"Complex" Consolidated Edison Co. of New York, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 23, 1998 Decided February 12, 1999

No. 97-1554

"Complex"

Consolidated Edison Company of New York, Inc., et al.,

Petitioners

v.

Federal Energy Regulatory Commission,

Respondent

Northern Illinois Gas Company, et al.,

Intervenors

Consolidated with

Nos. 97-1560, 97-1580, 97-1590

On Petition for Review of Orders of the

Federal Energy Regulatory Commission

Lee A. Alexander argued the cause for petitioners JMC
Power Projects and New England Power Company. With

him on the briefs were Stefan M. Krantz and Mitchell F.
Hertz. Yoav K. Gery entered an appearance.

Gary E. Guy argued the cause and filed the briefs for
petitioner Equitable Gas Company.

Harvey L. Reiter argued the cause for petitioners Consoli-
dated Edison Company of New York, Inc., et al. With him
on the briefs was Kenneth T. Maloney. Marc Richter en-
tered an appearance.

Timm L. Abendroth, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on
the brief were Jay L. Witkin, Solicitor, and Susan J. Court,
Special Counsel.

Jonathan D. Schneider argued the cause for intervenor
New York State Electric and Gas Corporation. Kevin J.
McKeon argued the cause for intervenor Connecticut Natural
Gas Corporation. With them on the brief were Richard M.
Lorenzo, Gary E. Guy, David I. Bloom, Scott P. Klurfeld,
David D'Alessandro, Tom Rattray, Barbara K. Heffernan,
Roy R. Robertson, Jr., Nancy A. White, Elizabeth Ward
Whittle and Kevin M. Sweeney. Lillian S. Harris and Bruce
A. Connell entered appearances.

Jeffrey D. Komarow argued the cause for intervenors
Tennessee Gas Pipeline Company and Bay State Gas Compa-
ny, et al. With him on the brief were Robert H. Benna,
Barbara K. Heffernan and Tom Rattray. Michael J. Fre-
muth entered an appearance.

Before: Wald, Randolph and Rogers, Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: Tennessee Gas Pipeline Company ("Tennes-
see") owns and operates a "long-line" interstate natural gas
pipeline system running from the Texas gulf coast to New
Hampshire. In 1991, Tennessee made a general rate filing
pursuant to section 4 of the Natural Gas Act. 15 U.S.C.
s 717c (1994). A number of Tennessee's customers brought
challenges. Most issues were resolved at various points in
the ensuing rate proceedings, with the exception of those

raised by the petitioners here. Petitioners now seek review
of several rulings issued by the Federal Energy Regulatory
Commission ("FERC" or the "Commission"). See Tennessee
Gas Pipeline Co., 76 F.E.R.C. p 61,022 (1996) ("Opinion 406")
("Tennessee II"), reh'g denied, Tennessee Gas Pipeline Co.,
80 F.E.R.C. p 61,389 (1997) ("Opinion 406-A") ("Tennessee
III"). For the reasons set forth in Parts I, II, and III, we
deny each of the petitions for review.1

Part I: The NET/T-180 Facilities

JMC Power Projects and the New England Power Compa-
ny (jointly "JMC Power") petition for review of several
FERC rulings, in the relevant portions of which the Commis-
sion approved a Tennessee proposal to continue recovering
the costs of a series of facility expansions, collectively re-
ferred to as the NET/T-180 facilities, on an incremental
basis.2 Petitioners claim that, in accepting the proposed
incremental rate treatment, FERC unjustifiably departed
from both its own precedent and prior decisions of this court,
and unlawfully utilized quantitative measures in assessing the
potential costs and benefits of the expansion facilities to pre-

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1 Part I, written by Judge Wald, discusses the NET/T-180 facili-
ties. Part II, written by Judge Randolph, discusses the FSST/
T-149 and Boundary facilities, as well as the Niagara Spur Charge.
Part III, written by Judge Rogers, discusses the Uniform Hourly
Take Tariff. The factual background and procedural history rele-
vant to each of the petitioners' challenges are discussed within the
respective parts.

2 "Incremental" pricing refers to a cost-recovery method in which
the constructing pipeline develops a separate cost of service for the
expansion facilities, recapturing the construction cost solely from
the particular customers who utilize them. See TransCanada Pipe-
lines Ltd. v. FERC, 24 F.3d 305, 307 n.1 (D.C. Cir. 1994). Under
"rolled-in" pricing, the primary alternative to incremental treat-
ment, the pipeline adds the costs of the expansion facilities to its
total rate base, recovering its expenditures by increasing the gener-
al rate that all customers pay in proportion to their reservation of
capacity or direct usage. See Algonquin Gas Transmission Co. v.
FERC, 948 F.2d 1305, 1308 & n.1 (D.C. Cir. 1991).

existing customers. We conclude that Opinions 406 and 406-
A clearly clarified the Commission's historic test for deter-
mining the propriety of rolled-in versus incremental pricing of
expansion facilities' costs, and that FERC provided a rea-
soned explanation for a modest shift from its strictly two-
tiered Battle Creek test3 towards a standard that examines
additional relevant factors. Because FERC supplied a suffi-
cient explication for this clarification which, as intended,
brought FERC policy into accord with this court's Natural
Gas Act jurisprudence, we deny JMC Power's petition for
review.

A.Background

Between 1988 and 1992, FERC approved the construction
of seven separate projects (collectively the "NET/T-180 facili-
ties")4 by Tennessee, whose costs were initially to be recov-

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3 In Battle Creek Co. v. FPC, 281 F.2d 42 (D.C. Cir. 1960), this
court first gave its approval to the prevailing Federal Power
Commission ("FPC") policy with respect to the pricing of expansion
facilities. See Southeastern Michigan Gas Co. v. FERC, 133 F.3d
34, 37 (D.C. Cir. 1998). Under the so-called Battle Creek test, the
costs affiliated with expansion facilities can properly be rolled into
the general system rates whenever such facilities are integrated
with the pipeline system and provide system-wide benefits.

4 Serving various customers in Zones 5 and 6 of the Tennessee
pipeline, the NET/T-180 facilities are as follows. (1) The Ocean
State Power Project, which provides service to a new electric
generation facility, consists of roughly 14.3 miles of 30-inch main-
line looping, 10.7 miles of 20-inch pipeline extension, and three new
compressors. Its rate schedule was designated T-180. (2) The
Niagara Import project phase II, which provides transportation
service to four new customers, includes approximately 30.3 miles of
30-inch pipeline looping, 31.4 miles of 30-inch looping along the
Niagara Spur, and two new compressors in New York and Massa-
chusetts. (3) The Niagara Import project phase III, which provides
transportation service to three additional customers, includes a
percentage of a half mile 30-inch loop crossing the Niagara River, a
percentage of 17.3 miles of mainline looping and two new compres-
sors along the Niagara Spur, and roughly 24.4 miles of mainline
looping in New York and Massachusetts. (4) The NET-Northeast

ered through incremental pricing.5 In its 1991 general rate
filing pursuant to section 4 of the Natural Gas Act ("NGA"),
15 U.S.C. s 717c,6 Tennessee proposed to continue the exist-
ing incremental pricing of the NET/T-180 facilities.7 FERC
accepted the rate filing subject to refund, and set the matter
for evidentiary hearing before an Administrative Law Judge
("ALJ"). Tennessee and its customers later reached an
agreement settling most of the contested issues, which FERC
then approved on October 29, 1993. See Tennessee Gas
Pipeline Co., 65 F.E.R.C. p 61,142. The remaining issues
were assigned to the ALJ.

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project encompasses a part of both the Iroquois Gas Transmission
System ("Iroquois") Phase I and Phase II expansions. (5) Iroquois
Phase I provides service to twelve customers located in Massachu-
setts, Rhode Island, Connecticut, and New Hampshire. It includes
approximately 62.8 miles of mainline looping and pipeline replace-
ment. (6) Iroquois Phase II provides service to three customers,
along with 27.13 miles of mainline looping and replacement laterals
in Massachusetts, and an additional 9350 horsepower of compres-
sion at three stations situated in Massachusetts and New York. (7)
The NET-Elgin project serves four customers through 29.33 miles
of 30-inch and 36-inch mainline looping and 3100 additional horse-
power of compression at two New York stations. See Tennessee I,
76 F.E.R.C. at 61,108-09.

5 Although the projects were priced individually at the time of
their respective certification, in 1992 FERC accepted a partial
settlement through which Tennessee's different NET rate schedules
were consolidated into a single incremental rate schedule. See
Tennessee Gas Pipeline Co., 63 F.E.R.C. p 61,095 (1992).

6 Section 4(e) of the NGA provides that "[a]t any hearing involv-
ing a rate or charge sought to be increased, the burden of proof to
show that the increased rate is just and reasonable shall be upon
the natural-gas company...." 15 U.S.C. s 717c(e).

7 Tennessee had made a limited section 4 filing in Docket No.
RP92-132-000, solely addressing its NET-EU and T-180 Rate
Schedules. FERC consolidated this docket with Tennessee's gener-
al section 4 rate filing in Docket No. RP91-203-000, the filing which

In the ensuing series of evidentiary hearings, JMC Power
sought rolled-in treatment for the NET/T-180 facilities by
arguing that the facilities were fully integrated into the
Tennessee pipeline system and provided various operational
and financial benefits to Tennessee and its pre-expansion
customers. In particular, its primary witness testified that,
in his estimation, the NET/T-180 facilities produced between
$28.85 and $79.45 million in total levelized annual benefits8 to
pre-existing Tennessee customers, with a mid-case value of
$46.53 million. He also asserted that the annual levelized
costs of rolled-in treatment would amount to $22.73 million.
See Tennessee Gas Pipeline Co., 72 F.E.R.C. p 63,005, at
65,077 (1995) ("Tennessee I"). A number of Tennessee's pre-
existing customers challenged these claims, questioning the
existence of each alleged benefit, as well as the statistical
models upon which JMC Power had assessed their value.
According to the ALJ's initial decision, the weight of the
evidence favored the conclusion that the NET/T-180 facilities
provided neither operational benefits nor additional reliability
to Tennessee's system customers. In addition, the ALJ
found that rolling-in the costs of the NET/T-180 facilities to
Tennessee's general rate base would cause a rate increase for
pre-expansion customers in excess of 5%. See id. at 65,084-
86. On the basis of these findings, he concluded that both the
Battle Creek test and FERC's Pricing Policy Statement9

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gave rise to this case. See Tennessee Gas Pipeline Co., 58 F.E.R.C.
p 61,343 (1992).

