On June 19, 2008, the Federal Energy Regulatory Commission (FERC) approved a final rule under Docket No. RM08-1-000 (Final Rule) that changes the way holders of capacity on interstate natural gas pipelines are permitted to release that capacity. The Final Rule permanently removes the rate cap on capacity release transactions of one year or less, and relaxes FERC’s prohibition on tying and bidding requirements for certain capacity releases when an asset management arrangement is used.

Removal of Maximum Rate Ceiling for Short-Term Capacity Release. While pipelines are able to sell their own capacity at prices exceeding the maximum tariff rate through negotiated rate transactions utilizing pricing mechanisms such as basis differentials, releasing shippers previously remained subject to the price ceiling contained in the pipeline’s tariffs. Under the Final Rule, shippers will be permitted to release their capacity at market-based rates that exceed the rate cap for releases of one year or less. Long-term capacity releases will remain subject to the rate cap. 

Facilitate Asset Management Arrangements (AMAs). A relatively new development in the natural gas industry, an AMA is a contractual arrangement whereby a shipper releases some or all of its capacity to an asset manager who agrees to manage gas supply and delivery arrangements, including transportation and storage capacity, on behalf of the shipper. The Final Rule implements two revisions to FERC’s capacity release policy and regulations to facilitate the use of AMAs. First, FERC previously prohibited tying arrangements; that is, FERC did not permit a releasing shipper to attach stipulations to a capacity release. As a result, a shipper could not enter an AMA under which it released its capacity to the asset manager and required the asset manager to take assignment of the releasing shipper’s various gas supply arrangements in addition to the released capacity. The final rule exempts AMAs from the prohibition on tying arrangements. 

Second, the Final Rule eliminates the competitive bidding requirement imposed under Section 284.8 of the Commission’s regulations for capacity releases made pursuant to AMAs of any duration. The Final Rule’s definition of AMAs reserves the tying and bidding exemptions for bona fide AMAs without undue limitations and relaxes the delivery and purchase obligations of the replacement shipper and includes supply side AMAs. 

 
Gas Inventory and Firm Storage Capacity. The Final Rule clarifies that FERC’s prohibition on tying does not apply to conditions associated with gas inventory held in storage for releases of firm storage capacity.  Releasing shippers are therefore permitted to include conditions in a release concerning the sale and/or repurchase of gas in storage inventory even outside the AMA context.

Retail Open Access. The Final Rule grants capacity releases made by local distribution companies under state-approved retail access programs the same blanket exemptions from the prohibition against tying and the bidding requirements as capacity releases made in the AMA context.

Liquefied Natural Gas (LNG) and Tying. The Commission declined to adopt an exemption from the prohibition on tying arrangements that would have permitted the linkage of throughput agreements and/or sales of regasifed LNG at the outlet of an LNG terminal with a prearranged capacity release on an interstate pipeline connected to the terminal, instead providing for adjudication on a case-by-case basis.  Commissioner Moeller dissented in part, arguing that a narrow exception would be appropriate in light of the unique position of LNG terminals in the interstate pipeline system.
 
Effective Date. The Final Rule will take effect 30 days after publication in the Federal Register.