NATURAL GAS REGULATION 2020

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United States

Robert A James and Stella Pulman

Pillsbury Winthrop Shaw Pittman LLP

DOMESTIC SECTOR OVERVIEW

State of the market

1 Describe the domestic natural gas sector, including the

natural gas production, liquefied natural gas (LNG) storage,

pipeline transportation, distribution, commodity sales and

trading segments and retail sales and usage.

Operations in the upstream segment of the United States gas sector

are conducted by the same kinds of entities that engage in the explora-

tion and production of liquid hydrocarbons. This segment is occupied

by a variety of private parties, from individual entrepreneurs to large

integrated firms, engaged in securing grants of licences and leases to

explore for and produce valuable substances. Processing of gas and

fractionation of natural gas liquids can occur in the field by the lessee, or

in plants along gathering or trunk lines between the field and the main

trunkline pipeline systems. Operations in the midstream and down-

stream segments of gas and LNG storage, trunkline transportation and

local distribution are typically conducted by private entities subject to

public utility regulation at the federal or state level, or by municipal

utility districts.

The US has six LNG export terminals. As of October 2019, 16

new terminals had been approved by the Federal Energy Regulatory

Commission (FERC), eight of which were under construction. The US

has been a net exporter of natural gas since 2017, and the US Energy

Information Administration (EIA) predicts that US exports will continue

to increase as new LNG facilities come online. In 2019, the US became

the world’s third largest exporter of natural gas, behind Australia and

Qatar, and the International Energy Agency predicts the US will surpass

those countries to become the largest exporter within the next five

years. Although the US’s LNG exports continue to rise, 70 per cent of

total US natural gas exports were by pipeline in 2018, 67 per cent of

which went Mexico.

In 2019, the US natural gas pipeline network consisted of approxi-

mately 3 million miles of mainline, gathering and distribution systems.

Approximately 1,200 entities (many of which are affiliated) operate the

interstate and intrastate transmission system, and more than 1,300

entities operate the distribution system. The network serves more than

75 million customers, including approximately 5.4 million commer-

cial customers and over 185,000 industrial and power generation

consumers.

The US Department of Energy’s (DOE) 2015 Quadrennial Energy

Review report predicted that the US interstate transmission network

will continue to expand until 2030. Between 2015 and 2030, the DoE

anticipates the addition of 38 to 46.5 bcf/d (billion cubic feet per day)

of interstate pipeline capacity at a cost of between US$42 billion and

US$53.5 billion. The DoE projects that much of that expansion and

investment will be front-loaded (2015–2020), with subsequent years

(2021–2030) experiencing slower rates of expansion and comparatively

less investment. The DoE’s long-term forecast of slower interstate

transmission capacity expansion and lower investment reflects the fact

that much of future natural gas production and demand are expected to

be in close geographic proximity with one another, thereby reducing the

need for additional infrastructure. The DoE’s long-term projections also

reflect its expectation that existing natural gas pipelines will support

much of the changing supply and demand conditions and government

energy policies.

Consumption

2 What percentage of the country’s energy needs is met

directly or indirectly with natural gas and LNG? What

percentage of the country’s natural gas needs is met through

domestic production and imported production?

According to the EIA, in 2018, natural gas accounted for approximately

31 per cent of total US primary energy consumption, which represents

a 2 per cent increase from 2017. The US consumed approximately 30

trillion cubic feet of natural gas, and 100 per cent of that demand was

met through domestic production. Most of the natural gas that the US

imported via pipeline in 2018 was from Canada (more than 97 per cent).

US natural gas demand is projected to increase significantly in

the years ahead. The EIA’s 2019 Annual Energy Outlook predicts that

natural gas will comprise 34 per cent of total US energy consumption

by 2050, driven by increases in US domestic electric and industrial

consumption and comparatively low prices. Exports (via pipelines to

Mexico and LNG terminals) are also expected to be significant long-term

sources of demand. In 2018, FERC issued several amended presidential

permits to increase natural gas export capacity to Mexico, including one

for Tennessee Gas Pipeline, which increased the pipeline’s permitted

capacity by approximately 250 per cent.

Government policy

3 What is the government’s policy for the domestic natural gas

sector and which bodies set it?

A central feature of governmental policy for the domestic natural gas

sector is to regulate firms with monopoly power so they are unable to

abuse that power. This is balanced by policies that support increased

domestic gas production and, for limited parts of the sector, deregula-

tion and the promotion of competitive market forces. Policies are set by

the legislative and executive branches of both federal and state govern-

ments. Principal authority for establishing policies of the US federal

government regarding natural gas has been delegated to administra-

tive agencies that are part of the executive branch, particularly FERC.

NATURAL GAS REGULATION 2020

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Gas Regulation 20202

Regulatory authorities

4 Which authorities make regulatory policies and decisions

in respect of the production, transmission, distribution and

supply of natural gas?

Production, drilling and supply

Federal lands

Federal lands are managed by the Department of Interior (DoI). Within

the DoI, the Bureau of Ocean Energy Management (BOEM) and the

Bureau of Safety and Environmental Enforcement (BSEE) regulate

offshore drilling, the Bureau of Land Management (BLM) regulates

onshore drilling on federal lands and the Bureau of Indian Affairs over-

sees mineral leasing on Indian lands.

State lands

Drilling on state lands is managed by state departments of natural

resources and related agencies. Coastal states additionally have authori-

sation rights over submerged lands and ‘inland waters’ generally within

three miles of the coast. Each state has its own set of requirements and

regulations governing the leasing of such state-owned lands.

Privately owned lands

The leasing of private land is generally negotiated by lessees and indi-

vidual landowners.

Transmission

The primary federal regulatory agency governing natural gas trans-

mission is FERC. It has jurisdiction over the regulation of interstate

pipelines, and is concerned with overseeing the implementation and

operation of the natural gas transportation infrastructure. In addition,

FERC has primary regulatory authority to permit, site and approve

onshore and nearshore LNG import and export terminals.

FERC’s regulatory authority extends to the interstate transporta-

tion of natural gas, the import and export of natural gas by pipeline or

LNG terminal, and certain environmental and accounting matters. FERC

obtains its authority and directives in the regulation of the natural gas

industry from a number of laws:

• the NGA;

• the Natural Gas Policy Act of 1978;

• the Outer Continental Shelf Lands Act;

• the Natural Gas Wellhead Decontrol Act of 1989;

• the Energy Policy Act of 1992; and

• the Energy Policy Act of 2005.

The Office of Pipeline Safety of the Department of Transportation

(DoT) has jurisdiction over interstate pipeline safety, while the DoE has

authority over permits to import and export LNG. Comprehensive rules

have been issued by those agencies.

State authorities regulate pipeline capacity that is considered to

be ‘intrastate’.

Distribution

State regulatory utility commissions have oversight of issues related

to the siting, construction and expansion of local distribution systems.

State public utilities commissions have jurisdiction over retail

pricing, consumer protection and natural gas facility construction and

environmental issues not covered by FERC or the DoT. FERC also regu-

lates interstate pipeline rates, and ensures that rates and charges for

such pipeline services are just and reasonable and not the product of

undue discrimination.

