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


IROQUOIS GAS TRANSM

v.

FERC


98-1081a

D.C. Cir. 1999


*	*	*


Williams, Circuit Judge: Iroquois built a pipeline to bring  gas from
the United States-Canadian border down to the  New York City region.
The pipeline was so constructed that  its capacity could be expanded
rather cheaply; adding com- pressor stations would (or at least could)
bring down average  cost. In early 1996 Iroquois held an auction to
find out  whether demand was strong enough to justify such an ex-
pansion. At the time its maximum tariff rate was  $0.695/dekatherm
("DTh"). Iroquois set the minimum bid  for the additional capacity at
$0.50/DTh, which it says with- out contradiction is the minimum rate
at which it could  recover the cost of building the compressor and
yield a  surplus that could be used to reduce rates for existing 
shippers. The only shippers submitting viable bids that met  the $0.50
threshold were Coastal Gas Marketing Co. and  ProGas U.S.A., Inc.,
which bid $0.50 and $0.54, respectively,  for the new service.


Iroquois applied in mid-1996 for the certificate of public  convenience
and necessity required for construction of the  compressor station. It
proposed use of the auction rates for  the new shippers, and, as we
understand from oral argument,  committed in the application to
include a modest reduction in  rates for the earlier shippers--not
down to the auction lev- els--in its next rate case under s 4 of the
Natural Gas Act,  15 U.S.C. s 717c. The Federal Energy Regulatory
Commis- sion issued a certificate in mid-1997, see Iroquois Gas Trans-
mission System, L.P., 79 FERC p 61,394 (1997), but denied  Iroquois's
request to discount the rates below those charged  existing shippers.
Iroquois petitioned for rehearing on the 


discount issue, FERC denied the petition for rehearing, see  Iroquois
Gas Transmission System, L.P., 82 FERC p 61,086  (1998) ("Order on
Rehearing"), and this appeal followed.


While this appeal was pending, Iroquois accepted the certif- icate and
constructed the facilities. While construction pro- ceeded, a FERC
rate order reduced the maximum tariff rate  to $0.46/DTh, below the
rejected discount price. See Iro- quois Gas Transmission System, L.P.,
84 FERC p 61,086  (1998), reh'g denied in relevant part, 86 FERC p
61,261  (1999). On November 2, 1998 Iroquois began service to  Coastal
and ProGas at the new maximum rate.


* * *


The Commission argues that Iroquois is not "aggrieved," as  required
for our jurisdiction both under the Constitution and  the statute. See
Lujan v. Defenders of Wildlife, 504 U.S.  555, 560 (1992) (holding
"injury in fact" element of "irreduci- ble constitutional minimum" for
standing); 15 U.S.C.  s 717r(b) (providing that any party "aggrieved
by an order  issued by the Commission" may obtain judicial review).
Two  of the theories of non-aggrievement are frivolous. First,  FERC
suggests that because Iroquois objects to a floor  under its rates
rather than a ceiling over them, it suffers no  injury. This seems to
rest on the assumption that a firm can  always increase its profits by
raising prices--a proposition  which, if true, would cause every firm
to charge an infinite  price.1 The second frivolous theory is that
because Iroquois  accepted the certificate, it follows that it is not
harmed. But  in practical terms it seems self-evident that a firm may
be  worse off (or may reasonably perceive itself as worse off)  under
a conditioned certificate than under the same certifi- cate without
conditions. Its acceptance of the conditioned  certificate may show
that it would be still worse off with no  certificate at all, but that
comparison is irrelevant. We have  in fact previously heard the claims
of parties who accepted 




__________

n 1 Agency briefs sometimes seem to contain ideas that would not  see
the light of day if there were any consultation between the brief 
writers and the agency's policy staff. This appears to be such.


conditioned licenses from FERC and objected to the condi- tions. See
Transcontinental Gas Pipe Line Corp. v. FERC,  54 F.3d 893, 895-96
(D.C. Cir. 1995).


