Iberdrola Renewables, Incorporated v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 16, 2009 Decided February 26, 2010
No. 08-1195
I BERDROLA RENEWABLES, I NCORPORATED,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION ,
RESPONDENT
ALLIANCE PIPELINE L.P. AND I NTERSTATE NATURAL GAS
ASSOCIATION OF AMERICA,
I NTERVENORS
On Petition for Review of an Order
of the Federal Energy Regulatory Commission
Mark K. Lewis argued the cause and filed the briefs for
petitioner.
Judith A. Albert, Senior Attorney, Federal Energy
Regulatory Commission, argued the cause for respondent.
With her on the brief were Cynthia A. Marlette, General
Counsel, and Robert H. Solomon, Solicitor.

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Virginia A. Seitz argued the cause for intervenors. With
her on the brief were Joan Dreskin, Dan Regan, Timm
Abendroth, and William A. Williams.
Before: SENTELLE , Chief Judge, GRIFFITH, Circuit Judge,
and SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge GRIFFITH.
GRIFFITH, Circuit Judge: Although set against the
complicated regulatory framework of federal energy law, at
the end of the day, this petition for review of Federal Energy
Regulatory Commission (FERC) orders requires only our
straightforward application of the plain terms of a written
contract. The question is whether FERC arbitrarily or
capriciously read a contract to allow a pipeline to change its
rates without first obtaining FERC’s approval. Because the
contract expressly excludes such a role for FERC, we deny
the petition.
I.
Intervenor Alliance Pipeline L.P. operates an 887-mile
pipeline that transports natural gas from the North Dakota-
Canada border to the Chicago area. Alliance Pipeline L.P.,
Preliminary Determination on Non-Environmental Issues, 80
FERC ¶ 61,149, at 61,590 (1997) [hereinafter Preliminary
Determination]. Before Alliance began service on the
pipeline, each shipper chose to negotiate the rate it would pay
and committed that agreement to a written contract. Any
shipper could have chosen a different option, a non-negotiable
“recourse rate,” based only on the pipeline’s cost of providing
service and a FERC-determined profit margin.

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That the shipper in this case, predecessor in interest to
Petitioner, Iberdrola Renewables, Inc., selected a negotiated
rate is a critical fact that has bearing upon the central issue of
this petition: whether FERC must approve changes Alliance
made to the negotiated rate. In the exercise of its duty under
section 4 of the Natural Gas Act (NGA) to ensure that rates
are “just and reasonable,” 15 U.S.C. § 717c(a) (2006), the
Commission automatically reviews proposed changes to
recourse rates but reviews changes to negotiated rates only
when the contract requires it.1 See Alternatives to Traditional
Cost-of-Service Ratemaking for Natural Gas Pipelines, 74
FERC ¶ 61,076, at 61,241 (1996) [hereinafter Policy
Statement]. This approach reflects FERC’s assumption that
sophisticated parties will bargain for rates that are just and
reasonable. See id. at 61,241–42. So long as the pipeline
adjusts the negotiated rate consistently with the terms of the
written agreement, FERC will accept the rate change without
reviewing the adjustment for reasonableness. See id. at
61,238, 61,240. Shippers choosing negotiated rates thus can
agree to avoid FERC’s review under section 4 and thereby
“remove themselves from any protection the Commission
may give customers under recourse rates.” Colo. Gulf
Transmission Co., 78 FERC ¶ 61,263, at 62,124 (1997). In
effect, the shippers can bargain away the protection of
FERC’s prior approval of rate changes in exchange for what
they see as more favorable rates.
1 The briefing in this case and FERC’s orders below suggest that
negotiated rate customers and pipelines could provide in their
contracts for FERC review of negotiated rate changes. For purposes
of this case, we assume but do not decide that is so. If negotiated
rate customers like Iberdrola cannot contract for section 4 review,
the resolution of this case would be even more straightforward than
it is because neither party disputes that Alliance and the shippers
agreed to a negotiated rate.

