UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


PROC GAS CONSUM

v.

FERC


98-1075b

D.C. Cir. 1999


*	*	*


Wald, Circuit Judge: Tennessee Gas Pipeline Company  ("Tennessee")
filed a tariff revision with the Federal Energy  Regulatory Commission
("FERC" or "Commission") in 1996.  The company sought to change the
method it uses to allocate  requests for available capacity on its
natural gas pipeline,  switching from "first come-first served" to
"net present val- ue," or "NPV." Over objections, FERC ultimately
approved  a twenty-year cap on bids evaluated under NPV. It also 
approved the use of NPV to evaluate requests from shippers  to change
the primary points at which their gas enters or  leaves the pipeline.
Numerous petitioners argue that FERC  failed to engage in reasoned
decision making in both instanc- es in violation of the Administrative
Procedure Act ("APA").  Petitioners also contend that Tennessee did
not give sufficient  notice that NPV would apply to point change
requests. We  agree with both of petitioners' APA claims and therefore
 grant the petitions for review, remanding the issues to  FERC, but
hold that petitioners lack standing to raise the  notice claim.


I. Background


Tennessee transports natural gas via a pipeline system  from Louisiana,
Texas, and the Gulf of Mexico to areas as far  north as New England.
Prior to the orders at issue in this 


case, Tennessee awarded available firm capacity1 on the  pipeline on a
first come-first served basis; the first shipper to  submit a request
that satisfied the requirements of Tennes- see's tariff received the
capacity. The pipeline found that  method unsatisfactory:


Under the first come-first served policy, Tennessee must  award
capacity to any shipper, even one that requests  service for a very
short term (which could be for as little  as just a few days), if the
short-term shipper satisfactori- ly submits its request for service as
little as one hour  before a long term shipper submits its request for
ser- vice. Plainly, an efficient market would not function in  this
way, as a merchant exercising rational business  judgment would
typically favor a creditworthy long-term  customer (even if the
long-term customer requested a  reasonable discount) that ... would
provide more overall  benefits than those provided by the short-term
customer.  Similar inefficiencies arise where a short-haul shipper 
submits its request for service prior to another shipper  that wishes
to transport gas to points further down- stream or upstream.


Letter from Marguerite N. Woung, Attorney, Tennessee Gas  Pipeline
Company, to Lois D. Cashell, Secretary, FERC 3  (June 12, 1996).
Pursuant to section four of the Natural Gas  Act, 15 U.S.C. s 717c,
Tennessee therefore submitted tariff  revisions to FERC on June 12,
1996, proposing a change from  the first come-first served method of
evaluating capacity  requests to the NPV method.2 The change would be
accom- plished through the addition to Tennessee's tariff of a new 




__________

n 1 "Pipelines generally offer two forms of transportation service: 
firm transportation, for which delivery is guaranteed, and interrup-
tible transportation, for which delivery can be delayed if all the 
capacity on the pipeline is in use." United Distribution Cos. v. 
FERC, 88 F.3d 1105, 1123 n.10 (D.C. Cir. 1996); see Municipal  Defense
Group v. FERC, 170 F.3d 197, 198 n.1 (D.C. Cir. 1999).


2 The same submission involved another tariff revision--elimina- tion
of the requirement that pipeline service commence within  ninety days
of a request for service--that is not at issue here.


section five, entitled "Awards of Generally Available Capaci- ty."
Under NPV, Tennessee would announce an open season  each time it
wanted to sell available capacity. The highest  bidder during the open
season, based on the net present value  of the bid, would receive the
capacity (absent unusual circum- stances). This approach would take
into account differences  in the proposals such as price, volume of
gas, and duration of  contract. Using more technical language,
Tennessee de- scribed the NPV of a bid as the "discounted cash flow of
 incremental revenues per dekatherm to Transporter pro- duced, lost or


A. The Twenty-Year Cap


Tennessee's initial proposal did not include or discuss a cap  on the
length of a bid that would be considered in NPV  calculations. A cap
may prevent an end run around the  maximum rates approved by FERC, a
concern when monopo- ly conditions are present. See United
Distribution Cos. v.  FERC, 88 F.3d 1105, 1140 (D.C. Cir. 1996)
("UDC") ("Com- peting bidders who come up against the rate ceiling for
this  scarce resource--capacity on constrained pipelines--may bid  up
the length of the contract term to try to win the auction.  In effect,
bidding for a longer contract term becomes a  surrogate for bidding
beyond the maximum rate level."). A  cap functions like this: under a
ten year cap, two shippers  who want to submit otherwise identical
fifteen and twelve  year bids cannot; they are limited to ten year
bids, producing  the same NPV, and a tiebreaker determines the
winner.3  Without the cap, the fifteen year bidder wins. The goal of a
 cap in a monopoly situation, just as with the setting of  maximum
rates, is to simulate the end product of a competi- tive market. See
Stephen G. Breyer & Richard B. Stewart,  Administrative Law and
Regulatory Policy 237 (3d ed. 1992)  ("In principle, ratemaking might




