United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 18, 2011 Decided January 17, 2012
No. 08-1349
FREEPORT-MCMORAN CORPORATION, ET AL.
PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
EL PASO ELECTRIC COMPANY, ET AL.,
INTERVENORS
Consolidated with 10-1277, 10-1325
On Petitions for Review of Orders of
the Federal Energy Regulatory Commission
Barbara S. Jost argued the cause for petitioner Freeport-
McMoRan Corporation. With her on the briefs was Adam S.
Caldwell.
Kenneth M. Minesinger argued the cause for petitioner El
Paso Natural Gas Company. With him on the briefs were
Howard L. Nelson, Richard C. Green, Francesca E. Ciliberti,
Craig V. Richardson, and David Cain.
2
Jonathan J. Newlander, John R. Ellis, Keith T. Sampson,
Stuart A. Caplan, Frank R. Lindh, Harvey Y. Morris, James
H. McGrew, and Steven A. Weiler were on the joint briefs of
intervenors in support of petitioner El Paso Natural Gas
Company. Jerry F. Coffey and Mary F. McKenzie entered
appearances.
Lona T. Perry, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the briefs were Michael A. Bardee, General
Counsel, Robert H. Solomon, Solicitor, and Beth G. Pacella,
Senior Attorney.
John P. Gregg, David W. D'Alessandro, Douglas M.
Canter, Lisa S. Novins, Keith A. Layton, James F. Moriarty,
Thomas E. Knight, Barbara S. Jost, Adam S. Caldwell,
Douglas O. Waikart, Wendy B. Warren, David S. Shaffer, Joel
L. Greene, and Elizabeth B. Teuwen were on the joint briefs
of intervenors in support of respondent. Jennifer L. Brough,
Marie D. Zosa, and Kelly A. Daly entered appearances.
Kenneth M. Minesinger, Howard L. Nelson, Richard C.
Green, Francesca E. Ciliberti, Craig V. Richardson, David
Cain, John R. Ellis, Jonathan J. Newlander, and Steven A.
Weiler were on the briefs for intervenors in support of
respondent.
Before: ROGERS, GARLAND, and BROWN, Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: El Paso Natural Gas Company
(“El Paso”) operates an interstate pipeline that transports
natural gas to California and other western states, and
Freeport-McMoRan Corporation (“Freeport”) ships gas on El
3
Paso’s pipeline to power its various mining, smelting, and
refining facilities. They mount separate challenges to several
orders the Federal Energy Regulatory Commission (the
“Commission” or “FERC”) issued in connection with El
Paso’s 2005 rate filing and subsequent settlement. We deny
the petitions for review.
I
When it converted from bundled sales services to
transportation services in 1990, El Paso agreed to sell pipeline
capacity through full requirements (“FR”) contracts and
contract demand (“CD”) contracts. In an FR contract, El Paso
agreed to provide a shipper with as much capacity as it
needed, and in return, the shipper agreed to purchase all of its
capacity from El Paso. In a CD contract, El Paso agreed to
provide a shipper with a certain amount of capacity, and the
shipper was free to purchase additional capacity elsewhere.
The roots of this particular dispute stretch back a decade-
and-a-half. In 1996, as a result of California’s efforts to
deregulate the electricity industry, El Paso’s California-based
shippers relinquished, or “turned back,” their capacity rights,
leaving roughly 35% of El Paso’s total capacity unsubscribed.
The unsubscribed capacity—known as “turnback capacity”—
threatened to dramatically increase El Paso’s costs and its
shippers’ rates.
To spread the risk that El Paso would be unable to re-sell,
or “remarket,” the turnback capacity, the Commission
approved a settlement between El Paso and its remaining
shippers (the “1996 Settlement”), which established El Paso’s
terms and conditions of service through December 31, 2005.
For the first eight years of the Settlement term, the shippers
would bear 35% of the fixed costs relating to the turnback
4
capacity, while El Paso would credit back to its shippers 35%
of the revenue it generated from remarketing that capacity.
For the last two years of the Settlement term, El Paso would
bear all of the costs relating to turnback capacity, but would
keep all of the revenue it generated from remarketing.
In addition to its risk-sharing provisions, the 1996
Settlement limited the rates El Paso could charge its
remaining shippers. Article 3 of the Settlement capped the
rates El Paso could charge during the ten-year Settlement
term. And—critically, for the purposes of this case—Article
11.2 capped the rates El Paso could charge after the
Settlement term ended to any shipper “with a [contract] that
was in effect on December 31, 1995, and that remain[ed] in
effect, in its present form or as amended, on January 1, 2006.”
