Columbia Gas Transmission Corp. v. Ederal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 6, 2006 Decided February 13, 2007

No. 05-1285

COLUMBIA GAS TRANSMISSION CORPORATION AND
COLUMBIA GULF TRANSMISSION COMPANY,
PETITIONERS

V.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

CHARLOTTESVILLE, VIRGINIA AND
RICHMOND, VIRGINIA,
INTERVENORS

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

Barbara K. Heffernan argued the cause for petitioners.
With her on the briefs were Debra Ann Palmer, William S.
Lavarco, Stephen R. Melton, Kurt L. Krieger, and David P.
Sharo.

Beth G. Pacella, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
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the brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.

Before: GARLAND and BROWN, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

WILLIAMS, Senior Circuit Judge: Columbia Gas and
Columbia Gulf (“Columbia”), petitioners here, entered into
agreements with several local distribution companies
according to which the latter received discounted service on
the condition that they waive certain rights under the Natural
Gas Act (the “Act”). Columbia filed the discounted rate
agreements with the Federal Energy Regulatory Commission,
which rejected them and held that Columbia either had to
refile them as negotiated rate agreements or remove the
waivers. Columbia petitioned for rehearing, and FERC
denied the petition.

We deal here with two sets of issues. First, the
Commission argues that we do not have jurisdiction to
consider arguments that Columbia did not make in its petition
for rehearing. We reject this jurisdictional challenge and treat
all of Columbia’s arguments as properly before us. Second,
we review Columbia’s assertions that FERC’s orders are
inconsistent with its precedents and that its determinations are
otherwise arbitrary or capricious. We reject these challenges
and affirm the Commission’s orders.

* * *

Columbia Gas and Columbia Gulf are natural gas
companies that provide various services under Commission-
approved tariffs, including the transportation and delivery of
 3

natural gas. Both companies entered into agreements to serve
three large local distribution companies—Mountaineer Gas
Company, The Cincinnati Gas & Electric Company, and The
Union Light Heat & Power Company—at discounted rates
(collectively, the “discount shippers”). In addition to offering
the discounts, Columbia waived its right under § 4 of the Act,
15 U.S.C. § 717c, to seek Commission approval for an
increase in rates to be charged the discount shippers, and
promised that they would receive the benefit of any
Commission-approved reduction in the discounted rates.
Reciprocally, the discount shippers agreed to waive their right
under § 5 of the Act, 15 U.S.C. § 717d, to challenge any of
Columbia’s rates as unjust or unreasonable. Importantly, the
§ 5 waivers covered not only the discounted rates but also
precluded the discount shippers from challenging the rates for
any of Columbia’s services.

FERC initially rejected the agreements, Columbia Gulf
Transmission Corp., 109 F.E.R.C. ¶ 61,152 (2004) (“Initial
Order”), on two grounds. First, it said that § 5 waivers were
not appropriate in discount agreements but could be included
only in negotiated rate agreements. (Columbia customers who
intervened before the Commission argued that the distinction
between discount agreements and negotiated rate agreements
was substantive and not semantic. If they were discount
agreements, the intervenors argued, Columbia could have
sought a “discount adjustment” in its next tariff filing and
thereby possibly recovered the discount’s cost from
Columbia’s other customers. If they were negotiated rate
agreements, this cost-recovery opportunity would have been
unavailable. Our disposition doesn’t require us to sort this
out.) Independently, FERC objected to the scope of the
agreements’ § 5 waivers. FERC noted that it had previously
approved such waivers when they applied only to the
discounted rates and services, not, as in these agreements, to
both discounted and non-discounted rates. In accordance with
 4

the Commission’s order, Columbia removed the § 5 waivers
from the agreements, but petitioned for rehearing, attacking
both of the Commission’s reasons.

FERC denied the petition for rehearing, but marshaled
slightly different reasons. Columbia Gulf Transmission
Corp., 111 F.E.R.C. ¶ 61,338 (2005) (“Rehearing Order”).
The Commission continued to maintain that the discount
shippers’ § 5 waivers were impermissibly broad; it reasoned
that a pipeline should not be permitted “to condition the
offering of a discount for one service for which a shipper may
have competitive alternatives on limiting the shipper’s section
5 rights to challenge the pipeline rates for other services over
which the pipeline does have market power.” Id. at 62,507
P 14. It also argued that Columbia behaved discriminatorily
by offering discounts to (and extracting waivers from) only its
largest customers. This would disadvantage the small fry,
which, according to the Commission, might lack the resources
to bring § 5 challenges on their own but would be denied the
benefit of challenges by the large discount shippers (who
would not be bringing challenges at all). Id. at 62,507 PP 15–
16. Columbia filed a timely petition for review.