__________

n 3 A cap could function somewhat differently, permitting the filing 
of the fifteen and twelve year bids but only counting the first ten 
years in the NPV calculation. The winner would then obtain a  contract
for longer than ten years. Tennessee's cap does not  appear to work
this way.


object the setting of prices equal to those that the firm would  set if
it did not have monopoly power; i.e., to replicate a  'competitive
price.' "). Bids in a competitive market limited  in duration to ten
years thus help to prevent a pipeline's  market power from causing
market distortions.


A month after its June 12 filing, Tennessee addressed  concerns raised
by Process Gas Consumers Group ("Process  Gas"), an association of
industrial users of natural gas and  one of the petitioners here,
about the lack of a cap. Instead  of incorporating a cap in the tariff
itself, however, Tennessee  stated that it would "include a cap on the
duration of any bid  as part of the open season posting ... that is
applicable to  the particular service being offered." Response of
Tennessee  Gas Pipeline Company to Protests to NPV Filing at 6.


FERC ruled on Tennessee's proposed revisions on July 31,  1996,
generally approving of the switch from first come-first  served to


A net present value evaluation ... allocates capacity to  the shipper
who will produce the greatest revenue and  the least unsubscribed
capacity. As such, it is an eco- nomically efficient way of allocating
capacity and is con- sistent with Commission policy.


Tennessee Gas Pipeline Company, 76 F.E.R.C. p 61,101, at  61,522 (1996)
("Tennessee Gas I"). FERC was not wholly  satisfied, however, and
while it accepted the filing (with a  minimal suspension period), it
did so subject to certain condi- tions. One condition involved the
cap: "Tennessee should  explain why it proposes to vary the cap on a
transaction by  transaction basis rather than include a uniform cap in
its  tariff." Id. at 61,519. In response, Tennessee proposed a 
twenty-year cap: "Since bids beyond the 20th year are un- likely to
have a significant impact on the NPV analysis,  Tennessee is willing
to include in its tariff a 20-year limita- tion on the NPV bids."
Letter from Marguerite N. Woung,  Attorney, Tennessee Gas Pipeline
Company, to Lois D. Ca- shell, Secretary, FERC 6 (Aug. 15, 1996).


During the same time period, a cap had become an issue in  a different
circumstance arising out of FERC's Order No. 


636, part of the restructuring of the natural gas industry. In  our
review of Order No. 636, we addressed a twenty-year cap  selected by
FERC in the right-of-first-refusal context.4 Be- cause FERC failed to
adequately explain why twenty years  would protect shippers from
pipelines' market power and why  it relied on the lengths of one
specific type of contract (those  involving the construction of new
facilities) in coming up with  that figure, we remanded the cap for a
better justification.  See UDC, 88 F.3d at 1140-41. On February 27,
1997, FERC  acknowledged on remand that it could not offer a more 
adequate basis for a twenty-year cap, see Order No. 636-C,  Pipeline
Service Obligations and Revisions to Regulations  Governing
Self-Implementing Transportation Under Part  284 of the Commission's
Regulations, Regulation of Natural  Gas Pipelines After Partial
Wellhead Decontrol, 78 F.E.R.C.  p 61,186, at 61,773 (1997) ("Order
No. 636-C") ("The Commis- sion can find no additional record evidence,
not previously  cited to the Court, that would support a cap as long
as the  twenty-year cap chosen in Order No. 636."), and reduced the 
cap to a five-year one. See id. at 61,774.5 Process Gas, 




__________

n 4 We described that context as follows:


The right-of-first-refusal mechanism consists principally of two 
matching requirements: rate and contract term. Near the end  of a
long-term firm-transportation contract, the existing cus- tomer may
notify the pipeline that it intends to exercise its  right of first
refusal. The pipeline must post the availability of  that capacity on
its electronic bulletin board and, in accordance  with the criteria
set forth in its tariff, identify the "best bid"  offered by any
competing shippers. The customer then has the  right to match the
competing bid's rate, up to the maximum  "just and reasonable" rate
that the Commission has approved  for that service, and the competing
bid's contract term. Com- peting shippers may choose to bid for only a
portion of the  capacity in the expiring contract.


