[Federal Register: March 8, 2007 (Volume 72, Number 45)]
[Notices]
[Page 10514-10527]
[DOCID:fr08mr07-66]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL05-10-000]

Criteria for Reassertion of Jurisdiction Over the Gathering
Services of Natural Gas Company Affiliates

February 15, 2007.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Order Terminating Proceeding and Clarifying Policy.

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SUMMARY: The Federal Energy Regulatory Commission is terminating the
instant proceeding. The Commission also finds that it may only assert
jurisdiction over a gathering provider affiliated with an interstate
pipeline when the gatherer has used its market power over gathering to
benefit the pipeline in its performance of jurisdictional
transportation or sales service and that benefit is contrary to the
Commission's policies concerning jurisdictional service adopted
pursuant to the NGA. Further, the order clarifies that, where the
gathering affiliate has engaged in the type of conduct described above
as justifying an assertion of jurisdiction, the Commission need not
also find ``concerned action'' between the pipeline and its gathering
affiliate.

FOR FURTHER INFORMATION CONTACT: Richard Howe, Office of the General
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426.<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G.
Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

Order Terminating Proceeding and Clarifying Policy

    1. In September 2005, the Commission issued a Notice of Inquiry
(NOI) \1\ to evaluate possible changes in the criteria set forth in
Arkla Gathering Service Co.\2\ for determining when the Commission may
assert Natural Gas Act (NGA) jurisdiction over the gathering activities
of a gathering affiliate of a natural gas pipeline to guard against
abusive practices by the affiliated companies. In Arkla, the Commission
held that gathering affiliates of interstate pipelines are generally
exempt from the Commission's NGA jurisdiction. However, the Commission
also held that ``if an affiliated gatherer acts in concert with its
pipeline affiliate in connection with the transportation of gas in
interstate commerce and in a manner that frustrates the Commission's
effective regulation of the interstate pipeline, then the Commission
may look through, or disregard, the separate corporate structures and
treat the pipeline and gatherer as a single entity.'' \3\
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    \1\ 112 FERC ] 61,292 (2005).
    \2\ Arkla Gathering Service Co., 67 FERC ] 61,257, at 61,871
(1994), order on reh'g, 69 FERC ] 61,280 (1994), reh'g denied, 70
FERC ] 61,079 (1995), reconsideration denied, 71 FERC ] 61,297
(1995) (collectively, Arkla), aff'd in part and reversed in part,
Conoco Inc. v. FERC, 90 F.3d 536 (D.C. Cir. 1996) (Conoco).
    \3\ Arkla, 67 FERC at 61,871.
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    2. In Williams Gas Processing--Gulf Coast Company, L.P. v. FERC,\4\
the United States Court of Appeals for the District of Columbia Circuit
vacated and remanded Commission orders, in which the Commission had
sought to reassert jurisdiction over certain affiliated gathering
activities under the criteria set forth in Arkla. The court held that
the Commission had not met its own test under Arkla for reassertion of
jurisdiction. In light of the court's holding that the circumstances
presented by the Williams Gas Processing case did not satisfy the Arkla
test, the Commission determined to explore whether that test should be
modified. To assist this reevaluation of the Arkla test, the Commission
issued the NOI, asking parties to submit comments and respond to a
number of specific questions. After carefully reviewing the comments,
the Commission has determined not to change its current policies with
respect to affiliated gatherers, although we do clarify the existing
Arkla test.
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    \4\ Williams Gas Processing-Gulf Coast Co., L.P. v. FERC, 373
F.3d 1335 (D.C. Cir. 2004) (Williams Gas Processing).
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I. Statutory and Regulatory Backdrop

    3. Section 1(b) of the NGA gives the Commission jurisdiction over
(1) transportation of natural gas in interstate commerce, (2) sales in
interstate commerce of natural gas for resale,\5\ and ``natural gas
companies'' \6\ engaged in such transportation or sales. However,
section 1(b) exempts ``gathering of natural gas'' from Commission
jurisdiction. The Commission uses the ``primary function'' test to
determine whether a facility is devoted to jurisdictional interstate
transportation or non-jurisdictional gathering of natural gas.\7\ Under
that test, the Commission relies on various physical characteristics of
the facilities to determine their jurisdictional status.
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    \5\ The Wellhead Decontrol Act of 1989 removed all first sales
from Commission jurisdiction.
    \6\ Section 2(6) of the NGA defines ``natural-gas company'' as
``a person engaged in the transportation of natural gas in
interstate commerce, or the sale in interstate commerce of such gas
for resale.''
    \7\ The Commission first articulated the primary function test
in Farmland Industries, Inc., 23 FERC ] 61,063 (1983). The
Commission subsequently modified the test in Amerada Hess Corp., 52
FERC ] 61,268 (1990).
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    4. Before Order No. 436,\8\ interstate natural gas pipelines
generally did not perform transportation-only or gathering-only
services. Rather, they used all their facilities, including any
gathering facilities they owned, to provide a bundled transportation
and sale for resale service, for which they charged a single bundled
rate. The United States Supreme Court held that the gathering exemption
did not foreclose the Commission from reflecting ``the production and
gathering

facilities of a natural gas company in the rate base and determining
the expenses incident thereto for the purpose of determining the
reasonableness of the [bundled] rates subject to its jurisdiction.''
Colorado Interstate Natural Gas Co. v. FPC, 324 U.S. 581, 603 (1954).
See Conoco, Inc. v. FERC, 90 F.3d 536, 545 (D.C. Cir. 1996).
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    \8\ Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol, Order No. 436, 50 Fed. Reg. 42,408 (Oct. 18, 1985), FERC
Stats. & Regs. ] 30,665 at 31,554 (1985), vacated and remanded,
Associated Gas Distributors v. FERC, 824 F.2d 981 (D.C. Cir. 1987),
cert. denied, 485 U.S. 1006 (1988), readopted on an interim basis,
Order No. 500, 52 FR 30,334 (Aug. 14, 1987), FERC Stats. & Regs. ]
30,761 (1987), remanded, American Gas Ass'n v. FERC, 888 F.2d 136
(D.C. Cir. 1989), readopted, Order No. 500-H, 54 FR 52,344 (Dec. 21,
1989), FERC Stats. & Regs. ] 30,867 (1989), reh'g granted in part
and denied in part, Order No. 500-I, 55 FR 6,605 (Feb. 26, 1990),
FERC Stats. & Regs. ] 30,880 (1990), aff'd in part and remanded in
part, American Gas Ass'n v. FERC, 912 F.2d 1496 (D.C. Cir. 1990),
cert. denied, 498 U.S. 1084 (1991).
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A. Order Nos. 436 and 636

    5. In Order No. 436, the Commission initiated its open access
transportation program, under which shippers can obtain a
transportation-only service from the pipeline, and purchase their gas
from third parties. As part of Order No. 436, the Commission adopted a
regulation requiring that the rates for open access transportation
service ``separately identify cost components attributable to
transportation, storage, and gathering costs.'' \9\ In Northern Natural
Gas Co.,\10\ a pipeline seeking authorization to perform open access
transportation service stated that it intended to charge its customers
separate rates for any gathering services it provided in connection
with open access transportation service. However, the pipeline
contended that NGA section 1(b) prevented the Commission from requiring
those rates to be set forth in its tariff or determining the lawfulness
of those rates. The Commission rejected this contention.
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    \9\ 18 CFR 284.8 (d)(1) (1986). That regulation is now found at
18 CFR 284.10(c)(1) (2006).
    \10\ 43 FERC ] 61,473 (1988), order on reh'g, 44 FERC ] 61,384
(1988).(1988).
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    6. The Commission pointed out that NGA section 4(a) provides: 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, and all rules and
regulations affecting or pertaining to such rates or charges, shall be
just and reasonable [emphasis added].
    7. In addition, section 5(a) similarly provides that when the
Commission finds that any rate charged by a natural gas company ``in
connection with'' jurisdictional transportation or sales is unjust and
unreasonable, or finds that any rule, regulation, or practice affecting
such rate is unjust and unreasonable, the Commission may modify it. The
Commission concluded that these provisions ``require the Commission to
determine the rates, rules, and regulations not only for the actual
transportation or sales subject to the Commission's jurisdiction, but
also for other services performed in connection with or ancillary to
such transportation and sales,'' \11\ including gathering. The United
States Court of Appeals for the Eighth Circuit affirmed this
decision.\12\
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    \11\ Northern Natural Gas Co., 43 FERC at 62,160.
    \12\ Northern Natural Gas Co. v. FERC, 929 F.2d 1261 (8th Cir.
1991).
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    8. When pipelines first implemented Order No. 436, they generally
continued to bundle gathering service within their stand-alone open
access transportation service. Thus, even though the pipelines
separately identified their gathering costs in their rates for open
access transportation service, shippers still had to purchase a bundled
gathering/transportation service. However, in the 1989 Rate Design
Policy Statement,\13\ the Commission stated its preference for a full
unbundling of gathering services from transportation, so that shippers
would only pay for the services they actually used.\14\ While Order No.
636 \15\ only mandated pipelines to unbundle their sales service from
their transportation service, Order No. 636-A restated the Commission's
strong preference for fully unbundled gathering services with
separately charged rates, consistent with the Rate Design Policy
Statement.\16\ Ultimately, most pipelines with gathering facilities did
unbundle their gathering services, either in their Order No. 636
restructuring proceedings or in rate cases.\17\
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    \13\ Interstate Natural Gas Pipeline Rate Design, 47 FERC ]
61,295, at 62,059 (1989).
    \14\ See also Panhandle Eastern Pipeline Co., 57 FERC ] 61,264,
at 61,840 (1991) (Opinion No. 369), order on reh'g, 59 FERC ]
61,244, at 61,853 (1992) (Opinion No. 369-A).
    \15\ Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation, and Regulation of
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No.
636, 57 FR 13,267 (Apr. 16, 1992), FERC Stats. and Regs. Regulations
Preambles (January 1991-June 1996) ] 30,939 (Apr. 8, 1992), order on
reh'g, Order No. 636-A., 57 FR 36,128 (Aug. 12, 1992), FERC Stats.
and Regs. Regulations Preambles (January 1991-June 1996) ] 30,950
(Aug. 3, 1992), order on reh'g, Order No. 636-B, 57 FR 57,911 (Dec.
8, 1992), 61 FERC ] 61,272 (1992), notice of denial of reh'g, 62
FERC ] 61,007 (1993), aff'd in part, vacated and remanded in part,
United Dist. Cos. v. FERC, 88 F.3d 1105 (D.C. Cir. 1996), order on
remand, Order No. 636-C, 78 FERC ] 61,186 (1997).
    \16\ 16 Order No. 636-A, at 30,609. See also El Paso Natural Gas
Co., 60 FERC ] 61,109, at 61,353, 61,355 (1992), order on reh'g, 61
FERC ] 61,173, at 61,633-5 (1992).
    \17\ See, e.g., Opinion No. 369, 57 FERC at 61,841; Opinion No.
369-A, 59 FERC at 61,853; Columbia Gas Transmission Corp., 64 FERC ]
61,060, at 61,517 (1993); National Fuel Gas Supply Corp., 62 FERC ]
61,200, at 62,445 (1993).
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    9. In the Order No. 636 restructuring proceedings, the Commission
continued to require pipelines performing gathering services to include
a statement of their gathering rates in their tariff. The Commission
also required that the pipeline's tariff include a statement that its
gathering service is non-discriminatory, not unduly preferential, and
not inconsistent with the terms and conditions applicable to its Part
284 open access service. However, the Commission did not further
exercise its authority over the terms and conditions of gathering
services by requiring such pipelines to include a full gathering rate
schedule in their tariffs, similar to the separate rate schedules
required for jurisdictional service such as firm and interruptible
transportation service.\18\
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    \18\ 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, at
61,689 (1993); Williams Natural Gas Co., 64 FERC ] 61,165, at 62,432
(1993).
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B. The Arkla Policy and Conoco Inc. v. FERC

