Southwest Gas Corp. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 23, 1998 Decided June 2, 1998

No. 92-1623

Southwest Gas Corporation,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Southern California Gas Company, et al.,

Intervenors

Consolidated with

Nos. 93-1627, 94-1310

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Douglas M. Canter argued the cause and filed the briefs
for petitioner.

Patricia L. Weiss, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent, with whom
John H. Conway, Deputy Solicitor, and Susan J. Court,
Special Counsel, were on the brief. Edward S. Gelderman
and Timm L. Abendroth, Attorneys, entered appearances.

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

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: In this consolidated proceeding,
we consider petitions filed by Southwest Gas Corporation
("petitioner" or "Southwest"), a local distribution company
("LDC"), seeking review of six orders of the Federal Energy
Regulatory Commission ("FERC" or "the Commission") ap-
plying the changes in the natural gas pipeline regulatory
regime under Order No. 636 1 to the pipeline operated by El
Paso Natural Gas Company ("El Paso") which serves South-
west. Because we find that each challenge is either moot,
previously disposed of, or without merit under applicable
standards of review, we deny all petitions.

I. Background

A. The Regulatory Landscape

For most of the last two decades, the Commission has been
engaged in a major restructuring of the natural gas industry,
designed to produce a less regulated, more market-oriented
regime. See generally United Distrib. Cos. v. FERC, 88 F.3d
1105, 1121-30 (D.C. Cir. 1996) ("UDC"), and authorities col-
lected therein. In this undertaking, FERC determined that

__________
1 Order No. 636, Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing Transportation; and
Regulation of Natural Gas Pipelines After Wellhead Decontrol,
F.E.R.C. Stats. & Regs. (CCH) P 30,939, order on reh'g, Order No.
636-A, F.E.R.C. Stats. & Regs. (CCH) P 30,950, order on reh'g,
Order No. 636-B, 61 F.E.R.C. (CCH) P 61,272 (1992), aff'd in part,
rev'd in part, United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C. Cir.
1996), cert. denied, 117 S. Ct. 1723 (1997), order on remand, Order
No. 636-C, 78 F.E.R.C. P 61,186 (1997).

the prior practice of "bundling" sales and transportation
service--in which a pipeline functioned both as a gas mer-
chant and transporter, selling gas to local distribution compa-
nies connected with its system and delivering the gas to those
customers--prevented buyers from reaching competitively
priced wellhead gas as Congress had intended. See Order
No. 636 at 30,393 (citing H.R. Rep. No. 29, 101st Cong., 1st
Sess. 6 (1989)). The Commission therefore undertook a
process of "unbundling" with a view to requiring all pipelines
to separate transportation and sales services, culminating in
Order No. 636. See UDC, 88 F.3d at 1123-27 (reciting
history of mandatory unbundling); Pennsylvania Office of
Consumer Advocate v. FERC, 131 F.3d 182, 184 (D.C. Cir.
1997), corrected and affirmed, 134 F.3d 422 (D.C. Cir. 1998).
The present controversy involves Southwest's complaints con-
cerning the application of two regulations promulgated under
Order No. 636 to El Paso's pipeline serving Southwest.

The first regulation requires pipelines to devise a mecha-
nism whereby firm shippers, such as Southwest, can release
previously purchased but unneeded firm transportation ca-
pacity to third parties. 18 C.R.R. s 284.243 (1997). The
Commission concluded that such a mechanism would promote
the efficient use of pipeline capacity and enable more buyers
to access more sellers of gas, at the same time facilitating
nondiscriminatory open-access transportation and maximizing
the benefits of a competitive wellhead market. See Order No.
636 at 30,418; see also UDC, 88 F.3d at 1149.

