Consolidated Edison Co. of New York, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2002 Decided January 17, 2003

No. 01-1345

Consolidated Edison Company of New York, Inc., et al.,
Petitioners

v.

Federal Energy Regulatory Commission,
Respondent

Transcontinental Gas Pipe Line Corporation, et al.,
Intervenors

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

Steven J. Kalish argued the cause for petitioners. With
him on the briefs were Denise C. Goulet and Irwin Popow-
sky.

Timm Abendroth, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on

the brief were Cynthia A. Marlette, General Counsel, and
Dennis Lane, Solicitor.

Michael J. Thompson, Jeffrey G. DiSciullo, David A.
Glenn, Richard P. Bonnifield, Kenneth R. Carretta, Freder-
ick W. Peters, and Charles H. Shoneman were on the brief
for intervenors Transcontinental Gas Pipe Line Corporation,
et al. Gregory Grady entered an appearance.

Before: Ginsburg, Chief Judge, and Edwards and
Sentelle, Circuit Judges.

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: Petitioners Consolidated Edison
("ConEd") and other pipeline customers of Transcontinental
Gas Pipeline Corporation ("Transco") ask this court to vacate
three Orders issued by the Federal Energy Regulatory Com-
mission ("FERC" or the "Commission"), involving Transco's
proposed rate change for several of its expansion projects.
Petitioners contend that the policy standards used by FERC
to evaluate Transco's proposal violate the Administrative
Procedure Act ("APA").

Reversing a decision by an administrative law judge
("ALJ"), FERC approved Transco's proposal to shift from
"incremental" pricing to "rolled-in" rates based on standards
enunciated in a 1995 Policy Statement. Transcon. Gas Pipe
Line Corp., 87 F.E.R.C. p 61,087 (Apr. 16, 1999) ("Transco
I"), reprinted in Joint Appendix ("J.A.") 181-98. After peti-
tioners filed requests for rehearing on this matter, FERC
issued a new 1999 Policy Statement for future rate change
proposals. However, in addressing the petition for rehearing,
the Commission again evaluated Transco's proposal pursuant
to the 1995 Policy Statement and ultimately upheld its initial
ruling to approve the rate change. Transcon. Gas Pipe Line
Corp., 94 F.E.R.C. p 61,362 (Mar. 28, 2001) ("Transco II"),
reprinted in J.A. 199-215. Subsequently, in response to a
second petition for rehearing, FERC rejected objections to its
reliance on the 1995 Policy Statement. Order Denying Re-
hearing, Transcon. Gas Pipe Line Corp., 95 F.E.R.C. p 61,388
(June 13, 2001) ("Transco III"), reprinted in J.A. 232-36.

 Petitioners argue that the disputed Orders are unreason-
able, because they rely upon the 1995 Policy Statement rather
than the 1999 Policy Statement. Petitioners contend that
FERC was obliged to apply the more recent policy statement,
because it was issued while the Transco case was still pend-
ing. We disagree.

The application of a newly adopted policy statement to a
pending case is not presumed unless the policy change has
the "force of law." When an agency issues a policy statement
that is not binding and merely signals how the agency may
handle future cases, there is no legal principle that mandates
retroactive application of the new policy statement to pending
cases. Retroactive application to pending cases may be per-
missible, but it is not required. An agency may decide to
apply a pre-existing policy to resolve a pending case, so long
as that policy is not otherwise arbitrary and the agency
provides a reasoned explanation for its decision.

On the record before us, we hold that FERC did not act
unlawfully in applying its 1995 Policy Statement when it
resolved Transco's proposal to implement rolled-in rates. We
further hold that the 1995 Policy Statement is not unreason-
able, either facially or as applied in this case. Finally, we
hold that FERC sufficiently explained its reasons for relying
on the 1995 Policy Statement (rather than the 1999 Policy
Statement) to evaluate the rate change proposal. We reject
petitioners' arguments to the contrary. Accordingly, we deny
the petition for review.

