forty-seven years a competitive alternative for
Alabama-Tennessee's current captive customers," id. at
62,208, and noted that the Cities had taken advantage of this
option by deciding to enter into long-term contracts with
Southern rather than having to rely on Midcoast for their
natural gas. Id. at 62,209. Following the issuance of the
certificate, and despite the petition for review of the Commis-
sion's decision then pending before this court, Southern pro-
ceeded with construction of the pipeline. By September 1999,
Southern had spent approximately $60 million on the project.
The Certificate Order incorporated the Preliminary Deter-
mination's "findings with respect to the nonenvironmental
issues," id. at 62,222, which included those relating to rolled-
in pricing. As a consequence, the Cities initially will be
charged Southern's system-wide rates until such time as new
rates are established in a section 4 proceeding. A statement
made by Southern's counsel at oral argument and subsequent
submissions by the Cities to the court suggest a disagreement
as to the Cities' obligation to continue to use Southern's
facilities in the event the Commission should order the pay-
ment of incremental rates. Southern contends that the Cities
are under a twenty-year obligation to utilize the North Ala-
bama Pipeline irrespective of the rates they are required to
pay; the Cities maintain that their contracts do not require
them to pay other than rolled-in rates.
FERC denied Midcoast's application for the Alabama-
Tennessee Alternative. In doing so, the Commission cited
Midcoast's failure to determine the correct sizing of the
proposed project by conducting an "open season" during
which prospective shippers submit their capacity requests, as
well as its failure to demonstrate market support in the form
of contracts or other understandings with the local distribu-
tion companies it proposed to supply. See Order on Applica-
tion, 79 FERC at 62,240-41 (deferring action on application);
Midcoast Interstate Transmission, Inc., 83 FERC p 61,195,
61,831 (1998) ("Order Dismissing Application").
Midcoast filed a second certificate application seeking to
serve the Cities through a proposed Hartselle System Alter-
native ("Hartselle Alternative"). This alternative would per-
mit Southern to construct the first 98 miles of its proposed
pipeline, at which point the line would be connected with
Midcoast's existing system. In this manner, gas originating
in the Southern system could be delivered to the Cities
without the need for a new crossing of the environmentally
sensitive Tennessee River and Wheeler National Wildlife
Refuge. FERC dismissed this application because of Mid-
coast's failure to provide a complete response to a request for
certain environmental information and because, unlike South-
ern, it had no contracts or other evidence of market support
for the project. See Order Dismissing Application, 83 FERC
at 61,831.
II. Discussion
Petitioners maintain that FERC's decisions to grant a
certificate of public convenience and necessity to Southern
and to deny certificates to Midcoast were arbitrary and
capricious. They also challenge the Commission's application
of its Pricing Policy to establish a presumption that Southern
will be able to roll the construction costs of the North
Alabama Pipeline Project into its system-wide rates. Finally,
GASP Coalition ("GASP"), an unincorporated association of
individuals and groups concerned with the environmental
aspects of natural gas pipeline regulation, and Citizens Op-
posing North Alabama Pipeline Project ("CONAPP"), an
unincorporated association formed to challenge Southern's
expansion project, argue that FERC authorized Southern to
exercise the power of eminent domain in violation of the Fifth
Amendment to the United States Constitution. We have
jurisdiction to hear these consolidated cases pursuant to 15
U.S.C. s 717r(b).
A. Standard of Review
A reviewing court "must uphold the Commission's decision
unless it is 'arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.' " Michigan Consol.
Gas Co. v. FERC, 883 F.2d 117, 120 (D.C. Cir. 1989) (quoting
5 U.S.C. s 706(2)(A) (1982)). The Commission, however,
must "articulate a satisfactory explanation for its action in-
cluding a 'rational connection between the facts found and the
choice made.' " Motor Vehicle Mfrs. Ass'n of the United
States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983) (quoting Burlington Truck Lines, Inc. v. United
States, 371 U.S. 156, 168 (1962)).
