A federal appeals court in Washington, DC, Friday upheld a June 2005 order in which FERC required Transcontinental Gas Pipe Line to pay Sunoco Inc. for any additional gathering costs that it incurs due to the pipeline's violation of a 1992 settlement.

In its petition, Transco challenged the Federal Energy Regulatory Commission's authority to continue to enforce the terms of the settlement once the pipeline's gathering facilities were spun down to affiliate Williams Gas Processing-Gulf Coast Co. LP.

"Transco's principal contention is that FERC lacked jurisdiction to impose this remedy because the gathering services become nonjurisdictional once transferred to [affiliate] Williams. We disagree. At the time of the contract [in 1992], FERC had authority to regulate the gathering services. FERC, therefore, had authority to order Transco to pay compensation for terminating those services in violation of the contract. Transco's remaining challenges also lack merit, and we therefore deny Transco's petition for review," said a three-judge panel of the U.S. Court of Appeals for the District of Columbia.

While gathering presently is outside the scope of FERC's jurisdiction, the court noted that Transco's gathering services were within FERC's jurisdiction in 1992 because the pipeline provided the gathering services in connection with its interstate transmission of gas.

Under the 1992 settlement, Sunoco -- a customer of Transco -- agreed to drop litigation against the pipeline that involved the recovery of take-or-pay costs. In return, Transco agreed to provide Sunoco with 20 years of transportation (and gathering) service from the Gulf Coast to its refinery in Pennsylvania. FERC approved that deal in June 1992, and it became effective in August of that year.

Transco provided the transportation/gathering services as required by the 1992 agreement until November 2000, the court decision said. That's when Transco asked FERC for permission to sell seven gathering facilities in Texas to affiliate Williams Gas Processing.

FERC approved the comprehensive spin-down of Transco's gathering facilities to Williams in July 2001, but neither Transco nor Sunoco at the time mentioned that this would violate the terms of the 1992 settlement.

In 2002, Sunoco filed a complaint with FERC that challenged Transco's spin-down of the gathering facilities. It claimed that the transfer of the gathering operations to Williams violated the terms of its 1992 agreement, and it would have to pay $15 million to $28 million more in charges to Transco and Williams than it otherwise would have paid under the settlement.

As a remedy, FERC required Transco to acquire natural gas capacity from Williams and to assign that capacity to Sunoco at a rate consistent with the 1992 pact. It believed this would ensure that Sunoco continued to receive gathering services included in the settlement at the agreed-to-price.

But the Commission was forced to vacate the 2002 remedy after the D.C. Circuit Court ruled in mid-2004 that FERC lacked jurisdiction to regulate gathering services. Specifically, the court set aside an order in which the agency reasserted jurisdiction over the portion of the unregulated gathering facilities in Texas that Transco had sought to spin down to an affiliate. The Commission took this action in September 2002 after finding that Transco and Williams had "acted in concert" to push gathering rates to monopolistic levels on the gathering facilities and to apparently frustrate effective FERC regulation of Transco's interstate transportation system (see Daily GPI, July 14, 2004).

As a result of the court upset, FERC opted for a new remedy in 2005 that required Transco to "reimburse Sunoco for any additional costs Sunoco may incur as a result of Transco's violation of the 1992 settlement rate." This is the order that Transco challenged (see Daily GPI, June 20, 2005).

Transco argued that FERC tried to indirectly regulate William's provision of nonjurisdictional gathering services by forcing Transco to reimburse Sunoco for the costs of the gathering services.

"We disagree" with Transco, the court said. "FERC's reimbursement order does not regulate Williams' provision of gathering services in any way. FERC's order is expressly directed against Transco, not Williams. It requires Transco to reimburse Sunoco for causing Sunoco's costs to increase -- in other words, for forcing Sunoco to pay Transco and Williams more than the [firm transportation] rate that Sunoco would owe to Transco under the settlement. FERC's order has no effect on Williams' gathering services or the rate that Williams charges Sunoco for gathering."

In its petitions, "Transco raises eight additional arguments, none of which is persuasive, particularly given the 'high degree of deference' we give to the Commission's interpretation of a settlement agreement," the appeals court said.

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