Florida Gas Transmission Co. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 19, 2009 Decided May 14, 2010

No. 07-1533

FLORIDA GAS TRANSMISSION COMPANY,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

SOUTHERN NATURAL GAS COMPANY, ET AL.,
INTERVENORS

Consolidated with 08-1062

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.
 2

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
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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 (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.
 4

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. Fla. Gas Transmission Co., 121 F.E.R.C. ¶
61,267 (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
 5

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 (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
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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
 7

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 tariff is no longer just and reasonable.” Id. The
Commission also noted that although revaporized LNG had
previously been delivered in the Western Division, there were
“no reports in either the Western Division or the Market Area of
problems from Western Division gas delivered to either
market.” Id. ¶ 229. In short, the Commission concluded that
there were “no identified gas quality problems in the Western
Division under its existing tariff gas quality standards.” Id.
Likewise, its Order on Rehearing reiterated that “[t]he record
contained no evidence that past deliveries of Western Division
gas have caused problems either in the Western Division or the
Market Area.” Order on Rehearing ¶ 123.

Despite a complete lack of evidence that Western Division
gas caused operational problems, the Commission determined
that the new standards would apply to natural gas flowing from
the Western Division where it entered the Market Area. Florida
Gas argues that the Commission did not make the requisite
findings to support this decision. We agree. Section 5(a)
requires that the Commission find the existing tariff provision
“unjust, unreasonable, unduly discriminatory, or preferential”
before it may exercise its § 5 authority to determine a “just and
reasonable” tariff provision. 15 U.S.C. § 717d(a). Yet the
Commission’s orders are devoid of any such findings with
respect to Western Division gas. On the contrary, the
Commission explicitly found that there was no evidence that
Western Division gas had ever caused problems in the Western
Division or in the Market Area. Thus the Commission had no
§ 5 authority to impose the new standards on gas flowing from
the Western Division into the Market Area.
 8

The Commission’s arguments to the contrary are
unavailing. It contends that once it found the existing Market
Area standards unjust and unreasonable, it had § 5 authority to
regulate all natural gas that enters the Market Area, including
gas from the Western Division. We find this contention wholly
without merit. The findings that prompted the Commission to
exercise § 5 authority over Market Area gas had nothing to do
with gas from the Western Division. Indeed, the Commission
found that Western Division gas had an unblemished record.
Moreover, the gas that enters the Market Area is the same gas
that left the Western Division. Its movement from the Western
Division into the Market Area does not alter its composition.
Thus the Commission’s finding that Western Division gas has
not caused problems continues to apply with equal force at the
Alabama-Florida border.

The Commission asserts that a uniform interchangeability
standard is necessary to ensure that interchangeable gas is
delivered to Market Area end users. It insists that the new
standards should apply to all gas that enters the Market Area,
whether it be revaporized LNG, domestic natural gas, or the
commingled stream from the Western Division. This insistence
evinces an ongoing concern that Western Division gas might
someday create operational problems in the Market Area. But
this concern ignores the Commission’s own finding that
deliveries of Western Division gas have not caused problems in
the Market Area. Congress has not authorized the Commission
to exercise its NGA § 5 powers based on speculation,
conjecture, divination, or anything short of factual findings
based on substantial evidence. Absent a finding that the existing
Western Division standards were unjust or unreasonable, the
Commission had no authority to impose new standards on the
commingled stream that flows from the Western Division into
the Market Area.
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2. Imposing Standards in the Middle of the Pipeline

Florida Gas also argues that the Commission’s decision to
impose the new standards in the middle of its pipeline was
arbitrary and capricious. It argues that this decision deviated
from the Commission’s consistent prior practice of imposing
such standards only at delivery/receipt points. The Commission
counters that it has no such practice. Regardless of whether
there was a prior practice of this sort, Florida Gas also asserts
that the only logical place for imposing the new standards is at
delivery/receipt points. At those points, there is a change in
control, and the pipeline can identify and refuse nonconforming
deliveries to ensure that its commingled stream will meet
applicable gas standards.

Florida Gas raised these objections in its petition for
rehearing. When the Commission refused to budge, Florida Gas
sought to skirt the problem. It first filed tariff sheets that would
have applied the Market Area standards at its Western Division
receipt points, the last points at which it could exercise control
over the composition and quality of the commingled steam
before it reached the Alabama-Florida border. The Commission
rejected this approach. Fla. Gas Transmission Co., 119
F.E.R.C. ¶ 61,185 (May 25, 2007) (letter order). Florida Gas
then sought to eliminate the language applying the new
standards to gas entering the Market Area from the Western
Division. The Commission likewise rejected this approach.
Fla. Gas Transmission Co., 120 F.E.R.C. ¶ 61,128 (Aug. 2,
2007) (letter order).