8 Levelization refers to a process in which the costs of a one-time
capital expenditure or a lump-sum benefit are converted into a
constant annual cash flow so as to provide a consistent basis from
which to compare average annual costs and benefits. The annual
levelized cost refers to that amount which, if collected for each year
of the project's life, would yield the same present value of revenue
requirements as is yielded under traditional rate-making. The
JMC Power witness utilized levelized estimates so as to avoid the
distorting effects caused by straight-line depreciation, which does
not differentiate between present and future value.

9 In 1995, FERC issued a Pricing Policy for New and Existing
Facilities Constructed by Interstate Natural Gas Pipeline, 71

mandated incremental pricing. Accordingly, he approved the
Tennessee proposal to continue the existing incremental
treatment. See id. at 65,086.

JMC Power filed exceptions to the ALJ's initial decision
with the Commission, alleging that the judge had misinter-
preted both FERC and D.C. Circuit precedent, and had
misapplied the Battle Creek test in assessing the proper
pricing scheme for the NET/T-180 facilities. JMC Power
further contended that the ALJ had misconstrued the evi-
dence before him, as the testimony presented (in JMC Pow-

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F.E.R.C. p 61,241 (1995), reh'g denied, 75 F.E.R.C. p 61,105 (1996)
("Pricing Policy Statement"), which clarified its policy with respect
to the pricing of expansion facilities. The Commission solicited
comments on that subject in Docket No. PL94-4-000, receiving
written submissions from seventy-five companies and groups and
hearing oral comments from others through a public hearing.
Concerned that the use of rolled-in pricing could force existing
customers to pay substantially higher prices without receiving
proportionate system-wide benefits, and that the lack of price
certainty negatively impacted customers with long-term service
contracts, FERC announced a new policy designed to minimize
significant rate shocks and to provide greater cost certainty prior to
the construction of new facilities. The Pricing Policy Statement
sought to achieve these goals by making a determination as to the
appropriate rate design at the certificate stage, at which time
FERC would assess the system-wide benefits of a project as well as
its rate impact on existing customers. To the extent that rolled-in
pricing would increase the rates of existing customers by 5% or
less, and its proponents had made a showing of system benefits with
"reasonable particularity," see 71 F.E.R.C. at 61,916, FERC would
presume that the expansion costs should be rolled-in. Opponents of
rolled-in pricing could rebut this presumption by establishing that
the benefits of the expansion facilities were so insignificant that
rolled-in pricing would be unreasonable. See id. at 61,916-17. To
the extent that rolled-in pricing would cause a rate increase of more
than 5%, the Pricing Policy Statement created a rebuttable pre-
sumption in favor of incremental treatment. Opponents could
overcome this presumption through showing that the resulting
system benefits were sufficient to support rolled-in treatment. See
id.

er's view) fully established that the NET/T-180 facilities were
both integrated into the Tennessee pipeline and provided
significant benefits to pre-existing customers. These alleged
benefits included: increased interruptible service; increased
peak capacity due to both nonsynchronous demand and the
fuel switching capabilities of the primary NET/T-180 custom-
ers; avoided facilities costs for future expansions; the en-
couragement of price competition through increased access to
Canadian gas suppliers; fuel savings stemming from the
greater efficiency of the new compressors; contribution to
Tennessee's take-or-pay costs through the payment of the
volumetric surcharge established by the Cosmic Settlement;10
potential contributions to stranded investment and new facili-
ties costs; potential contributions to gas supply realignment
("GSR") costs; and general environmental and national secu-
rity benefits. Finally, JMC Power claimed that the ALJ had
miscalculated the rate impact of rolling-in the contested facili-
ties; according to JMC Power's calculations, rolled-in treat-
ment would only result in a 4.9% rate increase, below the 5%
presumption established in the Pricing Policy Statement.
The parties who had presented contrary evidence before the
ALJ filed briefs opposing JMC Power's exceptions.

In Opinion 406, the Commission agreed with the ALJ's
decision to order incremental pricing for the NET/T-180
facilities. The Commission found the alleged system benefits
postulated by JMC Power to be insubstantial; in each case,
the purported benefits flowed almost entirely to the shippers
for whom the NET/T-180 facilities were constructed. Be-
cause of the high load factor11 of these shippers--roughly 85-

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10 The "Cosmic Settlement" refers to an agreement that resolved
a significant number of Tennessee cases pending before FERC.
See Tennessee Gas Pipeline Co., 57 F.E.R.C. p 61,360 (1991), order
on reh'g approving settlement as modified, 59 F.E.R.C. p 61,045
(1992).

11 The term "load factor" refers to the ratio of a shipper's average
hourly use over its maximum hourly use. Customers who need a
constant supply of natural gas--e.g., industrial customers--will have
high load factors, while those whose needs vary throughout the

90%--FERC concluded that they likely made substantial
purchases of Canadian gas, thereby leaving little capacity
available for other pre-existing shippers and limiting the
availability of interruptible transportation.12 See Tennessee
II, 76 F.E.R.C. at 61,112. Moreover, FERC reasoned, a
capacity bottleneck at Station 219 prevented upstream ship-
pers from utilizing the NET/T-180 facilities, calling into
question any additional access to Canadian gas supplies. See
id. at 61,112-13. The alleged benefits of cheaper future
expansions and declining fuel costs were deemed purely
speculative, as were the payment of GSR costs in the event of
future conversions to open-access transportation, and the
alleged environmental and national security benefits.13 See
id. at 61,113-14. Finally, the Commission noted that JMC
Power had manipulated its estimation of the rate increase
that would accompany rolled-in treatment by illegitimately
adding the costs of the FSST, Niagara Spur, and the Bound-
ary facilities into the figure it used for the pre-expansion rate
base. See id. at 61,114 n.144.

Departing from the ALJ's reasoning to some extent, FERC
based its final determination on the grounds that JMC Power
had failed to provide sufficient evidence for the Commission

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day--e.g., residential suppliers--will generally have lower load fac-
tors.

12 Interruptible service "provides gas on a 'when available' basis
and may be interrupted after notice to the subscriber." Algonquin,
948 F.2d at 1309 n.5.

13 FERC reasoned that the environmental and national security
benefits proffered by JMC Power raised the type of general social
benefits which the Pricing Policy Statement had deemed improper
for consideration because they "are difficult to substantiate and
quantify." Id. at 61,114 n.143 (quoting Pricing Policy Statement, 71
F.E.R.C. at 61,196). FERC also noted the ALJ's finding, based
upon the record before him, that such benefits were merely specula-
tive, and that they were unrelated to the operation of a gas pipeline.
Finally, the Commission stated that it was not "aware of any cases
decided under Battle Creek in which such general social benefits
were relied on to support rolled-in rates." Id.

to find, under section 5 of the NGA,14 not only that rolled-in
treatment itself would be just and reasonable, but also that
the pipeline's proposed continuation of the existing incremen-
tal treatment would be unjust and unreasonable. Since the
NGA delegates the primary initiative to propose transporta-
tion rates to the pipelines, see United Gas Pipe Line Co. v.
Mobile Gas Service Corp., 350 U.S. 332 (1956); ANR Pipeline
Co. v. FERC, 771 F.2d 507, 513 (D.C. Cir. 1985), FERC
distinguished its treatment of the FSST/T-149 and Boundary
facilities, see discussion infra Part II, on the grounds that
Tennessee had proposed to roll-in their facilities costs. See
Tennessee II, 76 F.E.R.C. at 61,115. By contrast, as Tennes-
see had proposed to continue the existing incremental treat-
ment of the NET/T-180 facilities in this section 4 proceeding,
FERC could only have ordered rolled-in treatment by acting
under section 5 of the NGA. See Algonquin Gas Transmis-
sion Co. v. FERC, 948 F.2d 1305, 1311 (D.C. Cir. 1991).
Accordingly, it reviewed JMC Power's exceptions by asking
whether, as the proponent of rolled-in treatment, JMC Power
had offered evidence sufficient to justify the statutory burden
FERC would face were it to act under section 5 to order
rolled-in treatment.15 The Commission analogized the pres-

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14 Section 5(a) of the NGA provides that:

Whenever the Commission, after a hearing had upon its own
motion or upon complaint of any State, municipality, State
commission, or gas distributing company, shall find that any
rate, charge or classification demanded, observed, charged, or
collected by a natural-gas company in connection with any
transportation or sale of natural gas, subject to the jurisdiction
of the Commission, or that any rule, regulation, practice, or
contract affecting such rate, charge, or classification is unjust,
unreasonable, unduly discriminatory, or preferential, the Com-
mission shall determine the just and reasonable rate, charge,
classification, rule regulation, practice or contract to be thereaf-
ter observed and in force, and shall fix the same by order....

15 U.S.C. s 717d(a).

15 In order to act under section 5, FERC would have been
required to show that the existing incremental pricing was unjust
and unreasonable. Implicitly, then, FERC asked whether JMC

ent case to the Algonquin proceedings, in which this court
had remanded the Commission's decision to set aside the
proposed incremental treatment, and to order rolled-in rates,
on the grounds that it had failed to produce substantial
evidence to satisfy its section 5 burden. On the record before
it, FERC held that JMC Power had similarly failed to
establish that the proposed incremental treatment would be
unjust or unreasonable.

In Opinion 406-A, FERC denied JMC Power's request for
rehearing and further elaborated its decision denying rolled-
in treatment for the NET/T-180 facilities cost.16 Focusing

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Power had satisfied the standard that FERC itself would have had
to meet were it to reject the proposed incremental pricing and to
order rolled-in pricing. Since FERC supported the incremental
treatment proposed by Tennessee in its section 4 rate filing, and
found it to be just and reasonable, it shifted the statutory burden of
section 5 onto the shoulders of JMC Power when assessing the
argument for rolling-in the NET/T-180 facilities cost. Although
this burden would have been FERC's had it formulated and or-
dered its own rate, FERC discussed the matter in terms of whether
JMC Power had provided sufficient evidence to satisfy the section 5
burden. We shall do the same.

