 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued February 22, 2018         Decided September 21, 2018

                       No. 16-1285

                ANR STORAGE COMPANY,
                     PETITIONER

                            v.

       FEDERAL ENERGY REGULATORY COMMISSION,
                    RESPONDENT

 NORTHERN STATES POWER COMPANY - MINNESOTA, ET AL.,
                   INTERVENORS


          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 for the Court filed by Circuit Judge KATSAS.

    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

                               2
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
1
  HHI is calculated by squaring the market share of each supplier in
the market, then summing those numbers. HHIs range up to 10,000,
the index for a market with only one seller; higher numbers indicate
a more concentrated market. See W. Holmes & M. Mangiaracina,
Antitrust Law Handbook § 6:5 (2017).


                                 3
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 not met its evidentiary burden to show it
        lacks significant market power in the relevant
        markets.

Id. P 220.


2
   “Working gas” refers to the total amount of gas that may be
withdrawn from a facility, whereas “daily deliverability” refers to the
amount of gas that can be withdrawn in one day. Given the
fluctuating and uncertain demand for natural gas over time, FERC
considers both to be important market measures.

                                  4
    After FERC denied rehearing in large part, ANR Storage
Co., 155 FERC ¶ 61,279 (2016) (Rehearing Order), ANR
sought review in this Court. We have jurisdiction under 15
U.S.C. § 717r(b).

                               II

     Under the Administrative Procedure Act, the question
before us is whether FERC’s refusal to allow ANR to charge
market-based rates was “arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(A). To determine the answer, we focus on the
reasons stated in the orders under review; we neither supply our
own reasoning for the agency decision, SEC v. Chenery Corp.,
332 U.S. 194, 196 (1947), nor consider the agency’s post-hoc
rationalizations, Nat’l Petrochemical & Refiners Ass’n v. EPA,
630 F.3d 145, 164 (D.C. Cir. 2010). Rather, the agency
decision itself must be “reasonable and reasonably explained.”
Nw. Corp. v. FERC, 884 F.3d 1176, 1179 (D.C. Cir. 2018). In
particular, the decision must give a “reasoned analysis” to
justify the disparate treatment of regulated parties that seem
similarly situated, W. Deptford Energy, LLC v. FERC, 766 F.3d
10, 21 (D.C. Cir. 2014), and its reasoning cannot be internally
inconsistent, see, e.g., Sierra Club v. EPA, 884 F.3d 1185,
1194–96 (D.C. Cir. 2018).

     ANR raises a host of challenges to FERC’s decision. We
reject most of them, but conclude that two have merit.

                               A

    ANR contends that FERC’s finding of market power
conflicts with its own precedent. Primarily, ANR argues that
shares around 16% cannot establish market power, at least in
unconcentrated markets.        However, FERC has long

                               5
recognized that “market shares and HHIs alone do not give a
comprehensive view of all important factors.” 1996 Policy
Statement, 74 FERC at 61,235. Moreover, we cannot fault
FERC’s analysis that, even in an unconcentrated market, a 16%
share held by “the single largest storage provider,” Opinion No.
538, 153 FERC ¶ 61,052, P 219, is more concerning than
comparable shares held by “new entrants to competitive
markets that were dominated by other entities,” id. P 215.
Finally, we reject ANR’s contention that FERC’s decision is
inconsistent with any of the prior reasoned decisions addressed
at length by the parties. Instead, we conclude that FERC has
reasonably distinguished decisions involving storage providers
facing dominant competitors, e.g., Wyckoff Gas Storage Co.,
105 FERC ¶ 61,027, PP 47–61 (2003); storage markets linked
to large and highly competitive production markets in the Gulf
Coast region, e.g., Copiah Storage, LLC, 121 FERC ¶ 61,272,
PP 24–25 (2007), reh’g granted on other grounds, 123 FERC
¶ 61,082 (2008); and interruptible storage service that
competes with other related products and services, e.g.,
ONEOK Gas Storage, LLC, 90 FERC ¶ 61,283, 61,955 (2000).

