Commissioner James Danly Statement
April 15, 2021
Docket Nos. RP19-1634-002, RP20-788-000, RP13-1116-000 &
RP19-54-000
I concur with the Commission’s order in this proceeding with respect to the approval of the settlement rates agreed-to by the parties. However, I dissent with respect to the Commission’s approval of the retroactive application of the settlement rates to non-contracting parties during the suspension period, which constitutes approval of an unlawful retroactive rate change.
I .Background
Consistent with its custom in cases approving unlawful retroactive rate changes, the Commission neither acknowledges the order’s approval of the retroactive rate changes nor provides any justification for that approval. As is often the case in these orders, the retroactive effect of the Commission’s decision is not immediately apparent. The procedural history in this case is rather complicated, but for the purposes of filed rate doctrine analysis, it suffices to note that a settlement was entered into concerning the rates of two affiliated companies: Kinetica Deepwater Express, LLC (Kinetica Deepwater) and Kinetica Energy Express, LLC (Kinetica Energy) (collectively, Kinetica). The proceedings resolved by the settlement are:
- Kinetica Deepwater’s Natural Gas Act (NGA) rate increase filing made on September 30, 2019, in Docket No. RP19-1634-000. On October 30, 2019, the Commission issued an order accepting this rate increase for filing and suspending the tariff record to be effective April 1, 2020, subject to refund and the outcome of a hearing.[1] Because the rate increase was suspended until April 1, 2020, Kinetica Deepwater’s rate in effect prior to the rate increase filing continued to constitute Kinetica Deepwater’s filed rate.
- Kinetica Energy’s October 11, 2018 FERC Form No. 501-G was filed in Docket No. RP19-54-000, which was filed pursuant to Order No. 849,[2] the Commission’s Revised Policy Statement[3] and Opinion No. 511-C.[4] Collectively, these issuances required pipeline companies make an abbreviated rate filing showing the effects of the income tax reductions provided by the Tax Cuts and Jobs Act. As permitted by Order No. 849, Kinetica Energy elected to take no action.
The October 2019 Order did not institute settlement judge proceedings. The parties nevertheless requested that a settlement judge be designated and, following that designation by the Chief Administrative Law Judge,[5] they entered into negotiations. On April 15, 2020, as amended on April 21, 2020, Kinetica filed a stipulation and agreement (Settlement) that resolved all outstanding issues set for hearing by the Commission. Of relevance here, the Settlement established revised rates for both Kinetica Energy and Kinetica Deepwater. The rates established in the Settlement for Kinetica Deepwater are higher than its previously effective rates but lower than the increased rates the Commission set for hearing, thus representing a rate increase. The rates established in the Settlement for Kinetica Energy are lower than its earlier rates and thus represent a rate reduction.
Also of relevance is that the Settlement made Kinetica’s rate changes effective on February 1, 2020. Recall that the suspension period for Kinetica Deepwater’s rate increase ran from November 1, 2019 to April 1, 2020, so the February 1, 2020 effective date for Kinetica Deepwater’s rate increase constitutes a retroactive rate change during the suspension period. Recall also that Kinetica Energy’s rates were unchanged since before the date of its October 11, 2018, FERC Form No. 501-G filing. The February 1, 2020 effective date for its settlement rates therefore also constituted a retroactive rate change.
II. Rate Changes
Of course, retroactive rate changes do not always violate the filed rate doctrine or the rule against retroactive ratemaking. There are two exceptions to these doctrines: the notice exception[6] and the contract exception,[7] which permit retroactive rate changes. In order to determine whether a retroactive rate change is lawful under these two exceptions to an otherwise inflexible rule, the facts of any particular case must be thoroughly reviewed. Here, the facts for Kinetica Deepwater and Kinetica Energy are somewhat different, so it is necessary to recite the details of each case separately.
a. Kinetica Deepwater
As an initial matter, I do not object to making Kinetica Deepwater’s settlement rates retroactive to the end of the suspension period on April 1, 2020. NGA section 4 explicitly requires filed rate increases to go into effect at the end of a suspension period, subject to refund if the Commission ultimately determines that downward adjustments are required to ensure that the new rate is just and reasonable.[8] I support the Commission’s approval of the settlement rate, which constitutes the Commission’s finding that the settlement rate is the just and reasonable rate for Kinetica Deepwater going forward. That being the case, we are entitled under NGA section 4 to make the settlement rate effective on April 1, 2020.
However, the Settlement establishes the rate increase effective February 1, 2020, thereby imposing a retroactive rate increase during the suspension period.[9] Therefore, permitting the settlement rates to apply during this period would violate the filed rate doctrine and the rule against retroactive ratemaking unless one of the exceptions to those doctrines applies.
In this case, it is evident that the notice exception does not apply. At no time did the Commission provide notice that the rates charged by Kinetica Deepwater during the suspension period were subject to change. To the contrary, the October 2019 Order made clear that Kinetica Deepwater was obligated to charge its then-existing filed rate during the suspension period and that the hearing was established only to determine what rates would go into effect at the end of the suspension period.[10] The order initiating settlement judge procedures stated that negotiations were to address the issues in this docket,[11] which were limited to the rates that would go into effect at the end of the suspension period. No customer could read either order as constituting notice that the rates charged during the suspension period were provisional only and subject to change.
