Petition for Writ of Certiorari — Interstate Natural Gas Ass'n of America v. Federal Energy Regulatory Commission

No. es:

\ ae Supreme Court, U.S,

2 ae FILED |

J

| | JOSEPH F. SPANIOL, UR.

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

SOUTHERN CALIFORNIA GAS COMPANY,

Petitioner,

V.

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

December 10, 1987

L. E. LOBAUGH

T. D. CLARKE

E. R. ISLAND

Davip L. HUARD*

801 South Grand Avenue

Los Angeles, California 90017

(213) 895-5136

Attorneys for Southern

California Gas Company

*Counsel of Record

Nm

QUESTIONS PRESENTED

Whether the Federal Energy Regulatory Commission

(FERC) has erroneously interpreted its statutory responsi-

bility by creating presumptions favoring applicants and

switching burdens of proof to non-applicants for proceed-

ings to construct new facilities and provide new service.

Whether the FERC’s adoption of the Optional Expedited

Certificate Procedure (OECP) with its presumptions favor-

ing applicants who wish to bypass existing utility service is

supported by substantial evidence and reflects reasoned

decision-making.

Whether the FERC has unlawfully abandoned its statutory

responsibility by limiting its analysis of applications filed

under the OECP.

Whether the OECP is ripe for review.

Whether the action of the FERC has interfered with the

lawful exercise of state authority.

Whether state authority over transportation of gas to end

users within a state must be clarified.

TABLE OF CONTENTS

Sas Seas ET ae ERR MEI? ice sivesissnncatcinvassaadanlasbaanbetioncinen

NOE GAATE UNO citese sis sntnisdaaiegraaiinetaunae

LIST OF SUBSIDIARIES AND AFFILIATES

PR PEe POPe E BUP ARIK 26 Eder cisiscsccidiouitecbudalsstenaces

SE SRE MUN cscs csnenttniaseacerstatsiacesalen et ceeeaate

I].

Ill.

IV.

This Court Should Review to Correct the FERC’s

Erroneous and Unsupported Interpretation of its

Statutory Resomegey ooo vcs iedxssccsnnedereaanit oests

The Procedure Established for Optional ‘Ex.

pedited Certificates is Ripe for Review...................

This Court Should Review to Clarify the Scope of

State Jurisdiction over Transportation Within its

BOUNG OTIS iis iecietsisscanssrciesearen pee ea

This Court Should Review to Prevent the FERC

from Interfering with the Lawful Exercise of State

PIOUS oa isaecssinonssiticsesinionintieeee

SPL AIRES nsasansekosnilocissnnencercats debienatete anata tna

Page

16

ill

TABLE OF AUTHORITIES

Court Cases

Page(s)

Associated Gas Distributors v. FERC,, 824 F.2d 981

foliete . 1) ke agi 16,9, 11, 14

Atlantic Refining Company v. Public Service Commis-

sion (CATCO), 360 U.S. 378, 391 (1959)... 6, 15

City of Pittsburgh v. FPC, 237 F.2d 741, 752 (D.C.

cn shcsuenbadnansbekearensasssted 6

Consumer Federation of America v. FPC, 515 F.2d

347, 356 (D.C. Cir. 1975), cert. denied, 423 U.S.

a eR. snnnuaeuaseasnnboupstans 6

Farmers Union Central Exchange, Inc. v. FERC, 734

F.2d 1486. 1510 (D.C. Cir. ), cert. denied, 469 U.S.

REE EEE EERE EERE EEE EEE EEE EEE HEHE EEE EEE EEE EE EEE EEE EEE ES

FPC v. East Ohio Gas Co., 338 U.S. 464 (1950) ....11, 13

FPC v. Texaco, Inc., 417 U.S. 380, 400) (1974) 0... 19

FPC vy. Transcontinental Gas Pipe Line Corp., 365

Tee sa ncannanssenennnns 6, 12

FPC v. Transcontinental Gas Pipe Line Corp., 365

ah cai ac llssdanacaasvevenetiguenneasicheenssnees 13

Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 690

Cee oo esdndesnatauintheanesecses 11

Manyland v. Louisiana, 45\ U. ero gd, | | ew 14

Maryland’s People’s Counsel v. FERC, 761 F.2d 768

Ne RI NT WOME © P vsssecasc<ccnsnancorvscenssvannenesnes 6, 15

Maryland’s People’s Counsel v. FERC, 761 F.2d 780

SEE, WOES FEES. ON D canennscovetsecaceancccstnensences 6, 15

Maryland’s People’s Counsel v. FERC, 761 F.2d 780

SO ED FC PUEDES BEE DP ca<cscescrnsssenannecceranonsncses 6, 15

Missouri Edison Co. v. FPC, 479 F.2d 1185 (D.C.

eal canskcvcsnundanssinnicnndasendes 7

Panhandle Eastern Pipeline Co. v. FPC, 232 F.2d

467, 472 (3d Cir. 1956). cert. denied, 352 U.S. 891

Tee sa nssmesenauunanannntones 8

Page(s)

Panhandle Eastern Pipeline Company yv. Michigan

Public Service Commission, 341 U.S. 329, 336

Une Ui cceheeevesinasdcsbbbiihssdsnlnosnaiciadelesdsgidesedueunialliidenmiioumns 12

