Exxon Mobil Corp, et al v. FERC, No. 01-1407 (D.C. Cir. 2003)

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 9, 2002 Decided January 17, 2003

No. 01-1407

Exxon Mobil Corporation, et al.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

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

Intervenors

Consolidated with

01-1415

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Thomas J. Eastment argued the cause for petitioners

Exxon Mobil Corporation, et al. With him on the briefs were

Douglas W. Rasch, Bruce A. Connell, Joseph E. Mixon and

Charles J. McClees, Jr. Linda L. Geoghegan entered an

appearance.

Gregory Grady argued the cause for petitioner Transconti-

nental Gas Pipe Line Corporation. With him on the briefs

were Michael J. Thompson and David A. Glenn.

Timm L. 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.

Kenneth T. Maloney argued the cause for intervenors

KeySpan, et al. With him on the brief were James H. Byrd

and Steven J. Kalish. Edward B. Myers entered an appear-

ance.

Before: Ginsburg, Chief Judge, and Rogers and Tatel,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge: Transcontinental Gas Pipe Line

Corporation has tried for nearly ten years to convince the

Federal Energy Regulatory Commission to allow it to adopt a

pricing system called "firm to the wellhead" that many of its

competitors employ. In this case, Transco and a group of

natural gas producers that use its pipeline petition for review

of FERC's latest rejection of Transco's firm transportation

proposals. Because the Commission failed to reconcile its

decision here with an earlier opinion on a related matter, we

grant the petition and remand for further proceedings.

I.

Like so much of this circuit's FERC business, this case has

its roots in the Commission's 1992 restructuring of the natu-

ral gas industry under its landmark Order No. 636 to create a

"national gas market" with "head-to-head, gas-on-gas compe-

tition." Pipeline Service Obligations and Revisions to Regu-

lations Governing Self-Implementing Transportation; and

Regulation of Natural Gas Pipelines After Partial Wellhead

Decontrol, [Regs. Preambles 1991-1996] FERC Stats. &

Regs. (CCH) p 30,939, at 30,434 (1992), on reh'g, Order No.

636-A, [Regs. Preambles 1991-1996] FERC Stats. & Regs.

(CCH) p 30,950 (1992), on reh'g, Order No. 636-B, 61

F.E.R.C. p 61,272 (1992), reh'g denied, 62 F.E.R.C. p 61,007

(1993), aff'd in part, United Distrib. Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 1996). Order No. 636 made three changes

relevant here. First, it required interstate pipelines to pro-

vide local gas distributors that had contracts to purchase gas

in downstream areas an opportunity to convert those entitle-

ments into rights to "firm transportation" (FT) service that

could be used to deliver gas purchased from a variety of

producers upstream. Second, the order changed traditional

FT pricing--which requires customers to pay both a reserva-

tion charge to preserve their priority capacity and a separate

usage charge based on volumes actually shipped--by mandat-

ing that pipelines allocate all fixed costs to the reservation

charge. According to FERC, this "straight fixed variable"

system would make pricing more transparent. Finally, be-

cause most pipelines base their rates on a zone system, Order

No. 636 increased transportation flexibility by requiring that

where FT customers pay reservation charges to secure capac-

ity in any part of a zone, they must be given secondary rights

to receive or deliver gas at other points within that zone, even

if the locations are not specified in their contracts.

Most interstate pipelines responded to Order No. 636 by

offering their converting customers rights to firm transporta-

tion from producers' gathering facilities downstream to the

delivery points specified in the customers' contracts. This is

called "firm-to-the-wellhead" (FTW) service, although techni-

cally it does not extend to individual wellheads.

