Authority to Abandon Exchange Service Granted

Despite Increased Costs to Shippers, Balance of Equities Lies With Granting Abandonment
Mark Reishus
July 9, 2019 at 11:28:14 ET
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On July 8, 2019, FERC granted authority to Texas Eastern Transmission LP (Texas Eastern) and Columbia Gas Transmission LLC (Columbia) to abandon individually certificated natural gas exchange service provided under Rate Schedules X-128 (Texas Eastern) and X-130 (Columbia). Protesting parties expressed concern about increased costs associated with Columbia’s replacement of the exchange service, which was provided at no fee, with capacity release agreements. “But, the potential for future rate effects does not require us to deny the abandonment.” FERC concluded that, “on balance the equities lie with granting the abandonment.”

Exchange Agreement

In its March 1, 2019 application, filed in Docket No. CP19-104, Texas Eastern explained that, on Sept. 29, 1986, it and Columbia “entered into a gas-for-gas exchange agreement to provide each pipeline with operational flexibility to meet customers’ needs (‘Exchange Agreement’) in accordance with the certificate of public convenience and necessity granted by the Commission in Docket No. CP84-429-001 authorizing Texas Eastern to, amongst other things, ‘exchange [] up to 80,000 [dekatherms] equivalent of natural gas per day with Columbia.’ The Exchange Agreement is now included as Rate Schedule X-128 in Texas Eastern’s FERC Gas Tariff.”

Texas Eastern said the Exchange Agreement “provides that Texas Eastern will deliver up to 80,000 dekatherms per day of natural gas at designated points of exchange on a year-round, firm basis, and that Columbia shall deliver firm quantities equivalent to the quantities delivered by Texas Eastern at certain points of exchange. The Exchange Agreement provides that after the expiration of the primary term on October 31, 2000, either party may terminate the agreement by providing written notice to the other party not less than two years prior to the termination date designated in such notice.” On Oct. 30, 2014, Texas Eastern provided notice to Columbia of its intent to terminate the Exchange Agreement effective Oct. 31, 2018.

Columbia’s separate March 1, 2019 application, filed in Docket No. CP19-103, contains a similar description of the Exchange Agreement and its termination.

Abandonment Requests

Texas Eastern asserted that “Rate Schedule X-128 was individually certificated and is not subject to pre-granted abandonment authorization. Therefore, Texas Eastern submits this instant Application with the Commission for approval to abandon the certificated service performed under Rate Schedule X-128. Texas Eastern further requests that the abandonment of this service become effective on the date the Commission issues authorization to abandon the subject rate schedule.”

Columbia asserted that, because “Rate Schedule X-130 was individually certificated, it is not subject to pre-granted abandonment authorization as are blanket certificate transactions, and therefore Columbia is submitting this instant Application with the Commission for approval to abandon the certificated service performed under Rate Schedule X-130. Columbia further requests that the abandonment of this service become effective on the date the Commission issues authorization to abandon the subject rate schedule.”

Both pipelines argued that the present and future public convenience and necessity support the abandonment of service provided under the rate schedules. They noted that the proposed abandonments would not require the abandonment of any facilities, nor impact their ability to meet their firm service commitments to their shippers. Columbia added that it does not anticipate an interruption, reduction, termination or change of service due to the abandonment.

Reason for Termination

On April 8, 2019, Texas Eastern responded to an engineering data request from FERC’s Office of Energy Projects. In the response, Texas Eastern provided more detail about why it terminated the Exchange Agreement.

“Prior to its termination,” Texas Eastern explained, “the exchange service with Columbia provided Texas Eastern with gas on a west-to-east basis, with Texas Eastern delivering gas to Columbia at points east of where it received gas from Columbia, and provided Columbia with gas on an east-to-west basis. The firm nature of Texas Eastern’s obligations was predicated upon the ability to accomplish the exchange by displacement. This allowed both Texas Eastern and Columbia to avoid constructing additional facilities by exchanging volumes of gas at mutually agreed upon locations to effect deliveries.”

However, in response to changing market demand, “Texas Eastern began to modify its system beginning in 2014 to reverse flow. The system was modified through western Pennsylvania and Ohio with gas now physically flowing from east to west, in the same direction of flow as the exchange with Columbia. Due to this change in the flow of the system, the exchange agreement no longer provided the mutual benefit to Texas Eastern in that the displacement of volumes could no longer be depended upon for effecting deliveries under the exchange. Texas Eastern no longer utilized the exchange to provide firm quantities of gas to its customers.”

Texas Eastern said that the provision of 18 C.F.R. Part 284 open access service in the same east-to-west direction as provided under the Exchange Agreement going forward would require construction of additional facilities, since displacement would no longer be effective. Texas Eastern and Columbia “did not agree on further forward haul service and Texas Eastern no longer utilized the exchange to provide firm quantities of gas. Therefore the east-to-west transportation previously effectuated by the exchange agreement was not incorporated into the Texas Eastern projects that resulted in reverse flow on its system through western Pennsylvania and Ohio.”

