[Federal Register Volume 61, Number 153 (Wednesday, August 7, 1996)]
[Proposed Rules]
[Pages 41046-41058]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20048]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 284
[Docket Nos. RM96-14-000]
Secondary Market Transactions on Interstate Natural Gas Pipelines
July 31, 1996.
AGENCY: Federal Energy Regulatory Commission, Energy.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Federal Energy Regulatory Commission is issuing a notice
of proposed rulemaking to revise section 284.243 of the Commission's
regulations to improve the efficiency of the Commission's capacity
release mechanism and encourage greater use of this mechanism. The
Commission is proposing to: make changes in its regulations and
policies to improve the operation of the capacity release mechanism;
eliminate the prior requirement for competitive bidding; and permit
shippers to release capacity, and pipelines to sell interruptible and
short-term firm service, at rates above the rate cap when the shipper
or pipeline has demonstrated that it does not exercise market power.
DATES: Comments on the proposed rule are due October 7, 1996. Comments
should be filed with the Office of the Secretary and should refer to
Docket No. RM96-14-000.
ADDRESSES: Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC, 20426.
FOR FURTHER INFORMATION CONTACT: Michael Goldenberg, Office of the
General Counsel, Federal Energy Regulatory Commission, 888 First
Street, NE., Washington, DC 20426; (202) 208-2294.
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in Room 2A, 888 First
Street, N.E., Washington, D.C. 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and may be accessed using a personal computer with a modem by
dialing 202-208-1397 if dialing locally or 1-800-856-3920 if dialing
long distance. To access CIPS, set your communications software to
19200, 14400, 12000, 9600, 7200, 4800, 2400, 1200bps, full duplex, no
parity, 8 data bits, and 1 stop bit. The full text of this document
will be available on CIPS indefinitely in ASCII and WordPerfect 5.1
format for one year. The complete text on diskette in WordPerfect
format may also be purchased from the Commission's copy contractor, La
Dorn Systems Corporation, also located in Room 2A, 888 First Street,
N.E., Washington D.C. 20426.
The Commission's bulletin board system also can be accessed through
the FedWorld system directly by modem or through the Internet. To
access the FedWorld system by modem:
Dial (703) 321-3339 and logon to the FedWorld system.
After logging on, type: /go FERC
To access the FedWorld system, through the Internet:
Telnet to: fedworld.gov
Select the option: [1] FedWorld
Logon to the FedWorld system
Type: /go FERC
Or:
Point your Web Browser to: http://www.fedworld.gov
Scroll down the page to select FedWorld Telnet Site
Select the option: [1] FedWorld
Logon to the FedWorld system
Type: /go FERC
The Federal Energy Regulatory Commission (Commission) requires
interstate natural gas pipelines to provide a mechanism that permits
firm shippers to release unneeded capacity to other shippers needing
that capacity. The Commission is proposing to revise its capacity
release regulations, Sec. 284.243, to improve the efficiency of the
program and encourage greater use of capacity release. The Commission
is proposing changes in three areas. First, the Commission is proposing
to require pipelines to improve their existing capacity release
procedures to make the system work more efficiently. Second, the
Commission is proposing to improve the speed and certainty of
transactions by removing the requirement for competitive bidding.
Third, the Commission proposes to permit releases of capacity and
pipeline sales of interruptible and short-term firm capacity at rates
above the pipeline's maximum rate upon a showing that the releasing
shipper or the pipeline cannot exercise market power.
I. Public Reporting Burden
The proposed rule would affect two existing Commission data
collections, FERC-545, Gas Pipeline Rates: Rate Change (Non-formal),
(OMB Control No. 1902-0154) (FERC-545), and FERC-549B, Gas Pipeline
Rates: Capacity Release Information (OMB Control No. 1902-0169)(FERC-
549B).
Under the existing data collection/requirements of FERC-545, there
would be a one-time estimated annual reporting burden of 4,125 hours
(55 hours per company) with the adoption of the revised regulations
proposed herein. A one-time tariff filing would adjust certain general
terms and condition language in pipeline tariffs to reflect the
implementation of the proposed changes in the Commission's capacity
release program. Tariff filings would be required of approximately 75
interstate natural gas pipelines. (See FERC-545 burden detail in
estimated burden table below.)
Under existing data collection FERC-549B there would be a reduction
in annual burden of an estimated 115,650 hours (1,542 hours per
company). The estimated burden reduction reflects the proposed
improvements to the way the capacity release program operates and the
elimination of competitive bidding requirements.
The revised regulations proposed in the subject NOPR are being
submitted to the Office of Management and Budget (OMB) for review under
section 3507(d) of the Paperwork Reduction Act of 1995, (44 U.S.C.
3507(d)). For copies of the OMB submission, contact Michael Miller at
(202)208-1415. Interested persons may send comments regarding these
burden estimates or any other aspect of these collections of
information, including suggestions for reductions of burden, to the
Desk Officer FERC, Office of Management and Budget, Room 3019 NEOB,
Washington, D.C. 20503, phone 202-395-3087 or via the Internet at
hillier_t@a1.eop.gov.
[[Page 41047]]
Comments should be filed with the Office of Management and Budget. A
copy of any comments filed with the Office of Management and Budget
also should be sent to the following address at the Commission: Federal
Energy Regulatory Commission, Information Services Division, Room 41-
17, Washington, DC 20426, Attention: Michael Miller.
Estimated Annual Burden Associated With the Subject NOPR
----------------------------------------------------------------------------------------------------------------
Total No. Total
Affected data collection/requirement No. of of Hours per annual
respondents responses response hours
----------------------------------------------------------------------------------------------------------------
FERC-549B (1902-0169):
Reporting/Data Requirement Burden.......................... 75 75 -1,542 -115,650
FERC-545 (1902-0154):
Reporting/Data Requirement Burden.......................... 75 75 55 4,125
Total Annual Hours Net Increase or (Decrease) in Burden.... 75 75 -1,487 -111,525
----------------------------------------------------------------------------------------------------------------
The above estimates include time for reviewing the requirements of
the Commission's proposed regulations, searching existing data sources,
gathering and maintaining the necessary data, and reviewing and
completing the collection of information.
Data Collection/Requirement Costs
The Commission expects that the proposed changes in its regulations
would result in a net reduction in day-to-day operating costs. The one-
time tariff filing burden/cost under FERC-545 would be more than offset
by the expected burden/cost reduction and efficiencies created under
FERC-549B. The Commission estimates that the changes in reporting
requirements proposed herein would result in an overall net reduction
in the average annualized cost per respondent for the first year.
Following the first year, a permanent annual reduction in burden/cost
would occur under the FERC-549B data collection as indicated below.
------------------------------------------------------------------------
Estimated annualized costs (per respondent)
------------------------------------------------------------------------
FERC-549B (Annual Reduction)............................... -$75,378
FERC-545 (One-time Initial Cost/First Year)................ 2,652
------------
Net Total Cost (Net Reduction)......................... -$73,726
------------------------------------------------------------------------
Internal Review:
The Commission has reviewed the proposed revisions to its
regulations and determined that the changes are necessary to establish
more efficient pipeline operations. The proposed rule would encourage
buyers to use the capacity release system more often and make it more
competitive with other means of acquiring capacity.
The proposed revisions are consistent with the Commission's plan
for efficient information collection, communication, and management
within the natural gas industry. The Commission has assured itself, by
means of its internal review, that there is reasonable and objective
support for the burden estimates associated with the proposed changes
in information requirements.
The Commission emphasizes that the increased cost under FERC-545
would be a one-time cost that pipelines would not incur on an ongoing
year-to-year basis. The estimated cost reflects the one-time tariff
filings to incorporate the revised regulations proposed herein. These
revisions appear necessary to improve the efficiency of the capacity
release program between shippers and pipelines, efficiency which, in
the long run, should reduce the costs of all participants in the
market.
II. Current Capacity Release Rules
The Commission instituted the capacity release mechanism to create
a uniform, national program for the reallocation of interstate pipeline
capacity to complement the unbundled, open access environment created
by Order No. 636. 1 The capacity release mechanism enables firm
shippers to make the most efficient and economical use of the capacity
for which they pay as well as providing shippers that previously had
been unable to acquire firm pipeline capacity (i.e., non-local
distribution company shippers) with access to firm capacity. By
permitting market forces to reallocate capacity to those who place a
higher value on the capacity than the original holder, the capacity
release mechanism increases economic efficiency as well as promoting
the most efficient use of the natural gas transportation network.2
---------------------------------------------------------------------------
\1\ Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation of
Natural Gas Pipelines After Partial Wellhead Decontrol, Order No.
636, 57 FR 13267 (Apr. 16, 1992), FERC Stats. & Regs. Preambles
[January 1991-June 1996] para. 30,939 (Apr. 8, 1992), order on
reh'g, Order No. 636-A, 57 FR 36128 (Aug. 12, 1992), FERC Stats. &
Regs. Preambles [January 1991-June 1996] para. 30,950 (Aug. 3,
1992), order on reh'g, Order No. 636-B, 57 FR 57911 (Dec. 8, 1992),
61 FERC para. 61,272 (1992), aff'd in part and remanded in part,
United Distribution Co. v. FERC, No. 92-1485 (D.C. Cir. July 16,
1996).
