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GAS DEVELOPMENTS AT FERC
A Bi-Monthly Report on Matters
of Interest to Gas-Fired Generators
In this issue:
To
Enhance Market Transparency, FERC Proposes To Collect Gas Pricing
Data From End Users
The Energy Policy Act of 2005 (“EPAct 2005”) grants
the Federal Energy Regulatory Commission (FERC) expanded authority
to obtain information on wholesale electric and natural gas prices
and availability. Congress gave FERC this authority with the expectation
that greater price transparency will improve market confidence.
Using this new authority, on April 19, 2007, FERC issued a proposed
rule (Docket Nos. RM07-10-000 and AD06-11-000) to substantially
increase the amount of gas market information gathered and made
public.
To track daily flows of gas, FERC proposes that intrastate pipelines,
which are not otherwise subject to FERC regulation, be required
to post daily to the Internet the capacities of, and volumes flowing
though, their major receipt and delivery points and mainline segments.
Regulated interstate gas pipelines are already required to post
scheduled flow data to the Internet. Additionally, FERC believes
that requiring information on intrastate pipeline physical flows
will provide the public with a better understanding of the daily
supply and demand conditions that affect U.S. wholesale gas markets.
According to FERC, such information is needed because a number of
the major natural gas pricing points are located at the confluence
of multiple interstate and intrastate pipelines and “while
distinctions between intrastate and interstate natural gas markets
may be meaningful from a legal perspective, they are not meaningful
from the perspective of market price formation.”
Significantly, FERC proposes to require large end users of gas,
such as gas-fired electric generators, (users who consume or transact
for more than 2,200,000 MMBtu/year) to annually report, in aggregate,
the number and volume of their gas transactions. In addition to
reporting the total amount of physical gas transactions by number
and volume, FERC would require a breakdown of transactions by: (1)
purchases and sales; (2) a number and volume breakdown of purchases
and sales distinguishing between monthly and daily spot market transactions;
and (3) a number and volume breakdown distinguishing the type of
pricing, in particular, whether the pricing was fixed or indexed.
Although currently formulated as an annual reporting requirement,
FERC seeks comment on whether these reports should instead be required
on a monthly basis, which would substantially increase the reporting
burden on end users. Although it preliminarily rejects transaction-specific
reporting in favor of aggregated reports, FERC leaves open the possibility
of requiring detailed transaction-specific reporting if there is
a way such reporting could be achieved without distorting the market.
FERC is skeptical that this can be done. FERC assumes that if it
requires reports on specific forms of transactions, the existence
of the reporting requirement, in and of itself, will create an incentive
for buyers and sellers to reformulate their transactions merely
to avoid a reporting requirement.
An important issue unaddressed in FERC’s notice of proposed
rulemaking is whether misreporting of pricing data under this rule,
albeit unintentional, could constitute unlawful market manipulation
under Order No. 670, Prohibition of Energy Market Manipulation,
and whether that order’s “safe harbor” provisions
need clarification in light of these newly proposed reporting requirements.
End users and other unregulated entities who will view these reporting
requirements as burdensome may well be concerned about the legal
exposure that accompanies such reporting in the absence of FERC
clarification.
Initial comments are to be filed with the FERC by June 11, 2007
and reply comments are due July 10, 2007.
In
AES Ocean Express Case, FERC Attempts To Steer Middle Course On
Gas Quality and Interchangeability
On April 20, 2007, the Federal Energy Regulatory Commission (FERC)
issued an opinion largely affirming an Administrative Law Judge’s
(“Judge’s”) findings regarding the appropriate
gas quality and interchangeability standards to be added to Florida
Gas Transmission Company’s (“FGT’s”) tariff
in anticipation of the pipeline’s receipt of revaporized imported
LNG. Imported LNG has a substantially higher heating content than
traditional domestic gas supplies. Consequentially, each pipeline
that is to receive imported LNG is required to propose new tariff
standards to insure that downstream users/facilities are not adversely
affected by changes to the chemical constituents of the delivered
gas. The AES Ocean Express case (Docket Nos. RP04-249-000, et al.)
is the first case where the FERC has established a hearing to consider
the proposed gas quality and interchangeability standards that a
pipeline proposes to accommodate the introduction of regassified
LNG into its pipeline system.
