[Federal Register Volume 61, Number 44 (Tuesday, March 5, 1996)]
[Notices]
[Pages 8611-8616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5066]



-----------------------------------------------------------------------

DEPARTMENT OF ENERGY
[Docket No. RM96-5-000]


Gas Pipeline Facilities and Services on the Outer Continental 
Shelf--Issues Related to the Commission's Jurisdiction Under the 
Natural Gas Act and the Outer Continental Shelf Lands Act; Statement of 
Policy

Issued February 28, 1996.

I. Introduction

    In this docket, the Commission has been exploring the issue of the 
application of its jurisdiction under the Natural Gas Act (NGA) \1\ and 
the Outer Continental Shelf Lands Act (OCSLA) over natural gas 
facilities and services on the Outer Continental Shelf (OCS).\2\ In 
response to several recent requests that the Commission declare 
existing certificated offshore systems \3\ and proposed offshore 
facilities in the Gulf of Mexico\4\ to be exempt gathering facilities, 
and in view of increases in successful offshore exploration and 
development activities, the Commission has elected to review issues 
concerning the status, scope, and effect of its regulation of gathering 
and transportation on the OCS. In view of the importance of current OCS 
production,\5\ and its potential as a source of new production, the 
Commission seeks in this proceeding to assure that regulatory policies 
do not impede or distort development activities on the OCS.

    \1\ Section 1(b) of the NGA grants the Commission regulatory 
jurisdiction over ``the transportation of natural gas in interstate 
commerce'' and ``the sale in interstate commerce of natural gas for 
resale.'' At the same time, section 1(b) exempts from the NGA's 
coverage ``the production or gathering of natural gas.'' Thus, 
section 1(b) first grants to the Commission broad plenary authority 
to regulate the business of transporting and of wholesaling natural 
gas moving in interstate commerce. Secondly, section 1(b) removes 
from that plenary grant of federal jurisdiction those aspects of 
natural gas regulation which are the proper subject of state 
regulation.
    \2\ Generally, sections 5(e) and 5(f)(1) of the OCSLA give the 
Commission certain responsibilities and authorizations to ensure 
that natural gas pipelines on the OCS transport for non-owner 
shippers in a nondiscriminatory manner and operate in accordance 
with certain competitive principles. Section 5(e) of the OCSLA 
requires pipelines to transport natural gas produced from the OCS 
``without discrimination'' and in such ``proportionate amounts'' as 
the Commission, in consultation with the Secretary of Energy, 
determines to be reasonable. In addition, section 5(f)(1) of the 
OCSLA requires pipelines transporting gas on or across the OCS to 
adhere to certain ``competitive principles.'' These ``competitive 
principles'' include a requirement that the pipeline must provide 
``open and nondiscriminatory access to both owner and nonowner 
shippers.'' The applicability of the provisions of sections 5(e) and 
5(f)(1) is not restricted to interstate pipelines that are subject 
to the Commission's NGA jurisdiction.
    The only pipelines that may be exempt from the Commission's 
authority under the OCSLA are certain ``feeder lines,'' which are 
defined in section 5(f)(2) of the OCSLA as a pipeline that feeds 
into a facility where oil and gas are ``first collected'' or a 
facility where oil and gas are ``first separated, dehydrated, or 
otherwise processed.'' These ``feeder lines'' may only be exempted 
from the requirements of the OCSLA by order of the Commission.
    \3\ See Sea Robin Pipeline Company (Sea Robin), 71 FERC para. 
61,351 (1995) (denying request for declaration of gathering status), 
reh'g pending; Enron Gulf Coast Gathering L.P., Docket No. CP95-516-
000; and, Venice Gathering Company, Docket No. CP95-202-000.
    \4\ See Shell Gas Pipeline Company (SGPC), Docket No. CP96-9-000 
(issued contemporaneously with this policy statement) and SGPC, 
Docket No. CP96-113-000.
    \5\ The Gulf of Mexico is the largest single domestic source of 
natural gas production, currently representing 27 percent of the 
lower 48 states' total dry gas production and 17 percent of proven 
reserves. Energy Information Administration, 1994 Annual Report, 
U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, Table 
8 at 28 and Table 9 at 31 (October 1995).
---------------------------------------------------------------------------

    The Commission solicited comments on the operational considerations 
pertaining to OCS exploration and development activities, and the legal 
and policy issues implicated in either maintaining or departing from 
present policy.\6\ Thirty-five responses were submitted by 
representatives of all segments of the industry.\7\ The Commission has 
reviewed these comments and will clarify its regulation of OCS 
facilities and services, as discussed below.