FERC is designed to be independent from influence from the

executive or legislative branches of government, or industry partici-

pants, including the energy companies over which it has oversight. It is

composed of five commissioners who are nominated by the President

and confirmed by the US Senate. Each commissioner serves a five-year

term, and one commissioner’s term is up every year.

The DoI, the DoT, the EPA and the DoE are cabinet-level agencies,

and their respective secretaries or administrators are chosen by the

President, subject to Senate confirmation.

There are several adjudicatory options for challenging or appealing

decisions of the regulator. FERC may make a decision without any

further procedures, hold a trial-type hearing before an administrative

law judge or hold a technical conference or ‘paper’ hearing. Alternate

dispute resolution, such as mediation and arbitration, may also be used.

FERC decisions may be appealed to the federal courts of appeal.

Where FERC is implementing a federal statute, an objecting party

must usually show that FERC’s implementation is an ‘arbitrary and

capricious’ interpretation of the federal statute. This is a high standard

that is rarely satisfied. Additionally, a party must show that it has

standing to bring the suit, and satisfy other justiciability requirements.

Members of state regulatory commissions are appointed in most

states, but are elected in some states. Decisions of state regulatory

commissions on matters such as intrastate pipeline and distribution

rates, as well as customer billing and service issues, can be appealed

through the state court system. However, such decisions are rarely

overturned unless the appellant can convince the court that a decision

is patently contrary to the evidence taken as a whole.

The government authorisations required to carry on natural gas

exploration and production activities depend on whether the proposed

project is to be conducted on federal, state- or privately owned land, and

whether it is proposed to be conducted onshore or offshore.

Enforcement

As with any segment of the industry that interacts with and is regu-

lated by government agencies, natural gas explorers and producers,

suppliers and other operators can be subject to licence revocation, fines

and penalties for failure to comply with applicable regulations or permit

requirements. Agencies follow notice and hearing procedures to issue

rulings, the findings and decisions of which are generally reviewable by

courts. Agencies can also seek court intervention to enforce their deter-

minations. Failure to comply with applicable requirements can result in

a loss of entitlements and suspension or termination of operations, in

addition to monetary penalties.

REGULATION OF NATURAL GAS PRODUCTION

Ownership and organisation

5 What is the ownership and organisational structure for

production of natural gas (other than LNG)? How does the

government derive value from natural gas production?

In contrast to the oil sector, in which some companies are active in all

segments, it is more common for companies in the natural gas sector

to concentrate on two or three segments (eg, production and gathering

or transmission and storage). Ownership of pipeline transportation

capacity is separated from ownership of the natural gas transported

via pipeline, although some Canadian producers also own pipelines that

cross from Canada into the US.

The federal government does not participate directly as a party

in private natural gas production transactions. However, in fiscal year

2018, approximately 9 per cent of all natural gas and 6 per cent of natural

gas liquids produced in the US occurred on federal or native lands. The

federal government derives value for gas produced on federal lands

through royalties, annual rentals and bonus payments. The Office of

Natural Resources Revenue, an agency within the DoI, is responsible

for the management of production revenues. Production on state lands

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is managed by the appropriate state agency. In addition, government

agencies impose a variety of taxes and charges. For example, FERC is

authorised to recoup its entire budget appropriation through the imposi-

tion of annual charges and filing fees.

Regulatory framework

6 Describe the statutory and regulatory framework and any

relevant authorisations applicable to natural gas exploration

and production.

The relevant statutory and regulatory framework for natural gas

exploration and production depends largely on whether the activity

is conducted on federal, state or private lands, and whether it occurs

onshore or offshore. Enforcement generally occurs through administra-

tive processes with the right to seek court review.

The BOEM and the BSEE oversee the management of the mineral

resources generally located more than three miles from the coast on the

outer continental shelf (OCS). The BOEM is responsible for managing

development in an environmentally and economically responsible

manner, and the BSEE is responsible for enforcing safety and envi-

ronmental regulations. The DoI prepares a five-year programme that

specifies the size, timing and the location of areas to be assessed for

federal offshore natural gas leasing. Bids are usually solicited on the

basis of a cash bonus and a royalty agreement, with the highest bidder

awarded the lease. OCS leases contain decommissioning obligations

requiring lessees to return the leased area to the legally required

condition, and the BOEM requires lessees to post security to ensure the

decommissioning and other lease obligations are met.

Additionally, federal regulations require open access to OCS pipe-

lines. The open access rule provides complaint procedures for shippers

of oil and gas produced on federal leases on the OCS who believe

that they have been denied open and non-discriminatory access to an

OCS pipeline.

Onshore, the BLM is charged with managing and conserving feder-

ally owned land, including natural gas resources. Unless they are

specifically carved out of the leasing programme, all BLM-managed

lands and national forests are open to leasing. Gas leasing is generally

not permitted in the national park system, in national wildlife refuges,

in the Wild and Scenic River Systems or in wilderness areas. Leasing in

national forests requires permission from the US Forest Service of the

Department of Agriculture. The BLM reviews and approves permits and

licences for companies to explore, develop and produce natural gas on

federal lands. Once projects are approved, the BLM enforces regulatory

compliance.

State resource agencies are generally responsible for production

occurring on state-owned lands. Many coastal states also have sepa-

rate offshore leasing programmes and rules pertaining to state coastal

waters and associated pipelines.

Unconventional gas production

7 Are there different rules for, or any restrictions on,

unconventional natural gas production (including fracking)?

US federal policy is generally characterised by promotion of alternative

drilling methods, while a number of states and local governments have

rules restricting such practices. Although fracking and other unconven-

tional production methods have turned the US into a net exporter of

natural gas, concerns regarding the safety of the practice are a topic of

intense public debate. Because much of US energy policy is governed at

the state and local levels, a patchwork of laws, restrictions and outright

bans on fracking has emerged across the United States.

For example, in November 2019, the governor of California halted

approval of all new hydraulic fracturing in the state pending review of

the projects by an independent panel of scientists. The Colorado legis-

lature passed a bill in 2019 allowing local governments more control

over health, environmental and siting rules for new wells in their juris-

dictions, and several cities in Colorado are expected to use the law to

impose fracking bans and other restrictions on natural gas producers.

Going in the opposite direction are states such as Texas, which

passed a state-wide law prohibiting cities and counties from instituting

fracking bans, and Ohio, whose Supreme Court ruled that the state

government has the exclusive authority to regulate natural gas produc-

tion, thereby invalidating all municipal fracking bans in the state.

Required security and guarantees

8 Are participants required to provide security or any

guarantees to be issued with a licence to explore for or to

store gas?

BLM requires natural gas producers operating on public lands to post

bonds prior to drilling. In addition, many states have bonding require-

ments that exceed the federal requirements as a prerequisite to

issuance of a well permit or authorisation of other drilling or explora-

tion operations. Security requirements associated with the storage of

natural gas may also be included in the storage provider’s tariff.

Offshore, the BOEM, with input from the BSEE, has adopted and

enforces an array of financial responsibility and security requirements

applicable to lease holders. This includes a requirement to post a base

bond in an amount set by regulation. In addition, and depending on a

number of factors, the agency may require supplemental security from

lessees to cover decommissioning and other lease obligations.

REGULATION OF NATURAL GAS PIPELINE TRANSPORTATION

AND STORAGE

Ownership and infrastructure

9 Describe in general the ownership of natural gas pipeline

transportation, and storage infrastructure.

