[Federal Register Volume 60, Number 108 (Tuesday, June 6, 1995)]
[Notices]
[Pages 29841-29844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13770]



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DEPARTMENT OF ENERGY
[Docket No. RP95-212-000]


Order To Show Cause

    Issued May 31, 1995.

    In the matter of KansOk Partnership; Kansas Pipeline 
Partnership; Kansas Natural Partnership; Riverside Pipeline Company, 
L.P.

    On November 30, 1993, KansOk Partnership (KansOk) filed a petition 
for rate approval in Docket No. PR94-3-000 to justify its firm and 
interruptible transportation rates for service performed under section 
311 of the Natural Gas Policy Act of 1978 (NGPA). Western Resources, 
Inc. (Western Resources) filed a protest contending that KansOk is an 
interstate pipeline, and not an intrastate pipeline as claimed, because 
of the interstate nature of its transportation service. The Commission 
will address KansOk's rate filing in Docket No. PR94-3-000 in an order 
issued concurrently with this order. The instant order establishes a 
separate show cause proceeding, pursuant to sections 5, 7, and 16 of 
the Natural Gas Act (NGA), to investigate Western Resources' claims.\1\

    \1\ In addition, the Commission notes that at a staff panel 
proceeding convened on December 1, 1994 in Docket No. PR94-3-000, 
Missouri Gas Energy also argued that KansOk and its affiliates 
should be considered an interstate pipeline subject to Commission 
jurisdiction. See Tr. at 25.
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    As discussed below, the Commission is requiring KansOk and its 
downstream affiliates, Kansas Pipeline Partnership (Kansas Pipeline), 
Kansas Natural Partnership (Kansas Natural), and Riverside Pipeline 
Company, L.P. (Riverside), to show cause: (1) Why all four affiliates 
should not be viewed collectively as one interstate pipeline system 
subject to the Commission's jurisdiction; and (2) in the alternative, 
why KansOk, by itself, should not be considered an interstate pipeline 
subject to the Commission's jurisdiction.

A. Description of the Pipelines

    KansOk owns and operates two distinct segments of pipeline, the 
West Leg and East Leg, totalling approximately 114 miles of pipeline. 
Both the West Leg and East Leg are [[Page 29842]] located solely within 
the state of Oklahoma. At the southern end of the East Leg in Oklahoma, 
KansOk interconnects with Transok, Inc. (Transok), an intrastate 
pipeline. KansOk leases capacity on Transok, and has firm contracts for 
transportation on the East Leg for a maximum of 95,000 MMBtu/day. The 
West Leg of KansOk interconnects with gathering facilities at its 
southern terminus and transports only interruptible volumes.
    At their northern termini, KansOk's West and East Legs 
interconnect, respectively, with the western and eastern segments of 
Riverside. Riverside is an interstate pipeline consisting of: (1) two 
segments of 1-mile pipeline crossing the Oklahoma-Kansas border at two 
separate locations; and (2) a third segment of 2-mile pipeline crossing 
the Kansas-Missouri border. The Kansas-Missouri segment was authorized 
under NGA section 7 in 1989.\2\ In 1992, Riverside constructed the two 
Oklahoma-Kansas segments pursuant to NGPA section 311.\3\

    \2\ See Riverside Pipeline Co., L.P., 48 FERC para. 61,309 
(1989).
    \3\ See responses to Staff Data Request No. 2 in KansOk 
Partnership, Docket No. PR91-6-000.
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    In Kansas, at their northern termini, the Riverside segments 
interconnect at two points with Kansas Natural, an intrastate pipeline. 
Kansas Natural then continues in a northeasterly direction through 
Kansas where it interconnects at two points with Kansas Pipeline, 
another intrastate pipeline.\4\ The two segments of Kansas Pipeline 
then continue approximately 64 miles to an interconnection with the 
Riverside pipeline segment at the Kansas-Missouri border, which 
completes the network in Kansas City, Missouri. Through this series of 
interconnections, gas flows from gathering fields in Oklahoma to 
markets in the Kansas City metropolitan area through five pipeline 
systems, all of which are affiliated except Transok. Further, KansOk, 
Riverside, Kansas Natural, and Kansas Pipeline all are operated by 
Kansas Pipeline Operating Company (KPOC).