16 The Commission first rejected an offer by 68% of the NET/
T-180 shippers to convert to open-access transportation service
under Part 284 of the Commission's regulations, conditional upon
FERC's acceptance of rolled-in treatment. Since the conversion
offer constituted a new proposal, and one opposed by Tennessee,
FERC could only accept the offer if it had satisfied section 5 of the
NGA. As superceding settlements in Docket No. RP93-151-024, et
al., Tennessee Gas Pipeline Co., 79 F.E.R.C. p 61,031 (1997), had
fixed Tennessee's GSR surcharge for existing customers, the pro-
posed shift to Part 284 service by some of the NET/T-180 shippers
would not have reduced the GSR costs borne by the pre-expansion
customers in the near future. See Tennessee III, 80 F.E.R.C. at
61,219-21. Morever, FERC noted that conversion to Part 284
service would have shifted the rate at which the NET/T-180
facilities were depreciated from the existing 5% level to the stan-
dard system rate of 2.5%. Such a shift would have reduced the
return on equity associated with the NET/T-180 facilities, decreas-
ing the level of revenues collected by Tennessee without providing

upon JMC Power's assertion that it had provided substantial
evidence to support its contention that rolled-in pricing would
be just and reasonable, FERC ruled that, even if true, JMC
Power had nevertheless failed to make the necessary prior
showing that the proposed incremental rates were unjust and
unreasonable. The Commission acknowledged that it had
previously considered the satisfaction of Battle Creek--a
showing of integration and system-wide benefits--sufficient
to support a finding both that rolled-in treatment is just and
reasonable and that incremental pricing is unjust and unrea-
sonable. However, FERC went on to note, this court's
Algonquin and TransCanada Pipeline Ltd. v. FERC, 24 F.3d
305 (D.C. Cir. 1994), decisions had overturned its previous
two rate-setting actions under NGA section 5. In its view, "a
contributing factor" to these decisions reversing the agency's
price setting action "has been an improper blurring of the
distinction between NGA sections 4 and 5." Tennessee III,
80 F.E.R.C. at 61,223.

In what it described as a refinement of the Commission's
past practices under section 5 of the NGA, taken in light of
this court's repeated admonitions to respect the boundaries
that separate section 4 from section 5 rate-settings, FERC
reiterated its premise that there is no single just and reason-
able rate. See id. at 61,223-24 & n.106 (citing Western
Resources, Inc. v. FERC, 9 F.3d 1568, 1578 (D.C. Cir. 1993);
Northwest Pipeline Corp., 71 F.E.R.C. p 61,012 at 61,042
(1995)). The mere fact that rolled-in treatment may be just
and reasonable under Battle Creek, FERC continued, does
not establish that incremental treatment is necessarily unjust
and unreasonable. "There is not a single magic point on the
continuum between incremental and rolled-in rates such that
at that single point an incremental rate becomes unjust and
unreasonable while a rolled-in rate simultaneously becomes
just and reasonable." Tennessee III, 80 F.E.R.C. at 61,224.

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any opportunity for it to offset these losses. See id. at 61,221-22 &
n.97. After taking the altered depreciation rate into account,
FERC found that the rate impact of rolled-in treatment would still
exceed the 5% threshold utilized in the Pricing Policy Statement.
See supra n.9.

The Commission then went on to explain that its references in
Opinion 406 to the fact that the benefits of the NET/T-180
facilities primarily inure to the NET/T-180 shippers served to
illustrate that the proposed incremental pricing was not un-
just and unreasonable. Because the facilities provided a
greater and more direct benefit to the expansion shippers
than to Tennessee's pre-existing customers, the postulated
system benefits of increased reliability, improved flexibility,
and reduction of costs were insufficiently material. This
determination, coupled with the fact that rolled-in treatment
would entail a substantial cost-shifting to pre-expansion cus-
tomers, led the Commission to reaffirm its earlier conclusion
that incremental treatment was neither unjust nor unreason-
able. Accordingly, the Commission had properly approved
the proposed section 4 rate filing in Opinion 406.

In this petition for review, JMC Power challenges the
Commission's decisions on three separate but interrelated
grounds. First, it alleges that FERC unjustifiably departed
from Battle Creek, and that it did so in contravention of--
rather than, as FERC maintains, in accordance with--this
court's Algonquin and TransCanada decisions. Second,
JMC Power contends that FERC unlawfully applied a "strict
quantitative" standard in assessing the costs and benefits of
rolled-in treatment, and that it fully satisfied the qualitative
Battle Creek standard that should have been utilized. Final-
ly, JMC Power asserts that the Commission improperly de-
parted from its own Great Lakes Gas Transmission, L.P., 72
F.E.R.C. p 61,081 (1995) ("Great Lakes I") precedent, wherein
it ordered rolled-in pricing on the grounds that Great Lakes
Gas Transmission, L.P. ("Great Lakes") had legitimately re-
lied upon the continued application of Battle Creek at the time
its expansion facilities were certificated and then constructed.
JMC Power maintains that it too relied upon the future
application of Battle Creek, and that the pricing of the
NET/T-180 facilities should be determined solely on the basis
of that standard. We disagree with all three of JMC Power's
contentions, and hold that FERC provided sufficient explica-
tion for its refinement of the Battle Creek test, and that the

multi-factored elaboration accords with both our supervening
jurisprudence and common sense.

B.Discussion

1.NGA Section 5 and Rolled-in Versus Incremental
Pricing

In Battle Creek Gas Company v. Federal Power Commis-
sion, 281 F.2d 42 (D.C. Cir. 1960), this court distilled from
FPC precedents a two-prong test for determining whether
the costs of expansion facilities were properly recovered
through incremental or rolled-in pricing. Under what has
become known as the Battle Creek test, the Commission asks:
(i) whether the expansion facilities form part of an integrated
system that functions as a single unit in serving pre-existing
and expansion customers alike; and (ii) whether the expan-
sion facilities provide system benefits that accrue generally to
all those who utilize the pipeline. See id. at 47. Rolled-in
pricing is only appropriate in those instances where expansion
facilities are integrated and provide system-wide benefits.

The Battle Creek test has proven more contentious in its
application than this seemingly straightforward articulation
might imply. In particular, when the question of its proper
application has intersected with the disparate burdens that
distinguish agency action under section 4 from that under
section 5 of the NGA, as it does in this case, both the
Commission and the courts have had a difficult time reconcil-
ing countervailing impulses. In Opinions 406 and 406-A, the
Commission sought to impose a degree of conceptual order
upon rate-setting at this point of overlap. Taken together,
they offer a reasoned reconciliation of the pipeline's role as
the primary initiator of price setting with FERC's statutory
duty to ensure that proposed rates are just, reasonable, and
nondiscriminatory.

a. Section 5 in Court

This court reviews rate-setting deferentially; our scrutiny
is limited to ensuring that the Commission has made a
principled and reasoned decision supported by the evidentiary
record. See Columbia Gas Transmission Corp. v. FERC,

628 F.2d 578, 593 (D.C. Cir. 1979). Nevertheless, this court
has strictly policed the statutory line that separates action
taken under NGA section 4 from that taken under NGA
section 5. In Algonquin, we described this distinction as
follows:

[T]he Commission may act under two different sections
of the Natural Gas Act (NGA or the Act) to effect a
change in a gas company's rates. When the Commission
reviews rate increases that a gas company has proposed,
it is subject to the requirements of section 4(e) of the
Act, 15 U.S.C. s 717c(e). Under section 4(e), the gas
company bears the burden of proving that its proposed
rates are reasonable. On the other hand, when the
Commission seeks to impose its own rate determinations,
rather than accepting or rejecting a change proposed by
the gas company, it must do so in compliance with
section 5(a) of the NGA.

948 F.2d at 1311. Under section 5, the Commission must
first establish that the proposed or existing rate is unjust and
unreasonable. It is only after this antecedent showing has
been made that the Commission properly can illustrate that
its alternative rate proposal is both just and reasonable. See
id. at 1314.

In recent years, we have rejected a series of rate orders on
the grounds that the Commission had failed to adhere to this
statutory distinction. Our Western Resources decision typi-
fies the reaction that past FERC rate-setting ignoring that
distinction has evoked. Western Resources, 9 F.3d 1568.
There, the Commission had rejected a proposed rate increase
by Panhandle Eastern Pipeline Company, substituting in its
place an alternative rate formulated by the Commission staff.
Defending this rate in a petition for review before this court,
FERC maintained that its formulation needed only to satisfy
the section 4 just and reasonable standard. In its view, the
proposed rate had met this standard by half; accordingly, it
ordered a rate that amounted to exactly 50% of the pipeline's
proposal. In rejecting this reasoning, as well as the rate it
sought to justify, this court noted that it

has consistently disallowed attempts to blur the line
between ss 4 and 5. As we complained four years ago,
'on four occasions in the last three years this court has
reviewed Commission efforts to compromise s 5's limits
on the power to revise rates. On each the court has
repelled the Commission's gambit. This is number five.'
We now make it an even six.

