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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 13, 2003 Decided July 25, 2003
No. 02-1107
NORTHERN NATURAL GAS COMPANY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
NORTHERN MUNICIPAL DISTRIBUTORS GROUP, ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Frank X. Kelly argued the cause for petitioner. With him
on the briefs were Steve Stojic, J. Gregory Porter, Dorothy R.
Dornan, and Maria K. Pavlou.
Judith A. Albert, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
the brief were Cynthia A. Marlette, General Counsel, and
Dennis Lane, Solicitor.
Before: GINSBURG, Chief Judge, and ROGERS and TATEL,
Circuit Judges.
Opinion for the Court filed by Chief Judge GINSBURG.
GINSBURG, Chief Judge: Northern Natural Gas Company
petitions for review of two orders in which the Federal
Energy Regulatory Commission rejected a proposed revision
of Northern’s tariff. The revision would have allowed the
pipeline company to enter into agreements for transportation
of natural gas at a rate somewhere between the maximum
and minimum levels prescribed in the tariff, as determined by
an index or formula. The Commission rejected the proposal
as ‘‘too ill-defined, such that its implementation could lead to
unreasonable results.’’ Northern Natural Gas Co., 98
F.E.R.C. ¶ 61,106 at 61,323 (2002) (‘‘Rehearing Order’’). Be-
cause the Commission failed to provide a reasoned explana-
tion for its ruling, we grant the petition and vacate the orders
under review.
I. Background
In order to provide pipeline operators flexibility in meeting
the pricing demands of their customers, the Commission has,
since the advent of open-access transmission, permitted them
to offer a discount from the rates specified in their tariffs.
See Associated Gas Distrib. v. FERC, 824 F.2d 981, 1007
(D.C. Cir. 1987) (‘‘Tariffs are to provide for ceilings and
floors, with the pipeline free to charge anywhere within that
band’’); see 18 C.F.R. § 284.10(c)(5) (2003) (‘‘the pipeline may
charge an individual customer any rate that is neither greater
than the maximum rate nor less than the minimum rate on
file for that service’’). The Commission aims to avoid price
discrimination by requiring the pipeline to provide to all
similarly situated shippers any discount it offers to one
customer. Natural Gas Pipeline Co. of Am., 82 F.E.R.C.
¶ 61,298 at 62,174 (1998). To that end, the Commission
requires the pipeline to post on an Internet web site the
3
details of all discounted rate agreements, including the name
of the shipper, the rate charged under the contract, the
maximum rate, and the quantity, duration, and receipt and
delivery points involved. 18 C.F.R. § 284.13 (2003).
Northern’s tariff, under the heading ‘‘Types of Discounts,’’
currently provides:
From time to time Shipper and Northern may agree in
writing on a level of discount of the otherwise applicable
rates and charges in addition to a basic discount from the
stated maximum rates. For example, Northern may
provide a specific discounted rate:
(1) to certain specified quantities under the Service
Agreement;
(2) if specified quantity levels are actually achieved or
with respect to quantities below a specified level;
(3) to production reserves committed by the Shipper;
(4) during specified time periods;
(5) to points of receipt, points of delivery, supply areas,
transportation paths or defined geographical areas; or
(6) in a specified relationship to the quantities actually
transported (i.e., that the rates shall be adjusted in a
specified relationship to quantities actually transported).
In all circumstances the discounted rate shall be between
the maximum rate and the minimum rate applicable to
the service provided.
In its proposed filing, Northern sought to add a seventh type
of discount ‘‘based on published index prices for specific
receipt or delivery points or other agreed-upon pricing refer-
ence points for price determination.’’ The proposal provided
that ‘‘[s]uch discounted rate may be based on the published
index price point differentials or arrived at by formula.’’
Like the types of discount previously authorized under the
tariff, the new type of discount was to be constrained by the
maximum and minimum rates in the tariff. Northern ex-
plained to the Commission that it sought the ability to use
4
‘‘index-based rates’’ in order to offer customers a tool for
reducing risk in long-term contracts.
In the orders under review, the Commission, rejecting
Northern’s proposal, distinguished the proposed type of dis-
count from those already available in the tariff on the ground
that it ‘‘established rates through the use of a fluctuating
index or formula rather than through a specific, fixed num-
ber.’’ Rehearing Order at ¶ 61,322. The Commission went
on to announce ‘‘certain minimum criteria’’ for evaluating
whether ‘‘a formula rate can form the basis of a discount
rate.’’ Id. at ¶ 61,323.
