CROSS‐CONTRACT CREDITING UNDER FERC ORDER 500

Abstract

In remanding Federal Energy Regulatory Commission (FERC) Order 436, the US. Court of Appeals for the District of Columbia Circuit did not require the FERC to issue a new policy on “take‐or‐pay” contracts between interstate pipelines and natural gas producers. The court asked only that the FERC meet the standard of “reasoned decision making.” FERC Order 500, in proposing the mechanism of cross‐contract crediting to reformulate take‐or‐pay contracts, went far beyond the court's decision.Take‐or‐pay contracts are but one component of an interrelated set of long‐run commitments by both pipelines and gas producers upstream and downstream. The FERC's abrogating take‐or‐pay contracts would reverberate beyond the immediate consequences for pipelines and producers. Implementing Order 500 would change the conditions under which gas producers explore, develop, and extract. It would influence the terms of future lease and royalty contracts with owners of mineral rights, and it would have adverse consequences for end users of gas. Evidence exists that promulgating Order 500 increased spot gas prices. Most take‐or‐pay problems have been resolved through voluntary renegotiation by the parties. Nullifying the remaining contracts through regulation will not accomplish the pro‐competitive goals that have guided the FERC's natural gas policy during the 1980s.