[Federal Register Volume 60, Number 108 (Tuesday, June 6, 1995)] [Notices] [Pages 29841-29844] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-13770] ----------------------------------------------------------------------- DEPARTMENT OF ENERGY [Docket No. RP95-212-000] Order To Show Cause Issued May 31, 1995. In the matter of KansOk Partnership; Kansas Pipeline Partnership; Kansas Natural Partnership; Riverside Pipeline Company, L.P. On November 30, 1993, KansOk Partnership (KansOk) filed a petition for rate approval in Docket No. PR94-3-000 to justify its firm and interruptible transportation rates for service performed under section 311 of the Natural Gas Policy Act of 1978 (NGPA). Western Resources, Inc. (Western Resources) filed a protest contending that KansOk is an interstate pipeline, and not an intrastate pipeline as claimed, because of the interstate nature of its transportation service. The Commission will address KansOk's rate filing in Docket No. PR94-3-000 in an order issued concurrently with this order. The instant order establishes a separate show cause proceeding, pursuant to sections 5, 7, and 16 of the Natural Gas Act (NGA), to investigate Western Resources' claims.\1\ \1\ In addition, the Commission notes that at a staff panel proceeding convened on December 1, 1994 in Docket No. PR94-3-000, Missouri Gas Energy also argued that KansOk and its affiliates should be considered an interstate pipeline subject to Commission jurisdiction. See Tr. at 25. --------------------------------------------------------------------------- As discussed below, the Commission is requiring KansOk and its downstream affiliates, Kansas Pipeline Partnership (Kansas Pipeline), Kansas Natural Partnership (Kansas Natural), and Riverside Pipeline Company, L.P. (Riverside), to show cause: (1) Why all four affiliates should not be viewed collectively as one interstate pipeline system subject to the Commission's jurisdiction; and (2) in the alternative, why KansOk, by itself, should not be considered an interstate pipeline subject to the Commission's jurisdiction. A. Description of the Pipelines KansOk owns and operates two distinct segments of pipeline, the West Leg and East Leg, totalling approximately 114 miles of pipeline. Both the West Leg and East Leg are [[Page 29842]] located solely within the state of Oklahoma. At the southern end of the East Leg in Oklahoma, KansOk interconnects with Transok, Inc. (Transok), an intrastate pipeline. KansOk leases capacity on Transok, and has firm contracts for transportation on the East Leg for a maximum of 95,000 MMBtu/day. The West Leg of KansOk interconnects with gathering facilities at its southern terminus and transports only interruptible volumes. At their northern termini, KansOk's West and East Legs interconnect, respectively, with the western and eastern segments of Riverside. Riverside is an interstate pipeline consisting of: (1) two segments of 1-mile pipeline crossing the Oklahoma-Kansas border at two separate locations; and (2) a third segment of 2-mile pipeline crossing the Kansas-Missouri border. The Kansas-Missouri segment was authorized under NGA section 7 in 1989.\2\ In 1992, Riverside constructed the two Oklahoma-Kansas segments pursuant to NGPA section 311.\3\ \2\ See Riverside Pipeline Co., L.P., 48 FERC para. 61,309 (1989). \3\ See responses to Staff Data Request No. 2 in KansOk Partnership, Docket No. PR91-6-000. --------------------------------------------------------------------------- In Kansas, at their northern termini, the Riverside segments interconnect at two points with Kansas Natural, an intrastate pipeline. Kansas Natural then continues in a northeasterly direction through Kansas where it interconnects at two points with Kansas Pipeline, another intrastate pipeline.\4\ The two segments of Kansas Pipeline then continue approximately 64 miles to an interconnection with the Riverside pipeline segment at the Kansas-Missouri border, which completes the network in Kansas City, Missouri. Through this series of interconnections, gas flows from gathering fields in Oklahoma to markets in the Kansas City metropolitan area through five pipeline systems, all of which are affiliated except Transok. Further, KansOk, Riverside, Kansas Natural, and Kansas Pipeline all are operated by Kansas Pipeline Operating Company (KPOC). \4\ By order dated March 17, 1995, the Kansas Corporation Commission authorized Kansas Natural and Kansas Pipeline to merge. The merger has not taken place yet. --------------------------------------------------------------------------- On April 19, 1995, Riverside filed a proposal in Docket No. RP95- 239-000 to establish a new Multiple Pipeline Transportation service. Riverside would contract for capacity, as available, on its upstream affiliated pipelines to provide transportation on those pipelines for new or existing firm shippers on its own system. The maximum and minimum rates for the proposed service would be the sum of the effective maximum and minimum rates of the transporting pipelines. B. Prior Commission Orders On February 6, 1992, a Letter Order was issued by direction of the Commission approving a settlement of the rate issues raised in KansOk's first proceeding, which it filed pursuant to NGPA section 311.\5\ At that time, no party contested KansOk's claim to be an intrastate pipeline.