Pacific Gas & Elec v. FERC

REVISED
IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 96-60036

PACIFIC GAS AND ELECTRIC COMPANY;
SOUTHERN CALIFORNIA GAS COMPANY;
SOUTHERN UNION GAS COMPANY,
Petitioners,

EL PASO MUNICIPAL CUSTOMER GROUP,
Intervenor,

versus

FEDERAL ENERGY REGULATORY COMMISSION,
Respondent,
COLORADO INTERSTATE GAS COMPANY (CIG);
SOUTHERN CALIFORNIA EDISON COMPANY;
ANR PIPELINE COMPANY; SALT RIVER PROJECT;
EL PASO NATURAL GAS COMPANY;
MERIDIAN OIL INC.’S,
Intervenors.

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No. 96-60039

NEW MEXICO ENERGY, MINERALS AND
NATURAL RESOURCES DEPARTMENT;
COMMISSIONER FOR PUBLIC LANDS FOR
THE STATE OF NEW MEXICO,
Petitioners,

versus

FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.

Petitions for Review of an Order of the
Federal Energy Regulatory Commission

February 19, 1997
Before HIGGINBOTHAM, BARKSDALE, and EMILIO M. GARZA, Circuit
Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This case requires us to decide whether the Natural Gas Act

supplies the Federal Energy Regulatory Commission with jurisdiction

over gathering facilities operated by a corporation that is wholly-

owned by an interstate natural gas pipeline company. We affirm

FERC’s conclusion that these gathering facilities are beyond its

regulatory reach, notwithstanding the fact that the gatherer is a

subsidiary of a pipeline company that transports gas in interstate

commerce.

I.

El Paso Natural Gas Co., one of the nation’s largest natural

gas pipeline companies, owns and operates twenty-nine gathering

facilities in New Mexico, Colorado, Oklahoma, and Texas. Because

some of these facilities are subject to certificates of public

convenience and necessity, El Paso sought FERC’s permission in 1994

to abandon its gathering facilities and convey them, along with

treating and processing facilities, to El Paso Field Services Co.,

which it would own in its entirety. El Paso established a Field

Services Division in 1991, and it explained in its FERC application

that conveying facilities to the liberated Field Services Co. was

the culmination of years of corporate reorganization.

After notice of El Paso’s application was published in the

Federal Register, forty-six parties filed motions to intervene.

Some of the intervenors sought to prevent El Paso from using Field

Services as a means of escaping FERC regulation. FERC issued El

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Paso’s abandonment order on September 13, 1995, effective January

1, 1996. According to FERC, it “does not have jurisdiction over

companies such as Field Services that perform only a gathering

function.” El Paso Natural Gas Co., 72 FERC ¶ 61,220, at 62,014

(Sept. 13, 1995). The order imposed two conditions on Field

Services: (1) it had to amend its tariff to guarantee

nondiscriminatory access to the facilities and arm’s-length

dealings between El Paso and Field Services, and (2) it had to

offer existing customers a two-year default contract that would

preserve the status quo.1 FERC refused to hold a full evidentiary

hearing on the matter and declined the intervenors’ request to

examine whether Field Services would face sufficient competition.

FERC did, however, reserve the right to assert its jurisdiction

over Field Services if El Paso and Field Services failed to

maintain their separate corporate identities. FERC denied

rehearing in a written opinion on November 29, 1995.

Five intervenors have filed this appeal and asked us to

invalidate the abandonment order. Three are local distributors of

natural gas who use the El Paso system: Pacific Gas & Electric Co.,

Southern California Gas Co., and Southern Union Gas Co. The other

two are units of the State of New Mexico: the New Mexico Department

1
Because El Paso has not challenged FERC’s power to require
Field Services to offer default contracts, that issue is not part
of this appeal. Cf. Conoco, Inc. v. FERC, 90 F.3d 536, 553 (D.C.
Cir. 1996) (“[W]e conclude that the Commission did not adequately
explain its jurisdiction to condition approval of the spin-down of
gathering facilities on a default contract mechanism . . . .”),
petition for cert. filed, 65 U.S.L.W. 3354 (U.S. Oct 31, 1996) (No.
96-686).

