The University of Texas School of Law. Presented: 9th Annual Gas and Power Institute September 23-24, 2010 Houston, Texas

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1 The University of Texas School of Law Presented: 9th Annual Gas and Power Institute September 23-24, 2010 Houston, Texas EXPANDING PIPELINE INFRASTRUCTURE IN NEWLY-DEVELOPED GAS FIELDS: AN EXAMINATION OF FEDERAL AND STATE REGULATORY REQUIREMENTS FOR MARCELLUS SHALE DEVELOPMENT IN WEST VIRGINIA KENNETH E. TAWNEY Author contact information: Kenneth E. Tawney Jackson Kelly, PLLC Charleston, West Virginia

2 A. INTRODUCTION The advent of hydraulic fracturing and horizontal wells has permitted oil and gas companies to begin development of major shale plays throughout the country. The largest of these, the Marcellus Shale formation, lies primarily in the States of New York, Pennsylvania, and West Virginia. The development of this rich new resource has been embraced in West Virginia, where development of coal, oil and gas has been the most important sector of the State s economy for well over a century. Nonetheless, development of the Marcellus Shale does not come without issues. The West Virginia Department of Environmental Protection, which includes the Office of Oil and Gas, is currently undergoing a program review that includes every agency, board and commission that regulates the oil and gas industry to determine what needs to be done to respond to the sudden explosion of oil and gas activity in the Marcellus Shale play in West Virginia. Water usage and disposal are major issues. Road usage is another major issue that could impact not only drilling operations but infrastructure development. In general, proposed legislation surrounding surface use are worth watching as well because of notice and damage compensation issues that could have a significant impact on development of infrastructure to support the development of the Marcellus Shale. How this agency review may ultimately impact the development of infrastructure in West Virginia is beyond prognostication at this point. But, it is important to note that everything in this paper based upon existing state law in West Virginia could change within the next six months. While most of the regulatory and statutory revisions proposed thus far will relate to oil and gas drilling operations, there will almost certainly be some spillover or even unintended impacts on the development of natural gas infrastructure in West Virginia. This paper focuses on three primary areas: 1. The statutory and regulatory authorization of the West Virginia Public Service Commission (Commission) to regulate gathering services. 2. The statutory and regulatory authorization of the Federal Energy Regulatory Commission (FERC) to regulate pipelines and the scope of such regulation. 3. The authority of the State of West Virginia and the U.S. Department of Transportation (DOT) to regulate the operation of the pipelines from a safety standpoint. West Virginia recognizes six basic classes of pipelines in the gas industry, those being a well line, a gathering line, an intrastate pipeline, an interstate pipeline, a storage line, and a distribution line with an ambiguous reference also to common carriers. Individual well lines are not currently regulated and need not be discussed. The focus of this section is on the regulation of and issues surrounding intrastate pipelines and gathering lines as defined in West Virginia. 1

3 B. THE STATUTORY AND REGULATORY AUTHORIZATION OF THE WEST VIRGINIA PUBLIC SERVICE COMMISSION (COMMISSION) TO REGULATE GAS TRANSPORTATION SERVICES There is a significant risk that a pipeline built in West Virginia will be held to be an intrastate pipeline for purposes of state regulation, particularly if compensation is charged to transport another party s gas. As a consequence, an intrastate pipeline would be required to provide firm and interruptible transportation service and interruptible pooling service at costbased rates and on a non-discriminatory basis. The primary question here is whether a pipeline is going to be an unregulated well line, a gathering line, or an intrastate pipeline subject to regulation. 1. Intrastate Pipelines. W. Va. Code a defines an intrastate pipeline to be any utility or any other person engaged in natural gas transportation in intrastate commerce to or for another person, firm or corporation for compensation. Accordingly, a transporter of natural gas does not have to be classified as a utility in order to be subject to regulation as an intrastate pipeline. Intrastate commerce includes the production, gathering, treatment, processing, transportation and delivery of natural gas entirely within this State. Id. Transportation includes exchange, backhaul, displacement or other means of transportation. Id. The statute also grants the West Virginia Public Service Commission (Commission) power to authorize and require the transportation of natural gas in intrastate commerce by intrastate pipelines,... for any person for one or more uses, as defined by rule, by the commission in the case of: (1) Natural gas sold by a producer, pipeline or other seller to such persons; or (2) Natural gas produced by such person. W. Va. Code a(b). Transporting gas for producers and charging them for that service brings companies, including producers, within the ambit of the statute. W. Va. Code a goes on to provide that, for reasons of safety, deliverability or operational efficiency, the Commission may, in its discretion, exclude from the statutory requirements any part of any pipeline solely dedicated to storage, or gathering, or low pressure distribution of natural gas. W. Va. Code a(c). Notwithstanding its broad powers, the Commission has adopted a light-handed regulatory approach with regard to intrastate pipelines. Under the Gas Transportation Rules, all non-utility intrastate pipelines are exempt from the Commission s tariff filing requirements for transportation and pooling services. The Commission has explained that: intrastate pipelines other than utilities are completely exempted from filing tariffs. Since these entities are likely to receive few requests for transportation services or may have limited experience in constructing tariffs, the Commission has made an initial determination to relieve these entities from the burden of establishing and filing unbundled transportation tariffs. However, when such entities are presented with a transportation request, they shall comply with the standards regarding transportation rates, practices and services set forth in [the Gas Transportation Rules]. 2

