Rockies Express Preliminary Determination Approves Rate and Contractual Offerings Based on Shipper Commitment

On September 21, the Federal Energy Regulatory Commission (FERC) issued a preliminary determination on all non-environmental issues approving Rockies Express Pipeline LLC's (Rockies Express) application 1) to construct and operate 713 miles of new natural gas transmission facilities from the Cheyenne Hub in Weld County, Colorado to an interconnection with Panhandle Eastern Pipeline Company in Audrain County, Missouri and 2) to lease capacity on Questar Overthrust Pipeline Company, which will extend the Rockies Express system 140 miles west from Wamsutter to the Opal Hub in Wyoming.

The proposal is in addition to Rockies Express' currently certificated facilities, which include a 136-mile segment currently in operation from the Meeker Hub in Colorado to the Wamsutter Hub in Wyoming and a 191-mile segment under construction from Wamsutter to the Cheyenne Hub.

The new infrastructure will provide a direct link between supplies of natural gas in the Rocky Mountains and markets in the Midwest.

Among other things, FERC’s order addressed Rockies Express’ conduct of an open season for capacity and precedent agreements signed by shippers on the new system.

Benefits for Foundation and Anchor Shippers

In order to secure large capacity commitments for such a big project, the Rockies Express open season offered greater benefits to shippers based on the quantity of firm transportation commitment.

Foundation Shippers. These are shippers who executed precedent agreements for long-term capacity commitments equal to or exceeding 500,000 Dth/day. They received the most beneficial negotiated reservation rates and contractual rights, including 1) most favored nation status with respect to their negotiated reservation rate and contractual rollover rights, renewable for one-year terms, at the same rate and quantity contained in their firm service agreements (FTSAs), and 2) a one-time Right of First Refusal (ROFR) upon expiration of the initial term of their service agreements applicable to any portion of the quantity (but not at the rate) in their initial FTSAs.

Anchor Shippers. These include shippers who make long-term capacity commitments equal to or exceeding 200,000 Dth/day, but less than 500,000 Dth/day. They received most favored nations rights with respect to the negotiated reservation rates afforded to all long-term firm shippers except Foundation Shippers, as well as annual contractual rollover rights and ROFR identical to those of Foundation Shippers.

Standard Shippers. These are shippers who entered into precedent agreements for firm transportation commitments of less than 200,000 Dth/day. They received contractual rollover and ROFR rights as applicable under the proposed Rockies Express tariff.

Conduct of the Open Season

FERC requires interstate pipelines that propose construction to hold a nondiscriminatory, nonpreferential, open-season for potential shippers to seek and obtain firm capacity rights. As part of the open season, the project sponsor must offer a maximum recourse rate so that a bidder in the open season has the option to choose between the recourse rate and a negotiated rate.

Rockies Express explained that in order to secure adequate support for the project it was required to make accommodations to prospective large shippers, but that these incentives were offered in a non-discriminatory and transparent manner. All potential shippers were provided notice of the different negotiated reservation rate options, had an equal opportunity to bid on capacity, and were offered the option to pay applicable recourse rates. Based on this explanation, FERC found that the open season was conducted consistent with its policy.

Rate and Contractual Incentives

FERC noted that Rockies Express had offered rates and contractual incentives to secure adequate support for the project and held a transparent open season where these rate and contractual incentives were clearly defined. Qualification for incentives was based on a shipper’s commitment to the Project, which was set forth in each shipper’s executed precedent agreement and is therefore publicly verifiable, and all potential shippers had an opportunity to become Foundation Shippers or Anchor Shippers. On this basis, FERC found that the negotiated rates and contractual terms offered to Foundation Shippers and Anchor Shippers were not unduly discriminatory.

Conclusion

In order to provide the regulatory certainty that the non-environmental components of the project meet the requirements of the Natural Gas Act, Rockies Express requested the Commission to address those issues as a preliminary determination. The Commission determined that Rockies Express adequately supported the need for each of the rate and contractual provisions to secure the necessary financial commitment for construction of the project. Thus, where large capacity commitments are necessary to support a project, FERC will allow a project sponsor to offer special rate and contract incentives in an open season, as long as the offer is presented in a non-discriminatory and transparent manner and all shippers have an equal opportunity to bid on the capacity.