Duke Engy Trdg & Mkt, et al v. FERC, No. 01-1163 (D.C. Cir. 2003)

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 11, 2002 Decided January 21, 2003

No. 01-1163

Duke Energy Trading and Marketing, L.L.C., and

American Natural Gas Corporation,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

PG&E Gas Transmission, Northwest Corporation

Intervenor

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Gordon J. Smith argued the cause and filed the briefs for

petitioner.

Laura J. Vallance, 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.

Lee A. Alexander, Stefan M. Krantz, and Debra H. Rednik

were on the brief for intervenor. Carl M. Fink entered an

appearance.

Before: Sentelle, Randolph and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: Duke Energy Trading & Market-

ing, L.L.C. (Duke) and American Natural Gas Corporation

(ANG) petition for review of a Federal Energy Regulatory

Commission (FERC or the Commission) order accepting a

tariff filing from PG&E Gas Transmission, Northwest Corpo-

ration (PG&E). PG&E Gas Transmission, Northwest Corp.,

93 F.E.R.C. p 61,072 (2000), reh'g denied, 94 F.E.R.C.

p 61,114 (2001). The order under review allows PG&E to

eliminate its queue system for allocating interruptible trans-

mission (IT) capacity among maximum rate bidders and to

replace it with pro rata allocation. We find that FERC acted

reasonably in accepting PG&E's filing and thus deny the

petition for review.

I. Background

PG&E operates a natural gas pipeline running 612 miles

from the Washington/Canada border to the border between

Oregon and California. On its pipeline, PG&E sells two

primary types of natural gas transportation capacity-firm and

interruptible. Firm capacity is purchased on a monthly basis

and cannot be interrupted or curtailed except in limited

circumstances. Interruptible capacity can be interrupted

when necessary to provide service to higher priority custom-

ers, such as firm customers. Interruptible capacity is bid for

as needed, rather than purchased monthly. PG&E's gas

tariff sets the maximum per-mile rates PG&E can charge for

its interruptible transportation services. The total amount a

shipper pays for service, and thus the revenue generated, is

derived by multiplying the per-mile bid by the number of

miles the gas is to be transported.

 Prior to the proceedings under review, PG&E allocated IT

capacity first to shippers bidding the maximum per-mile rate,

regardless of distance, and hence regardless of revenue.

PG&E then allocated any remaining capacity to shippers

bidding less than the maximum per-mile tariff rate by rank-

ing bids based on total revenue. Ties between bidders, at

both the maximum and sub-maximum rates, were broken

according to a shipper's position in the IT queue. Thus, if

two shippers' bids were tied, the shipper with the higher

position in the queue would be allocated the IT capacity.

Queue positions were determined by a lottery held by PG&E

in 1987. See Pacific Gas Transmission Co., 40 F.E.R.C.

p 61,193 (1987). In that lottery, ANG won the highest posi-

tion in the queue. Duke later acquired ANG.

On March 1, 2000, PG&E submitted a tariff filing pursuant

to Section 4 of the Natural Gas Act, 15 U.S.C. s 717c (2000),

seeking to change its IT capacity allocation method. PG&E

proposed to use the system it employed to rank sub-maximum

rate bidders to rank bids from maximum rate bidders as well.

Under this "revenue-based" or "distance-based" proposal,

allocation would be determined by net revenue generated per

dekatherm, with net revenue being determined by multiplying

the distance in pipeline miles from the receipt point to the

delivery point by the rate bid plus surcharges. Consequent-

ly, a long-haul maximum rate bidder would always defeat a

shorter-haul maximum rate bidder, because the long-haul

shipper's total bid would always generate greater revenue. If

any ties remained between bids generating the same net

revenue, capacity would be allocated pro rata-that is, each

tied bidder would receive a proportionate share of the re-

maining capacity. In sum, under PG&E's filing, the IT queue

would be replaced with revenue-based allocation followed by a

pro rata tiebreaker.

On September 14, 2000, FERC rejected PG&E's proposal.

