United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 11, 2002 Decided January 21, 2003
No. 01-1167
PG&E Gas Transmission, Northwest Corporation,
Petitioner
v.
Federal Energy Regulatory Commission,
Respondent
Avista Corporation, et al.,
Intervenors
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Stefan M. Krantz argued the cause for petitioner. With
him on the briefs were Lee A. Alexander and Debra H.
Rednik. Carl M. Fink entered an appearance.
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.
Before: Sentelle, Randolph and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Sentelle.
Sentelle, Circuit Judge: PG&E Gas Transmission, North-
west Corporation (PG&E) petitions for review of Federal
Energy Regulatory Commission (FERC) orders suspending,
PG&E Gas Transmission, Northwest Corp., 90 F.E.R.C.
p 61,349 (2000), and then rejecting, 92 F.E.R.C. p 61,202
(2000), reh'g denied, 94 F.E.R.C. p 61,119 (2001), PG&E's
tariff filing, in which it sought to change its method for
allocating natural gas transportation capacity. FERC claims
that PG&E's petition is moot because FERC later approved
an alternative method of allocating capacity. We disagree.
Reaching the merits of the petition, we hold that FERC failed
to adequately address relevant Commission precedent and
thus acted arbitrarily in denying PG&E's filing. Therefore,
we grant the petition for review and vacate FERC's orders
and remand for further consideration in light of this opinion.
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 transportation (IT) capacity can
be interrupted when necessary to provide service to higher
priority customers, such as firm customers. IT 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 IT services. The total amount a shipper pays for
service, and thus the revenue generated, is derived by multi-
plying 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, at 61,615 (1987).
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)
(NGA), 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 based on 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.
Consequently, 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 reve-
nue. 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
remaining capacity. In sum, under PG&E's filing, the IT
queue would be replaced with revenue-based allocation fol-
lowed by a pro rata tiebreaker. On March 31, 2000, the
Commission accepted and suspended FERC's tariff filing, and
asked PG&E to provide further "justification as to the bene-
fits gained by the pipeline and its shippers if such a change is
implemented." PG&E Gas Transmission, Northwest Corp.,
90 F.E.R.C. p 61,349, at 62,154 (Suspension Order). PG&E
filed additional supporting evidence for its proposal and
sought rehearing of the Suspension Order, claiming that the
Suspension Order improperly required PG&E to submit evi-
dence of the unreasonableness of the IT queue and the
superiority of its proposed distance-based allocation mecha-
nism. Under NGA s 4, PG&E contended, a pipeline propos-
ing a rate change need only prove that its proposed rate is
"just and reasonable."
On September 14, 2000, FERC rejected PG&E's revenue-
based allocation proposal. PG&E Gas Transmission, North-
west Corp., 92 F.E.R.C. p 61,202 (2000) (PG&E I). The
Commission held that the revenue-based mechanism would
unduly discriminate against maximum rate short-haul ship-
pers because longer-haul maximum rate shippers could al-
ways outbid shorter-haul shippers for capacity, even though
both would be bidding the same per-mile rate. Id. at 61,677.
Cf. 18 C.F.R. s 284.9(b) (2002) (banning undue discrimination
in the allocation of IT capacity by reference to 18 C.F.R.
s 284.7(b)). FERC explained that this result would contra-
dict the Commission's policy of allocating capacity to those
who value it most, since, at the maximum rate, both short-
haul and long-haul shippers value the capacity equally.
PG&E I, 92 F.E.R.C. at 61,677. Nonetheless, FERC realized
that the IT queue may be complex, inefficient, and adminis-
tratively burdensome. Id. at 61,676. Thus, FERC did not
preclude PG&E from submitting a later proposal to replace
the queue, id. at 61,677, and FERC noted that it had "accept-
ed other methods of allocating capacity when shippers all bid
the maximum rate, such as pro rata," id. at 61,676. Finally,
FERC rejected PG&E's request for rehearing of the Suspen-
sion Order. Id. at 61,677-78. The Commission held that it
was justified in seeking further evidentiary support for the
relative benefits of PG&E's distance-based mechanism in
light of protesters' concerns about discrimination against
short-haul shippers. Id. at 61,678.