[A] tariff proposal for an acceptable formula rate must:
(1) define the rate component to be discounted; (2) make
clear that the discounted, fixed rate resulting from the
formula cannot exceed the maximum rate, nor be less
than the minimum rate; (3) not change the underlying
rate design; and (4) not include any minimum bill or
minimum take provision that has the effect of guarantee-
ing revenue.
Id. Northern’s proposal did not satisfy these criteria, the
Commission held, because it was ‘‘vague,’’ ‘‘ill-defined,’’ and
did not ‘‘provide for a rate that is fixed’’; therefore, it ‘‘could
lead to unreasonable results.’’ Id. Accordingly, the Commis-
sion rejected the proposal and Northern petitioned for re-
view.
II. Analysis
Northern argues its proposal provides a lawful form of
discounting because the resulting rate will always be within
the maximum and minimum rates in the tariff, and under the
Commission’s rules a pipeline is ‘‘free to charge anywhere
within that band.’’ Associated Gas Distrib., 824 F.2d at 1007.
In Northern’s view, a discounted rate is by definition any rate
that falls within the tariff range, which the Commission has
already determined to be just and reasonable. Northern
claims the Commission failed to provide a reasoned explana-
tion for rejecting its position, and with it the proposed tariff
revision.
5
The Commission defends its decision on the ground that
the proposal provides no assurance the rate will ‘‘remain[ ]
fixed during the entire contract term,’’ will be offered to all
similarly situated shippers, will not change the underlying
rate design, and will not include any minimum bill and
minimum take requirements. We find none of these reasons
sufficient to support the Commission’s decision.
The Commission’s primary concern with Northern’s pro-
posal is that, insofar as it would allow Northern and a
customer to agree to a rate calculated upon the basis of a
price index, that rate may fluctuate during the term of their
contract. The Commission acknowledges it had approved
formula-based discounts on two prior occasions, but distin-
guishes the proposals it approved on the ground that one
used a formula to adjust rate components (within the tariff
maximum and minimum) in order to maintain a fixed rate, see
Panhandle Eastern Pipe Line Co., 90 F.E.R.C. ¶ 61,031 at
61,153 (2000) (‘‘discount agreements may provide for adjust-
ments to rate components upward or downward to achieve an
agreed upon overall rate’’), and the other merely referenced
an alternative fuel price index in order to determine a rate
that would ‘‘remain constant throughout the duration of the
contract,’’ Northern Natural Gas Co., 90 F.E.R.C. ¶ 61,064 at
61,242 (2000) (‘‘Initial Order’’) (distinguishing Williston Ba-
sin Interstate Pipeline Co., 85 F.E.R.C. ¶ 61,247). Under
Northern’s proposal, by contrast, ‘‘the discount would be
determined by an index that could change several times over
the term of the contract.’’ Initial Order at ¶ 61,242.
Northern does not deny that its proposal would allow
fluctuating discounts. Rather, it argues that the Commission
has failed to explain why a fluctuating discount is problemat-
ic, as long as the resulting rate will stay within the tariff
range. We agree. The orders under review treat the possi-
bility that a rate might change as an indication that the
proposal is too ‘‘vague’’ and ‘‘ill-defined.’’ Rehearing Order at
¶ 61,323. There is nothing inherently ‘‘vague’’ about rate
fluctuation, however, provided the fluctuation is governed by
an objective criterion, such as a published index or formula,
as Northern’s proposal requires. Moreover, the Commis-
6
sion’s rules require Northern to post the details of all dis-
counted rate agreements, so that similarly situated shippers
will be able to evaluate the discounts — even as they fluctu-
ate — and avail themselves of the discounted rates if they so
choose.
In its brief the Commission expresses concern that in order
to stay within the tariff range the parties to the agreement
may be forced to adopt ‘‘a change in indexing midstream’’;
this post hoc concern is utterly without foundation. North-
ern’s proposal sets the maximum and minimum rates in the
existing tariff as the ceiling and floor for the discounted rate;
those limitations will constrain the rate when the index or
formula in the contract would otherwise produce a rate
outside the range.
