On March 20, 2014, the Federal Energy Regulatory Commission ("FERC" or "Commission") issued proposed rules to change interstate natural gas pipelines' nomination and scheduling procedures to better synchronize them with the electric industry's scheduling practices.1The principal elements of the NOPR are proposals to:

  • Move the start of the Gas Day from 9:00 a.m. Central Clock Time ("CCT") to 4:00 a.m. CCT;
  • Start the first day-ahead nomination cycle (known as the "Timely Nomination Cycle") for pipeline scheduling at 1:00 p.m. CCT, rather than the current 11:30 a.m. CCT start time. The Commission asserts that this will allow administrators of organized wholesale electric markets to finalize their daily scheduling before the time that gas-fired generators must submit nominations for gas transportation service to interstate pipelines; and
  • Modify the current intraday nomination timeline to provide four intraday nomination cycles, instead of the existing two. Specifically, the Commission proposes to add an early morning nomination cycle with a mid-day effective flow time and a new late-afternoon nomination cycle (in which firm nominations would be permitted to displace or "bump" already scheduled interruptible service). The four standard intraday nomination cycles would be at "8:00 a.m.
  • CCT (bump), 10:30 a.m. CCT (bump), 4:00 p.m. CCT (bump) and 7:00 p.m. CCT (no-bump)."2

The NOPR provides for a period of 180 days from its publication in the Federal Register for the gas and electric industries to reach consensus, under the auspices of the North American Energy Standards Board ("NAESB"), on the details of potential alternatives to FERC's proposed scheduling reforms. NAESB must submit any alternative proposal that it develops by September 29, 2014. Comments on the NOPR (and on any proposal NAESB may submit) are due on November 28, 2014.

This paper briefly describes the historical and recent context for FERC's proposal, and identifies some important legal issues that the NOPR largely overlooks. Should it wish to make its proposed rules effective, FERC likely will have to address these questions, and how it does so could determine whether any disputed rules can survive judicial review. The views expressed in this paper are those of the authors only, and do not necessarily reflect the views of Wright & Talisman, P.C., or of any client of the firm.

Context of the NOPR

The nation's gas-fired electric generation fleet has expanded dramatically over the past 15-20 years, and the electricity industry's reliance on gas is expected to continue growing. In 2000, for example, the nation had approximately 243,000 megawatts of gas-fired generation capacity.3 That capacity essentially doubled over the next twelve years, totaling nearly 486,000 megawatts in 2012.4 Gas-fired capacity now represents about 41 percent of the nation's installed generation capacity. The U.S. Energy Information Administration ("EIA") projects that "[t]he combination of slow growth in electricity demand, competitively priced natural gas, programs encouraging renewable fuel use, and the implementation of environmental rules" will increase the reliance on gas from about 24 percent of total electricity consumption of approximately 4.1 trillion kilowatt-hours ("kwh") in 2010 to just over 35 percent of consumption of about 5.2 trillion kwh by 2040.5 If realized, this forecast would represent nearly 90 percent growth in the amount of electric energy generated by gas-fired power plants.

The electric industry's growing reliance on natural gas to fuel its generation fleet has captured the attention of regulators and policy makers for at least ten years. Though issues may have arisen even earlier, the two industries' interdependence certainly was highlighted for many when the combined demands for gas for heating and power generation during a severe spell of cold weather in New England in early 2004 nearly resulted in blackouts. Later that year, FERC's chairman called on NAESB to develop standards "to integrate the business practices of the gas and electric industries."6 In response to reports from NAESB in 2005 and 2006 regarding the deliberations of its Gas-Electric Interdependency Committee, FERC amended its regulations to incorporate limited changes in NAESB's business practices standards, primarily related to sharing certain operational information and types of communications between and among pipelines, generators, and electric industry balancing authorities and reliability coordinators.7 Notably, however, FERC declined to modify the no-bump rule for flowing interruptible gas in the Intraday 2 nomination cycle, and encouraged NAESB and individual pipelines to consider creating additional nomination cycles prior to Intraday 2.8 In the following years, FERC reiterated its reluctance both to change the no-bump rule and to impose additional intraday scheduling opportunities.9

