Originally published for customers July 24, 2024.
What’s the issue?
Open seasons are a key mechanism for allocating pipeline capacity and gauging market demand for new or expanded infrastructure, though their scope and complexity can vary. The Federal Energy Regulatory Commission (FERC) evaluates the need for a project by considering open seasons and the resulting precedent agreements to demonstrate market demand. This analysis has evolved over the years, adding layers of complexity to the regulatory landscape.
Why does it matter?
Understanding this landscape is crucial for grasping the critical role open seasons play in securing project financing and their potential to influence natural gas prices by signaling future changes in pipeline capacity and regional supply-demand dynamics.
What’s our view?
The market impact of an open season depends on its type, scope, and resulting capacity subscriptions. While FERC has not established a clear threshold for how much subscribed capacity a project must have to demonstrate sufficient market demand, its evolving analysis reveals that substantial precedent agreements can overcome property rights issues but general assertions of need are insufficient, particularly when extensive eminent domain is required.
Open seasons are a key mechanism for allocating pipeline capacity and gauging market demand for new or expanded infrastructure, though their scope and complexity can vary. The Federal Energy Regulatory Commission (FERC) evaluates the need for a project by considering open seasons and the resulting precedent agreements to demonstrate market demand. This analysis has evolved over the years, adding layers of complexity to the regulatory landscape.
Understanding this landscape is crucial for grasping the critical role open seasons play in securing project financing and their potential to influence natural gas prices by signaling future changes in pipeline capacity and regional supply-demand dynamics.
The market impact of an open season depends on its scope and resulting capacity subscriptions. While FERC has not established a clear threshold for how much subscribed capacity a project must have to demonstrate sufficient market demand, its evolving analysis reveals that substantial precedent agreements can overcome property rights issues but general assertions of need are insufficient, particularly when extensive eminent domain is required.
Open Season Overview — Regulatory Framework and Mechanics
An open season is a procedure that pipeline companies use to allocate and sell available capacity by notifying potential shippers of its availability and soliciting bids. Open seasons allow pipelines to gauge market interest, which helps them determine if there is sufficient demand for new or expanded capacity and decide if a project is economically justified. Resulting precedent agreements are a key factor in the Commission's evaluation of market need when considering approval for a pipeline project.
There are also “reverse” open seasons where pipelines seek shippers willing to “turn back” their contracted capacity. Pipelines often solicit turnback capacity during open seasons for expansion projects to ensure efficient use of their existing infrastructure before building new facilities. A related process worth distinguishing — capacity release — allows existing shippers to release their unused capacity to a secondary market.
FERC regulates open season processes to ensure they are fair and transparent and open to all potential shippers on a nondiscriminatory basis. Pipelines are required to post available firm capacity on their websites — electronic bulletin boards — as it becomes available. This information must include availability at receipt points, mainline, delivery points, and storage fields. Postings must occur before 11:30 a.m. Central Time, three days after gas begins flowing, and must be updated within ten business days after the month of gas flow.
While open seasons are a common method for selling capacity, they are not mandatory under the regulations. Pipelines have flexibility in how they market their capacity, including selling on a first-come, first-served basis, provided their tariff allows for this method. FERC’s overarching goal is to enable those who value capacity the most to obtain it, assuming pipelines will seek the highest possible rate in their economic interest.
When conducting an open season, pipelines typically announce available capacity, state criteria for acceptable bids, outline the method for determining the best bid, and set a bid closing date. Pipelines often evaluate bids on a net present value (NPV) basis, considering factors such as price, term, and quantity of transportation service. The goal of this process is to allow pipelines to maximize the value of their capacity while providing a fair and transparent method for allocation.
As we discussed in Junk and Jewel or Uncut Gems? FERC’s New Notice of Inquiry on Capacity Contracts, determining NPV can be controversial, especially when operationally unrelated and non-contiguous pipeline segments are bundled together. This bundling approach, particularly when desirable segments are combined with undesirable ones, prompted a Notice of Inquiry at the Commission which is still underway.
Current Examples: Kinder Morgan, Berkshire Hathaway, and Energy Transfer
An examination of current notices from three major pipeline operators — Kinder Morgan, Berkshire Hathaway, and Energy Transfer — demonstrates significant variation in the scope and design of open seasons.
Kinder Morgan’s current offerings highlight the long-term planning involved in pipeline expansions and the flexibility provided to potential shippers regarding start dates, contract lengths, and various receipt and delivery points. For example, the Elba Express Company’s (EEC) July 15 to July 29 open season for an expansion on its system offers variable incremental capacity depending on desired receipt and delivery points, with contract terms ranging from 20 to 30 years. This offering also solicits turnback capacity, demonstrating its use to efficiently design a project and avoid unnecessary expansion facilities.
