Energy Policy Update for Gas-Fired Generators
FERC Requires Reporting of Wholesale Physical Gas Transactions
In Order No. 704, issued December 26, 2007, the Federal Energy Regulatory Commission (FERC or Commission) issued final rules requiring wholesale gas market participants to report information each year regarding their purchases or sales of more than 2.2 million MMBtu/year of physical natural gas. Pursuant to these new rules, buyers and sellers must report the aggregate volumes of all relevant transactions in a new FERC Form No. 552, and indicate what amount of gas was priced at a fixed price, and whether they report fixed price transactions to price index publishers. In addition, market participants who buy or sell less than this volume threshold but who hold blanket sales certificates must also submit Form No. 552 for identification purposes and indicate whether they report fixed price transactions to price index publishers, although they need not submit aggregate physical transaction data.
In promulgating this rule, FERC relied upon its new transparency authority, which was added to the Natural Gas Act when Congress enacted the Energy Policy Act of 2005 (EPAct 2005). EPAct 2005's transparency provision directs the FERC “to facilitate price transparency in markets for the sale or transportation of physical natural gas in interstate commerce,” and allows the FERC to “prescribe such rules as the Commission determines necessary and appropriate” that “provide for the dissemination, on a timely basis, of information about the availability and prices of natural gas sold at wholesale and interstate commerce to the Commission, State commissions, buyers and sellers of wholesale natural gas, and the public.”
Through Order No. 704, FERC is seeking to enhance its ability to oversee the price formation process in wholesale gas markets. It intends to collect this information to evaluate the degree to which market participants use fixed-price day-ahead or month-ahead physical transactions as compared to transactions that rely on price indexes. FERC is concerned that the gas markets overall will only have continued confidence in the legitimacy of transactions based on index prices if they are derived from a sufficient number of actual physical fixed-price transactions. Thus, the final rule, which took effect on February 4, 2008, is intended to permit FERC to make an annual estimate of: (1) the size of the physical gas market; (2) the use of index pricing in that market; (3) the size of the fixed-price trading market that produces price indices separately from the subset reported to index publishers; and (4) the relative size of the major traders.
The final rule closely tracts the initially proposed rule (as reported in the May 2007 issue of “Gas Developments at FERC”). One major change is that the FERC has narrowed the scope of the rule by limiting it to buyers and sellers of wholesale gas, thus excluding all sales to end users. However, FERC has retained the requirement that both wholesale buyers and sellers must report transaction data, in effect, forcing duplicate reporting of every wholesale transaction. Further, all market participants subject to the reporting requirement, not just those operating under a blanket sales certificate as originally proposed, must indicate whether they report prices to an index publisher. Finally, companies with multiple affiliates can report transaction data either separately or in aggregate, as they may choose.
FERC Form No. 552 will be due on May 1 of each year, starting on May 1, 2009, for the calendar year 2008.
Pipeline Financial Reporting Obligations Expanded
In Order No. 710, issued March 21, 2008, but effective January 1, 2008, FERC expanded the market and cost information that gas pipelines must provide in the annual (Forms 2 and 2-A) and quarterly (Form 3-Q) reports they file with the Commission. Like other recent final FERC rules, (most notably Order No. 704 (see above)), this rule seeks to enhance the FERC's ability to meet its oversight responsibilities by expanding the transparency of the natural gas industry. The first forms to reflect these expanded information requirements will be due the first quarter of 2009, and each pipeline's 2009 annual report must contain expanded information for calendar year 2008.
Pipelines are no longer required to submit to regular rate review. In recent years, the Commission has been concerned over the substantial drop-off in both voluntary rate filings by individual pipelines as well as a decline in the number of complaints filed by pipeline customers and state public utility commissions seeking Commission review of the reasonableness of a pipeline's rates. Further, concerns have been raised as to whether the financial data provided by pipelines today is sufficient to even support such a complaint. One additional area of growing concern at the Commission is the impact of rising gas prices on pipeline revenues. Most pipelines retain a flat percentage of shipper-supplied gas as fuel for system operations. If that percentage has been set too high, some pipelines may be collecting excessive revenues through resales of shipper-supplied gas.
Order No. 710 seeks to remedy these problems by making sure there is sufficient public data available to support both a rate reassessment, and a complaint or a FERC-initiated investigation, where necessary. The final rule closely tracks the original FERC notice of proposed rulemaking (as reported in the November 2007 issue of “Gas Developments at FERC”), with minor revisions. One change requested by the pipeline industry was in the area of reporting information on affiliate transactions. Detailed information on affiliate transactions must now be reported only for transactions that exceed a $250,000 cost threshold, however pipelines must also provide the total amount of all services and transactions that fall below this $250,000 threshold. The requirement that pipelines separately report cost and revenue information on all incrementally priced projects has been expanded to provide that if the incremental project charges a separate fuel rate, and not the system-wide fuel rate, volumes received and used for that project must be separately reported. Finally, FERC expanded the newly required schedule on capital structure detail to include a requirement that the pipeline identify the entity whose capital structure is used.
With Constellation Settlement, FERC Signals Continued Close Scrutiny of the Capacity Release Market
Continuing a policy of strict enforcement of its capacity release rules, even while it is considering a possible relaxation of some of these rules (see the January 2007 issue of “Gas Developments at FERC”), on March 11, 2008, FERC announced that it had entered into a settlement with Constellation NewEnergy-Gas Division, LLC (CNE-G) whereby this retail gas marketer, a wholly owned subsidiary of Constellation Energy Group, Inc., will pay a $5 million civil penalty and disgorge unjust profits of almost $1.9 million for violation of the Commission's capacity release policies.
All releases of pipeline capacity at less than the maximum rate must be posted for competitive bidding if they are for more than 31 days. If the release if for 31 days or less, it is exempt from competitive bidding but the release may not be rolled-over, extended or in any way continued for a longer period without first complying with the FERC's bidding and posting rules. CNE-G violated these rules by engaged in a practice known as “flipping” whereby it entered into a short term release of discounted capacity in month one to one affiliate, and then “flipped” that release to another affiliate in month two, etc. By flipping these discounted releases between affiliates each month, CNE-G was able to preferentially release a sizeable amount of discounted capacity (12.8 Bcf) to its affiliates, without posting or giving any other market participants an opportunity to bid for the capacity. (In a similar order issued last fall, BP Energy Company was subject to a $7 million civil penalty for engaging in this same practice.)
Flipping violates two key components of the FERC's pipeline open access program. First, it violates the prior posting requirement, intended to promote market transparency by providing notice to all interested shippers of the availability of released capacity. Second, it violates the competitive bidding requirements, intended to insure that capacity goes to the shipper who values it the most.
Although this “flipping” violation was the most egregious violation, as it was done specifically for the purposes of circumventing the capacity release rules, FERC also found that CNE-G violated the “shipper must have title” rule, which requires that the releasing shipper have title to the gas being transported. Finally, FERC found that CNE-G engaged in prohibited “buy-sell” transactions which are commercial arrangements where a shipper holding pipeline capacity buys gas at the direction of another entity, ships that gas through the pipeline using its capacity, and then resells an equivalent quantity of gas to that same entity at a downstream point. In effect, the capacity holder is able to broker its pipeline capacity to the other entity, instead of posting the capacity on the pipeline's electronic bulletin board so that all interested shippers could bid to use the capacity.