United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 11, 2007 Decided March 9, 2007
No. 05-1214
NORTH BAJA PIPELINE, LLC,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Catherine E. Stetson argued the cause for petitioner. With
her on the briefs were Lee A. Alexander, Stefan M. Krantz,
James Howard, C. Todd Piczak, and Carl M. Fink. Debra H.
Rednik entered an appearance.
Lona T. Perry, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on the
brief were John S. Moot, General Counsel, and Robert H.
Solomon, Solicitor.
Before: HENDERSON, RANDOLPH and KAVANAUGH, Circuit
Judges.
Opinion for the Court filed by Circuit Judge KAVANAUGH.
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KAVANAUGH, Circuit Judge: Interstate natural gas
pipelines must submit their proposed shipping rates to the
Federal Energy Regulatory Commission for approval. This case
concerns a rate filing by North Baja, a pipeline that transports
natural gas from Arizona to Mexico through California. North
Baja proposed a formula for sharing with shippers the costs of
so-called force majeure interruptions – interruptions due to
uncontrollable and unexpected factors like severe weather.
North Baja also proposed to include scheduled maintenance as
a force majeure event. FERC determined that (i) North Baja’s
proposed cost-sharing formula was inconsistent with established
FERC policy and (ii) scheduled maintenance was not a force
majeure event under FERC precedents. We find FERC’s
decisions reasonable and reasonably explained, and we therefore
deny North Baja’s petition for review.
I
1. Natural gas shippers typically pay two fees to transport
gas on a pipeline. The first fee, called a “reservation charge,” is
based on the amount of pipeline capacity reserved by the
shipper. The second fee, called a “usage charge,” is based on
the actual amount of gas transported by the shipper. In
accordance with FERC policy, pipelines recover their fixed
costs (such as operating expenses) in the reservation charge and
their variable costs (primarily the cost of fuel for pipeline
compressors) in the usage charge. See Pipeline Service
Obligations and Revisions to Regulations Governing Self-
Implementing Transportation; and Regulation of Natural Gas
Pipelines After Partial Wellhead Decontrol, Order No. 636, 57
Fed. Reg. 13,267-02, 13,281 (Apr. 8, 1992), on reh’g, Order No.
636-A, 57 Fed. Reg. 36,128-01, 36,171 (Aug. 3, 1992). When
pipeline service is interrupted, shippers generally receive a
“reservation charge credit,” which (in substance) is a refund of
3
the reservation charge the shipper paid to reserve pipeline
capacity.
2. In October 2004, North Baja proposed a formula to share
the costs of force majeure occurrences between the pipeline and
its shippers. Under North Baja’s proposal, shippers would
receive no refund for the first ten days of a force majeure
interruption. If the interruption persisted longer than ten days,
the shippers would receive a percentage refund for each
additional day the pipeline was out of service.
FERC rejected North Baja’s proposed formula as
inconsistent with Commission policy. FERC explained that it
had previously approved two refund formulas for force majeure
events. See Order Accepting and Suspending Tariff Sheets
Subject to Conditions, 109 F.E.R.C. ¶ 61,159, at 61,766 ¶ 14
(Nov. 12, 2004). Under the first, called the Texas Eastern
policy, shippers receive no refund for the first ten days and
receive a full refund for any days beyond that. Id. (citing Tx. E.
Transmission Corp., 62 F.E.R.C. ¶ 61,015 (Jan. 13, 1993), and
Natural Gas Pipeline Co. of Am., 106 F.E.R.C. ¶ 61,310 (Mar.
29, 2004)). Under the second, called the Tennessee policy,
shippers receive a percentage refund for the entire period of the
interruption. Id. (citing El Paso Natural Gas Co., 104 F.E.R.C.
¶ 61,045 (July 9, 2003)). North Baja proposed a “hybrid” that
combined the pipeline-favorable aspects of each of the two
policies – the ten-day no-refund period of Texas Eastern and the
percentage refund of Tennessee. Id. FERC concluded that this
hybrid did not satisfy the Commission’s standard of fair cost-
sharing between pipelines and shippers. Id. at 61,766 ¶ 15.
In the same order, FERC concluded that events within North
Baja’s control – such as scheduled maintenance – are not force
majeure events. Id. at 61,765 ¶ 11. FERC directed North Baja
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either to change its proposal to conform with the Commission’s
rulings or to offer additional support for it. Id. at 61,766 ¶ 15.
