Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02261/USCOURTS-ca10-88-02261-0/pdf.json

Parties Involved:
ANR Pipeline Company
Intervenor
Cascade Natural Gas Corporation
Intervenor
Colorado Interstate Gas Company
Intervenor
Federal Energy Regulatory Commission
Respondent
Natural Gas Corporation of California
Intervenor
Northwest Pipeline Corporation
Petitioner
Pacific Gas and Electric Company
Intervenor
Questar Pipeline Company
Intervenor
Southwest Gas Corporation
Intervenor
Washington Natural Gas Company
Intervenor

Document Text:

PUBLISH 

UNITED STATES COURT OF APPEALS 

FOR THE TENTH CIRCUIT 

NORTHWEST PIPELINE CORPORATION, ) 

Petitioner, 

v. 

FEDERAL ENERGY REGULATORY 

COMMISSION, 

Respondent, 

QUESTAR PIPELINE COMPANY; 

COLORADO INTERSTATE GAS 

COMPANY; WASHINGTON NATURAL 

GAS COMPANY; CASCADE NATURAL 

GAS CORPORATION; SOUTHWEST GAS 

CORPORATION; ANR PIPELINE 

COMPANY; PACIFIC GAS AND 

ELECTRIC COMPANY; and NATURAL 

GAS CORPORATION OF CALIFORNIA, 

Intervenors. 

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No. 88-2261 

FILED 

United States Court of Appeals Tenth circuit 

JUN 1 3 1990 

ROBERT L. HOECKER 

Clerk 

ON PETITION FOR REVIEW OF ORDERS OF THE 

FEDERAL ENERGY REGULATORY COMMISSION 

No. RP82-56-000 

Steven W. Snarr, Assistant General Counsel, 

Senior Attorney, on the briefs) Salt Lake 

Petitioner Northwest Pipeline Corporation. 

(Mark c. Moench, 

City, Utah, for 

Robert Wolfe, Attorney, (Catherine C. Cook, General Counsel and 

Jerome Feit, Solicitor, on the brief) Washington, D.C., for 

Respondent Federal Energy Regulatory Commission. 

Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 1 
Gary G. Sacket, Division Counsel, Salt Lake City, Utah, for 

Intervenor Questar Pipeline Company. 

Robert B. McLennan, Attorney, San 

Intervenors Pacific Gas and Electric 

Corporation of California. 

Francisco, California, for 

Company and Natural Gas 

Daniel F. Collins, Donald C. Shepler, and Kathrine L. Henry, 

Washington, D.C., on the brief for Intervenors ANR Pipeline 

Company and Colorado Interstate Gas Company. 

Before MCKAY, MOORE, and ANDERSON, Circuit Judges. 

MOORE, Circuit Judge. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 2 
( 

Northwest Pipeline Corporation (Northwest) petitions for 

review of two orders of the Federal Energy Regulatory Commission 

(FERC or the Commission) . asserting jurisdiction over certain 

facilities under§ l(b) of the Natural Gas Act (NGA), 15 u.s.c. 

§ 717(b). Northwest urges the production and gathering exclusion 

of§ 717(b) exempts these facilities. Finding error in the 

Commission's assertion of jurisdiction, we reverse the orders in 

this respect. 

I. Background 

Northwest operates an interstate gas pipeline system which 

extends from New Mexico to Washington in the western United 

States. In addition to transporting and selling gas, Northwest 

produces, puichases, and imports gas, almost all of which is sold 

for resale subject to the Commission's jurisdiction. 

Northwest also owns and operates several gathering systems1 

in New Mexico, Colorado, Utah, and Wyoming, which are utilized for 

its own system supply and for other parties. The focus of the 

underlying rate proceeding in this case is the Piceance Basin 

area, comprised of six gathering facilities located in Colorado 

and Utah. Of the six Piceance Basin facilities, three, Grand 

Valley, Foundation Creek, and North Douglas Creek, are connected 

1The terms, "gathering system" or "gathering facilit.y, 11 refer to 

"pipelines and other facilities used to collect gas from various 

wells and bring it by separate and individual lines to a central 

point where it is delivered into a single line." In re Barnes 

Transp. Co., 18 F.P.C. 369 (1957). "Gathering lines" are "[p]ipes 

used to transport oil or gas from the lease to the main pipeline 

in the area .... In the case of gas, the flow is continuous 

from the well head to the ultimate consumer, since gas cannot be 

stored." 8 H. Williams & c. Meyers, Oil and Gas Law 406-07 (1987). 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 3 
to Northwest's own mainline transmission system; and three, River 

Bend, Love, and Argyle, are connected to the transmission system 

of Mountain Fuel Resources, Inc. 2 

Natural Gas Corporation of California (NGC), an exploration 

subsidiary of Pacific Gas and Electric Company (PG&E), utilizes 

Northwest's gathering and transportation services in the Piceance 

Basin area. Northwest moves NGC gas from the wellhead in the 

Rocky Mountain region through a tentacular network which feeds 

into Northwest's interstate pipeline for ultimate delivery to PG&E 

at the California border. Northwest's pipeline provides the "most 

practical routing for transportation of NGC's gas." 

