Rockies Express seeks FERC's early involvement as shipper faces possible bankruptcy

Washington — As one of its producer shippers heads toward potential bankruptcy, Rockies Express pipeline is pressing the Federal Energy Regulatory Commission to assert its jurisdiction quickly over a firm gas transportation agreement with the company.

The effort could presage future battles over who decides on the fate of gas transportation contracts if more gas producers enter bankruptcy reorganization amid decimated crude oil demand. A jurisdictional tug of war played out over power purchase agreements as FirstEnergy Solutions and Pacific Gas & Electric went through bankruptcy proceedings.

In a filing at FERC late last week (RP20-822), REX said it anticipates that shipper Ultra Resources will file for bankruptcy protection imminently and no later than May 15. Ultra "is expected" to ask the bankruptcy court for approval to reject the firm gas transportation agreement as an executory contract, REX asserted.

Ultra could not immediately be reached for comment on the assertions in REX's petition, but an Ultra Petroleum 10-K filing with the Securities and Exchange Commission raised the possibility of a near-term filing for bankruptcy relief in the US or Canada.

The firm transportation agreement, for 200,000 Dt/d, runs from December 1, 2019 until December 31, 2026, according to REX.

The pipeline company asked FERC to rule on its petition for a declaratory order by May 8, noting that the commission is aware a bankruptcy case involves an automatic stay. FERC appears to be operating on a somewhat longer timeline as it has called for comments no later than May 29 on the petition (RP20-822).

REX said it is not asking FERC to weigh in at this point on whether it would approve Ultra's rejection of the firm agreement. Rather, it asked FERC to declare its right to review any attempted rejection of the agreement under the Natural Gas Act, should Ultra file such a motion in bankruptcy court.

PUBLIC INTEREST STANDARD

The pipeline company argues that FERC has exclusive jurisdiction to set rates for interstate gas transportation service and that any modification of a filed rate stemming from a freely negotiated contract must be evaluated by the FERC under the Mobile-Sierra public interest standard.

In discussing the implications, REX noted that its firm shipper base is comprised almost entirely of negotiated rate shippers, and that REX would have to absorb the full cost of remaining reservation charges, should Ultra declare bankruptcy and seek to reject the firm agreement.

"To the extent the pipeline can mitigate its losses by re-subscribing shippers reemerging from bankruptcy at less volumes and lower rates, the end result may be a cost burden to the remaining shippers, or damage to the pipeline's opportunity to earn a reasonable rate of return, impacting the public interest," REX argued.

If a bankruptcy court were to abrogate the agreement, it would not consider the Mobile Sierra doctrine, which presumes the filed rate is just and reasonable, REX said.

IMPLICATIONS FOR OTHER PIPELINES

There are public policy implications, REX argued, because other pipelines also face higher business risks due to their significant negotiated rate profile.

"With shipper bankruptcies expected to increase precipitously, the rate exposures faced by Rockies Express may be the rule, and not the exception," REX wrote, suggesting nearly all the capacity certificated by FERC for greenfield projects is supported by shippers agreeing to negotiated rates.

In seeking FERC's action, the pipeline company recalls FERC's prior positions in Federal Power Act cases, such as the FirstEnergy bankruptcy, in which FERC argued on appeal that jurisdictional contracts constituted filed rates that only FERC was authorized to modify or abrogate on public interest grounds. After the 6th US Circuit Court of Appeals ordered the bankruptcy court to permit FERC to participate and provide its opinion on the public interest standard, FERC started a paper hearing on March 20 on the matter.

But in a separate case involving PG&E, the bankruptcy court declared FERC's decision announcing its concurrent jurisdiction to be unenforceable in bankruptcy. That ruling is on appeal by a large number of power producers in the 9th Circuit.