Northern Natural Gas Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 2, 2012 Decided November 27, 2012

No. 11-1240

NORTHERN NATURAL GAS 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
______
Frank X. Kelly argued the cause for petitioner. With him
on the briefs were Steve Stojic, J. Gregory Porter, and
Dorothy R. Dornan.
Beth G. Pacella, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief was Robert H. Solomon, Solicitor.
 2

Robert I. White was on the brief for intervenors Northern
States Power Company-Minnesota, et al. in support of
respondent.

Before: GARLAND and KAVANAUGH, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.

WILLIAMS, Senior Circuit Judge: In response to a tariff
filing by Northern Natural Gas Company, the Federal Energy
Regulatory Commission issued an interpretation of § 4(f) of
the Natural Gas Act, 15 U.S.C. § 717c(f). Northern Natural
Gas Co., 133 FERC ¶ 61,210 (2010), reh’g denied, Northern
Natural Gas Co., 135 FERC ¶ 61,085 (2011). Northern
objects to the interpretation, and further argues that even if it
is correct, its effect, at least vis-à-vis Northern, should be
prospective only. We reject both claims.

* * *

Section 4(a) of the Natural Gas Act requires that a natural
gas company’s rates be “just and reasonable.” 15 U.S.C.
§ 717c(a). The Commission has generally understood this to
mean cost-based rates, with “market-based” rates to be
allowed only for a firm that showed it lacked market power in
the relevant market. See, e.g., Alternatives to Traditional
Cost-of-Service Ratemaking for Natural Gas Pipelines, 74
FERC ¶ 61,076, at 61,227 (1996).
In 2005 Congress added § 4(f) to the Act to provide
another avenue to market rates. It states that
(1) the Commission may authorize a natural gas
company . . . to provide storage and storage-related
 3

services at market-based rates for new storage
capacity related to a specific facility placed in
service after August 8, 2005, notwithstanding the
fact that the company is unable to demonstrate that
the company lacks market power, if the
Commission determines that—
(A) market-based rates are in the public interest
and necessary to encourage the construction of
the storage capacity in the area needing storage
services; and
(B) customers are adequately protected.
15 U.S.C. § 717c(f) (emphasis added).
The next year Northern secured from the Commission a
declaratory order authorizing it to charge market-based rates
for its services at a new storage expansion project in Iowa.
Northern Natural Gas Co., 117 FERC ¶ 61,191 (2006). In
granting the authority, the Commission noted that Northern
had proposed such rates for shippers that had submitted
winning bids in an “Open Season” for use of the capacity and
had signed “precedent agreements,” and that “the use of
market-based rates does not apply to sales of [Northern’s]
storage capacity outside of these precedent agreements.” Id.
at P 9 & n.4 (emphasis added). In its Order on Rehearing, the
Commission echoed that thought, mentioning at the outset that
the original order had authorized “market-based rates to the
initial shippers that submitted winning bids and signed
precedent agreements.” Northern Natural Gas Co., 119
FERC ¶ 61,072 at P 1.
In 2010, Northern sought to extend its market-based rate
authority to the “resale of market-based rate capacity . . . to
the extent that such capacity becomes available [1] through
expiration of existing market-based rate . . . service
agreements or [2] upon bankruptcy or another event leading to
turn back of the capacity.” Joint Appendix (“ J.A.”) 11
 4

(brackets added). The Commission rejected the
corresponding amendments to Northern’s tariff insofar as they
related to capacity becoming available on expiration of the
existing agreements, explaining:
To qualify for market based rates under [§] 4(f), the
pipeline must show that the storage capacity for
which market-based rates is being sought is related
to new facilities and can demonstrate that the
granting of market-based rates is ‘necessary to
encourage the construction of the storage capacity.’

Northern Natural Gas Co., 133 FERC ¶ 61,210 at P 11 (2010)
(“Order”), reh’g denied, Northern Natural Gas Co., 135
FERC ¶ 61,085 (2011). It went on to emphasize that
Northern’s request related to “capacity that it has already
constructed.” Id. (emphasis in original).
On the other hand, the Commission approved market-
based rates for the second set of cases for which Northern
requested them, namely resales of storage “in the event of
bankruptcy, a default or other turn back during the 20 year
term” of the original contracts. Order, 133 FERC ¶ 61,085 at
P 12.