    \6\ See Notice of Inquiry into Jurisdictional Issues Respecting 
Natural Gas Pipeline Facilities and Services on the Outer 
Continental Shelf (NOI), 73 FERC para. 61,227 (1995).
    \7\ Four parties filed comments out-of-time, which for good 
cause shown, we accept. Minerals Management Service and Williams 
Field Services filed supplemental comments and OCS Producers filed 
reply comments. A list of the commenters is included as an appendix 
to this policy statement.
---------------------------------------------------------------------------

II. Background

    In 1989, in response to the decision in EP Operating Co. v. FERC 
(EP Operating) \8\--which reversed a Commission determination that a 
16-inch diameter, 51-mile long pipeline connecting an OCS production 
platform to an offshore processing plant was a jurisdictional 
transportation facility--the Commission set upon a review of its 
gathering policy. The purpose of that review was to assess the impact 
of EP Operating as well as the continuing viability and relevance of 
the ``primary function'' test, which at that time was the Commission's 
preferred methodology for determining the jurisdictional status of gas 
pipeline facilities.\9\ That review culminated in 

[[Page 8612]]
the Commission's articulation and application of the ``modified primary 
function'' test in Amerada Hess Corporation, (Amerada Hess I).\10\

    \8\ 876 F.2d 46 (5th Cir. 1989).
    \9\ The ``primary function'' test was articulated in Farmland 
Industries, Inc. (Farmland), 23 FERC para. 61,063 (1983). In 
Farmland the Commission enumerated several physical and geographic 
criteria to be included in the analysis for determining whether the 
primary function of a facility is the transportation or the 
gathering or production of natural gas. These factors are: (1) the 
length and diameter of the line, (2) the extension of the facility 
beyond the central point in the field, (3) the lines' geographic 
configuration, (4) the location of compressors and processing 
plants, (5) the location of wells along all or part of the facility, 
and (6) the operating pressure of the line. The primary function 
test has been found by the Commission to be applicable to both 
onshore and offshore facilities. The criteria set out in Farmland 
were not intended to be all inclusive. The Commission has also 
considered nonphysical criteria such as the intended purpose, 
location, and operation of the facility, the general business 
activity of the owner of the facility, and whether the 
jurisdictional determination is consistent with the objectives of 
the NGA and the Natural Gas Policy Act of 1978 (NGPA).
    \10\ 52 FERC para. 61,268 (1990).
---------------------------------------------------------------------------

    Amerada Hess I explained that because of recent advances in 
engineering and available technology, offshore drilling operations were 
moving further offshore and further from existing interstate pipeline 
interconnections. Accordingly, a relatively long pipeline on the OCS 
may be consistent with a primary function of gathering or production 
whereas an onshore pipeline of similar length would not. Therefore, in 
applying the primary function test to offshore pipeline facilities, the 
Commission modified that test in order to apply, in effect, a sliding 
scale that would allow for the use of gathering pipelines of increasing 
lengths and diameters in correlation to the distance from shore and the 
water depth of the offshore production area. Specifically, when 
applying the Farmland criteria, the Commission stated that it would 
consider, especially for offshore facilities, the changing technical 
and geographic nature of exploration and production.

III. The Notice of Inquiry

    As explained in the NOI, the Commission has been prompted to 
reexamine its approach to regulating OCS facilities in view of the fact 
that several companies have filed, or indicated their intent to file, 
requests for exempt gathering status for proposed projects designed to 
bring gas onshore from significant, newly developed deep water reserves 
in the Gulf of Mexico. Additionally, there are pending requests to 
declare existing certificated offshore systems to be gathering, 
including Sea Robin's request for rehearing of the Commission's June 
15, 1995 order denying gathering status for its offshore system. 
Accordingly, the NOI set out issues to be addressed by commenters 
regarding the need for continued NGA regulation of offshore facilities. 
The NOI contained a number of specific questions, among them whether 
the Commission should: continue to distinguish between gathering and 
transportation on the OCS; declare all OCS facilities to be gathering 
exempt from the Commission's jurisdiction under NGA section 1(b); issue 
a rule under the NGA declaring all OCS facilities to be jurisdictional 
transportation facilities; adopt a ``light-handed'' regulatory approach 
that relies on complaints of discriminatory access and/or the 
regulatory authority provided by the OCSLA; or, continue application of 
the modified primary function test on a case-by-case basis.

IV. Comments 11

    \11\ Marathon Oil submitted a response requesting that the 
Commission establish a priority for casinghead gas. However, as 
Marathon Oil notes, this particular concern is ``not included in the 
Commission's list of questions;'' therefore, this policy statement 
does not address the merits of Marathon Oil's request. We note a 
similar proposal to provide a priority for casinghead gas was 
considered and rejected in Order Nos. 509 and 509-A. Interpretation 
of, and Regulation of the OCSLA Governing Transportation of Natural 
Gas by Interstate Natural Gas Pipelines on the OCS, 53 FR 50,925 
(December 19, 1988), FERC Stats. & Regs., para. 30,842 at 31,290 
(1988), on reh'g, 54 FR 8,301 (February 28, 1989), FERC Stats. & 
Regs., para. 30,848 at 31,347-48 (1989).
    The State of Louisiana urged the Commission not to take any 
action that might extend federal regulation to include gathering 
activities in state waters which have traditionally been considered 
subject to regulation by the states. The Commission does not 
anticipate the clarification of its primary function test contained 
herein will affect the regulatory scheme now in effect offshore in 
state waters.
---------------------------------------------------------------------------

    The commenters overwhelmingly reject the suggestion that the 
Commission eliminate the distinction between transportation and 
gathering, maintaining that it is necessary, as a practical and legal 
matter, to continue to segregate facilities that perform primarily 
different functions.12 Generally, interstate pipelines assert that 
regulation under the OCSLA is adequate given OCS competition and 
parties' recourse to a complaint proceeding; generally producers 
believe continued NGA rate regulation is necessary to protect against 
OCS interstate pipelines' market power.

