THREAD: Okay friends, let's use this drizzly Friday to break down @FERC’s decision in #SpireSTL, because there’s a lot to unpack here, and it truly goes against the most fundamental of economic principles. 1/

So let’s start with the basics. @FERC can only approve a pipeline if it’s required by the public convenience and necessity. Everyone agrees with that. And one part of that analysis is determining whether the project is needed-- whether there is a market demand for the project. 2/

Pipeline companies often use what’s called a precedent agreement to show market demand. The idea is easy enough—a pipeline developer enters into an agreement with a prospective shipper, who wishes to reserve capacity on the proposed pipeline. 3/

A good analogy is to compare this arrangement to one between a driver and a parking garage owner. The pipeline developer, and @FERC applicant, is the garage owner, and the shipper (the driver) wants to purchase a reserved space in the garage for its gas (the car) 4/

The theory is that if market actors wish to purchase capacity on a new project, there must be a market demand for the project. Easy enough. 5/

So, using the parking garage analogy, if I want to purchase a reserved spot in a new garage, as opposed to a reserved spot in the existing garage next door, there is likely is something about the new garage that I like better. 6/

Things get tricky, though, when the precedent agreement is between two companies that are part of the same corporate umbrella. Think Gap and Old Navy. 7/

Using the parking garage example, let’s now say that I still want to purchase a reserved spot in the new garage, as opposed to the one next door, but I also happen to be the daughter of the garage developer. Might this influence my decision, even if its sound business sense? 8/

And more to the point, does this relationship weaken the argument that my contract with the new garage developer demonstrates an independent market demand for the new garage? 9/

Affiliate agreements aren’t inherently untoward, but they are inherently different from an arms-length transaction, and so the evidence they can provide to help determine if a project is needed is inherently different. 10/

Now let’s turn to Spire STL. Demand for gas in St. Louis is flat. The Spire project is not meant to add needed capacity, but to shift the pipeline on which capacity is shipped. This is undisputed (order at ¶23) 11/

Before the Spire STL project, Spire Missouri had pipeline capacity on MRT, an existing pipeline in the St. Louis area. Spire Missouri wants to shift its capacity onto Spire STL. This will likely cause unused capacity on MRT. This is also undisputed. (order at ¶ 30) 12/

Spire Missouri entered into a precedent agreement with Spire STL for the capacity it uses on MRT. Spire Missouri and Spire STL are corporate affiliates. Spire Missouri is Spire STL’s only customer, and the agreement covers 87.5 of the proposed capacity. 13/

This means that there’s 12.5 percent of the proposed Spire STL capacity that’s unsubscribed, and presumably the capacity on MRT will also be left open after Spire Missouri leaves. In a flat market. 14/

How does @FERC possibly justify that this demonstrates need? FERC says that there’s no reason to question that Spire Missouri has capacity needs and that it has no ability to question Spire Missouri’s business decisions (order at ¶ 15). 15/

But again, people aren’t questioning whether Spire Missouri has capacity needs: the question is whether Spire Missouri has capacity needs that cannot be served by existing demand (which, obviously it can be, because it currently is). 16/

And while FERC can’t regulate Spire Missouri, it does regulate Spire STL and must find that a pipeline is needed in order to approve it under the public convenience and necessity standard. 17/

FERC goes onto say that “when considering applications for new certificates, the Commission’s sole concern regarding affiliates of the pipeline as shipper is whether there may have been undue discrimination against a non-affiliate shipper.” (order at ¶ 17). Not true. 18/

FERC is also required to find the evidence an applicant uses to show need actually shows need. FERC then goes onto say that the legitimacy of the agreement between Spire STL and Spire Missouri can be confirmed by the fact that they executed a contract for this capacity. 19/

Again, while this demonstrates that there is a transaction going on between the two companies, this in no way shows that there is a market demand or need. This may be a great financial arrangement for Spire; that's not the legal standard. 20/

The MO PSC also challenged @FERC’s awarding of a 14% ROE to Spire STL, noting that this return is “inflated relative to other investments, such as the return for electric utilities” (at ¶ 44). 21/

And here may be my favorite part: “The returns approved for ... electric utilities and LDCs are not relevant because there is no showing that these companies face the same level of risk as faced by greenfield projects proposed by a new natural gas pipeline company.” 22/

Translation: FERC views Spire STL, a corporate affiliate invented to transfer Spire Missouri’s capacity to an intra-corporate entity, as being subject to the same risks as a truly new entrant into the market. 23/

As an analogy, let’s say Apple decided to create a new company, Apple Phones; Apple Phones will now make all of what were previously Apple’s phones. FERC would treat Apple Phones as a brand electronics entrant deserving of special protections and incentives. (order at ¶46) 24/

So why do we see so many affiliates contracting with one another? Because if you can create a “new” pipeline company, you can make a huge profit while shifting your overall company’s capacity needs to an internal product. It’s good business and bad regulatory oversight. 25/

This is exactly what is at the heart of @RichGlickFERC's dissent. He notes that the “record is replete with evidence suggesting that Spire Pipeline is a two-hundred-million-dollar effort to enrich Spire’s corporate parent rather than a needed piece of energy infrastructure.” 26/

If you read no other paragraph of the dissent, read ¶ 6: “[Given that demand is flat,] it should come as no surprise that Spire Missouri repeatedly rejected opportunities to contract for capacity on proposed pipelines that were substantially similar to the Spire Pipeline..." 27/

"...But it may be surprising that Spire Missouri has now decided to enter into a contract to support the development of the Spire Pipeline, especially since Spire STL held an open season to solicit customers for the Spire Pipeline and no one but Spire Missouri signed up..." 28/

"...Of course, there is a critical difference between the Spire Pipeline and the similar pipelines that Spire Missouri spurned: The profits Spire STL makes off Spire Missouri’s purchases of natural gas transportation service will go to their shared corporate parent..." 29/

spire STL is the quintessential case of why it's important to ensure that all pipelines approved by @FERC are required by the current or future public convenience and necessity. OK, happy Thanksgiving all! /Fin