On October 24, 2011, the United States Court of Appeals for the Fifth Circuit (“5th Circuit” or the “court”) issued a decision granting the Texas Pipeline Association and the Railroad Commission’s (“Petitioners”) petition for review and vacating FERC’s Order Nos. 720 and 720-A.  In its order, the 5th Circuit held that Order Nos. 720 and 720-A exceeded the scope of FERC’ authority under the Natural Gas Act (“NGA”) of 1938.

FERC implemented Order Nos. 720 and 720-A to comply with the Energy Policy Act of 2005 (“EPAct 2005”) and specifically Section 23 of EPAct 2005, which amended the NGA to direct FERC to “facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce.”  In order to effectuate this directive, FERC adopted, through Order No. 720, the “Posting Rule,” which requires that major non-interstate pipelines post scheduled flow information and post receipt and delivery point information for points with capacity greater than 15,000 MMBtu per day.  FERC lowered the number of non-interstate pipelines covered by the rule in Order No. 720-A, but the Petitioners filed for review with the 5th Circuit.

FERC argued that its interpretation of the NGA and Section 23 of EPAct 2005 authorized the Posting Rule.  Petitioners argued that the Posting Rule was outside the authority granted to FERC by the NGA, and violated the Administrative Procedure Act.  The 5th Circuit considered FERC’s interpretation under the Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. two-part test and found that Section 23 of EPAct 2005 cannot apply to pipelines that are involved solely in the “local distribution of gas” or involved in “other transportation.”  The 5th Circuit held that FERC “sees ambiguity in otherwise clear provisions,” and had not considered Section 23 within the context of Section 1(b) of the NGA, which states that “[t]he provisions of the chapter shall apply to transportation of natural gas in interstate commerce, to the sale in interstate commerce of natural gas for resale.., and to the importation or exportation of natural gas in foreign commerce…, but shall not apply to any other transportation or sale of natural gas or to the local distribution of natural gas or to the facilities used….”  The 5th Circuit further held that Congress did not intend to regulate the “entire natural-gas field to the limit of constitutional power,” but instead left regulation of specific entities, like intrastate pipelines, to the states.  The court pointed to the historical recognition of a distinction between interstate and intrastate natural gas transactions.

A copy of the 5th Circuit’s decision is available here.