Pan-Alberta Gas, Ltd. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 2, 2001 Decided June 1, 2001

No. 00-1005

Pan-Alberta Gas, Ltd. and Pan-Alberta Gas (U.S.) Inc.,
Petitioners

v.

Federal Energy Regulatory Commission,
Respondent

Southwest Gas Corporation,
Intervenor

On Petition for Review of Orders of the Federal
Energy Regulatory Commission

John R. Staffier argued the cause for petitioner. With him
on the brief was Marisa A. Sifontes.

Dennis Lane, Solicitor, Federal Energy Regulatory Com-
mission, argued the cause for respondent. On the brief were

John H. Conway, Deputy Solicitor, Timm L. Abendroth and
Monique L. Penn-Jenkins, Attorneys.

Alex A. Goldberg argued the cause for amicus curiae
Northwest Pipeline Corporation. With him on the brief were
Steven W. Snarr and Tim W. Muller.

Before: Edwards, Chief Judge, Ginsburg and Tatel,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: Pan-Alberta Gas, Ltd. and an
affiliate petition for review of orders of the Federal Energy
Regulatory Commission authorizing Northwest Pipeline Cor-
poration to add capacity to its natural gas pipeline and to sell
that capacity to Duke Trading and Marketing, LLC and its
affiliate. Pan-Alberta argues that the orders are not based
upon substantial evidence in the record, arbitrary and capri-
cious, and contrary to both Commission policies and North-
west's tariff. Because each of these arguments lacks merit,
we deny Pan-Alberta's petition.

I. Background

In 1999 the Commission granted Northwest a certificate of
public convenience and necessity authorizing the company to
expand by 50,000 dekatherms per day ("Dth/d") the physical
capacity of a segment of its natural gas pipeline in Oregon
and Washington. Northwest Pipeline Corp., 87 F.E.R.C.
p 61,227 at 61,914 (1999) ("Order"); see also Northwest Pipe-
line Corp., 89 F.E.R.C. p 61,172 (1999) ("Rehearing Order"
denying Pan-Alberta's requests for rehearing and clarification
of the Order). The Commission also approved Northwest's
sale of this new capacity to Duke, which agreed to pay
Northwest an annual "reservation Facility Charge" that
"would compensate Northwest for the incremental cost-of-
service attributable to the additional facilities." Order at
61,915. In addition, the Commission approved Duke's and
Northwest's agreement to amend 19 existing contracts.
Those contracts, which in the aggregate provided firm capaci-
ty for the transport of 50,000 Dth/d of gas between two points

in Colorado, would be amended to provide instead (with no
change in financial terms) for transport between points in
Oregon and in Washington. Order at 61,914. Duke's total
payments to Northwest for the Washington-Oregon capacity
would thus consist of two elements: the charge for the
capacity itself, as provided in the 19 amended contracts (and
sometimes called the "reservation charge," see, e.g., 18 C.F.R.
s 284.7(e); Order at 61,918), plus the newly agreed upon
"reservation Facility charge," see Order at 61,915.

The 19 contracts involved in this transaction arose out of
Duke's application of the "capacity release/segmentation pro-
cess" to what had been a single contract between Duke and
Northwest for 40,000 Dth/d of firm capacity along a segment
of Northwest's pipeline in Colorado. Rehearing Order at
61,521 n.2, 61,523; accord Order at 61,914 & n.5. Both
"capacity release" and "segmentation" require some explana-
tion.

"Capacity release" describes a transaction in which the
holder of a contract for firm transport (the "releasing" ship-
per) sells that capacity to a "replacement" shipper. The
releasing and replacement shippers may agree upon any price
up to the applicable reservation charge -- the maximum price
per unit of firm capacity established in the pipeline's tariff. A
shipper seeking to release capacity may either auction it to
the highest bidder on a public bulletin board maintained by
the pipeline or bypass the auction to contract at the reserva-
tion charge with a replacement shipper of its choosing. See
18 C.F.R. s 284.8(a)-(e). Once a deal to release capacity has
been struck, the replacement shipper pays the agreed-upon
price not to the releasing shipper but to the pipeline, with
which it enters into a new capacity contract. The pipeline
then credits payments received from the replacement shipper
to the account of the releasing shipper; and the releasing
shipper continues to pay the price stated in the original
contract, which remains in force. See id. s 284.8(f). The
pipeline therefore gains nothing from a capacity release
transaction; its income is fixed at the price originally agreed
upon with the releasing shipper, regardless of the terms of
the capacity release agreement.