I. Background

A. Regulatory Framework

Under the Natural Gas Act ("NGA"), FERC has jurisdic-
tion to approve the construction of natural gas pipeline facili-
ties and to regulate the transportation of natural gas in
interstate commerce. 15 U.S.C. s 717, et seq. (2000). Any
pipeline seeking to build or to expand its facilities must first
apply for a certificate of public convenience and necessity
from FERC. After notice and hearing, FERC may authorize

or "certificate" any pipeline project that the agency deter-
mines is "necessary or desirable in the public interest." Id.
s 717f.

The NGA requires that all rates and charges by pipelines
must be "just and reasonable." Id. s 717c(a). Rate cases
before FERC are reviewed under either section 4 or section 5
of the NGA:

[T]his court has strictly policed the statutory line
that separates action taken under NGA section 4
from that taken under NGA section 5. In Algon-
quin, we described this distinction as follows:

[T]he Commission may act under two different
sections of the Natural Gas Act (NGA or the
Act) to effect a change in a gas company's rates.
When the Commission reviews rate increases
that a gas company has proposed, it is subject
to the requirements of section 4(e) of the Act.
Under section 4(e), the gas company bears the
burden of proving that its proposed rates are
reasonable. On the other hand, when the Com-
mission seeks to impose its own rate determina-
tions, rather than accepting or rejecting a
change proposed by the gas company, it must
do so in compliance with section 5(a) of the
NGA.

Under section 5, the Commission must first establish
that the proposed or existing rate is unjust and
unreasonable. It is only after this antecedent show-
ing has been made that the Commission properly
can illustrate that its alternative rate proposal is
both just and reasonable.

"Complex" Consol. Edison Co. v. FERC, 165 F.3d 992, 1001
(D.C. Cir. 1999) (quoting Algonquin Gas Transmission Co. v.
FERC, 948 F.2d 1305, 1311 (D.C. Cir. 1991)) (citations omit-
ted).

Generally, a pipeline can allocate the costs associated with
new or expanded facilities in one of two ways. The pipeline

may "roll in" these costs, by distributing additional charges
among all customers of the pipeline system. This pricing
approach recognizes that the pipeline is "not just a collection
of discrete pieces and parts, but an integrated system serving
all of its customers." Battle Creek Gas Co. v. Fed. Power
Comm'n, 281 F.2d 42, 46 (D.C. Cir. 1960). The alternative to
rolled-in rates is "incremental" pricing:

Whatever its virtues, use of a "rolled-in" approach
alone is not adequate in all situations, particularly
where some assets are used by the utility solely for
the benefit of one customer. At some point in every
gas distribution facility the general system ends and
connective links to the local distributors' own equip-
ment begins. At this point the facility becomes so
identified with its function as a part of the local
distributor's gas plant that it may be unfair to
charge its costs to all of the customers of the utility.
This is particularly so where the extent and cost of
such segregated facilities vary greatly among the
customers. In such a situation the costs of these
facilities are commonly charged as an "incremental"
cost added in to the particular customer's rate base.
Whether the cost of a particular facility is more
properly treated as a systemic cost and rolled-in to
the rate base of all of the customers, or as a
segregated cost to a particular customer, which
should be treated on an incremental basis, is fre-
quently a difficult issue of fact presented to the
Commission.

Id. at 46-47 (footnote omitted).

Over time, FERC policy has moved away from routinely
encouraging rolled-in rates toward a preference for rate
proposals that rely upon incremental pricing. See Trans-
Canada Pipelines Ltd. v. FERC, 24 F.3d 305, 308 (D.C. Cir.
1994). Responding to this court's directives to justify its
evolving standard for evaluating rate allocation proposals,
FERC adopted a Policy Statement discussing its revised
approach. Pricing Policy for New and Existing Facilities

Constructed By Interstate Natural Gas Pipelines, 71
F.E.R.C. p 61,241 (1995), reh'g denied, 75 F.E.R.C. p 61,105
(1996) ("1995 Statement"). The Commission's goals were to
give the industry clear signals about which pricing approach
would govern an expansion project and to avoid imposing
"rate shock" on existing pipeline customers. 1995 Statement,
71 F.E.R.C. at 61,915.