Pipeline transportation and storage of natural gas are conducted by the

private sector. According to the DoT, there are roughly 170 operators of

interstate gas transmission pipelines and 1,100 operators of intrastate

transmission pipelines in the US.

As of November 2018, private companies operated 380 active

underground storage facilities, mainly in depleted reservoirs, aquifers

and salt caverns. In 2018, storage capacity decreased 1.2 per cent from

2017 levels, driven by several factors, including increased natural gas

production that has caused a reduced reliance on storage services.

Regulatory framework

10 Describe the statutory and regulatory framework and any

relevant authorisations applicable to the construction,

ownership, operation and interconnection of natural gas

transportation pipelines, and storage.

Pursuant to section 7 of the NGA, interstate pipelines and gas storage

facilities must obtain certification from FERC before constructing or

expanding facilities. Intrastate gas transmission and distribution facili-

ties are subject to certification by state and local authorities.

Under applicable statutes, FERC will issue a certificate to a pipeline

if the applicant demonstrates that the benefits from construction of the

pipeline outweigh the potential adverse impacts. FERC’s assessment

of the potential benefits focuses in part on whether there is a demon-

strated market need for the pipeline. Under FERC’s current policy, in

assessing need, FERC generally looks for whether, at the time the appli-

cation is filed, the applicant has entered into precedent agreements with

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Gas Regulation 20204

shippers, obligating the shipper to purchase firm capacity on the pipe-

line on a long-term basis. FERC is currently reviewing its policy, though,

and may apply different criteria in the future. In weighing the potential

benefits and adverse impacts from proposed pipelines, recent court

decisions have required FERC to examine the potential environmental

impact of increased carbon emissions that might result if the pipeline is

allowed to move forward.

FERC decisions may be appealed to a US court of appeal and state

commission decisions may be appealed to the state court system. FERC

may impose conditions on certificates requiring the recipient to obtain

additional approvals or permission from other federal and state admin-

istrative agencies.

The Pipeline and Hazardous Materials Safety Administration within

the DoT regulates the safety of gas pipeline and storage facilities. In

late 2016, the agency issued broad new safety requirements for both

interstate and intrastate underground gas storage facilities. Those new

regulations were issued under a statute (the Protecting our Infrastructure

of Pipelines and Enhancing Safety Act of 2016) incorporating lessons

learned from a massive 2015 leak from the Aliso Canyon storage facility

in southern California. The requirements included new safety standards

for interstate and intrastate underground storage facilities, annual safety

reporting obligations, adverse event reporting requirements and manda-

tory prior event reporting for certain significant events (eg, change of

operator or new facility construction). In late 2017, the agency reopened

the comment period for the rule and stayed enforcement until early 2018.

General compliance under the rule went into effect in January 2018, and

facility inspections by the agency began in March 2018, with an estimated

390 facilities requiring inspection. Initial inspection of all facilities is antic-

ipated to be completed within five years.

Land rights

11 How does a company obtain the land rights to construct a

natural gas transportation or storage facility? Is the method

for obtaining land rights to construct natural gas distribution

network infrastructure broadly similar?

The location, construction and operation of interstate pipelines, facilities

and storage fields involved in moving natural gas across state bounda-

ries must be approved by FERC. The pipeline company proposes the

route or location, which is then reviewed by FERC. If a proposed pipe-

line route is on or adjacent to private land, the company will inform

the private landowners and obtain any necessary rights of way (or

alternative access rights) prior to construction. The applicant must

consider alternative routes or locations to avoid or minimise the effects

on buildings, fences, crops, water supplies, soil, vegetation, wildlife, air

quality, noise, safety and landowner interests. FERC staff will consider

whether the pipeline can be placed near or within an existing pipeline,

power line, highway or railroad rights of way. By federal law, a pipeline

certified by FERC has eminent domain authority. Storage facilities are

usually located in depleted oil or natural gas production fields or in salt

deposits. Obtaining land rights for distribution network infrastructure is

broadly similar as for interstate pipelines, but approval must be sought

from state entities instead of FERC. Typically, the company must obtain

approval from the state siting authority (often the state utility board),

comply with city and local safety and zoning ordinances, negotiate with

private landowners or obtain eminent domain powers through a state

specific approval process.

Access

12 How is access to the natural gas transportation system

and storage facilities arranged? How are tolls and tariffs

established?

There are essentially three major types of pipelines along the transpor-

tation route: the gathering system, the transmission pipeline and the

distribution system. The gathering system transports raw natural gas

from the wellhead to the processing plant. Transmission pipelines use

higher-pressure and larger-diameter pipes to move natural gas quickly

over long distances; they are typically interstate, but can also be intra-

state. Interstate natural gas pipeline networks transport processed

natural gas from processing plants in producing regions to those loca-

tions with high natural gas requirements, particularly large, populated

urban areas. Distribution systems deliver natural gas to homes, busi-

nesses and power plants, although power plants may also be served

directly from transmission pipelines through FERC-approved laterals.

Transportation of natural gas is closely linked to its storage. If the

natural gas being transported is not required at the time, it can be put

into storage facilities for when it is needed. Natural gas pipeline compa-

nies have customers on both ends of the pipeline – the producers and

processors that deliver gas into the pipeline, and the consumers and

local distribution companies that take gas out of the pipeline.

In accordance with FERC rules, access to interstate natural gas

transportation and storage services must be provided on a non-discrim-

inatory basis. Generally, purchasers of gas interstate transportation

and storage services negotiate individual contracts with pipeline and

storage companies, which are subject to the service provider’s tariff as

approved by FERC. Where there is limited capacity for interstate storage

or transportation, capacity is allocated through a bidding process

in which the pipeline or storage capacity is generally awarded to the

highest bidders. Under FERC rules, the terms and rates charged for all

interstate pipeline transportation and storage services must be applied

in a non-discriminatory manner, cannot be unduly restrictive and must

be fair to all parties.

Traditionally, balancing of natural gas volumes was on a once-per-

day basis, known as the gas day. However, with the increase in the use

of natural gas to generate electricity, FERC moved to align gas nomina-

tions and balancing more closely to scheduling of electricity by system

operators. An order issued by FERC changed the Timely Nomination

Cycle for scheduling gas transportation from 11.30am Central Clock

Time (CCT) to 1pm CCT, and to add an additional intraday scheduling

opportunity during the gas day to the existing two.

Interconnection and expansion

13 Can customers, other natural gas suppliers or an authority

require a pipeline or storage facilities owner or operator to

expand its facilities to accommodate new customers? If so,

who bears the costs of interconnection or expansion?

FERC is authorised under section 7(a) of the NGA to order a company

to establish physical connection of its transportation facilities with the

facilities of, and sell natural gas to, persons engaged in local distribu-

tion of natural or artificial gas to the public. Such an order will be issued

if FERC finds that it is ‘necessary or desirable in the public interest’

to do so and that ‘no undue burden will be placed upon a natural gas

company’. Customers and natural gas suppliers can petition FERC to

order an expansion of interstate natural gas transportation facilities.

FERC is prohibited from compelling the enlargement of transportation

facilities, the establishment of physical connection or the sale of natural

gas if those actions would impair a natural gas company’s ability to

render adequate service to its existing customers. The costs of such

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expansion are considered in determining rates to be charged for service

by the natural gas company.

