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NGSA Presses for Advance Shipper Protections in Gathering Spin-Off, Spin-Down Cases

FERC should not only refashion its test for when to assert jurisdiction over offshore natural gas gathering lines to protect against monopoly abuse, but it should "take actions [in advance] that ensure that the need to subsequently reassert jurisdiction is no longer required or, at least, rarely occurs," the Natural Gas Supply Association (NGSA) said this week.

Prior attempts by the Federal Energy Regulatory Commission to protect shippers from monopoly abuse after offshore gathering facilities have been spun down by pipelines to their gathering affiliates, "although well intended, have been frustrated [by the courts] to date," the NGSA, which represents major gas producers, told the Commission on Monday.

"Therefore, in addition to reformulating the test for reassertion of jurisdiction, NGSA believes that now is also the time to establish parameters for the Commission to exert its existing [Natural Gas Act] authority to adequately protect pipeline customers in the first instance when a request for a spin-down or spin-off is before the Commission," not after it has been approved, the group said.

The NGSA comments were in response to a notice of inquiry (NOI), which FERC initiated in mid-September, on possible changes in the criteria used to determine when the agency can reassert jurisdiction over unregulated offshore gathering affiliates of natural gas pipelines that are suspected of engaging in abusive conduct and/or practices (see Daily GPI, Sept. 16).

Noting at the time that neither federal nor state regulators have jurisdiction over gathering in the Outer Continental Shelf (OCS), FERC opened the NOI so that it could review options that would permit it to reassert authority over non-jurisdictional gathering. The agency's attempts to reassert jurisdiction over offshore gathering in the past have been repeatedly thwarted by the courts.

The Commission all along "has assumed that [spinning off or spinning down] gathering from transportation represents an important step in the 'unbundling' process, whereby offshore shippers using spun-down gathering facilities will somehow enjoy an increased selection of more and/or better service options on a competitive basis," the NGSA said. "Experience has shown that nothing of the sort has happened."

The actual outcome of such unbundling "has been the ability of pipeline affiliates to raise rates on the gathering portions of their systems, as clearly evidenced with respect to the North Padre Island [NPI] facilities." Transcontinental Gas Pipe Line spun down its NPI gathering facilities to its gathering affiliate, Williams Field Services Co. (WFS). Shell Offshore Inc., a shipper, then accused WFS of charging an exorbitant gathering rate and attaching anticompetitive conditions to its gathering service on the NPI facilities.

While spin-downs of pipeline gathering facilities to affiliated gatherers appear to be more problematic than spin-offs to unaffiliated gatherers, the NGSA said it believes both types of transactions provide the potential to exert market power. "Consequently, when developing new policy, the Commission must focus on curing the potential problems associated with transfers of facilities, in which pipelines historically provided jurisdictional services to both affiliates and non-affiliates alike."

The producer group said it believes FERC's "current offshore policies support the approval of requested spin-downs or spin-offs, even in those instances where there is strong evidence that the new unregulated gatherer will be able to exert market power on existing shippers." Producers see this as a "tremendously risky prospect" for current as well as future investments on the OCS.

"The Commission should take every step it can to alleviate the possibility that its policies may create even the potential for the abuse of market power. When the Commission or the Federal Trade Commission review merger applications, they recognize that the potential for abuse, not actual abuse, must be a primary consideration. The same should hold true when developing sound gathering policies."

The NGSA said FERC has the discretion as well as the obligation to include a "public interest factor" in its overall determination of whether currently regulated offshore pipeline facilities should be deregulated. "We emphasize that we are only asking for prospective application of any new public interest test so that the Commission and the industry are not unnecessarily burdened with going back and reassessing past cases."

In issuing the NOI in September, FERC Chairman Joseph Kelliher called on Congress to change the law to give the Commission authority to regulate the rates of gas gathering on the OCS. Rep. Joe Barton (R-TX), chairman of the House Energy and Commerce Committee, included such a provision in the draft of his refinery bill, but he then withdrew it after it came under heavy pressure from pipelines and producers that own offshore gathering assets (see Daily GPI, Sept. 30).

FERC's NOI is seeking comments on the criteria set forth in the landmark 1994 order involving Arkla Gathering Service Co., which allowed the Commission to invoke its "in connection with" jurisdiction under the NGA to protect shippers against monopoly rents by unregulated gathering affiliates of pipeline companies.

Under the Arkla test, the Commission can reassert jurisdiction over gathering if it finds that a jurisdictional pipeline and its gathering affiliate acted in a concerted fashion to circumvent or frustrate effective agency regulation of the pipeline.

The NOI proceeding stems from a July 2004 court ruling involving Transco's North Padre Island facilities. A federal appeals court in Washington, DC vacated an order in which FERC reasserted jurisdiction over a portion of the NPI unregulated gathering facilities that Transco had spun down to affiliate WFS. FERC took this action after a shipper complained of monopoly abuse on the WFS facilities.

The U.S. Court of Appeals for the District of Columbia Circuit ruled that FERC exceeded its jurisdiction under the NGA when it reasserted jurisdiction over the WFS gathering facilities (see Daily GPI, July 14, 2004).

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