North Baja filed a request for clarification and rehearing
before the Commission. North Baja argued that FERC had made
two mistakes in the initial order. First, North Baja questioned
whether the Texas Eastern and Tennessee formulas were the only
permissible alternatives for a force majeure refund. Second,
North Baja contended that FERC erred in determining that
scheduled maintenance was not a force majeure event “without
first considering North Baja’s unique physical and operational
characteristics.” Joint Appendix 60.
FERC issued an Order on Rehearing, Clarification, and
Compliance. 111 F.E.R.C. ¶ 61,101 (Apr. 19, 2005). The
Commission stated plainly that the Texas Eastern and Tennessee
policies were not the only permissible approaches to force
majeure interruptions and that the Commission was “open to
alternative approaches if fully justified and supported.” Id. at
61,493 ¶ 20. North Baja’s formula did not meet that
requirement.
FERC also did not accept North Baja’s argument on the
scheduled maintenance issue. Id. at 61,492-61,493 ¶¶ 17-19.
FERC explained that an interruption “from planned or scheduled
maintenance is a non-force majeure event that requires the
pipeline to provide full credits.” Id. at 61,492 ¶ 17. Although
some maintenance may be unavoidable, FERC did “not agree
that the pipeline has no ‘control’ over how and when it performs
such maintenance . . . . These are activities over which North
Baja exercises a degree of control, unlike acts of God in typical
force majeure situations.” Id. at 61,492 ¶ 18. In addition, FERC
explained, “since such maintenance is planned, the pipeline
should have provided for such maintenance interruptions in its
rates.” Id. at 61,493 ¶ 18.
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North Baja filed a timely petition for review of the orders in
this Court. 15 U.S.C. § 717r(b).
II
We review the FERC decisions at issue here under the
Administrative Procedure Act’s arbitrary and capricious standard
of review. See 5 U.S.C. § 706(2)(A). FERC’s conclusions
therefore must be reasonable and reasonably explained. See
Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 839 (D.C.
Cir. 2006). We undertake that inquiry recognizing that we are
“particularly deferential to the Commission’s expertise in
ratemaking cases, which involve complex industry analyses and
difficult policy choices.” Exxon Mobil Corp. v. FERC, 430 F.3d
1166, 1172 (D.C. Cir. 2005) (internal quotation omitted).
1. With respect to the cost-sharing formula, FERC
reasonably rejected North Baja’s proposal as inconsistent with
agency policy. FERC has previously determined that two cost-
sharing arrangements – Texas Eastern’s full credit after ten days
and Tennessee’s percentage credit over the entire interruption
period – are equitable. See generally Natural Gas Pipeline Co.
of Am., 106 F.E.R.C. ¶ 61,310, at 62,208 ¶ 5 (Mar. 29, 2004).
Both alternatives incorporate a careful balancing of risk between
shippers and pipelines. The problem here is that North Baja
effectively cherry-picked the most pipeline-favorable aspects of
each formula by combining Texas Eastern’s ten-day no-refund
period with Tennessee’s percentage refund.
North Baja argues that its proposal should be measured
against the general principle that pipelines and shippers must
equitably share the risk of force majeure interruptions – and not
measured against any previously approved policy. It is true that
the Commission has evaluated proposals against the principle
6
that both pipelines and shippers should bear “some portion of the
risk associated with force majeure interruptions, so that
[pipelines] have an incentive to act expediently to cure a force
majeure interruption.” Tenn. Gas Pipeline Co., order on reh’g,
80 F.E.R.C. ¶ 61,389, at 62,296 (Sept. 29, 1997). But there is
nothing unreasonable about the Commission comparing North
Baja’s proposal to previously approved policies to determine if
the proposal equitably shares the risk between North Baja and its
shippers. The Commission has simply instructed North Baja to
choose the Texas Eastern or Tennessee formulas, or to propose
a formula that achieves an equitable cost-sharing in the same
ballpark as the Texas Eastern and Tennessee policies.
North Baja also questions whether the Commission will in
fact consider any approaches other than the specific Texas
Eastern and Tennessee policies. In the order on rehearing below,
however, the Commission made clear that it remained open to
alternative mechanisms. See 111 F.E.R.C. ¶ 61,101, at 61,493
¶ 20. FERC’s decision did not turn, moreover, on the proposal’s
failure to exactly mirror either the Texas Eastern or the
Tennessee policy, but rather on the fact that North Baja’s “hybrid
of the two policies” altered the responsibility for force majeure
events in favor of the pipeline and against the shippers. 109
F.E.R.C. ¶ 61,159, at 61,766 ¶ 14. As the order on rehearing
states, FERC remains open to other approaches that achieve a
similar sharing of risk as the two previously approved policies.
