Colorado Interstate Gas Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 5, 2009 Decided March 26, 2010

No. 08-1243

COLORADO INTERSTATE GAS COMPANY,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

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

Howard L. Nelson argued the cause for petitioner. With
him on the briefs was Kenneth M. Minesinger. Stephanie D.
Neal entered an appearance.

Robert M. Kennedy, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Cynthia A. Marlette, General Counsel, and
Robert H. Solomon, Solicitor.

Before: GARLAND and GRIFFITH, Circuit Judges, and
EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GRIFFITH.
 2

GRIFFITH, Circuit Judge: Petitioner, Colorado Interstate
Gas Company (CIG) operates a natural gas pipeline that
includes a gas storage facility in Fort Morgan, Colorado. An
accidental leak at the Fort Morgan facility led to the loss of a
substantial amount of gas, which CIG asked its shippers to
replace. The shippers refused, and the Federal Energy
Regulatory Commission (FERC) took their side in the orders
on review. FERC held that under its tariff CIG could only
recover from its shippers gas that was lost in the course of
normal pipeline operations, which this was not. We deny
CIG’s petition for review because FERC’s interpretation of
the tariff was reasonable, and its conclusion that the loss did
not result from normal operations was supported by
substantial evidence.

I.

At 12:30 p.m. on October 22, 2006, CIG learned of a gas
leak at its Fort Morgan facility when a nearby landowner
“noticed water coming to the surface within the boundaries”
of CIG’s facility. Affidavit of Larry D. Kennedy, Jr., at 1.
CIG immediately initiated its “Emergency Operating
Procedures” and designated Larry D. Kennedy, Jr., CIG’s
Manager of Reservoir Services, as its “Incident Response
Commander.” Id. Two hours after first learning of the leak,
CIG identified the #26 gas well as the source. At
approximately 7:00 p.m., CIG inserted a cast iron bridge plug
into the tank, which prevented additional gas from escaping.

CIG notified federal, state, and local authorities, as
required by the various regulations that govern unexpected
releases of natural gas. In the immediate aftermath of the leak,
CIG “communicated with the public and local authorities by
the use of newsletters, E-Mails, and public meetings on a
 3
regular basis,” and the pipeline established a “hot-line” for
concerned citizens. Id. at 3. Days later, as an added
precaution, CIG inserted a second plug to ensure the leak was
completely stopped. During a subsequent investigation, CIG
discovered that the leak had been caused by a crack in the
tank’s casing approximately 847 feet below ground level.

The amount of gas lost at Fort Morgan was substantial—
between 451,000 and 720,000 decatherms—and this dispute
stems from CIG’s attempt to recover gas from its shippers to
offset the loss. Whether CIG may recover this loss depends on
the language of its tariff.

The amount of gas a shipper delivers to a pipeline will
never be exactly the same as the amount of gas that arrives at
the destination. In the course of moving gas from one place to
another, some of it is lost due to small leaks or metering
errors. Gas lost in this way is known as lost and unaccounted-
for gas. In addition, some gas is used by the pipeline to power
the compressors that move the shippers’ gas through the
pipeline. This kind of gas is known as fuel gas. Both of these
quantities vary substantially and unpredictably, which makes
it difficult to know in advance what the cost of shipping will
be. FERC permits a pipeline to adjust its tariff in two ways in
an effort to provide more certainty to the pipeline’s bottom
line. Notice of Inquiry, Fuel Retention Practices of Natural
Gas Companies, 72 Fed. Reg. 55,762, 55,762 (Oct. 1, 2007)
[hereinafter Notice of Inquiry]; see Am. Gas Ass’n v. FERC,
593 F.3d 14, 17 (D.C. Cir. 2010). Each method involves the
pipeline retaining a percentage of the gas shipped as a hedge
against uncertain future costs.

First, the pipeline may include in its tariff a provision that
fixes a percentage of the transported gas that may be retained.
The percentage must be approved by FERC in a proceeding
 4
under section 4 of the Natural Gas Act. See 15 U.S.C.
§ 717c(a) (2006). In section 4 proceedings, FERC generally
considers every element of a pipeline’s cost of providing
service before approving the proposed retention percentage as
just and reasonable. See ANR Pipeline Co., 110 FERC
¶ 61,069, at 61,338 (2005). Under this approach, the retention
percentage remains constant until the pipeline initiates
another section 4 proceeding.