B. FERC's Decision to Grant Southern's Certificate
Midcoast asserts that FERC's decision to grant Southern's
certificate for the North Alabama Pipeline Project was arbi-
trary and capricious for two reasons: first, the agency failed
adequately to evaluate project alternatives that were environ-
mentally and economically preferable to Southern's proposal;
and second, the record does not support FERC's conclusion
that Southern's proposal would promote competition in the
natural gas market.
Under the National Environmental Policy Act ("NEPA"),
FERC is required to evaluate the environmental impact of
each proposed project and issue an Environmental Impact
Statement ("EIS"). See 42 U.S.C. s 4332 (1994). The EIS
must provide "a detailed statement ... on ... alternatives to
the proposed action" and their environmental consequences.
Id. s 4332(C)(iii). As the Supreme Court has observed,
however,
it is now well settled that NEPA itself does not mandate
particular results, but simply prescribes the necessary
process. If the adverse environmental effects of the
proposed action are adequately identified and evaluated,
the agency is not constrained by NEPA from deciding
that other values outweigh the environmental costs.
Robertson v. Methow Valley Citizens Council, 490 U.S. 332,
350 (1989) (citations omitted). All that is required is that the
agency "identify the reasonable alternatives to the contem-
plated action" and "look hard at the environmental effects of
[its] decision[ ]." Corridor H Alternatives, Inc. v. Slater, 166
F.3d 368, 374 (D.C. Cir. 1999) (internal quotation marks and
citation omitted).
FERC concedes the environmental superiority of the
Alabama-Tennessee Alternative, but it has given both the
environmental issues and the alternatives to the North Ala-
bama Pipeline Project careful consideration. See Certificate
Order, 79 FERC at 62,202-05. Having taken the required
"hard look," the Commission concluded that other values
outweighed what the FEIS described as the project's limited
but nonetheless acceptable environmental costs if specified
mitigation measures were taken. It then conditioned the
certificate on Southern's compliance with those measures.
This strikes us as responsible agency decision making.
Nor can we fault the Commission's rejection of Midcoast's
claims of economic superiority for its own alternatives, given
the Cities' decisions to enter into long-term contracts with
Southern. We have "consistently required the Commission to
give weight to the contracts and settlements of the parties
before it," provided that its authorization of a proposed
service represents the agency's "independent judgment [that]
the new service 'is or will be required by the present or
future public convenience and necessity.' " Tejas Power
Corp. v. FERC, 908 F.2d 998, 1003 (D.C. Cir. 1990) (quoting
NGA s 7(e), 15 U.S.C. s 717f(e)). FERC made such a
determination here. In its Certificate Order, it considered
Southern's ability to provide the desired service, its own
policy of introducing pipeline competition to a market where
none had previously existed, the Cities' expressed desire to
have an alternate source of natural gas, and the benefits that
Southern's proposed pipeline would offer the Cities in terms
of increased delivery pressure, better service, and the elimi-
nation of scheduling complexities. Certificate Order, 79
FERC at 62,208-10.
FERC was entitled to take competition into consideration
in determining whether to approve Southern's certificate
application. The agency had developed a long-standing policy
of favoring competition in natural gas markets, and it had
"identified the benefits that it believed competition through-
out that market would afford consumers, and adopted
industry-transforming rules aimed at securing them." See,
e.g., Kansas Power and Light Co. v. FERC, 891 F.2d 939, 942
(D.C. Cir. 1989). FERC was entitled to rely on the general
economic theory that the introduction of competition to the
market will benefit consumers. See Associated Gas Distribs.
v. FERC, 824 F.2d 981, 1008-09 (D.C. Cir. 1987) ("Agencies
do not need to conduct experiments in order to rely on ...
predictions that competition will normally lead to lower
prices.").
Although the Commission has since adopted a new pricing
policy that constitutes a distinct departure from its previous
approach in situations comparable to the one now before us,
that fact is irrelevant to the question of whether it acted
arbitrarily or capriciously at the time it issued the orders now
being challenged. We are not impressed by Midcoast's argu-
ments that the economic advantages of its alternatives were
so self-evident at the time FERC issued the certificate to
Southern that its reliance on its existing policy was unreason-
able. Nor are we impressed by Midcoast's charge that the
Commission has effectively substituted one monopoly for
another. The ability of the Cities to contract with Southern
on a long-term basis for the shipment of their natural gas
reflects the fact that, for the first time, they had a choice of
providers. Their choice of one pipeline over another does not
evidence a lack of competition. To the contrary, "[u]nsuc-
cessful bidders are no less competitors than the successful
one. The presence of two or more suppliers gives buyers a
choice." United States v. El Paso Natural Gas Co., 376 U.S.
