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

716 F.2d 1, 230 U.S. App. D.C. 197
CourtCourt of Appeals for the D.C. Circuit
DecidedAugust 9, 1983
DocketNos. 81-1690, 81-1680, 81-1691, 81-1692, 81-1696, 81-1802, 82-1004 and 82-1177
StatusPublished
Cited by16 cases

This text of 716 F.2d 1 (Interstate Natural Gas Ass'n v. Federal Energy Regulatory Commission) is published on Counsel Stack Legal Research, covering Court of Appeals for the D.C. Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Interstate Natural Gas Ass'n v. Federal Energy Regulatory Commission, 716 F.2d 1, 230 U.S. App. D.C. 197 (D.C. Cir. 1983).

Opinion

Opinion for the Court filed by Circuit Judge MIKVA.

MIKVA, Circuit Judge:

The petitioners in this action, numerous natural gas transmission and distribution companies and their respective trade associations, seek review of a final rule of the Federal Energy Regulatory Commission (FERC or Commission). That rule establishes a new approach to measuring the energy content of natural gas for the wellhead pricing purposes of the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. §§ 3311-3333 (Supp. V 1981). Specifically, the new rule requires that the energy content of natural gas be measured under the varying, relatively “dry” conditions at which gas is delivered for sale instead of the uniform, water-vapor saturated, “wet” condition under which the Commission had previously determined the energy content of gas. The petitioners argue that the new rule, by defining energy content in a way unforeseen by Congress, effectively raises the wellhead prices of natural gas above the maximum ceiling prices established by Congress in the NGPA. Alternatively, the petitioners argue that the rule was adopted without adequate notice and comment under the Administrative Procedure Act; was impermissibly given retroactive effect; and failed to guarantee wholesale gas purchasers automatic pass through of any retroactive payments they may be forced to make. We agree that the rule violates the NGPA’s statutory pricing scheme and accordingly vacate the Commission’s rule.

I. Background

A. Technical and Historical Background of the “Wet” Rule

The energy content of natural gas is measured in terms of British thermal units (Btu’s), each Btu representing the amount of energy needed to raise the temperature of one pound of water one degree Fahrenheit, see Texaco, Inc., 33 F.P.C. 1228, 1240 n. 5 (1965). The Btu content of any given stream of natural gas will vary, however, depending on the gas’ particular mix of combustible and noncombustible constituents. Natural gas is primarily composed of combustible hydrocarbons such as methane, propane, butane, ethane, and natural gasoline. Yet, natural gas contains small amounts of noncombustible substances as well. Of particular importance to the present ease is the fact that natural gas often contains relatively small amounts of water vapor. See FERC Order 93-A, Technical Appendix, reprinted in Joint Appendix (JA) 59, 63, 73. Because water vapor contains no available heat energy, its presence in any given volume of natural gas will reduce the Btu content of the gas by displacing energy-producing hydrocarbons. Id. at 61.

Prior to the passage of the NGPA, the Commission (and its predecessor, the Federal Power Commission) measured the Btu content of natural gas for the purpose of making “quality adjustments” to the gas rates set by the Commission under the Natural Gas Act of 1938 (NGA), 15 U.S.C. §§ 717a-717w (1976 & Supp. V 1981). Although the varying amounts of water vapor in natural gas streams could affect the gas streams’ relative Btu values, the Commission sought to factor out this relatively small variable — to ensure ease of measurement and consistency among samples — by determining Btu content under laboratory conditions that standardized the amount of water vapor at a convenient, albeit arbitrary, level. See Government Brief at 5 n. 9 & 8 n. 12. Specifically, the Commission promulgated a rule requiring the Btu content of a gas stream to be determined on the basis of a test volume of gas (1.0 cubic foot), saturated with water vapor at a specified, conveniently obtained temperature and pressure (60° F. and 30 inches of mercury). See 18 C.F.R. §§ 2.56a(c)(l), 2.56b(d)(l) (1982) (post- and pre-1973 gas, respectively). This rule was known as the “wet” rule because it required the gas sample to be saturated with water vapor at a temperature and pressure combination where the capacity of natural gas to absorb [201]*201water vapor is markedly higher than that existing at the temperature and pressure conditions under which most natural gas is sold. In practical effect, therefore, the wet rule tended to overstate water vapor content for gas which, when actually delivered, was neither saturated with water vapor nor delivered at the “standard” temperature or pressure. See FERC Order 93-A, Technical Appendix, reprinted in JA 63. This overstated water vapor content, in turn, caused an understatement in the number of Btu’s assumed to be in the test sample of natural gas.

Despite its relative inaccuracy, however, the Commission’s “wet” Btu determination enjoyed the advantages of widespread industry acceptance and consistent agency implementation. Originally proposed in a policy statement during the Commission’s administration of gas rates under the Natural Gas Act, see 26 Fed.Reg. 4,614 (1961), the wet rule was expressly sanctioned by the Commission in Texaco, Inc., 33 F.P.C. 1228 (1965), in which the Commission noted that the rule was accepted by the American Society for Testing Materials and the natural gas industry as a whole, id. at 1236-37. See also Sunray DX Oil Co., 29 F.P.C. 1079 (1963). The wet rule was carried forward into the Commission’s area rate proceedings under the NGA, see Area Rate Proceeding (Southern Louisiana Area), 46 F.P.C. 86, 143-44 (1973); Area Rate Proceeding, Docket No. AR61-1, 34 F.P.C. 159, 223-24 (1965), and into its national rate proceedings under the NGA as well, see National Rates for Jurisdictional Sales of Natural Gas, 56 F.P.C. 2698 (1976); Just and Reasonable National Rates for Sales of Natural Gas, 54 F.P.C. 3090 (1975); Just and Reasonable National Rates for Sales of Natural Gas, 52 F.P.C. 1604, 1630, 1651-52 (1974). Indeed, in its first national rate proceeding, the Commission specifically rejected an argument by natural gas producers that, because gas generally is sold to pipelines and distribution companies in a much “drier” condition than that defined in the wet rule, the Commission should adopt a more accurate “as delivered” or “dry” definition of Btu content:

The Producers argue that the heating content (Btu) ‘of the gas should be adjusted for the water vapor content in the gas asjft is delivered.’ In Texaco, Inc., the Commission determined that Btu adjustments should be made on the saturated basis. This is the basis which was utilized in the area rate proceedings, and is the basis that will be adopted in this proceeding.

52 F.P.C. at 1630.

Thus, at the time Congress passed the NGPA in 1978, the Btu content of natural gas had been defined by the Commission in terms of a standardized, saturated condition for over fifteen years. As codified in the Commission’s rules of practice, the wet rule provided:

The Btu content of the natural gas used in computing this rate adjustment [under the NGA] shall be the number of British thermal units (Btu) produced by the combustion, at constant pressure, of the amount of the gas which would occupy a volume of 1.0 cubic foot at a temperature of 60° F. saturated with water vapor and under a pressure equivalent to that of 30.00 inches of mercury at 32° F.

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Bluebook (online)
716 F.2d 1, 230 U.S. App. D.C. 197, Counsel Stack Legal Research, https://law.counselstack.com/opinion/interstate-natural-gas-assn-v-federal-energy-regulatory-commission-cadc-1983.