Dominion Resources, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 5, 2002 Decided April 19, 2002

No. 01-1031

Dominion Resources, Inc.,
Petitioner

v.

Federal Energy Regulatory Commission,
Respondent

Rochester Gas and Electric Corporation, et al.,
Intervenors

Consolidated with
01-1169

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

Catherine E. Stetson argued the cause for petitioners.
With her on the briefs were Kevin J. Lipson, J. Patrick
Nevins and Anne E. Bomar.

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

Before: Edwards and Randolph, Circuit Judges, and
Williams, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge
Williams.

Williams, Senior Circuit Judge: Petitioner Dominion Re-
sources, Inc. is the surviving parent corporation in a merger
of two already quite diverse companies, one ("Dominion")
primarily an electric power company, the other (Consolidated
Natural Gas Company ("CNG")) a natural gas pipeline with
upstream and downstream affiliates. The parties refer to
this type of merger as a "convergence merger." Dominion
here challenges the Federal Energy Regulatory Commis-
sion's May 2000 Compliance Order requiring the pipeline
subsidiary to observe FERC's Standards of Conduct, 18
C.F.R. ss 161.3, 250.16, in dealing with all of its energy
affiliates in the post-merger entity. See Dominion Re-
sources, Inc. & Consolidated Natural Gas Co., 91 FERC
p 61,140 (2000) ("Compliance Order"). Dominion contends
that the Compliance Order was far broader than the order on
which it purportedly rested, see Dominion Resources, Inc. &
Consolidated Natural Gas Co., 89 FERC p 61,162 (1999)
("Merger Order"), destroyed integrations that existed before
the merger, and was thus arbitrary and capricious. We agree
with Dominion and therefore vacate and remand.

* * *

In June 1999 Dominion and CNG sought Commission au-
thorization for their merger. See 16 U.S.C. s 824b. Domin-
ion was a holding company with predominantly electric utility
interests, specifically:

 . Virginia Electric and Power Company, an electric
transmission and distribution subsidiary; and

. Dominion Energy, a multifaceted firm active in

. power generation and power marketing, and

. oil and gas development and exploration.

CNG, in contrast, was a holding company with predominantly
gas utility interests:
. CNG Transmission ("CNGT"), a gas pipeline;

. CNG Retail Services and CNG Power Services, both
power marketers;

. various gas local distribution companies; and

. CNG Producing, a gas exploration and production
firm.

Before the merger, CNG also owned Virginia Natural Gas, a
local distribution company, but it divested that company
pursuant to a Consent Order with the Federal Trade Com-
mission. Merger Order, 89 FERC at 61,472-73; see Domin-
ion Resources, Inc. & Consolidated Natural Gas Co., 1999
WL 1336609 (F.T.C. Nov. 1999).
The restrictions that the parties dispute come in the con-
text of FERC's pre-existing generic Standards of Conduct.
These limit interactions between gas pipelines and their gas
marketing affiliates, with the aim of preventing pipelines from
using their monopoly positions to obtain anti-competitive ad-
vantages in downstream gas markets. E.g., Inquiry Into
Alleged Anticompetitive Practices Related to Marketing Af-
filiates of Interstate Pipelines, Order No. 497, FERC Stats.
& Regs. (CCH) p 30,820 (1988) ("Order No. 497"); Tenneco
Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992). Among other
things, they prevent pipelines from disclosing nonpublic infor-
mation preferentially to their affiliates and from otherwise
discriminating against non-affiliated shippers. 18 C.F.R.
s 161.3. But the rules appear to apply only to a pipeline's
relations with its gas marketing affiliates. Compare Notice
of Proposed Rulemaking, Standards of Conduct for Trans-
mission Providers, 66 Fed. Reg. 50919, 50921, 50923 (2001)
(proposing to apply the Standards of Conduct more broadly).

The Commission saw a similar risk in the onset of conver-
gence mergers--that pipelines might use their market power
in gas to manipulate downstream electric markets. E.g., San
Diego Gas & Electric Co. and Enova Energy, Inc., 79 FERC
p 61,372 (1997) ("Enova"). FERC has thus required the gas
segments in some convergence mergers, such as one involving
San Diego Gas & Electric and Enova Energy, to adhere to
specific Codes of Conduct that extend the generic Standards
of Conduct to cover gas companies' links with affiliates "with
an electric power merchant function." San Diego Gas &
Electric Co. and Enova Energy, Inc., 83 FERC p 61,199, at
61,871 (1998) ("Enova").

