Tennessee certified gas plan sidelined over FERC's reluctance to review criteria

Just days before Tennessee Gas Pipeline was hoping to offer a new pooling service for gas from producers certified to meet methane intensity standards, the US Federal Energy Regulatory Commission rejected the company's proposal.

But the regulator emphasized that it was primarily uncomfortable with Tennessee's proposal to have FERC weigh in on criteria for so-called responsibly sourced gas, preferring instead to allow market-driven initiatives to unfold more organically. FERC rejected the plan without prejudice to Tennessee refiling an alternative proposal that doesn't trigger such concerns.

Except for the proposal to include the criteria for pooled certified gas in its tariff, FERC would otherwise find Tennessee's proposal to be just and reasonable, said the order, approved by all five commissioners.

The proposal, if approved, would have sent a signal to the industry on market design for this nascent product, with the most recent filing supporting a certificate design over exchange-based physical gas trading hubs.

Tennessee first proposed in December to offer the pooling service to encourage transportation and trading of gas from producers with third-party certification that their supply meets minimum environmental, social and governance standards. The option as proposed then would have allowed for aggregation of certified supplies at pooling points, with plans to use Project Canary and MiQ to certify the gas, using a methane intensity threshold. Tennessee subsequently added Xpansive Data Systems' Digital Fuels Program as a third, optional certifier.

After some stakeholders including major shippers raised concerns that the pipeline company would serve as too much of a "gatekeeper" in defining certified gas and picking the certifiers, Tennessee proposed to place criteria in its tariff, allowing for FERC review. Further, it proposed to include the list of certifying agencies in its tariffs, and asked for a May 1 effective date.

FERC findings

But FERC's April 29 order said it was unclear how the commission would evaluate Tennessee's decision to adopt specific criteria.

"To date, based on the record in this proceeding, there are neither industry nor government-established standards that could guide the commission's review given the nascent [responsibly sourced gas] market," the commission said. FERC left open the door to finding differently were industry RSG standards to be adopted, analogous to standards set by the North American Energy Standards Board.

Further, FERC noted that there is no federal regulation for oil and gas methane emissions.

The commission also worried that by acting on criteria, it could hinder development in the market and acceptance of further RSG standards and certification vendors.

Market design

If approved, Tennessee's proposal could have helped shape how this nascent market would trade, tilting the scales in favor of either a certificate-based market, like the power market's Renewable Energy Credits, or a physically traded hub market. An early proposal from Tennessee favored a physical hub approach involving gas sourced from a certified production facility, with the intention of working with the Intercontinental Exchange to list these pooling points on its trading platform.

However, the physical sourcing requirement generated a number of protests from shippers, with the most vociferous objections coming from Appalachia gas producers that have not pursued third-party certification to the same extent as competitors.

In response, Tennessee resubmitted its proposal with a more certificate-based trading mechanism, specifying that physical gas need not be certified to be traded at these paper pooling locations as long as the molecules are accompanied by the appropriate certificates.

Mulling best approach

While Tennessee cannot offer the service until gaining approval from FERC, the company is mulling next steps for its effort.

"TGP is currently evaluating the FERC's order and assessing the best approach for obtaining approval of this value-added service as part of TGP's commitment to facilitating greater liquidity in the purchase and sale of responsibly sourced natural gas," the company said in an email May 2.

In explaining its preference to avoid freezing market evolution in place, FERC said it believed Tennessee had an incentive to be responsive to the market, otherwise shippers might prefer bilateral deals or alternatives to its pooling service.

FERC highlighted the comments made by EQT, an early adopter that partnered with MiQ and Equitable Origin to certify its 4 Bcf/d of Appalachia production.

The major gas producer had supported Tennessee's plan as a first step while worrying the proposal lacked a market incentive to drive further reduction of methane emissions.

"EQT states that it currently has a certified methane emissions intensity of 0.054% and that adopting a tariff provision that would treat as equal all natural gas with methane intensities below 0.20% would remove the economic incentive to improve (or maintain) emissions at leading levels," the FERC order pointed out.