Rio Grande Pipeline Co. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 21, 1999 Decided June 8, 1999

No. 98-1194

Rio Grande Pipeline Company,

Petitioner

v.

Federal Energy Regulatory Commission and

United States of America,

Respondents

Longhorn Partners Pipeline, L.P.,

Intervenor

On Petition for Review of Orders of the Federal

Energy Regulatory Commission

John B. Rudolph argued the cause for petitioner. With

him on the briefs was Alex A. Goldberg. Lisa M. Tonery

entered an appearance.

Judith Albert, Attorney, Federal Energy Regulatory Com-

mission, argued the cause for respondents. With her on the

brief were Joel I. Klein, Assistant Attorney General, U.S.

Department of Justice, John J. Powers, III, and Robert J.

Wiggers, Attorneys, Jay L. Witkin, Solicitor, Federal Energy

Regulatory Commission, and Susan J. Court, Special Coun-

sel. Samuel Soopper, Attorney, entered an appearance.

Lawrence A. Miller argued the cause for intervenor. With

him on the briefs was Kevin Hawley.

Before: Edwards, Chief Judge, Wald and Rogers, Circuit

Judges.

Opinion for the Court filed by Chief Judge Edwards.

Edwards, Chief Judge: Rio Grande Pipeline Company

("Rio Grande") purchased 194 miles of an existing refined

products pipeline from the Navajo Pipeline Company ("Nava-

jo") to deliver natural gas liquids ("NGLs") from the United

States to Mexico. In exchange for the pipeline, Rio Grande

paid Navajo an agreed sum of money and granted Navajo

Southern, Inc., a wholly owned subsidiary of Navajo, a minor-

ity interest in Rio Grande. In the proceeding under review,

Rio Grande sought to include the purchase price of the

pipeline in its rate base. Normally, a purchaser such as Rio

Grande is only permitted to include the seller's depreciated

original cost in its cost-of-service calculations; however, Rio

Grande pointed out that this transaction was different, be-

cause the pipeline was purchased for a new use and the

purchase price was less than the cost of constructing a

comparable facility. Rio Grande therefore contended that it

should be permitted to include the full purchase price of the

pipeline in its rate base under the so-called "benefits excep-

tion" to the original cost rule. The Federal Energy Regula-

tory Commission ("FERC" or "Commission") denied Rio

Grande's request, holding that the benefits exception can

never be employed when the seller acquires an equity interest

in the purchasing entity. Rio Grande petitions for review of

this ruling, claiming that FERC's decision is flatly at odds

with the benefits rule and that the agency's judgment defies

reason.

Before turning to the merits, we must first resolve three

threshold issues: (1) whether Longhorn Partners Pipeline

("Longhorn") is a proper intervenor in the matter now before

the court, (2) whether Rio Grande has been "aggrieved" by

the contested orders, and (3) whether the contested orders

are ripe for review. With these threshold issues resolved, we

then reach the question of whether FERC's rejection of Rio

Grande's request to include the full purchase price of the

pipeline in its rate base was arbitrary and capricious.

On the record at hand, we conclude that Longhorn is not a

proper intervenor in this action, because it does not have

standing. Indeed, it appears that Longhorn is really seeking

to participate as an amicus. Pursuant to our discretion under

Rule 29(a) of the Federal Rules of Appellate Procedure, we

will accord Longhorn amicus status so that its views on the

common issues can be considered. We also conclude that Rio

Grande is an aggrieved party, because it faces real and

present economic injury as a result of the orders here in

dispute. Likewise, because FERC's disputed policy is fully

crystallized and raises a concrete legal question, we find that

petitioner's claim is ripe for review by this court. Finally, on

the merits, we conclude that FERC's refusal to apply the

benefits exception in the present case was arbitrary and

capricious for lack of an adequate justification. Accordingly,

we grant Rio Grande's petition for review.

I. Background

Rio Grande is a partnership formed by two pipeline compa-

nies, Juarez Pipeline Company and Amoco Rio Grande Pipe-

line Company, to construct and maintain an integrated com-

mon carrier pipeline to deliver NGLs from the United States

to Mexico. As a part of this project, Rio Grande sought to

purchase 194 miles of an existing refined products pipeline

from Navajo, which would then be converted to NGL service.

