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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
–————
Argued March 15, 2004 Decided April 13, 2004
No. 03-1166
GAS TRANSMISSION NORTHWEST CORPORATION,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA,
INTERVENOR
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, C. Todd Piczak,
and Carl M. Fink.
David H. Coffman, 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.
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
Before: EDWARDS and HENDERSON, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: Gas Transmission North-
west Corporation (‘‘GTN’’) is an interstate natural gas pipe-
line that transports gas from the United States/Canada bor-
der to the California/Oregon border. In 2002 it sought
permission from the Federal Energy Regulatory Commission
to amend its tariff so that it could sell available, unsubscribed
capacity, or capacity expected to become available, to a
shipper willing to execute an agreement for service to start at
a specific future date. The Commission approved, finding
GTN’s so-called ‘‘prearranged deal’’ program ‘‘consistent with
Commission policy.’’ PG&E Gas Transmission, Northwest
Corp., 102 FERC ¶ 61,044 at 61,099 (2003) (‘‘Initial Order’’).
GTN recognized that the Commission’s normal mandate of
a right of first refusal (‘‘ROFR’’) for all holders of service
agreements of a year or more could obstruct the program, as
sale of the capacity for the period between agreement and the
scheduled start of service, coupled with the ROFR, would
undercut GTN’s effort to make a firm commitment of the
capacity in the future. See GTN’s October 15, 2002 Filing
(‘‘October 2002 Filing’’) at 4; see generally 18 C.F.R.
§ 284.221(d)(2). GTN thus sought a partial waiver of the
ROFR requirement, supporting its request by likening its
program to a group of ‘‘capacity reservation’’ cases in which
the Commission allowed shippers to reserve capacity for
future expansion projects and waived the ROFR requirement
for capacity sold in the interim. See October 2002 Filing at
3–4; see also, e.g., Northern Border Pipeline Co., 103 FERC
¶ 61,390 (2003); Columbia Gulf Transmission Co., 100 FERC
¶ 61,133 (2002); Tennessee Gas Pipeline Co., 82 FERC ¶ 61,-
288 (1998).
The Commission refused GTN’s request for a waiver, say-
ing that it ‘‘disagree[d]’’ with GTN’s argument that its prear-
ranged deal program was akin to the capacity reservation
3
cases. Initial Order, 102 FERC ¶ 61,044 at 61,100. It pur-
ported to explain, saying that ROFR waiver was suitable in
the latter cases ‘‘so that a general system expansion may be
optimally sized.’’ Id.
GTN requested rehearing, again emphasizing the similari-
ties between its prearranged deal program and the capacity
reservation cases and arguing that ‘‘granting limited waiver
of the ROFR for interim shippers in this case furthers
precisely the same goals as those the Commission found
determinative for TTT [waiving] the ROFR in the capacity
reservation context.’’ Request for Rehearing at 4. The
Commission denied rehearing. PG&E Gas Transmission,
Northwest Corp., 103 FERC ¶ 61,061 at 61,200 (2003) (‘‘Re-
hearing Order’’).
GTN seeks review, arguing that the Commission has failed
to offer a reasoned basis for its refusal to waive the ROFR
requirement. We remand so that the Commission may give a
rationale, if it has one.
* * *
Although our review is under the deferential ‘‘arbitrary and
capricious’’ standard, 5 U.S.C. § 706(2)(A), even that modest
criterion requires the Commission to ‘‘articulate a satisfactory
explanation for its action including a ‘rational connection
between the facts found and the choice made.’ ’’ Motor
Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463
U.S. 29, 43 (1983) (citation omitted).
As we’ve said, the Commission in its Initial Order tried to
differentiate GTN’s prearranged deal program from the ca-
pacity reservation cases by saying that the former did not
insure that ‘‘a general system expansion may be optimally
sized.’’ Initial Order, 102 FERC ¶ 61,044 at 61,100; see also
Columbia Gas Transmission Corp., 101 FERC ¶ 61,380 at
62,586 (2002) (‘‘The primary purpose of permitting the reser-
vation of capacity is to minimize the size of the expansion[.]’’).
Not having been understood, GTN tried to connect the dots
in its Request for Rehearing, explaining that its proposal,
4
with partial waiver of the ROFR, ‘‘will also help to ensure
that future expansion projects are both necessary and proper-
ly sized. In fact, making capacity available on a pre-arranged
basis may eliminate entirely the need to construct new capaci-
ty to serve the pre-arranged shipper’s currently anticipated
future needs.’’ Request for Rehearing at 4. In other words,
avoiding wasteful use of existing capacity obviates or reduces
the need for additional, potentially wasteful construction,
precisely the object of the capacity reservation program.
