Late last year, in its order in Hackberry LNG Terminal, L.L.C., FERC announced a new approach to the regulation of LNG import facilities. The new policy is intended to remove barriers to the construction of these facilities that were thought to arise as the result of FERC’s previous, more intrusive regulatory policy. Specifically, FERC granted Hackberry authority to provide terminalling services to its affiliate, Dynegy Marketing, at rates, terms and conditions agreed to by the two parties. Moreover, FERC found that it was not necessary to require Hackberry to offer open access service, or to maintain on file with FERC a tariff and rate schedules for its terminalling service. Hackberry will be required, however, to file with FERC a copy of its contract with its affiliate prior to commencing construction of the terminal. In addition, FERC observed that it retained jurisdiction to issue subsequent orders if necessary to address complaints of undue discrimination or other anti-competitive actions. The order does not state whether or how the new policy will affect LNG terminals in current operation.

The new policy represents a dramatic departure from FERC’s previous policy, under which most LNG terminals have operated subject to FERC-regulated open access tariffs, and from FERC’s usual insistence on open access. The new policy announced in Hackberry is all the more remarkable given that Hackberry completed an open seasons process and filed pro forma tariff provisions to offer open access firm and interruptible service at cost-based rates. Hackberry, therefore, offered to comply with the basic precepts of FERC’s open access regime, in addition to requesting authority to provide service for its affiliate – awarded through the open season process – at market-based rates. The decision, however, follows on the heels of a FERC-sponsored conference held in October to discuss natural gas market issues, at which several commenters argued for re-evaluation of FERC’s regulatory approach to LNG facilities.

FERC adopted the new policy in reliance on several factors, including the deregulated status of sales of imported LNG under the Energy Policy Act of 1992, the sponsor’s assumption of the project’s economic risk, the desire to provide incentives for the development of additional energy infrastructure, and FERC’s perception that protection of the public interest and a competitive wholesale natural gas market in the U.S. did not require adherence to the former, more intrusive policy. Indeed, FERC specifically rejected protests against the proposed use of market-based rates, noting that FERC was not required to offer cost-based rate protection to the international LNG trade. Thus, the new policy should not be viewed as a retreat from open access, which remains a principal focus; rather, it reflects a new view of LNG import facilities as akin to a supply source, not a transportation link.

Requests for rehearing of the order are due no later than January 17, and it remains to be seen whether any parties will request alterations to the new policy. Whether the new policy will provide FERC’s hoped-for impetus to the development of additional LNG import facilities also is a question mark. Many industry participants currently suffer from severe capital constraints and are seeking to cut capital projects and not commit to new ones. In addition, the new policy does not affect the various state and federal environmental permits and other clearances that must be received prior to construction of such facilities, nor does it afford any assistance addressing local protests to such projects. Further, FERC’s decision to act under Section 3 of the Natural Gas Act, which governs the importation and exportation of natural gas, rather than Section 7, which governs facilities and services used in the interstate transportation of natural gas, makes federal eminent domain authority under Section 7 unavailable to LNG terminal project sponsors. At the same time, the type of proprietary terminals envisioned by the new policy will almost certainly not qualify to use eminent domain authority under state law. These factors all remain formidable obstacles to new terminal development, especially greenfield projects. On the other hand, the new policy provides valuable regulatory, economic and contract certainty to project sponsors, who will now be able to exercise much greater control over allocation of terminal capacity, timing of construction, and the economic terms and conditions of terminal service. These elements are critical to the development and financing of capital-intensive LNG projects and may, therefore, spur new domestic activity in this area. Indeed, the attractions of the new regulatory policy may prompt sponsors of some pending international projects, particularly those in initial planning stages at locations in close proximity to the U.S., to look more favorably on U.S. markets, given the additional regulatory and political risks associated with international projects.

This material is not intended to create, and does not create, an attorney-client relationship between you and Vinson & Elkins L.L.P., and you should not act or rely on any of this information. As legal advice must be tailored to the specific circumstances of each case, nothing provided herein should be used as a substitute for advice of competent counsel. These materials do not constitute legal advice, do not necessarily reflect the opinions of Vinson & Elkins L.L.P. or any of its attorneys or clients, and are not guaranteed to be correct, complete, or up-to-date. Vinson & Elkins L.L.P. assumes no liability for the use or interpretation of information contained herein. This publication is provided "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. Unless otherwise indicated, V&E attorneys listed are: not Certified by the Texas Board of Legal Specialization. None of the attorneys listed on this website is certified as an "expert" or "specialist" pursuant to any authority governing the practice of law in New York.

Vinson & Elkins is a registered limited liability partnership. Principal office-Houston.