\2\ As part of its restructuring of the electric industry, the
Commission has also provided for transmission capacity reassignment
for electric utilities. See Promoting Wholesale Competition Through
Open Access Non-discriminatory Transmission Services by Public
Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. &
Regs. Preambles [January 1991-June 1996], para. 31,036, at 31,694
(Apr. 24, 1996).
---------------------------------------------------------------------------
The Commission's authority to establish a uniform, national program
governing the reallocation of interstate capacity has just been
affirmed by the United States Court of Appeals for the District of
Columbia in United Distribution Co. v. FERC (UDC).3 The Court also
affirmed the Commission's jurisdiction over, and authority to prevent,
other capacity reallocations that may interfere with the establishment
of the uniform federal program, such as buy-sell transactions in which
an LDC uses its interstate capacity to transport gas on behalf of a
purchaser. The Court found that the Commission's jurisdiction over a
buy-sell derives from the transportation component of the transaction;
the reallocation of interstate pipeline capacity to the purchaser is a
``central element'' of such transactions.4
---------------------------------------------------------------------------
\3\ No. 92-1485, 1996 U.S. App. Lexis 17436, slip op. at 63-81
(D.C. Cir. July 16, 1996).
\4\ Id., at 80. The Commission also has Natural Gas Act
jurisdiction over buy-sells and other transactions to the extent
they constitute the sale of natural gas for resale. See id., at 68.
---------------------------------------------------------------------------
Under the Commission's capacity release program, a firm shipper
(releasing shipper) sells its capacity by returning its capacity to the
pipeline for reassignment to the buyer (replacement shipper). The
pipeline contracts with, and receives payment from, the replacement
shipper and then issues a credit to the releasing shipper. The
replacement shipper may pay less than the pipeline's maximum tariff
rate, but
[[Page 41048]]
not more. The results of all releases are posted by the pipeline on its
Electronic Bulletin Board (EBB) and made available through
standardized, downloadable files.
The releasing shipper can locate a replacement shipper in two ways.
The releasing shipper can choose to have the pipeline post the notice
of release so other shippers can submit bids for that capacity, with
the capacity awarded to the highest bidder. Or, the releasing shipper
can enter into a pre-arranged transaction with a replacement shipper
for the release of capacity.
The regulations establish a number of requirements for pre-arranged
releases. For pre-arranged releases at less than the maximum rate, the
regulations generally require that the pipeline post the release and
permit other shippers to bid for that capacity. If a competitive bid
exceeds the pre-arranged release rate, the designated replacement
shipper is given the opportunity to match that bid and thus retain the
capacity.
The Commission, however, has recognized that, for short-term
transactions, shippers need the ability to reallocate capacity quickly
and efficiently. The original regulations, therefore, provided an
exemption from the competitive bidding requirements for transactions of
less than one calendar month. This exception has been extended to
transactions of 31 days or less. To ensure that parties cannot use the
exception to avoid bidding for longer-term transactions, the
regulations prohibit parties from rolling-over or granting extensions
to 31-day-or-less transactions unless they comply with the requirements
for prior notice and bidding.
Since Order No. 636, the Commission, on several occasions, has fine
tuned the mechanics of the capacity release procedure. In February
1993, the Commission convened a technical conference to examine methods
of creating standardized downloadable files for capacity information,
so that shippers and third-party service providers could obtain
capacity information without having to deal with the eccentricities of
the individual pipeline EBBs. The industry formed Working Groups to
devise the necessary standards, and, in Order No. 563, the Commission
adopted into its regulations the standards recommended by a consensus
of the industry.5
---------------------------------------------------------------------------
\5\ Standards For Electronic Bulletin Boards Required Under Part
284 of the Commission's Regulations, Order No. 563, 59 FR 516 (Jan.
5, 1994), FERC Stats. & Regs. Preambles [January 1991-June 1996]
para. 30,988 (Dec. 23, 1993), order on reh'g, Order No. 563-A, 59 FR
23624 (May 6, 1994), FERC Stats. & Regs. Preambles [January 1991-
June 1996] para. 30,994 (May 2, 1994), reh'g denied, Order No. 563-
B, 68 FERC para. 61,002 (1994).
---------------------------------------------------------------------------
The Commission also began receiving requests from local
distribution companies (LDCs) to revise the capacity release
regulations by removing the requirements for competitive bidding and
the cap on the rate releasing shippers could receive for
capacity.6 After the capacity release program had been in effect
for a year, the Commission began a review of the program which involved
informal meetings between staff and representatives from all segments
of the industry.
---------------------------------------------------------------------------
\6\ See Petition Of United Distribution Companies and Associated
Gas Distributors For A Rulemaking To Promote Growth And Development
Of The Secondary Market, Docket No. RM94-10-000, filed December 9,
1993.
---------------------------------------------------------------------------
During these meetings, all industry segments recommended that the
less-than-one calendar month exception from the bidding requirements be
extended to a full month to conform the bidding exception to the
industry's monthly purchasing schedule. The Commission adopted the
industry's recommendation in Order No. 577 and extended the bidding
exception to 31 days.7 The extension of the bidding exception
ensures that releasing and replacement shippers can consummate monthly
transactions quickly and provides replacement shippers with the needed
assurance that they will obtain the contracted-for capacity at the
negotiated price.
---------------------------------------------------------------------------
\7\ Release of Firm Capacity on Interstate Natural Gas
Pipelines, Order No. 577, 60 FR 16979 (Apr. 4, 1995), FERC Stats. &
Regs. Preambles [January 1991-June 1996] para. 31,017 (Mar. 29,
1993), reh'g granted, Order No. 577-A, 60 FR 27882 (June 8, 1995),
FERC Stats. & Regs. Preambles [January 1991-June 1996] para. 31,021
(May 31, 1995).
---------------------------------------------------------------------------
The Commission also improved the capacity release system as part of
its recent standardization of pipeline business and communication
practices. On July 17, 1996, the Commission issued a final rule
incorporating by reference business practice and communication
standards proposed by the Gas Industry Standards Board (GISB).8
These standards will be implemented by pipelines in the spring of 1997.
---------------------------------------------------------------------------
\8\ Standards for Business Practices of Interstate Natural Gas
Pipelines, Order No. 587, 76 FERC para. 61,042 (1996). GISB is a
consensus standards organization open to all members of the gas
industry. Under GISB procedures, standards must be approved by a
consensus of the five segments of the industry--pipelines, LDCs,
producers, end-users, and services (including marketers and third-
party computer service providers).
---------------------------------------------------------------------------
The standards require changes in pipelines' capacity release
procedures and in their methods of communicating capacity release
information. An important procedural change is the establishment of a
capacity release timeline.9 This timeline provides that, if
pipelines are notified of a non-biddable capacity release transaction
by 9:00 a.m. the day of nomination, the replacement shipper can
nominate the same day (at 11:30 a.m.). For biddable transactions (of
less than five months), the timeline provides that if a pre-arranged
transaction (or a shipper's offer soliciting bids) is posted to the
pipeline by 1:00 p.m., the pipeline must complete the bidding and
matching process by 5:00 p.m., and the replacement shipper can nominate
the next day.10
---------------------------------------------------------------------------
\9\ Capacity Release Standard 5.3.2. All times used in the
standards are central clock time (which is central standard time,
without a daylight savings time adjustment).
\10\ Longer-term transactions, those of five months or longer,
have a 4-day bidding period.
---------------------------------------------------------------------------
The communication standards require pipelines to process file
uploads of pre-arranged transactions. This change complements the file
downloads previously required by Order No. 563, because shippers and
third-party service providers now will be able to transmit pre-arranged
deals to the pipelines without being burdened by the inconsistent and
irregular procedures of individual pipeline EBBs. Instead, they will be
able to efficiently transmit this information to every pipeline using
the same file formats and protocols.
Proposed Revisions
The Commission proposes revisions to Sec. 284.243 to further
improve the efficiency of the capacity release mechanism and thereby
create an even more robust secondary market. The revisions are intended
to encourage greater use of capacity release and make capacity release
more competitive with other means of acquiring capacity, such as the
pipelines' interruptible and short-term firm services as well as the
so-called ``gray market.'' The gray market generally refers to LDCs'
use of their firm transportation capacity to make targeted bundled
transportation/gas sales to specific purchasers either on-system or
off-system.
Specifically, as discussed below, the Commission proposes three
major revisions to its capacity release regulations and policies.
