United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 16, 2007 Decided July 24, 2007
No. 05-1426
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Andrea C. Wolfman argued the cause for petitioner. With
her on the briefs were Joan Dreskin and Timm Abendroth.
Carol J. Banta, 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: ROGERS, GARLAND and BROWN, Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: The Federal Energy Regulatory
Commission (“FERC” or “the Commission”) issued an Ac-
2
counting Order, instructing natural gas pipeline companies to
expense certain costs associated with the Pipeline Safety
Improvement Act of 2002, Pub. L. No. 107-355, 116 Stat. 2985
(“PSIA”). After FERC denied a request for rehearing, the
Interstate Natural Gas Association of America (“INGAA”)
petitioned for review in this court. Finding FERC’s explanation
for its Accounting Order reasonable and its responses to
INGAA’s comments sufficient, we deny the petition.
I
Section 14 of PSIA, 49 U.S.C. § 60109(c)–(d), requires
each operator of natural gas pipelines to adopt and implement a
written integrity management program (“IMP”) to monitor and
reduce the risks associated with pipeline segments located in
areas of high population density (“High Consequence Areas,” or
“HCAs”). Each IMP includes a testing regime with two
components. First, companies are to conduct baseline integrity
assessments of their HCA segments by December 2012. Id.
§ 60109(c)(3)(A). Second, going forward, they are to retest
each HCA segment at least once every seven years unless
granted a waiver by the Secretary of Transportation. Id.
§ 60109(c)(3)(B), (5).
Under the Natural Gas Act, FERC has jurisdiction to
regulate the transportation and sale of natural gas in interstate
commerce. 15 U.S.C. § 717(a)–(b). This includes the power to
issue rules and regulations governing pipeline companies’
accounting practices. Id. §§ 717g(a), 717o. Pursuant to that
authority, FERC issued a Notice of Proposed Accounting
Release (“PAR”) describing its planned accounting rules for
PSIA testing and inviting comments. 69 Fed. Reg. 67,727 (Nov.
5, 2004). Under the proposal, testing costs under PSIA would
be expensed, not capitalized.
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The PAR acknowledged FERC had occasionally permitted
capitalization of testing costs in the past, citing in particular
Northwest Pipeline Corp., Docket No. AC94-149-000 (FERC
Apr. 30, 1996) (“NPC”). FERC distinguished NPC on the
ground that NPC’s testing costs were incurred “in connection
with [a] major pipeline rehabilitation project[] involving
significant replacements and modifications of facilities” that
“extended the overall pipeline system’s useful life and service-
ability,” while PSIA required testing as part of “on-going
maintenance programs.”
INGAA advocated capitalization of testing costs in com-
ments submitted in response to the PAR. FERC subsequently
issued an Accounting Order, 111 F.E.R.C. ¶ 61,501 (June 30,
2005), responding to comments and establishing definitive IMP
accounting rules for pipeline companies. The Order repeated
FERC’s earlier instruction to expense PSIA testing costs and
also set accounting rules for other IMP obligations. These rules
were to take effect on January 1, 2006, with no restrictions
placed on the accounting treatment of earlier expenditures.
The Accounting Order instructed pipeline companies to
expense the costs of writing IMP implementation plans, identi-
fying HCA segments, and conducting tests under PSIA, as well
as certain “costs incurred to develop and maintain a record-
keeping system to document [IMP] implementation and ac-
tions.” INGAA petitioned for rehearing, arguing IMP start-up
costs and data integration costs should be capitalized, as they are
not recurring costs. FERC denied this petition in a Rehearing
Order, 112 F.E.R.C. ¶ 61,309 (Sept. 19, 2005), and INGAA
sought judicial review.
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II
To establish standing as an association, INGAA must show
(1) at least one of its members has standing in its own right, (2)
the interests INGAA seeks to protect are germane to its purpose,
and (3) neither the claim asserted nor the relief requested
requires the participation of an individual INGAA member in
the suit. Am. Library Ass’n v. FCC, 401 F.3d 489, 492 (D.C.
Cir. 2005). Only the first of these requirements is in question.