According to Rio Grande, Navajo's willingness to sell this

segment of pipeline "at a reasonable price was directly depen-

dent on its ability to acquire a partnership interest in our

project." Statement of William C. Lawson, Management

Committee Chairman, Rio Grande, reprinted in Joint Appen-

dix ("J.A.") 61. Accordingly, in exchange for the pipeline, Rio

Grande agreed to pay an agreed sum of money to Navajo as

well as grant Navajo Southern, Inc., a wholly owned subsid-

iary of Navajo, a minority partnership interest in Rio Grande.

Rio Grande asserts, without contradiction, that the price paid

for the pipeline, including the value of the partnership inter-

est and the cost of converting and integrating the acquired

line, is at least $8 million less than the cost of constructing a

comparable new line. See id.

Rio Grande then sought to justify the rates for its new

service. Under 18 C.F.R. s 342.2, pipelines may justify an

initial rate for new service using one of two methods: the

carrier may either (1) file cost, revenue, and throughput data

supporting the proposed rate pursuant to s 342.2(a), or (2)

file a sworn statement that the proposed rate is agreed to by

at least one non-affiliated person who intends to use the

service, pursuant to s 342.2(b). Rates justified under

s 342.2(b) are simple to put into place, and often become

effective without a FERC order addressing them. However,

these rates are ineffective if a protest to the initial rate is

filed, in which case the carrier must seek a s 342.2(a) justifi-

cation. Moreover, if a negotiated rate is challenged and a

lower rate is found appropriate, the pipeline may have to pay

reparations for the amount overcharged. In contrast, a cost-

supported rate approved under s 342.2(a) is entitled to great-

er protection. For example, if a challenge is brought to a

cost-supported, Commission-approved rate and a reduction is

required, that reduction is given only prospective effect. See

generally Arizona Grocery Co. v. Atchison, Topeka & Santa

Fe Ry. Co., 284 U.S. 370, 387-89 (1932).

In this case, Rio Grande filed a petition for a declaratory

order, requesting approval of its initial rates. In its petition,

Rio Grande noted that a non-affiliated party, Petroleos Mexi-

canos ("PEMEX"), had agreed to the proposed initial rate of

$1.26 per barrel and, thus, the rates could be justified under

s 342.2(b). However, Rio Grande made clear that it was not

requesting FERC approval of a negotiated rate under

s 342.2(b):

[W]hether one or twenty "non-affiliated persons" agree

to its to-be-filed rate, [Rio Grande] is not assured that it

will be able to justify its "initial rate," if challenged,

unless it has the Commission's approval to include its

acquisition costs. Regardless of a consignee or shipper's

prior agreement to the rate, [Rio Grande's] proposed

tariff may be protested. In the event of a protest to a

negotiated rate, [Rio Grande] would have to submit "cost,

revenue and throughput data supporting such rate" and

incur the cost of a lengthy rate proceeding. 18 C.F.R.

s 342.2(a) (1995). Accordingly, [Rio Grande] also sub-

mits this Petition to establish its rate base and pre-

justify its rates.

In re Rio Grande Pipeline Co., Verified Petition for Declara-

tory Order (Oct. 7, 1996), reprinted in J.A. 8 (footnote

omitted). In support of its request for approval under

s 342.2(a), Rio Grande submitted detailed cost-of-service cal-

culations, which included the full purchase price of the new

pipeline.

Generally, when establishing the cost of service upon which

a pipeline's regulated rates are based, FERC employs "origi-

nal cost" principles. Under these principles, when a facility is

acquired by one regulated entity from another, the seller's

depreciated original cost is included in the cost-of-service

computations, even though the price paid by the purchaser

may exceed that amount. See Northern Natural Gas Co., 35

F.E.R.C. p 61,114, at 61,236 (1986). Applying the original

cost rule to this case, Rio Grande would not be permitted to

include the full purchase price of the pipeline in its rate base;

it would only be permitted to include Navajo's depreciated

cost of the pipeline. However, the Commission has created

an exception to this general rule for cases where it is shown

that the "acquisition results in substantial benefits to ratepay-

ers." Longhorn Partners Pipeline, 73 F.E.R.C. p 61,355, at

62,112 (1995) ("Longhorn I"). Under this "benefits excep-

tion," purchased facilities may be included in the rate base at

the full purchase price if the purchaser can demonstrate that:

(1) the acquired facility is being put to new use, and (2) the

purchase price is less than the cost of constructing a compa-

rable facility. See id. at 62,112-13.