9 F.3d at 1568 (internal citations omitted).

FERC decisions specifically addressing the appropriate
recovery method for the cost of expansion facilities--i.e.,
incremental versus rolled-in pricing--have faced similar repu-
diation. In Algonquin, 948 F.2d 1305, for example, this court
rejected a modification of proposed incremental rates on the
grounds that the Commission had failed to establish that the
proposed continuation of incremental treatment would be
unjust and unreasonable. In support of its order to roll-in
their cost, FERC had asserted generally that the new facili-
ties both increased the overall reliability of the pipeline and
made any future expansion easier and cheaper. See id. at
1312. Rejecting these conclusions as unsubstantiated, the
court directed the Commission to undertake an analysis of the
benefits allegedly associated with the expansion facilities, and
to outline "with reasonable particularity the system-wide
benefits which each new facility produces" before it could
order rolled-in treatment under NGA section 5. Id. at 1313.
In TransCanada, 24 F.3d 305, FERC ordered the incremen-
tal pricing of expansion facilities where the pipeline had
proposed to roll-in the costs. In its TransCanada proceed-
ings, FERC had articulated a new standard for determining
the propriety of rolled-in versus incremental pricing, which
this court styled the "commensurate benefits" test. Id. at
308. Under this standard, FERC weighed the system-wide
benefits that the expansion facilities provided existing cus-
tomers against the costs to those same customers of rolled-in
treatment; on the record before it, the Commission found
those benefits insufficient to support the proposed roll-in.
After comparing it with Battle Creek, we concluded that the
"commensurate benefits" test constituted a departure from
pre-existing Commission policy. As it had not been dictated

by any supervening decision of this court, and FERC had
failed to provide a reasoned explanation for this policy shift,
we rejected FERC's rate order and remanded for further
consideration and elaboration. See id. at 310.

b. The NET/T-180 Facilities

The parties before us disagree as to the proper reading of
these decisions. According to JMC Power, Algonquin and
TransCanada, together with Southeastern Michigan Gas Co.
v. FERC, 133 F.3d 34 (D.C. Cir. 1998) (affirming the rolled-in
treatment of expansion facilities' cost adopted by FERC on
remand from TransCanada), collectively require application
of Battle Creek to the NET/T-180 facilities. In its view,
Battle Creek controls irrespective of the particular cost-
recovery method proposed by the pipeline. Having demon-
strated that the expansion facilities are integrated with Ten-
nessee's mainline pipeline and having articulated qualitative
system benefits, JMC Power claims to have satisfied Battle
Creek's requirements for rolled-in pricing, whether assessed
under section 4 or section 5. By contrast, FERC asserts that
JMC Power has failed to satisfy the section 5 burden imposed
by our NGA jurisprudence, as the pipeline had proposed
incremental pricing for the NET/T-180 facilities. In its view,
a determination that rolled-in pricing would satisfy Battle
Creek if such rates had been proposed by the pipeline does
not carry with it a concomitant determination that incremen-
tal pricing would necessarily be unjust and unreasonable.
Rather, these two inquiries must be kept separate from one
another; to collapse them would violate the settled doctrine
that there is no single just and reasonable rate. See Tennes-
see III, 80 F.E.R.C. at 61,223-24 & n.107 (citing Permian
Basin Area Rate Cases, 390 U.S. 747, 767 (1968); Hope
Natural Gas Co., 320 U.S. 591, 602 (1944)). In order to
satisfy the NGA's grant of primary initiative for rate-setting
to the pipeline, as well as this court's derivative and repeated
assertion that section 5 of the NGA imposes a more rigorous
evidentiary burden than section 4, FERC contends that the
two prongs of Battle Creek cannot any longer constitute the
sole measure for determining the propriety of incremental
versus rolled-in pricing. Mindful of the Commission's broad

discretion over the proper allocation of costs among a pipe-
line's customers, see Algonquin, 948 F.2d at 1313; Consoli-
dated Gas Supply Corp. v. FPC, 520 F.2d 1176, 1185 (D.C.
Cir. 1975), we endorse FERC's reading.

An avowed refinement of the Battle Creek standard in light
of supervening decisions by this court, the minor policy shift
that FERC articulated in Opinions 406 and 406-A is reasoned
and justified. As FERC explicitly acknowledged in Opinion
406-A, our Algonquin and TransCanada decisions reveal that
"the Commission's past practices with respect to rolled-in
[versus] incremental pricing did not give sufficient weight to
this statutory scheme." Tennessee III, 80 F.E.R.C. at 61,224.
By separating the inquiry into whether a proposed rate is
unjust and unreasonable from that into whether FERC's
alternative formulation is just and reasonable, FERC tailored
its policy to our jurisprudence. This clarification accords
with our repeated emphasis of the necessary distinction be-
tween section 4 and section 5 rate-making proceedings, and
accordingly with the text and structure of the NGA. Cf.
Clark-Cowlitz Joint Operating Agency v. FERC, 826 F.2d
1074 (D.C. Cir. 1987) (in banc) (reinterpretation of FERC
policy more compelling when animated by belief that earlier
policy thwarted congressional intent).

Unlike the "commensurate benefits" test that this court
remanded in TransCanada, the refinement of Battle Creek
currently before us has been fully explicated below. In
Opinions 406 and 406-A, the Commission announced its at-
tempt to reconcile the tension between Battle Creek and the
evidentiary constraints of NGA section 5. It went on to
provide an elaborate and reasoned justification for what we
consider a reasonable reconciliation. See Tennessee II, 76
F.E.R.C. at 61,115-16; Tennessee III, 80 F.E.R.C. at 61,223-
25. Although FERC did not explicitly rely upon its 1995
Pricing Policy Statement, see discussion supra note 9, the
emphasis on the 5% cost impact figure that is present in the
filings of the parties, the ALJ's decision, and the Commis-
sion's discussion, evidences a keen awareness of its back-
ground presence. FERC clearly referenced and reiterated
the justifications underlying the Pricing Policy Statement in

its Tennessee II and Tennessee III decisions, and its desire to
prevent unwarranted rate shocks lends further support for its
refinement of Battle Creek.

We agree with FERC that the alternative reading prof-
fered by JMC Power improperly collapses the section 5
analysis into a single determination that rolled-in pricing
would be reasonable under Battle Creek. On this theory, it
makes no difference whether the pipeline proposed incremen-
tal or rolled-in rates, as the inquiry under either section 4 or
section 5 would be the same. So long as the proponent of
rolled-in treatment could show that the expansion facilities
are integrated with the pipeline and provide some qualitative
benefits, rolled-in treatment would be necessitated. This
reading falters on at least two grounds. First, it ignores the
statutory distinction between section 4 and section 5 rate-
setting.17 As this court has repeatedly emphasized, and we
reiterate, section 5 contains two separate and distinct compo-

__________
17 FERC properly accorded different treatment to the FSST/
T-149 facilities, for which Tennessee Gas had proposed rolled-in
pricing. Since Tennessee Gas proposed incremental treatment for
the NET/T-180 facilities, and since JMC Power failed to carry its
initial burden of establishing that such treatment would be unjust
and unreasonable, FERC properly approved the rate filing. Due to
the distinction between section 4 and section 5 proceedings, we
reject JMC Power's additional assertion of discriminatory treat-
ment as meritless.

JMC Power makes a separate claim of discrimination which
emerges directly out of this court's TransCanada decision. There-
in, we had concluded that FERC failed to assess whether incremen-
tal pricing of integrated facilities is necessarily discriminatory. See
TransCanada, 24 F.3d at 311. In the proceedings below, the
Commission explicitly responded to this challenge, going to great
lengths to establish why, given the particular facts of this case,
incremental treatment was just and reasonable. Since differential
rates founded upon differences of fact do not constitute discrimina-
tion, FERC clearly responded to the concerns we had articulated in
TransCanada. See generally Tennessee II, 76 F.E.R.C. at 61,113-
15; Tennessee III, 80 F.E.R.C. at 61,223-27.

nents. 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.

Second, despite its pretension to the contrary, the reading
articulated by JMC Power is not in any way dictated by any
prior decision of this court. Nothing we have said can be
reasonably read to limit FERC's freedom to modify its previ-
ous policies in the manner here chosen. In TransCanada, we
remanded FERC's orders on the grounds that the Commis-
sion had failed to supply a sufficient explanation for the new
"commensurate benefits" test it had utilized below. Never-
theless, we invited FERC to provide the sort of reasoned
explanation contained in Opinions 406 and 406-A. This
court's most recent decision in this area, Southeastern Michi-
gan, 133 F.3d 34, lends further support to the refinement of
Battle Creek that FERC has here undertaken. There, in
upholding FERC's Great Lakes I, 72 F.E.R.C. p 61,081, reh'g
denied, 75 F.E.R.C. p 61,089 (1996) ("Great Lakes II"), deci-
sion on remand from TransCanada, where FERC had ap-
proved the proposed rolled-in pricing, this court acknowl-
edged that "[o]n both a theoretical and practical basis, it is
perfectly possible for both cross-subsidization18 and system-
wide benefits to exist on the same facts." 133 F.3d at 41.
Although the court did not make the logical connection be-
tween this possibility and the potential existence of multiple
just and reasonable rates, its assertion implicitly acknowl-
edges one of the core ideas underlying FERC's refinement of
Battle Creek. It is because cross-subsidization and system-
wide benefits can coexist that there is no single "magic point"
at which incremental or rolled-in pricing becomes unjust.
Tennessee III, 80 F.E.R.C. at 61,224. While incremental
treatment may be required at one end of the rate-setting

__________
18 Cross-subsidization occurs when expansion facilities that pro-
vide limited benefits to an integrated pipeline system receive rolled-
in treatment. Where pre-expansion customers bear a portion of the
construction costs that is not equivalent to the benefits they receive,
they essentially subsidize the investment undertaken on behalf of
the expansion customers.

continuum, and rolled-in pricing required at the other, in
between the two extremes lie a series of intermediate points
in which both cost-recovery methods would satisfy section 4's
just and reasonable test.19 At each of these places along the
continuum, the pricing mechanism will essentially lie in the
hands of the initiating pipeline. It is only when the proposed
rate crosses the boundary separating the just from the unjust
that FERC can act under its section 5 authority to order a
rate of its own formulation.

c. FERC's Use of Quantitative Measures

JMC Power also makes much of the fact that FERC
allegedly assessed both the costs as well as the postulated
system benefits of the NET/T-180 expansion on a quantita-
tive basis, alleging that the use of any quantitative standard
was unlawful. While JMC Power attaches many of its previ-
ous arguments to this claim, it also makes an independent
assertion that the use of a quantitative standard is in and of
itself arbitrary, capricious, or contrary to law. We reject this
contention, as it rests upon a misreading of this court's
caselaw and defies both logic and common sense.