4 Exempt intrastate pipelines remain bound to offer services and charge rates consistent with the Commission s rules requiring that intrastate pipelines provide both firm and interruptible transportation and pooling services without unjust discrimination or preferences, either as to affiliates or non-affiliates. This tariff filing exemption may be revoked for good cause: This exemption is subject to future modification by the Commission. Additionally, the Commission s complaint procedure is available for the purpose of reviewing any service, practice, or policy of an entity claiming exemption under this section. Specific exemptions may be revoked by the Commission on a case by case basis for good cause shown. Upon revocation of this exemption, the Commission may require an intrastate pipeline to file tariffs under the much more intensive tariff filing rules required of public utilities under the Commission s Rules for the Construction and Filing of Tariffs ( Tariff Rules ), codified at 150 C.S.R. 2, even absent a finding that such pipeline is a public utility. In Cranberry Corp., the Commission revoked Cranberry s tariff filing exemption for lack of uniformity with regard to non-discriminatory application of its general terms and conditions. Although the Commission did not comprehensively define good cause, it held that a finding that an entity is not offering services in accordance with the rules would constitute good cause for revocation of the tariff filing exemption. Cranberry later argued that the Commission s decision to classify its system as an intrastate pipeline negated the possibility that Cranberry could be considered a public utility, and therefore the Commission s ratemaking authority would be governed by W. Va. Code a and the Gas Transportation Rules rather than the Commission s regulations for public utilities. In response, the Commission held that: Cranberry s status as a common carrier does not negate the possibility that it is a public utility. The Commission continues to interpret West Virginia law as giving this Commission full ratemaking jurisdiction over intrastate pipelines, without the need to declare such entities to be public utilities for ratemaking purposes. Such jurisdiction includes the authority to order Cranberry to file its future rate applications with supporting financial data in Tariff Rule 42 format, as will be ordered herein. The Commission declined to decide whether or not Cranberry was a public utility, and, therefore, established a broad precedent that it is authorized to apply tariff rules pertaining to public utilities to an intrastate pipeline. Regardless of whether the Commission is actually exercising jurisdiction, intrastate pipelines must abide by several requirements. The rates and charges of any intrastate pipeline must be fair and reasonable and not exceed reasonably comparable rates and charges which interstate pipelines are permitted to charge for similar transportation service. Rates must be determined in the same manner used by FERC to establish rates for NGPA 311 transportation. W. Va. Code a(d). 3

