To Enhance Market Transparency, FERC Proposes to Collect Gas Pricing Data From End Users
The Energy Policy Act of 2005 (“EPAct 2005”) grants the Federal Energy Regulatory Commission (FERC) expanded authority to obtain information on wholesale electric and natural gas prices and availability. Congress gave FERC this authority with the expectation that greater price transparency will improve market confidence. Using this new authority, on April 19, 2007, FERC issued a proposed rule (Docket Nos. RM07-10-000 and AD06-11-000) to substantially increase the amount of gas market information gathered and made public.
To track daily flows of gas, FERC proposes that intrastate pipelines, which are not otherwise subject to FERC regulation, be required to post daily to the Internet the capacities of, and volumes flowing though, their major receipt and delivery points and mainline segments. Regulated interstate gas pipelines are already required to post scheduled flow data to the Internet. Additionally, FERC believes that requiring information on intrastate pipeline physical flows will provide the public with a better understanding of the daily supply and demand conditions that affect U.S. wholesale gas markets. According to FERC, such information is needed because a number of the major natural gas pricing points are located at the confluence of multiple interstate and intrastate pipelines and “while distinctions between intrastate and interstate natural gas markets may be meaningful from a legal perspective, they are not meaningful from the perspective of market price formation.”
Significantly, FERC proposes to require large end users of gas, such as gas-fired electric generators, (users who consume or transact for more than 2,200,000 MMBtu/year) to annually report, in aggregate, the number and volume of their gas transactions. In addition to reporting the total amount of physical gas transactions by number and volume, FERC would require a breakdown of transactions by: (1) purchases and sales; (2) a number and volume breakdown of purchases and sales distinguishing between monthly and daily spot market transactions; and (3) a number and volume breakdown distinguishing the type of pricing, in particular, whether the pricing was fixed or indexed.
Although currently formulated as an annual reporting requirement, FERC seeks comment on whether these reports should instead be required on a monthly basis, which would substantially increase the reporting burden on end users. Although it preliminarily rejects transaction-specific reporting in favor of aggregated reports, FERC leaves open the possibility of requiring detailed transaction-specific reporting if there is a way such reporting could be achieved without distorting the market. FERC is skeptical that this can be done. FERC assumes that if it requires reports on specific forms of transactions, the existence of the reporting requirement, in and of itself, will create an incentive for buyers and sellers to reformulate their transactions merely to avoid a reporting requirement.
An important issue unaddressed in FERC’s notice of proposed rulemaking is whether misreporting of pricing data under this rule, albeit unintentional, could constitute unlawful market manipulation under Order No. 670, Prohibition of Energy Market Manipulation, and whether that order’s “safe harbor” provisions need clarification in light of these newly proposed reporting requirements. End users and other unregulated entities who will view these reporting requirements as burdensome may well be concerned about the legal exposure that accompanies such reporting in the absence of FERC clarification.
Initial comments are to be filed with the FERC by June 11, 2007, and reply comments are due July 10, 2007.
In AES Ocean Express Case, FERC Attempts to Steer Middle Course on Gas Quality and Interchangeability
On April 20, 2007, the Federal Energy Regulatory Commission (FERC) issued an opinion largely affirming an Administrative Law Judge’s (“Judge’s”) findings regarding the appropriate gas quality and interchangeability standards to be added to Florida Gas Transmission Company’s (“FGT’s”) tariff in anticipation of the pipeline’s receipt of revaporized imported LNG. Imported LNG has a substantially higher heating content than traditional domestic gas supplies. Consequentially, each pipeline that is to receive imported LNG is required to propose new tariff standards to insure that downstream users/facilities are not adversely affected by changes to the chemical constituents of the delivered gas. The AES Ocean Express case (Docket Nos. RP04-249-000, et al.) is the first case where the FERC has established a hearing to consider the proposed gas quality and interchangeability standards that a pipeline proposes to accommodate the introduction of regassified LNG into its pipeline system.
In the AES case, FGT proposed gas quality and interchangeability standards more stringent than the interim guidelines set forth in technical white papers filed with the FERC in early 2005 by the Natural Gas Council. After evaluating these white papers and soliciting public comment, FERC issued a June 15, 2006, Policy Statement (see July 2006 issue of “Gas Developments at FERC”) setting forth principles for addressing gas quality and interchangeability issues on each pipeline. The FERC encouraged pipelines and their customers to use the white papers’ interim guidelines as “a common scientific reference point for resolving the issues.”
The AES Ocean Express case was litigated before the issuance of this Policy Statement. However, the FERC’s opinion evaluates the Judge’s factual findings and resolves issues raised in the litigation in the context of the Policy Statement and, in one significant respect, expands upon the Policy Statement.
In the hearing, evidence was introduced regarding the potential adverse impacts of variability on low emission gas turbines (see “Will Turbines Require Expensive Retofits To Handle Imported LNG”). This evidence, and the large number of gas fired generators on the FGT system, influenced FERC’s decision to adopt FGT’s tariff proposal, which was substantially narrower than the white papers’ interim guidelines, and to reject the LNG suppliers’ attempt to convince FERC to essentially codify these interim standards as the pipeline industry standard. FERC also applies the new tariff standards to both domestic gas and revaporized LNG, not just revaporized LNG, as proposed by the Judge. In recognition of the fact that there is, as yet, no scientific consensus on these issues, FERC states that to the extent new test data demonstrates the need to further modify the FGT tariff, parties are free to propose further changes.
FERC recognizes the likelihood that downstream end users will incur costs to mitigate the impact of burning hotter gas than before the introduction of LNG. Accordingly, FERC was confronted with the request of its own litigation staff, and of the end users, that customers should be allowed to seek cost reimbursement from upstream entities (i.e., the producers/importers) associated with the need to modify their equipment to burn this hotter gas and deal with greater gas variability, which will result from the commingling of “hotter” revaporized LNG with traditional domestic gas supplies.
FERC concludes that it has an obligation to consider cost impacts on downstream users in ruling on the reasonableness of the tariff proposals in the first instance, and that the incremental downstream costs were, in fact, part of that analysis. Having ruled on the justness and reasonableness of the tariff proposals, however, FERC stated that it has “no basis to assert jurisdiction over the allocation and recovery of the downstream entities’ mitigation costs” because the only jurisdiction FERC has is with respect to the rates FGT charges its shippers for transporting gas.
This appears to be an unduly narrow reading of FERC’s jurisdiction because it ignores ample judicial precedent regarding FERC’s obligation under the Natural Gas Act to consider all factors bearing on the public interest, even where they are matters excluded from the FERC’s direct regulatory jurisdiction. Nor is it apparent why FERC construes the issue strictly as a rate/tariff matter. The same cost concerns were raised by FGT’s shippers when FERC was considering the pipeline’s application to construct the facilities needed to interconnect the upstream LNG facilities with the pipeline. In its 1999 Policy Statement on the pricing of new pipeline facilities, FERC set forth an analytical framework for conducting a cost-benefit analysis of new pipeline construction that takes into account cost impacts on existing customers of a pipeline. In the AES Order, FERC states that the 1999 Policy Statement “never inquired” and “never addressed” the cost impacts of compliance with tariff changes related to gas quality and interchangeability. However, to say that a Policy Statement, issued years prior to when such issues came to the forefront, does not address such issues, does not obviate the agency’s obligation to consider them now.