Appendix — Amoco Energy Trading Corp. v. Federal Energy Regulatory Commission

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TABLE OF CONTENTS

Appendix A - Conoco Inc. v. Federal Energy

Regulatory Commission,

90 F.3d 536 (D.C. Cir. 1996) ...1

Appendix B - Amendment to

Conoco Inc. v. Federal Energy

Regulatory Commission,

90 F.3d 536 (D.C. Cir. 1996) .. 34

Appendix C - Arkla Gathering Services Company,

67 F.E.R.C. (CCH) 4 61,257

4 Berar ras ee berate 36

Appendix D - Arkla Gathering Services Company,

69 F.E.R.C. (CCH) 7 61,280

EP IN eI eee 104

Appendix E - Section 1 of the Natural Gas Act

15 US.CS. § 717 (1996) .... 1717

Appendix F - Section 4 of the Natural Gas Act

15 U.S.C.S. § 717¢ (1996) ... 174

Appendix G - Section 5 of the Natural Gas Act

15 U.S.C.S. § 717d (1996) ... 178

Appendix H - Section 7 of the Natural Gas Act

15 U.S.CS. § 717f (1996) ... 180

Ne ens OF ee ee ee

l

APPENDIX A

Gnited States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 16, 1996 Decided August 2, 1996

No. 94-1724

Conoco Inc,

PETITIONER

Vv.

FEDERAL Enercy Recu.atory ComMISSION,

RESPONDENT

Vesta ENERGY CoMPANY, ET AL..

INTERVENORS

Consolidated with

94-1726, 94-1729, 94-1730, 94-1731, 94-1732,

94-1735, 95-1007, 95-1013, 95-1080,

95-1172, 95~1342 & 95-1364

On Petitions for Review of Orders of the

Federal Energy Regulatory Commission

Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

2

Gordon Gooch argued the cause for petitioners and interve-

nors in support of petitioners Conoco Inc., et al. Maria M.

Seidler argued the cause for pétitioner Arkansas Royalty

Membership. With them on the briefs were Dena E. Wig-

gins, Emery J. Biro, III, Bruce A. Connell, Mickey J.

Lawrence, David M. Sweet, Steven R. Hunsicker, Randall S.

Rich and Christopher J. Bernard. Mario M. Garza, Susan

B. Dyer, Elisa J. Grammar, Monique L. Penn-Jenkins and

Cheryl J. Walker entered appearances.

Richard D. Avil, Jr. argued the cause for petitioners and

intervenors NorAm Gas Transmission Company, et al., with

whom James E. Gauch, Charles L. Pain, Craig R. Rich and

Mari M. Dugger were on the briefs.

Patricia L. Weiss, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent, with whom

Jerome M. Feit, Solicitor was on the brief. Timm L. Aben-

droth, Attorney, entered an appearance.

John i. Cheatham, III, Richard C. Green, Kenneth M.

Minesinger, Charles L. Pain, Craig R. Rich, Mari M. Dug-

ger, Richard D. Avil, Jr. and James E. Gauch, filed the brief

on behalf of inventors Interstate Natural Gas Association of

America, et al. Jean E. Sonneman entered an appearance.

Daniel F. Collins entered an appearance for intervenor

ANR Pipeline Company. Peter G. Esposito entered an ap-

pearance for intervenor Natural Gas Clearinghouse. Law-

rence G. Acker and Brian D. O’Neill entered an appearance

for intervenors Trunkline Gas Company and Panhandle East-

ern Pipe Line Company. Judy A. Johnson entered an ap-

pearance for intervenor El] Paso Natural Gas Company.

David S. Berman entered an appearance for intervenor NJR

Energy Corporation. Steven A. Weiler entered an appearance

for intervenor for respondent NOARK Pipeline System.

Gordon J. Smith entered an appearance for intervenor Pan-

Energy Gas Services, Inc.

Patricia A. Curran entered an appearance for amicus

curiae Cabot Oil & Gas Corporation.

3

Before: Buckxiey, Senre.ie and Rocers, Circuit Judges.

Opinion for the Court filed by Cireuit Judge Rocers.

Rocers, Circuit Judge: In these consolidated petitions for

review of five orders of the Federal Energy Regulatory

Commission,’ the principal issue is whether a jurisdictional

exemption was properly granted to an affiliate of an inter-

state pipeline for its gathering? service, which had formerly

been operated by the pipeline itself, so long as the affiliate’s

gathering service functioned independently of the pipeline’s

transportation service, and so long as the affiliate provided

the pipeline’s existing customers contract protection during a

two-year transition period. Producer petitioners (“the Pro-

ducers”) * challenge the Commission’s determination that the

facilities to be transferred were exempt gathering facilities

under § 1(b) of the Natural Gas Act, 15 U.S.C. § 717(b)

1 Arkla Gathering Services Co., 67 F.E.R.C. 461,257 (1994)

(“Arkla I”), order on reh'g, Arkla Gathering Services Co., 69

F.E.R.C. 161,280 (1994) (“Arkla II”); reh’g denied, Arkla Gather-

ing Services Co., 70 F.E.R.C. 161,079 (1995) (“Arkla IV"); recon-

sideration denied, Arkla Gathering Services Co, 71 F.E.R.C.

161,297 (1995) (“Arkla V”). Arkla Gathering Services Co., 70

F.E.R.C. 161,018 (1995) (“Arkla IIT”), order on reh’g, Arkla IV,

order on reh’g, Arkla V.

s Gathering is the process of taking natural gas from the wells

and moving it to a collection point for further movement through a

pipeline’s principal transmission system. Northwest Pipeline Corp.

v. FERC, 905 F 2d 1408, 1404 n.1 (10th Cir. 1990).

% Producer petitioners are Amoco Energy Trading Corporation,

Amoco Production Company, Anadarko Petroleum Corporation, Ar-

kansas Royalty Membership, Conoco Inc., Independent Petroleum

Association of America, Marathon Oil Company, Oklahoma Inde-

pendent Petroleum Association, Texaco Inc. and Texaco Natural

Gas Inc.; producer intervenors are Exxon Corporation, Commis-

sioner of Public Lands for the State of New Mexico, New Mexico

Energy, Minerals and Natural Resources Department and Vesta

Energy Company.

4

(1994). The pipeline and gathering petitioners (“the Pipe-

lines”) ® challenge the Commission’s authority to require de-

fault contracts as a condition of the transfer. We conclude

that there is substantial evidence to support the Commission’s

application of its primary function test * in determining that

the gathering activity fell within the NGA § 1(b) exemption.

We also conclude, however, that the Commission has not

identified any source of authority to condition the transfer on

Commission-prescribed default contracts with the pipeline’s

existing customers. Accordingly, we grant the Pipelines’

petitions and deny the Producers’ petitions, and we remand

the cases to the Commission.

These appeals arise in the wake of major regulatory

changes in the natural gas industry. Beginning in 1978, when

Congress enacted the Natural Gas Policy Act, 92 Stat. 3350,

15 U.S.C. §§ 3301 et seq., to deregulate some wellhead price

controls, market forces began to play a greater role in

determining the supply, demand and price of natural gas.

Transcontinental Gas Pipe Line Co. v. State Oil & Gas Bd,

474 U.S. 409, 422 (1986) (“Transco”). Following suit, the

4 Natural Gas Act (“NGA” or “the Act”), 15 U.S.C. §§ 717-

717w (1994).

5 The pipeline and gathering petitioners are NorAm Field

Services Corporation (“NorAm Field”), NorAm Gas Transmission

Company (“NorAm Gas”) and GPM Gas Corporation; pipeline and

gatherer intervenors are Interstate Natural Gas Association of

America, a pipeline trade association, and Williams Field Services

Co., a gathering affiliate. At the time of the Commission’s initial

order, NorAm Field was know as Arkla Gathering Services Compa-

ny, and NorAm Gas was known as Arkla Energy Resources Compa-

ny. For ease of reference we refer to NorAm Field and NorAm

Gas in this opinion.

6 See Amerada Hess Corp., 52 F.E.R.C. 161,268 at 61,987-88

(1990); see also infra n.14.

PROT hereon,

5

Commission, in 1985, promulgated Order No. 436,’ which

established a program of open-access, nondiscriminatory

transportation by which gas distribution companies and in-

dustrial end-users could buy natural gas directly from gas

merchants other than pipelines and ship that gas on inter-

state pipelines. See Associated Gas Distributors v. FERC.

824 F.2d 981, 996 (D.C. Cir. 1987), cert. denied, 485 U.S. 1006

(1988). Then, in 1992, the Commission again altered the

regulatory scheme in Order No. 6362 by mandating the

unbundling of gas sales and interstate transportation that

Order No. 436 simply encouraged, in order to give pipeline

customers unimpeded access to the competitive wellhead mar-

ket and to permit all gas sellers to compete on an equal basis.

See 18 C.F.R. §§ 284.8(a)(1) & 284.9(a)(1)(1995); United Dist.

Companies v. FERC, __ F.3d —__ (D.C. Cir. July 16, 1996).

After Order No. 436, the Commission began to develop its

policy regarding affiliate gatherers. See Natural Gas Gath-

ering Services Performed by Interstate Pipelines and Inter-

state Pipeline Affiliates—Issues Related to Rates and Terms

7 Order No. 436, Regulation of Natural Gas Pipelines After

Partial Wellhead Decontrol, (Regs. Preambles 1982-85] F.E.R.C.

Stats. & Regs. (CCH) 130,665, order on reh’g, Order No. 436-A,

(Regs. Preambles 1982-85] F.E.R.C. Stats. & Regs. (CCH) 430,675

(1985), order on reh'g, Order No. 436-B, (Regs. Preambles 1986-

90} F.E.R.C. Stats. & Regs. (CCH) 130,688, order on reh’g, Order

No. 436-C, 34 F.E.R.C. 161,404, order on reh’g, Order No. 436-D,

34 F.E.R.C. 161,406, order on reh’g, Order No. 436-E, 34 F-E.R.C.

161,403 (1986), aff'd in part and vacated and remanded in part sub

nom. Associated Gas Distributors v. FERC, 824 F 2d 981 (D.C. Cir.

1987), cert. denied, 485 U.S. 1006 (1988).

® Order No. 636, Pipeline Service Obligations and Revisions to

Regulations Governing Self-Implementing Transportation Under

part 284 of the Commission's Regulations, and Regulation of Natu-

ral Gas Pipelines After Partial Wellhead Decontrol, III F.E.R.C.

Stats. & Regs. (CCH) 4 30,939, order on reh’g, Order No. 636~A, III

F.E.R.C. Stats. & Regs. (CCH) 130,950, order on reh’g, Order No.

636-B, 61 F.E.R.C. 161,272 (1992), reh'g denied, 62 F.E.R.C.

161,007 (1993), affd in part and vacated and remanded in part,

a i i

6

and Conditions of Service, 65 F.E.R.C. 161,136 at 61,689

(1993) (“Gathering Service Policy”). Although gathering is

exempted from Commission jurisdiction by NGA § 1(b), the

Commission required interstate pipelines that directly per-

formed gathering services to file statements of their gather-

ing rates as part of Order No. 436 enforcement.’ After Order

No. 636, the Commission did not require pipelines to include

in their tariffs a gathering rate schedule, specifying the terms

and conditions of the gathering services to be provided, but

required the pipelines to file their separately stated gathering

rates. Gathering Service Policy, 65 F.E.R.C. 161,136 at

61,689. In addition, as part of their Order No. 636 tariffs,

pipelines must file statements that their gathering services

are non-discriminatory, not. unduly preferential, and not in- :

consistent with the terms and conditions of the Part 284

certificates authorizing them to provide interstate transporta-

tion. Id

The Commission also found that it had jurisdiction to

regulate gathering services provided by pipeline affiliates in

connection with the pipelines’ interstate transportation in

some circumstances. The Commission noted that it had

taken the position that it had jurisdiction under NGA §§ 4 &

5, 15 U.S.C. §§ 717c, 717d (1994), to determine the justness

and reasonableness of the rates, terms, and conditions under

which gathering service is performed in connection with

interstate transportation. It cited Northern Natural Gas

Co., 48 F.E.R.C. 161,473 (1988), reh’g. denied, 44 F.E.R.C.

161,384 (1988), and Northwest Pipeline Co, 59 F.E.R.C. j

761,115 (1992) (“Northwest Pipeline I”), reh’g. denied, 60 |

F.E.R.C. 161,213 (1992) (“Northwest Pipeline IT”), petitions ;

for review dismissed, Williams Gas Processing Co. v. FERC,

17 F.3d 1320 (10th Cir. 1994). In Northwest Pipeline I],

[t]he Commission expressed the view that the traditional

form of regulation was not needed to address the mere

potential for affiliate abuse, and that it would only regu-

United Dist. Companies v. FERC, —— F.3d —— (D.C. Cir. July 16,

1996).

CU BK eS voifin

Dinka stant es

® Order No. 436, at 42,493, 18 C.F.R. § 284.7(d) (1990), cited in

Northern Natural Gas Co. v. FERC, 929 F.2d 1261, 1264 & n.12

(8th Cir. 1991).

;

late gathering rates of pipeline affiliates if shown by a

complaint that more extensive Commission regulation is

necessary to invalidate an unjust and unreasonable rate

or to correct an unduly discriminatory practice in order

to preserve its primary grant of authority over interstate

transportation or sales.

Gathering Service Policy, 65 F.E.R.C. 961,136 at 61,690

(citing 60 F.E.R.C. 161,213 at 61,729). Thus, interstate

pipeline affiliates are not required to file with the Commission

their gathering rates, conditions of service, or any other

statements. Jd.

The Commission acknowledged that there were differing

views as to how (and even whether) gathering should be

unbundled from interstate pipeline transportation. The Com-

mission noted, for example, that under bundled firm-to-the-

wellhead "* rate design, “it is difficult for producers connected

to other pipelines to compete.” Jd. On the other hand, some

argued, “such rates are a logical extension of the Commis-

sion’s requirement for SFV rates” mandated by Order No.

636, because firm-to-the-wellhead rate design removes fixed

costs from usage rates in the production area and thus

removes distortions in the choice among production connected

to different pipelines." Jd By early 1994, in an attempt to

address new issues including those arising from proposals of

interstate pipelines to “spin down” their gathering services to

corporate affiliates or “spin off’ their gathering services to a

non-related corporate entity, the Commission convened a

10 Shippers who pay a firm-to-the-wellhead rate receive the

right to firm transportation from the wellhead to their market

delivery points. Gathering Service Policy, 65 F.E.R.C. 961,136 at

61,690.

1! In straight fixed/variable (SFV) rate design, fixed costs are

allocated to the reservation or demand charge for firm transporte-

tion capacity, while variable costs are allocated to the usage or

commodity charge for the actual transportation of gas. Order No.

636 adopted SFV rate design in place of modified fixed/variable

(MF) rate design, in which some fixed costs are allocated to the

usage charge. United Dist. Companies, __ F.3d. at ___ & nn.24—

25.

8

public conference to explore, among other things, the extent

to which it should exercise its NGA §§ 4 & 5 authority over

the rates, terms, and conditions of gathering services. /d

Ultimately, the Commission decided to address many of the

issues with regard to gathering service performed by a

pipeline affiliate on a case-by-case basis. Arkla Il, 69

F.E.R.C. at 62,078 n.5.

In late 1993, NorAm Gas Transmission Company (“NorAm

Gas”) sought to “spin down” to a separate affiliate, NorAm

Field Services (“NorAm Field”), gathering facilities located at

105 sites in Arkansas, Louisiana, Oklahoma and Texas.

NorAm Gas wanted its gathering facilities to operate on a

level playing field with those of independent gatherers unreg-

ulated by the Commission. NorAm Field, the affiliate, peti-

tioned the Commission for a declaratory order disclaiming

jurisdiction over the affiliate’s gathering facilities, services

and rates. NorAm Field contended that its gathering ser-

vices would be exempt pursuant to NGA § 1(b) and itself, as

a non-natural gas company, exempt from the Act. In its

petition, NorAm Field stated that NorAm Gas had classified

all the facilities that would be transferred as gathering facili-

ties, and that, upon acquisition of these facilities, NorAm

Field would continue to provide the same gathering services,

but “conduct its business organizationally separate from

{NorAm Gas’}.” On this basis, NorAm Field maintained that

after acquisition the facilities should be exempt from Commis-

sion jurisdiction under NGA § 1(b).

The Commission made a preliminary determination that

the facilities to be transferred were gathering facilities within

the NGA § 1(b) exemption. Arkla I, 67 F.E.R.C. 161,257 at

61,866. The Commission relied on NorAm Field’s represen-

tation that it would operate the gathering systems in essen-

tially the same manner as had NorAm Gas, and on the

nature, size, and configuration of the facilities themselves.

The Commission declined, however, to declare NorAm Field’s

facilities exempt without assurances against affiliate abuse

and protection for NorAm Gas’ existing gathering service

customers. NorAm Gas was, therefore, required to include

9

non-discriminatory and equal-access provisions in its tariff.!2

In light of what the Commission found were reasonable

expectations of NorAm Gas’ existing gathering customers

that their service would not be arbitrarily terminated in the

event of a spin-down or spin-off, or offered only at unreason-

able terms, conditions, and rates, NorAm Field was required

to show that it negotiated private contracts with NorAm Gas’

existing customers. If NorAm Field could not negotiate a

contract with a customer, it must offer the customer a

“default contract” containing terms not inconsistent with

those currently offered by independent gatherers in the

particular region.