 "Segmentation" describes a transaction in which an owner
of firm capacity sells that capacity piecemeal. To use the
Commission's example, a shipper that owns the right to
transport 10,000 Dth/d between the Gulf of Mexico and New
York City could release to one replacement shipper the right
to transport 10,000 Dth/d from the Gulf to Atlanta, and
release to another replacement shipper the right to transport
10,000 Dth/d from Atlanta to New York. See Pipeline Ser-
vice Obligations, and Revisions to Regulations Governing
Self-Implementing Transportation Under Part 284 of the
Commission's Regulations, Order 636-B, 61 F.E.R.C. p
61,272 at 61,997 (1992). Because Northwest charges a "post-
age stamp" rate -- that is, a shipper purchasing capacity at
the reservation charge pays the same price to ship gas across
the country as it does to ship gas across town, see Northwest
Pipeline Corp., 82 F.E.R.C. p 61,158 at 61,576 (1998) -- a
shipper that resells its capacity in segments can realize
multiples of what it paid for that capacity.

An owner of firm capacity also has the right under the
Commission's regulations to change the specified segment of
the pipeline along which that capacity is to be provided (the
so-called "service path"); for example, in this case Duke, the
owner of firm capacity for the transport of gas between two
points in Colorado, sought to amend its contract to provide
instead for the same amount of capacity between Oregon and
Washington. See Rehearing Order at 61,523. Because ca-
pacity is sold at a postage stamp rate, such an amendment
does not entail a change in the price paid by the shipper.
Like a segmentation transaction, a change in service path is
limited by the operational constraints of the pipeline, see 18
C.F.R. s 284.7(d). Because the Northwest pipeline is bidirec-
tional, however, the net effect of all existing gas flows on the
pipeline (so-called net "displacement") may enable a shipper
to introduce gas into and remove gas from the pipeline at
newly designated points without Northwest having the physi-
cal capacity for that gas to traverse the path between the two
points. See, e.g., Order at 61,914.

With these techniques available to it, one can see how "a
sequence of long-term, segmented releases, and subsequent

receipt and delivery point amendments," Northwest Applica-
tion for Certificate of Public Convenience and Necessity,
FERC Docket No. CP-96-554, at 9 (May 1998), could enable
Duke, without increasing its total payments to Northwest, to
convert its original contract for 40,000 Dth/d of capacity into
multiple contracts, including 19 or more contracts that in the
aggregate provide it with firm capacity of 50,000 Dth/d or
more. See Order at 61,914 n.5. The release and replacement
of segmented contracts allow a shipper to increase its total
capacity under a firm transportation contract without incur-
ring a price increase, and service path amendments permit a
shipper to transform a short path into a long one that can be
further segmented and the parts sold, thus creating what
Northwest calls a "daisy chain" of transactions. Indeed, the
transaction approved in the Order is but the latest service
path amendment in Duke's "daisy chain." Like its predeces-
sors, this transaction does not affect the reservation charge
Duke pays for its capacity, which remains fixed at the price in
the original contract for 40,000 Dth/d. It differs from the
others in the chain only in that Duke agreed to pay a facilities
charge to Northwest in addition to the reservation charge.

Pan-Alberta registered various objections to this transac-
tion before the Commission, see Order at 61,916, and upon
issuance of the Order reiterated them in a request for rehear-
ing and clarification, which the Commission denied. Pan-
Alberta here seeks review of both the Order and the Rehear-
ing Order, and Northwest appears as amicus curiae in sup-
port of the Commission.

II. Analysis

Pan-Alberta argues that the Commission based its determi-
nation of the public convenience and necessity upon a misun-
derstanding of how much capacity Duke controlled on North-
west's pipeline. According to Pan-Alberta, the Commission
lacked substantial evidence to support its conclusion that
Duke had effective control over only 50,000 Dth/d of capacity,
making the Commission's answer to the "fundamental ques-
tion" of the extent of Duke's holdings "inherently arbitrary

and capricious." See Wisconsin Valley Improvement Co. v.
FERC, 236 F.3d 738, 745 (D.C. Cir. 2001) (agency decision is
arbitrary and capricious if factual determinations lack sub-
stantial evidence). In the alternative, Pan-Alberta argues
that the orders under review violate both Northwest's tariff
and the Commission's policy regarding release and replace-
ment.

The Orders are indeed less than pellucid about how much
capacity Duke controls, and the parties' briefs do nothing to
clarify the situation. Particularly confusing is the Commis-
sion's failure in the Orders, and all the parties' failure in their
briefs, unequivocally to state whether Duke's 19 contracts for
50,000 Dth/d of capacity are the sole progeny of the original
40,000 Dth/d contract between Northwest and Duke or
whether they are but a subset of the contracts resulting from
the "daisy chain" of transactions based upon the original
agreement. This confusion is exacerbated by the Commis-
sion's statement in the Rehearing Order (at 61,523) that Duke

has effectively transferred its contractual obligation for
40,000 Dth a day of capacity to the northern segment of
Northwest's system [i.e., from Oregon to Washington].
This frees up 40,000 Dth a day of capacity on the
southern segment [i.e., in Colorado].

In fact, the transfer "frees up" 50,000 Dth/d, not 40,000 Dth/d,
of capacity on the southern segment. Pan-Alberta suggests
this shows that the Commission mistakenly believed itself to
be approving a transfer of the original 40,000 Dth/d of
capacity at the root of the daisy chain rather than the 50,000
Dth/d that blossomed from it, or at least that the Commission
was confused regarding the amount of capacity at issue. The
Commission insists that it fully understood the transaction,
but concedes in its brief that some confusion could have been
avoided had it described the "transfer" in terms of the larger
quantity.

