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Certificated Natural Gas Storage Capacity Is Based on Science, Not Sales, FERC Rules

The Federal Energy Regulatory Commission (the Commission) issued an order on Thursday, March 19, 2015, refusing to allow the abandonment of certificated working gas capacity when the reason for the request was unrelated to the physical characteristics of the storage facility and unsupported by engineering or geological data.  The applicant had sought the abandonment authorization for the sole purpose of reducing its lease payments, which are largely based on the certificated working gas capacity of the facility.

The order, Tres Palacios Gas Storage LLC, 150 FERC ¶ 61,197 (2015), was issued following an  application by Tres Palacios Gas Storage LLC (Tres Palacios) for authorization to abandon a significant amount of its certificated working gas storage capacity in a salt dome storage facility in Matagorda and Wharton Counties, Texas.  Tres Palacios claimed that abandonment was justified because market conditions were such that it could not sell the capacity at rates that it considered acceptable.

In denying the application, the Commission ruled that Tres Palacios’s request was inconsistent with Commission policy, which requires specific facility parameters for each cavern, such as cushion gas capacity, working gas capacity and minimum pressures, and was inconsistent with Tres Palacios’s certificate authority, which authorizes specific parameters for each cavern.  In addition, the Commission explained that no geological or engineering data was submitted to support the change.  The order reaffirmed that certificated capacity is based on the physical attributes of a facility and that certificated working gas capacity is “unrelated to the amount of working gas capacity the storage company is able to sell.”

Karol Lyn Newman and Jessica Bayles represented the lessor, Underground Services Markham, LLC, in the proceeding before the Commission.




CFTC Finalizes Exception for Swaps with Utility Special Entities

The Commodity Futures Trading Commission (CFTC) last week released a final rule excluding certain electricity and natural gas swaps with governmental agencies and municipalities from the lower de minimis threshold for swaps with special entities.  The rule makes permanent currently existing no-action relief previously issued by CFTC Staff.  The final rule is the result of a petition filed by advocates for public energy companies claiming that subjecting swap transactions with governmental entities to a lower de minimis threshold would reduce the number of available counterparties, raise market liquidity concerns and make it more difficult for public energy companies to mitigate risk.  To address these concerns the CFTC will allow certain swaps with special entities to be counted as regular swaps for purposes of swap dealer registration.

Under the Commodity Exchange Act and the CFTC’s regulations, an entity is exempt from registration as a swap dealer if the aggregate notional value of the swaps it entered into during the preceding 12 month period does not exceed the de minimis threshold of $3 billion (subject to a phase-in level of $8 billion).  However, for swaps with special entities—federal or state agencies, municipalities, employee benefits plans, governmental plans and endowments—the de minimis threshold is only $25 million.  As a result, companies entering into swaps with special entities have to be aware of their counterparty’s special entity status and take care not to exceed the substantially lower de minimis threshold.

The CFTC’s new rule creates an exception to the $25 million special entity threshold, so that “utility operations-related swaps” entered into with “utility special entities” are subject to the general $3 billion de minimis threshold.  To qualify for the exception the swap must be with a special entity that owns or operates electric or natural gas facilities; associated with the generation, production, purchase or sale of electricity or natural gas; and for the purpose of hedging or mitigating commercial risk.  In explaining why the exception is necessary, the CFTC recognized that utility special entities have unique responsibilities to provide electricity or natural gas services that must be continuous and are important to public safety.  The CFTC also acknowledged that utility special entities often conduct swaps in localized and specialized markets, and the lower de minimis threshold could limit the number of willing counterparties to these important risk mitigation transactions.  The new rule treats utility special entities similarly to non-governmental entities and will reduce regulatory barriers to transacting with special entities.  The rule will become effective October 27, 2014.




