United States: FERC Issues Interpretation Narrowing The Scope Of The "Municipality" Exemption In The NGA, And Asserts Limited Jurisdiction Over Municipalities

In an order denying rehearing, issued to the City of Clarksville, Tennessee on May 19, 2016, FERC issued an interpretation narrowing the scope of the exemption for "municipalities" found in Natural Gas Act ("NGA") section 2(2). In several prior orders, FERC had held that a municipality is not a "person" under the NGA and would not be required to obtain the authorization provided by a section 284.224 blanket certificate to local distribution companies ("LDCs") and Hinshaw pipeline companies engaging in the interstate transportation of natural gas. In its May 19 order to the City of Clarksville, FERC held that while a municipality is not a "corporation" under the NGA, it is a person subject to FERC's jurisdiction when it "transports or sells gas for resale and consumption in another state, since the state cannot assert jurisdiction over such transportation or sales by the municipality."

Clarksville, a Tennessee municipality located in Montgomery County, Tennessee, owns and operates a natural gas distribution system that serves a significant geographical area within Tennessee. Clarksville also operates the gas distribution facilities that provide service to the U.S. Army base at Fort Campbell, which occupies 105,000 acres of land in two Tennessee and two Kentucky counties. Clarksville also provides gas service to 16 commercial customers in Kentucky, through a pipeline, known as the Kentucky Service Line, which extends from the Clarksville municipal system in Montgomery County, TN, 2,400 feet into Christian County, KY.

In a February 7, 2016 order, FERC granted Clarksville's request for NGA section 7(f) service area determinations covering the portion of the Fort Campbell Army base in Kentucky and the Kentucky Service Line that extends into Christian County, KY. Within a 7(f) service area, a natural gas company "may enlarge or extend its facilities for the purpose of supplying increased market demands in such service area without further authorization." In addition, "transportation to ultimate consumers in such service area by the holder of such service area determination, even if across State lines, shall be subject to the exclusive jurisdiction of the State commission in the State where the gas is consumed." NGA § 7(f), 15 U.S.C. §717f(f) (2012).

FERC's grant of the service area determinations was made over the objection of Todd County, KY, an intervenor, which argued that, because Clarksville also sells gas to the City of Guthrie, KY, for resale by the City of Guthrie to its residents, Clarksville failed to qualify for such a section 7(f) determination under Commission criteria that evaluates the extent to which an applicant makes sales of natural gas for resale in addition to delivering gas directly to end users in the proposed section 7(f) service area. Clarksville had countered that it only sold a small quantity of gas (10,675 Mcf in the prior year) to the City of Guthrie, that Clarksville delivered the gas to the City of Guthrie in Clarksville's home state of Tennessee, at a meter 20 feet below Tennessee's border with Kentucky, and that the City of Guthrie received the gas into a pipeline facility that Clarksville assumed was owned by the City of Guthrie.

The Commission concluded in its February 7 order that Clarksville's sales of gas for resale by the City of Guthrie did not alter the "primarily distribution nature" of Clarksville's operation, and thus did not preclude issuance to Clarksville of its requested service area determinations. The Commission further found that Clarksville's sales of gas for resale in interstate commerce were covered by the blanket marketing certificate the Commission had issued to "[a]ny person who is not an interstate pipeline" in 18 C.F.R. § 284.402. However, as to Clarksville's transportation in interstate commerce of gas for the City of Guthrie for consumption outside of the approved section 7(f) service areas, the Commission ruled that Clarksville must get a section 284.224 blanket certificate authorizing such transportation.

Clarksville sought rehearing of the Commission's determination that it must obtain a section 284.224 blanket certificate authorizing it to transport gas in interstate commerce in the same manner as an intrastate pipeline under section 311 of the NGPA of 1978. Clarksville argued in its rehearing request that it does not need authorization under section 7 of the NGA to transport and sell gas to Guthrie for resale and consumption in Kentucky because Clarksville is a "municipality" as defined in the NGA, and the Commission had held that "the plain language of the [Natural Gas] Act, found in Section 2, subsections (1), (2), (3), and (6) expressly excludes municipalities from the ambit of Commission jurisdiction." Panhandle Eastern Pipe Line Co. v. City of Rolla, Kansas, 26 FPC 736, 737 (1961) ("City of Rolla").