UDC, 88 F.3d at 1138 (internal citations omitted).


5 A petition for review of the cap selected in Order No. 636-C is 
currently pending. See Interstate Natural Gas Ass'n of America v. 
FERC, No. 98-1333 (D.C. Cir. filed July 22, 1998) (in abeyance).


which asked for a cap of ten years in a June 24, 1996 response  to
Tennessee's initial filing and in an August 30, 1996 request  for
rehearing of Tennessee Gas I, reduced its request to five  years in
light of Order No. 636-C on April 11, 1997.6


FERC approved the twenty-year cap for NPV on June 3,  1997:


Differing economic environments may dictate differing  durations of
service if Tennessee is to generate maximum  use of its system and
maximum revenues. Market forces  can be the determinant of duration of
service, and to  place a uniform cap in place could stifle those
forces.  Protesters have not offered persuasive arguments for  either
a uniform cap, or for a cap shorter than twenty  years. The Commission
disagrees with Process Gas that  the policy justifications of Order
No. 636-C apply simi- larly to this situation. As Tennessee points
out, in Order  No. 636-C, the five-year cap is imposed to protect
exist- ing customers from being forced into longer-term con- tract
extensions than they desire under the right-of-first- refusal. Here,
there is no reason for the Commission to  impose a shorter cap for new
capacity, unlike the case of  capacity subscribed under existing
contracts. Under the  instant proposal, market forces can determine
the dura- tion of service for the new, or newly available capacity 
within whatever cap Tennessee proposes for that particu- lar
transaction. Bidders are not forced into the maxi- mum duration which
in any event is limited to no more  than twenty years. Rather, the
primary issue here, is  whether when two shippers both desire new
capacity  should that capacity go to a shipper who values it more, 
i.e., for a longer term, than another shipper who might  value it
less. The Commission will accept Tennessee's  proposal.


Tennessee Gas Pipeline Company, 79 F.E.R.C. p 61,297, at  62,339 (1997)
("Tennessee Gas II") (footnote omitted). In a  footnote, FERC added:




__________

n 6 Process Gas was not the only party to argue that Tennessee's 
proposed twenty-year cap was too long.


The Commission considers twenty years to be the maxi- mum length of
time that can be considered reasonable in  this context. Any longer or
the consideration of unlimit- ed periods of time would be allowing an
unduly discrimi- natory exercise of monopoly power.


Id. at 62,339 n.11. Rehearing of Tennessee Gas I was denied  at the
same time. See id. at 62,334. On January 14, 1998,  FERC denied
rehearing of Tennessee Gas II and again  rejected objections to a cap
length of twenty years:


The Commission does not find the application of the 20- year NPV
criteria to be an application of monopoly  power in and of itself.
Even though Tennessee has  monopoly power irrespective of the length
of the contract  term, it still must have a rational way of allocating
 available capacity. Process Gas simply raises speculation  that the
cap will lead to unreasonable results. A 20-year  cap is consistent
with Commission policy of allowing  those who value capacity the
highest, including those who  value longer-term contracts, to acquire
the capacity. In  fact, we believe that with the lower turnover in
contracts  with such a cap, economic efficiency is increased, and the 
public interest is better served. Nor is the right-of-first- refusal
matching procedure relevant. The right-of-first- refusal procedure was
formulated with the purpose of  protecting the existing shipper. Here,
the existing ship- per has no more stake in the outcome of the bidding
 process regarding newly available capacity than any oth- er shipper
and has no right to that capacity which  requires protection.
Accordingly, based on the forego- ing, and without any evidence that
20 years is unjust and  unreasonable in this context, we find that the
20-year  cap is adequately supported.


Tennessee Gas Pipeline Company, 82 F.E.R.C. p 61,008, at  61,026-27
(1998) ("Tennessee Gas III") (footnotes omitted).  FERC further
justified its approval by stating that "[i]t is  still common to find
longer lengths of commitment for new  service." Id. at 61,026 n.6. In
support of that proposition,  FERC cited three of its previous
decisions involving ten and 


fifteen year agreements, known in the industry as "precedent 
agreements," between shippers and pipelines for capacity on  yet to be
constructed facilities.7 See id. The pipelines,  seeking authority
from FERC to proceed with the planned  construction, submitted the
agreements to demonstrate de- mand for the new capacity.


