“If the Commission is to remain tethered to the statute, as it must, that inquiry must be based primarily on physical criteria and the realities of the field.”
How later courts described this case
- “If the Commission is to remain tethered to the statute, as it must, that inquiry must be based primarily on physical criteria and the realities of the field.”
- "If the Commission is to remain tethered to the statute, as it must, [the jurisdictional] inquiry must be based primarily on physical criteria and the realities of the field."
- noting that “[n]eed for regulation cannot alone create authority to regulate.”
Written by the judges who cited it.
The opinion
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-60536
SEA ROBIN PIPELINE COMPANY;
Petitioner,
WILLIAMS GAS PROCESSING - GULF COAST COMPANY;
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
Intervenors
versus
FEDERAL ENERGY REGULATORY COMMISSION;
Respondent
PRODUCER-MARKETER TRANSPORTATION GROUP;
INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA;
TOTAL MINATOME CORPORATION;
ENERGY DEVELOPMENT CORPORATION;
EXXON CORPORATION; TEXACO NATURAL GAS INC;
SHELL GAS TRADING COMPANY; PHILLIPS
PETROLEUM COMPANY AND PHILLIPS GAS
MARKETING COMPANY (“PHILLIPS”);
MURPHY EXPLORATION AND PRODUCTION COMPANY;
MARATHON OIL COMPANY;
AMOCO PRODUCTION COMPANY AND
AMOCO ENERGY TRADING CORPORATION (“AMOCO”);
ANADARKO PETROLEUM CORPORATION,
Intervenors
Petition for Review of an Order of
the Federal Energy Regulatory Commission
October 23, 1997
Before POLITZ, Chief Judge, HIGGINBOTHAM and SMITH, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
In 1995, the Sea Robin Pipeline Company petitioned the Federal
Energy Regulatory Commission for a declaration that Sea Robin’s
facilities perform a “gathering” function rather than a
“transportation” function, thus exempting them from the
Commission’s jurisdiction under Section 1(b) of the Natural Gas
Act, 15 U.S.C. § 717(b). The Commission, in denying the petition,
determined that Sea Robin was engaged in jurisdictional
transportation activities as opposed to gathering. The Commission
denied Sea Robin’s petition for rehearing. Sea Robin then
petitioned this Court for review. We are persuaded that the
Commission gave inadequate attention to the physical and
operational facilities of Sea Robin in applying its primary
function test. We grant the petition for review, vacate FERC’s
order and remand the case to the Commission. On remand, the
Commission may again consider the applicability of the primary
function test to offshore pipeline systems and, if necessary,
reformulate this test.
I.
The physical specifications of Sea Robin’s pipeline system are
central to deciding whether it is a transportation or a gathering
facility. Sea Robin’s pipeline system is located entirely offshore
in the Gulf of Mexico and approximately 90% of its facilities lie
in water depths of less than 140 feet. The system is configured in
the form of an inverted “Y” with two arteries stretching roughly
2
southwest and southeast from a central point about fifty miles
south of the Louisiana coast. These two pipelines collect raw gas
from fifty-seven offshore production platforms. Sea Robin’s
Vermillion 149 Compressor Station stands at the intersection of
these two pipelines. It compresses the gas from the fifty-seven
platforms for travel north, up the inclined seabed, to the Erath
Compressor Station on the mainland. After collecting gas from four
more platforms, the system terminates near Erath, Louisiana, where
the gas is separated, dehydrated and processed. The Erath
Compressor Station then prepares the gas for delivery to downstream
transmission pipelines at five nearby entry points.
The Sea Robin system consists of 438 miles of dual-phase1
pipelines with a capacity to transport 1.26 billion cubic feet of
gas per day (Bcf/day) and includes around 69,500 hp of compression.
The total compression horsepower at the Vermillion 149 Station is
37,050 hp and is 32,490 hp at Erath, Louisiana. Of the 438 miles
of pipes, 339 miles are larger than twenty inches in diameter. The
remaining ninety-nine miles of pipes, mostly running from
individual platforms to the larger pipes, are between four and
sixteen inches in diameter. The longest segment is the Vermillion
149-Erath section, consisting of 66.3 miles of thirty-six inch
diameter pipeline running in a straight line from Sea Robin’s
Vermillion compressor station to onshore processing facilities.
