Midland Cogn Vntrs v. FERC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 13, 1997 Decided January 16, 1998

No. 96-1200

Southeastern Michigan Gas Company and

Michigan Gas Company,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Northern States Power Company (Minnesota), et al.,

Intervenors

Consolidated with

Nos. 96-1207, 96-1211, 96-1213, 96-1216, 96-1307, 96-1324,

96-1366, 96-1376, 96-1377, 96-1412, 96-1441, 97-1079

________

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Clinton A. Vince argued the cause for joint petitioners and
supporting intervenors, with whom Deborah A. Swanstrom,

Emmitt C. House, Mary Ann Walker, Neil L. Levy, David I.
Bloom, Randall B. Palmer, Shaheda Sultan, Elizabeth W.
Whittle, Gordon J. Smith, Ronald N. Carroll, Charles H.
Shoneman, Eileen G. Stanek, David D'Alessandro, Kelly A.
Daly, Thomas L. Casey, Solicitor General, State of Michigan,
Don L. Keskey and Henry Boynton, Assistant Attorneys
General, Frederick J. Killion, Allan W. Anderson, Jr., and
David B. Ward were on the joint briefs.

Deborah A. Moss argued the cause for petitioner Consum-
ers Energy Company, with whom William M. Lange was on
the briefs.

Frederick J. Killion argued the cause for petitioners
Northern States Power Company, et al., with whom John H.
Burnes, Jr., and Theresa I. Zolet were on the briefs.

Philip F. Cronin, Jr. argued the cause for petitioner
Rochester Gas and Electric Corporation, with whom Eliza-
beth W. Whittle was on the briefs.

William W. Brackett argued the cause for petitioner Mid-
land Cogeneration Venture Limited Partnership, with whom
Terry O. Brackett was on the briefs.

Joel M. Cockrell, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent, with whom
Jay L. Witkin, Solicitor, and John H. Conway, Deputy Solici-
tor, were on the brief.

James D. McKinney, Jr., argued the cause for intervenor
Great Lakes Gas Transmission Limited Partnership, with
whom G. William Stafford and John J. Wallbillich were on
the brief.

Allan W. Anderson, Jr., argued the cause for intervenors in
support of respondents, with whom David B. Ward, Shaheda
Sultan, Charles H. Shoneman,and Elizabeth W. Whittle were
on the brief.

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

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: This case grows out of a long-
running dispute between the Great Lakes Gas Transmission
Partnership ("Great Lakes"), various factions of its shippers,
and the Federal Energy Regulatory Commission ("FERC").
We first reviewed FERC's resolution of this matter in Trans-
Canada Pipelines Ltd. v. FERC, 24 F.3d 305 (D.C. Cir. 1994),
where we remanded the case to FERC for further consider-
ation. On remand, FERC abandoned its initial position and
issued new orders adverse to the parties that had prevailed in
the pre-TransCanada administrative proceedings. We now
consider whether FERC's latest ratesetting orders concern-
ing the Great Lakes Natural Gas Transmission Pipeline com-
plied with Section 4 of the Natural Gas Act ("NGA"), see 15
U.S.C. s 717c, and were not otherwise arbitrary and capri-
cious.

I.

FERC orders issued in 1989 and 1990 authorized Great
Lakes, which already operated a 2,000-mile interstate pipe-
line, to build a series of mainline loops that substantially
enlarged the system's shipping capacity and that increased its
rate base from $202 million to $953 million. FERC tradition-
ally approved pipelines' proposals to roll expansion costs into
their general rates (thereby allocating expansion costs to all
users pro rata regardless of the extent to which they use the
new facilities) so long as the pipeline could show both that the
system was integrated and that qualitative benefits accrued
to all customers as a consequence of the expansion. See
TransCanada, 24 F.3d at 308 (citing Great Lakes Gas Trans-
mission Co., 45 FERC p 61,237, 61,695 (1988)); Great Lakes
Gas Transmission L.P., 57 FERC p 61,140, 61,520 (1991),
reh'g denied, 62 FERC p 61,101, 61,713 (1993). When FERC
reviewed Great Lakes' proposal, however, it abruptly aban-
doned its traditional standard (called the "Battle Creek test"
after the case in which we first approved of its application, see
Battle Creek Gas Co. v. FPC, 281 F.2d 42 (D.C. Cir. 1960)).
Rather than the two-part Battle Creek test, FERC applied a
"commensurate benefits" test, in which it compared the cost
of expansion with the benefits accruing to existing users. 57
FERC at 61,520-21. Because it found that construction costs

far exceeded any consequent benefit to existing users, FERC
ordered Great Lakes to price its services incrementally (i.e.,
recovering expansion costs only from those customers that
use the new facilities ("expansion shippers")). See 57 FERC
at 61,512; Great Lakes Gas Transmission L.P., 57 FERC
p 61,141, 61,534 (1991), reh'g denied, 62 FERC p 61,102,
61,731 (1993). The expansion shippers petitioned this court
for relief, claiming that FERC's orders were arbitrary, dis-
criminatory, impermissibly retroactive, and issued in violation
of the Administrative Procedure Act. See TransCanada, 24
F.3d at 307.

We held that FERC failed to provide a "reasoned explana-
tion" for having abandoned the Battle Creek test and remand-
ed the case. See 24 F.3d at 310. While not holding that the
commensurate benefits test was itself invalid, we nonetheless
found that FERC's sudden abandonment of Battle Creek
required more elaborate explanation and more substantial
consideration of the consequences.1 See id. at 311.

