Con Edison Co NY Inc, et al v. FERC, No. 01-1345 (D.C. Cir. 2003)

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 8, 2002 Decided January 17, 2003

No. 01-1345

Consolidated Edison Company of New York, Inc., et al.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Transcontinental Gas Pipe Line Corporation, et al.,

Intervenors

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Steven J. Kalish argued the cause for petitioners. With

him on the briefs were Denise C. Goulet and Irwin Popow-

sky.

Timm Abendroth, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief were Cynthia A. Marlette, General Counsel, and

Dennis Lane, Solicitor.

Michael J. Thompson, Jeffrey G. DiSciullo, David A.

Glenn, Richard P. Bonnifield, Kenneth R. Carretta, Freder-

ick W. Peters, and Charles H. Shoneman were on the brief

for intervenors Transcontinental Gas Pipe Line Corporation,

et al. Gregory Grady entered an appearance.

Before: Ginsburg, Chief Judge, and Edwards and

Sentelle, Circuit Judges.

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: Petitioners Consolidated Edison

("ConEd") and other pipeline customers of Transcontinental

Gas Pipeline Corporation ("Transco") ask this court to vacate

three Orders issued by the Federal Energy Regulatory Com-

mission ("FERC" or the "Commission"), involving Transco's

proposed rate change for several of its expansion projects.

Petitioners contend that the policy standards used by FERC

to evaluate Transco's proposal violate the Administrative

Procedure Act ("APA").

Reversing a decision by an administrative law judge

("ALJ"), FERC approved Transco's proposal to shift from

"incremental" pricing to "rolled-in" rates based on standards

enunciated in a 1995 Policy Statement. Transcon. Gas Pipe

Line Corp., 87 F.E.R.C. p 61,087 (Apr. 16, 1999) ("Transco

I"), reprinted in Joint Appendix ("J.A.") 181-98. After peti-

tioners filed requests for rehearing on this matter, FERC

issued a new 1999 Policy Statement for future rate change

proposals. However, in addressing the petition for rehearing,

the Commission again evaluated Transco's proposal pursuant

to the 1995 Policy Statement and ultimately upheld its initial

ruling to approve the rate change. Transcon. Gas Pipe Line

Corp., 94 F.E.R.C. p 61,362 (Mar. 28, 2001) ("Transco II"),

reprinted in J.A. 199-215. Subsequently, in response to a

second petition for rehearing, FERC rejected objections to its

reliance on the 1995 Policy Statement. Order Denying Re-

hearing, Transcon. Gas Pipe Line Corp., 95 F.E.R.C. p 61,388

(June 13, 2001) ("Transco III"), reprinted in J.A. 232-36.

 Petitioners argue that the disputed Orders are unreason-

able, because they rely upon the 1995 Policy Statement rather

than the 1999 Policy Statement. Petitioners contend that

FERC was obliged to apply the more recent policy statement,

because it was issued while the Transco case was still pend-

ing. We disagree.

The application of a newly adopted policy statement to a

pending case is not presumed unless the policy change has

the "force of law." When an agency issues a policy statement

that is not binding and merely signals how the agency may

handle future cases, there is no legal principle that mandates

retroactive application of the new policy statement to pending

cases. Retroactive application to pending cases may be per-

missible, but it is not required. An agency may decide to

apply a pre-existing policy to resolve a pending case, so long

as that policy is not otherwise arbitrary and the agency

provides a reasoned explanation for its decision.

On the record before us, we hold that FERC did not act

unlawfully in applying its 1995 Policy Statement when it

resolved Transco's proposal to implement rolled-in rates. We

further hold that the 1995 Policy Statement is not unreason-

able, either facially or as applied in this case. Finally, we

hold that FERC sufficiently explained its reasons for relying

on the 1995 Policy Statement (rather than the 1999 Policy

Statement) to evaluate the rate change proposal. We reject

petitioners' arguments to the contrary. Accordingly, we deny

the petition for review.