We agree with Florida Gas that the Commission did not
adequately respond to its objections. First, the Commission
argued that it was consistent to subject all gas that enters the
Market Area to the new standards. Although it is in one sense
 10

consistent to treat all gas identically, it is a foolish consistency
in this case, for doing so equates two categorically different
sources: the commingled stream from the Western Division and
off-system receipts in the Market Area. Given the record,
treating these two sources identically makes no sense. Second,
the Commission characterized the Alabama-Florida border as a
receipt point. Initial Order ¶ 230. But there is simply no receipt
point at the Alabama-Florida border. Third, it argued that
Florida Gas was in the same position as any pipeline seeking to
comply with the quality standards imposed by a downstream
pipeline. Order on Rehearing ¶ 138. But this treats Florida Gas
as two separate pipelines, which it is not. If it were two
different pipelines, there would be a delivery/receipt point at
their interconnection, a change in control, and presumably an
interconnection agreement addressing gas quality. In this case,
however, there is one pipeline, no delivery/receipt point, and no
change in control. Thus the Commission’s responses do not
address Florida Gas’s fundamental objection, which is that it
lacks the practical ability to control the quality of its
commingled stream at the Alabama-Florida border unless it can
control the quality of the upstream deliveries it receives before
they commingle.

Moreover, the Commission failed to identify any
mechanism through which Florida Gas (or any other pipeline)
could maintain a compliant commingled stream without
controlling the quality of upstream deliveries. Although the
Commission rejects the suggestion that it has a policy of
imposing gas quality standards only where there is a change in
control, it does not dispute Florida Gas’s assertion that its
decision imposing the new standards in the middle of the
pipeline is unprecedented. Since a commingled gas stream is
the blended product of upstream deliveries, its composition
necessarily varies based on the composition, volume, and timing
of those deliveries. Imposing the standards on a commingled
 11

stream without allowing the pipeline to control the quality of
upstream deliveries hamstrings the pipeline’s ability to meet
those standards. The Commission’s assertion that past
performance suggests that Florida Gas may be able to meet the
new standards at the Alabama-Florida border without changing
its Western Division tariff, id. ¶ 139, only highlights the
complete lack of evidence that Western Division gas poses any
identifiable problem. If the Commission desires to impose
standards in the middle of a pipeline, it must give a rational
basis for doing so and explain in practical terms how it expects
the pipeline to meet those standards going forward. It has not
done so in the orders before us.

3. Conclusion

We hold that the Commission’s decision imposing the new
standards on gas entering the Market Area from the Western
Division was arbitrary, capricious, and not in accordance with
law. The Commission neither made the requisite findings before
exercising § 5 authority over Western Division gas nor gave a
rational explanation for imposing the new standards on the
commingled stream where it enters the Market Area. We thus
grant Florida Gas’s petition and vacate the Commission’s orders
insofar as they impose the new standards on Western Division
gas where it enters the Market Area.

B. The Interchangeability Standard

Gas interchangeability was raised in the proceeding below
because end users were “concerned about the interchangeability
of imported LNG compared to the historic quality of delivered
gas.” Initial Order ¶ 31. Although natural gas is primarily
composed of methane, it also includes other constituents, and its
precise composition can vary from source to source. Id. ¶ 28.
“Gas interchangeability refers to the extent to which a substitute
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gas can safely and efficiently replace gas normally used by an
end-use customer in a combustion application.” Id. ¶ 29. The
Wobbe Index is a measure of gas interchangeability. As the
Commission explains it, “If a fuel gas stream has a constant
Wobbe Index, regardless of fuel composition, a constant heat
release rate will be supplied through a specific orifice at a
constant supply pressure.” Id. The Modified Wobbe Index is
closely related to the Wobbe Index, but adds temperature as a
variable and uses a slightly different measure for heat value. Id.
¶ 49 & n.79. As we understand it, and as the parties seem to
assume, the differences between the Wobbe Index and the
Modified Wobbe Index are immaterial when considering the
percentage ranges at issue in this case. Indeed, the Commission
has explained that when the focus is on percentage ranges, the
differences between these indices are “so minor” that they are
“virtually interchangeable.” Order on Rehearing ¶ 39.

The historical Wobbe Index for gas delivered in the Market
Area ranged from 1,346 to 1,371, with an average of 1,356.
Initial Order ¶ 35. Florida Gas proposed a Wobbe Index range
of 1,340 to 1,396, which was plus or minus 2 percent from the
historical average. Id. The LNG suppliers sought a range of
1,302 to 1,400 (plus or minus 4 percent with a cap at 1,400). Id.
¶ 36. Conversely, the Florida generators (including Florida
Power) pushed for a range of 1,346 to 1,371 (plus or minus 1
percent). Id. The ALJ determined that the range Florida Gas
proposed was just and reasonable, and the Commission agreed.
Id. ¶¶ 38, 43.

The dispute over the appropriate Wobbe Index range
revolves around 55 Dry Low NOx (DLN) turbines that operate
in the Market Area. Id. ¶ 46. These turbines, some of which
were manufactured by General Electric (GE) and others
manufactured by Siemens-Westinghouse, are especially
sensitive to changes in gas quality. Id. Florida Power has 32
 13

DLN turbines on the FGT system. In selecting a Wobbe Index
range, the Commission considered evidence introduced at the
hearing, including the manufacturers’ specifications for the DLN
turbines, other documents concerning the turbines, expert
witness testimony, and the Natural Gas Council Plus Interim
Guidelines (NGC+ Interim Guidelines). Initial Order ¶¶
48–127. Weighing this evidence, the Commission found the
manufacturers’ published specifications to be the “most reliable
evidence in this record as to the allowable Wobbe Index ranges
of the gas the turbines may burn without operational problems.”
Id. ¶ 47. It found these specifications particularly reliable
because they were “public documents that customers rely upon
for ordering, operating their equipment and warranties.” Id. ¶ 54
(footnotes omitted). According to GE’s specifications, its DLN
turbines could operate within a range of plus or minus 5 percent
around the Modified Wobbe Index midpoint for which they
were built. Id. ¶¶ 50–51. Likewise, the Siemens-Westinghouse
specifications stated that its DLN turbines could operate within
a Modified Wobbe Index range of plus or minus 2 percent
around their midpoint and maintain their emission standards
without needing auto-tuning. Id. ¶ 55. Based on this evidence,
the Commission concluded that a Wobbe Index range of plus or
minus 2 percent around the historical average was appropriate.
Id. ¶ 34.

