Brooklyn Union Gas Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 15, 2005 Decided May 31, 2005
Reissued July 29, 2005

No. 04-1079

BROOKLYN UNION GAS COMPANY, D/B/A KEYSPAN ENERGY
DELIVERY NEW YORK, ET AL.,
PETITIONERS

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

INDEPENDENT OIL & GAS ASSOCIATION OF WEST VIRGINIA,
ET AL.,
INTERVENORS

On Petition for Review of Orders of the
Federal Energy Regulatory Commission

Kenneth T. Maloney argued the cause for petitioners. With
him on the briefs were Christopher M. Heywood and Thomas P.
Thackston.

Carol J. Banta, 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.
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Before: GINSBURG, Chief Judge, and ROGERS and TATEL,
Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: This case presents the following
question: may the Federal Energy Regulatory Commission hold
a gas pipeline and its customers to a rate settlement when all
parties but one agree to abrogate it? Under the circumstances of
this case, we conclude that it may.

I.
In the spring of 2002, two natural gas pipelines, Equitrans,
L.P. and Carnegie Interstate Pipeline Co., sought FERC’s
approval to merge their two companies. Fearing the merger
would lead to higher shipping rates, several parties objected. To
appease them, Equitrans proposed a settlement under which it
would maintain existing rates until at least March 31, 2005.
Following some adjustments, the protesting customers withdrew
their objections to the merger and endorsed the proposed
settlement.
But pleasing these shippers meant displeasing gas
producers. Under a prior settlement involving all parties to this
litigation, Equitrans had agreed to file a rate case proposing rates
to take effect no later than August 1, 2003. Claiming to have
accepted “significant rate concessions” in exchange for this
sunset, gas producers represented by the Independent Oil & Gas
Association of West Virginia (“IOGA”), a trade association,
insisted on maintaining the existing agreement’s rate case filing
deadline. They argued that the new proposal “would, for no
apparent consideration, terminate that obligation—
permanently.”
Under the Natural Gas Act, FERC must ensure that gas
rates are “just and reasonable.” 15 U.S.C. § 717c(a). “[I]n view
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of IOGA’s objections,” the Commission concluded that the
proposed rates fell short of that standard. See Equitrans, L.P.,
104 F.E.R.C. ¶ 61,008, at 61,018 (2003). FERC therefore
rejected the settlement, though it did approve the Equitrans-
Carnegie merger. Id. at 61,014. Although Equitrans and other
settlement proponents had encouraged FERC to sever IOGA
from the proceedings and approve the settlement as to all other
parties, the Commission explained that postponing general rate
litigation beyond the agreed-upon date would deprive IOGA of
the benefit of its bargain, thus undermining FERC’s policy of
encouraging rate settlements. See id. at 61,019. “[R]ejection of
this settlement,” the Commission declared, “will provide parties
assurance that when they bargain to reach a settlement it will not
be superceded by a later settlement, notwithstanding their
opposition,” except in truly “exceptional circumstances
justifying abrogation of the original settlement.” Id.
The jilted Equitrans customers—though not Equitrans and
Carnegie—sought rehearing. Sticking to its guns, FERC
reiterated that “[a]pproval of a settlement under the
circumstances presented here would risk undermining
confidence in the settlement process.” Equitrans, L.P., 106
F.E.R.C. ¶ 61,013, at 61,034 (2004). The prior settlement thus
remained in effect, requiring Equitrans to initiate new rate
litigation. Equitrans did so, and on September 1, 2004
(following a delay due to inadequate documentation in
Equitrans’s initial submission), new provisional rates took
effect, subject to refund, while the parties awaited a hearing in
Equitrans’s case. See Equitrans, L.P., 109 F.E.R.C. ¶ 61,214
(2004); Equitrans, L.P., 105 F.E.R.C. ¶ 61,407 (2003). For
some shippers, the new rates exceeded the old by more than fifty
percent.
Petitioners are Equitrans customers who sought severance
of IOGA and approval of the settlement. Pursuant to the Natural
Gas Act, 15 U.S.C. § 717r(b), and Administrative Procedure
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Act, 5 U.S.C. § 706, they now seek review of FERC’s rejection
of their position and denial of rehearing.