Processing

14 Describe any statutory and regulatory requirements

applicable to the processing of natural gas to extract liquids

and to prepare it for pipeline transportation.

The processing of natural gas is largely unregulated at the federal

and state levels except for applicable environmental, health, safety

and related regulations enforced by federal or state agencies. This

may include a requirement that the operator confirm the gas has been

processed to remove contaminants or impurities before putting it into a

transmission pipeline. Processing facilities not directly involved in juris-

dictional (interstate) transportation of gas are generally exempt from

FERC jurisdiction.

Contracts

15 Describe the contractual regime for transportation and

storage.

Each pipeline or storage company providing gas transportation or

storage services subject to FERC jurisdiction is required to file and

obtain FERC acceptance of a tariff for such services. Each tariff contains

the general terms and conditions of service, rate schedules and form

agreements. General terms and conditions in both transportation and

storage tariffs typically address:

• priority and curtailment of service;

• nominations and scheduling;

• receipt and delivery points;

• quality and pressure;

• title and risk of loss;

• measurement;

fuel reimbursement; and

balancing.

Transportation rate schedules typically set forth maximum and

minimum rates for the various types and classes of service and mutu-

ally agreed recourse rates that are no less than the minimum tariff rate.

Contracts for intrastate transportation and storage of natural gas

can also be privately negotiated. In many states, these contracts are

subject to the provider’s tariff that has been filed with a state govern-

mental authority.

REGULATION OF NATURAL GAS DISTRIBUTION

Ownership

16 Describe in general the ownership of natural gas distribution

networks.

In addition to interstate and intrastate pipeline companies that deliver

natural gas directly to large-volume users, natural gas local distribution

companies (LDCs) transport gas to specific customer groups. In 2017,

approximately 190 LDCs classified themselves as investor-owned, 960

as municipally owned and 220 as privately or cooperatively owned.

Regulatory framework

17 Describe the statutory and regulatory structure and

authorisations required to operate a distribution network.

To what extent are gas distribution utilities subject to public

service obligations?

The operation of a local distribution network by an LDC is governed by

the state regulatory authority with jurisdiction where the facilities are

located. The LDC may be required to obtain certificates of convenience

and necessity to serve in the state, and comply with all applicable safety

regulations.

Service by LDCs is generally required to be non-discriminatory

and at rates approved by the state regulatory authority. While each LDC

retains the right to disconnect service for non-payment, those rights are

subject to consumer protection regulations in most jurisdictions.

In the past, LDCs offered only bundled services, combining the cost

of natural gas transportation and distribution into one price reflected

on consumers’ bills. However, many states have moved towards retail

unbundling, following FERC’s example at the wholesale level, and now

offer customer choice programmes that allow them to purchase natural

gas from one supplier, and use the LDC only for service and delivery of

the gas. Following the community aggregation trend emerging in elec-

tricity markets, three states – Ohio, New York and New Jersey – are

allowing customers to leverage their combined purchasing power to

contract for natural gas.

Access and pricing

18 How is access to the natural gas distribution grid organised?

Describe any regulation of the prices for distribution services.

In which circumstances can a rate or term of service be

changed?

State and federal regulatory agencies have authority over access to the

natural gas distribution grid and, as a result, requirements differ from

state to state. Generally, LDCs are granted the exclusive right to serve

customers within a geographic area. An LDC has the benefit of a known

customer base, but is also subject to rate regulation and an obligation

to provide service. In many states, large customers have the ability to

bypass the LDC with respect to the purchase of gas because of their

ability to buy in significant quantities; however, even these customers

will need to avail themselves of the LDC’s distribution services. In some

circumstances, large retail customers can receive service directly from

interstate pipelines through FERC-approved laterals, thus bypassing

the LDC completely.

Privately owned LDCs generally have their rates determined by

the state regulatory authority, but the rates of publicly owned LDCs

are normally set by the LDC’s governing body. Rates typically allow the

LDC a reasonable return on investment, based on the cost of providing

service and returns on investments of comparable risk. Bundled rates

include fees for access to the distribution system.

Periodic adjustments may be made to rates and terms of service,

either at the LDC’s request or by order of the governing state regulatory

authority. Changes are typically made on the basis of changes in oper-

ating costs or the applicable law. New capital investments may also be

the basis for a rate increase request.

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System/service expansion and limitation

19 May the regulator require a distributor to expand its system

to accommodate new customers? May the regulator require

the distributor to limit service to existing customers so that

new customers can be served?

If an LDC has been granted an exclusive right to serve within a particular

geographic area by state law, it will also generally be required to extend

its system to serve new customers within that area if it can do so without

jeopardising the service provided to existing customers. The process for

expanding an existing system (including issues such as the manner in

which costs of expansion are recouped) is set forth in state statutes or

regulations.

Contracts

20 Describe the contractual regime in relation to natural gas

distribution.

Most contracts for natural gas distribution are either established by a

filed tariff or bilateral service agreement, with terms such as quantity

and type of service specific to the customer being served. However,

certain terms of service will likely be the same for all customers of the

LDC who are within the same customer class. There is typically little

flexibility for negotiation by individual customers with respect to the

terms of a service agreement.

REGULATION OF NATURAL GAS SALES AND TRADING

Ownership and organisation

21 What is the ownership and organisational structure for the

supply and trading of natural gas?

Natural gas is supplied and traded by private-sector companies,

pursuant to privately negotiated transactions. These companies can be

privately or publicly owned and range in size from entrepreneurs to very

large organisations. There are both physical and financial markets for

trading natural gas, and prices vary depending on supply and demand

across a myriad of production, aggregation, and demand hubs or market

centres. While physical trading involves an obligation to deliver or take

delivery of natural gas in exchange for payment, financial trading is

based on the movement of the price of natural gas. Financial trading

is conducted only through financial instruments and does not involve

physical delivery of gas, although pricing and settlement of the financial

products are tied to physical natural gas.

Pricing and trading takes place at various locations across the

country, primarily at the intersections of major pipeline systems known

as hubs. While there are more than 20 hubs, the key trading hub used as

a benchmark for the US natural gas market is Henry Hub in the Gulf of

Mexico region in Louisiana, and futures contracts trade on natural gas to

and from this hub. Much of the financial trading in natural gas is ‘basis’

trading reflecting the need to hedge differences between the reference

Henry Hub futures contract and prices at the regional market centres.

Government oversight

22 To what extent are natural gas supply and trading activities

subject to government oversight? What authorisations are

required to engage in wholesale trading of gas?

Under the current regulatory regime, only pipelines and LDCs are

directly regulated. Interstate pipeline companies are regulated

regarding the rates they charge, the access they offer to their pipelines

and the siting and construction of new pipelines. Similarly, LDCs are

regulated by state utility commissions that oversee their rates and

construction issues, and that ensure that proper procedures exist for

maintaining adequate supply to customers.

The trading of natural gas is largely market-driven; however, rules

are in place to ensure that the market is operated fairly. FERC has

also implemented ‘anti-manipulation’ rules that prohibit fraudulent or

deceptive practices, and omissions or misstatements of material facts

in connection with purchases or sales of natural gas or transportation

services subject to FERC jurisdiction.

