[Federal Register Volume 62, Number 158 (Friday, August 15, 1997)]
[Notices]
[Pages 43716-43718]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21613]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission
[Docket No. IN97-3-000]


Arkansas Oklahoma Gas Corporation; Order Instituting Proceeding

Issued August 8, 1997.
    Before Commissioners: James J. Hoecker, Chairman; Vicky A. 
Bailey, William L. Massey, and Donald F. Santa, Jr.

    Arkansas Oklahoma Gas Corporation (AOG) is a local natural gas 
distribution company in the Fort Smith, Arkansas area. It provides 
interruptible transportation (IT) of natural gas in interstate commerce 
subject to a blanket certificate issued under section 284.224 of the 
Commission's regulations.\1\ In a complaint to the Enforcement Task 
Force, a potential shipper stated that AOG's IT service agreements 
contain a ``sales provision'' requiring the shipper to sell gas to AOG 
when AOG determines that the gas is needed to protect AOG's sales to 
its local customers. The sales provision in AOG's IT agreements may 
violate sections 4 (a) and 4(b) of the Natural Gas Act (NGA),\2\ 
section 311 (a)(2) of the Natural Gas Policy Act of 1978 (NGPA),\3\ and 
sections 284.9(b)(1), 284.123(a) and 284.123(e) of the Commission's 
regulations relating to transportation under the blanket 
certificate.\4\
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    \1\ 18 C.F.R. Sec. 284.224 (1996).
    \2\ 15 U.S.C. 717c (a), (b) (1994).
    \3\ 15 U.S.C.A. Sec. 3371(a)(2) (1994).
    \4\ 18 C.F.R. Secs. 284.9(b), 284.123(a), 284.123(e) (1996).
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    This order establishes a proceeding pursuant to NGA sections 4, 5 
and 16 and NGPA sections 211 and 501.\5\ We are requiring AOG to sow 
why it has not violated NGA sections 4(a) and 4(b), NGPA section 
311(a)(2), or sections 284.9(b)(1), 284.123(a) and 284.123(e) of the 
Commission's regulations. We are also directing AOG to respond to data 
and document requests that relate to AOG's blanket certificate 
transportation.
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    \5\ 15 U.S.C. 717c, 717d, 717o, 3371, 3411 (1994).
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I. Background

    AOG makes direct sales to 60,000 residential and industrial 
customers in four Oklahoma and five Arkansas counties surrounding Fort 
Smith.\6\ AOG obtains system supply from more than 450 local production 
input points scattered throughout its system.\7\
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    \6\ See AOG's March 22, 1995 filing in Docket No. PR95-4-000, 
AOG's most recent rate case before the Commission.
    \7\ Id.
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    AOG received its Order No. 63 \8\ blanket certificate from the 
Commission on November 13, 1985.\9\ In particular, this certificate 
permits AOG to transport gas in interstate commerce under the same 
conditions as apply to transportation by intrastate pipelines under 
section 311(a)(2) of the Natural Gas Policy Act of 1978 (NGPA).\10\ 
These conditions are set forth in Part 284, Subpart C of the 
Commission's regulations. Section 284.224(e)(1) of the regulations 
provides that, as relevant here, any transportation transaction under 
an Order No. 63 blanket certificate is subject to the Subpart C terms 
and conditions and reporting requirements.\11\ In 1994, AOG transported 
8,334,725 MMBtu pursuant to its Order No. 63 authority, as compared to 
13,698,875 MMBtu that AOG distributed to retail customers.\12\
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    \8\ FERC Stats. & Regs. (Regulations Preambles 1977-1981) para. 
30,118 (1980).
    \9\ Arkansas Oklahoma Gas Corporation, 33 FERC para. 61,197 
(1995).
    \10\ 15 U.S.C. Sec. 3371(a)(2) (1994).
    \11\ When AOG received its Order No. 63 blanket certificate, the 
Commission regulated AOG as a ``natural gas company'' pursuant to 
the NGA. As such, AOG had received certificates under NGA section 7 
for constructing and operating facilities within this Commission's 
jurisdiction. In 1989, the Commission held that the Uniform 
Regulatory Jurisdiction Act of 1988 transferred exclusive 
jurisdiction over AOG's transportation of gas to ultimate consumers 
from the Commission to the Arkansas Public Service Commission and 
the Oklahoma Corporation Commission. Arkansas Oklahoma Gas 
Corporation, 48 FERC para. 61,338 (1989). As a result, except for 
the blanket certificate, the Commission vacated all NGA section 7 
certificates it had previously issued to AOG, effective October 6, 
1988. Nonetheless, AOG remains subject to the Commission's 
jurisdiction to the extent necessary to enforce the terms and 
conditions of the blanket certificate. Id.
    \12\ AOG's May 9, 1995 filing in Docket No. PR95-4-000, Answer 
to Item (2), p. 2 of 2.
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    In discussions with the Task Force, AOG stated that its IT 
agreements under its blanket certificate contain the following ``sales 
provision'' or a similar provision:

    Shipper agrees to sell to Transporter gas from the wells listed 
in the Exhibit ``A'', on a best efforts basis, when, in 
Transporter's judgment, the purchase of such gas is necessary to 
protect the continuity of gas service to Transporter's gas 
purchasing customers. Such a right to purchase from Shipper shall be 
up to the volumes sufficient for Transporter to cease curtailment. 
Any volumes in excess of those required to enable Transporter to 
meet its customers [sic] needs which Shipper can deliver to 
Transporter and which Transporter can transport will thereupon be 
transported pursuant to other provisions of the gas transportation 
agreement. Transporter will first balance gas deliveries and 
redeliveries and if Transporter is unable to balance them it will 
purchase the gas at the greater of the W.A.COG [sic] as filed with 
the Arkansas Public Service Commission for AOG system purchases or 
the ``net back'' price plus Transporter's transportation 
attributable to Purchaser's contract. (Use average W.A.COG for 
preceding twelve months.) Transporter further has the right to 
purchase transportation gas not currently flowing. These pricing 
provisions can be changed by mutual consent between the parties. 
This pricing provision is also subject to other pricing provisions 
set forth in any gas purchase contracts between Shipper and 
Transporter. Transporter's right to purchase gas hereunder shall be 
in effect as to any well listed in Exhibit ``A'' so long as this 
agreement is in effect.

    Pursuant to 18 C.F.R. Sec. 284.123(e), AOG was required to file an 
operating statement concerning its transportation under the blanket 
certificate.\13\ The statement must ``describe [ ] how the pipeline 
will engage in these transportation arrangements, including operating 
conditions, such as, quality standards and financial viability of the 
shipper.'' \14\ On March 22, 1988, AOG filed an amended operating 
statement with the Commission that does not refer to the sales 
provision.
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    \13\ This requirement applies to AOG's transportation by virtue 
of section 284.224(e)(1) of the Commission's regulations.
    \14\ 18 C.F.R. Sec. 284.123(e).
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    On June 23, 1997, AOG submitted a ``Statement of Position and Offer 
of Settlement'' (statement), pursuant to Rules 1b.18 and 1b.19 of the 
Commission's Rules Relating to Investigations.\15\ AOG requests 
confidential treatment for the statement. The statement (apart from the 
offer of settlement) is a legal argument that does not contain 
proprietary or otherwise privileged information that would be protected 
from disclosure under the Freedom of Information Act. AOG has not 
provided any reason why its legal analysis should not be made public. 
Therefore, the Commission grants AOG's request for confidential 
treatment for the offer of settlement and otherwise denies its request 
for confidential treatment of the remainder of the statement. The 
Commission addresses

[[Page 43717]]

below the substantive arguments contained in the statement.
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    \15\ 18 C.F.R. Sec. 1b.18, 19 (1996). These rules permit a 
person to submit a memorandum setting forth its position on matters 
relevant to an investigation.
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II. Discussion

