United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 9, 2002 Decided January 17, 2003
No. 01-1407
Exxon Mobil Corporation, et al.,
Petitioners
v.
Federal Energy Regulatory Commission,
Respondent
Consolidated Edison Company of New York, Inc., et al.,
Intervenors
Consolidated with
01-1415
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Thomas J. Eastment argued the cause for petitioners
Exxon Mobil Corporation, et al. With him on the briefs were
Douglas W. Rasch, Bruce A. Connell, Joseph E. Mixon and
Charles J. McClees, Jr. Linda L. Geoghegan entered an
appearance.
Gregory Grady argued the cause for petitioner Transconti-
nental Gas Pipe Line Corporation. With him on the briefs
were Michael J. Thompson and David A. Glenn.
Timm L. Abendroth, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Cynthia A. Marlette, General Counsel, and
Dennis Lane, Solicitor.
Kenneth T. Maloney argued the cause for intervenors
KeySpan, et al. With him on the brief were James H. Byrd
and Steven J. Kalish. Edward B. Myers entered an appear-
ance.
Before: Ginsburg, Chief Judge, and Rogers and Tatel,
Circuit Judges.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge: Transcontinental Gas Pipe Line
Corporation has tried for nearly ten years to convince the
Federal Energy Regulatory Commission to allow it to adopt a
pricing system called "firm to the wellhead" that many of its
competitors employ. In this case, Transco and a group of
natural gas producers that use its pipeline petition for review
of FERC's latest rejection of Transco's firm transportation
proposals. Because the Commission failed to reconcile its
decision here with an earlier opinion on a related matter, we
grant the petition and remand for further proceedings.
I.
Like so much of this circuit's FERC business, this case has
its roots in the Commission's 1992 restructuring of the natu-
ral gas industry under its landmark Order No. 636 to create a
"national gas market" with "head-to-head, gas-on-gas compe-
tition." Pipeline Service Obligations and Revisions to Regu-
lations Governing Self-Implementing Transportation; and
Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, [Regs. Preambles 1991-1996] FERC Stats. &
Regs. (CCH) p 30,939, at 30,434 (1992), on reh'g, Order No.
636-A, [Regs. Preambles 1991-1996] FERC Stats. & Regs.
(CCH) p 30,950 (1992), on reh'g, Order No. 636-B, 61
F.E.R.C. p 61,272 (1992), reh'g denied, 62 F.E.R.C. p 61,007
(1993), aff'd in part, United Distrib. Cos. v. FERC, 88 F.3d
1105 (D.C. Cir. 1996). Order No. 636 made three changes
relevant here. First, it required interstate pipelines to pro-
vide local gas distributors that had contracts to purchase gas
in downstream areas an opportunity to convert those entitle-
ments into rights to "firm transportation" (FT) service that
could be used to deliver gas purchased from a variety of
producers upstream. Second, the order changed traditional
FT pricing--which requires customers to pay both a reserva-
tion charge to preserve their priority capacity and a separate
usage charge based on volumes actually shipped--by mandat-
ing that pipelines allocate all fixed costs to the reservation
charge. According to FERC, this "straight fixed variable"
system would make pricing more transparent. Finally, be-
cause most pipelines base their rates on a zone system, Order
No. 636 increased transportation flexibility by requiring that
where FT customers pay reservation charges to secure capac-
ity in any part of a zone, they must be given secondary rights
to receive or deliver gas at other points within that zone, even
if the locations are not specified in their contracts.
Most interstate pipelines responded to Order No. 636 by
offering their converting customers rights to firm transporta-
tion from producers' gathering facilities downstream to the
delivery points specified in the customers' contracts. This is
called "firm-to-the-wellhead" (FTW) service, although techni-
cally it does not extend to individual wellheads.