Second, a pipeline may include in its tariff a provision
known as a fuel tracker, which tracks the amount of gas that is
reimbursable and permits periodic changes to the retention
percentage in what is known as a limited section 4 filing
based upon the difference between what the pipeline
estimated that amount to be and what it actually turned out to
be. See 18 C.F.R. § 154.403 (2009); ANR Pipeline Co., 110
FERC at 61,338–39; Notice of Inquiry, 72 Fed. Reg. at
55,762. In a limited section 4 proceeding, FERC evaluates the
reasonableness of the proposed retention percentage based
solely on the fuel tracker. This accelerated process allows the
pipeline to quickly account for the gas that is reimbursable by
avoiding the lengthy process of general section 4 review.
Tariffs with fuel trackers must also include a “true-up
provision,” under which the pipeline either remits to the
shippers any mistakenly retained gas or recovers additional
gas if the initial retention percentage was insufficient to
compensate the pipeline. See ANR Pipeline Co., 110 FERC at
61,338–40.

CIG’s tariff includes a fuel tracker, and four months after
the Fort Morgan accident the pipeline made a limited
section 4 filing with FERC seeking to increase its fuel
retention percentage from 0.00% to 0.06%. The lion’s share
of the gas that CIG sought to recover was lost in the Fort
Morgan leak. Several shippers protested CIG’s filing,
 5
contending that the Fort Morgan loss was unrecoverable.
They argued that CIG could only increase its retention
percentage to account for normal operating losses and not for
accidents like the Fort Morgan leak. See Colo. Interstate Gas
Co., 121 FERC ¶ 61,161, at 61,719–20 (2007) [hereinafter
Order Following Technical Conference]. FERC agreed,
rejected CIG’s proposed retention percentage, and accepted
CIG’s limited section 4 filing “subject to the removal of the
. . . Fort Morgan gas loss.” Id. at 61,724. CIG petitioned for
rehearing, which FERC denied. FERC elaborated on the
reasoning in its initial order, concluding that CIG’s
interpretation of its tariff was unreasonable, contrary to FERC
precedent, and failed to account for the industry’s usage of the
term “lost, unaccounted-for” gas to refer to a discrete category
of gas. Colo. Interstate Gas Co., 123 FERC ¶ 61,183, at
62,237, 62,240 (2008) [hereinafter Rehearing Order].

CIG timely petitioned this court for review of FERC’s
decisions. We have jurisdiction under 15 U.S.C. § 717r(b).
See Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 839
(D.C. Cir. 2006).

II.

The disposition of CIG’s petition turns on FERC’s
interpretation of the tariff’s fuel tracker to bar recovery for the
gas lost in the Fort Morgan leak. We review a challenge to
FERC’s interpretation under the Administrative Procedure
Act’s arbitrary and capricious standard of review, using a
two-step, Chevron-like analysis. See 5 U.S.C. § 706(2)(A);
Old Dominion Elec. Coop., Inc. v. FERC, 518 F.3d 43, 48
(D.C. Cir. 2008). We first “consider de novo whether the
[tariff] unambiguously addresses the matter at issue. If so, the
language . . . controls for we must give effect to the
unambiguously expressed intent of the parties.” Ameren
 6
Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir. 2003)
(internal quotation marks and citation omitted). “If the tariff
language is ambiguous, we defer to the Commission’s
construction of the provision at issue so long as that
construction is reasonable.” Koch Gateway Pipeline Co. v.
FERC, 136 F.3d 810, 814–15 (D.C. Cir. 1998).

We start by asking if the tariff clearly addresses whether
CIG is entitled to increase its retention percentage due to the
losses from the Fort Morgan leak. In a number of its
provisions, the tariff describes circumstances in which the
pipeline may recover from the shipper losses incident to the
transportation of gas. We begin with Article 6.1, which states,
“Shipper shall furnish Fuel Reimbursement as defined in
Article 1 of the General Terms and Conditions.” Colo.
Interstate Gas Co., FERC Gas Tariff, at Fourth Revised Sheet
No. 92. “Fuel Reimbursement,” as defined in Article 1.30,
“shall mean the compressor Fuel Gas and Lost, Unaccounted
For and Other Fuel Gas as described in Article 42 of the
General Terms and Conditions.” Id. at Thirteenth Revised
Sheet No. 230A. Neither party challenges that the tariff
permits reimbursement for fuel gas, leaving for our resolution
the meaning of the phrase “Lost, Unaccounted For and Other
Fuel Gas as described in Article 42.” Article 42, which is the
tariff’s fuel tracker, is entitled “Fuel and L&U” and describes
the gas eligible for reimbursement as “Lost, Unaccounted For
and Other Fuel ‘(L & U and Other Fuel).’” Id. at First Revised
Sheet No. 380F, Original Sheet No. 380G. All gas eligible for
reimbursement will be “stated in terms of a percentage of
Receipt Quantities, computed and adjusted quarterly.” Id. at
First Revised Sheet No. 380F. This is the retention
percentage.

