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


RIO GRANDE PIPEL

v.

FERC


98-1194a

D.C. Cir. 1999


*	*	*


Edwards, Chief Judge: Rio Grande Pipeline Company  ("Rio Grande")
purchased 194 miles of an existing refined  products pipeline from the
Navajo Pipeline Company ("Nava- jo") to deliver natural gas liquids
("NGLs") from the United  States to Mexico. In exchange for the
pipeline, Rio Grande  paid Navajo an agreed sum of money and granted
Navajo  Southern, Inc., a wholly owned subsidiary of Navajo, a minor-
ity interest in Rio Grande. In the proceeding under review,  Rio
Grande sought to include the purchase price of the  pipeline in its
rate base. Normally, a purchaser such as Rio  Grande is only permitted
to include the seller's depreciated  original cost in its
cost-of-service calculations; however, Rio  Grande pointed out that
this transaction was different, be- cause the pipeline was purchased
for a new use and the  purchase price was less than the cost of
constructing a  comparable facility. Rio Grande therefore contended
that it  should be permitted to include the full purchase price of the
 pipeline in its rate base under the so-called "benefits excep- tion"
to the original cost rule. The Federal Energy Regula- tory Commission
("FERC" or "Commission") denied Rio  Grande's request, holding that
the benefits exception can  never be employed when the seller acquires
an equity interest  in the purchasing entity. Rio Grande petitions for
review of  this ruling, claiming that FERC's decision is flatly at
odds  with the benefits rule and that the agency's judgment defies 


Before turning to the merits, we must first resolve three  threshold
issues: (1) whether Longhorn Partners Pipeline  ("Longhorn") is a
proper intervenor in the matter now before  the court, (2) whether Rio
Grande has been "aggrieved" by  the contested orders, and (3) whether
the contested orders  are ripe for review. With these threshold issues
resolved, we  then reach the question of whether FERC's rejection of
Rio  Grande's request to include the full purchase price of the 
pipeline in its rate base was arbitrary and capricious.


On the record at hand, we conclude that Longhorn is not a  proper
intervenor in this action, because it does not have  standing. Indeed,
it appears that Longhorn is really seeking  to participate as an
amicus. Pursuant to our discretion under  Rule 29(a) of the Federal
Rules of Appellate Procedure, we  will accord Longhorn amicus status
so that its views on the  common issues can be considered. We also
conclude that Rio  Grande is an aggrieved party, because it faces real
and  present economic injury as a result of the orders here in 
dispute. Likewise, because FERC's disputed policy is fully 
crystallized and raises a concrete legal question, we find that 
petitioner's claim is ripe for review by this court. Finally, on  the
merits, we conclude that FERC's refusal to apply the  benefits
exception in the present case was arbitrary and  capricious for lack
of an adequate justification. Accordingly,  we grant Rio Grande's


I. Background


Rio Grande is a partnership formed by two pipeline compa- nies, Juarez
Pipeline Company and Amoco Rio Grande Pipe- line Company, to construct
and maintain an integrated com- mon carrier pipeline to deliver NGLs
from the United States  to Mexico. As a part of this project, Rio
Grande sought to  purchase 194 miles of an existing refined products
pipeline  from Navajo, which would then be converted to NGL service. 
According to Rio Grande, Navajo's willingness to sell this  segment of
pipeline "at a reasonable price was directly depen- dent on its
ability to acquire a partnership interest in our  project." Statement
of William C. Lawson, Management 


Committee Chairman, Rio Grande, reprinted in Joint Appen- dix ("J.A.")
61. Accordingly, in exchange for the pipeline, Rio  Grande agreed to
pay an agreed sum of money to Navajo as  well as grant Navajo
Southern, Inc., a wholly owned subsid- iary of Navajo, a minority
partnership interest in Rio Grande.  Rio Grande asserts, without
contradiction, that the price paid  for the pipeline, including the
value of the partnership inter- est and the cost of converting and
integrating the acquired  line, is at least $8 million less than the
cost of constructing a  comparable new line. See id.


