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FERC Puts Distrigas on More Competitive Footing

FERC last Thursday approved Distrigas of Massachusetts LLC's (DOMAC) application to abandon its services provided under Section 7 of the Natural Gas Act (NGA) and to cancel the company gas tariff, including all rate schedules. By eliminating the tariff, DOMAC would be able to charge market-responsive prices for sales of vaporized liquefied natural gas (LNG) under Section 3, enabling it to more effectively compete with other gas suppliers in the Northeast market [CP08-49].

DOMAC said approval of the application would give it "comparative parity" with new LNG terminals and expansions that have been approved since FERC's landmark Hackberry decision in 2002, as well as offshore LNG facilities that have been approved under the Deepwater Port Act and projects that are being developed in Canada to deliver regasified LNG to U.S. markets (see NGI, Jan. 7, Dec. 23, 2002). In Hackberry the Federal Energy Regulatory Commission held that new onshore LNG import terminals and facility expansions were not subject to open-access requirements and could offer market-based rates for terminal services. DOMAC, which went into service in 1971, said its LNG terminal in Everett, MA, has been operating at a competitive disadvantage with the newer terminals, which, unlike DOMAC, do not have price, terms and conditions of sales regulated by FERC.

"We...concur with DOMAC's assessment of the regulatory regime currently applicable to LNG terminals. At the time DOMAC was granted NGA Section 7 certificate authorization to construct and operate its terminal and to make sales for resale, the Commission considered the offloading of LNG from a ship to be the end of foreign commerce subject to Section 3 and the beginning of transportation in interstate commerce subjection to Section 7," the order said [CP08-49].

"The Commission has since adopted the position that [Section 3] foreign commerce encompasses all aspects of the process of importation, including the transfer of LNG from a ship to storage tanks onshore and other terminal operations. Further, the Commission now views import terminals as analogous to gas production facilities. Thus, transportation of natural gas in interstate commerce subject to NGA Section 7 only begins when liquid loaded onto a truck leaves an LNG import terminal or when regasified LNG is delivered to a pipeline at the tailgate of a terminal," it noted.

"Our NGA Section 3 oversight will ensure the continued safe and secure operation of DOMAC's terminal," the order said.

Because it was the only terminal in the United States whose price, terms and conditions of sales were still regulated by FERC, DOMAC (which sells both vaporized and liquid LNG) said it was often overlooked by LNG suppliers. "[LNG] suppliers naturally will seek the highest-priced markets. When faced with the choice between supplying a purchaser that is subject to price regulation, such as DOMAC (whose resales are subject to a price cap), and a purchaser that can charge market prices, the supplier will choose to supply LNG to the purchaser that can resell the LNG at the full market price."

Moreover, DOMAC said FERC approval would enable it to better manage sales of vaporized LNG imported into the facilities of affiliate Neptune LNG LLC, which is developing a deepwater LNG import facility off the coast of Massachusetts. The project is on schedule to be in service in 2009 (see NGI, Aug. 13, 2007).

The company stressed that FERC approval would not alter the agency's oversight of the import terminal in Everett, nor would it lead to the interruption of LNG services with its existing customers. DOMAC said it would continue to provide service through the remaining term of the service agreements to all buyers who request it. DOMAC currently supplies approximately 20% of New England's annual gas market.

"We expect DOMAC's service commitments to provide current customers with sufficient time to negotiate terms and conditions of future service agreements or arrange for alternative sources of supply. We note, however, that compelling compliance with the terms and conditions of future sales service agreements will be beyond the reach of the Commission's Section 3 jurisdiction. Consequently we will deny DOMAC's proposal that we treat its liquid service agreement 'as a binding obligation enforceable by the Commission' under Section 3," the order said.

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