\6\ The record indicates that KansOk's 1990 actual transportation volumes consisted of 2.6 percent intrastate volumes and 97.4 percent NGPA section 311 volumes.\7\ \5\ See KansOk Partnership, 58 FERC para. 61,152 (1992). \6\ We note that in authorizing the construction of Riverside's initial system under the NGA, the Commission discussed an argument that the Hinshaw status of Riverside's affiliate, Kansas Pipeline, should be reconsidered. See Riverside Pipeline Company, L.P., 48 FERC para. 61,309, at 62,015-16 (1989). However, that case involved the issue of a single affiliate in one state, not a chain of affiliates claiming three different types of jurisdictional status. \7\ See Exhibit D to KansOk's February 11, 1991 Response to Staff's December 18, 1990 Data Request, which states that KansOk transported 31,672 Mcf of gas intrastate and 1,168,131 Mcf of gas under NGPA section 311, for a yearly total of 1,199,803 Mcf. --------------------------------------------------------------------------- KansOk's filing in Docket No. PR94-3-000 was made pursuant to a requirement in the February 6 order that KansOk file, on or before December 1, 1993, an application for rate approval to justify its current systemwide rates or to establish new systemwide rates. As stated, this show cause proceeding arises from Western Resources' protest in Docket No. PR94-3-000 claiming that KansOk is not an intrastate pipeline. C. Western Resources' Protest Western Resources argues that KansOk is an interstate pipeline, rather than an intrastate pipeline, because of the interstate nature of its transportation service. Specifically, Western Resources states that since June 1991, 100 percent of the volumes transported by KansOk on the East Leg, and over 99 percent of the volumes transported by it on the West Leg, were delivered to the interstate market, to customers in Kansas and Missouri. Only a de minimis amount of KansOk's business was intrastate. Specifically, Western Resources claims that the volumes moved intrastate on the West Leg in the first five months of KansOk's operations constituted only 0.3212 percent of the volumes moved on the West Leg, 0.1014 percent of KansOk's interruptible volumes, and 0.0133 percent of KansOk's total system volumes. All of the transportation performed by KansOk on the West Leg was interruptible, while the transportation performed on the East Leg was firm and interruptible. KansOk does not dispute these figures. In support of its argument that KansOk is an interstate pipeline, Western Resources cites Midcoast Ventures I (Midcoast),\8\ where the Commission, finding that the pipeline was an interstate pipeline, stated that it ``has never ruled that a company could qualify as an intrastate pipeline without doing any intrastate business in the state where it claims intrastate status.'' \9\ Western Resources argues that, under the Midcoast rationale, KansOk's de minimis intrastate operations do not qualify it to be an intrastate pipeline. Further, Western Resources points out that KansOk is not regulated by the Oklahoma Corporation Commission. Western Resources contends that, at a minimum, the East Leg of KansOk, which provides no intrastate service, should be treated as an interstate pipeline. Accordingly, Western Resources contends that the Commission should require KansOk to refile its rates under section 4 of the NGA. \8\ Midcoast Ventures I, 61 FERC para. 61,029 (1992). \9\ Id. at 61, 158. --------------------------------------------------------------------------- D. KansOk's Answer First, KansOk states that under section 1(b) of the NGA, the Commission is required to regulate the transportation and sale for resale of natural gas ``in interstate commerce,'' and to regulate any ``natural gas company'' engaged in such transportation or sale.\10\ Section 601(a) of the NGPA, however, limits the jurisdiction otherwise resulting from NGA section 1(b) by providing that the Commission's NGA jurisdiction ``shall not apply to any transportation in interstate commerce of natural gas if such transportation is * * * authorized by the Commission under'' NGPA section 311(a). In addition, section 601(a)(2)(B) of the NGPA provides that the NGA definition of a natural gas company does not include ``persons'' who provide sales or transportation authorized under section 311 of the NGPA. \10\ 15 U.S.C. 717(b) (1988). --------------------------------------------------------------------------- KansOk states that, as a corporate entity, it qualifies as an intrastate pipeline within the meaning of section 2(16) of the NGPA.\11\ In Order No. 46, the Commission explained that ``if a [[Page 29843]] corporate entity qualifies as an intrastate pipeline under section 2(16), it will retain that identity for its entire system even if it constructs a new portion of its system to be used exclusively for section 311(a)(2) transportation.'' \12\ \11\ See 15 U.S.C. 3301(16) which states: The term ``intrastate pipeline'' means any person engaged in natural gas transportation (not including gathering) which is not subject to the jurisdiction of the Commission under the [NGA] (other than any such pipeline which is not subject to the jurisdiction of the Commission solely by reason of section 1(c) of the [NGA]). \12\ Sales and Transportation of Natural Gas, FERC Stats. & Regs., Regulations Preambles 1977-1981 para. 30,081, at 30,536 (1979). --------------------------------------------------------------------------- In