by Lawrence J. Hand, Jr.

On November 17, 2006, the United States Court of Appeals for the District of Columbia Circuit vacated the Federal Energy Regulatory Commission’s Standards of Conduct as applied to interstate natural gas pipelines. These Standards of Conduct, which are set forth in Order No. 2004 and codified at 18 CFR Part 358, govern the relationship between an interstate natural gas pipeline and various affiliates. The Court found that FERC’s effort to expand the pre-existing standards of conduct beyond relationships between an interstate natural gas pipeline and its marketing affiliates was not supported by record evidence. It is not clear if or when the Commission will revisit Order 2004 and how it will attempt to address the infirmities cited by the Court. It is worth noting that the current Chairman of the Commission, Joseph Kelliher, issued a strong dissent when Order 2004 was originally enacted and argued in favor of keeping the Standards of Conduct applicable only to marketing affiliates of interstate pipelines.

Prior to Order 2004, the Standards of Conduct governed the relationship between interstate natural gas pipelines and their affiliates that engaged in the marketing of natural gas.  In enacting Order 2004, FERC expanded the application of the Standards of Conduct to include a broad category of affiliates (dubbed “Energy Affiliates”) that were subject to the standards of conduct. Generally speaking, Energy Affiliates were identified in the rule as those affiliates of an interstate natural gas pipeline that bought or sold natural gas in United States markets or held capacity on interstate natural gas pipelines. At the time of Order 2004’s passage, FERC attempted to justify expansion of the rule by citing the perceived threat that pipelines would grant undue preferences to certain non-marketing affiliates. 

 While the Court gave the FERC some guideposts as to what justification it would need to justify expansion of Order 2004 beyond marketing affiliates, the extent to which the FERC will attempt to reinstate Order 2004 as applied to natural gas pipelines is unclear. The strongly worded dissent written by then-Commissioner Kelliher would suggest that now Chairman Kelliher would favor limiting the Standards of Conduct to marketing affiliates. At the time of Order 2004’s passage, then-Commissioner Kelliher stated in his dissent: 

I do not see how a record of affiliate abuse limited to marketing affiliates argues in favor of expanding the scope of the rule beyond marketing affiliates. To my mind, it argues in favor of keeping the scope of the rule where it was. Indeed, there appears to have been no factual basis to support expanding the scope beyond marketing affiliates. 

However, if presented with sufficient evidence of abuse between interstate natural gas pipelines and non-marketing affiliates, the Commission could very well initiate proceedings designed to reinstate Order 2004 and apply it to marketing affiliates as well as all other “Energy Affiliates.”