Williston Basin Interstate Pipeline Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 11, 2008 Decided March 18, 2008

No. 06-1145

WILLISTON BASIN INTERSTATE PIPELINE COMPANY,
PETITIONER

V.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

NORTHERN STATES POWER COMPANY (MINNESOTA), ET AL.,
INTERVENORS

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

Robert T. Hall, III, argued the cause for petitioner. With
him on the briefs was Andrea Wolfman.

Robert B. Nelson, Robert A. Jablon, and Rebecca
Baldwin were on the brief for intervenors Montana Consumer
Counsel and South Dakota Public Utilities Commission.

Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
 2

were John S. Moot, General Counsel, Robert H. Solomon,
Solicitor, and Patrick Y. Lee, Attorney.

Robert I. White was on the brief for intervenor Northern
States Power Company (Minnesota). Nancy A. White entered
an appearance.

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

Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

WILLIAMS, Senior Circuit Judge: Williston Basin
Interstate Pipeline Company challenges orders of the Federal
Energy Regulatory Commission that modified its contract
with a shipper, the Northern States Power Company (“NSP”),
so that NSP would be able to resell transportation capacity for
which it had no use. While we find that the Commission was
correct to decide the case under the “just and reasonable”
standard of § 5(a) of the Natural Gas Act (“NGA”), 15 U.S.C.
§ 717d(a), we grant Williston’s petition; flaws in the
Commission’s reasoning render its orders arbitrary and
capricious.

* * *

Williston stores and transports natural gas throughout
Montana, North Dakota, South Dakota, and Wyoming. NSP, a
natural gas distributor, is one of Williston’s customers and
operates in North Dakota and Minnesota. Williston and NSP
entered into two contracts under which NSP would receive
transportation services from Williston along a pipeline called
the Mapleton Extension, which Williston had built under
arrangement with NSP to carry gas to an NSP distribution
system in eastern North Dakota. One contract, the “Rate
 3

Schedule X-13 contract,” was filed as an individually
certificated transportation service under Part 157 of the
Commission’s regulations, 18 C.F.R. Pt. 157. The second
contract was for open access service under Williston’s Rate
Schedule FT-1 under Part 284, 18 C.F.R. Pt. 284. Under Part
284, firm shippers that do not use all of their capacity can
“release” the unused portion and enjoy the revenue paid by
the replacement shipper, either directly or as a credit to the
pipeline’s charges. See id. § 284.8(a)-(g).

At about the time that Williston and NSP finalized the
Rate Schedule X-13 contract, the Commission initiated a
rulemaking that would eventually yield Order No. 636. See
Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation
of Natural Gas Pipelines After Partial Wellhead Decontrol,
57 Fed. Reg. 13267 (Apr. 16, 1992). The order, so far as is
relevant here, encouraged pipelines and their customers to
convert transportation service under Part 157 to open access
service under Part 284. While the order offered pipelines
inducements to convert, it imposed no mandate to do so. See
United Distribution Cos. v. FERC, 88 F.3d 1105, 1159 (D.C.
Cir. 1996).

In the course of a rate proceeding filed by Williston under
NGA § 4, 18 U.S.C. § 717c, the Commission found that Part
157 service under Rate Schedule X-13, without capacity
release rights, was no longer just and reasonable, and
accordingly granted NSP’s request that the service be
converted to Part 284. Williston Basin Interstate Pipeline Co.,
113 FERC ¶ 61,201 (November 22, 2005) (“Order”).
Williston filed for rehearing, arguing principally that (1)
NSP’s request could be granted only if it satisfied the stricter
“public interest” standard rather than merely the “just and
reasonable” standard; (2) the Commission’s action was an
unexplained departure from its longtime policy of making
 4

conversions to open access transportation voluntary; and (3)
the Commission ignored the financial impact on Williston and
its customers. The Commission denied rehearing. Williston
Basin Interstate Pipeline Co., 115 FERC ¶ 61,081 (April 20,
2006) (“Rehearing Order”). Williston petitioned for review
under NGA § 19(b), 15 U.S.C. § 717r(b).

* * *

We review the Commission’s orders under the arbitrary
and capricious standard. 5 U.S.C. § 706(2)(A); see also
Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361,
1368 (D.C. Cir. 2004). That standard requires that the
Commission “examine the relevant data and articulate a
satisfactory explanation for its action including a ‘rational
connection between the facts found and the choice made.’”
Motor Vehicle Manufacturers Ass’n v. State Farm Mutual
Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington
Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962)).
The reasoning offered by the Commission falls short.

