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Williams Gas Processing - Gulf Coast Company, L.P. v. Federal Energy Regulatory Commission

July 13, 2004

WILLIAMS GAS PROCESSING - GULF COAST COMPANY, L.P., ET AL., PETITIONERS
v.
FEDERAL ENERGY REGULATORY COMMISSION, RESPONDENT SHELL OFFSHORE INC., ET AL., INTERVENORS



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

Before: Ginsburg, Chief Judge, and Sentelle and Roberts, Circuit Judges.

The opinion of the court was delivered by: Roberts, Circuit Judge

Argued May 10, 2004

I.

The Natural Gas Act (NGA), 15 U.S.C. §§ 717-717w, grants FERC jurisdiction over rates charged by any "naturalgas company for or in connection with the transportation or sale of natural gas." Id. § 717c(a). A "natural-gas company," in turn, includes any firm "engaged in the transportation of natural gas in interstate commerce." Id. § 717a(6). The "gathering" of gas -- "generally defined as the process of taking natural gas from the wells and moving it to a collection point for further movement through a pipeline's principal transmission system," Williams Gas Processing - Gulf Coast Co., L.P. v. FERC, 331 F.3d 1011, 1013 (D.C. Cir. 2003) (internal quotation marks omitted) -- is explicitly excluded, however, from FERC's jurisdiction. See 15 U.S.C. § 717(b) ("this chapter ... shall not apply to ... the production or gathering of natural gas"). Notwithstanding that jurisdictional limitation, FERC historically exercised jurisdiction over gathering services provided directly by interstate pipelines on the theory that such gathering services are provided "in connection with" the interstate transportation of gas. See, e.g., Northern Natural Gas Co., 43 FERC ¶ 61,473 (1988), reh'g denied, 44 FERC ¶ 61,384 (1988) (citing 15 U.S.C. §§ 717c, 717d); see also Conoco Inc. v. FERC, 90 F.3d 536, 540 (D.C. Cir. 1996). FERC, however, has never claimed jurisdiction over stand-alone gathering entities, i.e., gathering facilities that are neither owned by nor affiliated with a pipeline within FERC's jurisdiction.

In response to this regulatory environment, several jurisdictional pipelines that provided gathering services sought either to "spin off" their gathering facilities as unrelated corporations or to "spin down" the gathering operations to corporate affiliates by transferring ownership of the gathering facilities from the pipeline to a subsidiary. While a gathering service spun off from a jurisdictional pipeline into a separate corporation was clearly beyond FERC's NGA jurisdiction, the jurisdictional status of gatherers spun down from an interstate pipeline was less clear. FERC had claimed that it retained "in connection with" jurisdiction over the rates charged by spun-down 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 FERC ¶ 61,136, 61,689- 90 (1993) (citing Northwest Pipeline Corp., 59 FERC ¶ 61,115, 61,436-37 (1992)). But FERC never found occasion to exercise its authority over such an entity. In fact, when the gathering affiliate in Northwest Pipeline challenged FERC's statutory authority for such jurisdiction in the court of appeals, "[t]he Commission represented ... that its orders neither assert[ed] jurisdiction nor impl[ied] that it ha[d] jurisdiction over [the gathering affiliate] at the present time." Williams Gas Processing Co. v. FERC, 17 F.3d 1320, 1322 (10th Cir. 1994). The Tenth Circuit therefore dismissed the petition for review for lack of a case or controversy. See id.

The Commission sought to resolve the jurisdictional status of spun-down gathering entities in Arkla Gathering Services Company, 67 FERC ¶ 61,257 (1994). FERC there reviewed a jurisdictional pipeline's proposal to spin down its gathering facilities to an affiliate and various objections to that application. The Commission concluded that, as a general matter, it lacked jurisdiction over "companies that perform only a gathering function"; "whether they are independent or affiliated with an interstate pipeline," such gathering entities "are not natural gas companies" under the NGA. Id. at 61,871. The Commission, though, found it hard to let go: FERC still maintained that it could, "in particular circumstances," reassert jurisdiction over a jurisdictional pipeline's gathering affiliate "where such action is necessary to accomplish the Commission's policies for the transportation of natural gas in interstate commerce." Id. The Commission warned that "if an affiliated gatherer acts in concert with its pipeline affiliate ... and in a manner that frustrates the Commission's effective regulation of the interstate pipeline," the Commission would set aside "the separate corporate structures and treat the pipeline ... as it would if the gathering facilities were owned directly by an interstate pipeline." Id.

The Commission went on to explain, however, that only certain "types of affiliate abuses" -- those "arising specifically from the interrelationship between the pipeline and its affiliate" -- would "trigger the Commission's authority to disregard the corporate form" and permit it to assert jurisdiction over a spun-down gathering affiliate. Id. Such abuses included "the affiliate's giving preferences to market affiliate gas or tying gathering service to the pipeline's jurisdictional transmission service; the pipeline's giving transportation discounts only to those utilizing the affiliate's gathering service; and actions resulting in cross-subsidization between the affiliate's gathering rates and the pipeline's transmission rates." Id. While the Commission acknowledged that "an affiliate could undertake other types of anti-competitive activities," the Commission viewed its residual jurisdiction as reaching only scenarios "where the abuse is directly related to the affiliate's unique relationship with an interstate pipeline." Id. Only that brand of anti-competitive behavior breached "the arm's length relationship between the pipeline and an affiliated gathering company" and thereby authorized the Commission to treat a jurisdictional pipeline and its gathering affiliate "together as a single `natural gas company' " subject to FERC jurisdiction. Id.