    \12\ Four parties--interstates Columbia, Natural, and Tennessee, 
and local distribution company (LDC) Brooklyn Union--argued for a 
blanket gathering declaration; the remaining thirty commenters seek 
to maintain, to one degree or another, the distinction between 
gathering and transportation, or else express no opinion.
---------------------------------------------------------------------------

    Commenters maintain that a declaration that all OCS facilities are 
of one generic type would constitute a precipitous departure from the 
Commission's past practice of case-specific consideration, upset 
parties' reliance upon functional classifications in developing 
offshore reserves and accepting terms and conditions of service, and 
invite judicial reversal. Gatherers Leviathan and Tejas note that NGA 
section 1(b) specifically exempts gathering facilities from the 
Commission's NGA jurisdiction; thus, particularly in light of EP 
Operating, the Commission is without authority under the NGA to find 
all OCS facilities to be jurisdictional. OCS Producers 13 concur, 
and add that it would constitute an abdication of the Commission's 
regulatory responsibility under NGA section 1(b) to classify all OCS 
facilities as gathering. OCS Producers argue that pipeline systems, 
including facilities offshore, perform different functions, that the 
Commission's historical practice has been to recognize the different 
functions through application of a primary function test, and that 
courts have upheld this practice. OCS Producers also raise concerns 
about the Commission's need to regulate the rates charged by the 
pipelines. Producers Blue Dolphin Exploration and Energy Development 
assert that OCS pipelines possess market power and it is the 
Commission's responsibility under the NGA is to protect gas consumers 
from the exercise of such power.

    \13\ OCS Producers represents the interests of major producers 
of oil and gas on the OCS, and marketers, and/or shippers on OCS 
pipelines and consists of: Amerada Hess Corporation; Amoco 
Production Company and Amoco Energy Trading Corporation; Anadarko 
Petroleum Corporation; Ashland Exploration Inc.; Chevron U.S.A. Inc; 
Conoco Inc.; Exxon Corporation; Marathon Oil Company; Meridian Oil 
Inc.; Mobile Natural Gas Inc.; Oryx Energy Company; OXY USA Inc.; 
Phillips Petroleum Company; Shell Offshore Inc.; Texaco Natural Gas 
Inc.; and, Union Pacific Fuels, Inc.
---------------------------------------------------------------------------

    The NOI sought comments on whether absent NGA regulation of OCS 
facilities or services, the Commission's regulatory authority under the 
OCSLA alone would be sufficient to protect the public interest, or 
would result in a regulatory gap.
    Section 5(f)(1) of the OCSLA provides that pipelines must provide 
open and nondiscriminatory access. Parties recognize that the scope of 
the Commission's regulatory reach over gas gathering and transportation 
under the OCSLA is largely untested and differ in their interpretation 
of the extent and type of action the Commission might take to assure 
open and nondiscriminatory access. However, parties agree that the 
OCSLA does not provide for NGA-type cost-based rate regulation.
    Interstate pipelines,14 producer-owned pipelines, gatherers 
Leviathan, 

[[Page 8613]]
Tejas, and Williams Field Services, and LDC Brooklyn Union consider the 
Commission's authority under the OCSLA to be sufficient to protect the 
public interest.15 These parties generally maintain that because 
of the competitive environment offshore, light-handed OCSLA oversight, 
coupled with a complaint procedure, can provide an adequate safeguard 
against the exercise of market power.16 PanEnergy contends the 
Commission's authority under the OCSLA is broad enough to encompass 
establishing nondiscriminatory rates. These parties do not anticipate 
that reliance upon the OCSLA alone will produce a regulatory gap.

    \14\ Excepting Blue Dolphin Pipe Line, which argues that absent 
a legislative mandate, the Commission cannot displace its NGA 
regulatory obligations by acting exclusively under the OCSLA.
    \15\ Tejas conditions its endorsement of OCSLA-only regulation 
upon the Commission's finding ``that interstate transportation on 
the entire OCS is workably competitive and that no interstate 
pipelines have market power over OCS transportation.''
    \16\ Leviathan would not rely entirely on complaints. Leviathan 
proposes to maintain cost-of-service based rates for existing OCS 
pipelines for three years, with annual inflation adjustments, and 
would similarly apply cost-based rates to new facilities exceeding 
24 inches in diameter. Blue Dolphin Pipe Line is concerned about the 
administrative burden born by the complainant and the fact that 
relief will be, at best, prospective.
---------------------------------------------------------------------------