Transco chose not to adopt FTW service when it voluntari-

ly unbundled its sales and transportation service about a year

before Order No. 636 was issued. The company, which

operates a pipeline running northeast from the Gulf of Mexico

to New York City, carried unbundling one step further by

breaking its transportation service into two distinct compo-

nents. First, Transco's 1991 settlements with its local gas

distributors, known as "FT conversion shippers," gave the

shippers firm transportation rights from "pooling points" at

certain compressor stations on Transco's main pipeline down-

stream to their designated delivery points. Second, the

agreements left service above the pooling points and on

supply laterals to be contracted for separately under Tran-

sco's "interruptible transportation" (IT) service tariff. Sub-

ject to a one-part volumetric price that includes both variable

and fixed costs, IT service must give way to higher priority

deliveries. Because the FT conversion shippers and FERC

were concerned about potential upstream disruptions, howev-

er, Transco specified that "IT feeder" shipments for delivery

to FT conversion shippers would have higher priority than

normal IT transmissions. Transcontinental Gas Pipe Line

Corp., 55 F.E.R.C. p 61,446 (1991), on reh'g, 57 F.E.R.C.

p 61,345 (1991), on reh'g, 59 F.E.R.C. p 61,279 (1992), aff'd in

part and remanded sub nom. Elizabethtown Gas Co. v.

FERC, 10 F.3d 866 (D.C. Cir. 1993).

Although the parties appear to have assumed during the

negotiations that FT conversion shippers would contract sep-

arately with Transco for IT feeder service, the settlement

agreements did not actually require them to do so. In

practice, producers such as Petitioners Exxon and the other

so-called Indicated Shippers have contracted with Transco for

IT feeder service to move their supplies to the pooling points.

Thus, while local gas distributors pay nearly all fixed costs on

competitor pipelines under FTW pricing systems, producers

linked to Transco pay about $50 million per year in fixed costs

under Transco's IT feeder rates. By raising their commodity

prices downstream, producers could pass those costs onto FT

conversion shippers and other local gas distributors, but

Transco and the Indicated Shippers assert that they are often

forced to absorb the expense instead to ensure that their

prices appear competitive with producers on other pipelines.

According to Transco, this puts it at a competitive disadvan-

tage and, over the long term, may prompt producers to avoid

connecting to its pipeline.

 FERC, however, has repeatedly rejected Transco's at-

tempts to adopt FTW pricing. In 1993, it ruled that Order

No. 636 did not require FTW pricing and declined to exercise

its authority under section 5 of the Natural Gas Act (NGA),

15 U.S.C. s 717d, to mandate such service. Transcontinental

Gas Pipe Line Corp., 63 F.E.R.C. p 61,194 (1993), on reh'g, 65

F.E.R.C. p 61,023 (1993). Transco then proposed a change to

its tariff under NGA section 4, 15 U.S.C. s 717c, that would

eliminate IT feeder service, give FT conversion shippers

secondary rights to service on supply laterals, and increase

their rates to cover the additional $50 million in fixed costs

that had previously been paid by producers ("FTW propos-

al"). The Commission rejected this plan as well, concluding

that it would abrogate the conversion shippers' existing con-

tracts and have anticompetitive effects. Transcontinental

Gas Pipe Line Corp., 72 F.E.R.C. p 63,003 (1995), modified 76

F.E.R.C. p 61,021 (1996), on reh'g, 77 F.E.R.C. p 61,270

(1996), on reh'g, 79 F.E.R.C. p 61,205 (1997). The Indicated

Shippers filed a petition for review of that decision before this

court.

While that petition was pending, FERC rejected still an-

other Transco proposal to replace IT feeder service with new

contracts for "firm transportation-supply lateral" service to

be offered to FT conversion shippers and other interested

parties ("FTSL proposal"). Although the Commission found

that change forbidden by neither the 1991 settlements nor the

FT conversion shippers' firm service contracts, Transconti-

nental Gas Pipe Line Corp., 85 F.E.R.C. p 61,357 (1998),

reh'g denied, 88 F.E.R.C. p 61,135 (1999), it concluded that

Transco's proposed terms would violate its flexible receipt

and delivery point policy under Order No. 636, Transconti-

nental Gas Pipe Line Corp., 86 F.E.R.C. p 61,175 (1999),

reh'g denied, 88 F.E.R.C. p 61,135 (1999). Shortly thereafter,

we acted on the Indicated Shippers' petition for review and

remanded the Commission's FTW decision for further expla-

nation. Exxon Corp. v. FERC, 206 F.3d 47, 52-54 (D.C. Cir.

2000).