* * *

We review the Commission’s interpretation of § 4(f) for
reasonableness under the familiar standard of Chevron, USA,
Inc. v. NRDC, Inc., 467 U.S. 837 (1984), which as specified in
Entergy Corp. v. Riverkeeper, Inc., 556 U.S. 208, 218 (2009),
means (within its domain) that a “reasonable agency
interpretation prevails.”
The Commission’s interpretation is fully consistent with
the obvious meaning of the statute. Subsection 4(f)(1)(A)
conditions the approval of market rates under § 4(f) on the
 5

Commission’s finding that such rates are “necessary to
encourage the construction of the storage capacity in the area
needing storage services.” The Commission’s first reading of
§ 4(f)—which preceded Northern’s market-based rates
petition—echoed this statutory requirement. Rate Regulation
of Certain Natural Gas Storage Facilities., 115 FERC
¶ 61,343 at P 130 (2006). It then spelled the point out in even
more direct terms: It observed that the Commission’s goal
under the statute was to provide an “incentive to build new
storage infrastructure,” id. at P 167, and said that a favorable
ruling even on the “public interest” requirement of the section
would reflect consideration of all aspects of proposals,
“including . . . the strength of the applicant’s showing that the
facilities would not be built but for market-based rate
treatment,” id. at P 128.
It seems obviously reasonable as a general matter that a
special benefit aimed at encouraging an investment can
perform that function only with respect to investments not yet
made when the favorable treatment is promised. How can a
benefit be an incentive to specific conduct if the conduct has
already occurred? There can be, of course, special cases
where targeting prospective conduct only is too costly to
implement. Suppose Congress decides that preferential tax
rates for capital gains will encourage investment. It might
limit the preference to investments made after the favorable
rate was assured; but the costs of sorting out the exact timing
of investments, and the need to apply multiple layers of rates
as Congress periodically adjusts them up and down, stand in
the way of such precision. In such a case, application of the
incentives to gains realized on prior investments may make
sense. The application of § 4(f), however, seems not to
present any comparable difficulty. Certainly Northern
identifies none.
We noted that the Commission had ruled in favor of the
second element of Northern’s request, namely for the right to
 6

charge market rates on the resale of storage “in the event of
bankruptcy, a default or other turn back during the 20 year
term” of the initial contracts. Order, 133 FERC ¶ 61,210 at
P 12. Northern, of course, does not complain about that
aspect of the Order, but its presence poses a potential question
as to whether the Commission really means to apply the
incentive rationale that it adopted at the outset and in the
challenged Order. We think the two—the incentive rationale
and this element of the Order—can be reconciled. It makes
sense for FERC to interpret its grant of market rates for the
original 20-year contracts as encompassing replacement
contracts that merely fill in a gap caused by the fortuitous
failing of one of the original shippers. To be sure, the
Commission might have taken the view that Northern did not
explicitly raise the issue in its initial request and that the
resulting order should be understood to preclude any such
gap-filling. But the Commission could readily have seen
good reason to avoid that stance. After all, an incentive tends
to be less effective if the party extending it gains a reputation
for sharp practice.
At oral argument Northern stressed the risks associated
with the storage capacity in question, risks that may involve
substantial future expenses. The Commission offers an
answer—namely that the risky character was readily
knowable in advance and that if market rates for more than 20
years were necessary, Northern could have held out for
approval of such rates either for longer original contracts or
for successor contracts after the initial 20 years. Of course it
is possible that new (previously unforeseeable) circumstances
will arise requiring heavy additional investment. In some
such cases, that additional investment might qualify as the sort
of investment that market rates would be “necessary to
encourage,” and thus (if the other statutory criteria were
satisfied) be eligible under § 4(f). There are, in short, answers
 7

to Northern’s stated anxiety—answers that fit properly within
the statutory language and the Commission’s interpretation.

* * *

Northern argues in the alternative that the effect of the
Commission’s interpretation should be, at least as to its Iowa
storage expansion project, prospective only. It rests this
argument on language the Commission used in an order
resolving one of the many proceedings occasioned by the
project. Northern Natural Gas Co., 120 FERC ¶ 61,233 at
P 18 (2007) (“2007 Order”). The proceeding revolved around
a service agreement that Northern filed with the Commission
and that contained a clause granting shippers a “right of first
refusal for the capacity stated in the agreement, . . . subject to
any rate authority applicable at the time of contract
expiration.” One of the shippers protested inclusion of the
proviso (the “subject to” clause) and asked the Commission to
clarify whether it would allow Northern to charge market-
based rates indefinitely. Northern contended that the
Commission had no need to reach the question, arguing that
“[w]hether Section 4(f) would authorize such authority is not
an issue in this proceeding,” and that by the proviso “Northern
was merely providing the expansion shippers the right to
retain their firm storage capacity at the end of their
agreements, at whatever rate is applicable at that time.” J.A.
333-34. In its 2007 Order the Commission effectively took
Northern up on that idea, holding that the question of which
rates should govern the contracts set to expire some 20 years
later would be determined at the point of expiration and not
before. In what appears to be dictum, however, the
Commission also said that
if sometime before the expiration of the contract,
Northern proposes additional protections against the
exercise of market power relating to the sale of
 8