B. Meter Amendments


When natural gas is shipped through a pipeline, the points  at which
the gas enters and leaves the system are called  "receipt" and
"delivery" points, respectively. A firm trans- portation shipper
selects "primary" receipt and delivery  points; these points are part
of its contract with the pipeline.  Designating a point as primary
guarantees the shipper use of  the point, an important right when the
pipeline lacks suffi- cient capacity at the point to satisfy demand.
Firm shippers  can select other points on a secondary basis, but can
only use  those points if there is sufficient capacity beyond that
taken  by shippers using them on a primary basis. A change in a 
primary receipt or delivery point is sometimes referred to as  a
"meter amendment" because gas is measured at these  points. Section
4.7 of Tennessee's relevant rate schedule  discusses meter


Change of Primary Points: Subject to agreement by  Transporter, a
Shipper may elect to substitute new  points for the Primary Delivery
or Receipts in its service  agreement. Such changes may be affected by
prior  notice to Transporter of 30 days if in writing or 15 days if 
by the TENN-Speed 2 [electronic bulletin board] sys- tem. All such
changes must be reflected in an amended  service agreement and shall
be effective at commence- ment of the following month. Transporter
shall not be  required to accept an amendment if there is inadequate




__________

n 7 FERC miscited the third of these decisions. The correct cita- tions
are: Transcontinental Gas Pipe Line Corp., 81 F.E.R.C.  p 61,104
(1997); Tennessee Gas Pipeline Co. and Distrigas of  Massachusetts
Corp., 79 F.E.R.C. p 61,375 (1997); Northern Natu- ral Gas Co., 79
F.E.R.C. p 61,046 (1997).


capacity available to render the new service or if the  change would
reduce the reservation charges applicable  to the agreement.


In Tennessee Gas I, issued on July 31, 1996, FERC did not  discuss the
effect of the change from first come-first served to  NPV on the meter
amendment process. Nor had the matter  been explicitly addressed to
that point by Tennessee or other  interested parties. On August 21 or
22, 1996, however, in a  posting on its electronic bulletin board
Tennessee made crys- tal clear that it would apply the new method to
primary point  change requests. A meter amendment request would
trigger  an open season and the requestor would have to compete with 
other interested shippers on the basis of NPV.


A number of parties protested, arguing, inter alia, that  applying NPV
to meter amendment requests is inconsistent  with FERC's professed aim
of assuring that firm shippers  have receipt and delivery point
flexibility, see Tennessee Gas  II, 79 F.E.R.C. at 62,335-36 & n.5,
and that the change would  "give new customers a priority over
existing customers since  the existing customers['] NPV will be
zero."8 Id. at 62,337.  FERC disagreed:


The Commission considers that the NPV criteria may  be rightfully
applied to requests for changes in receipt  and delivery points. A
request for a change in a receipt  or delivery point is a request for
capacity that is general- ly available at that new point. To apply the
NPV criteria  is to allocate that capacity to the entity that values
it the  most, and this is consistent with Commission policy. The 
Commission has previously discussed the desirability of 




__________

n 8 The source of existing shippers' difficulty under NPV is that 
Tennessee calculates the magic NPV number by looking at the net  or
incremental gain in revenue that the award of the capacity at the 
designated point will produce. If an existing shipper seeks merely  to
change from one primary point to another in the same zone, its 
payments to the pipeline will not change and the NPV of its bid will 
be zero; the amount it was already obligated to pay under the 
contract counts for nothing.


the economic efficiency achieved by allocating capacity to  parties who
value it the most. Here, Tennessee seeks to  allocate available
receipt and delivery point capacity to  the parties who value it the
most, a proposal that is not  inconsistent with Commission policy.
Existing shippers  have the right to bid on the generally available
receipt  and delivery point capacity, just as new or other existing 
shippers do. There is no reason to grant a preferential  right to
unsubscribed capacity to existing shippers.  Moreover, nothing in
these changes affects the rights of  parties to use these points on a
secondary basis. The  Commission considers that in responding to short
term  changes, such as a temporary force majeure event (as in  New
England's example of a hurricane), use of an open  receipt point on
[a] secondary basis would be both logical  and unaffected by the NPV


Id. (footnotes omitted).


In denying rehearing of Tennessee Gas II, FERC again  rejected
objections to its approval of Tennessee's application  of the new NPV
allocation method to meter amendment  requests, see Tennessee Gas III,
82 F.E.R.C. at 61,027-29,  despite arguments by existing shippers that
using NPV se- verely degrades their service because of increased
difficulty  in obtaining point changes. The shippers also argued on 
rehearing that using NPV for meter amendment requests is  unduly
discriminatory because even a de minimus bid from a  new shipper
creates some incremental value while a point  change request from an
existing shipper produces an NPV of  zero. See id. at 61,028.