    10. In the aftermath of Order No. 636, a number of pipelines
determined that it would be advantageous in the new regulatory
environment either to ``spin down'' their gathering facilities to
corporate affiliates or ``spin off'' the facilities to unrelated third
parties. In February 1994, the Commission held a public conference to
explore the issues raised by these filings.\19\ After receiving written
comments following the conference, the Commission determined to
establish its policy concerning the spin down of gathering facilities
to an affiliate of a natural gas company in the individual pending
cases, including Arkla \20\ and several companion orders issued the
same day.
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    \19\ 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 (1993).
    \20\ 67 FERC ] 61,257, order on reh'g, 69 FERC ] 61,280, reh'g
denied, 70 FERC ] 61,079, reconsideration denied, 71 FERC ] 61,297,
aff'd in part and reversed in part, Conoco, 90 F.3d 536.
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    11. First, the Commission addressed the issue of the extent of its
jurisdiction to regulate the rates, terms, and conditions of gathering
services performed by affiliates of natural gas companies. The
Commission held that it generally lacks jurisdiction over affiliates
that perform only a gathering service. The Commission recognized that
the Eighth Circuit had confirmed in Northern Natural v. FERC, that
under NGA sections 4 and 5 the Commission may regulate gathering
services provided by ``natural gas companies'' ``in connection with''
their jurisdictional transportation services. However, the Commission
pointed out that NGA section 2(6) defines a jurisdictional ``natural
gas company'' as a person engaged in the transportation or natural gas
in interstate commerce or the sales of such gas in interstate commerce
for resale. Interstate pipelines

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are, of course, such natural gas companies. The Commission then held:

    However, companies that perform only a gathering function,
whether they are independent or affiliated with an interstate
pipeline, are not natural gas companies because they neither
transport natural gas in interstate commerce, nor sell such gas in
interstate commerce for resale. Therefore, the Commission does not
have jurisdiction over such companies whether they are independent
or affiliated with an interstate pipeline.\21\
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    \21\ 67 FERC at 61,871. The Commission also observed that,
``although the Eighth Circuit's decision contained a footnote that
might be construed to the contrary, the issue of whether the
Commission has similar jurisdiction over pipeline-affiliated
gatherers was not before that Court. We do not believe that sections
4 and 5 of the NGA nor the holding in Northern support the view that
the Commission has jurisdiction over rates for gathering services
that are `in connection with' interstate gas transportation if those
services are not provided by a natural gas company.'' Id.

    12. Despite concluding that it generally lacked jurisdiction over
affiliates performing only a gathering function, the Commission stated
that it ``can exert control over the gathering activities of affiliated
gatherers in particular circumstances where such action is necessary to
accomplish the Commission's policies for the transportation of natural
gas in interstate commerce.'' The Commission then set forth the
following standard for asserting jurisdiction over an affiliated
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gatherer:

    If an affiliated gatherer acts in concert with its pipeline
affiliate in connection with the transportation of gas in interstate
commerce and in a manner that frustrates the Commission's effective
regulation of the interstate pipeline, then the Commission may look
through, or disregard, the separate corporate structures and treat
the pipeline and gatherer as a single entity, i.e., a single natural
gas company. In so doing, the Commission would regulate the
gathering activities as it would if the gathering facilities were
owned directly by an interstate pipeline.\22\
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    \22\ Id.

    13. The Commission then further explained its standard for
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asserting jurisdiction as follows:

    The types of affiliate abuses which would trigger the
Commission's authority to disregard the corporate form would be
limited to abuses arising specifically from the interrelationship
between the pipeline and its affiliate. That is, a complainant would
have to allege that the pipeline would benefit by certain actions
taken by the affiliate in conjunction with its affiliated pipeline.
Such actions might include 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
transportation rates. Although an affiliate could undertake other
types of anti-competitive activities, the Commission's jurisdiction
would be implicated only where the abuse is directly related to the
affiliate's unique relationship with an interstate pipeline. Except
where the Commission finds that a pipeline and its gathering
affiliate should be treated together as a single ``natural gas
company,'' the affiliated gatherer would be subject to state, not
Federal jurisdiction.\23\
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    \23\ Id.

    14. In Arkla, the Commission held that, in order to implement a
proposal to spin down gathering facilities to an affiliate, the
pipeline must file an application under NGA section 7(b) to abandon any
of the gathering facilities for which it had received a certificate. In
addition, the Commission held that, because the pipeline's termination
of its gathering services was a change of service subject to the
Commission's jurisdiction under NGA section 4, the pipeline must make a
section 4 filing to terminate its gathering services for both the
certificated and uncertificated facilities.\24\ The Commission held
that these filings would give it an opportunity to take several actions
to protect shippers, in addition to its reservation of the right to
assert jurisdiction over an affiliated gatherer in the circumstances
discussed above.
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    \24\ Arkla, 69 FERC at 62,082-3.
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    15. First, the Commission stated it would require the pipeline to
include non-discriminatory and equal access provisions in its
tariff.\25\ Second, as clarified on rehearing, the Commission required
the pipeline to file a default gathering contract continuing existing
rates for two years, which its affiliate had to offer to the pipeline's
existing gathering customers. The Commission held that such a default
contract was necessary to ensure continuity of service for the existing
customers who had a reasonable expectation of a continuation of
regulated service. Accordingly, without the default contract, the
Commission could not find any section 7 abandonment or section 4
termination of service to be in the public interest and just and
reasonable.\26\
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    \25\ The required tariff provisions state that the pipeline: (1)
Will provide nondiscriminatory access to all sources of supply, (2)
will not give shippers of its gathering affiliate undue preferences
over shippers of non affiliated gatherers, and (3) will not
condition or tie its agreement to provide transportation service to
an agreement by the producer, customer, end-use or shipper relating
to any service in which its gathering affiliate is involved.
    \26\ Arkla, 69 FERC at 62,081-5.
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    16. In addition to the pipeline's filings to implement the spin-
down, the entity acquiring the assets typically files a request for a
declaratory order declaring that the facilities are non-jurisdictional
gathering facilities. The Commission evaluates both those requests for
declaratory orders and pipeline requests to abandon certificated
gathering facilities pursuant to its primary function test.
    17. In one of the companion orders to Arkla, the Commission held
that, in determining whether to approve a spin down proposal, it would
not consider whether the customers of spun down facilities would have
competitive alternatives.\27\ Rather, the Commission would approve spin
down proposals, where application of the primary function test showed
that the facilities were gathering, and the pipeline complied with the
tariff language and default contract conditions. The Commission stated
that, because the NGA does not give it jurisdiction to regulate
affiliated gatherers, the existence or absence of competition is
irrelevant to whether or not the Commission will regulate affiliated
gatherers. The Commission pointed out that the comments filed in
response to its notice revealed that ``a significant part of the
gathering industry, perhaps as much as 70 percent, is performed by
unregulated independent gatherers,'' and ``many customers of such
gatherers are captive to a single gatherer, i.e., there is no
competition for gathering services.'' \28\ Nevertheless, the NGA only
authorizes the Commission to regulate gathering performed by natural
gas companies, i.e. pipelines, in connection with jurisdictional
transportation service. The Commission also found that the comments
suggested that abuse of market power was not a significant problem,
because customers of unregulated independent gatherers had found ways
to prevent excessive rates \29\ and there are various state and federal
antitrust laws that could be invoked. The Commission concluded that the
existence of competition is not particularly relevant to a decision to
allow a pipeline to abandon its gathering facilities and, to the extent
it was relevant, the excessive effort to assess it would be unwarranted
where customers have recourse to other remedies.
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    \27\ Mid Louisiana Gas Co., 67 FERC ] 61,255, at 61,850-1
(1994), order on reh'g, 69 FERC ] 61,303, at 62,168-9 (1994).
    \28\ Id. at 61,851.
    \29\ The Commission gave the example of gathering customers
threatening to build bypass facilities.
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    18. The United States Court of Appeals for the District of Columbia

Circuit reviewed the Commission's Arkla orders in Conoco, Inc. v. FERC,
90 F.3d 536 (D.C. Cir. 1996). The court affirmed the Commission's
holding that it generally lacks jurisdiction over affiliates that
perform only a gathering service and thus are not natural gas companies
as defined in NGA section 2(6). The court stated, ``Section 1(b)
contemplates that some measure of authority over gathering should be
reserved to the states, and jurisdiction over companies whose sole
business is gathering is a permissible place to start.'' \30\ With
regard to the Commission's reservation of the right to reassert
jurisdiction in certain circumstances, the court stated:
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    \30\ Conoco, 90 F.3d at 547.

    As an abstract matter, 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.\31\
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    \31\ Id. at 549.

    19. However, the court stated that, because the Commission had not
yet sought to exercise such authority, it could not speculate as the
specific circumstances under which such a reassertion of authority
would be justified.
    20. The court reversed the Commission's requirement that the
pipeline file a default contract as a condition for approval of a spin-
down, finding that the Commission had not identified any source of
authority to impose that condition. The court explained,

    Where an activity or entity falls within NGA Sec.  1(b)'s
exemption for gathering, the provisions of NGA Sec. Sec.  4, 5, and
7, including the ``in connection with'' language of Sec. Sec.  4 and
5, neither expand the Commission's jurisdiction nor override Sec.
1(b)'s gathering exemption * * * Because the Commission concluded
that the facilities to be transferred by NorAm Gas were exempt under
Sec.  1(b) as gathering facilities, and that NorAm Gas'
independently operated affiliate gatherer was not a ``natural gas
company'' subject to the NGA, the Commission cannot simply assert
authority over the facilities and the affiliate by invoking other
sections of the Act.\32\
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    \32\ Id. at 553.