FERC Commissioner Moeller Convenes Public Meeting Focusing on Resolving Natural Gas Supply Challenges for Electric Generators

Commissioner Philip Moeller of the Federal Energy Regulatory Commission (FERC) held a public meeting on September 18, 2014 to discuss ideas to facilitate and improve the way in which natural gas is traded and to explore the concept of establishing a centralized natural gas trading platform.  Although not an official FERC conference, the ideas at issue were an extension of FERC’s recent focus on gas-electric coordination.  During the well-attended meeting, Commissioner Moeller presided over a large roundtable discussion of stakeholders, including electric generation owners, natural gas producers, pipelines and marketers, who engaged in a spirited discussion of whether natural gas supplies are meeting the needs of electric generators and improvement in supply practices.  The central focus of the meeting was the creation of a natural gas information and trading platform containing bids and offers for the purchase and sale of commodity and capacity for receipt and delivery on points across multiple pipeline systems.

Participants agreed that the natural gas industry is evolving and an increasing share of natural gas is being supplied to electric generators—customers with different needs than the local distribution companies the natural gas pipeline industry was traditionally designed to serve.  Most participants further agreed that the needs of generators do not always align with pipelines’ traditional services.

Natural gas-fired generation owners voiced concerns regarding unknown or unreasonable commercial terms in pipeline service agreements, a lack of transparency surrounding available services and illiquidity in the natural gas market.  Pipeline representatives highlighted the availability of new services such as extra nomination cycles, no-notice service and the ability to reverse flow as examples of services intended to accommodate generators.  Nevertheless, the pipeline representatives also made the point that natural gas liquidity is outside pipelines’ control as they do not have title to the gas they transport.  Marketers and organized exchange representatives added that they have been responding to generators’ needs by making available bespoke products and exploring new standardized products to match generators’ demands.

In addressing possible solutions to transparency and liquidity problems, most meeting participants urged incremental change and expressed a preference for industry solutions over FERC’s regulatory intervention.  Electric generators preferred increased use of non-ratable service, no-notice service and new, shaped products.  Other proposals included eliminating the shipper-must-have-title rule, facilitating competition between capacity release and pipeline overrun services and encouraging generators to purchase firm transportation service rather than interruptible service.

FERC has established a docket number to allow interested parties to file written comments on any issue that was discussed at the meeting.  Comments are limited to five pages and are due by October 1, 2014.




Environmental Impact Analysis Required for Natural Gas Facilities Clarified in Court Decision Denying Residents’ Challenge to Compressor Siting Approval

A New York town’s challenge to the Federal Energy Regulatory Commission’s (FERC) siting authorization for a natural gas pipeline compressor station was rejected by the U.S. Court of Appeals for the D.C. Circuit in Minisink Residents for Environmental Protection and Safety v. FERC.  The court’s August 15 decision denying the petition for review of residents of the Town of Minisink, when read in conjunction with its decision earlier this year in Delaware Riverkeeper Network v. FERC, delineates the scope of environmental impact analysis that the court will require of FERC  under the National Environmental Policy Act (NEPA).

Residents of the Town protested the compressor station’s location and urged FERC and Millennium to pursue an alternative site referred to as the Wagoner Alternative.  The Wagoner Alternative would have resulted in the compressor station being located in a less populous area but would have required the replacement of a seven mile pipeline segment (called the Neversink segment).  In developing its environmental assessment, FERC had actively considered the Wagoner Alternative but concluded that because of the need to replace the Neversink segment, the environmental impact associated with the Minisink location would be less and the Minisink location was therefore preferable.  FERC’s decision approving the Minisink proposal was split 3-2, with former Chairman Wellinghoff and current Chairman LaFleur dissenting, both Commissioners concluding that the Wagoner Alternative was the better option.

Fundamental to the D.C. Circuit’s decision was its finding that FERC had adequately analyzed the Wagoner Alternative and that there was ample evidence to support its determination that the Wagoner Alterative would have a greater impact due to the need upgrade the Neversink segment.  The petitioners attempted to undermine this finding by pointing to a Millennium PowerPoint presentation that they alleged showed that even if the compressor station were to be located in Minisink, Millennium still planned to replace the Neversink segment.  The court, however, did not consider the PowerPoint persuasive in light of both Millennium’s representation to FERC and Millennium’s counsel’s representation at oral argument that Millennium had no current plans to replace the Neversink segment.