The Commission argues that ‘‘[e]ven with the check of
rates within the [tariff] band, the [proposal] provides no clue
to what reference points or formula might be selected, does
not indicate the conditions that will determine which refer-
ence points apply to which shippers, and requires consultation
between the parties.’’ Requiring such information, however,
is inconsistent with the Commission’s well-established prac-
tice, as reflected in Northern’s approved tariff, of allowing a
carrier and a shipper freely to agree upon ‘‘a specific dis-
counted rate’’ within the band of reasonable rates set out in
the tariff. The parties work out the details of the discount
agreement, after which the carrier must offer the same terms
to all similarly situated shippers. Under Northern’s current
tariff, for example, it may agree to give a shipper a discount
based upon specified ‘‘points of receipt, points of delivery,
supply areas, transportation paths or defined geographical
areas’’ or ‘‘in a specified relationship to the quantities actually
transported.’’ These general provisions give ‘‘no clue’’ to the
specifics of the discount upon which the parties may agree,
nor could they and still achieve pricing flexibility. The
Commission has failed to explain why a discounting provision
based upon an index requires a greater level of detail than
the other discounting provisions it has previously approved in
Northern’s and other carriers’ tariffs.
7
Finally, the Commission argues that Northern’s proposal
contains no assurance the discount agreements it authorizes
will ‘‘not change the underlying rate design; and TTT not
include any minimum bill and minimum take provision that
has the effect of guaranteeing revenue.’’ The Commission’s
concern appears to be that the proposal allows so much room
for negotiation that nothing — including a change in rate
design or a minimum bill or minimum take provision — can
be ruled out as the possible result of a contract under the
proposal. Resp. Br. at 16 (‘‘it is not possible to tell whether
or not rates under Northern’s proposal will satisfy these
criteria, especially considering that the proposal contains
nothing to limit the language that could be included in the
unspecified formula’’). Again, this concern is unfounded.
With regard to rate design, the Commission ignores the
requirement under the proposal that the resulting rate be
within the tariff range; obviously, an agreement could not
eliminate one component of a two-part rate (e.g., the reserva-
tion fee) and still charge the minimum rate for that compo-
nent. See Panhandle, 90 F.E.R.C. at ¶ 61,155 (no change in
rate design because each component remains within tariff
range).
Although the proposal contains no explicit prohibition of
minimum bill and minimum take agreements, neither do the
other discount provisions in the tariff. Such agreements are
independently made unlawful, however, by the Commission’s
rules. 18 C.F.R. §§ 284.7(e), 284.10(c)(1). The Commission
has not explained why it deems that prohibition insufficient to
prevent Northern and its shippers from entering into, post-
ing, and offering other shippers the prohibited terms.
We conclude the Commission failed to provide a reasoned
explanation for rejecting Northern’s proposal, and in particu-
lar for finding the rate collar in the present tariff insufficient
to ensure the resulting discounts would yield reasonable and
lawful rates. We note that the Commission relied heavily
upon several cases in which it had concluded, also without a
reasoned explanation, that an index-based rate provision ‘‘can
only be executed as part of a pipeline’s negotiated rate
authority.’’ Kern River Gas Transmission Co., 87 F.E.R.C.
8
¶ 61,284 at 62,140 (1999). See also Natural Gas Pipeline Co.
of Am., 86 F.E.R.C. ¶ 61,144 at 61,507 (1999); Tennessee Gas
Pipeline Co., 84 F.E.R.C. ¶ 61,096 at 61,497 (1998). From
our review of the relevant decisions, it appears the Commis-
sion has never explicated the distinction between discounted
and negotiated rates. The distinction Northern offers to fill
the void — that discounted rates must fall within the tariff
range whereas negotiated rates need not — is at least
suggested in one of the Commission’s policy statements. See
Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 74 F.E.R.C. ¶ 61,076 at 61,241 (1996)
(‘‘Because pipeline tariffs state that the pipeline will charge a
rate between the maximums and minimums stated on the rate
sheets, pipelines [that negotiate rates] will need to file con-
forming tariff sheets indicating that the rate for the service
will be either the rates stated on its existing rate schedule or
a rate mutually agreed upon by the pipeline and the custom-
er’’). Furthermore, when the Commission granted Northern
approval to negotiate rates, it required that Northern offer,
as an alternative or ‘‘recourse’’ rate in all cases, the rates in
the existing tariff — which the Commission said are by
definition reasonable. See Northern Natural Gas Co., 77
F.E.R.C. ¶ 61,035 at 61,135 (1996). These prior statements
strongly support, although they do not compel agreement
with, Northern’s conclusion that a ‘‘discounted’’ rate is any
rate that deviates from the rate sheets but falls within the
tariff range. Meanwhile, the Commission has provided no
coherent alternative definition. Perhaps now it will either do
so or adopt the definition suggested by Northern.
III. Conclusion
For the foregoing reasons, the petition for review is
Granted.