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Pipes, Producers Square Off in OCS Inquiry

July 20, 1998
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Pipes, Producers Square Off in OCS Inquiry

The on-going inquiry into how to regulate pipelines operating on the Outer Continental Shelf (OCS) took center stage at FERC last week, with interstate pipelines and natural gas producers responding with proposals that were miles apart.

Producers proposed a separate, almost-new primary function test for offshore pipelines. The test is used to distinguish whether gas pipelines are jurisdictional transportation or exempt gathering operations. Specifically, they called for the test to be whittled down to three steps for OCS facilities, with a focus on the physical, operational and geographical characteristics. But producers stood firm in their conviction that FERC continue to exert its Natural Gas Act (NGA) authority over jurisdictional pipelines in the offshore.

Interstate pipelines also suggested that the Commission alter the embattled test, but in such a way that existing jurisdictional pipelines on the OCS would be given a better shot at qualifying for exempt gathering. In short, they have asked FERC to lower the bar for exempt status. And for the OCS facilities that qualify as gathering, including those that previously were jurisdictional, the interstate pipes proposed that FERC exercise lighter handed authority under the Outer Continental Shelf Lands Act (OCSLA) over them. The OCSLA applies only to non-jurisdictional facilities.

The proposals were in response to a notice of inquiry (NOI) that FERC initiated in May into the regulation of pipelines on the OCS. The Commission took this action following the remand of the Sea Robin Pipeline case last fall in which the D.C. Circuit Court of Appeals overturned FERC's jurisdictional finding for the pipeline, and suggested that it take another look at its primary function test and possibly reformulate it. The results of the NOI will be used by FERC to decide the Sea Robin remand. And since Sea Robin is typical of other pipelines on the OCS, the ruling could be used to apply to those pipelines as well.

The Commission in the NOI indicated it wanted a "simple" and "common sense" approach to regulating OCS pipelines - a task that has proved elusive over the years. "In its quest for [such] simplicity," warned a group of OCS Producers, "the Commission should not draw an arbitrary 'bright-line' at the shoreline and conclude that all OCS pipelines function as gathering." The controversial Sea Robin opinion did not call for the Commission to "relax or eschew" its NGA regulation over OCS facilities in favor of the OCSLA, nor did it propose the elimination of the primary function test altogether, the 14 producers told FERC last week [RM98-8]..

"In short, while it is clear that the Commission must act upon the Sea Robin remand...there is no legal or policy basis for any fundamental reversal of [NGA] regulatory philosophy on the offshore," said the OCS Producers. But the Interstate Natural Gas Association of America (INGAA), which represents interstate pipelines, said it believes a switch to OCSLA oversight is crucial to create a more fair, competitive environment on the OCS. As it stands now, NGA-regulated OCS pipelines, which are required to get FERC approval for rates, are at a distinct disadvantage with unregulated offshore facilities, which can offer flexible services and close deals quickly, INGAA noted. It further blamed the "uneven regulation" for the "drastic decline" in the interstate pipelines' share of the offshore transportation market. Prior to 1990, interstate pipelines operated 64% of the offshore pipelines, the group said, but they only captured 13% of new offshore pipeline construction between 1990-1997.

In an attempt to even out the playing field, INGAA proposed several changes be made to the primary function test: 1) FERC must clarify its offshore policy statement to specifically incorporate the "modified" primary function test, which recognizes that pipelines now operating on the OCS have longer lengths, larger diameters and higher operating pressures; 2) it should resurrect the behind-the-plant factor - whether or not the gas being transported has been processed - as a characteristic to be considered in the test; 3) it should clarify that it will consider a facility's "overall" primary function; 4) FERC should not consider whether the original owner was an interstate pipeline or whether the facilities were once certificated; and 5) individual pipelines seeking a gathering determination should do so on a case-by-case basis. These alterations would give existing jurisdictional pipelines on the offshore a better chance at being classified as non-jurisdictional, INGAA believes.

Concurrent with these changes, according to INGAA's proposal, FERC would move to replace its NGA jurisdiction in the OCS with lighter handed authority under the OCSLA. The OCSLA, like the NGA, requires OCS transporters to provide open and non-discriminatory access. It also gives the Commission the authority to address discrimination in rates, but unlike the NGA it doesn't give FERC the power to set initial cost-of-service (COS) rates for transportation. INGAA doesn't foresee the latter as being much of a problem since, it says, producers rely on pipeline COS rates for a very small portion - 8% - of their transportation arrangements in the Gulf of Mexico.

In contrast, the OCS Producers have narrowed the primary function test down to three steps. First, they would continue the OCS policy statement's "rebuttable presumption," which provides that offshore facilities located in water depths of 200 meters or more will be presumed to be gathering "up to the point or points of potential connection with the interstate pipeline grid."

The second step is more involved. Here, OCS Producers propose five criteria to be considered by FERC when deciding the "function" of offshore facilities located in shallower waters. These include: 1) the extent to which offshore facilities are integrally related to gas production, facilities and activities, including the presence and proximity of oil and gas wells and primary separation facilities; 2) the diameter and length of the pipeline; 3) the function of compression in relation to the offshore facilities at issue; 4) physical location of the facilities; and 5) the extent to which facilities are operationally integrated with mainline transmission or production facilities. The third and last step calls for a rebuttable presumption in favor of the existing jurisdictional status of OCS facilities. This means that if a pipeline currently is certified as transmission, that presumption would continue. To change its status, the pipe would have to file under Section 1 (b) of the NGA. The rebuttable presumption also would apply to gathering facilities.

Under the producers' proposal, four factors in the primary function test would be eliminated: 1) the behind-the-plant test; 2) the central point in the field; 3) the operating pressure of the line; and 4) the geographical configuration of the line.

This new OCS primary function test "is grounded in well-formulated legal principles, it is supported by reason and common sense, and it does as little damage to the regulatory structure as possible, while at the same time addressing the Fifth Circuit's remand concerns," said the OCS Producers, adding that it should be applied prospectively. The Natural Gas Supply Association supported the OCS Producer's proposal for a new, separate primary function test for offshore pipelines, said Philip Budzik, NGSA's director of federal regulatory affairs. The Sea Robin court ruling "basically invited the Commission to do that," he told NGI.

Producers, however, remain steadfastly opposed to FERC abdicating its NGA oversight in favor of exercising OCSLA authority in the offshore. The extent of the Commission's oversight over rates, terms and conditions of service for offshore pipelines is "unchartered territory," having not been tested as yet, they noted. The producers maintain the OCSLA was intended to mainly complement the FERC's NGA jurisdiction rather than replace it.

Susan Parker

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