The Commission pointed out that it had previously regulat-

ed rates for gathering services provided by interstate pipe-

lines such as NorAm Gas as part of its review of the pipelines’

bundled gathering and interstate transportation rates. Arkla

I, 67 F.E.R.C. 161,257 at 61,872. In the Commission’s view,

“The pipelines’ historical obligation to [their] gathering cus-

tomers and the Commission’s later requirement for open-

access transportation created an expectation that the relation-

ship between the pipelines and producers connected to their

gathering systems would be governed by regulation, not

private contract.” Jd. The Commission expressed concern

that “in instances like the one here, where a pipeline is

proposing to transfer its gathering operations to a non-

pipeline entity, the existing customers could find themselves

unable to contract for service of the pipeline’s successor in

interest.” Jd. With these concerns in mind, the Commission

concluded that a “transition mechanism” was needed to en-

sure that “existing customers will not have their gathering

service arbitrarily terminated,” Arkla II, 69 F.E.R.C. 161,280

12 Specifically, the Commission required NorAm Gas to file

tariff provisions with assurances that it would (1) provide non-

discriminatory access, and not give any preference to customers of

NorAm Field over customers of nonaffiliated gatherers, in schedul-

ing, transportation, storage or curtailment and (2) not condition or

tie its agreement to provide transportation service to an agreement

by the producer, customer, or shipper relating to any service

provided by its gathering affiliate. The Pipelines do not challenge

the non-discriminatory, open-access conditions.

10

at 62,091-92, or “only offered [at] undue unreasonable terms,

conditions and rates.” Arkla I, 67 F.E.R.C. 961,257 at

61,872.

On rehearing, the Commission clarified that “when a pipe-

line seeks to transfer gathering facilities it must file under

section 7 for abandonment authorization for any facilities that

are certificated, and under section 4 to terminate service for

both certificated and uncertificated facilities.” Arkla II, 69

F.E.R.C. 161,280 at 62,083. The Commission also deter-

mined that the contract requirements for NorAm Gas’ exist-

ing customers could be fulfilled by either NorAm Gas or

NorAm Field, and specified that the new contracts must

provide NorAm Gas’ existing gathering customers two years’

continued service at the same rate currently charged the

customer for similar service, and at terms and conditions

consistent with existing contracts or service. Jd. at 62,092-

94.

Thereafter, the Commission preliminarily accepted NorAm

Gas’ abandonment request, finally determined that the facili-

ties were exempt gathering facilities, and provided further

direction on the default contract issues. Arkla III, 70

F.E.R.C. 161,018 at 61,074-75. The Commission denied re-

hearing of its decision in Arkla IJ, and subject to a further

default contract provision, granted abandonment and the

request for a declaratory order. Arkla IV, 70 F.E.R.C.

161,079 at 61,223. Finally, the Commission denied rehearing

of its order in Arkla IV, except as to the default contract

issue, ordered a final revision to the contact, and issued its

declaratory order contingent on the directed revision being

made. Arkla V, 71 F.E.R.C. 161,297 at 62,170.

Il.

Under the NGA, the Commission has jurisdiction over the

interstate transportation of natural gas, but not over the

gathering of natural gas."* The line between jurisdictional

18 Section 1(b) of the NGA provides that the Act

shall apply to the transportation of natural gas in interstate

commerce, to the sale in interstate commerce of natural gas for

1]

transportation and nonjurisdictional gathering is not always

clear. To draw that line, the Commission employs the “pri-

mary function test,” which examines various factors to deter-

mine whether a facility is primarily devoted to gathering or to

interstate transportation. The Producers contend that the

Commission erred in three ways in conditionally granting

NorAm Field’s request for a declaratory order and NorAm

Gas’s request for permission to abandon the services. First,

they contend that the Commission misapplied the primary

function test, and that the finding that the spun down facili-

ties are devoted to gathering was not supported by substan-

tial evidence. Second, they maintain that even if the facilities

provide gathering service, § 1(b) exempts only the physical

activity of gathering from Commission regulation, and the

Commission misinterpreted the NGA in declining to exercise

authority over gathering rates. Finally, the Producers argue

that the Commission’s orders are internally inconsistent; if,

as the Commission found, it would have jurisdiction to regu-

late NorAm Field’s gathering services in the event of anti-

competitive collusion between NorAm Field and NorAm Gas,

say the Producers, then NorAm Field’s services must be

jurisdictional and cannot fall within the § 1(b) exemption.

We are not persuaded by any of these arguments.

The primary function test is a set of factors that tend to

indicate whether a facility is devoted to the collection of gas

from wells—gathering—or to the further (“downstream”)

long-distance movement of gas after it has been collected—

interstate transportation. The test requires the Commis-

resale for ultimate public consumption for domestic, commer-

cial, industrial, or any other use, and to natural-gas companies

engaged in such transportation or sale, but shall not apply to

any other transportation or sale of natural gas or to the local

distribution of natural gas or to the facilities used for such

distribution or to the production or gathering of natural gas.

15 U.S.C. § 717(b) (1994) (emphasis added).

4 The primary function test was articulated by the Commission

in Farmland Industries, Inc., 23 F.E.R.C. 161,063 at 61,143 (1983),

and later modified in Amerada Hess Corp., 52 F.E.R.C. 161,268 at

12

sion to “assess and weigh all of the specific facts and circum-.

stances present in a given system.” West Texas Gathering

Co., 45 F.E.R.C. 961,386 at 62,221 (1988). Several criteria

are relevant, particularly the physical, geographical, and op-

erational aspects of the facilities, but no factor is determina-

_ tive, nor do all factors apply in every situation. Northwest

Pipeline Corp. v. FERC, 905 F.2d 1403, 1408 (10th Cir. 1990);

Farmland Industries, 23 F.E.R.C. 161,063 at 61,143; see

also Arkla I, 67 F.E.R.C. 9 61,257 at 61,867.

The Producers fault the Commission’s application of the

primary function test in this instance. The Producers main-

tain that the Commission went astray because it “denied

parties the opportunity to develop a full and specific record,”

“examined only superficially the various ... factors” of the

primary function test, and failed to examine the function of

individual facility segments “as part of an integrated

whole.” “ The Commission, the Producers assert, further

misapplied the primary function test with respect to three

criteria: the compressors; the central point in the field test;

and the web-like configuration of many of the facilities.

61,987-88 (1990). Louisiana Intrastate Gas Corp. v. FERC, 962

F.2d 37, 42-43 (D.C. Cir. 1992). The parties to these proceedings

fault only the Commission’s application of the test, and do not

dispute that the primary function test is a reasonable construction

of the Commission’s authority under NGA § 1(b) and merits defer-

ence under Chevron U.S.A. Inc. v. Natural Resources Defense

Council, 467 U.S. 837 (1984).

15 The Producers’ contention that the Commission erred in

denying them an evidentiary hearing to develop a full record in

support of their position that the facilities function as an integrated

part of the transmission system is meritless. The Commission

concluded that there were no disputed material issues of fact that

could not be resolved on the written record, Arkla II, 70 F.E.R.C.

161,079 at 61,221, and the Producers have not shown the contrary.

The court has repeatedly held that the Commission “is required to

hold hearings only when the disputed issues may not be resolved

through an examination of written submissions.” Environmental

Action v. FERC, 996 F.2d 401, 413 (D.C. Cir. 1993) (citations

omitted).

wht es, «sd ec bee

13

Specifically, the Producers contend that the Commission did

not develop a record to examine whether the compressors

functioned to further downstream transportation, failed to

specify those areas to which it found the central point in the

field test applicable or adduce record evidence showing that

the test was satisfied, and ignored how the facilities in

different areas operated interdependently to further inter-

state transportation.

The Producers’ complaints notwithstanding, we find that

the Commission’s determination that the facilities are primar-

ily devoted to gathering is supported by the record. The

Commission examined six factors.* It found, first, that the

pipelines were generally short in length and small in diame-

ter, which is indicative of gathering usage. Arkla IJ, 67

F.E.R.C. 961,257 at 61,867. All except 15 of the 3,138

pipeline segments to be transferred are less than 8 miles in

length; ninety percent of the pipelines are less than 6 inches

in diameter and, except for pipelines at one location, all are

less than 10 inches in diameter. Id. Second, the Commission

found that many of the subject areas satisfy the central point

in the field test." The few exceptions are small fields with

limited well connections and small diameter pipelines, or

16 The six factors are: (1) the length and diameter of the

relevant lines; (2) the extension of the facility beyond the central

point in the field; (3) the lines’ geographic configuration; (4) the

location of compressors and processing plants; (5) the location of

wells along all or part of the facility; and (6) the operating pressure

of the lines. The first five factors were relied on by the Commis-

sion in Farmland Industries, Inc., 23 F.E.R.C. 161,063, and West

Texas Gathering Co, 45 F.E.R.C. 961,386; the sixth factor was

considered in Amerada Hess Corporation et al, 52 F.E.R.C.

4 61,268.

17 Gathering generally involves the collection of gas from sepa-

rate wells at a single point, the “central point in the field.” There,

it is delivered into a single line for interstate transportation. The

central point in the field test examines whether the facilities in

question are upstream of this single point, in which case they are

likely to be gathering facilities, or downstream, in which case they

are likely to be transportation facilities.

T4

pipelines forming backbone-type structures. Third, the Com-

mission observed that the facilities’ three types of geographic

configuration, particularly the web-like configuration, are con-

sistent with a gathering determination. Fourth and fifth, the

Commission noted that the minimal compression used and the

location of numerous wells along the facilities are also consis-

tent with gas gathering. Jd at 61,867.* Last, the Commis-

sion found that the majority of subject areas operate at low

pressure, which is similarly indicative of gathering. /d at

61,868. From these findings, the Commission concluded that

all 105 systems qualified as exempt gas-gathering systems

under NGA § 1(b). Jd at 61,869.

The Commission may not “disregard those facts or issues

that prove difficult or inconvenient” or “refuse to come to

grips” with certain evidence in applying the primary function

test. See Tenneco Gas v. FERC, 969 F.2d 1187, 1214 (D.C.

Cir. 1992). The record reflects that the Commission, in fact,

“treat{ed] fully ‘each of the pertinent factors,’” see id. (quot-

ing Public Serv. Comm'n of New York v. FPC, 511 F.2d 338,

345 (D.C. Cir. 1975)), and made specific findings with respect

to the location of compressors upstream of processing plants,

the applicability of the central point test to some areas, and

the system’s web-like geographical configuration. 67

F.E.R.C. 961,257 at 61,867-69. Unlike Louisiana Intrastate

Gas, 962 F.2d at 42-43, where the court remanded because

the Commission’s decision was not based on the primary

function test and lacked reasoned consideration, the Commis-

sion here gave reasoned consideration to each of the pertinent

factors of the primary function test, articulating conclusions

based on factual findings. The Producers identify no critical

evidence that would undermine the Commission’s decision.

In evaluating and balancing the several factors under the

primary function test, the Commission brings to bear its

18 The facilities at issue consist of approximately 2,775 miles of

pipelines that are attached to approximately 3,900 active wells, 2,000

additional wells that flow gas through interconnections with third-

party gatherers, and another 1,300 wells that are presently either

inactive or split connected and producing into competitors’ gather-

ing systems. Jd at 61,864.

3

eg

15

considerable expertise about the natural gas industry. See

Universal Camera Corp. v. N.L.R.B., 340 U.S. 474, 488

(1951); Motor Vehicle Manufacturer's Ass’n of the United

States v. State Farm Mutual Automobile Ins. Co., 463 US.

29, 42-43 (1983); Marsh v. Oregon Natural Resources Coun-

cil, 490 U.S. 360, 377 (1989). Consequently, in view of the

substantial evidence to Support the Commission’s findings,

there is no basis for the court to substitute its judgment for

that of the Commission.

The Producers next contend that the Commission incor-

rectly expanded the scope of the § 1(b) gathering exemption

to deregulate the rates, terms, and conditions for gathering

service, contrary to prior Supreme Court decisions that held

§ 1(b)’s exclusion applicable only to the physical activities of

gathering. The Commission’s interpretation of § 1(b) is enti-

tled to Chevron deference. Oklahoma Natural Gas Co. v.

FERC, 28 F.3d 1281, 1283-84 (D.C. Cir. 1994) (citing Chevron

U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984)). The Supreme

Court decisions cited by the Producers have addressed the

Commission’s jurisdiction over gathering rates charged only

by interstate pipelines, and thus do not control the question

whether the Commission may regulate rates charged by

independent or pipeline-affiliated entities. Further, the stat-

ute itself does not clearly resolve the question one way or the

other, and the Commission’s interpretation is a permissible

resolution of the ambiguity.

The Producers rely on several Supreme Court decisions

and a decision from the Eighth Circuit for the proposition

that § 1(b)’s exemption should be restrictively construed to

apply only to the physical activities of gathering.’® The

Supreme Court “has consistently held that ‘production’ and

19 Phillips Petrcieum Co. v. Wisconsin, 347 U.S. 672, 678

(1954); Colorado Interstate Gas Co. v, FPC, 324 US. 581, 600-02

(1945); Interstate Natural Gas Co. v, FPC, 331 U.S. 682 (1947);

Northern Natural Gas Co. v. FERC, 929 F.2d 1261 (8th Cir. 1991),

cert. denied, 502 US. 856 (1991). But see FPC v. Panhandle

Eastern Pipe Line Co., 337 US. 498, 506-07 (1949) (“Panhandle

IT”).

16

‘gathering’ are terms 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. Kansas

Corp. Comm’n, 372 U.S. 84, 90 (1963). However, in each case

in which the Court has applied this narrow definition of

“production” and “gathering” to uphold the Commission’s

jurisdiction, the regulated entity was engaged in jurisdictional

activity. Thus, when a natural gas company provided bun-

died sales and interstate transportation from its own wells to

consumers and distributors, the Commission could properly

include the company’s production and gathering costs in its

rate base for the bundled service. Colorado Interstate, 324

U.S. at 603. That holding expressly depended upon the

company’s jurisdictional sales, however; the case does not

stand for the proposition that the Commission can regulate

the rates charged by any gatherer. Similarly, the Court held

that the Commission could regulate an independent produc-

er’s gas sales, but did so because the producer was engaged

in a jurisdictional activity, namely sales for resale, not be-

cause the Commission has general rate-making authority over

producers. Phillips Petroleum, 347 U.S. at 682. The Court

has also held that the Commission may regulate curtailment

of gas deliveries by interstate pipelines, even to direct-sales

customers apparently excluded by another of § 1(b)’s exemp-

tions, because of the Commission’s authority over the pipe-

lines’ jurisdictional transportation. FPC v. Louisiana Power

& Light Co., 406 U.S. 621, 642-47 (1972).

What the Court has not done is to recognize Commission

jurisdiction over entities performing neither jurisdictional

sales nor jurisdictional transportation. The Commission was

confronted in the instant case with two questions that the

Court has not answered: (1) Does the Commission have

jurisdiction over the rates charged by a gatherer that does

not transport gas interstate nor engage in jurisdictional

sales? and (2) If not, does the Commission nonetheless have

jurisdiction if the gatherer is affiliated with a jurisdictional

pipeline? The decisions relied on by the Producers predate

the massive reorganization of the industry occasioned by

Orders Nos. 436 and 636, and the Court has not yet ad-

OS tn ciate tines ae Sit ae Area o

17

dressed many of the jurisdictional issues governing this re-

structured system.

The Supreme Court introduced the concept of the “physi-

cal” activity of gathering when pipelines bundled together

jurisdictional and nonjurisdictional activities. Under these

circumstances, the Court upheld the reach of federal rate-

making regulatory jurisdiction to include both activities, fo-

cusing on the fact that the activity was a part of interstate

transportation or sale by a natural gas company.” In this

context the Court defined “gathering” narrowly, as limited to

activities preceding sales for resale. Phillips Petroleum, 347

U.S. at 678 (citing Colorado Interstate, 324 US. at 598). The

Commission did not reject the physical/nonphysical distinction

made by the Court in the context of bundled service, but

simply declined to apply it in a different factual and regulato-

ry situation not contemplated by the Court’s prior rationale.

The Supreme Court has to date recognized only the Commis-

sion’s authority to consider gathering costs “for the purposes

of determining the reasonableness of rates subject to its

jurisdiction.” Colorado Interstate, 324 U.S. at 603; see also

Panhandle III, 337 U.S. at 506 (“[tJhe use of such data for

rate making is not a precedent for regulation of any part of

production or marketing.”). The Producers did not ask the

Commission to regulate derivatively and merely “tak{fe] into

account the production properties and gathering facilities of

natural gas companies when it fixes their (bundled) rates.”

Colorado Interstate, 324 U.S. at 604. Rather, they sought to

have the Commission directly regulate unbundled gathering

rates charged by a non-natural gas company. Consequently,

we find no inconsistency between the Supreme Court prece-

dents and the Commission’s determination that the gathering

services at issue fall within NGA § 1(b)’s exemption.

2 See Colorado Interstate, 324 US. at 602-03; Public Util.

Comm'n of Colorado v. FERC, 660 F2d 821, 826 (1981) (“[TJhe

Supreme Court on numerous occasions has held that FERC ...

may take into consideration nonjurisdictiona! items when setting

jurisdictional rates.”), cert. denied, 456 U.S. 944 (1982).

18

The Producers’ reliance on Northern Natural, 929 F.2d

1261, is no more availing" In that case, the Eighth Circuit

upheld the Commission’s jurisdiction to enforce the Order No.

436 requirement that interstate pipelines separately identify

their costs attributable to bundled gathering services. As

that court recognized, such jurisdiction was indistinguishable

from the rate-setting authority recognized in Colorado Inter-

state. Id. at 1269. The only difference was that after Order

No. 436, the gathering service was no longer bundled with

jurisdictional sales, the jurisdictional “hook” relied on in

Colorado Interstate. Gathering was still bundled with inter-

state transportation, however, and because “[sjection 1(b)

grants jurisdiction over interstate transportation and over

interstate sales in the same words,” there was no reason to

come to a different result. Jd.

