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April 2011

Vol. 16, No. 15 Week of April 10, 2011

FERC’s new thinking on precedent agreements

For decades, the Federal Energy Regulatory Commission considered precedent agreements that covered much or all of a pipeline project’s capacity to be conclusive evidence that a project was needed and should get approved.

In general, a developer needed contracts from shippers for at least 25 percent of the pipeline’s capacity before applying to FERC for a construction certificate. A developer with 10-year commitments for all of the pipe’s capacity or that demonstrated more revenue than expenses was eligible to get FERC’s blessing.

That simple formula is now gone.

In the 1980s and 1990s, as FERC considered new pipeline projects under its capacity-means-everything standard, new voices asked to be heard.

They were property owners whose land the project would cross.

They were local and state governments concerned about air and water pollution, and other environmental issues, from the construction and its aftermath.

They were rival pipelines and their locked-in gas-shipping customers concerned that a new project would cost them money by adding competition, lowering prices or stealing business.

The vexed FERC commissioners in 1999 issued a new policy statement that now guides what it will consider before approving or rejecting a project.

“The new focus … will be on the impact of the project on the relevant interests balanced against the benefits to be gained from the project,” the policy states.

“Although the Commission traditionally has required an applicant to present contracts to demonstrate need, that policy … no longer reflects the reality of the natural gas industry’s structure, nor does it appear to minimize the adverse impacts on any of the relevant interests. Therefore, although contracts or precedent agreements will always be important evidence of demand for a project, the Commission will no longer require an applicant to present contracts for any specific percentage of the new capacity. Of course, if an applicant has entered into contracts or precedent agreements for the capacity, it will be expected to file the agreements in support of the project, and they would constitute significant evidence of demand for the project.”

The benefits of a new project might be powerful, FERC said. They might include meeting unserved demand, lowering prices customers pay, boosting reliability of the electricity grid and advancing the nation’s clean-air goals. A new project might unclog bottlenecks in regions where the gas supply far exceeds the available pipeline space.

But pipeline developers now must definitively demonstrate that these benefits outweigh the project’s downsides. A layer of expensive studies were added to the developer’s tasks before getting FERC’s approval.

“Vague assertions of public benefits will not be sufficient,” FERC policy states.

—Bill White






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