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


MO PUB SVC CMSN

v.

FERC


99-1203a

D.C. Cir. 2000


*	*	*


Karen LeCraft Henderson, Circuit Judge: Petitioner Mis- souri Public
Service Commission (MoPSC) seeks review of  three orders of the
Federal Energy Regulatory Commission  (FERC or Commission) setting
initial rates for natural gas  transportation by the Kansas Pipeline
Company (KPC or  Company).1 The petitioner argues that FERC failed to
dem- onstrate the approved rates are in the public interest, as 
required by section 7 of the Natural Gas Act (NGA), 15  U.S.C. s 717f,
and failed to reach a conclusion that is the  product of reasoned
decisionmaking. We agree. According- ly, we grant the petition for
review and remand the case to  the Commission for further ratemaking


I.


Section 7(c) of the NGA provides that "[n]o natural-gas  company . . .
shall engage in the transportation or sale of  natural gas, . . .
unless there is in force with respect to such  natural-gas company a
certificate of public convenience and  


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n 1 The orders under review are Kansas Pipeline Co., 87 F.E.R.C.  p
61,020 (Apr. 2, 1999); Kansas Pipeline Co., 83 F.E.R.C. p 61,107 
(Apr. 30, 1998); Kansas Pipeline Co., 81 F.E.R.C. p 61,250 (Nov. 25, 


necessity issued by the Commission authorizing such acts or 
operations." 15 U.S.C. s 717f(c). In order to issue such a 
certificate, the Commission must find that, among other  things, "the
proposed service, sale, [or] operation . . . is or  will be required
by the present or future public convenience  and necessity." Id. s
717f(e). Reaching this decision "re- quires the Commission to evaluate
all factors bearing on the  public interest." Atlantic Ref. Co. v.
Public Serv. Comm'n,  360 U.S. 378, 391 (1959). More specifically,
section 7 imposes  on the Commission a duty "to engage in 'a most
careful  scrutiny and responsible reaction to initial price proposals
of  producers.' That scrutiny demands attentiveness to the evi- dence
presented by the producer with 'price a consideration  of prime
importance' in the application of the public conve- nience and
necessity standard." Consumer Fed'n of Am. v.  Federal Power Comm'n,
515 F.2d 347, 356 (D.C. Cir.) (quot- ing Atlantic Ref. Co., 360 U.S.


II.


KansOk Partnership (KansOk), Kansas Pipeline Partner- ship (KPP) and
Riverside Pipeline Company (Riverside) en- gage in the transportation
of natural gas. Before November  2, 1995 KPP was regulated by the
Kansas Corporation Com- mission (KCC),2 while KansOk and Riverside
were regulated  by FERC under section 311 of the Natural Gas Policy
Act  (NGPA), 15 U.S.C. s 3371. On November 2, 1995 FERC  determined
that KansOk, KPP and Riverside constituted a  single interstate
pipeline system subject to FERC jurisdiction  under the NGA. See
KansOk P'ship, 73 F.E.R.C. p 61,160, at  61,480 (1995). FERC therefore
ordered the three entities,  collectively KPC, to apply for a
certificate of public conve- nience and necessity under section 7 of
the NGA. See id. at  61,488. KPC challenged FERC's assertion of
jurisdiction and  sought a rehearing, see Kansas Pipeline Co., 81
F.E.R.C.  p 61,005, at 61,006 (1997), but, at the same time, on




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n 2 KPP operated as a "Hinshaw" pipeline exempt from FERC  jurisdiction
pursuant to 15 U.S.C. s 717(c).


23, 1996 filed under protest a certificate application proposing  an
initial rate base of $100,647,042 and a cost of service of 
$36,708,843, see id. at 61,006-07, 61,017.


On October 3, 1997 the Commission confirmed its Novem- ber 2, 1995
decision asserting jurisdiction over KPC.3 See id.  at 61,036. FERC
then proceeded to examine KPC's pro- posed initial rates, terms and
conditions and concluded that  the rates were not in the public
interest. See id. at 61,017.  In the end, FERC adopted a rate base of
$39,011,785 and a  cost of service of $21,817,483. See id.


On November 3, 1997 KPC sought rehearing of the October  3, 1997 order.
The Company argued that the rates estab- lished by the order would
drive KPC into bankruptcy because  they did not allow KPC to recover
its operating expenses and  make payments on two outstanding loans. On
November 10,  1997 KPC sought a stay of the October 3, 1997 order,
which  the Commission granted on November 25, 1997. See Kansas 
Pipeline Co., 81 F.E.R.C. p 61,250, at 62,136 (1997).