The four platforms along this section are within twenty-five miles
1
The pipeline is “dual-phase” in that it carries a raw
stream of natural gas and liquid hydrocarbons taken directly from
the gas wells.
3
of the Vermillion compressor station, which means that the last
forty-one miles of the thirty-six inch diameter pipeline are
uninterrupted by lateral pipe segments. The gas and liquefiables
delivered by Sea Robin meet the merchantable natural gas quality
standards of downstream transmission pipelines.
II.
Section 1(b) of the Natural Gas Act, 15 U.S.C. § 717 et seq.,
governs “the transportation of natural gas in interstate commerce.”
See 15 U.S.C. § 717(b) (1988). In Section 1(b) Congress prescribed
not only “the intended reach of federal power, but also specif[ied]
the areas into which this power was not to extend.” Northwest
Central Pipeline Corp. v. State Corp. Comm’n, 489 U.S. 493, 510,
109 S.Ct. 1262, 1274, 103 L.Ed.2d 509 (1989) (quoting FPC v.
Panhandle E. Pipe Line Co., 337 U.S. 498, 503, 69 S.Ct. 1251, 1255,
93 L.Ed. 1499 (1949)). This Section expressly exempts from the
Commission’s jurisdiction “the production or gathering of natural
gas.”2 Thus, Congress “carefully divided” FERC’s regulatory power
and “did not envisage federal regulation of the entire natural-gas
industry field to the limit of constitutional power. Rather it
contemplated the exercise of federal power as specified in the
Act.” Id.
2
See Christian S. Gerig, Appalachian Natural Gas and FERC.
Order 636: The Deregulation Dilemma, 24 Cap. U. L. Rev. 761, 762-63
(1995) (describing the three components of the natural gas
industry, namely, gathering, transmission, and distribution).
4
Further, the Supreme Court has consistently held that
“exceptions to the primary grant of jurisdiction in Section 1(b)
are to be strictly construed,” Interstate Natural Gas Co. v. FPC,
331 U.S. 682, 690-91, 67 S.Ct. 1482, 1487, 91 L.Ed 1742 (1947), and
the terms “production” and “gathering” are to be “narrowly confined
to the physical acts of drawing the gas from the earth and
preparing it for the first stages of distribution.” Northern
Natural Gas Co. v. State Corp. Comm’n, 372 U.S. 84, 90, 83 S.Ct.
646, 649-50, 9 L.Ed.2d 601 (1963) (collecting cases); see also
Transcontinental Gas Pipe Line Corp. v. State Oil and Gas Bd., 474
U.S. 409, 418, 106 S.Ct. 709, 714-15, 88 L.Ed.2d 732 (1986);
Natural Gas Pipeline Co. v. Railroad Comm’n, 679 F.2d 51, 53-54
(5th Cir. 1982); Hamman v. Southwestern Gas Pipeline, Inc., 721
F.2d 140, 143 (5th Cir. 1983).
In the past, the Commission has employed three different
tests, namely, the behind-the-plant test, the central-point test,
and the primary function test, to determine whether a company’s
facilities qualify for the gathering exemption. Angela S.
Chitwood-Beehler, A Conflict in the Circuits: The FERC’s
Jurisdiction Over Gathering Rates, 13 Energy L.J. 375, 382 (1992).
The behind-the-plant test treats a system as a gathering facility
if it is located behind the gas processing plant which treats the
product coming from that area. Id.; In re Phillips Petroleum Co.,
10 F.P.C. 246, 277 (1951), overturned on other grounds by Phillips
Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed.
1035 (1954). The central-point test involves a determination of
5
where the separate and various lateral lines bring gas to a central
point for delivery into a single line. Angela S. Chitwood-Beehler,
supra at 382; Barnes Transportation Co., Inc., 18 F.P.C. 369
(1957).