FERC described two essential features of the 1995 Policy
Statement:

First, the Commission will make a determination of
an appropriate rate design in a pipeline's certificate
proceeding. Second, when the pipeline seeks rolled-
in pricing, the Commission will base its pricing
decision on an evaluation of the system-wide benefits
of the project and the rate impact on existing cus-
tomers. To reduce uncertainty, in those cases, the
Commission will establish a presumption for rolled-
in rates when the rate effect on existing customers is
not substantial.

Id. The Commission indicated that a rolled-in rate proposal
was presumptively valid if the rate impact on existing custom-
ers was 5% or less and the pipeline company also offered
evidence of general systemwide benefits. Id. at 61,916-17.

After 1995, as competition in the pipeline industry in-
creased, FERC decided to develop a new policy that de-
emphasized rolled-in rates. Certification of New Interstate
Natural Gas Pipeline Facilities, 88 F.E.R.C. p 61,227 (1999),
clarified, 90 F.E.R.C. p 61,128, further clarified, 94 F.E.R.C.
p 61,094 (2000) ("1999 Statement"). In issuing the new policy,
FERC sought to "strike the proper balance between the
enhancement of competitive alternatives and the possibility of
over building." 1999 Statement, 88 F.E.R.C. at 61,737. The
1999 Statement indicated that FERC would not approve
rolled-in rates unless the pipeline could show that the benefits
of construction outweighed the adverse economic effects on
existing pipeline customers:

 If residual adverse effects on [existing pipeline cus-
tomers, other pipelines in the market and their
captive customers, or the economic interest of adja-
cent landowners and communities] are identified,
after efforts have been made to minimize them, then
the Commission will proceed to evaluate the project
by balancing the evidence of public benefits to be
achieved against the residual adverse effects. This
is essentially an economic test.

Id. at 61,745. FERC emphasized that its "economic test" for
rate proposals would apply prospectively: "[T]he new policy
will not be applied retroactively to cases where the certificate
has already issued and the investment decisions have been
made." Id. at 61,750.

B. Procedural Background

Transco operates a natural gas pipeline that connects pro-
duction sites along the Gulf of Mexico with customers located
along the Eastern seaboard. The company's pipeline system
serves most of the East Coast metropolitan markets including
Atlanta, Washington, D.C., and New York City. Between
1984 and 1994, FERC certificated 12 of Transco's expansion
projects - nine that linked the company's pipeline to areas in
Pennsylvania and three others that added capacity to the
section of the pipeline between Virginia and Alabama. See
Transco II, 94 F.E.R.C. at 62,307, J.A. 200; Transco I, 87
F.E.R.C. at 61,383-84, J.A. 181-82. FERC initially certificat-
ed all of these projects under an incremental pricing scheme,
before it issued the 1995 Statement. Transco I, 87 F.E.R.C.
at 61,385, J.A. 183.

In March 1995, Transco applied to FERC for a general
rate increase pursuant to section 4 of the NGA. Id. at 61,383,
J.A. 181. This rate filing included a variety of planned
changes, but Transco did not seek to switch from incremental
pricing. Id. Several pipeline customers who paid incremen-
tal costs intervened and objected to this proposal, arguing
that Transco should instead adopt rolled-in rates. After a
series of negotiations led to a settlement of several issues in

dispute, FERC approved a deal reflecting the parties' partial
agreement and scheduled the remaining matters for a hearing
before an ALJ. Id. at 61,384, J.A. 182. As part of this
arrangement, Transco reserved the right to seek rolled-in
rates for its expansion projects at a later time.

In November 1996, while the administrative hearing on the
remaining issues was in progress, Transco and other interest-
ed parties submitted a new rate change proposal to FERC.
Id. Under this proposal, the company planned to roll in costs
for the expansion projects on a prospective basis. The Com-
mission consolidated the hearing on Transco's rolled-in rate
proposal with the ongoing agency proceedings. Following an
evidentiary hearing on this issue, the ALJ ruled that Transco
was not entitled to charge rolled-in rates to cover expansion
costs. Transcon. Gas Pipe Line Corp., 82 F.E.R.C. p 63,019
(1998), reprinted in J.A. 134-80. The ALJ determined that
the proposal was governed by section 5 of the NGA. Id. at
65,163-66, J.A. 140-43. Applying the standards from the 1995
Statement, the ALJ found that existing customers faced an
increase that exceeded the 5% presumption for rolled-in
rates. Id. at 65,175-76, J.A. 152-53. Therefore, the ALJ
concluded, Transco could not justify rolled-in rates simply by
referring to evidence of general systemwide benefits. Id. at
65,179, J.A. 156.

