In a major policy decision Thursday, FERC ruled against establishing a mechanism in interstate pipeline tariffs that would provide for recovery of mitigation and repair costs incurred by downstream gas users as a result of the introduction of revaporized liquefied natural gas (LNG) into their systems that meets approved standards for gas quality and interchangeability.

The Federal Energy Regulatory Commission announced the new policy in a three-year-old case involving a complaint filed by AES Ocean Express LLC against Florida Gas Transmission (FGT). The agency Thursday generally affirmed an administrative law judge's (ALJ) April 2006 ruling in the case and approved the standards proposed by FGT to accept AES Ocean's revaporized LNG, which would be imported from facilities currently under consideration in the Bahamas [RP04-249 et al].

Parties in the complaint case argued that FERC is responsible for establishing a method for downstream users to recover their costs of testing, remediation and repair that may be necessary to accommodate the introduction of LNG into FGT's pipeline system, FERC said. But ALJ Herbert Grossman in his initial decision said that such an endeavor would be "a prescription for unnecessary or inflated costs and endless bickering" (see Daily GPI, April 13, 2006).

The full Commission agreed with Grossman, saying no specific testing program has been established and that "it is not for the Commission to propose or supervise one and monitor its costs."

"This order provides greater regulatory certainty with respect to how the Commission will address gas interchangeability issues associated with LNG import projects," said FERC Chairman Joseph T. Kelliher. "This is critical if the U.S. is going to be successful in its competition with Europe and Asia for LNG imports."

FGT provides transportation services for electric generation (which accounts for 80% of its throughput) and local distribution companies located primarily in Florida and Alabama.

In his April 2006 decision, with which FERC concurred, Grossman recommended that FERC approve the more conservative interchangeability standards that FGT proposed to receive Btu-rich revaporized LNG in southern Florida for transportation through its system.

"The standards proposed by FGT...are hereby adopted for its entire system," including the leg located west of the Alabama-Florida state line, Grossman ruled then. 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.

FERC's decision to uphold Grossman's ruling is 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. But it is a critical setback for LNG suppliers, particularly AES Ocean Express, which seeks to build a pipeline to deliver revaporized LNG to FGT's system. FERC approved the pipeline project in January 2004.

The case stems from a complaint filed in April 2004 in which AES Ocean Express accused FGT of imposing overly restrictive gas quality/interchangeability requirements on AES Ocean in its effort to obtain an interconnection with FGT. AES Ocean claimed that FGT's "onerous" conditions were frustrating its plans to build an offshore pipeline to the southern Florida market.

In June of that year, the FERC 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 entry of revaporized 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.

Citing FERC's June 2006 Policy Statement on Natural Gas Quality and Interchangeability, the Commission affirmed the ALJ's recommendation and found that FGT's proposed interchangeability standard was just and reasonable because it would permit the safe operation of electric generation turbines receiving gas from FGT's system without violating environmental standards. At the same time, FERC noted that the standard would permit a substantial amount of LNG to be imported.

The Commission further determined the standards should apply to both domestic and revaporized LNG received by FGT to its market area customers, not only the LNG supply as recommended by the ALJ.

FERC also affirmed the ALJ's decision by ruling against establishing a mechanism in FGT's tariff that would provide for mitigation cost recovery for FGT's downstream gas users for introducing LNG into the pipeline system. Parties had argued the Commission is responsible for establishing a method for downstream users to recover their costs of testing, remediation and repair that may be necessary to accommodate the introduction of LNG into FGT's pipeline system. The ALJ said such an endeavor would be "...a prescription for unnecessary or inflated costs and endless bickering."

The Commission in its order agreed with the ALJ, stating no specific testing program has been established and that "it is not for the Commission to propose or supervise one and monitor its costs."

While the AES Ocean Express complaint was before the ALJ, FGT entered into arrangements with other companies to transport LNG supplies, including Southern Natural Gas Co., which constructed new facilities to interconnect LNG supplies imported at the Elba Island LNG terminal owned by Southern. The expansion facilities began operation in February 2006.

In addition, FERC last year notionally approved the Cypress Pipeline Project for a new pipeline that will for the first time transport Elba Island LNG supplies directly to Florida through an interconnection with FGT's Jacksonville Lateral near Jacksonville, FL, and to a direct interconnection with JEA, formerly known as Jacksonville Electric Authority (see Daily GPI, June 21, 2006). Southern also entered into agreements with BG LNG Services LLC and Florida Power Corp., a unit of Progress Energy, for firm transportation of revaporized LNG to various Florida interconnections.

The Commission said the FGT tariffs for providing services to these other companies will control the gas quality and gas interchangeability standards that Southern must meet to deliver the revaporized LNG to FGT's pipeline facilities.

While the Cypress project is currently under construction and expected to begin service by May, the AES Ocean Express project is no longer imminent, FERC noted. AES Ocean Express was granted an extension until Jan. 29, 2009 to complete construction of its project and to make its facilities available for service (see Daily GPI, Dec. 28, 2006).

The Commission Thursday also established certificate compliance requirements for Southern and FGT. The Commission further directed FGT to file tariff sheets implementing the approved interchangeability standards prior to the in-service date of the Cypress Pipeline's proposed interconnection with FGT.

The interchangeability issue has risen to the forefront as more revaporized LNG is entering the U.S. gas stream from imports, prompting pipelines such as FGT to worry about the impact of the Btu-rich gas on the integrity of their systems and local distribution companies to worry about the safety of regasified LNG for their end-use customers.

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