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Court Remands Off-System Capacity Rule to FERC

Court Remands Off-System Capacity Rule to FERC

The D.C. Circuit Court of Appeals last week remanded to FERC orders requiring interstate pipelines to get advance Commission approval before leasing capacity on other pipelines. The ruling was in response to a challenge by Coastal affiliates Colorado Interstate Gas (CIG) and ANR Pipeline to 1996-1997 orders involving Texas Eastern Transmission. The Coastal affiliates maintain the preclearance requirement puts them at a competitive disadvantage with non-pipeline companies, which aren't required to get FERC's prior blessing.

In the nine-page ruling, the court said FERC failed to offer a "reasoned explanation" for the difference in the way it treats pipelines and non-pipelines seeking to lease capacity on third-party lines. But while the court seemed supportive of ANR's and CIG's petition, it rejected their arguments that the Commission's Section 284 regulations "independently confer[red] on pipelines a right to acquire off-system capacity without prior Commission approval."

The court held FERC's justification for requiring prior authorization for pipelines had two major flaws. "First, in pointing to the various possible hazards of pipeline acqusitions of off-system capacity, the Commission never explains why these concerns are more severe when the acquisitions are made by a pipeline than by a non-pipeline - so much more severe that advance application and approval are needed only for the former."

Secondly, it "fails to address the petitioners' argument that regulatory mechanisms already exist to control any hazards that might arise when a pipeline is the acquiring entity... Its concern about the rate impact of capacity acquisitions is especially puzzling since a pipeline can only charge rates stated in a Commission-approved tariff," the court noted. As a result, it dismissed Commission arguments that the costs associated with the acquired capacity of pipelines might shift to existing shippers, sending their rates soaring.

"Even apart from rate matters, existing regulations appear to guard more thoroughly against the risks of anticompetitive behavior by pipeline holders of off-system capacity than against similar risks posed by non-pipeline holders of capacity," the appellate court's ruling said. "Perhaps the Commission reasonably fears that, even taking these safeguards into account, pipeline acquisitions of off-system capacity pose such grave threats that without preclearance it will be unable to perform its protective mission. If so, the Commission must explain the basis of that fear."

More importantly, the court noted it found no merit to "the Commission's theory that, because pipeline arrangements for acquiring existing capacity on other systems are substitutes for new construction, such acquisitions similarly require advance review." The mere transfer of existing capacity rights, it held, does not raise the same issues involved in certificate applications.

Joe Fisher, Houston; Susan Parker

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