First, the Commission is proposing to revise its regulations as well as
change policies to improve the operation of the capacity release
program. Second, the Commission proposes to eliminate the competitive
bidding requirement. Third, the Commission proposes to permit shippers
to release capacity, and pipelines to sell interruptible and short-term
firm service, at rates above the rate
[[Page 41049]]
cap when the shipper or pipeline has demonstrated that it does not
exercise market power. In addition, the Commission is revising its
regulations to reflect the long-standing policy that pipelines must
permit permanent releases of capacity--releases where the replacement
shipper takes over the remaining term of the releasing shipper's
contract, and the releasing shipper is relieved of its obligations
under its pipeline contract.11
---------------------------------------------------------------------------
\11\ El Paso Natural Gas Company, 61 FERC para. 61,333, at
62,311-12, aff'd, 62 FERC para. 61,311, at 62,999-17-999-18 (1993).
---------------------------------------------------------------------------
A. Improvements to the Mechanism
1. Comparability Between Released Capacity and Pipeline Short-Term
Services
The Commission proposes to add a requirement in its regulations
requiring pipelines to treat all short-term transportation--capacity
release, interruptible, and short-term firm--in a comparable manner.
This proposal ensures that the pipeline procedures are not inherently
biased in favor of pipeline services, so that capacity release can
compete on an even basis.
The recently adopted GISB standards go a long way towards achieving
such comparability. Interruptible shippers can submit a nomination
under their interruptible contract on the day they determine they need
service. While not identical, the GISB capacity release standards
permit replacement shippers (with pre-arranged transactions not subject
to bidding) to nominate the same day the pipeline is notified of the
capacity release transaction. If shippers submit a pre-arranged non-
biddable transaction to the pipeline by 9:00 a.m., the pipeline will
complete the contracting process by 10:00 a.m., thereby enabling the
replacement shipper to nominate by the 11:30 a.m. nomination
deadline.12
---------------------------------------------------------------------------
\12\ For transactions subject to bidding, the standards impose a
one-day delay between notification of the pipeline and the ability
to nominate to permit the pipeline to complete the bidding process.
This aspect of comparability is discussed in the competitive bidding
section, infra.
---------------------------------------------------------------------------
The Commission requests comment on whether the GISB standard should
be deemed sufficient to satisfy the proposed comparability requirement.
While non-biddable capacity releases must be posted to the pipeline
2\1/2\ hours prior to notification, interruptible shippers have no pre-
nomination notice requirement; they can simply submit a nomination at
the 11:30 a.m. nomination deadline. Comments should discuss whether the
2\1/2\ hour time differential between capacity release and
interruptible nominations is of competitive significance.
The comments also should address methods for making the capacity
release procedures parallel even more closely the procedures used by
the pipelines for interruptible service. For example, interruptible
shippers are pre-approved for creditworthiness and have master
contracts that enable them to submit nominations without any further
procedures. Similarly, pipelines could pre-approve replacement shippers
for creditworthiness and execute a master contract with all pre-
approved shippers. Once pre-approved, a replacement shipper, like an
interruptible shipper, could nominate pursuant to a capacity release
transaction so long as the pipeline is notified of the transaction
anytime prior to the nomination deadline.
In addition, for replacement shippers that have not been pre-
approved, the Commission could relax the policy, adopted in Order No.
636, that releasing shippers can never be liable for usage charges and
penalties incurred by replacement shippers.13 The Commission's
rationale for the policy was that such charges are unrelated to the
reservation of capacity and primarily are designed to recover the
variable costs of replacement shippers' use of the pipeline or to deter
replacement shippers from engaging in prohibited conduct. Since the
releasing shipper has no control over the conduct of the replacement
shipper after the release, the Commission found no purpose in requiring
the releasing shipper to be responsible for these charges.
---------------------------------------------------------------------------
\13\ Order No. 636-A, FERC Stats. & Regs. Preambles [January
1991-June 1996] at 30,564-65; Order No. 636-B, 61 FERC at 61,998.
---------------------------------------------------------------------------
While the Commission still finds this rationale generally
persuasive, it should not be invoked unnecessarily to impede capacity
release transactions. Thus, the Commission could permit a releasing
shipper to assume liability for usage and related charges for a limited
period during which the pipeline completes the credit check and the
contracting process.
2. Flexibility in the Use of Capacity
One of the Commission's goals is to provide shippers with the
utmost flexibility to manage their capacity, so they can derive the
maximum benefit from that capacity whether through their own use or
through release. The Commission, therefore, has adopted policies
requiring pipelines to permit shippers to segment or aggregate capacity
or use their capacity to effect backhauls and exchanges.14 In the
oft-quoted example of such flexibility in Order No. 636, the Commission
explained that a shipper with capacity from the Gulf of Mexico to New
York City could release the portion from the Gulf to Atlanta, Georgia,
and separately release the portion from Atlanta to New York or retain
the Atlanta to New York portion for the releasing shipper's own
use.15
---------------------------------------------------------------------------
\14\ Order No. 636, FERC Stats. & Regs. Preambles [January 1991-
June 1996] at 30,420-21; Order No. 636-A, FERC Stats. & Regs.
Preambles [January 1991-June 1996] at 30,558; Order No. 636-B, 61
FERC at 61,997.
\15\ Id.
---------------------------------------------------------------------------
The Commission also requires pipelines to provide for flexible
receipt and delivery points. Under this policy, any firm shipper can
switch its primary firm receipt or delivery points to any available
point and also use any available point on a secondary basis (with a
lower priority than a shipper using the point as a primary point, but a
greater priority than interruptible transportation, since the use of
the alternate point is for firm capacity).16
---------------------------------------------------------------------------
\16\ Order No. 636, FERC Stats. & Regs. Preambles [January 1991-
June 1996] at 30,428-29; Order No. 636-A, FERC Stats. & Regs.
Preambles [January 1991-June 1996] at 30,583.
---------------------------------------------------------------------------
In some cases, releasing and replacement shippers may not be
getting the full flexibility in managing their capacity that the
Commission envisioned in Order No. 636. Thus, the Commission will fully
enforce its current policies, and supplement those policies as
necessary, so that shippers have the tools to structure their use or
release of capacity to best meet their needs.
a. Segmentation of Capacity
During the informal discussions with Commission staff, several
participants stated that segmentation on some pipelines was difficult,
particularly in the supply area. The Commission also has become aware
of segmentation problems in some cases.17
---------------------------------------------------------------------------
\17\ See ANR Pipeline Company, 75 FERC para. 61,082, at 61,242
and 75 FERC para. 61,083 (1996).
---------------------------------------------------------------------------
As the Commission stated recently in Opinion No. 405,18 the
ability to segment capacity is an integral feature of the capacity
release mechanism. Segmentation can increase both releasing and
replacement shippers' access to supply sources. For example, through
segmentation, a releasing shipper can obtain access to an alternative
supply source while still recouping some of its investment by releasing
its supply area capacity to a
[[Page 41050]]
replacement shipper. The release then provides the replacement shipper
with access to the supply area without having to obtain, and pay for,
the full mainline path of the releasing shipper. With the right to
segment capacity between interconnections, shippers can customize their
capacity reservations to match their precise transportation path needs.
---------------------------------------------------------------------------
\18\ Transcontinental Gas Pipe Line Corporation (Transco), 76
FERC para. 61,021, slip op. at 15, 18-19 (1996).
---------------------------------------------------------------------------
The Commission, therefore, will vigorously enforce segmentation
rights to ensure that the capacity release system operates as
effectively as possible. As summarized in Opinion No. 405, the
Commission's current policy requires that pipelines adhere to the
following four principles in order to provide shippers with full and
effective segmentation rights.
First, to the extent operationally feasible, pipelines must assign
specific rights to capacity, including storage capacity, and capacity
at receipt and delivery points.19 To ensure shippers are aware of
available capacity, pipelines must fully comply with the Commission
regulations to post available capacity at each receipt and delivery
point.20
---------------------------------------------------------------------------
\19\ See Texas Eastern Transmission Corp., 62 FERC para. 61,015
at 61,080 (1993); Arkla Energy Resources, 62 FERC para. 61,076 at
61,452 (1993).
\20\ 18 CFR 284.8(b)(3) (provide notice of capacity at all
receipt and delivery points); Standards for Electronic Bulletin
Boards Required Under Part 284 of the Commission's Regulations,
Order No. 563, 59 FR 516 (Jan. 5, 1994), FERC Stats. & Regs.
Preambles [January 1991-June 1996] para. 30,988 (Dec. 23 1993) at
31,007, order on reh'g, Order No. 563-A, 59 FR 23,624 (May 6, 1994),
FERC Stats. & Regs. Preambles [January 1991-June 1996] para. 30,994
(May 2, 1994), at 31,040-41, order on reh'g, Order No. 563-B, 68
FERC para. 61,002 (1994) (posting of operationally available
capacity).
---------------------------------------------------------------------------
Second, the releasing shipper must be able to schedule service up
to its contract demand (CD) level on any segment it retains, while the
replacement shipper can simultaneously schedule up to its CD level on
the released segment. The purpose of permitting segmented capacity
would be frustrated if different segments of the pipeline could not be
used simultaneously. Therefore, the pipeline should not impose a
Maximum Daily Quantity (MDQ) limitation that prevents the segmented use
of capacity.21
---------------------------------------------------------------------------
\21\ See Texas Eastern Transmission Corp., 63 FERC para. 61,100
at 61,452 (1993); Texas Eastern Transmission Corp., 62 FERC para.