Interdependency issues continued to draw attention because of events such as the disruptions of electricity and gas services that occurred in the Southwest in early 2011. In July 2012, the Commission commenced a series of public conferences on gas-electric coordination issues in its Docket No. AD12-12-000. The extensive oral and written submissions the Commission received in that forum contributed to new rules issued in 2013 authorizing electric transmission providers and interstate natural gas pipelines to share non-public, operational information (including customer-specific and other commercially sensitive data) to promote reliability and enhance operational planning for both industries.10

Even more compelling, the extreme spikes in spot gas and electricity prices, accompanied by widespread unplanned outages of gas-fired generation facilities, experienced in the eastern United States, and especially in New England, during the polar vortex of January 2014 brought gas-electric interdependency to the attention of mainstream media. Though likely planned before that event, the Commission's proposed changes to pipeline nominations and scheduling procedures soon followed.

NAESB's Follow-up

NAESB responded to the NOPR by immediately reconvening its Gas-Electric Harmonization ("GEH") Forum to coordinate efforts to reach a consensus among gas and electric industry stakeholders in support of the NOPR or an alternative to FERC's proposal.11 Several hundred stakeholders from all segments of both industries participated in a series of meetings of the GEH Forum in April, May, and June 2014. The Forum's efforts ultimately resulted in no consensus regarding a change in the start of the gas day, but substantial agreement was reached with respect to several other aspects of FERC's proposed changes:

  • The gas day should have not more than three intraday nomination cycles;
  • The rule of no bumping of flowing interruptible gas in the last intraday cycle should be retained; and
  • There should be at least four hours of processing time between the timely day-ahead nomination deadline and the deadline for timely scheduling, and at least three and a half hours of processing time between the nomination and scheduling deadlines for all other standard nomination cycles.

The NAESB board reported to FERC on June 18, 2014, that it has directed the pertinent NAESB committees to begin preparing the necessary revisions to NAESB's standards to implement the GEH Forum's consensus support for changes to the nomination and scheduling deadlines and the addition of a third intraday nomination cycle.12 However, NAESB will not further address the start of the gas day.13 If approved by the affected NAESB committees and ratified by the NAESB board, these revisions to the standards will be filed with FERC by September 29, 2014.

The most notable aspect of the NAESB GEH process is how it highlighted the split between the gas and electricity industries over FERC's proposed change to the start of the gas day. The final two alternatives on which the GEH Forum participants voted were identical (i.e., both included the same three intraday nomination opportunities and the same nomination and scheduling deadlines), except that one provided for starting the gas day at 4:00 a.m. CCT and the other provided for a 9:00 a.m. CCT start. The package including the 4:00 a.m. start won 69 percent support from the WEQ participants, and only 28 percent support among the WGQ, while the 9:00 a.m. start won 38 percent from the WEQ and 82 percent from the WGQ.14

There is always the possibility, of course, that the coming months will witness the development of a compromise proposal regarding the gas day, or the emergence of the sort of consensus alternative that eluded the GEH process. Barring such an event, however, interested parties in the gas and electric industries presumably will lay out all sides of the dispute regarding FERC's proposed change to the start of the gas day in formal comments on the NOPR in November 2014. Based on the discussions in the NAESB forum, the arguments for and against an earlier gas day can be very generally summarized as follows.

Supporters of an earlier start contend that starting the gas day before generation is ramped up to meet weekday demand as consumers awaken and the business day begins will ensure the reliability of electricity service.

Opponents of the proposed 4:00 a.m. CCT start assert that requiring field operations before daylight hours presents safety risks for workers, will increase labor costs to staff facilities at irregular hours, and could require lighting many facilities for safety reasons. Opponents also question the logic of improving coordination between gas and electric operations by modifying the uniform, national gas day that has worked well (at least in their view) for more than 15 years, rather than changing the widely divergent electric operating days of regional and other electric system operators to conform them to the existing gas day.