    With respect to its transportation under its blanket certificate, 
AOG is subject to section 4 of the NGA. NGA section 4(a) requires that 
all rules and regulations affecting or pertaining to rates or charges 
for AOG's blanket certificate transportation be just and reasonable. 
The transportation service for which shippers pay AOG's rates includes 
a requirement that shippers sell gas to AOG, at AOG's discretion, to 
help it meet its own system supply requirements. AOG's sales provision 
appears to be an unreasonable rule or regulation relating to its rates 
for interstate IT service. Moreover, in determining its rates for 
transportation service, AOG does not appear to have addressed the value 
of the ``back-up'' supply service it requires of shippers. Therefore, 
to the extent AOG has required interstate shippers to agree to the 
sales provision, AOG appears to have imposed an unreasonable regulation 
relating to its rates for blanket certificate transportation, in 
violation of NGA section 4(a).
    NGA section 4(b) prohibits AOG from any undue preference or 
discrimination with respect to its transportation under the Order No. 
63 blanket certificate. The Commission has implemented this prohibition 
by subjecting AOG's blanket certificate transportation to section 
284.9(b)(1) of the Commission's regulations. Under this provision, AOG 
must provide interruptible service ``without undue discrimination, or 
preference, including undue discrimination or preference in the quality 
of service provided, the duration of service, the categories, prices, 
or volume of natural gas to be transported, customer classification, or 
undue discrimination or preference of any kind.'' With respect to its 
interruptible transportation, AOG is ``held essentially to the same 
non-discriminatory access standards as an interstate pipeline providing 
NGA section 7 service.'' \16\
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    \16\ Southwestern Public Service Co. v. Red River Pipeline, 74 
FERC para. 61,133 at 61,473 (1996) (Southwestern).
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    By tying its interstate transportation to the sales provision, AOG 
appears to have unduly discriminated against current and potential 
shippers, in violation of NGA section 4(b) and section 284.9(b)(1) of 
the Commission's regulations.\17\ In addition, AOG appears to have 
violated section 4(b) and section 284.9(b)(1) by failing to disclose 
the sales provision in the operating statement AOG filed with the 
Commission.\18\
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    \17\ See Order No. 436, FERC Stats. & Regs. [Regs. Preambles 
1982-1985] para. 30,655 at 31,511 (1985) (``arrangements by 
pipelines that tie or ``bundle'' gathering, production, storage or 
other services not requested by shippers to self-implementing 
transportation service offered under this rule would constitute 
undue discrimination in violation of the non-discriminatory access 
condition * * * if the costs of such services are not properly 
allocable to a fully-allocated transportation rate.'')
    \18\ Id. at 31,505 (``[R]easonable operating conditions imposed 
routinely by pipelines or shippers do not per se violate the non-
discriminatory access provision, provided that such conditions are 
stated `up-front' in the pipeline's transportation tariffs on file 
with the Commission and are applied by the pipeline fairly to all 
similarly-situated shippers and shipments.'' [emphasis in 
original]). In lieu of tariffs, holders of Order No. 63 blanket 
certificates file operating statements setting forth the conditions 
under which they will provide interstate transportation. Order No. 
436-A, FERC Stats. & Regs. para. 30,675 at 31,692-93. Thus, even if 
AOG's sales provision were reasonable, it appears that AOG is 
violating section 284.9(b)(1) because its operating statement does 
not disclose the provision.
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    AOG's blanket certificate subjects AOG's interstate IT service to 
the terms and conditions under which intrastate pipelines provide 
transportation pursuant to NGPA section 311(a)(2). This transportation, 
which must be subject to fair and equitable rates and charges pursuant 
to section 284.123(a) of the Commission's regulations, carries the same 
nondiscriminatory conditions as transportation by interstate 
pipelines.\19\ AOG's tying of its transportation to the sales provision 
