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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 14, 2004 Decided November 2, 2004
No. 03-1153
CHEVRONTEXACO EXPLORATION & PRODUCTION CO.,
A DIVISION OF CHEVRON U.S.A. INC., ET AL.,
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
DUKE ENERGY TRADING AND MARKETING, L.L.C., ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Jon L. Brunenkant argued the cause for petitioners. With
him on the briefs were Cheryl J. Walker, Carolyn S. Hazel,
Charles J. McClees, Jr., Frederick T. Kolb, and Douglas W.
Rasch.
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
Lona T. Perry, 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: GINSBURG, Chief Judge, and RANDOLPH and ROGERS,
Circuit Judges.
Opinion for the Court filed by Chief Judge GINSBURG.
GINSBURG, Chief Judge: ChevronTexaco and other shippers
of natural gas (‘‘Shippers’’) petition for review of two orders
in which the Federal Energy Regulatory Commission, pursu-
ant to § 4 of the Natural Gas Act, 15 U.S.C. § 717c, held the
ANR Pipeline Company had properly calculated and was
entitled to collect its annual cashout surcharge for 2001. The
Commission also concluded, however, that the approved
method of calculation prescribed in the pipeline’s filed tariff
was ‘‘not producing just and reasonable results,’’ and it
therefore initiated a proceeding under § 5 of the Natural Gas
Act to devise a new method. The Shippers argue that
because the Commission found the prescribed method of
calculating the surcharge led to an unjust and unreasonable
result, the Commission was bound either to reject the sur-
charge or to accept it subject to refund.
A method or formula for calculating a rate, also called a
‘‘rate rule,’’ when enshrined in an approved tariff, is itself a
‘‘filed rate’’; it is therefore subject to change at the instance
of the Commission pursuant only to § 5 of the NGA, which
authorizes the Commission to establish the rate ‘‘to be there-
after observed.’’ 15 U.S.C. § 717d(a). Therefore, we hold
the Commission correctly confined itself, in reviewing the
pipeline’s proposed 2001 surcharge, to determining whether
(1) the costs to be recovered were prudently incurred and (2)
the surcharge was calculated in accordance with the approved
method.
I. Background
When the volume of natural gas a shipper puts into the
ANR pipeline does not match the volume it takes out over a
3
specified period of time, that shipper must either eliminate
the imbalance by trading with other shippers or ‘‘cashout’’ the
imbalance by buying gas from or selling gas to the pipeline
itself, at a price pegged to certain market indices. For each
dekatherm (Dth) of gas reconciled through the cashout sys-
tem, the shipper must also pay ANR a surcharge, which is
calculated and set annually at an amount determined to allow
the pipeline company to recover its costs of operating the
cashout system for the previous year. ANR calculates the
surcharge rate for each year according to the method pre-
scribed in its tariff and files the surcharge rate with the
Commission for approval.
On May 1, 2002 ANR filed a proposed surcharge rate of
$.4464/Dth to recover its 2001 costs. The Shippers objected
to the new surcharge, which was nearly three times the
surcharge for the previous year. Pursuant to § 4 of the
NGA, the Commission then accepted but suspended the sur-
charge for up to five months. The Shippers challenged the
pipeline’s claimed cost of operating the cashout system and
proposed a new way of calculating the surcharge. The Com-
mission, however, finding the pipeline’s costs in operating the
cashout system were prudently incurred and the surcharge
had been calculated in accordance with the rate rule in the
pipeline’s tariff, ultimately approved the new surcharge.
ANR Pipeline Co., 101 F.E.R.C. ¶ 61,123 (2003).
The Commission went on, nonetheless, to hold that the
approved method of calculating the surcharge had become
‘‘unjust and unreasonable in at least two respects.’’ First, it
did not allow some shippers, including the petitioners, ‘‘an
adequate opportunity to resolve their imbalances’’ and, sec-
ond, the carryforward provision allowed for ‘‘wide swings in
the surcharge from year to year.’’ Because the Commission
did not believe it then had ‘‘sufficient facts before [it] to
devise a just and reasonable mechanism pursuant to section 5
of the Natural Gas Act,’’ the agency opened a further pro-
ceeding to remedy those defects.
The Shippers petitioned for rehearing, requesting that the
Commission reject the $.4464/Dth surcharge and ‘‘instead
4
require ANR to keep in effect its previously effective sur-
charge of $0.1508/Dth until a new just and reasonable sur-
charge is derived.’’ Alternatively, the Shippers sought ‘‘clari-
fication that the $0.4464/Dth surcharge [was] being collected
subject to refund.’’