Rio Grande then sought to justify the rates for its new  service. Under
18 C.F.R. s 342.2, pipelines may justify an  initial rate for new
service using one of two methods: the  carrier may either (1) file
cost, revenue, and throughput data  supporting the proposed rate
pursuant to s 342.2(a), or (2)  file a sworn statement that the
proposed rate is agreed to by  at least one non-affiliated person who
intends to use the  service, pursuant to s 342.2(b). Rates justified
under  s 342.2(b) are simple to put into place, and often become 
effective without a FERC order addressing them. However,  these rates
are ineffective if a protest to the initial rate is  filed, in which
case the carrier must seek a s 342.2(a) justifi- cation. Moreover, if
a negotiated rate is challenged and a  lower rate is found
appropriate, the pipeline may have to pay  reparations for the amount
overcharged. In contrast, a cost- supported rate approved under s
342.2(a) is entitled to great- er protection. For example, if a
challenge is brought to a  cost-supported, Commission-approved rate
and a reduction is  required, that reduction is given only prospective
effect. See  generally Arizona Grocery Co. v. Atchison, Topeka & Santa


In this case, Rio Grande filed a petition for a declaratory  order,
requesting approval of its initial rates. In its petition,  Rio Grande
noted that a non-affiliated party, Petroleos Mexi- canos ("PEMEX"),
had agreed to the proposed initial rate of  $1.26 per barrel and,
thus, the rates could be justified under  s 342.2(b). However, Rio
Grande made clear that it was not  requesting FERC approval of a
negotiated rate under  s 342.2(b):


[W]hether one or twenty "non-affiliated persons" agree  to its
to-be-filed rate, [Rio Grande] is not assured that it  will be able to
justify its "initial rate," if challenged,  unless it has the
Commission's approval to include its  acquisition costs. Regardless of
a consignee or shipper's  prior agreement to the rate, [Rio Grande's]
proposed  tariff may be protested. In the event of a protest to a 
negotiated rate, [Rio Grande] would have to submit "cost,  revenue and
throughput data supporting such rate" and  incur the cost of a lengthy
rate proceeding. 18 C.F.R.  s 342.2(a) (1995). Accordingly, [Rio
Grande] also sub- mits this Petition to establish its rate base and
pre- justify its rates.


In re Rio Grande Pipeline Co., Verified Petition for Declara- tory
Order (Oct. 7, 1996), reprinted in J.A. 8 (footnote  omitted). In
support of its request for approval under  s 342.2(a), Rio Grande
submitted detailed cost-of-service cal- culations, which included the
full purchase price of the new  pipeline.


Generally, when establishing the cost of service upon which  a
pipeline's regulated rates are based, FERC employs "origi- nal cost"
principles. Under these principles, when a facility is  acquired by
one regulated entity from another, the seller's  depreciated original
cost is included in the cost-of-service  computations, even though the
price paid by the purchaser  may exceed that amount. See Northern
Natural Gas Co., 35  F.E.R.C. p 61,114, at 61,236 (1986). Applying the
original  cost rule to this case, Rio Grande would not be permitted to
 include the full purchase price of the pipeline in its rate base;  it
would only be permitted to include Navajo's depreciated  cost of the
pipeline. However, the Commission has created  an exception to this
general rule for cases where it is shown  that the "acquisition
results in substantial benefits to ratepay- ers." Longhorn Partners
Pipeline, 73 F.E.R.C. p 61,355, at  62,112 (1995) ("Longhorn I").
Under this "benefits excep- tion," purchased facilities may be
included in the rate base at  the full purchase price if the purchaser
can demonstrate that:  (1) the acquired facility is being put to new


purchase price is less than the cost of constructing a compa- rable
facility. See id. at 62,112-13.


In its petition, Rio Grande argued that it had satisfied the 
requirements of the benefits exception. It explained that, by 
acquiring the pipeline from Navajo rather than constructing a  new
one, it had saved at least $8 million. It also explained  that the
pipeline would be put to a new use, because the  transport of NGLs,
unlike the transport of refined products,  required pressurization,
and because the line would serve  entirely different markets and
shippers than those served by  the previous refined products service.
Accordingly, Rio  Grande argued that it should be allowed to include
the full  purchase price of the pipeline in its rate base.


