United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 11, 2002 Decided January 21, 2003
No. 01-1163
Duke Energy Trading and Marketing, L.L.C., and
American Natural Gas Corporation,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
PG&E Gas Transmission, Northwest Corporation
Intervenor
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Gordon J. Smith argued the cause and filed the briefs for
petitioner.
Laura J. Vallance, 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.
Lee A. Alexander, Stefan M. Krantz, and Debra H. Rednik
were on the brief for intervenor. Carl M. Fink entered an
appearance.
Before: Sentelle, Randolph and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge: Duke Energy Trading & Market-
ing, L.L.C. (Duke) and American Natural Gas Corporation
(ANG) petition for review of a Federal Energy Regulatory
Commission (FERC or the Commission) order accepting a
tariff filing from PG&E Gas Transmission, Northwest Corpo-
ration (PG&E). PG&E Gas Transmission, Northwest Corp.,
93 F.E.R.C. p 61,072 (2000), reh'g denied, 94 F.E.R.C.
p 61,114 (2001). The order under review allows PG&E to
eliminate its queue system for allocating interruptible trans-
mission (IT) capacity among maximum rate bidders and to
replace it with pro rata allocation. We find that FERC acted
reasonably in accepting PG&E's filing and thus deny the
petition for review.
I. Background
PG&E operates a natural gas pipeline running 612 miles
from the Washington/Canada border to the border between
Oregon and California. On its pipeline, PG&E sells two
primary types of natural gas transportation capacity-firm and
interruptible. Firm capacity is purchased on a monthly basis
and cannot be interrupted or curtailed except in limited
circumstances. Interruptible capacity can be interrupted
when necessary to provide service to higher priority custom-
ers, such as firm customers. Interruptible capacity is bid for
as needed, rather than purchased monthly. PG&E's gas
tariff sets the maximum per-mile rates PG&E can charge for
its interruptible transportation services. The total amount a
shipper pays for service, and thus the revenue generated, is
derived by multiplying the per-mile bid by the number of
miles the gas is to be transported.
Prior to the proceedings under review, PG&E allocated IT
capacity first to shippers bidding the maximum per-mile rate,
regardless of distance, and hence regardless of revenue.
PG&E then allocated any remaining capacity to shippers
bidding less than the maximum per-mile tariff rate by rank-
ing bids based on total revenue. Ties between bidders, at
both the maximum and sub-maximum rates, were broken
according to a shipper's position in the IT queue. Thus, if
two shippers' bids were tied, the shipper with the higher
position in the queue would be allocated the IT capacity.
Queue positions were determined by a lottery held by PG&E
in 1987. See Pacific Gas Transmission Co., 40 F.E.R.C.
p 61,193 (1987). In that lottery, ANG won the highest posi-
tion in the queue. Duke later acquired ANG.
On March 1, 2000, PG&E submitted a tariff filing pursuant
to Section 4 of the Natural Gas Act, 15 U.S.C. s 717c (2000),
seeking to change its IT capacity allocation method. PG&E
proposed to use the system it employed to rank sub-maximum
rate bidders to rank bids from maximum rate bidders as well.
Under this "revenue-based" or "distance-based" proposal,
allocation would be determined by net revenue generated per
dekatherm, with net revenue being determined by multiplying
the distance in pipeline miles from the receipt point to the
delivery point by the rate bid plus surcharges. Consequent-
ly, a long-haul maximum rate bidder would always defeat a
shorter-haul maximum rate bidder, because the long-haul
shipper's total bid would always generate greater revenue. If
any ties remained between bids generating the same net
revenue, capacity would be allocated pro rata-that is, each
tied bidder would receive a proportionate share of the re-
maining capacity. In sum, under PG&E's filing, the IT queue
would be replaced with revenue-based allocation followed by a
pro rata tiebreaker.
On September 14, 2000, FERC rejected PG&E's proposal.