270, 38 F.E.R.C. ~ 61,302, at 61;979 (1987). 

Opinion No. 

These proceedings were generated by Northwest's filing a 

general rate increase for the gathering and transportation 

services charged to NGC in the Piceance Basin area. Ultimately, 

the parties agreed to proposed settlements approved by the 

Commission on all issues except the appropriate rate level for 

gathering services Northwest performs for NGC in the Piceance 

Basin. Surviving the Commission's resolution of this rate issue 3 

is the dispute over the propriety of FERC's assertion of 

jurisdiction 

facilities. 

in the first instance over these gathering 

2Questar Pipeline Company assumed the interests of Mountain Fuel 

Resources, Inc., and, as an intervenor in this action, filed a 

brief. 

3The ALJ divided the gathering rate issue into four separate 

inquiries: (1) the Commission's jurisdiction to review 

Northwest's gathering rates; (2) the choice of rate method; (3) 

the cost allocation and rate design; and (4) the prudence of 

Northwest's expenditures for the facilities involved. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 4 
The Commission affirmed the initial decision of the ALJ who 

found the gathering services Northwest performed for NGC subject 

to FERC's jurisdiction. The Commission agreed with the ALJ that 

the parties' use of the term "gathering" as a shorthand to 

describe the services at issue was not alone dispositive of the 

function performed. 4 Instead, Commission and court precedent 

cast these services as the transportation of natural gas in 

interstate commerce. Id., at 61,981. To reach this conclusion, 

the Commission reasserted its current preference for judging the 

facilities by using a "primary function" test instead of the more 

rigid, traditional tests previously applied to distinguish between 

jurisdictional transportation and nonjurisdictional gathering. 5 

By fostering the application of this test, the Commission 

suggested it could judge the facilities as a whole, not by their 

individual parts, so that given lines would not be segregated into 

jurisdictional and nonjurisdictional segments. Moreover, the 

Commission asserted that even if the Piceance Basin encompassed 

true gathering lines in terms of configuration, its concomitant 

primary function of transportation of gas from the wellhead to the 

4various contracts between Northwest and NGC were entitled Gas 

Gathering Agreements and referred to the services as gathering. 

5Previously, the Commission had applied two other tests. The 

"behind-the-plant" test made the determination of whether a 

particular facility was exempt based on location; i.e., if the 

facility was located behind a gas processing plant, it was judged 

to be nonjurisdictional. See Wisconsin v. FPC, 205 F.2d 706 

(D.C.), cert. denied, 346O.S. 896 (1953). The "central point" 

test characterized the gathering function as continuing until "the 

point where gas is collected at one central point before delivery 

into a single line where transmission begins." In re Barnes 

Transp. Co., 18 F.P.C. at 372. See Opinion No. 270, 38 F.E.R.C. 

~ 61,302, at 61,988. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 5 
interstate pipeline would override, subjecting the facilities to 

the Commission's jurisdiction. Finally, the Commission affirmed 

the assertion of jurisdiction on the ground that were it to 

decline regulating these facilities, an attractive regulatory gap 

would be created. "The conclusion is irresistible that Congress 

desired regulation by federal authority rather than 

nonregulation." Id., at 61,983 (quoting FPC v. Transcontinental 

Gas Pipe Line Corp., 365 U.S. 1, 28 (1961)). 6 

Subsequently, the Commission denied Northwest's request for a 

rehearing, rejecting Northwest's contentions that the Commission 

improperly redefined the primary function test and inexplicably 

departed from prior decisions. Viewing the result of this case 

against the vast regulatory scheme created by Congress, the 

Commission concluded that "the results here must be based on the 

intent of Congress in enacting the Act and that the Commission, 

6Two Commissioners disagreed with this conclusion, questioning the 

underlying assumptions on which the decision was based and 

addressing what they considered to be the order's redefinition of 

the primary function test. Commissioner Sousa stated: 

This test, as applied as recently as last month, has 

made the jurisdictional determination based on the 

primary function of the facility. The judge's analysis, 

while citing to the applicable precedent, redefines the 

test so as to make the primary function of the company 

determinative. The decision, without discussing any 

reasons for the change, adopts the new approach to the 

matter •••. 