FERC denied Rio Grande's request to allow the full pur- chase price of
the acquired line to be included in its cost-of- service calculations,
and, thus, rejected the proposed rates  under s 342.2(a). See Rio
Grande Pipeline Co., 78 F.E.R.C.  p 61,020, at 61,082-83 (1997) ("Rio
Grande I"). In support of  this position, FERC explained that "[t]he
general rule ... is  that the depreciated cost of an acquired asset
must be used in  cost-of-service calculations where the former owner
not only  receives the higher price but also has an equity interest in
the  acquiring company." Id. at 61,082. This position was war- ranted,
according to FERC, to ensure that a seller does not  "benefit from the
higher cost of service on the line, which it  cannot do as the owner
of a regulated asset at this time." Id.  (internal quotation marks
omitted). FERC noted, however,  that since Rio Grande had supplied the
affidavit required by  s 342.2(b), and no entity had protested the
charged rate, Rio  Grande was free to charge the proposed rate in its
transac- tions with PEMEX. See id. Rio Grande sought rehearing of  the
decision, which was denied on February 13, 1998. See  Rio Grande
Pipeline Co., 82 F.E.R.C. p 61,147 (1998) ("Rio  Grande II"). Rio
Grande then timely petitioned for review in  this court.


In an entirely separate transaction, Longhorn, like Rio  Grande,
negotiated a deal to purchase a pipeline segment.  And Longhorn
similarly agreed to grant an equity interest to 


the seller of the pipeline segment in addition to the payment  of a sum
of cash. After its deal had closed, Longhorn sought  approval from
FERC for the inclusion of the full purchase  price of its new asset in
its rate base under the benefits  exception. The Commission, however,
denied Longhorn's  request for the same reason it had denied Rio
Grande's  request: the benefits exception could not apply where a 
selling entity acquired an equity interest in the purchaser.  See
Longhorn Partners Pipeline, 82 F.E.R.C. p 61,146, at  61,543-44


Because of the possible precedential impact on its case,  Longhorn
sought to intervene in the Rio Grande proceedings  before the
Commission, but its motion was denied. See Rio  Grande II, 82 F.E.R.C.
at 61,548. In a separate action,  Longhorn filed a petition for review
of its own case in this  court, Longhorn Partners Pipeline v. FERC,
No. 98-1547  (filed Nov. 17, 1998); however, Longhorn also seeks to
main- tain intervenor status in the instant case before this court, 
over the objection of FERC.


II. Analysis


A. Longhorn's Intervenor Status


Longhorn relies principally on 28 U.S.C. s 2348 in support  of its
motion to intervene. In City of Cleveland v. NRC, 17  F.3d 1515,
1517-18 (D.C. Cir. 1994) (per curiam), however,  this court held that
Article III standing is a prerequisite to  s 2348 intervention, and it
is uncontested that Longhorn  lacks Article III standing with respect
to the Commission's  Rio Grande II order. From this, it might be
simply conclud- ed that Longhorn cannot intervene under 28 U.S.C. s
2348.  The matter is not so simple, however, for in the same year 
that City of Cleveland was issued, the court also issued  American
Train Dispatchers Ass'n v. ICC, 26 F.3d 1157  (D.C. Cir. 1994),
producing precedent that can be read as in  direct conflict with City


In Train Dispatchers, we faced the preliminary question of  whether to
permit the Railway Labor Executives' Association  ("RLEA") to
intervene in the proceedings challenging an ICC 


order although it had not participated at the agency level.  The court
in Train Dispatchers did two things with respect to  the intervention
question: (1) it held that the court may, in its  discretion, permit
intervention under 28 U.S.C. s 2348, and  (2) it expressly allowed
RLEA to intervene. See Train  Dispatchers, 26 F.3d at 1162 ("Thus,
even assuming that  RLEA is not entitled to intervene as of right
here, we may  allow it to intervene as a discretionary matter. We
choose to  do so in this case...."). Were Article III standing a
prere-  quisite to intervention, the court could not have decided, as
it  did, to "grant RLEA's motion to intervene without deciding 
whether it has Article III standing." Id. This statement  makes sense
only to the extent that Article III standing is  simply irrelevant to
(or at least not dispositive of) the discre- tionary decision to allow
intervention. Accordingly, it ap- pears that City of Cleveland and