Panhandle Eastern Pipeline Co. v. Public Service

Comm'n of Indiana, 332 U.S. 507 (1947) oo... 12

Panhandle Producers and Royalty Owners Association

v. Economic Regulatory Administration, 822 F.2d

a sinha 7

Public Service Commission of New York v. FERC,

642 F.2d 1335, 1346 (D.C. Cir. 1980), cert. denied,

ea ed |. 5 RRR Rect ieee 8

Scenic Hudson Preservation Conference v. FPC, 354

F.2d 608, 621 (2d Cir. 1965). cert. denied, 384

BAe Se WIEN Ui conan casiscccuihannanineadichacsoisialdaiesncortabidateies 6

Transcontinental Gas Pipeline Corp. v. State Oil and

Gas Board of Mississippi, 474 U.S. 409 (1986)........ 13

Commission Cases

American Distribution Company (Alabama Division),

ig > te Pkt ene ee ee 7

American Louisiana Pipeline Co., et al., 20 FPC 575

PIE cnaiiccheihsaldctpsniccadnl cpisinalacdbaseacuhsuanateidadcietesacacaas 8

ANR Pipeline Company 34 FERC 961,238

Ci IG BE Cin casita decacacen eta hb aattcc esa snnteaes 12,13

ANR Pipeline Company, 34 FERC 961,238. 61.412

IS is WIEN sk. cencalntsnsstsasoeina eal oocaraurameicdslabanans 13

froquois Gas Transmission System, 51 FR 23267

SN IE ISD isacesctccninesncihchat Aicauhnesnd seaceeatencionieren 10

Northern Natural Gas Company, 33 FPC 501 (1985). 7

Panhandle Eastern Pipeline Company, 29 FERC

961,338 at 61,709-10 ( Dec. 26, 1984) 00... 7

Transwestern Pipeline Company, 36 FPC 176 (1966). 12

Wyoming-California Pipeline Co., 41 FERC 961,040

ECA WOME B sicsdbcsdinicdadnchosatsastnca ciaakegpiimcnamment 10, 13

Vv

Legislative History

Page(s)

H.R. Rep. No. 709, 75th Cong., Ist Sess. 2 (1937)..... 1]

Statutes

Section I(b), Natural Gas Act, 15 U.S.C. §717(b)

FURIE Uisecsncincantiabonnisotnanascihdenibesbasnendonaianeaaaniexsal 2,7, 13,14

Section 7(a), Natural Gas Act, 15 U.S.C. §717f(a)

iF SOU :isicsickntitadesenenen aumnbadiresehitiiabaennesualaamannn 2

Section 7(c), Natural Gas Act, 15 U.S.C. §717f(c)

CIEE « cnc ciecascsedevctuasethinichbdseneclanementidemaanil ye eS

Section 7(e), Natural Gas Act, 15 U.S.C. §717f(e)

FINE. adidntnadndeneatersnaansddesestaaanaameaiaenaie y ie

Section 19(b), Natural Gas Act, 15 U.S.C. §717(1r)

i BIS 2 sa cciascce a cach hchsdesssammaeeenincetesaaaniaiadanalaniaaiedadalas 2

Section 4, Administrative Procedure Act, 5 U.S.C.

a: PIE Pex iaasunanhudéituacenicdidednapebenonbhesabdeseduaania 2,3. 8

Section 311, Natural Gas Policy Act, 15 U.S.C.

IE TES ois i cika cine neuter anaathetecccadectaneuaniammaliaaaes 3

vi

PARTIES TO THE PROCEEDING

Air Products & Chemicals, Inc.

Alabama— Tennessee Natural Gas Company

American Bakers Association

American Gas Association

American Iron & Steel Institute

American Paper Institute

American Public Gas Association

AMOCO Gas Company

ANA Pipeline Company

Arco Oil & Gas Company

Arizona Electric Power Cooperative, Inc.

Arizona Public Service Company

Arkla, Inc.

Ashland Corporation

Ashland Exploration, Inc.

Association for Texas Intrastate Natural

Atlanta Gas Light Company

Baltimore Gas and Electric Company

Bethlehem Steel Corp.

Brooklyn Union Gas Co.

Brooklyn Union Gas Company

Cabot Corporation

Carolina Utility Customers Association

Cascade Natural Gas Corp.

Cenoco, Inc.

Central Illinois Light Co., et al.

Champlin Petroleum Company

Chemical Manufacturers Association

Chevron U.S.A., Inc.

Cities Service Oil & Gas Corporation

Citizen Energy Corp.

Citizens Energy Corp.

City of Willcox, Arizona

Coke Company

Columbia Gas Transmission Co.

vil

Columbia Gas Transmission Corp.

Columbia Nitrogen Corp.

Consolidated Edison of New York, Inc.

Consolidated Gas Transmission Corporation

Consumer Power Company

CP National Corp.

Delhi Gas Pipeline Corp.

E] Paso Natural Gas Company

Elizabethtown Gas Company

Extex, Inc.

Exxon Corporation

Fertilizer Institute

Florida Transmission Company

Foothills Pipelines

Gas Pipelines

Interstate Natural Gas Association of America

K. N. Energy, Inc.

Kerr-McGee Corporation

Laclede Gas Company

Louisiana Intrastate Gas Corp.

