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'Exclusivity' of FERC Jurisdiction over Local Laterals Questioned

'Exclusivity' of FERC Jurisdiction over Local Laterals Questioned

An Indiana case that confronts the issue of whether regulating heretofore FERC-jurisdictional pipeline laterals should be shared with states has yielded somewhat conflicting decisions at the regulatory level so far. As a result, the potentially precedent-setting issue seems destined for resolution by state and federal appellate courts.

The case has become something of a cause celebre for Southern Indiana Gas &amp Electric (SIGECO) and other gas LDCs, who insist that shared jurisdiction between FERC and the states is in order because such laterals are mimicking services that historically have been provided by natural gas distributors. The proceeding, according to attorneys, has captured the attention of both LDCs and pipelines nationwide.

For LDCs, "their concern is this [lateral] could be a Pandora's box. They're seeing it as a lost opportunity. Before they pretty much had no competition from the pipelines. But this could be a new era in the gas industry in Indiana pending the outcome of this particular matter," said Ryan Soultz, a spokesman for the Indiana Utility Regulatory Commission (IURC).

The issue surfaced when Midwestern Gas Transmission proposed constructing a small-diameter lateral to directly provide service to a new facility, Grains Processing Corp. in Daviess County, IN. SIGECO, which saw Midwestern as a potential threat to its service territory, petitioned Indiana regulators to issue a "cease and desist" order against the proposed project for violating a state law requiring out-of-state gas transporters to first obtain certification to serve an in-state customer. The case set the stage for a classic state vs. federal tug of war.

In a Jan. 27th ruling, the IURC essentially left open the issue of whether to enforce the state certification statute in the Midwestern case. Instead, it chose to stay the proceedings until the issue of whether federal law preempts Indiana law is resolved on appeal at FERC and the D.C. Circuit Court of Appeals. The IURC concluded that acting on SIGECO's petition before the preemptive issue was settled would be "contrary to principles of economy and efficiency." In short, state regulators dodged the issue and "punted" it to the courts, said George A. Porch, an outside attorney for the utility. The IURC ruling was in marked contrast to FERC's December order asserting "exclusive" jurisdiction over the Midwestern lateral and authorizing construction of the project [CP98-538].

Significantly, the IURC did not dispute FERC's jurisdiction over the Midwestern lateral project, conceding that the federal agency was "surely within its authority" to claim jurisdiction. But, it noted, the question of whether that jurisdiction is exclusive "is not a question for FERC alone to determine." Rather, it should be left to the courts.

Porch indicated last week SIGECO planned to seek rehearing at the IURC, asking the state commission to look more favorably on its petition for a cease-and-desist order or, in the alternative, to clarify that its stay of the proceedings in the Jan. 27th order meant that construction of the lateral also was stayed. The utility thinks this was the IURC's intent in its decision even though it wasn't specifically spelled out, Porch said. It's concerned that without more explicit direction from the IURC, Midwestern will proceed to build the lateral. Midwestern declined on Friday to make any comment. However, in a letter to FERC last week the pipeline requested approval of a change in an environmental condition by "no later" than Feb. 5 so it could "promptly" begin construction of the project.

Indiana's order does not specifically halt the construction of the lateral, said IURC's Soultz, "nor does it create the permission [for Midwestern] to go forward" with it. "My gut is telling me since there's a petition for rehearing before the FERC that I would think that would serve as some kind of injunction," he told NGI.

If unsuccessful on rehearing at the IURC, Porch said SIGECO will petition the Indiana Court of Appeals. It also has asked for a rehearing of FERC's decision, and assuming it is turned down there, SIGECO intends to petition the D.C. Circuit Court. Last week, FERC issued a tolling order in the case, which essentially allows itself more time to decide the utility's rehearing request.

Indiana regulators concede the "weight" of the federal circuit court decisions on the preemption issue so far do not bode well for its state certification statute, and suggest it "would not survive a federal challenge." But despite this, the IURC refused to grant Midwestern's request to dismiss SIGECO's action based solely on FERC's decision in the case.

SIGECO believes FERC and the states should have "complementary" jurisdiction over small-diameter laterals built by interstate pipelines to directly serve customer load in Indiana, according to Porch. "We're not saying it should be all state or all federal." Such laterals have elicited the concern of SIGECO and other LDCs because, he said, they tend to duplicate existing distribution facilities and displace service that would otherwise be provided by LDCs. But FERC did not find this to be the case with the Midwestern lateral.

The central legal question in SIGECO vs. Midwestern is "whether interstate commerce runs...all the way to the local plant, or whether there's room for states to regulate matters with a local interest, such as the impact on ratepayers...taxing authority and safety issues," Porch said. "...[W]e think we have an interest in gas being delivered for consumption in Indiana - how it's regulated, how it's delivered [and] how it's taxed."

He thinks the Supreme Court decision in General Motors vs. Tracy supports the state's regulatory role in cases such as Midwestern. The high court specifically held that an out-of-state shipper of gas into the state of Ohio was subject to the state's use tax because it was performing a local distribution function.

Susan Parker

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