Northern Natural Gas Co., Div. of Enron Corp. v. F.E.R.C., s. 88-1042

Decision Date04 April 1991
Docket NumberNos. 88-1042,88-2195 and 88-2588,s. 88-1042
Citation929 F.2d 1261
PartiesNORTHERN NATURAL GAS COMPANY, DIVISION OF ENRON CORP., Petitioner, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Peoples Natural Gas Company, a division of UtiliCorp United Inc.; Texaco Inc., a Delaware Corporation; Exxon corporation, a New Jersey corporation; Amoco Production Company, a Delaware corporation; Mobil Oil Corporation; Mobil Producing Texas & New Mexico Inc.; Mobil Exploration and Producing Southeast Inc.; Mobil Exploration and Producing North America, Inc.; ARCO Oil and Gas Company; Chevron U.S.A., Inc.; Phillips 66 Natural Gas Company; Northern States Power Company (Minnesota); Northern States Power Company (Wisconsin); and Minnesota Utilities, Intervenors.
CourtU.S. Court of Appeals — Eighth Circuit

Gordon Gooch, Washington, D.C., for appellant Mobil.

George Meiburger, Washington, D.C., for appellant Northern.

Dwight Alpern, Robert Soloman, Washington, D.C., for appellee FERC.

R. Gordon Gooch, Washington, D.C., argued, for intervenor Mobil in support of FERC.

Before LAY, Chief Judge, BROWN *, Senior Circuit Judge, and WOLLMAN, Circuit Judge.

JOHN R. BROWN, Senior Circuit Judge.

This is a procedurally complex case about a fairly straightforward question. Were it not for the inches-deep stack of briefs and records of a years-long controversy confronting us and earnestly urging contradictory applications of the same statute and caselaw, we might be tempted to give too simple an answer.

The question is whether the Federal Energy Regulatory Commission (FERC) may, in implementing its "Open Access Order No. 436," 1 regulate the rates that natural gas pipeline companies charge third-party interstate transportation shippers for moving natural gas on gathering facilities owned by the pipeline. 2

We conclude that the agency may regulate rates charged for transportation on the pipeline's own gathering facilities performed in connection with jurisdictional interstate transportation.

To trace our path to this conclusion, we must, as nearly always is so in the world, begin at the beginning.

The Word

FERC, which regulates interstate sales and transportation of natural gas under the Natural Gas Act of 1938 (NGA) 3 and the Natural Gas Policy Act of 1978 (NGPA) 4 adopted Order No. 436 on October 9, 1985, in response to changes in the industry which had been accelerated by the NGPA's alterations in the comprehensive regulatory scheme of the NGA, 5 including the removal of some price controls and the consequent unleashing of competitive forces. The NGPA's deregulatory provisions were generally designed to increase the role of market forces in the natural gas industry. 6

Prior to the adoption of the NGPA, pipeline owners operated primarily as gas merchants, buying gas from producers at the wellhead and shipping it over their own pipelines for sale either to distributors (for resale in the market) or directly to commercial users.

One result of increased competition under the NGPA has been that shippers of gas seek "unbundled" transportation services from pipelines. As a gas merchant, a pipeline sold gas and transportation as a package, at a "bundled" sales rate. Today, pipelines still offer such bundled packages, but must also offer transportation service "unbundled" from the sale of gas. The contemporary unbundled-transportation customer is a distribution company or an end user who has purchased the gas directly from the producer or other seller at the wellhead. This "third party" gas competes in the market with gas the pipeline is offering to sell in a bundled package with transportation. Consequently, the Commission found in promulgating Order No. 436 that "the single most important economic change has been that natural gas has become a separate and distinct economic commodity." 7