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Of course, negotiated rate customers are not left without
redress if they think the rate has become unjust over time.
They can always challenge an established rate under section 5
of the NGA on the ground that the rate is “unjust,
unreasonable, unduly discriminatory, or preferential.” 15
U.S.C. § 717d(a). A section 5 review differs from a section 4
review in two significant ways. First, section 5 provides for
FERC review of a rate only after it has taken effect. By
contrast, FERC may only review a rate under section 4 at the
time it is filed. See Sea Robin Pipeline Co. v. FERC, 795 F.2d
182, 183–84 (D.C. Cir. 1986) (discussing the salient
differences between NGA section 4 and section 5). Second,
the pipeline bears the burden to show the proposed rate is
reasonable in a section 4 action, whereas the shipper bears the
burden to show an established rate is not in a section 5 case.
Thus, shippers seeking to involve FERC in the review of their
rates have three options: ex ante, they can (1) elect a recourse
rate, which FERC will automatically review at the time it is
filed, or (2) negotiate for FERC approval of rate changes in
their contract; ex post, they can (3) pursue a section 5 action
after the negotiated rate has taken effect.
This petition requires the court to determine whether the
negotiated contract between Alliance and its shippers calls for
FERC approval of a rate change, and the history of the
contract bears upon our analysis. The earliest form of the
agreement was executed while the pipeline’s application was
pending for the certificate of public convenience and
necessity that would allow it to operate. In this preliminary
contract, called the Precedent Agreement, the parties agreed
to a negotiated rate in lieu of a recourse rate. The agreement
provided that “[c]hanges in [Alliance’s] operating costs will
be reflected in its rates from time to time.” Open Season
Precedent Agreement, sched. C., at 3. No language in the

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Precedent Agreement called for FERC approval of changes to
the negotiated rate.
Even so, the proposed tariff Alliance filed with its
Certificate Application suggested that Alliance would need
FERC’s approval for any changes to the negotiated rate based
on changes in its operating costs: “The Negotiated Rates are
determined using actual operating and maintenance costs . . .
approved by the FERC from time to time.” Certificate
Application, Pro Forma Sheet 8 (emphasis added). FERC
directed Alliance to remove that language from its tariff,
explaining that such a provision belongs more appropriately
in the parties’ Transportation Agreement, which they would
sign after FERC issued Alliance its certificate. Preliminary
Determination, 80 FERC at 61,599. Thus, if the parties
wished, they could provide for FERC review of negotiated
rate changes in their contract. See id. Otherwise, prior
approval from FERC would not be forthcoming. After FERC
awarded Alliance its certificate, the parties executed the
Transportation Agreement, replacing the Precedent
Agreement. Alliance and its shippers included no language in
that contract providing for FERC review of negotiated rate
changes. Rather, the Transportation Agreement simply
repeated the language previously agreed to: “Changes in
[Alliance’s] operating costs will be reflected in its rates from
time to time.” Transportation Agreement, App. B.
Since pipeline service began in 2000, Alliance has
charged the negotiated rate, which it has periodically
increased—without FERC’s prior approval—to reflect
changes in its operating costs. From 2003 to 2007, these
annual increases averaged 2.5%. Each year the recourse rate
was higher than the negotiated rate, until late 2007 when
Alliance sought to increase the negotiated rate by about 6%.
For the first time, the negotiated rate exceeded the recourse

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rate. And for the first time, PPM Energy, Iberdrola’s
predecessor in interest, asked FERC to reject the filing on the
grounds that Alliance’s proposed rate increase “failed to
satisfy both the rate-change requirements under the negotiated
rate agreements and FERC’s basic requirements for such
filings.” Petitioner’s Br. at 11–12.
FERC denied PPM’s request, concluding that the
Transportation Agreement, as did the Precedent Agreement
before it, allowed Alliance to change the negotiated rates to
keep pace with increases in operating costs without prior
review from FERC. See Alliance Pipeline, L.P., 121 FERC
¶ 61,309, at 62,681 (2007). The Commission reminded PPM
that FERC had “specifically stated in its certificate order that
it would not review the level of Alliance’s negotiated rates
nor the method by which they were calculated.” Id. PPM
requested rehearing, arguing that despite what was put into
the written agreement both parties understood that Alliance
could only change the rate if FERC first approved the new
operating costs. See Alliance Pipeline, L.P., 122 FERC
¶ 61,250, at 62,428 (2008) [hereinafter Rehearing Order].
Denying rehearing, FERC explained that negotiated rate
customers are entitled to what they bargained for and no
more. Id. at 62,431. The Transportation Agreement did not
entitle PPM to FERC review of the proposed rate increase
before it took effect, though PPM could still challenge the rate
under section 5. See id.
After succeeding to PPM’s rights under the Transportation
Agreement, Iberdrola filed a timely petition for review in this
court, which we have jurisdiction to consider under 15 U.S.C.
§ 717r(b). See Nat’l Fuel Gas Supply Corp. v. FERC, 468
F.3d 831, 839 (D.C. Cir. 2006).