See PG&E Gas Transmission, Northwest Corp., 92 F.E.R.C.
p 61,202 (2000) (PG&E I). In PG&E I, FERC focused almost
exclusively on its concern that extending revenue-based allo-
cation to maximum rate bidders would unduly discriminate
against short-haul shippers whose bids could never generate
more revenue than longer-haul shippers.1 See id. at 61,677.
Even though FERC rejected PG&E's revenue-based alloca-
tion mechanism, the rejection was "without prejudice to
PG&E[ ] making a new filing to modify its proposal to include
an alternate allocation mechanism," id., and FERC explicitly
noted that it had "accepted other methods of allocating
capacity when shippers all bid the maximum rate, such as pro
rata," id. at 61,676.
Shortly thereafter, PG&E submitted a new tariff filing that
replaced the queue with simple pro rata allocation among all
maximum rate bidders. Under this proposal, each maximum
rate bidder would receive a proportionate share of capacity
regardless of revenue generated by its total bid. Petitioners
lodged a protest arguing that PG&E's new proposal was
identical to the filing rejected in PG&E I because both
proposals contained an element of pro rata allocation and
resulted in elimination of the IT queue. Petitioners also
contended that continued use of the IT queue would promote
FERC's efficiency goals better than pro rata allocation.
On October 25, 2000, FERC approved PG&E's filing over
petitioners' protest, rejecting petitioners' argument that
PG&E's filing was identical to the filing in PG&E I. PG&E
Gas Transmission, Northwest Corp., 93 F.E.R.C. p 61,072, at
61,187 (2000) (PG&E II). In addition, FERC reasoned that
pro rata allocation would eliminate the need for a complex
queue and improve efficiency along the pipeline by allocating
capacity based on willingness to pay rather than queue posi-
tion. Id. Finally, FERC relied on its own precedent finding
the pro rata method to be a just and reasonable means of
allocating interruptible capacity among tied bidders. Id.
FERC denied petitioners' request for rehearing, PG&E
Gas Transmission, Northwest Corp., 94 F.E.R.C. p 61,114
(2001) (Rehearing Order), and petitioners timely sought judi-
cial review.
__________
1 PG&E's appeal of this ruling is addressed in a companion case,
PG&E Gas Transmission, Northwest Corp. v. FERC, __ F.3d __
(D.C. Cir. 2003), issued by this Court today.
II. Analysis
Under Section 4 of the Natural Gas Act, 15 U.S.C. s 717c,
a pipeline proposing a rate change has the burden of showing
that the proposed rate is just and reasonable. Exxon Corp.
v. FERC, 206 F.3d 47, 51 (D.C. Cir. 2000). "If it meets that
burden, FERC approves the rate regardless of whether there
may be other rates that would also be just and reasonable."
Id. We will uphold FERC's decision to approve a tariff filing
unless it is "arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law." 5 U.S.C. s 706(2)(A)
(2000). Under this deferential standard, "the Commission
must be able to demonstrate that it has made a reasoned
decision based upon substantial evidence in the record."
Northern States Power Co. v. FERC, 30 F.3d 177, 180 (D.C.
Cir. 1994) (quotation omitted).
Petitioners attack FERC's ruling on two grounds. First,
petitioners claim that FERC arbitrarily and capriciously ap-
proved the pro rata mechanism in PG&E II after rejecting
what petitioners describe as an "identical" proposal in PG&E
I. Second, petitioners contend that FERC's acceptance of
the pro rata mechanism as "just and reasonable" was arbi-
trary and capricious and unsupported by substantial evidence.
We find neither argument persuasive.
A.
