Newsletter - TerraLex Connections
Transporting All of that Marcellus Shale Gas to the Market - The Critical Effect of Regulation on Midstream Pipeline Companies
By Kurt L. Krieger
Click here to view Kurt L. Krieger's bio
Click here to view Kurt L. Krieger's bio
Steptoe & Johnson PLLC
Much has been written about the major natural gas reserves in the Marcellus Shale formation located in West Virginia, Pennsylvania and New York. But much of the focus has been on ‘producing’ the gas – getting it out of the ground. Of course, it is the role of pipeline companies in their various business models to get that gas to market. Depending on the role a pipeline company plays – for whom and to where it transports the gas, for example – will determine the extent to which it is regulated by a state public service or utility commission or even the Federal Energy Regulatory Commission (“FERC”).
When planning to construct or acquire pipelines the first question to ask is: “Will the pipelines be regulated?” Getting the right answer is key to ensuring that financial and other business plan assumptions are sound. Depending upon the configuration of the pipelines, the manner in which they are used to transport natural gas, and the type of customer transporting the gas on the pipeline, the answer could be: (1) no regulation, (2) regulation by a state commission, or (3) possible regulation by FERC over services that are otherwise regulated by state commissions, or over the entire pipeline facility. And with respect to state regulation, as one might imagine, the extent of state regulation varies by state.
In West Virginia, the West Virginia Public Service Commission (“WVPSC”) has jurisdiction to regulate local distribution companies as public utilities and the transportation of gas by intrastate pipelines. For example, while intrastate pipelines operating in West Virginia are not required to obtain a certification of convenience and necessity prior to beginning operations, the WVPSC is given the authority to issue such a certificate. A public utility holds itself out to provide service to the general public and is heavily regulated. Pursuant to regulation, the WVPSC has elected not to regulate gathering lines. But what is a gathering line?
Typically, a gathering line transports gas from interconnected well lines to larger pipelines downstream. Determining whether pipelines are unregulated gathering lines requires a consideration of the following: (i) whether the lines directly connect to wells; (ii) whether gas flowing through the lines be compressed; (iii) whether gas flowing through the lines be processed gas; and (iv) consideration of the characteristics of the lines, e.g., line diameter, length, operating pressure. The WVPSC may classify lines as intrastate pipelines if: (i) the pipeline transports the gas of others for compensation; and (ii) the production, gathering, treatment, processing, transportation and delivery of the gas transported occurs entirely within West Virginia. It may be difficult to determine whether a line is purely gathering or whether it is intrastate, and the intrastate designation potentially subjects the pipeline to greater WVPSC regulation, for example, a requirement to provide nondiscriminatory access to its pipelines. If providing service to end users or the public, the possibility arises that the pipelines, services offered and rate charged are subject to full-scale public utility regulation.
In Pennsylvania, regulation of pipelines that might be viewed as gathering or intrastate under WVPSC regulations may be viewed as public utilities and subject to far greater regulation. Regulation by the Pennsylvania Public Utility Commission (“PaPUC”) of existing pipelines and those being constructed to transport Marcellus Shale gas is murky and is the subject of litigated proceedings currently pending before the PaPUC. In fact, the midstream companies constructing or acquiring pipelines to transport gas within the state have different opinions as to whether PaPUC regulation applies to their businesses while others are actively seeking to be regulated (or be subject to light-handed regulation) by the PaPUC as public utilities to obtain condemnation power. As of the writing of this article, the extent to which the PaPUC will regulate midstream company activities is still very much undecided. Given the significance of the issues involved in the pending PaPUC proceedings, it is possible that once the PaPUC renders its decisions that those decisions may end up before the Supreme Court of Pennsylvania.
If constructing or acquiring pipeline facilities, it is also important to determine whether the existing or proposed pipelines might be subject to FERC jurisdiction. If an existing or proposed pipeline has certain characteristics that render it subject to FERC regulation, FERC approval is likely required before ownership in the pipeline can be transferred or prior to its construction.
FERC regulates the transportation of natural gas in interstate commerce, the sale of natural gas for resale in interstate commerce, and the companies that engage in such activities. If a pipeline crosses state lines, is it subject to FERC’s jurisdiction? Possibly. While crossing state lines alone may not be enough to render the pipeline subject to FERC’s jurisdiction, if the pipeline does cross state lines the operator should determine whether the pipeline is subject to FERC’s jurisdiction. FERC applies a multi-part test to assess whether a pipeline is exempt from or subject to its jurisdiction, and FERC’s use of its test governs in these situations.
Conversely, it is often assumed that if a pipeline is located entirely within the boundaries of a single state or commonwealth that it is not subject to FERC jurisdiction. This can be a faulty assumption. Even pipeline facilities located entirely with the boundaries of a single state or commonwealth may be facilitating the transportation of natural gas in interstate commerce and subject to FERC’s jurisdiction and FERC regulation of such transportation transactions.
In Kentucky, while outside of the Marcellus Shale production area, the Kentucky Public Service Commission (“KYPSC”) has authority to regulate intrastate pipelines. By statute, however, pipelines dedicated to gathering are not subject to regulation by the KYPSC. However, determining whether a pipeline qualifies as a gathering line is difficult, as the KYPSC has not promulgated regulations directly addressing the topic. The KYPSC has made it clear that utility status is reserved for end-use service.
As this article is being written, new opportunities are arising in Ohio with the Utica Shale. Regulation by the Public Utility Commission of Ohio (“PUCO”) of pipeline assets will potentially be of a greater concern and focus as additional Utica Shale production comes online in Ohio.
Also, in all states or commonwealths, it is important to check for common carrier designations and associated rules that might capture the activities conducted by the pipeline. And some unregulated pipelines may nonetheless be subject to non-discrimination, open access, or ratable-take requirements when dealing with shippers or producers. There are also rules that can subject pipelines, including gathering lines, to a requirement to provide farm taps or end-use service.
Pipeline operators should also obtain legal guidance regarding the extent of safety or environmental regulation over their pipeline facilities, related reporting requirements, and whether they are required to register their pipeline facilities with one-call or similar Miss Utility-type programs under applicable state or commonwealth laws. For example, many state public service or utility commissions, including the WVPSC, have the authority to enforce federal and state gas pipeline safety rules through their safety divisions. In West Virginia, for example, certain parties engaging in the transportation of gas by pipeline must file an inspection and maintenance plan for their facilities located in non-rural areas, and notify the WVPSC of in advance of certain additions to those facilities. The West Virginia Department of Environmental Protection (“WVDEP”) has asserted direct jurisdiction regarding releases of product to the environment, including contamination of soils and waters. Any pipeline construction may require obtaining general discharge permits, if not more. West Virginia also has a greenhouse gas reporting statute that may apply, which statute compliments the new federal reporting requirements. Last, registering with one-call or Miss Utility-type programs, even if not required, may be a prudent thing to do to protect valuable pipeline assets and prevent the loss of life or catastrophic property damage.
It is important to determine the extent to which existing pipelines or ones to be built may be subject to regulation by FERC or the state or commonwealth in which they are to be located. Prior determinations as to the extent of regulation made (or failed to be made) by prior owners may be invalid. Furthermore, whether regulated or unregulated, it is important for pipeline operators to have well-drafted contracts with their customers that address important and sometimes complex issues involving nominating and balancing activities, lost-and-unaccounted-for gas or retainage, liquids transport and processing, and possible production acreage dedication issues to name only a few. Well-drafted, comprehensive contracts protect all parties and help to prevent future disputes and litigation.