On remand FERC again altered its course. Rather than
elaborate its rationales for adopting the commensurate bene-
fits test, FERC reverted to the Battle Creek test and held
that rolled-in pricing would be more equitable than incremen-
tal pricing. See Great Lakes Gas Transmission L.P., 72
FERC p 61,081, 61,423 (1995). FERC's Chair dissented,
arguing that the outcome was inequitable and not mandated
by TransCanada. See id. at 61,431-33. The FERC majority
justified its return to Battle Creek by finding that the expan-
sion parties had reasonably relied at the time of construction
on an expectation that FERC would apply the Battle Creek
standard. See id. at 61,427. FERC concluded that its initial

__________
1 FERC has since issued a rule that establishes a presumption in
favor of incremental pricing when rolling in expansion costs would
increase rates to existing customers more than five percent. See
Pricing Policy for New and Existing Facilities Constructed by
Interstate Natural Gas Pipelines, 75 FERC p 61,105 (1996). Be-
cause FERC issued its rule after this case had begun and did not
rely on it in this proceeding, we do not consider what effect its
application would have had.

decision to apply a commensurate benefits test was "legal
error" and ordered "Great Lakes to refund to the expansion
shippers the principal amounts that they paid in excess of the
lawful systemwide rolled-in rate.... [FERC also] per-
mit[ted] Great Lakes to impose offsetting surcharges on the
pre-expansion shippers." Id. at 61,430. FERC found that, in
the interests of equity, interest charges should not apply
retroactively (though a dispute exists over when interest
began to accumulate). See id.

Nonexpansion customers filed a petition for rehearing.
FERC rejected the petition, see Great Lakes Gas Transmis-
sion L.P., 75 FERC p 61,089, 61,268 (1996), affirming its
earlier decision, reemphasizing the significance of the expan-
sion shippers' reliance interest in the application of the Battle
Creek standards, and permitting Great Lakes to retain a
$15.7 million difference between surcharges and refunds. Id.
(The surplus was later recomputed to be $17.5 million. See
Great Lakes Gas Transmission L.P., 76 FERC p 61,157,
61,935 n.29 (1996).) Furthermore, FERC clarified that
rolled-in pricing applied to all nonexpansion shippers, regard-
less of the nature of their shipping contracts. See 75 FERC
at 61,293-94. FERC's Chair again dissented. FERC later
granted Great Lakes' motion to clarify the interest provisions
of the earlier orders, see 76 FERC p 61,926, and held, among
other things, that interest began to accrue on all surcharges
on October 1, 1995, when rolled-in rates took effect. Id. at
61,936-38. Various parties now petition for review of nearly
every element of FERC's orders.

II.

In TransCanada, we remanded the case to FERC to
permit it to elaborate its factual findings and to explain its
decision to apply the commensurate benefits test retroactive-
ly. See TransCanada Pipelines, 24 F.3d at 310-11; cf.
Checkosky v. SEC, 23 F.3d 452, 465 (D.C. Cir. 1994) (Silber-
man, J., concurring) (stating that remand without vacating is
proper when court is "unsure and [wants] ... clarification of
[the agency's] position and the rationale therefor"). On re-

mand, FERC abandoned the commensurate benefits test and
readopted the Battle Creek test. Natural Gas Pipeline of
America and a number of other natural gas shippers (collec-
tively "Natural") challenge both FERC's authority to return
to the Battle Creek test and its application thereof.

A.

Natural initially contends that FERC's decision to readopt
the Battle Creek test was arbitrary and capricious because it
misinterpreted TransCanada's mandate, arguing that in
TransCanada we remanded solely to permit FERC to clarify
its reasoning. While Natural is correct that the remand
provided that option, once FERC reacquired jurisdiction, it
had the discretion to reconsider the whole of its original
decision. See Radio Television S.A. de C.V. v. FCC, No.
96-1438, 1997 WL 761854, at *6 (D.C. Cir. Dec. 12, 1997).
We therefore reject Natural's contention that FERC misun-
derstood the ambit of its authority following the Trans-
Canada remand.

Natural next argues that FERC lacked substantial evi-
dence to support its finding that Great Lakes and the expan-
sion shippers had a settled expectation that FERC would
apply the Battle Creek test to its review of their Section 4
ratesetting petition. Natural again misunderstands FERC's
position. FERC does not purport to have made factual
findings regarding the parties' reliance interests. Rather,
FERC inferred from the significant costs incurred by Great
Lakes in building the expansion facilities that it and the
expansion shippers anticipated application of Battle Creek at
the time that they undertook construction. See 75 FERC at
61,274 & n.40. Because such a conclusion is not a factual
finding, it did not require specific evidentiary underpinnings.
Thus, we adopt the same standard of review we applied in
Adelphia Comm. Corp. v. FCC, 88 F.3d 1250 (D.C. Cir. 1996),
where we reviewed a Federal Communications Commission
presumption that was premised upon Commission experience
rather than factual findings to ensure that it was not arbi-
trary or capricious.