C. OCSLA

    21. Section 5(e) of the Outer Continental Shelf Lands Act (OCSLA)
authorizes the Secretary of Interior to grant rights of way through
submerged lands on the Outer Continental Shelf (OCS) for purposes of
transporting natural gas, upon the condition that the pipeline will
transport natural gas produced in the vicinity of the pipelines in such
proportionate amounts as the Commission, in consultation with the
Secretary of Energy, may determine to be reasonable. Section 6(e)(1)
provides that every permit, right-of-way, or other grant of
transportation authority must require that the pipeline be operated in
accordance with various competitive principles. These include that the
pipeline must provide open and nondiscriminatory access to both owner
and non-owner shippers. Section 6(e)(2) provides that the Commission
may exempt pipelines that feed into a facility where gas is first
collected from the required competitive principles of subparagraph 1.
    22. In 2002, the Commission issued Order No. 639,\33\ adopting
regulations requiring companies providing natural gas transportation
services, including gathering, on the OCS to periodically file
information with the Commission concerning their pricing and service
structures. The Commission relied on the OCSLA as providing the
necessary authority for these regulations, and stated that the required
information would assist it in determining whether OCS transportation
services conform to the open access requirements of the OCSLA. In Order
No. 639-A, the Commission recognized that it had generally relied only
on the NGA to regulate offshore natural gas facilities and services.
However, the Commission stated that, as offshore exploration and
development had evolved, it had grown beyond our ability to regulate by
relying exclusively on the NGA. The Commission further stated that
approximately half of offshore gas infrastructure was now considered
gathering and thus excluded from its NGA jurisdiction. In these
circumstances, the new OCSLA reporting requirements were needed to
ensure compliance with the OCSLA's competitive principles.
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    \33\ Regulations under the Outer Continental Shelf Lands Act
Governing the Movement of Natural Gas on Facilities on the Outer
Continental Shelf, Order No. 639, 65 FR 20,354 (Apr. 17, 2000), III
FERC Stats. & Regs. ] 31,097 (2000), order on reh'g, Order No. 639-
A, 65 FR 47,294 (Aug. 2, 2000), III FERC Stats. & Regs. ] 31,103
(2000), order denying clarification, 93 FERC ] 61,274 (2000).
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    23. In Williams Companies v. FERC, 345 F.3d 910 (D.C. Cir. 2003)
(Williams Companies), the D.C. Circuit affirmed a District Court
decision vacating the rules adopted by Order No. 639 as exceeding the
Commission's authority under the OCSLA. The court held that the OCSLA
does not provide the Commission a general power to enforce the OCSLA
open access provisions, but only assigns the Commission a few well-
defined tasks. When the Commission issues certificates pursuant to NGA
section 7, it must include the open access conditions required by OCSLA
section 6(f)(1). However, the court held that the OCSLA provided for
the Secretary of Interior to enforce those conditions, not the
Commission.

D. Shell Offshore Inc. v. Transco and the Williams Gas Processing
Remand

    24. Transco filed an application for abandonment in which it
proposed to spin-down roughly 22 miles of its North Padre Island
pipeline facilities on the OCS, which were originally functionalized as
transmission, to its affiliate, Williams Field Services (WFS). The
application was accompanied by WFS's petition to declare the facilities
gathering upon their acquisition by WFS. Over protests, the Commission
approved the abandonment and granted the petition, declaring the
facilities to be gathering upon completion of the sale, which occurred
on December 1, 2001.\34\
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    \34\ Transcontinental Gas Pipe Line Corp., 96 FERC ] 61,115
(2001), reh'g denied, 103 FERC ] 61,177 (2003).
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    25. Prior to the spin-down Transco had charged Shell Offshore Inc.
(Shell) $0.08/Dth to transport Shell's gas the 230-mile distance from
the interconnect with Shell's production facilities to one of Transco's
mainline pooling points. After the spin-down, Shell not only paid
Transco the $0.08 transportation rate, WFS also demanded that it pay
WFS an additional $0.08/Dth for transporting Shell's gas 3.08 miles
from the connection with Shell's production facilities on what had
become WFS's facilities to the interconnection with Transco's
transmission facilities. Shell chose to shut in its production rather
than pay double the rate it had been paying Transco alone for the same
transportation service.
    26. Shell filed a complaint against Transco and its affiliates, and
the Commission set the complaint for hearing before an ALJ. In
affirming the ALJ's Initial Decision, the Commission adopted the ALJ's
finding that Transco and WFS, in effectuating the spin-down, met the
Arkla test. Treating Transco and WFS as a single entity because of
their concerted actions, the Commission found that their behavior
frustrated the Commission's regulation of Transco by requiring Shell to
execute a gathering agreement that included an exorbitant gathering
rate and anticompetitive conditions, such as a life-of-reserves
commitment tying Shell's production to the Transco facilities for the
life of the reserves. The Commission also found that WFS's actions
violated the OCSLA. The Commission then imposed a just and reasonable
rate of $0.0169/Dth for

gathering services on the spun-down North Padre facilities.
    27. On rehearing, in attempting to rebuff arguments that the
Commission did not properly apply the Arkla test, the Commission
clarified that it viewed the Arkla test as being simply a circumvention
test. That is, the Commission could reassert jurisdiction based on its
finding that Transco created the ``illusion of a separate gathering
entity to evade the Commission's regulations,'' thus permitting ``WFS
to extract money that Transco, as a natural gas company, providing both
services alone, could not.'' \35\ The Commission denied requests for
rehearing, describing the spin-down as ``a sham * * * designed to
circumvent the Commission's regulation.'' \36\
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    \35\ Id. at P 7.
    \36\ 103 FERC ] 61,177 at P 7.
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    28. WFS filed a petition for review of the Commission's orders \37\
with the U.S. Court of Appeals for the District of Columbia. On July
13, 2004, the court vacated and remanded the Commission's orders in
Williams Gas Processing--Gulf Coast Company, L.P. v. FERC.\38\ The
court rejected both of the Commission's statutory bases for reasserting
jurisdiction--the NGA and the OCSLA. At the heart of the court's
findings with respect to the Commission's NGA jurisdiction is its
determination that the Commission misapplied the Arkla test. First, the
court found that the Commission failed to show that the narrow kinds of
abuses that would trigger a reassertion of jurisdiction had occurred.
The court stated that Arkla permits a reassertion of jurisdiction in
circumstances ``limited to'' abuses ``directly related to the
affiliate's unique relationship with an interstate pipeline,'' such as
``tying gathering service to the pipeline's jurisdictional transmission
service,'' or ``cross-subsidization between the affiliate's gathering
rates and the pipeline's transmission rates.'' \39\ Thus, under Arkla,
the court found that ``[o]nly those types of activities--where the
affiliate is leveraging its relationship with the pipeline to enhance
its market power--would `trigger the Commission's authority to
disregard the corporate form and treat the pipeline and its affiliate
as a single entity.' '' \40\ The court found that WFS's actions fell
outside this category. The court found that the gathering affiliate's
affiliation with the pipeline was ``utterly irrelevant to its ability
to charge high rates, or to impose onerous conditions for gathering
service.'' \41\ Instead, the affiliate ``could do these things for one
reason only--because it was a recently deregulated monopolist in the
North Padre gathering market.'' \42\ It observed that WFS was charging
the same rates and service conditions that any non-affiliate gatherer
could demand in the OCS and, thus, was not ``leveraging'' its unique
relationship with Transco.
---------------------------------------------------------------------------

    \37\ 100 FERC ] 61,254 (2002), reh'g denied, 103 FERC ] 61,177
(2003).
    \38\ Williams Gas Processing, 373 F.3d 1335.
    \39\ Id. at 1342.
    \40\ Id. (citing Arkla, 67 FERC at 61,871).
    \41\ Id. at 1342.
    \42\ Id.
---------------------------------------------------------------------------

    29. Second, the court found that the Commission, in piercing the
corporate veil to treat WFS and Transco as a single entity in a
``sham'' transaction (the spin-down), analyzed the elements of the
Arkla test out of sequence: ``it adopts as its first premise (WFS is
Transco) the Arkla Gathering test's ultimate conclusion--that corporate
form may be set aside.'' \43\ Under Arkla, the rationale for
reasserting ``in connection with'' jurisdiction is that the concerted
behavior between the two entities (i.e., the regulated pipeline and the
affiliated non-jurisdictional gathering affiliate) has frustrated the
Commission's ability to regulate the pipeline (not the gatherer). By
treating WFS and Transco as a single entity, the Commission ``could
thus attribute the gatherer's alleged malfeasance to the pipeline, and
apply the pipeline's regulatory requirements to the gatherer.'' \44\
The court found error, because ``Only when the Commission finds both
concerted action between a jurisdictional pipeline and its gathering
affiliate and that the concerted action frustrates the Commission's
effective regulation of the pipeline, may it then pierce the corporate
veil and treat the legally distinct entities as one.'' \45\
---------------------------------------------------------------------------

    \43\ Id. at 1343.
    \44\ Id.
    \45\ Id. (citing Arkla, 67 FERC at 61,871).
---------------------------------------------------------------------------

    30. The court also rejected the Commission's finding that WFS'
actions warranted application of the OCSLA's open access and
nondiscrimination prohibitions to set a just and reasonable gathering
rate. Describing an argument made on appeal that the Commission simply
was enforcing the open access and non-discrimination conditions in
Transco's tariff as post hoc rationalization, the court observed that
the Commission's assertion of OCSLA jurisdiction over WFS based on the
Arkla test ``is nowhere present in either the Order or the Order on
Rehearing.'' \46\ It left open for another day the broader question of
whether the Commission may ever assert jurisdiction over gas gatherers,
whether affiliated with a pipeline or not.
---------------------------------------------------------------------------

    \46\ Id. at 1345.
---------------------------------------------------------------------------

    31. On remand, the Commission found that, based on the record in
the proceeding and the court's interpretation of the Commission's
precedent, the Commission lacked sufficient basis to reassert NGA
jurisdiction or to assert OCSLA jurisdiction over the gathering rates
and services of WFS's North Padre Island gathering facilities.\47\ On
rehearing, Shell contended that the Commission should modify the Arkla
test, and grant relief based on the revised test. The Commission denied
rehearing on the ground that the case had been fully litigated based on
the existing test. However, the Commission concurrently issued a notice
of inquiry to evaluate possible changes in the Arkla test. Thirteen
comments have been filed. The commenters include (1) producers,\48\ (2)
providers of gathering services, and (3) interstate pipelines.\49\ No
local distribution companies, state regulatory Commissions, or other
representatives of natural gas consumers filed comments.
---------------------------------------------------------------------------

    \47\ Shell Offshore Inc. v. Transcontinental Gas Pipe Line
Corp., 110 FERC ] 61,254, order on reh'g, 112 FERC ] 61,293 (2005).
    \48\ The following producers submitted comments: Natural Gas
Supply Association (NGSA); Independent Petroleum Association of
America (IPAA); Producer Coalition (Producer Coalition); Shell
Offshore, Inc. (Shell Offshore); and Indicated Shippers (Indicated
Shippers). Indicated Shippers include: BPAmerica Production Company,
BP Energy Company, ExxonMobil Gas & Power Marketing Company, Chevron
U.S.A. Inc., Marathon Oil Company and Shell Offshore Inc).
    \49\ The following gathering providers and/or pipelines
submitted comments: Williams Midstream Gas and Liquids (Williams);
ONEOK Field Services Company (ONEOK); Western Gas Resources, Inc.
(Western); Duke Energy Field Services, Inc. (Duke); Enterprise
Products Partners, L.P. (Enterprise); Enbridge Energy Partners, L.P.
and Enbridge, Inc. (Enbridge); Williston Basin Interstate Pipeline
Company (Williston); and Interstate Natural Gas Association of
America (INGAA).
---------------------------------------------------------------------------

II. Comments

    32. Several of the producer commenters \50\ contend that the
Commission should modify the Arkla test so that the Commission can
reassert jurisdiction when: (a) the gatherer's facilities are connected
to an affiliate's transportation facilities, and (b) the gatherer
frustrates the Commission's effective regulation of interstate
transportation. They contend that such frustration may occur when the
gathering affiliate charges an excessive price for gathering, since
that effectively allows the corporate family to charge excessive rates
for the entire transportation path, including over the pipeline itself.
These producers further

contend that there is a problem with offshore gathering notwithstanding
the limited number of complaints to date. They assert that pipelines
are waiting for final resolution of the Commission's jurisdiction.
Spin-downs and spin-offs create the potential for abuse because they
involve existing facilities; the customer does not have meaningful
alternatives.
---------------------------------------------------------------------------

