CHAPTER 6 END USER AGREEMENTS
| Jurisdiction | United States |
(2001)
END USER AGREEMENTS
Shook, Hardy & Bacon L.L.P.
Houston, Texas 77002-2911
[Page 6-1]
Managing Partner
600 Travis, Suite 1600
(713) 227-8008
As the Federal Energy Regulatory Commission ("FERC" or the "Commission") recently stated, "[t]oday's natural gas market is again in the process of change, and is substantially different operationally and economically" than the market of years past.1 Upstream and downstream markets continue to mature, leading to an increase of both upstream and downstream market centers and gas trading points.2 This provides shippers with greater gas and capacity choices.3 Overall, the natural gas industry is relying on greater self-regulation to develop standards for business and electronic processes in an effort to create greater efficiency in moving gas across the integrated pipeline grid.4 Also, as residential unbundling at the state occurs, this paves the way for small commercial and residential customers to meet their gas needs through purchases in a competitive market.5
Each of these trends have reached various stages of development, and each has a powerful effect on the way end users—industrial, commercial and residential—should view the terms of their natural gas service. Industrial users, and some large commercial consumers, have options for obtaining natural gas. While they may purchase their natural gas from sellers near the wellhead,
[Page 6-2]
these customers should necessarily be concerned about their contractual rights and obligations for obtaining natural gas. As they may purchase their natural gas from sellers near the wellhead, these customers should necessarily be concerned about their contractual rights and obligations upstream of their local distribution company's ("LDC's") city gate. This also requires some focus on current pipeline regulation in the context of FERC Order Nos. 637 and 637-A and the effects of required tariff filings by the pipeline companies. Alternatively, they may purchase gas on a rebundled basis with delivery at the LDC city gate or their plant site.
Small commercial and residential customers also have options. They may continue to receive service from their LDC or they may seek supplies in the marketplace. This market is far less mature than the industrial and large commercial. Given its infancy and marketer reliability issues, the options available to small commercial and residential will likely be limited for some time.
INDUSTRIAL AND LARGE COMMERCIAL USERS
Introduction
Before discussing the particulars of end user agreements for industrial and large commercial users, it is helpful to review some background information on developments regarding the natural gas regulatory scheme. Industrial customers and some commercial users have two basic choices: (1) purchase natural gas from producers/sellers "upstream"—i.e., near the wellhead or (2) purchase natural gas on a delivered basis — i.e., at the city gate or plant delivery point.
The first option may produce a reduction in the cost of natural gas but requires substantial attention to interstate pipeline transportation issues including nominations, scheduling, balancing, and day-to-day operations. The labyrinth of pipeline tariffs is not for the unsophisticated
[Page 6-3]
or faint of heart. The following discusses both the background and issues relating to pipeline transportation.
Background
Order Nos. 637 & 637-A
Most recently, on February 9, 2000, the FERC issued Order No. 637 "in response to the growing development of more competitive markets for natural gas and the transportation of natural gas."6 Order No. 637 was the latest in a series of moves by Congress and FERC over the last three decades to revamp the natural gas regulatory plan by increasing competition in the pricing and transportation arenas, while improving overall service to shippers. For example, prior to Order No. 637, Order No. 636 required pipelines to unbundle their sales of gas from their transportation service in order to provide comparable service to all shippers whether they purchased gas from a pipeline or another gas seller.7 The Commission further adopted initiatives to increase pipeline capacity competition in order to reduce transportation costs and ultimately the overall price consumers pay for natural gas.8 One such measure was the establishment of the capacity release mechanism, whereby an existing pipeline customer could resell/release unutilized capacity to a replacement shipper in accordance with certain procedures.