Shortly after FERC's ruling in PG&E I, PG&E submitted
a new tariff filing that replaced the queue with simple pro
rata allocation among all maximum rate bidders. Under that
tariff, each maximum rate bidder receives a proportionate
share of capacity regardless of revenue generated by its total
bid, and thus regardless of distance. On October 25, 2000,
FERC approved PG&E's filing over the protest of some of
PG&E's IT customers, relying on Commission precedents
accepting pro rata allocation and reasoning that pro rata
allocation would eliminate the need for a complex queue and
improve efficiency along the pipeline. See PG&E Gas Trans-
mission, Northwest Corp., 93 F.E.R.C. p 61,072, at 61,187
(2000), reh'g denied, 94 F.E.R.C. p 61,114 (2001) (PG&E II).1
PG&E subsequently implemented its pro rata allocation
mechanism, and it remains in effect today.
Meanwhile, PG&E requested rehearing of FERC's PG&E
I ruling, claiming that FERC failed to address several Com-
mission precedents that allowed distance-based allocation.
On February 8, 2001, FERC denied PG&E's request for
rehearing. PG&E Gas Transmission, Northwest Corp., 94
F.E.R.C. p 61,119 (2001) (Rehearing Order). In the Rehear-
ing Order, FERC attempted to distinguish the cases on which
PG&E relied on the grounds that the cases "do not address
the issue raised here, but merely find that breaking ties at
the maximum rate should be done in a nondiscriminatory
manner." Id. at 61,451.
PG&E timely filed this petition for review.
II. Analysis
Under NGA s 4, a pipeline proposing a rate change has the
burden of showing that the proposed rate is just and reason-
able. Exxon Corp. v. FERC, 206 F.3d 47, 51 (D.C. Cir. 2000).
If the pipeline 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 reject a tariff filing unless it is "arbitrary, capri-
cious, an abuse of discretion, or otherwise not in accordance
with law." 5 U.S.C. s 706(2)(A) (2000). Under this deferen-
tial standard, "the Commission must be able to demonstrate
__________
1 We address the petition for review of PG&E's customers in a
companion case, Duke Energy Trading & Mktg., L.L.C. v. FERC,
___ F.3d ___ (D.C. Cir. 2003), issued by this Court today.
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).
In addition, the Commission must have "examine[d] the rele-
vant data and articulate[d] a satisfactory explanation for its
action including a rational connection between the facts found
and the choice made." Motor Vehicle Mfrs. Ass'n of United
States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43
(1983) (quotation omitted). PG&E's central claim is that
FERC did not exercise reasoned decisionmaking when it
rejected PG&E's filing. Before we reach the merits of
PG&E's contention, however, we first address whether this
case is properly before us.
A. Mootness
FERC claims that we should dismiss this petition as moot
because FERC approved, and PG&E implemented, its pro
rata allocation proposal after FERC rejected PG&E's
revenue-based proposal. Thus, FERC argues that allowing
the revenue-based mechanism would not provide PG&E with
any relief because the pro rata mechanism has already re-
placed the queue and performs the same capacity allocation
function the revenue-based mechanism would perform. We
disagree. A controversy persists over whether PG&E should
be allowed to implement its preferred method of IT capacity
allocation.
Article III of the Constitution limits federal courts to
resolving "actual, ongoing controversies." Honig v. Doe, 484
U.S. 305, 317 (1988). To satisfy Article III's case or contro-
versy requirement, "a litigant must have suffered some actual
injury that can be redressed by a favorable judicial decision."
Iron Arrow Honor Soc'y v. Heckler, 464 U.S. 67, 70 (1983).
FERC does not dispute that PG&E suffered an injury when
the Commission initially rejected its revenue-based mecha-
nism. Rather, it contends that PG&E's injury has been negat-
ed by the Commission's later acceptance of a different pro-
posal for allocation of IT capacity, and thus this Court can
offer no effective relief.
