Gathering INGAA Comments 11-22-05

As a matter of law, 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 natural gas in interstate commerce for resale. See 15 U.S.C. § 717a(6)(2000). The Commission has no regulatory authority over such companies because Section 1(b) of the NGA authorizes the Commission to regulate only (1) “the transportation of natural gas in interstate commerce,” (2) “the sale in interstate commerce of natural gas for resale,” or (3) “natural-gas companies engaged in such transportation or sale.”

The Commission in this proceeding inquires as to whether it may invoke its “in connection with” jurisdiction to regulate affiliated gatherers. The source of this “in connection with” authority is NGA Sections 4 and 5, which give the Commission authority to regulate rates charged by natural gas companies in transactions involving the transportation and sale for resale of natural gas in interstate commerce. In other words, the “in connection with” language in NGA Sections 4 and 5 does not create jurisdiction where jurisdiction does not exist under NGA Section 1. Indeed, in Conoco, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) reversed the Commission’s attempt to exercise “in connection with” jurisdiction over a gathering affiliate’s terms of service. The D.C. Circuit reasoned that, once the Commission determined that the subject entity is a gatherer excluded by Section 1(b) from the scope of the NGA, the Commission cannot assert, much less “reassert,” NGA jurisdiction over such entity simply by invoking other NGA provisions.

In Arkla Gathering Service Co.,7 the Commission reasoned that under the NGA it lawfully could “exert control” over the activities of a gatherer affiliated with an interstate pipeline (“gathering affiliate”) if a three-part test was satisfied (hereinafter referred to as the “Arkla test”). Specifically, if a gathering affiliate (1) “acts in concert with its pipeline affiliate,” (2) “in connection with the transportation of gas in interstate commerce,” and (3) “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.”

By focusing on the conduct of the regulated interstate pipeline and not merely on the existence of a relationship between the regulated interstate pipeline and its gathering affiliate, the Arkla test seeks to reflect the statutory limits on the Commission’s jurisdiction. According to the D.C. Circuit, the Commission must show “that the concerted action frustrated the Commission’s ability to regulate the pipeline.” 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.” Consistent with the Arkla test, any action taken by the Commission in response to comments received in this NOI must adhere to these statutory limits on FERC’s jurisdiction, as explained by the courts.11 An assertion of regulatory control over gathering companies is not simply an exercise of the Commission’s discretion. The Commission’s authority to regulate gathering is constrained by statute, and the elements of the Commission’s jurisdiction must be established in each instance.

In addition to the jurisdictional constraints imposed by the NGA, there is no reason to reexamine the sound public policy basis underlying Arkla. Pipelines spun down their gathering facilities in response to the Commission’s efforts to enhance competition through unbundling of services. In Arkla and other cases, the Commission recognized the positive effect on competition and market efficiency provided by the spin down of pipeline gathering facilities. Thus, the creation and growth of unbundled pipeline-affiliated gathering companies is a direct consequence of this Commission’s policies promoted in Order Nos. 436 and 636.

Nothing has changed that should cause the Commission to reconsider its policy in this matter, even if it lawfully could do so. In Arkla, the Commission properly concluded that “customers will ultimately benefit by obtaining gathering services from nonjurisdictional entities who can provide more flexible services.” Moreover, given the recent reduction in Gulf Coast production caused by severe weather, it is critically important for the Commission to pursue policies that will increase market access to supplies and increase diversity in the location of supply sources. No regulatory action should be taken that would inhibit the ability of pipeline-affiliated gatherers to compete and participate actively in the field to help develop and access new supplies from onshore production areas.

Finally, as Commissioner Brownell observed in concurrence, there have been a number of gathering facilities spun off or spun down since Order No. 636, but there have been very few