United States: FERC Concludes That Buy/Sell Transactions Occurring Pursuant To Supply AMAs, Similar To Those Under Demand AMAs, Are Not Subject To Order No. 636's Prohibition On Buy/Sell Transactions

On October 15, 2015, in response to a request for declaratory order filed by Rice Energy Marketing, LLC, FERC issued an order holding that buy/sell transactions in which the releasing shipper in a supply Asset Management Agreement ("AMA") sells its natural gas to its asset manager, the asset manager transports the gas over the released capacity, and then resells the natural gas to the releasing shipper are not buy/sell transactions prohibited by Order No. 636.

In Order No. 636, FERC adopted its capacity release program as part of the restructuring of natural gas pipelines required by that order. FERC also adopted several safeguards to ensure that the capacity release program's requirements – particularly that all such releases be conducted through the pipeline and so be transparent – were not evaded. FERC retained its shipper must have title requirement. Further, FERC prohibited shippers from engaging in buy/sell arrangements, which it described as transactions in which a shipper/capacity holder would buy gas in a production area from an end-user or merchant designated by the end-user, ship the gas on its own firm capacity, and resell the gas to the end-user at a retail delivery point. FERC found that permitting such buy/sell arrangements would create a major loophole and invite circumvention of the capacity release mechanisms created in Order No. 636.

However, in its subsequent Order No. 712, FERC sought to improve the efficiency of the capacity release market by, among other things, revising its policies to accommodate AMAs, under which a capacity holder releases some or all of its pipeline capacity to an asset manager. FERC exempted AMAs from the capacity release program's competitive bidding requirements and from the prohibition on tying a capacity release to any extraneous conditions. Order No. 712 approved two types of AMAs – delivery AMAs, where an entity that uses natural gas, such as an LDC, and holds pipeline capacity for purposes of transporting gas to its facilities, releases such capacity to an asset manager, and supply AMAs, where an entity that produces or sells natural gas, and holds pipeline capacity for purposes of transporting gas to markets, release such capacity to an asset manager.

Order No. 712 exempted both delivery AMAs and supply AMAs from competitive bidding requirements and the prohibition on tying. In response to comments stating that some users of natural gas preferred not to assign their natural gas purchase contracts to an asset manager, but instead desired to safeguard such competitively sensitive information by purchasing gas themselves, selling it to their asset manager who would transport the gas on released capacity, and resell the gas to the entity at its facility or city gate, FERC also granted in Order No. 712 "an exemption from the buy/sell prohibition for AMAs that qualify for the exemptions from bidding and tying, but only for volumes of gas delivered to the releasing shipper." FERC held that this exemption would "permit shippers to hire an asset manager solely for purposes of managing their interstate pipeline capacity, while they continue to purchase their gas supplies from a different marketer under contracts which they do not assign to the asset manager."

In its petition for declaratory order, Rice requested that FERC clarify that Order No. 712 granted an exemption from the prohibition on buy/sell arrangements not only to delivery AMAs but also to supply AMAs. In its October 15 order, FERC found that Order No. 712 only discussed and granted an exemption from the buy/sell prohibition with respect to delivery AMAs. However, FERC further found that Order No. 712's rationale for exempting delivery AMAs from the prohibition on buy/sell transactions applied equally to supply AMAs. For several reasons discussed in the October 15 order, FERC found that the buy/sell transactions occurring pursuant to a supply AMA do not represent an evasion of the capacity release rules. FERC therefore held that the buy/sell prohibition is inapplicable to volumes of natural gas that the asset manager in a supply AMA purchases from its releasing shipper, transports using released capacity, and then resells to the releasing shipper.

To view the order click here.

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