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Missouri Public Service Commission v. Feder Energy Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

April 7, 2015


Argued December 12, 2014

Concurring Opinion Dated April 7, 2015.

Page 311

Lera Shemwell argued the cause for petitioner. With her on the briefs was Stephen C. Pearson.

Carol J. Banta, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were David L. Morenoff, General Counsel, and Robert H. Solomon, Solicitor.

Paul Korman argued the cause for intervenor. With him on the brief were Amy W. Beizer and Emily R. Pitlick.

Before: GARLAND, Chief Judge, and ROGERS and MILLETT, Circuit Judges. OPINION filed by Circuit Judge Rogers. Concurring opinion by Circuit Judge Millett.


Rogers, Circuit Judge

This petition follows our remand for application of the " benefits exception" to the general policy of the Federal Energy Regulatory Commission against including

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an acquisition premium in a pipeline's rate base. Missouri Pub. Serv. Comm'n v. FERC (" Missouri I" ), 601 F.3d 581, 588, 390 U.S. App.D.C. 160 (D.C. Cir. 2010). The Commission describes its benefits exception as allowing an acquisition premium to be included in a pipeline's rate base when the purchase price is less than the cost of constructing comparable facilities, the facility is converted to a new use, and the transacting parties are unaffiliated. See Missouri Interstate Gas, LLC (" Remand Order" ), 142 F.E.R.C. ¶ 61,195, at ¶ 113 (2013). That is consistent with the Commission's precedent, see Longhorn Partners Pipeline, 73 F.E.R.C. ¶ 61,355, at 62,112 (1995), and with our own characterization of that precedent, see Rio Grande Pipeline Co. v. FERC, 178 F.3d 533, 536--37, 336 U.S. App.D.C. 229 (D.C. Cir. 1999). Although petitioners would distinguish past decisions on their facts, the court defers to the Commission's interpretation of its own precedents in the challenged orders. To the extent petitioner raises a question whether the pipeline project benefits Missouri customers in the first place, the Commission permissibly relied on its 2002 Order certificating the Missouri Interstate Gas facilities for interstate use. Accordingly, we deny the petition for review.


At issue is the acquisition premium associated with the Trans-Mississippi Pipeline (" TMP" ), a 5.6-mile stretch of pipeline that connects Missouri with Illinois beneath the Mississippi River. In 2002, pursuant to section 7 of the Natural Gas Act (" NGA" ), 15 U.S.C. § 717f, the Commission issued Missouri Interstate Gas, LLC (which later merged to become MoGas Pipeline, LLC (" MoGas" )) a certificate of public convenience and necessity to undertake a project that included using the TMP for natural gas service for the first time. The Commission found it was in the public interest because the project would " provide Missouri customers the opportunity to diversify their gas supply options with the installation of minor pipeline facilities and a minimal impact to the environment," Missouri Interstate Gas, LLC (" 2002 Order" ), 100 F.E.R.C. ¶ 61,312, at ¶ 2 (2002), and that in turn would improve reliability and supply diversity and increase competition, see id. ¶ ¶ 15, 17--18. On remand from this court in Missouri I, the Commission approved inclusion of the acquisition cost in MoGas's rate base because the TMP had been devoted to a new use, transporting natural gas instead of oil, and the cost of new construction would have been greater, see Remand Order ¶ ¶ 95, 110, and denied rehearing, Missouri Interstate Gas, LLC (" Rehearing Order" ), 144 F.E.R.C. ¶ 61,220 (2013).

Petitioner does not challenge the Commission's factual findings on remand or its determination that the TMP was converted to a new use. Instead, petitioner challenges the Commission's determination that the pipeline company had shown that the acquisition of pipeline facilities provided specific benefits in accordance with Commission precedent. Although acknowledging that a lower acquisition cost can produce benefits to customers in some cases, petitioner contends the Commission failed to adhere to its precedent and to examine whether there were actual quantifiable dollar benefits for Missouri customers.


NGA § 7 requires that the Commission must issue a certificate of public convenience and necessity before a new interstate pipeline may begin to operate. See 15 U.S.C. § 717f(c)(1)(A); Missouri I, 601 F.3d at 583. A certificate may issue only if " the proposed service, sale, operation,

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construction, extension, or acquisition, to the extent authorized by the certificate, is or will be required by the present or future public convenience and necessity." 15 U.S.C. § 717f(e). When the Commission issues a certificate of public convenience and necessity, it " sets initial rates governing the sale price of natural gas transported in the pipeline," Missouri I, 601 F.3d at 583, and may " attach to the . . . certificate . . . such reasonable terms and conditions as the public convenience and necessity may require," 15 U.S.C. § 717f(e). Under that authority, the Commission " employs a 'public interest' standard to determine the initial rates that a pipeline may charge for newly certificated service." Mo. Pub. Serv. Comm'n v. FERC, 337 F.3d 1066, 1068, 358 U.S. App.D.C. 24 (D.C. Cir. 2003) (citing Atl. Ref. Co. v. Pub. Serv. Comm'n, 360 U.S. 378, 391, 79 S.Ct. 1246, 3 L.Ed.2d 1312 (1959)). Initial rates " offer a temporary mechanism to protect the public interest until" the Commission sets permanent rates pursuant to NGA § 4, 15 U.S.C. § 717c. Algonquin Gas Transmission Co. v. Fed. Power Comm'n, 534 F.2d 952, 956, 175 U.S. App.D.C. 215 (D.C. Cir. 1976).

" Generally, when establishing the cost of service upon which a pipeline's regulated rates are based, [the Commission] employs 'original cost' principles," and " when a facility is acquired by one regulated entity from another, [only] the seller's depreciated original cost is included in the cost-of-service computations, even though the price paid by the purchaser may exceed that amount." Rio Grande, 178 F.3d at 536 (citing N. Natural Gas Co., 35 F.E.R.C. ¶ 61,114, at 61,236 (1986)). The cost above that amount (i.e., net-book value) is known as an acquisition adjustment or premium and is disallowed, unless the " benefits exception" applies. The general policy, as described by the Federal Power Commission, was designed to prevent facilities from being sold at artificially inflated prices in order to increase rates, see United Gas Pipe Line Co., 25 F.P.C. 26, at 64 (1961), and since then has been described as designed to protect customers from paying twice for depreciation, see, e.g., Cities Serv. Gas Co., 4 F.E.R.C. ¶ 61,268, at 61,596 (1978).

The Commission has established a two-part benefits exception test, whereby a pipeline facility that has been converted from one public use to another or placed in jurisdictional service for the first time may include an acquisition premium in its rate base if the pipeline can show by clear and convincing evidence that its acquisition of the facilities will provide " substantial, quantifiable benefits to ratepayers." Longhorn, 73 F.E.R.C. at 62,112. One way these benefits can be shown is by demonstrating that the proposed conversion would " result in utilization of a currently-underutilized facility, which could not be replicated for the price that [the pipeline was] willing to pay." Id. at 62,113. The new-use requirement is consistent with the Commission's general policy of exclusion of acquisition premiums because customers will not be burdened ...

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