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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 21, 2003 Decided February 20, 2004
No. 02-1257
WILLISTON BASIN INTERSTATE PIPELINE COMPANY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
TENNESSEE GAS PIPELINE COMPANY, ET AL.,
INTERVENORS
On Petition for Review of Orders of the Federal
Energy Regulatory Commission
Robert T. Hall III argued the cause for petitioner. With
him on the brief was John R. Schaefgen, Jr.
Lona T. Perry, 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.
Howard L. Nelson argued the cause and filed the brief for
intervenor Tennessee Gas Pipeline Company.
Before: GINSBURG, Chief Judge, and EDWARDS, Circuit
Judge, and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Chief Judge GINSBURG.
GINSBURG, Chief Judge: Williston Basin Interstate Pipeline
Company petitions for review of two orders in which the
Federal Energy Regulatory Commission, proceeding under
§ 5 of the Natural Gas Act (NGA), held Williston’s practice of
selective discounting was discriminatory, unjust, and unrea-
sonable. The Commission directed Williston to adopt instead
the discounting policy set forth in previous Commission or-
ders issued to other pipelines. Because the Commission
failed to provide an adequate explanation for its ruling, we
grant Williston’s petition and vacate the orders under review.
I. Background
As a result of the FERC’s restructuring of the natural gas
industry, pipelines now have significant flexibility in setting
the rates they charge shippers. See generally Associated
Gas Distribs. v. FERC, 824 F.2d 981 (D.C. Cir. 1987); Regu-
lation of Natural Gas Pipelines After Partial Wellhead De-
control, Order No. 436, FERC Stats. & Regs. [Regs. Pream-
bles 1982–85] (CCH) ¶ 30,665 (1985). This flexibility is seen
in the Commission’s approval of ‘‘selective discounting,’’ which
allows a pipeline to charge different rates to different ship-
pers provided certain conditions are met. Selective discount-
ing can benefit not only the favored shipper(s) but also
shippers that do not receive discounts because, by inducing
increased throughput, it may enable the carrier to spread its
fixed costs across a greater number of units shipped on its
system. See Interstate Natural Gas Pipeline Rate Design,
47 FERC ¶ 61,295, at 62,053 (1989).
The Commission has also given shippers greater flexibility
in the shipment of gas across a pipeline system. For in-
3
stance, where operationally feasible a shipper may ‘‘segment’’
its firm capacity ‘‘into separate parts for its own use or for
the purpose of releasing capacity to TTT replacement ship-
pers.’’ See Colorado Interstate Gas Co. (CIG), 95 FERC
¶ 61,321, at 62,120 (2001) (discussing requirements Commis-
sion set out in Order No. 637, Regulation of Short–Term
Natural Gas Transportation Services and Regulation of
Interstate Natural Gas Transportation Services, FERC
Stats. & Regs. [Reg. Preambles 1996–2000] (CCH) ¶ 31,091
(2000)). The Commission also has adopted ‘‘flexible point
rights,’’ which allow ‘‘firm shippers TTT to change receipt and
delivery points (secondary points) so they can receive and
deliver gas to any point within the firm capacity rights for
which they pay.’’ Id.
In CIG the Commission adjusted its policy on selective
discounting to resolve the perceived ‘‘tension between the
Commission’s current discount policy, which permits pipelines
to restrict discounts to specific shippers at specific points, and
the Commission’s goal in adopting its segmentation and flexi-
ble point right policies of enhancing competition.’’ Id. The
Commission newly permitted a shipper to pay the higher of
the discounted rate it received when shipping from its pri-
mary to a secondary delivery point or the discounted rate
offered to other ‘‘similarly situated’’ shippers at the secondary
point. The Commission provided the following example to
explain the issue:
Shipper A has a contract for 100 [dekatherms/day] from
point A to B at a discounted rate of $0.50, and the
pipeline has restricted the discount to Point B, so that
the shipper would be required to pay the maximum tariff
rate if it changes points. The maximum rate in the zone
is $1.00. Shipper A segments its capacity at Point C or
moves to Point C on a secondary basis, which is within its
capacity path. The pipeline has contracts at point C for
$0.75. The issue is what rate should Shipper A pay for
the transaction at C: (1) the maximum rate of $1.00
because the shipper is not using the original points in the
discount contract; (2) the $0.50 discounted rate because
4
the shipper is using points within its capacity path; or (3)
the rate charged for pipeline transportation service to
other customers at Point C of $0.75.