More recently, the Commission rejected any bright-line
approach that employs a single, dispositive factor in favor of a
multi-factor, primary function test that analyzes the totality of
the facts and circumstances in a given case. In other words, under
the primary function test, the Commission determines whether, with
reference to the specific facts and circumstances of the particular
facility in question, its primary function is gathering. EP
Operating Co. v. FERC, 876 F.2d 46, 48 (5th Cir. 1989). Applying
this test in Farmland Industries, Inc., 23 FERC ¶ 61,063 (1983),
the Commission identified five salient factors in determining
whether a pipeline is a gatherer or a transporter:
(1) the diameter and length of the facility;
(2) the location of compressors and processing plants;
(3) the extension of the facility beyond the central point in
the field;
(4) the location of wells along all or part of the facility;
and
(5) the geographical configuration of the system.
Id. at 61,143. The Commission later added a sixth factor: the
operating pressure of the line. EP Operating Co., 876 F.2d at 48.
No single Farmland factor is dispositive in the Commission’s
consideration of the facts and circumstances of a given case. See
6
Northwest Pipeline Corp. v. FERC, 905 F.2d 1403, 1408 (10th Cir.
1990).
In 1990, after this court’s decision in EP Operating Co. v.
FERC, 876 F.2d 46 (5th Cir. 1989), the Commission noted that
“because of recent advances in engineering and available
technology, offshore drilling operations continue to move further
offshore and further from existing interstate pipeline
connections,” and hence it would assess “the continuing viability
and relevance of the ‘primary function’ test to current industry
conditions.” Amerada Hess Corp., 52 FERC ¶ 61,268 (1990). The
Commission then proposed “a sliding scale which [would] allow the
use of gathering pipelines of increasing lengths and diameters in
correlation to the distance from shore and the water depth of the
offshore production area.” Id. at 61,988. The Commission also
stated that, in addition to the Farmland factors, it would take
into account non-physical criteria such as:
(1) the purpose, location and operation of the facility;
(2) the general business activity of the owner of the
facility; and
(3) whether the jurisdictional determination is consistent
with the objectives of the Natural Gas Act and the Natural Gas
Policy Act.
Id.
7
III.
A.
An agency determination may be set aside if it is “arbitrary,
capricious, an abuse of discretion or otherwise not in accordance
with law.” 5 U.S.C. § 706(2)(A); EP Operating Co., 876 F.2d at 48.
The fundamental precept that permits this deferential standard of
review is that “an agency must cogently explain why it has
exercised its discretion in a given manner” and “must supply a
reasoned analysis” for any departure from other agency decisions.
Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29, 48, 57, 103
S.Ct. 2856, 2869, 2874, 77 L.Ed.2d 443 (1983). However, “a court
is not to substitute its judgment for that of the agency” or
“supply a reasoned basis for the agency’s action that the agency
itself has not given.” Id. at 43, 103 S.Ct. at 2867 (quoting SEC
v. Chenery Corp., 332 U.S. 194, 196, 67 S.Ct. 1575, 1577, 91 L.Ed.
1995 (1947)).
Treating the first Farmland factor, the length and diameter of
the facility, the Commission decided that “based on the very large
size of [Sea Robin’s] system, th[e] demarcation between gathering
and transmission [was] clearly evident. In other words, the length
and diameter of the system’s components, as well as its overall
size, [we]re not outweighed by other elements of the ‘primary
function’ test.” Sea Robin Pipeline Co., 71 FERC ¶ 61,351, 62,398
(1995) (emphasis in original).
Then the Commission examined other elements of the primary
function test. It concluded that the behind-the-plant factor was
8
of “little relevance,” and the reality of how gas is processed on
the outer continental shelf (OCS) reduced the weight accorded to
this factor. Id. at 62,401. Similarly, the Commission found the
central point in the field factor “to be of limited importance with
regard to isolated OCS operations”; the operating pressure to be a
“neutral criteria in applying the primary function test to OCS
facilities”; the location of wells factor3 to be “not
determinative”; and the geographical configuration of Sea Robin’s
system to be simply “in large part a function of the location of
areas in the OCS that were in need of transportation services.”
Id. at 62,401-02.