The Dodd-Frank Wall Street Reform and Consumer Protection

Act (Dodd-Frank) granted oversight and rule-making authority to the

Commodity Futures Trading Commission (CFTC) to regulate deriva-

tives transactions, including trades involving energy commodities such

as natural gas. Many transactions previously exempt from regulation

under the Commodities Exchange Act are regulated under Dodd-Frank.

The CFTC has oversight authority for a wide range of practices in

the over-the-counter (OTC) derivative market, requiring registration of

swap dealers and major swap participants, imposing capital and margin

requirements on participants, requiring that derivatives trading take

place on regulated exchanges or swap execution facilities, and creating

a derivatives clearinghouse.

Dodd-Frank includes an ‘end user’ exception, allowing an exemp-

tion from clearing and exchange trading requirements for trades in

which one party is not a ‘financial entity’ (as defined by Dodd-Frank), the

purpose of the trade is to mitigate ‘commercial risk’ (to be defined by

the CFTC), and the entity notifies the CFTC how it will meet its financial

obligations associated with entering into uncleared swaps.

FERC and the CFTC are parties to a memorandum of under-

standing (MOU) on jurisdiction and information sharing to resolve

issues arising out of their overlapping responsibilities. Pursuant to the

MOU, the two agencies work together to share appropriate data relating

to financial markets for natural gas and electricity on an ongoing basis

to further the mutual interest of the agencies in protecting the nation’s

energy markets. In addition, the participating agencies will, to the extent

practicable, take steps to avoid duplicative information requests and

coordinate oversight (including market surveillance), investigative and

enforcement activities.

Trading processes

23 How are physical and financial trades of natural gas typically

completed?

There are two primary types of natural gas marketing and trading:

physical trading and financial trading. Physical trading is the buying

and selling of natural gas. Financial trading, on the other hand, involves

derivatives and other financial instruments where neither buyer nor

seller may take physical delivery of the natural gas. The North American

Energy Standards Board serves as an industry forum for the develop-

ment and promotion of standards and form contracts for natural gas

and electricity markets.

Physical trading contracts are negotiated between buyers and

sellers. There are numerous types of such contracts but they normally

contain standard terms, such as specifying the buyer and seller, the

price, the amount of natural gas to be sold, the receipt and delivery

points and the term of the contract. Additional terms and conditions

outline the payment dates, quality specifications and any other provi-

sions agreed to by both parties.

There is a significant market for natural gas derivatives and finan-

cial instruments in the US, exceeding the value of physical natural

gas trading.

Natural gas derivatives are traded on the New York Mercantile

Exchange (NYMEX) and other exchanges. One of the most common deriv-

atives is a monthly futures contract that requires the seller to deliver

and the buyer to take delivery of a fixed amount of natural gas (10,000

Pillsbury Winthrop Shaw Pittman LLP United States

www.lexology.com/gtdt 7

MMBtu), delivered at Henry Hub in Louisiana. The vast majority of these

contracts are settled financially at the market price at the time the buyer

or seller closes out its position. For buyers or sellers who choose to take

physical delivery, pricing is based upon the final settlement price for the

applicable contract on the day trading on NYMEX ends. Other natural

gas derivatives include options contracts, calendar spread options and

basis swap futures contracts. In addition to the derivatives available on

NYMEX, other derivatives are traded in OTC markets.

The International Swaps and Derivatives Association (ISDA) has

also created a standard contract – the ISDA master agreement – for

OTC derivatives transactions, which can be used for physical and

financial trades as well. The ISDA master agreement contains general

terms and conditions, such as provisions relating to payment netting,

tax gross-up, tax representations, basic corporate representations and

basic covenants and events of default and termination, but does not

include details of any specific derivatives transactions the parties may

enter into. Details of individual derivatives transactions are included in

‘confirmations’ entered into by the parties to the ISDA master agree-

ment. Each confirmation sets out the agreed commercial terms of a

particular transaction.

Available services and products

24 Must wholesale and retail buyers of natural gas purchase a

bundled product from a single provider? If not, describe the

range of services and products that customers can procure

from competing providers.

In its Order No. 636, FERC required interstate pipelines to separate

or unbundle their services for gas transportation from gas sales.

Regulators in many states have also required LDCs to offer unbundled

sales and transportation services for large customers located in their

distribution systems. As a result, LDCs, large industrial customers and

electric utilities can now buy gas directly from producers or marketers

in a competitive market; contract with interstate pipelines for transpor-

tation; and separately arrange for storage and other services formerly

provided by interstate pipelines or LDCs (such as nominating, balancing,

parking, loaning, metering and billing) from marketers, market centres,

hubs, storage operators and other third-party providers.

Some state regulatory agencies allow smaller-volume customers

to participate in aggregation programmes to purchase unbundled

services. As of late 2018, 23 states and the District of Columbia allowed

residential consumers and other small users to purchase natural gas

from suppliers other than LDCs, up from 20 states and the District of

Columbia in 2001. These customers are typically offered unbundled

services on a limited basis through an intermediate marketer who

‘rebundles’ the services and offers them as a competitively priced

alternative. Where unbundled LDC services are available, some states

require that smaller customers purchase a standby service from the

LDC. Participation in customer choice programmes decreased slightly in

2018 to 6.8 million customers, which represented 17 per cent of eligible

residential customers, down from 19 per cent in 2017.

REGULATION OF LNG

Ownership and organisation

25 What is the ownership and organisational structure for LNG,

including liquefaction and export facilities, and receiving and

regasification facilities?

All currently operating US LNG facilities are ultimately owned by US

or foreign private companies. Ownership structures vary from project

to project and may include direct ownership by a single entity, joint

ventures among two or more parties or many other possible structures.

Terminals may be operated on a ‘tolling’ basis, where the terminal

operator does not take title to the hydrocarbons; on a ‘merchant’ basis,

where the terminal operator purchases and takes title to gas and then

sells the LNG after completion of the regasification process or following

delivery; or on a ‘hybrid’ basis where the terminal operator or an affiliate

engages in tolling and buy-sell arrangements.

Regulatory framework

26 Describe the regulatory framework and any relevant

authorisations required to build and operate LNG facilities.

Responsibility for regulating construction and operation of LNG facilities

and for authorising LNG exports is divided between different agencies.

Under section 3 of the Natural Gas Act, FERC is responsible for author-

ising the siting and construction of onshore and near-shore LNG import

or export facilities. The Deepwater Port Act (DPA) provides that the US

Maritime Administration (MARAD) is responsible for siting and construc-

tion of offshore facilities. The DPA also provides that the governor of

a state adjacent to the proposed offshore facility must approve of the

facility, effectively providing veto power to the state.

FERC or MARAD must also ascertain whether a proposed LNG

export terminal meets environmental standards subject to the National

Environmental Policy Act (NEPA). Various state and local land, environ-

mental, wildlife and historical preservation agencies also play a role in

approving or denying a proposed facility’s environmental impact state-

ment (EIS), as well as outside advocacy groups. The environmental and

construction approval process is very lengthy and takes about three

years on average to complete, including a mandatory six-month pre-

filing process with FERC.