In seeking Commission approval, Dominion and CNG pro-
posed a narrower set of restrictions--ones applying such a
Code of Conduct between the CNG pipeline and "affiliates [1]
with wholesale power market-based authority [as opposed to
ones selling at prices at cost by regulation] and [2] with whom
CNG Transmission conducts transportation transactions."
Merger Order, 89 FERC at 61,477. The Commission reject-
ed this version and instead insisted on a Code applying "to
the 'corporate family' as a whole," id. at 61,478, though
offering the firms the alternative of submitting a new analysis
of competitive effects. Dominion and CNG accepted the
condition. But the composition of the "corporate family as a
whole" quickly became a bone of contention. In their accep-
tance letter Dominion and CNG read the phrase as they
believed the Commission had read it in Enova, i.e., covering
communications between the pipeline and "all affiliates within
the corporate family who engage in the wholesale electric
merchant function." Letter of Carmen L. Gentile, Counsel
for Dominion Resources, to David P. Boergers, Secretary,
Federal Energy Regulatory Commission, at 1-3 (Dec. 10,
1999) ("Dominion Acceptance Letter"); see also Code of
Conduct Principles Applicable to Dominion Resources, Inc.
and Consolidated Natural Gas Company, at s 2. The limita-
tion set forth in the letter, of course, was broader than the
firms' original proposal, since it included electric affiliates
regardless of whether they were free to sell at market rates
or whether they transacted directly with CNGT.

 In its May 2000 Compliance Order, the Commission reject-
ed Dominion's interpretation of "corporate family." Distin-
guishing Enova, the Commission held that the Merger Order
required that the Standards of Conduct be applied "to all
energy companies that would be affiliated under the proposed
transaction." Compliance Order, 91 FERC at 61,542-43. It
directed Dominion to modify its Proposed Code of Conduct
accordingly. The Commission denied Dominion's motion for
rehearing in November 2000, describing Dominion's argu-
ments as "a collateral attack on the Merger Order." Domin-
ion Resources, Inc. and Consolidated Natural Gas Company,
93 FERC p 61,706, at 61,707 (2000). Dominion filed a petition
for review.

Operating under the Commission's order in the meantime,
Dominion argued that the Commission should apply a "no-
conduit rule" to information received by certain employees.
See Dominion Resources, Inc., Consolidated Natural Gas Co.
and Dominion Transmission Inc., 93 FERC p 61,284, at
61,954 (2000). This would have enabled non-operating staff
shared by the pipeline and its affiliated energy companies to
receive restricted information (without making contemporane-
ous disclosure) so long as the employees in fact did not act as
conduits. Id. The Commission rejected this suggestion,
holding that an "automatic imputation rule" was appropri-
ate--any receipt of information by a shared employee would
trigger the strictures under the Standards of Conduct as
extended by the Compliance Order. Id.; see also Dominion
Transmission, Inc., 94 FERC p 61,135 (2001) (denying re-
hearing and granting clarification). Again, Dominion peti-
tioned for review.

* * *

The Commission challenges this court's jurisdiction over
the petitions for review. See Steel Company v. Citizens for a
Better Environment, 523 U.S. 83, 94-95 (1998). The Com-
mission argues that the Compliance Order merely implement-
ed the provisions of its earlier Merger Order, so that Domin-
ion was not "aggrieved" as required by the Federal Power

Act, 16 U.S.C. s 825l(b), or the Natural Gas Act, 15 U.S.C.
s 717r(b). The Commission further notes that insofar as
Dominion's claimed injuries were caused by the Merger Or-
der, the relevant time limitations for seeking rehearing and
review expired long before Dominion filed any petitions. See
16 U.S.C. s 825l(a)-(b) (establishing 30-day limitations period
for applications for rehearing and 60-day period for obtaining
judicial review thereafter); 15 U.S.C. s 717r(a)-(b) (same).
The Commission thus characterizes Dominion's petition as an
impermissible collateral attack on the Merger Order. See,
e.g., City of Nephi v. FERC, 147 F.3d 929, 934 (D.C. Cir.
1998). These jurisdictional arguments are essentially one: If
the Compliance Order was merely a "clarification," then
Dominion was not aggrieved by it and is indeed engaging in a
collateral attack. In contrast, if the Compliance Order was a
"modification," then Dominion clearly has standing to chal-
lenge it.