On April 16, 1999, the Commission reversed the ALJ's
ruling and approved the rolled-in rates proposed by Transco.
See Transco I, 87 F.E.R.C. p 61,087, J.A. 181. The Commis-
sion found that the ALJ erred in applying section 5, instead
of section 4, of the NGA. The Commission also determined
that the ALJ had misapplied the 1995 Statement in assessing
Transco's proposal. Rather than evaluating the combined
rate impact of all 12 expansion projects in light of the 5%
presumption, FERC held that the correct methodology was to
apply the 5% presumption to interrelated groups of projects.
Id. at 61,389, J.A. 187. Dividing the projects into seven
groups, FERC found that the rate change for each group
would not exceed the 5% threshold and that Transco had
shown benefits that satisfied its burden of proof. Id. at
61,394-95, J.A. 192-93.

 Petitioners filed a request for rehearing. FERC then
issued the new 1999 Policy Statement, i.e., after petitioners'
request for rehearing had been filed. On March 28, 2001, the
Commission denied petitioners' requests for a rehearing on
its initial Order. Transco II, 94 F.E.R.C. p 61,362, J.A. 199.
The Commission declined to apply the new 1999 Policy State-
ment, because the Transco case had been fully litigated under
the 1995 Policy Statement. Id. at 62,310, J.A. 203. The
Commission then upheld its initial finding that Transco's
rolled-in rate was warranted under the statute based on the
factors in the 1995 Statement:

The Commission is unpersuaded by ConEdison, et
al.'s arguments that Transco failed to meet its Sec-
tion 4 burden with regards to its roll-in proposal.
Transco has sufficiently shown that rolled-in rates
are just and reasonable as evidenced by the Com-
mission's findings that: (1) the expansion facilities
are fully integrated with Transco's system; (2) the
expansion facilities provide significant system bene-
fits; and (3) the rate impact of rolling in the costs of
the expansion facilities is less than 5 percent.

Id. at 62,316, J.A. 209.

On the same day that FERC issued its decision in Transco
II, the Commission decided another, unrelated case in which
it applied the 1999 Policy Statement. See Transcon. Gas
Pipe Line Corp., 94 F.E.R.C. p 61,360 (2001). Petitioners
again sought rehearing, contending that the 1999 Policy
Statement should have been applied to Transco in this pro-
ceeding as well. On June 13, 2001, FERC denied petitioners'
requests for further rehearing. Transco III, 95 F.E.R.C.
p 61,388, J.A. 232. The Commission specifically addressed
arguments that the 1999 Statement should have governed, as
in the other case decided on the same day as Transco II. Id.
at 62,450-51, J.A. 235-36. First, FERC noted that the pro-
jects in the two cases were of a different vintage. The
Commission also reiterated that, in Transco's case, the parties
had completed the evidentiary hearing under the 1995 State-
ment. The same was not true in the other case. Finally, the

Commission noted that its handling of Transco's rate change
proposal was not inconsistent with the policy goals articulated
in the 1999 Statement. Id.

This petition for review followed.

II. Analysis

FERC's orders must be upheld unless they are "arbitrary,
capricious, an abuse of discretion, or otherwise not in accor-
dance with law." 5 U.S.C. s 706(2)(A); see Union Pac.
Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C. Cir. 1997). The
court's role is "limited to assuring that the Commission's
decisionmaking is reasoned, principled, and based upon the
record." Pennsylvania Office of Consumer Advocate v.
FERC, 131 F.3d 182, 185 (D.C. Cir. 1997). In reviewing
FERC's orders, we must be certain that the Commission has
considered the relevant data and "articulate[d] ... a rational
connection between the facts found and the choice made."
Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1431 (D.C.
Cir. 1996) (quoting Motor Vehicle Mfrs. Ass'n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).