Kinder Morgan’s Tennessee Gas Pipeline Company, LLC is also conducting an open season from July 18 through July 24 for up to 10,000 Dth/d of firm capacity on its system. This includes two proposals with primary and secondary delivery points. Primary points are specific locations defined in a shipper’s contract where they have firm rights to receive gas, while secondary points are alternative locations where shippers can receive gas when capacity is available, offering greater flexibility to adapt to changing market conditions, but at a lower priority.
Berkshire Hathaway’s Northern Natural Gas Company's open season, running from July 9 to July 23, 2024, also shows flexibility in addressing shipper needs and illustrates how pipelines use open seasons to gauge interest in potential expansion projects and optimize their systems. The company states that “If sufficient customer interest indicates a project is feasible, Northern will develop the Project subject to certain conditions including securing contractual commitments for incremental firm throughput service with rates and terms sufficient to justify the Project economics.”
Finally, Energy Transfer’s current open seasons illustrate the role of prearranged deals and the flexibility of receipt and delivery points. For example, the Rover Pipeline’s July 12 through August 12 open season aims to expand a receipt interconnect and upgrade compression, adding 250,000 Dth/d of capacity for a 15-year term. This expansion is backed by an agreement with an anchor shipper. Another June 18 through July 26 open season for the Clover Leaf Project on the Enable Gas Transmission, LLC system features multiple receipt and delivery points along three paths for up to 30,000, 90,000 and 300,000 Dth/d respectively. It also expresses a willingness to install new points based on shipper preferences.
FERC's Analysis of Project Need
The results of open seasons, particularly the precedent agreements that emerge from them, play a crucial role in the Commission’s evaluation of pipeline certificate applications. FERC’s evaluation process is guided by its Certificate Policy Statement, which balances public benefits against potential adverse effects. The level of evidence required to establish need is proportional to the potential adverse impacts of a proposed project. As stated by the Commission, “The more interests adversely affected, or the more adverse impact a project would have on a particular interest, the greater the showing of need and public benefits required to balance the adverse impact.”
While market demand, as evidenced by precedent agreements, is a significant factor in this analysis, the Certificate Policy Statement also allows for the consideration of other factors, such as demand projections and cost savings to consumers, or comparisons of projected demand with current capacity.
Case Studies in FERC's Need Determination
Three key projects illustrate how FERC weighs precedent agreements in making decisions on certificate applications: the Turtle Bayou Gas Storage Company’s proposed storage facility (Turtle Bayou), the Jordan Cove Energy Project, and the Nexus Gas Transmission Project (Nexus). These projects evaluate evidence of market demand against impacts on landowners, property rights negotiations, and the potential need for eminent domain proceedings.
The Commission’s denial of Turtle Bayou serves as a clear example of how inadequate demonstration of market need can result in a certificate application's rejection. Turtle Bayou presented only general assertions of need for storage at regional and national levels, lacked evidence of capacity subscribed under precedent agreements, owned virtually none of the necessary property rights, and would likely require extensive use of eminent domain.
The Jordan Cove project added more nuance. Initially denied in 2016 for failing to show market demand despite potential landowner impacts, it was later approved in 2020. In 2016, there were no precedent agreements or open seasons conducted, only general assertions of need, and the project potentially impacted 157.3 miles of privately owned lands affecting approximately 630 landowners. However, when the project was resubmitted with evidence of a long-term precedent agreement for approximately 96% of its capacity, FERC approved it. This reversal underscores the weight FERC gives to demonstrable market demand resulting from open seasons.
Most recently, in 2017, the Commission approved Nexus after it conducted multiple open seasons between 2012 and 2015, resulting in precedent agreements for 885,000 Dth/day out of a total capacity of 1.5 million Dth/day (about 59% of the pipeline's capacity). Despite the pipeline not being fully subscribed, FERC considered these agreements significant evidence of project need. The Commission emphasized that Nexus, as a new company, would bear all the risk for any unsubscribed capacity.
Looking Forward
FERC's analysis of project need continues to evolve beyond the traditional reliance on open seasons and precedent agreements. Recent cases like the GTN XPress rehearing we discussed in Rolling the Dice Without Rolled-in Rates - The GTN XPress Rehearing highlight the emerging consideration of climate initiatives and their potential impact on long-term gas demand. While the Commission’s previous majority generally continued to favor the traditional approach of demonstrating demand through precedent agreements, former Commissioner Clements, in her dissenting opinions, argued for a more holistic approach that considers potential future demand risks in light of state climate laws.
With the recent addition of three new commissioners and ongoing litigation in some cases, the future direction of need analysis will continue to evolve. For industry stakeholders, staying informed of these regulatory developments is crucial, as they may significantly influence project viability and the long-term value of capacity contracts in an evolving energy market.