United States: FERC Rejects Interstate Pipeline's Reliance On " Memphis Clause" In Transportation Service Agreement And Pipeline's Attempt To Remove Overrun Transportation Service From Its Tariff, While Reaffirming FERC Policy That Overrun Service...

On November 19, 2015, FERC issued an order granting rehearing of its prior June 30, 2015 order accepting and suspending tariff records, subject to refund, filed by Alliance Pipeline L.P. ("Alliance"). In the prior order, FERC had set for hearing, among other issues, Alliance's proposal to eliminate Authorized Overrun Service ("AOS service") from its Rate Schedule FT-1. In the rehearing order, FERC held that Alliance could not eliminate AOS service from its Rate Schedule FT-1, because it had entered into negotiated agreements that set specific, negotiated rates for AOS service, and hence removal of AOS service from its tariff would violate these negotiated transportation service agreements without justification. FERC held that the Memphis Clause in each of the negotiated transportation service agreements would permit Alliance to modify tariff provisions of general applicability to all shippers where the Commission determined such modification to be just and reasonable, but did not support modifying, without some further justification, rates or services specifically negotiated over and agreed upon in the negotiated transportation service agreements. On the other hand, FERC directed Alliance to eliminate from the GT&C section of its tariff provisions providing that AOS service would have priority over IT service. FERC held that these provisions were both (1) contrary to its policy that overrun service and IT service should have equal priority and (2) not the subject of specific negotiation and agreement in the negotiated transportation service agreements.

Presently, Alliance's tariff provides certain shippers under Rate Schedule FT-1 with access to both firm capacity up to their contractual maximum daily quantity, plus all of the additional capacity that Alliance can make available on a best efforts, or interruptible, basis, with such additional capacity provided as AOS service. The tariff sets a maximum recourse rate for AOS service of $0.5283/Dth, the same as the maximum recourse rate for IT service. At the time Alliance filed its May 29, 2015 NGA Section 4 tariff filing giving rise to this proceeding, the GT&C section of its tariff also provided that such AOS service would have priority over IT service. Alliance had also entered into several negotiated transportation service agreements, with unexpired terms, under which Alliance had agreed to provide AOS service to specific shippers at either rates below the tariff maximum rate for AOS service or at a rate of $0.00.

In its May 2015 tariff filing, Alliance proposed to remove all references to AOS service from its FT-1 Rate Schedule and to remove the AOS charges from its Statement of Recourse Rates. The Commission found that if such were effected, firm shippers on Alliance's system seeking capacity above their contractual maximum daily quantity would be required to use IT service, were it available, and pay the recourse rate for IT service. Alliance provided numerous grounds in support of its proposed elimination of AOS service. First, Alliance noted that the GT&C provisions providing that AOS service took priority over IT service were contrary to Commission policy holding that overrun and IT services are both interruptible services and should have comparable priority. Second, Alliance stated that elimination of OAS service did not violate its negotiated TSAs. In this regard, Alliance noted that each negotiated TSA contained a Memphis Clause, which stated that:

Transporter shall perform and Shipper shall receive Firm Transportation Service in accordance with the provisions of Transporter's effective Rate Schedule FT-1 and the applicable [GT&C] of Transporter's FERC Gas Tariff on file with the [Commission] as the same may be amended or superseded in accordance with the Rules and Regulations of the Commission.

According to Alliance, the Memphis Clauses showed that revisions to the Alliance tariff were contemplated by the negotiated TSAs, and the elimination of AOS service from the Alliance tariff was, in fact, contractually permissible. Alliance further maintained that Alliance and its shippers did not negotiate terms and conditions as part of their negotiated contracts, but merely filled in new rates. More specifically, Alliance maintained that the pipeline and its shippers had not negotiated and executed non-conforming agreements for AOS service; rather, the terms for AOS service were embodied in the tariff; the tariff governed such service, and Alliance was contractually free to alter or eliminate AOS service from the tariff. Alliance also dismissed the notion that the presence of a negotiated rate for AOS service in each negotiated contract – a rate lower than the maximum rate for AOS service in the tariff and hence a rate that was the subject of negotiation and agreement – could provide a basis for requiring Alliance to continue to provide AOS service. Alliance contended that the rate language in the negotiated agreements did not create a perpetual right of shippers to receive AOS service, but only addressed the rate to be charged in the event AOS service was available. Alliance also claimed that its shippers were attempting to avoid the consequences of not having signed non-conforming agreements that specifically addressed AOS service. Alliance also reiterated that maintaining AOS service with a higher priority than IT service contravened established Commission policy.

In its November 19, 2015 order on rehearing, the Commission noted that it had a "longstanding policy" providing that "although authorized overrun service is associated with a firm service contract, nevertheless, it is still an interruptible service" and should be offered with "the same scheduling and curtailment priority" as interruptible service. The Commission further found that the priority accorded OAS service was not the subject of negotiation in Alliance's negotiated contracts and, hence, the GT&C tariff provisions granting a priority to AOS service should be eliminated, and could be eliminated with violating the negotiated TSAs.

With respect to AOS service itself, however, the Commission held that Alliance's negotiated rate agreements with various shippers required Alliance to provide AOS service to those shippers at the agreed-upon negotiated rates for the remaining terms of those contracts. The Commission noted that the only "free" AOS service that Alliance provides is the AOS service it provides under the negotiated rate agreements, and that Alliance's proposal to remove OAS service could "only mean that Alliance proposes to terminate its contractual obligations to provide authorized overrun service at the AOS negotiated rates in its negotiated rate agreements."

The Commission also rejected Alliance's claim that the Memphis Clause in each negotiated contract authorized Alliance to propose, and the Commission to accept, elimination of the AOS service. The Commission stated that it has held that a Memphis clause authorizes a pipeline to make unilateral NGA Section 4 filings with the Commission proposing changes in the "generally applicable maximum and minimum rates and other terms and conditions set forth in the tariff," and, if the Commission finds such changes to be just and reasonable, the Memphis clause automatically incorporates them into the shippers' service agreements. However, the Commission has also held that "Memphis clauses do not authorize the pipeline to make unilateral changes in the individually negotiated provisions of a particular service agreement, such as a customer's discounted rate or its contract demand." The Commission noted that each negotiated agreement had a negotiated rate for AOS service and such negotiated rate was to remain in effect for the entire primary contract term and any extension thereof. In one or more of the negotiated agreements the parties also "agree[d] not to take any action to frustrate the continued ability of such rates to be charged for the transportation service under this Firm Transportation Agreement."

The Commission further noted that "the Commission traditionally considers authorized overrun and interruptible service as identical," and that in the circumstances of this case, "the only substantive purpose served by" the proposal to eliminate AOS service was "to nullify" the pipeline's "contractually agreed-upon negotiated AOS rates." Such nullification, the Commission held, would be contrary to the Commission's holding in a prior case that "a Memphis clause does not ordinarily authorize a pipeline to unilaterally modify a contractually-agreed upon" rate. The Commission concluded that the proposal to remove OAS service from the tariff was not in accordance with the Commission's rules and regulations, was not just and reasonable "because it would result in modification of individually negotiated rates without justification," and should be rejected.

The Commission's order is available here.

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