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FERC Begins Inquiry of Offshore Gathering Jurisdiction, Wants Law Changed

FERC last Thursday began an inquiry into criteria for asserting jurisdiction over unregulated offshore gathering affiliates of natural gas pipelines that are suspected of engaging in abusive practices.

Noting that neither federal nor state regulators have jurisdiction over gathering in the Outer Continental Shelf (OCS), the Federal Energy Regulatory Commission initiated a notice of inquiry (NOI) to review options that would permit it to assert authority over non-jurisdictional gathering. The agency's attempts to exert jurisdiction over offshore gathering in the past have been overturned by the courts. "Our goal, I think, is pure, but the courts have found that we have overreached in pursuing that," said Chairman Joseph Kelliher.

Citing the extensive production shut-ins in the Gulf of Mexico following Hurricane Katrina, Kelliher and Commissioner Suedeen Kelly said they believe now is the time for Congress to give the agency outright authority in this area. However, Commissioner Nora Brownell urged FERC to first undertake a "more rigorous debate" on the extent of abuses to determine whether "our perception is borne out by reality."

"Current law contains a regulatory gap that permits offshore gathering companies to collect monopoly rents [higher rates than normal], which can lead to shut-in of offshore gas production. The Commission has tried different legal theories to prevent monopoly rents, and suffered a series of court defeats. We may have run out of theories. If the law permits monopoly rents, it is time to change the law," Kelliher noted.

"I think the time has come for Congress to close the regulatory gap for offshore gathering and end monopoly rents," he said on Thursday during the regular Commission meeting. Kelly echoed that sentiment, noting that Congress was considering revisiting several energy issues in the wake of Katrina. She said FERC jurisdiction over offshore gathering should be included in any legislation that seeks to restrain energy prices.

Kelliher said closing the regulatory gap was of particular concern in the wake of Katrina. "Restoration of offshore gas production is critical to mitigating high natural gas prices this winter. Allowing monopoly rents in offshore gathering may retard restoration of offshore gas production."

FERC's NOI seeks comments on the criteria set forth in the landmark 1994 order involving Arkla Gathering Service Co., which allows the Commission to invoke its "in connection with" jurisdiction under the Natural Gas Act to protect 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. A federal appeals court in Washington, DC, vacated an order in which FERC reasserted jurisdiction over a portion of North Padre Island (NPI) unregulated gathering facilities that Transcontinental Gas Pipe Line had spun down to its gathering affiliate, Williams Field Services Co (WFS). FERC took this action after Shell Offshore Inc. accused WFS of charging an exorbitant gathering rate and attaching anticompetitive conditions to its gathering service on the NPI facilities.

The U.S. Court of Appeals for the District of Columbia Circuit ruled that FERC exceeded its jurisdiction under the Natural Gas Act when it reasserted jurisdiction over the WFS gathering facilities.

In related action Thursday, FERC also denied a request by Shell Offshore for reconsideration of its complaint against WFS [RP02-99]. The agency said that granting Shell's request would require it to abandon the Arkla test and adopt new criteria for reasserting jurisdiction over gathering services of pipeline affiliates -- before undertaking the NOI.

NOI comments are due at FERC 60 days after the order is published in the Federal Register.

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