CHAPTER 8 SUMMARY OF STATUS OF KEY FERC REGULATORY DEVELOPMENTS IN 1989
| Jurisdiction | United States |
(May 1989)
SUMMARY OF STATUS OF KEY FERC REGULATORY DEVELOPMENTS IN 1989
Mobil Natural Gas Inc.
Houston, Texas
TABLE OF CONTENTS
Page
Section
Introduction
I. Judicial Review of Order Nos. 436 and 436-A
II. Order Nos. 500 and 500-A
III. Order No. 500-B and Clarifying Order
IV. Order No. 500-C
V. Order No. 500-D
VI. Order No. 500-E
VII. Order No. 500-F
VIII. Order No. 500-G
IX. Status of Court Review of Order 500, et seq.
X. Order No. 451
XI. Order No. 451-A
XII. Order No. 451-B
XIII. Order No. 451-C
XIV. Status of Court Review of Order 451, et seq.
XV. Order No. 380
XVI. Abandonment
XVII. Order No. 490
XVIII. Order No. 490-A
XIX. Status of Court Review of Order 490, et seq.
XX. Order No. 491
XXI. Order No. 509
XXII. Order No. 509-A
XXIII. Gathering versus Transportation Distinction
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Introduction
The natural gas industry is just entering the fourth phase of its modern era (post-Second World War). The first era was characterized by growth and optimism. While this period from 1946 to 1969 was dominated by extensive governmental interference in all aspects of the industry, it nevertheless saw rapidly increasing demand and market share for natural gas.
Elementary economics dictated that the combination of field price controls, rising gas demand and declining supplies would eventually create a shortage. The second era was the shortage era, stretching from 1970 through 1978. During this period, natural gas picked up a negative image as an unreliable fuel and was discussed as a finite dwindling resource.
Starting in 1979, as a result of the decontrol initiated by the Natural Gas Policy Act of 1978, the gas industry entered the third era. This phase is just ending. The third era was a transition period and, as such, very difficult on all industry segments. Analyses of this era focused on the problems inherent in transitioning from a regulatory to a competitive market. Resolution of these problems — high take-or-pay requirements in non-market responsive contracts, a regulatory rate morass ill-suited for a competitive market, and pessimism over future supplies and markets — have dominated policy debate.
The fourth era will be defined by gas industry growth and a competitive marketplace. The impacts of the deregulation in the field have profoundly
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changed the entire gas industry. To paraphrase H. R. Haldeman: "Once the toothpaste is out of the tube, its difficult to get it back again."
There is a nationwide surplus in natural gas deliverability that commenced in 1982 and continues today. The surplus in gas deliverability is attributable to a number of factors, including changing economic conditions, loss of markets to alternative fuels and increased conservation. This has resulted in substantial declines in market prices for gas that previously commanded premium prices and substantial declines in prices being paid under new contracts, including contracts for certain regulated "high cost" gas. This surplus has also resulted in reductions and attempted reductions by pipelines and other gas purchasers in the volumes and prices of their gas purchases through the exercise or assertion of "market out" and "force majeure" provisions in gas purchase contracts, unilateral implementation of reduced volume and price purchasing policies and other unilateral actions to reduce or freeze prices paid under gas contracts. This surplus has also created other delays and difficulties in the marketing of gas production, and has resulted in numerous legislative and regulatory proposals which have allowed and encouraged customers to purchase the lowest priced gas available and has increased competition for markets.
This paper summarizes the major orders that have been promulgated by the Federal Energy Regulatory Commission in the past several years to implement a more flexible regulatory framework which will permit enery suppliers much more flexibility to meet changing market conditions and provide consumers with a much wider array of purchase options.
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I. Judicial Review of Order Nos. 436 and 436-A
A. General Legal Citation to Order No. 436, et seq.
Order No. 436, "Regulation of Natural Gas Pipelines After Partial Wellhead Decontrol," 50 Fed. Reg. 42408 (October 18, 1985), [Reg. Preambles 1982-1985] FERC Stats. & Regs. (CCH) ¶ 30,665 (1985); modified, Order No. 436-A, "Order Granting in Part and Denying in Part Applications for Rehearing, Denying Petition for Stay and Granting Clarification," 50 Fed. Reg. 52217 (December 23, 1985), [Reg. Preambles 1982-1985] FERC Stats. & Regs. (CCH) ¶ 30,675 (December 12, 1985); modified further, Order No. 436-B, "Order Granting in Part Petitions for Rehearing and Reconsideration," 51 Fed. Reg. 6398 (February 24, 1986), III FERC Stats. & Regs. (CCH) ¶ 30,688 (1986); reh'g den., Order No. 436-C, "Order Denying Rehearing," 34 FERC (CCH) ¶ 61,404, (1986); Order No. 436-D, "Order Denying Applications for Rehearing," FERC (CCH) ¶ 61,405, (1986); Order No. 436-E, "Order Denying Request for Reconsideration," 34 FERC (CCH) ¶ 61,403 (1986); vacated and remanded sub nom., Associated Gas Distributors v. FERC, 824 F. 2d 981 (D.C. Cir. 1987), cert. den., 108 S. Ct. 1468, 1469 (1988).