Columbia's Replacement Efforts

On April 2, 2019, in an answer to protests and comments, Columbia described its efforts to replace the service previously offered under Rate Schedule X-130.

Upon receiving notice of Texas Eastern’s intent to terminate the Exchange Agreement effective Oct. 31, 2015, “Columbia took steps to preserve the operational flexibility afforded by the Exchange Agreement to ensure that Columbia could continue to meet its firm service obligations. Columbia sought to preserve the Exchange Agreement, and the parties ultimately agreed to extend the agreement for an additional three-year term expiring on October 31, 2018. Columbia subsequently sought to determine whether the shippers who relied upon the operational flexibility afforded by the Exchange Agreement would re-contract for their full capacity on Columbia such that Columbia would continue to use the flexibility provided by the Exchange Agreement to meet those shippers’ needs after October 31, 2018. Because the contract renewals were uncertain, Columbia waited to make a determination regarding replacement capacity until after decisions had been made regarding contract renewals, which did not occur until early 2018.”

Columbia said that, when it subsequently attempted to reach agreement with Texas Eastern to extend the Exchange Agreement beyond Oct. 31, 2018, Texas Eastern informed Columbia that it did not have the capacity necessary to continue to provide service pursuant to the Exchange Agreement. “Columbia then sought to obtain firm replacement capacity directly from Texas Eastern, but was informed that the necessary capacity was not available on Texas Eastern’s existing system. Columbia therefore undertook an extensive review of different options to replace the capacity, including obtaining capacity on other interstate pipelines or sponsoring an expansion project on Texas Eastern or another third-party pipeline to replace the capacity. Columbia determined, however, that obtaining capacity on another interstate pipeline would not reproduce the benefits of the Exchange Agreement and that an expansion project would be costly and would not guarantee that the necessary transportation capacity would be available prior to the Exchange Agreement’s termination date.”

However, Texas Eastern informed Columbia that several of its shippers were potentially interested in releasing their firm capacity on Texas Eastern’s system. “Columbia ultimately concluded that the most cost-effective, near-term option to replace the Exchange Agreement capacity was to obtain released capacity on Texas Eastern. Accordingly, Columbia entered into two new capacity release agreements for service on Texas Eastern … that to date have allowed Columbia to continue to meet its firm service obligations with no interruption or reduction in service.”

Protests and Adverse Comments

NiSource Distribution Companies (i.e., Columbia Gas of Kentucky Inc., Columbia Gas of Maryland Inc., Columbia Gas of Ohio Inc., Columbia Gas of Pennsylvania, and Columbia Gas of Virginia Inc.) filed comments in both dockets. They rely on significant purchases of firm transportation and storage services from Columbia, “and therefore benefit from the current exchange service.” They noted that the applications do not appear to offer any assurance that the proposed abandonments will not result in increased costs to Columbia’s shippers, and ultimately, their retail customers, “particularly the costs of upstream transmission and compression that are recovered through Columbia’s Transportation Costs Rate Adjustment (‘TCRA’).” Nor do the applications “appear to provide any assurance that Columbia has reliable, long-term resources in place to replace the exchange service to be abandoned.” NiSource Distribution Companies asserted that, without such assurances, the proposed abandonments are not permitted by the public convenience and necessity.

Washington Gas Light Co. (Washington Gas) filed protests in both dockets, noting that, if the service provided under the Exchange Agreement is abandoned, “Columbia will be required to pay approximately $7.4 million more per year to replace the service on a firm contract basis and another $545,000 per year in interruptible transportation costs. If Columbia is allowed to pass through these costs to its customers using its tariff TCRA mechanism – as it has sought to do in a TCRA filing made contemporaneously with the abandonment application — Columbia’s customers, including Washington Gas, will be harmed.” Washington Gas also asserted that Columbia’s capacity releases are only for a limited term and not subject to automatic renewal or a right of first refusal, and may provide less flexibility than before. “The combination of increased costs … and the decreased long-term reliability and flexibility of service that will result from the termination of the Rate Schedule X-130 service — without any ability to secure an equivalent replacement service — means that the requested abandonment is inconsistent with the public convenience and necessity.”

Antero Resources Corp. (Antero) filed a protest in Docket No. CP19-103, opposing Columbia’s abandonment authorization request. “The Commission has considered charging higher rates for the same service as an adverse effect in abandonment proceedings in the past. The Commission should deny Columbia’s request to abandon the Exchange Agreement because it will have an adverse impact on all shipper’s certificated services.”

The Cities of Charlottesville and Richmond, Virginia (Cities) filed a protest in both dockets. “There is no assurance that the capacity release market will have sufficient available capacity in critical periods to replicate service under the Exchange Agreement. Moreover, because the Exchange Agreement provides a cost-free exchange of gas between Columbia and Texas Eastern, the impact of abandonment of service under the Exchange Agreement is a material increase in the costs that Columbia is seeking to recover from its customers. Relying on the short-term capacity release market also raises the potential for significantly higher costs in the future because the applicable rate for such releases can exceed Texas Easter[n]’s maximum tariff rate. … The absence of any justification for the instant abandonments, coupled with admitted adverse impacts resulting [from] abandonment, warrants summary denial of the requested abandonments.”