See PG&E Gas Transmission, Northwest Corp., 92 F.E.R.C.

p 61,202 (2000) (PG&E I). In PG&E I, FERC focused almost

exclusively on its concern that extending revenue-based allo-

cation to maximum rate bidders would unduly discriminate

against short-haul shippers whose bids could never generate

more revenue than longer-haul shippers.1 See id. at 61,677.

Even though FERC rejected PG&E's revenue-based alloca-

tion mechanism, the rejection was "without prejudice to

PG&E[ ] making a new filing to modify its proposal to include

an alternate allocation mechanism," id., and FERC explicitly

noted that it had "accepted other methods of allocating

capacity when shippers all bid the maximum rate, such as pro

rata," id. at 61,676.

Shortly thereafter, PG&E submitted a new tariff filing that

replaced the queue with simple pro rata allocation among all

maximum rate bidders. Under this proposal, each maximum

rate bidder would receive a proportionate share of capacity

regardless of revenue generated by its total bid. Petitioners

lodged a protest arguing that PG&E's new proposal was

identical to the filing rejected in PG&E I because both

proposals contained an element of pro rata allocation and

resulted in elimination of the IT queue. Petitioners also

contended that continued use of the IT queue would promote

FERC's efficiency goals better than pro rata allocation.

On October 25, 2000, FERC approved PG&E's filing over

petitioners' protest, rejecting petitioners' argument that

PG&E's filing was identical to the filing in PG&E I. PG&E

Gas Transmission, Northwest Corp., 93 F.E.R.C. p 61,072, at

61,187 (2000) (PG&E II). In addition, FERC reasoned that

pro rata allocation would eliminate the need for a complex

queue and improve efficiency along the pipeline by allocating

capacity based on willingness to pay rather than queue posi-

tion. Id. Finally, FERC relied on its own precedent finding

the pro rata method to be a just and reasonable means of

allocating interruptible capacity among tied bidders. Id.

FERC denied petitioners' request for rehearing, PG&E

Gas Transmission, Northwest Corp., 94 F.E.R.C. p 61,114

(2001) (Rehearing Order), and petitioners timely sought judi-

cial review.

__________

1 PG&E's appeal of this ruling is addressed in a companion case,

PG&E Gas Transmission, Northwest Corp. v. FERC, __ F.3d __

(D.C. Cir. 2003), issued by this Court today.

 II. Analysis

Under Section 4 of the Natural Gas Act, 15 U.S.C. s 717c,

a pipeline proposing a rate change has the burden of showing

that the proposed rate is just and reasonable. Exxon Corp.

v. FERC, 206 F.3d 47, 51 (D.C. Cir. 2000). "If it meets that

burden, FERC approves the rate regardless of whether there

may be other rates that would also be just and reasonable."

Id. We will uphold FERC's decision to approve a tariff filing

unless it is "arbitrary, capricious, an abuse of discretion, or

otherwise not in accordance with law." 5 U.S.C. s 706(2)(A)

(2000). Under this deferential standard, "the Commission

must be able to demonstrate that it has made a reasoned

decision based upon substantial evidence in the record."

Northern States Power Co. v. FERC, 30 F.3d 177, 180 (D.C.

Cir. 1994) (quotation omitted).

Petitioners attack FERC's ruling on two grounds. First,

petitioners claim that FERC arbitrarily and capriciously ap-

proved the pro rata mechanism in PG&E II after rejecting

what petitioners describe as an "identical" proposal in PG&E

I. Second, petitioners contend that FERC's acceptance of

the pro rata mechanism as "just and reasonable" was arbi-

trary and capricious and unsupported by substantial evidence.

We find neither argument persuasive.

A.