appears to be an unjust and inequitable condition on its interstate 
transportation service, in violation of NGPA section 311(a)(2) and 
section 284.123(a) of the Commission's regulations.
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    \19\ Southwestern, supra n. 16 and Transok, Inc., 54 FERC para. 
61,229 at 61,673 (1991).
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    Further, AOG's failure to include the sales provision in its 
operating statement appears to have violated section 284.123(e), which 
requires the statement to be filed. A requirement that a shipper agree 
to sell gas to AOG appears to be sufficiently central to ``how the 
pipeline will engage in [Order No. 63] transportation arrangements'' 
that AOG must disclose it in its operating statement.
    In its statement, AOG asserts that the Commission does not have any 
authority over the sales provision. AOG argues that because the sales 
provision relates to AOG's gas purchases for the purpose of selling gas 
to its distribution customers, the provision is exempted from 
Commission jurisdiction pursuant to NGA section 1(b).
    Contrary to AOG's argument, the Commission has jurisdiction over 
the sales provision because AOG conditions Order No. 63 transportation 
on this provision. AOG's blanket certificate permits the company to 
conduct transportation permitted by NGPA section 311.\20\ Under NGPA 
section 311(c), the Commission may prescribe terms and conditions for 
such transportation.\21\ The legislative history indicates that section 
311 ``provides authority for the Commission to condition approval of 
the sale, transportation, or exchange under this section upon such 
specified terms and conditions as it deems appropriate.'' \22\ The 
Commission has recognized its authority to condition section 311 
transportation in numerous decisions.\23\ Thus, the Commission has 
authority to determine whether the sales provision is an appropriate 
condition of AOG's transportation, and to require AOG to delete the 
condition upon a finding that it is not appropriate.
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    \20\ Order No. 63, FERC Stats. & Regs. para. 30,118, at 30,825 
(1980). The Commission established these conditions pursuant to NGA 
section 7(e), 15 U.S.C. Sec. 717f(e), which granted the Commission 
authority to attach to the certificate ``such reasonable terms and 
conditions as the public convenience and necessity may require.''
    \21\ See, e.g., Associated Gas Distributors v. FERC, 824 F.2d 
981, 1016 (D.C. Cir. 1987) (``the authority of Sec. 311(c) * * * 
allows [the Commission] to prescribe `terms and conditions' '' for 
section 311 transportation).
    \22\ Conference Committee Report; Joint Explanatory Statement, 
H. Rept. 95-1752, at 106-109 (1978); S. Rept. 95-1126, at 106-109 
(1978), reprinted at 5 Natural Gas Policy Act Information Service 
para. 311:210 at p. 4.
    \23\ E.g., Missouri Gas Energy v. Williams Natural Gas Company, 
79 FERC para. 61,204 (1997) (section 311 construction projects must 
comply with the environmental requirements of section 157.206(d) of 
the Commission's regulations); Pacific Gas and Electric Company, 69 
FERC para. 61,140 at 61,505 (1994) (acceptance of an Order No. 63 
blanket certificate authorizes the Commission to enforce terms and 
conditions of the certificate).
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    AOG also argues that the sales provision is ``directly tied to its 
LDC state-regulated service obligation.'' Statement at 9. The 
Commission would have jurisdiction over the sales provision as an 
encumbrance on transportation in interstate commerce, even if the state 
commission had expressly authorized it, because Order No. 63 preempts 
state law.\24\ In addition, contrary to AOG's assertion, the portion of 
AOG's Arkansas Public Service Commission tariff that the company 
provided at Exhibit B to its statement makes no mention of the sales 
provision. In any event, if AOG believes that the sales provision 
contributes to its ability to perform its state authorized service 
obligations, it can remove the provision from its interruptible 
transportation contracts and execute separate, voluntary sales 
agreements that are not a prerequisite for receiving Order No. 63 
service.
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    \24\ See, e.g., Order No. 63, at 30,827.