response to Western Resources' Midcoast arguments, KansOk states that its case differs from Midcoast because it had legitimate intrastate business in Oklahoma before it ever transported gas under NGPA section 311. Unlike KansOk, the pipeline in Midcoast had no facilities and provided no transportation service in Kansas before conducting its first transaction, purportedly under NGPA section 311. Rather, Midcoast's claim to be an existing intrastate pipeline was based solely on its status as an intrastate pipeline in Texas. KansOk argues that Seagull Pipeline Corp. (Seagull) \13\ applies better here. In Seagull, the Commission ruled that the company did not lose its intrastate status by constructing new facilities to provide, in part, NGPA section 311(a)(2) transportation. KansOk states that, like the pipeline in Seagull, it was engaged in intrastate business prior to conducting its first NGPA section 311 transaction. Further, KansOk points out that when it filed its first rate proceeding under NGPA section 311, no party challenged its status as an intrastate pipeline, and the Commission accepted its intrastate status in approving fair and equitable rates for its section 311 service. \13\ Seagull Pipeline Corp., 11 FERC para. 61,267 (1980); see also Black Warrior Pipeline, Inc., 8 FERC para. 61,241 (1979). --------------------------------------------------------------------------- KansOk next states that the lack of state regulation over it has not resulted in harm to its customers, because it has been subject to the Commission's NGPA rate jurisdiction and has charged FERC-approved fair and equitable rates since the inception of its section 311 service. Also, since KansOk makes no retail sales to consumers within the state, it claims that the lack of state regulation is not unusual. Finally, KansOk argues that the transportation services it provides qualify as service provided ``on behalf of'' an interstate pipeline, namely Riverside. Under NGPA section 311(a)(2)(A), an intrastate pipeline may transport natural gas in interstate commerce on behalf of any interstate pipeline or local distribution company and be exempt from the Commission's NGA jurisdiction. E. Discussion The Commission is concerned that, when viewed as a whole, the KansOk-Riverside-Kansas Natural-Kansas Pipeline systems may, in reality, constitute one interstate pipeline system. At the very least, it appears that KansOk may in fact be an interstate pipeline. The four pipelines are contiguous in three states and move gas from Oklahoma through Kansas and into Missouri. In addition, in its recent filing in Docket No. RP95-239-000, Riverside is proposing an integrated transportation service using the available capacity of its affiliated pipelines. The Commission recognizes that one purpose of NGPA section 311 is to enable intrastate pipelines to transport gas destined for the interstate market and thus spare interstate pipelines from having to construct duplicative facilities.\14\ The NGPA accomplishes this through permitting intrastate pipelines to perform such transportation without becoming subject to NGA jurisdiction over the entirety of their operations. As the Commission stated in Lear Petroleum Corporation: \14\ Lear Petroleum Corp., 42 FERC para. 61,015, at 61,043 (1988). NGPA sections 601(a)(1)(C) and (a)(2)(A) provide that the intrastate pipelines do not become subject to the NGA by virtue of section 311 transactions. This ensures that intrastate pipelines are only subject to Commission regulation of their rates for section 311 transactions. Intrastate pipelines do not become subject to Commission regulation of their intrastate activities or of construction of facilities used for intrastate transportation.\15\ \15\ Id. See also Mustang Energy Corp. v. FERC, 859 F.2d 1447 (10th Cir. 1988). Nevertheless, the Commission is concerned that what would physically and operationally appear to be one interstate pipeline system from Kansas to Missouri has been broken down artificially into three intrastate systems and one small interstate system consisting only of border crossings. Of concern too is that these four companies are affiliated and operated as one system by KPOC. This suggests that the corporate structure of these companies was designed primarily to avoid the Commission's jurisdiction under the NGA. While the Commission has stated that it is not unusual, much less unlawful, for persons to structure transactions either to qualify for regulation by one entity or to avoid regulation by another,\16\ nevertheless at some point such structuring may be contrary to the public interest and inconsistent with the underlying purpose of statutes effecting a federal scheme of regulation. \16\ See, e.g., Riverside Pipeline Co., L.P., 48 FERC para. 61,309, at 62,015-16 (1989). --------------------------------------------------------------------------- Here, the Commission recognizes that the present corporate structure of the four companies will not frustrate the Commission's regulation over the rates charged by the companies for services currently performed under NGPA section 311, since the Commission regulates those rates. Rather, the Commission is concerned that the purpose of the NGA may be frustrated because KansOk, Kansas Pipeline, and Kansas Natural do not have to comply with Order No. 636.