Describing PG&E's second proposed tariff as "simply a

'rerun' of the same filing" that PG&E had previously made,

and the Commission rejected, petitioners assert that the new

filing "should have been summarily rejected under collateral

estoppel principles," and the Commission's acceptance of it

was arbitrary and capricious. Pet. Br. at 12. This argument

fails utterly. Petitioners' contention that the pro rata mecha-

nism at issue here is identical to the one FERC rejected in

PG&E I is meritless. As FERC correctly found, the present

proposal "no longer seeks to prioritize maximum rate bids

based upon a distance-based allocation mechanism." PG&E

II, 93 F.E.R.C. at 61,187. Rather, PG&E "solely proposes to

implement a tie-breaking procedure for maximum bids strict-

ly on a pro rata basis." Id. The most superficial analysis

demonstrates that FERC correctly found the instant proposal

to be entirely different than the revenue-based mechanism

followed by a pro rata tiebreaker it rejected in PG&E I. The

two proposals operate differently and produce vastly different

results. For example, envision two shippers each bidding the

maximum per-mile rate. Shipper A bids for 100 miles of

transportation, while Shipper B bids for 200 miles. Under

PG&E's first proposal, Shipper B would always receive IT

capacity over Shipper A because his bid would generate

greater revenue. Under the present pro rata proposal, by

contrast, each shipper would receive a proportionate alloca-

tion of capacity.

That the proposals both contain a pro rata component is

not determinative. The pro rata device plays a substantially

different role in the two proposals. Under the PG&E I filing,

the pro rata tiebreaker was to be applied only after the

revenue mechanism was used to rank bidders on the basis of

distance and hence revenue. That is, pro rata allocation

served only in a secondary capacity after application of the

revenue mechanism had failed to resolve all allocation issues.

Under the instant proposal, pro rata allocation is the sole

means for allocating capacity among maximum rate bidders,

and thus performs a much more fundamental and important

role. Just as importantly, total revenue plays no role in

allocating capacity among maximum rate bidders in the in-

stant proposal, thereby eliminating FERC's PG&E I concern

about discrimination against short-haul shippers. To suggest

that two separate tariffs are identical, and that the rejection

of one mandates the rejection of the other, simply because

they contain a common element makes no sense. As there

are a limited number of factors that pipelines can conceivably

rely upon to set tariffs, petitioners' approach would virtually

lock the pipelines and the Commission into a perpetual rate

once the first attempt at change has failed, no matter how

just and reasonable some subsequent submission might be.

Petitioners also apply the same sort of faulty reasoning to a

different element of the approved tariff by contending that

because FERC in PG&E I rejected one proposal to eliminate

the IT queue, FERC could not approve any subsequent

proposal that eliminated the queue. This is nonsense. The

fact that FERC rejected one rate proposal including elimina-

tion of the queue cannot conceivably preclude it from accept-

ing a later "just and reasonable" proposal merely because the

new proposal also eliminates the queue. FERC's order in

PG&E I offers no support for petitioners' argument. First,

nothing in PG&E I suggests that FERC found any inherent

defect in eliminating the queue. Rather, FERC's opinion

focused on the shortfalls of the revenue-based mechanism as

a primary allocator of capacity, rejecting it because it would

result in discrimination against short-haul shippers. See

PG&E I, 92 F.E.R.C. at 61,677. That is, the Commission

rejected only PG&E's proposed replacement for the queue; it

did not hold or even suggest that there could never be any

valid replacement. Moreover, the Commission never ad-

dressed the validity of the pro rata portion of the proposal,

much less the validity of a pro rata mechanism acting alone to

allocate capacity, as is proposed here. To the contrary,

FERC "reject[ed] PG&E[ ]'s capacity allocation proposal

without prejudice to PG&E[ ] making a new filing to modify

its proposal to include an alternate allocation mechanism."

Id. Far from barring future filings to eliminate the queue,

FERC explicitly noted that it "has accepted other methods of

allocating capacity when shippers all bid the maximum rate,

such as pro rata." Id. at 61,676. Thus, the Commission's

order implicitly, if not explicitly, invited PG&E to propose pro

rata allocation of IT capacity among maximum rate bidders.

It certainly did not preclude future proposals to eliminate the

queue.

Consequently, we reject petitioners' claim that the ruling

under review is inconsistent with FERC's order in PG&E I.

B.

Petitioners' second argument is as meritless as their first.

They contend that FERC's conclusion that PG&E's pro rata

proposal is "just and reasonable" under Section 4 of the

Natural Gas Act is arbitrary and capricious, as there was

before the Commission no substantial evidence that pro rata

allocation would be more efficient than the use of the queue.