Petitioners maintain that FERC acted unreasonably by
ignoring the relevant standards and factors articulated in the
1999 Policy Statement. They argue that, once FERC issued
the 1999 Statement, the continued application of the 1995
Statement in Transco's rate case was impermissible. They
further contend that the Commission's use of the earlier
policy was unreasonable, because neither the pipeline nor its
customers had a reliance interest in the previous policy. In
petitioners' view, FERC had an obligation to apply the 1999
Statement retroactively to all currently pending cases - even
including those in which the record had been fully developed
under a lawful pre-existing policy statement. Petitioners'
view is misguided.

Normally, an agency must adhere to its precedents in
adjudicating cases before it. See Hatch v. FERC, 654 F.2d
825, 835 (D.C. Cir. 1981). An agency may, within the realm
of its statutory authority, change the established law and
apply newly created rules. Id. at 837 (citing NLRB v. Bell

Aerospace, 416 U.S. 267 (1974)). Such changes may occur in
the course of an adjudication, so long as the agency acts
pursuant to delegated authority, adopts a permissible con-
struction of the statute, and adopts a rule that is not arbitrary
and capricious. NAACP v. FCC, 682 F.2d 993, 998 (D.C. Cir.
1982). A new rule may be applied retroactively to the parties
in an ongoing adjudication, so long as the parties before the
agency are given notice and an opportunity to offer evidence
bearing on the new standard, Hatch, 654 F.2d at 835, and the
affected parties have not detrimentally relied on the estab-
lished legal regime, Clark-Cowlitz Joint Operating Agency v.
FERC, 826 F.2d 1074, 1081 (D.C. Cir. 1987) (en banc); Retail,
Wholesale & Dep't Store Union v. NLRB, 466 F.2d 380, 390
(D.C. Cir. 1972).

"Policy statements" differ from substantive rules that carry
the "force of law," because they lack "present binding effect"
on the agency. Interstate Natural Gas Ass'n v. FERC, 285
F.3d 18, 59 (D.C. Cir. 2002). When an agency hears a case
under an established policy statement, it may decide the case
using that policy statement if the decision is not otherwise
arbitrary and capricious. See, e.g., Woodland Broad. v. FCC,
414 F.2d 1160, 1164 (D.C. Cir. 1969). If, however, the agency
changes its policy statement before the case is complete, it
must explain why the pending case should be decided on the
basis of the old versus the new policy. Williston Basin
Interstate Pipeline Co. v. FERC, 165 F.3d 54, 62 (D.C. Cir.
1999).

Thus, the principles governing retroactivity differ depend-
ing upon whether the agency has acted to change the sub-
stantive law or merely issue a new, non-binding policy state-
ment. If an agency adopts a new rule that reflects a change
in "law," we presume that the new rule will be given retroac-
tive application. The agency thus may decide a pending case
by applying the new substantive rule, subject to notice re-
quirements and detrimental reliance considerations. Clark-
Cowlitz Joint Operating Agency, 826 F.2d at 1081. If, how-
ever, an agency merely adopts a new "policy statement" that
does not purport to have the "force of law," it is "binding on
no party and ha[s] no precedential effect." Panhandle East-

ern Pipe Line Co. v. FERC, 198 F.3d 266, 269 (D.C. Cir.
1999). The agency need only give a reasoned explanation for
its failure to apply a new policy statement in a pending case
tried under an old policy statement. Williston Basin, 165
F.3d at 62.

Contrary to petitioners' suggestion, Williston Basin does
not stand for the proposition that an agency must apply a
newly adopted policy statement to all pending cases. In
Williston Basin, FERC "shifted course" with regard to one
of the policies in dispute while the case was on appeal in this
court. The court therefore held that the case should be
remanded to the agency to allow FERC to reconsider its
application of the pre-existing policy in light of the change.
Id. The court did not indicate which policy should be applied
by the agency on remand, because it was understood that
neither policy statement carried the "force of law." In other
words, the court did not presume that a new policy statement
must be applied retroactively to the parties in a pending case,
for the obvious reason that a policy statement only signals the
agency's possible behavior in future cases.