In its petition, Rio Grande argued that it had satisfied the

requirements of the benefits exception. It explained that, by

acquiring the pipeline from Navajo rather than constructing a

new one, it had saved at least $8 million. It also explained

that the pipeline would be put to a new use, because the

transport of NGLs, unlike the transport of refined products,

required pressurization, and because the line would serve

entirely different markets and shippers than those served by

the previous refined products service. Accordingly, Rio

Grande argued that it should be allowed to include the full

purchase price of the pipeline in its rate base.

FERC denied Rio Grande's request to allow the full pur-

chase price of the acquired line to be included in its cost-of-

service calculations, and, thus, rejected the proposed rates

under s 342.2(a). See Rio Grande Pipeline Co., 78 F.E.R.C.

p 61,020, at 61,082-83 (1997) ("Rio Grande I"). In support of

this position, FERC explained that "[t]he general rule ... is

that the depreciated cost of an acquired asset must be used in

cost-of-service calculations where the former owner not only

receives the higher price but also has an equity interest in the

acquiring company." Id. at 61,082. This position was war-

ranted, according to FERC, to ensure that a seller does not

"benefit from the higher cost of service on the line, which it

cannot do as the owner of a regulated asset at this time." Id.

(internal quotation marks omitted). FERC noted, however,

that since Rio Grande had supplied the affidavit required by

s 342.2(b), and no entity had protested the charged rate, Rio

Grande was free to charge the proposed rate in its transac-

tions with PEMEX. See id. Rio Grande sought rehearing of

the decision, which was denied on February 13, 1998. See

Rio Grande Pipeline Co., 82 F.E.R.C. p 61,147 (1998) ("Rio

Grande II"). Rio Grande then timely petitioned for review in

this court.

In an entirely separate transaction, Longhorn, like Rio

Grande, negotiated a deal to purchase a pipeline segment.

And Longhorn similarly agreed to grant an equity interest to

the seller of the pipeline segment in addition to the payment

of a sum of cash. After its deal had closed, Longhorn sought

approval from FERC for the inclusion of the full purchase

price of its new asset in its rate base under the benefits

exception. The Commission, however, denied Longhorn's

request for the same reason it had denied Rio Grande's

request: the benefits exception could not apply where a

selling entity acquired an equity interest in the purchaser.

See Longhorn Partners Pipeline, 82 F.E.R.C. p 61,146, at

61,543-44 (1998).

Because of the possible precedential impact on its case,

Longhorn sought to intervene in the Rio Grande proceedings

before the Commission, but its motion was denied. See Rio

Grande II, 82 F.E.R.C. at 61,548. In a separate action,

Longhorn filed a petition for review of its own case in this

court, Longhorn Partners Pipeline v. FERC, No. 98-1547

(filed Nov. 17, 1998); however, Longhorn also seeks to main-

tain intervenor status in the instant case before this court,

over the objection of FERC.

II. Analysis

A. Longhorn's Intervenor Status

Longhorn relies principally on 28 U.S.C. s 2348 in support

of its motion to intervene. In City of Cleveland v. NRC, 17

F.3d 1515, 1517-18 (D.C. Cir. 1994) (per curiam), however,

this court held that Article III standing is a prerequisite to

s 2348 intervention, and it is uncontested that Longhorn

lacks Article III standing with respect to the Commission's

Rio Grande II order. From this, it might be simply conclud-

ed that Longhorn cannot intervene under 28 U.S.C. s 2348.

The matter is not so simple, however, for in the same year

that City of Cleveland was issued, the court also issued

American Train Dispatchers Ass'n v. ICC, 26 F.3d 1157

(D.C. Cir. 1994), producing precedent that can be read as in

direct conflict with City of Cleveland.

In Train Dispatchers, we faced the preliminary question of

whether to permit the Railway Labor Executives' Association

("RLEA") to intervene in the proceedings challenging an ICC

order although it had not participated at the agency level.

The court in Train Dispatchers did two things with respect to

the intervention question: (1) it held that the court may, in its

discretion, permit intervention under 28 U.S.C. s 2348, and

(2) it expressly allowed RLEA to intervene. See Train

Dispatchers, 26 F.3d at 1162 ("Thus, even assuming that

RLEA is not entitled to intervene as of right here, we may

allow it to intervene as a discretionary matter. We choose to

do so in this case...."). Were Article III standing a prere-

quisite to intervention, the court could not have decided, as it

did, to "grant RLEA's motion to intervene without deciding

whether it has Article III standing." Id. This statement

makes sense only to the extent that Article III standing is

simply irrelevant to (or at least not dispositive of) the discre-

tionary decision to allow intervention. Accordingly, it ap-

pears that City of Cleveland and Train Dispatchers conflict.