61,015 at 61,111 (1993); Panhandle Eastern Pipe Line Co., 61 FERC
para. 61,357 at 62,419 (1993).
---------------------------------------------------------------------------
Third, absent a condition in the release, the replacement shipper
must have the same right to use alternate receipt and delivery points
as other firm shippers.22
---------------------------------------------------------------------------
\22\ See El Paso Natural Gas Company, 62 FERC at 62,984, 62,991
(1993). The priority for scheduling service at alternate receipt and
delivery points is lower than that for primary receipt and delivery
points. Once scheduled, however, service at alternate points has the
same priority as service at primary points. Alternate firm receipt
and delivery points always have priority over interruptible service.
---------------------------------------------------------------------------
Fourth, segmented releases must be scheduled as quickly as non-
segmented releases. There should be no additional payments for
segmenting capacity, nor should pipelines limit the amount charged for
releases of segments of capacity except that the price for any single
release may not exceed a price cap set by the Commission.23 Thus,
releasing shippers can subdivide their capacity as many times as they
are able even if the total amount received for the various releases
exceeds the as-billed rate paid by the releasing shipper.
---------------------------------------------------------------------------
\23\ See Order No. 636 at 30,420-21.
---------------------------------------------------------------------------
In addition to the policies articulated in Opinion No. 405, the
Commission expects pipelines to adhere to the principle, established in
Order No. 636-B,24 that forward haul shippers should be permitted
to release their capacity for a backhaul. Backhauls are, in essence,
segmented releases, which should be permitted unless the pipeline can
document operational constraints.
---------------------------------------------------------------------------
\24\ Order No. 636-B, 61 FERC at 61,997.
---------------------------------------------------------------------------
The Commission intends to apply these policies when it reviews
pipeline tariff filings or in other proceedings. Segmentation also is
an issue that the industry can examine through GISB to determine
whether standards for segmentation can be developed.
In addition, firm shippers should be able to use their own capacity
in segments. In the Commission's original formulation of the
segmentation requirement, it addressed segmentation only in the context
of capacity release; it did not specifically apply the policy to
shippers segmenting their capacity for their own use. There appears no
reason to distinguish between segmentation for capacity release and
segmentation for a shipper's own use. Permitting shippers to segment
capacity for their own use may enhance their ability to make full use
of capacity, as well as enhance the value of released capacity, because
the replacement shipper can segment the capacity it buys. The
Commission welcomes comments on whether pipelines should be required to
permit shippers to segment their capacity when not releasing capacity.
b. Use of Receipt and Delivery Points
During the restructuring proceedings mandated by Order No. 636, the
Commission permitted some pipelines to retain existing tariff
provisions that did not permit shippers' primary receipt and delivery
point CD rights to exceed their mainline rights.25 As a
consequence, the Commission accepted tariff provisions under which
releasing shippers would lose their rights to primary receipt or
delivery points if replacement shippers changed primary points under
the release.26 Even at the time, the Commission was skeptical
about the justifications for such restrictions,27 and rejected
applications to impose similar restrictions by pipelines without pre-
existing restrictions.28
---------------------------------------------------------------------------
\25\ Transwestern Pipeline Company, 62 FERC para. 61,090, at
61,659, 63 FERC para. 61,138, at 61,911-12 (1993).
\26\ A releasing shipper could preserve its right to return to
its primary point after the release by including a provision in its
notice of release restricting the replacement shipper's ability to
change points.
\27\ See Transwestern Pipeline Company, 62 FERC at 61,659, 63
FERC at 61,911-12 (1993); El Paso Natural Gas Company, 62 FERC para.
61,311, at 62,982-83 (1993).
\28\ See Northwest Pipeline Company, 63 FERC para. 61,124, at
61,806-08 n.72 (1993).
---------------------------------------------------------------------------
The continuation of such restrictions appears to limit the utility
of the capacity release mechanism. A releasing shipper may be unwilling
to enter into a short term release if, in so doing, it loses priority
to its primary receipt and delivery points for the remainder of a 20-
year contract. On the other hand, a replacement shipper may need to use
receipt and delivery points different from those held by the releasing
shipper. The replacement shipper may be reluctant to bid on mainline
firm capacity if its ability to receive or deliver gas at a currently
available point is subject to bumping by shippers coming later in time.
The Commission, therefore, intends to look more closely at
restrictions on the ability of replacement shippers to change primary
receipt or delivery points in the future. As pointed out in Opinion No.
405, pipelines may not impose overly restrictive limits on the amount
of primary receipt and delivery point capacity that a shipper can
reserve, and any such limitations must be operationally justified.
Pipeline operational flow orders (OFOs) also may create
difficulties for replacement shippers using secondary points. An OFO
may give shippers at a primary point scheduling priority over those
using that point on a secondary basis even though the operational
problem giving rise to the OFO is not at the point in question, but
instead affects an upstream point on the mainline to which all the
shippers have equal firm rights. For example, according to OFO notices
that the Commission downloaded from pipeline EBBs during
[[Page 41051]]
the winter of 1996, some pipelines restricted scheduled secondary point
deliveries, but did not limit scheduled primary point
deliveries.29 In this situation, a replacement shipper's inability
to use an available primary point could result in a limitation on the
amount of gas it can receive during a peak period.
---------------------------------------------------------------------------
\29\ Also, a pipeline's OFO may require shippers to shift supply
from secondary to primary points. When this provision is coupled
with a restriction on the replacement shipper's ability to change
primary points at the initiation of a release, the replacement
shipper may be unable to deliver gas where needed when an OFO is
invoked. Compare Northwest Pipeline Company, 71 FERC para. 61,315
(1995) (OFO can require shippers to switch supply from secondary to
primary points) with Transwestern Pipeline Company, 62 FERC para.
61,090, at 61,659, 63 FERC para. 61,138, at 61,911-12 (1993)
(replacement shipper's ability to switch to a new primary point is
restricted).
---------------------------------------------------------------------------
The Commission invites comment on whether pipeline OFOs have caused
problems for the use of secondary point capacity. Commenters should
suggest, based on their experience, ways in which OFOs can be more
narrowly focused or handled differently while still permitting the
pipelines to respond to operational problems on their systems. Comments
also should address whether primary and secondary receipt and delivery
points should be treated identically in OFO situations when the
operational constraint involves mainline capacity. This would be
consistent with the Commission's current policy that once gas is
scheduled, firm service is firm service, with no distinction in
priority between firm service designated for primary and secondary
points.
B. The Bidding Requirement
The current regulations exempt capacity release transactions from
competitive bidding if the transactions are at the maximum rate or are
for 31 days or less.30 Bidding is thus required for all discounted
releases (at less than the maximum tariff rate) longer than 31 days;
and for discounted 31 day-or-less transactions if the release is a
rollover or continuation of an exempt 31-day-or-less transaction. The
Commission's principal goal in requiring posting and bidding was to
make capacity release transactions open so other shippers could conduct
price discovery and could monitor transactions for potential
discrimination.31 The competitive bidding requirement was intended
to ensure that interstate transportation capacity would be allocated to
those placing the highest value on obtaining that capacity and to
prevent discriminatory allocation of interstate capacity at prices
below the going market price.
---------------------------------------------------------------------------
\30\ 18 CFR 284.243(h).
\31\ Order No. 636-A, FERC Stats. & Regs. Preambles [January
1991-June 1996] at 30,555.
---------------------------------------------------------------------------
The Commission has received a number of requests, particularly from
LDCs, to eliminate mandatory competitive bidding on pipeline EBBs.
Those advocating the removal of the bidding requirement contend bidding
adds delay to the capacity release process due to the administrative
cumbersomeness of the pipelines' bidding procedures. They maintain
bidding also adds uncertainty to the process because it creates a risk
for the replacement shipper that it will be unable to acquire capacity
at the price it expected. Bidding, they assert, thus can prevent
parties from negotiating mutually beneficial transactions. They further
maintain that, in the over two years the capacity release system has
been in effect, no significant pattern of abuse has been shown.
Proliance Energy LLC and Baltimore Gas and Electric Company filed
comments on the GISB standards in Docket No. RM96-1, arguing that, due
primarily to the bidding process, the GISB standards do not fully
achieve the Commission's goal of providing for comparability between
the capacity release process and the process of obtaining pipeline
short-term services, like interruptible or short-term firm. They
pointed out that interruptible shippers can nominate on the day they
want capacity, while the GISB standards require at least one day (if
not more) to complete transactions subject to bidding.
Based on the data collected by the Commission, bidding does not
appear to be widespread.32 From May 1, 1995, to June of
1996,33 competing bids were submitted on only 14% to 20% of all
transactions subject to bidding (which themselves comprise 28% of all
transactions).34 For transactions longer than 31 days, the
percentage on which competitive bids were made is in the range of 25%
to 31%.
---------------------------------------------------------------------------
\32\ The appendix provides more details of the capacity release
information the Commission has downloaded from the pipelines.