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of Energy, Minerals, and Natural Resources; and the Commissioner of

Public Lands for the State of New Mexico. Many of the remaining

intervenors have aligned themselves with these parties. The

appellants argue that allowing El Paso’s wholly-owned subsidiary to

operate El Paso’s gathering facilities without any regulatory

oversight and without any significant competition will lead to

unreasonably high natural gas prices.

II.

As a threshold matter, we must ensure that the local

distribution companies and the New Mexico appellants have standing

to challenge FERC’s order. According to El Paso, the abandonment

order does not threaten these appellants with any concrete,

imminent injury. The local distribution companies, on the other

hand, insist that they will inevitably be forced to pay higher gas

prices if FERC ends its regulation of the rates charged by the

gathering facilities through which the gas must pass. The New

Mexico appellants assert that they have an interest not only in

protecting their citizens from monopolistic gathering facilities,

but also in avoiding the expense of imposing their own regulation

of natural gas to compensate for FERC’s decision to bow out of the

regulation of gatherers affiliated with interstate pipelines. See

Florida v. Weinberger, 492 F.2d 488, 494 (5th Cir. 1974) (“[T]he

State of Florida has standing, arising from its clear interest . .

. in being spared the reconstitution of its statutory [system for

licensing nursing homes].”).

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 In addition to the constitutional and prudential standing

limitations, the Natural Gas Act itself specifies who may challenge

FERC’s orders issued under the Act. See 15 U.S.C. § 717r(a)

(granting the rights to seek rehearing before FERC and review in a

circuit court to “aggrieved” states, municipalities, and state

commissions); 15 U.S.C. § 717r(b) (granting the same rights to

“aggrieved” parties to FERC proceedings). A party has not been

“aggrieved” by a FERC decision unless its injury is “present and

immediate.” Tenneco, Inc. v. FERC, 688 F.2d 1018, 1022 (5th Cir.

1982). Case law has not established how this test for standing

might differ from the test developed under Article III. See, e.g.,

American Agriculture Movement v. Board of Trade, 848 F. Supp. 814,

819 n.6 (N.D. Ill. 1994) (suggesting that standing cases decided

under § 717r do not always provide solid authority for standing

cases decided under Article III), aff’d in part and rev’d in part,

62 F.3d 918 (7th Cir. 1995).

El Paso directs our attention to Williams Gas Processing Co.

v. FERC, 17 F.3d 1320 (10th Cir. 1994), another case in which an

interstate pipeline company created a wholly-owned subsidiary to

take over its gathering facilities and thus escape regulation.

FERC responded to the pipeline’s application to abandon the

facilities in much the same way that FERC responded to El Paso’s

application: it granted the request, placed no rate restrictions or

reporting obligations on the affiliate, and explained that its

jurisdiction over the affiliate would arise if the parent and the

affiliated subsidiary failed to subscribe to an open-access policy.

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Natural gas producers and shippers intervened in the FERC

proceedings and ultimately petitioned for review in the Tenth

Circuit because they did not want to pay an unregulated entity for

gathering and transportation costs. The court held that these

intervenors did not have standing under § 717r(b) because they

could not show a looming, unavoidable threat of injury from the

FERC action:

There is no evidence in this record that Chevron
and Conoco have suffered, or will unavoidably suffer,
an economic injury as a result of the Commission’s
orders. Their fear that Williams will charge
unreasonable rates is only speculation for now, and
even if it materializes, they can challenge the
reasonableness of Williams’s rates under section 5 [of
the Natural Gas Act], 15 U.S.C. § 717d.

Williams, 17 F.3d at 1322.

