Dominion Resources, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 5, 2002 Decided April 19, 2002

No. 01-1031

Dominion Resources, Inc.,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Rochester Gas and Electric Corporation, et al.,

Intervenors

Consolidated with

01-1169

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Catherine E. Stetson argued the cause for petitioners.

With her on the briefs were Kevin J. Lipson, J. Patrick

Nevins and Anne E. Bomar.

Robert H. Solomon, Associate Solicitor, Federal Energy

Regulatory Commission, argued the cause for respondent.

With him on the brief were Cynthia A. Marlette, General

Counsel, and Dennis Lane, Solicitor.

Before: Edwards and Randolph, Circuit Judges, and

Williams, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

Williams.

Williams, Senior Circuit Judge: Petitioner Dominion Re-

sources, Inc. is the surviving parent corporation in a merger

of two already quite diverse companies, one ("Dominion")

primarily an electric power company, the other (Consolidated

Natural Gas Company ("CNG")) a natural gas pipeline with

upstream and downstream affiliates. The parties refer to

this type of merger as a "convergence merger." Dominion

here challenges the Federal Energy Regulatory Commis-

sion's May 2000 Compliance Order requiring the pipeline

subsidiary to observe FERC's Standards of Conduct, 18

C.F.R. ss 161.3, 250.16, in dealing with all of its energy

affiliates in the post-merger entity. See Dominion Re-

sources, Inc. & Consolidated Natural Gas Co., 91 FERC

p 61,140 (2000) ("Compliance Order"). Dominion contends

that the Compliance Order was far broader than the order on

which it purportedly rested, see Dominion Resources, Inc. &

Consolidated Natural Gas Co., 89 FERC p 61,162 (1999)

("Merger Order"), destroyed integrations that existed before

the merger, and was thus arbitrary and capricious. We agree

with Dominion and therefore vacate and remand.

* * *

In June 1999 Dominion and CNG sought Commission au-

thorization for their merger. See 16 U.S.C. s 824b. Domin-

ion was a holding company with predominantly electric utility

interests, specifically:

. Virginia Electric and Power Company, an electric

transmission and distribution subsidiary; and

. Dominion Energy, a multifaceted firm active in

. power generation and power marketing, and

. oil and gas development and exploration.

CNG, in contrast, was a holding company with predominantly

gas utility interests:

. CNG Transmission ("CNGT"), a gas pipeline;

. CNG Retail Services and CNG Power Services, both

power marketers;

. various gas local distribution companies; and

. CNG Producing, a gas exploration and production

firm.

Before the merger, CNG also owned Virginia Natural Gas, a

local distribution company, but it divested that company

pursuant to a Consent Order with the Federal Trade Com-

mission. Merger Order, 89 FERC at 61,472-73; see Domin-

ion Resources, Inc. & Consolidated Natural Gas Co., 1999

WL 1336609 (F.T.C. Nov. 1999).

The restrictions that the parties dispute come in the con-

text of FERC's pre-existing generic Standards of Conduct.

These limit interactions between gas pipelines and their gas

marketing affiliates, with the aim of preventing pipelines from

using their monopoly positions to obtain anti-competitive ad-

vantages in downstream gas markets. E.g., Inquiry Into

Alleged Anticompetitive Practices Related to Marketing Af-

filiates of Interstate Pipelines, Order No. 497, FERC Stats.

& Regs. (CCH) p 30,820 (1988) ("Order No. 497"); Tenneco

Gas v. FERC, 969 F.2d 1187 (D.C. Cir. 1992). Among other

things, they prevent pipelines from disclosing nonpublic infor-

mation preferentially to their affiliates and from otherwise

discriminating against non-affiliated shippers. 18 C.F.R.

s 161.3. But the rules appear to apply only to a pipeline's

relations with its gas marketing affiliates. Compare Notice

of Proposed Rulemaking, Standards of Conduct for Trans-

mission Providers, 66 Fed. Reg. 50919, 50921, 50923 (2001)

(proposing to apply the Standards of Conduct more broadly).

The Commission saw a similar risk in the onset of conver-

gence mergers--that pipelines might use their market power

in gas to manipulate downstream electric markets. E.g., San

Diego Gas & Electric Co. and Enova Energy, Inc., 79 FERC

p 61,372 (1997) ("Enova"). FERC has thus required the gas

segments in some convergence mergers, such as one involving

San Diego Gas & Electric and Enova Energy, to adhere to

specific Codes of Conduct that extend the generic Standards

of Conduct to cover gas companies' links with affiliates "with

an electric power merchant function." San Diego Gas &

Electric Co. and Enova Energy, Inc., 83 FERC p 61,199, at

61,871 (1998) ("Enova").

