On February 21, 2014, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated and remanded a FERC gas storage order for failure to offer a reasoned basis for its decision. The D.C. Circuit held that FERC acted arbitrarily and capriciously when it ordered that new natural gas storage customers pay for replenishing base gas via incremental rates, rather than spreading the costs amongst all customers through rolled-in rates.
The original issue began in March of 2005 and May of 2006 when two natural gas shippers chose to release their gas storage rights with Transcontinental Gas Pipe Line Company, LLC (“Transco”), to two replacement shippers. However, before completing their release, the exiting shippers exercised a contractual provision to buy back “base gas” from the storage field that they had originally supplied. The base gas was bought back at a relatively low price that reflected the prices of natural gas when the base gas was originally supplied. As a result, Transco had to replenish the base gas – at a current, higher price – so as to maintain storage service levels. In doing so, Transco proposed to charge the replacement shippers an incremental rate for the newly acquired, higher-priced base gas. A FERC administrative law judge (“ALJ”) rejected Transco’s proposal, finding that all of Transco’s storage shippers benefited from the newly purchased base gas and that no one customer “caused” more base gas than any other customer. On review, FERC reversed the ALJ’s initial decision and approved Transco’s original proposal.
On appeal, the D.C. Circuit ruled that FERC’s order “failed to offer an intelligible explanation of how its decision manifested the cost causation principle” for similarly situated parties. The D.C. Circuit noted that FERC’s failure to support its decision is underscored by its failure to completely respond to an argument raised during administrative proceedings. Specifically, one of the replacement shippers argued that because FERC does not allow a transmission operator to mechanically assign upgrade costs to a new electricity generator that requires upgrades to the transmission network – and instead requires consideration of the benefits to all parties on the integrated system – FERC should not assign costs solely to the replacement shippers in this instance. According to the D.C. Circuit, FERC’s dismissal of the argument as “not relevant to the case…falls well short of the [Administrative Procedure Act’s] requirement that the Commission ‘provide an adequate explanation to justify treating similarly situated parties differently.’” Therefore, the D.C. Circuit vacated and remanded the matter back to FERC for further explanation.
A copy of the D.C. Circuit’s opinion is available here.