We question whether the appellants could make use of § 717d at

some later time to challenge unreasonably high rates. That section

applies only to rates charged by natural gas companies that make

sales within FERC’s jurisdiction. In both Williams and in this

case, FERC decided that affiliated gathering companies are not

natural gas companies unless they act “in connection with” their

parent pipelines. Section 717d would be available to these

appellants if Field Services were to charge rates that

discriminated against entities other than El Paso. But under

FERC’s order, there would be no jurisdiction over Field Services on

the basis of unreasonably high rates as such. Furthermore,

Williams fails to take account of any injury that might come from

terminating the affiliated gatherer’s duty to report rates. Unless

the gatherer has such a duty, the distributors must rely on FERC’s

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oversight to ensure that the gatherer does not abuse its

potentially monopolistic power.

In addition to Williams, El Paso relies on Shell Oil Co. v.

FERC, 47 F.3d 1186, 1200-03 (D.C. Cir. 1995). In that case, Shell

Oil objected to FERC’s conclusion that the Interstate Commerce Act,

which provides rate protection and tariff requirements, does not

apply to a pipeline system located entirely on the Outer

Continental Shelf. Shell obtained access to the pipeline in the

FERC proceeding under the Outer Continental Shelf Lands Act, 43

U.S.C. § 1334(f). Shell appealed because it objected to FERC’s

further conclusion that the Interstate Commerce Act does not grant

FERC jurisdiction over pipelines that lie entirely on the outer

continental shelf. The D.C. Circuit held that Shell did not have

standing to pursue such an appeal because “[t]he risk of injury .

. . flows from the legal rationale employed by the Commission in

its Order, not from the denial of relief actually sought by Shell

before the agency.” Shell Oil, 47 F.3d at 1201. The court went on

to reject Shell’s contention that “the hypothetical imposition of

unreasonable but non-discriminatory rates suffices for purposes of

finding injury in fact.” Id. at 1202 n.33. This case is different

from Shell Oil because the local distribution companies and the New

Mexico appellants have argued all along the same thing they are

arguing here: that FERC must regulate Field Services under the

Natural Gas Act. Furthermore, Shell’s potential injuries from rate

increases were more speculative than the potential injuries in this

case because a group of pipeline owners competed among themselves

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to sell capacity on the pipeline, and FERC determined that the

pipeline was underutilized even with Shell’s purchase of pipeline

capacity. Id. at 1202. Other cases cited by El Paso are also

distinguishable. See Colorado Interstate Gas Co. v. FERC, 83 F.3d

1298, 1301 (10th Cir. 1996) (holding that a natural gas company

that had agreed to report its gathering rates and provide non-

discriminatory access was not “aggrieved”); State ex rel. Sullivan

v. Lujan, 969 F.2d 877, 882 (10th Cir. 1992) (holding that Wyoming

did not have standing to challenge the Interior Department’s

exchange of land rich in coal because it could not show that the

Department would have leased the land for coal mining and thus have

entitled Wyoming to royalties); Panhandle Producers v. Economic

Regulatory Admin., 847 F.2d 1168, 1173-74 (5th Cir. 1988) (holding

that an association of natural gas producers did not have standing

to challenge the ERA’s failure to refer its policy of authorizing

imports of Canadian gas to FERC because the association was not

within the statute’s zone of interest); Tenneco, Inc. v. FERC, 688

F.2d 1018, 1022 (5th Cir. 1982) (holding that a natural gas

pipeline company did not have standing to challenge FERC’s decision

to transform an adjudicatory hearing into an off-the-record

investigation because the decision did not adjudicate facts or

deprive the pipeline of property).

We hold that the local distribution companies and the New

Mexico appellants have standing to challenge FERC’s abandonment

order. When an agency deregulates a major portion of a

distributor’s supply structure, the threat to the distributor’s

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economic security is not merely speculative. It is likely that

Field Services will charge a higher price than it would have under

FERC regulation. Thus, these appellants have a considerable

interest in the regulatory status of affiliated gatherers and will

be unable to challenge FERC’s treatment of the issue if FERC’s

position that affiliated gatherers are outside of its jurisdiction

becomes established precedent. We have recognized a similar

principle in affording standing to pipeline companies facing a high

risk of economic injury by FERC’s treatment of their competitors.

