PG&E Gas Transm NW v. FERC, No. 01-1167 (D.C. Cir. 2003)

Annotate this Case
United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 11, 2002 Decided January 21, 2003

No. 01-1167

PG&E Gas Transmission, Northwest Corporation,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Avista Corporation, et al.,

Intervenors

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Stefan M. Krantz argued the cause for petitioner. With

him on the briefs were Lee A. Alexander and Debra H.

Rednik. Carl M. Fink entered an appearance.

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.

Before: Sentelle, Randolph and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: PG&E Gas Transmission, North-

west Corporation (PG&E) petitions for review of Federal

Energy Regulatory Commission (FERC) orders suspending,

PG&E Gas Transmission, Northwest Corp., 90 F.E.R.C.

p 61,349 (2000), and then rejecting, 92 F.E.R.C. p 61,202

(2000), reh'g denied, 94 F.E.R.C. p 61,119 (2001), PG&E's

tariff filing, in which it sought to change its method for

allocating natural gas transportation capacity. FERC claims

that PG&E's petition is moot because FERC later approved

an alternative method of allocating capacity. We disagree.

Reaching the merits of the petition, we hold that FERC failed

to adequately address relevant Commission precedent and

thus acted arbitrarily in denying PG&E's filing. Therefore,

we grant the petition for review and vacate FERC's orders

and remand for further consideration in light of this opinion.

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 transportation (IT) capacity can

be interrupted when necessary to provide service to higher

priority customers, such as firm customers. IT 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 IT services. The total amount a shipper pays for

service, and thus the revenue generated, is derived by multi-

plying 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, at 61,615 (1987).

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)

(NGA), 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 based on 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.

Consequently, 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 reve-

nue. 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

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

queue would be replaced with revenue-based allocation fol-

lowed by a pro rata tiebreaker. On March 31, 2000, the

Commission accepted and suspended FERC's tariff filing, and

asked PG&E to provide further "justification as to the bene-

fits gained by the pipeline and its shippers if such a change is

implemented." PG&E Gas Transmission, Northwest Corp.,

90 F.E.R.C. p 61,349, at 62,154 (Suspension Order). PG&E

filed additional supporting evidence for its proposal and

sought rehearing of the Suspension Order, claiming that the

Suspension Order improperly required PG&E to submit evi-

dence of the unreasonableness of the IT queue and the

superiority of its proposed distance-based allocation mecha-

nism. Under NGA s 4, PG&E contended, a pipeline propos-

ing a rate change need only prove that its proposed rate is

"just and reasonable."

On September 14, 2000, FERC rejected PG&E's revenue-

based allocation proposal. PG&E Gas Transmission, North-

west Corp., 92 F.E.R.C. p 61,202 (2000) (PG&E I). The

Commission held that the revenue-based mechanism would

unduly discriminate against maximum rate short-haul ship-

pers because longer-haul maximum rate shippers could al-

ways outbid shorter-haul shippers for capacity, even though

both would be bidding the same per-mile rate. Id. at 61,677.

Cf. 18 C.F.R. s 284.9(b) (2002) (banning undue discrimination

in the allocation of IT capacity by reference to 18 C.F.R.

s 284.7(b)). FERC explained that this result would contra-

dict the Commission's policy of allocating capacity to those

who value it most, since, at the maximum rate, both short-

haul and long-haul shippers value the capacity equally.

PG&E I, 92 F.E.R.C. at 61,677. Nonetheless, FERC realized

that the IT queue may be complex, inefficient, and adminis-

tratively burdensome. Id. at 61,676. Thus, FERC did not

preclude PG&E from submitting a later proposal to replace

the queue, id. at 61,677, and FERC noted that it had "accept-

ed other methods of allocating capacity when shippers all bid

the maximum rate, such as pro rata," id. at 61,676. Finally,

FERC rejected PG&E's request for rehearing of the Suspen-

sion Order. Id. at 61,677-78. The Commission held that it

was justified in seeking further evidentiary support for the

relative benefits of PG&E's distance-based mechanism in

light of protesters' concerns about discrimination against

short-haul shippers. Id. at 61,678.