El Paso Natural Gas Co., 132 FERC ¶ 61,155, para. 5 n.4
(2010).
Four years after entering into the 1996 Settlement, El
Paso’s capacity surplus became a shortfall. Energy demand
grew rapidly and El Paso had no difficulty remarketing the
turnback capacity. Simultaneously, El Paso’s FR shippers
began demanding much more capacity. Unable to satisfy the
demands of all of its shippers with its available capacity, El
Paso invoked a provision in its operative tariff that permitted
pro rata curtailments. The routine use of those curtailments
disrupted service and prompted shippers to file complaints
against El Paso.
The Commission responded by instituting a Capacity
Allocation Proceeding and issuing a series of orders between
2002 and 2004 (the “CAP Orders”). Without faulting El Paso
or the FR shippers for the predicament, the Commission
determined that El Paso’s regular use of pro rata curtailments
was not just and reasonable, and invoked its authority under
5
the Mobile-Sierra doctrine “to proscribe contractual
arrangements that contravene the relevant public interests.”
United Distrib. Cos. v. FERC, 88 F.3d 1105, 1131 (D.C. Cir.
1996). It directed El Paso to reserve the capacity it needed to
satisfy its existing CD contracts, and allocate all remaining
capacity—including turnback capacity not under CD
contract—to the former FR shippers whose contracts were
converted to CD contracts with specific contract demand
limits. The Commission found that eliminating the
unpredictability of the FR contracts would “resolve the
current uncertainty on El Paso’s system and assure that firm
shippers receive[d] the firm service to which they [were]
entitled.” El Paso Natural Gas Co., 99 FERC ¶ 61,244,
61,997 (2002).
The Commission revised portions of the 1996 Settlement
to implement the CAP Orders, rejected calls from some
shippers to abrogate the Settlement entirely, and chose to
leave the Settlement’s rate caps intact. Shippers unhappy
with the conversion of their FR contracts filed petitions for
review of the CAP Orders, which we denied, finding
“substantial evidence of capacity curtailments on El Paso’s
mainline severe enough to render firm service unreliable and
thus justify Commission action.” Arizona Corp. Comm’n v.
FERC, 397 F.3d 952, 954 (D.C. Cir. 2005) (“ACC v. FERC
I”).
In June 2005, El Paso filed a general, system-wide rate
case (the “2005 Rate Case”), proposing rates that would go
into effect after the 1996 Settlement term ended on December
31, 2005. As part of its filing, El Paso sought to charge rates
above the Article 11.2 rate cap to shippers protected by that
provision on the ground that the provision had been abrogated
by the CAP Orders. The Commission suspended the
proposed rate increase and stated Freeport’s claim that El
6
Paso had previously withheld capacity would not be part of its
analysis of El Paso’s rates. El Paso Natural Gas Co., 112
FERC ¶ 61,150, para. 31 n.26 (2005) (the “2005 Order”).
Then, after holding two technical conferences, the
Commission issued an order on March 20, 2006, concluding
the CAP Orders had not abrogated Article 11.2. El Paso
Natural Gas Co., 114 FERC ¶ 61,290 (2006) (the “March
2006 Order”). In addition, the Commission determined
Article 11.2 limited the rates El Paso could charge former FR
shippers that had converted to CD shippers under the CAP
Orders, but did not limit the rates El Paso could charge for
capacity it had added to its system after the 1996 Settlement.
With rehearing requests for the March 2006 Order
pending, El Paso and its shippers filed a proposed settlement
on December 6, 2006 (the “2006 Settlement”). The
Settlement proposed “black box” rates—rates not based on El
Paso’s actual costs—that were lower than the proposed rates
in the 2005 Rate Case, and that would remain in effect
through December 31, 2008. The Settlement did not resolve
the outstanding questions relating to Article 11.2. Instead, it
provided that the Commission would rule on those issues in
its rehearing of the March 2006 Order, and would implement
its rulings after the 2006 Settlement term expired at the end of
2008. The Commission approved the Settlement over
Freeport’s objections in August 2007. El Paso Natural Gas
Co., 120 FERC ¶ 61,208, para. 1 (2007).
