OVERVIEW OF FEDERAL REGULATION
| Jurisdiction | United States |
(Jan 1995)
OVERVIEW OF FEDERAL REGULATION
Clanahan, Tanner, Downing & Knowlton, P.C.
Denver, Colorado
Table of Contents
REGULATION BEFORE 1938
THE NATURAL GAS ACT OF 1938
Purpose
Commission Implementation of the NGA
What the NGA Regulates
What is Interstate Commerce?
What is Transportation?
What is a Sale For Resale?
What is a Natural-Gas Company?
What Does the NGA Require?
Change in NGA Regulation Under FERC Order 636
ACTIVITIES EXCLUDED FROM THE NGA 11
What is Gathering?
Original Commission Tests
Development of the Modified Primary Function Test
Revision of the Behind-the-Plant Criteria
Application of the Central Point Criteria
Declaratory Orders
Decertification
FEDERAL REGULATION OF EXEMPT ACTIVITIES
Federal Regulation of Processing
Federal Regulation of Gathering
The Commission's Initial Position on Pipeline Affiliate Gathering
Change in the Commission's View on Its Jurisdiction Over Pipeline Affiliate Gathering
Conditions on Abandonment to Guard Against Affiliate Abuse
Protection of Existing Customers in a Spin-Down or Spin-Off
Valuation Issues Associated With Spin Downs
Jurisdiction to Condition Abandonment and Additional Conditions
Status of Commission Regulation of Pipeline Gathering
GATHERING AND TRANSPORTATION IN OTHER CONTEXTS
CONCLUSIONS
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GATHERING CASES
Amerada Hess Corporation, 52 FERC ¶61,268 (September 17, 1990)
Williams Natural Gas Company et al., 67 FERC ¶61,252 (May 27, 1994) 65
Order on Rehearing of Williams, 69 FERC ¶61,294 (December 6, 1995) 68
Superior Offshore Pipeline Company, 67 FERC ¶61,253 (May 27, 1994) 70
Order Dismissing Rehearing of Superior, 69 FERC ¶61,300 (December 6, 1994) 73
Amerada Hess Corporation, 67 FERC ¶61,254 (May 27, 1994) 74
Mid Louisiana Gas Company et al., 67 FERC ¶61,255 (May 27, 1994) 80
Order Denying Rehearing of Mid Louisiana, 69 FERC ¶61,303 (December 6, 1994) 84
Trunkline Gas Company, 67 FERC ¶61,256 (May 27, 1994) 89
Order on Rehearing of Trunkline, 69 FERC ¶61,301 (December 6, 1994) 94
Arkla Gathering Services Company, 67 FERC ¶61,257 (May 27, 1994) 98
Order on Rehearing of Arkla, 69 FERC ¶61,280 (December 2, 1994) 108
Eastern American Energy Corporation et al., 67 FERC ¶61,258 (May 27, 1994) 118
Order Denying Rehearing of Eastern, 69 FERC ¶61,282 (December 2, 1994) 122
OVERHEADS 127
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SPECIAL INSTITUTE ON
OIL AND NATURAL GAS PIPELINES — WELLHEAD TO END USERS
ROCKY MOUNTAIN MINERAL LAW FOUNDATION
February 26 and 27, 1995
Prior to the early 1980s, most natural gas was sold at or near the wellhead to the intrastate or interstate pipeline in the field. These pipeline purchasers transported the gas from the production area and resold it, usually to local distribution companies for distribution to residential, commercial and industrial customers, and occasionally directly to industrial customers connected to the pipeline. The pipeline purchasers typically provided a bundled service which included the gathering, processing, storage and transmission of the gas to market. Occasionally, the producers had to gather and process their gas to the pipeline in the field.1 Sometimes third parties gathered or processed the gas, often after first purchasing the gas at the wellhead. There were very few, if any, independent or pipeline affiliated marketers or brokers and local distribution companies and end users did not usually buy their gas directly from producers or independent gatherers or processors.
This marketing arrangement developed because of the large capital expenditures required to build transportation facilities. Long term contracts with secure supplies and demand were required to obtain the funds to finance construction of such facilities. These financing requirements led to the formation of natural pipeline monopolies. However, before 1938, there was no regulation of these monopolies.
