Energy Policy Update for Gas-Fired Generators
FERC Fine-Tunes Capacity Release Rules
On Nov. 20, 2008, the Federal Energy Regulatory Commission (FERC) issued Order No. 712-A, which reaffirmed, with minor modification, its newly revised capacity release rules. The revised rules, which first took effect on July 31, 2008, are designed to enhance competition in secondary markets by facilitating the manner in which pipeline capacity can be released.
Controversially, FERC removed the price cap on short-term sales of such released capacity while retaining the price cap on short-term sales of capacity by interstate pipelines. FERC did so because it concluded that this price limit on pipeline-owned capacity is “necessary to protect against the potential exercise of market power.” FERC's affirmance of this finding on rehearing sets up a court challenge to Order No. 712 by the interstate pipeline industry, which believes it is being unfairly disadvantaged by the agency's decision.
To increase market flexibility, Order No. 712 removed regulations that limited the ability of capacity holders to hire third-party agents to manage their gas supply portfolios. It did so by exempting qualifying asset management arrangements (AMAs) from the prohibition on tying releases to elements of a transaction not directly related to gas transportation (such as supply agreements), and from standard competitive bidding requirements.
On rehearing, FERC clarified the relationship between its decision to remove the price cap on short-term releases and competitive bidding requirements by explaining that all short-term releases, unless otherwise exempt, must now be subject to competitive bidding. According to FERC, without a price cap, the former exemption for short-term releases at the maximum rate no longer exists. However, releases for longer than one year at the maximum tariff rate will continue to be exempt from competitive bidding.
In response to a wide range of comments regarding the need to broaden the proposed AMA exemptions to include releases under state-approved retail access provisions, FERC in Order No. 712 modified its rules to allow “the same blanket exemptions from the prohibition against tying and bidding requirements as capacity releases made in the AMA context” to its treatment of releases made under a state-approved retail access program.
FERC also eliminated its tying prohibition for gas in storage, thus allowing a shipper releasing storage capacity to condition the release on the sale and/or repurchase of gas in storage inventory. Under the new rule, affirmed on rehearing, a shipper releasing storage capacity may require the replacement shipper to: (1) take title to gas in the released storage capacity at the time of the release; and (2) following the release, return the storage capacity to the releasing shipper with a specified amount of gas in inventory.
New Pipeline Information Posting Requirements to Take Effect
Also on Nov. 20, 2008, FERC issued final rules, which, for the first time, placed significant reporting obligations on major intrastate pipeline companies not historically subject to federal regulation. Conceding that these companies are not “natural gas companies” subject to FERC regulation under Section 1 of the Natural Gas Act, FERC justified its actions by relying on provisions of the Energy Policy Act of 2005, which expanded FERC's information gathering authority.
Congress mandated these changes under the Energy Policy Act in an effort to encourage price transparency in gas markets, thereby facilitating more efficient gas trading and strengthening market confidence. According to FERC, “[w]hile 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.”
Under the new reporting rules, which also apply to interstate pipelines traditionally regulated by FERC, pipelines that have delivered more than 50 million MMBtu per year on average for the past three years must now post design capacity and daily scheduled volumes for all receipt and delivery points that have a design capacity of at least 15,000 MMBtu per day.
The number of major intrastate pipelines that will be subject to the new posting requirements has been substantially narrowed from what was originally proposed (as reported in the May 2007 issue of “Gas Developments at FERC”). FERC increased the threshold for qualification from 10 million MMBtu per year to 50 million MMBtu per year and based the definition on deliveries, not gas flows. It also decided to exempt otherwise major intrastate pipelines from the new posting requirements if the pipeline: (1) is located upstream of a processing plant; (2) delivers almost all gas transported to retail customers; or (3) is a storage provider.
Interstate pipelines were required to begin compliance with this new rule on Feb. 1, 2009. Major intrastate pipelines were originally given until May 2, 2009, to comply; however, by order issued Jan.15, 2009, FERC extended their compliance deadline until 150 days after it rules on pending rehearing requests.