651, 661 (1964).
C. Rolled-In Rate Presumption
1. Jurisdiction
The Commission argues that we should dismiss the peti-
tions for review of the rolled-in pricing determination for two
reasons. It asserts, first, that the parties are not aggrieved
by the order, as required by section 19(b) of the NGA as a
precondition to seeking judicial review, 15 U.S.C. s 717r(b)
("Any party ... aggrieved by an order of the Commission ...
may obtain a review of such order in [a U.S.] court of
appeals"), and second, that the issue is not ripe for review.
While FERC's statement of the law is correct, it ignores
the fact that its rolled-in pricing determination can have
consequences more immediate than the establishment of a
presumption for a future rate proceeding. Midcoast con-
tends, in effect, that but for that determination, it would not
be faced with the loss of the Cities' business upon the
completion of the North Alabama Pipeline. If that claim
survives analysis, there can be no question that Midcoast has
suffered a certain, concrete injury that satisfies both the
statutory and constitutional requirements for judicial review.
Whether Midcoast is aggrieved is a question of fact; and
where they are in dispute, a court must assume the correct-
ness of the challenging party's version of the facts. See City
of New Orleans, LA v. FERC, 67 F.3d 947, 952 (D.C. Cir.
1995). Furthermore, in determining whether an injury ex-
ists, a court may go beyond the reasons advanced by the
challenger in support of its standing. See American Truck-
ing Ass'ns, Inc. v. United States Dep't of Transp., 166 F.3d
374, 385 (D.C. Cir. 1999) (inferring an argument in support of
standing); see also United States Int'l Trade Comm'n v.
Tenneco West, 822 F.2d 73, 75 (D.C. Cir. 1987) (finding
standing for reason other than those offered by Commission).
Midcoast's response to FERC's aggrievement argument
reflects more astonishment than coherence. Nevertheless, in
its briefs and in the administrative proceedings, Midcoast has
presented facts which, if correct, fully support a finding that
it has been aggrieved by the pricing determination. Midcoast
has calculated that if the Commission had required incremen-
tal pricing, Southern would have to charge users of the North
Alabama Pipeline an incremental rate of $10.00 in addition to
its system-wide rate of $8.80, for a total of $18.80 per
decatherm per month, as compared with the $8.60 that Mid-
coast proposed to charge. Midcoast contends that given this
disparity, FERC could not have found that the North Ala-
bama Pipeline would be a "competitive alternative" to Mid-
coast, Certificate Order, 79 FERC at 62,208; therefore, it
would not have authorized its construction.
Accepting, as we must for purposes of our analysis, the
accuracy of Midcoast's calculation of the incremental rate
Southern would be required to charge, we are satisfied that
Midcoast has been aggrieved. As a direct consequence of the
agency's action and irrespective of the outcome of a future
rate proceeding, Midcoast will have lost the Cities' business
from the moment the North Alabama Pipeline begins deliver-
ies of natural gas until the time that the Cities are released
from their obligations under the Southern contracts--whether
that be at the expiration of twenty years (as Southern con-
tends), or at an earlier date (in the Cities' view) if FERC
should subsequently order the payment of other than rolled-
in rates.
It is for this reason that we also find the issue ripe for
review. FERC argues that the challenge to rolled-in pricing
is not ripe because the Preliminary Determination did no
more than establish a rebuttable presumption in Southern's
favor; therefore, the matter should be deferred until it can be
determined whether rolled-in rates will in fact be applied. As
we have pointed out, however, Midcoast's injury is based not
on the likelihood that such rates will be imposed in the future
but on the inescapable fact that, following the Southern
project's completion, Midcoast will lose the Cities' business
for an indeterminate period. It is this that distinguishes the
present case from New York State Electric & Gas Corp. v.