The only conclusion we can draw from reading these two  cases is that
the two panels spoke past one another. They  rely on different lines
of circuit precedent, and neither opin- ion even acknowledges that the
other line exists. Given that  our sister circuits are similarly
divided, compare Ruiz v.  Estelle, 161 F.3d 814, 830 (5th Cir. 1998)
(holding that Article  III standing is not a prerequisite to
intervention), Associated  Builders & Contractors v. Perry, 16 F.3d
688, 690 (6th Cir.  1994) (same), Yniguez v. Arizona, 939 F.2d 727,
731 (9th Cir.  1991) (same), Chiles v. Thornburgh, 865 F.2d 1197, 1213
(11th  Cir. 1989) (same), and United States Postal Serv. v. Brennan, 
579 F.2d 188, 190 (2d Cir. 1978) (same), with Mausolf v.  Babbitt, 85
F.3d 1295, 1300 (8th Cir. 1996) (holding that  Article III standing is
necessary for intervention), and Unit- ed States v. 36.96 Acres of
Land, 754 F.2d 855, 859 (7th Cir.  1985) (concluding that intervention
under Rule 24 requires  interest greater than that of standing), we
believe it impera- tive that we now explain why we conclude that a
prospective  s 2348 intervenor must have standing to participate as an
 intervenor rather than only as an amicus curiae.


In City of Cleveland, the court denied the Alabama Electric 
Cooperative's ("AEC") motion to intervene in a dispute be- tween the
Nuclear Regulatory Commission ("NRC") and two 


nuclear power plants as to whether the latter could suspend  the
antitrust conditions in their operating licenses. Although  it lacked
Article III standing, in that it had no relationship  whatsoever with
the petitioners, their competitors, or the  geographic market at
issue, AEC sought to intervene on the  side of the NRC, because it
feared that an adverse decision  could lead a competitor to seek a
similar suspension of its  antitrust conditions. In denying AEC's
motion, the court  relied heavily upon Southern Christian Leadership
Confer- ence v. Kelley, 747 F.2d 777, 779 (D.C. Cir. 1984), wherein
the  court held that Article III standing is necessary for interven-
tion under Rule 24(a)(2) of the Federal Rules of Civil Proce- dure. In
particular, the court focused upon what it consid- ered the rationale
underlying the Kelley decision, namely that  "because a Rule 24
intervenor seeks to participate on an  equal footing with the original
parties to the suit, he must  satisfy the standing requirements
imposed on those parties."  City of Cleveland, 17 F.3d at 1517.
Because a prospective  s 2348 intervenor similarly seeks to
participate like a party,  the court reasoned, it should be treated
like a party. Accord- ingly, as we had held in Kelley, it must satisfy


The City of Cleveland court did not differentiate those  seeking to
intervene with party-like status from those seeking  a lesser degree
of participation. It instead assumed that  prospective intervenors
always sought to participate on an  equal footing with the original
petitioner. Although the City  of Cleveland court did not then address
the situation we now  face, we nevertheless believe that its more
general conclusion  remains valid: there is no reason to believe that
Congress  intended to create two tiers of s 2348 intervenors based
upon  the presence or absence of standing. See id.


The language of s 2348 alone does not settle the proper  relationship
between Article III standing and intervention,  but the general
structure that Congress has provided for  appellate review of agency
action strongly militates towards  reading s 2348 to require Article
III standing as a prerequi- site to intervention. A party petitioning
for review of agency  action must have standing, and the intervention
rules help to 


govern which existing suits a prospective party may legiti- mately
join. In this case, Longhorn essentially seeks to  participate as an
amicus curiae--it sought only to contribute  its views to those issues
raised by Rio Grande's petition for  review and, had Rio Grande ceded
some of its oral argument  time, to participate in oral argument.
Diamond v. Charles,  476 U.S. 54, 62-64 (1986), says that an entity
lacking Article  III standing can do no more than that. As Longhorn
readily  admits, in the status that it seeks, it could neither
petition for  rehearing en banc nor petition for certiorari unless Rio
 Grande first did the same. Thus, for the sake of clarity, 
simplicity, and administrative rationality, we believe that such 
limited participation should be accorded in the form of ami- cus, and
not intervenor. Those who possess Article III  standing, on the other
hand, can either petition for review  directly, particularly if they
desire to raise any additional  issues, or intervene under s 2348, in
which case they normal- ly would be limited to the scope of the
original petition for  review. See National Ass'n of Regulatory
Utility Comm'rs  v. ICC, 41 F.3d 721, 729-30 (D.C. Cir. 1994) (stating
that only  in extraordinary cases will an intervenor be permitted to 
raise additional issues not raised by petitioners). For those  who
have participated before the agency, s 2348 explicitly  provides that


any party in interest in the proceeding before the agency  whose
interests will be affected if an order of the agency  is or is not
enjoined, set aside, or suspended [to] appear  as parties thereto of
their own motion and as of  right....Communities, associations,
corporations, firms,  and individuals, whose interests are affected by
the order  of the agency, may intervene in any proceeding to review 


For those who have Article III standing but failed to partici- pate at
the agency level, s 2348 merely permits intervention.


