Accounting - Material Deviations FAQ

Basically, a material deviation is contractual language that goes beyond the filling-in of the blank spaces in the pro forma agreement and that affects the substantive rights of the parties. Columbia Gas Transmission Corp., 97 FERC ¶ 61,221 at 62,002 (2001).

The Commission has not defined the word - substantive. However, there are numerous orders in which the Commission addressed the issue of material deviations within contracts. Key orders giving guidance on what constitutes a material deviation include Southern Star Central, 125 FERC ¶ 61,082 (2008); Natural Gas Pipeline Negotiated Rate Policies and Practices, 104 FERC ¶ 61,134 (2003), order on rehearing and clarification, 114 FERC ¶ 61,042 (2006) (2003 Policy Statement); Columbia Gas Transmission Corp., 97 FERC ¶ 61,221, at 62,010 (2001). See also ANR Pipeline Co., 98 FERC ¶ 61,247, at 62,002 (2002); Natural Gas Pipeline Co. of America, 111 FERC ¶ 61,376 at P 9-12 (2005); Stingray Pipeline Company LLC, 121 FERC ¶ 61,216 (2007) (for additional material see Docket No. RP07-120-000); Texas Eastern Transmission LP, 119 FERC ¶ 61,337 (2007); CenterPoint Energy Gas Transmission Co., 106 FERC ¶ 61,214 (2004) (for additional information see Docket No. IN03-11-000). There are many additional orders in which the Commission addressed specific contracts containing material deviations. To research recent orders, please use the search in eLibrary.

A pipeline has several ways to seek informal or formal guidance from the Commission on whether the service agreement contains a material deviation. In the Commission's "Guidance Order" (Obtaining Guidance on Regulatory Requirements, 123 FERC ¶ 61,157 (2008)), the Commission listed mechanisms for companies seeking guidance from staff and the Commission itself. Mechanisms for obtaining Commission and staff guidance from the most formal to least formal include Commission orders, requests for declaratory orders, no-action letter responses, General Counsel Opinion Letters, Enforcement Hotline, compliance help desk, referred to on the Commission's web site as the virtual help desk, and meetings and discussions with individual members of Commission staff. In addition, if undergoing an audit, a pipeline may ask audit staff for its opinion regarding these matters. The compliance help desk is an on-line tool that allows interested persons to e-mail questions and receive responses from staff experts.

Following is a non-exclusive list of deviations from the pro forma contract that the Commission probably would not consider as material deviations provided that these deviations do not affect the substantive rights of the parties:

1. Typos, misspellings, capitalization, abbreviation discrepancies, and punctuation or font differences.

2. Whereas clauses which are solely a recitation of factual or descriptive information, e.g., description of the business of the shipper (for example, "Whereas the shipper is a local distribution company doing business in the state of .").

3. If contracts containing a material deviation at the time of their execution later come into conformance with the pro forma service agreement due to a tariff filing, the pipeline would not have to file it because the deviation would be cured. (If a pipeline makes changes only to its General Terms and Conditions, and not its pro forma service agreement, to offer to negotiate a particular contractual provision with shippers, a contract containing such a provision would still have to be filed as non-conforming because the pro forma service agreement would not contain a blank for filling in the provision agreed to between the pipeline and the shipper. See Northern Natural Gas Co. 102 FERC ¶ 61,171 at P 14-19 (2003).)

4. Word processing errors such as missing text at the bottom of a page are acceptable if the parties agree it is a word processing error.

5. Word substitutions that do not change the substantive rights of a party are not material deviations, for example, changing the word "utilize" to "use."

6. Minor reference mistakes related to the tariff or agreement section where the cited reference makes no sense, e.g., refers to a section that does not exist. Such errors do not have to be filed, but staff would expect the company to fix these types of errors.

7. Where the service agreement contains a blank for a specified commencement date and the contract states the contract becomes effective with the in service date of the facilities.

8. Formatting deviations like the addition of "This space intentionally left blank" .

When a service agreement is filed for Commission review, consistent with section 154.201(a) of the Commission's regulations, all deviations must be identified, not just material changes. Similarly, where a pipeline chooses to file a service agreement containing a negotiated rate agreement instead of filing a tariff sheet describing the agreement, and the agreement contains immaterial changes from the form of service agreement, it should identify all deviations from the pro forma service agreement despite the fact they are not material.

In order to properly analyze non-conforming contracts, the FERC requires that the pipelines highlight all provisions that deviate from a pipeline's pro-forma service agreement. Pipelines should highlight by underlining the deviations. In addition, the pipeline should provide a matrix which lists the non-conforming contract(s) and identifies for each contract the specific deviations applicable to that contract. A narrative that provides additional information concerning each deviation is also necessary.

When these documents or communications include terms or conditions that deviate from the pro forma service agreement and that affect the substantive rights of the parties under the tariff or the service agreement.