In seeking Commission approval, Dominion and CNG pro-

posed a narrower set of restrictions--ones applying such a

Code of Conduct between the CNG pipeline and "affiliates [1]

with wholesale power market-based authority [as opposed to

ones selling at prices at cost by regulation] and [2] with whom

CNG Transmission conducts transportation transactions."

Merger Order, 89 FERC at 61,477. The Commission reject-

ed this version and instead insisted on a Code applying "to

the 'corporate family' as a whole," id. at 61,478, though

offering the firms the alternative of submitting a new analysis

of competitive effects. Dominion and CNG accepted the

condition. But the composition of the "corporate family as a

whole" quickly became a bone of contention. In their accep-

tance letter Dominion and CNG read the phrase as they

believed the Commission had read it in Enova, i.e., covering

communications between the pipeline and "all affiliates within

the corporate family who engage in the wholesale electric

merchant function." Letter of Carmen L. Gentile, Counsel

for Dominion Resources, to David P. Boergers, Secretary,

Federal Energy Regulatory Commission, at 1-3 (Dec. 10,

1999) ("Dominion Acceptance Letter"); see also Code of

Conduct Principles Applicable to Dominion Resources, Inc.

and Consolidated Natural Gas Company, at s 2. The limita-

tion set forth in the letter, of course, was broader than the

firms' original proposal, since it included electric affiliates

regardless of whether they were free to sell at market rates

or whether they transacted directly with CNGT.

In its May 2000 Compliance Order, the Commission reject-

ed Dominion's interpretation of "corporate family." Distin-

guishing Enova, the Commission held that the Merger Order

required that the Standards of Conduct be applied "to all

energy companies that would be affiliated under the proposed

transaction." Compliance Order, 91 FERC at 61,542-43. It

directed Dominion to modify its Proposed Code of Conduct

accordingly. The Commission denied Dominion's motion for

rehearing in November 2000, describing Dominion's argu-

ments as "a collateral attack on the Merger Order." Domin-

ion Resources, Inc. and Consolidated Natural Gas Company,

93 FERC p 61,706, at 61,707 (2000). Dominion filed a petition

for review.

Operating under the Commission's order in the meantime,

Dominion argued that the Commission should apply a "no-

conduit rule" to information received by certain employees.

See Dominion Resources, Inc., Consolidated Natural Gas Co.

and Dominion Transmission Inc., 93 FERC p 61,284, at

61,954 (2000). This would have enabled non-operating staff

shared by the pipeline and its affiliated energy companies to

receive restricted information (without making contemporane-

ous disclosure) so long as the employees in fact did not act as

conduits. Id. The Commission rejected this suggestion,

holding that an "automatic imputation rule" was appropri-

ate--any receipt of information by a shared employee would

trigger the strictures under the Standards of Conduct as

extended by the Compliance Order. Id.; see also Dominion

Transmission, Inc., 94 FERC p 61,135 (2001) (denying re-

hearing and granting clarification). Again, Dominion peti-

tioned for review.

* * *

The Commission challenges this court's jurisdiction over

the petitions for review. See Steel Company v. Citizens for a

Better Environment, 523 U.S. 83, 94-95 (1998). The Com-

mission argues that the Compliance Order merely implement-

ed the provisions of its earlier Merger Order, so that Domin-

ion was not "aggrieved" as required by the Federal Power

Act, 16 U.S.C. s 825l(b), or the Natural Gas Act, 15 U.S.C.

s 717r(b). The Commission further notes that insofar as

Dominion's claimed injuries were caused by the Merger Or-

der, the relevant time limitations for seeking rehearing and

review expired long before Dominion filed any petitions. See

16 U.S.C. s 825l(a)-(b) (establishing 30-day limitations period

for applications for rehearing and 60-day period for obtaining

judicial review thereafter); 15 U.S.C. s 717r(a)-(b) (same).

The Commission thus characterizes Dominion's petition as an

impermissible collateral attack on the Merger Order. See,

e.g., City of Nephi v. FERC, 147 F.3d 929, 934 (D.C. Cir.

1998). These jurisdictional arguments are essentially one: If

the Compliance Order was merely a "clarification," then

Dominion was not aggrieved by it and is indeed engaging in a

collateral attack. In contrast, if the Compliance Order was a

"modification," then Dominion clearly has standing to chal-

lenge it.

