On October 15, 2015, the Federal Energy Regulatory Commission (FERC or the “Commission”) issued an order clarifying the extent to which natural gas asset management agreements (AMAs) provide an exemption from the Commission’s prohibition on buy/sell transactions. In response to a petition for a declaratory order filed by Rice Energy Marketing, LLC, the Commission clarified that the exemption from the prohibition on buy/sell transactions for certain transactions with asset managers applies to both “delivery” AMAs and “supply” AMAs, even though the Commission previously addressed the exemption in the context of only delivery AMAs.
Background on AMAs
AMAs are contractual relationships in which an “asset manager” agrees to manage another party’s gas supply and delivery arrangements, including its pipeline capacity. In a delivery AMA, a large gas purchaser, such as a local distribution company or an industrial user, assigns its pipeline capacity (and possibly its gas purchase contracts) to an asset manager. The AMA requires the asset manager to then deliver gas to the purchaser when called upon to do so under the terms of the AMA. To the extent that there is excess pipeline capacity or surplus purchased gas, the asset manager is expected to maximize the value of those assets by making bundled sales or releasing the pipeline capacity to third parties, with revenues to be shared as provided for under the AMA. Supply AMAs work similarly to delivery AMAs, except that, in supply AMAs, a large gas seller –most often a producer–assigns its pipeline capacity to the asset manager, who purchases and then markets the seller’s gas, sharing revenues as provided for under the terms of the AMA.
In 2008, the Commission recognized that AMAs provide significant benefits to market participants, and took steps to facilitate greater use of AMAs. In Order No. 712, the Commission found that AMAs maximize the utilization and value of pipeline capacity by creating a mechanism for capacity holders to use third-party experts to manager their capacity. The Commission found that AMAs result in ultimate savings for end-use customers by providing for lower gas supply costs and more efficient use of pipeline capacity. To facilitate greater use of AMAs, in Order No. 712, the Commission exempted qualifying AMAs (those meeting certain requirements relating to the scope of the asset manager’s gas delivery or purchase obligations) from the competitive bidding requirements of FERC’s interstate pipeline capacity release regulations. This exemption–codified in Section 284.8 of FERC’s regulations–allows capacity holders to release pipeline capacity to an asset manager in connection with an AMA without making the capacity available for competitive bidding (though the releases are still required to be publicly posted). Recognizing that AMAs are multifaceted agreements, the Commission also exempted qualifying AMAs from its prohibition on tying a release of interstate pipeline capacity to extraneous conditions. Finally, the Commission determined that its prohibition on buy/sell transactions did not preclude a party from managing its own gas purchase contracts, yet relying on an asset manager to manage its pipeline capacity, even though such arrangements could involve otherwise-prohibited buy/sell transactions.
The Buy/Sell Prohibition
The Commission’s prohibition on buy/sell transactions –established in Order No. 636 in 1992– prohibits a holder of interstate pipeline capacity from purchasing gas from a seller, transporting the gas on an interstate pipeline, and then reselling the gas back to the seller after it exits the pipeline – transactions that would allow a capacity holder to circumvent the capacity release requirements by effectively allowing another party to use its pipeline capacity. While such buy/sell transactions are prohibited, in Order No. 712, the Commission granted “an exemption from the buy/sell prohibition for AMAs that qualify for the exemptions from bidding and tying, but only for volumes of gas delivered to the releasing shipper.” The Commission found that it was acceptable for a gas purchaser to use an asset manager to manage its pipeline capacity while still maintaining direct responsibility for gas purchases, even though such purchases would need to be sold to the asset manager managing the pipeline capacity, potentially running afoul of the buy/sell prohibition. However, in Order No. 712, the Commission did not directly address whether supply AMAs would be similarly exempted from the buy/sell prohibition.
FERC Expands Buy/Sell Prohibition Exemption to Supply AMAs
In its October 15, 2015, order, the Commission clarified that “buy/sell transactions in which the releasing shipper in a supply AMA sells its natural gas to its asset manager, the asset manager transports the gas over the released capacity, and the asset manager then resells the natural gas to the releasing shipper are not buy/sell transactions of the type prohibited by Order No. 636.” The Commission found that, while Order No. 712 discussed and expressly granted a buy/sell exemption for only delivery AMAs, the exemption should nonetheless apply to “corresponding transactions conducted pursuant to a supply AMA.” The Commission found that buy/sell transactions in connection with supply AMAs, like delivery AMAs, do not involve evasion of the capacity release regulations, because the capacity will continue to be used for the same purpose for which the releasing shipper in the supply AMA originally purchased it – to transport its natural gas to market. Moreover, the capacity release to the asset manager in both delivery and supply AMAs is done transparently, in accordance with the Commission’s capacity release regulations (which, for AMAs, do not require competitive bidding, but do require the release to be posted).
In light of expanded domestic natural gas production, supply AMAs have become an increasingly important tool for natural gas producers and other large sellers to manage marketing functions and pipeline capacity. By clarifying that the buy/sell prohibition does not apply to certain buy/sell transactions with an asset manager, natural gas producers and large sellers should have more flexibility to enter into AMAs and be better positioned to benefit from the services provided by asset managers.