United States Court of Appeals
FOR THE DISTRICT OF CO LUM BIA CIRCUIT
Argued October 22, 2004 Reissued February 11, 2005
No. 03-1206
ARIZONA CORPORATION COMMISSION , ET AL.,
PETITIONERS
V.
FEDERAL ENERGY REGULATORY COMMISSION ,
RESPONDENT
ARIZONA PUBLIC SERVICE COMPANY , ET AL.,
INTERVENO RS
Consolidated with
03-1209
On Petitions for Review of Orders of the
Federal Energy Regulatory Commission
Richard M. Lorenzo and David W. D'Alessandro argued
the cause for petitioners and intervenor Southwest Gas
Corporation. With them on the briefs were Janice Alward,
Timothy J. Sabo, Barbara S. Jost, Kelly A. Daly, Joel L.
Greene, Donald G. Avery, Andrew B. Kolesar, III., James H.
McGrew, J. Michel Marcoux, John P. Gregg, Irving Jacob
Golub, Melissa E. Maxwell, James F. Moriarty, Douglas M.
2
Canter, and Steven J. Kalish. Janet F. Wagner and William A.
Mogel entered appearances.
Beth G. Pacella, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Cynthia A. Marlette, General Counsel, and
Dennis Lane, Solicitor. Lona T. Perry and Laura J. Vallance,
Attorneys, entered appearances.
Kenneth M. Minesinger argued the cause for intervenor
El Paso Natural Gas Company. With him on the brief were
Seth M. Galanter and Matthew C. Schruers.
Katherine B. Edwards, John Paul Floom, Harvey Y.
Morris, Gordon J. Smith, Paul B. Mohler, Frank R. Lindh,
John R. Ellis, David J. Gilmore, Kevin J. Lipson, Douglas L.
Beresford, Douglas Kent Porter, and Joseph S. Koury were on
the brief for intervenors. Michael A. Stosser, Arocles Aguilar,
Stephen E. Pickett, John P. Beall, Frederick T. Kolb, and
Bruce A. Connell entered appearances.
Before: GINSBURG, Chief Judge, and SENTELLE, Circuit
Judge, and WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge:1 Petitioners, a group
of natural gas shippers, challenge three FERC orders that
modify the terms—set in 1990 and 1996 Settlements—under
1
We issued our decision in this case by order and
memorandum on December 28, 2004. W e issue it today in opinion
form on motion of a party, changed only by the addition of the second
paragraph as background explanation.
3
which petitioners ship natural gas over the lines of El Paso
Natural Gas Company. El Paso Natural Gas Co., 99 FERC
¶ 61,244 (2002) (“May 2002 Order”); El Paso Natural Gas
Co., 100 FERC ¶ 61,285 (2002) (“September 2002 Order”);
El Paso Natural Gas Co., 104 FERC ¶ 61,045 (“July 2003
Order”). Most relevant to this case, FERC converted
petitioners’ contracts from full requirements (“FR”) to
contract demand (“CD”) arrangements, thereby obligating
them to pay for additions to capacity necessitated by growth
in their demand. Petitioners argue that the orders did not meet
the Mobile-Sierra public interest standard set forth in United
Gas Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332
(1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348
(1956). We find no error in FERC’s orders. The Commission
did not merely protect El Paso from an “improvident
bargain,” as petitioners allege, but exercised its Mobile-Sierra
authority to prevent “the imposition of an excessive burden”
on third parties. Northeast Utils. Serv. Co. v. FERC, 55 F.3d
686, 691 (1st Cir. 1995) (internal quotation marks and citation
omitted).
* * *
El Paso’s pipeline delivers natural gas from three
production basins—San Juan, Permian, and Anadarko—to
California and several nearer states. The 1990 Settlement
preserved FR service, but converted El Paso’s FR sales
customers to FR transportation customers and allocated
pipeline capacity pro rata among firm shippers. By 1996, El
Paso had accumulated substantial excess capacity because
Californian local distributors, under state orders, had turned
back their rights. Accordingly the parties adopted a new 1996
Settlement, setting current rates and terms to prevail until
2006. Under that Settlement, the reservation charges of the
CD shippers were based on the capacity they reserved, while
4
the FR shippers’ were based on 1996 “billing determinants.”
Nonetheless, the FR shippers remained free, as the name “full
requirements” suggests, to insist that El Paso meet their full
requirements. After the 1996 Settlement, El Paso’s capacity
surplus dwindled, making service unreliable and triggering
pro rata cutbacks. FERC responded in the May 2002 Order
by requiring, among other things, that all major FR shippers
convert to CD contracts. In the September 2002 Order it set
the conversion price when FR shippers and El Paso could not
agree, and in the July 2003 Order it finalized the details of
conversion and denied rehearing. Petitioners now appeal the
orders.