The only conclusion we can draw from reading these two

cases is that the two panels spoke past one another. They

rely on different lines of circuit precedent, and neither opin-

ion even acknowledges that the other line exists. Given that

our sister circuits are similarly divided, compare Ruiz v.

Estelle, 161 F.3d 814, 830 (5th Cir. 1998) (holding that Article

III standing is not a prerequisite to intervention), Associated

Builders & Contractors v. Perry, 16 F.3d 688, 690 (6th Cir.

1994) (same), Yniguez v. Arizona, 939 F.2d 727, 731 (9th Cir.

1991) (same), Chiles v. Thornburgh, 865 F.2d 1197, 1213 (11th

Cir. 1989) (same), and United States Postal Serv. v. Brennan,

579 F.2d 188, 190 (2d Cir. 1978) (same), with Mausolf v.

Babbitt, 85 F.3d 1295, 1300 (8th Cir. 1996) (holding that

Article III standing is necessary for intervention), and Unit-

ed States v. 36.96 Acres of Land, 754 F.2d 855, 859 (7th Cir.

1985) (concluding that intervention under Rule 24 requires

interest greater than that of standing), we believe it impera-

tive that we now explain why we conclude that a prospective

s 2348 intervenor must have standing to participate as an

intervenor rather than only as an amicus curiae.

In City of Cleveland, the court denied the Alabama Electric

Cooperative's ("AEC") motion to intervene in a dispute be-

tween the Nuclear Regulatory Commission ("NRC") and two

nuclear power plants as to whether the latter could suspend

the antitrust conditions in their operating licenses. Although

it lacked Article III standing, in that it had no relationship

whatsoever with the petitioners, their competitors, or the

geographic market at issue, AEC sought to intervene on the

side of the NRC, because it feared that an adverse decision

could lead a competitor to seek a similar suspension of its

antitrust conditions. In denying AEC's motion, the court

relied heavily upon Southern Christian Leadership Confer-

ence v. Kelley, 747 F.2d 777, 779 (D.C. Cir. 1984), wherein the

court held that Article III standing is necessary for interven-

tion under Rule 24(a)(2) of the Federal Rules of Civil Proce-

dure. In particular, the court focused upon what it consid-

ered the rationale underlying the Kelley decision, namely that

"because a Rule 24 intervenor seeks to participate on an

equal footing with the original parties to the suit, he must

satisfy the standing requirements imposed on those parties."

City of Cleveland, 17 F.3d at 1517. Because a prospective

s 2348 intervenor similarly seeks to participate like a party,

the court reasoned, it should be treated like a party. Accord-

ingly, as we had held in Kelley, it must satisfy the standing

requirements imposed on parties.

The City of Cleveland court did not differentiate those

seeking to intervene with party-like status from those seeking

a lesser degree of participation. It instead assumed that

prospective intervenors always sought to participate on an

equal footing with the original petitioner. Although the City

of Cleveland court did not then address the situation we now

face, we nevertheless believe that its more general conclusion

remains valid: there is no reason to believe that Congress

intended to create two tiers of s 2348 intervenors based upon

the presence or absence of standing. See id.

