United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 5, 2002 Decided October 25, 2002
No. 00-1498
Canadian Association of Petroleum Producers,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Northwest Pipeline Corporation,
Intervenor
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
James H. Holt argued the cause and filed the briefs for
petitioner.
Judith A. Albert, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Cynthia A. Marlette, General Counsel, and
Dennis Lane, Solicitor.
Steven W. Snarr, Alex A. Goldberg, and Timothy W. Mul-
ler were on the brief for intervenor Northwest Pipeline
Corporation.
Before: Ginsburg, Chief Judge, and Sentelle and
Randolph, Circuit Judges.
Opinion for the Court filed by Chief Judge Ginsburg.
Ginsburg, Chief Judge: The Canadian Association of Petro-
leum Producers petitions for review of two orders of the
Federal Energy Regulatory Commission approving an in-
crease in the rates charged by Northwest Pipeline Corpora-
tion for transporting natural gas. The CAPP contends that
the Commission allowed Northwest an excessive rate of re-
turn on equity (ROE), resulting in unduly high rates. Be-
cause the CAPP failed in its request for rehearing before the
Commission to raise its current challenge to the proxy group
range of ROEs upon which the Commission based North-
west's ROE, we lack jurisdiction to consider, and therefore
dismiss, that aspect of its petition. Because the Commis-
sion's decision to place Northwest at the median of the proxy
group range was reasonable and supported by substantial
evidence, we deny the remainder of the petition.
I. Background
In 1995 Northwest applied for a general rate increase that
would raise its revenues by $19.2 million per year. The
Commission, pursuant to its authority under s 4 of the Natu-
ral Gas Act, 15 U.S.C. s 717c, to regulate rates for interstate
gas transmission, scheduled an evidentiary hearing before an
Administrative Law Judge to consider, among other things,
the appropriate rate of return on the equity invested in the
pipeline.
The Commission uses a discounted cash flow (DCF) analy-
sis to determine the appropriate ROE for a regulated pipeline
company. See Canadian Association of Petroleum Produc-
ers v. F.E.R.C., 254 F.3d 289, 293 (D.C. Cir. 2001)
("CAPP I"). For a publicly-traded company, DCF analysis
provides an estimate of ROE based upon the price of the
company's stock, the dividend it pays, and projected growth
in its earnings. Id. For a company that is not publicly
traded, such as Northwest,
the Commission has recourse to calculating the implicit
rate of return on companies that are comparable (or at
least companies whose business is predominantly the
operation of natural gas pipelines) and publicly traded.
These companies are called the "proxy group." The
Commission then makes adjustments for specific charac-
teristics of the company whose rates are in question.
Id. at 294.
Northwest proposed to calculate its ROE using a DCF
analysis of a "proxy group" composed of six companies. The
CAPP, through its expert witness Malcolm Ketchum, chal-
lenged the representativeness of that group based upon a
"fundamental and continuing evolution taking place in the
portfolio of business ventures" in which the proxy companies
were engaged. According to Mr. Ketchum, deregulation had
enabled pipeline companies to diversify by segregating "pure
pipeline" gas transmission operations into affiliated entities
and then pursuing related--or, indeed, unrelated--lines of
business that posed higher risks but offered greater potential
for earnings growth. A higher estimate of growth, when
factored into the Commission's DCF analysis, results in a
higher ROE than would be required to attract investment in
a less risky, pure pipeline company. Therefore, Mr. Ketchum
argued, the Commission should supplement its DCF analysis
with "a critical assessment of the relative business risks faced
by a pure regulated pipeline, such as Northwest."
The ALJ did not adjust the proxy group range of ROEs
upon the basis of Mr. Ketchum's analysis. Neither, however,
did the ALJ accept Northwest's ROE figure, which was based
upon a DCF analysis using only short-term growth projec-
tions. Instead, using the Commission's then-prevailing DCF
methodology, the ALJ calculated the proxy group range by
giving equal weight to short- and long-term growth projec-
tions. See Northwest Pipeline Corp., 87 F.E.R.C. p 61,266 at
62,058, 1999 WL 357897 (June 1, 1999) ("Order"). Based
upon Northwest's risk profile, the ALJ then placed North-
west at the midpoint of the proxy group range. Id.
The Commission modified the ALJ's calculation of the
proxy group range in keeping with an intervening decision,
Transcontinental Gas Pipe Line Corp., 84 F.E.R.C. p 61,084,
1998 WL 608596 (July 29, 1998) ("Transco"), in which the
Commission had decided to give short-term growth projec-
tions more weight than long-term growth projections in its
DCF calculations. Order at 62,061. As for placement of
Northwest within the range, the Commission analyzed the
company's competitive circumstances and the status of its
contracts for the delivery of gas to users, and affirmed the
ALJ's finding that Northwest faced an average level of risk.