As we understand it, FERC's response reflects two propo- sitions.
First, allocating capacity to the highest bidder is  appropriate
because it is efficient. Second, existing shippers,  at least in some
cases, are able to compete with new shippers  on the basis of NPV for
capacity at a receipt or delivery  point. With respect to the latter,
FERC stated:


Moreover, there are other ways an existing shipper's bid  can render
incremental value. If it is paying a discount- ed rate, it can
increase the rate offered. It also can 


increase the amount of overall capacity requested or  extend the zones
its service covers.


Id. at 61,028 n.17. Responding to the example of the de  minimus bidder
who would trump the existing shipper of  whatever amount, FERC replied
that "[i]t is economically  more efficient to award the capacity to
the bidder who is  willing to pay something extra for that capacity."
Id. at  61,029.


II. Discussion


Process Gas filed a petition for review of Tennessee Gas I,  Tennessee
Gas II, and Tennessee Gas III on February 23,  1998.9 Numerous
parties, including Tennessee, intervened.  Bay State Gas Company ("Bay
State") and other natural gas  companies that operate in the
northernmost zone of Tennes- see's pipeline system filed another
petition for review on  March 12, 1998. These cases were consolidated
along with a  third, City of Clarksville v. FERC, No. 98-1099 (D.C.
Cir.  filed Mar. 16, 1998), later severed. See Process Gas Consum- ers
Group v. FERC, No. 98-1075 (D.C. Cir. Apr. 29, 1998).  Petitioners
argue that FERC violated the APA by failing to  adequately support its
decisions to approve (1) the twenty- year cap and (2) Tennessee's use
of the NPV method for  evaluating meter amendment requests. They argue
further  that Tennessee did not provide adequate notice under 15 
U.S.C. s 717c(d) that its proposal affected meter amendment 


A. The Twenty-Year Cap


The natural gas transportation industry is a natural monop- oly;
pipelines maintain an economically powerful position in  relation to
their customers. See, e.g., UDC, 88 F.3d at 1122.  Congress sought to
address this problem in 1938 by enacting  the Natural Gas Act, ch.
556, 52 Stat. 821 (1938) (codified as  amended at 15 U.S.C. ss
717-717(w)) ("NGA"), the "primary 




__________

n 9 An earlier petition for review filed by Process Gas was dis- missed
as premature. See Process Gas Consumers Group v.  FERC, No. 97-1458
(D.C. Cir. Nov. 4, 1997).


aim" of which is "to protect consumers against exploitation at  the
hands of natural gas companies." Federal Power  Comm'n v. Hope Natural
Gas Co., 320 U.S. 591, 610 (1944);  see also Public Sys. v. FERC, 606
F.2d 973, 979 n.27 (D.C.  Cir. 1979) ("control of the economic power
of utilities that  enjoy monopoly status" is the focus of regulation
under the  NGA and the Federal Power Act). In exercising the authori-
ty granted by the NGA to review rate changes proposed by  pipelines,
FERC must remain attuned to the status of the  affected market
vis-a-vis monopoly and competition.10 If the  market is not a
monopolistic one, market-based prices are  presumed to be proper. See
Elizabethtown Gas Co. v. FERC,  10 F.3d 866, 870 (D.C. Cir. 1993)
("when there is a competi- tive market the FERC may rely upon
market-based prices  ... to assure a 'just and reasonable' result").
If the market  is dominated by one or a few companies, FERC uses
devices  such as a rate ceiling that compensate for the imbalance in 
market power. This same concern is present as well when 




__________

n 10 The statutory standards FERC uses to assess rate proposals  are
found in 15 U.S.C. s 717c(a)-(b):


(a) Just and reasonable rates and charges


All rates and charges made, demanded, or received by any  natural-gas
company for or in connection with the transporta- tion or sale of
natural gas subject to the jurisdiction of the  Commission, and all
rules and regulations affecting or pertain- ing to such rates or
charges, shall be just and reasonable, and  any such rate or charge
that is not just and reasonable is  declared to be unlawful.


(b) Undue preferences and unreasonable rates and charges  prohibited


No natural-gas company shall, with respect to any transporta- tion or
sale of natural gas subject to the jurisdiction of the  Commission,
(1) make or grant any undue preference or ad- vantage to any person or
subject any person to any undue  prejudice or disadvantage, or (2)
maintain any unreasonable  difference in rates, charges, service,
facilities, or in any other  respect, either as between localities or
as between classes of  service.