\33\ Although the capacity release mechanism has been in place
since the fall of 1993, the May 1, 1995 date was chosen so that the
analysis would be based on a consistent set of data reflecting the
current regulations. Prior to May 1, 1995, the exemption from the
bidding requirement applied only to less-than-one-calendar-month
transactions. For the period after May 1, 1995, Order No. 577
extended the bidding exemption to 31-day-or-less transactions.
\34\ As shown in the appendix, the differences in the
percentages in the range reflect the effect of adjustments to deal
with inconsistent, and contradictory data showing a transaction as
being non-biddable, but also showing competing bids having been
submitted.
---------------------------------------------------------------------------
The original purposes of the posting and bidding requirements were
first and foremost to ensure public disclosure of capacity release
transactions, for both price discovery and monitoring, and secondarily
to ensure that capacity was allocated to the shipper placing the
greatest value on the capacity. In light of the experience with
capacity release, the Commission has reconsidered whether the bidding
requirement continues to be warranted. Experience demonstrates that the
competitive bidding requirement introduces delay, uncertainty, and
inefficiency into the capacity release process and is used
infrequently.
Even with the improvements in the GISB standards, the bidding
process still creates at least a one-day delay, and consequent
uncertainty for replacement shippers, who cannot be sure that they will
obtain the needed capacity at the price they are willing to pay.35
The delays and uncertainty imposed by mandatory competitive bidding
just do not seem warranted given that the data show that, for all
biddable transactions, competitive bids are submitted, at most, one-
fifth of the time.
---------------------------------------------------------------------------
\35\ If the releasing shipper specifies methodologies for
determining the highest bid other than the three standard methods,
the bidding process may take longer, introducing even further delay.
The three standard methodologies for determining the highest bid are
the highest absolute rate (independent of time and quantity), the
highest net revenue (rate times quantity independent of when
revenues are received), and the highest net present value (rate
times quantity adjusting for when revenues are received). Capacity
Release Standard 5.3.3.
---------------------------------------------------------------------------
The delay and uncertainty created by the competitive bidding
requirement further interferes with the goal of ensuring comparable
treatment between capacity release and pipeline short-term services. As
discussed in the prior section, if bidding is eliminated, replacement
shippers can nominate under a timetable comparable to that of
interruptible shippers. If competitive bidding is retained, however,
the Commission does not see how comparability between biddable capacity
release transactions and pipeline services could reasonably be
achieved. The present GISB timetable requiring the posting, bidding,
and matching process to take place in a 4-hour window the day prior to
nomination seems about as fast as can be reasonably required.
In addition, the Commission is aware that parties have been able to
design means of avoiding the bidding requirement.36 Eliminating
bidding
[[Page 41052]]
ensures that those abiding by the rules are not disadvantaged compared
to those who skirt them. Trying to control these avoidance practices
would only be likely to introduce greater administrative inefficiencies
into the process, inefficiencies which the amount of competitive
bidding does not seem to justify.
---------------------------------------------------------------------------
\36\ Inside F.E.R.C.'s Gas Marketing Report for December 1, 1995
(McGraw-Hill) alludes to a ``well-developed set of tricks'' allowing
some capacity traders to circumvent the bidding and roll-over
requirements. One such tactic mentioned in the article is for the
buyer to use different company names to effect multi-month releases.
The buyer uses one name to purchase capacity under the 31-day-or-
less exemption in the first month and then avoids the bidding
requirement for the next month by using a different company name,
such as that of an affiliate.
---------------------------------------------------------------------------
Even with elimination of bidding, the Commission's paramount goal--
providing public disclosure of transactions--will still be achieved by
continuing, and strengthening, the posting requirement. Indeed,
elimination of bidding may well result in greater and more accurate
public disclosure of price data, because shippers may forego the
mechanisms they have been using to avoid the bidding requirement.
The elimination of bidding does not mean that a releasing shipper
can release its capacity in an unduly discriminatory fashion, and the
Commission can still take action if it detects a pattern of undue
favoritism. For example, a release of capacity cannot be tied to
conditions unrelated to the use of the interstate capacity, such as the
purchase of gas from the releaser.37
---------------------------------------------------------------------------
\37\ Order No. 636-A, FERC Stats. & Regs. Preambles [January
1991-June 1996] at 30,559. As an example of discriminatory use of
interstate capacity by an LDC, see Interstate Gas Marketing., Inc.
v. Pennsylvania Public Utility Commission, No. 377 C.D. 1995, 1996
Pa. Commw., Lexis 270 (June 24, 1996).
---------------------------------------------------------------------------
The posting requirements, however, need to be strengthened. In
downloading pipeline capacity release information, the Commission has
found that relevant information about completed transactions is not
available in a single dataset.38 Easily accessible and retrievable
information about release transactions is crucial for the Commission
and the industry to monitor capacity release transactions effectively.
Thus, additional standardization appears necessary. GISB should
coordinate with Commission staff in seeking to resolve these issues,
and, if necessary, staff can convene a technical conference.
---------------------------------------------------------------------------
\38\ For example, some relevant information about pre-arranged
transactions is found in the dataset for capacity release offers,
but is not transferred to the dataset providing information about
awards. Thus, the Commission has to download both datasets to obtain
the information. An additional complication is that some pipelines
purge their offer and bid datasets after a transaction is completed.
Thus, unless shippers or the Commission download daily, which adds
burden and expense, some of this detail is lost.
---------------------------------------------------------------------------
The Commission is proposing to discontinue the pipelines'
obligation to afford a posting and bidding option for those shippers
wanting to solicit competitive bids. Given the preponderance of pre-
arranged transactions,39 requiring pipelines to provide a bidding
service (and permitting them to recover the costs of this service in
their cost-of-service) does not appear warranted.
---------------------------------------------------------------------------
\39\ Ninety-two percent of all capacity release transactions are
pre-arranged.
---------------------------------------------------------------------------
The proposal to eliminate the requirement for pipelines to provide
a bidding service does not signify that the Commission finds bidding
unimportant. Even if only a small percentage of capacity release
transactions are subject to bidding, the bidding results may provide
valuable information about the value of released capacity.
A mandatory requirement for pipelines to provide a bidding service,
however, does not appear necessary for releasing shippers to post
capacity for bid. Elimination of the requirement for bidding through
the pipelines will create an opportunity for the market to create even
more efficient, computerized capacity trading processes. At present,
third-party service providers cannot establish efficient bidding
programs for transactions subject to competitive bidding, because
transactions cannot be fully consummated on the third-parties' systems;
a pre-arranged transaction on the third-party boards still must be
transmitted to the pipeline and re-posted for a second round of bidding
according to the pipeline's bidding requirements. With the bidding
requirement removed, the dual posting will be eliminated, enabling
third-party service providers to complete transactions and then use the
GISB standards to upload the results to the pipelines for processing.
In addition, if they choose, pipelines still could institute a bidding
service in response to market demand.
The Commission requests comments on whether the requirement that
pipelines provide a posting and bidding service should be continued,
and, given that pipelines currently provide such a system on their
EBBs, how expensive it would be to continue providing the service.
Commenters, however, should take into account the possible need to
upgrade computer systems (for example, to permit file uploads of bids
and offers) as well as the additional costs of maintaining a bidding
mechanism if EBBs were replaced with more standardized Internet
technologies, as the industry is considering in the Business Practices
Rulemaking in Docket No. RM96-1.
Those commenters recommending retention of the bidding requirement
are requested to propose changes to improve the efficiency of the
current bidding mechanisms. For example, the Commission requests
comment on whether the efficiency of bidding could be improved if
third-party boards satisfied the bidding requirement. The Commission
requested and received some comments on substituting bidding on third-
party boards for pipeline bidding in response to the Business Practices
NOPR in Docket No. RM96-1. The few who commented on the issue opposed
the requirement on the grounds that locating capacity might be made
more difficult if shippers looking for capacity on one pipeline had to
monitor postings on all third-party boards. Commenters should consider
whether this problem outweighs the potential efficiency gains from
third-party bidding. Also, comments should discuss whether the
perceived problem--that pipeline listings will appear on multiple
third-party boards--is likely to occur or whether there are methods for
handling such problems. For example, the pipeline and its customers
could jointly solicit bids for, and choose, the third-party service
provider that will list offerings for that pipeline. Or, the Commission
could set standards that would ensure that shippers could access
multiple third-party displays on a single computer (for instance, by
using WindowsTM or Internet browsers).
The Price Cap
The Commission's regulations do not permit the rate for released
capacity to exceed the maximum rate in the pipelines' tariffs. The
Commission initially imposed this ceiling because the secondary market
had not been shown to be sufficiently competitive that releasing
shippers would be unable to exert market power.40
---------------------------------------------------------------------------
\40\ Order No. 636-A, FERC Stats. & Regs. Preambles [January
1991-June 1996] at 30,560.