In reaching this conclusion the Commission departed from
the NGC+ Interim Guidelines, which recommended adopting a
Wobbe Index range of plus or minus 4 percent from the
historical mean, with a maximum no greater than 1,400. It
found that “the special requirements of the electric generators
support Florida Gas’s proposal of a Wobbe Index range with
only a plus or minus 2 percent allowable variation from the
midpoint, with an upper limit of 1,396, instead of the plus or
minus 4 percent variation, with an upper limit of 1,400, allowed
by the NGC+ Interim Guidelines.” Id. ¶ 44. It concluded that
 14

“the ALJ properly used the NGC+ Interim Guidelines as a
starting point in determining the appropriate Wobbe Index range
on the Florida Gas system, but deviated from them to the extent
necessary to accommodate the circumstances on the Florida Gas
system as reflected in this record.” Id. ¶ 128.

The Commission also discounted contrary testimony from
three combustion experts provided by the Florida generators.
The Initial Order gives an exhaustive account of why it found
these witnesses less reliable than the manufacturers’ published
specifications. Id. ¶¶ 89–115. Although it credited some
witness testimony, it gave little weight to testimony in which the
witnesses were not specific, had not considered relevant data,
made inconsistent statements, or relied on anecdotal
information. For example, one witness had not reviewed the
manufacturers’ specifications before reaching his conclusions,
was not able to identify a specific Wobbe Index range that the
turbines could safely accommodate, and admitted that he was
not certain whether the proposed range would actually create
operational problems. Id. ¶¶ 97–98.

Florida Power challenges the Commission’s decision
adopting a Wobbe Index range of 1,340 to 1,396, contending
this decision was neither reached through reasoned
decisionmaking nor supported by substantial evidence. It
accuses the Commission of “rejecting relevant evidence,”
deciding “against the weight of the evidence,” and “failing to
make a rational connection between the facts in the case and
[the] choice made.” Florida Power Br. at 21–22. In evaluating
this argument, we give the Commission’s decision substantial
deference. “When considering FERC’s evaluation of ‘scientific
data within its technical expertise,’ we afford FERC ‘an extreme
degree of deference.’” Wash. Gas Light Co. v. FERC, 532 F.3d
928, 930 (D.C. Cir. 2008) (quoting Nat’l Comm. for the New
River, Inc. v. FERC, 373 F.3d 1323, 1327 (D.C. Cir. 2004)).
 15

Likewise, “when agency orders involve complex scientific or
technical questions . . . we are particularly reluctant to interfere
with the agency’s reasoned judgments.” B&J Oil & Gas v.
FERC, 353 F.3d 71, 76 (D.C. Cir. 2004). Thus we will not
second-guess the Commission’s technical judgment concerning
the appropriate Wobbe Index range as long as that judgment was
reached through reasoned decisionmaking and supported by
substantial evidence.

Florida Power first contends that the Commission’s decision
was not based on substantial evidence. It characterizes the
manufacturers’ specifications the Commission relied on as a
“single piece of evidence” that cannot constitute substantial
evidence. Florida Power Reply Br. at 2–3. We disagree. When
reviewing for substantial evidence, we do not ask whether
record evidence could support the petitioner’s view of the issue,
but whether it supports the Commission’s ultimate decision.
Fla. Mun. Power Agency v. FERC, 315 F.3d 362, 368 (D.C. Cir.
2003). The substantial evidence inquiry turns not on how many
discrete pieces of evidence the Commission relies on, but on
whether that evidence adequately supports its ultimate decision.
In this case, what Florida Power characterizes as a “single piece
of evidence” is actually two separate documents of 24 and 25
pages respectively. Moreover, the Commission explained that
it considered these public documents particularly reliable
because GE and Siemens-Westinghouse had an interest in
making the specifications broad enough to maximize their sales,
but not too broad, lest the turbines prove unable to handle the
full range, thereby disappointing customers and possibly giving
rise to warranty claims. “The ‘substantial evidence’ standard
requires more than a scintilla, but can be satisfied by something
less than a preponderance of the evidence.” FPL Energy Me.
Hydro LLC v. FERC, 287 F.3d 1151, 1160 (D.C. Cir. 2002). We
conclude that the manufacturers’ published specifications
constitute substantial evidence for the Commission’s decision.
 16

Florida Power also contends that the Commission’s decision
to adopt a Wobbe Index range between 1,340 and 1,396 was not
reached through reasoned decisionmaking. We disagree. The
Commission considered the NGC+ Interim Guidelines, which
suggested a Wobbe Index range of plus or minus 4 percent, with
a cap of 1,400. It also considered the sensitivity of the DLN
turbines, relying on the manufacturers’ specifications and a
reasonable assumption that the turbines were already centered
within the historical Wobbe Index range for the Market Area.
Ultimately the Commission settled on a Wobbe range that was
within the manufacturers’ specifications, recognizing that “there
may be some costs associated with retuning or recentering the
turbines,” but finding that “those costs should not be beyond
ordinary business costs that could be expected in operating
sophisticated equipment with special needs as to the fuel it
burns.” Initial Order ¶ 56.