While FERC is certainly correct that both the pro rata and
revenue-based proposals replace the queue and allocate IT
capacity between maximum rate bidders, the revenue-based
mechanism is undisputedly PG&E's preferred allocation
method. Indeed, PG&E proposed pro rata allocation only
after FERC rejected its revenue-based proposal. Therefore,
while approval of the "second-best" pro rata mechanism may
have lessened PG&E's injury, the injury persists in that
PG&E has been precluded from implementing its preferred
method of allocation.
Unquestionably, a favorable ruling of this Court would
redress PG&E's injury. If this Court grants PG&E's petition
for review, we will remand the case to FERC for it to
reconsider the revenue-based mechanism in light of this
Court's opinion. If, on remand, the Commission approves the
filing, PG&E will implement the revenue-based mechanism in
place of the existing pro rata system. Thus, a favorable
decision would provide PG&E with its desired relief: a fair
consideration of the revenue-based mechanism, and possibly,
an opportunity to implement its preferred method for allocat-
ing IT capacity.
The fact that both the existing pro rata mechanism and the
proposed revenue-based mechanism replace the queue and
perform the same function--allocating IT capacity--carries
no weight in the mootness analysis. FERC has cited no
authority for its proposition that merely because an agency
approves a litigant's second-best option to perform a given
function, the litigant may not continue to appeal the rejection
of its most favored option. Our decision in Rio Grande
Pipeline Co. v. FERC, 178 F.3d 533 (D.C. Cir. 1999) is
instructive. In Rio Grande, a pipeline company sought ap-
proval of its rates under 18 C.F.R. s 342.2(a) and submitted
evidence of reasonableness of the rates. 178 F.3d at 536.
Commission approval under s 342.2(a) would have protected
the pipeline from paying reparations to customers if the rate
was later found unreasonable. Id. In the alternative, the
pipeline sought approval under s 342.2(b), which allowed
approval if at least one pipeline customer had agreed to the
rate, but required reparations if the rate was successfully
protested. Id. FERC approved the rate under s 342.2(b),
but not under the more favorable provisions of s 342.2(a).
Id. at 537. The pipeline petitioned for review of FERC's
rejection of its s 342.2(a) claim. Id. On appeal, FERC
argued that the pipeline had suffered no injury because its
rate had been approved. Id. at 540. We disagreed, holding
that the pipeline was aggrieved because approval under
s 342.2(b) was less desirable than approval under s 342.2(a),
in that it subjected the pipeline to greater economic risks.
Id. Similarly, in the present case FERC has approved one
method for allocating capacity among PG&E's maximum bid-
ders, but it is a less desirable option than PG&E's preferred
method, which FERC rejected. Consequently, PG&E has
been aggrieved by FERC's ruling despite subsequent approv-
al of the pro rata tiebreaker. Since this Court's ruling can
remedy that injury, the case is not moot. Therefore, we reach
the merits of PG&E's petition.
B. Merits
On the merits, PG&E argues that FERC acted arbitrarily
and capriciously by failing to adequately address Commission
precedents that approved distance-based mechanisms for allo-
cating transportation capacity. We agree.
In its orders below, the Commission held that PG&E's
proposal violated 18 C.F.R. s 284.9(b)'s prohibition against
"undue discrimination," by making it more difficult for maxi-
mum rate short-haul shippers to obtain IT capacity. PG&E
I, 92 F.E.R.C. at 61,677. In examining the reasoning that
undergirds FERC's ruling, we note that discrimination is
undue only if "a pipeline's rate schedule creates a preference
without a reasonable basis." Algonquin Gas Transmission
Co. v. FERC, 948 F.2d 1305, 1316 (D.C. Cir. 1991) (quotation
omitted). By contrast, when differences in treatment are
"based on relevant, significant facts which are explained," the
disparate treatment does not run afoul of the NGA. Trans-
Canada Pipe Lines Ltd. v. FERC, 878 F.2d 401, 413 (D.C.