Standards for Abandonment

FERC began its analysis of the issues raised in these proceedings by describing how it reviews abandonment requests.

Section 7(b) of the [Natural Gas Act (NGA)] allows an interstate natural gas pipeline company to abandon jurisdictional facilities or services only if the abandonment is permitted by the ‘present or future public convenience or necessity.’ The Commission has stated that continuity and stability of existing service are the primary considerations in assessing the public convenience or necessity of a permanent cessation of service under section 7(b). The courts have explained that the burden of proof is on the applicant to show that the public convenience or necessity permits abandonment, that is, that the public interest will in no way be disserved by abandonment.”

FERC said it examines abandonment applications on a case-by-case basis. “In deciding whether a proposed abandonment is warranted, the Commission considers all relevant factors, but the criteria vary with the circumstances of the particular proposal. If the Commission finds that an applicant’s proposed abandonment will not jeopardize continuity of existing gas transportation services, it will defer to the applicant’s business judgment.”

Warning

Rate Schedules X-128 and X-130 were individually certificated. Therefore, they are not subject to pre-granted abandonment authorization as are blanket certificate transactions. This is way Texas Eastern and Columbia filed applications for approval to abandon the certificated service performed under the rate schedules.

FERC observed that, while the pipelines “do not have pregranted authorization to abandon their case-specific Part 157 services, that does not mean that they must continue to provide the case-specific services indefinitely. Rather, it means that they must file for, and receive, specific Commission authority before abandoning the services.”

FERC noted that “Texas Eastern and Columbia have abandoned the services that had been provided under the now-terminated exchange agreement without proper prior authorization from the Commission. The Commission takes seriously any company's failure to comply with the requirements for Commission approval prior to providing jurisdictional transportation service or to taking jurisdictional facilities out of service, and may take appropriate enforcement action if, in its discretion, it determines such action is warranted. While we will not take enforcement action against Texas Eastern and Columbia here, the companies are reminded that, in the future, when they do business that requires Commission authorization, they must submit required filings to obtain requisite authorizations on timely bases or face possible Commission sanctions.”

Ruling

FERC said that it “does not presume that service under case-specific Part 157 authority should continue after expiration of the service contracts. Although the Commission has not required customers under Part 157 contracts to convert to Part 284 service before termination of the existing individually certificated transportation agreements, termination of Part 157 service upon expiration of those contracts is appropriate unless shown otherwise under the particular circumstances.”

According to FERC, “many Part 157 certificates were designed to address the special circumstances that existed at the time the contracts were executed, and … it is thus appropriate, within broad limits, to give effect to these arrangements as long as the contracts are in effect so that the parties’ reasonable expectations on entering the contract can be relied on. However, the Commission has explained that once the contracts expire, allowing the shipper to continue the arrangement under existing terms could allow the shipper to unfairly receive favorable treatment not available to other shippers.”

FERC pointed out that the cases cited by Cities and Antero to support their arguments that the pipelines must show that the public interest will not be disserved by their proposed abandonments and that charging higher rates is an adverse effect involve the proposed abandonment of Part 284 open access service, “not abandonment of the kind of Part 157 case-specific authority at issue in this proceeding.”

The protesting parties’ “real concern is not with the abandonment per se, but rather with the costs associated with the replacement capacity release agreements that Columbia proposes to reflect in its rates through its [TCRA]. … But, the potential for future rate effects does not require us to deny the abandonment. Columbia and its customers, like any other customers of jurisdictional interstate pipeline companies, are entitled to just and reasonable rates. However, the public convenience or necessity does not require that Columbia or its customers continue to receive service at a price lower, or a quality higher, than that available to other shippers. That Columbia may now incur costs to replace the exchange service previously provided at no cost under the exchange agreement does not make it unreasonable for the Commission to decline to require Texas Eastern to continue its current services to Columbia under Part 157 case-specific certificate authority upon expiration of the underlying contract.”

FERC concluded that “Texas Eastern has shown that continuing the exchange service would adversely affect Texas Eastern’s customers (by being potentially subject to the costs associated with building the facilities Texas Eastern would need to continue service), and Columbia has shown that it has available alternatives to the exchange service. Given that the Commission cannot grant abandonment authority to Texas Eastern without also allowing Columbia to abandon the exchange service, on balance the equities lie with granting the abandonment. … [T]he Commission finds that Texas Eastern’s and Columbia’s abandonment of natural gas exchange services provided to each other under case-specific certificate authority and rate schedules is permitted by the present or future public convenience or necessity. The Commission therefore grants the abandonment proposals.”

For More Information

See ¶427: Backhauls and Exchanges for more information on the Commission’s policies concerning exchanges.

Texas Eastern Transmission LP and Columbia Gas Transmission LLC, Order Granting Abandonment Authority, 168 FERC ¶61,008 (2019) [Docket Nos. CP19-104-000 and CP19-103-000].

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