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Fracking and Alternative Energy

Troutman Sanders LLP: FERC Reaffirms Reservation Charge Crediting Policy; Orders Changes to Gas Pipeline Tariff’s Crediting, Force Majeure and Interruption of Service Provisions

On October 15, 2015, FERC issued an order to Algonquin Gas Transmission, LLC rejecting claims that FERC had failed to make specific factual findings to support its conclusion that the existing absence of reservation charge crediting provisions in Algonquin’s tariff was unjust and unreasonable, and rejecting the claim that FERC had improperly shifted the burden of proof to Algonquin in this Natural Gas Act (“NGA”) Section 5 proceeding. Consequently, FERC ordered Algonquin to file tariff provisions conforming to FERC’s reservation charge crediting policy. FERC also ordered Algonquin to remove from its tariff’s definition of force majeure a reference to outages caused by binding governmental orders, and to remove a reference to “curtailing” service for routine maintenance.

FERC’s crediting policy, established in individual adjudications rather than by rulemaking, requires a pipeline to provide partial reservation charge credits for outages of primary firm service during force majeure events, thereby sharing the burden/financial impacts of an interruption to firm service for which neither the pipeline nor the shipper is responsible. FERC requires full reservation charge credits to be provided to shippers during non-force majeure outages of firm primary service. FERC defines force majeure outages as events that are both unexpected and uncontrollable. FERC permits partial credits during force majeure outages to be given to shippers by one of two methods: (1) the No-Profit Method, under which the pipeline gives credits equal to its return on equity and income taxes starting on Day 1 of the force majeure outage; and (2) the Safe Harbor Method, under which the pipeline provides full credits to shippers after a short grace when no credit is due (i.e., 10 days or less). In 2007, in North Baja Pipeline, LLC v. FERC, the D.C. Circuit affirmed FERC orders requiring a pipeline to modify its tariff to conform to FERC’s reservation charge crediting policies.

In its October 15 Order, FERC explained that because its reservation charge crediting policies were developed in individual adjudications rather than in a rulemaking proceeding, FERC has the burden in an NGA Section 5 complaint case to make factual findings specific to the pipeline at issue demonstrating that its present tariff is, with respect to reservation charges, unjust and unreasonable, and that requiring adoption of tariff provisions embodying the Commission’s reservation charge crediting policies is just and reasonable. For the same reason, a pipeline is free to present facts demonstrating that in its particular situation its tariff provisions, while non-conforming, are just and reasonable and should not reflect FERC’s crediting policy.

In the October 15 Order, FERC rejected Algonquin’s claim that FERC had failed to make any findings of fact specific to Algonquin that would support holding the absence of reservation charge crediting provisions in Algonquin’s tariff to be unjust and unreasonable. FERC held that, to the contrary, it had found, specifically, that Algonquin’s tariff employs a straight-fixed-variable (“SFV”) rate methodology under which all of Algonquin’s fixed costs are recovered from its firm shippers through the reservation charges they pay and, hence, the absence of any reservation charge crediting for outages places 100% of the risk/financial burden of outages on firm shippers and no portion of such risk/burden on the pipeline. For the reasons already enumerated in prior proceedings, FERC held that placing 100% of the risk/burden of force majeure outages on firm shippers, and none on Algonquin, was unjust and unreasonable. With respect to non-force majeure outages, FERC pointed to its specific factual findings that Algonquin’s firm shippers included specific major LDCs serving residential consumers, electric generators, and other high priority uses, that these shippers pay substantial reservations charges for reliable firm service, and that the policy of full reservation charge crediting with respect to outages that are foreseeable or controllable should, on these facts, be applied to Algonquin to further FERC’s concern that non-force majeure interruptions of primary firm service be kept to an absolute minimum to avoid a serious risk of public harm, and FERC was not required to make further factual findings that Algonquin was mismanaging its system or experiencing a disproportionate number of service disruptions. FERC further held that the foregoing substantial evidence satisfied its burden under NGA Section 205 of making a prima facie showing that Algonquin’s current tariff provisions were unjust and unreasonable, and FERC’s invitation to Algonquin to present evidence of any special facts or circumstances known to it that would justify such absence had not shifted FERC’s Section 205 initial burden of proof and ultimate burden of persuasion from the Commission to Algonquin.

With respect to showing such special circumstances, Algonquin pointed out that its present relevant tariff provisions were the product of a 1994 general rate case settlement, were unchanged by a 1999 settlement, and no participant had shown, or even alleged, that relevant circumstances had changed in a way that would warrant departure from the settlement. FERC found that “[n]either of those settlements contains any provision either restricting the shippers’ rights under NGA Section 5 to seek a change in Algonquin’s tariff regarding reservation charge crediting today or suggesting that the settlement rates were in any way premised upon a continuation of the existing omission of any reservation charge crediting provisions.”

Algonquin also asserted that it had entered into long-term negotiated service agreements where the parties’ expectations were that such agreements did not provide for reservation charge crediting. Algonquin further argued that imposition of such crediting would impose an undue burden on non-negotiated rate shippers, because Algonquin would have to allocate the costs of such credits solely to the non-negotiated rate shippers. FERC held that it honors negotiated service agreements reasonably interpreted as providing for no or different reservation charge crediting than its policies, but Algonquin had not produced copies of any such agreements. With respect to Algonquin’s claim of an undue burden on non-negotiated rate firm shippers, FERC stated that its policy on negotiated rates does not allow the cost shifting to recourse customers that Algonquin foresees.

FERC also noted that, consistent with the fact that it proceeds by case-by-case adjudication in the area of reservation charge crediting, it had given Algonquin the opportunity to present evidence of, among other things, the pattern of outages on Algonquin’s system and to explain why FERC’s reservation charge crediting policies should not be applied. FERC noted that Algonquin chose not to produce any evidence of outages patterns, either to show that such outages are rare or non-existent or to show that outages are significant but unavoidable. FERC further noted that pipelines are free to show that their rates would not cover the cost of complying with FERC’s reservation charge crediting policies, but that no such showing was attempted here.
FERC found that the definition of force majeure events in Algonquin’s tariff included “the binding order of any court or governmental authority which has been resisted in good faith by all reasonable legal means.” FERC noted that under its precedents only certain government-related outages qualify as force majeure events. Those are outages resulting from one-time, non-recurring government requirements that (1) are not part of a pipeline’s routine, periodic maintenance programs and (2) provide the pipeline little discretion as to when the outage occurs. The Commission ordered Algonquin to modify the definition of a force majeure event so that it would not encompass “outages necessitated by compliance with government standards concerning the regular, periodic maintenance activities a pipeline must perform in the ordinary course of business to ensure the safe operation of the pipeline.”

FERC also found that a section of Algonquin’s tariff referred to a “right to curtail…service…to perform repair, maintenance or improvements.” FERC noted that is uses “curtail” to refer to pipeline orders terminating already scheduled service due to an emergency situation or unexpected capacity loss. Because FERC found that such already scheduled service should not be terminated for routine repair or maintenance or planned improvements, FERC directed Algonquin to remove the reference to “curtail” from this section of its tariff and rejected Algonquin’s arguments that FERC had failed to point to evidence supporting a conclusion that the section was unjust and unreasonable.

FERC’s order is available here.

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