Resources 
Frequently Asked Questions (FAQs)
Accounting - Material Deviations
Updated: 3/26/10
Changes to the text of answers are highlighted in bold.
These frequently asked questions (FAQs) were prepared by the
Commission staff to assist jurisdictional companies in complying with
Commission requirements for the filing of contracts with material deviations. The
Commission staff has received questions from representatives from the natural gas
industry in response to the Commission's order issued in Southern Star Central (125 FERC ¶ 61,082 
).
1. What constitutes a material deviation?
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).
2. Has the Commission provided guidance on what constitutes a material deviation and how to determine if a contract deviation affects the substantive rights of the parties?
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.
3. What mechanisms are in place to seek guidance on the issue of what is a material deviation and when a filing is necessary and provide some insight into which mechanisms are most appropriate under different circumstances?
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.
4. What deviations from the form of service agreement would not be considered material deviations?
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:
- Typos, misspellings, capitalization, abbreviation discrepancies, and
punctuation or font differences.
- 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 .").
- 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).)
- 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.
- Word substitutions that do not change the substantive rights of a party
are not material deviations, for example, changing the word "utilize" to
"use."
- 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.
- 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.
- Formatting deviations like the addition of "This space intentionally left blank" .
5. If a service agreement contains material deviations and is filed for the Commission's review, must all changes from the form of service agreement be identified?
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.
6. For contracts that have been identified as potentially non-conforming, what information needs to be filed and how should that information be presented for filing purposes at the FERC?
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.
7. When is the pipeline required to file with the Commission e-mails, discount agreements, construction agreements, or side agreements that contain material deviations to the form of service agreement?
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.
8. Where a tariff specifically permits the pipeline and a shipper to enter into an agreement, other than a transportation service agreement, to address a specific situation, for example, allocation agreements covering deliveries at a delivery point between shippers and the point operator, is that agreement considered conforming or non-conforming and must it be filed/redlined?
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.
9. What should the pipeline do if it decides to include provisions that are unique to new facilities in precedent agreements and in service agreements?
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.
10. Where should pipelines reflect collateral requirements and other conditions relating to construction of new facilities?
Collateral requirements and other conditions relating to construction of new facilities should be reflected in precedent agreements.
11. Do pipelines need to re-file service agreements filed in a certificate proceeding as non-conforming agreements when they go into effect if they have material deviations?
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.
12. Must a company review contracts that it executed in past periods in determining whether a material deviation exists, and if so, how far must the company go back?
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.
13. What tariff should be used to evaluate whether previously executed contracts that are currently in effect contain material deviations - the current tariff, the tariff that was in effect when the contract was signed, or the tariff that was in effect when the contract became effective?
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)).
14. Does audit staff typically examine expired contracts in the context of an audit?
In the context of an audit, audit staff typically will not examine expired
or terminated contracts during the contract review phase of the audit.
15. Where there is a provision in the tariff permitting the pipeline and the shipper to agree to some action different from the general rule in the tariff, and such agreement is reflected in the parties' service agreement, is that provision (which is permitted by the tariff) considered a material deviation?
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)).
16. What course of action should a pipeline take if it identifies a service agreement with a material deviation and the service agreement was not filed with the Commission?
Listed below are some appropriate avenues open to pipelines to address
a contract/service agreement that may include a material deviation.
- The pipeline could renegotiate the contract with the customer and remove the material deviation.
- The pipeline can amend the pro forma service agreement to incorporate the material deviation.
- 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).
- 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).
17. If a company has an on-line system for contracting for transportation services and the service agreement that results from this system, when printed out, does not look exactly like the pro forma service agreement in the tariff, is that a material deviation?
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.
.
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