Apache Corporation v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 15, 2010 Decided December 28, 2010
No. 09-1204
APACHE CORPORATION,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION ,
RESPONDENT
ENOGEX LLC, CHESAPEAKE ENERGY CORPORATION, AND
M IDCONTINENT EXPRESS PIPELINE LLC,
I NTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
Seth P. Waxman argued the cause for petitioner. With
him on the briefs were Jonathan E. Nuechterlein, Heather M.
Zachary, and Kenneth E. McNeil.
Carol J. Banta, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With her on
the brief were Thomas R. Sheets, General Counsel, and Robert
H. Solomon, Solicitor.

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James F. Bowe, Jr., Brett A. Snyder, David I. Bloom,
Adam C. Sloane, James F. Moriarty, Thomas E. Knight, and
Shannon Grewer were on the brief for intervenors in support
of respondent.
Before: TATEL , GARLAND , and KAVANAUGH , Circuit
Judges.
Opinion for the Court filed by Circuit Judge
KAVANAUGH .
KAVANAUGH , Circuit Judge: Pursuant to its
congressionally assigned authority, the Federal Energy
Regulatory Commission regulates the transmission of oil,
electricity, and natural gas. Its goals are to promote
competition and help American consumers gain access to
reliable and affordable energy. This case involves three
regulated entities in the natural gas market: Apache, a natural
gas producer; Enogex, an intrastate natural gas pipeline; and
Midcontinent, an interstate natural gas pipeline. All three
companies have operations in Oklahoma, where Apache
produces natural gas that is shipped over Enogex’s pipeline.
In 2006, the two pipelines agreed to a lease that would
enable the larger, interstate pipeline (Midcontinent) to
transport natural gas over the smaller, intrastate pipeline
(Enogex). As required by statute, the pipelines sought
FERC’s approval. Apache, a customer that uses Enogex’s
pipeline, objected to the lease, claiming that it was
discriminatory and would harm existing Enogex customers.
The Commission rejected those arguments and approved the
lease.

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In this Court, Apache challenges FERC’s approval as
contrary to the Commission’s regulations and precedents. We
find that the Commission did not adequately explain one
aspect of its decision to approve the lease, and we therefore
remand for the Commission to clarify its ruling. But we do
not vacate FERC’s order; its approval of the Enogex-
Midcontinent lease remains in effect and legally binding. We
deny the petition in part and remand for further explanation.
I
Natural gas producers find deposits underground and
bring the gas up to wellheads. Pipelines then transport the gas
from wellheads to local distribution companies.
Because building a duplicative natural gas pipeline
usually does not make economic sense, the owner of a
pipeline typically possesses a monopoly in its respective
region. Acting pursuant to its statutory authority, FERC has
long sought to prevent abuses of that monopoly power. See
Nat’l Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 834-35
(D.C. Cir. 2006). FERC now achieves that goal through
“open access” mandates. Commission Orders 436 and 636,
for example, require pipelines to provide producers with non-
discriminatory “open access” to natural gas transportation.
See id. at 835; Assoc. Gas Distribs. v. FERC, 824 F.2d 981,
997 (D.C. Cir. 1987).
Apache is a natural gas producer that operates wellheads
in Oklahoma. Enogex operates an intrastate natural gas
pipeline in Oklahoma and also offers limited interstate
transportation services under Section 311 of the Natural Gas
Policy Act of 1978. See 15 U.S.C. § 3371. Apache transports
nearly all of its Oklahoma gas over Enogex’s pipeline.

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Apache and Enogex have contracted only for “interruptible”
service, meaning that Apache’s shipments may be interrupted
(that is, must wait) if another Enogex customer has a prior
claim or higher priority. See 18 C.F.R. § 284.9.
Midcontinent is an interstate natural gas pipeline that
recently constructed a line extending from Bennington,
Oklahoma, to Butler, Alabama. In 2006, before Midcontinent
completed its new pipeline, Midcontinent and Enogex entered
into a lease agreement. Under the agreement, Midcontinent
would lease part of Enogex’s pipeline capacity, allowing
Midcontinent to transport gas from various points in
Oklahoma to Bennington and, from there, into Midcontinent’s
interstate system.
As required by law, Enogex and Midcontinent requested
FERC’s approval of the lease. Concerned that the Enogex-
Midcontinent lease would reduce its own access to Enogex’s
pipeline, Apache objected. The Commission concluded,
however, that the proposed arrangement did not unduly
discriminate against Apache and that the agreement satisfied
FERC’s standards for approval of pipeline leases. FERC thus
approved the lease and subsequently denied Apache’s petition
for rehearing.
Apache now seeks review of FERC’s decision in this
Court.
II
Apache raises two challenges to the Commission’s
decision.

