United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 17, 2009 Decided January 22, 2010
No. 08-1266
AMERICAN GAS ASSOCIATION,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,
INTERVENOR
On Petition for Review of Orders
of the Federal Energy Regulatory Commission
Andrew K. Soto argued the cause and filed the briefs for
petitioner.
Kathrine L. Henry, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Cynthia A. Marlette, General Counsel, and
Robert H. Solomon, Solicitor.
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Joan Dreskin, Timm L. Abendroth, and Daniel J. Regan
Jr. were on the brief for intervenor Interstate Natural Gas
Association of America in support of respondent.
Before: HENDERSON, ROGERS, and BROWN, Circuit
Judges.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: The Federal Energy Regulatory
Commission (FERC or the Commission) adopted extensive
revisions to its financial forms and reporting rules for
interstate natural gas pipelines. However, the Commission
declined to adopt petitioner’s request for additional and more
detailed reporting requirements for shipper-supplied gas for
pipeline operations. Petitioner, the American Gas
Association (AGA)—a national trade association of gas
utility companies—argues the Commission failed to engage
in reasoned decisionmaking, offering only conclusory and
unsupported explanations. Because the Commission failed to
respond to the reasonable concerns of a dissenting
Commissioner, we grant the petition for review.
I
Pursuant to its authority to ensure “[j]ust and reasonable
rates,” 15 U.S.C. § 717c(a), the Commission has substantial
discretion to prescribe rules and regulations concerning
“annual and other periodic or special reports,” and to
determine “the manner and form in which such reports shall
be made,” id. § 717i(a). FERC requires natural gas
companies to file either FERC Form No. 2 (Form 2), Annual
Report for Major Natural Gas Companies, 18 C.F.R. § 260.1,
or FERC Form No. 2-A (Form 2-A), Annual Report for
Nonmajor Natural Gas Companies, id. § 260.2. All natural
3
gas companies also must file FERC Form No. 3-Q (Form 3-
Q), Quarterly Financial Report of Electric Utilities, Licensees
and Natural Gas Companies, id. § 260.300.
After determining a pipeline’s existing rate is “unjust,
unreasonable, unduly discriminatory, or preferential,” FERC
is authorized to change the pipeline’s rates, either upon its
own motion or in response to a complaint. 15 U.S.C.
§ 717d(a). The Commission relies on investigations and
complaints under section 5 of the Natural Gas Act (NGA), id.,
to monitor pipeline rates, especially since the Commission no
longer reviews rates triennially, as it once did. See Pipeline
Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation Under Part 284 of the
Commission’s Regulations, and Regulation of Natural Gas
Pipelines After Partial Wellhead Decontrol, Order No. 636,
Jan. 1991–June 1996 FERC Stats. & Regs. Preambles
¶ 30,939 (1992), order on reh’g, Order No. 636-A, Jan.
1991–June 1996 FERC Stats. & Regs. Preambles ¶ 30, 950
(1992), order on reh’g, Order No. 636-B, 61 FERC ¶ 61,272
(1992) (Order 636); see also Complaint Procedures, Order
No. 602, 86 FERC ¶ 61,324, 1999 WL 177650, at *2 (1999)
(noting “[c]omplaints enable the Commission to monitor
activities in the marketplace and provide an early warning
system for identifying potential problems”). FERC or the
complaining customer has the burden of showing the existing
rate or practice is unjust or unreasonable and that the rate
proposed is just and reasonable. See, e.g., Transcon. Gas
Pipe Line Corp. v. FERC, 518 F.3d 916, 918 (D.C. Cir.
2008). Both rely on pipeline data reported on Forms 2, 2-A,
and 3-Q as the basis for initiating section 5 complaints and
satisfying their burden of proof. See, e.g., Pub. Serv. Comm’n
of NY v. Nat’l Fuel Gas Supply Corp., 115 FERC ¶ 61,299 at
62,072 (2006); Panhandle Complainants v. SW Gas Storage
Co., 117 FERC ¶ 61,318 at 62,540, 62,542 (2006). If the
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Commission or the complainant succeeds, FERC can order a