Marathon Oi) Company

Maryland Industrial Group

Maryland People’s Counsel

Memphis Light, Gas and Water Division

Mesa Operating Limited Partnership

Michigan Consolidated Gas Co.

Michigan Public Service Commission

Minnesota Public Utilities Commission

Mobil Oil Corporation

Monterey Pipeline Company

National Association of Regulatory Uulity Commissioners

National Gas Pipeline Company of America

North Shore Gas Company

Northern Illinois Gas Co.

Northern Natural Gas Company

Northern Valley Environmental Council

Northwest Central Pipeline Corporation

vill

Northwest Gas Company

Ohio Oil and Gas Association

Oklahoma National Gas Company

Pacific Gas and Electric Company

Pacific Gas Transmission Co.

Pan-Alberta Gas, Ltd.

Panhandle Eastern Pipeline Corporation

Panhandle Producers and Royalty Owners Association

Pennsylvania Public Utility Commission

Pennzoil Company, et al.

Phelp Dodge Corporation

Philadelphia Electric Co.

Phillips Petroleum Co.., et al.

Piedmont Natural Gas Co.

Placid Oil Company

Power District and Gas Distributors Information Service

Process Gas Consumers Group =

Producer’s Gas Company

Public Service Electric and Gas Co.

Public Utilities Commission of the State of California

Salt River Project Agricultural Improvement

Shell Offshore, Inc.

Shelli Western Electric and Paun, Inc.

Sohio Petroleum Company

South Jersey Co.

Southern California Gas Company

Southern Carolina Pipeline Corp.

Southern Indiana Gas and Electric Company

Southern Natural Gas Co.

Southern Natural Gas Company

State Corporation Commission, State of Kansas

State of Connecticut

State of Louisiana

State of Michigan

State of New York

Tenneco Oil Company

Tennessee Gas Pipeline Company

'

ix

Tenngasco Corp.

Texas Exploration Corporation

Texas Gas Transmission Corporation

The Peoples Gas Light

Transok Inc.

Transwestern Pipeline Co.

Trunkline Gas Company

UGI Corp. .

Union Oil Co., of California

Union Oil Company

United Distribution Companies

United Gas Pipeline Company

Valero Transmission Co.

Washington Gas Light Co.

Washington National Gas Company

Weirton Steel Corp.

West Coast Transmission Company Limited

West Virginia Consumer Advocate

Wisconsin Power & Light Co.

X

LIST OF SUBSIDIARIES AND AFFILIATES

PURSUANT TO RULE 28.1

Pacific Lighting Corporation

Dual Fuel Systems, Inc. ( California )— Dissolution

Pending

8309 Tujunga Avenue Corp. ( California )

Pacific Center Downtown, Inc. (California )

Pacific Enterprises ( California )

Pacific Library Tower ( California )

Pacific Lighting Land Company ( California )

Sabagli N.V. (Netherlands Antilles )

Southern California Tower (California )

Pacific Indonesia LNG Company (50%) (California )

Pacific Lighting Capital Company ( Netherlands Antilles )

Pacific Lighting Gas Development Company (California )

Pacific Lighting Overseas Finance N.V. ( Netherlands

Antilles )

Pacific Synthetic Fuel Company (California )

Pacific Western Resources Company ( California )

Southern California Conservation Financing Company

( California y

Pacific Lighting Energy Systems (California )

Central Plants, Inc. ( California )

Modular Products. Inc. (California )— Dissolution Pending

2 Pacific Energy Resources Incorporated (California )

Pacific Geothermal Company ( California )

Pacific Hydropower Company ( California )

Western Power, Inc. ( Washington )

Pacific Lighting Bio-Energy Company ( California )

Pacific Oroville Power. Inc. ( California )

Pacific Penobscot Power Company ( Maine )

-~ Pacific Recovery Corporation ( California )

Pacific Wood Fuels Company ( California )

xi

Pacific Interstate Company (California )

Pacific Gas Gathering Company (California )

Pacific Interstate Mojave Company (California)

Pacific Interstate Offshore Company ( California )

Pacific Interstate Transmission Company ( California )

Pacific Interstate Transmission Company ( Arctic)

(California )

Pacific Offshore Pipeline Company ( California )

Pacific Lighting Leasing Company (California )

Pacific Lighting Commercial Loans, Inc. ( California )

Pacific Lighting Oil and Gas Company (California )

Pacific Lighting Exploration Company ( California )

Terra Resources, Inc. (Delaware )

Pacific Lighting Real Estate Group (California )

Presley ASW Finance Co., Inc. (California )

Presley Financial Corporation ( California )

Presley-Home Mac Finance Co., Inc. (California )

Presley RAC Finance Co., Inc. (California )

Southern California Gas Company (California )

Pacific Lighting International Finance N.V. ( Netherlands

Antilles )

Southern California Gas International Finance N.V.

(Netherlands Antilles )

Southern California Gas Tower ( California )

Thrifty Corporation (California )

FTM Sports Corporation (50%) (California )

American Diversified Sports, Inc. (80%) ( Florida)

Gart Bros. Sporting Goods Company ( Colorado )

Colorado Wholesale Sporting Goods Co., Inc.

