Background

Gas Transmission Northwest, L.L.C. sought FERC approval for an expansion of its interstate natural gas pipeline, involving replacements for three compressor units along the pipeline route. The company requested both a certificate of public convenience and necessity under Section 7 of the Natural Gas Act and a predetermination that rolled-in rates would apply in subsequent rate proceedings. A rolled-in rate predetermination creates a rebuttable presumption favoring the allocation of expansion costs across all customers rather than charging only incremental expansion customers. FERC granted the certificate but denied the rate predetermination, prompting the company to petition for review. Simultaneously, the states of Washington and Oregon, along with environmental organizations Columbia Riverkeeper and Rogue Climate, challenged FERC's certificate approval on NEPA and NGA grounds.

The Regulatory Framework

The Natural Gas Act provides FERC with exclusive jurisdiction over the transportation of natural gas in interstate commerce. Under the NGA, natural gas companies seeking to construct interstate pipeline facilities, including those seeking to increase capacity on existing pipelines, must first obtain a certificate of public convenience and necessity from FERC. FERC sets initial rates in connection with certificate issuance, which are subject to different standards than rates set in subsequent NGA ratemaking proceedings. FERC's longstanding policy for determining initial rates applies depreciation rates established in the pipeline's most recent cost-of-service rate proceeding.

The Rate Predetermination Dispute

Gas Transmission Northwest argued that FERC acted arbitrarily in denying its rolled-in rate predetermination while simultaneously approving the certificate based on findings that existing customers would benefit from the expansion. The Fifth Circuit rejected this argument, holding that FERC's denial was not arbitrary and capricious. The court emphasized the distinct standards governing certificate approval versus rate predetermination. A certificate requires a showing that the project serves the public convenience and necessity, while a rolled-in rate predetermination requires demonstrating that the rate effect of the project on existing customers is not substantial. The court found that FERC reasonably applied its depreciation-rate policy, which uses historical cost-of-service data from prior proceedings, even though this resulted in higher initial rates than the company proposed.

Standing and Ripeness

As a threshold matter, the states of Washington and Oregon moved to dismiss Gas Transmission Northwest's petition for lack of standing. The Fifth Circuit held that the company had Article III standing to challenge the denial of the rolled-in rate predetermination. The court also determined that the company's petition was ripe for review, rejecting arguments that the rate dispute was premature.

Environmental Challenges

The state and environmental petitioners mounted several NEPA challenges to FERC's environmental impact statement. They argued that FERC's analysis of the no-action alternative was deficient, that FERC improperly segmented the project by excluding compressor replacements from environmental review, and that the EIS failed to adequately evaluate significant adverse effects. The Fifth Circuit rejected each of these challenges. The court held that FERC's analysis of the no-action alternative in the environmental impact statement was not arbitrary and capricious. The court further held that FERC reasonably declined to consider the compressor replacements as part of the expansion project subject to the EIS. Finally, the court determined that the EIS sufficiently evaluated reasonably foreseeable significant adverse effects.

Conclusion

The Fifth Circuit denied all petitions for review. The court upheld FERC's issuance of the certificate of public convenience and necessity as not arbitrary and capricious, and similarly upheld FERC's application of its longstanding depreciation-rate policy to set initial rates. The court also rejected all environmental challenges, finding that FERC's NEPA analysis satisfied applicable legal standards.