38 F.E.R.C. ,1 61,302, at 61,990 (Commissioner Sousa, dissenting; 

Commissioner Trabandt, concurring in the dissent). The 

Commissioners, however, concurred in the rate result of the order. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 6 
( 

nonetheless, has jurisdiction over these rates." Opinion No. 

270-A, 43 F.E.R.C. I 61,491, at 62,215 (1988). 7 

Northwest now challenges FERC's orders, arguing theCommission (1) exceeded its statutory authority, essentially 

rendering the§ l(b) gathering exemption a nullity; (2) departed 

from precedent in an arbitrary and capricious manner; (3) 

discriminated against interstate pipelines in its application of 

the gathering exemption; and (4) failed to support its decision 

with substantial evidence. We have jurisdiction to review these 

contentions under section 19(b) of the NGA, 15 u.s.c. § 717r(b). 

II. Section l(b) Jurisdiction 

A. 

Northwest asserts section l(b) of the NGA circumscribes the 

Commission's jurisdiction to regulate the transportation of 

natural gas in interstate commerce for sale or resale and reserves 

the regulation of production or gathering to the states. In 

effect, Northwest contends the Commission's broad sweep of 

jurisdictional and nonjurisdictional facilities under one rug 

implicitly repeals the production and gathering exemption contrary 

to congressional intent and Commission and court precedent. 

In opposition, summarizing the background and interplay of 

the NGA and the National Gas Production Act (NGPA), the Commission 

responds that its present regulatory effort reflects longstanding 

7In a second dissent, Commissioner Sousa reiterated his 

to the opinion's departing from the Farmland definition, 

p.12, of the primary function test without providing any 

basis for the action. 

-7-

objection 

see infra 

reasoned 

Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 7 
precedent that "no aspect of the interstate business of 

transporting or selling natural gas for resale is to be left 

unregulated by the Commission." In FERC's view, this case becomes 

an essential facet to the expanded regulatory role Congress 

intended in the agency's oversight of national energy production. 

According to FERC, this evolving regulatory scheme promotes and 

protects a national, interstate gas market. Moreover, fostering 

competitive market forces stimulates the national wellhead 

commodity market and assures equal and open access to that 

market. 8 The Commission contends that, within this scheme, the 

production and gathering exemption must be narrowly drawn and 

confined to the physical acts alone of production and gathering of 

natural gas which the states may regulate in the interest of 

natural resource conservation. 

B. 

Section l(b) of the NGA, 15 U.S.C. § 717(b), defines FERC's 

jurisdiction. It states: 

(b) The provisions of this chapter shall apply to 

the transportation of natural gas in interstate 

commerce, to the sale in interstate commerce of natural 

gas for resale for ultimate public consumption for 

domestic, commercial, industrial, or any other use, and 

to natural-gas companies engaged in such transportation 

8The Commission's brief includes a discussion of Order No. 436, 18 

C.F.R. § 284.8(b), which, it explains, imposes an open access 

condition on pipelines seeking Section 311 transportation or 

blanket certificates for transportation. The open access 

condition requires the pipelines to provide transportation without 

undue discrimination or preference. Within this scheme, FERC 

maintains that its right to regulate rates from the wellhead to 

the access point of a main transmission line is essential to 

perform its statutory duty of preventing "unjust and unreasonable" 

charges and anti-competitive abuse. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 8 
or sale, but shall not apply to any other transportation 

or sale of natural gas or to the local distribution of 

natural gas or to the facilities used for such 

distribution or to the production or gathering of 

natural gas. 

In§ l(b) of the Act, 

[t]hree things and three only Congress drew within its 

own regulatory power, delegated by the Act to its agent, 

the Federal Power Commission. These were (1) the 

transportation of natural gas in interstate commerce; 

(2) its sale in interstate commerce for resale; and (3) 

natural gas companies engaged in such transportation or 

sale. 

FPC v. Louisiana Power & Light Co., 406 U.S. 621, 636 (1972) 

(quoting Panhandle Eastern Pipe Line Co. v. Public Service Comm'n, 

332 U.S. 507, 516 (1947)). Set apart from federal regulation were 

the activities of production and gathering. Therefore, "under 

section l(b) the Commission does not have express or implied rateregulatory jurisdiction of the production and gathering of gas." 

Colorado Interstate Gas Co. v. FPC, 142 F.2d 943, 952 (10th Cir. 

1944), aff'd, 324 U.S. 581 (1945). 

However, because the NGA's "utility-type ratemaking," 

Transcontinental Gas Pipe Line Corp. v. State Oil and Gas Bd., 474 

U.S. 409, 420 (1986), was ill-suited to regulate or remedy the 

severe gas ahortages of the early 1970's, Congress enacted the 

NGPA, which "reflects a congressional belief that a new system of 

natural gas pricing was needed to balance supply and demand." 