The contract exception, on the other hand, appears potentially applicable at first glance. The parties to the Settlement clearly agreed to the retroactive effective date and therefore the contract exception would apply to them. There is, however, one debilitating problem—only two parties executed the Settlement: Kinetica Energy and Kinetica Deepwater. Not a single shipper subject to the increased rates executed the Settlement. Instead, the Settlement simply includes an attachment (Schedule 1) which is comprised of no more than a list of “Parties Supporting or Not Opposing Settlement.” This list likely includes a number of shippers on the two pipelines.
Is it possible that the Commission could consider “support or non-opposition” as equivalent to actually entering into a contract? And does the answer to that question turn at all on any distinction that must be made between “supporting” parties and those who are merely “non-opposing”? We do not get to answer that question here, because the Commission has not relied on the contract exception, or any exception at all, to approve Kinetica’s retroactive rate changes. Absent a satisfactory explanation for why the filed rate doctrine is inapplicable, the Commission has failed to engage in reasoned decision making and its order fails under the Administrative Procedure Act.[12]
Putting aside the question of which, if any, “Parties Supporting or Not Opposing” contractually agreed to pay the retroactive rate increase, there is no credible argument that shippers absent from Schedule 1 could somehow be deemed to have contractually agreed to a retroactive rate increase. The record does not indicate which, if any, Kinetica Deepwater shippers who shipped gas between February 1, 2020 and April 1, 2020 are not listed on Schedule 1. However, any attempt to charge the settlement rates to shippers who were not even listed on Schedule 1 would obviously violate the rule against retroactive ratemaking, as the Commission previously has held.[13]
b. Kinetica Energy
Kinetica Energy’s rates were not subject to a suspension period or a hearing, so we do not have the same statutory authority under NGA section 4 to make those rates effective on April 1, 2020. Consequently, application of Kinetica Energy’s reduced rates prior to April 15, 2020, the date they were filed, represents a retroactive rate change that we cannot approve absent an applicable exception to the filed rate doctrine and rule against retroactive ratemaking. The analysis above regarding the notice and contract exceptions also applies to Kinetica Energy’s settlement rates. There is no evidence of notice that would satisfy the notice exception and the shippers listed on Schedule 1 are not parties to the Settlement such that the contract exception can apply. These rate increases are unlawful under the filed rate doctrine and rule against retroactive ratemaking.
For these reasons, I respectfully concur in part and dissent in part.
[1] See Kinetica Deepwater Express, LLC, 169 FERC ¶ 61,085 (2019) (October 2019 Order).
[2] Interstate and Intrastate Nat. Gas Pipelines; Rate Changes Relating to Fed. Income Tax Rate, Order No. 849, 164 FERC ¶ 61,031 (2018), reh’g denied, Order No. 849-A, 167 FERC ¶ 61,051 (2019).
[3] Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs, 162 FERC ¶ 61,227, order on reh’g, 164 FERC ¶ 61,030 (2018).
[4] SFPP, L.P., Opinion No. 511-C, 162 FERC ¶ 61,228 (2018).
[5] See Kinetica Deepwater Express, LLC, Docket No. RP19-1634-001 (Oct. 31, 2019) (Settlement Order).
[6] See Old Dominion Elec. Coop. v. FERC, 892 F.3d 1223, 1231 (D.C. Cir. 2018) (quoting Nat. Gas Clearinghouse v. FERC, 965 F.2d 1066, 1075 (D.C. Cir. 1992)).
[7] See City of Piqua v. FERC, 610 F.2d 950, 954-55 (D.C. Cir. 1979).
[8] See 15 U.S.C. § 717c(e).
[9] I note that there is a series of older cases indicating that no rate increase is permitted during the suspension period, even with the agreement of the customers. See Hope Nat. Gas Co. v. Fed. Power Comm’n, 196 F.2d 803, 807-08 (4th Cir. 1952); see also Belco Petroleum Corp. v. FERC, 589 F.2d 680, 682 (D.C. Cir. 1978); Shell Oil Co. v. Fed. Power Comm’n, 334 F.2d 1002, 1009 (3rd Cir. 1964). If one reads these cases to hold that the terms of the NGA forbid rate increases during the suspension period, then they stand as an independent basis upon which to find the Commission’s order legally infirm.
[10] See October 2019 Order, 169 FERC ¶ 61,085 at PP 22-23.
[11] See Settlement Order, Docket No. RP19-1634-001 (Oct. 31, 2019).
[12] I will take this opportunity to suggest to anyone participating in the natural gas industry that it might be prudent to be clearer in your settlement agreements as to whether you are actually a party to that agreement. Though I understand that use of attachments listing “Parties Supporting or Not Opposing” is common in the industry, situations will almost certainly arise in which an entity’s status as party or non-party to a settlement will be dispositive. This will be even more important should the issue be presented to a body less indifferent to fundamentals of contract law than this Commission.
[13] See Cities of Anaheim v. Cal. Indep. Sys. Operator Corp., 102 FERC ¶ 61,274, at P 40, order on reh’g and compliance filing, 105 FERC ¶ 61,021 (2003) (“The objecting non-settling party correctly contends that the Offer of Settlement violates the rule against retroactive ratemaking and that, although the settling parties can agree to pay a higher rate for past periods, they cannot impose a higher rate on a party that opposes the terms.”); Equitrans, L.P., 85 FERC ¶ 61,395, at 62,527 (1998), reh’g dismissed, 87 FERC ¶ 61,116 (1999) (“While a party may agree to a retroactive rate increase in a settlement in order to receive other concessions, no party supporting the [s]ettlement has cited any precedent that would permit the Commission to impose such a retroactive rate increase on a party that objects to that increase.”).