capacity after the expiration of the primary term of
the service agreements, the Commission will
determine at that time whether the protections are
adequate and the extent to which market-based rates
should apply beyond the primary term of the service
agreement.
2007 Order, 120 FERC ¶ 61,233 at P 18. The Commission
added that “[i]f Northern should satisfy the requirements for
extending market-based rates,” the protesting shipper’s claim
to a right of first refusal at regulated rates would fail. Id.
Northern now argues that it reasonably and detrimentally
relied on this paragraph, invoking the principle that “when
there is a substitution of new law for old law that was
reasonably clear, the new rule may justifiably be given
prospectively-only effect in order to protect the settled
expectations of those who relied on the preexisting rule.”
Pub. Serv. Co. of Colorado v. FERC, 91 F.3d 1478, 1488
(D.C. Cir. 1996) (citation and internal quotation marks
omitted). We agree with Northern that the language cited
appears to suggest that a grant of market rates in the out years
was at least a serious possibility, whereas under the Order
such a grant would be impossible (subject, arguably, to
scenarios such as the one mentioned at the end of our
discussion of the main interpretive issue). Nevertheless, for
two reasons we do not agree that the Iowa expansion project
should be exempted from Commission’s current
interpretation. First, Northern has not shown that it relied on
the language of the 2007 Order in making its investment.
Second, it has not demonstrated that, even if it did, such
reliance would have been reasonable.
Northern’s only real argument tracing its investment to
the 2007 Order is chronological: it began construction after
the 2007 Order, but before the current order. While the
construction schedule may be necessary to show detrimental
 9

reliance, it is surely not sufficient—it fails to show that the
Commission’s statement was the, or even a, deciding factor in
its decision to proceed. The multiple proceedings actually
gave Northern an opportunity to lay the groundwork for such
a claim, which Northern in fact seized with respect to other
issues. Northern moved for clarification on certain issues, but
not on the availability of market rates after expiration of the
initial contracts. See Northern Natural Gas Co., 122 FERC ¶
61,227, order on reh’g and clarification, 122 FERC ¶ 61,270
(2008). It maintained, in the clarification proceeding, that it
was “at a definitive decision point (i.e., ‘go or no go’)” and
could not proceed without the desired clarification. J.A. 381.
Northern’s failure to call for assurance on availability of
market rates after 20 years is obviously telling.
Even if Northern had offered evidence that it
detrimentally relied on the 2007 Order, the limitation it
proposes would be inappropriate. Reliance must be not only
detrimental, but also reasonable. Pub. Serv. Co. of Colorado,,
91 F.3d at 1490. Northern could not reasonably have
expected to secure market-based rates past the expiration of
the initial contracts on the basis of the final paragraph of the
2007 Order. First, the language in the 2007 Order is arguably
dictum. The Commission accepted Northern’s view that there
was no immediate need to decide the nature of the rates to
which the right of first refusal would apply. The
Commission’s aside was superfluous.
Second, even on its own terms, the language does not
suggest that market-based rates would necessarily be
available. The Commission stated that it would “determine
[at the contract’s expiration] whether the protections are
adequate and the extent to which market-based rates should
apply beyond the primary term of the service agreement.”
120 FERC ¶ 61,233 at 61,974 (2007) (emphasis added). The
2007 Order thus did not pass judgment on that “extent.”
 10

This is not to say that the 2007 Order made clear that the
Commission would, a few years later, reject Northern’s
petition for an extension of its ability to charge market rates.
To the contrary, the Commission’s language may well have
been misleading. Dictum is at least as risky for the
Commission as it is for courts. But, for the reasons discussed
above, the misleading characterization of Northern’s future
options does not provide a basis for precluding the
Commission from applying to the Iowa project the
interpretation that is demanded by § 4(f) and that it has
uniformly embraced except for the utterance in the 2007
Order.

* * *

The petition for review is therefore

Denied