October 25, 2014

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Federal Energy Regulatory Commission (FERC) Concludes It Lacks Jurisdiction Over Liquified Natural Gas (LNG) Facility in Marcellus Region

FERC recently issued an order disclaiming jurisdiction over an LNG facility to be constructed and operated by Gulf Oil Limited Partnership (Gulf Oil) in the Marcellus Shale region.  Gulf Oil sought a declaratory order asking FERC to disclaim any jurisdiction it might have under Section 7 of the Natural Gas Act.  Gulf Oil asserted that the LNG facility will be used to convert natural gas produced in the Marcellus region into LNG for use as a vehicular fuel or for transportation by truck to LDCs for peak shaving purposes.  Gulf Oil stated that, to the best of its knowledge, neither the natural gas transported to the LNG facility nor the subsequently produced LNG would be transported over a pipeline in interstate commerce.  Gulf Oil noted that, after the LNG has been delivered by truck to LDCs, the LDCs could possibly re-gasify the LNG and transport it over interstate pipelines.

FERC granted the requested declaratory order disclaiming jurisdiction on July 17, 2014.  FERC stated that historically, its jurisdiction over the interstate transportation of natural gas has been limited to natural gas transported over pipelines and does not extend to natural gas transported by truck, train, or barge.  The order also notes that FERC has never claimed jurisdiction over facilities used to liquefy natural gas that has not previously been transported over jurisdictional interstate pipeline facilities.  FERC concludes, therefore, that because the natural gas involved in Gulf Oil’s proposed LNG facility will not, at any point, be transported over interstate pipeline facilities, the LNG facility will not be subject to FERC jurisdiction.  The order goes on to state that, even if LDCs receiving the LNG for peak shaving purposes subsequently decided to re-gasify the LNG and transport it via interstate pipeline, FERC “jurisdiction would not retroactively attach to Gulf Oil’s” LNG facility or operations.

FERC also made clear that Gulf Oil does not need FERC certificate authority to sell the LNG produced at its facility.  The order states that FERC’s jurisdiction has never been held to apply to direct sales of LNG to customers that will not resell it.  In addition, Gulf Oil’s sales of LNG to LDCs for resale and local distribution are exempt from FERC’s jurisdiction as “first sales” under the Natural Gas Policy Act (NGPA).  The NGPA’s definition of “first sale” includes sales to LDCs, interstate pipelines, intrastate pipelines, retail customers, or any other sale in a chain of transactions provided that the sale in the chain of transactions occurs prior to a sale to one of the previously listed entities.  Thus, Gulf Oil’s sales to LDCs would be “first sales” even if the LDC later resells the LNG to third parties.

© 2014 Schiff Hardin LLP

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About this Author

Partner

Debra Ann Palmer has been involved in a variety of proceedings before the Federal Energy Regulatory Commission (FERC) and the U.S. Courts of Appeals. She has 25 years of experience advising participants in the electric and natural gas industries on matters related to:

Enforcement and compliance with FERC rules and policies
Rates and terms and conditions of service
Competitive electric and gas markets
Electric reliability requirements
Regional Transmission Organization (RTO) requirements

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