The answer depends on whether a reasonable firm in
Dominion's position "would have perceived a very substantial
risk that [the Merger Order] meant" what the Commission
now says it meant. ANR Pipeline Co. v. FERC, 988 F.2d
1229, 1234 (D.C. Cir. 1993); see also 16 U.S.C. s 825l(b) ("No
objection to the order of the Commission shall be considered
by the court unless such objection shall have been urged
before the Commission in the application for rehearing unless
there is reasonable ground for failure so to do."); 15 U.S.C.
s 717r(b) (same). Mere ambiguity in the Merger Order is
not enough to excuse Dominion's previous failure to challenge
it. See ICC v. Brotherhood of Locomotive Engineers, 482
U.S. 270, 286 (1987) (stating that "the remedy for ... ambigu-
ity is to petition ... for reconsideration," otherwise time
limits "would be held hostage to everpresent ambiguities").
Nor is the reasonableness of Dominion's interpretation
enough. See ANR Pipeline, 988 F.2d at 1233-34. Rather,
we ask if the Commission's interpretation was so obscure that
the Merger Order "did not provide sufficient notice" to
Dominion that it inflicted the now-challenged burden. East
Texas Electric Cooperative v. FERC, 218 F.3d 750, 754 (D.C.
Cir. 2000); Raton Gas Transmission Co. v. FERC, 852 F.2d

612, 615-16 (D.C. Cir. 1988); see also Sam Rayburn Dam
Electric Cooperative v. FPC, 515 F.2d 998, 1007 (D.C. Cir.
1975) (explaining that the rule prevents agencies from "en-
ter[ing] an ambiguous or obscure order, wilfully or otherwise,
wait[ing] out the required time, then enter[ing] an 'explanato-
ry' order that would extinguish the review rights of parties
prejudicially affected"). "[A] party need not approach every
Commission order with paranoia, petitioning for rehearing on
account of any conceivable adverse meaning." ANR Pipe-
line, 988 F.2d at 1234.

Here we find that the Commission did not give the re-
quired notice. Dominion had little reason to believe that the
Commission would interpret the Merger Order so sweepingly
as to encompass all energy affiliates. In fact, the Merger
Order's language and context overwhelmingly suggested that
Dominion's interpretation was correct. The order discussed
the comments of only two intervenors, the New York Public
Service Commission and Allegheny Energy, and both sought
to impose the Standards of Conduct only on links between the
pipeline and all electric affiliates, not energy affiliates gener-
ally. Merger Order, 89 FERC at 61,474/1 ("The New York
Commission asserts that the Commission should require the
merged company to adhere to standards of conduct between
natural gas pipeline companies and affiliate electric compa-
nies...."); id. at 61,475/1 ("Allegheny ... specifically notes
that Applicants' commitment to adopt the pipeline standards
of conduct should apply to all affiliates engaged in wholesale
sales of electricity....").

A scouring of the agency record--specifically Allegheny's
Motion to Intervene and its Motion for Clarification--con-
firms this interpretation. See, e.g., Motion for Clarification
and Permission to Reply, and Reply of Allegheny Energy,
Dominion Resources, Inc. and Consolidated Natural Gas
Company, Docket No. EC99-81-000, at 8-9 (Sept. 8, 1999)
("Allegheny Motion for Clarification") (expressing concern
"that CNG's interstate pipeline and local gas distribution
company affiliates may share competitively sensitive informa-
tion already in their possession with electric affiliates" (em-
phasis added)); id. at 10-13 (asking that electric employees

be required to function independently of gas employees);
Motion to Intervene and Request for Conditions of Allegheny
Energy, Dominion Resources, Inc. and Consolidated Natu-
ral Gas Company, Docket No. EC99-81-000, at 13 (Aug. 5,
1999) ("The merger creates increased opportunities and in-
centives for CNG to share this information with the merged
company's electric affiliates....").

Recall that Dominion and CNG had proposed a narrower
set of limits to apply simply between the pipeline and a subset
of electric affiliates--"affiliates [1] with wholesale power mar-
ket-based authority and [2] with whom CNG Transmission
conducts transportation transactions." Merger Order, 89
FERC at 61,477-78; see also Allegheny Motion for Clarifica-
tion, at 6-7. The Commission purported to resolve that
dispute in favor of the intervenors. If it intended to go
beyond a choice between the competing proposals, a sensible
reader would expect it to say so and to say why. It did
neither.

Moreover, the Merger Order relied heavily--so far as
precedent was concerned, exclusively--on the Commission's
Enova decision. In the two pages in which the Commission
stated and explained its decision, 89 FERC at 61,477-78, it
thrice used the phrase, "as we stated in Enova" or its
equivalent ("as we discussed in Enova"). And the Merger
Order used operative language exactly matching that of the
Enova decision:

Therefore, the Applicants would need to revise their
commitment so that the standards of conduct require-
ments apply to the "corporate family" as a whole.

