Report of the Natural Gas Regulation Committee

Article excerpt

This Report summarizes several major natural gas decisions and policy developments that have occurred at the Federal Energy Regulatory Commission (FERC or Commission) and the U.S. Courts of Appeals, plus the gas-related provisions of the Energy Policy Act of 2005. The timeframe covered is the period since the last Report of the Committee, at year-end 2004. Below is an index of the major subjects covered:

I. EPACT 2005 NATURAL GAS PROVISIONS AND FERC PENALTY AUTHORITY

II. D.C. CIRCUIT DECISION IN A GA v. FERC

III. US LNG TERMINAL AUTHORIZATION (JUNE 2004 THROUGH JUNE 2006)

IV. NATURAL GAS QUALITY AND INTERCHANGEABILITY

V. REGULATIONS GOVERNING THE CONDUCT OF OPEN SEASONS FOR ALASKA NATURAL GAS TRANSPORTATION PROJECTS, 18 C.F.R. PART 157

VI. UPDATE ON CREDIT WORTHINESS ISSUES

VII. DISCOUNTING AND NEGOTIATED RATES

VIII. MARKET-BASED RATES FOR STORAGE

I. EPACT 2005 NATURAL GAS PROVISIONS AND FERC PENALTY AUTHORITY

The Energy Policy Act of 2005 (EPAct 2005),' enacted on August 8, 2005, is the first piece of wide-ranging energy legislation passed by Congress in over a decade. The Act contains several provisions of interest to the natural gas industry, including increased FERC penalty and rulemaking authority to discourage and punish manipulation of the wholesale natural gas market, and primary jurisdiction under the Natural Gas Act (NGA)2 for the FERC to permit, site and approve onshore liquefied natural gas (LNG) import terminals.

A. FERC Anti-Manipulation and Penalty Authority

Section 315 of the EPAct 2005 empowered the FERC with authority to enact anti-manipulation rules for participants in natural gas marketing and trading.3 The FERC exercised that authority in issuing its new anti-manipulation rule prohibiting:

any entity, directly or indirectly, in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to the jurisdiction of the Commission, ... (1) [T]o use or employ any device, scheme, or artifice to defraud, (2) [T]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) [T]o engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any [entity].4

The anti-manipulation provisions of the EPAct 2005 were written to "closely track the prohibited conduct language in section 10(b) of the securities Exchange Act of 1934,5 and specifically dictate that the terms 'manipulative or deceptive device or contrivance' are to be used 'as those terms are used in section 10(b) of the Securities Exchange Act of 1934.'"6 This modeling of the FERC's new rule after the language of Rule 10b-5 under the Securities Exchange Act of 1934 "will benefit entities subject to the new rule because there is a substantial body of precedent applying the comparable language" that, in the Commission's view, provides an appropriate analogy for interpretation of the new rule.7 The Commodity Futures Trading Commission's (CFTC's) anti-fraud rule8 under section 4(b) of the Commodity Exchange Act is also meant to provide some interpretive guidance for the new rule.9

The effect of the new rule is far-reaching, applying to "any entity"10 who manipulates the natural gas market in connection with a jurisdictional transaction. The Commission interprets the EPAct 2005's use of "any entity" to mean "any person or form of organization, regardless of its legal status, function or activities."" The FERC's authority does not extend, however, to fraudulent or manipulative behavior in connection with a "non-jurisdictional transaction (such as a first or retail sale)... ."12

To provide "firm but fair enforcement"13 of FERC rules and regulations, the EPAct 2005 greatly enhanced the FERC's criminal and civil penalty authority against violations of the NGA,14 Natural Gas Policy Act of 1978 (NGPA),15 Federal Power Act (FPA),16 and Interstate Commerce Act (ICA). …

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