\17\ In Order No. 636, the Commission explained that its ``responsibility under the NGA is to protect the consumers of natural gas from the exercise of monopoly power by pipelines in order to ensure consumers access to an adequate supply of gas at a reasonable price.''\18\ Order No. 636 also required the unbundling of pipeline sales services. \17\ Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol, 57 Fed. Reg. 13,267 (Apr. 16, 1992) III FERC Stats. & Regs. Preambles para. 30,939 (Apr. 8, 1992); order on reh'g, Order No. 636-A, 57 Fed. Reg. 36,128 (Aug. 12, 1992), III FERC Stats. & Regs. Preambles para. 30,950 (Aug. 3, 1992); order on reh'g, Order No. 636-B, 57 Fed. Reg. 57,911 (Dec. 8, 1992), 61 FERC para. 61,272 (Nov. 27, 1992); reh'g denied, 62 FERC para. 61,007 (1993); appeal pending sub nom. United Distribution Companies, et al. v. FERC, No. 92-1485 (D.C. Cir.). \18\ Order No. 636, at 30,392. --------------------------------------------------------------------------- The Commission has some concern that segmenting a single system into three intrastates and one interstate could frustrate the purposes underlying the NGA, Order No. 636, and other policies. For example, if the four pipelines operated by KPOC were found to be one interstate pipeline, they would be required to file a FERC tariff setting forth their terms and conditions of service, comply with the Commission's capacity release requirements under Order No. 636, and be subject to the Commission's NGA sections 4 and 5 authority with respect to their rates. Whereas under their present corporate structure, only Riverside is required to comply with these requirements; the three intrastate pipelines are not. The Commission recognizes that a finding that the four companies operated by KPOC constitute one interstate pipeline would require the Commission to disregard their corporate forms. However, the Commission has the authority to do so, under certain circumstances. For example, in General Telephone Co. v. U.S.,\19\ the court stated [[Page 29844]] that, ``[w]here the statutory purpose could * * * be easily frustrated through the use of separate corporate entities, the [Federal Communications Commission] is entitled to look through corporate form and treat the separate entities as one and the same for purposes of regulation.'' \20\ Therefore, if the Commission were to determine here that the corporate structure of the four companies frustrated the statutory purpose of the NGA and was contrary to the public interest, it would have the authority to disregard their corporate forms. \19\ 449 F.2d 846 (5th Cir. 1971). \20\ Id. at 855 (citations omitted). See also Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 322 (1939); Transcontinental Gas Pipe Line Corp. v. FERC, 998 F.2d 1313 (5th Cir. 1993). --------------------------------------------------------------------------- In any event, at the very minimum the Commission believes that KansOk may be an interstate pipeline, based on the nature of its transportation services. At present, it appears that KansOk provides no intrastate service on its East Leg, and only a de minimis amount of intrastate service on its West Leg. The Commission recognizes the KansOk's mix of intrastate and interstate transportation volumes has not changed dramatically since the Commission issued its February 6, 1992 order.\21\ Although no party contested KansOk's claim to be an intrastate pipeline at that time, Western Resources has raised the issue now. \21\ In 1990, approximately 97.4 percent of KansOk's transportation service was pursuant to NGPA section 311, whereas KansOk does not dispute Western Resources' claim that KansOk now performs approximately 99.9 percent of its services under NGPA section 311. --------------------------------------------------------------------------- F. Show Cause For the reasons discussed above, the Commission is instituting this show cause proceeding, pursuant to sections 5, 7, and 16 of the NGA, to investigate further these matters. To this end, the Commission is ordering the following: (1) KansOk, Riverside, Kansas Natural, Kansas Pipeline are ordered to show cause why the Commission should not disregard their corporate forms and find them to be one interstate pipeline system subject to the Commission's NGA jurisdiction; and (2) KansOk is ordered to show cause why, since all but a de minimis amount of the service it provides is in interstate commerce, it should not be found to be an interstate pipeline subject to the Commission's NGA jurisdiction. In their responses, the parties are encouraged to address the concerns raised above by the Commission. The Commission Orders (A) Within 30 days of the issuance of this order: (1) KansOk, Riverside, Kansas Natural, Kansas Pipeline are ordered to show cause why the Commission should not disregard their corporate forms and find them to be one interstate pipeline system subject to the Commission's NGA jurisdiction; and (2) KansOk is ordered to show cause why, since all but a de minimis amount of the service it provides is in interstate commerce, it should not be found to be an interstate pipeline subject to the Commission's NGA jurisdiction. (B) Notice of this proceeding will be published in the Federal Register. Interested persons will have 20 days from the date of publication of the notice to intervene. By the Commission. Lois D. Cashell, Secretary. [FR Doc. 95-13770 Filed 6-5-95; 8:45 am] BILLING CODE 6717-01-M