According to Natural, FERC's invocation of the reliance
rationale was an abuse of discretion because the expansion
shippers could not reasonably have relied either on the
outcome of administrative proceedings or on the standard
that would be applied. FERC did not premise readoption of
Battle Creek on the expansion shippers' reliance upon the
outcome of the Battle Creek test; it merely concluded that
the expansion shippers were entitled to rely on their expecta-
tion that FERC would apply that test to Great Lakes' Section
4 petition. Thus, we review only FERC's justification of its
return to Battle Creek on that basis. The nonexpansion
parties' objection to FERC's invocation of the reliance ratio-
nale is without foundation. In a long line of cases beginning
with Retail, Wholesale & Dep't Store Union v. NLRB, 466
F.2d 380 (D.C. Cir. 1972), we have held that, in some circum-
stances, parties are entitled to rely on the consistent applica-
tion of administrative rules. See, e.g., Williams Natural Gas
Co. v. FERC, 3 F.3d 1544, 1554-55 (D.C. Cir. 1993). So long
as courts are permitted to consider parties' reliance on old
rules in determining whether the retroactive application of a
new rule is arbitrary and capricious, it follows that agencies
may consider the benefits of doctrinal stability when deciding
whether to apply new rules retroactively.

Natural also contends that Great Lakes and the expansion
shippers were on notice of pending changes to FERC's rate
design policy, see Pricing Policy, 75 FERC p 61,105, when
they decided to build their new facilities and that such
knowledge bars them from now claiming that they relied on
the application of the Battle Creek test. In fact, there was no
notice of pending changes in the applicable standard (or at
least none to which we have been referred) at the time of the
original Section 7 proceeding, and notice of imminent admin-
istrative recalibration therefore cannot be the basis for chal-
lenging the reliance rationale in this instance. Compare
Chadmoore Comm., Inc. v. FCC, 113 F.3d 235, 240 (D.C. Cir.
1997) (noting that adjudication under review was part of
broader--and already publicized--plan to modify the distribu-
tion of construction licenses).

Finally, Natural asserts a vague claim that FERC violated
the pre-expansion shippers' constitutional rights by inducing
the very reliance upon which FERC ultimately justified appli-
cation of the Battle Creek test. Before Great Lakes began
construction of the expansion facilities, some pre-expansion
shippers moved FERC to consolidate Great Lakes' Section 7
permitting and Section 4 ratesetting proceedings. FERC
refused and instead granted the construction permits and
deferred ratesetting until after construction was complete.
See Great Lakes Gas Transmission L.P., 48 FERC p 61,127
(1990); Great Lakes Gas Transmission L.P., 48 FERC
p 61,273 (1989). Natural claims that FERC's decision to
permit construction prior to resolution of the rate issue,
coupled with its later invocation of the reliance rationale,
made the outcome of the Section 4 proceeding a foregone
conclusion and thereby denied the nonexpansion shippers a
meaningful hearing.

Not only does Natural fail to refer us to any applicable
constitutional provision, but it also mistakes FERC's conclu-
sion that Great Lakes relied on the application of Battle
Creek for a finding that Great Lakes relied on the outcome of
the Battle Creek test. Even if FERC's disaggregation of the
Section 4 and Section 7 proceedings induced the expansion
shippers to rely on application of the Battle Creek test,
FERC's invocation of the reliance rationale was wholly unre-
lated to its disposition of the merits of Great Lakes' petition.
In short, Natural does not refer us to any procedural irregu-
larity in its application, let alone any procedural or substan-
tive shortcoming of constitutional dimension in FERC's hear-
ings.

FERC's readoption of the Battle Creek test was a permissi-
ble exercise of administrative discretion, and we therefore
turn to whether FERC correctly applied the test.

B.

Natural further contends that even if FERC was entitled to
readopt Battle Creek, FERC erred in its application of the

test.2 While our standard for reviewing ratesettings is defer-
ential, see Time Warner Entertainment Co. v. FCC, 56 F.3d
151, 163 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 911 (1996), it
is "not ... an empty gesture." Northern States Power Co. v.
FERC, 30 F.3d 177, 180 (D.C. Cir. 1994); see Tarpon Trans-
mission Co. v. FERC, 860 F.2d 439, 442 (D.C. Cir. 1988)
(stating that we will not "rubberstamp[ ] unsupported, and
perhaps unsupportable, agency decisions").

The Battle Creek test permits rolled-in pricing when expan-
sion facilities are part of an integrated pipeline system and
when the expansion provides system-wide benefits, such as
additional capacity, increased reliability, or enhanced expansi-
bility. See Battle Creek, 281 F.2d at 47. Section 4 of the
NGA, pursuant to which FERC has the authority to regulate
natural gas sales and transportation pricing, mandates "just
and reasonable" rates. 15 U.S.C. s 717c(a). Natural and
FERC disagree over whether application of the Battle Creek
test in this instance generated "just and reasonable" rates.
Natural argues both that FERC neglected to satisfy its
statutory obligation to ensure the equity of its orders and
that, even if the rates in question here were reasonable,
FERC's application of the test was infected with error.

Natural claims at the outset that FERC failed to comply
with its statutory mandate to ensure "just and reasonable
rates" because its application of Battle Creek was mechanical
and failed to consider the equity of the additional costs with
which the nonexpansion parties would be saddled after rates
were rolled in. Although Natural is, of course, correct that

__________
2 At oral argument, Natural contended that because of the affili-
ate relationship between Great Lakes and TransCanada Pipelines
Ltd., which is also Great Lakes' largest customer and the largest
expansion shipper, FERC should have exercised heightened scruti-
ny over the effects of rolling in rates. After relegating this
argument to a single footnote in its briefs, Natural referred to it
repeatedly at argument. Natural's tactic smacks of sandbagging,
and we need "not resolve issues raised so fecklessly." Koger v.
Reno, 98 F.3d 631, 634 (D.C. Cir. 1996); cf. DiCola v. FDA, 77 F.3d
504, 506 n.* (D.C. Cir. 1996) ("As the parties have argued the issue
in the margins, so too do we dispose of it.").

all FERC ratemaking is "subject to the statutory 'fair and
equitable' standard," ANR Pipeline Co. v. FERC, 71 F.3d
897, 902 (D.C. Cir. 1995), fairness and equity do not require
FERC to compute the actual costs and benefits accruing to
each shipper before approving or modifying proposed rates.
See TransCanada, 24 F.3d at 309.