In September 2008, the Commission issued its order on
rehearing of the March 2006 Order. El Paso Natural Gas
Co., 124 FERC ¶ 61,227 (2008) (the “September 2008
Order”). It affirmed that Article 11.2 remained in effect and
limited the rates El Paso could charge its former FR shippers.
And it clarified that Article 11.2 capped the rates El Paso
could charge for turnback capacity it had allocated to its
7
former FR shippers under the CAP Orders. After the
Commission denied requests to rehear the September 2008
Order, El Paso Natural Gas Co., 132 FERC ¶ 61,155 (2010)
(the “August 2010 Order”), and denied Freeport’s request to
rehear the approval of the 2006 Settlement, El Paso Natural
Gas Co., 132 FERC ¶ 61,139 (2010), both El Paso and
Freeport petitioned for review of the March 2006, September
2008, and August 2010 Orders, and Freeport alone petitioned
for review of the 2005 Order and denial of rehearing, see El
Paso Natural Gas Co., 116 FERC ¶ 61,016 (2007), as well as
the Commission’s orders relating to the 2006 Settlement.
II
Predictably, El Paso and Freeport challenge FERC’s
orders from opposing perspectives. El Paso contends the
Commission erred by finding the CAP Orders had not
abrogated Article 11.2, and by applying Article 11.2 too
broadly. Freeport is one of several intervenors opposing those
arguments. Freeport, for its part, claims the Commission
erred by applying Article 11.2 too narrowly and by approving
the 2006 Settlement. El Paso is one of many intervenors
opposing those arguments.
We review the challenged orders “under the arbitrary and
capricious standard and uphold [the Commission]’s factual
findings if supported by substantial evidence.” Sacramento
Mun. Util. Dist. v. FERC, 616 F.3d 520, 528 (D.C. Cir. 2010).
We afford a “high degree of deference” to the Commission’s
interpretation of settlement provisions, Transcontinental Gas
Pipe Line Corp. v. FERC, 485 F.3d 1172, 1178 (D.C. Cir.
2007), and “substantial deference to the Commission’s
interpretations of its own regulations,” Bluestone Energy
Design, Inc. v. FERC, 74 F.3d 1288, 1292 (D.C. Cir. 1996).
8
With those liberal standards in mind, we turn to the
petitioners’ claims.
A
In the 2005 Rate Case, El Paso argued the CAP Orders
abrogated Article 11.2 by fundamentally altering the bargain
underlying the 1996 Settlement. The Orders required El Paso
to allocate all capacity not under CD contract to its former FR
shippers, effectively preventing the remarketing of certain
turnback capacity. Because the opportunity to profit from
remarketing was the central benefit of the 1996 Settlement, El
Paso claimed it should not be constrained by the central
burden of the Settlement—the Article 11.2 cap. The
Commission’s rejection of that argument was reasonable.
Initially, the Commission urges us to find El Paso’s
argument untimely because El Paso only raised it during the
2005 Rate Case, not during the Capacity Allocation
Proceeding. The Commission asserts “‘the entire 1996
Settlement, including Article 11.2, was under Commission
review in the Capacity Allocation Proceeding,’” and El Paso
“‘should have known or realized the Commission’s decision
to modify the 1996 Settlement in a limited manner and to
keep the remaining provisions, including Article 11.2, would
impact El Paso in future rate proceedings.’” FERC Br. 17–18
(quoting August 2010 Order, 132 FERC ¶ 61,155, at paras.
85–86).
But the Commission sang a different tune during the
Capacity Allocation Proceeding itself. When certain parties
asked it to abrogate the 1996 Settlement because the
Settlement terms would produce rates that were not just and
reasonable, El Paso Natural Gas Co., 104 FERC ¶ 61,045,
paras. 91–92 (2003), it rejected those requests as beyond the
9
scope of the Proceeding. As it explained in the March 2006
Order, the Proceeding “was narrowly focused on restoring
reliability to El Paso’s system,” so the “continued
applicability of Article 11.2 after the expiration of the
remaining terms and conditions of the Settlement was not at
issue in that case.” March 2006 Order, 114 FERC ¶ 61,290,
at para. 15. The Commission even assured the parties during
the Proceeding that El Paso’s next rate filing (i.e., the 2005
Rate Case) would “provide the opportunity to review the
justness and reasonableness of the rates and practices on El
Paso’s system.” El Paso Natural Gas Co., 104 FERC ¶
61,045, at para. 93. Now that El Paso has accepted that
invitation to contest the applicability of the Article 11.2 rate
cap in the 2005 Rate Case, the Commission can hardly claim
the argument is untimely.