new just and reasonable rate to replace the existing one. See
15 U.S.C. § 717d(a).
II
In February 2007, the Commission opened an inquiry to
determine “whether the . . . annual and quarterly financial
forms provide[d] sufficient information to the public to
permit an evaluation of the filers’ jurisdictional rates, and
whether these forms should otherwise be modified to improve
their usefulness.” Assessment of Information Requirements
for FERC Financial Forms, 118 FERC ¶ 61,108, 2007 WL
494954, at *1 (2007). Seven months later, the Commission
proposed rules amending the financial reporting requirements
of natural gas companies. See Revisions to Forms,
Statements, and Reporting Requirements for Natural Gas, 72
Fed. Reg. 54,860 (proposed Sept. 20, 2007) (to be codified at
18 C.F.R. pts. 158, 260) (NOPR). The stated purpose of the
proposed amendments was to “provide pipeline customers,
state commissions, and the public the information they need
to assess the justness and reasonableness of pipeline rates.”
Id. at 54,860. Noting the decline in section 4 filings since the
elimination of triennial rate review, the Commission affirmed
its reliance on section 5 complaints and concluded a section 5
complainant “must have access to the information needed to
meet [the burden of proof].” Id. at 54,861. Specifically, the
Commission determined the data on Forms 2, 2-A, and 3-Q
“must be sufficient to support a complaint.” Id.
Pipelines consume fuel when they operate equipment that
transports gas through pipelines and in and out of storage
facilities, but they also incur a certain amount of lost-and-
unaccounted-for gas through leakage and meter errors. Years
ago, FERC required interstate pipelines to “unbundle” the
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transportation and sales components of their services and
separately state the rates and charges for the services they
provide. See Order 636. In the Commission’s view,
customers should only pay for the services they use. See
Panhandle Eastern Pipeline Co., 61 FERC ¶ 61,172 at 61,628
(1992). FERC generally allows pipelines to recover
separately the cost of fuel used to provide various services by
requiring customers to pay a fuel charge equal to a certain
fuel retention percentage.
In an earlier proceeding FERC asked whether fuel cost
recovery policies should be modified. See Fuel Retention
Practices of Natural Gas Companies, 120 FERC ¶ 61,255,
2007 WL 2758903 (2007). The Commission found pipelines
were retaining or carrying over enormous fuel costs ($711
million in 2005) beyond what was consumed, lost, or
unaccounted for. See id. at *3. The Commission, however,
declined to take any immediate action, instead stating it
would rely on section 5 complaints from pipeline customers
to monitor over-recovery. Fuel Retention Practices of
Natural Gas Companies, 125 FERC ¶ 61,213, 2008 WL
4962560, at *3 (2008).
In the NOPR here, the Commission noted that with
increased gas prices, the disposition of fuel has become an
important component of pipelines’ cost of transportation. See
NOPR, 72 Fed. Reg. at 54,865–66. The Commission
therefore proposed adding a new schedule to Forms 2, 2-A,
and 3-Q (new pages 521a and 521b) requiring pipelines to
report detailed information regarding the acquisition and
disposition of shipper-supplied gas. Id. at 54,866. The new
schedule, the Commission believed, would help users of the
Forms more readily determine whether pipelines are over-
recovering their revenue requirements. Under the proposed
rule, pipelines would be required to report: (1) the difference
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between the volume of gas received from shippers and the
volume of gas consumed in pipeline operations each month;
(2) the disposition of any excess gas and the accounting
recognition given to such disposition, including the basis of
valuing the gas and the specific accounts charged or credited;
and (3) the source of gas used to meet any deficiency and the
accounting recognition given to the gas used to meet the
deficiency, including the accounting basis of the gas and the
specific accounts charged or credited. Id. In addition, “in
order to provide more clarity for gas purchase activity,” the
Commission also proposed requiring pipelines, which had
previously only been required to report volumes of gas
purchases in the aggregate, to report the volumes applicable
to each of their gas purchase expense accounts. Id.
The Commission also acknowledged that additional
reporting might be necessary to protect pipeline customers
from cross-subsidization of discounted, negotiated, or
recourse rates. See. id. at 54,867. Although FERC permits
pipelines to discount their generally applicable rates where
competitive market conditions warrant, see 18 C.F.R.