Id. at 421 (citing S. Rep. No. 95-436, at 10). Along with the 

NGPA's unleashing market forces to a greater extent to determine 

the supply, demand, and price of natural gas, FERC's regulatory 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 9 
control expanded to include jurisdiction over the intrastate 

market. Id. at 421. 9 

Nevertheless, the Court has continued to circumscribe FERC's 

broad authority to regulate comprehensively under the NGA and 

NGPA. Recently, in Northwest Central Pipeline Corp. v. State 

Corp. Comm'n, 489 U.S. 493, 109 S. Ct. 1262 (1989), the Court 

posited the conclusion that FERC does not preempt the States' 

"traditional power'' to regulate the production of gas on the 

premise that FERC's regulatory power is "carefully divided up." 

489 U.S. at , 109 S. Ct. at 1273. The Court emphasized that 

although Congress could have empowered FERC to regulate the entire 

natural gas field to the limit of constitutional power, it did not 

do so. Id. at 1273-74. Instead, Congress confined FERC's 

jurisdiction within the limits of section l(b), specifying not 

only the intended reach of federal power, but also "the areas into 

which this power was not to extend." Id. at 1274 (quoting FPC v. 

Panhandle Eastern Pipe Line Co., 337 U.S. 498, 503 (1949)). 

FERC, therefore, has exclusive jurisdiction over the sale and 

transportation of natural gas in interstate commerce for resale, 

while Congress expressly reserved to the states "the power to 

regulate, among other things 'the production or gathering of 

natural gas,' that is, 'the physical acts of drawing gas from the 

earth and preparing it for the first stages of distribution.'" 

109 S. Ct. at 1274 (quoting Northern Natural Gas Co. v. State 

9However, the Court has specifically noted that the enactment of 

the NGPA did not alter its consistent interpretation of FERC's 

jurisdiction. See Transcontinental Gas Pipe Line Corp. v. State 

Oil & Gas Bd., 474 U.S. 409 (1986). 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 10 
Corp. Comm'n, 372 U.S. 84, 89-90 (1963)). 1° Consistent with 

Congress' intent, the terms, production and gathering are to be 

"narrowly confined,'' Transcontinental Gas Pipe Line, 474 U.S. at 

418, and "exceptions to the primary grant of jurisdiction in 

section l(b) are to be strictly construed." Interstate Natural 

Gas Co. v. FPC, 331 U.S. 682, 690-91 (1947). 

Thus, although FERC's power to regulate may extend to the 

limits of its jurisdiction, the "express jurisdictional limitation 

on FERC's powers contained in § l(b) of the NGA,'' Northwest 

Central Pipeline, 109 S. Ct. at 1274, cannot be recast or obscured 

in the agency's attempt to formulate policy to protect the public 

interest and burner-tip consumer. 11 Unless Congress removes 

existing limitations on FERC's jurisdiction, the Agency's 

perception of national policy cannot establish or alter that 

jurisdiction which Congress has expressly granted. 

Louisiana Power & Light Co., 406 U.S. 621, 636 (1972). 

See FPC v. 

lOin Saturn Oil & Gas Co. v. FERC, 250 F.2d 61, 64 (10th Cir. 

1957), cert. denied, 355 U.S. 956 (1958), a case involving the 

issue whether a small company selling natural gas at the wellhead 

is subject to the Natural Gas Act, the court stated the production 

and gathering exemption "applies to the physical activities, 

facilities, and properties used in the production and gathering of 

natural gas and not to the business of production and gathering." 

(citing Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 677 

(1954)). 

11 Indeed, FERC's appellate brief does little to examine the 

factual and legal underpinning of this adjudication. Instead, the 

questions in this case are submerged in the Commission's broad 

policy discussions about the need for national supervision of 

energy policy. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 11 
c. 

We review the Commission's determination that the Piceance 

Basin facilities are jurisdictional to ascertain whether the 

decision has an adequate basis in law. Walker Operating Corp. v. 

FERC, 874 F.2d 1320, 1328 (10th Cir.), cert. denied, U.S. , 

110 s. Ct. 365 (1989) (citing Alexander v. FERC, 609 F.2d 543, 546 

(D.C. Cir. 1979)). "Unlike factual findings, questions of law are 

freely reviewable by the courts, and courts are under no 

obligation to defer to the agency's legal conclusions." Id. at 

1332 (quoting Pennzoil v. FERC, 789 F.2d 1128, 1235 (5th Cir. 

1986)). 

The Commission held that because the gathering lines in 

question are connected to an interstate pipeline, owned by a major 

interstate pipeline, the lines, even if performing traditional 

gathering functions, would be deemed jurisdictional. To reach 

this result, the Commission applied the primary function test. 

Our review must focus on the reformulation and application of the 

test to the facts of this case. 

