Columbia Gas Transmission Corp. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 20, 2006 Decided May 12, 2006

No. 04-1374

COLUMBIA GAS TRANSMISSION CORPORATION,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

VIRGINIA NATURAL GAS, INC., ET AL.,
INTERVENORS

Consolidated with
04-1437

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

Catherine E. Stetson argued the cause for petitioner
Virginia Natural Gas, Inc. With her on the briefs were Lee A.
Alexander, Stefan M. Krantz, James Howard, and C. Todd
Piczak.

Barbara K. Heffernan argued the cause for petitioner
Columbia Gas Transmission Corporation. With her on the briefs
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were Debra Ann Palmer, William S. Lavarco, Stephen R.
Melton, and Kurt L. Krieger.

Patrick Y. Lee, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.

Lee A. Alexander, Catherine E. Stetson, Stefan M. Krnatz,
James Howard, C. Todd Piczak were on the brief for intervenor
Virginia Natural Gas, Inc. in support of respondent.

Barbara K. Heffernan, Debra A. Palmer, William S.
Lavarco, Stephen R. Melton, Kurt L. Krieger were on the brief
for intervenor Columbia Gas Transmission Corporation in
support of respondent.

Before: GINSBURG, Chief Judge, and SENTELLE and
GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge: This case arises out of a
mechanical failure that interrupted the provision of liquefied
natural gas (“LNG”) at a plant owned by Columbia Gas
Transmission Corp. (“Columbia”) in Chesapeake, Virginia
during February 2003. Virginia Natural Gas (“VNG”)—one of
Columbia’s affected customers—filed a complaint before the
Federal Energy Regulatory Commission (“FERC” or “the
Commission”), seeking damages under the Natural Gas Act, 15
U.S.C. §§ 717-717w (“NGA” or “the Act”). Columbia raised a
force majeure defense, which FERC rejected. However, the
Commission concluded that a state court (not FERC) should
measure the extent of Columbia’s liability. Both Columbia and
VNG petition for review. Because FERC reasonably rejected
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Columbia’s force majeure defense, we deny Columbia’s
petition. However, because FERC failed to explain its decision
to defer to a state court on the remedial phase of these
proceedings, we grant VNG’s petition in part.

I

Columbia’s LNG facility in Chesapeake, Virginia stores
natural gas in its liquid state at a temperature of minus 260
degrees Fahrenheit. When a customer (such as VNG) requests
gas, the LNG is pumped from Columbia’s storage tank to
vaporizers, which convert the LNG into gaseous natural gas.
The tank-and-pump system is designed to maintain a certain
minimum level of LNG inventory—both to ensure that there is
enough gas to meet customers’ demands and to ensure that the
pumps operate effectively. The facility also has a ventilation
system, which vents LNG vapor. The vents are essential
because the LNG system pumps liquefied natural gas, not
gaseous natural gas. If LNG vapor enters the pumps, the pumps
will malfunction (a problem known as “cavitation”).

During a record-cold winter in 1993, Columbia’s
Chesapeake facility suffered a bout of cavitation. After an
investigation, Columbia determined that the cavitation coincided
with a spike in LNG demand and a corresponding dip in
Columbia’s LNG inventory (to the relatively low level of 30
feet). Apparently, when the storage tank’s inventory falls, it
becomes harder to keep the gas liquefied, which in turn
increases the likelihood of vapor entering the pumps and causing
cavitation. Pursuant to the advice of an independent consultant,
Columbia installed a new ventilation system in July 1997, which
was designed to vent LNG vapor more effectively at low
inventory levels. Columbia never conducted a “full draw-down”
test to determine the precise inventory level at which its new
pumps would fail. Nonetheless, the new ventilation system
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operated effectively until 2003, when customers’ demands for
LNG again spiked during another record-cold winter.

On February 19, 2003, Columbia’s pumps again
malfunctioned. The facility operator noticed that the LNG
inventory level had fallen to 23 feet, which is “a record low
level for [the Chesapeake] facility.” The facility operator further
noticed that the LNG pumps were operating in the “start-up”
mode, as opposed to the “continuous-run” mode, the latter of
which appears to be more effective at venting vapor and might
have decreased the risks of cavitation.

