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Court: Tennessee Can't Collect Full Reservation Charges from Suspended Shippers

A federal appeals court in Washington, DC on Friday upheld FERC's decision denying Tennessee Gas Pipeline Co. the right to collect full reservation charges from shippers whose service has been suspended, but it opened the door for the agency to allow pipelines to collect a lesser charge in such cases.

Tennessee Gas Pipeline challenged three 2003 orders in which the Commission ruled that the pipeline could not charge a defaulting shipper for future charges after its service had been suspended on Tennessee's system, although it acknowledged the pipe could sue a shipper for unmitigated damages caused by its contractual breach.

The El Paso Corp. pipeline subsidiary argued that it should be allowed to collect reservation charges during a shipper's suspension since it still must keep the capacity available for the shipper in the event it corrects the contractual default. The obligation to reserve shipper capacity is a continuing service of value that a pipeline provides to a suspended shipper, and the shipper, as the recipient of that "hold" service, should be required to pay the reservation charge, Tennessee claimed.

But the Commission countered that because Tennessee refused to transport gas during the suspension, it failed to perform its obligation under the contract and, therefore, "should not be permitted to continue to charge the shipper as if it were receiving service."

The U.S. Court of Appeals for the District of Columbia Circuit agreed with FERC. "We conclude that the Commission has shown that it would be unjust and unreasonable to allow collection of the full reservation charge during a shipper's suspension where the pipeline, in light of available remedies, 'retains full control of the shipper's obligation to pay,'" the three-judge panel said.

The court "has no occasion to decide whether Tennessee is entitled to recover a lesser charge from a suspended shipper," the judges wrote. "Tennessee concedes that it never asked the Commission to approve payment of a lesser amount to cover its costs related to the capacity-reservation charge."

FERC's policy that a pipeline may not collect a full reservation charge from a suspended shipper is consistent with its regulations on firm transportation service, but "the regulations do not appear to foreclose an argument to permit a lesser charge," the court said. "The court leaves it to the Commission to to value the service that pipelines provide shippers during periods of suspension and how much pipelines should be permitted to charge for that service.

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