Transco chose not to adopt FTW service when it voluntari-
ly unbundled its sales and transportation service about a year
before Order No. 636 was issued. The company, which
operates a pipeline running northeast from the Gulf of Mexico
to New York City, carried unbundling one step further by
breaking its transportation service into two distinct compo-
nents. First, Transco's 1991 settlements with its local gas
distributors, known as "FT conversion shippers," gave the
shippers firm transportation rights from "pooling points" at
certain compressor stations on Transco's main pipeline down-
stream to their designated delivery points. Second, the
agreements left service above the pooling points and on
supply laterals to be contracted for separately under Tran-
sco's "interruptible transportation" (IT) service tariff. Sub-
ject to a one-part volumetric price that includes both variable
and fixed costs, IT service must give way to higher priority
deliveries. Because the FT conversion shippers and FERC
were concerned about potential upstream disruptions, howev-
er, Transco specified that "IT feeder" shipments for delivery
to FT conversion shippers would have higher priority than
normal IT transmissions. Transcontinental Gas Pipe Line
Corp., 55 F.E.R.C. p 61,446 (1991), on reh'g, 57 F.E.R.C.
p 61,345 (1991), on reh'g, 59 F.E.R.C. p 61,279 (1992), aff'd in
part and remanded sub nom. Elizabethtown Gas Co. v.
FERC, 10 F.3d 866 (D.C. Cir. 1993).
Although the parties appear to have assumed during the
negotiations that FT conversion shippers would contract sep-
arately with Transco for IT feeder service, the settlement
agreements did not actually require them to do so. In
practice, producers such as Petitioners Exxon and the other
so-called Indicated Shippers have contracted with Transco for
IT feeder service to move their supplies to the pooling points.
Thus, while local gas distributors pay nearly all fixed costs on
competitor pipelines under FTW pricing systems, producers
linked to Transco pay about $50 million per year in fixed costs
under Transco's IT feeder rates. By raising their commodity
prices downstream, producers could pass those costs onto FT
conversion shippers and other local gas distributors, but
Transco and the Indicated Shippers assert that they are often
forced to absorb the expense instead to ensure that their
prices appear competitive with producers on other pipelines.
According to Transco, this puts it at a competitive disadvan-
tage and, over the long term, may prompt producers to avoid
connecting to its pipeline.
FERC, however, has repeatedly rejected Transco's at-
tempts to adopt FTW pricing. In 1993, it ruled that Order
No. 636 did not require FTW pricing and declined to exercise
its authority under section 5 of the Natural Gas Act (NGA),
15 U.S.C. s 717d, to mandate such service. Transcontinental
Gas Pipe Line Corp., 63 F.E.R.C. p 61,194 (1993), on reh'g, 65
F.E.R.C. p 61,023 (1993). Transco then proposed a change to
its tariff under NGA section 4, 15 U.S.C. s 717c, that would
eliminate IT feeder service, give FT conversion shippers
secondary rights to service on supply laterals, and increase
their rates to cover the additional $50 million in fixed costs
that had previously been paid by producers ("FTW propos-
al"). The Commission rejected this plan as well, concluding
that it would abrogate the conversion shippers' existing con-
tracts and have anticompetitive effects. Transcontinental
Gas Pipe Line Corp., 72 F.E.R.C. p 63,003 (1995), modified 76
F.E.R.C. p 61,021 (1996), on reh'g, 77 F.E.R.C. p 61,270
(1996), on reh'g, 79 F.E.R.C. p 61,205 (1997). The Indicated
Shippers filed a petition for review of that decision before this
court.
While that petition was pending, FERC rejected still an-
other Transco proposal to replace IT feeder service with new
contracts for "firm transportation-supply lateral" service to
be offered to FT conversion shippers and other interested
parties ("FTSL proposal"). Although the Commission found
that change forbidden by neither the 1991 settlements nor the
FT conversion shippers' firm service contracts, Transconti-
nental Gas Pipe Line Corp., 85 F.E.R.C. p 61,357 (1998),
reh'g denied, 88 F.E.R.C. p 61,135 (1999), it concluded that
Transco's proposed terms would violate its flexible receipt
and delivery point policy under Order No. 636, Transconti-
nental Gas Pipe Line Corp., 86 F.E.R.C. p 61,175 (1999),
reh'g denied, 88 F.E.R.C. p 61,135 (1999). Shortly thereafter,
we acted on the Indicated Shippers' petition for review and
remanded the Commission's FTW decision for further expla-
nation. Exxon Corp. v. FERC, 206 F.3d 47, 52-54 (D.C. Cir.
2000).