* * *

FERC argues that we lack jurisdiction to consider
Columbia’s arguments addressed to Commission justifications
that emerged for the first time in the Rehearing Order.
Section 19(a) of the Act, 15 U.S.C. § 717r(a), requires that a
party petition FERC for rehearing before it challenges a
Commission order in court. Section 19(b) goes on to say that
“[n]o objection to the order of the Commission shall be
considered by the court unless such objection shall have been
urged before the Commission in the application for rehearing
unless there is reasonable ground for failure so to do.” 15
 5

U.S.C. § 717r(b). We have frequently remarked on the
strictness of the jurisdictional provisions in the Act. See, e.g.,
ASARCO, Inc. v. FERC, 777 F.2d 764, 774 (D.C. Cir. 1985).
The Commission argues that Columbia’s petition for
rehearing did not address FERC’s concerns about market
power and undue discrimination and that, consequently, we
may not consider any such arguments now. Of course the
reason Columbia hadn’t attacked those arguments in its
petition for rehearing is plain: FERC hadn’t yet revealed
them. FERC argues, however, that § 19 conditions
Columbia’s ability to attack those justifications in court on its
having advanced its critiques in a second petition for
rehearing.

Our cases support the Commission’s claim only up to a
point. Where the Commission on rehearing changes its actual
order adversely to the petitioner—not merely the reasoning—
it is commonly treated as having issued a new order. While a
party may challenge the new order in court without a new
petition for rehearing, such a challenge can attack only the
original adverse provisions, not the new sources of complaint.
See Canadian Ass’n of Petroleum Producers v. FERC, 254
F.3d 289, 296–97 (D.C. Cir. 2001); Town of Norwood v.
FERC, 906 F.2d 772, 774–75 (D.C. Cir. 1990). Here FERC
reached exactly the same result in the Rehearing Order; it
simply marshaled new arguments to support the old outcome.
In such a case, we have held, FERC “does not thereby
transform its order denying rehearing into a new ‘order’
requiring a new petition for rehearing before a party may
obtain judicial review.” Southern Natural Gas Co. v. FERC,
877 F.2d 1066, 1073 (D.C. Cir. 1989). Thus, when a party
proceeds to court in such situations, it may have a “reasonable
ground” for not having earlier raised its objections to the
rationale underpinning the rehearing order. Id. at 1072.
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We adopted this approach in Southern Natural because
“[o]therwise, we would ‘permit an endless cycle of
applications for rehearing and denials,’ limited only by
FERC’s ability to think up new rationales.” Id. at 1073
(quoting Boston Gas Co. v. FERC, 575 F.2d 975, 978 (1st Cir.
1978)). We applied the same reading of § 19 in Washington
Water Power Co. v. FERC, 201 F.3d 497, 501 (D.C. Cir.
2000).

The principle of Southern Natural and Washington Water
is that when a party filing a petition for rehearing was not on
notice of the rationale that FERC would adopt in the rehearing
order, the party has a “reasonable ground” for not having
addressed that rationale in its petition and accordingly may do
so for the first time in court. And a party is on notice only of
ideas that FERC has addressed in the initial order with
reasonable specificity, but not of ones to which the
Commission has only alluded vaguely. See Southern Natural,
877 F.2d at 1072.