§ 284.10(c)(5); see also United Distrib. Cos. v. FERC, 88
F.3d 1105, 1142 (D.C. Cir. 1996), and to negotiate
individualized rates, see Alternatives to Traditional Cost-of-
Service Ratemaking for Natural Gas Pipelines, 74 FERC
¶ 61,076 (1996), FERC regulations restrict pipelines’ ability
to charge a different fuel rate than the generally applicable
one established in the tariff. With respect to discounted rates,
pipelines cannot discount the fuel use component unless they
can demonstrate the relevant service does not use fuel. See,
e.g., Ozark Gas Transmission, LLC, 122 FERC ¶ 61,295,
2008 WL 825306, at *3 (2008). Moreover, under FERC’s
“negotiated rate” policy, pipelines cannot impose cross-
subsidized fuel costs on their existing, non-negotiated rate
customers. See generally Alternatives to Traditional Cost-of-
7
Service Ratemaking for Natural Gas Pipelines, 74 FERC
¶ 61,076. Instead, pipelines must bear the cost of any under-
recovery of their costs themselves. See Dominion
Transmission, Inc. v. FERC, 533 F.3d 845, 849 n.4 (D.C. Cir
2008). The Commission therefore proposed adding a new
schedule requiring pipelines to report the revenues and
volumes applicable to discounted and negotiated rate
services. See NOPR, 72 Fed. Reg. at 54,867. The
requirement, the Commission stated, would help customers
identify the level of services provided under each rate
schedule and thus protect them against cross-subsidization.
See id.
In its comments, petitioner agreed the proposed reporting
revisions would help parties assess whether pipeline rate and
fuel charges remained just and reasonable. See Comments of
the Am. Gas Ass’n at 3, Docket No. RM07-9-000 (Nov. 13,
2007). However, petitioner argued “greater clarity regarding
gas purchase and sales activities can be achieved.” Id. at 4.
Petitioner therefore requested that the Commission also
require the information on the new fuel schedule to be broken
out by function (e.g., transportation, storage, gathering) and
that pipelines be required to include, by function, the amount
of fuel waived or reduced as part of a discounted or
negotiated rate agreement. Id. at 5. This information,
petitioner argued, was necessary to help customers determine
whether pipelines were engaging in any inappropriate cross-
subsidization. Id.
The Commission rejected petitioner’s proposals, deciding
instead to adopt only the new reporting requirements
contained in the NOPR. See Revisions to Forms, Statements,
and Reporting Requirements for Natural Gas Pipelines,
Order No. 710, 73 Fed. Reg. 19,389 (proposed Mar. 21, 2008)
(to be codified at 18 C.F.R. pts. 158, 260) (Order 710). In
8
response to petitioner’s requests, the Commission stated that
“[t]he information broken out by function (e.g.,
transportation, storage, gathering, etc.) sought by AGA is
available in Form 2 at page 520,” id. at 19,391–92; that “[t]he
NOPR’s proposals are designed to provide needed
transparency but also to reflect a fair balance between the
need for the information and the additional burden on the
pipeline,” id. at 19,392; and that “[w]e believe that the new
schedules (pages 521a and 521b) proposed in the NOPR
reflect this balance,” id. Petitioner filed a timely request for
rehearing; the Commission once again declined to require the
additional information. See Revisions to Forms, Statements,
and Reporting Requirements for Natural Gas Pipelines, 123
FERC ¶ 61,278 at 62,702 (2008) (“Order 710-A,” and,
together with Order 710, the “Orders”). The Commission
balanced the need for greater transparency with the additional
burdens placed on pipelines, id. at 62,704, and decided the
exclusion of the additional data sought by petitioner would
not “preclude the Commission’s or customers’ ability to
assess the justness and reasonableness of pipeline rates,” id.
The Commission also rejected petitioner’s request for
functionalized data regarding the amount of fuel waived,
discounted, or reduced as part of a negotiated rate agreement,
deeming the request “unnecessary and burdensome.” Id.
Commissioner Wellinghoff dissented from the Order. See id.
at 62,708–09 (Wellinghoff, Comm’r, dissenting).
III
“We review FERC’s orders under the arbitrary and
capricious standard and uphold FERC’s factual findings if
supported by substantial evidence.” Fla. Mun. Power Agency
v. FERC, 315 F.3d 362, 365 (D.C. Cir. 2003); see 15 U.S.C.
§ 717r(b). In general, “judicial scrutiny under the [NGA] is
limited to assuring that the Commission’s decisionmaking is
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reasoned, principled, and based upon the record.” Penn.