B. Overview Description of Court Review of Order No. 436
On June 23, 1987, in an expansive 125 page decision, the Court of Appeals for the District of Columbia issued its decision vacating Order No. 436 and remanding it for further proceedings consistent with its opinion. Generally, the Court upheld the substance of Order
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No. 436 and the procedures the Commission employed in adopting it. Among other things, the Court found (1) that the Commission has statutory authority under the Natural Gas Act (NGA) and the Natural Gas Policy Act (NGPA) to impose open-access transportation requirements; (2) that there is no legal defect in the rate provisions of Order No. 436; and (3) that the optional expedited certificate procedures outlined in Order No. 436 were adequately justified. However, the Court found a few problems in Order No. 436 which provided the basis for the remand, namely that: (1) the CD adjustment conditions suffered from a lack of both legal and reasoned decisionmaking; (2) the Commission's failure to address adequately the producer-pipeline take-or-pay dilemma did not constitute reasoned decisionmaking, and ; (3) the Commission failed to explain adequately some of its grandfathering decisions. The Court's decision was written by Judge Stephen Williams. The panel also included Judges Robert Bork and Abner Mikva. A summary of the most important aspects of the decision is provided below.
1. Take-or-Pay
a. The D.C. Circuit was highly critical of the FERC's refusal to take direct action on the problem of high take-or-pay/high price gas purchase contracts confronting pipelines, particularly in light of the shift in the balance of forces resulting from Order No. 436. The Commission's decision to do nothing more than reaffirm its pretty noncommittal April 1985 policy statement on regulatory treatment of take-or-pay buyout costs reflects "questionable
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legal premises" and fails to meet the requirement of reasoned decisionmaking, the Court stated. Thus, this portion of Order No. 436 was reversed and remanded for further proceeding.
b. Specifically, the Court found defective the Commission's (1) analysis of the impact of Order No. 436 leading to the conclusion that further action on uneconomic contracts was not necessary; (2) policy reasons for not intervening with respect to pipeline take-or-pay contracts; and (3) reasons for rejecting two leading alternative proposals advanced by participants in the rulemaking proceeding, namely, use of NGA Section 5 power to modify contracts involving jurisdictional gas, and conditioning producer access to Order No. 436 transportation on grant of take-or-pay relief. Rejecting the Commission's thesis that Order No. 436 would not cause an increase in take-or-pay liabilities, the Court said the FERC's observation that nondiscriminatory access and CD reduction/ conversion conditions are not intended to affect renegotiations or litigation does not undermine the challengers' inherently plausible suggestion: that these conditions will adversely impact the pipeline's take-or-pay problems. Moreover, the Court further pointed out that the Commission relies on the voluntary nature of Order No. 436 transportation, but this fundamental presumption is flawed since pipelines may not have much of a choice. Refusal to accept the open access option may spell bankruptcy through loss of critical load, while acceptance of the option may
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also be fatal. The Court explained that, "when a condemned man is given the choice between the noose and the firing squad, we do not ordinarily say that he has 'voluntarily' chosen to be hanged."
c. In addressing specific options for treating the take-or-pay problem, the Court, in response to FERC's refusal to invoke its NGA § 5 authority to set aside jurisdictional take-or-pay problem contracts, was not convinced of FERC's claim that such contracts account for only a small proportion of the troubling price discrepancy. On remand FERC must clarify the extent to which contracts for jurisdictional gas account for the take-or-pay problem. As an alternative remedy to the take-or-pay problem, the Court indicates that it would look favorably on the conditioning of access to nondiscriminatory transportation on a producer's agreement to provide take-or-pay relief. In response to FERC's earlier argument that such treatment would be unduly discriminatory, the Court stated:
Given that the Commission itself has identified the producer/pipeline contracts as a primary cause of the problem that Order No. 436 is intended to cure,...it eludes us why pipeline denial of access...
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