In an instructive footnote, the D.C. Circuit contrasted this case to its recent decision in Delaware Riverkeeper, where it held that FERC improperly segmented and failed to consider the cumulative impact of four connected pipeline construction projects.  The court clarified that the “critical” factor in Delaware Riverkeeper was that all of the pipeline’s projects were either under construction or pending before FERC for environmental review at the same time.  The court acknowledged that the issue before them in Minisink Residents would potentially be “more troublesome” if Millennium were now planning to pursue the Neversink upgrade.




Get LinkedIn to Updates on Mexico’s Energy Reforms

The energy reforms in Mexico have generated significant interest from energy investors around the world. McDermott has created a new LinkedIn Group, McDermott Discussion Group: Mexico’s Energy Reforms, to discuss legislative developments and their impacts on the changing energy private investment climate. Members of our team are well studied in these reforms and we will be posting updates on legislative developments and market updates. We encourage group member discussion and comments as well. Group participants stand to gain insight from our lawyers who are studying the reforms, from their peers who are also considering opportunities in Mexico, and from Mexican government officials who are tasked with executing the reforms.  The impact of the reforms will be felt across the board, covering the oil, gas and power sectors.

Click here to join our group. If you have any questions or technical issues, please contact Taylor Shekarabi.




D.C. Circuit Rules that FERC May Not Segment Its Evaluation of the Environmental Impact of Related Natural Gas Pipeline Construction Projects, Regardless of Whether They Are Separately Proposed

The D.C. Circuit Court of Appeals recently issued an opinion holding that the Federal Energy Regulatory Commission (FERC) violated the National Environmental Policy Act (NEPA) when it segmented its evaluation of the environmental impact of four separately proposed but connected projects to upgrade the “300 Line” on the Eastern Leg of Tennessee Gas Pipeline Company’s natural gas pipeline system.  Going forward, the court’s ruling will likely compel proponents of interrelated or complimentary pipeline projects to seek their certification on a consolidated basis and will require FERC to evaluate their cumulative impact.

Tennessee Gas’s challenged Northeast Project was the third of four proposed upgrade projects to expand capacity on the existing Eastern Leg of the 300 Line.  The Northeast Project added only 40 miles of pipeline, while the four proposed projects combined to add approximately 200 miles of looped pipeline.  FERC approved Tennessee Gas’s first proposed upgrade, the “300 Line Project,” in May 2010.  While that project was under construction, Tennessee Gas proposed three additional projects to fill gaps left by the 300 Line Project, one of which was the Northeast Project.   As part of its review of the Northeast Project, FERC issued an Environmental Assessment (EA) required by NEPA that recommended a Finding of No Significant Impact.  The EA for the Northeast Project, however, addressed only the Northeast Project’s environmental impact without reviewing the cumulative impact of all four projects.

The D.C. Circuit held that FERC was in error for failing to consider the cumulative impact.  Under NEPA, the D.C. Circuit explained, FERC must consider all connected and cumulative actions.  The D.C. Circuit found no “logical termini,” or rational endpoints to divide the four projects and found the projects were not financially independent.  Rather, the court found the Northeast Project was “inextricably intertwined” with the other three improvement projects that, taken together, upgraded the entire Eastern Leg of the 300 Line.  The court held that FERC must analyze the cumulative impact of the four projects and remanded the case to FERC for consideration.

The Court emphasized that in this case, “FERC was plainly aware of the physical, functional, and financial links between the two projects.”  Regardless of whether an interstate pipeline initially plans to embark on a series of related upgrades, once FERC is aware of the interrelatedness of proposed expansion projects, it must take care to review any cumulative environmental impacts that may arise.

The D.C. Circuit’s decision may also be a warning that FERC must pay greater attention to the NEPA review in pipeline construction projects.  The D.C. Circuit also has before it this term a case alleging that FERC did not sufficiently consider the environmental review of the siting of a new pipeline compressor station in light of less environmentally intrusive alternatives.  See Minisink Residents for Environmental Preservation and Safety v. FERC, Case No. 12-1481.  Both cases take issue with the rigor of FERC’s environmental review under NEPA, and the D.C. Circuit’s decisions may signal a new era of increased focus on the [...]

