Gas Transmission Northwest Corp. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 14, 2007 Decided October 16, 2007

No. 03-1257

GAS TRANSMISSION NORTHWEST CORPORATION,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

PROCESS GAS CONSUMERS GROUP, ET AL.,
INTERVENORS

Consolidated with
04-1065, 04-1066

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 Lee A. Alexander, Stefan M. Krantz,
James Howard, C. Todd Piczak, and Carl M. Fink. Debra H.
Rednik entered an appearance.
 2

Beth G. Pacella, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. On the brief
were John S. Moot, General Counsel, Robert H. Solomon,
Solicitor, and Patrick Y. Lee, Attorney.

Before: GARLAND and KAVANAUGH, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.

SILBERMAN, Senior Circuit Judge: Two interstate natural
gas pipelines seek review of Federal Energy Regulatory
Commission (“FERC”) orders that limit the amount of collateral
pipelines may require from non-creditworthy shippers.
Petitioners assert that the orders under review are an
unexplained departure from FERC precedent and, in any event,
are unreasonable (arbitrary and capricious). We disagree, and
we deny the petitions for review.

I.

Although we encounter a series of FERC orders,1 including
three orders on rehearing, then a joint request to hold petitions
in abeyance pending a rulemaking (which FERC terminated,
relying instead on a policy statement), and finally a remand of

1
The orders under review are: PG&E Gas Trans., 101 FERC ¶ 61,280
(2002); e prime, inc. v. PG&E Gas Trans., 102 FERC ¶ 61,062
(2003); North Baja Pipeline, LLC, 102 FERC ¶ 61,239 (2003); e
prime, inc. v. PG&E Gas Trans., 102 FERC ¶ 61,289 (2003); PG&E
Gas Trans., 103 FERC ¶ 61,137 (2003); e prime, inc. v. PG&E Gas
Trans., 104 FERC ¶ 61,026 (2003); North Baja Pipeline, LLC, 105
FERC ¶ 61,374 (2003); PG&E Gas Trans., 105 FERC ¶ 61,382
(2003); North Baja Pipeline, LLC, 115 FERC ¶ 61,141 (2006); North
Baja Pipeline, LLC, 117 FERC ¶ 61,146 (2006) (“Remand Order”).
 3

the record at FERC’s request to allow FERC to more fully
consider petitioners’ arguments, the issue before us is rather
simple. Petitioners, apparently stung by recent shipper defaults,
wished to amend their tariffs to require non-creditworthy
shippers (those who have below investment grade bond ratings)
to post twelve months’ reservation charges as collateral. The
Commission determined that petitioners’ proposed tariffs were
“unjust and unreasonable”; that as a matter of policy FERC
would ordinarily permit only a requirement of three months’
reservation charges. The Commission acknowledged that
certain pipelines had filed tariffs requiring twelve months’
collateral, but those exceptions to its policy fell into two
categories: either the tariffs had been filed without protests that
caused FERC to focus on the issue, or the longer collateral
requirements were explicitly permitted for newly constructed
facilities.

Besides asserting that these exceptions were actually
inconsistencies in its policy, petitioners contended that a three-
month reservation charge was inadequate collateral to cover
their “remarketing risk” – the ability to resell the contracted-for
pipeline capacity (at the same price). FERC recognized that a
three-month collateral requirement might not fully cover
petitioners’ remarketing risk, but it determined that this risk is
a normal cost of doing business and could be addressed as a
factor in petitioners’ rate of return.

Finally, petitioners contended that their particular situations
– both having suffered defaults in recent years – justified a
deviation from FERC’s policy. The Commission determined,
however, that the difficulties petitioners had faced were
transitory, caused by unusual events such as the Western energy
crisis.
 4

II.