    \4\ By order dated March 17, 1995, the Kansas Corporation 
Commission authorized Kansas Natural and Kansas Pipeline to merge. 
The merger has not taken place yet.
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    On April 19, 1995, Riverside filed a proposal in Docket No. RP95-
239-000 to establish a new Multiple Pipeline Transportation service. 
Riverside would contract for capacity, as available, on its upstream 
affiliated pipelines to provide transportation on those pipelines for 
new or existing firm shippers on its own system. The maximum and 
minimum rates for the proposed service would be the sum of the 
effective maximum and minimum rates of the transporting pipelines.
B. Prior Commission Orders

    On February 6, 1992, a Letter Order was issued by direction of the 
Commission approving a settlement of the rate issues raised in KansOk's 
first proceeding, which it filed pursuant to NGPA section 311.\5\ At 
that time, no party contested KansOk's claim to be an intrastate 
pipeline.\6\ The record indicates that KansOk's 1990 actual 
transportation volumes consisted of 2.6 percent intrastate volumes and 
97.4 percent NGPA section 311 volumes.\7\

    \5\ See KansOk Partnership, 58 FERC para. 61,152 (1992).
    \6\ We note that in authorizing the construction of Riverside's 
initial system under the NGA, the Commission discussed an argument 
that the Hinshaw status of Riverside's affiliate, Kansas Pipeline, 
should be reconsidered. See Riverside Pipeline Company, L.P., 48 
FERC para. 61,309, at 62,015-16 (1989). However, that case involved 
the issue of a single affiliate in one state, not a chain of 
affiliates claiming three different types of jurisdictional status.
    \7\ See Exhibit D to KansOk's February 11, 1991 Response to 
Staff's December 18, 1990 Data Request, which states that KansOk 
transported 31,672 Mcf of gas intrastate and 1,168,131 Mcf of gas 
under NGPA section 311, for a yearly total of 1,199,803 Mcf.
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    KansOk's filing in Docket No. PR94-3-000 was made pursuant to a 
requirement in the February 6 order that KansOk file, on or before 
December 1, 1993, an application for rate approval to justify its 
current systemwide rates or to establish new systemwide rates. As 
stated, this show cause proceeding arises from Western Resources' 
protest in Docket No. PR94-3-000 claiming that KansOk is not an 
intrastate pipeline.

C. Western Resources' Protest

    Western Resources argues that KansOk is an interstate pipeline, 
rather than an intrastate pipeline, because of the interstate nature of 
its transportation service. Specifically, Western Resources states that 
since June 1991, 100 percent of the volumes transported by KansOk on 
the East Leg, and over 99 percent of the volumes transported by it on 
the West Leg, were delivered to the interstate market, to customers in 
Kansas and Missouri. Only a de minimis amount of KansOk's business was 
intrastate. Specifically, Western Resources claims that the volumes 
moved intrastate on the West Leg in the first five months of KansOk's 
operations constituted only 0.3212 percent of the volumes moved on the 
West Leg, 0.1014 percent of KansOk's interruptible volumes, and 0.0133 
percent of KansOk's total system volumes. All of the transportation 
performed by KansOk on the West Leg was interruptible, while the 
transportation performed on the East Leg was firm and interruptible. 
KansOk does not dispute these figures.
    In support of its argument that KansOk is an interstate pipeline, 
Western Resources cites Midcoast Ventures I (Midcoast),\8\ where the 
Commission, finding that the pipeline was an interstate pipeline, 
stated that it ``has never ruled that a company could qualify as an 
intrastate pipeline without doing any intrastate business in the state 
where it claims intrastate status.'' \9\ Western Resources argues that, 
under the Midcoast rationale, KansOk's de minimis intrastate operations 
do not qualify it to be an intrastate pipeline. Further, Western 
Resources points out that KansOk is not regulated by the Oklahoma 
Corporation Commission. Western Resources contends that, at a minimum, 
the East Leg of KansOk, which provides no intrastate service, should be 
treated as an interstate pipeline. Accordingly, Western Resources 
contends that the Commission should require KansOk to refile its rates 
under section 4 of the NGA.