The “public interest” standard. Under the Mobile-Sierra
doctrine, “where parties have negotiated a natural gas
shipment contract that . . . denies either party the right to
change [] prices or charges unilaterally, [the Commission]
may abrogate or modify the contract only if the public interest
so requires.” Texaco Inc. v. FERC, 148 F.3d 1091, 1095
(D.C. Cir. 1998); see also United Gas Pipe Line Co. v. Mobile
Gas Service Corp., 350 U.S. 332 (1956) (establishing the
doctrine for natural gas pipelines); FPC v. Sierra Pacific
Power Co., 350 U.S. 348, 354-55 (1956) (same for power
transmission facilities). Williston contends that the
Commission should have applied that standard. The
Commission responds that the contract has a “Memphis
clause” displacing Mobile-Sierra.
 5

The label “Memphis clause” derives from the Supreme
Court’s decision in United Gas Pipe Line Co. v. Memphis
Light, Gas & Water Division, 358 U.S. 103 (1958), holding
that a contract provision allowing a party to seek a rate
adjustment under a suitable provision of the Natural Gas Act
(§ 4 for the utility, § 5 for the customer) obviates the need to
apply Mobile-Sierra’s “public interest” criterion. The
Memphis Court could see “no tenable basis of distinction
between the filing of [a new rate under § 4 of the NGA] in the
absence of a contract and a similar filing under an agreement
which explicitly permits it.” Id. at 112-13. Thus, a Memphis
clause simply entitles a party to file for changes under an
applicable provision of the NGA. See 358 U.S. at 115; see
also id. at 112, 114.

Here the contract, after providing that Williston could
apply to the Commission to make changes under § 4 of the
NGA, made a parallel provision for NSP, saying that the
agreement should not be construed as “in any way” affecting
NSP’s rights “to intervene, protest or otherwise participate in
such proceedings or to seek to initiate proceedings under
Section 5 of the Natural Gas Act, other provisions thereof, or
the FERC’s rules and regulations thereunder, or any other
applicable statute(s).” Williston Basin Interstate Pipeline
Company FERC Gas Tariff, Rate Schedule X-13, art. IX, Ex.
NSP-3 at 16, Joint Appendix (“J.A.”) 253.

Williston argues that while the provision here empowers
NSP to initiate proceedings under § 5 of the Natural Gas Act,
it fails to specify a controlling standard (and thus leaves
Mobile-Sierra’s “public interest” standard in place). But
Mobile-Sierra always leaves parties free to seek change under
its stringent standard. Thus, as we said in the case of a
contract similar to the one at issue here, which permitted
filings with the Commission but failed to specify a standard,
“specific acknowledgment of the possibility of future rate
 6

change is virtually meaningless unless it envisions a just-and-
reasonable standard.” Papago Tribal Utility Auth. v. FERC,
723 F.2d 950, 954 (D.C. Cir. 1983); see also Rehearing Order,
115 FERC ¶ 61,081 at 61,273 P 14 (noting that Williston’s
reading would render the clause “useless surplusage”).
Indeed, the clause at issue in Memphis itself made no mention
of the applicable standard, saying merely that gas was to be
delivered under the seller’s rate schedule “or any effective
superseding rate schedules, on file with the Federal Power
Commission.” 358 U.S. at 105 (italics omitted); see also id. at
114-15.

Williston next contends that the Commission was required
to apply the “public interest” test because the Commission
“did not merely adjust the rate or a term of the service, it
invalidated the contract and ordered [Williston] to enter into a
new and entirely different kind of contract and service with
NSP.” Petitioner’s Br. 18. In support, Williston relies on our
decision in ExxonMobil Corp. v. FERC, 430 F.3d 1166 (D.C.
Cir. 2005), where we accepted (as neither arbitrary or
capricious) the Commission’s finding that, despite the
presence of a Memphis clause, it could not apply the just and
reasonable standard to a pipeline’s proposal to shift certain
shippers from interruptible to firm service, a shift that would
have required them to pay a reservation charge. The
Commission explained that the pipeline’s plan would
effectively have required “the customer to take and pay for
additional service for which the customer has not contracted.”
Transco. Gas Pipe Line Corp., 107 FERC ¶ 61,156 at 61,508
P 17 (2004). We regarded the Commission’s conclusion as
within its discretion. ExxonMobil, 430 F.3d at 1173. But
whereas in ExxonMobil the proposed change would have
imposed the risk of pipeline underuse on customers not
hitherto bearing that risk, here the shift ordered by FERC
merely denies the adversely affected party (the pipeline) the
opportunity (or part of the opportunity) to garner additional
 7