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II.
Iberdrola argues that the parties intended that FERC
would review Alliance’s rate changes under section 4 at the
time they are filed. FERC and Alliance argue that Iberdrola’s
predecessor in interest bargained away such review in the
Transportation Agreement when it chose a negotiated rate
over the recourse rate and made no provision for FERC
review. Absent such an agreement, FERC would only review
the rate in a section 5 challenge, which Iberdrola has not
made. In the orders on review, FERC found that the parties
had agreed that FERC would not review Alliance’s rate
changes, and we must decide whether that interpretation was
arbitrary or capricious under the Administrative Procedure
Act. See 5 U.S.C. § 706(2)(A); Old Dominion Elec. Co-op.,
Inc. v. FERC, 518 F.3d 43, 48 (D.C. Cir. 2008). We begin by
“consider[ing] de novo whether the [contract] unambiguously
addresses the matter at issue. If so, the language of the
agreement controls for we must give effect to the
unambiguously expressed intent of the parties.” Ameren
Servs. Co. v. FERC, 330 F.3d 494, 498 (D.C. Cir. 2003)
(internal quotation marks and citation omitted). If we find the
contract ambiguous, “we give Chevron-like deference to
[FERC’s] reasonable interpretation” of the agreement.
Entergy Servs., Inc. v. FERC, 568 F.3d 978, 982 (D.C. Cir.
2009).
FERC read the Transportation Agreement to allow
Alliance to alter its negotiated rates to keep pace with
changed operating costs without FERC’s prior approval. The
contract states, “Changes in [Alliance’s] operating costs will
be reflected in its rates from time to time.” Transportation
Agreement, App. B. This language indicates that Alliance will
adjust the rate as its operating costs fluctuate. No mention is
made of a role for FERC. This contrasts sharply with the

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phrasing of the recourse rate provision in the Precedent
Agreement, which acknowledged FERC’s role in approving
rate changes: “Shippers electing recourse rates agree to pay
such rates, subject to changes determined by the FERC from
time to time.” Open Season Precedent Agreement, sched. C.,
at 3 (emphasis added). Of course, Iberdrola neither chose the
recourse rate nor bargained for similar language in the
negotiated rate agreement. Because the parties made no
provision for FERC approval of changes to the negotiated
rate, we agree with FERC. The Transportation Agreement
does not require that Alliance obtain FERC’s approval before
adjusting its rates, and FERC correctly declined to do so.
In the face of this plain language, Iberdrola argues in its
briefs that the contract is nevertheless unclear. Iberdrola finds
ambiguity not in what the contract says, but in what it does
not say. Iberdrola argues that the lack of any mechanism to
challenge how Alliance calculates its operating costs, which
can trigger rate increases, creates ambiguity. See Petitioner’s
Br. at 43; Oral Arg. Recording at 9:46–10:13. But a contract
is only ambiguous if it is “reasonably susceptible of different
constructions or interpretations.” Ameren Servs., 330 F.3d at
499 (internal quotation marks omitted). We do not doubt that
such a mechanism would be of benefit to this shipper and
might lead to greater clarity regarding the basis of the rate
change. But that is not the deal that was struck, and we fail to
see how Iberdrola’s argument casts any doubt on the question
before us: whether FERC must approve such rate changes. In
any event, at oral argument, Iberdrola effectively contradicted
its briefs and conceded that the contract is unambiguous. The
court asked Iberdrola’s counsel, “So you have to go outside
[the Transportation Agreement] to find ambiguity?” Iberdrola
responded, “Yes.” See Oral Arg. Recording at 6:23–:30.

