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LNG Mitigation Costs: Who Will pick up the tab?

FERC issues a surprising order regarding responsibility for LNG-related retrofit costs.

Fortnightly Magazine - July 2007

of 1,100 Btu/scf; (3) a limit of butanes and heavier hydrocarbons of 1.5 mole percent; and (4) an upper limit on the amount of total inert gases (primarily nitrogen and carbon dioxide) of up to four mole percent. 6

On June 15, 2006, FERC issued its Policy Statement on Provisions Governing Natural Gas Quality and Interchangeability in Interstate Natural Gas Pipeline Company Tariffs (the Interchangeability Policy Statement ), wherein FERC strongly encouraged pipelines and their customers, in negotiating technically based solutions, to use the guidelines established by the NGC+ Interchangeability Work Group. FERC also noted that, to the extent pipelines and their customers could not resolve disputes over gas quality and interchangeability, FERC would give significant weight to the NGC+ Interchangeability Work Group’s guidelines.

While some commentaters had asked FERC to address in the Interchangeability Policy Statement the issue of who should be responsible for mitigation costs resulting from the introduction of LNG into the U.S. pipeline grid, FERC declined to address the issue, stating that the issue “should be addressed, if and when problems are identified, in specific cases.” 7 The industry has waited since the issuance of the Interchangeability Policy Statement for the specific case in which FERC would address the issue of who would be responsible for mitigation costs resulting from changes to pipeline tariffs in response to increasing LNG volumes reaching U.S. shores. Many thought that case was AES Ocean Express ( see, “The Case That Mattered,” p. 53 ), but even after FERC issued its opinion in that case on April 20, 2007, the question remained unanswered.

Where Are We Left After AES Ocean Express?

Even after FERC’s Order in AES Ocean Express , the question of who pays for mitigation costs resulting from the introduction of LNG into the U.S. pipeline grid remains. FERC suggested that state regulators are in the best position to make the determination related to costs incurred by state-regulated entities. Thus, in the absence of an appellate court overturning AES Ocean Express on the issue of mitigation costs, it is likely that utilities that incur mitigation costs related to LNG will seek to recover such costs in state rate-making proceedings. Therefore, the ultimate answer to the question of who will bear the downstream costs resulting from the importation of LNG appears to be the ratepayers.

 

Endnotes

1. “U.S. overtakes Spain as largest LNG Importer in Atlantic Basin,” LNG Daily, Vol. 4, No. 82, April 30, 2007, p. 1.

2. Energy Information Administration, “ Short-Term Energy and Summer Fuels Outlook ,” May 8, 2007.

3. Energy Information Administration, “Annual Energy Outlook 2007,” Feb. 2007, at 12, 94, http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2007).pdf.

4. AES Ocean Express LLC v. Florida Gas Transmission Co., et al., opinion and order on initial decision, Opinion No. 495, 119 FERC ¶ 61,075, at par. 30 (Apr. 20, 2007).

5. NGC+ Interchangeability Work Group, “White Paper on Natural Gas Interchangeability and Non-Combustion End Use,” Feb. 28, 2005, at p. 5.

6. Id. at p. 26.

7. Policy Statement on Provisions Governing Natural Gas Quality and Interchangeability in Interstate Natural Gas Pipeline