In the AES case, FGT proposed gas quality and interchangeability
standards more stringent than the interim guidelines set forth in
technical white papers filed with the FERC in early 2005 by the
Natural Gas Council. After evaluating these white papers and soliciting
public comment, FERC issued a June 15, 2006 Policy Statement (see
July 2006 issue of “Gas Developments at FERC”) setting
forth principles for addressing gas quality and interchangeability
issues on each pipeline. The FERC encouraged pipelines and their
customers to use the white papers’ interim guidelines as “a
common scientific reference point for resolving the issues.”
The AES Ocean Express case was litigated before the issuance of
this Policy Statement. However, the FERC’s opinion evaluates
the Judge’s factual findings and resolves issues raised in
the litigation in the context of the Policy Statement and, in one
significant respect, expands upon the Policy Statement.
In the hearing, evidence was introduced regarding the potential
adverse impacts of variability on low emission gas turbines (see
“Will
Turbines Require Expensive Retofits To Handle Imported LNG”).
This evidence, and the large number of gas fired generators on the
FGT system, influenced FERC’s decision to adopt FGT’s
tariff proposal, which was substantially narrower than the white
papers’ interim guidelines, and to reject the LNG suppliers’
attempt to convince FERC to essentially codify these interim standards
as the pipeline industry standard. FERC also applies the new tariff
standards to both domestic gas and revaporized LNG, not just revaporized
LNG, as proposed by the Judge. In recognition of the fact that there
is, as yet, no scientific consensus on these issues, FERC states
that to the extent new test data demonstrates the need to further
modify the FGT tariff, parties are free to propose further changes.
FERC recognizes the likelihood that downstream end users will incur
costs to mitigate the impact of burning hotter gas than before the
introduction of LNG. Accordingly, FERC was confronted with the request
of its own litigation staff, and of the end users, that customers
should be allowed to seek cost reimbursement from upstream entities
(i.e., the producers/importers) associated with the need to modify
their equipment to burn this hotter gas and deal with greater gas
variability, which will result from the commingling of “hotter”
revaporized LNG with traditional domestic gas supplies.
FERC concludes that it has an obligation to consider cost impacts
on downstream users in ruling on the reasonableness of the tariff
proposals in the first instance, and that the incremental downstream
costs were, in fact, part of that analysis. Having ruled on the
justness and reasonableness of the tariff proposals, however, FERC
stated that it has “no basis to assert jurisdiction over the
allocation and recovery of the downstream entities’ mitigation
costs” because the only jurisdiction FERC has is with respect
to the rates FGT charges its shippers for transporting gas.
This appears to be an unduly narrow reading of FERC’s jurisdiction
because it ignores ample judicial precedent regarding FERC’s
obligation under the Natural Gas Act to consider all
factors bearing on the public interest, even where they are matters
excluded from the FERC’s direct regulatory jurisdiction. Nor
is it apparent why FERC construes the issue strictly as a rate/tariff
matter. The same cost concerns were raised by FGT’s shippers
when FERC was considering the pipeline’s application to construct
the facilities needed to interconnect the upstream LNG facilities
with the pipeline. In its 1999 Policy Statement on the pricing of
new pipeline facilities, FERC set forth an analytical framework
for conducting a cost-benefit analysis of new pipeline construction
that takes into account cost impacts on existing customers of a
pipeline. In the AES Order, FERC states that the 1999 Policy Statement
“never inquired” and “never addressed” the
cost impacts of compliance with tariff changes related to gas quality
and interchangeability. However, to say that a Policy Statement,
issued years prior to when such issues came to the forefront, does
not address such issues, does not obviate the agency’s obligation
to consider them now.
For more information, please contact:
This Law Letter is a publication
of the Energy Department of Davis Wright Tremaine LLP. Our purpose
in publishing this Law Letter is to inform our clients and friends
of recent developments in energy law. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations. Attorney Advertising. Prior results do not guarantee
a similar outcome. Thank you.
Copyright © 2007, Davis Wright
Tremaine LLP.
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