The on-going inquiry into how to regulate pipelines operating onthe Outer Continental Shelf (OCS) took center stage at FERC lastweek, with interstate pipelines and natural gas producersresponding with proposals that are miles apart.

Producers proposed a separate, almost-new primary function testfor offshore pipelines to determine whether gas pipelines arejurisdictional transportation or exempt gathering operations.Specifically, they called for the test to be whittled down to threesteps for OCS facilities, with a focus on the physical, operationaland geographical characteristics, and with a rebuttable presumptionfavoring a pipe’s current status. Producers also stood firm intheir conviction that FERC continue to exert its Natural Gas Act(NGA) authority over jurisdictional pipelines in the offshore.

Interstate pipelines also suggested that the Commission alterthe embattled test, but in such a way that existing jurisdictionalpipelines on the OCS would be given a better shot at qualifying forexempt gathering. In short, they have asked FERC to lower the barfor exempt status. And for the OCS facilities that qualify asgathering, including those that previously were jurisdictional, theinterstate pipes proposed that FERC exercise lighter handedauthority under the Outer Continental Shelf Lands Act (OCSLA) overthem. The OCSLA applies only to non-jurisdictional facilities.

The proposals are in response to a notice of inquiry (NOI) thatFERC initiated in May following the remand of the Sea RobinPipeline case last fall in which the court said FERC should takeanother look at its primary function test and possibly reformulateit.

The Commission in the NOI indicated it wanted a “simple” and”common sense” approach to regulating OCS pipelines – a task thathas proved elusive over the years. “In its quest for [such]simplicity,” warned a group of OCS Producers, “the Commissionshould not draw an arbitrary ‘bright-line’ at the shoreline andconclude that all OCS pipelines function as gathering….there isno legal or policy basis for any fundamental reversal of [NGA]regulatory philosophy on the offshore.”

That however, is just what the Interstate Natural GasAssociation of America (INGAA), which represents interstatepipelines, would like to see. It said it believes a switch to OCSLAoversight is crucial to create a more fair, competitive environmenton the OCS. As it stands now, NGA-regulated OCS pipelines, whichare required to get FERC approval for rates, are at a distinctdisadvantage with unregulated offshore facilities, which can offerflexible services and close deals quickly, INGAA noted. It furtherblamed the “uneven regulation” for the “drastic decline” in theinterstate pipelines’ share of the offshore transportation market.Prior to 1990, interstate pipelines operated 64% of the offshorepipelines, the group said, but they only captured 13% of newoffshore pipeline construction between 1990-1997 as producersincreasingly are building lines to connect new fields.

In an attempt to even out the playing field, INGAA first hasproposed that several changes be made to the primary function test:1) FERC must clarify its offshore policy statement to specificallyincorporate the “modified” primary function test, which recognizesthat pipelines now operating on the OCS have longer lengths, largerdiameters and higher operating pressures; 2) it should resurrectthe behind-the-plant factor – whether or not the gas beingtransported has been processed – as a characteristic to beconsidered in the test; 3) it should clarify that it will considera facility’s “overall” primary function; 4) FERC should notconsider whether the original owner was an interstate pipeline orwhether the facilities were once certificated; and 5) individualpipelines seeking a gathering determination should do so on acase-by-case basis. These alterations would give existingjurisdictional pipelines on the offshore a better chance at beingclassified as non-jurisdictional, INGAA believes. The group alsowould have FERC move to replace its NGA jurisdiction and strictrate regulation in the OCS with lighter handed authority under theOCSLA.

In contrast, the OCS Producers have narrowed the primaryfunction test down to three steps. First, they would continue theOCS policy statement’s “rebuttable presumption,” which providesthat offshore facilities located in water depths of 200 meters ormore will be presumed to be gathering “up to the point or points ofpotential connection with the interstate pipeline grid.”

The second step is more involved. Here, OCS Producers proposefive criteria to be considered by FERC when deciding the “function”of offshore facilities located in shallower waters. These include:1) the extent to which offshore facilities are integrally relatedto gas production, facilities and activities, including thepresence and proximity of oil and gas wells and primary separationfacilities; 2) the diameter and length of the pipeline; 3) thefunction of compression in relation to the offshore facilities atissue; 4) physical location of the facilities; and 5) the extent towhich facilities are operationally integrated with mainlinetransmission or production facilities. The third and last stepcalls for a rebuttable presumption in favor of the existingjurisdictional status of OCS facilities.

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