• FERC Levies Penalties against Gas Companies for Flipping Violations and Misclassifications of Service Agreements
  • June 12, 2013 | Authors: Peter S. Glaser; Kevin C. Greene; Daniel L. Larcamp; Clifford S. Sikora; Lara L. Skidmore
  • Law Firms: Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Washington Office ; Troutman Sanders LLP - Portland Office
  • On May 31, 2013, FERC approved a settlement (“Settlement Agreement”) between its Office of Enforcement (“Enforcement”) and Washington 10 Gas Storage Corporation (“Washington 10”) and DTE Gas Company (“DTE Gas”) (both subsidiaries of DTE Energy (“DTE”)). Specifically, Enforcement concluded that Washington 10 violated FERC regulations by: (1) misclassifying certain firm transportation storage contracts; (2) misclassifying Park and Loan (“PAL”) contracts, and therefore contracting for an unauthorized service; (3) filing inaccurate semi-annual reports; and (4) failing to file annual reports on hub activities. Additionally, Enforcement concluded that DTE Gas engaged in “flipping” by repeatedly releasing discounted rate capacity to affiliated replacement shippers on an alternating monthly basis to avoid competitive bidding requirements. Under the Settlement Agreement, Washington 10 agreed to pay a civil penalty of $725,000 and disgorge unjust profits of $2,508,227 plus interest, while DTE Gas agreed to pay a civil penalty of $15,000.

    With regard to Washington 10, FERC explained that while the company is an intrastate pipeline that provides various intrastate services to its customers, Washington 10 is also authorized to provide Natural Gas Policy Act (“NGPA”) Section 311 service - an interstate service - so long as it does not “exceed the intrastate cost-based rates” approved by the Michigan Public Service Commission (“MPSC”). In 2004, Washington 10 received authority from the MPSC for revisions to its tariff and to its cost and market-based rates that led to higher rates for its intrastate services. In March 2008, DTE submitted a self-report on behalf of Washington 10 admitting that it had misclassified numerous short-term storage and PAL contracts as intrastate contracts instead of interstate contracts. As a result, Washington 10 charged a higher rate for its services under the misclassified contracts.

    However, upon further investigation, Enforcement found that the self-report was incomplete, and that Washington 10 committed additional violations. In the Settlement Agreement, Washington 10 admitted that it misclassified a total of 32 firm transportation storage contracts as intrastate, instead of interstate, and overcharged eleven interstate customers more than the maximum rate authorized by the interstate Statement of Conditions approved by FERC. Washington 10 also misclassified 72 firm PAL contracts as intrastate contracts, despite their entering interstate markets, given that Washington 10’s SOC did not permit Washington 10 to offer firm PAL service, Washington 10 also admitted that it had contracted to provide an unauthorized service. For violations of FERC’s regulations and reporting failures references above, Washington 10 agreed to pay a $725,000 civil penalty and disgorge $2,508,227 in profits, plus interest. Washington 10 also agreed to develop and maintain compliance policies concerning FERC regulations. Enforcement noted that it considered that Washington 10’s overcharges to customers harmed the market, the conduct involved more than 700,000 MMBtus of natural gas, and the conduct continued for over 250 days.

    Regarding Washington 10’s affiliated local distribution company, DTE Gas, FERC explained after a preliminary, non-public investigation, Enforcement determined that DTE Gas violated section 284.8(h)(2) of FERC’s regulations regarding the short-term release of discounted rate capacity by the “repeated short-term release of discounted rate capacity to two or more affiliated replacement shippers on an alternating monthly basis.” Even though FERC noted that DTE Gas earned no profits from the capacity releases, it concluded that DTE Gas’ actions violated FERC’s open access and transparency principles because the released capacity was not offered to other potential replacement customers.

    Under the Settlement Agreement, DTE Gas agreed to pay a civil penalty of $15,000 and improve its compliance training and procedures. In assessing the civil penalty, Enforcement considered that DTE Gas’ failure to post capacity threatened market transparency, the conduct continued for more than 50 days, and that DTE Gas did not have appropriate compliance measures in place.

    Both Washington 10 and DTE Gas agreed to submit semi-annual compliance monitoring reports for one year following the effective date of the Settlement Agreement, with an optional second year at the discretion of Enforcement.