On October 15 2015 the Federal Energy Regulatory Commission (FERC) clarified that the exemption from the buy/sell prohibition for natural gas asset management agreements set forth in Order 712 also applies to supply-side asset management agreements.(1) In a helpful clarification, FERC held that there is no prohibition on buy/sell transactions in which the releasing shipper in a supply-side asset management agreement sells its natural gas to its asset manager, which transports the gas over the released capacity and then resells it to the releasing shipper.
Under an asset management agreement, a capacity holder can release pipeline capacity to an asset manager without subjecting the capacity to FERC's competitive bidding requirements, so long as the asset management agreement provides for a commodity delivery obligation (in the case of a delivery-side asset management agreement) or commodity purchase obligation (in the case of a supply-side asset management agreement).(2) When the capacity is not needed for the obligation to the releasing shipper, the asset manager can release it or use it to make sales to third parties, effectively allowing the asset manager to optimise pipeline capacity and thereby make more efficient use of natural gas transportation assets.
FERC prohibited so-called buy/sell transactions as part of the restructuring of natural gas pipelines required by Order 636.(3) When implementing the new capacity release programme at that time, FERC prohibited buy/sell arrangements prospectively.(4) In 2008 FERC issued Order 712, which exempted buy/sell transactions entered into in the context of an asset management agreement from the general prohibition, but only regarding volumes of gas "delivered to" the releasing shipper.(5)
On June 29 2015 Rice Energy Marketing LLC filed a petition for declaratory order at FERC requesting that FERC find that the exemption from the prohibition on buy/sell transactions for asset management agreements applies equally to supply-side asset management agreements as to delivery-side asset management agreements. The petition pointed to FERC's language in Order 712, which referred explicitly to supply-side asset management agreements being the "mirror image" of delivery-side asset management agreements.(6) Rice argued that the exemption of asset management agreements from the buy/sell prohibition should apply to all asset management agreements, not only delivery-side asset management agreements.
In its October 15 order, FERC confirmed that Order 712 exempted delivery-side asset management agreements from the buy/sell prohibition because the exempted transactions did not constitute the sort of buy/sell transactions prohibited by Order 636. FERC then clarified that the buy/sell prohibition similarly does not apply to volumes of natural gas which the asset manager in a supply-side asset management agreement purchases from its releasing shipper and then resells to that shipper. FERC reasoned that evading the requirements of the capacity release regulations was not at issue here, because:
"the releasing shipper is not releasing unneeded capacity, but capacity that will continue to be used for the same purpose for which the releasing shipper in the supply [asset management agreement] originally purchased it – to transport its natural gas to market."
The October 15 order clarifies that while these transactions in supply-side asset management agreements may be buy/sell arrangements, they are not prohibited buy/sell arrangements.
FERC's clarification is important for both holders of interstate capacity and asset managers, and should provide more flexibility for parties to structure their asset management agreements and associated commodity transactions. For example, producers and other supply-side shippers may hire asset managers for the purpose of managing their interstate pipeline capacity, while they continue to sell gas at downstream points under contracts which they do not wish to assign to the asset manager. The October 15 order assures market participants that a releasing shipper may buy back gas from asset managers at the downstream end of their capacity to effectuate such sales without violating FERC's buy/sell prohibition.
For further information on this topic please contact Joseph Williams or Jeffrey Allen Sherman at Norton Rose Fulbright's Washington office by telephone (+1 202 662 0200) or email (firstname.lastname@example.org or email@example.com). Alternatively, please contact Peggy Heeg at Norton Rose Fulbright's Houston office by telephone (+1 713 651 5151) or email (firstname.lastname@example.org). The Norton Rose Fulbright website is accessible at www.nortonrosefulbright.com.
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