A federal appeals court in Washington, DC Friday upheld FERC orders eliminating the contract term cap for incumbent pipeline shippers who exercise their rights of first refusal (ROFR) to retain transportation capacity under contracts that are due to expire. The court also upheld an agency decision to allow shippers to use forward-haul and backhaul transactions to transport gas to a single delivery point in an amount exceeding their contact demand.

The American Gas Association (AGA), which represents gas utilities, challenged the 2002 ROFR orders, arguing that the Federal Energy Regulatory Commission failed to provide "coherent support" for its decision to remove the then-existing five-year term matching cap under ROFR. AGA and pipeline shippers claimed the ROFR term cap was necessary to prevent the exercise of pipeline monopoly power upon contract expiration.

This marked the third time that the issue has been before the U.S. Court of Appeals for the District of Columbia Circuit. Twice the court remanded the issue back to the Commission to justify the term length of the matching cap. FERC decided to remove the ROFR term cap altogether in late 2002 because, according to former FERC Chairman Pat Wood, the agency was tired of "getting kicked in the ears by the courts" over the ROFR term cap.

Under the Commission's then-existing ROFR rules, a 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 FERC's decision to eliminate the five-year term matching cap, an existing shipper seeking to renew his expiring contract must now match the term in a third-party bid, regardless of the length -- 10, 20 or 30 years.

"We...agree with FERC that since the 'matching cap is not necessary to limit the exercise of market power by the pipelines,' there is 'no justification for distorting the bidding process and not allocating scarce pipeline capacity to the shipper placing the highest value on obtaining' it," the three-judge panel said. "We will, therefore, deny the petitions for review on this issue."

With respect to FERC's policy on forward-haul and backhaul transactions, pipelines argued that it "effectuated an increase in shippers' delivery point entitlements and the services pipelines are required to provide, thereby modifying existing contracts," according to the court. But "petitioners have given us no reason to second guess FERC's conclusion" on this issue, it noted.

On remand, "FERC reevaluated both the term cap and the backhaul/forward-haul issues and gave satisfactory explanations for its decisions. The petitions for review are denied."

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