     Nonetheless, we agree with ANR on one critical point—
that FERC did not adequately distinguish its past decisions
involving ANR’s principal competitor, DTE Energy Company.
As ANR explains, FERC has permitted two of DTE’s
subsidiary companies, Washington 10 Storage Corporation and
Michigan Consolidated Gas Company (MichCon), to charge
market-based rates for the last decade. When FERC granted
that approval, DTE’s market share was over 18% for working
gas and 17% for daily deliverability—slightly higher than
ANR’s current shares. See Petition for Authorization to
Charge Market-Based Rates at 8, Wash. 10 Storage Corp.,
Docket No. PR08-26-000 (FERC May 30, 2008); Petition for
Authorization to Charge Market-Based Rates at 10, Mich.
Consol. Gas Co., Docket No. PR09-10-000 (FERC Dec. 23,

                               6
2008). Moreover, DTE was then a strong, established
competitor, just as ANR is today. And by FERC’s own
reckoning, ANR and DTE appear virtually indistinguishable
with respect to their current market power: Critically, both
companies compete in the same Central Great Lakes Market
for natural-gas storage services. See Opinion No. 538, 153
FERC ¶ 61,052, PP 141, 192–95. 3 And whereas FERC
calculated ANR’s shares to be 16.12% of the market for
working gas and 15.16% of the market for daily deliverability,
id. P 213, its figures also indicate that DTE’s current shares are
14.48% of the market for working gas and 18.02% of the
market for daily deliverability, see id. PP 195, 213; J.A. 1495,
which hardly seem dispositively different.

     Despite these obvious similarities between the two leading
suppliers in the relevant markets, the administrative orders at
issue barely even mentioned FERC’s disparate treatment of the
two companies. The ALJ tersely asserted that the MichCon
order contained “no substantive analysis,” Initial Decision, 146
FERC ¶ 63,007, P 453, and the Commission itself simply
noted—without further discussion—that the ALJ had declined
to follow MichCon, Opinion No. 538, 153 FERC ¶ 61,052,
P 83. The mere observation that MichCon was unreasoned
does not satisfy FERC’s burden to provide some reasonable
justification for treating ANR and DTE differently.


3
   In this case, FERC found that ANR and DTE compete in a
“Central Great Lakes” geographic market that encompasses
Michigan, Illinois, Indiana, Ohio, and western Ontario. See
Opinion No. 538, 153 FERC ¶ 61,052, PP 113, 141, 192–95. In
approving market rates for MichCon, FERC found that MichCon
competed in a substantially similar “Great Lakes” geographic market
that encompassed Michigan, northern Illinois, northern Indiana, and
western Ontario. See Petition at 7–8, Mich. Consol. Gas Co.,
Docket No. PR09-10-000 (FERC Dec. 23, 2008).

                                7
     Before this Court, FERC suggests two variations on this
theme. First, it notes that Washington 10’s application to
charge market-based rates, unlike ANR’s, was unopposed.
Putting aside the fact that MichCon’s application was opposed,
this observation, too, fails to provide any reasonable
justification for treating ANR and DTE differently. Second,
FERC notes that the MichCon approval was effected through
an order styled as a settlement, in which FERC purported to
agree with MichCon that neither FERC, MichCon, “nor any
other party shall be deemed to have approved, accepted,
agreed, or otherwise consented to any principle or issue in this
proceeding.” Letter Order at 4, Mich. Consol. Gas Co.,
Docket Nos. PR09-10-000, PR09-10-001 (May 21, 2009).
Despite this disclaimer, FERC could not lawfully have granted
MichCon market-based rate authority unless it concluded that
the company lacked power in the relevant market. See N. Nat.
Gas Co., 700 F.3d at 13. Moreover, whatever the effect of the
MichCon order as a settlement of claims between FERC and
MichCon, neither of those parties could contract away FERC’s
statutory duty—imposed by the APA and owed to all other
regulated parties—to provide some reasonable justification for
any adverse treatment relative to similarly situated competitors.
Without more, FERC’s observation that its favorable treatment
of DTE affiliates was effected through one unopposed order
and one settlement provides no such justification.

     In its brief to this Court, FERC proposed a different
justification for treating DTE better than ANR. According to
FERC, when the DTE affiliates sought to charge market-based
rates, their market power was checked because DTE’s largest
competitor—ANR—charged cost-based rates. But when
ANR sought to charge market-based rates, its market power
posed a greater concern because ANR’s largest competitor—
DTE—already was charging market rates. We frankly doubt
that FERC may pick winners and losers in this way, based on

                               8
which of two otherwise indistinguishable competitors happens
to win a race to the FERC equivalent of a courthouse.
Nonetheless, we need not definitively resolve this question
now. Because FERC did not even hint at its first-to-apply
rationale in the orders under review, we cannot affirm on that
basis. See Chenery Corp., 332 U.S. at 196. Accordingly, we
need not and do not prejudge whether FERC may develop on
remand a reasonable justification for such an approach.

