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ALJ Adopts FGT's More Conservative LNG Standards; Decision a Blow to LNG Suppliers

In a long-awaited decision that is likely to have widespread repercussions for liquefied natural gas (LNG) suppliers, an administrative law judge (ALJ) last Tuesday recommended that FERC approve the more conservative interchangeability standards proposed by Florida Gas Transmission (FGT) to receive Btu-rich regasified LNG in southern Florida for transportation through its 5,000-mile system.

"The standards proposed by FGT in its rebuttal testimony are hereby adopted for its entire system," including the leg of the pipeline located west of the Alabama-Florida state line, said ALJ Herbert Grossman in his 65-page initial decision, which FERC may approve or reject in full or in part [RP04-249-001]. FGT sought approval of its proposed LNG-related standards for only its eastern leg, but Grossman said the standards should apply to the full length of its system -- both the eastern and western legs.

While Grossman clearly ruled in FGT's favor with respect to its LNG-content standards, he left open the door for other participants in the proceeding, which included LNG suppliers, power generators and local distribution companies (LDC), to present evidence to FERC prior to its final decision that "casts doubt on the findings or conclusions" in the ALJ's initial decision. They "may test end-use equipment individually or collectively and request that the Commission consider the results of the testing [when] reviewing this decision," Grossman said.

He also made plain that his decision approving FGT's proposed energy-content standards applied only to LNG, while the standards for domestic gas remained unchanged.

The ruling was a major victory for FGT, which is jointly owned by CrossCountry Energy and El Paso Corp. and whose 2.1 Bcf/d delivery system extends from South Texas to South Florida. The decision was a critical setback for LNG suppliers, particularly AES Ocean Express LLC, which seeks to build a pipeline to transport 842 MMcf/d of regasified LNG to southern Florida from a proposed LNG import terminal in the Bahamas. FERC approved the pipeline project in January 2004.

The case stems from an April 2004 complaint in which AES Ocean Express accused FGT of imposing overly restrictive gas quality/interchangeability requirements to block its effort to obtain an interconnection with FGT. AES Ocean claimed that FGT's "onerous" conditions were frustrating its plans to construct the Bahamas-to-Florida pipeline to transport regasified LNG to the southern Florida market.

In June of that year, the Federal Energy Regulatory Commission ordered FGT to revise its tariff to specify standards for the energy content of the domestic gas stream and imported LNG, clearing the way for the introduction of regasified LNG into its system. FGT responded with proposed gas quality and interchangeability standards that triggered numerous protests and led FERC to establish the ALJ proceeding to resolve the concerns.

The interchangeability issue has come to the forefront as more regasified LNG is entering the U.S. gas stream from foreign countries, prompting pipelines such as FGT to fret about the impact of the Btu-rich gas on the integrity of their systems and LDCs to worry about the safety of regasified LNG for their end-use customers.

Significantly Grossman found FGT's proposed range for Wobbe limits, which are used in measuring the interchangeability of LNG and natural gas, to be "just and reasonable limits." The proposed limit of 1,340 (minimum) to 1,396 (maximum) "will permit the safe operation of the [gas] turbines on its system, will do so without their violating environmental emissions standards...and will not void their manufacturers' warranties, while at the same time permitting the importation of a substantial amount of LNG," the judge said.

He rejected the LNG suppliers' proposed higher Wobbe limit of 1,400, saying it "could pose a risk to the safety and environment by the Siemens-Westinghouse turbines and might void their warranties as to emissions releases, unless they were upgraded at substantial cost, without substantially increasing the availability of LNG supplies."

Grossman also dismissed Florida generators' proposed narrower Wobbe limits of plus or minus 1% from the historic mean of 1,356, saying they were "overly restrictive in that they would preclude the importation of substantial amounts of LNG available on the world market that could otherwise be imported without jeopardizing safety and the environment or voiding manufacturers' warranties."

He accepted FGT's proposed Wobbe rate of change of 2% or less per six minutes for LNG being imported into the pipeline's system. This rate of change addresses the ability of turbines to adjust to changing Wobbe levels in the gas stream, according to FGT. Grossman noted, however, that FGT's proposal was not foolproof.

"While it would preclude a supplier from changing its LNG at a faster rate than this limit, it would not protect customers against a faster rate of change resulting from the quick blending of the LNG with domestic gas or its quick replacement of that gas (or vice-versa)... This, of course, does not detract from the justness and reasonableness of the provision that FGT has proposed, which I determine it to be," Grossman said.

He further approved FGT's proposed Higher Heating Value (HHV) limit of 1,025 to 1,110 Btu/scf for the leg of FGT's system located east of the Alabama-Florida state line, or in its market area. The upper value of 1,110 has been recommended by the Natural Gas Council task force and has been verified by testing on appliances as conservative, the judge said. And the lower limit of 1,025 Btu/scf "is based on the low value for historic gas in the market area," Grossman noted.

"In that FGT has proposed these [HHV] standards only for the market area [eastern leg], it did not consider the historic gas in the western [leg]. While the historic low was 1,026 in the market area, it was 1,022 in the western [leg]. Because I am applying the standards to FGT's entire system..., they should also contain a lower limit for the western [leg]... I am setting 1,022 as the lower limit" for the western portion of FGT system.

Grossman further ruled that, contrary to FGT's request, all of the pipeline's proposed interchangeability standards should apply to both the eastern and western legs of its system. FGT proposed that the standards should only apply to its eastern leg (market area), which it believes has the greatest risk of receiving unblended LNG supplies. It argued that the risk was minimal to its western leg.

"FGT's evidence, however, is not convincing that all of the LNG delivered to the western [leg] can be successfully blended to meet the standards we adopt here. Consequently, those standards should also apply to the western [leg]," he said.

Grossman also accepted FGT's proposed limits for gases contained in LNG, including methane, ethane, propane, butane, pentanes, nitrogen, oxygen, carbon dioxide, hydrogen sulfide and total sulfur.

He rejected participants' request that FGT's proposed standards be adopted on an interim basis. "FGT's revised standards are hereby adopted as final, with the following limitation: if, at any time before the Commission renders its final decision, any participants can find further evidence, not available at the time of hearing, through testing or otherwise, that casts doubt on the finding or conclusions of this initial decision, the participants may request that the Commission consider this evidence in making its determination."

Grossman declined to address the issue of who should bear the costs for testing, remediation and repair that may be necessary to accommodate the introduction of LNG into FGT's system, saying that "prospective costs are simply too indefinite to be considered in this proceeding."

Significantly, the ALJ proceeding left the existing quality standards for domestic gas intact. "Our main focus here...has been on safety and environmental matters relating to this new type of gas [LNG], and the LNG suppliers have been well represented to present their positions. Not so [for] the domestic suppliers, who have not been given fair notice that their continued supply of gas might be in jeopardy by our applying new standards to their gas," Grossman said.

"FGT's proposed tariff maintains the old standards for domestic gas. It may be that the domestic gas suppliers could, and already do, comply with standards proposed for LNG, which after all were presented with an eye on historic domestic gas, and that they would have no objection to the wholesale application of the new standards. We just do not know, and it would be unfair to deprive domestic gas suppliers of their full day in court by deciding this issue in a forum where they are not adequately represented. For that reason, the standards proposed here should apply only to LNG, as proposed by FGT, with the domestic gas standards remaining unchanged."

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