---------------------------------------------------------------------------
The Commission's inquiry here is to determine whether the price cap
can be lifted because the secondary market is sufficiently competitive
so that releasing shippers cannot exercise market power. The Commission
recognizes that, on many pipelines, a large number of shippers hold
firm capacity and, due to the Commission's flexible receipt and
delivery point policy, numerous shippers may be able to compete in
offering capacity to potential
[[Page 41053]]
replacement shippers. Pipeline short-term services, interruptible and
short-term firm, also potentially compete with capacity release
transactions. In addition, the Commission is mindful that removing the
cap for releases and for pipeline short-term services may produce more
efficient capacity utilization by permitting prices to rise to market
clearing levels. Removal of the cap also may remove the incentive for
releasers to use the ``gray market'' as a means of circumventing the
price cap.41
---------------------------------------------------------------------------
\41\ By making a bundled sale, releasers avoid the cap by, in
effect, adding the full price of capacity (even if above the cap) to
the unregulated price for gas to produce a total price to the buyer
fully reflective of the amount the buyer is willing to pay for
capacity.
---------------------------------------------------------------------------
The Commission, however, has some concerns about the potential for
the exercise of market power in certain situations. First, regardless
of the number of firm shippers on a pipeline, LDCs may still exercise
market power over customers behind their city-gate. Because a customer
behind an LDC's city-gate must use the LDC's system to transport gas to
its final destination, the LDC may be able to structure its intrastate
service so that the end-user's ability to obtain released interstate
capacity from shippers other than its own LDC is limited.42
---------------------------------------------------------------------------
\42\ See Questar Pipeline Company, 64 FERC para. 61,157, at
62,282-83 (1993); Meridian Oil Inc. v. Southern California Gas Co.,
65 FERC para. 61,379 (1993) (raising concerns about intrastate rate
structures effect on LDC customers' ability to seek interstate
capacity from sources other than their own LDC).
---------------------------------------------------------------------------
In addition, an LDC's control over take-away capacity at primary
delivery points may limit the capacity choices of a customer behind the
city-gate, and thus confer market power on the LDC. If a customer
behind an LDC's city-gate purchases capacity from its own LDC, it will
obtain access to the city-gate delivery point on a primary basis. If,
however, it buys mainline capacity from another firm shipper (with a
different primary delivery point), the customer would have to effect
delivery to the city-gate as a secondary delivery point. Particularly
during peak periods, the customer may not be able to use the secondary
point if it is preempted by the LDC's use of the point on a primary
basis. In this event, the customer would not have access to a
competitive market for capacity; it would have only one realistic
capacity option--the primary point capacity of its own LDC.
Second, on some pipelines or portions of systems, the market may
not be competitive, because one or only a few shippers control the firm
capacity, producing high concentration indices indicative of the
potential to exercise market power. For example, a downstream shipper
may possess market power because it holds a large percentage of the
available capacity on the last segment of the pipeline. This may be
particularly true on a telescoping pipeline where the capacity of the
system decreases the farther downstream one goes.
Third, interruptible capacity, standing alone, may not be a
sufficient competitive alternative to released capacity. In the first
place, interruptible service on a fully subscribed pipeline becomes
available only if firm shippers are not using or releasing their firm
capacity. On a peak day, for instance, a replacement shipper cannot
simply reject a high asking price for firm capacity release and count
on the use of interruptible service. If the replacement shipper rejects
the released firm capacity, and the releasing shipper either uses the
capacity itself or releases it to another replacement shipper, the
interruptible capacity may not be available. Even if the replacement
shipper is able to acquire interruptible capacity, its use of the
interruptible service is still subject to being bumped by firm service.
Although shippers potentially can use the ``gray market'' to avoid
the price cap, the Commission does not find the existence of the gray
market sufficient to warrant across-the-board removal of the price cap.
The Commission is unaware of any empirical data on the extent of gray
market activity, but the available information suggests that the gray
market is not a sufficiently attractive alternative that it will
replace capacity release. For example, the amount of capacity
represented by capacity release transactions is growing and a
significant number of the transactions during peak periods take place
at maximum rates.43 The requests by LDCs to remove the price cap
from the release market further indicate that LDCs do not find the gray
market a completely satisfactory substitute for capacity release.
---------------------------------------------------------------------------
\43\ See Appendix, at p. 1 and 5. For example, according to the
Commission's data, 30% of releases during the peak heating season in
January 1996 were at the maximum rate.
---------------------------------------------------------------------------
Moreover, the Commission cannot abjure its statutory responsibility
to ensure that rates are just and reasonable simply because of the
potential for shippers to avoid the price cap.44 Unless a shipper
can show that it cannot exercise market power, the Commission cannot
conclude that the market-based rates the shipper would charge are
competitive and, therefore, just and reasonable. The appropriate
response to the gray market, therefore, is not to remove the rate cap
across-the-board, but to establish reasonable conditions that will
permit shippers to exceed the price cap when they cannot exercise
market power.
---------------------------------------------------------------------------
\44\ If the Commission had information showing that a shipper
making a sale for resale used a bundled sale to exceed the maximum
rate for interstate transportation, the Commission has the statutory
authority to take action against that shipper. Such action could
include revocation or limitations on the shippers' blanket marketing
certificate to make sales for resale. 18 CFR 284.401-02. In
addition, if the gray market sale is a buy-sell, it is prohibited.
See Order No. 636, FERC Stats. & Regs. Preambles [January 1991-June
1996] at 30,416, aff'd, United Distribution Co. v. FERC, slip op. at
77-81.
---------------------------------------------------------------------------
The Commission, however, does have some concerns about whether the
gray market may reduce the efficiency and effectiveness of the capacity
release market and may permit undue discrimination to occur. In view of
the Court of Appeals decision in UDC, the Commission is interested in
exploring the extent of gray market activity and possible approaches
for achieving a consistent regulatory framework for both capacity
release and the gray market. Although the Commission does not wish to
disrupt economic transactions occurring in the gray market, it is
interested in receiving comments on alternatives for regulating
capacity release and gray market activities, such as whether gray
market transactions should be subject to after-the-fact posting.
The Commission proposes to lift the price cap for released,
interruptible, and short-term firm capacity when releasing shippers and
pipelines can demonstrate that they are unable to exercise market
power.45 The Commission is proposing to include in its capacity
release regulations at section 284.243(e) a provision authorizing
shippers to submit applications to remove the price cap. Consistent
with the Commission's Policy Statement on Alternatives to Cost-of-
Service Ratemaking,46 pipelines seeking to remove the cap for
interruptible service can file a request for a declaratory order.
---------------------------------------------------------------------------
\45\ The Commission may, in some circumstances, need to consider
the relationship between an LDC and its affiliate if that
affiliation bears upon the ability of the combined entity to
exercise market power.
\46\ 74 FERC para. 61,076 (1996).
---------------------------------------------------------------------------
LDCs (or in some cases other shippers controlling take-away
capacity at delivery points) would have an additional prerequisite to
establish that they cannot exercise market power. They will need to
establish that they provide the ability to obtain (either individually
or through aggregation) open access transportation on the LDC's
facilities. If an LDC does not provide
[[Page 41054]]
open access transportation, its intrastate rates and terms and
conditions of service may discourage its customers from seeking
capacity from other interstate shippers. If the LDC provides open
access transportation, however, a customer can be assured of
transportation on the LDC's facilities regardless of whether it
purchases interstate capacity from the LDC or another shipper. In
addition, an LDC's open access provisions need to deal with the market
power conveyed by the LDC's control over primary delivery points. Thus,
an acceptable open access service would need to include a right for
customers behind the city-gate to use the LDC's city-gate as a primary
delivery point, regardless of whether they purchase interstate capacity
from the LDC.
The Commission solicits comments on a number of aspects of this
proposal. Comments should address how to measure market power in the
secondary market, such as whether to use the traditional market power
analysis as used in the Policy Statement or whether modified criteria
can ease the evidentiary burden, without compromising the integrity of
the market power analysis. Comments should further address the minimum
criteria needed for an acceptable open access program and the
relationship between the open access definition and the required market
power showing. For example, should the Commission presume that there is
sufficient competition if an LDC's open access program includes an
assignment of its upstream interstate capacity rights to its customers
either individually or through aggregation? 47 By virtue of such
an assignment, there presumably would be such a large number of holders
of primary point capacity to the LDC's city-gate that any potential
buyer behind the city-gate would have a sufficient number of
alternative sources of capacity.
---------------------------------------------------------------------------
\47\ This assignment is akin to the assignment of pipeline
upstream 858 capacity to its customers in Order No. 636.
---------------------------------------------------------------------------
The Commission further requests comment on whether LDCs should be
permitted to directly assign their capacity, without going through the
pipeline's contracting process, in certain circumstances, such as when
they have demonstrated a lack of market power. Comments should address
whether a lack of market power provides adequate protection to permit
direct assignment and what limitations, if any, should be imposed on
direct assignment.
Comments also should consider how the Commission should determine
whether an LDC's open access program meets the necessary open access
criteria. For example, the Commission could review an LDC's program de
novo or it could first require challenges to made at the state level
and give deference to determinations by state Public Utility
Commissions.
