Fla. Gas Transmission Co. v. Fed. Energy Regulatory Comm'n, No. 07-1533

• Decision Date: 14 May 2010
• Docket Number: No. 07-1533,08-1062.
• Citation: 604 F.3d 636
• Parties: FLORIDA GAS TRANSMISSION COMPANY, Petitionerv.FEDERAL ENERGY REGULATORY COMMISSION, RespondentSouthern Natural Gas Company, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

604 F.3d 636

FLORIDA GAS TRANSMISSION COMPANY, Petitionerv. FEDERAL ENERGY REGULATORY COMMISSION, RespondentSouthern Natural Gas Company, et al., Intervenors.

Nos. 07-1533, 08-1062.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 19, 2009.

Decided May 14, 2010.

COPYRIGHT MATERIAL OMITTED

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

Steve Stojic argued the cause for petitioner Florida Gas Transmission Company, LLC. With him on the briefs was Frank X, Kelly.

Sarah E. Tomalty argued the cause and filed the briefs for petitioner Florida Power & Light Company. Barbara S. Jost entered an appearance.

Carol J. Banta, Attorney, Federal Energy Regulatory Commission, argued the cause for respondent. On the brief were Cynthia A. Marlette, General Counsel, Robert H. Solomon, Solicitor, and Judith A. Albert, Senior Attorney.

Katherine B. Edwards, John Paul Floom, R. David Hendrickson, Steve Stojic, and Frank X. Kelly were on the brief for intervenors Florida Gas Transmission Company, LLC, et al. in support of respondent.

Before: SENTELLE, Chief Judge, BROWN, Circuit Judge, and EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Chief Judge SENTELLE.

Opinion concurring in part and dissenting in part filed by Circuit Judge BROWN.

SENTELLE, Chief Judge:

Florida Gas Transmission Company, LLC (Florida Gas) and Florida Power & Light Company (Florida Power) each petition for review of Federal Energy Regulatory Commission (FERC or Commission) orders establishing new gas quality and interchangeability standards for Florida Gas's interstate natural gas pipeline system. Florida Gas challenges the geographic scope of the new standards. In a separate petition, Florida Power contests the breadth of the specific interchangeability standard adopted and the Commission's refusal to establish a cost-recovery mechanism for end-user mitigation costs. For the reasons set forth below, we grant Florida Gas's petition, but deny Florida Power's petition.

I. Background

Petitioner Florida Gas owns and operates an interstate natural gas pipeline system that runs from Texas to Florida. Petitioner Florida Power is a public utility that generates electricity using natural gas-fueled turbines connected to the Florida Gas system (FGT system). The FGT system was constructed in 1959 to transport domestic natural gas from Texas, Louisiana, Mississippi, and Alabama into Florida. AES Ocean Express LLC v. Fla. Gas Transmission Co., 119 F.E.R.C. ¶ 61,075 at ¶ 2, 2007 WL 1171015(Apr. 20, 2007) ( Initial Order ). About 80 percent of its throughput goes to electric generators; the remainder goes to local distribution companies. Id. For regulatory purposes, the FGT system is divided into two geographic regions: the Western Division, which includes its facilities west of the Alabama-Florida state line, and the Market Area, which includes its facilities east of that line. Id.

In January 2004, the Commission authorized AES Ocean Express LLC (AES) to construct and operate a natural gas pipeline that would transport revaporized liquid natural gas (LNG) and interconnect with the FGT system in the Market Area. Id. ¶ 3. When AES and Florida Gas were unable to reach an interconnection agreement, AES filed a complaint alleging that Florida Gas was insisting on unnecessary and onerous terms, including certain conditions relating to gas quality and interchangeability. Id. ¶ 4. In response to the complaint, the Commission noted that while the FGT system had primarily transported domestic natural gas, four new suppliers were seeking interconnections that would introduce revaporized LNG directly into the Market Area. Id. ¶ 5. Given that the composition of revaporized LNG can differ significantly from that of domestic natural gas, the Commission surmised that these new sources of revaporized LNG might create operational problems. Id. To forestall such problems, it ordered Florida Gas to file tariff revisions addressing its gas quality and interchangeability standards. Id. ¶ 7.