revenue from replacement shippers. Although the
Commission may have walked a fine line, it is not one that we
could call arbitrary or capricious. Accordingly, we reject
Williston’s contention that the Commission erred in relying
on the just and reasonable standard of § 5.

Application of the just and reasonable standard. Under
§ 5’s “just and reasonable” standard the Commission bears the
burden of demonstrating that the current rate is unjust and
unreasonable and that the replacement rate is just and
reasonable. See Municipal Def. Group v. FERC, 170 F.3d
197, 201 (D.C. Cir. 1999); Consolidated Edison Co. v. FERC,
165 F.3d 992, 1000-01 (D.C. Cir. 1999). The Commission
has somewhat mischaracterized the issue at a number of
places in its orders and brief. In the Rehearing Order, for
example, it said, “What is unduly preferential and
unreasonable is for Williston to garner revenues from the sale
of the capacity NSP has paid for.” 115 FERC at 61,280 P 42.
In one sense, to be sure, Williston has been “garner[ing]
revenues from the sale of the capacity NSP has paid for”; NSP
indeed is paying for specified capacity, at rates calculated to
cover Williston’s costs. But NSP engaged the capacity under
Part 157, which allowed Williston, not NSP, the right to resell
unused capacity. Thus the contract favors Williston’s
position, not NSP’s, contrary to the Commission’s rhetoric.

Second, the Commission seems confused about the
relationship between its authority and its obligation to explain
its policy. It declared in the Rehearing Order that “it is
illogical [for Williston to argue] that the Commission has the
authority to order the conversion, but that it must justify its
exercise of that authority as a ‘new policy.’” Id. at 61,276 P
26; see also Respondent’s Br. at 28-29. Regardless of
whether the Commission’s policy is new (a matter we take up
below), a party is perfectly consistent in its reasoning when it
recognizes the Commission’s authority, yet demands that the
 8

Commission articulate the policy well enough so that parties
(and courts) can understand how it arrived at its result. That
proposition is almost universally true, but is especially true
here, where (1) the Commission’s leading statement of
relevant policy, Order No. 636, deliberately refrained from
imposing the mandate that it has imposed here, and (2) it is
undisputed that this is the first instance in which the
Commission has imposed such a mandate. See Rehearing
Order, 115 FERC 61,275-76 at P 25 (acknowledging that the
orders here are such a first).

In its request for rehearing, Williston challenged the
Commission to state what it regarded as the “appropriate
conditions” for moving from simply “favoring” shippers’
entitlement to capacity release rights to mandating such rights.
The Commission picked up the gauntlet:

Quite simply, [the appropriate] conditions were: [1] the
history of Williston’s aggressive interpretation of Rate
Schedule X-13, reflected in its mispricing of the rates
thereunder, [2] the unique fact of its affiliation with its
largest customer and the protection from transmission
competition [that] the vestigial X-13 arrangement offered
these entities, [3] the impairment of market health
resulting from this diminution of competition, and [4] the
rejection by the transporter of alternatives offered at
hearing for transitioning to open-access service from X-
13, which was the culmination of many years of rebuffing
the shipper’s request to negotiate such a transition. [5]
Since these elements in the aggregate evidenced
obstruction of the Commission’s policy favoring open-
access use of capacity by those who pay for it, the
appropriate conditions were presented for the
Commission to act in furtherance of that pro-competitive
goal. Accordingly, rehearing on the issue of conversion
of the X-13 service is denied.
 9

Id. at 61,280 P 45.

