ANR Storage Co. v. Federal Energy Regulatory Commission

          Argued February 22, 2018

          On Petition for Review of Orders of the Federal Energy Regulatory Commission

          Mark Sundback argued the cause for petitioner. With him on the briefs were Kenneth Wiseman and William Rappolt. Kevin Siqveland entered an appearance.

          Lona T. Perry, Deputy Solicitor, Federal Energy Regulatory Commission, argued the cause for respondent. With her on the brief were David L. Morenoff, General Counsel, and Robert H. Solomon, Solicitor.

          Robert I. White, Nancy A. White, James H. Holt, Douglas F. John, and Matthew T. Rick were on the joint brief of intervenors Canadian Association of Petroleum Producers, et al. in support of respondent.

          Before: Henderson and Katsas, Circuit Judges, and Randolph, Senior Circuit Judge.

          OPINION

          KATSAS, CIRCUIT JUDGE.

         The Federal Energy Regulatory Commission refused to allow ANR Storage Company to charge market-based rates, as opposed to cost-based rates, for its natural-gas storage services. That decision rested on FERC's conclusion that ANR had failed to prove that it lacks market power. ANR challenges FERC's decision as both inconsistent with prior precedent and internally inconsistent.

         I

         Section 4(a) of the Natural Gas Act requires natural-gas companies to charge "just and reasonable" rates in interstate markets subject to FERC's regulatory jurisdiction. 15 U.S.C. § 717c(a). This requirement governs not only suppliers of natural gas, but also suppliers of natural-gas storage services. Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 295 n.1 (1988). FERC generally considers cost-based rates to be "just and reasonable," and it allows market-based rates only if the seller shows that it lacks power in the relevant markets. N. Nat. Gas Co. v. FERC, 700 F.3d 11, 13 (D.C. Cir. 2012).

         FERC assesses market power in three steps: first, it defines the relevant product and geographic markets; second, it calculates share and concentration within those markets; and third, it considers other relevant factors. Alternatives to Traditional Cost-of-Service Ratemaking for Natural Gas Pipelines, 74 FERC ¶ 61, 076, 61, 231 (1996) (1996 Policy Statement). The relevant product market includes both the specific service supplied by the firm at issue and "good alternatives," which FERC defines as any other service "that is available soon enough, has a price that is low enough, and has a quality high enough to permit customers to substitute the alternative." Id. (citation omitted). Market share measures a firm's ability to exercise market power unilaterally, whereas market concentration, as determined by the Herfindahl-Hirschman Index (HHI), measures the ability of sellers to exercise market power jointly. Id. at 61, 234. ^[1] Relevant factors that might prevent the exercise of market power, even for dominant competitors in concentrated markets, include the absence of entry barriers and the presence of countervailing buyer power. Id. at 61, 235.

         In 2012, petitioner ANR Storage Company sought authorization to charge market-based rates for its natural-gas storage services. FERC referred the matter to an administrative law judge, who held a hearing, found that ANR had failed to show a lack of market power, and thus declined to authorize market-based rates. ANR Storage Co., 146 FERC ¶ 63, 007 (2014) (Initial Decision).

         On review, the Commission rejected various aspects of the ALJ's reasoning, but ultimately affirmed his decision. ANR Storage Co., 153 FERC ¶ 61, 052 (2015) (Opinion No. 538). Among other things, FERC determined that the ALJ had erred by defining the relevant product market to exclude intrastate storage capacity as well as subscribed storage capacity committed to specific buyers but subject to release. See id. PP 106-08, 162-63. After expanding the relevant product and geographic markets beyond those used by the ALJ, FERC recalculated ANR's share to be 16.12% of the market for working gas and 15.16% of the market for daily deliverability, ^[2]and it calculated the HHIs for these respective markets to be 951 and 1, 010. Id. PP 183-213. FERC acknowledged that it had granted market-based rate authority to other natural-gas companies with similar shares, and it characterized the relevant HHIs as "low." Id. PP 214-15. However, it expressed concern that ANR was the largest competitor in the market for working gas, and that a significant part of that market consisted of intrastate or subscribed storage capacity. Id. P 219. FERC ultimately concluded:

Based on the size of the applicant in relation to the market, the relative lack of current competitors providing firm interstate storage service, the need for a substantial number of other facilities among the good alternatives to shift operations in order to offer firm interstate service, and also considering the fact that [ANR] is not a new entrant but a strong incumbent, the Commission finds that [ANR] has ...