FERC, 177 F.3d 1037, 1041 (D.C. Cir. 1999), in which we held
unripe a challenge to FERC's establishment of a presumption
in favor of rolled-in rates in a certificate proceeding. That
case was brought not by a competitor, but by a ratepayer who
would continue to pay existing rates until it was determined,
in the course of the pipeline's next section 4 filing, whether
system-wide customers would be required to absorb the cost
of new construction through the imposition of rolled-in rates.
Id. at 1040. Because Midcoast faces an imminent loss irre-
spective of the outcome of a future rate proceeding, there can
be no question that the Commission's pricing determination is
ripe for review under the classic test established in Abbott
Laboratories v. Gardner, 387 U.S. 136, 149 (1967): the legali-
ty of the rolled-in pricing determination is fit for immediate
judicial decision, and the hardship faced by Midcoast is
indisputable.
2. The merits
Having found Midcoast's challenge to be properly before
us, we now turn to the merits of its claim. Midcoast alleges
that the Commission's decision to establish a presumption of
rolled-in rates was erroneous for two reasons: first, the
Pricing Policy is not applicable to cases, such as this, that
involve questions of fair competition; and second, even if the
policy does apply to this case, Southern's project did not meet
the policy's criteria for rolled-in pricing.
Petitioners' first argument presents a general challenge to
the Commission's use of its Pricing Policy in a situation where
pipelines of disparate sizes are competing to serve a particu-
lar market. Midcoast maintains that, in such instances, appli-
cation of the policy will distort market realities because large
pipeline systems, such as Southern's, can readily absorb the
rolled-in cost of new projects without experiencing a rise in
system-wide rates that will exceed the policy's five percent
limit. As a result, the cost of the expansion facilities is
subsidized by the larger pipeline's existing system-wide cus-
tomers to the detriment of the smaller competitor. Midcoast
argues that to apply the Pricing Policy in a manner that
favors one pipeline over another makes a mockery of FERC's
contention that its certificate order serves the interest of
competition.
While it is true that the Commission emphasized the desir-
ability of providing the Cities with a choice between pipelines,
Midcoast's argument ignores the independent purpose of the
Pricing Policy, which was to "provide parties with greater
certainty about the rate design that will be applied" to new
pipelines, thereby allowing them to make better decisions as
to such matters as the amount of capacity to develop. Pricing
Policy, 71 FERC at 61,915. The Commission, and all those
who offered comments during the development of the Pricing
Policy, felt that such certainty was needed to encourage
efficient growth in the natural gas industry as a whole
following the Commission's restructuring of the industry to
convert pipelines into common carriers. Id. at 61,914-15
(discussing orders providing for open-access transportation
service and unbundling the sale of gas from related transpor-
tation service). In deciding to encourage efficient pipeline
expansion by offering greater rate certainty at the outset in
circumstances that could affect the balance of market forces,
FERC exercised the kind of judgment on matters of policy
that Congress has entrusted to it. As the Supreme Court has
reminded us, "[t]he scope of review under the 'arbitrary and
capricious' standard is narrow and a court is not to substitute
its judgment for that of the agency." Motor Vehicle Mfrs.
Ass'n, 463 U.S. at 43. Because the Commission fully ad-
dressed Midcoast's argument, we cannot fault its decision to
apply its policy to the facts of this case.
We now address Midcoast's contention that FERC misap-
plied the Pricing Policy. In reaching a pricing decision, the
Commission will evaluate two factors: "the system-wide bene-
fits of the project and the rate impact on existing customers."
Pricing Policy, 71 FERC at 61,915. In assessing the first of
these, the Commission will "look to the extent to which the
new facilities are integrated with the existing facilities and to
the specific system benefits conferred by the project." Id. at
61,915-16. If the proposed facilities are sufficiently integrat-
ed and the impact on existing customers is an increase of five
percent or less, the Commission will generally apply the
presumption in favor of rolled-in rates. Id. at 61,916.