The language of s 2348 alone does not settle the proper

relationship between Article III standing and intervention,

but the general structure that Congress has provided for

appellate review of agency action strongly militates towards

reading s 2348 to require Article III standing as a prerequi-

site to intervention. A party petitioning for review of agency

action must have standing, and the intervention rules help to

govern which existing suits a prospective party may legiti-

mately join. In this case, Longhorn essentially seeks to

participate as an amicus curiae--it sought only to contribute

its views to those issues raised by Rio Grande's petition for

review and, had Rio Grande ceded some of its oral argument

time, to participate in oral argument. Diamond v. Charles,

476 U.S. 54, 62-64 (1986), says that an entity lacking Article

III standing can do no more than that. As Longhorn readily

admits, in the status that it seeks, it could neither petition for

rehearing en banc nor petition for certiorari unless Rio

Grande first did the same. Thus, for the sake of clarity,

simplicity, and administrative rationality, we believe that such

limited participation should be accorded in the form of ami-

cus, and not intervenor. Those who possess Article III

standing, on the other hand, can either petition for review

directly, particularly if they desire to raise any additional

issues, or intervene under s 2348, in which case they normal-

ly would be limited to the scope of the original petition for

review. See National Ass'n of Regulatory Utility Comm'rs

v. ICC, 41 F.3d 721, 729-30 (D.C. Cir. 1994) (stating that only

in extraordinary cases will an intervenor be permitted to

raise additional issues not raised by petitioners). For those

who have participated before the agency, s 2348 explicitly

provides that choice, allowing

any party in interest in the proceeding before the agency

whose interests will be affected if an order of the agency

is or is not enjoined, set aside, or suspended [to] appear

as parties thereto of their own motion and as of

right....Communities, associations, corporations, firms,

and individuals, whose interests are affected by the order

of the agency, may intervene in any proceeding to review

the order.

For those who have Article III standing but failed to partici-

pate at the agency level, s 2348 merely permits intervention.

On the record here, there is no doubt that Longhorn is not

a proper intervenor. It appears that Longhorn is really

seeking to appear as an amicus. Because we have discretion

to grant a party such status, see Fed. R. App. P. 29(a), we will

accord Longhorn amicus status so that its views on the

common issues can be considered.

B. Aggrievement and Ripeness

FERC argues that Rio Grande is not aggrieved by the

disputed orders, and that, even if it is aggrieved, the orders

are not ripe for review. The Commission is wrong on both

counts.

A party seeking review of a final Commission order must

demonstrate that it has been "aggrieved" by the order. See

28 U.S.C. s 2344 (1994).

Like all parties seeking access to the federal courts,

petitioners are held to the constitutional requirement of

standing. Common to both these thresholds is the re-

quirement that petitioners establish, at a minimum, inju-

ry in fact to a protected interest. To demonstrate injury

in fact, petitioners must identify an invasion of a legally

protected interest which is (a) concrete and particular-

ized, and (b) actual or imminent, not conjectural or

hypothetical.

Shell Oil Co. v. FERC, 47 F.3d 1186, 2000 (D.C. Cir. 1995)

(citations and internal quotation marks omitted).

In this case, FERC argues that Rio Grande has not been

injured, because Rio Grande may charge the rate it sought to

charge pursuant to s 342.2(b). However, this conclusion

misses the point. Rio Grande filed its petition for a declara-

tory order specifically because it sought the security of a rate

approval under s 342.2(a). FERC's refusal to approve Rio

Grande's rate under s 342.2(a) means that the current rate

may be rendered ineffective if any party files a protest. Rio

Grande argues that this affects both its present economic

behavior--investment plans and creditworthiness--and its fu-

ture business relationships. In particular, Rio Grande as-

serts that the orders "have had a profoundly negative effect

on the active marketing of [this] project to new potential

users," have made existing and potential investors "extremely

skeptical over further investment in the project," and have

"negatively impact[ed] both [Rio Grande's] ability to raise

debt capital and its general creditworthiness." Brief of Rio

Grande at 19-20. FERC does not dispute these contentions.

On the record at hand, there can be no serious doubt over

Rio Grande's aggrievement by virtue of FERC's orders. As

indicated, Rio Grande is suffering present economic injury as

a result of the orders. See, e.g., Great Lakes Gas Transmis-

sion Ltd. Partnership v. FERC, 984 F.2d 426, 430 (D.C. Cir.

1993) (holding that showing of "present injurious effect on [a

petitioner's] business decisions and competitive posture within

the industry" is sufficient to prove that petitioner is ag-

grieved). There can also be no doubt that Rio Grande

satisfies the remaining Article III standing requirements,

because its injury flows from the FERC orders under review

and may be redressed if this court grants its petition for

review. It therefore has standing to petition for review of the

FERC orders at issue here.

FERC also claims that, even if Rio Grande has been

aggrieved and has standing to contest the disputed orders,

the case should nonetheless be dismissed as unripe. On this

score, FERC contends that Rio Grande's petition is unfit for

review, because Rio Grande "has not shown that the contest-

ed orders have had any immediate impact on its daily affairs,"

and that FERC has "not applied its pronouncements on

original cost to any of [Rio Grande's] actual rates." Brief for

FERC at 20-21. This is a mangled view of the ripeness

doctrine, and we reject it.