Florida Power also asserts that the Commission should not
have adopted the new standards until it knew exactly what effect
those new standards would have on Florida Power’s DLN
turbines. But reasoned decisionmaking does not require
complete prescience. In its reply brief, Florida Power argues
that the Commission never considered whether end-user
modifications necessitated by the new standards could be
completed before revaporized LNG was introduced into the FGT
system. This argument, which was not raised before the
Commission or in Florida Power’s initial brief, comes late and
falls short. The Commission had no duty to respond to
arguments Florida Power never made.

The Commission provided a thorough and lucid explanation
for its ultimate decision to adopt a Wobbe Index range of 1,340
to 1,396. It identified the evidence it credited, explained why it
considered some evidence more reliable than other evidence,
and demonstrated how that evidence supported its ultimate
 17

decision. Its decision exemplifies reasoned decisionmaking, and
Florida Power’s contention otherwise has no merit.

C. Mitigation Costs

In the proceeding below, electric generators and local
distribution companies asked the Commission to establish a
mechanism through which they could recover expenses incurred
when they modified and upgraded their equipment to handle gas
delivered under the new standards. The Commission gave two
rationales for refusing to establish any such cost-recovery
mechanism. First, it asserted that it lacked jurisdiction to
require nonjurisdictional parties (LNG suppliers and shippers)
to reimburse mitigation costs incurred by other nonjurisdictional
parties (electric generators and local distribution companies).
Second, it maintained that it had already considered end-user
mitigation costs in developing the new standards and
consequently adopted standards that would not impose excessive
mitigation costs.

The primary reason the Commission gave for refusing to
adopt a cost-recovery mechanism was that it lacked jurisdiction
to do so. Initial Order ¶¶ 267–73. It asserted that it only had
jurisdiction “to ensure that the rates, terms, and conditions of
Florida Gas’s transportation service are just and reasonable.” Id.
¶ 270; see also Order on Rehearing ¶ 105. The Commission
argued that it has no jurisdiction over first sales made by LNG
suppliers, the importation of LNG (which is considered a first
sale), or end users. Initial Order ¶¶ 268–69. Thus its
jurisdiction in this proceeding was limited to ensuring that the
Florida Power tariff contained just and reasonable gas quality
and interchangeability standards. Id. ¶ 270. According to the
Commission, it had no jurisdiction to require nonjurisdictional
parties to reimburse electric generators and local distribution
companies for their mitigation costs. Id. ¶¶ 272–73. In
 18

particular, it stressed that the cost-recovery mechanism Florida
Power and others sought involved shifting costs incurred by one
group of nonjurisdictional entities (end users like Florida Power)
to another group of nonjurisdictional entities (LNG suppliers
and shippers). Id. ¶ 269.

The Commission also rejected the contention that it could
establish a cost-recovery mechanism under § 7 or § 16 of the
NGA. Section 7 gives the Commission authority to issue or
withhold certificates of public convenience for the construction,
extension, or abandonment of natural gas transportation
facilities. 15 U.S.C. § 717f. It also provides that the
Commission may attach to those certificates “such reasonable
terms and conditions as the public convenience and necessity
may require.” § 717f(e). Section 16 provides that the
Commission “shall have power to perform any and all acts, and
to prescribe, issue, make, amend, and rescind such orders, rules,
and regulations as it may find necessary or appropriate to carry
out the provisions of this chapter.” § 717o(a). The parties who
sought reimbursement below argued that the Commission must
have the authority to allocate costs among nonjurisdictional
parties because it has done so in previous proceedings. In
response, the Commission distinguished those precedents and
argued that § 7 does not provide independent jurisdiction to do
what is otherwise outside its jurisdiction. In particular, it relied
on our statement in American Gas Ass’n v. FERC, 912 F.2d
1496 (D.C. Cir. 1990), that “the Commission may not use its §
7 conditioning power to do indirectly (1) things that it can do
only by satisfying specific safeguards not contained in § 7(e) . . .
or (2), a fortiori, things that it cannot do at all,” id. at 1510. See
Initial Order ¶ 291.

