|
GAS DEVELOPMENTS AT FERC
A Bi-Monthly Report on Matters of Interest to Gas-Fired Generators
Following Issuance of Policy Statement, FERC Moves Quickly To Resolve Pending Gas Quality and Interchangeability Disputes
On June 15, 2006, FERC issued a Policy Statement establishing generic policies for addressing gas quality/interchangeability disputes (See July 2006 Issue of “Gas Developments at FERC”). The Policy Statement provided that such disputes would be resolved on a case-by-case and pipeline-specific basis with reference to interim guidelines set forth in the “NGC+ Reports,” technical reports filed with FERC in February 2005 by an industry-wide working group formed under the auspices of the Natural Gas Council. As noted by FERC in the Policy Statement, “[these] interim guidelines suggest a process for applying scientific principles to individual markets but do not address the specifics of individual pipeline circumstances or tariff provisions.” However, “[t]hese interim recommendations provide a common language for discussion of these issues, and a reasonable framework to establish market-specific standards.”
In the several months since issuing the Policy Statement, FERC has cleared out a backlog of pending new LNG import and LNG facilities expansion cases that had been delayed pending the agency’s review of the NGC+ Reports. This first group of post-Policy Statement decisions illustrates some general principles used in development of such market-specific standards, which can be expected to impact FERC’s resolution of those gas quality/interchangeability disputes still pending before the agency.
In the Policy Statement, FERC had rejected requests that pipelines be required to include “merchantability” provisions in their tariffs in addition to developing specific gas quality and interchangeability standards using the interim processes recommended by the NGC+ Reports. In essence, a merchantability tariff provision would require the pipeline to warrant that any gas delivered would not adversely impact downstream gas users’ equipment, including electric generation facilities, regardless of its conformance to tariff specifications. FERC saw no benefit in mandating such a provision, noting that it could come into conflict with those specifications developed by reference to the interim guidelines.
Although in the Policy Statement, FERC claimed to adopt a neutral stance on merchantability, finding that as a policy matter, it “will neither mandate nor prohibit such provisions,” subsequent orders demonstrate that FERC is not willing to impose such a provision on a pipeline. Indeed, within one week of issuing the Policy Statement, FERC gave a green light to four pending LNG import/expansion projects without resolving the downstream gas quality/interchangeability concerns raised in these cases. This clearly signals FERC’s overall intention not to allow downstream merchantability issues to interfere with the rapid development of new LNG supplies. For example, in approving the Crown Landing LLC LNG project, FERC rejected efforts by downstream pipeline customers to place the cost burden associated with resolving gas quality/interchangeability concerns on either the project developer or the interconnecting pipeline under a general gas merchantability standard. Although FERC stated it wants a cooperative resolution of all such concerns, as a practical matter, FERC’s order gives the objecting downstream customers of the pipeline virtually no negotiating leverage because it gives the pipeline a green light to begin transporting the regasified LNG even if such issues remain unresolved.
Although it rejected efforts to impose a merchantability tariff provision on pipelines, FERC did make the procedural path for objecting pipeline customers easier in one respect. In approving the Cove Point Expansion Project, FERC clarified its Policy Statement to hold that downstream customers may present evidence of prior adverse impacts resulting from the introduction of regasified LNG into an existing pipeline in a certificate proceeding seeking to expand the facility. In other words, the complaining downstream customer need not file a separate Natural Gas Act Section 5 complaint but may raise the concerns in the pending certificate proceeding, even though the problem did not directly relate to the newly proposed service.
In finding a contested settlement involving ANR Pipeline Company consistent with the Policy Statement, FERC held that pipelines interconnecting with new LNG import facilities need not set their own gas quality/interchangeability standards to satisfy the gas quality standards of downstream entities. FERC rejected this “worst case downstream scenario approach” to standard setting because: (1) it could prevent development of a seamless interstate pipeline grid; (2) it could reduce the level of gas available to commodity markets by requiring upstream supplies to meet potentially expensive requirements needed for only a small portion of the downstream entities; and (3) it would be less expensive to have downstream entities develop localized solutions, as needed.
In a complaint involving Tennessee Gas Pipeline Company, FERC clarified that compliance filings on gas quality/interchangeability issues that were pending pre-Policy Statement must be updated by the pipelines to address all Policy Statement principles. Pipelines were also required to justify pending tariff proposals under these same principles. To facilitate the development of joint pipeline-customer proposals for resolving disputes on such matters, Tennessee, Southern Natural Gas Company, and other pipelines were given a two month window for negotiations before such compliance filings were due. In a subsequent order clarifying its instructions in the Tennessee case, FERC clarified that Policy Statement Principle 4, which states that pipelines are to set forth tariff provisions setting forth specific gas quality standards for gas to be delivered to the pipeline’s customers, is not an absolute requirement. Rather, a pipeline may alternatively provide an explanation as to why it is not proposing a specific gas quality specification for its delivery points. FERC noted that the Policy Statement, as a statement of policy, is not a binding rule and that pipelines may, if they wish, seek to explain why they should not be required to come under specific provisions and that parties are then free to contest the pipeline’s position to lead to a merits ruling on the matter. However, returning to a central theme of the Policy Statement, FERC again emphasized its desire for a negotiated resolution among the customers and pipeline on such matters.
In approving the Rockies Express Pipeline project, FERC modified the proposed tariff to eliminate a gas quality provision that favored foundation/anchor shippers over firm shippers that subsequently contract for service. The FERC noted that such a provision was unduly discriminatory because it gave certain shippers a higher quality of firm service solely based on the date that they contracted for service.
In the Policy Statement, FERC stated that pipelines are permitted “to exercise their discretion to waive strict gas quality limits when operating conditions allow, and to enforce such limitations when operating conditions require stricter measures, as long as it is done in a not unduly discriminatory manner.” In a case involving Natural Gas Pipeline Company of America, FERC again emphasized that it intended to give substantial discretion to pipelines in deciding when and to what extent it will allow exceptions to gas quality/interchangeability standards set forth in their tariffs. Thus, FERC permitted Natural to set a relatively low gas threshold system-wide, which allowed gas to exceed this threshold when localized circumstances permit on particular segments of its system. FERC explained that such action was not unduly discriminatory and indeed served to maximize throughput to all customers’ benefit.
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 © 2006, Davis Wright
Tremaine LLP.
return to Advisory Bulletins main page
|
.jpg)
