Order 712-A represents FERC's continued effort to liberalize its natural gas policies and regulations.

On November 21, 2008, the Federal Energy Regulatory Commission (FERC) issued an order on addressing several requests for rehearing and clarification of its June 19, 2008, order liberalizing the regulations governing the market for released pipeline and storage capacity. This order continues FERC's efforts to provide additional flexibility to gas market participants.

FERC issued Order 712 in June 2008, in which it adopted several industry proposals to modernize and provide additional flexibility in the market for released capacity (i.e., the sale of gas pipeline/storage capacity from one customer to another). For more information on Order 712, see McDermott's On the Subject entitled "FERC Updates Natural Gas Pipeline Capacity Regulations."

Removal of the price ceiling on short-term capacity releases of one year or less

A determination to allow and facilitate Asset Management Agreements (AMAs); releases made under a qualified AMA are exempt from the competitive bidding requirements for released capacity and are not subject to FERC's prohibition against tying releases to extraneous conditions

Overruling precedent and allowing a shipper releasing gas storage capacity to tie the release to the purchase of the gas in inventory and the obligation to deliver the same volume at the expiration of the release

Exempting releases to gas marketers under state approved retail access programs from the competitive bidding requirements and the prohibition against tying

Following the issuance of Order 712, industry participants sought rehearing and clarification of Order 712. FERC considered these requests and in late November 2008 issued Order 712-A, in which it largely affirmed the conclusions it reached in Order 712. FERC also addressed numerous requests for clarification regarding the new rules.

Removal of the Price Ceiling for Short-Term Releases

FERC affirmed its decision in Order 712 to remove the price ceiling (set at the maximum pipeline tariff rate) for releases of capacity of one year or less (i.e., short-term releases). However, FERC rejected several parties' requests to lift the price ceiling for short-term capacity sales made directly by pipelines. Citing pipelines' ability to charge negotiated rates, FERC reasoned that the availability of a recourse rate set at the maximum tariff rate is essential for protecting customers from the possible exercise of market power by pipelines and releasing shippers.

FERC also provided several clarifications:

Shippers may not simultaneously post multiple consecutive short-term releases whose total term exceeds one year, since permitting such a release arrangement would be inconsistent with FERC's policy of lifting the price ceiling only for releases of one year or less.

In order to discourage shippers from releasing units of capacity in a manner designed to circumvent the price ceilings for releases exceeding one year, FERC revised its regulations so that the elimination of the price cap for short-term releases will only apply to releases that take effect within one year of the date the pipeline is notified of the release.

All releases of one year or less, which are now no longer subject to the maximum rate ceiling, must be posted for competitive bidding unless another exemption applies. Under the previous rule, pre-arranged releases at the maximum tariff rate were not required to be posted for competitive bidding. However, with the elimination of the rate ceiling, FERC concluded that such an exemption no longer applies.

The anti-rollover provision contained in section 284.8.(h)(2) does not prevent a releasing shipper from releasing the same capacity to the same party for another consecutive period of 31 days or less, provided that the releasing shipper posts the capacity for competitive bidding.

Asset Management Agreements

The centerpiece of Order 712 was the establishment of AMAs. In a Delivery AMA, one party (i.e., releasing shipper) releases its pipeline or storage capacity rights to another party (i.e., asset manager) on the condition that the releasing shipper may call upon the asset manager to deliver an equal volume of gas using the same or equivalent capacity to the releasing shipper for at least five months during a 12-month period, or, for AMAs shorter than one year, the longer of five months or the length of the agreement. Also permitted were Purchase AMAs, in which an entity located in a production area may release its capacity on the condition that it may call upon the asset manager to purchase an equivalent quantity of gas during five months of the year, or the greater of five months or the term of the AMA for short-term agreements. Releases occurring under qualified AMAs are exempt from the competitive bidding requirements and the prohibition on tying.

In Order 712-A, FERC affirmed the establishment of AMAs and provided numerous clarifications, many of which are based on industry commentators' requests. Some of these clarifications include the following:

A releasing shipper is free to release only a portion of its pipeline or storage capacity in an AMA.

An asset manager may use either the specific released capacity or equivalent capacity to fulfill its delivery/purchase obligations under an AMA.

There is no restriction on which types of entities may enter into an AMA.

FERC rejected calls to reduce the five-month requirement to a five-twelfths requirement for AMAs with a term of less than a year.