The Producers rely on dictum in Northern Natural in an

attempt to extend its holding—and that of Colorado Inter-

state—to cover the instant case. The Eighth Circuit conclud-

ed that the Commission “[mJay ... under the NGA’s §§ 4

and 5, regulate rates charged for gathering on the pipeline’s

own gathering facilities in connection with jurisdictional inter-

state transportation, notwithstanding the explicit § 1(b) ex-

clusion of gathering from the act.” Jd A footnote earlier in

the decision defined “ ‘gathering facilities owned by the pipe-

line’ and all substantially similar expressions ... to include

such facilities owned or operated directly or indirectly by a

pipeline or its parent, affiliate, subsidiary or lessors.” Jd at

1263 n.2 (emphasis added). The Producers thus take the

position that the Commission’s cozclusion here, that it lacks

jurisdiction over NorAm Field’s gathering facilities, conflicts

with Northern Natural and is in error. Because the Eighth

Circuit did not have before it a situation like the one that

confronts us in the instant case, it did not have to consider

21 The Producers, in support of their Northern Natural argu-

ment, refer to the Tenth Circuit’s decision in Colorado Interstate

Gas Co. v. FERC, 83 F.3d 1298 (10th Cir. 1996). Because the Tenth

Circuit’s decision involves the Commission’s authority over gather-

ing services performed by an interstate pipeline, not an affiliate, it

is distinguishable for the same reasons as is Northern Natural

ee

tet

19

the full ramifications of its footnote. It did not discuss the

issue of the jurisdictional status of affiliate-run gathering

service, and it thus provides little persuasive authority on that

issue. The court noted that “[tJhe question is not before us of

whether gathering performed by producers or independent

gatherers for transportation in interstate commerce by an

interstate pipeline is sufficiently connected to interstate

transportation to justify rate regulation under §§ 4&5.” Id

at 1274. Hence, the language in Northern Natural cannot be

construed to indicate that the Eighth Circuit intended its

dictum in footnote two, referring to an “affiliate,” to apply to

an independently operated gathering affiliate. Instead, the

support for the Producers’ position to be found in Northern

Natural lies in the fact that the rationale underlying the

Eighth Circuit’s decision—namely, the perceived danger that

unregulated pipeline gathering rates might pose to effective

regulation of transportation rates—is reflected in the Com-

mission’s orders under review.“ In light of such concerns,

the Commission determined that NorAm Gas’ gathering affili-

ate would be exempt from NGA jurisdiction only so long as

the affiliate maintains an independent, arms-length relation-

ship with the interstate pipeline. But Northern Natural

provides no direct support for the Producers’ more expansive

claim that the Commission can regulate the gathering activi-

ties of the independent affiliate.

Thus, the Commission had some leeway in construing the

NGA’s jurisdictional provisions in the first instance, as there

was no controlling judicial precedent. Cf Louisiana Power,

406 US. at 631-36 & n.12 (considering efficacy of state

2 The Eighth Circuit stated that:

Permitting a pipeline to manipulate the otherwise unregulated

charges for gathering services performed over its own facilities

in connection with jurisdictional interstate transportation,

would, in effect, permit the pipeline to establish rates for

interstate transportation. Thus the pipeline could grant for-

bidden preferences in interstate transportation for its own gas,

to the disadvantage of third-party shippers.

929 F.2d at 1270.

20

regulation in construing Commission’s jurisdiction and noting

differing regulatory interests of gas-producing and gas-

consuming states); Northern Natural Gas Co. v. Kansas

Corp. Comm’n, 372 U.S. at 90 (noting limitation of production

and gathering exemption to physical acts). Having deter-

mined that the gathering facilities fell within § 1(b)’s gather-

ing exemption, the Commission concluded that it has no

jurisdiction over an affiliate gatherer so long as the affiliate

operates independently of the interstate pipeline and per-

forms only non-jurisdictional activities. Arkla I, 67 F.E.R.C.

961,257 at 61,870; Arkla II, 69 F.E.R.C. 161,280 at 62,086-

87. The Commission found that “[a] pipeline affiliate that

does not itself provide any jurisdictional sales or transporta-

tion services, is not a natural gas company under the NGA.”

Arkla IT, 69 F.E.R.C. 961,280 at 62,086. Indeed, a company

is not a “natural gas company” within the meaning of NGA

§ 2(6), 15 U.S.C. § 717a(6) (1994), and hence not subject to

the provisions of NGA §§ 4, 5 and 7, 15 U.S.C. §§ 717c, 717d,

and 717f, unless the company either transports gas in inter-

state commerce or makes sales in interstate commerce of

such gas for resale. It was within the scope of Chevron

deference for the Commission to conclude that the NGA

“shall not apply” to rates charged by a company providing

only gathering services. Section 1(b) contemplates that some

measure of authority over gathering should be reserved to

the states, and jurisdiction over companies whose sole busi-

ness is gathering is a permissible place to start.

Finally, the Producers challenge the Commission’s conclu-

sion that an independently operated affiliate, solely providing

gathering services, would be exempt from the Commission’s

NGA §§ 4 & 5 authority to review rates, even though the

Commission also reserved the right to exercise such authority

% Section 2(6) defines “natural gas company” to mean:

a person engaged in the transportation of natural gas in

interstate commerce, or the sale in interstate commerce of such

gas for resale.

15 U.S.C. § 717a(6).

21

if the affiliate should engage in anticompetitive behavior.“

The purposes of the NGA would be subverted, the Producers

contend, if an interstate pipeline could avoid NGA jurisdiction

over the rates, terms, and conditions of its gathering service

simply by spinning down its gathering facilities to an affiliate.

According to the Producers: “the Commission cannot have it

both ways. Either it has jurisdiction over the gathering

service spun down to the affiliate or it does not. By asserting

the potential of future exercise of jurisdiction, the Commis-

sion is acknowledging that it has jurisdiction.” ~

* Section 4(a) provides that:

All rates and charges made, demanded, or received by any

natural-gas company for or in connection with the transporta-

tion or sale of natural gas subject to the jurisdiction of the

Commission, and al] rules and regulations affecting or pertain-

ing to such rates or charges, shall be just and reasonable, and

any such rate or charge that is not just and reasonable is

declared to be unlawful.

15 U.S.C. § 717c(a) (1994). Section 5(a) provides in relevant part

that:

Whenever the Commission, after a hearing ... shall find that

any rate, charge, or classification demanded, observed,

charged, or collected by any natural-gas company in connection

with any transportation or sale of natural gas, subject to the

jurisdiction of the Commission ... is unjust, unreasonable,

unduly discriminatory, or preferential, the Commission shall

determine the just and reasonable rate, charge, classification,

rule, regulation, practice, or contract to be thereafter observed

and in force and shall fix the same by order.

15 U.S.C. § 717d(a) (1994).

% The Producers further contend that the Commission’s deci-

sion is inconsistent with its later holdings that jurisdiction cannot be

defeated where affiliated companies operate as one interstate pipe-

line. See KansOk Partnership v. Williams Natural Gas Co., 73

F.E.R.C. 161,160 (1995), order granting stay in part, 73 F.E.R.C.

161,293 (1995); Louisiana Gas System Inc. v. Panhandle Eastern

Corp. 73 F.E.R.C. 161,161 (1995). In KansOk and Louisiana Gas,

the Commission exercised jurisdiction over chains of interconnected

intrastate affiliates that collectively functioned as interstate pipe-

22

In its answer to protests filed in opposition to its petition

for a declaratory order of exemption from NGA §§ 4 & 5

regulation, NorAm Field proposed, as an alternative, that the

Commission only apply light-handed regulation of the affili-

ate’s rates and services through future complaint mecha-

nisms, if necessary. Arkla I, 67 F.E.R.C. 461,257 at 61,865.

This, in effect, is what the Commission has done. /d at

61,871; Arkla II, 69 F.E.R.C. 161,280 at 62,089-90. Recog-

nizing that purportedly independent affiliates could circum-

vent the purposes of the NGA, the Commission took two

preventive steps. First, “to guard against the risk of affiliate

abuse, and to ensure an arms length relationship” between

NorAm Gas and NorAm Field, it required NorAm Gas to add

open-access, non-discrimination, and anti-tying provisions to

its tariff. See supra n.12. Second, the Commission noted

that certain types of “affiliate abuses”—including the giving

of preferences and discounts to the affiliate’s benefit, and

other anticompetitive activity—would “trigger the Commis-

sion’s authority to disregard” the affiliate’s separate corpo-

rate structure. Arkla I, 67 F.E.R.C. 961,257 at 61,871.

Such circumstances, the Commission concluded, would em-

power it to “treat the pipeline and gatherer as a single

entity,” and thereby “regulate the gathering activities as it

would if the gathering facilities were owned directly by an

interstate pipeline.” Jd”

lines. By contrast, the Commission found NorAm Field exempt

from NGA jurisdiction because it will engage in nonjurisdictional

gathering. Hence, we find no inconsistency. As the Producers

admit, “[i]t is one thing to argue that a non-jurisdictional affiliate

can be created to perform non-jurisdictional activities,” as NorAm

Field seeks to do, and “it is another thing to allow a jurisdictional

activity ... to become a non-jurisdictional activity through the

creation of an affiliate,” as the Commission refused to allow in

KansOk and Louisiana Gas.

2% The Commission explained in its initial decision:

While the Commission generally does not have jurisdiction over

affiliated gatherers because affiliates are not natural gas com-

panies under the NGA, the Commission can exert control over

the gathering activities of affiliated gatherers in particular

23

In sum, the Commission’s position is that notwithstanding a

gatherer affiliate’s separate status under state corporation

law, the affiliate may lose its status as an independent entity

for purposes of the Act if it engages in anti-competitive

activity with its affiliated pipeline. In a prior case involving a

similar spin-down to a pipeline’s subsidiary, the Commission

had relied on

[t]he general rule ... that an agency may disregard the

corporate form in the interest of public convenience,

fairness, or equity. This principle of allowing agencies to

disregard corporate forms is flexible and practical in

nature. Corporations may be regarded as one entity for

the purposes with which the agency is immediately con-

cerned even though they are legitimately distinct for

other purposes.

Northwest Pipeline I, 59 F.E.R.C. 161,115 at 61,435 (quoting

Opinion No. 255, 37 F.E.R.C. 161,149 at 61,356 (1986)). In

the instant case, the Commission similarly concluded that

while it has

no authority to regulate an affiliated gatherer because it

is not a natural gas company under the NGA ... if

circumstances develop that would allow the pipeline and

its affiliated gatherer to engage together in anticompeti-

tive activity, the Commission will exert jurisdiction over

circumstances where such action is necessary to accomplish the

Commission’s policies for the transportation of natural gas in

interstate commence. More specifically, if an affiliated gather-

er 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, ie, 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.

Arkla I, 67 F.E.R.C. 161,257 at 61,871.

24

the gathering service to the extent needed to preserve

the Commission’s statutory mandates under the NGA.

Arkla II, 69 F.E.R.C. 161,280 at 62,087 (citing Northwest

Pipeline I, 59 F.E.R.C. 961,115 at 61,435-36). In other

words, while the Commission believes it has no jurisdiction

over gathering provided by a truly independent affiliate, it

also holds that its jurisdiction over interstate transportation

obligates it to ensure that there is no collusion between the

interstate pipeline and the gatherers to manipulate the inter-

state market by determining who will have access to it. As

with its treatment of the physical/nonphysical distinction, the

Commission has rejected the Producers’ request to regulate

gathering rates directly and continuously, but has distin-

guished exceptional situations in which its regulation of inter-

state transportation would include regulation of gathering

rates. In this sense, the Commission’s position on this issue,

far from being inconstant with its overall analysis, parallels

its treatment of gathering in general. For instance, while the

Commission does not believe it has the general authority to

regulate gathering rates, it has never renounced its authority

under Colorado Interstate to include gathering costs in the

rate base for bundled sales or interstate transportation ser-

vice. Thus, the Commission consistently maintains that when

gathering is intertwined with jurisdictional activities, the

Commission’s regulation of the latter may necessarily im-

pinge on the former.

It is in this light that we interpret the Commission’s

suggestion in its brief to the court that its exercise of

jurisdiction over gathering affiliates is a discretionary matter

entitled to judicial deference.” The Commission, if its juris-

dictional analysis is correct, must determine in each instance

whether the affiliate’s behavior calls for federal intervention.

As an abstract matter, we have no reason to doubt the

27 The Commission states in its brief that the “regulation of

gathering rates is a matter delegated to the Commission to be

determined in its discretion, and in this case, the Commission

reasonably concluded that jurisdiction over [NorAm Field’s} gather-

ing rates is currently not called for.”

EEE

25

Commission’s conclusion that a nonjurisdictional entity could

act in a manner that would change its status by enabling an

affiliated interstate pipeline to manipulate access and costs of

gathering, the precise concern of the Eighth Circuit in North-

ern Natural, 929 F.2d at 1270, supra n.22. Furthermore, we

are not in a position to evaluate this question other than as an

abstract matter because the Commission has yet to assert its

jurisdiction over a gathering affiliate. Both here and in

Northwest Pipeline I & II, the Commission concluded that its

stand-by jurisdiction was not called for under the circum-

stances. As suggested by the Tenth Circuit’s decision to

dismiss for want of a case or controversy the affiliate’s

petition in Northwest Pipeline, we cannot speculate about

what circumstances might develop in the future that would

cause the Commission to invoke the authority it seeks to

reserve in the instant case. Williams Gas Processing Co. v.

FERC, 17 F.3d 1320, 1321-22 (10th Cir. 1994). For now we

conclude only that, as a conceptual matter, the Commission’s

position is not internally contradictory.

Accordingly, we deny the Producers’ petitions challenging

the Commission’s determination that the gathering facilities

at issue are exempt under NGA § 1(b).

III.

The Pipelines, in turn, attack the default contract condition,

contending that the Commission exceeded the scope of “the

express jurisdictional limitation on its powers contained in

§ 1(b) of the NGA.”

Originally, the Commission found the authority to impose

the default contract condition in its NGA § 7(b) power to

determine whether the abandonment of facilities under its

jurisdiction is in the public convenience and necessity.“ The

% Section 7(b) provides that:

No natural-gas company shall abandon all or any portion of its

facilities subject to the jurisdiction of the Commission, or any

service rendered by means of such facilities, without the per-

mission and approval of the Commission first had and obtained,

26

order in Arkla | differed from the later orders in imposing

the condition directly on NorAm Field, rather than NorAm

Gas. Twenty percent of the gathering facilities that NorAm

Gas proposed to transfer to NorAm Field had been certificat-

ed pursuant to NGA § 7(c) when NorAm Gas included the

facilities in year-end budgetary certificate reports.” Arkla

IT, 69 F.E.R.C. 161,280 at 62,085. See also Arkla I, 67

F.E.R.C. 961,257 at 61,872. The Commission required

NorAm Gas to file an abandonment application pursuant to

§ 7(b), despite NorAm Gas’ protestation that the “mistaken-

ly” certificated facilities were nonjurisdictional and hence not

subject to the Commission’s abandonment authority.” The

after due hearing, and a finding by the Commission that the

available supply of natural gas is depleted to the extent that

the continuance of service is unwarranted, or that the present

or future public convenience or necessity permit such abandon-

ment.

15 U.S.C. § 717f(b) (1994).

29 As a precondition to operation, a natural gas company must

receive a certificate of public convenience and necessity from the

Commission. Section 7(c)(1)A) provides:

No natural-gas company ... shall engage in the transportation

or sale of natural gas, subject to the jurisdiction of the Com-

mission ... or acquire or operate any such facilities or exten-

sions thereof, unless there is in force with respect to such

natural-gas company a certificate of public convenience and

necessity issued by the Commission authorizing such acts or

operations.

15 U.S.C. 717f(c)(1)(A) (1994).

30 On rehearing, the Commission affirmed the § 7(b) filing

requirement, notwithstanding NorAm Gas’ objection that it had

mistakenly included nonjurisdictional facilities in its year-end bud-

get certificate reports. Arkla II, 69 F.E.R.C. 161,280 at 62,085.

The Commission reasoned that in so reporting these facilities, and

benefitting from “the advantages bestowed by ... certification,”

such as the ability to attract customers through the stability of

service implied by a certificate and the possibility of including the

facilities’ costs in NorAm Gas’ bundled-service rate base, NorAm

27

Commission also ordered NorAm Gas to include specific non-

discrimination standards in its interstate transportation tariff,

and required NorAm Field to demonstrate that it had negoti-

ated private contracts with NorAm Gas’ existing gathering

customers or offered them default contracts.

On rehearing, the Commission modified its approach in two

respects. First, the Commission shifted the default-contract

filing requirement from NorAm Field to NorAm Gas, disa-

vowing any intention to impose a standard of conduct or

otherwise regulate a non-jurisdictional entity.

(W]e will require that either NorAm [Gas] or [NorAm

Field] demonstrate that [NorAm Field] has negotiated

private contracts with [NorAm Gas’) existing customers.

If such a demonstration cannot be made ... NorAm

[Gas] may submit a “default contract” or pro forma

agreement which [NorAm Field] has offered to [NorAm

Gas’) existing customers.

Arkla IT, 69 F.E.R.C. 161,280 at 62,083. While continuing to

find the public convenience and necessity dependent on deal-

ings betweer. NorAm Field and gathering service customers,

the Commission placed the onus of warranting those dealings

on NorAm Gas. Second, the Commission concluded that the

condition was required not only by § 7(b) as it applied to the

twenty percent of the facilities that were certificated, but also

to all of the facilities, certificated or not, pursuant to NGA

§§ 4 & 5. Id at 62,082-83. Specifically, the Commission

found that NorAm Gas’ plan to cease providing gathering

service in connection with its interstate transportation service

constituted a “change in service,” thus requiring a § 4(d)

filing." In § 4(e), the Commission found the authority to

Gas had committed itself to seeking Commission authority to aban-

don them. Id; Arkla V, 71 F.E.R.C. 161,297 at 62,164-65.