Describing PG&E's second proposed tariff as "simply a
'rerun' of the same filing" that PG&E had previously made,
and the Commission rejected, petitioners assert that the new
filing "should have been summarily rejected under collateral
estoppel principles," and the Commission's acceptance of it
was arbitrary and capricious. Pet. Br. at 12. This argument
fails utterly. Petitioners' contention that the pro rata mecha-
nism at issue here is identical to the one FERC rejected in
PG&E I is meritless. As FERC correctly found, the present
proposal "no longer seeks to prioritize maximum rate bids
based upon a distance-based allocation mechanism." PG&E
II, 93 F.E.R.C. at 61,187. Rather, PG&E "solely proposes to
implement a tie-breaking procedure for maximum bids strict-
ly on a pro rata basis." Id. The most superficial analysis
demonstrates that FERC correctly found the instant proposal
to be entirely different than the revenue-based mechanism
followed by a pro rata tiebreaker it rejected in PG&E I. The
two proposals operate differently and produce vastly different
results. For example, envision two shippers each bidding the
maximum per-mile rate. Shipper A bids for 100 miles of
transportation, while Shipper B bids for 200 miles. Under
PG&E's first proposal, Shipper B would always receive IT
capacity over Shipper A because his bid would generate
greater revenue. Under the present pro rata proposal, by
contrast, each shipper would receive a proportionate alloca-
tion of capacity.
That the proposals both contain a pro rata component is
not determinative. The pro rata device plays a substantially
different role in the two proposals. Under the PG&E I filing,
the pro rata tiebreaker was to be applied only after the
revenue mechanism was used to rank bidders on the basis of
distance and hence revenue. That is, pro rata allocation
served only in a secondary capacity after application of the
revenue mechanism had failed to resolve all allocation issues.
Under the instant proposal, pro rata allocation is the sole
means for allocating capacity among maximum rate bidders,
and thus performs a much more fundamental and important
role. Just as importantly, total revenue plays no role in
allocating capacity among maximum rate bidders in the in-
stant proposal, thereby eliminating FERC's PG&E I concern
about discrimination against short-haul shippers. To suggest
that two separate tariffs are identical, and that the rejection
of one mandates the rejection of the other, simply because
they contain a common element makes no sense. As there
are a limited number of factors that pipelines can conceivably
rely upon to set tariffs, petitioners' approach would virtually
lock the pipelines and the Commission into a perpetual rate
once the first attempt at change has failed, no matter how
just and reasonable some subsequent submission might be.
Petitioners also apply the same sort of faulty reasoning to a
different element of the approved tariff by contending that
because FERC in PG&E I rejected one proposal to eliminate
the IT queue, FERC could not approve any subsequent
proposal that eliminated the queue. This is nonsense. The
fact that FERC rejected one rate proposal including elimina-
tion of the queue cannot conceivably preclude it from accept-
ing a later "just and reasonable" proposal merely because the
new proposal also eliminates the queue. FERC's order in
PG&E I offers no support for petitioners' argument. First,
nothing in PG&E I suggests that FERC found any inherent
defect in eliminating the queue. Rather, FERC's opinion
focused on the shortfalls of the revenue-based mechanism as
a primary allocator of capacity, rejecting it because it would
result in discrimination against short-haul shippers. See
PG&E I, 92 F.E.R.C. at 61,677. That is, the Commission
rejected only PG&E's proposed replacement for the queue; it
did not hold or even suggest that there could never be any
valid replacement. Moreover, the Commission never ad-
dressed the validity of the pro rata portion of the proposal,
much less the validity of a pro rata mechanism acting alone to
allocate capacity, as is proposed here. To the contrary,
FERC "reject[ed] PG&E[ ]'s capacity allocation proposal
without prejudice to PG&E[ ] making a new filing to modify
its proposal to include an alternate allocation mechanism."
Id. Far from barring future filings to eliminate the queue,
FERC explicitly noted that it "has accepted other methods of
allocating capacity when shippers all bid the maximum rate,
such as pro rata." Id. at 61,676. Thus, the Commission's
order implicitly, if not explicitly, invited PG&E to propose pro
rata allocation of IT capacity among maximum rate bidders.
It certainly did not preclude future proposals to eliminate the
queue.
Consequently, we reject petitioners' claim that the ruling
under review is inconsistent with FERC's order in PG&E I.
B.
Petitioners' second argument is as meritless as their first.
They contend that FERC's conclusion that PG&E's pro rata
proposal is "just and reasonable" under Section 4 of the
Natural Gas Act is arbitrary and capricious, as there was
before the Commission no substantial evidence that pro rata
allocation would be more efficient than the use of the queue.