5 The regulations mandate that intrastate pipelines provide non-discriminatory transportation of customer-owned gas, upon request, upon a first come/first served basis, to persons requesting such service over the existing facilities of the utility and intrastate pipelines. W.Va. CSR Transportation service shall include service to a pool, provided, however, that pool membership shall be made available only to interruptible transportation customers. Id. The regulations create a rebuttable presumption that capacity exists to satisfy requests for transportation service, with disputes resolved by the Commission. W.Va. CSR This series also sets forth the boundaries for the establishment of just and reasonable rates and tariffs for service. Further, all transportation services must be offered and provided without unjust discrimination or preference, either as to affiliates or non-affiliates. W.Va. CSR W.Va. CSR provides that rates charged must be flexible, both upward and downward, from a benchmark fully distributed cost based rate. However, the rate may not be flexed above the benchmark fully distributed cost-based rate for West Virginia-produced gas. Intrastate pipelines are required to offer services and charge rates with respect thereto in accordance with the provisions of these rules. W.Va. CSR b.3. The Commission makes it clear that the complaint procedure is available to review any service, practice or policy and that intrastate pipelines may be required to file tariffs and rates. The Commission has actually asserted jurisdiction over some companies as an intrastate pipeline. 2. Common Carriers. The ambiguous title of W. Va. Code a is Gas utility pipelines declared as common carriers; commission approval of certain transportation. There is no corresponding text actually making such a declaration. Nonetheless, the result of being a common carrier is that: All common carriers... shall... afford all reasonable, proper and equal facilities for the interchange of traffic between their respective lines, and for the receiving, forwarding and delivering of... property to and from their several lines, and those connecting therewith, and shall not discriminate in their rates and charges or methods or manner of service between such connecting lines. W. Va. Code Of primary significance is that, while seemingly crafted to apply to trucking companies and railroads, W. Va. Code also provides: If the commission [Commission] finds it to be in the public interest and to be practicable, without substantially impairing the ability of a carrier owning or entitled to the enjoyment of terminal facilities to handle its own business, it shall have power to require the use of any such terminal facilities, including main-line track or tracks for a reasonable distance outside of such terminal, of any carrier, by another carrier or other carriers.... (emphasis added) 4

6 This section allows a pipeline company to argue that it is entitled to first use its own facilities for its own gas and that the Commission may only require transportation of other producers gas to the extent the capacity is not needed by the pipeline company, which would be very helpful to a producer wanting to develop its own pipeline system and only provide incidental transportation service to others to help defray costs and, for example, assist the other producer under a quid pro quo arrangement. 3. Gathering. As noted above, W. Va. Code a(c) allows -- but does not require -- the Commission to exempt from the intrastate pipeline classification any pipeline solely dedicated to gathering. Gathering facilities have been granted a revocable exemption from the Commission s jurisdiction under the Commission s Rules Governing the Transportation of Natural Gas, 150 W.V.C.S.R. 16 ( Gas Transportation Rules ). Gathering facilities are, however, subject to the Commission s jurisdiction under its complaint procedures. The Commission defined gathering facilities and intrastate pipeline as follows: The term gathering facilities shall include all pipelines and related facilities used to collect the gas production of one (1) or more wells for the purpose of moving such production from the well(s) into the facilities of an interstate pipeline, a utility, or an intrastate pipeline. For the purposes of these rules, gathering facilities shall not be considered either public utilities or intrastate pipelines. (emphasis added) The term Intrastate Pipeline means any person, firm or corporation engaged in natural gas transportation commerce to or for another person, firm or corporation for compensation. W.Va. CSR j. and 1.5.k. When the Commission amended this definition in 1987, it specifically found that gathering lines should not be subject to the requirements of [its Gas Transportation Rules]. Regardless, the definitional overlap between the two regulations cannot be reconciled on the basis of anything other than whether one is charging compensation for providing transportation service. The Commission has never established a test to specify the difference between an intrastate pipeline and a gathering facility where a gathering facility stops and an intrastate pipeline begins. In a 2005 Recommended Decision never adopted by the Commission, an administrative law judge ( ALJ ) addressed the issue of whether the Big Creek Pipeline ( BCP ), owned by BCP, LLC, and Big Sandy Gas Company, was an intrastate pipeline or a gathering facility. Although the Recommended Decision was vacated by the Final Order which adopted a stipulation resolving the case, the decision is nonetheless instructive of how the Commission might distinguish these classifications in the future. EDC requested that the Commission declare BCP to be an intrastate pipeline required to grant EDC non-discriminatory access to its pipeline. BCP argued that it is a private gathering line and not an intrastate pipeline subject to the Commission s Gas Transportation Rules. The ALJ applied the facts of the case against the definition of intrastate pipeline, but did not provide any analysis as to why the facilities at issue are not gathering facilities. 5

