[Federal Register Volume 68, Number 162 (Thursday, August 21, 2003)]
[Notices]
[Pages 50530-50533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21373]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. AD03-13-000]


Application of the Primary Function Test for Gathering on the 
Outer Continental Shelf; Notice of Public Conference

August 14, 2003.
    Take notice that on September 23, 2003, the Commission will convene 
a public conference in the above captioned proceeding. The purpose of 
the conference will be to explore whether the Commission should 
reformulate its test for defining nonjurisdictional gathering in the 
shallow waters of the Outer Continental Shelf (OCS) and if so what the 
new test should be.
    The Commission has considered its offshore gathering policy a 
number of times in the past decade.\1\ Nevertheless, a satisfactory 
definition of gathering under the Natural Gas Act has remained elusive. 
A clear, consistent approach to offshore gathering is needed to protect 
producers and customers from the market power of third party 
transporters and to avoid different jurisdictional outcomes for 
companies that perform essentially the same economic function.
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    \1\ See generally Natural Gas Gathering Services Performed by 
Interstate Pipelines and Interstate Pipeline Affiliates --Issues 
Related to Rates and Terms and Conditions of Service, Docket No. 
RM94-4-000, Notice of Public Conference, 65 FERC ] 61,136 (1993); 
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, Docket 
No. RM96-5-000, Policy Statement, 74 FERC ] 61,222 (1996) (1996 
Policy Statement); Chevron U.S.A., Inc. v. FERC, 193 F. Supp. 2d 54 
(D.DC, January 11, 2002), appeal pending sub nom. Williams 
Companies, et al. v. FERC, No. 02-5056 (DC Cir.) (appeal of district 
court ruling on motion that FERC did not have authority under the 
Outer Continental Shelf Lands Act (OCSLA) to issue regulations 
requiring gas service providers on the Outer Continental Shelf 
(OCS)to submit quarterly reports of services provided).
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Background

A. Evolution of the Primary Function Test

    Although section 1(b) of the Natural Gas Act states that the 
provisions of that act do not apply ``to the production or gathering of 
natural gas,'' the act itself does not define those terms. The 
Commission has defined gathering as ``the collecting of gas from 
various wells and bringing it by separate and several individual lines 
to a central point where it is delivered into a single line.'' \2\ The 
Supreme Court has added that ``production'' and ``gathering'' are terms 
``narrowly confined to the physical acts of drawing the gas from the 
earth and preparing it for the first stages of distribution.'' \3\ 
These definitions have been useful in describing gathering as a 
concept. Nevertheless, as the courts have recognized, ``the line 
between gathering and transportation is inherently elusive.'' \4\ 
Attempts to establish a functional test, useful in the context of 
specific proceedings, resemble the pursuit of a desert mirage. 
Historically, the tendency has been to announce a particular physical 
characteristic that could be used to identify nonjurisdictional 
gathering, only to substitute other criteria later to reflect changes 
in the industry or in the evolution of Commission policy.\5\ In

[[Page 50531]]

Farmland Industries, Inc.,\6\ the Commission identified a number of 
factors for consideration in analyzing the section 1(b) gathering test, 
and stated that ``the ultimate test is whether the primary function can 
be classified as transportation or gathering.'' The primary function 
test factors included:

    \2\ Lomak Petroleum, Inc. v. FERC, 206 F.3d 1193, 1196 (DC Cir 
2000), quoting from Barnes Transportation Company, 18 FPC at 372 
(1957). See also Conoco, Inc. v. FERC, 90 F.3d 536, 539 n.2 (DC Cir. 
1996)(''Gathering is the process of taking natural gas from the 
wells and moving it to a collection point for further movement 
through the pipeline's principal transmission system.'') (quoting 
Northwest Pipeline Corp. v. FERC, 905 F.2d 1403, 1404 n.1 (10th Cir. 
1990)).
    \3\ Northern Natural Gas Co. v. State Corp. Comm'n, 372 U.S. 84, 
90 (1963).
    \4\ Exxon Mobil Gas Marketing Company v. FERC (Exxon), No. 00-
1355 (DC Cir. August 6, 2002) (Judge Edwards dissenting) slip op. at 
18, citing Conoco, Inc. v. FERC 90 F. 3d 536 at 542 (DC Cir. 1996).
    \5\ For many years, the Commission employed two principal tests 
to differentiate (primarily onshore) transportation from gathering 
facilities. The ``behind-the-plant'' test presumes that all 
facilities located between the wellhead and a processing plant are 
non-jurisdictional gathering lines, while facilities downstream of 
the processing plant are presumptively transportation facilities. 
See Phillips Petroleum Co., 10 FPC 246 (1951), rev'd in part on 
other grounds sub nom. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 
672 (1954). For gas that required no processing, the ``central-
point-in-the-field'' test applied, under which lateral lines that 
collect gas from separate wells before converging into a larger 
single line--typically at the point where the gas is compressed for 
transportation by the pipeline--were classified as gathering 
facilities. E.g., Barnes, supra
    \6\ 23 FERC ] 61,063 at 61,143 (1983). The Commission later 
added a number of ``non-physical'' criteria, including (1) the 
purpose, location and operation of a facility; (2) the business of 
the owner; (3) whether the jurisdictional determination is 
consistent with the objectives of the NGA and other legislation; and 
(4) the changing technical and geographic nature of exploration and 
production. Amerada Hess Corp., 52 FERC ] 61,268 at 61,844-45 
(1990). Under the primary function test, no one factor is 
determinative, nor do all factors apply in every situation. See 
e.g., Williams Field Services, 194 F.3d at 116; Farmland, 23 FERC at 
61,143.
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    [sbull] The length and diameter of a pipeline (longer and wider 
pipe indicating transportation);
    [sbull] The central point in a field;
    [sbull] The pipeline's geographic configuration (a web-like 
pattern, for example, suggesting a gathering function)
    [sbull] Location of compressors and processing plants (i.e., the 
``behind the plant'' test);
    [sbull] The location of wells along all or part of the facilities 
(typically indicating gathering); and
    [sbull] Operating pressure of a line, with higher pressure 
generally associated with the need to propel gas in a transportation 
function.

    The primary function test has been relatively satisfactory for 
analyzing onshore facilities. Offshore, however, the test has proven 
more difficult to apply.\7\ Thus, in EP Operating Co. v. FERC, 876 F.2d 
46, 48-49 (5th Cir. 1989), the Commission initially ruled that under 
the primary function test the offshore platform where initial gas 
treatment took place constituted a ``central point in the field'' where 
the gathering function was complete, and therefore the 51-mile long, 
16-inch diameter OCS pipeline downstream of the platform at issue in 
that case was a jurisdictional transportation facility. The court 
reversed that finding, holding that while the length and diameter of 
pipeline facilities might indicate a transportation function onshore, 
those factors had less weight in the offshore context because of the 
longer distances between the point of production in deep water and the 
nearest connection with an interstate pipeline. The court further 
questioned the validity of a central-point-in-the-field analysis 
applied to unitary OCS structures.
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    \7\ As more new facilities were constructed offshore on the OCS, 
where the pattern of gathering and distribution differs, the 
applicability of the factors was questioned. Specifically, it is 
often not feasible to process raw gas on open water. As a result, 
pipelines on the OCS typically do not gather gas at a local, 
centralized point within a producing field as they would onshore, to 
prepare it for traditional transportation. Rather, on the OCS, they 
construct relatively long lines to carry the raw gas from offshore 
platforms, where after production only rudimentary gas treatment 
takes place (primarily to remove water), to the shore or a point 
closer to shore where it can be processed into ``pipeline quality'' 
gas that can be transported by an interstate pipeline.
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    In response, the Commission modified its primary function test for 
the OCS, stating that as drilling operations pushed further offshore 
from existing interstate pipeline connections, it would apply a sliding 
scale to allow for the increasing length and diameter appropriate for 
gathering lines in correlation to the distance from shore and the water 
depth of the offshore production area.\8\ Later, following a conference 
on offshore gathering in Docket No. RM96-5-000, the Commission issued a 
policy statement announcing that it would ``presume facilities located 
in deep water [more than 200 meters] are primarily engaged in gathering 
or production.'' \9\
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    \8\ See Amerada Hess, 52 FERC at 61,988 (1990).
    \9\ See 1996 Policy Statement, note 1 supra.
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    As with onshore facilities, the use of the primary function test, 
as modified by the policy statement for deepwater facilities, seems to 
be workable, and there has been relatively little controversy 
concerning its application in recent years. Efforts to apply the 
primary function test to offshore facilities in the shallow OCS, 
however, have been contentious.