In another modification stemming from Transco, however,
the Commission placed Northwest, as a company of average
risk, at the median rather than the midpoint of the proxy
group range of ROEs. Id. at 62,068. The Commission noted
but, curiously, did not address the CAPP's argument that the
ALJ had erred by failing to take into account, when placing
Northwest within the range, the difference in risk between
Northwest and the companies in the proxy group. Order at
62,065.
The CAPP sought rehearing of the Order in two respects
relevant here. First, the CAPP argued that the Commission
had erred in placing Northwest at the median of the proxy
group range. Specifically, the CAPP challenged the Commis-
sion's finding that Northwest faced significant competition
and argued that the Commission's analysis of Northwest's
contracts was flawed. Again curiously, however, the CAPP
did not protest the Commission's failure to address the
CAPP's argument for adjusting Northwest's position within
the range to account for differences between Northwest and
the proxy companies.
Rather, the CAPP relied upon those differences to support
its second ground for rehearing, namely, that the Commis-
sion, in determining the proxy group range, should not have
applied the recently-revised weighting formula adopted in
Transco. The CAPP argued that short-term growth projec-
tions were influenced by the non-pipeline businesses of the
proxy group companies and thus skewed upward the range of
ROEs for the proxy group.
The Commission rejected both the CAPP's arguments.
Northwest Pipeline Corp., 92 F.E.R.C. p 61,287, 2000 WL
1457024 (Sept. 29, 2000) ("Rehearing Order"). First, the
Commission adhered to its position in Transco that short-
term growth projections are inherently more reliable than
long-term growth projections, and therefore should be
weighted more heavily. Id. at 62,003-04. Acknowledging
that "there may be some differences between the proxy
companies and Northwest," the Commission was satisfied
nevertheless that the proxy group comprised "the six publicly
traded companies whose operations most closely mirror the
operations of a pure pipeline company." Id. at 62,005. Sec-
ond, the Commission reiterated its conclusion that Northwest
faced average business risks stemming from actual and po-
tential competition and from a short average contract life
relative to the depreciable life of its facilities. Id. at 62,006-
08.
II. Jurisdiction
Before addressing the merits of the CAPP's petition for
review, we consider, at the Commission's urging, a jurisdic-
tional question arising from the difference between the
CAPP's position here and what it urged before the Commis-
sion in its request for rehearing. Upon the CAPP's motion,
we held the briefing in this case in abeyance pending our
disposition of CAPP I, a related petition in which we upheld
the Commission's relative weighting of short- and long-term
growth projections in calculating the proxy group range of
ROEs. 254 F.3d at 297. In the wake of that decision the
CAPP abandoned the similar challenge it had raised in its
rehearing request before the Commission in this case. In-
stead, the CAPP now argues--as it had in earlier stages of
the proceedings before the Commission--that the Commis-
sion should have adjusted Northwest's placement within the
range to account for the differences between Northwest and
the proxy group companies.
Section 19(b) of the Natural Gas Act, 15 U.S.C. s 717r(b),
provides that "[n]o objection to the order of the Commission
shall be considered by the court unless such objection shall
have been urged before the Commission in the application for
rehearing unless there is reasonable ground for failure to do
so." The Commission contends that because the CAPP's
rehearing argument was limited to challenging the Commis-
sion's decision to afford greater weight to short-term growth
projections, the CAPP is barred from arguing on review for
an adjustment to Northwest's placement within the range
based upon a challenge to the representativeness of the proxy
group. The CAPP responds that it has consistently objected
that "the use of growth estimates representative of growth in
diversified, unregulated businesses produces an unreasonable
ROE for FERC-regulated pipelines," and that the Commis-
sion is merely quibbling about a difference in the particular
manner in which that objection was raised in different con-
texts.
To evaluate the CAPP's point, one must bear in mind that
the Commission's process for setting the ROE for a non-
publicly traded pipeline company consists of two discrete
phases: (1) determination of the range of reasonableness and
of its median;* and (2) assessment of the individual pipeline
company's circumstances and "other factors" to determine
whether to make a "pragmatic adjustment" away from the
median. Tennessee Gas Pipeline Co. v. F.E.R.C., 926 F.2d
1206, 1209 (D.C. Cir. 1991). In its request for rehearing, the
CAPP challenged the Commission's weighting policy, which is
part of the first phase. Accordingly, the Commission ad-
dressed the CAPP's argument in its discussion of the DCF
__________
* In CAPP I, we remanded to the Commission for further
consideration its use of the median of the proxy group range. 254
F.3d at 297-99. In this case, the CAPP does not challenge the
Commission's use of the median, and we express no opinion upon
that issue.
methodology, a significant portion of which was devoted to
defending its weighting policy. Rehearing Order at 62,001-
05.
The CAPP did not urge, as it now does, that the difference
in riskiness between the proxy group and a pure pipeline
company should be accounted for in the second phase--the
company's placement within the range. Had the CAPP done
so, then the Commission might have come out differently in
its rehearing order. Or it might not have. That the matter
is open to such speculation, however, concludes the point; the
"obvious purpose" of the rehearing requirement "is to afford
the Commission the first opportunity to consider, and per-
haps dissipate, issues which are headed for the courts."