Thus the Commission’s principal answer fails to distinguish
its own prior precedent. See, e.g., PG&E Gas Transmission,
Northwest Corp. v. FERC, 315 F.3d 383, 390 (D.C. Cir. 2003).
The Commission adds nothing useful in its claim that GTN
is seeking ‘‘to insulate itself from its decision to enter into a
pre-arranged agreement for future service, at the expense of
shippers who enter into service agreements in the interim.’’
Initial Order, 102 FERC ¶ 61,044 at 61,100 (citing Williams
Gas Pipelines Central Inc., 97 FERC ¶ 61,249 (2001)). The
cited decision says only that ‘‘a contractual right of first
refusal may broaden the regulatory right of first refusal, but
it may not narrow it.’’ Williams Gas, 97 FERC ¶ 61,249 at
62,110. But that proposition has no applicability here, where
GTN is seeking to alter its tariff—not to file a single non-
conforming service agreement—so that the regulatory ROFR
will not apply to an entire set of service agreements.
In its Rehearing Order the Commission invoked the policy
concept behind its ROFR requirement—concern about a pipe-
line’s potential exercise of market power over shippers who
cannot invoke a ROFR. Rehearing Order, 103 FERC ¶ 61,-
061 at 61,199 (citing Order No. 637, Regulation of Short–
Term Natural Gas Transportation Services, and Regulation of
Interstate Natural Gas Transportation Services, 65 Fed. Reg.
10,155 (February 25, 2000)). But that plainly supplies no
explanation for the Commission’s more stringent insistence on
the ROFR here than in the capacity reservation cases. Un-
less the Commission can explain why the advantages of
capacity reservation are superior to those of GTN’s prear-
ranged deal program, or why the negative effects of ROFR
waiver are more severe in the latter context, it cannot rest its
5
refusal of GTN’s waiver request simply on the underlying
justification for its general ROFR requirement.
If on remand the Commission can adduce a compelling
distinction between the two contexts, waiver denial may well
be sustainable; if not, not. In any event, we go on to an
additional point. GTN argued that by refusing to waive the
ROFR requirement the Commission would render GTN’s
prearranged deal program ‘‘virtually useless,’’ as prearranged
shippers could not be certain that interim shippers would not
exercise their ROFR and prevent the prearranged shippers
from acquiring the capacity for which they had contracted.
Request for Rehearing at 7–8; see also Ozark Gas Transmis-
sion Sys. v. FERC, 897 F.2d 548, 553 (D.C. Cir. 1990)
(holding that it is unreasonable for FERC to approve a
program but to continue to apply policies that defeat the
program).
The Commission responded that the regulatory ROFR was
an existing requirement for which GTN’s program must
account. Rehearing Order, 103 FERC ¶ 61,061 at 61,199.
This is no answer at all. As evidenced by the capacity
reservation cases, the Commission will waive the ROFR
requirement in certain circumstances. See, e.g., Northern,
103 FERC ¶ 61,390; Columbia Gulf, 100 FERC ¶ 61,133;
Tennessee Gas, 82 FERC ¶ 61,288. Stating that the ROFR is
an existing requirement does not answer GTN’s argument
that this is one of those circumstances in which it should be
waived.
In its Initial Order (but curiously not in its Rehearing
Order), the Commission made an observation that might be
relevant to GTN’s Ozark argument: it said that a shipper
seeking capacity for future use could ‘‘insulate itself from the
risk that capacity may not be available at that time TTT by
purchasing capacity and releasing it until it has a use for it.’’
Initial Order, 102 FERC ¶ 61,044 at 61,100. As a non-
pipeline holder of capacity is not subject to the mandatory
ROFR, this approach would reconcile longterm commitment
with interim use.
6
An obvious difficulty with this argument is that it takes us
back to the Commission’s inadequate distinction of the capaci-
ty reservation cases. If purchaser responsibility is an ade-
quate solution for the prearranged deal, why not for capacity
reservation?
Perhaps there are material differences between capacity
reservation and GTN’s prearranged deal, so far as they affect
the trade-offs between improving the chances of averting
wasteful capacity construction and controlling the risks of
injurious pipeline exercises of market power. But at this
point the Commission has failed to identify them. ‘‘Diver-
gence from agency precedent demands an explanation.’’ Hall
v. McLaughlin, 864 F.2d 868, 872 (D.C. Cir. 1989).
* * *
The Board’s decision is accordingly remanded.
So ordered.