I. Background

A. Regulatory Framework

Under the Natural Gas Act ("NGA"), FERC has jurisdic-

tion to approve the construction of natural gas pipeline facili-

ties and to regulate the transportation of natural gas in

interstate commerce. 15 U.S.C. s 717, et seq. (2000). Any

pipeline seeking to build or to expand its facilities must first

apply for a certificate of public convenience and necessity

from FERC. After notice and hearing, FERC may authorize

or "certificate" any pipeline project that the agency deter-

mines is "necessary or desirable in the public interest." Id.

s 717f.

The NGA requires that all rates and charges by pipelines

must be "just and reasonable." Id. s 717c(a). Rate cases

before FERC are reviewed under either section 4 or section 5

of the NGA:

[T]his court has strictly policed the statutory line

that separates action taken under NGA section 4

from that taken under NGA section 5. In Algon-

quin, we described this distinction as follows:



[T]he Commission may act under two different

sections of the Natural Gas Act (NGA or the

Act) to effect a change in a gas company's rates.

When the Commission reviews rate increases

that a gas company has proposed, it is subject

to the requirements of section 4(e) of the Act.

Under section 4(e), the gas company bears the

burden of proving that its proposed rates are

reasonable. On the other hand, when the Com-

mission seeks to impose its own rate determina-

tions, rather than accepting or rejecting a

change proposed by the gas company, it must

do so in compliance with section 5(a) of the

NGA.



Under section 5, the Commission must first establish

that the proposed or existing rate is unjust and

unreasonable. It is only after this antecedent show-

ing has been made that the Commission properly

can illustrate that its alternative rate proposal is

both just and reasonable.



"Complex" Consol. Edison Co. v. FERC, 165 F.3d 992, 1001

(D.C. Cir. 1999) (quoting Algonquin Gas Transmission Co. v.

FERC, 948 F.2d 1305, 1311 (D.C. Cir. 1991)) (citations omit-

ted).

Generally, a pipeline can allocate the costs associated with

new or expanded facilities in one of two ways. The pipeline

may "roll in" these costs, by distributing additional charges

among all customers of the pipeline system. This pricing

approach recognizes that the pipeline is "not just a collection

of discrete pieces and parts, but an integrated system serving

all of its customers." Battle Creek Gas Co. v. Fed. Power

Comm'n, 281 F.2d 42, 46 (D.C. Cir. 1960). The alternative to

rolled-in rates is "incremental" pricing:

Whatever its virtues, use of a "rolled-in" approach

alone is not adequate in all situations, particularly

where some assets are used by the utility solely for

the benefit of one customer. At some point in every

gas distribution facility the general system ends and

connective links to the local distributors' own equip-

ment begins. At this point the facility becomes so

identified with its function as a part of the local

distributor's gas plant that it may be unfair to

charge its costs to all of the customers of the utility.

This is particularly so where the extent and cost of

such segregated facilities vary greatly among the

customers. In such a situation the costs of these

facilities are commonly charged as an "incremental"

cost added in to the particular customer's rate base.

Whether the cost of a particular facility is more

properly treated as a systemic cost and rolled-in to

the rate base of all of the customers, or as a

segregated cost to a particular customer, which

should be treated on an incremental basis, is fre-

quently a difficult issue of fact presented to the

Commission.



Id. at 46-47 (footnote omitted).

Over time, FERC policy has moved away from routinely

encouraging rolled-in rates toward a preference for rate

proposals that rely upon incremental pricing. See Trans-

Canada Pipelines Ltd. v. FERC, 24 F.3d 305, 308 (D.C. Cir.

1994). Responding to this court's directives to justify its

evolving standard for evaluating rate allocation proposals,

FERC adopted a Policy Statement discussing its revised

approach. Pricing Policy for New and Existing Facilities

Constructed By Interstate Natural Gas Pipelines, 71

F.E.R.C. p 61,241 (1995), reh'g denied, 75 F.E.R.C. p 61,105

(1996) ("1995 Statement"). The Commission's goals were to

give the industry clear signals about which pricing approach

would govern an expansion project and to avoid imposing

"rate shock" on existing pipeline customers. 1995 Statement,

71 F.E.R.C. at 61,915.

FERC described two essential features of the 1995 Policy

Statement:

First, the Commission will make a determination of

an appropriate rate design in a pipeline's certificate

proceeding. Second, when the pipeline seeks rolled-

in pricing, the Commission will base its pricing

decision on an evaluation of the system-wide benefits

of the project and the rate impact on existing cus-

tomers. To reduce uncertainty, in those cases, the

Commission will establish a presumption for rolled-

in rates when the rate effect on existing customers is

not substantial.