CIG contends that these provisions clearly define the
kinds of losses for which CIG may increase its retention
 7
percentage. According to CIG, the comma that appears
between “Lost” and “Unaccounted For” in Article 1.30
reveals that the tariff describes a three-item list of the types of
gas that qualify for reimbursement: (1) lost gas;
(2) unaccounted-for gas; and (3) other fuel gas.1 See
Petitioner’s Br. at 26. CIG argues that the gas lost in the Fort
Morgan leak is subject to reimbursement because it was
“lost.” This is a reasonable reading of Article 1.30, but it is
incomplete. It fails to take into account the way Article 42
suggests that “lost, unaccounted-for” gas is a single category.
In both its title, “Fuel and L&U,” and its parenthetical, “L &
U and Other Fuel,” Article 42 uses the abbreviation “L&U” in
ways that suggest “lost, unaccounted-for” gas is a discrete
classification.

But neither view is compelling to the exclusion of the
other. The tariff simply does not provide a clear answer to the
question of whether a pipeline may recover any gas that is
merely “lost.” On this issue, the tariff is “reasonably
susceptible of different constructions or interpretations,”
Ameren Servs. Co., 330 F.3d at 499 (internal quotation marks
omitted), and does not unambiguously establish what losses
justify an increase in CIG’s retention percentage.

We thus proceed to the second step of our Chevron-like
analysis and assess the reasonableness of FERC’s
interpretation. FERC gave three reasons for its conclusion that
CIG’s tariff does not permit recovery for the Fort Morgan gas.

1
“Other fuel gas” is gas that the pipeline uses for its own
operations, excluding gas used to power machinery to transport gas.
See Colo. Interstate Gas Co., 128 FERC ¶ 61,117 at 61,614 n.5
(2009) (“‘[O]ther fuel gas’ . . . reflects gas consumed in processing
activities, and is different from compressor fuel gas.”).
 8
First, FERC applied the industry understanding of the
phrase “lost, unaccounted-for” gas. Rebutting CIG’s argument
that it may recover any gas that is merely “lost,” FERC
concluded that the comma between the words “lost” and
“unaccounted-for” “does not change the trade usage and tariff
understanding of L&U as a single term.” Rehearing Order, at
62,241; see also Transwestern Pipeline Co., 51 FERC
¶ 61,343, at 62,116 n.3 (1990) (“Lost and unaccounted for gas
occurs from leakage, variations in metering at different
locations and other reductions in the volume of gas
transmitted . . . . incurred as part of a pipeline’s daily
operations.”). Relying on the trade usage of the term is
appropriate, as construing terms in light of their commonly
understood meaning is a hallmark of reasonable
interpretation. See Indep. Petrochemical Corp. v. Aetna Cas.
& Sur. Co., 944 F.2d 940, 945 (D.C. Cir. 1991); see also
United States v. Martinez-Noriega, 418 F.3d 809, 815 (8th
Cir. 2005) (“Trade usage of a term is also highly relevant to a
determination of the parties’ intended meaning.”). We have
consistently required that FERC interpret tariffs in light of
their “commercial . . . context,” and the Commission did so
here. Consol. Gas Transmission Corp. v. FERC, 771 F.2d
1536, 1547 (D.C. Cir. 1985) (internal quotation marks
omitted). CIG counters that FERC should never have
considered trade usage because the terms of the tariff clearly
establish the kinds of gas losses that are recoverable. See
Reply Br. at 4. But as we have just explained, the tariff was
not clear on this point, and FERC rightly looked to this kind
of extrinsic evidence. With such ambiguity, we afford FERC
“substantial deference . . . even where the issue simply
involves the proper construction of language.” Koch Gateway,
136 F.3d at 814 (internal quotation marks omitted). FERC
relied on its understanding of industry parlance and
reasonably construed the tariff’s use of “L&U.”
 9
Second, FERC’s interpretation of the fuel tracker ensures
that no provision of the tariff lacks legal effect. FERC noted
that CIG’s contrary interpretation would render meaningless
the Commission’s “review of CIG’s quarterly L&U and fuel
gas reimbursement percentage true-ups” under Article 42.5.
Order Following Technical Conference, at 61,722. Article
42.5 of CIG’s tariff requires the pipeline to reconcile the
actual amount of gas retained under the prevailing retention
percentage with the amount of gas that qualifies under the fuel
tracker. If CIG could recover any loss at all—including
catastrophic, abnormal losses—FERC would never need to
examine CIG’s data offered in connection with its true-ups.
See id. CIG’s proposed interpretation renders the true-up
provision of the fuel tracker a nullity, whereas FERC’s
interpretation does not. FERC reasonably gave effect to all the
tariff’s provisions—yet another maxim of reasonable
interpretation. See RESTATEMENT (SECOND) OF CONTRACTS
§ 203(a) (2009) (“[A]n interpretation which gives a
reasonable, lawful, and effective meaning to all the terms is
preferred to an interpretation which leaves a part . . . of no
effect.”).