Pacific Gas Transmission Co. v. FERC, 998 F.2d 1303, 1307 n.4 (5th

Cir. 1993). Down-stream gas distributors are within the zone of

interest contemplated by the rate regulation provisions of the

Natural Gas Act. See Interstate Natural Gas Co. v. Federal Power

Comm’n, 331 U.S. 682, 693 (1947). And similar cases have either

explicitly or implicitly found that entities other than direct

competitors can have a sufficient interest in a pipeline’s

regulatory status to confer standing. See, e.g., Conoco, Inc. v.

FERC, 90 F.3d 536 (D.C. Cir. 1996) (allowing producers to challenge

a pipeline’s spin-off of an affiliated gathering company), petition

for cert. filed, 65 U.S.L.W. 3354 (U.S. Oct 31, 1996) (No. 96-686);

Mississippi Valley Gas Co. v. FERC, 68 F.3d 503, 507-08 (D.C. Cir.

1995) (finding that a local distribution company had standing to

challenge FERC’s adjustment of a pipeline’s rates).

III.

We review FERC’s abandonment order to ensure that it is “based

on a permissible construction” of the Natural Gas Act; “a court may

9
not substitute its own construction of a statutory provision for a

reasonable interpretation made by the administrator of an agency.”

Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S.

837, 843-44, 104 S. Ct. 2776, 2782 (1984). An interpretation is

reasonable so long as it is not “arbitrary, capricious, or

manifestly contrary to the statute.” Id. at 844, 104 S. Ct. at

2782. In this case, we must determine whether FERC imposed a

reasonable construction on the description of its statutory powers

in sections four and five of the Natural Gas Act, 15 U.S.C. §§

717c(a) & 717d(a), which allow FERC to regulate prices charged “in

connection with” the transportation or sale of natural gas that is

subject to FERC jurisdiction.

The local distribution companies and the New Mexico appellants

rely principally on language in Northern Natural Gas Co. v. FERC,

929 F.2d 1261, 1269 (8th Cir.), cert. denied, 112 S. Ct. 169

(1991). The Northern Natural court held that FERC may regulate

gathering facilities owned by natural gas companies in spite of the

fact that gathering facilities are explicitly excluded from FERC’s

jurisdiction under 15 U.S.C. § 717(b). Such regulation, the court

reasoned, was necessary to perform FERC’s role of preventing unfair

trade practices by monopolistic pipelines under §§ 717c & 717d.

929 F.2d at 1273. It explained that “it would be inconsistent to

hold that the Commission may not regulate rates for transportation

over a pipeline’s own gathering facilities performed in connection

with admittedly jurisdictional interstate transportation.” Id. at

1269.

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 We do not find this language controlling in this case.

Northern Natural did not involve an affiliated gatherer. According

to Conoco, Inc. v. FERC, 90 F.3d 536 (D.C. Cir. 1996), petition for

cert. filed, 65 U.S.L.W. 3354 (U.S. Oct 31, 1996) (No. 96-686),

that fact makes all the difference. In Conoco, a case decided

after the parties in this case submitted the appellate brief, a

pipeline created a corporate subsidiary to take over its gathering

facilities so that it could “operate on a level playing field with

. . . independent gatherers unregulated by the Commission.” 90

F.3d at 541. As in this case, FERC allowed the pipeline to abandon

the facilities to the affiliate so long as it included equal-access

provisions in its tariff and offered customers a default contract

to preserve the status quo for at least two years. The court held

that FERC’s order was not an arbitrary and capricious

interpretation of the statute because transportation and sales by

truly independent gathering affiliates could be understood as not

“in connection with” transportation or sales by interstate

pipelines. Id. at 547.

Our task is not to determine whether the regulatory structure

that FERC gleans from the Natural Gas Act is the most sensible.