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The President’s Methane Reduction Strategy – Here’s What Energy Companies Need to Know

President Obama recently released a Strategy to Reduce Methane Emissions (Strategy) that sets forth a multi-pronged plan for reducing methane emissions both domestically and globally.  Domestically, the plan is to focus on four sources of methane—the oil and gas sector, coal mines, agriculture and landfills—and to pursue a mix of regulatory actions with respect to those sources.  Energy companies now have the opportunity to help influence exactly what those actions will be.

For the oil and gas sector, the Strategy indicates that the federal government will focus primarily on encouraging voluntary efforts to reduce methane emissions—such as bolstering the existing Natural Gas STAR Program and promoting new technologies.  But the Strategy also identifies two areas of potential mandatory requirements.  First, later this year, the Bureau of Land Management (BLM) will issue a draft rule on minimizing venting and flaring on public lands.  Regulated parties will have the opportunity to submit comments after the proposed rule is released.  Second, the Strategy confirms that the Environmental Protection Agency (EPA) will decide this fall whether to propose any mandatory methane control requirements on oil and gas production companies.  Consistent with that announcement, on April 15, 2014, EPA released five technical whitepapers discussing methane emissions from the oil and gas production process.  The agency is soliciting comments on those whitepapers—they are due by June 16, 2014.

For coal mines, the Strategy indicates that BLM will soon be seeking public input on developing a program to capture and sell methane from coal mines on public lands.  The Strategy further indicates that EPA will continue promoting voluntary methane capture efforts.

For landfills, the Strategy calls for public input on whether EPA should update its regulations for existing solid waste landfills, indicates that EPA will be proposing new regulations for future landfills, and indicates that EPA will continue to support the development of voluntary landfill gas-to-energy projects.

For agriculture, the Strategy does not suggest any new regulatory requirements.  Instead, it indicates that EPA and the Department of Energy will work to promote voluntary methane control efforts and that those agencies will place special emphasis on promoting biogas—starting with the release of a “Biogas Roadmap” in June 2014.

In addition to these sector-specific approaches, the Strategy emphasizes the need for improved methane measurement and modeling techniques, both domestically and globally.  All of the topics covered by the Strategy are ones about which regulated parties may want to submit comments—to EPA, BLM and/or the Office of Management and Budget.




Massachusetts Permit for New Natural Gas Plant Incorporates Global Climate Conditions Including Sunset Date

The Massachusetts Energy Facilities Siting Board (Siting Board) approved a certificate for a 630-megawatt natural gas-fired power plant in Salem last month.  The certificate is unique in that it incorporates the terms of a settlement agreement that imposes greenhouse gas emissions caps and requires the plant to sunset operations no later than 2050.

The facility is scheduled to begin operations in 2016 and will replace a 63-year-old oil- and coal-fired plant.  The emissions caps, which would gradually decrease beginning in 2026, could be satisfied by emissions reductions from reduced operations or carbon-capture systems; credits or allowances from the Regional Greenhouse Gas Initiative (RGGI); Renewable Energy Certificates; or investment in Massachusetts Renewable Portfolio Standard-eligible local renewable generation, energy efficiency or demand-response measures.

The certificate is the result of a settlement reached between the developer and an environmental organization.  The project is the first request to construct a generating facility since the state’s enactment of the Global Warming Solutions Act in 2008 (GWSA).  The GWSA requires greenhouse gas emissions reductions from all sectors of the economy to reach a target of a 25 percent reduction from 1990 levels by 2025 and an 80 percent reduction by 2050.  However, there are currently no regulations implementing the act with respect to Siting Board decisions.  The Massachusetts Executive Office of Energy and Environmental Affairs produced a Climate Plan that indicates at least some natural gas-fueled electric generation could comport with the GWSA targets.

The Siting Board initially approved the construction of the project and determined that it complied with the GWSA without the conditions of the settlement agreement, indicating that decreasing emissions caps or an expiration date may not be necessary for Siting Board approval of other projects.  However, after that decision was appealed by the environmental organization, the developer acceded to the environmental conditions in the hopes that they will demonstrate that the fossil fuel-fired plant can meet the requirements of the GWSA.  The settlement agreement was incorporated as a condition of the final certificate issued by the Siting Board.