Although the Commission relied heavily on this
jurisdictional rationale, it also explained that even if it had
jurisdiction, it would not implement the type of cost-recovery
 19

mechanism Florida Power and other end users sought because
it had already taken mitigation costs into account when it
developed the new standards: “[W]e have addressed impacts on
Florida Gas’s customers through the approval of
interchangeability standards governing the gas that can be
accepted onto Florida Gas’s system, and have found that the
approved standards should ensure that downstream entities do
not incur excessive mitigation costs.” Id. ¶ 292. In particular,
the Commission balanced the need to maximize the availability
of natural gas, which militated toward less restrictive standards,
with the need to avoid imposing excessive costs on end users,
which militated toward more restrictive standards. Order on
Rehearing ¶¶ 101, 107. Weighing these different interests, the
Commission arrived at a compromise standard of plus or minus
2 percent. In doing so, it departed from the Wobbe Index range
recommended in the NGC+ Interim Guidelines, adopting a more
restrictive range that fell within the acceptable range identified
in the DLN turbine manufacturers’ specifications. Initial Order
¶¶ 271, 292; Order on Rehearing ¶¶ 80, 101. The Commission
noted that while end users would incur some costs under the
new standards, LNG suppliers might also incur costs refining
their product to meet those standards. Order on Rehearing ¶
102. Having balanced these costs in selecting the appropriate
standards, the Commission was unwilling to upset that balance
by imposing a separate cost-recovery mechanism.

In its petition, Florida Power again contends that the
Commission had jurisdiction to establish a cost-recovery
mechanism under § 7 and § 16 of the NGA. On the contrary, we
find the Commission’s jurisdictional rationale convincing. The
Commission has no direct jurisdiction over the parties from
which Florida Power seeks compensation. And the Commission
cannot use its § 7 conditioning power to exercise direct control
over nonjurisdictional parties. See Am. Gas Ass’n, 912 F.2d at
1510. Likewise, while § 16 gives the Commission ancillary
 20

jurisdiction to carry out the statute’s other provisions, it does not
confer additional jurisdiction over parties otherwise outside the
Commission’s jurisdiction. Pub. Serv. Comm’n of N.Y. v.
FERC, 866 F.2d 487, 491–92 (D.C. Cir. 1989). The cost-
recovery mechanism advanced by Florida Power falls outside
the Commission’s jurisdiction because it would impermissibly
require nonjurisdictional parties to reimburse end-user
mitigation costs.

Even assuming the Commission had jurisdiction to establish
a cost-recovery mechanism, as Florida Power contends, it
provided an adequate alternate rationale for refusing to establish
any cost-recovery mechanism. In short, the Commission
explained that it already addressed the mitigation cost issue by
adopting new interchangeability standards that would not
impose excessive costs on electric generators. This explanation
provides an independent justification for the Commission’s
decision to eschew any cost-recovery mechanism. Thus the
Commission has adequately explained its reasons for refusing to
establish a cost-recovery mechanism for end-user mitigation
costs.

III. Conclusion

For the reasons set forth above, we grant Florida Gas’s
petition, but deny Florida Power’s petition. The challenged
orders are vacated insofar as they impose the new gas quality
and interchangeability standards on Western Division gas where
it enters the Market Area.

So ordered.
 BROWN, Circuit Judge, concurring in part and dissenting
in part: I concur in the court’s grant of Florida Gas’ petition
for review. But because FERC failed to satisfy its section 7
duty to find that the LNG projects it approved were in the
public interest and failed to satisfy its section 5 burden to
demonstrate Florida Gas’ revised tariff was just and
reasonable, I dissent from the court’s denial of Florida
Power’s petition.

I

Early in the decade, AES Ocean Express, LLC (AES),
and Southern Natural Gas Company (Southern) began efforts
to import re-gasified LNG into Florida Gas’ pipeline system
in Florida, the “Market Area.” AES and Southern filed
applications with FERC seeking certificate authorization
under Natural Gas Act (NGA) section 7(c), 15 U.S.C.
§ 717f(c), to construct and operate interstate natural gas
pipeline facilities to transport LNG into the Market Area by
interconnecting with Florida Gas’ pipeline. Meanwhile, AES
attempted to negotiate an interconnection agreement with
Florida Gas to allow AES to connect its proposed LNG
pipeline to Florida Gas’ pipeline. After negotiations broke
down, AES filed a complaint with FERC, initiating the AES v.
FGT proceeding. FERC ordered a hearing pursuant to NGA
section 5, 15 U.S.C. § 717d, which eventually led to the
orders challenged here.

At various points in these proceedings, Florida Power
intervened to raise concerns that introducing LNG into the
Market Area could damage its turbines, including thirty-two
that employ a Dry Low Nitrogen Oxide (DLN) combustion
system. Florida Power was worried that fluctuations in gas
composition caused by LNG would damage its DLN turbines.
Florida Power therefore requested FERC establish gas quality
standards that would protect its DLN turbines. In the
alternative, Florida Power suggested FERC could assign
 2
Florida Power’s mitigation costs caused by LNG to the
upstream parties responsible for introducing LNG to the
Market Area.

Acknowledging Florida Power’s concerns about adverse
impacts on its turbines, FERC promised to address the issue
in the AES v. FGT proceeding. The Commission also
conditioned approval of Southern’s LNG project and the AES
and Florida Gas interconnection agreement on the parties
meeting the gas quality and interchangeability standards to be
set in that proceeding. To the outside observer, it appeared
FERC would exercise its section 5 authority in the AES v.
FGT proceeding to remedy Florida Power’s concerns.