Third, FERC’s construction of CIG’s tariff is consistent
with how FERC has approached recovery claims for lost,
unaccounted-for gas under other fuel trackers. In particular,
FERC employed the test announced in Williams Natural Gas
Co., 73 FERC ¶ 61,394, at 61,215 (1995), which involved the
application of a similar fuel tracker. In Williams, FERC “put
forth a standard for recovering losses in tracking mechanisms
that described two categories of losses: losses resulting from
normal pipeline operations, which are recoverable; and losses
resulting from the malfunction of underground storage
mechanics, which are not recoverable in an L&U tracking
mechanism.” Rehearing Order, at 62,239. Following
Williams, FERC determined that the key factual determination
 10
in this case was whether the Fort Morgan loss more closely
approximated a normal operating loss, which is recoverable,
or an abnormal malfunction of underground storage
mechanics, which is not. We give deference to FERC’s
interpretations of its own precedents and conclude that it was
reasonable for FERC to use the approach sanctioned in
Williams to determine the outcome here. See NSTAR Elec. &
Gas Corp. v. FERC, 481 F.3d 794, 799 (D.C. Cir. 2007).

In contrast, CIG argues that FERC has departed from its
precedents. CIG reads these cases to limit FERC’s inquiry to
the prudence of the pipeline’s actions when considering if lost
gas is eligible for reimbursement. See Petitioner’s Br. at 20–
24. But CIG misreads those decisions. In the case upon which
CIG relies most, High Island Offshore System, LLC (HIOS),
118 FERC ¶ 61,256 (2007), FERC permitted the pipeline to
change its retention percentage because the reported level of
lost and unaccounted-for gas was “not an anomaly.” Id. at
62,235. Critically, however, the Commission in HIOS did not
purport to describe the types of costs that are eligible for
recovery, whereas Williams provided just such a holding. By
following the rule outlined in Williams, FERC did not
unlawfully diverge from its precedents.

Additionally, CIG maintains that FERC’s interpretation
was unreasonable because the Williams distinction between
“normal” and “unusual” is not rationally related to whether a
pipeline could increase its retention percentage. The pipeline
argues that this standard “deprives CIG of an opportunity to
recover its prudently incurred costs.” See Petitioner’s Br. at
14. This argument fails for two reasons. First, it wrongly
implies that such losses are never recoverable. The decisions
below made no such prohibition and concluded simply that
CIG could not recover these costs through a limited section 4
filing. FERC left open the possibility that a pipeline could
 11
recover losses like those at Fort Morgan in a regular section 4
case.2 See Rehearing Order, at 62,240. Second, the standard
announced in Williams and applied below is rationally related
to whether a pipeline can use an accelerated procedure
without the lengthy investigation entailed in a section 4 case.
By only permitting recovery for normal operating losses,
FERC and the parties save the time and resources required to
undertake a general rate case for frequently recurring
expenses. The pipeline and its shippers reasonably anticipate
that normal costs will occur each year, and the limited section
4 filing ensures that both parties can quickly resolve these
claims.

III.

We turn finally to CIG’s contention that FERC was
arbitrary and capricious in determining that the Fort Morgan
loss was not a normal operating event. This court “uphold[s]
FERC’s factual findings if supported by substantial
evidence.” Wash. Gas Light Co. v. FERC, 532 F.3d 928, 930
(D.C. Cir. 2008) (internal quotation marks omitted).
“Substantial evidence is ‘such relevant evidence as a
reasonable mind might accept as adequate to support a
conclusion.’” Butler v. Barnhart, 353 F.3d 992, 999 (D.C.
Cir. 2004) (quoting Richardson v. Perales, 402 U.S. 389, 401
(1971)).

The circumstances of the Fort Morgan incident amply
support FERC’s finding that this accident, which led to
substantial gas loss over the period of a few days, was not

2
As part of a prior settlement agreement, CIG has agreed to a
moratorium on section 4 actions. See Petitioner’s Br. at 4 n.1. That
CIG has voluntarily taken that option off the table has no impact on
what FERC is required to do under the law.
 12
normal. FERC reasonably described the accident as “a totally
unexpected non-routine malfunction of underground storage
mechanics . . . not associated with routine maintenance or
other normal operations activity.” Order Following Technical
Conference, at 61,723. Indeed, CIG responded by initiating
“Emergency Operating Procedures” and establishing a hot-
line for concerned residents of the area. A reasonable person
could accept this evidence as adequate to conclude the Fort
Morgan incident was not part of CIG’s “normal pipeline
operations.” FERC’s determination was supported by
substantial evidence.

IV.

For the foregoing reasons, the petition for review is

Denied.