United States: FERC Updates Natural Gas Pipeline Capacity Regulations

FERC responded favorably to the industry call to eliminate the max rate cap on short-term releases and allow asset management agreements, but rejected the call to allow tying LNG throughput with downstream transportation.

On June 19, 2008, the Federal Energy Regulatory Commission (FERC) approved significant changes to its natural gas pipeline capacity release regulations. Intending to "strengthen competition in the secondary capacity release market, and therefore benefit consumers," FERC approved changes that should give natural gas users, producers and marketers more options for how they transact as well as "more accurate price signals on the market value of pipeline capacity."

FERC's actions stem from the petition of a group of marketers who sought clarification and modernization of FERC's regulatory regime in light of increasing utilization of asset management or optimization agreements. With this new ruling, FERC essentially recognizes the validity of allowing producers and users to outsource capacity optimization along with supply and risk management services. FERC's regulatory changes should herald new business opportunities as market participants take advantage of the asset management and profit sharing opportunities the new rules permit.

No Max Rate Cap on Releases of One Year or Less

The Final Rule removes the price ceiling on short-term capacity releases of one year or less. Consequently, all releases for one year or less will now have to be posted for competitive bidding under Part 284 (unless the release is done in conjunction with an asset management agreement, as discussed below). This means that a pre-arranged replacement shipper will no longer have the certainty of knowing it will get the capacity for not more than the maximum tariff rate. Under the new regime, the pre-arranged replacement shipper will presumably get the capacity by matching any competing bid, but no longer enjoy any cap on how high that competing bid might go.

For releases longer than one year, FERC does retain the exemption from bidding for prearranged releases at the maximum tariff rate. FERC also retains the exemption from bidding for releases of 31 days or less. The prohibition on "rolling over" (and the related issue of "flipping") still applies to 31-day or less releases (albeit some conflict seems to exist between the 31-day release and new provisions for all releases of one year or less since the latter subsumes the former).

Asset Management Agreements

The second major element of FERC's change is the determination to allow (indeed, facilitate) asset management agreements (AMAs). FERC embraces the notion that AMAs benefit consumers by allowing better price signals and more efficient use of pipeline capacity. FERC finds that a wide array of gas market participants may benefit from asset management arrangements, and it explicitly rules that AMAs (and the flexibility permitted under the new rules) are open to any market participant.

To make AMAs more workable, the Final Rule exempts capacity releases made to implement AMAs from the prohibition on tying capacity releases to any extraneous conditions and from the bidding requirements of section 284.8. The Final Rule also exempts releases under an AMA from the posting and bidding requirement, and decrees that payments or other consideration exchanged between the releasing shipper and the replacement shipper as part of an AMA "are not subject to the maximum rate" limitation of Part 284.8. Order 712 even exempts AMAs from the buy/sell prohibition and rules that a releasing shipper can under an AMA retain the obligation to purchase gas in the supply areas, then sell that volume to its asset manager and repurchase it from the manager in the downstream markets.

To differentiate releases for purpose of an AMA from other secondary capacity release, FERC imposed an obligation that the asset manager bear a "significant" purchase or delivery obligation (depending on whether the AMA is for a downstream or producer market) to the releasing shipper for at least five months out of each 12-month period (or the term of the release, if shorter) for up to 100 percent of the daily contract demand of released capacity.

The exemptions from the prohibition against tying and the bidding requirements granted for AMAs also applies to capacity releases made to a marketer participating in a state-approved retail access program.

Elimination of Tying Prohibition for Gas in Storage Inventory

Overruling its decision in Texas Eastern Transmission LP, 120 FERC ¶ 61,199 (2007), FERC allows a shipper release storage capacity to tie the release to the purchase of inventory and the obligation to deliver the same volume at the expiration of the release. Under Order 712, a shipper releasing storage capacity may require the replacement shipper to 1) immediately take title to any gas in the released storage capacity when the release occurs, and 2) at the conclusion of the release, return the storage capacity to the releasing shipper with a particular amount of gas in storage.

FERC Commits to Maintain Enforcement Vigilance

Order 712 directs FERC staff to monitor the capacity release program under the revised rules and to issue a report on them within six months after two years of experience with the new regime. To ensure its new regulatory structure comports with its statutory obligations, FERC reiterates its vigilance on enforcement and oversight. As Commissioner Marc Spitzer stated: "Shippers and potential shippers are looking for greater flexibility in the use of capacity. I believe that the changes we adopt in this Final Order will further facilitate shippers' ability to compete with pipelines by offering competitively-priced alternatives. I look forward to reviewing Staff's report on the performance of the capacity release program after the industry and Commission have had two years of experience under the new rule. Specifically, I look forward to reading whether there have been any allegations that a virtual pipeline, i.e., a marketer controlling a significant percentage of capacity and supply on one of more pipelines, has used that power to discriminate. I also remind entities that our complaint process remains a viable tool if an entity believes that a shipper has used the capacity release rules in a discriminatory manner."

What FERC Did Not Change

FERC explicitly declined to eliminate the shipper-must-have-title rule, and FERC also retained the prohibition on buy/sells (except for AMAs). Both requirements exist in order to make sure "capacity brokering" does not occur and to force shippers to make their allocations of capacity through the Part 284 regulatory structure. FERC also declined to allow any of these changes to Part 157 service, and declined to allow this new flexibility for pipeline releases (which may be a point challenged on rehearing). FERC declined to allow LNG importers to tie their throughput agreements with downstream capacity release (albeit FERC acknowledges that an AMA would provide the work-around to that problem for LNG importers).

Conclusion

Order 712 represents a significant liberalization of FERC's capacity release regulations. As a result, wide industry interest in AMAs is expected. FERC also likely will closely scrutinize compliance and enforcement issues. FERC will need to show it has the means and will to weed out and stop any market power or manipulation issues that arise from these changes.

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