They further argue that FERC ignored its own precedents
finding queues to be just and reasonable and instead "cherry-
picked" precedents finding pro rata applications to be just
and reasonable. None of this undermines the validity of the
Commission's decision.
Petitioners' arguments rest on a fundamental misunder-
standing of the inquiry under Section 4 of the Natural Gas
Act. Under Section 4, a pipeline seeking to change its
existing tariff need not demonstrate that the existing tariff, in
this case the queue, is unjust and unreasonable. Mun. Def.
Group v. FERC, 170 F.3d 197, 201 (D.C. Cir. 1999) ("s 4
applied and the Commission was not required to establish
that [the pipeline's] prior allocation method was unjust or
unreasonable."). Rather, the Commission need only find that
the proposed tariff is just and reasonable. Exxon Corp., 206
F.3d at 51. Nothing in Section 4 requires the pipeline to
prove that its proposal is more just and reasonable than the
existing system. The pipeline must only show that its pro-
posal is just and reasonable in its own right. In this case,
then, FERC had no obligation to find that the IT queue was
no longer functioning well, nor even to find that pro rata
allocation is more efficient than the IT queue. As petitioners
correctly conceded at oral argument, there may be a number
of different potential rates all of which are just and reason-
able. Thus, FERC needed only to find pro rata allocation to
be just and reasonable.
In finding PG&E's pro rata allocation proposal just and
reasonable FERC cited four cases in which "[t]he Commis-
sion has ruled ... that the pro rata methodology for breaking
ties for interruptible service is just and reasonable under
Section 4 of the Natural Gas Act." PG&E II, 93 F.E.R.C. at
61,187 & n.6. Specifically, FERC relied on Northern Border
Pipeline Co., 69 F.E.R.C. p 61,114 (1994), reh'g denied, 70
F.E.R.C. p 61,034 (1995), a case with similar facts to this one
in which FERC approved elimination of a queue in favor of
pro rata allocation among tied bidders. PG&E II at 61,187.
Petitioners do not dispute that these cases establish the
validity of the pro rata mechanism. See Pet. Br. at 24 ("the
Commission has clearly determined that either queue or pro-
rata tiebreakers are equally consistent with Commission poli-
cy"). Nor do petitioners submit any reason why we should
attempt to limit the Commission's application of its own
precedent. Rather, petitioners argue that FERC should have
rejected the pro rata proposal by relying on precedent find-
ing queues to be just and reasonable. As explained above,
petitioners' argument is a non sequitur. Under Section 4, the
fact that PG&E's queue was just and reasonable under
FERC precedent does not preclude FERC from accepting
pro rata allocation as just and reasonable as well. Therefore,
we hold that the Commission did not "cherry-pick" favorable
precedent, as petitioners claim, but instead reasonably fol-
lowed the consistent rulings of the Commission finding pro
rata tiebreakers to be just and reasonable.
We would be remiss if we did not note one complicating
factor. We have today issued the opinion in a companion
case, PG&E Gas Transmission v. FERC, __ F.3d __, grant-
ing PG&E's petition for review of the FERC decision in
PG&E I. We recognize the very real possibility that Com-
mission proceedings on remand may result in the displace-
ment of the tariff approved in PG&E II, which we review in
this proceeding. We wish to make it plain that we do not
intend this opinion to bar any party from litigation of any
issue not decided herein. We decide only those issues raised
in this petition, in the anticipation that the approved tariff
which we review herein will continue in effect unless and until
displaced by some other tariff in further appropriate proceed-
ings.
III. Conclusion
We hold that FERC was not precluded from approving
PG&E's pro rata allocation mechanism by its rejection of an
earlier filing proposing revenue-based allocation followed by a
pro rata tiebreaker. On the merits, we hold that FERC
adequately supported its conclusion that PG&E's proposal to
allocate IT capacity pro rata among maximum rate bidders is
"just and reasonable" under Section 4 of the Natural Gas Act.
Accordingly, the petition for review is
Denied.