(Colorado )

Sports Castle Travels, Inc. (89%) (Colorado )

Xil

Michigan Sporting Goods Distributors, Inc. ( Michigan)

Rexall Square Drugs, Inc. (California )

The Newman Importing Company, Inc. ( California )

Thrifty Jr. Inc. (California )

Thrifty Realty Company ( California )

Thrifty Wilshire, Inc. ( California )

United Merchandising Corp. ( California )

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

SOUTHERN CALIFORNIA GAS COMPANY,

Petitioner,

N

FEDERAL ENERGY REGULATORY COMMISSION,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Southern California Gas Company (““SoCalGas’’) respect-

fully petitions this Court for review of a decision of the United

States Court of Appeals for the District of Columbia Circuit

affirming portions of Order No. 436, et seq., (“Order No. 436”)

of the Federal Energy Regulatory Commission (““FERC” or

“Commission” ).

OPINIONS BELOW

The opinion of the Court of Appeals is reported at 824

F.2d 981 (D.C. Cir. 1987) and is reproduced in the Appendix

to this Petition (App. B). The Orders of the FERC are

reported as follows:

Regulation of Natural Gas Pipelines After Partial Well-

head Decontrol (Order No. 436), 50 Fed. Reg. 42.408 (Oct.

18. 1985). [Reg. Preambles 1982-1985] FERC Stats. & Regs.

2

130,665 (Oct. 9, 1985), modified, Order No. 436-A, 50 Fed.

Reg. 52,217 (Dec. 23, 1985), [Reg. Preambles 1982-1985]

FERC Stats. & Regs. 30,675 [Dec. 12, 1985], modified

further, Order No. 436-B, 51 Fed. Reg. 6398 ( Feb. 24, 1986),

III FERC Stats. & Regs. 130,688 ( Feb. 14, 1986). reh’g denied,

Order No. 436-C, 34 FERC 961,404 (Feb. 14, 1986), reh’g

denied, Order No. 436-D, 34 FERC 961,405 ( Mar. 28, 1986),

reconsideration denied, Order No. 436-E, 34 FERC 961.403

(Mar. 28, 1986).

JURISDICTION

The order of the Court of Appeals was issued June 23,

1987, and entered following a denial of timely petitions for

rehearing and suggestions for rehearing en banc on September

15, 1987. (App. A-1). The jurisdiction of this Court is invoked

under 28 U.S.C. §§1254(1). 2101(c). and 2350 (1982).

STATUTES INVOLVED

The principal statutory provisions involved are Sections

l(b), 7(a), 7(c). 7(e), 19(b) of the Natural Gas Act of 1938

(“NGA”), 15.U.S.C. §§717(b), 717f(a), 717f(c), 717f(e).

717(1r), Section 311, Natural Gas Policy Act, 15 U.S.C. Section

3371, and Section 4 of the Administrative Procedure Act. 5

U.S.C. §553.

STATEMENT OF THE CASE

This case involves orders of the FERC which “envisage

a complete restructuring of the natural gas industry.” (App.

B-17.) Included within the FERC Order is a procedure and

POUT a 2)

3

substantive presumption which, unless vacated or revised, will

negate a 50-year policy which fairly recognized the statutory

division of responsibility concerning the regulation of natural

gas between the states and federal agencies, and which arro-

gates to the FERC a disproportionate and unintended share of

this economic power.

On May 30, 1985, the FERC issued a Notice of Proposed

Rulemaking (““NOPR”) which “proposed significant changes

to our regulation of natural gas pipeline companies in light of

the many changes in the natural gas industry over the years.”

The NOPR proposed a package of four interrelated parts. A

simplified “blanket” transportation program was proposed to

replace existing self-implementing transportation programs un-

der Section 7 of the Natural Gas Act, 15 U.S.C. § 717f, and

Section 311 of the Natural Gas Policy Act of 1978, 15 U.S.C.

§ 3371. The FERC also proposed to allow interstate pipelines

to obtain expedited certificates enabling them to construct and

operate new facilities and offer certain new services. This

Optional Expedited Certificate Procedure (““OECP”’) provided

for minimal regulatory review and an automatic presumption

that the proposal was in the public interest if the applicant

complied with limited conditions concerning the economic risk

of the venture. The Commission also initially proposed certain

treatment for take-or-pay contract settlements and to segment

purchased gas costs into blocks to place downward pressure on

gas prices.

The final rule retained the transportation program, elimi-

nated the take-or-pay program, and deferred the block billing

proposal. The final rule promulgated the OECP but provided

an additional notice requirement in the event the proposal

included “‘bypass” of a local distribution company (“LDC’’).

The Circuit Court vacated and remanded Order No. 436

for reasons related to provisions of the transportation program

and for failure to deai with take-or-pay problem contracts. As

to the OECP, the Circuit Court notes the concern of LDCs and

4

state commissions that the OECP would facilitate pipelines in

bypassing LDCs to serve attractive customers.

The Circuit Court finds that the OECP was not ripe for

review since no application had raised the problem with the

FERC, the Court would be issuing an advisory opinion, and,

petitioners had not shown any hardship if the OECP was not

adjudicated now.

As to the substance of the proposal, the Circuit Court

rejects arguments that failure to consider the waste in dupli-

cative facilities and the adverse impact on customers of by-

passed LDCs’ invalidates the presumption favoring applicants.