    \8\ Midcoast Ventures I, 61 FERC para. 61,029 (1992).
    \9\ Id. at 61, 158.
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D. KansOk's Answer

    First, KansOk states that under section 1(b) of the NGA, the 
Commission is required to regulate the transportation and sale for 
resale of natural gas ``in interstate commerce,'' and to regulate any 
``natural gas company'' engaged in such transportation or sale.\10\ 
Section 601(a) of the NGPA, however, limits the jurisdiction otherwise 
resulting from NGA section 1(b) by providing that the Commission's NGA 
jurisdiction ``shall not apply to any transportation in interstate 
commerce of natural gas if such transportation is * * * authorized by 
the Commission under'' NGPA section 311(a). In addition, section 
601(a)(2)(B) of the NGPA provides that the NGA definition of a natural 
gas company does not include ``persons'' who provide sales or 
transportation authorized under section 311 of the NGPA.

    \10\ 15 U.S.C. 717(b) (1988).
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    KansOk states that, as a corporate entity, it qualifies as an 
intrastate pipeline within the meaning of section 2(16) of the 
NGPA.\11\ In Order No. 46, the Commission explained that ``if a 
[[Page 29843]] corporate entity qualifies as an intrastate pipeline 
under section 2(16), it will retain that identity for its entire system 
even if it constructs a new portion of its system to be used 
exclusively for section 311(a)(2) transportation.'' \12\

    \11\ See 15 U.S.C. 3301(16) which states: The term ``intrastate 
pipeline'' means any person engaged in natural gas transportation 
(not including gathering) which is not subject to the jurisdiction 
of the Commission under the [NGA] (other than any such pipeline 
which is not subject to the jurisdiction of the Commission solely by 
reason of section 1(c) of the [NGA]).
    \12\ Sales and Transportation of Natural Gas, FERC Stats. & 
Regs., Regulations Preambles 1977-1981 para. 30,081, at 30,536 
(1979).
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    In response to Western Resources' Midcoast arguments, KansOk states 
that its case differs from Midcoast because it had legitimate 
intrastate business in Oklahoma before it ever transported gas under 
NGPA section 311. Unlike KansOk, the pipeline in Midcoast had no 
facilities and provided no transportation service in Kansas before 
conducting its first transaction, purportedly under NGPA section 311. 
Rather, Midcoast's claim to be an existing intrastate pipeline was 
based solely on its status as an intrastate pipeline in Texas.
    KansOk argues that Seagull Pipeline Corp. (Seagull) \13\ applies 
better here. In Seagull, the Commission ruled that the company did not 
lose its intrastate status by constructing new facilities to provide, 
in part, NGPA section 311(a)(2) transportation. KansOk states that, 
like the pipeline in Seagull, it was engaged in intrastate business 
prior to conducting its first NGPA section 311 transaction. Further, 
KansOk points out that when it filed its first rate proceeding under 
NGPA section 311, no party challenged its status as an intrastate 
pipeline, and the Commission accepted its intrastate status in 
approving fair and equitable rates for its section 311 service.

    \13\ Seagull Pipeline Corp., 11 FERC para. 61,267 (1980); see 
also Black Warrior Pipeline, Inc., 8 FERC para. 61,241 (1979).
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    KansOk next states that the lack of state regulation over it has 
not resulted in harm to its customers, because it has been subject to 
the Commission's NGPA rate jurisdiction and has charged FERC-approved 
fair and equitable rates since the inception of its section 311 
service. Also, since KansOk makes no retail sales to consumers within 
the state, it claims that the lack of state regulation is not unusual.
    Finally, KansOk argues that the transportation services it provides 
qualify as service provided ``on behalf of'' an interstate pipeline, 
namely Riverside. Under NGPA section 311(a)(2)(A), an intrastate 
pipeline may transport natural gas in interstate commerce on behalf of 
any interstate pipeline or local distribution company and be exempt 
from the Commission's NGA jurisdiction.
E. Discussion

