In a reversal of its prior position, a federal appeals court has upheld FERC’s decision on remand reaffirming Tennessee Gas Pipeline’s switch in 1996 to the more competitive net-present-value (NPV) method for allocating pipeline capacity and primary receipt/delivery points on its system. Prior to 1996, the pipeline had offered capacity and primary points on a less competitive “first come, first-served” basis.

The Process Gas Consumers Group (PGC), which represents industrial gas shippers, had challenged the Commission’s 2000 decision on remand , which waived altogether a cap on the duration (term) of the bids that Tennessee could consider under its NPV method for allocating capacity, and reaffirmed Tennessee’s NPV method of allocating available primary points in a manner that favored new shippers over existing shippers.

The U.S. Court of Appeals for the District of Columbia on Friday sided with the Federal Energy Regulatory Commission on both issues in its latest ruling, which was a complete about-face from the court’s first ruling in the case. Citing potential monopoly concerns, the court had objected to the Commission’s initial decision in which it approved both a 20-year cap on the length of the bids for Tennessee capacity, and the pipeline’s NPV method for awarding new primary point capacity.

In 1999, the appeals court “remanded [that ruling] to the Commission, directing it to ‘take the problem [of Tennessee’s monopoly power] seriously and confront it with a forthright explanation of why a 20-year cap would not augment that power.” Using the NPV method, the PGC group had argued that Tennessee would exercise its market power to compel shippers to bid for longer contracts than they would otherwise bid for in a competitive market.

In response to the appellate court’s concerns on remand, FERC not only declined to impose a shorter cap on capacity bids, but it removed the cap altogether, arguing that there was little risk that Tennessee would exercise its monopoly power to force shippers into excessively long contracts. Moreover, the Commission offered expanded arguments in favor of Tennessee’s NPV method for evaluating competing bids for new primary points that became available on its system.

The PGC group persisted in its challenge of Tennessee’s NPV system for assessing bids for primary points, saying it favored new shippers over existing ones. Under the method, a prior commitment by an existing shipper (seeking to switch primary points) to continue paying for its firm capacity would be awarded an NPV of zero, while a new shipper’s promise to pay for as-yet unallocated mainline capacity would receive a positive NPV.

With respect to the cap issue, the court was won over by the Commission’s arguments. “These several rationales [offered by FERC] for uncapping the NPV bidding process not only satisfy our deferential standard of review, but also address our principal concern in PGC 1 — FERC’s failure to articulate how a 20-year cap would prevent Tennessee from exploiting its monopoly power,” the court said.

“No longer relying on a cap to accomplish that objective, FERC now explains that other regulatory constraints adequately limit Tennessee’s ability, as well as any incentive, to induce lengthy contracts. We think this persuasive for two reasons. First, because the Commission already regulates the rates pipelines may charge and requires them to sell all available capacity at those rates, we agree with FERC that Tennessee has neither the legal ability to withhold existing capacity nor an incentive to refuse to build new capacity.

Second, any effort by Tennessee affirmatively to manipulate the bidding process would violate other Commission rules and would therefore presumably be actionable. Accordingly, as FERC argues, the fact that shippers may at times bid up contract length likely reflects not an exercise of Tennessee’s market power, but rather competition for scarce capacity.”

The court also was swayed by FERC’s arguments on the issue of calculating bids for new primary points. The Commission argued there was nothing in Tennessee’s tariff that entitled existing shippers to win contested primary points from new shippers wishing to purchase the point and associated mainline capacity. Moreover, it noted it was “entirely reasonable” for Tennessee to adopt a point allocation method that produced greater revenue for its system by selling additional mainline capacity, a move that would benefit all of the pipeline’s shippers through lower rates.

“Again, we find these explanations adequate to satisfying both our standard of review and PGC 1,” the court opined. “On remand, the Commission [has] fully complied with [the court’s] requirement, re-evaluating both issues and satisfactorily explaining its ultimate decisions…The petitions for review are denied, and the orders of the Commission are affirmed.”

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