On the merits of El Paso’s argument, the Commission
found the CAP Orders had neither changed the bargain
underlying the 1996 Settlement nor abrogated Article 11.2.
Although the Orders may have prevented El Paso from
generating revenue through remarketing turnback capacity,
“El Paso’s ability to remarket . . . was always subject to its
contractual obligation under the FR customers’ [contracts] to
use the [turnback] [c]apacity to serve the FR customers.”
September 2008 Order, 124 FERC ¶ 61,227, at para. 33. In
the Commission’s telling, by allocating turnback capacity to
the FR shippers in the CAP Orders, it merely enforced the
obligations El Paso already had when it entered into the 1996
Settlement. Id.
That reasoning is sound. As we observed in our earlier
review of the CAP Orders, following the 1996 Settlement,
“the FR shippers remained free, as the name ‘full
requirements’ suggests, to insist that El Paso meet their full
requirements.” ACC v. FERC I, 397 F.3d at 954. And
10
nothing in the 1996 Settlement allowed El Paso to prioritize
remarketing turnback capacity above using that capacity to
satisfy its obligations to the FR shippers. Although El Paso
may have entered into the 1996 Settlement with the hopes of
profiting from remarketing, the Settlement did not guarantee
El Paso that outcome.
El Paso disputes its contractual obligation to allocate
turnback capacity to its FR shippers. If such an obligation
existed, why didn’t the Commission simply enforce it, rather
than “chang[ing] the risk sharing provisions and terminat[ing]
FR service” in the Capacity Allocation Proceeding? El Paso
Br. 17. But the Commission could not have simply ordered
El Paso to satisfy its existing obligations—El Paso did not
have enough capacity. The very purpose of the Capacity
Allocation Proceeding (as its name suggests) was to
determine how best to allocate the available capacity on El
Paso’s system between the competing demands of its
shippers, while preserving as much of the 1996 Settlement as
possible. See September 2008 Order, 124 FERC ¶ 61,227, at
para. 35.
A provision in effect during the 1996 Settlement required
expansion of the El Paso system only if it was “economically
justified.” El Paso Natural Gas Co., 104 FERC ¶ 61,045, at
para. 100. El Paso contends the Commission negated that
provision. In El Paso’s view, “[i]f the FR shippers could
simply ‘grow into’ . . . existing capacity for free, the provision
effectively requiring them to pay for expansions to serve their
growth would have been practically meaningless.” El Paso
Br. 18. El Paso’s argument misconstrues the “economically
justified” phrase. That language did not require FR shippers
to pay for expansions to serve any growth in their demand
following the 1996 Settlement; it only prevented the FR
shippers from insisting that El Paso engage in economically
11
infeasible expansions to increase the amount of available
capacity. Thus, once the FR shippers had demanded all of the
available capacity on El Paso’s system, they had a choice
between paying to make expansion economically feasible for
El Paso, and not paying El Paso and shipping less than their
full requirements. They chose the second option, see El Paso
Natural Gas Co., 104 FERC ¶ 61,045, at para. 103 n.103, but
that choice did not compel El Paso to pursue an economically
unjustified expansion of its system.
Finally, El Paso maintains the Commission’s reasoning
contravenes the “central purpose” of the 1996 Settlement,
which was to “give [El Paso] the maximum incentive to
remarket” turnback capacity, not reserve that capacity for the
future use of the FR shippers. El Paso Br. 19. That may well
have been the parties’ motivation in 1996, when energy
demand was relatively low and the FR shippers feared they
would be stuck shouldering a large bill for El Paso’s unsold
turnback capacity. But energy demand grew rapidly in the
following years, and while the FR shippers were partially
insulated from the costs of unsold turnback capacity, they
were fully entitled under their contracts to demand that
turnback capacity for themselves. El Paso’s quarrel is with
the vicissitudes of the energy market and the nature of its FR
contracts, not with the Commission’s refusal to abrogate
Article 11.2.