    The Commission is concerned that, when viewed as a whole, the 
KansOk-Riverside-Kansas Natural-Kansas Pipeline systems may, in 
reality, constitute one interstate pipeline system. At the very least, 
it appears that KansOk may in fact be an interstate pipeline. The four 
pipelines are contiguous in three states and move gas from Oklahoma 
through Kansas and into Missouri. In addition, in its recent filing in 
Docket No. RP95-239-000, Riverside is proposing an integrated 
transportation service using the available capacity of its affiliated 
pipelines.
    The Commission recognizes that one purpose of NGPA section 311 is 
to enable intrastate pipelines to transport gas destined for the 
interstate market and thus spare interstate pipelines from having to 
construct duplicative facilities.\14\ The NGPA accomplishes this 
through permitting intrastate pipelines to perform such transportation 
without becoming subject to NGA jurisdiction over the entirety of their 
operations. As the Commission stated in Lear Petroleum Corporation:

    \14\ Lear Petroleum Corp., 42 FERC para. 61,015, at 61,043 
(1988).

    NGPA sections 601(a)(1)(C) and (a)(2)(A) provide that the 
intrastate pipelines do not become subject to the NGA by virtue of 
section 311 transactions. This ensures that intrastate pipelines are 
only subject to Commission regulation of their rates for section 311 
transactions. Intrastate pipelines do not become subject to 
Commission regulation of their intrastate activities or of 
construction of facilities used for intrastate transportation.\15\

    \15\ Id. See also Mustang Energy Corp. v. FERC, 859 F.2d 1447 
(10th Cir. 1988).

    Nevertheless, the Commission is concerned that what would 
physically and operationally appear to be one interstate pipeline 
system from Kansas to Missouri has been broken down artificially into 
three intrastate systems and one small interstate system consisting 
only of border crossings. Of concern too is that these four companies 
are affiliated and operated as one system by KPOC. This suggests that 
the corporate structure of these companies was designed primarily to 
avoid the Commission's jurisdiction under the NGA. While the Commission 
has stated that it is not unusual, much less unlawful, for persons to 
structure transactions either to qualify for regulation by one entity 
or to avoid regulation by another,\16\ nevertheless at some point such 
structuring may be contrary to the public interest and inconsistent 
with the underlying purpose of statutes effecting a federal scheme of 
regulation.

    \16\ See, e.g., Riverside Pipeline Co., L.P., 48 FERC para. 
61,309, at 62,015-16 (1989).
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    Here, the Commission recognizes that the present corporate 
structure of the four companies will not frustrate the Commission's 
regulation over the rates charged by the companies for services 
currently performed under NGPA section 311, since the Commission 
regulates those rates. Rather, the Commission is concerned that the 
purpose of the NGA may be frustrated because KansOk, Kansas Pipeline, 
and Kansas Natural do not have to comply with Order No. 636.\17\ In 
Order No. 636, the Commission explained that its ``responsibility under 
the NGA is to protect the consumers of natural gas from the exercise of 
monopoly power by pipelines in order to ensure consumers access to an 
adequate supply of gas at a reasonable price.''\18\ Order No. 636 also 
required the unbundling of pipeline sales services.