The second regulation at issue is a requirement that pipe-
lines provide their firm shippers with flexibility to choose
among the locations at which the pipeline will receive gas
from or deliver it to them. 18 C.F.R. ss 284.221(g) & (h)
(1997). The Commission intended this flexibility to achieve
the goals of the capacity release program we have just
described. Order No. 636 at 30,428-29. Firm shippers tak-
ing advantage of this flexibility may use any delivery points
which they have under contract on an interruptible basis
without losing priority for firm service. Thus, a firm shipper
may change delivery points in order to permit another entity
to ship gas using the firm shipper's unneeded capacity with-

out losing capacity rights. However, Order No. 636 does not
permit unlimited flexibility in the choice of delivery points. A
firm shipper may resell its capacity at no additional charge
only for delivery within the firm transportation area to which
it is entitled and for which it pays. Id. As relevant to the
present controversy, this means that an LDC in a down-
stream portion of a region served by a pipeline can arrange
delivery of gas to another LDC in an upstream portion (that
is between the production field and the seller) but not in a
downstream portion outside the contract delivery area. Id.
In FERC parlance, the shipper may sell capacity at no
additional charge only "within the path" of its firm service.
Order No. 636-A at 30,582. A shipper's right to flexible use
of delivery points is subject to the rights of firm shippers
using those points as primary delivery points, but is superior
to the rights of interruptible shippers at those same points.
Id. at 30,583.

B. The Factual Background

Southwest is an LDC that buys natural gas transported
through an interstate pipeline owned and operated by El
Paso. See Southwest Gas Corp. v. FERC, 40 F.3d 464, 465-
66 (D.C. Cir. 1994).2 The distribution systems of Southwest
and other LDCs are connected to El Paso's San Juan main-
line pipeline facility at five pipeline connection points, known
as "delivery points," at the western terminus of El Paso's
pipeline near Topock, Arizona ("Topock delivery points").

As part of the Commission's transition to a market-based
regime, and pursuant to a Commission order authorizing El
Paso to offer separate sales and transportation services under
a so-called "Global Settlement," see El Paso Natural Gas Co.,
54 F.E.R.C. %57 61,316 (1991), El Paso entered into a "full
requirements" transportation service agreement with South-
west to deliver all of Southwest's gas requirements at two of
the Topock delivery points. Subsequently, the Commission
authorized El Paso to construct and operate a major expan-
sion of its mainline pipeline facility. See El Paso Natural

__________
2 Our exposition of the facts of this case is drawn, in large
measure, from Judge Buckley's opinion in Southwest Gas Corp.

Gas Co., 56 F.E.R.C. P 61,198 at 61,774-75 (1991). Based on
the expanded pipeline capacity, El Paso executed contracts in
1991 with seven new shippers ("Expansion Shippers") for
delivery of gas at any of the five Topock delivery points,
including the two delivery points utilized by Southwest.
These contracts provided the Expansion Shippers with "firm
service rights" (which the regulations define as rights that are
not subject to a prior claim from another customer, see 18
C.F.R. s 284.8(a)(3) (1997)), up to the maximum volumes
specified in their contracts. Nonetheless, an Expansion Ship-
per could only receive delivery at either of the two Topock
delivery points utilized by Southwest with Southwest's prior
agreement.

On August 17, 1992, Southwest filed a complaint with the
Commission alleging that, by contracting with the Expansion
Shippers for firm service rights at the Topock delivery points,
El Paso had unlawfully overbooked capacity at these points,
thereby undermining its pre-existing commitments to South-
west, a "full requirements" customer. On December 28, 1992,
the Commission dismissed the complaint, finding that South-
west "made no allegations that it has actually been harmed by
the actions of El Paso...." Southwest Gas Corp. v. El Paso
Natural Gas Co., 61 F.E.R.C. P 61,368 at 62,464 (1992).

On January 27, 1993, Southwest filed a petition for rehear-
ing. The Commission denied Southwest's request, again find-
ing no impairment of Southwest's contractual rights. South-
west Gas Corp. v. El Paso Natural Gas Co., 63 F.E.R.C.
P 61,111 at 61,763-64 (1993). The Commission emphasized
that Southwest "retain[ed] the ability to call on the entire
capacity of" the two Topock delivery points and failed to
provide "any reason why Southwest would be forced to
contract with the expansion shippers...." Id.

We subsequently denied Southwest's petition for review,
holding that Southwest had failed to demonstrate an "injury
in fact." Southwest Gas Corp., 40 F.3d at 468 (citing Lujan
v. Defenders of Wildlife, 504 U.S. 555, 559-60 (1992)). We
concluded that Southwest had failed to show that the expan-
sion contracts had disrupted the flow of gas at the two

Topock delivery points, or that it was likely to do so in the
future. Id.

