FERC has upheld an October 2002 decision eliminating the contract term limit for existing pipeline shippers who exercise their rights of first refusal (ROFR) to retain transportation capacity under contracts that are due to expire in the near term.

This decision on rehearing, like the earlier one, was a major blow to existing pipeline shippers, especially local distribution companies (LDCs) and industrial gas users, who believed that the Federal Energy Regulatory Commission’s requirement of a five-year term matching cap under ROFR helped to keep potential pipeline abuse of shippers to a minimum.

The order makes the issue of a matching cap — which has been a thorn in FERC’s side for several years — ripe for review by an appellate court once again. In April 2002, the U.S. Court of Appeals for the District of Columbia remanded the issue to the Commission, saying the agency had failed to provide an “affirmative explanation” for its choice of five years for the matching cap. The Commission, frustrated with the issue, decided to eliminate the ROFR term cap completely.

Prior to the October 2002 order, 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 as a result of that ruling, an existing shipper seeking to renew his expiring contract now has to match the term in a third-party bid, regardless of the length — 10, 20 or 30 years.

The latest order, which was issued Friday, found that the “matching cap is not necessary to limit the exercise of market power by the pipelines because the Commission’s other regulatory requirements act to prevent pipelines from exercising market power.”

Since a ROFR term cap is not needed, “the Commission finds no justification for distorting the bidding process and not allocating scarce pipeline capacity to the shipper placing the highest value on obtaining that capacity,” the order said [RM98-10-012]. “Removal of the term cap eliminates any bias toward shorter term contracts, and the resulting imbalance of risks as between the existing customers and the pipelines.”

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