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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 18, 2005 Decided March 11, 2005
No. 03-1452
TENNESSEE GAS PIPELINE COMPANY,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
PSEG ENERGY RESOURCES & TRADE LLC, ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Howard L. Nelson argued the cause and filed the briefs for
petitioner. Janice A. Alperin entered an appearance.
Dennis Lane, Solicitor, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief was Cynthia A. Marlette, General Counsel. Lona T. Perry,
Attorney, entered an appearance.
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Before: EDWARD S and ROGERS, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge ROGERS.
ROGERS, Circuit Judge: Tennessee Gas Pipeline Company
petitions for review of three Orders of the Federal Energy
Regulatory Commission requiring revision of its tariff to provide
that shippers are not responsible for full reservation charges
after service is suspended. In effect, Tennessee challenges the
propriety of the Commission’s determination that, as a matter of
policy, it will not allow pipelines to collect full reservation
charges from shippers whose service has been suspended.
Because the Commission’s policy is not arbitrary or capricious
or contrary to law, we deny the petition.
I.
On August 16, 2002, Tennessee made a filing under section
4 of the Natural Gas Act (“NGA”), 15 U.S.C. § 717c (2000), to
amend its tariff. Among other revisions, it sought to clarify the
credit evaluation provisions by adding the following provision:
“Regardless of whether Shipper is insolvent, has lost its
creditworthiness status or does not desire to continue service
with Transporter, Shipper shall continue to be liable for all
charges due under its service agreement and associated rate
schedule.” Following a technical conference and public
comment, the Commission conditionally accepted Tennessee’s
creditworthiness proposal, subject to Tennessee filing revised
tariff sheets incorporating certain modifications. Tenn. Gas
Pipeline Co., 102 F.E.R.C. ¶ 61,075 (Jan. 29, 2003) (“First
Order”). The Commission stated:
While Tennessee’s tariff does not give it the right to
collect charges for service after a contract is terminated, it
is unclear what happens when a contract is suspended.
3
When service is suspended, a shipper’s service is stopped
and that shipper should not be held responsible for future
charges. Certainly the shipper must pay Tennessee for
service up to the date service was suspended, but they [sic]
are not responsible for charges after Tennessee suspended
service. Tennessee is required to revise its tariff to provide
that shipper’s [sic] are not responsible for charges after
service is suspended.
Id. at 61,195.
Tennessee sought rehearing on the ground that the
Commission failed to meet its burden under section 5 of the
NGA, 15 U.S.C. § 717d, to show that Tennessee’s then-current
tariff language was unjust or unreasonable and that the
Commission’s proposed change was not unjust and
unreasonable. Tennessee argued that “[r]eserving the firm
capacity without payment of the reservation charge is at
complete odds not only with the fundamental premise of a firm
transportation contract, but with the whole Part 284 regulatory
scheme.” Request for Rehearing, at 5 (Feb. 28, 2003). The
Commission denied rehearing, affirming that Tennessee
shippers should not be billed for reservation charges after
service is suspended. Tenn. Gas Pipeline Co., 103 F.E.R.C. ¶
61,275 (June 4, 2003) (“Second Order”). The Commission
explained: “If the pipeline elects to suspend service, it cannot
bill for service that it does not offer to provide, but the pipeline
would be able to sue the shipper for the consequential,
unmitigated damages caused by its contractual breach.” Id. at
62,066. The Commission noted that it “has affirmed its policy
in two recent order[s],” id. at 62,066 n.70 (citing PG&E Gas
Transmission, Northwest Corp., 103 F.E.R.C. ¶ 61,137 (2003);
Gulf South Pipeline Co., 103 F.E.R.C. ¶ 61,129 ( 2003)). While
ruling that section 5 of the NGA was inapplicable because
“Tennessee points to no current tariff provision that permits it
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to bill during service suspension, which is consistent with
Commission policy,” id. at 62,067, and requiring Tennessee’s
tariff, in order to ensure that tariff silence would not be
misunderstood, specifically to reflect “the status quo” that
Tennessee has no authority to bill shippers for service during
suspension, id., the Commission also ruled that “for the reasons
discussed,” see id. at 62,066, billing shippers during suspension
is unjust and unreasonable under section 5 of the NGA, id. at
62,067. The Commission, in relevant part, denied Tennessee’s
further request for rehearing. Tenn. Gas Pipeline Co., 105
F.E.R.C. ¶ 61,120 (Oct. 24, 2003) (“Third Order”). Tennessee
petitions for review of the three Orders.
