Midwestern Gas Transmission Co. v. McCarty

• Decision Date: 13 November 2000
• Docket Number: No. IP 00-0592-C-H/G.,IP 00-0592-C-H/G.
• Parties: MIDWESTERN GAS TRANSMISSION COMPANY, a Delaware corporation, Plaintiff, v. William D. McCARTY, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; David A. Hadley, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; Judith G. Ripley, in her capacity as Commissioner of the Indiana Utility Regulatory Commission; Camie J. Swanson-Hull, in her capacity as Commissioner of the Indiana Utility Regulatory Commission; David E. Ziegner, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; and Southern Indiana Gas and Electric, Company, an Indiana corporation, Defendants.
• Court: U.S. District Court — Southern District of Indiana

120 F.Supp.2d 1155

MIDWESTERN GAS TRANSMISSION COMPANY, a Delaware corporation, Plaintiff, v. William D. McCARTY, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; David A. Hadley, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; Judith G. Ripley, in her capacity as Commissioner of the Indiana Utility Regulatory Commission; Camie J. Swanson-Hull, in her capacity as Commissioner of the Indiana Utility Regulatory Commission; David E. Ziegner, in his capacity as Commissioner of the Indiana Utility Regulatory Commission; and Southern Indiana Gas and Electric, Company, an Indiana corporation, Defendants.

No. IP 00-0592-C-H/G.

United States District Court, S.D. Indiana, Indianapolis Division.

November 13, 2000.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

G. Daniel Kelley, Jr., Ice Miller Donadio & Ryan, Indianapolis, IN.

Beth H. Henkel, Deputy Attorney General, Indianapolis, IN.

Fred E. Schlegel, Baker & Daniels, Indianapolis, IN.

ENTRY ON ALL PENDING MOTIONS

HAMILTON, District Judge.

Introduction

The federal Natural Gas Act authorizes the Federal Energy Regulatory Commission (FERC) to exercise jurisdiction, in relevant part, over "the transportation of natural gas in interstate commerce," but not over "any other transportation ... of natural gas or ... the local distribution of natural gas...." 15 U.S.C. § 717(b). Local distribution of natural gas is left to state regulation. Companies engaged in the interstate gas business have long sought to avoid state regulation of so-called "bypass" arrangements in which the interstate business bypasses a local gas distribution company and supplies gas directly to large industrial customers. Compare, e.g., Panhandle Eastern Pipe Line Co. v. Michigan Public Service Comm'n, 341 U.S. 329, 333, 71 S.Ct. 777, 95 L.Ed. 993 (1951) (holding that state could exercise jurisdiction over such bypass arrangements, at least where same entity both sold and transported gas to end user), with Federal Power Comm'n v. Louisiana Power & Light Co., 406 U.S. 621, 632, 638, 92 S.Ct. 1827, 32 L.Ed.2d 369 (1972) (holding that federal commission had power to issue curtailment regulation that would affect pipeline owner's direct sales contracts with industrial customers based on interstate "transportation" jurisdiction, especially to protect interests of ultimate consumers). As a general rule, local gas distribution companies oppose such bypass arrangements, which take away big customers and substantial revenues and rate base from those companies, which are required to serve all customers in a given area.

The parties to this action disagree as to whether the Natural Gas Act applies to bar state regulation of bypass arrangements where the operator of an interstate natural gas pipeline delivers gas directly to the customer but does not also sell the gas to the customer. FERC, which is not a party to this case, and plaintiff Midwestern Gas Transmission Company (Midwestern) both say the federal law bars state regulation of such arrangements. Defendant Southern Indiana Gas and Electric Company (SIGECO) says it does not. The defendant Commissioners of the Indiana Utility Regulatory Commission have indicated they agree with SIGECO, although their principal point is that they are entitled to decide the issue themselves and to have their decision reviewed through normal processes of judicial review. The line between federal and state regulatory jurisdiction over such bypass arrangements has considerable importance in the natural gas industry and to consumers, both large and small, of natural gas. As shown below, there is ample ground for reasonable disagreement on that issue.

The central issue in this case, however, is much narrower. Plaintiff Midwestern seeks an injunction to stop three administrative proceedings now pending before the Indiana Utility Regulatory Commission. The issue here is only whether federal law somehow bars the Indiana Commission from even considering the issue of its jurisdiction and from having its decisions subjected to ordinary judicial review through the Indiana courts and ultimately to the Supreme Court of the United States. As explained below, the answer is no. Abstention under Younger v. Harris, 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971), applies here, so that an injunction to stop the ongoing state proceedings is not warranted. The jurisdictional contest over natural gas bypass arrangements may go forward in the state proceedings and through the ordinary channels of judicial review. The court therefore denies plaintiff's request for injunctive relief and grants defendants' motions to dismiss this action.

