CHAPTER 4 FEDERAL OIL AND GAS PIPELINE REGULATION: AN OVERVIEW

• Jurisdiction: United States

Oil and Gas Agreements: Midstream and Marketing
(Feb 2011)
CHAPTER 4
FEDERAL OIL AND GAS PIPELINE REGULATION: AN OVERVIEW
Judith M. Matlock
Davis, Graham & Stubbs, LLP
Denver, Colorado

JUDITH M. MATLOCK is a partner in the Energy Group of the Denver law firm of Davis, Graham & Stubbs L.L.P. She received her B.A., magna cum laude, from the University of Colorado in 1979. In 1982, she received her J.D. from the University of Colorado. She is a member of Phi Beta Kappa, Order of the Coif, and the Denver, Colorado, American, and Federal Bar Associations. Ms. Matlock's practice is concentrated in the area of natural resources law. She represents producers in the areas of exploration and production, operations, transportation and marketing of production, and calculation and payment of royalties and taxes. Her practice also includes representing clients before the Federal Energy Regulatory Commission and State Public Utility Commissions on matters involving gas and electricity. Ms. □Matlock has been a member of the Executive Committee of the Rocky Mountain Mineral Law Foundation, served as a trustee of the Foundation, and served as vice chair of the Special Institutes Committee of the Foundation. She has been the program chair for several Foundation Special Institutes and Short Courses including Natural Gas Marketing & Transportation (1991); Practical Natural Gas Marketing Short Course (1993 and 1994); Negotiating Natural Gas Contracts (1993); Environmental Regulation of the Oil & Gas Industry (1993 with Samuel D. Haas); and The Electricity Industry (1996). She is also a frequent lecturer and writer on energy topics. Some of her recent articles include "Natural Gas Processing Agreements," Institute on Natural Gas Marketing II (RMMLF 1988); "Problems Caused by Producer Imbalances," Institute on Natural Gas Marketing and Transportation (RMMLF 1991); "Transportation Tariffs and Agreements," Institute on Practical Natural Gas Marketing (RMMLF 1994); "New Roles of Wellhead, Gathering System and Gas Plant Operators After Order No. 636," 40 Rocky Mt. Min. L. Inst. (1994); "Overview of Federal Regulation of Natural Gas Pipelines," Institute on Oil and Natural Gas Pipelines: Wellhead to End User (RMMLF 1995); "Federal Regulation and Wholesale Wheeling," Institute on The Electric Industry (RMMLF 1996); "Payment of Gas Royalties in Affiliate Transactions," 48th Annual Institute on Oil and Gas Law and Taxation (SWLF 1997); "Impact of the Restructuring of the Electric Power Industry on Oil, Gas, Coal, and Other Mineral Producers," 43rd Rocky Mt. Min. L. Inst. (1997); "The MMS 1997 Transportation and Related Amendments - An Historical Legal Analysis of Industry's Perspective," Institute on Federal and Indian Oil & Gas Royalty Valua-tion & Management II (RMMLF 1998); "The 'Duty to Market' Downstream At No Cost To The Lessor (The Alleged Federal 'Duty to Market')," Institute on Federal and Indian Oil & Gas Royalty Valuation and Management (RMMLF 2000); and "Post Production Costs," Institute on Natural Gas Transportation & Marketing (RMMLF 2001).

Table of Contents

SECTION

INTRODUCTION

I. FEDERAL REGULATION OF NATURAL GAS PIPELINES

1.1. The Governing Laws

A. The Natural Gas Act of 1938

B. The Natural Gas Policy Act of 1978

C. Regulations implementing the NGA and the NGPA

1.2. The NGA - Regulation of transportation of natural gas in interstate commerce and sales for resale of natural gas

A. Regulated activities under the NGA

B. Interstate commerce under the NGA

C. Transportation under the NGA

D. Sales for resale

E. Natural-Gas Companies subject to regulation under the NGA

F. NGA jurisdiction focuses on facilities; ICA jurisdiction focuses on movements

1.3. Overview of the regulatory requirements under the NGA and the NGPA

A. Certificates of convenience and necessity; abandonment authority

1. Construction of facilities

2. Transportation Service

B. Just and reasonable rates

C. Nondiscrimination

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D. Reporting requirements

1.4. Activities excluded from federal regulation under the NGA

A. Intrastate transportation; sales for resale of gas not in interstate commerce

B. First sales

C. Direct sales

D. Production

E. Gathering - not what you think

F. Transportation by Hinshaw Pipelines

G. Sales and transportation under section 311 of the NGPA

H. Local distribution

1.5. Whether a pipeline is a gathering line or an interstate pipeline under the NGA

A. Jurisdictional status is facility specific, not activity or ownership specific

B. Importance of determining jurisdictional status; declaratory orders; civil and criminal remedies if wrong about jurisdictional status