FERC looks at pipeline-shipper contract terms other than  price. See
UDC, 88 F.3d at 1140 (increased contract length  can be a surrogate
for bidding over the maximum approved  rate); Tejas Power Corp. v.
FERC, 908 F.2d 998, 1004 (D.C.  Cir. 1990) ("[i]n a competitive
market, where neither buyer  nor seller has significant market power,
it is rational to  assume that the terms of their voluntary exchange
are rea- sonable"); Tennessee Gas II, 79 F.E.R.C. at 62,342 ("both the
 Commission and the courts carefully scrutinize use of [length  of
term] and place limits on it to be sure that there is not  undue
exercise of monopoly power").


In this case FERC acknowledges that the market served  by Tennessee's
pipeline has monopolistic characteristics. See  Tennessee Gas III, 82
F.E.R.C. at 61,026; Tennessee Gas II,  79 F.E.R.C. at 62,339 n.11. The
question for us then is  whether FERC has adequately justified its
conclusion that a  twenty-year cap will function to assure that the
NPV method  of awarding available capacity is "just and reasonable."
15  U.S.C. s 717c(a). That is, whether it will prevent the NPV  method
from compelling shippers to offer the pipeline longer  contracts than
they would in a competitive market. We have  recognized that a cap is
"necessarily [a] somewhat arbitrary  figure," but that acknowledgment
does not free FERC of its  obligation to "provide[ ] substantial
evidence to support its  choice and respond[ ] to substantial
criticisms of that figure."  UDC, 88 F.3d at 1141 n.45. Reasoned
decision making, which  we find absent here in several respects,
remains a regulatory  essential, even when the agency tools are rough


As previously noted, FERC supported its approval of the  twenty-year
cap by pointing to three previous Commission  decisions involving ten
and fifteen year precedent agree- ments. Because every market for
natural gas pipeline trans- portation does not suffer from monopoly
conditions, see Al- ternatives to Traditional Cost-of-Service
Ratemaking for  Natural Gas Pipelines, 74 F.E.R.C. p 61,076 (1996),
consider- ing the range of negotiated firm transportation contract 
lengths can be a defensible way of determining the adequacy  of a
particular cap. Of course, when FERC approves a cap  the contract data
it relies on must support its decision. Here 


FERC's orders fall short by neglecting to explain why the  existence of
ten and fifteen year precedent agreements sup- ports a twenty-year
cap. Given these numbers, we might  have expected FERC to refuse to
allow Tennessee to use a  cap of more than fifteen years, not twenty
years; assuming  that competitive market contracts typically run to no
more  than fifteen years, a twenty-year cap would allow Tennes- see's
market power to induce excessively long bids. We do  not mean to say
that a twenty-year cap can never be justified  from these numbers,
only that there must be some (rational)  explanation of the link
between the numbers and the cap.  We see none here.


FERC must also explain its choice of a data set in the face  of an
objection. See UDC, 88 F.3d at 1141 (cap remanded in  part because
FERC looked at the lengths of contracts involv- ing the construction
of new pipeline facilities and then failed  to respond to the
objection that this was the wrong type of  contract to consider).
Petitioners called for the same five- year cap as the Commission
selected on remand from UDC in  Order No. 636-C for the
right-of-first-refusal context, asking  that the data relied on in
that proceeding be used in the  evaluation of Tennessee's cap. In that
order, FERC went  well beyond a cursory citation to a few contracts
and re- viewed data from pipelines' quarterly electronic filings. See 
Order No. 636-C, 78 F.E.R.C. at 61,773. It summarized the  data as


For pre-Order No. 636 long-term contracts, the average  term was
approximately 15 years. The data show that  since Order No. 636,
pipelines have entered into substan- tially shorter contracts than
before. Post-Order No. 636  long-term contracts had an average term of
9.2 years for  transportation, and 9.7 years for storage. For all cur-
rently effective contracts (both pre- and post-Order No.  636), the
average term is 10.3 years for transportation  and 10 years for
storage. Moreover, ... the trend  toward shorter contracts is
continuing. About one quar- ter to one third of contracts with a term
of one year or  greater, entered into since Order No. 636, have had 


terms of one to five years. However, nearly one half of  such contracts
entered into since January 1, 1995, have  had terms of one to five
years....


The industry trend thus appears to be contract terms  that are much
shorter than twenty years.