81 Section 4(d) provides:

Unless the Commission otherwise orders, no change shall be

made by any natural-gas company in any such rate, charge,

classification, or service, or in any rule, regulation, or contract

relating thereto, except after thirty days’ notice to the Commis-

28

impose conditions necessary to make the proposed change

just and reasonable.“ The Commission concluded that an

sion and to the public. Such notice shall be given by filing with

the Commission and keeping open for public inspection new

schedules stating plainly the change or changes to be made in

schedule or schedules then in force and the time when the

change or changes will go into effect. The Commission, for

good cause shown, may allow changes to take effect without

requiring the thirty days’ notice herein provided for by an

order specifying the changes so to be made and the time when

they shall take effect and the manner in which they shall be

filed and published.

15 U.S.C. § 717c(d) (1994).

3 Section 4(e) provides, in pertinent part:

Whenever any such new schedule is filed the Commission

shall have authority, either upon complaint of any State, munic-

ipality, State commission or gas distributing company, or upon

its own initiative without complaint, at once, and if it so orders,

without answer or formal pleading by the natural-gas company,

but upon reasonable notice, to enter upon a hearing concerning

the lawfulness of such rate, charge, classification or service;

and, pending such hearing and the decision thereon, the Com-

mission, upon filing with such schedules and delivering to the

natural-gas company affected thereby a statement in writing of

its reasons for such suspension, may suspend the operation of

such schedule and defer the use of such rate, charge, classifica-

tion or service, but not for a longer period than five months

beyond the time when it would otherwise go into effect; and

after full hearings, either completed before or after the rate,

charge classification, or service goes into effect, the Commis-

sion may make such orders with reference thereto as would be

proper in a proceeding initiated after it had become effective.

If the proceeding has not been concluded and an order made at

the expiration of the suspension period, on motion of the

natural-gas company making the filing, the proposed change of

rate, charge, classification, or service shall go into effect....

At any hearing involving a rate or charge sought te be in-

creased, the burden of proof to show that the increased rate or

charge is just and reasonable shall be upon the natural-gas

company, and the Commission shall give to the hearing and

29

abrupt change in the regulatory status of NorAm Gas’ gath-

ering services would be unreasonable and unjust under §§ 4

and 5 because it would immediately eliminate NGA price and

access protection upon which customers had come to depend.

Id, at 62,082. In so concluding the Commission relied as well

on “well established continuity of services principles.” Jd.

at 62,083. For it to find in the § 7(b) proceeding that the

facilities abandonment was in the public convenience and

necessity, and that the termination of service in the § 4

proceeding was just and reasonable, the Commission required

NorAm Gas to “demonstrate that its existing customers will

be guaranteed service after the facilities are transferred.”

Arkla IV, 70 F.E.R.C. 161,079 at 61,219.

The Commission rejected the Pipelines’ argument that it

was beyond the scope of NGA jurisdiction to require NorAm

Field, a nonjurisdictional entity, to execute gathering agree-

ments with NorAm Gas’ existing customers. Arkla II, 69

F.E.R.C. 161,280 at 62,081. The Commission’s principal

response was that permitting NorAm Gas to terminate its

gathering services without adequate protection would frus-

trate the policy of promoting a competitive market, and that

the Commission could use its § 4 authority to regulate nonju-

risdictional activities performed “in connection with” jurisdic-

tional service to prevent that outcome. The Commission

noted that one of the goals of Order No. 636, namely to

“ensure that all shippers have meaningful access to the

pipeline transportation grid” in order to promote “competi-

tive, national market” transactions, would be advanced by its

assertion of “in connection with” authority in light of the

decision of such questions preference over other questions

pending before it and decide the same as speedily as possible.

15 U.S.C. § 717c(e) (1994).

%@ Although these principles were developed in connection with

assessing the public convenience and necessity of § 7(b) abandon-

ment of certificated facilities and services, the Commission conclud-

ed that similar principles must apply when addressing the termi-

nation of non-certificated jurisdictional services. Arkla II, 69

F.E.R.C. 161,280 at 62,083 n.42.

30

Eighth Circuit’s decision in Northern Natural, 929 F.2d 1261.

Id. at 62,081 (citations omitted). As the Commission itself

had concluded on another occasion:

the section 4 and 5 grant of authority to regulate activi-

ties “in connection with” interstate transportation gives

the Commission the discretion to regulate other aspects

of the natural gas industry where necessary to make

effective the Commission’s primary jurisdiction over in-

terstate transportation.

Northwest Pipeline II, 60 F.E.R.C. 161,213 at 61,729 (quot-

ing Northwest Pipeline I, 59 F.E.R.C. 961,115 at 61,435-36

(quoting NGA §§ 4 and 5)). Or, as the Commission argues in

its brief to the court, although “the physical gathering activi-

ties which [NorAm Field] will perform are exempt from the

Commission’s jurisdiction under § 1(b) ... that is not to say

they are also free of the Commission’s term and rate authori-

ty under §§ 4 and 5.” Brief for Respondent at 19 (citing

Northern Natural, 929 F.2d at 1263). Applying the reason-

ing in Northern Natural, the Commission further concluded

that failing to review the termination of gathering services

here would create potential obstacles to open-access transpor-

tation by providing pipelines with the opportunity to grant

undue preferences or advantages, and enable pipelines, in

effect, to assume the Commission’s congressionally-assigned

role in determining whether rates are fair and just and

whether proposed action by a pipeline is in the public inter-

est. Arkla II, 69 F.E.R.C. 161,280 at 62,082.

The Commission had several other responses to the Pipe-

lines’ objection. In its view, “a natural corollary to the

requirement to file ... gathering rates is a requirement to

submit for Commission review any proposal to change—or in

this case to terminate—some or all of the rates or services

embodied in the rates.” Jd. at 62,081-82. Also, concluding

that “the states are not in a position to protect the expecta-

tions of existing customers at the point the pipeline decides to

exit from the market for gathering,” the Commission sought

to avoid a “regulatory gap” contrary to congressional intent in

enacting the NGA. /d. Finally, in the Commission’s view, it

31

was not engaged in continuing regulation of NorAm Field,

since once the gathering facilities were transferred and the

contracts for continuity of service were in place, the Commis-

sion’s involvement in these proceedings would be over. Arkla

IV, 70 F.E.R.C. 161,079 at 61,219.

We conclude that the Commission has not identified any

source of authority to impose the default contract condition.

Granting the Commission’s statutory interpretation due def-

erence, the statute forecloses what appears to be the principal

justification offered by the Commission: that the phrase “in

connection with” in § 4 permits it to regulate facilities that it

has expressly found are not within its § 1(b) jurisdiction.

Where an activity or entity falls within NGA § 1(b)’s exemp-

tion for gathering, the provisions of NGA §§ 4, 5 and 7,

including the “in connection with” language of §§ 4 and 5,

neither expand the Commission’s jurisdiction nor override

§ 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

[sJections 4, 5 and 7 do not concern the producing 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. Thus §§ 4(a), (b), (c),

5(a) and 7(c) speak of “transportation or sale of natural

gas subject to the jurisdiction of the Commission” while

§ 7a) and (b) refer respectively to “transportation facili-

ties” and “facilities subject to the jurisdiction of the

Commission.” Nothing in the sections indicates that the

power given to the Commission over natural-gas compa-

nies by § 1(b) could have been intended to swallow all

the exceptions of the same section and thus extend the

power of the Commission to the constitutional limit of

congressional authority over commerce.

See also Colorado Interstate, 324 U.S. at 602-03. Because

the Commission concluded that the facilities to be transferred

by NorAm Gas were exempt under § 1(b) as gathering

facilities, and that NorAm Gas’ independently operated affili-

ate gatherer was not a “natural gas company” subject to the

32

NGA, the Commission cannot simply assert authority over

the Reciitties and the affiliate by invoking other sections of the

Act.

Nor are the Commission’s other explanations for asserting

§§ 4 & 5 authority adequate. Although a § 4(d) change-in-

service filing may seem a “natural corollary” to the require-

ment to file gathering rates, what is natural may not always

be part of the Act, and the Commission must explain how the

NGA effectuates this corollary. The “regulatory gap” argu-

ment, depending on the inability of the states to protect

existing customers, finds support in Supreme Court authority.

E.g., Louisiana Power, 406 U.S. at 631. Nonetheless, the

Commission did not explain why the states would be unable to

protect NorAm Gas’ customers, nor why the purported gap

would be a two-year problem. Finally, the fact that the

Commission’s involvement would end once the contracts be-

tween NorAm Field and the NorAm Gas customers were

signed does not explain why the Commission has the jurisdic-

tion to be involved in the first place.

Likewise, there are difficulties with the Commission’s reli-

ance on § 7(b). As previously discussed, §§ 4, 5, & 7 do nut

expand the Commission’s § 1(b) jurisdiction. Section 7(b)

requires approval for abandonment of “facilities subject to the

jurisdiction of the Commission, or any service rendered by

means of such facilities.” This provision is no more an

% Our concern with the Commission’s statutory interpretation

is reenforced by Northwest Central Pipeline v. State Corp.

Comm'n, 489 U.S. 493 (1989) (finding no preemption of a state law

regulating natural gas production). There, the Court, observing

that Congress “carefully divided up regulatory power over the

natural gas industry” so as to “expressly reservie) to the States the

power to regulate ... gathering,” id at 509-514, held that “[t]o find

preemption of [a state’s] regulation merely because purchasers’

costs and hence rates might be affected would be largely to nullify

that part of NGA § 1(b) that leaves to the States contro] over

production,” id. at 514. The Court expressly cautioned once again

against interpreting the Commission’s powers over transportation

and sales to include those areas reserved to the states. Jd at 512

(quoting Panhandle ITI, 337 U.S. at 513-14).

ee ee ee)

ASAE Ren Pat Ree aoe REN ~

oe

5

Ed

2

2

+

,

33

expansion of jurisdiction than is the “in connection with”

language of § 4. In any event, while the record is not

absolutely clear on the point, it appears that only twenty

percent of the facilities to be transferred by NorAm Gas were

ever certificated. As the Commission itself recognized, even

if the abandonment authority could be invoked, it could apply

to only that portion of the facilities. Arkla J, 67 F.E.R.C.

4 61,257 at 61,872.

Although we conclude that the Commission did not ade-

quately explain its jurisdiction to condition approval of the

spin-down of gathering facilities on a default contract mecha-

nism, the Commission’s options for assuring continuity of

service and reasonable rates for gathering customers are not

necessarily exhausted. There may be other alternatives that

the Commission has not as yet explored, and we do not pre-

judge whatever efforts or determinations it may make in the.

future to address the spin-down phenomenon. In the orders

under review, the Commission relied on an impermissible

statutory interpretation to impose the default contract condi-

tion. Accordingly, we grant the Pipelines’ petitions, deny the

Producers’ petitions, and remand the cases to the Commis-

sion.

34

APP B

UNITED STATES COURT OF APPEALS

For The District Of Columbia Circuit

No. 94-1724 September Term, 1995

Conoco Inc.,

Petitioner,

Vv.

Federal Energy Deedee Commission,

Respondent.

Vesta Energy Company, et al.,

Intevenors

Consolidated with 94-1726, 94-1729, 94-1730,

94-1731, 94-1732, 94-1735, 95-1007, 95-1013,

95-1080, 95-1172, 95-1342, 95-1364

BEFORE: Buckley, Sentelle and Rogers, Circuit Judges

ORDER

It is Ordered, by the Court, that the opinion filed

herein on August 2, 1996, is amended, as follows:

ee eS ee

wid Bos eee 2

;

<

j

4

“4

;

35

At page 5, footnote 8, line 8

delete the words

and vacated

BY:

Per Curiam

FOR THE COURT:

Mark J. Langer, Clerk

Robert A. Bonner

Deputy Clerk

36

APPENDIX C

Arkla Gathering Services Company,

67 F.E.R.C. (CCH) ¥ 61257 (1994)

Arkla Gathering Services Company

Docket No. CP94-36-000

FEDERAL ENERGY REGULATORY

COMMISSION

Preliminary Determination on Jurisdictional Status of

Facilities

May 27, 1994

PANEL:

Before Commissioners: Elizabeth Anne Moler,

Chair; Vicky A. Bailey, William L. Massey, and Donald F.

Santa, Jr.

OPINION:

On October 21, 1993, Arkla Gathering Services

Company (Gathering Company) filed a petition for

declaratory order requesting a determination that certain

facilities that Gathering Company intends to acquire from

Arkla Energy Resources Company (AER), its affiliate, will

be gathering facilities exempt from the Commission’s

jurisdiction under section 1(b) of the Natural Gas Act

(NGA). We find that the facilities will be exempt

eee

37

gathering facilities under NGA section 1(b) upon their

acquisition by Gathering Company, contingent on AER

and Gathering Company meeting the additional conditions

discussed below. |

I. Background and Proposal

Gathering Company states that it intends to

acquire the on-shore gathering systems, related metering

and other appurtenant equipment currently owned and

operated by AER. The subject facilities are located in 105

areas in Arkansas, Louisiana, Oklahoma, and Texas.

Gathering Company’s pleadings and responses to

data requests include maps and information that set out

for each area: (1) the geographic configuration of the

systems; (2) the diameter and length of pipelines in the

systems; (3) the compressors; (4) the pressure of the lines;

(5) the custody transfer points of the gas; and (6) the

number of wells attached to the pipelines in each area.

Gathering Company states that the combined

facilities consist of approximately 2,775 miles of pipelines

that are attached to approximately 3,900 active wells.

Approximately 2,000 additional wells are flowing gas into

the subject facilities through interconnections with

third-party gatherers. In addition, another 1,300 wells are

presently either inactive or split connected and producing

into competitors’ gathering systems. The subject facilities

are described in greater detail in Appendix A to this

order.

38

Gathering Company points out that: 11 of the

subject areas have 100 or more wells connected to them;

34 have between 20 and 99 wells; 36 areas have between

four and 19 wells; and 24 have fewer than four wells.

Gathering Company states that of the 24 areas with fewer

than four wells, 64 of a total of 67 pipelines in the areas

are between 2 and 6 inches in diameter.

Gathering Company also points out that almost 90

percent of the pipelines in the 105 subject areas are 6

inches or less in diameter, and that approximately 98

percent of the lines are 8 inches or less. It also states that

any compression performed in the subject areas is

necessary to move low-pressure gas through the fields.

Gathering Company states that all of the subject

facilities currently are classified by AER as gathering,’

and that none of the facilities is certificated under NGA

section 7(c). However, Gathering Company points out

that some of the facilities may have been reported in

AER’s year-end budgetary certificate reports. It claims,

however, that those facilities were not constructed under

AER’s budget-type certificate and that the reports were in

‘Arkansas Royalty and Indicated Shippers maintain that AER

has claimed in prior rate cases that some of the subject facilities are

transmission in nature. However, the Commission has indicated that

the criteria for determining how particular facilities are treated for

purposes of rate cases are different from those for determining

whether the same facilities are jurisdictional under NGA section 1(b).

See Arkla Energy Resources, 63 FERC 61,265, at 62,719 n.25 (1993);

Trunkline Gas Company, 58 FERC 61,240, at 61,792 (1992).

39

error.’ Gathering Company also states that after the

facilities are transferred, it intends to perform the same

gathering functions that AER is currently performing

except that it will conduct its business separate from

AER’s. Therefore, Gathering Company claims that the

facilities should continue to be exempt from Commission

jurisdiction under NGA section 1(b) upon its acquiring

them.

In its petition for declaratory order, Gathering

Company argued that its prospective gathering rates and

services also should be declared exempt from the

Commission’s jurisdiction. Gathering Company contended

that the Commission’s treatment of similar rates and

conditions and/or terms of service in Northwest Pipeline

Corp. (Northwest)’ and Panhandle Eastern Pipe Line Co.

(Panhandle)* would be unjustified here. In those cases,

the Commission determined that it had the discretion to

exert jurisdiction over the rates and terms and conditions

*In response to a data request, Gathering Company lists

approximately 600 of the subject pipelines that were identified in

AER’s year-end budget reports.

*Northwest Pipeline Corp., 59 FERC 61,115, reh’g denied, 60

FERC 61,213 (1992), appeal dismissed sub nom. Williams Gas

Processing Co. v. FERC, No. 92-9553 (10th Cir., Feb. 28, 1994). In

dismissing the appeal of the Commission’s decision, the court ruled

that there was no case or controversy because the Commission had

not asserted jurisdiction or implied that it had jurisdiction over

Williams Gas Processing Co. at the present time.

‘Panhandle Eastern Pipe Line Co., 62 FERC 61,027, reh’g

denied, 65 FERC 61,167 (1993).

40

of service of gathering activities of a pipeline affiliate

when those activities were performed in connection with

interstate transportation of gas by the pipeline. However,

the Commission found it unnecessary to exert jurisdiction

over the pipeline affiliate unless the affiliate used its

relationship with the pipeline to engage in anticompetitive

activities. In a subsequent filing, however, Gathering

Company requests that the Commission grant it the same

treatment applied in Northwest, Panhandle, and other

recent ordets.°

II. Procedural Matters

A. Interventions

Notice of the petition for declaratory order was

published in the Federal Register on November 1, 1993

(58 Fed. Reg. 58,333). Numerous motions to intervene

and notices of intervention were filed. Timely unopposed

motions to intervene and notices of intervention are

granted by operation of Rule 214 of the Commission’s

regulations.° n6 Texaco Gas Marketing Inc. and Williams

Field Services Mid-Continent Region Company tendered

untimely, unopposed motions to intervene. They have

shown an interest in this proceeding, and their

participation, we find, will not delay the proceeding or

prejudice the rights of any other party. Accordingly, for

“See Mid Louisiana Gas Co., 65 FERC 61,166 (1993); KN

Energy, Inc. (KN Energy), 65 FERC 61,168 (1993), reh’g denied, 66

FERC 61,171 (1994).

