The U.S. Court of Appeals for the DC Circuit Tuesday remanded tothe FERC the Commission’s ruling that interstate pipelines must getprior approval before leasing capacity on other pipelines. Thedecision came at the behest of Coastal affiliates ColoradoInterstate Gas and ANR Pipeline in their petition for rehearing ofa 1996 ruling from a Texas Eastern Transmission case. The Coastalaffiliates maintain the preclearance requirement burdens them witha competitive disadvantage.

In its Order 636, the “FERC reasoned that if pipelines wereallowed to retain upstream capacity on other pipelines, they couldinhibit the development of a competitive sales market by favoringtheir sales function or otherwise making it more difficult fordownstream customers to buy from producers at competitive prices,”the court said.

The Commission’s rationale for the prior approval requirementincluded four reasons. First, the pipeline acquiring the capacitymight control customer choices or tie use of the acquired capacityto other pipeline or pipeline affiliate services. Second, ratechanges could result, adversely impacting customers of theacquiring pipelines, firms competing with the acquiring pipeline’smarketing affiliate, or customer choice among supply basins. Third,there might be preferential treatment of the acquiring pipelineover the customers of the selling pipeline. Fourth, adverse effectsmight come from the way capacity would be managed or otherwiseintegrated into the existing open access operations of theacquiring pipeline, particularly with regard to access to receiptand delivery points on the acquired capacity.

The court said the FERC’s justification of its priorauthorization requirement has two problems. “.[T]he Commissionnever explains why these concerns are more severe when theacquisitions are made by a pipeline than by a non-pipeline – somuch more severe that advance application and approval are neededonly for the former.” And, “.[T]he Commission fails to address thepetitioners’ argument that regulatory mechanisms already exist tocontrol any hazards that might arise when a pipeline is theacquiring entity. This failure to address existing controls onpipeline behavior applies to all of the risks identified by theCommission. .[E]xisting regulations appear to guard more thoroughlyagainst the risks of anticompetitive behavior by pipeline holdersof offsystem capacity than against similar risks posed bynon-pipeline holders of capacity.”

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