Id. at 62,120–21. Under the approach adopted by the Com-
mission in CIG and applied to Williston here, Shipper A’s
discounted rate at Point C would be $0.75—the higher of
options (2) and (3) in the example.
The Commission also expressed the concern, however, that
the pipeline ‘‘may not have the same incentive’’ to offer
discounts at secondary points where a shipper competes
directly with the pipeline’s sale of primary capacity at that
point because, without the discount, the pipeline’s sale of
primary capacity would command the maximum rate. Id. at
62,121. It therefore adopted a ‘‘rebuttable presumption’’ that
a shipper should receive a discount at a secondary point if the
pipeline is already granting a discount at that point ‘‘under
other firm or interruptible service agreements,’’ id.; the
pipeline may ‘‘rebut the presumption by demonstrating that
the segmented or secondary point transaction is not similarly
situated to the shippers receiving discounts from the pipe-
line.’’ Id. In Granite State Gas Transmission (GSG), 96
FERC ¶ 61,273 (2001), reh’g denied, 98 FERC ¶ 61,019 (2002),
the Commission added the requirement that pipelines process
a shipper’s request for a discount in ‘‘no longer than two
hours.’’ 96 FERC ¶ 61,273, at 62,037. See also Gulf S.
Pipeline Co, L.P., 98 FERC ¶ 61,278 (2002) (applying CIG/
GSG policy).
In February 2002 the Commission, reviewing Williston’s
compliance with Order No. 637, noted the company had not
proposed changes in its pro forma tariffs relating to selective
discounting and directed it to adopt the policy set forth in
CIG and GSG. 98 FERC ¶ 61,212, at 61,803–04 (2002).
Williston sought rehearing, arguing that because it is a
reticulated rather than a linear pipeline, the CIG/GSG policy
is harmful both to its shippers and to its system. The
5
Commission denied rehearing in June 2002. 99 FERC ¶ 61,-
327 (2002).
Williston petitioned this court for review of both the Febru-
ary and June 2002 orders.
II. Analysis
The Commission may require Williston to adopt new tariffs
for selective discounting incorporating the policy the agency
adopted in CIG and GSG only if it shows that Williston’s
existing rate or practice is ‘‘unjust, unreasonable, unduly
discriminatory, or preferential’’ and that the Commission’s
proposed policy is both ‘‘just and reasonable.’’ NGA § 5(a),
15 U.S.C. § 717d(a); Interstate Natural Gas Ass’n of America
(INGAA) v. FERC, 285 F.3d 18, 37 (D.C. Cir. 2002). To
discharge this burden the Commission must ‘‘demonstrate
that it has made a reasoned decision based upon substantial
evidence in the record.’’ N. States Power Co. v. FERC, 30
F.3d 177, 180 (D.C. Cir. 1994). Williston argues the orders
under review ‘‘display an absence of factual analysis and fail
to articulate a reasoned explanation’’ demonstrating that ei-
ther the Commission’s own discount policy prior to its adop-
tion of the CIG/GSG policy or Williston’s selective discounting
was ‘‘unjust, unreasonable or unduly discriminatory.’’