7 First, the ALJ noted that such determinations are made according to the specific facts of each case, on a case-by-case basis. The decision then noted the broad scope of the term transportation under W. Va. Code a. The ALJ determined that BCP s lines did not gather gas, but displaced and transported it, since (1) gas moved from small flow lines owned by well owners to lines owned by BCP and (2) large sections of lines were not connected to wells. Second, the ALJ found that BCP had transported gas to or for another person, firm or corporation. Although BCP transported gas only for affiliates, those companies were separate legal entities, BCP had transported gas for another corporation as an intrastate pipeline. Further, in a decision with potentially far-reaching implications, the ALJ held that once an operation has functioned as an intrastate pipeline, organizational restructuring cannot remove this designation. Third, since BCP transported gas within the boundaries of West Virginia, it operated entirely within this state. Thus, BCP s transportation of gas met the statutory definition of intrastate commerce. Finally, BCP had transported gas to its affiliates for compensation because it had been paid for its expenses both on a percentage basis and a throughput basis. Evidence of a throughput charge, which seems very similar to a transportation charge, appears to be a strong indicator of compensation. Further, Black s Law Dictionary defined compensation as remuneration and other benefits received in return for services rendered, which indicated that any time payment or reimbursement of this sort is required for use of a pipeline, compensation has been paid. Unfortunately, the ALJ s decision did not adequately explain why the pipeline was not a gathering line. The ALJ noted only that gas moved from well lines to the BCP pipeline and that there were long sections of pipe where no wells were connected. That generally can be said of any line commonly thought to be gathering, so on this point the decision provides no real elucidation. The Commission considered amending this definition once again in 1995 in order to bring certain gathering lines within its jurisdiction, but it decided not to do so, agree[ing] with the opponents to the rule change that problems relating to a nonutility s gathering facility should currently be addressed on a case-by-case basis through the complaint process. The Commission promised to reconsider the current regulatory scheme concerning gathering facilities if it fails to protect the public interest. Since the Commission has not done so, it can be presumed that the current regulatory scheme exempting gathering facilities from regulation has been satisfactory to the Commission at least since Public Utility Status. There is substantial risk that any company building a pipeline would qualify as a public utility in West Virginia unless it is used solely to transport gas owned by the company owning the pipeline. However, the Commission has chosen to exercise its jurisdiction differently with respect to different classes of public utilities. The Commission has generally chosen not to exercise rate and tariff (terms and conditions of service) jurisdiction over companies involved in gas gathering, with notable exceptions. 6

8 W. Va. Code extends the jurisdiction of the Commission to any utility engaged in the transportation of gas by pipeline or engaged in supplying gas. A "public utility" is any business, whether enumerated or not, which is held to be a public service. W. Va. Code To determine whether a company is a public utility providing a public service the West Virginia Supreme Court applies certain tests. Whenever any business or enterprise becomes so closely and intimately related to the public, or to any substantial part of a community, as to make the welfare of the public, or a substantial part thereof, dependent upon the proper conduct of business, it becomes subject to the exercise of the regulatory power of the state. Boggs v. Public Serv. Comm n, 174 S.E.2d 331 (1970). It is immaterial what a person, firm or corporation is called or how and in what manner service to the public is furnished, whether it is by special contract or otherwise, if such person, firm or corporation dedicates himself or itself to public service and holds himself or itself out to serve the public with a product such as gas, oil, electricity or water. They, by such actions, constitute themselves a public utility. In determining whether or not a company is a public utility the law looks at what is being done, not what it is asserted that it is doing. Wilhite v. Public Serv. Comm n, 149 S.E.2d 273 (W. Va. 1966). Courts make an important distinction about services which are not public in nature as follows: A corporation which lays its own pipeline to transport natural gas produced or purchased in a gas field and to deliver the same to two large industrial consumers with whom it has negotiated private contracts, and which has not dedicated itself or held itself out to public service and seeks no other customers, is not upon that state of facts a public utility, even though the effect of this is to take a substantial amount of patronage from an existing public utility. However, changes in the type of service rendered or the number of customers served might cause an opposite result in a future proceeding. Wilhite v. Public Serv. Comm n, 149 S.E.2d 273 (W. Va. 1966). On the other hand, where gas gathering lines had served rural customers continuously for over 33 years, such use constituted a dedication or devotion of lines to public service and the Court upheld a Commission order that the facility continue to operate as a public utility. Boggs v. Public Service Comm n. 174 S.E.2d 311 (W. Va. 1970). Traditionally, notions of public service were focused on the central theme of whether a company was holding out to provide service at uniform rates to all persons within a service area who request it, e.g., Wilhite, supra, or whether that is in fact what was happening even if the company denied that it was holding out to provide service. E.g, Boggs, supra. However, the West Virginia Supreme Court of Appeals has not been willing to adopt a narrow view of the Commission s authority. In Lumberport-Shinnston Gas Co. v. Public Service Comm n, 165 W. Va. 762, 113 S.E.2d 378 (1980), the Court held that a coal and coke company that generated and sold electricity to one local electric distribution company was nevertheless a public utility subject to the jurisdiction of the Commission. The court seemed to be heavily influenced by the 7