The Commission is proposing to permit pipelines to file to have the
price cap lifted for interruptible and short-term firm service, because
these services appear to compete directly with capacity release. In the
staff paper attached to the February 8, 1995 request for comments on
market-based rates, the staff concluded that market-based rates for
pipeline interruptible service might be warranted upon a showing that
capacity release was a good substitute for pipeline interruptible
service, but that the ability, at that time, to make such a showing was
doubtful.48 With the revisions to the capacity release program to
make it comparable to pipeline short-term services, capacity release
should now become a sufficient alternative to pipeline capacity. The
Commission, however, requests comments on issues relating to the
release of the price cap for short-term firm service, such as how to
establish regulations dealing with roll-overs or extensions of short-
term firm contracts to ensure that shippers do not lose the protection
of the price cap when they purchase long-term firm capacity.
---------------------------------------------------------------------------
\48\ Alternatives to Traditional Cost-of-Service Ratemaking for
Natural Gas Pipelines, 70 FERC para. 61,139, at 61,415 (1995)
(Request for Comments on Alternative Pricing Methods).
---------------------------------------------------------------------------
As an alternative to the maximum reservation rate limitation on all
capacity releases, or the complete elimination of the price cap, the
Commission requests comments on the appropriateness of permitting the
release and reassignment of capacity subject to a cost-based annual
revenue cap. Under such an approach, what reporting requirements should
be imposed on holders of capacity to ensure that the annual revenue
limitation is not exceeded? If the Commission adopts this revised
revenue cap, should it apply for short-term firm and interruptible
transactions as well? How should the interruptible rate under an annual
limitation be determined?
After receipt of comments on this proposal, the Commission intends
to hold a technical conference to explore issues related to removal of
the price cap and the best means of measuring market power in the
secondary market. In addition, to obtain additional record information
for determining whether, and how, to relax the price cap, the
Commission is proposing, in a separate order in this docket, to
establish an experimental, pilot program under which the cap will be
lifted for some LDCs and pipelines which meet the specified criteria.
The Commission will use the record developed from the comments, the
technical conference, and the pilot program to make its final
determination on whether, and how, to relax the price cap.
IV. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act of 1980 (RFA) 49 generally
requires a description and analysis of final rules that will have
significant economic impact on a substantial number of small entities.
The proposed regulations would impose requirements only on interstate
pipelines, which are not small businesses, and, in fact, the overall
effect of these revisions is to reduce costs, not only for the
pipelines, but for those dealing with pipelines, including small
businesses. Accordingly, pursuant to section 605(b) of the RFA, the
Commission hereby certifies that the regulations proposed herein will
not have a significant adverse impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\49\ 5 U.S.C. 601-612.
---------------------------------------------------------------------------
V. Environmental Analysis
The Commission is required to prepare an Environmental Assessment
or an Environmental Impact Statement for any action that may have a
significant adverse effect on the human environment.50 The
Commission has categorically excluded certain actions from these
requirements as not having a significant effect on the human
environment.51 The action taken here falls within categorical
exclusions in the Commission's regulations for rules that are
clarifying, corrective, or procedural, for information gathering,
analysis, and dissemination, and for sales, exchange, and
transportation of natural gas that requires no construction of
facilities.52 Therefore, an environmental assessment is
unnecessary and has not been prepared in this rulemaking.
---------------------------------------------------------------------------
\50\ Order No. 486, Regulations Implementing the National
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. &
Regs. Preambles 1986-1990 para. 30,783 (1987).
\51\ 18 CFR 380.4.
\52\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27).
---------------------------------------------------------------------------
VI. Information Collection Requirement
OMB's regulations at 5 CFR 1320.11 require that it approve certain
reporting and recordkeeping requirements (collections of information)
imposed by a Federal agency. Upon approval of a
[[Page 41055]]
collection of information, OMB shall assign an OMB control number and
an expiration date. Respondents subject to the filing requirements of
this proposed rule shall not be penalized for failing to respond to
these collections of information unless the collections of information
display valid OMB control numbers.
Title: FERC-545, Gas Pipeline Rates: Rate Change (Non-formal).
Action: Data Collection/Requirements.
OMB Control No.: 1902-0154.
Respondents: Interstate Natural Gas Pipelines (Not applicable to
small businesses).
Frequency of Responses: One-time tariff filings (First year).
Title: FERC-549B, Gas Pipeline Rates: Capacity Release Information.
Action: Reduction in Data Collection/Requirements.
OMB Control No.: 1902-0169.
Respondents: Interstate Natural Gas Pipelines (Not applicable to
small businesses).
Frequency of Responses: Continuing/Day-to-Day--Elimination of
Certain Capacity Release/Competitive Bidding Requirements (Annual
Burden/Cost Reduction).
Necessity of Information: The subject Notice of Proposed Rulemaking
solicits public comments on the Commission's efforts to encourage
greater use of the capacity release mechanism and to make capacity
release more competitive with other means of acquiring capacity. The
implementation of the proposed revisions to the Commission's
regulations would help the Commission carry out its responsibilities
under the Natural Gas Act and coincide with the current regulatory
environment which the Commission instituted with Order Nos. 636, 563,
and 587 and the restructuring of the natural gas industry. The
Commission's Office of Pipeline Regulation (OPR) would use the tariff
data filed under FERC-545 in rate proceedings to review rate and tariff
changes by natural gas companies for the transportation of gas and for
general industry oversight. Based on experience over the last two
years, the Commission has determined that the competitive bidding
requirements may no longer be warranted and that their elimination may
increase industry efficiency. The information collected under FERC-545
in the subject NOPR would be reported to the Commission and be subject
to audit.
The Commission is submitting a copy of the subject NOPR to OMB for
its review. Interested persons may obtain information on the proposed
modifications to the Commission's regulations by contacting the Federal
Energy Regulatory Commission, 888 First Street N.E., Washington, DC
20426 [Attention: Michael Miller, Information Services Division,
(202)208-1415] or the Office of Management and Budget [Attention: Desk
Officer for the Federal Energy Regulatory Commission (202)395-3087].
VII. Comment Procedures
The Commission invites interested persons to submit written
comments on the matters proposed in this notice, including any related
matters or alternative proposals that commenters may wish to discuss.
An original and 14 copies of comments to this notice must be filed with
the Commission no later than October 7, 1996. Comments should be
submitted to the Office of the Secretary, Federal Energy Regulatory
Commission, 888 First Street, NE, Washington, DC 20426, and should
refer to Docket No. RM96-14-000. Additionally, the Commission strongly
encourages commenters to submit a computer diskette of their comments
in WordPerfect version 6.1 format or lower or in ASCII format, with the
name of the filer and Docket No. RM96-14-000 on the outside of the
diskette. Those providing files in ASCII format should take care to
examine the form of an ASCII conversion to ensure, for instance, that
it includes footnotes, headers, and footers, as these have often been
left out in past electronic filings. All written comments will be
placed in the Commission's public files and will be available for
inspection in the Commission's Public Reference Room at 888 First
Street, NE, Washington, DC 20426, during regular business hours.
List of Subjects in 18 CFR Part 284
Continental shelf, Natural gas, Reporting and recordkeeping
requirements, Incorporation by reference.
By direction of the Commission.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the Commission proposes to amend
Part 284, Chapter I, Title 18, Code of Federal Regulations, as set
forth below.
PART 284--CERTAIN SALES AND TRANSPORTATION OF NATURAL GAS UNDER THE
NATURAL GAS POLICY ACT OF 1978 AND RELATED AUTHORITIES
1. The authority citation for part 284 continues to read as
follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 42 U.S.C 7101-7532; 43
U.S.C 1331-1356.
2. Sec. 284.243 is amended by removing paragraph (h), redesignating
paragraph (g) as paragraph (h), and revising paragraphs (b) through (f)
and adding paragraph (g) to read as follows:
Sec. 284.243 Release of firm capacity on interstate pipelines.
* * * * *
(b) Firm shippers must be permitted to release their capacity, in
whole or in part, on a permanent or short-term basis, without
restrictions on the terms and conditions of the release. A replacement
shipper is any shipper that obtains released capacity.
(c) A firm shipper that wants to release any or all of its firm
capacity must notify the pipeline of the replacement shipper to which
it wishes to release its capacity and the terms and conditions of the
release. The pipeline must provide a mechanism complying with
Sec. 284.10 of this part by which the shipper or its designated agent
can notify the pipeline of the terms of the release.
(d) The pipeline must provide notice of the name of the replacement
shipper and the terms and conditions of the release on its Electronic
Bulletin Board and in downloadable files required under Sec. 284.10 of
this part.
(e) The pipeline must allocate released capacity to the replacement
shipper at the rate established by the parties, but such rate shall not
exceed the pipeline's maximum rate, unless the Commission has granted
the releasing shipper's application to release capacity at a rate
exceeding the maximum.
(f) Unless otherwise agreed by the pipeline, the contract of the
shipper releasing capacity will remain in full force and effect, with
the net proceeds from any resale to a replacement shipper credited to
the releasing shipper's reservation charge. If the releasing shipper
has released its capacity for the remaining term of its contract, the
pipeline must permit the releasing shipper to terminate its contract.
