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Court Vacates Rule Restricting Pipe, Energy Affiliate Conduct

In a major ruling Friday, a federal appeals court in Washington, DC vacated a 2004 order issued by the Federal Energy Regulatory Commission that restricted interstate natural gas pipelines' interactions with an expanded sphere of energy affiliates. The court said FERC failed to provide record evidence of abuse to justify its decision to broaden the reach of its standards of conduct to include energy affiliates other than marketing affiliates.

"We conclude that FERC's asserted factual premises do not withstand scrutiny and that the order [Order 2004] does not reflect the reasoned decisionmaking required by the Administrative Procedure Act. We, therefore, hold that the order is arbitrary and capricious as applied to natural gas pipelines. We will grant the petition, vacate the order as applied to natural gas pipelines, and remand," the U.S. Court of Appeals for the District of Columbia Circuit said in a 26-page decision. The Commission order also restricted the behavior between electric transmission facilities and a number of affiliates, but that part was not considered in the court ruling.

Order 2004 significantly expanded Order 497 regulations that bar pipeline providers from giving preferential treatment solely to their marketing affiliates. It extended the FERC restrictions against preferential treatment, information disclosure and employee sharing to a number of other affiliates of regulated pipelines providers, including traders, producers, gatherers and processors. In vastly expanding the reach of the standards, FERC relied on both a "claimed theoretical threat" of pipes granting undue preference to nonmarketing affiliates, and indicated that abuse by pipelines and nonmarketing affiliates was a "real problem," according to the court ruling.

At the time, however, then-Commissioners Joseph Kelliher and Nora Brownell dissented, saying that the FERC majority had failed to provide record evidence of abuse to support expanding the scope of the standards beyond marketing affiliates. "Our review of the record on which FERC relied reveals that Commissioners Kelliher and Brownell were plainly correct: Unlike in Order 497, FERC here has provided no evidence of a real problem with respect to pipelines' relationships with nonmarketing affiliates," the three-judge panel opined.

"Indeed, Order 2004 does not include a single example of abuse by nonmarketing affiliates. Nor does the record disclose complaints from competitors of pipelines' nonmarketing affiliates," the court said.

FERC did not seek to justify Order 2004 based solely on the theoretical danger; it claimed that it had evidence that pipelines and a broad number of energy affiliates were engaged in anticompetitive abuses, the court said. "Therefore, if we find that the claimed record evidence [of abuse] does not support the order, we cannot uphold it," it noted .

This is a "very significant" ruling by the court, said Don Santa, president of the Interstate Natural Gas Association of America, which along with several pipelines challenged the FERC order. "It's not out of the ordinary for the court to remand a Commission order on one or two ancillary issues...But it's pretty unusual for a court to say to the Commission that the fundamental reason that you had for adopting this order...[was wrong]," he said.

FERC's case for expanded standards was based on multiple arguments. When the court found that one of the arguments (record of abuse) was groundless, FERC's entire case fell apart, Santa said. The appeal turned on the issue of whether there was evidence of abuse between gas pipelines and nonmarketing affiliates, Santa noted. "The Commission didn't point to a real problem that needed to be addressed."

On remand, "FERC may decide not to proceed with rules in this area. Alternatively, it may seek to develop a factual record that could fully satisfy the standard of Tenneco" in which the court upheld the agency's Order 497 order regulating the behavior of pipes and their marketing affiliates after FERC presented a concrete record of complaints.

In the event of the absence of factual evidence of abuse, FERC may try to support its case for expanded standards by relying solely on a theoretical threat of abuse, but the court offered no guarantee that the Commission would prevail.

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