    \50\ Shell Offshore and Indicated Shippers.
---------------------------------------------------------------------------

    33. Other producer commenters recognize that the Commission has
limited legal authority to reassert jurisdiction over gathering
facilities that have been spun down to an affiliate or spun off to an
independent company.\51\ These commenters accordingly request that the
Commission should review the potential for an abuse of market power
when it considers a pipeline's request for abandonment of gathering
facilities, rather than only considering whether the facilities are
gathering facilities. These commenters also request that the Commission
should redefine gathering so that fewer facilities qualify for the
gathering exemption from Commission regulation.
---------------------------------------------------------------------------

    \51\ Producer Coalition comments at 2-3, 10-11; IPAA comments at
2-3.
---------------------------------------------------------------------------

    34. Gathering providers and pipelines contend that the Commission
should retain the current Arkla test for reasserting jurisdiction. They
argue that, as a legal matter, the Commission lacks jurisdiction to
assert jurisdiction over gathering performed by non-natural gas
companies except in the situation allowed by the current Arkla test.
These commenters also state that there is no regulatory gap with
respect to gathering. The states regulate gathering onshore and in
state waters. OCS gathering is governed by the OCSLA and antitrust
laws. In any event, they state that there is no industry-wide problem
requiring a solution, since only a few complaints have been filed with
the Commission. Moreover, they argue the current policy appropriately
permits affiliated and non-affiliated gatherers to compete under the
same regulatory structure. Also current commercial arrangements have
been entered into based on the Arkla policy as it now stands. Re-
regulation by the Commission would introduce regulatory risk and
adversely affect investment in new infrastructure. The potential
chilling of long-term commitments in gathering is not warranted given
the relatively small number of spin-downs and the effectiveness of
current regulation.

III. Discussion

    35. After carefully reviewing the comments, the Commission has
determined to clarify the existing Arkla test in certain respects.
However, consistent with the court's decision in Williams Gas
Processing, an assertion that the gathering affiliate has charged too
high a rate, by itself, would be insufficient to justify a reassertion
of jurisdiction over the affiliate's gathering activities.

A. The Arkla Test for Reasserting Jurisdiction

    36. As the Commission held in Arkla, and the court affirmed in
Conoco, the Commission generally lacks jurisdiction over affiliates of
interstate pipelines that perform only a gathering service. However,
the Commission has reserved the right to ``exert jurisdiction over the
[affiliate's] gathering service to the extent needed to preserve the
Commission's statutory mandates under the NGA.'' \52\ The Commission
has no doubt as to its authority to disregard corporate structures,
including those created when a pipeline spins down its gathering
facilities to a corporate affiliate, where necessary to prevent
frustration of the statutory purpose of the NGA.\53\ For example, in
Transcontinental Gas Pipe Line Corp. v. FERC (Transco),\54\ the court
upheld the Commission's order that found Transco had used affiliates to
engage in a complicated scheme to (1) make jurisdictional sales to non-
captive customers at less than its filed rate, while (2) passing
through losses in those sales to its jurisdictional captive customers:
``For the Commission not to have investigated further would frustrate a
statutory purpose by allowing Transco to set up subsidiaries to sell
gas at prices at which the company could not legally sell.'' \55\
---------------------------------------------------------------------------

    \52\ Arkla, 69 FERC at 62,087.
    \53\ Capital Tel. Co. v. FCC, 498 F.2d 734, 738, n.10 (D.C. Cir.
1974) (``[w]here the statutory purpose could be easily frustrated
through the use of separate corporate entities a regulatory
commission is entitled to look through the corporate entities and
treat the separate entities as one for purposes of regulation.'').
    \54\ 998 F.2d 1313 (5th Cir. 1993).
    \55\ Id. at 1321.
---------------------------------------------------------------------------

    37. The issue here is what circumstances would require the
Commission to exert jurisdiction over an affiliate's gathering
activities in order to avoid frustration of the purposes of the NGA. In
order to answer that question, it is first necessary to understand the
relevant statutory purposes of the NGA, particularly what activities
the Congress intended the Commission to regulate when it enacted the
NGA. Therefore, the first section below discusses the extent to which
the regulation of gathering may be considered to be within the
statutory purposes of the NGA. We then clarify, in the next section,
the type of conduct that would frustrate the NGA's statutory purposes,
and thus justify a reassertion of jurisdiction. Finally, we consider
the issues of whether a finding of ``concerted action'' between the
affiliate and the pipeline is necessary to justify a reassertion of
jurisdiction, and whether the affiliate's gathering activities must be
conducted by separate personnel.
1. Statutory Purpose of the NGA
    38. The statutory purpose of the NGA is, of course, ``to protect
consumers against exploitation at the hands of natural gas companies.''
\56\ In order to carry out that purpose, NGA section 1(b) gives the
Commission jurisdiction to regulate: (1) Transportation of natural gas
in interstate commerce, (2) sales for resale of natural gas in
interstate commerce,\57\ and (3) ``natural gas companies'' engaged in
such transportation and sales. This gives the Commission full authority
to regulate the rates, terms, and conditions of jurisdictional
transportation service performed by natural gas companies, i.e.
interstate pipelines. If a natural gas company provides gathering
service in addition to jurisdictional transportation service, the
Commission's regulation of the jurisdictional transportation service
``may necessarily impinge on'' the gathering service if ``gathering is
intertwined with jurisdictional activities.'' \58\ For example, the
Supreme Court has held that the Commission may consider a natural gas
company's gathering costs ``for the purpose of determining the
reasonableness of rates subject to its jurisdiction.'' \59\
---------------------------------------------------------------------------

    \56\ FPC v. Hope Natural Gas Co., 320 U.S. 591, 610 (1944).
    \57\ Excluding ``first sales'' deregulated by the Wellhead
Decontrol Act of 1989.
    \58\ Conoco, 90 F.3d at 549.
    \59\ Colorado Interstate Gas Co., 324 U.S. 581, 603 (1945).
---------------------------------------------------------------------------

    39. However, the statutory purpose of the NGA does not include the
regulation of gathering service, particularly by companies who are not
natural gas companies. This follows from the fact that NGA section 1(b)
expressly exempts ``gathering of natural gas'' from the Commission's
jurisdiction. As the Supreme Court stated in Northwest Central Pipeline
v. State Corp. Commission, 489 U.S. 493, 509-14 (1989), Congress in the
NGA ``carefully divided up regulatory power over the natural gas
industry'' so as to ``expressly reserve to the States the power to
regulate * * * gathering.''
    40. Several of the producer commenters nevertheless argue that the

provisions of NGA sections 4 and 5 permitting the Commission to
determine rates for a natural gas company's services performed ``in
connection with'' jurisdictional transportation and sales support a
holding that the statutory purpose of the NGA includes ensuring that
natural gas companies and their affiliates do not charge excessive
rates for gathering. These commenters rely on the Eighth Circuit's
holding in Northern Natural that the Commission ``may * * * under the
NGA's Sec. Sec.  4 and 5 regulate rates charged for gathering on the
pipeline's own gathering facilities in connection with jurisdictional
interstate transportation, notwithstanding the explicit Sec.  1(b)
exclusion of gathering from the act.'' 929 F.2d at 1269. In addition,
they point out that the court defined the phrase `` `gathering
facilities owned by the pipeline' and all subsequently similar
expressions [used in its opinion] * * * to include such facilities
owned or operated directly or indirectly by a pipeline or its parent,
affiliate, subsidiary or lessors.'' Id., at 1263 n. 2.
    41. However, in both Arkla and Conoco, the Commission and the D.C.
Circuit rejected similar contentions that the Eighth Circuit's decision
should be relied upon to find that the Commission has NGA sections 4
and 5 ``in connection with'' jurisdiction over gathering affiliates.
For example, in Conoco, the D.C. Circuit pointed out that the gathering
service at issue in Northern Natural was provided by the pipeline
itself, not an affiliate, and thus the Eighth Circuit ``did not have to
consider the full ramifications of its footnote. It did not discuss the
issue of the jurisdictional status of affiliate-run gathering services,
and it thus provides little persuasive authority on that issue.'' 90
F.3d, at 546.
    42. While the Commission's regulation of a natural gas company's
jurisdictional transportation services may necessarily impinge on any
gathering services that company performs which are intertwined with its
jurisdictional activities, the ``in connection with'' language of
sections 4 and 5 does not constitute a grant of authority to the
Commission to regulate gathering independent of its effect on
jurisdictional transportation. The D.C. Circuit made this clear in
Conoco, when it reversed Arkla's default contract condition. Arkla had
required a pipeline spinning down gathering facilities to an affiliate
to file a default contract offering the existing gathering customers
service at existing rates for two years. The court rejected the
Commission's argument that it could impose this condition pursuant to
its section 4 authority to regulate non-jurisdictional activities
performed ``in connection with'' jurisdictional service. The Commission
had argued that permitting a pipeline to terminate its gathering
services without adequate protection for its existing gathering
customers would frustrate the Commission's policy, in its regulation of
jurisdictional transportation service, to promote a competitive market.
The court held that the statute forecloses interpreting the phrase ``in
connection with'' in section 4 as permitting the Commission to regulate
facilities which the Commission has expressly found to be outside its
section 1(b) jurisdiction.
    43. The court explained its decision as follows:

    Where an activity or entity falls within NGA section 1(b)'s
exemption for gathering, the provisions of NGA Sec. Sec.  4, 5, and
7, including the ``in connection with'' language of Sec. Sec.  4 and
5, neither expand the Commission's jurisdiction nor override Sec.
1(b)'s gathering exemption. In language no less applicable here, the
Supreme Court held in Panhandle III, 337 U.S. at 508-09, that
``sections 4, 5, and 7 do not concern the production or gathering,
of natural gas; rather, they have reference to the interstate sale
and transportation of gas and are so limited by their express terms.
* * * Nothing in the sections indicates that the power given to the
Commission over natural-gas companies by Sec.  1(b) could have been
intended to swallow all the exemptions of the same section, and thus
extend the power of the Commission to the constitutional limit of
congressional authority over commerce.'' Because the Commission
concluded that the facilities to be transferred by NorAm Gas were
exempt under Sec.  1(b) as gathering facilities, and that NorAm Gas'
independently operated affiliated gatherer was not a ``natural gas
company'' subject to the NGA, the Commission cannot simply assert
authority over the facilities and the affiliate by invoking other
sections of the act.