Particularly, the Circuit Court justifies the OECP in that the

applicant pipeline bears some risk of loss, that construction

seems likely only where wasteful investment seems remote, and

that state regulatory commissions can keep the impact slight

and protect consumers. The Circuit Court noted the possibility

of concurrent state regulation over bypass transportation and

endorsed the ability of state commissions to protect consumers.

Judge Mikva concurs with the vast majority of the opinion

but dissents as to the impact of the OECP on the grounds that it

may prevent state commissions from providing “affordable

energy for their residents” and the ease it will provide pipelines

to bypass LDCs.

SoCalGas, among others, sought rehearing of the Circuit

Court opinion limited to its upholding of the OECP. Rehear-

ing, however, was denied.

REASONS FOR GRANTING THE WRIT

In evaluating applications to construct facilities or provide

new services, the FERC is obligated to make certain public

interest findings, to evaluate all aspects of the application, and

to consider the impact of the proposal on the consuming public.

In that regard, the FERC and the NGA have required the

5

applicant to bear the burden of proof and, in cases involving

the bypass of an LDC, the FERC and the Courts have

established a presumption favor:ng service to all end users by

the existing LDC.

The opinion below upholds the substance of the OECP and

finds the procedure not ripe for review. By doing so, the Circuit

Court condones the creation of a new presumption favoring an

applicant wishing to bypass the LDC and transferring the

burden to the opponent of an application.

In reinterpreting its statutory responsibility, the FERC also

proposes to restrict its consideration of an application, under

the OECP, to limited and direct economic considerations. The

FERC relies on state commissions to protect consumers from

the impact. State authority to regulate such transactions,

however, has never been defined and may not, in fact, exist.

Thus, the FERC is vacating an area it has traditionally

regulated, created a possible regulatory gap, abolished an

historic preference for LDC service to consumers, and failed to

describe or investigate the ability or inability of the states to fill

the gap.

Review by this Court is thus warranted.

THIS COURT SHOULD REVIEW TO CORRECT

THE FERC’S ERRONEOUS AND UNSUPPORTED

INTERPRETATION OF ITS STATUTORY

RESPONSIBILITY

Under the Natural Gas Act (NGA), the FERC is obli-

gated to find that any construction or operation of facilities,

transportation or sale of natural gas in interstate commerce “‘is

or will be required by the present or future public convenience

6

and necessary.” 15 U.S.C. §717f(c) and f(e). This duty

“requires the Commission to evaluate a// factors bearing on the

public interest.” Atlantic Refining Company v. Public Service

Commission (CATCO), 360 U.S. 378, 391 (1959); FPC v.

Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 8 (1961).

And, no attempt should be made by the agency “to sweep aside

the critical safeguards that are embodied in its certification

process.”” Consumer Federation of America v. FPC, 515 F.2d

347, 356 (D.C. Cir. 1975), cert. denied, 423 U.S. 906 (1975).

In making its public interest finding, the FERC is required

to consider the competitive consequences of the proposed new

service or facility, Maryland People’s Counsel v. FERC, 761

F.2d 768 (D.C. Cir. 1985) (MPC I); Manland People’s

Counsel v. FERC, 761 F.2d 780 (D.C. Cir. 1985) (MPC IJ);

and Maryland People’s Counsel v. FERC, 768 F.2d 450 (D.C.

Cir. 1985) (MPC III), the possibility of alternatives to the

application even if not raised by any protest, and to consider

the “reasonably foreseeable future” of the project, City of

Pittsburgh v. FPC, 237 F.2d 741, 752 (D.C. Cir. 1956). Such a

finding must include consideration of the indirect effects of a

proposed new service on the ultimate consumers of gas who are

the FERC’s “prime constituency.”” MPC IJ at 781. The FERC

is not entitled to rest on the record developed by the parties to

the proceeding, but must “| act] affirmatively in order to make

a complete record.” Scenic Hudson Preservation Conference v.

FPC, 354 F.2d 608, 621 (2d Cir. 1965), cert. denied, 384 U.S.

941 (1966).

In adopting the OECP, the FERC turns its back on all of

these requirements. As detailed in the Circuit Court opinion,

the FERC does not propose to look at any element of an

application under the OECP to construct facilities or provide

new service which may bypass an LDC except elements

detailed in the new regulations. 824 F.2d at 1030, 1031 (App.

B-94, 95). These elements relate exclusively to potential

financial risk borne by the pipeline applicant. The FERC does

not intend to review the impact to others or alternatives to the

proposal.

7

The FERC cannot unilaterally decide to limit its analysis to

only two issues; was the customer free contractually to seek

bypass, and, did it benefit that customer individually. All other

issues cannot be ignored as the FERC has done in approving an

OECP application to bypass an existing LDC. American

Distribution Company (Alabama Division), 37 FERC 961,282

(1986). The “public interest” may not coincide with the

interests of the bypassing pipeline and its industrial customer.

The FERC’s new policy conflicts with past FERC and

court decisions referring to the “long-established” and “‘well-

established” FERC policy “to favor service to industrial cus-

tomers by local distributors,” as opposed to direct pipeline sales

or transportation. See, e.g., Missouri Edison Co. v. FPC, 479

F.2d 1185 (D.C. Cir. 1973).

Unlike Section 3 of the Natural Gas Act, 15 U.S.C. §717b,

the burden of proof concerning the public convenience and

necessity under Section 7(c) rests clearly with the applicant.