We agree with the Commission that, notwithstanding their
expository shortcomings, the Orders do enable one accurately
to understand the transaction and do not show that the
Commission misunderstood any material fact. The Orders

make clear that Duke began with a single contract for 40,000
Dth/d of firm capacity, that it parlayed that contract into
multiple contracts for a total of 50,000 Dth/d of capacity, and
that it sought in the subject transaction to amend the service
path for that 50,000 Dth/d from one in Colorado to a route
between Oregon and Washington, along a segment of the
pipeline that Northwest had agreed to expand. See Order at
61,914 & n.5. As the Commission points out, its above-quoted
description of the transfer, although confusing, is entirely
consistent with this understanding and in no way inaccurate:
Duke has in fact "effectively transferred" its original 40,000
Dth/d contract to give it control over 50,000 Dth/d of capacity
on "the northern segment of Northwest's system." Rehear-
ing Order at 61,523.

Pan-Alberta suggested before the Commission that "Duke's
capacity will increase [as a result of the Order] from the
original 40,000 Dth a day under its original primary contracts
to as much as 90,000 Dth a day (50,000 Dth a day of new
capacity on the expansion facilities plus the original 40,000
Dth a day in Colorado)." Id. As Northwest explains, howev-
er, the 90,000 Dth/d figure is an artifact of the arrangement
whereby the contract of a releasing shipper continues in force
even as that shipper cedes effective control of its capacity to
the replacement shipper. See above at 3. Duke, which is
both the releasing and the replacement shipper in the disput-
ed transaction, thus emerges from the Order with contracts
for 90,000 Dth/d of capacity: as the replacement shipper it
controls 50,000 Dth/d of capacity in the north, while as the
releasing shipper it nominally maintains its original contract
for 40,000 Dth/d of capacity in the south. Of course, by
releasing its capacity Duke has ceded any right actually to
ship gas along the Colorado service path; its 90,000 Dth/d of
contracts notwithstanding, it effectively controls only 50,000
Dth/d of capacity. This account is again fully consistent with
the Orders.

Indeed, because any release of capacity generates a new
contract between the pipeline and the replacement shipper
while leaving the releasing shipper's contract in force, a daisy
chain of transactions necessarily creates a corresponding

daisy chain of contracts. Depending upon the number of
links in the chain, Duke may well be party to contracts that
formally give it the rights to even more than 90,000 Dth/d of
capacity, over much of which it has no effective control.

We also reject Pan-Alberta's claim that the total amount of
capacity that Duke controls is a fact "fundamental" to wheth-
er the transaction at issue serves the public interest and
necessity. As the Commission points out, the orders under
review do not address let alone ratify the transactions by
which Duke parlayed its 40,000 Dth/d of capacity into 50,000
Dth/d; they address only whether Duke and Northwest may
"change the primary service path[ ]" for the 50,000 Dth/d of
capacity that Duke had secured previously. Order at 61,914.
Even if the daisy chain in fact yielded contracts that in the
aggregate gave Duke effective (not just formal) control over
more than 50,000 Dth/d of capacity, such additional capacity
would be immaterial to the transaction now in suit. For the
same reason, we do not consider Pan-Alberta's claim that the
daisy chain of transactions by which Duke parlayed its 40,000
Dth/d into 50,000 Dth/d is inconsistent with the Commission's
policy that "releasing and replacement shippers do not have a
right to obtain more capacity than that which the releasing
shipper initially held." Transcontinental Gas Pipe Line
Corp. (Transco), 89 F.E.R.C. p 61,167 at 61,503 (1999) (citing
Tennessee Gas Pipeline Co., 85 F.E.R.C. p 61,052 at 61,163
(1998)). Because the daisy chain transactions were not at
issue when the Orders were before the Commission, Pan-
Alberta may not challenge their validity in this case. Cf.
Southwest Gas Corp. v. FERC, 145 F.3d 365, 370 (D.C. Cir.
1998) ("The Commission need not revisit the reasoning of a
general order every time it applies it to a specific circum-
stance").

Finally, Pan-Alberta claims that the arrangement under
which Duke pays usage charges only on its original 40,000
Dth/d of capacity rather than on the 50,000 Dth/d violates the
requirement of Northwest's tariff that the shipper pay a
reservation charge for each Dth/d of capacity it controls. As
the Commission notes, however, this requirement is satisfied
because Duke makes payments on each of its two distinct

contracts with Northwest -- one as a releasing shipper with
respect to 40,000 Dth/d, and one as a replacement shipper
with respect to 50,000 Dth/d. See Order at 61,918. The tariff
is not violated merely because the payments Duke makes on
its replacement contract for 50,000 Dth/d are credited to its
account in its role as releasing shipper. See id.

III. Conclusion

For the foregoing reasons, the petition for review is

Denied.