On April 20, 2007, the Commission issued its order in the
AES v. FGT proceeding, AES Ocean Express LLC v. Fla. Gas
Transmission Co., 119 F.E.R.C. ¶ 61,075 (Apr. 20, 2007)
(Initial Order), and on December 20, 2007, the Commission
issued an order on rehearing, AES Ocean Express LLC v. Fla.
Gas Transmission Co., 121 F.E.R.C. ¶ 61,267 (Dec. 20, 2007)
(Order on Rehearing) (together the Orders). In the Orders,
FERC ruled Florida Gas’ revised tariff was “just and
reasonable” and that FERC lacked jurisdiction to assign
Florida Power’s mitigation costs to non-jurisdictional
upstream parties, including Southern and AES. Furthermore,
the Commission stated it would be inappropriate to consider
Florida Power’s mitigation costs in any future Florida Gas
proceeding. Florida Power petitioned this court for review.

II

One troubling aspect of the Orders is that they highlight
FERC’s dereliction of its section 7 duty to balance public
benefits and adverse effects.
 3
NGA section 7 requires a company seeking to construct
new gas facilities to seek a certificate of “public convenience
and necessity” from FERC. Under NGA section 7(e), “a
certificate shall be issued . . . if it is found . . . that the
proposed service, . . . operation, construction, [or] extension
. . . is or will be required by the present or future public
convenience and necessity.” 15 U.S.C. § 717f(e).

FERC has issued a policy statement interpreting its
section 7 authority. See Certification of New Interstate
Natural Gas Pipeline Facilities, 88 F.E.R.C. ¶ 61,227 (Sept.
15, 1999) (Certificate Policy Statement). As the Commission
explained in AES’ section 7 proceeding, the Certificate Policy
Statement requires FERC to conduct a multi-step analysis to
“balance[] public benefits against potential adverse
consequences.” AES Ocean Express, LLC, 103 F.E.R.C.
¶ 61,030 at ¶ 17 (Apr. 10, 2003). First, as a “threshold
requirement,” the Commission must ensure the proposed
project will not be subsidized by existing customers. Id. ¶ 18.
Then, the Commission must “determine whether the applicant
has made efforts to eliminate any adverse effects the project
might have on the applicant’s existing customers.” Id. Next,
the Commission will consider “potential impacts of the
proposed project on other pipelines in the market [and] those
existing pipeline’s captive customers.” Id. ¶ 19. Finally, “[i]f
residual adverse effects on these interest groups are identified
after efforts have been made to minimize them, the
Commission will evaluate the project by balancing the
evidence of public benefits to be achieved against the residual
adverse effects.” Id. “This is essentially an economic test.”
Id. The Commission will proceed with the section 7
certificating process “[o]nly when the [public] benefits of the
proposal outweigh the adverse effects on other economic
interests.” Id.
 4
Ever since Southern filed a section 7 application and AES
sought to interconnect to Florida Gas’ pipeline, Florida Power
has diligently raised its concerns with FERC about the
adverse effects that introducing LNG into the Market Area
could have on its DLN turbines. See AES Ocean Express LLC
v. Fla. Gas Transmission Co., 107 F.E.R.C. ¶ 61,276 at
¶¶ 14–18 (June 18, 2004); S. Natural Gas Co., 113 F.E.R.C.
¶ 61,199 at ¶¶ 17–21 (Nov. 22, 2005). Instead of addressing
Florida Power’s concerns in Southern’s section 7 proceeding,
however, FERC deferred consideration of the issue to the AES
v. FGT section 5 proceeding.1

FERC employed a similar tactic when issuing its new
Policy Statement on Provisions Governing Natural Gas
Quality and Interchangeability in Interstate Natural Gas
Pipeline Company Tariffs, 115 F.E.R.C. ¶ 61,325 (June 15,
2006) (2006 Policy Statement). Florida Power had submitted
comments to FERC about the policy statement, presumably
expressing similar concerns to those it had raised in the
Southern and AES proceedings. At the conclusion of the
2006 Policy Statement, FERC again postponed consideration
of the issue:

Some commenters ask the Commission to impose
specific obligations on LNG project developers regarding
merchantability, identification of adverse impacts,
compensation for negative impacts, and mitigation.

1
The Commission initially found in AES’ section 7 proceeding that
“[b]ecause [AES] is a new company proposing a new project, the
potential for one class of customers to financially subsidize or to
adversely impact another is not present.” AES Ocean Express,
LLC, 103 F.E.R.C. ¶ 61,030 at ¶ 20 (Apr. 10, 2003). However, the
adverse effects issue was resurrected in the AES v. FGT proceeding
when AES sought to interconnect its pipeline with Florida Gas’
pipeline.
 5
However, the Commission believes that these are issues
that should be addressed, if and when problems are
identified, in specific cases.

Id. ¶ 47 (footnote omitted). Thus, as in the Southern section 7
proceeding, FERC’s 2006 Policy Statement again deferred
consideration of adverse effects and mitigation costs to
another day.

Yet, when FERC finally reached the AES v. FGT
proceeding—the “specific case” it claimed to have been
waiting for—it summarily dismissed the potential adverse
effects of LNG on Florida Power’s turbines. FERC variously
described Florida Power’s mitigation costs as “not . . . beyond
ordinary business costs that could be expected in operating
sophisticated equipment with special needs as to the fuel it
burns,” Initial Order ¶ 56, not “significant,” id. ¶ 61,
“speculative and indefinite,” id. ¶ 266, and “not so excessive
as to render Florida Gas’s proposed standards unjust and
unreasonable,” Order on Rehearing ¶ 80. At oral argument,
FERC’s counsel repeated this cryptic assessment: “[T]he
Commission said [the costs] are speculative, but we know
what kinds of costs we’re looking at, and we just don’t find
them to be that . . . significant.” Tr. of Oral Argument at
27:19–23.