Recently the author of the opinion below noted this fact in

upholding the use of rebuttable presumptions pursuant to

Section 3. Panhandle Producers and Royalty Owners Associ-

ation v. Economic Regulatory Administration, 822 F.2d 1105

(D.C. Cir. 1987). Unfortunately, this important distinction was

not considered in the instant opinion. Indeed, as discussed

later, the circuit court opinion provides for a conclusive pre-

sumption favoring the applicant as part of a blanket program

(OECP) pursuant to Section 7.

The opportunity for specific review of bypass applications

which consider all relevent factors is all petitioner seeks. The

policy against bypass has never guaranteed distributors that

bypass proposals would not be permitted by the Commission in

every case, and the preference for service by an LDC would not

necessarily apply if case-by-case economic considerations pre-

cluded it. See, e.g., Northern Natural Gas Company, 33 FPC

501 (1985), and, Panhandle Eastern Pipe Line Company, 29

FERC 961,338 at 61,709-10 (Dec. 26, 1984). Thus, bypass of

an LDC is not favored but may be granted if, after a review of

AQ

8

the facts and relevant policy, the FERC determines that the

proposed service would be in the public interest. It has been

the traditional and necessary approach of the FERC, mandated

by the NGA, which the OECP now drastically alters.

The Circuit Court states that the historic policy disfavoring

LDC bypass has been only “the concern over the wasteful

construction of duplicative facilities.” 824 F.2d at 1038 (App.

B-t12). To the contrary, the most often cited reason against

bypass is the extent to which the loss of large industrial

customers of the LDC shifts costs to its remaining customers,

particularly captive, small customers. American Louisiana Pipe

Line Co., et al., 20 FPC 575 (1958). Other factors supporting

the policy against bypass include the fact that LDCs and their

ratepayers, as the original pipeline customers, paid most of the

cost of construction and maintenance of the facilities and

Should have a superior right to the pipeline’s limited capacity,

Panhandle Eastern Pipe Line Co. v. FPC, 232 F.2d 467, 472

(3d Cir. 1956), cert. denied, 352 U.S. 891 (1956), and, that

LDC service, as opposed to pipeline or producer direct service,

is subject to greater regulatory supervision.

In neither of the two Notices of Inquiry issued by the

Commission in Docket No. RM85-1-000 was the issue of

bypass of local distributors, or the Commission’s historical

policy against such bypass, directly mentioned. Even the

NOPR failed to mention this long-honored FERC policy. The

Administrative Procedure Act, 5 U.S.C. §553, requires that the

agency notice must contain the substance of the proposed rule

and may require a description of the issues involved. Failing to

mention such a major change to a cornerstore of FERC

regulation was inexcusable.

Courts have repeatedly recognized that “the Federal

Energy Regulatory Commission ‘bears the burden of explaining

the reasonableness of any departure from a longstanding

practice ...’” Public Service Commission of New York vy.

FERC, 642 F.2d 1335, 1346 (D.C. Cir. 1980), cert. denied, 454

9

U.S. 879 (1981). The FERC and the Circuit Court, however,

fail to give reasoned decisions for the abandonment of the long-

standing policy, as pointed out in the dissenting opinion of

Judge Mikva on this issue. They can only vaguely refer to

FERC’s “overall reasoning” for support. 824 F.2d at 1038

(App. B-112). Such a major change requires more support

than “overall reasoning” — itneeds detailed findings reflecting

reasoned decision-making.

THE PROCEDURE ESTABLISHED FOR OPTIONAL

EXPEDITED CERTIFICATES IS RIPE FOR REVIEW

The OECP, as adopted by the Commission and now

approved by the Circuit Court, is ripe for review. The

procedure would allow a bypass application to be approved, no

matter how unwise and unsupported, as long as the pipeline

complies with the new regulations showing that it may bear

certain economic risks associated with its own investment. The

presumption operates to foreclose all scrutiny of the individual

certificate application beyond its compliance with the stated

objectives.

To receive a hearing, LDCs and state commissions must

raise material issues of fact. These facts must be in addition to

arguments concerning the negative impact to the LDC and its

customers no matter how devastating. The Circuit Court notes

that while the outcome is not necessarily automatic, the FERC

“significantly circumscribes its discretion”. 824 F.2d at 1032

(App. B-98, 99).

Such material facts must be gleaned from the little infor-

mation contained in the FERC’s notice of the filing and the

abbreviated application. No discovery is allowed to determine

the impact or defects prior to an FERC order. The protest

itself, therefore, is both the first and the last opportunity the

adversely affected parties will have to establish their legal and

10

factual arguments. As stated bluntly in the Notice of Proposed

Rulemaking ( NOPR), “[t]he protestor shall carry the burden

of proof in demonstrating that certification of the proposed

activities would not be in the public convenience and necessi-

ty.”’ This is despite the fact that the NGA places such a burden

firmly on the applicant. 15 USC § 717f(c).

As a practical matter, dismissal by the FERC of the major

concerns of LDCs and state commissions as irrelevant makes

the “rebuttable” presumption conclusive as to them.. Adoption

of such a conclusive presumption underscores the ripeness of

the issue. Petitioner does not wish to prevent competition; it

only desires a meaningful opportunity for a hearing to review

all the impacts of an application before the FERC makes its

decision.