On remand, in the order at issue in this case, FERC again

rejected Transco's FTW proposal. Transcontinental Gas

Pipe Line Corp., 95 F.E.R.C. p 61,322 (2001), on reh'g, 96

F.E.R.C. p 61,142 (2001). This time the Commission focused

on two facts: that the 1991 settlements and the conversion

shippers' FT contracts gave them service rights only on

Transco's main pipeline and that conversion shippers had

chosen not to contract separately with Transco for IT feeder

service. Although their agreements contain so-called Mem-

phis clauses that authorize Transco to make unilateral

changes in rates, terms, and conditions of conversion ship-

pers' firm service, see United Gas Pipe Line Co. v. Mem-

phis Light, Gas & Water Div., 358 U.S. 103 (1958), the Com-

mission concluded that the proposed change exceeded the

scope of those clauses because it would force the conversion

shippers to take capacity for which they had not contracted

and then increase their rates accordingly. After rejecting

Transco's proposal under NGA section 4 as not "just and

reasonable," FERC again rejected the Indicated Shippers'

argument that it should have exercised its NGA section 5

authority to require Transco to use the two-part, straight

fixed variable pricing structure favored in Order No. 636

throughout its entire pipeline.

Transco now petitions for review of the Commission's sec-

tion 4 decision, while Exxon and the other Indicated Shippers

challenge both the section 4 and section 5 rulings. A group of

FT conversion shippers intervenes in support of FERC's

decision.

II.

Under NGA section 4(e), interstate pipelines bear the

burden of proving that proposed rate changes are just, rea-

sonable, and not unduly discriminatory. 15 U.S.C. s 717c(a),

(d), (e). If a pipeline carries this burden, the Commission

must approve the change even if other rates would also be

just and reasonable. Western Resources, Inc. v. FERC, 9 F.3d 1568, 1578-79 (D.C. Cir. 1993). Although our review of

FERC decisions under the Administrative Procedure Act is

quite deferential, see 5 U.S.C. s 706(2)(C), we must reverse a

decision that departs from established precedent without a

reasoned explanation. ANR Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C. Cir. 1995).

Because the Commission has already ruled that FTW

service using two-part, straight fixed variable rates is gener-

ally permissible, see, e.g., Tex. E. Transmission Corp., 62

F.E.R.C. p 61,015, at 61,094 (1993); Transcontinental Gas

Pipe Line Corp., 76 F.E.R.C. p 61,021, at 61,060, the validity

of FERC's decision here hinges upon whether Transco's

particular FTW proposal would involve a contract modifica-

tion not authorized by the Memphis clauses contained in the

1991 settlement agreements and the conversion shippers'

existing firm service contracts. See Memphis Light, Gas &

Water Div., 358 U.S. at 110-13; United Gas Pipe Line Co. v.

Mobile Gas Serv. Corp., 350 U.S. 332, 343 (1956). At first

glance, the Commission's conclusions that Transco's proposal

would force conversion shippers to accept and pay for capaci-

ty in excess of their current contractual obligations and that

such a change exceeds the scope of the Memphis clauses

seem perfectly reasonable. Although the Commission ruled

in the FTSL case that the 1991 settlements and the conver-

sion shippers' firm service agreements did not prohibit Tran-

sco from replacing IT feeder service with some other rate

structure, that case involved a proposal to create a new set of

voluntary contracts rather than, as here, an attempt to force

supply lateral service on conversion shippers involuntarily

under their existing FT contracts. Transcontinental Gas

Pipe Line Corp., 85 F.E.R.C. at 62,388-91. Petitioners,

moreover, point to no case in which a Memphis clause has

been used to force a pipeline customer to take additional

service rather than to accept changes in the rates, terms, or

conditions of service already agreed upon. Indeed, before the

Commission, petitioners conceded that requiring customers to

accept greater volumes of gas deliveries than called for in

their service contracts would not be authorized by a normal

Memphis clause. Transcontinental Gas Pipe Line Corp., 95

F.E.R.C. at 62,139-40.

There is, however, a serious glitch: The Commission failed

to reconcile its decision at issue here with its previous opin-

ions concerning the complex ways in which the 1991 settle-

ments and firm service agreements, Transco's FT tariff, and

the Commission's own flexible delivery and receipt point

policy interact with each other to shape the FT conversion

shippers' rights to service.

