Washington — The Federal Energy Regulatory Commission has sided with Rockies Express Pipeline in another important test of how the regulator will treat gas transportation agreements between pipelines and financially struggling producers.
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In an order Oct. 28, FERC concluded that the record did not support a finding that the public interest requires abrogation or changes to gas transportation agreements between Gulfport Energy and REX (RP20-1220). But the commission appeared to leave open the possibility that it might have been able to offer some relief had the producer presented arguments differently.
The ruling follows FERC's prior finding that such transportation agreements constitute filed rates under the Natural Gas Act, subject to the filed rate doctrine and Mobile-Sierra presumption that freely negotiated wholesale rates are just and reasonable. FERC also has previously found that it would have concurrent jurisdiction with the bankruptcy court in relation to the transportation agreements should Gulfport file for bankruptcy.
A number of pipelines have recently turned to FERC to assert a role, as more producer shippers appeared headed towards bankruptcy. Gulfport recently extended a forbearance agreement with its lenders to Nov. 13. The forbearance was necessary after the company missed the interest payment due on its 6% senior unsecured notes due Oct. 15, 2024.
Anticipating a possible bankruptcy filing by the producer shipper, Rockies Express petitioned FERC to establish a quick turnaround adjudicatory proceeding to determine whether continued performance under the Gulfport agreements does not seriously harm the public interest.
Gulfport argued that abrogation or modification of the agreements would not impose a major burden on REX's other shippers or consumers of gas and that pipelines bear the risks arising from unsubscribed capacity on new facilities, according to the order.
But FERC found in its Oct. 28 order that the first factor of the Mobile-Sierra test bars FERC changing the filed rate unless that rate harms the public utility – in this case the pipeline.
"Gulfport argues the opposite – namely that the gas pipeline will remain in service regardless of whether the Gulfport [transportation service agreements] are modified, abrogated or kept intact."
FERC concluded that the Gulfport TSAs "do not impair the financial ability of the public utility—here , the pipeline—to continue its service."
Potential path forward
The commission pointed out that Gulfport could have instead made arguments based on its own financial distress to satisfy the first Mobile-Sierra factor in the context of a high-rate challenge, as has been applied in other cases. FERC is "acutely aware that the natural gas industry is experiencing a period of unprecedented demand destruction and depressed commodity prices," the commission said.
"We stood ready to find that the public interest requires modification or abrogation of the Gulfport TSAs, provided that record supported doing so," the commission found. It included a hypothetical example of evidence that could have been submitted highlighting intertwined needs of both the pipeline and the shipper to endure the current market, in order to support a modification such as altering payment schedules.
Further, FERC found Gulfport failed to provide adequate record evidence to show it will suffer sufficient harm to satisfy the first prong of the Mobile-Sierra test, in that it argued only that the long term contracts are above current market rates and would exacerbate Gulfport's financial troubles.
FERC found Gulfport merely asserts financial injury without connecting that evidence to the public interest.
Turning to the next Mobile-Sierra factor, FERC found Gulfport did not demonstrate that the agreements saddled other customers with an excessive burden, an important aspect of that test. Instead, FERC said the producer conceded that there was not reason to expect undue burdens such as gas shortages or price increases.
FERC was also unpersuaded that its findings would deter future anchor shipper agreements, ultimately raising costs for consumers.
As to a third Mobile-Sierra test, FERC found there was not evidence that Gulfport TSA rates resulting from an open season were unduly discriminatory.
The commission also rejected Gulfport arguments about the impropriety of proceeding with the paper hearing.