Greenhouse Gas Limits for New Power Plants – Comments due to EPA by March 10, 2014

Yesterday, the United States Environmental Protection Agency’s (EPA) proposal to set greenhouse gas emissions limits for new coal-fired and natural gas-fired power plants was published in the Federal Register.  This proposal was originally posted on EPA’s website on September 20, 2013; however, the formal publication triggers the start of a 60-day public comment period.  The publication also suggests that EPA is still on track to meet President Obama’s June 2014 deadline for publishing an initial proposal to regulate emissions from existing power plants.

The proposed rule would limit new coal plants to 1,100 pounds of CO2 emissions per megawatt-hour (lbs/MWh) of electricity produced, with compliance measured on a rolling average basis during each 12-operating month period.  The proposal would also require new small natural gas plants to meet a 1,100 lbs/MWh emission limit, while requiring larger, more efficient natural gas plants to meet a limit of 1,000 lbs/MWh.  The proposed rule will not regulate greenhouse gas emissions from existing or modified power plants.

Comments on the proposed rule are due by March 10, 2014, although EPA noted in the proposal that a comment will be “best assured of having its full effect” if received by February 7, 2014.  EPA will also hold a public hearing on January 28, 2014 in Washington, D.C. from 9:00 am to 8:00 pm, during which interested parties will be able to present their views (limited to 5 minutes each) concerning the proposed rule.  Given that EPA received over 2.5 million comments on its initial April 2012 proposal, a large number of stakeholders are likely to voice comments.




Energy Regulators FERC, CFTC Finally Reach Proactive Understanding on Jurisdiction and Information Sharing

Primary regulators of energy transactions, the Federal Energy Regulatory and Commodity Futures Trading Commissions (FERC, CFTC or jointly Participating Agencies) began the new year by entering on January 2 two overdue Memoranda of Understanding (MOU), one on overlapping jurisdictions, the other on sharing of information generated in connection with market surveillance and investigations into suspected market manipulation, fraud or abuse.  Both MOUs became effective immediately.

FERC, with jurisdiction over physical natural gas and power transactions, and the CFTC, with jurisdiction over financially settled products such as energy futures and swaps, had battled in recent years over the reach of each other’s jurisdiction, culminating in a March 2013 decision of the U.S. Court of Appeals for the D.C. Circuit finding that FERC improperly invaded CFTC’s jurisdiction when, under authority of the Energy Policy Act of 2005, it sought to fine Amaranth Advisors trader Brian Hunter for allegedly manipulating  natural gas futures in order to increase the profitability of corresponding physical natural gas transactions.  When the Participating Agencies failed to meet the 2011 deadline of the Dodd-Frank Wall Street Reform Act for reaching the jurisdictional understanding, a troika of western-state senators with energy committee portfolios – Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Lisa Murkowski (R-AK) – expressed concern and called on the two commissions to expedite action on an MOU.

The MOUs put in place procedures that replace a reactive status quo ante in which the two agencies collaborated and shared information, if at all, only upon the request of one or the other, with a proactive framework that obliges the staffs of both agencies to notify each other of requests from within their regulated community for authorizations or exemptions from authorization requirements that may implicate the other’s regulatory responsibilities.  Once so notified, the Notified Agency must promptly inform the Notifying Agency that it (1) has no interest, (2) has an interest, triggering a consultative process between the staffs of the Participating Agencies, or (3) wants to revisit the issue once a regulated company has filed request for an authorization or exemption or the Notifying Agency has instigated sua sponte an authorization or exemption.  If (2) is selected, then the triggered consultative process will seek to determine whether the CFTC has jurisdiction under the Commodity Exchange Act or FERC has jurisdiction under the Federal Power, Natural Gas or Natural Gas Policy Acts, with disputes elevated from staff to directors and ultimately to the respective commissioners.  While the jurisdictional MOU imposes these obligations on the Participating Agencies, it expressly creates no private right of action that could be enforced by a regulated company or other third party.

The MOU on information sharing obligates the Participating Agencies to share information needed in connection with each other’s market surveillance or investigations into suspected manipulation, fraud or market power abuse in markets that the requesting Participating Agency regulates.  FERC is authorized to seek from the CFTC information from (1) designated contract markets, (2) registered swap execution facilities, (3) registered derivatives clearing organizations, [...]

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