Interstate Natural Gas Ass'n of America v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 16, 2007 Decided July 24, 2007

No. 05-1426

INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA,

PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,

RESPONDENT

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Andrea C. Wolfman argued the cause for petitioner. With

her on the briefs were Joan Dreskin and Timm Abendroth.

Carol J. Banta, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With her on the

brief were John S. Moot, General Counsel, and Robert H.

Solomon, Solicitor.

Before: ROGERS, GARLAND and BROWN, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge: The Federal Energy Regulatory

Commission (“FERC” or “the Commission”) issued an Ac-

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counting Order, instructing natural gas pipeline companies to

expense certain costs associated with the Pipeline Safety

Improvement Act of 2002, Pub. L. No. 107-355, 116 Stat. 2985

(“PSIA”). After FERC denied a request for rehearing, the

Interstate Natural Gas Association of America (“INGAA”)

petitioned for review in this court. Finding FERC’s explanation

for its Accounting Order reasonable and its responses to

INGAA’s comments sufficient, we deny the petition.

I

Section 14 of PSIA, 49 U.S.C. § 60109(c)–(d), requires

each operator of natural gas pipelines to adopt and implement a

written integrity management program (“IMP”) to monitor and

reduce the risks associated with pipeline segments located in

areas of high population density (“High Consequence Areas,” or

“HCAs”). Each IMP includes a testing regime with two

components. First, companies are to conduct baseline integrity

assessments of their HCA segments by December 2012. Id.

§ 60109(c)(3)(A). Second, going forward, they are to retest

each HCA segment at least once every seven years unless

granted a waiver by the Secretary of Transportation. Id.

§ 60109(c)(3)(B), (5).

Under the Natural Gas Act, FERC has jurisdiction to

regulate the transportation and sale of natural gas in interstate

commerce. 15 U.S.C. § 717(a)–(b). This includes the power to

issue rules and regulations governing pipeline companies’

accounting practices. Id. §§ 717g(a), 717o. Pursuant to that

authority, FERC issued a Notice of Proposed Accounting

Release (“PAR”) describing its planned accounting rules for

PSIA testing and inviting comments. 69 Fed. Reg. 67,727 (Nov.

5, 2004). Under the proposal, testing costs under PSIA would

be expensed, not capitalized.

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The PAR acknowledged FERC had occasionally permitted

capitalization of testing costs in the past, citing in particular

Northwest Pipeline Corp., Docket No. AC94-149-000 (FERC

Apr. 30, 1996) (“NPC”). FERC distinguished NPC on the

ground that NPC’s testing costs were incurred “in connection

with [a] major pipeline rehabilitation project[] involving

significant replacements and modifications of facilities” that

“extended the overall pipeline system’s useful life and service-

ability,” while PSIA required testing as part of “on-going

maintenance programs.”

INGAA advocated capitalization of testing costs in com-

ments submitted in response to the PAR. FERC subsequently

issued an Accounting Order, 111 F.E.R.C. ¶ 61,501 (June 30,

2005), responding to comments and establishing definitive IMP

accounting rules for pipeline companies. The Order repeated

FERC’s earlier instruction to expense PSIA testing costs and

also set accounting rules for other IMP obligations. These rules

were to take effect on January 1, 2006, with no restrictions

placed on the accounting treatment of earlier expenditures.

The Accounting Order instructed pipeline companies to

expense the costs of writing IMP implementation plans, identi-

fying HCA segments, and conducting tests under PSIA, as well

as certain “costs incurred to develop and maintain a record-

keeping system to document [IMP] implementation and ac-

tions.” INGAA petitioned for rehearing, arguing IMP start-up

costs and data integration costs should be capitalized, as they are

not recurring costs. FERC denied this petition in a Rehearing

Order, 112 F.E.R.C. ¶ 61,309 (Sept. 19, 2005), and INGAA

sought judicial review.

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II

To establish standing as an association, INGAA must show

(1) at least one of its members has standing in its own right, (2)

the interests INGAA seeks to protect are germane to its purpose,

and (3) neither the claim asserted nor the relief requested

requires the participation of an individual INGAA member in

the suit. Am. Library Ass’n v. FCC, 401 F.3d 489, 492 (D.C.