There is room to question whether the formality of creating a

separate corporate entity justifies turning a heavily regulated

gathering facility into a facility that is outside of FERC

jurisdiction. The appellants express a legitimate concern that

FERC’s reading gives little assurance that affiliated gatherers

will in fact act independently of the pipelines that own them.

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Although FERC states that it will re-assert its jurisdiction if the

gatherers adopt rate or access practices that discriminate in favor

of their parent pipelines, it is not clear what mechanism FERC

might use to enforce its threat.

Nevertheless, the Conoco court is correct that FERC’s reading

of “in connection with” is a permissible interpretation of the

statute under the Chevron doctrine. The statute itself states that

it does not apply to gathering activities. If Field Services were

not owned by El Paso, there would be no question that FERC does not

have the authority to regulate it. The statute does not address

affiliated gatherers, and the petitioners have not cited any cases

that conflict with FERC’s reasoning that a gatherer that deals with

its parent even-handedly should get the same treatment as a

gatherer whose owners are not involved in jurisdictional

activities. The statutory language, then, allows FERC to treat

Field Services on its own terms and not as a company that provides

transportation or sales “in connection with” jurisdictional

activities. See also Altamont Gas Transmission Co. v. FERC, 92

F.3d 1239, 1245-46 (D.C. Cir. 1996) (deferring to FERC’s

determination that coordination and integration at arm’s length

between Pacific Gas Transmission, an interstate pipeline company,

and PG&E, a nonjurisdictional intrastate distribution company, did

not give FERC jurisdiction over the subsidiary pipeline company),

petition for cert. filed 65 U.S.L.W. 3531 (U.S. January 22, 1997).

The local distribution companies and the New Mexico appellants

also argue that FERC violated the Act because it failed to consider

12
whether competition was sufficient to warrant granting El Paso’s

abandonment request. Under 15 U.S.C. § 717f(b), FERC may not

authorize abandonment unless it finds that “future public

convenience or necessity permit such abandonment.” FERC’s response

to this argument curiously suggests that it does not have the power

to examine whether abandonment would be in the public interest when

a pipeline is abandoning its gathering facilities to a

nonjurisdictional entity. As we read the statute, it makes no

difference who gets the facilities or, indeed, whether anyone gets

them at all — “[a]bandonment within the meaning of NGA § 7 is an

act that permanently reduces a significant portion of a particular

service dedicated to interstate markets.” Columbia Gas

Transmission Corp. v. Allied Chemical Corp., 652 F.2d 503, 511 (5th

Cir. Aug. 1981) (citing Reynolds Metal Co. v. FPC, 534 F.2d 379,

384 (D.C. Cir. 1976)). But any error on FERC’s part was

inconsequential. FERC has the authority to develop its own methods

of ensuring public convenience and necessity. Consolidated Edison

Co. v. FERC, 823 F.2d 630, 636 (D.C. Cir. 1987). FERC did consider

antitrust problems that could arise from El Paso’s spin-off of its

gathering facilities and took steps to maintain competition by

requiring open access and default contracts and threatening to re-

assert its jurisdiction if Field Services should act

discriminatorily. The statute does not require a more specific

inquiry into the state of competition so long as FERC has carefully

evaluated the danger that abandonment will lead to monopoly and

acted to maintain competition. See generally United Distribution

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Cos. v. FERC, 88 F.3d 1105, 1134-42, 1134 (D.C. Cir. 1996)

(granting petitioners relief “insofar as the Commission stated . .

. that any change to injection and withdrawal schedules can be

effected without a § [717f(b)] abandonment proceeding,” but

generally deferring to FERC on the adequacy of its protections

against monopoly power), petition for cert. filed, 65 U.S.L.W. 3531

(U.S. January 31, 1997).

In sum, we choose to follow the D.C. Circuit’s lead and hold

that FERC construed the Natural Gas Act reasonably when it

determined that gatherers are outside of its statutory jurisdiction

even if they are wholly-owned subsidiaries of interstate pipeline

companies.

AFFIRMED.

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