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
"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.