III. Primary Function Test 

A. 

In Farmland Industries, Inc., 23 F.E.R.C. ~ 61,063 (1983), 

the Commission announced its preference for applying a primary 

function test to decide whether a particular facility or pipeline 

qualifies for the gathering exemption. Indeed, the Commission 

adopted the test with the recognition that its analysis of the 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 12 
gathering exemption had become "more refined" over the years. 

Id., at 61,142. 

In a prior disposition, the Commission denied Farmland, 

Inc. 's predecessor the gathering exemption on the ground that the 

predecessor, Brooks Pipe Line Company, was a "'natural-gas 

company' engaged in the transportation of gas in interstate 

commerce." This designation, the Commission stated, arose from 

the application of the "producer-pipeline dichotomy," a single 

mechanical test that was dispositive of the facility's status. 

Id. 

Applying the primary function test, however, the Commission 

reversed its prior order. The Commission explained, "the ultimate 

test is whether the primary function of the facility can be 

classified as transportation or gathering." Id., at 61,143. The 

Commission listed several factors to consider in judging the 

facility: 

1) the diameter and length of the facility, 

2) the location of compressors and processing plants, 

3) the extension of the facility beyond the central 

point in the field, 

4) the location of wells along all or part of the 

facility, and 

5) the geographical configuration of the system. 

Applying these criteria to Farmland, the Commission concluded 

the facility (1) located behind a processing plant; (2) spanning 

only 18 miles; (3) having a six-inch diameter pipe; and (4) 

operated at nonpipeline transmission pressures, had, as its 

primary function, the gathering of natural gas. A companion 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 13 
facility, satisfying both the central point in the field and 

primary function tests, was also judged to be gathering although 

it, too, had previously been denied the exemption. Farmland, 

thus, indicated that no single factor would be dispositive in the 

Commission's consideration of all the facts and circumstances of a 

given case. 12 

In Dorchester Gas Producing Co., 32 F.E.R.C. ~ 61,409 (1985), 

the Commission examined certain facilities located behind a 

processing plant and concluded the section l(b) exemption applied. 

The Commission reiterated: 

[I]t would consider all the facts and circumstances of 

each case, rather than mechanically applying any one 

particular standard to determine the nature of any 

facility. The facility need not meet all of the 

Farmland criteria. In any given situation, the criteria 

can and frequently do overlap. The Farmland primary 

function test has not overruled, but merely subsumes, 

other traditi£~al tests used to determine the nature of 

the facility. 

Id., at 61,917 (emphasis added), 

In West Texas Gathering Co., 45 F.E.R.C. ~ 61,386 (1988), the 

Commission stated that "an analysis under the primary function' 

test must assess and weigh all of the specific facts and 

12The Commission reevaluated and then reversed its prior order in 

Beacon Gasoline Co., 30 F.E.R.C. ~ 61,041 (1985), and found the 

facilities operationally similar to those in Farmland upon 

application of the primary function test. In another order, 

Locust Ridge Gas Co., 37 F.E.R.C. 11 61,295 (1986), the Commission 

reversed its denial of the gathering exemption although the 

facilities were previously found to serve the sole purpose of 

bringing gas to a point of interconnection with two interstate 

pipelines. Id., at 61,882. 

13 In Dorchester Gas Producing Co. v. FERC, 848 F.2d 634, 637 

Cir. 1988), the Fifth Circuit, reviewing a subsequent FERC 

clarifying this order, 36 F.E.R.C. ~ 61,049 (1986), observed 11 the appropriate standard to be applied was evolving." 

-14-

(5th 

order 

that 

Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 14 
circumstances present in a given system, and on the basis of that 

assessment, determine whether the primary function of a pipeline 

system is the gathering or the transmission of natural gas." Id., 

at 62,221. The Commission denied rehearing of its prior order 

finding jurisdiction over the facility. However, in a separate 

dissent to the prior order, a Commissioner noted that certain 

factors were too heavily weighed. Indeed, the dissent predicated 

its analysis on the recognition that "the delivery of gas to a 

pipeline is the normal function of a gatherer. It is rare to find 

a case where a gathering facility doesn't deliver, ultimately, to 

a pipeline facility." 43 F.E.R.C. ~ 61,305, at 61,845 (1988) 

(Commissioner Sousa, dissenting) (citation omitted). 14 

More recently, in EP Operating Co. v. FERC, 876 F.2d 46 (5th 

Cir. 1989), the Fifth Circuit reversed FERC's denial of the 

gathering exemption upon finding the Commission could not explain 

its disparate treatment of the Green Canyon Line, the line at 

issue, from a similar line found to be nonjurisdictional. The 

court examined the application of the primary function test to two 

similar cases, both involving lines from Outer Continental Shelf 

(OCS) operations. The court noted that in the first cases, Shell 

Gas Pipeline Co., 36 F.E.R.C. ~ 61,317 (1986), and Shell Gas 

Pipeline Co., 41 F.E.R.C. ~ 61,032 (1987) (Shell I & II), the 

Commission rejected the mechanical application of length and 

diameter standards, while in the EP Operating case, the Commission 

judged the line jurisdictional because of its length and diameter. 