To export LNG overseas, project operators must apply for export

authorisation from the DoE. Separate authorisations are required for

exports to countries with which the US already has a free trade agree-

ment (FTA) and countries that have not yet signed FTAs with the US

(non-FTA countries). By statute, approval for exports to countries with

FTA agreements is essentially automatic. To obtain approval for exports

to non-FTA countries (including Japan and most European coun-

tries), the DoE must make a determination that allowing exports is in

the ‘public interest’. This determination must be made based upon an

administrative record that includes public comments. It also includes

the DoE’s analysis of the economic impact of allowing exports. In deter-

mining whether to grant approval, the DoE generally looks at whether

exporting natural gas will have a significant impact on the domestic

supply of natural gas and the potential impact on prices in the US.

In addition, the DoE must make an independent determination

regarding whether allowing LNG exports is consistent with the require-

ments of NEPA. This determination is generally based on the EIS or

Environmental Assessment prepared by FERC or MARAD, with respect

to which the DoE is a ‘cooperating agency’, but may also include addi-

tional analysis prepared by the DoE.

The US Court of Appeals for the District of Columbia (DC) Circuit

issued two opinions in 2017 that provide additional guidance for LNG

permitting decisions issued by the DoE and FERC. Taken together, the

cases provide that while there is a strong public interest presumption in

favour of LNG exports, an EIS must include an analysis of downstream

greenhouse gas emission impacts, including impacts from, for example,

power plants the pipeline will serve.

The natural gas industry and importing countries have placed

significant pressure on Congress and the administration to expedite

LNG export applications, particularly those for small-scale exports. The

administration and the DoE published a final rule in 2018 intended to

expedite the application process for small-scale natural gas exports,

and similar legislation was introduced in Congress in 2019. Although

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Gas Regulation 20208

Asia remains the largest importer of US LNG, tariff disputes between

the US and China were disruptive to the industry in 2019.

As of November 2019, FERC had approved 11 new LNG export

projects in the prior nine months, and the DoE had approved seven new

export and re-export applications. Including projects under construc-

tion, the US’s export capacity is expected to rise from 6.9 bcfd in 2019 to

9.6 bcfd by the end of 2020.

Pricing

27 Describe any regulation of the prices and terms of service in

the LNG sector.

LNG terminals built after FERC’s 2002 Hackberry decision and the

passage of the Energy Policy Act of 2005 are not required to offer open

access to terminal customers. Instead, the owner of the terminal may

operate the terminal in accordance with market conditions, thereby

offering access to customers of its choosing at prices and on such terms

and conditions as may be agreed between the owner and the customer.

The terms and conditions of such access are generally reflected in a

terminal use agreement between the terminal owner and the customer.

However, open access requirements still apply to interstate pipelines

transporting regasified LNG from LNG terminals in the US and with

respect to the terms and conditions of LNG import and regasification

services provided by non-Hackberry terminals (which are still subject

to regulation by tariff). FERC can deny an application if an LNG terminal

is not open-access, thus providing FERC discretion to decide whether to

allow non-open access in connection with new or expansion applications.

MERGERS AND COMPETITION

Competition authorities

28 Which government body may prevent or punish

anticompetitive or manipulative practices in the natural gas

sector?

Prohibitions on anticompetitive and manipulative conduct are found in

federal and state laws of general application (called ‘antitrust laws’ in

the US) and in the laws and regulations applicable to public utilities in

particular. The antitrust laws include the Sherman Act (combinations in

restraint of trade, monopolisation), the Clayton Act (mergers, exclusive

dealing) and the Robinson-Patman Act amendments to the Clayton Act

(discrimination on price and other terms of sale), and are enforced at

the federal level by the Federal Trade Commission (FTC) and the anti-

trust division of the Department of Justice (DoJ). The FTC may also

enjoin unfair acts of competition under the FTC Act. Many states have

analogues to some or all of the federal antitrust laws, and some of the

state laws have particular application to petroleum products, including

natural gas. The main federal and state antitrust laws are also enforced

by state attorneys general, local governmental bodies and, in some

cases, by private parties injured by the conduct in question.

The governmental bodies responsible for regulation of public utili-

ties enforce their own rules, particularly FERC and the various state

public utilities commissions. FERC created its own Office of Enforcement

(superseding the former Office of Market Oversight and Investigations)

with responsibility for identifying and taking action against fraud and

anticompetitive practices in the electricity and natural gas sectors. The

Energy Policy Act of 2005 broadened the scope of FERC’s rule-making

and enforcement authority under the NGA to prevent market manipu-

lation. Competition principles also inform the review and approval by

these bodies of the rates and terms and conditions of tariffs for inter-

state and intrastate transportation and storage services.

Under Dodd-Frank, the CFTC was granted enforcement authority

for futures, swaps and spot commodity markets, including natural

gas markets, substantively similar to the enforcement authority of the

Securities and Exchange Commission (SEC) under Rule 10b-5 under

the Securities Exchange Act of 1934. Section 6(c)(1) of the Commodity

Exchange Act prohibits manipulative or deceptive devices or contriv-

ances; Rule 180.1(a), which Implements Section 6(c)(1), prohibits any

manipulative device, scheme or artifice to defraud. The scope of this

enforcement authority has recently been at issue in several court cases.

Competition standards

29 What substantive standards does that government body

apply to determine whether conduct is anticompetitive or

manipulative?

The antitrust laws generally draw a distinction between conduct that is

highly likely to be anticompetitive without redeeming justification and

per se unlawful (eg, cartels), and conduct whose anticompetitive effects

must be examined and weighed against any justifications, employing a

‘rule of reason’. The definition of the relevant geographical and product

market, and measures of industrial concentration within that market,

must be evaluated under the rule of reason and other antitrust laws

dealing with market power and monopolisation offences. The FTC Act

and similar acts enjoining unfair competition employ a wider variety of

standards that may not fall within the scope of specific laws, potentially

including manipulation of prices or price indices.

Congress delegated to the CFTC expanded authority to regulate

manipulative conduct with respect to certain commodities in interstate

commerce (including natural gas), as well as futures, derivatives and

OTC swap markets. Given the similarity between the statutes prohibiting

manipulative conduct in the securities and commodities contexts, the

CFTC modelled its regulations on SEC Rule 10b-5 and similar standards

already in place at FERC and the FTC. Rule 10b-5 is the most predominant

regulation covering manipulative conduct associated with the purchase

or sale of publicly traded securities. CFTC rules broadly prohibit fraud

and manipulation in connection with any swap or contract of sale of any

commodity in interstate commerce. The scope of the CFTC’s enforce-

ment authority has recently been at issue in several court cases.

Enforcement

30 What authority does the government body have to preclude

or remedy anticompetitive or manipulative practices?

All of the federal and state antitrust enforcement agencies have power

to seek monetary damages and a variety of equitable remedies for viola-

tion of the laws they are authorised to enforce. Many of these laws carry

criminal penalties, and damages can be trebled or otherwise subject to

increase for punitive or exemplary purposes. Federal and state agencies

have the power to revoke authorisations for market-based rate-making

in the event that an entity is found to have engaged in anticompetitive

practices. Violations of an unfair competition law are ordinarily subject

to an injunction, but a violation of that injunction can result in fines.

Private parties can seek damages for injuries to them occasioned by

violation of the laws, and in some cases can bring class actions for

others similarly situated.