The answer depends on whether a reasonable firm in

Dominion's position "would have perceived a very substantial

risk that [the Merger Order] meant" what the Commission

now says it meant. ANR Pipeline Co. v. FERC, 988 F.2d

1229, 1234 (D.C. Cir. 1993); see also 16 U.S.C. s 825l(b) ("No

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.

s 717r(b) (same). Mere ambiguity in the Merger Order is

not enough to excuse Dominion's previous failure to challenge

it. See ICC v. Brotherhood of Locomotive Engineers, 482

U.S. 270, 286 (1987) (stating that "the remedy for ... ambigu-

ity is to petition ... for reconsideration," otherwise time

limits "would be held hostage to everpresent ambiguities").

Nor is the reasonableness of Dominion's interpretation

enough. See ANR Pipeline, 988 F.2d at 1233-34. Rather,

we ask if the Commission's interpretation was so obscure that

the Merger Order "did not provide sufficient notice" to

Dominion that it inflicted the now-challenged burden. East

Texas Electric Cooperative v. FERC, 218 F.3d 750, 754 (D.C.

Cir. 2000); Raton Gas Transmission Co. v. FERC, 852 F.2d

612, 615-16 (D.C. Cir. 1988); see also Sam Rayburn Dam

Electric Cooperative v. FPC, 515 F.2d 998, 1007 (D.C. Cir.

1975) (explaining that the rule prevents agencies from "en-

ter[ing] an ambiguous or obscure order, wilfully or otherwise,

wait[ing] out the required time, then enter[ing] an 'explanato-

ry' order that would extinguish the review rights of parties

prejudicially affected"). "[A] party need not approach every

Commission order with paranoia, petitioning for rehearing on

account of any conceivable adverse meaning." ANR Pipe-

line, 988 F.2d at 1234.

Here we find that the Commission did not give the re-

quired notice. Dominion had little reason to believe that the

Commission would interpret the Merger Order so sweepingly

as to encompass all energy affiliates. In fact, the Merger

Order's language and context overwhelmingly suggested that

Dominion's interpretation was correct. The order discussed

the comments of only two intervenors, the New York Public

Service Commission and Allegheny Energy, and both sought

to impose the Standards of Conduct only on links between the

pipeline and all electric affiliates, not energy affiliates gener-

ally. Merger Order, 89 FERC at 61,474/1 ("The New York

Commission asserts that the Commission should require the

merged company to adhere to standards of conduct between

natural gas pipeline companies and affiliate electric compa-

nies...."); id. at 61,475/1 ("Allegheny ... specifically notes

that Applicants' commitment to adopt the pipeline standards

of conduct should apply to all affiliates engaged in wholesale

sales of electricity....").

A scouring of the agency record--specifically Allegheny's

Motion to Intervene and its Motion for Clarification--con-

firms this interpretation. See, e.g., Motion for Clarification

and Permission to Reply, and Reply of Allegheny Energy,

Dominion Resources, Inc. and Consolidated Natural Gas

Company, Docket No. EC99-81-000, at 8-9 (Sept. 8, 1999)

("Allegheny Motion for Clarification") (expressing concern

"that CNG's interstate pipeline and local gas distribution

company affiliates may share competitively sensitive informa-

tion already in their possession with electric affiliates" (em-

phasis added)); id. at 10-13 (asking that electric employees

be required to function independently of gas employees);

Motion to Intervene and Request for Conditions of Allegheny

Energy, Dominion Resources, Inc. and Consolidated Natu-

ral Gas Company, Docket No. EC99-81-000, at 13 (Aug. 5,

1999) ("The merger creates increased opportunities and in-

centives for CNG to share this information with the merged

company's electric affiliates....").

Recall that Dominion and CNG had proposed a narrower

set of limits to apply simply between the pipeline and a subset

of electric affiliates--"affiliates [1] with wholesale power mar-

ket-based authority and [2] with whom CNG Transmission

conducts transportation transactions." Merger Order, 89

FERC at 61,477-78; see also Allegheny Motion for Clarifica-

tion, at 6-7. The Commission purported to resolve that

dispute in favor of the intervenors. If it intended to go

beyond a choice between the competing proposals, a sensible

reader would expect it to say so and to say why. It did

neither.

Moreover, the Merger Order relied heavily--so far as

precedent was concerned, exclusively--on the Commission's

Enova decision. In the two pages in which the Commission

stated and explained its decision, 89 FERC at 61,477-78, it

thrice used the phrase, "as we stated in Enova" or its

equivalent ("as we discussed in Enova"). And the Merger

Order used operative language exactly matching that of the

Enova decision:

Therefore, the Applicants would need to revise their

commitment so that the standards of conduct require-

ments apply to the "corporate family" as a whole.