The Commission also considered a sixth factor, the operating 

14see Locust Ridge, 37 F.E.R.C. ~ 61,295 (1986). 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 15 
pressure of the line, which was not used in Farmland. Despite the 

Commission's characterization of the floating rig as the central 

point in the field, the court correctly noted that "this is only 

one factor to be considered. The true test of primary function is 

whether, with reference to the specific facts and circumstances of 

this particular line, its primary function is gathering." Id. at 

49_15 

Thus focusing on the specific facts and circumstances of the 

Green Canyon Line, the Fifth Circuit held that the fifty-one-mile 

line, the distance necessary to connect the point of production to 

the nearest interstate pipeline is "simply the most practical way 

to move the product from the seabed to a point nearer shore where 

it can be processed and introduced into a pipeline." Id. The 

Fifth Circuit also noted the geographic configuration of the lines 

was almost identical to that in Shell I & II. The court 

concluded, "The primary function of the Green Canyon Line is as 

[sic] an integral part of the natural gas gathering system for the 

Green Canyon area, and the line is exempt from Commission 

jurisdiction." Id. A reasoned analysis, the court observed, must 

eschew "the application of any overarching bright line standards." 

Id. at 48. 

15since the central point is considered the place where all 

"gathered'' gas is delivered into a single line, gathering would be 

complete at that point "so that lines extending downstream from 

there are generally considered to be transportational lines." EP 

Operating Co., 876 F.2d at 49. Noting that the Commissioner had 

not considered a central point in the field factor in Shell I & 

II, the court questioned the validity of this analysis for 

isolated OCS operations. Id. 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 16 
B. 

Although FERC's analytical framework provides a flexible 

method for evaluating a particular facility, we conclude FERC 

improperly applied its own test to the Piceance Basin facilities. 

Six subsystems are at issue, three of which connect to Mountain 

Fuel's pipeline, and three to Northwest's pipeline. Of the first 

group, the Riverbend subsystem, for example, collects gas from 

twenty-three wells (1) which are scattered along the lines; (2) 

which have three- or four-inch diameters; (3) at low pressure; and 

(4) dehydration facilities are located at three points of 

interconnection' in order to prepare the gas for later transmission 

in Northwest's high-pressure lines. Despite the other aspects of 

its configuration, the Commission found that Riverbend had no 

central gathering point and connected directly into Mountain 

Fuel's mainline. 

In the second group of subsystems, North Douglas Creek, for 

example, gathers gas from eighty-five wells (1) dispersed 

throughout the producing area along the lines; (2) at low 

pressure; (3) located behind a processing plant; and (4) which 

serves as a central point. The Commission, adopting the findings 

of the ALJ, denied the exemption to North Douglas Creek without 

specifically detailing its characteristics. A third subsystem, 

Grand Valley, interlaces a producing area (1) connecting ninetyfour wells; (2) with lines ranging in diameter from three inches 

to twelve inches; (3) at low pressure; and (4) the West Water 

Compressor Station collects gas and dehydrates it to prepare it 

for transmission in Northwest's mainline. Grand Valley's system 

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Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 17 
was also denied the exemption without the Commission's explaining 

why its characteristics failed to satisfy the primary function 

test. Instead, the Commission stated that "the three facilities 

[North Douglas Creek, Grand Valley, and Foundation 

connected to Northwest's transmission system 

subsystems lack central gathering points; (2) they 

Creek] 

( 1) these 

include 

compressor stations; and (3) that all three subsystems function as 

part of Northwest's interstate pipeline system. 1116 In Dorchester 

Gas Producting Co., 32 F.E.R.C. ~ 61,409 (1985), however, the 

Commission judged the compression occurring in the field to be 

incidental to the gathering process and not intended for mainline 

transmission. 1 7 

The Commission not only failed to apply its own test but also 

ultimately trumped nonjurisdictional factors with jurisdictional 

factors. Indeed, the ALJ found, and the Commission agreed, that 

even if the configurations examined involved true gathering lines, 

"they would still be considered jurisdictional because of their 

primary transportation function." 38 F.E.R.C. ~ 61,302, at 

61,982. In support, the Commission cited Continental Oil Co. v. 