If the rulemaking develops in this way, FERC will have to sift through the opposing arguments and whatever cost-related and other evidence parties may submit with their comments, and then decide what to do – if anything. We discuss below the key legal aspects of the NOPR in general, and of the issue concerning the gas day start time in particular. The rulemaking process has no deadline by which FERC must issue a final rule. In fact, issuance of the NOPR does not obligate FERC to issue a final rule at all. Thus, if the comments on the NOPR are contentious, it is difficult to predict whether or when FERC might act.

Legal Questions

The strong divergence of views between gas and electricity industry stakeholders regarding FERC's proposed change to the start of the gas day underscores an intriguing legal issue lurking in the NOPR. FERC is proposing a change that will affect every shipper on every interstate pipeline, along with every supplier of gas to each of those shippers. The NOPR, however, states that FERC is proposing the earlier gas day based on the perceived needs of a single segment of the gas market, electric generators.15 Accordingly, assuming the comments on the NOPR later this year present cogent opposition to the proposed earlier start of the gas day, should the Commission want to proceed with its proposal, it will have to marshal factual evidence to counterbalance any evidence on increased costs and/or safety risks that opponents of the change may offer, and will have to provide a reasoned explanation for its decision. It also will have to reinforce the legal foundation for its action relative to that of the NOPR.

Like any federal administrative agency, when FERC issues new regulations, it is obligated to demonstrate that its decision is supported by substantial evidence and is not arbitrary.16 This standard requires an agency to show that it has addressed all relevant, substantive arguments and that its reasoning "articulate[s] a rational connection between the facts found and the choice made."17

Section 4 of the Natural Gas Act ("NGA") requires that all rates, terms, and conditions for interstate transportation of gas must be "just and reasonable," and shall not be unduly discriminatory against, or unduly preferential to, any shipper or group of shippers.18 Section 5 of the Act empowers the Commission to order changes in interstate pipelines' terms of service, but requires two steps in doing so. First, the Commission must determine that the existing terms are (or have become) unlawful, i.e., unjust and unreasonable, or unduly discriminatory or preferential.19 Second, the Commission must establish new terms that it finds are just and reasonable, and not unduly discriminatory or preferential.20

When FERC established the current gas day and intraday nomination cycles, it standardized pipeline scheduling practices across the industry for the first time.21 The Commission found that "[a] prerequisite for [shipper] access [to the integrated, open-access interstate pipeline grid] is the ability to move gas efficiently across multiple pipelines to its ultimate destination,"22 and the then-prevailing, non-standardized scheduling practices prevented such efficiencies and thus were "unjust and unreasonable under section 5 of the Natural Gas Act."23 Accordingly, FERC directed all interstate pipelines to file revised tariffs to incorporate the standardized scheduling practices.24

However, FERC's reasoning in the Order No. 587 series does not a fortiori support its proposed revisions to interstate pipelines' now long-established nomination and scheduling practices. To revise the current scheduling practices as FERC proposes in the NOPR, it first must find, with evidentiary support in the record of its rulemaking proceeding, that the existing, standardized practices (which it previously approved) are unjust and unreasonable, and/or unduly discriminatory or preferential.25

In the NOPR, FERC grounded its statements regarding the need for reform of gas scheduling in the effects of current pipeline scheduling practices on the electricity market.26 In any final rule, to better withstand judicial review, FERC likely would need to make and support findings that the current practices, including the start of the gas day, negatively affect matters under FERC's NGA jurisdiction, i.e., transportation of natural gas. The Commission also will have to explain why the existing gas day and/or current intraday nomination cycles, which it previously approved, are now unjust and unreasonable or unduly discriminatory. That could be troublesome, since the Commission twice previously has refused to modify pipeline scheduling practices, most recently after finding that, to the extent generators rely on interruptible transportation of their natural gas fuel, "changing the intra-day nomination rules would not constitute an improvement in gas-electric coordination."27

Should FERC find the current gas day or other pipeline scheduling terms unlawful, section 5 of the NGA would require it then also to determine that its revisions to those practices would be just and reasonable and non-discriminatory.28 FERC purported to make such a finding in the NOPR, but only with respect to one class of shippers: "improvements in the coordination of the electric and natural gas nomination and scheduling practices could provide greater opportunities for gas-fired generators to obtain needed natural gas supplies and for pipelines to plan for their expected demands."29 To survive judicial review, should FERC adopt the revised practices it has proposed, the Commission likely would need to expand on that claim, and identify evidence in the record to support it.