II.
The court may set aside the Commission’s orders only if
they are “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A)
(2000). “[T]he Commission must be able to demonstrate that it
has ‘made a reasoned decision based upon substantial evidence
in the record.’” Northern States Power Co. (Minnesota) v.
FERC, 30 F.3d 177, 180 (D.C. Cir. 1994) (quoting Town of
Norwood v. FERC, 962 F.2d 20, 22 (D.C. Cir. 1992)). The
court’s review of Commission policy is “highly deferential”
because “‘the breadth of agency discretion is, if anything, at
[its] zenith when the action assailed relates primarily . . . to the
fashioning of policies, remedies and sanctions.’” Columbia Gas
Transmission Corp. v. FERC, 750 F.2d 105, 109 (D.C. Cir.
1984) (alteration in original) (quoting Niagara Mohawk Power
Corp. v. FPC, 379 F.2d 153, 159 (D.C. Cir. 1967)); see also
Northern Mun. Distribs. Group v. FERC, 165 F.3d 935, 941
(D.C. Cir. 1999).
Because the Commission acknowledged in the Second
Order, 103 F.E.R.C. at 62,066 n.70, that it had established a
policy in the First Order, the court need not examine
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Tennessee’s challenge to the Commission’s determination that
Tennessee’s pre-existing tariff did not allow it to collect full
reservation charges from a shipper whose service had been
suspended, nor whether the Commission was required to
proceed under sections 4 or 5 of the NGA in ordering Tennessee
to modify its tariff. Even assuming the Commission has the
burden of proof, as it would under section 5, we hold that the
Commission’s policy is reasonable and entitled to deference.
Reservation charges are the portion of a two-part rate (with
usage charges being the other component) through which a
pipeline may collect fixed costs attributable to firm
transportation service. See 18 C.F.R. § 284.7(e) (2004).
According to Tennessee, the Commission generally requires
pipelines to utilize a straight fixed variable (“SFV”) rate design
under which all fixed costs are included in the reservation
charge and all variable costs are included in the usage charge.
“A firm transportation customer must pay the reservation charge
on the capacity it reserves whether or not it uses the capacity.
It pays the usage charge only to the extent it actually uses its
reserved capacity.” Altamont Gas Transmission Co., 69
F.E.R.C. ¶ 61,034, 61,134 (1994). “Therefore, under SFV, the
pipeline’s fixed costs are at risk only to the extent it has
unreserved capacity.” Id. However, Tennessee states that its
rates vary from SFV because twelve percent of its transmission
cost of service is recovered in the usage charge. See Tenn. Gas
Pipeline Co., 77 F.E.R.C. ¶ 61,083, 61,355-59 (1996).
Tennessee therefore maintains that during a suspension it will
lose even more revenues than a pipeline whose rates are based
on a pure SFV rate design.
During suspension, a shipper cannot transport gas on the
pipeline although it remains entitled to the contracted capacity.
Northern Natural Gas Co., 103 F.E.R.C. ¶ 61,276, 62,076
(2003). Under Tennessee’s tariff, once a shipper loses its
6
creditworthiness status, it may continue to use its reserved
capacity so long as it provides at least one of four assurances to
the pipeline, such as an irrevocable letter of credit verifying the
shipper’s creditworthiness or a prepayment for service. See
Tennessee Tariff § 4.4; First Order, 102 F.E.R.C. at 61,193.
Consequently, the key difference between the entitlements of
the suspended shipper and unsuspended shipper is that service
for the suspended shipper is subject to the shipper in some way
filling whatever apparent gap in creditworthiness caused the
suspension, sometimes including making an advance payment
to the pipeline in order to use reserved capacity.