REGULATION BEFORE 1938
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. The Commerce Clause of the United States Constitution delegates to
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Congress the power to regulate commerce among the States. 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.
Before 1938, the only regulation of the natural gas pipeline industry was on the state or local level. The states regulated the production of natural gas for conservation purposes. The distribution of natural gas was also regulated, generally through the issuance of franchises. However, because of the Commerce Clause, the states were not permitted to regulate the transportation of natural gas in interstate commerce, West v. Kansas Natural Gas Co.,2 the rates charged by interstate natural gas pipeline companies at the city gates, Public Util. Comm'n v. Landon,3 or the price at which interstate pipelines could sell outside the producing state, Public Util. Comm'n v. Attleboro Steam & Elec. Co..4 Because the federal government was not regulating these activities before 1938, these activities fell into a regulatory gap.
In 1935, the Federal Trade Commission recommended to Congress that Congress complement state regulation by filling the regulatory gas. In a report issued to Congress by the FTC based upon an eight year investigation of the interstate and international gas and electric business, the FTC advised Congress that monopoly conditions existed in the gas pipeline industry which were leading to excessive prices for service. In 1938, Congress filled the regulatory gap by enacting the Natural Gas Act of 1938 ("NGA").5
THE NATURAL GAS ACT OF 1938
Purpose
The following statement of purpose is contained in Section 1(a)6 of the NGA:
As disclosed in reports of the Federal Trade Commission made pursuant to Senate Resolution 83 (Seventieth Congress, First Session) and other reports made pursuant to the authority of Congress, it is hereby declared that the business of
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transporting and selling natural gas for ultimate distribution to the public is affected with a public interest, and that Federal regulation in matters relating to the transportation of natural gas and the sale thereof in interstate and foreign commerce is necessary in the public interest.
Based upon this statement of purpose and the legislative history of the NGA, the Commission and the Courts have determined that the basic mandate of the NGA is to protect consumers from excessive rates and charges.7
Commission Implementation of the NGA
The NGA was first enforced by the Federal Power Commission ("FPC"). Since 1978, the Federal Energy Regulatory Commission ("FERC") has been responsible for implementing the NGA.8 In this paper, the term "Commission" will refer either to the FPC or the FERC, as appropriate.
What the NGA Regulates
As stated in section 1(b) of the NGA,9 the NGA applies to the following activities:
The provisions of this Act 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.
[Emphasis added.]
In the NGA, Congress thus exercised its constitutional authority to regulate the interstate commerce of natural gas by giving its delegated agent, the Commission, jurisdiction over three areas:
(1) Transportation in interstate commerce,
(2) Sales in interstate commerce for resale, and
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(3) Natural gas companies engaged in such transportation or sale.
Each of these areas of jurisdiction is independent so that, for example, even though the NGA does not give the Commission authority to regulate direct sales to consumers,10 the transportation in interstate commerce of the gas to the consumer is subject to the Commission's authority under the NGA.11
What is Interstate Commerce?
The key to the Commission's jurisdiction is "interstate commerce." The term is defined in Section 2(7) of the NGA12 as follows:
"Interstate commerce" means commerce between any point in a State and any point outside thereof, or between points within the same State but through any place outside thereof, but only insofar as such commerce takes place within the United States.
It has been held that natural gas which crosses state lines at any stage of its movement from wellhead to ultimate consumption is in "interstate commerce" within the meaning of the NGA.13 This means, for example, that sales by producers, regardless of the point of sale, are sales for resale in interstate commerce if the gas is ever ultimately transported across state lines. This also means that gas is in interstate commerce even when it is being gathered and even after it leaves an interstate pipeline and is delivered into a local distribution system or into an intrastate pipeline for transportation to a local distribution system. This is why gathering and distribution had to be specifically exempted in the NGA and why the "Hinshaw Pipeline" exemption, discussed below, was required to exempt certain transportation by intrastate pipelines of gas delivered to them by interstate pipelines. This is also why intrastate pipelines were unwilling to transport natural gas to interstate pipelines until section 311 of the NGPA exempted such transportation from the NGA.
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Note that the definition of "interstate commerce" does not mean...
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