The Commission denied rehearing, holding that ‘‘ANR is
entitled to continue recovering the rates provided for in its
approved tariff until the Commission acts under NGA § 5 to
fix the just and reasonable rate ‘to be thereafter observed.’ ’’
As the pipeline had not proposed to change the method of
calculating the surcharge, ‘‘any modification in these rates TTT
would occur pursuant to NGA § 5,’’ which provides only
prospective relief. Accordingly, ‘‘there can be no refund.’’
ANR Pipeline Co., 103 F.E.R.C. ¶ 61,065, 61,205 (2003).
II. Analysis
The Natural Gas Act requires that ‘‘[a]ll rates and charges
made, demanded, or received by any natural-gas company TTT
be just and reasonable,’’ and declares ‘‘any such rate or
charge that is not just and reasonable TTT unlawful.’’ 15
U.S.C. § 717c(a). To make good this policy, the Commission
is given two distinct powers: it may accept or reject a
pipeline’s rate filings under § 4, and it may set rates upon its
own initiative under § 5.
Pursuant to § 4, ‘‘pipelines must file with the Commission
all rates and any change they propose in their rates.’’ Sea
Robin Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir.
1986). The pipeline bears the burden of showing its proposed
rate is just and reasonable. Id. If the Commission harbors
any doubt on that score, it may hold ‘‘a hearing concerning
the lawfulness of such rate,’’ 15 U.S.C. § 717c(e), but in the
end its options are limited to ‘‘acceptance (in whole or in part)
or rejection of the pipeline’s proposed rate[ ].’’ Sea Robin,
795 F.2d at 183. Further, ‘‘[t]he Commission need not con-
fine rates [under the NGA] to specific, absolute numbers but
may approve,’’ as it had done here, ‘‘a tariff containing a rate
‘formula’ or a rate ‘rule.’ ’’ Transwestern Pipeline Co. v.
FERC, 897 F.2d 570, 578 (D.C. Cir. 1990).
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When the Commission finds that a previously accepted rate
has become ‘‘unjust, unreasonable, unduly discriminatory, or
preferential,’’ the Commission, pursuant to § 5, ‘‘determine[s]
the just and reasonable rate TTT to be thereafter observed
and in force.’’ 15 U.S.C. § 717d(a). In proceeding under
§ 5, however, the Commission bears the burden of adducing
substantial evidence to prove (1) the pipeline’s existing rate is
unjust and unreasonable and (2) the rate determined by the
Commission is just and reasonable. ‘‘Complex’’ Consol. Edi-
son Co. of N.Y., Inc. v. FERC, 165 F.3d 992, 1003 (D.C. Cir.
1999); Pub. Serv. Comm’n of N.Y. v. FERC (Transco), 642
F.2d 1335, 1345 (D.C. Cir. 1980). As we held in Sea Robin,
these limitations apply as well to rate rules: ‘‘a Commission-
initiated change in either the rates or their method of calcula-
tion can be accomplished only upon the agency’s compliance
with the strictures of section 5.’’ 795 F.2d at 186.
In this case the Shippers argue that ‘‘once [the Commision]
determined TTT that ANR’s cashout surcharge mechanism
was ‘unjust and unreasonable,’ [it] should TTT have rejected
ANR’s proposed increase in its cashout surcharge.’’ Their
seemingly straightforward claim is that because the $.4464/
Dth surcharge was calculated according to a mechanism the
Commission held to be unjust and unreasonable, the sur-
charge must also be unjust and unreasonable, and the Com-
mission was therefore bound to reject it as unlawful pursuant
to § 4. For its part, the Commission argues that, when a
pipeline has filed and the Commission has approved a method
for calculating a particular rate, the pipeline’s subsequent
filing of a specific numerical value calculated by that method
must be evaluated pursuant to § 4, which in this context
limits the agency ‘‘to assuring that the TTT calculations con-
formed to the previously approved tariff mechanism.’’ Conse-
quently, ‘‘changes to the approved tariff mechanism itself
could only be made in accordance with the strictures of NGA
§ 5.’’