Individual pipeline companies (which constitute INGAA’s
membership) are harmed by the Accounting Order’s expensing
requirements in at least two ways. First, expensing these costs
rather than capitalizing them reduces the companies’ “rate
bases,” thereby decreasing their maximum allowable revenues.
See Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d
54, 56–57 (D.C. Cir. 1999); Boston Edison Co. v. FERC, 885
F.2d 962, 964 (1st Cir. 1989). Second, capitalized expenditures
can be recovered through rate increases as the capital account
depreciates, while expenses might be unrecoverable if deemed
nonrecurring. Because we find the harm to INGAA members
sufficient for standing purposes, INGAA has standing.
We review FERC’s actions under 15 U.S.C. § 717r(b). See
CNG Transmission Corp. v. FERC, 40 F.3d 1289, 1292–93
(D.C. Cir. 1994) (confirming that accounting orders satisfy
§ 717r(b)’s “aggrievement” condition). However, we may not
consider an objection not “urged before the Commission in the
application for rehearing unless there is reasonable ground for
failure so to do.” 15 U.S.C. § 717r(b). Factual findings by
FERC are conclusive if supported by substantial evidence, id.,
and barring constitutional concerns not at issue here, FERC is
“free to fashion individual accounting rules” as long as they are
not arbitrary or capricious. Anaheim v. FERC, 669 F.2d 799,
806 (D.C. Cir. 1981) (internal quotation marks omitted); see
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also 5 U.S.C. § 706(2); Sithe/Independence Power Partners v.
FERC, 165 F.3d 944, 948 (D.C. Cir. 1999).
On the merits, INGAA suggests two grounds on which we
should set aside the Accounting Order. We address these in
turn.
A
First, INGAA contends FERC deviated from its precedent
in NPC without providing a reasoned explanation. See Motor
Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 57 (1983); Williams Gas Processing – Gulf
Coast Co. v. FERC, 373 F.3d 1335, 1341 (D.C. Cir. 2004).
FERC interpreted NPC as permitting capitalization of
testing that (1) “was done in connection with major pipeline
rehabilitation projects involving significant replacements and
modifications of facilities”; (2) “extended the overall pipeline
system’s useful life and serviceability” or otherwise benefited
future accounting periods; and (3) was not “associated with any
on-going maintenance programs.” This is a reasonable reading
of NPC’s terse ruling, and we defer to it. See Williams Gas
Processing, 373 F.3d at 1341.
Later, in the Accounting Order, FERC found NPC did not
cover PSIA testing, as such testing “does not by itself increase
the useful life of a pipeline asset or improve its efficiency,” and
the “primary aim” of the IMPs was “not to increase the capacity
or efficiency of the pipeline” but to “maintain the integrity of the
pipeline.” As these comments reasonably respond to and negate
all three prongs of the NPC test, we reject INGAA’s first
argument.
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B
Second, INGAA argues FERC failed to respond reasonably
to its comments on the PAR and the Accounting Order. When
FERC issues accounting rules pursuant to 15 U.S.C. §§ 717g
and 717o, it must abide by the Administrative Procedure Act
(“APA”) strictures at 5 U.S.C. § 553. Mobil Oil Corp. v. FPC,
469 F.2d 130, 139 (D.C. Cir. 1972); Pub. Serv. Comm’n v. FPC,
467 F.2d 361, 366 (D.C. Cir. 1972); accord Texaco, Inc. v. FPC,
412 F.2d 740, 745 (3d Cir. 1969). These include the duty to
“give reasoned responses to all significant comments in a
rulemaking proceeding.” Int’l Fabricare Inst. v. U.S. EPA, 972
F.2d 384, 389 (D.C. Cir. 1992) (per curiam) (internal quotation
marks omitted). However, “comments must be significant
enough to step over a threshold requirement of materiality
before any lack of agency response or consideration becomes of
concern,” Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 375,
394 (D.C. Cir. 1973), and “[t]he APA requirement of agency
responsiveness to comments is subject to the common-sense rule
that a response be necessary,” NRDC v. U.S. EPA, 859 F.2d 156,
188 (D.C. Cir. 1988) (per curiam).