Merger Order, 89 FERC at 61,478.

Therefore, the Applicants would need to revise their

commitment so that the [Order No. 497] restrictions and

requirements would be applicable to the corporate family

as a whole....

Enova, 79 FERC at 62,595. Obviously the only difference is

that in the Merger Order the phrase corporate family is put

in quotes, in apparent homage to Enova. Yet, in Enova, the

Commission ultimately required that the Standards of Con-

duct be applied only "to any affiliate in the corporate family

with an electric power merchant function." Enova, 83 FERC

at 61,871.

Before us the Commission relies heavily on some language

not including the qualifier "electric," such as "all the merged

company's affiliates," "any combination of the energy compa-

nies that would be affiliated," and " 'corporate family' as a

whole." Id. at 61,477-78. But the context suggests that this

language assumed "electric" as an implicit limitation. For

example, the Commission rejected applying the Standards of

Conduct to only "market-based" affiliates because "the

merged company's affiliates with cost-based rates could undu-

ly profit from higher electricity prices when market rates are

less than cost-based rates." Id. at 61,478/1 (emphasis added).

Indeed, the Enova merger order also used vague terms to

describe the Commission's concerns, expressing concern over

"the potential for abuse between any combination of the

energy companies that would be affiliated." Enova, 79

FERC at 62,565. It is hardly surprising, then, that concur-

ring FERC Commissioner HEbert unequivocally read the

Merger Order to cover only links to electric affiliates:

This order requires the applicants for a merger to submit

a new analysis or to accept Standards of Conduct apply-

ing to all electric affiliates. (The applicants offered only

those with market-based rates.)

Merger Order, 89 FERC at 61,482 (HEbert, Comm'r, concur-

ring).

The reasonableness of the Compliance Order's interpreta-

tion also sheds light on the likelihood that Dominion would

have anticipated it. Here, of course, the jurisdictional ques-

tion merges somewhat with the merits, for the predictability

of a Commission position is related to its defensibility. Fur-

ther, if the Commission's late-revealed distinction of Enova

were very powerful, that would operate both to justify the

Compliance Order's much more stringent terms and to under-

mine Dominion's understanding that the words used in Enova

would have the same meaning when used in the Merger

Order; if the distinction were plain, the reader would have to

infer that only a loose analogy was meant.

In fact the Compliance Order's insistence that the Stan-

dards of Conduct be imposed on "all energy affiliates," rather

than only "electric affiliates," represents a sharp and unex-

plained break with FERC precedent and is otherwise arbi-

trary and capricious. See ANR Pipeline Co. v. FERC, 71

F.3d 897, 901 (D.C. Cir. 1995) ("[W]here an agency departs

from established precedent without a reasoned explanation,

its decision will be vacated as arbitrary and capricious.").

The Commission's attempts to distinguish Enova are rather

thin. It principally stresses that the Dominion merger in-

volves several separate gas local distribution companies

("LDCs"), whereas the LDCs in the Enova merger were part

of other entities explicitly covered by the Standards of Con-

duct or the merger-related Code of Conduct. Compliance

Order, 91 FERC at 61,542 n.11. These separate LDCs in the

present merger would be subject to neither the generic

Standards of Conduct at 18 C.F.R. s 161.3, because they are

not pipelines, nor s 2 of Dominion's Proposed Code of Con-

duct, because they are not electric affiliates. The LDCs thus

"could be used to engage in some of the improper sharing of

competitively-sensitive information and other abuses (e.g.,

failing to offer the same discounts to affiliates and non-

affiliates, and not processing all similar requests for service in

the same manner)." Compliance Order, 91 FERC at

61,542/2.

An LDC loophole may very well exist, but it is hardly as

large as the Commission suggests. The Compliance Order

completely fails to acknowledge that Sections 4 and 5 of

Dominion's Proposed Code of Conduct ("PCC") impose re-

strictions on Dominion's LDCs that are almost completely

analogous to those imposed on pipelines under 18 C.F.R.

s 161.3:

Section 4:

(i) Any employee engaged in the wholesale merchant

function is prohibited from obtaining or receiving from

an affiliated LDC any information that the affiliated

LDC receives from any non-affiliated shipper or any

potential non-affiliated shipper on its system.