(g) The pipeline must establish tariff provisions that will permit
replacement shippers to nominate and contract for service on a basis
comparable to shippers nominating and contracting for interruptible or
firm capacity from the pipeline.
* * * * *
Note.--The following appendix will not appear in the Code of
Federal Regulations.
[[Page 41056]]
Appendix--RM96-14-000
I. Capacity Release Award Characteristics
Source: Monthly EDI Downloads--30 Pipelines 1
---------------------------------------------------------------------------
\1\ Algonquin Gas Transmission, Alabama-Tennessee Natural Gas,
ANR Pipeline, Colorado Interstate Gas, CNG Transmission, Columbia
Gas, Columbia Gulf, East Tennessee Natural Gas, El Paso Natural Gas,
Florida Gas Transmission, Midwestern Gas Transmission, Mississippi
River Transmission, Natural Gas Pipeline, Noram Gas Transmission,
Northern Border Pipeline, Northern Natural Gas, Northwest Pipeline,
Pacific Gas Transmission, Paiute Pipeline, Panhandle Eastern Pipe
Line, Southern Natural Gas, Stingray Pipeline, Tennessee Gas
Pipeline, Texas Eastern Transmission, Texas Gas Transmission,
Trunkline Gas, Trailblazer Pipeline, Transcontinental Gas Pipe Line,
Transwestern Pipeline, Williams Natural Gas.
---------------------------------------------------------------------------
Released Capacity Held By Replacement Shippers
(Trillion Btu/day)
Capacity Held During the Month 2
---------------------------------------------------------------------------
\2\ Includes all capacity releases since 6/1/94 still in effect
during the indicated month.
---------------------------------------------------------------------------
(From Awards Between 06/01/94 and 04/30/96)
------------------------------------------------------------------------
Max Average
------------------------------------------------------------------------
January 1995........................................ 9.4 8.8
February 1995....................................... 10.8 10.1
March 1995.......................................... 10.5 9.9
April 1995.......................................... 11.7 11.2
May 1995............................................ 12.6 11.9
June 1995........................................... 14.1 13.3
July 1995........................................... 14.9 14.0
August 1995......................................... 17.0 16.0
September 1995...................................... 17.1 16.4
October 1995........................................ 16.1 15.5
November 1995....................................... 15.1 14.4
December 1995....................................... 14.1 13.5
January 1996........................................ 13.9 13.3
February 1996....................................... 15.1 14.6
March 1996.......................................... 15.2 14.7
April 1996.......................................... 17.5 16.7
------------------------------------------------------------------------
Note: The same 30 pipelines reported 86.5 trillion Btu/day firm
transportation quantities in their April 1, 1996 Index of Customers
filing.
Capacity Release Awards By Term and Whether Prearranged
[Awards from 5/1/95-5/31/96] \3\
------------------------------------------------------------------------
Percent of
Term Prearranged No. of total
awards awards
------------------------------------------------------------------------
< =="" 31="" days...................="" no..............="" 1,379="" 7="" yes.............="" 16,696="" 82="" -----------------------="" 18,075="" 89=""> 31 days..................... No.............. 172 1
Yes............. 2,007 10
-----------------------
2,179 11
All........................... No.............. 1,551 8
Yes............. 18,703 92
-----------------------
20,254 100
------------------------------------------------------------------------
\3\ Awards data for May 1996 is not complete.
Capacity Release Awards By Term and Whether Recallable
[Awards from 5/1/95-5/31/96]
------------------------------------------------------------------------
Percent of
Term Recallable No. of total
awards awards
------------------------------------------------------------------------
< =="" 31="" days...................="" no..............="" 6,188="" 32="" yes.............="" 11,394="" 58="" -----------------------="" 17,582="" 90=""> 31 days..................... No.............. 911 4
Yes............. 1,128 6
-----------------------
2,039 10
All........................... No.............. 7,099 36
Yes............. 12,522 64
-----------------------
19,621 100
------------------------------------------------------------------------
II. Capacity Release Bidding
Source: Monthly EDI Downloads--30 Pipelines (Awards from 5/1/95-5/31/
96)
Capacity Release Awards By Term and Whether Biddable and Prearranged \4\
----------------------------------------------------------------------------------------------------------------
No. of
Term Biddable Prearranged awards Percent
----------------------------------------------------------------------------------------------------------------
< =="" 31="" days..........................="" yes.....................="" yes....................="" 1,759="" 22="" [[page="" 41057]]="" no.....................="" 310="" 4="" no......................="" yes....................="" 5,726="" 73="" \5\="" no.................="" 104="" 1="" -----------------------="" 7,899="" 100=""> 31 days............................ Yes..................... Yes.................... 292 34
No..................... 34 4
No...................... Yes.................... 529 61
\5\ No................. 10 1
-----------------------
865 100
All.................................. Yes..................... Yes.................... 2,051 24
No..................... 344 4
No...................... Yes.................... 6,255 71
\5\ No................. 114 1
-----------------------
8,764 100
----------------------------------------------------------------------------------------------------------------
\4\ Analysis limited to awards with corresponding offer information in database. Resulting sample size is 43% of
all awards. Offer information is source for whether transaction is biddable.
\5\ This reported data is inconsistent, since it would seem that a transaction which is non-biddable should be
pre-arranged.
Capacity Release Awards With Competitive Bidding 6
----------------------------------------------------------------------------------------------------------------
Percent
No. of Awards with with
Term Reported as biddable biddable competing competing
awards bids bids
----------------------------------------------------------------------------------------------------------------
<=31 days.................................="" yes..........................="" 1,398="" 168="" 12="" no="" \7\.......................="" 111="" 111="" ...........="" --------------------------="" total="" \8\....................="" 1,509="" 279="" 19="">31 days.................................. Yes.......................... 252 64 25
No \7\....................... 21 21 ...........
--------------------------
Total \8\.................... 273 85 31
All....................................... Yes.......................... 1,650 232 14
No \7\....................... 132 132 ...........
--------------------------
Total \8\.................... 1,782 364 20
----------------------------------------------------------------------------------------------------------------
\6\ Analysis limited to awards with corresponding offer and bid information in database. Resulting sample size
is 35% of all awards. Offer information is the source for whether transaction is biddable. Bid information
indicates whether competing bids were submitted.
\7\ This reported data is inconsistent, in that the underlying offers were coded as non-biddable but in fact
competitive bids were submitted.
\8\ This reflects the inclusion in the analysis of awards coded as non-biddable for which competitive bids were
actually submitted. Including these awards leads to the higher percentage of awards with competing bids shown
in the last column.
III. Capacity Release Discounts
Source: EDI Downloads--30 Pipelines (Awards from 6/1/94-5/31/96)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mean Mean
Percent of Percent of Percent of Percent of percent of percent of
No. of awards with awards at awards with awards at max. resv. max. volum.
Award date awards discounted max. resv. discounted max. volum. rate rate
included resv. rate rate volum. rate rate (discounted (discounted
awards) awards)
--------------------------------------------------------------------------------------------------------------------------------------------------------
June 1994.................................................... 900 62 6 31 1 42.2 33.6
July 1994.................................................... 856 68 6 26 0 28.5 19.3
August 1994.................................................. 973 65 6 29 1 18.4 25.5
September 1994............................................... 999 68 7 23 2 19.6 24.5
October 1994................................................. 1082 62 13 22 4 23.5 27.8
November 1994................................................ 907 57 12 28 4 28.0 28.9
December 1994................................................ 920 54 15 27 3 27.2 22.8
January 1995................................................. 1184 56 14 27 3 25.9 18.7
February 1995................................................ 1287 65 10 22 2 25.2 21.7
March 1995................................................... 1691 70 8 20 2 24.2 23.6
April 1995................................................... 1726 70 6 21 3 22.3 20.6
May 1995..................................................... 1738 67 7 24 2 21.0 23.8
June 1995.................................................... 1450 63 5 31 1 22.0 24.1
July 1995.................................................... 1540 60 6 33 2 26.6 23.9
[[Page 41058]]
August 1995.................................................. 1597 59 5 34 1 24.2 28.5
September 1995............................................... 1776 60 16 23 1 28.6 33.6
October 1995................................................. 1804 58 19 22 1 25.1 37.0
November 1995................................................ 1462 58 17 21 3 34.5 46.0
December 1995................................................ 1048 48 25 24 3 43.8 39.3
January 1996................................................. 981 43 30 24 3 41.3 27.0
February 1996................................................ 922 46 29 21 3 40.9 20.5
March 1996................................................... 1555 56 24 17 3 37.0 21.3
April 1996................................................... 1357 66 19 14 2 31.2 17.8
May 1996..................................................... 609 52 18 29 2 29.8 23.5
June 1996.................................................... 97 70 7 23 . 15.9 19.6
30,461 60 13 24 2 27.7 26.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
[FR Doc. 96-20048 Filed 8-6-96; 8:45 am]
BILLING CODE 6717-01-P