In the Order on Rehearing, FERC asserted that it
properly considered the public interest. Order on Rehearing
¶¶ 106–07. FERC claimed its responsibility to consider the
public interest “is related to the development of plentiful
supplies of natural gas at reasonable prices [and] [t]he
Commission properly considered these factors in issuing the
certificates that will promote increased supplies in the regions
served by Florida Gas.” Id. ¶ 107. FERC candidly revealed
its view that Florida Power and other similarly situated parties
 6
“have not explained how the public interest, as opposed to
their interests, would be served by allocating their costs to
upstream entities not subject to our jurisdiction, even if the
Commission had the authority to do so.” Id.

As FERC itself has noted, its section 7 duty to consider
the public interest is broader than promoting a plentiful
supply of cheap gas, as important as that policy may be. And
although FERC determined that the introduction of LNG
would serve the public interest by increasing gas supplies, it
does not follow inexorably that Florida Power’s customers
should pay the cost of the adverse effects of the expansion.
Rather, FERC must ensure “the [public] benefits of the
proposal outweigh the adverse effects on other economic
interests.” AES Ocean Express, LLC, 103 F.E.R.C. ¶ 61,030
at ¶ 19. While “[t]here is no dispute that the ‘public interest’
standard of NGA § 7 is less exacting than the ‘just and
reasonable’ requirement of § 4 . . . both the Supreme Court
and this circuit have made clear that the Commission has a
duty to use its § 7 power to protect consumers.” Mo. Pub.
Serv. Comm’n v. FERC, 337 F.3d 1066, 1070 (D.C. Cir.
2003) (citation omitted). Here, FERC neglected that duty.

We have long held FERC’s section 5 burden is two-fold:
“We will not approve a rate formulated by FERC unless the
Commission has shown (i) that the proposed and rejected rate
is unjust and unreasonable and (ii) that its alternative
formulation is just and reasonable.” Complex Consol. Edison
Co. of N.Y., Inc. v. FERC, 165 F.3d 992, 1003 (D.C. Cir.
1999). An important part of the Commission’s duty is “to
examine the cost-shifting effect of its orders.” Algonquin Gas
Transmission Co. v. FERC, 948 F.2d 1305, 1315 (D.C. Cir.
1991). FERC therefore cannot establish its order is just and
reasonable if it “fail[s] to make findings as to the impact the
[order] would actually have on ultimate consumers.” Id.
 7
(second alteration in original). FERC acknowledged this
obligation in the Initial Order, explaining that “the gas quality
and interchangeability standards that are adopted in this
proceeding must facilitate increased access to LNG supplies,
and ensure that the introduction of LNG into Florida Gas’
system will have no detrimental impact on the pipeline or its
customers.” Initial Order ¶ 8.

Before the Commission, Florida Power argued that if
FERC approved Florida Gas’ revised tariff, Florida Power
would incur mitigation costs adjusting its turbines to handle
wider fluctuations in gas quality. Thus, to properly assess the
impact of its orders and fulfill its section 5 burden, FERC was
obligated to examine Florida Power’s mitigation costs.

In reviewing the evidence submitted by the parties, FERC
acknowledged “there may be some costs associated with
retuning or re-centering the turbines.” Initial Order ¶ 56
(footnote omitted). FERC stated those costs could be as little
as $100,000. Id. ¶ 57. However, FERC also noted that “for
some turbines (and none have been specifically identified in
this proceeding) not all the equipment necessary for a turbine
to operate within [the gas quality range] may be in place.” Id.
¶ 60. For those turbines, the costs could be over $1 million
each. Id.

Rather than considering whether it was just and
reasonable for a Florida Gas customer, such as Florida Power,
to incur these mitigation costs, FERC simply declared, “None
of the costs identified in the record are significant.” Id. ¶ 61.
This is perplexing. Florida Power owns thirty-two DLN
turbines. Id. ¶ 112. As Florida Power notes in its brief to this
court, its mitigation costs, by FERC’s calculation, could total
$32 million. Br. of Pet’r Florida Power at 16. At another
point in the Initial Order, FERC stated the mitigation costs
 8
were between $100,000 and $1.5 million. Initial Order ¶ 130.
At the high end of this estimate, it appears the “minor
mitigation measures,” id., described by the Administrative
Law Judge could cost Florida Power $48 million.

In an era where we speak nonchalantly of trillions of
dollars, costs in excess of $40 million may indeed be trivial.
But we cannot know this without a frame of reference.
Florida Power reaps no profits from the introduction of LNG.
Why is it just and reasonable for Florida Power to pay
mitigation costs caused by upstream parties that retain the
profits without receiving a corresponding benefit? Other than
claiming it lacks jurisdiction, FERC does not explain.
Ordinarily, FERC is careful to avoid cross-subsidization, yet
the Orders would appear to have this effect. FERC’s blanket
statement that the costs in the record are not “significant”
does not satisfy its burden to establish just and reasonable
rates.