Natural argues that our decision in Algonquin Gas Trans-
mission Co. v. FERC, 948 F.2d 1305 (D.C. Cir. 1991), man-
dates that FERC compute quantitative costs and benefits in
determining the equity of a rate scheme and that because
FERC did not consider the actual costs and benefits associat-
ed with the expansion facilities, its decision was arbitrary and
capricious. The Algonquin opinion is composed of two parts.
In the first section of the opinion, which addressed the
proposed roll-in of facilities expansion costs, we held that
when FERC imposes rates of its own design (rather than
merely reviewing those submitted by the parties) under Sec-
tion 5 of the NGA, see 15 U.S.C. s 717d, it must "offer more
than a conclusionary statement that the existence of system-
wide benefits renders it unjust to allocate facilities costs
incrementally." Id. at 1313. We held that FERC must
"show[ ] that the incremental facilities produce specific, sys-
tem-wide benefits...." Id. at 1314. FERC's remand orders
in the present case reviewed the various benefits that would
accrue to all users from Great Lakes' expansion, and FERC
thereby satisfied this element of Algonquin. See 75 FERC
at 61,280-83.

As both parties noted at oral argument, our decision in
TransCanada seems in some tension with the second section
of Algonquin. In that portion of Algonquin, we addressed
FERC's decision to permit the roll-in of increased gas costs
caused by increased demand from new customers and the gas
company's consequent use of higher-priced suppliers. We
held that where FERC rejects the parties' pricing scheme
and instead mandates a pricing plan that causes existing
customers to pay more for service that is unchanged from
that which they received before the ratemaking, FERC must
"explicitly consider the cost shifting that its order might
effect." Algonquin, 948 F.2d at 1315. In TransCanada, we
stated that:

Algonquin undoubtedly does require a reasonably specif-
ic qualitative description of the systemwide benefits of an
integrated facility. But the Court was careful not to
require a balancing of costs and benefits (much less a
quantification thereof), and indeed confirmed that the
general test for rolling-in was the same that Great Lakes
discerns in Commission precedent [relying on Battle
Creek].

TransCanada, 24 F.3d at 309. Our TransCanada holding
therefore seems to accentuate the first Algonquin holding to
the detriment of the second. The two holdings, however, are
reconcilable upon consideration of their underlying factual
bases.

In Algonquin, we held that FERC had to consider the cost-
shifting effect of its order because existing users in that case
got no benefit in exchange for increased rates. See Algon-
quin, 948 F.2d at 1314-15. When FERC approves a rate
application under the Battle Creek standard, it must have
found that expansion provided existing users with qualitative
benefits. See TransCanada, 24 F.3d at 308 (pointing out the
two Battle Creek prongs). Thus, where no discernable differ-
ence existed between pre- and post-expansion service, FERC
was obligated to consider the cost shifting implicit in its
order, see Algonquin, 948 F.2d at 1315, but where benefits
accrue to nonexpansion customers, there is no cost shifting--
rather, existing users merely are being charged for the
quantum of the new facilities and its attendant benefits
attributable to their demand. The second part of Algonquin
involved a roll-in of gas costs rather than facilities costs, and
the result in Algonquin depends critically upon the unique
nature of gas as a fungible commodity. In most ratesettings,
including the one currently before us, changes to an integrat-
ed system's facilities lead to qualitative improvements in
service to all customers, and the Battle Creek test will apply.
The cost-shifting portion of Algonquin therefore is consistent
with the Battle Creek requirement that a transporter show
qualitative benefits that accrue to existing users before
rolling in expansion costs. Compare id. with Battle Creek,
281 F.2d at 47-48.

As for Natural's claim that the statute requires a specific
finding that rates are equitable, FERC addressed the ques-
tion when it noted that:

Under the Battle Creek test, once facilities are found to
be integrated into the mainline system and to provide a
positive benefit to all customers, the costs of those facili-
ties are considered to be part of the pipeline's cost of
serving all its customers. That is because the demand of
all customers for system capacity creates the need for
system expansion.

75 FERC at 61,284 (emphasis added). Because every shipper
is economically marginal, the costs of increased demand may
equitably be attributed to every user, regardless when it first
contracted with the pipeline. See 1 Alfred E. Kahn, The
Economics of Regulation 140 (1970). Thus, when an expan-
sion is both integrated and to the benefit of existing users,
FERC is not bound to study the quantitative effect of rolling-
in construction costs.

Natural next contends that FERC's application of the
Battle Creek test was infected with bad faith (and is therefore
arbitrary and capricious) because the remand orders' findings
contradict FERC's pre-TransCanada findings on the same
factual record. FERC responds that whatever tension exists
between its original findings and those it made on remand
reflects only that the Battle Creek standard is less exacting
than the commensurate benefits test. Natural refers the
court specifically to four of FERC's findings: reliance, cross-
subsidization, efficiency, and capacity. The first three find-
ings may be dealt with summarily because it is plain that any
alleged contradictions are the direct consequence of FERC's
readoption of the more lenient Battle Creek standard on
remand. For example, on the cross-subsidization findings,
while Natural is correct that FERC initially found impermis-
sible cross-subsidization, the standard applied on remand
required only that the expansion parties show some qualita-
tive improvement to satisfy the system-wide benefits element
of the Battle Creek test. On both a theoretical and practical
basis, it is perfectly possible for both cross-subsidization and

system-wide benefits to exist on the same facts. Indeed, both
can logically be said to occur any time that a system change
benefits all customers but to differing degrees. Thus, the
first series of orders' finding of cross-subsidization is not
inconsistent with the remand orders' finding that some quali-
tative system-wide benefits may accrue to all shippers.