In particular, Williston complains the Commission ignored
the role selective discounting plays in assuring the pipeline
‘‘operational flexibility,’’ namely, to ‘‘encourage the use of
specific points because the firm shipper’s use of those points
will impact the physical gas flow in the pipeline network in a
manner that permits Williston to maximize its pipeline capaci-
ty and system utilization.’’ Application of the CIG/GSG poli-
cy to its system would undercut Williston’s ability to target
discounts in this manner. Williston also claims the Commis-
sion’s policy would allow a shipper to obtain a long-term
discount with respect to an underutilized portion of Williston’s
system and then to use the discount instead either to reduce
its own shipments or to displace those of other shippers on
more heavily utilized portions of the system. Williston ex-
plains that this could occur when a firm shipper changes its
6
delivery point, resulting in a ‘‘transaction[ ] with lower sched-
uling priority TTT not be[ing] scheduled.’’ Williston’s counsel
elaborated upon this point at oral argument, explaining that
an interruptible shipper may be displaced by a firm shipper
because, ‘‘while the firm shipper is on the system[,] its
capacity is guaranteed to it.’’
The Commission first responds broadly that Williston’s
claims ‘‘cannot override the Commission’s authority to modify
tariffs and contracts where necessary to further its competi-
tive policies.’’ In support of its application of the CIG policy
to Williston, the Commission reiterates the rationale of that
case, principally its view that restricting the discount offered
a shipper to a particular point or points ‘‘undermines competi-
tion.’’ In its order denying rehearing the Commission was a
little more specific insofar as it disagreed with Williston’s
prediction of how shippers on its system would, if allowed,
exploit the Commission’s discounting policy: According to the
Commission, shippers will not apply discounts obtained for
underutilized portions of Williston’s system to displace
throughput in heavily utilized portions because ‘‘[t]he firm
shipper changing points would pay the greater of its own
discounted rate or the prevailing discounted rate at the
alternate point.’’
As mentioned above, the Commission’s determination that
Williston’s selective discounting was unjust and unreasonable,
if it is to stand, must be supported by a reasoned decision
based upon substantial evidence. In this context a generic
paean to discounting simply will not do; as the Commission
itself stated in GSG, ‘‘in each individual Order No. 637
compliance proceeding, pipelines can raise specific factual
conditions on their pipeline that they believe warrant a
change in the application of the discount policy to their
pipeline.’’ 98 FERC ¶ 61,019, at 61,055. The Commission’s
rejection of the pipeline’s objections obviously must be re-
sponsive to the particular concerns raised by the pipeline.
In this case, the Commission did not adequately address
Williston’s concern, as stated in its Petition for Rehearing,
that the CIG/GSG policy would compromise the pipeline’s
7
ability to target discounts at ‘‘particular receipt/delivery
points, subsystems or other defined geographical areas.’’ In-
deed, the Commission did not even mention Williston’s prac-
tice of using discounts to manage ‘‘gas flow movements’’
across its system before concluding Williston’s selective dis-
counting was discriminatory, unjust, and unreasonable. Nor
did the Commission consider whether its policy on selective
discounting should be tailored to reflect the complexities
Williston claims for its reticulated pipeline system.
Williston raised in its Petition for Rehearing its com-
plaint that, despite the Commission’s statements to the con-
trary, the Commission ‘‘change[d] the rules regarding selec-
tive discounting, and [it] d[id] so summarily, TTT with no
consideration of its statement that ‘discount policies on reti-
culated pipelines need to be evaluated differently than
those on straight-line pipelines.’ ’’ Williston’s reticulated
pipeline has multiple ‘‘lateral’’ lines, which results in a
‘‘complex grid or web-like system of numerous sized pipe-
line segments, ranging from 2 to 16 inches in diameter
within its various sections.’’ The Commission discussed the
complexities of Williston’s system in the course of consider-
ing Williston’s segmentation proposal, 99 FERC ¶ 61,327, at
62,386–89, 62,394–95, but it did not explain why its imposi-
tion of the CIG/GSG policy would not impair Williston’s
ability to use selective discounting to ensure ‘‘operational
flexibility’’ for its reticulated pipeline.