* * *
The main factual question is whether the record
contains substantial evidence of capacity curtailments on El
Paso’s mainline severe enough to render firm service
unreliable and thus justify Commission action under Mobile-
Sierra. FERC cites numerous sources to answer in the
affirmative. One FR shipper, Southwest Gas Corporation,
had, “[f]or ten years, . . . complained about firm service
degradation by El Paso.” Southwest’s experience was
apparently common: another group of shippers, for example,
complained that its “customers for at least [a] year . . .
experience[d] cutbacks in scheduled quantities due to capacity
constraints, regardless of the supply basin accessed. . . . El
Paso’s overtaxed mainline system is reaching the breaking
point.” El Paso, too, took the position that it lacked
“sufficient capacity . . . to serve . . . [customers’] aggregate
capacity rights.”
Petitioners, in turn, identify holes in FERC’s evidence.
They argue that FERC failed to quantify the curtailments and
instead relied only on a data response sheet and customers’
comments. The capacity shortfalls, they insist, arose from
5
“aberrational” events such as the California energy crisis and
an explosion in El Paso’s pipeline at Carlsbad, New Mexico.
Reply Brief at 18-19. Indeed, one El Paso executive said in
April 2002 that “the main line . . . is not really curtailing very
often.” Petitioners contend that at a minimum FERC should
have conducted a hearing to verify the scope and origin of El
Paso’s capacity problems.
But “[t]he question . . . is not whether record evidence
supports [petitioners’] version of events, but whether it
supports FERC’s.” Fla. Mun. Power Agency v. FERC, 315
F.3d 362, 368 (D.C. Cir. 2003). Admittedly, FERC’s
investigation of the mainline curtailments could have been
more searching. But its decision does not lack substantial
evidence simply because petitioners offered “some
contradictory evidence.” Id. We are especially reluctant to
second-guess FERC’s findings because many of the present
petitioners themselves moved for a summary FERC ruling
that El Paso “lacks up to 1.1 Bcf of mainline capacity needed
to serve . . . its existing firm customers.” Motion for Partial
Summary Disposition by Texas, New Mexico and Arizona
Shippers, at 1. A complaint filed by most of the present
petitioners alleged that customers of the El Paso System were
experiencing cutbacks due to capacity constraints regardless
of the supply basin accessed. That most of the petitioners
changed positions suggests, as argued by the joint brief of
multiple intervenors in support of FERC, that their real
complaint is only against the remedy FERC chose. Joint Brief
of Intervenors at 19.
Affidavits from the staff of the petitioner firms,
moreover, made clear that remedying the curtailments
required that El Paso newly “path[]” its system, with receipt,
mainline, and delivery point rights allocated “on a fair basis.”
Joint Brief of Intervenors at Ex. A (July 12, 2001 Affidavit of
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Donald C. Lindquist). That is, simply waiting for aberrant
events to subside would not suffice. Nor do petitioners
persuade us that El Paso improperly withheld capacity. FERC
observed, and petitioners did not disprove, that El Paso
operated its “dynamic” pipelines at reasonable levels of
capacity. July 2003 Order, 104 FERC at 61,158-62, ¶¶ 62-76.
Even assuming some doubt remains regarding the
exact scope of El Paso’s mainline curtailments, FERC could
reasonably find that petitioners’ contracts posed an unusual
threat to the public interest. The problem was what FERC
called the “unrestricted growth rights under the FR contracts.”
Id. at 61,152, ¶ 30. Whereas El Paso could charge cost-based
rates to CD shippers who requested additional capacity to
serve increased demand, El Paso was obligated to provide
petitioners additional service on demand at rates locked in by
the 1996 Settlement and reflecting El Paso’s excess capacity
at that time. That excess eroded thanks to intervening
changes. Only the CD rates related closely to current
conditions, yet the CD shippers were exposed to the
curtailments every bit as much as the FR shippers were.
Petitioners respond that CD growth actually
outstripped FR growth, and object to FERC’s focus on the
latter. But FERC explained its focus on the FR contracts
quite logically. The Commission recognized that there was
not “a single cause of the capacity crisis.” May 2002 Order,
99 FERC at 62,002. This is obviously quite realistic, since
every molecule shipped in a peak period plays a role in
creating the need for expanded facilities able to carry the
entire peak load. Cf. Town of Norwood v. FERC, 962 F.2d
20, 25-26 (D.C. Cir. 1992). But FERC found that FR growth
was “the most significant part of the problem and any solution
must tie future growth in FR customers’ demands to
appropriate allocations of costs related to those demands as
7
well as to capacity expansions. . . . [I]ncreases [in FR usage]
take place without any added revenue responsibility and
provide no incentive for El Paso to build additional facilities.”
May 2002 Order, 99 FERC at 62,003. In other words, FERC
believed that it should address primarily those streams of gas
whose growth, under the terms prevailing before the
modification, was not “tie[d]” to sound cost allocation and
incentives. See also July 2003 Order, 104 FERC at 61,170-
71, ¶¶ 113-17.
Petitioners’ complaint that their consumption growth
rates are somewhat “heterogeneous” (Reply Brief at 7) is no
answer. The Mobile-Sierra doctrine permits generalized
findings of public interest when intervening circumstances
affect a class of contracts in the same manner. Transmission
Access Policy Study Group v. FERC, 225 F.3d 667, 710 (D.C.