On February 27, 1998 KPC filed with the Commission a  document titled
"Motion of Kansas Pipeline Company Acced- ing to FERC Jurisdiction,
and Requesting Interim Relief, Or,  in the Alternative, Request for a
Rehearing" in which it made  the following proposal: KPC would dismiss
its appeal chal- lenging FERC's jurisdiction, see supra note 3, if
FERC  permitted KPC to continue charging the contractual rates  that
had been agreed to by KPC and its customers and had  been approved by
KPC's prior regulators (Motion Rates)  until such time as section 4
rates were approved by FERC.  FERC agreed with KPC's proposal and on
April 30, 1998  issued an order permitting KPC to grandfather its old
rates  pending a section 4 proceeding. See Kansas Pipeline Co., 83 
F.E.R.C. p 61,107, at 61,518 (1998). In support of its decision  FERC
declared: "As discussed below, the Commission has  determined that
granting the motion is in the public interest 




__________

n 3 On December 2, 1997 KPC filed a petition for review with this 
court challenging FERC's decision. See Kansas Pipeline P'ship v. 
FERC, No. 97-1710 (D.C. Cir. Dec. 2, 1997) (voluntarily dismissed  on
May 8, 1998).


because it will result in rates that are in the public interest,  will
remove the jurisdictional issue from the proceeding, and  preserve the
financial integrity of the applicant." Id. at  61,505.


FERC's conclusion that the rates are "in the public inter- est"
warrants some explanation. At the beginning of its  analysis, the
Commission noted that KPC's November 3, 1997  request for rehearing of
the October 3, 1997 order was  "largely moot" in light of its approval
of the Motion Rates.  Nevertheless FERC proceeded to discuss the
issues raised by  the rehearing request in order to "provide a context
for our  decision to grant the applicant's February 27 motion." Id. at
 61,506. In the discussion, FERC reversed its October 3, 1997 
position on several issues. See id. at 61,506-09. Ultimately,  FERC
concluded that, if the initial rates set by the October 3,  1997 order
were adjusted "based on the rehearing arguments  that the Commission
found to be persuasive," those rates  (Rehearing Rates) would be
higher than KPC's Motion Rates.  Id. at 61,511. Because approval of
the Motion Rates also  resolved the jurisdictional issue, the
Commission concluded  that "it is in the public interest to grant


Petitioner MoPSC sought a rehearing of FERC's April 30,  1998 order,
challenging FERC's conclusion that the Rehear- ing Rates would be
higher than the Motion Rates.4 MoPSC  asserted that FERC's analysis
was plagued by numerous  errors and unexplained departures from
settled FERC po- lices. On April 2, 1999 FERC denied rehearing,
explaining  that in the April 30, 1998 order it had not relied
strictly on a  comparison of the Motion Rates and the Rehearing Rates
but  rather had "concluded that the motion rates were in the  public
interest because they were negotiated among the par- ties and approved
by the prior regulatory regime." Kansas 




__________

n 4 MoPSC has standing in this case pursuant to section 15 of the  NGA.
See 15 U.S.C. s 717n ("In any proceeding before it, the  Commission in
accordance with such rules and regulations as it may  prescribe, may
admit as a party any interested . . . State commis- sion, . . . whose
participation in the proceeding may be in the public  interest."); see
also 18 C.F.R. s 385.214 (FERC rules of practice  and procedure).


Pipeline Co., 87 F.E.R.C. p 61,020, at 61,064 (1999). FERC  also
emphasized the advantage of the Company's concession  on the
jurisdiction issue as well as the importance of preserv- ing the
Company's financial integrity. See id. Unsatisfied,  MoPSC filed this
petition for review.


III.


We review FERC's orders under the familiar arbitrary and  capricious
standard of the Administrative Procedure Act.  See 5 U.S.C. s
706(2)(A); Williston Basin Interstate Pipeline  Co. v. FERC, 165 F.3d
54, 60 (D.C. Cir. 1999). Although  "[j]udicial scrutiny under the
National Gas Act is limited to  assuring that the Commission's
decisionmaking is reasoned,  principled, and based upon the record,"
Columbia Gas Trans- mission Corp. v. FERC, 628 F.2d 578, 593 (D.C.
Cir. 1979);  accord Williston Basin Interstate Pipeline Co., 165 F.3d
at  60, the Commission's orders must nonetheless articulate "a 
rational connection between the facts found and the choice  made."
Association of Oil Pipe Lines v. FERC, 83 F.3d  1424, 1431 (D.C. Cir.
1996) (citations and internal quotation  marks omitted). To carry out