On February 20, 2003, Columbia issued a “Notice of
Interruption of Service” to its affected customers, including
VNG. Under the parties’ service tariff, Columbia is obligated
to provide VNG with liquefaction, storage, regassification, and
delivery of up to 52,090 Dekatherms of LNG per day. However,
on account of the cavitation mishap, Columbia reduced VNG’s
supply of LNG to 25% of its contractual entitlement.
Columbia’s violation of the terms of its service tariff with VNG
lasted 41 days (between February 19 and March 31, 2003).
Over the same period, Columbia periodically violated two other
agreements that prescribe the minimum pressures at which
Columbia must deliver LNG to VNG.

In the aftermath of Columbia’s service failure, VNG
demanded $37 million in damages—only $7 million of which
VNG allegedly incurred during the 41-day period of reduced
LNG output from Columbia’s Chesapeake plant. The other $30
million in damages reflected “the return of demand charges and
contributions in aid of construction paid out over more than a
decade.” “Demand charges” are “nonrefundable deposit
payments required to reserve pipeline capacity.” Amoco Prod.
Co. v. Watson, 410 F.3d 722, 730 (D.C. Cir. 2005).
“Contributions in aid of construction” (“CIACs”) are fees a
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customer pays to a supplier to ensure that a pipeline is built to
handle customers’ LNG demands, even during “critical
periods.” After Columbia failed to uphold its end of the bargain,
VNG demanded a refund of its pre-2003 expenditures, in
addition to the $7 million it claimed it had lost during the 41-day
service interruption.

Columbia admitted that it failed to meet its firm-service
obligations to VNG under the applicable tariffs. However,
Columbia mounted a defense based on the force majeure clause
in its contract with VNG. The clause reads:

The term force majeure means an event that creates an
inability to serve that could not be prevented or overcome
by the due diligence of the party claiming force majeure.
Such events include, but are not defined by or limited to,
acts of God, strikes, lockouts, acts of a public enemy, acts
of sabotage, wars, blockades, insurrections, riots,
epidemics, landslides, earthquakes, fires, hurricanes,
storms, tornadoes, floods, washouts, civil disturbances,
explosions, accidents, freezing of wells or pipelines, partial
or entire electronic failure . . ., mechanical or physical
failure that affects the ability to transport gas or operate
storage facilities, or the binding order of any court,
legislative body, or governmental authority which has been
resisted in good faith by all reasonable legal means.

General Terms & Conditions (“GT&C”) § 15.1 (emphases
added). Columbia argued that it should not be liable to VNG
because the former’s breach of its service tariffs was caused by
a “mechanical or physical failure” that “could not be prevented
or overcome by [Columbia’s] due diligence.”

FERC rejected Columbia’s force majeure argument,
assigning three reasons. See Virginia Natural Gas, Inc. v.
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Columbia Gas Transmission Corp., 108 FERC ¶ 61086 (2004)
(“Initial Order”). First, FERC concluded that Columbia should
have performed a “full draw-down” test to verify the plant’s
performance capabilities after its pumps malfunctioned in 1993.
Id. at 61441. Second, because Columbia’s pumps previously
failed when inventory dipped to 30 feet, the gas supplier was on
notice that its pumps are the Chesapeake facility’s “weak link,”
which could be broken by a plunge in its LNG inventory. Id. at
61442. Third, when its inventory fell to an all-time low of 23
feet, Columbia failed to exercise due diligence by leaving its
pumps in the “start-up” mode instead of switching its pumps to
the “continuous-run” mode. Id. at 61441-42. Nevertheless,
FERC declined to award compensatory damages to VNG
because the Commission concluded that the company’s
entitlement to monetary relief (if any) was based on “a violation
of the terms of its service agreement with Columbia. A court of
law is the most appropriate forum for determining damages due
to a breach of contract claim. VNG will therefore need to bring
such claims before an appropriate court.” Id. at 61442.

Both Columbia and VNG filed timely requests for
rehearing, both of which FERC denied. See Virginia Natural
Gas, Inc. v. Columbia Gas Transmission Corp., 109 FERC ¶
61090 (2004) (“Rehearing Order”). In the Rehearing Order,
FERC again found that Columbia breached its service
obligations to VNG, id. at 61379, again rejected Columbia’s
force majeure defense, id. at 61384, and again refused to award
damages to VNG, id. at 61385. Both sides filed timely petitions
for review.

