In an unprecedented move Thursday, the Federal Energy Regulatory Commission said it will reassert jurisdiction over the portion of the North Padre Island (NPI) unregulated gathering facilities that Transcontinental Gas Pipe Line spun down to its gathering affiliate, Williams Field Services Co. (WFS). The Commission took this action after finding Transco and WFS “acted in concert” to push gathering rates to monopolistic levels on the NPI offshore Texas facilities and to frustrate effective FERC regulation of Transco’s interstate transportation system.

The agency’s action, believed to be the first time it has reasserted its authority over gathering since it turned the responsibility over to the states a few years ago, upheld an initial decision issued by Administrative Law Judge Lawrence Brenner in June (See Daily GPI, June 10). The judge’s ruling “provides a sound basis for reasserting NGA jurisdiction over the…rates and services provided on the spun-down NPI gathering facilities,” FERC said in its order [RP02-99, RP02-144]. Because the two affiliates acted together, they were able to “demand rates, terms and conditions of service that are unjust, unreasonable and unduly discriminatory, in violation of Section 4 and 5 of the NGA.” In addition, they violated Section 5 of the Outer Continental Shelf Lands Act, which requires “open and nondiscriminatory access” for shippers to offshore facilities.

Williams has filed a lawsuit in federal court challenging the ALJ decision, claiming FERC’s expedited hearing schedule prejudiced the case against its affiliates (See Daily GPI, Aug. 15).

The Commission “does not assert jurisdiction over companies that perform only a gathering function,” but it will take steps against an “otherwise nonjurisdictional gathering affiliate…where such action is necessary to fulfill the Commission’s obligations with respect to the transportation of natural gas in interstate commerce,” the order said. When FERC turned over regulation of gathering to the states in the late 1990s, it “did not foreclose its future ability to exercise its authority to reassert NGA jurisdiction in particular circumstances or prevent aggrieved parties from filing a complaint when such circumstances arise.”

The FERC order was in response to a complaint brought by Shell Offshore Inc. in November 2001, accusing Transco and affiliates — WFS, Williams Gulf Coast Gathering Co., and Williams Gas Processing-Gulf Coast Co. LP — of acting in concert in an anticompetitive manner to push Shell and other captive customers into agreeing to “unreasonable and unjust” gathering rates for service on NPI. Transco and WFS were so closely linked that FERC said “WFS acted as if it were a division of Transco, rather than a separate company.”

A number of other producers united behind Shell in its complaint against the Williams affiliates, including Apache Corp., Exxon Mobil, BP and the Natural Gas Supply Association (See Daily GPI, Dec. 27, 2001). Shell and other affected probudcers said they had to shut in production from NPI due to the high gathering rates that were being offered.

At the center of the dispute are the rates and service on the portion of the NPI facilities which FERC permitted Transco to spin down to WFS as unregulated gathering. The facilities in question include two small pipes (total 22 miles in length), which connect to Transco’s IT-feeder rate transmission pipeline at a common point on the Outer Continental Shelf for transportation to onshore points in Texas. Transco had sought authority to transfer the entire NPI system to WFS, but the Commission had denied the request. In its complaint, Shell had asked FERC to reassert its jurisdiction over the NPI facilities under the Natural Gas Act.

The evidence in the case shows that Transco and WFS possessed “monopoly market power” with respect to gathering and transportation of natural gas on the spun-down NPI system, and were able to demand a “monopolistically egregious rate” from Shell and other captive customers, according to the FERC order. Shell was required to pay an 8 cents/Dth gathering rate to WFS on top of an almost 8-cent NGA-regulated rate paid to Transco for IT-feeder service, it noted. FERC staff had calculated that Shell should have been paying a gathering rate of only 2.5 cents on the NPI facilities.

While it anticipated some hike in gathering rates after the spindown, FERC said it did not expect to see an “exercise and abuse of market power by Transco/WFS that raised gathering rates to egregious levels.”

Within seven days of the order, FERC has ordered Transco to file revised tariff sheets to reflect an approved unbundled gathering rate of 1.69 cents/Dth for service on the NPI facilities. It also ordered the pipeline to submit all contracts for service on the NPI system within 30 days.

Transco and WFS had argued that any market power they may have exercised only affected Shell, not its customers, but the Commission wasn’t convinced. “We agree with the ALJ that even if the most direct victim of such behavior may be Shell and other producers on the NPI system, if such behavior happens repeatedly it may have a significant cumulative effect on downstream consumers’ markets by distorting producers’ price signals. The public would thereby suffer,” the order said.

In a related case last Thursday, FERC granted relief to Sunoco Inc. in a complaint brought against Transco for seeking the transfer of the North Padre Island and Central Texas gathering systems to affiliate Williams Gas Processing-Gulf Coast Co. LP, parent of WFS. The Commission agreed the sale violated the terms of a 1992 settlement with Sunoco.

In an order on complaint issued Thursday, the Commission ruled that, in compliance with the settlement, Transco was to obtain the necessary capacity at seven receipt points on the gathering facilities from Williams Gas Processing and assign it to Sunoco at the “rates, terms and conditions” that were spelled out in the agreement [RP02-309].

FERC approved the comprehensive spindown for Transco’s gathering facilities to Williams Gas Processing in July 2001, but neither Transco nor Sunoco at the time mentioned that this would violate the terms of the 1992 settlement, which obligated Transco to provide firm transportation service to Sunoco for 20 years at the seven receipt points.

Williams Gas Processing will continue providing gathering service to Sunoco, but potentially at a higher rate, the order said. Sunoco estimated it could cost it an additional $15 million to $28 million over the remaining 10-year term of its service agreement.

The Commission held that Transco’s sale of the gathering facilities to its affiliate violated the terms of the 1992 settlement, which also resolved Sunoco’s take-or-pay costs with the pipeline. “While Sunoco should have noted this issue” when Transco petitioned FERC to approve the spindown, “our concern about Sunoco’s tardiness is outweighed by Transco’s breach of a settlement approved by the Commission. Thus, Sunoco is entitled to an equitable remedy.”

Sunoco asked FERC to consider several remedial actions against Transco, but the agency rejected most because they were either “too drastic and unnecessary,” or the pipeline’s behavior “[did] not constitute a fatal flaw.” The Commission also denied Sunoco’s request for monetary relief, saying the record in the case was “insufficient” to support this.

The Commission noted it couldn’t even directly order Transco to continue providing service to Sunoco on the gathering system, “since Transco will no longer own the facilities.” The only remedy left to the agency was to order the pipeline to subscribe to the capacity at the seven receipt points on the spun-down gathering facilities, and assign it to Sunoco at rates, terms and conditions that were consistent with the settlement.

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