JMC Power's argument is difficult to reconstruct, but it
seems to begin from this court's statement in Battle Creek
that the rolled-in treatment of new facilities is just and
reasonable when they are integrated with the pipeline and
provide system-wide benefits. Although the Trunkline Gas
Company had not quantified the benefits that would likely
accrue from the expansion facilities, in the form of increased
capacity and a reduction in the costs of planned future
expansions designed to meet the supply needs of all custom-
ers, the Battle Creek court held that the existence of the
__________
19 Although formulated in different terms, the Battle Creek court
recognized this variability in its statement that

[w]hether the cost of a particular facility is more properly
treated as a systemic cost and rolled-in to the rate base of all of
the customers, or as a segregated cost to a particular customer,
which should be treated on an incremental basis, is frequently a
difficult issue of fact presented to the Commission.

281 F.2d at 47.

benefits had been sufficiently established to support rolled-in
treatment. 281 F.2d at 47-48. In Algonquin, this court
rejected an assertion of system-wide benefits that failed to
establish the existence of any such benefits with "reasonable
particularity," but rested instead upon conclusory assertions
of fact. 948 F.2d at 1313. Algonquin thereby called into
question excessive reliance upon unsubstantiated qualitative
benefits. In TransCanada, by contrast, the court cut off any
shift towards requiring quantitative elaboration, emphasizing
that the Algonquin decision "was careful not to require a
balancing of costs and benefits (much less a quantification
thereof)." 24 F.3d at 308. From this statement, JMC Power
seemingly reads a ban on the use of quantitative analysis into
this court's decisions.

However, the mere fact that the court has not required the
explicit quantification of benefits which, as this case well
illustrates, are difficult to forecast with precision, does not
carry a concomitant prohibition on the use of quantitative
measures. Where the parties expend the necessary re-
sources to allow for quantitative projections, FERC is not
forbidden from looking at those estimations. Cf. Southeast-
ern Michigan, 133 F.3d at 41 ("when an expansion is both
integrated and to the benefit of existing users, FERC is not
bound to study the quantitative effect of rolling in construc-
tion costs") (emphasis added). While JMC Power goes to
great lengths to establish that FERC utilized a "strict quanti-
tative standard," the evidence does not bear out its conten-
tion. Once it is understood that FERC simply attempted to
assess whether JMC Power had made out a claim that
incremental pricing would be unjust and unreasonable, all of
its allegedly damning statements become innocuous. They
amount to nothing more than a determination that the alleged
benefits proffered by JMC Power, which FERC found to be
either speculative or to the primary benefit of the NET/T-180
customers, did not establish that incremental pricing would
be unjust. For the same reason, FERC did not err in
referencing its finding that rolling-in the expansion facilities
would have a rate impact of greater than 6%. That finding

merely supports its conclusion that the section 5 burden had
not been satisfied.

JMC Power fails to recognize the import of such quantita-
tive estimations because it seeks to collapse the two prongs of
the section 5 analysis into a single assessment of whether
rolled-in rates would be just and reasonable. Once it is
recognized that NGA section 4 and section 5 have different
requirements, however, it becomes clear that FERC can
properly utilize quantitative measures of costs and benefits in
making a section 5 assessment of whether a proposed cost-
recovery method would be unjust and unreasonable.

2.The Great Lakes Decisions and Reliance

After this court's TransCanada decision, which invalidated
FERC's application of its newly-crafted "commensurate bene-
fits" test for failure to provide a reasoned explanation for its
departure from Battle Creek, FERC ordered a roll-in of the
expansion facilities' costs at issue. See Great Lakes I, 72
F.E.R.C. p 61,081. Rather than articulating a sufficiently
detailed justification for its policy shift, FERC decided that,
on the facts of the case, it would be more equitable simply to
apply Battle Creek. At the time that the Great Lakes
expansion shippers had made substantial financial commit-
ments for the planning and construction of the additional
pipeline facilities, Battle Creek provided the prevailing back-
drop. In its petition for review, JMC Power argues that it
too relied upon the continued application of Battle Creek when
making its own financial commitments. In its view, the same
principles of equity and nondiscrimination that FERC relied
upon in Great Lakes I dictate adherence to Battle Creek in
this case as well. We do not agree.

Despite the alleged similarities stressed by JMC Power
between its situation and that of the Great Lakes expansion
shippers, material differences separate the respective busi-
ness and regulatory environments that they confronted.
First, and we think dispositive in light of our preceding
discussion of the difference between section 4 and section 5
rate-settings, the pipeline company--Great Lakes Gas Trans-
mission Limited Partnership--proposed rolling-in the costs of

the expansion facilities at issue in the Great Lakes decisions.
See Atchison, Topeka & Santa Fe Ry. Co. v. Wichita Bd. of
Trade, 412 U.S. 800, 808 (1973) (plurality opinion) (factual
differences serve to distinguish cases "when some legislative
policy makes the differences relevant to determining the
proper scope of the prior rule"). In the ensuing section 4
proceeding, FERC needed only to determine whether rolled-
in pricing would be just and reasonable. Throughout its
Great Lakes II opinion denying rehearing of its order approv-
ing the proposed rolled-in rates, 75 F.E.R.C. p 61,089, FERC
emphasized the procedural posture of the dispute and the
resulting evidentiary burdens. Responding to objections
made by a pre-expansion customer--Texas Eastern--FERC
distinguished a series of its own previous decisions ordering
incremental treatment on the grounds that, in each case,
incremental rates had been proposed by the pipeline in a
section 4 rate filing. "In all but one of the cases Texas
Eastern cites, the Commission implemented incremental
rates at the request of the pipeline. The other case ... did
not involve facilities-based incremental charges...." Id. at
61,272.

The assertion that the NET/T-180 shippers stand in the
same position as the Great Lakes expansion shippers cannot
survive the comparison. Since Tennessee Gas proposed to
continue the existing incremental treatment of the NET/
T-180 facilities, this case presents the very scenario expressly
distinguished in Great Lakes II. Moreover, FERC's opinion
there went on to note that, where the pipeline proposes
incremental treatment, "the Commission can only order
rolled-in rates if it meets its burden under NGA section 5 to
show that the existing non-rolled-in rates are unjust and
unreasonable, and rolled-in rates are just and reasonable."
Id. In the present case, FERC concluded that JMC Power
had failed to satisfy its burden of establishing that the
proposed incremental rates are unjust and unreasonable. We
have not been directed to any evidence in the record that
points to a contrary direction, and see no reason to disrupt
this conclusion.

Turning to the facts underlying the Great Lakes decisions,
we note that the original certification of the Great Lakes
expansion provided for rolled-in treatment of the facilities'
cost. Given that Great Lakes Transmission L.P. is an affiliate
of TransCanada Pipelines, its largest customer, TransCanada
knew that the pipeline would seek to continue rolled-in treat-
ment in its next rate filing. Accordingly, its assumption that
Battle Creek would continue to apply in the resulting section 4
proceeding, and that the expansion facilities would continue to
receive rolled-in treatment, was reasonable. In the present
case, by contrast, the original certification process provided
for incremental pricing of the NET/T-180 facilities, without
any guarantee or firm commitment that the pipeline would
necessarily seek rolled-in rates at the next section 4 proceed-
ing. See Tennessee II, 76 F.E.R.C. at 61,115. The Commis-
sion held that JMC Power had no reasonable expectation of
rolled-in treatment, and we agree. As JMC Power makes no
other claim that the application of FERC's refinement of
Battle Creek would entail a "manifest injustice," Clark-
Cowlitz, 826 F.2d at 1081, we uphold its application to the
NET/T-180 facilities.

C.Conclusion

For the reasons stated, JMC Power's petition for review is
denied.

Part II: The FSST/T-149 and Boundary Facilities
and the Niagara Spur Charge

Equitable Gas Company petitions for review of the Com-
mission's orders in Tennessee II, reh'g denied, Tennessee III.
In the relevant portions of these orders, the Commission
approved Tennessee's proposal to recover the costs of a
series of facility expansions, collectively referred to as the
FSST/T-149 and Boundary facilities, on a "rolled-in" basis,
and rejected Tennessee's proposed "Niagara Spur Charge,"
an incremental surcharge to Tennessee's open-access firm
transportation rate (Rate Schedule FT-A) concerning Ten-
nessee's Niagara Spur facilities. Equitable claims that the
Commission wrongly reviewed Tennessee's roll-in proposal

under section 4 instead of section 5 of the Natural Gas Act
and that the Commission wrongly denied Equitable's request
for a rehearing on the Niagara Spur Charge. We hold that
Opinions 406 and 406-A properly followed the statutory
framework set up by the Natural Gas Act and that the
Commission acted well within its discretion in denying Equi-
table's request for a rehearing. We therefore deny Equita-
ble's petition for review.

A.Background

Tennessee's pipeline system divides into seven zones.
Zones 0 and 1 (the Texas and Southern Zones) comprise
Tennessee's production area. The remaining zones (Central,
Eastern, Northern, New York, and New England) comprise
its market area. Between 1984 and 1993, Tennessee con-
structed four independent expansion projects in Zones 5 and
6, including the FSST/T-149, Boundary, and Niagara Spur
facilities.20

Tennessee designed its FSST/T-149 facilities to provide
service to nine customers in Zone 6 and one customer in
eastern Zone 5. Constructed along scattered portions of
Tennessee's mainline in Pennsylvania, New York, New Jer-
sey, Connecticut, Massachusetts, and New Hampshire, the
facilities include approximately 74 miles of looping and 17,300
horsepower of new and additional compression. The original
estimated cost of the facilities was $99,043,000.

Tennessee's Boundary facilities were built to provide addi-
tional gas service to four eastern Zone 5 and nine Zone 6
customers to meet their peak period needs. These facilities
consist of approximately ten mainline looping segments total-
ing 40 miles in various counties of Pennsylvania and Tennes-
see.

__________
20 These projects primarily involved the addition of mainline
looping and compression. The looping increased the carrying ca-
pacity of the entire pipeline. See Algonquin, 948 F.2d at 1308-09
n.4. Both the looping and the increased compression protect cus-
tomers from outages.

Pursuant to settlements the Commission approved in 1985
and 1987, Tennessee agreed to recover the costs of the
FSST/T-149 and Boundary facilities initially by incremental
rates. Then, in its 1991 general rate filing pursuant to
section 4 of the Natural Gas Act, 15 U.S.C. s 717c, Tennessee
proposed to roll in the costs of the FSST/T-149 and Bound-
ary facilities. See Tennessee II, 76 F.E.R.C. at 61,095-96.