Office of Consumer Advocate v. FERC, 131 F.3d 182, 185
(D.C. Cir. 1997) (internal quotation marks omitted). “A
passing reference to relevant factors, however, is not
sufficient to satisfy the Commission’s obligation to carry out
‘reasoned’ and ‘principled’ decisionmaking.” Mo. Pub. Serv.
Comm’n v. FERC, 234 F.3d 36, 41 (D.C. Cir. 2000). The
Commission must “fully articulate the basis for its decision.”
Id. (internal quotation marks omitted).
We recognize the Commission enjoys broad discretion to
invoke its expertise in balancing competing interests and
drawing administrative lines. See ExxonMobil Gas Mktg. Co.
v. FERC, 297 F.3d 1071, 1085 (D.C. Cir. 2002) (stating
FERC “has wide discretion to determine where to draw
administrative lines,” and thus courts “are generally unwilling
to review line-drawing performed by the Commission unless
a petitioner can demonstrate that lines drawn . . . are patently
unreasonable, having no relationship to the underlying
regulatory problem” (internal quotation marks omitted)); Pub.
Serv. Comm’n of the State of NY v. FPC, 543 F.2d 757, 806
(D.C. Cir. 1974) (noting that “a vital function delegated to the
Commission by the [NGA] is the maintenance of the balance
between producer, pipeline, and consumer interests at the
point of just and reasonable rates”). The Commission’s
discretion is, however, bounded by the requirements of
reasoned decisionmaking. See, e.g., Interstate Natural Gas
Ass’n of Am. v. FERC, 494 F.3d 1092, 1096 (D.C. Cir. 2007).
In cases where parties raise reasonable alternatives to the
Commission’s position, we have held that reasoned
decisionmaking requires considering those alternatives. See
Laclede Gas Co. v. FERC, 873 F.2d 1494, 1498 (D.C. Cir.
1989) (“[W]here a party raises facially reasonable alternatives
to FERC’s decision . . . the agency must either consider those
alternatives or give some reason, within its broad discretion
10
. . . for declining to do so.” (internal citation omitted)). We
have applied this requirement to include dissenting
commissioners. See Chamber of Commerce v. SEC, 412 F.3d
133, 137–38 (D.C. Cir. 2005). In Chamber of Commerce,
two dissenting commissioners of the Securities and Exchange
Commission (SEC) articulated a well-defined, serious option
that the majority ignored. We held the SEC’s failure to
consider the rulemaking alternative violated the
Administrative Procedure Act. Id. at 144. Although the SEC
would be excused for failing to consider an alternative that
was, “for whatever reason, unworthy of consideration,” the
alternative proposed by the dissenting commissioners was
“neither frivolous nor out of bounds.” Id. at 145. The SEC,
therefore, “had an obligation to consider it.” Id. (citing
Laclede Gas, 873 F.3d at 1498). While the SEC might
ultimately have decided the alternative did not sufficiently
serve the interests of the parties involved, we held the
commission nonetheless had a duty to “bring[] its expertise
and its best judgment to bear upon that issue.” Id.
Accordingly, while FERC is not required to agree with
arguments raised by a dissenting Commissioner, see id., it
must, at a minimum, acknowledge and consider them. The
Commission failed to do so here. Like the concerns raised in
Chamber of Commerce, the points raised by Commissioner
Wellinghoff were “neither frivolous nor out of bounds,” yet
the Commission provided no direct response.
With respect to the request to break out by function the
new information provided on pages 521 a/b, the Commission
noted some fuel information is broken out by function on
page 520 of Form 2. See Order 710-A, 123 FERC at 62,704.