Cir. 1989).
Throughout the course of this litigation, PG&E has consis-
tently pointed to several cases in which FERC approved
distance-based allocation methods and held that such methods
did not constitute undue discrimination against short-haul
shippers. In PG&E I, FERC utterly failed to confront these
cases. In its Rehearing Order, FERC's attempt to distin-
guish these precedents was confusing at best, if not outright
disingenuous. Finally, on review before us, FERC counsel
concocted a harmonization of Commission precedent with the
Commission ruling. Of course, this Court cannot consider
such post hoc justifications, but may only consider the
grounds on which the Commission actually relied in making
its decision. Algonquin Gas Transmission, 948 F.2d at 1312
n.12 (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).
We now briefly address the relevant Commission precedents
and FERC's attempts to distinguish them in its orders.
In Northern Natural Gas Co., 82 F.E.R.C. p 61,077, reh'g,
84 F.E.R.C. p 61,154 (1998), FERC approved the pipeline's
proposal to allocate capacity based on net present value
(NPV), with NPV determined in part by whether the gas was
to be transported over two zones or wholly within one zone.
82 F.E.R.C. at 61,287. The Commission recognized that
under the pipeline's proposal, "continuous service that in-
cludes both [Zone A] and [Zone B] should be awarded the
service if they have a higher NPV that [sic] purely [Zone A]
transportation at the maximum rate." Id. Even so, FERC
approved the proposal over protests that the allocation sys-
tem would unduly discriminate against single zone shippers.
Id. Despite Northern Natural's obvious relevance to the
present case, FERC failed even to mention Northern Natural
in its orders below, much less attempt to distinguish it.
Similarly, in Tennessee Gas Pipeline Co., 65 F.E.R.C.
p 61,224, at 62,111 (1993), the Commission approved a zone-
based system with allocation based on price, wherein price
was based on the route traveled and quantity of gas trans-
ported. Id. Tennessee's distance-based allocation proposal
applied to both maximum and sub-maximum rate bids. Id.
Moreover, while the Commission ordered Tennessee to delete
its consideration of quantity, the Commission allowed Tennes-
see to consider distance, specifically rejecting arguments that
the distance-based mechanism would unduly discriminate
against short-haul shippers. Id. In a later proceeding, the
Commission again rejected an attempt to eliminate Tennes-
see's consideration of distance in allocating IT capacity, de-
spite complaints that it discriminated against maximum rate
short-haul shippers. See Tennessee Gas Pipeline Co., 71
F.E.R.C. p 61,399, at 62,582 (1995).
In its Rehearing Order in this proceeding, FERC mislead-
ingly tried to distinguish Tennessee. See 94 F.E.R.C. at
61,452. The Commission only mentioned Tennessee's holding
that the pipeline had to delete any consideration of quantity
from its allocation mechanism so as not to discriminate
against small or short-haul shippers. Id. However, FERC
completely ignored the next paragraph in Tennessee, in which
the Commission explicitly upheld consideration of distance
against charges of undue discrimination. Tennessee, 65
F.E.R.C. at 62,111. Thus, FERC utterly failed to distinguish
the relevant holding of Tennessee and explain why its reason-
ing should not be applied to the present case.
Finally, in Trunkline Gas Co., 64 F.E.R.C. p 61,141, at
62,126 (1993), reh'g denied in relevant part, 65 F.E.R.C.
p 61,355 (1994), FERC again approved a zone-based system
that allocated IT capacity based, in part, on number of zones
traveled. The distance-based mechanism applied to both
maximum and sub-maximum rate bids. Id. Furthermore,
FERC rejected a protestor's proposal that would have allo-
cated capacity based on percentage of maximum rate paid,
regardless of distance traveled. Id. The Commission explic-
itly acknowledged that under Trunkline's filing a maximum
rate short-haul shipper could be trumped by a lower rate
longer-haul shipper. Id. Nonetheless, the Commission con-
cluded that the proposal did not unduly discriminate against
short-haul shippers and promoted allocative efficiency. Id. at
62,126-27.