9 fact that the coal and coke company had not obtained abandonment authorization from the Commission nearly 50 years before when it sold the electric distribution assets, but did not limit its holdings to those facts, and went on to hold that all contracts made by a utility relating to the public service must be deemed to be entered into in contemplation of the exercise by the state of its regulatory power whenever the public interest may make it necessary S.E.2d at 387. Traditional notions of public service were brought into question when the West Virginia Supreme Court of Appeals recently ruled that the Commission has jurisdiction to regulate entities indirectly serving the public in The Affiliated Construction Trades Foundation v. Public Service Comm n, 211 W. Va. 315, 565 S.E.2d 778 (2002) ( ACT ). The West Virginia Supreme Court held that the Big Sandy Peaker Plant was a public utility even though it would only produce electricity at peak periods and would only sell gas on the wholesale market. After noting that the statutory definition of a public utility is inclusive, the Court held: We conclude that electric generation and transmission facilities intended solely for the sale of electricity on the wholesale market are within the statutory definition of public utility set forth in West Virginia Code whenever it appears that the electricity produced will, in the course of distribution, ultimately be sold to the public. Accordingly, we find that the PSC determination that Big Sandy is not a public utility was erroneous as a matter of law. Carried to its logical extreme, natural gas production facilities and pipeline facilities are public utilities since the gas being produced and transported is, in the ultimate course of distribution, sold to the public. The consequences of regulation as a public utility are significant. The general power of the Commission to regulate public utilities is quite broad, including the power to investigate all rates, methods and practices, require conformance to laws, rules, regulations and orders of the commission; and to require reports, rates, classifications, schedules and timetables to be filed with the commission. The commission may change any unjust or unreasonable intrastate rate and may prescribe a rate, charge or toll that is just and reasonable, and change or prohibit any practice, device or method of service in order to prevent undue discrimination or favoritism. W. Va. Code The regulations regarding gas public utilities are found at 150 CSR 4, titled Rules and Regulations for the Government of Gas Utilities and Gas Pipeline Safety and 150 CSR 16, titled Rules Governing the Transportation of Natural Gas. Series 4 sets forth the regulatory requirements for those natural gas pipelines that are deemed to be public utilities, including extensive requirements for recordkeeping and reporting; metering; customer relations; engineering; inspections and tests; standards of quality of service; safety; promotional practices; and inspection, enforcement and appeals. 8

10 C. THE STATUTORY OR REGULATORY AUTHORIZATION OF THE FERC TO REGULATE THE ACTIVITIES OF A NEW GATHERING COMPANY AND THE SCOPE OF SUCH REGULATION Federal regulation recognizes (but does not necessarily regulate) several different players in the industry, including producers, gathering pipelines, intrastate pipelines, interstate pipelines, Hinshaw pipelines, local distribution companies (LDCs), and end users. Production of gas is generally not subject to federal regulation. Gathering pipelines move gas from the wellhead to other pipelines (interstate, intrastate, Hinshaw or LDCs) and even end-use customers, including both commercial end users and mainline tap residential customers. An intrastate pipeline is a pipeline in which the facilities are located entirely within a state and which does not transport natural gas that has previously been transported in interstate commerce or will subsequently be transported in interstate commerce. Generally, an intrastate pipeline receives gas into its system from wells in a state and transports the gas to other locations in the same state for ultimate consumption by end users within that state. A Hinshaw pipeline is a pipeline or LDC which receives gas that has traveled in interstate commerce, but which comes into its system within the boundaries of a state and all of the gas is ultimately consumed within that state. In addition, to avoid federal regulation, the company s rates, services and facilities must be subject to state regulation. Both intrastate pipelines and Hinshaw pipelines are generally regulated by the states. Interstate pipelines generally move gas from one state to another, although an interstate pipeline may also have facilities located in only one state if the gas flows across state lines before entering the facilities or after leaving the facilities and the facilities do not qualify for gathering line, distribution line or Hinshaw pipeline treatment. The FERC has jurisdiction over natural gas pipelines pursuant to Section 1(b) of the Natural Gas Act ( NGA ), 15 U.S.C. 717(b), which provides as follows: The provisions of this chapter shall apply to the transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale for ultimate public consumption for domestic, commercial, 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. (emphasis added) To be jurisdictional, a pipeline must: (1) move natural gas in interstate commerce; and (2) be classified as transportation rather than distribution, production or gathering. 9