In its May 19, 2016 order, the Commission reviewed the NGA's text, prior Commission orders, and two U.S. Supreme Court opinions and one Fifth Circuit opinion. The Commission noted that under NGA § 1(b), FERC regulates the "transportation of natural gas in interstate commerce," the "sale in interstate commerce of natural gas for resale for ultimate public consumption" and the "natural gas companies engaged in such transportation or sale." "Natural gas company" is defined in NGA § 2(6) as a "person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale." NGA § 2(1) defines "person" to include "an individual or a corporation." NGA § 2(2) states that "Corporation . . . shall not include municipalities as hereafter defined." NGA § 2(3) defines "municipality" as a "city, county or other political subdivision or agency of a State."

Further, in City of Rolla, the Federal Power Commission ("FPC") had disclaimed jurisdiction over that municipality's sales for resale of gas that would be transported by an interstate pipeline to other states. The FPC had reasoned that a municipality was not a "person" for purposes of the NGA because "person" is defined to include an individual or a "corporation," and "corporation" is defined to exclude a municipality and other political subdivisions of a state. Further, FERC noted that in two subsequent orders the Commission had relied on City of Rolla's reasoning to conclude that it lacked jurisdiction over municipalities, citing Somerset Gas Service, 59 FERC ¶ 61,012 (1992), and Northwest Alabama Gas District, 42 FERC ¶ 61,371 (1988). Similarly, FERC had relied on City of Rolla in its Order No. 319 to conclude that municipalities did not need the authorization provided by a section 284.224 blanket certificate to LDCs and Hinshaw pipeline companies because the NGA's municipal exemption allowed municipal gas utilities to engage in the same types of transactions without certificate authority.

Nonetheless, in the May 19 order FERC noted that the U.S. Supreme Court, in construing similar provisions of the Federal Power Act ("FPA"), had found a municipality to be a "person" under the FPA, referencing United States v. Public Utilities Commission of California, 345 U.S. 295, 316 (1953). There, the Supreme Court found sufficient ambiguity for it to hold that a Nevada county was a "person" for certain purposes under the FPA. FERC further relied on a Fifth Circuit opinion holding, regarding circumstances in which Texas owned gas flowing in interstate commerce, "the fact that Texas can never become a 'natural gas company' is irrelevant once Texas has allowed its gas to be dedicated to interstate service." Similarly, the Supreme Court concluded in California v. Southland Royalty Co., 436 U.S. 519, 529 (1978) that "whether or not the owners were 'natural gas companies' was 'somewhat beside the point'" when gas has already been dedicated to the interstate market.

Finally, FERC held that its interpretation is reasonable, because otherwise there would be a regulatory gap created by the fact that "a state cannot authorize or regulate a municipal gas utility's sales for resale and deliveries of gas that will be transported to another state for consumption. Further, a state does not have jurisdiction to regulate a pipeline that crosses its state border or to authorize the transportation of gas by a pipeline located entirely within that state if the gas will leave that state." FERC held that "[i]t is not reasonable to infer that Congress intended that a municipality's status as a political subdivision of its state make it exempt from NGA section 7 jurisdiction if the municipality transports or sells gas for resale and consumption in another state, since the state cannot assert jurisdiction over such transportation or sales by the municipality."

The May 19 order overrules the Commission's prior holdings in City of Rolla, Somerset, and Northwest Alabama, observing: "we believe ...[they] relied on an interpretation and application of the NGA's exemption for municipalities that was too expensive to the extent they would support Clarksville's position that its status as a municipality in Tennessee allows it to set its own rates for service for customers in another state."

FERC's May 19 order therefore (1) denied Clarksville's rehearing request; (2) granted Clarksville a certificate of limited jurisdiction under Part 157, subpart A, to continue natural gas deliveries for the City of Guthrie, KY; (3) held that the limited certificate of jurisdiction would be void unless Clarksville accepted it per section 157.20(a); (4) directed Clarksville to comply with NGA § 4 by filing, within 60 days, a mutually agreed-upon rate for the transportation component of Clarksville's service for the City of Guthrie; and (5) directed the Commission's Office of Energy Projects—Pipeline Certificates to contact the City of Guthrie within seven days of issuance of the May 19 order to offer guidance to the City of Guthrie regarding its submission of an application for approval of a section 7(f) service area including the portion of Guthrie's supply pipeline that lies between Clarksville's meter in Tennessee and the Tennessee-Kentucky state border.

A copy of the Commission's order is available here.

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