Signaling that its decision could have broad repercussions for pipelines, the Federal Energy Regulatory Commission last Thursday called on the natural gas industry to comment on how interstate pipelines should be allowed to handle bids by short-haul shippers for transportation capacity that becomes available when the right-of-first-refusal (ROFR) option is not exercised.

The issue arose in a proceeding involving Northern Border Pipeline Co., which had sought to revise its tariff to prevent short-haul shippers who bid the maximum rates (but for less than the full length of haul of available capacity) from acquiring the capacity for longer than 31 days. FERC rejected the Enron-affiliated pipeline’s tariff proposal, saying it flouted agency policy that requires pipes to sell capacity to shippers who are willing to pay the maximum rates for service, with shippers able to dictate the length of contracts.

Northern Border has filed for rehearing of the September 2003 decision. It contends the order prevents it from selling the entire path at a later time if demand for the long-haul capacity develops, and burdens the pipeline and its other customers with unused capacity. This would force Northern Border to seek recovery of the costs associated with the unsubscribed capacity through the rates of its other customers, it told the Commission [RP03-563-002].

“This case raises important issues concerning the application of the Commission’s policies on awards of capacity and the right of first refusal (ROFR) in a situation when an existing shipper chooses not to exercise its ROFR and, after the bidding period, the highest valued bid is a short-haul bid (bid for less than the full posted capacity path) at the maximum rate,” the FERC order said.

“Application of the Commission’s current approach would require the awarding of that capacity to the short-haul shipper for whatever term it selects, leaving a portion of the capacity unsubscribed,” it noted.

“In evaluating this issue, it would appear that a short-haul bid for under one year would have relatively little impact on the pipeline’s ability to market the capacity for a long-haul, because at the end of contract, the capacity would again be put up for bid. The more significant concern would appear to occur when a short-haul shipper requests a contract for one year or more,” the order said.

Under FERC’s existing ROFR policy, “even a one-year contract to a short-haul shipper could effectively strand the unsubscribed capacity, preventing the pipeline from re-marketing the capacity. The Commission’s current ROFR would require the pipeline to allow the short-haul shipper with a one-year contract to retain its capacity by matching the highest rate bid for its ‘current capacity path.’ It would not have to match the rate on a longer haul bid.”

Because “this case may have implications for other pipelines,” FERC is seeking comments within 60 days on four agency options (or options offered by industry) for dealing with short-haul bids “in the situation in which capacity becomes available because a current shipper opts not to renew its existing contract.” The options are:

More broadly, FERC “is seeking comment on whether its current policy continues to appropriately balance the risks to the pipeline, bidding shippers, as well as the other shippers on the pipeline (which could be subject to paying higher rates if the pipeline files a rate case to re-allocate the costs of stranded capacity).”

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