FERC concluded that, “based upon the manufacturers’
specifications, [Florida Power] can operate [its] turbines using
gas with the Wobbe Index range variability allowed by
Florida Gas’ proposed standard, without incurring costs
beyond what can reasonably be expected in operating
sophisticated equipment with special needs as to the fuel it
burns.” Id. ¶ 63. FERC cannot be suggesting Florida Power
will not incur any mitigation costs, or it would say so.
Instead, FERC appears to be suggesting the costs should not
surprise Florida Power because DLN turbines, like luxury
sedans, are expensive to own and maintain. But presumably
DLN turbines, like luxury sedans, may be damaged by the
fuel their owners fill them with if the fuel is not of the proper
quality. Once again, FERC fails to square its analysis with its
obligation to “make findings as to the impact the [order]
 9
would actually have on ultimate consumers.” Algonquin Gas
Transmission Co., 948 F.2d at 1315 (alteration in original).

III

After finding Florida Gas’ revised tariff just and
reasonable, FERC could have called it a day. But it went a
step further, announcing, “[O]nce the Commission has
considered those contentions [about the pipeline’s standards
placing excessive cost burdens on existing customers], and
approved just and reasonable gas quality and
interchangeability standards, the Commission will not act
further to provide for the recovery of any mitigation costs
incurred by non-jurisdictional downstream gas users.” Initial
Order ¶ 261. FERC thus declared, “[N]o mechanism should
be established in this proceeding . . . to recover any costs
[Florida Power] may incur as a result of the introduction of
LNG into the Florida Gas system [and] the Commission
further finds that no such mechanism should be established in
any future Florida Gas proceeding.” Id.

FERC may be correct on the narrow conclusion that it
lacks jurisdiction to assign mitigation costs directly to non-
jurisdictional entities. However, FERC does not suggest, and
there is no reason to believe, this prevents FERC from
providing Florida Power with some relief. FERC and the
court today rely too heavily on American Gas Ass’n v. FERC,
912 F.2d 1496 (D.C. Cir. 1990), where we stated: “The
Commission may not use its § 7 conditioning power to do
indirectly (1) things that it can do only by satisfying specific
safeguards not contained in § 7(e) (in the case of reducing
previously approved jurisdictional rates, by meeting its
burden under § 5), or (2), a fortiori, things that it cannot do at
all.” Id. at 1510 (citations omitted).
 10
The proper question is not what FERC is prohibited from
doing “at all,” but whether FERC reneged on its commitment
to protect consumers from the cost-shifting effect of its
orders—a task well within the Commission’s powers. As
FERC finally admits on rehearing, it had sufficient section 7
conditioning authority that its conditions for allowing LNG
into the Market Area “could have the effect of inducing the
LNG Suppliers or other upstream parties to install some
degree of processing capability in order to increase the
amount of LNG supplies which can satisfy Florida Gas’s
approved gas quality standards.” Order on Rehearing ¶ 104.
FERC had jurisdiction to get the job done; it simply declined
to employ its power to remedy the adverse effects of LNG on
Florida Power’s DLN turbines.

FERC’s bold claim with regard to section 5 is that, once
it has made the just and reasonable determination, the issue of
mitigation costs is forever closed. This conclusion seems
suspect. It is clear from the record that no one was certain
what the impact of allowing LNG into the Market Area would
be—not the experts who testified at the hearing, not Florida
Power, not the Administrative Law Judge, and certainly not
FERC. If Florida Power were to incur substantial mitigation
costs in the future, it would appear Florida Gas’ rates could
become so unjust and unreasonable FERC would be required
to act. Section 5 is not frozen in time, and neither is FERC’s
burden under it.

Finally, I note the Commission may be impermissibly
attempting, once again, to dilute its burden of proof under
section 5. Relying on ANR Pipeline Co., 109 F.E.R.C.
¶ 61,138 (Nov. 3, 2004), the Commission stated, “[T]o the
extent the pipeline’s section 5 proposal [i]s just and
reasonable, the Commission would approve it even if other
just and reasonable remedies might exist.” Initial Order ¶ 25
 11
(footnote omitted). Over objections, the Commission stated
this “deference [to Florida Gas] was appropriate.” Id. ¶ 26.
Under section 4, the pipeline bears the burden of proof.
Under section 5, FERC does. We often have rejected FERC’s
attempts to shift its section 5 burden, and this appears to be
another such case. See W. Res., Inc. v. FERC, 9 F.3d 1568,
1577–79 (D.C. Cir. 1993).

* * *

After FERC promised it would address Florida Power’s
concerns about adverse effects to its turbines in the AES v.
FGT proceeding, it reversed course, giving little credence to
Florida Power’s mitigation costs and concluding it lacked
jurisdiction to address the issue now or in the future. In doing
so, FERC failed to fulfill its section 7 duty to find the LNG
projects were in the public interest and failed to satisfy its
section 5 burden to establish the revised tariff was just and
reasonable. Throughout this process FERC has said one thing
and done another. It has kept Florida Power running toward
an ever-receding dream of remediation. FERC’s decisions are
entitled to a great deal of deference. The court grants such
deference here. FERC wins. But being bested in a game
where the winner not only writes the rules but is permitted to
constantly change them is the definition of arbitrariness.