Merger Order, 89 FERC at 61,478.

Therefore, the Applicants would need to revise their
commitment so that the [Order No. 497] restrictions and
requirements would be applicable to the corporate family
as a whole....

Enova, 79 FERC at 62,595. Obviously the only difference is
that in the Merger Order the phrase corporate family is put
in quotes, in apparent homage to Enova. Yet, in Enova, the

Commission ultimately required that the Standards of Con-
duct be applied only "to any affiliate in the corporate family
with an electric power merchant function." Enova, 83 FERC
at 61,871.

Before us the Commission relies heavily on some language
not including the qualifier "electric," such as "all the merged
company's affiliates," "any combination of the energy compa-
nies that would be affiliated," and " 'corporate family' as a
whole." Id. at 61,477-78. But the context suggests that this
language assumed "electric" as an implicit limitation. For
example, the Commission rejected applying the Standards of
Conduct to only "market-based" affiliates because "the
merged company's affiliates with cost-based rates could undu-
ly profit from higher electricity prices when market rates are
less than cost-based rates." Id. at 61,478/1 (emphasis added).
Indeed, the Enova merger order also used vague terms to
describe the Commission's concerns, expressing concern over
"the potential for abuse between any combination of the
energy companies that would be affiliated." Enova, 79
FERC at 62,565. It is hardly surprising, then, that concur-
ring FERC Commissioner HEbert unequivocally read the
Merger Order to cover only links to electric affiliates:

This order requires the applicants for a merger to submit
a new analysis or to accept Standards of Conduct apply-
ing to all electric affiliates. (The applicants offered only
those with market-based rates.)

Merger Order, 89 FERC at 61,482 (HEbert, Comm'r, concur-
ring).

The reasonableness of the Compliance Order's interpreta-
tion also sheds light on the likelihood that Dominion would
have anticipated it. Here, of course, the jurisdictional ques-
tion merges somewhat with the merits, for the predictability
of a Commission position is related to its defensibility. Fur-
ther, if the Commission's late-revealed distinction of Enova
were very powerful, that would operate both to justify the
Compliance Order's much more stringent terms and to under-
mine Dominion's understanding that the words used in Enova
would have the same meaning when used in the Merger

Order; if the distinction were plain, the reader would have to
infer that only a loose analogy was meant.

In fact the Compliance Order's insistence that the Stan-
dards of Conduct be imposed on "all energy affiliates," rather
than only "electric affiliates," represents a sharp and unex-
plained break with FERC precedent and is otherwise arbi-
trary and capricious. See ANR Pipeline Co. v. FERC, 71
F.3d 897, 901 (D.C. Cir. 1995) ("[W]here an agency departs
from established precedent without a reasoned explanation,
its decision will be vacated as arbitrary and capricious.").

The Commission's attempts to distinguish Enova are rather
thin. It principally stresses that the Dominion merger in-
volves several separate gas local distribution companies
("LDCs"), whereas the LDCs in the Enova merger were part
of other entities explicitly covered by the Standards of Con-
duct or the merger-related Code of Conduct. Compliance
Order, 91 FERC at 61,542 n.11. These separate LDCs in the
present merger would be subject to neither the generic
Standards of Conduct at 18 C.F.R. s 161.3, because they are
not pipelines, nor s 2 of Dominion's Proposed Code of Con-
duct, because they are not electric affiliates. The LDCs thus
"could be used to engage in some of the improper sharing of
competitively-sensitive information and other abuses (e.g.,
failing to offer the same discounts to affiliates and non-
affiliates, and not processing all similar requests for service in
the same manner)." Compliance Order, 91 FERC at
61,542/2.

An LDC loophole may very well exist, but it is hardly as
large as the Commission suggests. The Compliance Order
completely fails to acknowledge that Sections 4 and 5 of
Dominion's Proposed Code of Conduct ("PCC") impose re-
strictions on Dominion's LDCs that are almost completely
analogous to those imposed on pipelines under 18 C.F.R.
s 161.3:

Section 4:

(i) Any employee engaged in the wholesale merchant
function is prohibited from obtaining or receiving from
an affiliated LDC any information that the affiliated

 LDC receives from any non-affiliated shipper or any
potential non-affiliated shipper on its system.