II

We need not linger long over Columbia’s petition for
review because FERC’s rejection of the force majeure defense
was easily supported by “substantial evidence.” “The
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‘substantial evidence’ standard requires more than a scintilla,
but can be satisfied by something less than a preponderance of
the evidence.” FPL Energy Maine Hydro LLC v. FERC, 287
F.3d 1151, 1160 (D.C. Cir. 2002). Columbia argues that FERC
flunks this deferential standard of review because it is “sheer
speculation” to assume that Columbia could have done anything
to avert the 2003 cavitation-generated system failure. We
disagree.

FERC reasonably concluded that cavitation could have been
“prevented or overcome by [Columbia’s] due diligence.”
GT&C § 15.1. The record includes evidence that (i) the
Chesapeake facility experienced cavitation in 1993 when its
inventory levels fell to 30 feet; (ii) Columbia concedes inventory
levels in 2003 fell even lower (to 23 feet); (iii) Columbia did not
test its facilities before the 2003 event to determine whether
cavitation sets in at a particular inventory level; and (iv) VNG
submitted evidence that in the wake of the 2003 event,
“Columbia indicated that there was a basic engineering flaw
with the plant design which prevented the proper operation of
the pumps when the tank liquid level fell beneath approximately
30 feet.” Although Columbia vigorously denies this last piece
of evidence, and although Columbia denies that low inventory
levels are the sole cause of cavitation, there is certainly “more
than a scintilla” of evidence that suggests the two are correlated.
In fact, Columbia admits as much. See Joint Appendix 234, ¶ 18
(Aff. of Chesapeake Facility Operator Randy Shivley)
(admitting that low inventory levels, amongst other variables,
cause cavitation). Thus, even if FERC cannot be sure that
Columbia’s due diligence would have prevented the cavitation,
the Commission nonetheless reasonably concluded that
cavitation “could [have been] prevented or overcome by
[Columbia’s] due diligence.” GT&C § 15.1 (emphasis added).
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In the final analysis, there is some uncertainty surrounding
the cause of Columbia’s cavitation, and Columbia might be
correct that “operation in continuous run mode would [not]
have, in fact, made a different [sic].” Reply Br. at 9. “The
question we must answer, however, is not whether record
evidence supports [Columbia’s] version of events, but whether
it supports FERC’s.” Florida Mun. Power Agency v. FERC, 315
F.3d 362, 368 (D.C. Cir. 2003). The record supports FERC’s
conclusion that Columbia could have “prevented or overcome”
the pump failure. We therefore deny Columbia’s petition for
review.

III

A

VNG’s petition for review has two parts, one of which is
essentially frivolous. VNG argues that Columbia unlawfully
“abandoned” its service obligations, in violation of NGA § 7(b),
15 U.S.C. § 717f(b), when it temporarily cut back its LNG
operations at the Chesapeake plant. However, our precedents
make it abundantly clear that “[a]n ‘abandonment’ within the
meaning of section 7(b) occurs whenever a natural gas company
permanently reduces a significant portion of a particular
service.” Reynolds Metals Co. v. FPC, 534 F.2d 379, 384 (D.C.
Cir. 1976) (emphasis added); see also United Distrib. Cos. v.
FERC, 88 F.3d 1105, 1134-35 (D.C. Cir. 1996) (same). VNG
never suggests that Columbia’s service interruption was
“permanent”: It is undisputed that Columbia’s services returned
to normal at the end of March 2003. Unsurprisingly, VNG
points to no case that suggests that a temporary service
interruption constitutes an “abandonment” under NGA § 7. We
easily reject VNG’s abandonment claim.
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B

The second part of VNG’s petition is meatier. VNG claims
that the Commission unlawfully refused to award a monetary
remedy after finding that Columbia breached its service
obligations. In a footnote to the Initial Order, FERC justified its
remedial (non-)decision by noting that VNG’s request for relief
includes “remedies beyond those typically contemplated by the
Commission.” 108 FERC at 61442 n.24. However, after VNG
petitioned for rehearing and asked FERC to clarify its footnote,
the Commission did not do so. See Rehearing Order, 109 FERC
at 61380-81. After noting that it could exercise its remedial
authority under the NGA, FERC explained simply that “the
interests of efficiency and consistency would be best served by
having all of VNG’s various claims heard and decided in one
place and at one time, namely, before a [state] court competent
to award or reject each of the proposed the [sic] remedies.” Id.
at 61381. VNG argues that FERC’s failure to explain its
abdication of its remedial authority is arbitrary and capricious.
See 5 U.S.C. § 706(2)(A); Sithe/Indep. Power Partners, L.P. v.
FERC, 165 F.3d 944, 948 (D.C. Cir. 1999). We agree.

