Gulf South Pipeline Company v. FERC, 955 F.3d 1001

Background

Gulf South filed a Section 7 application to construct the Westlake Expansion (compressor station + short pipeline) to serve a new Entergy Louisiana power plant; Entergy executed a 20‑year precedent agreement for all expansion capacity.
Gulf South proposed "incremental‑plus" (additive) rates: any shipper using the new facilities would pay the existing Lake Charles Zone rate plus an incremental Westlake Expansion rate reflecting construction cost.
FERC approved the certificate but rejected Gulf South’s incremental‑plus proposal; it made Entergy (the expansion shipper) pay a higher incremental rate while existing Lake Charles shippers pay only the lower zone rate even when they occasionally use the expansion facilities. The rates diverged sharply ($0.1325 vs $0.03 per dekatherm).
FERC also denied Gulf South’s proposed depreciation rate based on a 35‑year useful life (Gulf South asked 2.86%) and denied a revised initial rate of return (Gulf South sought ~10.8%; FERC retained the company’s last approved 10.41%).
Gulf South sought rehearing and then judicial review, challenging FERC’s denial of incremental‑plus rates and its decisions on depreciation and initial rate of return.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether FERC permissibly denied Gulf South’s requested incremental‑plus (additive) rates for use of the expansion facilities	Gulf South: incremental‑plus rates are appropriate because the pipeline can track which shippers use the expansion; cost‑causation dictates users of the expensive expansion should pay the expansion cost; alternatively, create a new rate zone	FERC: facilities are part of an integrated system so incremental‑plus is inappropriate; existing shippers already pay for zone facilities; policy favors charging only expansion subscribers; open‑access/secondary service makes treatment reasonable	Court: Vacated denial as arbitrary and capricious. Substantial evidence supports FERC’s integration finding, but FERC failed to explain why integration justified denying incremental‑plus rates when use can be tracked; remanded for further explanation and consideration of a new rate zone
Whether FERC erred in refusing to update Gulf South’s initial rate of return in the Section 7 order	Gulf South: recent changes in capital structure justify updating the rate of return now (to ~10.81/10.68%)	FERC: longstanding policy is to use the last approved rate of return in Section 7 proceedings and defer any update to a full Section 4 rate case (with evidentiary hearing)	Court: Denial upheld. FERC reasonably applied its policy and permissibly required a Section 4 hearing to address fact‑intensive issues; Gulf South’s settlement choices and moratorium contributed to the status quo
Whether FERC erred in rejecting Gulf South’s proposed depreciation rate based on a 35‑year useful life	Gulf South: expansion life justifies higher depreciation (2.86%); contract life with Entergy supports a shorter useful life	FERC: general Section 7 practice is to use the last approved depreciation rate for integrated expansions unless a clear single‑customer/lateral exception applies	Court: Denial upheld. Gulf South conceded that the 20‑year contract life was not the correct benchmark and failed to justify the 35‑year figure in the record; using the last approved 1.32% rate was reasonable

Key Cases Cited

Atl. Ref. Co. v. Pub. Serv. Comm’n of State of N.Y., 360 U.S. 378 (Sup. Ct.) (Section 7 rates "hold the line" pending full Section 4 adjudication)
Battle Creek Gas Co. v. Fed. Power Comm’n, 281 F.2d 42 (D.C. Cir. 1960) (concept of integrated pipeline systems)
Chippewa & Flambeau Imp. Co. v. FERC, 325 F.3d 353 (D.C. Cir. 2003) (substantial‑evidence review of FERC factual findings)
Fla. Mun. Power Agency v. FERC, 315 F.3d 362 (D.C. Cir. 2003) (deference to agency factual findings)
BNP Paribas Energy Trading GP v. FERC, 743 F.3d 264 (D.C. Cir. 2014) (cost‑causation principle: rates should reflect burdens/benefits)
Ala. Elec. Co‑op., Inc. v. FERC, 684 F.2d 20 (D.C. Cir. 1982) (properly designed rates should match costs to customers)
Carnegie Nat. Gas Co. v. FERC, 968 F.2d 1291 (D.C. Cir. 1992) (agency may depart from cost‑causation only for competing policies in limited circumstances)
ANR Storage Co. v. FERC, 904 F.3d 1020 (D.C. Cir. 2018) (agency must justify adverse treatment relative to similarly situated competitors)
W. Deptford Energy, LLC v. FERC, 766 F.3d 10 (D.C. Cir. 2014) (reasoned explanation required when departing from precedent)
Fed. Power Comm’n v. Hope, 320 U.S. 591 (Sup. Ct.) (rate reasonableness principle)
Missouri Pub. Serv. Comm’n v. FERC, 601 F.3d 581 (D.C. Cir. 2010) (need for particularized inquiry before including certain premiums in Section 7 rates)
United Gas Imp. Co. v. Callery Props., 382 U.S. 223 (Sup. Ct.) (Section 7 rates intended as interim pending full rate adjudication)
Petal Gas Storage, LLC v. FERC, 496 F.3d 695 (D.C. Cir. 2007) (depreciation: forecast useful life based on wear and exhaustion)
Memphis Light, Gas & Water Div. v. Fed. Power Comm’n, 504 F.2d 225 (D.C. Cir. 1974) (depreciation increases prices to current consumers; definition of depreciation)
Boston Edison Co. v. FERC, 885 F.2d 962 (1st Cir. 1989) (discounted cash flow method context for rate‑of‑return determinations)