We note that the exhaustion requirement in § 19(b) of the
Act is, on its face, similar to provisions in other statutes. See
Washington Ass’n for Television and Children v. FCC, 712
F.2d 677, 682 & n.6 (D.C. Cir. 1983) (noting that some
statutes, such as the National Labor Relations Act (“NLRA”),
explicitly permit exceptions based on “extraordinary
circumstances” and inferring such an exception in the
Communications Act’s exhaustion requirement, 47 U.S.C.
§ 405). Yet cases under the Natural Gas Act and the Federal
Power Act, such as Southern Natural and Washington Water,
find a “reasonable ground” for failure to exhaust more readily
than decisions under the NLRA, the Communications Act or
kindred provisions, where we regularly reject the excuse that
the agency came up with the justification under attack only in
its ultimate decision; the challenger’s remedy, we say, is to
seek rehearing. See, e.g., Washington Ass’n, 712 F.2d at 683;
 7

Epilepsy Foundation of Northeast Ohio v. NLRB , 268 F.3d
1095, 1101–02 (D.C. Cir. 2001). A possible explanation for
the apparent anomaly is that the Natural Gas Act and the
Federal Power Act require a petition for rehearing before any
judicial relief, so that the petitioner has by definition already
been through two rounds of agency process. This gives some
force to Southern Natural’s concern about an “endless cycle.”
Exhaustion indeed! We have found no cases addressing the
application of conventional exhaustion requirements to an
agency explanation that emerged only on rehearing.

For each of Columbia’s arguments, we will consider
whether FERC’s Initial Order placed Columbia on notice of
the rationales that the Commission eventually adopted in the
Rehearing Order.

* * *

Columbia claims that FERC contravened its own
precedents when it decided that the § 5 waivers were overly
broad. Since Columbia raised the objection in its petition for
rehearing, we clearly have jurisdiction. We review under the
arbitrary or capricious standard of the Administrative
Procedure Act, 5 U.S.C. § 706(2)(A). See ANR Pipeline Co.
v. FERC, 71 F.3d 897, 901 (D.C. Cir. 1995). Importantly, we
also defer to the Commission’s interpretations of its own
precedents. See Cassell v. FCC, 154 F.3d 478, 483 (D.C. Cir.
1998).

In the Rehearing Order, FERC explained “the
Commission’s general policy of restricting the use of [§ 5
waiver] clauses to relatively narrow situations.” Rehearing
Order at 62,508 P 20. FERC has made similar statements
before. See Algonquin Gas Transmission, LLC, 111 F.E.R.C.
¶ 61,003 at 61,006 P 9 (2005) (“[T]he Commission has been
 8

particularly reluctant to sanction a NGA section 5 waiver
provision in a particular transaction, where the customer
waives its NGA section 5 rights not only as to the rate for its
particular transaction at issue, but as to the pipeline’s rates for
all services.”). The Commission acknowledged that it had
approved broader § 5 waivers in other cases, including
Algonquin, but it distinguished those cases. As to two cases
that Columbia says involved broad § 5 waivers—Vector
Pipeline, 85 F.E.R.C. ¶ 61,083 (1998), reh’g denied, 87
F.E.R.C. ¶ 61,225 (1999), and Alliance Pipeline, 80 F.E.R.C.
¶ 61,149 (1997), modified in part, 84 F.E.R.C. ¶ 61,239, reh’g
denied, 85 F.E.R.C. ¶ 61,331 (1998)—FERC noted that in
those cases there was no significant discussion of the waiver
issue and that in any event the rates in question were
“available to all shippers desiring the rates during the
subscription phase of the project,”1 so that the cases didn’t
involve the market power or discrimination issues posed by
Columbia’s agreements. Rehearing Order at 62,508 n.25.

As to Algonquin itself, the Commission pointed to
features of that case sharply reducing the risk of
discrimination: Algonquin had offered to execute such
agreements with all similarly situated customers, and it had
balanced the § 5 waivers by the customers with a pipeline
agreement not to seek any generally applicable rate increases
under § 4. Rehearing Order at 62,507 P 17. Columbia has not

1
We infer that FERC emphasizes the subscription phase, when
a pipeline firm is seeking commitments from potential customers
for a new pipeline, on the ground that then a pipeline’s market
power is relatively low: potential shippers will have either the
alternative of continuing to use their then-current carriers, or, if they
have no current carrier because they haven’t yet constructed
facilities to use the proposed service, of choosing to locate their
facilities elsewhere if they decline the proposed new service.
 9

undercut these alleged distinctions, so we have no reason to
find that the Commission has diverged from its precedents.

