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Williams Gas Processing – Gulf Coast Co., L.P. v. Fed. Energy Reg. Commn., 475 F.3d 319 (D.C. Cir. 2006)
Josh Clemons
In December the U.S. Court of Appeals for the D.C. Circuit vacated two orders by the Federal Energy Regulatory Commission (FERC) concerning natural gas pipelines off the Louisiana coast, sending the agency back to the drawing board.
Factual Background
This case arose from the difficulty that a government agency, in this case FERC, has in applying its relatively simple statutory mandate to the complexities of the physical world.
Williams Gas Processing-Gulf Coast Co. (Williams) and Transcontinental Gas Pipe Line Corp. (Transco) operate natural gas pipelines off the coast of Louisiana. Congress has given FERC jurisdiction over natural gas pipelines in the Natural Gas Act.1 However, FERC’s jurisdiction extends only to pipelines that “transport” natural gas, and not to those that merely “gather” it. FERC is obligated to use a defensible rationale to distinguish between these two types of pipeline.
In 2001 FERC determined that it lacked jurisdiction over a Transco pipeline that lies downstream of Jupiter Energy Corp.’s pipeline facilities. Two years later the agency determined that it did have jurisdiction over a Jupiter Energy pipeline that fed into that Transco pipe. As a result of these two decisions, FERC was in the strange position of having jurisdiction over a pipeline that flowed into a pipeline over which it lacked jurisdiction. For this reason the Fifth Circuit vacated FERC’s order with respect to the Jupiter pipeline. FERC subsequently issued a decision concluding that it had jurisdiction over Transco’s pipeline because it served a transportation function.
In 2005 FERC issued two decisions in an attempt to settle the situation. The first decision affirmed jurisdiction over the Jupiter pipeline. The second affirmed jurisdiction over the Transco pipeline. This Transco decision was being challenged in this case. (The Jupiter decision is being challenged in the Fifth Circuit.)
Williams and Transco argued before the D.C. Circuit that FERC could not lawfully reconsider its original jurisdictional finding because it had issued its decision in final orders that were affirmed by a court. They also argued that FERC had based the finding on an incorrect interpretation of the facts, and the agency had therefore failed to support its findings adequately.
Evolution of the “Primary Function” Test
Under the Natural Gas Act, FERC is charged with regulating “the transportation [transmission] of natural gas in interstate commerce” but cannot regulate “the production or gathering of natural gas.”2 In general, a “gathering” pipeline is one that collects gas from its source (a well or wells). The gathering pipeline then delivers the gas to a pipeline that will transport the gas in interstate commerce.
The complexity of pipeline systems can make it difficult to draw this deceptively simple jurisdictional line. At one time FERC embraced the “primary function test,” which utilized six fairly simple factors to assess a pipeline’s physical characteristics. The Fifth Circuit rejected that test as overly simplistic.3 FERC then modified the test to take into account important nonphysical criteria. The Fifth Circuit remained unsatisfied, and rejected the test again.4
FERC went back to the drawing board and devised a test that it believed would allow it to consistently and accurately identify the point at which “gathering” ends and “transportation” begins. The first key change to the test was a decrease in emphasis on the pipeline’s physical location relative to the processing plant. The second change was the addition of an inquiry into whether a “central location” exists where gas is “aggregated for further transportation to shore.”5
Using this new and improved “primary function” test, FERC in 2001 made a series of determinations that resulted in a “muddle” of gathering pipelines that fed into transportation pipelines that fed into gathering pipelines.6 The Fifth Circuit overturned these determinations as being arbitrary and capricious because FERC had acted against its own principle that there is an identifiable single point at which gathering ends and transportation begins. As a result of this decision, FERC classified a 24-inch lateral owned by Transco as a “transportation” pipeline.
Transco, believing that FERC’s 2001 decision disclaiming jurisdiction should have stood, petitioned FERC for a rehearing. FERC denied this petition on the grounds that the 2001 decision was based “on the basis of incomplete information” and “no gas is collected along the length of Transco’s downstream line.”7
Legal Analysis
When a court reviews an agency decision, the standard of review is simple: the agency’s decision must not have been “arbitrary and capricious,” which means that the agency must have had a reasonable basis for its decision. The agency should also have clearly expressed its rationale. Underlying this deferential standard is the principle that specialized agencies are generally more qualified than courts to address complicated factual situations in their areas of expertise.
The core issue, as Transco and Williams saw it, was that FERC had purportedly applied the same test to the 24-inch lateral pipeline in 2005 as it did in 2001 yet reached an entirely different conclusion. The agency, Transco and Williams argued, did not have adequate reasoning to support this switch.
“Incomplete Information”
When FERC reclassified the 24-inch lateral in 2005, it claimed that the 2001 decision was based on “incomplete information” about the lateral’s location relative to other transportation pipelines. FERC claimed that it obtained additional information later, but the court opined that the agency did not adequately explain how this information mandated reclassification in light of apparently conflicting policy: whereas FERC had previously claimed that jurisdiction over an upstream facility does not determine jurisdiction over a downstream facility, the agency now argued the opposite.
The inconsistency in FERC’s policy did not end there. The court isolated two jurisdictional principles that FERC seemingly abandoned in its reclassification of the 24-inch lateral. The first principle, which FERC asserted in 1996, was that there is a definite, determinable point at which gathering ends and transportation begins. The second was that a transportation facility cannot feed into a gathering facility.
The court found that FERC defied these principles without convincingly establishing its basis for doing so. The agency’s “incomplete information” rationale was insufficient to sustain its deviation from policy. Thus, the decision reclassifying the 24-inch lateral was ruled to be arbitrary and capricious.
Conclusion
The D.C. Circuit vacated FERC’s 2005 orders and sent the issue back to the agency for further consideration. The agency is now obligated to provide a decision based on clearly articulated reasoning.
.Endnotes
1. 15 U.S.C. §§ 717-717z.
2. Id. § 717(b)
3. EP Operating Co. v. FERC, 876 F.2d 46 (5th Cir. 1989)
4. Sea Robin Pipeline Co. v. FERC, 127 F.3d 365 (5th Cir. 1997).
5. Id.
6. Williams Gas Processing – Gulf Coast Co., L.P. v. Fed. Energy Reg. Commn., 475 F.3d 319, 325 (D.C. Cir. 2006).
7. Id. at *6 |