Shortly after FERC's ruling in PG&E I, PG&E submitted

a new tariff filing that replaced the queue with simple pro

rata allocation among all maximum rate bidders. Under that

tariff, each maximum rate bidder receives a proportionate

share of capacity regardless of revenue generated by its total

bid, and thus regardless of distance. On October 25, 2000,

FERC approved PG&E's filing over the protest of some of

PG&E's IT customers, relying on Commission precedents

accepting pro rata allocation and reasoning that pro rata

allocation would eliminate the need for a complex queue and

improve efficiency along the pipeline. See PG&E Gas Trans-

mission, Northwest Corp., 93 F.E.R.C. p 61,072, at 61,187

(2000), reh'g denied, 94 F.E.R.C. p 61,114 (2001) (PG&E II).1

PG&E subsequently implemented its pro rata allocation

mechanism, and it remains in effect today.

Meanwhile, PG&E requested rehearing of FERC's PG&E

I ruling, claiming that FERC failed to address several Com-

mission precedents that allowed distance-based allocation.

On February 8, 2001, FERC denied PG&E's request for

rehearing. PG&E Gas Transmission, Northwest Corp., 94

F.E.R.C. p 61,119 (2001) (Rehearing Order). In the Rehear-

ing Order, FERC attempted to distinguish the cases on which

PG&E relied on the grounds that the cases "do not address

the issue raised here, but merely find that breaking ties at

the maximum rate should be done in a nondiscriminatory

manner." Id. at 61,451.

PG&E timely filed this petition for review.

II. Analysis

Under NGA s 4, a pipeline proposing a rate change has the

burden of showing that the proposed rate is just and reason-

able. Exxon Corp. v. FERC, 206 F.3d 47, 51 (D.C. Cir. 2000).

If the pipeline 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 reject a tariff filing unless it is "arbitrary, capri-

cious, an abuse of discretion, or otherwise not in accordance

with law." 5 U.S.C. s 706(2)(A) (2000). Under this deferen-

tial standard, "the Commission must be able to demonstrate

__________

1 We address the petition for review of PG&E's customers in a

companion case, Duke Energy Trading & Mktg., L.L.C. v. FERC,

___ F.3d ___ (D.C. Cir. 2003), issued by this Court today.

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).

In addition, the Commission must have "examine[d] the rele-

vant data and articulate[d] a satisfactory explanation for its

action including a rational connection between the facts found

and the choice made." Motor Vehicle Mfrs. Ass'n of United

States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43

(1983) (quotation omitted). PG&E's central claim is that

FERC did not exercise reasoned decisionmaking when it

rejected PG&E's filing. Before we reach the merits of

PG&E's contention, however, we first address whether this

case is properly before us.

A. Mootness

FERC claims that we should dismiss this petition as moot

because FERC approved, and PG&E implemented, its pro

rata allocation proposal after FERC rejected PG&E's

revenue-based proposal. Thus, FERC argues that allowing

the revenue-based mechanism would not provide PG&E with

any relief because the pro rata mechanism has already re-

placed the queue and performs the same capacity allocation

function the revenue-based mechanism would perform. We

disagree. A controversy persists over whether PG&E should

be allowed to implement its preferred method of IT capacity

allocation.

Article III of the Constitution limits federal courts to

resolving "actual, ongoing controversies." Honig v. Doe, 484 U.S. 305, 317 (1988). To satisfy Article III's case or contro-

versy requirement, "a litigant must have suffered some actual

injury that can be redressed by a favorable judicial decision."

Iron Arrow Honor Soc'y v. Heckler, 464 U.S. 67, 70 (1983).

FERC does not dispute that PG&E suffered an injury when

the Commission initially rejected its revenue-based mecha-

nism. Rather, it contends that PG&E's injury has been negat-

ed by the Commission's later acceptance of a different pro-

posal for allocation of IT capacity, and thus this Court can

offer no effective relief.