Id. The Commission indicated that a rolled-in rate proposal

was presumptively valid if the rate impact on existing custom-

ers was 5% or less and the pipeline company also offered

evidence of general systemwide benefits. Id. at 61,916-17.

After 1995, as competition in the pipeline industry in-

creased, FERC decided to develop a new policy that de-

emphasized rolled-in rates. Certification of New Interstate

Natural Gas Pipeline Facilities, 88 F.E.R.C. p 61,227 (1999),

clarified, 90 F.E.R.C. p 61,128, further clarified, 94 F.E.R.C.

p 61,094 (2000) ("1999 Statement"). In issuing the new policy,

FERC sought to "strike the proper balance between the

enhancement of competitive alternatives and the possibility of

over building." 1999 Statement, 88 F.E.R.C. at 61,737. The

1999 Statement indicated that FERC would not approve

rolled-in rates unless the pipeline could show that the benefits

of construction outweighed the adverse economic effects on

existing pipeline customers:

 If residual adverse effects on [existing pipeline cus-

tomers, other pipelines in the market and their

captive customers, or the economic interest of adja-

cent landowners and communities] are identified,

after efforts have been made to minimize them, then

the Commission will proceed to evaluate the project

by balancing the evidence of public benefits to be

achieved against the residual adverse effects. This

is essentially an economic test.



Id. at 61,745. FERC emphasized that its "economic test" for

rate proposals would apply prospectively: "[T]he new policy

will not be applied retroactively to cases where the certificate

has already issued and the investment decisions have been

made." Id. at 61,750.

B. Procedural Background

Transco operates a natural gas pipeline that connects pro-

duction sites along the Gulf of Mexico with customers located

along the Eastern seaboard. The company's pipeline system

serves most of the East Coast metropolitan markets including

Atlanta, Washington, D.C., and New York City. Between

1984 and 1994, FERC certificated 12 of Transco's expansion

projects - nine that linked the company's pipeline to areas in

Pennsylvania and three others that added capacity to the

section of the pipeline between Virginia and Alabama. See

Transco II, 94 F.E.R.C. at 62,307, J.A. 200; Transco I, 87

F.E.R.C. at 61,383-84, J.A. 181-82. FERC initially certificat-

ed all of these projects under an incremental pricing scheme,

before it issued the 1995 Statement. Transco I, 87 F.E.R.C.

at 61,385, J.A. 183.

In March 1995, Transco applied to FERC for a general

rate increase pursuant to section 4 of the NGA. Id. at 61,383,

J.A. 181. This rate filing included a variety of planned

changes, but Transco did not seek to switch from incremental

pricing. Id. Several pipeline customers who paid incremen-

tal costs intervened and objected to this proposal, arguing

that Transco should instead adopt rolled-in rates. After a

series of negotiations led to a settlement of several issues in

dispute, FERC approved a deal reflecting the parties' partial

agreement and scheduled the remaining matters for a hearing

before an ALJ. Id. at 61,384, J.A. 182. As part of this

arrangement, Transco reserved the right to seek rolled-in

rates for its expansion projects at a later time.

In November 1996, while the administrative hearing on the

remaining issues was in progress, Transco and other interest-

ed parties submitted a new rate change proposal to FERC.

Id. Under this proposal, the company planned to roll in costs

for the expansion projects on a prospective basis. The Com-

mission consolidated the hearing on Transco's rolled-in rate

proposal with the ongoing agency proceedings. Following an

evidentiary hearing on this issue, the ALJ ruled that Transco

was not entitled to charge rolled-in rates to cover expansion

costs. Transcon. Gas Pipe Line Corp., 82 F.E.R.C. p 63,019

(1998), reprinted in J.A. 134-80. The ALJ determined that

the proposal was governed by section 5 of the NGA. Id. at

65,163-66, J.A. 140-43. Applying the standards from the 1995

Statement, the ALJ found that existing customers faced an

increase that exceeded the 5% presumption for rolled-in

rates. Id. at 65,175-76, J.A. 152-53. Therefore, the ALJ

concluded, Transco could not justify rolled-in rates simply by

referring to evidence of general systemwide benefits. Id. at

65,179, J.A. 156.