The Facts

Plaintiff Midwestern is a "natural-gas company" under the Natural Gas Act, 15 U.S.C. § 717a. The defendants are the SIGECO and the named Commissioners of the Indiana Utility Regulatory Commission (the "Indiana Commission"). Midwestern has contracted to transport natural gas directly to two large industrial users who buy the gas outside the state of Indiana. Those two industrial users, Grain Processing Corporation (GPC) and Scepter, Inc., are the ultimate consumers of the gas thus transported. GPC and Scepter do not purchase gas from Midwestern itself, however. The facilities of both GPC and Scepter lie within the geographic area that the Indiana Commission has allotted to SIGECO for local distribution of natural gas.

I. The Indiana Statutes

Section 87 of the Indiana Public Service Commission Act of 1913, as amended, requires a certificate of necessity from the Indiana Commission before a "gas utility" may render "gas distribution service" in any rural area in the state of Indiana. Ind.Code § 8-1-2-87(c). A "gas utility" is defined as "any public utility selling or proposing to sell or furnish gas directly to any consumer or consumers within the state of Indiana for his, its or their domestic, commercial, or industrial use." Ind. Code § 8-1-2-87(a)(4). The term "gas distribution service" is defined in Section 87 to mean "the furnishing or sale of gas directly to any consumer within the state of Indiana for his or its domestic, commercial, or industrial use." Ind.Code § 8-1-2-87(a)(5). A gas utility seeking to provide such service must file an application with the Commission. The applicant has the burden of proving at a hearing that it has lawful power and authority to obtain the certificate, that it has the financial ability to provide the gas distribution service, that public "conveyance [sic] and necessity" require the rendering of the proposed service, and that the public interest will be served by issuing the certificate. Ind.Code § 8-1-2-87(d).

Indiana law also imposes more specific requirements that apply to so-called "bypass" arrangements like those at issue in this case. Specifically, Ind.Code § 8-1-2-87.5 ("Section 87.5") was enacted in 1985 and provides in part:

(b) Any person, corporation, or other entity that:

(1) is engaged in the transportation of gas from outside Indiana for direct sale or delivery to any end use consumer or consumers within this state;

(2) is engaged in the transportation of gas solely within this state on behalf of any end use consumer or consumers; or

(3) is an end use consumer engaged in the transportation within this state of gas owned or acquired by such end use consumer for use in this state, other than transportation on the premises where the gas is consumed;

is a public utility as defined in [Ind.Code § 8-1-2-1] and must obtain a necessity certificate from the commission before it may engage in any activities described in this subsection. This subsection does not apply to a gas utility operating pursuant to an indeterminate permit or necessity certificate issued under [Ind. Code § 8-1-2-87], nor to the production, sale, and gathering of natural gas produced in Indiana.

In addition, Ind.Code § 8-1-2-87.6 governs the production, sale, gathering, and transportation of natural gas produced in Indiana. (The full text is set forth below in footnote 11 where the court addresses the dormant Commerce Clause issues raised with respect to Section 87.6.)

Midwestern owns and operates an interstate gas pipeline that operates in four states, including Indiana. Midwestern and SIGECO agree that Sections 87 and 87.5 by their terms apply to Midwestern's bypass arrangements with GPC and Scepter. Midwestern's pipeline is also connected to the SIGECO distribution system. SIGECO receives gas transported by Midwestern and then distributes that gas to SIGECO's customers, including residential, commercial, and industrial users.

II. Midwestern's Bypass Arrangements with GPC and Scepter

GPC operates a facility for processing corn in a rural area of Daviess County, Indiana, which is in SIGECO's service area as designated by the Indiana Commission. Midwestern contracted with GPC to construct and operate a new pipeline 2.8 miles long that connects the GPC facility to Midwestern's interstate pipeline. Midwestern also agreed to transport through these pipelines to GPC natural gas that GPC purchases from out-of-state suppliers other than Midwestern. Midwestern does not sell natural gas to GPC. At the present time, the Midwestern connection to GPC is in operation and gas is being delivered to GPC through that connection.

Scepter, Inc. operates an industrial facility where it recycles aluminum scrap and dross in Knox County, Indiana, which is also in SIGECO's service area as designated by the Indiana Commission. Scepter built a pipeline from its facility across land owned by other persons to connect with Midwestern's interstate pipeline. See Hardy Aff., Ex. A. Midwestern contracted with Scepter to transport natural gas to Scepter that Scepter purchases from out-of-state suppliers other than Midwestern. Midwestern also does not sell natural gas to Scepter. Scepter built, owns, operates, and maintains the pipeline connecting its facility to the Midwestern interstate...