     At oral argument, FERC floated one final proposed
justification—that the market metrics of Washington 10 and
MichCon, as relatively small affiliates of DTE, may be
meaningfully different from those of DTE and thus ANR. At
first glance, this rationale seems difficult to reconcile with
FERC’s longstanding practice of attributing to each company
the capacity of all affiliates. See, e.g., Opinion No. 538, 153
FERC ¶ 61,052, P 193 (“Concerning affiliates, the [1996]
Policy Statement requires that applicants aggregate the
capacity of affiliated companies into one estimate.”). But
because this rationale likewise was not asserted in the orders
under review, we may not affirm on this ground, and we do not
foreclose further development of this point on remand.

     On the record before us, ANR and DTE seem
indistinguishable as leading competitors with virtually
identical shares in the same relevant markets. Because FERC
did not provide any reasonable justification for allowing DTE
affiliates but not ANR to charge market-based rates, its
decision is arbitrary and capricious.

                                B

     ANR also challenges FERC’s market-power analysis
regarding two particular categories of storage capacity: (i)
storage in the intrastate as opposed to interstate market, and (ii)

                                9
storage already subscribed, but subject to capacity release. 4
FERC trifurcated its analysis of these possible competitive
alternatives to ANR’s service: first, it included them in the
relevant product market; second, it deemed them “good
alternatives”; but third, it deemed them not sufficiently good
alternatives to constrain ANR’s exercise of market power.
ANR contends that FERC’s analysis on these points was
internally inconsistent. We agree.

     On the question of market definition, FERC explained that
a relevant product market encompasses all goods or services
“reasonably interchangeable” with those supplied by the
company at issue, consistent with settled antitrust principles.
Opinion No. 538, 153 FERC ¶ 61,052, P 59 (citing United
States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395
(1956)). Applying that definition, FERC concluded that
interstate and intrastate storage services are reasonably
interchangeable for two reasons. First, on the supply side of
the market, “[f]acilities providing intrastate storage service
need only alter their regulatory status in order to provide
interstate storage service,” id. P 107, and such providers can
“quickly enter the interstate market upon a price increase,” id.
P 108. Second, on the demand side, “use of existing intrastate
storage reduces the overall demand for interstate storage and
can serve to discipline an anti-competitive price increase in the
interstate storage market.” Id. FERC therefore concluded
that, “while distinctions between intrastate and interstate
natural gas markets may be meaningful from a legal




4
   “Capacity release” describes a transaction in which the holder of
a contract to store or transport natural gas sells that right to another
company seeking storage or transportation services. See, e.g., Pan-
Alberta Gas, Ltd. v. FERC, 251 F.3d 173, 174–75 (D.C. Cir. 2001).

                                  10
perspective, they are not meaningful from the perspective of
market price formation.” Id.

     FERC reinforced these conclusions in its analysis of
competitive alternatives. Consistent with the 1996 Policy
Statement, FERC stated that “a good alternative must be
available soon enough, have a price low enough, and have a
quality high enough to permit customers to substitute the
alternative for the applicant’s service.” Id. P 142. Then, it
concluded that intrastate storage was a “good alternative” to
interstate storage. In particular, it determined that suppliers of
intrastate storage may obtain the necessary approval from
FERC to enter the interstate market “soon enough to potentially
discipline any attempt by [ANR] to raise prices above
competitive levels.” Id. P 163. Likewise, it concluded that
subscribed capacity “that may reasonably be expected to
become available” though a release also was a “good
alternative.” Id. P 162. For these reasons, FERC reversed
the ALJ’s exclusion from the market of various intrastate and
subscribed storage capacity. See id. PP 186–211.5

     FERC then turned on a dime. Despite its inclusion of
intrastate and subscribed facilities as good alternatives in the
relevant market, FERC found “concerning” the “sheer number”
of such facilities that would need to “enter the interstate market
with available capacity” in order to constrain ANR. Id. P 219.

5
   We are uncertain how FERC viewed the relationship between the
inquiries into product market and good alternatives. Compare, e.g.,
Opinion No. 538, 153 FERC ¶ 61,052, P 60 (“The Commission
measures reasonable interchangeability of services in the same
manner as it determines good alternatives.”), with id. PP 58–110,
142–65 (separately analyzing product market and good alternatives).
Either way, the point is that FERC repeatedly described intrastate
and fully subscribed capacity as economically meaningful
substitutes, not merely theoretical ones.