The Circuit Court cites the lack of record evidence to

indicate that industrial customers wish to bypass LDCs and that

petitioners cannot point to “the slightest hardship.” 824 F.2d at

1033 (App. B-102). Due to the long-standing FERC policy

against bypass, no such record could be established nor did the

FERC even try at that time to establish a record on this point.

However, since the issuance of the program and the presump-

tion in favor of bypass, the construction of bypass pipelines and

pipeline direct service to industrials has become a constant and

disheartening problem for the states and the LDCs. Since the

recent inception of this program, many OECP applications have

been filed. Some involve minor projects but others involve the

construction of hundreds of miles of facilities costing hundreds

of millions of dollars. See, e.g., Iroquois Gas Transmission

System, 51 FR 23267 (June 20, 1987). One OECP application

proposes to bypass LDC service through a 1,000-mile-long-

pipeline estimated to cost over $665 million. Wyoming-

California Pipeline Co., 52 FR 32337, 8 (Aug. 27, 1987). The

OECP is significant, substantial, and must be reversed before

irreparable damage is done.

THIS COURT SHOULD REVIEW TO CLARIFY

THE SCOPE OF STATE JURISDICTION OVER

TRANSPORTATION WITHIN ITS BOUNDARIES

This Court has noted that the NGA was intended to

supplement rather than supplant state regulation. FPC v. East

Ohio Gas Co., 338 U.S. 464 (1950). The House Report to the

NGA states that the NGA “takes no authority from State

Commissions, and is so drawn as to complement and in no

manner usurp State regulatory authority”. H.R. Rep. No. 709,

75th Cong., Ist Sess. 2 (1937). See also,. Interstate Natural

Gas Co. v. FPC, 331 U.S. 682, 690 (1947).

Key to the Circuit Court’s opinion is that the FERC can

safely avoid considering impacts to the states, the affected LDC,

and the other gas consumers in the state, because the states

have the ability to react meaningfully to bypass. 824 F.2d at

1035 (App. B-105). The opinion suggests that the states may

exert some sort of certification authority, citing Panhandle

Eastern Pipe Line Company v. Michigan Public Service Com-

mission, 341 U.S. 329, 336 (1951), or utilize its taxing power to

mitigate the impact. 824 F.2d at 1035 (App. B-106). The

opinion further, however, declines to rule on the extent of state

authority as not in issue or as “too hypothetical”. 824 F.2d at

1035, 1037 (App. B-104-106, 109-111). If it is later found that

the states lack the authority to take the suggested actions or

exert the proposed jurisdiction, then the FERC has created a

situation where states and affected LDCs can neither mean-

ingfully complain to the FERC nor take preventive action

within the states. That is, if the FERC does not regulate, no

one will or can.

There is no record in this proceeding concerning the extent

or existence of state authority to address the transportation of

natural gas for consumption within a state once it crosses its

boundaries nor the ability of such jurisdiction to protect con-

sumers and the public interest. The FERC did not even

12

attempt to develop such a record. The FERC and the Circuit

Court apparently believe that the states can regulate all local

concerns. 824 F.2d at 1035 (App. B-106). However, the mere

statement by the FERC, and the Circuit Court’s implied

agreement, that “the states have ample authority to regulate

interstate pipelines services that bypass distributors” is not

enough. Either this Court must direct the FERC to continue to

consider all impacts of bypass on consumers or it must affirm

and detail state jurisdiction. Otherwise, a regulatory gap will

exist where Congress intended there be none.

The Circuit Court relies on two opinions of this Court for

the existence of state authority. Panhandle Eastern Pipe Line

Co. v. Public Service Comm’n of Indiana, 332 U.S. 507 (1947):

Panhandle Eastern Pipe Line Co. v. Michigan Public Service

Comm’n, 341 U.S. 329 (1951).. Those cases do establish that

the states may regulate the price at which gas is sold by

interstate pipelines to end use customers, and that state-level

certificates for certain facilities in a bypass proposal may be

required, but they do not address transportation. Trans-

portation, however, is exactly what the entire FERC Order was

intended to foster.

Even if the states can legally regulate bypass to protect the

public interest, the FERC has traditionally carried out this

responsibility. See, e.g., FPC v. Transcontinental Gas Pipe Line

Corp., 365 U.S. 1 (1961); ANR Pipeline Company, 34 FERC

761,238 (Feb. 20, 1986): Transwestern Pipeline Company, 36

FPC 176 (1966). The Commission cannot simply vacate the

area without so much as an inquiry into the extent of actual.

parallel state regulation. Many state statutes do not provide for

regulation of bypass situations (Reply Brief of Associated Gas

Distributors, et a/., at 5-6), and municipal utilities generally are

not subject to state utility commission jurisdiction.

The FERC argues that “where transportation bypass 1s

concerned there is ‘a point in time and space’ where federal

Pi itt

13

authority ends and state authority begins.” FERC Br. at 162.

The Circuit Court decision should be modified to specifically

adopt this principle and clarify that state authority, where

asserted, exists to enable a state to regulate local distribution

and transportation from that “point in time and space” to the

end user. As required by Section 1(b) of the NGA, 15 U.S.C.

§ 717(b), the state thus retains the ability to regulate matters of

essentially local concern. FPC v. East Ohio Gas Co., 338 U:S.

