Cascade Natural Gas Corp. v. F.E.R.C.

Decision Date07 February 1992
Docket Number90-9582,Nos. 90-9581,s. 90-9581
Citation955 F.2d 1412
PartiesCASCADE NATURAL GAS CORPORATION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Washington Natural Gas Company, Northwest Natural Gas Company, and Northwest Pipeline Corporation, Intervenors. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent. Northwest Pipeline Corporation, Northwest Natural Gas Company, North Pacific Paper Corporation, and Weyerhaeuser Company, Intervenors.
CourtU.S. Court of Appeals — Tenth Circuit

Ted P. Gerarden (Andrew N. Greene, with him, on the brief), Donelan, Cleary, Wood & Maser, P.C., Washington, D.C., for petitioner Cascade Natural Gas Corp.

Robert D. Cedarbaum, Asst. Atty. Gen. (Kenneth O. Eikenberry, Atty. Gen., with him, on the briefs), Olympia, Wash., for petitioner Washington Utilities and Transp. Com'n.

Timm L. Abendroth, Atty. (William S. Scherman, Gen. Counsel, and Joseph S. Davies, Deputy Sol., with him, on the brief), F.E.R.C., Washington, D.C., for respondent F.E.R.C.

Helmut Wallenfels, Weyerhaeuser Co., Tacoma, Wash., for intervenors North Pacific Paper Corp. and Weyerhaeuser Co.

Steven W. Snarr, Asst. Gen. Counsel, and Patricia E. Schmid, Atty., Northwest Pipeline Corp., on the brief, for intervenor, Northwest Pipeline Corp.

Before LOGAN, ANDERSON and EBEL, Circuit Judges.


Cascade Natural Gas Corporation ("Cascade") and the Washington Utilities and Transportation Commission ("WUTC") petition for review of orders of the Federal Energy Regulatory Commission (the "Commission") authorizing Northwest Pipeline Corporation ("Northwest") to construct a tap and meter facility that would allow it to deliver natural gas directly to two industrial consumers, Weyerhaeuser Company ("Weyerhaeuser") and North Pacific Paper Corporation ("Norpac"). To receive delivery, these consumers have extended their plant facilities by constructing a 9-mile long pipeline that intersects Northwest's interstate pipeline. 1 Together, these facilities bypass Cascade's own distribution system, obviating the need for Cascade's services--a result that concerns both Cascade, which stands to lose revenues, and the WUTC, which, among other things, fears increased utility rates for the remaining local consumers.

Without holding an evidentiary hearing, the Commission authorized construction of the tap and meter facility under Section 7(c) of the Natural Gas Act (the "NGA") and denied the petitioners' motions for a rehearing. Northwest Pipeline Corp., 51 F.E.R.C. p 61,289, reh'g denied, 53 F.E.R.C. p 61,012 (1990). The petitioners seek review of the Commission's orders on several grounds. We have jurisdiction to review the orders under Section 19(b) of the NGA, 15 U.S.C. § 717r(b). Finding no error by the Commission, we affirm.


Cascade, like many other local distribution companies ("LDCs"), is a public utility that holds a state-regulated monopoly on the retail distribution and sale of natural gas within its service area--in this case 86 communities in the states of Oregon and Washington. Northwest, too, holds a virtual monopoly in the same region. However, its business is the interstate transportation and wholesaling of natural gas. Traditionally, acting as merchant, it purchased natural gas from producers and then sold and delivered it to various LDCS, like Cascade, who in turn sold and delivered the gas to local residential and industrial consumers.

Recently, restructuring in the natural gas industry has threatened to modify substantially the nature of both businesses. Under a pro-competitive "open access" policy promoted by the Commission, parties (including both LDCs and ultimate consumers) may purchase natural gas directly from producers and then arrange to have it transported by the interstate pipelines on a non-discriminatory basis. As a result, transporting third-party natural gas for hire--not buying it from producers and transporting it for resale to the LDCs--has become a substantial role for pipeline operators like Northwest.

Since the LDCs normally maintain the only gas lines connecting an industrial consumer with the interstate pipeline, the LDCs, like the pipeline operators, have also been asked to "unbundle" their services in order to transport gas owned by industrial consumers. The LDCs' services are not indispensable, however. A consumer may determine that it can provide these services more efficiently itself by constructing its own lines for local transportation. Because of the costs involved, those companies close to an interstate pipeline have a greater incentive to construct a bypass than companies distantly located.

