FERC Rejects Requests Pipeline Requests for LNG Costs

In a long-awaited ruling expected to impact liquefied natural gas (LNG) suppliers, FERC recently said it will not accept requests from interstate natural gas pipelines to compensate customers or other downstream entities for any costs they may incur in using gas supplies, including revaporized LNG that meets approved standards for gas quality and interchangeability.

The Federal Energy Regulatory Commission (FERC) announced the new gas interchangeability policy in a case involving a complaint filed in 2004 by AES Ocean Express LLC against Florida Gas Transmission Co. (FGT) (Docket Nos. RP04-249-001, et al.).

The new policy generally affirms an administrative law judge (ALJ) ruling last year (see Daily GPI, April 13, 2006), which approved the standards proposed by FGT to receive AES Ocean Express' revaporized LNG. The LNG would be imported from facilities that would be built in the Bahamas. Imported LNG has a higher heat content than domestically produced gas supplies.

"This order provides greater regulatory certainty with respect to how the Commission will address gas interchangeability issues associated with LNG import projects," said FERC Chairman Joseph T. Kelliher. "This is critical if the U.S. is going to be successful in its competition with Europe and Asia for LNG imports."

FGT provides transportation services for electric generation (which accounts for 80% of its throughput) and local distribution companies located primarily in Florida and Alabama.

In a January 2004 order, the Commission authorized AES Ocean Express to construct and operate natural gas pipeline facilities to transport revaporized LNG from an offshore receipt point at the boundary between the Exclusive Economic Zone of the United States and the Commonwealth of the Bahamas to onshore delivery points in Broward County, FL. AES Ocean wants to interconnect its planned pipeline with FGT's system.

Under the terms of the authorization, AES Ocean Express was to deliver large quantities of revaporized LNG directly into FGT's market area. However, when the two companies were unable to reach an agreement on the terms and conditions, AES Ocean Express filed a formal complaint with the Commission.

AES Ocean Express accused FGT of imposing overly restrictive gas quality/interchangeability requirements on AES Ocean in its effort to obtain an interconnection with FGT. AES Ocean claimed that FGT's "onerous" conditions were frustrating its plans to construct the Bahamas-to-Florida pipeline to deliver regasified LNG to the southern Florida market.

FERC ordered hearings before an ALJ to determine the appropriate gas quality and interchangeability standards to accommodate introducing regasified LNG into FGT's pipeline system. Because of the requirements of the electric generators attached to its system, FGT proposed interchangeability standards that were more stringent than would otherwise have been permitted by the interim standards adopted by Natural Gas Clearinghouse.

Citing FERC's June 2006 Policy Statement on Natural Gas Quality and Interchangeability, the Commission affirmed the ALJ's recommendation and found that FGT's proposed interchangeability standard was just and reasonable because it would permit the safe operation of electric generation turbines receiving gas from FGT's system without violating environmental standards. At the same time, FERC noted that the standard would permit a substantial amount of LNG to be imported.

The Commission further determined the standards should apply to both domestic and revaporized LNG received by FGT to its market area customers, not only the LNG supply as recommended by the ALJ.

FERC also affirmed the ALJ's decision by ruling against establishing a mechanism in FGT's tariff that would provide for mitigation cost recovery for FGT's downstream gas users for introducing LNG into the pipeline system. Parties had argued the Commission is responsible for establishing a method for downstream users to recover their costs of testing, remediation and repair that may be necessary to accommodate the introduction of LNG into FGT's pipeline system. The ALJ said such an endeavor would be "...a prescription for unnecessary or inflated costs and endless bickering."

The Commission in its order agreed with the ALJ, stating no specific testing program has been established and that "it is not for the Commission to propose or supervise one and monitor its costs."

While the AES Ocean Express complaint was before the ALJ, FGT entered into arrangements with other companies to transport LNG supplies, including Southern Natural Gas Co., which constructed new facilities to interconnect LNG supplies imported at the Elba Island LNG terminal owned by Southern. The expansion facilities began operation in February 2006.

In addition, FERC last year notionally approved the Cypress Pipeline Project for a new pipeline that will for the first time transport Elba Island LNG supplies directly to Florida through an interconnection with FGT's Jacksonville Lateral near Jacksonville, FL, and to a direct interconnection with JEA, formerly known as Jacksonville Electric Authority (see Daily GPI, June 21, 2006). Southern also entered into agreements with BG LNG Services LLC and Florida Power Corp., a unit of Progress Energy, for firm transportation of revaporized LNG to various Florida interconnections.

The Commission said the FGT tariffs for providing services to these other companies will control the gas quality and gas interchangeability standards that Southern must meet to deliver the revaporized LNG to FGT's pipeline facilities.

While the Cypress project is currently under construction and expected to begin service by May, the AES Ocean Express project is no longer imminent, FERC noted. AES Ocean Express was granted an extension until Jan. 29, 2009, to complete construction of its project and to make its facilities available for service (see Daily GPI, Dec. 28, 2006).

The Commission Thursday also established certificate compliance requirements for Southern and FGT. The Commission further directed FGT to file tariff sheets implementing the approved interchangeability standards prior to the in-service date of the Cypress Pipeline's proposed interconnection with FGT.