    44. We recognize that Congress intended the NGA to be a
comprehensive regulatory scheme, without any ``attractive gaps.'' \60\
Given this purpose of the NGA, the Supreme Court has held that, in
borderline cases, Commission jurisdiction may be found where necessary
to avoid a regulatory gap.\61\ In light of this rule of statutory
construction, the Commission included in the NOI several questions
designed to enable it to further review the extent to which regulation
of gatherers affiliated with interstate pipelines may be justified as
necessary to prevent a regulatory gap.\62\ Upon review of those
comments, we continue to find that the regulatory gap argument does not
justify a finding that a purpose of the NGA is to enable the Commission
to regulate gathering, particularly by non-natural gas companies,
whether onshore or on the OCS.
---------------------------------------------------------------------------

    \60\ FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 28
(1961).
    \61\ FPC v. Louisiana Power & Light Co., 406 U.S. 621, 631
(1972). In Conoco, 90 F.3d at 553, the court found that the
Commission had not supported its contention that a default contract
was necessary to avoid a regulatory gap, finding that the Commission
had not explained why the states would be unable to protect NorAm
Gas Transmission Company's customers.
    \62\ Question 11 asked, ``Is there a gap between state
regulation of gathering services and the Commission's regulation of
natural gas companies, and, if so, what is the nature of that gap?''
Question 12 asked, ``Should the Commission view the conduct of
offshore affiliated gatherers differently from onshore affiliated
gatherers due to this lack of state regulation offshore?''
---------------------------------------------------------------------------

    45. Onshore and in state waters, there is no regulatory gap,
because the states have full authority to regulate gathering within
their borders, including the rates charged by non-natural gas company
gathering providers. As the court stated in Conoco, ``Section 1(b)
contemplates that some measure of authority over gathering should be
reserved to the States, and jurisdiction over companies whose sole
business is gathering is a permissible place to start.'' \63\ And,
while states have not imposed across-the-board, cost-based rate
regulations on local gatherers, they have imposed anti-discrimination
requirements and permitted the filing of complaints by producers.\64\
---------------------------------------------------------------------------

    \63\ 90 F.3d at 547.
    \64\ See Enbridge comments at 26-30, summarizing how Texas,
Louisiana, New Mexico, Wyoming, and Oklahoma regulate gathering. See
also Enterprise comments at 16 and Williams comments at 24-25.
---------------------------------------------------------------------------

    46. We recognize that states cannot regulate gathering on the OCS,
since only the federal government has regulatory authority with respect
to the OCS.\65\ However, this does not justify a finding that a purpose
of the NGA is to fill any regulatory gap with respect to the regulation
of gathering on the OCS. NGA section 1(b) makes no distinction between
the Commission's jurisdiction onshore and its jurisdiction on the OCS.
Thus, given our holding that the purposes of the NGA do not include the
regulation of gathering by non-natural gas companies onshore, there is
no basis in the language of the NGA to make a different finding with
respect to

gathering by non-natural gas companies offshore.
---------------------------------------------------------------------------

    \65\ Under the OCSLA, 43 U.S.C. 1331 et seq. (2000), it is ``the
policy of the United States that * * * the subsoil and seabed of the
outer Continental Shelf appertain to the United States and are
subject to its jurisdiction, control, and power of disposition * * *
'' 43 U.S.C. 1332 (2000). However, while `` `[a]ll law applicable to
the Outer Continental Shelf is federal law, [] to fill the
substantial `gaps' in the coverage of federal law, OCSLA borrows the
`applicable and not inconsistent' laws of the adjacent States as
surrogate federal law.' '' Ten Taxpayer Citizens Group v. Cape Wind
Associates, 373 F.3d 183, 192 (1st Cir. 2004) (quoting Gulf Offshore
Co. v. Mobil Oil Corp., 453 U.S. 473, 480 (1981)).
---------------------------------------------------------------------------

    47. We find that Congress determined how to address any regulatory
gap with respect to gathering on the OCS in the OCSLA. When Congress
first enacted the OCSLA in 1953, it recognized that there was no
federal law applicable to the recovery of natural resources from the
OCS.\66\ At that time, Congress enacted only a `` `bare bones' leasing
authority with essentially no statutory standards or guidelines,''
because there was a ``relative lack of basic knowledge concerning, and
interest in, development of the resources of the Shelf at that time.''
\67\ However, by the late 1970s, it was recognized that ``the OCS
represents such a large and promising area for oil and gas
exploration,'' that ``Congress must update the [OCSLA] * * * to provide
adequate authority and guidelines for the kind of development activity
that probably will take place in the next few years.'' \68\
Accordingly, Congress amended the OCSLA in 1978 for this purpose.
---------------------------------------------------------------------------

    \66\ For example, the House Committee on the Judiciary, which
reported on H.R. 5134, the bill which was enacted in 1953 as the
OCSLA, found that ``no law [] exists whereby the Federal Government
can lease those submerged lands [in the Outer Continental Shelf], *
* * [] [T]herefore, [it is] the duty of the Congress to enact
promptly a leasing policy for the purpose of encouraging the
discovery and development of the oil potential of the Continental
Shelf.'' H.R. Rep. No. 413 (1953).
    \67\ S. Rep. No. 95-284, at 48 (1977).
    \68\ Id.
---------------------------------------------------------------------------

    48. The OCSLA, unlike the NGA, contains no exemption for gathering,
but applies to the full range of gas exploration, development,
production, gathering, and transportation activities. One purpose of
the 1978 OCSLA amendments was to assure that resources on the OCS are
developed ``in a manner which is consistent with the maintenance of
competition.'' \69\ To that end, section 5(e) of the OCSLA authorizes
the Secretary of the Interior to grant rights of way through submerged
lands on the OCS for purposes of transporting natural gas, upon the
condition that the pipeline will transport natural gas produced in the
vicinity of the pipelines in such proportionate amounts as the
Commission, in consultation with the Secretary of Energy, may determine
to be reasonable. Section 5(f)(1) provides that every permit, right-of-
way, or other grant of transportation authority must require that the
pipeline be operated in accordance with various competitive principles.
These include that the pipeline must provide open and nondiscriminatory
access to both owner and non-owner shippers.
---------------------------------------------------------------------------

    \69\ OCSLA section 3(3).
---------------------------------------------------------------------------

    49. However, the D.C. Circuit held in Williams Companies v. FERC
\70\ that these sections do not give the Commission any general power
to create and enforce open access on the OCS. Rather, Congress intended
that the Secretary of the Interior have the general power to enforce
these provisions,\71\ with the Commission assigned only a few well-
defined roles. One of those roles is to include in any certificates
issued to an OCS pipeline pursuant to NGA section 7 the condition
required by OCSLA section 5(f)(1). However, since our NGA section 7
certificate authority does not extend to gathering facilities, this
provision cannot give us any jurisdiction with respect to OCS
gathering.\72\
---------------------------------------------------------------------------

    \70\ 345 F.3d 910 (D.C. Cir. 2003).
    \71\ In addition, OCSLA section 23 authorizes citizens to
commence civil actions to enforce any provision of the OCSLA.
    \72\ In addition, OCSLA section 5(f)(2) permits the Commission
to exempt from section (f)(1) competitive principles ``any pipeline
or class of pipelines which feeds into a facility where oil and gas
are first collected, separated, dehydrated, or otherwise
processed.'' However, the court held in Williams Companies that ``a
provision allowing FERC to exempt a subset of facilities from
section (f)(1)'s competitive principles is plainly not an
authorization for it to adopt and enforce principles over all
facilities.'' 345 F.3d at 914.
---------------------------------------------------------------------------

    50. In this order, we express no opinion on the extent of the
Secretary of the Interior's authority under these provisions of the
OCSLA to address assertions that a gatherer has abused its market power
to charge unreasonably high prices. We hold only that Congress
recognized in both 1953 when it first enacted the OCSLA and in 1978
when it amended that Act, that there was a regulatory gap on the OCS,
and adopted the current provisions of the OCSLA for the express purpose
of addressing that gap. In so doing, Congress did not amend the NGA to
give this Commission any additional authority under that Act with
respect to the OCS. We therefore conclude that the regulation of
gathering on the OCS is no more within the purposes of the NGA than is
the regulation of gathering onshore or in state waters.\73\
---------------------------------------------------------------------------

    \73\ In addition to the state and OCSLA regulation described
above, gathering affiliates are also subject to federal and state
anti-trust laws. For example, the Clayton Act, 15 U.S.C. 12-17
(2000), prohibits various anti-competitive activities.
---------------------------------------------------------------------------

2. Conduct Frustrating the Statutory Purpose
    51. We now turn to the issue of the type of conduct that would
frustrate the NGA's statutory purpose, and thus justify the
Commission's disregarding the corporate form in order to exert
jurisdiction over an affiliate's gathering service. For the reasons
discussed below, the Commission finds that it may assert NGA sections 4
and 5 ``in connection with'' jurisdiction over the activities of an
affiliated gatherer, when (1) the gatherer has used its market power
over gathering to benefit the pipeline in its performance of
jurisdictional transportation or sales service and (2) that benefit is
contrary to the Commission's policies concerning jurisdictional
services adopted pursuant to the NGA. However, the fact that an
affiliated gatherer has abused its market power over gathering to
benefit its own gathering service would not, by itself, justify an
assertion of jurisdiction.
    52. Examples of the types of conduct by an affiliated gatherer
which could justify an assertion of jurisdiction include the following.
An affiliated gatherer could refuse to provide gathering service or
charge higher rates, unless the shipper also entered into a contract
with the affiliated pipeline for long-term firm service, rather than
short-term firm or interruptible transportation service. This could
enable the pipeline to obtain more profitable contracts for its
jurisdictional transportation service, than it otherwise could. That is
because the Commission requires pipelines to accept a maximum rate bid
for a short-term service, absent a higher net present value bid for a
longer-term service.\74\ Or, in situations where an affiliated, long-
haul pipeline is interconnected with other interstate pipelines in the
production area, the affiliated gatherer could refuse service or charge
higher rates, unless the shipper also entered into a long-haul
transportation contract with the affiliated pipeline for the entire
haul to the market area, rather than using an unaffiliated
interconnecting pipeline to reach the market area. This would similarly
enable the pipeline to obtain a more profitable contract than it
otherwise could, because, under the Commission's open access
requirements, pipelines must accept maximum rate bids for short-haul
service, absent a higher net present value bid for long-haul service.
Such circumvention would frustrate the Commission's regulation of the
pipeline's jurisdictional transportation service pursuant to the NGA.
---------------------------------------------------------------------------

    \74\ Northern Border Pipeline Co., 107 FERC ] 61,027, at P 11
(2004).
---------------------------------------------------------------------------

    53. The above two examples of conduct justifying assertion of
jurisdiction are both anti-competitive

tying arrangements,\75\ which, in the words of Arkla, are ``directly
related to the affiliate's unique relationship with an interstate
pipeline.'' \76\ That is because the actions benefit the pipeline by
enabling the pipeline to obtain more profitable contracts for its
jurisdictional transportation service. The actions do not provide any
direct benefit to the gathering affiliate's own business. Thus, absent
the affiliation, a gatherer with market power would not appear to have
an incentive to exercise its market power in such a manner. Such
conduct would not increase the profitability of an independent
gatherer's business.
---------------------------------------------------------------------------

    \75\ As the court found in Williams Gas Processing, 374 F.3d at
1342, a tying arrangement is ``conditioning the sale of a good or
service on the purchase of another different (or tied) good or
service.'' In the above examples, the gathering affiliate would be
conditioning sale of its gathering service on the purchase of a
particular type of transportation service from the pipeline.
    \76\ 67 FERC at 61,871.
---------------------------------------------------------------------------

