A recent Federal Energy Regulatory Commission order demonstrates that the Commission continues to impose penalties for violations of well-established rules prohibiting activities such as "flipping" and the misclassification of natural gas-related contracts.

Introduction

On May 31, 2013, the Commission issued an order approving a settlement between the FERC Office of Enforcement and two subsidiaries of DTE Energy – DTE Gas Company and Washington 10 Storage Corporation.1 The order resolves an Enforcement investigation into capacity release flipping activities conducted by DTE Gas and the misclassification of interstate storage and park and loan ("PAL") contracts by Washington 10. The Commission found that these actions by DTE Gas and Washington 10 violate long-established FERC rules prohibiting flipping and the misclassification of interstate storage and PAL services. Under the settlement, DTE Gas agrees to pay a $15,000 civil penalty and implement compliance measures regarding capacity release transactions and Washington 10 agrees to pay a $725,000 civil penalty, a $2,508,227 disgorgement fee and implement compliance measures regarding the classification of interstate storage and PAL services.

Violations

DTE Gas owns and operates an intrastate natural gas pipeline system and is regulated primarily by the Michigan Public Service Commission. Washington 10 is an intrastate pipeline providing intrastate natural gas storage services and also is regulated by the Michigan PSC.

DTE Gas

The Commission found that DTE Gas violated FERC rules prohibiting capacity release flipping. Flipping is "the repeated short-term release of discounted rate capacity to two or more affiliated replacement shippers on an alternating monthly basis that avoids the competitive bidding requirements."2 The Commission determined that DTE Gas released interstate pipeline capacity to affiliates at a price less than the maximum rate without posting such releases for competitive bidding. Specifically, between September 2001 and March 2006, DTE Gas released 17,755,000 Dth of capacity to WPS Energy Services and its affiliates “at less than the maximum rate without offering the capacity for competitive bidding,” and that, between March 2001 and October 2002, DTE Gas released “approximately 10.96 million Dth of capacity on an alternating monthly basis at less than the maximum rate without making those releases available to competitive bidding with four other sets of affiliated customers.”3 Although DTE Gas did not profit from these violations, the Commission stated that the failure to post these releases prevented them from being offered to other potential replacement customers and represents a serious threat to market transparency.

Washington 10

The Commission found that Washington 10’s misclassification of certain natural gas-related contracts as intrastate rather than interstate violated several FERC regulations under the Natural Gas Act (“NGA”) and Natural Gas Policy Act (“NGPA”). Specifically, Washington 10 misclassified thirty-two firm transportation storage contracts as “intrastate” under Michigan PSC’s jurisdiction, rather than as “interstate” under FERC’s jurisdiction. As a result, Washington 10 charged eleven customers $2,508,227 in excess of the amount allowable under its FERC-approved Statement of Operating Conditions (“SOC”). Washington 10 also misclassified seventy-two PAL contracts as intrastate instead of interstate. As a result, Washington 10 “agreed to provide firm PAL service to sixty-eight interstate storage customers and misclassified four additional interruptible PAL service contracts as intrastate rather than interstate.”4 Although it did not earn unjust profits from the misclassification of these PAL contracts, Washington 10’s FERC-approved SOC only authorized it to provide interruptible PAL service to interstate storage customers. Furthermore, Washington 10’s misclassifications caused it to violate certain FERC reporting requirements.

Conclusion

As stated above, the Commission approved a settlement resolving this matter. Under the settlement, DTE Gas agreed to pay a $15,000 civil penalty, receive annual compliance training, adopt or maintain compliance procedures regarding capacity release transactions and submit semiannual compliance monitoring reports. Washington 10 agreed to pay a $725,000 civil penalty and a $2,508,227 disgorgement fee and to receive annual compliance training, adopt or maintain compliance procedures regarding FERC regulations under the NGA and NGPA and submit semiannual compliance monitoring reports.