The fourth alleged contradiction, which concerned FERC's
findings regarding system capacity, gives us greater pause--
indeed FERC's own counsel conceded at oral argument that
"[m]aybe [FERC] misspoke a little on capacity." In its
original orders, FERC found that "it has not been shown that
the additional capacity will inure to the benefit of existing
customers by providing additional interruptible and overrun
["I/O"] capacity." 57 FERC at 61,524. In the remand
orders, however, FERC made two capacity-related findings:
(1) expansion "will accommodate greater variation in demands
on the system," and (2) it will "increase the opportunity for
overrun and interruptible service for all of Great Lakes'
customers." 72 FERC at 61,428. FERC's first finding on
remand is not inconsistent with its original findings. That
additional I/O capacity does not exist does not necessarily
imply that the system could not accommodate greater varia-
tion in demand (e.g., increased ability to moderate supply
when undertaking maintenance). See 75 FERC at 61,281.
As for the second finding, FERC supports its conclusion with
specific references to the testimony of one of Great Lakes'
experts, Mr. Elkouri. Mr. Elkouri testified that the expan-
sion facilities increase capacity for existing users. And that
is, of course, true--increased demand with no increase in
capacity would decrease every shipper's capacity to use the
pipeline at some point (no contract is perpetual), and to the
extent that there is greater capacity, there is consistently
more opportunity for its use by I/O shippers (regardless of
projected load, intermittent capacity will inevitably arise).
Whatever apparent contradictions are embedded in the rec-
ord are therefore the product of a change in the governing
legal standard and of FERC's reexamination of the adminis-
trative record. See Troy Corp. v. Browner, 120 F.3d 277, 283
(D.C. Cir. 1997) ("we only determine whether the decision

was arbitrary and capricious, or otherwise contrary to law.
In so doing, we examine whether the decision was based on
the relevant factors and was not 'a clear error of judgment.' "
(quoting Citizens to Preserve Overton Park, Inc. v. Volpe, 401
U.S. 402, 416 (1971))).3

III.

After it had applied the Battle Creek test and concluded
that Great Lakes' proposal to roll in expansion costs was
reasonable, FERC found that the expansion shippers should
be refunded the difference between the amount they were
charged when rates were incremental and that which they
would have been charged if expansion costs had been rolled
in. FERC therefore required Great Lakes to reimburse the
expansion shippers for their excess costs and permitted Great
Lakes to charge nonexpansion shippers an offsetting sur-
charge. FERC further held that interest accrued on refunds
and surcharges only as of October 1, 1995, when rolled-in
prices took effect.

A.

Natural contends that FERC improperly awarded the ex-
pansion shippers a retroactive remedy because of a mistaken

__________
3 In its reply brief, Natural appears to contest the sufficiency of
the factual bases for FERC's findings regarding integration and the
existence of system-wide benefits. Natural claims that those find-
ings have been in dispute throughout this proceeding. In support
of its argument, Natural refers us to the administrative record. We
have consistently held that "[c]onsidering an argument advanced for
the first time in a reply brief ... is not only unfair to an appellee
but also entails the risk of an improvident or ill-advised opinion on
the legal issues tendered." McBride v. Merrell Dow & Pharmaceu-
ticals, Inc., 800 F.2d 1208, 1211 (D.C. Cir. 1986) (citations omitted).
A party does not preserve factual issues on appeal by raising them
in the administrative proceeding and then referring to them without
elaboration in a reply brief. Not only does the opposing party lose
its opportunity to contest the merits of the factual challenge, but
the court does not get the benefit of the adversarial process.
Natural has forfeited any factual objections to FERC's orders.

belief that its original orders were infected with legal error.
See, e.g., 72 FERC at 61,430. According to Natural, because
TransCanada did not mandate readoption of the Battle Creek
test, the original FERC orders were not "erroneous," and on
remand, FERC was free to choose any pricing scheme.
Thus, contrary to FERC's orders, the expansion parties were
not "entitled" to be "made whole," and FERC was not
authorized to impose a retroactive remedy.

Natural misapprehends the nature of FERC's original er-
ror. Regardless of whether incremental rates could have
been justified, they were not. FERC's failure to explain
itself was itself error, see TransCanada, 24 F.3d at 309-10,
and the rates it imposed without adequate reasoning there-
fore were invalid. Thus, although Natural is correct that
incremental rates were not per se impermissible, their appli-
cation was erroneous in this case. And because FERC may
"undo what [was] wrongfully done by virtue of [a prior]
order," United Gas Improvement Co. v. Callery Properties,
Inc., 382 U.S. 223, 229 (1965), its decision to approve a
retroactive remedy was within its discretion. See Natural
Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073-74 (D.C.
Cir. 1992) (noting presumption in favor of retroactive reme-
dies for erroneous FERC decisions).

B.