The Commission suspended Tennessee's 1991 filing for five
months and ordered an evidentiary hearing before an admin-
istrative law judge to resolve cost allocation and rate design
issues. Two years later, in October 1993, the Commission
approved a settlement among Tennessee and its customers
resolving all questions concerning the allowable level of cost
Tennessee could recover in its rates. The settling parties left
for prospective resolution before an administrative law judge
("ALJ") the allocation of costs of the new facilities among
Tennessee's customers, and the design of Tennessee's rates.
See id. at 61,080.

In an initial decision issued after hearings, Tennessee I, 72
F.E.R.C. p 63,005, the ALJ ruled that Tennessee--and its
customers supporting the rolled-in pricing of the FSST/T-149
and Boundary facilities--had the burden under section 5 of
the Act to show both that incremental pricing of those
facilities was unjust and unreasonable, and that the proposed
rolled-in pricing was just and reasonable. See id. at 65,068.
Concluding that Tennessee and the other proponents of
rolled-in pricing had not met that burden, see id. at 65,068-69,
the ALJ held that Tennessee could not recover the costs of
the FSST/T-149 and Boundary facilities on a rolled-in basis.

The ALJ also addressed Tennessee's proposal to modify
the previous rolled-in rate treatment of the Niagara Spur by
creating a new, incremental Niagara Spur Charge. Because
the Niagara Spur is integrated into Tennessee's system and
was intended to benefit the Tennessee system as a whole, the
ALJ rejected Tennessee's proposal. See id. at 65,073.

On review, the Commission reversed the ALJ's ruling with
respect to the FSST/T-149 and Boundary facilities. See
Tennessee II, 76 F.E.R.C. at 61,097-104. The Commission

held that because Tennessee had proposed the change to
rolled-in pricing under section 4 of the Act, Tennessee needed
to establish only that rolled-in pricing was just and reason-
able without the additional burden of establishing that incre-
mental rates were unjust and unreasonable under section 5.
See id. at 61,097-104. Finding that Tennessee had met its
section 4 burden of proof, the Commission approved Tennes-
see's proposal to roll in the costs of the FSST/T-149 and
Boundary facilities. See id. at 61,098-104. The Commission
also affirmed the ALJ's rejection of Tennessee's proposed
incremental Niagara Spur Charge. See id. at 61,107-08.

Equitable, a distributor of natural gas in Pennsylvania,
West Virginia and Kentucky, sought rehearing, which the
Commission denied in Order 406-A. See Tennessee III, 80
F.E.R.C. at 61,070.

B.Discussion

The first issue Equitable raises is whether section 4 or
section 5 of the Act governs Tennessee's proposal to roll in
the costs of its FSST/T-149 and Boundary facilities. As
discussed in Part I of this opinion, the approval or rejection of
rates proposed by the pipeline is governed by section 4. See
15 U.S.C. s 717c. Under section 4, the pipeline must prove
that its proposed rates are just and reasonable. See 15
U.S.C. s 717c; see also Public Serv. Comm'n v. FERC, 866
F.2d 487, 488 (D.C. Cir. 1989). Section 5 applies when the
Commission or an intervenor seeks to impose on the pipeline
rates different from either present rates or rates proposed by
the pipeline. See 15 U.S.C. s 717d. Under section 5, the
Commission or the intervenor must prove that the pipeline's
present rates are not just and reasonable and that the new
rates proposed by the Commission or the intervenor are just
and reasonable. See 15 U.S.C. s 717d; see also Public Serv.
Comm'n, 866 F.2d at 488.

It was Tennessee who proposed to roll in the costs of the
FSST/T-149 and Boundary facilities. One would therefore
suppose that section 4 governed the rate proceeding. Equita-
ble nevertheless insists section 5, rather than section 4,
applies. It claims that once Tennessee canceled its rate

change request, there was no longer any basis for using
section 4. The trouble with Equitable's argument is that
Tennessee did not, in fact, withdraw its proposal and did not
abandon its stated desire for rolled-in pricing of its FSST/
T-149 and Boundary facilities. Equitable has another line of
argument based on the fact that Commission trial staff and
other parties--but not Tennessee--presented the evidence in
support of Tennessee's rate-change request concerning the
FSST/T-149 facilities.21 According to Equitable, whether
section 4 or section 5 governs depends not on the identity of
the party proposing the rate change, but on the identity of
the party supporting the rate change with evidence at the
hearing. Since the pipeline here did not mount the case in its
favor, section 4 did not control. Nothing in the Act or this
circuit's precedent suggests, let alone supports, this theory.
When choosing between section 4 and section 5, the Act
makes the source of the proposed rate change decisive. See
East Tenn. Natural Gas Co. v. FERC, 863 F.2d 932, 937
(D.C. Cir. 1988). Because the pipeline (Tennessee) proposed
the rate change concerning the FSST/T-149 and Boundary
facilities, the Commission properly followed the framework
set up by the Act and applied section 4. See Sea Robin
Pipeline Co. v. FERC, 795 F.2d 182, 183-84 (D.C. Cir. 1986).22

This leads to Equitable's second challenge. Even if section
4 governs Tennessee's rate-change request, Equitable tells us
that the Commission erred in another respect--namely, in
holding that Tennessee proved that rolled-in rates were just
and reasonable. Equitable argues that Tennessee could not
have met its section 4 burden of proof because Tennessee

__________
21 Tennessee provided some of the evidentiary support for rolling
in the costs of the Boundary facilities.

22 This is not inconsistent, as Equitable claims, with the Commis-
sion's decision to apply section 5 to the New England Customer
Group's proposal to eliminate the direct assignment of Tennessee's
New England lateral facilities' costs. Because the New England
Customer Group proposed rates different from those urged by the
pipeline, the Commission properly applied section 5 to the New
England Customer Group's proposal. See 15 U.S.C. s 717d.

itself did not present any evidence at the hearing to support
its proposal.

City of Winnfield, La. v. FERC, 744 F.2d 871 (D.C. Cir.
1984), forecloses Equitable's line of reasoning, although no
one saw fit to cite the decision to us. That case involved
s 205 of the Federal Power Act, 16 U.S.C. s 824d, which
requires utilities to prove that their rate-change proposals are
just and reasonable. The precise question in City of Winnfield
was whether an electric utility could meet its burden of proof
under s 205 even though Commission staff--not the utility--
presented key evidence in support of a rate change. See 744
F.2d. at 876. The court held that "[i]f evidence is introduced
in the proceeding supporting a rate increase, the increase can
lawfully be imposed, regardless of the source from which that
evidence comes." Id. at 877. In reaching this conclusion, the
court noted that the burden of proof requirement under s 205
relates to the burden of persuasion (or, more accurately, the
risk of non-persuasion), not to the burden of production, and
thus the identity of the party submitting evidence is not
dispositive. See 744 F.2d at 877.23 Section 205 of the Feder-
al Power Act and section 4 of the Natural Gas Act are
identical in form and have been treated as identical in sub-
stance. See 744 F.2d at 875; compare 16 U.S.C. ss 824d(e)
& 824e(a) with 15 U.S.C. ss 717c(e) & 717d(a). There is no
reason to adopt one set of evidentiary rules for rate proposals
from utilities but a different set for rate proposals from

__________
23 The procedural setting of City of Winnfield was unusual. The
utility proposed incremental pricing to replace its average cost rates
but indicated that if the Commission rejected this proposal, the
utility would accept a staff proposal to increase the utility's average
cost rates. See 744 F.2d at 873. In the s 205 proceeding, the
Commission declined to permit the incremental pricing proposal but
granted the average cost rate increase. See id. at 875. The court
stated that "it would be wasteful to require, instead of the sensible
procedure adopted here, that the Commission first deny [the utili-
ty's] requested increase and that the utility then commence a
separate s 205 proceeding proposing the acceptable increase of
rates under the existing scheme that the Commission staff had
suggested." See id. at 876-77.

pipelines. We therefore hold that in a proceeding supporting
a rate change pursuant to section 4 of the Natural Gas Act, a
pipeline may rely on any submitted evidence--regardless of
its source--to satisfy its burden of proof.

The two previous Commission decisions Equitable cites do
not change our mind about this. According to Equitable,
under Equitrans, L.P., 80 F.E.R.C. p 61,144 (1997), order on
reh'g, 81 F.E.R.C. p 61,030 (1997), and El Paso Natural Gas
Co., 48 F.E.R.C. p 61,018 (1989), the Commission must reject
pipeline-initiated filings if the pipeline fails to support the
filing with evidence. The facts in those cases differ from the
facts in this case. As the Commission pointed out, in El
Paso, no party furnished any evidence to support the filing.
In Equitrans, the pipeline submitted some evidence to sup-
port its filing, but the Commission described it as "seriously
deficient."24 81 F.E.R.C. at 61,157. In marked contrast, here
no one disputes that intervenors and the Commission trial
staff presented extensive evidence to support Tennessee's
filing. Equitable does not challenge the adequacy of the
evidence. The issue, according to Equitable, is whether the
standard governing a pipeline's rate proposal turns on the
identity of the party supporting the filing with evidence. As
City of Winnfield makes clear, it does not.

One other detail about Tennessee's filing merits mention.
Equitable contends that Tennessee failed to submit certain
statements required by 18 C.F.R. ss 154.301 & 154.312.
Although the record is not clear in this regard, the Commis-
sion appeared to concede at oral argument that Tennessee
may not have filed some documents required by Commission
regulations. We will assume, arguendo, that Tennessee failed
in this respect. But we will not assume that Tennessee's
neglect obligated the Commission to reject its filing. The

__________
24 Equitable also cites Pacific Gas Transmission Co., 66 F.E.R.C.
p 61,384 (1994). But that case does not address the issue here,
namely, whether a pipeline's failure to support a section 4 filing
with evidence requires the Commission to reject the pipeline's
filing.

Commission has broad discretion to decide whether a filing
substantially complies with its regulations. See United Gas
Pipe Line Co. v. FERC, 707 F.2d 1507, 1512 (D.C. Cir. 1983).
The Commission may even accept defective filings. See id.
That seems to be the posture the Commission adopted with
respect to Tennessee's filing. In any event, it does not
appear that Equitable raised this issue in a timely manner
before the Commission. Equitable thus cannot raise it--and
this court will not address it--now. See 15 U.S.C. s 717r(b).