In general, FERC intended Order No. 637 to improve service, give revenues from penalties back to consumers, allow for the segmentation of service, and make secondary marketing capacity equal to the interruptible transportation ("IT") service in all respects. Specifically, the order adopted eight changes to FERC's previous regulatory model, including: (1) removing the price cap on short-term capacity releases (less than one year) until 9/30/02; (2) providing permission for pipelines to propose peak/off-peak rates for all short-term services; (3) allowing pipelines to propose
[Page 6-4]
term-differentiated rates; (4) requiring pipelines to modify their scheduling procedures to eliminate disadvantages for released capacity relative to pipeline capacity and thereby allow these respective capacities to compete on a comparable basis; (5) directing pipelines to permit shippers to segment capacity for their own use or release; (6) revising penalty policies to require pipelines to provide greater imbalance management services, create incentives to minimize use of operational flow orders ("OFOs"), assess penalties only to the extent required to protect system reliability, and credit penalty revenues to shippers; (7) narrowing the right of first refusal mechanism to limit its future application to maximum rate contracts for 12 or more months of consecutive service; and (8) expanding, modifying and consolidating interstate pipeline reporting requirements for improved price transparency and more effective monitoring for the exercise of market power and undue discrimination.9 In a follow-up order, Order No. 637-A, the Commission largely denied rehearing of Order No. 637, but made adjustments to the penalty and reporting requirements imposed on interstate pipelines, and clarified that shippers with multi-year contracts for seasonal-only service at the maximum rate will retain the right of first refusal.10 In whole, these new and enhanced policy initiatives were carefully designed to emphasize a "service-oriented approach" to interstate natural gas transportation, as opposed to a punitive regime; specifically, one that would facilitate shippers' efficient and effective use of natural gas and transportation services.
For industrial and large commercial customers, Order No. 637 generated several issues regarding pipeline transportation. For instance, FERC encouraged new imbalance management measures and penalty policies to help pipeline consumers. Under these measures, pipelines must not limit imbalance netting and trading through a weekly cash-out mechanism. They also must not increase penalties and/or decrease tolerances except during critical operating periods.
[Page 6-5]
Such activity by the pipelines restricts shipper flexibility and does not always effectively discipline harmful conduct.11
Despite these measures, some pipelines companies have attempted to restrict flexibility by, for example, tightening balancing by using smaller tolerances, and by utilizing daily or weekly, rather than monthly, balancing. These companies then offer "new services" to handle balancing, which also serve to benefit the pipeline rather than the shipper. Also, the pipelines will use an average of the three lowest and three highest prices for cash out, rather than a weighted average for the month. The Commission discouraged such punitive conduct by the pipelines through Order No. 637-A by defining a "penalty" as "any charge imposed by the pipeline on a shipper that is designed to deter shippers from engaging in certain conduct and reflects more than simply the costs incurred as a result of the conduct."12 Yet, through the process of tariff filings, required by Order Nos. 637 and 637-A, pipeline companies continue to explore the boundaries of present-day regulation as the following describes.
Pipeline Tariff Compliance Filings
Balancing Restrictions & Increased Penalties
Through tariff filings, certain pipeline companies have proposed balancing restrictions that include lower tolerances, daily or weekly versus monthly balancing, and punitive formulas for determining a cash-out price. For example, in the Transcontinental Gas Pipe Line Corp. line of cases, the Commission rejected Transco's proposed cash-out regime that included tighter tolerances (a reduction from 2.5% to 1.5%) and harsher penalties through the application of a newly calculated cash-out price using the arithmetic average of the three Lowest or Highest Daily
[Page 6-6]
Midpoint Prices for the zone to determine the average spot price.13 Previously, Transco had calculated the average spot price by using the monthly weighted average spot price. However, shortly after FERC issued Order No. 637, the Commission rejected Transco's proposed changes to its cash-out regime as "punitive and inconsistent with Order No. 637's policies on penalties and imbalance management tools."14 The Commission then ordered Transco to reinstate its previous cash-out mechanism.15 On rehearing after the issuance of Order No. 637-A, FERC went further to say that simply because Transco did not refer to the proposed charges as "penalties," this did not affect the Commission's determination as to their punitive nature.16
Against such punitive tariff filings, industrial users have consistently argued that, consistent with Order No. 637, penalties that have no...
To continue reading
Request your trial