FERC announced actions in response to the 2017 tax reform legislation and a revised income tax policy, which eliminates the income tax allowance for Master Limited Partnerships. Regulated entities should ensure that they comply with FERC’s orders regarding the treatment of income taxes and consider whether to file comments on the proposed rulemaking and notice of inquiry.
Transmission Planning and Construction Right of First Refusal Ruled Unduly Discriminatory, Not Mobile-Sierra Protected
The provision contained in incumbent electric utility tariffs—conferring on the holder the right of first refusal (ROFR) to construct additions to the high-voltage electrical grid, regardless of who conceived of and proposed the addition—is unduly discriminatory, the U.S. Circuit Court of Appeals for the D.C. Circuit held in a July 1 decision in Oklahoma Gas & Electric Co. v. FERC, No. 14-1281. The court’s decision upheld utility-specific applications of the FERC mandate—a central open-access innovation of the agency’s Order No. 1000 (Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities)—that directed independent system operators and regional transmission organizations (ISO/RTO) to remove from their existing tariffs and membership agreements the ROFR provision (Removal Mandate).
Earlier in South Carolina Public Service Authority v. FERC, 762 F.3d 41 (D.C. Cir. 2014), the same court generally had upheld the Removal Mandate as applied to ISO/RTOs but had reserved judgment on whether the 60-year-old Mobile-Sierra presumption that the rates in negotiated arm’s length natural gas and power sales agreements are just and reasonable applied to the ROFR provisions of the ISO/RTO tariffs and membership agreements. In Sierra, the Supreme Court of the United States held that the presumption applies against not only the parties to a negotiated agreement but against FERC itself; thus, if it were found to apply to the ROFR, FERC could overcome the presumption only by showing that the ROFR seriously harmed the public interest.
The court could have resolved ISO/RTO and incumbent utilities’ challenges to the Removal Mandate in either of two ways. First, it could have determined that the context in which the ROFR provision was included in the tariffs and membership agreements prevented the presumption from applying in the first instance because of infirmities or unfair dealings in contract formation, such as fraud or duress. Second, it could determine that the presumption did apply and then address the question of whether FERC had overcome the presumption with evidence that the ROFR in member agreements seriously harmed the public interest. The court took the former course. It ruled that the Mobile-Sierra presumption never applied in the first instance because (quoting Order No. 1000 and citing South Carolina), the ROFR “created ‘a pre-existing [i.e., not negotiated] barrier to entry’ for nonincumbent transmission owners.” Citing precedent from the Seventh Circuit, the court found that “such terms” as the ROFR are “self-protective and anti-competitive [and] cartel-like.”
By cabining its holding to the anticompetitive effects of the ROFR, the court was able to bypass two other and possibly more complicated issues. First, it bypassed the issue of whether the Mobile-Sierra presumption applies not only to the rates in regulated natural gas and power sales agreements, but also to agreement terms that affect rates. As the court noted, both the petitioners and FERC argued the case based “on the premise” that the presumption applies to both to rates and agreements terms that affect rates. Second and possibly more nettlesome is whether the Mobile-Sierra presumption would protect other provisions of ISO/RTO tariffs even [...]
Timing Is (Almost) Everything: FERC Implements D.C. Circuit Guidance on NEPA Review of Multiple Pipeline Construction Projects
In the wake of two recent D.C. Circuit decisions, the Federal Energy Regulatory Commission (FERC) has begun to implement its new policy concerning the review of natural gas pipeline construction proposals under the National Environmental Policy Act (NEPA). To decide whether a NEPA review must include other projects proposed by the pipeline, FERC will look at the timing and maturity of other proposals and the independence of the projects.
In the first decision, Delaware Riverkeeper Network, the U.S. Court of Appeals for the D.C. Circuit held that FERC failed to consider the cumulative environmental impact of four projects that had been separately proposed by the same pipeline. The D.C. Circuit held that the projects were not financially independent and were “a single pipeline” that was “linear and physically interdependent,” so the cumulative environmental impacts must be considered concurrently.
In the second decision, Minisink Residents for Environmental Preservation and Safety, the D.C. Circuit held that FERC had properly considered and rejected an alternative site to build a natural gas pipeline compressor station. Contrasting the decision to Delaware Riverkeeper, the court clarified that the “critical” factor in the previous decision was that all of the pipeline’s projects were either under construction or pending before FERC for environmental review at the same time.
In several recent orders, FERC has implemented the D.C. Circuit’s guidance in addressing claims of improper segmentation. For example, FERC recently authorized Transcontinental Gas Pipe Line Company (Transco) to construct and operate the Leidy Southeast Project. The Leidy Southeast Project will include nearly 30 miles of new pipeline loop and four compressor stations to provide capacity from supply areas in Pennsylvania to various receipt points as far south as Choctaw County, Alabama. Opponents of the pipeline project (coincidentally Delaware Riverkeeper Network) claimed that FERC should have also considered in its NEPA review three other Transco projects—one already constructed and two proposed projects.
FERC rejected opponents’ request to conduct a joint NEPA review. FERC emphasized that (1) the first Transco project was approved nearly a year before Transco proposed the Leidy Southeast Project; (2) the other two Transco projects “were not fully defined ‘proposals’ at any time during the period that the Leidy Southeast Project was receiving consideration;” and (3) the Leidy Southeast Project was not “connected” to the other Transco projects, as it did not “rely on” other projects for its operation and “would have been built even if” the first project had not been constructed.
President Obama’s recently released budget proposal for the 2017 fiscal year repeats many of his past energy-related tax proposals, including a permanent extension of the renewable energy production tax credit and a provision making it refundable. Making the production tax credit permanent and refundable signals the administration’s continued strong support for renewable energy. This On the Subject summarizes the key energy-related tax provisions contained in the budget proposal and detailed further in the US Department of the Treasury’s general explanation of the proposal.
Egypt has suffered from significant social and political unrest. This resulted in a drop in oil and gas production levels at the same time as domestic energy consumption was rising. Egypt was facing a serious energy crisis. The election of Abdel Fattah al-Sisi as president in June 2014 proved to be a turning point:
- There has been a substantial reduction in the level of fuel subsidies.
- Significant steps have been taken to repay debts owed to international oil and gas companies.
- There is ongoing diversification of energy sources, with more renewable power projects and increasing imports of liquefied natural gas (LNG).
The future looks positive. A number of agreements have recently been signed by international oil and gas companies and it seems Egypt is still a destination for international investment.
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.
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.
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.