D.C. Circuit Approves Retroactive Application of FERC’s New Interpretation of the Natural Gas Act

When can an agency adjudicate past conduct according to a new policy that conflicts with the agency’s former policy? Even though adjudication is retroactive by nature, “when there is a substitution of new law for old law that was reasonably clear, the new rule may justifiably be given prospectively-only effect in order to protect the settled expectations of those who relied on the preexisting rule.”  Yesterday’s opinion by Judge Williams declines to extend that anti-retroactivity principle to the Federal Energy Rate Commission’s 2010 order denying a gas company’s request for market-based rates.

In a 2007 order, the Commission had granted the gas company market-based rate authority under § 4(f) of the Natural Gas Act, which permits such rates as an incentive where “necessary to encourage the construction of the storage capacity in the area needing storage services.” But in 2010, when the gas company asked to extend those favorable rates beyond the expiration date of its existing contract, the Commission balked. In a new order, FERC interpreted § 4(f) to prohibit market-based rates where the storage capacity had already been constructed. Because the gas company had already built the new facilities, no further incentive was justified. The gas company argued that this interpretation should apply only prospectively (if at all), because the company had relied to its detriment on the Commission’s 2007 order, which had strongly suggested that the gas company could (under certain circumstances) extend market-based rates beyond the expiration of the original contract.

The court gave two main reasons for rejecting the gas company’s anti-retroactivity argument:

First, the gas company failed to prove that it had relied on the Commission’s favorable statement in the 2007 order. The fact that the gas company began construction after that order was insufficient to prove reliance.

Second, the court held that any reliance would have been unreasonable. The court relied on two related factors to support this arguably less comfortable holding.

  • The Commission’s favorable language in the 2007 order that it repudiated in 2010 “appears to be dictum.”
  • The possibility of market-based rates was always contingent on the Commission’s exercise of discretion. FERC did not promise that market-based rates would be available but only said it would consider “the extent to which market-based rates should apply beyond the primary term” of the contract if it found the gas company had proposed adequate “protections against the exercise of market power.”

The court did not rely on its conclusion (in an earlier part of the opinion) that the Commission’s more recent interpretation of § 4(f) “is fully consistent with the obvious meaning of the statute.” That omission was well advised: Obvious though it may be that the statute is designed to encourage new construction, the statute is by no means unambiguous about the specific market-based rate mechanism by which the Commission must achieve that statutory objective. New construction of storage capacity would, of course, look even more tantalizing to gas companies if they believed (as Northern Natural Gas Co. apparently did) that it might possibly (even if not certainly) open the door to market-based rates in perpetuity.

An alternative rationale for the court’s “unreasonable reliance” holding — one the court did not rely on but which might have taken some of the sting out of the Commission’s apparent bait and switch — is suggested by Judge Williams’s observation that the gas company itself asked the Commission in 2007 not to decide whether market-based rates would be available after the expiration of the original contract. When the regulated entity is the cause of its own uncertainty, it is harder to fault the agency for an apparent change of course down the road.

N. Natural Gas Co. v. FERC, No. 11-1240 (Nov. 27, 2012) (Williams, S.J., joined by Garland & Kavanaugh, JJ.)

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