## Facts

- FERC, acting under § 5 of the Natural Gas Act, issued Order No. 636 requiring interstate natural gas pipelines to unbundle services and file compliance tariffs, including curtailment rules and load-management plans.
- Texas Eastern Transmission Corp. (Tetco) filed an Order No. 636 compliance tariff allowing capacity curtailment even for firm transportation service when capacity was insufficient due to force majeure or operational necessity.
- Tetco’s tariff generally required pro rata curtailment but contained an “emergency service” exception allowing continued service where gas was needed to avoid irreparable injury to life or property.
- FERC approved the emergency-service exception (with revisions) and accepted a compensation mechanism requiring emergency-exempt customers to compensate customers curtailed beyond their pro rata share.
- The compensation formula used a tariff-specified price measure and did not fully compensate curtailed customers for lost profits or other consequential losses from curtailment.
- Industrial consumer interests argued the limited compensation weakened incentives for customers to plan for emergencies (e.g., obtain backup fuel) and proposed alternatives, including compensation equal to actual damages or market price plus a premium.
- FERC rejected the proposed alternatives and characterized the approved compensation as an adequate remedy, asserting that no workable alternative had been proposed that it could monitor effectively, without explaining why the specific proposals were unworkable.

## Issues

1. Whether FERC acted arbitrarily and capriciously under the Administrative Procedure Act by approving Tetco’s emergency-curtailment compensation mechanism without adequately explaining its reasoning.
2. Whether FERC was required to address, with a reasoned explanation, the petitioners’ incentive-based objections and their concrete alternative compensation proposals.

## Decision

- The D.C. Circuit granted the petition for review in part and remanded FERC’s orders.
- The court held that FERC’s explanation did not adequately engage the petitioners’ contentions or explain the rejection of proposed alternatives, preventing meaningful judicial review.
- The court did not invalidate the emergency-service exception itself or dictate a specific compensation formula, leaving the substantive choice to FERC on remand.

## Legal Principles

- Under the APA’s arbitrary-and-capricious standard, an agency must provide a reasoned explanation for its decision and respond to significant, nonfrivolous objections.
- When regulated parties present plausible, concrete alternatives, the agency must explain why those alternatives are rejected; conclusory statements that the chosen approach is “adequate” are insufficient.
- Judicial deference to FERC’s policy choices in tariff design does not excuse a failure to explain how the chosen mechanism addresses the relevant concerns, including incentive effects and administrability.

## Conclusion

The court remanded because FERC approved a limited compensation mechanism tied to emergency exemptions from pro rata curtailment without adequately addressing objections that it created poor planning incentives or explaining why proposed, more compensatory alternatives were infeasible or unmonitorable.


Process Gas Consumers Grp. v. Fed. Energy Regul. Comm'n, 158 F.3d 591 (D.C. Cir. 1998)