On remand, in the order at issue in this case, FERC again
rejected Transco's FTW proposal. Transcontinental Gas
Pipe Line Corp., 95 F.E.R.C. p 61,322 (2001), on reh'g, 96
F.E.R.C. p 61,142 (2001). This time the Commission focused
on two facts: that the 1991 settlements and the conversion
shippers' FT contracts gave them service rights only on
Transco's main pipeline and that conversion shippers had
chosen not to contract separately with Transco for IT feeder
service. Although their agreements contain so-called Mem-
phis clauses that authorize Transco to make unilateral
changes in rates, terms, and conditions of conversion ship-
pers' firm service, see United Gas Pipe Line Co. v. Mem-
phis Light, Gas & Water Div., 358 U.S. 103 (1958), the Com-
mission concluded that the proposed change exceeded the
scope of those clauses because it would force the conversion
shippers to take capacity for which they had not contracted
and then increase their rates accordingly. After rejecting
Transco's proposal under NGA section 4 as not "just and
reasonable," FERC again rejected the Indicated Shippers'
argument that it should have exercised its NGA section 5
authority to require Transco to use the two-part, straight
fixed variable pricing structure favored in Order No. 636
throughout its entire pipeline.
Transco now petitions for review of the Commission's sec-
tion 4 decision, while Exxon and the other Indicated Shippers
challenge both the section 4 and section 5 rulings. A group of
FT conversion shippers intervenes in support of FERC's
decision.
II.
Under NGA section 4(e), interstate pipelines bear the
burden of proving that proposed rate changes are just, rea-
sonable, and not unduly discriminatory. 15 U.S.C. s 717c(a),
(d), (e). If a pipeline carries this burden, the Commission
must approve the change even if other rates would also be
just and reasonable. Western Resources, Inc. v. FERC, 9
F.3d 1568, 1578-79 (D.C. Cir. 1993). Although our review of
FERC decisions under the Administrative Procedure Act is
quite deferential, see 5 U.S.C. s 706(2)(C), we must reverse a
decision that departs from established precedent without a
reasoned explanation. ANR Pipeline Co. v. FERC, 71 F.3d
897, 901 (D.C. Cir. 1995).
Because the Commission has already ruled that FTW
service using two-part, straight fixed variable rates is gener-
ally permissible, see, e.g., Tex. E. Transmission Corp., 62
F.E.R.C. p 61,015, at 61,094 (1993); Transcontinental Gas
Pipe Line Corp., 76 F.E.R.C. p 61,021, at 61,060, the validity
of FERC's decision here hinges upon whether Transco's
particular FTW proposal would involve a contract modifica-
tion not authorized by the Memphis clauses contained in the
1991 settlement agreements and the conversion shippers'
existing firm service contracts. See Memphis Light, Gas &
Water Div., 358 U.S. at 110-13; United Gas Pipe Line Co. v.
Mobile Gas Serv. Corp., 350 U.S. 332, 343 (1956). At first
glance, the Commission's conclusions that Transco's proposal
would force conversion shippers to accept and pay for capaci-
ty in excess of their current contractual obligations and that
such a change exceeds the scope of the Memphis clauses
seem perfectly reasonable. Although the Commission ruled
in the FTSL case that the 1991 settlements and the conver-
sion shippers' firm service agreements did not prohibit Tran-
sco from replacing IT feeder service with some other rate
structure, that case involved a proposal to create a new set of
voluntary contracts rather than, as here, an attempt to force
supply lateral service on conversion shippers involuntarily
under their existing FT contracts. Transcontinental Gas
Pipe Line Corp., 85 F.E.R.C. at 62,388-91. Petitioners,
moreover, point to no case in which a Memphis clause has
been used to force a pipeline customer to take additional
service rather than to accept changes in the rates, terms, or
conditions of service already agreed upon. Indeed, before the
Commission, petitioners conceded that requiring customers to
accept greater volumes of gas deliveries than called for in
their service contracts would not be authorized by a normal
Memphis clause. Transcontinental Gas Pipe Line Corp., 95
F.E.R.C. at 62,139-40.
There is, however, a serious glitch: The Commission failed
to reconcile its decision at issue here with its previous opin-
ions concerning the complex ways in which the 1991 settle-
ments and firm service agreements, Transco's FT tariff, and
the Commission's own flexible delivery and receipt point
policy interact with each other to shape the FT conversion
shippers' rights to service.