On April 16, 1999, the Commission reversed the ALJ's

ruling and approved the rolled-in rates proposed by Transco.

See Transco I, 87 F.E.R.C. p 61,087, J.A. 181. The Commis-

sion found that the ALJ erred in applying section 5, instead

of section 4, of the NGA. The Commission also determined

that the ALJ had misapplied the 1995 Statement in assessing

Transco's proposal. Rather than evaluating the combined

rate impact of all 12 expansion projects in light of the 5%

presumption, FERC held that the correct methodology was to

apply the 5% presumption to interrelated groups of projects.

Id. at 61,389, J.A. 187. Dividing the projects into seven

groups, FERC found that the rate change for each group

would not exceed the 5% threshold and that Transco had

shown benefits that satisfied its burden of proof. Id. at

61,394-95, J.A. 192-93.

 Petitioners filed a request for rehearing. FERC then

issued the new 1999 Policy Statement, i.e., after petitioners'

request for rehearing had been filed. On March 28, 2001, the

Commission denied petitioners' requests for a rehearing on

its initial Order. Transco II, 94 F.E.R.C. p 61,362, J.A. 199.

The Commission declined to apply the new 1999 Policy State-

ment, because the Transco case had been fully litigated under

the 1995 Policy Statement. Id. at 62,310, J.A. 203. The

Commission then upheld its initial finding that Transco's

rolled-in rate was warranted under the statute based on the

factors in the 1995 Statement:

The Commission is unpersuaded by ConEdison, et

al.'s arguments that Transco failed to meet its Sec-

tion 4 burden with regards to its roll-in proposal.

Transco has sufficiently shown that rolled-in rates

are just and reasonable as evidenced by the Com-

mission's findings that: (1) the expansion facilities

are fully integrated with Transco's system; (2) the

expansion facilities provide significant system bene-

fits; and (3) the rate impact of rolling in the costs of

the expansion facilities is less than 5 percent.



Id. at 62,316, J.A. 209.

On the same day that FERC issued its decision in Transco

II, the Commission decided another, unrelated case in which

it applied the 1999 Policy Statement. See Transcon. Gas

Pipe Line Corp., 94 F.E.R.C. p 61,360 (2001). Petitioners

again sought rehearing, contending that the 1999 Policy

Statement should have been applied to Transco in this pro-

ceeding as well. On June 13, 2001, FERC denied petitioners'

requests for further rehearing. Transco III, 95 F.E.R.C.

p 61,388, J.A. 232. The Commission specifically addressed

arguments that the 1999 Statement should have governed, as

in the other case decided on the same day as Transco II. Id.

at 62,450-51, J.A. 235-36. First, FERC noted that the pro-

jects in the two cases were of a different vintage. The

Commission also reiterated that, in Transco's case, the parties

had completed the evidentiary hearing under the 1995 State-

ment. The same was not true in the other case. Finally, the

Commission noted that its handling of Transco's rate change

proposal was not inconsistent with the policy goals articulated

in the 1999 Statement. Id.

This petition for review followed.

II. Analysis

FERC's orders must be upheld unless they are "arbitrary,

capricious, an abuse of discretion, or otherwise not in accor-

dance with law." 5 U.S.C. s 706(2)(A); see Union Pac.

Fuels, Inc. v. FERC, 129 F.3d 157, 161 (D.C. Cir. 1997). The

court's role is "limited to assuring that the Commission's

decisionmaking is reasoned, principled, and based upon the

record." Pennsylvania Office of Consumer Advocate v.

FERC, 131 F.3d 182, 185 (D.C. Cir. 1997). In reviewing

FERC's orders, we must be certain that the Commission has

considered the relevant data and "articulate[d] ... a rational

connection between the facts found and the choice made."

Ass'n of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1431 (D.C.

Cir. 1996) (quoting Motor Vehicle Mfrs. Ass'n v. State Farm

Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).