While FERC is certainly correct that both the pro rata and

revenue-based proposals replace the queue and allocate IT

capacity between maximum rate bidders, the revenue-based

mechanism is undisputedly PG&E's preferred allocation

method. Indeed, PG&E proposed pro rata allocation only

after FERC rejected its revenue-based proposal. Therefore,

while approval of the "second-best" pro rata mechanism may

have lessened PG&E's injury, the injury persists in that

PG&E has been precluded from implementing its preferred

method of allocation.

Unquestionably, a favorable ruling of this Court would

redress PG&E's injury. If this Court grants PG&E's petition

for review, we will remand the case to FERC for it to

reconsider the revenue-based mechanism in light of this

Court's opinion. If, on remand, the Commission approves the

filing, PG&E will implement the revenue-based mechanism in

place of the existing pro rata system. Thus, a favorable

decision would provide PG&E with its desired relief: a fair

consideration of the revenue-based mechanism, and possibly,

an opportunity to implement its preferred method for allocat-

ing IT capacity.

The fact that both the existing pro rata mechanism and the

proposed revenue-based mechanism replace the queue and

perform the same function--allocating IT capacity--carries

no weight in the mootness analysis. FERC has cited no

authority for its proposition that merely because an agency

approves a litigant's second-best option to perform a given

function, the litigant may not continue to appeal the rejection

of its most favored option. Our decision in Rio Grande

Pipeline Co. v. FERC, 178 F.3d 533 (D.C. Cir. 1999) is

instructive. In Rio Grande, a pipeline company sought ap-

proval of its rates under 18 C.F.R. s 342.2(a) and submitted

evidence of reasonableness of the rates. 178 F.3d at 536.

Commission approval under s 342.2(a) would have protected

the pipeline from paying reparations to customers if the rate

was later found unreasonable. Id. In the alternative, the

pipeline sought approval under s 342.2(b), which allowed

approval if at least one pipeline customer had agreed to the

rate, but required reparations if the rate was successfully

protested. Id. FERC approved the rate under s 342.2(b),

but not under the more favorable provisions of s 342.2(a).

Id. at 537. The pipeline petitioned for review of FERC's

rejection of its s 342.2(a) claim. Id. On appeal, FERC

argued that the pipeline had suffered no injury because its

rate had been approved. Id. at 540. We disagreed, holding

that the pipeline was aggrieved because approval under

s 342.2(b) was less desirable than approval under s 342.2(a),

in that it subjected the pipeline to greater economic risks.

Id. Similarly, in the present case FERC has approved one

method for allocating capacity among PG&E's maximum bid-

ders, but it is a less desirable option than PG&E's preferred

method, which FERC rejected. Consequently, PG&E has

been aggrieved by FERC's ruling despite subsequent approv-

al of the pro rata tiebreaker. Since this Court's ruling can

remedy that injury, the case is not moot. Therefore, we reach

the merits of PG&E's petition.

B. Merits

On the merits, PG&E argues that FERC acted arbitrarily

and capriciously by failing to adequately address Commission

precedents that approved distance-based mechanisms for allo-

cating transportation capacity. We agree.

In its orders below, the Commission held that PG&E's

proposal violated 18 C.F.R. s 284.9(b)'s prohibition against

"undue discrimination," by making it more difficult for maxi-

mum rate short-haul shippers to obtain IT capacity. PG&E

I, 92 F.E.R.C. at 61,677. In examining the reasoning that

undergirds FERC's ruling, we note that discrimination is

undue only if "a pipeline's rate schedule creates a preference

without a reasonable basis." Algonquin Gas Transmission

Co. v. FERC, 948 F.2d 1305, 1316 (D.C. Cir. 1991) (quotation

omitted). By contrast, when differences in treatment are

"based on relevant, significant facts which are explained," the

disparate treatment does not run afoul of the NGA. Trans-

Canada Pipe Lines Ltd. v. FERC, 878 F.2d 401, 413 (D.C.