As required by Order No. 636, El Paso submitted a propos-
al to the Commission in which it sought to implement a
capacity release program. See El Paso Natural Gas Co., 61
F.E.R.C.P 61,333 at 62,283-84 (1992). According to South-
west, the orders arising out of those proceedings in effect
permit the Expansion Shippers to sell their rights to capacity
at the Topock delivery points to other shippers on the second-
ary market. Southwest petitioned for review of those orders.

After FERC rejected one El Paso proposal to implement a
capacity release mechanism, El Paso proposed to FERC that
shippers use as primary delivery points any available delivery
points within their delivery zone which do not include those
downstream from their ultimate delivery point. El Paso next
proposed that shippers use any receipt points located within
the part of El Paso's system covered by the shipper's con-
tract. See El Paso Natural Gas Co., 62 F.E.R.C. P 61,311 at
62,981 (1993). Finally, El Paso proposed to limit the capacity
that a full requirements customer could release to its maxi-
mum "billing determinants," a measure of customer demand
or entitlement to a pipeline's services.

As part of a group of El Paso's customers located east of
California, Southwest objected to El Paso's flexible delivery
point proposal, arguing--as it had during the 1992 complaint
proceeding--that its right to capacity had priority over the
rights of any Expansion Shippers at the Nevada Topock
delivery point utilized by it. Southwest also quarreled with
El Paso's receipt point proposal, arguing that it ought to be
able to use receipt points outside its contracted-for zone at no
extra charge. In particular, Southwest wanted to use the
California Topock delivery points, "downstream" from its
contract zone, without paying an additional charge, by means
of "backhaul" or "displacement."

The Commission rejected Southwest's challenges and ap-
proved El Paso's proposal. In rejecting Southwest's claim for
priority at the Nevada Topock delivery point, the Commission
repeated a point it had made when ruling on Southwest's

earlier complaint: any Expansion Shipper wanting to use that
delivery point would be required to make arrangements with
Southwest, the sole owner of the facilities at that point. Id.
at 62,989. The Commission also rejected Southwest's request
that it be able to use the California Topock delivery points at
no extra charge. Noting that that delivery point was down-
stream from the rate zone covered by Southwest's reservation
charges, the Commission determined that Southwest's re-
quest was foreclosed by the requirements of Order No. 636.
The Commission added that Southwest was free to use the
California Topock delivery points if it wished to pay the
applicable zone reservation charge.

Southwest petitioned for rehearing. It argued that the
Commission had deferred certain issues in the 1992 complaint
proceeding to the restructuring proceeding. Southwest then
complained that the Commission had failed to address these
issues in the restructuring proceeding, despite what South-
west considers FERC's earlier promise to do so. The Com-
mission rejected Southwest's arguments and denied its peti-
tion for rehearing. Notwithstanding Southwest's arguments
to the contrary, FERC stated that the deferred issues (the
impact of El Paso's flexible receipt and delivery point mecha-
nism on shippers) had been resolved in an earlier order. It
also found that requiring shippers to pay reservation charges
for the zone in which the receipt point is located was consis-
tent with Order No. 636, which is premised on requiring
shippers to pay for the facilities and capacity on the portion of
the system they use.

After El Paso submitted revised tariff sheets to comply
with FERC's most recent order, a group of El Paso shippers
taking gas deliveries in Arizona (the "Arizona Directs") peti-
tioned for rehearing of that order. See El Paso Natural Gas
Co., 65 F.E.R.C. P 61,134 at 61,675-77 (1993). They asked the
Commission to make it clear that a full requirements custom-
er could not use capacity at its primary delivery points in
excess of its billing determinants. If this were not the case,
they explained, a full requirements customer could block the
use of its delivery points by others by claiming that its total
capacity could be applied to each of its primary delivery

points. Southwest opposed this request, arguing that the
clarification would undermine its right to release up to the
total amount of capacity for which it had contracted.

The Commission agreed with the Arizona Directs, and
clarified its prior order accordingly. It concluded that limits
should be applied at each delivery point, not the aggregate of
all delivery points. Id. at 61,677. The Commission found
that this result was reasonable since it would help small
shippers like the Arizona Directs with one or a few primary
delivery points and would give such shippers more flexibility
in releasing capacity. At the same time, the Commission
found that this result would not interfere with the partic-
ipation of full requirements customers in the capacity release
program.