    \17\ Pipeline Service Obligations and Revisions to Regulations 
Governing Self-Implementing Transportation; and Regulation of 
Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg. 
13,267 (Apr. 16, 1992) III FERC Stats. & Regs. Preambles para. 
30,939 (Apr. 8, 1992); order on reh'g, Order No. 636-A, 57 Fed. Reg. 
36,128 (Aug. 12, 1992), III FERC Stats. & Regs. Preambles para. 
30,950 (Aug. 3, 1992); order on reh'g, Order No. 636-B, 57 Fed. Reg. 
57,911 (Dec. 8, 1992), 61 FERC para. 61,272 (Nov. 27, 1992); reh'g 
denied, 62 FERC para. 61,007 (1993); appeal pending sub nom. United 
Distribution Companies, et al. v. FERC, No. 92-1485 (D.C. Cir.).
    \18\ Order No. 636, at 30,392.
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    The Commission has some concern that segmenting a single system 
into three intrastates and one interstate could frustrate the purposes 
underlying the NGA, Order No. 636, and other policies. For example, if 
the four pipelines operated by KPOC were found to be one interstate 
pipeline, they would be required to file a FERC tariff setting forth 
their terms and conditions of service, comply with the Commission's 
capacity release requirements under Order No. 636, and be subject to 
the Commission's NGA sections 4 and 5 authority with respect to their 
rates. Whereas under their present corporate structure, only Riverside 
is required to comply with these requirements; the three intrastate 
pipelines are not.
    The Commission recognizes that a finding that the four companies 
operated by KPOC constitute one interstate pipeline would require the 
Commission to disregard their corporate forms. However, the Commission 
has the authority to do so, under certain circumstances. For example, 
in General Telephone Co. v. U.S.,\19\ the court stated 
[[Page 29844]] that, ``[w]here the statutory purpose could * * * be 
easily frustrated through the use of separate corporate entities, the 
[Federal Communications Commission] is entitled to look through 
corporate form and treat the separate entities as one and the same for 
purposes of regulation.'' \20\ Therefore, if the Commission were to 
determine here that the corporate structure of the four companies 
frustrated the statutory purpose of the NGA and was contrary to the 
public interest, it would have the authority to disregard their 
corporate forms.

    \19\ 449 F.2d 846 (5th Cir. 1971).
    \20\ Id. at 855 (citations omitted). See also Taylor v. Standard 
Gas & Electric Co., 306 U.S. 307, 322 (1939); Transcontinental Gas 
Pipe Line Corp. v. FERC, 998 F.2d 1313 (5th Cir. 1993).
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    In any event, at the very minimum the Commission believes that 
KansOk may be an interstate pipeline, based on the nature of its 
transportation services. At present, it appears that KansOk provides no 
intrastate service on its East Leg, and only a de minimis amount of 
intrastate service on its West Leg. The Commission recognizes the 
KansOk's mix of intrastate and interstate transportation volumes has 
not changed dramatically since the Commission issued its February 6, 
1992 order.\21\ Although no party contested KansOk's claim to be an 
intrastate pipeline at that time, Western Resources has raised the 
issue now.

    \21\ In 1990, approximately 97.4 percent of KansOk's 
transportation service was pursuant to NGPA section 311, whereas 
KansOk does not dispute Western Resources' claim that KansOk now 
performs approximately 99.9 percent of its services under NGPA 
section 311.
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F. Show Cause

    For the reasons discussed above, the Commission is instituting this 
show cause proceeding, pursuant to sections 5, 7, and 16 of the NGA, to 
investigate further these matters. To this end, the Commission is 
ordering the following:
    (1) KansOk, Riverside, Kansas Natural, Kansas Pipeline are ordered 
to show cause why the Commission should not disregard their corporate 
forms and find them to be one interstate pipeline system subject to the 
Commission's NGA jurisdiction; and
    (2) KansOk is ordered to show cause why, since all but a de minimis 
amount of the service it provides is in interstate commerce, it should 
not be found to be an interstate pipeline subject to the Commission's 
NGA jurisdiction.
    In their responses, the parties are encouraged to address the 
concerns raised above by the Commission.

The Commission Orders

    (A) Within 30 days of the issuance of this order:
    (1) KansOk, Riverside, Kansas Natural, Kansas Pipeline are ordered 
to show cause why the Commission should not disregard their corporate 
forms and find them to be one interstate pipeline system subject to the 
Commission's NGA jurisdiction; and
    (2) KansOk is ordered to show cause why, since all but a de minimis 
amount of the service it provides is in interstate commerce, it should 
not be found to be an interstate pipeline subject to the Commission's 
NGA jurisdiction.
    (B) Notice of this proceeding will be published in the Federal 
Register. Interested persons will have 20 days from the date of 
publication of the notice to intervene.

    By the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 95-13770 Filed 6-5-95; 8:45 am]
BILLING CODE 6717-01-M