11 Pipelines generally run from production wells via well lines that interconnect with a gathering line. The gathering line receives gas from other producers along its length and may deliver some gas to local markets located along the lines, and often ultimately interconnects with an interstate pipeline. Gas generally flows directionally from the production fields to interstate pipelines or directly to markets, although, at least in West Virginia s historic gathering systems, some lines are at times backfed from an interstate pipeline if local production is insufficient to serve local markets (usually during the winter heating season). Gas flowing through these backfed pipelines is thus flowing in interstate commerce. An important question, for federal jurisdictional purposes, is whether the pipelines transport or gather natural gas. 1. Gathering. The FERC determines whether facilities perform a transportation or gathering function through application of its primary function test set forth in Farmland Industries, Inc., 23 FERC 61,063 (1983), as modified by Amerada Hess Corporation, et al., 52 FERC 61,268 (1990). The primary function test is used to determine precisely what its name suggests; whether the primary function of the facilities is gathering or transportation of natural gas. If the primary function of the facilities is transportation, the facilities are subject to FERC s jurisdiction, but if the primary function of the facilities is gathering, the facilities are exempt from FERC jurisdiction. Because the primary function test is one of degree, care must be taken to consider whether the character of a pipeline is changing. For example, tying two gathering lines together, each with an interconnection into two separate interstate pipeline facilities, could be viewed as an economically beneficial way to gather gas and have the ability to deliver it into two different interstate pipelines depending upon gas prices, only coincidentally crossing state lines. On the other hand, it could be viewed as the interstate transportation of gas. A device available to mitigate such a risk is to seek a declaratory order from FERC or, of less help but certainly easier to obtain, an opinion letter from the FERC General Counsel as provided in the FERC regulations that the reconstituted facilities would still qualify as gathering. Similarly, spinning down gathering facilities into a separate company or companies does not change the configuration, function, and character of the facilities, but the general business activity of the new company will be different. That difference alone is not likely to be of sufficient magnitude to make the FERC change its primary function analysis, but it might be an important factor in light of any other changes to the system. Before leaving the subject, it is perhaps worthwhile to heed the admonition of the FERC in responding to certain protestors concerns regarding lack of competition for gathering services in Columbia Gas Transmission Corp., 79 FERC 61,038 (1997): The issue of competition has been raised in previous abandonment proceedings, and we have consistently explained that the determination of the primary function of particular facilities should not turn on whether a competitive market for gathering services exists or will develop. As previously noted, in the event shippers experience any abuse or discrimination following a spin down or spin off, they will have recourse to state and federal laws 10

12 governing anticompetitive behavior or may bring their concerns before a state regulatory agency. In addition, if a jurisdictional pipeline is alleged to be operating in concert with its nonjurisdictional affiliate in a manner that frustrates our effective regulation of the interstate pipeline, affected parties may initiate an NGA section 5 complaint. When confronted with such circumstances, we may elect to look through or disregard the separate corporate structures and treat the pipeline and gatherer as a single entity, i.e., a single natural gas company. (footnotes omitted) 2. Interstate Transportation. As alluded to previously, one circumstance that could be somewhat problematic for a pipeline company is the backfeeding of lines to serve markets where local production is insufficient to serve local markets. In Gatherco, Inc., 90 FERC 61,211 (2000), FERC issued a limited jurisdiction certificate to Gatherco because of such backfeeds in Ohio: The Gatherco II gathering facilities will also be used to deliver gas to LDCs. The Commission recognizes that a gatherer's incidental use of gathering facilities for the delivery of local production to an LDC does not alter the overall non-jurisdictional gathering function of the facilities. The nuance in this proceeding is that, if local production received into any given segment of Gatherco's non-integrated system is inadequate to meet Gatherco's requirements, Gatherco will receive interstate gas under its FTS service agreement with Columbia and will deliver that gas to the LDCs in a commingled gas stream. Even though Gatherco is primarily a gatherer, the transportation of gas received from an interstate pipeline constitutes the transportation of gas in interstate commerce under NGA Section 1(b). Gatherco is not an LDC. Nevertheless, because of the limited scope of jurisdictional activities proposed and because Gatherco's primary function is the non-jurisdictional gathering of natural gas, the Commission will issue a certificate of limited jurisdiction to authorize Gatherco to perform these limited activities without the full panoply of NGA rate and service obligations. Under such a certificate, jurisdiction extends only to the specific activity authorized, and the gatherer remains nonjurisdictional with respect to its remaining non-jurisdictional gathering operations. Accordingly, this order grants Gatherco the requisite authorization to transport and deliver gas to LDCs on its system as described in the record. (footnotes omitted) Gatherco is not regulated by the Public Utilities Commission of Ohio, and does not qualify for a Hinshaw exemption as discussed below. More recently, FERC held that Norse 11

