FERC last Thursday issued a final rule that seeks to bolster competition in the secondary gas capacity release markets by removing the price ceiling on short-term releases of natural gas transportation capacity and exempting asset management arrangements (AMAs) and other transactions from the agency’s tying prohibition. The order, however, rejected requests for an exemption to the capacity tying prohibition for liquefied natural gas (LNG).

The order permanently removes the rate cap on capacity-release transactions of one year or less. But it does not lift the rate ceiling on long-term capacity releases of more than one year or on primary sales of capacity by pipelines.

“The final rule will strengthen competition in the secondary capacity-release market, and therefore benefit consumers, by giving shippers more options for how they obtain gas supplies and improving access to the interstate natural gas pipeline system,” said Federal Energy Regulatory Commission (FERC) Chairman Joseph Kelliher. “The rule also will provide more accurate price signals on the market value of pipeline capacity.”

FERC staff said a number of protections are available to ensure that improper behavior, market power and market manipulation do not occur once the price caps are removed in the short-term capacity release market. They would include the Commission’s hotline; FERC’s market monitoring unit, which can detect unusual happenings in the market; and real-time information available to the agency and industry.

The order also seeks to encourage the use of AMAs by exempting capacity releases made as part of such arrangements from the prohibition on tying any capacity releases to extraneous conditions, and exempting capacity releases made as part of an AMA from the bidding requirements in Section 284.8 of the Commission regulations. It also clarifies the definition of AMAs to relax the delivery and purchase obligations of the replacement shipper and to permit supply-side AMAs.

An AMA is a prearranged capacity release where a capacity holder, such as a local distribution company, releases some of its capacity to an asset manager who then agrees to either purchase from or supply the gas needs of the capacity holder. AMAs represent a relatively new development in the natural gas industry. These arrangements are contractual relationships where a party agrees to manage gas supply and delivery arrangements, including transportation and storage capacity, for another entity.

FERC’s “prompt action” on AMAs will save natural gas customer “real dollars” next winter, Commissioner Marc Spitzer said.

Moreover, the FERC order clarifies that its prohibition on tying does not apply to conditions associated with natural gas held in storage for releases of firm storage capacity. This exemption from tying will allow a releasing shipper to include conditions in a release concerning the sale or repurchase of gas in storage inventory, even outside the context of an AMA.

The final rule permits shippers releasing storage capacity to require the replacement shipper to take title to any gas in the released storage capacity at the time the release takes effect, and to return the storage capacity to the releasing shipper at the end of the release with a specified amount of gas in storage.

And to advance retail open-access programs, the FERC order exempts capacity releases made under state-approved retail access programs from the prohibition against tying and from the bidding requirements in Section 284.8 of agency regulations. FERC’s rules allow for use of various pricing formulas for the released capacity, one of which would be to tie the sale to published price indexes. This would work to streamline and speed transactions. An executive committee of the North American Energy Standards Board will be voting next week in Houston on standards it has developed for index-based capacity releases.

The Commission denied StatoilHydro’s request for a clarification that a prohibited tying arrangement would not occur if an LNG importer combined an LNG throughput agreement or the sale of regasified LNG at the outlet of a terminal with a prearranged release of transportation capacity on the terminal’s directly connected pipeline. The agency also rejected an alternative request for a limited exception to the agency’s capacity tying prohibition for LNG. Instead, it said it would adjudicate exemption requests on a case-by-case basis [RM08-1].

“I support this action. Statoil argues that [an] exemption is necessary to avoid LNG from being stranded at the terminal. If indeed the problem exists, I’m open to seeking the right solution. To date, there’s no evidence of access problems for LNG imports,” Commissioner Jon Wellinghoff said. “Further, our current rules allow LNG shippers to acquire pipeline capacity to secondary markets through prearranged deals at maximum rates.” He said he intends to “take a hard look at the effect on our open-access program” before allowing capacity tying exclusions for LNG on an individual basis.

The decision of whether to grant a blanket tying exemption for LNG “was a very close call” for him, Spitzer said. “However, I do not believe the commentators provided adequate detail on the types of transactions for which they were seeking a tying exemption. I would agree that the Commission needs more information on how far downstream the commentators seek for the exemption to apply. And I would point out…that the LNG importers are not left without a remedy. They may enter into supply-side AMAs [and] they may file a fully justifiable proposal…with the necessary facts for the Commission to make an informed ruling on the potential exemption,” he said.

Commissioner Philip Moeller dissented in part from the majority. “I cannot support this determination. While LNG imports admittedly have characteristics that are similar to both natural gas production and storage, LNG imports maintain differences, too. LNG…owners and terminal operators may have less flexibility as they enter into negotiations in supply arrangements in this global market,” he said.

“The Commission should provide the regulatory certainty to permit the linkage of such agreements without fear of running afoul of the tying prohibition. Providing such assurance could benefit the public interest by encouraging increased LNG supply delivery and the efficiencies associated with linking the terminal capacity and pipeline capacity [so the] commodity can flow uninterrupted from the terminal to its directly connected pipeline,” Moeller said.

“I think our conclusion was we actually couldn’t grant the clarification unless we granted broad waivers from our rules or undertook a rulemaking,” the latter of which takes time, said Kelliher.

As a result of FERC’s failure to grant an LNG exception to its current capacity tying prohibition, “U.S. capacity holders will be placed at a competitive disadvantage compared to capacity holders at European and Asian facilities,” said Kirstin E. Gibbs, partner with the law firm of Sutherland in Washington, DC. Moreover, “terminal operations could be jeopardized and efficiency levels at the terminal reduced.”

The rule takes effect 30 days after publication in the Federal Register.

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