In particular, FERC would need to confront evidence of the costs related to adopting a pre-dawn start of the gas day30 and provide defensible findings that the benefits of the new rules would justify those costs. In so doing, FERC would need to be mindful of the recent decision in Illinois Commerce Commission v. FERC, where the court admonished the Commission that "even the modest goal of rough commensurability [between cost causation and cost responsibility] requires some effort by the Commission ... to quantify the benefits."31 In any final rule, therefore, a bare assertion like the NOPR's claim that "[o]n balance ... the overall benefits to both industries of moving the Gas Day earlier so that the morning ramp period for gas-fired generators and other gas consumers is included in a single Gas Day outweigh the potential for increased costs,"32 is unlikely to be sufficient. Instead, to justify adopting its proposal, FERC seemingly would have to quantify (at least roughly) the costs and benefits of its new scheduling protocol, or explain why quantification is impractical or unhelpful.

In the event that FERC adopts an earlier start of the gas day or other new rules that entail higher costs for pipelines, it also will face the question of how responsibility for those costs should be allocated among pipelines' customers. Opponents of FERC's action almost certainly will argue that, because (as they are likely to see it) the Commission is modifying pipeline scheduling terms for the primary benefit of electric generators, then generators alone should bear the associated cost of the prescribed changes. While this issue has emotional weight as a question of fairness, it is likely that FERC will decline to address it in any final rule, and instead will defer it to pipelines' individual rate cases.

FERC's desire to improve operational coordination between the natural gas and electricity industries is both understandable and laudable, and the NOPR may be a well-considered step in that direction. However, FERC has provided relatively little legal or factual foundation for the NOPR's proposals. Perhaps the Commission was hopeful that NAESB's stakeholder process would produce an alternative set of reforms with consensus support across both industries. However, it now appears that the rulemaking effort will be contested, particularly concerning the proposed change to the start of the gas day. If so, FERC has considerable work to do to create a legally defensible final rule, should it decide to adopt its proposal.

Footnotes

1. Coordination of the Scheduling Processes of Interstate Natural Gas Pipelines and Public Utilities, Notice of Proposed Rulemaking, IV FERC Stats. & Regs., Proposed Regs ¶ 32,700 (2014) ("NOPR").

2. NOPR at P 8.

3. Electric Power Annual 2010, U.S. Energy Information Administration, Table 1.1.A (Nov. 2011), www.eia.gov/electricity/annual/archive/03482010.pdf.

4. Electric Power Annual 2013, U.S. Energy Information Administration, Table 4.3 (Dec. 2013), www.eia.gov/electricity/annual/pdf/epa.pdf.

5. Annual Energy Outlook 2014 Early Release Overview, U.S. Energy Information Administration, 14 (Dec. 2013) http://www.eia.gov/forecasts/aeo/er/pdf/0383er(2014).pdf. See, e.g., 2013 Special Reliability Assessment: Accommodating an Increased Dependence on Natural Gas for Electric Power; Phase II: A Vulnerability and Scenario Assessment for the North American Bulk Power System, North American Electric Reliability Corporation, 1 (May 2013) ("Gas use is expected to continue to increase in the future, both in absolute terms and as a share of total power generation and capacity."), http://www.nerc.com/pa/RAPA/ra/Reliability%20Assessments%20DL/NERC_PhaseII_FINAL.pdf.

6. Letter from Pat Wood, III, Chairman, Fed. Energy Regulatory Comm'n, to Michael Desselle, Chairman and CEO, N. Am. Energy Standards Bd., at 1 (Dec. 14, 2004) (available at http://www.naesblist.org/pdf/geic020105wt.pdf).

