December 01, 2020

FERC Rescinds Pipeline Contracts and Reaffirms Capacity Posting Policy

Michael R. Pincus, Michael Diamond, and Jacob I. Cunningham

On October 15, 2020, the Federal Energy Regulatory Commission (FERC or Commission) issued an order finding that Northern Border Pipeline Company awarded pipeline capacity through pre-arranged deals that were unduly preferential toward an affiliated natural gas producer, and unduly discriminatory against similarly situated customers. The Commission rescinded the prearranged deals and capacity awards and directed Northern Border to hold a new open season. 

Background

One of the Commission’s priorities in regulating the natural gas transportation market is that pipeline capacity be made available on a transparent, open-access basis to ensure that the capacity is allocated to the party that values it the most. Although capacity is ordinarily awarded to the highest bidder during an open season, the Commission allows pipeline companies to sell capacity through prearranged deals with customers (also referred to as shippers), provided that the pipeline company’s tariff allows for prearranged deals and the pipeline company first publicly posts the capacity as available. If the pipeline company enters into a prearranged deal, it must then post the terms of the prearranged deal and provide all shippers an opportunity to bid on the capacity in an open season. If a shipper submits a bid with a greater net present value (NPV) than that of the prearranged deal, the prearranged shipper may match that bid and obtain the capacity. If the prearranged shipper declines to match, the pipeline must award the capacity to the highest bidder. Awards of jurisdictional capacity may be scrutinized and potentially reversed by the Commission under section 5 of the Natural Gas Act (15 U.S.C. § 717d) if the award is unjust, unreasonable, unduly discriminatory, or preferential.

In February 2020, Northern Border held an open season for six packages of long-term capacity that it intended to sell to an affiliate through prearranged deals, with service agreements to commence on June 1, 2020, or later. Northern Border had previously posted the capacity as operationally or seasonally available, but had not posted the capacity as available for long-term subscription. Northern Border’s prearranged deal open season imposed restrictions limiting the rate, term, and volumes that parties could include in their bids, and indicated that given the restrictions the prearranged deals provided the highest possible NPV for the capacity. At the conclusion of the open season, Northern Border awarded all of the capacity to the prearranged shipper.

Two groups of shippers subsequently filed complaints with the Commission, asserting that Northern Border had not posted the subject capacity as generally available prior to making the prearranged deals, and that the bid restrictions in the open season made it impossible for any shipper to offer bids with higher NPVs than the prearranged shipper’s bid. Northern Border responded that the open season was consistent with procedures contained in its tariff, which did not require it to post capacity that would not be available within 95 days. Northern Border also contended that the open season bid restrictions were consistent with Commission policy permitting pipelines to specify bidding parameters in open seasons.

Commission Findings

The Commission granted the complaints, finding that Northern Border had conferred an undue preference upon its affiliate and unduly discriminated against similarly situated shippers, in violation of section 5 of the Natural Gas Act, the Commission’s regulations, and the Commission’s Standards of Conduct. The Commission found that Northern Border failed to post the capacity as being available long-term before entering into the prearranged deals, such that shippers did not have equal access to information about the capacity. The Commission noted that even though Northern Border’s tariff did not expressly require it to post capacity that would not be available within 95 days, Commission policy requires capacity to be posted before it is sold through prearranged deals in the absence of specific terms to the contrary in the pipeline company’s tariff. The Commission also found that Northern Border’s restrictions on rate, term, and volumes that parties could include in their bids guaranteed that the capacity would ultimately be awarded to Northern Border’s affiliate and denied other potentially interested parties a meaningful opportunity to bid on the capacity. The Commission found that these restrictions undermined its fundamental open-access and nondiscrimination principles and provided no assurance that the prearranged deals allocated the capacity to the party that values it the most.

The Commission rescinded the contracts, ordered Northern Border to hold a new open season for the capacity, and directed Northern Border to make tariff revisions requiring it to post capacity on its website before entering a prearranged deal.

Implications

In this order, the Commission confirmed its long-standing policy that capacity sold as part of a prearranged deal must first be posted as available on the pipeline’s website before entering into a prearranged deal. The Northern Border order also makes clear that even when a pipeline has complied with the requirements of its tariff, the Commission may take action to enforce its policies separate and distinct from tariff requirements, particularly with respect to fundamental Commission priorities like the preservation of a transparent market for pipeline capacity.

Notably, the Commission’s remedy in this case goes further than it has in similar situations. The Commission’s usual practice of addressing improperly awarded contracts is to uphold the contracts and prohibit the pipeline from engaging in similar conduct in the future. While the Commission’s rescission of Northern Border’s contracts was atypical, the Commission emphasized that the complaints were filed shortly after the capacity was awarded and before service under the prearranged deals had begun. The Commission also noted there was no record evidence concerning the extent to which the shipper or other parties had relied on the capacity award and the parties should have been aware that the transactions involved regulatory risk.

Although the Commission did not penalize the pipeline or initiate any formal proceedings to take a broader look at its processes of awarding capacity, the order makes clear the Commission takes seriously alleged violations of the prohibitions against undue preference and discrimination. 

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Michael R. Pincus, Michael Diamond, and Jacob I. Cunningham

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Michael R. Pincus, Michael Diamond, and Jacob I. Cunningham are attorneys in Van Ness Feldman, LLP’s nationally recognized natural gas pipeline practice, and regularly represent natural gas pipeline and LNG companies on rate, tariff, and certificate matters before the Federal Energy Regulatory Commission.