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When Shippers Seek Release

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

Fortnightly Magazine - July 2007


Then comes the rule against tying arrangements: “All terms and conditions for capacity release must be posted and nondiscriminatory, and must relate solely to the details of acquiring transportation on interstate pipelines. Release of pipeline capacity cannot be tied to any other conditions.” (Order 636-A, Dkt. No. RM91-11, Aug. 3, 1992, 1991-96 FERC Stats. & Regs, ¶30,950, at p. 30,559.)

To avoid the risk, shippers may seek a waiver of FERC rules before the fact. And the commission ordinarily has granted such waivers only where a shipper wants to exit the natural-gas supply management business in a rational and orderly fashion. FERC recently denied a waiver for capacity release above the maximum rate cap and tied to a purchase and sale agreement for long-term firm natural gas supplies, where the shipper did not aim to wind up the gas business. (See Louis Dreyfus Energy Services LP, Dkt. RP06-187, Mar. 3, 2006, 114 FERC ¶61,246.)

One idea suggests that FERC need not worry so much about the SMHT rule; the rule would become somewhat irrelevant if FERC instead would simply decide to eliminate the tying rule and the price cap on capacity releases in the secondary market.

Seven years ago, in Order 637, the commission launched a two-year experiment in which it lifted the maximum rate ceiling on capacity release transactions of less than one year’s duration. Toward the end of the experiment, the commission staff reported that above-cap releases had accounted for only 2 percent of total transactions and gas volumes released, and for no more than 6 percent of the released capacity volumes in any particular month. Some 76 percent of all above-cap releases had occurred on only four pipelines. (See Staff Paper, Dkt. PL02-4, May 30, 2002.)

Today, five years, later, many still see those findings as encouraging. New Jersey Natural Gas finds it “inexplicable” that FERC eventually abandoned the experiment, having let it lapse in September 2002 “without published explanation or justification.” (See Comments, New Jersey Natural, p. 14, filed Apr. 11, 2007.)

Sixteen months ago, in a case reviewing pipeline authority to negotiate market-based rates, then-commissioner Nora Mead Brownell reiterated that the two-year experiment on capacity release pricing had shown “positive results.” Brownell thought the experiment had demonstrated that an uncapped capacity release market could be competitive, and produce just and reasonable rates for customers. She added that without the price-cap waiver, the capacity likely would have been sold in the bundled and unregulated “grey market,” without public posting of release terms on pipeline Web sites. (See Dkt. PL02-6, Mar. 23, 2006, 114 FERC 61,304, Brownell concurring.)

Note also that Brownell then had called for a reconsideration of FERC policy, including a re-evaluation of interruptible transportation provided by pipelines in the primary market:

“I believe it is time to again consider a wide range of proposals for pricing transportation services in the secondary market, as well as competing IT services.”

Market Lessons

The AGA argues that FERC’s SMHT rule has become particularly problematic due the development of gas retail choice, and a competitive supplier that procures and