7. See Standards for Business Practices for Public Utilities, Order No. 698, 2006—2007 FERC Stats. & Regs., Regs. Preambles ¶ 31,251, order on clarification and reh'g, Order No. 698-A, 121 FERC ¶ 61,264 (2007). FERC subsequently incorporated into its regulations Version 2.0 of certain business practice standards adopted by NAESB's WGQ, including revisions of some of the same standards regarding gas-electric coordination. See Standards for Business Practices of Interstate Natural Gas Pipelines, Order No. 587-V, FERC Stats. & Regs., Regs. Preambles 2008-2013 ¶ 31,332 (2012). A full citation to the Order No. 587 series can be found at note 21, infra.

8. Order No. 698 at P. 68.

9. See Standards for Business Practices of Interstate Natural Gas Pipelines, Notice of Proposed Rulemaking, IV FERC Stats. & Regs., Proposed Regs. ¶ 32,645 (2009); Order No. 587-U, FERC Stats. & Regs., Regs. Preambles 2008-2013 ¶ 31,307 (2010).

10. See Communication of Operational Information Between Natural Gas Pipelines and Transmission Operators, Order No. 787, FERC Stats. & Regs., Regs. Preambles 2008-2013 ¶ 31,350 (2013), order on reh'g, Order No. 787-A, 147 FERC ¶ 61,228 (2014).

11. NAESB's board decided when it convened the stakeholder process to respond to the NOPR that a consensus alternative would require the support of at least 67 percent of the companies voting (with one vote per company in each industry segment for which it qualifies under NAESB's segment definitions) in each of the Wholesale Gas Quadrant ("WGQ") and the Wholesale Electric Quadrant ("WEQ"), and at least 40 percent of the votes of each segment within each quadrant.

12. Report of the North American Energy Standards Board, Docket No. RM14-2-000, at 10-11 (June 18, 2014) ("NAESB Report").

13. Id.

14. Id. at 9.

15. See, e.g., NOPR at PP 7 (stating FERC proposes to modify the scheduling protocols of interstate gas pipelines and then conform those of organized wholesale electricity markets because the industries' "differing timelines can cause significant price and/or supply risk for gas-fired generators"), 50 (discussing the same risks for electric generators); see also infra n.26.

16. See Associated Gas Distribs. v. FERC, 824 F.2d 981, 1016, 1018 (D.C. Cir. 1987).

17. Transcon. Gas Pipe Line Corp. v. FERC, 518 F.3d 916, 919 (D.C. Cir. 2008) (quoting Nat'l Ass'n of Clean Air Agencies v. EPA, 489 F.3d 1221, 1228 (D.C. Cir. 2007)).

18. Natural Gas Act, section 4(a) & (b), 15 U.S.C. § 717c(a) & (b).

19. See, e.g., Consol. Edison Co. of New York, Inc. v. FERC, 165 F.3d 992, 1001 (D.C. Cir 1999).

20. Id.

21. Standards for Business Practices of Interstate Natural Gas Pipelines, Order No. 587, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,038, reh'g denied, Order No. 587-A, 77 FERC 61,061 (1996), final rule, Order No. 587-B, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,045, final rule, Order No. 587-C, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,050, reh'g denied, Order No. 587-D, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,052, reh'g denied, Order No. 587-E, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,053, notice of proposed rulemaking, Order No. 587-F, 81 FERC 61,181 (1997), final rule, Order No. 587-G, FERC Stats. & Regs., Regs. Preambles 1996 –2000 31,062, final rule, Order No. 587-H, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,063, order on reh'g, Order No. 587-I, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,067 (1998), order on reh'g, Order No. 587-J, 81 FERC 61,181, final rule, Order No. 587-K, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,072 (1999), final rule, Order No. 587-L, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,100, final rule, Order No. 587-M, FERC Stats. & Regs., Regs. Preambles 1996–2000 31,114 (2000), final rule, Order No. 587-N, FERC Stats. & Regs., Regs. Preambles 2001–2005 31,125, final rule, Order No. 587-O, FERC Stats. & Regs., Regs. Preambles 2001–2005 31,129, reh'g denied, Order No. 587-P, 99 FERC 61,348, order on reh'g, Order No. 587-Q, 100 FERC 61,105 (2002), final rule, Order No. 587-R, FERC Stats. & Regs., Regs. Preambles 2001–2005 31,141 (2003), final rule, Order No. 587-S, FERC Stats. & Regs., Regs. Preambles 2001–2005 31,179 (2005), final rule, Order No. 587-T, FERC Stats. & Regs., Regs. Preambles 2008–2013 31,289 (2009), final rule, Order No. 587-U, FERC Stats. & Regs., Regs. Preambles 2008–2013 31,307 (2010), final rule, Order No. 587-V, FERC Stats. & Regs., Regs. Preambles 2008–2013 31,332 (2012).

