Fortnightly
Gas Pipelines and the Hinshaw Amendment: Conflicts Loom as the "Bright Line" Fades Between Federal and State Jurisdiction
April 01, 1997
By Roger A. Berliner, John W. Jimison, and Peter G. Hirst
Recent rulings have left LDCs wondering exactly who is protected by Hinshaw \(em if anyone.
The Hinshaw Amendment, %n1%n having escaped much notice for 40-odd years, lately has become a hotbed
of controversy. The question concerns how to divide federal and state authority over natural gas markets. Recent court rulings threaten to upset the current federal-state scheme established by the Natural Gas Act. Importantly, however, the issues involve more than just natural gas pipelines \(em the industry for which the law was written. They may well spill over to the electric utility industry, where federal-state conflicts complicate efforts to introduce regulatory reform.
Added to the Natural Gas Act in 1954, the amendment was conceived as a way to avoid another layer of federal regulation over intrastate pipelines already subject to state oversight. Congress sought to draw a "bright line," exempting intrastate pipelines from federal jurisdiction under the NGA. The exemption applied if the gas was received at the state border and consumed within the state, while subject to state regulation.
Today, however, that bright line is fading. Two recent decisions from a federal appeals court illustrate the gradual erosion and ensuing confusion of the demarcation between federal and state jurisdiction. In United Distribution Co. v. FERC, which challenged Order 636, the court upheld the FERC's assertion of jurisdiction over local distribution companies brokering interstate capacity. Then, in Altamont v. FERC, which challenged a series of FERC orders issuing certificates to Pacific Gas Transmission Co. for expansion of its interstate pipeline, the court took a sharply different slant by rejecting the FERC's authority to protect interstate shippers in the face of policies adopted by the California Public Utilities Commission that subjected interstate gas transportation to an illegal tying arrangement. These recent rulings threaten to distort the work of Congress, which designed the Hinshaw Amendment to eliminate duplication of federal and state jurisdiction over natural gas pipelines.
And while the debate rages in legal terms, the exercise is more than academic. There are real dollars at stake, big dollars. Just ask shippers on the Pacific Gas
Transmission line who were forced to pay an additional 45 cents for unwanted transportation within California. Or ask the local distribution companies that seek to profit by selling interstate capacity rights at market-driven rates.
Nor is it a coincidence that these challenges have occurred at a time of great regulatory change in the manner in which both the gas and electric transmission grids operate. Gas markets have changed with the arrival of unbundled services, brokering and trading of transmission capacity, and pipeline expansion across state boundaries and international borders. These developments have sharply altered the dynamic of the Hinshaw Amendment. In short, the amendment is under siege. It now lies at the core of a critical inquiry into the scope of authority exercised by the Federal Energy Regulatory Commission, both in gas and electric matters.
In this inquiry, punctuated by "murky" FERC opinions (as characterized by FERC Commissioner Hoecker) and conflicting court decisions, it is only fitting that California should take center stage. After all, California was the home state of Congressman Hinshaw. But more than that, California has served as a lightning rod for federal-state conflicts in gas pipeline regulation. It is also the state that fought the most vigorously against an end to its own jurisdictional hegemony when interstate pipelines first sought to increase service within the state.
The View From Northern California
The PGT expansion case involved a sequence of FERC
decisions related to a parallel expansion not only of PGT's interstate pipeline but PGT parent PG&E's intrastate transmission system as well. %n2%n The FERC identified an abuse of interstate shippers on PGT by Hinshaw-protected PG&E (an illegal "tying" requirement that they also pay certain PG&E tariffs). The FERC initially banned construction of the expansion until the condition was eliminated. But the FERC backed off from that remedy when the California PUC \(em which had approved the PG&E tariff condition \(em promised to revisit the issue. In addition, the FERC did not want to block needed capacity. Instead, the FERC imposed a financial penalty on the interstate pipeline. Ultimately, interstate shippers lost any protection when the CPUC reaffirmed its "crossover ban," and the D.C. Circuit Court rejected the FERC's limited financial remedy as an improper attempt to influence Hinshaw-protected state rate regulation.
In the Pacific Gas expansion certificate proceeding, PGT and Pacific Gas & Electric had originally sought a single certificate for transportation from the Canadian border on PGT to Southern California on PG&E's companion expansion. Competing shippers seeking markets in Northern California claimed it was not an accident that the project bypassed the prized Northern California markets of PG&E. PG&E's wholly owned affiliate, Alberta & Southern, exclusively had served these prized markets. The shippers argued that it was unduly discriminatory to force them to pay for the facilities within California as a condition to obtaining transportation on the interstate system. The FERC agreed.
