The Case That Mattered

Deck: 

What’s the story with AES Ocean Express?

Fortnightly Magazine - July 2007

In January 2004, FERC authorized AES Ocean Express LLC (AES) to construct and operate natural-gas pipeline facilities to transport revaporized LNG from an offshore receipt point at the boundary between the Exclusive Economic Zone of the United States and the Commonwealth of the Bahamas to onshore delivery points on the east coast of Florida. AES proposed to connect its planned pipeline to the pipeline system of Florida Gas Transmission (FGT). AES and FGT were unable to agree upon the terms and conditions to be included in FGT’s tariff regarding the LNG delivered through AES’ proposed pipeline, leading to AES filing a formal complaint with FERC, wherein it alleged that FGT sought to impose unreasonably restrictive gas quality and interchangeability standards on LNG delivered into the FGT system.

In response to AES’ complaint, FERC ordered FGT to file quality and interchangeability standards to address the introduction of LNG into the FGT system. FGT subsequently filed its proposed tariff revisions with FERC, requesting, among other things, a Wobbe Index range for receipts of gas into the FGT Market Area between 1,340 and 1,396, which equated to plus or minus 2 percent of FGT’s historic Wobbe Index of 1,368, and a minimum HHV of 1,025 Btu/scf and a maximum HHV of 1,100 Btu/scf. As a result of a number of interventions and comments filed with respect to FGT’s proposed tariff provisions, FERC ordered a hearing before an administrative law judge (ALJ) to determine the appropriate natural-gas quality and interchangeability standards regarding the LNG delivered into FGT’s system.

On April 11, 2006, after a lengthy and heavily contested hearing, the ALJ issued a 65-page initial decision, finding that FGT’s proposed Wobbe Index range of 1,340 to 1,396 and proposed HHV limits of 1,025 to 1,100 Btu/scf for deliveries into FGT’s Market Area were just and reasonable. However, the ALJ found that the standards should be applied only to imported LNG and should not be extended to domestic natural gas. In addition, the ALJ found that mitigation costs downstream users may incur as a result of the introduction of LNG into FGT’s system were speculative, but the ALJ left open the issue of whether actual mitigation costs attributable to the importation of LNG could be recovered in the future, stating: “To the extent that a participant may incur a cost which it attributes to the actual importation of LNG under this decision, it may make an appropriate filing, presumably under Section 5 of the NGA, to recover that cost.”1

Most of the parties in AES Ocean Express, other than FGT and the LNG suppliers, requested that FERC establish some method for downstream gas users to recover their costs of testing, remediation, and repair to accommodate the introduction of LNG into FGT’s system. The electric generators connected to FGT’s system argued that the sponsor of the LNG should be required to bear any costs to install equipment necessary to protect their turbines. In making this argument, the electric generators pointed out that in a prior case, Columbia Gas Transmission Corp.,2 FERC had approved a pipeline’s proposal to compensate two sales customers for their costs of modifying equipment in order to accommodate the pipeline’s purchase of LNG to serve its customers.

Local distribution companies (LDCs) connected to the FGT system, also relying on Columbia Gas Transmission and subsequent FERC rulings, similarly argued that FERC should rule on the cost responsibility for moderating the impact of interchangeability with respect to imported LNG. The LDCs urged FERC to confirm how the costs for necessary mitigation measures will be allocated, and to specify the procedures by which the costs will be monitored, verified, and collected. Specifically, the LDCs argued that the mitigation costs should be borne by the LNG suppliers and project sponsors, because they are the parties that financially benefit from the importation of LNG.

FERC staff also argued that FERC should establish an appropriate mitigation cost-allocation methodology. Unlike the electric generators and LDCs that advocated that all mitigation costs be borne by the LNG sponsors and suppliers, staff recommended socializing the mitigation costs over all parties.

FGT strongly opposed the arguments that FGT include a mechanism in its rates to permit generators and LDCs to recover their mitigation costs from other parties. FGT stressed that FERC has no jurisdiction with respect to FGT’s electric-generation customers and LDCs, adding that the mitigation costs sought to be recouped by the electric generators and LDCs related to facilities that are not used and useful for a pipeline’s jurisdictional transportation service.

Not surprisingly, the LNG suppliers involved in the proceeding argued that they should not bear responsibility for mitigation costs because there was no showing that such costs were necessary. They argued that FERC lacks authority to direct payments among parties that are not subject to FERC’s jurisdiction, lacks jurisdiction to order payments for equipment upgrades from jurisdictional customers, and lacks authority to award damages or reparations. On a final note, the LNG suppliers pointed out that, contrary to the assertions of the electric generators and LDCs, in Columbia Gas Transmission Corp. FERC found that the pipeline, not the supplier, should reimburse affected customers for their mitigation costs.

A little more than one year after the ALJ issued the initial decision, after considering the record and the various arguments of the parties, FERC issued its 126-page opinion and order on the initial decision in AES Ocean Express. In its order, FERC generally upheld the ALJ’s decision to accept FGT’s proposed standards as just and reasonable, but found that the proposed standards are applicable to all gas tendered to FGT’s market area, not just to LNG. In addition, although FERC acknowledged that “the adopted standards could require owners of downstream appliances to incur certain incremental expenses to enable their equipment to use the gas delivered off the Florida Gas system,”3 FERC agreed with the ALJ that such mitigation costs were speculative. However, in an interesting turn, FERC disagreed with the ALJ regarding the future recovery of actual end-user mitigation costs.

Recognizing the importance of the cost-mitigation issue, and possibly recognizing the likelihood that no matter what FERC decided on the issue, FERC’s decision probably would be met with an appeal, the commission spent nearly 20 pages (approximately one-sixth of its order) addressing cost mitigation. FERC ultimately came to the conclusion that it has no jurisdiction to consider how mitigation costs should be allocated among non-jurisdictional customers. FERC noted:

The commission’s only rate jurisdiction in this situation is over the rates Florida Gas charges its shippers for transporting their gas. The mitigation costs which Florida Gas’s LDC and electric generator customers seek to recover from the LNG project sponsors, Florida Gas, or other shippers are not Florida Gas’s costs, but are the customers’ costs of testing and modifying their own equipment.4

FERC pointed out that the electric generators and LDCs, many of whom are subject to the jurisdiction of the Florida Public Service Commission (FPSC), were asking FERC to establish a mechanism under which their mitigation costs would be allocated to other parties, some of whom were also regulated by the FPSC. FERC noted that it believed such a matter is more appropriately within the jurisdiction of the Florida regulatory bodies. Thus, it appears FERC has passed the buck to state regulators to address the issue of end-user cost mitigation resulting from the introduction of LNG into the U.S. pipeline grid.—JEG

 

Endnotes

1. AES Ocean Express LLC v. Florida Gas Transmission Co., Initial Decision, 115 FERC ¶ 63,009, at par. 225 (Apr. 11, 2006).

2. 13 FERC ¶ 61,102 (1980), opinion and order denying reh’g, 14 FERC ¶ 61,073 (1981), aff’d Corning Glass Works v. FERC, 675 F.2d 392 (1982).

3. 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. 250 (Apr. 20, 2007).

4. Id at par. 272.