it is imperative that the Commission articulate the criti- cal facts
upon which it relies when it decides [the rele- vant rates].
Similarly, when the Commission finds it  necessary to make predictions
or extrapolations from the  record, it must fully explain the
assumptions it relied on  to resolve unknowns and the public policies
behind those  assumptions. Where the Commission balances compet- ing
interests in arriving at its decision, it must explain on  the record
the policies which guide it. Only if the  Commission observes these
minimum standards can we  be confident that missing facts, gross flaws
in agency  reasoning, and statutorily irrelevant or prohibited policy 
judgments will come to a reviewing court's attention.  Moreover, by
requiring that the Commission fully articu- late the basis for its
decision, we assure the Commission,  itself, the first opportunity to
correct any defects which  may emerge from such disclosure.


Columbia Gas Transmission Corp., 628 F.2d at 593 (footnote  omitted);
accord Great Lakes Gas Transmission Ltd. P'ship  v. FERC, 984 F.2d
426, 432 (D.C. Cir. 1993).


Defending its approval of the Motion Rates as in the public  interest,
FERC asserts that it relied on the following  grounds: (1) approval of
the Motion Rates ended the jurisdic- tional dispute, thus eliminating
regulatory uncertainty and  avoiding protracted litigation; (2) the
Motion Rates had been  negotiated among the parties; (3) the Motion
Rates had been  approved by KPC's prior regulators; (4) the
Commission's  adjustment of the October 3 rates preserved KPC's
financial  integrity and prevented KPC's bankruptcy; and (5) the Mo-
tion Rates were lower than the Rehearing Rates. MoPSC  challenges each


In evaluating the Commission's arguments, we bear in  mind the
"time-honored rule that a reviewing court 'must  judge the propriety
of [agency] action solely by the grounds  invoked by the agency.' "
Western Resources, Inc. v. FERC,  9 F.3d 1568, 1576 (D.C. Cir. 1993)
(quoting SEC v. Chenery  Corp., 332 U.S. 194, 196 (1947)). The court
does not "give an  agency the benefit of a post hoc rationale of
counsel." Loui- siana Ass'n of Indep. Producers & Royalty Owners v.
FERC,  958 F.2d 1101, 1123 n.12 (D.C. Cir. 1992).


In our view, the record does not manifest that FERC  originally invoked
all of the grounds it now relies on to 




__________

n 5 FERC argues that MoPSC is precluded from mounting a chal- lenge to
the first four grounds because it failed to make those  arguments in
its petition for rehearing as required by section 19(a)  of the NGA.
See 15 U.S.C. s 717r(a) ("The application for rehear- ing shall set
forth specifically the ground or grounds upon which  such application
is based."). We find no merit in FERC's argu- ment. As is clear from
our discussion infra, the Commission's April  30, 1998 order did not
include all of the grounds it asserts here and,  therefore, the
petitioner had no reason to question unaddressed  matters in seeking
rehearing. See 15 U.S.C. s 717r(b) ("No objec- tion to the order of
the Commission shall be considered by the court  unless such objection
shall have been urged before the Commission  in the application for
rehearing unless there is reasonable ground  for failure so to do."
(emphasis added)).


support its action. First, the Commission did not use the  second and
third rationales in its April 30, 1998 order.  FERC's entire
discussion of these two points is contained in  one sentence: "In its
motion, [KPC] proposes to charge rates  that have been negotiated
among the parties and approved by  the prior regulatory regime, until
such time as the Commis- sion directs [KPC] to file a NGA Section 4
rate case."  Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,510. The
 order does not explain the significance of the two rationales  or how
they relate to the choice made by the Commission.  Moreover, FERC's
own conclusion shows no reliance on these  factors.6 Thus, we reach
the inescapable conclusion that  FERC's reference to the negotiations
among parties and to  the approval by prior regulators was merely
descriptive of the  Motion Rates rather than a declaration of what
FERC now  argues are two of its primary reasons for reaching its deci-


As to the first and fourth rationales, the April 30, 1998  order does
include them as grounds for the decision. See  Kansas Pipeline Co., 83
F.E.R.C. p 61,107, at 61,505 ("[T]he  Commission has determined that
granting the motion . . .  will remove the jurisdictional issue from
the proceeding, and  preserve the financial integrity of the
applicant."). A passing  reference to relevant factors, however, is
not sufficient to  satisfy the Commission's obligation to carry out
"reasoned"  and "principled" decisionmaking. We have repeatedly re-
quired the Commission to "fully articulate the basis for its 
decision." Columbia Gas Transmission Corp., 628 F.2d at 




