The D.C. Circuit Court of Appeals last week remanded to FERCorders requiring interstate pipelines to get advance Commissionapproval before leasing capacity on other pipelines. The ruling wasin response to a challenge by Coastal affiliates ColoradoInterstate Gas (CIG) and ANR Pipeline to 1996-1997 orders involvingTexas Eastern Transmission. The Coastal affiliates maintain thepreclearance requirement puts them at a competitive disadvantagewith non-pipeline companies, which aren’t required to get FERC’sprior blessing.

In the nine-page ruling, the court said FERC failed to offer a”reasoned explanation” for the difference in the way it treatspipelines and non-pipelines seeking to lease capacity onthird-party lines. But while the court seemed supportive of ANR’sand CIG’s petition, it rejected their arguments that theCommission’s Section 284 regulations “independently confer[red] onpipelines a right to acquire off-system capacity without priorCommission approval.”

The court held FERC’s justification for requiring priorauthorization for pipelines had two major flaws. “First, inpointing to the various possible hazards of pipeline acqusitions ofoff-system capacity, the Commission never explains why theseconcerns are more severe when the acquisitions are made by apipeline than by a non-pipeline – so much more severe that advanceapplication and approval are needed only for the former.”

Secondly, it “fails to address the petitioners’ argument thatregulatory mechanisms already exist to control any hazards thatmight arise when a pipeline is the acquiring entity… Its concernabout the rate impact of capacity acquisitions is especiallypuzzling since a pipeline can only charge rates stated in aCommission-approved tariff,” the court noted. As a result, itdismissed Commission arguments that the costs associated with theacquired capacity of pipelines might shift to existing shippers,sending their rates soaring.

“Even apart from rate matters, existing regulations appear toguard more thoroughly against the risks of anticompetitive behaviorby pipeline holders of off-system capacity than against similarrisks posed by non-pipeline holders of capacity,” the appellatecourt’s ruling said. “Perhaps the Commission reasonably fears that,even taking these safeguards into account, pipeline acquisitions ofoff-system capacity pose such grave threats that withoutpreclearance 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 “theCommission’s theory that, because pipeline arrangements foracquiring existing capacity on other systems are substitutes fornew construction, such acquisitions similarly require advancereview.” The mere transfer of existing capacity rights, it held,does not raise the same issues involved in certificateapplications.

Joe Fisher, Houston; Susan Parker

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