Cir. 2005). Only the first of these requirements is in question.

Individual pipeline companies (which constitute INGAA’s

membership) are harmed by the Accounting Order’s expensing

requirements in at least two ways. First, expensing these costs

rather than capitalizing them reduces the companies’ “rate

bases,” thereby decreasing their maximum allowable revenues.

See Williston Basin Interstate Pipeline Co. v. FERC, 165 F.3d

54, 56–57 (D.C. Cir. 1999); Boston Edison Co. v. FERC, 885

F.2d 962, 964 (1st Cir. 1989). Second, capitalized expenditures

can be recovered through rate increases as the capital account

depreciates, while expenses might be unrecoverable if deemed

nonrecurring. Because we find the harm to INGAA members

sufficient for standing purposes, INGAA has standing.

We review FERC’s actions under 15 U.S.C. § 717r(b). See

CNG Transmission Corp. v. FERC, 40 F.3d 1289, 1292–93

(D.C. Cir. 1994) (confirming that accounting orders satisfy

§ 717r(b)’s “aggrievement” condition). However, we may not

consider an objection not “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). Factual findings by

FERC are conclusive if supported by substantial evidence, id.,

and barring constitutional concerns not at issue here, FERC is

“free to fashion individual accounting rules” as long as they are

not arbitrary or capricious. Anaheim v. FERC, 669 F.2d 799,

806 (D.C. Cir. 1981) (internal quotation marks omitted); see

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also 5 U.S.C. § 706(2); Sithe/Independence Power Partners v.

FERC, 165 F.3d 944, 948 (D.C. Cir. 1999).

On the merits, INGAA suggests two grounds on which we

should set aside the Accounting Order. We address these in

turn.

A

First, INGAA contends FERC deviated from its precedent

in NPC without providing a reasoned explanation. See Motor

Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto. Ins.

Co., 463 U.S. 29, 57 (1983); Williams Gas Processing – Gulf

Coast Co. v. FERC, 373 F.3d 1335, 1341 (D.C. Cir. 2004).

FERC interpreted NPC as permitting capitalization of

testing that (1) “was done in connection with major pipeline

rehabilitation projects involving significant replacements and

modifications of facilities”; (2) “extended the overall pipeline

system’s useful life and serviceability” or otherwise benefited

future accounting periods; and (3) was not “associated with any

on-going maintenance programs.” This is a reasonable reading

of NPC’s terse ruling, and we defer to it. See Williams Gas

Processing, 373 F.3d at 1341.

Later, in the Accounting Order, FERC found NPC did not

cover PSIA testing, as such testing “does not by itself increase

the useful life of a pipeline asset or improve its efficiency,” and

the “primary aim” of the IMPs was “not to increase the capacity

or efficiency of the pipeline” but to “maintain the integrity of the

pipeline.” As these comments reasonably respond to and negate

all three prongs of the NPC test, we reject INGAA’s first

argument.

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B

Second, INGAA argues FERC failed to respond reasonably

to its comments on the PAR and the Accounting Order. When

FERC issues accounting rules pursuant to 15 U.S.C. §§ 717g

and 717o, it must abide by the Administrative Procedure Act

(“APA”) strictures at 5 U.S.C. § 553. Mobil Oil Corp. v. FPC,

469 F.2d 130, 139 (D.C. Cir. 1972); Pub. Serv. Comm’n v. FPC,

467 F.2d 361, 366 (D.C. Cir. 1972); accord Texaco, Inc. v. FPC,

412 F.2d 740, 745 (3d Cir. 1969). These include the duty to

“give reasoned responses to all significant comments in a

rulemaking proceeding.” Int’l Fabricare Inst. v. U.S. EPA, 972

F.2d 384, 389 (D.C. Cir. 1992) (per curiam) (internal quotation

marks omitted). However, “comments must be significant

enough to step over a threshold requirement of materiality

before any lack of agency response or consideration becomes of

concern,” Portland Cement Ass’n v. Ruckelshaus, 486 F.2d 375,

394 (D.C. Cir. 1973), and “[t]he APA requirement of agency

responsiveness to comments is subject to the common-sense rule

that a response be necessary,” NRDC v. U.S. EPA, 859 F.2d 156,

188 (D.C. Cir. 1988) (per curiam).