The third issue Equitable raises is whether the Commission
abused its discretion by not rehearing a proposal to reinstate
Tennessee's proposed Niagara Spur Charge.25 The Commis-
sion held that rolled-in pricing of the Niagara Spur facilities
was just and reasonable. Equitable argues that the Niagara
Spur cost-allocation decision warranted a rehearing because
the Commission allowed further hearings on a cost-allocation
issue involving Tennessee's New England lateral facilities.

The Commission reasonably treated the two questions dif-
ferently, ordering a rehearing in one but not the other. After
a review of the record and allegations by the New England
Customer Group regarding the treatment of non-New Eng-
land lateral facilities, the Commission concluded that the
existing cost-allocation of the New England laterals potential-
ly violated the anti-discrimination provisions of section 5 of

__________
25 Tennessee's Niagara Spur is located in Zone 5 and extends
from an interconnection between the systems of Tennessee and a
Canadian pipeline at the Niagara River to a connection with Ten-
nessee's mainline at East Aurora, New York. The expansion of the
Niagara Spur facilities involved the addition of odorization facilities
and permanent compression facilities. The new facilities increased
pressure on the Niagara Spur so that Tennessee could begin using
the Niagara Spur to deliver gas to mainline customers. The
Niagara Spur Charge recovers approximately half of the cost of the
Niagara Spur facilities from those Rate Schedule FT-A shippers
with primary receipt points on the Niagara Spur for delivery of
transportation of Canadian gas supply into Tennessee's Zones 5 and
6. The remaining Niagara Spur costs are allocated to incremental
Rate Schedule NET-Segment 1 shippers with firm transportation
rights on the Niagara Spur.

the Act. Although a hearing had already been held on the
general issue of the justness and reasonableness of that
allocation methodology, the specific subsidiary issue whether
the methodology is unduly discriminatory was not fully ex-
plored. In order to answer that question on the merits, the
Commission believed it needed to develop the record further,
and thus ordered a rehearing. The situation with the Niaga-
ra Spur cost-allocation issue was different. The record re-
garding this subject was adequate to decide on the merits
whether rolled-in pricing of the Niagara Spur facilities was
just and reasonable. In the Commission's considered view,
further hearings were not needed. See Cajun Elec. Power
Coop., Inc. v. FERC, 28 F.3d 173, 177 (D.C. Cir. 1994). We
find no reason to question the Commission's judgment. For
these reasons, and in deference to the Commission's expertise
in deciding whether to conduct hearings in the first instance,
see Alabama Power Co. v. FERC, 993 F.2d 1557, 1565 (D.C.
Cir. 1993); Southern Union Gas Co. v. FERC, 840 F.2d 964,
970-71 (D.C. Cir. 1988), we hold that its refusal to rehear a
proposal concerning the Niagara Spur Charge fell well within
the Commission's discretion.

C.Conclusion

No useful purpose would be served by setting forth Equita-
ble's other arguments. We have considered and rejected
them. We therefore affirm the Commission's rulings in
Opinions 406 and 406-A and its denial of Equitable's request
for rehearing.

Part III: The Uniform Hourly Take Tariff

Consolidated Edison, Brooklyn Union, and the Long Island
Lighting Companies (collectively "Con Ed") fare no better in
contending that the Commission erred in concluding that
Tennessee does not unduly discriminate in the implementa-
tion of a tariff provision governing the uniform hourly take of
gas. The Commission reasonably found that while Tennessee
routinely provides New England customers with greater
hourly flexibility than New York area customers such as Con
Ed, Tennessee was not unduly discriminatory because the

two sets of customers were not similarly situated, due to the
operational constraints of the system.

A.Background

A tariff provision affecting two of Tennessee's rate sched-
ules requires customers to take "[a]s nearly as practicable"
uniform hourly quantities of their daily entitlements to gas.
s 4.11 of Rate Schedule FT-A; see also s 4.4 of Rate Sched-
ule IT. Con Ed complained to the Commission that Tennes-
see does not uniformly apply that provision; while a flow
control valve at the White Plains meter limited Con Ed's
hourly take of gas to strictly 1/24 (or 4.2%) of its daily
contract, New England customers, with no flow control valves
in place at their meters, routinely could take up to 6% of their
daily entitlements during any given peak hour "under an
informal, unwritten, and unfiled agreement." Tennessee I, 72
F.E.R.C. at 65,116. At the rates in effect during the adminis-
trative proceedings, Con Ed claimed that it could have con-
tracted for 31% less gas, at an annual savings of approximate-
ly $4 million, had it been given the same hourly flexibility as
the New England customers. Contending that Tennessee's
practice constitutes undue discrimination in violation of sec-
tions 4 and 5 of the Natural Gas Act, see 15 U.S.C. ss 717c-
717d, Con Ed claimed that it should be allowed the same
degree of hourly flexibility, or in the alternative, if Tennessee
was able to demonstrate that it was operationally incapable of
resetting the meters to provide the same flexibility, then Con
Ed should be charged a lower rate to reflect the "inferior"
quality of service. 72 F.E.R.C. at 65,116.

In his initial decision, the ALJ found that there was no
evidence of undue preference; the uniform hourly take provi-
sion applied to all of Tennessee's customers, and any custom-
er was entitled to flexibility if it was operationally feasible for
Tennessee to allow that customer to take gas in excess of its
scheduled hourly entitlement. Id. at 65,121. Given its even-
handed application of the provision, Tennessee explained that
any difference in the hourly flexibility of New York and New
England customers was due to the system's operational de-
sign, requiring flow control devices on all of Tennessee's

meters with maximum daily quantities ("MDQs") of 100,000
Dekatherm ("Dth") per day or greater, such as the White
Plains meter used to service Con Ed.26 Id. at 65,118, 65,121.
The ALJ found that if Tennessee removed or even reset the
flow control valve on the White Plains meter to allow for the
same flexibility as in New England, the amount of gas that
Con Ed could potentially draw from the system would deplete
the pipeline's flow, rendering Tennessee incapable of meeting
its obligations to other regional customers. Id. In New
England, however, no set of customers on a single meter
could draw enough gas to compromise the system. The ALJ
concluded, therefore, that Con Ed had not met its burden to
demonstrate that Tennessee implemented its uniform hourly
take provision in an unduly discriminatory way by treating
similarly situated customers differently. Id. at 65,121.

The Commission affirmed the ALJ's ruling, finding that the
difference in hourly flexibility was the result of operational
constraints rather than preferential treatment: the evidence
showed that Tennessee (1) installed flow control devices on all
meters with MDQs of 100,000 Dth per day or greater, (2)
permitted all customers subject to the tariff to vary their
hourly takes if operationally feasible, and (3) applied the same
operational standard to all of its customers, granting every
customer a provisional right to hourly flexibility.27 Tennessee
II, 76 F.E.R.C. at 61,137-38. The Commission also found
that the ability of customers to take in excess of their hourly
schedule was not a firm entitlement; customers were still

__________
26 As the Commission noted, the capacity of the White Plains
meter is approximately 300,000 Dth per day; Consolidated Edison's
MDQ alone is 165,000 Dth per day. Tennessee II, 76 F.E.R.C. at
61,135 n.258.

27 The Commission noted that under the operational standard,
Tennessee adjusted the flow control valve at the White Plains meter
on several occasions in the winter to allow Con Ed to take gas in
excess of 1/24 of its MDQ per hour; in the summer, the flow control
valve could be shut off altogether. 76 F.E.R.C. at 61,137 n.274.

subject to the tariff restriction, and no customer had a firm
right to hourly flexibility. Id. at 61,138.

To the extent that the consistent application of the opera-
tional standard resulted in differing degrees of hourly flexibil-
ity for New York and New England customers, the Commis-
sion agreed with the ALJ that it was due to the physical
design of the system: given the size of the flow through the
White Plains meter (300,000 Dth per day) and the proportion
(50%) it comprised of the total pipeline capacity of the New
York market, the Commission found that it was operationally
not feasible for Tennessee to reset the White Plains meter to
give Con Ed the same flexibility as Tennessee provided to
New England customers, as none of their meters presented
the same potential for endangering the service of others. Id.
at 61,138-39. In addition, the Commission concluded that
Con Ed failed to show "that a limitation upon hourly takes, in
and of itself, apart from any considerations of undue discrimi-
nation, merits the reallocation of fixed costs and redesign of
rates to reflect maximum hourly entitlements, instead of
maximum daily quantities." Id. at 61,140.

In seeking rehearing, Con Ed asserted that the consistent
application of the operational standard was irrelevant if the
New England customers received, in effect, a firm right to
hourly flexibility, and that the difference in flexibility did not
constitute a reasonable variation in the nature of service
received by the customers within a class. Tennessee III, 80
F.E.R.C. at 61,244-45. Furthermore, Con Ed maintained
that the differences in flexibility resulted from Tennessee's
intentional design of its system, making the resulting differ-
ences unduly discriminatory. Under the circumstances, Con
Ed concluded, the proper remedy was to adjust rates to
reflect that it received an inferior quality of service. Id. at
61,245.

The Commission denied rehearing. Although the New
England customers received more hourly take flexibility than
Con Ed, it was not undue discrimination, in the Commission's
view, because the two were not similarly situated, and a
rational basis existed for denying Con Ed the additional

flexibility. Id. The record showed that the size and propor-
tion of the White Plains meter required Tennessee to main-
tain flow control over Con Ed, while "no meter in New
England present[ed] the same potential for endangerment of
service that the White Plains meter present[ed]." Id. at
61,246. Because the differing degrees of flexibility resulted
from the evenhanded application of an operational standard,
the Commission opined that the evidence in the record dem-
onstrated that the difference was not arbitrary. Id. The
Commission rejected Con Ed's complaint that it received
allegedly "inferior" service, inasmuch as Con Ed had failed to
show that the lesser amount of hourly flexibility made the
quality of service it received "inferior" to merit a rate adjust-
ment. Id. The mere fact that Con Ed had to contact
Tennessee officials to request flexibility while the New Eng-
land customers could take additional gas off the system
without contacting Tennessee officials, the Commission found
was a "difference without substance." Id. (internal brackets
omitted). The Commission noted, moreover, that Con Ed's
service may be superior in other respects, such as delivery
pressure, to the service in New England. Id. at 61,246 &
61,246 n.183. In any event, regardless of whether the quality
of service was inferior, the Commission concluded that Con
Ed failed to justify its remedy of a downward rate adjustment
because it had not shown that Tennessee incurred less costs
in providing service with limited flexibility to New York
customers "than it does in providing the more flexible service
to the New England customers, or by showing that Tennes-
see incurs more costs to provide the New England customers
with the extra flexibility." Id. at 61,247.