After Florida Gas filed pro forma tariff sheets in July 2004, the Commission determined that the issues concerning gas quality and interchangeability warranted a hearing. Id. ¶ 8. After holding an extensive hearing, the presiding Administrative Law Judge (ALJ) issued an initial decision in April 2006. Id. ¶ 12. In April 2007, the Commission largely affirmed the ALJ's decision in its Initial Order, which mandated new gas quality and interchangeability standards for the FGT system's Market Area. Id. ¶ 16. Although various parties (including Florida Gas and Florida Power) petitioned for rehearing, the Commission denied rehearing on the issues raised in this case. AES Ocean Express LLC v. Flo. Gas Transmission Co., 121 F.E.R.C. ¶ 61,267, 2007 WL 4465158 (Dec. 20, 2007) ( Order on Rehearing ). These petitions followed. They raise three distinct issues: (1) the geographic scope of the new standards (raised by Florida Gas), (2) the specific interchangeability standard adopted (raised by Florida Power), and (3) the lack of a cost-recovery mechanism for end-user mitigation costs (raised by Florida Power). We address these issues seriatim, incorporating additional background information as needed.

II. Analysis

We have jurisdiction to consider these petitions under § 19(b) of the Natural Gas Act (NGA), 15 U.S.C. § 717r(b). The Administrative Procedure Act requires us to “hold unlawful and set aside” the challenged aspects of the Commission's orders to the extent they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). Under this standard, the Commission “must be able to demonstrate that it has made a reasoned decision based upon substantial evidence in the record.” Pac. Gas & Elec. Co. v. FERC, 373 F.3d 1315, 1319 (D.C.Cir.2004) (quoting N. States Power Co. v. FERC, 30 F.3d 177, 180 (D.C.Cir.1994)). In addition, we must “ensure that FERC ‘articulate[s] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.’ ” Id. (quoting Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983)).

A. Geographic Scope

In developing the new standards, the Commission considered two distinct questions about their scope. First, it considered whether the new standards should apply throughout the FGT system, or only in the Market Area. Second, it considered whether the standards should apply to all natural gas, or only to revaporized LNG. Florida Gas proposed new standards that would only have governed Market Area receipts of revaporized LNG. Initial Order ¶ 208. The ALJ agreed that the new standards should only address revaporized LNG, but concluded that they should govern all receipts of revaporized LNG, not just those that occurred in the Market Area. Id. ¶¶ 209, 220-21. The Commission reversed, concluding that the new standards would only apply in the Market Area. Id. ¶ 227. Responding to end-user concerns, however, it determined that the new gas quality standards would apply not just to revaporized LNG, but to all natural gas received in the Market Area. Id. ¶¶ 212-18. Moreover, the Commission declared that “[t]he gas quality receipt point standards for the Market Area will apply equally to receipts from the Western Division.” Id. ¶ 230. Thus it imposed the new standards on the commingled stream of natural gas already flowing through the FGT system where it entered the Market Area from the Western Division.

At this border, though, the natural gas stream crosses the invisible regulatory line that separates the Western Division from the Market Area. Other than that, nothing significant occurs at this point-there is no receipt point, processing facility, or anything else that might affect the composition of the commingled stream. Florida Gas contends that the Commission's decision to impose the new gas quality and interchangeability standards at this border violates § 5 of the NGA.

1. Section 5 Authority

Section 5(a) of the NGA authorizes the Commission to determine “just and reasonable” tariff provisions once it has found the existing tariff provisions “unjust, unreasonable, unduly discriminatory, or preferential.” 15 U.S.C. § 717d(a). A finding that the existing tariff provisions are unjust or unreasonable is a prerequisite for exercising authority under § 5 of the NGA. Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 186-87 (D.C.Cir.1986); ANR Pipeline Co. v. FERC, 771 F.2d 507, 514 (D.C.Cir.1985). The Commission acknowledged this statutory requirement when it reversed the ALJ's decision that would have applied the new standards throughout the FGT system. It recognized that “to require Florida Gas to extend its proposed interchangeability standards to the Western Division, the Commission would have to find under NGA section 5 that their existing standards applicable to the Western Division are unjust and unreasonable.” Initial Order ¶ 227. Yet it expressly disavowed any such finding, conceding that “[t]he record developed at the hearing is inadequate to support a finding that the current Western Division gas standards are unjust and unreasonable.” Id. ¶ 228.

Evaluating the record, the Commission explained that while there was evidence about two imminent projects that would deliver revaporized LNG into the Market Area, there was only speculative evidence about future projects that might deliver revaporized LNG into the Western Division. Id. Specifically, the Commission found that it was “not clear which of these projects will ever be completed, whether they would deliver gas to Florida Gas, how Florida Gas's operations may be impacted or whether the Western Division markets required any special gas quality considerations.” Id. (footnotes omitted). Thus it was “difficult to find anything in this speculative and inchoate Western Division record to support a finding that the existing Florida Gas...