    54. By contrast, a gathering affiliate's charging an unreasonably
high rate for its gathering service, without more, does not frustrate
the statutory purpose of the NGA and thus would not justify an
assertion of jurisdiction.\77\ This is true, even where the gathering
affiliate owns gathering facilities that provide the sole link between
a production field and the interstate pipeline. As already discussed,
the statutory purpose of the NGA does not include the regulation of
gathering service, particularly by companies who are not natural gas
companies. Rather, the NGA only permits the Commission to affect
gathering service to the extent necessary to carry out its
responsibilities under the NGA to regulate jurisdictional services. A
gathering affiliate's exercise of market power to charge high gathering
prices may increase its own profits. But such an exercise of market
power does not affect the Commission's regulation of jurisdictional
transportation service. It does not permit the pipeline to circumvent
any of the Commission's policies concerning jurisdictional
transportation service or otherwise benefit the affiliated pipeline in
its performance of jurisdictional transportation service.
---------------------------------------------------------------------------

    \77\ Contrast Transco, 998 F.2d 1313, in which the court
affirmed the Commission's assertion of jurisdiction where the use of
corporate affiliates had enabled the pipeline to make jurisdictional
sales at unduly discriminatory prices.
---------------------------------------------------------------------------

    55. Thus, unlike the examples of conduct justifying an assertion of
jurisdiction described above, there is simply no relationship between
the gathering affiliate's relationship with the pipeline and its
charging of high prices for gathering service. As now Chief Justice
Roberts wrote in Williams Gas Processing, ``The fact that WFS is an
affiliate of Transco is utterly irrelevant to its ability to charge
high rates, or to impose onerous conditions for gathering service. This
irrelevance is demonstrated by the fact that WFS, as a deregulated
monopolist, could have (and likely would have) undertaken the same
course of conduct had Transco been owned by someone else entirely. The
fact that WFS had an affiliate relationship with Transco neither
enhanced nor detracted from its ability to charge high rates or impose
onerous conditions.'' \78\
---------------------------------------------------------------------------

    \78\ Williams Gas Processing, 373 F.3d at 1342.
---------------------------------------------------------------------------

    56. When the Commission determined in Arkla that it lacks
jurisdiction over non-natural gas companies performing gathering
service including affiliates of pipelines, the Commission recognized
that many customers of such gatherers are ``captive * * * i.e., there
is no competition for gathering services.'' \79\ The Commission
nevertheless held that the NGA only authorizes it to regulate gathering
performed by natural gas companies in connection with jurisdictional
services. Therefore, the Commission stated that ``the absence of
competition by itself is not sufficient to confer upon the Commission
jurisdiction to regulate gathering by non-pipelines.'' \80\ It follows
that a gathering affiliate's exercise of market power solely to charge
high gathering prices does not violate the NGA's statutory purpose.
---------------------------------------------------------------------------

    \79\ Mid Louisiana Gas Co., 67 FERC at 61,851.
    \80\ Id.
---------------------------------------------------------------------------

    57. Producer commenters generally recognize that, in order to
assert jurisdiction over an affiliated gatherer, the Commission must
find that the gatherer has engaged in conduct that frustrates the
statutory purpose of the NGA. For example, Shell Offshore proposes that
the Commission modify the Arkla test ``to provide that the Commission
may assert jurisdiction over the gathering services on an affiliate of
an interstate pipeline whenever the affiliate abuses its market power
and the abuses frustrate the effective regulation of the pipeline as a
consequence of any of the factors underlying the `in connection with'
relationship between the interstate transportation service and the
gathering services.'' \81\ The producers argue that any abuse of market
power by an affiliated gatherer, including simply charging excessive
rates frustrates our regulation of the pipeline. That is because, as
Shell Offshore argues, those excessive gathering rates ``effectively
exact monopolistic rents * * * over the entire combined service [of
both the gatherer and the pipeline] nominally applying them solely to
the gathering component.'' \82\
---------------------------------------------------------------------------

    \81\ Shell Offshore comments at 41 (emphasis supplied).
    \82\ Id. at 43.
---------------------------------------------------------------------------

    58. In order to find a frustration of statutory purpose in the
manner suggested by the producer commenters, the Commission would have
to treat a gathering affiliate's charges in excess of a reasonable
gathering rate as being additional charges for the pipeline affiliate's
jurisdictional transportation service, rather than additional charges
for the gathering affiliate's own service. However, this would
effectively nullify the Commission's holding in Arkla, affirmed by the
D.C. Circuit in Conoco, that the Commission lacks jurisdiction to
regulate the rates charged by a gathering affiliate that performs only
a gathering service. That is because whenever the gathering affiliate
charged more than we determined was a reasonable rate for gathering
service, we would treat the excess charge as a charge for
jurisdictional transportation service and disallow it. This would have
essentially the same effect as our directly regulating the rates
charged for gathering by all affiliated gatherers.
    59. Above, we have held that Congress reserved to the states
jurisdiction to regulate gathering within their boundaries (i.e.,
onshore and in state waters) by non-natural gas companies, including
affiliates of natural gas companies. Therefore, it is consistent with
the statutory purpose of the NGA to allow the states to address any
assertions that a non-natural gas company, whether or not affiliated
with a pipeline, has charged excessive rates for gathering service
within their boundaries. Similarly, we have held that Congress gave us
no greater NGA authority with respect to OCS gathering, than over
gathering onshore and in state waters, and has only provided for
regulation of OCS gathering by non-natural gas companies under the
OCSLA. The court has interpreted the OCSLA as giving the Department of
the Interior, and not this Commission, the authority to enforce the
non-discrimination and other requirements of the OCSLA. Therefore, we
find it consistent with the purposes of the NGA and the OCSLA that a
remedy, if any, for excess charges by non-natural gas companies for OCS
gathering be provided by the Department of Interior, not us.
    60. Finally, we emphasize that, if an interstate pipeline itself
engages in anti-competitive conduct that favors its gathering
affiliate, the Commission has

full authority under the NGA to provide a remedy, without the need to
assert jurisdiction over the affiliate. For example, if a pipeline
seeks to subsidize its gathering affiliate by including costs properly
allocated to the gathering affiliate in its interstate transportation
rates, the Commission could order the removal of those costs.\83\
Similarly, as described above, the Commission has required pipelines
spinning down gathering service to an affiliate to include in their
tariffs provisions stating that the pipeline (1) will provide
nondiscriminatory access to all sources of supply, (2) will not give
shippers of its gathering affiliate undue preferences over shippers of
non affiliated gatherers, and (3) will not condition or tie its
agreement to provide transportation service to an agreement by the
producer, customer, end-user or shipper relating to any service in
which its gathering affiliate is involved. No pipeline has questioned
our authority to impose these requirements.
---------------------------------------------------------------------------

    \83\ Colorado Interstate Gas Co., 324 U.S. 581, 603 (1945).
---------------------------------------------------------------------------

    61. Thus, it is only when the gathering affiliate engages in anti-
competitive conduct benefiting the pipeline, that the Commission must
assert jurisdiction over the affiliate's activities in order to provide
a remedy. In this regard, we note that in Arkla one of the examples we
gave of activity that could justify a reassertion of jurisdiction was:
``the pipeline's giving transportation discounts only to those
utilizing the affiliate's gathering service.'' We clarify that there
would be no need to assert jurisdiction over the affiliate in this
situation, since the Commission has authority under the NGA to remedy
any undue discrimination in the pipeline's offering of discounts to its
customers, without regard to its jurisdiction with respect to other
companies who may benefit from those discounts. The appropriate example
of activity that could justify exerting jurisdiction over the gathering
affiliate in this context would be the reverse situation: where, as
described above, the gathering affiliate gives gathering discounts only
to those entering into particular types of contracts for the pipeline's
transportation service that are beneficial to the pipeline. Similarly,
any improper shifting of costs between a natural gas company and its
gathering affiliate could be remedied in a proceeding to set the
former's rates.
3. Whether Concerted Action Is Necessary
    62. In Arkla, the Commission stated that it would reassert
jurisdiction ``if an affiliated gatherer acts in concert with its
pipeline affiliate in connection with the transportation of gas in
interstate commerce and in a manner that frustrates the Commission's
effective regulation of the interstate pipeline.'' This language has
been interpreted as creating a two-pronged test under which the
Commission must make separate findings that: (1) the jurisdictional
pipeline and its gathering affiliate have engaged in ``concerted
action'' and (2) the concerted action frustrates the Commission's
ability to regulate the pipeline.\84\ In the NOI, the Commission
requested the parties' views on the need for the ``concerted action''
prong of the Arkla test.\85\
---------------------------------------------------------------------------

    \84\ Williams Gas Processing, 373 F.3d at 1343.
    \85\ Question 8 asked, ``Should a showing of `concerted action'
by the gathering affiliate and the pipeline be required, or should
it be sufficient for the gathering affiliate alone to have engaged
in anticompetitive or otherwise objectionable behavior to trigger
the Commission's reassertion of jurisdiction?'' Question 9 asked,
``What kind of activities would constitute `concerted action'
between the gathering affiliate and its affiliated pipeline for
purposes of circumventing the Commission's effective regulation of
the pipeline?''
---------------------------------------------------------------------------

    63. After evaluating the parties' comments on this issue, the
Commission concludes that, in determining whether to assert
jurisdiction over the activities of a gathering affiliate, the focus
should be on whether the gathering affiliate has engaged in the type of
conduct described in the previous section as justifying such an
assertion of jurisdiction. While a finding that the pipeline also
participated in the conduct may buttress the need for an assertion of
jurisdiction over the activities of the gathering affiliate, we find,
for the reasons discussed below, that a finding of such ``concerted
action'' is not a necessary prerequisite to an assertion of
jurisdiction.
    64. The D.C. Circuit has held that ``[w]here the statutory purpose
could be easily frustrated through the use of separate corporate
entities, the Commission is entitled to look through the corporate form
and treat the separate entities as one and the same for purposes of
regulation.'' \86\ Thus, the fundamental test for asserting
jurisdiction over the activities of an affiliate is whether such
jurisdiction is necessary to avoid frustration of the statutory
purpose. When this test is met, the Commission may look through the
corporate form, even though the separate corporations were formed in
good faith, and there has been no showing that the corporate form was
adopted for the purpose of evading the statute.\87\
---------------------------------------------------------------------------

    \86\ Transco, 998 F.2d at 1321 (quoting Capital Tel. Co. v.
United States, 449 F.2d 846, 855 (5th Cir. 1971)).
    \87\ Anderson v. Abbott, 321 U.S. 349 (1944); Kavanaugh v. Ford
Motor Co., 353 F.2d 710 (7th Cir. 1965).
---------------------------------------------------------------------------