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[[Page 43718]]

    AOG also contends that its interruptible transportation service is 
a gathering service that has been regulated by the Commission as a 
matter of convenience. Statement at 15. This argument proves too much, 
for if AOG's facilities are exempt gathering facilities, it should not 
have a blanket certificate. Indeed, AOG specifies that it does not want 
the Commission to declare that AOG's facilities are ``gathering.'' 
Statement at 17 n.25.
    AOG next argues that the Commission cannot require it to amend its 
operating statement by including the sales provision, and adds that it 
is not aware that the Commission has ever required an intrastate 
pipeline or an Order No. 63 transporter to amend its operating 
statement. Statement at 18-19. AOG quotes from Transok, Inc.\25\ for 
the proposition that, while the Commission can reject or suspend 
proposed changes in tariff provisions that interstate pipelines file 
under NGA section 4, it cannot reject or suspend an Order No. 63 
transporter's operating statement filed under NGPA section 311. Here, 
the Commission is not considering whether to reject or suspend AOG's 
operating statement. Instead, the Commission is exercising its 
authority to determine whether AOG's sales provision is lawful and 
whether it should be included in AOG's operating statement. That is 
consistent with our actions in Transok. There, the Commission 
determined, inter alia, that an intrastate pipeline that provides 
section 311 service must curtail firm shippers on a nondiscriminatory 
basis. In that proceeding, the Commission directed Transok to amend its 
operating statement to meet this requirement.\26\
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    \25\ 54 FERC para.61,229 at 61,672 n.5 (1991).
    \26\ Id. at 61,676. In response, Transok filed an amended 
operating statement that deleted a provision that the Commission 
determined might discriminate against interstate shippers. 56 FERC 
para.61,275 at 62,083 n.12 (1991).
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    AOG next cites CNG Transmission Corporation \27\ for the 
proposition that the Commission can only recommend (not require) the 
terms and conditions under which an LDC transacts business on its 
system. In that order, the Commission declined to specify how an LDC 
should broker transportation capacity to end users receiving the LDC's 
non-jurisdictional distribution service. Here, the Commission is 
exercising its authority over the terms of AOG's jurisdictional 
transportation.
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    \27\ 55 FERC para.61,189 at 61,627 (1991).
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    Finally, AOG suggests that because the Commission approved its 
rates three times since it filed its operating statement, the sales 
provision is insulated from further review. Statement at 19. But the 
Commission never addressed the sales provision when it approved AOG's 
rates, and there is no indication that the Commission was aware of it.
    The Commission will require AOG to show why, by including the sales 
provision in its interstate IT agreements, and by not disclosing this 
provision in its operating statement, it has not violated and is not 
violating NGA sections 4(a) and 4(b), NGPA section 311(a)(2) and 
sections 284.9(b)(1), 284.123(a) and 284.123(e) of the Commission's 
regulations.
    The Commission orders:
    (A) Within 30 days of the issuance of this order, AOG shall:
    (1) File an answer to the allegations of violations that conforms 
to the requirements of Rule 213 of the Commission's Rules, 18 C.F.R. 
Sec. 385.213 (1996). In its answer, AOG shall admit or deny, 
specifically and in detail, each allegation set forth in Part II of 
this order, and shall set forth every defense relied on. If an 
allegation is only partially accurate, AOG shall specify that part of 
the allegation it admits and that part of the allegation it denies.
    (2) Show why, by including the sales provision in its interstate IT 
agreements, it has not violated and is not violating NGA sections 4(a) 
and 4(b), NGPA section 311(a)(2) and section 284.9(b)(1) of the 
Commission's regulations.
    (3) Show why, by not disclosing the sales provision in its 
operating statement, it has not violated and is not violating sections 
284.9(b)(1) and 284.123(e) of the Commission's regulations.
    (4) AOG shall separately state the facts and the arguments that it 
advances. AOG must support with exhibits, affidavits and/or prepared 
testimony any facts that it alleges. AOG's statement of material facts 
must include citation to supporting data. In addition to its answer, 
AOG must respond to the following requests for information and 
documents. All materials must be subscribed and verified as set forth 
in sections 385.2005 (a) and (b)(2) of the Commission's regulations, 18 
C.F.R. Secs. 385.2005 (a) and (b)(2) (1996).
    (a) State the full legal name and business address of each entity 
with which AOG has executed a currently effective Order No. 63 
transportation agreement. For each entity identified, provide a copy of 
the transportation agreement, as amended. For each transportation 
agreement provided, state the expiration date of the agreement if it is 
not clearly set forth in the copy of the agreement.
    (b) State whether AOG has ever invoked the sales provision (or a 
similar provision) for any transportation agreement provided in 
response to (a).
    (c) For each transportation agreement for which AOG has invoked the 
sales provision (or a similar provision), provide the following 
information and documents:
    (i) The date on which AOG invoked the provision;
    (ii) The period during which the shipper sold gas to AOG pursuant 
to the provision;
    (iii) The quantity and sales price of the gas the shipper sold to 
AOG, and the amount of the transportation charges AOG refunded to the 
shipper; and
    (iv) All documents relating to AOG's purchase of gas under the 
provision or notification to the shipper that sales would no longer be 
required under the provision.
    (B) AOG's request for confidential treatment for its June 23, 1997 
statement is granted with respect to the offer of settlement contained 
therein and denied with respect to the remainder of the statement.
    (C) Notice of this proceeding will be published in the Federal 
Register. Interested parties will have 20 days from the date of 
publication of the notice to intervene.

    By the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.
[FR Doc. 97-21613 Filed 8-14-97; 8:45 am]
BILLING CODE 6717-01-M