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Court Upholds FERC Orders Curtailing Arbitrage Opportunities

The federal court of appeals in Washington, DC on Friday denied a petition seeking review of FERC's approval of a formidable cash-out mechanism proposed by Northern Natural Gas pipeline to deter shippers from taking advantage of arbitrage opportunities on its system.

Producers and industrial customers served by Northern Natural's system challenged the 2003 orders, which were aimed at eliminating shipper arbitrage opportunities that often led to an increase in net imbalances on the pipeline's system. They had argued that the pipeline's approved cash-out mechanism violated Order 637, which they claimed required penalties to be justified by the need to protect system reliability. The petitioners further said FERC lacked "substantial evidence" of shipper arbitrage activities.

However, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the FERC orders "[were] supported by substantial evidence, as well as [were] consistent with the Commission's prior decisions."

The record contained "substantial evidence of under-recovery by Northern under the prior [cash-out] regime, and even included admissions by parties filing comments in opposition to the proposed changes that imbalances were out of control," the three-judge panel said.

In seeking a tougher cash-out mechanism, Northern Natural reported that shippers were deliberately taking more gas from the pipeline system than they put in, reselling it in the spot market and paying for it in the cash-out at the lower (monthly average) rate. The practice earned shippers enough to pay for their monthly imbalances and elicit a profit.

In an attempt to end the arbitrage activity, Northern Natural in 2003 proposed a cash-out mechanism that required a shipper who withdrew more gas than it delivered in the course of a month to pay the pipeline for the net excess at the highest of the five weekly average prices applying to that month. If a shipper withdrew less gas than it delivered, Northern would pay the shipper at the lower of the five weekly averages. FERC approved a "slightly modified version" of the pipeline's proposal.

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