More serious is FERC's argument that the rate order  mentioned above,
reducing the maximum rate to less than the  proposed discount rate,
removed any effective injury. FERC  has not worded this theory as one
of mootness, though it  appears in effect to be such a claim: a
supervening event has,  in FERC's theory, rendered the apparent injury
a nullity.  Yet FERC itself seems unready even to assert the factual 
prediction necessary for this to be true. At oral argument it  was
unwilling to say that the rate order established mootness,  evidently
sharing Iroquois's belief that there is considerable  probability that
over the course of the current contracts the  contested no-discount
ruling will constrain Iroquois. Indeed,  such constraint seems highly
probable, perhaps certain. Iro- quois contemplates additional
compressor stations like the  one whose addition precipitated this
dispute. The ability to  price the additional capacity
incrementally--to set rates for  newly available service higher than
incremental cost but  lower than those for existing shippers--seems
likely to be  extremely valuable to Iroquois in its efforts to exploit
the  business opportunities inherent in such capacity expansions.  See
Great Lakes Gas Transmission v. FERC, 984 F.2d 426,  430-31 (D.C. Cir.
1993) (pipeline presently injured by "at- risk" condition in
certificate because of impact on negotiating  strategy).


On the merits, it is common ground that the Commission  has embraced
the theoretical soundness of allowing certain  kinds of rate
discounting and has in fact formally approved  such discounting, both
in the form of generic grants of  authority and in specific cases. See
FERC Regulation of  Natural Gas Pipelines after Partial Wellhead
Decontrol, ("Or- der No. 436"), 50 Fed. Reg. 42,408, 42,451-55 (1985);
Associ- ated Gas Distributors v. FERC, 824 F.2d 981, 1009-13 (D.C. 
Cir. 1987); Southern Natural Gas Co., 67 FERC p 61,155 at  61,456
(1994) (on rehearing); see also Alternatives to Tradi- tional
Cost-of-Service Ratemaking for Natural Gas Pipelines,  74 FERC p
61,076 at 61,238-42 (1996) (expressing Commis-


sion readiness to entertain, on a shipper-by-shipper basis,  requests
to implement negotiated rates, even where the pipe- line has market
power, where customers retain the ability to  choose cost-of-service
based tariff rate). Pointing to South- ern, Iroquois argues that
FERC's controlling principle has  been that if a competitively
justified discount transaction will  benefit the non-discount
customers by bringing about reduced  rates for the capacity they use,
FERC will approve the  discount. FERC's contention is that Iroquois's
application  for a certificate presented a completely new problem,
that of  injury to existing customers as sellers in end-use markets; 
thus, it says, Southern and its other pro-discounting acts are  in no
way precedents against its decision here. We will  return to this, the
core issue, after briefly pursuing a prelimi- nary substantive


The parties dispute the extent to which a pipeline in  Iroquois's
position, seeking certification of new construction  and of service on
a discounted basis, must demonstrate a  competitive necessity for the
discounts. But we cannot read  the Commission's decision here as
resting on any deficiency in  Iroquois's showing on this score.
Iroquois initially relied  primarily on its having conducted an
auction for the proposed  new capacity and having received no viable
bids higher than  $0.54/DTh. (Although some shippers placed higher
bids, they  were not willing to execute the required precedent agree-
ments.) See Iroquois Gas Transmission System, L.P., 79  FERC p 61,394
at 62,690. It argues that this shows that  competitive forces of some
sort, such as other pipelines  transporting gas to the area of
destination, or the availability  of alternative fuels in the area of
destination, have in fact  driven the maximum extractable price down
to that level.  The Commission's brief argues that the Commission
insists,  and is entitled to insist, on proof of competition from
pipe- lines (without explaining why that affects the case for dis-
counting). Iroquois responds that FERC has said that it was  a
"reasonable presumption that a pipeline will always seek  the highest
possible rate from non-affiliated shippers,"  Williams Natural Gas
Co., 77 FERC p 61,277 at 62,206  (1996), and has explicitly recognized


ensure that prices reflect competitive market forces," Notice  of
Proposed Rulemaking, Regulation of Short-Term Natural  Gas
Transportation Services, 63 Fed. Reg. 42,982, 42,998/2  (1998).


In the end, however, the Commission's disposition of Iro- quois's
petition for rehearing refutes its claim that some  deficiency in the
showing of competition was determinative.  With its petition for
rehearing Iroquois proffered evidence of  competition from another
pipeline, and the Commission de- clined to accept it--not on some
theory that it was too late in  the game to offer such evidence, but
on the ground that the  affidavits were "immaterial." Order on
Rehearing, 82 FERC  at 61,334 n.14. Indeed, the body of the
Commission's order  contains no attack on Iroquois's showing of
competitive forces  and appears to rest entirely on other grounds.