Nowhere—not in the Initial Order, not in the Rehearing
Order, and not in its briefs—does FERC explain its conclusion
that VNG’s requested relief includes “remedies beyond those
typically contemplated by the Commission.” 108 FERC at
61442 n.24. To be sure, FERC notes that its remedial authority,
even “exercised at its zenith, does not extend to imposing civil
penalties or reparations.” Rehearing Order, 109 FERC at 61380
& nn.6-7. However, FERC does not explain how or why VNG’s
requested relief includes verboten “civil penalties” or
“reparations.”
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Assuming (as FERC does) that Columbia violated the
NGA,1 at least some of VNG’s damage demands appear to fall
within FERC’s understanding of its remedial authority. See,
e.g., Sunoco v. Transco, 111 FERC ¶ 61400, 2005 WL 1414290,
*7 (June 16, 2005) (requiring an offending pipeline to pay
consequential damages for its breach of a service agreement).
Of course, after considering VNG’s demands on the merits,
FERC might conclude that VNG’s claims are overbroad.
However, that possibility does not absolve FERC from making
a choice and explaining it. See Motor Vehicle Mfrs. Ass’n v.
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (An
agency must “examine the relevant data and articulate . . . a
rational connection between the facts found and the choice
made.” (internal quotation marks and citation omitted)); SEC v.
Chenery Corp., 332 U.S. 194, 196-97 (1947) (“It will not do for
a court to be compelled to guess at the theory underlying the
agency’s action; nor can a court be expected to chisel that which
must be precise from what the agency has left vague and
indecisive.”); Commc’ns & Control, Inc. v. FCC, 374 F.3d 1329,
1335-36 (D.C. Cir. 2004) (holding a conclusion supported “with
no explanation” is the epitome of “arbitrary and capricious”
decisionmaking (emphasis in original)).

1
Without explaining which provision of the NGA Columbia
violated, FERC notes that “compensation for Columbia’s LNG service
shortfalls may be awarded by the Commission pursuant to NGA
section 16 . . . .” Rehearing Order, 109 FERC at 61381. Because the
Commission has remedial authority under § 16 only if Columbia
violated one of the NGA’s substantive provisions, see New England
Power Co. v. FPC, 467 F.2d 425, 430-31 (D.C. Cir. 1972), aff’d, 415
U.S. 345 (1974), the Commission’s assertion of its § 16 power
necessarily implies an independent violation of the NGA. We express
no opinion on this issue. On remand, FERC should make plain the
basis for its authority to award remedies (if any).
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If part of VNG’s damage demand is beyond the
Commission’s remedial authority, FERC should have so ruled
—or at least should have explained why it would defer in this
case even if the demand were within its authority. Cf. Arkansas
Louisiana Gas Co. v. Hall, 7 FERC ¶ 61175, 61321-22 (1975)
(concluding FERC should defer to pending remedial
proceedings in a state court). Given that the Commission has
suggested that VNG’s demands straddle the remediable-
unremediable border, see, e.g., Rehearing Order, 109 FERC at
61381, it is incumbent upon the Commission to explain which
fall where. A tight-lipped punt will not do.

Finally, we hasten to emphasize one limit on today’s
decision. VNG argues that “once a violation of the NGA has
been found, the Commission must take action to remedy the
violation—the Commission’s [remedial] duty is ‘mandatory.’”
We need not and do not go so far. In addition to the fact that it
is unclear whether Columbia violated the NGA, see supra note
1, it is also irrelevant for present purposes whether FERC must
remedy every NGA violation. The Commission’s failure to
explain itself renders its decision in this case arbitrary and
capricious.

IV

For the reasons stated above, Columbia’s petition for review
is denied, and VNG’s petition for review is granted in part and
denied in part.

So ordered.