B
Having upheld the Commission’s determination that
Article 11.2 remains in effect, we now turn to the petitioners’
arguments about the Commission’s application of that
provision. There are five such arguments: three from El Paso
that the Commission applied Article 11.2 too broadly, and
two from Freeport that the Commission applied Article 11.2
12
too narrowly. None of these arguments overcome the “high
degree of deference” we afford to the Commission’s
interpretation of settlement provisions. Transcontinental Gas,
485 F.3d at 1178.
1. The Commission reasonably determined the converted
FR contracts were “amended” within the meaning of that
term in Article 11.2. The Article 11.2 rate cap applies “to any
firm Shipper with a [contract] that was in effect on December
31, 1995, and that remains in effect, in its present form or as
amended, on January 1, 2006, but only for the period that
such Shipper has not terminated such [contract].” August
2010 Order, 132 FERC ¶ 61,155, at para. 5 n.4 (emphasis
added). In the March 2006 Order, the Commission
determined the CAP Orders “amended” the FR contracts in
effect on December 31, 1995, by converting to them to CD
contracts. 114 FERC ¶ 61,290, at para. 39. Accordingly, the
Commission found Article 11.2 limited the rates El Paso
could charge the former FR shippers. Id.
El Paso protests that the Commission’s ruling stretches
the meaning of “amended” too far. An amendment, El Paso
submits, is generally understood to require the consent of both
parties to a contract, and it never agreed to convert the FR
contracts to CD contracts. But this was not a typical situation.
While both parties to an agreement traditionally must agree to
amend it, the Commission can unilaterally modify contracts
between private parties under the Mobile-Sierra public
interest doctrine. See Atlantic City Elec. Co. v. FERC, 295
F.3d 1, 14 (D.C. Cir. 2002). In this context, the Commission
reasonably could interpret “amended” in Article 11.2 to
include modifications it imposed without the parties’
agreement.
13
El Paso also contends the CAP Orders could not possibly
have “amended” the FR contracts because the Orders
dramatically altered the contractual relationship between El
Paso and its shippers. El Paso’s premise is that an
“amendment” can only be a minor revision to a contract, but it
cites no authority for that view. Although amendments may
often be minor, we perceive no reason they must be.
Moreover, “minor” is in the eye of the beholder: the
Commission argues the CAP Orders merely effectuated
contractual terms El Paso could no longer meet.
El Paso’s strongest point is that the Commission itself
labeled the converted contracts as “new CD contracts” in the
CAP Orders. See, e.g., El Paso Natural Gas Co., 104 FERC ¶
61,045, paras. 17, 31, 53, 165; El Paso Natural Gas Co., 100
FERC ¶ 61,285, paras. 1–2, 5–6 (2002). That gives us pause.
But the Commission also frequently referred to “converting,”
El Paso Natural Gas Co., 99 FERC ¶ 61,244, at 62,003,
62,007, 62,008–09 (2002), or “modifying,” El Paso Natural
Gas Co., 104 FERC ¶ 61,045, at paras. 1, 42–43, 98, 105
(2003), the FR contracts in the CAP Orders, so its ruling that
the CAP Orders “amended” the FR contracts is consistent
with many of its prior characterizations. More importantly,
the Commission’s ruling is a reasonable interpretation of the
Settlement language. That is enough to sustain the ruling
given the substantial deference we afford the Commission’s
“reading of a settlement agreement even where the issue
simply involves the proper construction of language.”
Transcontinental Gas Pipe Line Corp. v. FERC, 922 F.2d
865, 869 (D.C. Cir. 1991).
2. The Commission reasonably determined Article 11.2
applied to turnback capacity. Article 11.2 “applies to any
firm Shipper with a [contract] that was in effect on December
31, 1995 . . .,” and prohibits El Paso from “charg[ing] a rate
14
applicable to service under such [contract]” that exceeds a
certain level. August 2010 Order, 132 FERC ¶ 61,155, at
para. 5 n.4. The Commission found that “the focus of [Article
11.2] is the service obligation under the eligible [contract],
not the capacity used to meet that obligation.” September
2008 Order, 124 FERC ¶ 61,227, at para. 53. As a result, it
concluded that the Article 11.2 rate cap applied to any
demands for service under contracts that were in effect on
December 31, 1995, even if El Paso used turnback capacity to
satisfy those demands. Id.
El Paso takes issue with that ruling, but we are not
persuaded by its concerns. It claims the 1996 Settlement
permitted it to “charge rates for the turnback capacity with no
restriction on its right to seek FERC approval of rate increases
for such capacity after 2005.” El Paso Br. 28. But the
Settlement did not guarantee El Paso the right to charge
higher rates for turnback capacity. Instead, the 1996
Settlement allowed El Paso to charge higher rates for
turnback capacity if it remarketed that capacity. When El
Paso had to use turnback capacity to satisfy the demands of its
FR shippers under contracts covered by Article 11.2, its right
to charge more for that capacity gave way to its contractual
obligations.