The Commission ordered PGT to hold a new open season. It also required PGT to offer shippers a delivery point at Malin, Ore., the terminus of the PGT system where it interconnects with PG&E. Finally, the Commission ordered PGT to remove any tariff provisions requiring service on the PG&E expansion. PGT did not contest that ruling ... directly. Instead, the project devised a strategy to circumvent the FERC's order. At the heart of that strategy was the use of its Hinshaw pipeline and its ability to play one regulatory jurisdiction against the other.
Shortly after the FERC's order untying the two projects, PGT's president wrote President Eckert of the California Public Utilities Commission a letter. The letter was not shared with any of the case's parties. He asked the CPUC to ban any shipper from crossing over from the PGT expansion to the existing PG&E facilities. PGT's president acknowledged in the letter that some shippers on PGT would not sign up for the PG&E expansion without a crossover ban. He maintained this lack of sign ons was causing a "mismatch" of capacity rights.
PGT's president did not say PG&E was concerned that the FERC's untying of the two Malin projects would leave PG&E unable to recover 100 percent of the $800-million PG&E expansion. These were the same costs the CPUC had said would be "at risk." The letter also did not say PG&E was concerned that PGT expansion shippers competing in Northern California on an equal footing with PG&E would financially hurt its affiliated supplier.
Failing to obtain a formal response to this request, PGT's parent, PG&E filed a petition before the CPUC requesting a crossover ban. PG&E sent the petition to prospective PGT expansion shippers a scant one day before their commitments on PGT would be binding for 30 years. The crossover ban prohibited the sale of any firm gas at the border unless it was first subject to the PG&E expansion toll to Southern California. The ban affected any gas reaching the California border via PGT's expansion with firm transportation rights to Malin.
Initially, the FERC responded to the CPUC's actions by declaring the PGT expansion contrary to the public's interest. The Commission declared the tying arrangement anti-competitive. The Commission prohibited construction until they remedied the discrimination. However, the FERC's action did not hold.
The FERC received significant pressure from California Gov. Wilson, PGT, PG&E, and their allied shippers in Southern California and the Pacific Northwest. In addition, genuine confusion ensued over the FERC's own jurisdiction in light of the CPUC's orders.
Without changing its underlying findings of discriminatory shipping arrangements, the FERC voted by a 3-2 margin to allow the project to go forward. The project was subject only to a 2-percent rate-of-return penalty on PGT. The penalty would remain in place until the source of the discrimination was removed. The FERC claimed it did not have jurisdiction to order removal of the effect of the discrimination. Neither PG&E nor the CPUC budged on the requirement to use the PG&E expansion. The shipping requirements remain in place today, more than three years after the system became operational.
FERC's Southern California Exposure
The FERC has continued to straddle the jurisdictional line, even when the results produce irreconcilable decisions. In September 1996, the FERC found that a charge imposed on interstate shippers by Southern California Gas Company (SoCal Gas) violated the Natural Gas Act. %n3%n The FERC stopped short, however, of ordering refunds of more than $3 million to the interstate shippers because of SoCal's Hinshaw status.
SoCal imposed the access charge on interstate shippers using the Kern/Mojave system at the Wheeler Ridge Interconnection with SoCal Gas' system. The CPUC had authorized the charge.
The CPUC's approval of the charge was based on its own narrow interpretation of the geographical boundaries governing federal and state jurisdiction. The CPUC found that shippers delivering gas to SoCal, and subject to the interconnection charge, were transformed into SoCal intrastate customers. The shippers were transformed because they opted to receive gas and transportation by SoCal in California. The complainants argued that they already paid the FERC-approved rate for interstate transmission service on the Kern/Mojave system and that SoCal's interconnection charge was an illegal add-on.
Briefly reciting the legislative history surrounding the Hinshaw Amendment, the FERC sided with the interstate shippers. The Commission found the SoCal charge did not fall within the Hinshaw exemption. To make this finding, the FERC relied on a mechanical analysis similar to that performed by the CPUC to support the other side. The FERC said the charge was imposed for moving gas over the Kern/Mojave pipeline and delivering it to SoCal.
The FERC drew the line both geographically and based on who has title to or possession of the gas. The FERC stated, "We interpret the exemption as drawing the line of demarcation between federal and state regulation at the point when the intrastate company receives the gas from an interstate shipper."