Nor did the Commission adequately explain why a shipper
that agreed to pay the maximum rate for delivery to a
secondary point should receive a discount there merely be-
cause it receives a discount at its primary point. The Com-
mission says now that it was entitled to rely upon ‘‘general
economic theory that the introduction of competition to the
market will benefit consumers,’’ Midcoast Interstate Trans-
mission, Inc. v. FERC, 198 F.3d 960, 968 (D.C. Cir. 2000),
and that it ‘‘reasonably concluded that prohibiting shippers
from retaining discounts at secondary points where similarly
situated shippers were receiving discounts unduly restricted
competition in the capacity market.’’ The Commission’s posi-
8
tion is not supported, however, either by ‘‘general economic
theory,’’ or by specific evidence in the record of this case.
As for the record, the Commission does not point to any
evidence casting doubt upon Williston’s prediction that ship-
pers will exploit the Commission’s discounting policy to dis-
place volumes of gas now moving on more heavily utilized
portions of the system. Instead, the Commission merely
points out, as it did in its order of June 2002, that a firm
shipper applying its discount at a secondary point ‘‘never pays
less than its contractual rate.’’ While true, the observation is
not at all responsive to Williston’s claim that the availability
at the secondary point of a discount for firm shippers will
have adverse ‘‘consequences for pipeline system management
and utilization.’’ Nor does the Commission address the effect
of its policy upon Williston’s ability to sustain selective dis-
counting. In its Petition for Rehearing Williston claimed the
Commission’s policy would limit the pipeline’s ability to grant
discounts. The Commission responds merely that Williston
‘‘may be correct,’’ but the policy is necessary to achieve the
Commission’s goal of enhancing competition. Not surprising-
ly, this conclusory and contradictory remark (for without
selective discounting the hoped for competition cannot materi-
alize) is unsupported by any citation to evidence in the record.
Timpinaro v. SEC, 2 F.3d 453, 459 (D.C. Cir. 1993).
As for ‘‘general economic theory,’’ the Commission failed to
explain what theory supports its conclusion that Williston’s
selective discounting, which restricted shippers’ discounts to
certain points, ‘‘unduly restricted competition in the capacity
market.’’ (Emphasis supplied.) As this court stated in Unit-
ed Distribution Cos. v. FERC, 88 F.3d 1105, 1142 (D.C. Cir.
1996), ‘‘the purpose of selective discounting is to increase
throughput by allowing pipelines to engage in price discrimi-
nation in favor of demand-elastic customersTTTT’’ See also 1
ALFRED E. KAHN, THE ECONOMICS OF REGULATION: PRINCIPALS
AND INSTITUTIONS 132–33 (reprint 1988). A pipeline is unlikely
to be able to increase throughput by selective discounting,
however, if capacity at secondary points can be transferred
readily among shippers through resale at the discounted rate.
Indeed, economic theory tells us price discrimination, of
9
which selective discounting is a species, is least practical
where arbitrage is possible—that is, where a low-price buyer
can resell to a high-price buyer. See JEAN TIROLE, THE
THEORY OF INDUSTRIAL ORGANIZATION 134 (1988); see also
INGAA, 285 F.3d at 32–33 (price discrimination not practical
because, ‘‘given the ease with which capacity can be trans-
ferred between shippers, resellers would have no way to
prevent arbitrage’’). Yet this is precisely what the Commis-
sion’s policy would appear not only to allow but to encourage.
In sum, the Commission’s unelaborated and, upon elabora-
tion, unavailing invocation here of ‘‘general economic theory’’
fails to support its conclusion that Williston’s selective dis-
counting is unreasonable or unduly discriminatory.
Williston also objects to the Commission’s rebuttable pre-
sumption that a shipper may transfer a discount to an alter-
nate point if another ‘‘similarly situated’’ shipper is receiving
a discount at that point. Williston argues this presumption
impermissibly shifts to the pipeline the burden the Commis-
sion is required to shoulder under § 5 of the NGA. Interve-
nor Tennessee Gas Pipeline also argues the presumption is
arbitrary and capricious regardless whether it can be rebut-
ted. Because we vacate the Commission’s orders for the
reasons set forth above, we do not reach the merits of this
issue.
III. Conclusion
For the foregoing reasons, the petition for review is grant-
ed, the Commission’s orders are vacated, and the matter is
remanded to the Commission for further proceedings consis-
tent herewith.
So ordered.