    In contrast, producers 17 and industrial end users 18 are 
wary of relying solely on the OCSLA and what they view as a cumbersome 
complaint procedure. They contend that absent the Commission's NGA rate 
regulation, barriers to entry and a current lack of transportation 
alternatives leave OCS producers subject to OCS transportation 
pipelines' potential to exercise market power. For example, Energy 
Development states the OCSLA protects only access, but does not provide 
the Commission authority to regulate OCS transportation rates, and 
without rate regulation there is no effective check on the exercise of 
market power. Producers and end users predict that removing NGA rate 
regulation would result in a regulatory gap.19

    \17\ OCS Producers, IPAA, NGSA, Blue Dolphin Exploration, CNG, 
Energy Development, Total Minatome, and Vastar.
    \18\ Process Gas Consumers and NGSA.
    \19\ OCS Producers, IPAA, NGSA, Blue Dolphin Exploration, Energy 
Development, Total Minatome, Process Gas Consumers, and NGSA.
---------------------------------------------------------------------------

    Several commenters stress that the Commission may not opt to 
substitute OCSLA regulation for NGA regulation, since simultaneous 
regulation is mandated by statute.20 Enserch, NGSA, and Texaco 
speculate that if the Commission were to rely solely on the OCSLA and 
remedial complaint procedures, rate and litigation uncertainties would 
chill offshore exploration and development.

    \20\ Blue Dolphin Exploration, Energy Development, CNG, IPAA, 
OCS Producers, NGSA, and Process Gas Consumers.
---------------------------------------------------------------------------

    The NOI asked whether the Commission should, under a light-handed 
regulatory approach, distinguish between new and existing OCS 
pipelines. Most interstates 21 and gatherers 22 assert that a 
distinction between OCS facilities based on age would be inappropriate, 
unlawful, and place existing facilities which are subject to NGA rate 
regulation at a competitive disadvantage. However, interstate Koch, and 
producer Texaco, suggest that new facilities be presumed to be 
gathering, and thus eligible for light-handed regulation under the 
OCSLA. Tejas comments that new gathering lines will be less likely to 
exert market power than existing pipelines.

    \21\ INGAA, Columbia, Sea Robin, PanEnergy, and Tennessee.
    \22\ Centana and Williams Field Services.
---------------------------------------------------------------------------

    Some producers 23 argue that a lack of market power, not 
vintage, is the proper criteria to consider in distinguishing which 
facilities might appropriately be subject to light-handed regulation. 
OCS Producers accept that vintage might be considered as a factor when 
determining whether light-handed regulation is appropriate in a 
particular instance. Total Minatome urges that light-handed regulation 
apply only to production from OCS leases granted after promulgation of 
such regulation so as not to thwart the expectations upon which prior 
development was undertaken. Leviathan proposes to distinguish existing 
facilities which have customers who have relied on a certain level of 
regulation from new facilities which have customers with no such 
reliance.

    \23\ Blue Dolphin Exploration and IPAA.
---------------------------------------------------------------------------

    The NOI requested comments on the option of allowing all rate 
regulation to end at any point that a pipeline and a non-affiliated 
shipper agree. INGAA and PanEnergy endorse the proposal. OCS Producers, 
Process Gas Consumers, Blue Dolphin Pipe Line, and Tejas disagree with 
this option. Tennessee asserts there should be no rate regulation 
behind the processing plant, regardless of agreement. Total Minatome 
claims this option is not needed, since pipelines can currently 
negotiate discounts with any customer and minimum rates are low enough 
to not inhibit freely negotiated rates. Leviathan also rejects this 
option and proposes market-based rates for new supply facilities 24 
inches in diameter or less, light-handed rate regulation for new supply 
facilities greater than 24 inches in diameter, and light-handed rate 
regulation (through a rate freeze and an inflation adjustment) for 
existing OCS faculties.
    Several parties addressed particular concerns involving rates. 
Atlanta Gas, Brooklyn Union, and Natural argue that if the Commission 
were to declare existing OCS jurisdictional facilities to be gathering, 
then it should promptly require pipelines to revise their rates to 
exclude costs associated with their OCS facilities from their rates. 
Leviathan proposes an anti-cost-shifting limitation to prevent cross-
subsidies between existing and new facilities by barring discount rate 
adjustments for jurisdictional purposes by a market area pipeline in 
setting downstream rates for downstream transportation of gas 
transportation on OCS facilities of that pipeline or its affiliates. 
Brooklyn Union claims a number of interstate pipelines have onshore or 
offshore points of aggregation, and that transportation facilities 
upstream of these pooling points provide the same function as OCS 
facilities; consequently, these facilities, like OCS facilities, should 
be subject only to light-anded regulation.
    The NOI asked parties to consider the rationale for and 
consequences of declaring all offshore facilities to be either 
gathering or transportation. No party adopted the proposition that all 
OCS facilities be declared transportation. Columbia, Natural, 
Tennessee, and Brooklyn Union argued for a generic determination that 
all offshore facilities are gathering. CNG proposes a limited 
declaration of nonjurisdictional status for OCS pipelines owned by 
producers (or their affiliates) and used exclusively by the same 
producers (or their affiliates), claiming such facilities function as 
extensions of the production platforms to which they are connected. All 
other parties seek to maintain, to one degree or another, the 
distinction between gathering and transportation, or else express no 
opinion.
    If the Commission did declare all offshore facilities gathering, 
Leviathan, Sea Robin, Tejas, and Tennessee suggest existing customers' 
expectations may be protected, as they have been onshore, through a 
default contract mechanism. Leviathan proposes a term that runs for the 
life of the currently connected reserves with an option to purchase gas 
supplies attached to competing offshore pipelines. Tennessee suggests a 
contract term of two years, and adds that issues relating to existing 
customers could be resolved in individual abandonment proceedings. 
Total Minatome proposes retaining the existing rate structure for 
current shippers for the life of production and providing that current 