The Commission repeatedly emphasized that the non-physical
criteria in its test supported its conclusion that Sea Robin was a
transporter, particularly Sea Robin’s prior certification as a
jurisdictional pipeline and its ownership by an interstate
pipeline, the Southern Natural Gas Company, as opposed to a
producer of gas. Finally, the Commission urged that granting
gathering status to Sea Robin would amount to deregulation of the
entire natural gas pipeline system on the outer continental shelf.
3
The Commission urges that we have no jurisdiction to review
its orders with regard to the location of wells Farmland factor
since Sea Robin did not challenge its orders with respect to this
particular factor. We find that the record establishes that Sea
Robin did raise this objection adequately in its petition for
rehearing to satisfy the requirements of 15 U.S.C. § 717r(b).
9
B.
Sea Robin’s system resists easy categorization because the
logistics of offshore pipelines obscures differences between
gathering gas from Gulf platforms and transporting it to the
mainland. Since it is not feasible to process raw gas on open
water, entities like Sea Robin do not have an opportunity to gather
the gas at a local, centralized point to prepare it for traditional
transportation. Instead, they must construct large pipes to carry
(often over a hundred miles away) the raw gas from offshore rigs to
the shore for processing. In short, the pattern of gathering and
distribution on shore differs from the pattern of transportation
and gathering of gas from the middle of the Gulf to the mainland.
See Edwin I. Malet, Outer Continental Shelf Oil Pipelines Under The
Interstate Commerce Act, 43 La. L. Rev. 1143, 1172-73 (1983)
(noting that it “is unclear whether or under what circumstances the
business of ‘gathering’ may be considered a transportation service
subject to regulation.... Indeed, most, if not all, offshore oil
movement might be characterized as gathering.”). Nevertheless,
Section 1(b) of the Natural Gas Act requires that the Commission
reckon with this statutory distinction between gatherers and
transporters and provide a framework for making a meaningful
distinction between the two, in the context of offshore pipelines.
It appears that the very size of Sea Robin’s system led the
Commission to conclude presumptively that it is a transportation
facility. In so doing, the Commission retracted its prior
acknowledgment that the efficiencies associated with moving large
10
volumes of gas to shore may require the use of large diameter
pipelines. The Commission abandoned, without reasoned
consideration, its “sliding scale” of Amerada Hess that would
“allow the use of pipelines of increasing lengths and diameters in
correlation to the distance from shore and the water depth of the
production area.” Instead, the Commission reverted to its single
factor, bright-line approaches that it had previously rejected as
unworkable for offshore pipelines. See Northwest Pipeline Corp.,
905 F.2d at 1409 (noting that a reasoned analysis of the primary
function test must eschew the application of any overarching bright
line standards); EP Operating Co., 876 F.2d at 48.
The Commission purported to work through all the factors in
its primary function test. Yet it excluded at least four factors
on grounds that they did not shed light on the problem because of
the distinctive considerations involved in retrieving gas from the
outer continental shelf. The Commission found that over half of
its own physical Farmland factors were not probative in the
offshore context and should therefore be excluded without any
application to the Sea Robin system. While we recognize that every
factor in the primary function test may not apply in every
situation, by excluding consideration of a large number of the
Farmland factors, the Commission, in effect, reduced the primary
function analysis to a litmus test that turned on the length and
diameter of the overall system.
The Commission must apply consistently its primary function
test and not discount, without reasoned analysis, application of
11
any factor which points to a non-jurisdictional result. It may not
“disregard those facts or issues that prove difficult or
inconvenient” or “refus[e] to come to grips” with certain results
in applying the primary function test. Tenneco Gas v. FERC, 969
F.2d 1187, 1214 (D.C. Cir. 1992).
