On April 24, 2018, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) held that FERC lacks jurisdiction over certain of the City of Clarksville, Tennessee’s (“Clarksville”) interstate sales of natural gas for resale, because the plain language of the Natural Gas Act (“NGA”) excludes sales by municipalities from FERC’s jurisdiction, which extends to interstate sales of natural gas for resale under NGA section 7.

Clarksville is a municipality that owns natural gas distribution facilities in Tennessee, as well as facilities that service the U.S. Army base in Fort Campbell – partially located in Kentucky – and certain commercial customers through the “Kentucky Service Line,” which extends 2,400 feet from Clarksville’s pipeline system in Tennessee into Kentucky. Given that it owns these limited facilities crossing the border into Kentucky, Clarksville applied for a NGA section 7(f) service area determination from FERC to confirm that its service area includes its services to Fort Campbell and the Kentucky Service Line. During the section 7(f) proceeding, FERC learned that Clarksville transports natural gas to a meter and regulation station just south of the Tennessee/Kentucky border in Tennessee, where Clarksville sells and delivers the gas to the City of Guthrie, Kentucky (“Guthrie”). In approving Clarksville’s section 7(f) application, FERC noted that the sales to Guthrie were covered by a blanket marketing certificate already granted to Clarksville.

Clarksville requested rehearing of FERC’s order on the issue of whether its sales to Guthrie are subject to FERC’s jurisdiction. Specifically, Clarksville argued that FERC lacks jurisdiction because the NGA excludes municipalities from the definition of “person,” as that term is used in defining “natural-gas companies,” which are subject to FERC’s broad authority over interstate natural gas transportation and sales for resale.

After FERC denied Clarksville’s rehearing request, Clarksville petitioned the D.C. Circuit for review. In response to the petition, FERC maintained that its jurisdiction under the NGA extends to Clarksville’s sales to Guthrie because, according to U.S. Supreme Court precedent in the Federal Power Act (“FPA”) context, FERC can interpret a municipality to be a jurisdictional “person” in order to prevent a regulatory gap from forming in contravention of the NGA’s purpose. In addition, FERC contended that, even if Clarksville is not a “natural-gas company,” NGA section 1(b) provides FERC with jurisdiction over the sale of natural gas in interstate commerce separately from its jurisdiction over “natural-gas companies” engaging in those sales.

In its opinion, the D.C. Circuit held that the plain language of the NGA, as well as substantial FERC precedent, excludes municipalities from the definition of “natural-gas company.” Accordingly, the D.C. Circuit held that FERC is precluded from regulating Clarksville’s sales to Guthrie through an NGA section 7 certificate. In doing so, the D.C. Circuit rejected FERC’s contention that it must have jurisdiction over Clarksville’s sales to prevent a regulatory gap, instead finding that a local governing body has regulatory authority over the sales. The D.C. Circuit further reasoned that, even if a regulatory gap existed, the NGA was intended to prevent regulatory gaps in order to protect consumers and municipalities from large natural gas companies, which was not the case here.

In regard to NGA section 1(b), the D.C. Circuit held that, while section 1(b) states that FERC has jurisdiction over interstate sales for resale and “natural-gas companies” engaged in such sales, NGA section 1(b) is not “jurisdiction-creating” and should not be interpreted to mean that FERC has jurisdiction over everything related to interstate sales for resale. Lastly, the D.C. Circuit noted that, while Clarksville had acquiesced to FERC’s jurisdiction when it sought an NGA section 7(f) service area determination, Clarksville’s sales to Guthrie only occurred within Tennessee. Therefore, the D.C. Circuit concluded that FERC’s prior precedent allowing it to regulate a municipality where pipeline facilities cross state lines was inapplicable to Clarkville’s sales to Guthrie.

A copy of the D.C. Circuit’s opinion is available here.