As we noted in Mississippi Valley Gas Co. v. FERC, 68

F.3d 503, 508 (D.C. Cir. 1995), in applying the ripeness

doctrine,

we are to consider the nature of the challenged issue and

inquire whether the agency action is sufficiently final for

review. When a petitioner raises a purely legal question,

we assume that issue is suitable for judicial review.

However, our assessment of the finality of the agency

action also includes consideration of whether the agency

or the court will benefit from deferring review until the

agency's policies have crystallized and the question arises

in some more concrete and final form.

(citations and internal quotation marks omitted). In other

words, a case is ripe when it "presents a concrete legal

dispute [and] no further factual development is essential to

clarify the issues ... [and] there is no doubt whatever that

the challenged [agency] practice has 'crystallized' sufficiently

for purposes of judicial review." Payne Enters., Inc. v.

United States, 837 F.2d 486, 492-93 (D.C. Cir. 1988). The

Commission is quite wrong in its implicit suggestion that Rio

Grande's petition must be dismissed absent a showing of

"hardship," for, "under the ripeness doctrine, the hardship

prong of the [Abbott Laboratories v. Gardner, 387 U.S. 136,

149 (1967) ] test is not an independent requirement divorced

from the consideration of the institutional interests of the

court and agency." Id. at 493; accord City of Houston v.

HUD, 24 F.3d 1421, 1431 n.9 (D.C. Cir. 1994). Under these

well-established principles, the Commission's claim that this

case is unripe for review must be rejected.

The record here shows conclusively that this case presents

a concrete legal dispute and that FERC's policy is crystal-

lized. In Rio Grande I, the Commission stated:

In this case, whether or not Rio Grande satisfies the two-

prong test, we must deny its request. That test presup-

poses a write-up that would be permissible if the test

were satisfied. That is not the case here. In this

instance, the seller of the acquired line, Navajo, has an

equity position in Rio Grande through an affiliate, Navajo

Southern, one of the partners of Rio Grande. Rio

Grande argues that in this case Navajo Southern's equity

interest should not be a bar to the write-up, because it

was essential to structuring an agreement acceptable to

Navajo so that the project could go forward. The gener-

al rule, however, is that the depreciated cost of an

acquired asset must be used in cost-of-service calcula-

tions where the former owner not only receives the

higher price but also has an equity interest in the

acquiring company. This is so because otherwise the

seller "might benefit from the higher cost of service on

the line, which it cannot do as the owner of a regulated

asset at this time." Thus, we must deny Rio Grande's

request for a write-up.

78 F.E.R.C. at 61,082 (quoting Longhorn I, 73 F.E.R.C. at

62,113). In Rio Grande II, the Commission reaffirmed its

position:

Here, we have a regulated entity allegedly changing its

service and requesting a write-up of the assets dedicated

to the new service....In the absence of Navajo's equity

interest, this case might fall within one of the recognized

exceptions to the general rule. However, we need not

address this issue because in this case a company is

selling the asset to itself. To allow the write-up in this

situation would open the door to circumvention of the

purpose of the original cost concept....Accordingly, we

will deny rehearing.

82 F.E.R.C. at 61,548. It is clear here that the Commission

has decided that the benefits exception cannot be used where

a selling entity acquires an equity interest in the purchaser as

a result of the transaction, and has applied this new rule by

denying Rio Grande's request for approval of its cost-justified

rates. Thus, because FERC's orders raise a concrete legal

dispute regarding a policy that has crystallized to its final

form, the orders are ripe for review.

C. The Merits

We now turn to the merits of Rio Grande's challenge:

FERC's refusal to apply the benefits exception based on

Navajo's equity interest in Rio Grande. We review the

Commission's orders under the usual arbitrary and capricious

standard. See Williston Basin Interstate Pipeline Co. v.

FERC, 165 F.3d 54, 60 (D.C. Cir. 1999); 5 U.S.C. s 706(2)(A)

(1994). In this context, our role is "limited to assuring that

the Commission's decisionmaking is reasoned, principled, and

based upon the record." Pennsylvania Office of Consumer

Advocate v. FERC, 131 F.3d 182, 185 (D.C. Cir. 1997) (cita-

tions and internal quotation marks omitted).

Rio Grande argues that the Commission acted arbitrarily

and capriciously, because it did not adequately explain its

refusal to permit the inclusion of the full cost of the acquired

line in Rio Grande's rate base. We agree.