II.
In its brief, FERC questions petitioners’ standing to sue.
But when pressed at oral argument, FERC counsel stated, “I
don’t think I’d go so far as to withdraw [the standing argument],
but I will concede that my argument time might be better spent
on the merits.” A wise strategic decision, we think. By
exposing petitioners to higher provisional rates, FERC’s
rejection of the proposed settlement inflicted a concrete injury
that Commission-ordered refunds could correct, thus giving
petitioners standing to pursue their claims here. See Lujan v.
Defenders of Wildlife, 504 U.S. 555, 560 (1992) (identifying the
“irreducible constitutional minimum of standing” as (1) “injury
in fact,” (2) “a causal connection between the injury and the
conduct complained of,” and (3) likelihood that “the injury will
be redressed by a favorable decision” (internal quotation marks
omitted)).
Turning to the merits, we review FERC’s action under
familiar APA standards, overturning the disputed 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);
see also Sithe/Independence Power Partners, L.P. v. FERC, 165
F.3d 944, 948 (D.C. Cir. 1999). Although “[t]he Commission
must be able to demonstrate that it has made a reasoned decision
based upon substantial evidence in the record,” our review is
“highly deferential.” Id. at 948 (internal quotation marks
omitted). Indeed, with respect to rate settlements specifically,
we have described FERC’s discretionary standards as “quite
generous and flexible.” Arctic Slope Reg’l Corp. v. FERC, 832
F.2d 158, 164 (D.C. Cir. 1987). As petitioners see it, FERC
abused this discretion in two respects: the challenged orders
conflict with Commission precedent and FERC’s reliance on the
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first settlement to reject the second was unreasonable. Neither
argument is convincing.
Regarding FERC precedent, petitioners focus primarily on
Trailblazer Pipeline Co., 106 F.E.R.C. ¶ 61,034 (2004)
(“Trailblazer II”), in which the Commission severed an
objecting party and approved an otherwise undisputed
settlement, much as petitioners hoped FERC would do here. But
despite its name, Trailblazer II comes too late for petitioners,
because FERC decided it nine days after denying rehearing in
this case. Although agencies must either abide by their
precedent or provide a “reasoned explanation” for departing
from it, see Exxon Mobil Corp. v. FERC, 315 F.3d 306, 309
(D.C. Cir. 2003), we too follow precedent, and our case law
says, “We will not reach out to examine a decision made after
the one actually under review. . . . An agency’s decision is not
arbitrary and capricious merely because it is not followed in a
later adjudication.” MacLeod v. ICC, 54 F.3d 888, 892 (D.C.
Cir. 1995).
In footnotes and in their reply brief, petitioners cite several
authentic agency precedents—among others, Texas Gas
Transmission Corp., 98 F.E.R.C. ¶ 61,244 (2002), on reh’g, 99
F.E.R.C. ¶ 61,328 (2002), Wyoming Interstate Co., 92 F.E.R.C.
¶ 61,256 (2000), and an earlier decision involving the same
pipeline as Trailblazer II, i.e., Trailblazer Pipeline Co., 85
F.E.R.C. ¶ 61,345 (1998), on reh’g, 87 F.E.R.C. ¶ 61,110
(1999), on reh’g, 88 F.E.R.C. ¶ 61,168 (1999) (“Trailblazer I”).
As petitioners concede, however, none of these cases (nor for
that matter Trailblazer II) involved abrogation of any
preexisting rate filing obligation. Thus, petitioners’ precedent-
based argument stands or falls with their overall reasonableness
challenge. If FERC’s explanation for its action—that approving
the second settlement notwithstanding the first would violate its
pro-settlement policy—makes sense, then the challenged orders
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were not only justifiable in their own right, but also
distinguishable from Commission precedent.
We see nothing unreasonable in FERC’s decision. As
FERC explained, “The Commission . . . is concerned that the
[proposed] settlement would by its terms declare a previously
approved settlement of no force and effect, despite the objection
of a party to the earlier settlement.” 104 F.E.R.C. at 61,019. In
the order on rehearing, FERC elaborated:
Approval of a settlement under the circumstances presented
here would risk undermining confidence in the settlement
process. The Commission believes that a party to a rate
settlement generally should be able to rely upon the terms
and conditions of that settlement until a new rate case can
be conducted . . . . Parties to a settlement should not have
to worry that other parties to the settlement may, at a later
date, do an “end run” in a proceeding not involving the
subject matter of the settlement, and change the settlement
without all of the parties’ consent.
106 F.E.R.C. at 61,034. Like FERC, we think it obvious that