Here, Weyerhaeuser and Norpac determined that by extending their plant facilities and constructing a meter station to receive delivery directly from Northwest, they would pay $.20 per MMBtu to transport the natural gas locally, instead of the $.70 per MMBtu that Cascade was charging to provide the service. Upon the consumers' request, Northwest agreed to construct the tap and meter facility onto its existing trunk line. The consumers agreed to reimburse Northwest for expenses incurred in constructing the tap and meter facility and any associated litigation. Northwest apparently had little incentive to "compete" with Cascade. It claims its revenues remain the same whether it transports the gas to Cascade's existing facility, from which Cascade transports the gas to Weyerhaeuser and Norpac, or to the tap and meter facility adjoining the consumers' facilities. 2 Northwest applied for the Commission's approval to construct the bypass, and the request was granted.


At the threshold, petitioners maintain that the Commission had no jurisdiction to authorize the bypass construction. "We review the Commission's determination that [construction of the facility is] jurisdictional to ascertain whether the decision has an adequate basis in law." Northwest Pipeline Corp. v. FERC, 905 F.2d 1403, 1407-08 (10th Cir.1990) (citing Walker Operating Corp. v. FERC, 874 F.2d 1320, 1328 (10th Cir.1989), cert. denied, 493 U.S. 954, 110 S.Ct. 365, 107 L.Ed.2d 352 (1989)). In making that determination, this court has held that we "are under no obligation to defer to the agency's legal conclusions." Id. at 1408 (citing Walker, 874 F.2d at 1332). 3

Section 1(b) of the NGA delineates the power of the Commission in the following way:

(b) The provisions of this chapter shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, industrial, or any other use, and to natural-gas companies engaged in such transportation or sale, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used for such distribution or to the production or gathering of natural gas.

15 U.S.C. § 717(b) (emphasis added).

The nature of section 1(b) was greatly influenced by a series of Commerce Clause cases predating the NGA, in which the Supreme Court confronted various challenges to state attempts to regulate natural gas sales. In spite of the conflicting analyses used, these cases drew in effect a "bright line" between the permissible and impermissible forms of state regulation, depending primarily on whether the regulated sale was retail or wholesale. The regulation of direct retail sales by either the LDCs or the interstate pipelines was thought to correspond (perhaps exclusively) 4 to the state regulatory power, while the regulation of interstate transportation and wholesales of natural gas, it was thought, could only be exercised by federal power. See Illinois Gas Co. v. Central Ill. Pub. Serv. Co., 314 U.S. 498, 504-06, 62 S.Ct. 384, 386-87, 86 L.Ed. 371 (1942). Cf. Missouri v. Kansas Gas Co., 265 U.S. 298, 44 S.Ct. 544, 68 L.Ed. 1027 (1924); Public Util. Comm'n of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 47 S.Ct. 294, 71 L.Ed. 54 (1927). 5

Since these decisions had left the states powerless to regulate interstate transportation and wholesales, these matters were left unregulated until Congress enacted the NGA. Section 1(b) of the NGA gave the Commission plenary jurisdiction over three areas, and three areas only: (1) the "transportation of natural gas in interstate commerce," (2) the "sale in interstate commerce of natural gas for resale," and (3) "natural-gas companies engaged in such transportation or sale." 15 U.S.C. § 717(b). See Panhandle Pipe Line Co. v. Public Serv. Comm'n of Ind., 332 U.S. 507, 516, 68 S.Ct. 190, 195, 92 L.Ed. 128 (1947) ("Panhandle I ").

Since Congress intended to complement, not supplant, existing forms of state regulation, Congress excluded from the Commission's jurisdiction "any other transportation or sale of natural gas" and "the local distribution of natural gas." 15 U.S.C. § 717(b). However, since Congress believed that the clauses affirmatively granting jurisdiction excluded by definition these negative limitations, Congress "could correctly describe the 'local distribution' proviso as surplusage which was 'not actually necessary.' " East Ohio Gas Co., 338 U.S. at 470-71, 70 S.Ct. at 270.

With this, Congress believed that it had cleanly and completely divided the regulatory universe between those matters granted to the Commission and the excluded matters over which the states exercised authority prior to the NGA.

Here, Cascade and the WUTC have advanced two arguments against the Commission's assertion of jurisdiction. First, they argue that regulation of the bypass construction implicates the same "local interests" and the same form of local regulation that Congress intended to reserve to the states when it enacted § 1(b) of the NGA. Second, they argue that by transporting gas through the bypass, Northwest has stepped directly into the shoes...

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