3. The Commission reasonably found the applicable rate
cap for turnback capacity was determined by the shipper’s
delivery point. The 1996 Settlement established different rate
caps for different geographic zones. El Paso argued before
the Commission that the California rate cap (the highest cap)
should apply to the turnback capacity allocated to former FR
shippers because that capacity had been turned back by
California shippers. The Commission rejected that argument,
holding that the delivery point of the shipper now using the
15
capacity should determine the rate cap. September 2008
Order, 124 FERC ¶ 61,227, at para. 62.
Nothing in the 1996 Settlement labels the turnback
capacity as “California capacity” forevermore. Hence, the
Commission, in accord with its normal practice, could
reasonably base rates on the “rate applicable to the new
shipper’s receipt points, not the rate that the former shipper
paid.” Id. Although El Paso seizes on the Commission’s
reference to “rates” instead of rate caps, El Paso fails to
explain why that distinction renders the Commission’s ruling
arbitrary. From the record before us, we see no reason why
the Commission’s standard approach for determining rates
should not apply to determining rate caps.
4. The Commission reasonably found Article 11.2 did not
apply to capacity created by the Line 2000 project. The
Commission found Article 11.2 did not limit the rates El Paso
could charge for capacity it had added after the 1996
Settlement through the Line 2000 and Power Up projects.
March 2006 Order, 114 FERC ¶ 61,290, at para. 69. The
Commission reasoned that because El Paso had no obligation
under the 1996 Settlement to expand its system unless it was
“economically justifiable,” it should be able to recover the full
cost of its expansion projects. Id. at para. 68.
Freeport concedes Article 11.2 does not apply to
expansion capacity, and admits the Power Up project added
capacity to the El Paso system. But the company claims the
Line 2000 project was a “replacement and reliability project,”
not an expansion project. Freeport Br. 42. As such, Freeport
argues the Commission should have applied the Article 11.2
rate cap to the Line 2000 capacity.
16
Freeport’s characterization of Line 2000 as a
“replacement project” relies on two documents: El Paso’s
Line 2000 project application and the Commission’s approval
order. Read in their entirety, however, these documents
support the Commission’s position. In its application, El Paso
stated that when it first proposed the project in 2000, it
intended to use the new capacity to replace capacity on one of
its older pipelines, but after the energy crisis worsened in late
2000, it chose to convert the project from a replacement
project to an expansion project. El Paso then explained
repeatedly, and in great detail, how the project would add 230
million cubic feet per day (MMcf/d) of capacity to its system.
As for the approval order, the Commission’s observation that
the project was “not intended to serve new market
requirements above customers’ existing contractual
requirements” was consistent with its later ruling that the
project expanded capacity. El Paso Natural Gas Co., 95
FERC ¶ 61,176, 61,575 (2001). When the approval order was
issued, El Paso lacked sufficient capacity to accommodate the
demands of its FR shippers. Thus, the Line 2000 project
could expand capacity with the goal of satisfying “existing
contractual requirements.” See id. at 61,574–75 (“[B]y
providing more capacity to the system, the project will serve
to benefit El Paso’s existing customers”).
Alternatively, Freeport argues the Line 2000 project only
replaced capacity that the Commission permitted El Paso to
reserve to manage “transients”—unpredictable increases in
pipeline usage. That claim overlooks the Commission’s
determination in the CAP Orders that “El Paso, like all
pipelines, must reserve capacity to manage transients,” and
the capacity El Paso reserves is not “available system
capacity.” El Paso Natural Gas Co., 104 FERC ¶ 61,045, at
paras. 78, 80. Because the Line 2000 project increased the
amount of available capacity on El Paso’s system, the
17
Commission reasonably characterized it as providing
“expansion capacity” not subject to the Article 11.2 rate cap.
