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Court vacates FERC orders asserting jurisdiction over city’s gas sale

The U.S. Court of Appeals for the D.C. Circuit in April vacated Federal Energy Regulatory Commission orders in which the Commission asserted jurisdiction over the City of Clarksville, Tennessee’s transportation and sale of natural gas from the city's gas distribution system in Tennessee to the City of Guthrie, Kentucky.

Clarksville has its own city-run gas distribution utility as well as a public power utility that provides electricity, internet, digital television, and telephone service.

The court reviewed two FERC orders interpreting the Natural Gas Act (NGA), which, like the Federal Power Act (FPA), excludes municipalities from most aspects of FERC regulation.

In the orders, FERC determined that Clarksville was required to obtain FERC authorization under NGA section 7(c) to engage in the sale and transportation of natural gas for a transaction in which the gas was consumed across the state line in Kentucky, even though Clarksville’s portion of the transaction occurred entirely within Tennessee.

Although FERC has found it has jurisdiction under the NGA when municipal natural gas facilities cross state borders, FERC’s orders in the case departed from decades of precedent by asserting jurisdiction over Clarksville’s sale and transportation of natural gas occurring entirely within Tennessee.

In May 2016, in an order denying a rehearing request from Clarksville, FERC interpreted its authority over municipal natural gas transactions in a new way. The commission said that, in the circumstances presented by Clarksville’s transaction with the City of Guthrie, Clarksville could be deemed a "person" subject to FERC jurisdiction under the NGA, even though the statute specifically excludes municipalities from FERC regulation on most matters. FERC asserted that it has jurisdiction when a municipality "transports or sells gas for resale and consumption in another state."

Clarksville appealed FERC’s orders and the American Public Power Association and the American Public Gas Association filed a joint friend-of-the-court brief backing Clarksville's appeal of the Commission orders.

FERC claimed jurisdiction over Clarksville's service to the city of Guthrie "based solely on the fact that the gas leaves the state of Tennessee," the Association and APGA said. "The question in this case is whether FERC can regulate wholesale sale and transportation of natural gas by Clarksville on its Tennessee distribution facilities simply and only because that sale leads to natural gas leaving the state."

The Association and APGA said the interpretation used by FERC was contrary to eight decades of precedent and was contrary to Congress's intent in both the 1935 FPA and the 1938 NGA.

FERC "has expanded its jurisdiction under the NGA in contravention of the intent of Congress and decades of precedent," said the two trade associations. "Its ruling is potentially far reaching by exposing the thousands of municipally owned utilities across the nation to federal regulation of their rates and services." Congress "explicitly excluded municipalities from FERC's jurisdiction" under both the NGA and the FPA, said the Association and APGA.

They asked the appeals court to uphold the municipal exemption and to vacate and remand the FERC orders at issue in Clarksville v. FERC.

Details on court ruling

In its decision, the appeals court finds that, based on the plain language of the NGA “and significant FERC precedent,” Clarksville, as a municipality, is exempt from FERC regulation under the applicable sections of the NGA. The court notes that FERC makes two arguments to support its assertion of jurisdiction, “neither of which is persuasive.”

First, the Commission, relying on a 1953 Supreme Court decision (United States v. Public Utilities Commission of California), asserted that a municipality can be a jurisdictional “person” and, therefore, a “natural gas company” subject to FERC’s jurisdiction under the NGA in some situations. In this case, FERC argued it was necessary to interpret the NGA as applicable to Clarksville in order to avoid a “regulatory gap” that would leave the Clarksville-Guthrie transaction unregulated by either state or federal authorities.

But the appeals court, which cited the brief submitted by the Association and APGA, questioned whether any regulatory gap exists in this case. The court went on to say that “even if there were a regulatory gap, it would not be of the sort Congress was worried about in enacting the NGA.” The court concluded, therefore, that the reasoning of the 1953 Supreme Court decision cited by FERC was not relevant to this case.

Second, FERC argued that even if it were to accept Clarksville’s argument that a municipality could not be a natural gas company as defined in the NGA, Clarksville’s interpretation of the NGA is excessively narrow because the statute provides the Commission jurisdiction over three separate areas: (i) the transportation of natural gas in interstate commerce; (ii) the sale of natural gas in interstate commerce for resale; and (iii) natural gas companies engaged in such transportation or sale.

Because the transaction between Clarksville and Guthrie constitutes the transportation and sale for resale of natural gas in interstate commerce, FERC said that Clarksville’s identity as a municipality is essentially irrelevant where the gas is “dedicated to the interstate market.”

The court rejected FERC’s argument that its jurisdiction over wholesale sales and transportation of natural gas in interstate commerce under Section 1(b) of the NGA are independent bases for jurisdiction over Clarksville’s sales and transportation, notwithstanding the exclusion of municipalities from the NGA’s definition of natural gas companies.

“While FERC is correct that Section 1(b) provides for jurisdiction over those three separate areas, the articulation of the scope of FERC’s jurisdiction does not mean that Congress gave FERC jurisdiction over everything within those three areas,” the appeals court noted.

“Indeed, Section 1(b) is not power-conferring or jurisdiction-creating and should not be read to say that FERC has jurisdiction over anything and everything related to the transportation and sale for resale of natural gas in interstate commerce. None of the cases on which FERC relies stands for such a broad interpretation of FERC’s authority,” the court went on to say.

The court said that it sees “no reason to deviate from the clear and unambiguous language of the statute” and therefore granted the petition for review before it and vacated the FERC orders “to the extent they are inconsistent with this opinion.”

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