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


TRUNKLINE LNG CO

v.

FERC


98-1224a

D.C. Cir. 1999


*	*	*


Garland, Circuit Judge: In 1977, Trunkline LNG Compa- ny ("Trunkline")
applied to the Federal Energy Regulatory  Commission (FERC)1 for
authority to construct and operate a  liquefied natural gas (LNG)
processing plant in Lake Charles,  Louisiana. Although FERC granted
that authority, the high  cost of LNG eventually caused Trunkline to
suspend its  service. In 1996, Trunkline again sought approval for its
 LNG operations, as well as for rates that would permit it to  recover
depreciation expenses it had been unable to recover  during the period
of suspension. FERC granted Trunkline's  application, but conditioned
its approval upon exclusion of the  unrecovered depreciation from
Trunkline's rate base. FERC  also conditioned its approval upon
Trunkline filing a study of  its costs and revenues within three
years. Trunkline appeals  both conditions. We affirm.


I


Trunkline received authorization in 1977 to construct and  operate the
Lake Charles plant and to sell regasified LNG to  a single customer,
an affiliate known as Trunkline Gas Com- pany (Trunkline Gas). As a
condition of authorization, FERC  required Trunkline to file a tariff
containing minimum bill  provisions intended to allocate the risk of
loss that would  arise in the event of a suspension of service. Under
the  provisions of the minimum bill, in a period of interrupted 
service the customer would continue to pay rates that would  permit
Trunkline to recover its debt service and other  nonequity-related
fixed costs (interest and principal repay- ment, taxes, and fixed
operating and maintenance expenses).  It would not, however, be
permitted to recover equity-related 




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n 1 Trunkline's original application was filed with the Federal Pow- er
Commission (FPC). The FPC ceased to exist on September 30,  1977 and
most of its functions were transferred to FERC. See  Department of
Energy Organization Act, Pub. L. No. 95-91, sec.  402, 91 Stat. 565,
583 (1977) (codified at 42 U.S.C. s 7172(a)); Exec.  Order No. 12,009,
42 Fed. Reg. 46,267 (1977).


fixed costs (through depreciation expenses or otherwise) ex- cept to
the extent that it actually provided service.2 In the  Commission's
view, this arrangement ensured that Trunkline  would be able to
finance the project's construction, while  equitably apportioning the
risk of suspended or reduced  operations between Trunkline's
stockholders and its custom- er. See Trunkline LNG Co., 82 F.E.R.C. p
61,198, at 61,781  (1998) (order denying rehearing).


Trunkline commenced delivery of LNG in 1982. Due to the  high cost of
the LNG it was obtaining from Algeria, however,  Trunkline suspended
operations from mid-1984 through 1989.  Although Trunkline's customer
received no service after the  suspension, it continued to pay the
nonequity fixed costs  pursuant to the terms of the minimum bill.
Pursuant to the  same terms, Trunkline was unable to recover $106.9
million in  depreciation costs during this period.


On October 16, 1996, Trunkline filed the application at issue  in this
case, seeking a certificate of public convenience and  necessity under
section 7 of the Natural Gas Act (NGA), 15  U.S.C. s 717f. It once
again sought authorization to provide  terminalling services (receipt,
storage, regasification, and de- livery of LNG) at the Lake Charles
plant, this time to  customers other than Trunkline Gas. Trunkline's
proposed  rates were predicated upon a rate base that included the 
$106.9 million in depreciation the company had been unable to  recover
from 1984 through 1989.


Although FERC granted Trunkline's request for a certifi- cate, it
imposed two conditions. First, it required Trunkline  to exclude the
$106.9 million in unrecovered depreciation from  its rate base.
Inclusion of those costs, it said, would improp- erly permit Trunkline
to earn a return on the depreciation  expenses it did not recover
because of the suspension of  service. See Trunkline LNG Co., 81
F.E.R.C. p 61,147, at  61,666 (1997) (order issuing certificate). FERC




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n 2 During periods in which operations were reduced but not sus-
pended, the tariff provided for a proportionate reduction of Trunk-
line's return on equity. See Trunkline LNG Co., 82 F.E.R.C.  p 61,198,
at 61,781 (1998).


Trunkline, within three years of the start of operations, "to  make a
Natural Gas Act section 4 rate filing to justify its  existing rates
or to propose alternative rates." Id.