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Iberdrola finds ambiguity outside the contract in the
previously discussed language from Alliance’s Certificate
Application, which indicated that Alliance would seek
FERC’s approval before adjusting the negotiated rate. This
argument fails as a matter of law. “If a contract is not
ambiguous, extrinsic evidence cannot be used as an aid to
interpretation.” Consol. Gas Transmission Corp. v. FERC,
771 F.2d 1536, 1544 (D.C. Cir. 1985). “[I]f the intent of the
parties on the particular issue is clearly expressed in the
document, ‘that is the end of the matter.’” Nat’l Fuel Gas
Supply Corp. v. FERC, 811 F.2d 1563, 1572 (D.C. Cir. 1987)
(quoting Chevron U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, 842 (1984)). Such is the case here. The
contract’s plain language settles this matter. Even if we were
to consider this extrinsic evidence, it is of no help to
Iberdrola. Both parties were aware that FERC had instructed
Alliance to remove that language from its tariff and to include
it in the Transportation Agreement if the parties wanted
FERC approval for any negotiated rate changes. They were,
therefore, on notice that FERC would only review rate
changes if the parties included such a provision in their
contract. Their knowledge of how FERC would read the
contract is the most probative piece of extrinsic evidence of
the parties’ intent, and it cuts strongly against Iberdrola.
Iberdrola argues in the alternative that even if it loses on
the contract interpretation issue, FERC has unlawfully
abdicated its obligations under section 4 by permitting
Alliance to update its negotiated rates without prior approval.
See Petitioner’s Br. at 26–32. But this argument ignores the
fact that the premise of the negotiated rate regime is that
FERC will not review freely negotiated rates, which are
presumed to be reasonable when a recourse rate is also
offered. See Policy Statement, 74 FERC at 61,239 (stating that
FERC “would dispense with cost-of-service regulation for an

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individual shipper when mutually agreed upon by the pipeline
and a shipper”); cf. Dominion Transmission, Inc. v. FERC,
533 F.3d 845, 852–53 (D.C. Cir. 2008) (noting that FERC
must “presume that the rate set out in a freely negotiated . . .
contract meets the ‘just and reasonable’ requirement imposed
by law”). By selecting a negotiated rate, Iberdrola’s
predecessor intentionally avoided section 4 review to obtain
greater rate flexibility and (at the time) lower rates. FERC’s
requirement that Alliance offer the recourse rate gave
Iberdrola the choice of a FERC-reviewed rate. Iberdrola’s
predecessor rejected that option, and Iberdrola raises no
argument that persuades us to part company from the well-
established rule that freely negotiated rates are presumed just
and reasonable.
Iberdrola also argues that the FERC orders are unlawful
because they permit a rate change pursuant to a contract that
does not satisfy the NGA’s “specificity” requirement. This
rule mandates that a pipeline’s tariff include either a clearly
specified rate formula or the actual rate being charged. See
NorAm Gas Transmission Co., 75 FERC ¶ 61,091, at 61,309
(1996). The specificity requirement exists to ensure that other
shippers can observe prevailing rates so that they might detect
unlawful price discrimination. Cf. Maislin Indus., U.S., Inc. v.
Primary Steel, Inc., 497 U.S. 116, 126 (1990) (noting that the
“duty to file rates with the Commission . . . [has] always been
considered essential to preventing price discrimination”).
Iberdrola’s argument fails because Alliance has, in its tariff,
filed the actual rate being charged at all times. That was all
Alliance was required to do. Any shipper could view
Alliance’s tariff and determine the prevailing rates, which
were filed in advance of any new rate taking effect. See
Rehearing Order, 122 FERC at 62,429.

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Finally, Iberdrola contends that FERC’s interpretation
provides Alliance carte blanche to raise its rates at will,
suggesting that Alliance may have manipulated the
calculation of its operating costs to artificially increase the
negotiated rate. See Petitioner’s Br. at 30–31. But even this
possibility does not entitle Iberdrola to the section 4 review its
predecessor bargained away. Nonetheless, Iberdrola is not
without a remedy. Iberdrola can always obtain relief from the
courts in a breach of contract action. Likewise, Iberdrola can
always challenge a rate change it thinks unreasonable in a
section 5 action. At the end of the day, Iberdrola wants more
than the FERC scrutiny of Alliance’s new rate available in a
section 5 challenge. Iberdrola wants the section 4 review that
its predecessor failed to include in its contract with Alliance.
We cannot vitiate a properly executed contract, which one
party now regrets having entered.
By electing a negotiated rate, Iberdrola’s predecessor in
interest calculated that the bargained-for rate would offer a
more profitable arrangement than the recourse rate. That the
negotiated rate now exceeds the recourse rate does not entitle
Iberdrola to FERC review of Alliance’s rate changes.
Iberdrola’s predecessor executed an unambiguous contract,
leaving the shipper exposed to Alliance’s reported changes in
operating costs. As Alliance appropriately notes, “The fact
that Iberdrola, in hindsight, considers its predecessor’s
bargain unwise is no reason to disregard the contract’s clear
meaning.” Intervenor’s Br. at 22. FERC enforced the contract
as written. The Commission, therefore, did not act arbitrarily
or capriciously by rejecting Iberdrola’s protest of Alliance’s
negotiated rate change.

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III.
For the foregoing reasons, the petition for review is
Denied.

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