In its July 26, 1995, Order, FERC held that "refunds and
surcharges shall not include interest." 72 FERC at 61,430.
FERC permitted non-expansion parties to amortize their
payments, but if they chose amortization, they were liable for
interest "for the amortization period." Id. FERC declined
to require interest for the entire period because it hoped to
"ease the adverse effects of [its] legal error on non[expansion]
shippers, while also ensuring that Great Lakes is kept whole."
75 FERC at 61,294. Great Lakes moved for clarification of
whether interest accumulated on all balances from October 1,
1995 (when rolled-in rates took effect) or whether it did not
begin to accumulate until 90 days after Great Lakes' amended
compliance filing, which occurred roughly ten months later.

See 76 FERC at 61,937. FERC held that it intended only to
exclude the accrual of interest until October 1, 1995. Interest
accumulated every day after that, regardless of whether
payment was ultimately lump-sum or amortized. Id. Peti-
tioners challenge both FERC's interest exemption and its
imposition of interest on all payments made after October 1,
1995.

Midland Cogeneration Venture Limited Partnership
("MCV"), one of the expansion shippers, asserts that FERC's
decision to deny interest on the period prior to October 1,
1995 was legal error and was an abuse of discretion. 15
U.S.C. s 717c(e), provides that

the Commission may, by order, require the natural-gas
company to furnish a bond, to be approved by the
Commission, to refund any amounts ordered by the
Commission, to keep accurate accounts in detail of all
amounts received by reason of such increase, specifying
by whom and in whose behalf such amounts were paid,
and, upon completion of the hearing and decision, to
order such natural-gas company to refund, with interest,
the portion of such increased rates or charges by its
decision found not justified.

MCV claims that FERC misread this statutory provision to
permit it discretion in the award of interest. See MCV br. at
4. MCV contends that while the award of remedial damages
is discretionary, the imposition of interest is not. Thus, as
MCV reads the statute, the auxiliary verb "may" serves
"order" but not "with interest," which itself modifies only
"refund." See 15 U.S.C. s 717c(e). Second, MCV refers the
court to FERC's own regulations, which state that:

Any natural gas company that collects rates or charges
... must refund that portion of any increased rates or
charges ... found by the Commission not to be justified
... together with interest as required in paragraph (d) of
this section.

18 C.F.R. s 154.501(a)(1). Paragraph (d) requires that inter-
est be computed from the date of collection to the date of
refund. Id. at s 154.501(d). FERC argues that the statute

gives it discretion whether to award interest and that case
law supports its authority not to award interest. See Estate
of French v. FERC, 603 F.2d 1158, 1162-63 (5th Cir. 1979).

There is no doubt that section 717c(e) is ambiguous--
indeed if read literally, the clause would permit FERC "by
order[ ] [to] require the natural gas company ... to order
such natural gas company to refund, with interest, the
portion of such increased rates ... found not justified." 15
U.S.C. s 717c(e) (emphasis added). Because the statute is at
best unclear (and at worst incomprehensible), obedient to
Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 843 (1984), we
defer to the agency's reasonable interpretation, which in this
case is embodied in 18 C.F.R. s 154.501.

FERC, however, ignored its own regulation when inter-
preting the statute. As we have previously held, "[t]he
Commission may not ... rely solely on its equitable discre-
tion to justify straying from well-established rules and proce-
dures. [It] must articulate valid reasons for its departure."
FERC v. Triton Oil & Gas Corp., 750 F.2d 113, 116 (D.C. Cir.
1984). In the instant case, FERC decided to exclude interest
payments because it sought to "ease the adverse effects on
the pre-expansion shippers of [its] legal error, while also
ensuring that Great Lakes is kept whole." 72 FERC at
61,430. In its disposition of the interest issue, FERC did not
mention its regulation governing refunds and surcharges.
Because FERC failed to give a "valid reason[ ] for ...
depart[ing] [from the regulation]," Triton Oil, 750 F.2d at
116, its decision to exempt the nonexpansion shippers from
paying interest for the whole period was error. Further-
more, because FERC has had ample opportunities to resolve
this matter on its own but has neither heeded its own
regulation nor explained its failure to do so, we reverse
FERC's decision to exempt the refunds and surcharges from
interest assessments and hold that interest shall be assessed
on all surcharges for the entire period that incremental rates
were in effect. Because we decide this matter in favor of
MCV, we need not consider Natural's petition challenging
FERC's decision to require interest on all payments made
after October 1, 1995.

IV.

In 1991 FERC held that Great Lakes' proposal to price I/O
service at $0.275 per thousand cubic feet ("Mcf"), which
reflected a 100 percent load factor rate (i.e., equivalent to the
rate paid by shippers with firm contracts), was unreasonable
because "the maximum [load factor] rate is always higher
than needed to ration daily usage." 57 FERC at 61,548.
FERC instead fixed the I/O rate at a 140 percent load factor
or $0.16 per Mcf. See id. at 61,547-49. In the remand
orders, FERC retroactively modified the I/O rate, applying
the 140 percent load factor to the full rolled-in price and
consequently imposed $0.10 per Mcf surcharge for I/O service
prior to the rolling in of expansion costs. The resulting price
for I/O service, $0.26 per Mcf, was only $0.015 lower than the
price rejected by FERC in 1991.4 In its remand orders,
FERC held that when I/O shippers agreed to pay the "maxi-
mum rate" in their contracts and were aware of the pending
Section 4 proceedings, their final rates were contingent on the
outcome of the underlying rate proceedings. See 75 FERC
at 61,297.