Trunkline sought rehearing with respect to the two condi- tions imposed
on its certificate. The Commission denied  rehearing, affirming its
decision to exclude the depreciation  costs but effectively modifying
the three-year filing require- ment. Rather than require Trunkline to
make a filing justify- ing its rates or proposing new ones under NGA
section 4, 15  U.S.C. s 717c, FERC simply directed Trunkline to file a
cost  and revenue study. The Commission indicated that it would 
review the study and only then determine whether it should  exercise
its authority to establish just and reasonable rates  under section 5
of the NGA, 15 U.S.C. s 717d. See 82  F.E.R.C. at 61,780.


II


We review FERC orders under the arbitrary and capri- cious standard of
5 U.S.C. s 706(2)(A). See Union Pac.  Fuels, Inc. v. FERC, 129 F.3d
157, 161 (D.C. Cir. 1997). We  find nothing arbitrary or capricious
about FERC's decisions  here.


Trunkline argues that the Commission's refusal to allow it  to include
its lost depreciation charges in its rate base repre- sents an
unreasonable departure from the Commission's long- standing practice
of allowing utilities to earn a return on their  investments.
Trunkline contends that it never had the oppor- tunity to recover the
lost depreciation, and hence should not  be denied that opportunity


What Trunkline's analysis ignores, however, is that it did  have the
opportunity to recover that depreciation--if it had  provided service
from 1984 through 1989. Trunkline's failure  to recover is simply a
consequence of its failure to provide  that service, a possibility
contemplated by the tariff in effect  at the time. The risk allocation
reflected in that tariff was  not an unreasonable one. Trunkline's
shareholders obtained  the benefit of being able to finance the Lake
Charles plant  and commence its operations, but bore the risk of


of their investment if business did not go well. Trunkline's  customer
obtained the benefit of LNG service, but also bore  part of the risk
since it would have to continue to pay under  the minimum bill even if
it received no service.


Moreover, whatever the rationality of the original 1977  tariff, it is
far too late in the day to dispute that tariff now.  The only question
here is whether anything has changed that  would make it unreasonable
to require Trunkline to adhere to  the terms of the arrangement
originally struck in that year.  In fact, nothing has changed. To the
contrary, the subse- quent interruption of service was precisely the
circumstance  the tariff anticipated, and the resulting preclusion of
deprecia- tion recovery flowed directly from the original risk
allocation  formula. To permit Trunkline to recover its costs now
would  overturn that original allocation, permitting Trunkline's 
shareholders to recover a return on their equity notwith- standing the
terms of the original arrangement.3


Trunkline makes much of the fact that the 1977 minimum  bill was
canceled when service to Trunkline Gas was aban- doned, and argues
that FERC's current open-access regula- tions now prohibit the
imposition of such minimum bills. See  Trunkline Br. at 26 (citing 18
C.F.R. s 284.8(d)). Trunkline  failed to preserve this argument by
failing to raise it in its  rehearing request. See 15 U.S.C. s
717r(b); United Distri- bution Cos. v. FERC, 88 F.3d 1105, 1170 (D.C.
Cir. 1996). In  any event, it misses the point. FERC's 1996 order does
not  impose a minimum bill on rates charged under the new 




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n 3 In its initial order, FERC ruled not only that inclusion of the 
lost depreciation in Trunkline's rate base was unjustified, but that
it  was also prohibited by a FERC regulation, 18 C.F.R.  s
284.7(c)(5)(iii). See 81 F.E.R.C. at 61,666. That regulation states 
that a "pipeline may not file a revised or new rate designed to 
recover costs not recovered under rates previously in effect." In its 
order denying rehearing, however, FERC concluded that because 
inclusion of the depreciation was unjustified, it was "unnecessary to 
address whether the regulation would otherwise prohibit" it. 82 
F.E.R.C. at 61,782. Because FERC did not rest its decision on the 
regulation, we need not address that question either, notwithstand-
ing Trunkline's request that we do so.


certificate. Rather, it simply bars Trunkline from including  in its
new rate base those depreciation expenses it lost under  the
conditions of the prior tariff.