B. The Sea Robin Pipeline

    Difficulties applying the primary function test to offshore 
facilities were highlighted by the Commission's decision in Sea Robin 
Pipeline Company (Sea Robin).\10\ Sea Robin's offshore pipeline 
facilities were certificated as jurisdictional transmission facilities 
by the Commission in 1969. The system consists of 438 miles of pipeline 
that transports unprocessed gas from shallow water on the OCS to a 
processing plant onshore. The system is configured in the form of a 
``Y''. Along the two arms of the ``Y'', 45 lateral lines with diameters 
ranging from 4.5 to 30 inches are connected to 67 receipt points 
located on production platforms, or at subsea taps. Through those 
upstream arms, Sea Robin moves the gas to a manned platform with two 
turbine compressor units at the fork of the ``Y'' closer to shore. The 
bottom line of the ``Y'', from the platform to shore, consists of 66.3 
miles of 36-inch pipeline. Along this segment the gas is mingled with 
additional gas from four platforms.
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    \10\ 71 FERC ] 61,351 (1995), reh'g denied, 75 FERC ] 61,332 
(1996).
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    In response to a request to reclassify the Sea Robin facilities 
from transmission to gathering, the Commission found that the primary 
function of Sea Robin's entire system was and continued to be 
jurisdictional transportation. In reaching that conclusion, the 
Commission emphasized the length and size of Sea Robin's pipeline, and 
also certain non-physical factors, such as the reliance of shippers in 
the original jurisdictional determination. The U.S. Court of Appeals 
for the Fifth Circuit remanded that decision.\11\ In doing so the court 
said the Commission had relied too heavily on the size of Sea Robin's 
system as a determinative factor and did not give enough consideration 
to the different nature of gathering on the OCS. The court also faulted 
the Commission for reliance on non-physical considerations, such as Sea 
Robin's ownership and shipper expectations. The court specifically 
found that the Commission's consideration of a ``regulatory gap'' in 
the absence of Natural Gas Act jurisdiction was inappropriate: ``Need 
for regulation cannot alone create authority to regulate.'' \12\
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    \11\ Sea Robin Pipeline Company v. FERC, 127 F.3d 365 (5th Cir. 
1997).
    \12\ Id. at 371.
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    In its decision, the court suggested that the primary function test 
could be adapted to the operational characteristics of the OCS, so that 
portions of its system could be considered to be predominantly 
gathering and other parts predominantly transportation. On remand, 
then, the Commission adopted this suggestion and reformulated the 
primary function test to draw the jurisdictional line at an internal 
point on the Sea Robin system, at the junction of the ``Y''.\13\ The 
Commission concluded that the part of Sea Robin's pipeline facilities 
from the platform to shore was a jurisdictional transportation system. 
Upstream of that point the two legs of the ``Y'' formed a non-
jurisdictional gathering system.
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    \13\ Sea Robin Pipeline Company, Order on Remand, 87 FERC ] 
61,384 (1999) (Comm. Bailey dissenting), rehearing denied, 92 FERC ] 
61,072 (2000).
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    In reformulating its primary function test, the Commission 
concluded that the ``behind-the-plant'' factor is not

[[Page 50532]]

necessarily determinative of where gathering ends when applied to 
offshore facilities. In addition, the Commission announced that where a 
pipeline system includes a facility where gas is delivered by several 
relatively small diameter lines for aggregation and preparation for 
further delivery onshore through a single larger diameter pipeline, the 
location of that collection facility will be afforded considerable 
weight for purposes of identifying the demarcation point between 
gathering and transportation on OCS systems.\14\
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    \14\ 87 FERC at 62,248.
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    Although not all OCS pipeline systems exhibit such a centralized 
aggregation point, e.g., facilities with a straight-line or spine-and-
lateral type configuration, the presence of such a location would be 
considered the offshore analogue of the onshore ``central-point-in-the-
field'' criterion.
    The Commission's decision on remand, based on its reformulated test 
that included the central point of aggregation as a factor offshore, 
was upheld by the U.S. Court of Appeals for the District of Columbia 
Circuit in Exxon (note 4 supra).\15\
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    \15\ See also Williams Gas Processing--Gulf Coast Company, L.P. 
et al. v. FERC, No. 01-1327 (DC Cir. June 20, 2003).
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C. The ``Reformulated, Modified Primary Function Test''

