Pipelines are breathing a lot easier in the wake of a FERC orderthat said Texas Eastern Transmission (Tetco) acted reasonably whenit demanded further financial security from Public Service Electricand Gas (PSEandG) as a condition for authorization to transfertransportation contracts (worth over $3 billion in payments,according to the pipeline) to a wholly-owned subsidiary. ChairmanJames J. Hoecker said the Commission was merely clarifying itspolicy in light of this particular case, but the decision may causedistribution companies to think twice about transferringliabilities to avoid paying stranded costs.

Last October, PSEandG requested the Board of Utilities of theState of New Jersey to approve its plan to transfer obligationsunder gas purchase contracts and transportation/storage contractsto Public Service Energy Trading Company (PSETC), a wholly ownedsubsidiary. Under the contracts, those contract obligations couldonly be transferred if the pipeline agreed, and FERC regulationsrequire that pipelines cannot withhold permission “unreasonably.”

The pipeline didn’t actually ask FERC to bar the assignment, itjust wanted PSEandG to remain liable for payment as the parentcompany, with full ownership and control of its subsidiary. Thedistribution company said it would guarantee three months of demandcharges, but Tetco said that wasn’t enough. The pipeline believesthe capacity release plan is a sham transaction designed toabrogate eight contracts, some of which extend until 2016.

Niagara Mohawk told FERC if the plan were allowed to go forwardevery Tetco customer could create its own subsidiary in order toavoid its contract liability. On the other side, Brooklyn Uniontold FERC granting Tetco’s request would stifle LDC efforts topromote competition.

PSEandG said the plan was perfectly legitimate. It would reducerisk exposure for the company and its customers, allowing someprotection to the non-jurisdictional status of the company’s “greymarket” sales transactions and allowing it to make the initialsteps toward turning its regulated gas business into an unregulatedmarketing company.

Commissioner Curt Hebert, Jr. dissented, questioning whether theissue could not be dealt with as a simple contract issue by the NewJersey courts. But the commission order clearly states Tetco waswithin its rights to deny the request. “Many difficult and novelissues will arise during periods of transition” to a competitivemarket, said the Commission. “We are confident that theseobjectives can be achieved without raising the types of concernsexpressed by Texas Eastern.”

The Interstate Natural Gas Association of America, whichrepresents the major pipeline companies, lauded the Commission’sdecision, saying it was “right on target.” INGAA said the casewasn’t about the future of unbundling or restructuring. “This caseis about whether a customer can use a federal rule–in this case,Order 636’s capacity release regulations – to effectively abrogatea contract in interstate commerce.”

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