Multi-Party Agreements for Sharing Pipeline Capacity: Potential Benefits, Potential Risks
On July 15, 2015, Algonquin Gas Transmission, LLC (“Algonquin”) filed proposed revisions to its Tariff to adopt a pro forma Multiple Shipper Option Agreement (“MSOA”), which would give multiple customers the ability to share interstate pipeline capacity by entering into a single firm transportation service agreement. Although Algonquin’s proposal may be attractive to certain customers looking to defray the costs of purchasing firm capacity, Algonquin’s proposal comes with its own risks and potential costs that should be carefully evaluated by any party considering entering into such an arrangement.
Algonquin’s filing is the first proposal of its kind following the Federal Energy Regulatory Commission’s (“FERC”) issuance of Order No. 809, which amended FERC’s regulations in an attempt to improve coordination between the electric and gas industries and ensure the reliable and efficient operation of the interstate natural gas pipeline and electricity systems. The order is a direct response to the increasing reliance of wholesale power markets on natural gas-fired generation and recognition that reforms were needed to ensure that generators are able to obtain access to the fuel necessary to meet applicable performance obligations imposed on them by the tariffs of RTOs and ISOs.
Among other things, Order No. 809 revised FERC’s regulations to require interstate natural gas pipelines offering firm transportation service to revise their tariffs, within 60 days of a shipper request, to allow multiple shippers associated with a designated agent or asset manager to share pipeline capacity without the need to comply with the Commission’s capacity release requirements. FERC noted that in recent years it had accepted proposals by several pipelines to offer multiple shippers the option to enter into a single contract for transportation service and that imposing such a requirement would afford shippers, including natural gas-fired generators, with greater contractual flexibility and facilitate the efficient use of pipeline capacity.
Consistent with Order No. 809, Algonquin proposes to allow a group of customers (referred to as “Principals”) to share pipeline capacity by entering into an MSOA and designating an agent or asset manager (the “Administrator”) for the purpose of managing their capacity pursuant to a single firm transportation agreement. The Administrator would act as the designated agent for the Principals for purposes of contracting, nomination, scheduling, billing, and other matters and would be eligible to use the overall firm contractual entitlement to provide service to one or more of the Principals using the capacity. In its filing, Algonquin explains that it has not yet received a request from a customer to enter into a multi-party firm contract, but that it anticipates that this option will become increasingly attractive as new services are developed on Algonquin’s system.
Algonquin’s filing and FERC’s requirement that pipelines allow customers to enter into multi-party agreements to share capacity may hold potential benefits. For instance, a customer participating in such an arrangement will know that it has reliable access to firm capacity as necessary to meet its obligations, reducing that customer’s reliance on interruptible capacity or capacity release. This may be attractive to the owners of natural gas-fired generation seeking to ensure that they have access to the transportation necessary to support their ISO and RTO energy and/or capacity commitments. In addition, the MSOA may provide customers with a valuable source of capacity that can be released and sold at market rates on a short-term basis (i.e., a year or less) during periods where the customers’ needs allow.
While the flexibility afforded by the ability to enter into an agreement to share capacity outside of the capacity release context may be attractive to some, both Order No. 809 and Algonquin’s proposal require customers to take on additional financial risks that must be assessed when considering the benefits of such an arrangement. For instance, the MSOA provides that the Principals must agree to indemnify and hold Algonquin harmless from third-party claims attributable to Algonquin’s reliance on the Administrator’s instructions pursuant to the MSOA. In addition, parties entering into such an arrangement to agree to be jointly and severally liable for firm transportation service. FERC has explained that such a requirement is necessary to ensure consistency with FERC’s “shipper-must-have-title” policy. According to FERC, absent such a requirement, “shippers under the multi-party contracts that are not liable for the total charges under the agreement would be in violation of the Commission’s shipper-must-have-title policy to the extent that they used capacity in excess of that for which they were liable to pay.”
The significance of these requirements should not be underestimated. In effect, each customer must agree to be financially liable for the total payments under the firm service agreement and agree to hold Algonquin harmless from certain third-party claims. In some cases, the potential financial exposure may be significant enough to deter customers from pursuing such a multi-party arrangement, particularly smaller customers who may only use a small portion of the total contractual entitlement and may find the prospect of bearing the costs associated with larger customers’ usage simply too much to bear. Given the additional risk associated with such agreements, it may not be surprising that the pipelines that amended their tariffs prior to the issuance of Order No. 809 to permit multi-party agreements have received limited customer interest, as the Interstate Natural Gas Association of America acknowledged in response to FERC’s initial proposal to mandate such a requirement.
In light of these requirements, it is critical that a customer considering entering into such an agreement carefully evaluate the creditworthiness of potential counterparties and the potential for default. In addition, prior to entering into such an agreement, a customer should evaluate what recourse it might have against defaulting customers and whether additional steps are necessary to protect their financial interests. The selection of an Administrator will also be important. Ideally, the Administrator should be knowledgeable and experienced in administering contracts for others on the pipeline, have sufficient assets to address potential liabilities, and, obviously, be fair and agreeable to all shippers. Finally, regulated gas and electric utilities considering entering into an MSOA or similar arrangement may want to notify regulators about their plans to enter the agreement to ensure that regulators do not see any potential issues.