Finally, both Trunkline and FERC make reference to a  1991 settlement
agreement which allowed Trunkline to make  accounting entries
recording the amount of its unrecovered  depreciation. See Trunkline
LNG Co., 57 F.E.R.C. p 61,022  (1991) (order approving contested
settlement). That settle- ment has no consequences for this
litigation. Far from  disputing the import of the settlement, both
Trunkline and  FERC vociferously agree that while the settlement
permitted  Trunkline to record its lost depreciation, it did not
determine  whether the company would be able to recover that deprecia-
tion in the future. Rather, as the settlement order explained,  the
accounting treatment was "nothing more than a method  of keeping track
of unrecovered depreciation for possible  future application for rate
recovery." Id. at 61,091. The  settlement agreement itself


Nothing contained in this Stipulation and Agreement  shall be taken to
reflect a determination as to [Trunk- line's] future right to recover
the amount recorded in the  memorandum account. Any such recovery in
jurisdic- tional rates shall be subject to a filing, or filings, by 
[Trunkline] requesting authority for such recovery which  is accepted
and allowed to be placed in effect by the  Commission....


See J.A. at 239. In short, the settlement did nothing more  than leave
the matter open for future dispute.


In the instant application, Trunkline requested authority to  include
the uncollected depreciation charges in its rate base,  just as the
settlement anticipated it would. FERC, however,  rejected that request
as it was equally free to do. Because  we have found FERC's rejection
reasonable, we have no basis  for overturning it.


III


Trunkline also disputes the second condition imposed in  FERC's initial
order: the condition that Trunkline make, 


within three years, "a Natural Gas Act section 4 rate filing to 
justify its existing rates or to propose alternative rates." 81 
F.E.R.C. at 61,666. Trunkline argues that such a condition is  in
contravention of our holding in Public Serv. Comm'n v.  FERC (PSC),
that FERC may not require a natural gas  company to periodically
refile its rates pursuant to section 4.  See 866 F.2d 487, 492 (D.C.
Cir. 1989). As we noted in PSC,  FERC may, at any time, conduct an
examination of a compa- ny's rates pursuant to section 5 of the NGA,
15 U.S.C.  s 717d. Under that section, however, the burden of proof is
 on the Commission to show that the rates in question are not  just
and reasonable. See PSC, 866 F.2d at 488. By contrast,  a section 4
filing and proposed rate change is initiated by the  company, and it
is the company that bears the burden of  proving that its proposed
rates are just and reasonable. See  15 U.S.C. s 717c(e). Accordingly,
we held that FERC may  not require periodic refilings under section 4,
because such a  procedure would effectively shift the burden of proof
estab- lished under section 5. See PSC, 866 F.2d at 490.


We need not determine whether FERC's initial order in  Trunkline would
have contravened our PSC decision, because  FERC apparently had second
thoughts prior to its order  denying rehearing. In the latter order,
the Commission  explained that it was not really requiring Trunkline
to pro- pose a change in its rates under section 4, but "merely" 
requiring it to file a "cost and revenue study" that would  provide
the basis for a section 5 filing by the Commission  should it conclude
one were necessary. 82 F.E.R.C. at  61,780. The Commission agrees that
if it decides to go  forward after reviewing the study, it will bear
the burden of  proof. Hence, the rehearing order does not implicate
our  holding in PSC.


Trunkline further contends that even if there is no section 4  problem,
the requirement of a cost and revenue study is  improper because it is
unreasonable. There is no question  that FERC has the authority to
require Trunkline to submit  such a study. Indeed, Trunkline conceded
at oral argument  that such a study is within FERC's power under
section 10(a)  of the NGA to require natural gas companies to file


annual and other periodic or special reports as the Commis- sion may
... prescribe as necessary or appropriate to assist  the Commission."
15 U.S.C. s 717i(a).4 FERC imposed the  requirement because Trunkline
had no recent history of  continuous operation, and there was thus no
relevant experi- ence upon which to base forecasts of future costs or
service  levels. See 82 F.E.R.C. at 61,780. The Commission believed 
that within three years there would be such a history, which  it could
then review to determine whether Trunkline's rates  were just and
reasonable. As there is nothing arbitrary or  capricious about that
conclusion, we uphold the reporting  condition as well.


IV


We conclude that the conditions FERC imposed upon  Trunkline's
certificate are reasonable and in accordance with  law. Accordingly,
FERC's orders, as modified in the order  denying rehearing, are
affirmed and the petition for review is  denied.




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n 4 Section 10(a) authorizes FERC to "require that such reports  shall
include, among other things, full information as to ... gross 
receipts, interest due and paid, depreciation, amortization, ... cost 
of facilities, cost of maintenance and operation of facilities ... ,
and  sale of natural gas." 15 U.S.C. s 717i(a).