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When Shippers Seek Release

Price caps, secondary markets, and the revolution in natural-gas portfolio management.

Fortnightly Magazine - July 2007

When the Federal Energy Regulatory Commission (FERC) decided in February, in Order 890, to lift the price cap for electric-transmission customers seeking to resell their grid capacity rights in the secondary market, it cautioned against expecting a quid pro quo for gas:

“Our findings here address the particular circumstances associated with the electric-utility industry and are not intended to suggest that corresponding changes should be made to the rate for capacity release by customers of natural-gas transportation capacity.

“Any such changes,” FERC wrote, would come “only after notice and comment based on a record applicable to the natural-gas industry.” ( See Docket Nos. RM05-17, RM05-25, Feb. 16, 2007, 118 FERC ¶ 61,119 at para. 814, fn. 492 .)

But wait a minute. Was the commission just teasing?

In fact, FERC already had opened a rulemaking investigation to consider exactly that question—whether to lift the price cap for gas-pipeline capacity releases in the secondary market. And it had done so in January, a good six weeks prior to the release of Order 890. Moreover, this prior investigation, announced as a simple request for comments, has since shaped up as perhaps the most compelling and thought-provoking policy discussion to have hit the natural-gas industry in years.

In this prior case, FERC asked the gas industry for thoughts and ideas that call into question a whole host of key policies that heretofore have stood at the core of how natural-gas pipeline markets have played out over the past 15 years or so:

1. Price Caps. The ceiling on the price that shippers can receive for releasing their firm rights to gas-pipeline capacity into the secondary market for purchase by replacement shippers, which is set at the level of the pipeline’s tariff rate, also known as the “recourse rate,” or the “maximum lawful rate.”

2. Posting and Bidding. Rules that have required releasing shippers to announce certain proposed release transactions on the pipeline company’s Internet site, if the release is offered at less than the pipeline’s tariff recourse rates, so that other potential buyers can have an opportunity to bid on purchasing the rights offered for reassignment.

3. Shipper Must Have Title. This concept, known sometimes as the SMHT rule, mandates that a customer that acquires pipeline capacity cannot use those rights to transport natural gas already owned by a third party.

4. Buy/Sell Transactions. The prohibition against such deals bars shippers from circumventing the SMHT rule and transporting gas for a third party by simply purchasing title to gas at the top of the transaction, and then selling it back at the end.

5. Tying Arrangements. Such deals also are proscribed. Thus, FERC policy has made it unlawful for those who are selling off capacity rights on a given pipeline from making the deal conditional upon a linked release or transfer of some other right, such as rights to gas supply, or rights to capacity on other pipelines.

These rules, which

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