13 Pipeline, L.L.C. could not use its gathering lines purchased from Columbia to receive gas from an interstate pipeline for delivery to an electric generating facility unless it obtained a certificate of public convenience and necessity. Nornew Energy Supply, Inc., Docket No. CPO1-94, Jan. 16, Intrastate Pipelines. Another federal consideration is the Natural Gas Policy Act of 1978, 15 U.S.C. 3301, et seq. ( NGPA ). Section 311 of the NGPA provides that FERC may authorize intrastate pipelines to transport natural gas on behalf of an interstate pipeline or an LDC served by an interstate pipeline. 15 U.S.C. 3371(a)(2). The statute goes on to specify that rates for such service must be fair and equitable. The FERC promulgated regulations governing such transportation in 18 CFR Part 284. Generally, the regulations provide that intrastate pipelines providing NGPA 311 transportation service must do so on an open-access, non-discriminatory basis and charge fair and equitable rates as determined by FERC or a state regulatory agency. Companies need to be attentive to the fact that the receipt of gas from anyone other than producers at the wellhead might carry federal jurisdictional consequences. 4. Hinshaw Pipelines. The backfeeding of gas mentioned above would qualify for a Hinshaw exemption under section 1(c) of the Natural Gas Act, 17 U.S.C. 717c, but only if the state is actually setting the rates for the service. The Hinshaw exemption is perhaps most succinctly set forth in FERC s regulations in 18 CFR 152.1(a), which provides for applications to be filed for exemptions from the Natural Gas Act by any person engaged in transportation in interstate commerce for sale or resale, of gas received by applicant from another person within or at boundary of a State, if all of the gas so received is ultimately consumed in such State, PROVIDED, rates and services of applicant and its facilities are subject to regulation by a State Commission and the State Commission is exercising that jurisdiction. Another option (perhaps unpalatable) to avoid federal regulation in this circumstance is to submit to state rate regulation. D. THE AUTHORITY OF THE STATE AND THE UNITED STATES DEPARTMENT OF TRANSPORTATION TO REGULATE THE SAFETY OPERATIONS OF PIPELINES 1. West Virginia. W. Va. Code 24B-2-1 sets forth the jurisdiction of the Commission concerning safety standards as follows: The commission shall have power and authority to prescribe and enforce safety standards for pipeline facilities, and to regulate safety practices of persons engaged in the transportation of gas or hazardous liquids, to the extent permitted by the Act of 1968 and the Act of 1979 and any amendments thereto. Such standards may apply to the design, installation, inspection, testing, construction, extension, operation, replacement and maintenance of pipeline facilities. Standards affecting the design, installation, construction, initial inspection and initial testing shall not be applicable to pipeline facilities in existence on the date such 12