Thus, the FERC defined its "exclusive" federal jurisdiction as extending until the local distribution company receives the gas, including its jurisdiction with respect to the interstate shippers who deliver the gas to SoCal.
The interstate shippers sought refunds of the interconnection charges. The FERC denied the refund. The Hinshaw exemption was back in play. The FERC said that since SoCal is a Hinshaw pipeline, it is not subject to the FERC's jurisdiction and power to order refunds under the Natural Gas Act.
However, interstate shippers can take scant comfort in being right. The Natural Gas Act requires the FERC to protect interstate shippers from the effects of discriminatory acts. Not only had the FERC failed to find a way to compensate the shippers for their losses, it has contradicted its own jurisdiction in doing so. The FERC had asserted its authority to regulate the rates of Hinshaw-exempt SoCal. Yet, the FERC also claimed it did not have the jurisdiction to order refunds because SoCal is exempt from federal regulation.
As Commissioner Hoecker noted in his dissent in the Union Pacific case, the FERC's duty in the face of an NGA violation is to protect those purchasing jurisdictional services. He also noted that the Commission's discretionary power is at its zenith when fashioning an equitable remedy like restitution. "Rights and remedies must be congruent; in other words, a right is no better than its remedy."
The Court's Inconsistent View of the Hinshaw Amendment
Regrettably, the District of Columbia Circuit has now echoed the FERC's own inconsistent treatment of its jurisdictional reach.
Altamont v. FERC. In Altamont v. FERC %n4%n, the court reviewed the FERC's actions in the PGT expansion case. Significantly, the court strongly implied that the FERC had the authority to disregard PG&E's Hinshaw status. The court also implied the FERC could assume jurisdiction over the entire project with "a proper evidentiary record." Since the FERC declined to exercise that prerogative, the court held the Commission was powerless in the matter. The FERC could not even "consider" the matter. The court said Congress had delegated to the states authority over Hinshaw pipelines. Shippers in the case have asked the Supreme Court to review the decision. %n5%n
This attempt to walk the bright line \(em even in the face of a clear conflict of authority vis-a-vis the crossover ban \(em leads the court to a conclusion that is insupportable.
The FERC was attempting to apply its jurisdictional power to condition PGT's certificate to
protect interstate shippers. In rejecting the FERC's authority, the court concludes that the crossover ban is merely an element of PG&E's rate design. The court called the ban a bookkeeping convention rather than a regulatory bar to pipeline access.
The court adopted this characterization of the crossover ban to support its conclusion that the FERC is powerless to consider matters subject to state jurisdiction. Powerless, even if those matters are relevant to issues within the FERC's immediate domain. This is the same ban described by PGT expansion shippers and the FERC as an illegal tying of interstate and intrastate commerce.
By characterizing the ban in such a way, the court is, in part, compounding the confusion that surrounds the Hinshaw Amendment. This confusion reaches every facet of today's natural gas industry \(em unbundling, restructuring, capacity brokering and trading. However, the court also is ignoring a long line of judicial decisions. These decisions have, at a minimum, accorded deference to the FERC's ability to consider nonjurisdictional matters as they affect its own jurisdiction.
Most disturbingly, the court narrowly construes one preeminent case in this field, FPC v. Conway Corp. %n6%n The Conway case gives the FERC broad power to consider nonjurisdictional matters if the undue discrimination at issue is "in any way" traceable to the FERC's jurisdictional rates. The petitioners in the Altamont case clearly believed they met that hurdle and more: The crossover ban was directed at gas arriving at the border under the PGT's expansion, firm-rate schedule. In the FERC's current efforts to restructure the electric industry, it will look at unbundling behind the city gate to assess market power. How can the decision in Altamont be squared with what the FERC believes is not only its right but its obligation in electric power restructuring?
United Distribution Co. v. FERC. Moreover, squaring the court's ruling in Altamont is difficult when a second, contradictory ruling was made within days in the very same court. In United Distribution Co. v. FERC %n7%n, the District of Columbia Circuit considered challenges to the FERC's Order No. 636. The court upheld the FERC's jurisdiction and affirmed its termination of the CPUC-approved buy/sell arrangement. The court also supported the FERC's regulation in the LDC transfer and reassignment of capacity held on interstate pipelines. The Commission had properly asserted its authority.
In part, the court ruled in favor of the FERC in United because the issues in question were "firmly grounded" in the transportation transaction subject to the FERC's jurisdiction. The transaction fell within the FERC's jurisdiction despite prior approval by state regulatory authority or the LDCs' regulation by the same state authority.