Tennessee’s position is that it should be allowed to collect
the reservation charge during a shipper’s suspension because the
pipeline must reserve capacity, which will be available to the
shipper when it cures its contractual default. The obligation to
reserve shipper capacity, Tennessee maintains, is a continuing
service of value that the pipeline provides to the suspended
shipper, and the shipper, as the recipient of that “hold” service,
should be required to pay the reservation (or demand) charge.
Otherwise, Tennessee asserts, it will suffer a non-recoverable
loss because it is foregoing its ability to resell capacity to
another firm shipper. Imposing reservation charges during
suspension is reasonable, Tennessee contends, because the
pipeline should be paid for the service it continues to provide;
conversely, a shipper is not responsible for usage charges during
a period of suspension. Tennessee’s position that a suspended
shipper should pay the reservation charge is, then, a claim for
payment of the full reservation charge during suspension of
service.
However, a “reservation charge” encompasses charges for
both reservation and transportation services. See Third Order,
105 F.E.R.C. at 61,648; cf. 18 C.F.R. § 284.7(a)(1) & (3), (e).
The Commission’s position is that a pipeline may not collect a
7
full reservation charge from a suspended shipper because,
during suspension, pipelines do not provide full “service” to the
shipper. Third Order, 105 F.E.R.C. at 61,648. While
acknowledging that there is value provided to the suspended
shipper when the pipeline reserves capacity for the shipper, the
Commission considered the value of that service to be less when
all service is suspended. In the Commission’s words:
Tennessee maintains that it is still continuing its obligation
to reserve capacity for the shipper during suspension, and
should therefore be paid for reserving that capacity. But
the shipper is not paying simply to reserve capacity; it is
paying to reserve capacity, and, more importantly, to have
Tennessee transport gas using that capacity.
Id. The Commission concluded that because the pipeline is
refusing to transport gas during suspension, the pipeline is
failing to perform its obligation under the contract and
“therefore, should not be permitted to continue to charge the
shipper as if it were receiving service.” Id.
Further, the Commission explained in responding to
Tennessee’s complaint that it is at risk for under-recovery of its
costs if it cannot charge for service during suspensions, that
“this is an election of remedies the pipeline must make.” Id. If
concerned about its liability, the pipeline may suspend (and
ultimately terminate the contract) and sue for damages for
breach of contract. Id. Or the pipeline may elect to continue to
provide the service with the shipper remaining responsible for
the reservation charges. Id. The Commission noted that
Tennessee conceded that upon termination of a contract it can
no longer charge the shipper under its contract. Id.
Consequently, while allowing pipelines “the added remedy of
suspension of service on shorter notice than [for] termination of
service,” the Commission saw no reason to allow the pipeline
8
to charge for “service” during suspension when it would not
have that right if “service” was terminated. Id. Under
Tennessee’s tariff, the Commission observed, the shipper’s
contractual breach may consist only of the failure to post
collateral due to a change in its creditworthiness evaluation, and
Tennessee may decide to suspend service to the shipper to avoid
incurring additional obligations. But the Commission saw no
reason to give Tennessee “an added incentive to suspend service
by being protected against financial loss in the meantime.” Id.
We conclude that the Commission has shown that it would
be unjust and unreasonable to allow collection of the full
reservation charge during a shipper’s suspension where the
pipeline, in light of available remedies, “retains full control of
the shipper’s obligation to pay.” Second Order, 103 F.E.R.C.
at 62,066. In suspension situations, the Commission observed,
the pipeline has control, and can choose whether to proceed in
a manner that allows it to collect the full reservation charge. In
non-suspension situations, the shipper controls whether to use
its capacity and remains liable to pay the full reservation charge
even if it decides not to use all of its reserved capacity during a
particular period. Tennessee’s response is that it is the shipper’s
default in its contractual obligation that has caused the pipeline
to suspend service until the shipper cures the default. In fact the
challenged orders simply identify what consequences follow a
pipeline’s decision to suspend a shipper’s service, leaving it to
Tennessee to factor those consequences into its choice, upon a
shipper’s default, to continue to provide service, to suspend
service, or to terminate the contract.