Southwest sought rehearing of the Commission's order,
arguing, among other things, that the Commission improperly
placed limitations on its ability to use delivery point capacity.
In other words, it took issue with the Commission's insistence
that full requirements customers must designate in advance
of a capacity release what portion of their capacity rights they
wished to retain at each primary delivery point. In addition,
Southwest complained about individual capacity caps to be
imposed on each of its delivery points in Arizona.

FERC largely rejected Southwest's arguments. It further
explained that it was necessary to limit full requirements
customers' rights at their receipt and delivery points so that a
full requirements customer would not be able to "effectively
tie up capacity on all delivery points despite being able to
release capacity" and thereby gain an unfair competitive
advantage over the other customers competing in the capacity
release market. El Paso Natural Gas Co., 66 F.E.R.C.
P 61,183 at 61,381 (1994). By adopting the Arizona Directs'
proposal--requiring full requirements customers to announce
in advance of a capacity release what portion of their capacity
rights they wished to retain at each primary delivery point--
FERC ensured that other shippers would learn what delivery
point capacity was available for their use.

Although the Commission denied Southwest's petition for
rehearing, it stated that it would review El Paso's capacity
release program after one year to determine if the adminis-
trative difficulties Southwest had predicted had actually oc-
curred. Id. at 61,380. It is in this posture that we consider
Southwest's consolidated petitions for review.

II. Analysis

At the outset, we note that we need not discuss Southwest's
petition in No. 92-1623 at length. That petition, which
challenged the Commission's failure to require El Paso to
provide "no notice" service, has been rendered moot by
FERC's later decision requiring such service. See Order No.
636-C, 78 F.E.R.C. P 61,186 at 61,771-72. Southwest tacitly
admits this mootness. Petitioner's brief at 6 & n.4. None of
petitioner's other issues need detain us much longer.

A. Southwest's Claimed Historic Rights to Firm Capacity

In a rather muddled manner, Southwest describes one of
the issues presented for review:

Where the law requires natural gas pipelines to provide
unbundled firm transportation service that is equal in
quality to the bundled firm gas service formerly provid-
ed, may a pipeline offer a local distribution company
capacity rights at delivery points that are inferior to that
LDC's capacity rights prior to unbundling, and inferior
to the capacity rights of subsequent purchasers of firm
capacity?

Petitioner's brief at 1. What Southwest really seems to be
seeking is what it calls "first-in-time delivery point capacity
allocation." In other words, Southwest contends that because
it had delivery rights before Expansion Shippers were added
to the customer mix on El Paso's line, it should have a
priority right to capacity over the Expansion Shippers.
FERC dismissed that claim, stating:

The parties expressed concerns regarding historical pri-
mary delivery points and flexible/alternate delivery
points. This issue seems more properly to be one of the
allocation of delivery point capacity which must, there-

fore, be addressed by El Paso in El Paso's restructuring
proceedings....

Southwest Gas Corp. v. El Paso Natural Gas Co., 61
F.E.R.C. P 61,368 at 62,464 (1992). In the restructuring
proceeding, the Commission granted some of the relief that
Southwest sought by reserving to Southwest and the Expan-
sion Shippers priority rights at fully booked delivery points,
but did not grant Southwest's claim to "vested" or "historical"
rights as against the Expansion Shippers. El Paso Natural
Gas Co., 64 F.E.R.C. P 61,265 at 62,827 (1993). The Commis-
sion contends that this ruling, addressing the priority rights
as against all parties except the Expansion Shippers, disposed
of all allocation claims left open by its original order, and that
all other issues raised were not properly before it, having
been disposed of in prior orders. Southwest contends that
the Commission erred by failing to address its other argu-
ments relating to delivery point capacity. We agree with the
Commission.