On the record here, there is no doubt that Longhorn is not  a proper
intervenor. It appears that Longhorn is really  seeking to appear as
an amicus. Because we have discretion  to grant a party such status,
see Fed. R. App. P. 29(a), we will 


accord Longhorn amicus status so that its views on the  common issues
can be considered.


B. Aggrievement and Ripeness


FERC argues that Rio Grande is not aggrieved by the  disputed orders,
and that, even if it is aggrieved, the orders  are not ripe for
review. The Commission is wrong on both  counts.


A party seeking review of a final Commission order must  demonstrate
that it has been "aggrieved" by the order. See  28 U.S.C. s 2344
(1994).


Like all parties seeking access to the federal courts,  petitioners are
held to the constitutional requirement of  standing. Common to both
these thresholds is the re- quirement that petitioners establish, at a
minimum, inju- ry in fact to a protected interest. To demonstrate
injury  in fact, petitioners must identify an invasion of a legally 
protected interest which is (a) concrete and particular- ized, and (b)
actual or imminent, not conjectural or  hypothetical.


Shell Oil Co. v. FERC, 47 F.3d 1186, 2000 (D.C. Cir. 1995)  (citations
and internal quotation marks omitted).


In this case, FERC argues that Rio Grande has not been  injured,
because Rio Grande may charge the rate it sought to  charge pursuant
to s 342.2(b). However, this conclusion  misses the point. Rio Grande
filed its petition for a declara- tory order specifically because it
sought the security of a rate  approval under s 342.2(a). FERC's
refusal to approve Rio  Grande's rate under s 342.2(a) means that the
current rate  may be rendered ineffective if any party files a
protest. Rio  Grande argues that this affects both its present
economic  behavior--investment plans and creditworthiness--and its fu-
ture business relationships. In particular, Rio Grande as- serts that
the orders "have had a profoundly negative effect  on the active
marketing of [this] project to new potential  users," have made
existing and potential investors "extremely  skeptical over further
investment in the project," and have  "negatively impact[ed] both [Rio


debt capital and its general creditworthiness." Brief of Rio  Grande at
19-20. FERC does not dispute these contentions.


On the record at hand, there can be no serious doubt over  Rio Grande's
aggrievement by virtue of FERC's orders. As  indicated, Rio Grande is
suffering present economic injury as  a result of the orders. See,
e.g., Great Lakes Gas Transmis- sion Ltd. Partnership v. FERC, 984
F.2d 426, 430 (D.C. Cir.  1993) (holding that showing of "present
injurious effect on [a  petitioner's] business decisions and
competitive posture within  the industry" is sufficient to prove that
petitioner is ag- grieved). There can also be no doubt that Rio Grande
 satisfies the remaining Article III standing requirements,  because
its injury flows from the FERC orders under review  and may be
redressed if this court grants its petition for  review. It therefore
has standing to petition for review of the  FERC orders at issue


FERC also claims that, even if Rio Grande has been  aggrieved and has
standing to contest the disputed orders,  the case should nonetheless
be dismissed as unripe. On this  score, FERC contends that Rio
Grande's petition is unfit for  review, because Rio Grande "has not
shown that the contest- ed orders have had any immediate impact on its
daily affairs,"  and that FERC has "not applied its pronouncements on 
original cost to any of [Rio Grande's] actual rates." Brief for  FERC
at 20-21. This is a mangled view of the ripeness  doctrine, and we


As we noted in Mississippi Valley Gas Co. v. FERC, 68  F.3d 503, 508
(D.C. Cir. 1995), in applying the ripeness  doctrine,


we are to consider the nature of the challenged issue and  inquire
whether the agency action is sufficiently final for  review. When a
petitioner raises a purely legal question,  we assume that issue is
suitable for judicial review.  However, our assessment of the finality
of the agency  action also includes consideration of whether the
agency  or the court will benefit from deferring review until the 
agency's policies have crystallized and the question arises  in some
more concrete and final form.