As noted above, normally when a facility is acquired by one

regulated entity from another, the purchaser may only in-

clude the seller's depreciated original cost in its rate base,

even though the price paid by the purchaser may exceed that

amount. However, under the benefits exception, the Com-

mission has permitted the purchasing pipeline to include the

full purchase price of an acquired asset in its cost-of-service

computations if the pipeline can show that: (1) an acquired

facility is being put to new use, and (2) the purchase price is

less than the cost of constructing a comparable facility. See

Longhorn I, 73 F.E.R.C. at 62,112-13.

In its orders below, FERC did not even reach the question

of whether Rio Grande satisfied the two-prong exception;

instead, it concluded that the exception could not be employed

where the seller acquires an equity position in the purchaser:

"[t]he general rule...is that the depreciated cost of an ac-

quired asset must be used in cost-of-service calculations

where the former owner not only receives the higher price

but also has an equity interest in the acquiring company."

Rio Grande I, 78 F.E.R.C. at 61,082. On rehearing, FERC

did not waver from this position, stating that it considered the

deal between Rio Grande and Navajo one in which the

"company is selling the asset to itself." Rio Grande II, 82

F.E.R.C. at 61,548.

The Commission now claims that it has simply interpreted

its original cost rule and the exception thereto. This self-

serving explanation cannot carry the day. The Commission

in this case has effectively added a new per se exclusion to the

application of the benefits exception when an asset's seller

acquires an interest in the purchaser. The creation of this

per se exception makes no sense and, indeed, FERC cites no

established authority or plausible reasons in support of it.

First, on its face, the retention of some interest in the

acquired facilities in lieu of a money payment will reduce the

cost basis included in Rio Grande's rate base and, thus, rates

will be lower than if the facilities were sold solely for money.

This result would appear to be in the public interest. Re-

duced rates result because, as Rio Grande made clear at oral

argument, the amount it seeks to include in its rate base is

only the total amount of money paid and does not include the

value of any equity interest. Thus, in a situation such as this,

if a company will sell its facility for $100 outright or $80 plus

a 5% equity interest, the better deal for the ratepayer is the

$80-plus-equity deal, because $80, rather than $100, may be

included in the rate base.

Moreover, it is clear that Rio Grande has put the pipeline

to a new use: transportation of NGLs. From the perspective

of an acquiring entity, concepts of "depreciation" are normally

inapposite in such circumstances. Thus, it hardly makes

sense for FERC to require the use of a depreciated figure in

this situation where the use is brand new.

The Commission stated in Rio Grande II that "[t]o allow

[a] write-up in this situation would open the door to circum-

vention of the purpose of the original cost concept." 82

F.E.R.C. at 61,548. Although this is a valid concern, the door

was already opened to this possibility when FERC permitted

the benefits exception in the first place. And to the extent

that FERC is worried about sham transactions where equity

interests are involved, no party has claimed that every trans-

action of the sort at issue here is unethical and a sham.

Indeed, there does not appear to be any difference between a

deal of this sort and one in which a seller receives money for

the asset, but later uses that money towards the acquisition of

an interest in the purchaser. Presumably, this second deal

would qualify for consideration under the benefits exception,

since the seller did not become affiliated with the purchaser

as a result of the sale. However, the Commission has not

explained why the first deal is cause for such concern that it

may never qualify for the benefits exception, whereas the

second deal may. In addition to this apparent inconsistency,

it is also not clear how there could even be sham transactions,

given the requirement that there must be a new use for the

facility, and that the purchase price must be less than the cost

of building anew.

To the extent that the Commission is troubled by these

transactions, there are surely ways, short of a per se exclu-

sion, to ensure that the deal was negotiated at arm's length.

In fact, it is difficult to discern why the Commission would

not consider other possibilities short of prohibiting the appli-

cation of the benefits exception to these sorts of deals, when

limiting purchasers to all-cash deals could result in higher

prices and thus harm to ratepayers. Arguably, the Commis-

sion might decide that a per se rule or even a substantially

more rigid version of the benefits test is appropriate based on

reasoned findings regarding affiliate transactions. However,

we need not address these possibilities; as it now stands, the

Commission's orders defy good reason. We therefore reverse

and remand this case to the Commission for further consider-

ation.

III. Conclusion

For the foregoing reasons, we deny Longhorn intervenor

status in this proceeding, but grant it amicus status. We also

grant Rio Grande's petition for review and remand for further

proceedings consistent with this opinion.

So ordered.