5. The Commission reasonably adopted the presumption
that the capacity of El Paso’s system on December 31, 1995
was 4000 MMcf/d. Apart from the rate cap it imposes, Article
11.2 prohibits El Paso from including in its rates “any cost,
charge, surcharge, component, or add-on in any way related to
the capacity of its system on December 31, 1995, to deliver
gas on a forward haul basis to [eligible] [s]hippers . . . that
becomes unsubscribed or is subscribed at less than” the
applicable Article 11.2 cap rate. August 2010 Order, 132
FERC ¶ 61,155, at para. 5 n.4. In the March 2006 Order, the
Commission adopted the presumption that “the first 4000
MMcf/d of firm subscribed capacity on El Paso’s system is
1995 capacity” for the purposes of Article 11.2. 114 FERC ¶
61,290, at para. 60. That presumption “ensure[d] that El Paso
must have [4000 MMcf/d of] subscribed capacity at
maximum rates . . . before it can propose to include the cost of
unsubscribed or discounted capacity in the rates of eligible
shippers.” September 2008 Order, 124 FERC ¶ 61,227, at
para. 98.
Freeport contends the Commission should have engaged
in fact-finding instead of adopting a presumption. In its
request for rehearing of the March 2006 Order, Freeport
argued the Commission’s presumption skewed the intended
effect of Article 11.2 by conflating the amount of capacity on
El Paso’s system in 1995 with the actual capacity on the
system at that time. An example may help illustrate the
distinction. Assume that El Paso had 4500 MMcf/d of
capacity on its system in 2005, and that all of that capacity
was fully subscribed at maximum rates. Then, assume a
shipper with a contract in effect in 1995 relinquished 350
MMcf/d of capacity. Applying the Commission’s
18
presumption, El Paso could include the costs of all 350
MMcf/d of that unsubscribed capacity in its rates without
running afoul of Article 11.2, because it still had more than
4000 MMcf/d of capacity subscribed at maximum rates. But
if Article 11.2 prevented El Paso from charging for
unsubscribed capacity that was actually on the system in
1995, then it could not include any of the costs of the 350
MMcf/d in its rates. To address that issue, Freeport requested
a hearing in which the Commission would develop a way to
differentiate between pre-1995 and post-1995 capacity.
The Commission rejected that request because El Paso
“operates its system as an integrated whole,” and thus
“market[s] undifferentiated capacity which cannot be
physically attributed to pre-1995 or post-1995 capacity.”
September 2008 Order, 124 FERC ¶ 61,227, at para. 98. In
light of that limitation, the Commission found it reasonable to
adopt the 4000 MMcf/d presumption because El Paso “only
had that much capacity on its system” at the time of the 1996
Settlement. Id.
Freeport has not challenged the Commission’s ruling that
it was impossible to distinguish between pre- and post-1995
capacity, and the Commission could reasonably decline to
conduct a fact-finding hearing in the absence of a genuine
disputed issued. And while Freeport claims the
Commission’s adoption of a 4000 MMcf/d presumption was
arbitrary because it underestimated the amount of capacity on
El Paso’s system in 1995, the Commission’s decision in that
regard was reasonable as well. The Commission adopted the
4000 MMcf/d presumption based on the parties’ joint
representation—in the “Offer of Settlement” for the 1996
Settlement—that the capacity of El Paso’s system at that time
was “slightly more than 4000 MMcf/d.” March 2006 Order,
114 FERC ¶ 61,290, at para. 60. Because the Commission
19
intended for the presumption to reflect the parties’
expectations when they entered into the 1996 Settlement, it
reasonably chose to derive the presumption from the parties’
joint statement on the Settlement, rather than from El Paso’s
independent representations in other unrelated filings.
C
We come at last to the 2006 Settlement between El Paso
and its shippers. Freeport was the only shipper to contest the
Settlement, and it claims the Commission’s approval of the
Settlement over its objections was procedurally and
substantively infirm. We disagree.
As a procedural matter, the Commission may only
address the merits of a contested offer of settlement “if the
record contains substantial evidence upon which to base a
reasoned decision or . . . there is no genuine issue of material
fact.” 18 C.F.R. § 385.602(h)(1)(i). Freeport submits the
Commission did not satisfy this requirement because it
improperly excluded evidence relating to a disputed issue—El
Paso’s culpability for withholding capacity during the energy
crisis of 2000 and 2001.
This is the latest round in a long bout over the “capacity
withholding evidence.” In 2000, the California Public
Utilities Commission (“CPUC”) filed a complaint with the
Commission alleging El Paso had driven up the price of
natural gas by withholding available capacity on its pipeline.
In 2002, an administrative law judge found in the CPUC’s
favor. See Pub. Utils. Comm’n of Cal. v. El Paso Natural
Gas Co., 100 FERC ¶ 63,041 (2004). But in a subsequent
order approving a settlement between El Paso and its shippers
on market power issues, the Commission vacated the ALJ’s
finding because the settlement and the CAP Orders had
20
absolved El Paso of any capacity withholding liability. Pub.