*18 C.F.R. 385.214 (1993).

41

good cause shown, we will grant the late motions to

intervene. Appendix B to this order lists all intervenors.

B. Protests and Answers

Protests to the petition were filed by Arkansas Gas

Consumers (Arkansas Consumers), the Arkansas and

Louisiana Public Service Commissions, jointly (the State

PSCs), Arkansas Royalty Membership (Arkansas Royalty),

Indicated Shippers, Phillips Petroleum Company and

GPM Gas Corporation, jointly (Phillips), Samson

Resources Company and Oklahoma _ Independent

Petroleum Association, jointly (Samson), and Sonat

Marketing Company (Sonat).

Gathering Company filed a motion for leave to file

an answer to the protests. It claims that its answer is

warranted in order to correct and complete the record.

Upon reviewing the notice convening a public conference,

issued in Docket No. RM94-4-000,’ Gathering Company

states that it determined that the Commission may be

hesitant to grant its original request that its prospective

rates and services be declared non-jurisdictional.

Therefore, its answer "proposes a more reasoned and

"Natural Gas Gathering Services Performed By Interstate

Pipelines and Interstate Pipeline Affiliates -- Issues Related To Rates

and Terms and Conditions of Service, issued October 28, 1993. The

public conference took place on February 24, 1994, and explored the

extent to which the Commission should exercise its rate and tariff

jurisdiction, under NGA sections 4 and 5, over the rates and/or terms

and conditions for gathering services performed by interstate pipelines

and their affiliates.

42

reasonable approach" by requesting that the Commission

only apply light handed regulation over Gathering

Company’s rates and services through future complaint

mechanisms, if necessary. Gathering Company states that

it is not withdrawing its original request for a

determination that it would be exempt from the

Commission’s sections 4 and 5 jurisdiction. It requests

that the Commission grant its revised request now, and

then review its original request after the court issues its

opinion in the Northwest proceeding and after the

Commission completes the process initiated in Docket No.

RM94-4-000.

Indicated Shippers and Arkansas Royalty filed

answers opposing Gathering Company’s motion for leave

to file an answer to the protests. They point out that the

answer is forbidden by the Commission’s rules. Indicated

Shippers argues that the answer actually is an amendment

to the petition for declaratory order and violates the

protestants’ right to be heard in response. Similarly,

Arkansas Royalty contends that the parties have been

denied adequate time to submit a thorough response.

Both parties request that Gathering Company’s motion be

denied. Alternatively, Indicated Shippers requests

additional time to respond.

On January 19, 1994, the Commission issued a

Notice of Extension of Time for parties to respond to

Gathering Company’s answer. Indicated Shippers filed an

answer, but Arkansas Royalty did not.

‘Gathering Company’s answer to the protests, at p. 2.

43

Vesta Energy Company (Vesta) also tendered for

filing an answer to the protests. It adopts and supports

the protests filed by Arkansas Consumers, Sonat, and

Arkansas Royalty, as well as comments filed by Oryx Gas

Marketing Company (Oryx).’? Noark Pipeline System,

Limited Partnership (Noark) also tendered for filing an

answer to the protests in support of Gathering Company’s

petition.

While our rules do not permit answers to

protests,’ we may, for good cause, waive a rule.’ We

find good cause to do so in this instance. In its answer,

Gathering Company provides additional, relevant

information concerning the subject facilities, and it

modifies its position concerning the Commission’s

jurisdiction over its prospective rates and services.

Accordingly, we will accept Gathering Company’s answer

to the protests, noting the opportunity given to all parties

to respond to it. Similarly, to achieve a complete and

accurate record, we will accept all pleadings tendered to

date for filing.

On March 21, 1994, Arkansas Royalty filed a

motion requesting that the Commission require Gathering

*Although Oryx did not file a protest, in its motion to

intervene it requests that the Commission carefully.consider the

practical and policy ramifications that Gathering Company’s proposal

will have on the objectives of Order No. 636. Arkansas Royalty,

Indicated Shippers, and Samson express similar concerns.

See 18 C.F.R. 385.213(a)(2) (1993).

18 C.F.R. 385.101(e) (1993).

44

Company to supplement its petition for declaratory order

with certain additional information. Specifically, Arkansas

Royalty requests that Gathering Company file additional

information including: (1) more specific maps; (2)

evidence that Gathering Company will provide access to

other interstate pipelines; (3) the net book value of each

of the facilities to be transferred; and (4) evidence on how

Gathering Company will determine its gathering rates in

the areas where no competition exists. Oklahoma

Independent Petroleum Association and Producer-Market

Transportation Group Gathering Coalition (filing jointly),

Indicated Shippers, and Vesta filed answers in support of

Arkansas Royalty’s motion. Finally, Gathering Company

filed an answer in opposition to the motion.

We will deny Arkansas Royalty’s motion. The

motion merely reiterates arguments alleging insufficient

information that Arkansas Royalty presented in its

protest. As discussed below, we find that the existing

record is sufficient to enable the Commission to reach a

fully informed decision in this preliminary determination.

a Request for Joinder of Parties

Indicated Shippers contends that the true facts

cannot be established unless the Commission joins

additional parties to this proceeding. Specifically,

Indicated Shippers requests that the Commission join

AER, Arkla Pipeline Group, Texas Eastern Transmission

Corporation (Texas Eastern), and ANR Pipeline Company

(ANR) as parties to this proceeding. Indicated Shippers

states that AER and Arkla Pipeline Group are affiliated

45

with Gathering Company and that Texas Eastern and

ANR have proceedings currently pending before the

Commission that pertain to certain of the gathering

facilities.* Indicated Shippers argues that the Texas

Eastern and ANR proceedings involve issues relevant to

the Commission’s determination here.

We will deny Indicated Shippers’ request. We find

that the existing record is sufficient to resolve fully all

issues in this preliminary determination, and that nothing

would be gained by granting Indicated Shippers’ request.

We note, however, as discussed below, AER will need to

file an application to abandon any certificated facilities.

Further, we note that Texas Eastern’s application in

Docket No. CP93-598-000 was withdrawn on November

16, 1993.

D. Requests for Hearing And/Or _ Technical

Conference

In their protests, several parties request a full

evidentiary hearing and/or technical conference.”

Arkansas Royalty, Indicated Shippers, and Phillips argue

that Gathering Company has not provided sufficient

"Indicated Shippers cites Docket No. CP93-598-000, in which

Texas Eastern proposed to acquire a leasehold in certain AER

gathering facilities, and Docket No. CP89-2195-002, in which ANR

proposed to acquire an interest in certain AER transmission (but not

gathering) facilities.

'3 Arkansas Royalty, Indicated Shippers, Phillips, Samson, and

the State PSCs.

46

information for the Commission to determine if the

subject facilities are exempt as gathering under NGA

section 1(b).

The requests are denied. An evidentiary trial-type

hearing is necessary only where material issues of fact are

in dispute that cannot be resolved on the basis of the

written record.'* No such material issues of fact are

present here. By accepting all tendered pleadings

discussed above, the Commission has achieved a complete

record for this preliminary determination and given all

parties an adequate opportunity to be heard. For the

same reasons, we find no need to convene a technical

conference.

III. Discussion

A. Jurisdictional Status of the Facilities

Under section 1(b) of the NGA, the Commission

has jurisdiction to regulate the transportation and sale for

resale of natural gas in interstate commerce and any

natural gas company engaged in such transportation or

sale. At the same time, section 1(b) exempts from

Commission jurisdiction the "production or gathering of

See, e.g., Southern Union Gas Co. v. FERC, 840 F.2d 964,

970 (D.C. Cir. 1988); Cerro Wire & Cable Co. v. FERC, 677 F.2d 124

(D.C. Cir. 1982); Citizens for Allegan County, Inc. v. FPC, 414 F.2d

1125, 1128 (D.C. Cir. 1969).

47

natural gas." The courts have narrowly construed the

section 1(b) gathering exemption to apply to the physical

activities of gathering.”°

The primary function test articulated in Farmland

Industries, Inc.,’’ as modified in Amerada Hess

Corporation, et al.,’* is the standard used to determine

whether specific facilities are gathering or transmission in

nature. Among other things, the primary function test

considers the following factors: (1) the length and

diameter of the lines; (2) the extension of the facility

beyond the central point in the field; (3) the lines’

geographic configuration; (4) the location of compressors

and processing plants; (5) the location of wells along all or

part of the facility; and (6) the operating pressure of the

lines. No one factor is determinative, nor do all factors

necessarily apply to all situations.”

Applying the primary function test to the facts of

this case, we conclude that the facilities will perform

*18 U.S.C. 717(b).

Transcontinental Pipe Line Corp. v. State Oil & Gas Bd.,

474 U.S. 409, 418 (1986) (quoting Northern Natural Gas Co. v. State

Corp. Comm’n, 372 U.S. 84, 90 (1963)). See also Northwest Central

Pipeline Corp. v. State Corp. Comm’n, 489 U.S. 493, 510 (1989).

"Farmland Industries, Inc., 23 FERC 61,063 (1983).

'’Amerada Hess Corp., 52 FERC 61,268 (1990).

9 Arkla’s facilities are not located on the Outer Continental

Shelf (OCS). A separate analysis is necessary for facilities on the

OCS. See EP Operating Co. v. FERC, 876 F.2d 48 (Sth Cir. 1989).

48

primarily a gathering function upon their acquisition by

Gathering Company, and, accordingly, will be exempt

from the Commission’s jurisdiction under NGA section

1(b). In reaching our conclusion, we rely on the facts

surrounding AER’s operation of the facilities, and

Gathering Company’s representation that it will operate

the systems in essentially the same manner.

: Length and Diameter of the Lines

The petition for declaratory order lists 3,138

segments of pipeline to be transferred. Generally, the

pipelines are short in length and small in diameter, which

is consistent with a gathering determination.

Most of the pipelines range in length from a few

hundred feet to a few miles. All but 15 of the 3,138

pipeline segments are less that 8 miles in length.” Each

of the pipeline segments that is longer than 8 miles forms

the backbone or spine of a system. As backbone

pipelines, they collect gas from numerous feeding lines

along their entire length. This type of backbone pipeline

is consistent with a gathering determination.”

The diameters of the pipelines in all but one of the

areas range in size from 2 to 10 inches. Ninety percent of

the pipelines are 6 inches or less in diameter, and 98

“Fourteen of these pipeline segments are between 8 and 13.6

miles in length. The Waskom Area contains the longest pipeline,

approximately 26 miles long, but it is only 3 inches in diameter.

“Northwest, 59 FERC at 61,434.

49

percent of the lines are 8 inches or less. These smaller

diameter pipelines are consistent with a gathering

determination. There are 14 pipelines that are 10 inches

in diameter. These 10-inch pipelines form the backbones

of their systems. Numerous smaller pipelines feed into

them. The largest diameter pipeline is in the Mathers

Ranch Area, which consists of one 4.7 mile segment of

12-inch pipeline. The pipeline currently is attached to one

well, but has numerous tap locations for connections to

producer owned lines. A short pipe that is only attached

to one or a few wells is indicative of a gathering

pipeline.”

2. ~ Central Point in the Field

The second criterion of the primary function test

requires consideration of whether the facilities extend

beyond a central point in the field. The central point in

the field test is based on the idea that gathering involves

the collection and movement of fatural gas through

various lines to a central point where the gas is delivered

into a single line for transmission. Any facilities located

upstream of the central point are considered

non-jurisdictional gathering facilities. This test is usuaily

considered in situations where no processing plant is

included in the system configuration.” The central point

2See KN Energy, 65 FERC at 61,852-853.

3 See Tennessee Gas Pipeline Co., 47 FERC 61,029 (1989);

Shell Oil Company and Chapparo Gathering Co., 24 FERC 61,371

(1983).

50

in the field test applies to many, or portions of many, of

the subject areas.

On the other hand, as discussed, several of the

areas consist of pipelines that form a backbone-type

structure, or short pipelines that are attached to one or a

few wells. The central point in the field test does not

apply to these types of facilities.

3. Geographic Configuration

The subject facilities generally fall into three types

of geographic configurations. One is the web-like

configuration commonly found in field gas gathering

systems. Many of the subject facilities display this type of

configuration.

The second configuration involves _ the

backbone-type structure, which consists of a pipeline that

connects to numerous feeding lines along its entire length.

The Amber and Sickles Areas in Oklahoma are examples

of this type of system.

The third type of configuration, found in several of

the smaller systems, consists of short, small diameter

pipelines that connect a few wells directly into the

transmission system. The Buffalo Wallow Area is an

example of this type of system. Generally, all three types

of configurations are consistent with a gathering

determination.

sa atl Sait iia i i i ied

51

Although many of the subject areas consist of only

one type of configuration, several of the areas contain

combinations of all three. For example, gas in the Enid

Area is delivered to five custody transfer points on AER’s

transmission system. One transfer point is connected to

a central compressor facility into which feed several

pipelines connected to many wells. Two custody transfer

points are connected to backbone-type structures. The

final two transfer points are connected to one or two

small pipelines that connect one or two wells directly to

the transmission system.

4. The Location of Compressors and

Processing Plants

Twenty-eight of the areas contain 71 field

compressors. According to Gathering Company, the

compression performed by these facilities is necessary to

boost low-pressure gas from the field. This type of

minimal compression is consistent with a primary function

of gathering.“ We note that there are no gathering

facilities downstream of any processing plants.

5. Location of Wells

This criterion, which requires that wells be located

along all or part of the facilities, is satisfied for each area.

There are 3,977 wells attached to pipelines in 103 of the

areas. Two areas are listed as having no wells attached to

“See Manchester Pipeline Corp., 46 FERC 36,356 (1989).

52

the pipelines. These areas are currently inactive.”

Additionally, Gathering Company has stated that an

estimated 2,000 additional wells are flowing gas into the

subject facilities through interconnections with third-party

gatherers. Another 1,300 wells are either inactive or split

connected and producing into competitors’ gathering

systems.

As stated, 11 of the areas have 100 or more wells

connected to them. Thirty-four have between 20 and 99,

and 36 have between four and 19 wells. Twenty-four

areas” have less than four wells. Of these 24 areas, 21

consist of very small diameter pipelines, usually 2 to 6

inches, that connect to each well. The Deer Creek and

Mayflower Areas have 4-inch pipelines attached to the

wells and 8-inch backbone-type pipelines to collect the

gas.

6. Operating Pressure of the Lines

“Attachment A to Gathering Company’s answer to the

protests lists three areas, the Canute, Holdenville, and Lillie Areas,

with no well connections. In response to a data request, however,

Gathering Company states that there are currently three wells in the

Canute Area.

Ada, Ames, Athens, Bloomington, Braman, Canute, Cedar

Springs, Chitwood, Geary, Gotebo, Holdenville, Indianapolis, Jesse,

Lillie, Mayfield, Metcalf, Missionary Lake, Oakman, Peek, Quitman,

and Stigler. The last of the 24 areas is Mathers Ranch, which is a

short pipeline attached to one well. Under the location of wells

criterion, we conclude that all of the systems are indicative of

gathering.

53

A majority of the areas operate at pressures below

500 psig. Thirty-six operate at pressures below 400 psig.

Fight of these 36 areas operate at less than 150 psig.”’

Forty of the areas operate at pressures above 500 psig.

Eighteen of these 40 operate up to or over 900 psig.”

Ten areas are currently inactive.” In response to a data

request, Gathering Company states that the higher

pressure systems do not have central point compression,

and that the operating pressures are determined by the

wellhead pressures of the wells. In other situations,

Gathering Company states that the producers have

installed individual wellhead compressors. These facts

are consistent with a gathering determination. In sum, we

conclude that all of the subject areas satisfy this criterion

of the primary function test.

7. Observations and Conclusions

All of the 105 systems, except for the Mathers

Ranch Area, are comprised of pipeline segments smaller

that 10 inches in diameter. Ninety percent of the

pipelines are 6 inches or less in diameter. Most of the

” Bradley, Calhoun, Carthage, Deek Creek, Gragg, Jefferson,

Jesse, and Metcalf.

“Apache, Buffalo Wallow, Butler, Chickasha, Hinton,

Indianapolis, Indian Rock, Leedy, Mayfield, Midway, Oakman,

Panola, Red Oak, Sickles, Stiles Ranch, Strong City, Tatum, and

Weatherford.

*Ada, Braman, Hamon-Locke sub-area, Holdenville,

Jerusalem, Lillie, Mayflower, Peek, Terryville, and Whelan.

54

pipelines also are short in length. The longer ones are

backbone-type pipelines that collect gas from numerous

feeding lines. Many of the areas connect to more than a

few wells, are web-like in configuration, and are located

upstream of a central point in the field. The few

exceptions consist mainly of small fields with limited well

connections and small diameter pipelines, or of

backbone-type pipelines. The compressors found in 28 of

the areas primarily aid in moving otherwise low-pressure

gas through the systems. Finally, the areas that operate

at high pressures do so primarily because they are

connected to high pressure wells.

Accordingly, we conclude that all 105 systems

qualify as gathering systems under the primary function

test. Therefore, once the preconditions discussed below

are satisfied, and upon the transfer of the subject facilities

to Gathering Company, the facilities will be exempt from

the Commission’s jurisdiction under NGA section 1(b).

B. Jurisdiction Over Gathering Company’s Prospective

Rates and Services

B The Parties’ Arguments

Several parties” argue that, under the court’s ruling

* Arkansas Royalty, Arkansas Consumers, Indicated Shippers,

and th e State PSCs.