pipelines and their customers might hesitate to enter rate
settlements if a subset of settling parties could later pull the rug
out from under them. Accordingly, although petitioners point
out that approval of the proposed agreement here could have
brought significant benefits such as “rate certainty” and reduced
litigation costs, FERC hardly abused its discretion in holding
that a strong commitment to preexisting settlements would
better serve the public interest than allowing modifications over
the objection of one or more parties.
Nor did FERC act irrationally in concluding that IOGA had
legitimate grounds to insist on the rate filing obligation.
According to petitioners, separate adjudication of IOGA
members’ rates would have fully protected their interests, thus
removing any need for general rate litigation. Yet as FERC
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pointed out, “even if the IOGA members are not themselves
shippers on Equitrans’ or Carnegie’s system, these producers
have reserves located in a geographic region where they can
access Equitrans’ or Carnegie’s facilities as a path to market.”
104 F.E.R.C. at 61,019. Hence, the Commission explained, the
IOGA members’ interests go beyond their own direct shipping
rates. They also “have an interest in the rates that shippers who
purchase their gas pay for transportation service since . . . those
rates affect the producers’ netback.” Id.
We pause to translate. “Netback,” it seems, is oil and gas
argot for the effect of shipping costs on producer profits. As
producers upstream from the pipeline, IOGA members can
deliver gas to end users only if someone pays Equitrans’s rates.
Hence, whether they contract for shipping themselves or leave
that to a shipper or customer, the gas’s value at the source is the
“net” of the overall consumer price minus shipping costs.
Cf. ARCO Alaska, Inc. v. FERC, 89 F.3d 878, 883 (D.C. Cir.
1996) (explaining with respect to petroleum development that
“value at the wellhead goes up as transportation tariffs go down”
because “the wellhead price is a ‘netback’ from the price of the
oil delivered to a refiner”).
FERC has previously acknowledged that netback pricing
concerns give producers a valid interest in transportation rates
charged to third parties such as shippers and consumers. See,
e.g., Trailblazer I, 87 F.E.R.C. at 61,442 (describing a gas
producer’s ownership of “significant reserves located in a
geographic region where they are accessible to use [the
pipeline’s] system as a path to a market” as “sufficient to give
[the producer] a significant interest in [the pipeline’s] rates”).
In effect, so have we. In Arctic Slope, although we approved
FERC’s severance of the owner of “substantial possible and
proven oil reserves” from a settlement affecting rates on a
pipeline that constituted “the only possible method of transport”
for that owner’s oil, we did not do so on grounds that the owner
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lacked any interest in the shipping rates of settling parties. See
Arctic Slope, 832 F.2d at 160. Rather, making a point
comparable to FERC’s netback pricing theory, we emphasized
that “the settlement currently affects [the oil owner’s] interests,”
for the “level of bonus and royalty payments” the owner could
negotiate were “potentially affected by transportation costs in
bringing oil via [the pipeline] to market.” Id. at 160, 167; see
also id. at 164 n.10.
We readily admit that in other contexts, even apart from
Trailblazer II, FERC seems to have assigned less significance
to netback pricing concerns. In Trailblazer I, for example, while
recognizing a producer’s “substantial interest” in third-party
shippers’ rates, the Commission held that severance would
protect that interest, for the producer could structure its
transactions to take advantage of either its separate litigated rate
or rates charged to settling shippers, whichever was lower.
See 88 F.E.R.C. at 61,569. But again, neither Trailblazer I nor
any other case cited by petitioners involved conflict with a
previous settlement. Moreover, even assuming IOGA members
could likewise structure their dealings to avoid significant harm,
petitioners appear not to have raised this issue before the
Commission, so we may not consider it here. See 15 U.S.C. §
717r(b).
Simply put, petitioners signed an agreement calling for a
general rate case by a specified date, and the IOGA producers’
ownership of gas supplies upstream from the pipeline gave them
a reason, acknowledged in FERC precedent, to insist on that
deadline. That is enough to justify FERC’s action in this case.
Had petitioners wished to preserve the option of postponing the
rate case, they should never have agreed to the mandatory sunset
contained in the first settlement. Accordingly, we deny the
petition for review.
So ordered.