The heart of those other grounds appears to us as follows:  First (and
most critically), the diminutive drop in the rates to  be paid by the
non-discount shippers (according to our back- of-the-envelope
calculations, perhaps 0.5 to 1 percent at most)  is overwhelmingly
offset by the injury that they would suffer  in end-use markets, being
exposed to competition from new  shippers who would benefit from
considerably lower transpor- tation costs. Second, the Commission
regards this impact as  particularly unjustifiable because it was the
existing shippers'  commitments that made construction of the pipeline
possible.  And, it said, at the time the commitments were made


there was much less potential for competition between  marketers of gas
and LDCs [local distribution compa- nies] and the Commission's
regulations and policies  would not have offered these Iroquois
shippers the op- portunity to assure by contract negotiation that the 
benefits of the cheap expansibility of the system would  accrue to


Id. at 61,335.


Each of these theories seems vulnerable. First is the  asserted
assumption of the irrelevance of end-use market  competition in prior
cases. Shippers do not have gas carried 


around aimlessly; they have it carried in order to sell (or use)  it
at the point of destination. Iroquois accordingly argues  that these
competitive impacts have, presumably, been perva- sive. Except to the
extent that discounts may have been  based on a specific class of
end-users having a more elastic  demand, gas carried for new shippers
at lower cost than for  existing shippers would seem sure to fill
demand that the  latter would otherwise have filled, or had a chance
to try to  fill, in the absence of the new discounted service. When
the  shippers in Southern objected before the Commission to a 
proposal that (as here) lowered their transport costs (but  enabled
new shippers to ship at even better rates), their  objection seems
likely to have been based on the impact in  the end-use market. In the
Order on Rehearing the Com- mission addressed this issue only in the


Discounting does not always have the effect it would in  this case,
where [1] the expansion shippers would be  competing in the existing
shippers' markets and [2] the  existing shippers are the very ones who
made the cheap  expansibility of the pipeline possible.


Id. at 61,334 (emphasis added).


The force of this answer seems uncertain. First, it is  unclear just
how the non-competitive relation referred to in  the first explanation
would come about. The incremental gas  will be shipped only if it can
be sold in the destination market,  and it would seem, therefore, most
likely to compete either  for sales previously being made by, or
potentially to be made  by, the existing shippers. But even if
entirely true, the  assertion that discounting does not "always"
involve the dis- count shippers competing in the existing shippers'
market is  rather weak--perfectly consistent with the intuitively
plausi- ble proposition that it does so in the mine run of cases. Thus
 it does not really contradict Iroquois's contention that the 
Commission's standard view in favor of discounts was indif- ferent to
(or even enthusiastic about) the prospect of addition- al competition


Nor, as a matter of logic, is it apparent how it will not  universally
be the case that the expansion shippers will be 


using capacity made possible by the existing shippers. A 
non-cost-based discount seems by definition to mean that the  favored
shippers make a smaller unit contribution to covering  the fixed costs
of capacity than do the disfavored ones. See  Southern Natural Gas
Co., 67 FERC at 61,456-57 (rejecting  contention that there is
necessarily any improper cross- subsidization from competition-based
discount, even though  customers' unit contributions to fixed costs
differ). We do  not understand how in this respect the present case is
 different from the universal case in any economically material 


Let us return to the Commission's discussion of changes in  competition
and regulatory environment since the existing  shippers negotiated
their contracts in the '80s:2


At that time [when the existing shippers came onto the  system], there
was much less potential for competition  between marketers of gas and
LDCs, and the Commis- sion's regulations and policies would not have
offered  these Iroquois shippers the opportunity to assure by 
contract negotiation that the benefits of the cheap expan- sibility of
the system would accrue to them.


Order on Rehearing, 82 FERC at 61,335.


We inquired at oral argument just what regulatory obsta- cles there may
have been to contract clauses assuring treat- ment at least as
favorable as any other shipper. Petitioner  unsurprisingly denied that
any record evidence showed that  barriers existed, and neither
Commission nor Intervenors'  counsel contradicted him or explained
what such barriers  might have been. As to the difference in
competitive environ- ment, we do not doubt that with Order No. 636 and
kindred  actions the Commission has advanced the role of competition




__________

n 2 The deal appears to have been closed in the very late '80s. A 
20-year agreement among New York shippers, New Jersey ship- pers,
Iroquois, and Texas Eastern was evidently executed January  25, 1989.
See Iroquois Gas Transmission System, L.P., 52 FERC  p 61,091 at
61,351 n.31 (1990). It is not clear whether that is the  pertinent
date for these purposes.


in the industry. But Order No. 436 embraced the desirability  of
gas-on-gas competition, see 50 Fed. Reg. 42,411/2 (claiming  order
"secures to consumers the benefits of competition in  natural gas
markets"); see also id. at 42,453/1 (noting that  discounting enables
pipelines to compete with each other and  respond to commodity
traders), and also explicitly favored  value-of-service discounts, id.
at 42,453/1-2, so to the extent  that the Commission suggests that
parties negotiating in the  wake of Order No. 436 could not have
anticipated competition  between marketers and LDCs, we think more
detailed expla- nation is in order.