Points 1, 4 and 5 appear irrelevant. Point 1 seems to
suggest that Williston’s choice to litigate an adverse
Commission rate ruling somehow disentitles it to have its
position here examined on the merits. (We note that Williston
picked up a dissent in the litigation, Williston Basin Interstate
Pipeline Co. v. FERC, 215 F.3d 875, 880 (8th Cir. 2000),
which makes the Commission’s use of this red herring all the
more odd.) Point 4 (which is echoed in Point 5) seems, in
effect, to blame Williston for insisting on retaining the rights
that the Commission itself established under Part 157 and left
in place in Order No. 636. But a party’s resistance to an order
can hardly constitute affirmative grounds for issuing the
order; an agency’s loose claim of lèse majesté is not a
substitute for policy analysis. And Point 5 (insofar as it goes
beyond Point 4) repeats the Commission’s oversimplifying
remark that NSP has already paid for the capacity. True, but
its contract gave Williston the rights over unused capacity,
and the Commission formerly found that arrangement, and
Part 157 arrangements generally, just and reasonable.

This leaves Point 2, the fact that Williston’s largest
customer is its affiliate, and Point 3, the enhancement to
competition that would flow from shippers’ enjoying capacity
release. We take the affiliation to be relevant because, even in
a world of general open access, the affiliate would not
compete with Williston in the resale of unused pipeline
capacity. At the margin, that presumably enhances the
argument for shifting NSP to open access, as it means that the
competitive capacity resale market is smaller than one would
otherwise expect. But while we clearly see that a capacity
resale market with an abundance of independent resellers
would be more competitive than one dominated by the
pipeline, this was surely just as true when the Commission
adopted its general policy of not forcing conversion.
 10

Similarly, while the Commission consistently viewed
enhanced competition as a generic reason for a preference for
capacity release (since the policy’s adoption), it has never
hitherto found a case that justified ordering a pipeline to
convert at the request of a shipper. Because the general policy
preference has been a constant, the Commission’s failure to
identify the special characteristics applicable to Williston, or
to explicitly revise its policy, leaves a serious gap in its
reasoning.

The Commission decisions offered by Williston fall
somewhat short of showing a clear change in policy. We find
it hard to discern much of a policy at all. Williston calls our
attention to passages in Transcontinental Gas Pipe Line
Corp., 106 FERC ¶ 61,299 (2004), in which the Commission
rejected an effort of customers to convert certain service to
Part 284. Id. at 62,109-10 P 34, 62,111-12 P 44. But the case
appears distinguishable in that the pipeline offered testimony
indicating that the remedy “would compromise [the
pipeline’s] operation [sic] flexibility and its ability to perform
no-notice service in the manner in which it performs such
service today.” Id. at 62,111-12 P 44. If one thought that this
established a general principle that the Commission would
mandate conversions to Part 284 in the absence of operational
problems, one would be wrong. Elsewhere in the decision,
the Commission rejected such a mandate, even while noting
(and not refuting) the customers’ argument that the pipeline
had failed to show operational problems. Instead, it relied
heavily on exactly the point that Williston stressed here—that
in Order No. 636 the Commission had rejected the idea of
entitling Part 157 customers to receive capacity release rights.
Id. at 62,112-13 PP 49-53.

Williston cites Marathon Oil Co. v. Trailblazer Pipeline
Co., 111 FERC ¶ 61,236 (2005), for a more general
proposition—the Commission’s stated reluctance to override
 11

contracts even where Mobile-Sierra is inapplicable and a
party proposes action under § 5:

Absent a compelling reason, the Commission does not
believe it should second-guess the business and economic
decisions between knowledgeable business entities when
they enter into negotiated rate contracts. Pipelines rely on
their contracts and the integrity of the Commission’s
process in deciding whether to construct new facilities.
As such, the Commission is reluctant to upset the
expectations of pipelines when they make investment
decisions in reliance on the commitments by their
customers and the Commission’s approval.

Id. at 62,064 P 64. In the Rehearing Order, the Commission
responded to the citation by saying that here the facts
presented a “compelling reason,” 115 FERC at 61,276-77 P
29, but the only reason yet revealed is the ubiquitous interest
in enhancing competition. Moreover, as Williston notes
without dispute from the Commission, it built the Mapleton
Extension in reliance on its contracts with NSP, reliance
seemingly indistinguishable from the reliance the Commission
invoked in Marathon for refusing to alter the contract.

In short, however one characterizes prior policy, we do
not think the Commission has yet articulated a “rational
connection between the facts found and the choice made,” as
required by State Farm, 463 U.S. at 43.