The Commission's attempt to distinguish Trunkline in its
Rehearing Order is confusing at best. First, FERC seems to
claim that Trunkline applied only to below maximum rate
bids. See Rehearing Order, 94 F.E.R.C. at 61,452. This is
flatly wrong, as even FERC counsel admitted at oral argu-
ment. See Tr. of Oral Arg. at 28-29. Second, FERC claimed
"[t]he Trunkline issue is different because it did not discuss
allocation methodology for resolving ties when the bids are
equal." Rehearing Order, 94 F.E.R.C. at 61,452. It is true
that Trunkline's revenue-based proposal did not involve
breaking ties between equal bidders, but neither does
PG&E's proposal in any relevant sense. That is, in Trunk-
line, bids were ranked based on adding the rates for each
zone traveled. Similarly, in PG&E's proposal, bids are
ranked based on multiplying the per-mile rate by the number
of miles traveled. The fact that PG&E's proposal breaks ties
between bidders who bid the same per-mile rate is not a
relevant difference from the proposal in Trunkline when,
under both systems, a maximum rate short-haul shipper can
always be outbid by a longer-haul shipper. Thus, the distinc-
tion to which FERC alluded between the zone-based system
in Trunkline and the distance-based system in the PG&E
tariff is a distinction without a difference.
In sum, FERC's attempts to distinguish its precedents
approving distance-based allocation were alternately non-
existent, misleading, and irrelevant. On brief to this Court,
counsel argues that these precedents are distinguishable be-
cause they involved zone-based systems with rates based on
several factors, of which distance is only one. This contrasts,
counsel contends, with PG&E's proposal, in which distance is
the sole determinant of capacity allocation at the maximum
rate. Thus, PG&E's proposed allocation mechanism is unduly
discriminatory while those in Northern Natural, Tennessee,
and Trunkline were not. We cannot consider this argument.
FERC's order "must stand or fall on the grounds articulated
by the agency in that order," not the reasoning proffered by
its appellate counsel. NorAm Gas Transmission Co. v.
FERC, 148 F.3d 1158, 1165 (D.C. Cir. 1998) (quotation omit-
ted). We therefore make no judgment about the validity of
counsel's argument because it is a purely post hoc justification
which cannot sustain the Commission's orders. See Chenery,
332 U.S. at 196.
As outlined above, FERC's orders in this case do not
adequately explain why the Commission's precedent in favor
of distance-based allocation does not compel approval of
PG&E's filing. In "gloss[ing] over" these precedents, FERC
"cross[ed] the line from the tolerably terse to the intolerably
mute." Greater Boston Television Corp. v. FCC, 444 F.2d
841, 852 (D.C. Cir. 1970). Indeed, FERC has given no
explanation whatsoever for this apparent shift in Commission
policy. FERC's failure to come to terms with its own prece-
dent reflects the absence of a reasoned decisionmaking pro-
cess. See North Carolina Utils. Comm'n v. FERC, 42 F.3d
659, 666 (D.C. Cir. 1994) (rejecting a FERC order because
the Commission did not "sufficiently explain[ ] its departure
from its prior cases"); Hatch v. FERC, 654 F.2d 825, 834
(D.C. Cir. 1981) ("[A]n agency must provide a reasoned
explanation for any failure to adhere to its own precedents.").
Consequently, we vacate FERC's orders and remand, so that
FERC may reconsider PG&E's proposal in light of this
opinion and Commission precedent.
III. Conclusion
We hold that this case did not become moot when FERC
approved PG&E's pro rata allocation proposal after it reject-
ed PG&E's revenue-based mechanism. A live controversy
persists regarding whether PG&E should be able to imple-
ment revenue-based allocation of IT capacity. On the merits,
we hold that FERC failed to adequately address Commission
precedent allowing pipelines to consider distance when allo-
cating transportation capacity. Accordingly, we grant the
petition for review and vacate FERC's orders and remand for
further consideration in light of this opinion.
So ordered.