743 F.3d 264
D.C. Cir.2014Background
- Washington Storage Field originally operated under a 1975 scheme where shippers supplied "base gas" (held by Transco) and retained rights to repurchase their share on terminating service; Transco rolled its purchases into rates.
- In the late 1990s Transco amended its tariff to require it to procure any new base gas itself (outside the historic purchase-repurchase scheme), meaning departures followed by replacements could force Transco to buy additional base gas.
- In 2005–2006 two historic shippers repurchased base gas at historic low prices and released their field rights to replacement shippers (Paribas and South Jersey), prompting Transco to propose buying ~3.4 million dekatherms of new base gas.
- Transco proposed bifurcated rates: historic shippers would keep rolled‑in rates reflecting low historic base gas costs; replacement shippers would pay an incremental rate reflecting the new base‑gas purchases.
- An ALJ rejected Transco’s filing, finding on physical and operational grounds that all base gas serves all customers and costs should be allocated pro rata; FERC reversed, applying "cost causation" and approving incremental pricing for replacement shippers.
- The D.C. Circuit vacated and remanded, holding FERC’s explanation inadequately justified departing from pro rata allocation and failing to address a material analogy to FERC’s treatment of generator interconnection/transmission upgrades.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FERC permissibly assigned full/primary cost of new base gas to replacement shippers (incremental pricing) under cost‑causation | Paribas: Because the field is operated integrally and base gas benefits all shippers, costs must be allocated pro rata; FERC’s electricity‑sector analogy supports that view | FERC/Transco: The exiting shippers' releases were the "immediate and proximate" cause of the need for new purchases, so equity and causation justify incremental pricing for replacements | Vacated and remanded: FERC failed to provide a reasoned, non‑arbitrary explanation tying cost‑causation to its incremental allocation and did not adequately address Paribas’s analogy to transmission cost allocation |
| Whether equitable considerations (historic shippers’ early provision of base gas) justify treating historic and replacement shippers differently | Paribas: Past contributions do not entitle historic shippers to perpetual exemption from sharing new costs; any equity argument must be explained | FERC: Historic shippers provided essential early support; equity favors protecting them from new costs | Held: FERC invoked equity but gave no clear, logical rationale explaining why historic shippers retain a special claim in perpetuity; explanation inadequate |
| Whether FERC reasonably dismissed Paribas’s analogy to generator interconnection/transmission upgrade rulings | Paribas: FERC treats analogous transmission upgrades as shared costs when benefits are system‑wide; that precedent applies here | FERC: The electricity analogy is "not relevant" | Held: FERC’s wholesale dismissal of the analogy without engaging distinguishing facts or policy reasons was arbitrary and capricious |
| Whether the ALJ’s factual findings required pro rata allocation | ALJ/Paribas: Physical operation shows base gas serves all customers equally; causation cannot be assigned to one shipper | FERC: Alternative causation theories exist; focusing on the release supports incremental allocation | Held: Court did not adopt ALJ’s outcome but found FERC’s competing causation theory insufficiently explained and inadequately reconciled with the record |
Key Cases Cited
- K N Energy, Inc. v. FERC, 968 F.2d 1295 (D.C. Cir. 1992) (articulating cost‑causation principle in natural gas ratemaking)
- Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004) (cost assessment compares burdens imposed to benefits drawn)
- Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 475 F.3d 1277 (D.C. Cir. 2007) (new and continuing customers that cause costs should be treated alike)
- Town of Norwood v. FERC, 962 F.2d 20 (D.C. Cir. 1992) (equitable factors may in some circumstances trump cost‑causation)
- Entergy Services, Inc. v. FERC, 391 F.3d 1240 (D.C. Cir. 2004) (generator interconnection costs that benefit the system should not be mechanically assigned to the new generator)
- Comcast Corp. v. FCC, 526 F.3d 763 (D.C. Cir. 2008) (agency must adequately explain treating similarly situated parties differently)
- SEC v. Chenery Corp., 318 U.S. 80 (1943) (courts may not affirm agency action on grounds not articulated by the agency)