Petitioners make a half-hearted attempt to suggest that
FERC’s decision to abandon a rulemaking on the collateral issue
somehow suggests that its policy is really an illegal substantive
rule, but there is nothing to their argument. FERC simply
decided that a general policy statement would suffice, leaving
open case by case determinations. But the Commission was,
and is, prepared to defend the application of its policy in
individual cases as it has done here, and an agency’s policy can
just as well be articulated in adjudications as in rulemaking.
SEC v. Chenery Corp., 332 U.S. 194, 202-03 (1947). In short,
FERC has not sought to rely on the policy statement, but rather
to defend its policy in the challenged orders. Guardian Fed.
S&L Ass’n v. Fed. S&L Ins. Corp., 589 F.2d 658, 666 (D.C. Cir.
1978).

Petitioners’ alleged inconsistencies in FERC’s decision are,
in our view, adequately explained. With regard to the
unchallenged filings, FERC said:

[I]n the absence of protests, the Commission may
simply have accepted these provisions without
examining whether they conformed to Commission
policy and precedent. Under such circumstances,
accepting another pipeline’s provisions does not
necessarily establish a generic Commission policy or
precedent regarding similar tariff provisions.

Remand Order, 117 FERC ¶ 61,146 at 61,786 (2006). We think
that position is eminently reasonable. FERC’s acceptance of a
pipeline’s tariff sheets does not turn every provision of the tariff
into “policy” or “precedent.” See, e.g., Alabama Power v.
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FERC, 993 F.2d 1557, 1565 n.4 (D.C. Cir. 1993); Nevada
Power Co., 113 FERC ¶ 61,007 at 61,013-14 (2005) (refusing to
treat a rate calculation from a prior tariff as precedent because
“the issue was not raised, and the Commission did not discuss
it or rule on it”). When a proposed tariff with more than a three-
month collateral requirement has been challenged by shippers,
FERC has required pipelines to amend their filing to comply
with its policy. See Valero Interstate Trans. Co., 62 FERC ¶
61,197 at 62,397 (1993).

Petitioners nevertheless contend that FERC’s practice puts
them at a competitive disadvantage vis-a-vis pipelines whose
nonconforming collateral provisions in their tariffs escaped
scrutiny. But as FERC’s counsel assured us at oral argument, if
petitioners, or anyone filing a complaint, challenged those tariff
provisions, the Commission would apply its three-month policy.

Apparently, however, two pipelines in direct competition
with petitioners (Alliance Pipeline and Northern Border
Pipeline) have twelve-month collateral requirements that are not
subject to challenge. That is because they fall within another
exception to FERC’s policy. The Commission, as we noted,
permits pipelines to impose a twelve-month collateral
requirement on newly constructed facilities, and those pipelines
are such. Petitioners contend that this policy is arbitrary and
capricious because the Commission has not adequately
explained its differential treatment of new pipelines and existing
pipelines. To be sure, FERC’s initial explanation for treating
tariffs on new facilities differently is, as petitioners recognized,
economically faulty. FERC said, “[O]nce the pipeline is in
service, the construction costs are sunk (have already been
expended), so the ongoing financial risk to the pipeline is less
. . . .” PG&E Gas Trans., 103 FERC ¶ 61,137 at 61,472 (2003).
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Actually the financial risk is the same whether the pipeline is
already built or not. But in its rehearing order, FERC explained
reasonably that pipelines and their financing institutions’
reliance interests for new investment justify the longer collateral
requirement. “[T]he pipeline is under no obligation to construct
facilities, and the pipeline as well as its lenders have an interest
in ensuring a reasonable amount of collateral from the initial
shippers supporting the project before committing funds to the
project.” PG&E Gas Trans., 105 FERC ¶ 61,382 at 62,700
(2003).