[[Page 8614]]
shippers receive any lesser rate that might be negotiated by new 
shippers. PanEnergy rejects the need for a default contract, noting 
gathering facilities offshore remain subject to the Commission's OCSLA 
jurisdiction. Columbia, Enron, and PanEnergy believe that vigorous 
competition and the Commission's ability to remedy discrimination under 
the OCSLA will protect existing customers' expectations. Blue Dolphin 
Exploration states that the Commission should protect existing 
customers by (1) conditioning any declaration of gathering status for 
existing facilities owned by interstates or their affiliates upon 
divestiture of those facilities to a non-pipeline, non-pipeline 
affiliate party, and, (2) requiring interstate pipelines to divest all 
interests in offshore gathering facilities to unaffiliated, non-
interstate owned or controlled third parties. OCS Producers contend 
that without NGA rate regulation, no uniform standard conditions could 
adequately protect historical customers.
    As noted above, the vast majority of comments received reject the 
prospect of a blanket declaration and instead advocate continuing to 
distinguish between gathering and transportation on a case-by-case 
basis. However, while producers and industrial end users endorse a 
continued application of the Commission's current modified primary 
function test, other parties propose that that test be altered in 
various ways.
    Interstate and producer-owned pipelines complain that 
nonjurisdictional gatherers enjoy competitive advantages over regulated 
transporters and urge the Commission to apply the primary function test 
in a manner that favors finding OCS facilities to be gathering. For 
example, INGAA asserts the Commission should continue with a case-
specific analysis, but should ``customize its analysis for offshore 
facilities,'' recognizing that size, ownership, and vintage are not 
necessarily determinative of gathering offshore, whereas the behind-
the-plant location of many offshore lines demonstrates their ``true 
gathering nature.'' Rather than relying exclusively on a bright-line 
physical test, Sea Robin urges the Commission to consider the 
commercial function of an OCS facility. ANR would eliminate ownership 
as a factor when considering the status of jurisdictional stand-alone 
OCS facilities. Williams Field Services maintains that gathering 
systems' facilities may extend beyond a processing plant to deliver 
into multiple transportation systems.
    Enron and PanEnergy propose adopting a rebuttable presumption that 
all offshore facilities are gathering. Hence, gathering status for new 
and existing facilities would be granted unless parties opposed 
demonstrate the facilities function primarily as transportation. Koch 
and Texaco would limit the presumption to new offshore facilities so as 
not to disturb the expectations of existing owners and customers. 
Texaco would also require that an existing jurisdictional pipeline 
seeking gathering status be evaluated in view of the technology 
employed at the time the facilities were constructed and be obliged to 
demonstrate that circumstances have changed since the facilities were 
initially classified.
    On the other hand, producers and industrial end users generally 
urge the Commission to continue applying the primary function test 
without any change which would skew that test in favor of a gathering 
determination. OCS Producers, IPAA, NGSA, and Process Gas Consumers 
maintain there is no legal or policy basis for altering the 
Commission's present application of the modified primary function test. 
OCS Producers claim that revisions of the test such as elevating the 
behind-the-plant factor above all others, ``would lead to the 
conclusion that virtually all pipeline facilities on the OCS are 
nonjurisdictional gathering.'' OCS Producers, Vastar, and Blue Dolphin 
Exploration endorse the outcome of the Commission's application of the 
primary function test in Sea Robin.
    CNG would have the Commission disregard the behind-the-plant and 
central-point-in-the-field factors, and the facilities' geographic 
configuration and ownership, in favor of those factors deemed relevant 
to determining an offshore facility's core operation, namely: size, 
location of connecting platforms, operating pressures, and compression. 
According to CNG, pipelines with a single or serial attachment of 
supply sources serve as surrogate supply laterals and are likely to be 
gathering, whereas systems that generate economies of scale in 
aggregating multiple, scattered sources of supply are likely to be 
transportation.
    Total Minatome considers offshore production platforms to function 
as the central point in a field, aggregating gas from different wells. 
Accordingly, Total Minatome views the large diameter lines that move 
gas from platforms as transportation lines, and proposes that the 
short, low-pressure lines linking multiple platforms be considered 
feeder lines under the OCSLA and gathering lines under the NGA.
    Leviathan, a gatherer, proposes a novel jurisdictional test whereby 
new OCS system extensions of market area pipelines--i.e., expansions to 
reach new production or attach additional OCS supplies--would be 
treated as jurisdictional transportation if the pipe diameters exceeded 
24 inches. Market area pipelines' new supply pipe with a diameter of 24 
inches or less would be treated as gathering. New jurisdictional 
production area facilities greater than 24 inches in diameter, 
including extensions of jurisdictional pipelines, would be treated as 
jurisdictional transportation facilities. Existing and new gathering 
facilities, including new OCS supply pipe with a diameter of 24 inches 
or less, would be presumed to be nonjurisdictional. Existing OCS 
transportation facilities would be treated as they have been 
historically.

