Take-or-pay provisions in natural gas contracts
Potential economic distortions are associated with rigid pricing and output contingency clauses in long term natural gas contracts. High take-or-pay provisions may give rise to sub-optimal production and consumption patterns and result in misallocation of resources. The inefficiency of existing inflexible take-or-pay contracts and the liabilities they have engendered have been recognized by FERC as a major impediment to competition. Assuming that market pressure will induce producers and pipelines to renegotiate their take-or-pay contracts, FERC relied on its certification authority and enforcement power to promote competition through the establishment of an open access transportation system. But because FERC's market approach to take-or-pay problems does not comport with its duty to protect consumers and pipelines, the Commission resorted to the prudence review process to achieve its dual goal of resolving take-or-pay problems and unbundling gas services. FERC's use of the prudence review process in a dispositive manner as well as an incentive to induce compliance with the new rules aimed at furthering competition raises many legal and policy questions. It lacks clearly established definitional, procedural, and substantive rules regarding the applicability of the prudence test to the pipelines' purchasing practices. Also lacking is a definition of the relationship between prudence, and price and output stipulations in non-jurisdictional producer-pipeline contracts. Consequently, the uncertainties concerning the application of prudence to the purchasing practices of the pipelines may be a significant factor in delaying commitments to the development of reserves for future natural gas supply. Furthermore, the current prudence practice may carry the risk of backdoor regulation of natural gas production.
- Research Organization:
- Pennsylvania Univ., Philadelphia, PA (USA)
- OSTI ID:
- 6840048
- Country of Publication:
- United States
- Language:
- English
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