Moreau v. F.E.R.C., 982 F.2d 556, 564 (D.C. Cir. 1993)
(emphasis omitted). The CAPP's decision upon rehearing to
focus its argument about the differences between Northwest
and the proxy companies solely upon the initial calculation of
the range of ROEs denied the Commission the opportunity to
consider the precise challenge the CAPP now raises for
judicial review. This we cannot countenance. See New Jer-
sey Zinc Co. v. F.E.R.C., 843 F.2d 1497, 1502-03 (D.C. Cir.
1988) (finding no jurisdiction where specific objection was not
made in rehearing application, despite claim it was encom-
passed by "overarching objection"). Simply put, the court
cannot review what the Commission has not viewed in the
first instance.
Nor do we see any "reasonable ground" for the CAPP's
failure to renew in its rehearing request its argument that the
Commission must take Mr. Ketchum's analysis into account
when locating Northwest within the proxy range of ROEs.
The CAPP protests that in seeking rehearing it "placed its
objection in the context of the weighting not because that was
the only means, or even CAPP's preferred means, of address-
ing [it] ... but because the revised weighting was the only
portion of the Commission's order in which the FERC made
any mention of the growth estimates." The CAPP's tactical
decision to "frame its objection to conform to the way the
Commission was interpreting the issue" cannot be accepted,
however, in mitigation of the CAPP's failure also to present
its argument for a downward adjustment. We therefore
conclude that we are without jurisdiction to consider, and
must dismiss, the portion of the CAPP's petition challenging
the representativeness of the proxy group.
III. The Merits
The CAPP also challenges the Commission's determination
that, in light of Northwest's competitive circumstances and
the duration of its long-term transmission contracts, the
pipeline company faced average levels of business risk and
therefore should earn a ROE at the median of the proxy
range. We review the Commission's factual findings for
substantial evidence, 15 U.S.C. s 717r(b), and conclude that
the CAPP's objections are without merit.
The record demonstrates that Northwest does not have a
monopoly in the geographic market it serves; customers do
have alternatives and have made use of them. For example,
Tuscarora Gas Transmission Company beat out Northwest
for a major contract in Nevada, while Pacific Gas Transmis-
sion Company competes with Northwest in Washington, Ore-
gon, and Northern California. In addition, the Commission
identified competitive threats, such as the application of BC
Gas to enter Northwest's region and the potential for indus-
trial customers to bypass Northwest's system by connecting
directly with a gas producer. Although the CAPP faults the
Commission for relying in part upon evidence portending
future competition, in neither Williams Natural Gas Co., 77
F.E.R.C. p 61,277, 1996 WL 862628 (Dec. 19, 1996), nor Ozark
Gas Transmission Sys., 68 F.E.R.C. p 61,032, 1994 WL
363498 (July 7, 1994), upon which the CAPP relies, did the
Commission announce a blanket rule against considering po-
tential competitive threats. Indeed, because the ROE neces-
sary to attract investment depends upon market perception of
future risks, such a rule would make little sense. The
Commission therefore reasonably factored evidence of poten-
tial competition into its ROE calculus.
The Commission also addressed adequately the CAPP's
contention that Northwest's exposure to risk is reduced by
the buoyant demand for gas in the area it serves. That other
states outside the region experienced similar and even great-
er increases in consumption led the Commission reasonably to
conclude that growth in demand was not "abnormally" high in
Northwest's territory. Rehearing Order at 62,007. The
Commission was likewise reasonable in declining to attach
conclusive weight to Northwest's favorable ranking in Stan-
dard and Poor's credit reports, preferring instead to make its
own assessment of the degree of risk facing the company.
Id.
Finally, we hold that the Commission reasonably consid-
ered it a risk factor that, although Northwest's facilities were
being depreciated over a 50-year period, its long-term con-
tracts had on average only 14 years to run. Id. at 62,007-08.
In some cases the Commission has examined a pipeline's
remaining contract life in isolation, and the CAPP points out
that by this measure Northwest compares favorably to other
pipelines. The comparison of contract life to depreciable life,
however, wants neither logic nor Commission precedent to
support it. See id. at 62,008 (quoting Pine Needle LNG Co.,
75 F.E.R.C. p 61,121 at 61,410, 1996 WL 208856 (Apr. 30,
1996)). Here, the Commission has identified record evidence
for its conclusion that the greater than 3:1 ratio of North-
west's remaining period of depreciation to the average life of
its contracts was equivalent to or higher than that of other
pipeline companies. That evidence is not particularly
strong--Northwest's expert conceded upon cross-examination
that he did not conduct a comparative "study"--but the
Commission was entitled to credit it.
IV. Conclusion
For the foregoing reasons, the petition for review is
Dismissed in part and denied in part.