The Commission’s position in the orders under review is
consistent with its precedent. In Dakota Gasification Co., 77
F.E.R.C. ¶ 61,271, 62,146 (1996), it explained:
6
[W]hen a pipeline has an approved mechanism in its
tariff for the flowthrough of a particular type of cost and
the pipeline makes a limited section 4 filing to recover
newly incurred costs pursuant to that mechanism, the
Commission’s refund authority is very limited. Since the
pipeline’s limited section 4 filing would not propose to
change the approved flowthrough mechanism, the Com-
mission would have to proceed under section 5 to make
any change in that mechanismTTTT The only rate
change initiated by the pipeline in such a limited section
4 filing is the inclusion in the approved flowthrough
mechanism of newly incurred costs. The Commission
could, therefore, order refunds of the resulting proposed
rate increase, in the limited circumstance of a finding
that the costs were not of the type authorized for recov-
ery under the approved flowthrough mechanism or that
the pipeline was imprudent in incurring the new costs.
The Commission is surely correct that it could not change
the mechanism in ANR’s tariff except in a § 5 proceeding, for
a rate rule in a tariff is itself a filed rate. And nothing in § 4
‘‘gives the Commission the authority to reject, post hoc, a
previously accepted [tariff] provision or to specify what
should replace it.’’ Sea Robin, 795 F.2d at 187.
The precise question here, however, is whether under § 4
the Commission could, as the Shippers maintain, nevertheless
reject the pipeline’s correctly calculated surcharge filing be-
cause the Commission no longer regarded the method of
calculation to be just and reasonable. We agree with the
Commission that it could not.
By allowing the pipeline first to file a rate rule, which it did
in 1993, later to be followed by annual calculations according
to that rule, the Commission effectively bifurcated its inquiry
into the reasonableness of the resulting rates. When it
initially approved the rate rule for ANR’s cashout surcharge,
the agency determined that it would produce just and reason-
able results. Thereafter, the Commission properly reviewed
the pipeline’s surcharge filings only for compliance with the
rate rule in its tariff; if the costs to be collected were
7
prudently incurred and the surcharge was calculated correct-
ly, then the pipeline’s § 4 filing was properly deemed just and
reasonable.
In the course of the 2002 proceeding, the Shippers persuad-
ed the Commission that the previously filed rate rule had
proved to be unjust and unreasonable. Because the Commis-
sion had already approved it, however, the agency could
change the underlying rule only by following the procedures
prescribed in § 5.
The Tenth Circuit addressed a related question in North-
west Pipeline Corp. v. FERC, 61 F.3d 1479 (1995). There,
the pipeline argued that
Commission approval of a ‘rate’ is not always confined to
the approval of a specific numeric value, but may instead
extend to the approval of a calculational formula or ‘rate
rule’ which, once approved, is established for purposes of
the NGA. While specific numeric input data to such a
formula may vary from year to year TTT the formula
itself does not change and therefore may be attacked
only in the context of a Section 5 proceeding.
61 F.3d at 1490. In ruling for the Commission, the court did
not reject the pipeline’s reasoning, but held instead that ‘‘the
Commission’s order did not direct Northwest to calculate the
[rate] differently, it simply ordered Northwest to calculate
the [rate] correctly.’’ Id.
Our holding today is the opposite side of the same coin:
When the Commission finds a pipeline did calculate a rate
correctly according to the rate rule in its tariff, the Commis-
sion must accept the § 4 filing despite any perceived flaws in
the rate rule and may only then proceed under § 5 — as it
has since done with respect to ANR’s annual cashout sur-
charge, see ANR Pipeline Co., 107 F.E.R.C. ¶ 63,006
(2004) — to devise and substitute a just and reasonable rate
rule ‘‘to be thereafter observed.’’
Finally, the Shippers argue, in the alternative, that the
Commission should have accepted the surcharge subject to
refund. Pending its decision under § 4, the Commission may
8
‘‘suspend the operation TTT and defer the use’’ of a proposed
rate for up to five months. Thereafter the rate ‘‘shall go into
effect,’’ but ‘‘the Commission may, by order, require the
natural-gas company TTT to refund any amounts’’ later found
by the Commission to be unjust and unreasonable. 15 U.S.C.
§ 717c(e). This provision for acceptance of a rate subject to
refund, which is the ‘‘only statutory exception to the rule
prohibiting retroactive rate changes,’’ is but ‘‘a necessary
compromise to accommodate delays in the approval process.’’
East Tenn. Natural Gas Co. v. FERC, 863 F.2d 932, 942
(D.C. Cir. 1988). Both the structure of and the rationale for
the refund provision, therefore, make it inapplicable where
the Commission lacks the authority to reject the rate filing as
unjust and unreasonable. Hence the Commission properly
held that ‘‘there can be no refund’’ when a pipeline files a
calculation consistent with an approved rate rule. ANR
Pipeline Co., 103 F.E.R.C. at 61,205.
III. Conclusion
For the foregoing reasons, the petition for review is
Denied.