A federal appeals court last Tuesday vacated a pipeline rate decision and sent it back to the Federal Energy Regulatory Commission for a second time, calling the “different rationales” cited by the agency for approving significantly higher initial Section 7 rates for natural gas transportation service on the then-Kansas Pipeline Co. “arbitrary and capricious.”

The U.S. District Court of Appeals for the District of Columbia also directed the Commission to “address the question of an appropriate refund” for customers of Kansas Pipeline, which is now Enbridge Pipelines.

At issue in the case is whether then-Kansas Pipeline’s customers were overcharged as a result of the initial contractual rates assessed by FERC in 1998 for service under Section 7 of the Natural Gas Act (NGA), pending completion of the pipe’s Section 4 rate case. In the case of Kansas Pipeline, the Section 7 rates turned out to be significantly higher than the Section 4 rates that were later approved.

The Missouri Public Service Commission (PSC) challenged FERC’s justification for the higher Section 7 rates twice, and won a favorable decision from the appellate court both times, with the latest ruling issued last week.

The PSC asked the court to refund, with interest, the difference between the FERC-approved Section 4 rates for Kansas Pipeline and the higher initial Section 7 rates, which were in effect from Dec. 2, 1997 until the Section 4 rates went into effect.

“At oral argument, FERC counsel did not dispute that the Commission would have authority to require such a refund if we vacated its orders,” the three-judge appellate panel said. “Although we do not see any reason why a refund would not be in order at this point, the Commission has not yet addressed the question. And we could not, in any event, calculate the appropriate amount of a refund on our own,” it noted. It directed FERC to take up the issue on remand.

The rate issue is unusual primarily because the case itself was unusual. In 1995, FERC ruled that three affiliated and interconnected gas pipelines of Kansas Pipeline constituted a single interstate pipeline system subject to agency jurisdiction under NGA, rather than three separate pipelines that were subject to state jurisdictions. Even though Kansas Pipeline was an existing system, the Commission ordered the pipeline to file an application for Section 7 certification to operate the pipeline system and transport gas in interstate commerce. In 1998, FERC approved the pipeline’s initial rates for new service under Section 7.

In response to the Missouri PSC’s first appeal, the Commission cited a host of reasons to justify the higher rates, including that the rates: 1) ended the dispute over whether the pipeline was properly subject to FERC’s jurisdiction; 2) had been negotiated among the parties; 3) had been approved by Kansas Pipeline’s prior state regulator, the Kansas Corporation Commission; 4) preserved Kansas Pipeline’s financial integrity and prevented the pipeline’s bankruptcy; and 5) were lower than the rates FERC would otherwise have approved on rehearing.

The court rejected all of the reasons, and remanded the case to FERC. The Commission responded by reaffirming the rates that it had initially approved in 1998, and citing an “array of other rationales” for its action on remand. “We once again find FERC’s reasoning arbitrary and capricious,” the court said in its latest ruling.

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