The "question of how to allocate costs among a pipeline's
customers is a difficult issue of fact, and one on which the
Commission enjoys broad discretion." Algonquin Gas Trans-
mission Co. v. FERC, 948 F.2d 1305, 1313 (D.C. Cir. 1991)
(internal quotation marks and citation omitted). As always,
its conclusions must be supported by substantial evidence;
and when FERC determines that rolled-in pricing is warrant-
ed, it must "outline[ ] with reasonable particularity the sys-
tem-wide benefits which each new facility produces." Id.
(discussing standard of review of Commission's decision in
rate case).
In addition to finding that the system would realize a long-
term economic benefit of $25 million, the Commission identi-
fied four operational benefits that the Southern project would
provide existing customers: enhancement of system reliabili-
ty, increase in the availability of interruptible transportation
service, the availability of new opportunities for marketers
and shippers, and the provision of firm service for increased
shipments to the Cities by two Southern system shippers.
Preliminary Determination, 76 FERC at 61,638. These bene-
fits are comparable to the examples cited in the Pricing Policy
as justifying rolled-in rates, Pricing Policy, 71 FERC at
61,916 ("increased access, reliability, flexibility, or new ser-
vices"); and FERC has presented sufficient evidence to sup-
port its conclusion that these benefits satisfy the first prong
of its two-factor test.
In addressing the second, "five percent" prong, the Com-
mission provided a detailed explanation of how it determined
that rolling in the project's construction costs would result in
a rate increase of only 1.8 percent. See Southern Natural
Gas Co., 85 FERC p 61,134, 61,526 (1998) ("Order Amending
Certificate"). Although the cost of the project has reportedly
increased from $66.6 million at the time the Commission
made its computation to $103.5 million, this cost overrun
would result in a rate increase of only 2.8 percent, well within
the limits of the Pricing Policy. In its Preliminary Determi-
nation, the Commission described in detail why it chose a
particular depreciation rate and rate of return, why it includ-
ed or did not include certain portions of Southern's claimed
contract demand, and how it calculated the return Southern
would receive from the new facility over time. Preliminary
Determination, 76 FERC at 61,637-38. Furthermore, the
Commission did not blindly accept the numbers provided by
Southern, finding, for example, that the long-term system
benefit would be some $10 million less than the figure submit-
ted by the pipeline. Id. at 61,638. Finally, the Commission
specifically addressed the issues Midcoast raised in subse-
quent motions to reconsider and again explained in some
detail how and why it arrived at its conclusions. See, e.g.,
Certificate Order, 79 FERC at 62,214-15.
Midcoast repeatedly argued that Southern's proposed pipe-
line was "a downstream lateral for the benefit of one or only a
small number of customers" (quoting the Pricing Policy, 71
FERC at 61,917) and, therefore, should not receive rolled-in
pricing under the Pricing Policy. The Commission failed to
address this argument in any meaningful way. Instead, it
dismissed the issue with the following comment:
[Midcoast's] assertion that the proposed project is a
lateral and thus does not qualify for rolled-in treatment
under the policy statement is without merit. As South-
ern notes, its system generally consists of two parallel
mainlines with 15 mainline extensions totaling nearly
1350 miles and serving 66 firm shippers at 196 delivery
points. The proposed facilities are similar to Southern's
other mainline extensions that have been granted rolled-
in rate treatment.
Preliminary Determination, 76 FERC at 61,638-39. In re-
sponding to Midcoast's argument in later petitions for rehear-
ing, the Commission simply referred back to this conclusory
"determination" that the proposal was a mainline extension
rather than a lateral. See, e.g., Order Amending Certificate,
85 FERC at 61,526; Southern Natural Gas Co., 86 FERC
p 61,129, 61,437 (1999).
As unsatisfactory as these responses are, we will not re-
mand the issue for further explanation because the reason
that downstream laterals built for the sole benefit of a few
customers do not qualify for rolled-in pricing is that they
cannot meet the first criterion set forth in the Pricing Policy:
they do not provide system-wide benefits. This is made clear
in the balance of the sentence quoted by Midcoast: in such
cases, "the Commission generally will presume that the pro-
ject should be priced incrementally, because other shippers
will not share in the benefits." Pricing Policy, 71 FERC at
61,917 (emphasis added).
