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

Producers proposed a separate, almost-new primary function testfor offshore pipelines. The test is used to distinguish whether gaspipelines are jurisdictional transportation or exempt gatheringoperations. Specifically, they called for the test to be whittleddown to three steps for OCS facilities, with a focus on thephysical, operational and geographical characteristics. Butproducers stood firm in their conviction that FERC continue toexert its Natural Gas Act (NGA) authority over jurisdictionalpipelines in the offshore.

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

The proposals were in response to a notice of inquiry (NOI) thatFERC initiated in May into the regulation of pipelines on the OCS.The Commission took this action following the remand of the SeaRobin Pipeline case last fall in which the D.C. Circuit Court ofAppeals overturned FERC’s jurisdictional finding for the pipeline,and suggested that it take another look at its primary functiontest and possibly reformulate it. The results of the NOI will beused by FERC to decide the Sea Robin remand. And since Sea Robin istypical of other pipelines on the OCS, the ruling could be used toapply 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 thathas proved elusive over the years. “In its quest for [such]simplicity,” warned a group of OCS Producers, “the Commissionshould not draw an arbitrary ‘bright-line’ at the shoreline andconclude that all OCS pipelines function as gathering.” Thecontroversial Sea Robin opinion did not call for the Commission to”relax or eschew” its NGA regulation over OCS facilities in favorof the OCSLA, nor did it propose the elimination of the primaryfunction test altogether, the 14 producers told FERC last week[RM98-8]..

“In short, while it is clear that the Commission must act uponthe Sea Robin remand…there is no legal or policy basis for anyfundamental reversal of [NGA] regulatory philosophy on theoffshore,” said the OCS Producers. But the Interstate Natural GasAssociation of America (INGAA), which represents interstatepipelines, said it believes a switch to OCSLA oversight is crucialto create a more fair, competitive environment on the OCS. As itstands now, NGA-regulated OCS pipelines, which are required to getFERC approval for rates, are at a distinct disadvantage withunregulated offshore facilities, which can offer flexible servicesand close deals quickly, INGAA noted. It further blamed the “unevenregulation” 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, thegroup said, but they only captured 13% of new offshore pipelineconstruction between 1990-1997.

In an attempt to even out the playing field, INGAA proposedseveral changes be made to the primary function test: 1) FERC mustclarify its offshore policy statement to specifically incorporatethe “modified” primary function test, which recognizes thatpipelines now operating on the OCS have longer lengths, largerdiameters and higher operating pressures; 2) it should resurrectthe behind-the-plant factor – whether or not the gas beingtransported has been processed – as a characteristic to beconsidered in the test; 3) it should clarify that it will considera facility’s “overall” primary function; 4) FERC should notconsider whether the original owner was an interstate pipeline orwhether the facilities were once certificated; and 5) individualpipelines seeking a gathering determination should do so on acase-by-case basis. These alterations would give existingjurisdictional pipelines on the offshore a better chance at beingclassified 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 withlighter handed authority under the OCSLA. The OCSLA, like the NGA,requires OCS transporters to provide open and non-discriminatoryaccess. It also gives the Commission the authority to addressdiscrimination in rates, but unlike the NGA it doesn’t give FERCthe power to set initial cost-of-service (COS) rates fortransportation. INGAA doesn’t foresee the latter as being much of aproblem since, it says, producers rely on pipeline COS rates for avery small portion – 8% – of their transportation arrangements inthe Gulf of Mexico.

In contrast, the OCS Producers have narrowed the primaryfunction test down to three steps. First, they would continue theOCS policy statement’s “rebuttable presumption,” which providesthat offshore facilities located in water depths of 200 meters ormore will be presumed to be gathering “up to the point or points ofpotential connection with the interstate pipeline grid.”

The second step is more involved. Here, OCS Producers proposefive 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 relatedto gas production, facilities and activities, including thepresence and proximity of oil and gas wells and primary separationfacilities; 2) the diameter and length of the pipeline; 3) thefunction of compression in relation to the offshore facilities atissue; 4) physical location of the facilities; and 5) the extent towhich facilities are operationally integrated with mainlinetransmission or production facilities. The third and last stepcalls for a rebuttable presumption in favor of the existingjurisdictional status of OCS facilities. This means that if apipeline currently is certified as transmission, that presumptionwould continue. To change its status, the pipe would have to fileunder Section 1 (b) of the NGA. The rebuttable presumption alsowould apply to gathering facilities.

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

This new OCS primary function test “is grounded inwell-formulated legal principles, it is supported by reason andcommon sense, and it does as little damage to the regulatorystructure as possible, while at the same time addressing the FifthCircuit’s remand concerns,” said the OCS Producers, adding that itshould be applied prospectively. The Natural Gas Supply Associationsupported the OCS Producer’s proposal for a new, separate primaryfunction test for offshore pipelines, said Philip Budzik, NGSA’sdirector 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 FERCabdicating its NGA oversight in favor of exercising OCSLA authorityin the offshore. The extent of the Commission’s oversight overrates, 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 complementthe FERC’s NGA jurisdiction rather than replace it.

Susan Parker

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