Williston also argued that the order would be quite costly
for Williston and its customers. As to the customers, the
Commission said that until Williston filed a new rate case
there would be no effect on customers, see Order, 113 FERC
¶ 61,201 at 61,833 P 57. This is typically true, of course, but
is hardly a reason for refusing to anticipate looming
developments.
 12

As to the immediate impact on Williston, the
Commission said that conversion to open-access service
would yield a gain of approximately $402,000 to $695,000 per
year for NSP and a loss of only about $50,000 for Williston
(which it viewed as trivial). See Rehearing Order, 115 FERC
at 61,278 P 35. The Commission nowhere attempts to
reconcile these numbers. While there may be an implication
that NSP will reap more benefits than Williston would lose
because NSP will be a more aggressive marketer of the
capacity, the Commission doesn’t say so. Nor does it say that
Williston has been deceptively hiding resale revenues.

Williston offered an explanation—in effect that the
Commission was comparing apples to oranges: a comparison
of NSP’s gains from resale rights throughout Williston’s
pipeline system with Williston’s losses from NSP’s flexibility
on the Mapleton Extension only. In fact, as the administrative
law judge noted, a witness for Williston testified that the
$50,000 estimate depends only on the Mapleton Extension.
See Williston Basin Interstate Pipeline Co., 111 FERC
¶ 63,007 at 65,033 P 108 (2005).

The Commission has responded to this confusion (both
on rehearing and at oral argument) by reverting to its mantra
that the entitlement was in any event NSP’s: “[E]ven in the
unlikely event Williston’s estimates prove true, it is the
shipper and its customer who should receive the revenues,
since they are paying for the capacity.” Rehearing Order, 115
FERC at 61,278 P 35 n.58. This argument is no more
effective here than in its other incarnations. See p. 7 supra.

To the extent that a mandated change would adversely
affect shippers, another Williston argument may be relevant.
Williston points to documents that it says indicate that it and
NSP shared the understanding that Williston’s existing
shippers would not bear the costs of building the extension,
 13

Ex. WBIP-1 at 4, J.A. 299; Ex. WBIP-10, J.A. 301, and Ex.
WBIP-11, J.A. 309, and indeed that Williston would benefit
from any capacity that NSP was not fully using, as of course
Part 157 allowed. In the present confusion on the cost shift
data, we take no position on these claims.

Finally, the Commission in one passage seems to invoke
the notion that “other cost reductions” may offset the
“reallocation of the Rate Schedule X-13 costs.” Rehearing
Order, 115 FERC at 61,279 P 38. But unless the
Commission’s edict somehow enabled such cost reductions,
the prospect seems quite irrelevant.

The last issue is Williston’s argument that the
Commission erroneously decided to continue NSP’s right to
exercise a right to biennial rate adjustments established by the
Rate Schedule X-13 contract; Williston says this denial gave
NSP an undue preference, as its other Part 284 customers (to
whom the Commission’s orders would assimilate NSP) have
no such right. The Commission, rejecting Williston’s claim,
explained that “[its] intent was to preserve as much of the
parties’ original agreement as possible, while according NSP
the ability to release capacity and other features of Part 284
service that are accorded FT shippers.” Id. at 61,280 P 43
The Commission also said that “it is reasonable … to maintain
the biennial restatement process, because the X-13 rate always
was intended to converge with the FT-1 rate.” Id. at 61,278 P
35.

Of course, the Commission, if it had wished, could have
preserved the entire agreement between Williston and NSP, so
its sudden effort to wrap itself in the sacred character of
contracts sounds a bit lame. In reality the Commission seems
to be saying that it wants to preserve as much of the parties’
original agreement as possible, subject to its greater desire to
shift the capacity release revenues to NSP. It may be that the
 14

Commission’s decision can rest exclusively on the
“convergence” argument alluded to just above, but the
Commission never developed the point, and in any event,
when an agency relies on two theories, one of them unsound,
we usually remand unless we are quite sure that the agency
regards the remaining reason as sufficient. See National Fuel
Gas Supply Corp. v. FERC, 468 F.3d 831, 839 (D.C. Cir.
2006).

* * *

Because there seems to be a significant possibility that
the Commission may find an adequate explanation for its
actions, and, in any event, it appears that the consequences of
its current ruling can be unraveled if it fails to, see Allied-
Signal v. United States Nuclear Regulatory Comm’n., 988
F.2d 146, 150-51 (D.C. Cir. 1993), we remand the case to the
Commission but do not vacate the orders.

So ordered.