C. Development of FERC test to distinguish between gathering and interstate facilities

D. The modified primary function test - the current jurisdictional test

E. Further revision of the Behind-the-Plant Criteria - residue gas "stub lines"

F. Application of the Central Point Criteria

G. Incidental sales to end users

H. Pipeline straddling a state line

I. Pipelines located entirely within a single state - not determinative

J. Decertification - changing policies can affect status

1.6. Case Study - Williston Basin Interstate Pipeline Company - certificated interstate facilities held to be non-jurisdictional gathering facilities after sale to producers

1.7. Case Study - KN Wattenberg Transmission Limited Liability Company - if at first you don't succeed

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1.8. Case Study - Sea Robin Pipeline Company - modification of primary function test as applied to offshore facilities

1.9. Case Study - Laser Marcellus Gathering Company, LLC- facility crossing state line held to be gathering

1.10. Case Study - Pecan Pipeline (North Dakota), Inc. - a unique "stub line" decision

1.11. Case Study - Whiting I ¹ - limited jurisdiction certificate to a producer

II. FEDERAL REGULATION OF PETROLEUM AND PETROLEUM PRODUCTS PIPELINES

2.1. Governing Law - the Interstate Commerce Act as of October 1, 1977

2.2. Interstate Commerce Act - Regulation of Transportation in Interstate or International Commerce by Common Carriers

2.3. Major Obligations of Pipelines as to Jurisdictional Movements Under the ICA

A. Duty to provide and furnish transportation upon reasonable request therefor

1. Common carrier service requires prorationing of capacity if demand exceeds capacity; no firm service available

2. Capacity allocations in connection with volume commitments necessary to fund expansions

B. Duty to establish reasonable through routes with other carriers

C. Duty to establish just and reasonable rates, fares, charges and classifications applicable thereto

D. Prohibition on undue or unreasonable preference or advantage; Elkins Act provides for criminal liability for soliciting or granting rebates, concessions, or discrimination

E. Duty to establish classification of property for transportation; regulations and practices

F. Recordkeeping and reporting requirements

2.4. What is not regulated by the ICA

A. No regulation of pipeline construction or the initiating and termination of service

B. Transportation wholly within one State - not what you think it means

C. The Uncle Sam Oil Company exception - private carriage - a very difficult test to meet

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1. Mere ownership of all of the oil in the pipeline does not exempt the pipeline owner from ICA regulation

2. Private carriage

3. Champlin I - Transportation of a pipeline owner's own refinery products to its own terminal stations not private carriage

4. Champlin II - Recordkeeping required but pipeline not required to file rates and charges and provide transportation for others

5. Hunt Refining - temporary waiver of certain ICA requirements for pipeline not meeting the Uncle Sam exception but whose services are unneeded by any third parties

2.5. Whether a particular movement is interstate or intrastate - essential character of the movement - fixed and persisting intent with which shipment made

A. Importance of determining jurisdictional status

B. Whether a particular movement is interstate or intrastate - essential character of the movement - fixed and persisting intent with which shipment made

C. Ownership of the product by the pipeline owner does not affect the jurisdictional status of the movement - the Pipe Line Cases

2.6. Case Study - Texaco Refining and Marketing v. SFPP - Jurisdiction Under the ICA Over Interstate Movements on a 3.8 Mile Gathering Line

2.7. Case Study - Williams Energy Service - pipeline located wholly within one state

2.8. Case Study - Interstate Energy Company - Storage Providing a Sufficient Break in Transportation - a Close Call

III. RECAP OF JURISDICTIONAL TESTS UNDER THE NGA AND THE ICA

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The Commerce Clause of the United States Constitution delegates to Congress the power to regulate commerce among the States. The Tenth Amendment to the United States Constitution reserves to the individual states all powers not delegated to the United States or prohibited to the States by the Constitution. Therefore, the federal government has the constitutional authority to regulate interstate commerce and the state governments have the constitutional authority to regulate matters of state or local concern.

Congress did not exercise its authority under the Commerce Clause to regulate pipelines transporting crude oil, liquids and refined petroleum products until the Hepburn Amendment in 1906 extended the Interstate Commerce Act ("ICA") to such pipelines. Congress did not exercise its authority under the Commerce Clause to regulate natural gas pipelines until the Natural Gas Act of 1938 ("NGA") was passed. Although both the ICA and the NGA apply to transportation in interstate commerce...