Id. at 61,774 (footnotes omitted). In Tennessee Gas II and  III, FERC
rejected the proposition that this discussion in  Order 636-C is
relevant to the instant situation. It reasoned  that the
right-of-first-refusal process protects existing ship- pers as opposed
to the present circumstances where Tennes- see is conducting an open
season for generally available  capacity and there are no existing
shippers that stand to lose  their capacity and thus require
protection. This, however,  seems to us a distinction without a
difference. The NGA  aims to protect all shippers and potential
shippers from  pipelines' excessive market power, not just existing
shippers  faced with an expiring contract. If the data relied on in 
Order No. 636-C is not relevant in this context, FERC has  yet to tell


Apart from these concerns, we find FERC's reasoning on  the cap to be
unpersuasive and largely conclusory. In the  orders under review, FERC
frequently refers to its goal of  encouraging the allocation of
pipeline capacity to parties  willing to pay the most for it. See,
e.g., Tennessee Gas II, 79  F.E.R.C. at 62,337 ("The Commission has
previously dis- cussed the desirability of the economic efficiency
achieved by  allocating capacity to parties who value it the most."
(footnote  omitted)). We do not quarrel with that goal, but remind 
FERC of its admitted need to balance the goal with its duty  to
prevent exploitation of Tennessee's monopoly power.  FERC appears to
have forgotten the latter in its focus on  maximizing pipeline


Under the instant proposal, market forces can determine  the duration
of service for the new, or newly available  capacity within whatever
cap Tennessee proposes for  that particular transaction.


...


[T]he primary issue here, is whether when two shippers  both desire new
capacity should that capacity go to a  shipper who values it more,
i.e., for a longer term, than  another shipper who might value it


Id. at 62,339.


A 20-year cap is consistent with Commission policy of  allowing those
who value capacity the highest, including  those who value longer-term
contracts, to acquire the  capacity.


Tennessee Gas III, 82 F.E.R.C. at 61,026 (footnote omitted).  To the
limited extent that FERC answered claims that the  cap is too long
given the market power problem, its state- ments appear to be
disconnected and on occasion contradicto- ry:


Bidders are not forced into the maximum duration which  in any event is
limited to no more than twenty years.


Any longer or the consideration of unlimited periods of  time would be
allowing an unduly discriminatory exercise  of monopoly power.


Tennessee Gas II, 79 F.E.R.C. at 62,339 & n.11.


The Commission does not find the application of the 20- year NPV
criteria to be an application of monopoly  power in and of itself.


Tennessee Gas III, 82 F.E.R.C. at 61,026. Once the Commis- sion
acknowledged that there is a monopoly problem, it was  obligated to
take the problem seriously and confront it with a  forthright
explanation of why a twenty-year cap would not  augment that power.
Cf. Laclede Gas Co. v. FERC, 997 F.2d  936, 947 (D.C. Cir. 1993) (in
determining whether to accept a  proposed settlement, it is
appropriate for FERC to consider  the possibility of protracted
litigation; however, it "must  indicate why the interest in avoiding
lengthy and difficult  proceedings warrants acceptance of this
particular settle- ment"). Instead, the orders seem to suggest that
FERC  approved the twenty-year cap because, functionally, twenty 


years would amount to no cap at all. This is hardly rational  decision
making.


B. Meter Amendments


As with the twenty-year cap, FERC's explanation for ap- plying NPV to
meter amendments emphasized the maximiza- tion of pipeline revenue.
Once again, however, the Commis- sion fell short in addressing an
important countervailing  concern--this time, the ability of existing
shippers to change  primary points. Throughout the administrative
proceedings,  petitioners stressed the importance of receipt and
delivery  point flexibility to shippers and their belief that, under
NPV,  much flexibility would be lost due to the inability of existing 
shippers seeking new meter points under changed market  circumstances
to outbid new shippers. Petitioners cited the  example of a shipper
whose original source of natural gas has  dried up necessitating a
change of a receipt point to a  different supplier at a different
location. The inability to  switch points to meet such exigencies can
cause disruptions  not just for shippers, but for end users as well.