Northern States Power ("NSP") and other I/O shippers
assert on appeal that FERC's decision was arbitrary and
capricious because it conflicts with the earlier FERC finding
that $0.275 was "too high at all times" and because the I/O
shippers' contracts with Great Lakes do not permit retroac-
tive modification. FERC never held that $0.275 per Mcf was
per se excessive. Rather, FERC decided in 1991 that a 100
percent load factor rate was too high; the consequent price
per Mcf was incidental. NSP confuses the rate that it pays
(i.e., the price per Mcf) with the load factor according to
which the price is computed. In its remand orders, FERC
imposed a surcharge on the basis of a load factor of 140
percent, which is consistent with its 1991 decision. See 76
FERC at 61,934 ("Great Lakes' interruptible rate for all
periods is volumetric, and the only issue is what that volumet-

__________
4 Although Northern States Power claims that the $0.015 per Mcf
difference is de minimis, we need not decide whether that 6
percent difference in the price per Mcf is significant.

ric rate should be."). As to whether the I/O shippers' con-
tracts with Great Lakes permitted retroactive changes in
pricing, we defer to FERC's reasonable interpretation of
contracts within its jurisdiction. See Williams, 3 F.3d at
1549. FERC's decision that the I/O shippers' agreement to
pay the "maximum rates plus all applicable surcharges," see
76 FERC at 61,934, subjected them to retroactive surcharges
is eminently reasonable. See Clearinghouse, 965 F.2d at
1075-76.

V.

Between 1991 and 1994, Great Lakes received three Sec-
tion 7 certificates to build facilities to serve Rochester Gas &
Electric ("RG&E"). See Great Lakes Gas Transmission,
L.P., 56 FERC p 61,052 (1991); Great Lakes Gas Transmis-
sion, L.P., 56 FERC p 61,051 (1991); Great Lakes Gas Trans-
mission, L.P., 66 FERC p 61,115 (1992). The third order is
not at issue here. Both certificates issued by FERC stated
that RG&E would be liable for "the currently effective maxi-
mum applicable FT rate." 76 FERC at 61,929 (internal
quotations omitted); see 56 FERC at 61,205; 56 FERC at
61,210. The second order also stated that "[t]he initial rate
... shall be subject to the Commission's final determination
in Docket Nos. RP89-186-000 and RP90-20-000." 56 FERC
at 61,210. Despite the different wording of the orders, they
were consolidated into a single contract, which provided that
RG&E would "pay ... the rates and charges in effect from
time to time under Rate Schedule FT, or any effective
superseding rate schedule...." Rate Schedule FT was de-
fined elsewhere in the contract as the "FERC Gas Tariff ...
as filed with the Commission and as changed and adjusted
from time to time by [Great Lakes] in accordance ... with
any final Commission order affecting such rates." 76 FERC
at 61,931.

In the remand orders, FERC held that because RG&E's
rate was contingent on the current FT price, the pending
proceedings applied retroactively to RG&E as if it were a
pre-expansion shipper. See 76 FERC at 61,928-29. On
appeal, RG&E makes a series of arguments whose underlying
principle is the same: the rate set in the underlying orders

and contract was not contingent, and retroactive application
of the rolled-in rate therefore is impermissible. Resolution of
that issue turns upon the meaning of the phrase "maximum
FT rate" in RG&E's contract with Great Lakes and in
FERC's certificate orders authorizing service. "FERC's in-
terpretation of [a] contract[ ] [within its jurisdiction] is enti-
tled to deference under the principles articulated in Chevron
...." Williams, 3 F.3d at 1549. Thus, the agency's inter-
pretation will be upheld "as long as [it] is reasonable."
LILCO v. FERC, 20 F.3d 494, 497 (D.C. Cir. 1994). The
court similarly "sustain[s] the Commission's interpretation of
[an][o]rder if it is reasonable." Natural Gas Clearinghouse
v. FERC, 108 F.3d 397, 399 (D.C. Cir. 1997).

The two certificate orders were issued on the same day,
and their incorporation into a single consolidated contract
suggests that the parties saw no material difference between
them. Although only the second order includes a clause
stating explicitly that the "authorized rate ... shall be sub-
ject to the Commission's final determination in [certain pend-
ing dockets]," 56 FERC at 61,210, FERC may reasonably
have read the orders together and concluded that the more
specific language of the second order clarified the ambiguity
in the first order.

RG&E argues that the clause in the second order noting
the reservation of the right to modify rates refers only to the
cost-of-service settlement rather than to the roll-in proceed-
ings. FERC disposed of that argument in the remand orders
by finding that "the settlement [to which RG&E claims that
the provision refers] expressly reserved for litigation the
pricing issue ultimately resolved in the remand order [in
favor of rolled-in rates]." Id. at 61,932. FERC's reading of
the clause's reservation is reasonable. Where a rate is set by
reference to a pending proceeding, the substance of that
proceeding may reasonably be read into the order. Cf.
Clearinghouse, 965 F.2d at 1075 (holding that "there could be
no violation of the filed rate doctrine so long as the users of
Tarpon's service received adequate notice that the rate stated
in Tarpon's 1987 filing might replace the Commission-ordered
rate even for service originally provided under the latter").

VI.