                                11
For that reason, together with ANR’s status as a market leader,
FERC concluded that ANR had not proven a lack of market
power. See id. P 220. Likewise, on rehearing, FERC
reiterated its view that neither the demand nor supply impacts
of intrastate and subscribed facilities would prevent ANR’s
exercise of market power. Rehearing Order, 155 FERC
¶ 61,279, P 37.

     We recognize that substitutability is a question of degree,
so it is possible that, for imperfect substitutes, there may be
only limited shifting of consumption or production.
Nonetheless, under normal antitrust standards, which FERC
affirmatively invoked, Opinion No. 538, 153 FERC ¶ 61,052,
PP 59–61, it makes little sense to conclude that alternatives
within the relevant product market do not discipline
anticompetitive price increases. To the contrary, the market
includes only the “arena within which significant substitution
in consumption or production occurs,” taking into account all
relevant “commercial realities.” Ohio v. Am. Express Co., 138
S. Ct. 2274, 2285 (2018) (emphasis added) (citations omitted).
More to the point, FERC itself, in deeming intrastate capacity
to be a good alternative within the relevant product market,
determined that intrastate suppliers could shift “easily,”
“quickly,” and “economically” into the interstate market, and
that “distinctions between interstate and intrastate natural gas
… are not meaningful from the perspective of market price
formation.” Opinion No. 538, 153 FERC ¶ 61,052, PP 107–
08 (emphasis added). Likewise, FERC included in the market
not all subscribed capacity that theoretically might become
available, but only capacity “that may reasonably be expected
to become available.” Id. P 162. Given this entire analysis,
we fail to see how FERC could then conclude that any “delay”
in supply shifts would be intolerably “concerning.” See id.
P 219.


                              12
     Before this Court, FERC stresses that Opinion No. 538
engaged in a detailed analysis of each of ANR’s possible
competitive alternatives. True enough, but that very analysis
determined that the intrastate storage facilities and subscribed
facilities at issue were good alternatives within the relevant
market. FERC did not suggest that these facilities would be
incapable of checking ANR. See Opinion No. 538, 153 FERC
¶ 61,052, PP 186–210.

     The intervenors, who include customers and competitors
of ANR, press a different point. They contend that, even if it
is relatively easy for intrastate storage providers to obtain from
FERC the necessary regulatory approval to provide interstate
storage services, intrastate providers face various other
restrictions on such shifting—including prohibitions imposed
under state, local, or Canadian law. Because FERC did not
adopt such reasoning in its administrative orders (or even in
this Court), we cannot affirm on that basis. See Chenery
Corp., 332 U.S. at 196. Again, however, we leave the issue
open for further exploration on remand.

    There may be good reasons why intrastate or fully
subscribed facilities would not check ANR’s exercise of
market power, but FERC’s conclusion to that effect is
inconsistent with most of it analysis on this point. Because
FERC’s decision is internally inconsistent, it is arbitrary and
capricious.

                                C

     ANR’s other contentions lack merit. We note them only
briefly, to avoid unnecessary litigation on remand.

   First, ANR challenges certain adverse rulings made by
FERC on rehearing: the exclusion from the relevant market of

                               13
two previously included competitors (Dominion Transmission
and NiSource, Inc.) and the attribution to ANR of the entire
storage capacity of an affiliated company (Eaton Rapids). We
find no error in these rulings, which would have increased
ANR’s market shares at least slightly above the ones calculated
in Opinion No. 538. Because FERC has not yet assessed the
significance of these rulings, if any, we leave that issue open
on remand.

     Second, ANR contends that FERC made certain
computational errors in Opinion No. 538 itself. On rehearing,
FERC concluded that these alleged errors were immaterial to
its overall assessment. We cannot disagree, though we expect
FERC to correct any outstanding errors on remand if it chooses
to perform new calculations to account for its changed position
regarding Dominion, NiSource, and Eaton Rapids.

    Finally, ANR contends that FERC failed to adequately
consider other factors bearing on market power, such as the
asserted lack of entry barriers and the mitigating measures
proposed by ANR to protect its customers. We conclude that
FERC permissibly rejected these arguments.

                              III

    For the reasons given, we grant the petition for review, set
aside the Commission’s orders, and remand for further
proceedings consistent with this opinion.

                                                    So ordered.




                              14
