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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.
Copyright © 2007, Davis Wright
Tremaine LLP.
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