ANR Storage Company v. FERC

Citation: 904 F.3d 1020Docket: 16-1285

Court: Court of Appeals for the D.C. Circuit; September 21, 2018; Federal Appellate Court

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The United States Court of Appeals for the District of Columbia Circuit reviewed a petition from ANR Storage Company challenging the Federal Energy Regulatory Commission's (FERC) decision to deny its request to charge market-based rates for natural-gas storage services. FERC based its refusal on ANR's failure to demonstrate a lack of market power, citing Section 4(a) of the Natural Gas Act, which mandates 'just and reasonable' rates. The court noted that FERC typically permits market-based rates only when a company successfully proves it lacks market power, a determination made through a three-step assessment of relevant product and geographic markets, market share, and concentration.

In 2012, ANR sought to establish market-based rates, but after a hearing, an administrative law judge (ALJ) concluded that ANR did not show a lack of market power, leading FERC to uphold this finding despite some disagreement with the ALJ's reasoning. FERC expanded the relevant product market to include both intrastate storage capacity and subscribed storage capacity, ultimately recalculating ANR's market shares and Herfindahl-Hirschman Index (HHI) values—16.12% for working gas and 15.16% for daily deliverability—indicating a concentrated market.

FERC granted market-based rate authority to other natural gas companies with similar market shares but raised concerns about ANR’s status as the largest competitor in the working gas market, particularly regarding intrastate or subscribed storage capacity. FERC concluded that ANR did not meet its burden to demonstrate a lack of significant market power due to its size relative to the market and the limited number of competitors in firm interstate storage services. Following the denial of rehearing for ANR Storage Co., 155 FERC 61,279 (2016), ANR sought judicial review under 15 U.S.C. 717r(b) to challenge FERC's refusal to allow market-based rates, questioning its decision as arbitrary or capricious under the Administrative Procedure Act.

The court emphasized that its review focuses solely on FERC's stated reasons and does not entertain post-hoc rationalizations. It requires the agency's decision to be reasonable and well-explained, particularly when differentiating similarly situated parties. ANR challenged FERC's market power findings, arguing that a 16% market share should not indicate market power in unconcentrated markets. However, the court found that FERC's consideration of additional factors beyond market shares was justified, noting that a single largest provider's share poses more concern than that of new entrants in competitive markets.

While most of ANR's challenges were rejected, the court agreed that FERC failed to adequately distinguish its decisions regarding ANR’s competitor, DTE Energy Company. It highlighted that DTE's subsidiaries had been allowed to charge market-based rates despite having slightly higher market shares than ANR’s current levels, suggesting inconsistency in FERC’s rationale.

FERC's assessment indicates that ANR and DTE hold similar market power in the Central Great Lakes Market for natural gas storage services, with ANR having market shares of 16.12% for working gas and 15.16% for daily deliverability, while DTE has shares of 14.48% and 18.02% respectively. The administrative orders reviewed show minimal acknowledgment of how FERC treated the two companies differently. The ALJ criticized the MichCon order for lacking substantive analysis, and FERC's mere mention of this does not fulfill its obligation to justify disparate treatment. FERC suggested that MichCon's unopposed application for market-based rates distinguishes it from ANR, but this fails to provide a reasonable basis for differing treatment. FERC's claim that DTE's market power was moderated by ANR's cost-based rates, while ANR's market power was a concern due to DTE's market rates, raises doubts about FERC's ability to preferentially treat one competitor over the other. Additionally, FERC proposed that the metrics for DTE's smaller affiliates may differ from those of ANR, which contradicts the agency's policy of aggregating affiliate capacities. However, since these justifications were not presented in the reviewed orders, they cannot serve as a basis for affirmation. Overall, ANR and DTE are nearly indistinguishable as competitors in the relevant markets.

FERC's decision to allow DTE affiliates to charge market-based rates while excluding ANR was deemed arbitrary and capricious due to a lack of reasonable justification. ANR contested FERC's market-power analysis, particularly regarding intrastate versus interstate storage capacity and subscribed storage subject to capacity release. FERC's analysis was divided into three parts: it included these alternatives in the relevant market, labeled them as 'good alternatives,' but ultimately determined they were insufficient to restrain ANR's market power. ANR argued that FERC's reasoning was inconsistent.

FERC defined the relevant product market based on antitrust principles, concluding that intrastate and interstate storage services are reasonably interchangeable due to the ability of intrastate providers to quickly enter the interstate market and the impact of intrastate use on interstate demand. FERC reinforced its conclusions by stating that a 'good alternative' must be readily available, competitively priced, and of high quality. It determined that intrastate storage could discipline ANR's pricing and that subscribed capacity could also serve as a good alternative.

Despite acknowledging these alternatives, FERC expressed concern over the number of facilities needed to effectively constrain ANR's market power. This raised questions about the interplay between product market definition and good alternatives. FERC consistently categorized intrastate and subscribed capacities as economically meaningful substitutes, concluding that ANR had not demonstrated a lack of market power. Even upon rehearing, FERC maintained that neither demand nor supply from these alternatives would impede ANR's ability to exert market power. The conclusion drawn highlights the complexities of substitutability and the implications for antitrust standards in evaluating market behavior.

The market is defined as the area where significant substitution in consumption or production occurs, factoring in all relevant commercial realities. FERC determined that intrastate capacity is a viable alternative within the relevant product market, noting that intrastate suppliers can easily transition to the interstate market and that distinctions between interstate and intrastate natural gas are not significant for market price formation. FERC focused on capacity that can reasonably be expected to become available, rather than all theoretically available capacity. The Court questions FERC's concern over delays in supply shifts, given its own analysis showing that intrastate storage facilities are legitimate alternatives to ANR's services. While intervenors highlight various restrictions intrastate providers may face in shifting to interstate services, FERC did not incorporate this reasoning in its orders, leaving the issue open for further examination on remand. The Court found FERC's conclusion inconsistent with its analysis, deeming it arbitrary and capricious.

ANR's additional claims regarding adverse FERC rulings and computational errors were found to lack merit. Specifically, the exclusion of two competitors and the attribution of storage capacity to an affiliate were not erroneous rulings, and FERC deemed alleged computational errors immaterial to its overall assessment. ANR's arguments regarding market power factors, such as entry barriers and customer protection measures, were also permissibly rejected by FERC. Consequently, the Court grants the petition for review, sets aside FERC's orders, and remands for further proceedings.