Petitioners cite Tennessee Gas Pipeline Co., 76 F.E.R.C.
p 61,022 (1996), aff'd, "Complex" Consol. Edison Co. v. FERC,
165 F.3d 992 (D.C. Cir. 1999), and Pacific Gas Transmission
Co., 50 F.E.R.C. p 61,067 (1990), in support of their view that
new policy statements must be applied to pending cases. The
decisions in these cases do not say this. Rather, in these
cases, the agency opted to apply "new" policies to ongoing
adjudications. But this is neither surprising nor impermissi-
ble. FERC merely exercised its discretion to apply new
policies to ongoing adjudications. The agency did not say
that it was bound to follow the policy statements in all future
cases, nor did the reviewing court.

In this case, FERC's new policy statement did not purport
to carry the "force of law." The 1999 Statement was non-
binding and it was issued with a statement that FERC
intended to change its enforcement regime in future rate
cases. Furthermore, there is nothing in the record of this
case indicating that application of the 1995 Statement was

unreasonable or otherwise unlawful. Nonetheless, FERC
had a duty to explain why it chose to apply the old, and not
the new, pricing policy in Transco II and Transco III.
Indeed, the need for an explanation is quite apparent here,
because the Commission elected to apply the new policy in
another rate case on the same day that it decided to apply the
1995 Policy Statement, and declined to apply the 1999 Policy
Statement, in Transco II. See Williston Basin, 165 F.3d at
62. Petitioners claim that the agency's decision on this score
cannot survive review. We disagree.

Petitioners argue that FERC's "vintage" distinction fails to
justify its use of the 1995 Policy Statement in the present
case. While the "vintage" concept appears to denote the
length of time that the pipeline facilities have been incremen-
tally priced, see Transcon. Gas Pipe Line Corp., 94 F.E.R.C.
at 62,303, Respondent's Br. at 19 n.8, the Commission did not
provide a clear definition of this term and did not adequately
explain why a different "vintage" matters in its decision about
which policy statement should apply. We therefore agree
with petitioners that this justification alone cannot sustain the
agency's decision.

The Commission provided a second explanation for han-
dling the two cases differently, however - administrative
convenience. Unlike the instant case, in which all of the
underlying litigation was completed before the announcement
of the new 1999 Policy Statement, the original filing in the
second rate case did not occur until 2000. Transcon. Gas
Pipe Line Corp., 94 F.E.R.C. at 62,299. When FERC reject-
ed petitioners' first request for rehearing in Transco II, the
Commission explained that it would apply the 1995 Statement
because the factual record had been fully developed:

The hearing in this case was conducted while the
1995 Pricing Policy Statement was in effect, and all
the parties have presented evidence and filed plead-
ings based on the application of that policy. By
contrast, the new policy having not been established
until after the instant rehearing requests were filed,
there is no record in this case upon which the

 Commission could make a determination as to how
the new policy should apply, and the parties have
had no opportunity to present positions on that
issue.

Transco II, 94 F.E.R.C. at 62,310, J.A. 203. The Commission
referred to this same rationale in denying petitioners' second
request for rehearing:

Because the hearing took place while the 1995 Pric-
ing Policy Statement was in effect, and the parties'
evidence and arguments were presented with refer-
ence to that policy, the Commission reasonably ap-
plied the 1995 Pricing Policy to the issues in this
case.

Transco III, 95 F.E.R.C. at 62,451, J.A. 236. In both of these
statements, FERC suggested that applying the 1999 State-
ment would lead to significant delays and inconveniences.
The parties had already developed an entire evidentiary
record highlighting the factors relevant to the 1995 Policy
Statement. The 1995 Statement was not unreasonable or
unlawful, either facially or as applied in this case, so the
Commission was not foreclosed from relying on it in assessing
the merits of Transco's proposal. And reopening the record
would have wasted significant time and money, which would
have undermined the agency's interest in efficiency and the
parties' interest in a prompt resolution of the matter. We
therefore find that FERC's justification for applying the 1995
Policy Statement in the Transco case is reasonable and
consistent with the overall goals of the Natural Gas Act.

III. Conclusion

For the reasons discussed above, we hereby deny the
petitions for review.