Columbia’s second objection pertains to FERC’s
economic rationale justifying a restriction on the scope of § 5
waivers. FERC essentially argued that companies like
Columbia should not be allowed to exploit market power and
demand § 5 waivers with respect to rates that are not the
subject of discounts. Rehearing Order at 62,506–07 P 14. In
response, Columbia maintains that all of the rates—
discounted and non-discounted—are interrelated, so that relief
under § 5 for one rate entails changes in all others. Because
Columbia didn’t object to the market power rationale in its
petition for rehearing, we must consider whether the Initial
Order adequately placed Columbia on notice of the rationale it
now attacks. At a high level of abstraction, the Initial Order
did discuss FERC’s concern about discount agreements and
the breadth of the § 5 waivers. But the Rehearing Order
introduced a new basis for concern—the fear that in markets
where shippers had alternatives (i.e., competitive markets)
pipelines would bargain for advantages aimed at defeating
shippers’ regulatory protections in non-competitive markets.
See id. Because FERC first advanced the market power
argument in the Rehearing Order, Columbia is not
jurisdictionally barred from urging an objection here.

Although the objection is properly before us, it is
unavailing. As a preliminary matter, we note that Columbia
first articulated its objection in a footnote in its opening brief,
a dubious practice. United States v. Whren, 111 F.3d 956, 958
(D.C. Cir. 1997). Furthermore, the argument in the opening
brief acquires a completely contradictory form by the time it
arrives at the reply brief. Initially Columbia argued that the
rates for various services rise and fall together. Petitioners’
Br. at 28 n.30 (arguing that if a petitioner were to prevail on a
§ 5 complaint with respect to the rate for one service, the rates
 10

for all other services would correspondingly fall). By
contrast, the reply brief styles ratemaking as a “zero sum”
game, so that if “the costs allocated to one service are reduced
. . . the costs allocated to other services necessarily increase.”
Reply Br. at 15–16. But it is not “the court’s duty to identify,
articulate, and substantiate a claim for the petitioner,”
National Exchange Carrier Ass’n v. FCC, 253 F.3d 1, 4 (D.C.
Cir. 2001), and we decline to do so here. FERC has
articulated a market power rationale that isn’t transparently
defective, and Columbia hasn’t marshaled a coherent critique
(it never developed either of the two contradictory theories).
So we cannot find the Commission’s conclusion arbitrary or
capricious. See 5 U.S.C. § 706(2)(A).

Finally, Columbia argues that FERC erroneously decided
that Columbia’s agreements with large shippers are unduly
discriminatory against small shippers. In exchange for
discounts on certain rates, the large shippers waived their right
to challenge the rate structure or the “recourse rates.”
Rehearing Order at 62,507 P 15. (The latter are the traditional
cost-of-service rates in the pipeline’s tariff, for which a
shipper may always opt in default of an attractive negotiated
rate. Northern Natural Gas Co., 105 F.E.R.C. ¶ 61,299 at
62,442 P 3 (2003)). FERC reasoned that because small
shippers often don’t have the resources to mount § 5
challenges, Columbia’s agreements with large shippers
significantly insulated its rate structure from challenges.
Because the Commission didn’t advance this rationale about
small shippers until the Rehearing Order at 62,508 P 20,
Columbia is not jurisdictionally barred from objecting here.

On the merits of the claim, Columbia fares less well. It
attacked FERC’s logic by noting that even if § 5 waivers are
narrow in scope, large shippers will not challenge other rates
unless the expected benefit of the challenge outweighs the
discount. Furthermore, Columbia observed that the interests
 11

of large and small shippers often are not parallel, meaning that
small shippers do not necessarily benefit from large shippers’
§ 5 challenges. But to say that FERC’s preservation of the
large shippers’ right to bring challenges is an imperfect
protection for small shippers’ interests is a far cry from
establishing that the benefits of FERC’s policy are
outweighed by its drawbacks. Columbia does not challenge
FERC’s basic theory that the broad § 5 waivers impede the
readiness of large shippers to bring challenges that might also
benefit small shippers. To the extent that the agreements at
issue here likely operate to the detriment of small shippers at
the margin, the Commission’s logic is sound. We see no basis
for concluding that FERC’s rationale is arbitrary or
capricious.

* * *

For the foregoing reasons, we uphold the Initial and
Rehearing Orders against all challenges by Columbia.

So ordered.