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Pa. PUC Developments on Regulation of Midstream Operators
October 08, 2012

In two recent developments, the Pennsylvania Public Utility Commission ("PUC" or "Commission") appears to have settled, at least for the time being, the long outstanding question of whether midstream natural gas services might generally be regulated as "public utility" services. As summarized below, these developments indicate that, until specific facts and circumstances dictate otherwise, the PUC will not, as a rule, exercise its "public utility" jurisdiction over these operations. 

On August 20, 2012, the PUC entered into a Joint Stipulation ("Stipulation") with the Pennsylvania Independent Oil and Gas Association ("PIOGA") in a case before the Commonwealth Court of Pennsylvania that centered on this "public utility" regulatory question. By way of background, PIOGA initiated the Commonwealth Court proceeding in late 2011 with a Petition for Review of two PUC Orders that, in the context of a PUC proceeding by Laser Northeast Gathering Company, LLC ("Laser"), arguably would have provided the basis for characterizing all midstream natural gas gathering services as "public utility" services. Specifically, as argued by PIOGA, although Laser ultimately withdrew its application for "public utility" status, the Commission's Orders in the underlying case ultimately could have established precedent for future determinations by the PUC that all other such midstream developers are "public utilities" subject to the PUC's jurisdiction. For this reason, PIOGA sought the Commonwealth Court's reversal of the PUC's Laser orders on the grounds that natural gas gathering services do not meet the definition of "public utility" services under the Commission's regulations.

The Stipulation between PIOGA and the PUC resolved this basic definitional and jurisdictional question. Specifically, the Stipulation memorialized the agreement between these parties that the determination of "public utility" status is "necessarily a fact-based determination," and that the PUC in the Laser case "made no general or final factual findings and established no precedent … that the service provided by midstream gathering companies, per se, qualifies as public utility service." Furthermore, the Stipulation noted the PUC's understanding and declaration that, while a gathering company might be able to prove its "public utility" status after a full evidentiary hearing, the "technical and operational nature of midstream gathering service" dictates that these services are "generally provided on a private contract basis rather than on a 'public utility' service basis."

On a related note in another proceeding, the PUC on September 13, 2012, issued an Order approving the withdrawal of the application for "public utility" authority of another midstream developer, Peregrine Keystone Gas Pipeline, LLC ("Peregrine"). In so doing, the Commission also vacated the Recommended Decision issued by the presiding Administrative Law Judge in that case, which presented a firm declaration that midstream gathering services are not public utilities. Despite the request of PIOGA in this proceeding, the Commission's Order withdrawing Peregrine's application refused to declare that its prior Laser orders have no precedential effect. The PUC did, however, acknowledge that, as espoused in its Commonwealth Court Stipulation, the Commission has not established a specific precedent on this issue in favor of PUC regulation of midstream companies.

PIOGA has since filed with the PUC a Petition for Reconsideration of the Order in the Peregrine case, challenging the PUC's independent determination to vacate the ALJ's Recommended Decision. Specifically, PIOGA argues that the Recommended Decision represents the "only fully developed, on-the-record analysis of the issues" related to the question of whether the PUC should exercise jurisdiction over midstream entities. According to PIOGA, the Recommended Decision "is an integral part of the body of guidance provided to interested persons and the general public by the Commission . . . concerning natural gas midstream services and, as such, should be preserved and not discarded."

The upshot of these developments for midstream operators is that, despite the long-running PUC and court proceedings on this specific question, there is now no precedent or blanket rule regarding the "public utility" status of midstream natural gas services, except that, as embodied by the PUC's Stipulation with PIOGA, such services are not fundamentally considered to be provided on a "public utility" basis without evidence to the contrary. Whereas the PUC's decision to vacate the Recommended Decision in the Peregrine case eliminates the firm, potentially precedential, finding that gathering services are not "public utility" services, the Stipulation in the Commonwealth Court (despite the PUC's decision in the Peregrine case) clearly removes any blanket precedent that the prior Laser orders might have provided for an automatic finding that such "public utility" status does exist.

Accordingly, while the Commonwealth Court Stipulation significantly reverses the course of the PUC's original determination in Laser against PUC regulation, the question of whether particular midstream services might qualify as "public utility" service is essentially reset to square one. As dictated by the Stipulation and the PUC's Order in the Peregrine case, should another midstream operator seek "public utility" status, such a determination will again have to be made on the specific facts of each individual case.

The resolution of PIOGA's pending Petition for Reconsideration in the Peregrine case (whether directly by the PUC or ultimately through appeal to the Commonwealth Court) is therefore of critical importance. If successful, the Petition for Reconsideration would establish the Peregrine Recommended Decision - directly militating against PUC regulation - as the clearest regulatory guidance in future cases. As such, this continues to be an issue of great importance for midstream operators in Pennsylvania.

Barry A. Naum