FPC, 266 F.2d 208 (5th Cir.), cert. denied, 361 U.S. 827 (1959), 

which stated that if a facility performs an exempt function as 

well as a jurisdictional function, FERC may exercise jurisdiction 

16Although Northwest asserts North Douglas Creek, Riverbend, and 

Grand Valley have central points, the Commission found otherwise. 

17sorne of the Dorchester lines were 12 inches in diameter. 

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over the entire facility. However, Continental Oil expressly 

involved the production exemption. 18 

The Commission's orders state that the status of Northwest as 

an interstate pipeline company subject to its jurisdiction is one 

relevant factor to be included in its primary function analysis. 

Nevertheless, despite any possible showing that the facilities 

might perform gathering, the Commission would deem them 

jurisdictional because of the perceived primary transportation 

function; i.e., ultimately, the facilities are owned by and 

eventually connected to a company which has as its primary 

function the interstate transportation of gas. 

By taking Northwest's status into consideration as one 

factor, the Commission has, in fact, subsumed the primary function 

analysis within that factor. However, Northwest's status in 

interstate transportation cannot alone transform the character of 

these particular facilities. Some transportation must occur to 

move the gas from the wellhead in some manner. 19 What the 

Commission must decide in applying the primary function test is 

whether that transportation is incidental to traditional gathering 

functions and, thus, exempt from its jurisdiction. 

18 rn Continental Oil, the Fifth Circuit specified, "Neither 

gathering nor facilities for gathering are in issue here; only 

facilities for production." 266 F.2d at 210. 

19 rn Hamman v. Southwestern Gas Pipeline, 721 F.2d 140 (5th Cir. 

1983), a case involving the Natural Gas Pipeline Safety Act, the 

court noted that the regulations accompanying this act define a 

gathering line as ''a pipeline that transports gas from a current 

production facility to a transmission line or main." 49 C.F.R. 

§ 192.3 (emphasis added). 

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Of equal concern is the broad reach of the result. 20 

Although the analytical basis requires the Commission to consider 

the facts and circumstances of each facility, the Commission again 

submerges this particularized analysis in an extended discussion 

of FERC's broad national authority. 21 The Commission is correct 

that "Congress did not desire that an important aspect of this 

field be left unregulated. 1122 FPC v. Transcontinental Gas Pipe 

Line Corp., 365 U.S. 1, 19 (1961). However, at the same time, the 

Court added that "Congress did not desire comprehensive federal 

regulation; much authority was reserved for the States." Id. 

There is no question that in section l(b) Congress intended 

to distinguish between transportation in interstate commerce and 

"any other transportation" related to facilities for the 

production or gathering of natural gas. The Commission's 

announced intention to utilize the primary function test to 

evaluate these differences itself reinforces this distinction. 

20ouring oral argument, Commission counsel was asked to give an 

example of an interstate pipeline performing gathering services 

that is not or would not be subject to the Commission's 

jurisdiction. Counsel ventured the example of a noncontiguous 

pipeline. In a subsequent clarification to the court, FERC's 

counsel stated, "The Commission's position in this case is that 

the service of moving natural gas in interstate commerce for hire 

by an interstate pipeline company, the rates charged and 

conditions for that service, and the facilities through which that 

service is performed are subject to the Commission's jurisdiction 

under the Natural Gas Act." Letter from the Office of the General 

Counsel of FERC dated January 24, 1990, (emphasis added). 

21 In its brief, the Commission states, "[W]hat is at stake in this 

proceeding is the Commission's ability to carryout [sic] its 

statutory mandate by fostering wellhead competition in a national 

commodity market through an open, unified national gas 

transportation network." 

22The Commission's brief misquotes this sentence stating "any 

important aspect." See Respondent's brief at 19. 

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However, the movement of gas alone from the wellhead cannot 

transform the services into interstate transportation. See 43 

F.E.R.C. '61,305, at 61,845. 

We share the Fifth Circuit's concern that the Commission has 

failed to provide a reasoned explanation for classifying these 

lines as jurisdictional. The gathering exemption was not meant to 

attach only to certain owners/operators but to facilities. If, as 

FERC maintains, the primary function test was intended to be more 

flexible, to avoid mechanical application of single factors, and 

to examine and weigh each element, the result must still be based 

on the calculation of these factors in this adjudication, not the 

Commission's perception of national regulatory policy. Indeed, 

although FERC may construct sound policy in this case, we do not 

believe it satisfies its own precedent or the 

Congress. 23 

intent of 

IV. Regulatory Gap 

As an additional ground for asserting jurisdiction, the 

Commission adopted the ALJ's conclusion that "the public interest 

requires a finding of jurisdiction because if the Commission did 

not regulate Northwest's gathering charges, a regulatory gap would 

be created." 38 F.E.R.C. ,r 61,302, at 61,984. The Commission 

relies on FPC v. Transcontinental Gas Pipeline Corp., 365 U.S. 1, 

28 (1961) (Transco). In resolving borderline cases not covered by 

23until FERC resolves this question, we 

alternate argument that sections 4(a) and 

§§ 717(c) and 717(d) respectively, provide 

asserting jurisdiction to review the rates 

-21-

do not consider its 

5 of the NGA, 15 U.S.C. 

another mechanism for 

charged. 