22. Order No. 587 at 30,059.

23. Order No. 587 at 30,060.

24. Order No. 587 at 30,055.

25. See, e.g., Atl. City Elec. Co. v. FERC, 295 F.3d 1, 10 (D.C. Cir. 2002) (under the analogous provision of the Federal Power Act, "[i]n order to make any change in an existing rate or practice, FERC must first prove that the existing rates or practices are 'unjust, unreasonable, unduly discriminatory or preferential.'" (quoting 16 U.S.C. § 824e(a))); see also Am. Gas Ass'n v. FERC, 593 F.3d 14, 16 (D.C. Cir. 2010) (to change a pipeline's tariff under section 5 of the Natural Gas Act, "FERC or the complaining customer has the burden of showing the existing rate or practice is unjust or unreasonable and that the rate proposed is just and reasonable.").

26. See, e.g., NOPR at PP 5 ("recent developments in electricity markets signal that changes to the gas nomination schedule may be needed . . . [and show] the crucial interrelationship between natural gas pipelines and electric transmission operators and underscore the need for improvements in the coordination of natural gas and electric markets."), 7 ("These differing timelines can cause significant price and/or supply risk for gas-fired generators . . . ."), 28 ("improvements in the coordination of the electric and natural gas nomination and scheduling practices could provide greater opportunities for gas-fired generators to obtain needed natural gas supplies and for pipelines to plan for their expected demands. Providing these opportunities will be beneficial for both industries in helping to ensure reliable and efficient operations."), 30 ("Some natural gas-fired generators have sought to ensure reliability by subscribing to firm pipeline service, but have found that the standard, nationwide nomination opportunities for interstate natural gas pipeline transportation service may not provide them with sufficient opportunities to reschedule gas supplies for unanticipated weather events after the Timely Nomination Cycle."), 33 ("the Commission is concerned that existing interstate natural gas pipeline scheduling practices and the application of some of the Commission's regulations by pipelines may not provide sufficient flexibility to meet the needs of natural gas-fired generators, and could be limiting the efficient use of existing pipeline infrastructure, thereby making less capacity available to shippers (including natural gas-fired generators)."), 33 (The current scheduling practices "may not be sufficient to meet the needs of gas-fired generators to obtain capacity to deliver additional natural gas supplies during the electric operating day."), 34 ("We recognize that making modifications to the nationwide natural gas scheduling system and instituting the other reforms proposed in these three proceedings will not, and cannot, resolve all of the concerns that may arise with increased utilization of natural gas by electric generators.").

27. Order No. 587-U at P 27.

28. See, e.g., Tenneco Gas Co. v. FERC, 969 F.2d 1187, 1199-1201 (D.C. Cir. 1992) (remanding for further explanation a regulation in which FERC failed to provide adequate justification of its statutory authority and, if authorized, reasoning).

29. NOPR at P 28.

30. See, e.g., NOPR at P 40 ("The Commission recognizes that moving the start of the Gas Day to 4:00 a.m. CCT may result in increased costs to mitigate potential safety issues associated with employees conducting manual operations in the dark.").

31. Ill. Commerce Comm'n v. FERC, No. 13-1674, et al., 2014 U.S. App. LEXIS 11961, at * 21 (7th Cir. June 25, 2014).

32. NOPR at P 40.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.