Pursuant to the Energy Policy Act of 2005, FERC has the authority

to issue rules to inhibit market manipulation and to facilitate price

transparency in natural gas markets. FERC has recently instituted regu-

lations that require certain gas market participants to annually report

information regarding their wholesale physical natural gas transac-

tions; their reporting of transactions to price index publishers; and their

blanket certificate status. Similar regulations require interstate and

certain major intrastate pipelines to post capacity, daily scheduled flow

information and daily actual flow information.

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www.lexology.com/gtdt 9

FERC’s 2018 decision in Calpine v PJM Interconnection has trig-

gered greater scrutiny of competition in wholesale power markets.

States are expanding programmes favouring renewable, nuclear and

coal sources over natural gas-fired power producers, who then have

to compete with one another in regional transmission organisation

(RTO) and independent system operator (ISO) capacity auctions. FERC

responded to the gas-fired power producers’ complaint of an unlevel

playing field by (i) requiring minimum bids on certain subsidised

generators, and (ii) allowing states to exempt both certain quantities of

generation and equivalent amounts of load from the regional auctions.

The outcome of these mandates could be severely challenging for the

generators that have been the beneficiaries of state-level subsidies.

Further FERC proceedings, and parallel actions in the RTOs, ISOs, state

agencies and courts continued in 2019.

In addition to agency regulations, the Energy Policy Act of 2005

confers greater enforcement authority to FERC to prevent market

manipulation. FERC has the ability to seek injunctions prohibiting

those who have engaged in energy market manipulation from further

engaging in activities subject to FERC’s jurisdiction. The Act also

increases the maximum civil penalties to US$1 million per violation per

day, and increases the maximum criminal penalties to US$1 million per

violation and up to five years’ imprisonment.

As a result of Dodd-Frank, the CFTC has the authority to seek an

injunction, penalise manipulative or anticompetitive behaviour and

issue penalties.

States also have antitrust statutes and the ability for plaintiffs to

seek damages in state courts. This remedy took on new importance as

a result of the US Supreme Court’s decision in Oneok v Learjet in 2015.

In that case, the court held that FERC’s exclusive jurisdiction under

the NGA did not pre-empt state law antitrust claims for gas market

manipulation.

Merger control

31 Does any government body have authority to approve

or disapprove mergers or other changes in control over

businesses in the sector or acquisition of production,

transportation or distribution assets?

Mergers and certain changes in control are subject to notification to the

FTC and the DoJ under the Hart-Scott-Rodino Antitrust Improvements

Act of 1976, as amended. (Natural gas transactions are usually reviewed

by the FTC.) The reportability of a transaction depends on the size

of the transaction, and in certain circumstances, on the size of the

parties thereto. Acquisitions of natural gas and oil reserves and asso-

ciated production assets, including gathering pipelines, have a higher

threshold of US$500 million before reporting is required. For midstream

and downstream transactions, transactions greater than US$90 million

may require review. The structure of the transaction – whether it is a

merger, contribution to an existing business or other form – can also

affect whether the deal is reportable.

The purpose of the requirements is to provide the enforcement

agencies with the information needed to evaluate whether the combina-

tion would violate the antitrust laws, and the time needed to seek an

injunction in court barring the deal from proceeding. The parties ordi-

narily may not consummate the transaction until 30 days after the filing

(although the agencies can make a second request for more informa-

tion and stop the clock while the additional information is assembled

and delivered). For non-controversial transactions, as is typical in the

upstream sector, the agencies grant an early termination of this waiting

period, and a merger can be completed within two weeks of the filing.

For controversial transactions, the agencies may signal their willing-

ness to enter into a consent decree conditioned on certain divestitures

or promises to engage or refrain from engaging in certain acts, or the

parties can enter into sustained negotiations or litigation occupying

months. Moreover, the agencies can forgo the opportunity to enjoin the

merger and instead challenge it long after the deal has closed. This has

occurred several times in the energy industry.

FERC itself has limited grounds for reviewing mergers in the

natural gas sector. In some cases, FERC action must be taken for issu-

ance or revision of certificates of public convenience and necessity, or

for abandonment of assets under the NGA.

Price restrictions

32 In the purchase of a regulated gas utility, are there any

restrictions on the inclusion of the purchase cost in the price

of services?

The purchase of a regulated gas utility is subject to state regulation.

Upon purchase of a regulated utility, most states will set rates based on

the net book value of facilities instead of the purchase price. Additionally,

states typically bar the inclusion of any acquisition premium in rates.

Corporate governance regulations

33 Are there any restrictions on the acquisition of shares in gas

utilities? Do any corporate governance regulations or rules

regarding the transfer of assets apply to gas utilities?

With the repeal in 2005 of the Public Utility Holding Company Act of 1935,

there are no general federal prohibitions on entities that may own a gas

utility company or requirements for registration with the SEC. However,

acquisition of assets that have been dedicated for use by public utilities

is often also subject to review and approval by the state commission

with jurisdiction. Examples are California Public Utilities Code section

851, requiring approval by the California Public Utilities Commission of

transfers of public utility assets, and section 854, requiring Commission

approval of utility mergers.

INTERNATIONAL

Foreign participation

34 Are there any special requirements or limitations on foreign

companies acquiring interests in any part of the natural gas

sector?

There are no special requirements or limitations on foreign compa-

nies acquiring interests in the natural gas sector. However, an entity

applying for certification of an LNG facility under section 3 of the NGA

and the regulations issued pursuant to that section by FERC is required

to disclose on its application any ownership by a foreign government or

subsidisation by a foreign government.

In addition, under the Exon-Florio Amendment to the Defense

Production Act of 1950, the Committee on Foreign Investment in the

United States (CFIUS) reviews proposed foreign investments in US

facilities to determine whether such investment threatens US national

security. Exon-Florio was amended by the Foreign Investment and

National Security Act of 2007 to treat ‘energy security’ and ‘critical infra-

structure’ as falling within the concept of national security. The law

mandates full-scale CFIUS review where the proposed purchaser is

owned by a foreign government. Finally, there are other laws applicable

to the natural gas industry restricting foreign ownership, including the

Mineral Lands Leasing Act, which forbids aliens and foreign corpora-

tions from directly owning mineral leases on federal lands. However,

these laws do not prohibit aliens and foreign corporations from forming

a US entity that owns mineral leases on federal lands.

In 2017, Congress repealed the SEC disclosure rule for payments

by resource extraction issuers (ie, oil, natural gas and mining companies

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Gas Regulation 202010

that file annual reports with the SEC). The repealed rule would have

required resource extraction issuers to disclose payments made to

the US government and foreign governments for the purpose of the

commercial development of oil, natural gas or minerals beginning with

fiscal years ending on or after 30 September 2018. While similar rules

were adopted by the SEC in 2012, such rules were vacated by the US

District Court for the District of Columbia. Although the Dodd-Frank

Act and the Securities Exchange Act of 1934 require the SEC to issue

resource extraction disclosure of payment rules, Congress may amend

Dodd-Frank to limit or delete this requirement. In September 2019,

the Department of Treasury published proposed regulations to imple-

ment changes to CIFIUS’ jurisdiction and processes that were made

by passage of the Foreign Investment Risk Review Modernization Act,

which was signed into law in 2018.