***
Alternatively, petitioners re-argue before us that the
Commission’s policy ordinarily limiting collateral to three
months’ reservation charges is unreasonable because it does not
cover the remarketing risk. Petitioners concede that a pre-paid
three-month charge will typically protect the pipeline against a
non-payment risk because normally the pipeline will be able to
discontinue service to the shipper in default within three
months.2 But that does not cover the pipeline against its
remarketing risk. If the pipeline cannot find a replacement for
the defaulting shipper, it would have unused capacity. The
Commission acknowledges that the pipelines have this risk, but
FERC concluded that it was an ordinary business risk and
therefore should be factored into the pipeline’s rate of return –
which is another way of saying the cost of that risk should be
spread over all the pipeline’s customers. Petitioners assert that

2
The pipeline would have to seek the Commission’s approval before
it terminated service to the shipper in default, termed an abandonment.
But, contrary to petitioners’ contentions, there is no reason to believe
that FERC would not grant a pipeline’s abandonment request if a non-
creditworthy shipper failed to post the required amount of collateral.
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FERC’s approach is inconsistent with its policy of ordinarily
attributing a pipeline cost to the one shipper who is responsible
for the cost. But FERC has never proclaimed that as an absolute
rule. See K.N. Energy, Inc. v. FERC, 968 F.2d 1295, 1300 (D.C.
Cir. 1992) (noting that pipeline rates must reflect “to some
degree” the costs caused by the customer paying the rates).

FERC rejected a collateral charge of more than three
months in the normal situation because a greater charge was
thought to hinder the Commission’s policy of eliminating entry
barriers and promoting “open access” to pipeline services. Of
course, “open access” is just another way of saying that the
Commission seeks to maximize the number of shippers in order
to increase the country’s supply of natural gas. Here, FERC
chose to promote this policy by encouraging the non-
creditworthy marginal shipper’s entry into the market. Some
remarketing risk may be spread to creditworthy shippers, but the
Commission believes its policy is justified by the beneficial
effects on open access, and the resulting increase in the supply
of natural gas. That strikes us as the sort of policy call entrusted
to the Commission – not to us.

Petitioners complain, however, that they have no assurance
– despite FERC’s claim – that they will be adequately
compensated in the rate of return for remarketing risk. Counsel
for the Commission assured us, however, that it was a legitimate
factor to be considered, and it is certainly premature for
petitioners to speculate that FERC will not permit them an
adequate rate of return. In at least one prior case, FERC has
considered the effects of remarketing risk while determining the
proper rate of return for a natural gas pipeline. In the Ozark
ratemaking proceeding, the Commission set Ozark Gas
Transmission’s return on equity “at the top of the zone of
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reasonableness” because of several factors related to credit risk.
Ozark Gas Trans. Sys., 68 FERC ¶ 61,032 at 61,107-08 (1994).
FERC noted that “one of Ozark’s two principal customers . . . is
involved in bankruptcy proceedings, and at this point, still could
choose to reject its contract with Ozark.” Id. at 61,108. Ozark
also had “substantial excess capacity” and faced “considerable
competition” from other pipelines in the region. Id. In other
words, the Commission was willing to increase Ozark’s rate of
return to compensate the pipeline for its relatively high credit
risk and remarketing risk.

***
Finally, petitioners claim that they face unique challenges.
GTN complains that it has faced twelve defaults in recent years,
and its primary markets (Northern California and the Pacific
Northwest) are likely to experience slower growth in the future.
But FERC determined that the defaults by GTN’s shippers were
“isolated,” and “appear to be related to or a result of an unusual
event, the western energy crisis.” Remand Order, 117 FERC at
61,784-85. The Commission also emphasized that “GTN has
failed to show that northern California markets will not be
steady or continue to grow over time, regardless of the isolated
bankruptcies of a handful of shippers.” Id. at 61,785. We see
no reason to second guess these factual determinations, since
“[t]he court properly defers to policy determinations invoking
the Commission’s expertise in evaluating complex market
conditions.” Tennessee Gas Pipeline Co. v. FERC, 400 F.3d
23, 27 (D.C. Cir. 2005).

North Baja, for its part, claimed that it faced a default from
one out of five shippers, or 20% of its customer base. The
Commission responded that despite this default, North Baja was
“95 percent subscribed for long term firm capacity.” Remand
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Order, 117 FERC at 61,785. Given that the pipeline was
operating at nearly full capacity, FERC rejected reasonably
North Baja’s assertion that it was in a “tenuous position” with
respect to credit risk.

III.

For the aforementioned reasons, the petitions for review are

Denied.