Will landmark case on LNG quality and interchangeability chill imports?

Pipeline & Gas Journal, Sept, 2007 by Erik J.A. Swenson, Lisa M. Tonery, Tania S. Perez

The Federal Energy Regulatory Commission (FERC) issued a potentially precedent-setting decision last April with important implications for the U.S. natural gas industry and the future of LNG imports. In the AES Decision, called "AES Ocean Express vs. Florida Gas Transmission Co." the FERC refused to accept requests to compensate customers of an interstate natural gas pipeline--Florida Gas Transmission (FGT) and other downstream entities for any mitigation costs such entities may incur as a result of the receipt of LNG on the FGT system.

Compensation had been sought, not for natural gas that failed to meet interstate pipeline gas compositional standards, but for costs incurred in using LNG-derived natural gas that meets applicable standards for gas quality and interchangeability. While the FERC refused to compensate users of-on-spec LNG, it did allow FGT to adopt interchangeability standards that are more stringent than those interim standards adopted by the Natural Gas Clearinghouse's NGC White Paper and recommended by LNG importers.

FERC found imposition of the higher standards to be just and reasonable because gas meeting such standards would permit electric generation turbines on FGT's system to operate safely and in compliance with environmental standards without the need to modify the turbines.

Interchangeability Decision

The AES decision--the first decision by the FERC under its Interchangeability Policy Statement issued in June 2006--is intended to clarify the Commission's gas quality and interchangeability policy. Unfortunately, the only certainty seems to be the dissatisfaction on both ends of the pipeline. Upstream, LNG suppliers--such as BP Energy Co., Chevron U.S.A. Inc., ConocoPhillips Co., ExxonMobil Gas & Power Marketing Co., and Shell NC LNG, LLC--are seeking rehearing of the AES decision, claiming that the restrictive standards placed on regasified LNG "will prevent the importation of LNG from over two-thirds of the world's LNG plants into the Florida market?' They seek broader standards to encourage a wider range of LNG imports.

Downstream, electric generators, LDCs and other users claim the Commission erred in failing to approve a cost-recovery mechanism to allow them to recover expenses associated with remediation and repair that may be necessary to allow their equipment to utilize the gas delivered by FGT.

If the LNG suppliers claim that interchangeability standards more restrictive than the NGC White Paper will shut out supplies while the natural gas users assert that even FGT's strict standards are too relaxed to be fully compatible with existing natural gas infrastructure, there is unlikely to be any result fully satisfactory to all the stakeholders. The AES decision may raise more questions than it answers and may have the potential to create unnecessary costs, as suggested by the numerous requests for reheating that have been filed.

Notwithstanding the controversy, a primary lesson learned from the AES case is that answers provided by regulators are likely to be less satisfactory than compromises reached by stakeholders. Thus, stakeholders should consider now where their flexibility lies and what costs and risks they can best absorb if compromises are to be successful.

Background

The AES Ocean Express vs. Florida Gas Transmission Co. case arose in 2004 when AES Ocean Express (AES) proposed building a gas pipeline from an LNG-receiving terminal in the Bahamas into the Florida market, thus necessitating an intercoinnect with the FGT system. AES and FGT were unable to agree on the gas quality and interchangeability terms and conditions of the Interconnection Agreement. Consequently, AES filed a complaint with the Commission alleging that FGT had refused to allow the tie-in based on gas quality concerns and that FGT's "onerous" conditions were frustrating its plans to build an offshore pipeline to the southern Florida market.

FGT first complied with the Commission's directive to revise the gas quality and interchangeability provisions in its tariff, proposing new standards based on (i) the ability of turbine equipment used by Florida power generators to handle increases in regasified LNG; and (ii) the historical maximum and minimum Btu content in FGT's market area.

After various parties challenged FGT's proposed standards, the complaint was set for a hearing before an Administrative Law Judge (ALJ). Following completion of the hearing and the submission of several rounds of legal briefs, the ALJ issued an Initial Decision on April 11, 2006. The AES Decision is the Commission's review of the Initial Decision.

Prompted by the number of gas quality and interchangeability issues being raised on an ad hoe basis in complaint, certificate and tariff proceedings, in June 2006, the Commission issued its Policy Statement on Gas Quality and Interchangeability. The Policy Statement elaborates five principles by which FERC will address quality and interchangeability issues in the future:

First, only natural gas quality and interchangeability specifications contained in Commission-approved gas tariffs may be enforced.