Appellate Case: 88-2261 Document: 01019867827 Date Filed: 06/13/1990 Page: 21 
explic~t congressional authority, the Transco Court explained, "we 

must ask whether state authority can practicably regulate a given 

area and, if we find that it cannot, then we are impelled to 

decide that federal authority governs. 1124 Id. at 19-20. If ''by 

its very nature" the problem is not one with which state 

regulatory commissions can be expected to deal, the conclusion is 

irresistible that Congress desired regulation by federal authority 

rather than nonregulation." Id. at 28. 25 

The Commission asserts that neither Colorado nor Utah, the 

states in which the Piceance Basin facilities are located, are 

interested in regulating the charges because the gas is consumed 

in other states; and even if they chose to regulate, they would be 

obliged to promote first their state interests, contravening 

FERC's statutory mandate to foster national wellhead competition. 

Although California, through the California Public Utilities 

Commission (CPUC), can review the rates PG&E paid to NGC and 

passed on to its consumers, the Commission asserts this indirect 

regulation, based on a ''prudency" standard, is ineffective and 

24 rn Transco, the Court held the Commission could deny 

certification based on the proposed end use for the gas, which 

considered the proposed inferior use in industrial boilers as 

opposed to use by domestic consumers, preemption of pipeline 

facilities for this inferior use, and price. 

25 In their brief in support of FERC, intervenors, PG&E and NGC 

state that FERC's jurisdiction over these facilities was clearly 

established in Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 

reh'g denied, 332 U.S. 785 (1947). Interstate, however, addressed 

the issue of whether the FPC, FERC's predecessor, had jurisdiction 

in the first instance over the sales of gas in interstate commerce 

from petitioner's wells transported through petitioner's lines. 

Both the regulatory setting and the facts are inapposite. Indeed, 

Interstate reaffirmed the States' ''full freedom" to regulate the 

physical production and gathering of natural gas. Id. at 690. 

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would ultimately lead to a hodgepodge of individual gathering 

rates. 26 

In support of this theory, the Commission relies on Public 

Service Comm'n v. FERC, 610 F.2d 439 (6th Cir. 1979), which held 

that FERC's jurisdiction includes the movement of natural gas from 

the wellhead through gathering lines owned by an interstate 

pipeline. The case, however, is inapposite. In Public Service, 

Kentucky gave a statutory preference to intrastate purchasers of 

certain interstate gas. As the court distinguished in City of 

Farmington v. FERC, 820 F.2d 1308, 1314 (D.C. Cir. 1987), the 

preference diverted sales of gas from "preexisting interstate 

sales -- over which the Commission clearly had jurisdiction -- to 

serve local consumers." (citation omitted). 

If, upon proper application of the primary function test, the 

facilities are indeed exempt from Commission jurisdiction, 

whatever "attractive gap'' results was clearly created by Congress. 

Jurisdiction must already exist before the Commission can resort 

to analyzing its regulatory role by application of this theory. 

Moreover, in other cases, FERC has approved the indirect 

regulation of gathering facilities, see, e.g., Galaxy Energies, 

Inc., 21 F.E.R.C. ,1 61,208 (1982); and its assertion that Colorado 

and Utah have no interest or an adverse interest in this 

regulation is speculative. In either case, on this record, the 

26 Intervenors, ANR Pipeline and Colorado Interstate Gas Company, 

contend that FERC's attractive gap argument seeks to "envelop 

gathering services provided by interstate pipelines within the 

fold of Order No. 436." Intervenor Questar Pipeline Company urges 

we reject these generic, policy-based grounds for a fact-specific 

analysis. 

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"attractive gap theory" is inappropriate to fill 

facilities are either gathering and exempt 

the 

from 

void. The 

Commission 

jurisdiction, or transportation and subject to jurisdiction. 

v. Conclusion 

Because we believe the Commission improperly applied its own 

test and failed to hinge its result to the particular facts of 

this case, we REVERSE its decision in Opinion Nos. 270 and 270-A. 

This conclusion obviates the need to address Northwest's 

contention that FERC's disposition denies it and other interstate 

pipelines the equal protection of the laws. The case is, 

therefore, REMANDED for a determination whether the facilities at 

issue are properly exempted from FERC's jurisdiction on the ground 

that they perform gathering functions as defined in section l(b). 

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