In the initial order on remand, FERC mandated that
Great Lakes refund expansion shippers the difference be-
tween what they had paid when rates were incremental and
what they should have paid had expansion costs been rolled
in. See 72 FERC at 61,430. FERC consequently permitted
Great Lakes to collect an offsetting surcharge from nonex-
pansion shippers. See id. In a motion for rehearing, various
nonexpansion shippers objected to the $15.7 million surplus
(reflecting the difference between projected surcharges and
refunds) that Great Lakes proposed to retain after distribu-
tion of all refunds. See 75 FERC at 61,295. FERC held that
Great Lakes was entitled to retain whatever funds remained
after all refunds were disbursed. See id. at 61,296. Based on
revised estimates of the amount that Great Lakes would
collect in surcharges, the projected surplus was later recom-
puted to be $17.5 million. See 76 FERC at 61,935 n.29.
RG&E and Consumers Energy Company ("Consumers")
challenge Great Lakes' authority to retain the $17.5 million
difference. They contend that FERC acted arbitrarily and
capriciously and ignored the terms of its own orders when it
permitted Great Lakes to retain the surplus.

FERC explains that "[v]irtually all of th[e] [surplus] was
due to the addition of new customers after the cost-of-service
rate design settlement was approved." 76 FERC at 61,935;
see 75 FERC at 61,296. FERC supports that finding by
reference to Great Lakes' "May 10 revised refund/surcharge
plan." See id. at 61,935 n.29. That finding is corroborated
by RG&E's brief--RG&E, which was a "new customer,"
claims that it will be liable for an additional $8 million in
surcharges. See RG&E br. at 4. Furthermore, Great Lakes'
November 1, 1995 filing shows that an additional $3.7 million
is attributable to additional service to ANR Pipeline. This
prong of Consumers' argument is therefore a restatement of
RG&E's claim. To the extent that RG&E and similarly
situated petitioners agreed to rates that would incorporate

the rate setting at issue in this appeal, they are apparently
subject to the remand orders. See Part V. supra.

Consumers next contends that Algonquin Gas Transmis-
sion Co., 63 FERC p 61,326, 63,170 (1993), compels FERC to
ensure that surcharges and refunds exactly match. Any
other outcome, according to Consumers, is inconsistent with
Commission policy and unsupported by sound reasoning. In
its orders, FERC distinguished the situation in Algonquin
from the one at issue here. See 75 FERC at 61,296. In
Algonquin, FERC required exactly offsetting surcharges and
refunds because "the pipeline ... failed to submit workpapers
reflecting the ... rate design for the appropriate time frame,
and ... generally [failed to] support[ ] its refund and sur-
charge calculations." Id. (citing 63 FERC at 63,180). Con-
sumers responds that Algonquin is indistinguishable from the
instant case and that the reasons for which FERC required
exactly offsetting charges in Algonquin apply with equal
force here.

FERC is correct that its Algonquin holding was premised
upon Algonquin's inadequate explanation of its proposed sur-
charges and refunds. See 63 FERC at 63,180 ("We ... find
Algonquin's plan more counter-intuitive and less supportable
(given the paucity of explanation that has been so far provid-
ed) ... than a more straightforward, common-sense approach
that provides for an equal dollar amount of refunds and
surcharges."). By contrast, Great Lakes' plan and FERC's
rationales for approving it explain in detail why Great Lakes
should be permitted to retain the surplus. See 75 FERC at
61,296-97 (noting that the surplus is due in large part to the
introduction of new services and that no party disputes Great
Lakes' computations). Because FERC's distinction is reason-
able, its decision to depart from Algonquin was not arbitrary
or capricious.

Consumers reads the term "offsetting discharges" as a
narrow mandate for Great Lakes to assess surcharges and to
distribute refunds only if they were exactly offsetting.
FERC's initial order permitted Great Lakes to devise the
means by which rates would be assessed in order to minimize
harm to Great Lakes and to place all parties in as nearly as

possible the position in which they would have been absent
the original imposition of incremental rates. See 75 FERC at
61,295-97. FERC's later explanation of that order should be
upheld if it is reasonable. See Natural Gas Clearinghouse,
108 F.3d at 399; K N Energy, Inc. v. FERC, 968 F.2d 1295,
1299 (D.C. Cir. 1992). Because the word "offset" is not
unambiguous and because FERC's policy rationales support
the reasonableness of its reading of "offset," its interpretation
of the phrase "offsetting discharge" is valid.

Consumers' final contention is that permitting Great Lakes
to retain the $17.5 million would allow it to exceed its
permissible rate of return in violation of the NGA. Because
FERC approved all the rate orders that contained contingent
pricing schemes, the assessment did not violate the NGA.
Despite Consumers' contention that a new Section 4 rate
proceeding was required to increase rates to account for new
service, the roll-ins were not truly retroactive--"notice ...
'changes what would be purely retroactive ratemaking into a
functionally prospective process by placing the relevant audi-
ence on notice at the outset that the rates being promulgated
are provisional only and subject to later revision.' " Clearing-
house, 965 F.2d at 1075 (quoting Columbia Gas Transmis-
sion Corp. v. FERC, 895 F.2d 791, 797 (D.C. Cir. 1990)).
Thus, as FERC points out, Consumers' disagreement with
the legality of the retroactive application of the roll-in is
really disapproval of the underlying rate, which, as we have
already held, is permissible.

Conclusion

For the reasons stated above, we deny all the petitions
except MCV's. We grant MCV's petition and reverse
FERC's decision not to award interest for the entire period to
which surcharges and refunds apply. The joint petitioners
also have moved to strike Addendum A of MCV's brief. Joint
petitioners' motion is granted. Addendum A is beyond the
scope of the issue that MCV was entitled to brief, and its
content is inconsistent with Circuit Rule 28(a)(3).

So ordered.