(ii) Any employee engaged in the wholesale merchant

function is prohibited from obtaining or receiving from

an affiliated LDC information related to transportation

of natural gas that is not contemporaneously provided

to all potential shippers, affiliated and non-affiliated, on

the affiliated LDC's system.

(iii) Any employee engaged in the wholesale merchant

function is prohibited from obtaining or receiving indi-

rectly from any other employees of any affiliate infor-

mation which the employee engaged in the wholesale

merchant function is prohibited from obtaining or re-

ceiving directly from an affiliated LDC under clauses

(i) and (ii).

(iv) To the maximum extent practicable, employees

engaged in the wholesale merchant function will func-

tion independently of an affiliated LDC's operating

employees.

Section 5:

The Applicants further commit that no affiliated LDC

will unduly discriminate in favor of any actual or poten-

tial affiliated electric generator and against any actual or

potential non-affiliated electric generator regarding ser-

vice availability, tariff provisions containing the rate and

non-rate conditions of service, and/or the application and

enforcement of any tariff provision.

Sections 4 and 5 require LDCs to keep to themselves (i.e.,

not disclose to any power merchant affiliate) information

received from non-affiliated shippers, compare PCC s 4(i)

with 18 C.F.R. s 161.3(e), to disclose information related to

gas transportation to all shippers contemporaneously (if dis-

closed at all), compare PCC s 4(ii) with 18 C.F.R. s 161.3(f),

to separate "[t]o the maximum extent possible" LDC employ-

ees from those engaged in the wholesale merchant function,

compare PCC s 4(iii) with 18 C.F.R. s 161.3(g), and to apply

tariff provisions and to process requests for transportation

without discrimination, compare PCC s 5 with 18 C.F.R.

s 161.3(a)-(d). A threat exists only insofar as an LDC might

become a conduit by which pipeline information can reach

electric affiliates: Section 4(i) is ineffective because it only

prohibits LDCs from disclosing information received directly

by the LDC from non-affiliated shippers. Section 4(ii) is

possibly ineffective because its contemporaneous disclosure

rule applies only to information related to gas transportation.

And Section 4(iii) is irrelevant because it prohibits other

affiliates from becoming conduits of LDC information; it

provides no additional protection against LDCs becoming

conduits of pipeline information.

In addressing this conduit problem, however, the Commis-

sion has used a tank to block a mousehole. Ordinarily, of

course, the Commission is entitled to some deference on its

choice of remedy. But the Compliance Order goes much

further than any apparent need or any cure of the subtle

distinction between this case and Enova. It prohibits the

pipeline from sharing information with any affiliated energy

company, whether it is an LDC or not. The Commission

offers no justification for such a broad limitation.

Further, the Compliance Order destroys pre-merger inte-

grations and their accompanying efficiencies, a change the

Commission never justifies or explains. Before the merger,

CNGT was subject only to the generic Standards of Conduct

applicable between pipelines and their marketing affiliates; it

was thus able to share information and employees with its gas

exploration and production firm. Under the Compliance Or-

der, however, this sharing is now proscribed. But the logic of

correcting anticompetitive hazards posed by a merger implic-

itly suggests remedies only between the merging companies.

After all, the most severe remedy available to an agency is

outright prohibition of the merger, the ultimate in Chinese

walls between the two entities. The Compliance Order,

however, creates barriers within the pre-existing entities,

without explanation. Of course, if the Commission has a

general case for broader restrictions, it can make that case in

the rulemaking that it has launched to expand the generic

Standards of Conduct to "govern the relationships between

the transmission providers and all of their energy affiliates,

not just those engaged in marketing or sales functions."

Notice of Proposed Rulemaking, 66 Fed. Reg. at 50,922/2

(2001).

Finally, we need not reach Dominion's "no-conduit" rule

arguments. Since we vacate the Compliance Order, the only

employees subject to the Standards of Conduct will be those

shared between the pipeline and its (gas or electric) market-

ing affiliates. Dominion already concedes that those employ-

ees should "be bound by the stricter 'automatic imputation'

rule." Dominion Brief at 35-36 & n.17.

* * *

In sum, the Merger Order was obscure enough that Domin-

ion could not reasonably have been expected to anticipate the

Commission's later interpretation. Dominion therefore has

standing to challenge the Compliance Order. In addition, the

Commission's insistence that the Standards of Conduct be

applied to all affiliated energy companies is an unexplained

and unjustified departure from precedent. The Compliance

Order is therefore arbitrary and capricious.

We vacate the Compliance Order and remand to the Com-

mission for proceedings consistent with this opinion.

So ordered.