Con Ed contends in its petition for review that because the
differing degree of hourly flexibility available to New York
and New England customers constitutes undue discrimina-
tion, the Commission erred in denying an appropriate reme-
dy--namely an adjustment of its rate to reflect the inferior
quality of service. See 5 U.S.C. s 706(2)(A),(E). Interve-
nors, Tennessee and the Bay State Gas Company, contend as
a preliminary matter that the court is barred from entertain-
ing what in effect is a new claim of undue discrimination. See

NGA s 19(b), 15 U.S.C. s 717r(b); Louisiana Ass'n of Indep.
Producers & Royalty Owners v. FERC, 958 F.2d 1101, 1117
n.8 (D.C. Cir. 1992). We disagree. Intervenors maintain
that throughout the administrative proceedings, Con Ed's
claim of undue discrimination was consistently one of outright
preference, in which Tennessee granted additional hourly
flexibility to New England customers rather than New York.
Con Ed's allegedly new position, that the undue discrimina-
tion arises from the fact that it pays the same rate while
receiving inferior service, was thus never argued before the
Commission. In fact, Con Ed's petition for rehearing articu-
lated the theory of discrimination it raises now on appeal.
We therefore address Con Ed's contention, and do so with the
recognition that the Commission has broad discretion in
exercising its authority under the NGA, see Tennessee Gas
Pipeline Co. v. FERC, 860 F.2d 446, 452 (D.C. Cir. 1988), and
that the court may not "substitute its judgment for that of the
agency." Motor Vehicle Mfrs. Ass'n v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983). Our review is limited
to assuring that the Commission's orders are reasoned, prin-
cipled, and based upon the record. See, e.g., Pennsylvania
Office of Consumer Advocate v. FERC, 131 F.3d 182, 185-86
(D.C. Cir. 1997), modified, 134 F.3d 422 (D.C. Cir. 1998);
Western Resources, 9 F.3d at 1572; Columbia Gas Transmis-
sion Corp. v. FERC, 628 F.2d 578, 593 (D.C. Cir. 1979).

B.Discussion

Under the NGA, see 15 U.S.C. ss 717c, 717d, differences in
the rates paid by two sets of customers are not always unduly
discriminatory. Rather, to show undue discrimination, the
petitioner must demonstrate that the two classes of custom-
ers are similarly situated for purposes of the rate. See, e.g.,
Tennessee Gas, 860 F.2d at 452 n.9; City of Vernon v. FERC,
845 F.2d 1042, 1046-47 (D.C. Cir. 1988); Consolidated Edison
Co. v. FERC, 676 F.2d 763, 773 & 773 n.31 (D.C. Cir. 1982).

In its request for rehearing, Con Ed did not challenge the
Commission's findings that the largest meters of 100,000 Dth
per day or greater, such as the one in White Plains, New
York, required flow control devices while the smaller meters,

such as many of those in the New England states, remained
on pressure control. See 80 F.E.R.C. at 61,245. The Com-
mission reasonably concluded that this operational distinction,
which created the difference in hourly flexibility the two
groups received, showed that the New York and New Eng-
land customers were not "similarly situated," and that there-
fore there was no undue discrimination because Tennessee
had a rational basis for treating the two differently. See id.
at 61,245-46.

The capacity constraints also entered into the Commission's
analysis. It found, and Con Ed did not contest, that the
capacity of the White Plains meter comprised half of the New
York area market, see 76 F.E.R.C. at 61,138-39; 80 F.E.R.C.
at 61,245-46, and to the extent Con Ed could take gas off the
system in excess of the uniform hourly requirement, that Con
Ed could potentially deplete the availability of service in the
area, adversely affecting other Tennessee customers. 80
F.E.R.C. at 61,246. "[D]ifferences ... based on relevant,
significant facts which are explained are not contrary to the
NGA." TransCanada Pipelines Ltd. v. FERC, 878 F.2d 401,
413 (D.C. Cir. 1989); see also Metropolitan Edison Co. v.
FERC, 595 F.2d 851, 857 (D.C. Cir. 1979); St. Michaels Utils.
Comm'n v. FPC, 377 F.2d 912, 915 (4th Cir. 1967). The
Commission noted the difference in operational circumstances
but found that Tennessee applied the same feasibility stan-
dard to all customers in determining whether to grant addi-
tional flexibility. See 80 F.E.R.C. at 61,246. For these
reasons we conclude that the Commission gave an adequate
explanation of how it reached its conclusion that there was no
undue discrimination; the record substantially supported the
Commission's findings that the two customer groups were not
similarly situated, and a rational, non-discriminatory basis
existed for the difference in situation, namely operational
constraints.

Contrary to Con Ed's contention, the Commission did not
give inconsistent reasons in Opinion Nos. 406 and 406-A.
The Commission, in Opinion 406, affirmed the ALJ's finding
that although there was in fact a difference in the degree of
hourly flexibility, it was not a "substantive difference in

treatment between the New York customers and New Eng-
land customers on the part of Tennessee" because no custom-
er had a firm right to that flexibility and all customers were
given the same opportunity to vary their hourly takes if
operationally feasible. 76 F.E.R.C. at 61,140. In Opinion
No. 406-A, the Commission again acknowledged that "al-
though Tennessee assesses all customer requests to vary
hourly takes under the same standard, in practice, there is a
difference between the hourly take flexibility that the New
England customers receive and the flexibility that the New
York customers receive." 80 F.E.R.C. at 61,245. The Com-
mission then explained that the difference in treatment was
not unduly discriminatory; in other words, it was "not a
substantive difference in treatment" because the customers
were not similarly situated and Tennessee had a rational
basis for treating them differently. Id.

Citing Alabama Elec. Coop., Inc. v. FERC, 684 F.2d 20
(D.C. Cir. 1982), Con Ed contends that the Commission's
finding that the New York and New England customers were
not similarly situated should have led to a finding of undue
discrimination. "Just as charging similarly situated custom-
ers different rates is unduly discriminatory," Con Ed main-
tains, "so too is it discriminatory to charge customers the
same rate if, as FERC has found here, they are not similarly
situated." Yet Alabama Electric does not stand for the
proposition that charging the same rates to differently situat-
ed customers always constitutes undue discrimination. Al-
though Alabama Electric stated that in the "unusual case,"
id. at 21, charging the same rate to differently situated
customers could constitute a form of discrimination, the criti-
cal determination was whether that difference was unreason-
able or undue. Id. at 28. Because the Commission provided
a sufficient explanation for the operational limits placed upon
Con Ed, the resulting differences were not unduly discrimina-
tory.

Nor can Alabama Electric be read to recognize quality of
service claims such as Con Ed's as necessarily constituting
undue discrimination. Although 15 U.S.C. s 717c(b)(2) for-
bids "any unreasonable difference in ... service," the differ-

ence in service here was not unreasonable because of opera-
tional constraints. Furthermore, the court in Alabama
Electric held that the application of the same rate to cus-
tomers who were similar in many respects could still poten-
tially constitute undue discrimination if the rate applied to
the two classes of customers yielded disparate rates of re-
turn on the costs to the pipeline to service them. Id. at 27-
28. Because "it has come to be well established that ...
rates should be based on the costs of providing service to
the utility's customers," id., the court concluded the critical
factor in the claim of undue discrimination was a disparity in
the costs of service. Id. at 28 & 28 n.34; see also Electrici-
ty Consumers Resource Council v. FERC, 747 F.2d 1511,
1515-16 (D.C. Cir. 1984).

Here, the Commission could properly find that Con Ed
failed to make an adequate showing regarding such costs to
justify a downward rate adjustment. 80 F.E.R.C. at 61,247.
A witness for Con Ed referred to testimony by Tennessee's
expert that there were additional costs in monitoring pres-
sure control and in maintaining the New England lateral
pipelines, all of which operationally contribute to New Eng-
land's greater flexibility; the Con Ed witness also testified
that only 50% of those costs were directly incurred by New
England customers, and the rest borne by others on the
system, despite the benefit to New England customers.
However, merely asserting that the direct assignment of 50%
of the lateral costs to New England customers was insuffi-
cient to reflect the cost of additional flexibility is not the same
as submitting evidence in support of such a claim. Under
section 5 of the NGA, see Sea Robin Pipeline, 795 F.2d at
184, Con Ed had the burden to justify a change in rates, yet it
submitted no cost allocation studies on providing hourly flexi-
bility to New England customers in comparison to those in
New York. The evidence in the record demonstrates neither
"that Tennessee incurs less costs in providing to the New
York customers a service with limited flexibility than it does
in providing the more flexible service to the New England
customers, ... [nor] that Tennessee incurs more costs to
provide the New England customers with the extra flexibili-

ty." 80 F.E.R.C. at 61,247; cf. Alabama Elec., 684 F.2d at 28
& 28 n.34. Moreover, the Commission found that Con Ed
had not sufficiently shown that the quality of service it
received was necessarily inferior to the service received by
New England customers to warrant an adjustment in rates.
See 80 F.E.R.C. at 61,246. The New England customers'
service was not firm, see 76 F.E.R.C. at 61,138, and the
Commission noted that the record reflected that in some
regards, the service to Con Ed may be better than that in
New England. 80 F.E.R.C. at 61,246.

C.Conclusion

Because the Commission's refusal to order Tennessee to
provide Con Ed with a rate adjustment on the grounds of
undue discrimination was reasoned and supported by the
record, we deny Con Ed's petition for review.

Accordingly, we deny the petitions for review filed by JMC
Power, Equitable, and Con Ed.

So ordered.