FERC’s failure to explain why it didn’t grant Virginia Natural Gas’ (VNG) request for money damages against Columbia Gas Transmission for breach of pipeline service was both “arbitrary and capricious,” the U.S. Court of Appeals for the District of Columbia Circuit said Friday.

The case stems from a 2004 complaint filed by Norfolk, VA-based VNG alleging that Columbia Gas failed to meet its firm service obligations during peak winter months due to poorly maintained liquefied natural gas (LNG) facilities in Chesapeake, VA, which the local distribution company (LDC) said caused it to suffer more than $37 million in damages during the winter of 2003.

FERC ruled that Columbia had breached its service obligations to VNG, whose supply was reduced to one-fourth of its contractual entitlement for 41 days in early 2003. The Federal Energy Regulatory Commission rejected Columbia’s defense of force majeure and refused to award damages to VNG, concluding that a state court was the most appropriate forum to determine the damages due to a breach of contract claim. Both sides sought rehearing at FERC, which was denied, and then filed petitions with the court.

The appellate court wasted no time in dismissing Columbia’s petition seeking review of FERC’s rejection of its force majeure defense, saying the agency ruling “was easily supported by ‘substantial evidence.'” However, the court found VNG’s petition to be “meatier.” VNG claimed that FERC unlawfully refused to award damages after finding that the pipeline breached its service obligations. The LDC further argued that FERC’s failure to explain its abdication of its remedial authority was “arbitrary and capricious” in nature.

“Nowhere — not in the initial order, not in the rehearing order, and not in the briefs — does FERC explain its conclusion that VNG’s requested relief includes ‘remedies beyond those typically contemplated by the Commission,” the three-judge appeals panel said.

“Assuming (as FERC does) that Columbia violated the NGA [Natural Gas Act], at least some of VNG’s damage demands appear to fall within FERC’s understanding of its remedial authority…Of course, after considering VNG’s demands on the merits, FERC might conclude that VNG’s claims are overbroad. However, that possibility does not absolve FERC from making a choice and explaining it,” the court noted.

“If part of VNG’s damage demand is beyond the Commission’s remedial authority, FERC should have so ruled — or at least should have explained why it would defer [to the courts] in this case even if the demand were within its authority…Given that the Commission has suggested that VNG’s demands straddle the remediable-unremediable border, it is incumbent upon the Commission to explain which falls where. A tight-lipped punt will not do.”

The court, however, disagreed with VNG’s argument that FERC has a mandatory duty to remedy all violations of the NGA. “We need not and do not go so far. In addition to the fact that it is unclear whether Columbia violated the NGA, it is also irrelevant for present purposes whether FERC must remedy every NGA violation,” the court said.

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