In short, the Commission appears to have treated Iro- quois's proposal
as a special case by noting characteristics  that appear in their
essence to hold true for a wide range of  discounted service. And in
suggesting that it was merely  filling in a contract clause that the
parties would have arrived  at had they anticipated the issue and been
able to deal with it  contractually, FERC has not explained either why
they would  not have anticipated it, what obstructed a contractual
resolu- tion, or why FERC believes the parties would have arrived at 
the hypothesized provision if they had foreseen and been able  to
address the problem.


At oral argument and in the briefs a number of additional  arguments
were mooted that could not be a basis for affir- mance because they
were never suggested by the Commission  in its orders. See
Sithe/Independence Power Partners, L.P.  v. FERC, 165 F.3d 944, 950
(D.C. Cir. 1999) (citing SEC v.  Chenery Corp., 318 U.S. 80, 87
(1943)). Nor, for the reasons  discussed below, do they seem to help
us discern the Commis- sion's likely path. Cf. Bowman Transportation,
Inc. v. Ar- kansas-Best Freight System, Inc., 419 U.S. 281, 286 (1974)
 (upholding decision because agency's "path may reasonably  be
discerned," despite explanation of "less than ideal clari- ty.").


The Intervenor suggests a distinction between existing  shippers being
exposed to competition in "new" end use  markets (which counsel
appeared to acknowledge as common  in prior situations) and their
being exposed to competition in 


old ones (the present case). It is not clear why such a  distinction
would make a principled difference. If the Com- mission relied on such
a distinction it would need to explain  why end-users served by
existing shippers should be denied  the benefits of competition while
new end-users may enjoy its  benefits.


Intervenor also alluded to a possible distinction between  using
discounts to fill existing capacity (prior situations) and  using them
to fill new capacity that can be added at a cost  lower than the
resulting incremental revenue (current situa- tion). See Intervenor
Br. at 24, Oral Arg. Tr. 31-34. Yet on  the surface in both cases the
discounts seem to address  essentially the same problem--that of
neglected profitable  opportunities. Again the force of the


We note that classic analysis of non-cost-based discounting  by
carriers has turned on differences in the price-elasticity of  demand
for the carried product. It pursues the goal of an  optimal trade-off
between the desirability of maximizing out- put and the necessity of
the utility's recovering all its costs.  See Order No. 436, 52 Fed.
Reg. at 42,453; Associated Gas  Distributors, 824 F.2d at 1010-11. It
may be that where the  only differences between the shippers are (1)
time of signing  up for the service, and (2) contractual commitment of
the  customers who signed up early, the standard analysis is in  some
way inapplicable.3 But the Commission has not ad- vanced such a theory
of inapplicability, nor has it made clear  the relation between its
order here and prior policy. We do  not at this stage know if the
Commission's decision is a 




__________

n 3 We have recognized that in a situation where increasing  volume
raises unit costs, each customer's contribution to the peak  load
"causes" the associated costs, regardless of whether it is a new 
customer adding load or an old one not cutting its load. Sithe/Inde-
pendence Power Partners, L.P. v. FERC, 165 F.3d 944, 951-52  (D.C.
Cir. 1999) (quoting Town of Norwood v. FERC, 962 F.2d 20,  24 n.1
(D.C. Cir. 1992)). Superficially, this case appears the con- verse:
putting aside the contract point, the new shippers' load does  not
seem to "enable" the pipeline to attain the lower unit costs  anymore
than does that of the earlier shippers. Thus there does  not seem to
be a cost-based theory for the discount.


response to a true novelty (and if so in what the novelty lies),  or if
it is a change in response to some new understanding of  the situation
(and if so, what the new understanding may be).


Because the Commission decision does not clearly enough  reveal its
grounds for judicial review to be meaningful, see  Chenery, 318 U.S.
at 87, the case is remanded to the Commis- sion.


So ordered.