Conoco Inc. v. F.E.R.C.

• Decision Date: 02 August 1996
• Docket Number: 94-1729,Nos. 94-1724,94-1726,s. 94-1724
• Parties: , Util. L. Rep. P 14,115 CONOCO INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Vesta Energy Company, et al., Intervenors. to 94-1732, 94-1735, 95-1007, 95-1013, 95-1080, 95-1172, 95-1342 and 95-1364.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 536

90 F.3d 536

319 U.S.App.D.C. 313, Util. L. Rep. P 14,115

CONOCO INC., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Vesta Energy Company, et al., Intervenors.

Nos. 94-1724, 94-1726, 94-1729 to 94-1732, 94-1735, 95-1007,

95-1013, 95-1080, 95-1172, 95-1342 and 95-1364.

United States Court of Appeals, District of Columbia Circuit.

Argued April 16, 1996.

Decided Aug. 2, 1996.

On Petitions for Review of Orders of the Federal Energy Regulatory Commission.

R. Gordon Gooch, Washington, DC, argued the cause, for petitioners and intervenors in support of petitioners Conoco Inc., et al. Maria M. Seidler, Tulsa, OK, argued the cause, for petitioner Arkansas Royalty Membership. With them on the briefs were Dena E. Wiggins, Washington, DC, Emery J. Biro, III, Bruce A. Connell, Mickey J. Lawrence, Houston, TX, David M. Sweet, Steven R. Hunsicker, Randall S. Rich, Washington, DC, and Christopher J. Bernard, Cincinnati, OH. Mario M. Garza, Houston, TX, Susan B. Dyer, Indianapolis, IN, Elisa J. Grammer, Monique L. Penn-Jenkins and Cheryl J. Walker, Washington, DC, entered appearances.

Richard D. Avil, Jr., Washington, DC, argued the cause, for petitioners and intervenors NorAm Gas Transmission Company, et al., with whom James E. Gauch, Washington, DC, Charles L. Pain, Petersburg, VA, Craig R. Rich and Mari M. Dugger, Tulsa, OK, were on the briefs.

Patricia L. Weiss, Attorney, Federal Energy Regulatory Commission, argued the cause, for respondent, with whom Jerome M. Feit, Solicitor, Washington, DC, was on the brief. Timm L. Abendroth, Attorney, Washington, DC, entered an appearance.

John H. Cheatham, III, Richard C. Green, Kenneth M. Minesinger, Washington, DC, Charles L. Pain, Petersburg, VA, Craig R. Rich, Mari M. Dugger, Tulsa, OK, Richard D. Avil, Jr. and James E. Gauch, Washington, DC, filed the brief on behalf of intervenors Interstate Natural Gas Association of America, et al. Jean E. Sonneman, Washington, DC, entered an appearance.

Daniel F. Collins, Washington, DC, entered an appearance, for intervenor ANR Pipeline Company. Peter G. Esposito entered an appearance, for intervenor Natural Gas Clearinghouse. Lawrence G. Acker and Brian D. O'Neill entered an appearance, for intervenors Trunkline Gas Company and Panhandle Eastern Pipe Line Company. Judy A. Johnson entered an appearance, for intervenor El Paso Natural Gas Company. David S. Berman entered an appearance, for intervenor NJR Energy Corporation. Steven A. Weiler entered an appearance, for intervenor NOARK Pipeline System. Gordon J. Smith entered an appearance, for intervenor PanEnergy Gas Services, Inc.

Patricia A. Curran, Houston, TX, entered an appearance, for amicus curiae, Cabot Oil & Gas Corporation.

Before: BUCKLEY, SENTELLE and ROGERS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

In these consolidated petitions for review of five orders of the Federal Energy Regulatory Commission, ¹ the principal issue is whether a jurisdictional exemption was properly granted to an affiliate of an interstate pipeline for its gathering ² service, which had formerly been operated by the pipeline itself, so long as the affiliate's gathering service functioned independently of the pipeline's transportation service, and so long as the affiliate provided the pipeline's existing customers contract protection during a two-year transition period. Producer petitioners ("the Producers") ³ challenge the Commission's determination that the facilities to be transferred were exempt gathering facilities under § 1(b) of the Natural Gas Act, 15 U.S.C. § 717(b) (1994). ⁴ The pipeline and gathering petitioners ("the Pipelines") ⁵ challenge the Commission's authority to require default contracts as a condition of the transfer. We conclude that there is substantial evidence to support the Commission's application of its primary function test ⁶ in determining that the gathering activity fell within the NGA § 1(b) exemption. We also conclude, however, that the Commission has not identified any source of authority to condition the transfer on Commission-prescribed default contracts with the pipeline's existing customers. Accordingly, we grant the Pipelines' petitions and deny the Producers' petitions, and we remand the cases to the Commission.

I.

