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FERC Reforms Capacity Release Rules

Energy Law Update

June 23, 2008

On June 19, 2008, FERC reformed its rules regarding the release of firm capacity on interstate natural gas pipelines.  A petition filed in October 2006 by Bracewell & Giuliani LLP on behalf of a number of gas marketing firms was a major impetus for the rule changes.  The reforms represent one of the most important initiatives FERC has undertaken in its regulation of natural gas transportation in almost a decade.

Major rule changes adopted by FERC would:

  • exempt short-term releases of capacity from pipelines' maximum rate caps;
  • exempt capacity releases associated with both supply and marketing asset management arrangements from FERC's prohibition against tying and the bidding requirements of FERC's capacity release rules;
  • clarify that the tying prohibition does not apply to conditions associated with gas inventory held in storage for releases of firm storage capacity; and
  • exempt capacity releases made to marketers under state-approved retail access programs from the tying prohibition and from the bidding requirements under the capacity release rules.

FERC's rule changes provide much needed guidance to the natural gas industry and assist natural gas market participants in avoiding compliance problems associated with the issues addressed by the rule changes.  An understanding of the rule changes is critical to the formation of many structured natural gas transactions.

FERC's rule changes are expected to provide shippers on interstate natural gas pipelines with more options, to enhance competition in secondary capacity markets, and to provide benefits to natural gas consumers. Importantly, FERC admonished that it intends to monitor the behavior of market participants in response to the rule changes and will not hesitate to take action to enforce its rules and punish violators, if necessary.