V. Commission Response and OCS Policy

    As stated in the NOI, the Commission has been presented with recent 
requests to clarify the jurisdictional status of OCS pipeline 
facilities. These facilities are an integral part of proposals to 
explore and develop natural gas reserves in deep water areas of the 
Gulf of Mexico and bring gas from such projects onshore for processing 
and delivery into the onshore interstate transportation grid. On the 
one hand, the Commission recognizes that such projects are expensive, 
and would not be undertaken in an atmosphere of regulatory uncertainty. 
We do not want to employ a policy that might impede exploration and 
development of these new areas. On the other hand, we are mindful of 
our obligations under the NGA to prevent the exercise of market power 
by companies that transport natural gas.
    To strike a balance between these different objectives, we will 
retain our existing primary function test and clarify how we intend to 
apply that test for determining whether particular facilities 
constitute gathering facilities exempt from our jurisdiction under NGA 
section 1(b). We will add a new factor to our primary function test 
that will apply to facilities that are designed to collect gas produced 
in water depths of 200 meters or greater. Such facilities will be 
presumed to qualify as gathering facilities up to the point or points 
of potential connection with the interstate pipeline grid. From there 
on, the facilities will be evaluated under our existing primary 
function test and if found to be primarily transportation facilities, 
will be subject to our jurisdiction under NGA section 7.
    We realize this statement of our gathering policy will require 
further refinement in that it leaves unresolved a number of questions 
that will have to be addressed in individual cases. For 

[[Page 8615]]
instance, what constitutes a point of potential connection with the 
interstate pipeline grid may depend on individual circumstances. In 
SGPC, Docket No. CP96-9-000, which we are issuing contemporaneously 
with this policy statement, the platform and downstream stub lines 
interconnecting with Texas Eastern Transmission Corporation's 
interstate line six miles away are considered gathering. All facilities 
downstream of these are deemed to be transportation. To consider 
another example, the Viosca Knoll system (which predates this policy 
statement, but which we believe is consistent with it) was constructed 
in depths less than 200 meters, but was specifically designed to access 
new, deep water production. Viosca Knoll, a 20-inch diameter, 95-mile 
pipeline, was constructed roughly parallel to the edge of the 
Continental Shelf in a type of ``header'' configuration interconnecting 
with interstate pipelines at either end. The facility was declared to 
be gathering then and a similar project would qualify for a presumption 
of gathering under the policy we are adopting today.24

    \24\ Viosca Knoll Gathering System, 66 FERC ] 61,237 (1994), 
reh'g denied, 68 FERC ] 61,050 (1994).
---------------------------------------------------------------------------

    Despite the issues that will still need to be addressed in 
individual cases, we believe the above policy provides the necessary 
certainty for most new projects and fairly balances the concerns raised 
by the commenters in this proceeding. Many commenters, for instance, 
opposed any initiative that would effectively eliminate NGA regulation 
on the OCS and rely only on the OCSLA to provide a level playing field. 
Commenters pointed to reliance on the existing regulatory scheme for 
access to reasonably priced transportation and protection against 
market power by interstate pipelines. The policy adopted here would not 
upset that scheme. Existing interstate pipelines and gathering 
facilities would retain their status barring some change in 
circumstances, and new proposals for construction on the OCS would be 
considered under the current primary function test for gathering.
    At a depth of roughly 200 meters, however, geographical and 
topographical changes on the sea floor make a rigid application of the 
modified primary function test undesirable. This is the point at which 
the Outer Continental Shelf drops off sharply to very deep waters. Of 
necessity, exploration past this point must rely on large, floating 
production platforms. The expense of exploring for and producing gas at 
these depths is considerably greater than in shallower waters. 25 
This depth also is consistent with the 200 meter depth specified in the 
Outer Continental Shelf Deep Water Royalty Relief Act, which provides 
royalty relief to encourage new oil and gas production in deep water 
lease blocks in the Gulf of Mexico. See P.L. 104-58, Title III, 43 USC 
Sec. 1337 (1995).