In this case, FERC's characterization of Transco's FTW
proposal as a contract modification rests largely on a 1995
opinion in which the Commission found that Transco's FT
conversion shippers have no rights to service on supply
laterals unless they contract separately for IT feeder service.
Although FERC's flexible receipt point policy would normally
provide secondary rights to service at all points within any
zone in which an FT shipper pays reservation charges, the
Commission concluded that Transco FT shippers have sec-
ondary rights only on the main pipeline because "[i]n the
production area, the reservation charge is for service on the
mainline facilities. A shipper pays a separate IT rate for
service on supply laterals (IT-Feeders)." Transcontinental
Gas Pipe Line Corp., 73 F.E.R.C. p 61,361, at 62,128 (1995).
Applying that ruling to this case, the Commission reasoned
that because the FT conversion shippers have in fact chosen
not to contract for IT feeder service, forcing supply lateral
service on them would modify their FT contracts in a way
unauthorized by their Memphis clauses.
Disagreeing, petitioners point out that the Commission
stated in its 1999 opinion rejecting the FTSL proposal that its
flexible receipt point policy would automatically give Tran-
sco's FT customers secondary rights on supply laterals--
apparently without modifying their service contracts--if
Transco eliminated its IT feeder service. According to the
opinion, the only reason that Transco's FT customers did not
already have such rights as a benefit of paying zone reserva-
tion charges was that FERC had "made an exception to its
general receipt and delivery point policy, because the IT-
Feeder service itself provided shippers with the flexibility to
access receipt and delivery points throughout the production
area." Transcontinental Gas Pipe Line Corp., 86 F.E.R.C.
at 61,609. If Transco eliminated the IT feeder service,
however, there would no longer be "any basis for permitting
Transco to deny shippers the receipt and delivery point
flexibility attendant to firm service," id., despite Transco's
protests that its firm zone rates did not include the costs
allocated to service on the production area laterals. The
Commission stated that any cost allocation problems could be
fixed by adjusting zone reservation charges in a separate
filing and did not change the basic rule that shippers paying a
reservation rate for capacity within a particular zone are
entitled to access at any point within that zone on a secondary
basis. Id. at 61,610-11. Applying the same logic to this case,
petitioners argue that no contract modification is necessary to
give the FT conversion shippers rights on the supply laterals
since they will gain such rights automatically under the
Commission's general policies and Transco's proposed tariff
modifications and that Transco is entitled to adjust its zone
reservation charges accordingly.
The Commission may be able to reconcile the 1995 and
1999 decisions, but its efforts so far have only added to the
confusion. When petitioners pointed out the conflict, the
Commission flatly denied that the conversion shippers' cur-
rent lack of supply lateral rights is "the result of any exemp-
tion from any Commission policy" without acknowledging the
directly contradictory language in its 1999 decision. Trans-
continental Gas Pipe Line Corp., 96 F.E.R.C. at 61,609.
Instead, the Commission simply dismissed that case, saying
only that "adoption of FTW rates might also have an effect on
flexible receipt and delivery points in Transco's production
area, but that is a separate issue" from Transco's proposal
forcing the conversion shippers to accept additional capacity
in abrogation of their original contracts. Id. at 61,610. In
our view, this explanation falls short because the 1999 opinion
seems to indicate that the Commission's general policy would
give FT conversion shippers secondary rights on the supply
laterals without the need for a contract modification. See
also Regulation of Short-Term Natural Gas Transportation
Services, and Regulation of Interstate Natural Gas Trans-
portation Services, 101 F.E.R.C. p 61,127 (2002) (rejecting an
argument that Commission policies that increase firm ship-
pers' secondary rights modify individual service agreements).
Because FERC failed to explain its conclusions here in
light of its previous decisions, we remand the case for recon-
sideration consistent with this opinion. Given Transco's as-
surance at oral argument that it will immediately implement
its FTW proposal if the Commission approves the rate change
under section 4, we think it unnecessary to address the
Indicated Shippers' section 5 arguments. See Exxon Corp.,
206 F.3d at 48-49.
So ordered.