The court firmly rejected the LDCs' argument that the FERC wrongly asserted jurisdiction over their own trading of interstate capacity. Again, the court emphasized that "the Commission's jurisdiction attaches to the subject of the capacity resale transaction: interstate transportation rights." The court contrasted the regulatory regime envisioned by the LDCs and predicted that under such a scheme: "holders of capacity rights could engage in resales without regard to the principals of open access and nondiscrimination that are at the heart of the uniform capacity release system. Such a result is directly contrary to Congress' intent in enacting the Natural Gas Act."
Congressional Intervention vs. the FERC's Regulatory Role
Some would argue that congressional intervention may be necessary to realign federal and state regulatory roles. Congress may do just that. A leading congressional figure has indicated an interest in addressing the Hinshaw Amendment. The amendment could be addressed in the context of electricity restructuring legislation currently under consideration by Congress.
A broader congressional inquiry could explore the extent to which they should redraw the bright line to focus upon transmission versus distribution systems. For example, in both the PG&E and SoCal situations, the pipes on either side of the jurisdictional line are identical \(em 36-inch to 42-inch transmission facilities. PG&E actually describes these facilities as "backbone transmission." It is worth debating whether the FERC or the states should regulate what essentially are interstate transmission services. Doing this would leave to the states all of the facilities and issues inherent in a pure distribution context.
Such an inquiry could affirm what the court in Altamont suggested \(em that the FERC can and should disregard the separate corporate status of integrated pipeline systems. The inquiry also could find that the FERC can exercise its jurisdiction over previously recognized Hinshaw pipelines. The Commission's two recent cases, KansOk %n8%n and Centana %n9%n, exercised the authority suggested by Altamont. Such an exercise of authority is compelled where three elements are present: (1) the Hinshaw and interconnected jurisdictional pipeline are closely affiliated entities; (2) the transmission portion of the Hinshaw pipeline operates as an
integrated part of the interstate system; and (3) where the failure to exercise jurisdiction over the Hinshaw would frustrate the FERC's policies or otherwise allow abuses.
If this test were applied to PGT and PG&E, the FERC would be well within its authority to assert jurisdiction over PG&E's transmission facilities.
At a minimum, clarification is obviously required to end the murkiness. This need for clarification underscores the FERC's obligation to address all matters that affect its fundamental responsibility to interstate shippers. The FERC should not back down from its jurisdictional obligations. The FERC can exercise its jurisdiction without directly challenging the rights of the states to regulate their intrastate facilities. However, the FERC must fully protect interstate shippers, such as those PGT expansion shippers that signed 30-year binding contracts in reliance upon the FERC's authority to
protect them from unduly discriminatory practices. In today's restructured gas industry, protecting interstate shippers lies at the very heart of the FERC's responsibility under the Natural Gas Act. t
Roger A. Berliner, John W. Jimison and Peter G. Hirst are attorneys with Brady & Berliner, P.C.
115 U.S.C.§717(c), added to the Natural Gas Act in 1954.
2Pacific Gas Trans. Co., Dkt. Nos. CP89-460-000 et al., Jan. 22, 1991, 54 FERC ¶61,035 (preliminary determination on nonenvironmental issues); Dkt. Nos. CP89-460-003 et al., Aug. 1, 1991, 56 FERC ¶61,192 (order issuing certificate); Dkt. Nos. CP89-460-000 et al., Oct. 24, 1991, 57 FERC ¶61,097 (order on report); Dkt. Nos. CP89-460-008 et al., March 16, 1993, 62 FERC ¶61,243 (order on rehearing).
3Union Pacific Fuels, Inc. v. So. Cal. Gas Co., Dkt. No. RP93-197-000, Sept. 19, 1996, 76 FERC ¶61,300 ("Union Pacific").
4Altamont Gas Trans. Co., et al. v. FERC, 320 U.S.App.D.C. 42, 88 F.3d 1239 (D.C.Cir.1996).
5The authors represent the shippers in this petition for certiorari.
6FPC v. Conway Corp., 426 U.S. 271 (1976).
7United Distr. Cos., et al. v. FERC, 319 U.S.App.D.C. 42, 88 F.3d 1239 (D.C.Cir.1996).
8KansOk Partnership, Dkt. No. RP95-212-003, June 5, 1996, 75 FERC ¶61,264.
9Centana, 78 FERC ¶61,194.
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