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Four Firms Fined Millions for Capacity Release Violations

FERC last Tuesday approved stipulation and consent agreements requiring four energy companies and affiliates to pay nearly $10 million, as well as disgorge almost $250,000 in unjust profits plus interest, for circumventing the agency's posting and bidding requirements for released capacity, violating shipper-must-have-title (SMHT) requirements and ignoring the prohibition on buy-sell transactions.

The stipulation and consent agreements, which were negotiated with the Federal Energy Regulatory Commission's Office of Enforcement (OE), involved Sequent Energy Management LP and Sequent Energy Marketing LP, subsidiaries of Atlanta-based AGL Resources Inc.; ProLiance Energy LLC, a natural gas marketer in Indiana, and affiliate Relius Energy; Piedmont Natural Gas Co., a local distribution company (LDC) serving customers in North and South Carolina and Tennessee; and Wasatch Oil & Gas Corp., an independent oil and gas producer, and affiliate Wasatch Energy LLC, a wholesale marketer that no longer exists.

Sequent Management and Sequent Marketing were slapped with the largest civil penalty -- $5 million -- and ordered to disgorge $53,728, plus interest, in unjust profits for flipping and other violations [IN09-19]. Flipping refers to transactions that are conducted without regard to the agency's posting and bidding requirements for discounted firm capacity. Flipping typically is a series of short-term releases of discounted rate capacity to two or more affiliated replacement shippers on an alternating monthly basis, without complying with the posting and bidding requirements, which creates a long-term, noncompetitive discounted rate release, according to FERC.

The Sequent flipping transactions occurred over a 28-month period between August 2005 and November 2007, the order said. During that time Sequent Management and Sequent Marketing either released or acquired 30.49 Bcf of transportation capacity on Texas Eastern Transmission, Destin Pipeline, Texas Gas Transmission, Transcontinental Gas Pipe Line (Transco) and Florida Gas Transmission via flipping transactions, FERC noted.

The two Sequent affiliates also transported 14.37 Bcf of natural gas in violation of the SMHT rule, which requires that the shipper must hold title to gas that is being transported. FERC's enforcement staff further confirmed that the companies engaged in 1.06 Bcf of prohibited buy-sell transactions over a four-month period in late 2006, late 2007 and early 2008, a violation that was self-reported by Sequent Management.

A prohibited buy-sell transaction is a commercial arrangement in which a shipper holding pipeline capacity buys gas at the direction of, on behalf of, or directly from another entity (i.e., end-user), ships that gas through its interstate pipeline capacity, and then resells an equivalent quantity of gas to the downstream consumer at the delivery point, according to FERC.

ProLiance Energy has agreed to pay a civil penalty of $3 million, as well as disgorge unjust profits of $195,959 for engaging in flipping, SMHT and buy-sell violations [IN09-21]. FERC said it opened an investigation into the company in late 2007 following a self-report by ProLiance.

OE said it confirmed that ProLiance Energy and affiliate Relius Energy improperly obtained 21.5 Bcf of discounted rate pipeline capacity on Texas Gas Transmission via flipping transactions.Through segmentation, ProLiance Energy was able to transport 34.2 Bcf of natural gas on that capacity. Relius released 14.6 Bcf of discounted rate capacity through flipping transactions on Texas Gas, which was used by a replacement shipper to transport 8.8 Bcf of gas, FERC said.

Moreover, FERC said ProLiance violated SMHT requirements by improperly transporting about 6.7 Bcf of gas owned by ProLiance on capacity held by others, but delivered to third parties. And it found that ProLiance Energy entered into three transactions violating the buy-sell prohibition, which involved the transportation of 325,977 Dth of gas.

Piedmont Natural Gas was ordered to pay a civil penalty of $1.25 million for flipping violations [IN09-18]. FERC's enforcement found that the LDC improperly released 20.33 Bcf of discounted rate capacity through flipping transactions between August 2005 and October 2007.

"Enforcement concluded that the flipping transactions violated [FERC regulations] and denied other market participants an opportunity to bid for discounted, long-term releases of capacity that may not have otherwise been available from Transco or other releasing shippers. Piedmont admits making the releases in question but neither admits nor denies Enforcement's conclusion that its releases of discounted rate capacity to affiliated replacement shippers on an alternative monthly basis violated [regulations]," the order said.

Wasatch Oil & Gas and Wasatch Energy agreed to pay a civil penalty of $320,000 for flipping violations [IN09-23]. The two companies, as affiliated replacement shippers, improperly acquired 6.06 Bcf of discounted rate capacity through flipping transactions with two releasing shippers between August 2005 and October 2006, "the result of which was that the Wasatch affiliates avoided the requirement to post or obtain such capacity through competitive bidding," according to FERC.

The four energy companies and affiliates were directed to pay their penalties to the U.S. Treasury within 10 days of the orders.

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