FERC's response was that, contrary to petitioners' claims,  in many
cases existing shippers actually can compete with  new bidders for
changed meter points on the basis of NPV.  Despite the disadvantage
faced by existing shippers stem- ming from the pipeline's focus on
incremental revenue only,  FERC suggested ways in which an existing
shipper can  generate a bid with a positive value: "If it is paying a 
discounted rate, it can increase the rate offered. It also can 
increase the amount of overall capacity requested or extend  the zones
its service covers."11 Tennessee Gas III, 82  F.E.R.C. at 61,028 n.17.
But the petitioners make a good  case that these options are largely
illusory in the majority of  cases. It is often impossible to offer a
higher rate or to  request more capacity because the only pipeline
capacity that  could be of any use to the existing customer is al-
ready spoken for. Extending zones is impossible for shippers  using
delivery points in the northernmost zone and receipt  points in the
southernmost and commercially infeasible for 




__________

n 11 The pipeline is evidently divided into seven zones, numbers  zero
through six.


many other shippers. Even when an existing shipper can  produce an NPV
higher than zero, it is easier for a new  shipper to go even higher
than for an existing shipper. By  improperly minimizing the difficulty
that existing shippers  will face in the NPV process when they request
meter  amendments, FERC failed to seriously address the problems  that
the use of NPV might cause for existing shippers.


FERC also suggested that shippers unable to obtain a  point on a
primary basis can use it on a secondary basis.12  This secondary
option has substantially diminished utility  because it does not
guarantee access to the point over any  fixed period of time.


At the end of the day, though, FERC's position is that  regardless of
the ability of existing shippers to compete on  the basis of NPV or to
meet their needs by using secondary  points, it is best to award
primary point capacity on the basis  of the amount of additional
revenue generated for Tennessee.  If existing shippers are injured, so
be it. The orders under  review suggest this bottom line and at oral
argument FERC  counsel appeared to endorse it. While awarding capacity
to  the party who will increase the pipeline's revenues the most is 
certainly one proper consideration in establishing a new price 
regime, we think it was unreasonable for FERC to ignore the  serious
potential problems for existing shippers highlighted  by petitioners.
Existing shippers into entered into their  contracts with Tennessee
with an expectation of a certain  amount of primary point flexibility.
When the pipeline pro- poses to take away that flexibility altogether
or reduce it  substantially, FERC is obligated to provide a better
explana- tion of why the shippers' resultant loss cannot be taken into
 account in a more balanced application of the NPV pricing  system.
This includes explaining why an alternative ap- proach suggested by
petitioners--crediting to a bid some  portion of the payments already
obligated instead of incre-




__________

n 12 The NPV capacity allocation method does not affect secondary 
points.


mental revenue only--is not preferable to the approach  FERC


C. Notice of Change in Meter Amendment Process


Petitioners also contend that Tennessee's initial filing failed  to
give adequate notice that NPV would be applied to re- quests for meter
amendments. They say that they only  realized Tennessee's intent when
they read the pipeline's  electronic bulletin board posting in the
latter part of August  1996. The notice requirement is imposed by 15
U.S.C.  s 717c(d):


Unless the Commission otherwise orders, no change shall  be made by any
natural-gas company in any such rate,  charge, classification, or
service, or in any rule, regula- tion, or contract relating thereto,
except after thirty  days' notice to the Commission and to the public.
Such  notice shall be given by filing with the Commission and  keeping
open for public inspection new schedules stating  plainly the change
or changes to be made in the schedule  or schedules then in force and
the time when the change  or changes will go into effect.


FERC twice rejected the claim of inadequate notice. See  Tennessee Gas
III, 82 F.E.R.C. at 61,027; Tennessee Gas II,  79 F.E.R.C. at


We agree with FERC that petitioners lack standing to  raise this issue
because they fail to satisfy standing's injury  prong; the injury they
allege is too speculative. See Office of  the Consumers' Counsel v.
FERC, 808 F.2d 125, 128-29 (D.C.  Cir. 1987) (to have standing, a
party seeking judicial review of  a FERC order must allege a
non-speculative harm). Peti- tioners assert that, "had Tennessee's
customers received pri- or notice of the tariff change FERC ultimately
approved,  they might well have made changes to their primary receipt 
or delivery points before the tariff change took effect." Joint  Reply
Br. for Pet'rs at 20 (emphasis in original). "Might well  have" sounds
speculative, especially in this context. The  method used by Tennessee
to evaluate point change requests  would seem to have little or no
effect on the need or even  desirability, from the standpoint of a
shipper, of a point  change. Thus, we expect that any point change
request that  "might well have" been made before the tariff change was


implemented on August 1, 1996, would have been lodged  before or after
that date. Yet petitioners point to no such  point change requests
that were denied. If opportunities for  meter amendments were actually
missed, petitioners should  have been able to cite them.


III. Conclusion


The petitions for review are granted. We remand to the  Commission to
better explain or modify its approval of the  twenty-year cap and of
Tennessee's use of the NPV method  of allocating pipeline capacity in
the context of requests from  existing shippers for meter amendments.
We do not reach  petitioners' notice claim for lack of standing.