In short, FERC’s decision on the cost-sharing issue was entirely
reasonable.
2. With respect to the Commission’s determination that
scheduled maintenance is not a force majeure event, FERC
applied its longstanding and consistent definition of what
constitutes a force majeure interruption. More than ten years
ago, the Commission analyzed this issue at length. See Tenn.
Gas Pipeline Co., Opinion No. 406, 76 F.E.R.C. ¶ 61,022 (July
7
3, 1996). In that opinion, the Commission ruled that a pipeline
was required to issue full refunds for scheduled maintenance. Id.
at 61,084-61,089. FERC explained that “[b]ecause a pipeline is
responsible for operating its system so that it can meet its
contractual obligations, if the pipeline must curtail firm service
due to an event within its control, or management, the
Commission finds it inequitable for the pipeline’s customers to
bear the risk associated with such mismanagement.” Id. at
61,086. Furthermore, requiring a pipeline to pay for scheduled
maintenance interruptions “provide[s] an incentive for the
pipeline to manage its system so that it can avoid interruptions
that it could have avoided if it had better managed its system.”
Id.
As a general matter, FERC has repeatedly reiterated that
scheduled maintenance is not a force majeure event. See Fl. Gas
Transmission Co., 107 F.E.R.C. ¶ 61,074, at 61,245 ¶¶ 28-29
(Apr. 20, 2004); Alliance Pipeline L.P., 84 F.E.R.C. ¶ 61,239, at
62,214 (Sept. 17, 1998). In El Paso Natural Gas Co., moreover,
the Commission decided that the rule applies even to pipelines
with little excess capacity. See 105 F.E.R.C. ¶ 61,262, at 62,350
¶ 7, 62,352 ¶ 15 (Nov. 28, 2003). FERC explained that “[t]he
Commission’s policy on this issue as set forth in the Florida Gas
decision is not dependent upon specific operating conditions on
the pipeline.” Id. at 62,352 ¶ 15.
In its orders here, FERC expressly relied on these precedents
and applied its well-established and reasonable definition of a
force majeure event to the case before it. 111 F.E.R.C. ¶ 61,101,
at 61,492 ¶ 17 & nn.12-13; see also Bellevue Hosp. Ctr. v.
Leavitt, 443 F.3d 163, 176 (2d Cir. 2006).
North Baja argues that Opinion 406 emphasized “control”
and contends that a pipeline, when it operates at full capacity,
cannot avoid interrupting service at some point to perform
8
necessary maintenance. In North Baja’s view, “[o]n a single-line
system with virtually no excess capacity, such as North Baja, the
pipeline has no control over the occurrence of service
interruptions, regardless of when the maintenance activities take
place. Certain mainline maintenance cannot be performed on a
single-line system, like North Baja’s, without either taking the
entire pipeline out of service or reducing its throughput . . . .”
Petitioner’s Br. at 22-23. Therefore, at least for a pipeline that
has little or no excess capacity, North Baja contends that FERC
policy dictates that scheduled maintenance must be considered
a force majeure event. Moreover, North Baja argues that FERC
was obligated to consider the specific factual circumstances of
North Baja – in particular, that it was operating at full capacity
and that scheduled maintenance outages were therefore
uncontrollable. Cf. Williston Basin Interstate Pipeline Co. v.
FERC, 358 F.3d 45, 48-49 (D.C. Cir. 2004); Mich. Wis. Pipe
Line Co. v. FPC, 520 F.2d 84, 89 (D.C. Cir. 1975).
In Opinion 406, however, the Commission defined force
majeure events as events that are not only uncontrollable, but
also unexpected. As the Commission wrote, “neither Tennessee,
nor its shippers are at fault for force majeure interruptions,
because these are unexpected and uncontrollable events.” 76
F.E.R.C. ¶ 61,022, at 61,088. Although some scheduled
maintenance interruptions may be uncontrollable, they certainly
are not unexpected. There is nothing unreasonable about
FERC’s policy that pipelines’ rates should incorporate costs
associated with a pipeline “operating its system so that it can
meet its contractual obligations,” and that a cost-sharing
mechanism should be reserved for uncontrollable and
unexpected events that temporarily stall service. The
Commission here reasonably determined that North Baja’s
circumstances did not exempt it from the Commission’s
longstanding policy regarding scheduled maintenance.
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III
Although North Baja has capably advanced its arguments to
this Court, we find FERC’s decisions reasonable and reasonably
explained for purposes of our deferential review under the
Administrative Procedure Act. We therefore deny North Baja’s
petition.
So ordered.