Do You See What I See: Hidden Competitive Commercial Contract Gems

A feature that is valued by many of our customers’, especially commercial teams, is the ability to customize alerts for filings to gain a competitive edge on tariff changes, specifically those involving “non-conforming agreements." Shippers and competing pipelines mine these filings for competitive commercial information, including contract extensions, maximum pressure changes, opt-out provisions, and intelligence about unsubscribed capacity. Today, we explain why these filings can be so informative and then look at a few recent examples to explore the type of competitive information that can be uncovered.

Aren’t Discount, Negotiated and Non-conforming Agreements All The Same?

The majority of the revenue generated in the pipeline industry is derived from shipper contracts that are at the maximum rate under a pipeline’s tariff. But FERC has given pipelines the flexibility to respond to market forces by allowing for three additional types of agreements: negotiated, discounted and, today’s topic, non-conforming. Each of these contract types have different filing requirements.
A discounted agreement is the simplest of the three. Its contract price needs to be at a rate lower than the maximum rate, but higher than the minimum rate set forth in the pipeline’s tariff. The pipeline need not notify FERC that it has entered into such an agreement, but is required to post the discounted rate on the pipeline’s electronic bulletin board before the first gas flows under the contract.
A negotiated rate agreement is a contract in which the charged rate is, or at some point in the future could be, below the minimum tariff rate or above the maximum tariff rate. Such contracts arise as a way to share risk between the shipper and the pipeline. One common situation is where the rate charged is based on an index that could vary below the minimum or above the maximum tariff rate. Another common use of such contracts is with agreements that require the construction of new facilities for the shipper and the pipeline wants to make sure it receives a fixed rate for a fixed term, which won’t be impacted by any change in its tariff rates. Before flowing gas under this type of contract, the pipeline is required to file and seek approval for the proposed rate from FERC.
A non-conforming agreement can be set at the tariff rate, a discounted rate or a negotiated rate. The key distinction of a non-conforming agreement is that it contains terms or conditions that differ from the pipeline’s form contract for the service being provided. Because the terms and conditions vary from the pipeline’s form, FERC requires the pipeline to file the entire contract for approval before flowing gas under the contract. This filing requirement makes such contracts a rich source of competitive knowledge because they not only contain the actual contract language of such agreements, but can also inform both shippers and pipelines regarding issues that are open for negotiation, as well as alert them to risks that may not have previously been on their radar.

Benefits Granted to Shippers

Examples of benefits negotiated by the shipper in recent non-conforming agreements, which are captured with our alerting, include the following:

As many of our customers know, the precedent agreements that support new projects are often filed confidentially with FERC, making it difficult to determine the actual language used for clauses like the “most favored nation” clause granted to Osaka Gas Trading. The benefit of these non-conforming filings is that it is possible to obtain the precise language that is used to describe the trigger for such a right.

Benefits Granted to the Pipeline

Examples of benefits negotiated by the pipeline in recent agreements include the following:

The Colorado Interstate Gas Company provision regarding carbon emission costs is certainly foresighted. For long term agreements, which include many non-conforming agreements, it is often beneficial to anticipate how future costs will be addressed. The contract is often silent on this issue, making it likely that the pipeline will bear such costs in a discounted or negotiated rate agreement.

Provisions That Bind Both Parties

Most tariffs do not allow a pipeline to commit to a ramp-up of capacity and so these ramp-up agreements will almost always be considered non-conforming. Such ramp-up agreements provide tremendous insight about the unsubscribed capacity of the pipeline and whether it will be available before the ramp-up begins.
To set an alert for your use, visit our Email Alerts page, and select the alert for “Tariff Revisions”:

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