On Petition for Review of Orders of the Federal Energy Regulatory Commission
Before: Ginsburg, Chief Judge, and Edwards, Circuit
Judge, and Williams, Senior Circuit Judge.
The opinion of the court was delivered by: Ginsburg, Chief Judge
Williston Basin Interstate Pipeline Company petitions for review of two orders in which the Federal Energy Regulatory Commission, proceeding under § 5 of the Natural Gas Act (NGA), held Williston's practice of selective discounting was discriminatory, unjust, and unreasonable. The Commission directed Williston to adopt instead the discounting policy set forth in previous Commission orders issued to other pipelines. Because the Commission failed to provide an adequate explanation for its ruling, we grant Williston's petition and vacate the orders under review.
As a result of the FERC's restructuring of the natural gas industry, pipelines now have significant flexibility in setting the rates they charge shippers. See generally Associated Gas Distribs. v. FERC, 824 F.2d 981 (D.C. Cir. 1987); Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, Order No. 436, FERC Stats. & Regs. [Regs. Preambles 1982-85] (CCH) ¶ 30,665 (1985). This flexibility is seen in the Commission's approval of "selective discounting," which allows a pipeline to charge different rates to different shippers provided certain conditions are met. Selective discounting can benefit not only the favored shipper(s) but also shippers that do not receive discounts because, by inducing increased throughput, it may enable the carrier to spread its fixed costs across a greater number of units shipped on its system. See Interstate Natural Gas Pipeline Rate Design, 47 FERC ¶ 61,295, at 62,053 (1989).
The Commission has also given shippers greater flexibility in the shipment of gas across a pipeline system. For instance, where operationally feasible a shipper may "segment" its firm capacity "into separate parts for its own use or for the purpose of releasing capacity to ... replacement shippers." See Colorado Interstate Gas Co. ( CIG ), 95 FERC ¶ 61,321, at 62,120 (2001) (discussing requirements Commission set out in Order No. 637, Regulation of Short-Term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Transportation Services, FERC Stats. & Regs. [Reg. Preambles 1996-2000] (CCH) ¶ 31,091 (2000)). The Commission also has adopted "flexible point rights," which allow "firm shippers ... to change receipt and delivery points (secondary points) so they can receive and deliver gas to any point within the firm capacity rights for which they pay." Id.
In CIG the Commission adjusted its policy on selective discounting to resolve the perceived "tension between the Commission's current discount policy, which permits pipelines to restrict discounts to specific shippers at specific points, and the Commission's goal in adopting its segmentation and flexible point right policies of enhancing competition." Id. The Commission newly permitted a shipper to pay the higher of the discounted rate it received when shipping from its primary to a secondary delivery point or the discounted rate offered to other "similarly situated" shippers at the secondary point. The Commission provided the following example to explain the issue:
Shipper A has a contract for 100 [dekatherms/day] from point A to B at a discounted rate of $0.50, and the pipeline has restricted the discount to Point B, so that the shipper would be required to pay the maximum tariff rate if it changes points. The maximum rate in the zone is $1.00. Shipper A segments its capacity at Point C or moves to Point C on a secondary basis, which is within its capacity path. The pipeline has contracts at point C for $0.75. The issue is what rate should Shipper A pay for the transaction at C: (1) the maximum rate of $1.00 because the shipper is not using the original points in the discount contract; (2) the $0.50 discounted rate because the shipper is using points within its capacity path; or (3) the rate charged for pipeline transportation service to other customers at Point C of $0.75.
Id. at 62,120-21. Under the approach adopted by the Commission in CIG and applied to Williston here, Shipper A's discounted rate at Point C would be $0.75 -- the higher of options (2) and (3) in the example.
The Commission also expressed the concern, however, that the pipeline "may not have the same incentive" to offer discounts at secondary points where a shipper competes directly with the pipeline's sale of primary capacity at that point because, without the discount, the pipeline's sale of primary capacity would command the maximum rate. Id. at 62,121. It therefore adopted a "rebuttable presumption" that a shipper should receive a discount at a secondary point if the pipeline is already granting a discount at that point "under other firm or interruptible service agreements," id.; the pipeline may "rebut the presumption by demonstrating that the segmented or secondary point transaction is not similarly situated to the shippers receiving discounts from the pipeline." Id. In Granite State Gas Transmission ( GSG ), 96 FERC ¶ 61,273 (2001), reh'g denied, 98 FERC ¶ 61,019 (2002), the Commission added the requirement that pipelines process a shipper's request for a discount in "no longer than two hours." 96 FERC ¶ 61,273, at 62,037. See also Gulf S. Pipeline Co, L.P., 98 FERC ¶ 61,278 (2002) (applying CIG/ GSG policy).
In February 2002 the Commission, reviewing Williston's compliance with Order No. 637, noted the company had not proposed changes in its pro forma tariffs relating to selective discounting and directed it to adopt the policy set forth in CIG and GSG. 98 FERC ¶ 61,212, at 61,803-04 (2002). Williston sought rehearing, arguing that because it is a reticulated rather than a linear pipeline, the CIG/GSG policy is harmful both to its shippers and to its system. The Commission denied rehearing in June 2002. 99 FERC ¶ 61,-327 (2002).
Williston petitioned this court for review of both the February ...