    \25\ ``In 1991, total costs for the average exploratory natural 
gas well in the lower 48 states were almost $600,000 onshore, and 
over $5 million offshore. In deep water, a tension leg platform in 
3,000 feet of water can cost a billion dollars.'' U.S. Senate 
Committee on Energy and Natural Resources, Report 103-248 (April 11, 
1994) (commenting on S. 318, a draft of what became the Outer 
Continental Shelf Deep Water Royalty Relief Act, Title III, P.L. 
104-58, enacted November 28, 1995).
---------------------------------------------------------------------------

    There is little point in attempting to distinguish between new 
projects of this kind based on their physical features. Such deep water 
projects perform essentially the same function and they are all 
primarily engaged in production and gathering activities. We think the 
better approach is to consider all such facilities as production and 
gathering facilities up to the point where they duplicate or are in 
proximity to facilities that are established as transportation 
facilities; downstream of that point, we will determine the facilities' 
jurisdictional status based on our primary function test.
    At present, there are a limited number of projects that produce 
from these depths, so there is no significant reliance by investors, 
producers, or shippers on an established regulatory scheme. Further, 
the companies who are sponsoring pending projects are large companies 
that intend to produce, gather, and transport their own gas and who 
appear less in need of regulatory protection than others closer to 
shore. As noted in the comments, these producers closer to shore have 
relied on regulated interstate pipelines to transport most, if not all, 
of their gas onshore and may be captive to these pipelines if 
Commission oversight were suddenly withdrawn. In sum, it is our view 
that under current circumstances the need for NGA regulation of deep 
water projects far offshore is significantly less than it is elsewhere.
    Having said this, however, we note that where gas is destined for 
interstate commerce, there is necessarily a point at which the 
gathering or collection of the gas ends, and interstate transportation 
begins. The original primary function test was designed to help 
identify this point. For the reasons explained, though, the rigid 
application of that test has not been helpful in categorizing the new 
large projects designed to bring gas onshore from deep water production 
areas. For long lines designed to bring gas onshore from deep water, we 
believe the place where gathering or collection ends and transportation 
begins is the point or points of potential connection with the existing 
interstate pipeline grid. Whether the lines actually interconnect there 
or not, we see little difference in function between an interstate 
transportation line that takes gas to shore and a newly built line 
that, for all practical purposes, runs parallel to it and serves the 
same purpose of moving gas to shore.
    One of the principles underlying our policy on the OCS is to hold 
all owners of facilities that perform similar functions to the same 
regulatory requirements that our statutory jurisdiction allows. It 
would be inconsistent to allow new, large pipelines that perform a 
function no different from nearby existing lines subject to NGA 
regulation to operate outside the framework of Order No. 636 while, at 
the same time, applying the requirements of Order No. 636 to existing 
pipelines with the same physical features and function.
    For example, in the SGPC order, 26 the Commission is issuing a 
certificate under NGA section 7(c) for that portion of the proposed 
facility that performs a transportation function. The Commission will 
regulate the WD 143 to Venice Line as an NGA facility because, under 
the Commission's ``primary function'' test, the line is 
``representative of the other long-haul transportation systems in the 
area that serve to move OCS production, that has been aggregated at 
interconnection platforms, to shore for processing and subsequent 
redelivery onto the onshore interstate transportation grid.'' 27 
Like other interstate pipelines performing the same function, the 
Commission will require SGPC to comply with all the requirements of 
Order No. 636. 28

    \26\ See Docket No. CP96-9-000, issued contemporaneously with 
this policy statement.
    \27\ Id., slip op. at 20.
    \28\ In response to the interstate pipelines' concerns about 
competing on the OCS with unregulated entities, the Commission notes 
it recently issued a policy statement that allows a pipeline to 
negotiate creative approaches to pricing other than traditional 
cost-of-service ratemaking if its cost-based recourse rate is 
available. See Alternatives to Traditional Cost-of-Service 
Ratemaking for Natural Gas Pipelines, 74 FERC para. 61,076 (1996).
---------------------------------------------------------------------------

    The Commission will continue to exercise rate jurisdiction for 
gathering facilities that are owned by natural gas companies 
(irrespective of whether these natural gas companies are existing 
interstate pipelines or new deep water producers that also own 
transportation 

[[Page 8616]]
facilities).29 As noted in the SGPC order, the Commission will 
have jurisdiction over rates charged by SGPC for gathering services 
over those facilities upstream of the WD 143 platform.

    \29\ Under sections 4 and 5 of the NGA, the Commission has 
jurisdiction over the rates and charges received by natural gas 
companies for or ``in connection with'' the jurisdictional 
transportation of gas. Thus, an interstate pipeline's gathering 
rates generally are subject to the Commission's jurisdiction because 
they are in connection with the pipeline's jurisdictional 
transportation services. See Northern Natural Gas Company, 929 F.2d 
1261 (8th Cir. 1991), cert. denied, 112 S.Ct. 169 (1991).
---------------------------------------------------------------------------

    Moreover, in addition to our NGA ``in connection with'' 
jurisdiction over gathering rates charged by natural gas companies, the 
Commission has jurisdiction pursuant to sections 5(e) and 5(f) of the 
OCSLA. Such jurisdiction is not restricted to interstate pipelines 
subject to the Commission's NGA jurisdiction, but rather extends to all 
pipelines on the OCS, including gathering lines owned by non-interstate 
pipelines.30 The Commission acknowledged this jurisdiction in 
Order Nos. 509 and 509-A. In Order No. 509-A, the Commission stated 
that ``the open-access mandate of the OCSLA applies to all pipeline 
operations on the OCS, and will consider appropriate measures for 
remedying discriminatory access to other OCS facilities on a case by 
case basis.'' 31