Ee eee a eee ae Pee eee ee ee

55

in Northern Natural Gas Company (Northern Natural),”!

the Commission has a statutory mandate to exert full

NGA sections 4 and 5 jurisdiction over the rates charged

by Gathering Company "in connection with" AER’s

jurisdictional interstate transportation, to assure just and

reasonable rates. The parties claim that the Commission’s -

regulation under the NGA is mandatory and not

discretionary, and that anything less than full regulation of

Gathering Company’s rates would be an unlawful

abdication of the Commission’s responsibility under the

NGA.

Several parties” also argue that if the Commission

does not regulate Gathering Company’s rates and services,

Gathering Company and AER will use their substantial

market and monopoly power to frustrate open-access to

AER’s interstate transmission system through Gathering

Company’s gathering rates and/or terms and conditions of

service. Indicated Shippers argues that a Federal Trade

Commission (FTC) finding® that certain markets in the

"929 F.2d 1261 (8th Cir. 1991), cert. denied, 112 S.Ct. 169

(1991).

* Arkansas Royalty, Indicated Shippers, Phillips, Samson, and

Sonat.

*In 1986, Arkla, Inc. (Arkla) acquired an interstate pipeline

that roughly parallelied its mainline in central and western Arkansas.

The FTC initiated an investigation of the acquisition that resulted in

Arkia’s entering into a

settlement, without acknowledging or disclaiming the FTC’s

allegations, to divest itself of certain assets, some of which included

gathering facilities. See In the Matter of Arkla, Inc., 112 FTC 509

eS

56

Arkoma Basin in Arkansas are highly concentrated is

evidence of a lack of competition in that area and of the

potential for Gathering Company to behave in an

anticompetitive manner.

Arkansas Royalty claims that Gathering Company

will shift costs to captive supplies to compete better where

there are other service alternatives. It contends that less

attractive wells with no competitive alternatives will face

increasingly higher rates and may be abandoned

prematurely. Sonat and Samson advance similar

arguments.

Phillips, Indicated Shippers, and Arkansas Royalty

argue that Gathering Company has not demonstrated that

the potential for abuse of the affiliate relationship does

not exist. Indicated Shippers states that AER should be

required to add to its tariff a guarantee of access to its

mainline facilities for all gatherers. Similarly, Phillips

states that the Commission should consider some

appropriate limitation to protect parties against

discrimination in favor of the affiliated gatherer. All of

these parties, and the State PSCs, request that the

Commission require Gathering Company to show

evidence of sufficient competitive alternatives from

wellhead to transmission interconnect for each gathering

area.

Arkansas Royalty, Indicated Shippers, Orxy, and

(1989).

57

Samson argue that the proposed transfer would frustrate

the Commission’s Order No. 636 competitive objectives.

Arkansas Royalty argues that the operational and physical

interrelationship of the gathering facilities and mainline

transmission system is such that the two cannot be

operated independently without threatening the goals of

Order No. 636. Indicated Shippers maintains that AER’s

Order No. 636 compliance orders imposed access

conditions on gathering that AER will simply walk away

from by transferring the facilities.

Several parties argue that Gathering Company

should be required to honor prior contractual and/or

regulatory obligations. Specifically, Samson states that an

integral part of the rate settlement in Docket No.

RP93-3-000 was an agreement that AER would charge a

gathering rate no higher than 14.17 cents per MMBtu. It

argues that AER must not be able to evade that bargain

by transferring the facilities to a non-jurisdictional

company. The State PSCs request that the Commission

cap Gathering Company’s maximum gathering rates at the

level approved in Docket No. RP93-3. Samson also argues

that Gathering Company should be required to honor

AER’s contracts for discounted transportation.

“Pipeline Service Obligations and Revisions to Regulations

Governing Self-Implementing Transportation; and Regulation of

Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg.

13,267 (April 16, 1992), III FERC Stats. and Regs. 30,939 (April 8,

1992); order on reh’g, Order No. 636-A, 57 Fed. Reg. 36,128 (August

12, 1992), III FERC Stats. and Regs. 30,950 (August 3,

1992); order on reh’g, Order No. 636-B, 57 Fed. Reg. 57,911

(December 8, 1992), 61 FERC 61,272 (November 27, 1992).

58

Arkansas Royalty argues that many lines were paic

for.by producers as “aid-in-construction," and that the

have relied on Commission regulation to ensure that AE

will not double recover costs. Arkansas Royalty also,

points out that some producers are getting free gatherin

services as non-cash consideration under take-or-pay at

buydown settlements, and it is concerned about the status

of those agreements after the transfer.

In its answer to the protests, Gathering Company,

claims that the involved facilities are subject to substantial

competition. Specifically, it points out that in a response,

to a data request it provided a list of over 400 gatherers

operating in the same areas where the subject facilities are,

located. It also states that sections 7 and 8 of the,

Transfer Agreement between Gathering Company and,

AER provide that both companies will observe principles.

of open-access and refrain from acting in an unduly,

discriminatory manner. Sections 7 and 8 of the Transfer.

Agreement read as follows:

7.1 In providing any services to each other,

Transferee and Transferor will provide such

services in a manner not inconsistent with

principles of open-access.

7.2 Transferee and Transferor will refrain from

charging prices or imposing terms and conditions

for services which are intended to discourage or

deny any shipper access to any transmission system

and will operate their businesses in a manner.

consistent with applicable laws requiring conduct

59

which is not unduly discriminatory.

8.1 After transfer of the Assets to Transferee,

Transferor will take no unreasonable action or

make no unreasonable change to its currently

existing operating practices, at any existing or

future receipt point between its facilities and the

gathering facilities of Transferee acquired

hereunder, that would deny the receipt of gas into

Transferor’s system.*

Furthermore, in its answer to the protests,

Gathering Company states that it will honor all long-term

commitments, including any which deal with contributions

in aid-in-construction and discounts.

Arkansas Royalty challenges Gathering Company's

statement that the Transfer Agreement provides

open-access and non-discriminatory protection.

Specifically, Arkansas Royalty states that the Transfer

Agreement only creates rights between Gathering

Company and AER, and expressly provides that it is not

intended to create any third-party beneficiary rights.”

Similarly, Indicated Shippers states that the Transfer

Agreement does not alleviate any concerns of potential

Petition for declaratory order, Appendix A at pp. 7 and 8.

*Section 11.2 of the Transfer Agreement states that: "Nothing

in the Transfer Agreement is intended or will be construed to confer

upon or give any person or entity other than the parties hereto any

rights or remedies under or by reason of the Transfer Agreement of

any transaction contemplated hereby."

discrimination.

Arkansas Royalty and Indicated Shippers disagree

with Gathering Company’s contention that there is

substantial competition in the subject areas. Arkansas

Royalty claims that Gathering Company’s information is

unreliable and should be discounted.

Noark, in comments supporting Gathering

Company's petition, states that it will compete with

Gathering Company for supply in Arkansas. Noark agrees

with the protestants that there is currently minimal

competition in the subject gathering areas. However, it

contends that this is the result of past regulation, and that

deregulation is necessary to attract the capital that is

needed to modernize existing systems and meet

production needs.

12. Commission Response

First, we address those protestants who argue that

Commission regulation of a pipeline gathering affiliate is

mandatory. Section 1(b) of the NGA gives the

Commission jurisdiction over (1) the transportation of

natural gas in interstate commerce, (2) the sale in

interstate commerce of natural gas for resale, and (3)

natural gas companies engaged in such transportation or

sale. 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 sales of such gas

in interstate commerce for resale. Interstate pipelines are

61

natural gas companies, and the Commission’s jurisdiction

to regulate pipeline activities includes gathering.

Although, the Commission’s mandate under the NGA and

its primary rate jurisdiction is with respect to interstate

transportation. not gathering, in Northern Natural the

U.S. Court of Appeals for the Eighth Circuit confirmed

that under NGA sections 4 and 5 the Commission may

regulate rates charged for gathering services provided by

natural gas companies (i.¢e., pipelines) "in connection with"

the pipelines’ jurisdictional interstate transportation.

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.

While the Commission generally does not have

jurisdiction over affiliated gatherers because affiliates are

not natural gas companies under the NGA, the

Commission 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. More specifically, 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

62

may ook through, or disregard, the separate corporate

structures and treat the pipeline and gatherer as a single

entity, 1.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.”

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 in‘errelationship 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 transmission rates. -Although an

"The Eight Circuit held in Northern only that the

Commission may regulate pipeline-owned gathering that is "in

connection with" the pipeline’s jurisdictional transportation.

Notwithstanding the footnote in that case 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 section 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."

63

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.

Moreover, to guard against the risk of affiliate

abuse, and to ensure an arms length relationship between

the pipeline and an affiliated gathering company, we

believe the pipeline must include in its tariff the following

standards:

(a) AER will provide nondiscriminatory access to

all sources of supply in accordance with Part 284 of

the Commission’s regulations and will not give

shippers of its gathering affiliate undue preference

over shippers of nonaffiliated gatherers or other

customers in scheduling, transportation, storage or

curtailment priority.

(b) AER 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 by any gathering affiliate,

any services by it on behalf of its gathering

affiliate, or any services in which its gathering

affiliate is involved.

We will condition the abandonment authorization

64

discussed below in section C.2. upon AER’s filing tariff

provisions containing the standards of conduct described

above.

Accordingly, we disagree with the protestants who

urge that the Commission must regulate all affiliate

gathering. The Commission’s jurisdiction to regulate

affiliate gatherers is indeed limited, as discussed above.

Some protestants argue that in the absence of

competition for gathering, the Commission must regulate

an affiliated gatherer. We disagree. As we discuss in

more detail in Mid Louisiana Gas Company, et al., (Mid

Louisiana)* which the Commission is considering

concurrently with the instant case, the presence or

absence of gathering competition in a particular area has

no bearing on the Commission’s authority to regulate

affiliated gatherers. As discussed above, an affiliate is not

a natural gas company. Moreover, as we also discuss in

Mid Louisiana, it would be unreasonably burdensome and

time consuming to attempt to gage the level of

competition for the gathering services at issue in this

proceeding.

Nevertheless, we recognize that in the past, the

Commission has fully regulated gathering by interstate

*In Docket No. CP93-79-001, the Commission is acting on a

request for rehearing of its order in Docket No. CP93-79-000 in which

the Commission permitted Mid Louisiana Gas Company to abandon

gathering facilities by transfer to its affiliate, Fairbanks Gathering

Company.

65

pipelines under a cost-based regime. The pipelines’

historical obligation to its gathering customers and the

Commission’s later requirement for open access

transportation created an expectation that the relationship

between the pipelines and producers connected to their

gathering systems would be governed by regulation, not

private contract. Because of the current absence of

comprehensive contracts, in instances like the one here,

where a pipeline is proposing to transfer its gathering

operations to a non-pipeline entity, the existing customers

could find themselves unable to contract for service of the

pipeline’s successor in interest. We agree that existing

customers have a reasonable expectation that their service

will not be arbitrarily terminated in the event of a

spin-down or spin-off or only offered undue unreasonable

terms, conditions and rates.

Therefore, as a precondition to a final

determination that the subject facilities will be exempt

from our jurisdiction, Gathering Company must

demonstrate that it has negotiated private contracts with

AER’s existing customers. If Gathering Company is

unable to reach agreement with AER’s existing customers

(or where most producers have entered into contracts, but

there are a few holdouts), Gathering Company may

submit a "default contract" or pro forma agreement which

has been offered to existing customers. The terms for

service should not be inconsistent with the terms,

conditions and rates for various services currently offered

by independent gatherers in the particular region. If we

conclude that the "default contract" meets this standard,

we will issue a final declaratory order. Existing customers

66

who choose not to take service under these terms,

conditions and rates will not be guaranteed continuation

of service. By giving AER’s existing customers an

opportunity to negotiate contracts with Gathering

Company prior to issuance of a declaratory order and

providing a default standard for such contracts where the

parties cannot otherwise devise mutually agreeable terms,

conditions and rates, the Commission eliminates to the

extent possible any advantage Gathering Company has

over captive gathering customers.

as Other Matters

1. Valuation Issue

Gathering Company indicates that the facilities will

be transferred at net book value. Phillips is concerned

that AER will charge its customers for stranded gathering

costs. Phillips also argues that transferring the facilities

at net book value may not be adequate to represent the

true market value of the assets. It states-that this may

give Gathering Company an unfair advantage because the

depreciated value of the facilities may be artificially low.

Phillips recommends that the Commission require "AER

to hold an ’open season’ to bid for the facilities . . . [and

to] require AER to accept the highest bid for the

facilities."”

We will deny Phillips’ request. As we stated in Mid

Louisiana Gas Co., et al.,

*Phillips’ protest, at p. 7.

a ee a eS OO Fy ey ee ee, ee ae ee o- —

ee

67

[A] pipeline might seek to spin off

facilities that have a market value higher

than their book value, while retaining and

seeking to recover stranded investment

costs for gathering facilities with a market

value lower than their book value.

Pipelines should be aware that if they seek

to recover stranded investment costs for

gathering facilities, the Commission will

consider all the pipeline’s gathering

transactions, including the transfer of assets

to an affiliate, when assessing the

recoverability of such stranded costs.”

2. Budget-Type Certificate Issue

Finally, we note that Gathering Company has

stated that some of the facilities may have been reported

in AER’s year-end budgetary certificate reports. Because

many of the facilities are certificated, AER must file an

application under NGA section 7(b) to abandon those

facilities. We will condition the abandonment

authorization on AER’s demonstrating that there is in

place a regime of private contracts that were negotiated

by Gathering Company with AER’s existing customers.

The Commission orders:

(A) Upon their acquisition by Gathering Company,

the subject facilities will be exempt from Commission

“65 FERC 61,166, at 61,643 (1993).

68

jurisdiction under section 1(b) of the NGA.

(B) The finding in Ordering Paragraph (A) is

conditioned on Gathering Company’s demonstrating that

there is in place a regime of private contracts with AER’s

existing customers, in accordance with the discussion in

the body of this order.

(C) The finding in Ordering Paragraph (A) is

conditioned on AER’s filing an application to abandon

any facilities that may have been built under its

budget-type certificate, as discussed above. The

abandonment authorization will be conditioned on AER’s

demonstrating that there is in place a regime of private

contracts that were negotiated by Gathering Company

with AER’s existing customers, and on AER’s filing tariff

provisions containing the standards of conduct, as

discussed in the body of this order.

(D) The requests for hearing are denied.

(E) The late motions to intervene are granted.

(F) Gathering Company’s motion for leave to file

an answer to the protests is granted.

(G) Arkansas Royalty’s motion to supplement

petition for declaratory order is denied.

(H) All tendered pleadings, as discussed above,

are accepted into the record.

69

(1) Indicated Shippers’ request to join additional

parties to this proceeding is denied.

APPENDIX:

Appendix A

Oklahoma

1. Amber Area - The Amber Area consists of: ten

4-inch pipelines, ranging in length from approximately 36

feet to 3.4 miles; and one 6-inch pipeline, approximately

2 miles long. The pipelines connect to 16 wells and

operate near 800 psig. The gas is dehydrated prior to

delivery to two custody transfer points on AER’s

transmission system.

2. Ames Area - The Ames Area consists of: four

2-inch pipelines, ranging in length from approximately 123

feet to one mile; one 3-inch pipeline, approximately 0.8

miles long; and three 4-inch pipelines, approximately 0.5

to 1.6 miles long. The pipelines connect to three wells and

operate at 350 psig. The gas is dehydrated before delivery

into one custody transfer point on AER’s transmission

system.

3. Apache Area - The Apache Area consists of:

three 4-inch pipelines, two approximately 1.5 miles long

and one approximately 4.1 miles long; and one 8-inch

pipeline approximately 4.6 miles long. The pipelines

connect to six wells and operate at 700-900 psig. The gas

is dehydrated prior to delivery to three custody transfer

70

points on AER’s transmission system.

4. Ashland Area - The Ashiand Area consists of:

five 2-inch pipelines, ranging in length from approximately

120 feet to one mile; three 3-inch pipelines, approximately

193 feet to 0.8 miles long; and 17 4-inch pipelines,

approximately 382 feet to 1.9 miles long. The pipelines

connect to 29 wells and operate near 750 psig. The gas is

dehydrated prior to delivery to two custody transfer points

on AER’s transmission system.

5. Binger Area - The Binger Area consists of:

twelve 4-inch pipelines, ranging in length from

approximately 93 feet to 2.4 miles; and one 6-inch

pipeline, approximately 4.8 miles long. The pipelines

connect to nine wells and operate at 800-850 psig. The gas

is dehydrated downstream of five custody transfer points

on AER’s transmission system.

6. Bloomington Area - The Bloomington Area

consists of one 4-inch pipeline approximately two miles

long. The pipeline connects to one well and operates

near 350 psig. The producers dehydrate the gas at the

wellhead and it is delivered to a custody transfer point on

AER’s transmission system.

7. Bokoshe Area - The Bokoshe Area consists of:

four 3-inch pipelines, ranging in length from

approximately 0.3 to 0.9 miles; twelve 4-inch pipelines,

approximately 0.7 to 1.6 miles long; and two compressors

totaling 470 horsepower. The pipelines connect to 15

wells and operate at 250-400 psig. The gas is dehydrated

71

and compressed upstream of delivery to a custody transfer

point on AER’s transmission system.

8. Bradley Area - The Bradley Area consists of:

five 4-inch pipelines, ranging in length from approximately

346 feet to 0.8 miles; and two 8-inch pipelines, one 3.3

miles and one 4.6 miles long. The pipelines connect to

seven wells and operate near 100 psig. The gas is

dehydrated upstream of two custody transfer points on

AER’s transmission system.

9. Braman Area - The Braman Area consists of

one 439-foot, 2-inch pipeline that connects to two wells,

and a 42 horsepower compressor. The Braman Area is

currently inactive. When producing it delivers gas into

AER’s transmission system after it is dehydrated and

compressed.

