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Call Me NAESB - Standards Organization's Base Contract is Central to Winter Storm Uri Litigation

In the aftermath of the massive Winter Storm Uri in February of last year and its impact on the natural gas industry, there has been a blizzard of civil and regulatory litigation. Whether it’s someone not providing contracted gas supply, not taking expensive must-take gas supply, or saying “not that contract, but this contract” where there was a big difference in pricing between the two, lawyers are having a field day with the meaning of two words: force majeure. To what extent was one party to an agreement protected from being in breach of contract because their deal said some things could be force majeure, or beyond their control? The purchase and sale of natural gas at issue in these contracts is overwhelmingly done through a standard base contract produced by the North American Energy Standards Board, or NAESB (pronounced “Nays-be,” not “Nazz-be”). In today’s RBN blog, we discuss the standard contract used for the vast majority of natural gas supply deals in the U.S. and how its provisions relate to the issues raised by last February’s Deep Freeze.

Especially for folks in Texas, Winter Storm Uri was perhaps the most memorable event in a year full of real doozies. In fact, Terminal Frost, our blog on the gas-market havoc that Uri caused, got more hits than any other blog we posted in 2021. Without rehashing the mayhem that came with the Deep Freeze, suffice to say that many elements of Texas’s extensive gas and electric infrastructure failed to perform, mostly due to extreme frigid temperatures the likes of which few in the Lone Star State had experienced before. Gas demand spiked, gas supply tanked (due to well freeze-offs, pipeline-operating problems, and, most importantly, power being cut to supply facilities), wind turbines iced up and localized power interruptions morphed into a monstrous and sustained blackout affecting millions of customers … put simply, it was a mess. And when systems fail like that, lots of consumers don’t get their gas, supply-demand imbalances spike prices to stratospheric levels, a huge state goes without power with disastrous consequences, and everyone looks to limit their losses (or protect the massive profits they made). Enter the attorneys and their detailed reviews of what the contracts say and mean.

Which brings us to NAESB’s base contract. Almost everyone uses it, and it contains the force majeure provision most often at issue in Uri-related litigation. NAESB, a voluntary membership organization, is the central business-practice standards group of both the natural gas and electric industries and carries enormous clout in terms of setting the rules. NAESB became the successor to the Gas Industry Standards Board, or GISB, when it was expanded to include wholesale electric, retail gas, and retail electric in 2002. The GISB, in turn, was created in 1995 to deal with dysfunction in the gas pipeline sector following the industry’s restructuring by the Federal Energy Regulatory Commission (FERC) in 1993 (check out our Different Strokes series for more on how pipeline regulations have evolved). As the industry moved to a transportation-only model, with nominated transactions in far higher numbers than had ever been seen, the nomination processes and electronic bulletin boards (EBBs) of individual pipeline companies were an ugly patchwork quilt of individual company systems. Some just didn’t work to get gas flowing on a timely basis, and all of them required buyers and sellers to employ individual experts on each pipeline’s tariff and EBB. The GISB was created for the industry to voluntarily standardize how things were done, and to recommend to FERC that those standards become formal rules — which is exactly what FERC did in its No. 587 series of orders. Order 587 was issued in 1996 and its 25th major update and revision of FERC regulations was issued in July 2021.

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