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Monday, May 15, 2006 11:11 AM ET
Court orders FERC to explain LNG interruption decision in Virginia
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Virginia Natural Gas Inc.Virginia Beach, Virginia
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FERC must explain why it decided not to award Virginia Natural Gas Inc. a financial remedy for the alleged harm caused by a malfunction in February 2003 of an LNG plant in Chesapeake, Va., owned by Columbia Gas Transmission Corp., the U.S. Court of Appeals for the District of Columbia Circuit said in a May 12 ruling.

On Feb. 19, 2003, Columbia's pumps at the LNG plant malfunctioned. The next day, Columbia issued a "notice of interruption of service" to its customers, including VNG. Under its contract with VNG, Columbia is required to provide the LDC with liquefaction, storage, regasification and delivery of up to 52,090 Dth/d of LNG. On the day of the mishap, Columbia reduced VNG's supply to 25% of its contractual agreement. Columbia's violation of the terms of its service tariff with VNG lasted 41 days.

Nowhere in its initial order or its order on rehearing did FERC explain its conclusion that VNG's requested relief includes "remedies beyond [those] typically contemplated by the commission," the D.C. Circuit said in its ruling. "FERC does not explain how or why VNG's requested relief includes verboten 'civil penalties' or 'reparations,'" the court added.

In its petition to the court, VNG, a subsidiary of AGL Resources Inc., argued that FERC unlawfully refused to award a monetary remedy, even though the commission found that Columbia breached its service obligations, VNG said in its petition for review with the court.

FERC countered that it declined to award compensatory damages to VNG because it concluded that the company's entitlement to monetary relief was based on a violation of the terms of its service agreement with Columbia. "A court of law is the most appropriate forum for determining damages due to a breach of contract claim," the commission ruled.

Columbia installed a new ventilation system at the facility in July 1997, which was designed to vent LNG vapor more effectively when the storage facility reaches low inventory levels. Columbia, however, never conducted a full drawdown test to determine the precise inventory level at which its new pumps would fail, the court noted. Nonetheless, the new ventilation system operated effectively until 2003, when customers' demand for LNG spiked during a record-cold winter.

In the aftermath of the service failure, VNG demanded $37 million damages, only $7 million of which VNG allegedly incurred during the 41-day period of reduced LNG output. The other $30 million in damages reflected "the return of demand charges and contributions in aid of construction paid out over more than a decade," VNG said.

Columbia admitted that it failed to meet its firm service obligations to VNG but argued that its inability to serve the LDC could not have been prevented.

FERC rejected Columbia's argument, explaining that the company should have performed a full drawdown test to verify the plant's performance capabilities after its pumps suffered a malfunction in 1993. Because Columbia's pumps previously failed when inventory dipped to 30 feet, the gas supplier was on notice that its pumps could malfunction during another plunge in LNG inventory.

FERC also noted that when the facility's inventory fell to an all-time low of 23 feet in February 2003, Columbia failed to exercise due diligence by leaving its pumps in the "start-up" mode instead of switching its pumps to the continuous-run mode.

Like VNG, Columbia appealed FERC's decision to the D.C. Circuit; however, the court ruled against Columbia, a NiSource Inc. subsidiary, explaining that the commission's rejection of Columbia's force majeure defense was "easily supported" by substantial evidence in the case. FERC "reasonably concluded" that the malfunction could have been prevented or overcome by Columbia's due diligence, the court said.

Based on the D.C. Circuit's ruling, the case now goes back to FERC, which must explain why it believes VNG's requested damage demands do not fall within the commission's understanding of its remedial authority. (No. 04-1374)

 

 

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