    \30\ The only pipelines that may be exempt from the Commission's 
jurisdiction under the OCSLA are certain ``feeder lines,'' which are 
defined in section 5(f) of the OCSLA, 43 USC 1334(f)(2), as a 
pipeline which feeds into a facility where oil and gas are ``first 
collected'' or a facility where oil and gas are ``first separated, 
dehydrated, or otherwise processed.'' Moreover, these ``feeder 
lines'' only may be exempted from the requirements of the OCSLA by 
order of the Commission.
    \31\ Interpretation of, and Regulations Under, Section 5 of the 
Outer Continental Shelf Lands Act (OCSLA) Governing Transportation 
of Natural Gas by Interstate Natural Gas Pipelines on the Outer 
Continental Shelf, 54 FR 8,301 (February 28, 1989), FERC Stats. & 
Regs. para. 30,848 at 31,334 (1989).
---------------------------------------------------------------------------

    The Commission continues to believe this and will treat seriously, 
and respond promptly to, complaints filed pursuant to the OCSLA by 
shippers on OCS gathering pipelines that are not otherwise subject to 
the Commission's NGA ``in connection with'' jurisdiction. The 
Commission interprets the nondiscrimination mandates of sections 5(e) 
and 5(f) of the OCSLA to require, at a minimum, nondiscriminatory 
access and nondiscrimination with respect to rates and terms and 
conditions of service.
    In particular, the Commission believes it has the authority under 
the OCSLA to take those steps necessary to guarantee that all OCS 
pipelines, including those not subject to the NGA, provide fair and 
unrestricted access in a manner that ensures the efficient development 
of OCS natural gas resources. The Commission stated in Order No. 509 
that if it received complaints it would ``use its ancillary authority, 
its authority under sections 4 and 5 of the NGA, and its authority 
under section 5 of the OCSLA, as appropriate under the circumstances 
presented.'' 32

    \32\ Interpretation of, and Regulations Under, Section 5 of the 
Outer Continental Shelf Lands Act (OCSLA) Governing Transportation 
of Natural Gas by Interstate Natural Gas Pipelines on the Outer 
Continental Shelf, 53 FR 50,925 (December 19, 1988), FERC Stats. & 
Regs. para. 30,842 at 31,289 (1988).
---------------------------------------------------------------------------

    In sum, the Commission will continue to determine the primary 
function of offshore facilities on a case-by-case basis, as the 
majority of commenters advocate. However, in applying our primary 
function test to facilities offshore, in recognition of the technology 
and topography particular to operations in deep water, we will presume 
facilities located in deep water are primarily engaged in gathering or 
production. Other than this clarification regarding the primary 
function of facilities offshore, after consideration of the comments, 
we find no cause to seek to alter our regulatory authority under the 
NGA and OCSLA over natural gas facilities and services on the OCS. By 
the Commission.
Lois D. Cashell,
Secretary.

Appendix

    Parties submitting comments in Docket No. RM96-5-000:

American Gas Association (AGA)
Amoco Energy Trading Corporation jointly with Amoco Production Company 
(Amoco)
ANR Pipeline Company (ANR)
Atlanta Gas Light Company jointly with Chattanooga Gas Company 
(Atlanta)
Brooklyn Union Gas Company (Brooklyn Union)
Blue Dolphin Exploration Company (Blue Dolphin Exploration)
Blue Dolphin Pipe Line Company (Blue Dolphin Pipe Line)
Centana Gathering Company (Centana)
Chemical Manufactures Association (Chemical Manufactures) *
Columbia Gas Transmission Corporation jointly with Columbia Gulf 
Transmission Company (Columbia)
Consolidated Natural Gas Company (CNG)
Energy Development Corporation (Energy Development)
Enron Interstate Pipelines (Enron)
Enserch Exploration, Inc. (Enserch)
Independent Petroleum Association of America (IPAA)
Interstate Natural Gas Association of America (INGAA)
Koch Gateway Pipeline Company (Koch)
Leviathan Gas Pipeline Company (Leviathan)
Marathon Oil Company
Maryland Department of the Environment *
Minerals Management Service, U.S. Department of Interior (MMS) *
Natural Gas Pipeline Company of America (Natural)
Natural Gas Supply Association (NGSA) *
OCS Producers
PanEnergy Companies (PanEnergy)
Process Gas Consumers Group jointly with American Iron and Steel 
Institute and Georgia Industrial Group (Process Gas Consumers)
Sea Robin Pipeline Company (Sea Robin)
State of Louisiana (Louisiana)
Tejas Power Corporation (Tejas)
Tennessee Gas Pipeline Company (Tennessee)
Texaco Natural Gas Inc. (Texaco)
Total Minatome Corporation (Total Minatome)
Vastar Resources, Inc. (Vastar)
Venice Gathering Company (Venice)
Williams Field Services Group, Inc. jointly with Transcontinental Gas 
Pipe Line Corporation (Williams Field Services)

     * Filed out-of-time.

[FR Doc. 96-5066 Filed 3-4-96; 8:45 am]
BILLING CODE 6717-01-P