Assuming without deciding that FERC had the same
obligation to respond to INGAA’s arguments regarding the
Accounting Order as it had with respect to comments it received
on the original PAR, we find FERC responded sufficiently to all
of INGAA’s arguments from its petition for rehearing. See 15
U.S.C. § 717r(b) (limiting review to arguments raised on
rehearing).
INGAA generally complains the Commission ignored its
own regulations and departed from precedent without explana-
tion. Examined closely, however, INGAA’s complaint is more
accurately that the Commission’s interpretation of both regula-
tions and precedent differed from INGAA’s. For example,
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INGAA argued Abstract No. 89-13 from the Emerging Issues
Task Force of the Financial Accounting Standards Board (“EITF
89-13”) provided the proper framework for setting IMP account-
ing rules. But, in FERC’s view, EITF 90-8, Capitalization of
Costs to Treat Environmental Contamination, more fully
described which costs should be capitalized and which ex-
pensed. See Rehearing Order ¶ 14. Contrary to INGAA’s
analysis, FERC determined that under EITF 90-8, baseline
assessment costs should be expensed, as they would not
“increase or extend the life, capacity, safety, or efficiency of a
pipeline beyond its original construction or acquisition state.”
Id.; see EITF 90-8 at 2. While such baseline assessments could
arguably increase a pipeline’s certified capacity, it was reason-
able for FERC to read EITF 90-8 to require increases in actual
physical capacity.
FERC likewise rejected INGAA’s attempted analogy
between PSIA testing costs and prepaid expenses, as the testing
costs secured no future service or resource. Rehearing Order
¶ 10. Equally appropriate was FERC’s response to INGAA’s
argument that costs required to avoid loss of an asset ought to be
capitalized, a theory FERC noted would require capitalization of
even ordinary maintenance costs. Id. And while INGAA’s
assertion that PSIA expenses should be recognized in periods in
which their benefits are realized is not unreasonable, neither is
FERC’s determination that the posited future benefits are too
speculative to warrant capital accounting. Id. ¶ 9.
INGAA argued the initial costs of constructing databases
and composing IMP implementation plans would be incurred
only once and ought therefore to be capitalized. However, by
statute such projects were to be complete by January 1, 2006,
and the Accounting Order did not apply to expenditures prior to
that date. Thus, this comment was not “significant,” and FERC
had no duty to respond to it. See Portland Cement Ass’n, 486
8
F.2d at 394.
INGAA also maintained NPC controlled. As described
above, FERC reasonably distinguished the rule from NPC. See
Accounting Order ¶¶ 21–22.
INGAA noted the PSIA regulations were contained in
Subpart O of 49 C.F.R. Part 192 (§§ 192.901 et seq.), while pre-
PSIA maintenance requirements appeared in Subpart M
(§§ 192.701 et seq.). From this, INGAA inferred the new
regulations could not mandate maintenance expenditures,
contrary to FERC’s reasoning in the Accounting Order. But we
are aware of no authority making Subpart M the sole repository
for maintenance regulations in Part 192, and as FERC reason-
ably argued, “an increase in the required level of maintenance
does not change the fact that the work remains a maintenance
activity,” Rehearing Order ¶ 12. We thus deem FERC’s
response sufficient.
Finally, INGAA argued early PSIA expenditures served to
produce a “knowledge base” and improve “the original Integrity
Plan ‘asset,’” so they should be capitalized. FERC again
rejected INGAA’s proposal, noting “[t]he activities incurred
during the baseline period[] are not materially different, if
different at all, from the same category of costs that INGAA
does not object to expensing after the baseline period.” Rehear-
ing Order ¶ 13. In essence, INGAA wanted the first iteration of
certain periodic expenditures to be deemed non-recurring
precisely because they were first; FERC’s response rejecting this
theory was reasonable.
III
As described above, FERC provided a reasoned explanation
for its decision not to treat NPC as governing, and it responded
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sufficiently to all of INGAA’s arguments. Therefore, INGAA’s
petition for review is
Denied.