An Indiana case that confronts the issue of whether regulatingheretofore FERC-jurisdictional pipeline laterals should be sharedwith states has yielded somewhat conflicting decisions at theregulatory level so far. As a result, the potentiallyprecedent-setting issue seems destined for resolution by state andfederal appellate courts.

The case has become something of a cause celebre for SouthernIndiana Gas &amp Electric (SIGECO) and other gas LDCs, who insistthat shared jurisdiction between FERC and the states is in orderbecause such laterals are mimicking services that historically havebeen provided by natural gas distributors. The proceeding,according to attorneys, has captured the attention of both LDCs andpipelines nationwide.

For LDCs, “their concern is this [lateral] could be a Pandora’sbox. They’re seeing it as a lost opportunity. Before they prettymuch had no competition from the pipelines. But this could be a newera in the gas industry in Indiana pending the outcome of thisparticular matter,” said Ryan Soultz, a spokesman for the IndianaUtility Regulatory Commission (IURC).

The issue surfaced when Midwestern Gas Transmission proposedconstructing a small-diameter lateral to directly provide serviceto a new facility, Grains Processing Corp. in Daviess County, IN.SIGECO, which saw Midwestern as a potential threat to its serviceterritory, petitioned Indiana regulators to issue a “cease anddesist” order against the proposed project for violating a statelaw requiring out-of-state gas transporters to first obtaincertification to serve an in-state customer. The case set the stagefor a classic state vs. federal tug of war.

In a Jan. 27th ruling, the IURC essentially left open the issueof whether to enforce the state certification statute in theMidwestern case. Instead, it chose to stay the proceedings untilthe issue of whether federal law preempts Indiana law is resolvedon appeal at FERC and the D.C. Circuit Court of Appeals. The IURCconcluded that acting on SIGECO’s petition before the preemptiveissue was settled would be “contrary to principles of economy andefficiency.” In short, state regulators dodged the issue and”punted” it to the courts, said George A. Porch, an outsideattorney for the utility. The IURC ruling was in marked contrast toFERC’s December order asserting “exclusive” jurisdiction over theMidwestern lateral and authorizing construction of the project[CP98-538].

Significantly, the IURC did not dispute FERC’s jurisdiction overthe Midwestern lateral project, conceding that the federal agencywas “surely within its authority” to claim jurisdiction. But, itnoted,the question of whether that jurisdiction is exclusive “isnot a question for FERC alone to determine.” Rather, it should beleft to the courts.

Porch indicated last week SIGECO planned to seek rehearing atthe IURC, asking the state commission to look more favorably on itspetition for a cease-and-desist order or, in the alternative, toclarify that its stay of the proceedings in the Jan. 27th ordermeant that construction of the lateral also was stayed. The utilitythinks this was the IURC’s intent in its decision even though itwasn’t specifically spelled out, Porch said. It’s concerned thatwithout more explicit direction from the IURC, Midwestern willproceed to build the lateral. Midwestern declined on Friday to makeany comment. However, in a letter to FERC last week the pipelinerequested approval of a change in an environmental condition by”no later” than Feb. 5 so it could “promptly” begin construction ofthe project.

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

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

Indiana regulators concede the “weight” of the federal circuitcourt decisions on thepreemption issue so far do not bode wellfor its state certification statute, and suggest it “would notsurvive a federal challenge.” But despite this, the IURC refused togrant Midwestern’s request to dismiss SIGECO’s action based solelyon FERC’s decision in the case.

SIGECO believes FERC and the states should have “complementary”jurisdiction over small-diameter laterals built by interstatepipelines to directly serve customer load in Indiana, according toPorch. “We’re not saying it should be all state or all federal.”Such laterals have elicited the concern of SIGECO and other LDCsbecause, he said, they tend to duplicate existing distributionfacilities and displace service that would otherwise be provided byLDCs. But FERC did not find this to be the case with the Midwesternlateral.

The central legal question in SIGECO vs. Midwestern is “whetherinterstate commerce runs…all the way to the local plant, orwhether there’s room for states to regulate matters with a localinterest, such as the impact on ratepayers…taxing authority andsafety issues,” Porch said. “…[W]e think we have an interest ingas being delivered for consumption in Indiana – how it’sregulated, how it’s delivered [and] how it’s taxed.”

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

Susan Parker

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