Petitioners maintain that FERC acted unreasonably by

ignoring the relevant standards and factors articulated in the

1999 Policy Statement. They argue that, once FERC issued

the 1999 Statement, the continued application of the 1995

Statement in Transco's rate case was impermissible. They

further contend that the Commission's use of the earlier

policy was unreasonable, because neither the pipeline nor its

customers had a reliance interest in the previous policy. In

petitioners' view, FERC had an obligation to apply the 1999

Statement retroactively to all currently pending cases - even

including those in which the record had been fully developed

under a lawful pre-existing policy statement. Petitioners'

view is misguided.

Normally, an agency must adhere to its precedents in

adjudicating cases before it. See Hatch v. FERC, 654 F.2d 825, 835 (D.C. Cir. 1981). An agency may, within the realm

of its statutory authority, change the established law and

apply newly created rules. Id. at 837 (citing NLRB v. Bell

Aerospace, 416 U.S. 267 (1974)). Such changes may occur in

the course of an adjudication, so long as the agency acts

pursuant to delegated authority, adopts a permissible con-

struction of the statute, and adopts a rule that is not arbitrary

and capricious. NAACP v. FCC, 682 F.2d 993, 998 (D.C. Cir.

1982). A new rule may be applied retroactively to the parties

in an ongoing adjudication, so long as the parties before the

agency are given notice and an opportunity to offer evidence

bearing on the new standard, Hatch, 654 F.2d at 835, and the

affected parties have not detrimentally relied on the estab-

lished legal regime, Clark-Cowlitz Joint Operating Agency v.

FERC, 826 F.2d 1074, 1081 (D.C. Cir. 1987) (en banc); Retail,

Wholesale & Dep't Store Union v. NLRB, 466 F.2d 380, 390

(D.C. Cir. 1972).

"Policy statements" differ from substantive rules that carry

the "force of law," because they lack "present binding effect"

on the agency. Interstate Natural Gas Ass'n v. FERC, 285 F.3d 18, 59 (D.C. Cir. 2002). When an agency hears a case

under an established policy statement, it may decide the case

using that policy statement if the decision is not otherwise

arbitrary and capricious. See, e.g., Woodland Broad. v. FCC,

414 F.2d 1160, 1164 (D.C. Cir. 1969). If, however, the agency

changes its policy statement before the case is complete, it

must explain why the pending case should be decided on the

basis of the old versus the new policy. Williston Basin

Interstate Pipeline Co. v. FERC, 165 F.3d 54, 62 (D.C. Cir.

1999).

Thus, the principles governing retroactivity differ depend-

ing upon whether the agency has acted to change the sub-

stantive law or merely issue a new, non-binding policy state-

ment. If an agency adopts a new rule that reflects a change

in "law," we presume that the new rule will be given retroac-

tive application. The agency thus may decide a pending case

by applying the new substantive rule, subject to notice re-

quirements and detrimental reliance considerations. Clark-

Cowlitz Joint Operating Agency, 826 F.2d at 1081. If, how-

ever, an agency merely adopts a new "policy statement" that

does not purport to have the "force of law," it is "binding on

no party and ha[s] no precedential effect." Panhandle East-

ern Pipe Line Co. v. FERC, 198 F.3d 266, 269 (D.C. Cir.

1999). The agency need only give a reasoned explanation for

its failure to apply a new policy statement in a pending case

tried under an old policy statement. Williston Basin, 165 F.3d at 62.

Contrary to petitioners' suggestion, Williston Basin does

not stand for the proposition that an agency must apply a

newly adopted policy statement to all pending cases. In

Williston Basin, FERC "shifted course" with regard to one

of the policies in dispute while the case was on appeal in this

court. The court therefore held that the case should be

remanded to the agency to allow FERC to reconsider its

application of the pre-existing policy in light of the change.

Id. The court did not indicate which policy should be applied

by the agency on remand, because it was understood that

neither policy statement carried the "force of law." In other

words, the court did not presume that a new policy statement

must be applied retroactively to the parties in a pending case,

for the obvious reason that a policy statement only signals the

agency's possible behavior in future cases.

