Canadian Association of Petroleum Producers v. Federal Energy Regulatory Commission

The Federal Energy Regulatory Commission (the commission) (defendant) was tasked with setting just and reasonable rates of return for natural-gas pipeline investors. To enable the construction of necessary natural-gas pipelines, the rates of return set by the commission needed to be high enough to attract investors. In determining the rate of return to apply to a company that was not publicly traded, the commission consulted the rates of return for comparable companies. The commission approved a rate increase for Northwest Pipeline Corporation (Northwest), a private company. To calculate the appropriate rate of return for Northwest, the commission looked at five comparable companies and calculated the rate of return as the median of the rates of the comparable companies. During evidentiary hearings held by the commission about the appropriate rate of return, a group of natural-gas purchasers (the plaintiff purchasers) (plaintiffs) argued that the commission should have determined Northwest’s rate of return based on the average rate of return of the three comparable companies in the middle of the group, rather than the median rates of return of all five comparable companies. In explaining its decision to use the median, the commission had described the differences between the median and the average but did not explain its reason for using the median rather than the average. The plaintiff purchasers challenged the commission’s decision to use the median rate of return in the United States Court of Appeals for the District of Columbia Circuit, arguing that the commission’s decision was arbitrary and capricious because the commission failed to respond to their objections to the use of the median rate of return.