    65. In the preceding section, the Commission has explained that, in
order to justify an assertion of jurisdiction over the activities an
affiliated gatherer, there must be a showing that the gatherer has
engaged in conduct that frustrates the purpose of the NGA. This
requires a showing that the gathering affiliate has abused its market
power over gathering in order to benefit the pipeline in the pipeline's
performance of jurisdictional transportation or sales service in a
manner contrary to the Commission's policies concerning jurisdictional
services. We believe that a showing of such conduct by the gathering
affiliate is sufficient to show that Commission jurisdiction over the
affiliate is necessary to avoid frustration of the NGA's purpose,
regardless of whether there is also evidence of ``concerted action'' in
the form of pipeline participation in the affiliate's conduct.
    66. This conclusion may be illustrated by the examples the
Commission gave in the previous section of conduct that would frustrate
the purpose of the NGA. In those examples, the affiliated gatherer
refuses to provide gathering service or charges higher rates, unless
the shipper also enters into long-term or long-haul firm transportation
contracts with the affiliated pipeline. Commission policy prohibits
pipelines from demanding that their customers enter into such
contracts. The ``concerted action'' prong of the existing Arkla test
would prevent the Commission from asserting jurisdiction in this
situation, unless there was evidence not only that the gathering
affiliate had engaged in this activity, but also that the pipeline had
participated in the activity sufficiently to justify a finding of
``concerted action.'' This would suggest that the Commission would have
to find that the pipeline had requested the gathering affiliate to
engage in the activity, or at least that the two affiliates had in some
manner discussed or jointly planned the gathering affiliate's actions.
    67. However, as discussed in the previous section, the gathering
affiliate's actions would not provide any direct benefit to the
gathering affiliate's own business. Rather, their sole purpose would
appear to be to benefit the pipeline by enabling the pipeline to

obtain more profitable contracts for its jurisdictional transportation
service. If a gathering affiliate realizes on its own, without any
consultation with the pipeline, that it can benefit the overall
corporate family by requiring its customers to enter into contracts
with the pipeline which the pipeline could not legally require, the
purposes of the NGA have been frustrated just as much as if the two
entities jointly planned the gathering affiliate's actions. Therefore,
while every case must be decided based on the actual facts of that
case, we will not exclude the possibility that situations could arise
in which the Commission may assert jurisdiction over a gathering
affiliate without a finding of ``concerted action.''
    68. By the same token, consistent with the court's decision in
Williams Gas Processing,\88\ a finding that the gathering affiliate and
the pipeline have engaged in some form of ``concerted action'' would
not, by itself, justify asserting jurisdiction over the activities of
the gathering affiliate. There must be a finding of activity by the
gathering affiliate that frustrates the Commission's ability to
regulate the pipeline's jurisdictional service. Thus, concerted action
between the two affiliates on matters that do not frustrate the
purposes of the NGA, such as increasing the gathering affiliate's rates
simply to make its gathering business more profitable, would not
justify an assertion of jurisdiction.
---------------------------------------------------------------------------

    \88\ 373 F.3d at 1343.
---------------------------------------------------------------------------

4. Separate Operating Personnel
    69. In the NOI, the Commission requested the parties' views on the
extent to which a gathering affiliate must be separately staffed and
otherwise independent of its pipeline affiliate in order to be
considered exempt from the Commission's NGA jurisdiction.\89\ Several
gathering providers and pipelines assert that a requirement of separate
staffing would increase the costs of providing gathering services.\90\
Enbridge states that its OCS gathering and pipeline facilities were
developed as coordinated projects, and must be operated in close
coordination in order to deliver natural gas that meets the gas quality
provisions of the pipeline and downstream markets. Enbridge states that
it currently continues to realize economies of scale by using a single
group of contract administrators and operations, scheduling, and gas
control staff to operate its OCS pipelines and affiliated gatherers.
---------------------------------------------------------------------------

    \89\ Question 3 asked, ``What factors are relevant in
determining whether a gathering affiliate is separate from its
pipeline affiliate and independent from its pipeline affiliate in
performing its gathering functions?'' Question 4 asked, ``Must a
gathering affiliate be physically separate and separately staffed in
order to be independent of its pipeline affiliate?''
    \90\ Enbridge comments at 24-25; Enterprise comments at 13.
---------------------------------------------------------------------------

    70. Some producers assert that the Commission should require that
the gathering affiliate be separately staffed.\91\ However, other
producers also state that the relative degree of independence of the
gathering affiliate from the pipeline should not be the issue when
considering whether to assert jurisdiction over a gathering affiliate
because of its abuse of market power; rather the focus should be
whether there has been market power abuse, regardless of the extent to
which the gathering affiliate operates independently.\92\
---------------------------------------------------------------------------

    \91\ See, e.g., Producer Coalition comments at 2.
    \92\ Indicated Shippers comments at 32; Shell Offshore comments
at 57.
---------------------------------------------------------------------------

    71. In Order No. 2004,\93\ the Commission amended its standards of
conduct in 18 CFR part 358 in order to apply them not only to marketing
affiliates, but also to certain other ``energy affiliates.'' Order No.
2004 generally required natural gas pipeline transmission providers and
their energy affiliates to function independently.\94\ Order No. 2004
defined ``energy affiliates'' to include affiliates which are involved
in transmission transactions in U.S. energy and transmission markets or
which manage or control transmission capacity of the affiliated
pipeline.\95\ However, the Commission excluded gathering affiliates
from the definition of energy affiliate if the gatherers only made
incidental purchases or sales of de minimus volumes of natural gas to
remain in balance under applicable pipeline tariff requirements and
otherwise did not engage in energy affiliate activities such as
managing the affiliated pipeline's transmission capacity.\96\
---------------------------------------------------------------------------

    \93\ Standards of Conduct for Transmission Providers, Order No.
2004, 68 FR 69,134 (Dec. 11, 2003), FERC Stats. & Regs., Regulations
Preambles ] 31,155 (2003), order on reh'g, Order No. 2004-A, 69 FR
23,562 (Apr. 29, 2004), FERC Stats. & Regs., Regulations Preambles ]
31,161 (2004), order on reh'g, Order No. 2004-B, 69 FR 48,371 (Aug.
10, 2004), FERC Stats. & Regs., Regulations Preambles ] 31,118
(2004), order on reh'g, Order No. 2004-C, 70 FR 284 (Jan. 4, 2005),
FERC Stats. & Regs., Regulations Preambles ] 31,325 (2004), order on
reh'g, Order No. 2004-D, 110 FERC ] 61,320 (2005), vacated and
remanded as it applies to natural gas pipelines, National Fuel Gas
Supply Corporation v. FERC, 468 F.3d 831 (D.C. Cir. 2006).
    \94\ 18 CFR 358.4 (2006).
    \95\ See 18 CFR 358.3(d)(1), (2) and (6)(vi) (2006).
    \96\ 18 CFR 358.4(d)(6)(vi) (2006).
---------------------------------------------------------------------------

    72. However, in National Fuel Gas Supply Corp. v. FERC, 468 F.3d
831 (D.C. Cir. 2006), the D.C. Circuit vacated Order No. 2004 as
applied to natural gas pipelines and remanded the order to the
Commission. The court stated that vertical integration between a
pipeline and its affiliates should create efficiencies which benefit
consumers, and therefore the Commission cannot impede such vertical
integration without adequate justification. The court concluded that
Order No. 2004 had failed to provide such a justification with respect
to its application of the Standards of Conduct to the relationship
between natural gas pipeline transmission providers and their non-
marketing affiliates, i.e., energy affiliates.
    73. In response to the court's decision, the Commission issued an
interim rule on January 9, 2007,\97\ which among other things, provides
that the standards of conduct will not govern the relationship between
natural gas pipeline transmission providers and their energy
affiliates.\98\ Subsequently, on January 18, 2007, the Commission
issued a Notice of Proposed Rulemaking, proposing to make this interim
rule permanent.\99\ Consistent with the interim rule, the Commission
will not require that a gathering affiliate function independently of
its natural gas pipeline affiliate in order to be considered exempt
from the Commission's NGA jurisdiction. Any assertion of jurisdiction
over the gathering affiliate will turn on whether the affiliate has
engaged in the types of conduct described above as justifying such an
assertion of jurisdiction, without regard to the relative independence
of its employees. This finding is, of course, subject to the outcome of
the Notice of Proposed Rulemaking concerning the Commission's Standards
of Conduct.
---------------------------------------------------------------------------

    \97\ Standards of Conduct for Transmission Providers, Order No.
690, 72 FR 2427 (Jan. 19, 2007), III FERC Stats. & Regs. ] 31,237
(2007).
    \98\ See revised 18 CFR 358.1(e) (to be codified).
    \99\ Standards of Conduct for Transmission Providers, Notice of
Proposed Rulemaking, 72 FR 3,958 (Jan. 29, 2007), IV FERC Stats. &
Regs. ] 32,611 (2007).
---------------------------------------------------------------------------

B. The Primary Function Test

    74. Although the NOI did not request comments on the Commission's
primary function test, which is applied to determine whether facilities
perform primarily a gathering or a transmission function, or on the
extent to which the Commission may utilize its abandonment authority
under NGA section 7(b) to find that reclassifying facilities from
transmission to gathering is not consistent with the public interest
based on economic grounds, some producer commenters offered their

views on these subjects. We will briefly respond to these comments.
    75. Regarding the primary function test, the commenters note that
they expressed the same views in conjunction with the September 23,
2003 public conference in Docket No. AD03-13-000, convened to address
whether the primary function test should be reformulated in light of
perceived uncertainty in the application of the test to offshore
facilities.\100\ They note that although the Commission compiled a
substantial record in that proceeding, it has not taken any further
action, and urge that the Commission use the instant proceeding to
address this issue.
---------------------------------------------------------------------------

    \100\ See Notice of Public Conference, Application of the
Primary Function Test for Gathering on the Outer Continental Shelf
(Aug. 14, 2003) (NOI). This notice provides a comprehensive history
of the development of the Commission's primary function test,
particularly as it applied to offshore facilities. See also,
ExxonMobil Gas Marketing Co. v. FERC, 297 F.3d 1071 (D.C. Cir.
2002), cert. denied, 540 U.S. 937 (2003) (ExxonMobil) (providing a
thorough history of the primary function test).
---------------------------------------------------------------------------

    76. The commenters contend that the Commission should redefine
gathering so that fewer facilities will qualify for the gathering
exemption under the NGA. Although most commenters conclude that the
Commission should continue to employ a physical-factor test to
determine the primary function of facilities, they urge the Commission
to give more emphasis to non-physical factors. Such factors would
include the purpose, location, operation and ownership of a facility,
as well as whether the jurisdictional determination is consistent with
the objectives of the NGA and with the changing technical and
geographic nature of offshore exploration and production. For example,
one commenter suggests that an assessment of operational function would
reveal whether the subject pipeline facility will continue to provide
essentially the same service of moving gas from the wellhead or
platform to the same downstream pipeline after it is reclassified. If
so, a change in the jurisdictional classification would not be
warranted.
    77. Other commenters criticize what they perceive as the
Commission's emphasis on the central point of aggregation prong of its
physical test, arguing that the Commission should consider all factors
in an individual case.\101\ Another commenter suggests that when a
pipeline seeks to reclassify a facility from transmission to gathering,
there should be a presumption that the facility will continue to
perform a transmission function unless the pipeline can demonstrate
that the criteria of gathering are satisfied and that a change in
jurisdictional status will not be economically detrimental to existing
shippers on the facility who committed to service with the expectation
that they could rely on Commission oversight. Under this view, the
commenter opines, the Commission would not have to rely on its
abandonment authority under section 7(b) of the NGA to find that a
reclassification of a facility is inconsistent with the public
interest, because the effect of the requested reclassification on
shippers would be part of the test to determine jurisdiction. The
commenters also point out that the courts have found that the
Commission has great latitude or discretion when it determines what
constitutes gathering and what constitutes transmission.\102\
---------------------------------------------------------------------------