10. Butler Area - The Butler Area consists of: one

3-inch pipeline, approximately 0.3 miles long; and five

4-inch pipelines, ranging in length from approximately 0.7

to 2.3 miles. The pipelines connect to six wells and

operate at 800-900 psig. The gas is dehydrated upstream

of delivery to two custody transfer points on AER’s

transmission system.

11. Canute Area - The Canute Area consists of:

one 3-inch pipeline, approximately 0.8 miles long; and one

4-inch pipeline, approximately 0.4 miles long. The

pipelines connect to three wells and operate at 700 psig.

This is a dry gas system that delivers gas to a custody

transfer point on AER’s transmission system.

72

12. Carlton Area - The Carlton Area consists of:

seven 2-inch pipelines, ranging in length from

approximately 28 feet to 0.8 miles; six 3-inch pipelines,

approximately 560 feet to three miles long; and 17 4-inch

pipelines, approximately 0.2 to 3.4 miles long. The

pipelines connect to 30 wells and operate at approximately

350 psig. The gas is dehydrated upstream before delivery

into 13 custody transfer points on AER’s transmission

system.

13. Carpenter Area - The Carpenter Area consists

of: two 3-inch pipelines, ranging in length from

approximately 0.7 and 1.6 miles; nine 4-inch pipelines,

approximately 117 feet to 3 miles long; and one 6-inch

pipeline, approximately 1.2 miles long. The pipelines

connect to seven wells and operate near 700 psig. The

gas is dehydrated prior to delivery to six custody transfer

points on AER’s transmission system.

14. Carter Area - The Carter Area consists of: six

4-inch pipelines, ranging in length from approximately 25

feet to one mile; and one 6-inch pipeline, approximately

4.9 miles long. The pipelines connect to six wells and

operate at 700 psig. The gas is dehydrated prior to

delivery to a custody transfer point on AER’s transmission

system.

15. Centrahoma Area - The Centrahoma Area

consists of: seven 2-inch pipelines, ranging in length from

approximately 19 feet to 0.5 miles; three 3-inch pipelines,

approximately 467 feet to 0.6 miles long; eleven 4-inch

pipelines, approximately 569 feet to 1.2 miles long; and

ba = a eal a

73

three 6-inch pipelines, approximately 0.4 to 1.3 miles long.

The pipelines connect to 35 wells and operate near 700

psig. The gas is dehydrated upstream of three custody

transfer points on AER’s transmission system.

16. Chickasha Area - The Chickasha Area consists

of: one 2-inch pipeline, 636 feet long; one 2.5-inch

pipeline, approximately 0.2 miles long; eight 3-inch

pipelines, ranging in length from approximately 174 feet

to 1.5 miles; 34 4-inch pipelines, approximately 58 feet to

1.5 miles long; seven 6-inch pipelines, approximately 0.3

to 1.5 miles long; two 8-inch pipelines, approximately 0.2

and 0.3 miles long; and two 10-inch pipelines,

approximately 1.2 and 3.1 miles long. The pipelines

connect to 55 wells and operate at 300-950 psig. The gas

is dehydrated upstream of delivery to 24 custody transfer

points on AER’s transmission system.

17. Chitwood Area - The Chitwood Area consists

of: three 4-inch pipelines, one 210 feet, one 164 feet, and

one 0.8 miles long; and one 6-inch pipeline, approximately

1.5 miles long. The pipelines connect to two wells and

cperate at 700 psig. The gas is dehydrated prior to

delivery to a custody transfer point on AER’s transmission

system.

18. Custer Area - The Custer Area consists of:

seven 2-inch pipelines, ranging in length from

approximately 189 feet to three miles; three 3-inch

pipelines, approximately 0.7 to 1.2 miles long; and 25

4-inch pipelines, approximately 39 feet to 5.2 miles long.

The pipelines connect to 31 wells and operate near 350

A

74

psig. The gas is dehydrated prior to delivery to eight

custody transfer points on AER’s transmission system. Gas

on a few lines is dehydrated by the producers prior to

receipt by Gathering Company.

19. Deer Creek Area - The Deer Creek Area

consists of: five 4-inch pipelines, ranging in length from

approximately 179 feet to 1.1 miles; and one 8-inch

pipeline, approx mately ten miles long. The pipelines

connect to two wells and operate generally at less than

100 psig. The gas is either dehydrated prior to delivery to

AER’s transmission system or delivered to Western Gas

Resources for processing prior to delivery to AER’s

transmission system.

20. Eagle City Area - The Eagle City Area consists

of five 4-inch pipelines, approximately 912 feet to 3.3

miles long. The pipelines connect to five wells and

operate at approximately 350 psig. The gas is dehydrated

upstream of delivery to three custody transfer points on

AER’s transmission system.

21. Enid Area - The Enid Area consists of: seven

2-inch pipelines, ranging in length from approximately 212

feet to 0.7 miles; 19 3-inch pipelines, approximately four

feet to 2.7 miles long; ten 4-inch pipelines, approximately

566 feet to 1.1 miles long; one 8-inch pipeline,

approximately 5.1 miles long; and one 90 horsepower

compressor. The pipelines connect to 20 wells. Most of

the lines are currently inactive. However, when active,

they operate at approximately 300-350 psig. The gas is

dehydrated prior to delivery to AER’s transmission system

75

at five custody transfer points.

22. Erick Area - The Erick Area consists of: one

2-inch pipeline, 902 feet long; six 4-inch pipelines, ranging

in length from approximately 0.3 to 0.8 miles; and one

6-inch pipeline, approximately 1.6 miles long. The

pipelines connect to six wells and operate at

approximately 300 psig. This is primarily a dry gas system

with producers providing dehydration at the wellhead.

The gas is delivered to two custody transfer points on

AER’s transmission system. Most of the lines are

currently inactive.

23. Geary Area - The Geary Area consists of:

three 4-inch pipelines, two approximately 0.6 miles long

and one approximately 8.5 miles long. The pipelines

attach to three wells and operate at 400 psig. The gas is

dehydrated and delivered to a custody transfer point on

AER’s transmission system.

24. Gerty Area - The Gerty Area consists of: one

2-inch pipeline, 164 feet long; one 3-inch pipeline,

approximately 0.4 miles long; and ten 4-inch pipelines,

ranging in length from approximately 464 feet to 3.4

miles. The pipelines connect to 13 wells and operate

near 800 psig. The gas is dehydrated prior to delivery to

six custody transfer points on AER’s transmission system.

25. Gotebo Area - The Gotebo Area consists of:

one 4-inch pipeline, approximately 1.6 miles long; and one

6-inch pipeline, approximately 1.3 miles long. The

pipelines connect to one well. When producing, it

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delivers gas to Natural Gas Pipeline of America’s

transmission system.

26. Hinton Area - The Hinton Area consist of:

one 3-inch pipeline, approximately 0.2 miles long; 14

4-inch pipelines, ranging in length from approximately 118

feet to 2.4 miles; and two 6-inch pipelines, one 465 feet

long and one 10.3 miles long. The pipelines connect to 19

wells and operate near 900 psig. The gas is dehydrated

upstream of two custody transfer points on AER’s

transmission system.

27. Holdenville Area - The Holdenville Area

consists of: one 3-inch pipeline, approximately 0.5 miles

long; and one 4-inch pipeline, approximately 0.6 miles

long. The area is currently inactive. When it is

producing, the gas is delivered dehydrated to two custody

transfer points on AER’s transmission system.

28. Indianapolis Area - The Indianapolis Area

consists of two 4-inch pipelines, approximately 957 feet

and 0.2 miles long. The pipelines connect to two wells

and operate at approximately 900 psig. The gas is

dehydrated upstream of delivery to two custody transfer

points on AER’s transmission system.

29. Jesse Area - The Jesse Area consists of three

2-inch pipelines that total approximately 1.2 miles. The

pipelines attach to one well and operate at 50 psig. The

gas is delivered at two custody transfer points to Koch Oil

Plant.

77

30. Kinta Area - The Kinta Area consists of: nine

2-inch pipelines, ranging in length from approximately

eight feet to 0.7 miles; 37 3-inch pipelines, approximately

254 feet to 3.6 miles long; 53 4-inch pipelines,

approximately 47 feet to 2.1 miles long; four 6-inch

pipelines, approximately one mile to 3.3 miles long; one

8-inch pipeline, approximately 8.1 miles long; and one 700

horsepower compressor. The pipelines connect to 163

wells and operate at 400-800 psig. The gas is compressed

and dehydrated prior to delivery to four custody transfer

points on AER’s transmission system.

31. Kiowa Area - The Kiowa Area consists of:

three 2-inch pipelines, ranging in length from

approximately ten feet to 0.9 miles; 38 4-inch pipelines,

approximately 130 feet to 1.7 miles long; 14 6-inch

pipelines, approximately 169 feet to 3.4 miles long; and

two 8-inch pipelines, one 3.4 miles and one 5.7 miles long.

The pipelines connect to 85 wells and operate at 600-800

psig. The gas is dehydrated immediately upstream of a

custody transfer point on AER’s transmission system.

32. Lacy Area - The Lacy Area consists of: twelve

2-inch pipelines, ranging in length from approximately 315

feet to 1.4 miles; 15 3-inch pipelines, approximately 65

feet to 1.6 miles long; 25 4-inch pipelines, approximately

l6lfeet to 2.9 miles long; four 6-inch pipelines,

approximately 1.3 to 7.9 miles long; and one 530

horsepower compressor. The pipelines connect to 36

wells and operate at approximately 350 psig. The gas is

dehydrated prior to delivery into AER’s transmission

system at six custody transfer points.

78

33. Leedy Area - The Leedy Area consists of: 31

4-inch pipelines, ranging in length from approximately 613

feet to 1.8 miles; one 6-inch pipeline, approximately 1.2

miles long; and one 10-inch pipeline, approximately 6.4

miles long. The pipelines connect to 40 wells and operate

mostly at 350-400 psig. A few isolated lines operate at

900 psig. The gas is dehydrated upstream of delivery to

AER’s Leedy Compressor Station on its transmission

system.

34. Marlow Area - The Marlow Area consists of:

eight 2-inch pipelines, ranging in length from

approximately one foot to 0.7 miles; eight 3-inch pipelines,

approximately 330 feet to one mile long; 21 4-inch

pipelines, approximately 67 feet to 3 miles long; six 6-inch

pipelines, approximately 0.4 to 6 miles long; and one

8-inch pipeline, approximately 0.6 miles long. The

pipelines connect to 38 wells and operate at 250-350 psig.

The gas is dehydrated upstream of delivery to eleven

custody transfer points on AER’s transmission system.

35. Mayfield Area - The Mayfield Area consists of:

two 4-inch pipelines, each approximately 0.5 miles long;

and one 6-inch pipeline, approximately 5.1 miles long.

The pipelines attach to three wells and operate near 950

psig. The gas is dehydrated at the wellhead by the

producers and delivered to a custody transfer point on

AER’s transmission system.

36. Mayflower Area - The Mayflower Area

consists of: one 4-inch pipeline, approximately 2.6 miles

long; and one 8-inch pipeline, approximately 4.8 miles

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long. The pipelines connect to two wells. The area is

currently inactive. When producing, it delivers dehydrated

gas to a custody transfer point on AER’s transmission

system.

37. McAlester Area - The McAlester Area consists

of: one 2-inch pipeline, 142 feet long; one 3-inch pipeline,

approximately 4.7 miles long; eleven 4-inch pipelines,

ranging in length from approximately 107 feet to 1.2

miles; one 6-inch pipeline, approximately 0.4 miles long;

and two 8-inch pipelines, approximately 0.7 and 3.1 miles

long. The pipelines connect to 22 wells and operate at

600-700 psig. The gas is dehydrated upstream of two

custody transfer points on AER’s transmission system.

38. Midway Area - The Midway Area consists of:

one 3-inch pipeline, 142 feet long; seven 4-inch pipelines,

ranging in length from approximately 75 feet to 1.5 miles;

and one 6-inch pipeline, approximately 1.3 miles long.

The pipelines connect to ten wells and operate at

approximately 900 psig. The gas is dehydrated upstream

of delivery to two custody transfer points on AER’s

transmission system. One of the 4-inch lines delivers gas

to a custody transfer point on El] Paso Natural Gas

Company’s transmission system.

39. Minco Area - The Minco Area consists of: one

2-inch pipeline, approximately 0.3 miles long; two 3-inch

pipelines, one 200 feet and one 0.2 miles long; 18 4-inch

pipelines, ranging in length from approximately 21 feet to

3.6 miles; one 8-inch pipeline, approximately 4.9 miles

long; and two 10-inch pipelines, one 1.6 miles and one 2.6

ii

80

miles long. The pipelines connect to 19 wells and operate

at 800-850 psig. The gas is dehydrated prior to delivery

to five custody transfer points on AER’s transmission

system.

40. Oakman Area - The Oakman Area consists of:

one 2-inch pipeline, 419 feet long; and two 4-inch

pipelines, one 550 feet long and one 0.6 miles long. The

pipelines connect to three wells and operate at 700-900

psig. The gas is dehydrated prior to delivery to two

custody transfer points on AER’s transmission system.

41. Panola Area - The Panola Area consists of:

one 3-inch pipeline, approximately 0.4 miles long; and 14

4-inch pipelines, ranging in length from approximately 154

feet to one mile. The pipelines connect to 18 wells and

operate at 900-950 psig. The gas is dehydrated upstream

of delivery to three custody transfer points on AER’s

transmission system.

42. Paw Paw Area - The Paw Paw Area consists

of: 15 2-inch pipelines, ranging in length from

approximately ten feet to 0.8 miles; 43 3-inch pipelines,

approximately eight feet to 2.1 miles long; 50 4-inch

pipelines, approximately 195 feet to 7.4 miles long; four

6-inch pipelines, approximately 1.1 to 4.5 miles long; two

compressors totaling 340 horsepower; and three other

compressors that operate at 80, 65, and 170 horsepower.

The pipelines connect to 171 wells and operate at 400-600

psig. The gas is compressed and dehydrated prior to

delivery to four custody transfer points on AER’s

transmission system.

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81

43. Peek Area - The Peek Area consists of one

4-inch pipeline, approximately 1.7 miles long. It connects

to one well and delivers gas to a custody transfer point on

Panhandle Eastern Pipe Line Company’s transmission

system. This area is currently inactive.

44. Pine Hollow Area - The Pine Hollow Area

consists of: 23 2-inch pipelines, ranging in length from

approximately 40 feet to 1.1 miles; one 2.5-inch pipeline,

478 feet long; 15 3-inch pipelines, approximately 494 feet

to 1.8 miles long; nine 4-inch pipelines, approximately 158

to 3.4 miles long; one 8-inch pipeline, approximately 12

miles long; five compressors that operate at a total of

2,400 horsepower; and the Watkins compressor that

operates at 35 horsepower. The pipelines connect to 53.

wells and operate at 200-500 psig depending upon the

distance away from the Pine Hollow compressors. The

gas is dehydrated and compressed immediately upstream

of a custody transfer point on AER’s transmission system.

45. Quinton Area - The Quinton Area consists of:

five 3-inch pipelines, ranging in length from approximately

74 feet to 0.8 miles; 34 4-inch pipelines, approximately 330

feet to 2.6 miles long; twelve 6-inch pipelines,

approximately 0.7 to 2.4 miles long; and three 8-inch

pipelines, approximately 1.9 to 6 miles long. The

pipelines connect to 88 wells and operate at 400-500 psig.

The gas is dehydrated prior to delivery to a custody

transfer point on AER’s transmission system.

46. Russelville Area - The Russelville Area

consists of: 35 4-inch pipelines, ranging in size from

82

approximately 30 feet to 6 miles; 13 6-inch pipelines,

approximately 611 feet to 6.9 miles long; and three

10-inch pipelines, approximately 0.5 to 7.3 miles long. The

pipelines attach to 80 wells and operate at 300-400 psig.

The gas is dehydrated prior to delivery to three custody

transfer points on AER’s transmission system.

47. Reams Area - The Reams Area consists of: ten

2-inch pipelines, ranging in length from approximately 101

feet to 0.4 miles; 16 3-inch pipelines, approximately 18

feet to 1.3 miles long; 14 4-inch pipelines, approximately

514 feet to 2.9 miles long; one 6-inch pipeline,

approximately 10.9 miles long; one 8-inch pipeline,

approximately 1.3 miles long; one 10-inch pipeline,

approximately 5 miles long; and two field compressors

that operate at a total of 560 horsepower. The pipelines

connect to 58 wells. The lines operate at 50-70 psig

upstream of the Reams compressor, while other lines in

the area may operate at up to 500 psig. The Reams

compressor discharges into a custody transfer point on

AER’s transmission system. Various field lines and other

pipelines also deliver gas into other custody transfer

points on AER’s transmission system.

48. Red Oak Area - The Red Oak Area consists

of: three 2-inch pipelines, ranging in length from

approximately 146 feet to 1 mile; 29 3-inch pipelines,

approximately 22 feet to 1.1 miles long; 77 4-inch

pipelines, approximately 143 feet to 4.8 miles long; 13

6-inch pipelines, approximately 0.6 to 2.6 miles long; one

8-inch pipeline, approximately 2.3 miles long; and seven

compressors that operate at a total of 2,830 horsepower.

83

The pipelines connect to 158 wells and operate from

300-950 psig. The gas is dehydrated and delivered to nine

custody transfer points on AER’s transmission system.

49. Shattuck Area - The Shattuck Area consists of:

one 2-inch pipeline, 733 feet long; and five 4-inch

pipelines, ranging in length from approximately 203 feet

to 8.7 miles. The pipelines connect to 17 wells and

operate at 280-300 psig. The gas is dehydrated prior to

delivery to two custody transfer points on AER’s

transmission system.

