The American Gas Association (AGA) has petitioned the U.S. Court of Appeals for the District of Columbia Circuit to review FERC’s order eliminating the contract term limit for matching competing bids by pipeline shippers exercising their right-of-first-refusal (ROFR) in replacing expiring contracts.

“AGA’s view is that the ROFR protects consumers from the exercise of market power by providing natural gas utilities the opportunity to negotiate contracts by matching the bid of another prospective shipper at reasonable terms,” the group said in its court petition filed March 23 (No. 04-1094).

This will be the second time the ROFR portion of the Commission’s Order 637, which removed prices caps in the short-term capacity release market, goes before the court.

In April 2002, the Appeals Court for the District of Columbia remanded the issue to the Commission, saying the agency had failed to provide an “affirmative explanation” for its choice of five years for the matching cap. The Commission, frustrated with the issue, decided to eliminate the ROFR term cap completely and did so in an order on remand in October 2002 (see Daily GPI, Oct. 31, 2002).

Prior to the October 2002 order, an existing pipeline shipper whose contract was set to expire had to match a competitor’s bid up to a pipeline’s maximum rate, but only for a term of up to five years in order to keep his capacity. But as a result of that ruling, an existing shipper seeking to renew his expiring contract now has to match the term in a third-party bid, regardless of the length — 10, 20 or 30 years. This pits LDCs against gas-fired merchant power plants, which often have to lock in long-term gas supplies and transportation in order to satisfy their lenders.

In ordering the removal of the cap FERC found that the “matching cap is not necessary to limit the exercise of market power by the pipelines because the Commission’s other regulatory requirements act to prevent pipelines from exercising market power.”

Since a ROFR term cap is not needed, “the Commission finds no justification for distorting the bidding process and not allocating scarce pipeline capacity to the shipper placing the highest value on obtaining that capacity,” the order said [RM98-10-012]. “Removal of the term cap eliminates any bias toward shorter term contracts, and the resulting imbalance of risks as between the existing customers and the pipelines.”

The Commission reinforced its decision in an order on rehearing issued Jan. 29, 2004.

This decision on rehearing, like the earlier one, was a major blow to existing pipeline shippers, especially LDCs and industrial gas users, who believed that the Federal Energy Regulatory Commission’s requirement of a five-year term matching cap under ROFR helped to keep potential pipeline abuse of shippers to a minimum.

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