In a major upset for FERC, a federal appeals court in Washington, DC, last Tuesday set aside an order in which the Commission reasserted jurisdiction over the portion of the North Padre Island (NPI) unregulated gathering facilities that Transcontinental Gas Pipe Line had spun down to its gathering affiliate, Williams Field Services Co. (WFS).

The Commission took this action in September 2002 after finding that Transco and WFS had “acted in concert” to push gathering rates to monopolistic levels on the NPI offshore Texas facilities and to apparently frustrate effective FERC regulation of Transco’s interstate transportation system. The case was unprecedented in that it was the first time the agency had reasserted authority over gathering since it turned the responsibility over to the states in the 1990s.

Transco and WFS challenged the decision in the U.S. Court of Appeals for the District of Columbia, arguing that FERC lacked any authority under the Natural Gas Act (NGA) to assert jurisdiction over an affiliated gatherer, and had misapplied its own Arkla Gathering test that identifies “limited scenarios” for when the agency can treat a pipeline and affiliated gatherer as a single entity. The court decision, which found FERC had exceeded its jurisdiction, was a significant victory for Transco and its gathering affiliate [No. 03-1179].

In its Arkla Gathering order in 1994, FERC concluded that as a general matter it lacked jurisdiction over companies that perform only a gathering function. But the agency held open the opportunity to reassert authority over a jurisdictional pipeline’s gathering affiliate “in particular circumstances.”

FERC at the time warned that “if an affiliated gatherer acts in concert with its pipeline affiliate…and in a manner that frustrates the Commission’s effective regulation of the interstate pipeline,” it would set aside “the separate corporate structures and treat the pipeline…as it would if the gathering facilities were owned directly by an interstate pipeline” to reassert jurisdiction.

It said only certain “types of affiliate abuses” — those “arising specifically from the interrelationship between the pipeline and its affiliate” — would trigger the Commission’s authority to “disregard the corporate form” and permit it to reclaim jurisdiction over a spun-down affiliate. Such abuses would include the affiliates giving preferences to market affiliate gas or tying gathering service to the pipeline’s jurisdictional transmission service; the pipeline’s giving transportation discounts only to those using the affiliate’s gathering service; and actions resulting in cross-subsidization between the affiliate’s gathering rates and the pipeline’s transmission rates.

But the appeals court, in its 16-page ruling, said the “allegedly anticompetitive actions undertaken by WFS against Shell fall outside this category.” Shell Offshore Inc. filed a complaint at FERC in November 2001, which resulted in the controversial FERC order and subsequent court challenge.

Shell Offshore accused WFS of charging an exorbitant gathering rate, and attaching anticompetitive conditions to its gathering service on the NPI facilities. “WFS could do these things for one reason only — because it was a recently deregulated monopolist in the North Padre gathering market. The fact that WFS is an affiliate of Transco is utterly irrelevant to its ability to charge high rates, or to impose onerous conditions for gathering service,” the court said.

“WFS, as a deregulated monopolist, could have (and likely would have) undertaken the same course of conduct had Transco been owned by someone else entirely. The fact that WFS had an affiliate relationship with Transco neither enhanced nor detracted from its ability to charge high rates or impose onerous conditions,” the three-judge panel noted.

Because WFS’s actions did not stem from the “interrelationship” between Transco and WFS, the court said “they are not among the types of ‘affiliate abuses which would trigger the Commission’s authority to disregard the corporate form’ and to reassert jurisdiction.”

The appeals court further said FERC had misapplied its two-part Arkla Gathering test, which identifies scenarios when the Commission “may look through, or disregard, the separate corporate structures and treat the pipeline and gatherer as a single entity.” Only when FERC finds both concerted action between a jurisdictional pipeline and its gathering affiliate and that the concerted action frustrates the Commission’s effective regulation of the pipeline can it then pierce the corporate veil and treat the legally distinct entities as one.

The court said the Commission “jumped to the conclusion” that Transco and WFS were a single entity before it ever determined whether the activities had frustrated the agency’s regulation of the Transco pipeline. “By conflating WFS and Transco into a single unit — in FERC’s words ‘the Transco/WPS monopoly’ — the Commission could thus attribute the gatherer’s alleged malfeasance to the pipeline, and apply the pipeline’s regulatory requirements to the gatherer. This absolved the Commission of the burden of showing that the concerted action frustrated the Commission’s ability to regulate the pipeline.”

Consequently, “we must set aside the Commission’s order reasserting NGA jurisdiction over the NPI gathering facilities as arbitrary and capricious,” the appellate judges said. The order was vacated and remanded to FERC.

The court declined to confront the broader statutory issue of whether the NGA ever permits the Commission to assert jurisdiction over gas gatherers, including those affiliated with jurisdictional pipelines. “We express no opinion on that question, leaving it for another day.”

FERC fared no better when it argued it had jurisdiction under the Outer Continental Shelf Lands Act (OCSLA) to regulate the NPI gathering facilities and that WFS’s alleged violation of the statute’s open-access and non-discrimination requirements provided an alternative justification for the remedies set out in the order.

WFS countered that FERC exceeded its authority under OCSLA in the orders. “We agree,” the court said. “Even if we had not already rejected the Commission’s application of its Arkla Gathering test to extend NGA jurisdiction to WFS, we could not sustain the Commission’s assertion of OCSLA jurisdiction…for it is nowhere present in either the order or the order on rehearing.”

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