Relatedly, the Commission’s accent on business purpose,
ownership, and prior certification status misses the basic thrust
of the primary function test -- making a technical distinction
between gathering and transportation based on the physical and
operational characteristics of a pipeline facility. See Northwest
Pipeline Corp., 905 F.2d at 1407 n.10, 1410 (noting that “the
production and gathering exemption applies to the physical
activities, facilities, and properties used in the production and
gathering of natural gas and not to the business of production and
gathering” and a company’s “status in interstate transportation
cannot alone transform the character of [its] facilities”)
(citations omitted). Congress made its policy choices regarding
the reach of regulation. It did not make these choices by defining
goals and objectives, leaving their implementation to the
administrative agency. Rather, Congress drew a distinction based
on the physical patterns of the industry, gathering versus
transporting. It is this Congressional choice that demands that
the Commission define its jurisdictional reach in distinctions
between gathering and transporting. If the Commission is to remain
tethered to the statute, as it must, that inquiry must be based
primarily on physical criteria and the realities of the field. The
12
inquiry cannot be cut loose to locate a different inquiry that
Congress might have directed had it foreseen the offshore
development and the patterns emerging from deregulation. It is a
statute we are construing.
Further, the Commission’s emphasis on ownership may be called
into question in light of its recent practice of allowing pipeline
companies to spin-off affiliated gatherers and thus make them non-
jurisdictional. See, e.g., Pacific Gas & Elec. Co. v. FERC, 106
F.3d 1190, 1196-97 (5th Cir. 1997), cert. denied, 66 U.S.L.W. 3254
(U.S. Oct. 6, 1997) (No. 96-1847); Conoco, Inc. v. FERC, 90 F.3d
536 (D.C. Cir. 1996), cert. denied, 117 S.Ct. 1017 (1997) (both
allowing a wholly-owned gathering facility to escape FERC
jurisdiction). In short, general business activity and prior
certification are relevant, but they are only part of the mix. We
do not intend to cast a shadow on the Commission’s OCS Policy
Statement regarding consideration of non-physical criteria. See 74
FERC at ¶ 61,759. Rather, we intend that it be put in its place as
considerations secondary to the physical factors. The
determinative question is when did gathering cease and
transportation commence. Non-physical factors must be relevant to
this question.
The Commission raises the potential for a “regulatory gap”
problem by urging that if Sea Robin is found to be a gathering
system, then other large gas transporters may seek similar
declarations, thus upsetting the investment-backed expectations of
producers and shippers who have come to rely upon the Commission’s
13
exercise of regulatory authority. Need for regulation cannot alone
create authority to regulate. Commission jurisdiction must be
defined by first turning to a reasoned application of the primary
function test. See Northwest Pipeline Co., 905 F.2d at 1412. We
do not suggest that the formulation of a primary function test must
be blind to its consequences. But the look at consequences is not
the beginning point; it is a reality check.
On remand, the Commission may reformulate its primary function
test. It may choose to discontinue criteria not relevant to the
physical, geographical and operational characteristics of pipelines
in the OCS. The record suggests other criteria, such as the
quality of gas in the pipelines and the depth of the water in the
offshore production area, that may be relevant to the inquiry.
Finally, Sea Robin may choose to respond to the Commission’s
invitation to offer portions of its system as predominantly
involved in a gathering or a transportation function.4 Discomfort
in drawing the jurisdictional line at points internal to an overall
system may be soothed with the reminder that Congress did not
intend to extend FERC’s jurisdiction to all natural gas pipelines;
indeed it demands the drawing of jurisdictional lines, even when
the end of gathering is not easily located (consider, for example,
4
The Commission declined to address Sea Robin’s request
urging the Commission to find “at a minimum Sea Robin’s facilities
at and upstream of the Vermillion 149 platform...be declared to be
non-jurisdictional gathering facilities under the NGA”, because
the request was not part of the original petition. The Commission
noted that its decision was without prejudice. See 75 FERC ¶
62,084 n.90.
14
a distinction between the field south of the Vermillion Compressor
Station and the pipelines leading north to Erath, Louisiana).
IV.
The Commission has failed to supply the requisite reasoned
analysis in applying its primary function test. We GRANT the
petition for review, VACATE the Commission’s order and REMAND the
case for further consideration by the Commission. On remand, the
Commission may reconsider the applicability of the factors in its
primary function test to offshore pipeline systems and then, if
necessary, reformulate this test.
VACATED AND REMANDED.
15