(citations and internal quotation marks omitted). In other  words, a
case is ripe when it "presents a concrete legal  dispute [and] no
further factual development is essential to  clarify the issues ...
[and] there is no doubt whatever that  the challenged [agency]
practice has 'crystallized' sufficiently  for purposes of judicial
review." Payne Enters., Inc. v.  United States, 837 F.2d 486, 492-93
(D.C. Cir. 1988). The  Commission is quite wrong in its implicit
suggestion that Rio  Grande's petition must be dismissed absent a
showing of  "hardship," for, "under the ripeness doctrine, the
hardship  prong of the [Abbott Laboratories v. Gardner, 387 U.S. 136, 
149 (1967) ] test is not an independent requirement divorced  from the
consideration of the institutional interests of the  court and
agency." Id. at 493; accord City of Houston v.  HUD, 24 F.3d 1421,
1431 n.9 (D.C. Cir. 1994). Under these  well-established principles,
the Commission's claim that this  case is unripe for review must be


The record here shows conclusively that this case presents  a concrete
legal dispute and that FERC's policy is crystal- lized. In Rio Grande
I, the Commission stated:


In this case, whether or not Rio Grande satisfies the two- prong test,
we must deny its request. That test presup- poses a write-up that
would be permissible if the test  were satisfied. That is not the case
here. In this  instance, the seller of the acquired line, Navajo, has
an  equity position in Rio Grande through an affiliate, Navajo 
Southern, one of the partners of Rio Grande. Rio  Grande argues that
in this case Navajo Southern's equity  interest should not be a bar to
the write-up, because it  was essential to structuring an agreement
acceptable to  Navajo so that the project could go forward. The gener-
al rule, however, is that the depreciated cost of an  acquired asset
must be used in cost-of-service calcula- tions where the former owner
not only receives the  higher price but also has an equity interest in
the  acquiring company. This is so because otherwise the  seller
"might benefit from the higher cost of service on  the line, which it
cannot do as the owner of a regulated 


asset at this time." Thus, we must deny Rio Grande's  request for a
write-up.


78 F.E.R.C. at 61,082 (quoting Longhorn I, 73 F.E.R.C. at  62,113). In
Rio Grande II, the Commission reaffirmed its  position:


Here, we have a regulated entity allegedly changing its  service and
requesting a write-up of the assets dedicated  to the new
service....In the absence of Navajo's equity  interest, this case
might fall within one of the recognized  exceptions to the general
rule. However, we need not  address this issue because in this case a
company is  selling the asset to itself. To allow the write-up in this
 situation would open the door to circumvention of the  purpose of the
original cost concept....Accordingly, we  will deny rehearing.


82 F.E.R.C. at 61,548. It is clear here that the Commission  has
decided that the benefits exception cannot be used where  a selling
entity acquires an equity interest in the purchaser as  a result of
the transaction, and has applied this new rule by  denying Rio
Grande's request for approval of its cost-justified  rates. Thus,
because FERC's orders raise a concrete legal  dispute regarding a
policy that has crystallized to its final  form, the orders are ripe


C. The Merits


We now turn to the merits of Rio Grande's challenge:  FERC's refusal to
apply the benefits exception based on  Navajo's equity interest in Rio
Grande. We review the  Commission's orders under the usual arbitrary
and capricious  standard. See Williston Basin Interstate Pipeline Co.
v.  FERC, 165 F.3d 54, 60 (D.C. Cir. 1999); 5 U.S.C. s 706(2)(A) 
(1994). In this context, our role is "limited to assuring that  the
Commission's decisionmaking is reasoned, principled, and  based upon
the record." Pennsylvania Office of Consumer  Advocate v. FERC, 131
F.3d 182, 185 (D.C. Cir. 1997) (cita- tions and internal quotation
marks omitted).


Rio Grande argues that the Commission acted arbitrarily  and
capriciously, because it did not adequately explain its 


refusal to permit the inclusion of the full cost of the acquired  line
in Rio Grande's rate base. We agree.