464 (1950). This authority of the states applies to “any other

transportation or sale. . . or to the local distribution . . . or to the

facilities used for such distribution...” Section 1(b), Con-

trarily, the FERC itself, in the context of a bypass proposal,

recently indicated that it believes its transportation jurisdiction

Over pipelines is comprehensive, ANR Pipeline Company, 34

FERC 61,238, 61,412 (Feb. 28, 1986), including where the

application is under the OECP and the Commission has

severely restricted its review. Wyoming-California Pipeline Co.,

41 FERC 961,040 ( October 20, 1987). Thus, the FERC wishes

to withdraw from exercising its authority but concurrently

wishes to prevent state commissions from filling the void or

exercising their constitutional authority over “any other trans-

portation” and the “local distribution” of natural gas.

Cases construing the bounds of state vs. federal jurisdiction

have repeatedly stressed that Congress intended to leave no

“regulatory gaps” and that, if a question arises as to jurisdiction

over an area which would be difficult for the individual states to

regulate, the federal agency is assumed to have been entrusted

to regulate it. FPC v. Transcontinental Gas Pipe Line Corp.,

365 U.S. 1 at 28. See also; Transcontinental Gas Pipe Line

Corp. v. State Oil and Gas Board of Mississippi, 474 U.S. 409

(1986). Thus, if the FERC only considers the limited OECP

criteria, it is turning its back on the public interest with impunity

unless this Court sets aside the Circuit Court determination on

this issue or affirms the full extent of state authority.

14

Further, reference to the taxing power of a state as a

remedy to the rate implications of a bypass situation is similarly

misguided. 824 F.2d at 1035 (App. B-107). The states will

have difficulty taxing any transaction which exclusively involves

the interstate transportation of natural gas. Maryland v.

Louisiana, 451 U.S. 725 (1981). It is difficult to conceive of an

example where a tax to mitigate the impact of the bypass

transaction would be appropriate or adequate.

IV

THIS COURT SHOULD REVIEW TO PREVENT

THE FERC FROM INTERFERING WITH

THE LAWFUL EXERCISE OF STATE AUTHORITY

The OECP and its substantive presumption in favor of

bypass applications will force the states to modify rate policies

or enact new legislation concerning the regulation of the

distribution of natural gas for consumption, an area protected

from FERC interference by Section 1(b) of the Natural Gas

Act. 15 U.S.C. §717(b). The Circuit Court proposes that states

face a choice between injuring LDC shareholders, driving

industrial customers off the LDC system, or shifting costs to

residential consumers. 824 F.2d at 1038 (App. B-110, 111).

The states are thus no longer free to develop local policies for

the distribution and consumption of gas that do not com-

plement the FERC’s new policy. (App. B-126, 127.)

The FERC should, at a minimum, be required to evaluate

the impact to all affected groups before making a determination

fo issue a certificate of public convenience and necessity.

Rejecting the OECP does not defeat competition or prevent

bypass, it only insures that all essential impacts are evaluated

and unwise bypass is identified through complete procedures.

The OECP promotes bypass thereby promoting a segmen-

tation of the gas consumers market analogous to that found

Osa tate,

15

unlawful in the MPC cases. When pipelines bypass more and

more of an LDC’s industrial load, it leaves the small, non-fuel-

switchable residential and commercial customers to be served

by the LDC. This impact of bypass is not disputed. However,

the FERC has stated that policy and factual objections to

bypass concerning market distortions caused by an OECP

proposal, are foreclosed from consideration, effectively elimina-

ting review of proposals opposed by LDCs or state commis-

sions.

The FERC’s support for reduced regulation and com-

petitive forces of the marketplace is commendable. If such

actions include abdication of NGA obligations, Congressional

action is necessary to relieve the FERC of its responsibilities

and the FERC cannot abdicate without such Congressional

action. See, e.g., FPC v. Texaco, Inc., 447 U.S. 380, 400

(1974); Farmers Union Central Exchange, Inc. v. FERC, 734

F.2d 1486, 1510 (D.C. Cir.), cert. denied 469 U.S. 1034.

The Circuit Court further rejects the distinct differences

between an LDC’s obligation to serve all who desire service,

big or little, and that of a bypassing pipeline planning to serve

only a select few major customers. The bypassing pipeline

under the OECP has no obligation to provide service beyond

those it voluntarily assumes. The “raider” simply assumes a

potential bypass cost risk and reaps the benefits. In stark

contrast, an LDC has an ongoing statutory obligation to serve

all new or returning customers desiring service.

Finally, the Circuit Court concludes that only “economic”

bypass will occur. All bypass is economic for someone. It may,

however, be a disaster to residential and small commercial

customers. The impact to all affected consumers and companies

is fundamental to determining the true economics. The FERC

proposes to look at only one segment of the bypass which is

most likely to show “economic benefit” but to ignore those who

are certain to suffer and whom the FERC is directed to protect.

CATCO, supra at 391.

. 16

IV

CONCLUSION

This Court should issue its Writ of Certiorari to review the

decision of the court below.

Dated: December 10, 1987 Respectfully submitted,

L. E. LOBAUGH

T. D. CLARKE

E. R. ISLAND

Davip L. HUARD

Attorneys for Southern

California Gas Company