For AMAs longer than a year, FERC clarified that the minimum delivery/purchase obligation is five months for each 12 month period, and five-twelfths of the days for the remaining portion that is less than a year.

The delivery/purchase obligation under an AMA does not need to be a single continuous period. Parties are free to set the delivery/purchase obligation over months or days as they please, treating every 31 days as a month.

FERC clarified that the asset manager's delivery/purchase obligations under an AMA are subject to a pipeline or storage facility's operational limitations set forth in its tariff. FERC cited common "ratchet" provisions limiting the rate of injections and withdrawals from storage facilities, which may prevent a party from injecting/withdrawing the full contract demand on a given day.

For AMAs that include releases of both storage and transportation, the delivery/purchase obligations are not cumulative.

FERC clarified that the anti-rollover provision in 284.8(h)(2)—which prevents parties from extending short-term releases that are exempt from competitive bidding—does not apply to releases of 31 days or less for AMAs, or to releases to marketers under state-approved retail access programs. FERC amended the regulation text to make this clearer.

FERC clarified that parties are free to include a nomination deadline in an AMA, under which a releasing shipper in an AMA would have until the nomination deadline to demand delivery/purchase by the asset manager without the risk that the capacity has already been released by the asset manager on a non-recallable basis. Once the nomination deadline passes, the asset manager may release the capacity on a non-recallable basis. FERC concluded that nomination deadlines under an AMA may be set no earlier than 8:00 am on the weekday before gas flow.

FERC concluded that a releasing shipper in an AMA may include more capacity in an AMA than it typically uses to meet its historical gas demands, since parties often hold more capacity than they need in order to provide for peak day demand or other contingencies. Nonetheless, FERC cautioned that all capacity released in an AMA is subject to the delivery/purchase condition, even when it exceeds the releasing shipper's typical demand.

An asset manager may, in turn, release the capacity to another shipper in a separate AMA. FERC stated that some asset managers may have specific expertise with managing one kind of storage or pipeline asset, and may seek the expertise of another manager for other assets.

Elimination of Tying Prohibition for Gas in Storage Inventory

Overruling the agency's precedent, FERC in Order 712 concluded that 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 stated that these conditions would not be viewed as a violation of the tying prohibition. In Order 712-A, FERC further clarified the following issues:

With respect to storage capacity releases that include conditions regarding the sale and/or repurchase of gas outside of an AMA context, the parties may negotiate further terms and conditions related to the commodity portion of the transaction, and such arrangements will not run afoul of the tying prohibition. As an example, FERC cited the heightened creditworthiness requirements in today's natural gas commodity marketplace.

Parties may negotiate in-kind transfers of natural gas in storage in lieu of monetary transfers.

Releases Made Under State Approved Retail Access Programs

Order 712 exempted releases under state approved retail access programs from the bidding requirements, as well as the prohibition on tying arrangements. Note that this is separate from the similar policies for AMAs. On rehearing, FERC continued this policy, and offered the following clarifications:

FERC clarified that consecutive releases of capacity for less than a year (which exceed one year when combined) to a marketer participating in a state approved retail access program will not be considered a long-term capacity release subject to maximum rate ceiling.

A natural gas marketer participating in a state approved retail access program can release its capacity to an asset manager under an AMA in order to fulfill the marketer's obligations under the program.

Marketers who acquire released capacity under the retail access exemption may use any excess capacity for other purposes.

Canadian provincial retail unbundling programs are equivalent to state programs for the purpose of this exemption. However, FERC concluded that self-regulated municipals do not qualify for the exemption.

Liquefied Natural Gas (LNG) Issues

In Order 712, FERC initially rejected calls to allow holders of LNG capacity to link terminal throughput agreements and/or sales of gas at the terminal outlet with a pre-arranged capacity release on an interstate pipeline directly connected to the terminal. In Order 712-A, however, FERC clarified that a holder of LNG capacity may tie the release of its capacity on an LNG terminal to the release of capacity on a directly connected pipeline at the terminal's outlet, provided that both the LNG terminal and the pipeline are both open-access facilities regulated by FERC under part 284 of its regulations.

Impacts and Opportunities

Order 712-A represents FERC's continued effort to liberalize its natural gas policies and regulations in order to keep pace with rapidly changing developments in the industry. Companies in the energy industry should keep abreast of these and other regulatory changes.

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