As noted above, normally when a facility is acquired by one  regulated
entity from another, the purchaser may only in- clude the seller's
depreciated original cost in its rate base,  even though the price
paid by the purchaser may exceed that  amount. However, under the
benefits exception, the Com- mission has permitted the purchasing
pipeline to include the  full purchase price of an acquired asset in
its cost-of-service  computations if the pipeline can show that: (1)
an acquired  facility is being put to new use, and (2) the purchase
price is  less than the cost of constructing a comparable facility.
See  Longhorn I, 73 F.E.R.C. at 62,112-13.


In its orders below, FERC did not even reach the question  of whether
Rio Grande satisfied the two-prong exception;  instead, it concluded
that the exception could not be employed  where the seller acquires an
equity position in the purchaser:  "[t]he general rule...is that the
depreciated cost of an ac- quired asset must be used in
cost-of-service calculations  where the former owner not only receives
the higher price  but also has an equity interest in the acquiring
company."  Rio Grande I, 78 F.E.R.C. at 61,082. On rehearing, FERC 
did not waver from this position, stating that it considered the  deal
between Rio Grande and Navajo one in which the  "company is selling
the asset to itself." Rio Grande II, 82  F.E.R.C. at 61,548.


The Commission now claims that it has simply interpreted  its original
cost rule and the exception thereto. This self- serving explanation
cannot carry the day. The Commission  in this case has effectively
added a new per se exclusion to the  application of the benefits
exception when an asset's seller  acquires an interest in the
purchaser. The creation of this  per se exception makes no sense and,
indeed, FERC cites no  established authority or plausible reasons in


First, on its face, the retention of some interest in the  acquired
facilities in lieu of a money payment will reduce the  cost basis
included in Rio Grande's rate base and, thus, rates  will be lower
than if the facilities were sold solely for money. 


This result would appear to be in the public interest. Re- duced rates
result because, as Rio Grande made clear at oral  argument, the amount
it seeks to include in its rate base is  only the total amount of
money paid and does not include the  value of any equity interest.
Thus, in a situation such as this,  if a company will sell its
facility for $100 outright or $80 plus  a 5% equity interest, the
better deal for the ratepayer is the  $80-plus-equity deal, because
$80, rather than $100, may be  included in the rate base.


Moreover, it is clear that Rio Grande has put the pipeline  to a new
use: transportation of NGLs. From the perspective  of an acquiring
entity, concepts of "depreciation" are normally  inapposite in such
circumstances. Thus, it hardly makes  sense for FERC to require the
use of a depreciated figure in  this situation where the use is brand


The Commission stated in Rio Grande II that "[t]o allow  [a] write-up
in this situation would open the door to circum- vention of the
purpose of the original cost concept." 82  F.E.R.C. at 61,548.
Although this is a valid concern, the door  was already opened to this
possibility when FERC permitted  the benefits exception in the first
place. And to the extent  that FERC is worried about sham transactions
where equity  interests are involved, no party has claimed that every
trans- action of the sort at issue here is unethical and a sham. 
Indeed, there does not appear to be any difference between a  deal of
this sort and one in which a seller receives money for  the asset, but
later uses that money towards the acquisition of  an interest in the
purchaser. Presumably, this second deal  would qualify for
consideration under the benefits exception,  since the seller did not
become affiliated with the purchaser  as a result of the sale.
However, the Commission has not  explained why the first deal is cause
for such concern that it  may never qualify for the benefits
exception, whereas the  second deal may. In addition to this apparent
inconsistency,  it is also not clear how there could even be sham
transactions,  given the requirement that there must be a new use for
the  facility, and that the purchase price must be less than the cost 


To the extent that the Commission is troubled by these  transactions,
there are surely ways, short of a per se exclu-


sion, to ensure that the deal was negotiated at arm's length.  In fact,
it is difficult to discern why the Commission would  not consider
other possibilities short of prohibiting the appli- cation of the
benefits exception to these sorts of deals, when  limiting purchasers
to all-cash deals could result in higher  prices and thus harm to
ratepayers. Arguably, the Commis- sion might decide that a per se rule
or even a substantially  more rigid version of the benefits test is
appropriate based on  reasoned findings regarding affiliate
transactions. However,  we need not address these possibilities; as it
now stands, the  Commission's orders defy good reason. We therefore
reverse  and remand this case to the Commission for further consider-


III. Conclusion


For the foregoing reasons, we deny Longhorn intervenor  status in this
proceeding, but grant it amicus status. We also  grant Rio Grande's
petition for review and remand for further  proceedings consistent
with this opinion.


So ordered.