In a recent decision, the United States Court of Appeals for the District of Columbia vacated a series of FERC orders that had imposed standards of conduct on the relationship between natural gas pipeline entities and their non-marketing affiliates. In National Fuel Gas Supply Corporation v. FERC, the D.C. Circuit addressed the issue of whether the existing Standards of Conduct promulgated in Order 497, which currently regulate the behavior of natural gas pipeline entities and their marketing affiliates, could lawfully be extended to encompass the pipeline entities’ relationship with non-marketing affiliates such as producers, gatherers, processors, and traders.1 Noting insufficient factual support in the record, the D.C. Circuit concluded: "[p]rofessing that an order ameliorates a real industry problem but then citing no evidence demonstrating that there is in fact an industry problem is not reasoned decision-making."2 The Court vacated FERC Orders 2004, 2004-A, 2004-B, 2004-C, and 2004-D (hereafter "Order 2004") as applied to natural gas pipelines and remanded the issue to FERC with specific guidance on what it could do if it decided to re-issue the provisions.3

The D.C. Circuit explained in its opinion that FERC implemented Order 497 in response to concerns about favoritism and unfair competition.4 This Order required equal treatment by the pipelines to sellers, ordered contemporaneous disclosure of transportation information to all potential shippers if disclosed to an affiliate, and required independent functioning of pipeline and marketing affiliate employees.5 In Tenneco Gas v. FERC, the D.C. Circuit upheld Order 497 on the grounds that the agency’s decision was supported by both theoretical threat of anti-competitive behavior and sufficient record of abuse.6

In its review of Order 2004, the D.C. Circuit observed that, as in Tenneco, FERC had asserted two rationales in support of its decision-making.7 First, FERC argued that there was the theoretical threat of improper information sharing or discriminatory treatment between the pipelines and non-marketing affiliates.8 Second, FERC asserted that a record of abuses between the pipelines and non-marketing affiliates justified the new regulation.9

Upon review of the record, the D.C. Circuit sided with two FERC Commissioners who had dissented to the issuance of Order 2004 on the grounds that FERC was "relying on a record of abuse that in fact did not exist."10 The D.C. Circuit determined that the record consisted entirely of theoretical arguments or of abuses and complaints related to marketing affiliates.11. Therefore, the D.C. Circuit found that the dissenting Commissioners were "plainly correct"12 and that FERC "staked its rationale in part on a record of abuse, but that record is non-existent."13

The D.C. Circuit rejected two arguments by FERC that attempted to explain the lack of evidence in the record. First, FERC argued that the lack of complaints regarding abuses by non-marketing affiliates was an expected result where this group was not yet governed by the standards of conduct.14 The D.C. Circuit rejected this conclusion, noting the large number of complaints and evidence of abuses that were compiled prior to the adoption of Order 497 relating to marketing affiliates.15 Second, FERC argued that the absence of specific evidence of abuse by non-marketing affiliates did not mean that incidents had not occurred.16 In response, the D.C. Circuit noted simply that "the Administrative Procedures Act does not tolerate that kind of truism as the basis for administrative action here."17

Explaining its decision to vacate Order 2004 and remand to FERC, the D.C. Circuit held that where multiple grounds are asserted as basis for a decision, the failure of any single ground is ordinarily sufficient to vacate the decision and remand the issue to the agency.18 The D.C. Circuit noted that FERC could attempt to develop a factual record that would meet the standard established in Tenneco.19 In addition, the D.C. Circuit provided guidance regarding issues that FERC would need to address if it were to attempt to justify these provisions on a solely theoretical basis.20 For example, the D.C. Circuit stated that FERC must explain how any potential theoretical threat, unsupported by any record of abuse, "justifies such costly prophylactic rules."21 Similarly, the D.C. Circuit provided guidance on several other potential rationales that FERC may offer, such as the undetectibility of abuses, changes in the proportion of capacity held by non-marketing affiliates, and the rise in the variety of new services.22 While the D.C. Circuit provided these suggestions, it took no position as to whether these theoretical rationales, absent a record of abuses, could provide sufficient justification for extending the standards of conduct to non-marketing affiliates.23

Footnotes

1. No. 04-1183, 2006 U.S. App. LEXIS 28504 (D.C. Cir. November 17, 2006).

2. Id. at *36.

3. Id. at *4-5.

4. Id. at *11.

5. Id. at *12.

6. 969 F.2d 1187, 1197-99 (D.C. Cir. 1992).

7. Id. at *23.

8. Id.

9. Id.

10. Id. at *28.

11. Id. at *29.

12. Id. at *29.

13. Id. at*36.

14. Id.

15. Id. at *36-37.

16. Id. at *37.

17. Id.

18. Id. at *23.

19. Id. at *37.

20 .Id. at *38.

21. Id.

22. Id.

23. Id.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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