50. Sickles Area - The Sickles Area consists of:

nine 4-inch pipelines, ranging in length from

approximately 292 feet to 1.3 miles; and two 6-inch

pipelines, one 1.4 miles and one 3.1 miles long. The

pipelines connect to twelve wells and operate near 900

psig. The gas is dehydrated prior to delivery to three

custody transfer points on AER’s transmission system.

51. Sooner Trend Area - The Sooner Trend Area

consists of: six 2-inch pipelines, ranging in length from

approximately 14 feet to 0.3 miles; 34 3-inch pipelines,

approximately eight feet to 2 miles long; 23 4-inch

pipelines, approximately 165 feet to 3.5 miles long; and

three 6-inch pipelines, approximately 0.5 to 2.8 miles long.

The pipelines connect to 60 wells. Part of the system

operates at approximately 350 psig with a central point of

dehydration at one custody transfer point with AER’s

transmission system. There are six other custody transfer

points, one that delivers gas to Mustang Fuel.

84

52. Spiro Area - The Spiro Area consists of: 23

2-inch pipelines, ranging in length from approximately ten

feet to 1.2 miles; 41 3-inch pipelines, approximately 150

feet to 1.6 miles long; 99 4-inch pipelines, approximately

27 feet to 3 miles long; ten 6-inch pipelines, approximately

0.5 to 7 miles long; four 8-inch pipelines, approximately

1.7 to 11.9 miles long; and three compressors, one 220

horsepower and two 42 horsepower. The pipelines

connect to 212 wells and operate at 400-600 psig. The gas

is dehydrated prior to delivery at AER’s Spiro

Compressor facility.

53. Stigler Area - The Stigler Area consists of: one

3-inch pipeline, approximately 0.4 miles long; and three

4-inch pipelines, ranging in length from approximately 0.4

to 2.6 miles. The pipelines connect to one well and

operate at 400-600 psig. The gas is dehydrated prior to

delivery to a custody transfer point on AER’s transmission

system.

54. Strong City Area - The Strong City Area

consists of: three 4-inch pipelines, ranging in length from

approximately 172 feet to 0.7 miles. The pipelines

connect to five wells and operate near 900 psig. The gas

is dehydrated prior to delivery to two custody transfer

points on AER’s transmission system.

55. Wardville Area - The Wardville Area consists

of four 4-inch pipelines, approximately 0.6 to 4.5 miles

long. The pipelines connect to four wells and operate

near 800 psig. The gas is dehydrated upstream of a

custody transfer point on AER’s transmission system.

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85

56. Weatherford Area - The Weatherford Area

consists of: one 3-inch pipeline, approximately 0.9 miles

long; 19 4-inch pipelines, approximately 46 feet to 1.5

miles long; one 6-inch pipeline, approximately 3.3 miles

long; and one 8-inch pipeline, approximately 3.7 miles

long. The pipelines connect to 21 wells and operate at

900-950 psig, with a few lines operating at 400-450 psig.

The gas is dehydrated upstream of delivery to three

custody transfer points on AER’s transmission system and

one point on Delhi Gas Pipeline’s system.

57. Wilburton Area - The Wilburton Area consists

of: six 2-inch pipelines, ranging in length from

approximately 58 feet to 0.9 miles; 27 3-inch pipelines,

approximately 40 feet to 1.3 miles long; 129 4-inch

pipelines, approximately 16 feet to 3.2 miles long; seven

6-inch pipelines, approximately 0.6 to 1.9 miles long; three

8-inch pipelines, approximately 3 to 4 miles long; and one

10-inch pipeline, approximately 3.3 miles long. The

pipelines connect to 236 wells and operate at 500-700 psig.

The gas is dehydrated prior to delivery to several custody

transfer points on AER’s transmission system or to AER’s

Wilburton station.

58. Wirth Area - The Wirth Area consists of: one

2-inch pipeline, approximately 0.5 miles long; nine 4-inch

pipelines, ranging in length from approximately 50 feet to

0.7 miles; and one 8-inch pipeline, approximately 10 miles

long. The pipelines connect to 13 wells and operate at

400-450 psig. The gas is dehydrated prior to delivery to

a custody transfer point on AER’s transmission system.

86

Oklahoma - Arkansas Border

59. Bonanza Area - The Bonanza Area consist of:

14 2-inch pipelines, ranging in length from approximately

seven feet to one mile; 15 3-inch pipelines, approximately

36 feet to 1.4 miles long; 50 4-inch pipelines,

approximately 142 feet to 3.1 miles long; four 6-inch

pipelines, approximately one to 9.6 miles long; and four

compressors that operate at a total of 1,570 horsepower.

The pipelines connect to 128 wells and operate at 250-500

psig. The gas is dehydrated and compressed prio: to

delivery to four custody transfer points on AER’s

transmission system.

Arkansas

60. Aetna Area - The Aetna Area consists of: two

2-inch pipelines, 38 and 765 feet long; two 3-inch

pipelines, approximately 0.7 to 0.9 miles long; 33 4-inch

pipelines, ranging in length from approximately twelve

feet to 4.5 miles; and four 6-inch pipelines, approximately

43 feet to 4 miles long. The pipelines connect to 71 wells

and operate at 300-500 psig. The gas is dehydrated prior

to delivery to a custody transfer point on AER’s

transmission system.

61. BM-15 Area - The BM-15 area consists of: one

2-inch pipeline, 355 feet long; one 3-inch pipeline, 330

feet long; twelve 4-inch pipelines, ranging in length from

approximately 35 feet to 2 miles; and one 6-inch pipeline,

approximately 0.9 miles long. The pipelines connect to

26 wells and operate at 300-600 psig. The gas is

87

dehydrated prior to delivery to five custody transfer points

on AER’s transmission system.

62. Cecil Area - The Cecil Area consists of: 18

2-inch pipelines, ranging in length from approximately 106

feet to 1.9 miles; 39 3-inch pipelines, approximately 99

feet to 2.7 miles long; 59 4-inch pipelines, approximately

37 feet to 2.4 miles long; six 6-inch pipelines,

approximately 0.6 to 3 miles long, one 8-inch pipeline,

approximately 10.2 miles long; and five compressors, that

operate between 30 and 615 horsepower. The pipelines

connect to 187 wells and operate at 250-300 psig, with

some lines as high as 500 psig. The gas is dehydrated and

compressed prior to delivery to three custody transfer

points on AER’s transmission system at Walker Station.

63. Chismville Area - The Chismville Area consists

of: three 2-inch pipelines, ranging in length from

approximately 206 feet to 1.1 miles; five 3-inch pipelines,

approximately 261 feet to 0.7 miles long; 35 4-inch

pipelines, approximately 114 feet to 2.4 miles long; and

nine 6-inch pipelines, approximately 592 to 7.1 miles long.

The pipelines connect to 82 wells and operate at 600-800

psig. The gas is dehydrated prior to delivery to 16

custody transfer points on AER’s transmission system.

64. Clarksville Area - The Clarksville Area consists

of: 21 2-inch pipelines, ranging in length from

approximately 194 feet to 1.4 miles; 40 3-inch pipelines,

approximately 456 feet to 2.1 miles long; 35 4-inch

pipelines, approximately 44 feet to 2.6 miles long; and two

6-inch pipelines, approximately 0.7 to 3.7 miles long. The

88

pipelines connect to 127 wells and operate at 300-500 psig.

The gas is dehydrated and compressed prior to delivery to

six custody transfer points on AER’s transmission system. -

65. Ft. Chaffee Area - The Ft. Chaffee Area

consists of: eight 3-inch pipelines, ranging in length from

approximately 256 feet to one mile; 16 4-inch pipelines,

approximately 34 feet to 3.8 miles long; one 6-inch

pipeline, approximately 5.3 miles long, and two

compressors that operate at 700 and 220 horsepower.

The pipelines connect to 41 wells and operate at 70-150

psig. The gas is dehydrated, compressed and discharged

at the Ft. Chaffee compressor facilities into AER’s

transmission system.

66. Gragg Area - The Gragg Area consists of:

eleven 2-inch pipelines, ranging in length from

approximately seven feet to 0.6 miles; nine 3-inch

pipelines, approximately 0.2 to 1.4 miles long; 40 4-inch

pipelines, approximately 124 feet to 2.1 miles long; one

6-inch pipeline, approximately 3.8 miles ‘long; and five

compressors that operate between 42 and 530 horsepower.

The pipelines connect to 96 wells and operate at 80-120

psig. The gas is dehydrated and compressed prior to

delivery at the Sanderson, Mansfield, and Gragg

compressor interconnects or ten other custody transfer

points on AER’s transmission system.

67. Jerusalem Area - The Jerusalem Area consists

of: one 3-inch pipeline, approximately one mile long; and

six 4-inch pipelines, ranging in length from approximately

330 feet to 1.2 miles. The pipelines connect to four wells

89 .

and are currently idle. When the area is active the gas is

delivered to four custody transfer points on AER’s

transmission system.

68. Kibler Area - The Kibler Area consists of: 13

2-inch pipelines, ranging in length from approximately 13

feet to 1.4 miles; 68 3-inch pipelines, approximately 220

feet to 2 miles long; 37 4-inch pipelines, approximately

266 feet to 3.2 miles long; four 6-inch pipelines,

approximately one to 7.9 miles long; one 10-inch pipeline,

approximately 0.8 miles long; and two 220 horsepower

compressors. The pipelines connect to 225 wells and

operate at 120-500 psig. The gas is compressed and

dehydrated prior to delivery to four custody transfer

points on AER’s transmission system.

69. Knoxville Area - The Knoxville Area consists

of: seven 2-inch pipelines, approximately 184 feet to 1.3

miles long; 29 3-inch pipelines, approximately 110 feet to

1.7 miles long; 66 4-inch pipelines, approximately 41 feet

to 5.3 miles long; five 6-inch pipelines, approximately 0.6

to 8.2 miles long; two 8-inch pipelines, approximately 0.9

to 9.1 miles long; one 10-inch pipeline, approximately 5.5

miles long; and one 150 horsepower and two 140

horsepower compressors. The pipelines attach to 143

wells and operate at 300-500 psig. The gas is compressed

and dehydrated prior to delivery to three custody transfer

points on AER’s transmission system.

70. Line J Area - The Line J Area consists of: one

3-inch pipeline, approximately 0.6 miles long, and 32

4-inch pipelines, ranging in length from approximately 84

90

feet to 3.2 miles. The pipelines connect to 52 wells. Some

of the pipelines operate at 250-500 psig, while others

exceed 800 psig. The gas is dehydrated prior to delivery

to nine custody transfer points on AER’s transmission

system.

71. Missionary Lake Area - The Missionary Lake

Area consists of: one 2-inch pipeline, 994 feet long; one

2.5-inch pipeline, approximately 1.8 miles long; and one

4-inch pipeline, approximately 0.3 miles long. The

pipelines connect to two wells and operate at 100-200

psig. The gas is dehydrated prior to delivery to two

custody receipt points on AER’s transmission system.

72. Ozark Area - The Ozark Area consists of:

eight 2-inch pipelines, ranging in length from

approximately 31 feet to 0.4 miles; ten 3-inch pipelines,

approximately 84 feet to 1.2 miles long; 28 4-inch

pipelines, approximately 136 feet to 2.3 miles long; one

6-inch pipeline, approximately 4.5 miles long; and one

8-inch pipeline, approximately 4.8 miles long. The

pipelines connect to 80 wells and operate at 400-600 psig.

The gas is dehydrated prior to delivery to two custody

transfer points on AER’s transmission system.

73. Slaytonville Area - The Slaytonville Area

consists of: four 3-inch pipelines, ranging in length from

approximately 201 feet to 1.3 miles; and seven 4-inch

pipelines, approximately 0.5 to 1.5 miles long. The

pipelines connect to 10 wells and operate at 300-500 psig.

The gas is dehydrated prior to delivery to two custody

delivery points on AER’s transmission system.

91

74. Spardra Area - The Spardra Area consists of:

five 2-inch pipelines, ranging in length from approximately

146 feet to 1 mile; 15 3-inch pipelines, approximately 460

feet to 2.6 miles long; 29 4-inch pipelines, approximately

49 feet to 4.5 miles long; and one 6-inch pipeline,

approximately 0.3 miles long. The pipelines connect to 76

wells and operate at 300-500 psig, with a few operating at

over 800 psig. The gas is dehydrated prior to delivery to

five custody transfer points on AER’s transmission system.

75. Union City Area - The Union City Area

consists of: four 2-inch pipelines, ranging in length from

approximately 139 feet to 1.8 miles; 21 3-inch pipelines,

approximately 269 feet to 1.7 miles long; 19 4-inch

pipelines, approximately 459 feet to 3.4 miles long; and

one 60 horsepower compressor. The pipelines connect

to 63 wells and operate at 300-550 psig. The gas is

compressed and dehydrated prior to delivery to six

custody transfer points on AER’s transmission system.

76. Witcherville Area - The Witcherville Area

consists of: one 2-inch pipeline, approximately 0.7 miles

long; five 3-inch pipelines, ranging in length from

approximately 40 feet to 0.8 miles; 19 4-inch pipelines,

approximately 0.4 to 3.5 miles long; one 6-inch pipeline,

approximately 1.7 miles long; and one 700 horsepower

compressor. The pipelines connect to 35 wells and

operate at 90-200 psig. The gas is compressed and

dehydrated prior to delivery to four custody transfer

points on AER’s transmission system.

Texas-Oklahoma Border

92

77. Quitman Area - The Quitman Area consists

of: one 2-inch pipeline, 154 feet long; one 3-inch pipeline,

691 feet long; and three 4-inch pipelines, ranging in length

from approximately 517 feet to 1.2 miles. The pipelines

connect to three wells and operate at 500 psig. The gas

is dehydrated prior to delivery to four custody transfer

points on AER’s transmission system.

Texas

78. Beckville Area - The Beckville Area consists

of: 18 4-inch pipelines, ranging in length from

approximately 715 feet to 1.4 miles; four 6-inch pipelines,

approximately 1.3 to 9.1 miles long; and one 8-inch

pipeline, approximately 3.8 miles long. The pipelines

connect to 27 wells and operate at 200-300 psig. The gas

is delivered into the Hawk Gathering System owned by R.

Lacy Inc. -

79. Britt Ranch Area - The Britt Ranch Area

consists of: one 3-inch pipeline, 998 feet long; four 4-inch

pipelines, ranging in length from approximately 404 feet

to 4.4 miles; one 6-inch pipeline, 2.7 miles long; and one

8-inch pipeline, 5.4 miles long. The pipelines connect to

eight wells and operate at 800-1000 psig. The gas is

dehydrated prior to delivery to three custody transfer

points on AER’s transmission system.

80. Buffalo Wallow Area - The Buffalo Wallow

Area consists of: one 3-inch pipeline, approximately 0.6

miles long; six 4-inch pipelines, ranging in length from

approximately 200 feet to one mile; and one 6-inch

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pipeline, approximately 0.4 miles long. The pipelines

connect to seven wells and operate at 800-1,000 psig. The

gas is dehydrated and delivered to five custody points on

AER’s transmission system.

81. Carthage Area - The Carthage Area includes

two sub-areas, one low pressure and one high pressure.

The low pressure sub-area consist of: two 2-inch pipelines,

approximately 0.8 and 1.3 miles long; one 2.5-inch

pipeline, 96 feet long; nine 3-inch pipelines, ranging in

length from approximately 0.2 to 1.6 miles; 17 4-inch

pipelines, approximately 57 feet to 2.5 miles long; one

6-inch pipeline, approximately 2.8 miles long; one 8-inch

pipeline, approximately 2.1 miles long; one 10-inch

pipeline, approximately 4.4 miles long, and one 350

horsepower compressor. The pipelines connect to 35

wells and operate at 35 psig. The gas is dehydrated at a

central point and delivered to Union Pacific Resources

Co. (Union).

The high pressure area consists of: one 3-inch

pipeline, 175 feet long; 19 4-inch pipelines, ranging in

length from approximately 100 feet to 2 miles long; and

three 6-inch pipelines, approximately 0.4 to 4.8 miles long.

The pipelines connect to 30 wells and operate at 400-500

psig. The gas is dehydrated prior to delivery to Union or

to AER’s transmission system.

82. Cedar Springs Area - The Cedar Springs Area

consists of three 4-inch pipelines, ranging in length from

approximately 652 feet to 0.6 miles. The pipelines

connect to three wells and operate at 650-850 psig. The

cca i

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gas is dehydrated prior to delivery to two custody transfer

points on AER’s transmission system.

83. Hemphill Area - The Hemphill Area includes

the Hemphill and Hamon-Locke sub-areas. The Hemphill

sub-area consists of: five 3-inch pipelines, ranging in

length from approximately 437 feet to 0.5 miles; 31 4-inch

pipelines, approximately 56 feet to 3.8 miles long; three

6-inch pipelines, approximately 0.6 to 1.1 miles long; one

8-inch pipeline, approximately 2.3 miles long, one 10-inch

pipeline, approximately 0.7 miles long; and four

compressors totaling 922 horsepower. The pipelines

connect to 36 wells and operate at 300-400 psig. The gas

is compressed and dehydrated prior to delivery into a

custody transfer point on AER’s transmission system.

The Hamon-Locke sub-area consists of: one 2-inch

pipeline, 585 feet long; one 3-inch pipeline, 645 feet long;

four 4-inch pipelines, ranging in length from

approximately 745 feet to one mile; and one 65

horsepower compressor. The pipelines connect to five

wells and operate at approximately 200 psig. The gas is

dehydrated and compressed upstream of the delivery into

a custody transfer point on AER’s transmission system.

This area is currently inactive.

84. Indian Rock Area - The Indian Rock Area |

consists of: twelve 4-inch pipelines, ranging in length from

approximately 164 feet to 3.2 miles; two 6-inch pipelines, |

approximately 3.

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