The United States Court of Appeals for the District of Columbia Circuit recently upheld two FERC orders that permanently lift cost-based price ceilings on natural gas shippers' releases of unused firm pipeline transportation capacity into the short-term market (one year or less), while retaining price ceilings on sales by natural gas pipelines.
In Orders No. 712 and No 712-A, issued in 2008, FERC determined that, unlike shippers releasing capacity, pipelines could potentially exercise market power and might have an incentive to hamper construction of new transportation capacity if allowed to charge market-based rates for short-term sales. To alleviate this concern while lifting the price ceilings for capacity sales by shippers, FERC retained the ceilings for capacity sales by pipelines. The Interstate Natural Gas Association of America (INGAA) petitioned for review of these orders, claiming that pipelines' construction decisions were not influenced by prices in the short-term market. They also argued that Orders No. 712 and 712-A provide shippers with an unfair competitive advantage over pipelines by creating a bifurcated gas transportation market in which the capped pipeline prices will artificially inflate prices in the uncapped market.
The D.C. Circuit rejected the INGAA's arguments. The court found that INGAA did not adduce evidence contradicting FERC's concerns, supported by economic theory, that if pipelines find that maintaining scarce pipeline capacity increases their profits, they may be inclined to withhold construction of long-term capacity, since such capacity could result in reduced profitability. With respect to the question of artificially inflated prices in the uncapped market, the D.C. Circuit found that, in balancing the risks of market distortions against the possibility of market power wielded by the pipelines in the short-term market, FERC made a reasonable determination that protecting against undue market power is a priority. Finally, the D.C. Circuit found FERC's decision to be consistent with the Natural Gas Act's fundamental policy of protecting natural gas customers from the monopoly powers of pipelines.