Contracts, such as contribution in aid of construction (CIAC) agreements, interconnection agreements, allocation agreements, etc., as a general rule, do not have to be filed. However, section 4 of the Natural Gas Act requires natural gas companies to file all rates and charges for any transportation or sales and the classifications, practices, and regulations affecting such rates and charges, together with all contracts which in any manner affect or relate to such rates, charges, classifications, and services. If the rates, charges, classifications, practices, regulations and/or services relating to sales or transportation are included in these types of agreements and deviate materially from the form of service agreement and tariff provisions, they should be filed with the Commission. Since these agreements may have specific provisions that are no longer operative, the pipeline must clearly identify and highlight each provision that has expired and is therefore no longer enforceable. The pipelines must also conform to the instructions applicable to filing nonconforming agreements that would otherwise apply. That is, pipelines must highlight all provisions that deviate from a pipeline's pro-forma service agreement. The pipelines should highlight by underlining all deviations. In addition, the pipeline should provide a matrix which lists the non-conforming contracts and identifies for each contract the specific deviations applicable to that contract. A narrative that provides additional information concerning each deviation is also necessary.

If the pipeline includes unique provisions related to new facilities in precedent and service agreements, then the provision in the service agreement becomes a material deviation that must be filed with the Commission.

Collateral requirements and other conditions relating to construction of new facilities should be reflected in precedent agreements.

If a pipeline files non-conforming service agreements in a certificate proceeding which are intended to remain in effect after the in- service date of the new facilities, the pipeline must bring to the Commission's attention that the certificate filing includes non-conforming service agreements. The Commission may then take whatever action it deems appropriate. Generally, in the certificate order, the Commission has directed the pipeline to file contracts containing material deviations prior to the in-service date of the certificated facilities. (See Algonquin Gas Transmission, LLC, 126 FERC ¶ 61,110 (2009) and Midcontinent Express Pipeline LLC, 124 FERC ¶ 61,089 (2008)). Filing the non-conforming agreements in a certificate proceeding does not relieve the pipeline from the requirements of section 154.112(b) of the Commission's regulations which requires the pipeline to list its non-conforming agreements in FERC Volume No. 1.

A company should examine all previously executed contracts that are currently in effect to determine whether a material deviation exists. If the material deviation changes the substantive rights or responsibilities of a party(s), the contracts must be filed.

Under current Commission policy, if a contract in effect today, no matter when initially effective, contains a material deviation, from the pro forma agreement currently in place, the pipeline must file it. However, if the contract contains a material deviation from the currently effective version of the pro forma service agreement but the contract conforms to the pro forma service agreement in effect at the time the contract became effective, the pipeline would not have to file the contract, if the contract contains a Memphis clause which the pipeline reasonably interprets as extending to its shippers the same terms and conditions of service as reflected in the new pro forma service agreement. A Memphis clause allows a pipeline to reserve the right to make section 4 filings to propose changes in the rates and terms and conditions of service in settlements and in contracts (See United Gas Pipe Line Co. v. Memphis Light, Gas and Water Division 358 U.S. 103 (1958) and Texas Gas Transmission, LLC 130 FERC ¶ 61,114 (2010)).

In the context of an audit, audit staff typically will not examine expired or terminated contracts during the contract review phase of the audit.

Generally, no. Note that when Northern Natural filed several years ago to revise its form of service agreement to include a blank that could be filled in with any agreement authorized by its tariff, the Commission required it to include in the form of service agreement citations to the specific provisions in its tariff that authorized it to negotiate various terms of the service agreement (See Northern Natural Gas Co. 102 FERC ¶ 61,171 at P 14-19 (2003)). Further, when the pipeline's tariff authorizes it to negotiate something like an evergreen provision that differs from the default provision in the tariff, then the agreed upon evergreen provision is a "special detail" that the pipeline must post on its website under section 284.13(b)(1)(viii) of the Commission's regulations (See Natural Gas Pipeline Company of America, 93 FERC ¶ 61,286 (2000)).

Listed below are some appropriate avenues open to pipelines to address a contract/service agreement that may include a material deviation.

1. The pipeline could renegotiate the contract with the customer and remove the material deviation.

2. The pipeline can amend the pro forma service agreement to incorporate the material deviation.

3. The pipeline can file the service agreement with the Commission to determine whether the Commission views the language as a "material deviation" (and if so, whether the material deviation is acceptable or not).

4. The pipeline may seek informal or formal guidance from the Commission on whether the service agreement contains a material deviation. While there is no requirement to submit a self-report, a pipeline may also consider selfreporting the material deviations to OE. See Enforcement of Statutes, Regulations and Orders, 123 FERC ¶ 61,156 (2008) (Revised Policy Statement on Enforcement).

No, so long as the information provided on the on-line service agreement is the same as the information on the pro forma service agreement. However, if practical, the pipeline may want to revise its on-line system so that the resulting agreement looks like the pro forma agreement.