14 standards are adopted. Whenever the commission shall find a particular facility to be hazardous to life or property, it shall be empowered to require the person operating such facility to take such steps necessary to remove such hazards. Such safety standards shall be practicable and designed to meet the need for pipeline safety.... (emphasis added) A pipeline facility is defined as new and existing pipe, pipe rights-of-way and any equipment, facility, or building used in the transportation of gas or the treatment of gas during the course of transportation, or used in the transportation of hazardous liquid or the treatment of hazardous liquid during the course of transportation. An important point to note is that the statutory authorization is not limited to pipeline facilities owned by utilities or intrastate pipelines, nor does it exclude production facilities. The implementing regulations for the safety provisions in the code are found at 150 CSR 4, 9, Rules and Regulations Governing Gas Pipeline Safety. These regulations adopt by reference the regulations promulgated by the Office of Pipeline Safety of the United States Department of Transportation, published in Title 49 CFR Parts 191, 192, 195 and 199, and specify that they shall apply to all pipeline companies and interstate transmission facilities. The regulations then define a pipeline company as a person engaged in the operation of pipeline facilities or the transportation of gas subject to the provisions of Chapter 24B of the West Virginia Code, which would include public utilities and intrastate pipelines and gathering lines if the current regulatory exemption is revoked. The federal program does not apply to rural gathering lines. The issue of the regulatory authority of the Commission to require rural gathering systems to comply with the pipeline safety regulations was brought before the Commission on November 17, In that case, the PSC staff was asserting jurisdiction over an eight mile long, six inch diameter pipeline which transported gas from a number of wells to a distribution company. The Commission did not get to the merits of the definition of gathering or to the scope of its jurisdiction because it determined that a safety issue was not involved. The Commission concluded that, Where safety is not being compromised and there is ongoing rulemaking at the federal level to deal with the issue of defining what constitutes a transmission line and/or a gathering line, it is prudent to dismiss this case and postpone making a jurisdictional decision until the Department of Transportation has dealt with this issue. In Re T & F Operating, Inc., Case No G-PC, Order filed July 30, The Commission has not had occasion to revisit the scope of its authority since the U.S. Department of Transportation revised its rules to more clearly define the differences between gathering and transmission lines. 3. Federal Statutory Provisions. Since state law provides for regulation of pipeline safety to the extent permitted under federal law, a review of the Natural Gas Pipeline Safety Act of 1968 and the Hazardous Liquid Pipeline Safety Act of 1979 is necessary. The Natural Gas Pipeline Safety Act is found at 49 U.S.C. 60,101 et seq. Generally, the statute provides that the Secretary of Transportation shall prescribe the minimum safety standards for pipeline transportation and for pipeline facilities. The standards apply to 13

15 transporters of gas and hazardous liquid and to owners and operators of pipeline facilities. 49 U.S.C (1)(1)(A). The statute defines transporting gas as meaning (A)...the gathering, transmission, or distribution of gas by pipeline, or the storage of gas, in interstate or foreign commerce; but (B) does not include gathering gas, other than gathering through regulated gathering lines, in those rural locations that are located outside the limits of any incorporated or unincorporated city, town, or village, or any other designated residential or commercial area (including a subdivision, business, shopping center, or community development) or any similar populated area that the Secretary determines to be a nonrural area, except that the term transporting gas includes the movement of gas through regulated gathering lines; 49 U.S. C (21). In 2006, the federal Office of Pipeline Safety, after years of study, finally adopted definitions generally recommended by the American Petroleum Institute to distinguish between transmission lines and gathering lines. These complicated definitional distinctions and the precise requirements of the safety regulations are well beyond the scope of this paper. There are, nonetheless, important points to be noted in connection with the safety regulations. First, while it is possible that a company might not be subject to federal or state rate regulation, it might still be subject to pipeline safety jurisdiction by a state or federal agency. Second, the definitions of transmission and gathering are different in the two different regulatory regimes. A gathering line for state ratemaking purposes may not be a gathering line under pipeline safety standards, or it may be a regulated gathering line under the federal safety statute. Finally, the Commission may try to assert safety authority over rural gathering lines independent of the federal program. There is no precedent for such an administrative action, but the Commission has put the industry on notice that it believes it has such authority in its order in the T & F Operating, Inc. case as follows:...the Commission may have safety jurisdiction by virtue of W. Va. Code 24B regardless of whether a pipeline is an intrastate transmission pipeline. Since neither Staff nor T&F have addressed this possible basis of jurisdiction, and given the Commission s decision, this point need not be further developed. As a final but important note regarding pipeline safety, neither the state nor the federal regulations distinguish between interstate or intrastate transportation. Only gathering, transmission and distribution operations are recognized. A distinct possibility exists that a gathering pipeline in a densely populated area, not regulated by the State, could be subject to federal pipeline safety standards. 14

16 E. CONCLUSION Pipeline companies have many challenges. The regulatory issues covered in this paper do not touch upon many other legal and practical issues. For example, whether an intrastate pipeline can obtain a certificate of public convenience and necessity from the Commission and exercise powers of eminent domain is an open question. Right-of-way issues abound, for example, where heirs to property cannot be located. Environmental issues both air and water are serious concerns. From a practical standpoint, even interruptible access to an interstate pipeline and the time necessary to have a tap request granted and installed can be serious barriers to development of pipelines. Adequate processing facilities, and what to do with the ethane, are also serious issues facing the industry. Tackling all of them is not for the faint of heart. 15