Furthermore, the Commission explained that it
did not rely on th[e] fact [that the proposed facilities are
similar to Southern's other mainline expansions] to ap-
prove Southern's rolled-in rate proposal.... [T]he Com-
mission based its approval of rolled-in rate treatment on
its determination that the proposal met the pricing poli-
cy's two pronged test....
Southern Natural Gas Co., 86 FERC at 61,438. Because the
agency's findings of system-wide benefits and a minimal rate
impact are supported by substantial evidence, we reject this
challenge to its rolled-in pricing determination.
D. The Decision to Deny Midcoast's Petitions
Midcoast argues that the Commission's dismissals of its
petitions to construct and operate the Alabama-Tennessee
and Hartselle alternatives were unreasonable and an abuse of
discretion. We disagree.
The application for the Alabama-Tennessee Alternative
was rejected because of Midcoast's failure to hold an open
season, to solicit permanent capacity release offers, to allocate
some existing capacity in a non-discriminatory way through a
bidding process, and to demonstrate market support for its
proposal. Order Dismissing Application, 83 FERC at 61,829-
30. The Hartselle Alternative application was rejected for
failure to file an appropriate environmental report and to
demonstrate market support. Id. at 61,831.
Certain types of market data "must accompany each appli-
cation when tendered for filing." 18 C.F.R. s 157.14(a) (1999)
(emphasis added). The data to be submitted include a "[c]on-
formed copy of each contract, letter of intent or other agree-
ment for sale or transportation of natural gas." Id.
s 157.14(a)(11)(v). If no agreements exist, the applicant must
explain its "basis for assuming that contracts will be consum-
mated and that service will be rendered under the terms
contemplated in the application." Id. Midcoast failed or was
unable to provide this information for either of its proposals.
That the latter may be the case is suggested by the state-
ment, in the Commission's order dismissing the applications,
that "the shippers responding to Southern's open season
adamantly do not want the service from Midcoast." Order
Dismissing Application, 83 FERC at 61,830. Be that as it
may, in light of Midcoast's failure to comply with the regula-
tions, FERC's dismissal of the applications is hardly surpris-
ing and certainly not unreasonable, arbitrary, or capricious.
E. Fifth Amendment Claim
The Fifth Amendment to the United States Constitution
provides that private property may not be taken for public
use without just compensation. U.S. Const. amend. V.
GASP and CONAPP argue that the promotion of competition
in natural gas markets is not a legitimate public interest
sufficient to justify the condemnation of the land required for
the pipeline's right-of-way. Furthermore, even assuming that
the enhancement of competition is a permissible public inter-
est, GASP and CONAPP claim that Southern's taking of
private property for its project is not constitutional because
competition will not actually be achieved by the Commission's
substitution of one natural gas pipeline monopoly for another.
Our role in reviewing the use of the condemnation power is
extremely narrow.
[A]s long as the condemning authorities were rational in
their positions that some public purpose was served ...
[t]hat suffices to satisfy the Constitution, and we need
not make a specific factual determination whether the
condemnation will accomplish its objectives.
National R.R. Passenger Corp. v. Boston & Maine Corp., 503
U.S. 407, 422-23 (1992). Furthermore, the NGA explicitly
provides that
[n]othing contained in this section shall be construed
as a limitation upon the power of the Commission to
grant certificates of public convenience and necessity for
service of an area already being served by another
natural-gas company.
15 U.S.C. s 717f(g).
Once a certificate has been granted, the statute allows the
certificate holder to obtain needed private property by emi-
nent domain. Id. s 717f(h). The Commission does not have
the discretion to deny a certificate holder the power of
eminent domain. As we have already discussed, it was not
improper for FERC to consider the desirability of competi-
tion when it decided to grant Southern's application, and its
action did not result in the substitution of one monopoly for
another. In light of the above, and because, in issuing the
certificate to Southern, the Commission has explicitly de-
clared that the North Alabama Pipeline will serve the public
convenience and necessity, we hold that the takings com-
plained of served a public purpose.
III. Conclusion
For the foregoing reasons, the petitions for review are
Denied.