A federal appeals court in Washington, DC last Tuesday upheld an order in which FERC approved a significantly higher annual cashout surcharge rate for ANR Pipeline, even though it said the method for calculating the surcharge had become “unjust and unreasonable.”

ChevronTexaco Exploration & Production Co. and other shippers on the ANR system challenged a 2003 order approving a surcharge rate of $0.4464/Dth for the El Paso Corp.-owned pipeline to recover its 2001 cashout costs. This was nearly triple the previously effective surcharge of $0.1508/Dth on ANR. Shippers pay a cashout surcharge to reconcile natural gas imbalances on pipelines.

The Commission found that the pipeline’s costs in operating the cashout system were prudently incurred and that the surcharge had been calculated in accordance with the rate rule under ANR’s tariff, but the agency said the method for computing the surcharge had become unjust over time. “First, it did not allow some shippers, including the petitioners, ‘an adequate opportunity to resolve their imbalances,’ and second, the carry-forward provision allowed for ‘wide swings in the surcharge from year to years,'” FERC said in its order.

FERC denied rehearing of the order, saying that ANR was entitled to recover the rates provided for in its approved tariff until the Commission acted under Section 5 of the Natural Gas Act (NGA) to change the “just and reasonable rate ‘to be thereafter observed.'”

ChevronTexaco and other shippers argued that “once [the Commission] determined…that ANR’s cashout surcharge mechanism was ‘unjust and unreasonable,’ [it] should…have rejected ANR’s proposed increase in its cashout mechanism.” Since the $0.4464/Dth surcharge was calculated using a mechanism that the Commission held to be unjust and unreasonable, then the surcharge must also be unjust and unreasonable, and the Commission was bound to reject it as being unlawful, the shippers reasoned.

But the U.S. Court of Appeals for the District of Columbia Circuit sided with FERC on this issue. “The precise question here…is whether under Section 4 the Commission could, as the shippers maintain, nevertheless reject the pipeline’s correctly calculated surcharge filing because the Commission no longer regarded the method of calculation to be just and reasonable. We agree with the Commission that it could not,” the three-judge panel said.

“When the Commission finds a pipeline did calculate a rate correctly according to the rate rule in its tariff, the Commission must accept the Section 4 filing despite any perceived flaws in the rate rule and may only then proceed under Section 5 — as it has since done with respect to ANR’s annual cashout surcharge — to devise and substitute a just and reasonable rate rule ‘to be thereafter observed.'” Last week, FERC approved a number of reforms to ANR’s cashout mechanism (see related story).

The shippers, as an alternative, requested that the cashout surcharge be subject to refund, which FERC rejected. The court again agreed with the Commission. “The Commission properly held that ‘there can be no refund’ when a pipeline files a calculation consistent with an approved rate rule,” it said.

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