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First, Apache contends that the Enogex-Midcontinent
lease is discriminatory and that FERC’s approval subverts the
“open access” regulatory regime for natural gas
transportation. According to Apache, Enogex has given a
better deal to fellow pipeline Midcontinent than it has to
producers like Apache. As a result, according to Apache, the
lease discriminates against Apache and in favor of
Midcontinent.
Apache did not raise this claim in its petition for
rehearing to the Commission, and we therefore do not reach
the issue here. The Natural Gas Act provides that “[n]o
objection 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.” 15 U.S.C.
§ 717r(b). In its petition for rehearing to the Commission,
Apache argued that the lease discriminated against it in favor
of Midcontinent’s customers, not that the lease discriminated
against it in favor of Midcontinent itself. Request of Apache
Corp. for Reh’g at 9, Nos. CP08-6-000, CP08-9-000 (Aug.
25, 2008), reprinted in Joint Appendix 212. Indeed, Apache’s
petition for rehearing expressly disavowed Apache’s current
claim, emphasizing that “[t]he discrimination is not between
Midcontinent the lessee, and the other Enogex shippers.” Id.
Given that Apache did not advance – and in fact affirmatively
disclaimed – the discrimination argument it now articulates,
we do not consider Apache’s undue discrimination claim.
Second, Apache alternatively argues that the Enogex-
Midcontinent lease did not meet the Commission’s standard
for approval of pipeline leases.

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Since 2002, the Commission’s practice has been to
approve a pipeline lease if: “(1) there are benefits for using a
lease arrangement; (2) the rate under the lease is less than
comparable transportation service; and (3) the lease
arrangement does not adversely affect existing customers.”
Islander East Pipeline Co., 100 FERC ¶ 61,276, at ¶ 69
(2002) (emphasis added). FERC dutifully cited that test in its
order approving the Enogex-Midcontinent lease. See
Midcontinent Express Pipeline LLC and Enogex Inc., 124
FERC ¶ 61,089, at ¶ 31 (2008). But the problem here, as
Apache correctly points out, is that the Commission never
concluded that the Enogex-Midcontinent lease would not
adversely affect existing customers, the third prong of the test.
Instead, FERC simply found that the lease would “not have an
unduly adverse impact on Enogex’s existing services.” Id.
¶ 43 (emphasis added). The Commission further determined
that the lease’s benefits “outweigh any potential harm to
Enogex’s customers.” Id. ¶ 32.
The confusion arises because FERC’s analysis – with its
focus on whether the lease would cause any undue adverse
effects – is inconsistent with FERC’s pre-existing test for
pipeline leases, which examined whether the lease would
cause any adverse effects. There is a difference between
adverse effects and undue adverse effects. The former inquiry
focuses on a single factor in isolation; the latter inquiry entails
a balancing of multiple factors.
FERC might have tried to explain its decision in one of at
least two ways. First, FERC counsel suggests here that
diminished interruptible service does not constitute an
“adverse effect” for purposes of pipeline lease analysis
because interruptible service is inherently subject to
disruption and therefore cannot be “adversely affected” by a

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lease. Alternatively, the Commission might have modified its
pipeline lease test to preclude only “undue” adverse effects
and to expressly permit balancing of benefits against burdens
– either for all leases, or for a smaller subset that includes the
Enogex-Midcontinent lease. (FERC of course also could
have expressly relied in the alternative on both grounds.)
We do not decide the reasonableness of either of these
rationales because the Commission followed neither in the
order under review. It instead purported to follow its
precedents but then failed to apply the standard set forth in
those decisions. Because FERC has not provided a reasoned
explanation for its decision, we must remand for clarification.
See Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 43-44 (1983).
After FERC settles on an approach on remand, Apache of
course may file a new petition for review if it believes
FERC’s chosen path to be unlawful. Applying our precedents
on remand without vacatur, however, we find no basis at this
point for vacating FERC’s order approving the Enogex-
Midcontinent lease. There is “a serious possibility that the
Commission will be able to substantiate its decision on
remand.” Allied-Signal, Inc. v. U.S. Nuclear Regulatory
Comm’n, 988 F.2d 146, 151 (D.C. Cir. 1993). And “the
disruptive consequences of vacating” are substantial. Id. The
FERC order approving the Enogex-Midcontinent lease thus
remains in effect and legally binding. Because we are not
vacating the order approving the lease, we expect and direct
FERC to provide the necessary clarification without undue
delay.

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* * *
We deny Apache’s petition in part and remand for further
explanation.
So ordered.

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