FERC clarifies buy/sell prohibition exemption for AMAs

On October 15, 2015, the Federal Energy Regulatory Commission (“FERC”) clarified that the exemption from the buy/sell prohibition for natural gas asset management agreements (“AMA”) set forth in Order No. 712 also applies to supply side AMAs. [1]   In a helpful clarification, FERC held that buy/sell transactions in which the releasing shipper in a supply side AMA sells its natural gas to its asset manager, the asset manager transports the gas over the released capacity, and then resells the natural gas to the releasing shipper are not prohibited buy/sell transactions.

Under an AMA, a capacity holder can release pipeline capacity to an asset manager without subjecting the capacity to FERC’s competitive bidding requirements, so long as the AMA provides for a commodity delivery obligation (in the case of a delivery side AMA) or commodity purchase obligation (in the case of a supply side AMA). [2]   When the capacity is not needed for the obligation to the releasing shipper, the asset manager can release it or use it to make sales to third parties, effectively allowing the asset manager to optimize pipeline capacity and thereby make more efficient use of natural gas transportation assets.

FERC prohibited so-called buy/sell transactions as part of the restructuring of natural gas pipelines required by Order No. 636. [3]   When implementing the new capacity release program at that time, FERC prohibited buy/sell arrangements prospectively. [4]   In 2008, FERC issued Order No. 712, which exempted buy/sell transactions entered into in the context of an AMA from the general prohibition, but only with respect to volumes of gas “delivered to” the releasing shipper. [5]

On June 29, 2015, Rice Energy Marketing LLC (“Rice”) filed a petition for declaratory order at FERC requesting that FERC find that the exemption from the prohibition on buy/sell transactions for AMAs applies equally to supply side AMAs as to delivery side AMAs.  The petition pointed to FERC’s language in Order No. 712 that referred explicitly to supply side AMAs being the “mirror image” of delivery side AMAs. [6]   Rice argued that the exemption of AMAs from the buy/sell prohibition should apply to all AMAs, not only delivery side AMAs.

In its October 15 Order, FERC confirmed that Order No. 712 exempted delivery side AMAs from the buy/sell prohibition by relying on a finding that the exempted transactions did not constitute the sort of buy/sell transactions prohibited by Order No. 636.  FERC then clarified that the buy/sell prohibition similarly does not apply to volumes of natural gas which the asset manager in a supply side AMA purchases from its releasing shipper and then resells to that shipper.  FERC reasoned that evading the requirements of the capacity release regulations is not at issue here “because the releasing shipper is not releasing unneeded capacity, but capacity that will continue to be used for the same purpose for which the releasing shipper in the supply AMA originally purchased it – to transport its natural gas to market.”  In sum, the October 15 Order clarifies that while these transactions in supply side AMAs may be buy/sell arrangements, they are not prohibited buy/sell arrangements.

FERC’s clarification is important for both holders of interstate capacity and asset managers and should provide more flexibility for parties to structure their asset management agreements and associated commodity transactions.  For example, producers and other supply side shippers may hire asset managers for the purpose of managing their interstate pipeline capacity, while they continue to sell gas at downstream points under contracts which they do not wish to assign to the asset manager.  The October 15 Order assures market participants that a releasing shipper may buy back gas from asset managers at the downstream end of their capacity to effectuate such sales without violating FERC’s buy/sell prohibition.