A federal appeals court, in vacating two FERC orders Friday, said the Commission had failed to offer a “reasoned explanation” of why it denied a proposal of Northern Natural Gas Co. to offer shippers an index-based discount rate that would fluctuate between the pipeline’s maximum rate ceiling and minimum rate floor in its tariff.

The U.S. Court of Appeals for the District of Columbia granted Northern Natural’s petition challenging the 2002 orders, which held that the MidAmerican Energy pipeline’s proposal for a new index-based discount transportation rate was “too ill-defined” and could lead to “unreasonable results.”

As envisioned by Northern Natural, the proposed index discount rate would be based on published index price point differentials or a certain formula, and — like other discount rates — would be limited by the pipeline’s maximum rate ceiling and minimum rate floor.

Before the court, Northern Natural argued that FERC had failed to explain why a fluctuating discount rate was problematic as long as the resulting rate would remain within the tariff range. The three-judge appellate panel said it agreed with the pipeline.

“There is nothing inherently ‘vague’ about rate fluctuation, however, provided the fluctuation is governed by an objective criterion, such as a published index or formula, as Northern’s proposal requires,” the court noted.

Furthermore, the court dismissed FERC’s concern about whether the discount rate would be able to stay within Northern Natural’s tariff range, saying it was “utterly without foundation.” The pipeline’s proposal “sets the maximum and minimum rates in the existing tariff as the ceiling and floor for the discounted rate; those limitations will constrain the rate when the index or formula in the contract would otherwise produce a rate outside the range.”

In granting the petition, “we conclude the Commission failed to provide a reasoned explanation for rejecting Northern’s proposal, and in particular for finding the rate collar in the present tariff insufficient to ensure the resulting discounts would yield reasonable and lawful rates,” the court said.

In rejecting Northern Natural’s discount proposal, “we note that the Commission relied heavily upon several cases in which it had concluded, also without a reasoned explanation, that an index-based rate provision ‘can only be executed as part of a pipeline’s negotiated rate authority,'” the appellate panel said. “From our view…it appears the Commission has never [made] the distinction between discounted and negotiated rates.”

Northern Natural offered this definition– while discounted rates must fall with a pipeline’s tariff range, negotiated rates need not. In the meantime, “the Commission has provided no coherent alternative definition. Perhaps now it will either do so or adopt the definition suggested by Northern,” the court offered.

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