    Despite the several modifications of the primary function test 
described above, its utility in identifying nonjurisdictional gathering 
facilities remains uneven. As mentioned, the rule seems to work fairly 
well onshore, possibly because where other factors are not conclusive, 
there is usually a processing plant located at the end of a gathering 
system that serves as a logical demarcation point between 
jurisdictional and nonjurisdictional systems. Also, after an initial 
round of decisions interpreting the 1996 Policy Statement applying the 
primary function test to facilities located in deep water beyond the 
OCS, there has been relatively little controversy. In the shallow areas 
on the OCS, on the other hand, the status of facilities remains 
unsettled. The Commission continues to receive requests to reclassify 
jurisdictional transmission facilities as gathering, over the objection 
of customers who have been served through the facilities. In these 
types of cases, the correct interpretation of the primary function test 
is usually the main issue.
    Based on the number of contested cases presented to us, we are 
concerned about the high degree of uncertainty that seems built into 
the primary function test as applied offshore. The primary function 
test lists numerous factors for consideration, with no one factor 
having priority. Thus, for example, the size of a particular system may 
suggest that it is transmission, but the configuration may suggest 
gathering. The primary function test does not indicate how such 
inconsistencies should be resolved. The result, over time, has been the 
gradual reclassification of more and larger systems as gathering, even 
in cases where systems had been regulated for many years under the 
Natural Gas Act. Systems with generally similar physical characteristic 
may have a different regulatory status because of relatively minor 
physical differences. This result can produce different regulatory 
results for competitors who perform essentially the same economic 
function. It is also seems unfair to customers who may have made 
investments relying on the regulated status of a transporter, only to 
find themselves subject to the market power of that transporter in its 
new deregulated form. The ``need for regulation'' may not create 
authority to regulate; on the other hand, inconsistent classification 
and regulatory treatment cannot be what Congress intended when it 
established a comprehensive scheme of federal regulation that included 
transportation from the OCS.

Public Conference

    The Commission is convening a public conference to hear suggestions 
from interested persons on developing a new test for gathering on the 
OCS that is reasonably objective and that furthers the regulatory goals 
of the Natural Gas Act. (The conference will not include the policy 
adopted for deepwater facilities in Docket No. RM96-5-000.) A new test 
should ensure that similar facilities are subject to similar regulatory 
treatment. It should also provide incentives for investment in 
production, gathering, and transportation infrastructure offshore, 
without subjecting producers to the unregulated market power of third 
party transporters. Persons who appear at the conference should be 
prepared to indicate how the Commission's definition of gathering can 
be changed to achieve these goals. Persons seeking to make formal 
statements at the public conference should be prepared to address 
questions set forth below. Other questions may arise during the course 
of the proceedings.

Questions

    1. To what extent should a gathering test that be based on the 
length and diameter of the pipeline, the extent the facilities are 
operationally integrated with either production or transportation 
facilities, the function of compression in relation to the facilities, 
and the proximity to the pipeline transportation grid?
    2. To what extent should the location of processing plants, the 
central point of aggregation, the operating pressure of a line, and 
geographic configuration of facilities, be considered relevant in 
evaluating the status of facilities on the OCS? What are the advantages 
and disadvantages of relying on these factors? Are there any other 
factors that should be considered?
    3. What should be the relevance of non physical factors such as a 
facility's history of regulation or the major business purpose of an 
owner?
    4. If formerly certificated facilities are determined to be 
gathering, may the Commission nonetheless require the company to file 
for abandonment under section 7(b) of the Natural Gas act before the 
facilities may be transferred to another company?

Procedures

    The public conference convened by this notice will be held on 
September 23, 2003 at the offices of the Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426. All interested 
persons are invited to attend. Persons interested in speaking or making 
a presentation should indicate their interest no later than September 
3, 2003 by a letter addressed to the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, and 
should refer to Docket No. AD03-13-000. Each request to participate 
must include the name of a contact person, their telephone number and 
e-mail address. There is no need to provide advance notice to the 
Commission simply to attend the conference.
    Comments addressing the questions set out in this notice may also 
be filed by September 3, 2003. Every effort will be made to accommodate 
requests to make presentations, but depending on the number of requests 
received, a limit may have to be placed on the number of presenters and 
the time allowed for presentations.
    Members of the Commission intend to participate in the public 
conference and will reserve time for questions and answers. In a 
subsequent notice, we will provide further details on the conference, 
including the agenda and a list of participants, as plans evolve. For 
additional information, please contact Gordon Wagner, Office of General

[[Page 50533]]

Counsel, phone 202-502-8947, e-mail: [email protected].

Magalie R. Salas,
Secretary.
[FR Doc. 03-21373 Filed 8-20-03; 8:45 am]
BILLING CODE 6717-01-P