In this case, FERC's characterization of Transco's FTW

proposal as a contract modification rests largely on a 1995

opinion in which the Commission found that Transco's FT

conversion shippers have no rights to service on supply

laterals unless they contract separately for IT feeder service.

Although FERC's flexible receipt point policy would normally

provide secondary rights to service at all points within any

zone in which an FT shipper pays reservation charges, the

Commission concluded that Transco FT shippers have sec-

ondary rights only on the main pipeline because "[i]n the

production area, the reservation charge is for service on the

mainline facilities. A shipper pays a separate IT rate for

service on supply laterals (IT-Feeders)." Transcontinental

Gas Pipe Line Corp., 73 F.E.R.C. p 61,361, at 62,128 (1995).

Applying that ruling to this case, the Commission reasoned

that because the FT conversion shippers have in fact chosen

not to contract for IT feeder service, forcing supply lateral

service on them would modify their FT contracts in a way

unauthorized by their Memphis clauses.

Disagreeing, petitioners point out that the Commission

stated in its 1999 opinion rejecting the FTSL proposal that its

flexible receipt point policy would automatically give Tran-

sco's FT customers secondary rights on supply laterals--

apparently without modifying their service contracts--if

Transco eliminated its IT feeder service. According to the

opinion, the only reason that Transco's FT customers did not

already have such rights as a benefit of paying zone reserva-

tion charges was that FERC had "made an exception to its

general receipt and delivery point policy, because the IT-

Feeder service itself provided shippers with the flexibility to

access receipt and delivery points throughout the production

area." Transcontinental Gas Pipe Line Corp., 86 F.E.R.C.

at 61,609. If Transco eliminated the IT feeder service,

however, there would no longer be "any basis for permitting

Transco to deny shippers the receipt and delivery point

flexibility attendant to firm service," id., despite Transco's

protests that its firm zone rates did not include the costs

allocated to service on the production area laterals. The

Commission stated that any cost allocation problems could be

fixed by adjusting zone reservation charges in a separate

filing and did not change the basic rule that shippers paying a

reservation rate for capacity within a particular zone are

entitled to access at any point within that zone on a secondary

basis. Id. at 61,610-11. Applying the same logic to this case,

petitioners argue that no contract modification is necessary to

give the FT conversion shippers rights on the supply laterals

since they will gain such rights automatically under the

Commission's general policies and Transco's proposed tariff

modifications and that Transco is entitled to adjust its zone

reservation charges accordingly.

The Commission may be able to reconcile the 1995 and

1999 decisions, but its efforts so far have only added to the

confusion. When petitioners pointed out the conflict, the

Commission flatly denied that the conversion shippers' cur-

rent lack of supply lateral rights is "the result of any exemp-

tion from any Commission policy" without acknowledging the

directly contradictory language in its 1999 decision. Trans-

continental Gas Pipe Line Corp., 96 F.E.R.C. at 61,609.

Instead, the Commission simply dismissed that case, saying

only that "adoption of FTW rates might also have an effect on

flexible receipt and delivery points in Transco's production

area, but that is a separate issue" from Transco's proposal

forcing the conversion shippers to accept additional capacity

in abrogation of their original contracts. Id. at 61,610. In

our view, this explanation falls short because the 1999 opinion

seems to indicate that the Commission's general policy would

give FT conversion shippers secondary rights on the supply

laterals without the need for a contract modification. See

also Regulation of Short-Term Natural Gas Transportation

Services, and Regulation of Interstate Natural Gas Trans-

portation Services, 101 F.E.R.C. p 61,127 (2002) (rejecting an

argument that Commission policies that increase firm ship-

pers' secondary rights modify individual service agreements).

 Because FERC failed to explain its conclusions here in

light of its previous decisions, we remand the case for recon-

sideration consistent with this opinion. Given Transco's as-

surance at oral argument that it will immediately implement

its FTW proposal if the Commission approves the rate change

under section 4, we think it unnecessary to address the

Indicated Shippers' section 5 arguments. See Exxon Corp.,

206 F.3d at 48-49.

So ordered.