On October 25, 2016, FERC held that a pipeline providing interstate service pursuant to Natural Gas Policy Act (“NGPA”) Section 311 may not give preferential curtailment priority to preexisting, intrastate customers unless their intrastate transportation service agreements expressly provide for a higher curtailment priority above the pipeline’s other firm services. In doing so, FERC clarified that it is not enough that a preexisting intrastate service agreement has “different” curtailment provisions than the pipeline’s Statement of Operating Conditions (“SOC”) used to provide interstate service pursuant to NGPA Section 311.

Under NGPA Section 311, intrastate pipelines may provide limited interstate transportation service on behalf of intrastate pipelines or local distribution companies served by an interstate pipeline. Instead of requiring these pipelines to file a full, open-access FERC gas tariff, FERC’s regulations require them to file SOCs, as well as rates and charges, regarding the limited interstate transportation service the pipelines will provide.

On April 6, 2016, ONEOK WesTex Transmission, L.L.C. (“ONEOK”) filed revisions to its SOC, including provisions specifying that ONEOK would curtail all firm transportation service on a pro rata basis in the event it lacked sufficient capacity to accommodate all firm transportation service nominations. In response, Atmos Energy Corporation (“Atmos”) disputed the revised curtailment provisions, arguing that its own firm transportation service on ONEOK should be exempted from the ONEOK’s proposed pro rata curtailment provisions because its firm service agreement with ONEOK preexisted the SOC’s curtailment provisions and because its service agreement states a different curtailment priority than the SOC’s curtailment provisions. On June 22, 2016, FERC issued an order accepting ONEOK’s revised SOC and rejecting Atmos’s arguments, holding that a pipeline’s obligation to give equal priority to all firm shippers – in accordance with FERC’s long-standing “firm is firm” policy – could only be trumped by a preexisting service agreement that expressly provides for heightened priority. FERC found that Atmos’s firm transportation service agreement did not meet this requirement because it appears to provide for the same curtailments rights available to all intrastate shippers under state law.

On July 22, 2016, Atmos requested rehearing of FERC’s June 22, 2016 order. Specifically, Atmos argued that FERC: (1) should have required ONEOK to include in its SOC curtailment provisions preferential treatment for shippers who have preexisting firm intrastate service agreements with different curtailment provisions; (2) exceeded its jurisdiction by interpreting Atmos’s intrastate service agreement, which Atmos argued may only be interpreted by the state utility commission or state courts; and (3) acted arbitrarily in deciding that the curtailment provision in Atmos’s firm transportation service agreement does not convey special curtailment rights under NGPA Section 311. In the alternative, Atmos requested that FERC clarify that it did not interpret Atmos’s intrastate service agreement.

In its October 25 order, FERC denied Atmos’s request on rehearing. In doing so, FERC held that if a pipeline chooses to provide interstate transportation service pursuant to NGPA Section 311, it may not give preexisting intrastate arrangements a higher priority than firm interstate transportation service unless preexisting intrastate transportation service agreements expressly provide for a curtailment priority above other firm services. Thus, FERC reasoned that it was not enough that Atmos’s intrastate transportation service agreement had “different” curtailment provisions than the SOC – Atmos’s service agreement must expressly provide for a higher curtailment priority than ONEOK’s other firm shippers in order to receive preferential treatment. Because FERC found that Atmos’s service agreement appears to give Atmos the same rights available to all intrastate shippers, FERC determined that Atmos was not eligible to receive preferential curtailment priority under ONEOK’s SOC. However, FERC granted Atmos’s request for clarification, stating that FERC did not interpret Atmos’s intrastate service agreement as a matter of law and that the state utility commission and state courts retain their jurisdiction over intrastate service agreements.

A copy of the order is available here.