They further argue that FERC ignored its own precedents

finding queues to be just and reasonable and instead "cherry-

picked" precedents finding pro rata applications to be just

and reasonable. None of this undermines the validity of the

Commission's decision.

Petitioners' arguments rest on a fundamental misunder-

standing of the inquiry under Section 4 of the Natural Gas

Act. Under Section 4, a pipeline seeking to change its

existing tariff need not demonstrate that the existing tariff, in

this case the queue, is unjust and unreasonable. Mun. Def.

Group v. FERC, 170 F.3d 197, 201 (D.C. Cir. 1999) ("s 4

applied and the Commission was not required to establish

that [the pipeline's] prior allocation method was unjust or

unreasonable."). Rather, the Commission need only find that

the proposed tariff is just and reasonable. Exxon Corp., 206 F.3d at 51. Nothing in Section 4 requires the pipeline to

prove that its proposal is more just and reasonable than the

existing system. The pipeline must only show that its pro-

posal is just and reasonable in its own right. In this case,

then, FERC had no obligation to find that the IT queue was

no longer functioning well, nor even to find that pro rata

allocation is more efficient than the IT queue. As petitioners

correctly conceded at oral argument, there may be a number

of different potential rates all of which are just and reason-

able. Thus, FERC needed only to find pro rata allocation to

be just and reasonable.

In finding PG&E's pro rata allocation proposal just and

reasonable FERC cited four cases in which "[t]he Commis-

sion has ruled ... that the pro rata methodology for breaking

ties for interruptible service is just and reasonable under

Section 4 of the Natural Gas Act." PG&E II, 93 F.E.R.C. at

61,187 & n.6. Specifically, FERC relied on Northern Border

Pipeline Co., 69 F.E.R.C. p 61,114 (1994), reh'g denied, 70

F.E.R.C. p 61,034 (1995), a case with similar facts to this one

in which FERC approved elimination of a queue in favor of

pro rata allocation among tied bidders. PG&E II at 61,187.

 Petitioners do not dispute that these cases establish the

validity of the pro rata mechanism. See Pet. Br. at 24 ("the

Commission has clearly determined that either queue or pro-

rata tiebreakers are equally consistent with Commission poli-

cy"). Nor do petitioners submit any reason why we should

attempt to limit the Commission's application of its own

precedent. Rather, petitioners argue that FERC should have

rejected the pro rata proposal by relying on precedent find-

ing queues to be just and reasonable. As explained above,

petitioners' argument is a non sequitur. Under Section 4, the

fact that PG&E's queue was just and reasonable under

FERC precedent does not preclude FERC from accepting

pro rata allocation as just and reasonable as well. Therefore,

we hold that the Commission did not "cherry-pick" favorable

precedent, as petitioners claim, but instead reasonably fol-

lowed the consistent rulings of the Commission finding pro

rata tiebreakers to be just and reasonable.

We would be remiss if we did not note one complicating

factor. We have today issued the opinion in a companion

case, PG&E Gas Transmission v. FERC, __ F.3d __, grant-

ing PG&E's petition for review of the FERC decision in

PG&E I. We recognize the very real possibility that Com-

mission proceedings on remand may result in the displace-

ment of the tariff approved in PG&E II, which we review in

this proceeding. We wish to make it plain that we do not

intend this opinion to bar any party from litigation of any

issue not decided herein. We decide only those issues raised

in this petition, in the anticipation that the approved tariff

which we review herein will continue in effect unless and until

displaced by some other tariff in further appropriate proceed-

ings.

III. Conclusion

We hold that FERC was not precluded from approving

PG&E's pro rata allocation mechanism by its rejection of an

earlier filing proposing revenue-based allocation followed by a

pro rata tiebreaker. On the merits, we hold that FERC

adequately supported its conclusion that PG&E's proposal to

allocate IT capacity pro rata among maximum rate bidders is

"just and reasonable" under Section 4 of the Natural Gas Act.

Accordingly, the petition for review is

Denied.