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When Shippers Seek Release

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

Fortnightly Magazine - July 2007

of 2005. Consider a recent ruling that assessed a $1 million civil penalty against Bangor Gas Co. for violating the shipper-must-have-title rule by using gas-pipeline rights to transport gas owned by third parties. (See Docket No. IN-7-23, March 7, 2007, 118 FERC ¶61,186.)

As Chairman Joseph T. Kelliher noted at the time, the Bangor case marked FERC’s first-ever imposition of a civil penalty for natural-gas violations under the new enforcement authority. Thus, releasing shippers now must take care to avoid costly fines. But it can prove awkward to structure a pre-arranged deal to release pipeline capacity to a marketer or portfolio manager without running afoul of the SMHT rule, not to mention the prohibitions against buy/sells and tying arrangements.

In practice, each rule seems to conspire against another. For example, as the marketer petition notes, shippers who want to forge a pre-arranged deal to outsource gas-supply oversight to a portfolio manager typically will find it necessary to violate one rule in order to avoid violating another:

“It is in fact essential that this assignment of purchase rights occur in order to ensure that the portfolio manager, in its use of the released transportation and/or storage capacity, complies with the commission’s ‘shipper-must-have-title’ requirement.” (See comments, Marketer Petition.)

Marisa Sifontes, senior counsel for Dominion Resources Services Inc., offers a similar explanation in her written comments filed on behalf of Dominion Retail and Virginia Power Energy Marketing Inc. on April 11:

“Thus we have a rule, the prohibition against tying arrangements, which makes a certain transaction structure, a structure which the market demands, arguably unlawful.”

Counter to these views comes a curious rebuttal, offered by Thomas Thackston, of PSEG Services Corp., in his written comments for PSEG Energy Resources and Trade LLC:

“Like any other market monitoring mechanism, shipper-must-have-title has been accused of interfering with the marketplace. Such accusations may be accurate, but even if true, they miss the point, since regulatory scrutiny and action is not only appropriate, but necessary.”

FERC articulated the SMHT rule in the late 1980s, before Order 636 and open access kicked in, to prevent shippers from locking in capacity rights under the old first-come, first-served priority rule, and then hoarding capacity for months or even years before acquiring gas and initiating an actual shipment:

“All shippers shall have title to the gas at the time that the gas is delivered to the transporter and while it is being transported by the transporter.” (38 FERC ¶61,150 at p. 61,408.) Many feel its usefulness has ended.

Part and parcel with the SMHT rule comes the prohibition against buy/sells. In a buy/sell, the shipper acquires title only temporarily, during the shipment, and only to achieve nominal compliance with the SMHT rule. It is understood that the end user retains beneficial ownership throughout, as FERC explained in Order 636:

“An LDC will purchase gas in the production area from an end user or a merchant designated by an end user. The LDC will ship the gas on its own firm capacity and sell the gas to the end user at the retail delivery