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Standards-of-Conduct Proposal Takes Leap Backward

FERC last Thursday took a giant step backward with its new proposal governing the conduct of natural gas pipelines and electric transmission providers and their marketing affiliates.

The notice of proposed rulemaking (NOPR), which is the Federal Energy Regulatory Commision's (FERC) second on the subject, seeks to return to the core principles outlined in Orders. 497 and 889, which until 2003 addressed standards of conduct for, respectively, gas pipeline and electric transmission provider employees.

In Order 2004, the Commission broadened the standards-of-conduct rule to restrict the relationship of gas pipelines and electric transmission providers with practically all energy affiliates, not just marketing affiliates (see NGI, Dec. 1, 2003). The U.S. Court of Appeals for the District of Columbia in 2006 vacated and remanded the part of Order 2004 that applied to gas pipelines, saying that FERC had failed to provide record evidence of abuses to justify its decision to broaden its standards of conduct (see NGI, Nov. 20, 2006).

FERC tried to fix the problem in its original NOPR, issued in January 2007, by limiting the standards-of-conduct restrictions for gas pipelines to only marketing affiliates (see NGI, Jan. 22, 2007). It also sought public comment on whether it should narrow the scope of affiliate restrictions for electric transmission providers. But as FERC moved to issue a final order, the agency realized that its proposal had "some of the significant flaws that marred Order 2004," Chairman Joseph Kelliher said.

"In particular, the original proposed rule retained the corporate functional approach which led to so many implementation difficulties. Additionally, our proposal in the original NOPR to allow integrated resource planning actually added new complexities to a rule that already has a wealth of complexity. So on careful reconsideration, today's proposed rule shifts focus to the employee function approach rather than the corporate approach -- a focus that I believe will better address the heart of the affiliate problems we are trying to prevent," he said.

"This proposed rule will narrow the scope of the standards of conduct rule so that it focuses on the relationship between transmission providers and marketing affiliates, rather than energy affiliates. This focuses the standards of conduct rule on the areas where there is the highest risk of affiliate abuse and undue discrimination," Kelliher noted.

"Importantly, unlike the prior proposed rule, this proposed rule will also focus on the actual functions that an employee performs rather than where he or she is listed on a corporate organization chart.

The new NOPR is broken down into three rules: the "independent functioning rule" as used in Order 497 and 889; the "no-conduit rule" that prohibits both passing and receipt of transmission function information; and the "transparency rule" that seeks to improve transparency to detect, correct and sanction any undue discrimination.

The "independent functioning rule" requires transmission function employees to function independently of marketing function employees. "There are exceptions: transmission function and marketing function employees may exchange certain limited information, such as information regarding generation necessary to perform generation dispatch and information necessary to maintain or restore operation of the transmission system. But contemporaneous records must be kept of any such exchanges, except in emergency circumstances, where the record can be made after the fact," FERC said.

Under the "no-conduit rule," transmission provider employees now may not disclose information concerning a transmission system to marketing or energy affiliates, according to the Commission.

The "transparency rule" requires records to be maintained of "permitted exchanges" between transmission function employees and marketing functioning employees; and requires companies to retain postings of waiver notices, acts of discretion and offers of discounts, as well as maintenance of waiver logs. To comply with the rule, it also beefs up the requirement to include annual training and certification of completion for affected employees.

Comments on the new NOPR are due within 45 days of publication in the Federal Register.

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