order approved by the Railroad Commission of Texas. The Black Lake pipeline system and Wattenberg
pipeline system are interstate transporters of NGLs and are subject to FERC jurisdiction under the Interstate
Commerce Act and the Elkins Act.
Should we fail to comply with all applicable FERC-administered statutes, rules, regulations and orders, we
could be subject to substantial penalties and fines. Under EPACT 2005, FERC has civil penalty authority under
the NGA and the NGPA to impose penalties for current violations of up to $1.0 million per day for each
violation and possible criminal penalties of up to $1.0 million per violation and five years in prison.
Other state and local regulations also affect our business. Our non-proprietary gathering lines are subject to
ratable take and common purchaser statutes in Louisiana. Ratable take statutes generally require gatherers to
take, without undue discrimination, oil or natural gas production that may be tendered to the gatherer for
handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue
discrimination as to source of supply or producer. These statutes restrict our right as an owner of gathering
facilities to decide with whom we contract to purchase or transport oil or natural gas. Federal law leaves any
economic regulation of natural gas gathering to the states. The states in which we operate have adopted
complaint-based regulation of oil and natural gas gathering activities, which allows oil and natural gas
producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to oil
and natural gas gathering access and rate discrimination. Other state regulations may not directly regulate our
business, but may nonetheless affect the availability of natural gas for purchase, processing and sale, including
state regulation of production rates and maximum daily production allowable from gas wells. While our
proprietary gathering lines are currently subject to limited state regulation, there is a risk that state laws will be
changed, which may give producers a stronger basis to challenge the proprietary status of a line, or the rates,
terms and conditions of a gathering line providing transportation service.
Discovery’s interstate tariff rates are subject to review and possible adjustment by federal regulators.
Moreover, because Discovery is a non-corporate entity, it may be disadvantaged in calculating its
cost-of-service for rate-making purposes.
FERC, pursuant to the NGA, regulates many aspects of Discovery’s interstate pipeline transportation
service, including the rates that Discovery is permitted to charge for such service. Under the NGA, interstate
transportation rates must be just and reasonable and not unduly discriminatory. If FERC fails to permit tariff
rate increases requested by Discovery, or if FERC lowers the tariff rates Discovery is permitted to charge its
customers, on its own initiative, or as a result of challenges raised by Discovery’s customers or third parties,
Discovery’s tariff rates may be insufficient to recover the full cost of providing interstate transportation service.
In certain circumstances, FERC also has the power to order refunds.
Under current policy, FERC permits pipelines to include, in the cost-of-service used as the basis for
calculating the pipeline’s regulated rates, a tax allowance reflecting the actual or potential income tax liability
on public utility income attributable to all partnership or limited liability company interests, if the ultimate
owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s
owners have such actual or potential income tax liability will be reviewed by FERC on a case-by-case basis. In
a future rate case, Discovery may be required to demonstrate the extent to which inclusion of an income tax
allowance in Discovery’s cost-of-service is permitted under the current income tax allowance policy.
Should we fail to comply with all applicable FERC-administered statutes, rules, regulations and orders, we
could be subject to substantial penalties and fines. Under EPACT 2005, FERC has civil penalty authority under
the NGA to impose penalties for current violations of up to $1.0 million per day for each violation and possible
criminal penalties of up to $1.0 million per violation and five years in prison.
Recent spills and their aftermath could lead to additional governmental regulation of the offshore
exploration and production industry, which may result in substantial cost increases or delays in our
offshore natural gas gathering activities.
In April 2010, a deepwater exploration well located in the Gulf of Mexico, owned and operated by
companies unrelated to us, sustained a blowout and subsequent explosion leading to the leaking of
hydrocarbons. In response to this event, certain federal agencies and governmental officials ordered additional
35