    \101\ See Sea Robin Pipeline Co., 87 FERC ] 61,384 (1999) (Sea
Robin), order on reh'g, 92 FERC ] 61,072 (2000), aff'd, ExxonMobil,
297 F.3d 1071 (D.C. Cir. 2002) (the Commission reformulated its
primary function test to include a central point of aggregation
prong for the primary function test when applied offshore, which was
intended to be an analogue for the central-point-in-the field prong
of the test which is applicable onshore, but is not dispositive
offshore).
    \102\ Citing, ExxonMobil, 297 F.3d 1071 (D.C. Cir. 2002) and
Williams Gas Processing--Gulf Coast Co. v. FERC, 331 F.3d 1011 (D.C.
Cir. 2003).
---------------------------------------------------------------------------

    78. Another commenter offers an alternative to the primary function
test which it calls the ``platform test.'' This approach would involve
redefining ``gathering'' as the preparation of natural gas for the
first stages of distribution, consistent with the Supreme Court's view
in Northern Natural Gas Co. v. State Corporate Commission,\103\ that
gathering is ``narrowly confined to the physical acts of drawing the
gas from the earth and preparing it for the first stages of
distribution.'' \104\ This commenter suggests that for offshore
production, gathering would cease at, or just downstream of, the
platform where the natural gas is first treated or prepared and made
ready for delivery into a pipeline for transportation to shore.
---------------------------------------------------------------------------

    \103\ 372 U.S. 84 (1963).
    \104\ Id. at 90.
---------------------------------------------------------------------------

    79. In the NOI for the conference in Docket No. AD03-13-000, we
acknowledged that

[a]s with onshore facilities, the use of the primary function test,
as modified by the policy statement for deepwater facilities, seems
to be workable, and there has been relatively little controversy
concerning its application in recent years. Efforts to apply the
primary function test to offshore facilities in the shallow OCS,
however, have been contentious.\105\
---------------------------------------------------------------------------

    \105\ See NOI at 4.

    80. We solicited responses to specific questions from interested
parties as well as any ideas for a new or further modified primary
---------------------------------------------------------------------------
function test. We stated:

[a] new test should ensure that similar facilities are subject to
similar regulatory treatment. It should also provide incentives for
investment in production, gathering, and transportation
infrastructure offshore, without subjecting producers to the
unregulated market power of third party transporters. Persons who
appear at the conference should be prepared to indicate how the
Commission's definition of gathering can be changed to achieve these
goals.\106\
---------------------------------------------------------------------------

    \106\ Id.
---------------------------------------------------------------------------

    81. Admittedly, that is a high standard for any new test to meet.
Nevertheless, we see no point in disturbing the current regulatory
regime unless doing so would result in a significant decrease in any
inconsistent or uncertain results. In other words, replacing one test,
which can be difficult to apply in many instances, with another test
which would be equally, or perhaps more difficult to apply, would not
achieve the desired goals that prompted us to issue the NOI in the
first place.
    82. We have not been persuaded by the comments and proposals
submitted in Docket No. AD03-13-000, or by the comments proffered in
this proceeding, that any new test would meet the above-described goals
better than the current primary function test does. Nor are we
convinced that we should depart from our practice of making
jurisdictional findings on a case-by-case basis and relying, instead,
on a more generic or ``bright line'' test, as some commenters propose.
Moreover, as noted above, generally the current primary function test
as applied to facilities located onshore and in deep water offshore has
satisfied most interested parties. Thus, it may well be that similar
results will be achieved as the Commission continues to make
jurisdictional determinations for facilities located in shallow water
by applying the current test on a case-by-case basis, making minor
adjustments to the test or emphasizing different factors as
circumstances evolve. Despite the fact that this approach may be more
difficult and may sometimes produce uneven results, it is consistent
with the guidance given to the Commission by the several courts that
have reviewed the Commission's jurisdictional determinations under NGA
section 1(b).\107\
---------------------------------------------------------------------------

    \107\ See, e.g., ExxonMobil, 297 F.3d at 1087; Sea Robin
Pipeline Co. v. FERC, 127 F.3d 365, 370 (5th Cir. 1997); Conoco, 90
F.3d at 543.
---------------------------------------------------------------------------

    83. Further, some commenters offer suggestions for a new approach
to the

primary function test that would run afoul of the courts' various
admonishments regarding the Commission's responsibilities in making
jurisdictional determinations. In addition, aspects of the Commission's
current test which some commenters criticize have been upheld as
reasonable by the courts. For example, with regard to the Commission's
reliance on the central point of aggregation as a place where gathering
ended and transportation began on some offshore facilities, the court
---------------------------------------------------------------------------
in ExxonMobil stated that

the central aggregation test is not a new, bright-line test, but
rather is an amalgamation of physical factors, and in any event, is
wholly consistent with past FERC precedent. It has long been the
Commission's view, upheld by this Court, among others, that when gas
from separate wells is collected by several lines which converge at
a single location in the producing field for delivery into a single
line for transportation, the separate lateral lines behind the
central point are classified as non-jurisdictional gathering
facilities.\108\
---------------------------------------------------------------------------

    \108\ ExxonMobil, 297 F.3d at 1085.

    84. Obviously, where there is no such point on facilities, this
prong of the primary function test would not apply, and other factors
of the test would dictate the jurisdictional outcome. Thus, the
``platform test'' suggestion would establish a bright line test that
would limit our ability to look at the other factors that may be
relevant.\109\
---------------------------------------------------------------------------

    \109\ ``The Fifth Circuit concluded that FERC had 'reverted to
its single factor, bright-line approach that it had previously
rejected as unworkable for offshore pipelines,' '' (ExxonMobil, 297
F.3d at 1079, quoting Sea Robin Pipeline Co., 127 F.3d at 370
(citations omitted)).
---------------------------------------------------------------------------

    85. Further, the courts have stated that the Commission may not
make the jurisdictional distinctions required under NGA section 1(b)
simply to assure a desirable policy result.\110\ Thus we cannot adopt
the commenter's notion that we can simply create a test to distinguish
gathering from jurisdictional transmission that is geared to the
preordained result that more offshore pipelines will be found to
perform a jurisdictional transportation rather than a gathering one.
The courts have also held that as long as the NGA contemplates a
distinction between gathering and jurisdictional transportation, the
Commission is required to make those distinctions even when doing so is
difficult.\111\ In other words, we may not devise a newly conceived
test just because it is easier to apply. For all of these reasons, at
this time the Commission is not adopting a new primary function test
applicable to offshore pipelines and will continue to apply its current
test in making jurisdictional determinations on a case-by-case basis.
---------------------------------------------------------------------------

    \110\ See ExxonMobil, 297 F.3d at 1088 (citing Sea Robin
Pipeline Co., 127 F.3d at 371).
    \111\ See Id. at 1080 (``Congress did not intend to extend the
FERC's jurisdiction to all natural gas pipelines; * * * it demands
the drawing of jurisdictional lines, even when the end of gathering
is not easily located.'' (citing Sea Robin Pipeline Co., 127 F.3d
365, 371 (5th Cir. 1997))).
---------------------------------------------------------------------------

    86. Producer commenters also contend that the Commission should
modify the way it considers whether it is in the public interest under
NGA section 7(b) to permit a natural gas pipeline to reclassify or
abandon certificated facilities or services, regardless of whether they
could be considered to be primarily gathering or production.\112\
Commenters argue that because a natural gas company receives benefits
by obtaining a certificate, the company should not be able to avoid
corresponding obligations by removing facilities or services from the
Commission's jurisdiction. They assert that the D.C. Circuit
erroneously held that section 7(b) does not apply to a pipeline's
reclassification of certificated facilities or services to gathering or
production.\113\
---------------------------------------------------------------------------

    \112\ See, e.g., United Gas Pipeline Co. v. McCombs, 442 U.S.
529, 538-539 (1978).
    \113\ See ExxonMobil, 297 F.3d at 1088.
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    87. The commenters suggest that when the Commission has permitted
such reclassifications or transfers, it has only paid lip service to
the public interest standard that must be met before services or
facilities may be abandoned under NGA section 7(b). They propose that
the Commission carefully consider and require mitigation of any
potential for abuse of market power when it reviews a proposed
abandonment of certificated facilities or services. Among the factors
the Commission should consider are the impact on existing customers,
the market power of the company that is acquiring the facilities or
services, the commercial considerations underlying the contracts
entered into by the interstate pipeline and its customers, and the
ongoing useful life of the facility. They urge that, if it is found
that an acquiring company will be able to exercise market power or will
provide service over facilities transferred or sold by a natural gas
company in a spin-down or spin-off, the acquiring company would be
engaged in interstate transportation and, therefore, would fall within
the Commission's jurisdiction. As noted, some commenters also proposed
changing the test to determine whether facilities perform a gathering
or production function by introducing economic or historical factors.
    88. As some commenters assert, it is true that the U.S. Court of
Appeals for the 5th Circuit and the U.S. Court of Appeals for the
District of Columbia Circuit hold different views regarding the extent
to which the NGA's abandonment authority under section 7(b) should be
applied to certificated facilities and services that a natural gas
company seeks to reclassify as non-jurisdictional gathering facilities
and continue to operate.\114\ In any event, those who suggest that the
Commission should first determine, based on market power issues and
other public interest concerns, whether it is consistent with the
public convenience or necessity to permit a pipeline to reclassify or
transfer facilities or services before the Commission actually
determines their proper function are putting the proverbial cart before
the horse.
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    \114\ The 5th Circuit held in Pacific Gas & Electric Co. v.
FERC, 106 F.3d 1190 (5th Cir. 1997) that the Commission has
discretion under section 7(b) to examine, to some extent, whether it
is in the public interest for a natural gas pipeline to abandon
facilities that have been classified as gathering. In contrast, the
D.C. Circuit in Williams Gas Processing-Gulf Coast Co., L.P. v.
FERC, 331 F.3d 1011 (D.C. Cir. 2003), held that once the Commission
determines that a facility is not dedicated to a jurisdictional
function, it does not have authority under section 7(b) to determine
whether a reclassification or transfer of the facilities is in the
public interest.
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    89. When a jurisdictional natural gas company comes before the
Commission to request that the function of certificated facilities it
owns and operates be deemed non-jurisdictional gathering or production,
the starting point for determining whether the subject facilities are
performing primarily a gathering or production function under NGA
section 1(b) is to consider the physical characteristics of the subject
facilities. While the courts have sanctioned giving some weight to non-
physical factors when applying the primary function test, non-physical
factors are secondary, and generally only come into play if application
of the physical factors results in a close call.\115\ The market power,
economic, and historical considerations that some commenters advocate
are not physical tests, and therefore cannot be given substantial
weight.
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    \115\ See, e.g., Sea Robin Pipeline Co. v. FERC, 127 F.3d 365,
370 (5th Cir. 1997) and Lomak Petroleum, Inc. v. FERC, 206 F.3d 1193
(D.C. Cir. 2000).
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    The Commission orders:
    (A) Commission policy concerning the assertion of jurisdiction over
the gathering services of natural gas company affiliates is clarified
as discussed above.
    (B) Docket No. PL05-10-000 is terminated.

    By the commission.
Magalie R. Salas,
Secretary.
[FR Doc. E7-4074 Filed 3-7-07; 8:45 am]

BILLING CODE 6717-01-P