The Commission sought, in Order No. 436, to facilitate competition in the market for natural gas as a distinct commodity by encouraging pipelines to provide transportation without discriminating against customers whose gas would compete with the pipeline's gas in the market. Without some regulatory scheme, a pipeline could discriminate by refusing to provide transportation services for gas competing with its own, or by charging higher transportation rates for competing gas than for non-competing gas. Such discrimination, if unimpeded, would impair competition, virtually forcing customers to purchase gas from the pipeline at prices bundled with the price of transportation services. 8

Thus, Order No. 436 streamlined the Commission's regulations regarding transportation certificates, while imposing an "open access" condition 9 which requires pipelines to provide transportation services without "undue discrimination or preference." 10 To take advantage of the streamlined certification rules, the pipeline may not refuse to transport "third party" gas purchased from a provider other than the pipeline. 11 In fixing transportation rates under this new regime, the pipelines are required to "separately identify cost components attributable to transportation, storage, and gathering costs." 12

Consequently,

Order No. 436 has restructured the role of interstate gas pipelines by opening the use of pipelines to third party gas sellers.... As restructured under open access, pipelines are to serve as transporters of natural gas not only for themselves but for others, even those who might be in competition with the pipeline in its role of gas merchant. 13

These changes have given rise to questions regarding the distinction between gathering and interstate transportation and the regulation thereof under the provisions of the NGA.

Gathering and interstate transportation are specifically distinguished in Sec. 1(b) of the NGA: 14

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

Sections 4(a) and (b) of the NGA 16 also have a significant role in defining the Commission's authority:

(a) All rates and charges made, demanded, or received by any natural-gas company for or in connection with the transportation or sale of natural gas subject to the jurisdiction of the Commission ... shall be just and reasonable, and any such rate or charge that is not just and reasonable is declared to be unlawful.

(b) No natural-gas company shall, with respect to any transportation or sale of natural gas subject to the jurisdiction of the Commission, (1) make or grant any undue preference or advantage to any person or subject any person to any undue prejudice or disadvantage, or (2) maintain any unreasonable difference in rates, charges, service, facilities, or in any other respect, either as between localities or as between classes of service. 17

Section 4(c) 18 requires natural gas companies to file "[u]nder such rules and regulations as the Commission may prescribe ... all rates and charges for any transportation or sale subject to the jurisdiction of the Commission, and the classifications, practices, and regulations affecting such rates and charges...." 19

Section 4(d) 20 requires 30 days notice by a natural gas company of a rate change unless the Commission for good cause shown allows, by order, a faster change. 21

Section 4(e) 22 grants the Commission the authority to "enter upon a hearing concerning the lawfulness" of proposed rates, permits the Commission to temporarily suspend a rate schedule "pending such hearing," and authorizes the Commission "after full hearings" to make "proper" orders regarding such rates. The burden is placed on the natural gas company to show that increased rates are "just and reasonable." 23

Section 5(a) 24 provides:

(a) Whenever the Commission, after a hearing had upon its own motion or upon complaint of any State, municipality, State commission, or gas distributing company, shall find that any rate, charge or classification demanded, observed, charged, or collected by any natural-gas company in connection with any transportation or sale of natural gas, subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge, or classification is unjust, unreasonable, unduly discriminatory, or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice or contract to be thereafter observed and in force, and shall fix the same by order.... [T]he Commission may order a decrease where existing rates are unjust, unduly discriminatory, preferential, otherwise unlawful, or are not the lowest reasonable rates. 25

Gathering, which Sec. 1(b) generally exempts from the provisions of the act, can be performed by a producer, by a pipeline (interstate or intrastate), or by an independent gathering firm. The term "gathering" refers to the process of collecting gas at the point of production (the wellhead) and moving it to a collection point for further movement through a pipeline's principal transmission system. 26 It should be pointed out, however, that the flow of the gas "is continuous from the well head to the ultimate consumer." 27 This is especially significant in this case where the gathering is performed by an interstate pipeline over its own facilities in connection with continuing interstate transportation by the same pipeline.

"Transportation" involves the movement of gas through a pipeline's principal transmission system. Transportation facilities which receive natural gas...

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