Conceding defeat to the courts, the Federal Energy Regulatory Commission voted last Wednesday to eliminate the contract term limit for incumbent pipeline shippers who exercise their rights of first refusal (ROFR) to retain transportation capacity under contracts that are due to expire shortly. The decision was a blow to existing pipeline shippers, who believed FERC’s requirement of a five-year term matching cap under ROFR thwarted potential abuses.

There was no apparent policy reason behind the Commission’s action. The agency just wants to “quit getting kicked in the ears by the courts” over the ROFR term cap, so FERC has removed it, Chairman Pat Wood told reporters. “You get beat up enough by the courts, you just roll [over].”

Under the Commission’s ROFR rules, an existing 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 with FERC’s decision to remove the five-year term matching cap last week, an existing shipper seeking to renew his expiring contract will now have to match the term in a third-party bid, regardless of the length — 10, 20 or 30 years.

The term limit issue has been a contentious one between the U.S. Court of Appeals for the District of Columbia and the Commission over the years. Last April, the court vacated and remanded the issue as part of its decision upholding the bulk of the agency’s Order 637, which addressed second-generation natural gas issues. It said at the time the Commission failed to provide an “affirmative explanation” for the choice of five years, or a response to pipelines’ objections. The court noted the “record simply lacks indicators” that FERC has been “seriously tackling” the issue.

FERC initially implemented the term limit under ROFR for two reasons — to deter pipelines from exercising market power, and to prevent pipes from showing preference to affiliates during the bidding process, recalled Commissioner William Massey. But it’s clear the courts, after sending the issue back to FERC two or three times, don’t believe the Commission has a “very good basis” for setting specific terms limits under ROFR, he said.

“I won’t say I’m 100% confident about this” latest action to lift the term matching cap, noted Massey, but he said he was willing to adopt the policy.

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