Assuming without deciding that FERC had the same

obligation to respond to INGAA’s arguments regarding the

Accounting Order as it had with respect to comments it received

on the original PAR, we find FERC responded sufficiently to all

of INGAA’s arguments from its petition for rehearing. See 15

U.S.C. § 717r(b) (limiting review to arguments raised on

rehearing).

INGAA generally complains the Commission ignored its

own regulations and departed from precedent without explana-

tion. Examined closely, however, INGAA’s complaint is more

accurately that the Commission’s interpretation of both regula-

tions and precedent differed from INGAA’s. For example,

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INGAA argued Abstract No. 89-13 from the Emerging Issues

Task Force of the Financial Accounting Standards Board (“EITF

89-13”) provided the proper framework for setting IMP account-

ing rules. But, in FERC’s view, EITF 90-8, Capitalization of

Costs to Treat Environmental Contamination, more fully

described which costs should be capitalized and which ex-

pensed. See Rehearing Order ¶ 14. Contrary to INGAA’s

analysis, FERC determined that under EITF 90-8, baseline

assessment costs should be expensed, as they would not

“increase or extend the life, capacity, safety, or efficiency of a

pipeline beyond its original construction or acquisition state.”

Id.; see EITF 90-8 at 2. While such baseline assessments could

arguably increase a pipeline’s certified capacity, it was reason-

able for FERC to read EITF 90-8 to require increases in actual

physical capacity.

FERC likewise rejected INGAA’s attempted analogy

between PSIA testing costs and prepaid expenses, as the testing

costs secured no future service or resource. Rehearing Order

¶ 10. Equally appropriate was FERC’s response to INGAA’s

argument that costs required to avoid loss of an asset ought to be

capitalized, a theory FERC noted would require capitalization of

even ordinary maintenance costs. Id. And while INGAA’s

assertion that PSIA expenses should be recognized in periods in

which their benefits are realized is not unreasonable, neither is

FERC’s determination that the posited future benefits are too

speculative to warrant capital accounting. Id. ¶ 9.

INGAA argued the initial costs of constructing databases

and composing IMP implementation plans would be incurred

only once and ought therefore to be capitalized. However, by

statute such projects were to be complete by January 1, 2006,

and the Accounting Order did not apply to expenditures prior to

that date. Thus, this comment was not “significant,” and FERC

had no duty to respond to it. See Portland Cement Ass’n, 486

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F.2d at 394.

INGAA also maintained NPC controlled. As described

above, FERC reasonably distinguished the rule from NPC. See

Accounting Order ¶¶ 21–22.

INGAA noted the PSIA regulations were contained in

Subpart O of 49 C.F.R. Part 192 (§§ 192.901 et seq.), while pre-

PSIA maintenance requirements appeared in Subpart M

(§§ 192.701 et seq.). From this, INGAA inferred the new

regulations could not mandate maintenance expenditures,

contrary to FERC’s reasoning in the Accounting Order. But we

are aware of no authority making Subpart M the sole repository

for maintenance regulations in Part 192, and as FERC reason-

ably argued, “an increase in the required level of maintenance

does not change the fact that the work remains a maintenance

activity,” Rehearing Order ¶ 12. We thus deem FERC’s

response sufficient.

Finally, INGAA argued early PSIA expenditures served to

produce a “knowledge base” and improve “the original Integrity

Plan ‘asset,’” so they should be capitalized. FERC again

rejected INGAA’s proposal, noting “[t]he activities incurred

during the baseline period[] are not materially different, if

different at all, from the same category of costs that INGAA

does not object to expensing after the baseline period.” Rehear-

ing Order ¶ 13. In essence, INGAA wanted the first iteration of

certain periodic expenditures to be deemed non-recurring

precisely because they were first; FERC’s response rejecting this

theory was reasonable.

III

As described above, FERC provided a reasoned explanation

for its decision not to treat NPC as governing, and it responded

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sufficiently to all of INGAA’s arguments. Therefore, INGAA’s

petition for review is

Denied.