We affirmed FERC's approval of the spin-down of the Arkla gathering facilities. See Conoco, 90 F.3d at 544-50. Specifically, we rejected the objections of various gas producers to the Commission's determination that it generally lacked NGA jurisdiction over gathering affiliates. Id. at 544- 49. We also approved -- "[a]s an abstract matter" -- the Commission's new policy concerning NGA gathering affiliates, stating "we have no reason to doubt the Commission's conclusion that a non-jurisdictional entity could act in a manner that would change its status by enabling an affiliated interstate pipeline to manipulate access and costs of gathering." Id. at 549. We explicitly acknowledged, however, that the question had not yet been squarely presented for resolution "because the Commission has yet to assert its jurisdiction over a gathering affiliate." Id. That time has now come.

II.

Transcontinental Gas Pipe Line Corporation (Transco) is a FERC-regulated natural gas transportation company that operates approximately 10,500 miles of natural gas pipeline extending from the Gulf of Mexico to New York. In November 2000, Transco sought permission from FERC to spin down its gathering facilities in the Gulf of Mexico located offshore of North Padre Island, Texas to its gathering affiliate Williams Gas Processing - Gulf Coast Company, L.P. (WGP).*fn1 The North Padre Island (NPI) gathering facilities consist of two small offshore legs -- 3.83 miles of 10-inch pipeline and 18.79 miles of 20-inch pipeline -- both of which gather and move gas before converging offshore and connecting to Transco's separate 24-inch pipeline that provides IT-feeder service*fn2 to an onshore processing facility and eventually to Transco's main pipeline in Texas.

FERC approved the spin-down of the NPI gathering facilities to WGP over the objections of numerous producers and shippers, including Shell Offshore Inc., an intervenor in this proceeding. See Transcontinental Gas Pipe Line Corp., 96 FERC ¶ 61,115, 61,433, 61,442 (2001) ( Spin-Down Order ), aff'd, Williams Gas Processing - Gulf Coast Co., 331 F.3d at 1020-23. Moreover, as WGP engaged only in gathering and other non-jurisdictional activities, the Commission concluded that once ownership of the NPI facilities was transferred from Transco to WGP, those facilities would become exempt from FERC's NGA jurisdiction. Spin-Down Order, 96 FERC at 61,442. The Commission, however, noted on several occasions that, as the NPI gathering facilities were located offshore, they would remain subject to FERC's jurisdiction under the Outer Continental Shelf Lands Act (OCSLA), 43 U.S.C. §§ 1331-1356, and OCSLA's requirement that service be provided on an open access and nondiscriminatory basis, id. § 1334(f)(1)(A). Spin-Down Order, 96 FERC at 61,435- 37. Transco closed the spin-down of the NPI gathering facilities to WGP on December 1, 2001, and those facilities are now operated by Williams Field Services (WFS), a wholly-owned subsidiary of WGP.

Intervenor Shell Offshore Inc. (Shell) produced gas offshore of North Padre Island, Texas and delivered its gas into the NPI 20-inch gathering pipeline at an interconnection 3.08 miles from that pipe's interconnection to Transco's 24-inch IT-feeder line. Prior to the spin-down of the NPI facilities, Transco charged Shell $0.08 per dekatherm to gather and transport Shell's gas 230 miles from Shell's NPI interconnection to Transco's main line. After the spin-down, WFS informed Shell that it intended to charge Shell $0.12 per dekatherm to gather and move Shell's gas just the 3.08 miles from Shell's NPI interconnection to Transco's 24-inch IT-feeder line. For its part, Transco proposed to maintain its transportation rate of $0.08 per dekatherm for the remaining 227 miles of IT-feeder service. Shell was thus being asked to pay $0.20 per dekatherm to move its gas to Transco's main line, whereas before the spin-down it had paid $0.08 per dekatherm for the same 230-mile haul.

Unable to reach an agreement with WFS on an appropriate gathering charge, on November 30, 2001, Shell filed a complaint with the Commission against Transco, WGP, and WFS, and shortly thereafter shut in its gas. See Shell Offshore Inc. v. Transcontinental Gas Pipe Line Corp., Docket No. RP02-99-000, Complaint Requesting Fast Track Processing and Request for Interim Relief (Nov. 30, 2001). The complaint alleged that Transco and WFS were unlawfully leveraging their dominance in the North Padre Island gathering and transportation markets in an effort to force Shell to pay unjust and unreasonable gathering rates and to accept anticompetitive terms and conditions of gathering service, such as promising to dedicate its North Padre gas reserves to WFS gathering for the life of production. Id. at 3. The complaint urged the Commission to find that Transco and WFS were acting in concert and in an anti-competitive manner that frustrated ...


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