(ii) Any employee engaged in the wholesale merchant
function is prohibited from obtaining or receiving from
an affiliated LDC information related to transportation
of natural gas that is not contemporaneously provided
to all potential shippers, affiliated and non-affiliated, on
the affiliated LDC's system.

(iii) Any employee engaged in the wholesale merchant
function is prohibited from obtaining or receiving indi-
rectly from any other employees of any affiliate infor-
mation which the employee engaged in the wholesale
merchant function is prohibited from obtaining or re-
ceiving directly from an affiliated LDC under clauses
(i) and (ii).

(iv) To the maximum extent practicable, employees
engaged in the wholesale merchant function will func-
tion independently of an affiliated LDC's operating
employees.

Section 5:
The Applicants further commit that no affiliated LDC
will unduly discriminate in favor of any actual or poten-
tial affiliated electric generator and against any actual or
potential non-affiliated electric generator regarding ser-
vice availability, tariff provisions containing the rate and
non-rate conditions of service, and/or the application and
enforcement of any tariff provision.

Sections 4 and 5 require LDCs to keep to themselves (i.e.,
not disclose to any power merchant affiliate) information
received from non-affiliated shippers, compare PCC s 4(i)
with 18 C.F.R. s 161.3(e), to disclose information related to
gas transportation to all shippers contemporaneously (if dis-
closed at all), compare PCC s 4(ii) with 18 C.F.R. s 161.3(f),
to separate "[t]o the maximum extent possible" LDC employ-
ees from those engaged in the wholesale merchant function,
compare PCC s 4(iii) with 18 C.F.R. s 161.3(g), and to apply
tariff provisions and to process requests for transportation
without discrimination, compare PCC s 5 with 18 C.F.R.

s 161.3(a)-(d). A threat exists only insofar as an LDC might
become a conduit by which pipeline information can reach
electric affiliates: Section 4(i) is ineffective because it only
prohibits LDCs from disclosing information received directly
by the LDC from non-affiliated shippers. Section 4(ii) is
possibly ineffective because its contemporaneous disclosure
rule applies only to information related to gas transportation.
And Section 4(iii) is irrelevant because it prohibits other
affiliates from becoming conduits of LDC information; it
provides no additional protection against LDCs becoming
conduits of pipeline information.

In addressing this conduit problem, however, the Commis-
sion has used a tank to block a mousehole. Ordinarily, of
course, the Commission is entitled to some deference on its
choice of remedy. But the Compliance Order goes much
further than any apparent need or any cure of the subtle
distinction between this case and Enova. It prohibits the
pipeline from sharing information with any affiliated energy
company, whether it is an LDC or not. The Commission
offers no justification for such a broad limitation.

Further, the Compliance Order destroys pre-merger inte-
grations and their accompanying efficiencies, a change the
Commission never justifies or explains. Before the merger,
CNGT was subject only to the generic Standards of Conduct
applicable between pipelines and their marketing affiliates; it
was thus able to share information and employees with its gas
exploration and production firm. Under the Compliance Or-
der, however, this sharing is now proscribed. But the logic of
correcting anticompetitive hazards posed by a merger implic-
itly suggests remedies only between the merging companies.
After all, the most severe remedy available to an agency is
outright prohibition of the merger, the ultimate in Chinese
walls between the two entities. The Compliance Order,
however, creates barriers within the pre-existing entities,
without explanation. Of course, if the Commission has a
general case for broader restrictions, it can make that case in
the rulemaking that it has launched to expand the generic
Standards of Conduct to "govern the relationships between
the transmission providers and all of their energy affiliates,

not just those engaged in marketing or sales functions."
Notice of Proposed Rulemaking, 66 Fed. Reg. at 50,922/2
(2001).

Finally, we need not reach Dominion's "no-conduit" rule
arguments. Since we vacate the Compliance Order, the only
employees subject to the Standards of Conduct will be those
shared between the pipeline and its (gas or electric) market-
ing affiliates. Dominion already concedes that those employ-
ees should "be bound by the stricter 'automatic imputation'
rule." Dominion Brief at 35-36 & n.17.

* * *

In sum, the Merger Order was obscure enough that Domin-
ion could not reasonably have been expected to anticipate the
Commission's later interpretation. Dominion therefore has
standing to challenge the Compliance Order. In addition, the
Commission's insistence that the Standards of Conduct be
applied to all affiliated energy companies is an unexplained
and unjustified departure from precedent. The Compliance
Order is therefore arbitrary and capricious.

We vacate the Compliance Order and remand to the Com-
mission for proceedings consistent with this opinion.

So ordered.