Cir. 2000); see also Interstate Natural Gas Ass’n of Am. v.
FERC, 285 F.3d 18, 37 (D.C. Cir. 2002) (“proportionality
between the identified problem and the remedy is the key”).
Whatever the heterogeneity in growth rates, petitioners’
contracts all enabled them to use capacity that cost
more—both in opportunity cost (the foregone uses of the CD
shippers) and in out-of-pocket cost (the pipeline expansion
costs for El Paso)—than they were obliged to pay.
Consequently, unless El Paso were required to eat the extra
cost, the FR contracts would jeopardize firm service for other
shippers.
Petitioners also offer two arguments why they believe
FERC was arbitrary and capricious in selecting a remedy—a
matter on which FERC wields maximum discretion, Conn.
Valley Elec. Co. v. FERC, 208 F.3d 1037, 1044 (D.C. Cir.
2000) (citing Niagara Mohawk Power Corp. v. FPC, 379 F.2d
153, 159 (D.C. Cir. 1967)). The first argument is that FERC
left them with access to less natural gas than their historic
8
needs demanded. But in fact FERC assigned each FR
customer (but one) capacity—priced at the Settlement
rates—in excess of its 2001 non-coincident peak demand, and
made available to other FR shippers capacity that had been
initially allocated to FR customers who said their allocation
exceeded what they would like. July 2003 Order, 104 FERC
at 61,148, ¶ 2; 61,164-65, ¶¶ 82-84, 88; 61,186, App. B.
Petitioners do not question FERC’s explanation for the single
exception. See id. at 61,164-65 n.84.
Petitioners’ second objection is that El Paso reneged
on its obligations to expand capacity. Section 3.6 of the 1990
Settlement requires El Paso to add capacity “to satisfy the
demands of a converting [FR] customer . . . ; provided,
however, that El Paso shall not be required to construct any
facilities that are not economically justifiable.” Section 16.3
of the 1996 Settlement, however, requires El Paso to
“maintain and operate facilities sufficient to satisfy . . . [its]
service obligations . . . .” See id. at 61,167, ¶ 97. Petitioners
read these terms to mean that El Paso must add capacity on
demand, provided El Paso could eventually recoup its costs.
FERC, however, cited several reasons why § 3.6 both
trumps § 16.3 and does not entitle petitioners to construction
on the scale they seek. The principal reason, which
petitioners’ appeal does not directly address, is that “[t]he
language of Section 16.3 is general in nature and does not
supercede the specific 1990 Settlement.” July 2003 Order,
104 FERC at 61,168-69, ¶ 106. By this reading, El Paso’s
§ 16.3 obligation to maintain its pipelines does not rewrite its
conditional § 3.6 obligation to add capacity.
In seeking to reconcile the two sections, petitioners’
argument for rehearing before the Commission presented an
obscure interpretation of § 3.6’s reference to “economically
9
justifiable” capacity additions. Petitioners left unclear
whether El Paso would be really made whole (including
recovery of the return on investment for the period between
construction and the filing of new, post-Settlement rates), and
how cost responsibility would be matched with cost causation
for different classes of users. See Joint Request for Rehearing
and Clarification, July 1, 2002 (“Joint Request”) at 24-28. Cf.
Michigan Bell Tel. Co. v. Engler, 257 F.3d 587, 596 & n.5
(6th Cir. 2001) (discussing the elusiveness of “economically
justifiable”). Petitioners thus made no effort at all to offer an
interpretation that could have both preserved their FR
contracts and met FERC’s concern for the incentives the
contracts created—which was, after all, the basic rationale for
the exercise of its Mobile-Sierra authority.
Interpretations of the Settlements aside, some
petitioners raise one issue on which the order on rehearing
was silent. Arizona Public Service Company and Pinnacle
West Energy Corporation (APS/PWEC) argue that they
invested over $1 billion in new electric generation facilities in
reasonable reliance on the 1996 Settlement and Transportation
Service Agreement (“1996 TSA”) with El Paso. Specifically,
APS/PWEC argue that El Paso agreed in § 8.3 of the 1996
TSA to construct such facilities as might be needed to supply
their proposed Redhawk Power Plant. Petitioners’ Brief at
43-44; Joint Request at 29 & n.20. Section 8.3(c) provides,
inter alia, that the cost of newly constructed mainline facilities
“shall be included in El Paso’s cost of service with the
ratemaking treatment thereof to be determined by
[FERC]. . . .”
But this drive-by allusion to § 8.3—the only part of
the 1996 TSA contained in the record—does not get
APS/PWEC where they want to go. APS/PWEC’s request for
rehearing did not explain how FERC should reconcile § 8.3
10
with other provisions of the 1990 and 1996 Settlements, nor
did it offer any interpretation that would reconcile petitioners’
views with the Commission’s concern for well calibrated
incentives. Consequently, we reject APS/PWEC’s argument,
reminding them that “the Commission cannot be asked to
make silk purse responses to sow’s ear arguments.” City of
Vernon v. FERC, 845 F.2d 1042, 1047 (D.C. Cir. 1988).