• Pa. PUC Administrative Law Judge Nixes Public Utility Status for Midstream Operators
  • December 29, 2010
  • Law Firm: Blank Rome LLP - Philadelphia Office
  •  In a closely-watched proceeding before the Pennsylvania Public Utility Commission (“Pa. PUC”) that—potentially—promises to determine the means by which natural gas extracted from the Marcellus Shale is brought to market, an Administrative Law Judge (“ALJ”) has ruled that ­natural gas gathering, treating and processing—or “midstream ­services”—are not services offered “to or for the public” within the meaning of the Public Utility Code and, ­consequently, midstream operators are not entitled to a certificate of public convenience that would allow them to operate as public utilities.

    The ALJ’s recommended decision was issued on December 1, 2010. Exceptions are due on January 14, 2011, and reply exceptions are due on February 7, 2011, setting up a final decision from the Pa. PUC to be rendered at a public meeting in 2011. Should the ­reasoning of the ALJ hold, midstream pipeline operators would be denied the highly sought opportunity to acquire property in Pennsylvania through eminent domain.

    The matter involves Laser Marcellus Gathering Company LLC (“Laser”), which in January 2010 filed an application with the Pa. PUC for a Certificate of Public Convenience (“Certificate”)—the operative document required of an entity seeking recognition as a public ­utility in Pennsylvania—to construct a six-mile pipeline in Susquehanna County which would transport extracted natural gas from source wells to processing facilities (Pa. PUC Docket Number A-2010-2153371).

    As the law in Pennsylvania is currently understood, an entity seeking to construct such a pipeline would be forced to negotiate with each and every landowner along the proposed right of way: an arduous, if not cost-prohibitive, process.

    By filing for a Certificate, Laser effectively expressed its willingness to submit to some form of regulation by the Pa. PUC in exchange for a key benefit of public ­utility status: the right to exercise eminent domain, thereby permitting it to construct its pipeline at a more moderate cost in the face of landowner opposition. In fact, Laser reached a settlement, joined by most but not all of the parties, which would have permitted the Pa. PUC to exercise substantial oversight—including establishment of a tariff, quality and service requirements, and carefully monitored eminent domain—in exchange for the right of eminent domain.  However, in a lengthy opinion—reflecting a voluminous evidentiary record generated by Laser, industry interests, other would-be pipeline operators, state agencies and concerned individuals—Administrative Law Judge Susan D. Colwell rejected that settlement and concluded that state law forbids the Pa. PUC from granting Laser, or, presumably, any other such pipeline operator, a Certificate of Public Convenience.

    In order to obtain a Certificate, a party must, most fundamentally, demonstrate that it seeks to provide a service “to or for the public.” There is no numerical test for how many members of the public must be potential recipients of the service; rather, the applicant must show “a public use [that] is not confined to privileged individuals, but is open to the indefinite public.” Drexelbrook Associates v. Pa. PUC, 417 Pa. 430, 436 (1965).

    Here, ALJ Colwell concluded that the service proposed by Laser—a pipeline which would serve, at least initially, a handful of well operators seeking to convey just-extracted natural gas to a processing facility which would ready it for eventual consumer distribution—did not meet this standard. As the transportation of natural gas at that stage of its creation is a so-called “midstream” service, it is unlike an Electricity Generation Supplier or a local Natural Gas Distribution Company, which is handling or transporting a commodity in the form in which it will reach end users. Instead, she described the essential function being served by Laser as a “business transaction,” affecting merely a select group of homeowners. As such, she concluded, the Pa. PUC has no jurisdiction to issue a Certificate to Laser, under reasoning that would apply to virtually any other midstream pipeline operator. Significantly, her ruling came despite Laser’s agreement to myriad conditions which almost indisputably constitute best practices in the industry.

    ALJ Colwell’s ruling will now proceed to consideration by the Pa. PUC, which will consider anew her legal reasoning and is free to accept or reject it.