An acquired US company may need to obtain a licence from the

Department of Commerce to export technology. Defence-related tech-

nologies used in energy projects may be subject to this requirement.

International agreements

35 To what extent is regulatory policy affected by treaties or

other multinational agreements?

While treaties and other multinational agreements have little direct

effect on purely domestic US gas regulatory policies, they do have

an effect on international import, export and trade of natural gas.

Multilateral agreements, such as the General Agreement on Tariffs and

Trade (GATT), entered into by the US and other members of the World

Trade Organization (WTO), typically dictate how WTO members may

treat goods exported from other WTO members, including gas and other

petroleum products. It is not settled whether the export provisions of

regional trade agreements conflict with the obligations of the US and

other parties under the GATT.

Many US LNG import facilities have sought export or re-export

authorisations from the DoE for LNG (pertaining to domestically

produced and previously imported natural gas, respectively). The NGA,

as amended, has deemed FTA exports to be in the public interest, and

applications shall be authorised without modification or delay. FTA

countries include Australia, Bahrain, Canada, Chile, Colombia, Costa

Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel,

Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru and

Singapore.

Potential exporters must also seek approval from the DoE under

section 3 of the NGA to export to countries with which the US does not

currently have an FTA in place. It is not settled whether gas export

restrictions remaining after entering into regional trade agreements

conflict with the obligations of the US and other parties under the GATT.

Cross-border sales and deliveries

36 What rules apply to cross-border sales or deliveries of

natural gas?

The NGA prohibits the import or export of natural gas to or from the

US without obtaining the prior approval of the DoE. The DoE offers two

types of import and export authorisations: long-term authorisation and

‘blanket’ (short-term) authorisation.

Long-term authorisation must be sought by a party wishing to

import or export natural gas pursuant to a signed gas purchase and

sale contract that has a term longer than two years. The applicant must

submit to the DoE an application, a copy of the gas purchase and sale

contract identifying the seller of the gas and the markets in which the

gas will be sold, and the term of the contract.

Vessels that are importing LNG into the US are deemed to pose a

special security risk. The US Coast Guard and the US Bureau of Customs

and Border Protection scrutinise such vessels more closely than many

other vessels importing cargo into the US, often resulting in delays in

the delivery and unloading of LNG.

Like most goods imported into the US, gas imports are subject

to US customs regulations. While many of these regulations apply

uniformly across products, in the case of bulk petroleum imports,

certain additional information is required in order for imports to be

cleared by customs.

TRANSACTIONS BETWEEN AFFILIATES

Restrictions

37 What restrictions exist on transactions between a natural gas

utility and its affiliates?

FERC requires interstate natural gas pipelines with affiliates that

engage in gas marketing functions to comply with FERC’s Standards of

Conduct rules. These rules are designed to ensure that pipelines treat

all customers, both affiliated and non-affiliated, on a non-discriminatory

basis with respect to the transportation of natural gas in interstate

commerce and also to ensure that the reliability and integrity of trans-

portation systems are not compromised.

In furtherance of these goals, FERC issued Order No. 717, amending

the Standards of Conduct rules governing, inter alia, transactions by

jurisdictional natural gas transmission providers and their affiliates.

Clarified by Orders No. 717-A to 717-D, the rules are designed to foster

compliance with the Standards of Conduct to facilitate enforcement

by the commission and to conform the rules to the 2006 decision of

the US Court of Appeals for the DC Circuit in National Fuel Gas Supply

Corporation v FERC. The standards now have three principal rules:

• the ‘independent-functioning rule’, which requires employees

handling transmission functions and employees handling

marketing functions (such as commodity sales) to operate inde-

pendently of each other;

• the ‘no-conduit rule’, which prohibits employees of a transmission

provider from passing information about transmission functions to

marketing function employees; and

• the ‘transparency rule’, which imposes streamlined posting

requirements on transmission providers to help FERC and other

interested parties detect any instances of undue discrimination or

preference.

Enforcement

38 Who enforces the affiliate restrictions and what are the

sanctions for non-compliance?

FERC has enforcement authority with respect to its regulations

governing transactions between a natural gas utility and its affiliate. It

has the ability to impose sanctions that could include restrictions on or

revocation of operating authority and civil penalties.

UPDATE AND TRENDS

Gas sector-specific regulation

39 Describe recent trends and developments in the regulation of

the domestic natural gas sector.

The New York Independent System Operator (NYISO) is proposing a plan

to put a price on CO

emissions in the power sector. The plan is intended

to complement the climate legislation that was signed into law by New

York’s governor in July 2019, which requires the state to achieve 100 per

cent carbon-free electricity by 2040. Under the plan, the NYISO would

attempt to incorporate the social cost of carbon into the wholesale

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www.lexology.com/gtdt 11

energy markets by assigning a per-ton price for CO

emissions. The

cost would be factored into electricity generators’ offers to sell into the

ISO market. Once completed, the plan will be submitted to FERC for

approval under section 205 of the Federal Power Act. Analysts predict

that the proposal will raise questions at FERC, including whether an

ISO should be allowed to influence public policy in this manner through

its tariff.

Another issue that is causing significant debate within FERC

and its regulated power markets is how to account for states’ out-of-

market subsidies. In the wake of the 2018 Calpine decision, in which

FERC rejected PJM Interconnection LLC’s proposal to change how its

auctions are run to account for states’ nuclear subsidies, FERC voted

in December 2019 on a plan that would effectively raise the price floor

applicable to subsidised resources. PJM, as well as a number of states

and clean energy advocates, asked FERC to reconsider its decision

and the issue may turn into a long drawn-out legal battle. Significant

uncertainty remains among grid operators, and this state of uncertainty

characterises much of the US energy landscape for 2020.

Other regulatory developments of particular relevance to the gas

sector

40 Describe any other recent regulatory trends and

developments of particular interest to those operating in the

domestic natural gas sector.

In September 2019, the US Fish and Wildlife Service (FWS) and US

National Marine Fisheries Service revised the Endangered Species

Act (ESA) regulations. The revised rules are designed to accelerate

agency determinations for listing and delisting of endangered or threat-

ened species and allow the government to take economic impacts into

consideration when making listing decisions or designating critical

habitat. Importantly, the revised rules redefine ‘foreseeable future’ in a

way that will likely foreclose future listing or designation on the basis of

climate change impacts, and eliminate automatic protections to species

listed as threatened, as opposed to endangered.

These rule revisions come at a time when the government, NGOs

and the natural gas industry are involved in litigation over protections

for the dunes sagebrush lizard, which has habitat in some of the most

productive parts of the Permian Basin. Listing the lizard as threatened or

endangered under the ESA would limit energy development in the area.

Last year, NGOs petitioned the FWS to list the lizard as a threatened or

endangered species and to designate critical habitat; the FWS did not

act. In October 2019, the groups filed a lawsuit in federal court chal-

lenging FWS’s failure to add the lizard to the Endangered Species List.

Robert A James

rob.james@pillsburylaw.com

Stella Pulman

stella.pulman@pillsburylaw.com

Four Embarcadero

Center, 22nd Floor

San Francisco

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United States

Tel: +1 415 983 1000

Fax: +1 415 983 1200

www.pillsburylaw.com

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Houston

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United States

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