These appeals arise in the wake of major regulatory changes in the natural gas industry. Beginning in 1978, when Congress enacted the Natural Gas Policy Act, 92 Stat. 3350, 15 U.S.C. §§ 3301 et seq., to deregulate some wellhead price controls, market forces began to play a greater role in determining the supply, demand and price of natural gas. Transcontinental Gas Pipe Line Corp. v. State Oil & Gas Bd., 474 U.S. 409, 422, 106 S.Ct. 709, 716-17, 88 L.Ed.2d 732 (1986) ("Transco"). Following suit, the Commission, in 1985, promulgated Order No. 436, ⁷ which established a program of open-access, nondiscriminatory transportation by which gas distribution companies and industrial end-users could buy natural gas directly from gas merchants other than pipelines and ship that gas on interstate pipelines. See Associated Gas Distributors v. FERC, 824 F.2d 981, 996 (D.C.Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1468, 99 L.Ed.2d 698 (1988). Then, in 1992, the Commission again altered the regulatory scheme in Order No. 636, ⁸ by mandating the unbundling of gas sales and interstate transportation that Order No. 436 simply encouraged, in order to give pipeline customers unimpeded access to the competitive wellhead market and to permit all gas sellers to compete on an equal basis. See 18 C.F.R. §§ 284.8(a)(1) & 284.9(a)(1)(1995); United Dist. Companies v. FERC, 88 F.3d 1105 (D.C.Cir.1996).

After Order No. 436, the Commission began to develop its policy regarding affiliate gatherers. See Natural Gas Gathering Services Performed by Interstate Pipelines and Interstate Pipeline Affiliates--Issues Related to Rates and Terms and Conditions of Service, 65 F.E.R.C. p 61,136 at 61,689 (1993) ("Gathering Service Policy"). Although gathering is exempted from Commission jurisdiction by NGA § 1(b), the Commission required interstate pipelines that directly performed gathering services to file statements of their gathering rates as part of Order No. 436 enforcement. ⁹ After Order No. 636, the Commission did not require pipelines to include in their tariffs a gathering rate schedule, specifying the terms and conditions of the gathering services to be provided, but required the pipelines to file their separately stated gathering rates. Gathering Service Policy, 65 F.E.R.C. p 61,136 at 61,689. In addition, as part of their Order No. 636 tariffs, pipelines must file statements that their gathering services are non-discriminatory, not unduly preferential, and not inconsistent with the terms and conditions of the Part 284 certificates authorizing them to provide interstate transportation. Id.

The Commission also found that it had jurisdiction to regulate gathering services provided by pipeline affiliates in connection with the pipelines' interstate transportation in some circumstances. The Commission noted that it had taken the position that it had jurisdiction under NGA §§ 4 & 5, 15 U.S.C. §§ 717c, 717d (1994), to determine the justness and reasonableness of the rates, terms, and conditions under which gathering service is performed in connection with interstate transportation. It cited Northern Natural Gas Co., 43 F.E.R.C. p 61,473 (1988), reh'g. denied, 44 F.E.R.C. p 61,384 (1988), and Northwest Pipeline Co., 59 F.E.R.C. p 61,115 (1992) ("Northwest Pipeline I"), reh'g. denied, 60 F.E.R.C. p 61,213 (1992) ("Northwest Pipeline II"), petitions for review dismissed, Williams Gas Processing Co. v. FERC, 17 F.3d 1320 (10th Cir.1994). In Northwest Pipeline II,

[t]he Commission expressed the view that the traditional form of regulation was not needed to address the mere potential for affiliate abuse, and that it would only regulate gathering rates of pipeline affiliates if shown by a complaint that more extensive Commission regulation is necessary to invalidate an unjust and unreasonable rate or to correct an unduly discriminatory practice in order to preserve its primary grant of authority over interstate transportation or sales.

Gathering Service Policy, 65 F.E.R.C. p 61,136 at 61,690 (citing 60 F.E.R.C. p 61,213 at 61,729). Thus, interstate pipeline affiliates are not required to file with the Commission their gathering rates, conditions of service, or any other statements. Id. The Commission acknowledged that there were differing views as to how (and even whether) gathering should be unbundled from interstate pipeline transportation. The Commission noted, for example, that under bundled firm-to-the-wellhead ¹⁰ rate design, "it is difficult for producers connected to other pipelines to compete." Id. On the other hand, some argued, "such rates are a logical extension of the Commission's requirement for SFV rates" mandated by Order No. 636, because firm-to-the-wellhead rate design removes fixed costs from usage rates in the production area and thus removes distortions in the choice among production connected to different pipelines. ¹¹ Id. By early 1994, in an attempt to address new issues including those arising from proposals of interstate pipelines to "spin down" their gathering services to corporate affiliates or "spin off" their gathering services to a non-related corporate entity, the Commission convened a public conference to explore, among other things, the extent to which it should exercise its NGA §§ 4 & 5 authority over the rates, terms, and conditions of gathering services. Id. Ultimately, the Commission decided to address many of the issues with regard to gathering service performed by a pipeline affiliate on a case-by-case basis. Arkla II, 69 F.E.R.C. at 62,078 n. 5.

In late 1993, NorAm Gas Transmission Company ("NorAm Gas") sought to "spin down" to a separate...