Report of the Natural Gas Regulation Committee

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This report summarizes policy developments and legal decisions that have occurred at the Federal Energy Regulatory Commission (FERC or Commission) and the U.S. Courts of Appeals in the area of natural gas regulation. The time frame covered by this report is the period between July 1, 2009, and June 30, 2010.*

I. RULEMAKING PROCEEDING

A. Affiliate Rules

On October 15, 2009, the Federal Energy Regulatory Commission (FERC) issued Order No. 717-A,1 clarifying the final rules governing the relationship between a transmission provider and its marketing function employees and the marketing function employees of its affiliates. The FERC clarified that the term marketing function employee, as defined in 18 C.F.R. § 358.3(d), "does not include an employee of an affiliate that does not engage in transmission transactions on the affiliated transmission provider's transmission system."2 The FERC denied rehearing that the marketing function definition be amended to include purchases as well as sales, finding that restricting the definition to include only sales more closely matches the FERC's statutory prohibitions against undue discrimination in section 206 of the Federal Power Act (FPA) and section 5 of the Natural Gas Act (NGA).3

The FERC clarified that a natural gas local distribution company (LDC) "making off-system sales of gas that has been transported on non-affiliated pipelines is not subject to the Standards of Conduct if it conducts transmission transactions with an affiliated interstate pipeline for the purpose of making bundled retail sales or on-system sales."4 Also, the FERC clarified that it intended to exempt all on-system sales by an intrastate pipeline, by a Hinshaw pipeline exempt from the Natural Gas Act (NGA), or by an LDC.5 The FERC denied a request for rehearing regarding the exclusion from the definition of marketing function the sale of natural gas from a seller's own production and from a seller's own gathering and processing facilities.6

The FERC clarified that the exemption regarding the seller's own production encompasses foreign sourced gas regardless of whether the seller owns the mineral rights at the foreign wellhead or acquires ownership onboard a liquefied natural gas (LNG) vessel, so long as it owns the gas before it enters the transmission provider's transmission facilities and the gas is the only gas the transmission provider is transporting.7 The FERC clarified that a releasing shipper is not performing a marketing function when it assigns gas supply to an asset manager under an asset management agreement (AMA). However, the FERC stated that if the AMA "leaves the releasing shipper any ability to conduct sales for resale or provides that the releasing shipper is to retain control of the transactions entered into by the asset manager, the releasing shipper would remain subject to the Independent Functioning Rule with regard to that specific agreement."8

The FERC clarified that an affiliate of an interstate pipeline is not engaged in marketing functions to the extent that such affiliate makes incidental purchases or sales of natural gas to remain in balance under applicable pipeline tariffs.9 The FERC also clarified that de minimis off-system sales that are related to an LDC's balancing requirements are not included in the definition of marketing function.

The FERC also denied a request to remove "submission of offers to sell in interstate commerce" from the definition of natural gas marketing function activities.10 The FERC clarified that the exclusion in 18 C.F.R. § 358.3(c)(2)(iii) for sales of natural gas solely from a seller's own production is consistent with the exclusion in Order No. 497-A that includes situations in which a producer sells gas that it owns, or sells gas of other interest owners in the same well and reservoir to the extent that the producer has contractual authority to sell such gas.11

The FERC clarified that marketing function employees include employees in the legal, finance, or regulatory division of a jurisdictional entity, whose intermittent day-to-day duties include the drafting and redrafting of non-price terms and conditions of, or exemptions to, umbrella agreements. …