Utils. Comm’n of Cal. v. El Paso Natural Gas Co., 105 FERC
¶ 61,201, at para. 60 (2003). The Commission affirmed that
ruling on rehearing, stating it had addressed El Paso’s
capacity withholding liability “in the Capacity Allocation
Proceeding [by] declining to find fault for the capacity
problems on El Paso Pipeline’s system.” Pub. Utils. Comm’n
of Cal. v. El Paso Natural Gas Co., 106 FERC ¶ 61,315, at
para. 51 (2003).
Various parties petitioned for review. Their “chief
concern” was that failing to challenge the Commission’s
ruling that it had addressed El Paso’s capacity withholding
liability in the CAP Orders would mean they were “estopped
from arguing in the subsequent rate proceeding that El Paso
acted to withhold capacity on its pipeline.” Arizona Corp.
Comm’n v. FERC, 168 F. App’x 447, 448 (D.C. Cir. 2005)
(“ACC v. FERC II”). In a brief judgment, we held petitioners’
claim was not ripe unless and until they raised the capacity
withholding argument in the 2005 Rate Case. Accordingly,
we dismissed the petition “without prejudice to the ability of
the petitioners to argue in [the 2005 Rate Case] that neither
the Commission’s orders in the Capacity Allocation
Proceeding, nor the decision of this court in [ACC v. FERC I],
precludes the argument that El Paso caused the capacity
shortfall in 2000–01 by . . . withhold[ing] capacity.” Id. And
we assured the petitioners that if “the Commission later
preclude[d] [them] from raising arguments they have raised in
the proceeding under review, they may seek redress in this
court at that time.” Id.
Which brings us back to the present case. Freeport
sought to introduce evidence relating to the capacity
withholding argument during the 2005 Rate Case, and the
Commission initially excluded that evidence because it was
21
“irrelevant” to the rate-setting issues currently before it. El
Paso Natural Gas Co., 120 FERC ¶ 61,208, at para. 22. The
Commission later clarified that it had excluded the evidence
not only because it was irrelevant, but also because Freeport
was collaterally estopped from raising El Paso’s capacity
withholding liability by the CAP Orders. El Paso Natural
Gas Co., 132 FERC ¶ 61,139, at paras. 49–61.
Freeport now contends the Commission’s collateral
estoppel determination violates ACC v. FERC II. That is not
so. Our limited ruling there was that our dismissal of
Freeport’s petition could not be used by the Commission in
the subsequent rate case as new evidence of preclusion. By
dismissing the petition “without prejudice,” we took no
position on whether Freeport should be allowed to make its
argument in the next rate case. ACC v. FERC II, 168 F.
App’x at 448. Indeed, we stated that the question of
Freeport’s ability to make the capacity withholding argument
“should not be resolved” unless it arose in the next rate case,
and that if the question did arise, we could then review the
Commission’s determination. Id. That scenario has come to
pass, and our review of the Commission’s collateral estoppel
finding—a finding Freeport does not meaningfully dispute on
the merits—reveals no error.
As for Freeport’s substantive challenge, we find the
Commission’s approval of the Settlement appropriate under
the so-called second Trailblazer approach. That approach
permits the Commission to approve a contested settlement if
“the contesting party would be in no worse position under the
terms of the settlement than if the case were litigated,” and
“the overall result is just and reasonable, even if some of the
aspects of the settlement are problematic and might not
warrant approval outside the context of the settlement.”
Trailblazer Pipeline Co., 87 FERC ¶ 61,110, 61,439 (1999).
22
Here, the Commission examined the proposed settlement at
length and concluded it met both requirements: it provided
Freeport with a host of “real and substantial benefits” that
outweighed any potential gains from litigation, particularly
because Freeport’s litigation strategy relied heavily on the
capacity withholding evidence the Commission already had
excluded; and it produced an overall result that was just and
reasonable for El Paso and all of its shippers. El Paso
Natural Gas Co., 132 FERC ¶ 61,139, at paras. 87–102. The
Commission’s approval of the 2006 Settlement thus fell
within the substantial “breadth of discretion” it enjoys in this
area. Arctic Slope Reg’l Corp. v. FERC, 832 F.2d 158, 164
(D.C. Cir. 1987).
III
Because the Commission’s orders are not arbitrary or
capricious, the petitions for review are
Denied.