Cir. 1989).

Throughout the course of this litigation, PG&E has consis-

tently pointed to several cases in which FERC approved

distance-based allocation methods and held that such methods

did not constitute undue discrimination against short-haul

shippers. In PG&E I, FERC utterly failed to confront these

cases. In its Rehearing Order, FERC's attempt to distin-

guish these precedents was confusing at best, if not outright

disingenuous. Finally, on review before us, FERC counsel

concocted a harmonization of Commission precedent with the

Commission ruling. Of course, this Court cannot consider

such post hoc justifications, but may only consider the

grounds on which the Commission actually relied in making

its decision. Algonquin Gas Transmission, 948 F.2d at 1312

n.12 (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).

We now briefly address the relevant Commission precedents

and FERC's attempts to distinguish them in its orders.

In Northern Natural Gas Co., 82 F.E.R.C. p 61,077, reh'g,

84 F.E.R.C. p 61,154 (1998), FERC approved the pipeline's

proposal to allocate capacity based on net present value

(NPV), with NPV determined in part by whether the gas was

to be transported over two zones or wholly within one zone.

82 F.E.R.C. at 61,287. The Commission recognized that

under the pipeline's proposal, "continuous service that in-

cludes both [Zone A] and [Zone B] should be awarded the

service if they have a higher NPV that [sic] purely [Zone A]

transportation at the maximum rate." Id. Even so, FERC

approved the proposal over protests that the allocation sys-

tem would unduly discriminate against single zone shippers.

Id. Despite Northern Natural's obvious relevance to the

present case, FERC failed even to mention Northern Natural

in its orders below, much less attempt to distinguish it.

Similarly, in Tennessee Gas Pipeline Co., 65 F.E.R.C.

p 61,224, at 62,111 (1993), the Commission approved a zone-

based system with allocation based on price, wherein price

was based on the route traveled and quantity of gas trans-

ported. Id. Tennessee's distance-based allocation proposal

applied to both maximum and sub-maximum rate bids. Id.

Moreover, while the Commission ordered Tennessee to delete

its consideration of quantity, the Commission allowed Tennes-

see to consider distance, specifically rejecting arguments that

the distance-based mechanism would unduly discriminate

against short-haul shippers. Id. In a later proceeding, the

Commission again rejected an attempt to eliminate Tennes-

see's consideration of distance in allocating IT capacity, de-

spite complaints that it discriminated against maximum rate

short-haul shippers. See Tennessee Gas Pipeline Co., 71

F.E.R.C. p 61,399, at 62,582 (1995).

In its Rehearing Order in this proceeding, FERC mislead-

ingly tried to distinguish Tennessee. See 94 F.E.R.C. at

61,452. The Commission only mentioned Tennessee's holding

that the pipeline had to delete any consideration of quantity

from its allocation mechanism so as not to discriminate

against small or short-haul shippers. Id. However, FERC

completely ignored the next paragraph in Tennessee, in which

the Commission explicitly upheld consideration of distance

against charges of undue discrimination. Tennessee, 65

F.E.R.C. at 62,111. Thus, FERC utterly failed to distinguish

the relevant holding of Tennessee and explain why its reason-

ing should not be applied to the present case.

Finally, in Trunkline Gas Co., 64 F.E.R.C. p 61,141, at

62,126 (1993), reh'g denied in relevant part, 65 F.E.R.C.

p 61,355 (1994), FERC again approved a zone-based system

that allocated IT capacity based, in part, on number of zones

traveled. The distance-based mechanism applied to both

maximum and sub-maximum rate bids. Id. Furthermore,

FERC rejected a protestor's proposal that would have allo-

cated capacity based on percentage of maximum rate paid,

regardless of distance traveled. Id. The Commission explic-

itly acknowledged that under Trunkline's filing a maximum

rate short-haul shipper could be trumped by a lower rate

longer-haul shipper. Id. Nonetheless, the Commission con-

cluded that the proposal did not unduly discriminate against

short-haul shippers and promoted allocative efficiency. Id. at

62,126-27.

