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ChevronTexaco Exploration & Production Co. v. Federal Energy Regulatory Commission

November 2, 2004


On Petition for Review of Orders of the Federal Energy Regulatory Commission

Before: Ginsburg, Chief Judge, and Randolph and Rogers, Circuit Judges.

The opinion of the court was delivered by: Ginsburg, Chief Judge

Argued September 14, 2004

ChevronTexaco and other shippers of natural gas ("Shippers") petition for review of two orders in which the Federal Energy Regulatory Commission, pursuant to § 4 of the Natural Gas Act, 15 U.S.C. § 717c, held the ANR Pipeline Company had properly calculated and was entitled to collect its annual cashout surcharge for 2001. The Commission also concluded, however, that the approved method of calculation prescribed in the pipeline's filed tariff was "not producing just and reasonable results," and it therefore initiated a proceeding under § 5 of the Natural Gas Act to devise a new method. The Shippers argue that because the Commission found the prescribed method of calculating the surcharge led to an unjust and unreasonable result, the Commission was bound either to reject the surcharge or to accept it subject to refund.

A method or formula for calculating a rate, also called a "rate rule," when enshrined in an approved tariff, is itself a "filed rate"; it is therefore subject to change at the instance of the Commission pursuant only to § 5 of the NGA, which authorizes the Commission to establish the rate "to be thereafter observed." 15 U.S.C. § 717d(a). Therefore, we hold the Commission correctly confined itself, in reviewing the pipeline's proposed 2001 surcharge, to determining whether (1) the costs to be recovered were prudently incurred and (2) the surcharge was calculated in accordance with the approved method.

I. Background

When the volume of natural gas a shipper puts into the ANR pipeline does not match the volume it takes out over a specified period of time, that shipper must either eliminate the imbalance by trading with other shippers or "cashout" the imbalance by buying gas from or selling gas to the pipeline itself, at a price pegged to certain market indices. For each dekatherm (Dth) of gas reconciled through the cashout system, the shipper must also pay ANR a surcharge, which is calculated and set annually at an amount determined to allow the pipeline company to recover its costs of operating the cashout system for the previous year. ANR calculates the surcharge rate for each year according to the method prescribed in its tariff and files the surcharge rate with the Commission for approval.

On May 1, 2002 ANR filed a proposed surcharge rate of $.4464/Dth to recover its 2001 costs. The Shippers objected to the new surcharge, which was nearly three times the surcharge for the previous year. Pursuant to § 4 of the NGA, the Commission then accepted but suspended the surcharge for up to five months. The Shippers challenged the pipeline's claimed cost of operating the cashout system and proposed a new way of calculating the surcharge. The Commission, however, finding the pipeline's costs in operating the cashout system were prudently incurred and the surcharge had been calculated in accordance with the rate rule in the pipeline's tariff, ultimately approved the new surcharge. ANR Pipeline Co., 101 F.E.R.C. ¶ 61,123 (2003).

The Commission went on, nonetheless, to hold that the approved method of calculating the surcharge had become "unjust and unreasonable in at least two respects." First, it did not allow some shippers, including the petitioners, "an adequate opportunity to resolve their imbalances" and, second, the carryforward provision allowed for "wide swings in the surcharge from year to year." Because the Commission did not believe it then had "sufficient facts before [it] to devise a just and reasonable mechanism pursuant to section 5 of the Natural Gas Act," the agency opened a further proceeding to remedy those defects.

The Shippers petitioned for rehearing, requesting that the Commission reject the $.4464/Dth surcharge and "instead require ANR to keep in effect its previously effective surcharge of $0.1508/Dth until a new just and reasonable surcharge is derived." Alternatively, the Shippers sought "clarification that the $0.4464/Dth surcharge [was] being collected subject to refund."

The Commission denied rehearing, holding that "ANR is entitled to continue recovering the rates provided for in its approved tariff until the Commission acts under NGA § 5 to fix the just and reasonable rate `to be thereafter observed.' " As the pipeline had not proposed to change the method of calculating the surcharge, "any modification in these rates ... would occur pursuant to NGA § 5," which provides only prospective relief. Accordingly, "there can be no refund." ANR Pipeline Co., 103 F.E.R.C. ¶ 61,065, 61,205 (2003).

II. Analysis

The Natural Gas Act requires that "[a]ll rates and charges made, demanded, or received by any natural-gas company ... be just and reasonable," and declares "any such rate or charge that is not just and reasonable ... unlawful." 15 U.S.C. § 717c(a). To make good this policy, the Commission is given two distinct powers: it may accept or reject a pipeline's rate filings under § 4, and it may set rates upon its own initiative under § 5.

Pursuant to § 4, "pipelines must file with the Commission all rates and any change they propose in their rates." Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir. 1986). The pipeline bears the burden of showing its proposed rate is just and reasonable. Id. If the Commission harbors any doubt on that score, it may hold "a hearing concerning the lawfulness of such rate," 15 U.S.C. § 717c(e), but in the end its options are limited to "acceptance (in whole or in part) or rejection of the pipeline's proposed rate[ ]." Sea Robin, 795 F.2d at 183. Further, "[t]he Commission need not confine rates [under the NGA] to specific, absolute numbers ...

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