Commissioner Wellinghoff, however, argued that is not
enough: “[U]nless Sheets 521 a/b are broken out by function,
a shipper cannot match the revenues generated by the sale of
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excess fuel with the functionalized costs.” Id. at 62,709
(Wellinghoff, Comm’r, dissenting). Thus, without the
additional functionalized data, customers cannot determine
whether pipelines are over-recovering their fuel costs for
particular functions and whether their rates are just and
reasonable. Id. (Wellinghoff, Comm’r, dissenting). As the
Commission acknowledged in Order 710, the purpose of the
rulemaking here was to “provide pipeline customers and the
public the information they need to assess the justness and
reasonableness of pipeline rates.” Order 710, 73 Fed. Reg. at
19,389. The dissent argued such an assessment is impossible
without accommodating petitioner’s requests, see Order 710-
A, 123 FERC at 62,709 (Wellinghoff, Comm’r, dissenting),
yet the Commission’s only response was that it had balanced
the burdens and benefits of petitioner’s request. See Order
710, 73 Fed. Reg. at 19,392; Order 710-A, 123 FERC at
62,704. The Commission apparently concluded the
objections of some pipelines to the burdens of additional
reporting were enough to justify rejecting petitioner’s
requests without further explanation. Nowhere in the Orders
did the Commission claim either that customers do not need
to be able to match excess fuel revenues with functionalized
costs or that customers already have enough information to do
so. Indeed, counsel for the Commission at oral argument
acknowledged the Commission “d[id] not address that
particular point.” Oral Arg. Recording at 18:12–15.
With respect to the request to break out by function the
amount of fuel waived, discounted, or reduced as part of a
negotiated rate, Commissioner Wellinghoff argued “it is
important to know the level of services provided under each
rate structure in order to protect against cross-subsidization.”
Order 710-A, 123 FERC at 62,709 (Wellinghoff, Comm’r,
dissenting). “[F]uel costs and revenues of the different types
of rate structures broken down by function,” he argued, “are
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critical to assessing the justness and reasonableness of the
pipeline’s fuel rates.” Id. (Wellinghoff, Comm’r, dissenting).
Thus, the dissent was concerned not only that pipelines are
over-recovering their excess fuel costs, but also that pipelines
are disadvantaging existing customers by forcing them to
subsidize negotiated and discounted rates provided to other
customers. While the Commission proffered several
justifications for its decision to reject petitioner’s request for
the additional discounted and negotiated rate data, the
Commission never mentioned cross-subsidization. The
Commission might reasonably have concluded existing data
reported on Form 2 adequately protect customers against
cross-subsidization, but the Commission failed even to make
that claim, instead choosing to ignore the dissent’s concern
entirely.
Finally, addressing the potential burden imposed on
pipelines by petitioner’s requests, Commissioner Wellinghoff
argued: “The pipeline maintains this information by function
in order to change its fuel rate either in a tracking mechanism
or its next section 4 rating filing, and to assure that its existing
customers are not subsidizing the negotiated rate program.
The increased burden is related solely to inputting the data in
the Form 2.” Id. (Wellinghoff, Comm’r, dissenting) (footnote
omitted). The Commission’s only statement regarding the
availability of the functionalized data was that “[i]t is unlikely
that all pipelines would have this information readily
available since many pipelines do not periodically file to
adjust fuel rates and may not keep records of this type of
information.” Id. at 62,704. The Commission said nothing
about how it reached that conclusion. The Commission thus
failed to acknowledge, much less substantively address, the
dissent’s point that pipelines do maintain the data requested.
Indeed, counsel for the Commission once again admitted the
majority “d[id] not respond specifically” to the point. Oral
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Arg. Recording at 20:00–05. According to its counsel, the
Commission was not obligated to respond since doing so was
not necessary to accomplish the purpose of the rulemaking,
which, counsel claimed, was to ensure pipelines were not
over-recovering for excess fuel costs. Our holdings in
Chamber of Commerce and Laclede Gas suggest otherwise:
Where a dissenting Commissioner raises a reasonable
alternative, the majority is obligated to consider it. See
Chamber of Commerce, 412 F.3d at 145; Laclede Gas, 873
F.2d at 1498.
Moreover, the Commission acknowledged in Order 710
that “it is important for the Commission and the pipeline
customer to know the level of services provided under each
rate schedule in order to protect against cross-subsidization
and to ensure that recourse rates remain just and reasonable.”
Order 710, 73 Fed. Reg. at 19,393–94. The Commission thus
recognized providing customers with additional information
to undergird section 5 complaints was necessary to protect
customers not only from fuel cost over-recovery, but also
from cross-subsidization. The dissent raised several concerns
related to cross-subsidization, yet the Commission responded
to none of them.
For the foregoing reasons, we grant the petition for
review and remand to the Commission for further
proceedings. On remand, the Commission may again
conclude the burdens of the additional reporting requirements
requested by petitioner outweigh their benefits, but the
Commission must do so in a reasoned decision that
acknowledges the concerns raised by the dissenting
Commissioner.
It is so ordered.