Petitioners cite Tennessee Gas Pipeline Co., 76 F.E.R.C.

p 61,022 (1996), aff'd, "Complex" Consol. Edison Co. v. FERC,

165 F.3d 992 (D.C. Cir. 1999), and Pacific Gas Transmission

Co., 50 F.E.R.C. p 61,067 (1990), in support of their view that

new policy statements must be applied to pending cases. The

decisions in these cases do not say this. Rather, in these

cases, the agency opted to apply "new" policies to ongoing

adjudications. But this is neither surprising nor impermissi-

ble. FERC merely exercised its discretion to apply new

policies to ongoing adjudications. The agency did not say

that it was bound to follow the policy statements in all future

cases, nor did the reviewing court.

In this case, FERC's new policy statement did not purport

to carry the "force of law." The 1999 Statement was non-

binding and it was issued with a statement that FERC

intended to change its enforcement regime in future rate

cases. Furthermore, there is nothing in the record of this

case indicating that application of the 1995 Statement was

unreasonable or otherwise unlawful. Nonetheless, FERC

had a duty to explain why it chose to apply the old, and not

the new, pricing policy in Transco II and Transco III.

Indeed, the need for an explanation is quite apparent here,

because the Commission elected to apply the new policy in

another rate case on the same day that it decided to apply the

1995 Policy Statement, and declined to apply the 1999 Policy

Statement, in Transco II. See Williston Basin, 165 F.3d at

62. Petitioners claim that the agency's decision on this score

cannot survive review. We disagree.

Petitioners argue that FERC's "vintage" distinction fails to

justify its use of the 1995 Policy Statement in the present

case. While the "vintage" concept appears to denote the

length of time that the pipeline facilities have been incremen-

tally priced, see Transcon. Gas Pipe Line Corp., 94 F.E.R.C.

at 62,303, Respondent's Br. at 19 n.8, the Commission did not

provide a clear definition of this term and did not adequately

explain why a different "vintage" matters in its decision about

which policy statement should apply. We therefore agree

with petitioners that this justification alone cannot sustain the

agency's decision.

The Commission provided a second explanation for han-

dling the two cases differently, however - administrative

convenience. Unlike the instant case, in which all of the

underlying litigation was completed before the announcement

of the new 1999 Policy Statement, the original filing in the

second rate case did not occur until 2000. Transcon. Gas

Pipe Line Corp., 94 F.E.R.C. at 62,299. When FERC reject-

ed petitioners' first request for rehearing in Transco II, the

Commission explained that it would apply the 1995 Statement

because the factual record had been fully developed:

The hearing in this case was conducted while the

1995 Pricing Policy Statement was in effect, and all

the parties have presented evidence and filed plead-

ings based on the application of that policy. By

contrast, the new policy having not been established

until after the instant rehearing requests were filed,

there is no record in this case upon which the



 Commission could make a determination as to how

the new policy should apply, and the parties have

had no opportunity to present positions on that

issue.



Transco II, 94 F.E.R.C. at 62,310, J.A. 203. The Commission

referred to this same rationale in denying petitioners' second

request for rehearing:

Because the hearing took place while the 1995 Pric-

ing Policy Statement was in effect, and the parties'

evidence and arguments were presented with refer-

ence to that policy, the Commission reasonably ap-

plied the 1995 Pricing Policy to the issues in this

case.



Transco III, 95 F.E.R.C. at 62,451, J.A. 236. In both of these

statements, FERC suggested that applying the 1999 State-

ment would lead to significant delays and inconveniences.

The parties had already developed an entire evidentiary

record highlighting the factors relevant to the 1995 Policy

Statement. The 1995 Statement was not unreasonable or

unlawful, either facially or as applied in this case, so the

Commission was not foreclosed from relying on it in assessing

the merits of Transco's proposal. And reopening the record

would have wasted significant time and money, which would

have undermined the agency's interest in efficiency and the

parties' interest in a prompt resolution of the matter. We

therefore find that FERC's justification for applying the 1995

Policy Statement in the Transco case is reasonable and

consistent with the overall goals of the Natural Gas Act.

III. Conclusion

For the reasons discussed above, we hereby deny the

petitions for review.