The Commission's attempt to distinguish Trunkline in its

Rehearing Order is confusing at best. First, FERC seems to

claim that Trunkline applied only to below maximum rate

bids. See Rehearing Order, 94 F.E.R.C. at 61,452. This is

flatly wrong, as even FERC counsel admitted at oral argu-

ment. See Tr. of Oral Arg. at 28-29. Second, FERC claimed

"[t]he Trunkline issue is different because it did not discuss

allocation methodology for resolving ties when the bids are

equal." Rehearing Order, 94 F.E.R.C. at 61,452. It is true

that Trunkline's revenue-based proposal did not involve

breaking ties between equal bidders, but neither does

PG&E's proposal in any relevant sense. That is, in Trunk-

line, bids were ranked based on adding the rates for each

zone traveled. Similarly, in PG&E's proposal, bids are

ranked based on multiplying the per-mile rate by the number

of miles traveled. The fact that PG&E's proposal breaks ties

between bidders who bid the same per-mile rate is not a

relevant difference from the proposal in Trunkline when,

under both systems, a maximum rate short-haul shipper can

always be outbid by a longer-haul shipper. Thus, the distinc-

tion to which FERC alluded between the zone-based system

in Trunkline and the distance-based system in the PG&E

tariff is a distinction without a difference.

In sum, FERC's attempts to distinguish its precedents

approving distance-based allocation were alternately non-

existent, misleading, and irrelevant. On brief to this Court,

counsel argues that these precedents are distinguishable be-

cause they involved zone-based systems with rates based on

several factors, of which distance is only one. This contrasts,

counsel contends, with PG&E's proposal, in which distance is

the sole determinant of capacity allocation at the maximum

rate. Thus, PG&E's proposed allocation mechanism is unduly

discriminatory while those in Northern Natural, Tennessee,

and Trunkline were not. We cannot consider this argument.

FERC's order "must stand or fall on the grounds articulated

by the agency in that order," not the reasoning proffered by

its appellate counsel. NorAm Gas Transmission Co. v.

FERC, 148 F.3d 1158, 1165 (D.C. Cir. 1998) (quotation omit-

ted). We therefore make no judgment about the validity of

counsel's argument because it is a purely post hoc justification

which cannot sustain the Commission's orders. See Chenery,

332 U.S. at 196.

As outlined above, FERC's orders in this case do not

adequately explain why the Commission's precedent in favor

of distance-based allocation does not compel approval of

PG&E's filing. In "gloss[ing] over" these precedents, FERC

"cross[ed] the line from the tolerably terse to the intolerably

mute." Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970). Indeed, FERC has given no

explanation whatsoever for this apparent shift in Commission

policy. FERC's failure to come to terms with its own prece-

dent reflects the absence of a reasoned decisionmaking pro-

cess. See North Carolina Utils. Comm'n v. FERC, 42 F.3d 659, 666 (D.C. Cir. 1994) (rejecting a FERC order because

the Commission did not "sufficiently explain[ ] its departure

from its prior cases"); Hatch v. FERC, 654 F.2d 825, 834

(D.C. Cir. 1981) ("[A]n agency must provide a reasoned

explanation for any failure to adhere to its own precedents.").

Consequently, we vacate FERC's orders and remand, so that

FERC may reconsider PG&E's proposal in light of this

opinion and Commission precedent.

III. Conclusion

We hold that this case did not become moot when FERC

approved PG&E's pro rata allocation proposal after it reject-

ed PG&E's revenue-based mechanism. A live controversy

persists regarding whether PG&E should be able to imple-

ment revenue-based allocation of IT capacity. On the merits,

we hold that FERC failed to adequately address Commission

precedent allowing pipelines to consider distance when allo-

cating transportation capacity. Accordingly, we grant the

petition for review and vacate FERC's orders and remand for

further consideration in light of this opinion.

So ordered.

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