Opinion ID: 146475
Heading Depth: 2
Heading Rank: 1

Heading: Geographic Scope

Text: In developing the new standards, the Commission considered two distinct questions about their scope. First, it considered whether the new standards should apply throughout the FGT system, or only in the Market Area. Second, it considered whether the standards should apply to all natural gas, or only to revaporized LNG. Florida Gas proposed new standards that would only have governed Market Area receipts of revaporized LNG. Initial Order ¶ 208. The ALJ agreed that the new standards should only address revaporized LNG, but concluded that they should govern all receipts of revaporized LNG, not just those that occurred in the Market Area. Id. ¶¶ 209, 220-21. The Commission reversed, concluding that the new standards would only apply in the Market Area. Id. ¶ 227. Responding to end-user concerns, however, it determined that the new gas quality standards would apply not just to revaporized LNG, but to all natural gas received in the Market Area. Id. ¶¶ 212-18. Moreover, the Commission declared that [t]he gas quality receipt point standards for the Market Area will apply equally to receipts from the Western Division. Id. ¶ 230. Thus it imposed the new standards on the commingled stream of natural gas already flowing through the FGT system where it entered the Market Area from the Western Division. At this border, though, the natural gas stream crosses the invisible regulatory line that separates the Western Division from the Market Area. Other than that, nothing significant occurs at this pointthere is no receipt point, processing facility, or anything else that might affect the composition of the commingled stream. Florida Gas contends that the Commission's decision to impose the new gas quality and interchangeability standards at this border violates § 5 of the NGA.
Section 5(a) of the NGA authorizes the Commission to determine just and reasonable tariff provisions once it has found the existing tariff provisions unjust, unreasonable, unduly discriminatory, or preferential. 15 U.S.C. § 717d(a). A finding that the existing tariff provisions are unjust or unreasonable is a prerequisite for exercising authority under § 5 of the NGA. Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 186-87 (D.C.Cir.1986); ANR Pipeline Co. v. FERC, 771 F.2d 507, 514 (D.C.Cir.1985). The Commission acknowledged this statutory requirement when it reversed the ALJ's decision that would have applied the new standards throughout the FGT system. It recognized that to require Florida Gas to extend its proposed interchangeability standards to the Western Division, the Commission would have to find under NGA section 5 that their existing standards applicable to the Western Division are unjust and unreasonable. Initial Order ¶ 227. Yet it expressly disavowed any such finding, conceding that [t]he record developed at the hearing is inadequate to support a finding that the current Western Division gas standards are unjust and unreasonable. Id. ¶ 228. Evaluating the record, the Commission explained that while there was evidence about two imminent projects that would deliver revaporized LNG into the Market Area, there was only speculative evidence about future projects that might deliver revaporized LNG into the Western Division. Id. Specifically, the Commission found that it was not clear which of these projects will ever be completed, whether they would deliver gas to Florida Gas, how Florida Gas's operations may be impacted or whether the Western Division markets required any special gas quality considerations. Id. (footnotes omitted). Thus it was difficult to find anything in this speculative and inchoate Western Division record to support a finding that the existing Florida Gas 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. 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.
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 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 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.
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.