Insofar as Southwest's rather confused and confusing argu-
ment questions the Commission's interpretation of the
breadth of its own prior order, "it is well established that an
agency's interpretation of the intended effect of its own
orders is controlling unless clearly erroneous." Transconti-
nental Gas Pipe Line Corp. v. FERC, 922 F.2d 865, 871 (D.C.
Cir. 1991) (citation omitted). Southwest has done nothing to
convince us that the Commission's interpretation of its own
prior order is clearly erroneous. Insofar as the petition
rehashes the issue previously litigated--that is, the Commis-
sion's permitting El Paso to book, and in Southwest's view to
overbook, capacity at the two Topock delivery points utilized
by Southwest--we already ruled in Southwest Gas Corp. that
Southwest has not demonstrated that the Commission's deci-
sion injured it in fact and thus made it an aggrieved party for
purposes of standing before this court. 40 F.3d at 467-68.
The present petition adds nothing new, nor does it change our
view. Finally, insofar as it is necessary to address the
substantive question of "historic" or "vested" rights claimed
by Southwest, the Commission not only reasonably but cor-
rectly points out that Southwest had no such rights, because

the flexibility available under El Paso's proposal did not exist
before Order No. 636 restructuring. 64 F.E.R.C. at 62,827.
The Commission further reasonably concluded that anything
lost by Southwest was at least "counterbalanced" by "other
more expansive rights" that Southwest gained under restruc-
turing. Id. at 62,828.

B. FERC's Refusal to Allow Southwest to Use California
Interconnection Points as Receipt Points

Southwest contends that it was arbitrary and capricious for
the Commission to deny it the use of California interconnec-
tion points with El Paso's pipelines as receipt points. Those
points were already available to Southwest as delivery points.
Had FERC approved Southwest's application, petitioner
would have been permitted to deliver gas to its system in
southern Nevada by "backhaul," which involves the displace-
ment of gas but not physical reversal of a forwardhaul flow of
gas. However, FERC rejected the request, concluding that
petitioner could use the California Topock delivery points as
receipt points only if it paid an additional zonal delivery
charge for the displacement service. 64 F.E.R.C. at P 62,830.
Southwest contends that FERC's decision denying the use of
less costly displacement service to an existing firm customer
without payment of higher forwardhaul charges is unrea-
soned, and therefore arbitrary and capricious. FERC replies
that this ruling is a rather straightforward application of the
Order No. 636 requirement that the flexibility given firm
shippers to choose among specific locations on the transport-
ing pipeline is limited to receipt and delivery points "within
the path" of the shipper's firm service. See Order No. 636-A
at 30,582.

We agree with FERC. The Commission need not revisit
the reasoning of a general order every time it applies it to a
specific circumstance. This part of Southwest's petition is no
more than an impermissible collateral attack on Order No.
636. Cf. Transwestern Pipeline Co. v. FERC, 988 F.2d 169,
174 (D.C. Cir. 1993) (denying challenge to a specific applica-
tion of a general order).

C. FERC's Requirement of Capacity Release Specifica-
tion

The Commission imposed two conditions on the partic-
ipation of full requirements customers, such as Southwest, in
El Paso's capacity release program. First, it required those
customers to limit their capacity releases to a defined level.
Second, it required them to designate the amount of capacity
they plan to release at each specific delivery point. South-
west attacks these limitations as arbitrary and capricious.
The Commission defends them as reasonable measures de-
signed to balance the interests of full requirements and
contract demand customers. The Commission's opinion in
the administrative proceeding offers a succinct defense of its
decision:

Assuming that Southwest would otherwise have to desig-
nate [contract demands] for its other delivery points that
are less than the physical capacity of each point, South-
west could nonetheless tie up 100 percent of the capacity
at each point if it retains its full requirements rights at
each point. There would be no way for other shippers to
acquire any primary rights at any of those points because
of Southwest's full requirements rights. It merely would
not be able to demand more than its total billing determi-
nant level from all of its delivery points in the aggregate.

El Paso Natural Gas Co., 66 F.E.R.C. P 61,183 at 61,381 n.9
(1994). We find this explanation, taken together with the rest
of the Commission opinion, more than adequate to meet the
familiar arbitrary and capricious standard of administrative
procedure review. See 5 U.S.C. s 706(2). We therefore
conclude that we must deny Southwest's petition.

III. Conclusion

For the reasons set forth above, we find that none of the
petitions offered by Southwest entitles it to the relief sought.
Although we have not addressed each of the arguments
raised by Southwest, we have carefully considered them all
and determined that none warrants reversal of the Commis-
sion's decisions. Therefore, the petitions for review are
denied.