__________

n 6 FERC's conclusion reads:


A comparison of [the Rehearing Rates] with the proposed  motion rates
shows that the combined motion rates for the  three zones are lower.
In addition, approving the motion rates  would remove the
jurisdictional issue from the proceeding,  since [KPC] has agreed to
accede to federal jurisdiction if its  motion is granted. Under these
circumstances, the Commis- sion concludes that it is in the public
interest to grant [KPC's]  motion.


Kansas Pipeline Co., 83 F.E.R.C. p 61,107, at 61,511.


593; accord Great Lakes Gas Transmission Ltd. P'ship, 984  F.2d at 432;
City of Charlottesville v. FERC 661 F.2d 945,  950 (D.C. Cir. 1981).
Here, the Commission fell short of  meeting the "minimum standards"
with which it is required to  comply. Columbia Gas Transmission Corp.,
628 F.2d at 593.


Having addressed the first four rationales upon which the  Commission
relies on appeal, we turn now to the Commis- sion's hypothetical
calculation of the Rehearing Rates. The  April 30, 1998 order
concludes that the Motion Rates are  lower than the rates FERC would
have approved had it  granted a rehearing. See Kansas Pipeline Co., 83
F.E.R.C.  p 61,107, at 61,511. The record makes clear this was the 
Commission's primary reason for approving the Motion  Rates.
Nevertheless, both in its April 2, 1999 order and  before this court,
FERC has avoided defending its computa- tion of the Rehearing Rates,
dismissing it as mere "context."  See Kansas Pipeline Co., 87 F.E.R.C.
p 61,020, at 61,064.  Indeed, during oral argument, FERC counsel could
not even  assure this court that the Commission's arithmetic in
calculat- ing the adjusted hypothetical cost of service was correct. 
Given that the only record basis on which FERC's decision  could be
affirmed is minimized by the Commission itself, we  are compelled to
remand the case to the Commission so that  it can reach a conclusion
that is the product of reasoned  decisionmaking.7




__________

n 7 In view of the Commission's own limited defense of its calcula-
tions, we need not reach the merits of MoPSC's related calculations 
arguments (e.g., rate of return computation, debt prepayment treat-
ment, reliance on stale data) raised in its request for rehearing of 
the April 30, 1998 order. On remand, if the Commission decides to 
recalculate the Rehearing Rates, it should consider MoPSC's argu-
ments and, if it chooses to depart from existing applicable ratemak-
ing policies, it must explain its reasoning on the record. See Great 
Lakes Gas Transmission Ltd. P'ship, 984 F.2d at 433 ("A full and 
rational explanation is especially important to this court when the 
condition imposed reflects a shift in FERC's policy or a departure 
from its typical manner of granting certificates and imposing condi-


We note, however, that our decision does not mean that at  least some
of the rationales offered by FERC could not  support the approval of
initial section 7 rates pending a  section 4 proceeding. See Atlantic
Ref. Co., 360 U.S. at 391  (approval of certificate of public
convenience and necessity  "requires the Commission to evaluate all
factors bearing on  the public interest"); Tejas Power Corp. v. FERC,
908 F.2d  998, 1003 (D.C. Cir. 1990) ("[T]his court has consistently 
required the Commission to give weight to the contracts and 
settlements of the parties before it.") (citing Union Elec. Co.  v.
FERC, 890 F.2d 1193, 1194-95 (1989)); Jersey Cent. Power  & Light Co.
v. FERC, 810 F.2d 1168, 1177-78 (D.C. Cir. 1987)  ("In reviewing a
rate order courts must determine whether or  not the end result of
that order constitutes a reasonable  balancing, based on factual
findings, of the investor interest in  maintaining financial integrity
and access to capital markets  and the consumer interest in being
charged non-exploitative  rates."); cf. Arctic Slope Regional Corp. v.
FERC, 832 F.2d  158, 167-68 (D.C. Cir. 1987) (upholding FERC decision
that  termination of lengthy litigation served public interest). In 
this case, however, the rationales fail because FERC has not 
adequately explained how the rationales, alone or together,  satisfy


For the foregoing reasons, we remand to FERC for further  proceedings
consistent with this opinion.


So ordered.