The court properly defers to policy determinations
invoking the Commission’s expertise in evaluating complex
market conditions. See Conoco Inc. v. FERC, 90 F.3d 536, 544
(D.C. Cir. 1996); Columbia Gas Transmission Corp., 750 F.2d
at 109. That Tennessee favors a different balancing of the risks
9
of loss, where Tennessee would continue to collect the full
reservation charge and the suspended shipper could recoup
some of these charges by releasing its capacity in the secondary
market until it cures its default, does not demonstrate that the
Commission’s policy is undeserving of deference by the court.
Moreover, consistent with the policy announced in the First
Order, the Commission has disallowed release or recall of
capacity by a suspended shipper on the ground that it would not
be “equitable to allow a shipper to have the right to recall or
release capacity on a pipeline’s system when it was not paying
for that capacity.” Trailblazer Pipeline Co., 103 F.E.R.C. ¶
61,225, 61,862 (2003). Tennessee’s contention that the
Commission never addresses its argument that the policy will
eviscerate the distinction between suspension of service and
contract termination ignores the Commission’s reference to the
shorter notice permitted for suspensions than for contract
termination. Third Order, 105 F.E.R.C. at 61,648. Whatever
the Commission’s prior policy may have been with respect to
electric utilities,1 Tennessee points to no Commission decision
allowing a pipeline to collect the full reservation charge during
suspension. See Third Order, 105 F.E.R.C. at 61,648.
Tennessee relies on Northern Border Pipeline Co., 95 F.E.R.C.
¶ 61,109, 61,316-17 (2001), but it can point to nothing in the
opinion where the Commission suggested an understanding of
the operation of revenue sharing credits, whereby shippers
retain pre-suspension credits, that would support Tennessee’s
collection of the full reservation charge during a shipper’s
suspension. Nor has Tennessee shown that the Commission’s
policy is inconsistent with its regulations on firm transportation
service, which simply provide that where a “customer purchases
firm service, a pipeline may impose a reservation . . . charge on
1
See, e.g., City of Bedford, 65 F.E.R.C. ¶ 63,017, 65,110-11 (1993)
(Electric Service Agreement, art. 6.3); Ind. & Mich. Elec. Co., 53
F.P.C. 2039, 2040 n.1 (1975).
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a shipper as a condition for providing such service.” 18 C.F.R.
§ 284.7(e); see also id. § 284.7(a)(1) & (3).
While the Commission could not reasonably determine
that pipelines, such as Tennessee, provide “no service” to
shippers during periods of suspension, this statement in the
Third Order appears only in response to Tennessee’s new
argument that Section 6.1 of the Service Agreement, providing
that a shipper will pay during the term of the contract “for
services provided,” bound the shipper to pay the full reservation
charge. Third Order, 105 F.E.R.C. at 61,648. In the challenged
Orders, the Commission’s reference to “service” means full
service. The Commission acknowledged that the shipper is
paying reservation charges “to reserve capacity” and “to have
Tennessee transport gas using that capacity.” Id. Commission
counsel acknowledged during oral argument that pipelines
continue to provide some service to suspended shippers: the
capacity-reservation service has value to the suspended shipper
because it remains in a superior position to shippers having no
contractual relationship with the pipeline and can begin using its
capacity upon curing its contractual default.
The court has no occasion to decide whether Tennessee is
entitled to recover a lesser charge from a suspended shipper.
Tennessee concedes that it never asked the Commission to
approve payment of a lesser amount to cover its costs related to
the capacity-reservation service, as distinct from the movement-
of-gas-transportation service, both of which are covered by the
full reservation charge. While the Commission’s policy that a
pipeline may not collect a full reservation charge from a
suspended shipper is consistent with its regulations on firm
transportation service, 18 C.F.R. § 284.7(a)(1) & (3), (e), the
regulations do not appear to foreclose an argument to permit a
lesser charge. Therefore, the court leaves it to the Commission
to decide in the first instance, when a case is properly before it,
11
how to value the service that pipelines provide shippers during
periods of suspension and how much pipelines should be
permitted to charge for that service.
Accordingly, we deny the petition for review.
So ordered.