On November 5, 2015, FERC issued an order accepting four non-conforming and negotiated rate agreements, subject to conditions, between Columbia Gas Transmission, LLC (“Columbia”) and New Jersey Natural Gas Company (“NJNG”), South Jersey Gas Company (“SJ Gas”), and South Jersey Resources Group (“SJ Resources”).  In the order, FERC found that two provisions in the agreements were permissible material deviations from Columbia’s pro forma agreement either because they had been offered to all anchor shippers or because they did not provide certain shippers with a different quality of service or adversely affect other shippers.  However, FERC held two material deviations to be impermissible because they conferred “valuable rights” and were not offered to other anchor shippers.

In the order, FERC restated its policy for determining whether a non-conforming provision in a service agreement is a material deviation from the pro forma agreement.  A material deviation is any provision in a service agreement that (1) goes beyond filling in the blank spaces with the appropriate information allowed by the tariff and (2) affects the substantive rights of the parties.  FERC explained that it prohibits negotiated terms and conditions of service that result in a shipper receiving a different quality of service than that offered to other shippers under the pipeline’s generally applicable tariff or that affect the quality of service received by others.  Furthermore, FERC stated that it must prohibit a material deviation if the deviation presents a significant potential for undue discrimination among shippers.  However, FERC also stated that it can permit material deviations that do not pose a substantial risk of undue discrimination.

As to the permissible deviations, first, FERC held that Columbia’s non-conforming provision that stated that NJNG, SJ Resources, and SJ Gas have the one-time right to extend the term of their service agreements is permissible.  FERC explained that it has held that a contract extension provision is a valuable right that must be offered on a not unduly discriminatory basis, but the provision may be permissible if offered to anchor shippers in the open season for the expansion.  In this case, because Columbia afforded all anchor shippers a contract extension right, FERC found the material deviation permissible.  Second, FERC also found the non-conforming provision that stated that SJ Resources and SJ Gas “shall be obligated to pay the rates and charges set forth herein on the Actual In-Service Date, regardless of whether Shipper will actually begin receiving service on that date” to be permissible.  FERC explained that the provision is a permissible material deviation because it relates solely to the rates the anchor shippers will pay and does not provide them with a different quality of service or adversely affect other shippers.

As to the impermissible deviations, first, FERC expressed concern with Appendix A of the SJ Gas Agreement, which contains transportation demand that increases from 50,000 Dth/day to 70,000 Dth/day at pre-determined intervals.  Although Columbia acknowledged that FERC had found similar provisions to be unduly discriminatory, Columbia argued that the Appendix A provisions were not material deviations.  Columbia further argued that, even if they were material deviations, (1) the provisions do not give SJ Gas special rights, (2) the information in Appendix A is the type of information contemplated by the fill-in-the-blank provisions in Appendix A of Columbia’s pro forma agreement, and (3) the provision was necessary for Columbia to secure SJ Gas’s support for the East Side Expansion project.  FERC found that the open season notice for the expansion project did not offer other anchor shippers this right to vary contract demand over time.  In addition, FERC found that the headings to Columbia’s pro forma Appendix A did not include such an option or explain that varying contract demands with different beginning and ending dates may be entered under each heading.  Finally, FERC found that the pro forma Appendix A’s reference to “Recurrence Interval” did not provide sufficient notice to Columbia’s other shippers that they have the same option to vary contract demand as was afforded SJ Gas.  Therefore, FERC required Columbia to either (1) revise the SJ Gas Agreement so that it no longer contains varying transportation demand amounts or (2) revise Columbia’s pro forma agreement to include a statement that the blanks in Appendix A can be filled in with multiple terms and demand quantities.

Second, FERC did not find the NJNG I and NJNG II Agreements permissible because they contain provisions allowing NJNG a one-time right to reduce the term of the agreements from fifteen years to ten years.  FERC explained that a provision giving a shipper the option to terminate, or reduce, its contract demand before the expiration of its contract is a valuable right that must be afforded to all other similarly situated firm shippers.  However, FERC clarified that the provision may be permissible if offered to anchor shippers in the open season for an expansion.  Here, FERC found that Columbia’s tariff does not state that it has any generally applicable provision offering an early termination option and that the open season notice for the expansion project did not offer an option to terminate a contract early.  As a result, FERC required Columbia to either (1) remove the early termination right from the agreements or (2) provide such rights to all customers under its generally applicable tariff.

FERC ordered the tariffs to be effective November 1, 2015, subject to the conditions discussed above.  FERC also required Columbia to revise its agreements or tariff within 30 days in accordance with FERC’s determination that some of the provisions are impermissible material deviations.

A copy of the order is available here.